Morrissey v. Curran

FEINBERG, Circuit Judge:

Plaintiffs James M. Morrissey and Ralph Ibrahim, members of the National Maritime Union of America, appeal from a decision of the United States District Court for the Southern District of New York, Robert J. Ward, /., dismissing on jurisdictional grounds their amended complaint against various officers of the Union and the trustees and administrator of the NMU Pension & Welfare Plan (“the Plan”). Because we believe that under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., jurisdiction exists as to at least one of the transactions alleged in the complaint, we reverse for further proceedings.

I

As the district judge rightly put it, this litigation has had “a lengthy history.” The earlier manifestations, summarized in the margin,¹ need not concern us now. The latest aspect is an amended complaint containing three causes of action based on ER-ISA.² That complaint alleges that defendants improperly administered the Plan by using more than $25,000 of its funds for pleasure trips, by improvidently investing over $1 million in a Panama venture, by misappropriating some $50,000 for personal use, and by. paying $201,820.58 to defendant Shapiro, the Plan’s administrator. Plaintiffs sought an accounting, money damages payable to the Plan and an injunction against future misuse of its assets.

The district judge recognized that the complaint alleged “continuing wrongdoing,” but concluded nonetheless that “all of the acts complained of appear to have taken place prior to January 1,1975.” Since ERI-SA did not become effective until that date, the district judge concluded that he lacked jurisdiction because ERISA was not retroactive. The judge rejected a complicated argument offered by plaintiffs that 29 U.S.C. §§ 1132(a)(3) and 1104(a)(1)(D) gave the court jurisdiction over any claim of violation of “the terms of the plan,” regardless of when the violation took place.³ The judge also held, contrary to plaintiffs’ contention, that 29 U.S.C. § 1105(a)(3)⁴ did not confer jurisdiction over a claim against a trustee who, prior to ERISA’s effective date, acquired knowledge continuing to the present time concerning another trustee’s breach of duty. Accordingly, the judge dismissed the amended complaint, and this appeal followed.

II

Before us, plaintiffs in large part repeat the arguments they made below for construing ERISA to furnish federal jurisdiction to examine pre-1975 transactions. While the authority in this circuit is against plaintiffs on the retroactivity 'of ERISA,⁵ we have not directly addressed the other issues of statutory construction that plaintiffs raise. However, for reasons indicated below, we do not find it necessary to deal with them. In this court, plaintiffs stress that whatever else the trustees may have done before 1975, they also breached their trust after that date. Plaintiffs argue that when the trustees became ERISA fiduciaries on January 1, 1975, they inherited an imprudent and unproductive investment in Panama, which they were bound to review and liquidate. As ERISA trustees, defendants cannot be excused from this obligation merely because the unwise investment was made before ERISA took effect.

The district judge did not deal with this argument, undoubtedly because it was not pressed with clarity below. However, the amended complaint contained allegations broad enough to encompass this claim of present fiduciary violation,⁶ and other papers before the district judge supported it.⁷ We have no doubt that under the “prudent man” rule, which is codified in ERI-SA,⁸ the trustees here had a duty within a reasonable time after ERISA took effect to dispose of any part of the trust estate which would be improper to keep.⁹

Under these circumstances, we remand the case to the district court, which has jurisdiction under ERISA over plaintiffs’ claim that the trustees improperly retained the Panama investment after January 1, 1975. Indeed, under the exclusive jurisdictional provisions of ERISA,¹⁰ that claim could be made nowhere else. See Marshall v. Chase Manhattan Bank, 558 F.2d 680 (2d Cir. 1977). We do not know whether the Fund actually possessed a Panama investment after January 1, 1975, or whether, if it did, keeping the investment was unwise. There was some dispute on the matter at oral argument in this court, and we cannot resolve such issues.' But on this record, it was error for the district judge to rule as a matter of law, with no further inquiry into the facts, that jurisdiction was lacking under ERISA. We leave to the district court the question whether to take jurisdiction over the other claims against defendants.¹¹ In exercising its discretion, the district court will undoubtedly keep in mind that a portion of plaintiffs’ action must be brought in the federal court, that the district court and the parties have already devoted considerable time and effort to the other incidents of alleged wrongdoing, that bifurcation of the claims may be wasteful and that success on the pendent claims may afford plaintiffs substantially complete relief. Of course, the substantiality of plaintiffs’ claim concerning post-1975 fiduciary abuse will also be relevant to the court’s determination.

Case remanded for further proceedings consistent with this opinion.

1 . Preliminary maneuvers began in August 1971, when plaintiffs served a demand letter on the Union. In January 1973, Judge Carter of the United States District Court for the Southern District of New York granted plaintiffs permission to bring suit under § 501 of the Labor Management Reporting and Disclosure Act. 29 U.S.C. § 501. A complaint was filed, and the case was later assigned to Judge Conner. In 1975, after obtaining leave of the court, plaintiffs filed an amended complaint asserting further § 501 violations and a new cause of action under § 302 of the Labor Management Relations Act. 29 U.S.C. § 186. Following further skirmishes of an inconclusive nature, plaintiffs obtained yet another order granting leave to sue, this time from Judge Palmieri, and filed a new complaint in February 1976 seeking an accounting and money damages under both § 501 and § 302. In an order dated October 1, 1976, Judge Ward dismissed the complaint without prejudice to the filing of an amended complaint incorporating an ERISA-based theory of federal jurisdiction. Such a pleading was filed in October 1976, and forms the basis of the instant appeal.

2 . A fourth cause of action, based upon 29 U.S.C. § 501, has been withdrawn by stipulation.

3 . 29 U.S.C. § 1132(a)(3)(B)(ii) allows plan participants, beneficiaries, or fiduciaries to bring an action in federal court “to enforce any provisions of this subchapter or the terms of the plan.” Among the “provisions of this subchap-ter” is 29 U.S.C. § 1104, which obligates fiduciaries to prudently discharge their plan-related duties and to abide by “the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter.” Juxtaposing the two sections, plaintiffs urge that post-1975 violations of “the terms of the plan” are also violations of “the provisions of this sub-chapter.” They then argue that the § 1132(a)(3)(B)(ii) reference to enforcement of both the plan and the statute can only be saved from redundancy if the authorization to enforce “the terms of the plan” is read to encompass redress of pre-1975 fiduciary abuses.

4 . That section provides:

(a) In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:

(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.

5 . See Nolan v. Meyer, 520 F.2d 1276, 1278 n.2 (2d Cir.), cert, denied, 423 U.S. 1034, 96 S.Ct. 567, 46 L.Ed.2d 408 (1975); Cuff v. Gleason, 515 F.2d 127, 129 (2d Cir. 1975); Haley v. Palatnik, 509 F.2d 1038, 1042 n.5 (2d Cir. 1975). Plaintiffs have been unable to cite any contrary precedent on this point, and we have found none.

6 . Paragraphs 14 and 24 of the amended complaint read, in pertinent part:

FOURTEENTH: Upon information and belief that heretofore the defendants, in violation of the terms of said plan, did make improvident and imprudent investments and loans in Panama and elsewhere of the funds entrusted to them without adequate security which have or will result in losses to the Deep Sea Funds of sums in excess of $1,000,-000.00 ....

TWENTY-FOURTH: That the defendants [sic] said use of said fund and the continuation of such use has done and will do irreparable harm to the . . . Fund and to the security intended to be provided for the retirement and other benefits of employee members of NMU.

(Emphasis supplied).

7 . An affidavit of plaintiffs’ attorney, listing expenditures connected with the Panama investment from January 1970 through October 1974, stated that

My information is that of the three million plus invested, there is no housing and no return of either income or principal invested. Naturally, we will need complete discovery on this and other imprudent investment of trust funds.

8 . 29 U.S.C. § 1104(a)(1)(B) provides in pertinent part:

Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims ....

9 . The trustee's obligation to dispose of improper investments within a reasonable time is well established at common law. See, e. g., Ill Scott on Trusts § 209 (3d ed. 1967). ERISA can hardly be read to eviscerate this duty, especially in light of its requirement that fiduciaries take remedial action upon discovery of breaches by co-fiduciaries. See 29 U.S.C. § 1105(a)(3). For discussions of the import of this provision in the context of improper investments, see S.Rep. No. 93-1090, 93d Cong., 2d Sess. 299-300 (1974) (ERISA trustee’s obligation to take corrective action upon discovery of investments acquired in violation of the trust instrument); Little & Thrailkill, Fiduciaries Under ERISA: A Narrow Path to Tread, 30 Vand. L.Rev. 1, 32 (1977) (ERISA trustee who discovers breach by another fiduciary must take “reasonable actions to remedy the breach”; this may include “correcting a prohibited transaction or an imprudent investment . . . .”).

10 . 29 U.S.C. § 1132(e)(1) vests federal district courts with “exclusive jurisdiction of civil actions under this subchapter” brought by, inter alia, participants and beneficiaries, unless the relief sought is limited to recovery or clarification of benefits due under the terms of a pension plan.

11 . To the extent that the complaint alleges claims under state law, the district court can take pendent jurisdiction over them. We note in this regard that several of the defendants on these claims were no longer trustees at the time ERISA became effective. These individuals are not, therefore, defendants on the post-1975 claim which we have found sufficient to vest jurisdiction in the district court. Thus, the district court will be required to determine not only whether to exercise pendent jurisdiction over the state claims, but also whether that jurisdiction extends to persons not parties to the claim conferring federal jurisdiction. This problem has provoked considerable attention, and the implications of the latest Supreme Court decision on the subject, Aldinger v. Howard, 427 U.S. 1, 96 S.Ct. 2413, 49 L.Ed.2d 276 (1976) , remain to be determined. See Grimes v. Chrysler Motors Corp., 565 F.2d 841 (2d Cir. 1977); Fawvor v. Texaco, Inc., 546 F.2d 636 (5th Cir. 1977); Ayala v. United States, 550 F.2d 1196 (9th Cir. 1977); petition for cert, filed,-U.S.-, 98 S.Ct. 50, 54 L.Ed.2d 70 (1977) ; Note, Aldinger v. Howard and Pendent Jurisdiction, 77 Colum.L.Rev. 127 (1977) and authorities cited therein. See also Leather’s Best, Inc. v. S. S. Mormaclynx, 451 F.2d 800, 809-11 (2d Cir. 1971) (pre-Aldinger). The point has not been briefed or argued before us, and we express no opinion on it.