KAREN B. COAN,
Individually and on behalf of the K.L.C. Inc. 401(k) Profit
Sharing Plan,
v.
ALAN H. KAUFMAN and EDGAR W. LEE,
I.
The District Court Erred in Concluding that Section 502(a) of ERISA
Requires a Participant to Bring Her Action as a Shareholders' Derivative
Action or to Join All Other Participants Individually or as a Class
II.
The District Court Erred In Concluding That the Relief Sought By Plaintiff
Was Legal Relief Not Available Under ERISA Section 502(a)(3)
as amended, 29 U.S.C. § 1001, et seq.:
Section 3(7), 29 U.S.C. § 1002(7)
Section 409(a), 29 U.S.C. § 1109(a)
Section 502(a)(2), 29 U.S.C. § 1132(a)(2)
Section 502(a)(3), 29 U.S.C. § 1132(a)(3)
Section 502(g)(2), 29 U.S.C. § 1132(g)(2)
Section 515, 29 U.S.C. § 1145
I. A Scott, The Law of Trusts:
III. A. Scott, The Law of Trusts:
IV. A. Scott, The Law of Trust
G. Bogert, The Law of Trusts and Trustees:
Charles A. Wright, The Law of the Federal Courts § 73, (5th ed.
1994)
Staff of Conf. Comm., 93d
Cong., Summary of the Differences Between the Senate Version and the House
Version of H.R. 2 to Provide for Pension Reform
STATEMENT OF THE
ISSUES
1. Whether the district court erred in
concluding that ERISA requires that a claim for breach of fiduciary duty
under ERISA section 502(a)(2), 29 U.S.C. § 1132(a)(2), alleging
imprudent investment of a pension plan's assets by defendants, proceed as
a shareholder's derivative action under Rule 23.1 of the Federal Rules of
Civil Procedure or a class action under Rule 23.
2. Whether the district court erred in
holding that the relief plaintiff seeks (an order reopening the terminated
plans, requiring defendants to make those plans whole for the losses they
sustained as a result of defendants' fiduciary breaches, and distributing
the increased benefits to the plans' participants) is not "equitable"
relief within the meaning of ERISA section 502(a)(3), 29 U.S.C. §
1132(a)(3), as interpreted by Mertens v. Hewitt Assocs., 508 U.S.
248 (1993), Great-West Life & Annuity Co. v. Knudson, 534 U.S.
204 (2002), and Strom v. Goldman, Sachs & Co., 202 F.3d 138 (2d
Cir. 1999).
INTEREST OF
THE SECRETARY OF LABOR
The Secretary is the federal officer charged
with interpreting and enforcing Title I of the Employee Retirement Income
Security Act of 1974, as amended, 29 U.S.C. § 1001, et seq.
("ERISA"). As such, the Secretary has significant interests in the
proper application of the safeguards Congress established through ERISA
for the administration of employee benefit plans and the protection of
participants in those plans. These interests include promoting
uniformity of law, protecting beneficiaries, enforcing fiduciary
standards, and ensuring the financial stability of employee benefit plan
assets. Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th
Cir. 1986) (en banc).
Although the Department of Labor has
primary interpretative and enforcement authority for Title I of ERISA, the
Secretary does not have the resources to pursue litigation regarding every
allegation of fiduciary imprudence. Accordingly, the Secretary has
an interest in ensuring that private litigants are able to vindicate their
rights under ERISA. The district court's holdings with respect to
the procedural requirements for bringing a breach of fiduciary duty claim
under ERISA section 502(a)(2), 29 U.S.C. § 1132 (a)(2), and with respect
to plaintiff's standing to sue, impact the Secretary's
interest.
Furthermore, the Secretary has a significant
interest in the proper application of ERISA's remedial provisions.
This case presents an important and recurring remedial issue that the
Secretary has previously briefed on a number of occasions: whether
section 502(a)(3), 29 U.S.C. § 1132 (a)(3), authorizes actions to recover
monetary losses from fiduciaries who have breached their obligations and
harmed individual beneficiaries. Under the district court's
interpretation of section 502(a)(3), fiduciaries who violate ERISA's
stringent obligations and injure beneficiaries may evade liability for the
losses they cause, a result that is not warranted by ERISA or by the
underlying trust law to which the Supreme Court directed courts to look in
resolving this remedial issue.
The Secretary believes that the district court
erred in granting summary judgment for defendants for the reasons stated
in the court's opinions and, therefore, pursuant to Rule 29 of the Federal
Rules of Appellate Procedure, respectfully submits this brief as amicus
curiae.
STATEMENT OF THE CASE
KLC, Inc., an equipment leasing company,
sponsored a defined contribution plan with a 401(k) component, a
profit-sharing component (the "Profit Sharing Fund") and a fund composed
of assets from a previously-terminated defined benefit plan (the "Rollover
Fund"). In 1998, Unicapital acquired KLC, and instructed it to
terminate its employee benefit plan. Defendants, officers of KLC and
trustees and investment fiduciaries of the plan, immediately transferred
the assets in the 401(k) component of the plan to the Unicapital 401(k)
plan. Although they understood that the Profit Sharing Fund and the
Rollover Fund would also have to be terminated eventually, they did not do
so during the pendancy of the acquisition, because, they testified, they
thought Unicapital's 401(k) plan did not offer as desirable investment
opportunities as the KLC plan. See Coan v. Kaufman, 333 F.
Supp. 2d 14, 15-17 (D. Conn. 2004) ("Coan I").
After the funds were terminated and the
participants, including Plaintiff Karen Coan, received lump-sum payments,
Coan brought this ERISA action "Individually and on behalf of the K.L.C.,
Inc. 401(k) Profit Sharing Plan." See Complaint ¶ 2,
Prayer for Relief ¶¶ 1-2. Coan alleges that that defendants not only
failed to diversify the assets of the Profit Sharing Fund and the Rollover
Fund, but also failed even to consider diversification. She seeks
relief to the plan for the period from December 1998 to December
2001. In total, she alleges approximately $540,000 in losses and
lost opportunity costs suffered by the plan. Coan I, 333 F.
Supp. 2d at 17-18.
On August 30, 2005, the court granted
defendants' motion for summary judgment. Id. at 16. In
granting summary judgment for the defendants, the district court held that
plaintiff could not proceed under ERISA section 502(a)(2) unless she
proceeded with a shareholders' derivative action under Rule 23.1 of the
Federal Rules of Civil Procedure. Id. at 23- 25. The
district court believed that the Second Circuit and Supreme Court had both
held that individuals cannot bring claims for breach of fiduciary duty,
citing Lee v. Burkhart, 99 F.2d 1004, 1009 (2d Cir. 1993) and
Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 141
(1985), and on that basis concluded that "Ms. Coan cannot recover
individually for the alleged breaches of fiduciary duty under §
502(a)(2)." Coan I, 333 F. Supp. 2d at
23-24.
Coan argued, however, that she does not seek an individual recovery, but
rather brings her suit in a representative capacity, on behalf of herself
and the plan. Id. at 24; see Complaint at ¶ 2, Prayer
for Relief ¶¶ 1-2. The district court rejected her argument because
she "never moved for class certification, or attempted to join other
former plan participants" and "has not sought to fulfill the requirements
of Fed. R. Civ. P. 23.1 or otherwise taken any of the steps required for a
plaintiff to proceed in a representative capacity." Coan I,
333 F. Supp. 2d at 24.
In refusing to modify its decision on plaintiff's motion for
reconsideration, the district court stressed plaintiffs' perceived
procedural shortcomings. Coan v. Kaufman, 349 F. Supp. 2d 271
(D. Conn. 2004) ("Coan II"). First, the district court
disagreed with the plaintiff's contention that plan participants can sue
in a representative capacity without meeting all the requirements of a
shareholders' derivative action. The court held that Diduck v.
Kaszycki & Sons Contractors, Inc., 974 F.2d 270 (2d Cir. 1992),
although overruled on numerous other issues, is still valid precedent
for the proposition that an action for unpaid contributions under ERISA
section 502(g)(2) must proceed pursuant to Rule 23.1, unless excused by
the court. Without acknowledging the difference between a claim for
unpaid contributions under section 502(g)(2) and a fiduciary breach claim
under sections 409(a) and 502(a), the court held that Diduck
compelled it to hold plaintiff to Rule 23.1's requirements. Coan
II, 349 F. Supp. 2d at 274.
Second, the district court concluded that even if plaintiff need not
proceed under Rule 23.1, "that would not necessarily mean (as Plaintiff
asserts) that all she had to do to pursue her lawsuit as a derivative
action was to label her lawsuit a 'representative action' and seek relief
on behalf of the plan." Id. at 275. The district court
cited Charles A. Wright, The Law of the Federal Courts § 73, at 525
(5th ed. 1994), which, in discussing the requirements of Rule 23.1, noted
that such an action "is not the only derivative action that is
possible. Trust beneficiaries may bring claims derivatively on
behalf of a trust if the trustee refuses to bring them, and the same
general principles will apply as in stockholders' suits, but the specific
provisions of Rule 23.1 are not controlling." On this basis, the
district court concluded that "even if the specific provisions of Rule
23.1 were not controlling, Plaintiff should still have made at least some
effort to comply with the 'general principles' that apply in shareholder
derivative actions." Coan II, 349 F. Supp. 2d at 275.
The court did not explain how plaintiff might have done so, short of
proceeding under Rule 23.1 itself.
Finally, the district court concluded that even courts which have
acknowledged that Rule 23.1 "might not precisely apply of its own accord
to ERISA derivative actions brought by plan participants" have nonetheless
applied the safeguards of Rule 23 or 23.1 of the Federal Rules of Civil
Procedure. Id. at 276 (citing Thornton v. Evans, 692
F.2d 1064 (7th Cir. 1983); Montgomery v. Aetna Plywood, Inc., No.
95 C 3193, 1996 WL 189347 (N.D. Ill. July 2, 1996)). The court
agreed with defendants that plaintiffs' "failure to . . . do
anything to demonstrate that her action actually was
intended to benefit former plan participants other than Karen Coan" doomed
her claim, although the court did not specify what actions, other than
compliance with Rule 23.1 or Rule 23, would have been sufficient.
Coan II, 349 F. Supp. 2d at 277.
The district court also held that the relief sought by plaintiff was legal
rather than equitable relief, and on that basis concluded that Coan's
alternative claim for equitable relief under ERISA section 502(a)(3) must
fail. Coan I, 333 F. Supp. 2d at 25-27. Plaintiff
described the relief she seeks as "an injunction ordering plan
reinstatement and the payment of additional benefits lost through a breach
of fiduciary duty." Id. at 25 (quoting Plaintiff's
Substituted Memorandum in Opposition to Motion for Summary Judgment at
46). The district court, however, found that:
[T]he substance of the
remedy Ms. Coan seeks is not equitable in nature. Instead, she seeks
damages from defendants for injuries she believes she suffered as a result
of their breaches of their fiduciary duties. Requesting the intermediate
step of reviving long-terminated funds solely for the purpose of
channeling funds from defendants' bank accounts into Ms. Coan's pockets
does not transform what is effectively a money damages request into
equitable relief.
Id. at 26.
Relying on Great-West, 534 U.S. at 210-14, the district court
focused on whether the monetary component of the relief sought could be
traced to particular funds or property in the defendants' possession, and
concluded that it could not. Coan I, 333 F. Supp. 2d at
26. The court concluded that Great-West overruled this
Court's decision in Strom, 202 F.3d at 143-45, which holds that
monetary relief paid by a breaching fiduciary is inherently
equitable. Coan I, 333 F. Supp. 2d at 25 n.10.
Therefore, the court concluded that the relief sought by Coan was legal
relief not available under section 502(a)(3).
SUMMARY OF THE
ARGUMENT
ERISA does not require that a plaintiff bringing
a breach of fiduciary duty action under section 502(a)(2) pursue a
shareholders' derivative action under Rule 23.1 of the Federal Rules of
Civil Procedure, pursue a class action under Rule 23 or join other
participants under Rule 19. Given ERISA's "carefully crafted and
detailed enforcement scheme," there is no reason to believe that Congress
inadvertently omitted additional requirements to bring a claim under
section 502(a)(2). E.g., Russell, 473 U.S. at 146-47;
see also Mertens, 508 U.S. at 254. While the
district court may have discretion under the Federal Rules of Civil
Procedure to require plaintiff to take steps to protect the absent
participants' interests, any such requirements arise from the Federal
Rules of Civil Procedure, not ERISA. To the extent the district
court held to the contrary, its decision should be reversed.
Moreover, the district court erred in dismissing
plaintiff's alternative claim for relief under section 502(a)(3) on the
basis that the relief sought was not "equitable relief" within the meaning
of that section. This Court correctly held in Strom that
relief to compensate participants and beneficiaries harmed by fiduciaries
is inherently equitable. This Court is bound to follow this ruling
because the Supreme Court's subsequent decision in Great-West
supports, rather than undercuts, the Court's reasoning in
Strom.
ARGUMENT
I. The
District Court Erred in Concluding that Section 502(a) of ERISA Requires a
Participant to Bring Her Action as a Shareholders' Derivative Action or to
Join All Other Participants Individually or as a Class
ERISA section 409(a) provides, inter alia:
29 U.S.C. §
1109(a). ERISA's fiduciary duties are among the "the highest known
to law." Donovan v.
Bierwirth, 680 F.2d 263, 272 n.2 (2d Cir. 1982); see Ulico
Casualty Co. v. Clover Capital Mgmt., Inc., 217 F. Supp. 2d 311, 315
(N.D.N.Y. 2002).
ERISA section 502(a)(2) provides that, "A civil action may be brought … by
a participant …. for appropriate relief under § 409." 29 U.S.C. §
1132(a)(2). Thus, section 502(a)(2) authorizes a plan participant to
bring an action to recover plan losses against a fiduciary who has
violated section 409. Russell, 473 U.S. at 140.
Such claims are "brought in a representative capacity on behalf of the
plan as a whole." Id. at 141 n.9.
Here, the district court erred in confusing two
issues: whether plaintiff stated a claim under ERISA and whether she
was required to proceed under the federal rules applicable to
shareholders' derivative actions, class actions and joinder. ERISA
section 502(a)(2) allows a plan participant (or a former participant with
a "colorable claim," as discussed in note 5, infra) to bring suit
for appropriate relief when a plan has suffered a loss due to fiduciary
breach – precisely the claims plaintiff has made here. Whatever the
requirements of Rules 19, 23 and 23.1 of the Federal Rules of Civil
Procedure, they apply of their own force and not by virtue of anything in
ERISA. In other words, ERISA does not require that a section
502(a)(2) derivative action be brought as a class action under Rule 23,
but also does not foreclose the plaintiff from bringing it as such.
The court relied on Russell and Lee v.
Burkhart in concluding that a plan participant pursuing a claim under
section 502(a)(2) must bring the case as a class action (or by joining the
other participants and beneficiaries). The plaintiffs in those
cases, however, sought benefits to which participants claimed to be
entitled under the terms of their plans, rather than seeking relief for a
fiduciary breach perpetrated upon a plan as a whole.
In Russell, the plaintiff was eventually paid disability benefits
due under the terms of her plan, but sought damages for the delay in
receipt. Russell, 473 U.S. at 136. In Lee,
plaintiffs sought benefits due under their plan but unpaid as a result of
the sponsor's bankruptcy. 991 F.2d at 1009. Such
individualized claims for benefits, authorized under section 502(a)(1)(B),
cannot be brought under section 502(a)(2). Russell, 473 U.S. at
148; Lee, 991 F.2d at 1009.
Neither case considered the procedural capacity in which a plaintiff
alleging a plan-wide fiduciary breach was obligated to proceed.
Nonetheless, the district court erroneously concluded that the import of
these cases was that ERISA required plaintiff to pursue a shareholders'
derivative action. Rule 23.1, by its terms, applies to actions
"brought by one or more shareholders or members to enforce the right of a
corporation or unincorporated association." Coan is not a
shareholder of the plan, and the plan is not a corporation or an
unincorporated association. See Kayes v. Pacific Lumber
Co., 51 F.3d 1449, 1462-63 (9th Cir. 1995) ("Plaintiffs here are not
suing as 'shareholders' or 'members' to enforce the right of any
'corporation' or 'unincorporated association.' Rather, they
are suing as plan beneficiaries to enforce the right of the plan against
its fiduciaries."); see Montgomery v. Aetna Plywood, Inc.,
No. 95 C 3193, 1996 WL 189347, at *4 (N.D. Ill. April 16, 1997) ("The
parties agree that Fed. R. Civ. P. 23.1 and 23.2 are inapplicable to this
case since neither the Plan nor the ESOP are a corporation or
unincorporated association."). Indeed, in the treatise cited by the
district court, Professor Wright recognized that while the general
principles of Rule 23 might apply to a derivative action that was not a
shareholders' derivative action "the specific provisions of Rule 23.1 are
not controlling" in such a case. Wright, supra at 525.
The authority cited by the district court as requiring ERISA fiduciary
claims to proceed under Rule 23.1 is plainly distinguishable.
Diduck involved a claim by a plan participant to enforce a
multiemployer plan's right of action against a participating employer for
delinquent contributions under ERISA section 502(g)(2).
Diduck, 974 F.2d at 274-75. Section 502(g)(2), 29
U.S.C. § 1132(g)(2), permits a fiduciary to bring an action to enforce
ERISA section 515, 29 U.S.C. § 1145, which requires employers to make the
contracted-for contributions to multiemployer plans.
Because section 502(g)(2) only provides for delinquent contribution suits
by fiduciaries, the Second Circuit and other courts have held that
a participant who wishes to assert the fiduciary's statutorily-granted
claim must follow the procedures of Rule 23.1, including making a demand
on the trustees, before proceeding. Diduck, 974 F.2d at 278;
see also Martinez v. Barasch, No. 01 CIV 2289 (MBM),
2004 WL 1555191, at *7 (S.D.N.Y. July 12, 2004); Hartline v. Sheet
Metal Workers' Nat'l Pension Fund¸134 F. Supp. 2d 1, 11 (D.D.C. 2001);
Dallas Cowboys Football Club v. National Football League, No.
95CIV9426 (SAS), 1996 WL 601705, at *3 (S.D.N.Y. Oct, 18, 1996).
ERISA section 502(a)(2), in contrast, expressly authorizes participants
and beneficiaries, as well as fiduciaries and the Secretary, to seek
redress for fiduciary breaches that have harmed their plan. 29
U.S.C. § 1132(a)(2). Diduck, and the other section 502(g)(2)
cases, therefore, are simply not on point.
The court also erred in relying on the Seventh Circuit's decision in
Thornton v. Evans, 692 F.2d at 1080. Although the
Thornton court applied the procedural requirements of Rule 23 or
Rule 23.1 to an ERISA suit against non-fiduciaries for participation in
fiduciary breaches, the court expressly limited its holding to suits
against non-fiduciaries. 692 F.2d at 1080 n.35. The court
reasoned that ERISA expressly provides for suits by individual
participants and beneficiaries against ERISA fiduciaries for their
breaches, but does not expressly provide for suits by
non-fiduciaries. Id. Thus, Thornton does not
support the district court's ruling here.
There is no suggestion in ERISA itself that
fiduciary claims under section 409(a) and 502(a) need to meet the
requirements of Rules 23.1, 23 or 19, all of which were in place at the
time of the passage of ERISA. In fact, the legislative history of
section 502 suggests that Congress considered, but rejected, requiring
fiduciary duty claims to be brought as class actions. While the
Senate bills made oblique reference to suits in a representative capacity,
the House bills specifically provided: "In any action by a
participant or beneficiary under subsection (a)(2) or (3), such
participant or beneficiary shall maintain such action as a representative
of all other participants similarly situated as a class, if (A) the law of
the jurisdiction provides for class actions, and, (B) the court is
satisfied that the requirements for a class action are not unduly
burdensome as applied in the particular circumstances." H.R. 2, 93d
Cong, 4047-48 (1974); see Staff of Conf. Comm., 93d Cong., Summary
of the Differences Between the Senate Version and the House Version of
H.R. 2 to Provide for Pension Reform, at 4047-48 (Comm. Print 1974)
(comparing House and Senate bills) (available on Westlaw at A&P ERISA
Comm. Print 1974(26)). Nonetheless, as adopted, ERISA contains no
such provision. 29 U.S.C. § 1132(a). Given this history, as well as
ERISA's "carefully crafted and detailed enforcement scheme"
Mertens, 516 U.S. at 254 (quoting Russell, 473 U.S. at
146-47), there is no reason to believe that Congress inadvertently omitted
a requirement that plaintiffs proceed under Rule 23.
Absent an express requirement in ERISA, the
Federal Rules of Civil Procedure control. Rule 23 itself is
permissive, not mandatory. Fed. R. Civ. P. 23 ("One or more members
of a class may sue in a representative capacity") (emphasis added);
see Watkins v. Simmons & Clark, Inc., 618 F.2d 398, 502
(6th Cir. 1980). The Secretary recognizes, however, that courts have
the inherent power to require the parties to give notice or take other
action to protect absent parties. See Daily Income Fund,
Inc. v. Fox, 464 U.S. 523, 529-31 (1984) (discussing Hawes v.
Oakland, 104 U.S. 450 (1881), in which, prior to Rule 23.1, the Court
imposed procedural requirements now largely codified in Rule 23.1 to
prevent abusive suits by shareholders on behalf of a
corporation).
Moreover, even if the district court has the
authority to mandate a class action in appropriate cases, it must first
perform a "rigorous analysis" of Rule 23's requirements to determine
whether a class action is appropriate, something that the district court
failed to do here. See Caridad v. Metro-North Commuter
R.R., 191 F.3d 283, 291 (2d Cir. 1999) (citing General Tel. Co. v.
Falcon, 457 U.S. 147, 161 (1982)). It is not clear, if the
district court had done so, whether it could have concluded that plaintiff
met the numerosity requirement for certification of a class under Rule 23
given the relatively small number of participants in the affected funds,
or that she was a proper representative of a class, given the plaintiff's
work as a consultant in connection with the termination of the plan and
distribution of its assets. See Coan II, 349 F.
Supp. 2d at 276 n.8 (these facts "might raise an issue as to the propriety
of her representation of other plan participants"). The district
court, however, engaged in no such analysis.
Likewise, although the district court had the
authority to require plaintiff to join other participants, it erred by not
following the terms of Rule 19 of the Federal Rules of Civil
Procedure. Rule 19 gives the court broad discretion in a two-step
procedure to decide who should be joined, if feasible, and whether the
case may proceed if he or she cannot be joined. See Fed. R. Civ. P.
19. Under Rule 19(a), the court must determine whether (1) in the
person's absence, complete relief cannot be afforded to those already
parties or (2) the person claims an interest relating to the subject of
the action such that disposition of the action in that person's absence
would either impair his ability to protect his interest or expose a
current party to the risk of inconsistent obligations. If the court
determines that such a person exists, it "shall order" the person to be
added as a party. Id.; see also Fed. R. Civ. P.
21 ("Parties may be dropped or added by order of the court on motion of
any party or of its own initiative at any stage of the action and on such
terms as are just."). If a person the court orders joined under Rule
19(a) cannot be joined, the court must consider the factors in Rule 19(b)
– including what prejudice might result, whether the court can lessen or
avoid such prejudice through protective provisions or shaping of the
relief, whether a judgment in the party's absence will be adequate, and
whether plaintiff will have an adequate remedy if her action is dismissed
for nonjoinder – to determine whether the party is truly
indispensable.
The district court engaged in no such
analysis. In the decision granting summary judgment, the district
court did refer to the plaintiff's perceived need to join the absent plan
participants as parties. See Coan I, 333
F. Supp. 2d at 24. Similarly, its conclusions with respect to Rules
23 and 23.1 in the order regarding plaintiff's Motion for Reconsideration
also suggest that the court believed that the absent parties were
indispensable parties to the litigation. See Coan II,
349 F. Supp. 2d at 276. However, at a minimum, the court was
required to make all the findings required by the Rule, and, if
appropriate, order Coan to join the remaining participants before
summarily terminating her case.
Thus, ERISA section 502(a)(2) required plaintiff
to do no more than she did: bring her claim on behalf of the plan.
Further, Rule 23.1's procedures for shareholders' derivative actions are
clearly inapplicable to breach of fiduciary duty actions under ERISA
sections 409 and 502(a)(2). The district court may have had other
options available to it to address its concerns regarding the rights of
the other participants in the affected funds, but those options arose
under the Rules of Civil Procedure, not ERISA. From the district court's decisions, it appears
that it failed to fully consider the requirements of those Rules.
For these reasons, the district court's award of summary judgment to the
defendants should be reversed.
II. The District Court
Erred In Concluding That the Relief Sought By Plaintiff Was Legal Relief
Not Available Under ERISA Section 502(a)(3)
ERISA section 502(a)(3)
provides:
A civil action may be
brought . . . by a participant, beneficiary, or fiduciary (A) to enjoin
any act or practice which violates any provision of this title 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 title
or the terms of the plan.
29 U.S.C. §
1132(a)(3). Section 502(a)(3) has been described as a "catch-all"
remedial section designed to provide relief for violations that section
502 "does not elsewhere adequately remedy." Varity Corp. v. Howe,
516 U.S. 489, 512 1996). As the district court recognized,
individualized claims for breach of fiduciary duty may be brought under
section 502(a)(3), so long as they seek "equitable relief." Coan
I, 333 F. Supp. 2d at 25 (quoting Chappell v. Lab. Corp. of
Am., 232 F.3d 719, 727 (9th Cir. 2000)).
The term "equitable relief" is
not defined in ERISA. Nevertheless, the Supreme Court has instructed
that to determine whether relief is equitable, courts must determine how
the relief was characterized when the bench was divided between equity
courts and law courts. Great-West, 534 U.S. at 212.
Moreover, the relief must have been "typically" available in equity
and not simply "occasionally" available in equity. Id. at
214; Mertens, 508 U.S. at 255-56. Furthermore, courts should
look to standard texts on remedies and trusts to make such determinations.
Great-West, 534 U.S. at 212.
In Strom (which was decided after Mertens but before
Great-West), this Court engaged in precisely this analysis to
conclude that relief against a fiduciary (as Coan seeks) was exclusively
available in equity, and treated as equitable by standard texts on
remedies and trusts. As Strom explained, beneficiary claims
against breaching fiduciaries to redress their breaches "have lain at the
heart of equitable jurisdiction from time immemorial." Strom, 202
F.2d at 144-45; see also III. A. Scott, The Law of
Trusts, § 197, at 188 (4th ed. 1988) (trust relationships "are, and
have been since they were first enforced, within the peculiar province of
courts of equity"); G. Bogert, The Law of Trusts and Trustees, §
870, at 123 (rev. 2d ed. 1995) ("The court of equity first recognized the
trust as a legal institution and has fostered and developed it").
Thus, in Strom, the Court properly considered, as the Supreme Court
had earlier suggested in Mertens, and would later expressly require
in Great-West, whether the remedy sought was an equitable remedy in
the days of the divided bench, and concluded that claims against
fiduciaries were inherently equitable. See also
Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 592 (7th Cir.
2000) ("[W]hen sought as a remedy for breach of fiduciary duty
[restitution] is properly regarded as an equitable remedy because the
fiduciary concept is equitable.") (quoting Health Cost Controls of
Ill., Inc. v. Washington, 187 F.3d 703, 710 (7th Cir. 1999) (emphasis
added)); Ream v. Frey, 107 F.3d 147 (3d Cir. 1997).
Accordingly, under the law of this Circuit, the relief Coan seeks in this
case is "equitable relief" within the meaning of ERISA section
502(a)(3).
A careful examination of trust law supports this
conclusion. "In a trust there is a separation of interests in the
subject matter of the trust, the beneficiary having an equitable interest
and the trustee having an interest which is normally a legal
interest." Restatement (Second) of Trusts, § 2, at 9 (1959);
id. § 74, at 192 (beneficiary has equitable interest in the
trust). "The duties of the trustee with respect to trust property
are equitable duties. By this [it] is meant that they are
enforceable in a court of chancery or a court having and exercising the
powers of a court of chancery." I. A. Scott, The Law of
Trusts, § 2.7, at 48-49.
As the Restatement of Trusts emphasizes, "the remedies of the
beneficiary against the trustee are exclusively equitable."
Restatement (Second) of Trusts, § 197, at 433 (emphasis
added). During the days of the divided bench, beneficiaries could
not obtain relief in a court of law because they did not hold legal title
to the property of the trust. I. A. Scott, The Law of Trusts,
§ 1, at 4; III. A. Scott, The Law of Trusts, § 197, at
188. They could only seek relief in a court of equity to enforce
their equitable interests. I. A. Scott, supra, § 1; III. A.
Scott, supra, § 197. The equity court, unlike the law court,
could compel the trustee to act in accordance with its fiduciary duties
and compensate the beneficiary for losses when the trustee's action caused
the beneficiary to suffer harm. III. A. Scott, The Law of
Trusts, §§ 197; 199.
As the Supreme Court has explained, "[t]he essence of equity jurisdiction
has been the power of the Chancellor to do equity and to mould each decree
to the necessities of the particular case. Flexibility rather than
rigidity has distinguished it." Hecht Co. v. Bowles, 321 U.S.
321, 329 (1944). Professor George Gleason Bogert explains in his
leading treatise: "Equity is primarily responsible for the protection of
rights arising under trusts, and will provide the beneficiary with
whatever remedy is necessary to protect him and recompense him for
loss, in so far as this can be done without injustice to the trustee or
third parties." G. Bogert, The Law of Trusts and Trustees, § 861,
at 3-4 (emphasis added).
The trust relationship, therefore, arises in equity and creates equitable
rights and duties, which, when breached, are redressed exclusively through
equitable remedies. Whether or not such a remedy against a fiduciary
consists of a money award does not change its character as an equitable
remedy. In actions such as this where a beneficiary sues a fiduciary
for its breach of duty, the fiduciary could be required to restore the
beneficiary to the "position in which he would have been if the trustee
had not committed the breach of trust." Restatement (Second) of
Trusts, § 205, at 458, cmt. a; see also
id. § 205, at 458; III. A. Scott, The Law of Trusts, §
199.3, at 206-07 ("If the trustee has committed a breach of trust the
beneficiaries can maintain a suit in equity to compel him to redress the
breach of trust, either by making specific reparation or by the payment of
money or otherwise."); id. §199, at 203-04 & 206 (listing money
payment designed to redress fiduciary breach as one of the "equitable
remedies" available to a beneficiary).
In Mertens and Great-West, the plaintiffs sought monetary
relief against non-fiduciaries, and the Court concluded that this was not
"equitable relief" within the meaning of section 502(a)(3).
Mertens, 508 U.S. at 248, 256; Great-West, 534 U.S. at
204, 219. This case, however, like Strom,
involves relief that was exclusively (and therefore "typically") available
in equity: relief (albeit monetary) against a fiduciary to restore
to a beneficiary losses resulting directly from a fiduciary breach.
Such relief is equitable not simply because a common law court of equity
could have granted it, but because only a common law court
of equity could have granted it. See Restatement of Trusts, §
197; supra, Section A. (pp. 5-7).
In Strom, this Court recognized this precise distinction. The
plaintiff in Strom sought monetary relief under section 502(a)(3)
for a fiduciary's negligent handling of life insurance application which
resulted in the participant's loss of coverage. 202 F.3d at
141. The Court distinguished its earlier decision:
As noted above, the
district court characterized this claim as seeking money damages, a
traditional legal remedy. Relying principally on our decision
in Geller v. County Line Auto Sales, Inc., 86 F.3d 18 (2d Cir.
1996), it rejected plaintiff's contention that the recovery of the amount
of the lost insurance benefit would be restitutionary, and therefore
equitable rather than legal, on the ground that restitution is available
only where a defendant has been enriched unjustly by the action complained
of, a circumstance absent in this case. It therefore dismissed
the claim against Goldman on the ground that Section 502(a)(3)(B) of
ERISA, 29 U.S.C. § 1132 (a)(3)(B), in relevant part, permits recovery only
of "appropriate equitable relief," not damages.
The district court's
reliance on Geller was misplaced. The critical fact that
distinguishes Geller from this case is that this is an action
against an alleged fiduciary whereas Geller involved a suit
by a fiduciary against nonfiduciary wrongdoers. And that
distinction is material. Geller was an appeal from the
dismissal of a complaint brought by trustees of an employee benefit plan
to recover from nonfiduciaries the amount of benefits paid by the trustees
to an ineligible person by reason of the defendants' alleged fraud.
Id. at 143. That distinction holds here, and
ought to lead to the same conclusion: monetary relief to redress a breach
by a fiduciary is equitable relief under section 502(a)(3).
The Secretary recognizes that some courts, like
the district court in this case, have read Mertens and
Great-West as barring a monetary recovery against fiduciaries as
well as non-fiduciaries, see, e.g., Callery v. U.S. Life
Ins. Co., 392 F.3d 401 (10th Cir. 2004); Rego v. Westvaco
Corp., 319 F.3d 140 (4th Cir. 2003); Helfrich v. PNC Bank Ky.,
Inc., 267 F.3d 477, 481-82 (6th Cir. 2001); Kerr v. Charles F.
Vatterolt & Co., 184 F.3d 938, 943-44 (8th Cir. 1999); FMC Med.
Plan v. Owens, 122 F.3d 1258 (9th Cir. 1997). These decisions
are erroneous. This more restricted reading of "equitable relief"
would leave beneficiaries without any remedy for serious violations of
ERISA's fiduciary provisions. A fiduciary, for example, could
deliberately mislead a participant (e.g., by misrepresenting the
terms or existence of health coverage), cause the participant to incur
substantial medical bills in reliance on the misrepresentation, and evade
responsibility for the loss. The participant would have no remedy
under ERISA if the recovery for the loss were not "equitable"
relief. Moreover, any state law claims based on the fiduciary's
misconduct would be preempted. As the Supreme Court stated in its
post-Mertens opinion in Varity, "it is hard to imagine why
Congress would want to immunize breaches of fiduciary obligation that harm
individuals by denying injured beneficiaries a remedy." 516 U.S. at
513. In fact, such a result is neither consistent with ERISA's
remedial purpose, nor compelled by Mertens or
Great-West. Instead, we believe that Great-West, by
emphasizing the need to look to the common law, fully supports the result
reached by this Court in Strom. The Strom decision,
therefore, is still controlling law in this Circuit.
As we argue above, because there is an available
remedy here under section 502(a)(2), "equitable relief" under section
502(a)(3) may not be "appropriate" in this case. Varity,
516 U.S. at 515 ("Thus, we should expect that where Congress
elsewhere provided adequate relief for a beneficiary's injury, there will
likely be no need for further equitable relief, in which case such relief
normally would not be 'appropriate'" within the meaning of section
502(a)(3)). This does not change the equitable nature of the relief,
however, and the district court erred in refusing to follow Strom
in this regard.
CONCLUSION
For the reasons set forth above, the Secretary of Labor urges this Court
to reverse the district court's grant of summary judgment to
defendants.
Respectfully submitted,
HOWARD M. RADZELY
Solicitor of Labor
TIMOTHY D. HAUSER
Associate Solicitor
Plan Benefits Security
Division
ELIZABETH HOPKINS
Counsel for Appellate and
Special Litigation
Plan Benefits Security
Division
____________________________
SUSAN J. LUKEN
Trial Attorney
United States Department of
Labor
Office of the Solicitor
Plan Benefits Security
Division
200 Constitution Avenue,
NW
Room N4611
Washington, DC 20210
(202) 693-5600
(202) 693-5610 (fax)
STATEMENT OF COMPLIANCE
As required by Rule 32(a)(7)(B) of the Federal Rules of Civil Procedure, I
certify that this brief is proportionally spaced, using Times New Roman
14-point font size, and contains 6213 words.
I relied on Microsoft Word 2000 to obtain the word count.
Dated: March
25, 2005
__________________________
Susan J. Luken
CERTIFICATE OF
SERVICE
I hereby certify that a copy of the foregoing was served upon:
Thomas G.
Moukawsher
Moukawsher
& Walsh, LLC
21 Oak
Street, Suite 209
Hartford,
CT 06106,
Glenn W.
Dowd
Day, Berry
& Howard, LLP
CityPlace
I
185 Asylum
Street
Hartford,
CT 06103-3499, and
Mary Ellen
Signorelli, Esq.
AARP
Foundation
601 E
Street NW
Washington,
DC 20049
by Federal Express, this ___ day of March,
2005.
____________________________
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