Alert March 30, 2011

District Court Allows Claim Against Financial Advisor to Go to Trial

The U.S. District Court for the Eastern District of Pennsylvania allowed claims of breach of fiduciary duty to proceed to trial later this spring against a defined benefit plan trustee, the plan’s sponsor and the plan’s financial advisor. Nagy v. DeWese, No. 09-3995-WY (E.D. Pa. Feb. 23, 2011).  

The factual setting is straightforward. The plan’s trustee instructed the financial advisor to send him checks drawn from the plan account. The trustee used the funds to pay corporate obligations of the plan sponsor, and to make loans to a separate corporation in which the trustee had a personal interest. Its assets so depleted, the plan became unable to pay promised benefits, and one aggrieved participant sued.   

The court first addressed the plaintiff’s motion for summary judgment against the trustee. The court held that the trustee’s actions violated a number of ERISA provisions:  the fiduciary duties to act prudently and solely in the interests of plan participants; the prohibition against transactions benefitting a party in interest; and the bar against plan assets inuring to the benefit of an employer. As such, judgment as to liability was granted against the trustee. However, because the plaintiff pointed to no evidence as to why the plan sponsor should be considered a fiduciary, the court denied the plaintiff’s motion for summary judgment as to the plan’s sponsor. Similarly, because the plaintiff pointed to no evidence of “particular funds or property in the defendants’ possession” belonging to the plaintiff, the court denied the plaintiff’s motion for restitution brought under ERISA Section 502(a)(3). These issues, as well as damages, were reserved for trial.

The court then spent the majority of its analysis focused on the motion for summary judgment brought by the financial advisor. It held that because the advisor could only transfer plan assets “pursuant to explicit instructions from the trustee,” the advisor was not acting in a fiduciary capacity with respect to those transfers. The court therefore held that the advisor could not be directly liable for such transfers and that the advisor had no duty to disclose such transfers to the plan or its participants.

Nonetheless, the court held that the advisor was an ERISA fiduciary over the investment of the plan’s assets because the advisor provided investment advice as to the investment of plan assets within the meaning of the regulations establishing whether providing investment advice for a fee is ERISA fiduciary conduct. The court also held that that advisor conceded that it knew that the trustee “was channeling the Plan’s money into a private investment.”  As such, the court found that genuine issues of material fact existed as to (i) whether the advisor knew that the trustee was breaching its duties to the plan by the trustee’s conduct and, (ii) if it so knew, whether it failed to make reasonable efforts under the circumstances to remedy the breach. Accordingly, the court allowed the claim against the advisor to proceed to trial on a theory of co-fiduciary liability under ERISA Section 405(a) relating to the previously adjudicated breach of duty by the trustee.