What Hat Are You Wearing?
This is the question the Tenth Circuit focused on in the case of Holdeman v. Devine, ___ F.3d ___ 2007 U.S. App. LEXIS 928 (10th Cir. 2007) that was decided last week. It’s a case my former partner and I have been working on for over six years now. It involves a self funded medical benefits plan (the Plan) that was sponsored by a group of businesses, Stateline, that ran a casino and hotel operation out in Wendover, Nevada, just across the border from Utah. Mike Devine was an officer of Stateline. He was also the named fiduciary of the Plan. He was operating in a dual role. As ERISA lawyers and regular blog readers know, fiduciaries are held to stringent standards under the statute. As fiduciary, Devine had to act solely in the interest of the employees and their dependants who were covered by the Plan. ERISA also required him to act in accordance with standards of a prudent fiduciary in a similar position. He also had to follow the requirements of the documents under which the Plan was established and operated. Those documents required that Stateline fund the Plan to the degree necessary to pay the covered medical expenses incurred by the employees and their dependants. At the same time, as the CEO of Stateline, he had to make sure that business operated in the black rather than the red. In this case, that was no small problem for Devine. As long as the money was coming in and income exceeded expenses (including the expense of funding the Plan), Devine didn’t have a problem carrying off both roles. But when expenses were greater than income, he had to make choices about what to pay and what to put off. The Supreme Court has interpreted ERISA as allowing employers to act both as fiduciaries of their benefit plans and officers of the business making purely business decisions. Pegram v. Herdrich, 530 U.S. 211 (2000). In so doing, Pegram holds that Devine, as the fiduciary, is allowed to have financial interests adverse to the Plan beneficiaries. However, Pegram also makes clear that Devine is not allowed to wear the employer hat at the same time he wears the fiduciary hat. And he must act like a fiduciary and fulfill his fiduciary duties when he is wearing the fiduciary hat. Devine was the named fiduciary of the Plan while at the same time he was an officer of Stateline for about 30 months. During that time, Stateline struggled. It lost millions of dollars in each of the three years the Plan existed. At the end of the 30-month period in question, Stateline filed bankruptcy. The Plan was underfunded by a little over a million dollars. The employees, their family members and the healthcare providers who rendered services were all left holding the bag on those medical expenses. We sued Devine alleging that he failed to carry out his fiduciary responsibilities to, in essence, ensure that the Plan was fully funded. The trial court decided in favor of Devine, ruling that all his decisions were made while wearing his CEO hat. This gave us heartburn. If it were true that he had never put on his fiduciary hat, how could it be said he lived up to his fiduciary duties? Who was looking out for the interests of the Plan participants and beneficiaries, the employees and their dependants, if Devine never acted in his fiduciary capacity? How could his inaction not constitute a breach of fiduciary duty? We appealed to the Tenth Circuit. That court affirmed portions of the trial court’s ruling and held that for a number of Devine’s decisions, he was wearing his CEO hat. For those decisions, the court had no ability to second guess Devine’s actions. But the Tenth Circuit reversed the trial court on a portion of the arguments we presented, saying that the trial court had failed to address whether Devine had fulfilled his fiduciary duties when faced with purely fiduciary questions and decisions. The Tenth Circuit decision makes clear that when individuals choose to act both as decision-makers for the employer and also as ERISA plan fiduciaries, the separate responsibilities that come with those roles must be considered and analyzed separately. The fact that a person with his business judgment hat on, as an officer of a corporation, chooses not to fund an ERISA plan does not eliminate the separate responsibility that same person has, as the ERISA fiduciary, to do everything possible to look after the interests of the Plan beneficiaries in a zealous, competent and loyal manner. Of course, it is not hard to imagine that this may create significant conflicts of interest for the individual who wears both hats. Those inherent and difficult conflicts of interest should be reason enough for individuals or companies to think twice before voluntarily undertaking dual roles as officer of the employer and fiduciary of the ERISA plan sponsored by the employer.