262 F.3d 897 (9th Cir. 2001), 99-15716, Patelco Credit Union v. Sahni

Docket Nº:99-15716, 99-15718
Citation:262 F.3d 897
Party Name:PATELCO CREDIT UNION; PATELCO CREDIT UNION HEALTH PLAN; AMANDA JONES, PLAINTIFFS-APPELLEES, v. SUDHIR SAHNI; SAHNI & ASSOCIATES, INC.; SUDHIR SAHNI & ASSOCIATES, DEFENDANTS-APPELLANTS. PATELCO CREDIT UNION; PATELCO CREDIT UNION HEALTH PLAN; AMANDA JONES, PLAINTIFFS-APPELLEES, v. SUDHIR SAHNI; SAHNI & ASSOCIATES, INC.; SUDHIR SAHNI & ASSOCIATES, DEF
Case Date:August 27, 2001
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 897

262 F.3d 897 (9th Cir. 2001)

PATELCO CREDIT UNION; PATELCO CREDIT UNION HEALTH PLAN; AMANDA JONES, PLAINTIFFS-APPELLEES,

v.

SUDHIR SAHNI; SAHNI & ASSOCIATES, INC.; SUDHIR SAHNI & ASSOCIATES, DEFENDANTS-APPELLANTS.

PATELCO CREDIT UNION; PATELCO CREDIT UNION HEALTH PLAN; AMANDA JONES, PLAINTIFFS-APPELLEES,

v.

SUDHIR SAHNI; SAHNI & ASSOCIATES, INC.; SUDHIR SAHNI & ASSOCIATES, DEFENDANTS-APPELLANTS,

AND

KERSTETTER & RILLO, APPELLANT.

No. 99-15716, 99-15718

United States Court of Appeals, Ninth Circuit

August 27, 2001

Argued and Submitted February 12, 2001

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Christopher J. Rillo, McKenna & Cuneo, L.L.P., San Francisco, California, for the appellants.

Michael Hoffman, Littler Mendelson, San Francisco, California, for the appellees.

Appeal from the United States District Court for the Northern District of California Susan Illston, District Judge, Presiding. D.C. No. CV-91-01028-S.

Before: Procter Hug, Jr., John T. Noonan, and William A. Fletcher, Circuit Judges.

Hug, Circuit Judge

OPINION

I. INTRODUCTION

Plaintiff Patelco Credit Union ("Patelco") and related parties brought this action under the Employee Retirement Income Security Act ("ERISA") for breach of fiduciary duties by Sudhir Sahni and his companies (collectively"Sahni") in administering Patelco's employee health benefit plan. The case was tried to the bench before District Judge Robert H. Schnacke; however, he died before making findings of fact or conclusions of law. The case was reassigned to District Judge Saundra Brown Armstrong, who granted partial summary judgment in favor of Patelco. The case was later reassigned to District Judge Susan Illston, who entered summary judgment in favor of Patelco on the remaining claims.

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Sahni argues on appeal (1) that due process requires a new trial when a judge dies after a bench trial without making findings of fact; (2) that Federal Rule of Civil Procedure 63 was violated because the successor judges did not certify familiarity with the record; (3) that the plan was not an ERISA plan; (4) that benefits checks from the employer's stop-loss carrier were not ERISA assets; (5) that genuine issues of material fact existed regarding whether Sahni was a fiduciary; (6) that genuine issues of material fact existed regarding whether Sahni breached his fiduciary duties or whether, instead, the money he retained was reasonable compensation that had been disclosed to and approved by Patelco; (7) that evidence and a witness were erroneously excluded; and (8) that sanctions were imposed in violation of Rule 11 and Rule 63 of the Federal Rules of Civil Procedure.

II. FACTUAL BACKGROUND

Plaintiffs in this action are Patelco Credit Union, the Patelco Credit Union Health Plan (the "Plan"), and Amanda Jones, a Vice President of Patelco and a fiduciary of the Plan. Defendants are Sudhir Sahni, an insurance broker, Sahni & Associates, Inc., and Sudhir Sahni & Associates, a sole proprietorship.

Patelco established the Plan to provide health and medical benefits for its employees. Prior to 1983 the Plan was fully insured by Travelers, with employees paying a $50 annual deductible. In 1983, upon the advice of Sahni, Patelco decided to partially self-fund the Plan in order to avoid paying rising premiums. Under the new arrangement, the employees would continue to pay a $50 annual deductible, but Patelco would cover any annual excess up to $500, at which point an insurance policy with Jordan Jones & Associates would cover the remainder.

Sahni managed the Plan and had control over its assets. For example, he selected Jordan Jones as the insurer of the claims in excess of $500. Each month, Patelco paid to Sahni, at his direction, an amount of money that he estimated would be necessary to cover (1) benefit checks that he would write to medical care providers, (2) insurance premiums for the Jordan Jones policy, and (3) the administrative fee that Sahni alleges Patelco had agreed to pay him. None of these components was itemized. As the employees filed claims for benefits, Sahni either approved or denied them and then wrote checks to medical care providers for those services that were covered. Sahni based his coverage decisions on Patelco's Plan booklet, which he had created by combining Travelers' previous booklet with a vision plan and a dental plan. Each month, Sahni produced and provided to Patelco lists of the under-$500 and over-$500 claims.

Sahni's accounting for the assets of the several plans that he administered can only be described as sloppy. He maintained three accounts: one for "premiums" that came in from clients like Patelco; one for paying claims; and one for his own company. However, the money of multiple plans was commingled in the accounts for premiums and claims. As to Patelco, the entire amount received each month pursuant to Sahni's estimate (which included money for premiums, money to pay claims, and his alleged administrative fee) was initially placed in the premiums account. Later, Sahni would transfer money from the premiums account to the claims account to cover the checks that he had written to medical care providers. Sahni had sole control over these accounts; Patelco's employees did not have check-writing authority, nor did they even know the account number or location of the accounts.

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In 1988, the Plan became fully self-funded. As before, employees paid the first $50 each year, but Patelco now paid everything over that amount. Patelco purchased stop-loss insurance from Standard Insurance Company of Oregon to protect it from catastrophic annual losses exceeding $10,000 per employee or $100,000 for the Plan. Sahni was the one who shopped around for an insurer to replace Jordan Jones and selected Standard Insurance. Patelco terminated Sahni as of March 31, 1990; however, Sahni continued to retain his administrative fees for three more months.

III. PROCEDURAL HISTORY

On April 4, 1991, Patelco filed suit against Sahni in the United States District Court for the Northern District of California. The complaint alleged that Sahni breached his fiduciary duties and engaged in transactions prohibited by ERISA1 sections 404(a) and 406(b), which are codified at 29 U.S.C. §§ 1104(a) and §§ 1106(b). On March 5, 1992, Patelco filed an amended complaint adding a RICO2 cause of action.

On December 17, 1993 the parties appeared before Judge Armstrong for a pretrial conference and oral arguments on various motions before the court. Judge Armstrong orally denied all of the motions with the exception of Patelco's request for sanctions, which she took under advisement.

On January 10, 1994, a bench trial commenced before Judge Schnacke; it concluded January 26, 1994. At the close of the plaintiff's case, on January 18, Judge Schnacke dismissed the RICO cause of action due to insufficiency of the evidence. However, before entering findings of fact or conclusions of law, Judge Schnacke unfortunately died. The case was reassigned to Judge Armstrong and later reassigned to Judge Illston. They entered several orders that are the subject of this appeal and which are discussed in detail below. Final judgment was entered by Judge Illston on March 8, 1999. A notice of appeal was timely filed, and we have jurisdiction pursuant to 28 U.S.C. §§ 1291.

A. February 14, 1994 Order Granting Sanctions (Armstrong, J.)

In an order dated February 14, 1994, Judge Armstrong set forth in detail the reasons for the oral pretrial rulings that she had made on December 18, 1993. Of relevance to this appeal is her ruling denying Sahni's motion for an order excluding evidence from trial or, in the alternative, compelling discovery and continuing the trial.3

Sahni's motion was premised on the following facts. In October 1991, Gerald Beaudoin, Sahni's first of four sets of attorneys in this case, served Patelco with a request for production of documents and a notice of deposition of Plaintiff Amanda

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Jones. Production was to occur at Beaudoin's office at the time of Jones's deposition; however, prior to the scheduled date, Beaudoin withdrew as counsel. Nevertheless, Patelco responded to the request, agreeing to produce certain documents but objecting to the remainder on a variety of grounds, including relevance. This response was served on Sudhir Sahni personally.

No further action occurred regarding these discovery requests until Sahni's fourth (and current) counsel, Chris Rillo, took over on December 1, 1993. Rillo came across these requests and sought the documents from Patelco. Patelco offered to produce the documents that it previously agreed to produce, but it refused to produce the documents to which it had previously objected. Dissatisfied, Rillo filed a motion in limine seeking to exclude all the evidence that Patelco had refused to produce. He argued that Patelco could not claim that the documents were irrelevant during discovery and then later admit them at trial. In the alternative, the motion sought to depose Jones, obtain the requested documents, and continue the trial.

Judge Armstrong ruled that if Sahni had wished to pursue the discovery, he should have done so "within a reasonable time" via Federal Rule of Civil Procedure 37. She did not consider his motion, "filed on the eve of trial and over two years after service of the discovery requests," to be timely. Instead, she attributed Sahni's failure to obtain the requested documents to lack of diligence. Considering Sahni's motion to be legally and factually frivolous as well as untimely, and noting that Patelco's counsel had explained to Rillo what had happened and warned that it would seek...

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