Plan Administrator not Liable for Fiduciary’s Diversion of Assets

The Philadelphia Pension Planning Corporation (PPPC) was the fiduciary in charge of managing Bustleton Landscaping Company’s retirement plan for approximately 23 years, until Charleen Ryan became the dominant shareholder, president and chief executive officer of PPPC in 1989. According to the opinion of the U.S. District Court for the Eastern District of Pennsylvania, nothing during those 23 years suggested PPPC would be unfit to manage the retirement plan under Ryan’s stewardship. The court found Leslie Schrey, a co-founder of the company, did not prove that Harold Lovett, the company’s other co-founder and admitted plan administrator, breached his fiduciary duty by permitting the plan’s continued relationship with PPPC.  

The court also rejected Schrey’s contention that Lovett breached a fiduciary duty by failing to monitor Ryan’s and PPPC’s performance, which ultimately led to the plan’s assets being plundered. The court noted a trustee has a duty to manage and control the assets of a plan; therefore, Lovett had a duty to ensure the plan’s assets were properly managed by Ryan and PPPC. The plan’s assets were entirely depleted by 2000. During the 1990s, and thereafter, Ryan went to extraordinary lengths to conceal the depletion, making it highly unlikely Lovett would discover the missing assets, according to the court’s decision.   

Ryan made lump-sum distributions to several plan participants and monthly payments were distributed to Schrey, Lovett and other participants. With annual reports and statements being issued and revealing no discrepancies, no further inquiry would have appeared necessary. A reasonably prudent trustee would not have suspected the plan’s assets were being mismanaged.  

Schrey contended Lovett should have asked Ryan to show him the actual bank certificates of deposit in which the plan’s assets were purportedly invested. The court conceded that in hindsight, now knowing that the assets were not invested in certificates of deposit, this appears obvious. “However, [the Employee Retirement Income Security Act’s] fiduciary duty of care requires prudence, not prescience,” the court said. It concluded that under the circumstances that existed at the time, Lovett managed the plan’s assets reasonably and prudently.   

(Cont...)

According to the court opinion, when the company established a tax-qualified pension plan in approximately 1966, PPPC was retained to perform administrative services. In January 1989, Ryan became dominant shareholder, president and chief executive officer of PPPC. The company also converted the pension plan to a profit sharing plan in 1989. 

At some point during the 1990s, unbeknownst to the trustees or plan administrator, Ryan directed PPPC employees who managed plan assets to stop investing the assets so she could manage them herself. Thereafter, Ryan diverted assets away from the plan and by 1999 or 2000 there were no assets remaining.  

In 2005, the plan was notified that withholding payments were overdue. Schrey paid the overdue balance and hired legal counsel to investigate the propriety of PPPC’s management of the plan. When Lovett’s counsel was unable to obtain the necessary information from Ryan, Lovett sued Ryan and PPPC. Lovett identified himself as the plan administrator as of 1976, and admitted to delegating full responsibility for plan administration to PPPC and Ryan.  

Schrey sued Lovett as co-fiduciary, but the court found Lovett was not liable as a co-fiduciary.  

The case is Schrey v. Lovett, E.D. Pa., No. 2:09-cv-00292-JCJ.