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Decided: August 4, 2014

The Fourth Circuit affirmed the district court’s holding that the RJR Pension Investment Committee (“RJR Pension”) had breached its fiduciary duty of care to Tatum by divesting a pension plan of certain stock, which resulted in a loss to the pension-holders. The Court also reversed the district courts holding, in favor of RJR Pension, which applied the incorrect standard for rebutting loss causation, and remanded to the district court for an opportunity to apply the correct standard. Finally, the Court reversed the district court’s decision to dismiss two committees as defendants, but affirmed the district court’s decision to not allow Tatum to amend his complaint to add the individual pension committee-members as defendants.

In March 1999, RJR Nabisco decided to spin-off its Nabisco business to protect its Nabisco stock from litigation involving RJ Reynolds tobacco products. Under a pension plan that was created on the date of the spin-off, RJR Pension was supposed to keep the Nabisco stock in the pension “frozen” so that members of the plan could maintain their investments. However, a “working group” made up of RJR employees decided to divest the plan of its Nabisco stock in six months. The stock had been declining in value, and when the group sold it, the pension-holders sustained substantial losses. Shortly after the stock was sold it rebounded, and ultimately appreciated in value compared to when the group sold it. Thereafter, Tatum brought a class action lawsuit against the Benefits Committee, Investment Committee, and RJR Pension for breaching their fiduciary duties under the Employee Retirement Income Security Act (“ERISA”).

The Court agreed with the district court that RJR Pension breached its “duty of procedural prudence” under ERISA because it did not act “solely in the interest of” the pension-holders. RJR Pension failed to conduct a thorough investigation before selling the Nabisco stock, but rather decided to sell based on an “unconfirmed assumption” that the pension was required to do so under ERISA. Further, the decision to sell was out of fear that the RJR company might otherwise face legal liability, when the decision should have considered the pension-holder’s best interests.

Next, the Court reasoned that after Tatum was able to show RJR breached its duty, the burden to refute causation shifted to RJR because “this burden-shifting framework comports with the structure and purpose of ERISA[,]” as well as general trust law principles. To carry its burden, RJR Pension had to show that its decision to sell the Nabisco stock was “objectively prudent.” Although the district court correctly shifted the burden, the Court reversed the district courts holding on the causation issue because the district court applied the wrong standard for refuting causation. The district court held that RJR Pension could carry its burden by showing a prudent fiduciary “could” have made the same decision, when the proper inquiry was whether a prudent fiduciary “would” have made the same decision. Failure to apply the more stringent “would” standard was a “real and legally significant” mistake, rather than harmless error.

Finally, the Court reversed the district court’s decision to dismiss the Benefits and Investment Committees as defendants because, although ERISA does not expressly say “committees” may be liable, the Court reasoned that here they were proper defendants as “person[s] who are fiduciaries[.]” However, the Court affirmed the district court’s decision to deny Tatum’s motion for leave to amend his complaint to name the individual committee members as defendants because he deliberately chose not to name the individuals as defendants in both his initial complaint and his first amended complaint.

Full Opinion

James Bull Sterling