19 Employee Benefits Cas. 1441, Pens. Plan Guide P 23909g Robert B. Reich, Secretary of the United States Department of Labor v. Fred Compton, Joseph McHugh John Nielsen, Frederick Hammerschmidt, Gersil N. Kay, Electrical Mechanics Association, the Fidelity-Philadelphia Trust Company, and the International Brotherhood of Electrical Workers, Local Union No. 98
Docket: 93-2019
Court: Court of Appeals for the Third Circuit; September 8, 1995; Federal Appellate Court
An appeal was made by Robert B. Reich, Secretary of the United States Department of Labor, against several defendants, including members of the Electrical Mechanics Association (EMA), the International Brotherhood of Electrical Workers, Local Union No. 98, and others, concerning alleged violations of the Employee Retirement Income Security Act of 1974 (ERISA). The case originated from financial transactions involving the EMA and the Local 98 Pension Plan, with the Secretary claiming these transactions were prohibited due to EMA's close ties to the union.
The district court had granted summary judgment in favor of the defendants, which is now partially reversed and remanded for further proceedings. The case details that in 1972, the Pension Plan loaned $800,000 to EMA at 7.5% interest to fund construction of a building that housed Local 98's offices. Following the enactment of ERISA, which imposed restrictions on certain transactions involving pension plans and parties in interest, the Plan sought an exemption from the Department of Labor in 1984 to avoid future violations.
The Department tentatively denied this exemption, advising the Plan to either renegotiate the loan terms or require full repayment. However, the Plan withdrew its exemption request and accepted a payment of $380,289.93 from EMA in full satisfaction of the loan, despite its higher accounting value of $653,817.47. This payment was financed by Local 98, which collected funds from its members through a special assessment to facilitate the repayment to EMA.
In 1984 and 1985, Fred Compton, Joseph McHugh, and John Nielsen served as Local 98's trustees for the Plan, while Frederick Hammerschmidt and Gersil Kay were employer-designated trustees, with Fidelity-Philadelphia Trust Company acting as the corporate trustee. Compton held the dual roles of president of both EMA and Local 98, while McHugh and Nielsen were also key members of Local 98's leadership during this period.
In October 1988, a complaint was filed by the Secretary against these defendants, alleging that EMA was a shell corporation under Local 98's control, rendering all transactions with EMA as transactions with Local 98, a party of interest under ERISA. The complaint claimed that a loan to EMA constituted a prohibited transaction under ERISA as of July 1, 1984, and that EMA's purchase of its note at less than principal value further violated ERISA provisions.
The complaint cited multiple breaches of fiduciary duty by the trustees, including failing to collect on the loan and knowingly allowing prohibited transactions to occur. Specific allegations included violations of ERISA sections regarding fiduciary obligations, with claims of self-dealing, failure to act in the Plan's interest, and liability for each other’s breaches.
The complaint sought an injunction against further ERISA violations, the restoration of the unpaid loan balance with interest to the Plan by Local 98 and EMA, and the recovery of all losses attributed to the breaches from all defendants jointly and severally.
After discovery, the Secretary sought summary judgment, claiming that EMA was merely a shell corporation controlled by Local 98. Initially, the district court denied this motion in February 1993 but later vacated its denial following the Supreme Court's ruling in Mertens v. Hewitt Associates, which prompted the court to request further briefs. Ultimately, the court granted summary judgment in favor of the non-moving defendants, interpreting Mertens as requiring a strict construction of ERISA. The court found that EMA did not qualify as a "party in interest" under ERISA, concluding that the Secretary's alter ego argument would improperly broaden the statute's application.
The Secretary then moved for reconsideration, arguing that the transactions in question violated ERISA's provisions, specifically sections 406(a)(1)(A, B, and D), asserting they constituted indirect transactions with Local 98 and utilized Plan assets for its benefit. Additionally, the Secretary raised concerns about potential breaches of fiduciary duties by the trustees under section 404(a) and alleged violations by union trustees concerning sections 406(b)(1) and (2) due to their dual roles in EMA's purchase of a note.
The district court rejected the motion, stating it could be denied on procedural grounds for presenting new arguments. On the merits, the court interpreted the transactions as not involving "indirect parties in interest" as defined by ERISA, and determined that Local 98 did not receive a direct or indirect financial benefit from the transactions. The court also dismissed the claim that union trustees violated ERISA sections due to their involvement in EMA's purchase, noting that the boards of the Plan and EMA were not the same, and the union trustees did not control EMA's board. However, the court did not address the Secretary's fiduciary duty argument under section 404(a), leading to the subsequent appeal.
The court examined whether it correctly granted summary judgment against the Secretary regarding claims that Plan trustees breached ERISA sections 406(a)(1)(A, B, and D). ERISA section 406(a) was enacted to prevent transactions that could harm the interests of plan participants and beneficiaries, which were previously permissible under an "arms-length" standard that proved difficult to enforce and susceptible to abuse. Section 406 prohibits fiduciaries from allowing the plan to engage in certain transactions with parties in interest, including sales, loans, exchanges of property, and transfers of plan assets.
The analysis is divided into two parts: first, the court will assess if the transactions in question constitute prohibited indirect transactions under sections 406(a)(1)(A, B, and D) involving Local 98; second, it will determine if these transactions represent the use of plan assets for the benefit of Local 98 in violation of section 406(a)(1)(D). The Secretary claims that the Plan's loan to EMA and the subsequent sale of the note to EMA were indirect transactions with Local 98, arguing that "indirect transactions" encompass multi-party transactions through intermediaries, complex two-party transactions, and dealings with an alter ego of a party in interest. The Secretary concedes that the first two categories do not apply, leaving the question of whether transactions with an alter ego qualify as indirect transactions under ERISA.
The Secretary argues that his interpretation of section 406(a)(1) should receive deference based on Chevron principles. However, the court finds this interpretation inconsistent with clear congressional intent, thus rejecting it. Section 406(a)(1) includes categorical prohibitions based on the definition of a "party in interest," outlined in section 3(14) of ERISA, which specifies various categories of parties that qualify, including fiduciaries, service providers, employers, employee organizations, significant shareholders, and their relatives. The Secretary has the authority, in consultation with the Secretary of Treasury, to adjust the ownership thresholds specified for certain categories. Additionally, regulations may be established to clarify the determination of ownership interests and treatment of indirect stockholdings. Any individual classified as a party in interest in relation to a specific trust is also considered a party in interest concerning that trust.
The Secretary's interpretation proposes an additional category—alter egos of parties in interest—within ERISA's comprehensive definitions, which overlaps with existing categories. This interpretation disrupts the legislative framework established in section 3(14), as supported by case law. Congress did not include "alter ego" in the definition of a party in interest, indicating intent to exclude it. The Secretary's view is based on the incorrect assumption of a uniform legal standard for alter ego liability across contexts, whereas the criteria differ significantly between labor and corporate law contexts. If alter ego analysis were mandated under ERISA, it would require subjective determinations about when related parties should be treated as parties in interest, a decision already made by Congress in section 3(14). Therefore, the court rejects the Secretary's alter ego argument, clarifying that section 406(a)(1) does not inherently prohibit transactions with an alter ego of a party in interest. The ruling is narrowly focused on this argument and does not address other interpretations of indirect transactions.
A fiduciary of a plan is prohibited from engaging in transactions that result in the use of plan assets for the benefit of a party in interest, as outlined in 29 U.S.C. Sec. 1106(a)(1)(D). A fiduciary breach occurs when five elements are met: 1) the individual is a fiduciary; 2) the fiduciary causes the plan to engage in the transaction; 3) the transaction uses plan assets; 4) the transaction benefits a party in interest; and 5) the fiduciary knows or should know that elements three and four are satisfied. In this case, the defendants are undisputed fiduciaries, and it is clear that plan assets were used in the transaction. The critical elements under scrutiny are the fourth and fifth. The fourth element requires proof of a subjective intent to benefit a party in interest, contrary to the Secretary's position that only knowledge of potential benefit is necessary. The interpretation that intent is required is supported by the statutory language "for the benefit," suggesting that actions must be taken with the purpose of benefiting the party in interest. Reading the statute otherwise could lead to unreasonable interpretations, such as prohibiting transactions that, while advantageous to the plan, might inadvertently benefit a party in interest.
The Secretary asserts that to meet the requirements of Section 406(a)(1) of ERISA, a party in interest must gain more than a minimal, incidental, or fortuitous benefit from a transaction. However, the statute does not explicitly mandate such a threshold, and the terms 'incidental' and 'fortuitous' imply a subjective element, suggesting a need for proof of subjective intent to benefit a party in interest. Evidence shows that this intent must be present among those involved in the transaction, although the specific individuals required to demonstrate this intent are not clearly defined in the statute.
Element five necessitates that the fiduciary must have known or should have reasonably known that the transaction involved the use of plan assets for the benefit of a party in interest, without requiring proof of subjective intent. In the current case, the court found that summary judgment for the defendants was inappropriate, as reasonable factfinders could conclude that the parties involved intended to benefit Local 98. Direct evidence, such as trustee Compton’s statement about not suing EMA, supports this conclusion, alongside circumstantial evidence indicating that the transactions benefitted Local 98.
The district court's reasoning that Local 98 did not benefit from the loan to EMA due to rent payments was disputed. There was no formal lease, and EMA did not aim to profit from it. Local 98 only made rent payments when EMA was financially strained, essentially covering EMA’s obligations. Historically, Local 98 had assumed EMA's financial responsibilities, providing funds for salaries and expenses without charging interest on loans. Therefore, reasonable factfinders could infer that Local 98 benefited from the continuation of a long-term below-market mortgage loan, which alleviated EMA's cash outflow that the union had effectively managed.
The district court's grant of summary judgment for the defendants was erroneous regarding whether the two transactions in question were prohibited under section 406(a)(1)(D). On remand, the court must determine two critical aspects of the Secretary's claim: the subjective intent of the parties involved to benefit a party in interest and the knowledge of the trustees regarding this intent.
Regarding claims under ERISA section 502(a)(5), the Secretary has presented two theories against the nonfiduciary defendants, EMA and Local 98. The first theory, which suggests that section 502(a)(5) allows for lawsuits against nonfiduciaries who knowingly participate in fiduciary breaches, is rejected. The second theory, asserting that section 502(a)(5) enables lawsuits against nonfiduciaries involved in transactions prohibited by section 406(a)(1), is accepted.
Section 502(a) of ERISA outlines various actions that can be initiated by participants, beneficiaries, fiduciaries, or the Secretary, including the ability to enforce rights under plan terms, seek equitable relief, and collect civil penalties. The Supreme Court’s interpretation of section 502(a)(3) in Mertens provides relevant guidance, emphasizing that nonfiduciaries can be held liable for knowingly participating in fiduciary breaches, despite not being fiduciaries themselves.
The Supreme Court in Mertens addressed whether the remedy sought by pensioners constituted 'appropriate equitable relief' under section 502(a)(3) of ERISA, while also examining if this section allows for a cause of action against nonfiduciaries for knowingly participating in a fiduciary's breach of duty. The Court noted that ERISA does not explicitly require nonfiduciaries to refrain from such participation, contrasting this with the statutory imposition of liability on cofiduciaries under section 405(a). This suggests a deliberate limitation, as the Court has previously cautioned against inferring causes of action in the ERISA context due to its detailed enforcement scheme.
Based on this, EMA and Local 98 argue that the Secretary cannot pursue claims against them for their alleged knowing participation in a fiduciary breach. Conversely, the Secretary contends that Mertens' discussion is merely dicta and that under section 502(a)(5), he can seek relief without proving that the respondents violated ERISA, as long as they were knowing participants in such a violation. The Secretary further claims that any ambiguities should favor his position, citing pre-Mertens case law that recognized claims against nonfiduciaries. Lastly, if section 502(a)(5) does not create a cause of action against nonfiduciaries, the Secretary argues for the recognition of such a cause through federal common law, referencing the Supreme Court's endorsement of developing federal common law under ERISA based on traditional trust law principles.
Courts of appeals have consistently rejected the Secretary's argument post-Mertens. In *Reich v. Rowe*, the Secretary sued corporate defendants tied to the OMNI Medical Health and Welfare Trust, alleging fiduciaries breached their duties and that financial consultants knowingly participated in this breach. The district court dismissed the claims against the consultants under Fed. R. Civ. P. 12(b)(6), a decision affirmed by the First Circuit. The Rowe court found the Supreme Court's Mertens dicta persuasive, interpreting section 502(a)(5) as allowing actions only against those who commit violations of ERISA or engage in proscribed acts. It concluded that nonfiduciary participation in a fiduciary breach does not constitute an actionable violation under ERISA. The court emphasized that Congress created a comprehensive enforcement scheme and could have included provisions for suing nonfiduciaries if intended. It stated that judicial remedies for nonfiduciary participation in fiduciary breaches fall under cases where Congress omitted a cause of action, thereby ruling the Secretary could not sue a professional service provider that aided in a fiduciary breach without receiving ill-gotten plan assets.
Similarly, in *Reich v. Continental Casualty Co.*, the Seventh Circuit rejected the Secretary's claim that a nonfiduciary could be held liable for knowingly participating in a fiduciary breach, reinforcing the Mertens dicta. The court expressed that the Supreme Court's recent considerations should guide lower courts, asserting that section 502(a)(5) does not permit the Secretary to sue nonfiduciaries solely for participating in fiduciary breaches. The court noted the shared language of sections 502(a)(3) and 502(a)(5) implies they should be interpreted similarly, thus affirming the limitation of the Secretary's authority under section 502(a)(5). The excerpt concludes by indicating an intention to address the Secretary's argument regarding the applicability of section 502(a)(5) to nonfiduciaries involved in transactions prohibited by section 406(a)(1).
EMA and Local 98 argue that the Secretary cannot seek relief from them for transactions deemed prohibited under section 406(a)(1) of ERISA, asserting that this section applies solely to fiduciaries. They contend that the Secretary's attempt to hold them liable for a fiduciary's breach of duty was rejected in the Mertens case. However, this interpretation is viewed as overly restrictive. Mertens implies that section 406(a) also sets obligations for nonfiduciaries involved in prohibited transactions. The court noted that ERISA includes several provisions that can impose duties on nonfiduciaries, referencing section 406(a) as an example prohibiting nonfiduciaries from engaging in certain transactions with ERISA plans.
Additionally, the First Circuit in Rowe indicated that the Secretary could pursue actions against nonfiduciaries under section 502(a)(5) if they participated in prohibited transactions. The court emphasized that while section 406(a) specifically assigns duties to fiduciaries, it does not absolve nonfiduciaries from liability for engaging in prohibited transactions, as such actions violate ERISA. Similarly, in Nieto v. Ecker, the Ninth Circuit ruled that equitable relief can be sought under section 502(a)(3) against parties in interest involved in prohibited transactions, highlighting that section 502(a)(3) is not limited to fiduciaries and allows for redress of ERISA violations involving all parties.
The Secretary's position is supported by parallel tax provisions that allow for nonfiduciary liability in prohibited transactions, as outlined in Section 4975 of the Internal Revenue Code, which imposes taxes on participants in such transactions. Section 4975(h) requires the Secretary of Treasury to notify the Secretary of Labor before issuing a notice of deficiency, allowing for potential correction of the transaction. This implies restitution obligations for involved parties, reinforcing the Secretary's authority under ERISA.
The argument that Section 406(a)(1) does not apply to nonfiduciaries who are not parties in interest is rejected. Section 406(a)(1)(D) extends liability to transactions benefiting a party in interest, thus allowing the Secretary to pursue claims against any participant in a prohibited transaction.
The court upholds the district court's summary judgment in favor of EMA and Local 98 regarding one transaction due to the lack of timely and adequate theories presented by the Secretary. However, the Secretary can maintain claims against EMA and Local 98 for the second transaction, as nonfiduciaries engaging in prohibited transactions violate ERISA and may be enjoined or face equitable relief under Section 502(a)(5).
Lastly, the court examines whether union trustees violated Section 406(b)(2) of ERISA. The Secretary contends that the trustees actively engaged in decision-making related to the sale of a note to EMA and Local 98, implicating their responsibilities under this section.
The district court's decision to grant summary judgment against the Secretary was found to be erroneous. Section 406(b) of ERISA prohibits plan fiduciaries from self-dealing to prevent conflicts of interest that could hinder their ability to act solely for the benefit of plan participants and beneficiaries. Specifically, Section 406(b)(2) prohibits fiduciaries from participating in transactions on behalf of parties whose interests conflict with the plan. This prohibition applies regardless of whether the transaction is deemed fair.
In the precedent case, Cutaiar v. Marshall, the court ruled that a loan transaction between two funds managed by the same trustees violated Section 406(b)(2), even in the absence of misconduct or unfair terms. The court emphasized that identical trustees overseeing different benefit plans must not engage in transactions between the plans without a Section 408 exemption, indicating that such actions constitute a per se violation of ERISA. It was noted that fiduciaries must prioritize the interests of each plan independently, ensuring that each plan is represented by trustees who can act without conflicting loyalties. The interpretation of Cutaiar reinforces the necessity for fiduciaries to uphold complete loyalty to the plan's participants and beneficiaries.
Each defendant, as a pension fund trustee, violated section 406(b)(2) by representing the welfare fund, which had interests adverse to the pension fund during a loan transaction. Similarly, as welfare fund trustees, they violated section 406(b)(2) by acting on behalf of the pension fund in the same context. The district court's interpretation of the Cutaiar case was overly narrow, asserting that it applied only to transactions with identical decision-makers, which contradicts the explicit language of section 406(b)(2). This provision imposes a duty against self-dealing on individual fiduciaries, prohibiting them from acting on behalf of or representing an adverse party, regardless of whether the boards involved are identical. The court also rejected the district court's distinction that Cutaiar involved transactions with a "party in interest," asserting that the Cutaiar opinion did not define either fund as such, nor did it limit the application of section 406(b)(2) to transactions involving parties in interest. Thus, the interpretation that section 406(b)(2) only pertains to dealings involving identical decision-makers or parties in interest is incorrect.
Section 406(b)(2) addresses parties with interests adverse to a plan or its participants or beneficiaries. A party can have adverse interests in a specific transaction without qualifying as a "party in interest" under section 3(14). The case of Cutaiar illustrates that when a plan engages in lending or borrowing, it creates adverse interests between the plan and the other party involved. In this instance, the Plan and EMA had such adverse interests regarding the sale of EMA's note, and similarly, the interests of the Plan and Local 98 were also adverse.
The critical question under section 406(b)(2) is whether the union trustees represented EMA or Local 98 during this transaction. Evidence indicates they did; all three trustees were Local 98 officials, and one was also an EMA officer. They participated in discussions concerning the mortgage transaction without recusal, suggesting potential violations of section 406(b)(2). The district court is tasked with determining if the trustees acted in their official capacities during this transaction, as such actions would indicate a breach of section 406(b)(2) due to the adverse interests involved.
Additionally, the Secretary claims the Plan trustees violated ERISA's loyalty and prudence requirements under sections 404(a)(1)(A) and (B), and Fidelity violated the obligation to comply with plan documents under section 404(a)(1)(D). The district court's judgment against all defendants did not adequately address these claims, which was deemed erroneous. ERISA codifies common law duties of loyalty and prudence for trustees, requiring fiduciaries to act solely in the interest of plan participants and beneficiaries and to adhere to the governing documents of the plan. Evidence suggests that the fiduciaries may have violated these duties, particularly given that the Plan trustees sold the note significantly below its accounting value while being involved in negotiations on both sides.
The Plan trustees did not take legal action against EMA to compel the purchase of a mortgage at its accounting value, as this would have effectively been a lawsuit against Local 98. The Second Circuit's precedent indicates that trustees breach their duty of loyalty when prioritizing the interests of the plan sponsor over those of the plan participants and beneficiaries. Evidence suggests the trustees may have acted imprudently, violating section 404(a)(1)(B) of ERISA, particularly since they were informed by their counsel and the Secretary that the loan contravened ERISA regulations. Despite advice to sell the loan at its accounting value, the trustees delayed action until two months before the expiration of ERISA's ten-year transition period. Fidelity's involvement in these transactions may indicate a failure to exercise the authority granted to them under the Plan, potentially violating section 404(a)(1)(D). The facts presented are sufficient for the Secretary's claims to withstand a summary judgment motion. Consequently, the district court's summary judgment in favor of the defendants is partially reversed, with the case remanded for further proceedings. The court does not express an opinion on the extent of potential liability for any defendant found to have violated ERISA.
Under 1105(b)(1)(A), when a plan's assets are held by multiple trustees, each trustee must exercise reasonable care to prevent breaches by co-trustees. The Secretary's argument, which was denied on the merits by the district court, claims that certain transactions constituted prohibited activities under section 406(a)(1), including indirect sales, lending, and transfers involving parties in interest. The Secretary provides examples of these violations but acknowledges that the specific transactions at issue do not fall into the first two categories.
The Secretary's alter ego argument lacks foundation in existing regulations or previous litigation, and it appears inconsistent with the provisions of ERISA. The absence of common law trust support for the alter ego doctrine further undermines the Secretary's position, as traditional trust law does not impose strict prohibitions against transactions involving related parties. Instead, transactions could only be challenged if improper influence or unfair pricing was demonstrated. ERISA's definitions, as outlined in section 3(21)(A), do not support the Secretary's interpretation in this context.
A fiduciary is defined as a person who exercises discretionary control over a plan's management or assets, provides investment advice for compensation, or holds discretionary authority in the plan's administration. Fidelity argued it was not a fiduciary, claiming it lacked discretionary authority and acted merely as a depository for a mortgage note. However, the evidence indicates Fidelity had authority over the management of the Plan's assets, as the 1980 Amendment granted it exclusive investment authority, and board meeting minutes demonstrated its control over investments. Fidelity's involvement in advising the sale of the note further supports its fiduciary status, as it initially warned the trustees that the sale would be imprudent. The district court's conclusion that Fidelity was a fiduciary aligns with previous court findings regarding fiduciary responsibilities under ERISA.
Additionally, the legislative history indicates that transactions benefiting a party in interest are prohibited under section 406(a)(1)(D). The Department of Labor's opinions suggest that such transactions violate the section if they involve a fiduciary using plan assets to benefit a party in interest. The district court's finding that Local 98 did not benefit from certain transactions is questioned, as it was established that EMA owed Local 98 a significant debt, primarily for salary expenses. This debt was not demanded for payment, reflecting an ongoing arrangement between Local 98 and EMA, which treated these transactions as related party interactions, resulting in an increasing liability on financial records due to non-payment.
EMA accumulated significant debt to Local 98 over the years, with amounts owed reaching $316,328.00 by June 30, 1987, and increasing to $559,918.00 by December 31, 1988. Local 98's accountant indicated that this debt was eventually forgiven, and there was an established practice between EMA and Local 98 of not formalizing loans in writing, including a policy against charging interest on advances.
The excerpt highlights specific provisions of the Employee Retirement Income Security Act (ERISA) that impose fiduciary duties, including the prohibition of prohibited transactions (section 406(a)), self-dealing (section 406(b)), and the duty of loyalty and prudence (section 404(a)). Breaches of these duties can lead to liability under section 409. The Secretary alleges that both EMA and Local 98 knowingly participated in breaches of fiduciary duties by the Plan trustees, which could render them liable under section 502(a)(5), contingent upon proving a fiduciary breach.
Case law is referenced to illustrate the legal landscape surrounding fiduciary responsibilities and participation in breaches, noting that courts have been reluctant to create common-law remedies for non-fiduciaries. Additionally, section 502(l) of ERISA is cited, indicating Congressional intent to impose penalties on nonfiduciaries who knowingly participate in fiduciary breaches, establishing a civil penalty equal to 20 percent of the recovery amount.
The Secretary argues that section 502(a)(5) must provide a remedy for nonfiduciary violations of fiduciary breaches; otherwise, the term "other persons" in section 502(l) would lack meaning. However, this interpretation is rejected, citing the Supreme Court's decision in Mertens, which clarified that the "equitable relief" available under section 502(a)(5) encompasses restitution of ill-gotten plan assets, and nonfiduciaries cannot be liable for knowing participation in a fiduciary’s breach unless they engaged in prohibited transactions. The Rowe court also criticized the Secretary’s reliance on civil penalties to infer a cause of action from a provision that only offers equitable relief. The conclusion drawn is that section 502(l) does not independently authorize equitable relief against nonfiduciaries who did not engage in prohibited acts or obtain plan assets. Furthermore, the argument lacks validity for Plan trustees, who are considered fiduciaries under ERISA, which imposes specific duties on them. Sections 502(a)(3) and (5) allow the Secretary to seek relief against fiduciaries for breaches, regardless of whether those breaches stem from participation in prohibited transactions. The reliance of EMA and Local 98 on Brock v. Citizens Bank of Clovis is deemed misguided, as the Tenth Circuit upheld the dismissal of the Secretary's claim for failing to allege a violation of a specific ERISA provision.
The Secretary alleges that EMA and Local 98 violated ERISA section 406(a)(1), which governs the conduct of nonfiduciaries. This case differs from Painters of Philadelphia Dist. Council No. 21 Welfare Fund v. Price Waterhouse, where claims against a nonfiduciary auditor were dismissed because the auditor was not considered a fiduciary under ERISA. Although EMA argues that this precedent prevents any section 502(a)(3) claims against nonfiduciaries, the court clarifies that such claims can only be pursued if based on fiduciary breaches. The court also notes that the Secretary's claim for relief under section 406(a)(1)(D) was not addressed by the district court, and thus, it will not be considered now. Additionally, the Secretary previously claimed that union trustees violated section 406(b)(1), but this claim has been abandoned. The court highlights that Local 98 was effectively the purchaser in the transaction involving EMA's note, as EMA lacked funds and needed Local 98's approval to proceed. Consequently, Local 98's role as the actual purchaser indicates that it had conflicting interests with the Plan regarding the transaction.
Evidence against Compton, president of EMA and Local 98, is deemed stronger than that against the other two union trustees, indicating a need for careful review by the district court on remand. The Secretary alleges that the union trustees breached section 406(b)(2) by prioritizing the interests of EMA or Local 98 while acting as plan trustees during the sale of EMA's note. This claim appears similar to a separate allegation under section 404(a)(1)(A), but the Secretary has not clearly differentiated these theories. Consequently, the court will not address this theory at this stage. Additionally, an amendment to the Trust Agreement grants Fidelity exclusive authority over fund investments. The plan trustees contend that they fulfilled their duty of loyalty and prudence, asserting there were no better alternatives available; however, the Secretary has presented enough evidence to challenge this claim, making summary judgment inappropriate for the district court's consideration.
