Chao v. Malkani

• Citation: 452 F.3d 290
• Decision Date: 22 June 2006
• Docket Number: No. 05-1654.,05-1654.
• Parties: Elaine L. CHAO, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. Roma MALKANI; Information Systems & Networks Corporation, Defendants-Appellants, and Information Systems and Networks Corporation Employees' Pension Plan; Information Systems and Networks Corporation Profit Sharing Plan; Salomon Smith Barney, Incorporated, Defendants, Clark Consulting, Party in Interest.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 290

452 F.3d 290

Elaine L. CHAO, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. Roma MALKANI; Information Systems & Networks Corporation, Defendants-Appellants, and Information Systems and Networks Corporation Employees' Pension Plan; Information Systems and Networks Corporation Profit Sharing Plan; Salomon Smith Barney, Incorporated, Defendants Clark Consulting, Party in Interest.

No. 05-1654.

United States Court of Appeals, Fourth Circuit.

Argued May 24, 2006.

Decided June 22, 2006.

ARGUED: John Carney Hayes, Jr., Nixon Peabody, L.L.P., Washington, D.C., for Appellants. Evan H. Nordby, United States Department of Labor, Office of the Solicitor, Washington, D.C., for Appellee. ON BRIEF: Leslie P. Machado, Nixon Peabody, L.L.P., Washington, D.C., for Appellants. Howard M. Radzely, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor for Plan Benefits Security, Karen L. Handorf, for Appellate and Special Litigation, Elizabeth Hopkins, Senior Appellate Attorney, Adam Neufeld, United States Department of Labor, Office of the Solicitor, Washington, D.C., for Appellee.

Before WILKINSON, TRAXLER, and GREGORY, Circuit Judges.

Affirmed by published opinion. Judge WILKINSON wrote the opinion, in which Judge TRAXLER and Judge GREGORY joined.

WILKINSON, Circuit Judge.

The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. (2000), safeguards the assets of employee benefit plans by setting forth standards of conduct for fiduciaries who have discretionary authority over such plans. In this case, the district court held that defendant plan fiduciaries breached their fiduciary duties. The court removed them as fiduciaries of the plan, and required them to remunerate it for the losses that resulted from their misconduct. While ERISA fiduciaries should not be removed lightly, we conclude that defendants' actions — including attempts to raid the plan's assets and deprive employees of vested benefits — constitute an egregious misuse of authority that justified the district court's remedies. We thus affirm the judgment.

I.

Defendants are Information Systems and Networks Corporation (ISN) and Roma Malkani. ISN offers engineering services primarily to federal and state governments; Malkani is ISN's president and sole owner. In 1982, in order to procure and retain talented employees, ISN established the ISN Employees' Pension Plan ("the Plan"), a defined contribution plan governed by ERISA. The Plan required that ISN make an annual contribution to a trust fund for each eligible employee. The contribution amount was based on a percentage of the employee's income. Upon retirement, the employee would receive the contributions made on his behalf, plus or minus any investment gains or losses.

The ISN Pension Plan Committee operated as the plan administrator. Malkani chaired this committee. The committee hired a "third-party administrator" to perform many administrative functions for the Plan, which included, inter alia, calculating ISN's annual required contribution, determining which employees had become fully vested and which had forfeited their benefits, distributing Plan assets to retired employees, and reimbursing other entities for their expenses in administering the Plan. Over its life, the Plan has employed four different third-party administrators, including Principal Life Insurance Company ("Principal") and Salomon Smith Barney, Inc. ("Salomon").

From 1982 to 1994, ISN provided annual contributions to the Plan in the amounts that third-party administrators indicated were required. In 1995, however, it stopped making payments at all. Since that time, it has only provided the Plan with one payment of $204,367, notwithstanding admonitions from third-party administrators that contributions were due.

Ultimately, ISN's refusal to make its annual contributions brought on this litigation. On November 28, 2000, the Secretary of Labor ("Secretary") filed suit against Malkani, alleging that she breached her fiduciary duties by failing to collect the required Plan contributions for 1995 and 1996. The Secretary later amended the complaint to encompass ISN's failure to contribute through 2003.

The day after the Secretary filed suit, defendants requested that Principal pay ISN $435,761.52 out of Plan assets for administrative expenses ISN allegedly incurred between 1994 and 2000. Principal responded that the Department of Labor (DOL) would probably not approve of the reimbursement, and that it might violate ERISA. In additional correspondence, defendants again asked for these expenses, but Principal rejoined that ISN should seek DOL guidance because the request was "unusual due to the amount of reimbursement, its retroactive nature, and its coincidence with the DOL's lawsuit." In response, defendants limited their demand to $62,888.05 for administrative expenses allegedly incurred in 2000. Principal acquiesced to this new request and paid ISN out of Plan funds.

But defendants did not stop there. They subsequently ordered Principal to pay ISN an additional $706,264.54 in Plan assets — even more than they had previously requested — for administrative expenses. Principal refused. ISN thereafter cancelled its contract with Principal, and hired Salomon as the new third-party administrator. Malkani appointed herself trustee of the Plan while the transition took place, thus equipping herself with the ability to withdraw Plan funds.

Principal informed the DOL of these events. The Secretary responded by filing a motion for a temporary restraining order to enjoin defendants from transferring any additional Plan assets to ISN for administrative expenses. On August 16, 2001, the district court granted this motion, and the parties thereafter entered into a consent order in which defendants agreed not to seek administrative expenses until the ultimate resolution of the case. The Secretary also amended her complaint. She added ISN as a defendant, and alleged that Malkani and ISN breached their fiduciary duties by seeking Plan assets for administrative expenses and for separate conduct in which they interpreted the Plan's vesting provisions in a way that divested employees of their nonforfeitable benefits.

A few days later, defendants once again attempted to acquire Plan assets on the grounds that the Plan was overfunded. On September 13, 2001, Malkani — claiming that ISN had excessively contributed to the Plan — sent a letter to Salomon directing it to place approximately $1.86 million of the Plan's funds in an ISN corporate account. Malkani's order was predicated on the calculations of George Morrison, who provided administrative services to pension plans. Malkani had hired Morrison to review the work of former third-party administrators. Morrison concluded that the Plan was overfunded because third-party administrators had previously required ISN to contribute larger amounts than necessary. Morrison, however, never recommended that Malkani seek reimbursement from Plan funds because he had made only an initial, incomplete assessment of the Plan.

Salomon alerted the DOL that Malkani had requested a large reimbursement, and the DOL objected. The parties eventually entered into another consent order forbidding ISN from obtaining any Plan assets until the outcome of the litigation. The Secretary amended her complaint once again to allege that defendants' latest request for Plan assets breached their fiduciary duties.

Both parties moved for summary judgment. The district court granted the Secretary's motion and denied defendants' request. It held that defendants breached their ERISA fiduciary duties, and ordered ISN to return the $62,888.05 in administrative expenses it had received from Principal. Chao v. Malkani, 216 F.Supp.2d 505, 518 (D.Md.2002). The district court also removed defendants as the Plan's fiduciaries, and barred them from ever again serving in this capacity for an employee benefit plan. Id. It concluded, however, that a trial was necessary to determine the amounts, if any, that defendants needed to compensate the Plan for ISN's repeated failure to make annual contributions. Id. at 510.

The district court held a three-day bench trial, and both parties called experts who opined on the amount that ISN owed the Plan. The Secretary's expert indicated that ISN owed the Plan $696,524.82 for its failure to contribute between 1995 and 2003. He suggested that ISN had over-contributed between 1982 and 1989 in the amount of approximately $895,000, but did not take these excess payments into account. Defendants' expert, by contrast, used overpayments from previous years to offset liabilities in later years, and opined that ISN had probably funded the Plan by more than was necessary. The district court credited the Secretary's expert, and held that defendants had to pay $720,763.89 (including interest) for ISN's failure to contribute to the Plan. It refused to allow defendants to offset ISN's liabilities in the years it did not fund the Plan with its earlier excess contributions. Defendants appeal the district court's grant of summary judgment and award of $720,763.89.

II.

ERISA's primary aim is to protect individuals who participate in employee benefit plans. See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983); Bidwill v. Garvey, 943 F.2d 498, 505 (4th Cir.1991). These plans affect the "well-being and security of millions of employees and their dependents," 29 U.S.C. § 1001(a) (2000), and are of paramount importance to "the national economy, and . . . the financial security of the Nation's work force," Boggs v. Boggs, 520 U.S. 833, 839, 117 S.Ct. 1754, 138 L.Ed.2d 45 (1997). But because plans often have immense assets, see, e.g., id. at 840, 117 S.Ct. 1754, the dangers of abuse in plan administration are apparent. ERISA was thus designed to deter "the mismanagement of funds accumulated to finance employee benefits and...