32 F.3d 1337
18 Employee Benefits Cas. 1513
Gerald E. WALLER; Robert C. Bryson; Harold Kurofsky;
James E. Fenningham; Elizabeth Montgomery; Walter Boge, on
Behalf of Themselves and All Others Similarly Situated and
Derivatively on Behalf of the Former Non-Contributory
Retirement Program for Certain Employees of Blue Cross of
California, Plaintiffs-Appellants,
v.
BLUE CROSS OF CALIFORNIA, Blue Cross and Blue Shield
Association and Leonard D. Schaeffer, Defendants-Appellees.
No. 92-55487.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted Aug. 5, 1993.
Decided July 5, 1994.
Michael A. Sherman, Barrack, Rodos & Bacine, San Diego, CA, and Leonard Barrack, Barrack, Rodos & Bacine, Philadelphia, PA, and William S. Lerach, Milberg, Weiss, Bershad, Spechrie & Lerach, San Diego, CA, for plaintiffs-appellants.
James C. Martin and Kurt C. Peterson, Crosby, Heafey, Roach & May; Jeffrey S. Davidson, Alexander F. MacKinnon, Kirkland & Ellis, Los Angeles, CA; James W. Rankin; and James R. Grimes, Chicago, IL, for defendants-appellees.
Philip R. Hertz, Washington, DC, for amicus Pension Benefit Guar. Corp.
Susan M. Green, Washington, DC, for amicus Secretary of Labor.
Appeal from the United States District Court for the Central District of California.
Before NORRIS, WIGGINS, and O'SCANNLAIN, Circuit Judges.
WILLIAM A. NORRIS, Circuit Judge:
Plaintiffs-appellants brought this action under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Secs. 1001 et. seq. ("ERISA"), alleging that defendants-appellees breached their fiduciary duty to the plan by imprudently choosing annuity providers to cover plan liabilities as part of terminating plaintiffs' plan. Without opinion, the district court granted defendants' motion to dismiss the Second Amended Complaint for failure to state a claim. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We affirm in part and reverse in part.
* FACTS AND PROCEDURAL HISTORY
In 1986 Blue Cross of California ("Blue Cross") terminated its retirement plan (the "Retirement Plan" or "Plan") by using approximately $62 million of the Plan's assets to purchase annuities for Plan participants and beneficiaries from Executive Life Insurance Company ("Executive Life") and Provident National Assurance Company ("Provident"). After purchasing the annuities, Blue Cross obtained a reversion of the residual assets, totalling approximately $32 million.
Plaintiffs represent participants and beneficiaries who are eligible (or will become eligible) to receive retirement benefits from the Retirement Plan in the form of annuities issued by Executive Life or Provident. Defendants are Blue Cross, its president, Leonard D. Schaeffer, and the named administrator, Blue Cross and Blue Shield Association (the "Association"). Plaintiffs allege that defendants were fiduciaries of the Retirement Plan and are liable under ERISA for the breach of fiduciary duty.
Plaintiffs do not contend that defendants breached their fiduciary duties in deciding to terminate the Retirement Plan. They acknowledge that ERISA gives employers the right to make a business decision to terminate a plan and transfer to themselves any residual assets remaining after the plan's liabilities are fully satisfied. Rather, the gravamen of plaintiffs' action is that defendants breached their fiduciary duties by unlawfully employing an infirm bidding process geared solely toward selecting those annuity providers who would enable defendants to obtain the maximum reversion possible. Plaintiffs claim that defendants' breach violated three sections of ERISA: (1) ERISA Sec. 404(a)(1)(A) and (B), 29 U.S.C. Sec. 1104(a)(1)(A) and (B), which imposes duties of loyalty and care on plan fiduciaries (Claims Two and Five); (2) ERISA Sec. 4044(d), 29 U.S.C. Sec. 1344(d), which requires that all liabilities of the plan be satisfied before an employer may take a reversion of residual assets (Claims Three and Six); and (3) ERISA Sec. 406(a) and (b), 29 U.S.C. Sec. 1106(a) and (b), which provides a list of prohibited transactions between a party in interest and a plan and between a plan fiduciary and the plan (Claims One and Four).
Plaintiffs seek to recover monetary damages and obtain equitable relief, including a constructive trust on all funds improperly or illegally obtained by Blue Cross as a result of defendants' conduct. They appeal the district court's dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. We affirm in part and reverse in part.
II
STANDING
We first address defendants' threshold argument that plaintiffs lack standing to bring this action. We agree with defendants that participants and beneficiaries of a terminated plan have no standing to seek legal damages for breach of fiduciary duty once the Plan was terminated and Plan liabilities were satisfied. Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir.1986) (per curiam).
We agree with plaintiffs, however, that they have standing to pursue the equitable remedy of a constructive trust to distribute defendants' allegedly ill-gotten profits to the former participants and beneficiaries of the Plan. In Amalgamated Clothing & Textile Workers v. Murdock, 861 F.2d 1406 (9th Cir.1988), we held that participants and beneficiaries of a terminated plan had standing to sue on behalf of all participants and beneficiaries of the plan for a constructive trust remedy to strip a fiduciary of ill-gotten profits earned from breach of his fiduciary duties. Id. at 1416-17. We explained that "ill-gotten profits [are] held in a constructive trust for plan participants and beneficiaries [and] may be construed as equitably vested benefits under an ERISA plan." Id. at 1419. Thus, "[e]ven after plan participants and beneficiaries have received their actuarially vested benefits from the plan, the plan should be viewed as continuing to exist for the purpose of distributing the equitably vested benefits." Id.
Defendants' reliance on Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), for its argument that participants and beneficiaries must in all circumstances bring suit on behalf of the plan rather than on their own behalf is misplaced. As we explained in Murdock, "every one of the elements of ERISA analyzed in Russell--the legislative history, the text of Sec. 409(a), the statutory duties of fiduciaries, and the statutory rights of beneficiaries--supports the imposition of a constructive trust on the alleged ill-gotten profits in favor of plan participants and beneficiaries ... where that is the only available means of removing the ill-gotten profits from a culpable fiduciary's hands." Murdock, 861 F.2d at 1416.
Defendants' reliance on Sokol v. Bernstein, 803 F.2d 532 (9th Cir.1986), is equally unavailing. In Sokol, "we followed the Supreme Court's reasoning in Russell and decided that extracontractual damages are also not available to individual plan beneficiaries under the catchall equitable relief provision of ERISA Sec. 502(a)(3)." Murdock, 861 F.2d at 1417. Defendants argue that Sokol bars suits, such as this one, brought on behalf of all participants and beneficiaries rather than on behalf of the plan. We rejected this argument in Murdock and will not revisit it here. See id.
Following Kuntz and Murdock, we hold that plaintiffs do not have standing to seek legal damages, but do have standing to pursue the constructive trust they seek to impose on any ill-gotten profits that reverted to Blue Cross as a result of the alleged breach of fiduciary duty. Because we hold that plaintiffs only have standing to bring a suit for constructive trust, we affirm the district court's dismissal of all claims against Leonard Schaeffer and the Association because nothing in the complaint indicates that anyone other than Blue Cross received any of the $32 million. See id. at 1419 (explaining that a constructive trust remedy is not available against a party that never had possession or title to the money).
III
STATUTE OF LIMITATIONS
Next, we address Blue Cross' contention that plaintiffs' claims are time-barred. The complaint was filed more than four years after Blue Cross purchased the annuities from Executive Life and Provident. Under ERISA Sec. 413, 29 U.S.C. Sec. 1113, no action for fiduciary breach may be brought after the earlier of (1) six years from the date of the last action constituting part of the breach (or on which the fiduciary could have cured the breach or violation), or (2) three years from the earliest date on which plaintiff had actual knowledge of the breach or violation. 29 U.S.C. Sec. 1113. Situations involving "fraud or concealment" are exempt from these provisions, and in such cases, an action may be filed up to six years after the date the breach or violation was discovered. 29 U.S.C. Sec. 1113.
If we accept the facts as alleged in the complaint as true, as we must for Rule 12(b)(6) purposes, plaintiffs' action is timely. We reject Blue Cross' argument that the statute of limitations necessarily began to run at the point plaintiffs learned that Blue Cross purchased annuities from Executive Life and Provident. We decline to equate knowledge of the purchase of annuities in this case with actual knowledge of the alleged breach of fiduciary duty. Cf. Fink v. National Sav. and Trust Co., 772 F.2d 951, 957 (D.C.Cir.1985) ("The disclosure of a transaction that is not inherently a statutory breach of fiduciary duty ... cannot communicate the existence of an underlying breach.").
Instead, we focus on the language of the statute, which tolls the statute of limitations until the time of a plaintiff's "actual knowledge of the breach or violation." 29 U.S.C. Sec. 1113. Although plaintiffs fail to allege the exact date they gained actual knowledge of the alleged breach of fiduciary duty, they do allege that the action was filed within three years of such actual knowledge. Specifically, plaintiffs allege that they "did not have actual knowledge ... until the publicized account of ELIC's financial difficulties and its ultimate insolvency and the subsequent investigation by counsel for plaintiffs and the Class." CR 51 p 47. Blue Cross does not dispute that if the statute of limitations is tolled until the date plaintiffs allege they gained actual knowledge, this action is timely. Accordingly, we hold that for the purposes of Blue Cross' Rule 12(b)(6) motion to dismiss, the action is not time-barred.
IV
MERITS
We now turn to the merits. Plaintiffs allege that Blue Cross breached its fiduciary duty by choosing annuity providers using an infirm bidding process that sacrificed participants' and beneficiaries' best interests to maximize the reversion of residual plan assets. Based on these alleged facts, plaintiffs contend that Blue Cross violated ERISA Secs. 404, 406, and 4044, 29 U.S.C. Secs. 1104, 1106, and 1344. Blue Cross maintains that it did not breach its fiduciary duty to the Plan because purchasing annuities as part of a plan termination is not a fiduciary act. We disagree and hold that plaintiffs have alleged facts sufficient to state a claim for breach of fiduciary duty under ERISA Sec. 404. We affirm, however, the district court's dismissal of plaintiffs' claims based on alleged violations of ERISA Secs. 406 and 4044.
* ERISA Sec. 404
Plaintiffs allege that Blue Cross breached its fiduciary duty under Sec. 404(a)(1)(A) and (B), which imposes a fiduciary duty of loyalty and care, in selecting Executive Life and Provident as annuity providers to cover plan liabilities. See 29 U.S.C. Sec. 1104(a)(1)(A) & (B). Blue Cross responds that (1) purchasing annuities as part of terminating the Plan was not a fiduciary act, but rather a business decision not subject to fiduciary obligations; (2) so long as it followed the requirements of Secs. 4041-4044, which define procedures for terminating ERISA plans, there can be no violation of ERISA; and (3) plaintiffs improperly attempt to base their Sec. 404 claim on Executive Life's later financial difficulties rather than on what Blue Cross knew at the time of the purchase. We address each of these issues in turn.
Plaintiffs do not dispute that "the decision to terminate a plan is a business decision and does not constitute a breach of fiduciary obligation." Murdock, 861 F.2d at 1419 (citations omitted). By alleging that Blue Cross breached its fiduciary duty in the selection of annuity providers, plaintiffs attack not the decision to terminate, but rather the implementation of the decision. We believe that this distinction is dispositive and hold that Blue Cross acted in a fiduciary capacity when choosing annuity providers to satisfy plan liabilities. See District 65, United Automobile etc. Workers v. Harper & Row Publishers, Inc., 670 F.Supp. 550, 556 (S.D.N.Y.1987) ("Harper & Row is ... liable as a fiduciary, because its acts with respect to implementing the termination decision required discretionary decisions on its part"); Cooke v. Lynn Sand & Stone Co., 673 F.Supp. 14, 23 (D.Mass.1986) (explaining that the choice of a discount rate to minimize the lump-sum distribution to plan participants as part of the termination in order to maximize the reversion is a breach of fiduciary duty).
ERISA's definition of "fiduciary" supports our holding. Under ERISA, a person is a fiduciary of a plan to the extent that he or she "exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets...." 29 U.S.C. Sec. 1002(21)(A). The choice of an annuity provider is the quintessential exercise of "discretionary control." "Congress' primary purpose in enacting this comprehensive legislative scheme was to prevent the great personal tragedy suffered by employees whose vested benefits are not paid when pension plans are terminated." Cunha v. Ward Foods, Inc., 804 F.2d 1418, 1423 (9th Cir.1986) (quoting Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 374, 100 S.Ct. 1723, 1732-33, 64 L.Ed.2d 354 (1980)) (internal quotations omitted). It would be odd indeed if ERISA operated as Blue Cross so strenuously maintains it does--to absolve the employer or administrator of making any meaningful investigation of the annuity provider at such a critical moment in the life of the plan.
Blue Cross asks us to ignore the obvious and instead focus on ERISA's separate treatment of fiduciary duties in separate Titles. Blue Cross argues that because fiduciary duties are in Title I and termination procedures are in Title IV and because the provisions of Title IV do not state that Title I fiduciary duties apply to it, we can infer that Congress did not intend fiduciary duties to govern any termination related actions. We are unpersuaded.
Amici, the Department of Labor ("DOL") and the Pension Benefit Guaranty Corporation ("PBGC"), take the position that Title I fiduciary standards in addition to Title IV termination requirements must be observed when a pension plan terminates. We find their position to be manifestly reasonable. Cf. Federal Election Comm'n v. Ted Haley Cong. Comm., 852 F.2d 1111, 1115 (9th Cir.1988) (Federal Election Commissioner's interpretation of the Federal Election Campaign Act "is entitled to due deference and is to be accepted by the court unless demonstrably irrational or clearly contrary to the plain meaning of the statute").
Title I and Title IV of ERISA protect pension benefits in different ways. Title I, which is administered by DOL, mandates reporting and disclosure of plans' financial information, sets minimum standards for participation, vesting, and funding of plans, establishes standards of conduct for plan fiduciaries, and provides for civil and criminal enforcement of these requirements. Nachman Corp., 446 U.S. at 361 n. 1, 100 S.Ct. at 1726 n. 1. Title IV, administered by PBGC, establishes the termination insurance program, which guarantees participants in covered pension plans a minimum level of benefits in the event their plan terminates. Id. Blue Cross' reliance on ERISA's silence in Title IV is misplaced in light of Title I's inclusive, functionally-based definition of "fiduciary" and ERISA's failure to explicitly exempt the purchase of annuities from Title I's fiduciary obligations. We find ERISA's failure to exempt purchasing annuities from Sec. 404's fiduciary obligations to be a powerful indicator of Congress' intent not to exempt the process for choosing annuity providers--possibly the most important decision in the life of the plan--from fiduciary scrutiny.
This interpretation of ERISA's fiduciary provisions comports fully with the common law of trusts, a body of law on which court should draw when deciding ERISA cases. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S.Ct. 948, 954, 103 L.Ed.2d 80 (1989) ("ERISA's legislative history confirms that the Act's fiduciary responsibility provisions, 29 U.S.C. Secs. 1101-1114, 'codif[y] and mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of trusts.' " (quoting H.R.Rep. No. 93-533, p. 11 (1973))); Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570, 105 S.Ct. 2833, 2840, 86 L.Ed.2d 447 (1985) ("[R]ather than explicitly enumerating all of the powers and duties of trustees and other fiduciaries, Congress invoked the common law of trusts to define the general scope of their authority and responsibility."). See also Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir.1983) (explaining that "in enacting ERISA Congress made more exacting the requirements of the common law of trusts relating to employee benefit trust funds"). The common law bestows upon a trustee of a terminating trust all "such duties and powers as are appropriate for the winding up of the trust." 4 A. Scott & W. Fratcher, The Law of Trusts Sec. 344 at 542 (4th ed. 1989). In performing these duties, the trustee remains obligated to act solely in the interest of the beneficiaries. Restatement (Second) of Trusts, Sec. 170 (1959). In addition, "[t]he trustee has the duty to carry out this phase of the trust administration with reasonable care and prudence." G.G. Bogert and G.T. Bogert, The Law of Trusts and Trustees Sec. 1010 at 450 (rev. 2d ed. 1983).
Because nothing in ERISA indicates a congressional intent to change the common law duties in this area, we hold that plaintiffs' allegation that Blue Cross acted imprudently and without due regard for the interests of plan participants and beneficiaries in choosing annuity providers states a claim for breach of fiduciary duty in violation of ERISA Sec. 404. We reject Blue Cross' argument that plaintiffs' allegations attempt to hold Blue Cross responsible for subsequent events--Executive Life's conservatorship, for example--that it could not have anticipated at the time it purchased the annuities. Whether Blue Cross could or should have anticipated Executive Life's later financial collapse is a question of fact that we will not address at the Rule 12(b)(6) stage of the litigation. Accordingly, we reverse the district court's dismissal of plaintiffs' Sec. 404 claims.
B
ERISA Sec. 4044
Plaintiffs' third and sixth claims for relief seek recovery for Blue Cross' alleged violation of the allocation of assets provision of ERISA Sec. 4044(d) in breach of their fiduciary duty. Because we find these claims without merit, we hold that they were properly dismissed by the district court for failure to state a claim.
Section 4044 outlines plan termination procedures and provides for the reversion of residual plan assets to the employer if all liabilities to plan participants and beneficiaries are satisfied, if the plan provides for reversion of assets, and if the distribution does not otherwise contravene any provision of law. See 29 U.S.C. Sec. 1344(d). Plaintiffs contend that as a result of Executive Life's insolvency, all Plan liabilities were not satisfied as required by Sec. 4044(d) and that such noncompliance with Sec. 4044(d) constitutes a breach of fiduciary duty. In other words, according to plaintiffs' argument, once an annuity provider is unable to provide full benefits, plan liabilities are no longer covered and the employer's duties to the plan are "revived." We find nothing in ERISA that supports placing such a burden on a plan sponsor to insure plan benefits after a plan has been terminated. If annuity contracts are purchased for participants in the correct amount and proper form at the time of termination, a plan's liabilities have been satisfied for purposes of Title IV of ERISA. See PBGC Opinion Letter No. 91-04 (May 3, 1991). To hold otherwise would nullify ERISA's authorization of plan terminations after purchase of annuities designed to pay vested benefits. See generally 29 C.F.R. Part 2617, Determination of Plan Sufficiency and Termination of Sufficient Plans (1992). We are unmoved by plaintiffs' attempt to characterize the Sec. 4044 claim as one for breach of fiduciary duty. Nothing in ERISA supports turning to fiduciary duty law to determine whether plan liabilities have been satisfied. Accordingly, we affirm the district court's dismissal of plaintiffs' Sec. 4044 claims.
C
ERISA Sec. 406
Plaintiffs' first and fourth claims for relief allege that Blue Cross violated ERISA Sec. 406(a)(1)(D) and (b)(1). Section 406 enumerates various transactions between a plan and a party in interest and between a plan and a fiduciary that constitute per se violations of ERISA. See Donovan v. Mazzola, 716 F.2d at 1238; M & R Inv. Co., Inc. v. Fitzsimmons, 685 F.2d 283, 287 (9th Cir.1982); 29 U.S.C. Sec. 1106(a) & (b). Plaintiffs argue that the allegedly excess reversion Blue Cross received upon terminating the Plan because of its breach of fiduciary duty is a prohibited transfer to a party in interest under Sec. 406(a). Plaintiffs also argue that Blue Cross entered into a prohibited transaction between a fiduciary and the plan under Sec. 406(b) by ignoring the welfare of Plan participants in their effort to maximize its reversion. The DOL takes the position that plaintiffs' Sec. 406(b) claim was wrongly dismissed "to the extent that plaintiffs allege that defendants consciously and deliberately sacrificed the quality of the annuity purchased in order to maximize the amount of the reversion, or obtain a collateral benefit for themselves or the sponsor." DOL Amicus Brief at 35 n. 12. Although we give deference to the DOL's interpretation, we agree with Blue Cross that such a reading does not comport with the language of the statute and the caselaw.
Plaintiffs base their Sec. 406 claim on the allegedly infirm process and improper motivations for choosing Executive Life and Provident. We hold that purchasing replacement annuities as part of a plan termination even with such alleged infirmities is not the kind of transaction Sec. 406 prohibits. As we explained in M & R Inv. Co.:
The party-in-interest prohibitions [under Sec. 406(a) ] act to insure arm's-length transactions by fiduciaries of funds subject to ERISA. A transaction with a party in interest is prohibited under the presumption that it is not arm's-length. The result is a broad per se prohibition of transactions ERISA implicitly defines as not arm's-length.
685 F.2d at 287. In other words, the transaction, itself, should communicate the breach. ERISA, however, permits the transaction that forms the basis for plaintiffs' Sec. 406 claim--the purchase of annuities as part of a plan termination. See 29 U.S.C. Sec. 1341(b)(3)(A)(i). Plaintiffs do not allege that either Executive Life or Provident is a party in interest. Absent such an allegation, we fail to see how purchasing annuities to terminate plaintiffs' Plan constitutes a per se violation of ERISA, even if accomplished through an infirm bidding process or for improper purposes. For the same reason, we also reject plaintiffs' Sec. 406(b) claim. See Lowen v. Tower Asset Management Inc., 829 F.2d 1209, 1213 (2d Cir.1987) (explaining that ERISA "gives notice to fiduciaries that they must either avoid the transactions described in Section 406(b) or cease serving in their capacity as fiduciaries, no matter how sincerely they may believe that such transactions will benefit the plan."); Fink, 772 F.2d at 955 (explaining that "[a]cquisition of employer securities by an EIAP does not, in and of itself, violate any of the absolute prohibitions of ERISA ..." even though it may violate ERISA's fiduciary duty of care).
Moreover, ERISA Sec. 408(b)(9) exempts from Sec. 406's prohibited transactions "[t]he making by a fiduciary of a distribution of assets of the plan in accordance with the terms of the plan if such assets are distributed in the same manner as provided under [29 U.S.C.] section 1344 of this title (relating to allocation of assets)." 29 U.S.C. Sec. 1108(b)(9). Plaintiffs, nonetheless, argue that Blue Cross violated Sec. 406 because the reversion of Plan assets was not, in fact, in accordance with the terms of ERISA Sec. 4044. We are unpersuaded. Because we affirm the district court's dismissal of plaintiffs' Sec. 4044 claims, we also reject this argument. Accordingly, we affirm the district court's dismissal of plaintiffs' Sec. 406 claims.
V
CONCLUSION
The judgment of the district court is AFFIRMED in part, REVERSED in part, and REMANDED for further proceedings.