Dec 15, 2017

More On Reconciling Fiduciary and Corporate Roles


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11/17/2008
Brian S. King
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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.

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4 Comments to "More On Reconciling Fiduciary and Corporate Roles"

As to your last question Don, I think Devine felt that it would 1) put Stateline at a competitive disadvantage to simply terminate the Plan and 2) would result in unhappy employees. However, it is self evident that you are in a better position if you have no benefits and KNOW you have no benefits than if you have no benefits but believe you are covered. The former group can fend for themselves. The latter are simply going to be left holding the bag despite their belief that they are taken care of.
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Brian:
Your last point is an excellent one. This is why the two hats are not mutually exclusive, all the time. Devine took on the fiduciary hat, and, apparently, never relinquished it, officially. This is why I ask the question of whether the court could reasonably assume that even when funds were limited, that Devine never wore the fiduciary hat. Instead of trying to define which hat he wore, because he could not wear both at the same time, the more reasonable question, I believe, is how come he never wore the fiduciary hat? It is beyond reason to think he did not.

One other thought, Brian. As the plan sponsor, he could have amended, modified, or even terminated the plan, wearing the settlor hat. I wonder why that approach was not taken?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
It was certainly proper for Devine to do what he did to try and keep the business afloat when viewed from the perspective of an officer of a business sponsoring a health benefit plan. But the same action when viewed from the perspective of a prudent fiduciary? No, I don't think so. The beneficiaries of the medical plan were not well served by having Devine repeatedly assure them that their bills would be paid when, in fact, he was doing less than what was reasonable and prudent, in his role as trustee of the plan, to make sure the plan would be funded.

It's easy for folks to say that the Devines of the world can't be expected to carry out both roles. In fact, if the money is their to both run the business and fully fund the plan, they probably can do both. But no one is forcing Devine to act both as CEO and plan fiduciary. If he reaches a point where he can't carry out both roles as the laws bearing on those jobs require, he should be held accountable for losses caused by his dereliction of duty.

Let's reverse the circumstances Don. Let's say that he performed with exactness the role of plan fiduciary, insisting at every turn that the plan be immediately and fully funded and ignored his role as CEO of the company. Does anyone believe the shareholders of the corporation wouldn't have a claim against Devine for ignoring his obligations to exercise prudent business judgment to keep the doors of the company open?
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Brian:
Thanks for sharing your thoughts with us. It seems fair to say that your heart certainly was in the right place, and that your intent was noble.
I can see where you would think the fiduciary hat would have a higher level of ethical conduct than the settlor hat.
However, wasn't it also ethical for Devine to do the best he could to keep the business afloat? If funds are limited, wouldn't it be more ethical to ensure that everyone gets his wages, versus a few people getting their benefits?

What is unethical, and probably illegal, to me, is that Devine never wore his fiduciary hat. If that was the case, wouldn't he have been negligent , at least to some degree?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM

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