court on defendants' motion for summary judgment on res judicata grounds.
William Mertens and other plaintiffs filed this action on September 9, 1988 and added class allegations on June 23, 1989. The complaint alleges breaches of fiduciary duty by members of the Investment Committee of the now-terminated Kaiser Steel Retirement Plan ("Investment Committee"). According to plaintiffs, who were participants in the Kaiser Steel Retirement Plan ("Plan"), the Investment Committee members failed to insure adequate funding of the Plan and an adequate funding policy and thus breached their fiduciary duties. The court's earlier orders in this matter covered these circumstances in greater detail than shall be done here.
In May 1986, twenty-four Plan beneficiaries filed an action alleging breaches of fiduciary duty by several entities and individuals, including the Kaiser Steel Retirement Plan and the Investment Committee members named as defendants in the present action. That action, denominated Horan v. Kaiser Steel Retirement Plan, CV 86-4424 PAR (Bx), was removed to federal court under ERISA jurisdiction. The Horan plaintiffs sought declaratory and injunctive relief in the form of an order that the fiduciaries purchase an annuity for each of the plaintiffs. On August 31, 1989 the United States District Court for the Central District of California granted summary judgment in favor of the defendants in Horan and issued a memorandum and order. Defendants in the present action now argue that the Horan claim, as reflected in the complaint, the briefs and evidence of the parties, and the court's memorandum and order must serve to bar the Mertens litigation on res judicata and collateral estoppel grounds.
Under Federal Rule of Civil Procedure 56, summary judgment shall be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial . . . . since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). See also T.W. Elec. Serv. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (the nonmoving party may not rely on the pleadings but must present specific facts creating a genuine issue of material fact); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (a dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.").
The court's function, however, is not to make credibility determinations. Anderson, 477 U.S. at 250. The inferences to be drawn from the facts must be viewed in a light most favorable to the party opposing the motion. T.W. Elec. Serv., 809 F.2d at 631.
The doctrine of res judicata bars re-litigation by parties or their privies of any claim brought to final judgment on the merits. United States v. ITT Rayonier, Inc., 627 F.2d 996 (9th Cir. 1980) (citing Montana v. United States, 440 U.S. 147, 153, 59 L. Ed. 2d 210, 99 S. Ct. 970 (1979)). The parties do not dispute that the Horan summary judgment order was a final judgment on the merits. They concentrate their energies instead on issues of identity of parties and claims.
Under the identity of parties requirement, an earlier action does not have res judicata effect on a later action unless the affected parties to the second action are the same as, or are in privity with, the parties to the first action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 58 L. Ed. 2d 552, 99 S. Ct. 645 (1979).
The defendants in Mertens are indisputably the identical parties as those in Horan since they were also named defendants in that action. There is also no dispute that a subset of the Mertens class members were Horan plaintiffs and are thus the identical parties.
However defendants also contend that all other class members, including the individual plaintiffs, though not parties to the Horan action, are in privity with the Horan plaintiffs. The defendants argue that the Plan is the real party in interest as plaintiff in both suits or that the Horan plaintiffs were the virtual representatives of the Mertens plaintiffs.
According to the defendants, the Plan is the real party in interest in both Horan and the present action since the central cause of action in both is based on breach of ERISA-prescribed fiduciary duties. The defendants correctly note that a civil action alleging a fiduciary's liability under ERISA section 409 ("section 409 action"), codified at 29 U.S.C. section 1109, must be brought on behalf of the benefit plan, since no individual relief is available. In Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 140, 87 L. Ed. 2d 96, 105 S. Ct. 3085 (1985), the Supreme Court held that, while plan beneficiaries have a statutory right to bring an action for breach of fiduciary duty, any recovery inures to the benefit of the plan as a whole; the action is thus brought in a representative capacity.
Normally a party who litigates as a representative is in privity with those she represents, See, e.g., Cramer v. General Tel. & Electronics Corp., 582 F.2d 259, 267 (3d Cir. 1978). Defendants argue that the same must be true here. However, the Massachusetts Mutual court did not elaborate on section 409 suits, leaving such particulars as what protections are to be afforded to absent plan participants, beneficiaries and the plan itself to be formulated by the lower courts. This court's search of post-Massachusetts Mutual jurisprudence discloses few cases dealing with the manner in which these suits shall be handled to effectuate their representative or derivative nature.
Although the Ninth Circuit has recognized that section 409 suits must be brought on behalf of benefit plans, it has not established the necessary mechanics. See, e.g., Sokol v. Bernstein, 803 F.2d 532, 536 (9th Cir. 1986) (no right of action under section 409 for "beneficiary qua beneficiary."). The few decisions which have addressed the characteristics of section 409 suits after Massachusetts Mutual are discussed below.
In developing the necessary procedural protections, this court must be mindful of the congressional goals underlying enactment of ERISA. One of the principal goals was to protect benefit plan participants and beneficiaries by establishing standards for fiduciary conduct and by providing ready access to the federal courts. 29 U.S.C. § 1001(b). Any procedures that are adopted to amplify section 409 suits must reconcile the preclusive effect of representative actions with that animating purpose. Useful paradigms for representative actions are available from two sources: the common law of trusts and shareholder derivative actions.
I. Trust Law Based Protections
Congress intended that courts "'draw on principles of traditional trust law' in formulating remedies for violations of ERISA's fiduciary duty standards." Nieto v. Ecker, 845 F.2d 868, 872 (9th Cir. 1988) (quoting Donovan v. Mazzola, 716 F.2d 1226, 1231, 1235 (9th Cir. 1983). Since trust law is the appropriate source for guidance in determining remedies in fiduciary duty actions, it follows that such law is appropriate for determining what procedural safeguards should be afforded absent parties in those actions.
When a trust beneficiary brings a suit which affects more than her own interests, or which affects the corpus of the trust, all other beneficiaries are generally held to be necessary parties who must be joined. See, e.g., Thornton v. Evans, 692 F.2d 1064, 1073 (7th Cir. 1982) (referring with approval to district court's reliance in ERISA action on "the common law principle that all beneficiaries are necessary parties in an action to restore the trust corpus."); Auslen v. Superior Court, 58 Cal. 2d 820, 824, 27 Cal. Rptr. 8, 377 P.2d 72 (1962) (superior court lacked jurisdiction over trust due to absence of some of the beneficiaries); G. Bogert, Trusts and Trustees, § 871 at 137 (West 1982).
In ERISA actions, the typically large numbers of participants and beneficiaries in most plans will render joinder impractical. Under those circumstances in common law trust actions, a class action may be maintained. Id. at 130. In section 409 actions plan participants and beneficiaries lack the direct right to relief typically held by class members, since the actions are brought on behalf of benefit plans. Nevertheless, they retain vital interests in those suits, since any equitable or monetary relief awarded to the plan would ultimately benefit them. Those interests could be considerable where the viability of a retirement plan, with its years of income for retirees, hangs in the balance. For retirees and their beneficiaries, the plan may represent their single largest asset. For health and welfare plan participants and beneficiaries, the plan may be all that stands between them and devastating medical bills.
As the Massachusetts Mutual Court noted, plan participants and beneficiaries share a "common interest . . . . in the financial integrity of the plan." Massachusetts Mutual, 473 U.S. at 142 n. 9. In the same note the Supreme Court enumerated the four classes of persons who are entitled by statute to enforce fiduciary obligations under section 409. The Court observed that by including the Secretary of Labor in this group, Congress intended that "actions for breach of fiduciary duty be brought in a representative capacity on behalf of the plan as a whole." Id. (emphasis added). This language also suggests the obligations of a party-plaintiff to the plan and to its participants and beneficiaries. Where the Secretary of Labor initiates the action it is presumed the Secretary will act in the best interest of the plan and those who are entitled to share in its benefits. Placing this same responsibility on one or more individuals without the protections of a class action or some similar procedural device could hardly measure up to the statutory expectations described by the Supreme Court in Massachusetts Mutual.
In order to achieve these ERISA objectives, the notice normally accorded to absent class members under Federal Rule of Civil Procedure 23(c)(2) should be available to absent plan participants and beneficiaries in section 409 actions. Although no opt-out opportunity can be granted, since the right to recovery belongs to the benefits plan, notice of the action would at least afford absent parties the opportunity to consider intervention in order to safeguard their derivative interests. Where absent parties will not only be affected, but may be bound by the litigation, they should receive "the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." Fed. R. Civ. P. 23(c)(2).
This court is not the first to recognize the need for class action-type protections in section 409 suits. The Southern District of New York allowed the litigation of a breach of fiduciary duty action by a class of plaintiff beneficiaries in Diduck v. Kaszycki & Sons Contractors, Inc., 737 F. Supp. 792 (S.D.N.Y. 1990) (certifying class under Federal Rule of Civil Procedure 23(b)(1)(B) with beneficiary as class representative in section 409 action against plan trustee).
Moreover, the Seventh Circuit addressed the issue in Thornton v. Evans. The Thornton plaintiffs were plan participants and beneficiaries who sued individuals alleged to be co-conspirators with plan fiduciaries in a scheme to defraud the plan. The Seventh Circuit ruled that:
plaintiffs, who seek to recover damages from non-fiduciary defendants for their role in a conspiracy directed against the Fund as a whole . . . . must sue either as representatives of the Fund in a derivative action or as representatives of the beneficiaries in a class action.