ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (Dist. Court No. 99-cv-2652) District Court Judge: The Honorable Robert F. Kelly
Before: Alito and Fuentes, Circuit Judges,
and OBERDORFER,*fn1 District Judge
The opinion of the court was delivered by: Oberdorfer, District Judge
Argued: September 12, 2002
Plaintiffs' appeal requires us to consider the liability of the trustee of two retirement plans for common law negligence and breach of fiduciary duty, if any, under the federal Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. The District Court entered judgment for defendant under Pennsylvania's Comparative Negligence law after a jury found plaintiff 's contributory negligence was greater than defendant's negligence and also found for defendant on the ERISA issue on the theory that the trustee was not a fiduciary within the meaning of that law. We reverse and remand.
I. FACTUAL AND PROCEDURAL BACKGROUND
Resolution of this fact specific case requires extensive exposition of them. Findings of the District Court and undisputed evidence establish that:
Ronald J. Srein is the sole stockholder and only employee of R.J. Srein Corporation. In the mid-1980's, Srein had created in the Corporation two ERISA qualified retirement plans, a Money Purchase Pension Plan and Profit Sharing Plan. In 1993 he sought to invest plan funds in participation agreements on so-called "viatical settlement contracts." A viatical settlement contract is, in essence, an investment in an insurance policy on the life of a terminally ill insured. It allows "individuals diagnosed with potentially terminal diseases . . . [to] obtain an immediate payment of part of the face value of their insurance policy in exchange for assigning all or part of the life insurance policy. This enables the insured [also called "viators"] to obtain money which would otherwise be unavailable to him until after his death. When the insured passes away, the viatical settlement company collects the policy proceeds, pays the investor the money he advanced under the agreement and the balance is divided between the investor and the settlement company in accordance with their agreement." (Finding of Fact No. 3, JA 22.) To arrange these investments, Srein engaged a broker, Craig Silverman and Findco, Inc., to locate "viators" and, for a commission, to negotiate investments in participation agreements. *fn2 During 1992 and early 1993, Srein entered on his own account six participation agreements for viatical settlement contracts with Findco.
Before February 1993 R. J. Srein Corporation engaged Eagle Retirement and Investment Planning as Trustee of an ERISA qualified Money Purchase Pension Plan. On February 3 of that year, Srein sought to enter into a participation agreement with Findco on behalf of that plan for a 100% interest in an insurance policy issued by Philadelphia Life Insurance Company on the life of one Errol Chamness. However, Eagle "would not allow such investments by retirement plans on which it was trustee because such investments were not registered." (JA 23.) Learning of this impasse, Silverman referred Srein to Laraine Daly, *fn3 a Frankford trust officer (hereinafter sometimes referred to together as "Frankford"). Frankford informed Srein that "Frankford Trust did not have any rules against non-registered investments, such as participation agreements in viatical settlement contracts, being held in investment plans for which it acted as trustee." (JA 24.) *fn4 Based on this representation Srein agreed to move his retirement accounts to Frankford.
Frankford then "facilitated setting up qualified ERISA plans for R.J. Srein Corp. at Frankford Trust and transferring assets from Eagle Retirement to Frankford Trust. [Frankford] understood that Mr. Srein was moving the R.J. Srein Corp. Plans to Frankford Trust for the purpose of, among other things, investing in participation agreements on viatical settlement contracts." (Finding of Fact No. 10, JA 24.)
On February 11, 1993, Srein, the Corporation and Frankford entered into five agreements that had the effect of creating a new R.J. Srein Corp. Money Purchase Pension Plan and a Profit Sharing Plan at Frankford. The new Plan documents named Srein as both Participant and Plan Administrator and designated Frankford the Plan trustee. Daly, on behalf of the bank, acted as the trust officer for both of the retirement plans. After creating the Plans, Srein directed Eagle Retirement to liquidate the retirement plans it held and to transfer their assets to Frankford. (JA 1217.)
The Profit Sharing Plan Trust Agreement ("Trust Agreement") between Srein and Frankford as Trustee declared that the Trustee shall "discharge [its] assigned duties and responsibilities . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Trust Agreement § 3.1(b). It continued, "at no time shall any part of the corpus or income of the Fund be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries, or for defraying reasonable expenses of administering the plan." Id. at § 4.1.
The Trust Agreement also provided with respect to investment decisions that Frankford invest the funds of the Plans:
as directed in writing by the Participant [Srein] . . . which written directions shall be timely furnished to the Trustee by the Plan Administrator [also Srein]. In making any investment of the assets of the Fund, the Trustee shall be fully entitled to rely on such directions furnished by the Plan Administrator and shall be under no duty to make any inquiry or investigation with respect thereto. It is especially intended under the Plan and this Agreement that the Trustee shall have no discretionary authority to determine the investment of the assets of the Fund. Profit Sharing Plan Trust Agreement § 2.1.
Similarly, the Master Profit Sharing Plan stated:
In making any investment of contributions under this § 6.3, the Trustee shall be fully entitled to rely on the written directions furnished by the Plan Administrator and shall be under no duty to make an inquiry or investigation with respect thereto. If the Trustee receives any contribution to the Trust that is not accompanied by written instructions directing its investment, the Trustee may hold or return all or a portion of the contribution uninvested without liability for loss of income or appreciation pending receipt of proper investment directions from the Plan Administrator.
Master Profit Sharing Plan § 6.3(c). That Plan further stated that "the assets of the Plan are held, administered and managed by the Trustee [Frankford] in accordance with the terms and conditions of the Trust Agreement," § 1.1, and that "the Trustee shall have the sole responsibility for the administration of the trust and the management of the assets held hereunder, as specifically provided in the Trust Agreement." Master Profit Sharing Plan § 10.1. The Master Money Purchase Plan had identical language in § 11.1.
In consideration for acting as trustee of the Corporation's Plans, Frankford was to be "compensated for its services in accordance with its normal schedule of fees." See Trust Agreement § 5.1. Frankford charged fees based upon the value of the assets held by the Plans. (JA 118.) As Daly explained "all trust accounts were charged a fee. In the case of employee benefit accounts, it would have been for use of the prototype plan document, the -- having a financial institution as trustee . . . . It also, in Srein's case, because we were acting as a directed trustee, it involved maintaining the security record, maintaining the document in the vault and producing . . . monthly statements of transactions and assets . . . ." (JA 1306.)
During the pendency of the Trust relationship between Frankford and the Plans, Srein entrusted to Frankford two Participation Agreements; one representing an interest in the Chamness policy and another in an insurance policy on the life of one J. Lloyd Madsen.
On February 11, 1993, Srein, as Plan Administrator, directed Daly to forward $72,500 from the Money Purchase Pension Plan to Findco's escrow agent, Neil Katim, to invest in a Participation Agreement for a 100% interest in the Chamness policy. As instructed, Frankford forwarded the $72,500 to Findco's escrow agent, who paid it to Chamness. (JA 1569.) Pursuant ...