853 F.2d 1487 (8th Cir. 1988), 87-2405, Schaefer v. Arkansas Medical Soc.

Docket Nº:87-2405, 87-2480.
Citation:853 F.2d 1487
Party Name:Paul C. SCHAEFER, Appellee/Cross-Appellant, v. ARKANSAS MEDICAL SOCIETY and Trustees of the Arkansas Medical Society Pension Trust, Appellants/Cross-Appellees.
Case Date:August 15, 1988
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 1487

853 F.2d 1487 (8th Cir. 1988)

Paul C. SCHAEFER, Appellee/Cross-Appellant,

v.

ARKANSAS MEDICAL SOCIETY and Trustees of the Arkansas

Medical Society Pension Trust, Appellants/Cross-Appellees.

Nos. 87-2405, 87-2480.

United States Court of Appeals, Eighth Circuit

August 15, 1988

Submitted May 11, 1988.

Page 1488

Michael W. Mitchell, Little Rock, Ark., for appellants/cross-appellees.

James M. Dunn, Fort Smith, Ark., for appellee/cross-appellant.

Before FAGG and WOLLMAN, Circuit Judges, RE, [*] Chief Judge.

RE, Chief Judge.

Paul C. Schaefer (Schaefer), retired executive vice president of the Arkansas Medical Society (AMS), sued the AMS and the Trustees of the Arkansas Medical Society Pension Trust (Trustees), in the United States District Court for the Western District of Arkansas, under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Secs. 1001-1461 (1982). Pursuant to 29 U.S.C. Sec. 1132(a)(1)(B), Schaefer sought to recover the value of an annual cost-of-living adjustment (COLA) to his pension benefits which, according to the terms of the AMS Pension Plan (Plan), was due upon the Plan's termination. The AMS and the Trustees counterclaimed for damages alleging that Schaefer breached his fiduciary duty to the Plan, under 29 U.S.C. Sec. 1104(a)(1)(A).

The district court held that the COLA was an accrued pension benefit, and that, although the termination of the Plan without payment of the accrued benefit violated the Plan's provisions, since Schaefer had breached his fiduciary duty as a trustee of the Plan, he should not recover the value of the COLA benefits. The court also held that the counterclaim of the AMS and the Trustees was time barred by ERISA's 3-year statute of limitations. See 29 U.S.C. Sec. 1113(a)(2)(A). All parties appeal the order of the court.

On appeal, the AMS and the Trustees contend that the district court erred in applying ERISA's 3-year statute of limitations to time bar their claim for damages. The AMS and the Trustees contend that ERISA's 6-year statute of limitations is applicable because Schaefer's conduct constituted

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"fraud or concealment" under 29 U.S.C. Sec. 1113(a). Schaefer cross-appeals, contending that the district court erred in holding that he breached his fiduciary duty as a trustee of the Plan, and that his breach was a defense to his claim for the value of the supplemental pension benefits due him under the COLA provision.

The questions presented on this appeal are: (1) whether the district court erred in applying the 3-year statute of limitations to bar the AMS and the Trustees' claim against Schaefer for breach of his fiduciary duty, and (2) whether the district court erred in holding that Schaefer breached his fiduciary duty and that his breach was a defense to his claim. Since the district court committed no error, we affirm.

I. BACKGROUND

Schaefer served as executive vice president of the AMS, a professional association of medical doctors, from 1951 until his retirement on July 31, 1976. He also served as a trustee of the AMS Pension Plan from its inception in 1956 until 1980. The board of trustees, which administered the Plan, consisted of Schaefer and four physicians.

In 1972, Schaefer became concerned with the amount of money available in the Plan to fund his retirement, and consulted with an attorney, Robert L. Jones, Jr., about the funding provisions of the Plan. At Schaefer's instruction, Jones prepared a letter of guaranty to be signed by the AMS which would insure continuous payment of the benefits promised under the Plan.

On February 4, 1973, the AMS Council (council), an executive body of the AMS, accepted a recommendation by Gene Warren, attorney for the AMS, that, because the Plan was underfunded, the AMS should "guarantee" in writing that it would contribute sufficient funds to provide the benefits promised to employees under the Plan. The next day, Schaefer gave Warren a proposed letter of guaranty, which was identical to the letter prepared by Jones, and suggested that Warren send the letter to him and to Leah Richmond. Richmond was an assistant, hired by Schaefer, who retired from the AMS as associate executive vice president in 1986. Although several other AMS employees were eligible to participate in the Plan, Schaefer rejected the suggestion that one letter be sent to all eligible employees. Hence, individual letters were sent only to Schaefer and to Richmond.

In 1975, Schaefer recommended to the AMS Executive Committee (executive committee), a five-member governing body of the AMS, that the Plan be amended to provide that pension benefits be subject to an annual cost-of-living adjustment (COLA), reflecting changes in the Consumer Price Index, and that employees' fringe benefits be included as compensation for purposes of calculating retirement benefits. Schaefer conducted no investigation to determine the cost of the COLA provision or the legality of the fringe benefits provision before making his presentation to the executive committee. On the recommendation of the executive committee, the council approved the amendments to the Plan.

Schaefer subsequently retained a consultant, Glen Owens, of Owens and Associates, to bring the Plan into compliance with ERISA standards. Owens voiced reservations about the cost of the COLA provision, and whether the AMS could afford the provision. Owens also expressed reservations about the legality of the fringe benefits provision. Schaefer, however, did not relay Owens' concerns to the AMS or the Trustees. Schaefer also retained a consultant, Thomas K. Sundell, of National Investors Life Insurance Company, to provide ways to fund the Plan. Sundell warned Schaefer that the COLA provision would be "an expensive addition to the Plan," and provided data projecting the expense of the provision.

After Schaefer's retirement in July 1976, the cost of the COLA provision quickly rose, and substantially increased the cost of funding the Plan. By 1978, several AMS members were concerned about the Plan's solvency and it was discovered that assets were only $104,000, while obligations exceeded $550,000. In 1979, the AMS considered modifying the Plan. Schaefer, who continued to serve as a Plan

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trustee, wrote a letter to several AMS members, urging that the AMS retain the Plan. Although Owens and Sundell had informed Schaefer of the rarity of COLA provisions among small organizations like the AMS, Schaefer wrote that such plans were prevalent.

In 1979, the AMS Budget Committee met with Owens and the Trustees to discuss methods to offset the increase in the AMS' obligations to the Plan. Subsequently, the Trustees recommended a 10 percent cap on the COLA provision, and persuaded Schaefer, with the assistance of Dr. Ken Lilly, chairman of the budget committee, to accept this cap in his benefits. In 1980, the council appointed an ad hoc committee to investigate the Plan's high costs, and to make a recommendation as to the future of the Plan. During the investigation the AMS and the Trustees learned that Owens and Sundell had warned Schaefer about the expense of the COLA, and the possible illegality of including nontaxable fringe benefits as compensation. On January 27, 1980, the council voted to remove Schaefer from the board of trustees of the Plan. On September 7, 1980, at the conclusion of the investigation, the council voted to terminate the Plan.

On September 20, 1984, Schaefer sued the AMS and the Trustees for the wrongful denial of his supplemental pension benefits under the COLA provision, which according to the terms of the Plan, were due upon its termination. Alleging that Schaefer's conduct in promulgating the Plan amendments constituted a breach of fiduciary duty, the AMS and the Trustees counterclaimed seeking damages in excess of $140,000.

The district court found that Schaefer was guilty of "substantial self-dealing and conflicts of interest" in his promulgation of the amended Plan "without providing the Council or the other trustees with information at his disposal which showed that such provisions would be costly, to say the least, and would ultimately result in the destruction of the Plan." Schaefer v. Arkansas Medical Soc'y, No. 84-2299, slip op. at 21 (W.D.Ark. Sept. 28, 1987). Consequently, the court held that Schaefer's breach of his fiduciary duty was a defense to his claim for the supplemental pension benefits due him under the COLA provision. Although the court held that termination of the Plan without payment of the COLA violated the Plan's provisions, in view of Schaefer's conduct, it declined to award him the value of the cost-of-living adjustment to his pension benefits. Id., slip op. at 40. The court also held that the AMS and the Trustees' counterclaim was time barred under ERISA's 3-year statute of limitations running from September 7, 1980, the latest day that the AMS had actual knowledge of Schaefer's breach of...

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