United States District Court, N.D. Illinois
January 15, 2004.
JAMES NELSON, on behalf of himself and a class of persons similarly situated, Plaintiff,
BRINSON PARTNERS, INC. and BP AMOCO SAVINGS PLAN, Defendants
The opinion of the court was delivered by: CHARLES KOCORAS, District Judge
This matter comes before the court on Defendant Brinson Partners,
Inc.'s ("Brinson") motion to dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(6). For the reasons set forth below, the motion is
Because this is a motion to dismiss, we accept all well pleaded facts
and allegations in the complaint as true and construe all inferences in
favor of the Plaintiff. Thompson v. Illinois Dep't of Prof'l
Regulation, 300 F.3d 750, 753 (7th Cir. 2002).
Plaintiff James Nelson ("Nelson") is a former employee of BP Amoco
Corporation ("BP"). Nelson was and is a participant in the BP Amoco
(the "Plan"), a 40 J (k)-type retirement plan that is an "employee
pension benefit plan" within the meaning of the Employment Retirement
Income Security Act ("ERISA"), § 3(2)(A), 29 U.S.C. § 1002(2)(A).
Defendant Brinson is a global investment advisory firm based in Chicago.
At all times relevant to this lawsuit Brinson acted as the investment
manager for the Plan's assets pursuant to an agreement between BP's
predecessor and Brinson known as the Investment Manager Agreement ("IM
A"). The TMA granted Brinson "full discretionary authority to manage the
assets" of the Plan.
As a BP employee participating in the Plan, Nelson had the opportunity
to choose from over 200 investment options. Among those options was the
Money Market Fund, the subject of this lawsuit, in which Nelson and other
BP employees invested. The Money Market Fund was described in BP
investment materials to Plan participants as a relatively safe investment
option that sought to provide a short-term fixed income (also known as
"money market") rate of return with a minimal risk of principal loss.
Evidence of the Money Market Fund's conservative investment philosophy
was that it held as its "benchmark" the rate of return for a 30-day U.S.
Despite its low-risk objectives, Brinson chose some investments for the
Money Market Fund that were riskier than those usually associated with
traditional money market funds such as unrated and low-rated debt
instruments. One such investment
occurred on October 11, 2001, when Brinson purchased for the Money
Market Fund an unsecured $20 million share of Enron debt know as a "loan
participation." This loan participation was a riskier and more complex
investment than the commercial paper in which money market funds
typically invest in that it was unrated by any credit rating agency and
that it was not liquid, meaning that it would have to be held until the
loan reached maturity unless it could be sold to another investor.
Maturity would never materialize as the $20 million loan participation
would quickly prove worthless as Enron soon defaulted on November 29,
2001, as part of its rapid plunge into bankruptcy. This loss represented
two percent of the Money Market Fund's total assets, which was highly
unusual as such funds rarely suffer losses. Soon thereafter BP discharged
Brinson as investment manager of its Money Market Fund.
Even though Enron's speedy downfall caught many in the financial
community by surprise, Nelson contends that prior to Brinson's purchase
of the Enron debt many warnings existed that should have alerted Brinson
to its impropriety as an investment for the Money Market Fund. Nelson
cites the following as "red flags" that should have dissuaded Brinson
from investing in Enron: (1) The rampant insider selling at Enron that
occurred in 2000 and early 2001; (2) the opaqueness of Enron's financial
statements; (3) the unsatisfactorily-explained resignation of Enron
President Jeffrey Skilling on August 15, 2001; (4) the increased price of
an Enron credit protection
contract (a derivative instrument that provided insurance against
an Enron default); and (5) the decline in Enron stock price over the
course of 2001,
Nelson also asserts Brinson should have sold the Enron loan
participation (even though it would have meant selling at a significant
loss) prior to Enron's loan default based on the following occurrences:
(1) Enron's October 16, 2001, announcement of a quarterly loss, its first
in four years, after taking $1 billion in charges for poorly performing
businesses; (2) the SEC's October 22, 2001, announcement that it had
initiated an investigation into Enron; (3) Enron CFO Andrew Fastow's
indictment and subsequent resignation on October 24, 2001; and (4) the
late October lowering of Enron's investment value by various finance
To support its assertion that Brinson's investment analyzation process
was imprudent at the time the Enron loan participation was purchased,
Nelson points to remedial measures that Brinson undertook in the wake of
the Enron default. For instance, Brinson subsequently implemented
"ratings screens" that sought to remove from its portfolio certain
investments that could be prone to rapid devaluation.
In addition, Nelson contends that for the entire period in question
Brinson operated under an undisclosed conflict of interest, namely
Brinson's parent company's close relationship with Enron. Brinson's
parent company, UBS, owned millions of shares of Enron stock, was one of
its largest creditors and served as one of its main
financial advisors. Nelson avers that by investing in Enron's debt,
Brinson did not act solely in the interest of the beneficiaries of the
Nelson filed the present lawsuit, on behalf of himself and other
beneficiaries of the Plan, on September 12, 2003. Nelson's complaint
alleges that Brinson violated various provisions of ERISA, particularly
that Brinson breached its fiduciary duties of loyalty and care. Nelson
seeks as restitution to the Plan the $20 million loss resulting from the
Enron loan participation investment. Brinson now moves to dismiss the
complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).
"The purpose of a motion to dismiss is to test the sufficiency of the
complaint, not to decide the merits." Gibson v. City of
Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990) (quoting Triad
Assocs., Inc. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir.
1989)). A complaint need only specify "the bare minimum facts necessary
to put the defendant on notice of the claim so that he can file an
answer." Higgs v. Carver, 286 F.3d 437, 439 (7th Cir. 2002)
(citing Beanstalk Group. Inc. v. AM General Corp.,
283 F.3d 856, 863 (7th Cir. 2002)). Dismissal is proper only when "it appears
beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." Conley v. Gibson,
355 U.S. 41, 45-46 (1957). With these principles in mind, we now address
the motion before us.
Nelson brings his claims pursuant to 29 U.S.C. § 1104(a)(2) and
29 U.S.C. § 1109(a), which allow for an ER1SA employee welfare benefit
plan beneficiary or participant to sue a plan fiduciary, on behalf of the
plan, for breach of fiduciary duty and recover losses resulting from such
breach for the benefit of the plan. Among the fiduciary duties imposed by
ERISA under the rubric of the "prudent man standard of care" are duties
of loyalty, 29 U.S.C. § 1104(a)(1)(A), and duties of care or
prudence, 29 U.S.C. § 1104(a)(1)(B). In order to properly state a
claim for breach of fiduciary duty under ERISA, a plaintiff's complaint
"must allege facts which set forth (1) that the defendants are plan
fiduciaries; (2) that the defendants breached their fiduciary duties; and
(3) that a cognizable loss resulted." Herdrich v. Pegram,
154 F.3d 362, 369 (7th Cir. 1998), rev'd on other grounds,
530 U.S. 211 (2000). On the face of his complaint, it is clear that Nelson has
sufficiently pleaded the first and third requisite elements: The
complaint alleges that Brinson was a fiduciary of the Plan and its Money
Market Fund and that a $20 million dollar loss to the Money Market Fund
resulted from Brinson's decision to invest in Enron debt. The paramount
question then, is whether Nelson has sufficiently alleged a breach of
fiduciary duty so as to satisfy Federal Rule of Civil Procedure 8.
ERTSA mandates that an employee welfare benefit plan fiduciary has a
duty of loyalty which "is the most fundamental of his or her duties, and
`must be enforced with uncompromising rigidity.'" Herdrich at
371, quoting NLRB v. Amax Coal Co., 453 U.S. 322,
329-330 (1981). The relevant ERISA provision states that "a fiduciary
shall discharge his duties with respect to a plan solely in the interest
of the participants and beneficiaries and for the exclusive purpose of
providing benefits to participants and their beneficiaries."
29 U.S.C. § 1104(a)(1)(A)(i). A fiduciary breaches this duty of loyalty
"whenever it acts to benefit its own interests." Herdrich at
371. We find that Nelson's complaint sufficiently alleged that Brinson
acted in its own interests by identifying the undisclosed (to the Plan)
relationship between Brinson's corporate parent, UBS, and Enron.
According to the complaint, Brinson's investment choice was motivated by
its parent UBS' status as a large shareholder, creditor, and financial
advisor of Enron. By alleging Brinson's desire to support Enron at a time
when other investors were losing confidence in the energy trading firm,
Brinson has advanced enough requisite facts to support an allegation that
Brinson breached its fiduciary duty of loyalty.
A deeper inquiry is necessary to answer the question whether Nelson
sufficiently pleaded Brinson's breach of its fiduciary duty of care.
Under ER1SA, apian fiduciary must "discharge his duties . . . with the
care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims."
29 U.S.C. § 1104(a)(1)(B). Nelson alleges that Brinson breached its
duty of care by imprudently investing in the riskier Enron loan
participation for the Plan's Money Market Fund when it should have
selected only conservative and safer "money market grade" investments
to meet its objective of a thirty-day Treasury note rate of return.
Nelson also contends that Brinson breached its duty of care by not
selling Enron's debt, even though it would have meant selling at a
loss, once evidence of Enron's financial woes became more widely
known to the investing community and the public, Brinson counters
that hindsight is twenty-twenty and that there was nothing imprudent
about its decision to invest in Enron, which before its rapid
collapse was considered one of America's best performing corporations.
When analyzing claims for breach of fiduciary duty of care "the
ultimate outcome of an investment is not proof of imprudence,
"DeBruyne v. The Equitable Life Assurance Soc, of the U.S.,
920 F.2d 457, 465 (7th Cir. 1990), as the question is whether the investment
"was prudent at the time it was made, not months or years later."
Ossey v. Marolda, 1998 WL 67624, *5 (N.D. Ill. 1998). As Judge
Bua so astutely observed, "the fiduciary duty of care requires prudence,
DeBruyne v. The Equitable Life Assurance Soc. of the
U.S., 720 F. Supp. 1342, 1349 (N.D. Ill. 1989).
The case giving rise to Judge Bua's remarks contained a factual posture
that was rather similar to the lawsuit at hand. DeBruyne
involved an employee benefit plan participant who sued the plan fiduciary
under ERISA for breach of fiduciary duty of care for making imprudent
investment decisions, The plan in question invested in what was described
as a "Balanced Fund," which sought to achieve low volatility yet steady
growth through a diversified portfolio of equity and debt securities.
DeBruyne, 720 F. Supp. at 1345. While the Balanced Fund initially met its
objectives and grew steadily, its value sharply declined following the
"Black Monday" stock market crash of October 19, 1987. The
DeBruyne plaintiff later sued the Balanced Fund's administrator
under ERISA, alleging that it had breached its fiduciary duty of care by
imprudently investing a disproportionate amount of the low-volatility
Balanced Fund's assets in stocks, leaving it unprepared to face the
plummet in stock prices that occurred on Black Monday. Id. at
1345-46. In awarding the defendants summary judgment, the DeBruyne court
asserted that it could not "`judge defendants' investment decision from
the vantage point of hindsight" and must only "consider the prudence of
defendants' conduct at the time they made the investments." Id.
at 1348. The court then noted how the Black Monday crash caught the
entire nation totally by surprise and that the
plaintiff could provide no evidence that, at the time of the crash,
the Balanced Fund's equity-debt mix was inappropriate, especially
considering the well-performing stock market of the mid-1980s.
Id. at 1348-49.
As was the case in DeBruyne, Nelson's complaint involves an
investment choice, Enron, that appeared wise to much of the financial
community when made but that hindsight proved to be a poor decision.
However, because the present lawsuit has not yet reached the summary
judgment stage, it is important to note that Nelson must only
allege imprudent investing by Brinson, not actually prove it. We
find that Nelson has propounded sufficient facts to support a claim of
breach of fiduciary duty of care. Unlike in DeBruyne, Nelson's
complaint points to factors that relate to the wisdom of the Enron
investment at the time it was made. It also alleges that Brinson failed
to utilize investment screening procedures, which it later adopted, that
could have prevented the purchase of portfolio assets that were
susceptible to rapid devaluation. Even though Nelson's assertions that
numerous warnings and "red flags" existed at the time of Brinson's
purchase of Enron debt certainly do not prove imprudent investing in
violation of ERISA, they are enough to advance a "possible
claim." Herdrich, 254 F.3d at 369, citing Conley
v. Gibson, 355 U.S. at 45-46 (emphasis in original). While also not
necessarily supporting a "winning claim," id., Nelson's
contentions that Brinson imprudently held on to the Enron investment,
until the point of default, after
it became apparent that the company's death was imminent are also
sufficient to bring a claim of breach of fiduciary duty of care.
Brinson also advocates dismissal of Nelson's complaint because it seeks
the reimbursement of funds to Nelson's account. Such a personal award
would be impermissible, as any recovery for breach of fiduciary duties
under 29 U.S.C. § 1104(a)(2) and 29 U.S.C. § 1109 "goes to the
plan as a whole and not an individual beneficiary." Anweiler v. Am.
Elec. Power Serv. Corp., 3 F.3d 986, 992 (7th Cir. 1993). However,
Nelson's complaint does not seek an individual recovery as his prayer for
relief requests "a monetary payment from [Brinson] to the Plan
to make good to the Plan the losses to the Plan resulting from
the aforesaid breaches of fiduciary duties." Compl. at ¶ 45(1)
(emphasis added). In any event, because courts have determined that ERISA
claims for breach of fiduciary duty "should be read as if the claim was
brought as a derivative action on behalf of the plan," Sack v.
Seid, 2002 WL 1838153, *3 (N.D. Ill. 2002), we will read Nelson's
complaint as one brought on behalf of the Plan. As such, any potential
recovery in this action will "inure to the benefit of the plan as a
whole." Massachusetts Life Ins. Co. v. Russell, 473 U.S. 134,
Finally, Brinson maintains that Nelson's claim is not sustainable as a
class action complaint. However, because Nelson has yet to seek class
certification, we will reject Brinson's argument as premature.
Based on the foregoing analysis, Brinson's motion to dismiss is denied.
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