Court Opinion

ID: 8409392
Source: CourtListenerOpinion
Date Created: 2022-11-02 16:57:23.082444+00
Date Added: 2024-06-11T16:46:47.976822
License: Public Domain

WILLIAM A. FLETCHER, Circuit Judge,
concurring and dissenting:
All members of the panel agree that the Receiver has done an excellent job in this difficult and complex case, and I agree with the majority’s opinion in all respects but one. Unlike the majority, I would hold that the district court erred in approving the 50% offset for damages recovered by ERISA plans from third parties.
The United States Secretary of Labor (“the Secretary”) has the statutory responsibility to administer ERISA. See, e.g., 29 U.S.C. §§ 1031(c) and 1135 (authority to issue regulations); id. § 1132(a)(2) (authority to bring civil enforcement actions); id. § 1134 (investigative authority); id. § 1137 (administrative procedure); id. § 1138(appropriations to carry out “functions and duties” under ERISA). The Secretary contends that the 50% offset for third-party recoveries violates ERISA. I agree with the Secretary.
The Secretary was the first to file suit contending that Capital Consultants, LLC (“CCL”) had violated ERISA and seeking a receivership. After the Secretary filed suit, plan trustees filed suit under ERISA; non-ERISA investors filed suit under federal and state laws; and the Securities and Exchange Commission filed suit under the federal securities laws. Over the course of several years, the Receiver marshaled the assets of CCL, made some distributions to claimants, and recommended a final plan of distribution that was approved by the district court.
The parties and the district court agree that the Receiver is a fiduciary of the ERISA plans that are claimants in the receivership. The majority opinion merely assumes without deciding that the Receiver is an ERISA fiduciary, Maj. Op. at 741, but in my view the point is beyond debate. Under ERISA, a person “is a fiduciary with respect to a plan to the extent ... he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.” 29 U.S.C. *751§ 1002(21)(A). ERISA “defines ‘fiduciary’ not in terms of formal trusteeship, but in functional terms of control and authority over the plan, thus expanding the universe of persons subject to fiduciary duties — and to damages — ■” under the statute. Mertens v. Hewitt Assocs., 508 U.S. 248, 262, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) (citation omitted; emphasis in original). We construe ERISA fiduciary status “liberally, consistent .with ERISA’s policies and objectives.” Ariz. State Carpenters Pension Trust Fund v. Citibank (Ariz.), 125 F.3d 715, 720 (9th Cir.1997).
As an ERISA fiduciary, the Receiver must comply with ERISA’s fiduciary duties of loyalty. ERISA requires that
a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries [.]
29 U.S.C. § 1104(a)(1) (emphasis added). ERISA fiduciary duties are “the highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996) (quoting Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d Cir.1982)). As a result, an ERISA fiduciary must have “ ‘an eye single’ toward beneficiaries’ interests.” Pegram v. Herdrich, 530 U.S. 211, 235, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) (quoting Donovan, 680 F.2d at 271).
The majority holds that the Receiver acted within his discretion when he required that any claim by an ERISA plan would be offset by 50% of any recovery from third parties by that plan. Although the majority does not say it in so many words, it holds that the Receiver’s fiduciary obligation under ERISA was overridden by some general interest in fairness, as the Receiver understood fairness, to other receivership claimants. However, the majority points to no provision in ERISA itself, or in the federal common law of ERISA, that would permit such a result.
In interpreting ERISA’s fiduciary provisions, we draw on the common law of trusts unless it is inconsistent with the statute’s language, structure, or purposes. See Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 250, 120 S.Ct. 2180, 147 L.Ed.2d 187 (2000); Waller v. Blue Cross of Calif., 32 F.3d 1337, 1344 (9th Cir.1994). Trustees of ERISA plans (and, by extension, fiduciaries occupying positions analogous to trustees) have an obligation to preserve all assets of the plan. As the Supreme Court wrote in Central States Pension Fund v. Central Transport, Inc., 472 U.S. 559, 105 S.Ct. 2833, 86 L.Ed.2d 447 (1985), “One of the fundamental common-law duties of a trustee is to preserve and maintain trust assets[.]” Id. at 572, 105 S.Ct. 2833; see also Collins v. Pension and Ins. Comm., 144 F.3d 1279, 1283 (9th Cir.1998) (“Plan trustees have a general duty to ensure a plan receives all funds to which it is entitled, so that those funds can be used on behalf of participants and beneficiaries.”).
In this case, a number of ERISA plans have brought successful third-party suits arising out of the CCL debacle. Many, though not all, of those suits were brought against ERISA plan trustees for insufficient supervision of the plans’ investments with CCL. See 29 U.S.C. § 1104(a)(setting forth standard of care). Recoveries have come not only from the trustees and their insurers, but also from insurance policies purchased by the ERISA plans to cover shortfalls in recoveries from trustees. See id. § 1110(b)(1) and (b)(2)(permitting both trustees and plans to purchase insurance for losses arising from fiduciary breach). No one disputes that, absent the receivership, all of the third-party recoveries *752would be assets of the ERISA plans. Moreover, no one disputes that the plans paid their trustees salaries sufficient to induce them to serve as trustees despite their liability for mismanagement, and that many of the plans paid for additional insurance out of plan assets.
I accept as fully applicable to this case the equal treatment principle of receivership law. Equality is, indeed, equity. See, e.g., Cunningham v. Brown, 265 U.S. 1, 13, 44 S.Ct. 424, 68 L.Ed. 873 (1924) (in distributing assets of estate in bankruptcy, “equality is equity”); United States v. 13328 & 13324 State Highway 75 North, 89 F.3d 551, 553-54 (9th Cir.1996) (disallowing tracing claim in equity receivership when assets of all defrauded creditors had been commingled; quoting the “equality is equity” phrase from Cunningham). But the “equality is equity” principle does not mean necessarily, or even usually, that all claimants must receive equal percentage payouts on their claims. For example, equality of treatment of secured creditors and unsecured creditors in bankruptcy does not mean that both receive equal percentage payouts. Rather, secured creditors receive all they are owed, up to the value of their security. Or, to take an even more obvious example, equality of treatment in bankruptcy does not mean that claimants get more or less from the bankruptcy estate depending on what other assets they have.
In this case, the ERISA plans are comparable to bankruptcy creditors who have assets outside the bankruptcy estate. The plans are claimants in the receivership, and they have assets — in the form of recoveries from third parties — that, absent the receivership, are their sole and undisputed property. The right to these assets was purchased by the plans prior to and independently of the receivership. The third-party suits, and the resulting plan assets, effectuate Congress’s desire in ERISA to provide special protection to participants and beneficiaries of ERISA plans. See 29 U.S.C. § 1001(b).
All investors in CCL were free to purchase insurance, or otherwise to pay to protect themselves against malfeasance. If they did not, that was their choice. The choice not to purchase insurance or other protection was not irrational, for it produced an obvious potential benefit: If CCL had performed as promised, such investors would have earned a higher rate of return on their investment as a result of not having paid that money. Yet the Receiver and the panel majority have approved a distribution plan that takes away 50% of the third-party recoveries of the ERISA plans, for which those plans have paid and for which other claimants have not.
The majority’s decision is purportedly in the service of the “equality is equity” principle. But the Receiver (and the majority) cannot justify the offset based on that principle, for if the Receiver really believed the principle required negating the plans’ third-party recoveries, he would not have required merely a 50% offset. He would have required a 100% offset. Far from producing equality of treatment, the 50% offset makes the inequality more obvious. The Receiver (and the majority) are in the uncomfortable position of recognizing that the equal treatment principle does not dictate the 50% offset, but nonetheless requiring that the ERISA plans submit to it. The principle now appears to be that the non-ERISA claimants are entitled to some of the ERISA plans’ money, but just not all of it.
The majority makes a number of arguments in favor of the 50% offset. First, it relies on two supposedly comparable cases in which offsets were allowed in receivership cases. In In re Cement and Concrete Antitrust Litigation, 817 F.2d 1435 (9th *753Cir.1987), rev’d on other grounds, 490 U.S. 93, 109 S.Ct. 1661, 104 L.Ed.2d 86 (1989), purchasers of cement brought an antitrust class action against cement manufacturers. A number of the defendants settled and paid into a settlement fund. We allowed all claimants against the settling companies to claim against the fund, but required those claimants who had already recovered from non-settling defendants (who had not paid into the fund) to offset that recovery against any claim against the fund.
In re Equity Funding Corp. of America Securities Litigation, 603 F.2d 1353 (9th Cir.1979), was a securities class action arising out of the fraud perpetrated by Equity Funding. The suit was brought by investors against accountants, rather than against Equity Funding itself. Equity Funding filed for bankruptcy in a separate proceeding. A distribution was made in the bankruptcy proceeding to debenture holders and equity owners. In the suit against the accountants, a settlement fund was established. Distribution from the fund was made to all claimants, but with a dollar-for-dollar offset for the debenture holders and equity owners based on their earlier distributions from the bankruptcy proceeding. The debenture holders complained that the dollar-for-dollar offset was unfair to them, as compared to the equity owners. They argued that because they had received a much larger percentage of their claims than the equity owners in the bankruptcy proceeding, the offset therefore had a disproportionately adverse affect on them. We sustained the dollar-for-dollar offset for both the debenture holders and the equity owners, based in substantial part on the rationale that the merits of the debenture holders’ claims against the accountants were weaker than the merits of the equity owners’ claims. Thus, the disproportionate adverse effect of the offset on the debenture holders was fair, given the disproportionate weakness of their claims on the merits.
Neither In re Cement nor In re Equity Funding is easily comparable to this case. In In re Cement, claimants who had already received compensation for the harm they had suffered were required to take an offset when they claimed compensation from the settlement fund for that same harm. Here, by contrast, some ERISA plans have suffered distinct and separately compensable harms arising from the acts or omissions of plan fiduciaries. In In re Equity Funding, the debenture holders complained only that their offset was disproportionate to the offset for the equity owners; they did not argue that they should be free from any offset. More important, in neither case was there a claim of fiduciary duty under ERISA or a comparable statute.
Second, the majority contends that not requiring an offset for the ERISA plans’ recoveries from third parties “could mean a double recovery for some clients.” Maj. Op. at 740. The majority refers to the possibility that an ERISA plan might recover more than its actual loss if its third-party recovery is added to its distribution from the receivership without offset. The majority’s concern is a strawman. There is no showing on the record before us that any “double recovery” would occur. The majority itself concedes that “the parties seem to agree that the chances of a double recovery are small at best.” Maj. Op. at 740. The Eighth District Electrical Pension Fund, one of the ERISA plan plaintiffs, asserts that a “double recovery” will not result from insurance recoveries: “No ERISA plan will obtain a double recovery, or windfall, by pursing claims under its own fiduciary liability insurance or bonds. The fundamental purpose of fiduciary liability is to make the trust whole, not provide a double recovery.” For her part, the *754Secretary “does not challenge the authority of the District Court or the receiver to structure relief to ensure that the plans do not receive more than a full recovery.”
Third, the majority contends that “the offset provision allows for more equal compensation to innocent CCL clients[.]” Maj. Op. at 741. “More equal compensation” is precisely what the offset provision does not allow, if equality means equal treatment to equally situated parties. For example, the offset disregards the difference between ERISA plans that purchased insurance and claimants that did not, giving both purchasers and non-purchasers a claim to the insurance proceeds. Under the majority’s rationale, in the case of a common catastrophe, a family whose now-deceased breadwinner did not purchase life insurance should have a claim on the life insurance proceeds of the family next door whose now deceased breadwinner did purchase such insurance.
Fourth, the majority contends that ERISA would be violated if there were no offset provision:
A change in the distribution formula that increases the distributions to some clients and reduces the distributions to others does not alone imply a breach of fiduciary duty by the receiver. By this reasoning, eliminating the offset clause would violate ERISA since it would favor some ERISA plans over others.
Maj. Op. at 741 (emphasis in original). The majority appears to think that the Receiver’s fiduciary duty requires him to even out recoveries from third parties among all ERISA plans, regardless of whether a particular ERISA plan has obtained a third-party recovery. But this is demonstrably not true. There are substantial variations among the ERISA plans' in the receivership. Some ERISA plans do not have any third-party recoveries at all. These plans’ trustees may have been careful but nonetheless duped by CCL, or these plans may have ■ delayed seeking any third-party recoveries. Other ERISA plans have already recovered against their trustees. Among those who have recovered against their trustees, some have recovered additional amounts based on insurance policies protecting against shortfalls in compensation in suits against trustees.
An ERISA fiduciary, including a Receiver, may not take assets belonging to one ERISA plan and simply distribute those assets to another ERISA plan of which it is also a fiduciary. Far from being required to equalize distribution to all ERISA plans, the Receiver is forbidden to equalize distributions if such equalization requires taking assets of one plan and giving them to another.
Fifth, the majority contends that the Secretary appears to have conceded that the offset is proper:
To the extent appellants argue that some non-ERISA plans would see increased distributions at the expense of ERISA plans, they cite no authority persuading us that the receiver was legally obligated to favor ERISA plans over non-ERISA plans. The DOL [Department of Labor] appears to concede that no such higher duty to ERISA clients exists. /FN 10/
/FN 10/ The DOL states that it “does not suggest that the receiver’s duties of prudence and loyalty obligated him to favor the [ERISA] plans in any way or prioritize their claims.”
Maj. Op. at 1359 '(first bracket added). The majority has misread the Secretary’s brief. The paragraph from which the sentence in the majority’s footnote 10 was taken carries precisely the opposite meaning. The Secretary first describes the *755duties of an ERISA fiduciary. She then writes the following paragraph, reproduced here in its entirety:
In this context, the Secretary does not suggest that the receiver’s duties of prudence and loyalty obligated him to favor the plans in any way or prioritize their claims. But she does contend that the receiver could not, consistent with his fiduciary duties, treat any plan unequally by disfavoring it with respect to the other clients of CCL. Nor could the receiver require the plans, in effect to transfer their assets to others CCL investors, whether they are other plans or non-plan clients. This is, in fact, what the receiver’s distribution plan does.
(Emphasis indicates language quoted by the majority.)
Finally, the majority contends that the 50% offset does not actually take third-party recoveries from the ERISA plans: “The receiver is not in our view illegally transferring from one ERISA plan to another CCL client an asset belonging to the ERISA plan.” Maj. Op. at 742. Of course, the majority is right in saying that it is not transferring ERISA plan assets in the sense of seizing assets from a plan and conveying those assets to another CCL client. But that is a distinction without a difference. The offset has precisely the same consequence as seizing 50% of a plan’s third-party recoveries, for the plan is denied money that it would otherwise receive from the receivership, solely because of its third-party recovery. The Receiver’s duty of loyalty to the ERISA plans for which he is a fiduciary is a real duty, not a technicality, and cannot be avoided by a lawyerly sleight of hand.
I would hold that the Receiver is a fiduciary of the ERISA plans that are claimants in the receivership; that the third-party recoveries are plan assets for which the ERISA plans have paid; that the Receiver has a duty to protect those assets on behalf of the plans; that the 50% offset effectively requires the plans to donate half of their third-party recoveries to the common pool of the receivership; and that the offset requirement violates ERISA.
I recognize that many of my arguments apply to the non-ERISA receivership claimants who have recovered from third parties, and I regard it as a close question whether the Receiver abused his discretion in providing a 50% offset as to those third-party recoveries. However, the Receiver is not an ERISA fiduciary as to these claimants. Because ERISA is the determining factor in my conclusion that the offset is improper as to the ERISA plans, I would not reverse the 50% offset for third-party recoveries by non-ERISA claimants. I would nevertheless remand to the district court to allow the Receiver to determine, within his discretion, whether he wishes to retain the 50% offset for non-ERISA claimants if the offset is improper for ERISA claimants.