EBIA Weekly Newsletter

Court Sets Method for Determining Damages Due to Breach of Loyalty in Fund-Mapping Case

   January 25, 2018

Tussey v. ABB, 2017 WL 6343803 (W.D. Mo. 2017)

In a case that began 12 years ago, the trial court has again determined the method it will use to calculate damages for a breach of the duty of loyalty. The breach was committed by the fiduciaries of two 401(k) plans who replaced one of the plans’ investment funds with funds that produced more revenue sharing. In 2012, the court initially concluded that damages for the fund-mapping portion of the case should be determined by comparing the higher return on the replaced fund to the lower returns on the new funds (see our Checkpoint article). But on appeal, the Eighth Circuit instructed the trial court to reconsider the damage calculation, and suggested a comparison between the new funds’ performance and the minimum return of the subset of managed allocation funds that the fiduciaries could have chosen without committing a fiduciary breach (see our Checkpoint article). After the trial court accepted the Eighth Circuit’s suggested comparison (see our Checkpoint article), the Eighth Circuit reopened the question of damages because the trial court’s second determination had failed to consider any other method for measuring the plans’ losses (see our Checkpoint article). The case was sent back to the trial court so it could decide for itself how to measure the damages.

In its third look at damages, the trial court has returned to its original damage measure, concluding that the proper method of calculating damages for the fiduciaries’ breach of loyalty is to compare the performance of the replaced fund with the performance of the new funds. The court rejected the employee’s request to treat the divestiture of the original fund and mapping of the proceeds into the new funds as different acts that require separate damage calculations, because the breach involved both. The court also rejected the fiduciaries’ arguments for a comparison similar to that initially suggested by the Eighth Circuit, observing that the requested comparison would be relevant to a claim of imprudence, but this case involves a breach of the duty of loyalty. Here, the court suggested, the damages should restore the plan to the position it would have occupied but for the disloyal decision. Parsing both Eighth Circuit opinions, the court concluded that using the original fund as the comparator is not foreclosed. The court declined to address any other issues relating to the calculation of damages, such as the method to be used to assess prejudgment interest, saving those for a future order.

EBIA Comment: While there may still be more twists and turns in this case, it amply illustrates the substantial risk and uncertainty associated with certain breaches of the duty of loyalty. The trial court’s 2012 calculation set damages for this portion of the case at $21.8 million, but in 2015 the same court found no damages due to an absence of evidence. While the court has now returned to its original methodology, it has also invited arguments that could significantly affect the amount to be awarded, so we will have to wait a little longer for a final outcome. For more information, see EBIA’s 401(k) Plans manual at Sections XXV.F.2 (“Revenue Sharing”) and XXXVII.H (“Claims for Breach of Fiduciary Duty”).

Contributing Editors: EBIA Staff.