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REICH v. COMPTON

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


July 21, 1993

ROBERT REICH, Secretary of the United States Department of Labor, Plaintiff
v.
FRED COMPTON, JOSEPH MC HUGH, JOHN NEILSON, FREDERICK HAMMERSCHMIDT, GERSIL N. KAY, ELECTRICAL MECHANICS ASSOC., FIDELITY-PHILADELPHIA TRUST CO., and the INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS,LOCAL 98, Defendants.

The opinion of the court was delivered by: ANITA B. BRODY

MEMORANDUM

 By the accompanying order, I am vacating my February 11, 1993 order denying the summary judgment motion of plaintiff, the Secretary of the Department of Labor ("the Secretary"), on his complaint alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., by Local Union No. 98 International Brotherhood of Electrical Workers Pension Plan ("the Plan") fiduciaries Fred Compton ("Compton"), Joseph McHugh ("McHugh"), John Neilson ("Neilson"), Frederick Hammerschmidt ("Hammerschmidt"), Gersil Kay ("Kay") and the Fidelity-Philadelphia Trust Company ("Fidelity"), and by Plan non-fiduciaries the International Brotherhood of Electrical Workers Local 98 ("Local 98") and the Electrical Mechanics Association ("EMA").

 I am being called upon to decide whether ERISA allows me to pierce the corporate veil of a corporation that is not a "party in interest" to the plan as defined by the statute but which is closely related to -- but not co-extensive with -- a labor organization that is a "party in interest" to the plan in order to find that the pension plan's loan mortgage and subsequent sale of the mortgage note to the corporation is a prohibited "party in interest" transaction. I find that it does not and enter judgment as a matter of law in favor of the non-moving defendants.

 A. Procedural background.

 The parties had completed briefing the Secretary's summary judgment motion when this case was reassigned to me from the Honorable J. Franklin Van Antwerpen on January 4, 1993. The Secretary identified seventy-two "undisputed" material facts that he contended entitled him to summary judgment. Fidelity and the employer trustees (Hammerschmidt and Kay) admitted most of these facts in their responsive brief.

 The parties were unable to identify any disputed material facts during oral argument on January 14, 1993. Local 98 and EMA, however, asked me to consider additional facts that they considered relevant to the threshold issue of whether EMA is the alter ego of Local 98, a real party in interest to the Plan under the statute. They also argued -- and I was concerned -- that the law of the Third Circuit considers the ability to pierce a corporate veil to be a "fact-intensive question" that requires full factual development at trial. See, e.g., United States v. Pisani, 646 F.2d 83 (3rd Cir. 1981) (district court pierced corporate veil after bench trial).

 I was reluctant to foreclose any opportunity for the parties to present further facts that could impact on my determination of whether EMA is an alter ego of Local 98. Nonetheless, it was apparent that a full bench trial was unnecessary because there were no credibility issues and that the testimony at trial might merely reiterate admissions already in the record.

 I suggested that the parties consider the possibility of my adjudicating the case on the submitted record rather than in the procedural context of a motion for summary judgment. Each party would have an opportunity to amplify the summary judgment record. I also explained that if no party requested cross-examination of any affidavits submitted as part of the record, there would be no need to present live testimony. When the parties responded that they had no objection to my proposal, I issued the following order:

 

AND NOW, this 11th day of February, 1993, it is ORDERED that plaintiff's motion for summary judgment is DENIED.

 

It is further ORDERED that the trial shall proceed as a bench trial on the record submitted by the parties and amplified as follows:

 

1. By February 19, 1993, defendants Compton, McHugh, Neilson, Electrical Mechanics Association and Local 98 shall file and serve responses in numbered paragraphs admitting or denying the numbered paragraphs setting forth the plaintiff Secretary's statement of material facts and the additional material facts identified by Fidelity, Hammerschmidt and Kay.

 

2. By April 15, 1993, each party shall file and serve (1) any further evidence, including any affidavits and exhibits, that they wish to be considered and which are not yet a part of the record, and (2) any further proposed findings of fact in numbered paragraphs.

 

3. By April 30, 1993, each party shall file and serve responses in numbered paragraphs admitting or denying any further proposed findings of fact submitted on April 15, 1993.

 

4. By April 30, 1993, each party shall file and serve its proposed conclusions of law and a statement of any evidentiary objections to the evidence submitted to the Court. The parties shall also identify any areas of cross-examination on the affidavits submitted as part of the record which the Court may consider hearing.

 5. This case shall be stricken from the trial pool.

 The Secretary, Local 98 and EMA submitted additional proposed findings of fact on April 15, 1993. The Secretary subsequently admitted all but one of Local 98 and EMA's proposed findings of fact. *fn1" This exercise confirmed that all of the material facts relevant to the issues before me are undisputed by the parties. *fn2" On May 10, 1993, the parties submitted their proposed conclusions of law.

 On June 1, 1993, the United States Supreme Court decided Mertens v. Hewitt Associates, U.S.L.W. (1993 Westlaw 179274) (June 1, 1993). I issued an order on June 8, 1993 allowing the parties until June 25, 1993 to submit briefs addressing the impact of Mertens, if any, on the instant case.

 The impact of Mertens on the instant case has caused me to reconsider my prior order simply denying the Secretary's motion for summary judgment. As I may modify or rescind a prior interlocutory order at any time until a final decree is entered, I will vacate my February 11, 1993 order denying the Secretary's summary judgment motion. Federal Rule of Civil Procedure 54(b) ( "... the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of the parties." ). See also Lavespere v. Niagara Mach. & Tool Works, Inc., 910 F.2d 167, 185 (5th Cir. 1990) ( "... we acknowledge that a new decision clarifying the applicable law may justify reexamining a denial of summary judgment."); Kenyatta v. Moore, 623 F. Supp. 220, 222 (D.C. Miss. 1985).

 Mertens now compels me to enter judgment in favor of the nonmoving defendants. A leading commentator notes that "the weight of the authority is that summary judgment may be rendered in favor of the opposing party even though he has made no formal cross-motion under rule 56." 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure: Civil 2d § 2720 (1983) (collecting cases). See also Johnson v. Bismarck Public School Dist., 949 F.2d 1000, 1004-05 (8th Cir. 1991) (affirming summary judgment in favor of non-moving party where movant asked court to rule on issue on summary judgment basis and there was no showing that movant did not have full and fair opportunity to develop the record); Missouri Pacific Railroad v. National Milling Co., 409 F.2d 882, 885 (3rd Cir. 1969) (summary judgment properly awarded to non-moving party in absence of cross-motion where record supported result); Selected Risks Ins. Co. v. Bruno, 555 F. Supp. 590, 595 (M.D. Pa. 1982), rev'd on other grounds, 718 F.2d 67 (3rd Cir. 1983).

 Wright and Miller cautions that "whenever the court believes that the non-moving party is entitled to judgment, great care must be exercised to assure that the original movant has had an adequate opportunity to show that there is a genuine issue and that his opponent is not entitled to judgment as a matter of law." Since my denial of summary judgment, the parties have expanded and amplified the record and briefed the applicable law. I now determine that, under the current law, the Secretary cannot maintain this action on these facts as a matter of law.

  B. Because ERISA must be strictly construed, the defendants did not violate prohibitions on party in interest transactions because EMA was not a party in interest as defined by the statute.

 The threshold question in this protracted litigation is whether ERISA prohibitions enacted in 1974 against transactions between a pension plan and a party in interest to the plan required the defendants to correct a 1972 mortgage loan by the Plan to EMA, a non-profit corporation incorporated in the 1920's to promote unity among and further instruction to members of the electrical trade.

 The Secretary admits that EMA is not a party in interest to the Plan, but asks that I pierce EMA's corporate veil to find that the Plan's loan to EMA was, in fact, a prohibited loan to Local 98, an admitted party in interest. Prior to Mertens, I may have been inclined to pursue the alter ego analysis. However, after the instruction in Mertens, I clearly cannot impose liability unless the statute explicitly prohibits the challenged transactions as a party in interest transaction. *fn3"

 In Mertens, the Supreme Court forcefully reiterated earlier directives to strictly construe the statute. See, e.g., Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146-47, 87 L. Ed. 2d 96, 105 S. Ct. 3085 (1985) ("We are reluctant to tamper with an enforcement scheme crafted with such evident care as the one in ERISA.") The plan participants in Mertens sued the plan's actuary for monetary relief when the plan was terminated after its assets were inadequately funded because the actuary failed to change the actuarial assumptions to reflect the additional costs imposed by a large number of early retirements.

 The Court first questioned whether the actuary, a non-fiduciary, violated ERISA if it knowingly participated in fiduciary breaches. Acknowledging the absence of explicit statutory authority to impose liability on non-fiduciaries for knowing participation, the Court expressed its "unwillingness to infer causes of action in the ERISA context, since that statute's carefully drafted and detailed enforcement scheme provides 'strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.'" 1993 Westlaw 179274 at *3 (quoting Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146-47, 87 L. Ed. 2d 96, 105 S. Ct. 3085 (1985)).

 The majority rebutted the dissent's assumption that there was a cause of action against non-fiduciaries for knowing participation because a claim against non-fiduciaries was not barred by ERISA: "The issue is whether the statute affirmatively authorizes such a suit." Id. at *7 n.5. However, because the parties assumed that there had been a violation of ERISA, the Court limited its ruling to the issue of whether a complainant could obtain monetary relief against a non-fiduciary who knowingly participated in a fiduciary breach. The Court held that "equitable relief" authorized by the statute did not include monetary relief.

  Although it acknowledged that ERISA has roots in the common law of trusts which permitted equity courts to assess money damages against a trustee, the Court nonetheless strictly construed ERISA to permit only traditional forms of equitable relief such as mandamus and restitution. By excluding money damages under this provision, the Court insured that the meaning of equitable relief would be consistent throughout the statute and preserved the distinctions between "equitable," "remedial" and "legal" relief that Congress intended to draw in the text of the statute. Id. at *5-6.

 The Court rejected arguments to interpret "equitable relief" to include monetary relief "in order to achieve the 'purpose of ERISA to protect plan participants and beneficiaries.'" Id. at *6 (citation omitted). Because the complex ERISA legislation as enacted "resolved innumerable disputes between powerful competing interests -- not all in favor of potential plaintiffs," the Court held that "we will not attempt to adjust the balance between those competing goals [of benefitting employees and containing pension costs] that the text adopted by Congress has struck." Id.

 Here, the seminal transaction between the Plan and EMA predated the 1974 enactment of the statute. On January 4, 1972, the Plan loaned EMA $ 800,000 at 7 1/2% interest for a 30 year term ending February 1, 2003 to finance a building constructed at 1719-29 Spring Garden Street in which EMA intended to house its apprenticeship training program. The note evidencing the debt was secured by a mortgage on the property.

 ERISA was enacted in 1974. One of the provisions of the new statute prohibited certain transactions between a plan and a party in interest to the plan:

 

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 --

 

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

 

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

 

(C) furnishing of goods, services, or facilities between the plan and a party in interest;

 

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

 

(E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 1107(a) of this title.

 Section 406(a)(1), 29 U.S.C. § 1106(a)(1).

 Under the transition rule codified at 29 U.S.C § 1114(c)(1), Congress extended an "exemption" period until June 30, 1984 to allow a plan to correct prior transactions entered before July 1, 1974 which would have been prohibited as party in interest transactions after the statute was enacted.

 On April 30, 1984, the Plan submitted an application for exemption from the prohibited transaction provisions of ERISA to allow the continuation of the mortgage between the Plan and the EMA. On June 1, 1984, the Department of Labor informed Plan counsel that it had "tentatively decided not to propose the requested exemption." The then-current market conditions adversely effected the marketability of the mortgage and the Plan continued to hold the note after the statutory exemption period expired on June 30, 1984.

 On September 10, 1984, the United States Department of Labor granted the Plan's request that its exemption application be withdrawn. On March 5, 1985, Fidelity reported the value of the mortgage held by the Plan as $ 380,289.93. On April 25, 1985, the trustees sold the note to EMA for $ 380,289.93. Fidelity received a $ 380,289.93 check from EMA and deposited it into Fidelity's trust funds checking account. The Plan's account was credited for this amount. Fidelity reprocessed the sale of the mortgage and executed a Mortgage Satisfaction piece and removed the mortgage from its trust fund. The Plan trustees reinvested the proceeds of the sale.

  The Secretary now claims that the defendants violated ERISA's prohibitions on transactions with parties in interest with a plan when they did not "correct" the EMA mortgage and note before the exemption deadline and when they subsequently caused the Plan to sell the note to EMA.

 The Secretary has admitted that EMA is not a party in interest to the Plan. *fn4" This concession alone is a sufficient basis to enter judgment on his claims that the Plan's transactions with EMA violated the statute's party in interest prohibitions.

 However, in the event that this admission by the complaining party is insufficient, I will make an independent finding that EMA is not a party in interest to the Plan. The statute defines a "party in interest" as including (A) any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such benefit plan; (B) any person providing services to such plan; (C) an employer any of whose members are covered by such plan; and (D) an employee organization any of whose members are covered by such plan. Section 3(14)(A)-(D) of ERISA, 29 U.S.C. § 1002(14)(A)-(D).

 Another arguably relevant "party in interest" defined by the statute at section 3(14)(G), 29 U.S.C. § 1002(14)(G) is:

 

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

 

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

 

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

 

(iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by .....[a party in interest under the statute]...;

 Employees, officers, directors, and shareholders holding ten percent or more of any of the above-defined parties in interest are also parties in interest to a plan. 29 U.S.C. § 1002(14)(H).

 EMA, a non-fiduciary that is not "a labor organization" within the meaning of section 2(5) of the Labor Management Relations Act, as amended, 29 U.S.C. § 152(5), is not an employee organization with members covered by the Plan. *fn5" Nor does EMA meet the specific statutory criteria enumerated by Congress to designate certain separately incorporated entities as parties in interest to a plan because of their relationship to another party in interest under the statute.

 The Secretary claims that EMA is an "alter ego" of Local 98 and urges the court to pierce the corporate veil of EMA. The Secretary reasons that the transactions between the Plan and EMA were actually transactions between the Plan and Local 98, an admitted party in interest to the Plan, that violated ERISA section 406(a)(1) prohibitions on transactions between a plan and a party in interest to the plan. This construction contradicts Mertens' directive because EMA is not a party in interest within the explicit four corners of section 3(14) of the statute. Because EMA is not itself a party in interest to the Plan under the 1974 statute, the continuation of the original 1972 transaction after the exemption period expired in 1984 did not violate ERISA section 406(a)(1) party in interest prohibitions. Likewise, the 1985 sale of the note by the Plan to EMA was not a prohibited party in interest transaction. *fn6"

  Accordingly, I will enter judgment against the Secretary and in favor of defendants Compton, McHugh, Neilson, Hammerschmidt, Kay, Fidelity, Local 98 and EMA on all claims against them. *fn7" An appropriate order follows.

  ORDER

 AND NOW, this 21st day of July, 1993, upon consideration of the decision of the United States Supreme Court in Mertens v. Hewitt Associates, U.S.L.W. (1993 Westlaw 179274) (June 1, 1993), it is hereby ORDERED that my order dated February 11, 1993 denying the Secretary of Labor's motion for summary judgment is hereby vacated.

 It is further ORDERED that, upon consideration of the Secretary's motion for summary judgment and defendants' responses thereto, the proposed findings of fact of each party and the responses thereto, the parties' proposed conclusions of law, and the Mertens decision and the parties' briefs regarding its impact on the instant case, summary judgment is denied as to the moving party and is granted in favor of the non-moving parties. Accordingly, judgment is entered against plaintiff and in favor of defendants Fred Compton, Joseph McHugh, John Neilson, Frederick Hammerschmidt, Gersil N. Kay, Electrical Mechanics Association, Fidelity-Philadelphia Trust Company, and the International Brotherhood Of Electrical Workers, Local 98 as plaintiff cannot maintain this action on the undisputed facts as a matter of law.

 ANITA B. BRODY, J.


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