Duty to Monitor Fiduciaries Does Not Include Duty to Inform

A federal judge has found that several defendants named in an Employee Retirement Income Security Act (ERISA) lawsuit are not fiduciaries and has dismissed some claims that BP failed to monitor fiduciaries.

The lawsuit had previously been dismissed based on the Moench presumption of prudence for fiduciaries of retirement plans in which company stock is offered as an investment. However, the 5th U.S. Circuit Court of Appeals revived the lawsuit after the Supreme Court ruling in Fifth Third Bank v. Dudenhoeffer that fiduciaries do not have a presumption of prudence.

The plaintiffs in the suit allege that BP and BP America are vicariously liable for their employees’ breaches of fiduciary duty under ERISA. They argue that the corporate defendants “effectively controlled the individual defendants” because the corporate defendants employed the individual defendants and appointed them to plan-related positions.  But, U.S. District Judge Keith P. Ellison of the U.S. District Court for the Southern District of Texas said more than an employer-employee relationship is required to meet the vicarious liability test; it requires that the principal have “participated in the agent’s breach.” He found that the plaintiffs failed to tie the corporate defendants in any way to the individual defendants’ alleged breach.

The plaintiffs alleged that BP Corporation North America Inc. (BPNAI) is a fiduciary because the plan document provides that BPNAI is the “Plan Sponsor.” But, Ellison said this provision is of no consequence to fiduciary status: a “company cannot be subject to fiduciary liability simply by virtue of its role as a plan sponsor.” In addition, he found the plan document names the Savings Plan Investment Oversight Committee (SPIOC) the “Investment Named Fiduciary,” and accordingly vests the SPIOC with authority and control regarding the “management or disposition of any assets of the Trust” as well as “the discretion to designate an Investment Manager.”

Ellison also dismissed the BP Board and designated officers as being fiduciaries to the plans. The plan document grants no substantive authority to the Board other than to act on BPNAI’s behalf “whenever [BPNAI] has the authority to take action under [the] Plan.” Also, the designated officers have no authority to limit or freeze investments in the BP Stock Fund unless they are so “directed” by the SPIOC.

Ellison found that the plaintiffs adequately allege that the insider SPIOC defendants—who were appointed by the appointing officers—breached their fiduciary duties to the plan.

However, he disagreed with plaintiffs’ claims that the appointing officers violated their duty to monitor the SPIOC. According to plaintiffs, the duty to monitor is composed of two fiduciary obligations: (1) a duty to inform appointees of material, non-public information that is within the possession of the monitoring fiduciary and could affect the appointees’ evaluation of the prudence of investing in the plan sponsor’s securities; and (2) a duty to ensure that the monitored fiduciaries are performing their fiduciary obligations.

Ellison concluded that ERISA does not impose a duty on monitoring fiduciaries to keep their appointees apprised of material, non-public information. He cited a ruling by U.S. District Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York in a stock drop case against Lehman Brothers in which Kaplan found “nothing in ERISA itself or in traditional principles of trust law” imposes such a duty. Ellison determined that under the terms of the plan document, the appointing officers’ fiduciary authority and control was limited to appointing and removing members of the SPIOC. Their fiduciary duties can be expanded no further. 

Although the duty to monitor does not include a duty to inform, it does include an obligation to take reasonable measures to ensure that appointees are adequately performing their duties. In deciding whether the plaintiffs sufficiently alleged that the appointing officers failed to adequately monitor the members of the SPIOC, Ellison said the plaintiffs’ claim that the appointing officers ignored “numerous ‘red flags’ that BP stock was not a prudent investment for the retirement plan” misconstrues the relevant law.

“The question is not whether Defendants had notice that the BP Stock Fund was an imprudent investment, but rather whether the Appointing Officers had ‘notice of possible breaches by [the members of the SPIOC] that they failed to investigate,’” Ellison wrote in his opinion. Plaintiffs must allege that the appointing officers had notice that the SPIOC members might be knowingly investing in stock that was artificially inflated—not just that the SPIOC members were investing in artificially inflated stock.

The court found that the plaintiffs have not pointed to any such allegation in the complaint, and their duty-to-monitor claim against the appointing officers fails as a result.

The opinion in IN RE: BP ERISA LITIGATION is here.