Opinion ID: 1035522
Heading Depth: 3
Heading Rank: 3

Heading: Involvement in Prohibited Transactions

Text: 7 Plaintiff also asserts claims under two provisions of Section 406, which prohibit certain transactions that “generally involve uses of plan assets that are potentially harmful to the plan.” Lockheed Corp. v. Spink, 517 U.S. 882, 893 (1996). Section 406(a) prohibits transactions between the plan and a party in interest. The relevant portion of the statute provides: Except as provided in section 1108 of this title, . . . 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 . . . furnishing of goods, services, or facilities between the plan and a party in interest [or] transfer to, or use by or for the benefit of a party in interest, of any assets of the plan . . .. 29 U.S.C. § 1106(a)(1)(C),(D). A “party in interest” includes insiders to a plan, such as fiduciaries, employers, employees, service providers, and certain stockholders. 29 U.S.C. § 1002(14). Prohibited Section 406(a) transactions between a plan and a party in interest are those “commercial bargains that present a special risk of plan underfunding because they are struck with plan insiders, presumably not at arm’s length.” Lockheed, 517 U.S. at 893. A party in interest can be held liable for Section 406(a) transactions and be required to disgorge its profits under the remedy provisions of Section 502(a)(3). Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 242-43, 245-249 (2000) (holding that a defendant who provided broker-dealer services to a plan was a party in interest, required to disgorge his profits after the plan fiduciary caused the plan to buy worthless motel properties from him as that was a Section 406(a) prohibited transaction given his insider status). To obtain that remedy, however, Plaintiff must first 8 allege that Fidelity is a party in interest that engaged in one of the statutorily prohibited transactions. Here, Plaintiff argues that a statutorily prohibited transaction occurred when A&P as a fiduciary caused the plan to hire and pay Fidelity, who was a party in interest, that would result in both a direct furnishing of services between the plan and a party in interest and a transfer of plan assets to a party in interest under Section 406(a). Fidelity, however, was not a party in interest at the time the Trust Agreement was signed.3 While Fidelity is currently a party in interest as a service provider to the plan, it was not “providing services” and was not a fiduciary when the Trust Agreement was signed, so that transaction did not fall within a prohibited category. Moreover, “Congress defined ‘party in interest’ to encompass those entities that a fiduciary might be inclined to favor at the expense of the plan’s beneficiaries.” Harris Trust, 530 U.S. at 242. Here, there is no allegation that A&P had a prior relationship with Fidelity and there is no fact from which this Court could infer that they showed favoritism to each other or did anything other than engage in arms-length negotiation. Negotiation between such unaffiliated parties does not fall into the category of transactions that Section 406(a) was meant to prevent. Lockheed, 517 U.S. at 893.4 3 At the time that Fidelity was collecting the fee under the terms of the Trust Agreement, it was both a fiduciary of the plan and a party in interest, but its conduct in causing the plan to pay the fee for its own benefit cannot trigger liability under ERISA Section 406(a) because this section deals with transactions between two distinct parties. Self-dealing transactions are addressed by ERISA Section 406(b), which we discuss herein. 4 ERISA Section 408 provides certain exceptions to Section 406(a) prohibited transactions, 29 U.S.C. § 1108(b), but we need not address whether an exception applies 9 We next turn to Section 406(b), which prohibits certain transactions between the plan and a fiduciary. Of relevance here is the portion of the statute that reads “[a] fiduciary with respect to a plan shall not . . . deal with the assets of the plan in his own interest or for his own account . . . .” 29 U.S.C. § 1106(b)(1). Section 406(b)’s purpose is to “prevent[ ] a fiduciary from being put in a position where he has dual loyalties and, therefore, he cannot act exclusively for the benefit of a plan's participants and beneficiaries.” Reich v. Compton, 57 F.3d 270, 287 (3d Cir. 1995) (internal citation omitted). Here, Plaintiff argues that Fidelity’s act causing the plan to disburse $1,200 of plan assets to itself as compensation for the DRO review constitutes a prohibited transaction because it was a fiduciary at the time of the disbursement. As previously discussed, Fidelity was a fiduciary only for purposes of administering the plan, not for purposes of negotiating or collecting its compensation. At the time of the disbursement, the fee structure was set and Fidelity lacked discretion to change it. What differentiates this case from cases in which we have held that Section 406(b) applied is the fact that Fidelity, at the time it collected the fee, had no actual control or discretion over the transaction at issue5 —the price of the previously bargained-for fees. here, as we do not find that the allegations describe a prohibited Section 406(a) transaction. 5 For example, 406(b) has been found to prohibit transactions involving kick-backs to fiduciaries and self-negotiated loans. See, e.g., Nat’l Sec. Systems, Inc. v. Iola, 700 F.3d 65, 91-93 (3d Cir. 2012) (holding that a fiduciary who receives consideration in connection with a transaction involving plan assets violated Section 406(b), and a nonfiduciary who facilitated that transaction could be liable); Reich, 57 F.3d at 287, 289-290 (holding that a plan trustee who essentially negotiated on both sides of a mortgage 10 Plaintiff points out that while there are exceptions to Section 406(a) prohibited transactions under Section 408, there are no exceptions to Section 406(b) prohibited transactions. Thus, Plaintiff argues that even if the fees are reasonable, the disbursement of any fees by the fiduciary to pay itself for its services is prohibited. This argument goes too far. Section 406(b)’s purpose is to prohibit transactions that might involve selfdealing by a fiduciary, not to prevent fiduciaries from being paid for their work. A service provider cannot be held liable for merely accepting previously bargained-for fixed compensation that was not prohibited at the time of the bargain. See Chi. Dist. Council of Carpenters Welfare Fund, 474 F.3d at 472 n.4 (holding that a service provider who accepted compensation prescribed by an arms-length agreement was not a fiduciary for compensation purposes and therefore not liable under Section 406(b)); Schulist v. Blue Cross of Iowa, 717 F.2d 1127, 1131 (7th Cir. 1983) (holding that Section 406(b) only governs a defendant service provider who was receiving agreed-upon rates directly from a plan if that defendant had discretionary authority or control with respect to the rates agreed to by the plan sponsor).6 In short, ERISA prohibits none of the alleged transactions, and thus Plaintiff’s Section 406 claims fail. transaction with the plan violated Section 406(b)); Cutaiar v. Marshall, 590 F.2d 523, 530 (3d Cir. 1979) (holding that a transfer between two funds where the trustees are identical but participants and beneficiaries are not violates Section 406(b)). 6 Cf. Sixty-Five Sec. Plan v. Blue Cross and Blue Shield of Greater New York, 583 F. Supp. 380, 388 (S.D.N.Y.), reargument denied 588 F. Supp. 119, 120 (S.D.N.Y. 1984) (finding an impermissible conflict of interest under ERISA where a service provider had full discretion to grant or deny insurance claims, and the provider’s fee was based upon a percentage of any claims it granted). 11