holding that the defendants had a “continuing duty” to review investments and that the action was not barred to the extent breaches occurred within six years of filing the ComplaintSummary of this case from In re Citigroup Erisa Litig.
01 Civ. 2289 (MBM)
March 18, 2003
Attorneys for Individual Plaintiffs, THOMAS M. KENNEDY, ESQ., SUSAN M. JENNIK, ESQ., Kennedy, Schwartz Cure, New York, N.Y.
Attorneys for Plaintiff, George Miranda, ROLAND R. ACEVEDO, ESQ., J. BRUCE MAFFEO, ESQ., Seiff, Kretz Maffeo, New York, New York
Attorneys for Defendants, George Barasch, Linda Barasch Glazer, Richard Glazer, Financial Administrators, Inc., and Barton, Babcock Blair, Inc., MICHAEL B. HIMMEL, ESQ., ROBERT J. KIPNEES, ESQ., Greenbaum, Rowe, Smith, Ravin, Davis Himmel, Iselin, N.J.
Attorney for Defendant Allied Trades Council and Jack Siebel, Reginald Rosado, and James Crowley as Officers of ATC, WILLIAM K. WOLF, ESQ., Friedman Wolf Grisi, New York, N.Y.
Attorneys for Defendants Trustees of the Union Mutual Medical Fund; Trustees of the Allied Welfare Fund; and Trustees of the Vacation Fringe Benefit Fund, KATHERINE H. PARKER, ESQ., MYRON D. RUMELD, ESQ., NEAL SCHELBERG, ESQ., Proskauer Rose LLP, New York, N.Y.
Attorneys for Defendant Trustees of the Allied Educational Foundation and the Union Mutual Fund Pension Plan, PETER ALTIERI, ESQ., JOHN HARRIS, ESQ., J. WILLIAM COOK, ESQ., Epstein, Becker Green, New York, N.Y.
Attorneys for Defendants Stephen Barasch and Churchill Administrators, Inc., DANIEL RIESEL, ESQ., STEVEN RUSSO, ESQ., HILARY SEMEL, ESQ., Sive, Paget Reisel, New York, N.Y.
OPINION AND ORDER
Plaintiffs in this case are current or former participants in employee benefit funds open to members of the Allied Trades Council ("ATC"), a union. Defendants are trustees of those funds, companies and persons who provide management and investment services to those funds, a related private foundation, and persons who control those entities. Plaintiffs claim that various groups of defendants have long manipulated investment services contracts with the employee benefit funds so as to reap inflated fees and otherwise enrich themselves, and have failed to manage the funds prudently. As a result, plaintiffs claim, benefits to union members have been depleted and dues wasted.
Based on these allegations, as explained more fully below, plaintiffs have brought two claims in their own behalf and as representatives of a class of persons similarly situated, for breaches of fiduciary duty and self-dealing, pursuant to the Employee Retirement Income Act of 1974, known as ERISA. In addition, they have alleged that certain defendants constitute a racketeering enterprise within the meaning of the Racketeer Influenced and Corrupt Organizations Act, known as RICO, and that their activities constitute a pattern of racketeering activity within the meaning of that statute. Finally, plaintiffs seek permission, as they must, to file a claim pursuant to the Labor Management Reporting Disclosure Act (the "LMRDA") against certain defendants for breach of fiduciary duties to the union.
The case is now before the court on defendants' motions to dismiss these claims on various grounds, including lack of standing and the bar of the statute of limitations. In addition, defendants move to strike plaintiffs' jury demand as to the ERISA claims, and for dismissal based on improper venue. For the reasons explained below, plaintiffs lack standing to bring the RICO claims and certain of the ERISA claims, and those are dismissed. Moreover, certain of the ERISA claims are time-barred to the extent they arise directly from contracts entered into or renewed six years or more before the filing of the initial complaint in this case. Other ERISA claims survive, and the motion to strike plaintiffs' jury demand is denied. The LMRDA claim may proceed. Finally, the motion to dismiss the action for improper venue is denied.
Plaintiffs have also moved for partial summary judgment. I have reviewed the parties' submissions related to that motion, which will be resolved in a subsequent opinion.
I.The facts alleged in the complaint, accepted as true for the purposes of the motions to dismiss, are as follows:
Plaintiffs Lisa Bona, Elaine N. Cogdell, Jose Martinez, Haywantie Singh, and Jovan Agnew Thomas ("Individual Plaintiffs") are present or former members of ATC and participants in related employee benefit funds, including the Allied Welfare Fund, the Vacation Fringe Benefit Fund ("Vacation Fund"), the Union Mutual Fund Pension Plan, and the Union Mutual Medical Fund (collectively "the Employee Benefit Funds"). (Compl. ¶¶ 1, 4) Plaintiff George Miranda is the principal officer of International Brotherhood of Teamsters, Local Union 815, a labor organization ("Local 815"). ( Id. ¶ 5) From January, 2000 to the present, Miranda has been designated by Local 815 as a trustee of the Union Mutual Fund Pension Plan, the Allied Welfare Fund, and the Vacation Fund. ( Id.)
George Barasch, his children Stephen Barasch and Linda Barasch Glazer, and his son-in-law Richard Glazer ("the Barasch Family" or "non-trustee defendants"), the trustees of the Employer Benefit Funds, and the officers of ATC have created an organization ("the Barasch Enterprise") in order to amass wealth through their control over ATC and the Employee Benefit Funds. ( Id. ¶¶ 1, 7) The Barasch Enterprise has been operating for decades and was a principal focus of the McClellan Committee of the United States Senate's hearings in the 1960's that led to adoption of ERISA. ( Id. ¶ 25) On June 30, 1966, the McClellan Committee issued a report detailing the Barasch Family's practices of utilizing labor unions, corporations, not-for-profit organizations, and employee benefit plans to enrich themselves. ( Id. ¶ 26) The activities of the Barasch Family have not changed materially since the 1960's. ( Id. ¶ 27).
John Morro is president, and Jack Siebel, Reginald Rosado, and James Crowley (collectively "ATC Defendants") are officers of ATC, which exists for the purpose of representing employees in collective bargaining with employers. ( Id. ¶ 6).
The Union Mutual Medical Fund, the Allied Welfare Fund, the Vacation Fund, and the Union Mutual Fund Pension Plan are multi-employer collectively bargained employee benefit plans that provide health and related benefits to plan participants and their beneficiaries. ( Id. ¶¶ 8-11) The Union Mutual Medical Fund is administered by a Board of Trustees consisting of defendants Arthur Fishbein, Eustace Bowen, and Sol Laskey and is controlled by the Barasch Enterprise. ( Id. ¶ 8) The Allied Welfare Fund is administered by a Board of Trustees consisting of defendants Gerald Herskowitz, Louis Kaplan, Stephen Camadeco, Rudolph Pascucci, Bruce Rogers, and Anthony Gugliano and is controlled by the Barasch Enterprise. ( Id. ¶ 9) The Vacation Fund is administered by a Board of Trustees consisting of defendants Harvey Rosen, Bruce Rogers, Gerald Herskovitz, Herman Wolfson, Stephen Camadeco, and James Crowley and is controlled by the Barasch Enterprise. ( Id. ¶ 10) The Union Mutual Fund Pension Plan is administered by a Board of Trustees consisting of defendants Irving Hans, Irving Kook, Donald Merino, Harold Banner, and Bertram Gelfand and is controlled by the Barasch Enterprise. ( Id. ¶ 11).
The trustees of the Allied Welfare Fund, the trustees of the Vacation Fringe Benefit Fund, and the trustees of the Union Mutual Medical Fund, who are represented by the same counsel, are collectively referred to as "Benefit Fund Trustees."
The trustees of the Union Mutual Fund Pension Plan are referred to as "UMP Trustees."
Churchill Administrators, Inc. ("Churchill"), Financial Administrators, Inc. ("Financial Administrators"), and Barton, Babcock Blair, Inc. ("BBB") are New Jersey corporations with their principal places of business in Englewood Cliffs, New Jersey. ( Id. ¶¶ 12-14) Churchill is administered by Stephen Barasch and is controlled by Stephen Barasch, George Barasch, Linda Barasch Glazer, and Richard Glazer. ( Id. ¶ 12) Financial Administrators is administered by Linda Barasch Glazer and Richard Glazer and is controlled by them, Stephen Barasch, and George Barasch. ( Id. ¶ 13) BBB is controlled by George Barasch, Linda Barasch Glazer, Richard Glazer, and Stephen Barasch. ( Id. ¶ 14).
Churchill, Financial Administrators, and BBB are referred to as "service provider defendants."
The Allied Educational Foundation holds itself out as a private foundation under the Internal Revenue Code and a trust established under New Jersey law. It is administered by a board of trustees that includes Irving Hans, Gerald Herskowitz, Herbert Pobiner, Charles Sachs, and Bertram Gelfand and is controlled by the Barasch Enterprise. ( Id. ¶ 15).
B. Class Action Allegations
Individual Plaintiffs bring five claims on behalf of two classes. "Class One" is made up of all members of the ATC and consists of approximately 3000 persons ( Id. ¶ 28) The individuals in Class One suffered monetary damages because the diversion of funds from the treasury of ATC to Barasch-controlled entities reduced ATC's assets and required the ATC class members to pay increased dues. ( Id. ¶ 22) "Class Two" is made up of all participants and beneficiaries in the Employee Benefit Plans and consists of approximately 13,000 persons. ( Id. ¶ 28) The individuals in Class Two were the primary and intended victims of the schemes to obtain monies from the Employee Benefit Funds by failing to maintain and increase health, welfare, and pension benefits to the levels warranted based upon plan funding due to an interest in protecting the large administrative fees paid to Barasch-controlled entities. ( Id. ¶ 24) The claims of the representative parties are typical of the claims of each class. ( Id. ¶ 28).
Individual Plaintiffs appear to include Lisa Bona and Jovan Agnes Thomas in Class Two, despite the fact that they worked an insufficient amount of time to qualify for a vested benefit from the Union Mutual Fund Pension Plan. According to the complaint, these two plaintiffs "represent a class of more than 6,000 similarly situated participants who were denied any benefit despite contributions having been made on their behalf, because the Defendants . . . failed and refused to structure plan benefits to recognize the high level of employee turnover among the employees of participating employers." ( Id. ¶ 23) Bona and Thomas's standing to bring suit under ERISA will be addressed below.
C. Allegations Relevant to All Claims
On January 1, 1947, George Barasch formed ATC and has dominated its affairs since then. ( Id. ¶ 29) On September 27, 1949, ATC created the Allied Trades Council Welfare Fund. ( Id. ¶ 30) On September 12, 1958, Barasch formed Churchill for the purpose of entering into administrative service contracts with ATC and its related Welfare Fund. Since that date, George Barasch or other members of the Barasch Family have been party to long-term minimum-fee management contracts under which tens of millions of dollars have been diverted to the Barasch Family from ATC, the Foundation, and the Employee Benefit Funds. ( Id. ¶ 31).
The Vacation Fund, the Union Mutual Medical Fund, and the Allied Welfare Fund have paid administrative fees to Churchill from 1995 to the present. ( Id. ¶ 32) On or about November 18, 1990, Churchill entered into a ten-year contract with the Vacation Fund that was not competitively bid and that set fees bearing no relationship to the work performed by Churchill. This contract has a series of provisions that are so favorable to Churchill that the contract could result only from overwhelming control over the Fund by the Barasch Enterprise. The provisions are identical or substantially similar to the provisions of the Union Mutual Fund Pension Plan's contract with Financial Administrators set forth below. On or about May 4, 1998, Churchill and the Vacation Fund renewed their agreement for two successive five-year terms at the option of Churchill. ( Id. ¶ 33).
The fees paid to Churchill from 1995 to 1998 are listed in the complaint. ( Id. ¶ 32) Typically, the Vacation Fund paid around $450,000 per year to Churchill, the Union Mutual Medical Fund paid around $190,00 per year to Churchill, and the Allied Welfare Fund paid over $800,000 per year to Churchill. ( Id.).
Churchill has an exclusive five-year administrative services contract with the Allied Welfare Fund terminating on December 31, 2004, which is renewable by Churchill for two additional five-year periods. The contract for administrative services between Churchill and Allied Welfare Fund has a per capita formula with a cost of living arrangement included in which administrative fees are subject to annual increases. ( Id.)
Churchill also has a long-term administrative services contract with the Union Mutual Medical Fund. The fees paid to Churchill by all three Funds were the result of dominance by the Barasch Family over these entities and were not proportional to the services rendered to these entities by Churchill. ( Id.)
Financial Administrators has a long-term administrative services contract with the Union Mutual Fund Pension Plan that is similar to the Churchill contracts. ( Id. ¶ 35) That contract has a series of one-sided provisions, including: (1) Financial Administrators is authorized to manage all operationas of the Plan, including the right to hire accountants, actuaries, attorneys, and other professionals; (2) Financial Administrators is authorized to provide legal advice to the Plan regarding all legal and professional matters and to represent the Plan's trustees in matters before government agencies and civil courts; (3) Financial Administrators is allowed to provide services similar to trust funds, without any adjustment of the compensation paid by the Plan to reflect economies of scale; (4) Financial Administrators is compensated on a sliding scale on all income of the Plan except interest, dividends, and capital gains that accrue to the Plan's trustees, and also receives a cost of living increase in the fees paid to it if the Consumer Price Index increases by four percent; (5) Financial Administrators is paid based on a minimum compensation scale of at least $470,000, and a guarantee that the compensation paid to it will be deemed to be at least at the midpoint of the "sliding scale"; (6) the contract remains in force for a minimum of ten years and either party has an option to renew for years through July, 2011; (7) although either party has the right to reopen the agreement to renegotiate the fee arrangement, Financial Administrators can force the Plan to a binding arbitration on the question of "the amount of compensation to be paid Financial ". . . and the arbitrator shall be bound to have the Trust Fund pay to Financial an amount sufficient to fully compensate for the services rendered by Financial under this agreement"; (8) the Plan's inability to assign the agreement is not a reason for lower compensation to be paid under the agreement; (9) Financial Administrators may assign its rights under the agreement in whole or in part. ( Id. ¶¶ 36-44).
The minimum was later increased to $580,000. ( Id. ¶ 45).
These provisions in the contract between the Union Mutual Fund Pension Plan and Financial Administrators, along with the excessive fees paid under the contract, resulted from the Barasch Family's dominance of the Employee Benefit Funds and were not proportional to the services rendered to these entities. As a result of these excessive fees, Financial Administrators was used to pay salaries to defendants Linda Glazer Barasch and Richard Glazer. In 2000, these defendants were paid salaries of $371,536. ( Id. ¶ 46).
The fees received by BBB from ATC and the Foundation also were excessive. ( Id. ¶¶ 47-48) These fees, which amounted to almost $190,000 per year from 1996 through 1998, resulted from the Barasch Family's dominance of ATC and the Foundation and were not proportional to the services rendered to these entities by BBB. ( Id. ¶ 48).
In 1999, ATC had gross revenues of $478,353 from the dues of its members and contributed $500,000 to the Allied Educational Foundation. ( Id. ¶ 49) In 1997, ATC had gross revenues of $335,430 from the dues of its members and contributed $250,000 to the Foundation. ( Id. ¶ 50) In 1996, ATC had gross revenues of $318,456 from the dues of its members and donated $250,000 to the Foundation. ( Id. ¶ 51) There was no legitimate union purpose for these expenditures. ( Id. ¶¶ 49-51).
Until late in 1999, Churchill, Stephen Barasch, the trustees of the Allied Welfare Fund, and the trustees of the Vacation Fund did not diversify the investments of the funds so as to capitalize on the opportunities available to the Allied Welfare Fund and the Vacation Fund. Financial Administrators, George Barasch, Linda Barasch Glazer, Richard Glazer and the trustees of the Union Mutual Fund Pension Plan similarly failed to diversify the investments of the Union Mutual Fund Pension Plan. ( Id. ¶ 52) As a result of the imprudent investment policies pursued by the Employee Benefits Funds, the benefits offered to participants were unduly restricted. ( Id. ¶ 53).
The Barasch Enterprise has offered many things of value to the trustees of the Employee Benefit Funds, including trips to France, Italy, and Israel on "cultural studies tours," designed in whole or part to allow the Barasch Family to profit from the unions, foundations, and funds that it controls. In return, George Barasch, Stephen Barasch, Linda Barasch Glazer, Richard Glazer and the entities they control have received more than $10 million from ATC, its affiliated foundations, and the Employee Benefit Funds since 1995. ( Id. ¶ 54).
George Barasch, Stephen Barasch, Linda Barasch Glazer, and Richard Glazer have exercised a substantial degree of control over the Employee Benefit Funds themselves. The Barasch Family members (1) selected the trustees of the Funds; (2) directed the Funds' drafting of plan documents; (3) advised the trustees on tax and insurance issues, plan changes and costs, and all other issues of plan management; (4) recommended particular investments, and, prior to 1999, made all of the Employee Benefit Funds' investment decisions; (5) arranged commercially unreasonable and imprudent contracts between the Funds and companies owned by the Barasch Family; (6) hired, fired, and otherwise supervised all employees who acted on behalf of the Funds; and (7) effectively determined appeals of benefit claims and otherwise interpreted the terms of the Plans. ( Id. ¶ 55).
D. Allegations Relevant to the RICO Action
The Barasch Enterprise is an organization with formal and informal institutional arrangements. It consists of the following entities: BBB, Churchill, Financial Administrators, ATC, the Employee Benefit Funds, and the Foundation. ( Id. ¶ 62).
The offices for ATC, all of the Employee Benefit Funds, the trustees of those Funds, BBB, Financial Administrators, and Churchill are located in the same two office buildings on Sylvan Avenue, Englewood Cliffs, New Jersey. ( Id. ¶ 62(b)) The same attorney, Henry Hamburger, represented ATC and the Employee Benefit Funds for many years. ( Id.) The same attorney, Jules Levine, represented the Employee Benefit Funds and the Foundation for many years. ( Id.) The same accountants, Newman Cohen, provided accounting services to ATC and all the Funds from 1997 to the present. Prior to 1997 the same accountant served all the defendant entities. ( Id.) The Barasch Enterprise promulgated a manual for organizations on Sylvan Avenue providing instructions for the administration of the affiliated entities. ( Id. ¶ 62(c)) Several defendants served as officers or trustees of more than one of the defendant entities. ( Id. ¶ 62(d)).
Churchill Benefit Services, Inc. was an additional for-profit entity utilized by the Barasch Family to provide administrative services to entities outside the Barasch Enterprise. On April 4, 1997, the Barasch Family caused the creation of a sham contract between Local 815 and Churchill Benefit Services, Inc. to allow Churchill to receive subsidized health care coverage for its employees. On November 19, 1999 that contract was cancelled by the parties to impede an investigation into the affairs of Local 815. ( Id. ¶ 62(g)) Churchill, BBB, and Financial Administrators established a single pension plan, known as the Allied Security Fund, for their employees along with the employees of Local 815. Barasch Family members are each entitled to receive substantial payment from this Fund. ( Id. ¶ 62(h)).
George Barasch, Linda Barasch Glazer, Richard Glazer, and Stephen Barasch directly and indirectly offered, gave, and promised to offer and give the trustees of the Employee Benefit Funds various things of value in order to influence the trustees. ( Id. ¶ 68) Specifically, in September 1999, Allied Welfare Plan paid all costs of a weekend trip to Kutsher's Country Club. ( Id. ¶ 69) Also, the trustees received free and heavily subsidized trips for themselves and their spouses to France, Italy, and Israel from the Foundation. The trip to France in 1998 cost the Foundation $254,307 and was for the purpose of "provid[ing] a broad picture of the economy, literary and cultural aspects of France." The trips to Italy and Israel were similarly without legitimate purpose. ( Id. ¶ 70) The trustees also received monies from the Employee Benefit Funds from 1994 through 1998 to secure their cooperation. Each trustee received between $42,000 and $45,000 during this period. ( Id. ¶ 71).
The officers of ATC, including Jon Morro, James Crowley, Jack Siebel, and Reginald Rosado, caused or permitted ATC to give to the Foundation $250,000 in 1996 and $500,000 in 1999. The officers knew that the money was not spent for legitimate union purposes. ( Id. ¶ 73) Morro, Crowley, Siebel, and Rosado dealt with and on behalf of the Barasch Enterprise for their own financial benefit. Crowley, in addition to money he received from ATC, received $8500 each year from 1995 through 1998 and thereafter as payment for his services to the Barasch Enterprise and as a trustee of the Vacation Fund. ( Id. ¶ 74).
Morro, Crowley, Siebel, and Rosado have caused ATC to enter into a long-term lease with National Management Corporation, owned by George Barasch, and a long-term administrative services contract with BBB, through which money was diverted to the Barasch Family. ( Id. ¶ 75).
E. Allegations Relevant to the Proposed LMRDA Action
Between 1995 and 1999, according to the LM-2 Reports it filed with the Department of Labor, ATC paid $1 million out of its treasury to the Foundation and $232,247 to BBB. The Foundation, in turn, according to IRS Form 990, paid $506,781 to BBB. ( Id. ¶ 82) There was no legitimate union purpose for these expenditures. ( Id. ¶ 83).
The activities of the Foundation included a "Workshop Project Abroad." In 1998, the Project provided a trip to France for 100 persons, at a cost of $254,307. In 1999, the Project provided a trip to Italy for 72 persons, at a cost of $214,636. The ATC officers participated in these trips. Defendant Crowley, moreover, with the knowledge of the other officers, received from the Project a trip to England valued at $2250. ( Id. ¶ 84).
The activities of the Foundation also included a "Health and Welfare Conference" held at locations such as Kutsher's Resort. In 1999, the conference cost $169,557. In 1998, the conference cost $166,027. In 1997, the conference cost $181,376. In 1996, the conference cost $226,771. In 1995, the conference cost $211,341. The ATC defendants participated in these conferences. Morro, Rosado, and Crowley received a trip to Kutsher's Resort for which they paid significantly less than market value. Siebel knew about the trip. ( Id. ¶ 85).
Morro, Siebel, Rosado, and Crowley had a pecuniary and/or personal interest in BBB and the Foundation. ( Id. ¶ 86) The payments made by ATC to BBB were the result of the Barasch Family's dominance of the ATC officers and were not proportional to the services rendered by BBB. ( Id. ¶ 87) Neither the payments made by ATC to the Foundation nor the payments to BBB were made for the benefit of ATC and its members. ( Id. ¶¶ 87-88).
On March 2, 2001, Individual Plaintiffs requested that Morro, Siebel, Rosado, and Crowley sue or otherwise recover damages for the breaches of fiduciary duty in making the payments to BBB and the Foundation. ( Id. ¶ 89) By letter dated April 6, 2001, Morro responded that the ATC Executive Board had investigated their charges and had "not found any evidence of wrongdoing." ( Id. ¶ 90).
Individual Plaintiffs bring five claims for relief. Miranda joins in the first and second claims. In their first claim, plaintiffs allege that the Benefit Fund Trustees and the UMF Trustees, along with the non-trustee defendants, breached their fiduciary duties to the Employee Benefit Funds under ERISA §§ 404 and 405 by, inter alia, directing the Employee Benefit Funds to enter imprudent contracts with administrators, failing to diversify the investments of the plans, and participating knowingly in the trustees' breaches of fiduciary duty. In their second claim, plaintiffs allege that the trustees, in violation of ERISA § 406, caused the Employee Benefit Funds to conduct business with parties in interest and that the non-trustee defendants, in violation of ERISA § 406, dealt with the assets of the Employee Benefit Funds to further their own interests rather than the interest of the Funds' participants.
In their third cause of action, Individual Plaintiffs allege that the individuals and entities comprising the Barasch Enterprise committed multiple acts of racketeering activity, including violations of 29 U.S.C. § 501, which imposes fiduciary duties on union officers, 18 U.S.C. § 664, which prohibits the willful conversion of an employee benefit fund's property for personal use, and 18 U.S.C. § 1954, which prohibits the acceptance of payments intended to influence the operations of employee benefit plans. According to the complaint, these acts constituted a "pattern of racketeering activity" as defined in 18 U.S.C. § 1961 (5). In their fourth claim, Individual Plaintiffs allege that the individuals and entities comprising the Barasch Enterprise, through the aforesaid activities, violated 18 U.S.C. § 1962(b), (c), and (d).
In their fifth claim, Individual Plaintiffs allege that the officers of ATC breached their fiduciary duties to the union under section 501(a) of the LMRDA by failing to hold the money and property of ATC solely for the benefit of ATC and its members and to refrain from dealing with ATC as an adverse party or on behalf of an adverse party.
Individual Plaintiffs bring the third, fourth, and fifth claims on behalf of a class made up of all members of the Allied Trades Council. Individual Plaintiffs bring the first and second claims on behalf of a class made up of all participants in and beneficiaries of the Employee Benefit Funds. Plaintiffs seek an array of remedies, including injunctive relief, monetary damages and, as to their RICO claims, treble damages. Notably, to remedy the abuses underlying the first and second claims, plaintiffs request relief from defendant trustees and fiduciaries, but not from non-fiduciaries.
Defendants now move to dismiss the complaint in whole or in part on numerous grounds. A motion to dismiss under Rule 12(b)(6) may be granted when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The court must take the facts alleged in the complaint as true and draw all reasonable inferences in favor of the nonmoving party. Jackson Nat'l Life Ins. Co. v. Merrill Lynch Co., 32 F.3d 697, 699-700 (2d Cir. 1994).
Plaintiffs have attached several documents to their complaint. Also, along with their motion papers, some defendants have submitted affidavits, declarations, and exhibits. In deciding the motions to dismiss, besides the documents attached to the complaint, the court will consider those documents in plaintiffs' possession and those documents relied on by plaintiffs in bringing suit. See Brass v. American Film Technologies, 987 F.2d 142, 150 (2d Cir. 1987) (on a motion to dismiss the court may consider "documents attached to the complaint" and `documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit").
A. Plaintiffs' Standing to Seek Monetary Relief
The trustees move to dismiss the ERISA claims against them on the ground that Individual Plaintiffs lack standing to sue the trustees for monetary relief. Insofar as defendants challenge plaintiffs' standing to sue for damages, their motion arises under Rule 12(b)(1) of the Federal Rules of Civil Procedure, because the question of standing implicates the court's subject-matter jurisdiction. Moore v. PaineWebber, Inc., 189 F.3d 165, 169 n. 3 (2d Cir. 1999). If a complaint is dismissed for lack of subject matter jurisdiction, other defenses become moot. Therefore, before addressing the other potential grounds for dismissal, I must determine whether, and to what extent, Individual Plaintiffs have standing to bring their claims against the trustees under ERISA § 502(a)(2) or ERISA § 502(a)(3).
Individual Plaintiffs do not purport to bring this action under ERISA § 502(a)(1).
1. Section 502(a)(2)
ERISA assigns fiduciaries specific duties, including the duties specified in sections 404, 405, and 406 of the statute. Section 409(a), 29 U.S.C. § 1109(a) (2000), makes fiduciaries liable for breach of those duties. Under section 409(a), a fiduciary is personally liable for damages, for restitution, and for "such other equitable or remedial relief as the court may deem appropriate," including removal of the fiduciary. Section 502(a)(2), 29 U.S.C. § 1132(a)(2)(2000) — the second of ERISA's six civil enforcement provisions — allows the Secretary of Labor or any plan beneficiary, participant, or fiduciary to bring a civil action "for appropriate relief under section 1109 of this title."
Unlike ERISA'S other enforcement provisions, Section 502(a)(2) authorizes relief for the benefit of a plan only. Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140-44 (1985) Thus, Individual Plaintiffs cannot recover damages on their own behalf under Section 502(a)(2). See Lee v. Burkhart, 991 F.2d 1004, 1009 (2d Cir. 1993) (" Russell . . . bars plaintiffs from suing under § 502(a)(2) because plaintiffs are seeking damages on their own behalf, not on behalf of the Plan."). However, Miranda, a fiduciary, can recover on behalf of the Employee Benefit Funds. Likewise, Individual Plaintiff 5, who are suing on behalf of a class of plan participants, also can recover on behalf of the Funds if they represent a class made up of all Fund participants. See Gruby v. Brady, 838 F. Supp. 820, 827 (S.D.N.Y. 1993) ("[A]s any recovery under section 502(a)(2), 29 U.S.C. § 1132(a)(2), goes to the Fund as a whole, and as Fund participants may bring an action only in a representative capacity on behalf of the entire Fund, the proposed class must include all participants, including retired and active members."); Diduck v. Kaszycki Sons Contractors, Inc., 737 F. Supp. 792, 799 (S.D.N.Y. 1990) ("[P]laintiff has individual standing to pursue [a section 409 claim] and may bring suit as a class representative if the requirements of Fed.R.Civ.P. 23 are met"), aff'd in part, rev'd in part on other grounds, 974 F.2d 270 (2d Cir. 1992); see also Montgomery v. Aetna Plywood, Inc., 1996 WL 189347, at *3 (N.D.Ill. Apr. 16, 1996) (concluding that a section 502(a)(2) action by a beneficiary "should be pursued as either a class action or derivative action, in order to avoid inconsistent rulings and to ensure the interests of the beneficiaries are adequately represented"). Section 502(a)(2), therefore, gives Individual Plaintiffs standing to seek monetary relief on behalf of the respective Employee Benefit Funds, but not on their own behalf.
2. Section 502(a)(3)
Individual plaintiffs claim that they can seek monetary relief on their own behalf under ERISA § 502(a)(3). That section permits a participant, beneficiary, or fiduciary to sue "(A) to enjoin any act or practice which violates any provision of [ERISA] or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [ERISA] or the terms of the plan. . . ." 29 U.S.C. § 1132(a)(3) (2000). Because section 502(a)(3) provides for "appropriate equitable relief" only, Individual Plaintiffs cannot seek traditional damages under that section. See Mertens v. Hewitt Assocs., 508 U.S. 248, 257-58 (1993) (refusing to permit a suit for monetary damages to go forward under section 502(a)(3)). However, they can obtain "appropriate equitable relief." The relevant question then in determining whether Individual Plaintiffs can obtain monetary relief on their own behalf is whether such relief, under the present circumstances, can be properly characterized "appropriate equitable relief." For reasons explained below, I conclude that the relief sought by Individual Plaintiffs in this case is not "equitable relief" under Great-West Life Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), and therefore Individual Plaintiffs lack standing to seek monetary relief on their own behalf for defendants' alleged breaches of fiduciary duty.
Great-West involved an ERISA-covered health plan, under which the defendant, Janet Knudson, was a beneficiary. The plan contained a subrogation clause conditioning the payment of benefits upon the plan receiving from each beneficiary a lien on any recovery from a third part. The plan contracted for health insurance with Great-West, and then assigned its rights under the subrogation clause to Great-West. After Knudson recovered from a third-party tortfeasor, Great-West sought injunctive relief to enforce restitution of the plan's expenses. Id. at 207-208.
The issue presented in Great-West was whether reimbursement to the health plan from payments made to a beneficiary by a third party constitutes "equitable relief" authorized by section 502(a)(3) of ERISA. The Court held that because the insurance company was seeking to impose personal liability on the plan beneficiary for a contractual obligation to pay money, the relief it sought was legal, rather than equitable, and therefore was not available under section 502(a)(3). First, the Court rejected the notion that Great-West sought injunctive relief. Id. at 210-11 ("[A]n injunction to compel the payment of money past due under a contract, or specific performance of a past due monetary obligation, was not typically available in equity."). Second, the Court concluded that, although Great-West sought restitution of the plan's expenses, it did not seek equitable restitution. The Court reasoned that, although a plaintiff could seek restitution at law where he could "show just grounds for recovering money to pay for some benefit the defendant had received from him," id. at 213, "a plaintiff could seek restitution in equity, ordinarily in the form of a constructive trust or an equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant's possession." Id. The Court concluded that, because the funds to which Great-West claimed an entitlement were not in Knudson's possession, Great-West could not seek equitable restitution. In reaching this conclusion, the Court stated: "`Almost invariably . . . suits seeking . . . to compel the defendant to pay a sum of money to the plaintiff are suits for `money damages,' as that phrase has traditionally been applied, since they seek no more than compensation for loss resulting from the defendant's breach of legal duty.'" Id. (quoting Bowen v. Massachusetts, 487 U.S. 879, 918-919 (1988) (Scalia, J., dissenting)).
To support their claim for monetary relief, Individual Plaintiffs rely on Strom v. Goldman Sachs, 202 F.3d 138 (2d Cir. 1999), which held that the term "equitable relief" under section 502(a)(3) includes a compensatory award for breach of fiduciary duty. Because Strom's holding cannot be reconciled with Great-West, I conclude that Strom does not control the present case; rather, Great-West controls, and Great-West bars Individual Plaintiffs' request for monetary relief from the trustees.
On the surface, Strom might be distinguished from Great-West because Strom involved an alleged breach of fiduciary duty, and "[a]n alleged breach of fiduciary duty always has been within the exclusive jurisdiction of equity." Strom, 202 F.3d at 145. However, the broad language in Great-West suggests otherwise. See Kishter v. Principal Life Ins. Co., 186 F. Supp.2d 438, 444-45 (S.D.N.Y. 2002) (concluding that Great-West repudiated Strom and its reasoning). In Great-West, the Court declined to hold that the special equity-court powers applicable to trusts define the reach of § 502(a)(3). Great-West, 534 U.S. at 219-20 (citing Mertens, 508 U.S. at 257-58 (rejecting a reading of ERISA extending the relief obtainable under § 502(a)(3) to whatever relief a court of equity would be empowered to provide in a particular case because such a reading would not limit in any way the relief available and thus would render the modifier "equitable" superfluous)). The Court explained that the phrase "equitable relief," as Congress used it in section 502, refers only to "`those categories of relief that were typically available in equity.'" Id. at 210 (quoting Mertens, 508 U.S. at 256) (emphasis in original), and not to any relief that conceivably could be granted by an equity court. Thus, in determining whether monetary relief in a particular case can be classified as equitable restitution, the crucial question under Great-West is whether a suit seeks to "restore to the plaintiff particular funds or property in the defendant's possession." Id. at 214.
John Langbein, a leading scholar of ERISA, has stated that "typically equitable" relief after Great-West is limited to injunctive relief and restitution for cases that might have been brought as constructive trust actions before the fusion of law and equity. See John H. Langbein, What ERISA Means by "Equitable": The Supreme Court's Trail of Error in Russell v. Mertens and Great West 85 (Yale Law Economics Research Paper No. 269, 2003), http://www.ssrn.com. Although Langbein has strongly criticized the Supreme Court's interpretation of ERISA § 502(a)(3), this court is bound by that interpretation.
The Second Circuit has not yet considered the impact of Great-West on suits for breach of fiduciary duty under ERISA. However, notwithstanding Strom, this court has applied Great-West to actions for breach of fiduciary duty. See Kishter, 186 F. Supp.2d at 445-46 (granting summary judgment on a breach of fiduciary claim brought under § 1132(a)(3) where the executor an ERISA beneficiary's estate sought to recover money that the beneficiary would have received if not for defendants' alleged failure to provide information about a life insurance policy); Augienello v. Coast to Coast Fin. Corp., No. 01 Civ. 11608, 2002 WL 1822926, at *5-6 (S.D.N.Y. Aug. 7, 2002) (dismissing an ERISA breach of fiduciary duty claim under § 1132(a)(3) where the plaintiffs sought deferred compensation funds).
Courts outside this district have also applied Great-West to suits for breach of fiduciary duty. E.g., Rego v. Westvaco Corp., 319 F.3d 140, 145 (4th Cir. 2003) (rejecting the argument that "any remedy, when sought for breach of fiduciary duty, is always an equitable remedy"); Santasania v. Union Trowel Trades Benefit Funds, No. 01 Civ. 1442, 2003 U.S. Dist. LEXIS 1503, at *9-10 (M.D. Pa. Feb. 4, 2003) (dismissing a § 1132(a)(3) claim for reimbursement of monthly COBRA payments where the plaintiff claimed that he would not have made the payments if not for the defendants' breach of fiduciary duty); Sampson v. Rubin, No. 00-10215, 2002 U.S. Dist. LEXIS 20877, at *14 (D. Mass. Oct. 29, 2002) (concluding, based on Great-West, that a plaintiff "may not use the equitable enforcement mechanisms of § 1132(a)(3) to secure compensatory relief for an alleged breach of fiduciary duty by the defendants").
In this case, as in Kishter and Augienello, Individual plaintiffs have not asked for equitable restitution, even though they have sued defendants for breach of fiduciary duty. According to Great-West, restitution is appropriate as an equitable remedy only where the specific property being sought is identifiable and in the hands of the defendant. Great-West, 534 U.S. at 213. Individual Plaintiffs have not alleged that the property they seek is either identifiable or in the hands of the trustees, from whom plaintiffs seek monetary relief.
Individual Plaintiffs' request for monetary relief is also not premised on an equitable claim for reformation of a written instrument. First, although the complaint's prayer for relief includes a demand for injunctive relief, the complaint does not demand reformation of the employee benefit plans. Second, even if the catch-all provision of the prayer for relief were interpreted to encompass a demand for reformation of the plans, the complaint contains no allegations that would support a claim for reformation. "[R]eformation is available in cases of fraud and mutual mistake." AMEX Assurance Co. v. Caripides, 316 F.3d 154, 161 (2nd Cir. 2003); see also 3 E. Allan Farnsworth, Farnsworth on Contracts § 7.5 (2d ed. 1998) (explaining that the equitable remedy of reformation is available in cases of mutual mistake or "when only one party is mistaken as to the contents or effect of a writing if that mistake was induced by the other party's fraudulent misrepresentation"). Here, plaintiffs have not alleged that the written terms of the employee benefit plans resulted either from fraudulent misrepresentation or from a mutual mistake.
Ultimately, Individual Plaintiffs' claim for monetary relief is nothing more than a claim for money damages as compensation for losses. Because Individual Plaintiffs do not seek "equitable relief" under section 502(a)(3), they are barred from recovering monetary damages on their own behalf.
Because I find that the monetary relief sought by Individual Plaintiffs under section 502(a)(3) is not equitable relief, it is not necessary to reach the question of whether it is "appropriate" equitable relief under Varity Corp. v. Howe, 516 U.S. 489 (1996).
B. Bona and Thomas
Defendants argue also that plaintiffs Bona and Thomas, as well as the class of workers whom they purport to represent, lack standing to assert ERISA claims under section 502(a). I agree.
To have standing to sue under ERISA § 502(a), a plaintiff must be a "a participant, beneficiary, or fiduciary" of a plan. 29 U.S.C. § 1132(a) (2000). Individual Plaintiffs allege that Bona and Thomas were "participants" in one of the Employee Benefit Funds. (Compl. ¶ 4) A "participant" is defined by ERISA as "any employee or former employee of an employer. who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employ." 29 U.S.C. § 1002(7)(2000). "In order to establish that he or she [is eligible or] `may become eligible' for benefits, a claimant must have a colorable claim that (1) he or she will prevail in a suit for benefits, or that (2) eligibility requirements will be fulfilled in the future." Firestone Tire Rubber Co. v. Bruch, 489 U.S. 101, 117-18 (1989).
The complaint acknowledges that neither Bona nor Thomas completed the necessary hours of service to become entitled to benefits under the terms of the Union Mutual Fund Pension Plan. (Compl. ¶ 23) Moreover, the complaint acknowledges that neither plaintiff has participated in the Plan since June, 1999. (Compl. ¶¶ 17, 21) Accordingly, based on their own allegations, Bona and Thomas have no standing to commence a private action as participants in the Union Mutual Pension Plan.
Individual Plaintiffs offer two separate theories to support Bona's and Thomas's standing to sue under ERISA § 502(a). In their complaint, Individual Plaintiffs assert that, although Bona and Thomas worked an insufficient amount of time to qualify for vested benefits from the Union Mutual Fund Pension Plan, they would have received benefits but for the excessive fees extracted from the Plan by the Barasch Enterprise. (Compl. ¶ 23) In their opposition papers, Individual Plaintiffs argue that, under Howe, ex-employees and ex-participants can maintain an action for appropriate equitable relief against ERISA fiduciaries.
Both theories are inadequate. The first theory — that Bona and Thomas would have been participants but for defendants' alleged wrongdoing — ignores the plain language of section 502(a), according to which a plaintiff must already be a plan participant in order to sue. The second theory — that former plan participants can sue under section 502(a)(3) — simply does not apply to the present case. Defendants do not argue that Bona and Thomas lack standing to sue because they are no longer members of the ATC; rather, they argue that Bona and Thomas lack standing because, according to the complaint, they worked an insufficient amount of time to qualify for benefits. Although Howe indicated that former participants or beneficiaries could obtain equitable relief under section 502(a)(3), the Howe Court did not dispense with the statutory requirement that plaintiff, in the first instance, be a "participant," "beneficiary," or "fiduciary" in order to sue under section 502(a) Because they never met the provisions's standing requirements, Bona and Thomas, as well as the class of employees unvested in the Union Mutual Fund Pension Plan whom they purport to represent, do not have standing to sue under ERISA § 502(a).
C. The Union Mutual Medical Fund
The Benefit Fund Trustees move to dismiss the ERISA claims against the trustees of the Union Mutual Medical Fund on the ground that Individual Plaintiffs, as well as Miranda, lack standing under 29 U.S.C. § 1002(7)(2000) to bring ERISA claims against these defendants.
Under the Union Mutual Medical Fund's Summary Plan, to be eligible for participation in the Union Mutual Medical Fund, individuals must first be members of the Union Medical Benefit Association. ( See Parker Aff. Ex. D at 6) Although Individual Plaintiffs broadly allege that they are "participants" in the four Employee Benefit Plans (Compl. ¶ 1), Individual Plaintiffs do not allege that they are members of the Union Medical Benefit Association, and Miranda does not allege that he is a trustee of the Union Mutual Medical Fund. The trustees of the Union Mutual Medical Fund argue that, absent such allegations, the ERISA claims against them must be dismissed.
Neither Miranda nor Individual Plaintiffs even dispute that their claims against the Union Mutual Medical Fund's trustees should be dismissed. Thus, regardless of whether thee broad allegations in the complaint are sufficient to state a claim against trustees of the Union Mutual Medical Fund, plaintiffs have abandoned their claims against those trustees. See Frink Am., Inc. v. Champion Road Mach., Ltd., 48 F. Supp.2d 198, 209 (N.D.N.Y. 1999) (collecting cases supporting dismissal of abandoned claims).
Several defendants move to dismiss plaintiffs' ERISA claims as time-barred. Dismissal for failure to state a claim based on a statute of limitations is appropriate only if a complaint clearly shows that a claim is not timely. Harris v. City of New York, 186 F.3d 243, 251 (2d Cir. 1999).
The limitations period applicable to claims alleging breach of fiduciary duty under ERISA is codified at 29 U.S.C. § 1113. That section provides:
No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of:
(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or
(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.
Thus, a claim alleging breach of fiduciary duty under ERISA must be brought "within either six years of the date of the last action which constituted part of the breach . . . or three years after the earliest date on which the plaintiff had actual knowledge of the breach, whichever is earlier." Kastaros v. Cody, 744 F.2d 270, 280 (2d Cir. 1984).
A. The Three-Year Limit
Several defendants contend that the ERISA claims brought by Individual Plaintiffs must be dismissed because these plaintiffs had actual knowledge of the alleged breaches of fiduciary duty more than three years before they sued. According to the Benefit Fund Trustees, the ERISA claims are untimely because the allegation that the Barasches have engaged in the course of conduct giving rise to the claims since 1958 establishes that plaintiffs knew about that conduct more than three years before they brought this lawsuit. According to nontrustee defendants, Financial Administrators, and BBB, the ERISA claims are untimely because the Employee Benefit Funds each filed a Form 5500 with the IRS disclosing its payments to service providers more than three years before the complaint was filed. This Form, defendants appear to argue, gave Individual Plaintiffs notice of the allegedly imprudent agreements.
To trigger the three-year statute of limitations, a plaintiff must "have actual knowledge of all material facts necessary to understand that some claim exists, which facts could include necessary opinions of experts, knowledge of a transaction's harmful consequences, or even actual harm." Reich v. Lancaster, 55 F.3d 1034, 1057 (5th Cir. 1995). It is not enough that a plaintiff suspects something is awry; rather, the plaintiff must have specific knowledge of the actual breach on which he sues. Martin v. Consultants Adm'rs., Inc., 966 F.2d 1078, 1086 (7th Cir. 1992). However, the plaintiff need not have "knowledge of the law or exacting factual details" in order to have actual knowledge. Crimi v. PAS Indus., No. 93 Civ. 6394, 1995 WL 272580 at *3 (S.D.N.Y. May 9, 1995).
As a threshold matter, defendants do not argue that Miranda had actual knowledge of the alleged ERISA violations three years before the original complaint in this matter. Plaintiffs filed the original complaint on March 19, 2001, approximately 14 months after Miranda became a trustee to the various funds. Numerous courts have concluded that, for ERISA statute of limitations purposes, the relevant question is when a current trustee, and not the plan itself through any of its previous agents, had actual knowledge of a breach of fiduciary duty. Landwehr v. Dupree, 72 F.3d 726, 731-32 (9th Cir. 1995); Gluck v. Unisys Corp., 960 F.2d 1168, 1176-77 (3rd Cir. 1992); Radiology Ctr., S.C. v. Stifel, Nicolaus Co., 919 F.2d 1216, 1222 (7th Cir. 1990); Dist. 65 Ret. Trust for Members of the Bureau of Wholesale Sales Representatives v. Prudential Sec., Inc., 925 F. Supp. 1551, 1559 (N.D. Ga. 1996) ("The ERISA statute of limitations plainly states that it is the plaintiff's actual knowledge that triggers the three-year time bar. Had Congress wished to impute the knowledge of former fiduciaries to successor trustees, Congress certainly could have done so."). Because Miranda served as a trustee for less than three years before plaintiffs filed their complaint, he cannot be charged with disqualifying knowledge of the alleged breaches of fiduciary duty.
Contrary to defendants' contentions, Individual plaintiffs also cannot, based on the pleadings alone, be charged with actual knowledge of the alleged breaches of fiduciary duty. First, although plaintiffs' allegations that defendants' course of conduct took place over many years and attracted public attention could conceivably be grounds to impute knowledge of the conduct to Individual Plaintiffs, these allegations do not support the inference that those plaintiffs had actual knowledge of the conduct. See Martin, 966 F.2d at 1086 n. 6 (explaining that section 413 was amended to delete a constructive knowledge provision and replace it with a more stringent actual knowledge requirement). Indeed, other than noting that plaintiffs have alleged that defendants' wrongdoing goes back to 1958, the Benefit Fund Trustees do not offer any theory as to how plaintiffs actually knew about the potential claims arising from the agreements.
Non-trustee and service provider defendants, on the other hand, argue that Individual Plaintiffs had knowledge of the transactions between Barasch-controlled entities and the Union Mutual Fund Pension Plan because the Pension Plan began filing Forms 5500 with the IRS in 1991 and Plan participants were invited to review these forms by a clause in the Summary Plan Description. ( See Kipnees Decl. Ex. A at 23). Plaintiffs respond that it was not until June, 1998 that any of the Forms 5500 acknowledged that the fees were paid to service providers pursuant to long-term unilaterally renewable agreements. Plaintiffs claim also that the full extent of defendants' activities was not apparent until early 2001, when they discovered the United States Senate Report identifying the Barasch Family as owning Churchill.
Although they ask for dismissal of the ERISA claims in their entirety, defendants do not explain why claims arising out of contracts other than the 1991 agreement between the Union Mutual Fund Pension Plan and Financial Administrators should be dismissed under ERISA § 413(2). Defendants assert that all the Funds filed Forms 5500, but they do not argue, nor could they, that these forms gave Individual Plaintiffs actual notice of the alleged breaches of fiduciary duty.
Notwithstanding the Forms 5500 filed by the Union Mutual Fund Pension Plan since 1991, Individual Plaintiffs' ERISA claims cannot be dismissed in any part based on the three-year statute of limitations. First, without any factual development on the issue, it is impossible to conclude that the Forms 5500 gave plaintiffs actual knowledge of the "essential facts" of the transactions constituting the violation. Martin, 966 F.2d at 1086. Plaintiffs allege not only that service providers charged excessive fees, but also that they were granted long-term contracts without competitive bidding. (Compl. ¶ 33).
Second, like the public attention that the alleged ERISA violations supposedly received, the financial reports filed with the IRS might suggest that Individual Plaintiffs had constructive notice of some alleged violations. See Diduck v. Kaszycki Sons Contractors, Inc., 974 F.2d 270, 283 (2d Cir. 1992) ("A defendant who is on notice that conduct violates a fiduciary duty is chargeable with constructive knowledge of the breach if a reasonably diligent investigation would have revealed the breach."). However, a single clause in a Summary Plan Description referencing the Plan's financial reports does not, on its own, give actual notice of the content of those reports. Even where a plaintiff openly questioned the legality of a transaction more than three years before filing suit, a court in this district found that the plaintiff did not necessarily have actual knowledge of an ERISA violation under section 413(2) of the ERISA statute. See United States v. Mason Tenders Dist. Council, 909 F. Supp. 882, 891 (S.D.N.Y. 1995) (finding that a newspaper article quoting a Labor Department official as saying that real estate transactions "certainly looked interesting" did not indicate that the Department had actual knowledge of the violations, but only that "the United States Department of Labor was alert to the need to conduct an investigation into the transactions"). Here, defendants have demonstrated only that plaintiffs could have examined tax forms detailing the fees paid for services provided to one plan. Absent a showing that plaintiffs actually did examine those forms and learned of the transactions, the court cannot impute actual knowledge to them.
B. The Six-Year Limit
Under § 413(1), an ERISA suit must be initiated within six years of the last action which constituted a part of the breach. With the exception of Stephen Barasch, all ERISA defendants argue that plaintiffs' breach of fiduciary duty claims are barred by the six-year statute of limitations. According to these defendants, when fiduciaries engage in a series of alleged ERISA violations, the statute of limitations runs from the time of the first violation and does not run anew for successive violations that merely maintain the status quo. Thus, plaintiffs' ERISA claims accrued when each the fiduciaries first entered into the disputed contracts with each of the service providers over six years ago.
Individual Plaintiffs and Miranda rely on the Seventh Circuit's decision in Martin. That case involved a Department of Labor ("DOL") suit against both the trustees of a multi-employer health and welfare fund and Consultants Administrators ("C A"), a corporation that supplied the fund with dental services. The DOL charged that the trustees violated provisions of ERISA by awarding noncompetetive contracts to C A, by operating a kickback scheme with C A, and by otherwise breaching their fiduciary duties. Martin, 966 F.2d at 1082. Defendants moved for summary judgment on the ground that the claims were barred by ERISA's statute of limitations. With respect to plaintiff's claim that the trustees had used improper bidding procedures, the Seventh Circuit found that plaintiff was aware of the 1984 procedure and that the ERISA claim based on that contract was therefore barred under the three-year statute of limitations used in actual notice cases. Id. at 1087. However, the Court rejected defendants' argument that because the bidding procedure for the service contract did not change between 1984 and 1987, the claims arising out of the 1987 contract were also barred by the statute of limitations:
The flaw in the trustees' argument is that it ignores the continuing nature of a trustee's duty under ERISA to review plan investments and eliminate imprudent ones. If knowledge of an ERISA violation barred claims based on similar future conduct, this continuing fiduciary duty would be severely weakened, and trustees would be left free to engage in repeated violations, so long as they have once been discovered but not sued. On the other hand, we must not allow the "continuing violation" theory to be abused by plaintiffs who delay bringing suit in the hope of racking up damages. Such abuse is avoided here because we have found that the DOL may not recover for bidding activities on the 1984 contract. Strictly speaking, we are faced here with a repeated, rather than a continued, violation. The bidding activity on the 1987 contract . . . is more accurately characterized factually as a distinct transaction. First, it involved a new and separate contract. And second, although the trustees employed similar bidding procedures for the 1984 and 1987 contracts, those procedures, rather than being part of a formal policy, were separately considered and decided upon with respect to each contract.Id. at 1087-88. Thus, the Martin Court allowed the suit to go forward insofar as it was based on the renewal of the service contract.
Plaintiffs argue that, because all of the agreements at issue in this case have been renewed within six years of the date on which the complaint was filed, the present action is timely under the reasoning in Martin. Defendants respond that Martin is distinguishable from this case and that, rather than following Martin, this court should follow Miele v. Pension Plan of New York State Teamsters Conference Pension Retirement Fund, 72 F. Supp.2d 88 (E.D.N.Y. 1999).
Miele involved an ERISA action against employee pension fund trustees alleging that they miscalculated Miele's benefits. The trustees argued that Miele's claims were barred by the six-year statute of limitations, because the claims accrued when Miele was informed of the alleged miscalculation almost ten years before he filed suit. Miele argued that a new statute of limitations began to run upon each monthly payment of the miscalculated benefit. Id. at 100. The Court rejected Miele's "continuing violation" theory. Referring to the Ninth Circuit's decision in Meagher v. International Ass'n of Machinists Aerospace Workers Pension Plan, 856 F.2d 1418 (9th Cir. 1988), in which the Ninth Circuit held that a pension plan amendment which resulted in the plaintiff's receiving reduced benefits triggered new causes of action and thus new statutes of limitations with the issuance of each check, the Miele Court explained:
[R]ecent Ninth Circuit case law calls into question the viability of the continuing claims theory, and courts in other circuits, including this one, have rejected the Meagher approach. As a result, the court does not attach much significance to the plaintiff's reliance on Meagher.
But most importantly, the court does not believe that the continuing claims doctrine is applicable to facts of the instant case. It is well-settled that the continuing claims doctrine does not apply to a claim based on a single distinct event which has ill effects that continue to accumulate over time. Rather, for the continuing claim doctrine to apply, the plaintiff's claims must be inherently susceptible to being broken down into a series of independent and distinct events or wrongs, each having its own associated damages.Id. at 101-02. (citations and footnote omitted)
Defendants reliance on Miele is misplaced. The Miele Court explained exactly why the "continuing violation" theory is problematic as applied to miscalculations of benefits. According to Miele, fiduciaries have no obligation "to continually reassess claim denials or benefit underpayments on a monthly basis." Miele, 72 F. Supp.2d at 102 n. 14. Because there is no such obligation, the fiduciary does not independently violate ERISA each time a Plan pays out too much or too little as a result of an initial miscalculation of benefits.
Yet this reasoning does not apply to the renewal of long-term contracts with service providers. Martin concluded that "[s]trictly speaking, we are faced with a repeated, rather than a continued, violation," Martin, 966 F.2d at 1088 (emphases in original), because, unlike the disbursement of benefits subsequent to a calculation of how much a participant is owed, the renewal of a contract clearly implicates a trustee's duty to review plan investments and eliminate imprudent ones. See id. at 1087-88 ("The flaw in the trustees' argument is that it ignores the continuing nature of a trustee's duty under ERISA to review plan investments and eliminate imprudent ones."); see also Morrisey v. Curran, 567 F.2d 546, 549 n. 9 (2d Cir. 1977) ("The trustee's obligation to dispose of improper investments within a reasonable time is well established at common law.").
A case from this district, cited by Martin and distinguished by Miele, is also persuasive. In Buccino v. Continental Insurance Co., 578 F. Supp. 1518 (S.D.N.Y. 1983), the plaintiffs alleged that fiduciaries of an employee benefit fund knowingly induced the fund to buy and retain individual life insurance policies even though they were more costly than a group policy. The defendants claimed that the action was barred by the six-year statute of limitations because the decision to acquire individual life insurance policies was made in 1971 and the payment of excessive premiums "simply flowed from the 1971 purchase decision." Id. at 1521. The Court rejected that argument, reasoning that "as Fund fiduciaries they were under a continuing obligation to advise the Fund to divest itself of unlawful or imprudent investments" and concluding a new claim arose each time the Fund made a premium payment. Id. (citing Morrisey, 567 F.2d at 548-49).
Like the defendants in Martin and Buccino, defendants in this case have a continuing duty to review plan investments. If the facts alleged in the complaint are proved, that duty was violated each time defendants renewed imprudent contracts with fund administrators. Applied to the present case, Martin and Buccino dictate that plaintiffs may sue defendants for renewing service contracts within six years of the date on which the complaint was filed, but not for entering those contracts in the first instance. See Martin, 966 F.2d at 1088 (finding that "the 1984 bidding claim is barred by the statute of limitations, but the 1987 bidding claim survives"); Buccino, 578 F. Supp. at 1522-23 (allowing the action go forward "to the extent that it is based upon defendants' failure to terminate the allegedly unlawful and imprudent insurance policies"). Thus, the complaint is dismissed to the extent plaintiffs seek relief for harms resulting from contracts entered into or renewed before September 7, 1995. However, the statute of limitations does not bar plaintiffs' action to the extent that it is based upon renewals of those contracts within six years of filing the complaint.
Just as allowing a plaintiff to use the continuing violations theory to delay bringing suit after learning about ERISA violations would frustrate the purpose of section 413(2), allowing a plaintiff to use the theory to recover for violations occurring over six years before a complaint is filed would frustrate the purpose of section 413(1). See Buccino, 578 F. Supp. at 1522. Once the renewal of a contract is deemed to be a separate transaction, section 413(1) directly bars only suits arising out of the original contract, or renewals, entered into more than six years before the complaint was filed.
The original complaint in this action is dated September 7, 2001.
Plaintiffs allege that, in addition to the trustees, George Barasch, Stephen Barasch, Linda Barasch Glazer, and Richard Glazer have breached their fiduciary duties under ERISA. (Compl. ¶¶ 57-61) These defendants move to dismiss the ERISA claims against them on the ground that they are not fiduciaries within the meaning of ERISA. In response, plaintiffs argue that they have adequately alleged that these defendants are fiduciaries of the Funds. Plaintiffs argue also that, even if particular defendants named in the complaint are not fiduciaries, they can be held liable for the trustees' breaches of fiduciary duty under sections 404, 405, and 406 of ERISA.
As a threshold matter, the court will not address the second argument, which amounts to an attempt by plaintiffs to rewrite the complaint by claiming in their opposition papers that they seek relief from non-fiduciaries. To remedy the abuses underlying the first and second claims for relief, plaintiffs ask the court to:
(a) permanently enjoin Defendant Trustees and fiduciaries from serving in a fiduciary capacity in a labor organization or employee benefit plan or as a party in interest to any employee benefit plans and (b) enter judgment against the Defendant Trustees, jointly and severally, in favor of George Miranda, the Individual Plaintiffs and the class they represent of employee benefit fund participants, in an amount of money equal to the damages they suffered as a result of the conduct by Defendants.
(Compl. at 38) Thus, clause (a) of the "Prayer for Relief" is directed to trustees and fiduciaries, not non-fiduciaries, and clause (b) is directed to trustees only. If particular defendants named in the complaint are not fiduciaries, then the complaint demands no relief from them as to the first two claims for relief.
ERISA defines a fiduciary of an employee benefit plan as follows:
A person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.29 U.S.C. § 1002(21)(A)(2000). Thus, "ERISA makes the existence of discretion a sine qua non of fiduciary duty." Pohl v. Nat'l Benefits Consultants, Inc., 956 F.2d 126, 129 (7th Cir. 1992).
The Department of Labor regulations that set forth the Department's interpretative guidelines further define the responsibilities of a fiduciary. The regulations provide that "persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures" and thus perform "purely ministerial functions" are not fiduciaries. 29 C.F.R. § 2509.75-8. The regulations further explain that the performance of ministerial functions includes, among other things, the application of rules determining eligibility for participation or benefits, the maintenance of service and employment records, the calculation of benefits, and the processing of claims. Id. See also Geller v. County Life Auto Sales, Inc., 86 F.3d 18, 21 (2d Cir. 1996).
According to non-trustee defendants, the allegations that they exercised discretionary authority and control over the funds are contradicted by the relevant plan documents and administrative services contracts, under which the trustees made all non-ministerial decisions on behalf of their respective funds. The terms of the employee benefit plans may be considered on this motion to dismiss, because these documents are referenced in and essential to the complaint. See Brass v. Am. Film Techs., 987 F.2d 142, 150 (2d Cir. 1993). However, these documents cannot establish dispositively that George Barasch, Stephen Barasch, Linda Barasch Glazer, and Richard Glazer were not fiduciaries of the Employee Benefit Funds.
Whether or not a person is a fiduciary is determined by the functions performed by that person, not by his or her title. Mertens, 508 U.S. at 252; Blatt v. Marshall Lassman, 812 F.2d 810, 812 (2d Cir. 1987). The complaint alleges that non-trustee defendants performed non-ministerial functions for the Employee Benefit Funds. First, the complaint alleges that, prior to 1999, these defendants made all decisions to invest the hundreds of millions of dollars controlled by the funds. (Compl. ¶ 55(c)). Second, the complaint alleges that these defendants selected the funds' trustees. (Compl. ¶ 55) Finally, the complaint alleges that these defendants make ultimate determinations regarding eligibility for benefits. (Compl. ¶ 55(f)).
Unlike ministerial functions such as drafting plan documents, providing advice on tax and insurance issues, and making initial determinations about eligibility for benefits, the tasks isolated in the complaint — directing the Funds' investments, selecting the trustees, and making final decisions about eligibility — are not ministerial. See Blue Cross Blue Shield of Ala. v. Sanders, 138 F.3d 1347, 1353 (11th Cir. 1998) (holding that third-party administrators are fiduciaries if they "have the authority to make ultimate decisions regarding benefits eligibility"); Reich v. Lancaster, 55 F.3d 1034, 1046 (5th Cir. 1995) (concluding that a party is a fiduciary to a fund where he "in effect, exercised discretionary authority and control over assets of the Fund" because the trustees accepted every recommendation he made); Hickman v. Tosco Corp., 840 F.2d 564, 566 (8th Cir. 1988) (explaining that a defendant corporation "is a fiduciary within the meaning of ERISA . . . because it appoints and removes the members of the administrative committee that administers the pension plan"); Liss v. Smith, 991 F. Supp. 278, 301 (S.D.N.Y. 1998) (explaining that while "mere influence does not transform [an advisor] into a fiduciary, in `some situations, an advisor's influence may be so great that it confers effective discretionary authority'") (quoting Reich, 55 F.3d at 1048); Whitfield v. Tomasso, 682 F. Supp. 1287, 1305 (E.D.N.Y. 1988) (concluding that a union is liable for trustees' fiduciary breaches where it appointed and removed the trustees). In light of plaintiffs' allegations that Barasch Family members performed non-ministerial functions, this court cannot conclude, as a matter of law, that they are not fiduciaries.
The cases from this district relied on by defendants do not support a different result. In DeLaurentis v. Job Shop Technical Services, Inc., 912 F. Supp. 57, 61-62 (S.D.N.Y. 1996), the Court held that a plaintiff had not alleged facts sufficient to establish a defendant's fiduciary status where the complaint merely identified the defendant as the entity responsible for drafting a plan and preparing quarterly statements. Likewise, in Protocare of Metropolitan New York v. Mutual Ass'n Administrators, Inc., 866 F. Supp. 757, 762 (S.D.N.Y. 1994), this Court held that a plaintiff had not alleged facts sufficient to establish an administrator's fiduciary status where the complaint stated only that an administrator made initial eligibility determinations based on pension plan rules. In each of these cases, the plaintiffs did not make factual allegations supporting the inference that the defendants performed non-ministerial functions. Here, by contrast, plaintiffs have alleged several facts supporting that inference.
Similarly, in Geller, 86 F.3d at 21, the Second Circuit affirmed the dismissal of a complaint stating only that an employer and two of its officers sent reports to benefit plan trustees, acknowledged and guaranteed that the employees listed were in fact eligible for the group insurance, and remitted premiums. Unlike those allegations, the allegations in this case support the inference that defendants are fiduciaries.
Defendants' attempts to cast doubt on plaintiffs' factual allegations are also unavailing at this stage of the litigation. Defendants assert that, consistent with the terms of the contracts between the Funds and the administrators, they merely provided investment advice to the trustees. Yet the complaint alleges the opposite. (Compl. ¶ 55(c)). Defendants assert also that they simply applied pension plan rules in making initial determinations regarding eligibility. Once again, the complaint alleges the opposite. (Compl. ¶ 55(f)) Finally, defendants assert that, in light of the Labor Management Relations Act's requirement that half the trustees of each benefit fund be elected by the contributing employers, they could not possibly select enough trustees to control the employee benefit funds. Although this assertion seems plausible, the role of a district court in reviewing a motion to dismiss "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Ryder Energy Distribution Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774, 779 (2d Cir. 1984) (internal quotation marks omitted). This court cannot grant defendants' motion to dismiss simply because defendants deny the allegations in the complaint and offer plausible grounds on which to discount the allegations. Plaintiffs are entitled to prove that George Barasch, Stephen Barasch, Linda Barasch Glazer, and Richard Glazer are ERISA fiduciaries.
UMF Trustees move to dismiss the ERISA claims against them on the alternative ground that plaintiffs' allegations are so conclusory as to be meaningless. According to UMF Trustees, the allegations fail to give fair notice of plaintiffs' claims and the grounds on which they rest. I disagree.
Plaintiffs claim that the trustees and non-trustees have violated sections 404, 405, and 406 of ERISA. Section 404, in relevant part, provides:
[A] fiduciary shall discharge his duties 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 expenses of administering the plan; (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
Section 405, in relevant part, provides:
In addition to any liability which he may have under any other provisions of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances: if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach . . ., if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
Section 406, in relevant part, provides:
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 transaction constitutes a direct or indirect — sale or exchange, or leasing, of any property between the plan and a party in interest . . ., furnishing of goods, services, or facilities between the plan and a party in interest . . . transfer to, or use by or for the benefit of a party in interest, of any assets of the plan.
With respect to section 404, the complaint alleges, inter alia, that the Funds' fiduciaries directed the Funds to enter long-term, one-sided administrative services contracts under which service providers have been overpaid. Plaintiffs allege also that the trustees failed to diversify the investments of the plan. With regard to section 405, the complaint alleges that non-trustee defendants participated knowingly in the trustees' breaches of fiduciary duty as co-fiduciaries, and failed to remedy those breaches. Finally, with respect to section 406, the complaint alleges that the trustees of the Funds engaged in transactions that constituted sales to, exchanges with, and transfers to parties in interest. The complaint alleges also that non-trustee defendants dealt with the assets of the Employee Benefit Funds in their own interest rather than in the interest of the Funds. These allegations give defendants fair notice of plaintiffs' claims, and are sufficient to withstand a motion to dismiss. See Salahuddin v. Cuomo, 861 F.2d 40, 42 (2d Cir. 1988) ("Dismissal . . . is usually reserved for those cases in which the complaint is so confused, ambiguous, vague, or otherwise unintelligible that its true substance, if any, is well disguised.").
Defendants move to dismiss the two RICO claims on the ground that plaintiffs lack standing to bring those claims under 18 U.S.C. § 1964(c). This motion is properly construed as a Rule 12(b)(6) motion rather than a Rule 12(b)(1) motion. See Lerner v. Fleet Bank, 318 F.3d 113, 128 (2d Cir. 2003).
"RICO renders criminally and civilly liable `any person [a] who uses or invests income derived `from a pattern of racketeering activity' to acquire an interest in or to operate an enterprise engaged in interstate commerce, [18 U.S.C.] § 1962(a); [b] who acquires or maintains an interest in or control of such an enterprise `through a pattern of racketeering activity,' § 1962(b); [c] who, being employed by or associated with such an enterprise, conducts or participates in the conduct of its affairs `through a pattern of racketeering activity,' § 1962(c), or, finally, [d] who conspires to violate [any of] the first three subsections of [18 U.S.C.] § 1962, § 1962(d)." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 232-33 (1989) (quoting 18 U.S.C. § 1962). The civil RICO cause of action arises out of 18 U.S.C. § 1964(c), which provides: "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee. . . ."
The complaint alleges that plaintiffs were harmed by (1) the increase in union dues caused by the diversion of funds from the treasury of ATC; and (2) the limitations and restrictions on benefits offered to participants in the Employee Benefit Funds, which resulted from the alleged mismanagement of the funds by the trustees and other members of the Barasch Enterprise. Defendants argue that plaintiffs lack standing to bring a RICO action because they have not adequately alleged that they were injured "by reason of" the RICO predicate acts alleged in the complaint. For the following reasons, I agree.
In Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), the Supreme Court held that the "by reason of" language in section 1964(c) requires a showing by the plaintiff that his or her injuries are proximately caused by the defendant's actionable conduct. Id. at 268. In determining whether a plaintiff's injuries have been proximately caused by a defendant's violations of section 1962, the crucial question is whether there is a direct connection "between the injury asserted and the injurious conduct alleged." Id. at 269. Absent such a direct connection, a plaintiff has no standing to bring a RICO suit. Id. at 268-69.
The Holmes Court isolated three reasons for RICO's directness requirement:
First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent, factors. Second, quite apart from problems of proving factual causation, recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. And, finally, the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.Id. at 269 (citations omitted).
Following the proximate cause analysis in Holmes, the Second Circuit has repeatedly reaffirmed that only "the targets, competitors and intended victims of the racketeering enterprise" have standing to bring civil RICO claims. Lerner, 318 F.3d at 124; see also In re Am. Express Co. S'holders Litig., 39 F.3d 395, 400 (2d Cir. 1994) (denying RICO standing to American Express shareholders because injury to the shareholders was neither the "preconceived purpose" nor the "specifically-intended consequence" of a scheme to discredit an American Express competitor); Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23-24 (2d Cir. 1990) (holding that the loss of employment for failure to cooperate in a RICO scheme was not proximately caused by racketeering activity because the employee was not "the target of the racketeering activity").
Accordingly, where damages to a plaintiff derive from an injury to a third party, the plaintiff lacks standing to bring a RICO action. See Laborers Local 17 Health Benefit Fund v. Philip Morris, Inc., 191 F.3d 229 (2d Cir. 1999) (concluding that union health and benefit fund lacked standing under RICO to sue tobacco companies for increased medical costs resulting from participants' and beneficiaries' tobacco-related illnesses because increased costs to the funds were a secondary result of direct harm suffered by the participants and beneficiaries at the hands of the companies); Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir. 1986) (dismissing civil RICO suit by shareholders of a bankrupt corporation against suppliers who allegedly forced the corporation into bankruptcy because "[t]he legal injury, if any, was to the firm" and "[a]ny decrease in value of plaintiffs' shares merely reflects the decrease in value of the firm as a result of the alleged illegal conduct").
As in Rand, courts have consistently found that shareholders, creditors, and employees of a corporation lack standing to sue under RICO where their injuries derive from direct injuries to the corporation itself. See Manson v. Stacescu, 11 F.3d 1127 (2d Cir. 1993) (dismissing RICO claims by shareholders, creditors and employees of a bankrupt company because their injuries were derivative of injuries to the corporation). Courts have also applied the direct injury test where a non-corporate entity, rather than one of its members, has been directly harmed. See Pappas v. Passias, 887 F. Supp. 465, 470 (E.D.N.Y. 1995) (concluding that a member of a Greek Orthodox Church had no standing to bring a civil RICO action against the hierarchy in the Archdiocese for allegedly misappropriating funds because "the injury he alleges has been incurred by an association or organization of which he is a member, and any derivative injury to him is no different from that sustained by similarly situated members of the same association or organization").
At least two district courts in this circuit have dismissed RICO claims brought by participants in employee benefit funds based on the direct injury test. See Donohue v. Teamsters Local 282 Welfare Funds, 12 F. Supp.2d 273, 278 (E.D.N.Y. 1998) (dismissing for lack of standing RICO claims brought by a fund participant against union officers and welfare fund trustees for alleged embezzlement of fund assets because the fund, rather than the individual plaintiff, was directly injured by the alleged embezzlement); Diduck v. Kaszynski Sons Contractors, Inc., 737 F. Supp. 792, 798 (S.D.N.Y. 1990) (dismissing for lack of standing a RICO claim brought by a benefit fund participant against a contributing employer for fraud because plaintiff who alleged his benefits were adversely affected was not directly injured by the alleged fraud — rather, the fund was directly injured), aff'd in part, rev'd in part on other grounds, 974 F.2d 270 (2d Cir. 1992).
Moreover, two circuit courts, as well as a district court in this Circuit, have dismissed RICO claims brought by union members based on the direct injury test where damages resulted from injuries to the unions. See Adams-Lundy v. Ass'n of Pro. Flight Attendants, 844 F.2d 245, 250 (5th Cir. 1988) (concluding that union member plaintiffs lacked standing to sue other union members because "[a]ny financial improprieties occurred with union funds and directly injured solely the union"); Bass v. Campagnone, 838 F.2d 10, 12 (1st Cir. 1988) (affirming dismissal of a suit brought by union members against union president on the ground that "[union members] allege an injury sustained by all of the members of the local collectively, rather than themselves individually"); Mayes v. Local 106, Int'l Union of Operating Eng'rs, No. 93 Civ. 716, 1999 WL 60135, at *3 (N.D.N.Y. Feb. 5, 1999) ("A plaintiff cannot bring a civil suit under RICO, in a personal capacity, where the injury he alleges has been incurred by a union of which he is a member and any derivative injury to him is no different from that sustained by similarly situated members of the same union."), aff'd 201 F.3d 431 (2d Cir. 1999).
The Second Circuit examined RICO standing in Commercial Cleaning Services, L.L.C. v. Colin Service Systems, Inc., 271 F.3d 374 (2d Cir. 2001). That case involved a class-action suit by a cleaning service alleging that a competitor hired undocumented aliens in violation of federal law, thereby enabling itself to underbid competing firms. Relying on the three policy factors addressed by Holmes, the Second Circuit held that Commercial's allegations satisfied the proximate cause requirement for civil RICO cases. According to the Court, the first factor — the difficulty of determining damages attributable to the RICO violations — weighed against dismissal of the RICO action because hiring illegal alien workers may have directly affected the plaintiff's bargaining power. Id. at 382 ("If plaintiffs can substantiate their claims, the plaintiffs may well show that they lost contracts directly because of the cost savings defendant realized through its scheme to employ illegal workers."). The second factor — the difficulty of apportioning damages among injured parties — also weighed against dismissal of the action because the class members were not alleging a derivative injury. Id. at 384 ("Unlike the situation in Holmes, Commercial and its fellow class members are not alleging an injury that was derivative of injury to others."). Finally, the third factor — the ability of other parties to vindicate the aims of the RICO statute — weighed against dismissal of the action because no class of potential plaintiffs were more directly injured by the alleged RICO violations. Id. at 385 ("In Holmes, those directly injured could be expected to sue, and their recovery would redound to the benefit of the plaintiffs suing for indirect injury. Here, in contrast, suits by governmental authorities to recover lost taxes and fees would do nothing to alleviate the plaintiffs' loss of profits.").
Unlike the plaintiffs in Commercial, plaintiffs in this case cannot pass the direct injury test, because, as in Pappas, Mayes, Donohue, Bass, and Adams-Lundy, the damages allegedly sustained by plaintiffs in this case merely derive from injuries to third parties. Because the injuries are derivative of direct injuries to the Employee Benefit Funds and ATC, the first two policy factors addressed by Holmes weigh against granting standing to Individual Plaintiffs. First, even if plaintiffs can prove their allegations, the damages attributable to the RICO violation would be difficult to determine, because factors aside from defendants' misconduct could account for the allegedly deficient benefits received by participants in Employee Benefit Funds and for the increased dues paid by ATC members. Second, it would also be difficult to apportion damages between the parties directly harmed by defendants' alleged misconduct, namely the union and the Funds, and Individual Plaintiffs.
However, the impact of the third Holmes factor — namely, the ability of other parties to vindicate the aims of the RICO statute — is unclear in this case. On the one hand, unlike in Commercial, there are private parties who have suffered direct injuries as a result of defendants' misconduct, and these parties appear to be the proper plaintiffs. On the other hand, denying standing to plaintiffs with derivative injuries is based on the presumed ability of the directly injured institutions to prosecute claims in their own name. Individual Plaintiffs argue that it is unrealistic to expect unions to sue those who control them. If the agency problem isolated by Individual Plaintiffs actually exists, the third Holmes factor arguably weighs against dismissal.
ATC Defendants cite several cases in which unions have sued their officers under RICO. See Doyle v. Kamenkowitz, 114 F.3d 371 (2d Cir. 1997) (local union was plaintiff in a RICO action against its former officers); Int'l Bhd. of Teamsters v. Carey et al., 163 F. Supp.2d 271 (S.D.N.Y. 2001) (international union was plaintiff in a RICO case against a former union officer). However, these cases merely confirm that unions pursue RICO suits against former officers. They do not undermine plaintiffs' contention that it is unrealistic to expect unions to sue their existing leadership.
Recognizing that unions may choose not to bring actions against those who control them, the First Circuit in Bass left open the possibility that an exception to RICO's standing scheme might be crafted in cases where plaintiff union members obtain class certification:
We recognize, of course, that the plaintiffs could not have initiated a derivative suit on behalf of the union . . . And we realize that it would have been fruitless to insist that the president, who ordinarily might sue on behalf of the local, initiate a RICO action in which he himself was to be named as a defendant. But the plaintiffs could have shown that they had the requisite support from the local to initiate an action on its behalf by obtaining class certification; had they been successful in this attempt, their complaint might have survived the motion for dismissal because it would have then alleged an injury common to the class of local members. We find it significant, however, that, in support of its argument opposing class certification, the defendant presented affidavits signed by approximately one-half of the membership of the local, in which the affiants attested to their belief in the defendant's innocence. Such strong opposition by those whom the action would assertedly benefit decisively undercuts the plaintiffs' claim for standing.Bass, 838 F.2d at 13 (citations omitted). Similarly, in Forbes v. Eagleson, No. 95 Civ. 7021, 1996 U.S. Dist. LEXIS 10583 (E.D. Pa. July 23, 1996), after concluding that a class of union members had standing to pursue a RICO claim against their labor representative because the union assigned its claims to the plaintiffs, the Court noted that "plaintiffs might have had standing even without the assignment." Id. at *14 n. 8. The Forbes Court pointed out that, unlike in Bass, where more than half the union members opposed the suit, there was "no such divergence of interests between the union and its constituent members" in the case at bar, where the plaintiffs had not yet moved for class certification. Id.
The dicta in Bass and Forbes suggest that if members of a union obtain class certification for a class made up of all union members, Holmes' directness requirement may be relaxed in order to ensure that union officials are held accountable for their misconduct. Under the logic of these cases, this court could defer its decision on RICO standing until a certification motion is decided. At that point, if the class were certified, the court could allow the RICO claims to go forward.
Although there may be cases in which the proposed exception should be applied, I decline to apply it in this case. The specific problem posed here — namely, how to resolve a conflict among the Holmes policy factors — is not new. In Laborers Local 17, the Second Circuit dealt with a case in which the first two Holmes factors weighed in favor of denying standing to a RICO plaintiff but the third factor appeared to weigh against dismissal for lack of standing. Laborers Local 17, 191 F.3d at 229. The case involved a RICO claim brought by labor union health and welfare trust funds against tobacco companies, alleging that the companies had engaged in a conspiracy to deceive the plaintiff funds with respect to the health risks associated with tobacco, causing the funds to expend millions of dollars to provide medical services for participants. The Court denied standing to the funds on the ground that their injuries derived from injuries to the individual smokers. Id. at 239. The Court then noted that "this conclusion is consistent with the three policy factors addressed by Holmes." Id. After concluding that both the first and the second policy factors weighed in favor of dismissal of the RICO causes of action for lack of standing, the Court turned to the third factor. The Court reasoned:
I decline also to embrace Individual Plaintiffs' more radical proposal that suits by union members, as a general rule, be exempted from the RICO standing scheme because an injury to a union is inevitably an injury to its members. Harms to unions, like harms to other organizations, indirectly affect the individuals who make up the union. Such indirect injury implicates the concerns raised by the Holmes Court regarding damage calculation and multiple recoveries.
The Funds correctly note that these RICO causes of action could not be asserted by the smokers or by the Funds in a subrogation action because the RICO statute requires an injury to "business or property," whereas the smokers' injuries are personal in nature. Hence, the Funds conclude there are no more directly injured "private attorneys general" who could vindicate the law for these alleged RICO violations. . .
Yet, to the contrary, our holding that plaintiffs lack standing under RICO need not bring about the result plaintiffs fear. The Funds may still bring a subrogation action to recover the medical costs paid out for the individual smokers, and the smokers themselves have sufficient independent incentive to pursue their own causes of action for such additional types of injuries as pain and suffering. Although these will not be RICO claims, they will remedy the harm done by defendants' alleged misconduct. Especially where such other actions are available, the lack of a RICO damages remedy for even direct personal injuries (such as those suffered by the individual smokers) actually weighs heavily against RICO standing for parties (such as the Funds) alleging harms that are purely contingent on personal injuries suffered by others.Id. at 241 (citations omitted).
The Second Circuit's reasoning is directly relevant to this case for at least three reasons. First, and perhaps most important, the Court indicated that where the directly injured parties have adequate remedies outside RICO, the third policy factor actually weighs against RICO standing. Here, Miranda and Individual Plaintiffs have pursued ERISA remedies on behalf of the Employee Benefit Funds. Moreover, Individual Plaintiffs have filed a claim against ATC officers under LMRDA § 501, which permits union members to recover on behalf of unions. Thus, denying RICO standing to Individual Plaintiffs will not prevent the injured parties in this case from undoing the direct harm done by defendants' alleged misconduct.
Second, the Court indicated that the threshold question in analyzing RICO standing is "whether the damages a plaintiff sustains are derivative of an injury to a third party." Id. at 238-39. The three policy factors "buttress the principle that plaintiffs with indirect injuries lack standing," id. at 239, but satisfying those policy considerations is not an independent prerequisite to RICO standing.
Finally, Laborers Local 17 suggests that parties with derivative injuries cannot claim RICO standing just because those parties serve as a close proxy for the directly injured parties. For RICO standing purposes, the Laborers Local 17 Court did not allow funds to serve as a proxy for their participants. Here, Individual Plaintiffs ask this court to reverse the equation, and allow participants in Employee Benefit Funds and members of unions to serve as proxies for the organizations they comprise. For all of the reasons stated above, this outcome is inconsistent with Holmes and its progeny.
Because I find that Individual Plaintiffs lack standing to prosecute their RICO claims, I need not decide whether the RICO claims are time-barred. Moreover, I need not address the myriad other grounds on which various defendants have moved to dismiss the RICO claims. Plaintiffs' third and fourth claims for relief are dismissed.
Individual Plaintiffs have applied for leave to file a claim for breach of fiduciary duty against defendants John Morro, Jack Siebel, Reginald Rosado, and James Crowley under Section 501 of the LMRDA. For the reasons stated below, leave to file an LMRDA claim is granted.
Section 501(a) provides, in pertinent part:
The officers, agents, shop stewards, and other representatives of a labor organization occupy positions of trust in relation to such organization and its members as a group. It is, therefore, the duty of each such person, taking into account the special problems and functions of a labor organization, to hold its money and property solely for the benefit of the organization and its members . . . .29 U.S.C. § 501(a)(2000). Section 501(b) states:
When any officer, agent, shop steward, or representative of any labor organization is alleged to have violated the duties declared in subsection (a) of this section and the labor organization or its governing board officers refuse or fail to sue or recover damages or secure an accounting or other appropriate relief within a reasonable time after being requested to do so by any member of the labor organization, such member may sue such officer, agent, shop steward, or representative in any district court of the United States or in any State court of competent jurisdiction to recover damages or secure an accounting or other appropriate relief for the benefit of the labor organization. No such proceeding shall be brought except upon leave of the court obtained upon verified application and for good cause shown . . . .Id. § 501(b). Individual Plaintiffs argue that they should be granted leave to pursue a breach of fiduciary duty action under section 501(a) because they have satisfied the requirements contained in section 501(b). ATC Defendants respond that Individual Plaintiffs' request is premature and that Individual Plaintiffs lack good cause to sue under the LMRDA.
The ATC Defendants do not dispute that Individual Plaintiffs have submitted a "verified application" to this court.
According to ATC Defendants, Individual Plaintiffs' request for leave is premature because Individual Plaintiffs have failed to show that ATC or its governing board "refuse[d] or fail[ed] to sue or recover damages . . . or other appropriate relief within a reasonable time." Id.
The facts bearing on Individual Plaintiffs' application are as follows: On March 2, 2001, Individual Plaintiffs sent a letter to John Morro, president of the ATC, requesting that the ATC take action to sue or recover damages for breaches of fiduciary duty in violation of Section 501(a), including the payments made to the Foundation and to BBB. (Compl. Ex. A) On April 6, 2001, Morro responded that "we have conducted a preliminary investigation of your allegations and have not found any evidence of wrongdoing." (Wolf Decl. Ex. A) Morro stated also that ATC would "investigate each of the issues you raised" and asked Individual Plaintiffs to provide ATC with evidence of wrongdoing. ( Id.) In an April 18, 2001 letter, Individual Plaintiffs restated the allegations against ATC officers in stronger terms and demanded that Morro call a meeting of the union membership to elect a committee to hear the charges. (Wolf Decl. Ex. B) In a May 10, 2001 letter, Morro declared that the allegations in the April 18 letter were false and accused Individual Plaintiffs' counsel of using the named plaintiffs to pursue a campaign on behalf of a rival union to take members away from the ATC. Morro also reiterated that "we are committed to and shall continue to investigate these charges and resolve all issues in compliance with the ATC Constitution and By Laws." Finally, Morro requested that any evidence of wrongdoing be turned over to the union and informed Individual Plaintiffs that copies of the charges in their March 2 letter and a copy of the April 18 letter had been given to the individuals named in the March 2 letter. (Wolf Decl. Ex. C).
ATC Defendants argue that Individual Plaintiffs are not eligible for leave to file suit because, when the suit was filed, ATC's officers were acting to address the Individual Plaintiffs' complaints. In support of their contention that Individual Plaintiffs' lawsuit is premature, ATC Defendants cite Commer v. McEntee, 145 F. Supp.2d 333, 339 (S.D.N.Y. 2001) ("The demand itself is not sufficient to confer rights upon the putative plaintiff under the statute, as the union must also refuse to take remedial action or to initiate suit within a reasonable period of time . . ."), vacated in part on other grounds, 34 Fed. App. 802 (2d Cir. 2002), and Hastings v. Green, No. 98 Civ. 2490, 1999 WL 1495423, at *7-8 (E.D.N.Y. Dec. 30, 1999) (finding that the union "did not refuse a request by plaintiffs to sue or to secure other appropriate relief, which is a prerequisite for bringing an action").
However, in Commer and Hastings, the plaintiffs did not demand that the defendants take legal action. Commer, 145 F. Supp.2d at 339 ("At the most, Commer in his correspondence with McEntee sought an investigation without demanding legal action against particular officers."); Hastings, 1999 WL 1495423, at *7 ("Plaintiff made no request for the commencement of legal proceedings."). Here, on the other hand, Individual Plaintiffs specifically requested that the Executive Board of the ATC "take action to sue or recover damages" from ATC Defendants. Yet, six months after receiving the request, the Board had neither sued nor recovered damages from ATC Defendants. The union had "a reasonable time" to respond to Individual Plaintiffs' complaints, but failed to take any action. See Purcell v. Keane, 406 F.2d 1195 (3d Cir. 1969) (holding that a one month period was a sufficient length of time under section 501(b) between the demand to sue and the plaintiff's filing of the suit, where the union investigative subcommittee did nothing during this time); Bentivegna v. Bevona, No. 97 Civ. 1989, 1998 U.S. Dist. LEXIS 1958, at *7 (S.D.N.Y. Feb. 24, 1998) (finding that three months and ten days constituted "reasonable time"); Carroll v. Bd. of Trs., Ohio Highway Drivers Welfare Trust, 573 F. Supp. 935, 937 (S.D. Ohio 1983) ("Plaintiffs sued in this Court about one month after Plaintiffs' counsel initially wrote opposing counsel. This would seem to be a `reasonable time' in which to wait to bring suit . . . ."); Richardson v. Tyler, 309 F. Supp. 1020 (N.D. Ill. 1970) (holding that 5 months between the time a request to sue was made and a complaint was served was a "reasonable time" where the union had failed to take any affirmative action).
The content of Morro's letters is also relevant. Morro did not simply say that the allegations would be investigated and that the matter would be resolved in due time. Rather, in the course of his two letters, Morro stated that a preliminary investigation had uncovered no wrongdoing, denied plaintiffs' allegations, and accused plaintiffs' counsel of using the named plaintiffs to pursue a campaign on behalf of a rival union. After all these statements, defendants cannot avoid liability under section 501 simply by asserting that the final investigation is still in progress. See Carroll, 573 F. Supp. at 937 ("It may be true that a `dialogue' is `ongoing' between counsel. But nothing in § 501(b) requires that court proceedings be held in abeyance until the dialogue is completed."). Individual Plaintiffs have adequately demonstrated that the ATC "refuse[d] or fail[ed] to sue or recover damages . . . or other appropriate relief within a reasonable time."
ATC Defendants argue next that Individual Plaintiffs lack good cause to sue under section 501 of the LMRDA. To establish "good cause," Individual Plaintiffs must show a reasonable likelihood of success and, with regard to any material facts alleged, must have a reasonable ground for belief in their existence. Dinko v. Wall, 531 F.2d 68, 75 (2d Cir. 1976) Defendants assert that Individual Plaintiffs have not satisfied these requirements.
The LMRDA does not authorize courts to intervene in the day-to-day activities of labor unions. Gurton v. Arons, 339 F.2d 371, 375 (2d Cir. 1964). Thus, as a general rule, union officers are not in violation of Section 501 unless they act beyond their authority. Guzman v. Bevona, 90 F.3d 641, 645-46 (2d Cir. 1996) However, "even authorized conduct may violate section 501 if (a) the officer personally benefitted from the expenditure and (b) the expenditure was `manifestly unreasonable.'" Id. at 646 (quoting Morrissey v. Curran, 650 F.2d 1267, 1274 (2d Cir. 1981)). Thus, a union officer who acts in accordance with the union's constitution and by-laws can violate Section 501 if he engages in deliberate self-dealing. Id. at 645-46.
The complaint does not allege that the payments at issue were unauthorized. Rather, the complaint alleges that ATC Defendants personally benefitted from the union s expenditures in the following ways: first, defendant Crowley received a free trip to England (Compl. ¶ 84); second, defendants Morro, Rosado, and Crowley received a subsidized trip to Kutsher's Resort ( Id. ¶ 85); third, defendants Morro, Siebel, Rosado, and Crowley had pecuniary or personal interests in BBB and the Foundation ( Id. ¶ 86). The complaint alleges also that the substantial payments to the Foundation and BBB, which totaled over $1.5 million and comprised a large portion if not all of the union's annual revenue from dues, had no legitimate union purpose and were not proportional to services rendered to ATC. ( Id. ¶¶ 81-88).
These detailed allegations establish Individual Plaintiffs' reasonable ground to believe that defendants personally benefitted from the ATC contributions to the Foundation and that these contributions were manifestly unreasonable. In Dinko, the Second Circuit defined the plaintiff's burden under section 501(b) as follows:
The factual showing to institute a suit should be no more demanding than that required to defend it against a motion for summary judgment; indeed, it should be somewhat less, since at the earlier stage a plaintiff has not yet had a chance for discovery and a defendant will still have the later protection of a summary judgment motion.Dinko, 531 F.2d at 75. As applied to this case, Dinko dictates that Individual Plaintiffs have met their burden, because the ATC Defendants have offered no evidence to rebut the allegations of deliberate self-dealing. The movant for summary judgment "always bears the initial responsibility of informing the district court of the basis for its motion" and identifying which materials "demonstrate the absence of genuine issues of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). With respect to the allegations in paragraphs 81 through 88 of the complaint, the ATC Defendants have not fulfilled this initial responsibility.
Moreover, the allegations in the complaint are sufficient to establish a reasonable likelihood of success. Individual Plaintiffs allege that in 1996, 1997, and 1999, ATC, which had dues receipts of $1,132,239, gave $1 million to the Foundation — a "manifestly unreasonable" diversion of funds away from the union. Individual Plaintiffs allege also that the officer defendants personally benefitted from the diversion of funds to ATC. If Individual Plaintiffs prove these allegations, there is a reasonable likelihood that their section 501(a) action will succeed.
ATC Defendants argue also that Bona and Thomas lack standing to sue under the LMRDA. This argument has no bearing on whether Individual Plaintiffs' application to file a claim should be granted because there is no dispute that Elaine N. Cogdell, Jose Martinez, and Haywantie Singh are members of ATC with standing to bring an action on behalf of the organization.
IX.The Barasch Family, along with Financial Administrators and BBB, moves to strike plaintiffs' demand for a jury trial on the two ERISA claims. Although neither Individual Plaintiffs nor Miranda has responded to the motion, they have not waived their right to a jury trial. The right to trial by jury in civil cases is protected by the Seventh Amendment. Gargiulo v. Delsole, 769 F.2d 77, 79 (2d Cir. 1985). This right can be waived knowingly and intentionally, but its waiver is not lightly inferred. Id. at 79; Bank of China, N.Y. Branch v. NBM L.L.C., No. 01 Civ. 0815, 2002 WL 1072235, at *1 (S.D.N.Y. May 28, 2002). Thus, I will consider the motion to strike on the merits.
The Seventh Amendment provides that "[i]n Suits at Common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved." U.S. Const. amend. VII. The right to a jury trial exists, and will be "carefully preserved," where legal rights are at issue. Chauffeurs, Teamsters and Helpers Local No. 391 v. Terry, 494 U.S. 558, 565 (1990). In determining whether a particular action will involve a determination of legal rights, a court must examine both the nature of the issues involved and the remedy sought, with the second inquiry being the more important. Id.; see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 42 (1991) ("The second stage of this analysis is more important than the first."). The Supreme Court has intimated that the inquiry into whether legal rights are at issue for Seventh Amendment purposes is similar to the inquiry into whether a party is seeking "other equitable relief" under ERISA § 502(a)(3). See Great West, 534 U.S. at 217.
I am not suggesting that the two inquiries are identical. In some situations, claims that would traditionally be considered equitable have not been deemed equitable for the purposes of the ERISA statute. See Mertens, 508 U.S. at 253-54 (indicating that ERISA does not allow recovery against non-fiduciaries who knowingly assist in a fiduciary's breach of duty even though trust law has long made non-fiduciaries liable for breach of trust).
The Second Circuit has repeatedly held that there is no jury trial available where plaintiffs seek equitable relief under ERISA. Sullivan v. LTV Aero. Def. Co., 82 F.3d 1251, 1258 (2d Cir. 1996) (finding that there is no right to a jury trial on an ERISA claim where the relief sought is "equitable in nature"); Katsaros v. Cody, 744 F.2d 270, 278 (2d Cir. 1984) ("Nor were appellants entitled to a jury trial of the claims against them since the plaintiffs seek equitable relief in the form of removal and restitution as distinguished from damages . . . ."), cert. denied sub nom. Cody v. Donovan, 469 U.S. 1072 (1984).
Based on Sullivan and Katsaros, plaintiffs have no right to a jury trial on their section 502(a)(3) claims. Moreover, neither Individual Plaintiffs nor Miranda is entitled to a jury trial on the ERISA claims against defendants other than the trustees because, with regard to those defendants, the complaint seeks injunctive relief. ( See Compl. at 38) One question remains: Are plaintiffs entitled to a jury trial on their section 502(a)(2) claims against the trustees? If so, the demand for a jury trial cannot be stricken at this stage of the litigation.
Because Miranda is an ERISA fiduciary suing on behalf of Employee Benefit Funds, section 409(a), by way of section 502(a)(2), entitles him to sue the trustees for damages or equitable relief arising from the alleged breach of fiduciary duty. Likewise, because Individual Plaintiffs represent a class of participants in the Employee Benefit Funds suing on behalf of the funds, section 409(a), by way of section 502(a)(2), entitles them to sue the trustees for damages or equitable relief arising from the alleged breach of fiduciary duty. For Seventh Amendment purposes, therefore, the narrow issue is whether Miranda and Individual Plaintiffs have sued the trustees for damages under section 502(a)(2) or whether they have sought an equitable remedy under that section.
The Supreme Court has indicated that for Seventh Amendment purposes, the equitable clean-up doctrine does not apply; thus, if a case involves requests for both injunctive and legal relief, a court may not deny the right to jury trial on the legal claim by stating that the legal remedy is incidental to the request for an injunction. See, e.g., Tull v. United States, 481 U.S. 412, 425 (1987); Curtis v. Loether, 415 U.S. 189, 196 n. 11 (1974).
Several courts have addressed the availability of a jury trial under ERISA § 502(a)(2). At least one court has concluded that, because ERISA fiduciary duty claims are distinct from trust enforcement claims traditionally heard by equity courts, section 502(a)(2) provides a right to a jury trial. See Cedar Rapids Pediatric Clinic Employees Pension Plan Trust v. Cont'l Assurance Co., No. 86 Civ. 5192, 1988 U.S. Dist. LEXIS 17467 (W.D. Ark. 1988) (finding that an action for breach of fiduciary duty under section 502(a)(2) is an action at law rather than at equity "since the action is not brought to enforce a trust"), remanded on other grounds, 957 F.2d 588 (8th Cir. 1992). On the other hand, most courts in this district and others have concluded that plaintiffs have no right to a jury trial in actions brought under section 502(a)(2). See Diduck, 737 F. Supp. at 811 (concluding that "no jury trials obtain under sections 409 and 502(a)(2) of ERISA" because "[c]laims for breach of fiduciary duty have traditionally been characterized as equitable" and "the nature of the relief afforded pursuant to section 409 is equitable and not legal"). In the most extensive treatment of the issue, one Court reasoned:
[I]ssues raised under § 1132(a)(2) for breach of fiduciary duty are examined under trust law principles and fiduciary standards. Actions for breach of fiduciary duty by a trustee were within the exclusive jurisdiction of courts of equity at common law, and, thus, not triable by a jury. In actions under § 1132(a)(2), any entitlement to monetary relief necessarily turns upon whether or not the fiduciary has breached its ERISA duties; thus, any relief sought is necessarily intertwined with the equitable process of resolving the ultimate issue — whether or not there has been a breach of fiduciary duty. Consequently, the nature of the proceedings are inherently equitable.Broadnax Mills, Inc. v. Blue Cross and Blue Shield of Virginia, 876 F. Supp. 809, 816 (E.D. Va. 1995) (internal quotation marks and citations omitted). The Court thus struck the plaintiff's demand for a jury trial.
However, these cases antedate the Supreme Court's decision in Great-West. Although that decision did not deal with the right to a jury trial per se, the Supreme Court's explication of the distinction between law and equity, discussed in detail in Part III, is relevant here as well. As I concluded in Part III, the monetary relief sought by plaintiffs in this case cannot be characterized as equitable relief under Great-West. Rather, plaintiffs seek damages from the trustees on behalf of the Employee Benefit Funds. Because they seek money damages rather than an equitable remedy, both Miranda and Individual Plaintiffs are entitled to a jury trial on their ERISA claims. Cf. White v. Martini, No. 99 Civ. 1447, 2002 WL 598432, at *4 (D. Minn. Apr. 12, 2002) (concluding that a plaintiff seeking equitable restitution is not entitled to a jury trial in a suit based on section 502(a)(2) but implying that after Great-West a plaintiff seeking money damages under ERISA would be entitled to a jury trial).
One case in this district indicates that, notwithstanding Great-West, suits for breach of fiduciary duty are necessarily "in equity" and therefore do not carry a right to a jury trial. In Pereira v. Cogan, No. 00 Civ. 619, 2002 WL 989460 (S.D.N.Y. May 10, 2002), a bankruptcy trustee alleged that directors and officers of a corporation breached their fiduciary duty to the corporation and its creditors by subordinating the interests of the creditors to the interests of a dominant shareholder. Plaintiffs moved to strike the defendants' demand for a jury trial on the fiduciary duty claims, and the Court granted the motion. With respect to the first prong of the Terry test, namely the "nature of the issues involved," id. at *2, the Court concluded that "[t]he general rule is that `[a]ctions for breach of fiduciary duty, historically speaking, are almost uniformly actions "in equity" — carrying with them no right to trial by jury.'" Id. at *3 (quoting In re Evangelist, 760 F.2d 27, 29 (1st Cir. 1985))). With regard to the second prong of the test, namely "the nature of the remedy sought," id. at *2, the Court concluded that, although "restitution may be legal if ordered in a case at law," id. at *4, "[t]his is an equity case and therefore the restitution is equitable," id..
In reaching its conclusion that the plaintiffs were seeking equitable restitution simply because an action for breach of fiduciary duty is "in equity," the Pereira Court rejected the argument that "the relief sought . . . is not in fact restitution because the officers and directors never personally possessed any of the disputed funds themselves." Id. However, the Great-West Court stated explicitly that a plaintiff could seek restitution in equity only "where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant's possession." Great-West, 534 U.S. at 213. Thus, with respect to the second prong of the Terry test, i.e., the nature of the remedy sought, Pereira appears to be at odds with Great-West.
As the Supreme Court stated in Mertens, "all relief available for breach of trust could be obtained from a court of equity." Mertens, 508 U.S. at 257; see also Reich, 33 F.3d at 756 (noting that "the . . . concept of fiduciary obligation was invented by equity judges"). Therefore, as in any suit for breach of fiduciary duty, the first prong of the test — "compar[ing] the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity," Granfinanciera, 492 U.S. at 42 — weighs against a jury trial in the present case. However, the second, more important, prong of the test — "determin[ing] whether [the remedy sought] is legal or equitable" — weighs in favor of a jury trial, because, under the Court's analysis in Great-West, plaintiffs seek legal relief from the trustees. Because the remedy sought against the trustees of the Employee Benefit Funds is a legal remedy, the motion to strike plaintiffs' jury demand on the ERISA causes of action is denied.
Finally, the UMF Trustees move to dismiss the complaint for improper venue under Fed.R.Civ.P. 12(b)(3). ERISA has its own venue provision which states, in relevant part, that "an action . . . may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found." 29 U.S.C. § 1132(e)(2) (2000). Miranda contends that because defendant trustees Reginald Rosado, Stephen Camadeco, Bertram Gelfand, and Anthony Guigliano reside in the Southern District of New York, the ERISA claims cannot be dismissed for improper venue.
The UMF Trustees are defendants in the ERISA and RICO actions. Because the RICO action has been dismissed, I consider the ERISA claims only in addressing the UMF Trustees' Rule 12(b)(3) motion.
Acknowledging that some defendants reside in the Southern District, the UMF Trustees change course in their Reply Brief and ask this court to transfer the action to New Jersey sua sponte under 28 U.S.C. § 1404(a), which allows a district court to transfer any civil action to another district where "[f]or the convenience of parties and witnesses [and] in the interest of justice." According to the UNF Trustees, venue would be more appropriate in New Jersey because the operative facts took place in New Jersey, the Employee Benefit Funds are located in New Jersey, many of the defendants live in New Jersey, relevant documents are located in New Jersey, and the district court in New Jersey is fully familiar with the governing law and could efficiently handle this case.
In its initial Memorandum of Law, the UME Trustees mention ERISA's venue provision in a footnote only, and do not ask the court to transfer the action under section 1404(a).
A court may sue sponte transfer an action under 28 U.S.C. § 1404(a) after giving both parties notice and an opportunity to be heard. In Haskel v. FPR Registry, Inc., 862 F. Supp. 909, 916 (E.D.N.Y. 1994), for example, the Court transferred an action sua sponte on the ground that the plaintiff's choice of forum was inconsistent with the parties' forum selection clause, and plaintiff, in response to a motion to dismiss for improper venue, "failed to satisfy the heavy burden of proof to show that the serious inconvenience of the contractual forum warrants setting aside the forum selection clause." Id. at 1917 (citations omitted). Likewise, in Clisham Management v. American Steel Building Co., 792 F. Supp. 150, 157 (D. Conn. 1992), the Court, after initially denying a motion to transfer, reversed its earlier decision sua sponte after concluding that the case presented complex and novel issues of Texas law that should not be decided by a district court in Connecticut. Id. at 158.
Here, Individual Plaintiffs and Miranda have had no opportunity to respond to the trustees' belated request to transfer the action to New Jersey. Moreover, it appears that Individual Plaintiffs contest the first ground for transfer put forward by the Trustees — that the operative events in this lawsuit did not take place in the Southern District of New York. ( See Pl.'s Mem. at 48-49) Therefore, unlike the Haskell and Clisham Management Courts, which had strong grounds to believe that venue in their districts was inappropriate based on an existing record, this court has not been presented with facts sufficient to support a sua sponte transfer. Cf. Invivo Research, Inc. v. Magnetic Resonance Equip. Corp., 119 F. Supp.2d 433, 437 (S.D.N.Y. 2000) (noting that the "convenience of party and non-party witnesses is perhaps the most important consideration of a Section 1404(a) motion"); 800-Flowers, Inc. v. Intercontimental Florist, Inc., 860 F. Supp. 128, 133 (S.D.N.Y. 1994) (laying out nine separate factors to be considered in evaluating a motion to transfer under section 1404(a)).
* * *
For the reasons stated, defendants' motion to dismiss is granted in part and denied in part. The RICO claims are dismissed in their entirety for lack of standing. Bona and Thomas's ERISA claims, as well as the ERISA claims against trustees of the Union Mutual Medical Fund, are dismissed for lack of standing. Individual Plaintiffs' ERISA claims are also dismissed for lack of standing to the extent that Individual Plaintiffs seek monetary relief on their own behalf. Finally, the ERISA claims are time-barred except to the extent that they arise out of the renewal of service contracts within-six years of plaintiffs' filing the complaint. Plaintiffs' application for leave to file a claim for breach of fiduciary duty under LMRDA § 501 is granted. Defendants' motion to strike plaintiffs' jury demand is denied, and the UMF Trustees' motion to dismiss for improper venue is also denied. The parties will attend a conference on April 15, 2003 to discuss the progress of this litigation. The conference will be held at 9:15 a.m. in Room 21B of the United States Courthouse, 500 Pearl Street, New York, New York 10007.