USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-1567
ROBERT B. REICH, SECRETARY OF LABOR,
UNITED STATES DEPARTMENT OF LABOR,
Plaintiff, Appellant,
v.
RICHARD ROWE, ETC., ET AL.,
Defendants, Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge]
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Before
Torruella, Cyr, and Stahl,
Circuit Judges.
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Edward D. Sieger, Senior Appellate Attorney, with whom
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Thomas S. Williamson, Jr., Solicitor of Labor, Allen H. Feldman,
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Associate Solicitor for Special Appellate and Supreme Court
Litigation, and Joseph S. Ackerstein, U.S. Department of Labor,
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Office of the Solicitor, were on brief for appellant.
William H. Kettlewell, with whom Dwyer, Collora & Gertner,
______________________ _________________________
was on brief for appellees.
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March 31, 1994
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TORRUELLA, Circuit Judge. We address in this case
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whether the civil enforcement provisions of the Employee
Retirement Income Security Act ("ERISA"), 29 U.S.C. 1132(a) -
(l), provide for equitable relief against a nonfiduciary who
knowingly participates in a fiduciary breach. This issue comes
to us in the shadow of a recent United States Supreme Court
opinion, Mertens v. Hewitt Associates, 113 S. Ct. 2063 (1993),
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which addressed the availability of remedies against
nonfiduciaries under ERISA and concluded, albeit only in dicta,
that no cause of action like the one brought in this case exists.
Id. at 2067. After conducting our own analysis of the statute,
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we find that, although ERISA may allow for some types of actions
against nonfiduciaries, it does not authorize suits against
nonfiduciaries charged solely with participating in a fiduciary
breach.
I. BACKGROUND
I. BACKGROUND
The genesis of this appeal was a lawsuit brought by the
United States Secretary of Labor (the "Secretary") on March 11,
1991, against several corporate and individual defendants
involved in the failed OMNI Medical Health and Welfare Trust
("OMNI"). In the complaint, the Secretary alleged a number of
ERISA violations in relation to OMNI's failure to pay
approximately two to three million dollars in medical benefits to
eligible employees of companies participating in the OMNI health
plan. The Secretary also contended that appellee, H. James
Gorman, Jr. ("Gorman"), a financial consultant who provided
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professional services to OMNI, knowingly participated in the
fiduciary breaches of several of OMNI's administrators. The
district court dismissed the action against Gorman for failure to
state a claim under ERISA and the Secretary brought this appeal.
We accept all the factual allegations in the
Secretary's complaint as true in order to review the district
court's dismissal under Rule 12(b)(6). Garita Hotel Ltd.
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Partnership v. Ponce Federal Bank, F.S.B., 958 F.2d 15, 17 (1st
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Cir. 1992).
Between 1986 and 1990, OMNI provided group medical,
dental, and life insurance and other benefits to a number of
small, unrelated business employers in Massachusetts. The
employers participating in OMNI established employee welfare
benefit plans (the "welfare plans") within the meaning of ERISA
3(1), 29 U.S.C. 1003(1). By collecting premiums from the
participating employers, OMNI held and controlled the assets of
the welfare plans and was responsible for paying benefits to the
employees.
The Secretary claimed that OMNI falsely represented
itself to be a "tax-exempt ERISA covered benefit plan" under
ERISA 3(1), 29 U.S.C. 1002(1), in order to avoid governmental
regulation and oversight. According to the Secretary, OMNI was a
multiple employer welfare arrangement ("MEWA") within the meaning
of ERISA 3(40)(a), 29 U.S.C. 1002(40)(a), but not an ERISA
plan exempt from state insurance regulation.
Count I of the complaint alleged that Harbor Medical
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Administrators, Inc. ("HMA"), the administrator of OMNI, and
HMA's President (Mr. Richard Rowe), Executive Vice-President (Mr.
Phillip Carpenter) and Vice President (Ms. Ann Dunlop) acted as
fiduciaries with respect to the employers' welfare plans. The
Secretary asserted that these four defendants breached their
fiduciary obligations under ERISA by engaging in a variety of
imprudent and self-serving activities. The activities included
engaging in prohibited transactions, mismanaging and misusing
assets of the welfare plans, falsely representing the status of
OMNI to employers and state regulators, and operating an illegal
insurance company.
Count II of the complaint alleged that Gorman, who was
Director of Group Insurance and Welfare Plan Consulting Services,
Actuarial, Benefits and Compensation Consulting, at the
accounting firm of Coopers & Lybrand, provided "professional
services" to OMNI from May through October of 1989. In
particular, he provided advice to HMA regarding the legal status
of OMNI under ERISA. On several occasions, Gorman informed
Dunlop, Rowe and others at HMA that they were operating an
illegal insurance company under Massachusetts law and that OMNI
did not enjoy the protection of the ERISA provision exempting
ERISA plans from state regulation. See 29 U.S.C. 1144.
___
Despite his own warnings, Gorman advised Dunlop, in response to a
letter from the New Hampshire Insurance Department inquiring as
to the legal status of OMNI, that she had the option to "try the
'red herring' across the trail of the Insurance Department just
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to keep them off balance" by telling them OMNI was an ERISA
covered plan. The gist of this advice was that OMNI could avoid
state regulation by obfuscating its true legal status. Gorman
provided Dunlop with a draft letter to send to the New Hampshire
Insurance Department falsely stating that OMNI was covered by
ERISA. Gorman further advised that there was little risk of
investigation by the state once it was informed of a plan's ERISA
status. Subsequently, Rowe adopted Gorman's draft letter and
sent it to New Hampshire's Insurance Department on October 17,
1989.
The complaint stated that Gorman acted at all times
"within the scope of his employment" and by his actions
participated in the fiduciary breaches of the defendants named in
Count I. The Secretary did not allege that Gorman himself was a
fiduciary. The Secretary concluded, however, that "Gorman is
liable under ERISA to the same extent as the fiduciaries for the
breaches committed." Gorman's employer, Coopers & Lybrand, was
also named as a defendant based on the theory that it was liable
for the actions of its agent.
To remedy the alleged violations, the Secretary sought
the recovery of plan losses, the undoing of prohibited
transactions and a permanent injunction against all defendants,
including Gorman, from serving as ERISA fiduciaries or service
providers to any ERISA plans.
On September 1, 1992, the district court granted
motions to dismiss filed by Gorman and Coopers & Lybrand based on
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the failure of Count II to state a claim under Rule 12(b)(6).
The district court held that neither of the two ERISA enforcement
provisions under which the Secretary could proceed, 29 U.S.C.
1132(a)(2) and 1132(a)(5), authorized a claim against
nonfiduciaries like Gorman or Coopers & Lybrand.1 The district
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1 29 U.S.C. 1132(a), entitled "Persons empowered to bring a
civil action," states in its entirety:
A civil action may be brought --
(1) by a participant or beneficiary --
(A) for the relief provided for in
subsection (c) of this subsection, or
(B) to recover benefits due to him under
the terms of his plan, to enforce his
rights under the terms of the plan, or to
clarify his rights to future benefits
under the terms of the plan;
(2) by the Secretary, or by a participant,
beneficiary or fiduciary for appropriate
relief under section 1109 of this title;
(3) by a participant, beneficiary, or
fiduciary (A) to enjoin any act or practice
which violates any provision of this
subchapter or the terms of the plan, or (B)
to obtain other appropriate equitable relief
(i) to redress such violation or (ii) to
enforce any provisions of this subchapter or
the terms of the plan;
(4) by the Secretary or by a participant, or
beneficiary for appropriate relief in the
case of a violation of 1025(c) of this title;
(5) except as otherwise provided in
subsection (b) of this section, by the
Secretary (A) to enjoin any act or practice
which violates any provision of this
subchapter, or (B) to obtain other
appropriate equitable relief (i) to redress
such violation or (ii) to enforce any
provisions of this subchapter; or
(6) by the Secretary to collect any civil
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court found that the Secretary could not obtain relief under
1132(a)(5) because that section applies only to nonfiduciary
defendants who are "parties in interest."2 The district court
also found that no cause of action existed under 1132(a)(2),
which authorizes the Secretary to seek appropriate relief under
29 U.S.C. 1109,3 because only fiduciaries could be sued under
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penalty under subsection (c)(2) or (i) or (l)
of this section.
2 A "party in interest" includes a "person providing services to
[an employee benefit] plan." 29 U.S.C. 1002(14)(B). ERISA
prohibits certain transactions between ERISA plans and their
parties in interest. 29 U.S.C. 1106(a)(1).
The complaint contained no allegation that Gorman was a party
in interest nor that he was engaged in any prohibited
transactions. The facts stated in the complaint do suggest that
Gorman satisfies the definition of a party in interest, but there
is no indication he participated in any prohibited transactions.
Although we do not decide whether the complaint must specifically
allege that the nonfiduciary defendant is a "party in interest"
in order to state a cause of action under 1132(a)(5), we do
discuss the importance, under certain circumstances, of alleging
that a defendant engaged in a prohibited transaction, see infra
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at pages 15, 18-19 & 23-24.
3 29 U.S.C. 1109(a) provides:
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 personally liable to
make good to such plan any losses to the
plan resulting from each such breach, and
to restore to such plan any profits of
such fiduciary which have been made
through use of assets of the plan by the
fiduciary, and shall be subject to such
other equitable or remedial relief as the
court may deem appropriate, including
removal of such fiduciary. A fiduciary
may also be removed for a violation of
section 1111 of this title.
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1109 and neither Gorman nor Coopers & Lybrand were fiduciaries.
On June 1, 1993, the Supreme Court held in a five to
four decision that ERISA does not permit a civil suit for money
damages against nonfiduciaries who knowingly participate in a
fiduciary breach. Mertens, 113 S. Ct. at 2072. The Court in
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Mertens found that "appropriate equitable relief," as authorized
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under 1132(a) (3),4 includes only those types of relief
typically available in equity, such as injunctions or
restitution. Such relief would not include a classic form of
legal relief like compensatory damages. Id. at 2068. The Court
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discussed, but expressly refrained from deciding, whether ERISA
provides any remedy at all for nonfiduciary participation in a
fiduciary breach. Id. at 2067-68.
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After the Mertens decision, the Secretary withdrew the
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appeal of his claim against Coopers & Lybrand because that claim
only sought monetary damages. The Secretary pursued the appeal
of Gorman's dismissal to the extent the Secretary was seeking
only equitable relief. The four fiduciary defendants in this
case defaulted leaving Gorman as the only defendant who is party
to this appeal.
II. DISCUSSION
II. DISCUSSION
At the center of this case is the language of
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4 Section 1132(a)(3) provides for the same remedies as 1132(a)
(5) in civil actions brought by an ERISA participant,
beneficiary, or fiduciary (as opposed to actions brought by the
Secretary under 1132(a)(5)), and contains nearly identical
language. Because the shared language in both provisions "should
be deemed to have the same meaning," Mertens, 113 S. Ct. at 2070,
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most analyses of one provision apply equally to the other.
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502(a)(5) of ERISA which states that the Secretary may bring a
civil action
(A) to enjoin any act or practice which
violates any provision of this
subchapter, or (B) to obtain other
appropriate equitable relief (i) to
redress such violation or (ii) to enforce
any provision of this subchapter.
The Secretary maintains that its action against Gorman for
alleged participation in the fiduciary breaches of OMNI's
administrators constitutes a claim for "appropriate equitable
relief to redress" violations of ERISA or "to enforce" provisions
of ERISA under 1132(a)(B).5 According to the Secretary, the
language of the provision does not explicitly require that the
ERISA violation must be one committed by the person against whom
the relief is sought, so long as the relief is "appropriate" for
purposes of "redressing" a violation. See Mertens, 113 S. Ct. at
_ ___ _______
2073 n.1 (White, J., dissenting). Likewise, one could arguably
bring an action against a nonfiduciary for the purposes of
"enforcing" a provision of ERISA which imposes no obligation on
that nonfiduciary but nevertheless requires some judicial relief
against the nonfiduciary in order to remain effective.
In this case, the Secretary argues that enjoining
Gorman from providing any services to an ERISA plan would be an
appropriate way of redressing the breaches committed by OMNI's
administrators and of preventing subsequent breaches by some
hypothetical group of fiduciaries who might take Gorman's advice
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5 The Secretary does not dispute that it has no remedy against
Gorman under 1132(a)(2) because Gorman is not a fiduciary.
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in the future. While plausible, we find that such a broad
reading of this enforcement provision is contrary to a common
sense construction of the ERISA statute and to the established
restriction on our ability to create new causes of action.
We interpret 1132(a)(5) to authorize actions only
against those who commit violations of ERISA or who are engaged
in an "act or practice" proscribed by the statute. Section
1132(a) (5)(A) authorizes injunctions against any "act or
practice" which violates ERISA, while 1132(a)(5)(B) authorizes
other equitable remedies for such acts or practices. Section
1132(a)(5)(B) simply adds remedies to the injunction authorized
under 1132(a)(5)(A); it does not expand the substantive reach
of ERISA to encompass new parties and transactions not otherwise
covered by its substantive provisions. See Mertens, 113 S. Ct.
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at 2067 (noting in dicta that identical language in 1132(a)(3)
"does not, after all, authorize 'appropriate equitable relief' at
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large, but only 'appropriate equitable relief' for the purpose of
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'redress[ing any] violations or . . . enforc[ing] any provisions'
of ERISA"); Call v. Sumitomo Bank of California, 881 F.2d 626,
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635 (9th Cir. 1989); Nieto v. Ecker, 845 F.2d 868, 873-74 & n.7
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(9th Cir. 1988); see also Kyle Rys., Inc. v. Pacific Admin.
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Servs., Inc., 990 F.2d 513, 516-17 (9th Cir. 1993) (holding that
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relief for nonfiduciary liability is only available when
nonfiduciary is engaged in a prohibited transaction under 29
U.S.C. 1106(a)(1)).
Gorman's alleged participation in HMA's fiduciary
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breach is not an "act or practice" which violates ERISA. See
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Mertens, 113 S. Ct. at 2067; Call, 881 F.2d at 635. Moreover,
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the Secretary does not point to any substantive provision of
ERISA that imposes a duty on nonfiduciaries to refrain from
participating in a fiduciary breach.6 Consequently,
1132(a)(5) does not authorize the Secretary's action against
Gorman in this case.
The Secretary nevertheless asserts that we should apply
the court's broad equitable powers and the court's federal common
law-making authority under ERISA to read 1132(a)(5) expansively
to authorize equitable relief for Gorman's alleged conduct. He
invokes the established rule that the courts have power under
ERISA to fashion common law based on the law of trusts to
construe ambiguous statutory language and fill gaps in the
statute. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101,
___ ___________________________ _____
110-15 (1989); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56
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(1987); Kwatcher v. Massachusetts Service Employees Pension Fund,
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879 F.2d 957, 966 (1st Cir. 1989). In several pre-Mertens cases,
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6 The Secretary does argue that one of the enforcement
provisions which imposes civil penalties for participation in a
fiduciary breach, 29 U.S.C. 1132(l), indicates that Congress
intended 1132(a)(5) to authorize remedies against
nonfiduciaries like Gorman. We reject this argument below, see
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infra pages 21-24. We note here, however, that 1132(l) is an
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enforcement provision and not a substantive provision; not even
the Secretary claims that the provision itself creates a
substantive duty not otherwise provided for in the statute.
Section 1132(l) was added to ERISA in 1989, see Omnibus Budget
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Reconciliation Act of 1989, Pub. L. No. 101-239, 2101, 103
Stat. 2123. Instead of extending the substantive reach of ERISA,
1132(l) explicitly based its penalty on amounts already
recoverable under existing provisions of the statute. 29 U.S.C.
1132(l)(2)(B).
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the courts have exercised this power to afford a remedy against
nonfiduciaries who participate in a fiduciary breach. See, e.g.,
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Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 279-81
______ _________________________________
(2d Cir. 1992); Whitfield v. Lindemann, 853 F.2d 1298, 1303 (5th
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Cir. 1988), cert. denied, 490 U.S. 1089 (1989); Brock v.
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Hendershott, 840 F.2d 339, 342 (6th Cir. 1988).
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We refuse to adopt a common law remedy in this case
because the Secretary's expansive application of 1132(a)(5)
creates a new cause of action and a new source of liability where
neither currently exists in the statute. As Justice Scalia
explained in Mertens,
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no provision explicitly requires
[nonfiduciaries] to avoid participation
(knowing or unknowing) in a fiduciary's
breach of fiduciary duty. It is
unlikely, moreover, that this was an
oversight, since ERISA does explicitly
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impose "knowing participation" liability
on cofiduciaries. See 405(a), 29
U.S.C. 1105(a). That limitation
appears all the more deliberate in light
of the fact that "knowing participation"
liability on the part of both cotrustees
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and third persons was well established
___
under the common law of trusts . . . .
In Russell we emphasized our
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unwillingness to infer causes of action
in the ERISA context, since that
statute's carefully crafted and detailed
enforcement scheme provides "strong
evidence that Congress did not intend to
___
authorize other remedies that it simply
forgot to incorporate expressly."
Mertens, 113 S. Ct. at 2067 (quoting Massachusetts Mut. Life Ins.
_______ ____________________________
Co. v. Russell, 473 U.S. 134, 146-47 (1985)) (citations omitted)
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(emphasis in original).
Although this discussion in Mertens is purely dicta,
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see id. at 2067-68 (reserving any decision on whether 1132(a)
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authorizes an action against a nonfiduciary for participating in
a fiduciary breach), its reasoning, based on the Russell
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decision, accords with this Circuit's jurisprudence established
in Drinkwater v. Metropolitan Life Ins. Co., 846 F.2d 821 (1st
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Cir.), cert. denied, 488 U.S. 909 (1988). In Drinkwater, we
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applied Russell to hold that extra-contractual damages are not a
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form of "other appropriate relief" under 1132(a)(5) because
such relief was not expressly granted and we could not conclude
"Congress intended to authorize any form of relief other than
what was expressly granted." Id. at 824; see also Russell 473
__ ________ _______
U.S. at 145-48 (refusing to imply a private cause of action for
individual beneficiaries to obtain damages caused by a fiduciary
breach because Congress had created such liability only in favor
of the ERISA plans themselves). In this case, Congress did not
expressly provide for a remedy against nonfiduciaries who
participate in a fiduciary breach. Therefore, and in light of
the potentially broad area of liability such a remedy would
create, we conclude that Congress did not intend for its grant of
equitable relief in 1132 (a)(5) to authorize the present action
against Gorman. See Framingham Union Hosp., Inc. v. Travelers
___ _____________________________ _________
Ins. Co, 744 F. Supp. 29, 33 (D. Mass. 1990) (finding that under
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ERISA, "the courts' authority to adopt trust-law principles is
limited to fashioning 'appropriate relief' under specified causes
of action, among specified parties") (citing Nieto, 845 F.2d at
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872).
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The Secretary claims that the Russell and Drinkwater
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decisions do not apply to this case because they involved
situations where the statutory language clearly excluded the
requested remedy. See Russell, 473 U.S. at 141-43 (language
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granting damage remedies "to the plan" excluded damages to other
parties like beneficiaries); Drinkwater, 846 F.2d at 824-25
__________
(finding express grant of "equitable relief" excluded other types
of relief such as compensatory and punitive damages). The
court's common lawmaking authority was not exercised in those
cases because that authority does not include the power "to
revise the text of the statute." Mertens, 113 S. Ct. at 2070.
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The Secretary maintains that in this case, however,
where the statute is silent or ambiguous, courts should look to
ERISA's broader purposes of protecting the interests of
participants and beneficiaries, see Firestone, 489 U.S. at 113,
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and provide a remedy where necessary to further those purposes;
the court should not just assume that the absence of express
authority is a deliberate omission and thus a bar to remedial
measures. According to the Secretary, our decisions in Kwatcher,
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879 F.2d at 965-66, and Malden Mills Indus., Inc. v. Alman, 971
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F.2d 768, 774-75 (1st Cir. 1992), are examples of this principle
because in those cases we applied common law remedies to
situations in which the ERISA statute did not specify a cause of
action. Kwatcher, 879 F.2d at 965-66 (applying federal common
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law to allow restitution action for recovery of overpayments to
an ERISA pension fund); Malden Mills, 971 F.2d at 774-75
_____________
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(recognizing a common law right to "restitution for overpayment
of contributions by an employer to a Fund").
All things considered, judicial remedies for
nonfiduciary participation in a fiduciary breach fall within the
line of cases where Congress deliberately omitted a potential
cause of action rather than the cases where Congress has invited
the courts to engage in interstitial lawmaking. To begin with,
Congress proscribed several "acts or practices" in ERISA's
substantive provisions that involve nonfiduciaries but did not
include among them a nonfiduciary's knowing participation in a
fiduciary breach. See Mertens, 113 S. Ct. at 2067 & n.4. For
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example, 29 U.S.C. 1106(a)(1) prohibits certain transactions
between "parties in interest," see supra, note 2, and ERISA
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plans,7 and 29 U.S.C. 1023(d)(8) prohibits actuaries from
breaching their duty to certify that their actuarial statements
are "complete and accurate." In addition, 29 U.S.C. 1105
imposes liability on cofiduciaries for knowingly participating in
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a fiduciary breach. It is such "acts or practices" as these for
which 1132(a)(5) provides a remedy.
If Congress desired to augment the existing remedies
against fiduciary breaches, 29 U.S.C. 1109(a), by providing for
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7 The fact that 1106 imposes the duty to refrain from
prohibited transactions on fiduciaries and not on the parties in
interest is irrelevant for our purposes because 1132(a)(5)
reaches "acts or practices" that violate ERISA and prohibited
transactions violate 1106. Although fiduciary breaches also
violate ERISA, nonfiduciaries cannot, by definition, engage in
the act or practice of breaching a fiduciary duty.
Nonfiduciaries, can, however, engage in the act or practice of
transacting with an ERISA plan.
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an action against nonfiduciaries for assisting those breaches, it
could have done so with provisions similar to those concerning
cofiduciaries and prohibited transactions. See Russell, 473 U.S.
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at 147 ("'The presumption that a remedy was deliberately omitted
from a statute is strongest when Congress has enacted a
comprehensive legislative scheme including an integrated system
of procedures for enforcement.'") (quoting Northwest Airlines,
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Inc. v. Transport Workers, 451 U.S. 77, 97 (1981)); see also
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Useden v. Acker, 947 F.2d 1563, 1581 (11th Cir. 1991), cert.
______ _____ ____
denied, 113 S. Ct. 2927 (1993) ("[A] court should only
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incorporate a given trust law principle if the statute's text
negates an inference that the principle was omitted deliberately
from the statute."). In contrast, the Kwatcher and Malden Mills
________ ____________
cases presented a situation not of deliberate omission, but one
where the remedy was "fully consonant with ERISA's underlying
policies as expressed in 29 U.S.C. 1103(c)(2)(A)." Kwatcher,
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879 F.2d at 967 (finding common law restitution action consistent
with statutory provision allowing for the return of mistaken
contributions); see also Malden Mills, 971 F.2d at 775 (noting
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that the same statutory provision supports a right of
restitution).
More importantly, we do not find it appropriate to
authorize a common law cause of action in this case because
nonfiduciary participation in a fiduciary breach is most likely
to involve, as it does here, service providers and other
nonfiduciary professionals who provide advice or expertise to
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ERISA fiduciaries. The advice and expertise provided by these
individuals -- whether actuaries, lawyers, accountants, or
consultants -- is vital for the successful operation of ERISA
plans which must function in a highly complex and regulated
environment. At the same time, such advice is particularly
vulnerable to remedies that impose liability like the one
requested by the Secretary. We do not mean to countenance the
action of someone who advises a fiduciary to break the law, but
we are concerned that extending the threat of liability over the
heads of those who only lend professional services to a plan
without exercising any control over, or transacting with, plan
assets will deter such individuals from helping fiduciaries
navigate the intricate financial and legal thicket of ERISA.
Congress recognized this danger and was purposefully
circumspect about limiting the liability of those providing
professional services to ERISA plans. See, e.g., 29 U.S.C.
___ ____
1108 (b)(2) (exempting from the list of transactions prohibited
under ERISA, contracts or arrangements with a party in interest
for "legal, accounting, or other services necessary for the
establishment or operation of the plan"). The text of ERISA
allocates liability for plan-related
misdeeds in reasonable proportion to
respective actors' power to control and
prevent the misdeeds. . . . Professional
service providers such as actuaries
become liable for damages when they cross
the line from advisor to fiduciary, [and
they] must disgorge assets and profits
obtained through participation as
parties-in-interest in transactions
prohibited by [ 1106(a)] and pay related
civil penalties, see 502(i), 29 U.S.C.
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1132(i) . . . .
Mertens, 113 S. Ct. at 2071-72.
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While we recognize that our decision to limit liability
for nonfiduciaries may provide less protection than existed
before ERISA was enacted and that the decision may appear
contrary to ERISA's purpose of protecting the interests of
participants and beneficiaries, we also recognize that the
present structure of ERISA was the outcome of certain cost-
benefit analyses that Congress undertook in order to fashion a
comprehensive regulatory scheme. Exposure not only to liability
for damages but to other forms of liability as well "would impose
high insurance costs upon persons who regularly deal with and
offer advice to ERISA plans, and hence upon ERISA plans
themselves." Id. at 2072. We will normally not attempt to
__
adjust the balance between the competing goals of protecting
employees' interests and containing pension costs that Congress
has struck in the ERISA statute. Id. (citing Alessi v.
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Raybestos-Manhattan, Inc., 451 U.S. 504, 515 (1981) and Russell,
_________________________ _______
473 U.S. at 148 n.17)); see also Pilot Life Ins. Co. v. Dedeaux,
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481 U.S. 41, 54 (1987). Congress decided that the best approach
was to limit liability for nonfiduciaries, especially service
providers, while at the same time increasing the number of
fiduciary parties and the scope of fiduciary responsibility. See
___
Mertens, 113 S. Ct. at 2071. We decline to upset this decision
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by invoking our common law authority in this case.
We are more willing to create common law remedies that
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are directed toward undoing specific transactions or recovering
assets of an ERISA plan. In those situations, the parties are
more likely to be in control of plan assets and thus functionally
more like fiduciaries. As we demonstrated in Kwatcher and Malden
________ ______
Mills, the provision of restitution remedies to seek the return
_____
of plan assets can be a proper exercise of our common lawmaking
authority. Kwatcher, 879 F.2d at 965-67; Malden Mills, 971 F.2d
________ ____________
at 774; accord Provident Life & Accident Ins. Co. v. Waller, 906
______ ___________________________________ ______
F.2d 985, 992-94 (4th Cir.), cert. denied, 498 U.S. 982 (1990);
____ ______
Luby v. Teamsters Health, Welfare, & Pension Trust Funds, 944
____ ___________________________________________________
F.2d 1176, 1185-87 (3d Cir. 1991).
In this case, however, no restitution remedy exists.
The Secretary never alleged that Gorman received or controlled
ERISA plan assets, and we would not consider the salary Gorman
presumably earned8 as ill-gotten profits. Instead, we would
consider Gorman's salary as a part of the ERISA plan's cost of
operations. Furthermore, the facts of this case do not present a
situation where the court must use its equitable powers, as the
Secretary warns, "to stop an ongoing bribery or kickback scheme,
or [provide] restitution and a constructive trust to recover
funds transferred from a plan to a nonfiduciary." In those
situations, unlike the present case, the act or practice being
remedied is either expressly proscribed by the statute (by
____________________
8 The Secretary makes no allegation that Gorman received
unreasonable compensation for his services. If such had been the
case, the Secretary might have stated a cause of action based on
Gorman's engagement in a prohibited transaction, 29 U.S.C.
1106, but not for participation in a fiduciary breach.
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1106, for example, which prohibits certain transactions between
the plan and a "party in interest"), and thus explicitly covered
under 1132(a)(5), or else within our recognized powers of
granting restitution.
On a somewhat different tack, the Secretary attempts to
characterize the suit against Gorman as merely a request for the
court to exercise its equitable powers to remedy an existing
violation of ERISA and not a request for creating an independent
cause of action or imposing new liability. This assertion
ignores the allegations made in the complaint and the essential
nature of the charge against Gorman. The complaint states:
Gorman at all times herein acted within
the scope of his employment and by his
actions participated in and furthered
what he knew or should have known were
the fiduciary breaches of [the fiduciary
defendants]. Accordingly, Gorman is
liable under ERISA to the same extent as
the fiduciaries for the breaches
committed after September 13, 1989.
The Secretary makes no claim that enjoining Gorman from
working for any ERISA plans in the future is necessary to redress
the breaches committed by OMNI's administrators or is necessary
to enforce the ERISA provisions imposing fiduciary duties.
Instead, the Secretary is asking that Gorman be held liable "as
the fiduciaries," a result plainly at odds with Russell and
_______
Drinkwater as discussed above. If the Secretary really intended
__________
merely to remedy the acts committed by other individuals, the
complaint would not have focussed on Gorman's alleged misdeeds
but rather on how Gorman is in a position to remedy the
-20-
fiduciary's misdeeds. In fact, under the Secretary's theory
Gorman's misdeeds would be irrelevant -- "innocent" and well-
meaning parties would be reachable as long as they were in some
position to help redress the fiduciaries' breaches.
Moreover, even if the Secretary were to rephrase the
complaint as a request for an injunction against Gorman
specifically for the purpose of redressing past, and preventing
future, fiduciary breaches, the Secretary would still fail to
state a cause of action. The Secretary's claim would still, in
substance, constitute a request for the imposition of liability
for an act that is not proscribed by the statute.
The suit against Gorman constitutes an appeal to the
court to impose liability for committing a specific act -- giving
improper advice to fiduciaries. It is not an appeal to the court
to remedy the subsequent breaches committed by the fiduciaries
themselves. The appropriate equitable relief for redressing
those breaches is not the action against Gorman but the remedy
already requested from the fiduciaries in Count I, which sought,
among other things, the restoration of plan losses and the
reversing of prohibited transactions. We see nothing that makes
Gorman a particularly suitable target for this type of relief as
he was not party to any prohibited transactions nor the recipient
of plan assets. For similar reasons, the assertion that
equitable relief against Gorman is necessary to prevent some
hypothetical fiduciary breaches committed by those whom Gorman
may advise in the future is unpersuasive. ERISA extensively
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regulates and polices fiduciaries, see 29 U.S.C 1101 - 1114,
___
and it provides ample remedies to prevent future fiduciary
breaches, see 29 U.S.C. 1132(a)(2), 1109. Should Gorman
___
advise future fiduciaries to break the law, we should think
ERISA's existing provisions are sufficient to deter those
fiduciaries from following his advice.
It is in light of the foregoing that we can best
understand the apparent fly in our analytic ointment, 29 U.S.C.
1132(l).9 The Secretary argues that this civil enforcement
____________________
9 29 U.S.C. 1132(l) provides in relevant part:
(1) In the case of --
(A) any breach of fiduciary
responsibility under (or other violation
of) part 4 by a fiduciary, or
(B) any knowing participation in such a
breach or violation by any other person,
the Secretary shall assess a civil penalty
against such fiduciary or other person in an
amount equal to 20 percent of the applicable
recovery amount.
(2) For purposes of paragraph (1), the term
"applicable recovery amount" means any amount
which is recovered from a fiduciary or other
person with respect to a breach or violation
described in paragraph (1) --
(A) pursuant to any settlement agreement
with the Secretary, or
(B) ordered by a court to be paid by such
fiduciary or other person to a plan or
its participants and beneficiaries in a
judicial proceeding instituted by the
Secretary under subsection (a)(2) or
(a)(5) of this section.
Under paragraph (3) of 1132(l), the Secretary may waive or
reduce this penalty if he believes that "the fiduciary or other
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provision, which authorizes civil penalties for participation in
a fiduciary breach by "other persons" based on amounts recovered
by the Secretary under 1132(a)(2) and 1132 (a)(5), indicates
that Congress intended for 1132(a)(5) to provide a remedy for
nonfiduciary violations of a fiduciary breach. Otherwise, the
Secretary claims, no civil penalties against "other persons"
under 1132(l)(1)(B) would be possible and the provision would
be rendered meaningless.
Justice Scalia rejected this argument in Mertens, 113
_______
S. Ct. at 2070-71, by noting that
the "equitable relief" awardable under
[ 1132(a)(5)] includes restitution of
ill-gotten plan assets or profits,
providing an "applicable recovery amount"
to use to calculate the penalty, . . .
and even assuming nonfiduciaries are not
liable at all for knowing participation
in a fiduciary's breach of duty, see
supra, at 2067-2068, cofiduciaries
_____
expressly are, see [29 U.S.C. 1105], so
there are some "other person[s]" than
fiduciaries-in-breach liable under [
1132(l)(1)(B)].
Id. at 2071.
__
We find it significant that the Secretary invokes the
civil penalty provision in a case where, because he is seeking an
injunction, 1132(l)'s civil penalty based on amounts recovered
under 1132(a)(5) is not applicable. Cofiduciary breaches
____________________
person will [otherwise] not be able to restore all losses to the
plan without severe financial hardship." 29 U.S.C. 1132
(l)(3)(B).
-23-
aside,10 it is difficult to imagine any case where knowing
participation in a fiduciary breach by a nonfiduciary would
occasion the type of remedy (restitution awards) that would
trigger 1132(l)(1)(B) without the nonfiduciary having engaged
in a prohibited transaction under 29 U.S.C 110611 or
otherwise having obtained some ill-gotten plan assets in a manner
not covered by the prohibited transaction section. We conclude,
therefore, that 1132(l) makes little sense as independently
authorizing equitable relief against nonfiduciaries like Gorman,
who allegedly participated in a fiduciary breach but did not
engage in an act prohibited by the statute or otherwise obtain
plan assets, when it can never be used for such relief. If
1132(l) fails to demonstrate Congressional intent to provide
money damages for nonfiduciary participation in a fiduciary
breach, see id. at 2070-71, it is even less likely to demonstrate
___ __
Congressional intent to provide nonmonetary equitable remedies
___________
____________________
10 The Secretary takes issue with Justice Scalia's proposal that
"any other person" in 1132(l)(1)(B) could refer to
cofiduciaries. According to the Secretary, cofiduciary
liability, established under 29 U.S.C. 1105, clearly falls
under 1132(l)(1)(A) and not 1132(l)(1)(B). We need not
resolve this dispute and therefore do not.
11 We recognize that prohibited transactions are also covered by
a separate civil penalty provision, 29 U.S.C. 1132(i), but that
does not necessarily mean civil penalties for prohibited
transactions cannot be obtained under 1132(l) as well. The
penalty under 1132(i) is completely discretionary and adjusted
according to whether the prohibited transaction was corrected or
not. The penalty under 1132(l), however, is mandatory and
contains special procedures for a general waiver. Thus, the two
provisions appear to serve distinct and coextensive purposes: one
is tailored specifically to redress individual transactions while
the other is designed to penalize conduct more generally.
-24-
for nonfiduciary participation in a fiduciary breach.
III. CONCLUSION
III. CONCLUSION
The Secretary's interpretation of 1132(a)(5) as
authorizing an actionable claim in any situation where an ERISA
violation has occurred and the Secretary thinks relief is
"appropriate," regardless of whether or not that relief is
directed at an act or practice addressed by the substantive
provisions of the statute, stretches the language of 502(a)(5)
past its breaking point. For this reason and because we decline
to exercise our common lawmaking authority or our inherent
equitable powers in situations where a professional service
provider assists in a fiduciary breach but receives no ill-gotten
plan assets, the judgment of the district court is affirmed.
________
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