Appeal from a judgment of the District Court for the Southern District of New York (Robert W. Sweet, Judge) imposing liability upon a corporation and an individual for breach of fiduciary duties under ERISA and awarding damages.
Feinberg and Newman, Circuit Judges, and Dumbauld, Senior District Judge.*fn*
JON O. NEWMAN, Circuit Judge.
This appeal concerns enforcement of the duty ERISA imposes upon fiduciaries of employee benefit plans to act "in accordance with the documents and instruments governing the plan." 29 U.S.C. § 1104(a)(1)(D) (1982). Grace Capital Inc. ("GCI") and H. David Grace ("Grace") appeal from a judgment entered in the District Court for the Southern District of New York (Robert W. Sweet, Judge) awarding the trustees of the Retirement Fund of the Fur Manufacturing Industry (the "Fund") $1,507,174. The Court concluded that GCI and Grace breached their fiduciary duties to the Fund by deviating from the written agreement governing GCI's actions as investment manager of the Fund's assets. We affirm the District Court's finding of liability as to GCI and its finding of personal liability as to Grace but remand for further fact-finding on one of the damage issues.
GCI is a registered investment advisor. Grace is president, chief executive officer, and principal shareholder of GCI. On August 28, 1981, GCI entered into a four-page Investment Management Agreement (the "Agreement") with the plaintiffs, who are trustees (the "Trustees") of the Fund. Under the terms of the Agreement, GCI became investment manager of the assets of the Fund and promised to "manage the [Fund's] Account in strict conformity with the investment guidelines promulgated by the Trustees from time to time and with all applicable Federal and State laws and regulations." The Agreement further provided that Grace would "personally supervise and manage the Account" in behalf of GCI and that any changes in the Trustees' guidelines would have to be in writing in order to be effective. Attached as a one-page exhibit to the Agreement was a list of four guidelines (the "Guidelines"), limiting GCI's investment discretion. Central to the present appeal is the first of these Guidelines, which placed the following restriction on the proportion of fund assets that GCI could invest in common stocks:
(1) Common stocks held shall not exceed 25% of the cost of the securities in the Account. Changes in the market value after the purchase of a security which increases [ sic ] the proportion to more than 25% for common stocks shall not violate the standards.
Over the three years that GCI acted as advisor to the Fund, this ceiling on common stock holdings was raised twice: to 35% in May 1982 and to 50% in September 1982. Both of these changes were recorded in the minutes of a Trustees' meeting, a form of documentation that both parties agree satisfies the Agreement's requirement that changes in the Guidelines be in writing. It is also undisputed that at the time of both the May and September 1982 Trustees' meetings, where the Trustees approved a raise in the ceiling, the percentage (on a cost basis) of common stock holdings already exceeded the applicable limit. Prior to a February 1984 Trustees' meeting, GCI proposed a further increase in the ceiling to 70%. During the eight-month period preceding this meeting, the common stock percentage had exceeded the 50% ceiling each month by an average of roughly 15 percentage points. The Trustees refused to increase the ceiling above 50%. Nevertheless, the equity holdings of the Fund's portfolio continued to increase until they reached about 80% in October 1984. At that point Grace and GCI were fired.
At the same time as the percentage of the Fund's equity holdings was increasing, the value of those holdings was decreasing. In June 1983, there had been an unrealized gain of $1,015,651 on equities; by October 1984, there was an unrealized loss of $3,642,045.
In August 1985, the Trustees brought suit, alleging that both defendants had breached a fiduciary duty, 29 U.S.C. § 1104(a)(1)(D), by failing to abide by the documents governing the plan and were thus liable to the Fund, under section 1109(a), for any losses the Fund sustained as a result of the breach.*fn1
The district court granted a motion for partial summary judgment on the issue of liability. Dardaganis v. Grace Capital Inc., 664 F. Supp. 105 (S.D.N.Y. 1987). The Court held that section 1104's requirement that fiduciaries abide by the plan documents together with the Agreement's provision that GCI manage the account "in strict conformity with the investment guidelines" required the Court to conclude, as a matter of law, that "any violation of the terms of [the] Agreement constitutes a breach of Grace Capital's fiduciary duty under § 1104(a)(1)(D) and creates liability to the Fund under 29 U.S.C. § 1109." Id. at 108. The District Court rejected defendants' argument that there were factual disputes as to whether preferred stock was subject to the equity percentage limit and whether the percentage was intended to be a strict limit or only a rough guideline. The Court found that the Agreement required GCI to conform to the 50% limitation -- by liquidating stock, if necessary -- even when cash withdrawals by the Trustees to meet Fund obligations resulted in an increase in the percentage of common stock above the 50% line. The Court also rejected defendants' arguments that the Trustees waived strict adherence to the 50% Guideline by not earlier enforcing it while aware of its violation. The Court held that such a defense under New York contract law is not a valid defense in an action for breach of fiduciary duty under ERISA. 664 F. Supp. at 109-10.
With respect to Grace, the Court found that, although he did not sign the Agreement in his personal capacity, he nevertheless became a fiduciary to the Plan because he was not only president, chief executive officer, and principal shareholder of GCI, but also was "solely responsible for all investment decisions made on behalf of the Fund account." Id. at 111. The Court initially denied summary judgment as to damages, finding that neither theory of "losses" to the Plan, 29 U.S.C. § 1109(a), offered by the parties was in accord with our opinion in Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985). Judge Sweet interpreted Donovan as requiring, in this context, a comparison of what the Plan actually earned with what it would have earned had GCI invested only 50% of the Fund's account in equities. For the purpose of litigating the damages question, Judge Sweet directed the parties to assume that the money invested in these excess holdings of stock would have been invested in the Fund's non-equity holdings during the relevant time period and would have returned a comparable yield.
In a second decision, Dardaganis v. Grace Capital Inc., 684 F. Supp. 1196 (S.D.N.Y. 1988), the Court analyzed the expert affidavits of both sides and granted summary judgment to the plaintiffs on the issue of damages. After defendants' motion for reargument was denied and the District ...