Opposition Brief — Fairway Spring Co. v. Sovran Bank/Maryland

FILED

eS a NOV 20 199)

Nos. 91-680 and 91-681

peice OF THE CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

FAIRWAY SPRING Co., INC., THEODORE PETERSON, as Presi-

dent and Director of Fairway Spring Co., Inc.; DONALD

R. PETERSON, as Vice President and Director of Fair-

way Spring Co., Inc.; DorotTHY TARByY, as Secretary-

Treasurer and Director of Fairway Spring Co., Inc.;

and LYNN G. KEYSER,

¥. Petitioners,

SOVRAN BANK/MARYLAND,

Respondent.

CHEMUNG CANAL TRUST COMPANY, as Trustee of the

Fairway Spring Company, Inc. Restated Pension Plan,

y. Petitioner,

SOVRAN BANK ‘MARYLAND,

Respondent.

On Petitions for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION

WILLIAM F. HANRAHAN *

ROBERT P. GALLAGHER

STEPHEN M. SAXON

LONIE A. HASSEL

GROOM AND NORDBERG, CHARTERED

1701 Pennsylvania Avenue, N.W.

Suite 1200

Washington, D.C. 20006

(202) 857-0620

Attorneys for Respondent

November 20, 1991 * Counsel of Record

sca 8

WILSON - Ergs PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

My

QUESTION PRESENTED

May the courts develop a federal common law of con-

tribution among fiduciaries under the Employee Retire-

ment Income Security Act of 1974 (“ERISA”) in ac-

cordance with Congress’s instruction, as acknowledged by

the Court, to develop federal common law under ERISA

based on trust law?

(i)

TABLE OF CONTENTS

STATEMENT OF THE CASE ....

Sg Re 5h tf

REASONS FOR DENYING THE WRIT .............. :

I.

II.

II.

A FEDERAL COMMON LAW RULE OF CON-

TRIBUTION AMONG ERISA FIDUCIARIES

IS CONSISTENT WITH THE PURPOSE OF

THE STATUTF AND THE DECISIONS OF

THIS COURT AND THE COURTS OF AP-

PEALS RECOGNIZING THAT THE COURTS

ARE TO DEVELOP A “FEDERAL COMMON

LAW OF RIGHTS AND OBLIGATIONS UN-

DER ERISA-REGULATED PLANS” .......

THERE IS NO SUBSTANTIAL CONFLICT

AMONG THE CIRCUITS. THE COURTS OF

APPEALS WHICH HAVE REJECTED CON-

TRIBUTION CLAIMS HAVE DONE _ SO

ONLY BECAUSE THERE IS NO IMPLIED

RIGHT OF CONTRIBUTION UNDER ERISA.

RECOGNIZING A RIGHT OF CONTRIBU-

TION AMONG ERISA FIDUCIARIES IS CON-

SISTENT WITH THE STATUTE’S POLICY

GOALS AND WILL SERVE TO FOSTER THE

GROWTH AND DEVELOPMENT OF EM-

PLOYEE BENEFIT PLANS .........................

SPNIEEEID cxcopiree<onevrnxsenssstscerisevertes iampensuleeee pestis ane

(iii)

Page

ou

11

16

19

iv

TABLE OF AUTHORITIES

CASES Page

Call v. Sumitomo Bank of California, 881 F.2d 626

en eS eS he wee Ad, 18, 14, 15

Call v. Sumitomo Bank of California, 689 F. Supp.

1014 (N.D. Cal. 1988), aff'd in part and rev’d in

part, 881 F.2d 626 (9th Cir. 1989)... 13, 15

Central States, Southeast & Southwest Areas Pen-

sion Fund v. Central Transport, Inc., 472 U.S.

Ns Se ee re 9,10

Cort 9. Ask, 423 U.S. G (3076) .......2.-..-.2.--.:.......... passim

Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978) _..... 9

Firestone Tire and Rubber Co. v. Bruch, 489 U.S.

a een a 6,9

Fox Valley & Vicinity Const. Workers Pension

Fund v. Brown, 897 F.2d 275 (7th Cir.) (en

banc), cert. denied, 111 S. Ct. 67 (1990) ............ 9,15

Franchise Tax Board v. Construction Laborers

Vacation Trust, 463 U.S. 1 (1988) ..................... 6

In re Dawson, No. 87-5-1372 (Bankr. D. Md.) _...... 3

Kim v. Fujikawa, 871 F.2d 1427 (9th Cir. 1989) -..11, 18, 14

Kwatcher v. Massachusetts Service Employees

Pension Fund, 879 F.2d 957 (1st Cir. 1989)... 8

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

ee ee tian 8

Massachusetts Mutual Life Ins. Co. v. Russell,

ar I IN sec par escecccvceunersecebnen sakabesentines 12, 13

McLaughlin v. Dawson, No. JFM 86-2536 (D. Md.

I I ae aaa 3

Miles v. Apex Marine Corp., 111 8.Ct. 314 (1990). 15

Nachwalter v. Christie, 805 F.2d 956 (11th Cir.

I eo 9

NARDA, Inc. v. Rhode Island Hospital Trust Na-

tional Bank, 744 F. Supp. 685 (D. Md. 1990)... 16

National Society of Professional Engineers v.

United States, 435 U.S. 679 (1978) ........000......... 7

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

NLRB v. Amaz Coal Co., 453 U.S. 322 (1981) ....... 10

Northwest Airlines, Inc. v. Transport Workers

Union, 451 U.S. 77 (1981) _.............-.-...-... 6, 7,11, 12, 15

Vv

TABLE OF AUTHORITIES—Continued

Page

Pappas v. Buck Consultants, Inc., 923 F.2d 531

Coe Sy ER resaeee ee cceea ie eeneetsene 15

Perry v. Knott, 4 Beav. 179 (1842) ....0..00 oo... 10

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) 5, 6, 7,8

Plucinski v. I.A.M. Nat. Pension Fund, 875 F.2d

UL RRR Ra ee 8

Provident Life and Accident Insurance Co. v.

Waller, 906 F.2d 985 (4th Cir.), cert. denied,

Eee Mt a RAR Ape mn 8, 16

Sherman v. Parish, 53 N.Y. 483 (1873) _..... Tee 10

Texas Industries v. Radcliff Materials, Inc., 451

ie i} rt en et onthe 11, 12, 13

Textile Workers Union v. Lincoin Mills, 353 U.S.

448 (1957) pean 7,8

United States v. Standard Oil Co., 332 U. Ss. 301

(1947) . ‘epics eich canard eee 6

Wheeldin v. Wheeler, 373 U.S. 647, 651-52 (1963). 7

Whitworth Bros. Storage Co. v. Central States,

Southeast & Southwest Areas Pension Fund, 794

F.2d 221 (6th Cir.), cert. denied ,479 U.S. 1007

CN soviet a eee 9

Woodfork v. Marine Cooks & Stewards Union, 642

ef &. Bi Ee A: 5 eee ees a tLREN Ts 8

STATUTES

Employee Retirement Income Security Act of 1974,

Se Gass“ ee oe ee oe passim

§ 2(a),29 U.S.C. § 1001(a) ... Raibldrantichins 16

$2(b), 20 U.S.C. § 1001 (dD) ......................... be 16

§ 3(21), 29 U.S.C. § 1002(21)... -............ 17, 18

§ 409 (a), 29 U.S.C. § 1109 (a)......... ee ..12, 13, 14, 15

§ 502 (a) (1), 29 U.S.C. § 1132 (a) (1) (B) ....... 9

§ 502 (a) (2), 29 U.S.C. § 1132 (a) (2) 2000... 12

EOP tk OR fs | | SRR eee enimcnernnes 6

Labor Management Relations Act, 1947

es ee reas Oe I voces oanccesecn coe ndecarsneteenueca: 8

S SP8(G), BP UBL, & ROY acc ccnveniccsicscrcicns 7,8

vi

TABLE OF AUTHORITIES—Continued

LEGISLATIVE HISTORY

120 Cong. Rec. 29942 (1974) (remarks of Sen.

GOTT 5. covcossceridcnsnsecmtrcedcddiicce eee

H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess.

(1974)...... saheenesoperseersenveusiaiisn

OTHER MATERIALS

G. Bogert, The Law of Trusts and Trustees, § 701

(2d ed. rev. 1982) paneer RATA SES)

Halsbury, 38 The Laws of England, * 1829 (3d ed.

| scinacnsciouesninenesilese ne aE ee eee

J. Pomeroy and S. Symons, II Equity Jurispru-

dence, §§ 405 and 406 (5th ed. 1941)...

Restatement (Second) of Trusts § 258 (1959) ....

10

10

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

No. 91-680

FAIRWAY SPRING Co., INC., THEODORE PETERSON, as Presi-

dent and Director of Fairway Spring Co., Inc.; DONALD

R. PETERSON, as Vice President and Director of Fair-

way Spring Co., Inc.; DoRoTHY TARBY, as Secretary-

Treasurer and Director of Fairway Spring Co., Inc.;

and LYNN G. KEYSER,

y Petitioners,

SOVRAN BANK/MARYLAND,

Respondent.

No. 91-681

CHEMUNG CANAL TRUST COMPANY, as Trustee of the

Fairway Spring Company, Inc. Restated Pension Plan,

y Petitioner,

SOVRAN BANK ‘MARYLAND,

Respondent.

On Petitions for a Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION

STATEMENT OF THE CASE

Recognizing the authority granted by Congress to the

federal courts under ERISA to develop a federal common

law of ERISA based on the common law of trusts, the

court of appeals reversed the dismissal of Sovran Bank/

Maryland’s' (“Sovran”) federal common law counter-

1C&S/Sovran Corporation is Sovran’s parent. Sovran has no non

wholly-owned subsidiaries.

2

claim and third party claims for contribution and in-

demnity against other fiduciaries of the Fairway Spring

Company, Ine. Restated Retirement Income Plan

(“Plan”), Appendix (“A.’) 27-41. Those other fiduciar-

ies seek a writ of certiorari from this Court.

Fairway Spring Company, Inc. (“Fairway”) estab-

lished the Plan in 1981 to provide retirement benefits for

its employees. A. 29. Under the terms of the Plan, Fair-

way has the authority to appoint a trustee of the Plan.

Id. Acting through its officers, petitioners Theodore

Peterson, Donald R. Peterson, and Dorothy Tarby, Fair-

way appointed Glen Dawson as the Plan’s trustee. A.

29-30.

While trustee of the Plan, Dawson made imprudent in-

vestments for the Plan and engaged in transactions pro-

hibited under ERISA’s fiduciary standards. A. 30. For

example, Dawson invested in various interest bearing

notes that purportedly were secured by real property.

Dawson failed to investigate the validity of the notes, the

creditworthiness of the obligors, or the validity of the se-

curity interests supporting the notes. Further, he failed

to obtain proper documentation of the Plan’s investments

in these notes and failed to perfect security interests in

the collateral. He also generally failed to diversify the

Plan’s investments. Joint Appendix to Appellate Briefs

(“J.A.”) 10-12. Dawson’s breaches of fiduciary duty al-

legedly caused the Plan ultimately to lose more than $1.6

million. J.A. 23.

Fairway and its officers, as the fiduciaries who ap-

pointed Dawson, also had the duty to monitor Dawson’s

performance. A. 30-31. Thus, they knew or should have

known of Dawson’s breaches. /d. However, without ac-

knowledging or taking action to remedy Dawson’s fidu-

ciary breaches, Fairway removed Dawson as trustee of

the Plan effective December 31, 1984. A. 30. After Daw-

son’s removal as trustee, Lynn Keyser, counsel to Fair-

way, exercised authority over the Plan and its assets. Jd.

Then, effective February 1, 1985, Fairway appointed

3

Sovran trustee of the Plan, again without acknowledging

any irregularities in Dawson’s performance. /d.

Some of the imprudent investments that Dawson rnade

for the Plan performed adequately for a time after Sov-

ran’s appointment as trustee. /d. Eventually, however,

payments owed to the Plan under some of these invest-

ments ceased.” /d. In 1989, due to the losses caused by

these investments, Fairway removed Sovran as trustee

and appointed Chemung trustee of the Plan. /d.

As trustee of the Plan, Chemung filed an action against

Sovran to recover the losses suffered by the Plan under

Dawson’s investments and two additional investments al-

legedly made by Sovran. /d. Chemung did not name

Fairway or its officers as defendants, despite their failure

to monitor Dawson, to correct his breaches, or to dis-

close his breaches to Sovran, J.A. 1-25. Instead, Chemung

sought to collect only from Sovran the amounts lost by

the Plan on Dawson’s bad investments, notwithstanding

the fact that Sovran, unlike Fairway and its officers, had

neither the duty nor the opportunity as Dawson’s succes-

sor to monitor or prevent his investments. /d. Under

Chemung’s theory, regardless of who was responsible for

Dawson’s fiduciary breaches, or the degree of culpability,

Sovran and Sovran alone was required to bear all of the

loss resulting from those breaches.

Sovran disagreed, filing a counterclaim against Chem-

ung and a third party action against Fairway, three of

“In 1986, the Department of Labor commenced an action against

Dawson to recover losses incurred by 46 pension plans, including the

Fairway Plan, caused by Dawson’s breaches of fiduciary duty in

connection with certain mortgage investments he made for the plans.

McLaughlin v. Dawson, No. JFM &6-2526 (D. Md.). Thereafter,

Dawson filed for bankruptcy. In re Dawson, No. 87-5-1372 ( Bankr.

D. Md.). The Plan received approximately $4,000 as its pro-rata

share of the $70,000 the Department of Labor received in settlement

of its action. Consent Order, McLaughlin v. Dawson, No. JFM &6-

2536 (D. Md. Nov. 9, 1988). Under the Consent Order, Dawson was

permanently enjoined from acting as a plan fiduciary. /d.

4

its officers, and Fairway’s attorney for breach of their

fiduciary duties to the Plan under ERISA, alleging, inter

alia, that they had failed to monitor the activities of

Sovran’s predecessor, failed to correct his fiduciary

breaches, and failed to disclose them to Sovran. A. 30-31.

The district court dismissed Sovran’s counterclaim and

third party complaint, holding that ERISA does not ex-

plicitly provide for contribution among fiduciaries and

declining to recognize such a remedy under federal common

law. A. 31. The United States Court of Appeals for the

Second Circuit reversed. A. 27-41. Consistent with three

decisions of this Court and decisions in eight other cir-

cuits, the court of appeals recognized that Congress ex-

plicitly instructed courts to develop federal common law

under ERISA based on trust law and that contribution

has been a part of trust law for more than a century.

SUMMARY OF ARGUMENT

The decision of the court of appeals recognizing a right

of contribution among fiduciaries is consistent with this

Court’s recognition of the authority granted to federal

courts to develop federal common law under ERISA based

on trust law. No conflict arises as a result of the Second

Circuit’s decision because no court of appeals that has

refused to recognize contribution applied the “federal

common law” analysis used by the Second Circuit. Spe-

cifically, the Ninth Circuit, which has rejected contribu-

tion among ERISA fiduciaries, applied the Cort v. Ash

test and determined there is no implied right of contribu-

tion under ERISA. The Second Circuit is in complete

accord with that finding.

Finally, recognizing a right of contribution is fully in

keeping with the purpose and goals of ERISA and will

not undercut the legislative scheme embodied in ERISA.

Accordingly, recognition of contribution among fiduciaries

under federal common law raises no issue that requires

the Court’s intervention.

5

REASONS FOR DENYING THE WRIT

I. A FEDERAL COMMON LAW RULE OF CONTRIBU-

TION AMONG ERISA FIDUCIARIES IS CONSIST-

ENT WITH THE PURPOSE OF THE STATUTE

AND THE DECISIONS OF THIS COURT AND THE

COURTS OF APPEALS RECOGNIZING THAT THE

COURTS ARE TO DEVELOP A “FEDERAL COM-

MON LAW OF RIGHTS AND OBLIGATIONS UN-

DER ERISA-REGULATED PLANS.”

The court of appeals based its decision to recognize a

right of contribution among ERISA fiduciaries on well-

settled principles of law. Nothing in the decision, and

nothing in its result, warrants review by this Court.

The court of appeals’ analysis of the issue is straight-

forward. Consistent with three decisions of this Court,

its own precedent, and decisions of eight other circuits,

the court of appeals began by recognizing that the courts

are obliged to develop a “federal common law of rights

and obligations under ERISA-regulated plans.” Pilot Life

Ins. Co. v. Dedeaux, 481 U.S. 41, 56 (1987). Proceeding

from this premise, the court of appeals, again consistent

with extensive precedent confirming that ERISA is

grounded in the law of private trusts, turned to tradi-

tional trust law for guidance in deciding whether to in-

corporate a right of contribution into the common law of

ERISA. The court of appeals readily discerned that from

the earliest days of the English chancery courts, and con-

tinuing today in the modern American law of private

trusts, the equity courts have uniformly recognized that

trust fiduciaries are entitled to seek contribution from

their cofiduciaries who have jointly caused the trust to

suffer a loss. The court of appeals therefore concluded

that it is entirely consistent with the statutory design

to permit an ERISA fiduciary accused of a breach of duty

to seek contribution from other plan fiduciaries whose

conduct contributed to the plan’s loss.

6

The petitioners contend that the court of appeals mis-

understood the Court’s repeated observations in Firestone

Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989),

Pilot Life Ins. Co., and Franchise Tax Board v. Construc-

tion Laborers Vacation Trust, 463 U.S. 1, 24 n.26 (1983)

that “the courts are to develop a ‘federal common law of

rights and obligations under ERISA-regulated plans.’ ”

Firestone Tire and Rubber Company, 489 U.S. at 110

(quoting Pilot Life Ins. Co., 481 U.S. at 56).* According

to the petitioners, this statement means nothing more than

that the federal courts are to apply the traditional com-

mon law tools of analysis to determine the meaning of the

statute. It does not mean, the petitioners assert, that the

federal courts are authorized in ERISA cases to act as

traditional common law courts and fashion rules of law

needed to resolve issues that the legislature has not ad-

dressed. Therefore, they conclude, the court of appeals

exceeded its authority as a court of limited jurisdiction by

adopting a rule not specifically delineated in ERISA. Pe-

tition (“Pet.”) at 10-12, 24-25.

This argument ignores the premises of this Court’s

statements in Firestone Tire and Rubber, Pilot Life, and

Franchise Tax Board.

It is, of course, elementary that the federal courts are

courts of limited jurisdiction. As such, they ordinarily

may do no more than apply federal law as enacted by

Congress. Northwest Airlines, Inc. v. Transport Workers

Union, 451 U.S. 77, 95 (1981); see United States v.

Standard Oil Co., 332 U.S. 301, 308 (1947). In some

instances, however, this Court has concluded that in en-

*In Franchise Tax Board, the Court observed that “* * * ERISA’s

legislative history indicates that, in light of the Act’s virtually

unique preemption provision, see § 514, 29 USC § 1144, ‘a body of

Federal substantive law will be developed by the courts to deal

with issues involving rights and obligations under private welfare

and pension plans.’ 120 Cong. Rec. 29942 (1974) (remarks of Sen.

Javits).” 463 U.S. at 24 n.26.

7

acting a particular statute, Congress intended to confer

on the federal courts the power to develop a body of fed-

eral common law consistent with federal policy expressed

in the statutory scheme. National Society of Professional

Engineers v. United States, 485 U.S. 679, 688 (1978) ;

Wheeldin v. Wheeler, 373 U.S. 647, 651-52 (1963). For

example, this Court long ago decided that in granting to

the federal courts exclusive power to adjudicate disputes

over breaches of collective bargaining agreements under

section 301(a) of the Labor-Management Relations Act,

1947 (“LMRA”), 29 U.S.C. § 185(a), Congress intended

that “* * * the substantive law to apply in suits under

§ 301(a) is federal law which the courts must fashion

from the policy of our national labor laws.” Textile

Workers Union v. Lincoln Mills, 353 U.S. 448, 456

(1957); see Northwest Airlines, Inc. v. Transport Work-

ers Union, 451 U.S. at 96 n.385 (“In Textile Workers v.

Lincoln Mills, * * * we concluded that § 301(a) supplied

a basis for federal jurisdiction over certain cases and an

authorization for judicial development of substantive fed-

eral law to govern those cases.’’).

It is against this background that this Court examined

the role of the federal courts in adjudicating disputes

arising under ERISA. In Pilot Life, a case involving the

availability of state common law causes of action against

an ERISA plan, the Court reviewed ERISA’s legislative

history and noted that the Conference Report on ERISA

made clear in discussing the civil] enforcement provisions

of the statute that, “‘|/ajll such actions . .. are to be

regarded as arising under the laws of the United States in

similar fashion to those brought under section 301 of the

Labor-Management Relations Act of 1947.’” Pilot Life,

481 U.S. at 55 (quoting H.R. Conf. Rep. No. 1280, p. 327

93d Cong., 2d Sess. (1974) (Court’s emphasis deleted).

Similarly, the Court noted that the principal majority and

minority sponsors of the legislation made floor statements

confirming that actions arising under ERISA “ ‘will be

8

regarded as arising under the laws of the United States,

in similar fashion to those brought under section 301 of

the Labor Management Relations Act’ ” and that “ ‘[i]t is

intended that a body of Federal substantive law will be

developed by the courts to deal with rights and obligations

under private welfare and pension plans.’” Jd. at 56

(citations omitted). From this, the Court concluded that

there was a clear expectation “* * * that a federal com-

mon law of rights and obligations under ERISA-regulated

plans would develop * * *” Td.

As this Court’s decisions recognize, the role of the fed-

eral courts in ERISA cases is not limited to statutory in-

terpretation, as the petitioners contend. To the contrary,

Congress plainly intended the courts to function in this

arena in the same way that they have done for over 30

years under the LMRA—to develop federal common law

“by looking at the policy of the legislation and fashioning

a remedy that will effectuate that policy.” Textile Work-

ers Union, 353 U.S. at 457.4

4 Consistent with this directive, the courts of appeals have re-

peatedly recognized their obligation to formulate rules of decision

under federal common law to resolve issues for which ERISA con-

tains no explicit statutory rule. E.g., Kwatcher v. Massachusetts

Service Employees Pension Fund, 879 F.2d 957, 966 (1st Cir. 1989)

(“Congress specifically contemplated that federal courts, in the

interests of justice, would engage in interstitial lawmaking in

ERISA cases in much the same way as the courts fashioned a fed-

eral common law of labor relations under section 301 of the

LMRA.”); Lowen v. Tower Asset Management, Inc., 829 F.2d 1209,

1220 (2d Cir. 1987) (recognizing a claim under general trust law

principles for knowing participation in a fiduciary breach);

Plucinski v. 1.A4.M. Nat. Pension Fund, 875 F.2d 1052, 1056 (3d Cir.

1989) (“Since Congress both authorized and expects that the courts

will create a common law under ERISA, we need not look for a

specific congressional intent to create the remedy at issue.”);

Provident Life and Accident Insurance Co. v. Waller, 906 F.2d 985,

993-94 (4th Cir.) (appropriate “to weave into the statutory fabric

of ERISA the federal common law remedy of unjust enrichment’),

cert. denied, 111 S. Ct. 512 (1990); Woodfork v. Marine Cooks &

Stewards Union, 642 F.2d 966, 972-73 (5th Cir. 1981) (“The legis-

9

The court of appeals was on equally solid ground when

it turned to the law of private trusts for guidance in

determining whether federal common law should incor-

porate a right of contribution among ERISA fiduciaries.

This Court has made it abundantly clear that trust law

is the appropriate guidepost for resolving issues on which

ERISA is silent.

ERISA abounds with the language and terminol-

ogy of trust law. * * * ERISA’s legislative history

confirms that the Act’s fiduciary responsibility pro-

visions, * * * “eodif{y] and make[] applicable to

[ERISA] fiduciaries certain principles developed in

the evolution of the law of trusts.” * * * Given this

language and history, we have held that courts are

to develop a “federal common law of rights and obli-

gations under ERISA-regulated plans.” * * * In

determining the appropriate standard of review for

actions under § 1132(a)(1){B), we are guided by

principles of trust law.

Firestone Tire & Rubber, 489 U.S. at 110 (citations

omitted; emphasis added). See Central States, Southeast

lative history of ERISA indicates that this section was intended to

create a federal common law concerning pension rights, which would

augment the rights created by ERISA’s substantive provisions.” ) ;

Whitworth Bros. Storage Co. v. Central States, Southeast &

Southwest Areas Pension Fund, 794 F.2d 221, 236 (6th Cir.) (em-

ployer’s claim for return of mistaken contributions arises under and

is governed by federal common law), cert. denied, 479 U.S. 1007

(1986); Fox Valley & Vicinity Const. Workers Pension Fund v.

Brown, 897 F.2d 275, 281 (7th Cir.) (en banc) (‘When ERISA is

silent on an issue, a federal court must fashion federal common law

rules to govern ERISA suits.’”’), cert. denied, 111 S. Ct. 67 (1990) ;

Eaves v. Penn, 587 F.2d 453, 462-63 (10th Cir. 1978) (relying on

common law of trusts to uphold remedy of recision); Nachwalter

v. Christie, 805 F.2d 956, 959-60 (11th Cir. 1986) (acknowledging

power to fashion federal common law but refusing to adopt a rule

estopping the enforcement of the plan’s terms “because ERISA

expressly addresses the issue”); but see Nieto v. Ecker, 845 F.2d

868, 872 (9th Cir. 1988) (rejecting argument “that the common

law of trusts supplies a federal cause of action where the statute

itself provides none.” )

10

& Southwest Areas Pension Fund v. Central Transport,

Inc., 472 U.S. 559, 570 (1985) (“* * * rather than ex-

plicitly enumerating all of the powers and duties of

trustees and other fiduciaries, Congress invoked the com-

mon law of trusts to define the general scope of their au-

thority and responsibility.”); NLRB v. Amax Coal Co.,

453 U.S. 322, 329-334 (1981) (Congress intended that

union welfare funds regulated by the Taft-Hartley Act

be operated under traditional trust law principles, and

this desire became explicit in ERISA).

Mindful of this, the court of appeals examined the

treatment of contribution claims under private trust law

and found overwhelming authority for the proposition

that a trust fiduciary is entitled to seek contribution from

a cofiduciary who shares responsibility for a loss sus-

tained by the trust. As the court of appeals put it,

We must next determine whether traditional trust

law provides for a right of contribution among de-

faulting fiduciaries. Indisputably, it does. Chemung

and Fairway do not seriously contend to the con-

trary, nor could they, because the right of contribu-

tion among co-trustees has been for over a century,

and remains, an integral and universally-recognized

part of trust doctrine. See Restatement (Second) of

Trusts § 258 (1959); Bogert, The Law of Trusts and

Trustees, § 701 (2d ed. rev. 1982) (citing Perry v.

Knott, 4 Beav. 179 (1842); Sherman v. Parish, 53

N.Y. 483 (1873) ).

A. 35.

The petitioners are now in no better position to argue

that a right of contribution is antithetical to the trust

law principles embodied in ERISA than they were in the

court of appeals. The principle of contribution is central

to the law of equity, and has been so since the develop-

ment of the concept of equity by the Roman courts. J.

Pomeroy and 8. Symons, II Equity Jurisprudence $$ 405

11

and 406 (5th ed. 1941); Halsbury, 38 The Laws of Eng-

land {1829 (3d ed. 1962). The petitioners have offered

no persuasive reason for this Court to depart from this

bedrock principle of equity; nor have they advanced any

reason for believing that Congress would have preferred

a different result under the law of employee benefit trusts.

II. THERE IS NO SUBSTANTIAL CONFLICT AMONG

THE CIRCUITS. THE COURTS OF APPEALS

WHICH HAVE REJECTED CONTRIBUTION

CLAIMS HAVE DONE SO ONLY BECAUSE THERE

IS NO IMPLIED RIGHT OF CONTRIBUTION UN-

DER ERISA.

The petitioners contend that the decision below conflicts

with decisions in other circuits, principally Call v. Suni-

tomo Bank of California, 881 F.2d 626 (9th Cir. 1989)

and Kim v. Fujikawa, 871 F.2d 1427 (9th Cir. 1989).

The petitioners are mistaken. These cases decided nothing

more than that a right of contribution among ERISA

fiduciaries is not a statutorily “implied right of action”

under the principles enunciated in Cort v. Ash, 422 U.S.

66 (1975). As the decision below recognized, the Ninth

Circuit correctly resolved the issue presented to it. A. 34.

But to say that ERISA contains no implied right of action

for contribution under the Cort v. Ash test plainly does

not answer the question of whether there should be a

federal common law right of contribution under ERISA.

As this Court has made clear in at least two decisions,

the question of whether there is a statutorily implied right

of action for contribution is entirely distinct from the

question of whether the federal courts, properly exercis-

ing federal common law powers in appropriate circum-

stances, should adopt a right of contribution. Northwest

Airlines, 451 U.S. at 86; Texas Industries v. Radcliff

Materials, 451 U.S. 630, 638 (1981). Here, the court of

appeals agreed that there is no statutorily implied right

of action for contribution, but recognized that it should

formulate a right of contribution as a matter of federal

12

common law. This decision is entirely consistent with this

Court’s precedent, and it is not in conflict with the Call

decision.

At issue here are two seemingly related but quite dif-

ferent doctrines. In Cort v. Ash, this Court distilled from

its earlier decisions a four factor test for determining

when, as a matter of statutory construction, it is appro-

priate for the courts to find a private cause of action im-

plied in a particular statutory scheme. The Court held

that it is appropriate to imply a cause of action only if

it can be determined that the party seeking the remedy

is a member of the class for whose benefit the legislation

was enacted, that Congress intended to create such a

cause of action, that the remedy is consistent with the

legislative scheme, and that the remedy is not one tradi-

tionally relegated to state law. 422 U.S. at 78. More re-

cently, this Court has confirmed that the factors identified

in Cort v. Ash apply equally to questions of statutory in-

terpretation under ERISA. Massachusetts Mutual Life

Ins. Co. v. Russell, 473 U.S. 184, 148 (1985) (“Thus, the

relevant text of ERISA, the structure of the entire stat-

ute, and its legislative history al! support the conclusion

that in $ 409(a) Congress did not provide, and did not

intend the judiciary to imply, a cause of action for extra-

contractual damages * * *.’’)*

The federal common law doctrine, in contrast, is avail-

able in only two limited situations: where the courts in

5 Throughout their briefs, the petitioners suggest that the deci-

sion here is inherently inconsistent with this Court’s decision in

Russell. However, it is evident that Russell was concerned only with

the question of whether a cause of action should be implied under

section 409(a) of ERISA. 473 U.S. at 138 n.5; id. at 149 (“This

case presents a single, narrow question: whether the § 409 ‘appro-

priate relief’ referred to in § 502(a)(2) includes individual recov-

ery by a participant or beneficiary of extra-contractual damages for

breach of fiduciary duty.”) (Brennan, J., concurring). Thus, unlike

Northwest Airlines and Texas Industries, the Court was never

presented with, and certainly did not reach, the question of federal

common law.

13

the absence of legislation must “* * * fashion federal com-

mon law in cases raising issues of uniquely federal con-

cern, such as the definition of rights or duties of the

United States * * *,” Northwest Airlines, 451 U.S. at 95;

or under a few statutes where “* * * Congress has vested

jurisdiction in the federal courts and empowered them to

create governing rules of law.” Texas Industries, 451

U.S. at 642. As the Court’s analyses in Northwest Air-

lines and Texas Industries make plain, the implied right

of action and federal common law doctrines are “two quite

different theories,” Northwest Airlines, 451 U.S. at 86,

and the outcome under one theory is not dispositive of the

outcome under the other theory.

Despite this, the petitioners contend that the decision

of the court of appeals conflicts with decisions in other

circuits rejecting a right of contribution among ERISA

fiduciaries. An examination of the cases that the petition-

ers rely on reveals that there is no substantial inter-

circuit conflict.

The petitioners rely principally on two decisions of the

Ninth Circuit, Kim v. Fujikawa, 871 F.2d 1427, and

Call v. Sumitomo Bank of California, 881 F.2d 626. Both

cases presented a single narow issue: whether section 409

of ERISA, 29 U.S.C. § 1109, can be interpreted to pro-

vide, by implication, a right of contribution among

ERISA fiduciaries. In Kim, the court summarily rejected

the claim, stating that

* * * As the Supreme Court noted in Massachusetts

Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 141-

42 (1984), section 409 of ERISA * * * only estab-

lishes remedies for the benefit of the plan. Therefore,

this section cannot be read as providing for an equit-

able remedy of contribution in favor of a breaching

fiduciary. See Call v. Sumitomo Bank, 689 F. Supp.

1014, 1017-20 (N.D. Cal. 1988).

* * * *

14

we cannot agree with Fujikawa’s contention

that Congress implicitly intended to allow a cause

of action for contribution under ERISA * * *.

Kim, 871 F.2d at 1432 (emphasis in original). Thus, as

the petitioners appear to concede, Pet. at 6, Kim on its

own plainly creates no conflict with the decision here. In-

deed, the court of appeals has explicitly agreed that a

right of contribution cannot be implied as a matter of

statutory interpretation under the test set out in Cort v.

Ash. A. 34.

The Call case likewise creates no conflict. Like Kim,

the only issue presented on appeal in Call was whether

there is a statutorily implied right of contribution under

section 409(a) of ERISA.

In their second cause of action, asserted by appel-

lants in their capacity as fiduciaries, appellants

sought contribution from all of the appellees in “an

amount to be determined at the time of trial.” Ap-

pellants based this claim on ERISA § 409(a), 29

U.S.C. § 1109(a).

Call, 881 F.2d at 629 (emphasis added). The court of

appeals rejected this argument explicitly on the ground

that its earlier decision in Kim was a binding determina-

tion of the issue.

+ + *

* *

* we are foreclosed from considering these argu-

ments because they were rejected in our recent deci-

sion in Kim * * * In that case, we held that ERISA

$409, 29 U.S.C. $1109, the provision upon which

appellants in the instant case rely, ‘only establishes

remedies for the benefit of the plan” and therefore

“cannot be read as providing for an equitable rem-

edy of contribution in favor of a breaching fi-

duciary.”

* * « *

The Kim opinion is unambiguous and _ undistin-

guishable. Because Kim governs this case, we affirm

the district court’s dismissal of appellants’ contribu-

tion claim.

15

Call, 881 F.2d at 630-31 (emphasis in original; citations

and footnote omitted).

It is readily apparent that Call does not conflict with

the decision here. The Call court held only that as a

matter of statutory interpretation, section 409(a) of

ERISA cannot be read to imply a cause of action for con-

tribution, a holding with which the court of appeals be

low agreed. A. 34. The appellants in Call did not argue,

and the court of appeals did not address the separate

question of whether the courts should adopt a right of

contribution as a matter of federal common law under

ERISA. Call, 881 F.2d at 629; see Call v. Sumitomo Bank

of California, 689 F. Supp. 1014, 1022 (N.D. Cal. 1988)

(“* * * under Northwest Airlines, this Court may not

imply a right of contribution into ERISA.’’).

Two other decisions cited by the petitioners require only

brief discussion. In Pappas v. Buck Consultants, Inc., 923

F.2d 531 (7th Cir. 1991), the court of appeals for the

Seventh Circuit declined to fashion as a matter of fed-

eral common law a cause of action against a non-fiduciary

for assisting in a violation of ERISA’s reporting and

disclosure requirements, concluding that such a claim

would be inconsistent with explicit statutory policies. As

such, the decision does not conflict in any way with the

decision below or with settled principles governing the

limits of the courts’ authority to develop federal common

law under a particular statutory scheme. See Miles v.

Apex Marine Corp., 111 8. Ct. 317, 323 (1990) (in for-

mulating maritime rules, the court “must * * * keep

strictly within the limits imposed by Congress’). Cf.

Fow Valley & Vicinity Const. Workers Pension Fund v.

Brown, 897 F.2d 275, 281 (7th Cir.) (en bane) (‘When

ERISA is silent on an issue, a federal court must fashion

federal common law rules to govern ERISA suits.”’), cert.

denied, 111 8S. Ct. 67 (1990).

In contrast, one district court in the Fourth Circuit

has explicitly decided that it would not adopt a federal

16

common law of contribution among ERISA fiduciaries,

reasoning that because Congress explicitly incorporated

various principles of traditional trust law into the stat-

ute, it did not intend the courts to incorporate other trust

principles as a matter of federal common law. NARDA,

Ine. v. Rhode Island Hospital Trust National Bank, 744

F. Supp. 685, 695-98 (D. Md. 1990). However, one

month before NARDA, in a decision not cited by the dis-

trict court, the Fourth Circuit adopted a federal common

law rule of unjust enrichment, reasoning that such a rule

furthered the policies expressed in the statute. Provident

Life & Acc. Ins. Co. v. Waller, 906 F.2d 985, 992-93 (4th

Cir.), cert. denied, 111 S. Ct. 512 (1990). This lone

trial court decision, which evidently does not reflect the

law in the Fourth Circuit, does not present a substantial

conflict that merits resolution by this Court.

III. RECOGNIZING A RIGHT OF CONTRIBUTION

AMONG ERISA FIDUCIARIES IS CONSISTENT

WITH THE STATUTE’S POLICY GOALS AND

WILL SERVE TO FOSTER THE GROWTH AND

DEVELOPMENT OF EMPLOYEE BENEFIT

PLANS.

Contrary to petitioners’ assertions, recognizing contri-

bution among fiduciaries as a remedy under ERISA com-

mon law is entirely consistent with the statute’s purpose.

Congress enacted ERISA to “protect the interests of par-

ticipants in employee benefit plans * * *,” ERISA § 2(b),

29 U.S.C. §$ 1001(b), articulating minimum standards to

“assur|e] the equitable character of such plans and their

financial soundness.” ERISA § 2(a), 29 U.S.C. § 1001

(a). Thus, ERISA establishes “standards of conduct, re-

sponsibility, and obligation for fiduciaries of employee

benefit plans, and * * * provid{es|] for appropriate reme-

dies, sanctions, and ready access to the Federal courts.”

ERISA § 2(b), 29 U.S.C. §1001(b). In specifying who

is a fiduciary subject to these standards, Congress reached

beyond mere titles, defining “fiduciary” as any individual

17

or institution exercising discretion or control over the

managemnet of a plan or its assets. ERISA § 3/21), 29

U.S.C. § 1002121). Recognizing contribution among this

broad class of fiduciaries under ERISA furthers the goal

of protecting the interests of participants and benefi-

ciaries.

The availability of contribution among fiduciaries, for

example, increases the likelihood that parties are brought

into the action with a sufficient pool of resources to provide

a full recovery to participants and beneficiaries. This is

particularly important where a claim is asserted against

one fiduciary and the fiduciary is unable to satisfy a judg-

ment, in whole or in part. The ability to assert a contri-

bution claim could also have the effect of extending the

limitations period by permitting one fiduciary to seek con-

tribution against another fiduciary even after a partici-

pant’s claim is barred. Thus, contribution wouid general-

ly make it easier for participants and beneficiaries to re-

cover for fiduciary breaches.

The potential for liability to other fiduciaries serves as

a stronger deterrent to fiduciary breach than the more

limited risk of liability only to the plan. Without con-

tribution, a breaching fiduciary is at risk only until an-

other fiduciary reimburses the plan for a breach. With

the possibility of an action for contribution, however, a

fiduciary’s potential liability is not extinguished by the

plan’s recovery’ from another fiduciary. This increased

risk of liability increases a fiduciary’s incentive to com-

ply with ERISA’s fiduciary standards.

Petitioners’ own example illustrates the salutary effect

the potential for contribution could have on a plan fidu-

ciary’s behavior. Petitioners explain that small employers

may lack the expertise to comply with ERISA’s technical

requirements. Pet. at 13. Putting themselves in that

class of small employers, petitioners apparently sought,

by hiring Dawson and then Sovran, to relieve themselves

of the duty to comply wich ERISA’s technical require-

18

ments. Pet. at 13. The specter of contribution, accord-

ing to petitioners, would have a chilling effect on small

employers, discouraging them from establishing ERISA

plans. Pet. at 14. However, even hiring professional plan

managers does not relieve an employer like Fairway of

IERISA’s very basic, non-technical duty to monitor fidu-

ciaries hired to perform specific functions. If the threat

of liability arising from potential contribution claims

would have caused Fairway to take a harder look at the

investments made by Dawson or to share with Sovran

any doubts about Dawson’s performance, such an effect

promotes the purposes of ERISA.

The greater expense and effort for ERISA plaintiffs

that petitioners foresee as a result of contribution among

fiduciaries is similarly not a persuasive reason to omit

this remedy. Pet. at 15. Petitioners’ argument fails to

acknowledge the multitudes who are already subject to

suit under ERISA’s broad, functional definition of “‘fidu-

ciary.” ERISA 3(21), 29 U.S.C. § 1002(21). Because

Congress defined “fiduciary” for purposes of ERISA very

broadly, most ERISA plaintiffs already name more than

one party in their fiduciary breach actions. The incre-

mental expense and effort that could result from cross-

claims and third party claims among fiduciaries would

hardly deter a plaintiff.

Permitting claims for contribution will also help to

ensure an adequate pool of qualified institutions and in-

dividuals willing to serve as fiduciaries, and equally im-

portant, willing to serve at a reasonable cost to the plan.

Fiduciaries commit breaches for reasons ranging from

negligence or ignorance to affirmative criminal intent.

Regardless of the reason for a breach, ERISA makes all

breaching fiduciaries strictly liable to the plan for losses

stemming from the breach. If, however, fiduciaries are

prohibited from allocating among themselves the cost of

the breach in accordance with their culpability, some in-

dividuals and institutions will be reluctant to undertake

the role of fiduciary.

19

At bottom, petitioners’ policy arguments against con-

tribution fail to recognize three fundamental proposi-

tions. First, Congress made it plain that it intended to

confer on the courts the power to establish a federal com-

mon law of employee benefit plans. Congress made it

equally plain that the common law of ERISA should find

its source in traditional trust law. Finally, from the

earliest days, traditional trust law incorporated concepts

of contribution and indemnity among trust fiduciaries. It

follows that there is no justification whatsoever for deny-

ing fiduciaries of employee benefit plans the right to seek

contribution and indemnity from their co-fiduciaries. To

rule otherwise serves no purpose except to insulate some

fiduciaries from the consequences of their misconduct.

CONCLUSION

The petition for certiorari should be denied.

Respectfully submitted,

WILLIAM F. HANRAHAN *

ROBERT P. GALLAGHER

STEPHEN M. SAXON

LONIE A. HASSEL

GROOM AND NORDBERG, CHARTERED

1701 Pennsylvania Avenue, N.W.

Suite 1200

Washington, D.C. 20006

(202) 857-0620

Attorneys for Respondent

November 21, 1991 * Counsel of Record