Donovan v. Bierwirth
6 Employee Benefits Cas. (BNA) 1033, 78 A.L.R. Fed. 91, 754 F.2d 1049 (1985)
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Rule of Law:
Under ERISA § 409, the measure of loss resulting from a fiduciary's breach of duty is the difference between what the plan actually earned on the improper investment and what the plan would have earned had the funds been invested prudently in an available alternative.
Facts:
- LTV Corporation made a tender offer to purchase a controlling interest in Grumman Corporation for $45 per share.
- At the time, the Grumman Corporation Pension Plan held approximately 525,000 shares of Grumman stock.
- The Plan's Trustees, John C. Bierwirth, Robert G. Freese, and Carl A. Paladino, were also high-ranking corporate officers of Grumman.
- The Trustees decided not to tender the Plan's existing shares to LTV.
- On October 12 and 13, 1981, to defeat the tender offer, the Trustees used Plan funds to purchase an additional 1,158,000 shares of Grumman stock at market prices ranging from $36 to $39.34 per share.
- After the tender offer ultimately failed, the price of Grumman stock fell to approximately $23 per share.
- About 17 months later, the Trustees sold the improperly purchased stock for $47.55 per share, realizing a net profit of over $13 million for the Plan.
Procedural Posture:
- The Secretary of Labor and a plan participant, Robert Lawrence, sued the Trustees of the Grumman Pension Plan in the U.S. District Court for the Eastern District of New York for breach of fiduciary duty.
- The district court granted a preliminary injunction, finding the plaintiffs showed a likelihood of success on their claim that the Trustees acted imprudently.
- The U.S. Court of Appeals for the Second Circuit affirmed the preliminary injunction as modified.
- On remand, the district court held a bench trial limited to the issue of whether the Plan suffered a 'loss'.
- The district court found that because the Grumman stock was eventually sold for more than its purchase price, the Plan suffered no loss, and dismissed the complaint.
- The Secretary of Labor and Lawrence, as plaintiffs-appellants, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does a "loss" exist under ERISA § 409 when pension plan fiduciaries purchase securities in breach of their duty but later sell those securities for a price that exceeds the purchase price?
Opinions:
Majority - Pierce, Circuit Judge
Yes, a loss can exist under ERISA § 409 even if an improperly purchased asset is later sold for a profit. The proper measure of loss requires a comparison of what the plan actually earned on the investment with what it would have earned if the funds had been available for other, proper plan purposes. The court rejected the Trustees' argument that no loss occurred simply because the sale price exceeded the purchase price, as this ignores the opportunity cost of forgoing more profitable, prudent investments. The court also rejected the Secretary of Labor's proposed measure of loss—the difference between the purchase price and a hypothetical 'fair value' at the time of purchase—because the stock was bought at the public market price without any fraud or concealment of information. Drawing from the common law of trusts, the court reasoned that the goal of a remedy is to restore beneficiaries to the position they would have been in 'but for' the breach. Therefore, the loss is the difference between what a prudent alternative investment would have returned and what the improper investment actually returned.
Analysis:
This decision established a significant precedent for calculating damages in ERISA fiduciary breach cases by incorporating the concept of opportunity cost. It moves beyond a simple 'out-of-pocket' loss calculation and affirms that a fiduciary can be liable for a 'loss' even if an improper investment ultimately yields a nominal profit. This holding broadens the scope of potential liability for fiduciaries, particularly in the context of corporate control contests where their loyalties may be divided. By focusing on what a prudent investment would have earned, the ruling strengthens protections for plan beneficiaries and creates a stronger deterrent against imprudent or self-interested investment decisions.
