Amalgamated Clothing & Textile Workers Union, AFL-CIO v. Murdock

Decision Date22 November 1988
Docket NumberAFL-CIO,No. 87-5654,87-5654
Citation861 F.2d 1406
Parties, 10 Employee Benefits Ca 1488 AMALGAMATED CLOTHING & TEXTILE WORKERS UNION,; Samuel Faulkner; Ruby Craver; Catherine Wilhoit; Melvin L. Smith; Willie James Ratliff; Flora M. Caldwell, Plaintiffs-Appellants, v. David H. MURDOCK; Harold M. Messmer, Jr.; Timothy F. Finley; Branson C. Jones; William S. Fisher; Harold D. Kingsmore; John H. Ketner, Jr.; Fieldcrest Cannon, Inc.; Cannon Holding Corp.; Continental Illinois National Bank & Trust Company of Chicago, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Stuart Libicki, Schwartz, Steinsapir, Dohrmann & Sommers, Los Angeles, Cal., for plaintiffs-appellants.

Henry C. Thumann, O'Melveny & Myers, Los Angeles, Cal., for defendants-appellees David H. Murdock and Cannon Holding Co.

Gregory P. Stone, Munger, Tolles & Olson, Los Angeles, Cal., for defendants-appellees Timothy F. Finley, Branson C. Jones, William S. Fisher, Harold D. Kingsmore and John H. Ketner, Jr.

Denise M. Parga, Mayer, Brown & Platt, Los Angeles, Cal., for defendant-appellee Continental Illinois Nat. Bank and Trust Co. of Chicago.

Patricia A. Timko, Latham & Watkins, Los Angeles, Cal., for defendant-appellee Fieldcrest Cannon, Inc.

Nancy J. Skovholt, Robert B. Flaig, Nancy J. Skovholt, Thelen, Marrin, Johnson & Bridges, Los Angeles, Cal., for defendant-appellee Harold M. Messmer, Jr.

Appeal from the United States District Court for the Central District of California.

Before PREGERSON, CANBY and WIGGINS, Circuit Judges.

PREGERSON, Circuit Judge:

This is an action for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Secs. 1001-1381 (1982) (ERISA). Plaintiffs contend that the district court erred in ruling that ERISA provides no remedy for breach of the fiduciary duty of loyalty after ERISA plan participants and beneficiaries have received their actuarially vested plan benefits. We hold that (1) when an ERISA fiduciary has profited by breaching his duty of loyalty to an ERISA plan, and (2) where imposing a constructive trust on the ill-gotten profits in favor of plan participants and beneficiaries is the only means available to deny the fiduciary his ill-gotten profits, a district court may impose a constructive trust on the ill-gotten profits and distribute them to plan participants and beneficiaries,

even after they have received their actuarially vested plan benefits. We therefore reverse the district court's ruling to the extent it holds that a constructive trust remedy was unavailable.

I BACKGROUND

The following facts were accepted as true for purposes of the district court proceedings.

Plaintiffs were participants in a voluntary employee benefit plan within the meaning of 29 U.S.C. Sec. 1002(35). 1 The plan was funded by employer contributions as actuarially necessary to provide plan benefits. At any point, the sponsoring employer could unilaterally amend or terminate the plan. Plan assets, however, were to be used for the exclusive benefit of plan participants and beneficiaries.

The complaint alleges that plan fiduciaries breached their duty of loyalty to the plan by using plan assets to further the interests of David H. Murdock, another plan fiduciary, rather than to further solely the interests of the plan participants and beneficiaries as required by ERISA. The pattern of abuse alleged in the complaint is as follows.

Murdock controlled, either directly or indirectly, substantial stock in two companies. In response to Murdock's influence, plan fiduciaries used plan assets to acquire additional stock in these two companies. Murdock then allegedly manipulated the combined stock holdings to "greenmail" 2 the two companies. Both companies paid a substantial premium to repurchase their stock and to prevent a takeover.

Plaintiffs in their complaint allege that this transaction involved a breach of the ERISA fiduciary duty of loyalty because "[plan] assets were invested and held ... and thereby put at risk not for the exclusive benefit of the Plan's participants and beneficiaries as required by the Plan and the Trust, but for the benefit of [one of the fiduciaries]." (Emphasis added.) Specifically, the complaint alleges that the fiduciaries breached the duty of loyalty expressed in ERISA Secs. 403(c)(1), 404(a)(1), 405(a)(2), 406(a)(1), (b), 29 U.S.C. Secs. 1103(c)(1), 1104(a)(1), 1105(a)(2), 1106(a)(1), (b). 3

Murdock allegedly profited from this breach in two ways. First, the companies repurchased stock Murdock owned or controlled at a premium in part because of the Second, Murdock allegedly profited by acquiring the premium the plan received from the stock repurchases. Murdock obtained this money by causing the plan to be amended, and then taking steps to terminate the plan and have its surplus assets distributed to him.

extra leverage he gained by allegedly manipulating the plan's stock. To the extent Murdock profited by obtaining any premium attributable to this extra leverage, he profited from the fiduciaries' breach of their duty of loyalty.

Before it was amended, the plan provided that only surplus generated by "erroneous actuarial computation" would revert to the sponsor of the plan upon the plan's termination. The amendment to the plan provided that any and all surplus held by the plan would revert to the sponsor.

After the plan was amended, Murdock allegedly stepped into the shoes of the plan's sponsor through a series of business transactions. Thereafter, he sought to terminate the plan by causing plan participants and beneficiaries to be paid the monies they were actuarially due under the plan. After the participants and beneficiaries were paid, Murdock allegedly collected the plan's surplus pursuant to the plan amendment. The plan's surplus allegedly included several million dollars--in cash and in kind--of profits attributable to the greenmail transactions. Total profits flowing from the fiduciaries' breach of the duty of loyalty are alleged to be in the tens of millions of dollars.

Plaintiffs seek damages as well as the imposition of a constructive trust on the alleged ill-gotten profits realized by Murdock as a result of the fiduciaries' breach of ERISA's duty of loyalty.

The defendants filed motions to dismiss and in the alternative motions for summary judgment. It appears that the district court treated the motions as motions to dismiss under Fed.R.Civ.P. 12(b)(6) and accepted as true the facts stated in the complaint. 4

The district court dismissed the action, concluding that ERISA provides no constructive trust remedy or other relief after plan participants and beneficiaries have been paid their actuarially vested plan benefits. The court also held that neither the plan's amendment nor its alleged termination constituted a breach of fiduciary duty. We reverse only the court's legal conclusion concerning the availability of a constructive trust remedy.

II STANDARD OF REVIEW

We review de novo the district court's determination to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim. Nieto v. Ecker, 845 F.2d 868, 870 (9th Cir.1988). We take the allegations of material fact as true and construe them in the light most favorable to plaintiffs. Id. (citing Western Reserve Oil & Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir.1985), cert. denied, 474 U.S. 1056, 106 S.Ct. 795, 88 L.Ed.2d 773 (1986)).

III DISCUSSION
A. Standing and Constructive Trust Remedy

This case raises two interrelated questions. First, do ERISA plan participants and beneficiaries have standing to seek a constructive trust remedy after they have Ordinarily, standing is a "threshold question ... [that] determin[es] the power of the court to entertain the suit." Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975). In this case, however, to resolve the question of standing, we must first decide whether the constructive trust remedy sought is available to plaintiffs.

received their actuarially vested plan benefits. Second, may the res of a constructive trust be distributed to plan participants and beneficiaries.

ERISA provides that an ERISA plan "participant" or "beneficiary" has standing to bring a civil action under ERISA Sec. 502(a), 29 U.S.C. Sec. 1132(a), 5 when that person "is or may become eligible to receive a benefit of any type from an employee benefit plan." ERISA Sec. 3(7), 29 U.S.C. Sec. 1002(7) (emphasis added) (defining "participant"); ERISA Sec. 3(8), 29 U.S.C. Sec. 1002(8) ("The term 'beneficiary' means a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder."). 6 In the course of deciding whether plaintiffs have standing--i.e., whether they may become eligible to receive a benefit of any type from an ERISA plan--we must decide (1) whether the court may impose a constructive trust on a fiduciary's alleged ill-gotten profits and distribute those profits to plan participants and beneficiaries; and (2) whether this distribution may be construed as "a benefit of any type from an employee benefit plan." Id. Because these questions are inextricably linked, we treat them together.

Defendants argue that plaintiffs are no longer plan "participants" who can maintain a cause of action under ERISA because they received all their actuarially vested plan benefits. They base this argument on Kuntz v. Reese, 785 F.2d 1410 (9th Cir.), cert. denied, 479 U.S. 916, 107 S.Ct. 318, 93 L.Ed.2d 291 (1986). In Kuntz we held that plan participants and beneficiaries have no standing to seek monetary damages for breach of fiduciary duty after they receive their contractually defined and vested benefits from an ERISA plan. 7 Id. at 1411-12. We reasoned that legal damages could not be considered "a benefit of any type from an employee benefit plan." Id. at 1411. Therefore, the plan participants and...

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