A federal court recently dismissed ERISA breach of fiduciary duty claims asserted by Delphi Beta Fund, LLC, a hedge fund, against two of its bank lenders, because there was no precedent for applying ERISA’s fiduciary duties to a third party lender to a hedge fund.  See Delphi Beta Fund, LLC v. Univest Bank and Trust Co., 2015 BL 89360 (E.D. Pa. Mar. 27, 2015). 

Beta Fund is a hedge fund that consists partly of ERISA-covered pension plans as investors, and allegedly was holding ERISA “plan assets” by virtue of the ERISA plan assets regulation’s “Look-Through Rule” (meaning, here, generally that “benefit plan investors” owned 25% or more of the equity interests in the fund).  Beta Fund’s deceased former manager, William Spiropoulos, allegedly engaged in certain troublesome loan transactions with the Defendant banks, Univest Bank and Trust Co. and MileStone Bank, in connection with certain loans granted to Pheasant Run Hotel, LLC, a portfolio company of Beta Fund.  Beta Fund asserted that, by virtue of the Look-Through Rule, Beta Fund was over the “ERISA 25% limit” and holding ERISA “plan assets.”  Accordingly, Beta Fund contended that it was an ERISA fiduciary to ERISA-covered plans invested therein and had standing to assert ERISA breach of fiduciary duty and prohibited transaction claims against Univest and MileStone arising out of the Spiropoulos loan transactions.

The court ruled that the defendant banks were not ERISA fiduciaries and did not engage in non-exempt “prohibited transactions.”  In so ruling, the court found that Beta Fund failed to provide any precedent for applying ERISA’s fiduciary duties to a third party lender to a hedge fund, and stated that if it accepted Beta Fund’s argument, “virtually anyone dealing with Beta Fund could be charged with ERISA’s fiduciary duties.”  In the court’s view, neither bank had any “control” over Beta Fund, nor did the banks do anything other than enter into a typical loan with Spiropoulos regarding construction of a hotel project and then act in accord with its contractual remedies.

The court accordingly held that, since neither bank was acting as an ERISA fiduciary to Beta Fund, they could not have breached any ERISA fiduciary duty to Beta Fund, nor could they have engaged in a non-exempt “prohibited transaction” under Section 406(b) of ERISA (which prohibited transaction rules are only applicable to ERISA fiduciaries).  Beta Fund’s claim that the banks assisted in a “prohibited transaction” under Section 406(a) of ERISA (which may be applicable to non-fiduciaries) also failed because such a claim requires “knowing participation” by the banks, which was not sufficiently alleged in the pleadings.