Court Rules for SunTrust Defense on Fiduciaries’ ‘Actual Knowledge’ Question

The district court found "the mere fact that the plan included the affiliated funds—and defendants were aware of that fact—is not sufficient to charge them with constructive knowledge of their predecessors’ alleged improper selection process.”

The U.S. District Court for the Northern District of Georgia’s Atlanta Division has ruled once again in an Employee Retirement Income Security Act (ERISA) lawsuit filed against SunTrust Bank.

The underlying lawsuit alleges that SunTrust Bank’s 401(k) plan engaged in corporate self-dealing at the expense of plan participants. The lead plaintiff suggests that plan officials violated their fiduciary duties of loyalty and prudence by selecting a series of proprietary funds (referred to as the STI Classic Funds) that were more expensive and performed worse than other funds they could have included in the plan—and by repeatedly failing to remove or replace the funds.

In 2014, the 11th U.S. Circuit Court of Appeals previously ruled in this matter. Although the 11th U.S. Circuit Court of Appeals disagreed with the District Court’s initial dismissal of certain claims based on ERISA’s three-year statute of limitations, it found all the claims were nonetheless time-barred by ERISA six-year statute of limitations.

The latest ruling out of the Georgia District Court comes on the defendants’ motion for summary judgment on Count VIII of the plaintiffs’ second amended consolidated class action complaint. In its ruling, the District Court grants summary judgement on behalf of the defense.

Case documents show Count VIII alleges certain defendants “were aware that their predecessor fiduciaries had breached their duties in selecting funds and thus breached their own duties by failing to take adequate steps to remedy, within the class period, their predecessors’ breaches in selecting the funds at issue.”

Though it ultimately sides with the defense, the text of the decision goes into significant detail regarding the lack of detail included in committee meeting minutes with respect to genuine deliberation over the investment menu during the class period. The text of the decision also recounts substantial details from the depositions of numerous individual fiduciary defendants.

In its analysis of the facts and legal standards applying in this case, the District Court states that “the issue on this motion for summary judgment is a narrow one.” It concerns simply concerns the predecessor fiduciaries’ initial selection process for the affiliated funds and whether the successor fiduciary defendants may be held liable for failing to remedy those allegedly imprudent selections.

To make this determination, the District Court first considers whether the successor fiduciary defendants needed actual knowledge of their predecessors’ imprudent selections for liability to attach, or whether constructive knowledge is sufficient. Then, the District Court determines whether plaintiffs have sufficiently demonstrated the successor fiduciary defendants had the requisite state of mind regarding their predecessors’ selection process.

“Defendants argue that, for them to be held liable for breaches by the predecessor fiduciaries, they need to have had actual knowledge of the predecessor fiduciaries’ breaches,” the decision explains. “Defendants further argue plaintiffs produced no evidence of actual knowledge by the successor fiduciaries; thus, Count VIII must fail. In response, plaintiffs contend they need only produce evidence that the successor fiduciary defendants had constructive knowledge of or were willfully blind to their predecessors’ breaches. Plaintiffs further submit that summary judgment is generally inappropriate where a party’s state of mind is at issue, as is the case here, because of the critical role of the fact-finder in assessing and weighing such evidence.”

At the core of the plaintiffs’ argument is the theory that Count VIII involves successor fiduciary liability, which they argue is separate and distinct from co-fiduciary liability. Thus, they argue, Count VIII “arises under ERISA’s general fiduciary duty provisions, 29 U.S.C. § 1104, as applied through 29 U.S.C. § 1109.” Furthermore, plaintiffs argue Section 1105 cannot apply, as defendants argue, because “predecessor and successor fiduciaries are not ‘co-fiduciaries’ because they are not fiduciaries at the same time and do not act jointly to manage the plan.”

In ruling for the defense on this complex set of issues, the District Court states that none of the cases cited by plaintiffs use the “constructive knowledge language” the plaintiffs rely on in their arguments. Moreover, the decision states, the cases do not appear to otherwise suggest constructive knowledge is the appropriate standard to apply in this matter.

Plaintiffs argue that, viewed collectively, summary judgement is inappropriate here because there exists a genuine issue of material fact as to whether defendants should have known of the alleged fund selection breaches. The District Court disagrees.

“First, the Court agrees with defendants that plaintiffs’ alleged showing of constructive knowledge assumes defendants had a duty to scour past meeting minutes and interrogate benefits plan committee members for any indication of prior breaches,” the decision explains. “Plaintiffs fail to cite any case justifying such a stringent obligation for defendants, however, and the availability of meeting minutes to defendants does not give them constructive knowledge of everything therein. Moreover, as defendants suggest, there is nothing inherently improper about the inclusion of proprietary funds in the plan.”

This means that, even if the affiliated funds were underperforming during the defendants’ tenure, that would not necessarily spur one to view their original selection as inherently suspect.

“Thus, the mere fact that the plan included the affiliated funds—and defendants were aware of that fact—is not sufficient to charge them with constructive knowledge of their predecessors’ alleged improper selection process,” the decision concludes. “In short, plaintiffs have failed to adduce evidence that defendants had actual knowledge of their predecessors’ breach; defendants thus cannot be liable for failing to remedy the allegedly imprudent selection process for the affiliated funds.”

The full text of the opinion is available here.