Dole v. Compton, Civ. A. No. 88-7920.

• Decision Date: 06 December 1990
• Docket Number: Civ. A. No. 88-7920.
• Citation: 753 F. Supp. 563
• Parties: Elizabeth DOLE, Secretary of the United States Department of Labor v. Fred COMPTON, Joseph McHugh, John Neilson, Frederick Hammerschmidt, Gersil N. Kay, Electrical Mechanics Association, the Fidelity-Philadelphia Trust Company, and the International Brotherhood of Electrical Workers, Local 98.
• Court: U.S. District Court — Eastern District of Pennsylvania

753 F. Supp. 563

Elizabeth DOLE, Secretary of the United States Department of Labor v. Fred COMPTON, Joseph McHugh, John Neilson, Frederick Hammerschmidt, Gersil N. Kay, Electrical Mechanics Association, the Fidelity-Philadelphia Trust Company, and the International Brotherhood of Electrical Workers, Local 98.

Civ. A. No. 88-7920.

United States District Court, E.D. Pennsylvania.

December 6, 1990.

Brenda J. Stovall, U.S. Dept. of Labor, Office of Sol., Plan Benefits Sec. Div., Washington, D.C., Marshall Harris, Regional Sol., Office of Sol., U.S. Dept. of Labor, Philadelphia, Pa., for plaintiff.

Harry R. Blackburn, Blackburn Michelman & Tyndall, P.C., Laurance E. Baccini, Kathleen M. Gregor, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for defendants.

Richard B. Sigmond, Sagot, Jennings & Sigmond, Richard C. McNeill, Philadelphia, Pa., for Electrical Mechanics Ass'n Intern. Broth. of Elec. Workers, Local 98.

OPINION AND ORDER

VAN ANTWERPEN, District Judge.

This matter comes before us on defendants' motion to dismiss plaintiff's complaint. The plaintiff, the Secretary¹ of the United States Department of Labor, has brought the captioned action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et seq., against trustees of the International Brotherhood of Electrical Workers Union No. 98 Pension Plan (the "Local 98 Plan"), the International Brotherhood of Electrical Workers Local 98 ("Local 98"), and the Electrical Mechanics Association ("EMA"). According to the allegations in the complaint, Local 98 is an employee organization whose members are covered by the Local 98 Plan and, thus, a party in interest to the Local 98 Plan within the meaning of ERISA, 29 U.S.C. § 1002(14)(D).² EMA is alleged to be a not-for-profit corporation controlled by Local 98 and established by it to train and to assist its members in obtaining jobs. The Secretary alleges that EMA was merely "a shell corporation wholly controlled by Local 98 and that all transactions with EMA were, in fact, transactions with Local 98." (Complaint, ¶ 8).

According to the Secretary's complaint, on January 4, 1972 the Local 98 Plan made a thirty-year loan to EMA for $800,000.00 at 7½% interest. This loan was intended to finance construction of a building located at 1714-19 Spring Garden Street, Philadelphia, Pennsylvania. This loan was secured by a mortgage on the property. EMA held legal title to the building and in turn rented the building to Local 98.

ERISA was enacted into law in 1974. As a result of the passage of this legislation, the Local 98 Plan loan to EMA became a prohibited transaction under the provisions of 29 U.S.C. § 1106(a)(1)(A), (B) and (D)³ and also under 29 U.S.C. § 1106(b)(1) and (2).⁴ Nevertheless, the Local 98 Plan loan was exempted from application of these provisions until June 30, 1984 by ERISA's transitional rule found at 29 U.S.C. § 1114(c)(1).⁵ At the end of this transitional period, however, this loan was still outstanding and remained so until April 25, 1985, when the outstanding principal balance of the loan was $653,817.47. On that date, the defendant trustees of the Local 98 Plan sold the note to EMA for $380,289.93 and released the mortgage on the Spring Garden property. EMA is alleged to have purchased the mortgage with funds provided by Local 98.

The complaint alleges that the failure of the defendant trustees of the Local 98 Plan fully to collect on the loan to EMA prior to July 1, 1984 (the end of the transitional rule period) and the continued holding of the loan after July 1, 1984 constituted a breach of their fiduciary duties since it amounted to a violation of 29 U.S.C. § 1106(a)(1)(B) and (D) and the sale of the note on April 25, 1985 to EMA likewise breached their fiduciary duties since this transaction constituted a violation of 29 U.S.C. § 1106(a)(1)(A) and (D). The complaint seeks relief not only against the trustees of the Local 98 Plan, but also against Local 98 as a party in interest which engaged in a prohibited transaction and, in addition, against EMA as a knowing participant in a breach of fiduciary duty. The complaint seeks, inter alia, an order requiring Local 98 and EMA to correct the prohibited transaction by restoring to the Local 98 Plan the unpaid balance of the loan with interest.

Defendants Local 98 and EMA have moved to dismiss the complaint on the following grounds: (1) that the complaint fails to state a claim against Local 98 and EMA upon which relief can be granted in that no liability can attach to them because they are not fiduciaries of the Local 98 Plan; (2) that the complaint violates the Taking Clause of the Fifth Amendment, because the result it seeks constitutes the taking of private property for public use without just compensation; and (3) that the complaint seeks a result which is unconstitutional under the Due Process Clause of the Fifth Amendment because it imposes retroactive liability on Local 98 and EMA and is not justified by a rational legislative purpose. For the reasons expressed below, we find no merit in these arguments and we deny the defendants' motion to dismiss the complaint.

I. Status of EMA and Local 98 as Defendants in this Action Under ERISA

Defendants EMA and Local 98 contend that because EMA and Local 98 are not alleged to be fiduciaries under ERISA, they cannot be held liable in an action under that statute. The defendants argue that the Supreme Court decision in Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), necessitates a narrow reading of the liability that can be imposed under ERISA. The defendants maintain that, since they are not "fiduciaries" as defined by the statute, they cannot be held liable in any action brought under ERISA. Russell, they argue, stands for the proposition that ERISA is a carefully drawn, "`comprehensive and reticulated statute'", Russell, 473 U.S. at 146, 105 S.Ct. at 3092 (quoting Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 361, 100 S.Ct. 1723, 1726, 64 L.Ed.2d 354 (1980)). They note that the Supreme Court stated, in Russell: "The six carefully integrated civil enforcement provisions found in § 502(a) 29 U.S.C. § 1132(a) of the statute as finally enacted ... provide strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly." Id. 473 U.S. at 146, 105 S.Ct. at 3092 (emphasis in original). Since ERISA does not expressly provide for nonfiduciary liability, the defendants argue, ERISA cannot provide a cause of action against them.

The defendants also cite to a Ninth Circuit case in support of their position. Nieto v. Ecker, 845 F.2d 868 (9th Cir.1988) held that ERISA does not provide a cause of action against non-fiduciaries who participate in a breach of trust with a fiduciary. The court in Nieto based its decision upon 29 U.S.C. § 1109(a)⁶ which speaks only of the personal liability of a "fiduciary" for any breach of fiduciary duty. The court concluded that, if Congress had wished to include non-fiduciaries in the liability imposed by ERISA, it would have done so explicitly. It also rejected interpreting § 1132(a)(3)⁷ so as to provide causes of action against non-fiduciaries, since to do so would render § 1109 superfluous, "a result contrary to the fundamental canons of statutory construction." Id. at 873.

The Third Circuit has not yet expressly addressed the issue of the liability of a non-fiduciary who knowingly participates in a breach of trust with a fiduciary. In Painters of Philadelphia District Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146 (3d Cir.1989), the issue before the court was this: whether an independent accounting firm, which had done nothing more than perform an audit required by statute, was a "fiduciary" who could be held liable under 29 U.S.C. § 1109(a). The Third Circuit found that the independent accounting firm was not a "fiduciary" as defined by ERISA and it, therefore, could not be held liable under § 1109(a). In a footnote, the Third Circuit also disposed of the appellants' argument that they had an express cause of action against the independent accounting firm (Price Waterhouse) under 29 U.S.C. § 1132(a)(3). The Third Circuit stated:

The short answer to this is that section 1132(a)(3) is limited by its terms to suits seeking equitable relief. See Northeast Dept. ILGWU Welfare Fund v. Teamsters Local Un. No. 229, 764 F.2d 147, 152-153 (3d Cir.1985) ("we believe that a prior decision of this court implicitly adopted the view that § 1132 must be read narrowly and literally." (emphasis added)). Appellants, however, rely on Justice Brennan's concurrence in Russell, 473 U.S. at 157-158, 105 S.Ct. at 3098, for the proposition that section 1132(a)(3) incorporates the general law of trusts, which allows monetary damages as part of equitable relief. Since we have held that Price Waterhouse is not a fiduciary under ERISA, however, it cannot be held liable on a trust-law theory. Moreover, allowing appellants' suit under section 1132(a)(3) would render section 1109(a) superfluous, and would thus violate a fundamental principle of statutory construction. Nieto, 845 F.2d at 873.

Id. at 1151 n. 6.

It would appear, from this footnote, that the Third Circuit would reject a cause of action derived from 29 U.S.C. § 1132(a)(3) against an entity which did not fit the definition of a "fiduciary" under ERISA. In Price Waterhouse, however, the Third Circuit had no occasion to consider the liability, under 29 U.S.C. § 1132(a), of a nonfiduciary who had knowingly participated with a fiduciary in that fiduciary's breach of trust. Moreover, the Third Circuit, in another footnote later in the Price Waterhouse opinion, said:

Appellants also argue that Price Waterhouse is liable under ERISA as a participant in Capri's breach of its fiduciary duty. We find this argument without merit. Appellants do not allege in

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