PEREZ v. WPN CORPORATION ET AL

Filing 144

MEMORANDUM OPINION indicating that, for reasons more fully stated within, the Court finds that the Third Amendment to the Severstal Wheeling, Inc. Investment Management Agreement is effective as of 11/1/2008. Accordingly, Defendants' Motion to Dismiss 124 will be granted as to Plaintiff's failure to invest claim. Plaintiffs will be permitted leave to amend the Amended Complaint consistent with this Opinion. Defendants' Motion to Dismiss 124 will be granted as to Plaintiff&# 039;s co-fiduciary liability claim. Defendants' Motion to Dismiss 124 will be denied as to Plaintiff's failure to monitor claim. Defendants' alternative Motion for Summary Judgment is denied. An appropriate Order will be entered. Signed by Judge Nora Barry Fischer on 6/7/17. (jg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
THOMAS E. PEREZ, SECRETARY OF
LABOR, UNITED STATES DEPARTMENT
OF LABOR,
Plaintiff,
v.
WPN CORPORATION, RONALD LABOW;
SEVERSTAL WHEELING, INC.
RETIREMENT COMMITTEE; MICHAEL
DICLEMENTE; DENNIS HALPIN;
WHEELING CORRUGATING COMPANY
RETIREMENT SECURITY PLAN; AND)
SALARIED EMPLOYEES’ PENSION
PLAN OF SEVERSTAL WHEELING, INC.,

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Civil Action No. 14-1494

Defendants.

Memorandum Opinion

I.

Introduction
The Secretary of Labor of the United States Department of Labor (“DOL”) brings this

action under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001, et seq.
(“ERISA”) alleging that the fiduciaries and investment managers of two related pension plans
violated ERISA causing a loss of the pension plans’ value of approximately $7,000,000.00.
Defendant fiduciary body, the Severstal Wheeling, Inc. Retirement Committee (the “Retirement
Committee”) and its two individual members, Michael DiClemente (“DiClemente”) and Dennis
Halpin (“Halpin”) appointed Ronald Labow (“Labow”) and WPN Corporation (“WPN”) to
manage the assets of the two pension plans, the Wheeling Corrugating Company Retirement
Security Plan and the Salaried Employees’ Pension Plan of Severstal Wheeling, Inc. (“the

Plans”).1 In its Amended Complaint the DOL alleges that Labow, the sole officer and principal
owner of WPN, and WPN are directly responsible under ERISA for the loss in value of the
Plans’ assets from approximately December 5, 2008 through May 19, 2009. The DOL alleges
that Retirement Committee, DiClemente, and Halpin (collectively, “Defendants”) are liable
under ERISA for failing to invest the Plans’ assets from November 3, 2008 to December, 5,
2008; for failing to monitor Labow and WPN’s conduct from December 5, 2008 to May 19,
2009; and for co-fiduciary liability for Labow and WPN’s violations.
Presently before the Court is Defendants’ Motion to Dismiss and, in the alternative, Motion
for Summary Judgment. (Docket No. 124). The DOL has filed a Response to the Motion
(Docket No. 130) and Defendants have filed a Reply (Docket No. 134). The Court heard oral
argument on the Motion on February 7, 2017 (Docket No. 135), after which both parties filed
Supplement Briefs (Docket Nos. 139 and 140). After careful consideration of the parties’
positions, and for the following reasons, Defendants’ Motion to Dismiss is granted, in part and
denied in part. Defendants’ alternative Motion for Summary Judgment is denied.
II.

Procedural History and Factual Background
A. Procedural History
The DOL filed a Complaint in this Court on October 14, 2014. (Docket No. 1). An

Amended Complaint was filed on March 27, 2015. (Docket No. 28). On April 10, 2015, the
Court issued a Consent Order on Stay granting the Retirement Committee, DiClemente, and
Halpin’s unopposed Motion for Stay of Proceedings. (Docket No. 37). The Stay was requested

1

By Order dated September 20, 2016, the pension plan Defendants, Wheeling Corrugating Company Retirement
Security Plan and the Salaried Employees’ Pension Plan of Severstal Wheeling, Inc. were denominated as nominal
parties that were not required to respond to the Amended Complaint or otherwise actively participate in this
litigation. (Docket No. 112).

2

to await the issuance of a decision on the merits in a lawsuit filed by the Retirement Committee
and its members (and the Plans) against Labow and WPN in the United States District Court for
the Southern District of New York. (Docket No. 37, at ¶ 1; Severstal Wheeling, Inc. v. WPN
Corp., No. 1:10-cv-954). Following a bench trial, District Judge Laura Taylor Swain issued a
decision dated August 10, 2015, finding that WPN and Labow breached their fiduciary duties
under ERISA and entered judgment for approximately $15,000,000.00. Severstal Wheeling, Inc.
Ret. Comm. v. WPN Corp., 119 F. Supp. 3d 240, 242 (S.D.N.Y. 2015). The decision was
affirmed by the United States Court of Appeals for the Second Circuit on August 30, 2016.
Severstal Wheeling, Inc. v. WPN Corp., 659 F. App'x 24 (2d Cir. 2016). The Stay in this Court
was lifted on the same day. (Docket No. 97). Defendants’ Motion to Dismiss and, in the
alternative, Motion for Summary Judgment was filed on October 31, 2016. (Docket No. 124).
B. Factual Background
From approximately June 2008 to approximately May 2009, the Plans’ sponsor was
Severstal Wheeling, Inc., which is no longer in business. (Am. Compl. ¶ 12, Docket No. 28).
The Plans were established to provide retirement benefits to employees. Pursuant to the Plans’
documents, Severstal Wheeling, Inc. Retirement Committee is the Plan Administrator and a
Named Fiduciary for each of the Plans. (Am. Compl. ¶ 8). DiClemente was a member of the
Retirement Committee from June, 2008, through February 2009, and is a Named Fiduciary
pursuant to the Plans’ documents. (Am. Compl. ¶ 9). Halpin was a member of the Retirement
Committee from June, 2008, through April, 2009, and is a Named Fiduciary pursuant to the
Plans’ documents. (Am. Compl. ¶ 10).

3

The Plans’ assets were part of a large trust, the WHX Trust, holding the assets of several
pension plans managed by Labow and WPN. (Am. Compl. ¶ 14). The Trustee of the WHX
Trust was Citibank, N.A. (Am. Compl. ¶ 15). In June, 2008, Citibank announced that it was
discontinuing its trust services by the end of 2008. (Am. Compl. ¶ 15.) As a result, the Plans’
assets were to be separated from the unrelated pension plan assets held in the WHX Trust and
deposited into a new standalone trust holding only the Plans’ assets. (Am. Compl. ¶ 16.) The
new standalone trust was “subsequently renamed” the Severstal Wheeling, Inc. Pension Plan
Master Trust (“Severstal Trust”). (Am. Compl. ¶ 16.) National City Bank became the Trustee of
the Severstal Trust on December 31, 2008.2 (Am. Compl. ¶ 15).
The allegations supporting the DOL’s claims that Defendants violated ERISA fall into
two definable time periods. The first period begins on November 3, 2008, with the transfer of
the Plans’ Assets from the WHX Trust to a standalone trust, and ends on December 5, 2008,
when a written investment management agreement was entered into between the Retirement
Committee and Labow and WPN.
The majority of the Plans’ assets (valued at approximately $31,446,845) were held in an
undiversified account with Neuberger Berman, LLC. (Am. Compl. ¶¶ 19, 21). The Neuberger
Berman account had approximately 97% of its value invested in eleven large cap energy stocks,
and remained in this undiversified state during the period from November 3, 2008 through
December 5, 2008. (Am. Compl. ¶¶ 21, 22).

2

National City Bank did not become Trustee of the Severstal Trust until December 31, 2008, which is consistent
with Citibank’s announcement that it was discontinuing its trust services by the end of 2008. However, there is no
allegation in the Amended Complaint that Citibank ever acted as Trustee for the newly formed Severstal Trust at
any time since its formation. Thus, it appears that there was no trustee of the Plans’ assets from November 3, 2008
to December 30, 2008.

4

The Neuberger Berman account holding the Plans’ assets was transferred from the WHX
Trust to the Severstal Trust on November 3, 2008. (Am. Compl. 19). On November 4, 2008,
DiClemente confirmed the transfer of the Neuberger Berman account to the Severstal Trust by
letter dated November 3, 2008. (Am. Compl. ¶ 20).
There was no written investment management agreement from November 3, 2008, until
December 5, 2008. (Am. Compl. ¶ 22). On December 5, 2008, DiClemente, on behalf of the
Retirement Committee, signed an investment management agreement with Labow and WPN,
titled the Third Amendment to the Severstal Wheeling, Inc. Investment Management Agreement.
(Am. Compl. ¶ 23). Although the investment management agreement signed on December 5,
2008, was backdated to be effective November 1, 2008 (Am. Compl. ¶ 23), the DOL alleges that
Labow and WPN’s investment manager fiduciary duties became effective on December 5, 2008.
In the DOL’s first claim it is alleged that from November 3, 2008 through December 5, 2008,
Defendants failed to discharge their fiduciary duties solely in the interest of the participants and
beneficiaries by failing to prudently invest the Plans’ assets when no investment management
agreement was in place in violation of ERISA sections 404(a)(1)(A) and 404(a)(1)(B); 29 U.S.C.
§§ 1104(a)(1)(A) & 1104(a)(1)(B). (Am. Compl. ¶ 35).
The second time period begins when the Retirement Committee entered into the
investment management agreement with Labow and WPN on December 5, 2008, and ends when
Labow and WPN are terminated on May 19, 2009. (Am. Compl. ¶¶ 23, 28). The Plans’ assets
remained in the undiversified Neuberger Berman account from December 5, 2008 through
December 30, 2008. (Am. Compl. ¶ 24). On December 30, 2008, the Retirement Committee,
DiClemente, and Halpin first learned that the Plans’ assets were in the undiversified Neuberger
5

Berman account and DiClemente informed Labow and WPN of the discovery. (Am. Compl. ¶
25).
The Plans’ assets remained in the undiversified Neuberger Berman account while
Defendants communicated with Labow and WPN, from December 30, 2008 through March 24,
2009. (Am. Compl. ¶ 26). On March 24, 2009, the Plans assets in the Neuberger Berman
account were sold for cash. (Am. Compl. ¶ 27).
The Plans’ assets remained in cash from March 24, 2009 through May 19, 2009, during
which time the Retirement Committee and Halpin communicated with Labow and WPN. (Am.
Compl. ¶ 29). On May 19, 2009, the investment management agreement was terminated and
Labow and WPN were fired. (Am. Compl. ¶¶ 6, 28).
From November 3, 2008 through May 19, 2009, the Plans suffered losses and lost
earnings of approximately $7,000,000.00. (Am. Compl. ¶ 32). The DOL’s second claim alleges
that Defendants failed to discharge their fiduciary duties solely in the interest of the participants
and beneficiaries by failing to monitor Labow and WPN from December 5, 2008 through May
19, 2009, while they acted as investment manager for the Plans in violation of ERISA sections
404(a)(1)(A) and 404(a)(1)(B); 29 U.S.C. §§ 1104(a)(1)(A) & 1104(a)(1)(B). (Am. Compl. ¶
35).
Finally, the DOL alleges in its third claim that Defendants are subject to co-fiduciary
liability because they enabled Labow and WPN to commit a breach of ERISA section 404(a)(1),
and knew of Labow and WPN’s breach and failed to make reasonable efforts to remedy the
breach, all in violation of ERISA sections 405(a)(2) and 405(a)(3); 29 U.S.C. §§ 1105(a)(2) &
1105(a)(3). (Am. Compl. ¶ 36).
6

Defendants seek dismissal of the DOL’s claims for failure to state a claim upon which relief
can be granted under Federal Rule of Civil Procedure 12(b)(6). In the alternative, Defendants
request the Court convert the motion to dismiss into a motion for summary judgment relying
primarily on the fact finding developed in the related proceeding in the United States District
Court for the Southern District of New York, as well as an Affidavit prepared by DiClemente.
The DOL was not a party in Severstal Wheeling, Inc. v. WPN Corp., No. 1:10-cv-954, nor were
Defendants. Although the District Court for the Southern District of New York found Labow
liable for fiduciary breaches, the decision in that case cannot be read to absolve Defendants from
liability. Finally, the Court agrees with the DOL that the opportunity to obtain discovery is
required before the motion is converted to a motion for summary judgment. Accordingly, the
Court declines to convert the motion to dismiss to a motion for summary judgment.
III.

Standard of Review
When reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure

12(b)(6), the court must “accept all factual allegations as true, construe the complaint in the light
most favorable to the plaintiff, and determine whether, under any reasonable reading of the
complaint, the plaintiff may be entitled to relief.” Eid v. Thompson, 740 F.3d 118, 122 (3d
Cir.2014) (quoting Phillips v. Cnty of Allegheny, 515 F.3d 224, 233 (3d Cir.2008)). A pleading
party need not establish the elements of a prima facie case at this stage; the party must only “put
forth allegations that ‘raise a reasonable expectation that discovery will reveal evidence of the
necessary element[s].”’ Fowler v. UPMC Shadyside, 578 F.3d 203, 213 (3d Cir.2009) (quoting
Graff v. Subbiah Cardiology Associates, Ltd., 2008 WL 2312671 (W.D.Pa. June 4, 2008)); see
also Connelly v. Lane Const. Corp., 809 F.3d 780, 790 (3d Cir.2016) (“Although a reviewing
7

court now affirmatively disregards a pleading’s legal conclusions, it must still . . . assume all
remaining factual allegations to be true, construe those truths in the light most favorable to the
plaintiff, and then draw all reasonable inferences from them.”) (citing Foglia v. Renal Ventures
Mgmt., LLC, 754 F.3d 153, 154 n. 1 (3d Cir.2014)).
Nonetheless, a court need not credit bald assertions, unwarranted inferences, or legal
conclusions cast in the form of factual averments. Morse v. Lower Merion School District, 132
F.3d 902, 906, n. 8 (3d Cir.1997). The primary question in deciding a motion to dismiss is not
whether the Plaintiff will ultimately prevail, but rather whether he or she is entitled to offer
evidence to establish the facts alleged in the complaint. Maio v. Aetna, 221 F.3d 472, 482 (3d
Cir.2000). The purpose of a motion to dismiss is to “streamline [ ] litigation by dispensing with
needless discovery and factfinding.” Neitzke v. Williams, 490 U.S. 319, 326–327, 109 S.Ct.
1827, 104 L.Ed.2d 338 (1989).
IV.

Discussion
Defendants first argue that the DOL fails to state claims upon which relief can be granted

for failure to invest or co-fiduciary liability because once Defendants appointed investment
managers they are entitled to the protection of the safe harbor provision of ERISA section
405(d)(1), 29 U.S.C. § 1105(d)(1). Defendants also argue that the DOL has failed to state a
claim upon which relief can be granted that Defendants breached their duty to monitor the
investment managers. Defendants argue that they complied with their duty to monitor and that
the DOL’s claim is an improper attempt to impute the investment managers’ conduct to
Defendants.

8

As discussed below, the Court agrees that once Defendants appointed investment
managers they are entitled to the safe harbor protection. The Court also finds that the DOL has
properly stated a claim for failure to monitor. In addition, because the Court finds that the
investment management agreement is effective as of November 1, 2008, the Court will permit
the DOL to amend its Amended Complaint to conform to the ruling.
A. Failure to Invest and Co-fiduciary Claims
Defendants argue that the DOL’s failure to invest and co-fiduciary liability claims should
be dismissed because Defendants are protected by the safe harbor provision of ERISA section
405(d)(1), 29 U.S.C. § 1105(d)(1). This sections states:
(d) Investment managers
(1) If an investment manager or managers have been appointed under section
1102(c)(3) of this title, then, notwithstanding subsections (a)(2) and (3) and
subsection (b) of this section, no trustee shall be liable for the acts or omissions of
such investment manager or managers, or be under an obligation to invest or
otherwise manage any asset of the plan which is subject to the management of
such investment manager.
29 U.S.C.A. § 1105(d)(1). Defendants argue that because they appointed an investment manager
effective November 1, 2008, the safe harbor provision explicitly relieves them from liability for
the acts or omissions of Labow and WPN, and from any obligation to invest assets.
Accordingly, Defendants assert that both the failure to invest claim and co-fiduciary liability
claim must be dismissed.
Implicit in the DOL’s argument is (i) that Labow and WPN were acting as the appointed
investment managers as of the November 1, 2008 backdated investment agreement, and (ii) that
Defendants fall within the meaning of the term “trustee” in section 1105(d)(1). The Court
addresses these arguments in turn.
9

1. Effective Date of Appointment of Investment Manager
If Defendants are correct that the appointment of the investment managers was effective
as of November 1, 2008, then Defendants would not have had a duty to invest the Plans’ assets
from November 3, 2008 to December 5, 2008. Conceivably Defendants would be exposed to cofiduciary liability for this time period, however Defendants’ argument is that the safe harbor
provision would relieve them from co-fiduciary liability for this time period as well.

If,

however, the effective date is December 5, 2008, then the failure to invest claim would survive
the motion to dismiss. This is true because if the investment managers were not properly
appointed during the relevant time period Defendants would retain control of the assets of the
plan with corresponding fiduciary duties.
Defendants argue that basic contract law allows parties the freedom to impose whatever
obligations they wish and that includes the ability to backdate the effective date of an agreement.
Defendants rely on an opinion from the United States Court of Appeals for the Third Circuit
approving insurance agreements that are not legally operative until the first premium is paid, and
affirming that the effective date of the agreement is essentially backdated once the first premium
is paid. Wise v. Am. Gen. Life Ins. Co., 459 F.3d 443 (3d Cir. 2006). In Wise, the Court of
Appeals reviewed several Pennsylvania cases before concluding that in Pennsylvania “backdated
contracts are not inherently unfair and should be enforced according to their explicit terms.”
Wise, 459 F.3d at 449 (citing Ford v. Fidelity Mutual Life Insurance Company, 314 Pa. 54, 170
A. 270 (1934)).

10

Defendants also point to the course of conduct between the parties in this case;
highlighting that Labow and WPN had been investment managers of the Plans’ assets prior to the
transfer to the Severstal Trust and remained as investment managers after the transfer. Thus,
Defendants argue that the agreement entered into on December 5, 2008, was in effect an
amendment to the ongoing investment management agreement between the parties; or, in other
words, a memorialization of what had been occurring in fact since November 1, 2008.
The DOL acknowledges that backdated contracts are not inherently unlawful, and
therefore, on its face the written investment agreement’s effective date is November 1, 2008.
However, the DOL argues that ERISA Section 3(38), defining the term “investment manager,”
requires that the investment manager “has acknowledged in writing that he is a fiduciary with
respect to the plan.” 29 U.S.C.A. § 1002(38). In addition, Defendants are prohibited under
ERISA section 410(a) from entering into an agreement with the intent to absolve Defendants
from liability for breaching their fiduciary duties. Section 1110(a) states in relevant part that
“any provision in an agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or duty under this part shall be void
as against public policy.” 29 U.S.C. § 1110(a).
The difficulty for the DOL is that it does not affirmatively allege in the Amended
Complaint (i) that Labow and WPN were not acting as investment managers from November 1,
2008 through December 5, 2008, and (ii) that Defendants’ intent in backdating the agreement
was to relieve itself “from responsibility or liability for any responsibility, obligation, or duty” it
had to invest the Plans’ assets during that time period. 29 U.S.C. § 1110(a). At best, the DOL
alleges that the “Plans did not have a written investment management agreement from on or
11

about November 3, 2008 until December 5, 2008.” (Am. Compl. ¶ 22). The written agreement
on its face states that the effective date is November 1, 2008, and absent factual allegations to the
contrary the Court agrees that November 1, 2008 is the effective date.
Accordingly, the Court will dismiss the DOL’s failure to invest claim and will grant the
DOL’s request to amend its Amended Complaint in order to allege that Defendants are liable for
failing to monitor the investment managers from November 3, 2008 to December 5, 2008; and to
extend the time frame of the claims of fiduciary breaches against Labow and WPN back to
November 3, 2008, when they were acting as investment managers pursuant to the written
investment agreement.
In the alternative, the Court notes that this ruling leaves open the possibility of a claim
alleging that Labow and WPN were not acting as investment managers from November 3, 2008
to December 5, 2008, that the purpose of backdating the investment agreement was to relieve
Defendants from liability during a time when they in fact retained control of the assets of the
plans, and that Defendants violated ERISA by failing to invest properly the Plans’ assets. The
DOL has not specifically indicated in its pleadings or during oral argument that it intends to
assert such a claim in the alternative, but the Court cannot discount the possibility that the DOL
may choose to assert such a claim. Of course for such a claim to succeed it must eventually be
supported by factual evidence establishing that Labow and WPN were not acting as investment
managers, and that Defendants backdated the agreement to relieve itself from liability for its
failure to invest the Plans’ assets.

12

2. “Trustee” Under Section 29 U.S.C. § 1105(d)(1)
It is undisputed that Defendants appointed investment managers with the authority to
manage, invest, and dispose of the Plans’ assets. Section 1105(d)(1) provides in part that “[i]f
an investment manager or managers have been appointed . . . then . . . no trustee shall be liable
for the acts or omissions of such investment manager or managers.” 29 U.S.C. § 1105(d)(1).
Defendants argue that the term “trustee” in the statute includes a named fiduciary with the power
to appoint an investment manager even if they are not a named trustee under ERISA, and
therefore they cannot be held liable as a co-fiduciary for the fiduciary breaches of Labow and
WPN.
Defendants argue that a reasonable reading of the statute leads to the conclusion that a
fiduciary’s appointment of an investment manager would trigger the safe harbor provision of
Section 405(d)(1) for the benefit of the fiduciary who took the action of appointing an
investment manager regardless of whether the fiduciary is named as a trustee. In other words,
where the underlying conduct invoking Section 1105(d)(1) is properly performed by a named
fiduciary who is not a named trustee, Defendants argue that the terms “named fiduciary” and
“trustee” are interchangeable.
The DOL’s sole argument in response is that the plain language of section 1105(d)(1)
provides protection only for “trustees” and since none of the Defendants are trustees they are
unable to avail themselves of the safe harbor provision. See Am. Compl. ¶ 8 (Retirement
Committee is Named Fiduciary and Plan Administrator, not a trustee); and Am. Compl. ¶¶ 9, 10
(DiClemente and Halpin are named Fiduciaries, not Trustees). Citibank was the Trustee of the
Severstal Trust when the Neuberger Berman account was transferred from the WHX Trust on
13

November 3, 2008, and National City Bank became the Trustee on December 31, 2008. (Am.
Compl. ¶ 15). There was apparently no trustee from November 3, 2008 through December 30,
2008. See footnote 2, supra.
The Court concludes that ERISA intended named fiduciaries (i) who have been granted
control of the assets of a plan and (ii) who have properly appointed an investment manager to
manage the assets of a plan, are protected by the safe harbor provision of Section 1105(d)(1),
even though the named fiduciaries are not designated as “trustees.” First, the logical reading of
the interplay of the relevant statutes leads to this conclusion.

Second, there is scant case law

addressing this issue but the cases that do discuss it also favor this conclusion. In contrast, the
Court has found no case that prohibited a named fiduciary from the benefits of the safe harbor
provision based solely on the named fiduciary not being a “trustee.” Finally, legislative history
addressing this issue supports the Court’s conclusion.
a. Relevant Statutes
The safe harbor provision of section 1105(d)(1) only comes into play when control over
the assets of a plan has been appointed to an investment manager. Therefore, the safe harbor
provision must be read in context with the related statutory sections defining who has control
over the assets of a plan, sections 1103(a) and 1102(c)(3), and who has authority to transfer
control over the assets of a plan to an investment manager, section 1102(c)(3)).
Relevant to the issue in this case, the statutory sections allow for control over the assets
of the plan to be with a trustee, a named fiduciary, or an investment manager. In the first
instance, section 1103(a) provides that assets of an employee benefit plan are to be held in trust
by a trustee who “shall have exclusive authority and discretion to manage and control the assets
14

of the plan.” 29 U.S.C. § 1103(a). Section 1102(c)(3), however, allows for the possibility that
“a person who is a named fiduciary” will have “control or management of the assets of the plan.”
29 U.S.C. § 1102(c)(3).

Section 1102(c)(3) also provides the authority for the investment

manager to gain control over the assets of a plan; namely, when the person who has control over
the assets of a plan, “a named fiduciary”, appoints an investment manager.

29 U.S.C. §

1102(c)(3). Similarly section 1103(a)(2) refers to the appointment power of section 1102(c)(3)
by which a trustee’s “exclusive authority” over the control of the assets of a plan is “delegated”
to an investment manager. 29 U.S.C. § 1103(a)(2).
Sections 1103(a), 1102(c)(3), and 1105(d)(1) all contemplate that control over the assets
of the plan may be either delegated or appointed to an investment manager. Section 1105(d)(1)
provides a safe harbor for the “trustee” if in fact control over the assets of the plan has been
appointed to an investment manager under section 1102(c)(3). Section 1103(a)(2) provides that
the trustee’s control is exclusive except when control is delegated to an investment manager
under section 1102(c)(3). Section 1102(c)(3), as noted, is the mechanism for the delegation of
authority over control of the assets of the plan to an investment manager.

29 U.S.C. §

1102(c)(3).
A fiduciary is defined in ERISA “‘not in terms of formal trusteeship, but in functional
terms of control and authority over the plan.’” Sec'y U.S. Dep't of Labor v. Koresko, 646 F.
App'x 230, 235 (3d Cir. 2016) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993)),
citing 29 U.S.C. § 1002(21)(A)(i) (“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”).
15

Here, as discussed above, control over the assets of the plan is with a trustee, a named fiduciary,
or an investment manager, all of which are fiduciaries. A logical conclusion to draw from the
interplay of the above ERISA statutory sections is that when control over the assets of a plan has
been delegated to an investment manager appointed by a named fiduciary, then whoever had
control over the assets of the plan prior to the appointment of the investment manager, no longer
has such control after the appointment. This conclusion must be true whether it was the trustee’s
exclusive control or whether a named fiduciary had control over the assets of the plan.
Significantly, the only way an investment manager can acquire control is if “a person who is a
named fiduciary” appoints the investment manager.

Therefore, it follows that once the

appointment of an investment manager is made by a “named fiduciary” under section 1102(c)(3),
that the person who had control over the assets of the plan -- trustee or named fiduciary -obtains the benefit of the safe harbor provision of section 1105(d)(1). There is no logical support
for concluding that the person with control over the assets of the plan who properly appoints an
investment manager would not be permitted the benefits of the safe harbor provision.
b. Case Law
Defendants cite two cases in support of their position. The United States Court of
Appeals for the Second Circuit briefly addressed the safe harbor provision’s applicability to a
fiduciary stating in relevant part:
The obligations of named fiduciaries with regard to their duty of care, however,
can be reduced by the appointment of an investment manager under ERISA
Section 402(c)(3). Under Section 405(d)(1), once such an appointment has been
made, the trustees cannot be held liable for any act or omission of that investment
manager so far as the assets entrusted to the manager are concerned. The plain
intent of this statutory structure is to allow plan trustees to delegate investment
authority to a professional advisor who then becomes a fiduciary with a duty of
care and duty of loyalty to the plan while the trustees' legal responsibilities
16

regarding the wisdom of investments are correspondingly reduced.
Lowen v. Tower Asset Mgmt., Inc., 829 F.2d 1209, 1219 (2d Cir. 1987) (emphasis added). As
can be seen, the Court used the terms “named fiduciary” and “trustee” interchangeably.
In Lowen, the Court discussed the safe harbor provision in the context of addressing the
question of whether defendant Tower Asset was a fiduciary under ERISA. Lowen, 829 F.2d at
1218. Tower Asset was appointed by the Trustees as the investment manager for the subject
plan pursuant to an investment management agreement of the plan. Lowen, 829 F.2d at 1212.
The Court described the “core issue in dispute” as arising from the claim that Tower Asset
cannot be regarded as a fiduciary because the Trustees of the plan “compelled Tower Asset to
make many, or all,” of the prohibited investments. Lowen, 829 F.2d at 1218. The Court held
that it was “simply beyond doubt” that Tower Asset was an ERISA fiduciary, noting that the
plan’s “named fiduciary,” the Trustees, were authorized to appoint an “investment manager”
under Section 402(c)(3).
Because there was an actual named trustee in this case who appointed Tower Asset as the
investment manager, the Lowen Court did not directly address the question of whether a named
fiduciary who was not a trustee is protected by the safe harbor provision. However, the Lowen
Court’s preliminary discussion regarding ERISA’s structure and purposes is persuasive support
that named fiduciaries are meant to be protected by the safe harbor provision. The Court of
Appeals noted that ERISA requires that “every plan designate a ‘named fiduciary’ with power
‘to control and manage’ the plan.” Lowen, 829 F.2d at 1218. The requirement of a “named
fiduciary” with control over the assets of a plan focuses responsibility and liability for
mismanagement with “’a degree of certainty.’”
17

Id. (quoting Birmingham v. Sogen-Swiss Int’l

Corp. Retirement Plan, 718 F.2d 515, 522 (2d Cir. 1983). As is shown by the above discussion
on the interplay of the relevant statues, the Court agrees that determining the party with control
over the assets of a plan is crucial to identifying legal responsibility under ERISA. From these
premises the Lowen Court concluded that a named fiduciary is able to benefit from the safe
harbor provision.
Defendants also rely on a District Court case from the United States District Court for the
Northern District of Illinois. In Harris Trust & Sav. Bank v. Salomon Bros., 832 F. Supp. 1169,
1177–78 (N.D. Ill. 1993), Harris Trust and Savings Bank, as Trustee for the Ameritech Pension
Trust, Ameritech Corporation, and an individual sued Salomon Brothers Inc. and Salomon
Brothers Realty Corporation (collectively “Salomon”) alleging, inter alia, violations of ERISA.
Plaintiffs brought suit based on several of Salomon’s investments alleged to have been based on
inaccuracies and misrepresentations. The District Court had issued a prior opinion finding that
plaintiffs had sufficiently alleged that Salomon was an ERISA investment advisor fiduciary. 3
Harris Trust & Sav. Bank v. Salomon Bros., 813 F. Supp. 1340, 1343 (N.D. Ill. 1992). Plaintiffs
subsequently filed an Amended Complaint, to which Salomon asserted a counterclaim alleging
that if Salomon is liable for any breaches of duty then Ameritech Corporation is also liable and
must contribute to any damages awarded.
Ameritech Corporation sought dismissal of the counterclaim, in part, by arguing that it
was protected by section 1105(d)(1)’s safe harbor provision even though it was not a named
trustee. The District Court agreed that Ameritech Corporation was able to avail itself of the

3

Salomon is alleged to have breached its ERISA fiduciary duties while acting as a “broker-dealer and investment
advisor” to the Trust. Harris Trust & Sav. Bank v. Salomon Bros., 813 F. Supp. 1340, 1342 (N.D. Ill. 1992).
Neither the Committee with authority to appoint an investment manager, or the investment manager was a named
party in the Harris Trust case.

18

protection afforded by section 1105(d)(1) because it either fell within the definition of a
“trustee,” and in the alternative, even if it did not meet the definition of a trustee it was still
protected from liability from the acts and omission of an appointed investment manager. Harris
Trust, 832 F. Supp. at 1177–78.
The District Court relied on section 1103(a)’s language that a “trustee” is granted
“exclusive authority and discretion to manage and control the assets of the plan” except when
such authority “has been delegated” to an investment manager. Harris Trust, 832 F. Supp. at
1177 (citing 29 U.SC. § 1103(a)).

The District Court reasoned that “[b]ecause the plan

instrument named Ameritech as a fiduciary, and because Ameritech had control over the trust
except to the extent that an investment manager was appointed, Ameritech falls within the
definition of a ‘trustee.’” Id. The District Court’s unstated premise that allowed it to conclude
that Ameritech Corporation fell within the definition of a “trustee,” is that the term “trustee” in
Section 1103(a) encompasses named fiduciaries who are not named trustees so long as such
fiduciaries have control of the assets except when an investment manager has been appointed.
In Harris Trust, the District Court concluded in the alternative that even if Ameritech
Corporation does not fall within the definition of a trustee it still is afforded protection from
liability under section 1105(d)(1). The Harris Trust Court relied on the legislative history of
ERISA, citing a “‘Joint Explanatory Statement of the Committee of Conference,’ [in which]
Congress explained that ‘as long as the named fiduciary had chosen and retained the investment
manager prudentially, the named fiduciary would not be liable for the acts or omissions of the
manager.’” Harris Trust, 832 F. Supp. at 1178 (quoting H.R.Conf.Rep. No. 1280, 93rd Cong., 2d
Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 4639, 5038, 5082).
19

Relying on regulations the District Court also noted that the DOL “stated that named
fiduciaries can delegate managerial authority over plan assets to an investment manager, thereby
releasing the named fiduciary from liability for the acts or omissions of the person to whom
authority was delegated.” Harris Trust, 832 F. Supp. at 1178 (citing 29 C.F.R. § 2509.75-8, FR14 “Questions and answers relating to fiduciary responsibility under the Employee Retirement
Income Security Act of 1974”)4. Finally, the Harris Trust Court relied on the Lowen Court’s
holding that “‘obligations of named fiduciaries with regard to their duty of care ... can be reduced
by the appointment of an investment manager under ERISA section 402(c)(3).’” Harris Trust,
832 F. Supp. at 1178 (quoting Lowen, 829 F.2d at 1219).
The Court has found an additional case supporting the view that the safe harbor applies
to named fiduciaries with control over a plan’s assets who subsequently appoint an investment
manager. Harley v. Minnesota Mining & Mfg. Co., 42 F. Supp. 2d 898 (D. Minn. 1999), aff'd
sub nom. Harley v. Minnesota Min. & Mfg. Co., 284 F.3d 901 (8th Cir. 2002). In Harley, the
fiduciary of the plan responsible for overseeing investment of the plan’s assets delegated that
responsibility to a Pension Asset Committee, who delegated the management of the assets to an
4

As discussed in the body of the Opinion, the Harris Trust Court’s reliance on FR-14 is misplaced as FR-14 does
not refer to 29 U.S.C. § 1105(d)(1). The relevant question and answer from the Code of Regulation is as follows:
FR–14 Q: If the named fiduciaries of an employee benefit plan designate a person who is not a
named fiduciary to carry out fiduciary responsibilities, to what extent will the named fiduciaries be
relieved of liability for the acts and omissions of such person in the performance of his duties?
A: If the instrument under which the plan is maintained provides for a procedure under which a
named fiduciary may designate persons who are not named fiduciaries to carry out fiduciary
responsibilities, named fiduciaries of the plan will not be liable for acts and omissions of a person
who is not a named fiduciary in carrying out the fiduciary responsibilities which such person has
been designated to carry out, except as provided in section 405(a) of the Act, relating to the
general rules of co-fiduciary liability, and section 405(c)(2)(A) of the Act, relating in relevant part
to the designation of persons to carry out fiduciary responsibilities. . . .
29 C.F.R. § 2509.75-8

20

investment manager. Harley, 42 F. Supp. 2d at 901, 908. The District Court acknowledged that
even with the appointment of an investment manager the fiduciary “still had an obligation to
supervise and monitor” the investments. Id. at 908. In a footnote the District Court, citing
Harris Trust, noted that “[b]ecause [the fiduciary] delegated to [an investment] manager[] the
fiduciary duty to administer the Plan’s assets according to agreed upon terms relating to that
investment, [the fiduciary] is not subject to liability for acts or omissions of the managers that
contravene those terms.” Id. at 908 n. 13. Again, the District Court, reiterated that this does not
relieve the fiduciary from oversight responsibilities, or its duty to monitor the investment over
time. Id.
Finally, in Whitfield v. Cohen, the District Court stated that “ERISA permits trustees of a
plan to appoint an investment manager to manage plan assets,” and “[w]here such an
appointment has been properly made, the trustees are not liable for the acts or omissions of the
investment manager.” Whitfield v. Cohen, 682 F. Supp. 188, 196 (S.D.N.Y. 1988) (citing 29
U.S.C. §§ 1102(c)(3) and 1105(d)(1)). The District Court’s statements elide the distinction
between a “named fiduciary” with appointing authority and a “trustee,” as there is no ERISA
statute stating that a “trustee” may appoint an investment manager. In Whitfield, the distinction
between these terms was not important since the defendant-fiduciary was a “trustee” and “named
fiduciary.” Moreover, the Whitfield Court would not permit the defendant the safe harbor of
section 1105(d) because the appointment of the investment manager had not been properly made.
Id. In any event, the analysis of the statutes and discussion of the case law persuade the Court
that under circumstances when an investment manager is properly appointed by a person with
control over the assets of a plan the terms “trustee” and “named fiduciary” are interchangeable.
21

c. Legislative History and DOL Fiduciary Responsibility Q & A’s
The Harris Trust case cites legislative history as well as the DOL’s “questions and
answers relating to certain aspects of fiduciary responsibility” published in the Code of
Regulations to support its conclusion that section 1105(d)(1) applies even if the fiduciary seeking
the safe harbor is not a trustee. Harris Trust, 832 F.Supp. at 1178. The Court agrees that the
legislative history supports the Harris Trust Court’s conclusion; however, the regulatory source
cited by the Harris Trust Court is misplaced; as such it merely provides instructive clarification
regarding section 1105.
The Harris Trust Court supported its conclusion in part by explaining that in question and
answer FR-145 the DOL “stated that named fiduciaries can delegate managerial authority over
plan assets to an investment manager, thereby releasing the named fiduciary from liability for the
acts or omissions of the person to whom authority was delegated.” Harris Trust, 832 F. Supp. at
1178 (citing 29 C.F.R. § 2509.75-8, FR-14 “Questions and answers relating to fiduciary
responsibility under the Employee Retirement Income Security Act of 1974”). However, FR-14
does not concern circumstances where an investment manager has been appointed, nor does it
address the safe harbor provision of section 1105(d)(1).

The “index of the questions and

answers” contains a table showing that FR-14 is addressing fiduciary responsibility under
sections 1105(a) and 1105(c)(2). 29 C.F.R. § 2509.75-8.
Section 1105(a) is the primary subsection addressing the circumstances of co-fiduciary
liability.

29 U.S.C. § 1105(a).

Section 1105(c)(1) circumscribes the type of fiduciary

responsibilities, “other than trustee responsibilities,” that a named fiduciary may allocate
5

According to the Code of Federal Regulations “Key to question prefixes,” “FR -- refers to fiduciary
responsibility,” and “D – refers to definitions.” 29 C.F.R. § 2509.75-8.

22

“among named fiduciaries” or to “persons other than named fiduciaries.”

29 U.S.C. §§

1105(c)(1)(A) & (B) (emphasis added). Section 1105(c)(2) is essentially the “safe harbor”
provision for named fiduciaries who allocate such fiduciary responsibilities to co-fiduciaries, not
investment managers. 29 U.S.C. § 1105(c)(2).
Section 1105(c)(3) notes that the meaning of “trustee responsibility” under subsection
1105(c) does not include the “power under the trust instrument of a named fiduciary to appoint
an investment manager in accordance with section 1102(c)(3) of this title.”

29 U.S.C. §

1105(c)(3). While subsection 1105(c) is not a model of clarity, DOL question and answer FR15, which addresses subsections 1105(c)(2) and (c)(3), specifically clarifies the issue. The
question of FR 15 is:
Q: May a named fiduciary delegate responsibility for management and control of
plan assets to anyone other than a person who is an investment manager as
defined in section 3(38) of the Act so as to be relieved of liability for the acts and
omissions of the person to whom such responsibility is delegated?
29 C.F.R. § 2509.75-8, FR-15 (emphasis added). The DOL’s answer is clear:
No. Section 405(c)(1) [concerning allocation of fiduciary responsibilities] does
not allow named fiduciaries to delegate to others authority or discretion to
manage or control plan assets.”
Id. (emphasis added). Clearly, that would include appointment of an investment manager
as FR-15 goes on to explain that a named fiduciary may delegate the authority to manage
or control plan assets to investment managers pursuant to sections 1103(a)(2) and
1102(c)(3). Id.
While the regulatory questions and answers do not address the question of whether a
named fiduciary who appoints an investment manager is entitled to the safe harbor of section
1105(d)(1), the legislative history does. The Harris Trust Court relied on a truncated quote from
23

the legislative history of ERISA, but the full context of the quote is even more persuasive
support for the conclusion reached in Harris Trust and by this Court:
Investment managers, investment committees, etc. -- . . . a person who is a named
fiduciary with respect to the control or management of plan assets may appoint a
qualified investment manager to manage all or part of the plan assets. . . . In this
case, the plan trustee would no longer have responsibility for managing the assets
controlled by the qualified investment manager, and the trustee would not be
liable for the acts or omissions of the investment manager. Also, as long as the
named fiduciary had chosen and retained the investment manager prudentially,
the named fiduciary would not be liable for the acts or omissions of the manager.
Id. First, the title of this section shows that it concerns investment managers. Second, it
begins by identifying the appointing authority vested in a “named fiduciary.” Next, it
points out that the “trustee” is relieved from liability when the named fiduciary appoints
an investment manager. Finally, it concludes, consistent with the case law, that the
named fiduciary who appointed the investment manager is also relieved from liability.
d. Conclusion
The Court concludes that Defendants are entitled to the safe harbor of section
1105(d)(1). Accordingly, Defendants cannot be held liable for the acts or omissions of Labow
and WPN during the time period Labow and WPN were investment managers. There is no
dispute that from December 5, 2008 through May 19, 2009, Labow and WPN were investment
managers and accordingly, we will grant Defendants’ motion to dismiss the DOL’s co-fiduciary
liability claims against Defendants for this time period.

As discussed above, the written

investment management agreement is effective as of November 1, 2008, and under section
1105(d)(1) Defendants were therefore not “under an obligation to invest” the assets of the plan.
Accordingly, the Court will grant Defendants’ motion to dismiss the DOL’s failure to invest
claim against Defendants.
24

B. Failure to Monitor Claim
Finally, Defendants argue for dismissal of the DOL’s claim alleging that Defendants
failed to properly monitor the investments as managed by Labow and WPN in violation of
ERISA sections 404(a)(1)(A) and 404(a)(1)(B). The Court will deny the motion to dismiss
because the DOL has properly stated a claim of failure to monitor against Defendants.
The power to appoint and dismiss an investment fiduciary “carries with it a duty ‘to
monitor appropriately’ those subject to removal.” Coyne & Delany Co. v. Selman, 98 F.3d 1457,
1465 (4th Cir. 1996) (quoting Ed Miniat, Inc. v. Globe Life Ins. Grp., Inc., 805 F.2d 732, 736
(7th Cir. 1986) and Leigh v. Engle, 727 F.2d 113, 135 (7th Cir. 1984)). An appointing authority
is not exposed to liability unless something “‘put [them] on notice of possible misadventure by
their appointees.’” Coyne, 98 F.3d at 1466 n.10 (quoting Newton v. Van Otterloo, 756 F.Supp.
1121, 1132 (N.D.Ind.1991). According to the Department of Labor’s regulatory questions and
answers, an appointing authority would be notified of a possible misadventure by
implementation of a regular monitoring procedure:
Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees
or other fiduciaries with respect to these appointments?
A: At reasonable intervals the performance of trustees and other fiduciaries
should be reviewed by the appointing fiduciary in such manner as may be
reasonably expected to ensure that their performance has been in compliance with
the terms of the plan and statutory standards, and satisfies the needs of the plan.
No single procedure will be appropriate in all cases; the procedure adopted may
vary in accordance with the nature of the plan and other facts and circumstances
relevant to the choice of the procedure.
29 C.F.R. § 2509.75-8, FR-17.
The Department of Labor reiterated the basic requirements of the duty to monitor in an
amicus brief submitted in the United States Court for the Northern District of Oklahoma, and
25

relied on by Defendants. In re: Williams Co. ERISA Lit., No. 02-153 (N.D. Ola. Aug 22, 2003)
(DOL Amicus Brief, attached as Ex. A to Def. Supp. Br.). The Department of Labor noted that
“in most cases, it will be enough that [appointing fiduciaries] adopt and adhere to routine
procedures sufficient to alert them to deficiencies in performance which could require corrective
action (e.g., the implementation of a system of regular reports on the investment fiduciaries
decisions and performance).” DOL Amicus Brief, at 5. In its amicus brief the Department of
Labor further explained that “appointing fiduciaries are not charged with directly overseeing the
investments [as that would be] duplicating the responsibilities of the investment fiduciaries”; that
appointing fiduciaries “are required to have procedures in place so that on an ongoing basis they
may review and evaluate whether the investment fiduciaries are doing an adequate job;” and the
procedures that are implemented allow the appointing fiduciary “under the applicable
circumstances, to assure themselves that” the investment fiduciaries “are properly discharging
their responsibilities.” DOL Amicus Brief, at 8-9.
The time for review of monitoring procedures is measured under a standard of
reasonableness.

See 29 C.F.R. § 2509.75-8, FR-17 (noting that review is at “reasonable

intervals”). “A fiduciary must ascertain within a reasonable time whether an agent to whom he
has delegated a trust power is properly carrying out his responsibilities”. Whitfield, 682 F. Supp.
at 196 (citing G. Bogert, Trusts and Trustees, § 557 at 155 (Revised 2d Ed. 1980)). The
appointing fiduciary also has a “duty to monitor [the investment manager’s] performance with
reasonable diligence and to withdraw the investment if it became clear or should have become
clear that the investment was no longer proper for the Plan.” Whitfield, 682 F. Supp. at 196

26

(citing Public Service Co. of Colorado v. Chase Manhattan Bank, 577 F.Supp. 92, 104 (S.D.N.Y.
1983).
As can be seen from FR-17, the Department of Labor’s amicus brief, and the case law,
the minimum requirement is that the appointing fiduciary imposes a regular monitoring
procedure. The Department of Labor’s guidance to appointing authorities on the duty to monitor
requires, “under the applicable facts and circumstances,” the following:


the appointing authority must adopt routine monitoring procedures;



the appointing authority must adhere to the routine monitoring procedures;



the appointing authority must review the results of the monitoring procedures;



the monitoring procedures must alert the appointing authorities to possible deficiencies;
and
the appointing authority must act to take required corrective action.



29 C.F.R. § 2509.75-8, FR-17; DOL Amicus Brief, at 5, 8-9. Thus, an appointing authority that
has instituted proper monitoring procedures has the corresponding duty to review and evaluate
what is reported by the procedures and further, to take corrective action when required.
Defendants’ argument for dismissal fails primarily because it mischaracterizes the DOL’s
allegations as requiring a de facto strict liability standard for the duty to monitor. See Def. Reply
Br. at 7-8 (DOL’s claim means that Defendants had to be “guarantor’s” of Labow’s conduct;
Defendants were required to watch “every single move of an investment manager;” Defendants
had “immediate and clear duty to second-guess Labow’s investment decisions”), and Def. Supp.
Br. at 2 (DOL’s claim requires Defendants to “terminate the investment managers at the first sign
of trouble,” and duty to monitor claim “improperly attempts to impute Labow’s conduct and
breaches” to Defendants). Defendants’ argument also raises the erroneous inference that an
appointing fiduciary cannot be found to have violated a duty to monitor so long as the appointing
27

fiduciary has implemented procedures that allow for regular reporting on the investment
fiduciaries. See Def. Supp. Br at 2 (“fiduciaries satisfy the duty by ensuring that procedures are
in place to monitor investment managers”); id. at 3 ( FR-17 “suggests that as long as appropriate
procedures are in place, fiduciaries satisfy the duty to monitor”); and id. at 4 (“if appropriate
procedures are in place, such as an outside auditor and annual review, the duty to monitor is
satisfied”). As discussed above, the duty to monitor requires that fiduciaries adopt a regular
monitoring procedure under the applicable facts and circumstances that is capable of alerting the
fiduciary of irregularities; that the fiduciary adhere to the monitoring procedure; and that the
fiduciary take corrective action when required. Moreover, if an appointing fiduciary is relieved
from liability simply by implementing monitoring procedures with regular reporting, even when
monitoring reveals a need for corrective action but the appointing fiduciary does not act, the duty
to monitor is reduced to a mere procedural implementation.
Contrary to Defendants’ characterization of the failure to monitor claim, the DOL’s claim
“does not require the creation of a specific monitoring procedure, does not require fiduciaries to
duplicate the efforts of investment managers, and does not require constant oversight of every
decision.” Def. Supp. Br. at 4. The DOL alleges several specific time frames over which
Defendants monitoring process was deficient and how it was deficient; that Defendants failed to
take action to rectify an undiversified account; that it was Labow whose performance was
inadequate; and that Labow and WPN should have been removed. The DOL does not allege an
unsupported claim that because the value of the Plans’ asset’s declined Defendants must not have
properly monitored Labow and WPN. The DOL’s failure to monitor claim is supported with,
inter alia, the following factual allegations.
28








Defendants failed to inquire into the status of the assets transferred on
November 3, 2008 (Am. Compl. ¶ 18);
From November 3, 2008, when the Neuberger Berman account was
transferred the assets were undiversified and Defendants did not
discover this until December 30, 2008 (Am. Compl. ¶¶ 21, 25);
Regardless of the backdated investment agreement, the DOL alleges
that Defendants’ failure to enter into a written agreement with a
defined investment policy when the assets were transferred on
November 3, 2008 contributes to their duty to monitor the investment
manager (Am. Compl. ¶ 22);
Once the undiversified account was discovered on December 30, 2008,
Defendants did not act promptly to correct the failure to diversify
through March 24, 2009 (Am. Compl. ¶ 26);
Once the assets were converted to cash Defendants failed in their duty
to monitor by not ensuring that Labow and WPN acted to prudently
invest the assets through May 19, 2009 (Am. Compl. ¶ 29).

At this stage of the pleadings there is no record on which to evaluate the conduct of the
Defendants with respect to monitoring the investment managers from November 3, 2008 through
May 29, 2009. Further discovery is needed to establish exactly what efforts, if any, were made
by Defendants in furtherance of their fiduciary duties.

Accordingly, the Court will deny

Defendants’ motion to dismiss the DOL’s claim for failure to monitor.
Defendants cite Howell v. Motorola, Inc., 633 F.3d 552, 572 (7th Cir. 2011), noting that
the Seventh Circuit Court opined that “plaintiffs’ argument that summary judgment was not
warranted on [the failure to monitor claim] borders on frivolous.” Howell, 633 F.3d at 573. The
Howell Court was criticizing plaintiffs’ argument that the duty to monitor essentially requires
“every appointing Board member to review all business decisions” of the investing fiduciary, a
requirement, the Court noted, that would defeat the purpose of the appointment in the first place.
Id. The Howell Court quoted plaintiffs’ “specific” argument: “that ‘appointing fiduciaries must
continually monitor their appointees.’” Id. at 574 (quoting but not citing plaintiff’s argument).
Despite Defendants’ characterization of the DOL’s arguments in the present case, the DOL
29

simply does not allege that Defendants were required to “continually monitor” Labow and WPN.
Contrary to what Defendants conclude from Howell, the Court’s opinion supports the
proposition that even if appropriate monitoring procedures are in place an appointing fiduciary
may be subject to liability. Howell, 633 F.3d at 573. The Howell Court stated that “[t]here is no
doubt that those who appoint plan administrations have an ongoing fiduciary duty under ERISA
to monitor the activities of their appointees.” Howell, 633 F.3d at 573 (citing Leigh, 727 F.2d at
134-35). The Court then quotes in full FR-17, and explains that the duty to monitor “exists so
that a plan administrator or sponsor cannot escape liability by passing the buck to another person
and then turning a blind eye.” Howell, 633 F.3d at 573. Moreover, the Howell plaintiffs’ failure
to monitor claim was dismissed not just because they oversimplified the duty to monitor in their
allegations, but also because they failed to produce any “evidence about how many reports were
produced” or “what resulted from annual reviews of the Committee by the directors.” Howell,
633 F.3d at 573. In other words, the Howell plaintiffs rested the entirety of their failure to
monitor claim explicitly on an argument -- with no supporting evidence -- that the duty to
monitor requires the appointing fiduciary “to review all business decisions,” or in plaintiffs’
words “to continually monitor” appointees. Id. If a plaintiff fails to produce such evidence, as
the Howell plaintiffs did, then summary judgment in favor of the appointing fiduciary may be
warranted. See Howell, 633 F.2d at 573 (case was at Circuit Court “after all parties have had a
chance to develop the record for purposes of summary judgment,” and plaintiffs failed to meet
their burden to show genuine issues of material fact existed).
Other cases cited by Defendants also do not support their argument that the DOL has
failed to state a claim of failure to monitor. Defendants assert that the District Court for the
30

Northern District of California found that plaintiffs failed to state a claim because the complaint
“did not specify an alleged defect in the monitoring system in place, and merely pleaded that the
parties sat idly by/failed to remove fiduciaries as the plans suffered losses.” Def. Supp. Br. at 67 (citing White v. Chevron Corp., No. 16-CV-0793-PJH, 2016 WL 4502808 (N.D. Cal. Aug. 29,
2016). In fact the White Court dismissed the duty to monitor claim because it was derivative and
“wholly dependent on the breaches of duty alleged in the first through fourth causes of action,”
which the Court had already dismissed. White, 2016 WL 4502808, at *19. In addition, the Court
noted that plaintiffs had failed to allege “that the fiduciaries ignored . . . some other signal of a
problem requiring closer attention. . . .” White, 2016 WL 4502808, at *16. The Court’s
alternative reason for finding that plaintiffs failed to state a claim of duty to monitor was due to a
specific “lack of clarity” revealing that plaintiffs’ claim was based on pure supposition,
explained by the Court as follows:
The allegation that Chevron Corporation had a duty to monitor its appointees “[t]o
the extent that any of [Chevron's] fiduciary responsibilities were delegated to
another fiduciary,” suggests that plaintiffs do not know whether Chevron
Corporation in fact delegated its fiduciary duties or to whom. Moreover, the fifth
cause of action does not specify which “appointees” or “other fiduciaries”
Chevron Corporation failed to monitor.
White, 2016 WL 4502808, at *18 (emphasis added).
Similarly, in In re Calpine Corp., the District Court for the Northern District of
California dismissed the failure to monitor claim as moot due to the the Court’s prior
dismissal of plaintiff’s direct claim of breach of fiduciary duty. In re Calpine Corp., No.
C-03-1685 SBA, 2005 WL 1431506, at *6 (N.D. Cal. Mar. 31, 2005). The Court also
cited FR-17 and noted that plaintiff did not allege facts to support a claim that defendants
had failed to periodically review the performance of the appointee. Id.
31

Finally, the United States District Court for the District of Washington allowed
plaintiffs’ claim of failure to monitor for failing to provide appointees with necessary
information to proceed, but dismissed plaintiffs’ second claim of failure to monitor
because it fell short of the facial plausibility standard set forth in Ashcroft v. Iqbal, 556
U.S. 662 (2009). In re Washington Mut., Inc. Sec., Derivative & ERISA Litig., No. 2:08MD-1919 MJP, 2009 WL 3246994, at *10–11 (W.D. Wash. Oct. 5, 2009). The Court’s
dismissal of the second failure to monitor claim is distinguishable from the present case
as the claim was based on the meritless and unsupported argument that if assets declined
then there must have been a failure to monitor. Id. 2009 WL 3246994, at *10-11. The
Court explained plaintiff’s lack of supporting allegations in detail, concluding that “the
inference that all PIC and PAC members were necessarily under-supervised as a result of
the decline in WaMu’s stock price falls short of the facial plausibility standard articulated
in Iqbal.” Id. 2009 WL 3246994, at *11.
The Court concludes that the DOL has properly stated a failure to monitor claim
and Defendants’ motion to dismiss the claim will be denied.
V.

Conclusion
For the foregoing reasons the Court finds that the Third Amendment to the Severstal

Wheeling, Inc. Investment Management Agreement is effective as of November 1, 2008.
Accordingly, Defendants’ Motion to Dismiss (Docket No. 124) will be granted as to Plaintiff’s
failure to invest claim. Plaintiffs will be permitted leave to amend the Amended Complaint
consistent with this Opinion.

32

Defendants’ Motion to Dismiss (Docket No. 124) will be granted as to Plaintiff’s cofiduciary liability claim. Defendants’ Motion to Dismiss (Docket No. 124) will be denied as to
Plaintiff’s failure to monitor claim.

Defendants’ alternative Motion for Summary Judgment is

denied.
An appropriate Order will be entered.

By the court:
s/Nora Barry Fischer
Nora Barry Fischer
United States District Judge
Dated: June 7, 2017

33