George Knight & Co. v. Watson Wyatt & Co.

Opinion

USCA1 Opinion

                  United States Court of Appeals

                      For the First Circuit


No. 98-1301



                   GEO. KNIGHT & COMPANY, INC.,



                      Plaintiff, Appellant,



                                v.



                     WATSON WYATT & COMPANY,



                       Defendant, Appellee.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



          [Hon. Richard G. Stearns, U.S. District Judge]


Before



            Boudin, Lynch, and Lipez, Circuit Judges.


Christine A. Burt for appellant.

  Peter A. Biagetti, with whom Joseph P. Messina, Laurence

A. Schoen, and Paul A. Meyer were on brief, for appellee.


February 22, 1999


LIPEZ, Circuit Judge. Plaintiff-appellant Geo. Knight &

Company, Inc. ("Knight") challenges the district court's entry of

a summary judgment in favor of Watson Wyatt & Co. ("Watson Wyatt"),

an international human resources and employee benefits consulting

firm which provided actuarial services to Knight for several

decades beginning in the 1960s.  The court held that Knight's

complaint, which alleges a breach of a fiduciary duty, professional

negligence, and violations of Massachusetts' unfair trade practices

statute, Mass. Gen. Laws ch. 93A, is barred by the applicable three

and four year statutes of limitations.  Knight argues that the

district court erred in its ruling that Knight's claims are not

subject to equitable tolling and thus are untimely.  We disagree

and affirm the judgment.     

                              I.  

     The following facts are not disputed.  In 1966 Geo.

Knight & Company, Inc., a manufacturing company based in

Massachusetts, established the George Knight Local No. 47

Retirement Plan (the "Plan") for the benefit of its eligible union

employees. For more than twenty years, Knight retained Watson

Wyatt, a Delaware corporation with a principal place of business in

Maryland, to provide actuarial services relating to the Plan.  As

part of this provision of actuarial services, Watson Wyatt

completed annual actuarial valuations reports ("AVRs") for the

Plan, as required by ERISA, 29 U.S.C.  1001-1461, and prepared

necessary reports and filings for Knight's review, signature, and

filing on behalf of the Plan, as required by ERISA and the Internal

Revenue Code.  During the course of their business relationship,

Watson Wyatt also prepared amendments to the Plan to comply with

changes in ERISA and the Internal Revenue Code and to ensure that

Knight's contributions to the Plan were tax deductible.       

     In March 1990 Watson Wyatt advised Knight by letter that

the Internal Revenue Code had been changed to require that each of

the Plan's actuarial assumptions be reasonable based on the Plan's

experience.  Watson Wyatt further advised Knight that, in light of

the Plan's historical experience, it believed that the Plan's

actuarial assumptions were inaccurate and might jeopardize the

deductibility of contributions in the event of an IRS audit. 

Watson Wyatt recommended that several of the Plan's actuarial

assumptions, including its investment return and expense

projection, be amended to reflect more accurately the Plan's

historical performance.  Watson Wyatt also advised Knight of the

actuarial effect of continuing the current assumptions, and again

cautioned that using the current investment return assumption might

be deemed unreasonable in the event of an IRS audit.  

     After meeting with Knight representatives in late March

1990 to discuss the proposed amendments to the Plan, Watson Wyatt

offered three alternative sets of assumptions designed to address

the deductibility concerns. Following the submission of these

alternatives, Knight asked Watson Wyatt to "calculate some

additional alternatives for pension plan improvements."  Watson

Wyatt did so.  After obtaining the approval of the union, Knight 

adopted one of Watson's original proposals, effective April 1,

1989.     

     In March 1996 Knight informed Watson Wyatt that an annual

audit by Knight's accountant had raised the question whether the

Plan was currently "excessively overfunded." In a letter responding

to Knight's inquiry, Watson Wyatt stated that in fact the Plan was

"not well funded for IRS purposes," and that, according to the

Plan's 1995 AVR, "the assets of $105,165 are equal to 50% of the

accrued liability of $208,501 for projected benefits . . . ."  

     Following this March exchange concerning the Plan's

funding status, Watson Wyatt provided Knight in November 1996 with

a copy of the Plan's AVR as of April 1, 1996.  In a cover letter to

the report, Watson Wyatt summarized the range of permissible

funding levels for the 1996-97 plan year, and further stated that

"[a]s discussed in our meeting of October 24, 1996, in order to

fund the plan over a 12-year period, we estimate that the Company

needs to fund approximately $30,000 per year (including $7,500 of

expenses paid outside the plan)."  

     Knight commenced this action against Watson Wyatt in

April 1997, asserting claims for professional negligence, breach of

fiduciary duty, and violations of Massachusetts' unfair trade

practices statute, Mass. Gen. Laws ch. 93A.  In its complaint,

Knight alleges, inter alia, that in 1990 Watson Wyatt negligently

advised it to adopt Plan amendments that were based on flawed

actuarial assumptions, that Watson Wyatt failed to take into

consideration the retroactive effect of such amendments, and that

the amendments immediately "caused the Plan to be substantially and

severely underfunded."

       The district court granted Watson Wyatt's motion for 

summary judgment on the ground that Knight's claims were barred by

the applicable three and four year statutes of limitation.  The

court held that neither the discovery rule nor Mass. Gen. Laws ch.

260,  12 acted to toll the relevant limitations periods.  This

appeal followed.             

                                

                              II. 

     Summary judgment is appropriate when there is no genuine

issue as to any material fact and the moving party is entitled to

a judgment as a matter of law.  See Fed. R. Civ. P. 56(c).  When

reviewing the entry of a summary judgment, we consider the

undisputed facts in the light most favorable to the nonmovant. SeeTagliente v. Himmer, 949 F.2d 1, 4 (1st Cir. 1991).  

A.  The Discovery Rule

     While Knight acknowledges that its complaint is untimely

based on the applicable three and four-year limitations periods, it

argues that it is entitled to equitable tolling under the discovery

rule.  Pursuant to the discovery rule, an action accrues when the

injured party knew, or, in the exercise of reasonable diligence,

should have known the factual basis for the cause of action.  SeeTagliente, 949 F.2d at 4.  In order for the statute of limitations

to be tolled pursuant to the discovery rule, "the factual basis for

the cause of action must have been 'inherently unknowable' at the

time of the injury."  Id.  The factual basis for a cause of action

is "inherently unknowable" if it is "incapable of detection by the

wronged party through the exercise of reasonable diligence."  Id.

(quoting Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 376

(1st Cir. 1991)).   

     Knight maintains that delayed accrual of its cause of

action is warranted pursuant to the discovery rule because it did

not know until 1996, nor could it have discovered through the 

exercise of reasonable diligence, that Watson Wyatt's 1990 conduct

had resulted in an "immediate and substantial underfunding" of the

Plan.  Accordingly, we must determine whether there is any genuine

issue as to a material fact that Knight knew, or in the exercise of

reasonable diligence should have known, of the Plan's alleged

underfunded status.  See id. at 4-5.  The burden is on Knight to

prove that it lacked knowledge or that, in the exercise of

reasonable diligence, it could not have known about the alleged

underfunding within the statute of limitations.  See id. at 5; seealso Riley v. Presnell, 565 N.E.2d 780, 785 (Mass. 1991).

     Although the factual basis for all of Knight's claims is

the allegedly "underfunded" condition of the Plan, its complaint

and the material in opposition to Watson Wyatt's motion for 

summary judgment lack clarity on the meaning of Knight's allegation

that the Plan is "underfunded"   a term that does not appear to

have a precise actuarial definition.  We must discern the meaning

of this term, however, to determine whether Knight knew or should

have known through the exercise of reasonable diligence about this

ambiguous condition. 

     Watson Wyatt contends that Knight's allegation of

"underfunding" was in fact a shorthand reference to a more precise

actuarial term known as "unfunded actuarial accrued liability." 

The district court's decision tacitly agreed with this contention,

and we find support for Watson Wyatt's position in the record. 

Before filing its complaint in the district court, Knight mailed a

demand letter to Watson Wyatt.  See Mass. Gen. Laws ch. 93A,

 9(3).  In the demand letter, Knight alleged that Watson Wyatt's

misdeeds damaged Knight "in the extra amount of funding

contribution required from it as Plan Sponsor," and explained that

"[t]hat extra amount constitutes the underfunding liability."  The

letter further alleged that "per the Valuation Report for April 1,

1996, the specific cash shortage as of April 1, 1996, was

$140,655."  This figure   $140,655   corresponds precisely with a

line item on the April 1, 1996, AVR entitled "unfunded actuarial

accrued liability."  Thus, in the absence of any definition to the

contrary, we conclude that Knight used the ambiguous term

"underfunded" in its demand letter and complaint to refer to a more

precise actuarial term   namely, "unfunded actuarial accrued

liability."    

     We turn next to determining whether Knight knew, or in

the exercise of reasonable diligence should have known, about the

Plan's "underfunded" status   or, stated more precisely, its

"unfunded actuarial accrued liability."  It is undisputed that each

of the AVRs filed annually by Watson Wyatt on behalf of Knight

contained a line item entitled "unfunded actuarial accrued

liability."  Each AVR was identically formatted, and no

calculations were required to discern the amount of "unfunded

actuarial accrued liability."  Viewing the AVRs alone, there can be

no question that Knight had sufficient information   indeed, all of

the information   it needed to know of the alleged "underfunded"

condition of the Plan.

     At oral argument before the district court, however,

Knight argued for the first time that the Plan was "underfunded" in

the amount of $360,000, not $140,655 as alleged in the earlier

demand letter. Thus, Knight argues, its allegation of

"underfunding" reflects more than the $140,655 "unfunded actuarial

accrued liability" disclosed on the AVR.  To support this

assertion, Knight points to a letter it received from Watson Wyatt

(the "Watson Wyatt letter") in November 1996.  In the letter,

Watson Wyatt stated:  "As discussed in our meeting of October 24,

1996, in order to fund the plan over a 12-year period, we estimate

that the Company needs to fund approximately $30,000 per year

(including about $7,500 of expenses paid outside the plan)." 

Knight maintains that the Watson Wyatt letter constituted an

admission that the Plan was "underfunded" in the amount of $360,000

($30,000 times twelve years).  Emphasizing that the $360,000 figure

did not appear in any of the reports that Watson Wyatt submitted to

it, Knight asserts that it "did not discover this $360,000.00

underfunding until 1996 when Watson Wyatt for the first time

revealed the same [in the Watson Wyatt letter]."

     Knight's belated recharacterization of its claim of

"underfunding" is unavailing.  Even if Knight did not know and

should not have known about the full extent of the Plan's

"underfunding" until it received the Watson Wyatt letter, Knight's

own pleadings establish that it had the ability   independent of

Watson Wyatt's purported "admission" letter    to discover that

the Plan was "underfunded."  See Cantu v. St. Paul Cos., 514 N.E.2d

666, 668 (Mass. 1987) (cause of action accrues on discovery of

"appreciable harm," even if the extent of the harm is not fully

known)(citing Olsen v. Bell Tel. Lab., Inc., 445 N.E.2d 609, 612

(Mass. 1983)).  Knight's complaint alleges that "[b]y and through

an independent review of the Plan, Knight discovered in late 1995

and early 1996 that the Plan was substantially and severely

underfunded.  Upon being advised of the same, Knight contacted

Watson [Wyatt] to discuss the Plan and to determine if in fact the

Plan had been and was continuing to be underfunded."  Similarly,

Knight's written demand letter states that "[t]his [underfunding]

situation was brought to the attention of Geo. Knight Co., Inc., by

its accountant when discovered in the spring of 1996."  As the

district court observed, these statements reveal that Knight did

indeed possess the information   exclusive of Watson Wyatt's so-

called admission letter   needed to discover that it had suffered

an appreciable harm.   

     Knight also contends that an annual tax filing prepared

by Watson Wyatt on behalf of Knight   the Form 5500 C/R   contained

information that was at odds with the annual AVRs and that left it

with the impression that the Plan was "well funded" (another

undefined term).  Assuming for the purpose of consideration on

summary judgment that the Form 5500 C/R information was

inconsistent with the AVR information, Knight's failure to make

further inquiry to resolve the inconsistency precludes a finding

that it exercised reasonable diligence in discovering the

underfunded condition of the Plan.  It is undisputed that Knight

never asked Watson Wyatt to explain how the Form 5500 C/R

information   which it contends created the impression that the

Plan was "well funded"   could be reconciled with the AVRs' express

disclosure of the existence of the Plan's unfunded actuarial

accrued liability   on which Knight bases its contention that the

Plan is "underfunded."  In these circumstances, we find no error in

the district court's conclusion that no jury could reasonably find

that Knight acted with the requisite level of diligence in

discovering the underfunded condition of the Plan.    

B.  Mass Gen. Laws ch. 260,  12.

     Alternatively, Knight argues that it is entitled to

tolling under Massachusetts' fraudulent concealment statute, Mass.

Gen. Laws ch. 260,  12, because Watson Wyatt failed "to make

adequate and full disclosure" of the Plan's underfunded status. 

Section 12 provides:

     If a person liable to a personal action

     fraudulently conceals the cause of such action

     from the knowledge of the person entitled to

     bring it, the period prior to the discovery of

     his cause of action by the person so entitled

     shall be excluded in determining the time

     limited for the commencement of the action.

  

Mass. Gen. Laws ch. 260,  12.  Although active fraud ordinarily is

required to constitute fraudulent concealment for the purposes of

section 12's tolling provision, see Stetson v. French, 72 N.E.2d

410, 412 (Mass. 1947), Massachusetts courts have recognized that

mere failure to reveal information can be fraudulent concealment by

a person, such as a fiduciary, who has a duty to disclose.  SeeJamesbury Corp. v. Worcester Valve Co., 443 F.2d 205, 209 (1st Cir.

1971) (breach of contractual duty to disclose tolls limitations

period pursuant to section 12); Demoulas v. Demoulas Super Mkts.,

Inc., 677 N.E.2d 159, 174 (Mass. 1997)(breach of fiduciary duty of

disclosure tolls limitations period pursuant to section 12);

Puritan Med. Ctr., Inc. v. Cashman, 596 N.E.2d 1004, 1010 (Mass.

1992) (same).  Such a duty to disclose may exist when "one party

reposes, to the other's knowledge, trust and confidence under

circumstances in which the other's failure to make disclosure would

be inequitable."  Burns v. Massachusetts Inst. of Tech., 394 F.2d

416, 419 (1st Cir. 1968) (citing Reed v. A.E. Little Co., 152 N.E.

918 (Mass. 1926); Broomfield v. Kosow, 212 N.E.2d 556 (Mass.

1965)). Thus, we must determine whether the record raises any

genuine issue of material fact that would bring this case within

the parameters of section 12's tolling provision   that is, whether

Knight reposed, to Watson Wyatt's knowledge, trust and confidence

in such circumstances that Knight's alleged failure to disclose

information beyond that expressly disclosed in the annual AVRs was

inequitable.  

     This equitable analysis is informed by Massachusetts

cases discussing a duty of disclosure pursuant to general

principles of fiduciary law.  These cases emphasize that the

circumstances creating such fiduciary obligations as a duty to

disclose are varied, see Broomfield v. Kosow, 212 N.E.2d 556, 559-

60 (Mass. 1965); Warsofsky v. Sherman, 93 N.E.2d 612, 615 (Mass.

1950), and no universally-applicable rule distinguishes those

circumstances which give rise to a duty to disclose from those that

do not.  Nonetheless, we have previously observed that a duty to

disclose will frequently be found where certain indicia of a

fiduciary relationship are present, including a great disparity or

inequality between parties and an abuse of that situation for the

benefit of the dominant party, particularly where unjust enrichment

would result.  See Industrial Gen. Corp. v. Sequoia Pac. Sys.

Corp., 44 F.3d 40, 44 (1st Cir. 1995).  Thus, trust and confidence

reposed in a party possessing a great disparity of knowledge or

expertise in a commercial setting, while ordinarily not enough

standing alone to give rise to fiduciary obligations, may produce

such obligations if the trust and confidence is knowingly betrayed

by that party for the purpose of securing some benefit to itself. 

See id.; Broomfield, 212 N.E.2d at 560-61; Reed, 152 N.E. at 920.

     In this case, as in most engagements of professional

services, there was a disparity of knowledge between Knight and

Watson Wyatt concerning actuarial matters, and Knight trusted

Watson Wyatt as the provider of its actuarial services.  However,

this is not a case in which one party's failure to disclose

information resulted in some unjust enrichment at the expense of

another party; to the contrary, this is an ordinary negligence

action. Cf., e.g., Broomfield, 212 N.E.2d 556 (constructive trust

is warranted where plaintiff trusted and confided in defendant, who

used the influence springing from that trust and confidence to

obtain personal advantage at the expense of the plaintiff); Reed,

152 N.E. at 921 (where defendant took unfair advantage of

plaintiff's trust in him, plaintiff is entitled to equitable

relief); Hawkes v. Lackey, 93 N.E. 828 (Mass. 1911)(awarding

equitable relief where defendant, in whom plaintiffs reposed trust

and confidence in the management of their business affairs, acted

for his own benefit and to their detriment in loan transaction). 

The equitable principles animating section 12's tolling provision,

see Burns, 394 F.2d at 419, would be implicated by an allegation of

a wrongful acquisition of a benefit.  However, there is no such

allegation before us in this case.

     There is also nothing in the record to suggest that

Knight's trust in Watson Wyatt resulted in its ceding control of

the Plan's management or assets to Watson Wyatt in a manner that

would make its alleged failure to provide a heightened level of

disclosure to Knight inequitable.  See Burns, 394 F.2d at 419. 

As part of its actuarial duties, Watson Wyatt informed Knight of

the minimum annual contribution amount for ERISA purposes and of

the maximum annual contribution amount for tax deductibility

purposes, and at least once advised Knight of its belief that the

Plan needed to be amended to ensure that Knight's contributions

remained tax deductible.  Although Watson Wyatt's work contributed

information necessary for Knight to make its decision whether and

how to amend the Plan, there is nothing in the record to suggest

that Watson Wyatt controlled Knight's decision.  Furthermore,

although Watson Wyatt informed Knight of the minimum and maximum

contributions to the Plan allowed by ERISA and the Internal Revenue

Code, respectively, we find no evidence in the record that Knight

controlled the decision about how much to contribute to the Plan

within these statutory ranges, or that Watson Wyatt exercised

discretion over the management of Knight's business affairs in any

respect.    

     We do not mean to suggest, of course, that an actuary can

never owe duties of a fiduciary nature to its client.  Indeed, it

is conceivable that if Watson Wyatt had found confidential

information in Knight's books and had appropriated the information

or had otherwise used the information to its own advantage, a claim

might be made for breach of a duty of loyalty.   Such allegations

are not now before us.  It is enough in this case that the essence

of Knight's claim is the alleged negligent performance of actuarial

services and not misappropriation or disloyalty in violation of

fiduciary duties; that Knight had adequate information in the form

of the annual AVR disclosures to put it on notice of such a

negligence claim; and that the special circumstances which would 

trigger section 12's equitable tolling provisions, see Burns, 394

F.2d at 419, are simply not present in this case.  

     Affirmed.