For Whom the Plan Tolls: Tatum v. Rjr Pension Investment Committee and the Emergence of Exacting Scrutiny Awaiting Fiduciaries in Breach in the Erisa Litigation Landscape Post Dudenhoeffer

• Jurisdiction: United States,Federal
• Citation: Vol. 49
• Publication year: 2022

49 Creighton L. Rev. 437. FOR WHOM THE PLAN TOLLS: TATUM v. RJR PENSION INVESTMENT COMMITTEE AND THE EMERGENCE OF EXACTING SCRUTINY AWAITING FIDUCIARIES IN BREACH IN THE ERISA LITIGATION LANDSCAPE POST DUDENHOEFFER

FOR WHOM THE PLAN TOLLS: TATUM v. RJR PENSION INVESTMENT COMMITTEE AND THE EMERGENCE OF EXACTING SCRUTINY AWAITING FIDUCIARIES IN BREACH IN THE ERISA LITIGATION LANDSCAPE POST DUDENHOEFFER

Peter M. Langdon

I. INTRODUCTION

The Employee Retirement Income Security Act, as amended ("ER-ISA"), was enacted in 1974.(fn1) The primary purpose and special nature of ERISA is to secure the protection of private individual pension rights and retirement viability of participants.(fn2) In the second quarter of fiscal year 2015, between April 1 and June 30, private and public pension net assets totaled $390.4 billion.(fn3) Recently, ERISA litigation has burgeoned and the United States Supreme Court has acknowledged the importance of ERISA.(fn4) The Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer(fn5) began to shed light on the shifting burden of proof in ERISA litigation.(fn6) However, the Supreme Court has refrained from entering into the litigation landscape post- Dudenhoeffer, rendering the landscape unclear as to who bears the burden of proof in ERISA fiduciary breach litigation proceedings.(fn7)

Tatum v. RJR Pension Investment Committee(fn8) concerned Richard Tatum of RJR Tobacco Company ("RJR"), the second largest tobacco company in the United States, who represented a certified class, which incurred a substantial loss to a 401(k) plan.(fn9) The loss occurred as a result of a stock divestment executed by the fiduciaries of the sponsored employee benefit plan.(fn10) Tatum filed suit in the United States District Court for the Middle District of North Carolina, alleging, inter alia, that RJR breached its fiduciary duty under section 404 of ERISA, 29 U.S.C. § 1104(a)(1)(B).(fn11) Eventually, the United States Court of Appeals for the Fourth Circuit affirmed the district court's holding that RJR breached its fiduciary duty by failing to exercise procedural prudence.(fn12) The circuit court reasoned RJR failed to conduct any semblance of an investigation or analysis of the divestment and executed the divestment on an arbitrary timeline.(fn13)

As a corollary, the circuit court declared that once Tatum established breach and a prima facie case of loss to the plan, the burden of proof for causation shifted to RJR.(fn14) The burden-shifting structure is in conformity with the special nature and purpose of ERISA, the common law of trusts, and sister circuit decisions.(fn15) Furthermore, the circuit court declared that, to carry the burden, RJR must prove the decision to divest the stock was objectively prudent.(fn16) Essentially, the Fourth Circuit declared a fiduciary must demonstrate that any other fiduciary would have rather than could have derived the same result.(fn17) The court stated the would have standard was more difficult to satisfy than the could have standard, which was the intended result.(fn18)

This Note will first review Tatum's facts and holding.(fn19) This Note will then discuss the legislative and judicial history of the ERISA fiduciary provisions.(fn20) This Note will argue the Fourth Circuit correctly interpreted and appropriately applied the burden-shifting framework under existing ERISA breach of fiduciary duty case law.(fn21) This Note will show Congress intended to apply specific trust law principles to ERISA fiduciaries, and this intent has been solidified by the United States Supreme Court.(fn22) This Note will also demonstrate that the Eighth and Second Circuits correctly interpreted the law regarding ERISA fiduciary breach, which originated from Congress and was solidified by the Court.(fn23) Finally, this Note will conclude that Tatum correctly interpreted ERISA fiduciary breach law from Congress, the Court, and sister circuits, and appropriately applied the burden-shifting framework as to loss causation under ERISA breach of fiduciary duty cases.(fn24)

II. FACTS AND HOLDING

In Tatum v. RJR Pension Investment Committee,(fn25) Richard Tatum, a participant in R.J. Reynolds Tobacco Company's ("RJR") sponsored employee benefits plan, filed a class action lawsuit on behalf of all similarly situated participants of the RJR 401(k) plan.(fn26) Tatum sued RJR, R.J. Reynolds Pension Investment Committee ("Investment Committee"), and R.J. Reynolds Employee Benefits Committee ("Benefits Committee").(fn27) Tatum alleged that RJR, as plan fiduciary, breached its duty to act prudently under ERISA by liquidating Nabisco Common Stock and Nabisco Holdings Stock ("Nabisco Funds") from RJR's 401(k) plan without a thorough investigation and on an arbitrary timeline, which resulted in significant losses to the 401(k) plan.(fn28)

Nabisco, Inc. ("Nabisco") and RJR merged into a single entity, R.J. Reynolds Nabisco, Inc. ("RJR Nabisco") in 1985.(fn29) Fourteen years later, in March 1999, the merged company separated the food business, Nabisco, from the tobacco business, RJR.(fn30) The company utilized a spin-off mechanism to sever the tobacco business from the food business to limit exposure to stock value fluctuation because of tobacco taint.(fn31)

Initially, RJR Nabisco sponsored multiple investment options under the company's 401(k) plan.(fn32) A total of eight investment options were offered, two of which were exclusively company stock funds.(fn33) Subsequent to the spin-off, the RJR Nabisco Common Stock Fund was divided into the following separate funds connected with the sponsored 401(k) plan: (1) a stock fund in Nabisco Group Holdings, common stock in the food business, and (2) stock in RJR, common stock in the tobacco business.(fn34) On the date of the spin-off, June 14, 1999, the new plan provided for retention of the Nabisco Funds; however, they were to be frozen in accordance with the plan documents.(fn35)

Pursuant to the plan, two committees were named as fiduciaries: the Benefits Committee and the Investment Committee.(fn36) The Benefits Committee was responsible for amending the plan and could do so only with a majority of its members.(fn37) At a meeting in March of 1999, a working group of employees, not including the Benefits Committee or the Investment Committee, made the decision to alter the newly created plan.(fn38) The working group decided to eliminate the Nabisco Funds from the post spin-off RJR 401(k) plan and spent approximately thirty to sixty minutes considering options for the Nabisco Funds in the RJR 401(k) plan.(fn39) The working group of employees settled on an arbitrary date to sell the Nabisco funds.(fn40) After the working group's determination, Robert Gordon, a member of the Benefits Committee, was notified that the working group reached a decision.(fn41) However, the Benefits Committee never met, discussed, or voted on the working group employees' determination.(fn42)

After the spin-off in June of 1999, the Nabisco funds began to sharply decline in value.(fn43) In October of that same year, officers met to resolve the situation with respect to the 401(k) stock funds.(fn44) The ad hoc group declined to pursue any alternative options.(fn45) In late October of 1999, RJR disseminated a letter declaring that the Nabisco funds would be eliminated from the plan on January 31, 2000.(fn46) The letter asserted that current law did not permit RJR to maintain the Nabisco funds and thus the funds must be eliminated.(fn47) Gordon directed the execution of the letter, the employee who prepared the letter knew it was incorrect, no lawyer reviewed the letter prior to its dissemination, and a second letter stating the same was sent out in January of 2000.(fn48)

On January 27, 2000, days before the sale of the Nabisco funds, Tatum sent an email to Gordon and Ann Johnson asking to halt the sale because it would result in his 401(k) account suffering a 60% loss.(fn49) RJR divested the Nabisco funds held by RJR employees in their personal 401(k) accounts on January 31, 2000.(fn50) From the spin-off date, June 14, 1999, to the date of the divestment on January 31, 2000, the stock price for Nabisco Holdings and Nabisco Common Stock, the Nabisco funds, dropped by 60% and 28%, respectively.(fn51)

RJR invested the divestment proceeds into an Interest Income Fund.(fn52) Officers decided this scenario would remain static until a participant decided to invest the new capital from the Interest Income Fund into one of the other six funds offered by the plan.(fn53) Employees of RJR were forced to divest from the Nabisco funds held by the plan; however, several officers of RJR were allowed to retain Nabisco funds or options for Nabisco funds.(fn54)

In March of 2000, the Nabisco funds began to increase in value.(fn55) An outside investor, Carl Icahn, founder of Icahn Capital Management, attempted a takeover of Nabisco via an unsolicited tender offer after three previous unsuccessful attempts.(fn56) Eventually, a bidding war ensued between Icahn and Philip Morris to acquire the Nabisco funds.(fn57) From the date of divestment on January 31, 2000 to Philip Morris' acquisition on December 11, 2000, the price of Nabisco Holdings Stock and Nabisco Common Stock increased by 247% and 82%, respectively.(fn58)

In May of 2002, Tatum commenced a class action lawsuit against RJR, the Benefits Committee, and the Investment Committee.(fn59) Tatum alleged that the Committees...