CASE NO. 1:05CV1935.
December 18, 2006
MEMORANDUM OF OPINION AND ORDER [Order on Docket No. 20]
On August 5, 2005, plaintiff Elaine L. Chao, Secretary of the United States Department of Labor, filed this action pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. On September 22, 2005, the Secretary filed an amended complaint. The defendants are the Trustees of the Sheet Metal Workers Local No. 33 Cleveland Pension Plan (the "Plan"), and the Plan itself.
The Trustees are defendants Alan Chermak, Ken Castro, Donald Skala, Jr., and Robert Finley.
On November 21, 2005, pursuant to Fed.R.Civ.P. 12(f), the Secretary filed a motion to strike (Docket No. 20) certain affirmative defenses asserted by the Trustees in their answer to the amended complaint. The parties have fully briefed the issues. For the following reasons, the motion is granted.
The Secretary alleges that in February 1998, the Trustees retained Capital Consultants, LLC ("CCL") to serve as investment manager for a portion of the Plan's assets. Among CCL's investments were "collateralized notes", loans for which the collateral consisted largely of the borrower's potential revenues from sales of goods and services. In September 2000, in a separate action, the Department of Labor and the Securities and Exchange Commission sued CCL for making imprudent investments, self-dealing, and excessive fees in part in connection with investments comprising collateralized notes. (First Amended Complaint as ¶¶ 7-9.)
In the current action, the Secretary alleges that the Plan Trustees violated ERISA by causing or permitting CCL to make loans of Plan assets, in the form of collateralized notes, that a reasonably prudent lender would not have made. The Secretary further alleges that such loans violate the explicit investment guidelines of the Plan in various respects. (See First Amended Complaint as ¶¶ 11-18.) The Secretary claims that the Trustees are liable for breaches of their fiduciary duties to the Plan, and therefore are jointly and severally liable for the Plan's financial losses incurred as a result of the alleged imprudent investments.
On October 14, 2005, the Trustees answered the amended complaint. Among their affirmative defenses, the Trustees assert that the Secretary's claims are barred by the doctrines of laches, waiver, and estoppel (Trustees' answer at ¶ 25), and by the failure to join necessary and indispensable parties (Trustees' answer at ¶ 28). In the current motion, the Secretary moves to strike these affirmative defenses pursuant to Fed.R.Civ.P. 12(f).
Fed.R.Civ.P. 12(f) permits the Court to strike any "insufficient defense". An affirmative defense is insufficient as a matter of law only if a defendant cannot succeed on the defense under any set of facts which it could prove. Williams v. Provident Investment Counsel, Inc., 279 F. Supp. 2d 894, 905-06 (N.D. Ohio 2003), citing, EEOC v. First National Bank, 614 F.2d 1004, 1008 (5th Cir. 1980),cert. denied, 450 U.S. 917 (1981).
There exists a three-part analysis in determining whether to strike an affirmative defense. First, the defense must be pleaded as an affirmative defense. Second, sufficient facts must be pled to support the defense under Fed.R.Civ.P. 8 and 9. Third, the defense must be able to withstand a challenge under the standards of Rule 12(b)(6), i.e., the defense must be stricken if the defendant can prove no set of pleaded facts which would establish the defense. Williams, 279 F. Supp. 2d at 906.
Among numerous affirmative defenses, the Trustees assert that the Secretary's claims are barred by the doctrines of laches, waiver, and estoppel (Trustees' answer at ¶ 25), and by the failure to join necessary and indispensable parties (Trustees' answer at ¶ 28). The Secretary claims that such defenses should be stricken as legally insufficient.
A. Laches, Waiver, and Estoppel
The Secretary claims that the defenses of laches, waiver, and estoppel cannot be asserted against the government in the ERISA context. Laches occur when the party asserting the defense is prejudiced by a lack of diligence of the opposing party. Costello v. United States, 365 U.S. 265, 281 (1961). The government generally is exempt from a laches defense so that the broader public interests protected by the government are not undermined by the deficient conduct of individual employees. Hatchett v. United States, 330 F.3d 875, 887 (6th Cir. 2003), cert. denied, 541 U.S. 1029 (2004), citing, United States v. Summerlin, 310 U.S. 414, 416 (1940); Costello, 365 U.S. at 281; Herman v. South Carolina National Bank, 140 F.3d 1413, 1427 (11th Cir. 1998), cert. denied, 525 U.S. 1140 (1999);United States v. Weintraub, 613 F.2d 612, 618 (6th Cir. 1979),cert. denied, 447 U.S. 905 (1980).
Although there are limited exceptions, when enforcing federal statutory rights the general rule applies, absent a clear manifestation of congressional intent to the contrary. S.E.R., Jobs For Progress, Inc., 759 F.2d 1, 7 (Fed. Cir. 1985). Specifically, laches have been held to be unavailable as a defense against the government in an ERISA enforcement action brought by the Secretary of Labor against plan fiduciaries. First Bank System, Inc. v. Martin, 782 F. Supp. 425, 426-27 (D. Minn. 1991). This court agrees with this reasoning. Nothing in the ERISA statute evidences a congressional intent for laches to apply, and the policies behind the general rule are present in this context.
The Trustees rely on a line of cases permitting laches as a defense in Title VII enforcement actions brought by the EEOC. (See Trustees' Opposition at 7.) However, the Title VII cases are not applicable here. The rationale for permitting a laches defense under Title VII is that the statute contains no statute of limitations for an EEOC enforcement action. ERISA, in contrast, contains a detailed statute of limitations provision for claims against fiduciaries, so the Title VII rationale is not appropriate. Herman, 140 F.3d at 1427 (11th Cir. 1998); Martin v. Consultants and Administrators, Inc., 966 F.2d 1078, 1090 (7th Cir. 1992).
The Trustees do not cite any case in which a laches defense was permitted in an ERISA enforcement action. The Trustees' only relevant support comes from a concurring opinion by Judge Posner in Martin, supra. He concluded that the Title VII cases should be applied to ERISA enforcement because, as in Title VII, the government is suing to enforce private rights, and not the public interest. Martin, 966 F.2d at 1101. This court disagrees. The case law recognizes that although private parties may benefit, an ERISA enforcement action serves the broader public interest in deterring future losses by ERISA plans, assuring uniform compliance with fiduciary obligations, and maintaining public confidence and integrity in the financial well-being of the pension system. Martin, 966 F.2d at 1090; Secretary of Labor v. Fitzsimmons, 805 F.2d 682, 694 (7th Cir. 1986); Donovan v. Cunningham, 716 F.2d 1455, 1462 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984); First Bank, 782 F. Supp. at 426-27. Therefore, the rationale behind precluding the laches defense applies.
The Trustees also rely on a line of cases holding that compliance with a statute of limitations does not bar a laches defense. (See Trustees' Opposition at 9.) In the Sixth Circuit, there is a presumption that an action filed within the statute of limitations is not barred by laches. The presumption is rebuttable, but only in "unusual circumstances". Tandy Corp. v. Malone Hyde, Inc., 769 F.2d 362, 365 (6th Cir. 1985), cert. denied, 476 U.S. 1158 (1986). The Trustees' argument is misplaced. The cases upon which they rely involve only private parties. They thus ignore the additional rule, applicable here, that laches generally is unavailable as a defense against the government. Furthermore, the Sixth Circuit has refused carve out exceptions to the general rule absent an explicit expression otherwise by the Supreme Court. See Weintraub, 613 F.2d at 618-19. Accordingly, the laches defense must be stricken.
A similar analysis warrants striking the defenses of equitable estoppel and waiver. Equitable estoppel, waiver, and laches are all equitable doctrines which should be treated as an ensemble when they arise from a common nucleus of operative fact. See K-Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 910 (1st Cir. 1989). In their opposition brief, the Trustees assert the same factual basis as to all three defenses, i.e., that the government at first chose to investigate and pursue CCL only for many years, and such delay prejudiced the Trustees. Given the Court's analysis of the laches defense, the Trustees cannot be permitted to overcome established doctrine simply by re-couching the same facts as waiver or estoppel. On this ground alone, the waiver and estoppel defenses must be stricken.
In addition, the Trustees have not pled or asserted any facts that would support either the defenses of equitable estoppel or waiver sufficient to overcome the standards for dismissal under Rule 12(b)(6). Equitable estoppel requires a definite misrepresentation by a party, intended to induce reliance by another, and which in, fact reasonably induces reliance by the other to his detriment. United States v. Guy, 978 F.2d 934, 937 (6th Cir. 1992).
"It is well established that estoppel cannot be used against the government on the same terms as against private parties. [Citations omitted.] At the very minimum, some affirmative misconduct by a government agent is required as a basis of estoppel." Guy, 978 F.2d at 937. "Ordinarily the United States is not estopped by acts of individual officers and agents." United States v. River Coal Company, Inc., 748 F.2d 1103, 1108 (6th Cir. 1984) (also requiring a finding of affirmative misconduct). In the context of ERISA enforcement actions, the Supreme Court has reversed every finding of estoppel that it has reviewed. Reich v. Valley National Bank of Arizona, 837 F. Supp. 1259, 1304 (S.D.N.Y. 1993), citing, Office of Personnel Management v. Richmond, 496 U.S. 414, 422 (1984). A review of more recent case law has not revealed any departure from this premise.
Here, the Trustees have not pled any facts in their answer which, if proved, would warrant a finding of "affirmative misconduct". Even the facts asserted in their opposition brief (which were not actually pled) do not justify even an inference of affirmative misconduct. The Trustees base their position on little more than the fact that the government pursued CCL first. This cannot create an equitable estoppel, so the defense must be stricken.
Similarly, the Trustees have neither pled nor asserted facts, which if proved, could give rise to a waiver. Waiver is the intentional relinquishment of a known right. Peoples Bank Trust Company of Madison County v. Aetna Casualty Surety Co., 113 F.3d 629, 638 (6th Cir. 1997); In re Air Crash Disaster, 86 F.3d 498, 517 (6th Cir. 1996); Carter v. Sowders, 5 F.3d 975, 981 (6th Cir. 1993), cert. denied, 511 U.S. 1097 (1994). Although a waiver may be implied from conduct, such conduct must include acts inconsistent with the right allegedly waived, misleading the other party to his detriment. Peoples Bank, 113 F.3d at 638. Thus, implied waiver is a form of equitable estoppel. Hogan v. Allstate Insurance Co., 1990 WL 233 at *2, 892 F.2d 1043 (6th Cir. 1990 (table). In addition, many jurisdictions require that an implied waiver be a clear, unequivocal, and decisive act showing an intention to relinquish the right. Peoples Bank, 113 F.3d at 638.
Here, there is no allegation that the Secretary (or anyone on her behalf) expressly waived the government's rights against the Trustees. Therefore, the alleged waiver is implied. Because implied waiver is a form of equitable estoppel, the waiver defense must be stricken for the same reasons as the estoppel defense. Furthermore, the Trustees allege no facts, either pled in their answer or asserted in their opposition brief, which, if proved, could meet the standards for an implied waiver under Rule 12(b)(6). Accordingly, the waiver defense also is stricken.
B. Failure To Join
The Secretary also moves to strike the Trustees' defense of failure to join necessary and indispensable parties, which arises under Fed.R.Civ.P. 19. The determination of joinder under Rule 19 is a three step process. First, under Rule 19(a) the Court determines whether a person is necessary to the action and should be joined if feasible. If necessary, the Court next determines whether joinder is feasible. If feasible, the party shall be joined. If not (due to lack of jurisdiction, for example), under Rule 19(b) the Court determines whether the action should be dismissed because the absent party is indispensable. Keweenaw Bay Indian Community v. State, 11 F.3d 1341, 1345-46 (6th Cir. 1993); Local 670 v. International Union, United Rubber, Cork, Linoleum and Plastic Workers of America, 822 F.2d 613, 618 (6th Cir. 1987), cert. denied, 484 U.S. 1019 (1988). If the court determines that a party is unnecessary, it need not consider feasibility and indispensability. Western Maryland Railway Co. v. Harbor Insurance Co., 910 F.2d 960, 962-63 (D.D. Cir. 1990).
The Trustees do not identify the alleged necessary parties in their answer, and in their opposition brief, they only broadly and non-specifically identify them as "investment managers, investment advisors, and other parties upon whom the trustees relied". (See Trustees' Opposition at 18.) Without more specificity, this court concludes that the Trustees have not properly pled this defense, and thus the defense should be stricken on that basis alone.
Even assuming proper pleading, the Trustees have not made the requisite showing under Rule 19 as a matter of law. Rule 19(a) states in relevant part:
A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest, or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
In their opposition brief, the Trustees' arguments are confined to the first clause, that complete relief cannot be afforded among those already parties. The Trustees argue that they cannot be liable for the acts and omissions of their investment managers and advisors, which the Secretary disputes. Regardless of the merits of these opposing positions, the Trustees' argument is irrelevant to joinder.
Under Rule 19(a)(1), completeness of relief is based on those who are already parties, not as between a party and the absent party whose joinder is sought. Angst v. Royal Maccabees Life Ins. Co., 77 F.3d 701, 705 (3d Cir. 1996); Bedel v. Thompson, 103 F.R.D. 78, 80 (S.D. Ohio 1984). Thus, so long as the merits can be determined fully against the Trustees, the fact that others may be liable is irrelevant. Similarly, nothing currently forecloses the Trustees from arguing against liability based on the conduct of others, even if those others are not made parties.
Indeed, the Trustees assert numerous other affirmative defenses based upon their position that the conduct of others shields them from liability. (See Trustees' Answer at ¶¶ 26, 27, 30, 31, and 32.) None of these defenses are subject to the current motion to strike. In addition, the conduct of others can be ascertained fully through third-party discovery.
For these reasons, the unspecified investment managers and advisors are not necessary parties to the action. Complete relief can be determined as to the Trustees, and they are not precluded from relying on the conduct of others to shield themselves from liability. Because there is no failure to join necessary parties pursuant to Rule 19(a), the Court need not analyze the provisions of Rule 19(b). Accordingly, the defense of failure to join is stricken.
IV. CONCLUSIONFor the foregoing reasons, the Secretary's motion to strike (Docket No. 20) is granted. Accordingly, the court strikes the Trustees' affirmative defenses that the Secretary's claims are barred by the doctrines of laches, waiver, and estoppel (Trustees' answer at ¶ 25), and by the failure to join necessary and indispensable parties (Trustees' answer at ¶ 28).
The parties are reminded of the current deadline dates. Discovery deadline is February 28, 2007, dispositive motions due April 30, 2007, trial is set for June 4, 2007.
IT IS SO ORDERED.