Pfahler v. National Latex Co.

405 F.Supp.2d 839

Kathleen PFAHLER, et al., Plaintiffs v. NATIONAL LATEX COMPANY, et al., Defendants.

No. 1:02 CV 1446.

United States District Court, N.D. Ohio, Eastern Division.

July 8, 2005.

COPYRIGHT MATERIAL OMITTED

Anand N. Misra, Shaker Heights, OH, Brian J. Halligan, Halligan & Ginty, Ashland, OH, Dennis J. Niermann, Cleveland, OH, Robert S. Belovich, Parma, OH, for Plaintiffs.

Gary A. Piper, Gregory G. Baran, Baran Piper Tarkowsky Fitzgerald & Theis, Mansfield, OH, Michele G. Cerni, Baran Piper Tarkowsky Fitzgerald & Theis, Toledo, OH, Andrew J. Dorman, David H. Brown, Ellyn B. Mehendale, Janik & Dorman, Ari H. Jaffe, Kohrman, Jackson & Krantz, Cleveland, OH, for Defendants.

MEMORANDUM OF OPINION AND ORDER

WELLS, District Judge.

Plaintiffs Kathleen Pfahler, R. Dean Strine, Gary L. Ramsey, and Theresa Devan filed this complaint, stylized as a derivative action on behalf of themselves, the National Latex Products Company Employee Welfare Benefit Plan ("NLP Plan"), and other NLP Plan participants, against defendants National Latex Products Co. ("National Latex"), Harry R. Gill, Jr. ("Harry Gill"), H. Ross Gill, III ("Ross Gill"), Patricia R. Gill, Glass & Associates, Inc. ("Glass"), Jay P. AuWerter, Jr., and General Electric Capital Corporation.¹ Plaintiffs allege that each of the defendants was a fiduciary, co-fiduciary, fiduciary-in-fact or trustee of the NLP Plan or were co-conspirators who conspired to breach and did breach fiduciary duties owed to the NLP Plan and its participants. On 22 April 2005, this Court issued a comprehensive summary judgment ruling which resulted in the dismissal of Harry Gill, Patricia Gill, and General Electric Capital Corporation.² (Docket # 235). With respect to the remaining defendants, this Court found that there were genuine issues of material fact regarding whether Glass, AuWerter, National Latex, and Ross Gill "breached their fiduciary duty by misusing plan assets in the form of employee contributions and by misrepresenting to NLP Plan participants that outstanding health claims would be paid." (Docket # 235, at 39-40).

Despite reaching that conclusion, this Court found that there were unresolved questions about the precise nature of plaintiffs' claim and the damages, if any, which are potentially recoverable. Accordingly, this Court requested briefing on the following five questions:

1. Because any recovery for a breach of fiduciary duty claim brought on behalf of a plan must go to that plan can plaintiffs bring a derivative action on behalf of a plan which is no longer operating?

2. Assuming that plaintiffs can bring a derivative action on behalf of a plan that is no longer operating, what damages would they be entitled to recover if successful?

3. Assuming that plaintiffs can bring a derivative action on behalf of a plan that is no longer operating and that they prevail and recover damages, what happens to the damages?

4. If plaintiffs seek to bring an ERISA Section 502(a)(3) breach of fiduciary duty claim on behalf of all plan participants, must they do so as a class action and comply with the requirements of Fed.R.Civ.P. 23?

5. Given that plaintiffs are limited to equitable relief in Individual Actions, what damages can plaintiffs recover if they prevail on their individual claims for breach of fiduciary duty?

(Docket # 236). Plaintiffs submitted an initial brief with respect to these questions on 13 May 2005. (Docket # 237). Defendants Ross Gill and National Latex filed a response brief (Docket # 240), as did defendants Glass and AuWerter (Docket # 239).³ Plaintiffs then filed a reply. (Docket # 242).

For the reasons set forth below, this Court concludes that plaintiffs may not bring a derivative action on behalf of a defunct plan and that plaintiffs may only bring a breach of fiduciary duty claim on behalf of other plan participants if they comply with the requirements of Fed. R.Civ.P. 23. Accordingly, plaintiffs are confined to their individual claims for breach of fiduciary duty based on ERISA Section 502(a)(3) and are limited to equitable relief on those claims. Because the damages sought by plaintiffs are either legal in nature or not clearly traceable, plaintiffs' alleged damages are beyond the remedial scope of Section 502(a)(3).

I. Nature of the Plaintiffs' Claim

The Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq., provides the legal basis for the plaintiffs' complaint. ERISA § 502(a), 29 U.S.C. § 1132(a), sets out the framework by which participants and beneficiaries of employee benefit plans can enforce their rights.⁴ This civil enforcement framework provides two mechanisms for bringing lawsuits for breaches of fiduciary duty which are relevant to this case: 1) one by which plan participants and/or beneficiaries bring an action on behalf of the plan itself (ERISA Section 502(a)(2)); and, 2) one by which individual participants and/or beneficiaries bring actions on their own behalf (ERISA Section 502(a)(3)). See e.g., Varity Corp. v. Howe, 516 U.S. 489, 510-15, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996); Smith v. Provident Bank, 170 F.3d 609, 616 n. 3 (6th Cir.1999). Plaintiffs maintain that their action should properly be understood as a derivative action on behalf of the NLP Plan and that "[t]he fact that the Plan may no longer be operating is no limitation upon this Court's authority to grant relief to the Plan under Section 502(a)(2)." (Docket # 237, at 3 and 8). However, if precluded from seeking relief on behalf of the NLP Plan itself, plaintiffs contend, in the alternative, that they may bring suit on behalf of all plan participants, under ERISA § 502(a)(3), without complying with the provisions of Fed.R.Civ.P. 23. As explained in more detail below, this Court disagrees on both points.

A. Breach of Fiduciary Duty Action on Behalf of a Plan: ERISA Section 502(a)(2)

Pursuant to ERISA Section 502(a)(2), participants and beneficiaries of an employee benefit plan may bring actions for relief from breaches of fiduciary duty on behalf of the plan. 29 U.S.C. §§ 1109 and 1132(a)(2); Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140-43, n. 9, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985). Plan fiduciaries who breach any of their ERISA-imposed responsibilities, obligations, or duties may be held personally liable for damages, for restitution, and for "such other equitable and remedial relief as the court may deem appropriate." Mertens v. Hewitt Assoc., 508 U.S. 248, 252, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) (citing 29 U.S.C. § 1109(a)). Section 502(a)(2) actions for breach of fiduciary duty must be brought "in a representative capacity on behalf of the plan as a whole" and recovery for a breach of fiduciary duty "inures to the benefit of the plan as a whole." Russell, 473 U.S. at 140-43, n. 9, 105 S.Ct. 3085; see also Weiner v. Klais and Co., Inc., 108 F.3d 86, 92 (6th Cir. 1997); Kuper v. Iovenko, 66 F.3d 1447, 1452-53 (6th Cir.1995) (explaining that any recovery for breach of fiduciary duty "must go to the plan"); Tregoning v. Amer. Community Mut. Ins. Co., 12 F.3d 79, 83 (6th Cir.1993); In re AEP ERISA Litigation, 327 F.Supp.2d 812, 820-21 (S.D.Ohio 2004).

In support of plaintiffs' contention that they can bring a Section 502(a)(2) action for breach of fiduciary duty on behalf of a defunct plan, plaintiffs rely heavily on Jackson v. Truck Drivers' Union Local 42 Health & Welfare Fund, 933 F.Supp. 1124 (D.Mass.1996).⁵ In Jackson, a single plaintiff sought the recovery of medical benefits from a defunct plan. 933 F.Supp. at 1129. Eschewing defendants' arguments that ERISA offers "no relief for an aggrieved beneficiary seeking damages from a plan that has been terminated," the court imposed a compound remedial scheme to afford plaintiff relief. Id. at 1135-40. First, the court permitted the plaintiff to obtain money damages on behalf of the plan, pursuant to Section 502(a)(2), and ruled that a constructive trust could be set up to receive those damages. Id. at 1129 and 1135-38. Next, the court concluded that the plaintiff could, pursuant to Section 502(a)(3), obtain equitable relief of restitution which included "compelling trustees to pay the benefits due." Id. at 1139-40.

To the extent that Jackson suggests that breach of fiduciary duty actions may be initiated on behalf of the defunct plans,⁶ this Court declines to follow its legal reasoning. Though purporting to sue on behalf of the defunct NLP Plan, the plaintiffs in this case are not trying to recover damages suffered by the NLP Plan, but rather are attempting to recover benefits and contributions which they are allegedly owed by the now defunct NLP Plan.⁷ Such attempts by plan participants to use Section 502(a)(2) as a mechanism for obtaining individual damages has been squarely and repeatedly rejected by the Sixth Circuit. Bauer v. RBX Industries, Inc., 368 F.3d 569, 582 n. 6 (6th Cir.2004) (explaining that a party alleging a Section 502(a)(2) breach of fiduciary duty claim "cannot seek personal remuneration"); Weiner, 108 F.3d at 91-92; Adcox v. Teledyne, Inc., 21 F.3d 1381, 1390 (6th Cir. 1994) (providing that plaintiffs cannot seek recovery on their own behalf with a Section 502(a)(2) breach of fiduciary claim); Tregoning, 12 F.3d at 83.

Accordingly, while the defunct nature of a plan may not necessarily represent an absolute obstacle to derivative actions on its behalf,⁸ it makes plaintiffs' attempt to recover for their own personal losses even more transparent. As Section 502(a)(2) does not permit personal recovery by individual plan participants, plaintiffs may not maintain their breach of fiduciary duty claim as a derivative action on behalf of the NLP Plan. A conclusion to the contrary would undermine the equitable relief limitation imposed on individual breach of fiduciary duty claims, discussed in more detail below, by permitting plan participants to recover money damages expressly precluded by Section 502(a)(3). If plai...