Silverman v. Mutual Benefit Life Insurance ( 1998 )

JACOBS, Circuit Judge,

with whom Judge Meskill concurs, concurring:

The opinion of the Court reflects the conclusion that Silverman failed to make the requisite showing under § 1109(a) that the fund’s losses resulted from Principal’s inaction. Judge Leval (as author) records his disagreement with that view and the opinion of the Court does not address it. Having signed the opinion of the Court, I write additionally to explain why Silverman has failed to .adduce evidence sufficient to raise a genuine- issue of material fact with respect to causation. ■

' [7,8] An ERISA plaintiff who seeks compensatory damages under § 1105(a)(3) must show, inter alia, that the losses “resulted] from” the defendant’s failure to take reasonable steps to' remedy the co-fiduciary’s breach. See 29 U.S.C. §§ 1109(a), 1105(a)(3) (1985); Diduck v. Kaszycki & Sons Contractors, 974 F.2d 270, 279 (2d Cir.1992). Causation of damages is therefore an element of the claim, and the plaintiff béars the burden of proving it. The specific-factual question is whether Zueker or Fertig, during the time period in which Principal is alleged to have violated its duty to act, possessed assets from which any portion of the embezzled funds could be recovered. • The date of Principal’s alleged breach of its duty to. act (if any) is a question for the fact-finder; but if there was a-breach,.it took place on some date between mid-November 1991 and March 1992. Unless Zueker and Fertig had resources that could be found and seized to replenish , the plan at such time as Principal breached a duty to act, the loss cannot have-been caused by Principal’s inaction.

Silverman has expressly declined to proffer evidence as to what Fertig and Zueker did with the funds they embezzléd, or as to whether at any pertinent time they had assets that could have, made good the loss. Silverman and the Department of Labor (appearing as amicus curiae) evidently recognize. that there is no record evidence to demonstrate a causative link between Principal’s inaction and the' plan’s losses. That is why they have argued ;(both in district court and on appeal) for a shift of the burden of proof on the issue of causation, so that once a plaintiff has shown a breach of section 1105(a)(3) and a related loss, the defendant must “prove that the loss was not caused by its breach of fiduciary duty.” Brief of the Secretary of Labor as Amicus Curiae at 7 (emphasis added).

This argument is derived from the common law of trusts, under which a defaulting fiduciary bears the burden of disproving causation. See In re Beck Industries, Inc., 605 F.2d 624, 636-37 (2d Cir.1979).¹ But the Supreme Court has cautioned that “the law of trusts often will inform, but will not necessarily determine the outcome of, an effort to interpret ERISA’s fiduciary duties.” Varity Corp. v. Howe, 516 U.S. 489, 497, 116 S.Ct. 1065, 1070, 134 L.Ed.2d 130 (1996). Congress has placed the burden of proving causation on the plaintiff by requiring him to prove that the losses “result[ed] from” the defendant’s inaction. See 29 U.S.C. §§ 1109(a), 1105(a)(3). And' we have held that it is the plaintiffs burden to “prov[e] an amount of damages caused by the fraud.” Diduck, 974 F.2d at 279. Section 1105(a)(3) provides for extraordinarily broad liability for co-fiduciaries because it requires only that the defendant be a fiduciary of the same plan as the breaching fiduciary, not that they be fiduciaries with respect to the same assets. So a co-fiduciary, like Principal in this case, may be held liable for another trustee’s breach with respect to assets over which the defendant co-fiduciary never exercised dominion or control. See 29 U.S.C. § 1105(a)(3).² The causation requirement of § 1109(a) acts as a check on this broadly sweeping liability, to ensure that solvent companies remain willing to undertake fiduciary responsibilities with respect to ERISA plans.

Silverman did not raise a fact issue as to whether Zucker and Fertig had assets at the time of the breach by showing that Zucker and Fertig had received $130,000 in late September or early October. Initially at least, an embezzler will almost always have the stolen funds in his hands. But the embezzler’s initial possession of the stolen funds cannot support an inference that an embezzler maintains the funds continuously thereafter in a place accessible to creditors (subject to the defendant’s showing that the funds were dissipated or hidden). Otherwise, a plaintiff who demonstrates a breach of the embezzler’s fiduciary duty — a threshold requirement under section 1105(a)(3)— would often be relieved of the burden of proving causation in any meaningful sense: evidence that the embezzler once possessed the money would constitute a prima facie showing that the money could have been recovered when the co-fiduciary later failed to alert the authorities.

Why cannot a jury infer that funds in hand in September were still available in November, or the following year? The problem is that (i) the stolen funds were in the embezzlers’ hands in September; but (ii) the money was gone by the following April; and (iii) the record does not show what happened to the money in the interval. A fact-finder could fix Principal’s culpable failure to act on any date after mid-November 1991; but Silverman has come forward with no evidence bearing on when the money vanished. So in order to decide whether — and how much — -money was available for recovery at an intervening point in time, the factfinder would have no tool but speculation.

Diduck illustrates the kind of evidentiary showing required. The judgment-proof employer in Diduck had made no pension contributions for people working off the books, and the co-fiduciary was the shop steward whose reports to the fund trustees had failed to reflect the off-the-books employment. Di-duck, 974 F.2d at 274. Notwithstanding the employer’s chronic shortage of funds, the defendant trustees had repeatedly and successfully enforced their demands for fund contributions on behalf of reported workers by threatening" work stoppages. Id. at 279. In light of the trustees’ ability to force payments in respect of on-the-books workers, we concluded that the trial court’s ruling that damages were sustained was “at most” a finding of

what might be called a prima facie case of damages caused by the fraud. At that point, the defendants should have been afforded an opportunity to rebut this showing. This chance was not afforded them. After such rebuttal, the trier would have to decide, whether the plaintiff had sustained his burden of proving an amount of damages caused by the fraud.

Id. Thus in Diduck, causation was established because ,the plaintiff showed that — at the time of the co-fiduciary’s breach — a tool was at hand to force timely payment of amounts due; and even then, a question remained open as to whether the plaintiff had proved or could prove an amount of damages recoverable. Here, Silverman has declined to offer any evidence to support the fact or amount of damages, other than-the underlying theft.

Silverman would have us adopt implicitly an unsupported presumption that embezzled funds are retained in an accessible place for some predictable and substantial period of time. However, “[i]t is generally understood that in law for a specified fact to be presumptive evidence of another it must be one which in common experience leads naturally and logically to that other.”' Wilkins v. American Export Isbrandtsen Lines, Inc., 446 F.2d 480, 484 (2d Cir.1971), cert. denied, 404 U.S. 1018, 92 S.Ct 679, 680, 30 L.Ed.2d 665 (1972). There is no body of common experience to establish that embezzlers as a class are so thrifty and provident that one may presume their prudent stewardship of the money they steal. The fact that Zucker and Fertig stole money in September does not support an inference that they had funds available for recovery one, two, three or four months later.

1 . The Department of Labor also relies on Martin v. Feilen, 965 F.2d 660, 671 (8th Cir.1992), cert. denied, 506 U.S. 1054, 113 S.Ct. 979, 122 L.Ed.2d 133 (1993), which holds that "once the ERISA plaintiff has proved a breach of fiduciary duty and a prima facie case of loss to the plan or ill-gotten profit to the fiduciary, the burden of persuasion shifts to the fiduciary to prove that the loss was not caused by, or his profit was not attributable to, the breach of duty." Even if the Eighth Circuit’s analysis is correct, the issue in Martin involved the calculation of damages, after the plaintiff proved a prima facie case that the plan suffered a loss resulting from the defendant's breach of its fiduciary duty. See id. (holding that Secretary of Labor had established a prima facie case by proving that defendants "violated § 1104 by causing the ESOP to engage in stock transactions that caused specific injury to the ESOP at the time in question.”). The issue before this Court involves the burden of proving causation, not damages.

2 . Section 1105(a)(3) provides that "a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.” 29 U.S.C. § 1105(a)(3) (1985).