SUPREME COURT RULES THAT A NONFIDUCIARY CAN BE LIABLE FOR PARTICIPATING IN A PROHIBITED TRANSACTION

In Harris Trust and Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. __ 2000 U.S. LEXIS 3962 (June 12, 2000), Justice Thomas delivered the opinion of the Court.  Since the Court delivered this opinion on the same day it delivered Pegram v. Herdrich, 2000 U.S. LEXIS 3964 (June 12, 2000), the court reversed the Seventh Circuit twice on ERISA matters.

ERISA bars a fiduciary of an employee benefit plan from causing the plan to engage in certain transactions with a “party in interest.”[i]  ERISA also authorizes certain parties to sue to obtain “appropriate equitable relief”.[ii]  The question before the Court was whether those parties have standing to sue a nonfiduciary “party in interest” to a transaction 29 U.S.C. § 1106(a) bars.  The court held that it does.[iii]

Congress enacted 29 U.S.C. § 1106(a)(1) to bar certain transactions deemed “likely to injure the pension plan.”[iv]  This section provides that “a fiduciary shall not cause the plan to engage in a transaction constituting a sale or exchange of any property between the plan and a party in interest.”[v]  Congress defined “party in interest” to encompass those entities that a fiduciary might favor at the expense of the plan’s beneficiaries.[vi]

The trustee claimed that an ERISA pension plan (the Ameritech Pension Trust (APT)) and a party in interest (respondent Salomon Smith Barney (Salomon)) entered into a transaction that 29 U.S.C. § 1106(a) prohibits and 29 U.S.C. § 1108 does not exempt.  Salomon provided broker-dealer services to APT, executing nondiscretionary equity trades at the direction of APT’s fiduciaries, thus qualifying itself (the court assumed) as a “party in interest.”[vii] During the same period, Salomon sold interests in several motel properties to APT for nearly $21 million.  NISA, an investment manager and fiduciary, directed APT’s purchase of the motel interests.[viii]

This litigation arose when Harris discovered that the motel interests were nearly worthless.  Harris claimed the interests were worthless all along.  Salomon asserted that the interests declined in value due to a downturn in the motel industry.  Petitioners sued Salomon under 29 U.S.C. § 1132(a)(3).[ix]

Petitioners claimed that NISA had caused the plan to engage in a per se prohibited transaction with Salomon, and that Salomon was liable as a nonfiduciary party in interest.[x]  Petitioners sought rescission, restitution, and disgorgement of Salomon’s profits made from use of the plan assets transferred to it.

Salomon moved for summary judgment, arguing that 29 U.S.C. § 1132(a)(3), when remedying a transaction that 29 U.S.C. § 1106(c) prohibits, authorizes a suit only against the party expressly constrained – the fiduciary who caused the plan to enter the transaction – and not against the counterparty to the transaction.[xi]  The District Court held that ERISA does provide a private cause of action against nonfiduciaries who participate in a prohibited transaction.  The court granted Salomon’s subsequent motion for interlocutory appeal.[xii] 

The Seventh Circuit reversed.[xiii]  It observed that 29 U.S.C. 1106(a), governs only the conduct of fiduciaries, not of counterparties or other nonfiduciaries.[xiv]  The court next hypothesized that “where ERISA does not expressly impose a duty, there can be no cause of action,” Ibid., relying upon dictum in Mertens v. Hewitt Associates,[xv], that 29 U.S.C. § 1132(a)(3) does not provide a private cause of action against a nonfiduciary for knowing participation in a fiduciary’s breach of duty.  The Seventh Circuit saw no distinction between Mertens (involving 29 U.S.C. § 1104) and the Harris case (involving 29 U.S.C. § 1106), explaining that neither section expressly imposes a duty on nonfiduciaries.  The Seventh Circuit decided that Congress chose one remedy (a civil penalty under 29 U.S.C. § 1132(l)) instead of a civil action under 29 U.S.C. § 1132(a)(3).  Accordingly, the Seventh Circuit held that a nonfiduciary cannot be liable under 29 U.S.C. § 1132(a)(3) for participating in a prohibited transaction.

In doing so, the Seventh Circuit departed from the uniform position of the Courts of Appeals that 29 U.S.C. § 1132(a)(3) – does authorize a civil action against a nonfiduciary who participates in a transaction prohibited by 29 U.S.C. § 1106(a)(1).[xvi]  The Supreme Court granted certiorari and reversed.[xvii]

29 U.S.C. § 1106(a) imposes a duty only on the fiduciary that causes the plan to engage in the transaction.  The court rejected the Seventh Circuit’s and Salomon’s conclusion that, absent a substantive provision of ERISA expressly imposing a duty upon a nonfiduciary party in interest, that courts may not hold a nonfiduciary party liable under 29 U.S.C. § 1132(a)(3).  The court held that 29 U.S.C. § 1132(a)(3) itself imposes certain duties, and therefore liability under that provision does not depend on whether ERISA’s substantive provisions impose a specific duty on the party the plaintiff sued.[xviii]

29 U.S.C. § 1132(a)(3) authorizes appropriate equitable relief for the purpose of ‘redress[ing any] violations or … enforc[ing] any provisions’ of ERISA.”[xix]  But 29 U.S.C. § 1132(a)(3) contains no limit on the universe of possible defendants.  The focus of the section is redressing ERISA violations.

The court said it would ordinarily assume that Congress intentionally failed to specify proper defendants in 29 U.S.C. § 1132(a)(3).[xx]  But ERISA’s “ ‘comprehensive and reticulated’ ” scheme warrants a cautious approach to inferring remedies the text did not specifically authorize.

29 U.S.C. § 1132(l) contemplates civil penalty actions by the Secretary against two classes of defendants, fiduciaries, and “other person[s].” The section allows the Secretary of Labor to assess a civil penalty against an “other person” participating in a breach of fiduciary duty.  The amount of the penalty depends on the amount recovered pursuant to 29 U.S.C. § 1132(a)(2) or 29 U. S.C. § 1132(a)(5).

The plain implication is that the Secretary may bring a civil action under 29 U.S.C. § 1132 against an “other person” who “knowing[ly] participat[es]” in a fiduciary’s violation; otherwise, there could be no amount recovered to determine the civil penalty.[xxi]  This action is available notwithstanding the absence of any ERISA provision explicitly imposing a duty upon an “other person” not to engage in such “knowing participation.”[xxii]  And if the Secretary may bring suit against an “other person” under 29 U.S.C. § 1132(a)(5) to the court, it follows that a participant, beneficiary, or fiduciary may bring suit against an “other person” under the similarly worded 29 U.S.C. § 1132(a)(3).[xxiii]  Relying on 29 U.S.C. § 1132(1) the Court concluded that liability under 29 U.S.C. § 1132(a)(3) or (a)(5) can exist absent the imposition of a specific duty under ERISA.[xxiv]

For these reasons, an action for restitution against a transferee of tainted plan assets satisfies the “appropriate[ness]” criterion in 29 U.S.C. § 1132(a)(3).  Such relief is also “equitable” in nature.[xxv]  Therefore, non-fiduciaries can be liable for participating in a fiduciary breach under 29 U.S.C. § 1106.

Notes