Donovan v. Mazzola
| Decision Date | 03 October 1983 |
| Docket Number | 82-4623,Nos. 82-4527,s. 82-4527 |
| Citation | 716 F.2d 1226 |
| Parties | 4 Employee Benefits Ca 1865 Raymond J. DONOVAN, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. Joseph P. MAZZOLA, Robert E. Buckley, Robert J. Costello, William Spencer, William Jennings, D.E. Dehnert, V.J. Kazarian, Keith Hansen, Lawrence J. Mazzola, H.J. Riboni, Raymond Springer, Stewart Smith, Fred Castro, James Emmons, The U.A. Local 38 Convalescent Fund, and The U.A. Local 38 Pension Fund, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Marc I. Machiz, Thomas L. Holzman, Washington, D.C., for plaintiff-appellee.
Joseph L. Alioto, Lawrence Alioto, Alioto & Alioto, San Francisco, Cal., for defendants-appellants.
Appeal from the United States District Court for the Northern District of California.
Before STEWART, * Associate Justice, and DUNIWAY and ALARCON, Circuit Judges.
These are companion appeals from two judgments of the district court. Appellants are certain present and former members of the Board of Trustees of the Pension Fund of Local 38 of the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry (Local Union 38), as well as the Union's Pension Fund and Convalescent Fund. First, appellants appeal the judgment wherein the district court found that the individual appellants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, (ERISA) 29 U.S.C. Secs. 1001 et seq. Second, appellants appeal the district court's judgment finding the individual appellants in contempt of court because they failed to post a $1 million indemnity bond as previously ordered by the court. We affirm the district court's judgment in each case.
Because the district court's findings are not clearly erroneous, we affirm the findings and incorporate them into our discussion. Fed.R.Civ.P. 52(a); see also M & R Inv. Co., Inc. v. Fitzsimmons, 685 F.2d 283, 285 (9th Cir.1982).
Local Union 38 is a Northern California labor union. In 1953, the union and employers of its members established the union's "Pension Fund" to provide retirement benefits to union members and their beneficiaries. The Pension Fund is an employee benefit plan as defined by ERISA, 29 U.S.C. Sec. 1002(3), and, therefore, subject to ERISA coverage, 29 U.S.C. Sec. 1003(a). The individual appellants as trustees of the Pension Fund, were fiduciaries with respect to the Pension Fund under ERISA, 29 U.S.C. Sec. 1002(21)(A).
In 1956, the Convalescent Fund of Local Union 38 was established by the union and the signatory employers. The Convalescent Fund owns and operates a hotel, the Konocti Harbor Inn, which provides rooms at discounted prices, a summer camp, and a low-cost retirement housing project for participants of the Convalescent Fund and their families. From January 1, 1975 through November 30, 1978, the individual appellants also served as trustees of the Convalescent Fund. Thereafter, they served as an "Advisory Committee" to the sole trustee of the Convalescent Fund.
The participants of the Pension Fund and Convalescent Fund although substantially the same are not identical. Since January 1, 1975, the Convalescent Fund has had more participants than the Pension Fund. The eligibility requirements of the two funds have also differed. Moreover, some contributing employers of the Pension Fund have not been at the same time contributing employers of the Convalescent Fund.
Between January 1, 1975, the effective date of ERISA, and 1979, when the present action was initiated, the individual appellants, as trustees of the Pension Fund, engaged in several transactions that prompted the Secretary of Labor under 29 U.S.C. Sec. 1132(e), to bring this action charging the individual appellants with numerous violations of ERISA. In December 1975, the individual appellants made a $1 1/2 million loan of Pension Fund assets to the Convalescent Fund. The following year, they granted a moratorium on that loan as well as all other loans that the Pension Fund had made to the Convalescent Fund. When granting the moratorium they did not request amendments favorable to the Pension Fund on the terms of the loans, nor did they require any additional security. In 1978 and 1979, the individual appellants also granted the Convalescent Fund two extensions to repay a $500,000 loan originally granted in December 1974 and due November 1, 1978. When these extensions were granted the amount owed on the final payment was in excess of $400,000. In spite of this, the individual appellants did not alter in any way the terms of that loan, nor did they seek or receive additional security. The Secretary charged that in making the above, the individual appellants violated 29 U.S.C. Secs. 1104 1 and 1106(b)(2) 2.
In March 1977, Dr. Schwartz, a friend of an individual appellant and personal physician for another, was retained and paid $250,000 by the trustees to perform a feasibility study to determine the most profitable use of the Convalescent Fund's Konocti Harbor Inn. The Secretary contended that a comparable study of equal or superior quality could have been obtained for substantially less money. Thus, the Secretary charged that the individual appellants breached their fiduciary duties under 29 U.S.C. Sec. 1104.
In addition to the loans made to the Convalescent Fund, in 1975, the individual appellants made a loan of $650,000 of Pension Fund assets to a limited partnership known as S & F Spas for the conversion of a hotel to a health spa. One of the principals of the limited partnership was Dr. Schwartz. Prior to making this loan the Pension Fund trustees had approved a $2 1/4 million construction loan secured by the property on which the spa was to be constructed. The Secretary claimed that in approving the $650,000 loan, the individual appellants breached their fiduciary duties under 29 U.S.C. Sec. 1104.
The Secretary also asked the district court: (1) to enjoin permanently the individual appellants from violating their fiduciary duties to the Pension Fund or any other employee benefit plan; (2) to remove them from service as fiduciaries of the Pension Fund; (3) to enjoin them for five years from serving as fiduciaries of any employee benefit plan covered by ERISA and appoint suitable successor fiduciaries; (4) to rescind all transactions between the Pension Fund and the Convalescent Fund which the individual appellants caused to be entered into; and were in violation of ERISA; and (5) to direct the individual appellants to reimburse the Pension Fund for any present or future losses stemming from violations of the individual appellants' fiduciary obligations. The Secretary also sought costs of the suit and any further relief the district court deemed appropriate.
After a trial on stipulated facts before a magistrate, both parties submitted objections to the magistrate's recommendations. In its findings of fact and conclusions of law filed on November 17, 1981, the district court made a de novo determination of all the portions of the magistrate's recommendation to which objections were made. Upon reviewing the record and making extensive findings of fact, the district court concluded that the Pension Fund trustees' actions were to be reviewed under the objective "prudent person" test. Applying the prudent person test, the district court concluded that the individual appellants had breached their fiduciary duties under ERISA as alleged by the Secretary.
Specifically, the district court found that the individual appellants violated Sec. 1104(a)(1)(B) because the challenged loans and extensions of credit were not ones that a reasonably competent lender would have made, nor were they made using accepted procedures used by such a lender. In addition, the district court found that the challenged loans and extensions of credit were in violation of 29 U.S.C. Sec. 1104(a)(1)(A) because they were not made for the exclusive purpose of benefiting the Pension Fund. Both the Convalescent Fund loan and the S & F Spas loan also violated the diversification requirement of 29 U.S.C. Sec. 1104(a)(1)(C). The convalescent loan was also a prohibited transaction in violation of 29 U.S.C. Sec. 1106(b)(2) because the individual appellants acted on both sides of the transaction. Finally, the district court found that the trustees had not complied with accepted industry standards in selecting a consultant to perform the feasibility study of the Konocti Harbor Inn and had thereby imprudently discharged their duty in violation of 29 U.S.C. Sec. 1104(a)(1)(B). By overpaying Dr. Schwartz for the study, the trustees also violated 29 U.S.C. Sec. 1104(a)(1)(A).
Pursuant to 29 U.S.C. Sec. 1109(a) 3 the district court subjected the individual appellants to joint and several liability for losses resulting from breaches of their fiduciary duty. The district court granted restitution for the losses incurred by the Pension Fund as a result of loaning the $1 1/2 million at a reduced interest and paying an excess price for the feasibility study. The district court also ordered the individual appellants to post a $1 million indemnity bond to insure against potential future losses to the Pension Fund resulting from the $1 1/2 million Convalescent Fund loan and the $650,000 S & F Spa loan. The bond was due sixty days from the entry of judgment. In addition, the district court found it appropriate to appoint an investment manager to control the Pension Fund's investment and financial component for a term of ten years. In all other respects the individual appellants were permitted to act as trustees of the Pension Fund. The district court entered its judgment accordingly on July 9, 1982. Appellants moved the district court under Fed.R.Civ.P. 59 for a new trial or to alter or amend the judgment. The district court denied their motion on...
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