The opinion of the court was delivered by: NEALON
This is a derivative action brought by pensioned coal miners on behalf of the Anthracite Health and Welfare Fund ("The Fund"). Plaintiffs have charged the United Mine Workers of America ("The Union") with responsibility for the failure of the Fund's trustees to collect tonnage royalties from anthracite coal mine operators accruing from June 7, 1946 to January 23, 1969. The case is presently before this court on remand from the Court of Appeals. The matters briefed, argued, and ready for disposition at this time are: (1) whether plaintiffs are entitled to prejudgment interest on the amount of principal liability, if any, that is ultimately found to be due, and (2) whether the statute of limitations and/or the equitable doctrine of laches preclude recovery of collection delinquencies that accrued more than six years prior to the commencement of this lawsuit. Before considering these issues, however, I believe it is necessary to address the Union's claim that principal liability may only be predicated on individual adjudications concerning the adequacy of collection efforts undertaken with respect to each delinquent operator.
The causes of action asserted herein arose during the precipitous decline of the anthracite industry. From 1946 to 1968 the tonnage of coal produced, the amount of revenue earned, and the number of persons employed in the anthracite fields dropped dramatically. Fund income was keyed to production and, as output fell, the Fund, which operated on a "pay-as-you-go" basis, was unable to maintain contemplated benefit levels.
The Court of Appeals for the Third Circuit, vacating this court's judgment entered in defendants' favor on April 13, 1976,
has found that plaintiffs' federal causes of action are sufficient to support pendent jurisdiction, that plaintiffs have established a breach of trust, that the Union is liable for this breach, and that the burden is now on the Union to show that losses would have occurred despite the breach. Nedd v. UMW, 556 F.2d 190 (3rd Cir. 1977), cert. denied, 434 U.S. 1013, 98 S. Ct. 727, 54 L. Ed. 2d 757 (1978). The Court of Appeals remanded the case "for further proceedings in which the liability of the Union shall be redetermined by the application of the fiduciary standards of conduct and burden of proof set forth in this opinion." Id. at 214.
The Union has argued that the Court of Appeals decision was not an adjudication of its liability for collection delinquencies and that plaintiffs must now establish a breach of trust for each royalty account that went uncollected. I am satisfied, however, that the Court of Appeals has found the Union liable under each of the theories asserted by plaintiffs. Close examination of its opinion reveals that the Court of Appeals concluded that the Union, by virtue of the § 302(c)(5) equal representation violation, had placed itself in the position of the trustees with respect to collection of delinquent royalties, and that the Union qua trustee was therefore bound by fiduciary standards of conduct. The Court of Appeals further found that (a) the Union's liability under any of the theories advanced by plaintiffs required no distinct factual findings; (b) the Union, "in a position of inherent conflict between its fiduciary obligation to the Fund beneficiaries and its duties toward the working miners whose jobs might be imperiled by vigorous (royalty) enforcement," id. at 210, breached its duty of loyalty by pursuing a royalty collection policy that prima facie benefited working miners to the detriment of pensioned miners; (c) the Union's enforcement efforts, while in control of the Fund, were not performed with the degree of common skill, common prudence, and common caution required of a fiduciary; and (d) the burden was now on the Union to show that losses would have occurred in the absence of a violation of fiduciary obligations. Thus, it is clear that the matter is presently before this court, not to decide whether the Union is to be held liable for breach of trust on a company-by-company basis, but to determine the extent of the Union's liability for pursuing a policy that would not have been followed by a reasonable man exercising common skill, prudence and caution, and which prima facie benefited working miners to the detriment of pensioned miners.
Directly and materially affecting the extent of the Union's exposure to damages are the questions of prejudgment interest and statute of limitations. Because the continuing breach of trust that occurred throughout the 1950's was not reasonably discoverable until 1961, and due to the longevity of this action, plaintiffs' claim for prejudgment interest now exceeds the asserted principal liability of $ 9,887,286.03. In addition, since much of the royalty collection delinquencies occurred more than six years before the commencement of this action in 1965, the statute of limitations defense has the potential to disgorge a large portion of the principal liability. Since these issues impact substantially on the size of any damages award, they have been isolated from other questions concerning principal liability and prepared for separate treatment.
The Union argues that federal law controls the prejudgment interest issue and that the rule fashioned by the federal courts commits the matter to the trial court's discretion. The Union further urges that this discretion be exercised to deny prejudgment interest. Plaintiffs, on the other hand, contend that (a) state law governs the pendent claim, (b) federal law controls the federal claims, and (c) both the state and federal rules grant prejudgment interest under the circumstances of this case as a matter of right. Alternatively, plaintiffs argue that under the federal rule of discretion entitlement to prejudgment interest is presumed, and that the Union has failed to demonstrate exceptional circumstances sufficient to defeat the presumption.
Initially, it must be ascertained whether the Union's liability for prejudgment interest is to be determined under federal law, Pennsylvania law, or both. A careful reading of the Court of Appeals decision in this case reveals that plaintiffs have established a breach of trust under state and federal law. The following passages from the court's opinion are instructive:
(T)he Union by virtue of the § 302(c)(5) equal representation violation, placed itself in the position of the Trustees for all practical purposes with respect to the enforcement of the royalty obligations of the mine operators. Whether one looks to the Pennsylvania law of trusts or to an appropriate federal standard created under any of the three federal legal theories asserted by the plaintiffs the Union must, in the circumstances of this case, be held to the same standard of conduct in discharging its assumed obligations toward the Fund as that of the Fund's nominal Trustees.
556 F.2d at 209 (emphasis added).
The pensioners established that the Union Trustees, in illegal domination of the Fund, were in a position of conflicting loyalties, and that in that position they pursued a policy which prima facie benefitted (sic) one group to the detriment of another. At that point the burden of explanation or justification should properly have shifted to the fiduciaries. n36
n36 Although this is a federal common law rule of union pension fund trustees' fiduciary duty, we think it is consistent with state law as well.
556 F.2d at 210 (emphasis added) (footnote omitted).
This is an appropriate federal rule of fiduciary obligation as well.
556 F.2d at 211 (emphasis added) (footnote and citations omitted).
It is thus clear that the Court of Appeals found the Union to be in breach of trust under both federal and state law. Therefore, Pennsylvania damage rules, including prejudgment interest principles, govern any recovery under the pendent cause of action, see Holmes v. Bateson, 434 F. Supp. 1365, 1390-91 (D.R.I.1977), aff'd in part, rev'd in part on other grounds, 583 F.2d 542 (1st Cir. 1978), and federal prejudgment interest standards apply to the federal claims. See, e.g., Southern Pacific Co. v. Miller Abattoir Co., 454 F.2d 357, 362 (3rd Cir. 1972); Meyers v. Moody, 475 F. Supp. 232, 251 (N.D.Tex.1979).
The Union argues, however, that this court's order of June 9, 1978, which sought to set an agenda for resolving liability-related questions, limits the scope of the damages inquiry to the federal claim asserted under section 302 because the order allows plaintiffs to recover without demonstrating inadequacy of individual collection efforts and only the section 302 claim would permit recovery without company-by-company adjudications of breach of trust. Therefore, argues the Union, only federal prejudgment interest rules should be applied.
The unsound premise on which the Union's argument rests is that general principles of the law of trusts would require plaintiffs to establish culpability on a company-by-company basis. The above analysis and quoted passages from its opinion demonstrate that the Court of Appeals considered that (a) the state and federal causes of action were in pari materia, (b) plaintiffs had established a breach of trust, (c) losses had occurred as a result of the breach, and (d) federal and state law shifted the onus to the Union to show what losses would have occurred despite the breach. Thus, this case is not now proceeding independently under section 302, but under both the federal and state claims.
There is, however, another argument for rejecting Pennsylvania law that has not been pursued by the parties. The Court of Appeals suggested that state regulation of the conduct of union pension fund trustees is preempted by federal law. Without deciding the question, Judge Gibbons stated:
It seems plain that the proper conclusion is that federal law should preempt all state law inconsistent with the federal common law standards for fiduciary conduct by union pension fund trustees. See, e.g., Employee Retirement Income Security Act of 1974, 88 Stat. 829 et seq., 93d Cong., 2d Sess. (1974). Section 514(a) of the Act, 29 U.S.C. § 1144(a) provides:
(a) Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title. This section shall take effect on January 1, 1975.
This subsection mandates federal supremacy of Part IV of Subchapter I, dealing with trustees' fiduciary duties, over inconsistent state laws. . . . The heart of this provision is § 1104(a)(1)(B), which establishes a "prudent man" standard. This rule, which supersedes all inconsistent state law, is no different from, nor more explicit than, the federal fiduciary duty under § 302 of the Taft-Hartley Act. . . .
556 F.2d at 205-06, n.31.
If, consistent with the Court of Appeals opinion, state regulation of union pension fund trustee conduct is preempted, then inconsistent state damage rules would appear to be inapplicable. For example, if state law exacted prejudgment interest for a breach of trust as a matter of right, but applicable federal law committed the question to the trial court's discretion or did not recognize any entitlement to such an award, it would seem to follow that the interests in uniformity underlying the preemption of inconsistent state substantive rules would also support rejection of inconsistent state damage rules. The preemption issue, however, is academic here because, contrary to plaintiffs' assertions, I find that both state and federal law make the award of prejudgment interest for breach of trust discretionary and utilize essentially identical factors to guide the exercise of discretion.
Prejudgment interest is "compensation allowed by law . . . as additional damages for loss of use of the money due as damages, during the lapse of time since the accrual of the claim." C. McCormick, Handbook of the Law of Damages § 50 (1935) (hereinafter referred to as McCormick ). Pennsylvania decisional law regards prejudgment interest as a component of damages. Thus, for example, in Jones Estate, 400 Pa. 545, 563, 162 A.2d 408, 417 (1960), the court stated: "Such an allowance is "not ...