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Brock v. Tic International Corp.

February 21, 1986

WILLIAM E. BROCK, SECRETARY OF LABOR, PLAINTIFF-APPELLANT,
v.
TIC INTERNATIONAL CORPORATION, DEFENDANT, THIRD-PARTY PLAINTIFF-APPELLEE, V. CONTINENTAL CASUALTY COMPANY AND VALLEY FORGE LIFE INSURANCE COMPANY, THIRD-PARTY DEFENDANTS



Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 79-1032-C --James E. Noland, Judge.

Author: Posner

Before WOOD, POSNER, and FLAUM, Circuit Judges.

POSNER, Circuit Judge.

On August 7, 1979, the Secretary of Labor brought this suit against TIC International Corporation, which he charged with having violated the "prudent man" rule in section 404(a)(1)(B) of the Employee Retirement Income Security Act, 29 U.S.C. § 1104(a)(1)(B), by advising a teamsters union health and welfare plan to make a "hold harmless" agreement with an insurance company as a result of which the plan lost $750,000. The district court granted TIC's motion for summary judgment and dismissed the complaint, on the ground that the suit was barred by ERISA's statute of limitations. The Secretary has appealed. Ordinarily the issue on appeal from a judgment entered on a motion for summary judgment is whether there was a genuine issue of material fact, in which event a grant of summary judgment would be inappropriate. In this case, however, the appellant does not want an opportunity to introduce evidence relating to the statute of limitations. He is content to argue that the record of the summary judgment proceeding establishes the inapplicability of the statute of limitations. In effect, he asks us to review the decision of the district court as if the court had entered judgment following a bench trial. Compare Schlytter v. Baker, 580 F.2d 848 (5th Cir. 1978); 10A Wright, Miller & Kane, Federal Practice and Procedure § 2720, at pp. 26-27 (2d ed. 1983); 6 Moore's Federal Practice paragraph 56.13, at p. 56-347 (2d ed. 1985).

Section 413(a), 29 U.S.C. § 1113(a), provides that no suit with respect to a fiduciary's breach of duty under ERISA shall be brought after the earlier of (1) six years after the date of breach or

(2) three years after the earliest date (A) on which the plaintiff had actual knowledge of the breach or violation, or (B) on which a report from which he could reasonably be expected to have obtained knowledge of such breach or violation was filed with the Secretary under this title; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.

The district court held that the Secretary "could reasonably be expected to have obtained knowledge" of TIC's alleged breach of trust from the plan's annual report, which had been filed with the Secretary on January 15, 1976--more than three years before the suit was filed. There is no suggestion of fraud or concealment, which would extend the deadline.

The report in question is Form D-2, the annual report that the plan was required to file with the Secretary for 1975. (Form D-2 was later superseded by Form 5500, but without any consequences for the issue in this case.) It is 26 pages long, the last two being the auditor's report. Note 3 to the auditor's report states that "The group insurance contract with the insurance carrier, which was terminated on February 1, 1975 (see Note 5), provided that to the extent premiums paid exceed the sum of the claims paid and provided for . . ., a refund of premiums is to be made to the Fund [plan]. . . . As of February 28, 1975, no significant adjustment of premium liability or refund is anticipated." Note 5 states:

The Board of Trustees terminated the group insurance contract and made the Fund self-insured as of February 1, 1975. The Board also signed a hold harmless agreement which released the insurance carrier from claims incurred prior to February 1, 1975 but not yet paid as of that date. Therefore, all future claims will be paid directly by the Fund. The liability for claims incurred but not paid at February 28, 1975 is estimated to total approximately $850,000. This estimate is based upon a review of direct claims paid since February 28, 1975.

In other words, before February 1 the employers' contributions to the plan had been used to pay premiums for health insurance and the insurance company had paid the employees' claims for benefits under the plan, but on February 1 the plan had become self-insured, meaning that it saved the premium expense but not would have to pay the claims directly. This switch in itself need not have caused any loss to the plan. But in connection with the switch the plan had made an agreement--the "hold harmless" agreement--excusing the insurance company from having to pay any claims accrued but unpaid before February 1, claims estimated at $850,000 as of February 28, the last day of the plan's fiscal year. One might have thought that in exchange for conferring this benefit on the insurance company the plan would have gotten a refund of premiums or some other consideration, but Note 3 to the auditor's report suggests that there was no other consideration. Read together, Notes 3 and 5 suggest that the plan made an utterly improvident, one-sided contract with the insurance company.

When the report was filed with the Department of Labor, it was read by a compliance specialist who was made suspicious by the auditor's report and began an investigation which revealed that the plan's advisor, TIC, had recommended the hold-harmless agreement to the plan's trustees. (The report did not mention TIC but another report on file with the Department, the plan description, listed TIC as a consultant.) This investigation eventuated in the present lawsuit.

The question whether the Department of Labor "could reasonably be expected to have obtained knowledge" of TIC's alleged breach of trust from the Form D-2 filed in 1976 may seem artificial. Since we know that the report kicked off the investigation that led to the filing of this lawsuit, it might seem that whatever might reasonably have been expected, the Department in fact obtained knowledge of the violation from the report. But the purpose of the three-year statute of limitations is to penalize the Department not for extraordinary diligence and imagination in scrutinizing reports but for negligent dawdling in the face of unmistakable evidence of a probable violation. If a reasonable person would not have been alerted to a probable violation by reading the report that the plan filed for 1975, the suit was filed within the statutory period even if an extraordinary person would have been, and was, alerted by the report and set the investigatory machinery in motion.

The question when a reasonable person would have known that his legal right had been invaded, so that the statute of limitations began to run, is a question of fact, meaning that we can reverse the district court's determination only if it was clearly erroneous. See, e.g., Glass v. Petro-Tex Chemical Corp., 757 F.2d 1554, 1561-62 (5th Cir. 1985); Castorina v. Lykes Bros. S.S. Co., 758 F.2d 1025, 1034 (5th Cir. 1985); Miles v. New York State Teamsters Conference Pension & Retirement Fund Employee Pension Benefit Plan, 698 F.2d 593, 598-99 (2d Cir. 1983). This is the standard of review, the Supreme Court has reminded us recently, "even when the district court's findings do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts." Anderson v. City of Bessemer City, 470 U.S. 564, 105 S. Ct. 1504, 1512, 84 L. Ed. 2d 518 (1985). It is not that the district court is in a better position than this court, in any realistic sense, to determine whether the plaintiff should have moved faster than it did to bring the lawsuit; it is that district judges are specialists in finding facts, as we are not, and that our primary function, which is to maintain the uniformity and coherence of the law, is not engaged by a judgment so dependent on the specific circumstances of each case. There will never be an auditor's report quite like this, so there is no pressing need to have a uniform rule prescribing its legal significance.

The district court's determination was not clearly erroneous. The auditor's report is the first place to which an analyst whose duty it is to read the annual reports of employee benefit plans for compliance with the federal standards, centrally including the prudent man rule, would turn; and when he did that here he would have seen (he did see) that the plan had made a contract under which it apparently gave up $850,000 in exchange for nothing. The auditor did not say, "The trustees or their advisors goofed, and blew $850,000 of plan assets"; that is not the customary diction of auditors; if the auditor had said that, the Department would have had actual knowledge of the breach of trust and the three-year period would have started to run anyway. The "could reasonably be expected" test, the alternative basis for starting the three-year period running, is intended to pick up the case where a probable violation is evident to anyone who reads the report with reasonable care. Here it was not even a matter of reading between the lines; all that was necessary was to read Notes 3 and 5 together--as Note 3 invited the reader to do. The Department says that "hold harmless agreement" is unclear, but Note 5 defines it--as excusing the insurance company from liability for $850,000 in accrued claims. There is no mention of any consideration for the fund's assuming this liability. Note 3 suggests that the consideration was to have been a refund or other adjustment in premiums paid by the plan to the insurance company; for the insurance contract had provided for a refund if premiums exceeded ...


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