Coan v. Kaufman

• Decision Date: 09 December 2004
• Docket Number: No. 3:01CV1737(MRK).,3:01CV1737(MRK).
• Citation: 349 F.Supp.2d 271
• Parties: Karen B. COAN, Individually and on behalf of the K.L.C. Inc. 401(k) Profit Sharing Plan, Plaintiffs, v. Alan H. KAUFMAN, et al., Defendants.
• Court: U.S. District Court — District of Connecticut

349 F.Supp.2d 271

Karen B. COAN, Individually and on behalf of the K.L.C. Inc. 401(k) Profit Sharing Plan, Plaintiffs, v. Alan H. KAUFMAN, et al., Defendants.

No. 3:01CV1737(MRK).

United States District Court, D. Connecticut.

December 9, 2004.

Jeffrey M. Sklarz, Zeisler & Zeisler, P.C., Bridgeport, CT, Thomas G. Moukawsher, Ian O. Smith, Moukawsher & Walsh, Hartford, CT, for Plaintiff.

Glenn William Dowd, Daniel Adam Schwartz, Kristin Thomas, Day, Berry & Howard, Hartford, CT, David L. Gussak, Reiner, Reiner & Bendett, Farmington, CT, for Defendant.

RULING AND ORDER

KRAVITZ, District Judge.

Currently pending before the Court is Plaintiff's Motion for Reconsideration [doc. # 80].¹ In her motion, Plaintiff asks the Court to reconsider its Decision in light of two decisions that Plaintiff neglected to bring to the Court's attention before its ruling: Kayes v. Pacific Lumber, 51 F.3d 1449 (9th Cir.1995); and In re AEP ERISA Litigation, 327 F.Supp.2d 812 (S.D.Ohio 2004).² Both parties filed briefs on the motion and the Court held an on-the-record telephonic argument on the motion on November 30, 2004.³ The Court GRANTS Plaintiff's Motion for Reconsideration [doc. # 80] insofar as the Court has decided to reconsider its Decision in light of the authorities cited by Plaintiff. However, having considered Kayes and AEP and the arguments of Plaintiff in her Motion and during oral argument, the Court declines to alter or vacate its Decision to grant Defendants' Motion for Summary Judgment. That is, having reconsidered its Decision, the Court now reaffirms it.

The premise of Plaintiff's Motion for Reconsideration is that this Court granted summary judgment to Defendants on Plaintiff's ERISA § 502(a)(2) claim "because of [Plaintiff's] noncompliance with Rule 23.1" of the Federal Rules of Civil Procedure. Pl.'s Recons. Brief at 6 [doc. # 81]. Plaintiff, who has never claimed to have complied with Rule 23.1, asserts in her reconsideration motion that both Kayes and AEP stand for the proposition that plan beneficiaries who are suing in their representative capacities — and not their individual capacities — on behalf of a plan or plan participants need not comply with the specific requirements of Rule 23.1. Those decisions state that "Rule 23.1 applies only to a narrow class of derivative suits: those brought by shareholders or members of a corporation or unincorporated association to vindicate a right which may properly be asserted by that corporation or association." Kayes, 51 F.3d at 1463; see also AEP, 327 F.Supp.2d at 821 (following Kayes).⁴

Having considered Kayes and AEP and the issue they raise at considerable length, the Court is not persuaded to alter its Decision for three reasons. First, it is not clear to this Court that Kayes and AEP represent the law in the Second Circuit on the issue of whether a plaintiff pursuing a "derivative" action under ERISA must comply with Rule 23.1. In Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270 (2d Cir.1992), the Second Circuit held that "[a] suit for unpaid contributions under [ERISA] § 502(g)(2) is brought `for or on behalf of a plan' and may only be maintained by an individual beneficiary derivatively.... Rule 23.1 is therefore applicable to derivative actions under § 502(g)(2)." Id. at 287; see also Diduck v. Kaszycki & Sons Contractors, Inc., 874 F.2d 912, 918 n. 1 (2d Cir.1989) (leaving the issue of compliance with Rule 23.1 to the district court on remand); id. at 923-24 (Van Graafeiland, J., dissenting) ("my colleagues and I agree that [plaintiff] is suing derivatively on behalf of the Funds.... [W]hen [plaintiff] attempts to leapfrog over nine trustees and assert a claim on their behalf against both the [third persons] and [the trustee], he disregards not only the provisions of rule 23.1 but also longstanding principles of trust law.").⁵ Inexplicably, neither party brought Diduck to the Court's attention in connection with Plaintiff's Motion for Reconsideration.

It is certainly true that the Second Circuit's decision in Diduck has been overruled with respect to its preemption analysis. See Gerosa v. Savasta & Co., 329 F.3d 317, 327 (2d Cir.2003) ("Our preemption analysis in Diduck, however, is no longer consistent with prevailing Supreme Court precedent.") (citing N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995)). It has also been overruled with respect to its holding that a "federal common law right of action" existed "in favor of plan participants against non-fiduciaries." See Gerosa 329 F.3d at 321 ("In Mertens, the [Supreme] Court rejected the central holding of Diduck, finding that non-fiduciaries who knowingly participate in a fiduciary breach cannot be liable for ordinary money damages.") (citing Mertens v. Hewitt Assocs., 508 U.S. 248, 255, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993)). However, the portion of Diduck addressing the applicability of Rule 23.1 to derivative actions under ERISA appears to remain good law. See Martinez v. Barasch, NO. 01 CIV.2289 (MBM), 2004 WL 1555191, at *7 (S.D.N.Y. July 12, 2004) ("`Rule 23.1 is applicable to derivative actions under § 502(g)(2)' of ERISA because such an action `is brought "for or on behalf of a plan" and may only be maintained by an individual beneficiary derivatively.'") (quoting Diduck, 974 F.2d at 287); Hartline v. Sheet Metal Workers' Nat'l Pension Fund, 134 F.Supp.2d 1, 22 (D.D.C.2000) ("Because the plaintiffs' claim for unpaid contributions is on behalf of the plan ... the court concludes that the plaintiffs' claim may properly be brought only as a derivative action and thus is subject to the requirements of Rule 23.1.") (citing Diduck, 974 F.2d at 287); Dallas Cowboys Football Club v. National Football League, No. 95CIV9426(SAS) 1996 WL 601705, at *3 (S.D.N.Y.1996) (relying on Diduck).

Plaintiff has never asserted that she complied with Rule 23.1 or that her noncompliance should be excused (as in Diduck, for example).⁶ Instead, Plaintiff has steadfastly maintained that she was not required to comply with Rule 23.1, relying most recently on Kayes and AEP. However, since the Second Circuit has never retreated from Diduck's holding that a plaintiff seeking to pursue a derivative action "for or on behalf of a plan" must comply with Rule 23.1 or be excused from doing so, this Court is obliged to follow Diduck, not Kayes or AEP, unless and until the Second Circuit says otherwise.

Second, even if Plaintiff need not have complied with the specific provisions of Rule 23.1 — because, as Plaintiff argues and Kayes and AEP hold, those provisions apply only to a specific subset of derivative actions that does not include ERISA actions against plan fiduciaries — that would not necessarily mean (as Plaintiff asserts) that all she had to do to pursue her lawsuit as a derivative action was to label her lawsuit a "representative" action and seek relief on behalf of the plan.⁷ Indeed, the portion of Charles Alan Wright's treatise that is relied on in Kayes and AEP states explicitly that "[t]rust beneficiaries may bring claims derivatively on behalf of the trust if the trustee refuses to bring them, and the same general principles will apply as in stockholders' suits, but the specific provisions of Rule 23.1 are not controlling." Charles A. Wright, The Law of Federal Courts § 73, at 525 (5th ed.1994) (emphasis added). Thus, even if the specific provisions of Rule 23.1 were not controlling, Plaintiff still should have made at least some effort to comply with the "general principles" that apply in shareholder derivative actions.

While the Court understands full well that it should not erect unnecessary barriers to vindication of the rights Congress provided in ERISA, there is good reason to require the protections of Rule 23.1 or the "general principles that apply in stockholders' suits" when one plan participant seeks to sue "derivatively" on behalf of an ERISA plan (and indirectly, the plan's absent participants). For as the Second Circuit noted in its landmark decision in Joy v. North, 692 F.2d 880 (2d Cir.1982), "[T]here is a danger in authorizing lawyers to bring actions on behalf of unconsulted groups." Id. at 887. Plaintiff contends that a district court can protect the plan and its absent participants in the process of fashioning any relief that is granted to the plan at the end of the case. That may be true but fashioning relief at the end of the case does nothing to protect the plan or absent participants during the course of the litigation, or in any settlement that lawyers for the parties may enter into before the judgment is entered. Nor would it necessarily protect the plan from inconsistent results in multiple actions. Derivative suits, therefore, are rightly "subject to judicial findings of adequate representation of shareholders and approval of settlements." Id. at 889.⁸

As a consequence, even those courts that have acknowledged that Rule 23.1 might not precisely apply of its own force to ERISA derivative actions brought by plan participants have nonetheless applied the procedural safeguards of either Rule 23 or Rule 23.1 in order to protect the plan and absent participants. See, e.g., Thornton v. Evans, 692 F.2d 1064, 1080 (7th Cir.1983) (noting that although "ERISA does not provide an explicit answer" as to the procedural requirements when individual beneficiaries sue on behalf of the entire fund, the court applied the procedural safeguards of Rule 23 and 23.1 to a suit under ERISA against non-fiduciary parties for conspiracy with fiduciaries in violation of statutory trust obligations); Montgomery v. Aetna Plywood, Inc., No. 95 C 3193, 1996 WL 189347, at *3-*4 (N.D.Ill.1996) (citing Thornton and Diduck and noting that "as a prudential matter, the Seventh Circuit has held that this type of action should be pursued as either a class action or derivative action, in order to avoid inconsistent rulings and...