Opinion ID: 693407
Heading Depth: 3
Heading Rank: 1

Heading: Class Action or Derivative Suit

Text: 71 Plaintiffs allege that the district court erred in denying their motion for class certification. The district court found that Plaintiffs had alleged only a derivative cause of action and held that under Fed.R.Civ.P. 23 a derivative suit cannot proceed as a class action because the class representatives' claims were not typical of the class claims. The district court reasoned that under Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), the beneficiaries in the present case do not have a direct claim. Thus, it is impossible for the present plaintiff's [sic] claims to be typical of the claims of the class, because they do not have a claim, rather they bring suit on behalf of the plan's claim. Kayes v. Pacific Lumber Co., C-89-3500 SBA, C-911812 SBA, 17 Employee Benefits Cas. 1174 (N.D.Cal. filed April 14, 1993) (Class Certification Order) at 5. Therefore, the district court held that Plaintiffs' suit had to be brought under Fed.R.Civ.P. 23.1 and ordered Plaintiffs to file a third amended complaint. 72 Whether or not an ERISA claim may be brought as a class action is a question of first impression in this circuit. This is a question of law which we review de novo. See generally, United States v. Yacoubian, 24 F.3d 1, 3 (9th Cir.1994). We find that the district court erred in holding that an ERISA action must be brought under Rule 23.1 and therefore erroneously concluded that this suit could not be maintained as a class action. 73 The district court based its holding that an ERISA suit is derivative in nature on the Supreme Court's holding in Russell and on this court's interpretation of Russell in Sokol v. Bernstein, 803 F.2d 532 (9th Cir.1986). In Russell, the Court held that while ERISA Sec. 502(a)(2), 29 U.S.C. Sec. 1132(a)(2), authorizes a beneficiary to bring an action against a fiduciary under Sec. 409 of ERISA, 29 U.S.C. Sec. 1109, the recovery available under Sec. 502(a)(2) inures to the benefit of the plan as a whole: A fair contextual reading of the statute makes it abundantly clear that its draftsmen were primarily concerned with the possible misuse of plan assets, and with remedies that would protect the entire plan, rather than with the rights of an individual beneficiary. 473 U.S. at 142, 105 S.Ct. at 3090. The Court held that extra-contractual compensatory or punitive damages based on emotional distress were not available for a breach of fiduciary duty under ERISA due to a delay in processing an individual's benefit claim. 74 Although the Supreme Court's holding in Russell was limited to Sec. 409 of ERISA regarding fiduciaries' personal liability, this court has extended it to embrace Sec. 502(a)(3), 29 U.S.C. Sec. 1132(a)(3), which empowers certain parties to bring an ERISA action. Sokol, 803 F.2d at 535-36. In concluding that extra-contractual emotional distress damages were not available to a beneficiary under Sec. 502(a)(3) of ERISA, this court expanded the Russell rationale that ERISA protections run to the plan, not to the beneficiaries: ERISA grants no private right of action by a beneficiary qua beneficiary; rather, it accords beneficiaries the right to sue on behalf of the entire plan if a fiduciary breaches the plan's terms. Id. at 536. 75 This rationale was followed in Horan v. Kaiser Steel Retirement Plan, 947 F.2d 1412 (9th Cir.1991), which held that beneficiaries could not maintain an ERISA breach of fiduciary duty claim because they sought a remedy on behalf of themselves rather than on behalf of the ERISA plan. Under Russell and Sokol, the plaintiffs fail to present a fiduciary breach claim if the only remedy sought is for their own benefit, rather than for the benefit of the Plan as a whole. Horan, 947 F.2d at 1418. 76 Sokol and Horan reveal that this court has interpreted the Supreme Court's Russell opinion to prevent any suit under ERISA for extracontractual damages and to require that an ERISA suit cannot be maintained unless the remedy sought inures to the benefit of the plan. On this basis, the district court concluded: 77 The logical result of reconciling Russell with the plain language of section 1132(a)(2) is that a participant or beneficiary who brings suit for breach of fiduciary duty, does so on behalf of the plan and not in his individual capacity. While the individual has standing to bring suit, and stands to gain if the suit is successful, his benefit is secondary or derivative of the plan's gain. 78 Class Certification Order at 4-5. 79 In so concluding, the district court erred in its determination that this action is a derivative one which must be brought under Fed.R.Civ.P. 23.1. Although this suit may be characterized as derivative in the broad sense, it clearly does not fall within the terms of Rule 23.1. That rule applies only to derivative actions brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association. (emphasis added). Plaintiffs here are not suing as shareholders or members to enforce the right of any corporation or unincorporated association. Rather, they are suing as plan beneficiaries to enforce the right of the plan against its fiduciaries. When a trust beneficiary brings a derivative suit on behalf of a trust, the specific provisions of Rule 23.1 are not controlling. Charles A. Wright, Law of Federal Courts Sec. 73 at 525 (5th ed. 1994). 80 As the Supreme Court made clear in Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535 n. 11, 104 S.Ct. 831, 838 n. 11, 78 L.Ed.2d 645 (1984), not every derivative action falls under Rule 23.1. Rule 23.1 applies only to a narrow class of derivative suits: those brought by shareholders or members of a corporation or unincorporated association to vindicate a right which may properly be asserted by that corporation or association. See, e.g., id. at 535, 104 S.Ct. at 838 (refusing to apply Rule 23.1 where the shareholder plaintiff suing on behalf of the corporation sought to assert a right which could not properly be asserted by the corporation). 81 The Federal Rules of Civil Procedure single out the specific type of derivative action described in Rule 23.1 because the law has historically been particularly wary of allowing shareholders to sue on their corporation's behalf. Because of the fear that shareholder derivative suits could subvert the basic principle of management control over corporate operations, courts have generally characterized shareholder derivative suits as a remedy of last resort. Renfro v. FDIC, 773 F.2d 657, 658 (5th Cir.1985). 82 Moreover, the law has generally imposed an intracorporate exhaustion requirement on plaintiffs in such cases. See, e.g., Hawes v. City of Oakland, 104 U.S. 450, 460-61, 26 L.Ed. 827 (1881). This requirement is reflected in Rule 23.1, which directs the shareholder plaintiff to allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff's failure to obtain the action or for not making the effort. 10 83 Neither the text of Rule 23.1 nor the concerns that motivate its separate treatment for shareholder derivative actions apply here, for the plaintiffs are not shareholders suing on behalf of a corporation. Accordingly, we conclude that the district court erred in requiring the plaintiffs to file an amended complaint complying with that rule. 84 Moreover, the district court erred in concluding that the class representatives' claims were not typical under Fed.R.Civ.P. 23(a)(3). Rule 23(a)(3) requires that the claims or defenses of the representative parties [be] typical of the claims or defenses of the class. There is no doubt that the named plaintiffs' claims are typical of the class claims. Defendants do not suggest that the named plaintiffs are subject to unique defenses or have different claims from those of any other member of the class. They rely only on the fact that Plaintiffs' common claim is a derivative one rather than a direct one. However, Rule 23(a)(3) imposes only the requirement that the class representatives' claims be typical, not that they be direct. 11 Therefore, we reverse the district court's determination that this suit may not be maintained as a class action. 85