Harris Trust & Savings Bank v. Brothers Inc.

• Citation: 184 F.3d 646
• Decision Date: 06 July 1999
• Docket Number: No. 98-1812,98-1812
• Parties: (7th Cir. 1999) HARRIS TRUST AND SAVINGS BANK, not individually but solely as Trustee for the Ameritech Pension Trust; AMERITECH CORPORATION; and JOHN A. EDWARDSON, laintiffs-Appellees, v. SALOMON BROTHERS INC. and SALOMON BROTHERS REALTY CORP., Defendants-Appellants
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 646

184 F.3d 646 (7th Cir. 1999)

HARRIS TRUST AND SAVINGS BANK, not individually but solely as Trustee for the Ameritech Pension Trust; AMERITECH CORPORATION; and JOHN A. EDWARDSON, laintiffs-Appellees, v. SALOMON BROTHERS INC. and SALOMON BROTHERS REALTY CORP., Defendants-Appellants.

No. 98-1812

United States Court of Appeals, Seventh Circuit

Argued November 30, 1998

Decided July 6, 1999

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 92-C-5883--Joan Humphrey Lefkow, Magistrate Judge.

Before FLAUM, KANNE, and EVANS, Circuit Judges.

TERENCE T. EVANS, Circuit Judge.

The Employee Retirement Income Security Act (ERISA) prohibits certain transactions between an employee pension plan and its service providers who are deemed "parties in interest" under the Act. In this case we decide whether ERISA provides a private cause of action against a party in interest for engaging in such prohibited transactions.

In the late 1980's defendant Salomon Brothers Inc. set up financing for two motel chains, Motels of America, Inc. and Best Inns, Inc., to acquire large blocks of motel properties throughout the country. In four separate transactions the companies initially sold mortgage notes secured by the acquired properties to Salomon, who in turn sold the notes to institutional investors. In exchange for its services Salomon received a participation interest in each group of motel properties which entitled it to a percentage of the "net cash flow" generated by the properties plus a percentage of any appreciation in the properties' value.

During this same time period Salomon also provided broker-dealer services to plaintiff Ameritech Pension Trust (APT), which holds assets for Ameritech Corporation's employee pension plans. Ameritech had appointed National Investment Services of America, Inc. (NISA) to serve as investment manager to APT. In 1987 Salomon offered to sell its participation interests in the Motels of America and Best Inns motel properties to APT as an investment. After extensive negotiations among Salomon, NISA, and Ameritech, APT purchased Salomon's participation interests in the four groups of motel properties for over $20 million. In the early 1990's the nationwide market for hotel and motel real property collapsed, and APT suffered a considerable loss on its investment.

In 1992 APT's newly appointed trustee, Harris Trust and Savings Bank, sued Salomon (and a related company, but we can disregard that detail), seeking to hold it liable for APT's loss on the motel property participation interests. Among the 12 claims in the initial complaint were three ERISA claims relevant here: (1) a claim that Salomon was a fiduciary that had breached its duties to the plan under Title 29 U.S.C. sec. 1104; (2) a claim that Salomon was a fiduciary that caused the plan to engage in prohibited transactions under sec. 1106(a); and (3) an alternative claim that Salomon as a nonfiduciary had knowingly participated in a breach of a sec. 1104 duty by plan fiduciaries.

After the plaintiffs filed suit, we held in another case, based on Supreme Court dicta, that ERISA does not provide a private cause of action against a nonfiduciary for participation in a fiduciary's breach of duty. See Reich v. Continental Cas. Co., 33 F.3d 754, 757 (1994); Mertens v. Hewitt Assocs., 508 U.S. 248 (1993). This holding effectively knocked out the plaintiffs' third claim. Evidently, the plaintiffs were also fearful that the district court would find that Salomon was not a plan fiduciary, so they amended their second claim to cite Salomon for participating as a nonfiduciary party in interest in a transaction prohibited by sec. 1106.

Salomon moved for summary judgment on all three ERISA claims, and the plaintiffs moved for summary judgment on their sec. 1106 claim. As the plaintiffs had feared, Magistrate Judge Joan Humphrey Lefkow, sitting by consent of the parties, first determined that Salomon was not a plan fiduciary and found for Salomon on the first claim. As expected, she also found that the holding in Continental Casualty eliminated the third claim against Salomon for nonfiduciary participation in a fiduciary breach. Judge Lefkow denied summary judgment on the newly constituted sec. 1106 claim, however, finding that ERISA does provide a private cause of action against nonfiduciaries who participate in a prohibited transaction.

After the Supreme Court's decision in Lockheed Corp. v. Spink, 517 U.S. 882 (1996), Salomon moved for reconsideration or, in the alternative, certification for interlocutory appeal on the sole remaining claim. In Lockheed the Supreme Court held that a sec. 1106 violation occurred only when a fiduciary had caused the plan to enter into the prohibited transaction. The district court declined to reconsider but granted certification for appeal of its denial of summary judgment. We review the denial of a motion for summary judgment de novo. See Hillman v. Resolution Trust Corp., 66 F.3d 141, 143 (7th Cir. 1995).

In a part of ERISA titled "Fiduciary Responsibility" the nature of a fiduciary's relationship to a qualified employee benefit plan is spelled out in detail. Title 29 U.S.C. sec. 1104 defines the duty owed:

[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[.]

29 U.S.C. sec. 1104(a)(1). Section 1109 then makes a fiduciary personally liable for breaching this duty and describes the remedies available for a breach. Another part of the Act titled "Administration and Enforcement" provides a specific civil enforcement provision against fiduciaries who breach their duties--the Secretary of Labor, plan beneficiaries, and plan fiduciaries can sue fiduciaries for "appropriate relief under [sec. 1109]." 29 U.S.C. sec. 1132(a)(2). ERISA also broadly allows the Secretary of Labor, plan fiduciaries, and plan beneficiaries to sue "to enjoin any act or practice which violates any provision of this title or the terms of the plan, or . . . to obtain other appropriate equitable relief . . . to redress such violations or . . . to enforce any provisions of this title or the terms of the plan." 29 U.S.C. sec. 1132(a)(3). This last provision and the phrase "other appropriate equitable relief" has been the cause of much consternation in the courts.

In Mertens v. Hewitt Associates, 508 U.S. 248 (1993), the Supreme Court considered a claim by plan beneficiaries against a nonfiduciary for knowingly participating in a fiduciary's breach of duty. The nonfiduciary defendant had acted as actuary for the Kaiser Steel Retirement Plan. When Kaiser began phasing out its steel operations a large number of employees took early retirement, and the defendant failed to change the plan's actuarial assumptions to reflect the costs of the unusually large influx of retirees. As a result, Kaiser failed to adequately fund the plan. The plaintiffs brought their action under the "other appropriate equitable relief" clause of sec. 1132(a)(3). The Mertens parties and the lower courts all assumed that sec. 1132(a)(3) provided a cause of action against nonfiduciaries for knowingly participating in a fiduciary breach, and the only question raised before the Supreme Court was whether money damages could constitute "other appropriate equitable relief." See Mertens, 508 U.S. at 251. After extensive ruminations on the nature of equity, a 5-4 majority held that money damages could not be considered equitable relief for the purposes of sec. 1132(a)(3).

More importantly for our purposes, Justice Scalia, writing for the majority, made clear the Court's doubts that sec. 1132(a)(3) provides a cause of action against nonfiduciaries for participating in a fiduciary breach because "no provision explicitly requires them to avoid participation (knowing or unknowing) in a fiduciary's breach of fiduciary duty." Id. at 254. There had been such a cause of action under the common law of trusts upon which ERISA was largely based. See id. Justice Scalia reasoned, however, that because Congress undoubtedly knew about the common law cause of action, it is all the more unlikely that the omission of an explicit cause of action in ERISA was inadvertent. See id. The "statute's . . . detailed enforcement scheme provides 'strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.'" See id. (quoting Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146-47 (1985)). We adopted Justice Scalia's rationale as the law of this circuit in Continental Casualty, 33 F.3d at 757.

On appeal, the plaintiffs have wisely abandoned their claim against Salomon for participating in a breach of fiduciary duty under sec. 1104. Instead, they cite sec. 1106, which addresses "Transactions between plan and party in interest." In pertinent part, sec. 1106 provides:

(a)(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect--

(A) sale or exchange, or leasing, of any property between the plan and a party in interest;

. . . .

(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. sec. 1106(a). Section 1106 prohibits plan fiduciaries from engaging in these transactions because they create a high potential for conflicts of interest. One example of a party in interest is "a person providing services to such plan." 29 U.S.C. sec. 1002(14)(B). For the purposes of our review we assume that at all relevant times Salomon was a party in interest vis a vis APT and that sec. 1106 therefore...