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MCDOUGALL v. DONOVAN

United States District Court, Northern District of Illinois, E.D


November 23, 1982

HOWARD MCDOUGALL, THOMAS F. O'MALLEY, R.V. PULLIAM, SR., ROBERT J. BAKER, LORAN W. ROBBINS, MARION M. WINSTEAD, HAROLD J. YATES AND EARL L. JENNINGS, JR., AS TRUSTEES OF CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, PLAINTIFFS,
v.
RAYMOND J. DONOVAN, SECRETARY OF LABOR, DEFENDANT-COUNTERPLAINTIFF, HOWARD MCDOUGALL, THOMAS F. O'MALLEY, R.V. PULLIAM, SR., ROBERT J. BAKER, LORAN W. ROBBINS, MARION M. WINSTEAD, HAROLD J. YATES AND EARL L. JENNINGS, JR., INDIVIDUALLY AND AS TRUSTEES OF CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, AND EARL N. HOEKENGA, AND CENTRAL STATES PENSION FUND, AND THE CENTRAL CONFERENCE OF TEAMSTERS, COUNTERDEFENDANTS.

The opinion of the court was delivered by: Aspen, District Judge:

MEMORANDUM OPINION AND ORDER

Plaintiffs ("the Trustees"), trustees of the Central States, Southeast and Southwest Areas Pension Fund ("the Fund"),*fn1 filed a complaint against the Secretary of Labor ("the Secretary") seeking, inter alia, a declaratory judgment that the Trustees' acquisition on behalf of the Fund of a Falcon 20F jet aircraft from the Falcon Jet Corporation ("Falcon") was not a "prohibited transaction" under § 406 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1106 (1976). Falcon had acquired the aircraft as a trade-in from the Central Conference of Teamsters ("the CCT").

The Secretary responded with an answer as well as a counterclaim against the Trustees individually and as trustees alleging, inter alia, that the acquisition in January, 1979, of the 20F aircraft and the leasing of hangar space by the Trustees from the CCT since at least 1975 constitute "prohibited transactions" under ERISA § 406, 29 U.S.C. § 1106, and that the on-going ownership, modification and usage of private aircraft by the Trustees since at least 1975 constitute breach of their fiduciary obligations under ERISA §§ 404, 405 and 409, 29 U.S.C. § 1104, 1105 and 1109. The Secretary joined as counterdefendants the Fund, the CCT and Earl N. Hoekenga ("Hoekenga"), a former trustee of the Fund.

The matter is before the Court on various procedural motions of the parties, motions to dismiss Hoekenga and the Fund, cross-motions for partial summary judgment on the counterclaim and a motion by the Trustees for summary judgment on their complaint. Jurisdiction is invoked pursuant to 29 U.S.C. § 1132.

I.

Counterdefendants Hoekenga and the Fund each move for a more definite statement of the counterclaim under Rule 12(e), Fed.R.Civ.P. Both contend that the counterclaim is vague and ambiguous, making preparation of a defense impossible.*fn2

Under Rule 8 of the Federal Rules of Civil Procedure, a complaint need only contain a short, plain statement of the claim, indicating that the plaintiff is entitled to relief. "[A] complaint is sufficient if it `will give defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.'" Mathes v. Nugent, 411 F. Supp. 968 (N.D.Ill. 1976), citing Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957). See Archie v. Chicago Truck Drivers Etc., 585 F.2d 210, 217 (7th Cir. 1978). The standard for granting a motion for a more definite statement is whether the complaint is so vague that a party cannot reasonably be required to frame a responsive pleading. 5 Wright & Miller, Federal Practice and Procedure § 1216 (1969).

In this case, the Secretary's counterclaim satisfies the
requirements of Rule 8. With respect to Hoekenga, the
counterclaim specifies the acts and omissions allegedly
comprising breaches of fiduciary duty on the part of the
Fund's trustees, the time period during which Hoekenga was a
trustee, and  the legal bases for the claims.*fn3

Taken together, these allegations give Hoekenga fair notice of
the claims against him and the grounds upon which they rest.
With respect to the Fund, the activities from which the
Secretary seeks to enjoin the Fund are enumerated with
sufficient specificity.*fn4

II.

Next, counterdefendants Hoekenga and Trustees respectively move under Rule 10(b) for an order compelling separate statements of the claims against them. The Secretary's counterclaim lists and classifies the transactions and occurrences upon which he bases his claims.*fn5 Many if not most of the alleged actions were on-going; the Secretary asserts that the transactions spanned the tenures of the various counterdefendant trustees. Although the Secretary does not attempt to specify which of the transactions occurred or were occurring during each individual trusteeship, allegations as to the dates of tenure of the various trustees are set forth.*fn6

Hoekenga and the Trustees contend that the Secretary's failure at the pleading stages to link specific transactions with specific trusteeships will cause the case to "explode into unavoidable confusion."*fn7 Fear of explosion is not the appropriate standard. Rule 10(b) simply requires "that each claim founded on a separate transaction or occurrence be stated in a separate count `whenever a separation facilitates the clear presentation of matters set forth.'" Mathes v. Nugent, supra, 411 F. Supp. at 972 (emphasis added). In his counterclaim, the Secretary has set forth the transactions and occurrences giving rise to his claims in separate paragraphs.*fn8 He has indicated that each allegation pertains to each trustee during his respective tenure. Under Rule 10(b), where the gist of the complaint is a scheme, plan or course of conduct, there is no requirement that each claim be stated separately merely because all the defendants may not be involved in each act or transaction. Securities and Exchange Commission v. Quing N. Wong, 252 F. Supp. 608, 614 (D.P.R. 1966), 5 Wright & Miller, Federal Practice and Procedure § 1324 (1969). The Secretary's counterclaim is sufficiently clear; further separation of his claims is unnecessary.*fn9

III.

Counterdefendants Hoekenga and the Fund each move to dismiss the Secretary's counterclaim under Rule 12(b).*fn10 Their motions will be discussed separately.

1. Motion of Hoekenga

Hoekenga seeks dismissal of the claims against him on the ground that the transactions alleged in the counterclaim as the basis for the trustees' individual liability occurred before and after — but not during — his tenure as trustee.

It is true, as Hoekenga points out, that ERISA § 409(b), 29 U.S.C. § 1109(b) limits a fiduciary's liability for breach of duty to those breaches committed during his tenure.*fn11 Hoekenga asserts that his term of service as trustee began in May, 1977, and concluded in February, 1978.*fn12 Therefore, he contends, he cannot be liable for the alleged initial purchase of a private aircraft around January 1, 1975,*fn13 nor for the purchase of the used Falcon 20F aircraft on May 31, 1979.*fn14

Without reaching the question at this point of whether Hoekenga was a trustee at those particular times and whether liability arises under ERISA for those particular acts, we hold that the counterclaim does state a claim against Hoekenga and will not be dismissed. The Secretary alleges on-going breaches of fiduciary duty, among other things, the retention, ownership, modification and use of private aircraft.*fn15 These occurred during Hoekenga's tenure, and, taking as true the allegations of the counterclaim as we are required to do when ruling on a motion to dismiss, Mathers Fund, Inc. v. Colwell, 564 F.2d 780, 783 (7th Cir. 1977), Hoekenga was party to the acts. Moreover, even if the investments that allegedly constitute a breach of duty or a prohibited transaction were entered into prior to Hoekenga's term of office, it has been held that a successor trustee has a duty to dispose of prior investments violative of ERISA upon assuming his responsibilities. Morrissey v. Curran, 567 F.2d 546, 548-49 (2d Cir. 1977). Thus, the Secretary has stated a claim against Hoekenga upon which relief may be granted.*fn16

2. Motion of the Fund

The Fund moves to dismiss the counterclaims against it on several grounds, namely that: (1) it is not a "fiduciary" within the meaning of ERISA § 3(21), 29 U.S.C. § 1002(21), and is thus not a proper defendant to a claim brought pursuant to ERISA § 409, 29 U.S.C. § 1109; (2) it is not a proper party because no separate and distinct relief has been sought against it; (3) the relief requested is improper; and (4) the action is barred by the statute of limitations. None of these arguments persuades the Court that the Fund's motion to dismiss should be granted.

The Fund's first three objections are addressed together. Initially, it should be noted that pursuant to ERISA § 502(d)(1), 29 U.S.C. § 1132(d)(1), employee benefit plans (such as the Fund) may sue and be sued as entities under the provisions of ERISA. This the Fund does not dispute; it does, however, contend that it is not an appropriate party defendant in a suit brought under ERISA § 409, 29 U.S.C. § 1109, which deals with liability for breach of fiduciary duty.*fn17 The Fund argues that only fiduciaries may be sued under this provision, and that the Secretary's dispute is properly with the trustees alone. This interpretation of § 409 was rejected by this Court as too narrow in denying CCT's motion to dismiss it as a defendant to the counterclaim. McDougall, et al. v. Donovan, 539 F. Supp. 596 (N.D.Ill. 1982). As we pointed out at that time, ERISA grants the Secretary broad authority to bring civil actions "(A) to enjoin any act or practice which violates any provision of [Title I of ERISA], or (B) to obtain other appropriate relief (i) to redress such violation, or (ii) to enforce any provision of [Title I]." 29 U.S.C. § 1132(a)(5) (1976). The equitable enforcement authority granted the Secretary is not limited to actions against fiduciaries, even if the violation at issue is derived from a section of the statute that governs the conduct of pension plan fiduciaries. McDougall, supra at 598; see also Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 641-42 (W.D.Wis. 1979).

Just as it is appropriate, if not necessary, in an action premised on fiduciary breach to join as defendant a party-in-interest who dealt with the trustees, see McDougall, supra, it is appropriate to join the plan itself. The relief sought in the instant case intimately involves the Fund, affecting its assets and administration. It may be correct, as the Fund asserts, that since the present trustees are defendants to the counterclaim, effective relief could be granted without joinder of the Fund as counterdefendant. Nonetheless, joinder of the Fund is clearly proper under the permissive joinder provisions of Fed.R.Civ.P. 20(a), and it is conceivable that as this litigation unfolds, the Fund may become a necessary party inasmuch as provisions regarding its future administration may be required for complete relief.*fn18 Furthermore, in light of Congressional intention to provide the Secretary "the full range of legal and equitable remedies in both state and federal courts," 1974 U.S.Code Cong. & Admin.News, S.Rpt. No. 93-127, 93d Cong., 1st Sess., p. 4639, 4838, 4871, we hold that the remedies sought by the Secretary are proper and within his power, and joinder of the Fund as a counterdefendant does not in any way overreach or abuse his equitable discretion.

Finally, the Fund asserts that the statute of limitations set forth in ERISA § 413, 29 U.S.C. § 1113 bars the Secretary's counterclaim.*fn19 The Fund contends that the three-year limitations period of § 1113(a)(2)(A) applies as a result of the Secretary's averment in his answer to the Trustee's complaint that in January, 1976, the Department of Labor began investigating the Fund's use of a private jet aircraft.*fn20 The Fund reasons from this averment that the limitations period commenced in January, 1976, when the Department of Labor began its investigation, and, as the Secretary filed his counterclaim in December of 1981, his action is barred.

We reject the Fund's interpretation of the January, 1976, date as the time at which the Secretary learned of the alleged breaches. Indeed, most of the acts and omissions alleged by the Secretary occurred after January, 1976. Moreover, the gravamen of the Secretary's counterclaim is the 1979 purchase of a Falcon 20F jet aircraft, and the on-going use of such private aircraft, placing his action well within even the most conservative application of § 1113(a).*fn21

IV.

Before the Court are several motions requesting summary judgment. The Secretary has moved for partial summary judgment on his counterclaim, specifically on his claim that the 1979 acquisition by the Fund of the Falcon 20F was a prohibited transaction within ERISA § 406(a)(1)(A), 29 U.S.C. § 1106(a)(1)(A).*fn22 The Trustees have filed a cross motion for partial summary judgment on the same issue of the counterclaim and have also moved for summary judgment on their complaint.

Summary judgment is appropriate where there is no genuine issue as to any material fact, and the moving party is entitled to judgment in its favor as a matter of law. Cedillo v. International Association of Bridge & Structural Iron Workers, Local Union No. 1, 603 F.2d 7, 10 (7th Cir. 1979). Where, as here, cross-motions for summary judgment are filed, the court is not to assume that there are no issues of material fact, but instead make an independent determination based on the affidavits and other proof submitted by the parties in support of their respective motions. 10 Wright and Miller, Federal Practice and Procedure § 2720 (1973). See Case & Co., Inc. v. Board of Trade of City of Chicago, 523 F.2d 355, 360 (7th Cir. 1975). Upon examination of the depositions, affidavits and documents submitted by the parties, this Court concludes that there are no material issues in dispute and that judgment may be rendered as a matter of law.

A review of the undisputed facts surrounding the transaction in question is set forth as follows. In December, 1978, CCT executed an agreement with Falcon to purchase a new Falcon 20F jet aircraft, Falcon 387. At that time, CCT owned an older 20F, Falcon 313. No provision was included in the purchase agreement as to the trade-in of Falcon 313, which CCT had purchased from Falcon in 1975 for $2,595,000. The two parties to the agreement had discussed such a trade-in, however, as well as the possibility that provision for the trade-in could be made during the following year through an amendment to the agreement.*fn23

On March 21, 1979, the Board of Trustees of the Fund voted to authorize and direct the executive director of the Fund "to submit an offer to purchase from Falcon Jet Corporation, at a purchase price of $2,900,000, the Falcon 20F aircraft which Falcon Jet was acquiring from Central Conference of Teamsters."*fn24 On March 23, 1979, the executive director delivered to a Falcon representative a document dated March 21, 1979, indicating the desire of the Board of Trustees to purchase the aircraft at a price of $2,900,000.*fn25

On May 30, 1979, the CCT and Falcon amended their aircraft purchase agreement of December, 1978. The amendment provided for the trade-in by CCT of the used Falcon 313 at a stipulated value of $2,900,000.*fn26 The aircraft was delivered to Falcon on May 31, 1979, at the Wilmington, Delaware, airport.*fn27

Also on May 30, 1979, the Board of Trustees of the Fund entered into a purchase agreement with Falcon, contracting to purchase the Falcon 313 for a price of $2,935,000.*fn28 Delivery was set for and executed upon May 31, 1979, at the Wilmington, Delaware, airport.*fn29

At issue in both the Trustees' motion for summary judgment on their complaint and the cross-motions for partial summary judgment on the counterclaim is whether the purchase of the Falcon 313 by the Trustees from Falcon was a "prohibited transaction" within ERISA § 406(a)(1)(A), 29 U.S.C. § 1106(a)(1)(A). For the reasons set forth below, the summary judgment of the Trustees on their complaint will be denied, and partial summary judgment will be granted in favor of the Secretary on his counterclaim.

Each provision of ERISA must be interpreted in light of the Congressional intent underlying the Act. ERISA resulted from concern over the rapid growth in size, scope and number of employee benefit plans, many of which had inadequate safeguards to protect the requisite funds. Congress passed the Act with the express purpose of

  protect[ing] . . . the interests of participants
  in employee benefit plans and their
  beneficiaries, by requiring the disclosure and
  reporting to participants and beneficiaries of
  financial and other information with respect
  thereto, by establishing standards of conduct,
  responsibility, and obligation for fiduciaries of
  employee benefit plans, and by providing for
  appropriate remedies, sanctions, and ready access
  to the Federal courts.

29 U.S.C. § 1001 (emphasis added).

Guidelines governing the conduct of plan fiduciaries are contained in several sections of the Act. Section 404, 29 U.S.C. § 1104, sets forth the general standard of fiduciary duty. A fiduciary is required to discharge his duties "solely in the interest of the participants and beneficiaries" and

(A) for the exclusive purpose of:

    (i) providing benefits to participants and
    their beneficiaries; and

    (ii) defraying reasonable expenses of
    administering the plan;

  (B) with the care, skill, prudence, and diligence
    under the circumstances then prevailing that a
    prudent man acting in a like capacity and
    familiar with such matters would use in the
    conduct of an enterprise of a like character
    and with like aims . . .

29 U.S.C. § 1104(a)(1).

Rather than leaving all fiduciary transactions to be judged by the general § 1104 standard, Congress also enacted § 1106, which prohibits fiduciaries from causing the plan to engage in certain specified transactions.*fn30 These prohibitions evince Congressional desire to prevent transactions that offer a high potential for loss of plan assets or for insider abuse. Marshall v. Kelly, 465 F. Supp. 341, 354 (W.D.Okla. 1979). They were designed to prevent a trustee "from being put into a position where he has dual loyalties and therefore he cannot act exclusively for the benefit of a plan's participants and beneficiaries." N.L.R.B. v. Amax Coal Co., a Division of Amax, Inc., 453 U.S. 322, 101 S.Ct. 2789, 2796, 69 L.Ed.2d 672 (1981), citing H.R.Conf.Rep. No. 93-1280, 93d Cong., 2d Sess., 296, 309, U.S.Code Cong. & Admin.News 1974, p. 5089.

With the exception of the provision in § 1108 for the granting of exemptions by the Secretary on a case-by-case basis,*fn31 it is apparent that Congress intended § 1106 to be virtually a per se prohibition against the enumerated transactions. In interpreting the prohibitions of § 1106(b), the Third Circuit discussed the provision in light of the underlying policy goals of ERISA.

  We note the national public interest in
  safeguarding anticipated employee benefits by
  establishing minimum standards to protect employee
  benefit plans. The substantial growth of plans
  affecting the security of millions of employees and
  their dependents, as well as the limited resources
  of the Department of Labor in the enforcement of
  ERISA, leads us to believe that Congress intended
  to create an easily applied per se prohibition of
  the type of transaction in question.

Cutaiar v. Marshall, 590 F.2d 523, 529 (3d Cir. 1979). The per se nature of the prohibitions is emphasized by the fact that whether one of the provisions has been violated does not depend on whether any harm results from the transaction. Marshall v. Kelly, supra at 354.

This policy underlying § 1106(a) is important in analyzing whether the Trustees' purchase of the Falcon 313 was prohibited under ERISA. 29 U.S.C. § 1106(a)(1)(A) provides that:

  (1) 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 —

    (A) sale or exchange, or leasing, of any
    property between the plan and a party in
    interest.

It is not disputed that the Fund is an employment benefit plan as defined by ERISA § 3(3), 29 U.S.C. § 1002(3), that the Trustees are fiduciaries as defined by ERISA § 3(21), 29 U.S.C. § 1002(21), and that relative to the Fund, the CCT is a party in interest as defined by ERISA § 3(14)(D), 29 U.S.C. § 1002(14)(D). It is also clear that there was no direct transaction between the Fund and the CCT. The question, then, is whether the purchase of the Falcon 313 was an indirect transaction between the Fund and the CCT within the prohibition of 29 U.S.C. § 1106(a)(1)(A).

In Amax, supra, the Supreme Court applied § 1106(a)(1)(E), which prohibits acquisition, on behalf of a plan, of certain employer security or employer real property. The Court emphasized that the purpose of this and related provisions was to insulate the trust from the employer's interest, and to ensure that the exclusive authority and discretion to arrange and control the assets of the plan rest in the trustees alone, and not in the employer or union who might be responsible for the trustees' appointments. 101 S.Ct. at 2796. Just as § 1106(a)(1)(E) seeks to protect the judgment of the trustees against influences exerted by employers in the context of security and real property purchases, § 1106(a)(1)(A) seeks more generally to protect against influences exerted by all "parties in interest." "Party in interest" is defined to include employee organizations any of whose members are covered by the plan. 29 U.S.C. § 1002(14)(D). Congress therefore intended § 1106(a)(1)(A) to prohibit dealings between, inter alia, a plan and any union whose members are among the beneficiaries of the plan.

A direct transaction between the Trustees and the CCT would have been precisely the type of transaction at which § 1106(a) is aimed. The Trustees argue vigorously that the presence of Falcon as an intermediary added an "arms length" element and took the transaction out of the prohibition. We do not believe that Congress intended the prohibitions of § 1106 to be so easily circumvented. The Trustees undisputedly knew that the Falcon 313 was being traded in to Falcon by the CCT. A bid for the plane was submitted by the Trustees to Falcon in an amount equivalent to that obtained by the CCT as trade-in value. Falcon sold the plane to the Trustees for an amount $35,000 higher than the bid and on the same day that the plane was traded in. Were we to interpret the "indirect transaction" prohibition of § 1106 so narrowly as to exclude the transaction at hand, virtually any transaction prohibited directly could be legitimized by the insertion of a third party, a party who, incidentally, could profit from its role.

Nonetheless, the Trustees urge that rules governing whether a transaction is to be considered a "sham" and thus reconstructed for tax purposes should apply in determining whether a transaction is an "indirect" transaction prohibited by § 1106. The test under the tax laws is whether the transaction in question had economic substance and a business purpose independent of its tax-saving purpose. See U.S. v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 (1950), and Falkoff v. Commissioner of Internal Revenue, 604 F.2d 1045 (7th Cir. 1979).

The Trustees' analogy to the tax laws is inapposite. Although the Trustees list business reasons other than avoidance of § 1106 that may have motivated the Fund, Falcon and the CCT each to enter the Falcon 313 transaction, Congress did not exclude from § 1106 transactions that have independent business purposes, just as it did not exclude transactions that are "fair" under some independent measure. Congressional intent to eliminate all transactions with even the potential to bias the independent judgment of pension plan fiduciaries must be followed. Accordingly, we hold that the acquisition of the Falcon 313 by the Trustees of the Fund was a prohibited transaction within the meaning of ERISA § 406, 29 U.S.C. § 1106.

V.

For the reasons stated herein, the Trustees' motion for summary judgment on their complaint is denied. Partial summary judgment is entered in favor of the Secretary on his counterclaim.*fn32 The motions of counterdefendants Hoekenga and the Trustees for an order compelling separate counts are denied. The motions of the Fund and Hoekenga for a more definite statement are denied. The motions of counterdefendants Hoekenga and the Fund to dismiss are denied.*fn33 The motions of the Fund and Hoekenga to strike the counterclaim are denied. It is so ordered.*fn34


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