Amicus Curiae Brief — Bank of America, N. A. v. Abraham

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Nos. 01-1179 and 01-1187 : ‘

In the Supreme Court of the United States |

BANK OF AMERICA, N.A., ETC., PETITIONERS

Vv.

JULIO ABRAHAM, ET AL.

NORCAL WASTE SYSTEMS, INC., ET AL.,

PETITIONERS

Vv.

JULIO ABRAHAM, ET AL.

ON PETITIONS FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE

THEODORE B. OLSON

EUGENE SCALIA Solicitor General

Solicitor of Labor Counsel of Record

ALLEN H. FELDMAN EDWIN S. KNEEDLER

Associate Solicitor Deputy Solicitor General

NATHANIEL I. SPILLER JAMESA. FELDMAN —

Deputy Associate Solicitor Assistant to the Solicitor

oa General

EDWARD D. SIEGER Department of Justice

Attorney ;

Washington, D.C. 20530-0001

Department of Labor a , “fe he 5

Washington, D.C. 20520 202) 314-22

QUESTION PRESENTED

Under Metropolitan Life Insurance Co. v. Taylor, 481

U.S. 58 (1987), certain state-law claims can be removed to

federal court if the Employee Retirement Income Security

Act of 1974 (ERISA), 29 U.S.C. 1001 et seg., “completely

preempts” them. The question presented is whether ERISA

completely preempts state-law claims for breach of fiduciary

duty where (a) the plaintiffs are former shareholders of a

company who became participants in the company’s em-

ployee stock ownership plan (ESOP), (b) the defendants

include persons responsible for administering the ESOP, and

(c) the alleged state-law claims arise from the plaintiffs’

receipt of notes when they soid their shares to the ESOP in a

leveraged buyout and do not arise from any action taken by

the ESOP with respect to plaintiffs as ESOP participants.

(I)

TABLE OF CONTENTS

Page

II sialic eniciniccenniannasdiniilatiidpashis 1

SIE siiiiitencsalinsiderncnttiacsnitinvnheniirtinashileniiinbnmansnuncintnalinnnte 6

A. Respondents’ claims cannot support removal

jurisdiction under the complete preemption

I itainneescapiiciccecnsincctensticentinneninnncinntiniinimenntnnennsenmanes 7

B. The Section 514(a) preemption issue does not fur-

nish an independent basis for review ...............s000000 10

C. The court of appeals’ discussion of the prohibited

transaction exemption has no bearing on the re-

MOVal OF PFeEMPtION ISSUC ..........-ceceecesereseseesesesesesessees 15

D. There is no conflict in the Circuits ............ccccsssesesssessees 17

ID caccctitnsinececeseaninncstiteeaehannenpiiagsnctnnanniatianinapanemaeeitinntion 20

TABLE OF AUTHORITIES

Cases:

Abraham v. Norcal Waste Sys., Inc., No. 94-2730

(N.D. Cal. July 29, 1994) ....... peilenniitindseanitdimgieaueaaen 4

Bartholet v. Reishauer A.G. (Ziirich), 953 F.2d 1073

CR el SID sicrhineciachcttininnneninceniseenstiniepsentectnennnmnennapeannammeennes 19

Caterpillar Inc. v. Williams, 482 U.S. 386 (1987) ....... 10-11

Darcangelo v. Verizon Communications, Inc., 292

BE BBE CORR Cay. I crccecccsccscccecnscnscanssecssrecnnscnsesoneccsonssnsee 12

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

270 (2d Cir. 1992) 19

Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.), cert.

SE Ss BOG CID ececcerecsnnsszsntncnccsenepnsncersccnsnsscnees 13

Dudley Supermarket, Inc. v. Transamerica Life Ins.

& Annuity Co., 302 F.3d 1 (Ist Cir. 2002) ............ccccsseees ~

Egelhoff v. Egelhoff, 532 U.S. 141 (2001) ...........ccscccsseeseees 14

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101

CRIED axcnyonicesssesisnesesnsecsssnensesscseasssaoqsasnnsessansunsapussenssessssenessesesesee 17

Franchise Tax Bd. v. Construction Laborers Vacation

UE NE CEI, WD acteenetencinrctcicecnnnsie 7, 8, 9,17

(III)

IV

Cases—Continued:

Glaziers & Glassworkers Union Local No. 252 Annuity

Fund v. Newbridge Sec., Inc., 93 F.3d 1171 (3d Cir.

ED ictiinshintnitenceaiiatabsccimaeitcl <dlleniasaeidiaenianaiiiobs

Hull v. Fallon, 188 F.3d 939 (8th Cir. 1999), cert.

denied, 528 U.S. 1189 (2000) ..............scsccssscsssssssscssssesssereees

Jass v. Prudential Health Care Plan, Inc., 88 F.3d

SA CO TD siiictesciniiinnitpaerarstisiesiltnanerminivininnanien

John Hancock Mut. Life Ins. Co. v. Harris Trust

& Sav. Bank, 510 U.S. 86 (19938) ...........ccccccsrcscsscsscscscsereees

Joyce v. RJR Nabisco Holdings Corp., 126 F.3d 166

i UD pisiarsetecenisstekteteanenincalainiisesheatenceninnasicinineignteiivinnce

Kramer v. Smith Barney, 80 F.3d 1080 (5th Cir.

I scicehiccicnieetiiecintiaaiiaa amici paiiiindttiniataninivesaniene

Lazorko v. Pennsylvania Hosp., 237 F.3d 242 (3d

Cir. 2000), cert. denied, 533 U.S. 930 (2001) ..............s00

Lehmann v. Brown, 230 F.3d 916 (7th Cir. 2000) ...........

LoPresti v. Terwilliger, 126 F.3d 34 (2d Cir. 1997) ........

Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269

Fe iecintiaeninintinseiviaininschcicvinictisiicnsnsitetaneinaninibinaniadanens

Martin v. Feilen, 965 F.2d 660 (8th Cir. 1992), cert.

denied, 506 U.S. 1054 (1998) ....

Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58

(1987) .......

Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995),

cert. denied, 516 U.S. 1115 (1996) ............cccccccsscsessesseeseees

Pegram v. Herdrich, 530 U.S. 211 (2000) .........ccccseseeeees

Pohl v. National Benefits Consultants, Inc., 956

F.2d 126 (7th Cir. 1992) ,

Rice v. Panchal, 65 F.3d 687 (7th Cir. 1995) 2.0...

Rivet v. Regions Bank, 522 U.S. 470 (1998) ..........scssesesees

Romney v. Lin, 105 F.3d 806 (2d Cir.), cert. denied,

522 U.S. 906 (1997)

Rush Prudential HMO, Inc. v. Moran, 1228. Ct.

2151 (2002) .......

Smith v. Dunhan-Bush, Inc., 959 F.2d 6 (2d Cir.

1992) PSS ON CE AN a da oe Rae

Page

V

Cases—Continued: Page

Smith v. Provident Bank, 170 F.3d 609 (6th Cir.

1999) .. in 8, 17,18

Sommers Drug Stores Co. Employee Profit Sharing

Trust v. Corrigan Enters., Inc., 793 F.2d 1456

(5th Cir. 1986), cert. denied, 479 U.S. 1034 (1987) ...... 13, 18

Varity Corp. v. Howe, 516 U.S. 489 (1996) ........ssesessesees 12

Statutes and regulations:

Employee Retirement Income Security Act of 1974,

2D U.S.C. 1001 66.809. .1.cn.ascserccccsesrcsascscccsscccsererscsssccsscsssensessees 1

§ 3(14), 29 U.S.C. 1002(14) ............cecorcscsrsrsrncececsssrsresesecs 3

§ 3(21)(A), 29 U.S.C. 1002(21)(A) .......ecccceceessecsenessesenenes 11

§ 404(a)(1)(A), 29 U.S.C. 1104(a)(L)(A) ..-.ececeseeseseneenes 4,10

§ 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B) .............. 4

§ 406(a), 29 U.S.C. 1106 (a) ........cssscrsssssecscscscesscecssnsecesenes 3

§ 408(b)(3), 29 U.S.C. 1108(b)(3) e 3

§ 408(c)(3), 29 U.S.C. 1108(C)(S) «......sesrecssereeeessereeneenennees 11

§ 502(a), 29 U.S.C. 1182(a) ......ccccercrcereseeececneceesenees passim

§ 502(a)(1)(B), 29 U.S.C. 1182(a)(1)(B) ......eeccccseresenenens s

§ 502(a)(2), 29 U.S.C. 1132(a)(2) 9

§ 502(a)(3), 29 U.S.C. 1132(a)(3) .. sana 9

§ 514(a), 29 U.S.C. 1144(a) ...... 5, 6, 7, 10, 13, 14, 15, 16, 20

§ 514(b)(2)(A), 29 U.S.C. 1144 (D)(2)(A) ...--eeceescceesneereees 13

Labor-Management Relations Act, 1947, § 301,

29 U.S.C. 185 11

5 U.S.C. 1367(a) 5

28 U.S.C. 1367(a) . 5

2B U.S.C. 14410D) .....cccccsscccscccsccsssosesscssecesecerereressrsssssnssersesssssososs 7

26 C.F.R. 54.4975-7(b) .. 3

29 C.F.R.:

Section 2509.94-2 14

Section 2550.408b-3 3

Jn the Supreme Court of the Gnited States

No. 01-1179

BANK OF AMERICA, N.A., ETC., PETITIONERS

v.

JULIO ABRAHAM, ET AL.

No. 01-1187

NORCAL WASTE SYSTEMS, INC., ET AL.,

PETITIONERS

v.

JULIO ABRAHAM, ET AL.

ON PETITIONS FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE

This brief is submitted in response to the Court’s invita-

tion to the Solicitor General to express the views of the

United States.

STATEMENT

Respondents are a group of former stockhulders of a

predecessor firm of petitioner Norcal. In a 1986 buyout, an

ESOP (an Employee Stock Ownership Plan) bought the

stock from respondents in return for cash and notes. Forty-

four of the 147 respondents continued as employees of the

reorganized firm and thus became participants in the ESOP,

which is subject to the Employee Retirement Income Secu-

rity Act of 1974 (ERISA), 29 U.S.C. 1001 et seg. Norcal

eventually defaulted on its debt to respondents. Respon-

dents filed a state-court action against, inter alia, the ESOP

(1)

2

and members of its administrative committee, alleging viola-

tion of state-law duties owed to respondents as former

stockholders and current noteholders of Norcal. The action

was removed to federal court. The court of appeals held that

there was no federal removal jurisdiction under the “com-

plete preemption” doctrine, because respondents were suing

as former shareholders and current noteholders, not as par-

ticipants in the ERISA plan, and their claims therefore could

not have been brought under ERISA’s civil enforcement

provisions. Although the court of appeals also concluded

that petitioners have no preemption defense on the merits to

respondents’ state-law claims, the court’s holding that the

federal court had no removal jurisdiction was sufficient to

dispose of this case.

1. In 1986, petitioner Norcal Solid Waste Systems, Inc.

(Norcal), created an ESOP as part of the company’s lever-

aged buyout of its employee-shareholders. Pet. App. 3a. Un-

der the buyout, a group of banks, led by petitioner Bank of

America, made loans to Norcal, which loaned the money to

the newly-created ESOP. Ibid. The ESOP then bought the

shares of the employee-shareholders for $65 million in cash

and $36.5 million in long-term notes. Jdid. Respondents are

147 former employee-shareholders (or their representatives)

who received those notes in the exchange. See 01-1179 Pet. 7.

The notes were governed by a trust indenture agreement

between the ESOP, as obligor, and one of the bank lenders,

Security Pacific National Bank, as the trustee. Pet. App. 3a.

The indenture was governed by California law. Id. at 4a.

Under the indenture, the banks could not take action against

the ESOP’s assets to recover the debt. The indenture also

prohibited the ESOP from merging into another entity un-

less the ESOP first redeemed the outstanding principal on

the notes, and it required the indenture trustee to exercise

its rights and powers if there was a default. The notes were

permitted by regulations that create an exception to

3

ERISA’s prohibition against transactions between an

ERISA plan and a “party in interest.”

2. In December 1987, Norcal combined with Envirocal,

Inc., and the Norcal ESOP combined with Envirocal’s ESOP.

Pet. App. 5a. In May 1988, Security Pacific, as indenture

trustee, told respondent noteholders that no action had been

taken that materially affected them. Ibid. In September

1988, the ESOP told its participants—44 of whom were

among the 147 respondent noteholders—of the transaction.

In 1990, the Norcal ESOP merged with another company’s

ESOP. Norcal and the Norcal ESOP took on additional debt

in those transactions. 01-1187 Pet. 9. In April 1991, Norcal

defaulted on its debts, and the Norcal ESOP defaulted on its

indebtedness to the noteholders. Pet. App. 5a.

3. In 1994, all 147 respondent noteholders filed a state-

court action against Norcal, the Norcal ESOP, Norcal’s bank

lenders, and several individual officers and directors of

Norcal. Pet. App. 5a-€a.2 Bank of America, which had by

then merged with Security Pacific, was sued both for its con-

duct as a lender and for Security Pacific’s conduct as trustee

under the indenture. Jbid.

The complaint sought relief under state law for alleged

wrongdoing in connection with the 1986 leveraged buyout,

the 1987 Envirocal transaction, and subsequent ESOP activi-

1 ERISA generally prohibits transactions between a plan and a “party

in interest,” a term that includes employers who sponsor a plan and

employees who participate in it. 29 U.S.C. 1002(14) (definition of “party in

interest”), 1106(a) (prohibition). A non-recourse loan to an ESOP that

meets certain conditions is exempt from that prohibition. See 29 U.S.C.

1108(b)(8); 29 C.F.R. 2550.408b-3; 26 C.F.R. 54.4975-7(b).

2 The court of appeals stated that the officer and director defendants

included members of the ESOP’s Administrative Committee, without fur-

ther elaboration. Pet. App. 5a-6a. In fact, two of those defendants were

alleged to be directors of Norcal and members of the ESOP committee,

but three other “officer and director” defendants were sued only as mem-

bers of the ESOP committee. See Compl. 17 16, 19, 22, 23, 24.

}

4

ties. Pet. App. 6a. “The acts allegedly resulted in [respon-

dents’] unwitting reliance in tendering their shares in Norcal

for restricted notes, the [indenture trustee’s] failure to re-

deem or enforce redemption of those notes at the time of the

Envirocal transaction, and the eventual default on [the]

notes.” Ibid. Count 5 of the complaint alleged that the offi-

cer and director defendants owed a state-law fiduciary duty

to respondents as shareholders that continued after they

exchanged their shares for the notes. Compl. 4 98. They

breached that duty, the complaint alleged, by arranging for

Norcal and the ESOP to enter into mergers in violation of

the indenture and shouldering massive new debts that were

made superior to respondents’ notes. Jd. 4 101. As relief,

respondents sought general and punitive damages. Id.

{ 103. Counts 4 and 6 made similar allegations against the

officer and director defendants and others under construc-

tive fraud and negligence theories. Jd. {| 86-95, 104-109.

Forty-four of the 147 noteholders—those who were ESOP

participants as well—simultaneously filed a federal court ac-

tion under ERISA’s civi! enforcement provision, Section

502(a), 29 U.S.C. 1132(a), alleging that Norcal, the Norcal

ESOP, and the individual officer and director defendants

who also had been sued in state court had breached their

fiduciary duties to the ESOP participants. Pet. App. 6a;

Compl. 44 9-19, Abraham v. Norcal Waste Sys., Inc., No. 94-

2730 (N.D. Cal. July 29, 1994). Those alleged breaches oc-

curred when the defendants caused Norcal and its ESOP to

merge with other companies and their ESOPs in 1987 and

1990 without an adequate investigation and independent ad-

vice regarding the participants’ interests. Jd. {4 15-18. The

ESOP participants alleged that those actions violated Sec-

tions 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. 1104(a)(1)(A)

and (B), which require a fiduciary to act solely in the interest

of plan participants, for the exclusive purpose of providing

5

them benefits, and with a high degree of prudence. Compl.

q 19.

4. Norcal, the ESOP, and the individual defendants re-

moved the state-court action to federal court, based on the

“eomplete preemption” doctrine of Metropolitan Life Insur-

ance Co. v. Taylor, 481 U.S. 58 (1987). Pet. App. 6a. Under

that doctrine, a claim pleaded under state law that in fact

falls within the scope of ERISA’s civil enforcement section,

29 U.S.C: 1132(a), is removable to federal court.

The district court concluded that removal was proper.

Pet. App. 21a-22a. The court then asserted supplemental

jurisdiction over the remaining claims and parties pursuant

to 28 U.S.C. 1367(a). Pet. App. 6a-7a. In 1995, the parties

settled all claims except for the respondent noteholders’

claims against Bank of America, as successor to the trustee

under the indenture. Id. at 7a. In 1996, Norcal and the

ESOP intervened to obtain a declaration that they had no

obligation under the indenture to indemnify the Bank. bid.

Bank of America prevailed, after a jury trial, against the

noteholders, and Norcal and the ESOP prevailed on the in-

demnification issue. The noteholders appealed on the ground

that the judgment against them should be vacated because

the district court lacked removal jurisdiction, 1d. at 7a-8a,

and Bank of America appealed on the indemnification issue.

5. The court of appeals vacated the district court’s judg-

ments. Pet. App. 8a-20a. The court reasoned that the dis-

trict court lacked subject matter jurisdiction over the re-

spondent noteholders’ state-court complaint because it did

not present a federal question on its face or under the “com-

plete preemption” doctrine. Id. at 9a. The court stated that

complete preemption may be invoked only if ERISA ex-

pressly preempts the state cause of action under Section

514(a), 29 U.S.C. 1144(a), and the cause of action is encom-

passed within ERISA’s civil enforcement provision, Section

502(a), 29 U.S.C. 1182(a). Pet. App. 9a. In the court’s view,

6

Section 514(a) does not preempt the state cause of action and

the action is outside the scope of Section 502(a). Ibid.

Accordingly, the court held that removal of the state-court

action was improper and ordered it remanded to state court.

Id. at 8a, 20a.

DISCUSSION

Under ERISA, the “complete preemption” doctrine per-

mits removal of claims that are pleaded on their face as

state-law claims but that in fact fall within the exclusive

federal cause of action provided by Section 502(a) of ERISA.

Respondents’ claims do not do so. Forty-four of the 147

respondents were participants in the ESOP, which is an

ERISA plan. They brought their state-law claims, however,

not in their status as ERISA plan participants, but rather to

assert rights that they, like the other 103 respondents,

allegedly acquired under state law as former stockholders

and current noteholders. Respondents therefore do not as-

sert claims that fall within the scope of ERISA Section

502(a), and their claims accordingly were not properly

removed to federal court.

Although the court of appeals’ holding that the district

court did not have jurisdiction was dispositive, the court also

addressed the question whether respondents’ state-law

claims are preempted under ERISA’s express preemption

provision in Section 514(a)—+.e., whether petitioners have a

valid federal preemption defense to respondents’ state-law

claims on the merits. The court held that respondents’ state-

law claims do not “relate to” an ERISA plan, and are there-

fore not preempted under Section 514(a). Petitioners con-

tend that that ruling is incorrect.

Insofar as petitioners suggest that an ERISA fiduciary

may never be held liable under state law, their argument is

too broad. ERISA fiduciaries remain subject to state law

insofar as they serve in other roles at the same time, and the

ERISA plans they administer remain subject to state laws of

7

general applicability in other contexts as well. Ultimately,

however, the disposition of this case does not turn on

whether respondents’ state-law claims are subject to

“ordinary” preemption under Section 514(a). A federal pre-

emption defense on the merits under Section 514(a)—as

opposed to “complete preemption” under Section 502(a)—

cannot provide the basis for federal jurisdiction. Accord-

ingly, regardless of whether the state law on which

respondents rely for their claims on the merits is preempted

under Section 514(a) of ERISA, the court of appeals

correctly concluded that there is no “complete preemption”

of—and thus no federal jurisdiction over—respondents’

state-law causes of action. That jurisdictional ruling is

correct and does not conflict with any decision of this Court

or any other court of appeals. Further review is therefore

not warranted.

A. Respondents’ Claims Cannot Support Removal Juri--

diction Under The Complete Preemption Doctrine

1. Under 28 U.S.C. 1441(b), a civil action brought in state

court that is founded on a claim or right arising under federal

law may be removed to federal court. Because preemption is

ordinarily a federal defense to the plaintiff’s suit, “it does not

appear on the face of a well-pleaded complaint, and, there-

fore, does not authorize removal to federal court.” Metro-

politan Life, 481 U.S. at 68. Thus, preemption under Section

514(a) of ERISA, does not, standing alone, authorize removal

of a state-court action to federal court. Id. at 64; Franchise

Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1

(1983).

A corollary to the well-pleaded complaint rule “is that

Congress may so completely pre-empt a particular area that

any civil complaint raising this select group of claims is

necessarily federal in character.” Metropolitan Life, 481

U.S. at 63-64. In Metropolitan Life, the Court held that a

state-law claim alleging improper processing of a claim for

8

benefits under an ERISA plan is subject to “complete pre-

emption,” because it falls within the scope of the “exclusive

federal cause of action for resolution of such disputes” cre-

ated by Section 502(a)(1)(B) of ERISA, 29 U.S.C.

1132(a)(1)(B). Courts of appeals have concluded, and respon-

dents do not dispute, that “complete preemption” also ap-

plies to claims that fall within other subsections of Section

502(a).°

Removal is permissible under the complete preemption

doctrine only when a federal cause of action occupies a field

so completely that every claim in that field necessarily arises

under federal law, and any attempt to present a state-law

claim is “artful pleading” to get around the federal nature of

the claim. See Rivet v. Regions Bank, 522 U.S. 470, 475

(1998); Lehmann v. Brown, 230 F.3d 916, 919 (7th Cir. 2000).

A court faced with such artful pleading will recharacterize

the state-law claim to include the necessary federal claim,

because a state-law claim within the completely preempted

area “is considered, from its inception, a federal claim, and

therefore arises under federal law.” Rivet, 522 U.S. at 476.

Conversely, however, a state-law claim outside the com-

pletely preempted area does not arise under federal law and

is not removable even if there is a valid federal preemption

defense to the claim. Franchise Tax, 463 U.S. at 25-27.

2. The state-law claims at issue here are not subject to

removal under the complete preemption doctrine, because

they fall outside the scope of Section 502(a) of ERISA. All

147 respondents—including the 44 who were also partici-

3 See, e.g., Dudley Supermarket, Inc. v. Transamerica Life Ins. &

Annuity Co., 302 F.3d 1, 3-4 (1st Cir. 2002) (breach of fiduciary duty);

Smith v. Provident Bank, 170 F.3d 609, 613 (6th Cir. 1999) (same); Joyce

v. RJR Nabisco Holdings Corp., 126 F.3d 166, 171-172 (8d Cir. 1997)

(same); Romney v. Lin, 105 F.3d 806, 810 (2d Cir.) (suit by fiduciary to

collect unpaid contributions), cert. denied, 522 U.S. 906 (1997); Kramer v.

Smith Barney, 80 F.3d 1080, 1083-1084 (5th Cir. 1996) (breach of fiduciary

duty).

9

pants in the SSOP—brought those claims in their capacities

as former shareholders of Noreal and current noteholders,

and they alleged that petitioners violated duties owed to

former shareholders and current noteholders under state

law. Compl. ¥ 98. Section 502(a) does not provide for suits

by shareholders or noteholders. Section 502(a)(2) authorizes

an action “by the Secretary, or by a participant, beneficiary

or fiduciary” of an ERISA plan, to obtain appropriate relief

against a fiduciary who violates ERISA, and Section

502(aX(3) authorizes “a participant, beneficiary, or fiduciary”

to obtain appropriate equitable relief to redress ERISA vio-

lations. 29 U.S.C. 1182(a)(2) and (3). Because respondents

are not asserting rights they enjoy as participants in or

beneficiaries of an ERISA plan, their claims do not arise

under Sections 502(a)(2) or (8). Cf. Franchise Tax, 463 U.S.

at 26-27 (State-court action by a State against an ERISA

plan is not subject to removal because Section 502 “does not

provide anyone other than participants, beneficiaries, or

fiduciaries with an express cause of action * * *. A suit for -

similar relief by some other party does not ‘arise under’ that

: provision.”).

Indeed, the proposition that respondents are asserting a

claim that does not arise under ERISA follows from the fact

that, had the case been brought solely by the 103 respon-

dents who do not also happen to be participants in the

ESOP, it clearly would not be completely preempted and

could not have been removed. Norcal acknowledges that

conclusion (see 01-1187 Reply Br. 4 n.2), and Bank of

America does not dispute it. But the claims brought in the

state-court action by the 44 respondents who are plan par-

ticipants are precisely the same claims brought by the 103

who are not. Accordingly, if the state-law claims brought by

the non-plan-participants do not arise under ERISA, neither

do the same claims brought by the plan participants.

10

B. The Section 514(a) Preemption Issue Does Not Fur-

nish An Independent Basis For Review

Petitioners argue that the state-court action brought by

the 44 respondents who are plan participants was subject to

removal because those respondents challenge, inter alia, the

same act—a decision by members of the ESOP administra-

tive committee to approve certain mergers—that formed the

basis for an ERISA breach-of-fiduciary-duty action brought

in federal court by that same group of 44 respondents. 01-

1187 Pet. 13-14; 01-1179 Reply Br. 1, 8. Petitioners contend

that if an act is subject to ERISA fiduciary duties, it cannot

also be subject to state-law duties because ERISA requires

a fiduciary to act solely in the interest of plan participants

and beneficiaries, 29 U.S.C. 1104(a)(1)(A), and an individual

who serves in a dual capacity must “wear only one [hat] at a

time, and wear the fiduciary hat when making fiduciary

decisions.” Pegram v. Herdrich, 530 U.S. 211, 225 (2000).

See 01-1187 Pet. 13-14; 01-1179 Reply Br. 6-7 n.3. Petition-

ers conclude that if an act is subject to ERISA and not to

state law, a state-law claim challenging that act by a person

who is a plan participant is necessarily a claim by a partici-

pant against an ERISA fiduciary within the scope of Section

502(a). See 01-1187 Pet. 14.

1. Assuming the correctness of petitioners’ premise that

a given act could never be subject to both ERISA and state

law, petitioners’ conclusion would nevertheless be incorrect.

If a given act is governed solely by ERISA, state-law duties

surrounding the performance of that act are necessarily pre-

empted under Section 514(a) of ERISA. Nonetheless, a

state-law claim challenging that act brought by a person who

happens to be a plan participant is not a claim by a partici-

pant against an ERISA fiduciary within the scope of Section

502(a) when the claim is based on duties under state law that

are independent of the individual’s status as a participant.

That conclusion follows from Caterpillar Inc. v. Williams,

11 :

482 U.S. 386 (1987), where employees challenged a defen-

dant’s act (termination of employment) solely on state-law

grounds (breach of individual employment contracts), even

though the employees had federal rights under a subsequent

collective bargaining agreement that, if asserted, would have

led to complete preemption under Section 301 of the Labor-

Management Relations Act of 1947, 29 U.S.C. 185. See 482

U.S. at 390, 394-395. The Court held that the state-law

claims were not completely preempted because “individual

employment contracts are not inevitably superseded by any

subsequent collective agreement covering an individual em-

ployee.” Id. at 396.

That reasoning applies in this case. The respondents in

this case who are participants in the ESOP, like the em-

ployees in Caterpillar, are relying on state-law rights (here,

as former shareholders and current noteholders) the origins

of which predated and which remain independent of the

rights they later acquired as ESOP participants. Those

state-law rights are not inevitably superseded by the par- -

ticipants’ rights under the ESOP. Thus, as in Caterpillar,

the state-law claims are not completely preempted, and peti-

tioners, like the employer in Caterpillar, 482 U.S. at 397-398,

had to raise their preemption defense on the merits in state

court.

2. Moreover, petitioners’ underlying premise—that a

given act cannot ever be subject to both state law and

ERISA—is incorrect. As petitioners recognize, an individ-

ual may serve in “dual capacities,” both as a fiduciary of an

ERISA plan and in some non-ERISA capacity, such as

employer, director of a corporation, or medical care provider.

See 29 U.S.C. 1002(21)(A) (person is an ERISA fiduciary “to

the extent” that he or she performs certain plan-related

functions); see also 29 U.S.C. 1108(c)(3) (employer may act as

ERISA fiduciary while also serving as “officer, employee,

agent, or other representative of a party in interest” to an

12

ERISA plan); Pegram, 530 U.S. at 223 (HMO may serve as

fiduciary and as a provider of medical services); Varity Corp.

v. Howe, 516 U.S. 489, 498 (1996). As a general rule, state-

law claims against an individual serving in such “dual capaci-

ties” are outside the scope of Section 502(a) of ERISA inso-

far as they challenge acts taken in the non-ERISA-fiduciary

capacity.*

To be sure, an ERISA fiduciary ordinarily is required to

act solely in the interests of plan participants to the extent

the fiduciary is making decisions that are subject to

ERISA’s requirements. ERISA fiduciaries, however, en-

gage in a variety of activities (e.g., investing in securities,

leasing property, lending money) that are subject to state

and federal laws generally applicable to those who perform

such activities, and they are not free to ignore those laws

just because they are ERISA fiduciaries. For example, the

trustees of an ERISA plan that owns a commercial building

as part of its investment portfolio would be required to com-

ply with building and safety codes and other state laws

applicable to such buildings, even if to do so would require

the expenditure of funds that in their view would be better

preserved for plan beneficiaries. In that situation, the

trustees may not ignore state laws of general applicability in

order to pursue single-mindedly the interests of plan bene-

ficiaries. In other circumstances, state laws, such as those

regulating “securities,” may be expressly applicable under

4 Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 191-194

(4th Cir. 2002) (participant’s claims that plan administrator improperly re-

leased confidential medical information not within Section 502(a) of

ERISA); Lazorko v. Pennsylvania Hosp., 237 F.3d 242, 249 (8d Cir. 2000)

(same for participant claims against HMO in its capacity as medical care

provider), cert. denied, 533 U.S. 930 (2001); Rice v. Panchal, 65 F.3d 637,

642-646 (7th Cir. 1995) (same); Lupo v. Human Affairs Int'l, Inc., 28 F.3d

269, 271-272 (2d Cir. 1994) (same); Pohl v. National Benefits Consultants,

Inc., 956 F.2d 126, 128 (7th Cir. 1992) (dicta) (removal not appropriate if

participant sued plan for slip-and-fall injury at plan’s offices).

13

the saving clause in Section 514(b)(2)(A) of ERISA, 29

U.S.C. 1144(b)(2)(A).

In addition, a fiduciary may act in a way that violates both

ERISA and state law. For example, a corporate officer who

is also a trustee of an ERISA plan may take actions that vio-

late duties owed to a pension plan or its beneficiaries under

ERISA and also violate duties owed by the corporation or its

directors to minority shareholders, including the plan, under

state law. See Sommers Drug Stores Co. Employee Profit

Sharing Trust v. Corrigan Enters., Inc., 793 F.2d 1456, 1458,

1468-1469 (5th Cir. 1986), cert. denied, 479 U.S. 1034 (1987).

Such an individual may reasonably be held liable for breach

of both ERISA and state-law duties in at least some circum-

stances, because he typically would have voluntarily as-

sumed such dual obligations, may generally be able to act

consistently with both sets of duties (cf. John Hancock Mut.

Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 100

(1993)), and can generally take steps—such as resigning from

the ERISA role—to avoid conflicts. See 793 F.2d at 1469;

Donovan v. Bierwirth, 680 F.2d 268, 271-272 (2d Cir.), cert.

denied, 459 U.S. 1069 (1982). The alternative advocated by

petitioners would allow individuals who have state-law du-

ties to assume inconsistent ERISA responsibilities and then

argue that their new ERISA responsibilities eliminate their

state-law duties.

3. In this particular case, difficult questions are raised by

petitioners’ claim that Section 514(a) of ERISA preempts

respondents’ claim against the “officer and director” defen-

dants who were sued in their capacities as members of the

ESOP administrative committee. The state-court complaint

may be read to allege that the committee members had a

state-law duty to act (at least in part) in the interest of all

147 respondent noteholders when deciding whether to ap-

prove the Envirocal merger. See Compl. 74 22, 23, 24, 98,

101. A state law requiring an ERISA fiduciary, based on the

14

interests of the noteholders, to vote for or against a merger

of a corporation in which the plan owns stock would appear

to conflict with the specific requirement in Department of

Labor regulations that a fiduciary, in voting an ESOP’s

shares, “consider those factors that may affect the value of

the plan’s investment and not subordinate the interests of

the participants and beneficiaries in their retirement income

to unrelated objectives.” 29 C.F.R. 2509.94-2 (proxy voting).

Assuming that there is no state-law duty of general appli-

cability that properly attaches to the shares and voting

rights held by the ESOP in those circumstances, such a

conflict could lead to preemption of state-law claims against

the fiduciaries. See, e.g., Egelhoff v. Egelhoff, 532 U.S. 141,

150 (2001). On the other hand, there may be more room for

the operation of state law if the complaint is read to allege

that specific officer and director defendants breached a pre-

existing state-law duty by putting themselves in a position

(as ERISA fiduciaries) where they could have to act in

conflict with their state-law duties.

4. Whether the court of appeals erred in finding no

preemption under Section 514(a), however, does not affect

the ultimate disposition of this case. The court’s judgment

rests on an ultimate conclusion that respondents’ state-law

claims were improperly removed to federal court—a conclu-

sion that does not depend on the correctness of the court of

appeals’ preemption analysis under Section 514(a). Further-

more, the court’s analysis under Section 514(a) may have

limited precedential value, because the court did not discuss

the portions of the complaint on which petitioners rely in this

Court in arguing for preemption. In particular, the court did

not address the significance of respondents’ apparent allega-

tions (see note 2, supra) that three individuals were sued

solely for actions taken in their capacities as ERISA fidu-

ciaries. See Pet. App. 5a-6a (noting only that state-court

action was commenced against “several individual officers

15

and directors of the defendant corporations (including some

members of the ESOP Administrative Committee)”’) (em-

phasis added). Moreover, the court’s finding of no pre-

emption under Section 514(a) should have little effect even

on the parties in this case. All of the parties, except peti-

tioner Bank of America, have settled their claims with

respondents. Jd. at 7a. Assuming that those settlements

remain binding, the only issues that remain open concern

respondents’ state-law claims against Bank of America as

successor to the trustee under the indenture agreement, and

whether Norcal and the Norcal ESOP have indemnity

obligations to Bank of America on those claims. Jbid. Those

claims are not subject even to ordinary preemption under

Section 514(a) of ERISA. Review of the question whether

Section 514(a) would preempt other claims, which have

already been settled, is unwarranted.

C. The Court Of Appeals’ Discussion Of The Prohibited

Transaction Exemption Has No Bearing On The

Removal Or Preemption Issues

Bank of America contends (01-1179 Pet. 13) that “(t]he

Ninth Circuit’s decision is grounded on the fact that the

challenged transactions are exempt from certain restrictions

that generally apply to ERISA plans and fiduciaries”—the

“prohibited transaction” rules that preclude certain trans-

actions between a plan and a “party in interest.” See note 1,

supra. Bank of America asserts (Pet. 13) that the court of

appeals “concluded that, because the transactions at issue

were ‘expressly exempted from the prohibited transaction

provision,’ they were not regulated by ERISA and thus

were subject to regulation under state law”—a conclusion

that Bank of America asserts conflicts with Moench v.

Robertson, 62 F.3d 553, 567-573 (3d Cir. 1995), cert. denied,

516 U.S. 1115 (1996), and other decisions.

Even if all of the above contentions were correct, they

would concern only the Ninth Circuit’s holding on ordinary

16

preemption under Section 514(a) of ERISA—not the dis-

positive jurisdictional holding that removal was improper

because this case is not subject to complete preemption. In

any event, Bank of America’s contentions are not correct.

The court of appeals did not ground its decision that ERISA

does not preempt the participant-noteholders’ state-law

claims on the fact that transactions between an ESOP and

parties in interest are subject to exemption from ERISA’s

rules prohibiting transactions involving parties in interest.

Nor did the court find that the exemption from ERISA’s

prohibited transaction rules for some transactions means

that those transactions are not subject to ERISA at all.

Rather, the court simply concluded that the participant-

noteholders’ claims based on asserted state-law duties owed

to former shareholders and current creditors “did not im-

plicate the prohibited transaction provision” of ERISA, and

that, as a result, their “status as ‘parties in interest [under

ERISA] is irrelevant” to their state-law claims. Pet. App.

12a. Indeed, petitioners themselves rely on the participant-

noteholders’ status as plan participants—not their status as

parties in interest—to support their preemption arguments.

See, ¢.g., 01-1179 Pet. 14 (ERISA governs transactions that

fall within the prohibited transaction rules because- ERISA

fiduciaries must “act solely in the interest of plan partici-

pants and beneficiaries”) (emphasis added).

As the court of appeals observed, by crafting exceptions

to the prohibited transaction rules, Congress presumably

intended that, “in all respects wnrelated to the objectives and

administration of ERISA,” state law would govern the

transactions that the exceptions allow. Pet. App. 13a. That

conclusion is consistent with Bank of America’s contention

that in other respects that are related to the objectives and

administration of ERISA, “ERISA does govern transactions

that fall within the exemptions to ERISA’s prohibited

transaction provisions for ESOPS.” 01-1179 Pet. 13.

17

D. There Is No Conflict In The Circuits

Petitioners assert that the court of appeals’ decision

conflicts with decisions of five other courts of appeals. 01-

1179 Pet. 13-19; 01-1187 Pet. 19-24. There is no conflict,

however, because each of the cases cited by petitioners in-

volved a claim that arose from a relationship governed by

ERISA. Accordingly, none of those decisions addressed the

issue presented here: whether ERISA completely preempts

state-law claims by ERISA participants based on alleged

violations of pre-existing and independent state-law duties.®

1. In Smith v. Provident Bank, 170 F.3d 609 (6th Cir.

1999), an ERISA plan participant brought suit in state court

alleging that a bank had breached a fiduciary duty under

state law when it took stock out of the plaintiff’s ERISA-

plan account to correct an error it had made in another

customer’s account. Id. at 612. The court held that removal

5 Bank of America expected this Court’s decision in Rush Prudential

HMO, Inc. v. Moran, 122 S. Ct. 2151 (2002), to address removal. See 01-

1179 Pet. 19. Rush did not address removal, except to restate the “com-

plete preemption” rule and to suggest that a suit to compel compliance

with the state HMO law could have been considered a suit to compel com-

pliance with an ERISA plan or a suit to recover benefits under Section

502(a) of ERISA. 122S. Ct. at 2157 & n.2, 2164-2165.

6 Bank of America sees a conflict with this Court’s recognition that

ERISA is intended to create a uniform body of federal law to govern the

obligations of ERISA fiduciaries. 01-1179 Pet. 18 (discussing Firestone

Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989)). Firestone did not, how-

ever, address removal jurisdiction, or suggest that complete preemption is

required whenever uniformity is threatened. Indeed, it is clear that

complete preemption does not follow whenever uniformity is threatened

by a state-law claim. As petitioners apparently acknowledge (see p. 9,

supra), a state-law action by the 103 respondents who were not

participants in the ERISA plan would not have been subject to removal.

Yet such an action would raise precisely the same issues regarding the

uniformity of obligations imposed on fiduciaries as does this action,

brought by all 147 respondents. See Franchise Tax Bd., 463 U.S. at 4

(removal improper, notwithstanding presence of “important” ERISA

preemption issue that “must eventually receive a definitive, uniform

resolution”).

18

of the case to federal court was proper, reasoning that

ERISA preempted the state-law breach-of-fiduciary-duty

claim and that removal was proper because “[a] claim for

breach of fiduciary duty against the fiduciary of an ERISA

plan necessarily presents a federal question.” Jd. at 614.

In contrast to the plaintiff's claims in Provident Bank,

respondents’ asserted state-law “fiduciary duty” rights are

independent of the ERISA plan because they existed re-

gardless of whether some former shareholders and hence

current noteholders later became ESOP participants. Ac-

cordingly, the Sixth Circuit’s statement that “(a] claim for

breach of fiduciary duty against the fiduciary of an ERISA

plan necessarily presents a federal question,” 170 F.3d at

614, means only that a claim for breach of an ERISA fiduci-

ary duty—i.e., one that grows out of a participant-fiduciary

relationship under ERISA—necessarily presents a federal

question. Thus, the Sixth Circuit’s decision is consistent

with the Ninth Circuit’s decision here.’

2. For similar reasons, Smith v. Dunham-Bush, Inc., 959

F.2d 6 (2d Cir. 1992), does not conflict with the decision in

this case. In Dunham-Bush, an employee brought an action

in state court to enforce an oral promise by his employer to

provide pension benefits. Jd. at 7. The Second Circuit held ©

that ERISA preempted the claim because it was “an attempt

to supplement the plan’s express provisions and secure an

additional benefit.” Jd. at 10. The court also held that the

state-law claim could be removed to federal court because a

7 In holding that the state-law claim in Provident Bank was subject to

removal, the Sixth Circuit cited the Fifth Circuit’s decision in Kramer.

See 170 F.3d at 614. Kramer, like Provident Bank, found removal juris-

diction with respect to a plan participant’s claim against a fiduciary for

mismanaging stock in his account. See Kramer, 80 F.3d at 1082. Kramer

coexists in the Fifth Circuit with Sommers Drug, which held that ERISA

does not preempt state-law claims that arise from a corporation’s “parallel

but independent” duties to its shareholders. Sommers Drug, 793 F.2d at

1468; see Pet. App. 14a-15a (Ninth Circuit’s reliance on Sommers Drug).

19

“claim for add-on benefits necessarily falls within the

intended scope of the civil enforcement provisions of section

502(a)(1)(B).” Id. at 11. Thus the state-law rights asserted

in Dunham-Bush, unlike those in this case, arose directly

from the employee’s status as a plan participant.®

3. In Hull v. Fallon, 188 F.3d 989 (8th Cir. 1999), cert.

denied, 528 U.S. 1189 (2000), a plan participant brought a

state-court malpractice action against a doctor who was also

the plan administrator, based on the doctor’s failure to

authorize medical treatment. Jd. at 941. The court held that

the action fell within the scope of Section 502(a) of ERISA

because the defendant was acting as plan administrator

rather than the participant’s treating physician, and “the

essence of [the] claim rests on the denial of benefits.” Id. at

943. Hull thus did not address a case like this, in which the

plaintiffs’ claims are independent of their status as plan par-

ticipants. Nor did Hull question the Eighth Circuit’s prior

recognition in Martin v. Feilen, 965 F.2d 660, 667 (1992),

cert. denied, 506 U.S. 1054 (1993), that fiduciaries of an

ESOP have both duties under ERISA and state-law duties

as corporate stockholders.

4. The Seventh Circuit’s decision in Jass v. Prudential

Health Care Plan, Inc., 88 F.3d 1482, 1489-1490 (1996), held

that a state-law negligence claim was actually a denial-of-

benefits claim covered by Section 502(a) of ERISA, and its

decision in Bartholet v. Reishauer A.G. (Zurich), 958 F.2d

1073, 1078 (1992), held that ERISA completely preempts an

- ® Contrary to Bank of America’s assertion (01-1179 Pet. 16), there is

also no conflict with the Second Circuit’s decisions in LoPresti v. Ter-

williger, 126 F.3d 34 (1997), and Diduck v. Kaszycki & Sons Contractors,

Inc., 974 F.2d 270 (1992). In those cases, the court held that Section 514(a)

of ERISA preempts a state-law action for conversion, brought by an

ERISA plan trustee or plan participants to recover plan losses from

another fiduciary or a third party that dealt with the plan. See LoPresti,

126 F.3d at 41; Diduck, 974 F.2d at 288. Neither case involved rights that

were independent of the operation of the ERISA plan.

20

employee’s state-law claim alleging breach of a promise to

establish a pension plan that gave certain pension credit to

the employee. Both cases thus involved claims that, unlike

respondents’ claims here, arose from the basic ERISA

participant-plan relationship.

5. Finally, in Glaziers & Glassworkers Union Local No.

252 Annuity Fund v. Newbridge Securities, Inc., 93 F.3d

1171 (8d Cir. 1996), a plan fiduciary brought a federal court

action against a brokerage firm alleging that a failure to dis-

close certain information about one of the firm’s employees

violated ERISA and state-law fiduciary duties. The Third

Circuit concluded that ERISA did not necessarily preempt

the state-law claims to the extent that the brokerage firm

was not an ERISA fiduciary. Jd. at 1185. The court had no

occasion to—and did not—consider the application of the

complete preemption doctrine. Nor did the Third Circuit ad-

dress even the narrow preemption issue under Section

514(a) in this case: whether an ERISA fiduciary taking ac-

tion that affects another person both as an ERISA

participant and in an unrelated status may be subject to both

federal and state law.

CONCLUSION

The petitions for a writ of certiorari should be denied.

Respectfully submitted.

THEODORE B. OLSON

EUGENE SCALIA Solicitor General

Solicitor of Labor EDWIN S. KNEEDLER

ALLEN H. FELDMAN Deputy Solicitor General

Associate Solicitor JAMES A. FELDMAN tals

NATHANIEL I. SPILLER Assistant to the Solicitor

Deputy Associate Solicitor General

EDWARD D. SIEGER

Attorney

Department of Labor

NOVEMBER 2002