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Donovan v. Estate of Frank E. Fitzsimmons

November 15, 1985


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 78 C 342, 76 C 3803 & 79 C 1725 - James B. Moran, Judge.

Author: Bauer

Before BAUER, COFFEY, Circuit Judges, and GRAY, Senior District Judge.*fn*

BAUER, Circuit Judge. The Secretary of Labor appeals the district court's approval of a comprehensive settlement of actions brought by participants in the Central States Southeast and Southwest Areas Pension Fund (CSPF) alleging that the benefit structure and investment management of the CSPF were illegal and that past investment mismanagement gave rise to a derivative action on behalf of the CSPF against other defendants. We affirm.


The Central States Southeast and Southwest Areas Pension Fund is a multi-employer pension trust created in 1955 under the provisions of Section 302 of the Taft-Hartley Act, 19 U.S.C. § 186. As required by that section, the CSPF has an equal number of trustees appointed by labor organizations and by employer organizations. All trustees serve without compensation, and no compensation of trustees by the CSPF is permitted under the statute. Since January 1975 the CSPF has been subject to the requirements of the Employee Retirement Income Security Act (ERISA). 19 U.S.C. ch. 18.

The Dutchak complaint, filed in late 1976, was instituted by eleven plaintiffs and contained eight counts alleging that forty-five separate defendants violated various federal and state laws. The complaint alleged that the Teamsters conspired with the other defendants to establish pension funds with long and arbitrary benefits provisions. Additionally, a substantial portion of the complaint contained allegations that the defendants breached their fiduciary duties through improprieties with regard to fund investments. The asset management claims spanned the entire history of the CSPF and challenged the conduct of the defendants as imprudent both generally and as to numerous specific loan transactions.

In 1978, the Secretary of Labor filed Donovan against various former trustees of the CSPF, alleging that the acts and omissions of these trustees with regard to CSPF investments were negligent and imprudent and hence in violation of ERISA. While the Secretary's complaint challenged various specific loans approved by the trustees of the CSPF, it did not contain the broad and general allegations of investment improprieties alleged in Dutchak. Moreover, the complaint sought relief only with regard to post-ERISA conduct, unlike Dutchak, which addressed both pre- and post-ERISA investments.

The Sullivan complaint was filed in 1979 on behalf of a class of CSPF participants and alleges that present and former trustees and other fiduciaries of the CSPF breached their fiduciary duties to the CSPF in numerous asset management transactions occurring between the inception of the CSPF in 1955 and the date of the filing of the complaint. The Sullivan complaint also alleged that the benefit rules of the CSPF were arbitrary and capricious and operated to deny retirement benefits to many participants on whose behalf substantial contributions had been made to the CSPF, and that the CSPF, the International Brotherhood of Teamsters, other Teamster-related entities, and the individual defendants defrauded the participants by making false and misleading statements about the benefits provided by the CSPF.

The three cases were consolidated for discovery purposes by order of the district court entered on November 27, 1979. On October 16, 1981, a settlement memorandum of understanding resolving the benefit claims, negotiated only by the private plaintiffs and the CSPF, was presented to the court. The proposed settlement was conditioned upon the resolution of the asset mismanagement claims and dismissal by the court of the Donovan complaint. The former trustees of the CSPF thereafter requested a stay of all substantive discovery in the three cases pending review of the settlement. This request was granted and subsequently extended over the Secretary's objections.

In response to the filing of the proposed settlement, the Secretary moved to intervene as a plaintiff in Sullivan and Dutchak, relying on his statutory right to intervene in private ERISA cases. 19 U.S.C. § 1132(h). The court granted the Secretary leave to intervene for the purpose of participating in the consideration of the settlement, and to object to the settlement. There followed an extended period of negotiation among the Secretary, the CSPF, the participants, and the insurance companies (but not between DOL and the insurance companies), accompanied by frequent pretrial conferences with reports to the court on the progress of the negotiations.

A final revised benefit settlement agreement was filed with the court on July 22, 1982. The court ruled that a settlement class should be certified, that the settlement should be preliminarily approved and notice sent to the class. The CSPF sent notice of the settlement to nearly 500,000 persons whom its records showed to be members of the class, and placed advertisements in major newspapers within the states where the CSPF has had significant numbers of participants; more than 2100 persons responded.

The district court held the final settlement hearing on June 14, 1984. Each of the major participants in the settlement addressed the court. The court rendered an oral opinion, which was later incorporated in and supplemented by the court's Findings of Fact and Conclusions of Law, and in which the court certified the class, approved the settlement, and dismissed the complaint in Donovan with prejudice. The Secretary's appeal to this court followed.


The first basis on which the Secretary challenges the settlement is the dismissal of its complaint in Donovan as an essential element of the overall settlement. The Secretary's argument is essentially that in dismissing the Secretary's complaint "the court relied exclusively on the doctrine of res judicata, yet because the Secretary and private plaintiffs represent different interests, they are not in privity for res judicata purposes." Secretary's br. at 13.

Under res judicata, "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Allen v. McCurry, 449 U.S. 90, 94, 66 L. Ed. 2d 308, 101 S. Ct. 411 (1980); Beard v. O'Neal, 728 F.2d 894, 896 (7th Cir. 1984). Strict identity of the parties is not necessary to achieve privity. Privity applies to successive parties who adequately represent the same legal interests. Southwest Airlines Co. v. Texas Internat'l Airlines, Inc., 546 F.2d 84, 95 (5th Cir.), cert. denied, 434 U.S. 832, 54 L. Ed. 2d 93, 98 S. Ct. 117 (1977); Jefferson School of Social Science v. Subversive Activities Control Bd., 118 U.S. App. D.C. 2, 331 F.2d 76, 83 (D.C. Cir. 1963); see generally TRW, Inc. v. Ellipse Corp., 495 F.2d 314, 317-18 (7th Cir. 1974).

The district court found privity between the Secretary and the Sullivan plaintiffs for several reasons:

(1) there is a "congruence of legal interests" between the Secretary and the private plaintiffs, (2) the private plaintiffs have adequately represented the Secretary's interests, and (3) the relationship between the private plaintiffs and the Secretary is "sufficiently close" due to the identity of their interests under ERISA.

Although the Secretary takes exception to each of these findings, these findings and the ultimate finding of privity are questions of fact, and thus will be upheld unless clearly erroneous. Vulcan, Inc., v. Fordees Corp., 658 F.2d 1106, 1109 (6th Cir. 1981), cert. denied, 456 U.S. 906, 72 L. Ed. 2d 162, 102 S. Ct. 1752, 215 U.S.P.Q. (BNA) 96 (1982); Astron Industrial Associates, Inc. v. Chrysler Motors Corp., 405 F.2d 958, 960-61 (5th Cir. 1968).

We have little difficulty in this case upholding the district court's privity findings. There can be no dispute that the Donovan claims are the "same claims" at issue in Dutchak and Sullivan. The language of the Donovan complaint parallels the language of Dutchak and Sullivan. The complaints allege the same wrongful investments, seek the same relief, and are predicated upon the same provisions of ERISA. Indeed, in paragraph 3 of his "Motion for Leave to Intervene" in Sullivan, the Secretary acknowledges that the Sullivan language is "virtually identical to the claims set forth in Donovan." Similarly, on page 9 of the "Memorandum of the Secretary of Labor in Opposition to the Motion of Certain Defendants for Reconsideration of this Court's Order of March 3, 1980," he describes the Donovan claims as "substantially identical." to those in Sullivan. Therefore, the Donovan complaint, being predicated upon the same facts and statutory provisions as the complaints in Dutchak and Sullivan, is based upon the "same claims" as Dutchak and Sullivan for purposes of the doctrine of res judicata.

Moreover, there can be little doubt that the Secretary's claims were adequately represented in Sullivan. The Secretary participated actively in Dutchak and Sullivan, initially because Donovan was consolidated with Dutchak and Sullivan for purposes of discovery, and later through his involvement in every detail of the settlement process as a plaintiff-intervenor. Also, the Secretary was a "full participant in the settlement process."

In October 1981 the Secretary moved for leave to intervene in Dutchak and Sullivan for the purpose of objecting to the settlement and arguing that any settlement should not affect Donovan. From November 1981, when the Secretary's motion to intervene was granted, until the settlement received final approval in August 1984, the Secretary was a full participant in the settlement process. During that three-year period the Secretary attended and participated in thirty-one pretrial or other conferences before the court relating to the settlement. The Secretary filed motions relating to the settlement on numerous subjects. During this period, the Secretary also filed memoranda and position statements on at least eighteen different matters. We therefore conclude that the Secretary's interest has been represented adequately.

The final issue is whether the Secretary represents the same legal interests that are involved in Dutchak and Sullivan. Congress enacted ERISA in 1974 to promote the well-being and security of employees and their dependents by protecting their interests in employee benefit plans. 29 U.S.C. § 1001(a); Leigh v. Engle, 727 F.2d 113, 139 (7th Cir. 1984). This congressional purpose is effectuated "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(b). To this end, Congress required that "all assets of an employee benefit plan be held in trust by one or more trustees." 29 U.S.C. § 1103(a). Every such trustee is a "fiduciary," 29 U.S.C. § 1002(21)(A), subject to comprehensive standards of conduct. 29 U.S.C. § 1004-1113. ERISA prescribes, for example, that every plan fiduciary shall discharge his duties with respect to a plan "solely in the interest of the participants and beneficiaries" and with the "care, skill, prudence and diligence" that a prudent person "familiar with such matters" would employ if acting under similar circumstances. 29 U.S.C. § 1104(a)(1).

ERISA expressly authorizes participants, beneficiaries, and the Secretary of Labor to enforce the Act's fiduciary standards. 29 U.S.C. § 1132(a)(2), (3) and (5). Specifically, participants, beneficiaries, and the Secretary may bring suit in federal court and hold fiduciaries "personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary . . . ." 29 U.S.C. § 1109(a), 1132(a)(2). A breaching fiduciary is also subject to other appropriate "equitable or remedial relief," including removal from his or her position as a fiduciary. Id.

The enforcement provisions of ERISA are intended to provide the Secretary, as well as participants and beneficiaries, with broad, flexible remedies to redress or prevent statutory violations. See, e.g., S. REP. No. 383, 93d Cong., 1st Sess. 8, 105 (1973), reprinted in LEGISLATIVE HISTORY OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, 94th Cong., 2d Sess. 1076, 1173 (1976) (hereinafter cited as LEGISLATIVE HISTORY); H. REP. No. 533, 93d Cong., 1st Sess. 17, 26 (1973) reprinted in LEGISLATIVE HISTORY at 2364, 2373. Leigh v. Engle, supra, 727 F.2d at 139; Donovan v. Mazzola, 716 F.2d 1226, 1235, 1239-40 n.9 (9th Cir. 1983), cert. denied, 464 U.S. 1040, 104 S. Ct. 704, 79 L. Ed. 2d 169 (1984). The fiduciary standards "must be enforced with 'uncompromising rigidity.'" NLRB v. Amax Coal Co., 453 U.S. 322, 329-34, 69 L. Ed. 2d 672, 101 S. Ct. 2789 (1981), quoting from Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928); see also Eaves v. Penn, 587 F.2d 453, 462 (10th Cir. 1978); Marshall v. Snyder, 572 F.2d 894, 901-902 (2d Cir. 1978).

The Secretary argues that Congress intended the Secretary of Labor to bear the primary responsibility for enforcing ERISA, both to protect the rights of plan participants and beneficiaries and to further the broader public policy goals set forth in the statute. The Secretary contends that this preeminent role is evident from the examination of ERISA and its predecessor legislation, the Welfare and Pension Plan Disclosure Act, Pub. L. 85-836, 72 Stat. 997 (repealed 1976).

Contrary to the Secretary's assertions, however, we think that the legislative history of ERISA demonstrates that section 502(a)(2) of ERISA, 29 U.S.C. § 1132(a)(2), was intended to grant both private parties and the Secretary equal standing to bring an action on behalf of fund beneficiaries. Repeatedly, Congress expressed its belief that the chief weakness of the Welfare and Pension Plans Disclosure Act, the predecessor act governing pension funds was it sole reliance upon "the initiative of the individual employee to police the management of his plan." S. REP. No. 127, 93d Cong., 1st Sess. 4 (1973), reprinted in LEGISLATIVE HISTORY at 613; H. REP. No. 533, 93d Cong., 1st Sess. 4 (1973), reprinted in LEGISLATIVE HISTORY at 2351; 120 Cong. Rec. 3978 (1974) ("Employee Benefit Security Act of 1974; Material Explaining H.R. 12906 Together With Supplemental Views," introduced by Representative Perkins), reprinted in LEGISLATIVE HISTORY at 3295; 120 Cong. Rec. 4281 (1974) (remarks of Representative Gaydos), reprinted in LEGISLATIVE HISTORY at 3377; 119 Cong. Rec. 147 (1973) (remarks of Senator Ribicoff), reprinted in LEGISLATIVE HISTORY at 207; 120 Cong. Rec. 19957 (1974) (remarks of Senator Ribicoff), reprinted in LEGISLATIVE HISTORY at 4811. It was this concern which led Congress to grant the Secretary enforcement powers under section 502(a)(2) of ERISA coextensive with those accorded private litigants. The "Civil Enforcement" provision of ERISA provides that "[a] civil action may be brought (1) . . . by a participant or beneficiary . . . [or] (2) by the Secretary . . . ." 29 U.S.C. § 1132. We find nothing in the statutory language which grants any more preeminent right of action to the Secretary than to private litigants.

The legislative hearings, reports, and debates variously refer to the Secretary's role as one of "watchdog," "guardian," or "protect[or]" of the private beneficiaries. S. REP. No. 634, 92d Cong., 2d Sess. 109 (1972); Welfare and Pension Plan Legislation: Hearings on H.R. 2 and H.R. 462 Before the General Subcommittee on Labor of the House Committee on Education and Labor, 93d Cong., 1st Sess. 373 (1973) (statement of Bernard E. Nash, National Retired Teachers Association an American Association of Retired Persons); 119 Cong. Rec. 30011 (1973) (remarks of Senator Beall), reprinted in LEGISLATIVE HISTORY at 1620. But the legislative record clearly reflects that Congress intended the Secretary to act as a representative of fund beneficiaries. Plan participants, beneficiaries, or the Secretary of Labor on behalf of the participants and beneficiaries are allowed to bring civil actions to redress breaches of a fiduciary's responsibility or to remove a fiduciary who has failed to carry out his duties. H.R. REP. No. 533, 93d Cong., 1st Sess. 20 (1973), reprinted in LEGISLATIVE HISTORY at 2367; 120 Cong. Rec. 3979 (1974) ("Employee Benefit Security Act of 1974: Material Explaining H.R. 12906 Together With Supplemental Views," introduced by Representative Perkins), reprinted in LEGISLATIVE HISTORY at 3299.

We thus believe that in granting the Secretary enforcement powers in Section 1132 Congress intended that the Secretary's interest be the same as that of the participants and beneficiaries who also had enforcement powers under Section 1132. The Secretary's only public interest enforceable under Section 1132 is that the rights of the participants and beneficiaries of a given plan are protected.

Recent statements by the Supreme Court in Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134, 105 S. Ct. 3085, 87 L. Ed. 2d 96 (1985), apply with particular force here. In Massachusetts Mutual the Court was asked to interpret the civil enforcement provisions of 29 U.S.C. § 1132. In holding that Congress did not intend to authorize remedies not expressly incorporated in ERISA, the Court stated:

Inclusion of the Secretary of Labor is indicative of Congress's intent that actions for breach of fiduciary duty be brought in a representative capacity on behalf of the plan as a whole. Indeed, the common interest shared by all four classes is in the financial integrity of the plan.

105 S. Ct. at 3090-91 n.9.

While Congress provided the Secretary with far-reaching authority to monitor plan activities, we do not find this authority an indicium of Congress's intent that the Secretary's enforcement authority under Section 1132 be broader than the participants and beneficiaries' authority. We cannot read these powers in isolation from the rest of ERISA, but must construe them in the context of the entire statute. Richards v. United States, 369 U.S. 1, 11, 7 L. Ed. 2d 492, 82 S. Ct. 585 (1962).

The Act requires extensive disclosure to the Secretary by plan administrators of financial data and other information relating to a plan. 29 U.S.C. § 1021(b), 1024(a). ERISA also provides the Secretary with broad investigatory powers to monitor plans, including the authority to conduct "spot" audits on the premises of the plan and to subpoena witnesses, id. § 1134, and provides for the cooperation between the Secretary and other government agencies in carrying out the Secretary's responsibilities. Id. § 1136. Rather than indicating an intent that the Secretary act independent of the interests of plan participants and beneficiaries, we think that these provisions are fully consistent with the Congressional intent that the Secretary act on behalf of the participants and beneficiaries. These investigatory powers are necessary so that the Secretary is fully informed about the plan and can monitor its implementation consistent with the interests of the participants and beneficiaries - and nothing more.

And finally the Secretary relies on Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983), cert. denied, 467 U.S. 1251, 104 S. Ct. 3533, 82 L. Ed. 2d 839 (1984), to support his argument that when bringing suits under Section 1132, the Secretary is suing to safeguard "the broader public interest" as well as to seek relief for plan participants and beneficiaries. Cunningham involved an ERISA suit by the Secretary, followed ten months later by a private class suit upon the same grounds in a different jurisdiction. The Secretary lost at the trial level and, while that case was on appeal, the private action was settled. The Secretary was not a party to the private action and in no way participated in the settlement.

The Secretary's reliance on Cunningham is misplaced. On the issue of whether the doctrine of res judicata or collateral estoppel barred the Secretary's appeal, the Cunningham court relied upon "the general principle of law that the United States will not be barred from independent litigation by the failure of a private plaintiff." 716 F.2d at 1462 (citing United States v. East Baton Rouge Parish School Board, 594 F.2d 56, 58 (5th Cir. 1979)). The Fifth Circuit specifically noted, however, that it was "not consider[ing]" the issue whether "a prior private settlement may limit the scope of the relief that the government may seek on behalf of settling parties," id. at 1462 n.10, and remanded the case for the express purpose of determining whether the private action had such a preclusive effect.

The Fifth Circuit also noted two aspects of the Cunningham case which are clearly distinguishable from this case. First, the court in Cunningham noted that the private plaintiffs' interests were in the recoupment of only their own economic losses, whereas the Secretary sought in Cunningham to determine the legality of specific conduct and to guard against future losses to the plan. This is clearly distinguishable from the CSPF settlement in this case wherein the legality of the trustees' conduct, recoupment of past losses, and the future integrity of the plan were clearly at issue and negotiated extensively in the course of the settlement. Second, the Fifth Circuit noted that "although the record . . . indicates that the Secretary consulted and cooperated with counsel for the [private] plaintiffs to a limited extent, the government did not have a 'sufficient "laboring oar" in the conduct of the [private] litigation to actuate the principles of estoppel.'" 716 F.2d at 1463 n.11. In this case, quite the contrary clearly occurred. The Secretary's action was tired before the same court, the Secretary intervened in the private actions, the cases were consolidated for discovery purposes, and the Secretary played a major role in the discovery and in the negotiation of the settlement. This case clearly is unlike Cunningham because here the Secretary utilized his statutory right of intervention and became a full participant in a settlement process spanning several years. After taking such an active role in the settlement process, the Secretary cannot declare himself beyond the power of the district court once the court, contrary to his wishes, concluded that the settlement was fair and reasonable.

In light of the legislative history, we find unpersuasive the Secretary's arguments to the contrary. The fact that ERISA was enacted in reaction to the ineffective policing of the management of pension plans by participants and beneficiaries under the predecessor legislation, and that the Secretary was given a role under ERISA, it clearly does not follow that Congress intended the Secretary's role to be pre-eminent to that which plan participants and beneficiaries had under previous statutes or are to have under ERISA. Indeed, we believe their interests are precisely the same.

We therefore conclude that the district court correctly applied res judicata principles when it approved the dismissal of Donovan as part of the settlement.


The Secretary next argues that the district court improperly certified as one class two groups of plaintiffs with antagonistic interests. Rule 23(a) of the Federal Rules of Civil Procedure sets forth four factors which must be met before a district court can certify a cause of action as a class action. The rule provides:

(a) PREREQUISITES TO CLASS ACTION. One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

The Secretary challenges the class certification only with regard to the fourth requirement of Rule 23(a). Essentially, the Secretary argues that the private plaintiffs are inadequate because they seek to represent a class within which they are substantial conflicting economic interests. This conflict arises, according to the Secretary, from the fact that the class, estimated at over 400,000 members, is comprised of both those pursuing benefit claims presently, estimated at around 20,000, and the remainder of the class whose benefit claims will arise in the future. The Secretary also claims that an additional conflict exists because to the ...

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