 Plasterers’ Local Union No. 96 Pension Plan v. Edgar Pepper; James S. Lertora

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 PLASTERERS’ LOCAL UNION NO. 96
PENSION PLAN; CHERIE PLEASANT,
Trustee on behalf of the
Plasterers’ Local Union No. 96
Pension Plan; JAMES MILLER,
Trustee on behalf of the
Plasterers’ Local Union No. 96
Pension Plan,
No. 10-1364 Plaintiffs-Appellees, 
v.
EDGAR PEPPER; JAMES S. LERTORA,
Defendants-Appellants,
and
HAROLD PERRY,
Defendant. 
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Peter J. Messitte, Senior District Judge.
(8:06-cv-00338-PJM)
Argued: September 21, 2011
Decided: December 1, 2011
Before DUNCAN and AGEE, Circuit Judges, and
Damon J. KEITH, Senior Circuit Judge of the United States
Court of Appeals for the Sixth Circuit,
sitting by designation.

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Vacated and remanded by published opinion. Judge Agee
wrote the opinion, in which Judge Duncan and Senior Judge
Keith concurred.
COUNSEL
ARGUED: John Carney Hayes, Jr., NIXON PEABODY,
LLP, Washington, D.C., for Appellants. Jonathan Rose, ALS-
TON & BIRD, LLP, Washington, D.C., for Appellees. ON
BRIEF: Richard S. Siegel, SHEPPARD MULLIN RICHTER
& HAMPTON LLP, Washington, D.C., for Appellees.
OPINION
AGEE, Circuit Judge:
Edgar Pepper and James Lertora (collectively "the Former
Trustees"), former trustees of the Plasterers’ Local Union No.
96 Pension Plan ("the Plan"), appeal from the judgment of the
United States District Court for the District of Maryland in
favor of the current trustees of the Plan ("the Current Trust-
ees"). The district court’s judgment was based on its finding
that the Former Trustees breached their fiduciary duties under
the Employee Retirement Income Security Act ("ERISA"), 29
U.S.C. § 1001 et seq., regarding the investment of Plan assets
as set forth under 29 U.S.C. § 1104(a)(1)(B) and (C). On
appeal, the Former Trustees challenge the district court’s
determination as to liability, its method of calculating dam-
ages, and the award of attorneys’ fees. We conclude that the
district court erred as to each of these issues, and therefore
vacate the judgment and remand the case for further proceed-
ings.
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I.
The Plan is a multiemployer pension plan subject to the
provisions of ERISA and established for the benefit of union
members. A Board of Trustees ("the Board") administers the
Plan and is comprised of union-appointed and employer-
appointed members. All members of the Board are fiduciaries
as set forth under §§ 1002(21)(a) and 1103(a).1 Lertora was a
contributing employer to the Plan and its predecessor plan for
approximately 30 years, and he served on the Board from the
1960s until 2004. At the time of trial, he was 80 years old and
retired. Pepper spent most of his career working in the plaster-
ing industry, and served as a trustee from approximately 1990
to 2005. At the time of trial, Pepper was 74 years old and
semi-retired.
After a predecessor pension fund plan sustained substantial
financial losses in the 1970s and 1980s, the Board imple-
mented the Plan in January 1987. The Board’s primary objec-
tive was to avoid further losses to the Plan’s assets. Toward
that end, in February 1992, the Board voted to invest in certif-
icates of deposit ("CDs") "of less than $100,000 to get better
rates," investing a maximum of $90,000 in any one issuing
bank. (J.A.2 3076.) At a meeting held in the fall of 1995, the
Board approved a suggestion that part of the Plan’s assets "be
invested in staggered one and two year term Treasury bills as
[CDs] mature." (J.A. 3078.) From that point through 2005,
Plan assets were invested entirely in $90,000 CDs and one-to-
two-year Treasury bills.
The Former Trustees and other former Board members tes-
tified that the Board’s objective from the 1990s forward was
"to avoid the risk of losing money" again because they did not
1All statutory references are to ERISA under Title 29, unless otherwise
noted.
2Pagination for citations to the record refer to the joint appendix
("J.A.").
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"want to lose a dime of the men’s money." (J.A. 2433.) They
"didn’t want to hear [about] loss[es]," and they chose and
remained with an investment policy with "guaranteed profit."
(J.A. 2465.) With one exception, neither the Former Trustees
nor the other Board members recalled discussing alternative
investment plans or whether they should create a written
investment plan.
The one exception was a June 2001 Board meeting, at
which a financial advisor with Morgan Stanley was scheduled
to make an investment presentation. Lertora "objected" and
the advisor was "asked to leave" without making the presenta-
tion. (J.A. 3204.) The Board then had the advisor draft a port-
folio proposal setting forth alternative investment strategies.
The record does not reflect that the proposal was discussed at
subsequent Board meetings, although the Board later unani-
mously voted not to change investments because "they were
pleased with the security of the investments." (J.A. 3200.)
Between 2004 and 2005, the Former Trustees and other
Board members were removed from their positions. The Cur-
rent Trustees then filed a complaint in the district court alleg-
ing the Former Trustees and others breached various fiduciary
duties regarding the Plan investments.3 Eight of the original
nine causes of action were dismissed prior to trial and are not
at issue in this appeal. The sole remaining cause of action
("Count V") alleged that the Former Trustees violated
§ 1104(a)(1)(B) for "fail[ure] to research the investment vehi-
cles within which Plan assets were invested to reasonably
assure that investment in such vehicles was prudent when
measured against investment in other vehicles of similar
class," or "to adequately review the investment strategy being
executed on behalf of the Plan to ensure that such strategy
was reasonable and prudent in relation to the funding require-
ments of the Plan, administrative costs incurred by the Plan,
3Pepper was a trustee at the time the Board voted to initiate this suit;
nonetheless, he voted in favor of filing the complaint.
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and real rate of return being earned under such a strategy."
(J.A. 39-40.)
During a three-day bench trial, the Former Trustees and
other witnesses testified about the Board decisions described
above. In addition, the parties each called an expert witness
to testify about investment strategy, prudent investment
decision-making considerations, and how the actual Plan
investments measured against those principles.4
The Current Trustees’ expert witness, Michael Cairns, testi-
fied that a prudent investment strategy would have been a
50/50 mix of S&P 500 and Barclays Capital Aggregate Bond
Index investments. He testified that when looking at the
period from December 31, 2002 to December 31, 2005, such
an investment would have been valued at $432,986.70 more
than the actual value of the Plan’s investments at the end of
2005.5 On cross-examination, Cairns acknowledged that mar-
ket performance is unpredictable, and that looking at a six-
year period from 1999 to 2005, his proposed investment plan
resulted in a valuation differential of only $103,859.01 more
4The trial also proceeded on other claims against another defendant,
Harold Perry, but nothing relating to that defendant is at issue in this
appeal.
5Prior to permitting Cairns to testify, the court heard the Former Trust-
ees’ motion in limine to limit Cairns’ testimony about the differential
between the amount his recommended "prudent investment" would have
generated and the Plan’s actual performance. Current Trustees wanted
Cairns to be able to testify using revised amounts for the Plan’s actual
investment costs that would take a number of factors (e.g., administrative
costs, payouts, and contractor contributions) into consideration that had
not been included in the values provided and used during discovery. The
district court held that Cairns would be limited to testifying using his pre-
trial calculations because of the unfair surprise and resulting prejudice to
the Former Trustees if Cairns were permitted to use the new values.
In light of that ruling, Cairns testified that had the Plan’s assets been
invested in his proposed 50/50 mix from 2003-2005, the Plan would have
been valued at $2,548,049.70. Subtracting the Plan’s actual investment
return of $2,115,063 resulted in the difference in value of $432,986.70.
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than the actual Plan investments. He also testified that his
analysis did not depend on "the specific circumstances of" the
Plan members, such as their age or the number of Plan mem-
bers, because be believed those factors were irrelevant as to
how to prudently invest a mature fund of the Plan’s size. (J.A.
2730-31.)
The Former Trustees’ expert, Frederick Taylor, testified
that the actual investment policy could be considered a pru-
dent investment strategy given the particular characteristics
affecting the Plan, including the declining union membership,
that it was a defined contribution plan, the uncertainties of the
market in the early and mid-2000s, and the Board’s conserva-
tive set of objectives. On cross-examination, Taylor agreed
that the Plan’s assets had not been diversified and that prudent
strategy would entail discussing investment objectives and
reviewing those investments "periodically." (J.A. 2987-88.)
At the conclusion of the evidence, the district court
awarded judgment in favor of the Current Trustees. In ruling
from the bench, the court observed that after the Board autho-
rized purchase of the CDs and Treasury bills,
[T]hat’s it. That’s the investment strategy, if you
will, that goes back to 1991. There’s one investiga-
tion, one consideration, if you will, if there was any
investigation, indeed, and then in 1995 another
investment decision. And it isn’t really until 2002
with the whole Morgan Stanley transaction that
there’s even the possibility of considering a different
investment strategy. We’re talking about seven years
from the last so-called investment decision that’s
made to reconsider and, frankly, the evidence is
somewhat perplexing in that regard because it does
not appear, notwithstanding what the minutes say,
that there was any reasonable consideration given to
the Morgan Stanley plan, that the [advisor] didn’t
really get to make his presentation . . . and basically
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– and I’m referring specifically to Mr. Lertora here,
he just was not of a mind to consider this plan.
(J.A. 3068.) The court then stated that the Board’s "unfavor-
able" experience with the stock market in the seventies,
"seemed to inform all investment decisions for the next . . .
20, 30 years." (J.A. 3068.)
The district court discussed a variety of steps the Board
could have taken to satisfy its duty to investigate investment
options, but observed that the Board failed to do anything of
that nature, which led it to conclude "there is some suggestion
that [they] were not even aware that they had an obligation to
diversify and investigate." (J.A. 3062-63.) Consequently, the
court held
there was a failure to investigate, there was a failure
to diversify and that certainly the message is that in
the future within reasonable periodic spaces, this
board of trustees has to investigate what the invest-
ment options are, to make sure that their decisions
are still viable, which it did not do here.[6]
6While Count V alleges only a breach under § 1104(a)(1)(B)’s duty to
investigate, neither the parties nor the district court did a clear job of dis-
tinguishing between the various duties of a fiduciary and addressing those
duties (and any breach) separately. The district court’s bench ruling
framed the issue in terms of a duty to investigate and a duty to diversify,
but only discussed in any detail the Former Trustees’ failure to investigate
investment options. (J.A. 3067-70.) The Former Trustees point to the com-
plaint to assert that the only issue at trial was whether the Former Trustees
violated subsection (B)’s duty to investigate. However, Federal Rule of
Civil Procedure 15(b)(2) provides that "[w]hen an issue not raised by the
pleadings is tried by the parties’ express or implied consent, it must be
treated in all respects as if raised in the pleadings." "Because notice to the
defendant of the allegations to be proven is essential to sustaining a cause
of action, Rule 15(b) applies only when the defendant has consented to
trial of the non-pled factual issues and will not be prejudiced by amend-
ment of the pleadings to include them." Gilbane Bldg. Co. v. Fed. Reserve
Bank of Richmond, 80 F.3d 895, 901 (4th Cir. 1996).
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(J.A. 3070-71.)
Having found a breach of fiduciary duties to investigate
investment options and to diversify investments, the district
court turned immediately to "what the damages should be."
(J.A. 3071.) The district court adopted Cairns’ testimony
about what a "prudent" investment would have yielded for the
three-year period between 2003 and 2005, and concluded that
$432,986.70 was the proper amount of damages. In so doing,
the court acknowledged that selecting the 2003 to 2005 time
frame for calculating damages was "somewhat sort of picked
out of the air." (J.A. 3071.) But it defended its decision to do
so by noting that the period was "within limitations," "within
the causes of action that [the Current Trustees] brought," and
included a timeframe during which the Former Trustees had
not investigated the Plan’s investments. (J.A. 3071-72.) The
court thereafter granted the Current Trustees’ motion for
attorneys’ fees and costs pursuant to 29 U.S.C. § 1132(g)(1),
and awarded $337,935.01 in fees and $20,014.47 in costs.
The Former Trustees noted a timely appeal, J.A. 3992-93,
and we have jurisdiction under 28 U.S.C. § 1291.
II.
"We review a judgment resulting from a bench trial under
a mixed standard of review—factual findings may be reversed
only if clearly erroneous, while conclusions of law are exam-
ined de novo." Universal Furniture Int’l, Inc. v. Collezione
Europea USA, Inc., 618 F.3d 417, 427 (4th Cir. 2010) (per
It is clear from the record that the parties tried the case and the district
court repeatedly framed the issues as involving the duties contained in
both subsections (B) and (C), thereby including the separate duties of
investigation and diversification. Accordingly, we conclude that the For-
mer Trustees’ argument that their alleged failure to diversify was not an
issue at trial lacks merit.
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curiam) (internal quotation marks and alterations omitted).
"[I]f the district court’s account of the evidence is plausible
in light of the record in its entirety, we will not reverse the
district court’s finding simply because we have become con-
vinced that we would have decided the question of fact differ-
ently." TFWS, Inc. v. Franchot, 572 F.3d 186, 196 (4th Cir.
2009) (internal quotation marks and citations omitted).
In this appeal the Former Trustees contend the district court
erred in holding them liable for a breach of fiduciary duty
because, although the court found a breach of the duty to
investigate, it "made no finding that the [Former Trustees]
held objectively imprudent investments." The Former Trust-
ees assert that this additional finding was a necessary condi-
tion precedent to the award of damages under § 1109(a)
because ERISA fiduciaries are "not liable in damages for
losses resulting from investments that were prudent, even
assuming the fiduciary’s method for selecting the investment
was infirm."7 (Appellants’ Opening Br. 21-25.)
We begin by reviewing the relevant statutory provision,
§ 1104(a), which sets forth the duties of ERISA fiduciaries.
Subsection (B) sets out the basic plan fiduciary duty to act
"with the care, skill, prudence, and diligence under the cir-
cumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the con-
duct of an enterprise of a like character and with like aims."
Subsection (C) requires fiduciaries to "diversify[ ] the invest-
7The Current Trustees assert that this issue has not been properly pre-
served. (Appellees’ Br. 25-34.) We have reviewed the record and conclude
that the Former Trustees adequately preserved their argument for appeal.
For example, during closing arguments, the Former Trustees cited, inter
alia, then-Judge Scalia’s opinion in Fink v. National Savings & Trust Co.,
772 F.2d 951, 961-65 (D.C. Cir. 1985) (Scalia, J., dissenting in part and
concurring in the judgment), supporting their contention that despite a
breach of fiduciary duty, if "there’s no loss, there’s no damage and there’s
no claim" and that the Plan "didn’t suffer any losses, at least while the
[Former Trustees] were in charge." (J.A. 3052-53.)
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ments of the plan so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do
so." § 1104(a)(1)(B), (C).
Although not set out verbatim in the statute, a generally
recognized duty of a Plan fiduciary under subsection (B)
includes that of investigating and reviewing investment
options for an ERISA plan’s assets.8 See DiFelice v. U.S. Air-
ways, Inc., 497 F.3d 410, 418 (4th Cir. 2007) ("[I]n common
parlance, ERISA fiduciaries owe participants duties of pru-
dence and loyalty. To enforce these duties, the court focuses
not only on the merits of a transaction, but also on the thor-
oughness of the investigation into the merits of that transac-
tion.") (internal quotation marks, citation, and alterations
omitted); see also Wright v. Oregon Metallurgical Corp., 360
F.3d 1090, 1097 (9th Cir. 2004) ("A court’s task in evaluating
a fiduciary’s compliance with [§ 1104(a)(1)(B)] is to inquire
whether the individual trustees, at the time they engaged in
the challenged transactions, employed the appropriate meth-
ods to investigate the merits of the investment and to structure
the investment.") (internal quotation marks and citation omit-
ted); In re Unisys Sav. Plan Litig., 74 F.3d 420, 434 (3d Cir.
1996) ("[T]he courts measure section 1104(a)(1)(B)’s ‘pru-
dence’ requirement according to an objective standard, focus-
ing on a fiduciary’s conduct in arriving at an investment
decision, not on its results, and asking whether a fiduciary
employed the appropriate methods to investigate and deter-
mine the merits of a particular investment.").
We note that the Former Trustees are not directly challeng-
ing the district court’s finding that they breached their fidu-
ciary duty to investigate. Indeed, the Former Trustees would
be hard-pressed to make that argument. As the district court
observed, "there is some suggestion that [they] were not even
8We use the term "duty to investigate" herein to reflect the subsection
(B) duty to investigate, research, and review the options for investment of
Plan assets.
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aware they had an obligation to diversify and investigate."
(J.A. 2063.) As described above, the Board followed the same
investment plan from the mid-1990s until 2005, with almost
no review—and arguably no substantive discussion—of other
investment options. Nor do we find fault with the district
court’s finding that the Plan’s assets were not diversified. The
undisputed evidence adduced at trial showed that the Plan’s
assets were invested exclusively in CDs of less than $100,000
and one-to-two year Treasury bills. These two specific find-
ings are not contested on appeal.
What is at issue is the noticeable gap in the district court’s
analysis between its finding that "there was a failure to inves-
tigate, there was a failure to diversify" and its summary ruling
concluding that the Former Trustees were therefore liable in
damages for the difference between the Plan’s actual and
hypothetical investment values. (J.A. 3070-71.) As discussed
below, simply finding a failure to investigate or diversify does
not automatically equate to causation of loss and therefore lia-
bility. The district court failed to analyze whether the pur-
ported losses to the Plan in fact resulted from breaches of duty
by the Former Trustees. The finding that the Former Trustees
breached their fiduciary duties to investigate and diversify did
not establish as a matter of law that the actual investments
were imprudent and liability can only attach if in fact that is
the case. Accordingly, in order to hold the Former Trustees
liable for damages based on their given breach of fiduciary
duty, the district court must first determine that the Former
Trustees’ investments were imprudent. This the district court
failed to do, and ERISA requires an independent finding of
causation of loss before liability for a breach of a fiduciary
duty is incurred.
Section 1109(a) provides that a fiduciary who breaches his
duties "shall be personally liable to make good to such plan
any losses to the plan resulting from each such breach . . . ."
(Emphasis added.) Thus, while certain conduct may be a
breach of an ERISA fiduciary’s duties under § 1104, that
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fiduciary can only be held liable upon a finding that the
breach actually caused a loss to the plan. See Allison v. Bank
One – Denver, 289 F.3d 1223, 1239 (10th Cir. 2002) ("The
phrase ‘resulting from’ indicates that there must be a showing
of ‘some causal link between the alleged breach . . . and the
loss plaintiff seeks to recover."); Friend v. Sanwa Bank, 35
F.3d 466, 469 (9th Cir. 1994) ("ERISA holds a trustee liable
for a breach of fiduciary duty only to the extent that losses to
the plan result from the breach."); Willett v. Blue Cross and
Blue Shield, 953 F.2d 1335, 1343 (11th Cir. 1992) ("Section
[1109(a)] of ERISA establishes than an action exists to
recover losses that ‘resulted’ from the breach of fiduciary
duty; thus the statute does require that the breach of the fidu-
ciary duty be the proximate cause of the losses claimed
. . . ."); Brandt v. Grounds, 687 F.2d 895, 898 (7th Cir. 1982)
(Under § 1109(a), "a causal connection is required between
the breach of the fiduciary duty and the losses incurred by the
plan."). As the Seventh Circuit observed in Brock v. Robbins,
830 F.2d 640 (7th Cir. 1987):
If trustees act imprudently, but not dishonestly, they
should not have to pay a monetary penalty for their
imprudent judgment so long as it does not result in
a loss to the Fund. The entire statutory scheme of
ERISA demonstrates that Congress’ overriding con-
cern in enacting the law was to insure that the assets
of benefit funds were protected for plan beneficia-
ries. The only possible statutory purpose for impos-
ing a monetary penalty for imprudent but harmless
conduct would be to deter other similar imprudent
conduct. However, honest but potentially imprudent
trustees are adequately deterred from engaging in
imprudent conduct by the knowledge that imprudent
conduct will usually result in a loss to the fund, a
loss for which they will be monetarily penalized.
This monetary sanction adequately deters honest but
potentially imprudent trustees. Any additional deter-
rent value created by the imposition of a monetary
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penalty is marginal at best. No ERISA provision jus-
tifies the imposition of such a penalty.
Id. at 647 (internal citation omitted).
It is not enough, then, for the district court to have found
that a breach of fiduciary duty occurred because the Former
Trustees failed to investigate investment options. The Former
Trustees can only be held liable for losses to the Plan actually
resulting from their failure to investigate. The district court
never undertook to determine what losses to the Plan, if any,
"result[ed] from" the breaches of fiduciary duty that it identi-
fied. Instead, it awarded damages that were calculated based
on the assumption that there had been an imprudent invest-
ment. But the mere fact that the Former Trustees failed to
investigate alternative investment options does not mean that
their actual investments were necessarily imprudent ones.9
9We recognize that the district court was without the benefit of specific
circuit guidance on this issue. We had not directly held that a trustee can
only be held liable for plan losses that actually resulted from a failure to
investigate, but having now considered the issue, we join our sister circuits
to so hold. See Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d
270, 279 (2nd Cir. 1992) ("The last element in this cause of action is proof
of a causal connection between the fraud perpetrated and the loss com-
plained of. The same causal connection is required between a breach of
fiduciary duty and the loss alleged."); In re Unisys Savings Plan Litiga-
tion, 173 F.3d 145, 154 (3d Cir. 1999) ("we are satisfied that the district
court’s holdings that [fiduciary] was prudent, and in the alternative, that
a hypothetical prudent fiduciary would have made the same investments,
are supported by the evidence."); Bussian v. RJR Nabisco Inc., 223 F.3d
286, 300 (5th Cir. 2000) ("ERISA’s obligations are nonetheless satisfied
if the [investment] selected would have been chosen had the fiduciary con-
ducted a proper investigation"); Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th
Cir. 1995) ("However, a fiduciary’s failure to investigate an investment
decision alone is not sufficient to show that the decision was not reason-
able. Instead, . . . in an effort to hold the fiduciary liable for a loss attribut-
able to this investment decision, a plaintiff must show a causal link
between the failure to investigate and the harm suffered by the plan");
Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir.
2004) (adopting Kuper); Willett v. Blue Cross & Blue Shield, 953 F.2d
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"Even if a trustee failed to conduct an investigation before
making a decision, he is insulated from liability [under
§ 1109(a)] if a hypothetical prudent fiduciary would have
made the same decision anyway." Roth v. Sawyer-Cleator
Lumber Co., 16 F.3d 915, 919 (8th Cir. 1994). "It is the
imprudent investment rather than the failure to investigate and
evaluate that is the basis of suit; breach of the latter duty is
merely evidence bearing upon breach of the former, tending
to show that the trustee should have known more than he
knew." Fink, 772 F.2d at 962 (emphasis in original). Thus,
while a failure to investigate is a breach of ERISA fiduciary
duty under § 1104(a)(1)(B), causation of loss is not an axiom-
atic conclusion that flows from a breach of that duty.
It was incumbent on the district court to determine whether
the Former Trustees’ failure to investigate caused them to
make imprudent investments, such that there was a loss to the
Plan for purposes of liability for those losses under § 1109(a).
The district court did not undertake that analysis and, in fact,
expressly left open the possibility that after satisfying their
duty to investigate, the Former Trustees "might well have,
although it seems somewhat unlikely, but they have [sic]
might well have arrived at the strategy that, in fact, they con-
tinued over time, although I think that’s unlikely." (J.A. 3069-
70.) Because the court never found that the failure to investi-
gate investment options led to imprudent investments or oth-
erwise found that the investments were objectively imprudent,
its analysis lacked the essential element of causation. Simply
finding a breach of the duty to investigate was insufficient to
hold the Former Trustees’ liable for losses to the Plan.
Similarly, the district court’s finding that there was a failure
to diversify is insufficient, in and of itself, to impose liability
1335, 1343 (11th Cir. 1992) ("Section 409 of ERISA establishes that an
action exists to recover losses that ‘resulted’ from the breach of a fiduciary
duty; thus, the statute does require that the breach of the fiduciary duty be
the proximate cause of the losses claimed by plaintiffs.").
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upon the Former Trustees. For purposes of holding a fiduciary
liable for a breach of the duty to diversify, the district court
was required to find more than just that the Former Trustees
failed to diversify the Plan’s assets. As the plain language of
subsection (C) provides, plan assets must be diversified "un-
less under the circumstances it is clearly prudent not to do
so." The district court never undertook this second part of the
statutory analysis that is required in order to find a violation
of subsection (C), which results in liability of the fiduciary. It
never discussed any of the evidence presented by the Former
Trustees as to why they opted against diversifying Plan assets,
nor did it conclude that those reasons were not "clearly pru-
dent." The district court’s analysis thus lacked the necessary
statutory finding that the failure to diversify caused a clearly
imprudent investment under the circumstances. Without the
specific finding that the failure of the subsection (C) duty to
diversify caused imprudent investment, the Former Trustees
could not be held liable under § 1109(a) for losses to the Plan,
if indeed any such losses occurred.
In so much as the district court failed to make the required
findings of causation necessary to establish liability for a
breach of either the subsection (B) or (C) fiduciary duties, we
must remand the case for the court to determine the prudence
of the Former Trustees’ actual investments. On remand, the
court should consider the factors identified in subsections (B)
and (C) that are relevant to the determination of prudent con-
duct. Subsection (B) states that fiduciaries discharge their
duties "with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims." § 1104(a)(1)(B) (emphasis added). Similarly, subsec-
tion (C) requires fiduciaries to diversify investments to mini-
mize the risk of large losses "unless under the circumstances
it is clearly prudent not to do so." § 1104(a)(1)(C) (emphasis
added). In analyzing the prudence of the Former Trustees’
actions, the court will need to make whatever necessary fac-
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tual findings are relevant to determining what "circum-
stances" informed their decision-making, including the unique
circumstances of the Plan. These include, but are not limited
to, the Plan’s size and type, the Plan members’ demographics,
and the Board’s goal and objectives. We identify these factors
as items relevant to the court’s analysis, but express no opin-
ion as to what factual findings the court will make or how that
will influence its decision as to whether the Former Trustees’
investment of the Plan’s assets was prudent.
Lastly, we note that the court will need to determine who
carries the burden of proving causation. While the plaintiff
bears the burden of at least making a prima facie showing that
there was a breach of fiduciary duty and that there was some
sort of loss to the Plan, the circuit courts of appeals are split
as to which party must demonstrate that the loss resulted from
the breach. Compare, e.g., Silverman v. Mutual Benefit Life
Ins. Co., 138 F.3d 98, 104 (2d Cir. 1998) (holding a plaintiff
"must show some causal link between the alleged breach of
[the fiduciary’s] duty and the loss plaintiff seeks to recover",
and Kuper v. Iovenko, 66 F.3d 1447, 1459-60 (6th Cir. 1995)
(stating "a plaintiff must demonstrate than an adequate inves-
tigation would have revealed to a reasonable fiduciary that the
investment at issue was improvident"), with McDonald v.
Provident Indem. Life Ins. Co., 60 F.3d 234, 237 (5th Cir.
1995) (holding that while the plaintiff bears the initial burden
of proving the breach and establishing a prima facie case of
loss to the plan’s assets, upon doing so, the burden shifts to
the defendant fiduciary to prove that the loss was not caused
by his breach), and Martin v. Feilen, 965 F.2d 660, 671 (8th
Cir. 1992) ("[O]nce the ERISA plaintiff has proved a breach
of fiduciary duty and a prima facie case of loss to the plan or
ill-gotten profit to the fiduciary, the burden of persuasion
shifts to the fiduciary to prove that the loss was not caused by,
or his profit not attributable to, the breach of duty."). We
express no opinion as to which approach is appropriate, and
leave to the district court to consider the parties’ arguments
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upon remand to determine the method most consistent with
the relevant statutory provisions.
III.
Upon remand, should the district court find that the Former
Trustees are liable for losses to the Plan attributable to a
breach of their ERISA fiduciary duties, the court would be
required to consider the proper measure of damages. For the
reasons described below, we find the district court’s determi-
nation of the amount of damages to have been in error. To aid
the parties and the district court in the event they revisit the
issue of what, if any, damages exist in this case, we feel it
prudent to draw attention to mistakes in the district court’s
analysis of the calculation of damages. See Goodman v. Prax-
air, Inc., 494 F.3d 458, 466 n.2 (4th Cir. 2007) ("[O]ur court
regularly issues opinions to provide guidance on remand in
the interest of judicial efficiency."). Specifically, we conclude
that the district court’s explanation for awarding damages in
the amount of $432,986.70 was insufficient for us to deter-
mine whether the award was proper, even if we were able to
reach the issue on its merits.
The district court concluded that the Plan suffered a loss of
$432,986.70 as a result of the Former Trustees’ breach, using
Cairns’ proposed investment strategy, the pretrial actual value
of the Plan’s assets, and calculating the difference in value
during the 2003-2005 period. The court then stated:
Now, is that somewhat sort of picked out of the air
because I picked that period of time as opposed to a
six-year period or look retrospectively at the item?
Yes, it is, but it still is within the framework or even
within that confined time there wasn’t any appropri-
ate investigation as to what the options were to see
whether diversification was appropriate. And within
that time line, that’s allowing a three-year period for
review. It’s within limitations. It’s within the causes
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of action that they brought. Had they tried to recover
for some other period of time, it might have resulted
in other results. But the way the court has decided
the case, this is essentially the only period of time
that remained viable under the various theories that
were floated by the [Current Trustees] in this case.
(J.A. 3071-72 (emphasis added).)
The district court thus failed to articulate a reasoned basis
for awarding damages based on the three-year period of 2003
to 2005.10 Neither party disputed that the proper measure of
damages in this case would be the comparison of what the
Plan actually earned with what the Plan would have earned
had the assets been prudently invested (assuming that the
Plan’s actual investment was imprudent). Instead, the dispute
centers on what period of time to use as the basis of the dam-
ages calculation.11 That decision is dispositive of the amount
10Our analysis is limited to the conclusion that the district court erred
by failing to articulate the basis for limiting the relevant time frame for the
calculation of damages to the three-year period it used. We make no com-
ment on the objective appropriateness of calculating damages based on
that time frame, and leave to the district court to consider the parties’ argu-
ments and state its reasons for the result it chooses. In addition, we do not
rely on or address any of the arguments as to the proper values to be used
in calculating damages over any particular period of time. That will also
be an issue for the parties to argue and the district court to determine on
remand.
11The Former Trustees’ closing arguments drew the district court’s
attention repeatedly to how important the time frame was to determining
the amount of damages. See J.A. 3053 ("[The amount of damages calcu-
lated under Cairns’ approach] depends entirely on the time frame you
select."), 3054 ("[I]n the history of this case, the [Current Trustees] ha[ve]
contended for four separate time frames, depending on what suited them
at any particularly moment."), 3055 ("[T]his hypothetical comparison
between what a portfolio would be worth on a particular day and what it
was actually worth is completely dependent on the time frame you select,
completely and utterly."), and 3055-56 ("[I]f you start the calculation from
2000 . . . you don’t get the 432,000, . . . [y]ou get 103,000 as the loss –
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of damages in this case because—as set out above using just
the arguments and amounts the parties set forth at trial—a
three-year versus six-year damages period substantially
changed the amount of loss that occurred. Moreover, the For-
mer Trustees argue that using the Plan’s Form 5500s and
related audit reports, their actual investments outperformed
the Cairns’ model by $55,000 over a six-year period. If that
projection is accurate, no damages were in fact incurred by
the Plan and the district court did not address why this calcu-
lation was incorrect.
Damages, if any exist, are determined based on the time
period to which the investment analysis is applied. Different
time frames result in distinctively different damage amounts
and must have a clearly articulated and reasoned basis. Pick-
ing the 2003 to 2005 time period "out of the air" is clearly not
a reasoned basis and constitutes reversible error as a matter of
law. At trial and on appeal, both parties proffer bases on
which the decision as to a time period could be supported or
rejected, for example, by pointing to various ERISA statutes
of limitation, which include both three and six-year periods,
depending on certain factual findings. On remand, if the dis-
trict court reaches the issue of damages, the court must articu-
late the reasoned basis for awarding damages based on a
particular time period.
IV.
A district court "in its discretion may allow a reasonable
attorney’s fee and costs of action to either party" in an ERISA
action. 29 U.S.C. § 1132(g)(1). In so much as we reverse the
as the ‘loss’ here, which I respectfully submit is illustrative of how arbi-
trary and speculative plaintiffs’ damages theory is."). Despite having been
made aware of the importance of this factor to calculating the appropriate
amount of damages, the district court failed to explain the basis for its
decision to select one time period over another.
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district court’s determinations as to liability and damages, the
award of attorneys’ fees and costs is reversed as well.
Because the issue of attorneys’ fees is likely to arise again on
remand regardless of which party prevails, we will briefly
address the Former Trustees’ argument that the district court
improperly analyzed whether such an award was appropriate
in this case. See Goodman, 494 F.3d at 466 n.2. The court’s
decision to award fees is reviewed for abuse of discretion,
Mid. Atl. Servs., LLC v. Sereboff, 407 F.3d 212, 221 (4th Cir.
2005), and its factual findings are reviewed for clear error.
Carolina Care Plan, Inc. v. McKenzie, 467 F.3d 383, 390 (4th
Cir. 2006), overruled on other grounds by Champion v. Black
& Decker (U.S.) Inc., 550 F.3d 353, 360 (4th Cir. 2008).
Following trial, the district court granted the Current Trust-
ees’ motion for attorneys’ fees and costs, and awarded them
$337,935.01 in fees and $20,014.47 in costs ("the fee award").
In deciding whether a fee award was appropriate in this case,
the district court relied on the five-factor test this Court
adopted in Quesinberry v. Life Ins. Co. of N. Am., 987 F.2d
1017 (4th Cir. 1993) (en banc). The court specifically
addressed three of the five Quesinberry factors and concluded
those favored awarding attorneys’ fees to the Current Trust-
ees. Specifically, it concluded that the breach of fiduciary
duty constituted more than mere negligence or error and dem-
onstrated a sufficient level of culpability to support an award,
that the Former Trustees would be able to pay a fee award,
and that the Current Trustees brought the litigation for Plan-
wide—rather than personal—benefit. In addressing the ability
to pay factor, the district court explained:
It would blink at reality for [the court] to confine its
consideration to the obviously modest circumstances
of the two individual [Former Trustees] who remain
in the case. The parties do not dispute that there is
an insurance policy which covers errors and omis-
sions of the [Former Trustees]. Accordingly, this is
not a case where [they] will have difficulty paying
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the award out of their own pockets, nor will the
award be paid out of the plan assets.
(J.A. 3923.)
On appeal, the Former Trustees contend that the fee award
was improper because, inter alia, the district court erred in
concluding the Former Trustees’ conduct was sufficiently cul-
pable to warrant the fee award and it clearly erred in finding
that the Former Trustees were able to pay such an award. As
to this latter factor, the Former Trustees argue they are "older
gentlemen of limited means" and that it was error to assume
an insurance policy would cover any fee award imposed
against them. In reply, the Current Trustees point to an inter-
vening Supreme Court decision—Hardt v. Reliance Standard
Life Ins. Co., 130 S. Ct. 2149 (2010)—to contend the district
court did not have to undertake the Quesinberry analysis, and
that the Current Trustees satisfied the statutory and Hardt
standard for whether a fee award is appropriate. They also
assert the district court did not clearly err in finding the For-
mer Trustees were able to pay the fee award based on insur-
ance policy coverage.
In Williams v. Metropolitan Life Insurance Co., 609 F.3d
622 (4th Cir. 2010), we acknowledged that Hardt required us
"to change our analytical approach to the review of an attor-
neys’ fees award in an ERISA case," and that the Supreme
Court’s "category of litigants eligible for an attorneys’ fees
award in an ERISA action is broader than under our prior
standard." Id. at 634. Hardt held that in deciding to award
attorneys’ fees, a court must be able to "fairly call the out-
come of the litigation some success on the merits without con-
ducting a lengthy inquir[y] into the question whether a
particular party’s success was substantial or occurred on a
central issue." 130 S. Ct. at 2158 (internal quotation marks
omitted). The Supreme Court specifically noted that its hold-
ing did not foreclose circuit courts of appeals from relying on
a Quesinberry-type analysis as an additional means of review-
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ing the district court’s exercise of its discretion once a claim-
ant is found to be eligible for an award of attorneys’ fees
under § 1132(g)(1). Id. at 2158 n.8.
We held in Williams that after conducting the analysis set
forth in Hardt, courts in the Fourth Circuit should "continue
to apply the general guidelines that we identified in Quesin-
berry when exercising [their] discretion to award attorneys’
fees to an eligible party." 609 F.3d at 635. The Quesinberry
factors are:
(1) degree of opposing parties’ culpability or bad
faith;
(2) ability of opposing parties to satisfy an award
of attorneys’ fees;
(3) whether an award of attorneys’ fees against the
opposing parties would deter other persons act-
ing under similar circumstances;
(4) whether the parties requesting attorneys’ fees
sought to benefit all participants and beneficia-
ries of a plan or to resolve a significant legal
question regarding ERISA itself; and
(5) the relative merits of the parties’ positions.
Quesinberry, 987 F.2d at 1029.
On remand, the court should use the Hardt analysis to first
determine whether either party is eligible for an attorneys’ fee
award, and then analyze the Quesinberry factors in exercising
its discretion whether to make an award in this case. As
always, the Quesinberry factors are "general guidelines" and
not a "rigid test" for when attorneys’ fees are appropriate.
Williams, 609 F.3d at 636. The district court must ensure that
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the record supports any factual findings underlying how it
weighs the Quesinberry factors.
When previously considering those factors, the court
clearly erred in finding that an insurance policy would pay the
fee award and that the Former Trustees thus were able to pay
any such award. Although the record contains scattered refer-
ences to the existence of an insurance policy, the policy is not
in the record, nor is there any evidence regarding its terms.
Similarly, at oral argument, the parties could point solely to
the existence of a policy. But there was no evidence to support
the court’s determination that the Former Trustees would not
have to personally satisfy the fee award because there is no
evidence in the record as to the terms of the insurance policy.
Without information regarding the nature of the cover-
age—the type and terms of coverage, including policy limits
and exclusions—the court could not properly conclude that
the Former Trustees were able to pay a fee award.
Should the court be required to determine the appropriate-
ness of attorneys’ fees and costs following the remand, it will
need to assess the record before it at that time to determine
whether such an award is warranted in light of the above con-
siderations. We make no comment on the appropriateness of
such an award to either of the parties in this case, but simply
note the court’s error regarding how the ability to pay factor
should be analyzed in light of the court’s previous clear error.
V.
For the reasons set forth above, we vacate the district
court’s judgment and remand for further proceedings consis-
tent with this opinion.
VACATED AND REMANDED
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