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Tatum v. RJR Pension Investment Committee

United States Court of Appeals, Fourth Circuit

April 28, 2017

RICHARD G. TATUM, individually and on behalf of a class of all other persons similarly situated, Plaintiff - Appellant,
v.
RJR PENSION INVESTMENT COMMITTEE; RJR EMPLOYEE BENEFITS COMMITTEE; R. J. REYNOLDS TOBACCO HOLDINGS, INC.; R. J. REYNOLDS TOBACCO COMPANY, Defendants-Appellees. CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA; AMERICAN BENEFITS COUNCIL, Amici Supporting Appellees.

          Argued: January 25, 2017

         Appeal from the United States District Court for the Middle District of North Carolina, at Greensboro. N. Carlton Tilley, Jr., Senior District Judge. (1:02-cv-00373-NCT-LPA)

         ARGUED:

          Jeffrey Greg Lewis for Appellant.

          Adam Howard Charnes for Appellees.

          Jeffrey Michael Hahn for Amicus Secretary of Labor.

         ON BRIEF:

          Matthew M. Gerend Robert M. Elliot, Helen L. Parsonage, Kelly M. Dermody, Daniel M. Hutchinson for Appellant.

          Daniel R. Taylor, Jr., Thurston H. Webb for Appellees.

          M. Patricia Smith, G. William Scott, Elizabeth Hopkins, Counsel for Appellate and Special Litigation, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Amicus Secretary of Labor.

          Kate Comerford Todd; Janet M. Jacobson; William M. Jay, Jaime A. Santos, for Amici Chamber of Commerce of the United States of America and American Benefits Council.

          Before WILKINSON, MOTZ, and DIAZ, Circuit Judges.

          DIANA GRIBBON MOTZ, Circuit Judge

         This Employee Retirement Income Security Act ("ERISA") case returns to us for a third time. The beneficiaries of an ERISA retirement plan appeal the judgment, issued after a full bench trial, that the fiduciary's breach of its duty of procedural prudence did not cause the substantial losses in the retirement plan resulting from the sale of non-employer stock funds. We had previously remanded the case to the district court so that it could apply the correct legal standard for determining loss causation, but we expressed no opinion as to the proper outcome of the case. On remand, applying the correct standard, the court found that the fiduciary's breach did not cause the losses because a prudent fiduciary would have made the same divestment decision at the same time and in the same manner. For the reasons that follow, we affirm.

         I.

         A.

         We begin with a brief review of the events leading up to this lawsuit. Our previous opinions and those of the district court set forth the facts of this case in far greater detail. See generally Tatum v. RJR Pension Inv. Comm. (Tatum IV), 761 F.3d 346, 351-55 (4th Cir. 2014); Tatum v. R.J. Reynolds Tobacco Co. (Tatum II), 392 F.3d 636, 637-39 (4th Cir. 2004); Tatum v. R.J. Reynolds Tobacco Co. (Tatum V), No. 1:02-cv-00373, 2016 WL 660902, at *2-*12 (M.D. N.C. Feb. 18, 2016); Tatum v. R.J. Reynolds Tobacco Co. (Tatum III), 926 F.Supp.2d 648, 651-69 (M.D. N.C. 2013).

         In 1999, RJR Nabisco, Inc. decided to spin off the company's food business, Nabisco, from its tobacco business. Tatum V, 2016 WL 660902, at *2. The company provided several rationales for this decision. But the critical motivating force seems to have been that tobacco litigation against RJR adversely affected the value of Nabisco stock. Id. at *3.

         Prior to the spin-off, participants in RJR Nabisco's ERISA-covered retirement plan ("the Plan") could hold stock in their retirement accounts in two funds related to the company: the RJR Nabisco Common Stock Fund and the Nabisco Common Stock Fund. Id. at *1. "After the spin-off, the RJR Nabisco Common Stock Fund was divided into two separate funds: the Nabisco Group Holdings Common Stock Fund . . ., which held the stock from the food business, and the RJR Common Stock Fund, which held the stock from the tobacco business." Tatum IV, 761 F.3d at 379. "Thus, as a result of the spin-off, there were two funds holding exclusively Nabisco stock: the Nabisco Common Stock Fund, which existed prior to the spin-off, and the Nabisco Group Holdings Common Stock Fund, which was created as a result of the spin-off" (collectively the "Nabisco Funds"). Id. at 379 n.1. RJR, as the Plan administrator, concluded that, given the spin-off, "it would be inappropriate to hold stock in what was to become a non-related company." Tatum V, 2016 WL 660902, at *4. Accordingly, RJR informed Plan participants that the Nabisco Funds would be frozen on the date of the spin-off and divested within six months. Id. at *5.

         The spin-off occurred on June 14, 1999. Id. At that time, RJR amended the Plan documents to freeze the Nabisco Funds. This meant that Plan participants could make no additional investments in the Funds, but participants could sell their shares in the Funds. Id. at *1, *5. In the months immediately following the spin-off, Nabisco stock sharply declined in value. Tatum IV, 761 F.3d at 353. In October 1999, RJR held a series of meetings to discuss the possibility of reversing its decision to divest the Funds, but ultimately decided to continue as planned. Id. Also in October, RJR experienced a significant adverse verdict in the tobacco litigation, which caused both RJR and Nabisco stock to fall. Tatum V, 2016 WL 660902, at *7. In November, RJR attempted to amend the Plan documents to indicate that the Plan would no longer offer the Nabisco Funds.[1]Id. at *9-*10. During this time, Nabisco stock continued to decrease in value. Id. From the date of the spin-off until January 31, 2000, when the divestment occurred, the price of the Nabisco Group Holdings common stock fell 60%, and the price of the Nabisco common stock fell by almost 30%. Id. at *11.

         Two months after the divestment, on March 30, 2000, investor Carl Icahn made an unsolicited bid to take over Nabisco, which allowed Nabisco to pursue corporate restructuring without tax consequences. Id. Nabisco Group Holdings rejected the Icahn offer in April, "but announced that it would explore all alternatives to maximize shareholder value, effectively putting [Nabisco Group Holdings] on the auction block." Id. By December 2000, Philip Morris had acquired Nabisco for $55 per share and RJR had bought Nabisco Group Holdings for $30 a share. Id. By the time the sales were completed, the price of both companies' stock had increased dramatically; Nabisco Group Holdings common stock increased 247% and Nabisco common stock increased 82%. Id.

         B.

         In May 2002, Richard Tatum, an RJR employee, brought this action against RJR and various RJR committees on behalf of himself and others similarly situated. He alleged that the defendants, as fiduciaries of the Plan, "breached their . . . duties under ERISA by eliminating Nabisco stock from the Plan on an arbitrary timeline without conducting a thorough investigation." Tatum IV, 761 F.3d at 355. Tatum further charged "that their fiduciary breach caused substantial loss to the Plan because it forced the sale of the Plan's Nabisco Funds at their all-time low, despite the strong likelihood that Nabisco's stock prices would rebound." Id.

         The district court initially concluded that the Plan documents required divestment of the Nabisco Funds and granted RJR's motion to dismiss. On appeal, we held "that the Plan documents did not mandate divestment of the Nabisco Funds, and thus did not preclude Tatum from stating a claim against the defendants for breach of fiduciary duty." Id. (citing Tatum II, 392 F.3d at 637). Accordingly, we reversed the judgment of the district court and remanded the case to it.

         The district court then conducted a four-week bench trial, which involved the testimony of numerous fact and expert witnesses and a mountain of documents. Upon consideration of this evidence, the court issued a detailed opinion containing extensive factual findings. The court held that RJR (1) breached its fiduciary duty of procedural prudence when it decided to remove the Nabisco Funds from the Plan "without undertaking a proper investigation into the prudence of doing so, " (2) "bore the burden of proving that [this] breach did not cause the alleged losses to the Plan, " and (3) had, despite its breach, met its burden by showing that a hypothetical prudent fiduciary could have made the same decision. Id. (quoting Tatum III, 926 F.Supp.2d at 651).

         On appeal, we agreed with the district court that RJR had breached its duty of prudence as an ERISA fiduciary, and, as such, bore the burden of proving the losses were not attributable to the breach. Id. at 351. However, we vacated the district court's judgment because we concluded that our precedent requires a breaching fiduciary to prove by a preponderance of the evidence that a hypothetical prudent fiduciary would have made the same decision. Id. at 351, 365, 368 (citing Plasterers' Local Union No. 96 Pension Plan v. Pepper, 663 F.3d 210, 218 (4th Cir. 2011)). We instructed the court "to review the evidence to determine whether RJR has met its burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same decision." Id. at 368. That review, we noted, might or might not lead the court to the same ultimate conclusion. This determination was for the district court on remand; we expressed no view as to the proper resolution of the case.

         On remand, the court issued another thorough opinion. In it, the court explained why in its view RJR had met its burden of showing by a preponderance of the evidence that a hypothetical prudent fiduciary would have divested the Nabisco Funds in the manner and at the time RJR did. Tatum V, 2016 WL 660902, at *26. Tatum filed the instant appeal.

         II.

         Tatum initially maintains that the district court disregarded our mandate, a question we consider de novo. See S. Atl. Ltd. P'ship of Tenn., LP v. Riese, 356 F.3d 576, 583 (4th Cir. 2004). Tatum argues that, in holding that a prudent fiduciary would have made the same decision as RJR made here, the court focused too much on risk, ignored the plain language of the Plan documents, failed to consider the testimony of Professor Thomas Lys, and did not explain why a prudent fiduciary would have divested the Nabisco Funds at the time that RJR did. We disagree.

         As to the district court's asserted singular focus on risk, we explained in Tatum IV that "while the presence of risk is a relevant consideration in determining whether to divest a fund held by an ERISA plan, it is not controlling." 761 F.3d at 367. We see no indication that the district court impermissibly rested its analysis solely on risk. Even a cursory review of its opinion reveals that the court also considered value and expected returns, the diversity of the Plan's investments, the requirements of the Plan documents, and the timing of the divestment. The court additionally took account of the nature of the Plan as a long-term savings vehicle and the role of a fiduciary in managing beneficiaries' assets. Tatum V, 2016 WL 660902, at *13, *25. Had the court considered only risk, it would have erred. But it did not. Rather, the court acted entirely within our mandate in addressing risk as a "relevant consideration" along with other factors.

         Next, Tatum takes issue with how the district court treated the Plan documents. Tatum contends that the court failed to give adequate consideration to the fact that these documents, absent the invalid November amendment, required that the Nabisco Funds remain frozen. In Tatum IV, we explained that, while the terms of the Plan documents cannot "trump the duty of prudence, " the "plan terms, and the fiduciary's lack of compliance with those terms, inform a court's inquiry as to how a prudent fiduciary would act under the circumstances." 761 F.3d at 367 n.16. We directed the district court on remand "to factor into its causation analysis RJR's lack of compliance with the governing Plan document." Id. at 368.

         The district court did precisely that. The court found that "it is more likely true than not that had a prudent fiduciary reviewed the information available to it at the time, including Plan documents, public disclosures, analysts' reports and associated research as to their significance, and newspaper articles, it would have decided to divest the Nabisco Funds at the time and in the manner as did RJR." Tatum V, 2016 WL 660902, at *23 (emphasis added). Moreover, the court recognized that RJR had not amended the Plan documents but noted that no evidence suggested that RJR intentionally disregarded Plan language or that Plan participants were unaware of the planned divestment. See id. at *24. The court then concluded that, given these facts, failure to effectuate the Plan amendment did not "affect determination of the substantive issues addressed by a prudent fiduciary." Id. at *25.[2]

         Tatum's assertion that the court refused to consider the testimony of Professor Lys similarly lacks merit. We instructed the court to consider Professor Lys's testimony "as to what constituted a prudent investment decision." Tatum IV, 761 F.3d at 368 n.17. The court did so -- dedicating an entire paragraph to Professor Lys's testimony as to how a prudent fiduciary would research an investment decision and citing Professor Lys's testimony on additional issues over a dozen times. See, e.g., Tatum V, 2016 WL 660902, at *12-*13, *18, *20-*21, *23. The district court ultimately found Professor Lys's testimony less persuasive than that of RJR's experts, id. at *13, but the court certainly considered Professor Lys's testimony.

         Finally, Tatum claims that the district court violated our mandate by failing to weigh "the timing of the divestment as part of the totality-of-the-circumstances inquiry."[3]But the district court's straightforward opinion belies any argument that it refused to consider the timing of the divestment. Relying on expert testimony, the court determined that a prudent fiduciary would have made the decision to divest the non-employer funds (the Nabisco Funds) and would have completed the divestment when RJR did. Id. at *23.[4]

         In sum, the district court did not disregard our mandate. That conclusion, of course, does not resolve this appeal, or even whether the court correctly evaluated risk, Plan language, Professor Lys's testimony, and the timing of the divestment. Tatum also argues that the court erred in its evaluation of these factors, and we now turn to those arguments.

         III.

         Tatum principally contends that in evaluating the evidence the district court applied two incorrect legal standards. The bulk of this argument rests on the assertedly critical distinction between investment decisions and divestment decisions. Tatum maintains that because the court failed to recognize this distinction, it ignored "factors relevant to a divestment decision." Tatum also claims that the district court, despite its explicit statements to the contrary, applied the improper "could have" standard that we rejected in Tatum IV. We review a district ...


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