# Amicus Curiae Brief — Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0016%3A19 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1985 - **Citation:** 472 U.S. 559 ## Text | — ¢ a 5 Vy 7 Bupreme Court. ft a CORRECTED copy » ». 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 an rocess =e Pet ADI AS30 a3) is ! +7 that " sa? 1 : ' ' ourt - rex ognivio!r Silt ; i i a ' ’ nor trustees and the union are no wru ne « ffect of limi ng the trustees au ere a mcre te ntroversy eXISts as | : ; X . identified « mpioyee is quixotic. o 4 ¥ + ‘ » * audit authority alioras no prove »* . ta Yr) \ mn ne pected 16 . nveres : COVE ge U US} iG > 7 > . . rs is lupix ate ne mion & Tor : ™ %i ‘4 ider Moving & Storage Co., slip of . : +h . > + h - . et | r¢ rT 1 na est mar its : ; - > : hha , hr oo : " . agree subordinate he trustees yA Ff P : : ’ P a " 1 the procedures spe iid TOF i , ™ : s - ~ : I 1sputes inaer tie ve Valk @ “ " : ios TY D yers ar : re in) ’ \ ‘ \ ‘ , : ° Fa: | ad as | al i : : ~ : 1 . ag : ‘\ , ; > ~ 4 La 4 1 _ % > 2 2 ‘ 1 4 ‘ > > . = > : 4 \ : a = s : 1 . 4 ~ ‘ . ‘ 4% ” \ 4 ~ a . & “ - : : ‘ ss : : . 4 ~ : ; : ary 4 1 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). --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0016%3A19. Public record. Not legal advice.