Fink v. National Sav. and Trust Co.

• Citation: 249 U.S.App.D.C. 33,772 F.2d 951
• Decision Date: 03 September 1985
• Docket Number: No. 84-5081,84-5081
• Parties: , 54 USLW 2170, 3 Fed.R.Serv.3d 934, 6 Employee Benefits Ca 2269 Ronald FINK, et al., Appellants v. NATIONAL SAVINGS AND TRUST COMPANY, et al.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 951

772 F.2d 951

249 U.S.App.D.C. 33, 54 USLW 2170, 3

Fed.R.Serv.3d 934,

6 Employee Benefits Ca 2269

Ronald FINK, et al., Appellants v. NATIONAL SAVINGS AND TRUST COMPANY, et al.

No. 84-5081.

United States Court of Appeals District of Columbia Circuit.

Argued Dec. 11, 1984.

Decided Sept. 3, 1985.

As Amended Sept. 3, 1985.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 83-00992).

Samuel W. Halpern, Washington, D.C., with whom James S. Ray and Orrin Baird, Washington, D.C., were on the brief, for appellants.

Alfred H. Moses, Washington, D.C., for appellees, Schoen, et al.

James E. Wesner and Jonathan Ginsburg, Washington, D.C., were on the brief, for appellee, NS & T Company.

Thomas L. Holzman, Atty., Dept. of Labor, Washington, D.C., was on the brief, for amicus curiae urging reversal.

Before MIKVA and SCALIA, Circuit Judges, and BAZELON, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge MIKVA.

Opinion concurring in part and dissenting in part filed by Circuit Judge SCALIA.

MIKVA, Circuit Judge:

Ronald Fink and Charles Kraft were participants in an employer sponsored retirement plan. Upon termination of their employment, they unsuccessfully sought to obtain benefits due under the plan. Fink and Kraft then brought suit in U.S. District Court to enforce their rights to benefits under the plan and to remedy breaches of fiduciary duty which led to the plan's financial difficulties. The District Court held that each of the claims for relief was time-barred, and granted summary judgment for the defendants below. In construing the statute of limitations contained in the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. Sec. 1113 (1982), we hold that the District Court erred in granting summary judgment as to claims that arose in the six years prior to the filing of this suit in which Appellants lacked actual or constructive knowledge of fiduciary breaches. In addition, disputed issues of material fact were present as to claims of fraud or concealment. Accordingly, we reverse and remand this case to the District Court.

I. BACKGROUND

Appellants Fink and Kraft are former employees of Consumers United Group, Inc. ("CUG"), a holding company engaged in the marketing, administration, and underwriting of group insurance programs, primarily for nonprofit associations. Appellees are CUG, its founder, James P. Gibbons, the CUG Profitsharing and Trust Plan (the "Plan") as well as the National Savings and Trust Co. ("NS & T"), a bank currently serving as the Plan's trustee, and the first trustees of the Plan, Richard D. Schoen, Denis G. Baron and Robert T. Freeman (collectively, the "initial Trustees"). NS & T was appointed to succeed the initial Trustees to avoid the necessity of registering CUG's stock under the Securities Act of 1933, 15 U.S.C. Sec. 77a (1982). See 15 U.S.C. Sec. 77c(a)(2). NS & T assumed its duties in January 1975.

The Plan was established in 1973 at the request of Gibbons. Despite its name, it was designed to provide retirement income to CUG employees by essentially conveying a 50% ownership interest in CUG to the employees; upon retirement, employees could convert their portion of the Plan's account balance into cash. Benefits were payable in one of three ways, at the election of the Plan Administrator: in a lump sum, in yearly installments extending over a maximum of ten years, or in the form of an annuity.

At the inception of the Plan, Gibbons owned 250 shares of CUG stock, which constituted 100% of CUG's common stock. In December 1974, CUG issued 250 additional shares of stock and sold the entire new issue to the Plan. The value of these shares was determined by Alexander Brown & Sons, an investment banking firm and member of the New York Stock Exchange. The Plan received the approval of the Internal Revenue Service in September 1974.

The Plan was funded solely by contributions from CUG; no employee contributions were allowed under the Plan and none have ever been made. There was no public market for the stock, nor did it pay any dividends. Thus, the 250 shares sold by CUG to the Plan could only be paid for to the extent CUG was able to make contributions under the Plan. CUG's method of funding the Plan was somewhat convoluted due to two limits imposed under the Internal Revenue Code on employer contributions. First, consistent with the status of the Plan as one of profit sharing, contributions could only be made out of current or accumulated profits. Rev.Rul. 66-174, 1966--1 C.B. 81. Second, total contributions were limited to fifteen percent of CUG's payroll. 26 U.S.C. Sec. 404(a)(3)(A).

The principal selling price for the 250 shares of stock was $1,711,000. Of that total, the Plan paid CUG $191,802.49 in cash in 1974. These monies had been contributed previously to the Plan by CUG. In addition, the Plan gave CUG a promissory note for the balance of $1,519,197.15 (the "Note"), payable from contributions made by CUG to the Plan over ten years. The Note called for interest at six percent per annum on the unpaid principal. The Plan also executed a Security Agreement, granting CUG a security interest in all shares for which it had not yet been paid. The Note and Security Agreement expressly provided that in the event the Plan did not make full and timely payments on the Note, CUG's sole recourse was to repossess those shares for which payment had not been made.

Initially, half of the Plan's assets consisted of CUG stock, with the other half consisting of liquid instruments such as Treasury Notes also purchased with monies contributed by CUG. This arrangement was in conformity with the Internal Revenue Service's advance ruling requirement that not more than one-half of the assets of a profit sharing plan be placed in employer securities. When ERISA was enacted, this limitation was removed, permitting profit sharing plans like the Plan to invest 100 percent of their assets in employer securities. See H.R.Rep. No. 93-1280, 93d Cong., 2d Sess. 317-18, reprinted in [1974] U.S.Code Cong. & Ad.News 4639, 5038, 5097. Accordingly, in 1976 the Trust was amended to provide that "the Trustee may, and the Company desires the Trustee to, invest the entire Trust Fund in the capital stock of the Company." From 1977 on, over 90 percent of the Trust's assets were invested in CUG stock.

From the inception of the Plan, the value of the CUG stock steadily increased and CUG made the maximum contributions to the Plan allowed by law. However, in 1979, CUG's business took a serious downturn due to the loss of their largest customer. As a result, CUG made no contributions to the Plan in 1978 or subsequent years; the Plan, in turn, could not make payments on the Note after April 14, 1978, and was unable to make benefit payments in the manner provided for under the Plan. See page 954 supra.

When Fink and Kraft left the employ of CUG in 1979, each received statements of their accounts with the Plan. In accordance with the terms of the Plan, Fink was promised payment of his balance of approximately $5,600 in five annual installments; Kraft was promised his balance of approximately $10,800 in ten annual installments. Both Fink and Kraft received a $1,000 payment late in 1979 and another $1,000 in 1980. No further payments were received. When the Plan's inability to make timely payments became apparent, this suit was initiated as a class action. Appellants alleged, inter alia, breaches of contract and of fiduciary duty under ERISA. The District Court denied class certification and held that all causes of action were time-barred.

In reviewing a district court's grant of a motion for summary judgment, a court of appeals looks at the case de novo. Callahan v. Woods, 736 F.2d 1269, 1272 (9th Cir.1984). We therefore do not restrict our review of the disposition of the fiduciary claims to whether the District Court abused its discretion, but instead examine the record closely and consider the same question put to the District Court: is there a genuine issue as to a material fact? See United States v. Diebold, 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962). We find such issues present.

II. BREACH OF FIDUCIARY DUTY

Appellants' principal allegation is against NS & T for violations of the fiduciary duties specified in ERISA, 29 U.S.C. Sec. 1104(a)(1)(A) & (B). ERISA requires a trust fund fiduciary to act "solely in the interest" of a plan's participants and beneficiaries, and to discharge his duties "with the care, skill, prudence, and diligence ... 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 ..." 29 U.S.C. Sec. 1104(a)(1)(B). If a trustee fails to adhere to these fiduciary standards, he may be held personally liable under ERISA for whatever losses result to a plan from his misconduct. 29 U.S.C. Sec. 1109(a).

Prudence under ERISA is measured according to the objective prudent person standard developed in the common law of trusts. S.Rep. No. 93-127, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Ad.News 4639, 4838, 4865 ("The fiduciary responsibility section, in essence, codifies and makes applicable to these fiduciaries certain principles developed in the evolution of the law of trusts.") A court's task in evaluating fiduciary compliance with this standard is to inquire "whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment." Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir.1983), cert. denied, --- U.S. ----, 104 S.Ct. 704, 79 L.Ed.2d 169 (1984).

This fiduciary standard is applicable to all ERISA funds, including those like the Plan which derive funds to pay beneficiaries through ownership of employer stock. The Plan is an "eligible individual account plan" ("EIAP") as defined in ERIS...