Solis v. Malkani

• Court: Court of Appeals for the Fourth Circuit
• Decided: February 4, 2011
• Docket: 09-1383
• Status: Unpublished

Opinion

UNPUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 09-1383

HILDA L. SOLIS, Secretary of Labor, United States Department of Labor,

Plaintiff – Appellee,

CLARK CONSULTING,

Party-in-Interest – Appellee,

v.

ROMA P. MALKANI; INFORMATION SYSTEMS AND NETWORKS CORPORATION EMPLOYEES’ PENSION PLAN; INFORMATION SYSTEMS AND NETWORKS CORPORATION PROFIT SHARING PLAN; INFORMATION SYSTEMS & NETWORKS CORPORATION,

Defendants - Appellants.

No. 10-1061

HILDA L. SOLIS, Secretary of Labor, United States Department of Labor,

ROMA P. MALKANI; INFORMATION SYSTEMS AND NETWORKS CORPORATION EMPLOYEES’ PENSION PLAN; INFORMATION SYSTEMS AND NETWORKS CORPORATION PROFIT SHARING PLAN; INFORMATION SYSTEMS & NETWORKS CORPORATION,

Defendants – Appellants,

and

SALOMON SMITH BARNEY, INCORPORATED,

Defendant - Appellee.

Appeals from the United States District Court for the District of Maryland, at Greenbelt. William D. Quarles, Jr., District Judge. (8:00-cv-03491-WDQ)

Argued: October 27, 2010 Decided: February 4, 2011

Before WILKINSON, GREGORY, and WYNN, Circuit Judges.

Affirmed by unpublished opinion. Judge Gregory wrote the opinion, in which Judge Wilkinson and Judge Wynn joined.

ARGUED: Norman Henry Singer, SINGER & ASSOCIATES, PC, Bethesda, Maryland, for Appellants. Edward D. Sieger, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Appellee Secretary of Labor; Gregory L. Skidmore, KIRKLAND & ELLIS, LLP, Washington, D.C., for Appellee Clark Consulting. ON BRIEF: M. Patricia Smith, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor for Plan Benefits Security, Nathaniel I. Spiller, Counsel for Appellate and Special Litigation, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for Appellee Secretary of Labor. Christopher Landau, KIRKLAND & ELLIS, LLP, Washington, D.C., for Appellee Clark Consulting.

Unpublished opinions are not binding precedent in this circuit.

2 GREGORY, Circuit Judge:

This appeal arises out of a successful enforcement action

brought under the Employee Retirement Income Security Act of

1974 (“ERISA”) by the Secretary of Labor (hereinafter the

“Secretary”) against the defendants-appellants, Information

Systems and Networks and Roma Malkani, its president and sole

owner (hereinafter, collectively, “ISN”).

On appeal, ISN asks us to reverse several district court

orders, wherein the court ruled in favor of the Secretary, the

appellee-plaintiff, and Clark Consulting (hereinafter “Clark”),

the appellee-party-in-interest. We must decide (1) whether ISN

waived its objections to a magistrate judge report by failing to

appeal for district court review within the statutorily

prescribed ten day period; (2) whether the court abused its

discretion by authorizing the independent fiduciary who replaced

Clark to terminate the pension plan; and (3) whether ISN’s

objections to the refusal of the district court to stay its

order requiring ISN to pay the replacement fiduciary are now

moot. For the following reasons, we affirm the decisions of the

district court.

I.

In November 2000, the Secretary initiated an ERISA lawsuit

against ISN on behalf of the beneficiaries of ISN’s defined

3 contribution pension and profit sharing plan. The lawsuit

alleged that ISN had violated its fiduciary duty to properly

administer the plan. See generally Chao v. Malkani, 216 F.

Supp. 2d 505, 508 (D. Md. 2000), aff’d., 452 F.3d 290 (4th Cir.

2006).

In July 2002, the district court granted partial summary

judgment in favor of the Secretary. The court specifically held

that ISN, at Malkani’s instruction, had violated section

406(a)(1)(D) of ERISA when it had monies totaling $62,888.05

transferred from the plan to it, ostensibly to pay for “plan

administration expenses.” 216 F. Supp. 2d at 518. The court

also noted that, both before and after that illegal transfer,

ISN had similarly attempted to have $435,761.52 and $706,264.54

transferred from the plan to it. Id. at 509. The court

therefore ordered that ISN be removed as the administrative

fiduciary of the plan; and asked the Secretary to name a

replacement independent fiduciary, with all of the costs and

expenses incurred by that fiduciary to be paid by ISN. Id. at

518-19.

A.

In March 2003, the Secretary filed a motion asking that

Clark be appointed as the independent fiduciary for the pension

plan. Attached to the motion was a proposal outlining Clark’s

expertise, the work to be performed, and the conditions under

4 which Clark could terminate the agreement (hereinafter the

“Proposal”). In May 2003, over the objections of ISN, the court

appointed Clark as the independent fiduciary, and again

confirmed that ISN would be liable for all costs incurred by

Clark.

In October 2004, the district court held a three-day bench

trial to determine whether ISN had violated ERISA. On March 30,

2005, the court issued a decision that found ISN liable for

breaching its fiduciary duties under ERISA and ordered ISN to

reimburse the pension plan. After ISN appealed that decision to

this Court, we wholly affirmed the district court. We held that

“defendants’ repeated and questionable conduct established their

breach of ERISA’s standards;” and that ISN had “continually

acted in an objectively unreasonable manner that conflicted with

their duties of loyalty and care.” 452 F.3d at 298.

B.

On July 24, 2006, following this Court’s decision upholding

the merits of the underlying action, the Secretary filed an

unopposed motion asking the district court to refer Clark’s

pending fee request to a magistrate judge. Three days later, on

July 27, the district court granted the referral request. The

order did not specify whether the referral called for the

magistrate judge to issue recommendations on a dispositive

motion or a formal order on a non-dispositive motion.

5 On July 11, 2007, the magistrate judge found that ISN owed

Clark approximately $498,116 in fees and costs. The findings of

the magistrate judge were entered on the docket as an “order of

the Court.” Joint Appendix (“J.A.”) 410. Rather than bringing

its objections to these findings before the district court, ISN

instead immediately appealed the “order” to this Court.

On June 5, 2008, we dismissed ISN’s appeal for lack of

appellate jurisdiction. We held that the “order” was not

directly appealable because it was issued as a recommendation

under 28 U.S.C. § 636(b). We further held that, before

appealing to this Court, ISN should have first challenged the

recommendation in the district court. We declined to rule on

whether ISN had waived its right to district court review by not

seeking review within ten days, 1 and remanded the case for

further proceedings.

On remand, the district court issued a February 25, 2009

opinion, which addressed whether ISN had waived district court

review of the findings of the magistrate judge. Consistent with

our ruling, the district court found that the issue of fees had

been referred to the magistrate judge as a dispositive motion

1 The current version of 28 U.S.C. § 636(b), which became effective on December 1, 2009, provides a party with fourteen days to file written objections to the recommendations issued by a magistrate judge for review by the district court.

6 and that, although not styled as such, the “order” was in fact a

recommendation under § 636(b). Further, the district court

found that, by failing to object to the recommendation within

ten days, ISN had waived its right to district court review of

these recommendations. For these reasons, the court wholly

adopted the recommendations of the magistrate judge without

modification.

C.

On April 23, 2009, Clark filed a motion to withdraw as the

independent fiduciary. Clark had recently restructured its

business, and was no longer able or willing to act as an

independent fiduciary. Clark noted that the Proposal permitted

it to terminate its engagement at any time with sixty days prior

notice and preapproval by the court. In response, the Secretary

requested that the court not release Clark until the appointment

of a proper replacement. Given Clark’s continuing struggles to

receive payment from ISN, the Secretary requested that ISN pay

all of the costs of the replacement fiduciary upfront. The

Secretary also asked the court to terminate the now-effectively

defunct plan.

On October 16, 2009, the district court issued a memorandum

and order allowing Clark to withdraw within thirty days, pending

the appointment of its replacement, and denied the Secretary’s

request that the pension plan be terminated. ISN was also

7 ordered to “advance the successor trustee’s annual fee and

estimated expenses” within sixty days. J.A. 72.

On November 16, 2009, the Secretary offered Nicholas

Saakvitne as the replacement fiduciary. A month later, on

December 16, 2009, the court accepted the replacement fiduciary.

In its December 16, 2009 order, the court directed ISN to pay

Saakvitne within fifteen days an upfront fee, plus the expected

costs of the 2009 and 2010 audits of the pension plan. The

court conditioned the concurrent appointment of Saakvitne and

the withdrawal of Clark on the payment by ISN of the upfront

fee. The court also adopted the proposed fiduciary agreement

for Saakvitne, which gave him the exclusive power to terminate

the pension plan.

ISN failed to pay Saakvitne within fifteen days. Instead,

a week after the deadline passed, ISN appealed the December 16,

2009 order of the district court. ISN asked the court to

approve a stay of the order upon the posting by ISN of a

supersedeas bond pursuant to Federal Rule Civil Procedure 62(d).

On January 15, 2010, in response to the motion for a stay,

Clark filed an emergency motion for contempt against ISN. The

same day, the district court ordered that ISN be held in civil

contempt and fined $250 a day until it paid Saakvitne’s fees and

expenses. The court explained that ISN could not suspend its

payment of expenses through a supersedeas bond because the

8 December 2009 order was not a final judgment, but an “injunctive

type” of remedy enforceable by contempt. Supplemental Appendix

(“S.A.”) 185-86. The court also noted that the bond posted by

ISN “may protect Saakvitne from non-payment; but, it does not

relieve the current fiduciary, Clark, who [only] may be removed

as trustee following the appointment of its replacement.” S.A.

186.

ISN did not appeal the January 15, 2010 order where the

court found ISN in contempt. Instead, ISN paid Saakvitne on

January 29, 2010; thereby, simultaneously confirming both the

withdrawal of Clark as the independent fiduciary and the

appointment of Saakvitne as the same.

II.

Here, we are called upon to address three issues: (1)

whether the district court erred in wholly adopting the

recommendations of the magistrate judge without review; (2)

whether the district court erred in issuing its December 2009

order requiring ISN to pay Saakvitne; and (3) whether the

district court abused its equitable powers under ERISA by

extending to Saakvitne the power to terminate the plan.

Whether ISN waived its right to challenge the findings of

the magistrate judge by failing to file its objections with the

9 district court within ten days is a question of law subject to

de novo review. See United States v. Schronce, 727 F.2d 91, 93-

94 (4th Cir. 1984); see also United States v. General, 278 F.3d

389, 399 (4th Cir. 2002) (“Whether a defendant has effectively

waived his statutory right to appeal . . . is a question of law

subject to de novo review.”).

ISN waived its right to full district court review of the

recommendations when it failed to object within ten days of

their issuance by the magistrate judge. In the last appeal, we

determined that the fees issue had been referred to the

magistrate judge under § 636(b)(1)(B), and, as such, had been

issued by the magistrate judge as a recommendation. Although we

declined to decide whether ISN had waived its right to review of

the recommendations by failing to file any objections with the

district court within ten days of the issuance of the

recommendations, the law at the time was clear: ISN had only

ten days to request further review. See 28 U.S.C. § 636(b)(1)

(West 2008) (“Within ten days after being served with a copy,

any party may serve and file written objections to such proposed

findings and recommendations . . . .”). Moreover, we note that

a party’s failure to object to a magistrate judge’s

recommendations within ten days in either a nondispositive, Fed.

R. Civ. P. 72(a), or a dispositive matter, Fed. R. Civ. P.

72(b), waives further review. “In this circuit, as in others,

10 ‘a party “may” file objections within ten days or he may not, as

he chooses, but he “shall” do so if he wishes further

consideration.’” Wells v. Shriners Hospital, 109 F.3d 198, 199

(4th Cir. 1997) (quoting Park Motor Mart v. Ford Motor Co., 616

F.2d 603, 605 (1st Cir. 1980)).

ISN also argues that the district court erred by failing to

inform ISN that it had ten days to request further review.

However, this Court has clearly stated that, although pro se

litigants are entitled to such a warning, the rule is different

for counseled parties:

A court is under no obligation to advise every lawyer of every deadline for every proceeding – much less every consequence should the deadline be missed or ignored. The 10 day deadline is hardly obscure . . . . [T]he Magistrates Act, the Federal Rules, and Fourth Circuit precedent provide[] more than sufficient notice . . . .

Wells, 109 F.3d at 200. Counsel for ISN chose not to file any

objections, and, instead, injudiciously appealed to this Court.

Counsel should have known that their failure to act waived the

right of their clients to district court review of the

recommendations, and that, thereafter, the court would be free

to adopt the recommendations wholesale. See Camby v. Davis, 718

F.2d 198, 200 (4th Cir. 1983) (“Absent objection, we do not

believe any explanation need be given before adopting the

[magistrate judge’s] report.”).

11 Therefore, there was no error when -- in accordance with

our earlier decision, which declared that the magistrate judge

had issued a recommendation –- the district court found that ISN

had only ten days to raise its objections, and, by failing to do

so, it had waived its right to any further review.

“We review a district court’s award of equitable relief for

abuse of discretion, accepting the court’s factual findings

absent clear error, while examining issues of law de novo.”

Dixon v. Edwards, 290 F.3d 699, 710 (4th Cir. 2002) (citations

omitted).

“A federal court enforcing fiduciary obligations under

ERISA is . . . given broad equitable powers to implement its

remedial decrees.” Delgrosso v. Spang & Co., 769 F.2d 928, 937

(3d Cir. 1985). These necessarily include the power to order

the termination of a plan. Indeed, § 1109(a) of ERISA states

that:

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be . . . subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

29 U.S.C. § 1109(a). In cases initiated by the Secretary, a

court is further authorized to provide other “appropriate

relief” where necessary. 29 U.S.C. §§ 1132(a)(2), 1132(a)(5).

12 Thus, in certain narrow circumstances, it is wholly appropriate

for a court to provide an appointed independent fiduciary with

the power to terminate a plan. Delgrosso, 769 F.2d at 937-38 &

n.12.

Here, in light of the deteriorating state of the pension

plan, the district court did not err in using its equitable

powers to extend to the replacement fiduciary, Saakvitne, the

authority to terminate the plan. Importantly, the pension plan

is now almost completely dormant, as only seven of its original

309 participants remain active. S.A. 47. See, e.g., Solis v.

Vigilance, Inc., No. C 08-05083 JW, 2009 WL 2031767, *3 (N.D.

Cal. July 9, 2009) (removing employer-fiduciaries who abandoned

plan and authorizing independent fiduciary to terminate the

plan); Chao v. Wagner, 2009 WL 102220, *3 (N.D. Ga. Jan. 13,

2009) (similar). In the event that the pension plan is formally

terminated, the statute requires that participants have their

contributions returned, with any surplus assets allocated by the

independent fiduciary to the appropriate participants. See 29

U.S.C. § 1344(a); Delgrosso, 769 F.2d at 937-38.

Notably, nowhere in its briefing and at no time during oral

argument could ISN articulate why it insisted on continuing the

pension plan. Indeed, given the unfortunate history of ISN’s

mismanagement of the plan and repeated attempts to

misappropriate its funds, see Malkani, 216 F. Supp. 2d at 509,

13 518, further continuation of the plan would likely only

perversely benefit ISN.

Therefore, given these circumstances, the court acted

within its discretion when it allowed the replacement fiduciary

to formally terminate the plan. 2

The issue of whether ISN’s request for a stay is moot is a

question of law to be reviewed de novo. Green v. City Of

Raleigh, 523 F.3d 293, 298 (4th Cir. 2008). Similarly, whether

the district court order requiring ISN to pay Saakvitne was one

for injunctive or monetary relief is also subject to de novo

review.

Because ISN has already paid Saakvitne and ISN did not

appeal the district court’s denial of its request for a stay

under Fed. R. App. P. 8(a)(2), ISN’s appeal of the earlier

December 2009 order is now moot. See, e.g., Koger v. United

States, 755 F.2d 1094, 1096-98 (4th Cir. 1985) (holding that an

appeal by taxpayers in a lawsuit seeking to enjoin the

2 Despite arguments by ISN to the contrary, as a defined contribution plan, Malkani, 452 F.3d at 291, the pension plan is not covered by § 1341. See 29 U.S.C. § 1321(b)(1) (individual account plans are not covered); 29 U.S.C. § 1002(34) (individual account plan is a defined contribution). Nonetheless, even if § 1341 were applicable here, so long as the proper procedures are followed, that section also permits a fiduciary to terminate a plan. 29 U.S.C. § 1341(b).

14 government from collecting income tax deficiencies was mooted

because the taxpayers had paid the deficiencies pending the

appeal).

Furthermore, the posting of a supersedeas bond may only

stay a monetary judgment pending an appeal, Fed. R. Civ. P.

62(d), and does not permit a party to stay injunctive relief,

see Illinois Bell Tel. Co. v. WorldCom. Techs., Inc., 157 F.3d

500, 502 (7th Cir. 1998) (where a court issues “an order to do,

rather than an order to pay, . . . the rationale as well as the

text of Rule 62(d) is inapplicable” (citation and internal

quotations omitted)). And, as the district court correctly

recognized:

The bond posted by [ISN] may protect Saakvitne from non-payment; but it does not relieve the current fiduciary, Clark, who may be removed as trustee [only] following the appointment of its replacement . . . . [T]he bond does not serve [Federal Rule of Civil Procedure] 62(a)(1) by relieving Clark of its duties during the pendency of the appeal.

The Court’s order for prepayment of Saakvitne is . . . an “affirmative injunction” because it is directed to [ISN], is enforceable by contempt, and was designed to protect the beneficiaries of the Plan for the next year. Because the order to prepay Saakvitne was injunctive relief, it was not stayed by the filing of a supersedeas bond . . . .

15 S.A. 186-187. The court properly exercised its equitable powers

to force ISN to pay Saakvitne. Thus, despite ISN’s payment of a

bond, the court committed no error in denying the stay. 3

III.

We hold that -- by failing to object to the recommendations

of the magistrate judge regarding payment of fees to Clark

within ten days as then required by 28 U.S.C. § 636(b) -- ISN

waived its right to further review of the recommendations.

Similarly, under these circumstances, the district court was

within its equitable powers to authorize the replacement

fiduciary, Saakvitne, to terminate the pension plan. Finally,

the motion by ISN seeking to stay the payment of fees to

Saakvitne is moot. Accordingly, the decisions of the district

court are

AFFIRMED.

3 Notably, Saakvitne is also not a party in this appeal, nor was the initial enforcement action brought for his monetary benefit. Under these circumstances, it is patently absurd of ISN to argue that the court’s order was anything other than an exercise of its equitable powers.