Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-86-01342/USCOURTS-ca10-86-01342-0/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

WILLIAM E. BROCK, Secretary of ) 

the United States Department ) 

of Labor, ) 

) 

Plaintiff-Appellee, ) 

Cross-Appellant, ) 

.FILED 

Unit.ed States Court of Appeals Tenth Circuit 

FEB 2 5 1988 

ROBERT L. HOECKER 

Clerk 

) 

vs. ) 

Nos. 86-1288 

86-1342 

) 

CITIZENS BANK OF CLOVIS; JEFF ) . JACOBS ; LYNELL G . SKARDA; ) 

OSCAR TOLIVER; and T.E. ) 

WILLMON, JR., ) 

) 

Defendants-Appellants, ) 

Cross Appellees. ) 

Appeal·from the United States District Court 

For the District of New Mexico 

D.C. No. 83-1054 

Larry D. Newsome (George R. Salem, Robert N. Eccles, and Louis L. 

Joseph, Washington, D.C.; and William L. Lutz, U.S. Attorney, and 

Ronald F. Ross, Assistant U.S. Attorney, Albuquerque, New Mexico, 

with him on the brief), United States Department of Labor, 

Washington, D.C., for Plaintiff-Appellee, Cross-Appellant. 

Charles C. Spann of Spann, Latimer & Hollowwa, Albuquerque, New 

Mexico, for Defendants-Appellants, Cross-Appellees. 

Before MOORE and BARRETT, Circuit Judges, and ANDERSON, District 

Judge.* 

MOORE, Circuit Judge. 

*Honorable Aldon J. Anderson, United States District Judge for the 

District of Utah, sitting by designation. 

Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 1 
This appeal presents several questions applying the Employee 

Retirement and Income Security Act (ERISA) to specific 

transactions involving the Citizens Bank of Clovis Pension Plan. 

The district court held that Citizens Bank of Clovis (Bank} and 

the trustees of the Bank's plan violated the diversification 

requirement and the prohibition against party-in-interest 

transactions contained in ERISA. The defendant Bank and the 

trustees appeal that decision. The court refused, however, to 

hold that ERISA's self-dealing prohibition was violated when the 

trustees invested plan assets in permanent loans to third parties 

to whom the Bank had provided interim financing. On procedural 

grounds, the court also refused to require the defendant Bank to 

restore to the plan the interest it earned from the loans. The 

plaintiff Secretary appeals the latter two decisions. Our 

analysis leads us to conclude the trial court properly resolved 

all issues, and we affirm. 

The plan for employees of the Bank has existed since 1958. 

In 1982, the Regional Administrator of the Department of Labor 

notified the trustees that eighty-five percent of the plan assets 

had been invested in real estate mortgages around Clovis, New 

Mexico. The Administrator contended these loans were an apparent 

violation of 29 u.s.c. § 1104(a}(l}(C), which requires 

diversification of a plan's investments. The Administrator warned 

the trustees to reduce the plan's investment in real estate to 

thirty percent of its assets, or legal action might be taken. The 

trustees responded that all their investments were prudent and 

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Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 2 
properly diversified. Unsatisfied with the response and concerned 

over other transactions, the Secretary filed this case. 

The Secretary's complaint presented three issues to the 

district court. First, he argued the trustees' alleged investment 

of over sixty-five percent of the plan's assets in commercial real 

estate first mortgages violated the diversification requirements 

of§ 1104. 1 Second, the Secretary alleged the trustees violated 

29 u.s.c. § 1106(a)(l)(B) when, on behalf of the plan, they 

borrowed money from the Bank. Third, he contended the trustees 

violated their fiduciary responsibilities when they made two loans 

to persons who used the proceeds to pay off previous loans from 

the Bank. 

controversy. 

The basic facts surrounding these issues were not in 

I. 

The trial court engaged in a lengthy and well-reasoned 

analysis of the diversification and loan issues constituting the 

appeal brought by the Bank and the trustees. We believe the 

court's reasoning on these issues was flawless. In short, the 

trial court concluded the diversification requirement was not met 

essentially because the trustees had chosen to invest in "one type 

of security" which did not protect against a multitude of risks. 

The court further found that the trustees failed to establish the 

investments were prudent notwithstanding the lack of 

1The original investment had been reduced to 65% by the time the 

complaint was'filed. 

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Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 3 
diversification. Both these conclusions are fully supported in 

the record, and we adhere to the trial court's analysis. 

The district court further found that any loan between a plan 

and a party in interest is a per se violation of 29 U.S.C. 

§ 1106(a)(l)(B). The trustees contended there was no violation 

because they did not loan plan assets to the Bank. The court 

correctly concluded, however, that§ 1106 proscribes loans made by 

. the party in interest to the plan as well as the reverse. 

We also agree with the district court that the trustees' 

reduction of the percentage of outstanding loans by the plan did 

not moot the issue of diversification. Because the defendants not 

only refused to assure the district court that they would maintain 

the reduced level of investments in real estate loans, but also 

"insist[ed] in a free hand in selecting investments for the plan,'' 

the diversification issue persists. Clearly, the issue could 

arise again, and the district court correctly proceeded to resolve 

it. Cf. Weinstein v. Bradford, 423 U.S. 147, 149 (1975). 

II. 

A. 

Turning to the Secretary's cross-appeal, we consider whether 

ERISA trustees are prevented from lending money to unrelated 

persons who thereafter use the loan proceeds to pay obligations to 

a party in interest. Precisely, we must decide whether 29 u.s.c. 

§ 1106 was violated when the trustees approved loans from plan 

funds which permitted the borrowers to pay off interim financing 

they had received from the Bank. 

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Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 4 
We note, initially, there is no specific provision of§ 1106 

which prohibits a fiduciary from using plan assets for such a 

transaction. If the violation exists, therefore, it must arise by 

implication. It is the Secretary's contention that the 

transaction here implicated both § 1106(a), which proscribes 

specific transactions between the plan and a party in interest, 

and § 1106(b), which proscribes transactions between a plan and a 

. fiduciary. He contends the requirement of 29 u.s.c. § 1104 that a 

fiduciary act solely for the benefit of the plan is applicable 

here as well. Notwithstanding his inability to point to any 

provision of ERISA that specifically prohibits the transaction he 

complains of here, the Secretary argues the defendants committed a 

per se violation of the statute. We do not agree. 

Alleging the transactions in controversy are inherently 

suspicious, the Secretary argues around the absence of a specific 

prohibition in the statute. He states that the public interest in 

maintaining the integrity of employee retirement plans demands a 

strict prohibition of any dealings in which doubt may be cast upon 

the loyalty of the fiduciary. While we do not denigrate the 

validity of the Secretary's concept of fiduciary responsibility, 

we are as unwilling as the district court to translate that 

concept into a per se violation when Congress has not done so. We 

agree with the district court that unless the act complained of 

falls within the specific list of dealings proscribed by§ 1106 

(or within the sole dealing provision of § 1104(a)(l)), the 

transaction does not constitute a per se violation of ERISA. 

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Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 5 
This is not to say the interjection of a third party into an 

otherwise prohibited transaction will sanitize an illegal dealing. 

Indeed, § 1106(a)(l) by its own terms applies to sham.dealings by 

proscribing "indirect'' transactions. Accordingly, if the 

Secretary could have proved that the loans to third parties were a 

sham to avoid application of§ 1106(a), the transactions would 

have been prohibited transfers of plan assets. 

B. 

The Secretary's attempt to avoid the burden 

violation of fiduciary duty underscores the 

of proving 

absence of 

specific ERISA provision upon which we can rely to find 

transactions complained of constituted per se violations. 

attempts to bridge this gap by suggesting that because 

a 

any 

the 

He 

the 

trustees were also employees of the Bank, they made the loans to 

protect their jobs. Hence, he contends the trustees violated 

§ 1106(b) which forbids dealings between the fiduciary and the 

plan. 

The Secretary would like us to presume that the trustees 

acted for their own benefit simply because they were employees of 

the Bank. He argues that it was in the best interest of the Bank 

to have the interim financing paid off; therefore, to please their 

employer and thus protect their jobs, the trustees approved the 

third party loans. Nothing but the Secretary's hypothesis 

supports this argument. 

We believe the trial court correctly perceived that the two 

loans questioned by the Secretary were different from those the 

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Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 6 
court found wanting between the Bank and the plan. Because we 

cannot find that the two loans constituted per se violations of 

either§ 1104 or § 1106, the trial court properly ruled the 

Secretary failed to meet his burden of proof. While we do not 

hold the transactions were free of ERISA violation, we simply 

conclude the trial court correctly ruled the trustees' approval of 

the loans was not a per se violation of the statute. 2 

III. 

Finally, the Secretary contends the trustees should be 

required t6 return to the plan the amount of interest the plan 

paid to the Bank for the loans made in violation of 29 u.s.c. 

§ 1106(a)(l)(B). Although the claim for recovery of such sums was 

set out in the pretrial order, it was not addressed in the trial 

court's dispositional memorandum and order. Noting the court's 

failure to deal with the claim, the Secretary filed a motion 

pursuant to Fed. R. Civ. P. 59(e) to amend the judgment to 

include, among other things, an order requiring reimbursement for 

the loan interest. Without discussing the merits of the motion, 

the court denied relief on the ground the motion was not timely. 

While the Secretary argues those merits in this court, he fails to 

2None of the cases relied upon by the Secretary belie this 

conclusion. He relies chiefly upon Cutaiar v. Marshall, 590 F.2d 

523 (3d Cir. 1979); Gilliam v. Edwards, 492 F. Supp 1255 (D. N.J. 

1980); Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629 

(W.D. Wis. 1979); and Marshall v. Kelly, 465 F. Supp. 341 

(W.D. Okla. 1978). These cases are all distinguishable factually 

because in each the fiduciary dealt directly with either himself 

or a party in interest to commit a specifically prohibited act. 

In none of those cases was it contended a fiduciary committed a 

per se violation by dealing with a third party. 

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Appellate Case: 86-1342 Document: 010110018293 Date Filed: 02/25/1988 Page: 7 
address the reason why his motion was denied in the trial court. 

Perhaps that failure is due to the correctness of the ruling. 

Because the Secretary's motion was not filed until thirteen days 

after entry of the findings of fact and conclusions of law, the 

trial court correctly denied relief on jurisdictional grounds. 

Beliz v. McLeod & Sons Packing Co., 765 F.2d 1317 (5th Cir. 1985); 

Scott v. Younger, 739 F.2d 1464 (9th Cir. 1984). 

AFFIRMED. 

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