Opinion
Civil Action No. 99-10815-GAO.
March 12, 2002.
MEMORANDUM AND ORDER
The plaintiff, Leonard J. Bertaux, Trustee for the Wallace, Floyd, Associates 401(k) Plan ("the Plan"), brought a claim under the Employee Retirement Income Security Act ("ERISA") against his predecessor Trustee, the defendant Dreyfus Trust Company ("Dreyfus Trust"), claiming that the value of the assets of the Plan were unnecessarily diminished by reason of Dreyfus Trust's breach of its fiduciary duty. In particular, the complaint alleged that Dreyfus Trust had been instructed to effect an in-kind transfer of the Plan's assets, consisting mostly of investments in stocks or mutual funds, to a new custodian, Charles Schwab Company, Inc. ("Schwab") but that Dreyfus Trust instead liquidated the assets and transferred cash to Schwab. Because the stock market was then experiencing a period of increasing prices, the liquidation and ultimate reinvestment caused the Plan to miss the opportunity for substantial appreciation in its assets. The other plaintiff, the Plan's sponsor Wallace, Floyd, Associates Inc. ("Wallace Floyd"), brought claims arising out of the same course of events against the other defendant, Dreyfus Service Corporation ("Dreyfus Service"), which acted as record keeper for Dreyfus Trust. In turn, Dreyfus Trust brought a counterclaim against Wallace Floyd (the employer/sponsor) under an indemnification clause in the trust agreement entered into between Wallace Floyd and Dreyfus Trust. At trial, the jury returned a special verdict finding that Dreyfus Trust had indeed breached its fiduciary duty as alleged by the Plan, but assessing damages for the breach at only $45.00. The jury also found that Dreyfus Trust had not acted with willful misconduct or gross negligence.
Now, both the Plan and Dreyfus Trust seek an award of attorneys' fees and costs. The Plan claims that it is entitled to attorneys' fees and costs under ERISA because it prevailed on the ERISA breach of fiduciary duty claim. See 29 U.S.C. § 1132 (g)(1) (providing that "the court in its discretion may allow a reasonable attorney's fee and costs of action to either party"). Dreyfus Trust claims that it is entitled to indemnification for its attorneys' fees and costs, as well as the small amount of damages assessed, under the contractual indemnification clause, which provides that Wallace Floyd (the Plan's sponsor) shall indemnify Dreyfus Trust for all costs "including, without limitation, attorney's fees and others costs and expenses incident to any suit [or] action . . . in connection with the Plan or this Trust Agreement." Trial Ex. 1, Sec. 3.8 at 7. In each case, the request is DENIED.
The defendant also argues that it is entitled to recover attorneys' fees under the ERISA statute, but since the defendant was not a prevailing party on the ERISA claim, it is not entitled to statutory relief. See Martin v. Blue Cross Blue Shield of Virginia, 115 F.3d 1201, 1210 (4th Cir. 1997); see also Cottrill v. Sparrow, Johnson Ursillo, Inc., 100 F.3d 220, 225 (1st Cir. 1996).
Plaintiff's Motion
The Court of Appeals for this circuit has adopted five guideline factors to be considered in deciding whether to award attorneys' fees under ERISA:
(1) the degree of culpability or bad faith attributable to the losing party; (2) the depth of the losing party's pocket, i.e., his or her capacity to pay an award; (3) the extent (if at all) to which such an award would deter other persons acting under similar circumstances; (4) the benefit (if any) that the successful suit confers on the plan participants or beneficiaries generally; and (5) the relative merit of the parties' positions.
Cottrill, 100 F.3d at 225 (citing Gray v. New England Tel. and Tel. Co., 792 F.2d 251, 257-58 (1st Cir. 1986)). The guidelines are flexible, designed not to control by rather simply to guide the court in its exercise of discretion. Not every factor need be considered in each case and "no one of them should be dispositive." Gray, 792 F.2d at 258.
The first factor considers culpability and fault broadly; it does not focus on whether there was bad faith or not on the part of the defendant. See McPherson v. Employees' Pension Plan of American Re-Ins. Co., 33 F.3d 253, 256 (3d Cir. 1994). While this factor ordinarily focuses only on the bad faith or culpability of the losing party, the Court may also, in appropriate circumstances, consider any culpability on the part of the prevailing party. See Cottrill, 100 F.3d at 225.
Here, Dreyfus Trust claims that it liquidated the Plan assets before transferring them because, despite its requests, the Plan did not submit the proper written authorization for an in-kind transfer. The jury found that Dreyfus Trust did not act with gross negligence or willful misconduct, and no direct evidence was presented that Dreyfus Trust acted in bad faith in liquidating the Plan. The loss in value to the Plan is attributable to careless practices and seemingly innocent oversights by several participants, including Dreyfus Trust, representatives of the Plan itself, and probably Schwab as well. Because several parties shared some responsibility for the damage to the plaintiff, the culpability factor does not weigh strongly in favor of an award of fees to the plaintiff.
The second factor, the depth of the loser's pockets, is also not dispositive. For all that appears, it seems certain that Dreyfus Trust could afford to pay the Plan's legal fees. However, this factor does not operate symmetrically. "An inability to afford attorneys' fees may counsel against an award, but the capacity to pay, by itself, does not justify an award." Cottrill, 100 F.3d at 227 (internal citations omitted).
The third guideline, general deterrence, is not helpful in these circumstances. An award for the plaintiff here could tend to promote more prudent transfer practices, closer attention to informally expressed wishes made on behalf of ERISA plans, and less insistence on bureaucratic punctilio by fiduciaries like Dreyfus Trust. On the other hand, the jury by its low damage award signaled that much of the loss might have been avoided if persons acting for the Plan had themselves been more diligent. In light of that signal, granting an award to the plaintiff might have the unwanted tendency to permit plan representatives to think that inattention on their part has no consequence.
The fourth factor considers the benefit the ERISA claim brought to the plan participants. In this case the Plan sought an award of damages in the vicinity of $200,000 (plus or minus, depending on the measure of damages used). The jury's award of $45.00, with the notation that it represented one dollar to each plan participant, represented only a symbolic victory, not one that conferred real benefits on the Plan's participants.
The final guideline, referring to the merits of the plaintiff's underlying case, is more or less a wash. The Plan's theory of liability attributed all responsibility for losses to an arrogant trustee's deliberate disregard of clear instructions given on behalf of the Plan. The evidence presented at trial was more ambiguous, revealing numerous miscommunications, forms lost in the mail, and dismayingly little follow-up by any of the actors. Evidence was also presented that the extent of the losses to the Plan could have been mitigated significantly if any of the entities involved in the transfer had monitored the transaction more closely.
In sum, the Plan's victory was Pyrrhic. It prevailed only in a symbolic sense. The substance of the claim, that Dreyfus Trust should be held liable for the full amount of the losses sustained, was rejected by the jury. There might be circumstances in which a symbolic victory is truly worthwhile, as when vindication of an important principle is at stake. But that was not true in this case. In the circumstances present here, an award of attorneys' fees to the Plan is not appropriate. Defendant's Motion
After suffering disastrous losses in defeating a Roman army at Asculum, Pyrrhus, King of Epirus, lamented, "Another such victory over the Romans, and we are undone." J. Bartlett, Familiar Quotations 82 (16th ed. 1992).
Dreyfus Trust argues that the judgment on its indemnification claim should include not only the forty-five dollar ($45.00) jury award, but also its attorneys' fees and costs from this entire lawsuit. The defendant's motion is denied.
The defendant argues that the plaintiff waived its right to challenge this award because the plaintiff did not bring the claim in its Rule 50(a) motion for judgment as a matter of law. On December 10, 2001, prior to sending the case to the jury, the parties agreed that after the jury returned a verdict, the Court would decide all issues concerning attorneys' fees, therefore the plaintiff has not waived its right to argue that the indemnification provision does not cover the defendant's attorneys' fees and costs in this action.
The general indemnification clause in the trust agreement between the Plan's sponsor, Wallace Floyd, and Dreyfus Trust provides:
Unless resulting from the Trustee's own gross negligence or willful misconduct, the Employer shall indemnify the Trustee and save it harmless from, against, for and in respect of any and all damages, losses, obligations, liabilities, liens, deficiencies, costs and expenses (including, without limitation, attorney's fees and other costs and expenses incident to any suit, action, investigation, claim or proceedings) suffered, sustained, incurred or required to be paid by the Trustee in connection with the Plan or this Trust Agreement.
Trial Ex. 1, Sec. 3.8 at 7. As noted, the jury found that Dreyfus Trust did not act with gross negligence or willful misconduct when it breached its fiduciary duty under ERISA.
New York law, which provides the guidance for questions pertaining to the construction of the trust agreement, respects the American Rule that the parties to litigation bear their own attorneys' fees and costs unless an award of attorneys' fees is authorized "by agreement between the parties or by statute or court rule." A.G. Ship Maintenance Corp. v. Lezak, 503 N.E.2d 681, 683 (N.Y. 1986); see also Chapel v. Mitchell, 642 N.E.2d 1082, 1084 (N.Y. 1994). An indemnification clause in a contract may shift attorneys' fees in cases of litigation between the parties to the contract, but the parties' intention to permit such fee-shifting must be "unmistakably clear" from the language in the contract. See Mallon Resources Corp. v. Midland Bank, No. 96 CIV 7458 (RAP), 1997 U.S. Dist. LEXIS 14954, at *23 (S.D.N.Y Sept. 24, 1997). General or broadly phrased indemnification clauses may not adequately express the contracting parties' clear intention to shift fees in cases of litigation between only them, as distinguished from litigation between the indemnitee and a stranger to the contract. See Hooper Assocs., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 905 (N.Y. 1989). Where an indemnification agreement can be given meaning and effect with respect to third-party suits against one of the contracting parties, New York courts have held that general indemnification language is insufficient to overcome the presumption, leaving in effect the American Rule, that parties — both successful and unsuccessful — must bear their own costs. See id.; see also Mallon, 1997 U.S. Dist. LEXIS 14954, at *23. That is, while general language might be sufficient to shift fees if the agreement would have no meaning or purpose unless it were to apply to litigation between the contracting parties, see e.g. Breed, Abbott, Morgan v. Hulko, 531 N.Y.S.2d 240 (N.Y.App.Div. 1988), a broad provision is not sufficient where it may foreseeably be applied to third-party cases and where there is no specific language that overrides the presumption that as between the parties to the contract the American Rule will govern.
The trust agreement provides that "[t]he construction, validity and administration of this Trust Agreement shall be governed by the laws of the state where the Trustee has its principal place of business, except to the extent that such laws are preempted by ERISA." Trial Ex. 1, Sec. 9.5 at 9.
Under these principles, Dreyfus Trust may not recover its attorneys' fees under the indemnification clause. In the trust agreement, that provision permits indemnification in the case of claims brought by third parties who are strangers to the agreement. Since it has meaning and can be given effect in such cases, it should not be construed to apply to suits between the parties to the agreement in the absence of a clear and specific statement that the parties intended that result.
Even if that is true, Dreyfus Trust argues, it is seeking indemnification for fees that were in fact incurred in defending a third-party suit. While Wallace Floyd was a party to the trust agreement, the Plan was not, so the Plan's suit was a suit by a third party, and the fees and costs incurred in defending that suit are recoverable under the clause from Wallace Floyd.
This Court concludes, however, that in the circumstances of this case, New York law would not distinguish between the Plan and the Employer for the purpose of determining whether an indemnification provision authorizes fee shifting, even though they are, strictly speaking, separate legal entities. The contractual obligations that Dreyfus Trust undertook when it agreed to the trust agreement are, as a practical matter, obligations owed as much to the Plan as to the Employer. Put another way, there is no substantive distinction to be made between the Plan and the Employer insofar as Dreyfus Trust's performance of its obligations is concerned. The trust agreement provides that Dreyfus Trust's duties and responsibilities under the agreement shall be discharged "solely in the interest of Participants and their beneficiaries, and (a) for the exclusive purpose of providing benefits to the Participants and their beneficiaries and defraying the reasonable expenses of administering the Plan. . . ." Trial Ex. 1, Sec. 3.1.1 at 6. The other two agreements between Wallace Floyd and Dreyfus Trust detail the provisions of the Plan including, for example, the eligibility requirements and investment and contribution options. Trial Exs. 2, 3. Under the agreements, all of Dreyfus Trust's obligations are to Wallace Floyd as the sponsor of the Plan, and not to Wallace Floyd in any other capacity. In other words, what Wallace Floyd contracted for was Dreyfus Trust's fiduciary services to the Plan sponsored by Wallace Floyd.
While there may be distinctions between the Plan and the Employer as sponsor that should be observed for other purposes, such as ERISA, those distinctions are not meaningful for purposes of the New York law regarding fee shifting under contractual indemnification clauses. In these circumstances, the interests of the Plan and the Employer with regard to the obligations imposed on Dreyfus Trust under the relevant agreements are sufficiently common that the policy underlying the rule set forth in Hooper would likely be applied by the New York courts in this context. 548 N.E.2d at 903. From the language of the contract, it is not unmistakably clear that the parties intended to shift attorneys' fees in a litigation between them, and without such clarity, the indemnification clause must not be construed to shift the burden of attorneys' fees from one party to another. The defendant's request for attorneys' fees and costs is denied.
Conclusion
For the foregoing reasons, the respective requests by the parties for the award of attorneys' fees are DENIED.