Your pension benefit fund trustee may be aware of valuable potential claims against companies whose conduct has resulted in significant losses to the fund. Does the trustee have a duty to litigate if the trustee knows or should know of these potential claims? Legally, the answer is: it depends. From a common sense perspective, the answer is: quite possibly. The trustee should exercise the highest of fiduciary duties and protect plan assets whenever possible.
For example, is a trustee of a pension fund holding stock of a company that plummets in value after the company’s directors and officers issue false and misleading statements regarding the company’s financial condition? Is a trustee of an ERISA health and welfare fund that pays for prescription coverage obligated to pursue a pharmaceutical manufacturer that has fraudulently increased prescription drug prices that wrongfully inflated costs that the fund had to pay? If the trustee does not have a duty to litigate these claims, what are the trustee’s duties short of litigation? Does the trustee have to investigate the harm to the fund?
Although there appears to be scant case law on this precise issue, Restatement (Second) of Trusts and case law involving claims against employers may provide some guidance. Courts have found that when “supervising pension assets, plan trustees have fiduciary obligations that have been described as “‘the highest known to the law.’” Flanigan v. GE, 242 F.3d 78, 86 (2d Cir. 2001) (emphasis added) (quoting Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982)). More specifically, if the plan is governed by ERISA, the United States Code at 29 U.S.C. §§ 1104(a)(1)(A) and (B), imposes three overlapping standards for discharging fiduciary duties. The trustee must discharge his duties “‘solely in the interests of the participants and beneficiaries.’ He must do this ‘for the exclusive purpose’ of providing benefits to them. And he must comply ‘with the care, skill, prudence, and diligence under the circumstances then prevailing’ of the traditional ‘prudent man’.” Donovan, 680 F.2d at 271; see also Tullis v. UMB Bank, 640 F. Supp. 2d 974, 977-78 (N.D. Ohio 2009).
The Restatement (Second) of Trusts § 177, Duty to Enforce Claims also provides that a “trustee is under a duty to the beneficiary to take reasonable steps to realize on claims which he holds in trust.” Id. Furthermore, comment a. to section 177 states in relevant part that “[i]f a third person commits a tort with respect to the trust property, it is the duty of the trustee to take reasonable steps to compel him to redress the tort.” Id. (emphasis added).
What does all this mean? Well, the Restatement tells us that these “reasonable steps” turn on the particular circumstances underlying the potential litigation. For example, pursuing litigation may be unreasonably expensive. Restatement (Second) of Trusts § 177 cmt. c. This may be a nominal economic concern if attorneys pursue claims on behalf of the pension fund on a contingent basis. Does the burden and risk of pursuing litigation outweigh the potential benefits? Indeed, a trustee’s duty to litigate may also be influenced by “the probability that the action would be unsuccessful or that if successful the claim would be uncollectible owing to the insolvency of the defendant or otherwise.” Id. While there may be proverbial “slam dunk” cases that arise in litigation, they are a rarity; the outcome of any lawsuit is usually uncertain. On the other hand, it is certainly not true that recovering dissipated assets through litigation is a futile exercise.
Some guidance may also be found in Hartline v. Sheet Metal Workers’ Nat’l Pension Fund, 134 F. Supp. 2d 1 (D.D.C. 2000), where the named plaintiffs – retired employees of the Sheet Metal Workers’ National Pension Fund (“Fund”) – brought a class action against the Fund, its trustees and the Sheet Metal Workers International Association (“SMWIA”). Id. at 3-4. Plaintiffs alleged that the SMWIA stopped contributing to the Fund on behalf of employees and that the trustees breached their fiduciary duties under ERISA section 404(a)(1) in part by “fail[ing] and refus[ing] to seek the payment of contributions due from the SMWIA . . . .” Id. at 6. Defendants moved to dismiss.
The court held that Rule 8(a) pleading standards were not met and that the plaintiffs needed to allege that the trustees “failed to act with the requisite care, skill, prudence, or diligence.” Id. at 18. In addition, the Hartline court noted the holding, that “to establish a breach of duty by a health plan’s fiduciary for failing to pursue a lawsuit against the plan sponsor, the plaintiff must show that the suit would be successful and that the health plan and its beneficiaries would benefit.” Hartline, 134 F. Supp. 2d at 17-18 (emphasis added) (citing Herman v. Mercantile Bank, N.A., 137 F.3d 584, 586 (8th Cir. 1998); see also McMahon v. McDowell, 794 F.2d 100, 110 (3d Cir. 1986) (indicating that a trustee does not violate his duty if it is “prudent to refrain from bringing an action”) (citation omitted). Although Hartline was not decided in the context of a trustee pursuing claims against a third-party, this case potentially demonstrates that trustees may have considerable discretion when deciding whether to litigate.
This does not mean, however, that trustees can put their heads in the sand either. While the trustee may not ultimately be required to bring a lawsuit, the trustee may at least have a duty to explore it as an option. For example, in Ches v. Archer, 827 F. Supp. 159 (W.D.N.Y. 1993), successor trustee and plan participants brought an action against former Ramco-Fitzsimons, Inc. officers and shareholders to recover unpaid contribution funds. Id. at 162. The court found that defendants who served as former plan trustees may have considered the option of litigation and that it may have been prudent not to pursue that option. Id. at 167. However, the court also indicated that the defendants failed to explain the trustees’ two months of inaction, id. at 166, and held that the trustees at least “had a duty to investigate the possibility of a lawsuit and other options and to make an informed decision whether to pursue any.” Id. at 167 (emphasis added).
The lesson from this is that counsel to a trustee should stay well-informed of potential actions and advise his or her client of their responsibilities on the appearance of a potential claim. If trust assets have been damaged, the trustee should make an informed decision regarding potential litigation that may restore trust assets.
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