Howard

Opinion by Judge FARRIS; Dissent by Judge O’SCANNLAIN.

INTRODUCTION

The plaintiffs are participants in an Employee Stock Ownership Plan that was created for the benefit of the employees of Pacific Architects and Engineers, Inc., a California corporation. In 1974, the ESOP purchased approximately 40% of Pacific’s stock irom Edward Shay for $4,269,162, or $10.67 per share. Shay was the president and chairman of Pacific, he was one of the ESOP’s fiduciaries, and, prior to the sale, he owned 100% of Pacific’s stock, In 1988, Shay’s co-fiduciaries, Richard Smith and Martin Lehrer, both of whom worked for Shay as senior executives, caused the ESOP to sell its Pacific stock back to Shay for $14.40 per share, a price determined by Arthur Young, Inc., the ESOP’s valuator. On its purchase and sale of the Pacific stock, the ESOP earned a compound annual return of 2.2%, a meagre gain considering that while the ESOP held the Pacific stock, the company was a substantial beneficiary of what Arthur Young called a “parabolic” rise in Japanese real estate values. The ESOP participants sued Shay, Lehrer, and Smith under ERISA for breach of their fiduciary duties. The district court held a bench…

dissenting:

I agree with the majority that ERISA fiduciaries are held to the standard not of a “prudent lay person” but rather of a “prudent fiduciary with experience dealing with a similar enterprise.” Whitfield v. Cohen, 682 F.Supp. 188, 194 (S.D.N.Y.1988). If they do not have all of the knowledge and expertise necessary to make a prudent decision, they have a duty to obtain independent advice. Of course, the mere seeking of an independent appraisal does not, by itself, satisfy the prudence requirement. As the Fifth Circuit noted in an oft-quoted passage, “[a]n independent appraisal is not a magic wand that fiduciaries may simply waive over a transaction to ensure that their responsibilities are fulfilled. It is a tool, and, like all tools, is useful only if used properly.” Donovan v. Cunningham, 716 F.2d 1455, 1474 (5th Cir.1983).

Nevertheless, I know of no case in which ERISA fiduciaries were adjudged to have breached their duty when they carefully selected and accurately informed the independent appraiser of the relevant data. In fact, the Fifth Circuit has held that

Cunningham, 716 F.2d at 1474 (citation omitted).

The majority cites this Fifth Circuit case to support the…