Amicus Curiae Brief — Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc.

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ALEXANDE ;

In the Supreme Court of the Anited CLERK

OCTOBER TERM, 1984

SPE V4

i

CENTRAL STATES. SOUTHEAST AND SOUTHWEST AREAS

PENSION FUND. ET AL.. PETITIONERS

i

CENTRAL TRANSPORT. INC.. ET AL

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

SUPPORTING PETITIONERS

Rex E. Lee

Solicitor General

KENNETH 5S. GELLER

Deputy Solicitor General

JOSHUA |. SCHWARTZ

Assistant to the Solicitor (;,enera

Department of Justice

Washington, DC. 20531

(902?) 633-2217

FRANCIS X. LILLY

Solicitor of Labor

KAREN |. WARD

Associate Solicitor

MARY-HELEN MAUTNER

Counsel for Appellate Litigation

BARBARA J. JOHNSON

Attorney

Department of Labor

Washington, D.C. 20210

BEST AVAILABLE COPY

QUESTION PRESENTED

Whether the Employee Retirement Income Security Act

of 1974, 29 U.S.C. 1001 et seg., permits the trustees of a

multiemployer employee benefit plan to audit records of an

employer participating in the plan to verify that the em

ployer is making contributions on behalf of all employees

for whom they are due

TABLE OF CONTENTS

Page

Interest of the United States ..................... l

inde ee eee bedeebeseceesscees 2

re oe ete duceeseesesedsoceces 8

Argument:

I. ERISA recognizes the authority of employee

benefit plan trustees to audit a participating

employer’s payroll records to verify that the

employer is making all contributions that are

le weenesese< iii eibeakeeShesedbececee se ll

A. ERISA requires trustees to employ prudent

and appropriate means to collect and pre-

nn cts cect i cecegeedeseees ll

B. An audit of a participating employer’s com-

plete payroll records is an appropriate

means for trustees to ensure that the em-

ployer is contributing on behalf of all cov-

rn boesessdesesescecooces 13

C. Other provisions of ERISA demonstrate

that Congress intended that plan trustees

be permitted to audit a participating em-

ployer’s payroll records .................. 22

D. The court of appeals’ decision is inimical to

the objectives of ERISA ................. 24

Il. The trust agreements authorize petitioners’

trustees to audit respondents’ payroll records

to ensure that all required employee benefit

plan contributions have been made .......... 26

RE SE 30

TABLE OF AUTHORITIES

Cases:

Audit Services Inc. v. Rolfson, 641 F.2d 757.... 15

(IIT)

IV

Cases—Continued: Page

Bugher v. Consolidated X-Ray Service Corp., 705

F.2d 1426, petition for cert. pending, No.

83-421 (filed Sept. 12, 1983) .................. 15

Central States, Southeast & Southwest Areas

Pension Fund v. CRST, Inc., 641 F.2d 616... 7

Donovan v. Lone Steer, No. 82-1684 (Jan. 17,

itntn060660006040500nsesnneehesnsenet 20

Donovan v. National Bank of Alaska, 696 F. od

GaP nuconéeceaschdsebensunedetesnesedeeneens 20

Donovan v. Shaw, 668 F.2d 985...............4. 20

Home for Destitute Crippled Children v.

Boomer, 320 Ill. App. 541, 51 N.E.2d 830..... 13

Jim McNeff, Inc. v. Todd, 461 U.S. 260 ........ 15

Laborers Health & Welfare Trust Fund v.

We PEED chuucdcdvcosceceseses 14, 15

Miniard v. Lewis, 387 F.2d 864................ 28

NLRB v. Acme Industrial Co., 385 U.S. 482.... 29

NLRB v. Amazx Coal Co., 453 U.S. 322 ..... 12, 14, 29

Nachman Corp. v. Pension Benefit Guaranty

Cag Ge Ge EP 6:00 60040606.0680686066- 11, 12, 21

Nedd v. United Mine Workers of America, 556

Pall EP Sanecncecéscutcdocibbednedseneetens 14

Nichols v. Trustees of Asbestos Workers Pension

Plan, 3 Empl. Ben. Cas. (BNA) 1726 ......... 14

Nixon v. Administrator of General Services, 433

es GP’ ecdbbl den chdbdensddceuddeadssoest« 19

Pension Benefit Guaranty Corp. v. R.A. Gray &

Co., No. 83-245 (June 18, 1984)............ ll, 24-25

Roark v. Lewis, 401 F.2d 425 .... 2... cece eee 28

Rosen v. Hotel & Restaurant Employees & Bar-

tenders Union, 637 F.2d 592, cert. denied, 454

Sees GE Sdbsubadodddndetescéedeaebudeeedese 13, 14

Schneider Moving & Storage Co. v. Robbins, No.

82-1860 (Apr. 18, 1964) ......ccceccccccess 4, 28, 29

Spooner v. Dunlop, 87 N.H. 384, 180 A. 256 .... 13

Cases—Continued:

Page

United States v. S & Vee Cartage Co., 704 F.2d

914, cert. denied, No. 83-228 (Oct. 31, 1983). 15, 24

United States v. Sells Engineering, Inc., No.

81-1032 (June 30, 1983) .... 6.2... eee eee eee

Upham v. Plankinton, 152 Wis. 275, 140 N.W.

Van Gunten v. Central States, 672 F.2d 586 ..

Statutes and rule:

Employee Retirement Income Security Act of

1974, 29 U.S.C.

ZO U.S.C. 1OOMe) ..... cc ccccccvccccccsveces ll,

i Pere l, 2,

29 U.S.C. 100la(a(3) ... 6... eee eee eee ee

29 U.S.C. 100206) ..... 2 ccc ec eee eeseeceees

29 U.S.C. 1023(aN3MA) .. «6. eee eee

29 U.S.C. LOZB(CM1) . 0... eee e eee eee eee ees 23,

29 U.S.C. 1024(a)(4)(B) .. 2... ee cee eee ees

29 U.S.C. 1024(aXS)(A) .. 6... eee eee eee

29 U.S.C. 1024(a(S5MC) .. 2. eee eee

29 U.S.C. 1059

29 U.S.C. 10GQ(aM 1)... cece cece cece ee eees

29 U.S.C. 105Q a2)... cece eee ee eee eee

29 U.S.C. 10GB) 2... nce cccccccccccccscccees

29 U.S.C. 1082

eeeeeeeeeeeeeeeeeveeeee ee#eneneeeee

29 U.S.C. 110B(a) ... 2... cee ee cece ences: bone

29 U.S.C. 110B(CM1) «1... cee eee eee eens

29 U.S.C. 110B(cM2MA) .. «2. ee eee eee ees

29 U.S.C. 1104

29 U.S.C. 1104(aX1)..........cccccecceeee- 6. 12.

29 U.S.C. 1104(a1I MA) .. 2. 6 ee cece eee

29 U.S.C. 1104(a)1(D) .. «2.6 ee ee eee 12, 19,

29 U.S.C. 1106(a)1MB) .. 2... eee eee ee

29 U.S.C. 1110

29 U.S.C. 1132

eeeeeeeeeeeeeeeeeeeeeeeeeeeee

29 U.S.C. LIB2(DM2)... 1. eee eee eee eee eee

29 U.S.C. 1184(a(1) .. 6... eee eee eee ewes

29 U.S.C. 11B4(aNZ) ... 6. cece eee eee eee

29 U.S.C. 1145

eeeeeveeeeveeeeeeeeeeveeeeeveeeeene?

21

13

26

Vi

Statutes and rule—Continued: Page

Labor Management Relations Act of 1947

§ 301(a), 29 U.S.C. 185(a) ......... cece eeee 5

Multiemployer Pension Plan Amendments Act of

1980, Pub. L. No. 96-364, 94 Stat. 1208 et seq. l

i ih Mi ctiecébbodeceuiebhedesstaenatacs 24

Dorit UE covstiwsdueeddebestebdsucsnee 21

Miscellaneous:

American Institute of Certified Public

Accountants:

Audits of Employee Benefit Plans (1983) 16, 21, 23

Audits of Employee Health and Welfare

EE GPE Cs ccccccunesassaceees 16

Statement on Auditing Standards No. 1

See 690660606000 bendencdende’sdeeees 16

Statement on Auditing Standards No. 9

DU 6 6oncqeedseseeeenneanssonsenceons 16

Statement on Auditing Standards No. 39

Di etetbietinataemeenetenaasesucences 16

G.G. Bogert & G.T. Bogert, The Law of Trusts

and Trustees (rev. 2d ed. 1980)............... 12, 13

126 Cong. Rec. 23039 (1980) ................056. 25

Dep't of Labor Advisory Op. No. 76-89 (Aug. 31,

PTT eT ee TTT ere 26

H.R. Conf. Rep. 93-1280, 98d Cong., 2d Sess.

SEE uudeésncenennseesenense seeeneeceecens« 18, 19

H.R. Rep. 93-533, 98d Cong., Ist Sess. (1973) ... 11, 12,

17, 18, 19, 20, 22

Private Welfare and Pension Plan Legislation:

Hearings on H.R. 1045, H.R. 1046 and H.R.

16462 Before the General Subcomm. on Labor

of the House Comm. on Education and Labor,

91st Cong., lst & 2d Sess. (1969-1970) ........ 12

Prohibited Transaction Exemption 76-1, 41 Fed.

Reg. (1976):

Vil

Miscellaneous—Continued: Page

Restatement (Second) of Trusts (1959) .......... 13

S. Rep. 93-127, 938d Cong., Ist Sess. (1973).... 11, 12,

17, 18, 19, 20, 22

A. Seott, The Law of Trusts (3d ed. 1967):

Staff of the Senate Comm. on Labor and Human

Resources, 96th Cong., 2d Sess., The

Multiemployer Pension Plan Amendments Act

of 1980, S. 1076: Summary and Analysis of

Consideration (Comm. Print 1980)............ 25

In the Supreme Court of the Gnited States

OCTCBER TERM, 1984

No. 82-2157

CENTRAL STATES, SOUTHEAST AND SOUTHWEST

AREAS PENSION FUND, ET AL., PETITIONERS

v.

CENTRAL TRANSPORT, INC., ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

SUPPORTING PETITIONERS

INTEREST OF THE UNITED STATES

This case will clarify the authority of trustees of a

multiemployer employee benefit plan that is subject to the

Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. 1001 et seg., as amended by the

Multiemployer Pension Plan Amendments Act of 1980

(Multiemployer Act), Pub. L. No. 96-364, 94 Stat. 1208 et

seq., to verify, by appropriate audits of the records of em-

ployers participating in the plan, that the employers are

remitting contributions on behalf of all employees for whom

they are due. The United States has a substantial interest

in the proper resolution of this issue.

The Secretary of Labor is charged with administering the

employee benefit rights protection provisions (Title I)

(1)

2

of ERISA. Failure to recognize auditing authority in em-

ployee benefit plan trustees sufficient to enable them to en-

force employer contribution and funding obligations would

shift to the Secretary the burden of detecting contribution

delinquencies—a burden that Congress intended to be

borne by plan trustees. It would also threaten the integrity

of the plans that the Secretary has been directed to pro-

tect. In addition, the court of appeals’ decision, by

undermining the efficacy of fiduciary safeguards for as-

suring that all required employer contributions are made,

has the potential to impose financial burdens upon the em-

ployee benefit plan termination insurance fund established

pursuant to Title IV cf ERISA, and to impose administra-

tive burdens upon the Pension Benefit Guaranty Corpora-

tion, a wholly owned government corporation that adminis-

ters the insurance program.

This Court recognized the substantial interest of the

United States in the question presented by inviting the So-

licitor General to express the government’s views at the pe-

tition stage. The United States filed a brief as amicus cu-

riae in support of the Petition.

S”ATEMENT

1. Petitioners are multiemployer e1iployee benefit plans

subject to ERISA and the Multiemployer Act (29 U.S.C

1001 et seq.). Petitioners provide health, welfare and pen-

sion benefits to certain persons whose employers are en-

gaged in interstate trucking. Respondents are 16 interstate

trucking companies. Each of the petitioner benefit plans

was created by a trust agreement entered into by

multiemployer associations to which respondents belong

and various local affiliates of the International Brotherhood

of Teamsters, Chauffeurs, Warehousemen and Helpers of

America.' By the terms of the National Master Freight

Agreement, a collective bargaining agreement to which the

' The trust agree ments covering the Pension Fund and the Health

and Welfare Fund are identical in all material respects. References

hereinaft>r are to the provisions of the Pension Fund trust agreement

which is reproduced at Pet. App. A43-A49

3

union and respondents are signatories, respondents are re-

quired to make weekly contributions to petitioners for each

employee “covered by the agreement.” An employee is

“covered,” irrespective of union membership, if he or she is

employed in a particular job classification described in the

collective bargaining agreement.? Respondents have ex-

pressly agreed to be bound by the trust agreements gov-

erning the petitioner funds. Pet. App. Al-A5, Al6. Under

the trust agreements, covered employees are entitled to

certain benefits providing that they satisfy stated

preconditions.

The trust agreements require each participating em-

ployer to make “continuing and prompt payments to the

Trust Fund as required by the applicable collective bar-

gaining agreement” (Art. III, § 1 (Pet. App. A44)). The

agreements establish boards of trustees to administer the

Funds and require the trustees “to demand and collect the

contributions of the Employers to the Fund” and to “take

such steps, including the institution and prosecution of

* * * any legal proceedings as the[y| * * * in their discre-

tion deem in the best interest of the Fund to effectuate the

collection or preservation of (employer! contributions * * *

owed to the Trust Fund” (Art. III, § 4 (Pet. App. A45)).

In order to facilitate the trustees’ performance of their

collection and enforcement responsibilities, Article III,

Section 5 of the trust agreements provides (Pet. App. A46):

Each Employer shall promptly furnish to the Trust-

ees, upon reasonable demand the names and current

addresses of its Employees, their Social Security num-

bers, the hours worked by each Employee and past in-

dustry employment history in its files * * *.

In addition, each employer is required to supply (ibid.):

such other information as the Trustees may reasonably

require in connection with the administration of the

Trust.

Article II1, Section 5 of the trust agreements provides as

well that (Pet. App. A46):

2 Respondents allege that 60% of their employees are not covered

Pet App A® AG4)

4

The Trustees may, by their representatives, examine

the pertinent records of each Employer at the Employ-

ers place of business whenever such examination is

deemed necessary or advisable by the Trustees in con-

nection with the proper administration of the Trust.

The trust agreements provide that Fund trustees may

construe the provisions of the trust agreements; any con-

struction adopted by the trustees in good faith is binding on

employers, the union and employees (Art. IV, § 17 (Pet.

App. A27, A48)). Furthermore, by the terms of the collect-

ive bargaining agreement and implementing agreements

providing for respondents’ participation in the Pension and

Health and Welfare Funds, respondents agreed to be bound

by all actions of the Funds’ trustees (Pet. App. A3-A4).

Finally, the trustees are empowered by the trust agree-

ments “(tjo do all acts, whether or not expressly authorized

herein, which the Trustees may deem necessary or proper

for the protection of the property held hereunder” (Art.

IV, § 14(e) (emphasis added) (Pet. App. A27, A45, A47)).

See generally Schneider Moving & Storage Co. v. Robbins.

No. 82-1860 (Apr. 18, 1984), slip op. 4-5.

2. In late 1979, petitioners contacted respondents to

arrange a “periodic review(| of participating employer con-

tributions for the benefit of Plan Participants and their

Beneficiaries,” including a “(djetermination of eligible Plan

Participants covered by Collective Bargaining Agree-

ments” (Pet. App. A6-A7). During the course of this audit,

in February and March 1980, respondents furnished peti-

tioners’ audit staff with only part of the information they

requested. Respondents provided payroll registers for

those employees whom respondents deemed covered by the

collective bargaining agreement. In addition, respondents

produced insurance exception listings, which are documents

prepared monthly listing the individuals and time periods

for which respondents acknowledged an obligation to make

contributions to the trust funds. /d. at A85-A86.

* The trust agreements involved in this case are the same ones inter

preted by the Court in Schneider Moving & Storage Co

5

Based on the limited information provided, petitioners’

auditors discovered substantial reporting and contribution

deficiencies, including respondents’ failure to pay sums

owed to the Funds totalling in excess of $268,000. Specifi-

cally, the auditors found that respondents had failed

promptly to report newly-hired employees, had reported

premature termination dates for departing employees, had

failed to contribute for employees who worked part of a

week during a strike, and had failed to contribute for em-

ployees who were on sick leave. The auditors also discov-

ered four instances in which respondents had made contri-

butions for an individual not listed on the various

documents that purportedly contained the names of all cov-

ered employees. Pet. App. A7, A83-A84, A87. Despite pe-

titioners’ request, however, respondents refused to provide

tax forms and complete payroll ledgers that included infor-

mation regarding employees who respondents claimed were

not covered (id. at A7, A86). At respondents’ direction, the

auditors left respondents’ premises on March 28, 1980 with-

out completing their audit (id. at A7, A88).

8. Petitioners commenced this action in the United

States District Court for the Eastern District of Michigan

pursuant to Section 301(a) of the Labor Management Rela-

tions Act of 1947, 29 U.S.C. 185(a), and Section 502 of

ERISA, 29 U.S.C. 1132, alleging that respondents failed

accurately to report, and to remit benefit fund contribu-

tions for, all employees covered by the collective bargaining

agreement (Pet. App. Al-A2). The relief sought by the plan

trustees included an injunction directing respondents to al-

low a complete audit of their payroll records in order to en-

able the trustees to verify that respondents had correctly

reported all covered employees and had made all required

contributions. Petitioners maintained that, without such an

independent audit, they would be unable to ensure the fi-

nancial integrity of the benefit funds or to fulfill their fidu-

ciary obligations to the plans’ participants and their tenefi-

ciaries. Pet. App. A2. The district court agreed, and held

(id. at AS-Al4) that petitioners had both a contractual

right under various provisions of the trust agreements and

a statutory obligation under ERISA to audit respondents’

6

payroll records “to independently verify the status and du-

ties of all individuals employed by [respondents] in order to

insure that proper benefit contributions are being made”

(id. at A3).

4. The court of appeals reversed (Pet. App. Al5- A34).

The court initially held (id. at A18-A20) that ERISA does

not itself afford petitioners any authority to audit respon-

dents’ records “to independently verify whether any given

employee is covered by the collective bargaining agree-

ments” (id. at Al9). The court of appeals acknowledged

that ERISA imposes broad fiduciary duties on benefit plan

trustees. 29 U.S.C. 1104. The court reasoned, however,

that because the Act also specifies that fiduciaries must act

“solely in the interest of [p.an] participants and beneficia-

ries,” and must act “in accordance with the documents and

instruments governing the plan insofar as such documents

and instruments are consistent with” the Act (Pet. App

Al% (quoting 29 U.S.C. 1104(a\(1)), ERISA does not sanc-

tion exercise of auditing authority by the trustees. The

court of appeals stated (Pet. App. A19-A20):

[Tjhe provisions of ERISA require reference to the

terms of the collective bargaining agreements and the

trust agreements to determine who are the partici-

pants and beneficiaries to whom statutorily imposed

duties are owed and to the terms of the trust agree-

ments to determine what the precise nature of those

duties are.

The court of appeals held, moreover, that the trust

agreements did not authorize the trustees to undertake the

audit contemplated, either. The court of appeals initially

concluded that the trust agreements define the term “em-

ployees” to include only workers covered under the benefit

plans and that the trustees’ right under Article III, Section

5 to demand pertinent information on “employees” accord-

ingly did not extend to persons other than those covered by

the plans (Pet. App. A20-A26). Additional language in Arti-

cle III, Section 5 that requires an employer to furnish other

information reasonably required by the trustees, and to

produce pertinent records for the trustees’ examination

(see pages 3-4, supra), was also dismissed as insufficient to

afford the trustees the audit authority claimed (Pet. App

A26). The court reasoned that this language “ ‘can only re-

fer to information reasonably required as to “covered” em-

ployees additional tv the records specifically listed’” (ibid.,

quoting Central States, Southeast & Southwest Areas Pen

sion Fund v. CRST. Inc... 641 F.2d 616. 619 (8th Cir

1981))

The court of appeals did recognize a contractual basis for

the trustees’ exercise of a tightly circumscribed auditing

authority extending beyond records on persons conceded

by an employer to be covered by the employee benefit plan

(Pet. App. A27-A3'). The court inferred that language in

the trust agreements expressly mandating that trustees

collect contributions owed by employers (see Art. IV, § 2

(Pet. App. A47)) and granting them power to protect trust

assets by taking acts not otherwise explicitly authorized

(see Art. IV, § 14(e) (Pet. App. 47)) required the trustees

to “ensure that contributions to the Funds correlate with

disbursement of benefits from them” (id. at A29). The

court premised this conclusion in part upon the common law

principle that “|plowers may be inferred or implied from

the terms of the governing instruments read as a whole,

from an express directive to accomplish a particular goal

unaccompanied by express directives on the ordinary and

natural means of obtaining that result, and from the pur

poses of the trust” (id. at A28)

Notwithstanding this analysis, the court of appeals held

that the trustees’ auditing authority is “confined to factual

situations in which the trustees have reasonable cause to

believe that a particular person is covered by a collective

bargaining agreement but has not been * * * classified

* * * as a covered employee” (Pet. App. A29). The court of

appeals explained that the trustees’ authority under the

trust agreement is “limited * * * by ERISA” (id. at A27)

The court believed that the trustees’ statutory duties to ad-

minister the Fund exclusively in the interest of participants

and other beneficiaries precluded them from reviewing em-

ployment records of non-covered employees (id. at A29)

The court of appeals’ conclusion appears to rest upon the

view that it would be “arbitrary and capricious” —and thus

8

an imprudent expenditure of plan assets inconsistent with a

fiduciary’s obligations under ERISA—to undertake an au-

dit designed to ferret out underpayments, absent reason-

able cause to suspect that an employer has failed to make

required payments in the case of a particular employee (id

at A29-A30).

The court of appeals also concluded that limiting the

trustees’ auditing authority to instances in which there is

cause to believe that required contributions have not been

made for an identified employee was consistent with tradi-

tional labor relations principles (Pet. App. A30-A31). The

court observed that “[cjoverage under the terms of a col-

lective bargaining agreement has traditionally been within

the province of the employer and union” (id. at A30). The

court of appeals believed that limiting the trustees’ audit

authority “preserves the privacy (sic) and integrity of the

grievance ard irbitration provisions agreed to by [respon-

dents} and the Union as a means of resolving questions of

employee coverage” (id. at A31).

Applying the limited auditing right it had recognized, the

court of appeals concluded that petitioners were entitled to

review only respondents’ records covering the four individ-

uals as to whom respondents had made trust fund contribu-

tions without listing the incividuals as covered (along with

the records covering those employees respondents con-

ceded to be covered). Any broader audit was deemed “out-

side of [the trustees’) statutorily and contractually imposed

duties, express or implied, as a matter of law” (Pet. App.

A32)

SUMMARY OF ARGUMENT

I

A. The court of appeals improperly limited petitioners’

authority to conduct an audit of contributing employers’

payroll records to assure that all contributions owed to the

employee benefit plan are being paid. Recognizing the im-

portance of pension and welfare plan benefits to the finan-

cial well-being of millions of persons, Congress required in

ERISA that employee benefit plan assets be held in trust.

Invoking established trust law doctrine, Congress sub-

9

jected plan officials to strict fiduciary standards of conduct.

Among the implied fiduciary duties recognized under the

law of trusts is the trustees’ fundamental obligation to col-

lect trust assets. This obligation, like those expressly es-

tablished by the pertinent trust agreement, may be carried

out both through powers explicitly conferred upon the fidu-

ciary and through the trustees’ inherent authority to use

ordinary and natural means to obtain the results mai dated

by the trust.

B. An audit of a participating employer’s payroll records

is a reasonable and appropriate means of carrying out the

trustees’ obligation to collect all contributions due to the

plan. Indeed, in light of the substantial opportunities that

exist for misclassification or underpayment by employers,

especially in multiemployer plans, such an independent

check on the accuracy and completeness of an employer's

coverage determinations must be available to plan trustees

if they are to provide meaningful protection for plan partic-

ipants. Generally accepted auditing standards and commvun

sense support the view that an employer’s omissions in list-

ing covered employees and making contributions on their

behalf can only be detected by audit procedures that look

beyond records on those employees the employer concedes

to be covered.

The legislative history of ERISA confirms the impor-

tance of plan trustees’ auditing authority. Ensuring full

funding of pension plan benefits through timely payment of

employer contributions was one of the Act’s principal objec-

tives. Moreover, Congress recognized that special features

of employee benefit plans—including the large number of

participants and the inability of individual participants ard

beneficiaries effectively to guard their own interests—

mandate that plan fiduciaries act vigilantly and vigorously

to guard plans’ financial soundness.

The court of appeals’ justifications for departing from

these principles are insubstantial. Review of payroll rec-

ords necessary to detect covered employees whom a partic-

ipating employer has failed to acknowledge is not inconsist-

ent with the statutory requirement that fiduciaries act on

behalf of beneficiaries and participants. Nor is a limitation

10

of auditing authority to employer payroll records on indi-

viduals as to whom there is already reasonable cause to

suspect employer delinquencies consistent with, much less

required by, fundamental notions of prudence. Audits that

are carefully staged in conformity with generally recog-

nized accounting procedures enhance, rather than threaten,

plan assets.

C. The reporting and disclosure requirements of ERISA

offer further evidence that plan trustees are vested with

authority to independentl; verify the accuracy and com-

pleteness of employer contributions. Financial statements

and schedules in annual reports that plan trustees are re-

quired to file with the Secretary must be certified as sound

and accurate under generally accepted auditing standards.

Those standards require assurance that a plan has disclosed

all contributions due. The annual reports must also disclose

the number of plan participants. Congress plainly under-

stood that plan officials had the authority to verify data

needed to meei these requirements. Indeed, 29 U.S.C.

1059 directly requires employers to provide trustees of

multiemployer plans with information necessary to ascer-

tain which of the employers’ workers is covered by the ben-

efit plan.

D. The court of appeals’ decision frustrates ERISA’s

overriding objective: to assure the financial security of em-

ployee benefit plans. By design or mistake, participating

employers sometimes fail to remit full contributions due on

behalf of all participants. If these contribution deficiencies

go undetected they can lead to inadequate funding of the

plans involvea. The court of appeals’ ruling undercuts ef-

forts to ensure proper funding by encouraging employers to

refuse to cooperate with trustees performing their fiduciary

duties.

Contrary to the conclusion of the court of appeals, the

trust agreements in this case plainly grant petitioners the

auditing authority they seek. The agreements provide that

contributing employers must furnish the trustees with any

information reasonably required in their administration of

1]

the trust and must afford access to employer records when

examination is deemed advisable by the trustees. Trustees

may also undertake any action necessary to protect trust

assets. Petitioners’ interpretation of these provisions as

providing for their exercise of audit authority is reasonable

and should be sustained.

ARGUMENT

I. ERISA RECOGNIZES THE AUTHORITY OF EM-

rLOYEE BENEFIT PLAN TRUSTEES TO AUDIT A

PARTICIPATING EMPLOYER'S PAYROLL REC-

ORDS TO VERIFY THAT THE EMPLOYER IS

MAKING ALL CONTRIBUTIONS Ti" AT ARE DUE

A. ERISA Requires Trustees To Employ Prudent And

Appropriate Means To Collect And Preserve Plan

Assets

After extensive study of the operation and failings of pri-

vate employee pension and welfare benefit plans, Congress

enacted the Employee Retirement Income Security Act of

1974, 29 U.S.C. 1001 et seg. ERISA was designed to re-

dress major deficiencies in plan functioning found to impli-

cate “the continued well-being and security of millions of

employees and their dependents” by establishing “minimum

standards * * * assuring the equitable character of such

plans and their financial soundness” (29 U.S.C. 1001(a)).

Congress wished to “mak[e] sure that if a worker has been

promised a defined pension benefit upon retirement —and if

he has fulfilled whatever conditions a.e required to obtain a

vested benefit—he actually will receive it.” Nachman

Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359

375 (1980). Accord, Pension Benefit Guaranty Corp. v.

R.A. Gray & Co., No. 83-245 (June 18, 1984), slip op. 2. To

achieve this end, Congress required that “all assets of an

employee benefit plan shall be held in trust” (29 U.S.C.

1103(a)). See S. Rep. 93-127, 93d Cong., !st Sess. 29-30

(1973); H.R. Rep. 93-533, 92d Cong., Ist Sess. 11-13 (1973).

In order “to make as certain as possible that pension fund

assets would be adequate” to pay benefits due, Congress

12

also “prescribed standards of conduct for plan” fiduciaries

(Nachman Corp., 446 U.S. at 375).

The fundamental standards of conduct for trustees are

set forth in Section 404 of ERISA, 29 U.S.C. 1104. Con-

gress required employee benefit plan fiduciaries to dis-

charge their duties with respect to the plan “solely in the

interest of the participants and beneficiaries” and with the

“care, skill, prudence and diligence” that a prudent person

“familiar with such matters” would employ if acting under

similar circumstances. 29 U.S.C. 1104(a)(1). Congress also

required fiduciaries to discharge their duties “in accordance

with the documents and instruments governing the plan in-

sofar as [they] are consistent with [ERISA].” 29 U.S.C.

1104(a)(1)(D).

In outlining the responsibilities of bene™ plan fiducia-

ries, Congress deliberately declined to enumerate the pow-

ers and duties of trustees, choosing instead to invoke the

common law of trusts. The House and Senate Reports each

explain: “The fiduciary responsibility section, in essence,

codifies and makes applicable to these fiduciaries certain

principles developed in the evolution of the law of trusts”

(S. Rep. 93-127, supra, at 29; H.R. Rep. 93-533, supra, at

11). See NLRB v. Amazx Coal Co., 453 U.S. 322, 332-333

(1981). Thus, the trustees’ statutory obligations to act in a

prudent manner and with utmost fidelity to the interests of

participants and beneficiaries are defined by reference to

the duties and powers of trustees recognized in the common

law.

The law of trusts recognizes fundamental fiduciary duties

that arise by virtue of the trust relationship. Trustees have

a common law duty to take necessary steps to preserve and

maintain trust assets. G.G. Bogert & G.T. Bogert, The

Law of Trusts and Trustees § 582 (rev. 2d ed. 1980) |here-

inafter cited as Bogert}; 2 A. Scott, The Law of Trusts

* Congress was equally concerned that welfare benefit plans, which

frequently pay benefits out of current contributions, be able to deliver

promised benefits. See Private Welfare and Pension Plan Legislation

Hearings on H.R. 1045, H.R. 1046 and H.R. 16462 Before the General

Subcomm. on Labor of the House Comm. on Education and Labor

Yist Cong., Ist & 2d Sess. 471-472 (1969-1970)

13

$ 175 (3d ed. 1967). Acts traditionally deemed necessary to

preserve trust assets include identifying the trust assets,

holding the settlor to his obligation to deliver the assets,

and asserting control over the assets. Bogert § 583, at

348-350, 355-356. Trustees also have a duty to investigate

the identity of beneficiaries for the purpose of notifying

them of gifts made for their benefit. Bogert § 583, at 348;

see Rosen v. Hote! & Restaurant Employees & Bartenders

Union, 637 F.2d 592, 600 (3d Cir.), cert. denied, 454 U.S

898 (1981).

Moreover, under the law of trusts made applicable to em-

ployee benefit plans by ERISA, the authority available to

trustees to carry out their fiduciary duties includes not only

the fiduciaries’ express powers, defined by the instrument

creating the trust, but also powers implied from the terms

and purposes of the trust. Bogert § 551, at 3, 41. Among

those implied powers is the trustee’s authority to “use the

ordinary and natural means” for obtaining the resuit dic-

lated by the settlor. /d. § 551, at 41; Restatement (Second)

of Trusts § 186 (1959); 3 A. Scott, supra, § 186, at 1496.5

B. An Audit Of A Participating Employer's Complete

Payroll Records Is An Appropriate Means For Trust-

ees To Ensure That The Employer Is Contributing

On Behalf Of All Covered Employees

1. In order to fulfill their express statutory duty to act

with fidelity to the interests of plan participants and benefi-

ciaries, and their implied duties to collect trust assets and

identify the beneficiaries, trustees must ensure that an em-

ployer is making appropriate contribucions for all covered

> A trustee's duty to maintain trust property by ordinary and natu

ral means gives rise to manifold diverse powers, each appropriate to

particular circumstances confronted by the trustee. For instanc:

trustees have been held to possess authority to repair or improve prop

erty to preserve its value, to mortgage or lease real estate to raise

needed revenue, and to maintain suit against the settlor or others to

secure possession of the assets. See, ¢.g., Spooner v. Dunlop, 87 N.H

384, 180 A. 256 (1985); Upham v. Plankinton, 152 Wis. 275, 140 N.W

5 (1913); Home for Destitute Crippled Children v. Boomer, 320 Ii

App. 541, 51 N.E.2d 830 (1944)

14

employees. Trustees of an empiovee benefit plan have an

obligation to safe:7uard not only the interests of those em-

pioyees who the employer acknowledges are covered, but

also the interests of unidentified, but covered, employees

for whom the employer is not making contributions. In ad-

dition, in a multiemployer plan, the trustees not only pro-

tect the interests of all participants, but effectively protect

participating employers generally against liability for

underfunding resulting from deficiencies in the contribu-

tions of any particular employer. In sum, benefit plan trust-

ees have an unqualified “obligation to enforce the terms of

the collective-bargaining agreement regarding employee

fund contributions against the employer.” NLRB v. Amaz

Coal Co., 453 U S. at 332, 337 (emphasis in original).* Ac-

cord, Nedd v. United Mine Workers of America, 556 F.2d

190, 212 (3d Cir. 1977); Laborers Health & Welfare Trust

Fund v. Kaufman, 707 F.2d 412, 416 (9th Cir. 1983).

To fulfill these obligations, and to avoid effecting a pro-

hibited extension of credit to an employer who is delinquent

in his contributions (see 29 U.S.C. 1106(a)(1(B)), trustees

must develop “reasonable, diligent and systematic methods

for the review of employer contribution accounts [including]

field audits.” Prohibited Transaction Exemption 76-1, 4!

Fed. Reg. 12740, 12741 (1976). Accord, Nichols v. Trustees

of Asbestos Workers Pension Plan, 3 Empl. Ben. Cas.

(BNA) 1726, 1732 (D.D.C. 1982). Ultimately, trustees must

“take action against employers who fail to contribute to the

fund as required by the plan” (Rosen v. Hotel & Restau-

rant Employees & Bartenders Union, 637 F.2d at 600)

An audit of a participating employer's payroll records is

an ordinary and natural means for trustees to enforce the

employer's obligation to contribute for each covered em-

ployee. See Prohibited Transaction Exemption 76-1, supra

Unless an employer's records disclosing the identity of em-

ployees and the nature of their employment are available

for the trustee’s examination, the trustees will be obliged

to rely upon the good faith and the correctness of unilateral

* As the Court emphasized in Amer Coal Co., trustees may not

“compromise the claims of the union or the employer with regard to

the latter's contributions” (453 U.S. at 336)

|

)

)

15

employer determinations as to coverage under the collect-

tive bargaining agreement. Such unquestioning reliance is

inconsistent with the fundame.ial statutory requirement

that an employee benefit plan fiduciary act “solely in the in-

terest of [plan] participants and beneficiaries” with the

“care, skill, prudence and diligence” that a prudent persor

“familiar with such matters” would employ in the circum

stances (29 U.S.C. 1104(a\(1)).’

One “familiar with such matters” wouid guide his per

formance of a trustee’s fiduciary obligations with the

knowledge that contributing employers, through inadvert-

ence, mistaken legal interpretation or fraud, do not always

remit complete and accurate contributions on behalf of all

covered employees. See, e.g., Jim McNeff, Inc. v. Todd

46 | U S 260 ' 1983): Bughe rv. ¢{ onsolidated x Ray Service

Corp., 705 F.2d 1426 (5th Cir. 1983), petition for cert

pending, No. 85-421 (filed Sept. 12, 1983); United States

S & Vee Cartage Co., 704 F.2d 914 (6th Cir. 1983), cert

denied, No. 83-228 (Oct. 21, 1983). Moreover, a knowledge-

able trustee would appreciate that general payroll audits

ean facilitate recovery of significant contribution delinquen-

cies undetectable by any other means. See, e.g., /i”

McNeff, Inc. v. Todd, supra (audit revealed that employer

wed more than $5,000 on behalf of five employees that em

ployer had never reported as covered); Laborers Health &

Welfare Trust Fund v. Kaufman, supra (audit indicated a

discrepancy exceeding $130,000 due to contruversy regara

ing covered or non-covered status of particular non-unior

labor); Bugher v. Consolidated X-Ray Service Cor}

supra (audit uncovered more than $100,000 due on behalf of

covered employees who employer erroneously believed

were not covered): Audit Services I me \ Rolfso p41

F.2d 757 (9th Cir. 1981) (audit revealed deficiency of more

than $25,000 due to employers’ failure to contribute on be

half of non-union covered employees). Accordingly, a pru

dent employee benefit plan fiduciary would not unquestior

16

ingly accept the accuracy of an employer's coverage

determinations.

Generally accepted auditing standards confirm that fail-

ure to recognize the audit authority of trustees of a

multiemployer pension or welfare benefit plan cripples

trustees’ ability to identify and collect all assets owed to the

plan in a manner consistent with fiduciary standards of

care. For instance, completion of an independent audit of

such a benefit plan requires that the auditor investigate

and be assured of the accuracy of the plan’s data on the

number and identity of participants. Such assurance may

be gained in part from an independent check of the emphvy-

er’s records, and in part from an assessment of the plar's

own internal safeguards to make sure that all contributior s

due are paid. American Institute of Certified Public Ac-

countants (AICPA), Audits of Employee Benefit Plans

§§ 8.4, 10.6 (1983); AICPA, Audits of Employee Health

and Welfare Benefit Funds 20-21 (1972); AICPA, State-

ment on Auditing Standards No. i, at AU 520.01 (1972);

AICPA, Statement on Auditing Standards No. 9, at AU

322 & AU 322.02 (1975). These professional auditing proce-

dures reflect an elementary —but critical —auditing princi-

ple based, at root, upon common sense:

The auditor should determine that the population [ex-

amined] is appropriate for the specific audit objective.

For example, an auditor would not be able to detect

understatements of an account due to omitic items by

sampling the recorded items. An appropriate sampling

plan for detecting such understatements would involve

selecting fron: a source in which the omitted items are

included.

AICPA, Statement on Auditing Standards No. 39 *17, at

AU 350.17 (1981) (emphasis added). There is no reason to

impute to Congress the intent to defy this common sense

principle by rendering employee benefit plan fiduciaries ac-

countable for collection of trust assets while denying them

the authority needed to carry out that obligation.*

* In fact. as explained below (see pages 22-23, infra), Congress gen

erally required employee benefit plans to conform to the norms of the

accounting profession in the conduct of their affairs

2. The legislat.ve history of ERISA provides additional

evidence that the Act should be interpreted to recogniz

the authority of employee benefit plan trustees independ

ently to verify that participating employers have made all

contributions required of them under applicable trust

agreements Recognition of trustee auditing authority ef

fe< tuates two of the maior Policy onectives that ‘ ongress

ing ERISA: reform of pre

,

intended to accomplish by ena

vailing pension and welfare plan funding practices anc

maintenance of uniform and high standards of fiduciary re

sponsibility for plan officials, employing the latter to aa

vance the former. See Rep 93-127 supra, at Y, ii H.R

tep. 93 Doo, Supra, al 7

The House and Senaté Reports explain Congress § I

ern with assuring full plan funding (H.R. Rep. 93-562

epra, at 7; S. Rep. 93-127, supra, at 9-10

The pension plan which offers full protection to its

employees is one which is funded with accumulated

ets which at least are equal to the accrued labpiiities

al iW itr a Cor trid it MOT rat ~ iffix lel - Tidil Lal! tr at

> , ’

_ a s™ a aii Limes

‘ ngress according!) req lired tna aii iTTe?T | at ' rua

f benefits based o1 iwrent service ~*~ * * De paid ior im

mediately” (H.R. Rep. 93-533, supra, at 14). See 29 U.5.'

’

itm ongress recog! ized. moreover pased IPO) LS SLUG

f pension pian failures, that one | the tw eading cause

I ss of individual benefit rignts | tne manner in whic!

pian|s are| executed with respect | tnew ntra

jal requirements of * * * funding 5. Rey 93.177

upra, at 5: H R. Rep. 93-533, supra, at 5). In additior

(‘ongress understood that iedividual employees are unabi

as a practical matter, to sefeguard their own pension and

benefit rights (S. Rep. 93-127, supra, a. 4; H.R. Re

io-Do0, supra, al : hus T tle fu protectiol ngre

niended | pr aL s ts be achieved are, =e errTiaing

goal of making “the private pension promise * * * rea

ratner (nal ijusory attained (id. at 10 benefit plat

fiduciaries—the only actors who ar harged faithfu and

singel naediy t protect participants niterest j ’ ‘

1s

effective means to verify the completeness and accuracy of

employer contributions.®

The legislative history of ERISA also demonstrates that

Congress was cognizant of the special attributes of em

ployee benefit plans that distinguish them from typical!

trusts governed by state lav The Senate and House Re

ports observe that “conventional trust law” was “developed

in the context of testamentary and inter vivos trusts (usu

ally designed to pass designated property to an individual

or small group of persons),” whereas “the typical employee

benefit plan, covering hundreds or even thousands of par

ticipants, is quite different from the testamentary trust

both in purpose and in nature” (S. Rep. 93-127, supra, at

29: H.R. Rep. 93-533, supra, at 12). Because of the large

number of participants in a typical employee benefit plan

and the fact that the trust is intended to receive a continu

ous stream of contributions keyed to the number and iden

tity of its employees and their functions, employee benefit

plans predictably experience specia difficulty in assuring

timely receipt of all of the assets to wich they are entitled

This is especially true of multiemployer plans because of

the fluid structure of employment in many industries in

which such plans are characteristically found. In industries

such as construction and trucking, variability, brevity and

uncertainty of job duration and the multiplicity of employ

ers for some workers over the course of a year greatly mul

tiply the opportunities for honest errors, mistaken judg

ments and outright fraud. See Bricklayers Fringe Benefit

Funds Am. Brief in Support of the Petition 4-5. Congress's

instruction that the “courts * * * interpret the prudent

A yr Th. pr iow) that auniect t arefu iT neated ex ey

a. " ' « : Na rye ry nure fT he henefit fany en

plover.” 29 U.S.t 3 See H.R. Conf. Rep. 98-1280, 98d

i Z i) : j rf rae Ne rustees exer “e aud

4 : » ‘ ior the returt at

: wy TT " atanKe t fact ’ a

; Appea le ’ mn tr ane

" ‘ 4 " g? rry ‘ whether ar ry

19

man rule and other fiduciary standards bearing in mind Une

special nature and purposes of employee benefit plans

Rep 93-127 supra, al 29 H_R Rep 93.4533 supra. at iz

H.R. Conf. Rep. 93-1280, 98d Cong., 2d Sess. se 1974

thus dictates that the trustees of muitiempioyer pians im

afforded auditing authority sufficient to enable them to ver

ifv the accuracy and completeness of employe! yntt

butions

ta (Contrary to the view if the court of appeais Pet

App. Al9, A29), checking an employers re ords to verity

that required contributions have beet made for all covered

employees whether or not identified as such Dy the «

ployer, is entirely consistent with the statutory directi\

that fiduciaries act solely In the interest of pial participal Ls

and beneficiaries. 29 LS. 1104(aX LNA such an aud

necessarily encompasses review of payroll records of per

eons who are not acknow dged by the employer! to

ered. and will, a8 a@ practical matte! often entall examina

tion of records of some persons who are not in fact covert a

Still. the essential purpose of such an audit is to protect

interests of plan participants hoth those who Nave erro

wsiy Deen excluded by the en ployer i making ‘ mtriou

’

tions. am. those who Nave Deen accurate! identified as

ered but whose interests are threatened Dy ul dertunding

the plan because of an employers failure to mak« ntribu

rons il respect of all covered re raons See Niror \ :

yniafrator fti,enera or ea 23 CI ~ VAS hs) i

’ f os :

‘ : “4 '

: ‘ : | al ire " ’

‘ " y r : "

al ; :

ERISA | App. Al® ey 29 ia

: ‘ i Day . , | *

: 1s ») ne a x * .

B ne ippea . iy

rT ‘ ue . . “~—

bis sal . : y a Vi

‘ ia es pla : , ,

: ‘ ‘ Day ; :

it

a”)

-

b Equally ineorrect is the court of appeals categorical

judgment (Pet. App. A29-A30) that a prudent fiduciary is

prohibited from undertaking an audit extending 6 yond the

records of those individuals eonceded to be covered and

those other identifiable individuals the trustees have rea

sonable cause to believe are covered.'' This limitation robs

j ‘ al ; ai fT ’ ‘ re : nana

re 4 . I he eyisia " nia ’ nponas » « ha hie ata

ery 1¢ ‘aa if a gy ’ : Dp? wi ne ha ¥ s Tou ar 2 her

. apy atié ae a * Ret 44 eu 7 4 Hi ; Ret 44 .

ij “e 4ia toe 2uUDD at

appeais Na ERISA te : % . nor

at es

! | appea ate nha ’ ~ etal | : re kl '

ya ar acTided tf ‘ eas atic aUSsS¢

ane, sree ’ hat beneT und rustees sf a t be afforded a

sreater latitude than the Secretary (Pet. App. A30 & The

Appea ‘rea ne sla ' : gr he Sec’ \ eeds reas

4 : A “ ’ ne i “et | a Dia ré¢ | : | re . ;

. ia ' ~ ' ar Nas re jalified a r ’

: ~ 4 4 re ar aur ae ; P rt « . L« 4

ie " : 4 es va ’ sere , ;

\ K if A L A068 F 9d 678. 6R4-OR or ™

, HAR F | os ya) (Reh Ce GR. The ry

ne \ ee Dia are erchangeabi :

\ hs4 4 ae | : : ’

. | ' . ew Nat aracd 5 4 re ' 1. a .

“ae ‘ Na ne ’ ' : oon for wl y wb :

‘ »! ac 7. ‘ acl lat prote ect ft re a! ’ at

' ADI AS Ait? ig? ane 4 ’ ace? rw ' re ~~ ry aT

yal ‘ ’ na re appeais ‘ ‘ ag

ne ‘ le Na r secretal estiga autnor

; re ’ ar “a? ¥ rhe ’ ~ ~ rf

. | rit . leed gt ae ¥ aw

, ry ’ “~ ’ ar aut? ’ ali y 6 ‘

' rut tue a. tremi eT Dia .

’ 4 he 4 se au r ’ raiie au) 1¢

e dis ered. res with pla rustees a unlike ha

gre witnne pierre ar aud ge authori ron ate

: ‘ etal Nas formed us hat approximate HH) OOO bene!

: hile a ‘ eportea with ? Het wee OO) a “wy hy

ploys it is sw rea Suge ha

ra ya aud y a Nor ne eta ‘ Dr te

‘ | " al De aradie ha aft '

the trustees auditing authority | the apility t 7 ver

previousiy unsuspected delinquencies i mntributions.'* It

would reward neeaiment | suct lé naouvuetl Ps and

would, contrary to fundamental precepts of fiduciary r

sponsibility, force trustees to rely heavily upon the proor

ang accurac\ if determinations made b\ ntriputing en

ployers. The court of appeals’ decision thus ts irreconcilabDk

with Congress 8 desire t ie Gulies and standaras cerive

from tin mmon law of trusts “to make a@8 certain a8 poss

bie that pensior fund assets would be adequate DAY D

fits due (Nachman Con 446 U.S. at 375). It nstrains

Dial trustees from emp Vile Treas aDiIe MeA! inal ar’

¥ suited | ae. pert rrTial ' 1 tre r fidu al ULlles

>

:

- _

, , , ‘ ‘ " "

ws \

; : al : "

" " ; "

" " ‘

va

: R

'

. ~ ~ :

: o .

" "

eu "

. . ~ : :

" ga " " ;

’ . : ‘

i a : R "

a : . P :

2»

4. The tension between the critical role that Congress ex-

pecied plan fiduciaries to play in assuring the financial

sou xdness of benefit plans and the restricted scope of the

aud ting authority recognized by the court of appeals is ex-

acerbated by the court's extremely restrictive application

of the “reasonable cause” standard it announced (see page

7, expra). Surely, when an audit limited to payroll records

of concededly covered employees uncovers significant em-

ployer contribution deficiencies, as it did in this case, pru-

dence dictates that further auditing be undertaken to verify

whether contributions are being made for all covered em-

plovyees. Even if particularized suspicion were required, pe-

titioners’ trustees had ample reason to investigate further

here

(C. Other Provisions Of ERISA Demonstrate That Con-

gress Intended That Plan Trustees Se Permitted To

Audit A Participating Employer's Payroll Records

Under ERISA Congress imposed stringent reporting re-

quirements on employee benefit plan trustees in order to

enable participants and beneficiaries, as well as the Secre-

tary of Labor, to ensure that trustees fulfill their duties

“(Tihe safeguarding effect of the fiduciary responsibility

section will operate efficiently only if fiduciaries are aware

that the details of their dealings will be open to inspection.”

S. Rep. 93-127, supra, at 27; H.R. Rep. 93-555, supra, at

11. Several of the specific reporting and disclosure require-

ments imposed upon employee benefit plans independently

confirm that Congress expected such trustees to be able to

audit employer payroll records to verify the accuracy of

employer identification of covered employees

First, in order to permit “better assessment of * * *

planis’| financial soundness by administrators and partict-

pants alike” (S. Rep. 93-127, supra, at 28), ERISA re-

yuires that the annual reports of employee benefit plans

filed with the Secretary of Labor include the opinion of an

independent public accountant as to whether the financial

statements contained in the report are accurate and pre-

yvincally resuits from meticulous enforcement f employer cent mbut ton

ire ™Ments “ee DacrSs o i> supra

23

sented “in conformity with generally accepted accounting

principles.” 29 U.S.C. 1023(aX5)A). To provide a founda-

tion for rendering such an opinion, the independent auditor

is to undertake “such tests of the books and records of the

plan as are considered necessary” under “generally ac-

cepted auditing standards” (ibid. ). If the independent ac-

countant presents a materially qualified opinion, the Secre-

tary may reject the annual report and order a second audit

or bring an enforcement action against the plan. 29 U.S.C

1024(a)(4)(B), (5A) and (C).

As explained above (page 16, supra), generally accepted

auditing standards require that employer records be avail-

able to confirm the accuracy of coverage determinations

and the adequacy of plan funding, particularly in the case of

an audit of a multiemployer plan,'* If neither the employee

benefit plan’s internal auditor nor the independent auditor

has access to employer payroll data, the independent audi-

tor generally will be obliged to express a qualified opinion

or to disclaim an opinion (AICPA, Audits of Employee

Benefit Plans, supra, § 12.17), thereby rendering the

plan’s annual report subject to rejection by the Secretary.

It is thus essential for plan operation under ERISA that

employer records needed to verify the completeness of the

employer's contributions be available for audit. Plainly

Congress expected that plan fiduciaries and their auditors

would be able to undertake such examinations.

The same conclusion follows from 29 U.S.C. 1023(c)(1)

Under that section, the annual report required to be filed

with the Secretary of Labor by the plan adrainistrator must

‘4 In preparing an opinion for a plans annual report, an i depender

accountant must determine whether the plan has properly assessed 4!

employer contributions due. In doing 80 the accountant considers

“Iwihether covered employees have been properly in luded” in em

ployers’ contribution reports AICPA. Audit of Employee Benefit

Plans, supra, $§ 8.2.2), 10.2(a) In assessing a multiempl«,.. plans

identification of coverea employees, “the (independent) audit-r ma)

need to make special arra:gements to examine employer recores (1d

§ 8.4) including “testing whether the data maintained |in the funds

files correspond to the cle ta maintained in employer payrol end pe r

sonnel files” (id. § 10.500)

24

reflect the number of employees covered by the plan. Ccen-

gress unquestionably understood that plan fiduciaries

would have access to the information and records necessary

to determine that figure reliably and independently.

Finally, 29 U.S.C. 1059 mandates that such employer

records be open to plan fiduciaries. Under Section

1059(a)(1) and (2) (emphasis added), an employer par-

ticipating in a multiemployer plan is required to “furnish to

the plan administrator the information necessary for the

administrator to maintain” records “with respect to each

(of the employer’s] employees sufficient to determine the

benefits due or which may become due to such employees.”

This requirement obviously would not be satisfied if the in-

formation provided by an employer—or the records main-

tained by the plan—were limited to persons an employer

concedes to be covered.'® In addition, Section 105%a)(1)

and (2) requires each employer to “furnish to the plan ad-

ministrator the information necessary” to enable the admin-

istrator to render a report “to each employee who is a par-

ticipant under the plan” stating the extent of his accrued

benefits thereunder, whenever such a report is requested

or in certain other circumstances. Like Section 1023(c)(1),

Section 1059 necessarily assumes that plan fiduciaries will

have access to information necessary to enable them cor-

rectly to determine the identity of plan participants. '®

D. The Court Of Appeals’ Decision Is Inimical To The

Objectives Of ERISA

In enacting ERISA, Congress sought to assure that

participating employees and their beneficiaries would have

fiscally sound benefit plans available to them. See Pension

‘Ss The term “employee” as used in ERISA is defined to include all

persons working for an employe:. 29 U.S.C 1002(6)

16 Employers that falsify informaticn that plans must use in meeting

their reporting requirements may ircu” criminal penalties under 18

U.S.C. 1027. See United States v. S & Vee Cartage Co., supra. In ad-

dition, a civil penalty of $10 is payable to the Secretary for “each em-

ployee” with respect to whom an empl vyer fails to furnish information

required to be supplied under Section ‘05%a). 29 U.S.C 1059%(b). Plan

fiduciaries’ exercise of auditing authority assists in the enforcement of

these penalty provisions

ee ee ee

Benefit Guaranty Corp. v. R.A. Gray & Co., slip op. 1-2.

Congress recognized that employer contribution delinquen-

cies pose a serious threat to the fiiancial soundness of

multiemployer plans. See, e.g., 126 Cong. Rec. 23039

(1980) (statement of Rep. Thompson).'? Audits of employer

records by plan fiduciaries to verify that all contributions

due have been remitted are an invaluable tool for detecting

employer delinquencies before plan soundness is substan-

tially undermined.

Accordingly, the decision below, if affirmed, will have a

substantial deleterious impact upon the administration of

employee benefit trust funds and will create substantial un-

certainty for fiduciaries as to the scope of their obligations.

As indicated above, the court of appeals’ decision sharply

restricts the tools available to employee benefit plan trust-

ees to carry out their responsibilities —responsibilities Con-

gress deemed essential to the “continued well-being and se-

curity of millions of employees” (29 U.S.C. 1001(a); see also

29 U.S.C. 100la(a)3)).

The court of appeals’ decision also will exacerbate the fis

cal problems that affect multiemployer plans because of em-

ployer contribution delinquencies by hindering trustees’ ef-

‘7 Representative Thompson, one of the floor managers of the

Multiemployer Act, described the various kinds of problems presented

by such delinquencies (126 Cong Rec. 23039 (1980))

Failure of employers to make promised contributions in a time!)

fashion imposes a variety of costs on plans While contributions

remain unpaid, the plan loses the benefit of investment income

that could have been earned if the past due amounts had been re

ceived and invested on time. Moreover, additional administrative

eosts are incurred in detecting and collecting delinquencies

* > >

These costs detract from the ability of plans to formulate or

meet funding standards and adversely affect the financial health

of plans. Participants and beneficiaries of plans as well as em

ployers who honor their obligation to contribute in a timely fash

ion bear the heavy cost of delinquencies in the form of lower ben

efits and higher contribution rates Moreover, * * * uncollected

delinquencies can add to the unfunded liability for all employers

Accord. Staff of the Senate Comm. on Labor and Human Resources

96th Cong., 2d Sess., The Multiemployer Pension Plan Amendments

Act of 1980. S. 1076: Summary and Anaiysis of ¢ onsideration 43-44

(Comm. Print 1980)

26

forts to assure that such plans receive all contributions due.

Pension. plans must pay benefits to eligible participants and

beneficiaries whether or not the employer has made re-

quired contributions to the plan on behalf of the particular

employees. Van Gunten v. Central States, 672 F.2d 586,

589 (6th Cir. 1982)."* Accordingly, undetected contribution

deficiencies, however caused, can result in underfunding of

plans and threaten the interests of those who depend on

them.

Finally, the court of appeals’ decision inevitably will en-

courage employer resistance to audits and will make fund-

ing delinquencies substantially harder to detect —especially

before they have ripened into serious financial difficulty for

a plan. Trustees who lack authority to audit general payroll

records must depend on the employer voluntarily to pro-

vide the information needed to assure that contributions

are being made for all eligible employees. The decision be-

low thus will frustrate the efforts of plan trustees to fulfill

their fiduciary duties, create confusion as to the extent of

their obligations, and breed litigation. The decisiun may

also discourage trustees from exercising the utmost dili-

gence in protecting the interests of all persons entitled to

benefits under employee benefit plans.

il. THE TRUST AGREEMENTS AUTHORIZE PETI-

TIONERS’ TRUSTEES TO AUDIT RESPONDENTS’

PAYROLL RECORDS TO ENSURE THAT ALL RE

QUIRED EMPLOYEE BENEFIT PLAN CONTRI-

BUTIONS HAVE BEEN MADE

1. Based on the foregoing considerations, we conclude

that Congress contemplated that employee benefit plan

trustees have the authority to verify the sufficiency of em-

'1® See also Dep't of Labor Advisory Op. No 76-89 (Aug. 31, 1976)

(Pet. App. A70-A71). We know of no support for the court of appeals’

speculation (Pet. App. A33-A34) that a covered employee on whose be

half no contributions were made might be estopped from claiming ben

efits under a plan. The legislative history of ERISA makes clear that

Congress rejected any suggestion that individuals should lose their

benefits because of their neglect to uncover an employer's failure to

make required contributions on their behalf. See page 17, supra

ployer contributions. But even if there were doubt as to

whether ERISA itself should be read to confer authority

upon benefit plan trustees to undertake such audits, the

court of appeals’ view that provisions of ERISA should be

read to limit the contractual grant of authority contained in

the trust agreements in this case would be wholly

untenable. As we have indicated above, verification of an

employer's coverage determinations is not inconsistent with

either the prudent person standard of care or the statutory

requirement of fidelity to the interests of covered persons

Thus, ERISA requires at a minimum that the provisions of

a trust agreement that authorize trustees to enforce the

contribution obligations of the employer be given a liberal,

commonsense interpretation that will enable the trustees to

fulfill their role as guardians of all participants’ interests

Read in this manner (or, indeed, read literally), the

access-to-records provisions of the trust agreements, Arti

cle III, Section 5 (see pages 3-4, supra), make clear that

the trustees are not limited to examination of records of

employees either who are acknowledged by the employer to

be covered or who the trustees have reasonable cause to

believe have been erroneously excluded. The trust agree-

ments expressly require participating employers to provide

the trustees not only with information on covered employ-

ees, but also with “such other information as the Trustees

may reasonably require in connection with the administra

tion of the Trust.” The agreements further authorize the

trustees to examine “the pertinent records of each Em

ployer at the Empioyer’s place of business whenever such

examination is deemed necessary or advisable by the Trust

ees in connection with the proper administration of the

Trust” (Pet. App. A46)

This contractual language is sweeping and unqualified;

trustees’ access to employer records turns simply upon the

trustees’ assessment that examination thereof would be

“advisable” in connection with the performance of their du

ties. In light of the breadth and the structure of the con

tractual language, and the fact that uncertainty and dis

putes as to coverage of particular individuals are a fixture

of pension plan operation, this language can only be fairly

28

read to authorize the trustees to review employer docu-

ments necessary to confirm independently that all contribu-

tions due have been made. Certainly, the trustees’ inter-

pretation of the trust agreements as conferring auditing

authority upon them is neither arbitrary nor unreasonable

and is plainly consistent with the language of the agree-

ments. Accordingly, under Article IV, Section 17 of the

trust agreements (see page 4, supra), that interpretation is

binding upon respondents. See Roark v. Lewis, 401 F.2d

425 (D.C. Cir, 1968); Miniard v. Lewis, 387 F.2d 864 (D.C.

Cir. 1967), see also Art. III, § 4 & Art. IV, § 14(e) (quoted

at pages 3-4, supra). :

In Schneider Moving & Storage Co. v. Robbins, No.

&2- 1860 (Apr. 18, 1984), this Court read Article III, Sect_on

5 of the trust agreements at issue here in precisely the

manner we advocate (slip op. 5 (footnote omitted) ):

To ensure compliance with the contribution require-

ments, the trust agreements gave ‘he trustees the au-

thority to examine [the employers’) payroll records. If

the trustees determined that [the employers] were not

complying with their contrivution requirements, they

had the authority under the trust agreements to ini-

tiate legal proceedings to enforce those requirements

* * *

The Court thus indicated that, contrary to the view of the

court of appeals in this case, the trustees’ audit authority is

available for the purpose of uncovering an employer's fail-

ure to make required contributions, and not merely to con-

firm suspected delinquencies.

2. The court of appeals’ decision conflicts with Schnetder

Moving & Storage Co. in another significant respect as

well. Contrary to the court of appeals’ analysis (see page 8,

supra), this Court squarely rejected the premise that peti-

tioners’ trustees are obliged to rely upon the union or the

arbitration mechanism provided in the collective bargaining

agreement to enforce the contribution obligations of

participating employers (slip op. 8-12). To be sure, the

court of appeals did not completely subordinate the trust-

ees’ enforcement responsibilities to the labor-management

arbitral process here. But the court of appeals’ reason:ng

that the auditing authority of trustees should be limited so

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30

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

Rex E. LEE

Solicitor General

KENNETH S. GELLER

Deputy Solicitor General

JOSHUA I. SCHWARTZ

Assistant to the Solicitor General

FRANCIS X. LILLY

Solicitor of Labor

KAREN I. WARD

Associate Solicitor

MARY-HELEN MAUTNER

Counsel for Appellate Litigation

BARBARA J. JOHNSON

Attorney

Department of Labor

AUGUST 1984

which grants access to records only “in connection with the proper ad-

ministration of the Trust” (Pet. App. A46).