Steen v. John Hancock Mutual Life Insurance

Citations: 106 F.3d 904; 97 Cal. Daily Op. Serv. 926; 97 Daily Journal DAR 1384; 1997 U.S. App. LEXIS 2137; 1997 WL 49963Docket: Nos. 95-15874, 95-16061

Court: Court of Appeals for the Ninth Circuit; February 9, 1997; Federal Appellate Court

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The California Council of Civil Engineers and Land Surveyors (Cal Council) established a trust fund, Cal Council Trust, to provide health insurance benefits to employees of its member employers through insurance purchased from John Hancock Mutual Life Insurance Co. A Rate Stabilization Reserve (RSR) was created to offset potential premium increases, with 12% of the annual premium set aside for this purpose. If the Cal Council withdrew from the insurance agreement with proper notice, the RSR balance would be returned. Following John's termination of the agreement, a dispute arose regarding the RSR funds owed to the Cal Council. 

The Civil Engineers and Land Surveyors of California (CELSOC) emerged from a merger between the Cal Council and another organization, inheriting the Cal Council Trust's responsibilities. The CELSOC Trust's Trustees filed claims against John Hancock and associated administrators under the Employee Retirement Income Security Act (ERISA) for recovery of the RSR funds. The district court ruled it lacked federal jurisdiction due to the collateral estoppel effect of a prior unpublished opinion. The Trustees appealed, and the appellate court affirmed in part and reversed and remanded in part.

The CELSOC Trust was formed from the merger of two organizations that previously maintained insurance trusts to provide health and welfare benefits. The Cal Council Trust participated in the Design Professionals Group Insurance Plan (DPGIP), which is not a legal entity but a term for the participating trusts. The trusts independently purchased insurance from John Hancock, contributing to the RSR to stabilize premium payments. The RSR Agreement stipulated that trusts with a balance below the required threshold must remedy the shortfall within five years. The agreement's termination by John Hancock on September 30, 1991, raised questions about the distribution of funds, as it did not explicitly address fund distribution upon termination.

CELSOC Trustees assert that upon termination of the RSR Agreement, the Cal Council Trust's RSR balance was around $3,000,000, yet John Hancock only returned $1,310,111.68 as the undisputed amount owed. They allege that John Hancock used the remaining funds to offset debts of other DPGIP Trusts and settle claims under the Cal Council policy that were not addressed prior to the policy's termination. On September 23, 1993, the CELSOC Life and Health Insurance Plan and its Trustees initiated a lawsuit against John Hancock and AA. C, seeking declaratory relief, equitable reformation, and the establishment of a constructive trust due to John Hancock's alleged breach of fiduciary duty and involvement in prohibited transactions under 29 U.S.C. 1106. The Trustees contended that the district court had jurisdiction under 29 U.S.C. 1132(e)(1), which permits ERISA plan fiduciaries to file claims.

On July 29, 1994, John Hancock moved to dismiss the complaint for lack of jurisdiction under Fed. R.Civ. P. 12(b)(1), claiming the CELSOC Plan and Trustees lacked standing, and argued that the issue had been previously resolved against them in the Ninth Circuit’s unpublished 1988 AIA-BIT decision. In AIA-BIT, a DPGIP participant trust's pursuit of over $2,000,000 from its RSR account was dismissed for lack of diversity and federal question jurisdiction, with the court ruling that the DPGIP was not an ERISA plan and the defendants were not ERISA fiduciaries because the RSR funds were not considered ERISA assets.

The district court noted unresolved factual issues regarding the intent and management of RSR funds, and Hancock's control over these funds. However, it ultimately ruled that the AIA-BIT decision precluded the current action due to lack of subject matter jurisdiction, establishing that the RSR was not an ERISA fund asset. The court concluded that the CELSOC Trust was in privity with the Cal Council Trust, giving the AIA-BIT decision preclusive effect on the Trustees' claims.

The district court determined that the Supreme Court's ruling in Harris Trust did not affect its factual conclusion in AIA-BIT that the RSR funds were premiums rather than ERISA funds held by the insurer for future purchases. Consequently, John Hancock's motion to dismiss was granted. The Trustees contended that the district court erred in applying collateral estoppel from AIA-BIT to prevent them from relitigating essential factual issues, and they argued that Harris Trust overruled AIA-BIT’s findings regarding the RSR funds. Additionally, they claimed that jurisdiction was valid based on the CELSOC Health and Life Insurance Plan being an ERISA plan, allowing them to sue as fiduciaries under 29 U.S.C. § 1002(14) for prohibited transactions under 29 U.S.C. § 1106. John Hancock countered that the Ninth Circuit's jurisdiction ruling in AIA-BIT was binding and that Harris Trust did not undermine AIA-BIT's collateral estoppel. Furthermore, John Hancock asserted that the CELSOC Plan lacked standing to pursue an ERISA claim, and the Trustees failed to prove their fiduciary status.

The district court's dismissal of John Hancock's motion for lack of jurisdiction is reviewed under the summary judgment standard, as it involves factual determinations essential to both the merits of the Trustees' claims and ERISA jurisdiction. The standard permits the court to resolve factual disputes regarding jurisdiction. The review of summary judgment is de novo, considering evidence in the light most favorable to the non-moving party. The district court ruled that the entire claim against AA. C and John Hancock was barred by collateral estoppel from AIA-BIT, but it agreed that the status of the CELSOC Plan as an ERISA plan and the Trustees' prohibited transaction claim were not barred by AIA-BIT.

Collateral estoppel, or issue preclusion, prevents the relitigation of issues that have already been conclusively determined in prior litigation involving the same parties or those in privity with them. This doctrine applies to both legal and factual issues. Courts have been cautious in applying collateral estoppel when the parties in the current case were not adversaries in the earlier litigation. While some jurisdictions allow preclusion where co-parties had a full and fair opportunity to litigate an issue, others restrict it to issues litigated adversarially. For instance, in Clark-Cowlitz Joint Operating Agency v. Federal Energy Regulatory Commission, issue preclusion was denied because the parties did not litigate the issue against each other. However, in the Ninth Circuit, co-party status does not automatically prevent the application of collateral estoppel, as demonstrated in American Triticale, Inc. v. Nytco Services, Inc., where the court ruled that even though the parties were co-defendants without cross-claims, collateral estoppel could still apply to issues that were actually litigated. Thus, the determination of whether collateral estoppel is applicable hinges on whether the issue was conclusively decided in the prior case, regardless of the parties' adversarial status.

In determining the applicability of collateral estoppel regarding the AIA-BIT case, caution is warranted due to the co-defendant status of the Cal Council and John Hancock. Federal courts typically refrain from applying collateral estoppel between co-defendants, as the previous action may not constitute the “actual, full, and fair litigation” needed for such application. To invoke collateral estoppel, the asserting party must demonstrate that the estopped issue is identical to an issue previously litigated and decided in the prior action, which must have resulted in a final judgment on the merits. Any uncertainty about whether an issue was fully litigated negates the use of collateral estoppel.

The Kamilche case outlines four factors to assess whether issues in the current proceeding align with those previously litigated: 1) substantial overlap of evidence or arguments; 2) application of the same legal rules; 3) whether pretrial preparation could encompass matters in both proceedings; and 4) the closeness of the claims involved.

Applying these principles, the Trustees are precluded from relitigating the status of RSR funds as ERISA assets and John Hancock’s role as an ERISA fiduciary, as these issues were definitively resolved in AIA-BIT. In that case, it was determined that the RSR was not a fund asset and that John Hancock and other defendants were not ERISA fiduciaries concerning those funds. CELSOC's breach of fiduciary duty claim against John Hancock and AA.C is based on the same RSR agreement considered in AIA-BIT, thereby establishing identical issues. A determination made on motions for judgment on the pleadings or summary judgment fulfills the requirement for an issue to be considered litigated for collateral estoppel purposes.

The district court affirmed that the AIA-BIT decision involved inadequate pleadings but highlighted that the jurisdictional issues and merits of the ERISA claim were intertwined, necessitating a deeper inquiry beyond mere pleading adequacy. AIA-BIT was unable to demonstrate that the RSR funds were ERISA funds or that AA.C or John Hancock served as ERISA fiduciaries. The dismissal of AIA-BIT's claim was based on a motion arguing that the RSR funds could not be classified as employee benefit plan assets, a motion initiated by CELSOC, which ensured comprehensive litigation on the matter.

The Trustees contended that the AIA-BIT decision's collateral estoppel effect regarding RSR funds and fiduciary status was negated by the Supreme Court's Harris Trust ruling, which classified certain funds as ERISA plan assets, imposing fiduciary standards on John Hancock. However, the mere potential for an erroneous conclusion in AIA-BIT does not eliminate its collateral estoppel effect in the current case. The Richey case outlines three inquiries for exceptions to collateral estoppel: (1) whether the issues are substantially the same, (2) if there have been significant changes in controlling facts or legal principles, and (3) whether special circumstances justify an exception. It was noted that a previously adjudicated fact cannot be contested in subsequent actions, even if the original decision was based on an erroneous legal interpretation. AIA-BIT concluded that the RSR's organization among DPGIP participants did not constitute an ERISA plan, and even if a welfare benefit plan existed, the RSR was not a fund asset, nor were John Hancock and other participants recognized as ERISA fiduciaries.

A determination of whether a plan qualifies as an ERISA plan is a factual finding, as established in several Ninth Circuit cases. Similarly, the classification of an individual as an ERISA fiduciary is also a factual conclusion that can only be overturned if found to be clearly erroneous. A legal change does not negate prior factual conclusions regarding the ERISA status of arrangements, such as the RSR arrangement not being an ERISA plan, RSR not being a fund asset, and John Hancock and AA.C. not being ERISA fiduciaries. Even if previous conclusions were deemed legal, reevaluation is warranted only with significant legal changes. The Supreme Court's decision in Harris Trust did not represent such a change regarding ERISA funds managed by insurance companies, nor did it alter existing authority. The Trustees' claims against John Hancock and AA.C. for breach of fiduciary duty are barred by collateral estoppel. However, the Trustees propose two additional arguments for federal jurisdiction under ERISA: one, that the CELSOC Health Plan qualifies as an “employee welfare benefit plan” not exempt from ERISA, and two, a claim against John Hancock and AA.C. for “prohibited transactions” under 29 U.S.C. § 1106, which remains valid regardless of fiduciary status or the nature of the RSR funds. The court acknowledges some confusion in the AIA-BIT ruling, particularly regarding its classification as an ERISA plan, ultimately clarifying that AIA-BIT was determined not to be an employee welfare benefit plan but a multiple employer trust.

AIA-BIT’s status as an employee welfare benefit plan under ERISA was assessed, with the panel concluding that AIA-BIT had sufficiently pled facts to avoid dismissal regarding its classification as a bona fide employers association. However, the panel shifted focus to the RSR Agreement, determining that the AA.C had exclusive control over RSR funds, characterizing the RSR arrangement as a multiple employer trust, and ruling that DPGIP was not an ERISA plan. Given the involvement of John Hancock, AA.C, and the Cal Council as co-defendants in AIA-BIT, there is caution against applying collateral estoppel due to confusion about whether AIA-BIT’s ERISA status was fully litigated. Cal Council did not challenge AIA-BIT’s ERISA status in its motion to dismiss, and there was insufficient evidence showing that it had a full opportunity to litigate this matter. Consequently, litigation regarding the Cal Council Plan's ERISA status remains open, along with the Trustees' claims against John Hancock and AA.C for engaging in prohibited transactions under ERISA. The court noted that while AIA-BIT could not pursue a prohibited transaction claim due to jurisdictional failures, this issue was not adequately litigated previously, allowing the Trustees' claims under 29 U.S.C. 1106 to proceed. The Trustees maintain standing to bring these claims, as material factual issues exist concerning their status as ERISA fiduciaries and the involvement of AA.C and John Hancock in prohibited transactions.

The district court incorrectly determined that an ERISA plan could only exist at the individual employer level within CELSOC, rather than at CELSOC as a whole. An ERISA “employee welfare benefit plan” is defined as a plan established or maintained by an employer or employee organization for providing specified benefits to participants or their beneficiaries. An employer encompasses individuals acting directly or indirectly for the benefit of an employee benefit plan, including groups or associations of employers. The Department of Labor requires a genuine organizational relationship among the employee associations, rather than a mere association for securing benefits.

The case of Moideen emphasized that a lack of common interest among members can disqualify a plan from ERISA status. In contrast, CELSOC's membership comprises firms in the civil engineering and land surveying sectors within California, demonstrating a commonality of interest. The CELSOC Plan is not disqualified from ERISA coverage under 29 C.F.R. 2510.3-K(j) as the criteria regarding employer contributions and organizational involvement are not met, since employers contribute to the CELSOC Plan and CELSOC actively promotes it to its members. Therefore, the district court's conclusion that CELSOC was not an employer under ERISA and that no ERISA plan existed at CELSOC's level was erroneous.

John Hancock is not eligible to sue under 29 U.S.C. 1132(a) as the CELSOC Plan lacks standing, which is reserved for ERISA plan participants, beneficiaries, fiduciaries, and the Secretary of Labor. However, if the trustees are deemed fiduciaries, they may bring claims against John Hancock and AA. C. for violations of ERISA provisions or the plan's terms, including seeking equitable relief under 29 U.S.C. 1132(a)(3). The CELSOC Trust Agreement names CELSOC as the "named fiduciary," but also allows for others, such as trustees, to have fiduciary duties. These trustees manage plan assets and possess authority to amend plan policies, thereby creating a factual issue about their status as ERISA fiduciaries.

Although John Hancock and AA. C are not ERISA fiduciaries, they may still be liable for prohibited transactions if deemed "parties in interest," which includes service providers to an employee benefit plan. The trustees allege that the compensation received by John Hancock and AA. C for services rendered exceeded reasonable value, potentially constituting a prohibited transaction under 29 U.S.C. 1106. The district court must assess whether the defendants are "parties in interest" and if they engaged in a prohibited transaction. Consequently, the district court's dismissal of the trustees' claims for breach of fiduciary duty is affirmed, while the dismissal of their prohibited transactions claims against AA. C and John Hancock is reversed and remanded. Each party will bear its own costs. Additional trusts involved in DPGIP include various state organizations of the American Institute of Architects and related entities.

CELSOC Trust is recognized as the successor to the Cal Council Trust and Consulting Engineers Trust, which are original RSR signatories. The court references Pilkington PLC v. Perelman, establishing that fiduciaries of a successor pension plan possess standing to pursue claims against the fiduciaries of a predecessor plan for breaches of fiduciary duty related to insurance company selection. Previous rulings, including Kamilche and Franklin Stainless Corp., underscore that collateral estoppel requires actual, fair litigation between parties, even when they previously shared alignment in a case. The absence of adversity in prior litigation does not negate the potential for collateral estoppel if the issues are identical and critical to the prior judgment. The court indicates that preclusion is applicable when both actions involve the same legal principles applied to a complete historical fact setting. The AIA-BIT case is mentioned concerning the interpretation of the RSR agreement under state insurance laws, and it was noted that the district court identified confusion in distinguishing between the DPGIP and its component trusts. Additionally, the court emphasizes that CELSOC does not qualify as an "employee organization" as defined under 29 U.S.C. 1002(4).

"Employee organization" encompasses labor unions, employee representation committees, and other groups formed by employees to engage with employers regarding employee benefit plans and employment matters. This definition includes organizations established for the purpose of setting up such plans, as outlined in 29 U.S.C. 1002(4) (1994). Judicial interpretations in ERISA cases affirm that this term applies to traditional labor unions and similar entities, as demonstrated in cases such as Mason Tenders Dist. Council Welfare Fund v. United City Contracting, Inc., Caterpillar, Inc. v. International Union, and Aquilio v. Police Benevolent Ass’n of New York State Troopers, Inc. In contrast, the CELSOC trust does not qualify as an "employee organization" under this definition.