The Duty of Loyalty
It is not surprising that in almost every civil action alleging a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), one of the alleged breaches will be a breach of the duty of loyalty to participants and beneficiaries. Not only does the language of the duty of loyalty appear specifically in Title I of ERISA, but courts have consistently emphasized the importance of this particular fiduciary duty.
The fundamental obligation of a fiduciary in discharging his duties is to act, as stated in Donovan v. Bierwith, “with an eye single to the interests of plan participants and beneficiaries.” According to Bussian v. R. J. Nabisco, Inc., “ERISA’s duty of loyalty is the highest known to the law.”
The Supreme Court has also joined in this chorus, stating in Pegram v. Herdrick, “the most fundamental duty owed by the trustees to the beneficiaries of the trust is the duty of loyalty.”
Section 78 of the Restatement (Third) of Trusts, which the Supreme Court cited in Tibble v. Edison International, is helpful in defining the contours of an ERISA fiduciary’s duty. It lists the three specific components of the duty of loyalty under trust law: 1) except as otherwise provided in the terms of the trust, a trustee has a duty to administer the trust solely in the interest of the beneficiaries; 2) except in discrete circumstances, the trustee is prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee’s fiduciary duties and personal interests; and 3) whether acting in a fiduciary or personal capacity, a trustee has a duty in dealing with a beneficiary to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the transaction.
Thus, under this standard, it is clear that not all breaches of the duty of loyalty involve self-dealing. See, for example, Kujanek v. Houston Poly Bag I Ltd., where withholding of material information from a beneficiary was a breach of the duty of loyalty, and Estate of Becker v. Eastman Kodak, where making materially misleading representations violated the duty of loyalty. Courts have also held—e.g., in Terraza v. Safeway—that, consistent with the duty of loyalty, a fiduciary must disclose all material investment information to plan participants.
In the ERISA context, the duty of loyalty extends to plan participants and beneficiaries, not simply to the plan itself.
At common law, the duty of loyalty and the duty of care are often cited together, and some courts have construed ERISA Section 404 as creating both a duty of loyalty and a duty of prudence, which together impose an “unwavering duty on ERISA trustees to make decisions with a single-minded devotion to plan participants and beneficiaries and, in so doing, to act as a prudent person would act in similar circumstances,” as stated in Krohn v. Huron Memorial Hospital. It is also true that, in a particular case, the duties of prudence and loyalty may be “interrelated and overlapping” (Leber v. Citigroup 401(k) Plan Investment Committee).
However, while there is a linkage between these two duties, in a litigation context, duty of loyalty claims cannot be based solely upon prudence-based allegations. A complaint must present separate allegations relating to the duty of loyalty (Romero v. Nokia, Inc. and White v. Chevron). As the Court of Appeals for the Second Circuit recently affirmed in Rosen v. Prudential Retirement Ins. & Annuity Co., a plaintiff wishing to state a loyalty-based claim under ERISA must do more than “simply recast purported breaches of the duty of prudence as disloyal acts.”
Two other points to be aware of in breach of the duty of loyalty matters: First, there is authority for the proposition that the trustee’s duty of loyalty is an objective test (Washington v. Bert Bell/Pete Rozelle NFL Retirement Plan). Second, just as location is the key in real estate, conduct is the key element in an action alleging breach of the duty of loyalty. As stated in Leber: “The standard for evaluating breach of loyalty claims focuses upon the fiduciary’s conduct and asks whether the fiduciary took all steps necessary to prevent conflicting interests from entering into the decisionmaking process … the proper inquiry has as its central concern the extent to which the fiduciary’s conduct reflects a subordination of participants’ and beneficiaries’ interest to those of a third party.”