Reich v. Rowe

• Decision Date: 08 December 1993
• Docket Number: No. 93-1567,93-1567
• Citation: 20 F.3d 25
• Parties: -1623, 62 USLW 2618, 17 Employee Benefits Cas. 2521 Robert B. REICH, Secretary of Labor, United States Department of Labor, Plaintiff, Appellant, v. Richard ROWE, etc., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 25

20 F.3d 25

73 A.F.T.R.2d 94-1623, 62 USLW 2618,

17 Employee Benefits Cas. 2521

Robert B. REICH, Secretary of Labor, United States Department of Labor, Plaintiff, Appellant, v. Richard ROWE, etc., et al., Defendants, Appellees.

No. 93-1567.

United States Court of Appeals First Circuit.

Heard Dec. 8, 1993.

Decided March 31, 1994.

Edward D. Sieger, Sr. Appellate Atty., with whom Thomas S. Williamson, Jr., Sol. of Labor, Allen H. Feldman, Associate Sol. for Sp. Appellate and Supreme Court Litigation, Washington, DC, and Joseph S. Ackerstein, U.S. Dept. of Labor, Office of the Sol., Boston, MA, were on brief, for appellant.

William H. Kettlewell, with whom Dwyer, Collora & Gertner, Boston, MA, was on brief, for appellees.

Before TORRUELLA, CYR, and STAHL, Circuit Judges.

TORRUELLA, Circuit Judge.

We address in this case whether the civil enforcement provisions of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. Sec. 1132(a)-(l ), provide for equitable relief against a nonfiduciary who knowingly participates in a fiduciary breach. This issue comes to us in the shadow of a recent United States Supreme Court opinion, Mertens v. Hewitt Associates, --- U.S. ----, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993), which addressed the availability of remedies against nonfiduciaries under ERISA and concluded, albeit only in dicta, that no cause of action like the one brought in this case exists. Id. at ----, 113 S.Ct. at 2067. After conducting our own analysis of the statute, we find that, although ERISA may allow for some types of actions against nonfiduciaries, it does not authorize suits against nonfiduciaries charged solely with participating in a fiduciary breach.

I. BACKGROUND

The genesis of this appeal was a lawsuit brought by the United States Secretary of Labor (the "Secretary") on March 11, 1991, against several corporate and individual defendants involved in the failed OMNI Medical Health and Welfare Trust ("OMNI"). In the complaint, the Secretary alleged a number of ERISA violations in relation to OMNI's failure to pay approximately two to three million dollars in medical benefits to eligible employees of companies participating in the OMNI health plan. The Secretary also contended that appellee, H. James Gorman, Jr. ("Gorman"), a financial consultant who provided professional services to OMNI, knowingly participated in the fiduciary breaches of several of OMNI's administrators. The district court dismissed the action against Gorman for failure to state a claim under ERISA and the Secretary brought this appeal.

We accept all the factual allegations in the Secretary's complaint as true in order to review the district court's dismissal under Rule 12(b)(6). Garita Hotel Ltd. Partnership v. Ponce Federal Bank, F.S.B., 958 F.2d 15, 17 (1st Cir.1992).

Between 1986 and 1990, OMNI provided group medical, dental, and life insurance and other benefits to a number of small, unrelated business employers in Massachusetts. The employers participating in OMNI established employee welfare benefit plans (the "welfare plans") within the meaning of ERISA Sec. 3(1), 29 U.S.C. Sec. 1002(1). By collecting premiums from the participating employers, OMNI held and controlled the assets of the welfare plans and was responsible for paying benefits to the employees.

The Secretary claimed that OMNI falsely represented itself to be a "tax-exempt ERISA covered benefit plan" under ERISA Sec. 3(1), 29 U.S.C. Sec. 1002(1), in order to avoid governmental regulation and oversight. According to the Secretary, OMNI was a multiple employer welfare arrangement ("MEWA") within the meaning of ERISA Sec. 3(40)(A), 29 U.S.C. Sec. 1002(40)(A), but not an ERISA plan exempt from state insurance regulation.

Count I of the complaint alleged that Harbor Medical Administrators, Inc. ("HMA"), the administrator of OMNI, and HMA's President (Mr. Richard Rowe), Executive Vice-President (Mr. Phillip Carpenter) and Vice President (Ms. Ann Dunlop) acted as fiduciaries with respect to the employers' welfare plans. The Secretary asserted that these four defendants breached their fiduciary obligations under ERISA by engaging in a variety of imprudent and self-serving activities. The activities included engaging in prohibited transactions, mismanaging and misusing assets of the welfare plans, falsely representing the status of OMNI to employers and state regulators, and operating an illegal insurance company.

Count II of the complaint alleged that Gorman, who was Director of Group Insurance and Welfare Plan Consulting Services, Actuarial, Benefits and Compensation Consulting, at the accounting firm of Coopers & Lybrand, provided "professional services" to OMNI from May through October of 1989. In particular, he provided advice to HMA regarding the legal status of OMNI under ERISA. On several occasions, Gorman informed Dunlop, Rowe and others at HMA that they were operating an illegal insurance company under Massachusetts law and that OMNI did not enjoy the protection of the ERISA provision exempting ERISA plans from state regulation. See 29 U.S.C. Sec. 1144. Despite his own warnings, Gorman advised Dunlop, in response to a letter from the New Hampshire Insurance Department inquiring as to the legal status of OMNI, that she had the option to "try the 'red herring' across the trail of the Insurance Department just to keep them off balance" by telling them OMNI was an ERISA covered plan. The gist of this advice was that OMNI could avoid state regulation by obfuscating its true legal status. Gorman provided Dunlop with a draft letter to send to the New Hampshire Insurance Department falsely stating that OMNI was covered by ERISA. Gorman further advised that there was little risk of investigation by the state once it was informed of a plan's ERISA status. Subsequently, Rowe adopted Gorman's draft letter and sent it to New Hampshire's Insurance Department on October 17, 1989.

The complaint stated that Gorman acted at all times "within the scope of his employment" and by his actions participated in the fiduciary breaches of the defendants named in Count I. The Secretary did not allege that Gorman himself was a fiduciary. The Secretary concluded, however, that "Gorman is liable under ERISA to the same extent as the fiduciaries for the breaches committed." Gorman's employer, Coopers & Lybrand, was also named as a defendant based on the theory that it was liable for the actions of its agent.

To remedy the alleged violations, the Secretary sought the recovery of plan losses, the undoing of prohibited transactions and a permanent injunction against all defendants, including Gorman, from serving as ERISA fiduciaries or service providers to any ERISA plans.

On September 1, 1992, the district court granted motions to dismiss filed by Gorman and Coopers & Lybrand based on the failure of Count II to state a claim under Rule 12(b)(6). The district court held that neither of the two ERISA enforcement provisions under which the Secretary could proceed, 29 U.S.C. Sec. 1132(a)(2) and Sec. 1132(a)(5), authorized a claim against nonfiduciaries like Gorman or Coopers & Lybrand. ¹ The district court found that the Secretary could not obtain relief under Sec. 1132(a)(5) because that section applies only to nonfiduciary defendants who are "parties in interest." ² The district court also found that no cause of action existed under Sec. 1132(a)(2), which authorizes the Secretary to seek appropriate relief under 29 U.S.C. Sec. 1109, ³ because only fiduciaries could be sued under Sec. 1109 and neither Gorman nor Coopers & Lybrand were fiduciaries.

On June 1, 1993, the Supreme Court held in a five to four decision that ERISA does not permit a civil suit for money damages against nonfiduciaries who knowingly participate in a fiduciary breach. Mertens, --- U.S. at ----, 113 S.Ct. at 2072. The Court in Mertens found that "appropriate equitable relief," as authorized under Sec. 1132(a)(3), ⁴ includes only those types of relief typically available in equity, such as injunctions or restitution. Such relief would not include a classic form of legal relief like compensatory damages. Id. at ----, 113 S.Ct. at 2068. The Court discussed, but expressly refrained from deciding, whether ERISA provides any remedy at all for nonfiduciary participation in a fiduciary breach. Id. at ---- - ----, 113 S.Ct. at 2067-68.

After the Mertens decision, the Secretary withdrew the appeal of his claim against Coopers & Lybrand because that claim only sought monetary damages. The Secretary pursued the appeal of Gorman's dismissal to the extent the Secretary was seeking only equitable relief. The four fiduciary defendants in this case defaulted leaving Gorman as the only defendant who is party to this appeal.

II. DISCUSSION

At the center of this case is the language of Sec. 502(a)(5) of ERISA which states that the Secretary may bring a civil action

(A) to enjoin any act or practice which violates any provision of this subchapter, or (B) to obtain other appropriate equitable relief (i) to redress such violation or (ii) to enforce any provision of this subchapter.

The Secretary maintains that its action against Gorman for alleged participation in the fiduciary breaches of OMNI's administrators constitutes a claim for "appropriate equitable relief to redress" violations of ERISA or "to enforce" provisions of ERISA under Sec. 1132(a)(5)(B). ⁵ According to the Secretary, the language of the provision does not explicitly require that the ERISA violation must be one committed by the person against whom the relief is sought, so long as the relief is "appropriate" for purposes of "redressing" a violation. See Mertens, --- U.S. at ---- n. 1, 113 S.Ct. at 2073 n. 1 (White, J., dissenting). Likewise, one could arguably bring an action against a nonfiduciary for the purposes of "enforcing" a provision of ERISA which imposes no obligation on that nonfiduciary but nevertheless requires some judicial relief...