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Brandt v. Edward Grounds and Mount Prospect State Bank

decided: July 6, 1982.

KENNETH BRANDT, GLENN MCHENRY, HENRY REITZ, TRUSTEES OF THE SMITHCO FABRICATORS, INC. PROFIT SHARING PLAN & TRUST, PLAINTIFFS-APPELLANTS,
v.
EDWARD GROUNDS AND THE MOUNT PROSPECT STATE BANK, AN ILLINOIS BANKING CORPORATION, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. Honorable Marvin E. Aspen, Presiding Judge.

Cummings, Chief Judge, and Cudahy, Circuit Judge, and William J. Campbell, Senior District Judge.*fn*

Author: Campbell

CAMPBELL, Senior District Judge.

This is an appeal from two orders of the District Court. The first order dismissed Count III of the second amended complaint for failure to state a claim under the Employee Retirement Income Security Act (hereafter "the Act" or "ERISA"), 29 U.S.C. § 1001 et seq. The second order denied plaintiffs' Motion for Leave to Amend Count III. The plaintiffs, the Trustees of the Smithco Fabricators Inc. Profit Sharing Plan & Trust (hereafter "the Trust"), contend that the District Court erred in its construction of ERISA and that it abused its discretion in denying leave to amend the complaint. For the reasons stated below, we affirm.

Appellants brought this action against Edward Grounds, a former trustee, and the Mount Prospect State Bank (hereafter "the Bank") seeking to recover approximately $175,000 allegedly converted by Grounds. During the period from November 11, 1975 through August 17, 1978 Grounds withdrew the money from two savings accounts maintained by the Trust at the Bank.*fn1 Withdrawals from those accounts required the signatures of two trustees. Grounds obtained approximately $14,600 by forging the signature of another trustee, Glenn McHenry, on the withdrawal slips. The balance of the $175,000 was withdrawn by obtaining McHenry's signature under false pretenses.

When the defalcation was discovered, the trustees brought this action against Grounds and the Bank. As amended, Count I of the complaint alleged a breach of fiduciary duty (under ERISA) against Grounds, Count II alleged a breach of the Bank's duty as a depositor (for accepting the forged instruments) and Count III alleged a breach of fiduciary duty (under ERISA) against the Bank.

On October 6, 1980, the District Judge granted the Bank's Motion to Dismiss Count III for failure to state a claim for which relief can be granted. Count III had alleged that the Bank had provided investment advice for a fee and therefore was a fiduciary under 29 U.S.C. § 1002(21) (A) (ii). However, the Court reasoned that since there were no allegations that the losses were caused by any investment advice provided by the Bank, the Bank could not be held liable as a fiduciary under the Act. 502 F. Supp. 598.

Subsequent to the dismissal order, the plaintiffs filed a Motion for Leave to Amend Count III. The proposed amendment still claimed a breach of fiduciary duty by the Bank, but alleged that in addition to providing investment advice, the Bank had exercised significant control over the Trust assets by executing investment transactions approved by the trustees. The plaintiffs alleged that as a result of that control, the Bank's fiduciary duty extended to the disposition and withdrawal of Trust assets. The alleged breach of this duty was the Bank's issuance of cashier's checks payable to Grounds personally (as distinguished from payable to him in his representative capacity as trustee). The trustees' Motion for Leave to Amend was denied on November 7, 1980.*fn2 The plaintiffs then filed this appeal.

The definition of "fiduciary" for purposes of ERISA is stated in 29 U.S.C. § 1002(21) (A):

". . . 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, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan . . ."

An ERISA fiduciary must perform his duties in accordance with the standards provided in 29 U.S.C. § 1104. A violation of those standards can subject the fiduciary to liability under either 29 U.S.C. § 1109 (relating to general fiduciary liability) or 29 U.S.C. § 1105 (relating to liability for breach of a co-fiduciary).

Appellants claim that the Bank qualifies as a fiduciary as a result of its providing investment advice for a fee.*fn3 They contend that the Bank violated the prudent man standard of 29 U.S.C. § 1104(b) by issuing cashier's checks to Grounds personally and should be liable for that breach under 29 U.S.C. § 1109 or alternatively, under 29 U.S.C. § 1105(a) (2) for the breach by Grounds.

We note that there is no allegation that the Bank was a "named fiduciary" as defined in 29 U.S.C. § 1102(a) (2). Therefore, assuming that the Bank became a fiduciary by providing investment advice, its fiduciary status existed only "to the extent" that it provided that advice, 29 U.S.C. § 1002(21) (A). As noted by the District Judge, the phrase "to the extent" obviously suggests a limitation of the fiduciary responsibility. This is supported by the regulations:

"A fiduciary with respect to the plan who is not a named fiduciary is a fiduciary only to the extent that he or she performs one or more of the functions described in section 3(21) (A) of the Act. The personal liability of a fiduciary who is not a named fiduciary is generally limited to the fiduciary functions, ...


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