Kenny v. Quigg

• Decision Date: 16 June 1987
• Docket Number: No. 86-2073,86-2073
• Citation: 820 F.2d 665
• Parties: Kathleen M. KENNY; William E. Brock, Secretary of the United States Department of Labor, Plaintiffs-Appellants, v. Richard S. QUIGG; George A. Janis; John J. Rachel; John O. Gauthier; Robert W. Shaw; Fletcher K. Ware; William A. Simpson; William C. Fisher; RGI Inc.; Rehab Computer Inc., Restated Employee Money Purchase Trust; Rehab Computer Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 665

820 F.2d 665

Kathleen M. KENNY; William E. Brock, Secretary of the United States Department of Labor, Plaintiffs-Appellants, v. Richard S. QUIGG; George A. Janis; John J. Rachel; John O. Gauthier; Robert W. Shaw; Fletcher K. Ware; William A Simpson; William C. Fisher; RGI Inc.; Rehab Computer Inc., Restated Employee Money Purchase Trust; Rehab Computer Inc., Defendants-Appellees.

No. 86-2073.

United States Court of Appeals Fourth Circuit.

Argued Feb. 2, 1987.

Decided June 16, 1987.

Robert Emmet Nagle, Washington, D.C., on brief, for plaintiffs-appellants.

George P. Blackburn, Jr., Fairfax, Va., Donald J. Myers (Diane E. Burkley, Michael A. Curto, Pierson, Ball & Dowd, Washington, D.C., on brief), for defendants-appellees.

Before WIDENER and ERVIN, Circuit Judges, and HAYNSWORTH, Senior Circuit Judge.

ERVIN, Circuit Judge:

This appeal arises out of litigation concerning the sale of stock owned by an employee stock ownership plan to the trustees of the plan and others. Kathleen M. Kenny, a participant in the plan, appeals from a final order approving the sale of the stock pursuant to the findings and conclusions of a court-appointed fiduciary. For the reasons discussed below, we reverse the decision of the district court and remand this case for further proceedings.

I.

Appellant Kathleen M. Kenny was employed by RGI, Inc., one of the appellees in this case. Prior to June 1984, all of RGI's stock was held by an employee stock ownership plan ("ESOP") for the benefit of RGI's employees. In June 1984, the five trustees of the ESOP, who were officers and directors of RGI, sold most of the RGI stock owned by the ESOP to themselves and three other RGI officers. The remainder of the RGI stock was sold to the company itself, to be held as treasury stock and then retired. The total price paid to the ESOP for the stock was $2.8 million. As part of the transaction, the ESOP was converted into a money purchase pension plan (the "Plan"). The eight purchasers of the RGI stock became trustees of the Plan.

After the sale of the RGI stock, the trustees of the Plan, RGI, and the Plan brought suit in the United States District Court for the Eastern District of Virginia, seeking court approval of the transaction. They named as defendants ninety employees of RGI who were participants in the Plan, including appellant Kenny. Kenny answered the complaint and filed a counterclaim. She alleged that by purchasing the RGI stock held by the ESOP, the ESOP trustees had breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Secs. 1001-1461 (1982). Kenny sought rescission of the sale of the RGI stock.

The district court appointed a special master to make an independent evaluation of the sale of the RGI stock. The special master concluded that in purchasing the RGI stock, the trustees of the ESOP had breached their fiduciary duties under ERISA by failing to act prudently and solely in the interest of the ESOP participants. The special master also found that the purchasers had paid the ESOP less than fair value for the RGI stock.

While the suit seeking court approval of the sale of the RGI stock was pending, the Secretary of Labor filed an action in the United States District Court for the Eastern District of Virginia against the trustees of the Plan, RGI, and the Plan. This appeal arises from the Secretary's suit. The Secretary's complaint alleged that the ESOP trustees had violated ERISA in effecting the sale of the RGI stock and that the Plan trustees had violated ERISA in seeking court approval of the transaction.

The Secretary filed a proposed consent order with his complaint. All of the parties to the Secretary's suit agreed to this consent order, and the district court approved it. Upon entry of the consent order, the complaint and counterclaim in the original suit seeking court approval of the sale of the RGI stock were dismissed by agreement of the parties.

The consent order entered in the Secretary's suit appointed Mellon Bank to serve as an independent fiduciary of the Plan. The consent order provided that Mellon Bank was to determine whether the Plan should hold or dispose of the RGI stock. For purposes of this inquiry, Mellon was to assume that the 1984 sale of the stock to the Plan trustees had been rescinded. If Mellon found that a sale of the RGI stock would not be prudent, the consent order provided that the 1984 transaction would be rescinded immediately. If Mellon found that a sale of the stock would be prudent, the consent order directed it to execute a sale of the stock, "undertaking all reasonable efforts to obtain the best price and terms available under the circumstances for the stock." The consent order further provided that "[t]he Court will retain jurisdiction over this matter for the purpose of enforcing the terms of this Order."

Mellon Bank reported its findings and conclusions to the district court in October and November 1985. Relying solely on its own internal valuation of the RGI stock, Mellon concluded that the current fair market value of the stock was $2.6 million and that it would be in the best interests of the Plan's participants and beneficiaries not to rescind the 1984 transaction in which the stock had been sold for $2.8 million.

After the Mellon Bank report, the defendants in the Secretary's suit moved the district court for a final order confirming that Mellon had discharged its duties and that the 1984 sale of the RGI stock need not be rescinded. The Secretary of Labor and appellant Kenny opposed this motion, arguing that Mellon had not adequately discharged the duties imposed on it by the consent order. The district court granted the defendants' motion for a final order, stating that all parties were bound by the decision of Mellon Bank, which the court was "unwilling to second-guess."

Kenny appealed from the district court's decision, but the Secretary did not. On appeal, Kenny contends that Mellon Bank failed to comply with the terms of the consent order and with its fiduciary duties in recommending that the 1984 sale of the RGI stock be allowed to stand. Kenny also maintains that the district court erred in approving the sale of the stock based on the Mellon Bank report.

The appellees have moved to dismiss Kenny's appeal on the ground that she was not a party to the suit below and did not seek to intervene on appeal in a timely fashion. With respect to the merits of Kenny's appeal, the appellees argue that the district court acted properly in approving the 1984 transaction based on the Mellon Bank report and that, in any event, Kenny is barred from challenging compliance with the consent order under res judicata principles.

II.

We first consider the appellees' contention that the appeal should be dismissed because Kenny was not a party to the proceedings below and did not seek to intervene on appeal in a timely fashion. We recognize, of course, the general rule that persons who are neither original parties to, nor intervenors in, district court proceedings ordinarily may not appeal a judgment of the district court. The reason for such a rule is obvious: because a nonparty generally is not bound by a judgment, he ordinarily cannot be aggrieved by the judgment to the extent necessary to permit appellate review. See, e.g., Newberry v. Davison Chemical Co., 65 F.2d 724, 729 (4th Cir.) (Because appellants were not named as parties and did not seek to intervene in proceedings in the district court they could not appeal from the decision of the district court, since "it is only a party affected by an order or decree who may appeal from it."), cert. denied, 290 U.S. 660, 54 S.Ct. 75, 78 L.Ed. 571 (1933).

There are, however, exceptions to the general rule precluding appeals by nonparties. For example, "it has been held that a person who had an interest in the cause litigated and participated in the proceedings actively enough to make him privy to the record may appeal despite the fact that he was not named in the complaint and did not intervene." 9 J. Moore, B. Ward & J. Lucas, Moore's Federal Practice p 203.06, at 3-23 (2d ed. 1987) (citing Adams v. Morton, 581 F.2d 1314 (9th Cir.1978), cert. denied, 440 U.S. 958, 99 S.Ct. 1498, 59 L.Ed.2d 771 (1979)); see also In re Eastern Sugar Antitrust Litigation, 697 F.2d 524, 527-28 (3d Cir.1982) (when nonparties had participated in settlement proceedings in district court and were aggrieved by district court's order which reduced settlement fund from which they were to recover, nonparties had standing to appeal); Securities & Exchange Commission v. Lincoln Thrift Association, 577 F.2d 600, 602-03 (9th Cir.1978) (because nonparties had participated in district court proceedings and had legitimate interest in outcome of those proceedings, nonparties had standing to appeal).

Our review of the record in this case indicates that Kenny participated significantly in the proceedings below and had a substantial interest in the outcome of those proceedings. The order dismissing Kenny's counterclaim in the original suit seeking court approval of the sale of the RGI stock permitted Kenny to participate in any communication to or from Mellon Bank acting in its capacity as independent fiduciary of the Plan. The record reveals that Kenny was apprised of Mellon's activities and of the proceedings in the district court. After the appellees filed their motion for a final order approving the sale of the stock pursuant to Mellon's recommendation, Kenny responded with her own memorandum opposing approval of the sale. In granting the appellees' motion for a final order, the district court considered, but rejected, Kenny's arguments in opposition to the appellees' motion.

The record also indicates that Kenny had a significant interest in the outcome of the Secretary's suit challenging the sale of the RGI stock. As a participant in the ESOP and the successor Plan, Kenny had a direct financial...