More On Reconciling Fiduciary and Corporate Roles
Following up on yesterday’s post about the Holdeman decision, we struggled for a long time to find the proper analogy to bring home with real force the point of the argument we were making both to the trial court and the Tenth Circuit on appeal. We didn’t dispute that, under ERISA, Devine could assume roles as both the CEO of the business sponsoring the Plan and as the named fiduciary of the Plan. But we also felt strongly in our bones that if there was ever a shortfall in funds to operate the business and fund the Plan, allowing Devine to get away with failing to fund the Plan in favor of keeping the business open was completely wrong. In that case, Devine had to be held to the higher fiduciary standard of making sure the employees and their dependants were taken care of in terms of seeing to it that their medical expenses were paid rather than treating them as just another creditor of the business. It seemed self evident to us that when you hold two competing responsibilities and one demands a higher level of ethical conduct, when the two conflict you have to heed the call of the higher duty or it ceases to have any meaning. How could we make that reality clear to the court in our arguments?
It wasn’t until we were on appeal that we came up with what I believe is an illustration that shines more light on the issue. And since it involved lawyers and judges, we thought it would immediately hit home to the Tenth Circuit panel. I have no idea whether it made a difference to the court but here’s the analogy.
When a lawyer takes a case on a contingent fee, he wears two hats. One is the business judgment hat. He will only get paid a fee if he is successful in the case. Otherwise he gets nothing. The other hat is a fiduciary hat. He acts as an officer of the court and must be completely forthright and trustworthy in providing to the court all citations to precedential case law even when that precedent is damaging to his position. Let's say that after the attorney files the case he is handling on a contingent fee basis and before briefing the case for the court to decide it, our lawyer becomes aware of a controlling case that basically guts his theory. Assume that despite this knowledge he fails to disclose the controlling authority to the court. The court becomes aware of it through some other means. At oral argument the court says "why didn't you disclose that authority? Were you aware of it? If so, didn't you have the obligation as an officer of the court to disclose it to me?" Our hero responds: "yes, I was aware of that precedent. But Judge, this is a huge case for me. I have people in the office who need to eat. In my business judgment, I could not disclose the existence of that case because it would have caused me to lose the case and the fee that goes with it. In turn, and again exercising my business judgment, I believed that disclosing to you the case that guts my legal theory in this matter would have quickly required me to close the doors of my law firm. My business judgment told me I must sacrifice obligations otherwise applicable to me as an officer of the court in favor of avoiding significant and immediate adverse impact on my employees and their families, not to mention my own family."
I believe the court would have said something like this to that unfortunate attorney. “Thank you for your candor. Not only am I ruling against you in this case but I am reporting you to the Bar. This justification is ludicrous. You know it and I know it. Your rationale is offensive to me and to every other right thinking judge or legal counsel. Go home and await a phone call to be investigated as to your worthiness to practice law.” And that Judge would be absolutely correct.
There is no question in my mind that the express language of ERISA dictates the same response by the federal judiciary to Devine as the Judge’s response in my hypothetical.