Contents    Prev    Next    Last

            Title Reich v. Compton

 

            Date 1995

            By Alito

            Subject Misc

                

 Contents

 

 

Page 1

LEXSEE 57 F.3D 270

ROBERT B. REICH, Secretary of the United States Department of Labor, Appellant v. FRED COMPTON, JOSEPH McHUGH, JOHN NIELSEN, FREDERICK HAMMERSCHMIDT, GERSIL N. KAY, ELECTRICAL MECHANICS ASSOCIATION, THE FIDELITY-PHILADELPHIA TRUST COMPANY, and THE INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS, LOCAL UNION NO. 98, Appellees

No. 93-2019

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

57 F.3d 270; 1995 U.S. App. LEXIS 13619; 19 Employee Benefits Cas. (BNA) 1441

August 11, 1994, Argued

June 5, 1995, Filed

SUBSEQUENT HISTORY:   **1  As Amended September 8, 1995.

PRIOR HISTORY: ON APPEAL FROM THE UNITED STATES  DISTRICT  COURT  FOR  THE  EASTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 88-

7920).

LexisNexis(R) Headnotes

COUNSEL: THOMAS S. WILLIAMSON, JR., Solicitor of Labor.

ALLEN H. FELDMAN, Associate Solicitor for Special

Appellate and Supreme Court Litigation.

NATHANIEL   I.   SPILLER,   Counsel   for   Appellate

Litigation.

ELLEN J. BEARD, (Argued), Attorney.

UNITED STATES DEPARTMENT OF LABOR, Room N-2700,  200  Constitution  Avenue,  N.W.  Washington, D.C. 20210, Attorneys for Appellant.

MICHAEL  KATZ,  ESQ.  (Argued),  MERANZE  AND KATZ,  Lewis  Tower  Building,  12th  Floor,  15th  and Locust  Streets,  Philadelphia,  PA  19102.  SANDRA  L. DUGGAN,   ESQ.   N.   MARLENE   FLEMING,   ESQ.

(Argued),  BLACKBURN & MICHELMAN, P.C. 2207

Chestnut Street,  Philadelphia,  PA 19103,  Attorneys for Appellees,  Fred  Compton,  Joseph  McHugh,  and  John Nielsen.

RICHARD              B.             SIGMOND,            ESQ.        RICHARD              C.

McNEILL, JR. ESQ. (Argued), SAGOT, JENNINGS & SIGMOND, 1172 Public Ledger Building, Philadelphia, PA 19106, Attorneys for Appellees, Electrical Mechanics Association, and International Brotherhood of Electrical, Workers, Local Union No. 98.

LAURANCE  E.  BACCINI,  ESQ.  (Argued),  CAROL A.  CANNERELLI-VAN  POORTVLIET,            **2        Of Counsel:            WOLF,   BLOCK,   SCHORR   and   SOLIS- COHEN, Twelfth Floor Packard Building, Philadelphia, PA           19102,      Attorneys              for            Appellees,                Frederick Hammerschmidt,   Gersil  N.  Kay,   and,   The  Fidelity- Philadelphia Trust Company.

JUDGES: Before:  BECKER, ALITO, and GIBSON *, Circuit Judges

* Hon. John R. Gibson, United States Circuit Judge for the Eighth Circuit, sitting by designation.

OPINIONBY: ALITO

OPINION:   *272   OPINION OF THE COURT

ALITO, Circuit Judge:

This  is  an  appeal  from  an  order  granting  summary judgment in favor of the defendants in an action brought by  the  Secretary  of  Labor  ("the  Secretary")  to  redress alleged  violations  of  the  Employee  Retirement  Income Security  Act  of  1974  ("ERISA"),  29  U.S.C.  §§  1001-

1461. The action was based on certain financial transac- tions involving the International Brotherhood of Electrical Workers  Union  No.  98  Pension  Plan  ("the  Plan")  and the  Electrical  Mechanics  Association  ("EMA"),  a  not- for-profit corporation closely related to Local 98 of the

57 F.3d 270, *272; 1995 U.S. App. LEXIS 13619, **2;

19 Employee Benefits Cas. (BNA) 1441

Page 2

International Brotherhood of Electrical Workers ("Local

98" or "the union"), whose members are covered by Plan. Maintaining that these transactions were prohibited be- cause of EMA's close relationship with Local **3   98, the Secretary sued the Plan trustees, Local 98, and EMA. The district court granted summary judgment for the de- fendants, but we now reverse in part, affirm in part, and remand for further proceedings.

I.

In 1972, the Plan made a 30-year loan of $800,000 to EMA at 7.5% interest. EMA used this loan to finance construction of a building, and the loan was secured by a  mortgage  on  this  property.  The  building  constructed with the loan housed Local 98's offices. Two years after EMA obtained the loan, Congress passed ERISA. Section

406(a) of ERISA, 29 U.S.C. § 1106(a), prohibits various transactions  involving  a  plan  and  a  "party  in  interest." With respect to transactions that occurred before 1974, however, these prohibitions did not take effect until June

30, 1984. See 29 U.S.C. § 1114(c).

Concerned that its outstanding loan to EMA would be considered a prohibited transaction after that date, the Plan applied to the Department of Labor on April 30, 1984 for an exemption from this provision. See 29 U.S.C. §

1108 (authorizing the Secretary to grant exemptions from

ERISA's prohibited transaction provisions). On June 1,

1984,  the Department tentatively denied the exemption

**4   and advised the Plan that its only permissible op- tions were to renegotiate the terms of the loan so that EMA was charged a market interest rate or to require EMA to satisfy   *273    the loan in full. Contrary to the advice of its counsel,  the Plan withdrew its exemption request and, on April 25, 1985, accepted from EMA a payment of $380,289.93, the fair market value of the loan, in full satisfaction of the debt, which at the time had an account- ing value of $653,817.47. n1 EMA borrowed the entire amount  of  this  payment  from  Local  98.  Local  98  then imposed  a  special  "rental"  assessment  on  its  members and paid the proceeds to EMA. EMA in turn used those funds to repay the money advanced by the union. Joint Appendix ("JA") at 133.

n1 The difference in value was due to the ex- traordinary increase in interest rates between 1972 and 1984.

During   1984   and   1985,   Fred   Compton,   Joseph McHugh,   and  John  Nielsen  were  Local  98's  desig- nated trustees ("union trustees") for the Plan;  Frederick Hammerschmidt  and  Gersil  Kay  were  the  employer- designated   **5        trustees  ("employer  trustees");   and Fidelity-Philadelphia  Trust  Company  ("Fidelity")  was

the Plan's corporate trustee. Compton was also president of  both  EMA  and  Local  98  from  1981  through  1987; McHugh  was  a  member  of  Local  98's  executive  board from 1981 through 1987; and Nielsen was financial sec- retary of Local 98 from 1981 through 1987, as well as a member of EMA's board of directors from 1981 through June 1984.

In  October  1988,  the  Secretary  filed  a  complaint in  district  court  against  Compton,  McHugh,  Nielsen, Hammerschmidt, Kay, Fidelity, EMA, and Local 98 (col- lectively "the defendants"). The complaint first asserted that EMA "was a shell corporation wholly controlled by Local 98" and that therefore "all transactions with EMA, were,  in  fact,  transactions  with  Local  98,"  which  was a  "party  in  interest"  under  section  3(14)(D)  of  ERISA,

29 U.S.C. § 1002(14)(D). n2 JA at 17-18. The complaint alleged that the loan to EMA became a prohibited transac- tion as of July 1, 1984, pursuant to sections 406(a)(1)(A),

(B), and (D) of ERISA, 29 U.S.C. §§ 1106(a)(1)(A), (B), and (D). n3 Id. at 18. Likewise, the complaint alleged that EMA's subsequent purchase of its note was a prohibited transaction **6    under these same provisions because the note was purchased for less than its principal value. Id. at 21.

n2  Section  3(14)  of  ERISA,  29  U.S.C.  §

1002(14),  is  set  out  in  the  text  infra  at  pages  15 to 16. The Secretary conceded that EMA was not a party in interest.

n3  Section  406(a)(1)  of  ERISA,  29  U.S.C.  §

1106(a)(1), is set out in the text, infra at page 12. Based  on  these  transactions,  the  complaint  claimed that  various  defendants  had  committed  several  differ- ent ERISA violations. First, the complaint claimed that from July 1, 1984 until August 25, 1984 (the date when EMA purchased the note), trustees Compton, McHugh, Nielsen,  Hammerschmidt,  and  Kay  had  breached  their fiduciary obligations under sections 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. §§ 1104(a)(1)(A) and (B), n4 by failing to collect on the loan. Id. at 19. Second, the com- plaint claimed that Fidelity had likewise breached its fidu- ciary duties under sections 404(a)(1)(A), (B), and (D) of ERISA,  29  U.S.C.  §§  1104(a)(1)(A),  (B),   **7    and

(D),  by  failing  to  take  appropriate  action  to  collect  on the  loan  during  this  same  period.  Id.  at  20.  Third,  the complaint alleged that all Plan trustees had breached their fiduciary obligations by causing the Plan to continue to hold the EMA loan during this same period even though they knew or should have known that doing so constituted a prohibited transaction under sections 406(a)(1)(B) and

(D) of ERISA, 29 U.S.C. §§ 1106(a)(1)(B) and (D). Id.

57 F.3d 270, *273; 1995 U.S. App. LEXIS 13619, **7;

19 Employee Benefits Cas. (BNA) 1441

Page 3

at 20-21. Fourth, the complaint charged that all the Plan trustees had breached their fiduciary obligations by caus- ing the Plan to sell the note to EMA when they knew or should have known that this was a prohibited transaction under sections 406(a)(1)(A) and (D) of ERISA, 29 U.S.C.

§§ 1106(a)(1)(A) and (D). Id. at 21. Fifth, the complaint

**9

(A) each shall use reasonable care to prevent a co-trustee from commit- ting a breach . . . .

alleged that the union trustees had breached their duties to the Plan under sections 406(b)(1) and (2) of ERISA, 29

U.S.C. §§ 1106(b)(1) and (2) n5, by "dealing *274  with the assets of the Plan in their own interest and for their own accounts, and in their individual capacity by acting in a transaction involving the Plan on behalf of a party (or representing a party) whose interests were adverse **8  to those of the Plan" and its participants or beneficiaries. Id. 21. Finally, the complaint alleged that EMA and Local

98 had participated in the trustees' breaches of their fidu- ciary duties and, furthermore, that each Plan trustee was liable  for  the  others'  fiduciary  breaches  under  sections

405(a)(2) and (3) and (b)(1)(A) of ERISA, 29 U.S.C. §§

1105(a)(2) and (3) and (b)(1)(A). n6 Id. at 21-22.

n4  Section  404(a)(1)  of  ERISA,  29  U.S.C.  §

1104(a)(1), is set out in the text, infra at page 50. n5  Section  406(b)(2)  of  ERISA,  29  U.S.C.  §

1106(b)(2), is set out in the text, infra at page 43. n6  Sections  405(a)(2)  and  (3)  of  ERISA,  29

U.S.C. §§ 1105(a)(2) and (3), provide:

(a)  In  addition  to  any  liability  which  he  may have under any other provision of this part, a fidu- ciary  with  respect  to  a  plan  shall  be  liable  for  a breach of fiduciary responsibility of another fidu- ciary with respect to the same plan in the following circumstances: . . .

(2) if, by his failure to comply with section  1104(a)(1)  of  this  title  in  the administration of his specific respon- sibilities which give rise to his status as a fiduciary, he had enabled such other fiduciary to commit a breach; or

(3) if he has knowledge of a breach by  such  other  fiduciary,   unless  he makes reasonable efforts under the cir- cumstances to remedy the breach.

Section   405(b)(1)(A)   of   ERISA,   29   U.S.C.   §

1105(b)(1)(A), provides:

Except as otherwise provided in subsection (d) of this section and in section 1103(a)(1) and (2) of this title, if the assets of a plan are held by two or more trustees --

The  complaint  sought  an  injunction  prohibiting  the defendants  from  committing  further  ERISA  violations. Id. at 23. It also sought an order requiring Local 98 and EMA to "restore to the Plan the unpaid balance of the loan with interest" and an order requiring each defendant, jointly and severally, "to restore to the Plan all Plan losses attributable to their fiduciary breaches." Id. at 23-24.

After  discovery,  the  Secretary  moved  for  summary judgment.  Much  of  the  Secretary's  argument  rested  on the contention that EMA was "a shell corporation or alter ego wholly controlled by Local 98." Id. at 147. The dis- trict court initially denied this motion in February 1993, but following the Supreme Court's decision in Mertens v.  Hewitt  Associates,  113  S.  Ct.  2063,  124  L.  Ed.  2d

161 (1993), the district court requested the parties to sub- mit  briefs  concerning  the  impact  of  that  decision.  The court subsequently vacated its earlier order denying the Secretary's  motion  for  summary  judgment  and  instead entered summary judgment in favor of the non-moving defendants.  McLaughlin v. Compton, 834 F. Supp. 743,

751  (E.D.  Pa.  1993)  ("Compton  I").  The  court  inter- preted Mertens as a directive to "strictly **10   construe" ERISA.   Id. at 747. Noting that EMA was not "a party in interest" under the applicable provision of ERISA, the district court reasoned that the Secretary's alter ego argu- ment would expand the reach of this provision and thus contravene Mertens' teaching that liability can be imposed under ERISA only when the statute "explicitly prohibits the challenged transaction . . . ." Id.

The Secretary moved for reconsideration, arguing that

"the literal text of ERISA" prohibited the transactions at issue in this case. JA at 343. Specifically, the Secretary contended  that  the  challenged  transactions  constituted

"indirect" transactions with Local 98, in violation of sec- tions 406(a)(1)(A), (B), and (D) of ERISA, and that the transactions constituted the "use" of Plan assets "for the benefit" of Local 98, in violation of section 406(a)(1)(D) of ERISA. Id. at 348-49. In addition, the Secretary argued that, even if the court adhered to its previous ruling that the loan to EMA and its subsequent purchase were not pro- hibited transactions, the court would still have to decide:

(a) whether all of the trustees had breached their fiduciary duties  under  section  404(a)  of  ERISA  and   **11    (b) whether the union trustees had breached their fiduciary duties and violated sections 406(b)(1) and (2) of ERISA, as interpreted in Cutaiar v. Marshall,  590 F.2d 523 (3d Cir. 1979), when, in connection with EMA's purchase of

57 F.3d 270, *274; 1995 U.S. App. LEXIS 13619, **11;

19 Employee Benefits Cas. (BNA) 1441

Page 4

the note for less than its accounting value, they allegedly

"acted on both sides of the transaction in their joint capac- ities as Plan trustees, union officers, and EMA governing board members . . . ." JA at 349-50.

*275    The district court denied this motion. After observing that "it would be appropriate to deny the mo- tion on purely procedural grounds" because it simply ad- vanced additional arguments not raised in the Secretary's prior brief concerning Mertens, the court addressed the merits of the Secretary's argument.   Reich v. Compton,

834  F.  Supp.  753,  755-56  (E.D.  Pa.  1993)  ("Compton II"). Interpreting the Secretary's motion as arguing that the transactions in question were "indirect party in inter- est transactions," the court wrote that "ERISA does not contemplate transfers to 'indirect parties in interest'--the transferee is either a party in interest under the statute or it is not." Id. at 756. The court also concluded that the transactions **12    did not constitute a "direct" benefit to the union because "no cash 'benefits' or 'plan assets' ever passed to Local 98." Id. Likewise, the court held that the questioned transactions did not constitute an "indirect benefit" to Local 98 because it paid rent to occupy the building constructed with the loan and because the union had no obligation to finance EMA's purchase of the note. Id.

Finally, the court rejected the argument that the union trustees  violated  sections  406(b)(1)  and  (2)  of  ERISA due to their participation in EMA's purchase of the note. Attempting  to  distinguish  Cutaiar,  supra,  the  court  ob- served that "the boards of the Plan and EMA were not identical" and that the union trustees did not constitute a majority of or control EMA's board.  Compton II, 834 F. Supp. at 757. The district court did not, however, address the Secretary's argument that the Plan trustees had vio- lated their fiduciary duties pursuant to section 404(a) of ERISA. This appeal followed.

II.   ERISA   Section   406(a)(1)   Claims   Against Fiduciaries  A.  We  first  address  whether  the  district court  correctly  entered  summary  judgment  against  the Secretary  with  respect  to  his  claims  that   **13             the Plan trustees violated sections 406(a)(1)(A), (B), and (D) of  ERISA,  29  U.S.C.  §§  1106(a)(1)(A),  (B),  and  (D). Congress  adopted  section  406(a)  of  ERISA  to  prevent plans from engaging in certain types of transactions that had been used in the past to benefit other parties at the ex- pense of the plans' participants and beneficiaries. Before ERISA, plans could generally engage in transactions with related  parties  so  long  as  the  transactions  were  "arms- length." Commissioner of Internal Revenue v. Keystone Consolidated Indus., 124 L. Ed. 2d 71, 113 S. Ct. 2006,

2012 (1993). Unfortunately, this rule was difficult to po- lice and thus "provided an open door for abuses" by plan

trustees. Id. Congress accordingly enacted section 406(a) with the goal of creating a categorical bar to certain types of transactions that were regarded as likely to injure a plan. Id.;  S.  Rep.  No.  93-383,  93rd  Cong.,  2d  Sess.  (1974), reprinted in 1974 U.S.C.C.A.N. 4890, 4981. Section 406, which  is  entitled  "Prohibited  transactions,"  provides  in pertinent part as follows:

(a)  Transactions  between  a  plan  and  a party in interest

Except  as  provided  in  section  1108  of  this title:

(1) A fiduciary with respect to **14   a plan  shall  not  cause  the  plan  to  engage  in a  transaction,  if  he  knows  or  should  know that such transaction constitutes a direct or indirect--

(A) sale or exchange, or leasing, of any property between the plan and a party in in- terest;

(B) lending of money or other extension of credit between the plan and a party in in- terest;

(C) furnishing of goods, services, or fa- cilities between the plan and a party in inter- est;

(D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan

. . . .

In considering the Secretary's section 406(a)(1) claims against the Plan trustees, we will separate our inquiry into two parts. First, in part II.B. of this opinion, we will con- sider whether the transactions at issue in this case may be prohibited "indirect" transactions between the Plan and a

"party in interest" (i.e., Local 98), in violation of section

406(a)(1)(A), (B), and (D). Second, we will consider, in part II.C. of this opinion, whether these transactions may constitute   *276   the use of Plan assets "for the benefit" of Local 98, in contravention of section 406(a)(1)(D). n7

n7 It is questionable whether the Secretary ade- quately raised this argument in district court prior to his motion for reconsideration, but since the district court denied the Secretary's motion for reconsider- ation on the merits, we also reach the merits of this argument.

57 F.3d 270, *276; 1995 U.S. App. LEXIS 13619, **14;

19 Employee Benefits Cas. (BNA) 1441

Page 5

**15

B. "Indirect" Transactions. Subsections (A), (B), and

(D) of section 406(a)(1) of ERISA all reach certain direct and indirect transactions between a plan and a party in interest. Subsection (A) applies to the sale, exchange, or lease of property between a plan and a party in interest. Subsection (B) applies to the lending of money or other extension of credit between a plan and a party in interest. And subsection (D) reaches, among other transactions, the transfer of plan assets to a party in interest. In this case, the Secretary argues that the Plan's loan to EMA and its sub- sequent sale of the underlying note to EMA were indirect transactions with Local 98 that violated these provisions. n8 The Secretary argues that indirect transactions within the meaning of section 406(a)(1) include the following three categories:

(1)  multi-party  transactions  from  a  plan through  one  or  more  third-party  interme- diaries to a party in interest;  (2) two-party transactions  that  are  more  complex  than  a simple sale, loan, or transfer of assets;  and

(3) transactions between a plan and the alter ego of a party in interest . . . .

Dept. of Labor 9/13/94 Letter-Brief at 2. n9 The Secretary

**16   admits that the first two types of transactions are not  involved  here.  n10  Thus,  the  question  before  us  is whether, as the Secretary contends, a transaction between a plan and an alter ego of a party in interest is, necessar- ily, an indirect transaction between the plan and a party in interest.

n8  Specifically,  the  Secretary  asserts  that  the transactions constituted either an "indirect . . . sale or  exchange  .  .  .  between  a  plan  and  a  party  in interest," in violation of section 406(a)(1)(A); an

"indirect . . . lending of money between the plan and  a  party  in  interest,"  in  violation  of  section

406(a)(1)(B), or an "indirect . . . transfer of plan assets  to . . . a party in interest," in violation of section 406(a)(1)(D).

n9 While the Secretary does not assert that this list is exhaustive, we limit our consideration in this appeal to the three categories that the Secretary has mentioned.

n10 According to the Secretary, an example of the first type of transaction prohibited by section

406(a)(1) is a case in which a third party obtains a loan from a plan and then immediately turns over those funds to a party in interest. As an example

of the second type of transaction prohibited by sec- tion  406(a)(1),  the  Secretary  points  to  Keystone Consolidated  Indus.,  113  S.  Ct.  at  2013  (1993). There  a  party  in  interest  transferred  property  to the plan in satisfaction of its funding obligations. According to the Secretary, this type of transaction can be conceptualized as a contribution of cash to the plan followed by the plan's purchase of the prop- erty with that cash. We agree with the Secretary that neither of these two types of transactions is at issue here.

**17

In advancing this argument, the Secretary begins by maintaining  that  his  interpretation  of  section  406(a)(1) is  entitled  to  deference  under  the  principles  set  out  in Chevron  U.S.A.,  Inc.  v.  National  Resources  Defense Council, Inc., 467 U.S. 837, 843-44, 81 L. Ed. 2d 694,

104 S. Ct. 2778 (1984). n11 We hold, however, that the Secretary's alter ego argument is inconsistent with clear congressional intent, and we therefore refuse to accept it. See Brown v. Gardner, 130 L. Ed. 2d 462, 115 S. Ct. 552,

556 (1994); Dole v. Steelworkers,  494 U.S. 26,  42-43,

108 L. Ed. 2d 23, 110 S. Ct. 929 (1990).

n11 The Secretary's alter ego argument, how- ever, does not appear to be embodied in any regu- lation or enforcement guideline. Moreover, it is not clear that the Secretary advanced this interpretation in any prior litigation. In light of our conclusion that the alter ego theory is inconsistent with the relevant provisions of ERISA, we need not determine the de- gree of deference, if any, that would otherwise be warranted under these circumstances. See Martin v. OSHRC, 499 U.S. 144, 156-57, 113 L. Ed. 2d

117, 111 S. Ct. 1171 (1991).

**18

The  categorical  prohibitions  contained  in  section

406(a)(1) are built upon the concept of a "party in inter- est," and section 3(14) of ERISA, 29 U.S.C. § 1002(14), provides a long and detailed definition of this concept. Section 3(14) states:

The term "party in interest" means, as to an employee benefit plan--

*277      (A)  any  fiduciary  (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan;

(B) a person providing services to such plan;

57 F.3d 270, *277; 1995 U.S. App. LEXIS 13619, **18;

19 Employee Benefits Cas. (BNA) 1441

Page 6

(C) an employer any of whose employees are covered by such plan;

(D)  an  employee  organization  any  of whose members are covered by such plan;

(E)  an  owner,  direct  or  indirect,  of  50

percent or more of--

(i)  the  combined  voting  power  of  all classes  of  stock  entitled  to  vote  or  the  to- tal value of shares of all classes of stock of a corporation,

(ii) the capital interest or the profits inter- est of a partnership, or

(iii)  the  beneficial  interest  of  a  trust or  unincorporated  enterprise,  which  is  an employer  or  an  employee  organization  de- scribed in subparagraph (C) or (D);

(F)  a  relative  (as  defined  in  paragraph

**19    (15) of any individual described in subparagraph (A), (B), (C), or (E);

(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of --

(i) the combined voting power of classes of stock entitled to vote or the total value of shares of all classes of stock of such corpo- ration,

(ii) the capital interest or profits interest of such partnership, or

(iii) the beneficial interest of such trust or estate,

is  owned  directly  or  indirectly,  or  held  by persons described in subparagraph (A), (B),

(C), (D), or (E);

(H) an employee, officer, director (or in- dividual  having  powers  or  responsibilities similar to those of officers or directors),  or a 10 percent or more shareholder directly or indirectly, of a person described in subpara- graph  (B),  (C),  (D),  (E),  or  (G),  or  of  the employee benefit plan; or

(I) a 10 percent or more (directly or di- rectly in capital or profits) partner joint ven- turer of a person described in subparagraph

(B), (C), (D), (E), or (G).

The Secretary,  after consultation and coordination with the Secretary of Treasury, may by regulation prescribe a

percentage lower than **20  50 percent for subparagraph

(E) and (G) and lower than 10 percent for subparagraph

(H)  or  (I).  The  Secretary  my  prescribe  regulations  for determining the ownership (direct or indirect) of profits and beneficial interests, and the manner in which indirect stockholdings are taken into account. Any person who is a party in interest with respect to a plan to which a trust described in section 501(c)(22) of Title 26 is permitted to make payments under section 1403 of this title shall be treated as a party in interest with respect to such trust.

The Secretary's interpretation would in effect add an additional category, i.e., an alter ego of a party in interest, to this seemingly comprehensive list. Moreover, this ad- ditional category would substantially overlap some of the categories specifically listed in this provision. See, e.g.,

29 U.S.C. §§ 1002(14) (E) and (G). We therefore agree with the district court that the Secretary's interpretation would upset the carefully crafted and detailed legislative scheme reflected in section 3(14). See Compton I, 834 F. Supp. at 746-47, 49. See also Mertens, 113 S. Ct. at 2067; Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S.

**21    134, 146-47, 87 L. Ed. 2d 96, 105 S. Ct. 3085

(1988). Congress could have easily provided in section

3(14) that an "alter ego" of a party in interest is also a party in interest, but Congress did not do so. See Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80, 83 (5th Cir. 1990), cert. denied, 498 U.S. 1108, 112 L. Ed. 2d 1098, 111 S. Ct. 1017 (1991). As the Supreme Court stated in Mertens,

113 S. Ct. at 2071-72, ERISA is "an enormously detailed statute that resolved innumerable disputes between pow- erful competing interests," and courts should not "attempt to adjust the balance . . . Congress has struck."

The Secretary's interpretation appears to rest on the false  premise  that  there  is  a   *278    uniform  body  of law that can be employed in all contexts for the purpose of determining whether one entity or person is another's alter ego. n12 In reality,  however,  the term alter ego is simply shorthand for the conclusion that one party should be held liable in a particular context for the transgressions of another closely related party. Consequently, the prin- ciples governing alter ego liability vary depending on the legal context in which the determination takes place. For example,  the  factors  supporting  the  imposition  of  alter ego liability in labor **22    law differ from those em- ployed in the corporate law setting. Compare Stardyne, Inc. v. NLRB, 41 F.3d 141, 151 (3d Cir. 1994) (explain- ing that, for the purposes of the National Labor Relations Act,  factors  relevant  for  determining  whether  two  em- ployers are alter egos include whether they share substan- tially identical management, business purpose, operation, equipment, customers, supervision, and ownership) with Culbreth v. Amosa Ltd., 898 F.2d 13, 14 (3d Cir. 1990)

(explaining that at common law two companies will be

57 F.3d 270, *278; 1995 U.S. App. LEXIS 13619, **22;

19 Employee Benefits Cas. (BNA) 1441

Page 7

considered alter egos of one another only "where the con- trolling corporation wholly ignored the separate status of the controlled corporation and controlled its affairs so  that its separate existence was a mere sham");  see also Berkey v. Third Ave. Ry., 244 N.Y. 84, 155 N.E. 58, 61

(1927) ("Dominion may be so complete, interference so obtrusive,  that by the general rule of agency the parent will  be  a  principal  and  the  subsidiary  an  agent.  Where control is less than this,  we are remitted to the tests of honesty and justice."). Thus, if alter ego analysis were to be required under sections 3(14) and 406(a)(1) of ERISA, the Secretary and the courts would have to decide,   **23  presumably based on their understanding of the "purpose" or "policy" underlying the relevant provisions of ERISA, under  what  circumstances  a  party  related  to  a  party  in interest should be subjected to the same prohibitions as a party in interest. Congress itself, however, made this very determination when it adopted the definition of a party in interest that is set out in section 3(14).

n12  Indeed,  the  Secretary  cannot  even  claim that his interpretation is consistent with the com- mon law of trusts upon which Congress engrafted ERISA.  See  Firestone  Tire  and  Rubber  Co.  v. Bruch, 489 U.S. 101, 110, 103 L. Ed. 2d 80, 109

S. Ct. 948 (1989). The Secretary can point to no body of trust law evidencing his proposed alter ego principles. This is not surprising given that the alter ego doctrine originally developed in the context of corporate law. The common law of trusts did not include per se prohibitions against a trustee dealing with a related party, and certainly did not include per se prohibitions against a trustee dealing with an alter ego of a related party. Instead, a trustee's sale of trust property to a related party could only be set aside if it were shown that the trustee was improperly influenced by the relationship and re- ceived an unfair price. See Keystone Consolidated Indus., 113 S. Ct. at 2012; Restatement (Second) of Trust § 170 cmt. e (1957); 2A Austin W. Scott

& William F. Fratcher, Law of Trusts § 170.6 (4th ed. 1987).

**24

For these reasons, we cannot accept the Secretary's al- ter ego argument, and we conclude that section 406(a)(1)'s prohibitions against certain indirect transactions between a plan and a party in interest do not automatically prohibit transactions between a plan and an alter ego of a party in interest.  We  emphasize  the  narrowness  of  our  holding. While we reject the Secretary's alter ego argument, we do not reach any other possible interpretations of the concept of an "indirect" transaction with a party in interest.

C. Use of Plan Assets for the Benefit of a Party in Interest.  In  addition  to  prohibiting  the  transfer  of  plan assets  to  a  party  in  interest,  section  406(a)(1)(D)  also provides as follows:

A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transac- tion constitutes . . . a direct or indirect . . . use . . . for the benefit of a party in interest, of any assets of the plan.

29 U.S.C. § 1106(a)(1)(D) (emphasis added). As we read this language, it provides that a fiduciary breach occurs when the following five elements are satisfied: (1) the per- son or entity is " a  fiduciary with **25   respect to the  plan"; (2) the fiduciary "causes" the plan to engage in the transaction at issue; (3) the transaction "uses" plan assets;

(4) the transaction's use of the assets is "for the benefit of" a party in interest; and (5) the fiduciary "knows or should know" that elements three and four are satisfied.

*279   In this case, it is clear that summary judgment in favor of the defendants cannot be sustained based on elements one, two, or three. With respect to the first ele- ment, it is undisputed that defendants Compton, McHugh, Nielsen,  Hammerschmidt,  and  Kay  were  "fiduciaries," and  we  think  it  is  clear,  as  the  district  court  held,  that Fidelity  was  a  "fiduciary"  as  well.  n13  As  for  element two, if the summary judgment record does not establish that the defendants "caused" the Plan to engage in the chal- lenged transaction, the record surely does not require the contrary conclusion. And with respect to element three, there can be no reasonable dispute that the transactions involved the "use" of Plan assets. The critical elements for present purposes are therefore elements four and five.

n13 Section 3(21)(A) of ERISA, 29 U.S.C. §

1002(21)(A), provides that, subject to an exception that is not applicable here:

A  person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation,  direct or indirect,  with  respect  to  any  moneys  or  property of such plan, or has authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. . . .

Fidelity claims that it was not a fiduciary be- cause  it  had  no  discretionary  authority  over  the

57 F.3d 270, *279; 1995 U.S. App. LEXIS 13619, **25;

19 Employee Benefits Cas. (BNA) 1441

Page 8

Plan's assets and was only a "depository" for the mortgage note. However, Fidelity clearly had, at the least, "authority respecting the management" of the Plan's assets. The 1980 Amendment to the Plan's trust agreement granted Fidelity "exclusive author- ity and discretion in the investment of the Fund .

.  .  ."  JA  at  342.  The  minutes  from  the  meetings of the Plan's Board of Trustees reveal that Fidelity had control over the Plan's investments. Id. at 55,

63, 83, 92-93. Likewise, Fidelity's involvement in the sale of the note to EMA clearly indicates that it

"rendered investment advice" to the Plan. Fidelity concedes that its chief investment officer initially advised the Plan trustees that the sale of this asset would be "imprudent." Id. at 83. Thus,  we agree with  the  district  court  and  conclude  that  Fidelity was a fiduciary with respect to the Plan.  Compton I,  834  F.  Supp.  at  751  n.7.  See  Lowen  v.  Tower Asset Management, Inc., 829 F.2d 1209, 1219 (2d Cir. 1987) (finding discretionary investment man- ager to be an ERISA fiduciary).

**26

Element four,  as previously noted,  requires that the challenged  transaction  must  constitute  the  use  of  plan assets  "for  the  benefit  of"  a  party  in  interest.  The  de- fendants  contend  that  this  element  requires  proof  of  a subjective  intent  to  benefit  a  party  in  interest,  whereas the Secretary maintains that such subjective intent is not necessary. Rather, the Secretary argues, all that need be proven is that the fiduciary should have known that the transaction would result in a benefit to a party in interest that was more than "minimal, incidental, or fortuitous." Dept. of Labor 9/13/94 Letter-Brief at 12.

We  conclude  that  element  four  requires  proof  of  a subjective  intent  to  benefit  a  party  in  interest.  This  in- terpretation is strongly supported, if not required, by the statutory  phrase  "for  the  benefit."  In  ordinary  usage,  if something is done "for the benefit of" x, it is done for the purpose of benefitting x. If something is not done for the purpose of benefitting x but has that unintended effect, it cannot be said that it was done "for the benefit of" x. (It would be self-contradictory if someone said:  "I did that for the benefit of x, but I did not want to benefit him.").

In addition,   **27    if element four did not require a subjective intent to benefit a party in interest, section

406(a)(1)(D) would produce unreasonable consequences that we feel confident Congress could not have wanted. See Commissioner v. Brown, 380 U.S. 563, 571, 14 L. Ed. 2d 75, 85 S. Ct. 1162 (1965). If "for the benefit of" is read to mean "having the effect of benefitting," section

406(a)(1)(D) would appear to prohibit a fiduciary from

causing a plan to engage in any transaction that he or she should know would result in any form or degree of benefit for any party in interest, even if the transaction would be highly advantageous for the plan and the benefit for the party in interest would be unintended, indirect, and slight. Apparently  recognizing  this  problem,  the  Secretary argues  that  the  benefit  to  the  party  in  interest  must  be more  than  "minimal,  incidental,  or  fortuitous."  Section

406(a)(1), however, contains no language that even hints at such a requirement. Moreover, this requirement lacks conceptual clarity. The   *280    concept of a more than

"minimal" benefit is nebulous, and although the Secretary insists that section 406(a)(1) does not require proof of a subjective intent, the terms "incidental" and "fortuitous" both suggest **28    a subjective element. "Incidental" means,  among  other  things,  "occurring  without  inten- tion  or  calculation."  Webster's  Third  New  International Dictionary 1143 (1971). "Fortuitous" means, among other things,  "occurring  without  deliberate  intention."  Id.  at

895.

We thus find strong support for a subjective intent re- quirement in the language of section 406(a)(1)(D), and finding  no  contrary  evidence  in  the  legislative  history, n14  we  conclude  that  element  four  requires  proof  of  a subjective intent to benefit a party in interest.

n14 On the contrary, we also note that the leg- islative history includes two examples of transac- tions  that  are  prohibited  by  section  406(a)(1)(D) and both involve transactions whose purpose was to benefit a party in interest. H.R. Conf. Rep. No.

93-1280, 93rd Cong., 2d Sess. (1974), reprinted in

1974 U.S.C.C.A.N. 5075, 5089.

Several Department of Labor opinion letters on which the Secretary has relied also suggest that the

"for benefit of" language requires proof of subjec- tive intent. According to the Secretary, "the com- mon  theme  in  those  opinions  is  that  a  complex transaction will violate Section 406(a)(1)(D) if it is . . . part of an agreement, arrangement or under- standing in which a fiduciary caused plan assets to be used in a manner designed to benefit a party in interest . . . ." Dept. of Labor 9/13/94 Letter-Brief at  14  (emphasis  added)  (citing  ERISA  Advisory Opinion No. 93-33A, 1993 ERISA LEXIS 33, at

*  5  (Dec.  16,  1993);  No.  89-18A,  1989  ERISA LEXIS 17, at * 6 (Aug. 13,  1989);  No. 85-33A,

1985 ERISA LEXIS 11, at * 9 (Oct. 1, 1985)).

**29

Precisely who must be shown to have this intent is not entirely clear from the statutory language. Since the

57 F.3d 270, *280; 1995 U.S. App. LEXIS 13619, **29;

19 Employee Benefits Cas. (BNA) 1441

Page 9

statutory language suggests that the transaction must be

"for the benefit" of a party in interest, it appears that the subjective intent to benefit a party in interest must be har- bored by one or more of those involved in the transaction. In this appeal,  however,  we will not attempt to go fur- ther  and  specify  precisely  which  persons  involved  in  a transaction must be shown to have this intent.

Element five requires proof that the fiduciary in ques- tion either knew or reasonably should have known that the transaction constituted the use of plan assets "for the benefit" of a party in interest. Thus, element five does not require proof of the fiduciary's subjective intent.

Applying this understanding of elements four and five to the record in the case before us, we hold that summary judgment was not properly granted in favor of the defen- dants on the basis that the two transactions did not violate Section  406(a)(1)(D)  of  ERISA.  Based  on  the  record, a reasonable factfinder could conclude that all of those involved in the two challenged transactions subjectively intended to benefit **30    Local 98. There is some di- rect evidence of such an intent:  trustee Compton stated that the Plan trustees refused to sue EMA to recover the balance of the loan because "if they  filed suit against

EMA   they  would be really filing suit against members of  the  union  .  .  .  ."  JA  at  467.  Furthermore,  there  was strong circumstantial evidence of an intent to benefit the Union. A reasonable factfinder could easily find that the two transactions had the effect of benefitting the Union, and a reasonable factfinder could infer that the trustees intended to bring about this effect.

Although the district court, in denying the Secretary's motion for reconsideration, suggested that the Union did not benefit from the loan to EMA because the Union paid rent to EMA, we believe that a factfinder could reason- ably come to a contrary conclusion. n15   *281    There was no formal lease agreement between EMA and Local

98, and EMA admitted that it was not trying to make any money from the lease.  Compton II, 834 F. Supp. at 749 n.6. Furthermore, Local 98 paid rent only when EMA ex- hausted its cash on hand. Id. Thus, the "rent" that Local

98 was charged was only the amount necessary to cover EMA's  financial   **31    obligations,  and  the  record  is clear that Local 98 historically treated EMA's obligations as its own. Local 98 consistently forwarded EMA money to cover salary and operating expenses during this time period and forgave repayment of these obligations. Id. Nor was EMA charged interest on these loans. Id. Indeed, as noted, Local 98 provided EMA with the funds necessary to purchase the note held by the Plan. Id. Thus, a reason- able  factfinder  could  conclude  that  Local  98  benefitted from the continuation of EMA's long-term below mar- ket mortgage loan because that loan reduced EMA's cash

outflow, an outflow for which the union took responsibil- ity. Likewise, a reasonable factfinder could conclude that Local 98 was functionally responsible for EMA's debt and that, Local 98 therefore benefitted from the repurchase of the note for less than its accounting value.

n15 The district court's apparent conclusion that Local 98 did not benefit from these transactions is puzzling given that it found the following facts to be undisputed:

As of June 30, 1984, EMA owed Local

98 $230, 290.00. This debt consisted primarily of salary expenses that the Union  paid to one or more of its em- ployees  who  performed  maintenance work  at  the  1719-29  Spring  Garden Street building. Of this amount, Local

98 charged EMA $17,293.00 in main- tenance  salary  expenses  during  the year  ending  June  30,  1984.  The  ar- rangement   between   Local   98   and EMA (which began prior to 1984) pro- vided that EMA would not pay Local

98  the  debt,  which  would  be  added to the intercompany payable account. Local 98 never demanded payment of the  debt  because  it  viewed  transac- tions  between  itself  and  EMA  as  re- lated  party  transactions.  The  reason the amount of intercompany payables to EMA and intercompany receivables to  Local  98  carried  on  the  financial books "grows each year is because the amount  that's  charged  to  salary  ex- penses,  just was never paid by EMA to Local 98, so it's a liability account that  just  keeps  increasing  each  year because  no  payments  are  ever  made, or if they are made,  they're very mi- nor."  Salary  and  other  expenses  by Local  98  for  EMA  continued  to  ac- cumulate  over  the  years.  For  exam- ple, "as of June 30, 1987, EMA owed Local 98 $316,328.00 consisting pri- marily  of  salary  and  other  expenses paid by Local 98 for EMA" that had accumulated  over  the  years.  During the  year  ending  December  31,  1988, EMA  owed  Local  98  $559,918.00. According  to  EMA's  accountant,  the debt was forgiven by Local 98. Local

98 and EMA had an established prac- tice  of  not  signing  loan  documents

57 F.3d 270, *281; 1995 U.S. App. LEXIS 13619, **31;

19 Employee Benefits Cas. (BNA) 1441

Page 10

**32

to  record  their  financial  transactions; Local 98's policy is to not charge EMA interests on advances and transfers.

Compton I, 834 F. Supp. at 749 n.6.

A civil action may be brought--

(1) by a participant or beneficiary--

(A) for the relief provided in subsection

(c) of this section, or

(B) to recover benefits due to him under

Thus, we hold that the district court should not have granted  summary  judgment  in  favor  of  the  defendants on  the  basis  that  the  two  challenged  transactions  were not prohibited transactions within the meaning of section

406(a)(1)(D). On remand, the district court will need to resolve the two disputed elements of the Secretary's sec- tion 406(a)(1)(D) claim:  whether a party to the transac- tions had the subjective intent to benefit a party in interest and whether any of the trustees knew of or should have known that the transactions were intended for the benefit of a party in interest.

III. ERISA Section 502(a)(5) Claims

In  this  section,  we  consider  the  Secretary's  claims against the nonfiduciary defendants (EMA and Local 98) pursuant  to  section  502(a)(5)  of  ERISA,  29  U.S.C.  §

1132(a)(5).  The  Secretary  advances  two  separate  theo- ries:  first,  that  section  502(a)(5)  authorizes  him  to  sue nonfiduciaries who knowingly participate in breaches of fiduciary duty by fiduciaries n16 and, second, that section

502(a)(5) authorizes him to sue nonfiduciaries who par- ticipate in transactions prohibited by section 406(a)(1). We reject the first theory but accept the latter.

n16 Several ERISA provisions impose a duty on plan fiduciaries. As previously discussed,  section

406(a)(1), 29 U.S.C. § 1106(a)(1), prohibits fidu- ciaries from causing the plan to engage in certain prohibited  transactions.  Likewise,  section  406(b) of  ERISA,  29  U.S.C.  §  1106(b),  prohibits  self- dealing by fiduciaries. Section 404(a)(1), 29 U.S.C.

§ 1104(a)(1),  imposes a duty of loyalty and pru- dence  on  fiduciaries.  In  addition,  section  409  of ERISA, 29 U.S.C. § 1109, imposes liability for any person who breaches a fiduciary duty. As discussed below, the Secretary alleges that EMA and Local

98 were knowing participants in the Plan trustees' breach of these duties and therefore that EMA and Local  98  are  liable  under  section  502(a)(5).  Of course, in order to hold EMA and Local 98 liable under this theory, the Secretary would first need to prove a breach of duty by a fiduciary.

**33

A. Section 502(a) of ERISA provides as follows:

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;

*282    (2)  by  the  Secretary,  or  by  a participant,  beneficiary  or fiduciary  for ap- propriate  relief  under  section  1109  of  this title;

(3) by a participant, beneficiary, or fidu- ciary (A) to enjoin any act or practice which violates  any  provisions  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;

(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 sub- section (b) of this section, by the Secretary

(A) to enjoin any act or practice which vi- olates any provisions of this subchapter,  or

(B) to obtain other appropriate equitable re- lief (i) to redress **34   such violation or (ii) to enforce any provision of this subchapter; or

(6) by the Secretary to collect any civil penalty under subsection (c)(2) or (i) or (l) of this section.

Although  the  Supreme  Court  has  not  directly  dis- cussed the scope of section 502(a)(5),  its discussion of section 502(a)(3) in Mertens provides considerable guid- ance due to the close relationship between those two pro- visions. In Mertens, former employees of the Kaiser Steel Corporation ("Kaiser") who participated in Kaiser's pen- sion plan sued the plan's actuary in addition to the plan's trustees.   113 S. Ct. at 2065. Claiming that the services provided by the actuary to the pension plan had been defi- cient and had caused the plan to be inadequately funded, the pensioners sought to hold the actuary liable for the

"all the losses that their plan sustained as a result of the alleged breach of fiduciary duties" by the plan's trustees. Id. at 2068. The pensioners conceded that the actuary was not a fiduciary within the meaning of ERISA.  Id. at 2067.

57 F.3d 270, *282; 1995 U.S. App. LEXIS 13619, **34;

19 Employee Benefits Cas. (BNA) 1441

Page 11

However, relying on section 502(a)(3) of ERISA, which allows plan participants to "obtain other appropriate eq- uitable relief to redress" violations **35   of ERISA, the pensioners nevertheless maintained that the actuary could be held liable for his "knowing participation in the breach of fiduciary duty by the Kaiser plan's fiduciaries." Id. Although the only issue squarely before the Supreme Court in Mertens was whether the remedy sought by the pensioners  constituted  "appropriate  equitable  relief"  as opposed to money damages, the Court's opinion discussed the antecedent question of whether section 502(a)(3) cre- ates a cause of action against nonfiduciaries for knowing participation in a fiduciary's breach of fiduciary duty. Id.

at 2067. The Court stated:

No provision explicitly requires nonfiducia- ries  to avoid participation (knowing or un- knowing) in a fiduciary's breach of fiduciary duty. It is unlikely,  moreover,  that this was an  oversight,  since  ERISA  does  explicitly impose "knowing participation" liability on cofiduciaries. See section 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 and third persons was well estab- lished  under  the  common  law  of  trusts.  In Russell we emphasized our **36    unwill- ingness 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  in- tend to authorize other remedies that it sim- ply forgot to incorporate expressly."

Id.  (quoting  Russell,   473  U.S.  at  146-47)  (citations omitted)  (emphasis  in  original).  Thus,  the  Court  ex- pressed considerable doubt that section 502(a)(3) autho- rizes suits against nonfiduciaries who participate in fidu- ciary breaches.

Relying  on  this  discussion,  EMA  and  Local  98  ar- gue  that  the  Secretary  cannot  proceed  against  them  on the  theory  that  they  knowingly  participated  in  a  fidu- ciary's  breach.  On  the  other  hand,  the  Secretary  urges that  we  disregard  Mertens'  discussion  of  this  issue  as

"mere dicta." The Secretary contends that the language of section 502(a)(5) does not require that the ERISA vio- lation be committed by the person against whom relief is sought. Rather, the Secretary argues that he may maintain a cause of action under section 502(a)(5) so long as the relief sought   *283   is "appropriate" for the purpose of

"redressing" a violation. Thus, the Secretary asserts that he does not have to show **37   that EMA and Local 98 actually violated any ERISA provision, but only that they were "knowing participants" in a fiduciary's violation and that  the  relief  sought  is  appropriate  for  redressing  that violation. The Secretary further contends that any ambi- guity should be resolved in his favor since pre-Mertens case law generally recognized ERISA claims against non- fiduciaries who participated in a fiduciary's breach. n17

In the event that we do not interpret the language of sec- tion 502(a)(5) as creating such a cause of action against nonfiduciaries, the Secretary urges us to recognize such a  cause  of  action  by  utilizing  our  authority  to  develop federal  common  law.  The  Secretary  points  out  that  the Supreme Court has authorized the federal courts to de- velop federal common law under ERISA by drawing on the traditional law of trusts, see Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 110, 103 L. Ed. 2d 80, 109

S. Ct. 948 (1984), and the Secretary notes that the com- mon law of trusts imposes liability on nonfiduciaries who knowingly participate in a fiduciary's breach of duty, see

3 Austin W. Scott & William F. Fratcher, Law of Trusts §

224.1, at 404 (4th ed. 1988).

n17          See          Diduck    v.             Kaszycki                 &             Sons

Contractors,  Inc.,  974  F.2d  270,  279-81  (2d  Cir.

1992);  Whitfield  v.  Lindemann,  853  F.2d  1298,

1302-03  (5th  Cir.  1988),  cert.  denied,  490  U.S.

1089 (1989); Brock v. Hendershott, 840 F.2d 339,

342 (6th Cir. 1982); Thornton v. Evans, 692 F.2d

1064, 1078 (7th Cir. 1982); Fink v. National Sav. and Trust Co.,  249 U.S. App. D.C. 33,  772 F.2d

951,  958 (D.C.Cir. 1985) (dicta). Cf.   Mertens v. Hewitt Assocs., 948 F.2d 607, 611 (9th Cir. 1991), aff'd on other grounds, 124 L. Ed. 2d 161, 113 S. Ct. 2063 (1993) (rejecting "knowing participation" liability);  Useden v. Acker,  947 F.2d 1563,  1581

(11th  Cir.),  cert.  denied,  113  S.  Ct.  2927  (1993)

(same).

**38

The  Secretary's  argument  has  been  rejected  by  the courts of appeals that have addressed it after Mertens. In Reich v. Rowe, 20 F.3d 25 (1st Cir. 1994), the Secretary sued several corporate defendants involved in the failed OMNI  Medical  Health  and  Welfare  Trust.      Id.  at  26. OMNI provided group medical, dental, and life insurance to business employers in Massachusetts. Id. The Secretary contended that OMNI's fiduciaries breached their duties and that OMNI's financial consultants "knowingly partic- ipated"  in  this  breach.   Id.  at  26-27.  The  district  court dismissed the Secretary's claim against the financial con- sultants under Fed. R. Civ. P. 12(b)(6), id. at 28, and the

57 F.3d 270, *283; 1995 U.S. App. LEXIS 13619, **38;

19 Employee Benefits Cas. (BNA) 1441

Page 12

First Circuit affirmed, id. at 35.

Despite the Secretary's urgings, the Rowe court found the Supreme Court's Mertens dicta to be persuasive.  Id. at 30-31. Interpreting section 502(a)(5) "to authorize ac- tions only against those who commit violations of ERISA or who are engaged in an 'act or practice' proscribed by the statute," id. at 29, the Rowe court concluded that this provision does not apply to a nonfiduciary's participation in a fiduciary breach because such participation **39

"is not an 'act or practice' which violates ERISA," id. at

30.  The  court  further  rejected  the  Secretary's  argument that it should apply the court's broad equitable power and the court's federal common law-making authority under ERISA  to  read  section  502(a)(5)  expansively  to  reach such  conduct.  The  court  noted  that  "Congress  had  en- acted  a  comprehensive  legislative  scheme  including  an integrated system of procedures for enforcement," id. at

31-32 (quoting Russell, 473 U.S. at 147), and that it could have easily provided for a claim based on knowing par- ticipation in a fiduciary breach, id. at 31. The court wrote: 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.

Id.  at  31.  Thus,  the  court  concluded  that  the  Secretary could not sue "a professional service provider that  as- sisted in a fiduciary breach but received no ill-gotten plan assets . . . ." Id. at 35.

Similarly,  in Reich v. Continental Casualty Co.,  33

F.3d 754, 757   **40   (7th Cir. 1994), cert. denied, 115 S. Ct. 1104, 130   *284   L. Ed. 2d 1071 (1995), the Seventh Circuit rejected the Secretary's argument that a nonfidu- ciary may be held liable for knowingly participating in a fiduciary breach. The court followed the Mertens dicta, stating that when the Supreme Court's view of an issue is embodied in

a recent dictum that considers all the relevant considerations and adumbrates an unmistak- able conclusion, it would be reckless to think the Court likely to adopt a contrary view in the near future. In such a case the dictum pro- vides the best, though not an infallible, guide to what the law is, and it will ordinarily be the duty of a lower court to be guided by it.

Id. n18

n18  Buckley  Dement,  Inc.  v.  Travelers  Plan Administrators of Illinois,  Inc.,  39 F.3d 784 (7th Cir. 1994) is also instructive. There, the sponsor of a health care plan who was also its administrator and  fiduciary  sued  a  third-party  claims  adminis- trator. Id. at 785-86. The sponsor argued that the administrator caused the plan to incur huge losses by failing to process a participant's medical claims before the plan's excess health insurance coverage policy  lapsed.  Id.  Because  the  administrator  was not a fiduciary, the sponsor asked the court to infer a federal common-law right to relief under ERISA. Id.  at  789.  Relying  on  Mertens'  dicta,  the  court declined  to  do  so,  holding  that  it  was  "without authority  to  entertain  a  claim  for  relief  against  a nonfiduciary based on the  fashioning of a federal common-law remedy." Id. at 790. Accord, Colleton Regional Hosp. v. MPS Medical Review Sys., Inc.,

866 F. Supp. 896 (D.S.C. 1994).

**41

In light of the Supreme Court's discussion in Mertens and   subsequent   decisions   of   the   First   and   Seventh Circuits, we reject the Secretary's argument that he may sue  a  nonfiduciary  under  section  502(a)(5)  for  know- ingly  participating  in  a  fiduciary  breach.  Contrary  to the  Secretary's  urging,  we  are  not  prepared  to  disre- gard  the  Supreme  Court's  discussion  of  this  issue  in Mertens. Moreover, we see little significance in the fact that the Supreme Court in Mertens was discussing sec- tion 502(a)(3) as opposed section 502(a)(5). As the Court noted in Mertens, the language shared by both provisions

"should be deemed to have the same meaning," 113 S. Ct. at 2070, and we therefore believe that the analysis of the one provision should apply equally to the other with respect to the question at issue. We therefore hold that sec- tion 502(a)(5) does not authorize suits by the Secretary against nonfiduciaries charged solely with participating in a fiduciary breach. n19

n19 The Secretary makes the additional argu- ment  that  section  502(l)  of  ERISA,  29  U.S.C.  §

1132(l), indicates that Congress intended for sec- tion  502(a)(5)  to  provide  a  remedy  against  non- fiduciaries  who  participate  in  a  fiduciary  breach. Section 502(l) provides in relevant part:

(1) in the case of--

(A) any breach of fiduciary respon- sibility  under  (or  other  violation  of) part 4 by a fiduciary, or

(B)  any  knowing  participation  in

57 F.3d 270, *284; 1995 U.S. App. LEXIS 13619, **41;

19 Employee Benefits Cas. (BNA) 1441

Page 13

such a breach or violation by any other persons,

the  Secretary  shall  assess  a  civil  penalty  against such a fiduciary or other person in an amount equal to 20 percent of the applicable recovery amount . .

. .

The    Secretary    contends    that    unless    section

502(a)(5) provides a remedy for nonfiduciary vi- olations of a fiduciary breach, the term "other per- sons" in section 502(l) would be rendered a nullity. We disagree.

A similar contention was advanced in Mertens. There,  it  was  argued  that  section  502(l)  demon- strated Congress intended to authorize the recovery

**42

gotten plan assets in a manner not cov- ered by the prohibited transaction sec- tion. We conclude, therefore, that sec- tion  502(l)   makes  little  sense  as  in- dependently authorizing equitable re- lief  against  nonfiduciaries  .  .  .  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.

Id. at 34-35 (footnote omitted).

of money damages for nonfiduciary participation in a fiduciary breach. The Supreme Court, however, rejected this argument, explaining:

The  "equitable  relief"  awardable  un- der section 502(a)(5) includes restitu- tion of ill-gotten plan assets or prof- its, providing an "applicable recovery amount' to use to calculate the penalty,

. . . and even assuming nonfiduciaries are not liable at all for knowing partic- ipation in a fiduciary's breach of duty, see supra, at 2067-2068, cofiduciaries expressly are, see section 405, so there are  some  "other  persons"  than  fidu- ciaries-in--breach liable under section

502(l)(1)(B).

113 S. Ct. at 2071.

We also agree with the discussion of this argu- ment in Rowe. The Rowe court noted that Secretary was relying on a provision that provides civil penal- ties in order to infer a cause of action from a provi- sion that only provides equitable relief. 20 F.3d at

34. Thus, the court explained:

It is difficult to imagine any case where knowing  participation  in  a  fiduciary breach  by  a  nonfiduciary  would  oc- casion  the  type  of  remedy  (restitu- tion  awards)  that  would trigger   sec- tion  502(l)(1)(B)   without  the  non- fiduciary having engaged in a prohib- ited transaction under section 406  or otherwise  having  obtained  some  ill-

*285   B. We now turn to the Secretary's argument that section 502(a)(5) authorizes him to sue a nonfidu- ciary who participates in a transaction prohibited by sec- tion 406(a)(1). In response to this argument,  EMA and Local 98 seem to suggest that the Secretary cannot obtain relief from them even if the transactions at issue are found to be prohibited under section 406(a)(1) of ERISA. n20

Section 406(a)(1) provides that " a  fiduciary with respect to a plan shall not cause the plan to engage in a prohib- ited  transaction . . . ." 29 U.S.C. § 1106(a)(1) (emphasis added). Since this language appears on its face to apply only to fiduciaries and not to other parties who participate in prohibited transactions, EMA and Local 98 maintain that the Secretary is attempting to make them liable for a fiduciary's breach of duty and that such a theory was rejected in Mertens.

n20 This argument is not available to the Plan trustees as they are all fiduciaries within the mean- ing of ERISA. As noted, ERISA imposes a number of substantive duties on plan fiduciaries, see supra note 16, and sections 502(a)(3) and (5) of ERISA,

29 U.S.C. §§ 1132(a)(3) and (5), clearly authorize the Secretary to obtain relief against fiduciaries who have breached their duties. Thus, the Secretary can sue any fiduciary who breached its duty because of its participation in a prohibited transaction (or who breached any other duty).

**43

While this argument is not without force, we are ul- timately persuaded that it is based on an unduly narrow interpretation of sections 406(a)(1) and 502 (a)(5). First, we note that Mertens itself seemed to imply that section

406(a) imposes duties on nonfiduciaries who participate in prohibited transactions. After observing that "ERISA contains various provisions that can be read as imposing

57 F.3d 270, *285; 1995 U.S. App. LEXIS 13619, **43;

19 Employee Benefits Cas. (BNA) 1441

Page 14

obligations upon nonfiduciaries," 113 S. Ct. at 2067, the Court  cited  section  406(a),  29  U.S.C.  §  1106(a),  as  an example  and  stated  that  this  provision  prohibits  a  non- fiduciary party in interest from "offering his services" to a plan or "engaging in certain other transactions with the plan," id. at 2067 n.4. **44

Second, EMA's and Local 98's position is inconsistent with the analysis of two other courts of appeals. In Rowe, the First Circuit, while refusing to accept the argument that  the  Secretary  could  sue  a  nonfiduciary  under  sec- tion 502(a)(5) for knowingly participating in a frivolous breach, suggested that the Secretary could maintain a suit under that provision against a party in interest who partic- ipated in a transaction prohibited under section 406(a)(1). The court observed:

Congress  proscribed  several  "acts  or  prac- tices" in ERISA's substantive provisions that involve  nonfiduciaries  .  .  .  .  See  Mertens,

____ U.S. at ____ & n.4, 113 S. Ct. at 2067

& n.4. For example, 29 U.S.C. § 1106(a)(1) prohibits certain transactions between "par- ties in interest," see supra, note 2, and ERISA plans . . . .

20 F.3d at 31 (footnote omitted). The court then added:

The fact that section 406  imposes the duty to  refrain  from  prohibited  transactions  on fiduciaries  and  not  on  the  parties  in  inter- est  is  irrelevant  for  our  purposes  because

section 502(a)(5)  reaches **45    "acts or practices" that violate ERISA and prohibited transactions violate section 406 . Although fiduciary breaches also violate ERISA, non- fiduciaries cannot,  by definition,  engage in the act or practice breaching a fiduciary duty. Nonfiduciaries can, however, engage in the act or practice of transacting with an ERISA plan.

Id. at 31, n.7.

Similarly,  in Nieto v. Ecker,  845 F.2d 868 (9th Cir.

1988), the court held that a suit seeking appropriate equi- table relief could be brought under section 502(a)(3) n21 against a   *286   party in interest who had participated in a transaction prohibited under section 406(a). The court explained:

n21 Nieto involved the construction of section

502(a)(3). However, as explained above, see supra

page 34, we see no reason to distinguish between section 502(a)(3) and 502(a)(5) on this issue.

It  is  true  that  section  406(a)  only  prohibits  certain transactions  by  fiduciaries,  and  does  not  expressly  bar parties  in  interest  from  engaging  in  these  transactions. However,   **46   section 502(a)(3)'s language expressly grants equitable power to redress violations of ERISA; prohibited transactions plainly fall within this category. Courts may find it difficult or impossible to undo such illegal transactions unless they have jurisdiction over all parties who allegedly participated in them. In contrast to section 409(a), section 502(a)(3) is not limited to fiducia- ries, and there is no reason to exempt parties in interest from this remedial provision when the engage in transac- tions prohibited by ERISA .

Id. at 873-74. n22

n22 In light of this analysis, EMA's and Local

98's reliance on Brock v. Citizens Bank of Clovis,

841  F.2d  344  (10th  Cir.),  cert.  denied,  488  U.S.

829,  102  L.  Ed.  2d  59,  109  S.  Ct.  82  (1988),  is misplaced. In Citizens Bank, the Secretary brought a suit against an ERISA trustee for violating sec- tion  406(a)(1).   841  F.2d  at  345-46.  The  ERISA trustee, a bank, had loaned plan funds to individ- uals  who  had  used  the  money  to  pay  off  interim financing that they had received from the bank. Id. The Secretary did not allege that this transaction vi- olated a specific provision of ERISA but argued that ERISA demanded "a strict prohibition of any deal- ing in which doubt may be cast upon the loyalty of the fiduciary." Id. at 347. Because the Secretary was unable to allege the violation of a specific provision of ERISA, the Tenth Circuit upheld the dismissal of his claim. Id. The present case, however, is clearly distinguishable because here the Secretary has al- leged that EMA and Local 98 violated a specific substantive provision of ERISA, section 406(a)(1), that regulates the conduct of nonfiduciaries.

**47

Third, we agree with the Secretary that the parallel tax provisions  support  his  position  that  nonfiduciaries  may be held liable for their participation in prohibited trans- actions.  Section 4975 of the Internal Revenue Code, 26

U.S.C. § 4975, imposes taxes on certain persons who par- ticipate in prohibited transactions. Section 4975(h) pro- vides that the Secretary of Treasury is required to notify the  Secretary  of  Labor  before  sending  a  notice  of  de- ficiency with respect to such taxes in order to give the latter a "reasonable opportunity to obtain a correction of

57 F.3d 270, *286; 1995 U.S. App. LEXIS 13619, **47;

19 Employee Benefits Cas. (BNA) 1441

Page 15

the prohibited transaction . . . ." Since "correction of the prohibited transaction" implies an order of restitution di- rected to the party who participated in the transaction with the plan, this provision buttresses the Secretary's position. For all of these reasons, we hold that the Secretary can bring  an  action  under  section  502(a)(5)  against  a  non- fiduciary who participates in a transaction prohibited by section 406(a). n23

n23 Contrary to EMA's suggestions, this hold- ing is not foreclosed by footnote six of our opinion in Painters of Philadelphia Council No. 32 Welfare Fund v. Price Waterhouse, 879 F.2d 1146 (3d Cir.

1989).  In  that  case,  a  plan  and  its  trustees  sued the plan's former auditor under section 502(a)(3) of ERISA, claiming that the auditor breached its fidu- ciary duties by failing to advise the trustees about improprieties allegedly committed by the plan's ad- ministrator, and that the auditor was therefore liable for the resulting losses under section 409 of ERISA,

29 U.S.C. § 1109, which makes a fiduciary liable for the losses caused by a fiduciary breach.  Id. at

1148-49. We upheld the dismissal of these claims. Id. at 1151. After explaining that the auditor was not a fiduciary under ERISA, we responded in footnote six to the plaintiffs' suggestion that they could sue the auditor under section 502(a)(3) even if it was not a fiduciary. We noted the plaintiff's reliance on Justice Brennan's concurrence in Russell, where it was  suggested  that  the  phrase  "other  appropriate equitable relief" in section 502(a)(3) might be read to incorporate principles of trust law under which a  beneficiary  might  obtain  extracontractual  dam- ages based on a fiduciary breach. See 473 U.S. at

150, 157-58. We then wrote:  "Since we have held that the auditor  is not a fiduciary under ERISA, however, it cannot be held liable on a trust-law the- ory." 879 F.2d at 151 n.6. Although EMA construes this  statement  to  mean  flatly  that  "a  .  .  .  section

502(a)(3)  action  for  equitable  relief  against  non- fiduciaries cannot be maintained," EMA Br. at 21, we interpret this statement to mean only that prin- ciples of trust law permitting the recovery of extra- contractual damages from a fiduciary who breaches his or her duties provide no basis for recovery from a nonfiduciary.

**48

Finally, we disagree with EMA's contention that even if  section  406(a)(1)  regulates   *287    the  behavior  of some nonfiduciaries, it does not reach nonfiduciaries that are not parties in interest. As we previously explained, see  supra  pages  19  to  27,  section  406(a)(1)(D)  applies

to  transactions  between  a  plan  and  a  third  party  when the transaction is "for the benefit of a party in interest." Section 406(a)(1)(D) therefore extends the scope of liabil- ity under ERISA beyond fiduciaries and parties in inter- est. Because section 502(a)(5) authorizes the Secretary to obtain relief against any party that participates in a trans- action that violates section 406(a)(1), EMA can be held liable for its role in the allegedly prohibited transaction. We will, however, uphold the district court's award of summary judgment in favor of EMA and Local 98 as to the first, but not the second, transaction. The liability of EMA and Local 98 as to the first transaction is predicated on the Plan trustees' holding of the note past the expira- tion of the grandfather period. Without deciding whether there is a theory under which parties such as EMA and Local 98 could be held liable based on a transaction of this nature, we affirm the decision of the district court with respect to this transaction because here the Secretary has not presented such a theory to us in a timely and adequate

manner.   **49

In sum, we hold that a nonfiduciary that is a party to a transaction prohibited by section 406(a)(1) engages in an "act or practice" that violates ERISA. We furthermore hold that the Secretary, pursuant to section 502(a)(5), may sue to enjoin this act or practice or "to obtain other ap- propriate equitable relief to redress such a violation." On remand,  therefore,  the Secretary may maintain his sec- tion 406(a)(1)(D) claims against EMA and Local 98 as to the second transaction. n24 We uphold the district court's award of summary judgment as to the first transaction be- cause neither EMA nor Local 98 controlled the decision to hold the note past the grandfather period and therefore they did not engage in an action or practice that violated

**50   ERISA.

n24   The   defendants   also   claim   that   the Secretary  is  not  entitled  to  the  relief  sought  for the alleged violations of section 406(a)(1)(D) be- cause it is not "appropriate equitable relief." This issue was not presented to or decided by the district court, and we decline to address it now.

IV. Section 406(b)(2) Claim

We  next  address  whether  the  district  court  erred  in ruling  that  the  union  trustees,  Compton,  McHugh  and Nielsen, did not violate section 406(b)(2) of ERISA, 21

U.S.C. § 1106(b)(2). n25 The Secretary argues that these trustees  violated  section  406(b)(2)  because,  in  connec- tion with the sale of the note to EMA, they "participated actively in the decisionmaking process regarding the dis- position of the mortgage loan on behalf of both the lender, the plan, and the borrowers, EMA and Local 98." Dept.

57 F.3d 270, *287; 1995 U.S. App. LEXIS 13619, **50;

19 Employee Benefits Cas. (BNA) 1441

Page 16

of Labor Br. at 40. We hold that the district court erred in granting summary judgment against the Secretary with respect to this claim.

n25  Before  the  district  court,  the  Secretary also  argued  that  the  union  trustees  violated  sec- tion 406(b)(1). The Secretary has abandoned this claim.

**51

Section 406(b) prohibits a plan fiduciary from engag- ing  in  various  forms  of  self-dealing.  Its  purpose  is  to

"prevent  a fiduciary from being put in a position where he has dual loyalties and, therefore, he cannot act exclu- sively for the benefit of a plan's participants and benefi- ciaries." H.R. Conf. Rep. No. 93-1280, 93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 5038, 5089.

Section 406(b)(2) provides in pertinent part:

A fiduciary with respect to a plan shall not--

. . .

(2) in his individual or any other capac- ity act in any transaction involving the plan on  behalf  of  a  party  (or  represent  a  party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries . . . .

This  provision  is  a  blanket  prohibition  against  a  fidu- ciary's "acting on behalf of" or   *288   "representing" a party with interests "adverse to the interests of the plan" in relation to a transaction with the plan. Thus, this provi- sion, like the prohibited transaction provisions of section

406(a)(1), applies regardless of whether the transaction is

"fair" to the plan.

In Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979), we addressed **52   the scope of section 406(b)(2). In that case, an identical group of trustees managed a union pen- sion fund and a union welfare fund. Id. at 525. Because of decreased employer contributions, the welfare fund began to run short of cash, and the trustees agreed to loan money from the pension fund to the welfare fund. Id. Despite the fact that the transaction involved no allegations of mis- conduct or unfair terms, we held that section 406(b)(2) had been violated. We first wrote:

When  identical  trustees  of  two  employee benefit plans whose participants and benefi- ciaries are not identical effect a loan between the plans without a § 408 exemption, a per se violation of ERISA exists.

590  F.2d  at  529.  See  also  Lowen  v.  Tower  Asset

Management, Inc., 829 F.2d 1209, 1213 (2d Cir. 1987)

(noting  that  section  406(b)  needs  to  be  "broadly  con- strued"  and  that  liability  may  be  imposed  "even  where there is 'no taint of scandal, hint of self-dealing, no trace of bad faith'") (citations omitted); Donovan v. Mazzola,

716 F.2d 1226,  1238 (9th Cir. 1983), cert. denied,  464

U.S. 1040, 79 L. Ed. 2d 169, 104 S. Ct. 704 (1984) (noting that per se prohibition of section 406(b) is the consistent with the remedial **53   purpose of ERISA, for "at the heart of the fiduciary relationship is the duty of complete and undivided loyalty to the beneficiaries of the trust")

(citations omitted). We then added:

We have no doubt that the pension fund's loan to the welfare fund falls within the pro- hibition of section 406(b)(2). Fiduciaries act- ing on both sides of a loan transaction can- not negotiate the best terms for either plan. By balancing the interests of each plan, they may  be  able  to  construct  terms  which  are fair and equitable for both plans; if so, they may qualify for a section 408 exemption. But without the formal procedures required un- der section 408, each plan deserves more than a balancing of interests. Each plan must be represented by trustees who are free to exert the  maximum  economic  power  manifested by their fund whenever they are negotiating a commercial transaction. Section 406(b)(2) speaks  of  "the  interests  of  the  plan  or  the interests of its participants or beneficiaries." It  does  not  speak  of  "some"  or  "many"  or

"most" of the participants. If there is a single member who participates in only one of the plans, his plan must be administered without regard for the interests of any other **54  plan.

590 F.2d at 530.

We interpret Cutaiar as follows. Each defendant,  in his capacity as a pension fund trustee,  violated section

406(b)(2) because, in connection with the loan from the pension fund to the welfare fund, he acted on behalf of and represented the welfare fund, a party with interests that were adverse to those of the pension fund as far as that transaction was concerned. Similarly, each defendant, in his  capacity  as  a  welfare  fund  trustee,  violated  section

406(b)(2) because, in connection with that loan, he acted on behalf of and represented the pension fund.

The district court in this case, however, read Cutaiar narrowly and, indeed, essentially limited the decision to

57 F.3d 270, *288; 1995 U.S. App. LEXIS 13619, **54;

19 Employee Benefits Cas. (BNA) 1441

Page 17

its facts. The district court stated:

The Secretary's  reliance  on Cutaiar  is mis- placed.  As  noted  by  the  Tenth  Circuit  in Brock v. Citizens Bank of Clovis, 841 F.2d

344, 347 n.2 (10th Cir. 1988), cert. denied,

488  U.S.  829,  102  L.  Ed.  2d  59,  109  S. Ct.  82  (1988),   Cutaiar  did  not  involve  a transaction with a third party. Moreover, the boards of the Plan and EMA were not identi- cal and Compton, McHugh and Nielsen did not  constitute  a  majority  of  EMA's  Board

. . . . Likewise, the purported **55    "con- flict of interest" violation of section 406(b)(2) is sheer hypotheses unsupported by any ev- idence that these three defendants--who did not control the board of EMA--acted on be- half of EMA, the adverse party to the Plan in the sale of the note.

*289   Compton II, 834 F. Supp. at 757. We do not agree with this interpretation of Cutaiar.

Although the district court was correct in noting that the trustees on both sides of the challenged transaction in Cutaiar were identical, Cutaiar did not hold that section

406(b)(2)  can  be  violated  only  when  there  are  identi- cal decisionmakers on both sides of the transaction. This would be contrary to the plain language of the provision. Section 406(b)(2) creates a duty against self-dealing for each individual fiduciary, not just fiduciaries as a group. Each fiduciary is prohibited from "acting on behalf of an

adverse  party (or representing) an adverse  party . . . ." Thus, a plan fiduciary may act on behalf of or represent an adverse party even if the groups controlling the plan and the adverse party are not identical. See Davidson v. Cook,  567 F. Supp.  225,  237 (E.D.Va. 1983) aff'd 734

F.2d 10 (4th Cir.), cert.   **56            denied, 469 U.S. 899

(1984) (finding a violation of § 406(b)(2) when trustees of pension fund loaned money to corporation with close ties to the union sponsoring the plan despite fact that boards of two groups were not identical).

Likewise, the fact that Cutaiar did not, in the district court's words, involve a transaction with "a third party,"

834 F. Supp. at 757, does not serve to distinguish this case. We understand the district court as opining that Cutaiar is inapposite because it involved a transaction between a fiduciary and a "party in interest," whereas the transaction at issue here was between a fiduciary and an entity other than a party in interest. This was the distinction drawn by the Tenth Circuit in Citizens Bank of Clovis, 841 F.2d at  347  n.2,  on  which  the  district  court  relied.  See  834

F.  Supp.  at  757.  However,  we  believe  that  this  reading

of Cutaiar is erroneous. First, we see no support for this interpretation in the Cutaiar opinion. That opinion never referred to either fund as a "party in interest." Nor did it mention the provision of ERISA that defines a party in interest,  section 3(14),  29 U.S.C. § 1002(14),  or the provision that **57   prohibits transactions with a party in  interest,  section  406(a)(1),  29  U.S.C.  §  1106(a)(1). n26 Second, it seems clear from the language of section

406(b)(2) that its prohibition is not restricted to conduct related to "parties in interest." Rather, section 406(b)(2) speaks more broadly of parties "whose interests are ad- verse  to  the  interests  of  the  plan  or  the  interests  of  its participants or beneficiaries." A party clearly may have interests that are adverse to those of a plan or its partici- pants or beneficiaries in relation to a particular transaction without being a "party in interest" as defined by section

3(14).

n26  Indeed,  as  the  Secretary  notes,  Dept.  of Labor Br. at 43 & n.22, it does not appear that the related plan in Cutaiar fell within the definition of a party in interest in section 3(14) of ERISA, 29

U.S.C. § 1002(14).

Cutaiar is significant for present purposes chiefly be- cause it stands for the proposition that, when a plan loans money to or borrows money from another party, the plan and   **58    the  other  party  will  have  adverse  interests within the meaning of section 406(b)(2). See 590 F.2d at

529. It follows, therefore, that in the present case the Plan and EMA had adverse interests with respect to the sale of EMA's note. Furthermore, it seems abundantly clear that the interests of the Plan and Local 98 were also adverse with respect to this transaction. n27

n27 This is shown clearly by the actions taken by  Local  98  in  connection  with  the  purchase  of EMA's note. See generally Compton I, 834 F. Supp. at 751 n.7. Because EMA had no money of its own, it was unable to proceed with the transaction until Local 98 approved. JA at 96, 471. Indeed, the record indicates that the Plan trustees considered Local 98 to be the actual purchaser of the note given the fact that EMA had no funds of its own. Since Local 98 advanced the funds to EMA necessary to purchase the note, the union's approval was a prerequisite to completing the transaction. Id. at 58-59, 89, 448,

471. In explaining the sale of the note,  Compton also revealed that Local 98 was the effective pur- chaser:  "The trustees felt that would be a prudent move and had to find a buyer for the market value, and that's when the union stepped in and decided they would purchase the mortgage and get rid of it

57 F.3d 270, *289; 1995 U.S. App. LEXIS 13619, **58;

19 Employee Benefits Cas. (BNA) 1441

Page 18

at the market value." Id. at 471 (emphasis added). Thus, as the "real" purchaser of the note, Local 98 necessarily had interests adverse to the Plan in re- lation to that transaction. See Cutaiar, 590 F.2d at

529.

**59

Since the interests of the Plan were adverse to those of EMA and Local 98 with   *290   respect to the trans- action at issue, the only remaining question under section

406(b)(2) is whether the union trustees acted on behalf of or represented EMA or Local 98 in connection with that transaction. The record strongly suggests that they did. All three union trustees were officials of Local 98, and Compton was also an officer of EMA. Moreover, the union trustees apparently did not recuse themselves when the transaction was being considered by EMA and Local

98. Instead, they participated in discussion of the mort- gage transaction at board meetings of EMA and Local 98. Rec. 38 at 23;  JA at 417-27,  446. While these facts in themselves may be sufficient to support summary judg- ment in favor of the Secretary on his section 406(b)(2) claim,  we  will  leave  that  determination  for  the  district court to make in the first instance. n28 On remand, the district  court  should  determine  whether,  during  EMA's and Local 98's deliberations concerning the purchase of EMA's note, the union trustees took any action in their capacities as union or EMA officers. If they did, then they took actions in this transaction on behalf **60   of EMA and/or Local 98, parties with interests adverse to the Plan, and they therefore violated section 406(b)(2). n29

n28  We  recognize  that  the  evidence  against

Compton,  who was president of EMA and Local

98,  is  stronger  than  against  the  other  two  union trustees.  We  are  sure  that  on  remand  the  district court will scrutinize this aspect on the record.

n29 The Secretary also suggests that the union trustees violated section 406(b)(2) because, while acting in their capacities as plan trustees during the consideration of the sale of EMA's note, they were actually serving the interests of EMA or Local 98. This theory, although based on section 406(b)(2), seems to resemble the Secretary's claim against all of the trustees under section 404(a)(1)(A), which is discussed below. However, the Secretary has not provided a precise description of this theory as dis- tinct from the section 406(b)(2) theory discussed in text. For this reason, and because it may not be nec- essary for the district court to reach this theory on remand, we do not address the validity or contours of such a theory at this time.

**61

V. Section 404(a)(1) Claims

We come,  finally,  to the Secretary's  claims that the Plan trustees violated ERISA's loyalty and prudence re- quirements, sections 404(a)(1)(A) and (B) of ERISA, 29

U.S.C. §§ 404(a)(1)(A) and (B), and that Fidelity violated ERISA's  requirement  that  fiduciaries  act  in  accordance with plan documents, section 404(a)(1)(D) of ERISA, 29

U.S.C. § 404(a)(1)(D). The district court did not specifi- cally address these claims in either of its two opinions, but it did enter judgment against all defendants on "all claims against them." Compton I, 834 F. Supp. at 751. We agree with the Secretary that this disposition was erroneous.

In addition to making certain actions by fiduciaries illegal per se, ERISA also codified common law duties of loyalty and prudence for ERISA trustees. In relevant part, section 404(a) provides as follows:

(a) Prudent man standard of care

(1) A  fiduciary shall discharge his du- ties with respect to a plan solely in the interest of the participants and beneficiaries and--

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii)  defraying  reasonable   **62       ex- penses of administering the plan;

(B)  with  the  care,  skill,  prudence,  and diligence under the circumstances then pre- vailing that a prudent man acting in a like ca- pacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; . . .

(D)  in  accordance  with  the  documents and instruments governing the plan . . . .

Based on the summary judgment record, a reasonable factfinder could conclude that the fiduciaries violated their duties. The evidence discussed above with regards to self- dealing  also  supports  the  Secretary's  argument  that  the trustees may have violated the duty of loyalty set out in section 404(a)(1)(A). As noted, the Plan trustees sold the note for well below its accounting value, and the record

57 F.3d 270, *290; 1995 U.S. App. LEXIS 13619, **62;

19 Employee Benefits Cas. (BNA) 1441

Page 19

shows that the union trustees were active on both sides of the negotiations. JA at 54, 58-59, 82, 89, 91, 95-96,

106.  Furthermore,  the  Plan  trustees  apparently  did  not sue EMA to force a purchase   *291   of the mortgage at its accounting value because that would have effectively been a suit against Local 98. Id. at 467. We agree with the Second Circuit that trustees violate their duty of loyalty when they act **63    in the interests of the plan spon- sor rather than "with an eye single to the interests of the participants and beneficiaries of the plan." Donovan, 680

F.2d 263, 271.

Likewise,  the  Secretary  has  adduced  evidence  sug- gesting  that  the  Plan  trustees  may  not  have  acted  in a  prudent  manner  and  may  thus  have  violated  section

404(a)(1)(B).  The  Plan  trustees  were  aware  that  their counsel and the Secretary considered the loan to violate ERISA. JA at 69, 87. Despite counsel's advice to sell the loan for its accounting value, the Plan trustees did not do so. Furthermore, the Plan trustees appear not to have made any effort to dispose of the mortgage until two months be- fore the end of ERISA's ten-year transition period. The evidence indicates that Fidelity participated in these trans- actions, and this evidence is sufficient to support a finding that it violated section 404(a)(1)(D) by failing to exercise the authority vested in it by the Plan, which included con- trol over Plan investments. n30 Although not necessarily dispositive, these facts certainly provide a sufficient basis for the Secretary's claims to survive a motion for summary judgment. n31

n30 As noted, an Amendment to the Agreement

of Trust between Local 98 and Fidelity provides that Fidelity "shall have exclusive authority and discre- tion  in  investment  of  the  Fund,  and  to  so  invest without distinction between principal and income." JA at 342.

**64

n31 The Plan trustees argue that there was no violation of the duty of loyalty and prudence be- cause the trustees had no superior alternative to the one they chose. Although there is evidence to sup- port this view, the Secretary has adduced sufficient facts to make the district court's resolution of this issue by summary judgment improper.

We  therefore  reverse  the  order  of  the  district  court insofar  as  it  granted  summary  judgment  against  the Secretary on these claims and we remand for further pro- ceedings regarding them.

VI. Conclusion

The district court's order entering summary judgment in  favor  of  all  defendants  on  all  claims  is  reversed  in part and affirmed in part. Given the complex nature of the transactions at issue here, we intimate no view as to the extent of the liability, if any, that should be imposed on a defendant that is ultimately found to have violated ERISA. We remand to the district court for further pro- ceedings consistent with this opinion.

	Contents    Prev    Next    Last