returns, to amend the plans in a timely manner, and for attorney fees allowable under ERISA. Although at first Defendant's default was taken, he eventually obtained counsel and the case proceeded. Slowly.
The parties repeatedly appeared before the court with requests for continuances in order for Defendant to produce documents and provide an accounting. The parties attempted to negotiate a resolution and eventually the missing funds were repaid, with substantial interest, and some of the payments were made by Defendant. The missing funds had been invested in promissory notes securing loans and there was evidence that in some cases funds were paid in several installments, with no note being issued until the last installment had been paid to the borrower. Most if not all of the borrowers were accounting clients of Defendant. Defendant testified that he had told Plaintiff to whom he had loaned money and the approximate amounts in April, 1993.
Defendant testified that he invested in the promissory notes in order to obtain a better return on investment than was offered by the bank. He lent to borrowers who were clients of his accounting practice, whom he knew had substantial net worth and the ability to pay.
Defendant himself borrowed $ 9,000 as partial payment for a 1991 Cadillac Eldorado. (Def. Ex. Q) This money was deposited into Defendant's personal bank account, which is a joint account with his wife. Defendant testified that this loan was repaid, with interest at 9 1/2%. Defendant also wrote a check on the plan account to pay a bill for computer services rendered to his accounting office.
By the time of the Pretrial Statement, in January, 1996, Defendant had provided to Plaintiff annual accountings, indicating account balances for all participants in each plan, and documentation that Plaintiff would accept. This was two and one-half years after suit was filed.
At trial, the only remaining issues were an amount of $ 5,500 still in dispute, and the Plaintiff's attorney's fees, in the amount of $ 26,415.25 (Pltf. Ex. 11), accounting fees of $ 1,650 (Pltf. Ex. 9) and actuarial expenses of $ 3,850 (Pltf. Ex. 8) and the $ 7500 penalty charged by the Internal Revenue Service for the late filing of plan amendments. (Pltf. Ex. 11) All these expenses were paid by the employer, Plaintiff's dental corporation.
CONCLUSIONS OF LAW
Both co-trustees were fiduciaries of the Trust in accordance with 29 U.S.C. section 1002(21)(A). Plaintiff had delegated to Defendant the duty of administering the plans, securing necessary filings with the Department of Labor and the Internal Revenue Service, to keep the plans current in conformance with law, and to protect the legal status of the plan. (Agreement of Trust at p. 8 - Plaintiff Exhibit 1)
By mid-1992, Defendant had failed to provide year-end beneficiary statements in a timely manner for the previous two years (fiscal 1991 and 1992).
By January, 1993, Defendants had withdrawn $ 220,000 from the Plans' accounts without the knowledge of Plaintiff, the co-trustee. Defendant had made loans to his clients and to himself, in many instances without collateral at the time the funds were disbursed, i.e. the promissory notes were only obtained some time after the funds were given to the borrower. Defendant borrowed money from the plan accounts on his own behalf and deposited the funds in his personal account.
A co-trustee has a duty to monitor the conduct of another trustee and to intervene if he suspects improprieties. Pension Ben. Guar. Corp. v. Greene, 570 F. Supp. 1483, 1457 (W.D.Pa. 1953) (trustee resignation valid only when he has made adequate provision for continued prudent management of assets). A co-trustee otherwise could be found liable for the breach of a co-fiduciary under 29 U.S.C. section 1105 Friend v. Sanwa Bank of California, 35 F.3d 466, 471 (9th Cir. 1994) ("Trustee liability likely would exist where newly-appointed successor was involved... in a transaction with the plan.")
Transactions between a plan and a fiduciary are prohibited by 29 U.S.C. section 1106(b). Prohibited transactions include loans from a plan to a fiduciary. Davidson v. Cook, 567 F. Supp. 225 (E.D.Va. 1983).
There is a per se ban on the transactions described above, which 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. McDougall v. Donovan, 552 F. Supp. 1206 (N.D.Ill. 1982). This chapter was intended to prevent transactions which offered high potential for loss of plan assets or for insider abuse. The fact that prohibited loan is or ultimately may be repaid does not render loans lawful. Marshall v. Kelly, 465 F. Supp. 341 (W.D. Okla. 1978); Donovan v. Mazzola, 716 F.2d 1226, 1230 (9th Cir. 1983) (Transaction was a prohibited transaction under 29 U.S.C. § 1106(b)(2) because the individual[s] acted on both sides of the [loan] transaction).
Consequently, regardless of whether there was any harm to the plan, Defendant engaged in a prohibited transaction, i.e. he made a loan from the plan to himself, a fiduciary of the plan. This transaction is prohibited regardless of whether any harm has come to the plan. This is a breach of his duty as a fiduciary.
One of the powers of a trustee of the plans is the power to invest. (Trust Agreement Article II(a) page 3, Plaintiff Exhibit 1).
One of the duties of a fiduciary is prudent management of the plan's assets. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978). Prudent management includes requiring sufficient collateral for loans. Donovan, 716 F.2d 1226, at 1231.
One of the provisions of the Trust Agreement is that a trustee may make loans to the Trustor (the dental corporation) but only with "adequate collateral and a fair rate of interest." (Trust Agreement at page 4)
By making loans to the clients of his accounting practice, let alone the trustor, without adequate collateral, i.e. without promissory notes, at least until some time after funds had been disbursed, Defendant violated an explicit term of the Trust Agreement. Defendant also did not use prudent management of the plans' assets as required by 29 U.S.C. section 1104 (1)(B).
Attorney's fees may be awarded against an offending party in an ERISA action, pursuant to 29 U.S.C. section 1109(a), which provides, in pertinent part:
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be 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, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.
The intent is that the offending party bear the costs of the award, rather than non-culpable, non-party plan participants. Eaves, 587 F.2d 453, at 464. (Court of Appeals remanded case to district court for determination "whether or not the 'common fund' theory should apply or attorney's fees should be awarded personally against the breaching fiduciaries." Id. at 465) (emphasis added).
The factors to be considered in determining whether to award attorney fees in an ERISA case are stated in Hummell v. S.E. Rykoff & Co., 634 F.2d 446, 453 (9th Cir. 1980). These factors are: (1) the degree of the opposing parties' culpability or bad faith; (2) the ability of the opposing parties to satisfy an award of fees; (3) whether an award of fees against the opposing parties would deter others from acting under similar circumstances; (4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties' positions. Id. (citations omitted).
No one of the Hummell factors is necessarily decisive, and some may not be pertinent to a given case. Carpenters Southern Cal. Admin. Corp. v. Russell, 726 F.2d 1410, 1416 (9th Cir. 1984).
"Bad faith" may be interpreted as bad faith in conduct of litigation. Tingey v. Pixley-Richards West Inc., 958 F.2d 908, 909 (9th Cir. 1992) (court found Plaintiff appeal not in bad faith). See also United Brotherhood of Carpenters v. Endicott Enter., Inc., 806 F.2d 918, 923 (9th Cir. 1986) (Question in determining bad faith is whether the suit is "the kind of vexatious litigation meant to be deterred by the imposition of attorney's fees.")
In applying to the opposing parties the Hummell factors, the court finds:
Plaintiff did not provide brokerage account information to Defendant when requested.
Defendant engaged in a prohibited transaction, by making a loan to himself of plan funds. Defendant also did not manage investments prudently, and violated the explicit terms of the Trust Agreement, by making loans to others without collateral. Defendant also was late filing plan reports and neglected to amend the plans as required by the Internal Revenue Service.
Regarding bad faith:
Plaintiff brought this litigation in good faith, as part of his duty as a fiduciary to intervene in the event of suspected wrongdoing by a co-trustee.
Defendant showed bad faith when he prolonged this litigation needlessly by delaying providing documents and accountings, even up to the very day of trial and beyond.
Regarding the ability to pay fees:
Both parties are practicing professionals, both in business for many years and owning substantial assets. Defendant admits in his Trial brief on page 5, line 6, that he has the ability to satisfy any attorney's fee award.
Regarding deterrence of others:
This issue may or may not be pertinent to this litigation. It is possible that co-trustees of other small plans may learn from Defendant's experience.
Regarding whether the requesting party sought to benefit all participants or resolve a significant legal question regarding ERISA:
Plaintiff, while the primary beneficiary of the plans, also sought to protect the interests of his employees, the other participants in the plans. There is probably no significant legal issue involved. All the law in this case is settled.
Regarding the relative merits of the parties' positions:
Plaintiff's counsel, at conclusion of the trial of this case, inquired of the court "What was I supposed to do?" In truth, Plaintiff had no choice but to bring this action. Once he suspected that Defendant had misappropriated plan funds, it was his duty as a fiduciary to intervene, to protect the plans' assets. He continued to pursue the case only because Defendant refused to provide documents and an adequate accounting. As of the day of trial there were still funds unaccounted for. There is no reason that this case has been going on for three full years, except for Defendant's refusal to cooperate in discovery, or to account for the funds in his care.
Defendant's apparent position of "No harm, no foul," is an inaccurate statement of ERISA law. A fiduciary may be guilty of a breach of his duty even if the plan suffers no harm or receives a profit from his investments.
Defendant's failure to file timely reports required Plaintiff to hire another accounting firm to backtrack and reconstruct the reports.
Because Defendant failed to amend the plans in a timely manner, and even assured Plaintiff that such amendments were not necessary, or could be done retroactively, the IRS assessed a penalty in the amount of $ 7500. Neither the employer nor the plan could claim this penalty as a tax deduction. This does not in any way signify, as Defendant has claimed, that the penalty could not have been paid by the plan.
Defendant further argues that fees and expenses may not be awarded because the employer, Plaintiff's dental corporation, paid for the IRS penalty, The accounting and actuarial expenses, and the attorney's fees necessitated by his fiduciary breach.
This flies in the face of the case law previously cited, which states that the costs of suit to protect a plan should be borne by the culpable party, and not by the plan. Eaves, 587 F.2d at 464. Furthermore, Plaintiff should not be penalized for choosing to risk his own funds, rather than those of his employees' pension and profit-sharing plans. To require Plaintiff to pay the IRS penalty would shift the consequences of Defendant's breach onto Plaintiff. Fees and expenses should be awarded to Plaintiff.
A trustee must resign or be removed by a written document. Pen. Ben. Guar. Corp., 570 F. Supp. at 1487; Agreement of Trust at pp. 10, 11 (Plaintiff Exhibit 1). Defendant has never resigned as trustee, nor has Plaintiff discharged him. This should be done in writing, as provided by the Agreement of Trust.
For all the above reasons, IT IS HEREBY ORDERED that Defendant shall pay to Plaintiff $ 26,415.25 for attorney's fees (or such greater amount as shall be established by motion), $ 1,650 for accounting fees and $ 3,850 for administration and actuarial expenses as well as the $ 7,500 penalty paid to the Internal Revenue Service. Furthermore, Plaintiff shall formally discharge Defendant as trustee, in writing. Plaintiff shall prepare a form of Judgment.
Dated: July 15, 1996
F. STEELE LANGFORD
Chief Magistrate Judge
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