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Secretary of Labor v. Fitzsimmons

decided: October 30, 1986; Amended December 22, 1986*fn*.

SECRETARY OF LABOR, PLAINTIFF-APPELLANT
v.
FRANK E. FITZSIMMONS, ET AL., DEFENDANTS-APPELLEES; DAVID DUTCHAK, ET AL., PLAINTIFFS-APPELLEES AND SECRETARY OF LABOR, INTERVENING PLAINTIFF-APPELLANT V. INTERNATIONAL BROTHERHOOD OF TEAMSTERS, ETC., ET AL, DEFENDANTS-APPELLEES; CHESTER SULLIVAN, ET AL., PLAINTIFFS-APPELLEES, AND SECRETARY OF LABOR, INTERVENING PLAINTIFF-APPELLANT V. ESTATE OF FRANK E. FITZSIMMONS, ET AL., DEFENDANTS-APPELLEES



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division, No. 78 C 342, James B. Moran, Judge.

Author: Coffey

Before BAUER, Chief Judge, CUMMINGS, CUDAHY, POSNER, COFFEY, EASTERBROOK, RIPPLE, Circuit Judges.

COFFEY, Circuit Judge

In Donovan v. Fitzsimmons, 778 F.2d 298 (7th Cir. 1985), a panel of this court affirmed an order of the district court approving the settlement of actions brought by participants in the Central States Southeast and Southwest Areas Pension Fund (CSPF) against the various named defendants alleging that the benefit eligibility rules for pension payments were arbitrary, unreasonably restrictive and further, that the trustees had mismanaged the Funds' assets. We granted the Secretary of Labor's petition for rehearing en banc to consider whether the district court properly dismissed the Secretary's action on the grounds that his claim was barred by the doctrine of res judicata. We vacate the order of the district court and remand this case for further consideration in light of our holding herein.

I. BACKGROUND

This case has a complex history dating back to the middle 1970's when aggrieved members of the International Brotherhood of Teamsters Union initially filed various actions against their pension fund known as the Central States Pension Fund, the CSPF's former trustees and the IBT. The initial suit was a class action, Dutchak, et al. v. International Brotherhood of Teamsters, et al (" Dutchak "), filed on behalf of individual Teamster members against the IBT and the CSPF in 1976 alleging that the benefit eligibility rules for pension payments were arbitrary and unreasonably restrictive and further that the trustees had mismanaged the Fund's assets. In the aftermath of the Department of Labor investigation concerning the alleged mismanagement of the Central States Pension Fund, the DOL filed a separate action against the former trustees of the CSPF, Donovan v. Fitzsimmons, et al., in 1975 and alleged that the former trustees had mismanaged the pension fund, in violation of 29 U.S.C. § 1104.*fn1 The DOL claimed the alleged mismanagment caused losses of between $50 to $70 million due to imprudent loans and improper investments in various real estate syndicates, hotels, including gambling casinos in Las Vegas, and other businesses.*fn2 After the DOL filed the Donovan action, the named plaintiffs in Dutchak requested leave to file an amended complaint with the court essentially incorporating most of the claimed fiduciary duty violations under ERISA set forth in the Donovan complaint; however, the district court did not rule on this motion. Thereafter, in 1979 the attorneys representing the plaintiffs in Dutchak filed a class action, Sullivan, et al. v. Fitzsimmons, et al., incorporating all of the allegations set forth in the previous Donovan and Dutchak complaints. In 1979, the court ordered the three cases consolidated for purposes of discovery.

On October 16, 1981, a proposed settlement was reached between the private plaintiffs in the Dutchak and Sullivan actions and the Central States Pension Fund and Teamsters Union resolving the benefit claims. According to the terms of the proposed settlement the CSPF agreed to substantially liberalize the rules governing the eligibility for pension benefits. The plaintiffs and the CSPF projected that the liberalized rules governing eligibility for pension benefits would require approximately $140 million be set aside for the additional participants who might now qualify for pension benefits under the proposed settlement. The proposed settlement between the private plaintiffs and the Central States Pension Fund also conditioned the final settlement upon the resolution of the asset mismanagement claims and the dismissal of the DOL's Donovan action. During the period of these settlement negotiations between the named plaintiffs and the CSPF and IBT, the Department of Labor was not informed that these parties were discussing settlement of the Secretary's action in Donovan, and thus the Secretary had no knowledge of, and was not a party to, any of these negotiations. In fact, as counsel for the named plaintiffs disclosed during the October 21, 1981 hearing, the CSPF directed the plaintiffs not to discuss the settlement negotiations with the Secretary of Labor: " Now as a condition of the negotiations, we were required [by the CSPF] not to communicate with the Department of labor about this activity or the contents . . . "*fn3 (Emphasis added). Subsequently, in November 1981, after the Secretary of Labor became aware of this highly unusual secrecy requirement as pertaining to him, the DOL moved to intervene as a plaintiff in the Sullivan and Dutchak class actions, pursuant to its right of intervention under 29 U.S.C. § 1132(h).*fn4 The Court granted the Secretary's motion to intervene for the limited purpose of objecting to the proposed settlement and participating in any settlement hearings.

On June 13, 1984 the final settlement agreement between the plaintiffs and the defendants was filed with the court, incorporating an Insurance Settlement Agreement providing that the CSPF's former trustee's insurance companies, Aetna and Lloyds of London, would pay $2 million to the CSPF in settlement of the asset mismanagement claims against the former trustees. The insurance companies agreed to pay the $2 million only if the former trustees agreed to release the respective insurance companies from any further liability*fn5 (Department of Labor's Appendix at 189-90), and settlement was also conditioned on the discharge from liability of the defendants in each action.

Between the time that the DOL intervened in the Sullivan and Dutchak action and the filing of the settlement agreement between the private plaintiffs and the defendants in June 1984, the Secretary did participate in the class actions in a very limited manner only as to the filing of memoranda with the court urging that the class not be certified since the named plaintiffs could not properly and adequately represent the asset mismanagement group's interests. In conjunction therewith and at the suggestion of the court, the Secretary of Labor filed a memorandum with the court addressing the nature and scope of the notice to be provided to the proposed class. In the spring of 1984, a notice was sent to all proposed class members (the benefit group and the asset mismanagement group) disclosing the terms of the settlement. The district court also permitted the Secretary of Labor to send an accompanying letter to the class urging rejection of the settlement.

On June 13, 1984, the district court held a hearing to review the terms of the settlement. During this hearing, the Secretary of Labor objected to the settlement of the asset mismanagement claims, contending that the anticipated recovery was wholly inadequate in light of the number and dollar amount of the claims against the former trustees and also that the settlement agreement failed to allow recovery from the personal assets of the former trustees. Some two and one-half months later, on August 27, 1984, the court issued its written findings and certified as one class "all persons on whose behalf a contribution has been made or required to be made" for purposes of approval of the settlement. This class consisted of all the benefit and asset mismanagement unnamed plaintiffs. The Department of Labor has continually contested the ability, authority and propriety of the named plaintiffs to represent both the benefit and asset mismanagement unnamed plaintiffs; however, the court disagreed and found that the unnamed plaintiffs were adequately represented under Fed. R. Civ. P. 23(a)(4) which requires that "the representative parties . . . fairly and adequately protect the interests of the class." In reaching its conclusion that Fed. R. Civ. P. 23(a)(4) was satisfied, the court determined that the DOL had adequately represented the interest of those members of the class who sought to limit the liberalization of eligibility rules governing benefits.

The court further determined that since the settlement had been presented to the court as a package, the entire settlement "must stand or fall as a package." The court after reviewing the settlement concluded that the settlement was fair and reasonable. To support its decision the court found that all parties had an opportunity to litigate the contested issues and that the $2 million to be received from the insurance companies was the largest amount attainable under the circumstances,*fn6 and that the cost of further litigation in this case outweighed the benefits to be gained. In approving the settlement, the court also ruled that there was no reason to believe that any of the former trustees were likely to commit ERISA violations in the future since they were not now serving on the CSPF board and a consent decree had been entered providing for special counsel to overlook future management of the Fund.*fn7 The court next addressed the issue of the continued viability of the Secretary's action in Donovan and determined that since there was a "congruence of legal interests" between the DOL and the private plaintiffs, privity existed between the parties for purposes of applying the doctrine of res judicata to bar the Secretary's action in Donovan, finding that the Secretary of Labor was bound by the settlement agreement since he had intervened in the class action. The court dismissed the Sullivan, Dutchak and Donovan actions.

On appeal, a split panel of this court affirmed the trial court's approval of the settlement agreement. With the granting of the Secretary of Labor's petition for rehearing en banc, we vacated the decision of the district court, and remand for further proceedings in light of our holding.

II. RES JUDICATA AND LIMITED INTERVENTION

On appeal, the DOL's primary contention is that the district court misapplied the doctrine of res judicata in finding that the DOL was in privity with the private plaintiffs in this action. The defendants argued to this court that the DOL acts merely as a representative of the interests of the beneficiaries of the fund. The DOL, however, contends that its interest in this litigation is much broader, encompassing its obligation to protect the interests of the general public, including the reinforcement of public confidence in a private pension system that involves billions of dollars in assets and investments that affect not only the entire United States economy but also the United States Treasury, as well as supervising the enforcement of the ERISA statute. Thus, the basic issue in this case is whether the DOL has an "interest" separate and distinct from that of the private plaintiffs or any private plaintiff for purposes of determining whether privity exists between the DOL and the private plaintiffs in Dutchak and Sullivan, and whether the Secretary's very limited intervention in this case precludes the Secretary from avoiding the effects of res judicata.

The Dutchak and Sullivan cases are private class actions joining all beneficiaries and potential beneficiaries of the pension fund. The district court certified this case as a class action, after proper notice had been given to all potential class members, as "consisting of all persons on whose behalf a contribution has been made or was required to be made . . . " to the CSPF. The trial court also determined that the Secretary was in privity with the private class action plaintiffs for purposes of res judicata.*fn8

"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). In order for the doctrine of res judicata to apply there must be (1) a final judgment on the merits, (2) an identity of the cause of action between the two actions, and (3) an identity of parties or their privies in the two actions. Lee v. City of Peoria, 685 F.2d 196, 199 (7th Cir. 1982); Church of the New Song v. Establishment of Religion, 620 F.2d 648, 652 (7th Cir. 1980), cert. denied, 450 U.S. 929, 101 S. Ct. 1387, 67 L. Ed. 2d 361 (1981). See also 1B Moore's Federal Practice P0.410[1] and 0.411[1]. Privity between parties is established where those parties' interests are so closely aligned that they represent the same legal interests. See Southwest Airlines Co. v. Texas Int'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).*fn9

In this case, the trial court found that there was an identity of the cause of action between the Secretary of Labor in Donovan and the private plaintiffs in Sullivan and Dutchak since their respective claims were based upon the same operative facts (trustees' violations of their fiduciary duties to the funds in asset management transactions) and alleged statutory violations (§ 302 of the National Labor Relations Act, 29 U.S.C. § 186 and § 404 of ERISA, 29 U.S.C. § 1104). The DOL does not contest this finding before this court. The district court also found that privity was established between the Secretary of Labor and the private parties since:

"(1) there is a 'congruence of legal interest' 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. Southwest Airlines Co. v. Texas International Airlines, 546 F.2d 84, 102 (5th Cir.), cert. denied, 434 U.S. 832, 54 L. Ed. 2d 93, 98 S. Ct. 117 (1977)."

The court, having determined that Sullivan and Donovan involved the same claims and that the DOL and private plaintiffs shared similar interests, and thus were in privity, found that the doctrine of res judicata barred further litigation in the Donovan action. Further, the court concluded that, although the DOL originally intervened in the Sullivan action "for the limited purpose of: (1) expressing the Secretary's views regarding the appropriateness and adequacy of the proposed settlement; and (2) participating in the contemplated settlement hearings . . ., "*fn10 the Secretary of Labor had been a "full participant in the settlement process" and thus was "bound to the extent of his own intervention." District court's Findings of Fact and Conclusions of Law at 22-25 (August 27, 1984).

A. The Parties' Interests

Whether or not the doctrine of res judicata applies in this case depends upon the statutory role of the DOL in bringing an ERISA action. Thus, the question of whether or not privity exists between the DOL and the private plaintiffs is a question of law subject to a review de novo on appeal. See Southwest Airlines Co., 546 F.2d at 95 ("the term privity . . . represents a legal conclusion that the relationship between the one who is a party . . . and the non-party is sufficiently close to afford application of the principle of preclusion") (quoting Vestal, Preclusion/Res Judicata Variables: Parties, 50 Iowa L. Rev. 27 (1964)). Initially we turn to the legislative history of ERISA to determine the primary interest and obligation of the Secretary of Labor in enforcing the ERISA laws.

History recounts that prior to the enactment of ERISA, federal involvement in the monitoring of pension funds in this country was minimal. Because of the growth of private pension plans and the problems concurrent therewith, Congress in 1958 expanded the government's role in supervising and monitoring pension plans with the enactment of the Welfare and Pension Claim Disclosure Act; however, this Act provided only limited disclosure of information and filing of reports for the pension funds. See Hutchinson and Ifshin, Federal Preemption Under The Employee Retirement Income Security Act of 1974, 46 U. Chi. L. Rev. 23, 28 (1978). Under this monitoring system, the primary responsibility for supervising the pension funds was left to the beneficiaries, "reserving to the states the detailed regulations relating to insurance and trusts . . . " Id. citing H.R. Rep. No. 2283 reprinted in [1958] U.S. Code Cong. & Ad. News 4181, at 4187. ERISA was enacted by Congress in 1974 after determining that the then present system of regulation was ineffective in monitoring and preventing fraud and other pension fund abuses.

"Experience . . . has demonstrated the inadequacy of the Welfare and Pension Plans Disclosure Act in regulating the private pension system. It is weak in its limited disclosure requirements and wholly lacking in substantive fiduciary standards. Its chief procedural weakness can be found in its reliance upon the initiative of the individual employee to police the management of his plan."

S. Rep. No. 1150, 92d Cong., 2d Sess. 5 (1972), cited in Hutchinson, supra. See also H.R. Rep. No. 93-533, 93d Cong., 1st Sess. 17 (1973), reprinted in [1974] U.S. Code Cong. & Ad. News 4639, 4655. Congress determined this problem to be national in scope warranting the federal government's intervention in order that they might safeguard the national interest in the private pension fund system and the beneficiary's interest in a retirement income.

"§ 1001. Congressional findings and declaration of policy

(a) The Congress finds that the growth in size, scope, and numbers of employee benefit plans in recent years has been rapid and substantial; that the operational scope and economic impact of such plans is increasingly interstate; that the continued well-being and security of millions of employees and their dependents are directly affected by these plans; that they are affected with a national public interest; that they have become an important factor affecting the stability of employment and the successful development of industrial relations ; that they have become an important factor in commerce because of the interstate character of their activities, and of the activities of their participants, and the employers, employee information and adequate safeguards concerning their operation, it is desirable in the interests of employees and their beneficiaries, and to provide for the general welfare and the free flow of commerce, that disclosure be made and safeguards be provided with respect to the establishment, operation, and administration of such plans; that they substantially affect the revenues of the United States because they are afforded preferential Federal tax treatment; that despite the enormous growth in such plans many employees with long years of employment are losing anticipated retirement benefits owing to the lack of vesting provisions in such plans; that owning to the inadequacy of current minimum standards, the soundness and stability of plans with respect to adequate funds to pay promised benefits may be endangered; that owing to the termination of plans before requisite funds have been accumulated, employees and their beneficiaries have been deprived of anticipated benefits; and that it is therefore desirable in the interests of employees and their beneficiaries, for the protection of the revenue of the United States, and to provide for the free flow of commerce, that minimum standards be provided assuring the equitable character of such plans and their financial soundness."

29 U.S.C. § 1001(a) (emphasis added). ERISA's statement of purpose makes it clear that Congress was aware of the public's proper concern that these pension plans receive adequate supervision and monitoring, and was also concerned with the potential effect these plans might have on interstate commerce and the public treasury. Specifically, Congress recognized that the economic impact of private plans was interstate, that the plans affected the national public interest in employment stability and industrial relations, and that because they substantially affect the very revenues of the United States and affect the free flow of commerce to the general welfare, private plans are afforded preferential tax treatment.

To accomplish the desired remedial and protective purposes of ERISA, Congress required that all assets of the employee benefit plans "be held in trust by one or more trustees," 29 U.S.C. 1103(a), subject to comprehensive standards of conduct wherein a fiduciary or trustee must discharge his duties solely in the interests of the participants "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 were to use . . . " 29 U.S.C. § 1104(a). The Congressional enactment further directed that the fiduciary might very well be held to be "personally liable to make good to such plan any losses to the plan resulting from each such breach . . . " of his fiduciary duty, 29 U.S.C. 1109(a), and the civil action to recover the losses caused by the fiduciary's breach of duty could be brought by the "Secretary, or by a participant [in a pension plan] . . . " 29 U.S.C. § 1132(a)(2). Moreover, Congress provided that "a copy of the complaint in any action under this subchapter by a participant, beneficiary, or fiduciary . . . shall be served upon the Secretary . . . " and that the Secretary "shall have the right in his discretion to intervene in any action [brought by a participant, beneficiary or fiduciary] . . . " 29 U.S.C. § 1132(h). But nothing in the statute or its legislative history equates the Secretary's interests with those of private litigants so as to justify the application of res judicata to bar the Secretary from bringing a separate claim where private litigation has begun or been concluded.

The defendants argue that the Secretary of Labor is in privity with the private litigants and therefore the doctrine of res judicata applies. The defendants contend that in including this right to intervene in the ERISA statutory scheme, Congress intended that the Secretary could exercise his option to intervene in the private litigation once he determined that intervention was in the best interests of the participants. Thus the defendants sum up their argument by stating the Secretary's only interest in this litigation is to represent the interests of the beneficiaries and plan participants alone. We disagree with the defendants' restrictive interpretation of the Secretary's role which is in direct contradiction of the legislative history and statutory scheme of ERISA. The congressional findings and declaration of policy recited above clearly indicate that Congress was not only concerned about the welfare of individual beneficiaries but was equally concerned with the impact of employee benefit plans on the stability of employment, the successful development of industrial relations, the revenues of the United States, the free flow of commerce, and the general welfare of the nation.*fn11 29 U.S.C. § 1001. An examination of the statutory scheme makes it eminently clear that the Secretary and the Secretary ...


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