Reich v. Compton

Decision Date08 September 1995
Docket NumberNo. 93-2019,No. 98,A,98,93-2019
Citation57 F.3d 270
Parties19 Employee Benefits Cas. 1441, Pens. Plan Guide P 23909G Robert B. REICH, Secretary of the United States Department of Labor, Appellant, v. Fred COMPTON, Joseph McHugh, John Nielsen, Frederick Hammerschmidt, Gersil N. Kay, Electrical Mechanics Association, The Fidelity-Philadelphia Trust Company, and The International Brotherhood of Electrical Workers, Local Unionppellees.
CourtU.S. Court of Appeals — Third Circuit

Thomas S. Williamson, Jr., Solicitor of Labor, Allen H. Feldman, Associate Solicitor for Special Appellate and Supreme Court Litigation, Nathaniel I. Spiller, Counsel for Appellate Litigation, Ellen J. Beard (argued), Atty. U.S. Dept. of Labor, Washington, DC, for appellant.

Michael Katz (argued), Meranze and Katz, Philadelphia, PA, Sandra L. Duggan, N. Marlene Fleming (argued), Blackburn & Michelman, P.C., Philadelphia, PA, for appellees, Fred Compton, Joseph McHugh, and John Nielsen.

Richard B. Sigmond, Richard C. McNeill, Jr. (argued), Sagot, Jennings & Sigmond, for appellees, Elec. Mechanics Ass'n and Intern. Broth. of Elec. Workers, Local Union No. 98.

Laurance E. Baccini (argued), Carol A. Cannerelli-Van Poortvliet, of counsel: Wolf, Block, Schorr and Solis-Cohen, Philadelphia, PA, for appellees, Frederick Hammerschmidt, Gersil N. Kay, and The Fidelity-Philadelphia Trust Co.

Before: BECKER, ALITO, and GIBSON *, Circuit Judges.

OPINION OF THE COURT

ALITO, Circuit Judge:

This is an appeal from an order granting summary judgment in favor of the defendants in an action brought by the Secretary of Labor ("the Secretary") to redress alleged violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Secs. 1001-1461. The action was based on certain financial transactions involving the International Brotherhood of Electrical Workers Union No. 98 Pension Plan ("the Plan") and the Electrical Mechanics Association ("EMA"), a not-for-profit corporation closely related to Local 98 of the International Brotherhood of Electrical Workers ("Local 98" or "the union"), whose members are covered by Plan. Maintaining that these transactions were prohibited because of EMA's close relationship with Local 98, the Secretary sued the Plan trustees, Local 98, and EMA. The district court granted summary judgment for the defendants, but we now reverse in part, affirm in part, and remand for further proceedings.

I.

In 1972, the Plan made a 30-year loan of $800,000 to EMA at 7.5% interest. EMA used this loan to finance construction of a building, and the loan was secured by a mortgage on this property. The building constructed with the loan housed Local 98's offices. Two years after EMA obtained the loan, Congress passed ERISA. Section 406(a) of ERISA, 29 U.S.C. Sec. 1106(a), prohibits various transactions involving a plan and a "party in interest." With respect to transactions that occurred before 1974, however, these prohibitions did not take effect until June 30, 1984. See 29 U.S.C. Sec. 1114(c).

Concerned that its outstanding loan to EMA would be considered a prohibited transaction after that date, the Plan applied to the Department of Labor on April 30, 1984 for an exemption from this provision. See 29 U.S.C. Sec. 1108 (authorizing the Secretary to grant exemptions from ERISA's prohibited transaction provisions). On June 1, 1984, the Department tentatively denied the exemption and advised the Plan that its only permissible options were to renegotiate the terms of the loan so that EMA was charged a market interest rate or to require EMA to satisfy the loan in full. Contrary to the advice of its counsel, the Plan withdrew its exemption request and, on April 25, 1985, accepted from EMA a payment of $380,289.93, the fair market value of the loan, in full satisfaction of the debt, which at the time had an accounting value of $653,817.47. 1 EMA borrowed the entire amount of this payment from Local 98. Local 98 then imposed a special "rental" assessment on its members and paid the proceeds to EMA. EMA in turn used those funds to repay the money advanced by the union. Joint Appendix ("JA") at 133.

During 1984 and 1985, Fred Compton, Joseph McHugh, and John Nielsen were Local 98's designated trustees ("union trustees") for the Plan; Frederick Hammerschmidt and Gersil Kay were the employer-designated trustees ("employer trustees"); and Fidelity-Philadelphia Trust Company ("Fidelity") was the Plan's corporate trustee. Compton was also president of both EMA and Local 98 from 1981 through 1987; McHugh was a member of Local 98's executive board from 1981 through 1987; and Nielsen was financial secretary of Local 98 from 1981 through 1987, as well as a member of EMA's board of directors from 1981 through June 1984.

In October 1988, the Secretary filed a complaint in district court against Compton, McHugh, Nielsen, Hammerschmidt, Kay, Fidelity, EMA, and Local 98 (collectively "the defendants"). The complaint first asserted that EMA "was a shell corporation wholly controlled by Local 98" and that therefore "all transactions with EMA, were, in fact, transactions with Local 98," which was a "party in interest" under section 3(14)(D) of ERISA, 29 U.S.C. Sec. 1002(14)(D). 2 JA at 17-18. The complaint alleged that the loan to EMA became a prohibited transaction as of July 1, 1984, pursuant to sections 406(a)(1)(A), (B), and (D) of ERISA, 29 U.S.C. Secs. 1106(a)(1)(A), (B), and (D). 3 Id. at 18. Likewise, the complaint alleged that EMA's subsequent purchase of its note was a prohibited transaction under these same provisions because the note was purchased for less than its principal value. Id. at 21.

Based on these transactions, the complaint claimed that various defendants had committed several different ERISA violations. First, the complaint claimed that from July 1, 1984 until August 25, 1984 (the date when EMA purchased the note), trustees Compton, McHugh, Nielsen, Hammerschmidt, and Kay had breached their fiduciary obligations under sections 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. Secs. 1104(a)(1)(A) and (B), 4 by failing to collect on the loan. Id. at 19. Second, the complaint claimed that Fidelity had likewise breached its fiduciary duties under sections 404(a)(1)(A), (B), and (D) of ERISA, 29 U.S.C. Secs. 1104(a)(1)(A), (B), and (D), by failing to take appropriate action to collect on the loan during this same period. Id. at 20. Third, the complaint alleged that all Plan trustees had breached their fiduciary obligations by causing the Plan to continue to hold the EMA loan during this same period even though they knew or should have known that doing so constituted a prohibited transaction under sections 406(a)(1)(B) and (D) of ERISA, 29 U.S.C. Secs. 1106(a)(1)(B) and (D). Id. at 20-21. Fourth, the complaint charged that all the Plan trustees had breached their fiduciary obligations by causing the Plan to sell the note to EMA when they knew or should have known that this was a prohibited transaction under sections 406(a)(1)(A) and (D) of ERISA, 29 U.S.C. Secs. 1106(a)(1)(A) and (D). Id. at 21. Fifth, the complaint alleged that the union trustees had breached their duties to the Plan under sections 406(b)(1) and (2) of ERISA, 29 U.S.C. Secs. 1106(b)(1) and (2), 5 by "dealing with the assets of the Plan in their own interest and for their own accounts, and in their individual capacity by acting in a transaction involving the Plan on behalf of a party (or representing a party) whose interests were adverse to those of the Plan" and its participants or beneficiaries. Id. 21. Finally, the complaint alleged that EMA and Local 98 had participated in the trustees' breaches of their fiduciary duties and, furthermore, that each Plan trustee was liable for the others' fiduciary breaches under sections 405(a)(2) and (3) and (b)(1)(A) of ERISA, 29 U.S.C. Secs. 1105(a)(2) and (3) and (b)(1)(A). 6 Id. at 21-22.

The complaint sought an injunction prohibiting the defendants from committing further ERISA violations. Id. at 23. It also sought an order requiring Local 98 and EMA to "restor[e] to the Plan the unpaid balance of the loan with interest" and an order requiring each defendant, jointly and severally, "to restore to the Plan all Plan losses attributable to their fiduciary breaches." Id. at 23-24.

After discovery, the Secretary moved for summary judgment. Much of the Secretary's argument rested on the contention that EMA was "a shell corporation or alter ego wholly controlled by Local 98." Id. at 147. The district court initially denied this motion in February 1993, but following the Supreme Court's decision in Mertens v. Hewitt Associates, --- U.S. ----, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993), the district court requested the parties to submit briefs concerning the impact of that decision. The court subsequently vacated its earlier order denying the Secretary's motion for summary judgment and instead entered summary judgment in favor of the non-moving defendants. McLaughlin v. Compton, 834 F.Supp. 743, 751 (E.D.Pa.1993) ("Compton I" ). The court interpreted Mertens as a directive to "strictly construe" ERISA. Id. at 747. Noting that EMA was not "a party in interest" under the applicable provision of ERISA, the district court reasoned that the Secretary's alter ego argument would expand the reach of this provision and thus contravene Mertens' teaching that liability can be imposed under ERISA only when the statute "explicitly prohibits the challenged transaction...." Id.

The Secretary moved for reconsideration, arguing that "the literal text of ERISA" prohibited the transactions at issue in this case. JA at 343. Specifically, the Secretary contended that the challenged transactions constituted "indirect" transactions with Local 98, in violation of sections 406(a)(1)(A), (B), and (D) of ERISA, and that the transactions constituted the "use...

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