Wolin v. Smith Barney Inc.

• Decision Date: 08 May 1996
• Docket Number: No. 95-3278,95-3278
• Citation: 83 F.3d 847
• Parties: Pens. Plan Guide P 23921L Harold WOLIN and Nathan Wortman, as Trustees of the RAM Industries, Inc. Profit Sharing Plan & Trust, Plaintiffs-Appellants, v. SMITH BARNEY INCORPORATED and Gene Mackevich, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 847

83 F.3d 847

Pens. Plan Guide P 23921L

Harold WOLIN and Nathan Wortman, as Trustees of the RAM

Industries, Inc. Profit Sharing Plan & Trust, Plaintiffs-Appellants, v. SMITH BARNEY INCORPORATED and Gene Mackevich, Defendants-Appellees.

No. 95-3278.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 23, 1996.

Decided May 8, 1996.

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 2101--William T. Hart, Judge.

Peter J. Berman (argued), Chicago, IL, for Plaintiffs-Appellants.

H. Nicholas Berberian (argued) and Mark T. Carberry, Neal, Gerber & Eisenberg, Chicago, IL, for Defendants-Appellees.

Before POSNER, Chief Judge, and FLAUM and KANNE, Circuit Judges.

POSNER, Chief Judge.

Though rarely the subject of sustained scholarly attention, the law concerning statutes of limitations fairly bristles with subtle, intricate, often misunderstood issues, as is well illustrated by the appeal in this case. The appeal comes about as follows. Wolin and Wortman, the trustees of a pension plan governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq., brought suit against a broker named Mackevich and the broker's employer, E.F. Hutton, succeeded by Smith Barney. The suit charged that Mackevich, and so by the principle of respondeat superior his employer as well, had violated the fiduciary duties imposed upon him by the Act by advising the trustees to make risky, illiquid investments while assuring them that the investments were liquid and safe. An initial question was whether Mackevich was a fiduciary. Not everyone who provides investment advice to an ERISA plan is. A broker who merely touts stocks to the plan is not. Farm King Supply, Inc. v. Edward D. Jones & Co., 884 F.2d 288, 292 (7th Cir.1989). The statute, 29 U.S.C. § 1002(21)(A)(ii), as glossed by the Department of Labor's regulations, 29 C.F.R. § 2510.3-21, and by the cases, such as Farm King Supply and Thomas, Head & Greisen Employees Trust v. Buster, 24 F.3d 1114, 1117-20 (9th Cir.1994), requires that the investment advisor, in order to be deemed a fiduciary, with all that that status implies, be rendering advice pursuant to an agreement, be paid for the advice, and have influence approaching control over the plan's investment decisions. There is no doubt that Mackevich satisfied these criteria. He was therefore a fiduciary of the plan, obligated to render prudent advice to the trustees and, even more clearly, to refrain from deliberately misleading them. 29 U.S.C. § 1104(a)(1); In re Unisys Savings Plan Litigation, 74 F.3d 420, 434, 442 (3d Cir.1996); Burdett v Miller, 957 F.2d 1375, 1381 (7th Cir.1992). The district judge nevertheless granted summary judgment for the defendants on the ground that the suit was untimely.

The plaintiff in a suit under ERISA against a fiduciary has six years after the "breach or violation" in which to sue, or three years after the plaintiff "had actual knowledge of the breach or violation," whichever comes first, "except that in the case of fraud or concealment, [the suit] may be commenced not later than six years after the date of discovery of such breach or violation." 29 U.S.C. § 1113(a). (There is no subsection (b), so from here on we shall drop the reference to (a).) The meaning of the "actual knowledge" clause is reasonably clear, as we shall see; the clause modifies and supplants the judge-made doctrine of equitable tolling. The "except" clause, however, is deeply puzzling. The purpose could be to codify another judge-made doctrine, that of equitable estoppel in its aspect as a defense to a plea of the statute of limitations--whether the whole of the doctrine, or the part of it that goes by the name "fraudulent concealment," or perhaps a concept of fraudulent concealment that crosses the boundary that separates equitable estoppel from equitable tolling. E.g., Martin v. Consultants & Administrators, Inc., 966 F.2d 1078, 1093-94 (7th Cir.1992); Radiology Center, S.C. v. Stifel, Nicolaus & Co., 919 F.2d 1216, 1220 (7th Cir.1990); J. Geils Band Employee Benefit Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245, 1252 (1st Cir.1996). To establish equitable estoppel a plaintiff must show that the defendant had taken steps to prevent the plaintiff from filing suit within the statutory period. Cada v. Baxter Healthcare Corp., 920 F.2d 446, 450-51 (7th Cir.1990). The defendant might have promised the plaintiff not to plead the statute of limitations, or might--this would be fraudulent concealment--have concealed his identity or other facts that the plaintiff needed in order to be able to file suit.

Among the puzzles of the "except" clause, besides its use of the term "fraud or concealment" rather than "fraudulent concealment" or "equitable estoppel," is that the six-year deadline for suing that it establishes seems both too short and too long. Too short because after the prospective plaintiff discovers the wrongful act the defendant may take steps to prevent him from suing--for example by falsely promising not to plead the statute of limitations--that may be effective for more than six years. Too long because after the plaintiff discovers the wrongful act, and assuming the defendant immediately desists from any efforts to prevent the plaintiff from suing, the plaintiff has a full six years to sue even though the preceding clause of the statute gives a plaintiff only three years to sue after he obtains actual knowledge of the wrongful act. Once the defendant has stopped trying to obstruct the bringing of the suit and his previous obstructive efforts have dissipated, the plaintiff will be in exactly the same position that he would have occupied had he, at just the same time, obtained actual knowledge of the wrongful act.

The explanation may be that Congress decided to substitute a fixed period of years for the open-ended judge-made doctrines of fraudulent concealment and equitable estoppel, thus promoting (as in statutes of repose) certainty of legal obligation. Larson v. Northrop Corp., 21 F.3d 1164, 1172 (D.C.Cir.1994); Martin v. Consultants & Administrators, Inc., supra, 966 F.2d at 1103-04 (concurring opinion). If there is fraudulent concealment the plaintiff gets a generous six years from the date of discovery of the violation in which to sue, but no more, even if the defendant somehow succeeds in preventing him from suing within that period.

The facts of the present case are simpler than their interpretation. In 1984 Wolin and Wortman, financial naifs who owned a modest business selling office supplies and furniture, retained Mackevich to advise them on investing the assets of their ERISA plan, which amounted to some $650,000. They told Mackevich that they wanted the assets placed in safe and liquid investments. Mackevich persuaded them to place $200,000 in a pair of real estate limited partnerships. (The rest of the assets presumably he invested properly.) He assured Wolin and Wortman that these would be safe and liquid investments. They were not. His assurances to them are the alleged wrongdoing, which the plaintiffs describe as fraud.

A remarkable feature of the case is that the prospectuses and other documents that Mackevich furnished the trustees stated in simple, lucid, prominent, and unmistakable language that investments in these real estate limited partnerships were risky and illiquid. Wolin and Wortman can credibly claim that they were defrauded by Mackevich only by confessing their own breach of fiduciary obligation to the plan of which they were the trustees and hence the primary fiduciaries. See 29 U.S.C. §§ 1102(a), 1103(a); Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 572, 105 S.Ct. 2833, 2841, 86 L.Ed.2d 447 (1985); In re Unisys Savings Plan Litigation, supra, 74 F.3d at 435-36; Plumbers & Steamfitters Local 150 Pension Fund v. Vertex Construction Co., 932 F.2d 1443, 1450 (11th Cir.1991). They failed to take the most elementary precautions to safeguard the plan's assets, violating "ERISA's duty to investigate," which "requires fiduciaries to review the data a consultant gathers, to assess its significance, and to supplement it where necessary." In re Unisys Savings Plan Litigation, supra, 74 F.3d at 435. One might expect Wolin and Wortman to be defendants along with Mackevich and his employer in a suit for breach of fiduciary obligation brought by the beneficiaries of the plan, rather than plaintiffs. Cf. SEC v. Lauer, 52 F.3d 667 (7th Cir.1995). A further obstacle to this suit is that no suit for securities fraud can be maintained on the basis of oral representations plainly inconsistent with written ones, e.g., Associates in Adolescent Psychiatry, S.C. v. Home Life Ins. Co., 941 F.2d 561, 571 (7th Cir.1991); see also Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1033 (2d Cir.1993), and this principle should apply to a suit under ERISA that charges securities fraud rather than anything special to ERISA.

We need not decide just how thin the trustees' suit is, however, because we agree with the district judge that even if it is meritorious it was filed too late. The alleged fraud occurred in 1984. The suit was not filed until 1995, eleven years later. No problem, say the plaintiffs; the defendants concealed the fraud until 1990. Every year, the plaintiffs' ERISA plan was required to file an information return with the Internal Revenue Service listing the plan's assets and liabilities. Every year, Wolin would call Mackevich and ask him what the limited partnerships were worth and Mackevich would tell him they were worth substantially more than their purchase price but that to be conservative Wolin should list as their value on the report to the IRS the purchase price. All this time Wolin and Wortman were receiving annual reports from each limited partnership that stated in language that could not have been much plainer that the value of...