Al Nieto, Clarence Valdez, Adrian Munenmann, Lester Olivera and Joana L. Gonzales v. Louis Ecker, and Roger Frommer

Citations: 845 F.2d 868; 9 Employee Benefits Cas. (BNA) 2153; 1988 U.S. App. LEXIS 5769; 1988 WL 39829Docket: 87-5598

Court: Court of Appeals for the Ninth Circuit; May 2, 1988; Federal Appellate Court

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Roger Frommer, an attorney, is the central figure in a lawsuit brought by Clarence Valdez, Adrian Munenmann, Lester Olivera, and Joana L. Gonzales, who are members of labor unions affiliated with the Cement Masons' Negotiating Committee for Southern California. The plaintiffs allege that Frommer improperly and fraudulently handled his professional services to employee retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). They argue that Frommer failed to prosecute lawsuits for collecting delinquent employer contributions and was compensated for services he did not perform.

The lawsuit, initiated on August 11, 1986, included claims under ERISA and state fraud law, seeking restitution, punitive damages, and injunctive relief. The district court dismissed the state claim against Frommer and later dismissed the ERISA claims, asserting that the plaintiffs did not establish that Frommer was a fiduciary of the Funds, which would subject him to ERISA's fiduciary duties. After the plaintiffs amended their complaint to assert that Frommer exercised authority and control over the Funds' assets, the district court dismissed the case again without leave to amend.

The Ninth Circuit Court of Appeals is reviewing the district court's dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. The plaintiffs argue that Frommer meets the ERISA fiduciary definition because his involvement in lawsuits constitutes control over the disposition of the Funds’ assets, thereby imposing fiduciary duties and liabilities under ERISA.

Yeseta v. Baima established that an attorney providing professional services to an ERISA plan is not classified as a fiduciary unless they exercise authority over the plan beyond their usual professional functions. The complaint did not allege that Frommer exercised such authority. Plaintiffs argued that Frommer's failure to collect employer contributions constituted a loss of plan assets under his control, suggesting he acted as a fiduciary. However, this reasoning could extend fiduciary status to any individual with some control over plan assets, which the court rejected, affirming the district court's ruling that Frommer was not a fiduciary under ERISA.

Even if Frommer was not a fiduciary, plaintiffs contended he could be liable under ERISA section 409(a) for conspiring with fiduciaries who breached their duties. Section 409(a) specifies that only fiduciaries who breach their obligations are personally liable for losses to the plan. While some courts have interpreted this section to impose liability on non-fiduciaries who assist fiduciaries, the court decided that such interpretations do not align with the statute's plain language. The rationale from Freund v. Marshall, which suggested a broader application of fiduciary standards to non-fiduciaries based on congressional intent, was carefully considered and ultimately found insufficient to justify deviating from the statute's explicit meaning.

Senator Williams' statement does not support the integration of state trust law into ERISA, as federal courts have limited jurisdiction based on Congressional grants. Plaintiffs' claims against Frommer are essentially for attorney malpractice under state law, and without explicit Congressional direction, these claims cannot be transformed into federal actions solely due to ERISA coverage. The statement from Senator Williams merely encourages reliance on state law principles within the confines of ERISA, without endorsing the addition of state law causes of action.

The Secretary of Labor cites previous cases suggesting ERISA incorporates common law trust principles; however, those cases do not support the broader claim that trust law provides a federal cause of action absent in the statute. In Donovan v. Mazzola, the court acknowledged that ERISA's fiduciary provisions were derived from common law, but did not imply an additional federal cause of action. Similarly, Terpinas only allowed state law interpretation of pre-ERISA plans without extending that to non-fiduciary claims.

The Supreme Court's ruling in Massachusetts Mut. Life Ins. Co. v. Russell reinforces this interpretation, emphasizing that ERISA is a comprehensive statute with specific civil enforcement provisions. The Court concluded that Congress intended to limit remedies to those explicitly stated in the law, indicating that non-fiduciaries cannot be sued under ERISA's section 409(a). Therefore, only fiduciaries as defined by ERISA are subject to lawsuits under this section.

Plaintiffs cannot seek relief against Frommer under ERISA section 409(a) because he is not a fiduciary. However, they argue that ERISA section 502(a)(3) grants broad equitable powers to obtain the relief they seek. This section allows civil actions by participants, beneficiaries, or fiduciaries to enjoin violations of ERISA provisions or the terms of the plan and to seek other equitable relief for such violations. A prior case suggested that this could permit claims for damages against non-fiduciaries involved in fiduciary breaches, but the current court disagrees, asserting this interpretation would render section 409(a) redundant.

Frommer, classified as a "party in interest" under ERISA, can still be liable for engaging in prohibited transactions, including receiving excessive compensation and obtaining a loan from the Funds, which violate sections 406(a)(1) and 408(b). Although section 406(a) restricts fiduciaries, section 502(a)(3) specifically provides the court with equitable power to address violations involving parties in interest. The court affirms that plaintiffs have a valid claim against Frommer under sections 406(a)(1) and 502(a)(3), allowing for appropriate equitable relief if they succeed. However, they cannot claim damages under section 409(a) since Frommer is not a fiduciary. The district court's judgment is partially affirmed and partially reversed, with further proceedings ordered. Each party will bear its own costs on appeal.

Judge Wiggins concurs with Judge Kozinski's finding that Frommer could be liable for violations of ERISA, identifying him as a "party in interest" under ERISA section 3(14)(B), which prohibits certain transactions with such parties. However, Wiggins notes that the plaintiffs did not plead this specific cause of action, and neither party invoked it on appeal, suggesting it should be dismissed on procedural grounds. More importantly, Wiggins disagrees with Kozinski's interpretation of section 409(a) of ERISA, which Kozinski argues applies solely to fiduciaries, thus excluding non-fiduciaries from liability. Wiggins cites numerous cases supporting the notion that non-fiduciaries can be held liable if they knowingly participate in a fiduciary's breach of trust, as ERISA incorporates common law trust principles. Wiggins contends that section 409(a) should not be read in isolation but rather in conjunction with other sections of ERISA, such as section 502(a)(3), which allows beneficiaries to seek remedies for violations. He criticizes Kozinski for overlooking the broader intent of ERISA, which aims to provide comprehensive remedies for breaches of fiduciary duty, as evidenced by various legislative statements, including those from Senator Williams. Wiggins concludes that there is substantial legislative support for applying common law trust principles within the framework of ERISA.

The Senate Committee on Labor, Public Welfare's report indicates that the fiduciary responsibility section of ERISA codifies principles from the law of trusts, with both the Senate and House Reports affirming that fiduciary conduct under the Act is based on existing trust law. This alignment is supported by extensive legislative history, not just a single senator’s statement. The opinion correctly identifies potential liability for Attorney Frommer under ERISA but is criticized for creating a circuit conflict by rejecting his liability under Section 409(a). The circuit's previous ruling in Mazzola established that Section 409(a) remedies should be informed by traditional trust law, which Judge Kozinski misinterprets by suggesting Mazzola does not imply a federal remedy outside the statute’s explicit provisions. Mazzola confirmed that remedies for breaches of fiduciary duty under ERISA can include bond requirements sourced from trust law, thereby contradicting Judge Kozinski’s position and causing an intracircuit conflict. The concurring opinion references additional legislative history that supports the derivation of ERISA's fiduciary principles from trust law but does not clarify which principles or fiduciaries are involved. Ultimately, the legislative history does not override the unambiguous nature of the statute itself, as established in case law.

Section 409(a) of ERISA incorporates common law trust remedies, but its application is limited to fiduciaries. The court rejects the defendant's argument that plaintiffs cannot invoke section 502(a)(3) because they only cited section 409 in earlier proceedings. The plaintiffs' request for equitable relief against the defendants suffices under federal notice pleading standards to support a claim under section 502(a)(3). 

ERISA section 406(a)(1) prohibits fiduciaries from engaging in certain transactions with parties in interest, including lending money or transferring plan assets. However, section 408(b) allows for reasonable arrangements with parties in interest for necessary legal services. The Internal Revenue Code imposes taxes on "disqualified persons" involved in prohibited transactions, but this tax is a civil penalty and does not preclude remedies under section 502(a)(3). The tax serves as a deterrent rather than an exclusive remedy, ensuring participants have recourse against violators of ERISA, which Congress intended. 

Certain actions by Frommer may not qualify as prohibited transactions under ERISA, in which case no remedies are available. Mazzola affirmed the appointment of an investment manager to oversee plan assets, noting that courts have the discretion to remove fiduciaries for imprudence or violations of ERISA. The district court appropriately exercised its discretion by removing the trustees due to multiple ERISA violations.

Judge Kozinski dismisses the significance of Senator Williams' remarks regarding ERISA's incorporation of common law trust principles. Mazzola references the Eaves case, arguing that Congress intended for courts to apply common law trust remedies, which Eaves supported by citing Senator Williams and other Committee reports. The Eaves decision allowed for the rescission of a purchase-sale transaction by an ERISA plan and the restoration of lost profits. Under 29 U.S.C. Sec. 1106(a)(1), ERISA section 408(b) exempts certain transactions from prohibitions, such as reasonable arrangements for legal services if compensation is reasonable. Conversely, the Internal Revenue Code imposes taxes on "disqualified persons" in prohibited transactions (26 U.S.C. Sec. 4975), with the definition closely mirroring that of parties in interest under ERISA. The existence of this tax does not negate the remedies available under section 502(a)(3) of ERISA, as the tax serves as a civil penalty and not a remedy. Furthermore, section 4975(h) emphasizes that the tax does not preclude remedial action by the Secretary of Labor or plan participants. Mazzola also affirms a lower court's appointment of an investment manager to oversee plan assets for ten years, noting that at common law, courts could remove trustees if their continuation would harm beneficiaries. Courts have similarly found removal of fiduciaries appropriate under ERISA for imprudence or prohibited transactions, justifying the district court's decision to divest trustees of their functions given multiple ERISA violations.