ERISA breach of fiduciary duty: shifting the burden of proving causation to the defendant.

• Author: Clark, Adolyn B.

THE Employee Retirement Income Security Act of 1974 ("ERISA") aimed to protect America's workers. It sought to decrease fraud and guard against harm to beneficiaries. (1) Congress passed ERISA to protect beneficiaries from losing all they had saved because of the wrongful actions of a fiduciary. (2) According to the U.S. Department of Labor, over half of the people who worked in 2012 worked for employers sponsoring a retirement plan. (3) Over sixty-one million people participated in a plan in 2012.

A split of authority currently exists whether the beneficiary can shift the burden of proving causation of losses to the fiduciary. The Fourth, (4) Fifth, (5) and Eighth (6) Circuits have held that the plaintiff can shift this burden, but the Second, (7) Sixth, (8) Ninth, (9) and Eleventh (10) Circuits have held that a shift should not occur. The remaining Circuits have noted the split, but they have declined to make a decision on the issue. (11) It is unclear if the plaintiff must prove causation or can shift that burden to the defendant. Recently, the Supreme Court denied a certiorari petition on this issue. (12) Consequently, the circuits must determine for themselves whether and in what circumstances shifting the burden to prove causation is appropriate.

This article compiles the status of this issue across the country, analyzes the arguments presented in favor of burden-shifting, and argues that the burden of proof for causation should be shifted to the fiduciary but only after the beneficiary meets certain criteria. This shift is based on the common law of trusts, which shifts the burden to the trustee once the beneficiary proves duty, breach, and loss. (13) Although trust law demands the burden shift, this article also suggests the shift is beneficial because the defendant is in a better position to prove causation and promoting such a shift will benefit fiduciary relationships.

1. Background

   Prior to the enactment of ERISA, (14) employee retirement plans lacked adequate funds for plan participants. (13) Participants could not easily access information about their plans, and there were many cases where fiduciaries were engaged in criminal behavior. (16) While Congress attempted to address these issues with various acts of legislation, these problems persisted. (17)

   In addition to the substantive problems with pension plans, there were also problems with the litigation regarding pension plan fiduciary breaches. (18) Benefit plans were subject to "the crazy-quilt system of legal jurisdiction throughout the various states governing non-collectively bargained plans." (19)

   In 1962, President Kennedy appointed the Committee on Corporate Pension Funds. The Committee conducted a study that concluded that the prior legislation was not enough, sparking nine years of Congressional debate. (20) These debates and investigations ultimately resulted in the enactment of the Employee Retirement Income Security Act ("ERISA") in 1974. (21)

   ERISA governs most voluntarily established private-sector retirement plans. (22) It requires the disclosure of certain information to the plan's beneficiaries and sets out standards for each plan. (23) Managing each type of retirement plan requires a fiduciary. (24) The Department of Labor defines the role of a fiduciary as "[u]sing discretion in administering and managing a plan or controlling the plan's assets." (25) Each plan must have at least one named fiduciary. (26) This person must have control over the plan's operations. (27) Typically, a plan's fiduciaries will "include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan's administrative committee, and those who select committee officials. (28) When a person is acting on behalf of the plan, she establishes herself as a fiduciary. (29)

   ERISA defines a fiduciary as:

   Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. (30) ERISA sets out specific duties for fiduciaries in [section] 1104. The Department of Labor offers a useful summary of these duties:

   Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

   * Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

   * Carrying out their duties prudently;

   * Following the plan documents (unless inconsistent with ERISA);

   * Diversifying plan investments; and

   * Paying only reasonable plan expenses.

   The duty to act prudently is one of a fiduciary's central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments ... Prudence focuses on the process for making fiduciary decisions. (31)

   When a fiduciary breaches one of these duties, ERISA [section] 1109 provides language for their liability:

   Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. (32) ERISA is silent on the appropriate placement of the burden for establishing liability. However, trust law generally provides an exception to the general rule that plaintiffs are required to prove all elements of their claim in regard to trustees. Under trust law, the burden of proof may be shifted to the defendant:

   [I]n matters of causation, when a beneficiary has succeeded in proving that the trustee has committed a breach of trust and that a related loss has occurred, the burden shifts to the trustee to prove that the loss would have occurred in the absence of the breach. (33) II. Circuit Split

   Circuit courts are currently split on whether the burden of proving causation can be shifted to the defendant in ERISA breach of fiduciary duty litigation. Three circuits shift the burden to the fiduciary. Five circuits require the beneficiary to prove causation. The remaining circuits have either noted the split and not made a decision or have not dealt with this issue. The Supreme Court has declined to hear this issue, most recently by denying the petition for certiorari from the Fourth Circuit. (34)

   1. Shifting the Burden of Proving Causation to the Defendant

      Those circuits shifting the burden of proving causation to the defendant have done so by relying on trust law principals. (35) The Eighth Circuit acted first in Martin v. Feilen, (36) the Fifth Circuit followed shortly after in McDonald v. Provident Life Insurance Company, (37) and the Fourth Circuit recently made the shift in Tatum v. RJR Investment Committee. (38)

      In Martin v. Feilen, the Eighth Circuit shifted the burden of proving causation. (39) In Martin, the Secretary of Labor brought an action against the business's controlling stockholders, directors, and accountants, alleging they violated their fiduciary duties under ERISA in connection with transactions involving an employee stock ownership plan (ESOP). (40) Feilen Meat Company ("FMC"), a beef boning and breaking business, established an employee profit-sharing plan in the late 1960s. (41) In 1974, FMC created an ESOP, in which the assets of the profit-sharing plan the company previously provided for its employees were placed. (42) Complex transactions led to financial losses. (43) As a result, in 1985, FMC closed and the employees lost their jobs and their entire retirement accounts in the ESOP. (44)

      The district court held that the defendants were ERISA fiduciaries and that they breached their fiduciary duty. The court did not award damages because it claimed the Secretary failed to prove that the breaches of fiduciary duty proximately caused the loss to the ESOP. (45)

      On appeal, the Eighth Circuit noted that the high standards for fiduciaries under ERISA are derived from trust law. (46) The court also relied on trust law for the procedure for ERISA litigation. (47) When discussing the appropriate damages, the court relied on trust law for the basic remedy of a breach of duty. (48)

      The Martin court discussed the issue of a burden shift, it stated:

      In addition, we agree with the Secretary that, once 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 was not attributable to, the breach of duty ... As Judge Friendly commented, "Courts do not take kindly to arguments by fiduciaries who have breached their obligations that, if they had not done this, everything would have been the same. (49) The Fifth Circuit shifted the burden of proof in McDonald v. Provident Indem. Life Ins. Co. (50) The court's decision to make the shift was based on the Eighth Circuit's holding in Roth (51) which depended on the earlier Eighth Circuit's decision in Martin. (52) The McDonald court stated:

      We review these [breach of fiduciary duty] claims under a three step analysis. To establish a claimed...