Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On June 5, 2017, in a split decision to be published, the U.S. Court of Appeals for the Tenth Circuit held that the plaintiff bears the burden on each element of its Employee Retirement Income Security Act of 1974 (“ERISA”) claim for breach of fiduciary duty, including causation and damages. Pioneer Centres Holding Co. Emp. Stock Ownership Plan & Trust v. Alerus Fin., N.A., Case No. 15-1227 (10th Cir. June 5, 2017). The Tenth Circuit affirmed a trial court’s decision that had bypassed the issue of whether the plan fiduciary had breached its duty.
The Pioneer Centres Holding Company Employee Stock Ownership Plan & Trust (the “Plan” or “ESOP”) sued Alerus Financial, N.A. (“Alerus”) for breach of fiduciary duty in connection with the failure of a potential employee-stock purchase transaction. The transaction would have allowed the ESOP to become the 100% owner of Pioneer Centres Holding Company (“Pioneer”)—an owner and operator of car dealerships.
The Plan hired Alerus as an independent transactional trustee. Alerus’s job was to determine whether, and on what terms, the Plan should purchase Pioneer’s main stockholder’s interest. The transaction hit a roadblock because Pioneer’s dealership agreement with Land Rover required Land Rover’s approval of any changes in ownership and management. Land Rover said it would not approve any transaction that gave the ESOP 100% ownership, and Alerus failed in its attempt to persuade Land Rover to change its mind. Therefore, Alerus never sent transaction documents to Land Rover, and Pioneer sold its assets to an unaffiliated third party instead (for more than $10 million above what the Plan would have offered for Pioneer’s stock).
Tenth Circuit Decision
In an opinion authored by Judge Carolyn B. McHugh and joined by Judge Gregory A. Phillips, the Tenth Circuit recognized that the plain language of section 409(a) of ERISA, 29 U.S.C. § 1109(a), establishes liability for losses “resulting from” a breach. The statute, however, is silent as to who bears the burden of proving a resulting loss. The Tenth Circuit, relying upon the default rule that a plaintiff bears the burden to prove its claim, rejected the “burden-shifting” framework that has been adopted by the Fourth,1 Fifth,2 and Eighth3 Circuit Courts of Appeal.
Those courts have looked to a framework found in the common law of trusts, which requires that once an ERISA plaintiff has proven a breach and a prima facie case of loss, the burden shifts to the trustee to prove that the breach of duty did not cause the loss. The Tenth Circuit, however, found resort to trust principles unnecessary because of the statute’s plain language. The Tenth Circuit reasoned that the statute limits liability to losses “resulting from” a breach of fiduciary duty, which dictates that the burden remains with the plaintiff at all times, since the plain language of the statute makes causation an element of the claim. This holding is in line with Second,4 Sixth,5 Ninth,6 and Eleventh7 Circuit Courts of Appeals.
The Tenth Circuit also held that the Plan failed to demonstrate a disputed material fact—namely, that Alerus’s alleged breach (its refusal to sign the proposed transaction documents) caused the Plan to suffer damages (failure of the proposed transaction) to withstand summary judgment. The Tenth Circuit agreed with the trial court’s conclusion that the Plan’s evidence was merely speculative because Land Rover gave no indication that it would approve the proposed sale even if Alerus had signed the documents.
In dissent, Judge Robert E. Bacharach only took issue with the Tenth Circuit’s holding as it pertains to whether the Plan submitted sufficient evidence to withstand summary judgment.
What Does This Mean for ERISA Plan Fiduciaries
By maintaining the burden of persuasion with a plaintiff, the Tenth Circuit’s decision does not remove an important check on otherwise potential sweeping liability of fiduciaries under ERISA. In the Tenth Circuit, an ERISA plaintiff will need to prove that its loss resulted from the plan’s action or inaction.
We expect the circuit split to be resolved by the U.S. Supreme Court at some point, although it is unclear whether the Plan’s trustees will appeal this case given the ruling on liability.
1 See Tatum v. RJR Pension Inv. Comm., 761 F.3d 346, 362 (4th Cir. 2014), cert. denied, 135 S. Ct. 2887 (2015).
2 McDonald v. Provident Indem. Life Ins. Co., 60 F.3d 234, 237 (5th Cir. 1995).
3 Martin v. Feilin, 965 F.2d 660, 671 (8th Cir. 1992).
4 Silverman v. Mut. Benefit Life Ins. Co., 138 F.3d 98, 105 (2d Cir. 1998) (Jacobs, J. and Meskill, J., concurring).
5 Kuper v. Iovenko, 66 F.3d 147, 1459-60 (6th Cir. 1995) abrogated on other grounds by Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014).
6 See Wright v. Ore. Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004).
7 Willett v. Blue Cross & Blue Shield of Ala., 953 F.2d 1335, 1343-44 (11th Cir. 1992).