Secretary of Labor v. Compton

Opinions of the United

1995 Decisions States Court of Appeals

for the Third Circuit

6-5-1995

Secretary of Labor v Compton

Precedential or Non-Precedential:

Docket 93-2019

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UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

No. 93-2019

____________

ROBERT B. REICH, Secretary of the

United States Department of Labor,

Appellant

v.

FRED COMPTON, JOSEPH McHUGH, JOHN NIELSEN,

FREDERICK HAMMERSCHMIDT, GERSIL N. KAY,

ELECTRICAL MECHANICS ASSOCIATION,

THE FIDELITY-PHILADELPHIA TRUST COMPANY, and

THE INTERNATIONAL BROTHERHOOD OF ELECTRICAL

WORKERS, LOCAL UNION NO. 98,

Appellees

____________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

(D.C. Civil No. 88-7920)

____________________

Argued: August 11, 1994

Before: BECKER, ALITO, and GIBSON*, Circuit Judges

(Opinion Filed: June 5, l995)

____________________

THOMAS S. WILLIAMSON, JR.

Solicitor of Labor

ALLEN H. FELDMAN

Associate Solicitor for Special Appellate

and Supreme Court Litigation

______________________________

*Hon. John R. Gibson, United States Circuit Judge for the Eighth

Circuit, sitting by designation.

NATHANIEL I. SPILLER

Counsel for Appellate Litigation

ELLEN J. BEARD (Argued)

Attorney

UNITED STATES DEPARTMENT OF LABOR

Room N-2700

200 Constitution Avenue, N.W.

Washington, D.C. 20210

Attorneys for Appellant

MICHAEL KATZ, ESQ. (Argued)

MERANZE AND KATZ

Lewis Tower Building, 12th Floor

15th and Locust Streets

Philadelphia, PA 19102

SANDRA L. DUGGAN, ESQ.

N. MARLENE FLEMING, ESQ. (Argued)

BLACKBURN & MICHELMAN, P.C.

2207 Chestnut Street

Philadelphia, PA 19103

Attorneys for Appellees, Fred Compton, Joseph

McHugh, and John Nielsen

RICHARD B. SIGMOND, ESQ.

RICHARD C. McNEILL, JR., ESQ. (Argued)

SAGOT, JENNINGS & SIGMOND

1172 Public Ledger Building

Philadelphia, PA 19106

Attorneys for Appellees, Electrical Mechanics Association

and International Brotherhood of Electrical

Workers, Local Union No. 98

LAURANCE E. BACCINI, ESQ. (Argued)

CAROL A. CANNERELLI-VAN POORTVLIET

Of Counsel:

WOLF, BLOCK, SCHORR and SOLIS-COHEN

Twelfth Floor Packard Building

Philadelphia, PA 19102

Attorneys for Appellees, Frederick Hammerschmidt,

Gersil N. Kay, and

The Fidelity-Philadelphia Trust Company

____________________

OPINION OF THE COURT

____________________

ALITO, Circuit Judge:

This is an appeal from an order granting summary judgment in

favor of the defendants in an action brought by the Secretary of

Labor ("the Secretary") to redress alleged violations of the

Employee Retirement Income Security Act of 1974 ("ERISA"), 29

U.S.C. §§ 1001-1461. The action was based on certain financial

transactions involving the International Brotherhood of

Electrical Workers Union No. 98 Pension Plan ("the Plan") and the

Electrical Mechanics Association ("EMA"), a not-for-profit

corporation closely related to Local 98 of the International

Brotherhood of Electrical Workers ("Local 98" or "the union"),

whose members are covered by Plan. Maintaining that these

transactions were prohibited because of EMA's close relationship

with Local 98, the Secretary sued the Plan trustees, Local 98,

and EMA. The district court granted summary judgment for the

defendants, but we now reverse in part, affirm in part, and

remand for further proceedings.

I.

In 1972, the Plan made a 30-year loan of $800,000 to EMA at

7.5% interest. EMA used this loan to finance construction of a

building, and the loan was secured by a mortgage on this

property. The building constructed with the loan housed Local

98's offices. Two years after EMA obtained the loan, Congress

passed ERISA. Section 406(a) of ERISA, 29 U.S.C. § 1106(a),

prohibits various transactions involving a plan and a "party in

interest." With respect to transactions that occurred before

1974, however, these prohibitions did not take effect until June

30, 1984. See 29 U.S.C. § 1114(c).

Concerned that its outstanding loan to EMA would be

considered a prohibited transaction after that date, the Plan

applied to the Department of Labor on April 30, 1984 for an

exemption from this provision. See 29 U.S.C. § 1108 (authorizing

the Secretary to grant exemptions from ERISA's prohibited

transaction provisions). On June 1, 1984, the Department

tentatively denied the exemption and advised the Plan that its

only permissible options were to renegotiate the terms of the

loan so that EMA was charged a market interest rate or to require

EMA to satisfy the loan in full. Contrary to the advice of its

counsel, the Plan withdrew its exemption request and, on April

25, 1985, accepted from EMA a payment of $380,289.93, the fair

market value of the loan, in full satisfaction of the debt, which

at the time had an accounting value of $653,817.47.1 EMA

borrowed the entire amount of this payment from Local 98. Local

98 then imposed a special "rental" assessment on its members and

paid the proceeds to EMA. EMA in turn used those funds to repay

the money advanced by the union. Joint Appendix ("JA") at 133.

1

. The difference in value was due to the extraordinary increase

in interest rates between 1972 and 1984.

During 1984 and 1985, Fred Compton, Joseph McHugh, and John

Nielsen were Local 98's designated trustees ("union trustees")

for the Plan; Frederick Hammerschmidt and Gersil Kay were the

employer-designated trustees ("employer trustees"); and Fidelity-

Philadelphia Trust Company ("Fidelity") was the Plan's corporate

trustee. Compton was also president of both EMA and Local 98

from 1981 through 1987; McHugh was a member of Local 98's

executive board from 1981 through 1987; and Nielsen was financial

secretary of Local 98 from 1981 through 1987, as well as a member

of EMA's board of directors from 1981 through June 1984.

In October 1988, the Secretary filed a complaint in district

court against Compton, McHugh, Nielsen, Hammerschmidt, Kay,

Fidelity, EMA, and Local 98 (collectively "the defendants"). The

complaint first asserted that EMA "was a shell corporation wholly

controlled by Local 98" and that therefore "all transactions with

EMA, were, in fact, transactions with Local 98," which was a

"party in interest" under section 3(14)(D) of ERISA, 29 U.S.C. §

1002(14)(D).2 JA at 17-18. The complaint alleged that the loan

to EMA became a prohibited transaction as of July 1, 1984,

pursuant to sections 406(a)(1)(A), (B), and (D) of ERISA, 29

U.S.C. §§ 1106(a)(1)(A), (B), and (D).3 Id. at 18. Likewise, the

complaint alleged that EMA's subsequent purchase of its note was

2

. Section 3(14) of ERISA, 29 U.S.C. § 1002(14), is set out in

the text infra at pages 15 to 16. The Secretary conceded that

EMA was not a party in interest.

3

. Section 406(a)(1) of ERISA, 29 U.S.C. § 1106(a)(1), is set

out in the text, infra at page 12.

a prohibited transaction under these same provisions because the

note was purchased for less than its principal value. Id. at 21.

Based on these transactions, the complaint claimed that

various defendants had committed several different ERISA

violations. First, the complaint claimed that from July 1, 1984

until August 25, 1984 (the date when EMA purchased the note),

trustees Compton, McHugh, Nielsen, Hammerschmidt, and Kay had

breached their fiduciary obligations under sections 404(a)(1)(A)

and (B) of ERISA, 29 U.S.C. §§ 1104(a)(1)(A) and (B),4 by failing

to collect on the loan. Id. at 19. Second, the complaint

claimed that Fidelity had likewise breached its fiduciary duties

under sections 404(a)(1)(A), (B), and (D) of ERISA, 29 U.S.C. §§

1104(a)(1)(A), (B), and (D), by failing to take appropriate

action to collect on the loan during this same period. Id. at

20. Third, the complaint alleged that all Plan trustees had

breached their fiduciary obligations by causing the Plan to

continue to hold the EMA loan during this same period even though

they knew or should have known that doing so constituted a

prohibited transaction under sections 406(a)(1)(B) and (D) of

ERISA, 29 U.S.C. §§ 1106(a)(1)(B) and (D). Id. at 20-21.

Fourth, the complaint charged that all the Plan trustees had

breached their fiduciary obligations by causing the Plan to sell

the note to EMA when they knew or should have known that this was

a prohibited transaction under sections 406(a)(1)(A) and (D) of

4

. Section 404(a)(1) of ERISA, 29 U.S.C. § 1104(a)(1), is set

out in the text, infra at page 50.

ERISA, 29 U.S.C. §§ 1106(a)(1)(A) and (D). Id. at 21. Fifth,

the complaint alleged that the union trustees had breached their

duties to the Plan under sections 406(b)(1) and (2) of ERISA, 29

U.S.C. §§ 1106(b)(1) and (2)5, by "dealing with the assets of the

Plan in their own interest and for their own accounts, and in

their individual capacity by acting in a transaction involving

the Plan on behalf of a party (or representing a party) whose

interests were adverse to those of the Plan" and its participants

or beneficiaries. Id. 21. Finally, the complaint alleged that

EMA and Local 98 had participated in the trustees' breaches of

their fiduciary duties and, furthermore, that each Plan trustee

was liable for the others' fiduciary breaches under sections

405(a)(2) and (3) and (b)(1)(A) of ERISA, 29 U.S.C. §§ 1105(a)(2)

and (3) and (b)(1)(A).6 Id. at 21-22.

5

. Section 406(b)(2) of ERISA, 29 U.S.C. § 1106(b)(2), is set

out in the text, infra at page 43.

6

. Sections 405(a)(2) and (3) of ERISA, 29 U.S.C. §§ 1105(a)(2)

and (3), provide:

(a) In addition to any liability which he may have

under any other provision of this part, a fiduciary

with respect to a plan shall be liable for a breach of

fiduciary responsibility of another fiduciary with

respect to the same plan in the following

circumstances: . . .

(2) if, by his failure to comply with section

1104(a)(1) of this title in the administration of

his specific responsibilities which give rise to

his status as a fiduciary, he had enabled such

other fiduciary to commit a breach; or

(3) if he has knowledge of a breach by such

other fiduciary, unless he makes reasonable

efforts under the circumstances to remedy the

breach.

The complaint sought an injunction prohibiting the defendants

from committing further ERISA violations. Id. at 23. It also

sought an order requiring Local 98 and EMA to "restor[e] to the

Plan the unpaid balance of the loan with interest" and an order

requiring each defendant, jointly and severally, "to restore to

the Plan all Plan losses attributable to their fiduciary

breaches." Id. at 23-24.

After discovery, the Secretary moved for summary judgment.

Much of the Secretary's argument rested on the contention that

EMA was "a shell corporation or alter ego wholly controlled by

Local 98." Id. at 147. The district court initially denied this

motion in February 1993, but following the Supreme Court's

decision in Mertens v. Hewitt Associates, 113 S. Ct. 2063 (1993),

the district court requested the parties to submit briefs

concerning the impact of that decision. The court subsequently

vacated its earlier order denying the Secretary's motion for

summary judgment and instead entered summary judgment in favor of

the non-moving defendants. McLaughlin v. Compton, 834 F. Supp.

743, 751 (E.D. Pa. 1993) ("Compton I"). The court interpreted

Mertens as a directive to "strictly construe" ERISA. Id. at 747.

(..continued)

Section 405(b)(1)(A) of ERISA, 29 U.S.C. § 1105(b)(1)(A),

provides:

Except as otherwise provided in subsection (d) of

this section and in section 1103(a)(1) and (2) of this

title, if the assets of a plan are held by two or more

trustees --

(A) each shall use reasonable care to prevent a

co-trustee from committing a breach . . . .

Noting that EMA was not "a party in interest" under the

applicable provision of ERISA, the district court reasoned that

the Secretary's alter ego argument would expand the reach of this

provision and thus contravene Mertens' teaching that liability

can be imposed under ERISA only when the statute "explicitly

prohibits the challenged transaction . . . ." Id.

The Secretary moved for reconsideration, arguing that "the

literal text of ERISA" prohibited the transactions at issue in

this case. JA at 343. Specifically, the Secretary contended

that the challenged transactions constituted "indirect"

transactions with Local 98, in violation of sections

406(a)(1)(A), (B), and (D) of ERISA, and that the transactions

constituted the "use" of Plan assets "for the benefit" of Local

98, in violation of section 406(a)(1)(D) of ERISA. Id. at 348-

49. In addition, the Secretary argued that, even if the court

adhered to its previous ruling that the loan to EMA and its

subsequent purchase were not prohibited transactions, the court

would still have to decide: (a) whether all of the trustees had

breached their fiduciary duties under section 404(a) of ERISA and

(b) whether the union trustees had breached their fiduciary

duties and violated sections 406(b)(1) and (2) of ERISA, as

interpreted in Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979),

when, in connection with EMA's purchase of the note for less than

its accounting value, they allegedly "acted on both sides of the

transaction in their joint capacities as Plan trustees, union

officers, and EMA governing board members . . . ." Id. at 349-

50.

The district court denied this motion. After observing that

"it would be appropriate to deny the motion on purely procedural

grounds" because it simply advanced additional arguments not

raised in the Secretary's prior brief concerning Mertens, the

court addressed the merits of the Secretary's argument. Reich v.

Compton, 834 F. Supp. 753, 755-56 (E.D. Pa. 1993) ("Compton II").

Interpreting the Secretary's motion as arguing that the

transactions in question were "indirect party in interest

transactions," the court wrote that "ERISA does not contemplate

transfers to `indirect parties in interest'--the transferee is

either a party in interest under the statute or it is not." Id.

at 756. The court also concluded that the transactions did not

constitute a "direct" benefit to the union because "[n]o cash

`benefits' or `plan assets' ever passed to Local 98." Id.

Likewise, the court held that the questioned transactions did not

constitute an "indirect benefit" to Local 98 because it paid rent

to occupy the building constructed with the loan and because the

union had no obligation to finance EMA's purchase of the note.

Id.

Finally, the court rejected the argument that the union

trustees violated sections 406(b)(1) and (2) of ERISA due to

their participation in EMA's purchase of the note. Attempting to

distinguish Cutaiar, supra, the court observed that "the boards

of the Plan and EMA were not identical" and that the union

trustees did not constitute a majority of or control EMA's board.

Compton II, 834 F. Supp. at 757. The district court did not,

however, address the Secretary's argument that the Plan trustees

had violated their fiduciary duties pursuant to section 404(a) of

ERISA. This appeal followed.

II. ERISA Section 406(a)(1) Claims Against Fiduciaries

A. We first address whether the district court correctly

entered summary judgment against the Secretary with respect to

his claims that the Plan trustees violated sections 406(a)(1)(A),

(B), and (D) of ERISA, 29 U.S.C. §§ 1106(a)(1)(A), (B), and (D).

Congress adopted section 406(a) of ERISA to prevent plans from

engaging in certain types of transactions that had been used in

the past to benefit other parties at the expense of the plans'

participants and beneficiaries. Before ERISA, plans could

generally engage in transactions with related parties so long as

the transactions were "arms-length." Commissioner of Internal

Revenue v. Keystone Consolidated Indus., 113 S. Ct. 2006, 2012

(1993). Unfortunately, this rule was difficult to police and

thus "provided an open door for abuses" by plan trustees. Id.

Congress accordingly enacted section 406(a) with the goal of

creating a categorical bar to certain types of transactions that

were regarded as likely to injure a plan. Id.; S. Rep. No. 93-

383, 93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N.

4890, 4981. Section 406, which is entitled "Prohibited

transactions," provides in pertinent part as follows:

(a) Transactions between a plan and a party in

interest

Except as provided in section 1108 of this title:

(1) A fiduciary with respect to a plan shall not

cause the plan to engage in a transaction, if he knows

or should know that such transaction constitutes a

direct or indirect--

(A) sale or exchange, or leasing, of any

property between the plan and a party in interest;

(B) lending of money or other extension of

credit between the plan and a party in interest;

(C) furnishing of goods, services, or facilities

between the plan and a party in interest;

(D) transfer to, or use by or for the benefit of

a party in interest, of any assets of the plan . .

. .

In considering the Secretary's section 406(a)(1) claims

against the Plan trustees, we will separate our inquiry into two

parts. First, in part II.B. of this opinion, we will consider

whether the transactions at issue in this case may be prohibited

"indirect" transactions between the Plan and a "party in

interest" (i.e., Local 98), in violation of section 406(a)(1)(A),

(B), and (D). Second, we will consider, in part II.C. of this

opinion, whether these transactions may constitute the use of

Plan assets "for the benefit" of Local 98, in contravention of

section 406(a)(1)(D).7

B. "Indirect" Transactions. Subsections (A), (B), and (D)

of section 406(a)(1) of ERISA all reach certain direct and

indirect transactions between a plan and a party in interest.

Subsection (A) applies to the sale, exchange, or lease of

7

. It is questionable whether the Secretary adequately raised

this argument in district court prior to his motion for

reconsideration, but since the district court denied the

Secretary's motion for reconsideration on the merits, we also

reach the merits of this argument.

property between a plan and a party in interest. Subsection (B)

applies to the lending of money or other extension of credit

between a plan and a party in interest. And subsection (D)

reaches, among other transactions, the transfer of plan assets to

a party in interest. In this case, the Secretary argues that the

Plan's loan to EMA and its subsequent sale of the underlying note

to EMA were indirect transactions with Local 98 that violated

these provisions.8 The Secretary argues that indirect

transactions within the meaning of section 406(a)(1) include the

following three categories:

(1) multi-party transactions from a plan through one or

more third-party intermediaries to a party in interest;

(2) two-party transactions that are more complex than a

simple sale, loan, or transfer of assets; and (3)

transactions between a plan and the alter ego of a

party in interest . . . .

Dept. of Labor 9/13/94 Letter-Brief at 2.9 The Secretary admits

that the first two types of transactions are not involved here.10

8

. Specifically, the Secretary asserts that the transactions

constituted either an "indirect . . . sale or exchange . . .

between a plan and a party in interest," in violation of section

406(a)(1)(A); an "indirect . . . lending of money between the

plan and a party in interest," in violation of section

406(a)(1)(B), or an "indirect . . . transfer [of plan assets] to

. . . a party in interest," in violation of section 406(a)(1)(D).

9

. While the Secretary does not assert that this list is

exhaustive, we limit our consideration in this appeal to the

three categories that the Secretary has mentioned.

10

. According to the Secretary, an example of the first type of

transaction prohibited by section 406(a)(1) is a case in which a

third party obtains a loan from a plan and then immediately turns

over those funds to a party in interest. As an example of the

second type of transaction prohibited by section 406(a)(1), the

Secretary points to Keystone Consolidated Indus., 113 S. Ct. at

2013 (1993). There a party in interest transferred property to

the plan in satisfaction of its funding obligations. According

Thus, the question before us is whether, as the Secretary

contends, a transaction between a plan and an alter ego of a

party in interest is, necessarily, an indirect transaction

between the plan and a party in interest.

In advancing this argument, the Secretary begins by

maintaining that his interpretation of section 406(a)(1) is

entitled to deference under the principles set out in Chevron

U.S.A., Inc. v. National Resources Defense Council, Inc., 467

U.S. 837, 843-44 (1984).11 We hold, however, that the

Secretary's alter ego argument is inconsistent with clear

congressional intent, and we therefore refuse to accept it. See

Brown v. Gardner, 115 S. Ct. 552, 556 (1994); Dole v.

Steelworkers, 494 U.S. 26, 42-43 (1990).

The categorical prohibitions contained in section 406(a)(1)

are built upon the concept of a "party in interest," and section

3(14) of ERISA, 29 U.S.C. § 1002(14), provides a long and

detailed definition of this concept. Section 3(14) states:

The term "party in interest" means, as to an employee

benefit plan--

(..continued)

to the Secretary, this type of transaction can be conceptualized

as a contribution of cash to the plan followed by the plan's

purchase of the property with that cash. We agree with the

Secretary that neither of these two types of transactions is at

issue here.

11

. The Secretary's alter ego argument, however, does not appear

to be embodied in any regulation or enforcement guideline.

Moreover, it is not clear that the Secretary advanced this

interpretation in any prior litigation. In light of our

conclusion that the alter ego theory is inconsistent with the

relevant provisions of ERISA, we need not determine the degree of

deference, if any, that would otherwise be warranted under these

circumstances. See Martin v. OSHRC, 499 U.S. 144, 156-57 (1991).

(A) any fiduciary (including, but not limited

to, any administrator, officer, trustee, or

custodian), counsel, or employee of such employee

benefit plan;

(B) a person providing services to such plan;

(C) an employer any of whose employees are

covered by such plan;

(D) an employee organization any of whose

members are covered by such plan;

(E) an owner, direct or indirect, of 50 percent

or more of--

(i) the combined voting power of all

classes of stock entitled to vote or the

total value of shares of all classes of stock

of a corporation,

(ii) the capital interest or the profits

interest of a partnership, or

(iii) the beneficial interest of a trust or

unincorporated enterprise, which is an

employer or an employee organization

described in subparagraph (C) or (D);

(F) a relative (as defined in paragraph (15) of

any individual described in subparagraph (A), (B),

(C), or (E);

(G) a corporation, partnership, or trust or

estate of which (or in which) 50 percent or more

of --

(i) the combined voting power of classes of

stock entitled to vote or the total value of

shares of all classes of stock of such

corporation,

(ii) the capital interest or profits

interest of such partnership, or

(iii) the beneficial interest of such trust

or estate,

is owned directly or indirectly, or held by

persons described in subparagraph (A), (B), (C),

(D), or (E);

(H) an employee, officer, director (or

individual having powers or responsibilities

similar to those of officers or directors), or a

10 percent or more shareholder directly or

indirectly, of a person described in subparagraph

(B), (C), (D), (E), or (G), or of the employee

benefit plan; or

(I) a 10 percent or more (directly or directly

in capital or profits) partner joint venturer of a

person described in subparagraph (B), (C), (D),

(E), or (G).

The Secretary, after consultation and coordination with

the Secretary of Treasury, may by regulation prescribe

a percentage lower than 50 percent for subparagraph (E)

and (G) and lower than 10 percent for subparagraph (H)

or (I). The Secretary my prescribe regulations for

determining the ownership (direct or indirect) of

profits and beneficial interests, and the manner in

which indirect stockholdings are taken into account.

Any person who is a party in interest with respect to a

plan to which a trust described in section 501(c)(22)

of Title 26 is permitted to make payments under section

1403 of this title shall be treated as a party in

interest with respect to such trust.

The Secretary's interpretation would in effect add an

additional category, i.e., an alter ego of a party in interest,

to this seemingly comprehensive list. Moreover, this additional

category would substantially overlap some of the categories

specifically listed in this provision. See, e.g., 29 U.S.C. §§

1002(14) (E) and (G). We therefore agree with the district court

that the Secretary's interpretation would upset the carefully

crafted and detailed legislative scheme reflected in section

3(14). See Compton I, 834 F. Supp. at 746-47, 49. See also

Mertens, 113 S. Ct. at 2067; Massachusetts Mutual Life Ins. Co.

v. Russell, 473 U.S. 134, 146-47 (1988). Congress could have

easily provided in section 3(14) that an "alter ego" of a party

in interest is also a party in interest, but Congress did not do

so. See Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80, 83

(5th Cir. 1990), cert. denied, 498 U.S. 1108 (1991). As the

Supreme Court stated in Mertens, 113 S. Ct. at 2071-72, ERISA is

"an enormously detailed statute that resolved innumerable

disputes between powerful competing interests," and courts should

not "attempt to adjust the balance . . . Congress has struck."

The Secretary's interpretation appears to rest on the false

premise that there is a uniform body of law that can be employed

in all contexts for the purpose of determining whether one entity

or person is another's alter ego.12 In reality, however, the

term alter ego is simply shorthand for the conclusion that one

party should be held liable in a particular context for the

transgressions of another closely related party. Consequently,

12

. Indeed, the Secretary cannot even claim that his

interpretation is consistent with the common law of trusts upon

which Congress engrafted ERISA. See Firestone Tire and Rubber

Co. v. Bruch, 489 U.S. 101, 110 (1989). The Secretary can point

to no body of trust law evidencing his proposed alter ego

principles. This is not surprising given that the alter ego

doctrine originally developed in the context of corporate law.

The common law of trusts did not include per se prohibitions

against a trustee dealing with a related party, and certainly did

not include per se prohibitions against a trustee dealing with an

alter ego of a related party. Instead, a trustee's sale of trust

property to a related party could only be set aside if it were

shown that the trustee was improperly influenced by the

relationship and received an unfair price. See Keystone

Consolidated Indus., 113 S. Ct. at 2012; Restatement (Second) of

Trust § 170 cmt. e (1957); 2A Austin W. Scott & William F.

Fratcher, Law of Trusts § 170.6 (4th ed. 1987).

the principles governing alter ego liability vary depending on

the legal context in which the determination takes place. For

example, the factors supporting the imposition of alter ego

liability in labor law differ from those employed in the

corporate law setting. Compare Stardyne, Inc. v. NLRB, 41 F.3d

141, 151 (3d Cir. 1994) (explaining that, for the purposes of the

National Labor Relations Act, factors relevant for determining

whether two employers are alter egos include whether they share

substantially identical management, business purpose, operation,

equipment, customers, supervision, and ownership) with Culberth

v. Amosa Ltd., 898 F.3d 13, 14 (3d Cir. 1990) (explaining that at

common law two companies will be considered alter egos of one

another only "where the controlling corporation wholly ignored

the separate status of the controlled corporation and controlled

its affairs [so] that its separate existence was a mere sham");

see also Berkey v. Third Ave. Ry., 155 N.E. 58, 61 (1927)

("Dominion may be so complete, interference so obtrusive, that by

the general rule of agency the parent will be a principal and the

subsidiary an agent. Where control is less than this, we are

remitted to the tests of honesty and justice."). Thus, if alter

ego analysis were to be required under sections 3(14) and

406(a)(1) of ERISA, the Secretary and the courts would have to

decide, presumably based on their understanding of the "purpose"

or "policy" underlying the relevant provisions of ERISA, under

what circumstances a party related to a party in interest should

be subjected to the same prohibitions as a party in interest.

Congress itself, however, made this very determination when it

adopted the definition of a party in interest that is set out in

section 3(14).

For these reasons, we cannot accept the Secretary's alter ego

argument, and we conclude that section 406(a)(1)'s prohibitions

against certain indirect transactions between a plan and a party

in interest do not automatically prohibit transactions between a

plan and an alter ego of a party in interest. We emphasize the

narrowness of our holding. While we reject the Secretary's alter

ego argument, we do not reach any other possible interpretations

of the concept of an "indirect" transaction with a party in

interest.

C. Use of Plan Assets for the Benefit of a Party in

Interest. In addition to prohibiting the transfer of plan assets

to a party in interest, section 406(a)(1)(D) also provides as

follows:

A fiduciary with respect to a plan shall not cause the

plan to engage in a transaction, if he knows or should

know that such transaction constitutes . . . a direct

or indirect . . . use . . . for the benefit of a party

in interest, of any assets of the plan.

29 U.S.C. § 1106(a)(1)(D) (emphasis added). As we read this

language, it provides that a fiduciary breach occurs when the

following five elements are satisfied: (1) the person or entity

is "[a] fiduciary with respect to [the] plan"; (2) the fiduciary

"cause[s]" the plan to engage in the transaction at issue; (3)

the transaction "use[s]" plan assets; (4) the transaction's use

of the assets is "for the benefit of" a party in interest; and

(5) the fiduciary "knows or should know" that elements three and

four are satisfied.

In this case, it is clear that summary judgment in favor of

the defendants cannot be sustained based on elements one, two, or

three. With respect to the first element, it is undisputed that

defendants Compton, McHugh, Nielsen, Hammerschmidt, and Kay were

"fiduciaries," and we think it is clear, as the district court

held, that Fidelity was a "fiduciary" as well.13 As for element

13

. Section 3(21)(A) of ERISA, 29 U.S.C. § 1002(21)(A), provides

that, subject to an exception that is not applicable here:

[A] person is a fiduciary with respect to a plan to the

extent (i) he exercises any discretionary control

respecting management of such plan or exercises any

authority or control respecting management or

disposition of its assets, (ii) he renders investment

advice for a fee or other compensation, direct or

indirect, with respect to any moneys or property of

such plan, or has authority or responsibility to do so,

or (iii) he has any discretionary authority or

discretionary responsibility in the administration of

such plan. . . .

Fidelity claims that it was not a fiduciary because it

had no discretionary authority over the Plan's assets and was

only a "depository" for the mortgage note. However, Fidelity

clearly had, at the least, "authority respecting the management"

of the Plan's assets. The 1980 Amendment to the Plan's trust

agreement granted Fidelity "exclusive authority and discretion in

the investment of the Fund . . . ." JA at 342. The minutes from

the meetings of the Plan's Board of Trustees reveal that Fidelity

had control over the Plan's investments. Id. at 55, 63, 83, 92-

93. Likewise, Fidelity's involvement in the sale of the note to

EMA clearly indicates that it "render[ed] investment advice" to

the Plan. Fidelity concedes that its chief investment officer

initially advised the Plan trustees that the sale of this asset

would be "imprudent." Id. at 83. Thus, we agree with the

district court and conclude that Fidelity was a fiduciary with

respect to the Plan. Compton I, 834 F. Supp. at 751 n.7. See

Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1219 (2d

Cir. 1987) (finding discretionary investment manager to be an

ERISA fiduciary).

two, if the summary judgment record does not establish that the

defendants "cause[d]" the Plan to engage in the challenged

transaction, the record surely does not require the contrary

conclusion. And with respect to element three, there can be no

reasonable dispute that the transactions involved the "use" of

Plan assets. The critical elements for present purposes are

therefore elements four and five.

Element four, as previously noted, requires that the

challenged transaction must constitute the use of plan assets

"for the benefit of" a party in interest. The defendants contend

that this element requires proof of a subjective intent to

benefit a party in interest, whereas the Secretary maintains that

such subjective intent is not necessary. Rather, the Secretary

argues, all that need be proven is that the fiduciary should have

known that the transaction would result in a benefit to a party

in interest that was more than "minimal, incidental, or

fortuitous." Dept. of Labor 9/13/94 Letter-Brief at 12.

We conclude that element four requires proof of a subjective

intent to benefit a party in interest. This interpretation is

strongly supported, if not required, by the statutory phrase "for

the benefit." In ordinary usage, if something is done "for the

benefit of" x, it is done for the purpose of benefitting x. If

something is not done for the purpose of benefitting x but has

that unintended effect, it cannot be said that it was done "for

the benefit of" x. (It would be self-contradictory if someone

said: "I did that for the benefit of x, but I did not want to

benefit him.").

In addition, if element four did not require a subjective

intent to benefit a party in interest, section 406(a)(1)(D) would

produce unreasonable consequences that we feel confident Congress

could not have wanted. See Commissioner v. Brown, 380 U.S. 563,

571 (1965). If "for the benefit of" is read to mean "having the

effect of benefitting," section 406(a)(1)(D) would appear to

prohibit a fiduciary from causing a plan to engage in any

transaction that he or she should know would result in any form

or degree of benefit for any party in interest, even if the

transaction would be highly advantageous for the plan and the

benefit for the party in interest would be unintended, indirect,

and slight.

Apparently recognizing this problem, the Secretary argues

that the benefit to the party in interest must be more than

"minimal, incidental, or fortuitous." Section 406(a)(1),

however, contains no language that even hints at such a

requirement. Moreover, this requirement lacks conceptual

clarity. The concept of a more than "minimal" benefit is

nebulous, and although the Secretary insists that section

406(a)(1) does not require proof of a subjective intent, the

terms "incidental" and "fortuitous" both suggest a subjective

element. "Incidental" means, among other things, "occurring

without intention or calculation." Webster's Third New

International Dictionary 1143 (1971). "Fortuitous" means, among

other things, "occurring without deliberate intention." Id. at

895.

We thus find strong support for a subjective intent

requirement in the language of section 406(a)(1)(D), and finding

no contrary evidence in the legislative history,14 we conclude

that element four requires proof of a subjective intent to

benefit a party in interest.

Precisely who must be shown to have this intent is not

entirely clear from the statutory language. Since the statutory

language suggests that the transaction must be "for the benefit"

of a party in interest, it appears that the subjective intent to

benefit a party in interest must be harbored by one or more of

those involved in the transaction. In this appeal, however, we

will not attempt to go further and specify precisely which

persons involved in a transaction must be shown to have this

intent.

14

. On the contrary, we also note that the legislative history

includes two examples of transactions that are prohibited by

section 406(a)(1)(D) and both involve transactions whose purpose

was to benefit a party in interest. H.R. Conf. Rep. No. 93-1280,

93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 5075,

5089.

Several Department of Labor opinion letters on which the

Secretary has relied also suggest that the "for benefit of"

language requires proof of subjective intent. According to the

Secretary, "[t]he common theme in those opinions is that a

complex transaction will violate Section 406(a)(1)(D) if it is .

. . part of an agreement, arrangement or understanding in which a

fiduciary caused plan assets to be used in a manner designed to

benefit a party in interest . . . ." Dept. of Labor 9/13/94

Letter-Brief at 14 (emphasis added) (citing ERISA Advisory

Opinion No. 93-33A, 1993 ERISA LEXIS 33, at *5 (Dec. 16, 1993);

No. 89-18A, 1989 ERISA LEXIS 17, at *6 (Aug. 13, 1989); No. 85-

33A, 1985 ERISA LEXIS 11, at *9 (Oct. 1, 1985)).

Element five requires proof that the fiduciary in question

either knew or reasonably should have known that the transaction

constituted the use of plan assets "for the benefit" of a party

in interest. Thus, element five does not require proof of the

fiduciary's subjective intent.

Applying this understanding of elements four and five to the

record in the case before us, we hold that summary judgment was

not properly granted in favor of the defendants on the basis that

the two transactions did not violate Section 406(a)(1)(D) of

ERISA. Based on the record, a reasonable factfinder could

conclude that all of those involved in the two challenged

transactions subjectively intended to benefit Local 98. There is

some direct evidence of such an intent: trustee Compton stated

that the Plan trustees refused to sue EMA to recover the balance

of the loan because "if [they] filed suit against [EMA] [they]

would be really filing suit against members of the union . . . ."

JA at 467. Furthermore, there was strong circumstantial evidence

of an intent to benefit the Union. A reasonable factfinder could

easily find that the two transactions had the effect of

benefitting the Union, and a reasonable factfinder could infer

that the trustees intended to bring about this effect.

Although the district court, in denying the Secretary's

motion for reconsideration, suggested that the Union did not

benefit from the loan to EMA because the Union paid rent to EMA,

we believe that a factfinder could reasonably come to a contrary

conclusion.15 There was no formal lease agreement between EMA

and Local 98, and EMA admitted that it was not trying to make any

money from the lease. Compton II, 834 F. Supp. at 749 n.6.

Furthermore, Local 98 paid rent only when EMA exhausted its cash

on hand. Id. Thus, the "rent" that Local 98 was charged was

15

. The district court's apparent conclusion that Local 98 did

not benefit from these transactions is puzzling given that it

found the following facts to be undisputed:

As of June 30, 1984, EMA owed Local 98 $230, 290.00.

This debt consisted primarily of salary expenses that

[the Union] paid to one or more of its employees who

performed maintenance work at the 1719-29 Spring Garden

Street building. Of this amount, Local 98 charged EMA

$17,293.00 in maintenance salary expenses during the

year ending June 30, 1984. The arrangement between

Local 98 and EMA (which began prior to 1984) provided

that EMA would not pay Local 98 the debt, which would

be added to the intercompany payable account. Local 98

never demanded payment of the debt because it viewed

transactions between itself and EMA as related party

transactions. The reason the amount of intercompany

payables to EMA and intercompany receivables to Local

98 carried on the financial books "grow[s] each year is

because the amount that's charged to salary expenses,

just was never paid by EMA to Local 98, so it's a

liability account that just keeps increasing each year

because no payments are ever made, or if they are made,

they're very minor." Salary and other expenses by

Local 98 for EMA continued to accumulate over the

years. For example, "[a]s of June 30, 1987, EMA owed

Local 98 $316,328.00 consisting primarily of salary and

other expenses paid by Local 98 for EMA" that had

accumulated over the years. During the year ending

December 31, 1988, EMA owed Local 98 $559,918.00.

According to EMA's accountant, the debt was forgiven by

Local 98. Local 98 and EMA had an established practice

of not signing loan documents to record their financial

transactions; Local 98's policy is to not charge EMA

interests on advances and transfers.

Compton I, 834 F. Supp. at 749 n.6.

only the amount necessary to cover EMA's financial obligations,

and the record is clear that Local 98 historically treated EMA's

obligations as its own. Local 98 consistently forwarded EMA

money to cover salary and operating expenses during this time

period and forgave repayment of these obligations. Id. Nor was

EMA charged interest on these loans. Id. Indeed, as noted,

Local 98 provided EMA with the funds necessary to purchase the

note held by the Plan. Id. Thus, a reasonable factfinder could

conclude that Local 98 benefitted from the continuation of EMA's

long-term below market mortgage loan because that loan reduced

EMA's cash outflow, an outflow for which the union took

responsibility. Likewise, a reasonable factfinder could conclude

that Local 98 was functionally responsible for EMA's debt and

that, Local 98 therefore benefitted from the repurchase of the

note for less than its accounting value.

Thus, we hold that the district court should not have granted

summary judgment in favor of the defendants on the basis that the

two challenged transactions were not prohibited transactions

within the meaning of section 406(a)(1)(D). On remand, the

district court will need to resolve the two disputed elements of

the Secretary's section 406(a)(1)(D) claim: whether a party to

the transactions had the subjective intent to benefit a party in

interest and whether any of the trustees knew of or should have

known that the transactions were intended for the benefit of a

party in interest.

III. ERISA Section 502(a)(5) Claims

In this section, we consider the Secretary's claims against

the nonfiduciary defendants (EMA and Local 98) pursuant to

section 502(a)(5) of ERISA, 29 U.S.C. § 1132(a)(5). The

Secretary advances two separate theories: first, that section

502(a)(5) authorizes him to sue nonfiduciaries who knowingly

participate in breaches of fiduciary duty by fiduciaries16 and,

second, that section 502(a)(5) authorizes him to sue

nonfiduciaries who participate in transactions prohibited by

section 406(a)(1). We reject the first theory but accept the

latter.

A. Section 502(a) of ERISA provides as follows:

A civil action may be brought--

(1) by a participant or beneficiary--

(A) for the relief provided in subsection (c)

of this section, or

(B) to recover benefits due to him under the

terms of his plan, to enforce his rights under the

terms of the plan, or to clarify his rights to

future benefits under the terms of the plan;

16

. Several ERISA provisions impose a duty on plan fiduciaries.

As previously discussed, section 406(a)(1), 29 U.S.C. §

1106(a)(1), prohibits fiduciaries from causing the plan to engage

in certain prohibited transactions. Likewise, section 406(b) of

ERISA, 29 U.S.C. § 1106(b), prohibits self-dealing by

fiduciaries. Section 404(a)(1), 29 U.S.C. § 1104(a)(1), imposes

a duty of loyalty and prudence on fiduciaries. In addition,

section 409 of ERISA, 29 U.S.C. § 1109, imposes liability for any

person who breaches a fiduciary duty. As discussed below, the

Secretary alleges that EMA and Local 98 were knowing participants

in the Plan trustees' breach of these duties and therefore that

EMA and Local 98 are liable under section 502(a)(5). Of course,

in order to hold EMA and Local 98 liable under this theory, the

Secretary would first need to prove a breach of duty by a

fiduciary.

(2) by the Secretary, or by a participant,

beneficiary or fiduciary for appropriate relief

under section 1109 of this title;

(3) by a participant, beneficiary, or fiduciary

(A) to enjoin any act or practice which violates

any provisions of this subchapter, or (B) to

obtain other appropriate equitable relief (i) to

redress such violation or (ii) to enforce any

provision of this subchapter;

(4) by the Secretary, or by a participant, or

beneficiary for appropriate relief in the case of

a violation of 1025(c) of this title;

(5) except as otherwise provided in subsection

(b) of this section, by the Secretary (A) to

enjoin any act or practice which violates any

provisions of this subchapter, or (B) to obtain

other appropriate equitable relief (i) to redress

such violation or (ii) to enforce any provision of

this subchapter; or

(6) by the Secretary to collect any civil

penalty under subsection (c)(2) or (i) or (l) of

this section.

Although the Supreme Court has not directly discussed the

scope of section 502(a)(5), its discussion of section 502(a)(3)

in Mertens provides considerable guidance due to the close

relationship between those two provisions. In Mertens, former

employees of the Kaiser Steel Corporation ("Kaiser") who

participated in Kaiser's pension plan sued the plan's actuary in

addition to the plan's trustees. 113 S. Ct. at 2065. Claiming

that the services provided by the actuary to the pension plan had

been deficient and had caused the plan to be inadequately funded,

the pensioners sought to hold the actuary liable for the "all the

losses that their plan sustained as a result of the alleged

breach of fiduciary duties" by the plan's trustees. Id. at 2068.

The pensioners conceded that the actuary was not a fiduciary

within the meaning of ERISA. Id. at 2067. However, relying on

section 502(a)(3) of ERISA, which allows plan participants to

"obtain other appropriate equitable relief to redress" violations

of ERISA, the pensioners nevertheless maintained that the actuary

could be held liable for his "knowing participation in the breach

of fiduciary duty by the Kaiser plan's fiduciaries." Id.

Although the only issue squarely before the Supreme Court in

Mertens was whether the remedy sought by the pensioners

constituted "appropriate equitable relief" as opposed to money

damages, the Court's opinion discussed the antecedent question of

whether section 502(a)(3) creates a cause of action against

nonfiduciaries for knowing participation in a fiduciary's breach

of fiduciary duty. Id. at 2067. The Court stated:

[N]o provision explicitly requires [nonfiduciaries] to

avoid participation (knowing or unknowing) in a

fiduciary's breach of fiduciary duty. It is unlikely,

moreover, that this was an oversight, since ERISA does

explicitly impose "knowing participation" liability on

cofiduciaries. See section 405(a), 29 U.S.C. §

1105(a). That limitation appears all the more

deliberate in light of the fact that "knowing

participation" liability on the part of both cotrustees

and third persons was well established under the common

law of trusts. In Russell we emphasized our

unwillingness to infer causes of action in the ERISA

context, since that statute's carefully crafted and

detailed enforcement scheme provides "strong evidence

that Congress did not intend to authorize other

remedies that it simply forgot to incorporate

expressly."

Id. (quoting Russell, 473 U.S. at 146-47) (citations omitted)

(emphasis in original). Thus, the Court expressed considerable

doubt that section 502(a)(3) authorizes suits against

nonfiduciaries who participate in fiduciary breaches.

Relying on this discussion, EMA and Local 98 argue that the

Secretary cannot proceed against them on the theory that they

knowingly participated in a fiduciary's breach. On the other

hand, the Secretary urges that we disregard Mertens' discussion

of this issue as "mere dicta." The Secretary contends that the

language of section 502(a)(5) does not require that the ERISA

violation be committed by the person against whom relief is

sought. Rather, the Secretary argues that he may maintain a

cause of action under section 502(a)(5) so long as the relief

sought is "appropriate" for the purpose of "redressing" a

violation. Thus, the Secretary asserts that he does not have to

show that EMA and Local 98 actually violated any ERISA provision,

but only that they were "knowing participants" in a fiduciary's

violation and that the relief sought is appropriate for

redressing that violation. The Secretary further contends that

any ambiguity should be resolved in his favor since pre-Mertens

case law generally recognized ERISA claims against nonfiduciaries

who participated in a fiduciary's breach.17 In the event that we

17

. See Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d

270, 279-81 (2d Cir. 1992); Whitfield v. Lindermann, 853 F.2d

1298, 1302-03 (5th Cir. 1988), cert. denied, 450 U.S. 1089

(1989); Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir. 1982);

Thornton v. Evans, 692 F.2d 1064, 1078 (7th Cir. 1982); Fink v.

National Sav. and Trust Co., 772 F.2d 951, 958 (D.C.Cir. 1985)

(dicta). Cf. Mertens v. Hewitt Assocs., 948 F.2d 607, 611 (9th

Cir. 1991), aff'd on other grounds, 113 S. Ct. 2063 (1993)

(rejecting "knowing participation" liability); Useden v. Acker,

947 F.2d 1563, 1581 (11th Cir.), cert. denied, 113 S. Ct. 2927

(1993) (same).

do not interpret the language of section 502(a)(5) as creating

such a cause of action against nonfiduciaries, the Secretary

urges us to recognize such a cause of action by utilizing our

authority to develop federal common law. The Secretary points

out that the Supreme Court has authorized the federal courts to

develop federal common law under ERISA by drawing on the

traditional law of trusts, see Firestone Tire and Rubber Co. v.

Bruch, 489 U.S. 101, 110 (1984), and the Secretary notes that the

common law of trusts imposes liability on nonfiduciaries who

knowingly participate in a fiduciary's breach of duty, see 3

Austin W. Scott & William F. Fratcher, Law of Trusts § 224.1, at

404 (4th ed. 1988).

The Secretary's argument has been rejected by the courts of

appeals that have addressed it after Mertens. In Reich v. Rowe,

20 F.3d 25 (1st Cir. 1994), the Secretary sued several corporate

defendants involved in the failed OMNI Medical Health and Welfare

Trust. Id. at 26. OMNI provided group medical, dental, and life

insurance to business employers in Massachusetts. Id. The

Secretary contended that OMNI's fiduciaries breached their duties

and that OMNI's financial consultants "knowingly participated" in

this breach. Id. at 26-27. The district court dismissed the

Secretary's claim against the financial consultants under Fed. R.

Civ. P. 12(b)(6), id. at 28, and the First Circuit affirmed, id.

at 35.

Despite the Secretary's urgings, the Rowe court found the

Supreme Court's Mertens dicta to be persuasive. Id. at 30-31.

Interpreting section 502(a)(5) "to authorize actions only against

those who commit violations of ERISA or who are engaged in an

`act or practice' proscribed by the statute," id. at 29, the Rowe

court concluded that this provision does not apply to a

nonfiduciary's participation in a fiduciary breach because such

participation "is not an `act or practice' which violates ERISA,"

id. at 30. The court further rejected the Secretary's argument

that it should apply the court's broad equitable power and the

court's federal common law-making authority under ERISA to read

section 502(a)(5) expansively to reach such conduct. The court

noted that "Congress had enacted a comprehensive legislative

scheme including an integrated system of procedures for

enforcement," id. at 31-32 (quoting Russell, 473 U.S. at 147),

and that it could have easily provided for a claim based on

knowing participation in a fiduciary breach, id. at 31. The

court wrote:

All things considered, judicial remedies for

nonfiduciary participation in a fiduciary breach fall

within the line of cases where Congress deliberately

omitted a potential cause of action rather than the

cases where Congress has invited the courts to engage

in interstitial lawmaking.

Id. at 31. Thus, the court concluded that the Secretary could

not sue "a professional service provider [that] assist[ed] in a

fiduciary breach but receive[d] no ill-gotten plan assets . . .

." Id. at 35.

Similarly, in Reich v. Continental Casualty Co., 33 F.3d 754,

757 (7th Cir. 1994), cert. denied, 115 S. Ct. 1104 (1995), the

Seventh Circuit rejected the Secretary's argument that a

nonfiduciary may be held liable for knowingly participating in a

fiduciary breach. The court followed the Mertens dicta, stating

that when the Supreme Court's view of an issue is embodied in

a recent dictum that considers all the relevant

considerations and adumbrates an unmistakable

conclusion, it would be reckless to think the Court

likely to adopt a contrary view in the near future. In

such a case the dictum provides the best, though not an

infallible, guide to what the law is, and it will

ordinarily be the duty of a lower court to be guided by

it.

Id.18

In light of the Supreme Court's discussion in Mertens and

subsequent decisions of the First and Seventh Circuits, we reject

the Secretary's argument that he may sue a nonfiduciary under

section 502(a)(5) for knowingly participating in a fiduciary

breach. Contrary to the Secretary's urging, we are not prepared

to disregard the Supreme Court's discussion of this issue in

Mertens. Moreover, we see little significance in the fact that

the Supreme Court in Mertens was discussing section 502(a)(3) as

opposed section 502(a)(5). As the Court noted in Mertens, the

18

. Buckley Dement, Inc. v. Travellers Plan Administrators of

Illinois, Inc., 39 F.3d 784 (7th Cir. 1994) is also instructive.

There, the sponsor of a health care plan who was also its

administrator and fiduciary sued a third-party claims

administrator. Id. at 785-86. The sponsor argued that the

administrator caused the plan to incur huge losses by failing to

process a participant's medical claims before the plan's excess

health insurance coverage policy lapsed. Id. Because the

administrator was not a fiduciary, the sponsor asked the court to

infer a federal common-law right to relief under ERISA. Id. at

789. Relying on Mertens' dicta, the court declined to do so,

holding that it was "without authority to entertain a claim for

relief against a nonfiduciary based on [the] fashioning of a

federal common-law remedy." Id. at 790. Accord, Colleton

Regional Hosp. v. MPS Medical Review Sys., Inc., 866 F. Supp. 896

(D.S.C. 1994).

language shared by both provisions "should be deemed to have the

same meaning," 113 S. Ct. at 2070, and we therefore believe that

the analysis of the one provision should apply equally to the

other with respect to the question at issue. We therefore hold

that section 502(a)(5) does not authorize suits by the Secretary

against nonfiduciaries charged solely with participating in a

fiduciary breach.19

19

. The Secretary makes the additional argument that section

502(l) of ERISA, 29 U.S.C. § 1132(l), indicates that Congress

intended for section 502(a)(5) to provide a remedy against

nonfiduciaries who participate in a fiduciary breach. Section

502(l) provides in relevant part:

(1) in the case of--

(A) any breach of fiduciary responsibility under

(or other violation of) part 4 by a fiduciary , or

(B) any knowing participation in such a breach

or violation by any other persons,

the Secretary shall assess a civil penalty against such

a fiduciary or other person in an amount equal to 20

percent of the applicable recovery amount . . . .

The Secretary contends that unless section 502(a)(5) provides a

remedy for nonfiduciary violations of a fiduciary breach, the

term "other persons" in section 502(l) would be rendered a

nullity. We disagree.

A similar contention was advanced in Mertens. There,

it was argued that section 502(l) demonstrated Congress intended

to authorize the recovery of money damages for nonfiduciary

participation in a fiduciary breach. The Supreme Court, however,

rejected this argument, explaining:

[T]he "equitable relief" awardable under section

502(a)(5) includes restitution of ill-gotten plan

assets or profits, providing an "applicable recovery

amount' to use to calculate the penalty, . . . and even

assuming nonfiduciaries are not liable at all for

knowing participation in a fiduciary's breach of duty,

see supra, at 2067-2068, cofiduciaries expressly are,

B. We now turn to the Secretary's argument that section

502(a)(5) authorizes him to sue a nonfiduciary who participates

in a transaction prohibited by section 406(a)(1). In response to

this argument, EMA and Local 98 seem to suggest that the

Secretary cannot obtain relief from them even if the transactions

at issue are found to be prohibited under section 406(a)(1) of

ERISA.20 Section 406(a)(1) provides that "[a] fiduciary with

(..continued)

see section 405, so there are some "other person[s]"

than fiduciaries-in-breach liable under section

502(l)(1)(B).

113 S. Ct. at 2071.

We also agree with the discussion of this argument in

Rowe. The Rowe court noted that Secretary was relying on a

provision that provides civil penalties in order to infer a cause

of action from a provision that only provides equitable relief.

20 F.3d at 34. Thus, the court explained:

[I]t is difficult to imagine any case where knowing

participation in a fiduciary breach by a nonfiduciary

would occasion the type of remedy (restitution awards)

that would trigger [section 502(l)(1)(B)] without the

nonfiduciary having engaged in a prohibited transaction

under [section 406] or otherwise having obtained some

ill-gotten plan assets in a manner not covered by the

prohibited transaction section. We conclude,

therefore, that [section 502(l)] makes little sense as

independently authorizing equitable relief against

nonfiduciaries . . . who allegedly participated in a

fiduciary breach but did not engage in an act

prohibited by the statute or otherwise obtain plan

assets, when it can never be used for such relief.

Id. at 34-35 (footnote omitted).

20

. This argument is not available to the Plan trustees as they

are all fiduciaries within the meaning of ERISA. As noted, ERISA

imposes a number of substantive duties on plan fiduciaries, see

supra note 16, and sections 502(a)(3) and (5) of ERISA, 29 U.S.C.

§§ 1132(a)(3) and (5), clearly authorize the Secretary to obtain

relief against fiduciaries who have breached their duties. Thus,

the Secretary can sue any fiduciary who breached its duty because

respect to a plan shall not cause the plan to engage in a

[prohibited] transaction . . . ." 29 U.S.C. § 1106(a)(1)

(emphasis added). Since this language appears on its face to

apply only to fiduciaries and not to other parties who

participate in prohibited transactions, EMA and Local 98 maintain

that the Secretary is attempting to make them liable for a

fiduciary's breach of duty and that such a theory was rejected in

Mertens.

While this argument is not without force, we are ultimately

persuaded that it is based on an unduly narrow interpretation of

sections 406(a)(1) and 502 (a)(5). First, we note that Mertens

itself seemed to imply that section 406(a) imposes duties on

nonfiduciaries who participate in prohibited transactions. After

observing that "ERISA contains various provisions that can be

read as imposing obligations upon nonfiduciaries," 113 S. Ct. at

2067, the Court cited section 406(a), 29 U.S.C. § 1106(a), as an

example and stated that this provision prohibits a nonfiduciary

party in interest from "offer[ing] his services" to a plan or

"engag[ing] in certain other transactions with the plan," id. at

2067 n.4.

Second, the legislative history of ERISA appears to

contradict the position advocated by EMA and Local 98. The

Senate Report stated:

The bill also makes a party in interest who

participates in a prohibited transaction . . .

personally liable for any losses sustained by the plan

(..continued)

of its participation in a prohibited transaction (or who breached

any other duty).

and for any profits made through using plan assets. . .

. This liability is appropriate because in these

situations often the party in interest is a major

beneficiary of a fiduciary breach . . . .

S. Rep. No. 93-383, 93rd Cong., 2d Sess. (1974), reprinted

in 1974 U.S.C.A.A.N. 4890, 4989.

Third, EMA's and Local 98's position is inconsistent with the

analysis of two other courts of appeals. In Rowe, the First

Circuit, while refusing to accept the argument that the Secretary

could sue a nonfiduciary under section 502(a)(5) for knowingly

participating in a frivolous breach, suggested that the Secretary

could maintain a suit under that provision against a party in

interest who participated in a transaction prohibited under

section 406(a)(1). The court observed:

Congress proscribed several "acts or practices" in

ERISA's substantive provisions that involve

nonfiduciaries . . . . See Mertens, ____ U.S. at ____

& n.4, 113 S. Ct. at 2067 & n.4. For example, 29

U.S.C. § 1106(a)(1) prohibits certain transactions

between "parties in interest," see supra, note 2, and

ERISA plans . . . .

20 F.3d at 31 (footnote omitted). The court then added:

The fact that [section 406] imposes the duty to refrain

from prohibited transactions on fiduciaries and not on

the parties in interest is irrelevant for our purposes

because [section 502(a)(5)] reaches "acts or practices"

that violate ERISA and prohibited transactions violate

[section 406]. Although fiduciary breaches also

violate ERISA, nonfiduciaries cannot, by definition,

engage in the act or practice breaching a fiduciary

duty. Nonfiduciaries can, however, engage in the act

or practice of transacting with an ERISA plan.

Id. at 31, n.7.

Similarly, in Nieto v. Ecker, 845 F.2d 868 (9th Cir. 1988),

the court held that a suit seeking appropriate equitable relief

could be brought under section 502(a)(3)21 against a party in

interest who had participated in a transaction prohibited under

section 406(a). The court explained:

It is true that section 406(a) only prohibits

certain transactions by fiduciaries, and does not

expressly bar parties in interest from engaging in

these transactions. However, section 502(a)(3)'s

language expressly grants equitable power to redress

violations of ERISA; prohibited transactions plainly

fall within this category. Courts may find it

difficult or impossible to undo such illegal

transactions unless they have jurisdiction over all

parties who allegedly participated in them. In

contrast to section 409(a), section 502(a)(3) is not

limited to fiduciaries, and there is no reason to

exempt parties in interest from this remedial provision

when the engage in transactions prohibited by [ERISA].

Id. at 873-74.22

21

. Nieto involved the construction of section 502(a)(3).

However, as explained above, see supra page 34, we see no reason

to distinguish between section 502(a)(3) and 502(a)(5) on this

issue.

22

. In light of this analysis, EMA's and Local 98's reliance on

Brock v. Citizens Bank of Clovis, 841 F.2d 344 (10th Cir.), cert.

denied, 488 U.S. 829 (1988), is misplaced. In Citizens Bank, the

Secretary brought a suit against an ERISA trustee for violating

section 406(a)(1). 841 F.2d at 345-46. The ERISA trustee, a

bank, had loaned plan funds to individuals who had used the money

to pay off interim financing that they had received from the

bank. Id. The Secretary did not allege that this transaction

violated a specific provision of ERISA but argued that ERISA

demanded "a strict prohibition of any dealing in which doubt may

be cast upon the loyalty of the fiduciary." Id. at 347. Because

the Secretary was unable to allege the violation of a specific

provision of ERISA, the Tenth Circuit upheld the dismissal of his

claim. Id. The present case, however, is clearly

distinguishable because here the Secretary has alleged that EMA

and Local 98 violated a specific substantive provision of ERISA,

section 406(a)(1), that regulates the conduct of nonfiduciaries.

Fourth, we agree with the Secretary that the parallel tax

provisions support his position that nonfiduciaries may be held

liable for their participation in prohibited transactions.

Section 4975 of the Internal Revenue Code, 26 U.S.C. § 4975,

imposes taxes on certain persons who participate in prohibited

transactions. Section 4975(h) provides that the Secretary of

Treasury is required to notify the Secretary of Labor before

sending a notice of deficiency with respect to such taxes in

order to give the latter a "reasonable opportunity to obtain a

correction of the prohibited transaction . . . ." Since

"correction of the prohibited transaction" implies an order of

restitution directed to the party who participated in the

transaction with the plan, this provision buttresses the

Secretary's position. For all of these reasons, we hold that the

Secretary can bring an action under section 502(a)(5) against a

nonfiduciary who participates in a transaction prohibited by

section 406(a).23

23

. Contrary to EMA's suggestions, this holding is not

foreclosed by footnote six of our opinion in Painters of

Philadelphia Council No. 32 Welfare Fund v. Price Waterhouse, 879

F.2d 1146 (3d Cir. 1989). In that case, a plan and its trustees

sued the plan's former auditor under section 502(a)(3) of ERISA,

claiming that the auditor breached its fiduciary duties by

failing to advise the trustees about improprieties allegedly

committed by the plan's administrator, and that the auditor was

therefore liable for the resulting losses under section 409 of

ERISA, 29 U.S.C. § 1109, which makes a fiduciary liable for the

losses caused by a fiduciary breach. Id. at 1148-49. We upheld

the dismissal of these claims. Id. at 1151. After explaining

that the auditor was not a fiduciary under ERISA, we responded in

footnote six to the plaintiffs' suggestion that they could sue

the auditor under section 502(a)(3) even if it was not a

fiduciary. We noted the plaintiff's reliance on Justice

Brennan's concurrence in Russell, where it was suggested that the

Finally, we disagree with EMA's contention that even if

section 406(a)(1) regulates the behavior of some nonfiduciaries,

it does not reach nonfiduciaries that are not parties in

interest. As we previously explained, see supra pages 19 to 27,

section 406(a)(1)(D) applies to transactions between a plan and a

third party when the transaction is "for the benefit of a party

in interest." Section 406(a)(1)(D) therefore extends the scope

of liability under ERISA beyond fiduciaries and parties in

interest. Because section 502(a)(5) authorizes the Secretary to

obtain relief against any party that participates in a

transaction that violates section 406(a)(1), EMA can be held

liable for its role in the allegedly prohibited transaction.

We will, however, uphold the district court's award of

summary judgment in favor of EMA and Local 98 as to the first,

but not the second, transaction. The liability of EMA and Local

98 as to the first transaction is predicated on the Plan

trustees' holding of the note past the expiration of the

grandfather period. We know of no way, and the Secretary has not

suggested one, that EMA and Local 98 could have forced the Plan

(..continued)

phrase "other appropriate equitable relief" in section 502(a)(3)

might be read to incorporate principles of trust law under which

a beneficiary might obtain extracontractual damages based on a

fiduciary breach. See 473 U.S. at 150, 157-58. We then wrote:

"Since we have held that [the auditor] is not a fiduciary under

ERISA, however, it cannot be held liable on a trust-law theory."

879 F.2d at 151 n.6. Although EMA construes this statement to

mean flatly that "a . . . section 502(a)(3) action for equitable

relief against nonfiduciaries cannot be maintained," EMA Br. at

21, we interpret this statement to mean only that principles of

trust law permitting the recovery of extracontractual damages

from a fiduciary who breaches his or her duties provide no basis

for recovery from a nonfiduciary.

to divest itself of the note in a timely fashion. We also note

that ERISA had not been enacted at the time of the first

transaction. Thus, we conclude that EMA and Local 98 did not

engage in an "act or practice" prohibited by ERISA and therefore

they cannot be held liable by the Secretary pursuant to section

502(a)(5). On the other hand, EMA and Local 98 were clearly

active parties in the second transaction and therefore the

Secretary has a cause of action against them on this transaction.

In sum, we hold that a nonfiduciary that is a party to a

transaction prohibited by section 406(a)(1) engages in an "act or

practice" that violates ERISA. We furthermore hold that the

Secretary, pursuant to section 502(a)(5), may sue to enjoin this

act or practice or "to obtain other appropriate equitable relief

to redress such a violation." On remand, therefore, the

Secretary may maintain his section 406(a)(1)(D) claims against

EMA and Local 98 as to the second transaction.24 We uphold the

district court's award of summary judgment as to the first

transaction because neither EMA nor Local 98 controlled the

decision to hold the note past the grandfather period and

therefore they did not engage in an action or practice that

violated ERISA.

IV. Section 406(b)(2) Claim

24

. The defendants also claim that the Secretary is not entitled

to the relief sought for the alleged violations of section

406(a)(1)(D) because it is not "appropriate equitable relief."

This issue was not presented to or decided by the district court,

and we decline to address it now.

We next address whether the district court erred in ruling

that the union trustees, Compton, McHugh and Nielsen, did not

violate section 406(b)(2) of ERISA, 21 U.S.C. § 1106(b)(2).25

The Secretary argues that these trustees violated section

406(b)(2) because, in connection with the sale of the note to

EMA, they "participated actively in the decisionmaking process

regarding the disposition of the mortgage loan on behalf of both

the lender, the plan, and the borrowers, EMA and Local 98."

Dept. of Labor Br. at 40. We hold that the district court erred

in granting summary judgment against the Secretary with respect

to this claim.

Section 406(b) prohibits a plan fiduciary from engaging in

various forms of self-dealing. Its purpose is to "prevent[] a

fiduciary from being put in a position where he has dual

loyalties and, therefore, he cannot act exclusively for the

benefit of a plan's participants and beneficiaries." H.R. Conf.

Rep. No. 93-1280, 93rd Cong., 2d Sess. (1974), reprinted in 1974

U.S.C.C.A.N. 5038, 5089.

Section 406(b)(2) provides in pertinent part:

A fiduciary with respect to a plan shall not-- . . .

(2) in his individual or any other capacity act

in any transaction involving the plan on behalf of

a party (or represent a party) whose interests are

adverse to the interests of the plan or the

interests of its participants or beneficiaries . .

. .

25

. Before the district court, the Secretary also argued that

the union trustees violated section 406(b)(1). The Secretary has

abandoned this claim.

This provision is a blanket prohibition against a fiduciary's

"act[ing] on behalf of" or "represent[ing]" a party with

interests "adverse to the interests of the plan" in relation to a

transaction with the plan. Thus, this provision, like the

prohibited transaction provisions of section 406(a)(1), applies

regardless of whether the transaction is "fair" to the plan.

In Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979), we

addressed the scope of section 406(b)(2). In that case, an

identical group of trustees managed a union pension fund and a

union welfare fund. Id. at 525. Because of decreased employer

contributions, the welfare fund began to run short of cash, and

the trustees agreed to loan money from the pension fund to the

welfare fund. Id. Despite the fact that the transaction

involved no allegations of misconduct or unfair terms, we held

that section 406(b)(2) had been violated. We first wrote:

When identical trustees of two employee benefit plans

whose participants and beneficiaries are not identical

effect a loan between the plans without a § 408

exemption, a per se violation of ERISA exists.

590 F.2d at 529. See also Lowen v. Tower Asset Management, Inc.,

829 F.2d 1209, 1213 (2d Cir. 1987) (noting that section 406(b)

needs to be "broadly construed" and that liability may be imposed

"even where there is `no taint of scandal, hint of self-dealing,

no trace of bad faith'") (citations omitted); Donovan v. Mazzola,

716 F.2d 1226, 1238 (9th Cir. 1983), cert. denied, 464 U.S. 1040

(1984) (noting that per se prohibition of section 406(b) is the

consistent with the remedial purpose of ERISA, for "at the heart

of the fiduciary relationship is the duty of complete and

undivided loyalty to the beneficiaries of the trust") (citations

omitted). We then added:

We have no doubt that the pension fund's loan to

the welfare fund falls within the prohibition of

section 406(b)(2). Fiduciaries acting on both sides of

a loan transaction cannot negotiate the best terms for

either plan. By balancing the interests of each plan,

they may be able to construct terms which are fair and

equitable for both plans; if so, they may qualify for a

section 408 exemption. But without the formal

procedures required under section 408, each plan

deserves more than a balancing of interests. Each plan

must be represented by trustees who are free to exert

the maximum economic power manifested by their fund

whenever they are negotiating a commercial transaction.

Section 406(b)(2) speaks of "the interests of the plan

or the interests of its participants or beneficiaries."

It does not speak of "some" or "many" or "most" of the

participants. If there is a single member who

participates in only one of the plans, his plan must be

administered without regard for the interests of any

other plan.

Id. at 530.

We interpret Cutaiar as follows. Each defendant, in his

capacity as a pension fund trustee, violated section 406(b)(2)

because, in connection with the loan from the pension fund to the

welfare fund, he acted on behalf of and represented the welfare

fund, a party with interests that were adverse to those of the

pension fund as far as that transaction was concerned.

Similarly, each defendant, in his capacity as a welfare fund

trustee, violated section 406(b)(2) because, in connection with

that loan, he acted on behalf of and represented the pension

fund.

The district court in this case, however, read Cutaiar

narrowly and, indeed, essentially limited the decision to its

facts. The district court stated:

The Secretary's reliance on Cutaiar is misplaced. As

noted by the Tenth Circuit in Brock [v. Citizens Bank

of Clovis, 841 F.2d 344, 347 n.2 (10th Cir. 1988),

cert. denied, 488 U.S. 829 (1988),] Cutaiar did not

involve a transaction with a third party. Moreover,

the boards of the Plan and EMA were not identical and

Compton, McHugh and Nielsen did not constitute a

majority of EMA's Board . . . . Likewise, the

purported "conflict of interest" violation of section

406(b)(2) is sheer hypotheses unsupported by any

evidence that these three defendants--who did not

control the board of EMA--acted on behalf of EMA, the

adverse party to the Plan in the sale of the note.

Compton II, 834 F.Supp. at 757. We do not agree with this

interpretation of Cutaiar.

Although the district court was correct in noting that the

trustees on both sides of the challenged transaction in Cutaiar

were identical, Cutaiar did not hold that section 406(b)(2) can

be violated only when there are identical decisionmakers on both

sides of the transaction. This would be contrary to the plain

language of the provision. Section 406(b)(2) creates a duty

against self-dealing for each individual fiduciary, not just

fiduciaries as a group. Each fiduciary is prohibited from

"act[ing] on behalf of an [adverse] party (or represent[ing]) an

[adverse] party . . . ." Thus, a plan fiduciary may act on

behalf of or represent an adverse party even if the groups

controlling the plan and the adverse party are not identical.

See Davidson v. Cook, 567 F.Supp. 225, 237 (E.D.Va. 1983) aff'd

734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984)

(finding a violation of § 406(b)(2) when trustees of pension fund

loaned money to corporation with close ties to the union

sponsoring the plan despite fact that boards of two groups were

not identical).

Likewise, the fact that Cutaiar did not, in the district

court's words, involve a transaction with "a third party," 834 F.

Supp. at 757, does not serve to distinguish this case. We

understand the district court as opining that Cutaiar is

inapposite because it involved a transaction between a fiduciary

and a "party in interest," whereas the transaction at issue here

was between a fiduciary and an entity other than a party in

interest. This was the distinction drawn by the Tenth Circuit in

Citizens Bank of Clovis, 841 F.2d at 347 n.2, on which the

district court relied. See 834 F. Supp. at 757. However, we

believe that this reading of Cutaiar is erroneous. First, we see

no support for this interpretation in the Cutaiar opinion. That

opinion never referred to either fund as a "party in interest."

Nor did it mention the provision of ERISA that defines a party in

interest, section 3(14), 29 U.S.C. § 1002(14), or the provision

that prohibits transactions with a party in interest, section

406(a)(1), 29 U.S.C. § 1106(a)(1).26 Second, it seems clear from

the language of section 406(b)(2) that its prohibition is not

restricted to conduct related to "parties in interest." Rather,

26

. Indeed, as the Secretary notes, Dept. of Labor Br. at 43 &

n.22, it does not appear that the related plan in Cutaiar fell

within the definition of a party in interest in section 3(14) of

ERISA, 29 U.S.C. § 1002(14).

section 406(b)(2) speaks more broadly of parties "whose interests

are adverse to the interests of the plan or the interests of its

participants or beneficiaries." A party clearly may have

interests that are adverse to those of a plan or its participants

or beneficiaries in relation to a particular transaction without

being a "party in interest" as defined by section 3(14).

Cutaiar is significant for present purposes chiefly because

it stands for the proposition that, when a plan loans money to or

borrows money from another party, the plan and the other party

will have adverse interests within the meaning of section

406(b)(2). See 570 F.2d at 529. It follows, therefore, that in

the present case the Plan and EMA had adverse interests with

respect to the sale of EMA's note. Furthermore, it seems

abundantly clear that the interests of the Plan and Local 98 were

also adverse with respect to this transaction.27

27

. This is shown clearly by the actions taken by Local 98 in

connection with the purchase of EMA's note. See generally

Compton I, 834 F. Supp. at 751 n.7. Because EMA had no money of

its own, it was unable to proceed with the transaction until

Local 98 approved. JA at 96, 471. Indeed, the record indicates

that the Plan trustees considered Local 98 to be the actual

purchaser of the note given the fact that EMA had no funds of its

own. Since Local 98 advanced the funds to EMA necessary to

purchase the note, the union's approval was a prerequisite to

completing the transaction. Id. at 58-59, 89, 448, 471. In

explaining the sale of the note, Compton also revealed that Local

98 was the effective purchaser: "The trustees felt that would be

a prudent move and had to find a buyer for the market value, and

that's when the union stepped in and decided they would purchase

the mortgage and get rid of it at the market value." Id. at 471

(emphasis added). Thus, as the "real" purchaser of the note,

Local 98 necessarily had interests adverse to the Plan in

relation to that transaction. See Cutaiar, 590 F.2d at 529.

Since the interests of the Plan were adverse to those of EMA

and Local 98 with respect to the transaction at issue, the only

remaining question under section 406(b)(2) is whether the union

trustees acted on behalf of or represented EMA or Local 98 in

connection with that transaction. The record strongly suggests

that they did. All three union trustees were officials of Local

98, and Compton was also an officer of EMA. Moreover, the union

trustees apparently did not recuse themselves when the

transaction was being considered by EMA and Local 98. Instead,

they participated in discussion of the mortgage transaction at

board meetings of EMA and Local 98. Rec. 38 at 23; JA at 417-27,

446. While these facts in themselves may be sufficient to

support summary judgment in favor of the Secretary on his section

406(b)(2) claim, we will leave that determination for the

district court to make in the first instance.28 On remand, the

district court should determine whether, during EMA's and Local

98's deliberations concerning the purchase of EMA's note, the

union trustees took any action in their capacities as union or

EMA officers. If they did, then they took actions in this

transaction on behalf of EMA and/or Local 98, parties with

interests adverse to the Plan, and they therefore violated

section 406(b)(2).29

28

. We recognize that the evidence against Compton, who was

president of EMA and Local 98, is stronger than against the other

two union trustees. We are sure that on remand the district

court will scrutinize this aspect on the record.

29

. The Secretary also suggests that the union trustees violated

section 406(b)(2) because, while acting in their capacities as

plan trustees during the consideration of the sale of EMA's note,

V. Section 404(a)(1) Claims

We come, finally, to the Secretary's claims that the Plan

trustees violated ERISA's loyalty and prudence requirements,

sections 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. §§ 404(a)(1)(A)

and (B), and that Fidelity violated ERISA's requirement that

fiduciaries act in accordance with plan documents, section

404(a)(1)(D) of ERISA, 29 U.S.C. § 404(a)(1)(D). The district

court did not specifically address these claims in either of its

two opinions, but it did enter judgment against all defendants on

"all claims against them." Compton I, 834 F. Supp. at 751. We

agree with the Secretary that this disposition was erroneous.

In addition to making certain actions by fiduciaries illegal

per se, ERISA also codified common law duties of loyalty and

prudence for ERISA trustees. In relevant part, section 404(a)

provides as follows:

(a) Prudent man standard of care

(1) [A] fiduciary shall discharge his duties

with respect to a plan solely in the interest of

the participants and beneficiaries and--

(A) for the exclusive purpose of:

(..continued)

they were actually serving the interests of EMA or Local 98.

This theory, although based on section 406(b)(2), seems to

resemble the Secretary's claim against all of the trustees under

section 404(a)(1)(A), which is discussed below. However, the

Secretary has not provided a precise description of this theory

as distinct from the section 406(b)(2) theory discussed in text.

For this reason, and because it may not be necessary for the

district court to reach this theory on remand, we do not address

the validity or contours of such a theory at this time.

(i) providing benefits to participants

and their beneficiaries; and

(ii) defraying reasonable expenses of

administering the plan;

(B) 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

would use in the conduct of an enterprise of

a like character and with like aims; . . .

(D) in accordance with the documents and

instruments governing the plan . . . .

Based on the summary judgment record, a reasonable factfinder

could conclude that the fiduciaries violated their duties. The

evidence discussed above with regards to self-dealing also

supports the Secretary's argument that the trustees may have

violated the duty of loyalty set out in section 404(a)(1)(A). As

noted, the Plan trustees sold the note for well below its

accounting value, and the record shows that the union trustees

were active on both sides of the negotiations. JA at 54, 58-59,

82, 89, 91, 95-96, 106. Furthermore, the Plan trustees

apparently did not sue EMA to force a purchase of the mortgage at

its accounting value because that would have effectively been a

suit against Local 98. Id. at 467. We agree with the Second

Circuit that trustees violate their duty of loyalty when they act

in the interests of the plan sponsor rather than "with an eye

single to the interests of the participants and beneficiaries of

the plan." Donovan, 680 F.2d at 271.

Likewise, the Secretary has adduced evidence suggesting that

the Plan trustees may not have acted in a prudent manner and may

thus have violated section 404(a)(1)(B). The Plan trustees were

aware that their counsel and the Secretary considered the loan to

violate ERISA. JA at 69, 87. Despite counsel's advice to sell

the loan for its accounting value, the Plan trustees did not do

so. Furthermore, the Plan trustees appear not to have made any

effort to dispose of the mortgage until two months before the end

of ERISA's ten-year transition period. The evidence indicates

that Fidelity participated in these transactions, and this

evidence is sufficient to support a finding that it violated

section 404(a)(1)(D) by failing to exercise the authority vested

in it by the Plan, which included control over Plan

investments.30 Although not necessarily dispositive, these facts

certainly provide a sufficient basis for the Secretary's claims

to survive a motion for summary judgment.31

We therefore reverse the order of the district court insofar

as it granted summary judgment against the Secretary on these

claims and we remand for further proceedings regarding them.

30

. As noted, an Amendment to the Agreement of Trust between

Local 98 and Fidelity provides that Fidelity "shall have

exclusive authority and discretion in investment of the Fund, and

to so invest without distinction between principal and income."

JA at 342.

31

. The Plan trustees argue that there was no violation of the

duty of loyalty and prudence because the trustees had no superior

alternative to the one they chose. Although there is evidence to

support this view, the Secretary has adduced sufficient facts to

make the district court's resolution of this issue by summary

judgment improper.

VI. Conclusion

The district court's order entering summary judgment in favor

of all defendants on all claims is reversed in part and affirmed

in part. Given the complex nature of the transactions at issue

here, we intimate no view as to the extent of the liability, if

any, that should be imposed on a defendant that is ultimately

found to have violated ERISA. We remand to the district court

for further proceedings consistent with this opinion.