Secretary of Labor v. Compton , 57 F.3d 270 ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
6-5-1995
Secretary of Labor v Compton
Precedential or Non-Precedential:
Docket 93-2019
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 93-2019
____________
ROBERT B. REICH, Secretary of the
United States Department of Labor,
Appellant
v.
FRED COMPTON, JOSEPH McHUGH, JOHN NIELSEN,
FREDERICK HAMMERSCHMIDT, GERSIL N. KAY,
ELECTRICAL MECHANICS ASSOCIATION,
THE FIDELITY-PHILADELPHIA TRUST COMPANY, and
THE INTERNATIONAL BROTHERHOOD OF ELECTRICAL
WORKERS, LOCAL UNION NO. 98,
Appellees
____________________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 88-7920)
____________________
Argued: August 11, 1994
Before: BECKER, ALITO, and GIBSON*, Circuit Judges
(Opinion Filed: June 5, l995)
____________________
THOMAS S. WILLIAMSON, JR.
Solicitor of Labor
ALLEN H. FELDMAN
Associate Solicitor for Special Appellate
and Supreme Court Litigation
______________________________
*Hon. John R. Gibson, United States Circuit Judge for the Eighth
Circuit, sitting by designation.
NATHANIEL I. SPILLER
Counsel for Appellate Litigation
ELLEN J. BEARD (Argued)
Attorney
UNITED STATES DEPARTMENT OF LABOR
Room N-2700
200 Constitution Avenue, N.W.
Washington, D.C. 20210
Attorneys for Appellant
MICHAEL KATZ, ESQ. (Argued)
MERANZE AND KATZ
Lewis Tower Building, 12th Floor
15th and Locust Streets
Philadelphia, PA 19102
SANDRA L. DUGGAN, ESQ.
N. MARLENE FLEMING, ESQ. (Argued)
BLACKBURN & MICHELMAN, P.C.
2207 Chestnut Street
Philadelphia, PA 19103
Attorneys for Appellees, Fred Compton, Joseph
McHugh, and John Nielsen
RICHARD B. SIGMOND, ESQ.
RICHARD C. McNEILL, JR., ESQ. (Argued)
SAGOT, JENNINGS & SIGMOND
1172 Public Ledger Building
Philadelphia, PA 19106
Attorneys for Appellees, Electrical Mechanics Association
and International Brotherhood of Electrical
Workers, Local Union No. 98
LAURANCE E. BACCINI, ESQ. (Argued)
CAROL A. CANNERELLI-VAN POORTVLIET
Of Counsel:
WOLF, BLOCK, SCHORR and SOLIS-COHEN
Twelfth Floor Packard Building
Philadelphia, PA 19102
Attorneys for Appellees, Frederick Hammerschmidt,
Gersil N. Kay, and
The Fidelity-Philadelphia Trust Company
____________________
OPINION OF THE COURT
____________________
ALITO, Circuit Judge:
This is an appeal from an order granting summary judgment in
favor of the defendants in an action brought by the Secretary of
Labor ("the Secretary") to redress alleged violations of the
Employee Retirement Income Security Act of 1974 ("ERISA"), 29
U.S.C. §§ 1001-1461. The action was based on certain financial
transactions involving the International Brotherhood of
Electrical Workers Union No. 98 Pension Plan ("the Plan") and the
Electrical Mechanics Association ("EMA"), a not-for-profit
corporation closely related to Local 98 of the International
Brotherhood of Electrical Workers ("Local 98" or "the union"),
whose members are covered by Plan. Maintaining that these
transactions were prohibited because of EMA's close relationship
with Local 98, the Secretary sued the Plan trustees, Local 98,
and EMA. The district court granted summary judgment for the
defendants, but we now reverse in part, affirm in part, and
remand for further proceedings.
I.
In 1972, the Plan made a 30-year loan of $800,000 to EMA at
7.5% interest. EMA used this loan to finance construction of a
building, and the loan was secured by a mortgage on this
property. The building constructed with the loan housed Local
98's offices. Two years after EMA obtained the loan, Congress
passed ERISA. Section 406(a) of ERISA, 29 U.S.C. § 1106(a),
prohibits various transactions involving a plan and a "party in
interest." With respect to transactions that occurred before
1974, however, these prohibitions did not take effect until June
30, 1984. See 29 U.S.C. § 1114(c).
Concerned that its outstanding loan to EMA would be
considered a prohibited transaction after that date, the Plan
applied to the Department of Labor on April 30, 1984 for an
exemption from this provision. See 29 U.S.C. § 1108 (authorizing
the Secretary to grant exemptions from ERISA's prohibited
transaction provisions). On June 1, 1984, the Department
tentatively denied the exemption and advised the Plan that its
only permissible options were to renegotiate the terms of the
loan so that EMA was charged a market interest rate or to require
EMA to satisfy the loan in full. Contrary to the advice of its
counsel, the Plan withdrew its exemption request and, on April
25, 1985, accepted from EMA a payment of $380,289.93, the fair
market value of the loan, in full satisfaction of the debt, which
at the time had an accounting value of $653,817.47.1 EMA
borrowed the entire amount of this payment from Local 98. Local
98 then imposed a special "rental" assessment on its members and
paid the proceeds to EMA. EMA in turn used those funds to repay
the money advanced by the union. Joint Appendix ("JA") at 133.
1
. The difference in value was due to the extraordinary increase
in interest rates between 1972 and 1984.
During 1984 and 1985, Fred Compton, Joseph McHugh, and John
Nielsen were Local 98's designated trustees ("union trustees")
for the Plan; Frederick Hammerschmidt and Gersil Kay were the
employer-designated trustees ("employer trustees"); and Fidelity-
Philadelphia Trust Company ("Fidelity") was the Plan's corporate
trustee. Compton was also president of both EMA and Local 98
from 1981 through 1987; McHugh was a member of Local 98's
executive board from 1981 through 1987; and Nielsen was financial
secretary of Local 98 from 1981 through 1987, as well as a member
of EMA's board of directors from 1981 through June 1984.
In October 1988, the Secretary filed a complaint in district
court against Compton, McHugh, Nielsen, Hammerschmidt, Kay,
Fidelity, EMA, and Local 98 (collectively "the defendants"). The
complaint first asserted that EMA "was a shell corporation wholly
controlled by Local 98" and that therefore "all transactions with
EMA, were, in fact, transactions with Local 98," which was a
"party in interest" under section 3(14)(D) of ERISA, 29 U.S.C. §
1002(14)(D).2 JA at 17-18. The complaint alleged that the loan
to EMA became a prohibited transaction as of July 1, 1984,
pursuant to sections 406(a)(1)(A), (B), and (D) of ERISA, 29
U.S.C. §§ 1106(a)(1)(A), (B), and (D).3 Id. at 18. Likewise, the
complaint alleged that EMA's subsequent purchase of its note was
2
. Section 3(14) of ERISA, 29 U.S.C. § 1002(14), is set out in
the text infra at pages 15 to 16. The Secretary conceded that
EMA was not a party in interest.
3
. Section 406(a)(1) of ERISA, 29 U.S.C. § 1106(a)(1), is set
out in the text, infra at page 12.
a prohibited transaction under these same provisions because the
note was purchased for less than its principal value. Id. at 21.
Based on these transactions, the complaint claimed that
various defendants had committed several different ERISA
violations. First, the complaint claimed that from July 1, 1984
until August 25, 1984 (the date when EMA purchased the note),
trustees Compton, McHugh, Nielsen, Hammerschmidt, and Kay had
breached their fiduciary obligations under sections 404(a)(1)(A)
and (B) of ERISA, 29 U.S.C. §§ 1104(a)(1)(A) and (B),4 by failing
to collect on the loan. Id. at 19. Second, the complaint
claimed that Fidelity had likewise breached its fiduciary duties
under sections 404(a)(1)(A), (B), and (D) of ERISA, 29 U.S.C. §§
1104(a)(1)(A), (B), and (D), by failing to take appropriate
action to collect on the loan during this same period. Id. at
20. Third, the complaint alleged that all Plan trustees had
breached their fiduciary obligations by causing the Plan to
continue to hold the EMA loan during this same period even though
they knew or should have known that doing so constituted a
prohibited transaction under sections 406(a)(1)(B) and (D) of
ERISA, 29 U.S.C. §§ 1106(a)(1)(B) and (D). Id. at 20-21.
Fourth, the complaint charged that all the Plan trustees had
breached their fiduciary obligations by causing the Plan to sell
the note to EMA when they knew or should have known that this was
a prohibited transaction under sections 406(a)(1)(A) and (D) of
4
. Section 404(a)(1) of ERISA, 29 U.S.C. § 1104(a)(1), is set
out in the text, infra at page 50.
ERISA, 29 U.S.C. §§ 1106(a)(1)(A) and (D). Id. at 21. Fifth,
the complaint alleged that the union trustees had breached their
duties to the Plan under sections 406(b)(1) and (2) of ERISA, 29
U.S.C. §§ 1106(b)(1) and (2)5, by "dealing with the assets of the
Plan in their own interest and for their own accounts, and in
their individual capacity by acting in a transaction involving
the Plan on behalf of a party (or representing a party) whose
interests were adverse to those of the Plan" and its participants
or beneficiaries. Id. 21. Finally, the complaint alleged that
EMA and Local 98 had participated in the trustees' breaches of
their fiduciary duties and, furthermore, that each Plan trustee
was liable for the others' fiduciary breaches under sections
405(a)(2) and (3) and (b)(1)(A) of ERISA, 29 U.S.C. §§ 1105(a)(2)
and (3) and (b)(1)(A).6 Id. at 21-22.
5
. Section 406(b)(2) of ERISA, 29 U.S.C. § 1106(b)(2), is set
out in the text, infra at page 43.
6
. Sections 405(a)(2) and (3) of ERISA, 29 U.S.C. §§ 1105(a)(2)
and (3), provide:
(a) In addition to any liability which he may have
under any other provision of this part, 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 in the following
circumstances: . . .
(2) if, by his failure to comply with section
1104(a)(1) of this title in the administration of
his specific responsibilities which give rise to
his status as a fiduciary, he had enabled such
other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such
other fiduciary, unless he makes reasonable
efforts under the circumstances to remedy the
breach.
The complaint sought an injunction prohibiting the defendants
from committing further ERISA violations. Id. at 23. It also
sought an order requiring Local 98 and EMA to "restor[e] to the
Plan the unpaid balance of the loan with interest" and an order
requiring each defendant, jointly and severally, "to restore to
the Plan all Plan losses attributable to their fiduciary
breaches." Id. at 23-24.
After discovery, the Secretary moved for summary judgment.
Much of the Secretary's argument rested on the contention that
EMA was "a shell corporation or alter ego wholly controlled by
Local 98." Id. at 147. The district court initially denied this
motion in February 1993, but following the Supreme Court's
decision in Mertens v. Hewitt Associates, 113 S. Ct. 2063 (1993),
the district court requested the parties to submit briefs
concerning the impact of that decision. The court subsequently
vacated its earlier order denying the Secretary's motion for
summary judgment and instead entered summary judgment in favor of
the non-moving defendants. McLaughlin v. Compton, 834 F. Supp.
743, 751 (E.D. Pa. 1993) ("Compton I"). The court interpreted
Mertens as a directive to "strictly construe" ERISA. Id. at 747.
(..continued)
Section 405(b)(1)(A) of ERISA, 29 U.S.C. § 1105(b)(1)(A),
provides:
Except as otherwise provided in subsection (d) of
this section and in section 1103(a)(1) and (2) of this
title, if the assets of a plan are held by two or more
trustees --
(A) each shall use reasonable care to prevent a
co-trustee from committing a breach . . . .
Noting that EMA was not "a party in interest" under the
applicable provision of ERISA, the district court reasoned that
the Secretary's alter ego argument would expand the reach of this
provision and thus contravene Mertens' teaching that liability
can be imposed under ERISA only when the statute "explicitly
prohibits the challenged transaction . . . ." Id.
The Secretary moved for reconsideration, arguing that "the
literal text of ERISA" prohibited the transactions at issue in
this case. JA at 343. Specifically, the Secretary contended
that the challenged transactions constituted "indirect"
transactions with Local 98, in violation of sections
406(a)(1)(A), (B), and (D) of ERISA, and that the transactions
constituted the "use" of Plan assets "for the benefit" of Local
98, in violation of section 406(a)(1)(D) of ERISA. Id. at 348-
49. In addition, the Secretary argued that, even if the court
adhered to its previous ruling that the loan to EMA and its
subsequent purchase were not prohibited transactions, the court
would still have to decide: (a) whether all of the trustees had
breached their fiduciary duties under section 404(a) of ERISA and
(b) whether the union trustees had breached their fiduciary
duties and violated sections 406(b)(1) and (2) of ERISA, as
interpreted in Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979),
when, in connection with EMA's purchase of the note for less than
its accounting value, they allegedly "acted on both sides of the
transaction in their joint capacities as Plan trustees, union
officers, and EMA governing board members . . . ." Id. at 349-
50.
The district court denied this motion. After observing that
"it would be appropriate to deny the motion on purely procedural
grounds" because it simply advanced additional arguments not
raised in the Secretary's prior brief concerning Mertens, the
court addressed the merits of the Secretary's argument. Reich v.
Compton, 834 F. Supp. 753, 755-56 (E.D. Pa. 1993) ("Compton II").
Interpreting the Secretary's motion as arguing that the
transactions in question were "indirect party in interest
transactions," the court wrote that "ERISA does not contemplate
transfers to `indirect parties in interest'--the transferee is
either a party in interest under the statute or it is not." Id.
at 756. The court also concluded that the transactions did not
constitute a "direct" benefit to the union because "[n]o cash
`benefits' or `plan assets' ever passed to Local 98." Id.
Likewise, the court held that the questioned transactions did not
constitute an "indirect benefit" to Local 98 because it paid rent
to occupy the building constructed with the loan and because the
union had no obligation to finance EMA's purchase of the note.
Id.
Finally, the court rejected the argument that the union
trustees violated sections 406(b)(1) and (2) of ERISA due to
their participation in EMA's purchase of the note. Attempting to
distinguish Cutaiar, supra, the court observed that "the boards
of the Plan and EMA were not identical" and that the union
trustees did not constitute a majority of or control EMA's board.
Compton II, 834 F. Supp. at 757. The district court did not,
however, address the Secretary's argument that the Plan trustees
had violated their fiduciary duties pursuant to section 404(a) of
ERISA. This appeal followed.
II. ERISA Section 406(a)(1) Claims Against Fiduciaries
A. We first address whether the district court correctly
entered summary judgment against the Secretary with respect to
his claims that the Plan trustees violated sections 406(a)(1)(A),
(B), and (D) of ERISA, 29 U.S.C. §§ 1106(a)(1)(A), (B), and (D).
Congress adopted section 406(a) of ERISA to prevent plans from
engaging in certain types of transactions that had been used in
the past to benefit other parties at the expense of the plans'
participants and beneficiaries. Before ERISA, plans could
generally engage in transactions with related parties so long as
the transactions were "arms-length." Commissioner of Internal
Revenue v. Keystone Consolidated Indus., 113 S. Ct. 2006, 2012
(1993). Unfortunately, this rule was difficult to police and
thus "provided an open door for abuses" by plan trustees. Id.
Congress accordingly enacted section 406(a) with the goal of
creating a categorical bar to certain types of transactions that
were regarded as likely to injure a plan. Id.; S. Rep. No. 93-
383, 93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N.
4890, 4981. Section 406, which is entitled "Prohibited
transactions," provides in pertinent part as follows:
(a) Transactions between a plan and a party in
interest
Except as provided in section 1108 of this title:
(1) A fiduciary with respect to a plan shall not
cause the plan to engage in a transaction, if he knows
or should know that such transaction constitutes a
direct or indirect--
(A) sale or exchange, or leasing, of any
property between the plan and a party in interest;
(B) lending of money or other extension of
credit between the plan and a party in interest;
(C) furnishing of goods, services, or facilities
between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of
a party in interest, of any assets of the plan . .
. .
In considering the Secretary's section 406(a)(1) claims
against the Plan trustees, we will separate our inquiry into two
parts. First, in part II.B. of this opinion, we will consider
whether the transactions at issue in this case may be prohibited
"indirect" transactions between the Plan and a "party in
interest" (i.e., Local 98), in violation of section 406(a)(1)(A),
(B), and (D). Second, we will consider, in part II.C. of this
opinion, whether these transactions may constitute the use of
Plan assets "for the benefit" of Local 98, in contravention of
section 406(a)(1)(D).7
B. "Indirect" Transactions. Subsections (A), (B), and (D)
of section 406(a)(1) of ERISA all reach certain direct and
indirect transactions between a plan and a party in interest.
Subsection (A) applies to the sale, exchange, or lease of
7
. It is questionable whether the Secretary adequately raised
this argument in district court prior to his motion for
reconsideration, but since the district court denied the
Secretary's motion for reconsideration on the merits, we also
reach the merits of this argument.
property between a plan and a party in interest. Subsection (B)
applies to the lending of money or other extension of credit
between a plan and a party in interest. And subsection (D)
reaches, among other transactions, the transfer of plan assets to
a party in interest. In this case, the Secretary argues that the
Plan's loan to EMA and its subsequent sale of the underlying note
to EMA were indirect transactions with Local 98 that violated
these provisions.8 The Secretary argues that indirect
transactions within the meaning of section 406(a)(1) include the
following three categories:
(1) multi-party transactions from a plan through one or
more third-party intermediaries to a party in interest;
(2) two-party transactions that are more complex than a
simple sale, loan, or transfer of assets; and (3)
transactions between a plan and the alter ego of a
party in interest . . . .
Dept. of Labor 9/13/94 Letter-Brief at 2.9 The Secretary admits
that the first two types of transactions are not involved here.10
8
. Specifically, the Secretary asserts that the transactions
constituted either an "indirect . . . sale or exchange . . .
between a plan and a party in interest," in violation of section
406(a)(1)(A); an "indirect . . . lending of money between the
plan and a party in interest," in violation of section
406(a)(1)(B), or an "indirect . . . transfer [of plan assets] to
. . . a party in interest," in violation of section 406(a)(1)(D).
9
. While the Secretary does not assert that this list is
exhaustive, we limit our consideration in this appeal to the
three categories that the Secretary has mentioned.
10
. According to the Secretary, an example of the first type of
transaction prohibited by section 406(a)(1) is a case in which a
third party obtains a loan from a plan and then immediately turns
over those funds to a party in interest. As an example of the
second type of transaction prohibited by section 406(a)(1), the
Secretary points to Keystone Consolidated Indus., 113 S. Ct. at
2013 (1993). There a party in interest transferred property to
the plan in satisfaction of its funding obligations. According
Thus, the question before us is whether, as the Secretary
contends, a transaction between a plan and an alter ego of a
party in interest is, necessarily, an indirect transaction
between the plan and a party in interest.
In advancing this argument, the Secretary begins by
maintaining that his interpretation of section 406(a)(1) is
entitled to deference under the principles set out in Chevron
U.S.A., Inc. v. National Resources Defense Council, Inc., 467
U.S. 837, 843-44 (1984).11 We hold, however, that the
Secretary's alter ego argument is inconsistent with clear
congressional intent, and we therefore refuse to accept it. See
Brown v. Gardner, 115 S. Ct. 552, 556 (1994); Dole v.
Steelworkers, 494 U.S. 26, 42-43 (1990).
The categorical prohibitions contained in section 406(a)(1)
are built upon the concept of a "party in interest," and section
3(14) of ERISA, 29 U.S.C. § 1002(14), provides a long and
detailed definition of this concept. Section 3(14) states:
The term "party in interest" means, as to an employee
benefit plan--
(..continued)
to the Secretary, this type of transaction can be conceptualized
as a contribution of cash to the plan followed by the plan's
purchase of the property with that cash. We agree with the
Secretary that neither of these two types of transactions is at
issue here.
11
. The Secretary's alter ego argument, however, does not appear
to be embodied in any regulation or enforcement guideline.
Moreover, it is not clear that the Secretary advanced this
interpretation in any prior litigation. In light of our
conclusion that the alter ego theory is inconsistent with the
relevant provisions of ERISA, we need not determine the degree of
deference, if any, that would otherwise be warranted under these
circumstances. See Martin v. OSHRC, 499 U.S. 144, 156-57 (1991).
(A) any fiduciary (including, but not limited
to, any administrator, officer, trustee, or
custodian), counsel, or employee of such employee
benefit plan;
(B) a person providing services to such plan;
(C) an employer any of whose employees are
covered by such plan;
(D) an employee organization any of whose
members are covered by such plan;
(E) an owner, direct or indirect, of 50 percent
or more of--
(i) the combined voting power of all
classes of stock entitled to vote or the
total value of shares of all classes of stock
of a corporation,
(ii) the capital interest or the profits
interest of a partnership, or
(iii) the beneficial interest of a trust or
unincorporated enterprise, which is an
employer or an employee organization
described in subparagraph (C) or (D);
(F) a relative (as defined in paragraph (15) of
any individual described in subparagraph (A), (B),
(C), or (E);
(G) a corporation, partnership, or trust or
estate of which (or in which) 50 percent or more
of --
(i) the combined voting power of classes of
stock entitled to vote or the total value of
shares of all classes of stock of such
corporation,
(ii) the capital interest or profits
interest of such partnership, or
(iii) the beneficial interest of such trust
or estate,
is owned directly or indirectly, or held by
persons described in subparagraph (A), (B), (C),
(D), or (E);
(H) an employee, officer, director (or
individual having powers or responsibilities
similar to those of officers or directors), or a
10 percent or more shareholder directly or
indirectly, of a person described in subparagraph
(B), (C), (D), (E), or (G), or of the employee
benefit plan; or
(I) a 10 percent or more (directly or directly
in capital or profits) partner joint venturer of a
person described in subparagraph (B), (C), (D),
(E), or (G).
The Secretary, after consultation and coordination with
the Secretary of Treasury, may by regulation prescribe
a percentage lower than 50 percent for subparagraph (E)
and (G) and lower than 10 percent for subparagraph (H)
or (I). The Secretary my prescribe regulations for
determining the ownership (direct or indirect) of
profits and beneficial interests, and the manner in
which indirect stockholdings are taken into account.
Any person who is a party in interest with respect to a
plan to which a trust described in section 501(c)(22)
of Title 26 is permitted to make payments under section
1403 of this title shall be treated as a party in
interest with respect to such trust.
The Secretary's interpretation would in effect add an
additional category, i.e., an alter ego of a party in interest,
to this seemingly comprehensive list. Moreover, this additional
category would substantially overlap some of the categories
specifically listed in this provision. See, e.g., 29 U.S.C. §§
1002(14) (E) and (G). We therefore agree with the district court
that the Secretary's interpretation would upset the carefully
crafted and detailed legislative scheme reflected in section
3(14). See Compton I, 834 F. Supp. at 746-47, 49. See also
Mertens, 113 S. Ct. at 2067; Massachusetts Mutual Life Ins. Co.
v. Russell, 473 U.S. 134, 146-47 (1988). Congress could have
easily provided in section 3(14) that an "alter ego" of a party
in interest is also a party in interest, but Congress did not do
so. See Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80, 83
(5th Cir. 1990), cert. denied, 498 U.S. 1108 (1991). As the
Supreme Court stated in Mertens, 113 S. Ct. at 2071-72, ERISA is
"an enormously detailed statute that resolved innumerable
disputes between powerful competing interests," and courts should
not "attempt to adjust the balance . . . Congress has struck."
The Secretary's interpretation appears to rest on the false
premise that there is a uniform body of law that can be employed
in all contexts for the purpose of determining whether one entity
or person is another's alter ego.12 In reality, however, the
term alter ego is simply shorthand for the conclusion that one
party should be held liable in a particular context for the
transgressions of another closely related party. Consequently,
12
. Indeed, the Secretary cannot even claim that his
interpretation is consistent with the common law of trusts upon
which Congress engrafted ERISA. See Firestone Tire and Rubber
Co. v. Bruch, 489 U.S. 101, 110 (1989). The Secretary can point
to no body of trust law evidencing his proposed alter ego
principles. This is not surprising given that the alter ego
doctrine originally developed in the context of corporate law.
The common law of trusts did not include per se prohibitions
against a trustee dealing with a related party, and certainly did
not include per se prohibitions against a trustee dealing with an
alter ego of a related party. Instead, a trustee's sale of trust
property to a related party could only be set aside if it were
shown that the trustee was improperly influenced by the
relationship and received an unfair price. See Keystone
Consolidated Indus., 113 S. Ct. at 2012; Restatement (Second) of
Trust § 170 cmt. e (1957); 2A Austin W. Scott & William F.
Fratcher, Law of Trusts § 170.6 (4th ed. 1987).
the principles governing alter ego liability vary depending on
the legal context in which the determination takes place. For
example, the factors supporting the imposition of alter ego
liability in labor law differ from those employed in the
corporate law setting. Compare Stardyne, Inc. v. NLRB, 41 F.3d
141, 151 (3d Cir. 1994) (explaining that, for the purposes of the
National Labor Relations Act, factors relevant for determining
whether two employers are alter egos include whether they share
substantially identical management, business purpose, operation,
equipment, customers, supervision, and ownership) with Culberth
v. Amosa Ltd., 898 F.3d 13, 14 (3d Cir. 1990) (explaining that at
common law two companies will be considered alter egos of one
another only "where the controlling corporation wholly ignored
the separate status of the controlled corporation and controlled
its affairs [so] that its separate existence was a mere sham");
see also Berkey v. Third Ave. Ry., 155 N.E. 58, 61 (1927)
("Dominion may be so complete, interference so obtrusive, that by
the general rule of agency the parent will be a principal and the
subsidiary an agent. Where control is less than this, we are
remitted to the tests of honesty and justice."). Thus, if alter
ego analysis were to be required under sections 3(14) and
406(a)(1) of ERISA, the Secretary and the courts would have to
decide, presumably based on their understanding of the "purpose"
or "policy" underlying the relevant provisions of ERISA, under
what circumstances a party related to a party in interest should
be subjected to the same prohibitions as a party in interest.
Congress itself, however, made this very determination when it
adopted the definition of a party in interest that is set out in
section 3(14).
For these reasons, we cannot accept the Secretary's alter ego
argument, and we conclude that section 406(a)(1)'s prohibitions
against certain indirect transactions between a plan and a party
in interest do not automatically prohibit transactions between a
plan and an alter ego of a party in interest. We emphasize the
narrowness of our holding. While we reject the Secretary's alter
ego argument, we do not reach any other possible interpretations
of the concept of an "indirect" transaction with a party in
interest.
C. Use of Plan Assets for the Benefit of a Party in
Interest. In addition to prohibiting the transfer of plan assets
to a party in interest, section 406(a)(1)(D) also provides as
follows:
A fiduciary with respect to a plan shall not cause the
plan to engage in a transaction, if he knows or should
know that such transaction constitutes . . . a direct
or indirect . . . use . . . for the benefit of a party
in interest, of any assets of the plan.
29 U.S.C. § 1106(a)(1)(D) (emphasis added). As we read this
language, it provides that a fiduciary breach occurs when the
following five elements are satisfied: (1) the person or entity
is "[a] fiduciary with respect to [the] plan"; (2) the fiduciary
"cause[s]" the plan to engage in the transaction at issue; (3)
the transaction "use[s]" plan assets; (4) the transaction's use
of the assets is "for the benefit of" a party in interest; and
(5) the fiduciary "knows or should know" that elements three and
four are satisfied.
In this case, it is clear that summary judgment in favor of
the defendants cannot be sustained based on elements one, two, or
three. With respect to the first element, it is undisputed that
defendants Compton, McHugh, Nielsen, Hammerschmidt, and Kay were
"fiduciaries," and we think it is clear, as the district court
held, that Fidelity was a "fiduciary" as well.13 As for element
13
. Section 3(21)(A) of ERISA, 29 U.S.C. § 1002(21)(A), provides
that, subject to an exception that is not applicable here:
[A] person is a fiduciary with respect to a plan to the
extent (i) he exercises any discretionary control
respecting management of such plan or exercises any
authority or control respecting management or
disposition of its assets, (ii) he renders investment
advice for a fee or other compensation, direct or
indirect, with respect to any moneys or property of
such plan, or has authority or responsibility to do so,
or (iii) he has any discretionary authority or
discretionary responsibility in the administration of
such plan. . . .
Fidelity claims that it was not a fiduciary because it
had no discretionary authority over the Plan's assets and was
only a "depository" for the mortgage note. However, Fidelity
clearly had, at the least, "authority respecting the management"
of the Plan's assets. The 1980 Amendment to the Plan's trust
agreement granted Fidelity "exclusive authority and discretion in
the investment of the Fund . . . ." JA at 342. The minutes from
the meetings of the Plan's Board of Trustees reveal that Fidelity
had control over the Plan's investments. Id. at 55, 63, 83, 92-
93. Likewise, Fidelity's involvement in the sale of the note to
EMA clearly indicates that it "render[ed] investment advice" to
the Plan. Fidelity concedes that its chief investment officer
initially advised the Plan trustees that the sale of this asset
would be "imprudent." Id. at 83. Thus, we agree with the
district court and conclude that Fidelity was a fiduciary with
respect to the Plan. Compton I, 834 F. Supp. at 751 n.7. See
Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1219 (2d
Cir. 1987) (finding discretionary investment manager to be an
ERISA fiduciary).
two, if the summary judgment record does not establish that the
defendants "cause[d]" the Plan to engage in the challenged
transaction, the record surely does not require the contrary
conclusion. And with respect to element three, there can be no
reasonable dispute that the transactions involved the "use" of
Plan assets. The critical elements for present purposes are
therefore elements four and five.
Element four, as previously noted, requires that the
challenged transaction must constitute the use of plan assets
"for the benefit of" a party in interest. The defendants contend
that this element requires proof of a subjective intent to
benefit a party in interest, whereas the Secretary maintains that
such subjective intent is not necessary. Rather, the Secretary
argues, all that need be proven is that the fiduciary should have
known that the transaction would result in a benefit to a party
in interest that was more than "minimal, incidental, or
fortuitous." Dept. of Labor 9/13/94 Letter-Brief at 12.
We conclude that element four requires proof of a subjective
intent to benefit a party in interest. This interpretation is
strongly supported, if not required, by the statutory phrase "for
the benefit." In ordinary usage, if something is done "for the
benefit of" x, it is done for the purpose of benefitting x. If
something is not done for the purpose of benefitting x but has
that unintended effect, it cannot be said that it was done "for
the benefit of" x. (It would be self-contradictory if someone
said: "I did that for the benefit of x, but I did not want to
benefit him.").
In addition, if element four did not require a subjective
intent to benefit a party in interest, section 406(a)(1)(D) would
produce unreasonable consequences that we feel confident Congress
could not have wanted. See Commissioner v. Brown, 380 U.S. 563,
571 (1965). If "for the benefit of" is read to mean "having the
effect of benefitting," section 406(a)(1)(D) would appear to
prohibit a fiduciary from causing a plan to engage in any
transaction that he or she should know would result in any form
or degree of benefit for any party in interest, even if the
transaction would be highly advantageous for the plan and the
benefit for the party in interest would be unintended, indirect,
and slight.
Apparently recognizing this problem, the Secretary argues
that the benefit to the party in interest must be more than
"minimal, incidental, or fortuitous." Section 406(a)(1),
however, contains no language that even hints at such a
requirement. Moreover, this requirement lacks conceptual
clarity. The concept of a more than "minimal" benefit is
nebulous, and although the Secretary insists that section
406(a)(1) does not require proof of a subjective intent, the
terms "incidental" and "fortuitous" both suggest a subjective
element. "Incidental" means, among other things, "occurring
without intention or calculation." Webster's Third New
International Dictionary 1143 (1971). "Fortuitous" means, among
other things, "occurring without deliberate intention." Id. at
895.
 We thus find strong support for a subjective intent
requirement in the language of section 406(a)(1)(D), and finding
no contrary evidence in the legislative history,14 we conclude
that element four requires proof of a subjective intent to
benefit a party in interest.
Precisely who must be shown to have this intent is not
entirely clear from the statutory language. Since the statutory
language suggests that the transaction must be "for the benefit"
of a party in interest, it appears that the subjective intent to
benefit a party in interest must be harbored by one or more of
those involved in the transaction. In this appeal, however, we
will not attempt to go further and specify precisely which
persons involved in a transaction must be shown to have this
intent.
14
. On the contrary, we also note that the legislative history
includes two examples of transactions that are prohibited by
section 406(a)(1)(D) and both involve transactions whose purpose
was to benefit a party in interest. H.R. Conf. Rep. No. 93-1280,
93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 5075,
5089.
Several Department of Labor opinion letters on which the
Secretary has relied also suggest that the "for benefit of"
language requires proof of subjective intent. According to the
Secretary, "[t]he common theme in those opinions is that a
complex transaction will violate Section 406(a)(1)(D) if it is .
. . part of an agreement, arrangement or understanding in which a
fiduciary caused plan assets to be used in a manner designed to
benefit a party in interest . . . ." Dept. of Labor 9/13/94
Letter-Brief at 14 (emphasis added) (citing ERISA Advisory
Opinion No. 93-33A, 1993 ERISA LEXIS 33, at *5 (Dec. 16, 1993);
No. 89-18A, 1989 ERISA LEXIS 17, at *6 (Aug. 13, 1989); No. 85-
33A, 1985 ERISA LEXIS 11, at *9 (Oct. 1, 1985)).
Element five requires proof that the fiduciary in question
either knew or reasonably should have known that the transaction
constituted the use of plan assets "for the benefit" of a party
in interest. Thus, element five does not require proof of the
fiduciary's subjective intent.
Applying this understanding of elements four and five to the
record in the case before us, we hold that summary judgment was
not properly granted in favor of the defendants on the basis that
the two transactions did not violate Section 406(a)(1)(D) of
ERISA. Based on the record, a reasonable factfinder could
conclude that all of those involved in the two challenged
transactions subjectively intended to benefit Local 98. There is
some direct evidence of such an intent: trustee Compton stated
that the Plan trustees refused to sue EMA to recover the balance
of the loan because "if [they] filed suit against [EMA] [they]
would be really filing suit against members of the union . . . ."
JA at 467. Furthermore, there was strong circumstantial evidence
of an intent to benefit the Union. A reasonable factfinder could
easily find that the two transactions had the effect of
benefitting the Union, and a reasonable factfinder could infer
that the trustees intended to bring about this effect.
Although the district court, in denying the Secretary's
motion for reconsideration, suggested that the Union did not
benefit from the loan to EMA because the Union paid rent to EMA,
we believe that a factfinder could reasonably come to a contrary
conclusion.15 There was no formal lease agreement between EMA
and Local 98, and EMA admitted that it was not trying to make any
money from the lease. Compton II, 834 F. Supp. at 749 n.6.
Furthermore, Local 98 paid rent only when EMA exhausted its cash
on hand. Id. Thus, the "rent" that Local 98 was charged was
15
. The district court's apparent conclusion that Local 98 did
not benefit from these transactions is puzzling given that it
found the following facts to be undisputed:
As of June 30, 1984, EMA owed Local 98 $230, 290.00.
This debt consisted primarily of salary expenses that
[the Union] paid to one or more of its employees who
performed maintenance work at the 1719-29 Spring Garden
Street building. Of this amount, Local 98 charged EMA
$17,293.00 in maintenance salary expenses during the
year ending June 30, 1984. The arrangement between
Local 98 and EMA (which began prior to 1984) provided
that EMA would not pay Local 98 the debt, which would
be added to the intercompany payable account. Local 98
never demanded payment of the debt because it viewed
transactions between itself and EMA as related party
transactions. The reason the amount of intercompany
payables to EMA and intercompany receivables to Local
98 carried on the financial books "grow[s] each year is
because the amount that's charged to salary expenses,
just was never paid by EMA to Local 98, so it's a
liability account that just keeps increasing each year
because no payments are ever made, or if they are made,
they're very minor." Salary and other expenses by
Local 98 for EMA continued to accumulate over the
years. For example, "[a]s of June 30, 1987, EMA owed
Local 98 $316,328.00 consisting primarily of salary and
other expenses paid by Local 98 for EMA" that had
accumulated over the years. During the year ending
December 31, 1988, EMA owed Local 98 $559,918.00.
According to EMA's accountant, the debt was forgiven by
Local 98. Local 98 and EMA had an established practice
of not signing loan documents to record their financial
transactions; Local 98's policy is to not charge EMA
interests on advances and transfers.
Compton I, 834 F. Supp. at 749 n.6.
only the amount necessary to cover EMA's financial obligations,
and the record is clear that Local 98 historically treated EMA's
obligations as its own. Local 98 consistently forwarded EMA
money to cover salary and operating expenses during this time
period and forgave repayment of these obligations. Id. Nor was
EMA charged interest on these loans. Id. Indeed, as noted,
Local 98 provided EMA with the funds necessary to purchase the
note held by the Plan. Id. Thus, a reasonable factfinder could
conclude that Local 98 benefitted from the continuation of EMA's
long-term below market mortgage loan because that loan reduced
EMA's cash outflow, an outflow for which the union took
responsibility. Likewise, a reasonable factfinder could conclude
that Local 98 was functionally responsible for EMA's debt and
that, Local 98 therefore benefitted from the repurchase of the
note for less than its accounting value.
Thus, we hold that the district court should not have granted
summary judgment in favor of the defendants on the basis that the
two challenged transactions were not prohibited transactions
within the meaning of section 406(a)(1)(D). On remand, the
district court will need to resolve the two disputed elements of
the Secretary's section 406(a)(1)(D) claim: whether a party to
the transactions had the subjective intent to benefit a party in
interest and whether any of the trustees knew of or should have
known that the transactions were intended for the benefit of a
party in interest.
III. ERISA Section 502(a)(5) Claims
In this section, we consider the Secretary's claims against
the nonfiduciary defendants (EMA and Local 98) pursuant to
section 502(a)(5) of ERISA, 29 U.S.C. § 1132(a)(5). The
Secretary advances two separate theories: first, that section
502(a)(5) authorizes him to sue nonfiduciaries who knowingly
participate in breaches of fiduciary duty by fiduciaries16 and,
second, that section 502(a)(5) authorizes him to sue
nonfiduciaries who participate in transactions prohibited by
section 406(a)(1). We reject the first theory but accept the
latter.
A. Section 502(a) of ERISA provides as follows:
A civil action may be brought--
(1) by a participant or beneficiary--
(A) for the relief provided in subsection (c)
of this section, or
(B) to recover benefits due to him under the
terms of his plan, to enforce his rights under the
terms of the plan, or to clarify his rights to
future benefits under the terms of the plan;
16
. Several ERISA provisions impose a duty on plan fiduciaries.
As previously discussed, section 406(a)(1), 29 U.S.C. §
1106(a)(1), prohibits fiduciaries from causing the plan to engage
in certain prohibited transactions. Likewise, section 406(b) of
ERISA, 29 U.S.C. § 1106(b), prohibits self-dealing by
fiduciaries. Section 404(a)(1), 29 U.S.C. § 1104(a)(1), imposes
a duty of loyalty and prudence on fiduciaries. In addition,
section 409 of ERISA, 29 U.S.C. § 1109, imposes liability for any
person who breaches a fiduciary duty. As discussed below, the
Secretary alleges that EMA and Local 98 were knowing participants
in the Plan trustees' breach of these duties and therefore that
EMA and Local 98 are liable under section 502(a)(5). Of course,
in order to hold EMA and Local 98 liable under this theory, the
Secretary would first need to prove a breach of duty by a
fiduciary.
(2) by the Secretary, or by a participant,
beneficiary or fiduciary for appropriate relief
under section 1109 of this title;
(3) by a participant, beneficiary, or fiduciary
(A) to enjoin any act or practice which violates
any provisions of this subchapter, or (B) to
obtain other appropriate equitable relief (i) to
redress such violation or (ii) to enforce any
provision of this subchapter;
(4) by the Secretary, or by a participant, or
beneficiary for appropriate relief in the case of
a violation of 1025(c) of this title;
(5) except as otherwise provided in subsection
(b) of this section, by the Secretary (A) to
enjoin any act or practice which violates any
provisions of this subchapter, or (B) to obtain
other appropriate equitable relief (i) to redress
such violation or (ii) to enforce any provision of
this subchapter; or
(6) by the Secretary to collect any civil
penalty under subsection (c)(2) or (i) or (l) of
this section.
Although the Supreme Court has not directly discussed the
scope of section 502(a)(5), its discussion of section 502(a)(3)
in Mertens provides considerable guidance due to the close
relationship between those two provisions. In Mertens, former
employees of the Kaiser Steel Corporation ("Kaiser") who
participated in Kaiser's pension plan sued the plan's actuary in
addition to the plan's trustees. 113 S. Ct. at 2065. Claiming
that the services provided by the actuary to the pension plan had
been deficient and had caused the plan to be inadequately funded,
the pensioners sought to hold the actuary liable for the "all the
losses that their plan sustained as a result of the alleged
breach of fiduciary duties" by the plan's trustees. Id. at 2068.
The pensioners conceded that the actuary was not a fiduciary
within the meaning of ERISA. Id. at 2067. However, relying on
section 502(a)(3) of ERISA, which allows plan participants to
"obtain other appropriate equitable relief to redress" violations
of ERISA, the pensioners nevertheless maintained that the actuary
could be held liable for his "knowing participation in the breach
of fiduciary duty by the Kaiser plan's fiduciaries." Id.
Although the only issue squarely before the Supreme Court in
Mertens was whether the remedy sought by the pensioners
constituted "appropriate equitable relief" as opposed to money
damages, the Court's opinion discussed the antecedent question of
whether section 502(a)(3) creates a cause of action against
nonfiduciaries for knowing participation in a fiduciary's breach
of fiduciary duty. Id. at 2067. The Court stated:
[N]o provision explicitly requires [nonfiduciaries] to
avoid participation (knowing or unknowing) in a
fiduciary's breach of fiduciary duty. It is unlikely,
moreover, that this was an oversight, since ERISA does
explicitly impose "knowing participation" liability on
cofiduciaries. See section 405(a), 29 U.S.C. §
1105(a). That limitation appears all the more
deliberate in light of the fact that "knowing
participation" liability on the part of both cotrustees
and third persons was well established under the common
law of trusts. In Russell we emphasized our
unwillingness to infer causes of action in the ERISA
context, since that statute's carefully crafted and
detailed enforcement scheme provides "strong evidence
that Congress did not intend to authorize other
remedies that it simply forgot to incorporate
expressly."
Id. (quoting Russell, 473 U.S. at 146-47) (citations omitted)
(emphasis in original). Thus, the Court expressed considerable
doubt that section 502(a)(3) authorizes suits against
nonfiduciaries who participate in fiduciary breaches.
Relying on this discussion, EMA and Local 98 argue that the
Secretary cannot proceed against them on the theory that they
knowingly participated in a fiduciary's breach. On the other
hand, the Secretary urges that we disregard Mertens' discussion
of this issue as "mere dicta." The Secretary contends that the
language of section 502(a)(5) does not require that the ERISA
violation be committed by the person against whom relief is
sought. Rather, the Secretary argues that he may maintain a
cause of action under section 502(a)(5) so long as the relief
sought is "appropriate" for the purpose of "redressing" a
violation. Thus, the Secretary asserts that he does not have to
show that EMA and Local 98 actually violated any ERISA provision,
but only that they were "knowing participants" in a fiduciary's
violation and that the relief sought is appropriate for
redressing that violation. The Secretary further contends that
any ambiguity should be resolved in his favor since pre-Mertens
case law generally recognized ERISA claims against nonfiduciaries
who participated in a fiduciary's breach.17 In the event that we
17
. See Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d
270, 279-81 (2d Cir. 1992); Whitfield v. Lindermann, 853 F.2d
1298, 1302-03 (5th Cir. 1988), cert. denied, 450 U.S. 1089
(1989); Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir. 1982);
Thornton v. Evans, 692 F.2d 1064, 1078 (7th Cir. 1982); Fink v.
National Sav. and Trust Co., 772 F.2d 951, 958 (D.C.Cir. 1985)
(dicta). Cf. Mertens v. Hewitt Assocs., 948 F.2d 607, 611 (9th
Cir. 1991), aff'd on other grounds, 113 S. Ct. 2063 (1993)
(rejecting "knowing participation" liability); Useden v. Acker,
947 F.2d 1563, 1581 (11th Cir.), cert. denied, 113 S. Ct. 2927
(1993) (same).
do not interpret the language of section 502(a)(5) as creating
such a cause of action against nonfiduciaries, the Secretary
urges us to recognize such a cause of action by utilizing our
authority to develop federal common law. The Secretary points
out that the Supreme Court has authorized the federal courts to
develop federal common law under ERISA by drawing on the
traditional law of trusts, see Firestone Tire and Rubber Co. v.
Bruch, 489 U.S. 101, 110 (1984), and the Secretary notes that the
common law of trusts imposes liability on nonfiduciaries who
knowingly participate in a fiduciary's breach of duty, see 3
Austin W. Scott & William F. Fratcher, Law of Trusts § 224.1, at
404 (4th ed. 1988).
The Secretary's argument has been rejected by the courts of
appeals that have addressed it after Mertens. In Reich v. Rowe,
20 F.3d 25 (1st Cir. 1994), the Secretary sued several corporate
defendants involved in the failed OMNI Medical Health and Welfare
Trust. Id. at 26. OMNI provided group medical, dental, and life
insurance to business employers in Massachusetts. Id. The
Secretary contended that OMNI's fiduciaries breached their duties
and that OMNI's financial consultants "knowingly participated" in
this breach. Id. at 26-27. The district court dismissed the
Secretary's claim against the financial consultants under Fed. R.
Civ. P. 12(b)(6), id. at 28, and the First Circuit affirmed, id.
at 35.
Despite the Secretary's urgings, the Rowe court found the
Supreme Court's Mertens dicta to be persuasive. Id. at 30-31.
Interpreting section 502(a)(5) "to authorize actions only against
those who commit violations of ERISA or who are engaged in an
`act or practice' proscribed by the statute," id. at 29, the Rowe
court concluded that this provision does not apply to a
nonfiduciary's participation in a fiduciary breach because such
participation "is not an `act or practice' which violates ERISA,"
id. at 30. The court further rejected the Secretary's argument
that it should apply the court's broad equitable power and the
court's federal common law-making authority under ERISA to read
section 502(a)(5) expansively to reach such conduct. The court
noted that "Congress had enacted a comprehensive legislative
scheme including an integrated system of procedures for
enforcement," id. at 31-32 (quoting Russell, 473 U.S. at 147),
and that it could have easily provided for a claim based on
knowing participation in a fiduciary breach, id. at 31. The
court wrote:
All things considered, judicial remedies for
nonfiduciary participation in a fiduciary breach fall
within the line of cases where Congress deliberately
omitted a potential cause of action rather than the
cases where Congress has invited the courts to engage
in interstitial lawmaking.
Id. at 31. Thus, the court concluded that the Secretary could
not sue "a professional service provider [that] assist[ed] in a
fiduciary breach but receive[d] no ill-gotten plan assets . . .
." Id. at 35.
Similarly, in Reich v. Continental Casualty Co., 33 F.3d 754,
757 (7th Cir. 1994), cert. denied, 115 S. Ct. 1104 (1995), the
Seventh Circuit rejected the Secretary's argument that a
nonfiduciary may be held liable for knowingly participating in a
fiduciary breach. The court followed the Mertens dicta, stating
that when the Supreme Court's view of an issue is embodied in
a recent dictum that considers all the relevant
considerations and adumbrates an unmistakable
conclusion, it would be reckless to think the Court
likely to adopt a contrary view in the near future. In
such a case the dictum provides the best, though not an
infallible, guide to what the law is, and it will
ordinarily be the duty of a lower court to be guided by
it.
Id.18
In light of the Supreme Court's discussion in Mertens and
subsequent decisions of the First and Seventh Circuits, we reject
the Secretary's argument that he may sue a nonfiduciary under
section 502(a)(5) for knowingly participating in a fiduciary
breach. Contrary to the Secretary's urging, we are not prepared
to disregard the Supreme Court's discussion of this issue in
Mertens. Moreover, we see little significance in the fact that
the Supreme Court in Mertens was discussing section 502(a)(3) as
opposed section 502(a)(5). As the Court noted in Mertens, the
18
. Buckley Dement, Inc. v. Travellers Plan Administrators of
Illinois, Inc., 39 F.3d 784 (7th Cir. 1994) is also instructive.
There, the sponsor of a health care plan who was also its
administrator and fiduciary sued a third-party claims
administrator. Id. at 785-86. The sponsor argued that the
administrator caused the plan to incur huge losses by failing to
process a participant's medical claims before the plan's excess
health insurance coverage policy lapsed. Id. Because the
administrator was not a fiduciary, the sponsor asked the court to
infer a federal common-law right to relief under ERISA. Id. at
789. Relying on Mertens' dicta, the court declined to do so,
holding that it was "without authority to entertain a claim for
relief against a nonfiduciary based on [the] fashioning of a
federal common-law remedy." Id. at 790. Accord, Colleton
Regional Hosp. v. MPS Medical Review Sys., Inc., 866 F. Supp. 896
(D.S.C. 1994).
language shared by both provisions "should be deemed to have the
same meaning," 113 S. Ct. at 2070, and we therefore believe that
the analysis of the one provision should apply equally to the
other with respect to the question at issue. We therefore hold
that section 502(a)(5) does not authorize suits by the Secretary
against nonfiduciaries charged solely with participating in a
fiduciary breach.19
19
. The Secretary makes the additional argument that section
502(l) of ERISA, 29 U.S.C. § 1132(l), indicates that Congress
intended for section 502(a)(5) to provide a remedy against
nonfiduciaries who participate in a fiduciary breach. Section
502(l) provides in relevant part:
(1) in the case of--
(A) any breach of fiduciary responsibility under
(or other violation of) part 4 by a fiduciary , or
(B) any knowing participation in such a breach
or violation by any other persons,
the Secretary shall assess a civil penalty against such
a fiduciary or other person in an amount equal to 20
percent of the applicable recovery amount . . . .
The Secretary contends that unless section 502(a)(5) provides a
remedy for nonfiduciary violations of a fiduciary breach, the
term "other persons" in section 502(l) would be rendered a
nullity. We disagree.
A similar contention was advanced in Mertens. There,
it was argued that section 502(l) demonstrated Congress intended
to authorize the recovery of money damages for nonfiduciary
participation in a fiduciary breach. The Supreme Court, however,
rejected this argument, explaining:
[T]he "equitable relief" awardable under section
502(a)(5) includes restitution of ill-gotten plan
assets or profits, providing an "applicable recovery
amount' to use to calculate the penalty, . . . and even
assuming nonfiduciaries are not liable at all for
knowing participation in a fiduciary's breach of duty,
see supra, at 2067-2068, cofiduciaries expressly are,
B. We now turn to the Secretary's argument that section
502(a)(5) authorizes him to sue a nonfiduciary who participates
in a transaction prohibited by section 406(a)(1). In response to
this argument, EMA and Local 98 seem to suggest that the
Secretary cannot obtain relief from them even if the transactions
at issue are found to be prohibited under section 406(a)(1) of
ERISA.20 Section 406(a)(1) provides that "[a] fiduciary with
(..continued)
see section 405, so there are some "other person[s]"
than fiduciaries-in-breach liable under section
502(l)(1)(B).
113 S. Ct. at 2071.
We also agree with the discussion of this argument in
Rowe. The Rowe court noted that Secretary was relying on a
provision that provides civil penalties in order to infer a cause
of action from a provision that only provides equitable relief.
20 F.3d at 34. Thus, the court explained:
[I]t is difficult to imagine any case where knowing
participation in a fiduciary breach by a nonfiduciary
would occasion the type of remedy (restitution awards)
that would trigger [section 502(l)(1)(B)] without the
nonfiduciary having engaged in a prohibited transaction
under [section 406] or otherwise having obtained some
ill-gotten plan assets in a manner not covered by the
prohibited transaction section. We conclude,
therefore, that [section 502(l)] makes little sense as
independently authorizing equitable relief against
nonfiduciaries . . . who allegedly participated in a
fiduciary breach but did not engage in an act
prohibited by the statute or otherwise obtain plan
assets, when it can never be used for such relief.
Id. at 34-35 (footnote omitted).
20
. This argument is not available to the Plan trustees as they
are all fiduciaries within the meaning of ERISA. As noted, ERISA
imposes a number of substantive duties on plan fiduciaries, see
supra note 16, and sections 502(a)(3) and (5) of ERISA, 29 U.S.C.
§§ 1132(a)(3) and (5), clearly authorize the Secretary to obtain
relief against fiduciaries who have breached their duties. Thus,
the Secretary can sue any fiduciary who breached its duty because
respect to a plan shall not cause the plan to engage in a
[prohibited] transaction . . . ." 29 U.S.C. § 1106(a)(1)
(emphasis added). Since this language appears on its face to
apply only to fiduciaries and not to other parties who
participate in prohibited transactions, EMA and Local 98 maintain
that the Secretary is attempting to make them liable for a
fiduciary's breach of duty and that such a theory was rejected in
Mertens.
While this argument is not without force, we are ultimately
persuaded that it is based on an unduly narrow interpretation of
sections 406(a)(1) and 502 (a)(5). First, we note that Mertens
itself seemed to imply that section 406(a) imposes duties on
nonfiduciaries who participate in prohibited transactions. After
observing that "ERISA contains various provisions that can be
read as imposing obligations upon nonfiduciaries," 113 S. Ct. at
2067, the Court cited section 406(a), 29 U.S.C. § 1106(a), as an
example and stated that this provision prohibits a nonfiduciary
party in interest from "offer[ing] his services" to a plan or
"engag[ing] in certain other transactions with the plan," id. at
2067 n.4.
Second, the legislative history of ERISA appears to
contradict the position advocated by EMA and Local 98. The
Senate Report stated:
The bill also makes a party in interest who
participates in a prohibited transaction . . .
personally liable for any losses sustained by the plan
(..continued)
of its participation in a prohibited transaction (or who breached
any other duty).
and for any profits made through using plan assets. . .
. This liability is appropriate because in these
situations often the party in interest is a major
beneficiary of a fiduciary breach . . . .
S. Rep. No. 93-383, 93rd Cong., 2d Sess. (1974), reprinted
in 1974 U.S.C.A.A.N. 4890, 4989.
Third, EMA's and Local 98's position is inconsistent with the
analysis of two other courts of appeals. In Rowe, the First
Circuit, while refusing to accept the argument that the Secretary
could sue a nonfiduciary under section 502(a)(5) for knowingly
participating in a frivolous breach, suggested that the Secretary
could maintain a suit under that provision against a party in
interest who participated in a transaction prohibited under
section 406(a)(1). The court observed:
Congress proscribed several "acts or practices" in
ERISA's substantive provisions that involve
nonfiduciaries . . . . See Mertens, ____ U.S. at ____
& n.4, 113 S. Ct. at 2067 & n.4. For example, 29
U.S.C. § 1106(a)(1) prohibits certain transactions
between "parties in interest," see supra, note 2, and
ERISA plans . . . .
20 F.3d at 31 (footnote omitted). The court then added:
The fact that [section 406] imposes the duty to refrain
from prohibited transactions on fiduciaries and not on
the parties in interest is irrelevant for our purposes
because [section 502(a)(5)] reaches "acts or practices"
that violate ERISA and prohibited transactions violate
[section 406]. Although fiduciary breaches also
violate ERISA, nonfiduciaries cannot, by definition,
engage in the act or practice breaching a fiduciary
duty. Nonfiduciaries can, however, engage in the act
or practice of transacting with an ERISA plan.
Id. at 31, n.7.
Similarly, in Nieto v. Ecker, 845 F.2d 868 (9th Cir. 1988),
the court held that a suit seeking appropriate equitable relief
could be brought under section 502(a)(3)21 against a party in
interest who had participated in a transaction prohibited under
section 406(a). The court explained:
It is true that section 406(a) only prohibits
certain transactions by fiduciaries, and does not
expressly bar parties in interest from engaging in
these transactions. However, section 502(a)(3)'s
language expressly grants equitable power to redress
violations of ERISA; prohibited transactions plainly
fall within this category. Courts may find it
difficult or impossible to undo such illegal
transactions unless they have jurisdiction over all
parties who allegedly participated in them. In
contrast to section 409(a), section 502(a)(3) is not
limited to fiduciaries, and there is no reason to
exempt parties in interest from this remedial provision
when the engage in transactions prohibited by [ERISA].
Id. at 873-74.22
21
. Nieto involved the construction of section 502(a)(3).
However, as explained above, see supra page 34, we see no reason
to distinguish between section 502(a)(3) and 502(a)(5) on this
issue.
22
. In light of this analysis, EMA's and Local 98's reliance on
Brock v. Citizens Bank of Clovis, 841 F.2d 344 (10th Cir.), cert.
denied, 488 U.S. 829 (1988), is misplaced. In Citizens Bank, the
Secretary brought a suit against an ERISA trustee for violating
section 406(a)(1). 841 F.2d at 345-46. The ERISA trustee, a
bank, had loaned plan funds to individuals who had used the money
to pay off interim financing that they had received from the
bank. Id. The Secretary did not allege that this transaction
violated a specific provision of ERISA but argued that ERISA
demanded "a strict prohibition of any dealing in which doubt may
be cast upon the loyalty of the fiduciary." Id. at 347. Because
the Secretary was unable to allege the violation of a specific
provision of ERISA, the Tenth Circuit upheld the dismissal of his
claim. Id. The present case, however, is clearly
distinguishable because here the Secretary has alleged that EMA
and Local 98 violated a specific substantive provision of ERISA,
section 406(a)(1), that regulates the conduct of nonfiduciaries.
Fourth, we agree with the Secretary that the parallel tax
provisions support his position that nonfiduciaries may be held
liable for their participation in prohibited transactions.
Section 4975 of the Internal Revenue Code, 26 U.S.C. § 4975,
imposes taxes on certain persons who participate in prohibited
transactions. Section 4975(h) provides that the Secretary of
Treasury is required to notify the Secretary of Labor before
sending a notice of deficiency with respect to such taxes in
order to give the latter a "reasonable opportunity to obtain a
correction of the prohibited transaction . . . ." Since
"correction of the prohibited transaction" implies an order of
restitution directed to the party who participated in the
transaction with the plan, this provision buttresses the
Secretary's position. For all of these reasons, we hold that the
Secretary can bring an action under section 502(a)(5) against a
nonfiduciary who participates in a transaction prohibited by
section 406(a).23
23
. Contrary to EMA's suggestions, this holding is not
foreclosed by footnote six of our opinion in Painters of
Philadelphia Council No. 32 Welfare Fund v. Price Waterhouse, 879
F.2d 1146 (3d Cir. 1989). In that case, a plan and its trustees
sued the plan's former auditor under section 502(a)(3) of ERISA,
claiming that the auditor breached its fiduciary duties by
failing to advise the trustees about improprieties allegedly
committed by the plan's administrator, and that the auditor was
therefore liable for the resulting losses under section 409 of
ERISA, 29 U.S.C. § 1109, which makes a fiduciary liable for the
losses caused by a fiduciary breach. Id. at 1148-49. We upheld
the dismissal of these claims. Id. at 1151. After explaining
that the auditor was not a fiduciary under ERISA, we responded in
footnote six to the plaintiffs' suggestion that they could sue
the auditor under section 502(a)(3) even if it was not a
fiduciary. We noted the plaintiff's reliance on Justice
Brennan's concurrence in Russell, where it was suggested that the
Finally, we disagree with EMA's contention that even if
section 406(a)(1) regulates the behavior of some nonfiduciaries,
it does not reach nonfiduciaries that are not parties in
interest. As we previously explained, see supra pages 19 to 27,
section 406(a)(1)(D) applies to transactions between a plan and a
third party when the transaction is "for the benefit of a party
in interest." Section 406(a)(1)(D) therefore extends the scope
of liability under ERISA beyond fiduciaries and parties in
interest. Because section 502(a)(5) authorizes the Secretary to
obtain relief against any party that participates in a
transaction that violates section 406(a)(1), EMA can be held
liable for its role in the allegedly prohibited transaction.
We will, however, uphold the district court's award of
summary judgment in favor of EMA and Local 98 as to the first,
but not the second, transaction. The liability of EMA and Local
98 as to the first transaction is predicated on the Plan
trustees' holding of the note past the expiration of the
grandfather period. We know of no way, and the Secretary has not
suggested one, that EMA and Local 98 could have forced the Plan
(..continued)
phrase "other appropriate equitable relief" in section 502(a)(3)
might be read to incorporate principles of trust law under which
a beneficiary might obtain extracontractual damages based on a
fiduciary breach. See 473 U.S. at 150, 157-58. We then wrote:
"Since we have held that [the auditor] is not a fiduciary under
ERISA, however, it cannot be held liable on a trust-law theory."
879 F.2d at 151 n.6. Although EMA construes this statement to
mean flatly that "a . . . section 502(a)(3) action for equitable
relief against nonfiduciaries cannot be maintained," EMA Br. at
21, we interpret this statement to mean only that principles of
trust law permitting the recovery of extracontractual damages
from a fiduciary who breaches his or her duties provide no basis
for recovery from a nonfiduciary.
to divest itself of the note in a timely fashion. We also note
that ERISA had not been enacted at the time of the first
transaction. Thus, we conclude that EMA and Local 98 did not
engage in an "act or practice" prohibited by ERISA and therefore
they cannot be held liable by the Secretary pursuant to section
502(a)(5). On the other hand, EMA and Local 98 were clearly
active parties in the second transaction and therefore the
Secretary has a cause of action against them on this transaction.
In sum, we hold that a nonfiduciary that is a party to a
transaction prohibited by section 406(a)(1) engages in an "act or
practice" that violates ERISA. We furthermore hold that the
Secretary, pursuant to section 502(a)(5), may sue to enjoin this
act or practice or "to obtain other appropriate equitable relief
to redress such a violation." On remand, therefore, the
Secretary may maintain his section 406(a)(1)(D) claims against
EMA and Local 98 as to the second transaction.24 We uphold the
district court's award of summary judgment as to the first
transaction because neither EMA nor Local 98 controlled the
decision to hold the note past the grandfather period and
therefore they did not engage in an action or practice that
violated ERISA.
IV. Section 406(b)(2) Claim
24
. The defendants also claim that the Secretary is not entitled
to the relief sought for the alleged violations of section
406(a)(1)(D) because it is not "appropriate equitable relief."
This issue was not presented to or decided by the district court,
and we decline to address it now.
We next address whether the district court erred in ruling
that the union trustees, Compton, McHugh and Nielsen, did not
violate section 406(b)(2) of ERISA, 21 U.S.C. § 1106(b)(2).25
The Secretary argues that these trustees violated section
406(b)(2) because, in connection with the sale of the note to
EMA, they "participated actively in the decisionmaking process
regarding the disposition of the mortgage loan on behalf of both
the lender, the plan, and the borrowers, EMA and Local 98."
Dept. of Labor Br. at 40. We hold that the district court erred
in granting summary judgment against the Secretary with respect
to this claim.
Section 406(b) prohibits a plan fiduciary from engaging in
various forms of self-dealing. Its purpose is to "prevent[] a
fiduciary from being put in a position where he has dual
loyalties and, therefore, he cannot act exclusively for the
benefit of a plan's participants and beneficiaries." H.R. Conf.
Rep. No. 93-1280, 93rd Cong., 2d Sess. (1974), reprinted in 1974
U.S.C.C.A.N. 5038, 5089.
Section 406(b)(2) provides in pertinent part:
A fiduciary with respect to a plan shall not-- . . .
(2) in his individual or any other capacity act
in any transaction involving the plan on behalf of
a party (or represent a party) whose interests are
adverse to the interests of the plan or the
interests of its participants or beneficiaries . .
. .
25
. Before the district court, the Secretary also argued that
the union trustees violated section 406(b)(1). The Secretary has
abandoned this claim.
This provision is a blanket prohibition against a fiduciary's
"act[ing] on behalf of" or "represent[ing]" a party with
interests "adverse to the interests of the plan" in relation to a
transaction with the plan. Thus, this provision, like the
prohibited transaction provisions of section 406(a)(1), applies
regardless of whether the transaction is "fair" to the plan.
In Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979), we
addressed the scope of section 406(b)(2). In that case, an
identical group of trustees managed a union pension fund and a
union welfare fund. Id. at 525. Because of decreased employer
contributions, the welfare fund began to run short of cash, and
the trustees agreed to loan money from the pension fund to the
welfare fund. Id. Despite the fact that the transaction
involved no allegations of misconduct or unfair terms, we held
that section 406(b)(2) had been violated. We first wrote:
When identical trustees of two employee benefit plans
whose participants and beneficiaries are not identical
effect a loan between the plans without a § 408
exemption, a per se violation of ERISA exists.
590 F.2d at 529. See also Lowen v. Tower Asset Management, Inc.,
829 F.2d 1209, 1213 (2d Cir. 1987) (noting that section 406(b)
needs to be "broadly construed" and that liability may be imposed
"even where there is `no taint of scandal, hint of self-dealing,
no trace of bad faith'") (citations omitted); Donovan v. Mazzola,
716 F.2d 1226, 1238 (9th Cir. 1983), cert. denied, 464 U.S. 1040
(1984) (noting that per se prohibition of section 406(b) is the
consistent with the remedial purpose of ERISA, for "at the heart
of the fiduciary relationship is the duty of complete and
undivided loyalty to the beneficiaries of the trust") (citations
omitted). We then added:
We have no doubt that the pension fund's loan to
the welfare fund falls within the prohibition of
section 406(b)(2). Fiduciaries acting on both sides of
a loan transaction cannot negotiate the best terms for
either plan. By balancing the interests of each plan,
they may be able to construct terms which are fair and
equitable for both plans; if so, they may qualify for a
section 408 exemption. But without the formal
procedures required under section 408, each plan
deserves more than a balancing of interests. Each plan
must be represented by trustees who are free to exert
the maximum economic power manifested by their fund
whenever they are negotiating a commercial transaction.
Section 406(b)(2) speaks of "the interests of the plan
or the interests of its participants or beneficiaries."
It does not speak of "some" or "many" or "most" of the
participants. If there is a single member who
participates in only one of the plans, his plan must be
administered without regard for the interests of any
other plan.
Id. at 530.
We interpret Cutaiar as follows. Each defendant, in his
capacity as a pension fund trustee, violated section 406(b)(2)
because, in connection with the loan from the pension fund to the
welfare fund, he acted on behalf of and represented the welfare
fund, a party with interests that were adverse to those of the
pension fund as far as that transaction was concerned.
Similarly, each defendant, in his capacity as a welfare fund
trustee, violated section 406(b)(2) because, in connection with
that loan, he acted on behalf of and represented the pension
fund.
The district court in this case, however, read Cutaiar
narrowly and, indeed, essentially limited the decision to its
facts. The district court stated:
The Secretary's reliance on Cutaiar is misplaced. As
noted by the Tenth Circuit in Brock [v. Citizens Bank
of Clovis, 841 F.2d 344, 347 n.2 (10th Cir. 1988),
cert. denied, 488 U.S. 829 (1988),] Cutaiar did not
involve a transaction with a third party. Moreover,
the boards of the Plan and EMA were not identical and
Compton, McHugh and Nielsen did not constitute a
majority of EMA's Board . . . . Likewise, the
purported "conflict of interest" violation of section
406(b)(2) is sheer hypotheses unsupported by any
evidence that these three defendants--who did not
control the board of EMA--acted on behalf of EMA, the
adverse party to the Plan in the sale of the note.
Compton II, 834 F. Supp. at 757. We do not agree with this
interpretation of Cutaiar.
Although the district court was correct in noting that the
trustees on both sides of the challenged transaction in Cutaiar
were identical, Cutaiar did not hold that section 406(b)(2) can
be violated only when there are identical decisionmakers on both
sides of the transaction. This would be contrary to the plain
language of the provision. Section 406(b)(2) creates a duty
against self-dealing for each individual fiduciary, not just
fiduciaries as a group. Each fiduciary is prohibited from
"act[ing] on behalf of an [adverse] party (or represent[ing]) an
[adverse] party . . . ." Thus, a plan fiduciary may act on
behalf of or represent an adverse party even if the groups
controlling the plan and the adverse party are not identical.
See Davidson v. Cook, 567 F. Supp. 225, 237 (E.D.Va. 1983) aff'd
734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984)
(finding a violation of § 406(b)(2) when trustees of pension fund
loaned money to corporation with close ties to the union
sponsoring the plan despite fact that boards of two groups were
not identical).
Likewise, the fact that Cutaiar did not, in the district
court's words, involve a transaction with "a third party," 834 F.
Supp. at 757, does not serve to distinguish this case. We
understand the district court as opining that Cutaiar is
inapposite because it involved a transaction between a fiduciary
and a "party in interest," whereas the transaction at issue here
was between a fiduciary and an entity other than a party in
interest. This was the distinction drawn by the Tenth Circuit in
Citizens Bank of Clovis, 841 F.2d at 347 n.2, on which the
district court relied. See 834 F. Supp. at 757. However, we
believe that this reading of Cutaiar is erroneous. First, we see
no support for this interpretation in the Cutaiar opinion. That
opinion never referred to either fund as a "party in interest."
Nor did it mention the provision of ERISA that defines a party in
interest, section 3(14), 29 U.S.C. § 1002(14), or the provision
that prohibits transactions with a party in interest, section
406(a)(1), 29 U.S.C. § 1106(a)(1).26 Second, it seems clear from
the language of section 406(b)(2) that its prohibition is not
restricted to conduct related to "parties in interest." Rather,
26
. Indeed, as the Secretary notes, Dept. of Labor Br. at 43 &
n.22, it does not appear that the related plan in Cutaiar fell
within the definition of a party in interest in section 3(14) of
ERISA, 29 U.S.C. § 1002(14).
section 406(b)(2) speaks more broadly of parties "whose interests
are adverse to the interests of the plan or the interests of its
participants or beneficiaries." A party clearly may have
interests that are adverse to those of a plan or its participants
or beneficiaries in relation to a particular transaction without
being a "party in interest" as defined by section 3(14).
Cutaiar is significant for present purposes chiefly because
it stands for the proposition that, when a plan loans money to or
borrows money from another party, the plan and the other party
will have adverse interests within the meaning of section
406(b)(2). See 570 F.2d at 529. It follows, therefore, that in
the present case the Plan and EMA had adverse interests with
respect to the sale of EMA's note. Furthermore, it seems
abundantly clear that the interests of the Plan and Local 98 were
also adverse with respect to this transaction.27
27
. This is shown clearly by the actions taken by Local 98 in
connection with the purchase of EMA's note. See generally
Compton I, 834 F. Supp. at 751 n.7. Because EMA had no money of
its own, it was unable to proceed with the transaction until
Local 98 approved. JA at 96, 471. Indeed, the record indicates
that the Plan trustees considered Local 98 to be the actual
purchaser of the note given the fact that EMA had no funds of its
own. Since Local 98 advanced the funds to EMA necessary to
purchase the note, the union's approval was a prerequisite to
completing the transaction. Id. at 58-59, 89, 448, 471. In
explaining the sale of the note, Compton also revealed that Local
98 was the effective purchaser: "The trustees felt that would be
a prudent move and had to find a buyer for the market value, and
that's when the union stepped in and decided they would purchase
the mortgage and get rid of it at the market value." Id. at 471
(emphasis added). Thus, as the "real" purchaser of the note,
Local 98 necessarily had interests adverse to the Plan in
relation to that transaction. See Cutaiar, 590 F.2d at 529.
Since the interests of the Plan were adverse to those of EMA
and Local 98 with respect to the transaction at issue, the only
remaining question under section 406(b)(2) is whether the union
trustees acted on behalf of or represented EMA or Local 98 in
connection with that transaction. The record strongly suggests
that they did. All three union trustees were officials of Local
98, and Compton was also an officer of EMA. Moreover, the union
trustees apparently did not recuse themselves when the
transaction was being considered by EMA and Local 98. Instead,
they participated in discussion of the mortgage transaction at
board meetings of EMA and Local 98. Rec. 38 at 23; JA at 417-27,
446. While these facts in themselves may be sufficient to
support summary judgment in favor of the Secretary on his section
406(b)(2) claim, we will leave that determination for the
district court to make in the first instance.28 On remand, the
district court should determine whether, during EMA's and Local
98's deliberations concerning the purchase of EMA's note, the
union trustees took any action in their capacities as union or
EMA officers. If they did, then they took actions in this
transaction on behalf of EMA and/or Local 98, parties with
interests adverse to the Plan, and they therefore violated
section 406(b)(2).29
28
. We recognize that the evidence against Compton, who was
president of EMA and Local 98, is stronger than against the other
two union trustees. We are sure that on remand the district
court will scrutinize this aspect on the record.
29
. The Secretary also suggests that the union trustees violated
section 406(b)(2) because, while acting in their capacities as
plan trustees during the consideration of the sale of EMA's note,
V. Section 404(a)(1) Claims
We come, finally, to the Secretary's claims that the Plan
trustees violated ERISA's loyalty and prudence requirements,
sections 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. §§ 404(a)(1)(A)
and (B), and that Fidelity violated ERISA's requirement that
fiduciaries act in accordance with plan documents, section
404(a)(1)(D) of ERISA, 29 U.S.C. § 404(a)(1)(D). The district
court did not specifically address these claims in either of its
two opinions, but it did enter judgment against all defendants on
"all claims against them." Compton I, 834 F. Supp. at 751. We
agree with the Secretary that this disposition was erroneous.
In addition to making certain actions by fiduciaries illegal
per se, ERISA also codified common law duties of loyalty and
prudence for ERISA trustees. In relevant part, section 404(a)
provides as follows:
(a) Prudent man standard of care
(1) [A] fiduciary shall discharge his duties
with respect to a plan solely in the interest of
the participants and beneficiaries and--
(A) for the exclusive purpose of:
(..continued)
they were actually serving the interests of EMA or Local 98.
This theory, although based on section 406(b)(2), seems to
resemble the Secretary's claim against all of the trustees under
section 404(a)(1)(A), which is discussed below. However, the
Secretary has not provided a precise description of this theory
as distinct from the section 406(b)(2) theory discussed in text.
For this reason, and because it may not be necessary for the
district court to reach this theory on remand, we do not address
the validity or contours of such a theory at this time.
(i) providing benefits to participants
and their beneficiaries; and
(ii) defraying reasonable expenses of
administering the plan;
(B) with the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent man acting in a
like capacity and familiar with such matters
would use in the conduct of an enterprise of
a like character and with like aims; . . .
(D) in accordance with the documents and
instruments governing the plan . . . .
Based on the summary judgment record, a reasonable factfinder
could conclude that the fiduciaries violated their duties. The
evidence discussed above with regards to self-dealing also
supports the Secretary's argument that the trustees may have
violated the duty of loyalty set out in section 404(a)(1)(A). As
noted, the Plan trustees sold the note for well below its
accounting value, and the record shows that the union trustees
were active on both sides of the negotiations. JA at 54, 58-59,
82, 89, 91, 95-96, 106. Furthermore, the Plan trustees
apparently did not sue EMA to force a purchase of the mortgage at
its accounting value because that would have effectively been a
suit against Local 98. Id. at 467. We agree with the Second
Circuit that trustees violate their duty of loyalty when they act
in the interests of the plan sponsor rather than "with an eye
single to the interests of the participants and beneficiaries of
the plan." Donovan, 680 F.2d at 271.
Likewise, the Secretary has adduced evidence suggesting that
the Plan trustees may not have acted in a prudent manner and may
thus have violated section 404(a)(1)(B). The Plan trustees were
aware that their counsel and the Secretary considered the loan to
violate ERISA. JA at 69, 87. Despite counsel's advice to sell
the loan for its accounting value, the Plan trustees did not do
so. Furthermore, the Plan trustees appear not to have made any
effort to dispose of the mortgage until two months before the end
of ERISA's ten-year transition period. The evidence indicates
that Fidelity participated in these transactions, and this
evidence is sufficient to support a finding that it violated
section 404(a)(1)(D) by failing to exercise the authority vested
in it by the Plan, which included control over Plan
investments.30 Although not necessarily dispositive, these facts
certainly provide a sufficient basis for the Secretary's claims
to survive a motion for summary judgment.31
We therefore reverse the order of the district court insofar
as it granted summary judgment against the Secretary on these
claims and we remand for further proceedings regarding them.
30
. As noted, an Amendment to the Agreement of Trust between
Local 98 and Fidelity provides that Fidelity "shall have
exclusive authority and discretion in investment of the Fund, and
to so invest without distinction between principal and income."
JA at 342.
31
. The Plan trustees argue that there was no violation of the
duty of loyalty and prudence because the trustees had no superior
alternative to the one they chose. Although there is evidence to
support this view, the Secretary has adduced sufficient facts to
make the district court's resolution of this issue by summary
judgment improper.
VI. Conclusion
The district court's order entering summary judgment in favor
of all defendants on all claims is reversed in part and affirmed
in part. Given the complex nature of the transactions at issue
here, we intimate no view as to the extent of the liability, if
any, that should be imposed on a defendant that is ultimately
found to have violated ERISA. We remand to the district court
for further proceedings consistent with this opinion.