Court Opinion

ID: 8094
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:34:22+00
Date Added: 2024-06-11T12:07:02.900179
License: Public Domain

United States Court of Appeals,

                          Fifth Circuit.

                          No. 94-30618.

Warren A. MAHER, et al., Plaintiffs-Appellants, Cross-Appellees,

                                v.

 STRACHAN SHIPPING COMPANY, et al., Defendants-Appellees, Cross-
Appellants.

              United States of America, Intervenor.

                          Nov. 14, 1995.

Appeals from the United States District Court for the Eastern
District of Louisiana.

Before POLITZ, Chief Judge, and JONES and PARKER, Circuit Judges.

     EDITH H. JONES, Circuit Judge:

     When this class action was filed in 1992, the applicable ERISA

statute of limitations, 29 U.S.C. § 1113 (1987), barred cases six

years after the breach occurred and three years after the earliest

date on which a plaintiff "had actual knowledge of the breach or

violation ..."   The district court found that the plaintiffs'

knowledge in 1987 that Strachan had purchased Executive Life

annuities to replace their former retirement benefits plan tolled

the three year statute of limitations period and time-barred their

claims.   Accordingly, the central issue on appeal is whether the

information known by the class members three years before the date

suit was filed amounted to "actual knowledge of the breach or

violation" for purposes of § 1113(2)(A).   We hold that for summary

judgment purposes, it does not, and the lower court's grant of

summary judgment must be reversed.     We also reject Strachan's

                                1
challenge to the impact of the Pension Annuities Protection Act of

1994 on appellants' standing.

                               BACKGROUND

     Strachan    Shipping   Company       ("Strachan")    was   the   employer

sponsor of a qualified retirement plan subject to the provisions of

ERISA   (the   "Plan").     The   Plan     was   a   defined    benefit   plan

established to provide retirement benefits for Strachan's employees

and their beneficiaries.      Strachan administered the Plan through

its appointed    retirement   board,       of   which   defendants/appellees

Robert W. Groves III and Edwin L. Ennis were members.             Groves was

chairman of the board of directors as well as a member of the

board's compensation committee.       Ennis was the secretary/treasurer

of Strachan and also served on the compensation committee.                 All

appellees were fiduciaries of the plan.

     By memorandum dated December 26, 1986, Ennis informed plan

participants and beneficiaries that the plan was being reorganized.

On April 17, 1987 and July 15, 1987, memoranda from Ennis advised

plan participants and beneficiaries that the plan's reorganization

was "designed to allow the company to utilize excess assets which

have accumulated in the pension plan."            The parties were assured

that their benefits would not be "diminished in any way by this

reorganization."

     Shortly afterward, Strachan agreed to purchase a group single

premium annuity contract from the now-infamous Executive Life for

approximately $10,750,000 to cover the plan participants' benefits.

As a Result of this purchase and the plan's termination, Strachan

                                      2
received a cash reversion of over $4,500,000.1

     On November 1, 1987, Executive Life began paying monthly

benefits to former plan participants and beneficiaries who were in

pay status.   The checks were in the same amounts as the checks

previously received by beneficiaries, but they indicated that

Executive Life was now the payor.     Participants who were not in pay

status first received their Executive Life Annuity Certificates

from Strachan in May of 1989, along with a memorandum from Strachan

informing participants that their benefits had been secured with

"the purchase of a Group Annuity Contract from Executive Life

Insurance Company."

     On   April   11,   1991,   Executive    Life   was   placed   into

conservatorship by the California Commissioner of Insurance.        The

Commissioner immediately reduced participants' annuity payments by

thirty (30) percent.    In August, 1992, appellants filed a class

action pursuant to Section 502(a) of ERISA, 29 U.S.C. § 1132(a),

against Strachan and its officers alleging a breach of their

fiduciary duties to plan participants and beneficiaries.2           See

     1
      The plan was a "defined benefit plan," under which the risk
of loss or gain associated with plan investments remained
entirely with Strachan. When such a plan terminates, assets in
excess of plan liabilities revert to the plan sponsor if plan
language permits, which it did in this case.
     2
      The district court certified a plaintiff class which
includes all participants of Strachan's former pension plan who
resided in Louisiana in April 1991 and who hold Executive Life
annuities. Participants in states having a state guaranty fund
in place in April 1991 received their full annuity payment
through supplementation. Louisiana had no state guaranty fund,
and the plaintiff class members in pay status are therefore not
receiving such supplementation.

                                  3
ERISA    §§   404(a)(1)(A)    and   (B),   §   403(c)(1),    29   U.S.C.    §§

1104(a)(1)(A) and (B), and § 1103(c)(1).

     The district court granted summary judgment to Strachan,

holding that appellants had no standing or remedy under ERISA and

that their suit is barred by the three-year statute of limitations.

According to the court, the appellants were put on notice and had

actual    knowledge   of   the   breach    when   Strachan   purchased     the

Executive Life annuities.        The court emphasized that some of the

members of the plaintiff class had indicated some "concern" about

Executive Life more than three years before filing suit.            And, for

a similar period, some of the class had known that the plan's

termination would enable Strachan to take an enhanced reversion

because of Executive Life's low bid.

     After receiving the initial adverse judgment, the class moved

for relief based on the October 22, 1994, passage of the Pension

Annuitants Protection Act, which amended Section 502(a) of ERISA to

make clear that annuitants have standing to obtain relief for

violations of ERISA in connection with annuity purchases. Applying

the amendment, the district court issued an order granting the

plaintiffs' motion as to standing but reiterating the statute of

limitations bar.

                             STANDARD OF REVIEW

         This court reviews a district court's granting of summary

judgment de novo, applying the same standard as the district court.

Dupre v. Chevron U.S.A., 20 F.3d 154, 156 (5th Cir.1994).            Summary

judgment is proper if there is "no genuine issue as to any material

                                      4
fact" and the movant, Strachan, is entitled to judgment as a matter

of law.   Fed.R.Civ.Proc. 56(c);     Green v. Touro Infirmary, 992 F.2d
537, 538 (5th Cir.1993).

                                DISCUSSION

A. Statute of Limitations

     The ERISA statute of limitations is keyed respectively to the

date the cause of action arose and the date the plaintiff had

actual notice.         Hogan v. Kraft Foods, 969 F.2d 142, 145 (5th

Cir.1992). The statute specifies a two-step analysis of accrual of

an ERISA action:       first, when did the alleged breach or violation

occur; and second, when did the plaintiff have actual knowledge of

the breach or violation?      Ziegler v. Connecticut General Life Ins.

Co., 916 F.2d 548, 550 (9th Cir.1990).

     In this case, Strachan's selection process for an annuity

provider ended on August 6, 1987, with the signing of a Letter

Agreement with Executive Life to purchase a group annuity contract.

Both sides acknowledge that the alleged breach occurred on that

date. Ziegler, 916 F.2d at 551 (the culpability resulting from the

breach    of   ERISA    fiduciary   duty   arises   with   the   contract's

creation). Under the first step of analysis, the Maher class filed

their action within six years of August 6, 1987.

     The second step requires a determination whether the class had

actual knowledge of the breach more than three years before the

complaint was filed.       Because suit was filed in August 1992, the

claim is time barred only if appellants had actual knowledge of the

breach before August 1989.      As to both participants in the Plan and

                                      5
beneficiaries in pay status, the district court equated mere

knowledge of Strachan's purchase of annuities from Executive Life

with actual knowledge of the alleged breach of fiduciary duty.

Each group had actual knowledge early enough to bar their claims

under this analysis.

     This court recently adopted a test articulated by the Third

Circuit for applying the three-year time bar.   Reich v. Lancaster,

55 F.3d 1034, 1057 (5th Cir.1995) (district court did not err in

finding tax forms did not provide plaintiffs actual knowledge of

breach of fiduciary duty or ERISA violation).    The Third Circuit

held:

     [a]ctual knowledge of a breach or violation requires that a
     plaintiff have actual knowledge of all material facts
     necessary to understand that some claim exists, which facts
     could include necessary opinions of experts, knowledge of a
     transaction's harmful consequences, or even actual harm.

Gluck v. Unisys Corp., 960 F.2d 1168, 1177 (3d Cir.1992).

     Later, the Third Circuit elaborated its formula;   stating:

     [actual knowledge] requires a showing that plaintiffs actually
     knew not only of the events that occurred which constitute the
     breach or violation but also that those events supported a
     claim for breach of fiduciary duty or violation under ERISA.

International Union v. Murata Erie North America, 980 F.2d 889, 900

(3rd Cir.1992).   Based on this test, the Third Circuit held that

the defendant fiduciary failed to make the showing of actual

knowledge necessary to meet the "stringent requirement" imposed by

ERISA § 413(2), 29 U.S.C. § 1113(2).   Id. at 901.

        Application of this actual knowledge standard makes it

difficult to conceive how appellants' claims would be barred as a

matter of law by their knowledge of the transfer of plan assets

                                6
into       an   annuity   contract   with   a   company    that   received   some

unfavorable publicity.           The Ninth Circuit recently dealt with a

similar issue in Waller v. Blue Cross of California, 32 F.3d 1337

(9th Cir.1994), which involved the termination of an ERISA plan

replaced by annuities purchased from Executive Life.3                  The court

declined        to   equate   plaintiffs'   knowledge     of   the   purchase   of

annuities with actual knowledge of the alleged breach of fiduciary

duty, reasoning that the disclosure of a transaction that is not

inherently a statutory breach of fiduciary duty cannot communicate

the existence of an underlying breach.            Id. at 1341, citing Fink v.

National Savings and Trust Co., 772 F.2d 951, 957 (D.C.Cir.1985).

       In reaching its finding there was no genuine issue of fact

that the class obtained actual knowledge of the breach of fiduciary

duty no later than May 19, 1989, when those not in pay status

received their Executive Life Annuity Certificates from Strachan,

the district court noted that there was a "general concern over the

stability of Executive Life [in 1987]."                   Strachan also relies

heavily upon deposition testimony of several of the named class

       3
      Although this case is factually very similar to the case
sub judice, we note the different underlying procedural postures.
Waller came before the Ninth Circuit on a 12(b)(6) motion, while
we are presented with the issue on a grant of summary judgment.
The Waller court noted, "[b]ecause this case was dismissed for
failure to state a claim, all allegations of material fact in
plaintiffs' complaint are taken as true and construed in the
light most favorable to the plaintiff." Waller, 32 F.3d at 1338,
n. 1. The standard on summary judgment review, however, requires
us to look at the evidence adduced by both sides. Nevertheless,
the determinative issue in both cases is whether the plaintiffs
had obtained actual knowledge of the alleged breach when they
learned the defendant employer had purchased annuities from
Executive Life.

                                        7
plaintiffs, seven of whom expressed concern about Executive Life's

financial well-being or knowledge of the selection of Executive

Life as early as 1987 or 1988.              For example, appellant Armstrong

testified that he had concerns about Executive Life in early 1988;

that he gained this knowledge through articles that had been

published about the insurance carrier's troubled times;                      that he

knew    Executive     Life     had   been     selected     because      it   was   the

low-bidder, giving rise to the greatest reversion to Strachan;

and, that he had discussed these doubts with defendant Ennis.

Appellant Collins testified to having read articles about Executive

Life's problems before August 1987, and he had discussed these

concerns with appellant Maher and appellee Ennis.                   Appellant Maher

testified in deposition to having read a Wall Street Journal

article about Executive Life's junk bond dealings and that he had

asked    Strachan's     John     MacPherson        to   guarantee      his   pension.

Additionally, appellants Mintz, Maniglia, and Higgens testified to

knowing of Executive Life's selection before the actual August 1987

signing, and    appellant        Tomeny     knew    that   a   lunch    meeting    had

occurred at which several of these concerns had been aired by the

appellants to Strachan's management.

       Although this testimony demonstrates unease with the choice of

Executive Life, it does not, in our view, show to the exclusion of

a genuine fact issue that appellants had actual knowledge of the

facts necessary to understand that some claim existed, knowledge of

the harmful effect the purchase of Executive Life would have, or

knowledge of any actual harm prior to August 24, 1989.                       Reich v.

                                          8
Lancaster, 55 F.3d 1034, 1057 (5th Cir.1995) (citing Gluck v.

Unisys Corp., 960 F.2d at 1177).                 Waller, supra.       "It is not enough

that [appellants] had notice that something was awry, [they] must

have had specific knowledge of the actual breach of duty upon which

[they]      sue[    ]."      Brock   v.     Nellis,      809 F.2d 753,   754    (11th

Cir.1987).         See also Radiology Center, S.C. v. Stifel, Nicolaus &

Co.,       919 F.2d 1216,      1222    (7th        Cir.1990).4          The    class

representatives' information, of course, does not prove that other

class members had any awareness of articles about Executive Life's

financial stability. But even as to the named class members, there

is no evidence that they had actual knowledge about Executive

Life's      actual    financial      condition       beyond       predictions       in   the

financial press.          We are hesitant to hold that actual knowledge of

a   fiduciary       breach   or   violation        may    exist    simply     because     of

unfavorable publicity surrounding a company, unless the publicity

itself relates to facts rather than predictions of the company's

adverse condition.

       We also reject Strachan's argument that knowledge of the

transaction, i.e. the purchase of Executive Life Annuities, is

       4
      Mere notice of the Executive Life purchase was not notice
of an ERISA violation or even grounds for believing something was
"awry." The purchase of an annuity from an insurance company is
not a per se violation of ERISA. The Act permits plan sponsors
to terminate plans, replace plan benefits with annuities, and
recapture the remaining plan assets to the extent contemplated by
the plan's governing documents. ERISA §§ 4041(b)(3)(A) and
4044(d)(1), 29 U.S.C. 1341(b)(3)(A) and 1344(d)(1). The
appellants cannot be charged with actual knowledge of an ERISA
violation based upon their awareness of events which the Act
permits. See Waller, 32 F.3d at 1341.

                                             9
enough by itself to trigger the three-year statute of limitations.5

Inasmuch as appellants are challenging the actual selection of

Executive Life, they must have been aware of the process utilized

by Strachan in order to have had actual knowledge of the resulting

breach of fiduciary duty.6            Donovan v. Cunningham, 716 F.2d 1455,

1467 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S. Ct. 3533,

82 L. Ed. 2d 839 (1984) ("The focus of the inquiry is how the

fiduciary acted in his selection of the investment, and not whether

his investments succeeded or failed.").               See also Fink v. National

Sav.       and   Trust   Co.,   772 F.2d 951,   957   (D.C.Cir.1985).   The

deposition testimony clarifies what appellants did not know about

Executive Life's selection by Strachan. Armstrong stated he had no

personal knowledge of any facts to indicate that Strachan had

breached its fiduciary duty.                 Collins testified that he had no

knowledge beyond the shortage of his annuity contract to suggest

appellee had failed to act prudently, diligently, and solely in the

       5
      Strachan mixes apples and oranges in its argument that
knowledge of the transaction amounts to actual knowledge
sufficient to trigger the statute. The transaction does toll the
statute, but this in turn does not automatically translate to
actual knowledge of a breach. See Martin v. Consultants &
Admrs., Inc., 966 F.2d 1078 (7th Cir.1992); International Union
v. Murata Erie North America, 980 F.2d 889 (3rd Cir.1992);
Blanton v. Anzalone, 760 F.2d 989 (9th Cir.1985); Larson v.
Northrop Corp., 21 F.3d 1164 (D.C.Cir.1994); Tassinare v.
American Nat. Ins. Co., 32 F.3d 220 (6th Cir.1994).
       6
      The appellants' claim in this respect is predicated upon
the appellants' charges under 29 U.S.C. §§ 1103(c)(1) and
1104(a)(1)(A), ERISA §§ 403(c)(1) and 404(a)(1)(A), whereby the
defendant fiduciaries were required to act solely in the interest
of the plan's participants and beneficiaries and for the
exclusive purpose of providing benefits to them, and 29 U.S.C. §
1104(a)(1)(B), ERISA § 404(a)(1)(B), the prudent person fiduciary
standard.

                                             10
interest of the plan participants.           Maher did not know the steps

taken by Strachan to investigate the risks of purchasing Executive

Life annuities.       And Tomeny, Maniglia, Higgens, and Mentz were

unaware of Executive Life's low bid or the reasoning behind the

selection.      The   summary    judgment    evidence       to   date   indicates

appellants' collective awareness only of Executive Life's selection

and negative publicity, cursory discussions with and one letter to

Strachan's management, and a refusal to guarantee a pension. These

facts, taken with the information that Strachan made available

about    Executive    Life's    selection,     and    the   evidence     that   no

pecuniary loss was suffered until April 1991, strongly suggest that

the class did not have actual knowledge of a breach or violation

before August 1989. Even recognizing the difficulty in determining

in the abstract precisely what constitutes actual knowledge of a

breach or violation, these facts do not seem sufficient to show it.

See also     Martin   v.   Pacific   Lumber,    1993    U.S.Dist.       LEXIS   660

(N.D.Cal. Jan. 15, 1993) (no limitations bar under similar facts

pertaining to Executive Life).7

     Because of this conclusion, we reject Strachan's request to

decertify the class or to permit it to investigate the claims of

all class members to determine if adequate class representatives

can be found.    See Intern. Woodworkers v. Chesapeake Bay Plywood,

659 F.2d 1259, 1270 (4th Cir.1981);                  Keasler v. Natural Gas

     7
      The parties cite two different proceedings arising from the
same Pacific Lumber case. We cite from the court's order denying
defendants' motion for summary judgment asserting that the ERISA
claim was time barred.

                                      11
Pipeline Co. of America, 84 F.R.D. 364, 367-68 (E.D.Texas 1979);

In   Re     Plywood        Antitrust     Litigation,         76 F.R.D. 570,   586

(E.D.La.1976).

B. Pension Annuitants Protection Act of 1994 ("PAPA")

        The district court originally held that the class lacked

standing       to    sue   because     appellants,         having       already    received

annuities to replace the plan, were no longer participants or

beneficiaries of the plan at the time they brought suit.                          The court

reversed itself on this issue a few days after the PAPA was signed

into law.       Section 2 of PAPA expressly amends Section 502(a) of

ERISA     to    permit     "any   individual         who    was     a    participant      or

beneficiary at the time of" the breach of a fiduciary duty to bring

a civil action

     in the event that the purchase of an insurance contract or
     insurance annuity in connection with the termination of an
     individual's status as a participant covered under a pension
     plan ... constitutes a violation of [ERISA]....

Pub.L. No. 103-401, 108 Stat. 4172 (1994).                        PAPA specifies that

this amendment applies to "any legal proceeding pendings, or

brought, on or after May 31, 1993."              Pub.L. No. 103-401, 108 Stat.

4172 (1994).          Strachan admits that PAPA clearly dictates the

appellants' standing but argues that in doing so, the provision

violates       the   constitutional      separation         of    powers     doctrine    by

directing the court to decide this case in a particular manner

without changing underlying ERISA law.

          Strachan's       argument    fails    on    several       grounds.         First,

isolated statements in the legislative history, particularly those

speaking to the motives of individual legislators, are not relevant

                                           12
to the issue of what Congress actually did.8                      Thomas v. Union

Carbide Agric. Prods. Co., 473 U.S. 568, 589, 105 S. Ct. 3325, 3337,

87 L. Ed. 2d 409 (1985);        Walker v. United States Dep't. of Housing

& Urban Dev., 912 F.2d 819, 830 (5th Cir.1990).

     Second,      Strachan's     claim      that   the     PAPA    represents     an

unconstitutional attempt by Congress to "require courts to reach

particular      conclusions    of    law    in   cases   without    changing     the

underlying law," contrary to the separation of powers doctrine set

forth in United States v. Klein, 80 U.S. (13 Wall.) 128, 20 L. Ed.
519 (1871), ignores the Court's recent explanation of the doctrine.

In Robertson v. Seattle Audubon Soc'y, 503 U.S. 429, 112 S. Ct.
1407, 118 L. Ed. 2d 73 (1992), the Court unanimously decided that

Klein    does   not   restrict      Congress's     power   to     change   the   law

applicable to cases pending in the courts even if it overrides the

effects of already rendered decisions.             The legislation was upheld

because it "compelled changes in the law, not findings of results

under the law."       Id. at 437, 112 S.Ct. at 1413.         The effect of PAPA

is similar and requires a similar result.

         The Ninth Circuit has already characterized the amendment as

a clarification of existing law rather than a change of law.                     The

purpose of the clarification, however, was to attribute standing

     8
      Strachan cites particular portions of the legislative
history to support its position that the PAPA was not intended to
change the law but to correct a mistaken interpretation of ERISA
standing requirements employed in some federal courts. See
H.R.Rep. No. 872, 103d Cong., 2nd Sess. (1994), 1994 WL 702776,
at *97; 140 Cong.Rec. H10621-22 (daily ed. Oct. 3, 1994)
(statement of Rep. Williams); H.R.Rep. No. 872, 103d Cong., 2nd
Sess. (1994), 1994 WL 702776, at *96.

                                           13
not only to annuitants in pending cases but to those in future

cases as well.   The legislation was properly called an "amendment"

to ERISA.    The PAPA does not encroach on the domain of the

judiciary.   See   Kayes   v.    Pacific   Lumber,   51 F.3d 1449   (9th

Cir.1995).

                                CONCLUSION

     For the reasons discussed above, the judgment of the district

court is reversed and the case remanded for further proceedings

consistent herewith.

     REVERSED and REMANDED.

                                    14