Waller v. Blue Cross of California

Decision Date05 July 1994
Docket NumberNo. 92-55487,92-55487
Citation32 F.3d 1337
Parties18 Employee Benefits Cas. 1513 Gerald E. WALLER; Robert C. Bryson; Harold Kurofsky; James E. Fenningham; Elizabeth Montgomery; Walter Boge, on Behalf of Themselves and All Others Similarly Situated and Derivatively on Behalf of the Former Non-Contributory Retirement Program for Certain Employees of Blue Cross of California, Plaintiffs-Appellants, v. BLUE CROSS OF CALIFORNIA, Blue Cross and Blue Shield Association and Leonard D. Schaeffer, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Michael A. Sherman, Barrack, Rodos & Bacine, San Diego, CA, and Leonard Barrack, Barrack, Rodos & Bacine, Philadelphia, PA, and William S. Lerach, Milberg, Weiss, Bershad, Spechrie & Lerach, San Diego, CA, for plaintiffs-appellants.

James C. Martin and Kurt C. Peterson, Crosby, Heafey, Roach & May; Jeffrey S. Davidson, Alexander F. MacKinnon, Kirkland & Ellis, Los Angeles, CA; James W. Rankin; and James R. Grimes, Chicago, IL, for defendants-appellees.

Philip R. Hertz, Washington, DC, for amicus Pension Benefit Guar. Corp.

Susan M. Green, Washington, DC, for amicus Secretary of Labor.

Appeal from the United States District Court for the Central District of California.

Before NORRIS, WIGGINS, and O'SCANNLAIN, Circuit Judges.

WILLIAM A. NORRIS, Circuit Judge:

Plaintiffs-appellants brought this action under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Secs. 1001 et. seq. ("ERISA"), alleging that defendants-appellees breached their fiduciary duty to the plan by imprudently choosing annuity providers to cover plan liabilities as part of terminating plaintiffs' plan. Without opinion, the district court granted defendants' motion to dismiss the Second Amended Complaint for failure to state a claim. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We affirm in part and reverse in part.

I FACTS AND PROCEDURAL HISTORY

In 1986 Blue Cross of California ("Blue Cross") terminated its retirement plan (the "Retirement Plan" or "Plan") by using approximately $62 million of the Plan's assets to purchase annuities for Plan participants and beneficiaries from Executive Life Insurance Company ("Executive Life") and Provident National Assurance Company ("Provident"). 1 After purchasing the annuities, Blue Cross obtained a reversion of the residual assets, totalling approximately $32 million.

Plaintiffs represent participants and beneficiaries who are eligible (or will become eligible) to receive retirement benefits from the Retirement Plan in the form of annuities Plaintiffs do not contend that defendants breached their fiduciary duties in deciding to terminate the Retirement Plan. They acknowledge that ERISA gives employers the right to make a business decision to terminate a plan and transfer to themselves any residual assets remaining after the plan's liabilities are fully satisfied. Rather, the gravamen of plaintiffs' action is that defendants breached their fiduciary duties by unlawfully employing an infirm bidding process geared solely toward selecting those annuity providers who would enable defendants to obtain the maximum reversion possible. Plaintiffs claim that defendants' breach violated three sections of ERISA: (1) ERISA Sec. 404(a)(1)(A) and (B), 29 U.S.C. Sec. 1104(a)(1)(A) and (B), which imposes duties of loyalty and care on plan fiduciaries (Claims Two and Five); (2) ERISA Sec. 4044(d), 29 U.S.C. Sec. 1344(d), which requires that all liabilities of the plan be satisfied before an employer may take a reversion of residual assets (Claims Three and Six); and (3) ERISA Sec. 406(a) and (b), 29 U.S.C. Sec. 1106(a) and (b), which provides a list of prohibited transactions between a party in interest and a plan and between a plan fiduciary and the plan (Claims One and Four).

issued by Executive Life or Provident. Defendants are Blue Cross, its president, Leonard D. Schaeffer, and the named administrator, Blue Cross and Blue Shield Association (the "Association"). Plaintiffs allege that defendants were fiduciaries of the Retirement Plan and are liable under ERISA for the breach of fiduciary duty. 2

Plaintiffs seek to recover monetary damages and obtain equitable relief, including a constructive trust on all funds improperly or illegally obtained by Blue Cross as a result of defendants' conduct. They appeal the district court's dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. We affirm in part and reverse in part.

II STANDING

We first address defendants' threshold argument that plaintiffs lack standing to bring this action. We agree with defendants that participants and beneficiaries of a terminated plan have no standing to seek legal damages for breach of fiduciary duty once the Plan was terminated and Plan liabilities were satisfied. Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir.1986) (per curiam).

We agree with plaintiffs, however, that they have standing to pursue the equitable remedy of a constructive trust to distribute defendants' allegedly ill-gotten profits to the former participants and beneficiaries of the Plan. In Amalgamated Clothing & Textile Workers v. Murdock, 861 F.2d 1406 (9th Cir.1988), we held that participants and beneficiaries of a terminated plan had standing to sue on behalf of all participants and beneficiaries of the plan for a constructive trust remedy to strip a fiduciary of ill-gotten profits earned from breach of his fiduciary duties. Id. at 1416-17. We explained that "ill-gotten profits [are] held in a constructive trust for plan participants and beneficiaries [and] may be construed as equitably vested benefits under an ERISA plan." Id. at 1419. Thus, "[e]ven after plan participants and beneficiaries have received their actuarially vested benefits from the plan, the plan should be viewed as continuing to exist for the purpose of distributing the equitably vested benefits." Id.

Defendants' reliance on Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), for its argument that participants and beneficiaries must in all circumstances bring suit on behalf of the plan rather than on their own behalf is misplaced. 3 As we explained in Murdock, "every one of the elements of ERISA analyzed Defendants' reliance on Sokol v. Bernstein, 803 F.2d 532 (9th Cir.1986), is equally unavailing. In Sokol, "we followed the Supreme Court's reasoning in Russell and decided that extracontractual damages are also not available to individual plan beneficiaries under the catchall equitable relief provision of ERISA Sec. 502(a)(3)." Murdock, 861 F.2d at 1417. Defendants argue that Sokol bars suits, such as this one, brought on behalf of all participants and beneficiaries rather than on behalf of the plan. We rejected this argument in Murdock and will not revisit it here. See id.

in Russell--the legislative history, the text of Sec. 409(a), the statutory duties of fiduciaries, and the statutory rights of beneficiaries--supports the imposition of a constructive trust on the alleged ill-gotten profits in favor of plan participants and beneficiaries ... where that is the only available means of removing the ill-gotten profits from a culpable fiduciary's hands." Murdock, 861 F.2d at 1416. 4

Following Kuntz and Murdock, we hold that plaintiffs do not have standing to seek legal damages, but do have standing to pursue the constructive trust they seek to impose on any ill-gotten profits that reverted to Blue Cross as a result of the alleged breach of fiduciary duty. 5 Because we hold that plaintiffs only have standing to bring a suit for constructive trust, we affirm the district court's dismissal of all claims against Leonard Schaeffer and the Association because nothing in the complaint indicates that anyone other than Blue Cross received any of the $32 million. See id. at 1419 (explaining that a constructive trust remedy is not available against a party that never had possession or title to the money).

III STATUTE OF LIMITATIONS

Next, we address Blue Cross' contention that plaintiffs' claims are time-barred. 6 The complaint was filed more than four years after Blue Cross purchased the annuities If we accept the facts as alleged in the complaint as true, as we must for Rule 12(b)(6) purposes, plaintiffs' action is timely. We reject Blue Cross' argument that the statute of limitations necessarily began to run at the point plaintiffs learned that Blue Cross purchased annuities from Executive Life and Provident. We decline to equate knowledge of the purchase of annuities in this case with actual knowledge of the alleged breach of fiduciary duty. Cf. Fink v. National Sav. and Trust Co., 772 F.2d 951, 957 (D.C.Cir.1985) ("The disclosure of a transaction that is not inherently a statutory breach of fiduciary duty ... cannot communicate the existence of an underlying breach.").

                from Executive Life and Provident.  Under ERISA Sec. 413, 29 U.S.C. Sec. 1113, no action for fiduciary breach may be brought after the earlier of (1) six years from the date of the last action constituting part of the breach (or on which the fiduciary could have cured the breach or violation), or (2) three years from the earliest date on which plaintiff had actual knowledge of the breach or violation.  29 U.S.C. Sec. 1113. 7  Situations involving "fraud or concealment" are exempt from these provisions, and in such cases, an action may be filed up to six years after the date the breach or violation was discovered.  29 U.S.C. Sec. 1113
                

Instead, we focus on the language of the statute, which tolls the statute of limitations until the time of a plaintiff's "actual knowledge of the breach or violation." 29 U.S.C. Sec. 1113. Although plaintiffs fail to allege the exact date they gained actual knowledge of the alleged breach of fiduciary duty, they do allege that the action was filed within three years of such actual...

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