Tatum brought a class action on behalf of participants in RJR's 401(k) retirement savings plan, alleging that the company breached its fiduciary duties by liquidating two funds held by the plan without sufficient investigation into the prudence of those actions. Tatum contended that the fiduciaries' action required disposing of stock at a time when its price had reached a low mark, even though analysts at the time were recommending that investors buy or at least hold the stock. After the divestment, the value of the stock increased significantly.
The district court found that RJR provided no evidence of "any process by which fiduciaries investigated, analyzed, or considered the circumstances regarding the Nabisco stocks and whether it was appropriate to divest." Thus, the district court concluded that a breach of fiduciary duty had occurred and that RJR had the burden of demonstrating that its breach did not cause the alleged losses to the plan. The district court determined, however, that RJR had met that burden because its decision was "one which a reasonable and prudent fiduciary could have made after performing such an investigation."
On appeal to the Fourth Circuit, Tatum argued that the district court applied an incorrect standard for determining the causation issue. Specifically, Tatum argued that the lower court "incorrectly considered whether a reasonable fiduciary, after conducting a proper investigation, could have sold the Nabisco Funds at the same time and in the same manner, as opposed to whether a reasonable fiduciary would have done so." RJR, in turn, argued that the correct standard had been applied, but that the district court had erred in its threshold conclusion that a breach had occurred.
The Fourth Circuit first upheld the district court's finding of a breach. "By conducting no investigation, analysis, or review of the circumstances surrounding the divestment, RJR acted with procedural imprudence no matter what level of scrutiny is applied to its actions," the court wrote.
The Fourth Circuit also agreed with Tatum that the district court had applied the incorrect standard. RJR was required to prove that notwithstanding its imprudence, the ultimate investment decision was "objectively prudent." According to the court, "a decision is 'objectively prudent' if 'a hypothetical prudent fiduciary would have made the same decision anyway."
Citing the Supreme Court's opinion in Knight v. Comm'r, 552 U.S. 181 (2008), the court emphasized that this distinction was not merely a matter of semantics. In Knight, the Supreme Court had "instructed that 'could' describes what is merely possible while 'would' describes what is probable." The Fourth Circuit reasoned that "[w]e would diminish ERISA's enforcement provision to an empty shell if we permitted a breaching fiduciary to escape liability by showing nothing more than the mere possibility that a prudent fiduciary 'could have' made the same decision."
The court remanded the case to the district court to apply the more demanding standard.
In a lengthy and vigorous dissent, one of the judges on the panel wrote, among other things, that loss causation "remains part of the plaintiff's burden in establishing monetary liability under ERISA" and that the "minute parsings" of the differences between "would have" and "could have" constituted "semantics at its worst." In the dissenting judge's view, the decision will "lead to ... litigation at every stage behind reasonable investment decisions by ERISA-plan fiduciaries."
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