Opinion ID: 199274
Heading Depth: 2
Heading Rank: 2

Heading: Restitution of the Misallocated Monies

Text: 16 We review a restitution order under a bifurcated standard: whether restitution is available is a question of law we review de novo, Texaco Puerto Rico, Inc. v. Department of Consumer Affairs, 60 F.3d 867, 874-75 (1st Cir. 1995), while our review of a district court's decision to grant or withhold an equitable remedy is for abuse of discretion, id. at 875. 17 Because the issues in this case involve the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq., we turn to that statutory scheme first to assess its impact. ERISA here affects the nature of the claims that may be made, who may make them, and the outcome of the ultimate question. 3 ERISA is a comprehensive statute with a carefully drafted remedial scheme that catalogues parties who may pursue civil actions to redress ERISA violations, as set forth in 29 U.S.C. § 1132(a). Under § 1132(a)(3), only a participant, beneficiary, or fiduciary may seek relief to redress ERISA violations. Employers and pension funds are not among the enumerated parties empowered to sue for violations of ERISA. SeeKwatcher v. Mass. Serv. Employees Pension Fund, 879 F.2d 957, 964-65 (1st Cir. 1989). 18 In this case, the Denman Plan asserted a claim for a declaratory judgment that it was the rightful owner of the disputed assets, while the Eagle Plan sought restitution. 4 Despite the limits on standing to sue and remedies available in suits involving ERISA plans, courts recognize that in certain cases, a party otherwise unable to sue under ERISA may nevertheless pursue a federal common law action for restitution or other equitable relief. Concerned about ERISA's expansive preemptive sweep, the Supreme Court has held that courts are to develop a federal common law of rights and obligations under ERISA-regulated plans. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110-11 (1989) (internal quotation marks omitted). [T]he traditional equitable action for restitution is part and parcel of ERISA's federal common law. Kwatcher, 879 F.2d at 966; accord Luby v. Teamsters Health, Welfare, & Pension Trust Funds, 944 F.2d 1176, 1186 (3d Cir. 1991) (Although ERISA itself does not explicitly provide a statutory right of restitution, it is clear that Congress intended federal courts to fashion a federal common-law under ERISA, and this permits application of a federal common-law doctrine of unjust enrichment if restitution would not override a contractual provision of an ERISA plan.). But courts are careful not to allow federal common law to rewrite ERISA's carefully crafted statutory scheme, and recognize that federal common law will only give rise to a claim pursuant to ERISA in the limited class of cases where the issue in dispute is of central concern to the federal statute. Provident Life & Accident Ins. Co. v. Waller, 906 F.2d 985, 990 (4th Cir.) (internal quotation marks omitted), cert. denied, 498 U.S. 982 (1990); seeFranchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 25-26 (1983); United McGill Corp. v. Stinnett, 154 F.3d 168, 171 (4th Cir. 1998) (Courts should only fashion federal common law when necessary to effectuate the purposes of ERISA.) (internal quotation marks omitted). 19 In Kwatcher, we concluded that an employer may pursue a federal common law action for restitution to recover overpayments mistakenly made to an ERISA fund, even though an employer would not have standing to sue under ERISA's civil enforcement provision. We held that the availability of restitution is fully consonant with ERISA's policies and supplements ERISA's remedial scheme by providing a tool for courts to use when one party 'has been unjustly enriched at the expense of another.' 879 F.2d at 967, quoting Restatement (First) of Restitution § 1 (1937). 20 Other courts have ordered restitution of disputed ERISA plan assets in actions brought by pension funds and fund trustees, as well as by employers. In Luby, the Third Circuit awarded a plan restitution of payments mistakenly made to a plan beneficiary, concluding that the equitable remedy available to an employer to recover mistaken overpayments to ERISA plans should extend to an ERISA plan itself. See 944 F.2d at 1186. Similarly, in Provident, the Fourth Circuit concluded there was an implied right of action for a plan administrator to pursue a federal common law action for restitution of payments mistakenly made to a plan beneficiary. See 906 F.2d at 989-90. Moreover, in Malden Mills Indus., Inc. v. Alman, 971 F.2d 768, 774-75 (1st Cir. 1992), a pension plan's claim for reimbursement from an employer for benefits overpayments was allowed. We conclude that where funds are mistakenly transferred from one ERISA plan to another, as in the case of funds mistakenly paid into a plan by an employer, a plan is entitled to pursue a federal common law action for restitution to it of its missing funds. Thus the interpleader action, where both plans seek the funds, is appropriate. 21 ERISA also impacts the resolution of the ultimate question. At least two ERISA principles are involved. The first is the principle, embedded in 29 U.S.C. § 1104(a)(A)(i)-(ii), that the exclusive purpose of an ERISA plan is providing benefits to participants and their beneficiaries and paying reasonable expenses of plan administration. The second is the anti-inurement principle embedded in 29 U.S.C. § 1103(c)(1), that plan assets shall never inure to the benefit of any employer but shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries . . .. Restitution in a case such as this does not run afoul of ERISA's policy of protecting employee pension plans because the Denman Plan [is] not entitled to funds to which [it] had no right in the first place. Kwatcher, 879 F.2d at 967 (citation omitted). Indeed, the rationale in Kwatcher is even more compelling in this case because returning the disputed assets to their rightful owner, the Eagle Plan, protects the interests of that pension plan's participants. As in Luby, [t]o permit restitution here would only further the goals of ERISA, that is to safeguard the corpus of funds set aside under the [Plan] for valid [] Fund beneficiaries. 944 F.2d at 1186. 22 The Denman Plan argues that restitution is inappropriate because it obtained, as transferee, Denman's rights to the misallocated assets as a bona fide purchaser, cutting off the Eagle Plan's claim to its funds. See Restatement (First) of Restitution § 172 cmt. a (acquisition by bona fide purchaser cut[s] off the constructive trust). The premise of the argument is questionable. It is not likely Denman was ever a bona fide purchaser of plan assets. Plan assets are held in trust for the beneficiaries. What Pensler purchased, and then transferred to Denman, was a corporation. Conversely, the Denman Plan was not a bona fide purchaser of anything here. 5 It received more than $600,000 and paid nothing for the assets. Similarly, the doctrine under the Restatement (First) of Restitution -- that a bona fide purchase cuts off a constructive trust -- has little application here. This is not a situation of a constructive trust (which may arise to offset a fraud) being subverted to a bona fide purchaser where equity must choose which of two innocent victims to compensate. 23 More fundamentally, even if there were an arguable bona fide purchaser argument available, the structure of ERISA is not hospitable to the Denman entities' argument. As the Supreme Court has held, [a]lthough trust law may offer a starting point for analysis in some situations, it must give way if it is inconsistent with the language of the statute, its structure, or its purposes. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 447 (1999) (internal quotation marks omitted). It would thwart ERISA's purpose of protecting the interests of pension plan members if the Eagle Plan's interest in those misallocated funds was cut off by operation of the bona fide purchaser doctrine here. 24 Denman also argues the district court was compelled under Kwatcher to do an equitable analysis and that it failed to do so. We conclude that the district court did, in fact, properly weigh the equitable factors and found them to favor restitution to the Eagle Plan. Given the two ERISA principles described before -- exclusive benefit and non-inurement -- it would take a very strong showing to tip the equitable balance toward the Denman Plan. The Eagle Plan has been deprived of assets stemming from payments made on behalf of its plan beneficiaries. A person who has been unjustly enriched at the expense of another is required to make restitution to the other. Restatement (First) of Restitution § 1 (1937). 25 There are some equities on Denman's side, to be sure. It bears little culpability here, as the mistake was the trustee's. This error has imposed costs on Denman and the Denman Plan. If, after the restitution, the Denman Plan would be underfunded by ERISA standards -- and there is no evidence in the record that it would be -- Denman must make payments to bring it up to ERISA-compliant levels. 6 State Street has also extracted over $150,000 from the Denman Plan's account to cover the Bank's attorneys' fees incurred in this litigation. But there are none of the countervailing considerations courts have recognized as reasons not to grant restitution. Restoring the funds to the Eagle Plan would not override an explicit contractual provision in the Denman plan. Cf. Cummings v. Briggs & Stratton Retirement Plan, 797 F.2d 383, 390 (7th Cir. 1986). Nor would it give the Eagle Plan participants benefits not afforded by the Plan document. Cf. Van Orman v. American Ins. Co., 680 F.2d 301, 312 (3d Cir. 1982). It would be unjust to allow the Denman Plan to retain the assets that belong to the Eagle Plan and its beneficiaries. See Kwatcher, 879 F.2d at 967. The district court did not abuse its discretion in ordering restitution. 7 26