The recent case of In Re: Delphi Corporation Securities, Derivative & ERISA Litigation represents another victory for fiduciaries in a company stock case. As in most of the recent cases holding for fiduciaries, prudent practices and processes won the day and this recent case is no exception. However, what stands out in the case is the illustration that the case provides of the various roles that ERISA counsel can play in the fiduciary process and how utilizing counsel at critical junctures in the process can contribute towards a positive outcome for fiduciaries.
In the Delphi case, the directed trustee was being sued for breach of fiduciary duty. The issue before the district court was whether the directed trustee had acted properly by not divesting the 401(k) plan of its investment in company stock (which had occurred through direction by participants into a company stock investment option under the plan) until three days before the company filed for bankruptcy. (Six months before the bankruptcy filing the employer had amended the plan to prohibit additional participant money from going into the stock fund, but had not closed down the stock fund altogether.)
Generally, ERISA would dictate that a directed trustee is required to follow the directions of a named fiduciary when such directions are "proper, in accordance with the terms of the plan and not contrary to ERISA." After reviewing the facts of the case and what went on, the district court provided a discussion of the issue as to when ERISA might require a directed trustee to take this language of the statute to heart--"contrary to ERISA"--and override a plan document's requirement, and named fiduciary's direction, to invest in company stock. The court in the Delphi case concluded, after reviewing DOL guidance and case law, that the directed trustee had not breached its fiduciary duty "in not taking action to override the provisions of the. . Trust documents and initiating the sale of [company] stock before it did. . . " The court came to this conclusion even though a panoply of very well-respected ERISA attorneys had provided expert testimony that, in their opinion, ERISA would have required the directed trustee to divest the plan of its stock at a much earlier time.
So what was ERISA counsel's role in the process that lead to this favorable outcome for the fiduciaries? You can find it in the case if you read between the lines:
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The Plan documents, including an investment policy statement, had been drafted to provide a fiduciary structure and investment direction that was clearly outlined and followed. (Pgs. 4-8 of the opinion). Excerpt from the opinion:
. . . It is this “directed trustee”exception that is at issue in this case. State Street contends that as to the retention of Delphi stock in the Company Stock Fund, it comes within this third exception as it was a “directed trustee,” subject to the proper directions of GMIMCo, the named fiduciary of the Plan. An examination of the Plan Documents in this case supports State Street’s contention. . .
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The agreements between the Plan and the directed trustee contained language that was consistent with the fiduciary structure dictated by the Plan documents. (Pg. 9 of the opinion)
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The directed trustee had adopted a "formal process for monitoring and evaluating company stock and making fiduciary decisions" which was followed and implemented. (Pg. 10 of the opinion)
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"Outside counsel" was hired to advise the fiduciary about “the current state of the law regarding when a directed trustee is bound to disregard its fiduciary obligation to follow plan provisions to invest in company stock” and advised the fiduciary "that extraordinary events such as imminent bankruptcy of the company are required before a fiduciary may disregard plan provisions." (Pgs. 16-17 of the opinion)
Bottom line: The case illustrates how important it is to involve qualified ERISA counsel in the drafting of plan documents, negotiations regarding agreements entered into between fiduciaries and providers, and the prudent processes that are established for implementing the plan documents. Also, when legal issues arise, engaging counsel to advise the fiduciaries helps to ensure that decisions that are made will withstand judicial scrutiny.
Please note that the court viewed the testimony offered by the plaintiffs' panel of ERISA experts as an invasion of the "sole province of the court to determine the applicable law." (Footnote 10.) In other words, the court liked the fact that the fiduciaries engaged ERISA counsel in the decision-making process. However, it rejected their input when offered as expert testimony in the litigation phase.
