Pacific Ins. Co. v. Eaton Vance Management

• Decision Date: 27 May 2004
• Docket Number: No. 03-1691.,No. 03-1798.,03-1691.,03-1798.
• Citation: 369 F.3d 584
• Parties: PACIFIC INSURANCE COMPANY, LIMITED, Plaintiff, Appellant/Cross-Appellee, v. EATON VANCE MANAGEMENT, Defendant, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — First Circuit

369 F.3d 584

PACIFIC INSURANCE COMPANY, LIMITED, Plaintiff, Appellant/Cross-Appellee, v. EATON VANCE MANAGEMENT, Defendant, Appellee/Cross-Appellant.

No. 03-1691.

No. 03-1798.

United States Court of Appeals, First Circuit.

Heard January 8, 2004.

Decided May 27, 2004.

Rehearing Denied June 17, 2004.

Harvey Weiner with whom Barry D. Ramsdell and Peabody & Arnold LLP were on brief, for appellant.

Jeffrey B. Maletta with whom Aimee E. Bierman and Kirkpatrick & Lockhart LLP were on brief, for appellee.

Before HOWARD, Circuit Judge, COFFIN and CAMPBELL, Senior Circuit Judges.

HOWARD, Circuit Judge.

These cross-appeals arise out of an indemnification dispute between an employer and its insurer. The principal issue is whether the employer must be indemnified for certain belated contributions it made to the profit-sharing accounts of various subsidiary employees. Upon determining that these payments (and certain other amounts) were covered by the relevant policy, the district court granted the employer's motion for summary judgment in the amount of $1,015,138.94 and denied the insurer's cross-motion for summary judgment seeking a declaration of no coverage under the policy. See Pacific Ins. Co. v. Eaton Vance Mgmt., 260 F.Supp.2d 236 (D.Mass. Aug.14, 2002); Pacific Ins. Co. v. Eaton Vance Mgmt., 260 F.Supp.2d 334 (D.Mass. April 30, 2003). We reverse in part, vacate in part, and remand.

I.

The relevant facts having been twice reported, see id., we confine ourselves to the essentials.

A. The Plan

Since the 1950s, Eaton Vance Management ("Eaton Vance")¹ and its predecessors have operated a qualified profit-sharing plan ("Plan")² for their employees. Annual contributions to the Plan are discretionary and, if made, are derived from Eaton Vance's profits in a given fiscal year. Of particular importance are the Plan's employee-eligibility criteria.

Prior to November 1984, employees of Eaton Vance's subsidiaries were not included in the Plan unless the respective subsidiary expressly adopted the Plan by written resolution.³ In July 1986, Eaton Vance adopted new Plan documents — effective November 1, 1984 ("1984 documents") — that allegedly broadened the Plan's eligibility criteria to include automatically subsidiary employees unless specifically excluded. Supplying our own emphasis to language that significantly differs from, or adds to, language in the prior governing documents, see supra n. 3, the 1984 documents provide in pertinent part:

The term employee includes: (a) any common-law employee of the employer....

"Employer" means the employer named in the last section of the adoption agreement, any commonly controlled organization, and any predecessor organization....

An employee ordinarily becomes an active participant on his entry date. However, there are three exceptions: ... (c) An employee is not an active participant during any period in which he is not an employee in an eligible class.

An employee is in an eligible class unless: [he falls within one of four exceptions not germane to this appeal].

Subject to the rules of this article, a commonly controlled organization may join the principal employer [Eaton Vance] in adopting this plan. A commonly controlled organization with any employees eligible must join the principal employer in adopting this plan. No other organization may do so.

An organization joins by a written resolution....

It is uncontested that, despite its adoption of the 1984 documents, Eaton Vance management was unaware of the change in language.

Because Eaton Vance did not intend to broaden the eligibility criteria (i.e., it continued to believe that a subsidiary's affirmative adoption of the Plan was a condition precedent to the subsidiary's employees' eligibility), it continued to operate the Plan as it had prior to the adoption of the 1984 documents and treated as participants only those employees of those subsidiaries that had expressly adopted the Plan. Accordingly, it did not automatically establish accounts in the names of all subsidiary employees. Nor did it specifically exclude them from the Plan or provide them with information regarding the Plan.

B. The Claim Against Eaton Vance

On February 2, 1999, Wilfredo Hernandez, then an employee of an Eaton Vance subsidiary (Compass Management, Inc.), sent to Eaton Vance a letter indicating that money due him under the Plan had not been deposited into his account. Upon receiving this letter, Eaton Vance contacted its outside ERISA counsel for an evaluation of Hernandez's claim. Although Compass had not adopted the Plan by written resolution, outside counsel advised Eaton Vance that, due to the plain language of the 1984 documents, Hernandez likely would be successful if he chose to litigate. Further, counsel warned Eaton Vance that there would be serious tax consequences if the IRS discovered that the Plan had not been administered according to its terms. Eaton Vance thereafter adopted counsel's advice and has since steadfastly maintained — both before the district court and on appeal — that the 1984 documents were worded so as to cover Hernandez and other similarly situated employees.

On April 28, 1999, outside ERISA counsel sent to Hernandez's attorney a letter acknowledging that Eaton Vance should have recognized Hernandez and other "similarly affected participants" as Plan participants. The letter also stated that Eaton Vance would fund those accounts at the level they would have been funded had the employees been recognized as participants all along.⁴

C. The Insurance Policy

Back in 1998, Pacific Insurance Company ("Pacific") had issued to Eaton Vance a Mutual Fund Errors and Omission Policy ("Policy") effective from August 1, 1997, to August 1, 1999. The Policy provided coverage for

[l]oss or liability incurred by [Eaton Vance], from any claim made against [Eaton Vance] during the Endorsement Period, by reason of any actual or alleged failure to discharge his or its duties or to act prudently within the meaning of the Employee Retirement Income Security Act of 1974 ["ERISA"]..., or by reason of any actual or alleged breach of fiduciary responsibility within the meaning of said Act ... in [Eaton Vance's] capacity as a fiduciary with respect to any pension or employee plan or trust.

D. The Notification & The Funding of Overdue Accounts

By letter dated June 18, 1999, Eaton Vance notified Pacific of the Hernandez claim. Pacific thereafter responded with a letter acknowledging receipt of Eaton Vance's letter. Subsequently, Eaton Vance asked Pacific to agree to a filing with the IRS under the Voluntary Compliance Review ("VCR") program. (This filing had been proposed by outside ERISA counsel as a means to end Eaton Vance's exposure to governmental penalties for noncompliance with the 1984 documents.) Pacific acknowledged this request but "before consenting to this action" urged Eaton Vance to consider withholding any additional contributions to the Plan. Pacific further stated that it was "reserv[ing] its rights" and advised Eaton Vance "to take whatever action [it] deems appropriate to protect Eaton Vance including the filing of a VCR application."

The VCR application ultimately was filed with, and approved by, the IRS. Although Hernandez had been the only party to make a claim under the Plan, Eaton Vance thereafter established accounts for a total of forty-nine employees and contributed $880,869.86 to those accounts (representing the amount — principal and interest — needed to fund the accounts to the level they would have attained had Eaton Vance timely contributed).

E. The Litigation

On June 8, 2000, Pacific filed a diversity action in the District of Massachusetts seeking a declaratory judgment of no coverage under the Policy. See 28 U.S.C. §§ 1332 and 2201. Specifically, Pacific alleged, inter alia, that (1) Eaton Vance did not breach its fiduciary duties or fail to discharge its duties or act prudently within the meaning of ERISA; (2) the obligation to make payments is not due "by reason of" a breach of fiduciary responsibility or "by reason of" a failure of Eaton Vance to discharge its duties; and, (3) even if there is coverage under the Policy, a $1,000 per claim deductible exists for each excluded employee. Eaton Vance counterclaimed, alleging that the Policy covered its liabilities. Eventually, both parties moved for summary judgment.

On August 14, 2002, the district court entered summary judgment for Eaton Vance upon determining, inter alia, that (1) Eaton Vance had breached its fiduciary duty under ERISA; and (2) Eaton Vance's liability to the excluded employees was caused by this breach. See Pacific Ins. Co., 260 F.Supp.2d at 241-44. The court did find, however, that there existed a $1,000 deductible for each employee's claim; accordingly, it granted summary judgment to Pacific on this issue. See id. at 247-48. Finally, on April 30, 2003, Pacific was ordered to pay Eaton Vance $1,015,138.94.⁵ See Pacific Ins. Co., 260 F.Supp.2d at 346-47.

These cross-appeals followed.

II.

A. Standards of Review

Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In ruling on the motion, the district court must view "the facts in the light most favorable to the non-moving party, drawing all reasonable inferences in that party's favor." Barbour v. Dynamics Research Corp., 63 F.3d 32, 36 (1st Cir.1995). And, of course, "[t]he standards are the same where, as here, both parties have moved for summary judgment." Bienkowski v. Northeastern Univ., 285 F.3d 138, 140 (1st Cir.2002) (citing 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720, at 335-36 (3d ed. 1998) ("The court must rule on each party's motion on an individual and...