National Security Systems, Inc. v. Iola ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 10-4154
_____________
NATIONAL SECURITY SYSTEMS, INC.;
STEVEN CAPPELLO;
UNIVERSAL MAILING SERVICE, INC.;
MICHAEL MARONEY, SR.; MICHAEL MARONEY, JR.;
LIMA PLASTICS, INC.;
JOSE M. CARIA, also known as JOSEPH M. CARIA;
MARGIT GYANTOR;
FINDERNE MANAGEMENT COMPANY, INC.;
ROCQUE DAMEO; DANIEL DAMEO;
ALLOY CAST PRODUCTS, INC.;
KENNETH FISHER; FRANK PANICO
v.
ROBERT L. IOLA, JR.; JAMES W. BARRETT;
GERARD T. PAPETTI;
CIGNA FINANCIAL ADVISORS INC;
LINCOLN NATIONAL LIFE INSURANCE COMPANY;
U.S. FINANCIAL SERVICES CORPORATION;
RONN REDFEARN; STEVEN G. SHAPIRO;
TRI-CORE, INC.;
COMMONWEALTH LIFE INSURANCE COMPANY;
MONUMENTAL LIFE INSURANCE COMPANY;
PEOPLES SECURITY LIFE INSURANCE COMPANY;
RAYMOND J. ANKNER; BEAVEN COMPANIES, INC.;
CJA ASSOCIATES, INC.;
NATIONSBANK TEXAS TRUST;
RIGGS NATIONAL BANK; PNC BANK N.A.;
BANK OF AMERICA
1
UNIVERSAL MAILING SERVICE, INC.;
MICHAEL MARONEY, SR.; MICHAEL MARONEY, JR.;
LIMA PLASTICS, INC.; JOSE M. CARIA, also known as
JOSEPH M. CARIA; MARGIT GYANTOR;
FINDERNE MANAGEMENT COMPANY, INC.;
ROCQUE DAMEO; DANIEL DAMEO;
ALLOY CAST PRODUCTS, INC.;
KENNETH FISHER; FRANK PANICO,
Appellants
_____________
No. 10-4155
_____________
NATIONAL SECURITY SYSTEMS, INC.;
STEVEN CAPPELLO;
UNIVERSAL MAILING SERVICE, INC.;
MICHAEL MARONEY, SR.; MICHAEL MARONEY, JR.;
LIMA PLASTICS, INC.;
JOSE M. CARIA, also known as JOSEPH M. CARIA;
MARGIT GYANTOR;
FINDERNE MANAGEMENT COMPANY, INC.;
ROCQUE DAMEO; DANIEL DAMEO;
ALLOY CAST PRODUCTS, INC.;
KENNETH FISHER; FRANK PANICO
v.
ROBERT L. IOLA, JR.; JAMES W. BARRETT;
GERARD T. PAPETTI;
CIGNA FINANCIAL ADVISORS INC;
LINCOLN NATIONAL LIFE INSURANCE COMPANY;
U.S. FINANCIAL SERVICES CORPORATION;
RONN REDFEARN; STEVEN G. SHAPIRO;
TRI-CORE, INC.;
COMMONWEALTH LIFE INSURANCE COMPANY;
MONUMENTAL LIFE INSURANCE COMPANY;
PEOPLES SECURITY LIFE INSURANCE COMPANY;
2
RAYMOND J. ANKNER; BEAVEN COMPANIES, INC.;
CJA ASSOCIATES, INC.;
NATIONSBANK TEXAS TRUST;
RIGGS NATIONAL BANK; PNC BANK N.A.;
BANK OF AMERICA
JAMES W. BARRETT,
Appellant
_____________
On Appeal from the United States District Court
for the District of New Jersey
(No. 3-00-cv-06293)
District Judge: Honorable Anne E. Thompson
Argued November 16, 2011
Before: FUENTES and CHAGARES, Circuit Judges, and
RESTANI, Judge.*
(Filed: November 8, 2012)
Steven J. Fram, Esq. (Argued)
Kerri E. Chewning, Esq.
Archer & Greiner
One Centennial Square
P.O. Box 3000
Haddonfield, NJ 08033
Counsel for Appellants / Cross-Appellees
Edward M. Koch, Esq.
White & Williams
1650 Market Street
One Liberty Place, Suite 1800
Philadelphia, PA 19103
Christopher P. Leise, Esq. (Argued)
*
Honorable Jane A. Restani, Judge, United States Court of
International Trade, sitting by designation.
3
White & Williams
457 Haddonfield Road
Suite 400, Liberty View
Cherry Hill, NJ 07095
Counsel for Appellee / Cross-Appellant
____________
OPINION
____________
CHAGARES, Circuit Judge.
We are called upon once again to address litigation
arising out of a tax avoidance scheme devised in the late
1980s.1 Defendant James Barrett, a financial planner,
induced the plaintiffs, four small New Jersey corporations and
their respective owners, to adopt an employee welfare benefit
plan known as the Employers Participating Insurance
Cooperative (―EPIC‖). EPIC‘s advertised tax benefits, the
plaintiffs discovered years later, were illusory; the scheme
masqueraded as a multiple employer welfare benefit plan, but
in fact was a method of deferring compensation. After the
Internal Revenue Service audited the plaintiffs‘ plans and
disallowed certain deductions claimed on their federal income
tax returns, the plaintiffs initiated this suit against Barrett and
other entities involved in the scheme. They asserted claims
under the Employee Retirement Income Security Act of 1974
(―ERISA‖), 29 U.S.C. §§ 1001-1461; the civil component of
the Racketeer Influenced and Corrupt Organization Act
(―RICO‖), 18 U.S.C. §§ 1961-1968; and New Jersey statutory
and common law. A jury found Barrett liable on the
plaintiffs‘ common law breach of fiduciary duty claim, but
1
This Court has, on at least three occasions, considered
claims arising out of employee welfare benefit plans with tax
avoidance features resembling the scheme at the root of this
case. See Cetel v. Kirwan Fin. Grp., Inc., 460 F.3d 494 (3d
Cir. 2006); Neonatology Assocs., P.A. v. Comm‘r, 299 F.3d
221 (3d Cir. 2002); Faulman v. Sec. Mut. Fin. Life Ins. Co.,
353 F. App‘x 699, 2009 WL 4367311 (3d Cir. Dec. 3, 2009).
4
not liable on their RICO claim. The District Court held a
bench trial on the ERISA claim and issued partial judgment
for the plaintiffs.
The parties raise a litany of challenges to rulings made
by the District Court over the course of the proceedings.
Several of their claims present matters of first impression in
this Circuit. For the reasons that follow, we will affirm the
District Court in most respects. On the issues of whether the
District Court properly deemed certain state law causes of
action preempted by ERISA, properly held certain ERISA
claims time-barred, and properly limited the jury‘s
consideration of one theory of recovery under RICO, we will
vacate and remand for further proceedings.
I.2
A.
EPIC was a complex tax avoidance scheme designed
to exploit 26 U.S.C. § 419A(f)(6), a tax code provision that
exempts ―10-or-more-employer plans‖ from limitations on
employers‘ deductions for contributions to employee welfare
benefit plans. See IRS Notice 95-34, 1995-1 C.B. 309.
Promoters of EPIC marketed it to closely held corporations as
a means of obtaining two attractive tax benefits: pre-
retirement, it permitted employers to claim large deductions
for contributions to employee benefit plans, and post-
retirement, it promised owner-employees a stream of tax-free,
annuity-like payments. Defendant Ronn Redfearn, a now-
deceased insurance salesman, created EPIC. He formed
defendant Tri-Core, Inc., a corporation that has since filed for
bankruptcy protection, to administer employee benefit plans
that conformed with EPIC‘s specifications.
EPIC purported to be a multiple employer welfare
benefit plan and trust, but in fact was an umbrella structure
within which discrete employee welfare benefit plans
operated. To join EPIC, a participating corporation signed a
standard form contract drafted by Tri-Core and titled the
2
We recount the facts based on the findings made by the
District Court in the bench trial.
5
―EPIC Welfare Benefit Plan and Trust Adoption Agreement‖
(―Adoption Agreement‖). An Adoption Agreement
established an employee welfare benefit plan funded by
employer contributions, set up a trust to hold plan assets, and
generally bound the employer to the terms of participation in
EPIC. It denominated the employer as the plan fiduciary and
administrator, but also required the employer to delegate
―substantial ministerial functions‖ to Tri-Core. In particular,
Tri-Core was responsible for formulating rules necessary to
administer the plans, determining employees‘ eligibility for
benefits, processing claims, collecting and accounting for
premiums, and directing others with respect to plan
administration.
Tri-Core selected two group term life insurance
policies as the only investment vehicles for the plans. The
Inter-American Insurance Company of Illinois initially issued
the policies, but after it declared bankruptcy in 1991,
defendant Commonwealth Life Insurance Company
(―Commonwealth‖) began issuing the policies. One of the
products, the Millennium Group 5 (―MG-5‖) policy, provided
participants with a fixed pre-retirement death benefit, charged
premiums commensurate with risk, and extended to
participants an option to convert to an individual life
insurance policy upon retirement or termination of
employment.
The second product was the continuous group (―C-
group‖) policy. A C-group policy consisted of two phases:
an accumulation phase and a payout phase. In the
accumulation phase, the employer made contributions (in the
form of insurance premiums) to a group term life insurance
policy that funded a guaranteed pre-retirement death benefit
for an employee‘s beneficiaries. The policies were valued at
a multiple of the employee‘s most recent annual salary. C-
group premiums far exceeded premiums for conventional life
insurance policies, often by a multiple of four to six. The
portion of the premium necessary to fund the death benefit
was set aside for that purpose. The remainder of the premium
— the difference between the C-group premiums and the
actual cost of insuring the employee‘s life — was reserved as
so-called ―conversion credits.‖ Conversion credits were
maintained in a ―premium stabilization reserve fund,‖ an
6
account that guaranteed policy holders a minimum interest
rate.
To transition to the payout phase, the employee could
convert from the group term life insurance policy to an
individual life insurance policy. Conversion could occur
under five circumstances, including retirement or termination
of employment. Upon conversion, the death benefit from the
group policy would transfer to the employee‘s individual
policy, as would conversion credits from the interest-bearing
account. The value of the transferred conversion credits was
calculated at the time of conversion and was not guaranteed.
A portion of the conversion credits was earmarked for
lowering the post-retirement premium to the premium
associated with the employee‘s age at the time of entry into
EPIC rather than at the time of conversion. Surplus
conversion credits not necessary for keeping the policy in
force were then made available to the employee, who could
borrow against the policy at an interest rate identical to that of
the interest-bearing account in which the conversion credits
were held. That is, the employee could withdraw funds from
the policy as a loan that would never be repaid. In this way,
the employee could access, as tax-free income, excess funds
paid as ―contributions‖ by the employer to the plan.
As mentioned, EPIC called for establishment of a trust
to hold and manage each plan‘s assets. A number of banks
were designated trustees of EPIC plans over the course of
EPIC‘s operation. In practice, Tri-Core, not the trustees,
directed the management of plan assets; the trustee operated
only as a pass-through entity. When an employer adopted an
EPIC plan, Tri-Core instructed the trustee to purchase the mix
of MG-5 and C-group life insurance products selected by the
employer. The employer then deposited its contributions with
the bank trustee on a biannual or quarterly schedule, and the
trustee remitted the premiums to Commonwealth‘s general
asset account. Commonwealth thereafter placed a portion of
the payments in the premium stabilization reserve fund.
As the architect, promoter, and manager of EPIC, Tri-
Core received a commission from Commonwealth on each C-
group policy it sold. Commonwealth paid Tri-Core out of its
general asset account and set the commission rate at a
7
percentage of the employers‘ annual contributions. Tri-Core
typically received up to 85% of employer contributions in the
first year of the policy and approximately 6% in subsequent
years, and then redistributed part of its commission to the
insurance broker who sold the EPIC plans.
B.
Redfearn enlisted defendant James Barrett in 1989 to
market EPIC to closely held corporations with few employees
and principals between the ages of 45 and 60. At the time,
Barrett was a financial planner employed by Cigna Financial
Advisors, Inc. In the years that followed, Barrett provided
financial planning advice to each of the plaintiffs: Michael
Maroney, Sr. and Michael Maroney, Jr., executive officers of
Universal Mailing Service, Inc. (collectively, the ―Universal
Mailing plaintiffs‖); Jose Caria and Margit Gyantar,
executive officers of Lima Plastics, Inc. (collectively, the
―Lima Plastics plaintiffs‖); Rocque Dameo and Daniel
Dameo, executive officers of Finderne Management
Company, Inc. (collectively, the ―Finderne plaintiffs‖); and
Kenneth Fisher and Frank Panico, executive officers of Alloy
Cast Products, Inc. (collectively, the ―Alloy Cast plaintiffs‖).3
We hereinafter refer to the four corporations as the ―corporate
plaintiffs‖ and the eight executive officers as the ―individual
plaintiffs.‖
Acting as Tri-Core‘s regional agent for New Jersey,
Barrett introduced EPIC to the individual plaintiffs and
recommended that their companies establish employee
benefit plans within the EPIC umbrella. Barrett plied them
with projections of their tax-free retirement income,
brochures and other marketing materials produced by Tri-
Core, and a legal opinion letter that vouched for the validity
of the favorable tax benefits.4 Employers‘ inflated
3
Two additional plaintiffs, National Security Systems, Inc.
and Steven Cappello, settled their claims and are not involved
in this appeal.
4
Trial testimony disclosed Barrett‘s knowledge of a
published article that questioned the validity of the EPIC
model. Appendix (―App.‖) 6649-52, 6659. The District
Court made no findings of fact with respect to Barrett‘s
8
contributions to the plans‘ group insurance policies, Barrett
represented, were fully deductible as business expenses, and
employees with C-group policies could expect tax-free
retirement income. Barrett did not explain that the
conversion credits — the source of the projected post-
retirement income — were not guaranteed, but in fact were
calculated by Tri-Core at the time of conversion.
Finding Barrett persuasive, each of the corporate
plaintiffs elected to establish an employee welfare benefit
plan within EPIC. They did so primarily because they
believed that it would provide them a tax-advantageous way
to save for retirement. Between 1990 and 1992, each
executed an Adoption Agreement with Tri-Core. Per the
Adoption Agreements, the corporate plaintiffs assumed the
role of sponsor and administrator of their employee welfare
benefit plans. As administrators, they selected one of the two
life insurance products designated by Tri-Core — the MG-5
policy or the C-group policy — for each employee. On
Barrett‘s recommendation, the corporate plaintiffs purchased
C-group policies for each of the individual plaintiffs and MG-
5 policies for other employees in the company. In other
words, the individual plaintiffs designed the plans to generate
tax-free post-retirement income for themselves, but not for
their employees. As required by their Adoption Agreements,
the corporate plaintiffs delegated most of their plan
management and investment duties to Tri-Core.
Tri-Core and Barrett (acting as an agent of Tri-Core)
frequently sent the corporate plaintiffs invoices for their
quarterly or biannual premiums. They also collected the
corporate plaintiffs‘ plan contributions and forwarded the
payments to the trustees. Barrett served as Tri-Core‘s contact
person for the plaintiffs, fielding their inquiries about plans
and benefits. He was not named a fiduciary of the employers‘
plans, nor did he have discretion to manage or invest plan
assets.
The Universal Mailing and Alloy Cast plaintiffs were
notified when they established their plans that Tri-Core would
awareness that EPIC posed tax risks to participating
employers.
9
receive a commission on the purchase of their life insurance
contracts, but they were not provided information on the
amount of the commission, who paid it, or how it was
calculated. From its commission, Tri-Core paid Barrett the
equivalent of 40-50% of the corporate plaintiffs‘ first-year
plan contributions and 3% of their contributions in
subsequent years. Barrett, in turn, distributed a portion of his
commission to co-brokers. Some of the plaintiffs were aware
that Barrett received commissions, but he did not tell them
how much he was paid or how his compensation was
calculated.
Between 1990 and 1997, the corporate plaintiffs each
made contributions to their plans totaling several hundred
thousand dollars.5 On their federal income tax returns, they
deducted the contributions in full as ordinary and necessary
business expenses pursuant to 26 U.S.C. § 162. In 1995, the
Internal Revenue Service (―IRS‖) issued Notice 95-34, which
concerned employer trust arrangements premised on the same
scheme as EPIC. See 1995-1 C.B. 309. The Notice
explained that the arrangements do not satisfy the 10-or-
more-employer-plan exemption provided by § 419A(f)(6)
because they call for individual plans maintained by each
employer.6 Employers, the IRS warned, should expect
disallowance of deductions for contributions made to such
plans. The Notice characterized EPIC-style plans as
providing deferred compensation subject to taxation.
In 1997 and 1998, the IRS audited certain tax returns
of each of the corporate plaintiffs. Consistent with its
position in the Notice, the IRS disallowed most of their
deductions.7 Each corporate plaintiff incurred over $100,000
in fees and taxes or penalties.8
5
The Lima Plastics plaintiffs contributed $726,001.00, the
Alloy Cast plaintiffs $378,057.87, the Finderne plaintiffs
$336,591.86, and the Universal Mailing plaintiffs
$755,819.00.
6
The United States Tax Court endorsed this position in Booth
v. Commissioner, 108 T.C. 524, 571 (T.C. 1997).
7
In Neonatology Associates, P.A. v. Commissioner, 115 T.C.
43 (T.C. 2000), the United States Tax Court considered two
test cases involving a tax deferral scheme that mirrored EPIC.
10
II.
A.
The Finderne plaintiffs and Alloy Cast plaintiffs
initiated separate actions in New Jersey Superior Court
against Barrett and related defendants in 1999. Asserting a
number of state law claims, they alleged that Barrett‘s
fraudulent misrepresentations about the tax benefits of the
plan caused them substantial economic injury. The trial
judges in those actions issued judgments for the defendants
on the basis that the claims were preempted by ERISA and
that federal courts retain exclusive jurisdiction over the
ERISA claims. Finderne Mgmt. Co. v. Barrett, 809 A.2d 842,
847 (N.J. Super. Ct. App. Div. 2002).
The cases were consolidated on appeal and the
Appellate Division of the New Jersey Superior Court
reversed, holding that ERISA did not preempt the state law
claims. Id. at 856. The court first determined that although
the EPIC structure itself was not a multiple employer
employee welfare benefit plan under ERISA, each individual
employer plan did constitute an ERISA employee benefit
plan. Id. at 850-51. The court nevertheless determined that
ERISA did not preempt the plaintiffs‘ state law claims
because the harm alleged — reliance on misrepresentations
about the tax benefits of the EPIC model made in the course
of marketing EPIC — occurred before the corporate plaintiffs
established their individual ERISA plans. Id. at 855. The
challenged conduct, therefore, did not ―relate to‖ an ERISA
plan. Id. (applying 29 U.S.C. § 1144(a)). Moreover, the
court explained, Barrett‘s alleged misrepresentations that the
plans would qualify for favorable tax treatment did ―not
impact the structure or administration of the ERISA plans;
The court upheld the Commissioner‘s disallowance of
deductions and imposition of penalties on participant
corporations. We affirmed that decision. Neonatology, 299
F.3d at 233.
8
However, the District Court found that ―the effect of the IRS
audit on the Finderne plaintiffs was not established at trial.‖
App. 56 ¶ 46.
11
they [did] not relate to any state laws that regulate the type of
benefits or terms of the ERISA plan; they [were] unrelated to
laws creating reporting, disclosure, funding or vesting
requirements or the plans; and they [did] not affect the
calculation of plan benefits.‖ Id. at 855.
On remand, the Finderne plaintiffs added a federal
RICO claim which, along with a common law breach of
fiduciary duty claim, was tried before a jury. The jury
returned a verdict for the plaintiffs and awarded
approximately $70,000 in damages. The judgment was
affirmed on appeal. Finderne Mgmt. Co. v. Barrett, 955 A.2d
940 (N.J. Super. Ct. App. Div. 2008). The Alloy Cast
plaintiffs‘ case on remand was removed to federal court and
consolidated with this case.
B.
In December 2000, the plaintiffs initiated this action in
the United States District Court for the District of New
Jersey. The amended complaint asserted eighteen claims
against seventeen defendants, but the only allegations
relevant here are that Tri-Core and Barrett intentionally
misrepresented or failed to disclose material information
about EPIC. In general, the claims fall into three substantive
theories of liability. Tri-Core and Barrett allegedly (1)
misrepresented the tax risks and benefits of the plans, (2)
concealed their extraction of commissions from the plaintiffs‘
contributions to the plans, and (3) misrepresented the ability
of plan participants to access conversion credits in their
premium rate stabilization funds. Against Barrett, the
corporate plaintiffs asserted claims under ERISA § 502(a)(2)
and (a)(3) for violations of the duties imposed by ERISA §§
404, 405, and 406. In addition, the plaintiffs asserted five
civil RICO claims under 18 U.S.C. § 1964(c), as well as nine
state statutory and common law claims, including breach of
fiduciary duty.
The parties filed cross motions for partial summary
judgment. With respect to the Finderne plaintiffs, the District
Court granted summary judgment in favor of Barrett on all
claims that were or could have been asserted in the state court
proceeding. What remained were the Finderne plaintiffs‘
12
ERISA claims, which survived because Congress vested
federal courts with exclusive jurisdiction over most ERISA
claims. See 29 U.S.C. § 1132(e).
The District Court next turned to Barrett‘s contention
that he was not a proper defendant under ERISA § 502(a)(2)
and (a)(3). Barrett was not a fiduciary with respect to the
plans, the court explained. In effect, this legal conclusion
necessitated the grant of summary judgment to Barrett on the
§ 502(a)(2) claim, for that provision only provides a cause of
action against ERISA fiduciaries. See 29 U.S.C. §§ 1109,
1132(a)(2); Mertens v. Hewitt Assocs., 508 U.S. 248, 252-53
(1993).9 But Barrett‘s status as a nonfiduciary, the court
continued, did not preclude potential liability under §
502(a)(3), for that provision permits claims for equitable
relief against knowing participants in a fiduciary‘s breach of
its fiduciary obligations under ERISA. By requesting
disgorgement of Barrett‘s commissions, the court determined,
the plaintiffs sought ―appropriate equitable relief‖ within the
meaning of § 502(a)(3). The court also rejected Barrett‘s
argument that the ERISA claims were barred by the statute of
limitations set forth in 29 U.S.C. § 1113 because no evidence
revealed when the plaintiffs became aware of Tri-Core‘s
commissions. Finding a number of remaining disputes of
material fact, the court denied the plaintiffs‘ motion for
summary judgment on the § 502(a)(3) claim.
Finally, the District Court addressed Barrett‘s
argument that certain state law claims (asserted by the Alloy
Cast, Lima Plastics, and Universal Mailing plaintiffs) were
preempted by ERISA § 514(a). Reasoning that state law
claims based on misrepresentations made by Barrett about tax
advantages did not ―relate to‖ the individual ERISA plans
because they pre-dated the plans‘ formation, the court found
no ERISA preemption. The court next considered state law
claims concerning Barrett‘s alleged misrepresentations about
9
Section 502(a)(2) extends a cause of action ―for appropriate
relief‖ under ERISA § 409. Section 409 makes a ―fiduciary
with respect to a plan‖ personally liable for losses caused by
its breach of fiduciary obligations imposed by ERISA and
permits a court to award ―equitable or remedial relief‖ against
the fiduciary. 29 U.S.C. § 1109(a).
13
conversion credits and commissions made before and after
the ERISA plans were established. Because those claims
―related to‖ alleged misconduct in the administration of the
plans, the District Court held, they were preempted.
C.
The District Court bifurcated the claims into those that
would be decided by a jury (the RICO and state law claims)
and those that would be decided by the court in a bench trial
(the ERISA claims).10 For the sake of judicial economy, the
court held one two-week trial in November and December of
2009. As a result of the summary judgment ruling and the
plaintiffs‘ withdrawal and settlement of claims, only the
ERISA, RICO, and common law breach of fiduciary duty
claims against Barrett remained by the end of the trial.
Consistent with the rationale of the preemption ruling, the
common law breach of fiduciary duty claim concerned only
Barrett‘s alleged pre-plan misrepresentations about EPIC‘s
tax benefits. The ERISA claims were narrowed to Barrett‘s
alleged participation in Tri-Core‘s breach of the fiduciary
duties imposed by ERISA §§ 404(b) and 406(b). Over the
plaintiffs‘ objection, the District Court instructed the jury not
to consider evidence pertaining to Tri-Core and Barrett‘s
commissions in their deliberations on the RICO claim.
The jury returned a verdict for Barrett on the RICO
claim and for the plaintiffs on the common law breach of
fiduciary duty claim. It awarded the plaintiffs the damages
they incurred as a result of the IRS audits: $128,925 to the
Alloy Cast plaintiffs, $133,415 to the Lima Plastics plaintiffs,
and $176,643 to the Universal Mailing plaintiffs. Barrett
promptly requested apportionment of damages between
Barrett and other tortfeasors — namely, Tri-Core and
Redfearn. Over the plaintiffs‘ objection, the court gave the
instruction, and the jury determined that one half of the
plaintiffs‘ loss was attributable to Tri-Core and Redfearn.
10
Because ERISA § 502(a)(3) authorizes only ―equitable
relief,‖ no right to a jury trial attaches under the Seventh
Amendment to the United States Constitution. Cox v.
Keystone Carbon Co., 861 F.2d 390, 393 (3d Cir. 1988).
14
That determination halved the damages recoverable from
Barrett.
The parties filed several post-trial motions. In a series
of decisions, the court granted Barrett‘s motion for judgment
as a matter of law on the plaintiffs‘ demand for punitive
damages; denied the plaintiffs‘ motion for a new trial on their
civil RICO claims; and denied the plaintiffs‘ motion for
judgment as a matter of law with respect to the jury‘s
apportionment of damages.
Some time later, the court issued its findings of fact
and conclusions of law with respect to the ERISA claims. As
had been established by the summary judgment ruling, the
claims only concerned misrepresentations made with respect
to commissions and the accessibility of conversion credits,
both of which occurred after the establishment of the plans.
The court reiterated that while the EPIC framework was not a
―multiple employer‖ welfare benefit plan within the meaning
of ERISA § 3(40), each individual plan at issue in this case
was covered by ERISA as a ―single-employer plan,‖ as
defined by ERISA § 3(41). See 29 U.S.C. § 1002(40), (41).
Turning to the status of the defendants, the District
Court reaffirmed that Tri-Core was a fiduciary under ERISA
§ 3(21)(A), 29 U.S.C. § 1002(21)(A), but Barrett was not.
The court determined that Barrett nevertheless could be held
accountable under § 502(a)(3) if he knowingly participated in
Tri-Core‘s violation of substantive ERISA provisions. The
District Court next ruled that Tri-Core breached its fiduciary
obligations imposed by ERISA § 406(b)(3), but not §§
406(b)(1) or 404. Taking the § 404 claim first, it explained
that Tri-Core did not misrepresent the accessibility of
conversion credits in the reserve fund because the plan
documents clearly stated that no employee was entitled to
employer contributions. Nor did Tri-Core misappropriate
plan assets for its own account, an act that would have
violated § 406(b)(1), because Tri-Core was no longer a
fiduciary when Commonwealth paid its commissions and
Commonwealth did not pay its commissions out of plan
assets. Regarding the plaintiffs‘ theory that Tri-Core received
excessive compensation, the court explained that the only
relevant testimony in the record confirmed that the
compensation was reasonable under industry norms. Finally,
15
to the extent that § 404 imposed a duty on Tri-Core to
disclose the fact and amount of its commissions, the court
found that any nondisclosure did not harm the plaintiffs
because the plans provided guaranteed benefits.
Tri-Core‘s receipt of commissions from
Commonwealth, however, did run afoul of § 406(b)(3),
according to the District Court. Section 406(b)(3), ERISA‘s
anti-kickback provision, bars a fiduciary from receiving
consideration in connection with a transaction involving plan
assets. 29 U.S.C. § 1106(b)(3). The District Court found that
Tri-Core promoted Commonwealth‘s policies as investment
vehicles for the plans knowing that it would draw a handsome
salary from Commonwealth on each C-group policy it sold.
This gave Tri-Core an incentive to recommend that the
plaintiffs choose C-group policies as plan assets. Indeed,
EPIC depended on funding the plans with C-group policies.
Section 406(b)(3), the court concluded, forbids this sort of
symbiotic relationship between a plan fiduciary and an
institution offering funding vehicles for the plan.
The reasonableness of Tri-Core‘s commissions, the
court next determined, was no defense. Whether or not Tri-
Core‘s commissions were reasonable, § 406(b)(3) erects a
categorical bar to such compensation. The court found that
an abundance of evidence established that Barrett knew about
and actively assisted in Tri-Core‘s violation of § 406(b)(3).
Accordingly, the court concluded that Barrett was liable
under § 502(a)(3) for his knowing participation in Tri-Core‘s
§ 406(b)(3) violation, and it issued judgment for the plaintiffs
on that claim.
Disgorgement of one-half of the commissions Barrett
received in connection with his sale of EPIC to plaintiffs, the
District Court determined, would most equitably remediate
their injuries.11 Exercising its discretion, the court applied a
11
The court ordered Barrett to disgorge $15,508.97 to the
Finderne plaintiffs, $41,634.35 to the Lima Plastics plaintiffs,
$38,657.08 to the Alloy Cast plaintiffs, and $16,657.61 to the
Universal Mailing plaintiffs.
16
prejudgment interest rate of 3.91%12 and declined to award
the plaintiffs attorneys‘ fees and costs.
Both parties moved to amend the judgment. The
District Court granted in part and denied in part the motions.
Reversing its prior ruling, it held the Alloy Cast and
Universal Mailing plaintiffs‘ ERISA claims were time-barred
in light of evidence establishing their awareness, dating to
1990, of Tri-Core‘s § 406(b)(3) violation. The parties‘
remaining contentions, the court concluded, had already been
resolved or were otherwise meritless. The plaintiffs timely
appealed and Barrett cross appealed.
III.
We have subject matter jurisdiction over this case
under 28 U.S.C. §§ 1331 and 1367 and 29 U.S.C. § 1132(e).
Our appellate jurisdiction is based on 28 U.S.C. § 1291.
―We exercise plenary review over a district court‘s
summary judgment ruling.‖ Disabled in Action of Pa. v. Se.
Pa. Transp. Auth., 635 F.3d 87, 92 (3d Cir. 2011) (quotation
marks omitted). ―Summary judgment is appropriate only
where, drawing all reasonable inferences in favor of the
nonmoving party, there is no genuine issue as to any material
fact and . . . the moving party is entitled to judgment as a
matter of law.‖ Id. In an appeal from an ERISA bench trial,
we review the District Court‘s findings of fact for clear error
and its conclusions of law de novo. Vitale v. Latrobe Area
Hosp., 420 F.3d 278, 281 (3d Cir. 2005).
IV.
Congress enacted ERISA ―to ensure the proper
administration of pension and welfare plans, both during the
years of the employee‘s active service and in his or her
retirement years.‖ Boggs v. Boggs, 520 U.S. 833,
12
The court borrowed the rate from that set forth in 28 U.S.C.
§ 1961. Its calculus resulted in $29,114.72 for the Finderne
plaintiffs, $81,941.41 for the Lima Plastics plaintiffs,
$76,329.75 for the Alloy Cast plaintiffs, and $29,458.71 for
the Universal Mailing plaintiffs.
17
839 (1997). Crafted to bring order and accountability to a
system of employee benefit plans plagued by
mismanagement, see Massachusetts v. Morash, 490 U.S. 107,
112 (1989), ERISA is principally concerned with protecting
the financial security of plan participants and beneficiaries.
29 U.S.C. § 1001(b); Boggs, 520 U.S. at 845; Shaw v. Delta
Air Lines, Inc., 463 U.S. 85, 90 (1983). To this end, the
statute sets forth detailed disclosure and reporting obligations
for plans and imposes various participation, vesting, and
funding requirements. See 29 U.S.C. §§ 1021-1086; Morash,
490 U.S. at 113.
Relevant here, ERISA also prescribes standards of
conduct for plan fiduciaries, derived in large part from the
common law of trusts. 29 U.S.C. §§ 1101-1114; Firestone
Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110 (1989).
Section 404 requires fiduciaries to discharge their duties
―solely in the interest of the participants and beneficiaries . . .
with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity‖ would use. 29 U.S.C. § 1104(a)(1).
Supplementing that foundational obligation is § 406, which
prohibits plan fiduciaries from entering into certain
transactions. Id. § 1106. Subsection (a) erects a categorical
bar to transactions between the plan and a ―party in interest‖
deemed likely to injure the plan. Id. § 1106(a); Reich v.
Compton, 57 F.3d 270, 275 (3d Cir. 1995).13 Subsection (b)
prohibits fiduciaries from entering into transactions with the
plan tainted by conflict-of-interest and self-dealing concerns.
29 U.S.C. § 1106(b); Lowen v. Tower Asset Mgmt., Inc., 829
F.2d 1209, 1213 (2d Cir. 1987). Section 408 offsets § 406 by
creating exemptions from liability on certain transactions that
would otherwise be prohibited. 29 U.S.C. § 1108.
ERISA also aims ―to provide a uniform regulatory
regime over employee benefit plans‖ in order to ease
administrative burdens and reduce employers‘ costs. Aetna
13
ERISA defines ―party in interest‖ to include nine classes of
individuals or entities, 29 U.S.C. § 1002(14), but the general
concept ―encompass[es] those entities that a fiduciary might
be inclined to favor at the expense of the plan‘s
beneficiaries.‖ Harris Trust & Sav. Bank v. Salomon Smith
Barney, Inc., 530 U.S. 238, 242 (2000).
18
Health Inc. v. Davila, 542 U.S. 200, 208 (2004). To ensure
that plan regulation resides exclusively in the federal domain,
Congress inserted in the statute an expansive preemption
provision, codified at § 514(a). See 29 U.S.C. § 1144(a);
Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523
(1981). Congress paired § 514(a) with § 502(a), which
enumerates a set of integrated civil enforcement remedies
designed to redress violations of the statute or the terms of a
plan. See 29 U.S.C. § 1132(a).
All of these aspects of ERISA are at issue in this case.
In the sections that follow, we address the plaintiffs‘
objections to the District Court‘s ruling on preemption, the
amenability of Barrett to suit under ERISA for his
participation in a violation of Tri-Core‘s fiduciary
obligations, and the availability of various statutory defenses
to liability. We also examine the District Court‘s application
of ERISA‘s statute of limitations and its award of equitable
relief in favor of the plaintiffs.
A.
We begin with the plaintiffs‘ challenge to the grant of
partial summary judgment in favor of Barrett on the basis that
ERISA preempts a subset of the state law claims.14 The
complaint alleged that Barrett induced the plaintiffs to
participate in EPIC by misrepresenting the tax advantages of
the plans, the accessibility of conversion credits, the presence
of a reserve fund, and the nature of the commissions he and
Tri-Core anticipated earning. It also alleged that Barrett
encouraged the plaintiffs‘ ongoing participation in EPIC after
the plans‘ adoption by continuing to misrepresent the
accessibility of conversion credits within a reserve fund and
by concealing information about the commissions he and Tri-
Core earned. Insofar as the claims of fraud, breach of
fiduciary duty, breach of contract, breach of the implied duty
of good faith and fair dealing, and conspiracy/aiding and
abetting pertained to alleged misrepresentations about
commissions, the accessibility of conversion credits, and the
14
We exercise plenary review over the legal question of
ERISA preemption. Barber v. UNUM Life Ins. Co. of Am.,
383 F.3d 134, 138 n.5 (3d Cir. 2004).
19
presence of a reserve fund, the District Court deemed them
preempted.
ERISA possesses ―extraordinary pre-emptive power.‖
Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 65 (1987). Its
broad preemptive scope reflects Congress‘s intent to lodge
regulation of employee benefit plans firmly in the federal
domain. N.Y. State Conference of Blue Cross & Blue Shield
Plans v. Travelers Ins. Co., 514 U.S. 645, 656-57 (1995).
Consolidation of regulation and decisionmaking with respect
to covered plans in the federal sphere, Congress anticipated,
would promote uniform administration of benefit plans and
avoid subjecting regulated entities to conflicting sources of
substantive law. Id. at 657. This, in turn, would ―minimize
the administrative and financial burden‖ imposed on
regulated entities, Ingersoll-Rand Co. v. McClendon, 498
U.S. 133, 142 (1990), and expand employers‘ provision of
benefits in light of the more predictable set of liabilities, Rush
Prudential HMO, Inc. v. Moran, 536 U.S. 355, 379 (2002).
What emerged from Congress‘s deliberations on ERISA was
a statute that both preempts state law expressly and contains a
comprehensive civil enforcement scheme that preempts any
conflicting state remedy. Ingersoll-Rand, 498 U.S. at 138-45;
Barber, 383 F.3d at 138-41.15
The District Court focused on express rather than
conflict preemption, so we will begin by considering whether
the District Court properly found the plaintiffs‘ state law
causes of action expressly preempted. Section 514(a)
provides that ERISA ―shall supersede any and all State laws
insofar as they may now or hereafter relate to any employee
benefit plan[.]‖ 29 U.S.C. § 1144(a). A ―State law‖ under
the statute includes ―all laws, decisions, rules, regulations, or
other State action having the effect of law, of any State.‖ Id.§ 1144(c)(1). State common law claims fall within this
15
Under the conflict preemption analysis, ―any state law
cause of action that duplicates, supplements, or supplants the
ERISA civil enforcement remedy conflicts with the clear
congressional intent to make the ERISA remedy exclusive
and is therefore pre-empted.‖ Davila, 542 U.S. at 209 (citing
Ingersoll-Rand, 498 U.S. at 143-45; Pilot Life Ins. Co. v.
Dedeaux, 481 U.S. 41, 54-56 (1987)).
20
definition and, therefore, are subject to ERISA preemption.
See, e.g., Ingersoll-Rand, 498 U.S. at 140; Pilot Life Ins. Co
v. Dedeaux, 481 U.S. 41, 48 (1987).
The term ―relate to‖ in § 514(a) is ―deliberately
expansive.‖ Ingersoll-Rand, 498 U.S. at 138; Pilot Life, 481
U.S. at 46. Nevertheless, the Supreme Court cautions, its
broad scope cannot ―extend to the furthest stretch of its
indeterminacy‖; otherwise, ―for all practical purposes pre-
emption would never run its course.‖ Travelers, 514 U.S. at
655. The test for whether a state law cause of action
―relate[s] to‖ an employee benefit plan is whether ―‗it has a
connection with or reference to such a plan.‘‖ Egelhoff v.
Egelhoff ex rel. Breiner, 532 U.S. 141, 147 (2001) (quoting
Shaw, 463 U.S. at 97). The ―connection with‖ component of
this test, however, supplies scarcely more content than the
―relate to‖ formulation. So, in applying the test, we must also
look to ―‗the objectives of the ERISA statute as a guide to the
scope of the state law that Congress understood would
survive,‘ as well as to the nature of the effect of the state law
on ERISA plans.‖ Cal. Div. of Labor Standards Enforcement
v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 325 (1997)
(quoting Travelers, 514 U.S. at 658-59).
We are satisfied that the District Court correctly held
the plaintiffs‘ common law claims were preempted to the
extent they relate to Barrett‘s alleged misrepresentations,
made after the plans‘ adoption, about commissions and the
accessibility of conversion credits within a purported reserve
fund.16 Those claims have ―a connection with‖ the ERISA
plans because they are premised on the existence of the plans.
See Ingersoll-Rand, 498 U.S. at 140 (finding that a common
law claim for wrongful discharge ―relates to‖ an ERISA plan
because the cause of action ―is premised on[] the existence of
a pension plan‖). To prevail on those claims, the plaintiffs
would have had to plead, and the court to find, that the plans
were in fact adopted. The court would then be called on to
assess Barrett‘s representations in light of the plaintiffs‘
benefits and rights under the plans. This type of analysis —
16
The plaintiffs do not contend that any of the claims survive
by virtue of the insurance savings clause in § 514(b)(2)(A),
29 U.S.C. § 1144(b)(2)(A).
21
concerning the accuracy of statements made by an alleged
(state law) fiduciary to plan participants in the course of
administering the plans — sits within the heartland of ERISA.
See, e.g., Kollman v. Hewitt Assocs., LLC, 487 F.3d 139,
149–50 (3d Cir. 2007) (reasoning that the calculation and
payment of a benefit due to a plan participant goes to the
essential function of an ERISA plan). We therefore conclude
that the plaintiffs‘ common law claims are preempted to the
extent they relate to Barrett‘s conduct after he enrolled the
plaintiffs in EPIC.
We are left, then, with the plaintiffs‘ common law
claims concerning Barrett‘s representations about the
presence of a reserve fund, the accessibility of conversion
credits, and the nature of his commissions made before the
establishment of the plans.17 Those representations, plaintiffs
allege, induced them to participate in EPIC. Whether or not
claims touching on those alleged misrepresentations are
preempted requires us to confront the following question: do
common law claims that an insurance agent misrepresented
the structure and benefits afforded by an ERISA plan in order
to induce participation in that plan ―ha[ve] a connection with‖
the plan, such that they are preempted?
In answering this question, we are not without
guidance. Several Courts of Appeals have held that an
insurance agent who makes fraudulent or misleading
statements to induce participation in an ERISA plan is
amenable to suit under state law theories of recovery. See,
e.g., Woodworker‘s Supply, Inc. v. Principal Mut. Life Ins.
Co., 170 F.3d 985, 991-92 (10th Cir. 1999) (holding the
plaintiffs‘ fraudulent inducement claims not preempted
because the actions had occurred before the defendant had
become a fiduciary); Wilson v. Zoellner, 114 F.3d 713, 721
(8th Cir. 1997) (finding that a state law claim of negligent
misrepresentation was not preempted because allowing the
plaintiff to recover for pre-plan tortious conduct would not
prevent plan administrators from carrying out their duties and
would not impose new duties on plan administrators); Coyne
& Delany Co. v. Selman, 98 F.3d 1457, 1472 (4th Cir. 1996)
17
Neither Barrett nor the plaintiffs question the District
Court‘s finding that the claims concerning Barrett‘s pre-plan
promises of tax advantages were not preempted.
22
(finding a state law claim of professional negligence not
preempted because ―the court‘s inquiry will be centered on
whether the defendants‘ conduct comported with the relevant
professional standard‖); accord Morstein v. Nat‘l Ins. Servs,
Inc., 93 F.3d 715 (11th Cir. 1996); Perkins v. Time Ins. Co.,
898 F.2d 470 (5th Cir. 1990). Displacing claims of this
variety, these courts reason, ―would not further Congress‘
purpose in passing ERISA.‖ Woodworkers, 170 F.3d at 991
(citing Coyne & Delany Co., 98 F.3d at 1466-71). We agree.
―Holding insurers accountable for pre-plan fraud does not
affect the administration or calculation of benefits, nor does it
alter the required duties of plan fiduciaries.‖ Id. (citing
Wilson, 114 F.3d at 719; Coyne & Delaney Co., 98 F.3d at
1471). A state‘s common law, generally intended to ―prevent
sellers of goods and services, including benefit plans, from
misrepresenting . . . the scope of their services,‖ is ―‗quite
remote from the areas with which ERISA is expressly
concerned — reporting, disclosure, fiduciary responsibility,
and the like.‘‖ Wilson, 114 F.3d at 720 (quoting Dillingham,
519 U.S. at 330).
In our view, these sorts of claims rest on
misrepresentations made about an ERISA plan before that
plan‘s existence. They are not premised on a challenge to the
actual administration of the plan. To the extent that a
reviewing court would need to examine the provisions of the
plan in considering the claims, it would be only to determine
whether the representations made by Barrett regarding plan
structure and benefits were at odds with the plan itself, or
with the plaintiffs‘ understanding of the benefits afforded by
the plans. This is not the sort of exacting, tedious, or
duplicative inquiry that the preemption doctrine is intended to
bar. To the contrary, that comparison requires only a cursory
examination of the plan provisions and turns largely on ―legal
duties generated outside the ERISA context.‖ Coyne &
Delany Co., 98 F.3d at 1472. Nor do we think these claims
strike at that area of core ERISA concern — ―funding,
benefits, reporting, and administration‖ — in which the use of
state, rather than federal, law threatens to undermine the goals
of Congress in enacting ERISA in the first place. See
Kollman, 487 F.3d at 149.
23
Accordingly, we conclude that ERISA does not
preempt the plaintiffs‘ state law claims to the extent they
allege that Barrett misrepresented the existence of a reserve
fund, the availability of conversion credits, and the nature of
his commissions before adoption of the EPIC plans. To the
extent it granted partial summary judgment in favor of Barrett
on those theories of recovery, we will vacate the District
Court‘s ruling and remand for further proceedings. Retrial on
these claims may be necessary. However, the District Court
may, on remand, consider other arguments pressed by the
parties in dispositive motions or consider, among other issues,
whether retrial on those claims would result in double
recovery for a single injury. We express no view on these
matters.
B.
We turn next to Barrett‘s cross appeal, which
challenges the District Court‘s threshold determination that
Barrett is amenable to suit under ERISA § 502(a)(3) as a
nonfiduciary who knowingly participated with Tri-Core in
transactions forbidden by § 406(b)(3). Section 406(b)(3)
prohibits a fiduciary from ―receiv[ing] any consideration for
his own personal account from any party dealing with [an
ERISA plan] in connection with a transaction involving assets
of the plan.‖ 29 U.S.C. § 1106(b)(3).18 Section 502(a)(3)
18
Section 406(b) provides in full:
A fiduciary with respect to a plan shall not—
(1) deal with the assets of the plan in his own
interest or for his own account,
(2) in his individual or in 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, or
(3) receive any consideration for his own
personal account from any party dealing with
24
authorizes a civil action by ―a participant, beneficiary, or
fiduciary‖ of an ERISA plan ―to obtain . . . appropriate
equitable relief (i) to redress . . . violations [of Title I of
ERISA or the plan] or (ii) to enforce any provisions of [Title I
of ERISA] or the terms of the plan[.]‖ 29 U.S.C. §
1132(a)(3).19 The plaintiffs‘ theory was that § 502(a)(3)
enabled them to seek restitution from Barrett for an ―act or
practice‖ that injured them — namely, Tri-Core‘s receipt of
commissions from Commonwealth in connection with
transactions involving plan assets. Accepting the premise, the
District Court deemed Barrett a proper defendant under §
502(a)(3) as construed by the Supreme Court in Harris Trust
such plan in connection with a transaction
involving the assets of the plan.
29 U.S.C. § 1106(b).
19
In relevant part, § 502(a) provides:
A civil action may be brought—
....
(3) by a participant, beneficiary, or fiduciary
(A) to enjoin any act or practice which violates
any provision of this subchapter or the terms of
the plan, or (B) to obtain other appropriate
equitable relief (i) to redress such violations or
(ii) to enforce any provisions of this subchapter
or the terms of the plan;
....
(5) except as otherwise provided in subsection
(b) of this section, by the Secretary (A) to
enjoin any act or practice which violates any
provision 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[.]
29 U.S.C. § 1132(a).
25
& Savings Bank v. Salomon Smith Barney, Inc., 530 U.S.
238 (2000). Barrett maintains that a recent decision of this
Court, Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011),
clarifies that he cannot be held accountable under § 502(a)(3)
because he is not a fiduciary or a party in interest to a
transaction prohibited by ERISA § 406(a).20 To weigh these
20
Section 406(a) provides in full:
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; or
(E) acquisition, on behalf of the plan, of
any employer security or employer real
property in violation of section 1107(a)
of this title.
(2) No fiduciary who has authority or discretion
to control or manage the assets of a plan shall
permit the plan to hold any employer security or
employer real property if he knows or should
know that holding such security or real property
violates section 1107(a) of this title.
29 U.S.C. § 1106(a).
26
competing positions, we must first step back and recount the
pertinent cases construing § 502(a)(3).
1.
The Supreme Court first had occasion to construe §
502(a)(3) in Mertens v. Hewitt Associates, 508 U.S. 248(1993). That suit arose out of the Kaiser Steel Corporation‘s
inadequate funding of its ERISA-governed pension plan,
resulting in termination of the plan and diminished payouts
for beneficiaries. Id. at 250. A putative class of former
Kaiser employees brought suit under § 502(a)(3) against
Kaiser and Hewitt Associates, a nonfiduciary actuary whose
acts and omissions allegedly caused Kaiser to miscalculate its
funding obligations. The plaintiffs sought equitable relief and
money damages from Hewitt for its active participation in the
plan fiduciaries‘ breach of legal duties. Id. The Supreme
Court agreed to consider ―whether ERISA authorizes suits for
money damages against nonfiduciaries who knowingly
participate in a fiduciary‘s breach of fiduciary duty.‖ Id. at
251.
Within this question, the Court recognized, are two
distinct issues. The antecedent issue is whether a § 502(a)(3)
claim may be asserted against a nonfiduciary that knowingly
participates in a fiduciary‘s breach of fiduciary duty. The
secondary issue concerns the availability of money damages.
Because the parties‘ briefs were directed primarily to the
second question, the Court resolved only that issue, holding
that ―appropriate equitable relief‖ under § 502(a)(3) does not
encompass suits seeking compensatory damages from
nonfiduciaries. Id. at 254-55.
Although it ―reserve[d] decision of th[e] antecedent
question,‖ the Court took the opportunity to make some brief
comments. Id. at 255. While certain ERISA provisions like §
406(a) may by their plain text impose duties on
nonfiduciaries, the Court observed, ―no provision explicitly
requires them to avoid participation (knowing or unknowing)
in a fiduciary‘s breach of fiduciary duty.‖ Id. at 254 & n.4.
By contrast, the Court noted, ERISA § 405(a), the cofiduciary
provision, ―does explicitly impose ‗knowing participation‘
liability on cofiduciaries.‖ Id. (emphasis in original) (citing
27
29 U.S.C. § 1105(a)). In effect, the Court‘s dicta hitched
defendant status in a § 502(a)(3) suit to the scope of ERISA‘s
substantive provisions. In so doing, it cast doubt upon the
viability of suits proceeding on the theory that § 502(a)(3)
provides a remedy for a nonfiduciary‘s knowing participation
in a fiduciary‘s breach of a duty imposed by ERISA.
We employed Mertens‘s dicta in Reich v. Compton, a
case concerning a series of questionable transactions
undertaken by an ERISA-governed union pension plan. 57
F.3d at 272. The Secretary of the Department of Labor sued
the fiduciaries of the plan for breach of the duties imposed by
ERISA §§ 404(a), 406(a), and 406(b). The Secretary also
asserted claims against two nonfiduciaries, alleging that they
had knowingly participated in the fiduciaries‘ violations of
their obligations under ERISA. Compton, 57 F.3d at 273-74.
The Secretary‘s cause of action against the nonfiduciaries
arose under § 502(a)(5). Id. at 281. That provision replicates
the language of § 502(a)(3) in all relevant respects, with the
exception that it extends a cause of action to the Secretary
instead of a participant, beneficiary, or fiduciary of the plan.
Compare 29 U.S.C. § 1132(a)(3), with id. § 1132(a)(5).21
The Secretary advanced two theories in support of his
claims against the nonfiduciaries: ―first, that section
502(a)(5) authorizes him to sue nonfiduciaries who
knowingly participate in breaches of fiduciary duty by
fiduciaries and second, that section 502(a)(5) authorizes him
to sue nonfiduciaries who participate in transactions
prohibited by section 406(a)(1).‖ Compton, 57 F.3d at 281.
Taking the theories in turn, we first rejected the Secretary‘s
argument that § 502(a)(5) permits actions against
nonfiduciaries charged solely with participating in a fiduciary
breach. Id. at 284. Three decisions informed our analysis.
First, because § 502(a)(5) mirrors § 502(a)(3), we relied
heavily on the dicta in Mertens addressing the scope of §
502(a)(3). Id. at 282. We explained that ―the Court
expressed considerable doubt that section 502(a)(3)
authorizes suits against nonfiduciaries who participate in
21
The Supreme Court instructs that the overlapping language
in the two provisions ―should be deemed to have the same
meaning.‖ Mertens, 508 U.S. at 260.
28
fiduciary breaches.‖ Id. To the Secretary‘s contention that
the plain language of § 502(a)(5) embraces a claim against a
nonfiduciary to redress a fiduciary‘s breach of ERISA, we
pointed out that the Courts of Appeals for the First and
Seventh Circuits had already rejected that argument. Id. at
283-84 (citing Reich v. Continental Cas. Co., 33 F.3d 754(7th Cir. 1994); Reich v. Rowe, 20 F.3d 25 (1st Cir. 1994)).
Both Courts of Appeals, we observed, found the Mertens
dicta convincing. Id.; see also Continental Cas. Co., 33 F.3d
at 757; Rowe, 20 F.3d at 29-31. We did not undertake an
independent analysis of the statutory language, but rather
rooted our holding in the reasoning of our sister Courts of
Appeals and of the Supreme Court in Mertens. Compton, 57
F.3d at 284.
The Secretary‘s second theory, which narrowly
focused on the alleged breach of § 406(a), fared better.
Section 406(a) disallows certain transactions between
fiduciaries and parties in interest deemed likely to injure plan
participants and beneficiaries. 29 U.S.C. § 1106(a); Harris
Trust, 530 U.S. at 241-42. We agreed with the Secretary 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‖ and may be subject to suit under § 502(a)(5).
Compton, 57 F.3d at 287. While acknowledging that §
406(a)(1) on its face imposes a duty only on fiduciaries, we
nevertheless credited the Supreme Court‘s suggestion in
Mertens that the statute also imposes obligations on
nonfiduciary ―part[ies] in interest‖ who participate in
proscribed transactions. Id. at 285 (citing Mertens, 508 U.S.
at 253-54 & n.4). Put another way, the ―party in interest‖
language in § 406(a)(1), rather than any language in §
502(a)(5), supplied the textual hook for our conclusion that
the nonfiduciaries were amenable to suit. See id. Our
analysis comported with that of the Courts of Appeals for the
First and Ninth Circuits, which likewise construed § 406(a)(1)
to apply to nonfiduciaries. Id. at 285-86 (citing Rowe, 20
F.3d at 31 & n.7; Nieto v. Ecker, 845 F.2d 868, 873-74 (9th
Cir. 1988)).
Five years later, the Supreme Court decided Harris
Trust. The question in that case was whether § 502(a)(3)
authorizes a participant, beneficiary, or fiduciary of an
29
ERISA plan to seek equitable relief from a nonfiduciary party
in interest to a transaction prohibited by § 406(a)(1). Harris
Trust, 530 U.S. at 241. That is, the Court in Harris Trust
considered the second question addressed in Compton, with
the inconsequential distinction that the suit arose under §
502(a)(3) rather than § 502(a)(5). Like this Court in
Compton, the Supreme Court answered that question in the
affirmative. Id. Notable for our purposes here was the
reasoning employed by the unanimous Court, which diverged
from Compton in important respects.
The case arose when the trustee of a pension plan
alleged that another fiduciary purchased worthless interests in
motel properties from a party in interest. Id. at 242-43. If
proven, the transaction would have been a violation of §
406(a). The nonfiduciary seller of the interest in the motel
properties persuaded the Court of Appeals for the Seventh
Circuit that § 502(a)(3) does not authorize a plan fiduciary to
seek equitable relief from a party in interest to a transaction
prohibited by § 406(a). Id. at 244.
The Supreme Court began its analysis with the
observation that, by its terms, § 406(a) ―imposes a duty only
on the fiduciary that causes the plan to engage in the
transaction.‖ Id. at 245 (citing 29 U.S.C. § 1106(a)(1)). This
construction undercut one basis for our extension in Compton
of § 502(a)(5) liability to a party in interest to a § 406(a)
transaction: the Supreme Court implicitly rejected its
suggestion in Mertens that the text of § 406(a) anticipates
liability for nonfiduciary parties in interest to § 406(a)
transactions.
Moving beyond § 406(a), the Court next explained that
§ 502(a)(3), standing alone, imposes certain duties. Id.
Liability under § 502(a)(3), the Court emphasized, ―does not
depend on whether ERISA‘s substantive provisions impose a
specific duty on the party being sued.‖ Id. Rather,
―defendant status under § 502(a)(3) may arise from duties
imposed by § 502(a)(3) itself.‖ Id. at 247. Unlike other
ERISA rights of action, § 502(a)(3) ―admits of no limit . . . on
the universe of possible defendants.‖ Id. at 246. Its focus ―is
on redressing the ‗act or practice which violates any
provision of [ERISA Title I].‘‖ Id. (quoting 29 U.S.C. §
301132(a)(3)) (emphasis in original). By carefully delineating
three classes of plaintiffs but leaving defendant status open-
ended, the Court explained, § 502(a)(3) signals Congress‘s
intent not to delimit categories of defendants subject to §
502(a)(3) liability. Id. at 247. Instructive, too, was the
common law of trusts, which had long countenanced suits for
restitution or disgorgement against third parties who
knowingly took trust property from a trustee in breach of the
trustee‘s fiduciary duty. Id. at 250.
Confirming the Court‘s interpretation was ERISA §
502(l), which requires the Secretary of Labor to ―assess a
civil penalty against an ‗other person‘ who ‗knowing[ly]
participat[es] in‘ ‗ any . . . violation of . . . part 4 [of ERISA
Title I] . . . by a fiduciary.‖ Id. at 248 (paraphrasing 29
U.S.C. § 1132(l)(1)-(2)) (alteration in original).22 The civil
22
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 of this subtitle by a
fiduciary, or
(B) any knowing participation in such a breach
or violation by any other person,
the Secretary shall assess a civil penalty against such
fiduciary or other person in an amount equal to 20 percent of
the applicable recovery amount.
(2) For purposes of paragraph (1), the term ―applicable
recovery amount‖ means any amount which is
recovered from a fiduciary or other person with respect
to a breach or violation described in paragraph (1)—
(A) pursuant to any settlement agreement with
the Secretary, or
(B) ordered by a court to be paid by such
fiduciary or other person to a plan or its
participants and beneficiaries in a judicial
31
penalties recoverable under § 502(l) are defined by reference
to amounts recoverable by the Secretary in § 502(a)(5)
actions. Id. That reference led the Court to conclude that §
502(a)(5) must authorize suits against any ―other person‖ who
―knowing[ly] participat[es]‖ in a fiduciary‘s violation of her
duties, ―notwithstanding the absence of any ERISA provision
explicitly imposing a duty upon an ‗other person‘ not to
engage in such ‗knowing participation.‘‖ Id. And if the
action was available under § 502(a)(5), it must also be
available under § 502(a)(3). Id. at 248-49. Section
―502(a)(3) (or (a)(5)) liability,‖ the Court concluded, does not
―hinge[] on whether the particular defendant labors under a
duty expressly imposed by the substantive provisions of
ERISA Title I.‖ Id. at 249.
Finally, the Court turned to reconcile this construction
with Mertens. The Court first rejected the implication in
Mertens that an ―other person‖ under § 502(l) might be
limited to cofiduciaries, who are expressly made liable by §
405(a) for knowing participation in another fiduciary‘s breach
of duty. Id. at 249 (citing Mertens, 508 U.S. at 261).
Congress, the Court noted, defined ―person‖ in ERISA
without regard to status as fiduciary, cofiduciary, or party in
interest. Id. (citing 29 U.S.C. § 1002(9)). And, while a
cofiduciary is a type of fiduciary, § 502(l) ―clearly
distinguishes between ‗fiduciary‘ . . . and an ‗other person.‘‖
Id. (citing 29 U.S.C. § 1132(l)(1)(A) and (B)). The Court
dismissed as ―dictum‖ the portions of Mertens discussing §
502(l) and the portion relied on by the courts in Compton,
Rowe, and Continental Casualty Company to cast doubt on
liability of nonfiduciaries under § 502(a)(3). Id. (citing
Mertens, 508 U.S. at 255, 260-61).
Several Courts of Appeals have considered whether
the Court‘s holding in Harris Trust applies only to alleged
violations of § 406(a) or whether it sweeps more broadly.
Without exception, they have concluded that the Harris Trust
proceeding instituted by the Secretary under
subsection (a)(2) or (a)(5) of this section.
29 U.S.C. § 1132(l).
32
reasoning is not tethered to the limitations of § 406(a). See
Longaberger Co. v. Kolt, 586 F.3d 459, 468 n.7 (6th Cir.
2009); Bombardier Aerospace Employee Welfare Benefits
Plan v. Ferrer, Poirot & Wansbrough, 354 F.3d 348, 353-54
(5th Cir. 2003); Carlson v. Principal Fin. Grp., 320 F.3d 301,
308 (2d Cir. 2003); McDannold v. Star Bank, N.A., 261 F.3d
478, 486 (6th Cir. 2001). More to the point, the Courts of
Appeals for the Fifth and Sixth Circuits have stated directly
that nonfiduciaries who are not parties in interest are proper
defendants under § 502(a)(3) as construed by Harris Trust.
Kolt, 586 F.3d at 468 n.7; Bombardier, 354 F.3d at 353-54.
2.
We turn now to consider whether Barrett is amenable
to suit under § 502(a)(3) in view of the Supreme Court‘s
reasoning in Harris Trust. Barrett, we have noted, was found
liable for his knowing participation in transactions forbidden
by § 406(b)(3), which prohibits a ―fiduciary with respect to a
plan‖ from ―receiv[ing] any consideration for his own
personal account from any party dealing with such plan in
connection with a transaction involving the assets of the
plan.‖ 29 U.S.C. § 1106(b)(3). Several matters are not in
dispute. By accepting a salary from Commonwealth (a party
dealing with the plans) in connection with its investment of
plan assets in insurance policies issued by Commonwealth,
the parties agree, Tri-Core (as fiduciary) contravened §
406(b)(3).23 Nor is there a dispute on appeal that Barrett,
23
Barrett does contend that because the plaintiffs selected the
insurance policy for each employee — either a C-group or
MG-5 policy — Tri-Core did not engage with
Commonwealth in a transaction prohibited by § 406(b)(3).
The argument is premised on a single unreported decision of
this Court that involved the relationship between an insurance
company and participants in a different EPIC plan. See
Faulman v. Sec. Mut. Fin. Life Ins. Co., 353 F. App‘x 699
(3d Cir. 2009). That situation is obviously distinct from the
basis of liability in this case: the relationship between a
corporate fiduciary and an insurance company. In any event,
Barrett‘s argument finds no support in the text of § 406(b)(3)
or in controlling precedent. Whether or not the plaintiffs
chose one of the two policies designated by Tri-Core as their
33
acting as a nonfiduciary, had knowledge of all of the
circumstances surrounding Tri-Core‘s receipt of commissions
from Commonwealth and participated in the transactions.
The parties also agree that the plaintiffs have standing to
bring the § 502(a)(3) claim and that their requested remedy is
equitable in nature.
The parties‘ consensus on these issues leaves us to
consider only one narrow legal question: is Barrett, a
nonfiduciary who knowingly participated in a transaction
prohibited by § 406(b)(3), amenable to suit under §
502(a)(3)? We hold that he is. Tri-Core‘s receipt of
compensation from Commonwealth in connection with its
directed purchase of plan assets from Commonwealth was an
act or practice prohibited by ERISA. Operating in concert
with Tri-Core, Barrett actively facilitated that act or practice.
As the Court in Harris Trust explained, § 502(a)(3) provides a
right of action against a transferee of ill-gotten trust assets
who is a knowing participant in an ERISA violation. 530
U.S. at 251. It is of no consequence that Barrett was not a
fiduciary and that his receipt of commissions was not itself a
statutory violation, because liability under § 502(a)(3) ―does
not depend on whether ERISA‘s substantive provisions
impose a specific duty on the party being sued.‖ Id. at 245.
As construed by the Court in Harris Trust, § 502(a)(3)
provides the plaintiffs a cause of action to obtain equitable
relief from Barrett for his knowing participation in Tri-Core‘s
§ 406(b)(3) violation. Id. at 245, 247, 250-51.
Barrett counters that our recent decision in Renfro
undercuts this straightforward application of Harris Trust. In
Renfro, a putative class of participants in a 401(k) plan
brought suit under § 502(a)(3) against Fidelity Management
Trust Company, the manager and administrator of certain
funds in the plan. 671 F.3d at 317-19. They alleged that
Fidelity‘s mismanagement of the plan‘s investment options
amounted to a breach of the fiduciary duties of diligence and
prudence imposed by ERISA § 404(a). Fidelity moved to
plan funding vehicles has no bearing on the propriety of Tri-
Core‘s receipt of compensation from Commonwealth in
connection with its directed purchase of plan assets from
Commonwealth.
34
dismiss on the basis that it was not a fiduciary with respect to
the challenged conduct. Both the District Court and this
Court agreed. Id. at 323. But that did not end the inquiry,
because the plaintiffs contended that even if Fidelity was a
nonfiduciary, it was amenable to suit under § 502(a)(3) for its
knowing participation in the plan fiduciary‘s breach of
fiduciary duty under § 404(a). We disagreed, holding that §
502(a)(3) ―does not authorize suit against ‗nonfiduciaries
charged solely with participating in a fiduciary breach.‘‖ Id.
at 325 (quoting Compton, 57 F.3d at 284). In arriving at that
conclusion, we relied on the Mertens dicta and the portion of
Compton finding no § 502(a)(5) cause of action against
―‗nonfiduciaries charged solely with participating in a
fiduciary breach.‘‖ Id. (quoting Compton, 57 F.3d at 284).
In a brief footnote, we asserted that this reasoning accorded
with Harris Trust. Id. at 325 n.6. We characterized Harris
Trust as consonant with our holding in Compton that §
502(a)(3) ―authorized suits for nonfiduciary participation by
parties in interest to transactions prohibited under ERISA.‖
Id. at 325 n.6. So framed, § 502(a)(3) did not supply a cause
of action against Fidelity because the ―plaintiffs d[id] not
appear to contend the Fidelity entities were parties in interest
to a prohibited transaction.‖ Id.
Barrett urges us to read Renfro as establishing a firm
rule that a nonfiduciary may only be subjected to suit under §
502(a)(3) if she knowingly participates as a party in interest
in a § 406(a) transaction. We do not think this expansive
reading of Renfro is compatible with Harris Trust. As an
initial matter, Renfro was a § 404 breach of fiduciary duty
case, not a § 406 prohibited transaction case, and the
provisions safeguard the rights of plan participants and
beneficiaries in distinct ways. Section 404 codifies the
fiduciary‘s ―general duty of loyalty to the plan‘s
beneficiaries.‖ Harris Trust, 530 U.S. at 241-42. It springs
from the common law of trusts, which likewise charged
fiduciaries with a duty of loyalty. See Pegram v. Herdrich,
530 U.S. 211, 224 (2000) (citing 2A A. Scott & W. Fratcher,
Trusts § 170, p. 311 (4th ed.1987)). Section 406(b)(3), at
issue in this case, is among the prophylactic rules listed in §
406. Section 406(a) ―categorically bar[s] certain transactions
deemed ‗likely to injure the . . . plan.‘‖ Harris Trust, 530
U.S. at 242 (quoting Comm‘r v. Keystone Consol. Indus.,
35
Inc., 508 U.S. 152, 160 (1993)). And § 406(b) categorically
bars certain transactions likely to generate self-dealing, a
practice detrimental to plan participants and beneficiaries.
Compton, 57 F.3d at 287. Both provisions ―appl[y]
regardless of whether the transaction is ‗fair‘ to the plan.‖ Id.
at 288.
The congruity of the prohibited transaction provisions
leaves no logical basis for distinguishing between
nonfiduciaries‘ knowing participation in § 406(b) transactions
and nonfiduciaries‘ knowing participation in § 406(a)
transactions. Accord LeBlanc v. Cahill, 153 F.3d 134, 153
(4th Cir. 1998) (finding no reason why, in a § 502(a)(3)
action, ―allowing equitable relief to be obtained from
nonfiduciary parties in interest who participated in a
transaction prohibited under ERISA § 406(a)(1) would be any
different if the transaction were prohibited under ERISA §
406(b)(2) or § 406(b)(3)‖). Harris Trust, a § 406(a) case, is
the controlling precedent here; this Court‘s reasoning in
Renfro is inapt for § 406(b) transactions. Our narrow holding
in Renfro, applying to ―nonfiduciaries charged solely with
participating in a fiduciary breach,‖ see 671 F.3d at 325, is
limited in scope to nonfiduciaries who knowingly participate
in a § 404 breach of fiduciary duty.
We have still a more fundamental disagreement with
Barrett‘s position. His interpretation of Harris Trust and
Renfro hinges on the ―party in interest‖ language in § 406(a).
That textual hook, the argument goes, justified the Supreme
Court‘s willingness to subject nonfiduciaries who knowingly
participate in fiduciaries‘ violations of ERISA to § 502(a)(3)
suits. Like the Courts of Appeals for the Fifth and Sixth
Circuits, see Kolt, 586 F.3d at 468 n.7; Bombardier, 354 F.3d
at 353-54, we do not read Harris Trust as limited in reach
only to cases involving § 406(a) transactions between a
fiduciary and a party in interest. The Court‘s reasoning in
Harris Trust relied on a textual analysis of § 502(a)(3), its
analogue in § 502(a)(5), and the reference in § 502(l) to §
502(a)(5). Defendant status under § 502(a)(3), the Court
explained, arises from § 502(a)(3) itself, not from the
permutations of the various substantive provisions in ERISA
Title I. Harris Trust, 530 U.S. at 245, 249. That the
nonfiduciary defendant was a ―party in interest‖ was beside
36
the point; under § 502(a)(3), it was an ―other person‖ that
participated in a forbidden ―act or practice‖ and therefore was
amenable to suit. Id. at 245 n.2, 248. Barrett, too, is an
―other person,‖ as defined in § 502(l), who knowingly
participated in a fiduciary‘s breach of a provision of ERISA
Title I. See id. at 248.
Finally, our suggestion in Renfro that Harris Trust
applies only to nonfiduciary parties in interest to § 406(a)
transactions is dicta. And to the extent that Renfro is
inconsistent with the reasoning in Harris Trust, we must
follow the Supreme Court over our own precedent. See
United States v. Tann, 577 F.3d 533, 541-42 (3d Cir. 2009).
We have no occasion today to reconsider whether Renfro
accurately reflects the construction given to § 502(a)(3) in
Harris Trust. It is enough to say that § 406(b) prohibited
transactions are more akin to § 406(a) prohibited transactions
than to § 404 breaches of fiduciary duty. Because that is so,
we follow the Court‘s guidance in Harris Trust in holding that
Barrett was amenable to suit under § 502(a)(3) for his
knowing participation in Tri-Core‘s violation of § 406(b)(3).
C.
Even if Tri-Core‘s receipt of commissions from
Commonwealth ran afoul of § 406(b)(3), Barrett argues in the
alternative, the undisputed reasonableness of its commissions
precludes liability. He points to ERISA § 408(b)(2) and
(c)(2), provisions he reads to exempt reasonable
compensation tainted by self-dealing from the reach of §
406(b)(3). The plaintiffs respond that § 406(b)(3) establishes
a per se prohibition on kickbacks and related behavior,
regardless of the reasonableness of compensation. Finding
the plaintiffs‘ position convincing, the District Court
concluded that § 406(b) enumerates per se violations, the
reasonableness of which is immaterial. We agree.
To determine if § 408(b)(2) or (c)(2) excuse Tri-Core‘s
§ 406(b)(3) violation, we must ―examine first the language of
the governing statute, guided not by ‗a single sentence or
member of a sentence, but look[ing] to the provisions of the
whole law, and to its object and policy.‘‖ John Hancock Mut.
Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 94-95
37
(1993) (quoting Pilot Life, 481 U.S. at 51) (alterations in
original). Section 406(b)(3), as we have noted, provides that
―[a] fiduciary with respect to a plan shall not . . . receive any
consideration for his own personal account from any party
dealing with such plan in connection with a transaction
involving the assets of the plan.‖ 29 U.S.C. § 1106(b)(3).
Section 408(b)(2) provides
The prohibitions provided in section 1106 of
this title shall not apply to any of the following
transactions: . . . (2) Contracting or making
reasonable arrangements with a party in interest
for office space, or legal, accounting, or other
services necessary for the establishment or
operation of the plan, if no more than
reasonable compensation is paid therefor.
Id. § 1108(b)(2). And § 408(c)(2) provides, in relevant part,
Nothing in section 1106 of this title shall be
construed to prohibit any fiduciary from . . . (2)
receiving any reasonable compensation for
services rendered, or for the reimbursement of
expenses properly and actually incurred, in the
performance of his duties with the plan; except
that no person so serving who already receives
full time pay from an employer or an
association of employers, whose employees are
participants in the plan, or from an employee
organization whose members are participants in
such plan shall receive compensation from such
plan, except for reimbursement of expenses
properly and actually incurred[.]
Id. § 1108(c)(2).
We begin with Barrett‘s effort to invoke § 408(b)(2) as
a defense to liability. Section 408(b)(2), by its plain terms,
applies only to ―transactions . . . with a party in interest.‖ Id.
§ 1108(b)(2). ERISA § 406(a) proscribes transactions with
―part[ies] in interest,‖ but § 406(b) does not. It follows that §
408(b)(2) provides an exemption for § 406(a) transactions,
but not for § 406(b) transactions. Accord Patelco Credit
Union v. Sahni, 262 F.3d 897, 910 (9th Cir. 2001); Daniels v.
38
Nat‘l Employee Benefit Servs., Inc., 858 F. Supp. 684, 693
(N.D. Ohio 1994); Gilliam v. Edwards, 492 F. Supp. 1255,
1263-64 (D.N.J. 1980). The Department of Labor, the agency
charged with administration and enforcement of Title I of
ERISA, agrees. It explains that § 408(b)(2) ―exempts from
the prohibitions of section 406(a) of the Act payment by a
plan to a party in interest, including a fiduciary,‖ but ―does
not contain an exemption from acts described in section
406(b)(1) . . . , section 406(b)(2) . . . or section 406(b)(3)[.]‖
29 C.F.R. § 2550.408b–2(a). Barrett‘s liability derives from
his knowing participation in a § 406(b) transaction. Hence, §
408(b)(2) provides him no defense to liability.
The question of whether § 408(c)(2) confers a
―reasonable compensation‖ defense on a § 406(b)(3) violator
requires more discussion. We are concerned here with the
interaction between two statutes, but first consider the
language Congress used in crafting § 406(b)(3). Speaking
unequivocally, § 406(b)(3) commands that fiduciaries ―shall
not‖ receive consideration in connection with a transaction
involving plan assets. 29 U.S.C. § 1106(b)(3). It does not
purport to forbid fiduciaries from extracting only
unreasonable consideration from transactions involving plan
assets. To the contrary, it disallows ―any consideration,‖ no
matter how reasonable or inconsequential. Read most
naturally, § 406(b)(3) is a flat prohibition on a fiduciary‘s
receipt of consideration in connection with a transaction
involving plan assets. We have previously construed §
406(b)(2), another of the stringent self-dealing prohibited
transactions, in the same manner. Section 406(b)(2), we
explained, is a ―blanket prohibition,‖ Compton, 57 F.3d at
287, one that ―creates a per se proscription on the type of
transaction in question,‖ see Cutaiar v. Marshall, 590 F.2d
523, 528 (3d Cir. 1979). Even when a transaction discloses
―no taint of scandal, no hint of self-dealing, no trace of bad
faith‖ and involves ―fair and reasonable‖ terms, § 406(b)(2)
admits of no exceptions. Cutaiar, 590 F.2d at 528.24
24
Construing § 406(b)(2) in Cutaiar v. Marshall, we
acknowledged that under § 408(a), the Secretary of the
Department of Labor may grant an exemption from the
strictures of § 406(b) so long as the exemption is published in
the Federal Register and a public hearing is held on the
39
Section 406(b) differs from its neighbor § 406(a) in
this regard. Section 406(a) prohibits fiduciaries from causing
the plan to engage in certain transactions with parties in
interest, ―[e]xcept as provided in section [408].‖ See 29
U.S.C. § 1106(a). But § 406(b) contains no corresponding
reference to § 408. To avoid rendering the prefatory clause in
§ 406(a) mere surplusage, see Board of Trustees of the Leland
Stanford Junior Univ. v. Roche Molecular Sys., Inc., 131 S.
Ct. 2188, 2196 (2011), we must give meaning to this
discrepancy in the § 406 subsections. The Court of Appeals
for the Ninth Circuit has reasoned that by prefacing § 406(a),
but not § 406(b), with a qualification, Congress tempered §
406(a) transactions, but not § 406(b) transactions, with § 408
exemptions. See Sahni, 262 F.3d at 910. We agree that this
is the most sensible construction of these incongruous
provisions. By expressly limiting liability under § 406(a) by
reference to the exemptions in § 408, then removing the same
limiting principle from § 406(b), Congress cast § 406(b) as
unyielding.25
Barrett urges us to pay no mind to the language of §
406(b), and instead probe only the plain text of § 408(c)(2).
Regardless of the character of the § 406(b) prohibitions, he
contends, § 408(c)(2) insulates Tri-Core from liability so long
as its compensation is reasonable. At first blush, his
construction of § 408(c)(2) has some appeal: the provision
declares, without limitation, that ―nothing‖ in § 406 —
matter. 590 F.2d at 530. Section 408(a)‘s burdensome
procedures, we reasoned, were indicia of Congress‘s ―intent
to create, in [§] 406(b), a blanket prohibition of certain
transactions, no matter how fair, unless the statutory
exemption procedures are followed.‖ Id. We emphasized,
―[E]ach 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.‖ Id.
25
A number of district courts have reached the same
conclusion. See LaScala v. Scrufari, 96 F. Supp. 2d 233, 239-
40 (W.D.N.Y. 2000); Daniels, 858 F. Supp. at 693; Whitfield
v. Tomasso, 682 F. Supp. 1287, 1303-04 (W.D.N.Y. 1988);
Gilliam, 492 F. Supp. at 1263-64; Marshall v. Kelly, 465 F.
Supp. 341, 353-54 (W.D. Okla. 1978).
40
subsection (a) or (b) — can prohibit a fiduciary from
receiving reasonable compensation for servicing the plan. 29
U.S.C. § 1108(c)(2). But Barrett ignores the remainder of §
408(c)(2), which in substance is an exception to that broad
general rule. Under § 408(c)(2), persons receiving full-time
pay from an employer whose employees are plan participants
―shall not receive compensation from such plan.‖ Id. The
exception speaks to a matter left unaddressed by the general
pronouncement — that is, from whom are they prohibited
from receiving reasonable compensation? A fiduciary that
falls under the exception cannot receive compensation ―from
such plan.‖ This language permits an inference that §
408(c)(2) is concerned only with fiduciaries‘ receipt of
compensation from plans, not from other companies in which
the fiduciary invests plan assets.
By focusing on a particular class of entities that may
compensate fiduciaries, the exception may shed light on the
scope of § 408(c)(2)‘s general rule. But it does not do so
unambiguously. Read in conjunction with the exception, the
general rule applies only to reasonable compensation paid to a
fiduciary by a plan. See Lowen, 829 F.2d at 1216 n.4
(―[S]ervices exempted under ERISA Section 408(c)(2) are
services rendered to a plan and paid for by a plan for the
performance of plan duties, not services rendered to
companies in which a plan invests funds that are paid for by
those companies.‖). Read as a standalone requirement, on the
other hand, the general rule exempts a fiduciary from the
strictures of § 406(b) so long as compensation is reasonable.
See Harley v. Minn. Mining & Mfg. Co., 284 F.3d 901, 909
(8th Cir. 2002) (construing § 408(c)(2) to unambiguously
and ―sensibly insulate[] the fiduciary from liability [for a §
406(b) violation] if . . . compensation [is] . . . reasonable‖).
Against the backdrop of these dueling constructions – both
plausible – we conclude that § 408(c)(2) is ambiguous.
Compounding that ambiguity is the unsettled relationship
between § 408(c)(2) and the self-dealing prohibitions of §
406(b) – a relationship informed by Congress‘s omission of
any reference to § 408 in § 406(b).
It is well settled that ―when a statutory provision is
ambiguous, Chevron, [U.S.A., Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837, 842-43 (1984)] dictates that we
41
defer to the agency‘s reasonable construction of that
provision.‖ Cheng v. Att‘y Gen., 623 F.3d 175, 187 (3d Cir.
2010). Because we have concluded above that § 408(c)(2) is
ambiguous, we look to the Department of Labor‘s
construction of the statute. The Department interprets §
408(c)(2) as a provision that ―clarif[ies] what constitutes
reasonable compensation for such services,‖ but not as an
independently operative reasonable-compensation exception.
29 C.F.R. § 2550.408c-2(a). This reading of § 408(c)(2) is a
reasonable construction of the statute insofar as it relates to
the § 406(b) prohibited transactions. The ―crucible of
[Congress‘s] concern [in enacting ERISA] was misuse and
mismanagement of plan assets.‖ Russell, 473 U.S. at 140 n.8.
One facet of plan misuse particularly troubling to Congress
was self-dealing by fiduciaries. N.L.R.B. v. Amax Coal Co.,
453 U.S. 322, 333-34 (1981). Construing § 408(c)(2) to
shield self-dealing fiduciaries with a defense whenever
reasonable sums change hands would undercut Congress‘s
goal of stamping out conflict-of-interest tainted behavior. Cf.
Lowen, 829 F.2d at 1221. This case illustrates the point.
Whether or not Tri-Core‘s compensation was reasonable, the
steady inflow of payments from Commonwealth rewarding
each sale of a C-group policy may have compromised its best
judgment as fiduciary. Skewed judgment of this order ranked
among the principal abuses motivating Congress to include
the § 406(b) provisions in ERISA in the first place. It is
reasonable for the Department of Labor, tasked with
implementing § 408(c)(2) in a manner that effectuates
Congress‘s intent, to interpret it as a clarifying provision.
Deferring, as we do, to the Department of Labor‘s
view that § 408(c)(2) is not an independent reasonable
compensation exemption, we hold that it affords Barrett no
defense to liability for knowingly participating in Tri-Core‘s
§ 406(b)(3) violation.
D.
We turn now to the plaintiffs‘ challenge to the District
Court‘s rejection of their alternative theories of recovery on
their § 502(a)(3) claim against Barrett. The District Court
found that Tri-Core‘s receipt of commissions violated §
406(b)(3), but concluded that Tri-Core did not otherwise
42
breach fiduciary obligations imposed by ERISA §§ 404 and
406(b)(1).26 Had the District Court determined that Tri-Core
violated § 404 or § 406(b)(1) and that Barrett knowingly
participated in Tri-Core‘s conduct, the plaintiffs posit, it
might have ordered full, rather than partial, disgorgement of
Barrett‘s ill-gotten commissions. We will affirm the District
Court‘s rejection of the plaintiffs‘ alternative theories of
recovery.
1.
Section 406(b)(1) prohibits a ―fiduciary with respect to
a plan‖ from ―deal[ing] with the assets of the plan in his own
interest or for his own account.‖ 29 U.S.C. § 1106(b)(1). At
trial, the plaintiffs argued that Tri-Core, acting as a fiduciary,
violated § 406(b)(1) by misappropriating a portion of their
plan contributions as commissions. They understood their
contributions as ―assets of the plan‖ and saw
Commonwealth‘s payment of commissions to Tri-Core from
its general asset account as Tri-Core‘s act of self-dealing.
The District Court rejected the argument, citing two
independent reasons. First, by the time the corporate
plaintiffs‘ contributions reached Commonwealth‘s
commingled general asset account, the court explained, Tri-
Core no longer had discretion and control over those assets,
and therefore was no longer a fiduciary under ERISA §
3(21)(A). Second, the court reasoned, the contributions were
no longer plan assets once they were placed in
Commonwealth‘s general asset account. In the court‘s view,
ERISA § 401(b)(2), the insurer exemption codified at 29
26
The District Court appears to have analyzed the § 406(b)(1)
theory in its general discussion of whether the plaintiffs
established a § 404 violation. But it clearly addressed the
plaintiffs‘ argument that Tri-Core‘s alleged misappropriation
of plan assets as commissions constituted self-dealing. On
appeal, Barrett and the plaintiffs treat this discussion as the
court‘s ruling on the § 406(b)(1) theory. Therefore,
notwithstanding the District Court‘s failure to label its
analysis as falling under the rubric of § 406(b)(1), we will
address it as such here.
43
U.S.C. § 1101(b)(2), shielded the corporate plaintiffs‘
contributions from classification as plan assets.27 Under
either rationale, Tri-Core did not violate § 406(b)(1) (and
Barrett by extension did not knowingly participate in Tri-
Core‘s violation of § 406(b)(1)) because the statute covers
only fiduciaries‘ handling of plan assets.
The plaintiffs maintain on appeal that the second basis
for the court‘s rejection of their § 406(b)(1) theory was error.
That is, they object to the court‘s application of the insurer
exemption to the facts of this case. But they do not challenge
the District Court‘s first holding that Tri-Core lacked
discretionary authority over their assets in Commonwealth‘s
general asset account when Commonwealth arranged for
payment of commissions to Tri-Core. Because that holding
constituted an independent basis for the District Court‘s
decision, the plaintiffs cannot prevail even if we were to
disagree with the applicability of insurer exemption to these
circumstances.
In any event, we agree with the District Court that Tri-
Core lacked control and discretionary authority over the plan
assets in Commonwealth‘s general asset account, and
therefore was no longer a fiduciary. Under ERISA §
3(21)(A), an entity is a fiduciary with respect to a plan if it (i)
―exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any
authority or control respecting management or disposition of
its assets‖ or (ii) ―renders investment advice for a fee or other
compensation . . . or has any authority or responsibility to do
so,‖ or (iii) ―has any discretionary authority or discretionary
responsibility in the administration of such plan.‖ 29 U.S.C.
§ 1002(21)(A). An entity can be a fiduciary with respect to
certain plan activities, but not with respect to others. Renfro,
671 F.3d at 321. Thus, in every case concerning a fiduciary‘s
obligations under ERISA, the threshold question is whether
some person or entity ―was acting as a fiduciary (that is, was
27
ERISA contains no comprehensive definition of ―plan
assets,‖ but gives content to the term through certain
exclusions. John Hancock, 510 U.S. at 89, 95. Section
401(b)(2), the insurer exemption, is one such exclusion.
44
performing a fiduciary function) when taking the action
subject to complaint.‖ Pegram, 530 U.S. at 226.
No record evidence shows that Tri-Core managed the
investment of the plan contributions or otherwise rendered
investment advice once the contributions reached
Commonwealth. True, Tri-Core directed the trustees‘
handling of the contributions. But Tri-Core did not direct
Commonwealth with respect to its handling of the
contributions once they became commingled in its general
asset account. Moreover, as the District Court observed,
there was neither an allegation nor evidence that Tri-Core and
Barrett failed to remit the full value of the corporate
plaintiffs‘ contributions to the trustee. Had Tri-Core siphoned
off a percentage of the contributions as compensation before
transmitting the balance to the trustee, it might then have
exercised discretionary authority over the assets within the
scope of ERISA‘s definition of a plan fiduciary. See 29
U.S.C. § 1002(21)(A). And under those circumstances, the
plaintiffs‘ § 406(b)(1) theory very well might prevail. But
that is not the case before us. Because we agree that Tri-Core
was not a fiduciary with respect to plan assets by the time
Commonwealth paid it commissions, we will affirm the
rejection of the plaintiffs § 406(b)(1) theory.28
28
One might wonder how, under the District Court‘s
rationale, Tri-Core was a fiduciary with respect to the §
406(b)(3) transactions, but not with respect to the § 406(b)(1)
transactions. The answer lies in the wording of the
provisions. The District Court concluded, and Barrett does
not dispute, that Tri-Core acted in a fiduciary capacity when it
received consideration from Commonwealth ―in connection
with a transaction involving assets of the plan,‖ in violation of
§ 406(b)(3). 29 U.S.C. § 1106(b)(3). In connection with the
relevant transaction in the § 406(b)(3) claim — Tri-Core and
Barrett‘s recommendation that the corporate plaintiffs adopt
plans funded with Commonwealth‘s insurance policies —
Tri-Core did exercise discretion and control over what
became plan assets, knowing all the while that it would
receive compensation from Commonwealth for its
recommendation. But by the time Commonwealth generated
the commission — the relevant transaction for the § 406(b)(1)
45
2.
A fiduciary‘s duties of loyalty and prudence under
ERISA § 404 encompass a duty to communicate candidly,
Jordan v. Fed. Express Corp., 116 F.3d 1005, 1012 (3d Cir.
1997), and to not ―‗materially mislead those to whom the
duties of loyalty and prudence are owed,‘‖ In re Unisys Corp.
Retiree Med. Benefit ERISA Litig., 579 F.3d 220, 228 (3d
Cir. 2009) (quoting Adams v. Freedom Forge Corp., 204 F.3d
475, 492 (3d Cir. 2000)). The plaintiffs argued at trial that
Tri-Core infringed these duties in several respects. On
appeal, they only seriously dispute the District Court‘s
rejection of their theory that the Department of Labor‘s
Prohibited Transaction Exemption 84-24 (―PTE 84-24‖)29
supplements the § 404 duties and that Tri-Core failed to
comply with PTE 84-24. Like the District Court, we think the
plaintiffs‘ reliance on PTE 84-24 is misplaced. PTE 84-24,
much like ERISA § 408, provides conditional exemptions
from § 406 prohibited transaction restrictions. It does not
create independent affirmative duties. In attempting to
shoehorn PTE 84-24 into the substantive duties imposed by §
404, the plaintiffs misconstrue the narrow function of the
exemption. Accordingly, we will affirm the District Court‘s
rejection of the plaintiffs‘ § 404 theory of recovery.
E.
The plaintiffs next object to the District Court‘s post-
trial ruling that ERISA‘s statute of limitations barred the
claims asserted by the Universal Mailing and Alloy Cast
plaintiffs against Barrett. The court determined that, in 1990,
the principals of those corporations signed a disclosure form
attached to the Adoption Agreement that notified them of Tri-
Core‘s commissions from Commonwealth. The form
provided:
theory — Tri-Core no longer exercised discretion over the
plan assets.
29
49 Fed. Reg. 13208 (1984), as amended by 71 Fed. Reg.
5887 (2006).
46
The Insurer, as defined in the Plan document, is
an Insurance Company(ies) selected by Tri Core
to provide various Life Insurance Contracts. Tri
Core will receive a commission on the purchase
of Life Insurance Contracts. The Insurer is not
in any way related to Tri Core.
App. 3841 (example of disclosure form); 3844 (Michael
Maroney‘s signature); 3858 (Kenneth Fisher‘s signature).30
That disclosure, the District Court held, gave the Universal
Mailing and Alloy Cast plaintiffs actual knowledge of Tri-
Core‘s § 406(b)(3) breach and started the statute of
limitations clock on any claim to redress the violation.
ERISA‘s statute of limitations provides, in relevant
part:
No action may be commenced . . . with respect
to a fiduciary‘s breach of any responsibility,
duty, or obligation under this part . . . after the
earlier of
(1) six years after (A) the date of the last action
which constituted a part of the breach or
violation, or (B) in the case of an omission the
latest date on which the fiduciary could have
cured the breach or violation, or
(2) three years after the earliest date on which
the plaintiff had actual knowledge of the breach
or violation.
29 U.S.C. § 1113. This provision ―offers a choice of periods,
depending on ‗whether the plaintiff has actual knowledge of
the breach.‘‖ Cetel v. Kirwan Fin. Grp., Inc., 460 F.3d 494,
511 (3d Cir. 2006) (quoting Kurz v. Phila. Elec. Co., 96 F.3d
1544, 1551 (3d Cir. 1996)). ―[A]ctual knowledge of a breach
or violation requires that a plaintiff have actual knowledge of
all material facts necessary to understand that some claim
exists.‖ Gluck v. Unisys Corp., 960 F.2d 1168, 1177 (3d Cir.
30
The parties did not locate similar forms from the Finderne
and Lima Plastics plaintiffs.
47
1992) (punctuation omitted). ―[W]here a claim is for breach
of fiduciary duty, to be charged with actual knowledge
‗requires knowledge of all relevant facts at least sufficient to
give the plaintiff knowledge that a fiduciary duty has been
breached or ERISA provision violated.‘‖ Cetel, 460 F.3d at
511 (quoting Gluck, 960 F.2d at 1178).
The Universal Mailing and Alloy Cast plaintiffs
contend that they did not have ―actual knowledge‖ of Tri-
Core‘s breach in 1990 because they did not know at that time
that Tri-Core was a fiduciary. This argument is meritless. In
the very same disclosure form that alerted the Universal
Mailing and Alloy Cast plaintiffs to Tri-Core‘s commission,
they delegated to Tri-Core responsibility for administration of
their plans. See App. 3841 (―The Plan Administrator has
delegated his duties under the Trust to Tri Core. . . . Tri Core
has agreed to serve as the Plan Administrator‘s delegatee.‖).
Having ceded to Tri-Core discretionary authority to manage
and administer plan assets, they plainly were aware that Tri-
Core was a fiduciary within the meaning of ERISA § 3(21).
The District Court‘s finding of actual knowledge
nevertheless was clearly erroneous for a different reason.
Barrett‘s liability under § 502(a)(3) was premised on his
knowing participation in Tri-Core‘s receipt of commissions.
The disclosure form gave the Universal Mailing and Alloy
Cast plaintiffs actual knowledge in 1990 of all facts necessary
to understand that an ERISA claim could be lodged against
Tri-Core. What matters here is whether they had actual
knowledge of all material facts necessary to appreciate that a
claim against Barrett existed. The District Court did not
consider when the Universal Mailing and Alloy Cast
plaintiffs acquired actual knowledge that Barrett participated,
knowingly, in Tri-Core‘s receipt of compensation from
Commonwealth. Absent any consideration of those facts, the
District Court clearly erred in finding that, by 1990, plaintiffs
had actual knowledge of all facts necessary to establish a §
502(a)(3) claim against Barrett. Accordingly, we will vacate
the District Court‘s partial grant of Barrett‘s motion to amend
the judgment on the Universal Mailing and Alloy Cast
plaintiffs‘ ERISA claims and remand for consideration of
when they acquired actual knowledge of Barrett‘s knowing
participation in Tri-Core‘s breach of § 406(b)(3).
48
F.
Finally, both parties dispute the District Court‘s
rulings on remedies. The plaintiffs contend that the District
Court erred in (1) awarding restitution of only half of
Barrett‘s commissions; (2) imposing a prejudgment interest
rate commensurate with the interest rate set forth in 28 U.S.C.
§ 1961; and (3) declining to award attorneys‘ fees and costs.
Barrett‘s cross appeal contends that the District Court erred in
awarding any prejudgment interest.
1.
To remedy Barrett‘s violation of § 502(a)(3), the
District Court awarded the plaintiffs restitution of half of the
commissions Barrett received in connection with his sale of
C-group policies. The court reached this conclusion by
considering the nature of Barrett‘s liability. Barrett‘s receipt
of commissions from Commonwealth (by way of Tri-Core)
was not itself a violation of § 406(b)(3), but rather derived
from his knowing participation in Tri-Core‘s § 406(b)(3)
violation. In addition, Barrett passed along 50% of his
commissions to others with whom he worked. For these
reasons, the District Court deemed it most equitable to order
Barrett to disgorge some, but not all, of the compensation he
received for his sale and management of the plaintiffs‘ plans.
The plaintiffs contend that the District Court should have
awarded full disgorgement of Barrett‘s commissions because
the common law authorized recovery of all profits obtained
by wrongful conduct. Barrett responds that partial
disgorgement was an appropriate equitable remedy under §
502(a)(3) because he was entitled to some compensation for
the services he rendered.31
―[A]ppropriate equitable relief‖ under § 502(a)(3), the
Supreme Court instructs, ―refer[s] to ‗those categories of
relief that were typically available in equity[.]‘‖ Great-West
Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209-10
(2002) (quoting Mertens, 508 U.S. at 256) (emphasis in
31
Neither party has suggested that the relief fashioned by the
District Court conflicts with the terms of the plans.
49
original); see also CIGNA Corp. v. Amara, 131 S. Ct. 1866,
1878 (2011); Sereboff v. Mid Atlantic Med. Servs., 547 U.S.
356, 361-62 (2006). To determine if a form of relief was
typically available in equity we consult well-known treatises
and the Restatements. Great-West, 534 U.S. at 217. Those
sources help decipher whether, ―[i]n the days of the divided
bench,‖ a remedy was equitable in nature, in which case it
may be redressed by a § 502(a)(3) action, or legal in nature,
in which case it may not. Id. at 212.
It is undisputed that restitution of ill-gotten
commissions is an equitable remedy. The Restatement of
Restitution provides, ―where a fiduciary in violation of his
duty to the beneficiary receives or retains a bonus or
commission or other profit, he holds what he receives upon a
constructive trust for the beneficiary.‖ Restatement of
Restitution § 197, at 808 (1937). This rule applies even when
the fiduciary‘s disloyal enrichment causes the beneficiary no
harm. Id. § 197, at 809-10, cmt. c. ―The rule . . . is not based
on harm done to the beneficiary in the particular case, but
rests upon a broad principle of preventing a conflict of
opposing interests in the minds of fiduciaries, whose duty it is
to act solely for the benefit of their beneficiaries.‖ Id. The
Restatement of Trusts is in accord: when a fiduciary receives
a commission from an insurance company in exchange for
purchasing insurance policies as trust assets, ―he is
accountable for the commission.‖ Restatement (Second) of
Trusts § 170, at 370-71, cmt. o (1959).
These authorities instruct that had Tri-Core, as
fiduciary, remained in the suit as a defendant, its commissions
acquired from Commonwealth in breach of § 406(b)(3) would
be subject to a constructive trust for the plaintiffs, who would
be entitled to restitution of the payments. See Harris Trust,
530 U.S. at 250 (―The trustee or beneficiaries may . . .
maintain an action for restitution of the property (if not
already disposed of) or disgorgement of proceeds (if already
disposed of), and disgorgement of the third person‘s profits
derived therefrom.‖). But what of Barrett, a third party who
accepted what he knew to be commissions, obtained in breach
of § 406(a)(3)? Here again, the Restatement of Restitution is
instructive:
50
Where property is held by one person upon a
constructive trust for another, and the former
transfers the property to a third person who is
not a bona fide purchaser, the interest of the
beneficiary is not cut off . . . . In such a case he
can maintain a suit in equity to recover the
property from the third person, at least if his
remedies at law are not adequate.
Restatement of Restitution § 160, at 647, cmt. g; see also id. §
201, at 813-14. The plaintiffs‘ interest in the constructive
trust placed over Tri-Core‘s commissions, the Restatement
suggests, is not diminished because Tri-Core transferred a
portion of its commissions to Barrett. On this understanding,
Barrett should be held accountable for the commissions he
knowingly received by way of Tri-Core‘s fiduciary breach.
Cf. Skretvedt, 372 F.3d at 213-14 (analyzing the constructive
trust remedy and concluding that, in a case involving unpaid
benefits, ―Dobbs, Palmer, and the Restatement all make clear
that the constructive trust remedy typically would allow [the
beneficiary], in equity, to force [the plan administrator] to
disgorge the gain it received on his withheld benefits under a
restitutionary theory‖).
We now reach the nub of the controversy: did the
District Court have discretion to halve the commissions
recoverable from Barrett? ERISA § 502(a)(3) authorizes
suits for ―appropriate equitable relief.‖ 29 U.S.C. §
1132(a)(3) (emphasis added). Our Court recently construed
the term ―appropriate‖ to confer discretion on district courts,
sitting as courts of equity, to limit equitable relief by
doctrines and defenses traditionally available at equity. US
Airways, Inc. v. McCutchen, 663 F.3d 671, 676 (3d Cir.
2011), cert. granted, 80 U.S.L.W. 3638 (U.S. Jun. 25, 2012)
(No. 11-1285). It is a bedrock principle of equity that courts
possess discretion to limit equitable relief. See, e.g., 1 Dan B.
Dobbs, Law of Remedies § 2.4(1), at 91-92 (2d ed. 1993).
Equitable discretion enables a court to shape relief ―to fit its
view of the balance of the equities and hardships,‖ id. § 2.4(1)
at 92, and to fashion relief tailored to the unique
circumstances of a case. See Brown v. Plata, 131 S. Ct. 1910,
1944 (2011) (―Once invoked, the scope of a district court‘s
equitable powers . . . is broad, for breadth and flexibility are
51
inherent in equitable remedies.‖); Holland v. Florida, 130 S.
Ct. 2549, 2563 (2010) (―[W]e have . . . made clear that often
the ‗exercise of a court‘s equity powers . . . must be made on
a case-by-case basis.‘‖ (quoting Baggett v. Bullitt, 377 U.S.
360, 375 (1964))).
In limiting the plaintiffs‘ recovery to partial
disgorgement of Barrett‘s ill-gotten commissions, the District
Court did precisely what equity enables it to do: it exercised
its discretion not to award complete relief after balancing the
equities and hardships. It was within the District Court‘s
discretion under § 502(a)(3) to consider the role that Barrett
played as a nonfiduciary with respect to the plaintiffs‘ plans
and the amount of commissions he actually retained. See
Dobbs, Law of Remedies § 2.4(5), at 109-10; see also Amara,
131 S. Ct. at 1880 (referring to a district court‘s ―discretion
under § 502(a)(3)‖). In light of Barrett‘s comparatively
minor role in the underlying ERISA violation and his
redistribution of a portion of the commissions to co-brokers,
the District Court did not abuse its discretion by ordering
Barrett to disgorge some, but not all, of his compensation for
marketing and servicing the plaintiffs‘ plans. Accordingly,
we will affirm the award of restitution.
2.
The District Court also awarded the plaintiffs
prejudgment interest on the disgorged commissions. Section
502(a)(3) authorizes a court to award prejudgment interest as
a form of appropriate equitable relief. Fotta v. Trs. of the
United Mine Workers of Am., 319 F.3d 612, 616 (3d Cir.
2003). Both parties object to the prejudgment interest rate
applied by the District Court. We review such challenges for
abuse of discretion. Holmes v. Pension Plan of Bethlehem
Steel Corp., 213 F.3d 124, 133 (3d Cir. 2000).
Prejudgment interest exists to make plaintiffs whole
and to preclude defendants from garnering unjust enrichment.
Id. at 132. Recognizing these goals, the District Court first
explained that prejudgment interest was ―not necessarily
required‖ to make the plaintiffs whole. App. 71. This was so
because, in the court‘s view, the plaintiffs received all
benefits to which they were entitled under their plans and
52
because Tri-Core‘s commissions came from
Commonwealth‘s general asset fund, not directly from the
plans. On the other hand, the District Court reasoned, some
prejudgment interest was necessary to prevent Barrett from
unjustly retaining compensation from transactions that plainly
conflicted with the plans‘ interests. Balancing these equities,
the District Court imposed a modest prejudgment interest rate
of 3.91%. It borrowed this rate from the post-judgment
interest rate set by 28 U.S.C. § 1961 and applied the average
rate from the time the plaintiffs established the plans to the
date of the order.
The plaintiffs contend that the District Court should
have awarded prejudgment interest at the rate of return of a
typical retirement account because their money would have
earned interest at that rate had it been invested in a tax-
compliant vehicle. This may be so, but Barrett‘s knowing
participation in Tri-Core‘s receipt of commissions — the
basis for ERISA liability — has little to do with whether the
plaintiffs selected the best investment vehicle for retirement
savings. The plaintiffs offer no argument that calls into
question the District Court‘s conclusion that, because they
received the benefits to which they were entitled under the
plans, prejudgment interest was unnecessary to fully
compensate their injuries.
Barrett contends that because the District Court found
that prejudgment interest was not needed to make the
plaintiffs whole, they should not have been awarded interest
on Barrett‘s commissions. That argument neglects that
prejudgment interest aims to make plaintiffs whole and to
prevent unjust enrichment. Holmes, 213 F.3d at 132.
Alternatively, relying on a denial-of-benefits case, Barrett
argues that because his commissions were reasonable, there
was no unjust enrichment. The argument misapprehends the
nature of the ERISA violation for which he was found liable.
Section 406(b) enumerates per se harms, the commission of
which is itself a wrong, irrespective of the reasonableness of
the ill-gotten profits. The mere fact of Barrett‘s knowing
participation in the § 406(b) violation indicates that, to some
extent, both Barrett and Tri-Core were unjustly enriched by
their self-dealing. For the same reason, Barrett‘s final
argument — that he did not act wrongfully — is baseless.
53
Neither parties‘ objections to the prejudgment interest
rate are persuasive. We have emphasized that, in reviewing a
District Court‘s assignment of prejudgment interest, ―what
matters is . . . whether its balancing of the equities amounted
to an abuse of discretion.‖ Id.; see also Restatement (Second)
of Trusts § 207(1), at 468 (―Where the trustee commits a
breach of trust and thereby incurs a liability for a certain
amount of money with interest thereon, he is chargeable with
interest at the legal rate or such other rate as the court in its
sound discretion may determine[.]‖). The District Court
thoughtfully weighed the interests in making the plaintiffs
whole and in avoiding Barrett‘s unjust enrichment. Its
application of a modest prejudgment interest rate was not an
abuse of discretion.
3.
Finally, the plaintiffs contend that they are entitled to
attorneys‘ fees and costs. ERISA provides that a ―court in its
discretion may allow a reasonable attorney‘s fee and costs of
action to either party.‖ 29 U.S.C. § 1132(g)(1). The Supreme
Court construes this provision to permit a district court to
award fees and costs to any party that has achieved ―‗some
degree of success on the merits.‘‖ Hardt v. Reliance Standard
Life Ins. Co., 130 S. Ct. 2149, 2158 (2010) (quoting
Ruckelshaus v. Sierra Club, 463 U.S. 680, 694 (1983)). Once
satisfied that a party has met that threshold standard, the court
must consider the following policy factors in determining
whether to award fees and costs:
(1) the offending parties‘ culpability or bad
faith; (2) the ability of the offending parties to
satisfy an award of attorneys‘ fees; (3) the
deter[r]ent effect of an award of attorneys‘ fees
against the offending parties; (4) the benefit
conferred on members of the pension plan as a
whole; and (5) the relative merits of the parties‘
position.
Ursic v. Bethlehem Mines, 719 F.2d 670, 673 (3d Cir. 1983).
We review a challenge to a district court‘s allocation of
counsel fees and costs for abuse of discretion. MacPherson v.
54
Employees‘ Pension Plan of Am. Re-Ins. Co., 33 F.3d 253,
256 (3d Cir. 1994).
The District Court considered each of the discretionary
factors before denying the plaintiffs‘ request for fees and
costs. In the court‘s view, Barrett was minimally culpable
when compared with Redfearn, the mastermind behind EPIC,
and Tri-Core, the entity that breached its fiduciary duties. In
addition, the court found, imposition of fees would have
negligible deterrent effect, many of the plaintiffs‘ claims
lacked merit, and the case conferred no benefit on the plans,
for the plans were inoperative by the close of the trial.
Weighing against those considerations, the court reasoned,
was Barrett‘s ability to satisfy a fee award. Because this
factor did not counterbalance the other four, however, the
court declined to award fees and costs under § 1132(g)(1).
The plaintiffs contest the District Court‘s application
of the Ursic factors to the factual record. While they construe
the evidence differently, they fall short of establishing that the
District Court abused its discretion in balancing the factors.
The court thoughtfully considered each factor, and its
characterization of the evidence is well founded in the record.
We will affirm its denial of attorneys‘ fees and costs.
V.
The plaintiffs mount a number of challenges to rulings
made by the District Court with respect to the civil RICO and
common law breach of fiduciary duty claims. The jury
returned a verdict in favor of Barrett on the former and the
plaintiffs on the latter. For the reasons that follow, we will
vacate the verdict on the RICO claim and remand for retrial.
We will affirm in all other respects.
A.
The plaintiffs‘ principal objection to the District
Court‘s rulings in the jury trial involves the jury charge on the
civil RICO claim against Barrett. After the parties rested, the
court determined that it would instruct the jury not to consider
evidence concerning Barrett‘s receipt of commissions in its
assessment of the RICO claim. App. 7707-08; 7769. We
55
review the propriety of this instruction for abuse of discretion.
United States v. Dobson, 419 F.3d 231, 236 (3d Cir. 2005);
Livingstone v. N. Belle Vernon Borough, 91 F.3d 515, 524
(3d Cir. 1996).
The RICO statute provides a civil cause of action to
―[a]ny person injured in his business or property by reason of
violation of section 1962 of this chapter.‖ 18 U.S.C. §
1964(c). Section 1962, which contains RICO‘s criminal
provisions, makes it ―unlawful for any person employed by or
associated with any enterprise . . . to conduct or participate,
directly or indirectly, in the conduct of such enterprise‘s
affairs through a pattern of racketeering activity or collection
of unlawful debt.‖ 18 U.S.C. § 1962(c). The Supreme Court
has distilled the provision into four components: ―(1) conduct
(2) of an enterprise (3) through a pattern (4) of racketeering
activity.‖ Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496
(1985).32
―Racketeering‖ may include mail or wire fraud under
18 U.S.C. §§ 1341 and 1343. See 18 U.S.C. § 1961(1). The
plaintiffs based their RICO claim on these predicate offenses.
The elements of mail and wire fraud are (1) a scheme or
artifice to defraud for the purpose of obtaining money or
property, (2) participation by the defendant with specific
intent to defraud, and (3) use of the mails or wire
transmissions in furtherance of the scheme. United States v.
Riley, 621 F.3d 312, 329 (3d Cir. 2010); United States v.
Yusuf, 536 F.3d 178, 187-88 & n.14 (3d Cir. 2008). Thus,
the plaintiffs maintained that Barrett was associated with Tri-
Core, an enterprise, and participated in its pattern of
committing mail and wire fraud through a specific scheme to
defraud.
The plaintiffs‘ theories as to what constituted Tri-
Core‘s ―scheme to defraud‖ had a chameleonic quality
throughout the proceedings. By the time of trial, they had
32
The complaint initially asserted five RICO claims alleging
separate theories of enterprise. By the time of trial, the claims
were narrowed to the single theory that Tri-Core operated as
an enterprise within the meaning of RICO. Barrett does not
challenge this characterization of Tri-Core on appeal.
56
settled on four general formulations of the alleged scheme:
(1) Barrett and Tri-Core misled the plaintiffs into
participating in EPIC in order to generate grossly excessive
compensation for themselves; (2) Tri-Core and Barrett misled
them into participating in EPIC by concealing the
commissions they would receive; (3) Tri-Core and Barrett
misled them into participating in EPIC by misrepresenting the
tax benefits and drawbacks of the plan; and (4) Tri-Core and
Barrett misled them into participating in EPIC by
misrepresenting the existence of a reserve fund and the
accessibility of conversion credits. The plaintiffs encouraged
the District Court to charge the jury that it could find any one
of the alleged schemes constituted a scheme to defraud.
Before charging the jury, however, the District Court
announced that it would limit the jury‘s consideration of both
theories involving Barrett‘s receipt of commissions. That is,
it would not permit the jury to find a scheme to defraud based
on the plaintiffs‘ first or second theory. Accordingly, the
District Court instructed the jury:
You should know that I will be deciding the
issues plaintiffs have raised regarding the
defendants‘ commissions. You‘ve heard a lot
of questions about how much and when and so
forth and so on. All right. Those issues you
will not be deciding one way or another. So
you should disregard all testimony regarding
the commissions received by the defendant.
You will concentrate on the other issues raised
by the plaintiffs.
App. 7769. In place of the commissions theories, the District
Court instructed, the jury could rely only on the following to
determine whether the plaintiffs established a scheme to
defraud:
The plaintiffs allege that Barrett committed the
following racketeering acts; that defendant
Barrett used the mails to further a fraudulent
scheme or artifice to sell insurance through
misrepresentations which involved preparing
promotional materials that contain[ed]
57
affirmative misrepresentations, and omitted to
disclose material information, the sending of
money through the mails and the distributions
of money in the form of contributions and
otherwise to defraud plaintiffs and others
regarding the tax benefits of an employee
welfare benefit plan.
App. 7775-76. The plaintiffs objected and argued that by
paring down the instruction and taking from the jury the
question of whether excessive or concealed commissions
amounted to a scheme to defraud, the District Court
―eviscerated‖ their RICO claim. Reply Br. 24.33
We begin by considering the plaintiffs‘ objection to
the excision of the excessive compensation theory from the
jury charge. The District Court did not instruct the jury to
decide if Barrett and Tri-Core extracted excessive
commissions because it believed the plaintiffs presented no
evidence that Tri-Core and Barrett‘s commissions were
excessive by industry standards. The court reasoned that ―the
amount of the commissions in this case . . . cannot be
characterized,‖ and the plaintiffs‘ failure to adduce any such
evidence left nothing for the jury to consider. App. 7707-08.
On appeal, the plaintiffs protest that there was
―overwhelming‖ evidence that the commissions were
excessive. Reply Br. 21. But they fail to identify a single
item of evidence from which a juror could conclude that Tri-
Core and Barrett misrepresented information in order to
generate unreasonably high compensation.34 Nor does our
33
Barrett argues in passing, and without legal citation, that it
was ―necessary to instruct the jury to disregard commissions
evidence since the district court would be considering that in
connection with the ERISA claim.‖ Barrett Br. 25. We see
no reason, however, why the plaintiffs cannot recover under
both ERISA and RICO for harms derived from Tri-Core and
Barrett‘s receipt of commissions from Commonwealth. It
bears repeating that ERISA § 502(a)(3) allows for only
equitable relief. The civil RICO statute (18 U.S.C. §
1964(c)), on the other hand, authorizes treble damages.
34
The plaintiffs‘ only argument in this regard is: ―Barrett‘s
commissions were clearly excessive based on the facts that
58
review of the record reveal a basis on which a jury could find
Tri-Core and Barrett‘s compensation disproportionately high
compared to relevant industry standards. In light of this
failure of proof, the District Court did not abuse its discretion
in refusing to instruct the jury to consider whether Barrett
generated excessive commissions as part of a scheme to
defraud.
The District Court‘s excision of the concealed
compensation theory from the jury charge presents a more
difficult issue. We have not located any explanation in the
record for the court‘s decision not to permit the jury to
consider the theory. Nor has Barrett pointed us to any basis
for the decision. Concealment of material facts in order to
obtain money through such concealment, the plaintiffs
correctly argue, may constitute fraud under 18 U.S.C. §§
1341 and 1343. United States v. Bryant, 655 F.3d 232, 249
(3d Cir. 2011). Indeed, we have explained that the mail fraud
statute ―‗has been expansively construed to prohibit all
schemes to defraud by any means of misrepresentation that in
some way involve the use of the postal system.‘‖ United
States v. Olatunji, 872 F.2d 1161, 1166 (3d Cir. 1989)
(quoting United States v. Boffa, 688 F.2d 919, 925 (3d Cir.
1982)). There was conflicting evidence at trial about whether
Tri-Core and Barrett made sufficient disclosures to the
plaintiffs about the source and quantity of their compensation.
And there was an adequate evidentiary basis on which a jury
could find that Tri-Core and Barrett were not truthful about
their commissions. Under the circumstances, it was an abuse
of discretion for the District Court to refuse to instruct the
jury that this evidence could constitute a scheme to defraud
under the mail and wire fraud statutes.35
they were undisclosed; that they were significantly greater
than the amounts that the Plaintiffs anticipated Barrett would
receive; and that they were disproportionate to not only the
amount of time that Barrett devoted to the Plaintiffs but also
to the value of his services.‖ Reply Br. 22. These facts have
nothing to do with whether they were excessive by industry
standards.
35
The plaintiffs also argued to the District Court that PTE 84-
24 imposed on Barrett a separate duty to disclose information
to them about his commissions. App. 7682. The District
59
The District Court‘s refusal to charge the jury on the
concealed commissions theory was not harmless error. See
28 U.S.C. § 2111 (requiring reviewing courts to issue
judgment ―without regard to errors or defects which do not
affect the substantial rights of parties‖). In instructing the
jury to disregard the mountain of evidence pertaining to Tri-
Core and Barrett‘s commissions, the court withdrew a large
swath of the case from the jurors‘ deliberations. We question
whether any jury could separate the commissions testimony
from the rest of the case. Testimony concerning the
plaintiffs‘ knowledge of Barrett and Tri-Core‘s commissions
was intertwined with testimony concerning the scheme in
general. We cannot know whether the instruction to ignore
testimony on commissions infected the jury‘s consideration of
the plaintiffs‘ other scheme-to-defraud theories. At a
minimum, though, it is not ―highly probable‖ that the
instruction did not affect the plaintiffs‘ substantial rights. See
McQueeney v. Wilmington Trust Co., 779 F.2d 916, 923-27
(3d Cir. 1985). We therefore we will vacate the jury‘s verdict
on the RICO claim and remand for retrial.36
B.
The plaintiffs next challenge the damage award on the
breach of fiduciary duty claim. They objected to the award in
their motion for a new trial, which was denied by the District
Court. We review the denial of a motion for a new trial for
abuse of discretion. Thabault v. Chait, 541 F.3d 512, 532 (3d
Cir. 2008).
The plaintiffs‘ argument is premised on the jury‘s
alleged confusion with respect to the verdict form. The
District Court initially handed the jury a simple verdict form
Court rightly understood PTE 84-24 as supplying an
exemption from liability for prohibited transactions under
ERISA rather than an independent duty to disclose. See App.
7815.
36
Because we have ordered a new trial on the RICO claim,
we need not consider the plaintiffs‘ argument that statements
made by Barrett‘s counsel at summation prejudiced the jury‘s
resolution of the claim.
60
with one line to fill in damages for each group of plaintiffs.
The following day, the court provided the jury with an
optional supplemental verdict form that broke down the
damages for each group of plaintiffs into several line items.
Over the course of its deliberations, the jury asked the court a
question, in writing, about the form. Ultimately, its verdict
sheet listed one damages sum for each cluster of plaintiffs,
not broken into component parts.
The plaintiffs moved for a new trial on the basis that
the verdict form was inconsistent and that the jury awarded
insufficient damages. The District Court denied the motion
on the merits and noted that, in any event, the plaintiffs did
not timely object to the form of the verdict sheet. On appeal,
the plaintiffs contend that because the jury did not fill in the
supplemental verdict form, they are entitled to a new trial.
The argument is not well taken. The jury was under no
obligation to fill out the supplemental form, and the District
Court was correct to point out that the plaintiffs‘ failure to
object timely rendered the argument waived. We conclude
that the District Court did not abuse its discretion in declining
to upset the jury‘s verdict on the breach of fiduciary duty
claim.
C.
The plaintiffs next contend that the District Court
lacked a legal basis for instructing the jury to apportion
liability. New Jersey law permits a tortfeasor to request
apportionment of damages among multiple responsible
parties. N.J. Stat. Ann. § 2A:15-5.2. An apportionment
instruction may be given if the trial court determines, ―as a
matter of law, [that] the jury is capable of apportioning
damages.‖ Campione v. Soden, 695 A.2d 1364, 1375 (N.J.
1997). ―The absence of conclusive evidence concerning
allocation of damages will not preclude apportionment by the
jury[.]‖ Id. Rather, the trial court need only determine
―whether there is any rational basis for the jury to conclude
that the respective fault of each defendant can be
apportioned.‖ Baglini v. Lauletta, 768 A.2d 825, 838 (N.J.
Super. App. Div. 2001). An instruction may be given even if
the other tortfeasors have settled with the plaintiff, are
deceased (like Redfearn), or have declared bankruptcy (like
61
Tri-Core). Young v. Latta, 589 A.2d 1020, 1021 (N.J. 1991).
These permissive standards reflect New Jersey‘s policy of
favoring apportionment among responsible parties. See
Boryszewski ex rel. Boryszewski v. Burke, 882 A.2d 410,
423 (N.J. Super. App. Div. 2005).
Barrett requested that the jury apportion damages
between himself and Tri-Core and Redfearn, both absent
defendants, for the breach of fiduciary duty claim. He had
previously asserted a cross-claim against Tri-Core and
Redfearn for negligence. In Barrett‘s view, a portion of the
plaintiffs‘ harm was attributable to Tri-Core and Redfearn‘s
negligent misrepresentations about EPIC‘s tax consequences.
Over the plaintiffs‘ objection, the District Court gave the
instruction. The jury ultimately divided responsibility evenly
between Barrett and Tri-Core/Redfearn (treated as one
entity), thus halving the damages recoverable from Barrett.
The plaintiffs maintain that neither Tri-Core nor
Redfearn could be found liable for negligently
misrepresenting the tax risks of EPIC. This argument, we
conclude, is meritless. As an initial matter, we find no error
in the District Court‘s legal conclusions. To prove negligent
misrepresentation, a party must establish ―‗[a]n incorrect
statement, negligently made and justifiably relied on, [that]
may be the basis for recovery of damages for economic loss .
. . sustained as a consequence of that reliance.‘‖ Singer v.
Beach Trading Co., 876 A.2d 885, 890-91 (N.J. Super. Ct.
App. Div. 2005) (quoting McClellan v. Feit, 870 A.2d 644,
650 (N.J. Super. Ct. App. Div. 2005)); see also Restatement
(Second) of Torts § 552 (1965). Material omissions, too, can
support liability for negligent misrepresentation if a party has
a duty to disclose. Karu v. Feldman, 574 A.2d 420, 426 (N.J.
1990). The District Court concluded that Tri-Core and
Redfearn, the architects of EPIC, had a duty to disclose
known tax risks by virtue of their special relationship with the
plaintiffs, ascertainable and predictable members of the class
of potential investors in the plan. See People Express
Airlines v. Consol. Rail Corp., 495 A.2d 107, 112 (N.J.
1985). We agree. It was foreseeable that the plaintiffs would
rely on their representations about the integrity of the claimed
tax benefits.
62
We also find no error in the District Court‘s conclusion
that the record disclosed a rational basis upon which a jury
could deem Tri-Core and Redfearn partially responsible for
the plaintiffs‘ loss. Trial testimony supplied a sound
evidentiary predicate for the conclusion that Tri-Core and
Redfearn made affirmative misrepresentations or material
omissions on which the plaintiffs justifiably relied to their
detriment. Tri-Core and Redfearn created the brochures and
marketing materials used by Barrett to promote EPIC,
materials that trumpeted the tax benefits of EPIC plans while
disguising their unsteady grounding in the tax code. All the
while, Tri-Core and Redfearn knew that there was doubt
about the deductibility of the contributions made under the
scheme. The plaintiffs knew that Tri-Core and Redfearn were
the architects of EPIC and reasonably accepted their
representations as made by experts peddling a secure
investment vehicle. As we have explained, New Jersey law
sets a low bar for the quantum of evidence needed to obtain
an instruction on comparative fault. See Boryszewski, 882
A.2d at 418. In light of this standard, the District Court
properly granted Barrett‘s request to apportion damages for
the breach of fiduciary duty claim.
D.
Finally, the plaintiffs contend that the District Court
erred in granting Barrett judgment as a matter of law on their
claim for punitive damages under N.J. Stat. Ann. § 2A:15-5.9
et seq. Our review of an order granting judgment as a matter
of law is plenary. Lightning Lube, Inc. v. Witco Corp., 4
F.3d 1153, 1166 (3d Cir. 1993). The plaintiffs maintain that
the evidence adduced at trial was sufficient to permit the jury
to consider whether Barrett‘s breach of fiduciary duty
warranted punitive damages. We disagree. Trial testimony
did not disclose clear and convincing evidence that Barrett
acted with actual malice or with wanton and willful disregard
of harm in recommending EPIC to the plaintiffs. N.J. Stat.
Ann. § 2A:15-5.12.
VI.
We wish to commend the District Court on its
exemplary handling of this difficult matter. For the reasons
63
discussed, we will affirm its judgments in all respects but
three. We will vacate the District Court‘s partial grant of
summary judgment in favor of Barrett regarding plaintiffs‘
state law claims to the extent that they allege that Barrett
misrepresented the existence of a reserve fund, the
availability of conversion credits, and the nature of his
commissions before adoption of the EPIC plans and remand
for further proceedings consistent with this opinion. We will
vacate the jury‘s verdict on the plaintiffs‘ RICO claim and
remand for retrial consistent with this opinion. And, insofar
as it held the Universal Mailing and Alloy Cast plaintiffs‘
ERISA claims time-barred, we will vacate the District Court‘s
partial grant of Barrett‘s motion to amend the judgment and
remand for further proceedings.
64