Court Opinion

ID: 1015981
Source: CourtListenerOpinion
Date Created: 2013-07-04 21:41:40.874386+00
Date Added: 2024-06-11T15:23:27.563286
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                              No. 02-1513

SERGIO AREVALO; ROBERT IVERSON, III; THOMAS
OHRBECK; JOHN PAGANO; PRICE J. POLYNICE,

                                            Plaintiffs - Appellants,

           versus

HARRIS HERMAN; MARCO POSSATI,

                                             Defendants - Appellees,

           and

KIMBERLY ERRICO,

                                                           Defendant.

Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond. Dennis W. Dohnal, Magistrate
Judge. (CA-01-512)

Argued:   February 25, 2003                 Decided:   April 19, 2005

Before GREGORY and SHEDD, Circuit Judges, and C. Arlen BEAM, Senior
Circuit Judge of the United States Court of Appeals for the Eighth
Circuit, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED: Marie Dempsey Carter, MARIE D. CARTER, P.L.C., Richmond,
Virginia, for Appellants. Samuel M. Brock, III, SPILMAN, THOMAS &
BATTLE, P.L.L.C., Charleston, West Virginia, for Appellees.     ON
BRIEF: James S. Crockett, Jr., TROUTMAN SANDERS, L.L.P., Richmond,
Virginia, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

                               2
PER CURIAM:

     Former employees of the now defunct Sky Trek International

Airlines,    Inc.   ("Sky   Trek")    allege   that   President    and   Chief

Executive Officer Harris Herman ("Herman") and Chairman of the

Board of Directors Marco Possati ("Possati") violated the Employee

Retirement Income Security Act ("ERISA") by failing to pay medical

claims incurred by the employees before the bankruptcy trustee

terminated the company's benefit plan. The district court1 granted

Herman and Possati's motion for summary judgment, and the employees

appeal.     We affirm.

                                      I.

     Sky Trek provided its current and former employees a self-

funded    medical   benefit    plan    that    was    designed    to   operate

independently from the company. The employees and the company both

advanced funds to the plan. Current employees made payments to the

fund through payroll deductions and former employees contributed

through direct payments to a third-party administrator ("TPA").

Medical claims were not processed by the plan itself, but rather by

the TPA.2    The TPA determined which claims to pay and then paid the

     1
      The Honorable Dennis W. Dohnal, United States Magistrate
Judge for the Eastern District of Virginia, sitting by consent of
the parties pursuant to 28 U.S.C. § 636(c)(1).
     2
      The New England Financial Employee Benefits Group processed
claims for current employees and the COBRA Company of Virginia
processed claims for former employees.

                                       3
claims.     Sky Trek maintained a bank account to which the TPA had

access    for   reimbursement      of     claim    costs    and   administrative

expenses.

     On May 12, 2000, Sky Trek filed for reorganization under

Chapter 11 of the Bankruptcy Act.             11 U.S.C. §§ 1101-1174.        This

reorganization       was    subsequently      converted      to   a   Chapter     7

liquidation     on   June   22,   2000.       11   U.S.C.   §§    701-766.      The

bankruptcy court refused to allow Sky Trek to pay medical claims

incurred by employees before the initial bankruptcy petition was

filed, and the bankruptcy trustee terminated the plan.

     Several employees sued Possati and Herman for failing to pay

pre-petition medical claims, asserting that they were personally

liable for breaching their fiduciary duty, under ERISA, to the plan

and the plan participants.        Herman and Possati responded that they

were not fiduciaries.        In granting Herman and Possati's motion for

summary judgment, the district court determined that the company

officials were not fiduciaries, and that even if they were, they

did not breach any duties.              The employees appeal and seek a

judgment requiring payment of their individual medical claims.3

     3
      Specifically, the employees seek "declaratory relief to
establish that . . . Possati and Herman are personally liable,
jointly and severally, for the losses that resulted from their
fiduciary breaches as well as judgment providing for individual
recovery from them, including pre-judgment interest, attorney's
fees, costs, [and] other reasonable costs incurred as provided for
by ERISA." Arevalo v. Herman, No. 3:01CV512, slip op. at 1-2 (E.D.
Va. April 12, 2002).

                                          4
                                  II.

     We review de novo the district court's decision to grant

Herman and Possati's motion for summary judgment.     Higgins v. E.I.

DuPont de Nemours & Co., 863 F.2d 1162, 1167 (4th Cir. 1988).      We

view the evidence in the light most favorable to the nonmoving

party.   Thompson v. Potomac Elec. Power Co., 312 F.3d 645, 649 (4th

Cir. 2002).

                                   A.

     Section 1002(21)(A) of ERISA defines fiduciary:

     [A] person is a fiduciary with respect to a plan to the
     extent (i) 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, . . . or (iii)
     he has any discretionary authority or discretionary
     responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A).     "[T]he inclusion of the phrase 'to the

extent' in § 1002(21)(A) means that a party is a fiduciary only as

to   the     activities   which   bring   the   person   within   the

definition. . . . [A] court must ask whether a person is a

fiduciary with respect to the particular activity at issue."

Coleman v. Nationwide Life Ins. Co., 969 F.2d 54, 61 (4th Cir.

1992).     The employees argue that Herman and Possati exercised the

necessary discretion and control over the plan to be personally

liable for the unpaid claims.     Specifically, they claim that since

Herman and Possati were Sky Trek officials they "knew (or should

                                   5
have known) that when the company filed for bankruptcy protection

the Plan participants would not have coverage for medical claims

incurred pre-petition."4          Appellants' Brief at 15.            According to

the employees, Herman and Possati had a fiduciary duty to inform

the plan participants, pre-petition, that the bankruptcy filing

would prevent Sky Trek from funding the plan.                 They offer neither

plan language nor persuasive precedent within or without the

Bankruptcy Act or ERISA in support of this purported early notice

requirement.

       Herman and Possati stated, and the district court concurred,

that under the facts of this case they "had no involvement with the

design, implementation, or operation of the Plan."                     Arevalo v.

Herman, No. 3:01CV512, slip op. at 3 (E.D. Va. April 12, 2002).                  We

also agree.          Even if it is true that Herman and Possati, pre-

petition,      had    a   fiduciary   duty    toward   the    employees   and   the

requisite control and discretion over the plan, they clearly lost

that       control    and    discretion       once   Sky     Trek's   Chapter    11

reorganization was converted to a Chapter 7 liquidation and the

bankruptcy trustee took over sole control of Sky Trek.                 And, on May

19, 2000, while in Chapter 11, Sky Trek filed an application with

the bankruptcy court seeking to continue to fund the plan for pre-

       4
      While Sky Trek was operating under Chapter 11 protection,
this is almost certainly an incorrect premise. It is also likely
that the bankruptcy court had the authority to approve at least
some pre-petition medical claims in the Chapter 7 proceeding, but
it chose not to do so.

                                          6
petition claims, but the court denied the application on May 23,

2000.5    Thus, Herman and Possati did not breach a fiduciary duty by

failing to pay the claims.       They had no means or authority to do so

after Sky Trek's bankruptcy began.

                                       B.

     The employees attempt to establish that Herman and Possati

were also fiduciaries of the plan under 29 U.S.C. § 1002(21)(A)(i)

because    of    their   authority   over   the   plan   assets,    namely    the

employee     contributions.          The    employees    claim     that    their

contributions to the plan were assets over which Herman and Possati

exercised       discretionary   control,    and   that   Herman    and    Possati

breached their fiduciary duty to properly manage those assets.6

Herman and Possati counter that although employee and employer

contributions were transferred to the plan account, the bankruptcy

trustee prohibited the payment of the claims and terminated the

plan. Any contributions made after the Chapter 7 bankruptcy filing

did not become plan assets, according to Herman and Possati,

because those funds were remitted directly to the bankruptcy

trustee.

     5
      Even after the court refused to cover pre-petition claims,
Sky Trek transferred $59,484.21 to the TPA account on May 23, 2000,
and the TPA credited $16,346.69 back to Sky Trek on May 31, 2000.
     6
      The employees seem to argue that Herman and Possati breached
their fiduciary duty to properly manage the plan assets by failing
to use them to pay the outstanding medical claims.

                                       7
       The Department of Labor, the agency responsible for enforcing

ERISA, has defined "plan assets" as follows:

       [T]he assets of the plan include amounts . . . that a
       participant or beneficiary pays to an employer, or
       amounts that a participant has withheld from his wages by
       an employer, for contribution to the plan as of the
       earliest date on which such contributions can reasonably
       be segregated from the employer's general assets.

29 C.F.R. § 2510.3-102(a).7          The employee contributions fall under

this definition of plan assets because the funds were segregated

from       Sky    Trek's   general   assets.8   Herman   and   Possati   were

fiduciaries of the plan, to the extent they exercised any authority

over the disposition of the plan assets.            However, they did not

breach their fiduciary duty by failing to pay the employees'

medical claims because they were no longer in control of the plan

assets.          The bankruptcy court or the trustee made the decisions

regarding payment of pre-petition medical claims, not the company

officials.

       7
      "[I]n no event shall the date determined pursuant to
paragraph (a) of this section occur later than 90 days from the
date on which the participant contribution amounts are received by
the employer (in the case of amounts that a participant or
beneficiary pays to an employer) or the date on which such amounts
would otherwise have been payable to the participant in cash (in
the case of amounts withheld by an employer from a participant's
wages)." 29 C.F.R. § 2510.3-102(c).
       8
      One employee, John Pagano, made a contribution to the plan
after the bankruptcy court denied Sky Trek's application to pay
pre-petition claims. This contribution was remitted directly to
the bankruptcy trustee.    Therefore, this contribution did not
become an asset of the plan.

                                         8
                                       C.

      The employees brought suit under sections 1132(a)(2) and

1132(a)(3) of ERISA. These sections indicate who may bring a civil

action under the Act.

      (a) A civil action may be brought . . . (2) by the
      Secretary, or by a participant, beneficiary or fiduciary
      for appropriate relief under section 1109 of this title;
      (3) by a participant, beneficiary, or fiduciary (A) to
      enjoin any act or practice which violates any provision
      of this subchapter or the terms of the plan, or (B) to
      obtain other appropriate equitable relief (i) to redress
      such violations or (ii) to enforce any provisions of this
      subchapter or the terms of the plan.

29   U.S.C.   §   1132   (a)(2)-(3).        Section   1132(a)(2)    allows   a

participant in a plan to bring a civil action for breach of

fiduciary duty, with the fiduciary being personally liable for the

breach.9      Section    1132(a)(3)    permits   a    participant   to   seek

equitable relief for violations of the terms of the plan.            In their

complaint, the employees sought equitable restitution for their

unpaid medical claims from Herman and Possati personally.

      The Supreme Court has limited the relief available under

section 1132(a)(3) to equitable relief "typically available" in a

court of equity.      Great-West Life & Annuity Ins. Co. v. Knudson,

534 U.S. 204, 210 (2002) ("[P]etitioners seek, in essence, to

impose     personal   liability   on    respondents    for   a   contractual

      9
      Section 1109 provides that a person who breaches his
fiduciary duty "shall be personally liable to make good to such
plan any losses to the plan resulting from each such breach, . . .
and shall be subject to such other equitable or remedial relief as
the court may deem appropriate." 29 U.S.C. § 1109(a).

                                       9
obligation to pay money--relief that was not typically available in

equity.").       Additionally, "for restitution to lie in equity, the

action generally must seek not to impose personal liability on the

defendant, but to restore to the plaintiff particular funds or

property    in    the   defendant's   possession."          Id.   at   214.        The

employees seek to impose personal liability on Herman and Possati

for the unpaid medical claims, a goal prohibited by Great-West

Life.    Even if they were not seeking to impose personal liability

on the company officials, the employees could not proceed under

section 1132(a)(3) because neither Herman nor Possati have Sky Trek

funds     in their possession to pay the pre-petition claims.                      The

bankruptcy trustee is and has been in sole control of Sky Trek

money and property.

        The only possible remedy available to the employees under

ERISA is set forth in section 1132(a)(2).              To proceed under this

section, the employees must seek to benefit the plan as a whole,

rather than to seek payment of their individual claims.                            See

Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142

(1985)    ("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.").         Since the relief the employees seek is

                                       10
payment of their individual medical claims, section 1132(a)(2)

affords them no relief.

                                   III.

     The   district   court   appropriately   granted   the   motion   for

summary judgment.     We affirm.

                                                                AFFIRMED

                                    11