Plans terminated in July, 1976. The plaintiff subsequently became statutory trustee of all plans.
In addition to the stipulation of facts, the parties have filed affidavits, depositions, and a 644-page appendix that contains 62 joint exhibits, which the Court refers to in this Opinion. The Court, after carefully considering the motions, the stipulated facts and submitted materials, and the briefs of the parties, hereby grants the plaintiff's motion for summary judgment and denies defendants' motion.
The plaintiff's claim contains both pre-ERISA and ERISA violation. Accordingly, the Court deems it appropriate to discuss the pre-ERISA and ERISA violations separately below. Moreover, as stated above, the defendants assert counterclaims which will also be discussed in a separate section of this Opinion.
A. Pre-ERISA Claims
The plaintiff alleges that Greene and Allen violated their fiduciary responsibilities as trustees of the trusts in the 1971-74 period in violation of Pennsylvania trust law.
In response to these claims, the defendants assert two major defenses. First, the defendants assert that the provisions of ERISA are inapplicable to most of the plaintiff's claims.
Second, the defendants contend that the six-year statute of limitations, under either Pennsylvania law
bars any claim against them which arises from conduct that occurred prior to May 22, 1974.
The Court deems it appropriate to dispose of defendants' contentions before addressing the merits of plaintiff's pre-ERISA claims because resolution of these two contentions at this point will help facilitate orderly discussion and understanding of the pre-ERISA claims.
It appears that defendants' first contention -- that the provisions of ERISA are inapplicable to several of plaintiff's claims -- is acceptable to plaintiff since plaintiff bases its claims for pre-1975 conduct on state law. However, the Court deems it necessary to address the issue because of the jurisdictional question which it raises.
Title 29 U.S.C. § 1144(b)(1) provides that ERISA "shall not apply with respect to any cause of action which arose, or any act or omission which occurred, before January 1, 1975." In Martin v. Bankers Trust Co., 565 F.2d 1276 (4th Cir.1977), the plaintiff brought an action in federal court alleging an ERISA violation for acts which occurred before the effective date of ERISA. The Fourth Circuit held that ERISA's substantive provisions did not apply to the claim. The Third Circuit has also held that the language of 29 U.S.C. § 1144(b)(1) compels the conclusion that acts or omissions which occurred prior to the effective date of ERISA are not controlled by that Act. Reuther v. Trustees of Trucking Employees of Passaic and Bergen County Welfare Fund, 575 F.2d 1074, 1078 (3d Cir.1978). Thus, plaintiff's claims that arise from acts or omissions that occurred prior to the effective date of ERISA are controlled by state law, and not by ERISA. This gives rise to the question of whether state law claims can be heard in the same case as ERISA claims.
The answer to this question is found in a Second Circuit opinion and a decision of this Court relying upon that Second Circuit decision. In Morrissey v. Curran, 567 F.2d 546 (2d Cir.1977), the defendants improperly administered a pension plan by: (1) misappropriating funds for personal use, (2) improvidently investing over $1 million in a foreign venture, and (3) paying a large sum to the administrator of the plan. Id. at 547. The district court dismissed the suit finding that all acts complained of occurred pre-ERISA. The Second Circuit reversed, reasoning that ERISA imposed a continuing duty to review and liquidate improvident investments. Thus, as to at least one of the claims, the defendants' fiduciary duty continued after ERISA. The Court held that that particular claim was within the "exclusive jurisdiction of that Act." Id. at 549. Moreover, the Second Circuit, relying upon the United States Supreme Court case of Aldinger v. Howard, 427 U.S. 1, 96 S. Ct. 2413, 49 L. Ed. 2d 276 (1976), indicated that the district court could take pendent jurisdiction over the other claims under state law. Id. n. 11, 96 S. Ct. 2421 n. 11.
This reasoning was adopted by this Court in Trustees of the Retirement Benefit Plan v. Equibank, 487 F. Supp. 58 (W.D.Pa.), appeal dismissed, 639 F.2d 772 (3d Cir.1980). In the Equibank case, the Court held that the significance of Morrissey is two-fold. First, it highlights the difficulty of attempting to bifurcate pre-ERISA acts from post-ERISA acts.
Id. 487 F. Supp. at 62. Second, even though pre-ERISA acts or omissions are separate state law claims, Morrissey indicates that a court may assume pendent jurisdiction. Id.
In this case, the Court believes that plaintiff has raised valid ERISA claims and violations.
Accordingly, the Court can assume pendent jurisdiction over plaintiff's pre-ERISA, state law claims.
Next, the Court disposes of defendants' statute of limitations argument, which lacks merit. As stated, the defendants contend that the six-year statute of limitations, under both Pennsylvania law and ERISA, bars conduct that occurred prior to May 22, 1974. The defendants raise the ERISA statute of limitations even though they acknowledge that ERISA was not in effect prior to 1975. The plaintiff asserts that the ERISA statute of limitations does not apply, and the Court agrees. This leaves the Pennsylvania statute of limitations to contend with.
Greene and Allen became trustees of the trusts for the Bollinger plans in the middle 1960's and of the Portersville plans in 1970. Stipulation of Facts para. 15. They served in this capacity up until the effective date of ERISA.
Greene and Allen were named trustees in connection with written, expressed
trust funds and trust agreements. See generally Joint Appendix, Joint Exhibits 1-4 (pp. 1-73) and Joint Exhibits 8-13 (pp. 118-171). Accordingly, Greene and Allen were "express trustees."
Under Pennsylvania law, an express trustee may not plead the statute of limitations as a defense. Sherwin v. Oil City National Bank, 229 F.2d 835, 836 n. 2 (3d Cir.1956); Pennsylvania Co. for Insurances on Lives v. Ninth Bank & Trust Co., 306 Pa. 148, 154, 158 A. 251 (1932). Thus, Greene and Allen, as express trustees, cannot plead the statute of limitations.
Alternatively, even if the statute of limitations defense were available to Greene and Allen, the statute does not begin to run until the cestui knows, or under the circumstances ought to know, of the facts that give rise to the cause of action. United States v. Rose, 346 F.2d 985 (3d Cir.1965); Pennsylvania Co. for Insurances on Lives, supra, 306 Pa. at 155, 158 A. 251. The plaintiff was not appointed statutory trustee of the Portersville Plans until December of 1976 and was not appointed statutory trustee of the Bollinger Plans until May of 1977. Joint Appendix, Joint Exhibits 8-11 (pp. 117-128). Accordingly, plaintiff was not in a position to know of the facts which give rise to this action until, at the earliest, December of 1976.
Plaintiff filed the action in May of 1980, well within the six-year statute of limitations period. In sum, the statute of limitations defense is not available to Greene and Allen, but even if it was, plaintiff has filed this action in a timely fashion.
Having disposed of these two issues, the Court turns its attention to the plaintiff's state law claims. Plaintiff claims that defendants Greene and Allen breached their fiduciary duty under state law by making certain loans, on behalf of the plans, and by failing to collect, or take other action in connection with, the failure of Bollinger and Portersville to make contributions to the respective pension plan trust funds. These claims will be discussed in more detail below.
1. The Loans
The Court first addresses the alleged illegal loan transactions. In late 1970, the first loan transaction took place. In that transaction, Greene and Allen
agreed, on behalf of the plans to loan Superior $39,200.
Stipulation of Facts para. 28. In return, Superior gave the plans a promissory note, which provided for 9 1/2 interest per annum and 16 quarterly payments, and a security in all of its machinery and equipment, inventory, and accounts receivable. Joint Appendix, Joint Exhibit 28 (p. 304). The financing statement filed in this transaction indicated that the collateral for the loan was free and clear of all liens and encumbrances. Joint Appendix, Joint Exhibit 28 (p. 307). However, as the plaintiff correctly points out, the inventory pledged as collateral was, in fact, encumbered because it had previously been pledged as collateral in another transaction. Joint Appendix, Joint Exhibit 6 (p. 91).
Between June and September, 1972, the Portersville Union Plan loaned an additional $30,800 to Superior. Joint Appendix, Joint Exhibit 28 (p. 302). No new note was signed, or additional security given, for this second loan.
Greene Deposition of October 26, 1981, p. 137. On September 11, 1975, Superior paid the entire principal balance of $9,925
due to the Bollinger Union Plan. Stipulation of Facts para. 28; Joint Appendix, Joint Exhibit 28 (p. 302). However, by February 17, 1976, the amount of $78,175,
which includes principal and interest amounts, remained outstanding to the other three plans. Joint Appendix, Joint Exhibit 28 (p. 302). Greene testified, at a deposition, that none of the quarterly installments required by the note were paid because there were no funds available. However, Greene further testified that he was not concerned because the loans were more than adequately covered by the collateral.
Greene deposition of October 26, 1981, p. 65.
Additionally, the Bollinger Salaried Plan made certain loans to Bollinger. On October 11, 1971, Greene transferred $11,233.63 from the Bollinger Salaried Plan investment account to that plan's checking account. Greene and Allen then immediately wrote a check for $11,000 to Bollinger and took back an unsecured, demand note. The note, signed by Greene and Allen, called for 9 percent interest per annum on the principal amount. Joint Appendix, Joint Exhibit 4 (pp. 439-447).
By 1973, Bollinger could not afford to make contributions to the Bollinger Salaried Plan. In January of 1973, Bollinger issued two checks, totalling $7,330.50, to the Bollinger Salaried Plan, and that plan simultaneously issued a check for $7,000 to Bollinger. Stipulation of Facts, para. 38. Greene called this a "wash transaction," which insured that the checks would cross at the bank and that neither would bounce. Greene further stated that this was, in essence, a loan transaction and that this loan transaction was preferable to a showing of "unpaid pension plan contributions on the books." Greene deposition of October 26, 1981, p. 106. In return for the loan, Greene and Allen signed a demand note, on behalf of Bollinger, which provided for 9 percent interest per annum. Joint Appendix, Joint Exhibit 43 (p. 459). It should be noted that this $7,000 loan took place while the original $11,000 amount was still outstanding and with no payment having been made, on either principal or interest, since the original loan of October 11, 1971. Joint Appendix, Joint Exhibit 45 (pp. 466-481).
On November 8, 1973, Greene withdrew $8,700 more from the Bollinger Salaried Plan investment account and, on the same day, transferred that amount to Bollinger. In return for the loan, Greene and Allen signed an $8,700 demand note, which provided for 9 percent interest per annum. Joint Appendix, Joint Exhibit 42 (pp. 449-451).
In August of 1974, a second "wash transaction" took place. That is, at that time, Bollinger again could not afford to make contributions to the Bollinger Salaried Plan. Greene deposition of October 26, 1981, pp. 104-106. Therefore, Bollinger issued a check to the Bollinger Salaried Plan in the amount of $8,531.50, and the plan simultaneously issued a check back to Bollinger in the amount of $8,500 and took back an unsecured demand note, signed by Greene and Allen, for that amount. Stipulation of Facts, para. 38.
Bollinger was billed monthly for the interest due on the loans and that minimal payments were made.
However, as of the time of Bollinger's bankruptcy filing, in March of 1976, $35,288.99 remained outstanding, which figure includes the principal and balance of $27,850 and the interest balance of $7,438.99.
Joint Appendix, Joint Exhibit 45 (p. 519).
There were also loans made from the Bollinger Union Plan to Bollinger. Two of the loans were "wash transactions." First, in January of 1973, Bollinger made a $9,127 contribution to the plan and immediately took back a $9,000 loan. An unsecured demand note, providing for 9 percent interest, was signed by Greene and Allen in return for the loan. Joint Appendix, Joint Exhibit 46 (pp. 529-531). A second "wash transaction" occurred in February of 1974. In that transaction, Bollinger made an $8,832.80 contribution to the Bollinger Union Plan and took back a $8,600 loan. Again, Greene and Allen signed a demand note, which provided for 9 percent interest on the $8,600 amount. Joint Appendix, Joint Exhibit 48 (pp. 531-536).
Also, the Bollinger Union Plan loaned Bollinger $5,850 in November of 1973. In return, Bollinger gave an unsecured demand note back to the plan signed by Greene and Allen. As in all other cases, the note provided for 9 percent interest. Joint Appendix, Joint Exhibit 49 (pp. 536-542).
Between February of 1973 and July of 1976, Bollinger was sent monthly bills on these loans by the Bollinger Union Plan Trust. Various payments were made, with all payments applied to principal. By the time of Bollinger's bankruptcy in March of 1976, there remained outstanding $17,220.75, which figure represents $13,100 in principal and $4,120.75 in interest.
Joint Appendix, Joint Exhibit 50 (p. 581).
The Portersville Salaried Plan also made loans to Bollinger. In October and November of 1973, the Portersville Salaried Plan made two loans to Bollinger, totalling $3,750.
Once again, Bollinger gave back two unsecured demand notes, at 9 percent interest, signed by Greene and Allen, in exchange for the loans. Joint Appendix, Joint Exhibit 39 (pp. 393-403). As of March, 1976,
there remained $4,012.62 outstanding. Joint Appendix, Joint Exhibit 40 (p. 433).
Finally, the Portersville Union Plan made loans to Kincaid. Between June of 1972 and September of 1972, the Portersville Union Plan loaned Kincaid $26,806.97. Joint Appendix, Joint Exhibit 37 (p. 382). Another loan was made, in January, 1973, for $3,193.03, and still another occurred in October of 1974, for $2,900. Joint Appendix, Joint Exhibit 37 (pp. 386-387). These loans total $32,900.
The plaintiff's brief acknowledges that $2,100 was paid on these loans, with that entire payment going toward principal. This left a principal balance due of $30,800. The only evidence of interest due on this amount is a bill from the Portersville Union Plan Trust to Kincaid, indicating that $5,283 interest was due. Joint Appendix, Joint Exhibit 38 (p. 391). The total principal and interest outstanding is $36,083.
The Court notes, at this point, that the total claimed outstanding on these loans is $170,780.36. It is now appropriate to review the applicable Pennsylvania law that governs these transactions.
Every fiduciary is obligated, in managing the investment of trust assets, to exercise the care, skill, and judgment of an ordinarily prudent person unless it either has or procures its appointment by representing that it has greater skill, in which case it is obligated to exercise such greater skill.
Estate of Stetson, 463 Pa. 64, 74-75 n. 4, 345 A.2d 679, 685 n. 4 (1975). See In re Estate of Killey, 457 Pa. 474, 477, 326 A.2d 372, 375 (1974). This "prudent man rule" is statutory law in Pennsylvania. Title 20 Pa.C.S.A. § 7302(b) provides in pertinent part as follows:
Any investment shall be an authorized investment if purchased or retained in the exercise of that degree of judgment and care, under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent distribution of their funds, considering the probable outcome to be derived therefrom as well as the probable safety of their capital.