What Does Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp. Tell Us About the Current Judicial Approach to Breach of Fiduciary Duty Cases?

For many years, I argued on this blog that courts, when it came to ERISA breach of fiduciary duty cases, were too slow to decide cases on the facts and too quick to decide them on the basis of judicial assumptions or, worse yet, legal presumptions. I criticized this roundly in my article "Retreat from the High Water Mark," where I discussed the different outcomes in excessive fees cases between those where the courts made certain assumptions about the mutual fund marketplace and those where the courts took evidence on that issue before deciding the case. As I have often written, both on this blog and elsewhere, the world often looks much different after evidence is taken than it does before.

Certainly, particularly after Iqbal and Twombly – which were needed correctives to certain aspects of federal practice – there is room for dismissing poorly pled or weakly supported breach of fiduciary duty cases right at the get go, by means of motions to dismiss. The problem, though, came when courts went beyond simply considering whether the acts alleged in the complaint were sufficient to describe a breach of fiduciary duty claim under generally accepted principles concerning such claims, for instance whether the complaint alleged fiduciary status and facts indicating a lack of prudence, and instead moved onto dismissing claims that satisfied those standards by creating presumptions that established separate and additional pleading barriers to prosecuting such a claim, as occurred with the Moench presumption, or by assuming knowledge of the investment practices and world at issue as a basis for dismissal that could not be found in the record at the time the motion was decided, as the Seventh Circuit arguably did in Hecker.

For those of you who have been paying attention, I haven’t written much on that theme lately, and there is a reason for it: presumably independent of anything I have written, courts have begun doing exactly what I argued for, and the pendulum has now firmly swung towards courts deciding such cases on their merits after considering the evidence. Indeed, Fifth Third Bancorp v. Dudenhoeffer, with its rejection of the Moench presumption, may have signaled to lower courts the need to decide all breach of fiduciary duty cases on their merits and not on the creation of legal presumptions or judicial assumptions based on sources beyond the ERISA statute itself or the evidence in a given case.

This jumped out at me when I read this Bloomberg BNA article on the Northern District of Illinois’ decision the other day (actually, while I was at depositions in Chicago, around the corner from the court, metaphorically speaking) in Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp., followed by a reading of the decision itself. The Bloomberg BNA article nicely sums up the events that gave rise to the lawsuit, explaining that:

In 2006, the Teamsters plan authorized BNY Mellon to lend securities from the plan's accounts in return for collateral that would then be invested in certain approved investments. The goal was to provide the plan incremental returns without exposure to the substantial risk often present in speculative investments.

As part of this securities lending program, BNY Mellon purchased almost $25 million in Lehman-backed floating rate notes.

As Lehman's financial condition deteriorated and ultimately collapsed, the Teamsters plan suffered a $24.5 million deficiency from the note held by BNY Mellon.

The plan filed suit against two BNY entities, accusing them of fiduciary imprudence and disloyalty under the Employee Retirement Income Security Act.

BNY Mellon sought to have the case resolved on the pleadings by arguing that Dudenhoffer established legal rules that bar the claim, on the thesis that the defendants, after Dudenhoffer, could not be liable for breach of fiduciary duty for having failed to “[recognize,] based on publicly-available information alone, that Lehman's debt was over-valued.”

The Court, though, rejected this argument, ruling that:

Defendants' argument about the impact of Fifth Third is based upon a reading of the complaint that is too narrow. The Court does not read the plaintiffs' complaint as alleging that the defendants lacked prescience or that they should have recognized from the information available in the market that the Lehman bonds were over-valued. Rather, the plaintiffs allege that, under the circumstances as they existed in the market at the time, no reasonably prudent securities lending fiduciary would have concluded that Lehman debt was a sufficiently safe investment for a securities lending client and no reasonably prudent securities lending fiduciary would have maintained the collateral investments in the Lehman Notes through Lehman's bankruptcy filing. Thus the claim is not that the defendants were imprudent in failing to recognize that Lehman would file for bankruptcy and not pay out on the notes, but that it was imprudent to hold the Lehman debt, given the circumstances existing in the market and given the plaintiffs' investment profile. Nothing in Fifth Third forecloses such claims.

In short, the Court concluded that the complaint pled the standard elements to show a breach of fiduciary duty, namely a lack of prudence under the then prevailing circumstances, and that such a claim was entitled to proceed to an adjudication on its merits, after discovery. This is a far cry from the day, not too long ago, that many such claims never made it past the pleading stage and into discovery, at which point a court could decide whether a fiduciary breach occurred by looking at all of the evidence, learned during discovery, of what was actually done, and under what circumstances, by the fiduciaries of a plan. As I have said before, the world often looks different in that light than it does when early, preliminary motions in a case are filed.