By Pension and Benefits Editorial Staff
Contractual and co-fiduciary relationships between an investment advisor and 403(b) plans’ fiduciaries were not sufficient to create the privity that would shield the advisor from ERISA liability for claims from which the fiduciaries had been absolved in earlier litigation, according to the U.S. Court of Appeals in New York (CA-2). Although the facts and legal claims submitted in the case were similar, the parties had separate and distinct responsibilities to the plan and the bases for their respective liability to the plan participants were different.
Excess fees and underperforming investments under 403(b) plans. New York University (NYU) sponsors two 403(b) plans for employees of the University (Faculty Plan) and its medical school (Medical Plan). The plans are overseen by a Retirement Plan Committee, comprised of nine NYU employees (e.g., Chief Investment Officer, VP of Finance, VP of HR, and Director of Benefits). The Committee further retained an investment advisor (Cammack LaRhette Consulting (Cammack)) to assist in the evaluation, selection and management of the plan’s recordkeepers and the monitoring of plan investments. Cammack provided the Committee with quarterly “due diligence” reports on the performance of the investment options under the plan, including a comparison of the performance of the funds against benchmark indices.
Plan participants, citing excessive recordkeeping fees and losses from the investment funds, brought suit alleging fiduciary breach by the Committee. Note, Cammack was not a party to the suit.
A federal trial court in New York concluded that the retirement committee did not act imprudently in the selection and monitoring of an allegedly high cost recordkeeper or in retaining underperforming investment funds (Sacerdote I). Subsequently, the participants filed a new action against Cammack and a variety of affiliates of NYU (but not NYU), alleging substantially the same claims as those asserted in the earlier litigation, including the dismissed claims. The trial court rejected the claims, holding that the participants did not have the right to maintain two actions on the same subject against the same parties at the same time. Although Cammack and the affiliates had not been parties to the earlier litigation, the court reasoned that they were in privity with the NYU fiduciaries in Sacerdote I because they had a sufficiently close relationship with NYU fiduciaries and their interests were aligned with those of NYU.
The participants appealed, challenging only the dismissal of Cammack. The issue on appeal was whether the claims against Cammack, which were substantially similar to the claims asserted against NYU in the preceding litigation, should have been barred on the basis of Cammack’s alleged privity with NYU. The Second Circuit panel concluded that the parties were not in privity and vacated and remanded the lower court’s order.
Circumstances allowing for privity. Initially, the appeals court explained, a plaintiff that suffers harm at the hands of two defendants may bring separate suits against both parties, alleging that each caused the injury. However, courts recognize only narrow circumstances in which applying the preclusion doctrine to a nonparty would be appropriate, fair, and not violative of the due process rights of the nonparty. In the event that any of the circumstances are present, the parties are in privity.
The United States Supreme Court in 2008 specified the circumstances sufficient to invoke the privity rule (Taylor v. Sturgell, 553 U.S. 880). According to the Court, the “recognized exceptions” to the rule against nonparty preclusion fall into the following six categories: (1) agreements by a nonparty to be bound by the determination of issues in an action between others; (2) certain pre-existing substantive legal relationships based in property law between the nonparty and the party, such as preceding and succeeding owners of property, bailee and bailor, and assignee and assignor; (3) representative suits where the nonparty’s interest was adequately represented by a party with the same interests, such as class actions and suits brought by trustees, guardians, and other fiduciaries; (4) when a nonparty has assumed control over the litigation in which the judgment was rendered; (5) when a nonparty is acting as a proxy, agent, or designated representative of a party bound by a judgment; and (6) when a statutory scheme expressly forecloses successive litigation by nonlitigants, so long as the scheme comports with due process.
Close relationship and aligned interests not sufficient to justify privity. The trial court, in concluding that NYU and Cammack were in privity, focused on facts alleged in the participants’ complaint, including that: Cammack provided advisory services to NYU; Cammack is a co-fiduciary to the plan and is a party to the contract that requires it to advise NYU on investment options; Cammack participated in and enabled the NYU fiduciaries to commit breaches of fiduciary duty by providing imprudent investment advice and by failing to make any reasonable effort to remedy the breach. The alleged facts indicated to the trial court that Cammack had a “sufficiently close relationship” to NYU to justify preclusion.
The appeals court disagreed that Cammack and NYU’s interests were “sufficiently identical” to support a finding of privity. According to the court, the bases for liability as to NYU and Cammack were not “necessarily the same.” Camack and NYU, the court stressed had “separate and distinct” responsibilities as co-fiduciaries to the plan and could be found liable for the participants’ injuries for separate reasons. Specifically, the court explained, Cammack’s potential liability arose from providing allegedly flawed advice to the retirement committee. However, NYU’s potential liability arose from allegedly failing to independently investigate the merit of the plans’ investments or failing to determine whether it was reasonable to rely Cammack.
A reasonable trier of fact, the court continued, could find that Cammack provided flawed advice to NYU and was liable for the participants’ losses, while also finding that NYU reasonably relied on Cammack’s advice. A reasonable trier of fact could, conversely, find the opposite as well. Under such a scenario, the parties’ interests would diverge. Thus, the court concluded that the court was in error, especially at the pleadings state, to accept Cammack’s argument that its interests were identical to those of NYU over the participants’ plausible assertions to the contrary.
Specified conditions for privity not present in case. The appellate panel next noted that none of the six circumstances recognized by the Supreme Court in Taylor as allowing for privity were present in the case. No evidence indicated that Cammack: agreed to be bound by the result in Sacerdote I; assumed control of NYU’s defense in the earlier case; or was designated a representative or proxy of NYU.
No property-based pre-existing substantive legal relationship. The court stressed that NYU and Cammack did not have the type of property-based “pre-existing substantive legal relationship” that would justify a finding of privity. The contract between NYU and Cammack obliged Cammack to provide investment advisory services but did not create a property rights-based relationship similar to those recognized by the Supreme Court in Taylor that would render a nonparty subject to the judgment of the party with which it was in privity.
Representative suit exception not applicable. Finally, the court concluded that the representative suit exception to a plaintiff’s right to separately sue each defendant was not applicable. Cammack did not establish, the court explained, that NYU understood itself to be acting in a representative capacity for Cammack in litigation Sacerdote I or that the trial court took care to protect the interests of Cammack in that case.
Source: Sacerdote v. Cammack Larhette Advisors, LLC (CA-2).
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