Herman v. South Carolina Nat'l Bank

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 97-6058
D. C. Docket No. CV-92-L-2858-NE
CV91-L-1075-NE
CV92-H-1544-NE
ALEXIS HERMAN, Secretary of the
United States Department of Labor,
Plaintiff-Appellant,
versus
SOUTH CAROLINA NATIONAL BANK;
WILLIAM A. FICKLING, JR., et al.,
Defendants-Appellees.
_____________
No. 97-6154
_____________
D.C. Docket No. CV-91-L-1075-NE
CV-92-H-1544-NE
CV-92-L-2858-NE
FRANCES J. KNOP; et al.,
Plaintiffs,
versus
CHARTER MEDICAL CORPORATION, et al.,
Defendants,
SOUTH CAROLINA NATIONAL BANK,
Defendant-Third Party
Plaintiff-Appellee,
versus
ALEXIS HERMAN, Secretary of the
United States Department of Labor, et al.,
Third Party Defendants-
Appellants.
SOUTH CAROLINA NATIONAL BANK,
Plaintiff-Appellee,
WILLIAM A. FICKLING, JR., et al.,
Intervenor-Plaintiffs-
Appellees,
versus
ALEXIS HERMAN, Secretary of the
United States Department of Labor, et al.,
Defendants-Appellants.
________________________
Appeals from the United States District Court
for the Northern District of Alabama
_________________________
(May 15, 1998)
2
Before EDMONDSON and HULL, Circuit Judges, and CLARK, Senior Circuit
Judge.
HULL, Circuit Judge:
These three consolidated cases concern an ERISA trustee’s paying $80 million
from the assets of an employee stock ownership plan to purchase allegedly worthless
stock from a closely held corporation’s owner, his relatives, and related entities.
Claiming ERISA expressly prohibits this stock purchase, the Secretary of Labor
appeals the district court’s grant of summary judgment to the plan’s trustee and the
stock sellers.1 After review, we reverse.
I. FACTUAL BACKGROUND
A. The Stock Purchase
In 1990, South Carolina National Bank (“SCNB”) was the trustee of the
Charter Medical Corporation Employee Stock Ownership Plan (“the Plan”). Trustee
SCNB paid $80 million from Plan assets to William A. Fickling, Jr., his relatives, and
related entities (the “Ficklings”) to purchase their common stock in Charter Medical
Corporation (“Charter”). Mr. Fickling was the President and Chairman of the Board
of Directors at Charter, a closely held corporation. The Secretary contends that the
Ficklings, as “parties in interest” under ERISA § 3(14), and SCNB, as the Plan trustee,
1
Alexis Herman, the current Labor Secretary, has been substituted for
Lynn Martin, the Labor Secretary in 1992 who initially brought this action.
3
violated ERISA § 406 when SCNB paid $80 million in Plan assets, or more than
adequate consideration, to purchase the Ficklings’ essentially worthless Charter stock.
To avoid conflicts of interest and self-dealing, ERISA prohibits stock
transactions between a “party in interest” and a plan trustee. Although employee
stock ownership plans (“ESOPs”) invest in their employers’ securities and generally
are exempt from this prohibition, the exemption applies only if the transaction is for
“adequate consideration.”2 Before addressing further the Secretary’s action against
SCNB and the Ficklings, we review the two other lawsuits about this stock purchase
that became consolidated with the Secretary’s action.
B. Private Litigants’ Lawsuit Against Charter, the Ficklings, and SCNB
In 1991, private litigants brought a class action against Charter, the Ficklings,
SCNB, and others (the “Knop action”).3 The plaintiff class consisted of the Plan’s
2
An employee stock ownership plan is an ERISA plan that invests
primarily in the employer’s stock. 29 U.S.C. § 1107(d)(6)(A). See infra notes 10 and
20 for discussion of this ERISA prohibition and exemption. Charter’s stock was not
publicly traded and had no established market price. The Secretary contends the
parties improperly evaluated the impact of over one and one-half billion dollars in
corporate debt on Charter’s solvency and the value of its stock.
3
The three consolidated lawsuits are: (a) the Secretary’s complaint in
Martin v. South Carolina Nat’l Bank, et al., No. CV-92-2858-NE (N.D. Ala. July 24,
1992) (transferred from M.D. Ga.); (b) SCNB’s third party complaint against the
Secretary in Knop, et al. v. Charter Med. Corp, et al., No. 91-L-1075-NE (N.D. Ala.
May 10, 1991) (third party complaint filed Aug. 18, 1992); and (c) SCNB’s complaint
against the Secretary in South Carolina Nat’l Bank v. Martin, No. 92-H-1544-NE
4
beneficiaries, who alleged violations of ERISA, federal securities laws, and state law
in both this $80 million stock purchase in 1990 and an earlier $375 million stock
purchase in 1988. The Secretary was not a party to the Knop class action.
In March 1992, the Secretary was advised that the private litigants were settling
with all defendants. The Secretary responded that she was conducting her own
investigation of the stock transactions and was not bound by the private litigants’
settlement. The Secretary received the formal settlement documents on April 6, 1992.
By this time, the Secretary’s expert had advised that Charter’s significant debt of one
and one-half billion dollars and the stock valuation errors during the 1990 purchase
made the stock essentially worthless. On April 9, 1992, the Secretary again advised
the Knop parties that the Secretary was continuing her investigation, may bring suit,
and was not bound by the Knop settlement. None of the parties sought to join the
Secretary in the Knop action.
At the Knop fairness hearing on April 30, 1992, the district court approved the
settlement. Charter made a $12.3 million financial contribution to the settlement, but
the Ficklings and SCNB did not contribute any money to the settlement.4
(N.D. Ala. July 7, 1992).
4
SCNB stresses that Charter funded the Knop settlement as part of
Charter’s agreement to indemnify SCNB. The Ficklings also contend that they
contributed financially because: (a) as preferred shareholders they surrendered certain
5
Nonetheless, the private litigants dismissed with prejudice all claims against the
Ficklings and SCNB. Knop counsel informed the district court that the Secretary had
advised the parties that the Department of Labor “had no desire to impede the
proposed settlement but that their silence should not be taken as restricting whatever
they might do in the future.”
C. SCNB’s Lawsuit Against the Secretary
Immediately after the Knop settlement, SCNB filed a new lawsuit against the
Secretary on July 7, 1992, and simultaneously moved in Knop to file a third party
complaint against the Secretary.5 Each case sought a declaration that the Secretary
was in privity with the private Knop plaintiffs and that the Knop settlement precluded
the Secretary from additional relief in any future lawsuit.
D. Secretary’s Lawsuit Against the Ficklings and SCNB
priority rights as part of a bankruptcy plan of reorganization that allowed the Plan to
obtain some value for the allegedly worthless stock; and (b) they consented to less
favorable allocation of common stock. The Secretary disputes this contention and
argues that there is no evidence that these conditions resulted in a benefit to the Plan
or a sacrifice by the Ficklings and that there is some evidence to suggest that the
reverse is true. In any event, given the magnitude of the Plan’s losses, these
contributions were negligible.
5
See supra note 3.
6
On July 24, 1992, the Secretary filed her own action against the Ficklings and
SCNB.6 The Secretary did not sue Charter or any parties contributing monetarily to
the Knop settlement, but sued only the Ficklings and SCNB, who paid nothing. The
Secretary sought to recover from the Ficklings and SCNB $80 million (offset by sums
already recovered), ERISA’s statutory civil penalties, equitable relief for recission and
disgorgement of profits, and injunctive relief.
E. Three Lawsuits Consolidated
In late 1992, the three lawsuits were consolidated because each involved
whether the Secretary was bound by the private Knop settlement. In early 1993, the
Ficklings and SCNB moved for summary judgment. In a June 25, 1993 order, the
district court granted summary judgment for the Ficklings in a single sentence without
analysis, citing only Useden v. Acker, 947 F.2d 1563 (11th Cir. 1991). However, as
discussed infra, Useden supports, not defeats, the Secretary’s claim against the
Ficklings.
In contrast to the Ficklings’ motion, the district court held in abeyance SCNB’s
motion for partial summary judgment and permitted discovery only on the narrow
issue of whether SCNB had breached its fiduciary obligations. The Secretary was
prohibited from conducting discovery on SCNB’s claims of laches, res judicata, and
6
See supra note 3.
7
release and other issues. In 1996, the district court granted SCNB’s 1993 motion for
partial summary judgment, finding that laches, res judicata, and release barred the
Secretary’s claims. The district court did not distinguish between the Secretary’s legal
claims for money damages, equitable claims for disgorgement of profits, or right to
assess ERISA’s civil penalties, but treated all as claims for monetary relief.
Subsequently, the Secretary and SCNB settled her claims for injunctive relief,
making the case final.7 The Secretary then appealed the district court’s grant of
summary judgment for the Ficklings and SCNB on the Secretary’s remaining legal
and equitable claims and right to assess civil penalties.8
II. ERISA § 406 PROHIBITS THIS STOCK TRANSACTION BETWEEN
PLAN AND “PARTIES IN INTEREST”
We first examine the ERISA violation in issue. The Secretary alleges that the
Ficklings are “parties in interest,” as defined under ERISA § 3(14), and that they
violated ERISA § 406 by engaging in a prohibited stock transaction with SCNB.
As alleged by the Secretary, ERISA § 406 does prohibit stock transactions
between an ERISA plan and a “party in interest”, as follows:
7
SCNB agreed not to serve as a trustee for any ERISA plan for three years
or ever again for Charter’s Plan.
8
We review a district court’s grant of summary judgment de novo.
Useden v. Acker, 947 F.2d 1563, 1572 (11th Cir. 1991).
8
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;
...
(D) transfer to, or use by or for the benefit of, a party in interest,
of any assets of the plan;....
29 U.S.C. § 1106(a)(1)(A),(D) (ERISA § 406(a)(1)(A),(D)) (emphasis supplied).
Also, the Ficklings may be considered “parties in interest” under a number of
§ 3(14)’s definitions.9 ERISA § 3(14) defines a “party in interest” to include
fiduciaries, plan employees, service providers, employers whose employees are
covered by ERISA plans, employee organizations whose members are covered by a
plan, and owners of 50% or more of stock in these employers and employee
organizations, or a relative of such an owner. 29 U.S.C. § 1002(14) (ERISA § 3(14)).
A “party in interest” also includes employees, officers, and directors, as well as
9
The district court’s order, dated December 3, 1992, transferring the
Secretary’s action from Georgia to Alabama, made a finding that “Mr. Fickling was
a ‘party in interest’ with respect to the ESOP under ERISA, as were his relatives and
affiliated business entities.” Martin v. South Carolina Bank, et al., No. 92-298-1-
MAC(DF), at 2 (M.D. Ga. Dec. 3, 1993). Subsequently, the district court in Alabama
granted summary judgment to the Ficklings on a different basis, without completed
discovery on, and without reaching, the “party in interest” issue. Thus, our analysis
assumes arguendo that the Ficklings are “parties in interest” as the Secretary alleges.
See also infra note 26.
9
shareholders, partners, and joint venturers owning ten percent or more of entities that
are themselves “parties in interest.” Id.
ERISA prohibits stock transactions between a plan and a “party in interest”
because of the obvious conflicts of interest and the high potential for abuse and injury
to the plan. See 29 U.S.C. § 1106(a)(1)(A), (D) (ERISA § 406(a)(1)(A),(D)). The
Supreme Court noted that in enacting § 406(a) barring transactions between a “party
in interest” and an ERISA plan, “Congress’ goal was to bar categorically a transaction
that was likely to injure the pension plan.” Commissioner v. Keystone Consol. Indus.,
Inc., 508 U.S. 152, 160 (1993). It is clear that a stock transaction for more than
adequate consideration between SCNB, as Plan trustee, and the Ficklings, as “parties
in interest,” violates § 406.10 The parties mainly dispute whether the Secretary can sue
the Ficklings as “parties in interest” for participating in that stock transaction
prohibited by § 406 or only the fiduciary SCNB.
10
Since an ESOP invests mainly in an employer’s securities, ERISA §
408(e) exempts from § 406's prohibited transactions an ESOP’s acquisition of
employer stock if (1) the acquisition is for “adequate consideration,” and (2) no
commission is charged with respect to the acquisition. 29 U.S.C. § 1108(e) (ERISA
§ 408(e)). The Secretary alleges that the § 408(e) exemption does not apply to the
Plan’s stock purchase because the Plan paid more than adequate consideration for the
stock. The issue of whether the consideration was adequate was never resolved in the
district court and is not before this court on appeal. Instead, the parties and the court
have assumed arguendo for this appeal that SCNB paid more than adequate
consideration for the allegedly worthless stock. See infra note 20.
10
III. SECRETARY MAY SUE FICKLINGS FOR EQUITABLE RELIEF
UNDER § 502(a)(5) FOR ACTS VIOLATING § 406
A. Useden Distinguishes Suits Against Non-fiduciaries Under §§ 502(a)(2) and
409 From Suits Against Non-fiduciary “Parties in Interest” Under §§ 502(a)(5) and
406
The district court granted summary judgment to the Ficklings, citing only this
court’s decision in Useden v. Acker, 947 F.2d 1563 (11th Cir. 1991). Useden concerns
breach of fiduciary duties under § 409 and holds that non-fiduciaries cannot be sued
under § 502(a)(2) for breaching fiduciary duties under § 409. However, Useden
supports, not defeats, the Secretary’s claim against the Ficklings as “parties in
interest” under § 406 because Useden goes further and indicates that § 502(a)(5)
authorizes suits for equitable relief against non-fiduciary “parties in interest” whose
acts violate § 406 without restricting the type of party who may be sued. See Useden,
947 F.2d at 1581. Comparisons of § 409 versus § 406 and § 502(a)(2) versus §
502(a)(5), plus review of Useden, readily reveal why the Secretary can sue the
Ficklings here.
We begin with ERISA § 502(a), where Congress outlined who may bring civil
actions and for what relief. A comparison of § 502(a)(2) with § 502(a)(5) follows:
A civil action may be brought –
...
11
(2) by the Secretary, or by a participant, beneficiary or fiduciary
for appropriate relief under section [409];11
...
(5) ...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)(2), (5) (ERISA § 502(a)(2), (5)) (emphasis supplied). Section
502(a)(5) authorizes the Secretary to obtain “appropriate equitable relief” to redress
ERISA violations. While § 502(a)(5) limits the Secretary to only “equitable relief,”
§ 502(a)(5) does not restrict “the types of parties who can be so sued.” Useden, 947
F.2d at 1581. Section 502(a)(5) does not restrict equitable relief to being against only
fiduciaries.
In contrast, the Secretary may sue under § 502(a)(2), but only “for appropriate
relief under section [409].” Section 502(a)(2), in effect, incorporates § 409, and
thereby limits relief to that available under § 409. We thus turn to § 409, which
provides that only fiduciaries “shall be personally liable” for breach of fiduciary
duties, as follows:
Any person who is a fiduciary with respect to a plan who breaches any
of the responsibilities, obligations, or duties imposed upon fiduciaries by
this subchapter shall be personally liable to make good to such plan any
losses to the plan resulting from each such breach, and to restore to such
11
29 U.S.C. § 502(a)(2) refers to appropriate relief under § 1109 of Title
29, the codified version of § 409 of ERISA.
12
plan any profits of such fiduciary which have been made through use of
assets of the plan by the fiduciary, and shall be subject to such other
equitable or remedial relief as the court may deem appropriate, including
removal of such fiduciary.
28 U.S.C. § 1109(a) (ERISA § 409(a)) (emphasis supplied).
The Useden court read the terms of § 409 and § 502(a)(2), referencing § 409,
as limiting relief to fiduciaries for breaches of fiduciary duties. Useden held that the
defendants bank and attorneys, who had advised the former plan fiduciary trustee,
were not liable for breaches of fiduciary duties under §§ 409 and 502(a)(2) because
the bank and attorneys had not acquired fiduciary status in the financial transactions
in issue. Useden, 947 F.2d at 1572-79.
Importantly for this case, Useden went further and pointed out significant
differences between § 409 and § 406 and between § 502(a)(2) and § 502 (a)(5).
Useden first noted the absence of textual treatment of non-fiduciaries in § 409 and §
409's express language limiting personal liability to fiduciaries. Useden then
contrasted that with § 3(14)(B)’s broad definition of “parties in interest with whom
plans are prohibited to enter into certain transactions under section 406(a)” and §
502(a)(5)’s authorization of suit for equitable relief for “any act or practice” violating
ERISA “without restricting the type of parties who may be sued.” Id. at 1581.
Useden summarized these important differences in these ERISA statutes, as follows:
13
In the present case, appellant would have us ignore the obvious
care with which ERISA’s remedial provisions are formulated, instead
requiring us to supplement the statute with a substantive right against a
party that Congress readily could have chosen to reach. Congress clearly
contemplated the involvement of non-fiduciary parties with employee
benefit plans when it drafted provisions of ERISA. For example, ERISA
sections 502(a)(3) and 502(a)(5) authorize suits to enjoin or obtain other
equitable relief for “any act or practice” violating either the statute or the
terms of a plan, without restricting the types of parties who may be so
sued. ERISA section 3(14)(B), moreover, broadly defines the “parties
in interest” with whom plans are prohibited to enter into certain
transactions under section 406(a). Significantly, however, Congress
expressly limited the scope of sections 502(a)(3) and 502(a)(5) to
equitable remedies, and likewise limited section 409(a) to provide a right
of action only against fiduciaries. It is telling that, despite textual
treatment of non-fiduciaries in various other parts of the ERISA scheme,
provisions [§§ 409 and 502(a)(2)] relevant to appellant’s theory contain
no textual support for a claim for monetary damages against non-
fiduciaries. We cannot infer that Congress’s silence is accidental in an
area where Congress has already said so much out loud.
Id. at 1581-82 (citations omitted) (emphasis supplied). Construing first §§ 409 and
502(a)(2), Useden holds only that non-fiduciaries cannot be sued for breach of
fiduciary duties because § 409 contains no references to non-fiduciaries and because
Congress expressly limited liability in §§ 409 and 502(a)(2) to fiduciaries.
In reaching this holding, Useden then contrasts §§ 409 and 502(a)(2) with §§
406 and 502(a)(5) and answers in dicta the very different question posed here
regarding who can be sued for equitable relief under § 502(a)(5) for engaging in stock
transactions prohibited by § 406. In short, who can the Secretary sue for acts that
violate ERISA § 406? Useden directly points to a “party in interest” who participates
14
in a prohibited transaction in violation of § 406 as an example of a non-fiduciary
against whom relief may be sought under § 502(a)(5). Id. at 1581. This is precisely
the Secretary’s claim against the Ficklings in this case.12 In addition to pointing out
ERISA’s textual treatment of “parties in interest” in § 406, Useden goes further and
concludes these “parties in interest” can be sued for equitable relief under § 502(a)(5)
because § 502(a)(5) does not restrict the type of parties who may be sued.
B. Other Circuits Hold Non-fiduciary “Parties in Interest” May Be Sued for
Violating § 406
Similar to Useden’s dicta, other circuit courts have held uniformly that an
ERISA-defined “party in interest,” like the Ficklings, may be sued for equitable relief
under either § 502(a)(5) or § 502(a)(3) when that “party in interest” violates ERISA
by engaging in transactions with fiduciaries prohibited by § 406. See Reich v. Stangl,
73 F.3d 1027 (10th Cir.), cert. denied, 117 S. Ct. 48 (1996) (§ 502(a)(5)); Landwehr
v. Dupree, 72 F.3d 726 (9th Cir. 1995) (§ 502(a)(3)); Reich v. Compton, 57 F.3d 27012
In holding that a non-fiduciary cannot be sued for breach of fiduciary
duties in Reich v. Rowe, 20 F.3d 25 (1st Cir. 1994), the First Circuit also compared §
409 against § 406 and contrasted actions against non-fiduciaries for participation in
a fiduciary’s breach with actions against non-fiduciary “parties in interest” for
participation in prohibited transactions. The First Circuit concluded that “[a]lthough
fiduciary breaches also violate ERISA, non-fiduciaries cannot, by definition, engage
in the act or practice of breaching a fiduciary duty. Non-fiduciaries can, however,
engage in the act or practice of transacting with an ERISA plan.” Id. at 31 n.7.
15
(3d Cir. 1995) (§ 502(a)(5)); Nieto v. Ecker, 845 F.2d 868 (9th Cir. 1988) (§
502(a)(3)); see also Reich v. Rowe, 20 F.3d 25 (1st Cir. 1994) (§ 502(a)(5)). Where
a fiduciary and a “party in interest” directly engage in a transaction that violates § 406,
no circuit has limited relief under § 502(a)(5) to only the fiduciary. Instead, reading
§§ 502(a)(5) and 406 together, these circuits have held that the ERISA “party in
interest” who benefitted from the impermissible transaction with the fiduciary is liable
under ERISA for equitable relief and is required to disgorge ill-gotten assets from the
ERISA plan.
We agree with the panel’s dicta in Useden and other circuits addressing this
same issue, and now hold that under §§ 502(a)(5) and 406 the Secretary may seek
equitable relief from “parties in interest” to transactions prohibited by § 406. As
Useden points out, § 502(a)(5) is aimed at such “act[s] or practice[s] violating
[ERISA]” without restricting the types of parties who may be so sued.” Id. at 1581.
C. Supreme Court’s Mertens
The Ficklings emphasize that § 406 begins, like § 409, with the term
“fiduciary” and that § 406 provides that a fiduciary shall not cause the plan to enter
into prohibited transactions with “parties in interest.” The Ficklings argue that § 406
imposes a duty on only fiduciaries not to cause a plan to enter into transactions with
“parties in interest,” but does not prohibit a “party in interest” from entering into that
16
same transaction with a fiduciary. This argument, however, ignores key differences
in the statutory language of § 406 and § 409, plus the Supreme Court’s recent decision
in Mertens recognizing § 406's prohibition on “parties in interest” engaging in
transactions with an ERISA plan.
First, as to the statutory language, § 409 provides that a fiduciary “shall be
personally liable” for breaches of fiduciary duties. In contrast, § 406 does not address,
much less limit, who shall be personally liable; instead § 406 prescribes the type of
transactions that ERISA prohibits. While § 406 does instruct fiduciaries -- typically
the plan trustee -- not to cause the plan to enter into transactions with “parties in
interest,” § 406 also serves to prohibit transactions between a fiduciary and a “party
in interest.” Even if § 406 imposes an affirmative duty on fiduciaries not to cause the
plan to enter into certain prohibited transactions, this in no sense lessens the fact that
a transaction between a plan and a “party in interest” remains a prohibited transaction
under § 406. See Useden, 947 F.2d at 1581-82; Reich v. Stangl, 73 F.3d 1027, 1030-
31 (10th Cir. 1996); Reich v. Rowe, 20 F.3d 25, 31 n.7 (1st Cir. 1994); Reich v.
Compton, 57 F.3d 270, 285-86 (3d Cir. 1995); Nieto v. Ecker, 845 F.2d 868, 873-74
(9th Cir. 1988).
Second, § 502(a)(2) limits the Secretary to only “appropriate relief under
section [409],” and then § 409 limits personal liability to fiduciaries. In contrast, §
17
502(a)(5), as Useden recognizes, permits the Secretary to obtain equitable relief to
address any act or practice that violates § 406 without restricting who may be sued.
See Useden, 947 F.2d at 1581. As “parties in interest” to a prohibited transaction, the
Ficklings engaged in an act or practice that violates ERISA. Section 502(a)(5) thus
expressly authorizes the Secretary to obtain appropriate equitable relief from the
Ficklings to redress that ERISA violation. While the Ficklings may not be subjected
to legal claims for compensatory damages for joining in a fiduciary’s breach under §
409, they may be liable as “parties in interest” for equitable disgorgement of their
profits received from engaging in a prohibited transaction in violation of § 406.
More importantly, a recent Supreme Court decision supports Useden’s analysis
of § 406. In Mertens v. Hewitt Assocs., 508 U.S. 248, 260-61 (1993), the Supreme
Court acknowledged in dicta that non-fiduciaries may be sued and required under §
502(a)(5) to disgorge illgotten plan assets or profits obtained through participation in
transactions prohibited by § 406. The Supreme Court explained that “the ‘equitable
relief’ awardable under § 502(a)(5) includes restitution of ill-gotten plan assets or
profits....” Mertens, 508 U.S. at 260. The Supreme Court held that non-fiduciaries
may not be liable for the legal remedy of compensatory damages for breach of
fiduciary duties because ERISA contains no provision requiring non-fiduciaries to
avoid participation in a fiduciary’s breach of fiduciary duty.
18
However, the Supreme Court also contrasted the lack of any ERISA provision
regarding a non-fiduciary’s participation in a fiduciary’s breach with other ERISA
provisions, such as § 406 “that can be read as imposing obligations upon
nonfiduciaries....” Id. at 253-54. As an example of a provision that imposes such an
obligation, the Supreme Court cited § 406(a)’s prohibition on “parties in interest”
offering services or engaging in other transactions with the plan. Id. at 254 n.4. The
Supreme Court further stated that professional service providers “must disgorge assets
and profits obtained through participation as parties-in-interest in transactions
prohibited by § 406, and pay related civil penalties or excise taxes....” Id. at 262
(citations omitted).
While Mertens involved service providers, the concept that “parties in interest”
can be sued for disgorgement of profits for participating in a transaction prohibited by
§ 406 is no less applicable to other non-fiduciary “parties in interest,” such as the
Ficklings.13 See 29 U.S.C. § 1002(14)(B) (ERISA § 3(14)(B)) (including service
providers within the definition of “parties in interest”). Even though disgorgement of
profits may produce money, Mertens makes it clear that disgorgement of profits is a
13
The Third and Tenth Circuits also found that the Supreme Court in
Mertens implied that a non-fiduciary “party in interest” may be liable under §
502(a)(5) for participating in transactions prohibited by § 406. Reich v. Compton, 57
F.3d 270, 285 (3rd Cir. 1995); Reich v. Stangl, 73 F.3d 1027, 1032 (10th Cir. 1996).
19
distinctly equitable remedy different from the legal remedy of compensatory damages
for breach of fiduciary duty. See Mertens 508 U.S. at 260. The Court’s definition of
appropriate equitable relief under § 502(a)(5) clearly encompasses the fruits of a
prohibited transaction from “parties in interest” like the Ficklings.14
In sum, under § 502(a)(5), the Secretary may sue the Ficklings as “parties in
interest” for equitable relief for engaging in a prohibited transaction with SCNB in
violation of § 406. Therefore, the district court erred in granting summary judgment
to the Ficklings.
IV. PRIVATE LITIGANTS’ SETTLEMENT DOES NOT BAR
SECRETARY’S ACTION
The Ficklings and SCNB next contend that the Knop private settlement bars the
Secretary’s action against them. This issue requires us to examine the Secretary’s
special statutory role in seeking relief and assessing civil penalties for ERISA
violations.
A. Secretary’s Statutory Role
14
In Lockheed Corp. v. Spink, 517 U.S. 882, 116 S. Ct. 1783 (1996), the
Supreme Court acknowledged that Mertens’s statements about § 406 were dicta, but
declined to retreat from that dicta and stated again, albeit in dicta, that “a party in
interest who benefitted from an impermissible transaction can be held liable under
ERISA.” Id. at 1789 n.3.
20
In § 502(a), Congress granted the Secretary an independent and unqualified
right to sue and seek redress for ERISA violations because ERISA plans significantly
affect the “national public interest.” ERISA itself contains a declaration of public
purpose that recognizes that the economic impact of private benefit plans affects the
“national public interest.”15 See 29 U.S.C. § 1001(a) (ERISA § 2(a)). Private ERISA
litigants seek to redress individual grievances. However, in suing for ERISA
violations, the Secretary seeks not only to recoup plan losses, but also to supervise
enforcement of ERISA, to guarantee uniform compliance with ERISA, to expose and
deter plan asset mismanagement, to protect federal revenues, to safeguard the
enormous amount of assets and investments funded by ERISA plans, and to assess
civil penalties for ERISA violations.
One circuit court succinctly summarized the Secretary’s national public interest
in bringing ERISA actions as ensuring “the financial stability of billions of dollars of
assets which in turn have a monumental effect on not only the Treasury of the United
States, but on the national economy and commerce as well.” Secretary of Labor v.
15
ERISA’s statement of purpose provides “that the growth in size, scope,
and numbers of employee benefit plans in recent years has been rapid and substantial;
that the operational scope and economic impact of such plans is [sic] increasingly
interstate; that the continued well-being and security of millions of employees and
their dependents are directly affected by these plans; that they are affected with a
national public interest;....” 29 U.S.C. § 1001(a) (ERISA § 2(a)) (emphasis supplied).
21
Fitzsimmons, 805 F.2d 682, 692 (7th Cir. 1986) (en banc). In addition to recovering
plan losses, the Secretary “has an even stronger and paramount obligation to protect
the very integrity, heart and lifeline of the program itself.” Id. at 692-93.
ERISA’s legislative history also emphasizes the Secretary’s national public
interest in deterrence, including the need for the Labor Department to have “broad
authority to monitor employee benefit plans and deter violations of the law,” and to
“restructure its enforcement efforts to emphasize deterrence.” H. Conf. Rep. No. 101-
386, at 431-32 (1989), reprinted in 1989 U.S.C.C.A.N. 3018, 3035.16 The
congressional Conference Committee concluded that the Secretary must have and use
enforcement powers and civil penalties to make ERISA meaningful, as follows:
[I]t has become apparent that the Department must use its enforcement
powers more vigorously to make the protection of ERISA meaningful.
The conferees believe strengthened civil penalties will better enable the
Department to protect participants and beneficiaries. The conferees
further believe that the need for strengthened enforcement and deterrence
of violations of ERISA applies not only to the Department of Labor, but
to judicial oversight of private rights of action affecting employee benefit
plans. It remains the intent of Congress that the courts use their power
16
In 1989, Congress expanded § 502 to confer additional enforcement
powers upon the Secretary, including assessment of civil penalties against plan
administrators, § 502(c)(2), “parties in interest,” § 502(i), fiduciaries, § 502(l)(1)(A),
(m), and, in some instances, against “any person,” § 502(c)(4), (c)(5), (l)(1)(B).
Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2123. These
civil penalties go directly to the United States Treasury. While the Secretary must
assess civil penalties, none of the contested issues about these civil penalties is
presently before the court on appeal.
22
to fashion legal and equitable remedies that not only protect participants
and beneficiaries but deter violations of the law as well.
Id. at 3035-36. Against this statutory background, we examine why the private
litigants’ settlement in Knop does not bar the Secretary’s action here.
B. Res Judicata
The district court incorrectly held that the private litigants’ settlement barred
the Secretary’s claims under the doctrine of res judicata or claim preclusion.17 This
doctrine does not apply unless “the parties to both actions, or those in privity with
them, are identical.” Richardson v. Alabama State Bd. of Educ., 935 F.2d 1240, 1244
(11th Cir. 1991); see also Hart v. Yamaha-Parts Distributs., Inc., 787 F.2d 1468, 1471-
72 (11th Cir. 1986). This circuit has held that “‘[a] nonparty to a prior decision cannot
be bound by it unless he had sufficient identity of interest with a party that his
interests are deemed to have been litigated.’” In re Birmingham Reverse
Discrimination Employment Litigation, 833 F.2d 1492, 1498 (11th Cir. 1987) aff’d sub
nom. Martin v. Wilks, 490 U.S. 755 (1989) (quoting Wilson v. Attaway, 757 F.2d
1227, 1237 (11th Cir. 1985)). The doctrine does not apply here because the Secretary
17
Application of res judicata presents questions of law reviewed de novo.
Richardson v. Miller, 101 F.3d 665, 667-68 (11th Cir. 1996); Riddle v. Cero Wire &
Cable Group, Inc., 902 F.2d 918, 921-22 (11th Cir. 1990). For the same reasons that
res judicata principles do not apply in this case, the Knop plaintiffs could not release
the Secretary’s claims against the defendants.
23
was not a party to the Knop settlement and has national public interests separate and
distinct from those of the Knop private litigants.
Every circuit addressing the issue has held that the Secretary is not bound by
prior private litigation when the Secretary files an independent action to address
ERISA violations. See, e.g., Beck v. Levering, 947 F.2d 639, 642 (2d Cir. 1991), cert.
denied sub nom., Levy v. Martin, 504 U.S. 909 (1992); Secretary of Labor v.
Fitzsimmons, 805 F.2d 682, 690-94 (7th Cir. 1986); Donovan v. Cunningham, 716
F.2d 1455, 1462-63 (5th Cir. 1983); see also Brock v. Gillikin, 677 F. Supp. 398, 402
(E.D.N.C. 1987). Each court recognized that the Secretary’s national public interests
in bringing an ERISA enforcement action are wholly distinct and separate from those
of private litigants who seek to redress individual grievances or recoup plan losses for
their personal benefit as plan beneficiaries. See, e.g., Fitzsimmons, 805 F.2d at 693-
94. The courts note that under ERISA’s statutory framework, private plaintiffs do not
adequately represent, and are not charged with representing, the broader national
public interests represented by the Secretary.18
18
The district court cited footnote 9 in Massachusetts Mutual Life
Insurance Co. v. Russell, 473 U.S. 134 (1985) for the proposition that the Secretary
sues only in a representative capacity. However, Russell’s footnote 9 addressed only
actions under § 502(a)(2) for breach of fiduciary duties under § 409. Russell did not
involve res judicata or a Secretary’s claim under § 502(a)(5) for equitable relief
against “parties in interest” participating in a prohibited transaction in violation of §
406. Russell also points out that § 502(a)(2) “authorizes suits by four classes of party-
24
A previous ERISA decision from this circuit foreshadows our similar
conclusion that the Knop private settlement does not bar the Secretary’s action here.
In Campbell v. Hall-Mark Electronics Corp., 808 F.2d 775 (11th Cir. 1987), this court
affirmed a denial of the Secretary’s motion to intervene to oppose a plan participants’
class action settlement. This court noted that the Secretary’s interests were not
prejudiced significantly by the settlement because “the Secretary certainly may
continue to litigate his own case in pursuit of whatever broader public policy interests
he deems important.” Id. at 779. Campbell recognized that the Secretary has an
independent right to sue. A corollary to Campbell is that a private litigation settlement
does not preclude the Secretary’s separate action.
Similar to this case, the Secretary’s main objection to the private settlement in
the Seventh Circuit’s Fitzsimmons decision was that the private “recovery was wholly
inadequate in light of the number and dollar amount of the claims against the former
trustees and also that the settlement agreement failed to allow recovery from the
personal assets of the former trustees.” Fitzsimmons, 805 F.2d at 686. After
extensive review of ERISA’s statutory framework and purposes, the Seventh Circuit
plaintiffs: the Secretary of Labor, participants, beneficiaries, and fiduciaries.” 473
U.S. at 142 n.9. In contrast, ERISA separates the Secretary’s right to sue for ERISA
violations in § 502(a)(5) from the participant’s, beneficiary’s, and fiduciary’s right
to sue for ERISA violations in § 502(a)(3).
25
en banc held directly that the private settlement did not bar the Secretary’s
independent right to sue. Id. at 694.19
These ERISA cases are consistent with the well-established general principle
that the government is not bound by private litigation when the government’s action
seeks to enforce a federal statute that implicates both public and private interests. See
Hathorn v. Lovorn, 457 U.S. 255, 268 n.23 (1982); City of Richmond v. United
States, 422 U.S. 358, 373 n.6 (1975); Sam Fox Publ’g Co., Inc. v. United States, 366
U.S. 683, 689-90 (1961); United States v. East Baton Rouge Parish Sch. Bd., 594 F.2d
56, 58 (5th Cir. 1979). In East Baton Rouge Parish School Board, this court also
recognized this general principle that a private plaintiff’s prior litigation does not bar
the government’s action, stating:
[T]he district court’s conclusion [that the private plaintiffs and the
United States were identical] is directly contrary to the general principle
of law that the United States will not be barred from independent
litigation by the failure of a private plaintiff. This principle is based
19
Appellees quote selective statements from Fitzsimmons and argue that
a private settlement limits the Secretary to only injunctive relief, even if the Secretary
can sue independently. Fitzsimmons’s discussion about the separate interest of the
Secretary in obtaining injunctive relief is only one of the many examples of the
Secretary’s separate interests discussed in Fitzsimmons. The Seventh Circuit also
discusses the Secretary’s separate legal interests in protecting a plan’s financial
stability, in obtaining disgorgement of illegal profits, in preventing unjust enrichment,
in restoring plan assets, in protecting beneficiaries’ incomes, and in deterring future
ERISA violations, all of which implicate monetary recoveries. (The civil penalties,
enacted in 1989, were not in effect when Fitzsimmons was decided.)
26
primarily upon the recognition that the United States has an interest in
enforcing federal law that is independent of any claims of private
citizens. In the present context the Supreme Court has characterized this
as “the highest public interest in the due observance of all constitutional
guarantees.” Also, any contrary rule would impose an onerous and
extensive burden upon the United States to monitor private litigation in
order to ensure that possible mishandling of a claim by a private plaintiff
could be corrected by intervention.
East Baton Rouge Parish Sch. Bd., 594 F.2d at 58 (quoting in part United States v.
Raines, 362 U.S. 17 (1960) (citations omitted)).
Subsequently, the Fifth Circuit directly applied this same principle to an ERISA
case similar to this one, Donovan v. Cunningham, 716 F.2d 1455, 1462-63 (5th Cir.
1983). In Donovan, an ESOP trustee allegedly had paid more than adequate
consideration for the stock of the company’s president.20 The Fifth Circuit concluded
that the Secretary's interest was different from private plaintiffs’ interests and, thus,
the Secretary was not precluded from bringing an independent action for ERISA
violations. Id.21
20
The Fifth Circuit held that the “adequate consideration” exemption in
ERISA § 408 was not applicable and thus the stock transaction was prohibited by
ERISA § 406. Donovan discusses at length the mechanics of ESOPs, the duties of
ESOP fiduciaries under ERISA, and the nature of the inadequate consideration
exemption in ERISA § 408. See generally Donovan v. Cunningham, 716 F.2d 1455(5th Cir. 1983); see also supra note 10.
21
Appellees contend Donovan supports their defense that the Secretary’s
independent action is limited to injunctive relief. We disagree. Donovan’s discussion
of injunctive relief concerned only whether the Secretary’s action was moot because
27
The ERISA enforcement scheme, carefully constructed by Congress, is
undermined if private litigants can sue ERISA violators first, reach a settlement, and
bar the Secretary’s action. The terms of the Knop private settlement illustrate why
this result is not what Congress intended, or provided, in ERISA. The Knop
settlement recovered from Charter only a small fraction of the Plan’s $80 million in
assets lost in the stock purchase. The private plaintiffs released and dismissed with
prejudice both SCNB and the Ficklings despite having alleged serious ERISA
violations against them and even though they made a negligible contribution to the
settlement. Since only the Secretary can assess civil penalties, none were paid.22
the private parties dissolved the ESOP as part of their settlement. In fact, the Donovan
court noted that whether the Secretary’s equitable claim for disgorgement was barred
was not addressed by the district court and remanded that issue because “the parties
have not adequately addressed the issues raised by these remedial arguments in the
special context of ERISA.” Donovan, 716 F.2d at 1462-63 & n.10.
22
Defendants rely heavily on EEOC cases from other circuits that preclude
the EEOC from recovering monetary relief for private individuals who already have
settled in their own name. However, this circuit has recognized that the interests of
the EEOC and private litigants at times “are not necessarily compatible,” and “are not
always identical.” Riddle v. Cerro Wire & Cable Group, Inc., 902 F.2d 918, 922-23
(11th Cir. 1990) (holding private litigant’s Title VII claims not barred by EEOC’s
settled suit). Riddle concluded that although the EEOC is able to recover damages for
back pay and benefits, the EEOC is primarily interested in preventing employment
discrimination in the workplace; whereas, the aggrieved individual is more interested
in “specific personal relief” in her private action. Id. at 922-23.
Defendants’ reliance on EEOC cases also ignores the different statutory
enforcement schemes of Title VII and the ADEA, which reflect Congress’s intent to
limit multiple suits. Title VII and the ADEA require a private plaintiff to file a
28
While private plaintiffs understandably may be willing to compromise claims
to gain prompt and definitive relief, the Knop settlement does not further the broader
national public interests represented by the Secretary and reflected in Congress’s
delegation of ERISA enforcement powers to the Secretary. The national public
interest in deterrence of asset mismanagement suffers if private parties can release
claims against ERISA violators for negligible financial recovery and thereby
immunize plan trustees and “parties in interest” from ERISA violations. Furthermore,
the public treasury is ill-served by denying the Secretary the opportunity to assess
civil penalties, expressly authorized by Congress to deter ERISA violations, as well
as the occasion to ensure that the Plan receives full value for the millions of dollars
in tax subsidies.
C. ERISA § 502(h)
The district court emphasized that ERISA § 502(h) requires private litigants to
serve their complaint on the Secretary and gives the Secretary discretion to intervene.
discrimination charge with the EEOC before suing. 42 U.S.C. § 2000e-5(b), (e), and
(f); 29 U.S.C. § 626(d). The ADEA also terminates a private plaintiff’s right of action
under the ADEA upon “commencement of an action by the Equal Employment
Opportunity Commission to enforce the right of such employee under this chapter.”
29 U.S.C. § 626(c)(1). In contrast, ERISA gives plan beneficiaries and the Secretary
independent rights of action, does not require private plaintiffs to file charges with the
Secretary before suing, and nowhere forecloses private actions after the Secretary files
suit, or, the Secretary’s suit after a private action commences.
29
See 29 U.S.C. § 1132(h) (ERISA § 502(h)). The purpose of § 502(h) is to provide the
Secretary notice of ongoing private lawsuits. See Secretary of Labor v. Fitzsimmons,
805 F.2d 682, 691 (7th Cir. 1986) (en banc). In § 502(h) Congress gave the Secretary
discretion to intervene, but chose not to require the Secretary to do so. As the Seventh
Circuit noted, Congress “never mandated that the Secretary must intervene in each and
every piece of litigation or forever be barred by the doctrine of res judicata.” Id. As
this court previously recognized, “[t]he courts should not jam judicially created
doctrines such as res judicata into the gears of Congress’ carefully crafted statutory
machinery.” United States v. Barnette, 10 F.3d 1553, 1561 (11th Cir. 1994).
Given the volume of cases the Department of Labor monitors, courts recognize
that it is unreasonable and unwise to require the Secretary to intervene in every
ERISA action or be precluded.23 See, e.g., Donovan v. Cunningham, 716 F.2d 1455,
1462 (5th Cir. 1983) (stating that to bar Secretary’s ERISA action as a result of private
settlement “would impose an onerous and extensive burden upon the United States to
monitor private litigation in order to ensure that possible mishandling of a claim by
23
In 1989, the congressional Conference Committee, reporting on the civil
penalties in § 502(l) noted that the Department of Labor was responsible for
approximately 5.5 million employee benefit plans holding $2 trillion in assets and that
the Department’s resources had not kept pace with the growing importance of the
benefits to the public, the expanding amount of plan assets, or the increasing number
of plans. H.R. Conf. Rep. No. 101-386, at 432 (1989), reprinted in 1989
U.S.C.C.A.N. 3029, 3035.
30
a private plaintiff could be corrected by intervention”). Likewise, we decline to
mandate judicially that the Secretary must intervene or be barred because this would
frustrate Congress’s express decision to leave intervention to the Secretary’s
“discretion” in § 502(h) and would permit defendants violating ERISA to settle
quickly with private plaintiffs and defeat the Secretary’s enforcement powers granted
by Congress.
F. Laches
The district court also incorrectly held that the doctrine of laches precluded the
Secretary’s action against SCNB. “It is well settled that the United States is not bound
by state statutes of limitation or subject to the defense of laches in enforcing its
rights." United States v. Summerlin, 310 U.S. 414, 416 (1940); United States v.
Fernon, 640 F.2d 609, 612 (5th Cir. Unit B Mar. 1981) (following Summerlin). This
principle protects public rights vested in the government for the benefit of all from
“the inadvertence of the agents upon which the government must necessarily rely.”
United States v. Alvarado, 5 F.3d 1425, 1427 (11th Cir. 1992); see also United States
v. Arrow Transp. Co., 658 F.2d 392, 394-95 (5th Cir. Unit B Oct. 1981) (“Although
the fact situation describes a textbook case of laches, that defense cannot be asserted
against the United States in its sovereign capacity to enforce a public right or to
protect the public interest.”).
31
To overcome this accepted rule, the district court relied upon Title VII cases.
However, this circuit permits laches to bar an EEOC suit only because Title VII
contains no statute of limitations. See e.g., EEOC v. Dresser Indus., Inc., 668 F.2d
1199, 1201-02 (11th Cir. 1982) (“Laches is an equitable doctrine designed to prevent
unfairness to a defendant due to a plaintiff’s delay in filing suit in the absence of an
appropriate statute of limitations.”) (emphasis supplied); see also EEOC v. Vucitech,
842 F.2d 936, 942 (7th Cir. 1988); Boone v. Mechanical Specialties Co., 609 F.2d 956,
959 (9th Cir. 1979); EEOC v. Liberty Loan Corp., 584 F.2d 853, 856 (8th Cir. 1978).
In contrast, ERISA contains a detailed statute of limitations for actions
regarding certain fiduciary breaches and ERISA violations. The Secretary filed her
lawsuit within the time permitted by ERISA.24 The rationale in EEOC suits for
departing from the accepted rule is not present here.25 Given the Supreme Court’s
24
Congress has specified the limitations period for a variety of
circumstances, providing that an ERISA plaintiff must sue within six years from the
last breach or violation, within three years from the date of actual knowledge of a
breach or violation, or, in the case of fraud or concealment, within six years from the
date of discovery of the breach or violation. 29 U.S.C. § 1113 (ERISA § 413).
Allowing the federal government, in effect, to be estopped frustrates federal statutes
and infringes upon Congress’s exclusive authority to make law.
25
Neither the district court nor the defendants cite any authority grafting
the EEOC exception onto ERISA. Defendants do cite Martin v. Consultants &
Adm’rs, Inc., 966 F.2d 1078 (7th Cir. 1992), but the majority in Martin pretermitted
deciding whether laches applied by finding “the elements of laches have not been met
in the case before us.” 966 F.2d at 1091. But see 966 F.2d at 1100 (Posner, J.,
32
mandate that the judiciary not tamper with ERISA’s enforcement scheme,
Massachusetts Mut. Life Ins. v. Russell, 473 U.S. 134, 147 (1985), and our circuit’s
recognition of the importance of ERISA’s time lines, Brock v. Nellis, 809 F.2d 753,
754 (11th Cir. 1987), the district court erred in extending the laches exception in Title
VII to ERISA actions. See Reich v. Valley Nat’l Bank of Arizona, 837 F. Supp. 1259,
1308-09 (S.D.N.Y. 1993); First Bank Sys., Inc. v. Martin, 782 F. Supp. 425, 426-27
(D. Minn. 1991); Donovan v. Schmoutey, 592 F. Supp. 1361, 1403 (D. Nev. 1984).
V. CONCLUSION
In conclusion, the Knop private settlement does not bar the Secretary’s
independent right to sue under ERISA in this case. Accordingly, the district court
erred in granting summary judgment in favor of the defendants SCNB and the
Ficklings. The Secretary’s action may proceed against SCNB as a fiduciary for legal
and equitable relief and civil penalties. The Secretary’s action may proceed against
the Ficklings as “parties in interest” for civil penalties and equitable relief, including
concurring).
33
but not limited to disgorgement of profits, recission, and restitution of Plan losses.26
Given our declaration that the Secretary’s action may proceed, SCNB’s third-
party complaint seeking declaratory judgment in the Knop action and SCNB’s
separate declaratory judgment action are now resolved by this appeal. The court
directs that judgment on the declaratory judgment issue be entered in favor of the
Secretary.
For the above reasons, we REVERSE the district court’s orders granting
summary judgment and VACATE the final judgments entered in favor of the
defendants SCNB and the Ficklings. The action is REMANDED for further
proceedings consistent with this opinion.
26
When the case returns to the district court, each party should be allowed
to complete discovery, including on whether each of the Fickling defendants is a
“party in interest” under ERISA § 406. Also, the Ficklings argue that the Secretary
should not be able to rely on § 3(14)(H) as to certain Fickling defendants because the
Secretary referred to only § 3 (14)(G), (E), and (F) as to those particular persons or
entities. However, the Secretary’s allegation, that the Ficklings are “parties in
interest” under § 3(14) engaging in a transaction prohibited under § 406, was more
than sufficient to put the Ficklings on notice of the Secretary’s claims. Any failure to
specify each and every sub-subsection of § 3(14) as to each and every person is
immaterial.
34