ERISA-Fourth Circuit Expresses Its View On Assessing Liability For Breach Of Duty Of Prudence When Liquidating A Plan Investment

Tatum v. RJR Pension Investment Committee, No. 13-1360 (4th Cir. 2014) involved an appeal from a judgment in favor of R.J. Reynolds Tobacco Company and R.J. Reynolds Tobacco Holdings, Inc. (collectively “RJR”). Richard Tatum brought this suit on behalf of himself and other participants in RJR’s 401(k) retirement savings plan (collectively “the participants”). He alleges that RJR breached its fiduciary duties under ERISA, when it liquidated two funds held by the plan on an arbitrary timeline without conducting a thorough investigation, thereby causing a substantial loss to the plan.

After a bench trial, the district court found that RJR did indeed breach its fiduciary duty of procedural prudence and so bore the burden of proving that this breach did not cause loss to the plan participants. But the court concluded that RJR met this burden by establishing that a reasonable and prudent fiduciary could have made the same decision after performing a proper investigation. In analyzing the case, the Fourth Circuit Court of Appeals (the “Court”) affirmed the district court’s holdings that RJR breached its duty of procedural prudence, in that RJR failed to engage in a prudent decision-making process, and therefore bore the burden of proof as to causation. But, because the Court concluded the district court then failed to apply the correct legal standard in assessing RJR’s liability, the Court reversed its judgment and remanded the case back to the district court.

What did the Court say about the correct legal standard for assessing liability? The Court said that, to carry its burden and avoid liability for loss, RJR had to prove that despite its imprudent decision-making process, its ultimate investment decision was “objectively prudent,” that is, a hypothetical prudent fiduciary would have made the same decision anyway. In making this determination, a court must consider all relevant evidence, including-in this case- the timing of the divestment.

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