Srein v. Frankford Trust Co

Opinions of the United

2003 Decisions States Court of Appeals

for the Third Circuit

3-13-2003

Srein v. Frankford Trust Co

Precedential or Non-Precedential: Precedential

Docket 01-4516

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PRECEDENTIAL

Filed March 13, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-4516

RONALD J. SREIN and R. J. SREIN CORP.,

Appellant

v.

FRANKFORD TRUST COMPANY,

n/k/a/ KEY TRUST COMPANY

ON APPEAL FROM THE

UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF PENNSYLVANIA

(Dist. Court No. 99-cv-2652)

District Court Judge: The Honorable Robert F. Kelly

Argued: September 12, 2002

Before: ALITO and FUENTES, Circuit Judges,

and OBERDORFER,* District Judge

(Opinion Filed: March 13, 2003)

* The Honorable Louis F. Oberdorfer, Senior District Judge for the

District of Columbia, sitting by designation.

2

JAMES L. GRIFFITH (ARGUED)

JOHN P. HALFPENNY

STEVEN K. DILIBERTO

KLETT, ROONEY, LIEBER &

SCHORLING

18th & Arch Streets

Two Logan Square, 12th Floor

Philadelphia, PA 19103-2746

Counsel for Appellant

MARK D. BRADSHAW (ARGUED)

TODD R. BARTOS

Stevens & Lee

4750 Lindle Road

P.O. Box 11670

Harrisburg, PA 17108-1670

Counsel for Appellees

OPINION OF THE COURT

OBERDORFER, District Judge:

Plaintiffs’ appeal requires us to consider the liability of

the trustee of two retirement plans for common law

negligence and breach of fiduciary duty, if any, under the

federal Employee Retirement Income Security Act (“ERISA”),

29 U.S.C. § 1001, et seq. The District Court entered

judgment for defendant under Pennsylvania’s Comparative

Negligence law after a jury found plaintiff ’s contributory

negligence was greater than defendant’s negligence and also

found for defendant on the ERISA issue on the theory that

the trustee was not a fiduciary within the meaning of that

law. We reverse and remand.

I. FACTUAL AND PROCEDURAL BACKGROUND

Resolution of this fact specific case requires extensive

exposition of them. Findings of the District Court and

undisputed evidence establish that:

Ronald J. Srein is the sole stockholder and only employee

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of R.J. Srein Corporation. In the mid-1980’s, Srein had

created in the Corporation two ERISA qualified retirement

plans, a Money Purchase Pension Plan and Profit Sharing

Plan. In 1993 he sought to invest plan funds in

participation agreements on so-called “viatical settlement

contracts.” A viatical settlement contract is, in essence, an

investment in an insurance policy on the life of a terminally

ill insured. It allows “individuals diagnosed with potentially

terminal diseases . . . [to] obtain an immediate payment of

part of the face value of their insurance policy in exchange

for assigning all or part of the life insurance policy. This

enables the insured [also called “viators”] to obtain money

which would otherwise be unavailable to him until after his

death. When the insured passes away, the viatical

settlement company collects the policy proceeds, pays the

investor the money he advanced under the agreement and

the balance is divided between the investor and the

settlement company in accordance with their agreement.”

(Finding of Fact No. 3, JA 22.) To arrange these

investments, Srein engaged a broker, Craig Silverman and

Findco, Inc., to locate “viators” and, for a commission, to

negotiate investments in participation agreements.1 During

1992 and early 1993, Srein entered on his own account six

participation agreements for viatical settlement contracts

with Findco.

Before February 1993 R. J. Srein Corporation engaged

Eagle Retirement and Investment Planning as Trustee of an

ERISA qualified Money Purchase Pension Plan. On

February 3 of that year, Srein sought to enter into a

participation agreement with Findco on behalf of that plan

for a 100% interest in an insurance policy issued by

Philadelphia Life Insurance Company on the life of one

Errol Chamness. However, Eagle “would not allow such

investments by retirement plans on which it was trustee

because such investments were not registered.” (JA 23.)

Learning of this impasse, Silverman referred Srein to

1. A “Participation Agreement” evidences the rights and duties of the

parties including payment to the insured, assignment of the policy to

and for the benefit of the investor and the obligation of the insurance

carrier to pay the proceeds to the broker for transmittal to the investor

after deduction of the commissions.

4

Laraine Daly,2 a Frankford trust officer (hereinafter

sometimes referred to together as “Frankford”). Frankford

informed Srein that “Frankford Trust did not have any

rules against non-registered investments, such as

participation agreements in viatical settlement contracts,

being held in investment plans for which it acted as

trustee.” (JA 24.)3 Based on this representation Srein

agreed to move his retirement accounts to Frankford.

Frankford then “facilitated setting up qualified ERISA

plans for R.J. Srein Corp. at Frankford Trust and

transferring assets from Eagle Retirement to Frankford

Trust. [Frankford] understood that Mr. Srein was moving

the R.J. Srein Corp. Plans to Frankford Trust for the

purpose of, among other things, investing in participation

agreements on viatical settlement contracts.” (Finding of

Fact No. 10, JA 24.)

On February 11, 1993, Srein, the Corporation and

Frankford entered into five agreements that had the effect

of creating a new R.J. Srein Corp. Money Purchase Pension

Plan and a Profit Sharing Plan at Frankford. The new Plan

documents named Srein as both Participant and Plan

Administrator and designated Frankford the Plan trustee.

Daly, on behalf of the bank, acted as the trust officer for

both of the retirement plans. After creating the Plans, Srein

directed Eagle Retirement to liquidate the retirement plans

it held and to transfer their assets to Frankford. (JA 1217.)

The Profit Sharing Plan Trust Agreement (“Trust

Agreement”) between Srein and Frankford as Trustee

declared that the Trustee shall “discharge [its] assigned

duties and responsibilities . . . with the care, skill,

prudence, and diligence under the circumstances then

prevailing that a prudent person 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.” Trust

Agreement § 3.1(b). It continued, “at no time shall any part

2. Laraine Daly married prior to the trial and is now Laraine Beckman.

3. An unregistered investment is “a security not registered with the

Securities and Exchange Commission and therefore not sold publically

unless specific conditions are met.” BLACK’S LAW DICTIONARY 1377 (7th ed.

1999).

5

of the corpus or income of the Fund be used for, or diverted

to, purposes other than for the exclusive benefit of

Participants or their Beneficiaries, or for defraying

reasonable expenses of administering the plan.” Id. at § 4.1.

The Trust Agreement also provided with respect to

investment decisions that Frankford invest the funds of the

Plans:

as directed in writing by the Participant [Srein] . . .

which written directions shall be timely furnished to

the Trustee by the Plan Administrator [also Srein]. In

making any investment of the assets of the Fund, the

Trustee shall be fully entitled to rely on such directions

furnished by the Plan Administrator and shall be

under no duty to make any inquiry or investigation

with respect thereto. It is especially intended under the

Plan and this Agreement that the Trustee shall have no

discretionary authority to determine the investment of

the assets of the Fund.

Profit Sharing Plan Trust Agreement § 2.1.

Similarly, the Master Profit Sharing Plan stated:

In making any investment of contributions under this

§ 6.3, the Trustee shall be fully entitled to rely on the

written directions furnished by the Plan Administrator

and shall be under no duty to make an inquiry or

investigation with respect thereto. If the Trustee

receives any contribution to the Trust that is not

accompanied by written instructions directing its

investment, the Trustee may hold or return all or a

portion of the contribution uninvested without liability

for loss of income or appreciation pending receipt of

proper investment directions from the Plan

Administrator.

Master Profit Sharing Plan § 6.3(c). That Plan further stated

that “the assets of the Plan are held, administered and

managed by the Trustee [Frankford] in accordance with the

terms and conditions of the Trust Agreement,” § 1.1, and

that “the Trustee shall have the sole responsibility for the

administration of the trust and the management of the

assets held hereunder, as specifically provided in the Trust

6

Agreement.” Master Profit Sharing Plan § 10.1. The Master

Money Purchase Plan had identical language in § 11.1.

In consideration for acting as trustee of the Corporation’s

Plans, Frankford was to be “compensated for its services in

accordance with its normal schedule of fees.” See Trust

Agreement § 5.1. Frankford charged fees based upon the

value of the assets held by the Plans. (JA 118.) As Daly

explained “all trust accounts were charged a fee. In the

case of employee benefit accounts, it would have been for

use of the prototype plan document, the — having a

financial institution as trustee . . . . It also, in Srein’s case,

because we were acting as a directed trustee, it involved

maintaining the security record, maintaining the document

in the vault and producing . . . monthly statements of

transactions and assets . . . .” (JA 1306.)

During the pendency of the Trust relationship between

Frankford and the Plans, Srein entrusted to Frankford two

Participation Agreements; one representing an interest in

the Chamness policy and another in an insurance policy on

the life of one J. Lloyd Madsen.

A. The Chamness Policy

On February 11, 1993, Srein, as Plan Administrator,

directed Daly to forward $72,500 from the Money Purchase

Pension Plan to Findco’s escrow agent, Neil Katim, to invest

in a Participation Agreement for a 100% interest in the

Chamness policy. As instructed, Frankford forwarded the

$72,500 to Findco’s escrow agent, who paid it to

Chamness. (JA 1569.) Pursuant to the Agreement,

Chamness conveyed the policy, including a right to its

proceeds to Findco.

The Agreement’s terms required Findco to obtain an

insurance change of beneficiary form from Philadelphia Life

“naming the Escrow Account and the Participant as the

proportional, percentage, irrevocable beneficiaries of the

Policy . . . .” (JA 1569.) Findco failed to do so. Meanwhile,

Frankford placed the Agreement in its vault and assigned it

an “arbitrary, random number[ ]” because “the participation

agreements were not registered investments, [and] they did

not have pre-existing numbers assigned to them.” (JA 25.)

Then, on February 17, 1993, unbeknownst to either Srein

7

or Frankford, Findco entered into a second participation

agreement with D.P. Partnerships for a 100% interest in the

same Chamness policy. (JA 25.)

After Chamness passed away, on August 31, 1994,

Philadelphia Life forwarded the proceeds of that policy to

Findco’s escrow agent. At Findco’s direction, the escrowee

divided the net proceeds from the Chamness policy between

D.P. Partnership and Findco (for its commission); Srein’s

Plan received nothing. (JA 738.) Nevertheless, Frankford,

apparently oblivious of Chamness’ death and the

distribution of the policy proceeds to D.P. Partnership,

continued to list the Chamness policy as an asset of the

Srein Money Purchase Plan and continued to charge the

Plan a trustee fee based upon the value of that asset

through the year 1999. (JA 119, 1123.)

B. The Madsen Policy

On June 3, 1993, Findco and “the Frankford Trust

Company, Trustee, F.B.O. the R.J. Srein Corp. Profit

Sharing Plan,” entered into a Participation Agreement for a

100% interest in an insurance policy issued by American

National Insurance on the life of J. Lloyd Madsen. (JA

1575.) Daly signed the Agreement as trust officer for the

Profit Sharing Plan; Srein signed on behalf of the Plan. As

instructed by Srein, acting in his capacity as Plan

Administrator, Frankford paid $62,500 from the Profit

Sharing Plan for the investment in the Participation

Agreement. (JA 711, 716.) As a result of the assignment of

random numbers to the Agreements, Frankford had no

ability to determine whether more than one customer of the

bank invested in a Participation Agreement for the same

viatical settlement contract. (JA 25.)

The terms of the Madsen Agreement were essentially the

same as those set forth in the Chamness Agreement. It

obligated Madsen to assign to Findco ownership of the

policy on his life and Findco to obtain an insurance change

form from American National naming it and the Srein Profit

Sharing Plan as beneficiaries of the policy. Findco, as with

the Chamness policy, failed to name the Srein Plan as

beneficiary. Again, Frankford assigned the Participation

Agreement a random number and placed it in its vault. (JA

8

25.) Sixteen months later, on October 28, 1994, Frankford

was also serving as trustee for the Stephan Matt Richards’

retirement plan (“Richards’ Plan”) with Daly serving as the

trust officer. On that date, on instructions from that Plan,

Frankford paid $23,030 of the plan’s funds to purchase a

28% interest in the same Madsen policy with respect to

which it held the Srein Plan Participation Agreement. (JA

403.) Daly signed the Richards’ Participation Agreement as

“Trustee, FBO Stephen M. Richards.” (JA 397.) Although

Frankford, and specifically Daly, was the trustee for both

plans, the District Court found that “due to the sixteen and

a half month gap between the two purchases and the fact

that the agreements did not have preexisting numbers

assigned to them since they were unregistered investments,

Frankford did not recognize the two purchases of the same

policy.” (JA 16.)

On May 29, 1995, Lloyd Madsen died; American National

promptly delivered to Silverman $27,499, the policy

proceeds for “Frankford Trust Co. FBO S.M. Richards . . .

& Findco, Inc., Craig Silverman, assignee.” (JA 409.)

Silverman forwarded to Frankford the American National

check designating it for the Richards’ Plan. (JA 407.)

“Frankford Trust did not recognize that these proceeds

related to the same Madsen policy, in which the R.J. Srein

Corp Profit Sharing Plan had taken a 100% interest.” (JA

27.) Daly deposited the check into the Richards’ Plan

account; the Srein Plan received none of the proceeds of the

Madsen policy. Moreover, as in the Chamness case,

Frankford continued to list the Madsen policy as an asset

of the Srein Profit Sharing Plan and continued to charge it

fees until 2001. (JA 118-119.) During the pendency of the

trust relationships, Frankford charged the Srein plans

approximately $7,000 in trustee fees based on the value of

the Chamness and Madsen Participation Agreements. (JA

1014, 1021.)

In early 1997, Srein, having had no return on his six pre-

1993 personal investments in Participation Agreements for

viatical policies as well as those made by the Plans for

which Frankford was trustee, became suspicious of

Silverman and Findco. After some investigation, Srein

discovered that Silverman had been selling Participation

9

Agreements for investments in the same viatical policies to

more than one investor. Ultimately, in June 1997, Srein

and Frankford jointly sued Silverman, Findco, and Findco’s

escrow agent for fraud. Srein won a judgment in excess of

two million dollars. However, by that time, Findco and the

other defendants were insolvent and the judgment

uncollectible. Srein then instituted the instant action

against Frankford in the District Court.

After a trial on the merits a jury returned a special

verdict that defendant was negligent causing $566,000 in

damage to plaintiffs (a $66,000 loss by the Profit Sharing

Plan for the Madsen policy and $500,000 for losses by

Srein from personal viatical investments) but that Srein’s

negligence was a seventy percent contributory cause of the

losses. Applying the Pennsylvania Comparative Negligence

Act,4 the District Court rendered a judgment for defendant

on the negligence claim.

That court also ruled, consistently with the verdict of the

jury serving in an advisory capacity, that Frankford was not

a fiduciary because it was a directed trustee. Emphasizing

that Frankford had exercised no discretion and provided no

investment advice, the District Court entered judgment for

defendant on the ERISA claim.

On appeal, Appellants argue that Frankford functioned

as a fiduciary within the meaning of 29 U.S.C.

§ 1002(21)(A)(i) of ERISA because, as trustee, it exercised

“authority and control” over the management and

disposition of the ERISA plans’ assets.5 Appellants also

4. Under the Pennsylvania Comparative Negligence Act a plaintiff is

entitled to a proportionate share of the damages only when his

contributory negligence does not exceed fifty percent. See Comparative

Negligence Act, 42 Pa. C.S. 7102(a).

5. 29 U.S.C. § 1002(21)(A) states that a person functions as an ERISA

fiduciary to the extent that “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 (emphasis added).

10

contend that the district court erred when it applied

Pennsylvania contributory negligence laws to the common

law claims.

II. DISCUSSION

A. The ERISA Claims

1. Standard of Review

The parties disagree at the threshold about the proper

standard of review to apply to the District Court’s decision

that Frankford Trust was not an ERISA fiduciary. Plaintiffs

argue that the fiduciary status issue is a legal question that

we review de novo. Frankford conversely argues that the

issue before us presents a mixed question of law and fact

for which appellate courts review only the legal conclusions

de novo; factual findings survive unless clearly erroneous.

See Scully v. US WATS, 238 F.3d 497, 505 (3d Cir. 2001).

Here, Plaintiffs accept the underlying factual findings

regarding the agreements entered and actions taken by

Frankford pursuant to the Plan and Trust Agreements; they

dispute only whether or not the District Court properly

determined that those agreements and actions impose

fiduciary status on Frankford. Given that only legal issues

are raised on appeal, we review the district court’s legal

conclusion de novo. See id.; see also Hamilton v. Carell, 243

F.3d 992, 997 (6th Cir. 2001) (“Where the facts are not in

question, a party’s status as an ERISA fiduciary is purely a

question of law”); Libbey-Owens-Ford Co. v. Blue Cross &

Blue Shield Mut., 982 F.2d 1031, 1034 (6th Cir. 1993)

(whether a plan administrator is a fiduciary is a question of

law).

2. Frankford’s Fiduciary Status

“ERISA ‘defines fiduciary not in terms of formal

trusteeship, but in functional terms of control and

authority over the plan . . . .’ ” Mertens v. Hewitt Assocs.,

508 U.S. 248, 262 (1993). ERISA creates liability for

breaches of fiduciary duty “to the extent” that a person

functions in a fiduciary capacity. 29 U.S.C. § 1002(21)(A);

see also Glaziers & Glassworkers Union Local No. 252 v.

Newbridge Sec., Inc., 93 F.3d 1171, 1180 (3d Cir. 1996).

11

Fiduciary status attaches to a person managing an ERISA

plan under subsection (i) of § 1002(21)(A) if that person

exercises discretion in the management of the plan, or if the

person exercises any authority or control over the

management or disposition of the plan’s assets. See Bd. of

Trs. of Bricklayers and Allied Craftsmen Local 6 of New

Jersey Welfare Fund v. Wettlin Assocs. Inc., 237 F.3d 270,

273 (3d Cir. 2001). This Court recognizes that the

“significant difference between the two clauses [of

subsection (i)] is that discretion is specified as a

prerequisite to fiduciary status for a person managing an

ERISA plan, but the word ‘discretionary’ is conspicuously

absent when the text refers to assets.” Id.; see also IT Corp.

v. General Am. Life Ins. Co., 107 F.3d 1415, 1421 (9th Cir.

1997). It has been well said that “[f]iduciary status under

§ 1002(21)(A) is not an all or nothing concept . . . [A] court

must ask whether a person is a fiduciary with respect to

the particular activity in question.” Maniace v. Commerce

Bank of Kansas City, N.A., 40 F.3d 264, 267 (8th Cir 1994),

cert. denied, 514 U.S. 1111 (1995) (internal quotations

omitted).

Here, we accept, as we must, the District Court finding

that Srein directed, and Frankford exercised no discretion

with respect to, the decisions to invest in the Participation

Agreements for the Madsen and Chamness policies. But it

is obvious that Srein did not direct the placement of the

several agreements in the Frankford vault without cross-

referencing one to the other, the assignment of random

numbers to the agreements, or the payment for and

acceptance of participation agreements for other Frankford

customers with respect to a policy already the subject of

one of R.J. Srein Corporation’s participation agreements.6

6. Frankford recognized that Srein is “sophisticated in commercial

finance matters”. (JA 1568.) In Srein’s informed, if not expert, opinion,

Frankford “should have had a mechanism to track the assets regardless

of what the assets were. And again that the representation to me that

they could administer X trustee [sic] for unregistered or unusual

investments should not, as far as I’m concerned doesn’t mitigate or

didn’t mitigate their responsibility to properly register or cross reference

those types of investments, whether they were mortgages, private stock

offerings, viatical contracts, its irrelevant. Assign a number to the asset

12

Nor did Srein direct Frankford to accept and distribute to

the Richards’ plan twenty-eight percent of the proceeds of

the Madsen policy. Without inquiry or investigation,

Frankford came to know that Madsen died. Proceeds of the

policy on his life came into its possession. It was in

“control” of those proceeds and, for whatever reason,

erroneously distributed them to another of its customers.

That was, by any definition, the exercise of “control”7 (if not

“authority”) respecting “disposition of [plaintiff ’s] assets.” In

this case Frankford exercised direction over the Madsen

policy when it placed that asset in the Richards’ plan

account, and therefore, diverted the value of that asset from

the Srein Plan account.

We conclude as a matter of law that the facts found by

the District Court establish that Frankford exercised

undirected “authority and control” over plaintiffs’ valuable

interests in the Madsen life insurance policy and therefore

functioned as a fiduciary with respect to the Srein Plan’s

interests in the Madsen policy.

We find strong support for this conclusion in the Sixth

Circuit’s decision in Smith v. Provident Bank, 170 F.3d 609

(6th Cir. 1999). The Smith court found that a directed

trustee acted as an ERISA fiduciary to the extent that it

exercised control over plan assets. In that case, Provident

Bank, as trustee for two benefit plans, had no authority to

make investments for the plans unless directed to do so by

the plan fiduciary, Robert Stauter. In 1990, Stauter

instructed Provident to purchase approximately $10,000

worth of Ameritrust stock, and to hold that stock in trust

for the plan. As instructed, Provident made the purchase

and if it comes up in the system somewhere else than there’s a problem.

It’s like a registration of a bond.” (JA 1232.) Srein does not claim that

Frankford should have investigated and discovered the Findco fraud.

Srein explained that he believed Frankford should have known from

information in its own files and “alerted [him] to the fact that there had

been a double sale of one of the policies [he] had a double interest in [as

Plan Participant and Plan Administrator].” (JA 1233.)

7. “Control” is “the act or power of controlling; regulation; domination or

command,” and “controlling” is defined as “exercising restraint or

direction over.” Webster’s Unabridged Dictionary 442 (2d ed. 1998).

13

and recorded the stock acquired in the account for the

plan. A second trust client of Provident, the Catholic

Archdiocese of Cleveland, also instructed the bank to

purchase $10,000 worth of Ameritrust stock. Provident

failed to purchase the stock for the Archdiocese.

Subsequent to these transactions, Stauter removed

Provident as plan trustee and directed it to transfer the

plan’s assets to a new trustee, Society Bank. To “correct” its

original mistake, Provident placed the Ameritrust shares

into the account of the Archdiocese, and delivered to the

new trustee of the Stauter plans ten thousand dollars in

cash. The Smith court held that Provident functioned as

fiduciary for the Stauter plan when it removed the

Ameritrust shares from the plan account and placed them

elsewhere. Id. at 613-614.

Defendant’s reliance on the Beddall and Maniace cases,

from the First and Eighth Circuits respectively, is

misplaced. In each of those cases the plaintiff attempted to

state a claim against the trustee bank for actions taken (or

not taken) clearly at the direction of another. In Maniace,

the plaintiffs charged that the defendant bank violated a

fiduciary duty to the plaintiff ’s Employee Stock Ownership

Plan because it improvidently retained a plan owned stock

as its value declined. See Maniace, 40 F.3d at 267. The

Maniace court explained that the bank was specifically

directed to retain employer stock in the ESOP plan by a

committee authorized to give such a direction. Therefore, it

had neither discretionary authority, nor control of that plan

asset. Id. Similarly, in Beddall v. State Street Bank & Trust

Co., 137 F.3d 12 (1st Cir. 1998), Plan documents placed in

an investment advisor responsibility for determining the

value of plaintiff ’s retirement plan assets. The First Circuit

concluded that the appointment of the investment advisor

divested the bank of any control or authority over the

valuation of the plan’s investments. Id. at 21.

In reaching our conclusion we have considered whether

Frankford was a mere custodian of plan assets. We

recognize that “ERISA does not consider as a fiduciary an

entity such as a bank when it does no more than receive

deposits from a benefit fund on which the fund can draw

checks.” See, e.g., Wettlin, 237 F.3d at 275; see also Brandt

14

v. Grounds, 687 F.2d 895, 898 (7th Cir. 1982) (non-trustee

bank acting as mere custodian of funds not liable for failing

to prevent plan trustee’s embezzlement). However, in this

case, Frankford acted as more than a “plain vanilla”

custodian of assets. Frankford charged Srein a fee, in part,

for “having a financial institution act as trustee.” (JA 1306.)

As trustee, Frankford made representations to Srein

regarding its ability and willingness to manage plans

holding unregistered investments after the then-incumbent

trustee declined to do so. These factors, together with

Frankford’s actual control of the Madsen policy assets, lead

us to the conclusion that Frankford was more than a mere

custodian of assets performing only administrative and

ministerial duties.

Neither Arizona State Carpenters Pension Trust Fund v.

Citibank, 125 F. 3d 715, 722 (9th Cir. 1997) nor Beddall,

cited by the dissent, require a different result. In each of

those cases the banks in question performed no more than

administrative responsibilities at the direction of a plan

trustee. Neither bank took on the responsibility of acting as

a trustee, directed or undirected, for the plan, nor solicited

business from the plaintiffs on the representation that it

was sufficiently able to perform such duties. Frankford’s

functions were not so limited. When, as here, a trustee

bank is entrusted with and performs duties to “control,

manage, hold, safeguard and account for [a] fund’s assets

and income,” it functions as a fiduciary under ERISA.

Wettlin, 237 F.3d at 275.

Accordingly, we conclude that the District Court erred in

concluding that Frankford was not a fiduciary with respect

to the Madsen investment.

A question remains as to whether Frankford was a

fiduciary with respect to the Chamness policy. On the one

hand, it took custody of the Chamness Participation

Agreement, gave it only a random number, maintained a

record of it on its books and collected fees long after the

insured died and the proceeds were distributed elsewhere.

However, Frankford did not exercise control over the Plan’s

Chamness investment to the extent that it did with respect

to the Madsen one. Moreover, Frankford had no duty “to

make any inquiry or investigation with respect” to whether

15

Chamness was alive. See Trust Agreement § 2.1. Nor did it

have “in-house” information (as it did with respect to the

Madsen investment) about the double sale of that policy to

the D.P. Partnership plan. We conclude that Frankford was

not a fiduciary with respect to the Chamness Participation

Agreement or the policy interest which it evidenced.

3. Breach of Fiduciary Duty

ERISA imposes upon a fiduciary the duty to act “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(B). The District Court never

reached this fact intensive issue. Accordingly, we remand to

the district court the question of whether Frankford’s

actions, and inactions, with respect to the Madsen

investment amounted to a breach of fiduciary duty and, if

so, the consequences of the breach.

B. Appellants’ Negligence Claim

In addition to its claim for damages resulting from

Frankford’s breach of fiduciary duty, plaintiffs brought a

claim for negligence under Pennsylvannia law with respect

to Srein’s personal investments and those of the two plans.

The jury found that Frankford was negligent with respect to

the Madsen policy and for Srein’s personal investment

losses. (JA 538.) However, the jury found no negligence

with respect to Frankford’s role with respect to the

Chamness policy. (JA 540.) It further determined that Srein

suffered $566,000 in damages but that Srein was a 70%

cause of those damages. (JA 539.) The District Court

applied Pennsylvania’s Comparative Negligence Act to the

jury’s verdict and entered judgment for Frankford on the

negligence claims.

Plaintiff moved for a new trial after judgment arguing,

first, that there was insufficient evidence to support a

finding that Srein was guilty of contributory negligence with

respect to his investment losses, and second, that the

District Court erred in failing to instruct the jury that,

under the Pennsylvania Comparative Negligence Act, a

finding that Srein was more than fifty percent at fault for

16

his losses would require the court to enter a judgment in

favor of the defendant.8 The District Court denied that

motion.

1. Jury Instruction

Plaintiffs’ claims for negligence were traversed by the

defense of contributory negligence. Under the governing

Pennsylvania Comparative Negligence Act, a verdict that a

plaintiff was more than fifty percent at fault requires the

trial court to enter a judgment for the defendant.

Pennsylvania courts have modulated the rule to the extent

of requiring a judge trying a case governed by

Pennsylvania’s law to include in a jury charge information

to that effect. See Peair v. Home Ass’n. of Enola Legion No.

751, 430 A.2d 665, 671 (Pa. Super. Ct. 1981).

Here the District Court instructed the jury that “[i]f you

find that . . . the plaintiff was contributorily negligent and

that the plaintiff ’s contributory negligence was a

substantial factor in bringing about plaintiff ’s own harm,

the fact that the plaintiff was contributorily negligent will not

bar recovery by the plaintiff. But any damage sustained by

plaintiff will be diminished in proportion to the amount of

the negligence attributed to the plaintiff.” (JA 1133-34)

(emphasis added). Furthermore the judge never told the

jury that if it attributed fifty percent or more of the blame

for plaintiff ’s injury upon that plaintiff, the judge would

enter judgment for the defendant. This instruction was

plainly wrong for what it said, and for what it didn’t say.

Although plaintiff failed to object to the instruction and

omission before the court charged the jury, the plain error

8. On appeal plaintiffs also raise for the first time the argument that the

District Court erred in applying Pennsylvania’s Comparative Negligence

Act in this case because that Act applies only to “actions brought to

recover damages for negligence resulting in death or injury to person or

property . . . .” 42 Pa. Cons.Stat. Ann. § 7102(a). We have consistently

held that we will not consider issues that are raised for the first time on

appeal absent “compelling reasons.” Patterson v. Cuyler, 729 F.2d 925,

929 (3d Cir. 1984); see also Harris v. City of Philadelphia, 35 F.3d 840,

845 (3d Cir. 1994). Plaintiffs identified no such reasons and accordingly

we decline to address the contention.

17

requires us to take cognizance of it and act. See Alexander

v. Riga, 208 F.3d 419, 426-27 (3d Cir. 2000).9

2. Sufficiency of Evidence

We review for clear error the determination of the District

Court that there was sufficient evidence of contributory

negligence. See Scully v. US WATS, 238 F. 3d 497, 505 (3d

Cir. 2001). Srein, administrator of the Plans, was by all

accounts a sophisticated investor. He received periodic

reports about both his personal, and the Plans’, viatical

investments. Several years elapsed before he noticed that

these investments had not “matured.” It was not

unreasonable for the trier of fact, governed by a

comparative negligence law and instruction, to allocate

some blame to him.

III. CONCLUSION

We reverse the judgment of the District Court on the

plaintiffs’ negligence claim and remand for new trial. We

also reverse its decision that defendant was not a fiduciary

and remand the case for further consideration of plaintiffs’

claim that defendant breached its fiduciary duty with

respect to the plan’s interest in the Madsen policy.

9. However, we note that the defendant raised the question of whether

ERISA preempted the negligence claim during a pretrial conference

before the District Court. The District Court apparently failed to rule on

the contention. On remand it may wish to revisit the preemption issue

before it undertakes any new trial. See The 1975 Salaried Retirement

Plan For Eligible Employees of Crucible, Inc. v. Nobers, 968 F.2d 401, 406

(3d Cir. 1992), cert. denied, 506 U.S. 1086 (1993) (explaining that

preemption applies when a state law claim depends on the existence of

an ERISA plan).

18

FUENTES, Circuit Judge, concurring and dissenting:

I join all portions of the majority’s well-reasoned opinion

other than Part II, subsection (A)(2). I write separately

because I do not agree with the conclusion that Frankford

functioned as a fiduciary with respect to the Srein Plan’s

interest in the Madsen policy.1 Therefore, I respectfully

dissent from that portion of the majority’s decision.

In establishing a retirement plan for R.J. Srein Corp.,

Ronald Srein, a college graduate, successful businessman,

and sophisticated investor, negotiated four separate

agreements with Frankford. According to the documents,

Srein had the authority to control and manage the

operation and administration of the Srein Plan. Indeed, he

was identified in the documents as both the “plan

administrator” and “plan fiduciary.” Frankford, on the other

hand, was authorized only upon written direction from

Srein to pay benefits and expenses from the Plan’s funds;

make investments on behalf of the Plan; and allocate

contributions under the Plan to the participants. Frankford

was identified as the “plan trustee.”

I agree with the District Court that under the four Srein

Plan documents “the role of Frankford was of a limited

nature as Frankford was to exercise no investment

discretion, and Srein was solely responsible for selecting

the investments for the plans.” (D. Ct. Op. at pp. 4) I also

agree with the District Court’s observation that Frankford’s

intended role was that of directed trustee, rather than

fiduciary. Id. at 10-12.

Notwithstanding the nature of the contractual duties set

forth in the Plan documents, the majority, citing Board of

Trs. of Bricklayers and Allied Craftsmen Local 6 of New

Jersey Welfare Fund v. Wettlin Assocs. Inc., 237 F.3d 270

(3d Cir. 2001), notes that an entity may be found to be a

fiduciary when it is entrusted with duties to “control,

1. The majority analyzed the two viatical investments made by the Srein

Plan through Frankford separately. I agree with the majority’s conclusion

that Frankford’s handling of the Chamness policy did not create

fiduciary status. I limit my comments, therefore, to the majority’s

analysis of Frankford’s handling of the Madsen policy.

19

manage, hold, safeguard, and account for a fund’s assets

and income.” I note, however, that where the duties

entrusted to an entity are merely ministerial, fiduciary

status may be inappropriate. See Beddall v. State Street

Bank and Trust Co., 137 F.3d 12, 20 (1st Cir. 1998)

(“Without more, mechanical administrative responsibilities

(such as retaining the assets and keeping a record of their

value) are insufficient to ground a claim of fiduciary

status.”); Arizona State Carpenters Pension Trust Fund v.

Citibank, 125 F.3d 715, 722 (9th Cir. 1997) (“Having to

make a decision in the exercise of a ministerial duty does

not rise to the level of discretion required to be an ERISA

fiduciary.”).

Here, as the District Court found, the evidence presented

leads to the conclusion that Frankford was entrusted with

duties that were merely ministerial. The Plan documents

stated that Frankford had no duty to make any inquiry or

investigation with respect to the instructions from Srein

and had no discretionary authority to determine

investments for the assets of the fund. It is clear that

Frankford was entrusted with less authority than the entity

in Wettlin in determining whether to disburse benefits. C.f.

Wettlin, 237 F.3d at 275 (“[T]he contract provides that

Wettlin is to ‘[r]eceive request for benefits from employees

and take appropriate action thereon,’ ” without clarifying

what action should be taken.). Accordingly, on the

spectrum of duties a bank might be entrusted to perform,

I agree with the District Court that Frankford’s duties were

closer to being a depository than a fiduciary.

Nonetheless, I am mindful that a trustee’s actual exercise

of “any authority or control respecting management or

disposition of [a Plan’s] assets” could confer fiduciary status

under the definition set forth in 29 U.S.C. § 1002(21)(A)(i).2

2. The full definition of “fiduciary” provided in ERISA is as follows:

[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 has any authority or

responsibility to do so, or (iii) he has any discretionary authority or

discretionary responsibility in the administration of such plan.

20

The Supreme Court has observed that ERISA “defines

‘fiduciary’ not in terms of formal trusteeship, but in

functional terms of control and authority over the plan,

thus expanding the universe of persons subject to fiduciary

duties. . . .” Mertens v. Hewitt Assocs., 508 U.S. 248, 262

(1993) (emphasis supplied) (citations omitted); see also

Acosta v. Pacific Enterprises, 950 F.2d 611, 618 (9th Cir.

1991) (holding that it is a “person’s actions, not the official

designation of his role, [which] determine whether he enjoys

fiduciary status.”)

The majority finds that Frankford exercised “undirected

control” (if not actual authority) over the Srein Plan assets

when it (1) deposited proceeds from the Madsen policy in

the Richards Plan; and (2) failed to develop an effective

record-keeping system for viatical investments. Based on

these findings the majority concludes that Frankford

functioned as a fiduciary.

My disagreement on this point stems from my slightly

different interpretation of the second clause of subsection (i)

of 29 U.S.C. § 1002(21)(A). This clause confers fiduciary

status on those who exercise “any authority or control

respecting management or disposition of [plan] assets.” I

am aware that this clause, unlike the first, does not require

an exercise of discretion. See Wettlin, 237 F.3d at 272-73.

However, I think that the meaning of the determinative

words used requires a greater degree of responsibility than

was exercised by Frankford.3 In order to conclude that

3. As was set forth above, 29 U.S.C. § 1002(21)(A)(i) confers fiduciary

status on those who exercise “any discretionary authority or

discretionary control respecting management of such plan or exercises

any authority or control respecting management or disposition of its

assets.” The relevant definition of “exercise” as a verb (as it is used in the

second clause of subsection (i)) is “to put into action, practice, or use . . .

to discharge; perform.” Webster’s Unabridged Dictionary 677 (2d ed.

1998). The relevant definition of “authority” is “the power to determine,

adjudicate, or otherwise settle issues or disputes; jurisdiction; the right

to control, command, or determine, [or] . . . a power or right delegated

or given.” Id. at 139. The relevant definition of “control” as a noun is “the

act or power of controlling; regulation; domination or command.” Id. at

442. “Controlling” is defined as “exercis[ing] restraint or direction over.”

Id. “Management” is defined as “the act or manner of managing;

21

Frankford acted as a fiduciary under the second clause of

subsection (i), there must be sufficient evidence that

Frankford used its power to direct or command the

handling or placement of either the Madsen policy

participation agreement or money in the Srein Plan

account.

The majority finds sufficient the evidence that Frankford

deposited proceeds from the Madsen policy in the Richards

Plan account. I disagree that this evidence is sufficient to

confer fiduciary status. The Srein Plan owned a 100%

interest in the Madsen Policy and the Richards Plan owned

a 28% interest in the same policy. After Mr. Madsen died,

Frankford received proceeds from Findco on the Madsen

policy. Frankford deposited those proceeds in the Richards

Plan account. It did so because Findco designated them as

payable to that Plan. If Frankford had deposited proceeds

designated for the Srein Plan into the Richards Plan

account, that would be an example of control over Srein

Plan assets. But that is not what happened here. Srein

even testified that Frankford never directed money out of

the Srein Plan’s account without his consent.

The majority finds that Frankford’s action in depositing

the Madsen policy proceeds in the Richards Plan account is

similar to the bank’s action in Smith v. Provident Bank, 170

F.3d 609 (6th Cir. 1999), which was sufficient to establish

fiduciary status. I disagree. In Smith, the bank corrected its

own accounting mistake by removing shares from one

account and moving them to another account on its own

initiative, thus demonstrating control over assets. 170 F.3d

at 612. Here, however, Frankford did not remove the

Madsen Policy from the Srein Plan and move it into the

Richards Plan. Frankford simply invested the Srein and

Richards Plans’ funds as directed by those Plans’

administrators and later deposited the Madsen policy

handling, direction, or control.” Id. at 1166. “Disposition” is defined as

“arrangement or placing . . . [or] final settlement of a matter.” Id. at 568.

Finally, “assets” are defined as “items of ownership convertible into cash;

total resources of a person or business, as cash, notes and accounts

receivable, securities, . . .” Id. at 125.

22

proceeds into the Richards Plan account upon receiving

them from Findco. It may well be that Frankford’s failure to

notice that both the Srein and Richards Plans owned an

interest in the Madsen policy was negligent, but it does not

demonstrate that Frankford exercised any control over

Srein Plan assets.

The majority also finds that Frankford exercised

“undirected control” on the basis that it failed to develop an

effective record-keeping system for viatical investments.

Again, I disagree. The majority’s holding indicates that

Frankford’s failure to act has somehow risen to the level of

an exercise of authority or control. The bank’s failure to

act, at most, could be characterized as an omission

amounting to negligence, but I fail to see how it is an

exercise of authority or control. In any event, even if

Frankford had established a record-keeping system for

viatical investments, that action would not be an exercise of

“undirected control” over the management or disposition of

Srein Plan assets. See e.g. Beddall, 137 F.3d at 21 (“A

financial institution cannot be deemed to have volunteered

itself as a fiduciary simply because it undertakes reporting

responsibilities that exceed its official mandate.”); Arizona

State Carpenters Pension Trust Fund, 125 F.3d at 722

(“Preparing reports of account activities and determining

whether to use a particular format to inform the Trustees

of delinquencies do not amount to an assumption of control

or authority over the Trust Funds . . . .”). Therefore, the

failure to establish a record-keeping system is not evidence

of an exercise of authority or control either.

I, therefore, dissent.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit