Denise Clark v. Feder Semo and Bard, P.C. , 739 F.3d 28 ( 2014 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 13, 2013 Decided January 7, 2014
No. 12-7092
DENISE M. CLARK,
APPELLANT
v.
FEDER SEMO AND BARD, P.C., ET AL.,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:07-cv-00470)
Stephen R. Bruce argued the cause for appellant. With him
on the brief was Allison C. Pienta.
Jason H. Ehrenberg argued the cause and filed the brief
for appellees. James C. Bailey entered an appearance.
Before: ROGERS, TATEL, and GRIFFITH, Circuit Judges.
GRIFFITH, Circuit Judge: In 2005, the Washington, D.C.
law firm of Feder Semo closed its doors and terminated its
retirement plan. Appellant Denise Clark was an attorney at the
law firm for almost a decade and participated in the plan.
Unfortunately, when the plan was terminated, there were not
enough assets to satisfy all of its obligations. Dissatisfied with
2
the amount of money that came her way, Clark sued, alleging
that decisions made by Joseph Semo and Howard Bard (the law
firm’s directors who administered the retirement plan)
breached their fiduciary duties under the Employee Retirement
Income Security Act of 1974 (ERISA). The district court
rejected all of Clark’s claims, and we affirm its judgment and
reasoning. We think, however, that two issues merit further
discussion.
I
There was enough money in the retirement plan at
termination for Semo and Bard to distribute $229,949 to firm
founder Gerald Feder. Clark argues this violated § 401(a)(4) of
the Internal Revenue Code, which prohibits payments that
favor highly compensated employees. The district court
properly concluded that there is no cause of action under
ERISA for a breach of § 401(a)(4), relying upon decisions of
other circuits. 1 But neither the district court nor any of those
decisions addressed the particular statutory argument advanced
by Clark. We write to explain its flaws.
Section 401(a)(4) provides that retirement plans may lose
their tax-favored status if “the contributions or benefits
provided under the plan . . . discriminate in favor of highly
compensated employees.” 26 U.S.C. § 401(a)(4). It may well
be that the distribution to Feder was discriminatory, but Clark
doesn’t seek to disqualify the plan; she seeks relief under
ERISA. And here we must be cautious because the Supreme
Court has repeatedly warned courts against permitting suits to
1
See Reklau v. Merchs. Nat’l Corp., 808 F.2d 628, 631 (7th
Cir. 1986) (violations of § 401(a)(4) not actionable); Stamper v.
Total Petroleum, Inc. Ret. Plan, 188 F.3d 1233, 1238-39 (10th Cir.
1999) (violations of § 401(a)(25) not actionable).
3
proceed under ERISA based on novel causes of action not
expressly authorized by the text of the statute. See Great-West
Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209 (2002)
(“ERISA is a comprehensive . . . [statute that is] the product of
a decade of congressional study of the Nation’s private
employee benefit system,” and courts should avoid “extending
remedies not specifically authorized by its text.” (internal
quotation marks omitted)); see also Harris Trust & Sav. Bank
v. Salomon Smith Barney Inc., 530 U.S. 238, 246-47 (2000).
Clark suggests that express authorization for her claim is
found in 29 U.S.C. § 1344, a provision of ERISA that sets forth
general rules governing the allocation of the assets of a
retirement plan upon termination. She points to a portion of
§ 1344 that authorizes the Secretary of the Treasury to step in
and override an application of those general rules that would
violate § 401(a)(4). 2 According to Clark, this authority for the
Secretary to intervene into the workings of a plan also imposes
upon a fiduciary the duty to avoid the discriminatory
distributions barred by § 401(a)(4). But Clark never tells us
how authority for the Secretary to intervene becomes the
source of a duty for a plan fiduciary. She does not because she
cannot. Section 1344 authorizes the Secretary of the Treasury
to take action to prevent a plan from losing tax benefits, but
says nothing at all about what a fiduciary may or may not do
about distributions at termination. As Clark vaguely suggests,
general principles of fiduciary law imported into ERISA may
2
See 29 U.S.C. § 1344(b)(5) (“If the Secretary of the Treasury
determines that the allocation made pursuant to this section (without
regard to this paragraph) results in discrimination prohibited by
section 401(a)(4) of title 26 then, if required to prevent the
disqualification of the plan (or any trust under the plan) under section
401(a) or 403(a) of title 26, the assets allocated under [various
subsections] shall be reallocated to the extent necessary to avoid such
discrimination.”).
4
set bounds on the distributions Semo and Bard authorized, but
Clark’s argument is based upon § 401(a)(4), which is not the
source of any such limits. Section 1344’s reference to
§ 401(a)(4) stands in contrast to other ERISA provisions that
use unequivocal language to describe the duties of plan
fiduciaries. See, e.g., 29 U.S.C. § 1106(a)(1) (“A fiduciary
with respect to a plan shall not cause the plan to engage in a
transaction . . . [that] constitutes a direct or indirect . . . sale or
exchange, or leasing, of any property between the plan and a
party in interest . . . .”); id. § 1106(b) (“A fiduciary with respect
to a plan shall not . . . deal with the assets of the plan in his own
interest or for his own account . . . .”); id. § 1104(a)(1)(B) (“[A]
fiduciary shall discharge his duties with respect to a plan . . . by
diversifying the investments of the plan so as to minimize the
risk of large losses . . . .”).
Furthermore, the terms of § 1344 operate only “[i]f the
Secretary of the Treasury determines that” applying its
allocation rules unfairly favors the highly compensated. 29
U.S.C. § 1344(b)(5). Clark suggests the Secretary made that
determination when he mandated in a treasury regulation that
retirement plans must comply with § 401(a)(4). See Treas.
Reg. § 1.401(a)(4)-5(b)(2) (retirement plans must include a
provision limiting distributions upon termination to “a benefit
that is nondiscriminatory under section 401(a)(4)”). But surely
this is not the type of particularized determination
contemplated by § 1344. That determination comes only in the
wake of a finding by the Secretary that the application of the
allocation rules to the distribution of the assets of a specific
retirement plan will violate the rule against discrimination.
Nothing like that has happened here.
5
II
In calculating Clark’s distribution, Semo and Bard placed
her in a group of employees whose share was based on the
firm’s annual contribution to the retirement plan of 10% of
their salary. Clark objected and asked that she be reassigned to
the group whose share was based on the firm’s annual
contribution of 20% of their salary. Relying upon the advice of
the plan’s lawyer, William Anspach, Semo and Bard denied
her request. Clark argued before the district court that Bard and
Semo were not entitled to rely on that advice because it was
based on a mistake of fact that they would have discovered had
they undertaken an independent investigation. The district
court properly concluded that relying on the advice of counsel
was justified under the circumstances, but cited no authority in
support. We write to clarify when ERISA permits plan
fiduciaries to act in reliance on the advice of counsel.
Prior to ERISA’s passage, retirement plans were governed
in large part by the common law of trusts. See Varity Corp. v.
Howe, 516 U.S. 489, 496 (1996). A fundamental principle of
that law holds trustees to the standard of conduct of an
objectively prudent person. See id.; Fink v. Nat’l Sav. & Trust
Co., 772 F.2d 951, 955 (D.C. Cir. 1985); RESTATEMENT
(THIRD) OF TRUSTS § 77 & cmt. a (2005). Over time, a body of
case law developed that fleshed out the meaning of that
standard. In ERISA, Congress provided that a plan fiduciary
must act “with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use.” 29
U.S.C. § 1104(a)(1)(B). Doing so, ERISA adopted much of
what the common law had, over time, come to require of
fiduciaries. As the Supreme Court described it, “rather than
explicitly enumerating all of the powers and duties of trustees
and other fiduciaries, Congress invoked the common law of
6
trusts to define the general scope of their authority and
responsibility.” Cent. States, Se. & Sw. Areas Pension Fund v.
Cent. Transp., Inc., 472 U.S. 559, 570 (1985); see also
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110
(1989) (“ERISA abounds with the language and terminology
of trust law. ERISA’s legislative history confirms that the
Act’s fiduciary responsibility provisions codif[y] and mak[e]
applicable to [ERISA] fiduciaries certain principles developed
in the evolution of the law of trusts.” (alterations in original)
(citations omitted) (internal quotation marks omitted)).
Even so, the Supreme Court has cautioned that although
trust law principles developed at common law are a good
“starting point” for determining a fiduciary’s duties under
ERISA, Congress may not have adopted them all. See Varity
Corp., 516 U.S. at 497; see also Harris Trust & Sav. Bank, 530
U.S. at 250. Courts must therefore be on the lookout for
instances in which ERISA departs from the common law,
sometimes requiring more, other times requiring less, of
fiduciaries. See Varity Corp., 516 U.S. at 497.
In determining the “starting point,” the Supreme Court has
relied on sources such as the Restatement of Trusts, see, e.g.,
Cent. States, 472 U.S. at 570 n.11; see also Eddy v. Colonial
Life Ins. Co. of Am., 919 F.2d 747, 750 (D.C. Cir. 1990), and
well-known treatises on the law of trusts, including that of
Professor Bogert, see, e.g., Varity Corp., 516 U.S. at 498.
Following the Supreme Court’s example, our review of those
sources shows that it is a principle firmly rooted and founded in
the common law of trusts that a fiduciary may rely on the
advice of counsel when reasonably justified under the
7
circumstances. 3 The propriety of that reliance must be judged
based on the circumstances at the time of the challenged
decision. 4 The fundamental question is always whether a
prudent trustee in those particular circumstances would have
acted in reliance on counsel’s advice. Of course, reliance
would be improper if there were significant reasons to doubt
the course counsel suggested. 5
Because nothing in ERISA suggests that Congress
displaced this common law principle, we conclude that
ERISA’s adoption of the common law’s standard of fiduciary
care in § 1104(a)(1)(B) permits prudent fiduciaries making
important decisions to rely on the advice of counsel in
appropriate circumstances. We join the other circuits that have
indicated that ERISA permits such reliance. 6
Following a six-day bench trial, the district court
concluded that Semo and Bard had rightfully relied upon the
view of Anspach that Clark had been properly placed in the
10% group. Our review of such a fact-intensive, case-specific
determination is necessarily deferential. See Salve Regina Coll.
v. Russell, 499 U.S. 225, 233 (1991) (explaining that “probing
appellate scrutiny” of a case-specific determination is unlikely
3
See RESTATEMENT (THIRD) OF TRUSTS § 77 cmt. b (2005);
id. cmt. b(2); BOGERT ET AL., THE LAW OF TRUSTS AND TRUSTEES
§ 541 (2013).
4
See RESTATEMENT (THIRD) OF TRUSTS § 77 cmt. a; BOGERT
ET AL., supra note 3, § 541.
5
See RESTATEMENT (THIRD) OF TRUSTS § 77 cmt. b(2);
BOGERT ET AL., supra note 3, § 541 & n.57.
6
See Howard v. Shay, 100 F.3d 1484, 1489 (9th Cir. 1996);
Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 918 (8th Cir.
1994); cf. Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 300-01 (5th
Cir. 2000); Gregg v. Transp. Workers of Am. Int’l, 343 F.3d 833, 841
(6th Cir. 2003).
8
to add “to the clarity of legal doctrine”). Ample evidence
supported the district court’s conclusion.
Prior to advising Semo and Bard about Clark’s request,
Anspach consulted what he believed to be the relevant
documents. Based on his review, he concluded that Clark and
Bard should be assigned to the same group. Both had started
work at the firm around the same time, and both made partner
in the same year. And Bard, Anspach concluded, had always
been in the 10% group, proof sufficient that Clark belonged
there too. In recommending to Semo and Bard that Clark be
placed in that group, Anspach forwarded to them a memo
written three months after Clark made partner that showed that
she and Bard were in the 10% group. Bard had always thought
that he and Clark had been in the 10% group during all the
years they had worked together at the firm. In Bard’s mind, the
memo confirmed this view. The memo also reinforced the
shared belief of Semo and Bard that the 20% group was
reserved for Semo, who was more senior than Clark and Bard.
As it turns out, Anspach was mostly right but partly
wrong. He was right that Clark and Bard had both been in the
10% group for most of their time at the firm. But he was wrong
in reporting that Clark and Bard had been in the 10% group for
all of their years at the firm. For some reason not offered by
any of the parties, Bard was placed in the 20% group for a
single year in 2001, though neither Bard nor Semo had
requested, approved, or even known of the assignment.
Clark argues that the district court erred in concluding that
Semo and Bard were entitled to rely on Anspach’s
recommendation. Although she never makes clear why, she
seems to assume that Semo and Bard had an absolute duty to
look behind Anspach’s advice and conduct their own
investigation to see if it was grounded in fact. But, as we have
9
already established, Clark is wrong to the extent she suggests
fiduciaries have such an unyielding obligation. Clark’s
argument turns on the fact that Anspach’s advice was based, in
part, on a mistake about who was grouped where in 2001. Even
so, Semo and Bard were justified in relying on Anspach’s
advice. At the time it was given, they had no reason to know or
even suspect Anspach’s mistake. He had been the plan’s
counsel since the early 1990s. There was no reason to think he
was unfamiliar with its details. His recommendation appeared
to be based on a reasonable investigation, was accompanied by
supporting documentation, and was consistent with the
understanding that Semo and Bard had about the way the
plan’s groups were structured. Nothing about Anspach’s
advice would have suggested to Semo and Bard the need to
investigate further.
III
For the reasons stated above, and for the reasons stated in
the district court’s opinions, we affirm.