Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 1 of 24 IN THE UNITED STATES COURT OF FEDERAL CLAIMS JICARILLA APACHE NATION, Plaintiff, v. THE UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) No. 02-25 L Hon. Francis M. Allegra UNITED STATES REPLY BRIEF IN SUPPORT OF ITS MOTION FOR PARTIAL SUMMARY JUDGMENT (AS TO POOLING -RELATED CLAIMS) IGNACIA S. MORENO Assistant Attorney General STEPHEN R. TERRELL AYAKO SATO BARBARA M.R. MARVIN KATHRYN LIBERATORE United States Department of Justice Environment and Natural Resources Division Natural Resources Section P.O. Box 663 Washington, D.C. 20044-0663 Tel: (202) 616-9663 Fax: (202) 353-2021
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 2 of 24 TABLE OF CONTENTS I. INTRODUCTION...1 II. ARGUMENT...2 A. There Is No Substantive Source of Law That Compels Pooling...2 B. There Is No Common Law Duty to Pool Funds for Investment Purposes...7 1. Common law trust principles are not generally applicable to the United States as Indian trustee...7 2. There is no common law fiduciary obligation to pool trust funds for investment purposes...10 C. Interior s Decision to Not Pool Tribal Trust Funds for Investment Purposes Is Reviewed for Abuse of Discretion....12 D. No reasonable fact-finder could conclude that the United States decision to not pool tribal trust funds for investment purposes was arbitrary, capricious, an abuse of discretion, or contrary to law...13 III. CONCLUSION...19 -i-
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 3 of 24 TABLE OF AUTHORITIES Cases Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)...13 Cheyenne-Arapaho Tribes of Oklahoma v. United States, 512 F.2d 1390 (Ct. Cl. 1975).. 2, 5-7 Chippewa Cree Tribe of the Rocky Boy s Reservation v. United States, 69 Fed.Cl. 639 (2006)...8 Cobell v. Norton, 240 F.3d 1081 (D.C. Cir. 2001)... 8 Cobell v. Norton, 392 F.3d 461 (D.C. Cir. 2004)... 8 Cobell v. Salazar, 573 F.3d 808 (D.C. Cir. 2009)... 16 Erie R.R. v. Tompkins, 304 U.S. 64 (1938)...8 Gros Ventre Tribe v. United States, 469 F.3d 801 (9th Cir. 2006)...8 Invitrogen Corp. v. Clontech Laboratories, Inc., 429 F.3d 1052 (Fed. Cir. 2005)...14 Manchester Band of Pomo Indians v. United States, 363 F.Supp. 1238 (N.D. Cal. 1973). 3-5, 15 Milwaukee v. Ill., 451 U.S. 304 (1981)...8 Mitchell v. United States, 664 F.2d 265 (Ct. Cl. 1981), aff d 463 U.S. 206 (1983)...12, 13 Nat l Air Traffic Controllers Ass n v. United States, 160 F.3d 714 (Fed. Cir. 1998)...8 Navajo Tribe of Indians v. United States, 624 F.2d 981 (Ct. Cl. 1980)... 7 Shoshone Indian Tribe of the Wind River Reservation v. United States, 364 F.3d 1339 (Fed. Cir. 2004)...8 Sitrick v. Dreamworks, LLC, 516 F.3d 993 (Fed. Cir. 2008)... 14 United States v. Mitchell, 445 U.S. 535 (1980)...9 United States v. Mitchell, 463 U.S. 206 (1983)...9 United States v. Navajo Nation, U.S., 129 S.Ct. 1547 (2009)...3 -ii-
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 4 of 24 United States v. Navajo Nation, 537 U.S. 488 (2003)...3, 9 United States v. Tohono O odham Nation, U.S., 131 S.Ct. 1723 (2011)...8 United States v. White Mountain Apache Tribe, 537 U.S. 465 (2003)...9 Statues 25 U.S.C. 161a...3, 8, 9 25 U.S.C. 162a...3, 8, 9 25 U.S.C. 348...9 25 U.S.C. 4011...9 Other Authorities RESTATEMENT (SECOND) OF TRUSTS (1959)...10, 11, 13 RESTATEMENT (THIRD) OF TRUSTS (2007)... 10-13 -iii-
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 5 of 24 I. INTRODUCTION It is axiomatic that this Court lacks subject-matter jurisdiction to impose upon the United States by judicial fiat a trust obligation that is not rooted in statute or other substantive source of law. Nonetheless, Plaintiff seeks to impose liability against the United States based upon a theory, developed by its experts in 2011 (over 36 years after the beginning of Phase 1 in this case), that the United States must pool tribal trust funds for investment purposes. Plaintiff s theory is without merit. No statute mandates the United States to pool tribal trust funds for investment purposes. Congress has never required that tribal trust funds be pooled for investment purposes. No Court has ever compelled the United States to pool tribal trust funds for investment purposes. To the contrary, the language used by Congress in the investment statutes speaks of principal accounts (plural) and funds of any Indian tribe, suggesting individual investment of tribal trust funds instead of a pooled investment of all tribal trust funds. This Court lacks subject-matter jurisdiction to compel the Department of the Interior ( Interior ) to pool tribal trust funds for investment purposes or to award damages based upon Interior s historic decision, fully consistent with the terms of the investment statutes, to invest tribal trust funds individually. Thus, it should dismiss or grant summary judgment to the United States on the claim. Should this Court reach the merits of Plaintiff s pooling claim, however, it should not substitute its judgment, the opinions of Plaintiff s experts, or amici curiae s unsubstantiated opinions, for the reasonable and deliberative decisions made by Interior during the Phase 1 period. The voluminous factual evidence submitted by the United States, by Plaintiff, and even by amici curiae, establish indisputably that Interior took a hard look at pooling tribal trust funds during the Phase 1 period. Interior weighed the pros and cons of pooling, it consulted outside experts to - 1 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 6 of 24 propose mechanisms and plans to implement pooling, it consulted with Indian tribes, it consulted with the Solicitor s Office, and it was subject to Congressional oversight and inquiry. Given the weight of such evidence, this Court cannot conclude that Interior s long, intensive, and deliberative process was arbitrary, capricious, or contrary to law. The best judgment of Interior was to reject pooling of tribal trust funds for investment purposes, and that decision cannot be the basis for a damages claim decades after the fact. Thus, the Court should grant summary judgment to the United States on Plaintiff s pooling-related claims, if it were to reach the merits. II. ARGUMENT A. There Is No Substantive Source of Law That Compels Pooling In its opening brief, the United States established that no substantive source of law compels the United States to pool tribal trust funds for investment purposes. United States Opening Brief ( U.S. Br. ) at 15-19; Docket No. 269-1. In response, Plaintiff does not argue that there is a statute or other substantive source of law that compels pooling of tribal trust funds for investment purposes. Instead, Plaintiff rests its argument on the United States general trust obligation to maximize the trust income by prudent investment outlined in Cheyenne-Arapaho Tribes of Oklahoma v. United States, 512 F.2d 1390, 1394 (Ct. Cl. 1975). Plaintiff s Brief at 2-6. 1/ Plaintiff s argument misses the mark because it has improperly conflated two distinct issues. It is possible to maximize the trust income by prudent investment without pooling. It is also conceivable that an investment pool could fail to maximize the trust income by prudent 1/ Amici curiae s argument is duplicative of Plaintiff s argument. Docket No. 285 at 21-30. Amici argues this Court has subject-matter jurisdiction over Plaintiff s pooling claims by operation of the common law and the general trust obligation to maximize the trust income by prudent investment. Id. - 2 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 7 of 24 investment. Pooling and prudent investment are different issues, with different jurisdictional inquiries. Whether the United States was able to maximize the trust income by prudent investment is a completely different inquiry. The only issues relevant here are the following: was the United States compelled by a statutory or regulatory prescription to pool tribal trust funds for investment purposes and is the failure to invest tribal trust funds on a pooled basis moneymandating in breach? For a duty to be judicially enforceable, a Tribe first must identify a substantive source of law that establishes specific fiduciary or other duties. United States v. Navajo Nation, 537 U.S. 488, 506 (2003) ( Navajo I ). That substantive source of law must be a statutory or regulatory prescription, not arising merely out of a general trust relationship. Id. Although principles of trust law might be relevant to the subsequent and separate question of whether that source in turn creates a money-mandating duty (United States v. Navajo Nation, U.S., 129 S.Ct. 1547, 1552 (2009) ( Navajo II )) those trust law principles have no place in the threshold inquiry into whether there is any duty in the first place, which is the relevant inquiry here. As set forth in the United States opening brief, Congress clearly contemplated individual investment of tribal trust funds in the investment statutes, 25 U.S.C. 161a and 162a. U.S. Br. at 16 (interest to be applied to the principal accounts (plural) to the credit of Indian tribes (plural); Interior may invest the common or community funds of any Indian tribe or the trust funds of any tribe or individual Indian. ). Thus, there is no statutory or regulatory basis for Plaintiff s pooling claims. In an effort to show otherwise, Plaintiff relies upon Manchester Band of Pomo Indians v. United States, 363 F.Supp. 1238 (N.D. Cal. 1973) ( Manchester Band ), for the proposition that - 3 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 8 of 24 the United States has an obligation to maximize income on tribal trust funds by prudent investment. Docket No. 280 at 4-5. Amici argue that Manchester Band stands for the proposition that the United States must consider pooling in investing Indian trust funds. Docket No. 285 at 30-31. Plaintiff s and amici s arguments are unavailing. Neither Plaintiff s nor amici s interpretations of Manchester Band is correct. Manchester Band is not a basis for this Court s subject-matter jurisdiction. Manchester Band was decided on a motion for partial summary judgment after evidentiary sanctions were imposed against the United States based upon its failure to respond to discovery. 363 F.Supp. at 1240. Included among the facts admitted as a result of the evidentiary sanction was, Defendants have failed to show that at any time between 1938 and the present, they acted as reasonably prudent trustees in the management of the funds which they held in trust for the Manchester Band of Pomo Indians. Id. at 1250-51. At issue in the case were certain trust funds held in an IIM account as a result of operation of and sale of a tribal dairy herd and funds held in a Proceeds of Labor account as a result of leasing of tribal lands. Id. at 1241-42. The tribe alleged various failures by the United States to credit interest to its trust accounts or properly invest the tribe s trust accounts. Id. Although the United States District Court for the Northern District of California spoke of obtaining the highest rate of return for the Indians (id. at 1247), it did not set any standards, limitations, or guidelines about how the highest rate of return should be obtained. In fact, the district court was unable to assess damages on the tribe s motion for partial summary judgment because, it stated, evidence will have to be offered from which a determination can be made as to which investments would have been made by a reasonably prudent trustee in the course of - 4 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 9 of 24 discharging his fiduciary obligations. Id. at 1248. Manchester Band is equally silent about whether the United States was required to pool all tribal trust funds for investment purposes. Contrary to Plaintiff s and amici s contentions, Manchester Band does not compel the United States to pool tribal trust funds for investment purposes. In a footnote, the Northern District of California stated, In this connection the Secretary must consider whether funds from one Indian trust fund should be combined with funds from another Indian trust to purchase a single instrument of indebtedness, and thereby extending to small trusts the benefits of larger returns from larger and longer term investments. Id. at 1248, n. 3. Combining funds from multiple tribes to purchase a jumbo CD (the type of commingling contemplated by this passage in Manchester Band) is a far cry from pooling all tribal trust funds for investment purposes. More fundamentally, it is undisputed that, during the Phase 1 period, Interior did combine the funds of multiple Indian tribes to purchase jumbo CDs which allowed larger returns. Harrington Decl., 7; Docket No. 285-3 at 43. Amici are simply wrong if they contend that Manchester Band requires the type of pooling proposed by Plaintiff s experts: all tribal trust funds combined for all investment purposes. Plaintiff also relies upon Cheyenne-Arapaho in support of its jurisdictional argument. Docket No. 280 at 4-6. Amici similarly contend that Cheyenne-Arapaho imposes upon the United States an alleged common law duty to pool funds for investment purposes. Docket No. 285 at 24-26. Both of these contentions fail and thus should be rejected. In Cheyenne-Arapaho, the Court of Claims held that the United States has the obligation to maximize the trust income by prudent investment, and the trustee has the burden of proof to justify less than a maximum return. 512 F.2d at 1394. Cheyenne-Arapaho did not specifically - 5 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 10 of 24 define maximization. Nor did it define maximization as requiring pooled investment. In fact, the Court in Cheyenne-Arapaho explicitly refused to define maximization. Id. at 1395, n. 7 ( In the absence of any suggestion by the parties how a maximum is to be determined, either method suggested above, or some other appropriate system, appears proper. ). Further, Cheyenne-Arapaho recognized that there is a host of other factors that must be considered by the United States when determining how to invest tribal trust funds. In discussing damage calculations, Cheyenne-Arapaho included discretionary factors, finding it incumbent on the trial judge to decide the length of time within which it would have been reasonable for [the Government] to make funds available for investment, to make actual investments, and to reinvest where appropriate. Id. at 1395. If the United States breached its fiduciary duty, damages were to be calculated as the difference between what interest defendant paid for the funds and the maximum the funds could have legally and practically earned if properly invested outside. Id. at 1396. The Court of Claims elaborated: In fixing damages, it will be necessary... to make some determination as to the term for which funds were available for investment. In the absence of a showing by defendant of specific immediate budgetary commitments by the tribes, claimed liquidity needs should be considered in the light of the actual history of the tribes funds. Id. The Court of Claims repeated use of the term funds (plural) and tribes (plural) and focus on the individual needs of each tribe and on the liquidity needs and corresponding investment maturity for each individual tribe supports the United States position. No statute or substantive source of law requires the United States to invest tribal trust funds on a pooled basis. In Cheyenne-Arapaho, the Court of Claims did not hold that the United States had to pool tribal trust funds; nor did it hold that the trial commissioner was to calculate damages without - 6 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 11 of 24 considering the individual needs and circumstances of each plaintiff tribe. Id. The Cheyenne- Arapaho plaintiffs did not assert that the United States breached its fiduciary duties by not pooling funds, and thus the court in Cheyenne-Arapaho had no opportunity to address the jurisdictional issue raised by this motion. As detailed in the United States opening brief, no statute, regulation, case law, or substantive source of law compels the United States to invest tribal trust funds on a pooled basis, and Plaintiff s failure to anchor its pooling claim to a substantive source of law that is moneymandating in breach means that this Court has no subject-matter jurisdiction over Plaintiff s claim. U.S. Br. at 15-19. Plaintiff agrees that [p]ooling is not, in and of itself, a fiduciary obligation that always applies to the investment of trust funds. Docket No. 280 at 8 (emphasis in original). B. There Is No Common Law Duty to Pool Funds for Investment Purposes. Plaintiff argues that common law trust duties should apply to the United States as statutory Indian trustee and assumes (without identifying) a common law duty to pool funds. Docket No. 280 at 2-4. Amici make a similar argument. Docket No. 285 at 21-23. Plaintiff s and amici s argument is flawed for two reasons. First, common law trust principles do no apply wholesale to the United States as statutory Indian trustee. Second, there is no common law duty requiring pooling of trust funds for investment purposes. 1. Common law trust principles are not generally applicable to the United States as Indian trustee. The United States is under no obligation to invest tribal trust funds absent a statute, treaty, or contractual requirement. Navajo Tribe of Indians v. United States, 624 F.2d 981, 994 (Ct. Cl. 1980). Therefore, Plaintiff s investment mismanagement claims have to be based upon 25 U.S.C. - 7 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 12 of 24 161a and 162a, or regulations, rules, or policies enacted pursuant to those investment statutes. See Chippewa Cree Tribe of the Rocky Boy s Reservation v. United States, 69 Fed.Cl. 639, 662 (2006) (holding that the investment statutes were the necessary jurisdictional substantive source of law for trust fund mismanagement claims); see also Shoshone Indian Tribe of the Wind River Reservation v. United States, 364 F.3d 1339, 1354 (Fed. Cir. 2004) ( Shoshone II ) (acknowledging, in dicta, 25 U.S.C. 161a and 162a as a basis for plaintiffs claims). Plaintiff may not pursue common law or equitable investment mismanagement claims. There is no federal general common law. Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938); Milwaukee v. Ill., 451 U.S. 304, 312 (1981). Plaintiff may not assert a common law claim for breach of trust. See Gros Ventre Tribe v. United States, 469 F.3d 801, 814 (9th Cir. 2006) ( Tribes cannot allege an independent common law cause of action for breach of trust ); Cobell v. Norton, 240 F.3d 1081, 1104 (D.C. Cir. 2001) ( Cobell VI ) ( No common law claim for an accounting is cognizable.... ); Cobell v. Norton, 392 F.3d 461, 472 (D.C. Cir. 2004) ( Cobell XIII ) ( Insofar as plaintiffs may have said that [they could invoke all the rights that a common law trust entails against the government in this case], they were wrong. ). Also, this Court is not a court of equity, it has no jurisdiction over equitable claims, and it has no jurisdiction to grant equitable relief that is unrelated to established liability for monetary damages. United States v. Tohono O odham Nation, U.S., 131 S.Ct. 1723, 1729 (2011) ( the CFC has no general power to provide equitable relief against the Government or its officers. ); Nat l Air Traffic Controllers Ass n v. United States, 160 F.3d 714, 716 (Fed. Cir. 1998). The limited and general statutory mandate for the government to hold tribal funds in trust (e.g., 25 U.S.C. 161a, 162a, 4011(a)) is an insufficient hook for imposing broad - 8 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 13 of 24 common-law trust duties on the United States as statutory Indian trustee. Where a statute required the United States to hold the land allotted for individual Indians in trust for the sole use and benefit of those Indians, the Supreme Court did not automatically import common-law trust principles, even as to the property itself. United States v. Mitchell, 445 U.S. 535, 541 (1980) ( Mitchell I ) (quoting Indian General Allotment Act, 25 U.S.C. 348 (1976)). Instead, the Supreme Court interpreted that statute not to impose a trust duty to manage allotted forest lands. Id. at 546. The statute, at most, created a bare trust requiring only limited trust responsibilities. United States v. Mitchell, 463 U.S. 206, 224 (1983) ( Mitchell II ). Plaintiff and amici s reliance on United States v. White Mountain Apache Tribe, 537 U.S. 465 (2003), is misplaced. In White Mountain, the Court interpreted a federal statute as requiring the government, inter alia, to preserve tribal property that the statute authorized the government to use for its own purposes. Id. at 475; see id. at 479-480 (Ginsburg, J., concurring). The United States duties thus arose not from a general trust relationship or generic common-law trust principles, but rather from the unique statute at issue in that case. 2/ The investment statutes are unambiguous in granting the Secretary of the Interior discretion to invest tribal trust funds individually. 25 U.S.C. 161a and 162a. There is no basis to resort to the common law to qualify or abrogate that discretion conferred upon Interior by Congress. Plaintiff attempts to do so in its opposition is baseless and should not be countenanced. 2/ White Mountain was decided the same day as Navajo I, and Justice Ginsburg, who authored the latter opinion, joined the Court s opinion in White Mountain (a 5-4 decision) based on the express understanding that it was not inconsistent with Navajo I. White Mountain, 537 U.S. at 479 (Ginsburg, J. concurring). Justice Souter, who authored White Mountain, acknowledged in dissent in Navajo I that the second stage of the jurisdictional inquiry occurs only once a statutory or regulatory provision is found to create a specific fiduciary obligation. Navajo I, 537 U.S. at 514 (Souter, J., dissenting). - 9 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 14 of 24 2. There is no common law fiduciary obligation to pool trust funds for investment purposes. Even assuming arguendo that the Court were to use the general law of trusts to fill in any interstices in the investment statutes, Plaintiff and amici fail to identify any common law trust duty to pool trust funds for investment purposes. Plaintiff does not even attempt to identify a common law duty to pool funds for investment purposes. Docket No. 280 at 2-8. Amici cite to the RESTATEMENT (SECOND) OF TRUSTS 227, cmt. j (1959), and the RESTATEMENT (THIRD) OF TRUSTS 90, cmt. m (2007), Docket 285 at 30-31, but the Restatement does not impose a duty on trustees to pool trust funds for investments. RESTATEMENT (SECOND) OF TRUSTS 227, cmt. j, i.e., the Restatement in effect during the Phase 1 period, provided, in relevant part: Combining trust funds in making investments. The fact that in making investments trust funds of one trust are combined with funds of other trusts administered by the trustee does not make the investment improper, provided that it is in other respects proper. Thus, an investment of trust funds in a participating interest in one or more mortgages on land held by the trustee is a proper trust investment if the mortgage or mortgages were a proper trust investment. Contrary to amici s assertion, the Restatement did not impose a duty to pool or combine funds. Rather, it permitted a trustee to combine funds for investment purposes, provided that it is in other respects proper. Id. Tellingly, amici do not cite to another comment to the same Restatement section that is on point: Permissive or mandatory terms of the trust. The terms of the trust as to investments may be either permissive or mandatory; that is, the trustee may be merely authorized or he may be directed to invest in certain securities or kinds of securities. If he is merely authorized to make certain investments, he has a privilege but not a duty to make such investments; if he is directed to make such investments, he has not merely a privilege but a duty to do so. - 10 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 15 of 24 Id. at cmt. t. The mere fact that a trustee may commingle funds does not equate to a mandatory duty to do so. Similarly, the trustee s exercise of its privilege to commingle funds does not result in a money-mandating breach. The Restatement did not state, imply, or suggest otherwise. It is undisputed that, during the Phase 1 period, Interior did commingle tribal trust accounts to purchase Treasury one-day certificates (see U.S. Br. at 3, n. 2) and jumbo CDs. Harrington Decl., 7; Parris Decl., 26, 28-29, 31, Docket No. 285-1 at 68-70. Plaintiff and amici cannot be heard to claim Interior breached the foregoing provisions of the Restatement. Like the RESTATEMENT (SECOND), the RESTATEMENT (THIRD) OF TRUSTS does not impose a mandatory trust duty to pool funds for investment purposes. Section 90, comment m, relied upon by amici, states in part: Use of common trust funds is supported under state laws either by special systems of statutory and administrative regulation or by enabling legislation (usually the Uniform Common Trust Fund Act) that relies essentially on Regulation 9 of the U.S. Comptroller of the Currency to govern the operation of these bank funds. Some statutes (enacted before the proprietary mutual-fund movement, supra) also authorize the creation of mutual investment companies, in the shares of which participating banks and trust companies may invest the funds of individual trusts under their administration. These various practices are intended to facilitate economical fund management and diversification of investments for small trusts and, in some states, for small corporate trustees. * * * * The use of pooled-investment vehicles by individual or other trustees is expressly sanctioned by statute in many states and by the terms of many trusts. Id. Thus, even at common law, pooling is not a mandatory duty, and it is only permissible if allowed by statute or other substantive source of law. The trustee s ability to pool trust funds for investment purposes is a privilege, to be exercised at the trustee s discretion, not a mandatory - 11 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 16 of 24 trust duty that is money-mandating in breach. See id. ( Like any other investments or techniques, pooling devices can be misused. Therefore, they must be employed or selected with care and with attention to how a particular fund s characteristics fit the trustee s investment strategy and the trust s productivity and other needs or objectives. ). Plaintiff and amici s claim that the common law provides a jurisdictional basis for Plaintiff s claims for damages as a result of the breach of an alleged duty to pool trust funds for investment purposes is unavailing. The common law does not vest this Court with subject-matter jurisdiction over Plaintiff s pooling-related claims. In any event, there is no duty to pool at common law. Plaintiff and amici s failure to cite any case (even at common law) finding that a trustee breached a trust duty by failing to invest trust funds on a pooled basis speaks volumes about the fatal flaws inherent in their claims. C. Interior s Decision to Not Pool Tribal Trust Funds for Investment Purposes Is Reviewed for Abuse of Discretion. In the event that this Court were to deem it appropriate to address the merits of Plaintiff s pooling claims (which it should not do), Plaintiff and the United States agree that Interior s decision to reject pooling of tribal trust funds for investment purposes should be reviewed under the arbitrary, capricious, or abuse of discretion standard. U.S. Br. at 19-20 citing Mitchell v. United States, 664 F.2d 265, 274 (Ct. Cl. 1981), aff d 463 U.S. 206 (1983); Docket No. 280 at 15-16. As stated by Plaintiff, [a] court will not interfere with a trustee s exercise of a discretionary power (or decision not to exercise the power) when that conduct is reasonable, not based on an improper interpretation of the terms of the trust, and not otherwise inconsistent with - 12 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 17 of 24 the trustee s fiduciary duties. Id. citing RESTATEMENT (THIRD) OF TRUSTS, 87, cmt. b. 3/ Because Congress unmistakably granted broad discretion to Interior as to how tribal trust funds were to be invested (see U.S. Br. at 19-20), Interior s decision to invest tribal trust funds individually should be reviewed for abuse of discretion; that is, whether Interior s decision was arbitrary, capricious, in abuse of discretion, or contrary to law. As such, in order to defeat summary judgment, Plaintiff must present sufficient disputed issues of material fact so as to allow a reasonable fact-finder to find in Plaintiff s favor under this heightened burden of proof. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). Plaintiff cannot meet its burden of proof. D. No reasonable fact-finder could conclude that the United States decision to not pool tribal trust funds for investment purposes was arbitrary, capricious, an abuse of discretion, or contrary to law. The facts entitle the United States to summary judgment in its favor on Plaintiff s pooling claims. Preliminarily, this issue is not a battle of the experts, as argued by Plaintiff. Docket No. 280 at 8. All experts agree that the duty of care focuses on process, not results. As explained by Dr. Laura T. Starks, one of the United States experts, As such, the duty of care focuses on the process, which requires consideration of the portfolio as a whole, the beneficiary s tolerance for risk, and the purpose of the trust. This is because prudent and skillful investing (even though wellintentioned) does not necessarily lead to high investment returns. Even greatly 3/ Plaintiff s citation to the comments to the Restatement, though, is misleading. The actual Restatement provision provided Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court, except to prevent an abuse by the trustee of his discretion. RESTATEMENT (SECOND) OF TRUSTS, 187; accord RESTATEMENT (THIRD) OF TRUSTS, 87. - 13 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 18 of 24 skilled, loyal and careful investing can result in losses. Thus, the test of prudence is one of conduct and process, not one of outcome or performance. Supplemental Appendix of Exhibits ( Suppl. App. ), Ex. 33 at 210-11 (footnotes and emphasis omitted). 4/ Dr. Goldstein, one of Plaintiff s experts, agrees. Suppl. App., Ex. 34 at 215. Peter A. Ferriero and Kevin W. Nunes (collectively, Rocky Hill ) are Plaintiff s investment experts, but nowhere in Rocky Hill s expert report does it cite to facts detailing Interior s decision-making process with respect to pooling. Appendix of Exhibits ( App. Ex. ), Ex. 1 at 1-52; Docket No. 269-2. There are no footnotes, citations to facts or evidence, or citations to any financial, economic, or trust authorities in the one paragraph in Rocky Hill s expert report devoted to its pooling claims. App. Ex. 1 at 19-20. The ipse dixit and conclusory statements in Rocky Hill s expert report are not sufficient to defeat summary judgment. Sitrick v. Dreamworks, LLC, 516 F.3d 993, 1001 (Fed. Cir. 2008) ( Conclusory expert assertions cannot raise triable issues of material fact on summary judgment. ); Invitrogen Corp. v. Clontech Laboratories, Inc., 429 F.3d 1052, 1080 (Fed. Cir. 2005) ( a party does not manufacture more than a merely colorable dispute simply by submitting an expert declaration asserting that something is black when the moving party s expert says it is white; there must be some foundation or basis for the opinion. ). The undisputed material facts in this case establish that Interior considered pooling tribal trust funds for investment purposes during the Phase 1 period. Undisputed Fact ( UF ) 12 (Poitras and Miller suggestion); UF 13-16 (internal Interior proposal); UF 28 (Mellon Bank contract); Docket No. 281-1 at 93-100 (Security Pacific National Bank contract). It is 4/ Citations to the concurrently filed Supplemental Appendix of Exhibits are to the exhibit number and the sequentially numbered page(s). - 14 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 19 of 24 undisputed that Interior consider[ed] whether funds from one Indian trust fund should be combined with funds from another Indian trust to purchase a single instrument of indebtedness, and thereby extending to small trusts the benefits of larger returns from larger and longer term investments. Manchester Band, 363 F.Supp. at 1248, n. 3. The undisputed material facts establish that Interior consulted outside experts to review its investment practices during the Phase 1 period. Most notably, Interior commissioned Price- Waterhouse to perform a review of Interior s investment of Indian trust funds. See Docket No. 281-1 at 12-15 (excerpts of Price-Waterhouse report). In part, Price-Waterhouse concluded In assessing the overall performance of the funds in recent years, we have found that the BIA Branch of Investments has achieved excellent investment results relative to other managed portfolios operating under similar investment authorizations. These recent successes are primarily attributable to a strategy of investing in short-term assets in the face of volatile interest rates and to the discovery of federal subsidies implicit in the pricing of FDIC and FSLIC insured CD s [sic]. Suppl. App. Ex. 35 at 220. The undisputed material facts also establish that Interior consulted with its tribal beneficiaries as to the pooling proposals. UF 18. The agency advised the tribes of the potential benefits of pooling, the potential disadvantages of pooling, and the impediments to implementing pooling. UF 17-18, 21-25. Interior received questions from tribes and Bureau of Indian Affairs field offices about pooling. Docket No. 281-1 at 44-91. There was opposition from tribal beneficiaries to Interior s proposal to pool tribal trust funds for investment purposes. UF 20; Harrison Decl., 12. One of the tribes that opposed pooling tribal trust funds was Plaintiff. UF 35-36. Although Plaintiff now attempts to distance itself from its prior position in its opposition, the evidence shows that, at the time, Plaintiff - 15 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 20 of 24 opposed pooling during the Phase 1 period. App. Ex. 11 at 98. Plaintiff admits that it communicated its opposition to pooling to Interior. UF 35. One of Plaintiff s Tribal presidents during the Phase 1 period testified that Plaintiff was opposed to pooling. UF 36. Plaintiff s rationale for its opposition (Docket No. 280 at 13-14) is not relevant at this juncture. What is relevant is the fact that Plaintiff and other tribes were opposed to pooling tribal trust funds for investment purposes. See also Harrison Decl., 12 (some tribes put forth their opposition in tribal resolutions forwarded to the Bureau of Indian Affairs). In fact, Plaintiff was opposed to even commingling its trust funds with trust funds of other tribes. Suppl. App. Ex. 36 at 229 (commanding that [n]o swap transactions are to be paid from Jicarilla funds. ). Plaintiff s designee under rule 30(b)(6) of the Rules of the United States Court of Federal Claims testified at length as to Plaintiff s opposition to commingling its funds with other tribes funds absent advance notice and consent from Plaintiff; as well as Plaintiff s desire that Interior honor Plaintiff s request that its funds not be used for swap transactions. Suppl. App. Ex. 37 at 231-34. The wishes of the beneficiary are clearly something that should be considered by a trustee when making investment decisions. 5/ Even Plaintiff would be hard-pressed to deny that well-established and -honored notion. Interior solicited and obtained the advice of its Solicitor s Office with respect to its pooling proposal. Docket No. 285-1 at 11-15. That office s conclusion was that the state of the 5/ The United States has not argued that the Indian self-determination policy or the Indian Self Determination and Education Assistance Act (codified at 25 U.S.C. 450, et seq.) excuses its trust responsibilities. C.f. Docket No. 285 at 31-37. The United States, instead, relies upon the obvious: the wishes of tribal beneficiaries are important factors to be considered when setting investment policy, especially in the Indian trust context, a unique trust involving a sovereign settlor, trustee, and beneficiaries. U.S. Br. at 20-22; see also Cobell v. Salazar, 573 F.3d 808, 811 (D.C. Cir. 2009) ( Cobell XXII ) (recognizing the unique nature of this trust ). - 16 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 21 of 24 law on the question is not crystal clear. Id. at 14. The agency lawyer offered his personal opinion, [i]f challenged, however, I believe that the chances are good that the pooling of tribal trust funds for investment purposes even in the absence of express statutory authority may be successfully defended. Id. at 14-15. This statement is far from a ringing endorsement of the pooling proposal; at least one agency attorney anticipated litigation if Interior were to implement pooling. Interior attempted to implement pooling at least twice as part of its efforts to privatize trust funds management functions. Congress opposed both efforts, with Congressman Mike Synar chastising Interior after its second attempt to privatize as follows: Additionally, the Bureau wasted more than two years and as much as $1 million of taxpayer money attempting -- inappropriately and unsuccessfully -- to privatize its financial management responsibilities over the Indian Trust Fund.... Moreover, the Bureau persisted in its attempts to transfer financial management services for the Indian Trust to a commercial bank even after Congress had directed it not to do so -- five times. And in its ultimate affront to Congress and the account holders of the Indian trust Fund, the Bureau gave a $5,000 cash award for management excellence to the headquarters employee who helped design and oversee this privatization fiasco. Suppl. Ex. 32 at 205. The undisputed material facts in the record full justify the United States concern, as statutory trustee, that pooling would impair the government-to-government relationship with Indian tribes, that Congress would object to pooling, or that the United States may have still faced breach of trust lawsuits even if it had decided to pool tribal trust funds for investment purposes. There is no evidence in the record to conclude that Interior s decision to invest tribal trust funds individually was arbitrary, capricious, abusive of discretion, or contrary to law. The process by which the United States proposed and evaluated pooling was robust. That process involved - 17 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 22 of 24 consulting with beneficiaries, seeking outside expert advice, obtaining legal opinions, and responding to Congress. Plaintiff has presented no evidence, expert or otherwise, that the United States process of considering pooling was imprudent. The foregoing should effectively dispose of the Court s inquiry in the matter. Plaintiff devotes only one paragraph in its opposition to respond to the fact that Interior was unable to obtain FDIC or FSLIC insurance coverage for the proposed tribal trust pool during the Phase 1 period. Docket No. 280 at 14-15. Amici acknowledge that lack of insurance coverage was a limitation on Interior s ability to pool tribal trust funds for investment purposes. Docket No. 285 at 37. Both Plaintiff and amici speculate that Interior could have devised an investment pool comprised exclusively of other government-backed securities aside from bank CDs. Docket No. 280 at 14-15; Docket No. 285 at 37-38. But Plaintiff has not presented any evidence that it would have been prudent or appropriate to implement an investment pool with short-term securities other than CDs during the Phase 1 period. The undisputed evidence in the record shows that CDs were an integral component of any investment pool for tribal trust funds. CDs were to be part of the investment pool, as reported by the Bureau of Indian Affairs vendor tasked with developing the technical requirements to pool tribal trust funds. Suppl. App. Ex. 31 at 194-96. FDIC and FSLIC insurance coverage was identified by Interior as a necessary requirement for pooling. UF 13. According to Price-Waterhouse, Interior s exceptional investment performance was primarily attributable to a strategy of investing in short-term assets in the face of volatile interest rates and to the discovery of federal subsidies implicit in the pricing of FDIC and FSLIC insured CD s [sic]. Suppl. App. Ex. 35 at 220. Without FDIC or FSLIC insurance coverage, [i]t would be necessary to negotiate for collateral from all banks, and this - 18 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 23 of 24 would entail lower earnings, if the banks were willing to do it. UF 22. Plaintiff and amici attempt to gloss over the insurance coverage issue is unpersuasive. The lack of FDIC and FSLIC insurance coverage for pooled investment was a significant and substantive impediment to pooling tribal trust funds for investment purposes during the Phase 1 period. The factual record shows that there were disadvantages to pooling and that there were impediments to pooling tribal trust funds for investment purposes during the Phase 1 period. Those disadvantages and impediments were considered by Interior, along with the potential advantages of pooling. To prevail at trial, Plaintiff must prove by admissible evidence that Interior s careful and deliberative process was arbitrary, capricious, abusive of discretion, or contrary to law. Plaintiff cannot meet its burden. Plaintiff has failed to present any evidence to support that claim, and it has failed to raise a triable issue of material fact as to the reasonableness of Interior s decision on pooling. There are no disputed issues of material fact for trial. The conclusory opinions of Plaintiff s experts are insufficient to defeat summary judgment. Plaintiff has failed to place at issue material facts that could entitle it to judgment in its favor at trial under the applicable burden of proof: was Interior s decision arbitrary, capricious, abusive of discretion, or contrary to law. The United States is entitled to partial summary judgment on the pooling claims. III. CONCLUSION For the reasons set forth herein, for the reasons set fort in the United States opening brief, and based upon all the evidence in the record, as may be presented at argument, or as may be submitted with leave of court, the United States respectfully requests that its motion for partial summary judgment as to Plaintiff s pooling-related claims be granted. - 19 -
Case 1:02-cv-00025-FMA Document 287 Filed 05/24/11 Page 24 of 24 Respectfully submitted this 24th day of May, 2011, IGNACIA S. MORENO Assistant Attorney General s/ Stephen R. Terrell STEPHEN R. TERRELL United States Department of Justice Environment and Natural Resources Division Natural Resources Section P.O. Box 663 Washington, D.C. 20044-0663 Tel: (202) 616-9663 Fax: (202) 353-2021 OF COUNSEL: AYAKO SATO BARBARA M.R. MARVIN KATHRYN LIBERATORE United States Department of Justice Environment and Natural Resources Division Natural Resources Section P.O. Box 663 Washington, D.C. 20044-0663 GLADYS COJOCARI HOLLY CLEMENT DONDRAE MAIDEN Office of the Solicitor United States Department of the Interior Washington, D. C. 20240 THOMAS KEARNS Office of the Chief Counsel Financial Management Service United States Department of the Treasury Washington, D.C. 20227-20 -