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Secretary United States Department of Labor v. Kwasny

United States Court of Appeals, Third Circuit

April 5, 2017

SECRETARY UNITED STATES DEPARTMENT OF LABOR
v.
RICHARD J. KWASNY; KWASNY AND REILLY, P.C.; KWASNY AND REILLY 401(K) PROFIT SHARING PLAN Richard J. Kwasny, Appellant

          Submitted Pursuant to Third Circuit L.A.R. 34.1(a) November 7, 2016

         On Appeal from the United States District Court for the Eastern District of Pennsylvania (District Court No. 2-14-cv-04286) District Judge: The Honorable Eduardo C. Robreno

          Richard J. Kwasny Attorney for Appellant

          Leonard H. Gerson Thomas Tso United States Department of Labor Office of the Solicitor Attorneys for Appellee

          Before: McKEE and RESTREPO, Circuit Judges; HORNAK, District Judge. [*]

          OPINION

          McKEE, Circuit Judge.

         Richard Kwasny appeals the District Court's order granting summary judgment in favor of the Secretary of Labor and denying his cross-motion for summary judgment. Because the record shows no genuine issue of disputed fact regarding Kwasny's violation of the Employee Retirement and Income Security Act of 1974 ("ERISA") by directing employee 401(k) contributions into his Firm's general assets, we hold that the District Court did not err in granting summary judgment. We will therefore affirm, but remand for a determination of whether the judgment against Kwasny should be offset by a previous Pennsylvania state court judgment entered against Kwasny for the same misdirected employee contributions.

         I

         Richard Kwasny is a former managing partner of the now-dissolved law firm Kwasny & Reilly, P.C. (the "Firm"). While Kwasny was a partner at the Firm, the Firm established a 401(k) Profit Sharing Plan (the "Plan") for its employees, and Kwasny was named as a trustee and fiduciary of the Plan.[1] Between September of 2007 and November of 2009, the Plan sustained losses in the amount of $40, 416.30[2]because Plan contributions withdrawn from employees' paychecks were commingled with the Firm's assets and were not deposited into the Plan.

         In 2011, the Secretary of Labor received a substantiated complaint from a Plan member, which triggered an investigation. The Secretary eventually filed this action to recover the lost funds, remove Kwasny as trustee and fiduciary of the Plan, and enjoin Kwasny from acting as a plan fiduciary in the future. The Secretary and Kwasny thereafter filed cross motions for summary judgment. The District Court granted the Secretary's motion for summary judgment and denied Kwasny's. Kwasny appeals.

         II

         The District Court had jurisdiction pursuant to 29 U.S.C. § 1132(e). We have jurisdiction under 28 U.S.C. § 1291. Our review of a District Court's grant of summary judgment is plenary.[3] Accordingly, we apply the same standard as the District Court.[4] Summary judgment is appropriate where, construing all evidence in the light most favorable to the nonmoving party, "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."[5] Our function is not to "weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial."[6]

         III

         We must first decide whether the District Court correctly found that Kwasny violated the Employee Retirement and Income Security Act of 1974 ("ERISA") by directing employee 401(k) contributions into the firm's general assets. Next, we must determine whether the District Court erred in denying Kwasny's motion for summary judgment based on his affirmative defenses.

         A

         The District Court's grant of the Secretary's motion for summary judgment was based primarily on facts deemed admitted under Federal Rule of Civil Procedure 36(b).[7]Kwasny never sought to amend or withdraw the admissions, even upon invitation by the District Court.[8] Kwasny likewise does not appeal the order deeming the issues admitted. In addition to Kwasny's admissions, the District Court relied on testimony by the Firm's former bookkeeper, Kathleen Meske.[9] Kwasny's evidence, on the other hand, consists only of his own declaration, which he claims creates a genuine issue of material fact.

         Matters deemed admitted due to a party's failure to respond to requests for admission are "conclusively established" under Federal Rule of Civil Procedure 36(b), [10]and may support a summary judgment motion.[11] Rule 36(b) is intended to narrow the triable issues in the case.[12] An admission is therefore an "unassailable statement of fact"[13]and is binding on the non-responsive party unless withdrawn or amended.[14] Because Kwasny did not appeal the District Court's order deeming the issues admitted, the admissions continue to bind him in this appeal.[15] Accordingly, the District Court was correct to treat Kwasny's admissions as established fact.

         Kwasny's admissions and Meske's declaration together establish a prima facie case of an ERISA violation. Under ERISA, trustees of an ERISA retirement plan (such as a 401(k) plan) have the following duties: (1) ensure that plan assets are held in a trust account, [16] (2) act solely in the interest of the plan participants and their beneficiaries, [17] (3) act prudently, [18] (4) prevent the plan from engaging in a direct or indirect transfer of plan assets for the benefit or use of a party in interest, [19] and (5) refrain from dealing with the plan's assets for the fiduciary's own interest.[20] Breach of these duties results in a violation and may trigger restitution or injunctive relief.[21] Plan funds protected under the statute include money withheld from employees' paychecks for purposes of the benefit plan but not yet delivered to the benefit plan.[22] The Plan's trustees are jointly and severally liable for money that is withheld but misdirected from a plan.[23]

         Here, the record establishes that: (1) "Between January 2007 and December 2007 Richard Kwasny was a trustee of the Plan, " (2) "Between September 7, 2007 and November 13, 2009, $41, 936.73 was withheld from employee compensation but not deposited into the Plan, "[24] (3) "Richard Kwasny directed that employee withholdings intended for deposit into the Plan be commingled with the general assets of the Firm, " (4) "Richard Kwasny directed that the employee withholdings intended for deposit into the Plan be used for the benefit of the Firm, and (5) "Richard Kwasny was responsible for determining if payroll checks and contribution checks were issued . . . between January 2007 and December 2009."[25] Additionally, the Firm's bookkeeper, Kathleen Meske, declared that Kwasny instructed her to send the employee contribution checks to the Plan asset custodian only after he paid employee wages, Kwasny himself, and the Firm's outstanding bills. In sum, the facts establish that Kwasny, a Plan trustee, used withheld employee contributions-protected Plan funds under ERISA-for the benefit of himself and the Firm in violation of his fiduciary duties.

         Kwasny argues that Meske's declaration should be ignored because she was not privy to all conversations among the partners, and unbeknownst to Meske, the partners could have decided not to accept a paycheck and therefore did not have funds to contribute to the 401(k). However, the possibility that the firm partners may have properly failed to contribute funds is irrelevant. The ERISA violation is prefaced on Kwasny's directing employee contributions to be withheld from the employees' paychecks, not the partners'. Similarly, Kwasny's assertion that he was not the only trustee of the Firm and was therefore not solely responsible for Plan assets is irrelevant because, as we have already noted, trustee liability is joint and several.[26] Moreover, the fact that Kwasny was not permitted to cross-examine Meske is irrelevant for summary judgment purposes.[27] We therefore conclude that the District Court's grant of summary judgment in favor of the Secretary was correct.

         B

         We also agree with the District Court's conclusion that Kwasny is not entitled to summary judgment based on either of the two defenses he raises on appeal: (1) statute of limitations, and (2) res judicata.

         1. Statute of Limitations

         Actions such as this one for breach of fiduciary duty may not be brought under ERISA after the earlier of "(1) six years . . . after the date of the last action which constituted a part of the breach or violation . . . or (2) "three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation."[28] Put simply, Section 1113 creates "a general six year statute of limitations, shortened to three years in cases where the plaintiff has actual knowledge."[29] Actual knowledge "requires a showing that plaintiffs actually knew not only of the events that occurred which constitute the breach or violation but also that those events supported a claim of breach of fiduciary duty or violation under ERISA."[30]

         Kwasny asserts the statute of limitations has expired because Firm employees and the Department of Labor had actual knowledge of the withholdings before 2011, and therefore, the Secretary's 2014 suit is barred. Kwasny relies on the following statements from his declaration:

• Firm employees were aware that their contributions were not being deposited into the Plan as early as 2007 because it was widely known and documented in monthly statements to employees.
• A Department of Labor investigator examined all the Firm's Plan books and records at some point in 2010 in response to a complaint by Larry Haft, ...

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