This continues an article begun here on Sunday, April 28, 2013.
One Judge, Judge Straub, dissented in part and concurred in part. Judge Straub pointed out that previous ERISA case law had consistently followed an objective "prudent person" standard; "it focuses on the process of the fiduciary's conduct preceding the challenged decision."[1] The focus of the prudent person standard of fiduciary liability under ERISA "asks whether the fiduciary, at the time he engaged in the challenged transaction," used methods which were appropriate both to investigate, and if the investigation turned up good results, to set up the investment.[2]
Anyone who has had the experience of writing a pleading, whether it be a complaint, an answer and affirmative defenses, or all of these, knows that in drafting a client's allegations of fact it is good pleading practice to frame the available facts based on the prevailing law. Given the potential of a later motion being filed by the opposing party or parties to challenge whether these factual allegations are properly framed either as a claim or as a defense under the applicable law, the pleader tries to frame the client's allegations accordingly, applying law to fact because that is what the Court will do if the legal sufficiency of the allegations is attacked. If the pleader can match factual allegations available in the given case to read in a similar way to legal quotations which she or he will argue from relevant case law or statutes at the hearing, so much the better.
That is precisely what the attorneys for the plaintiffs tried to do in this case, match their clients' factual allegations to the applicable law -- or at least to the law which applied at the time the complaint was filed. Recall that that ERISA case law extant at the time that the complaint in this case was filed, had consistently followed an objective "prudent person" standard; "it focuses on the process of the fiduciary's conduct preceding the challenged decision."[3] The focus of the prudent person standard of fiduciary liability under ERISA "asks whether the fiduciary, at the time he engaged in the challenged transaction," used methods which were appropriate both to investigate, and if the investigation turned up good results, to set up the investment.[4]
In this case, the plaintiffs pleaded that the defendant breached its fiduciary obligations under ERISA "by making 'high-risk investments ... at precisely the time when defaults of subprime mortgages were skyrocketing and numerous subprime lenders were facing insolvency.'" That is what they specifically alleged, for example, in paragraph 29 of their Amended Complaint.[5]
The one Judge in the minority on this panel pointed out that although the Amended Complaint did not contain factual allegations that "specifically detail" how the defendant perpetrated its alleged mismanagement, the plaintiffs did sufficiently "allege that [defendant] acted imprudently by maintaining investments in high-risk mortgage securities, at a time when [defendant] knew or should have known that the market for such securities was collapsing."[6] Regardless of whether the plaintiffs would ultimately prevail at the end of this case, the plaintiffs at the beginning of this case sufficiently alleged a breach of fiduciary duties under ERISA against Wall Street, in the eyes of the Judge who was in the minority on this panel.
There you have it. Two Judges applied what amounted to a summary judgment or directed verdict standard, both dependent on evidence of record, to a motion to dismiss an amended complaint and concluded not that proof was lacking but that allegations were lacking (even though, at least arguably, they were there). It is respectfully submitted that the Judge who wrote in the minority on this panel was the one who got it right in this case.
[1] Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgt., Inc., 2013 WL 1296481 *19 (2d Cir. April 2, 2013)(Straub, J., dissenting and concurring in part).
[2] Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgt., Inc., 2013 WL 1296481 *19 (2d Cir. April 2, 2013)(Straub, J., dissenting and concurring in part). [Emphasis added.]
[3] Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgt., Inc., 2013 WL 1296481 *19 (2d Cir. April 2, 2013)(Straub, J., dissenting and concurring in part).
[4] Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgt., Inc., 2013 WL 1296481 *19 (2d Cir. April 2, 2013)(Straub, J., dissenting and concurring in part). [Emphasis added.]
[5] Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgt., Inc., 2013 WL 1296481 *20 (2d Cir. April 2, 2013)(Straub, J., dissenting and concurring in part). [Emphasis added.]
[6] Pension Benefit Guar. Corp. v. Morgan Stanley Inv. Mgt., Inc., 2013 WL 1296481 *20 (2d Cir. April 2, 2013)(Straub, J., dissenting and concurring in part). [Emphasis added.]
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