Supplemental Brief — Bank of America, N. A. v. Abraham

Supreme Court, U8.

FILED

> Nov 19 2002

No. 01-1179 OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

BANK OF AMERICA, N.A.,

Petitioner,

Vv.

JULIO ABRAHAM, et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SUPPLEMENTAL BRIEF FOR THE

PETITIONER PURSUANT TO RULE 15.8

James B. Wright E. Edward Bruce

BUCHALTER, NEMER, Counsel of Record

FIELDS & YOUNGER Robert A. Long, Jr.

333 Market Street, 29th Floor Keith A. Noreika

San Francisco, CA 94105-2130 COVINGTON & BURLING

(415) 227-0900 1201 Pennsylvania Ave., NW

Washington, DC 20004-2401

(202) 662-6000

November 2002 Counsel for Bank of America

peer

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

CASES

Page(s)

Allis-Chalmers Corp. v. Lueck, 471 U.S. 202 (1985) ........... 5

Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987)........... 5,6

. Dudley Supermarket, Inc. v. Transamerica Life

Insurance & Annuity Co., 302 F.3d 1 (ist Cir.

SITU Dh cxicicsiniceeleiietiaiagceesamaapeaaiilaahliteintiessini 5, 6, 8, 9

Egelhoff v. Egelhoff, 532 U.S. 141 (2001) ...........ccseesesseeees 3

Fidelity Federal Savings & Loan Association v. de la

Gaetan, SIE Us SET CRIBS) catectinsicencenictrctesnrnssancionnneneins 3

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

SER caiciescacssdsssiodsicabsasiedesibilpimiecsantaticestdbcupiasniaaiaiulissiahaanbeinsbain 2,5

Franchise Tax Board v. Construction Laborers Vacation

BE FIED Tels Or vtcsictcnnsanelnbiitininimiiintenniasivianiintniion 4

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

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

I ee EE iinccctecs sn sesnhensncininnieeracthiciialaiinnditicibiioses 6

Livadas v. Bradshaw, 512 U.S. 107 (1994)...........sccssssseeseees 5

Metropolitan Life Insurance Co. v. Taylor, 481 U.S.

I Me ihn iscsi eias cies enipececceicsiieisiiacdienceomierieeiniiabaia 3

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41

ERE issccchins sssecsletidibiedehcha anathadieessilesbdudesatbuiimenniiibnatoces 2,7, 10

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

ITNT hs inseinsicssnnissiscinblichdesitiimsioniepaiiadcnphiaphapaseciebiaceseensiatartas 3,9

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

Pi aiscinsssticsuscampsipibsiladgbigleambiscmndiamaeabiepianiine 5, 6, 7,8

STATUTES AND REGULATION

ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1) .... eect eeeeees 1

EEREBA, © SOR, 29 U.S.C. GUUS iacsiisscieciscserensiscrsscscadsanes 2,3,4

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MISCELLANEOUS

Restatement (Second) of Judgments §§ 18, 19, 24............... 4

- ill -

SUPPLEMENTAL BRIEF FOR THE

PETITIONER PURSUANT TO RULE 15.8

Petitioner Bank of America, N.A., submits this

supplemental brief in response to the amicus curiae brief

filed by the Solicitor General.

1. On the key factual dispute in this case, the

Solicitor General agrees with Petitioners. The 44

Respondents who are participants in the ERISA plan filed

two lawsuits: one in federal court alleging that the defendants

had violated fiduciary duties owed to plan participants

imposed by ERISA in approving Norcal’s merger with

Envirocal, and another in state court alleging that this same

act by the same defendants violated additional fiduciary

duties owed to these 44 plan participants, as well as 103

others, in their capacity as former shareholder and current

noteholders. See U.S. Br. 3-4. The Solicitor General thus

disagrees with Respondents’ contention that their state-law

“claims do not arise from the same acts that would sae rise

to liability under ERISA.” Br. in Opp. 16.

2. The Solicitor General also agrees with Petitioners

on several other key points. First, ERISA imposes on

ERISA fiduciaries a duty to “act solely in the interest of plan

participants,” see U.S. Br. 4 (quoting ERISA § 404(a)(1), 29

U.S.C. § 1104(a)(1)) (emphasis added)' — something that a

fiduciary cannot do if compelled by state law to act in the

interest of former shareholders or noteholders. Second, the

Solicitor General agrees that “complete preemption” under

ERISA is not limited to claims for benefits under Section

' Later in his brief, the Solicitor General states that “an ERISA fiduciary

ordinarily is required to act solely in the interests of plan participants.”

U.S. Br. at 12 (emphasis added). The statutory text contains no such

qualification.

ee ee ee a Ee yee

502(a)(1)(B), but “applies to claims that fall within other

subsections of Section 502(a),” including claims for breach

of fiduciary duty. U.S. Br. at 8 & n3. Third, he

acknowledges (Br. 17 n.15) that ERISA creates a uniform

body of federal law to govern the duties of ERISA

fiduciaries, in order to allow fiduciaries to “predict the

legality of proposed actions without the necessity of

reference to varying state laws,” Pilot Life Ins. Co. v.

Dedeaux, 481 U.S. 41, 56 (1987), and to avoid conflicts that

would arise if an ERISA fiduciary were subject to ERISA

fiduciary duties and state-law fiduciary duties with respect to

the same acts. See also Firestone Tire & Rubber Co. v.

Bruch, 489 U.S. 101, 110 (1989).

3. In addition, the Solicitor General appears to agree |

with Petitioners that at least some of Respondents’ state-law |

claims are preempted by ERISA: “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 approve

the Envirocal merger.” U.S. Br. 13 (citing complaint).

Moreover, the Solicitor General recognizes, “[a] state law

requiring an ERISA fiduciary, based on the 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.” Jd. at 13-14 (quoting 29 C.F.R. § 2509.94-2)

(emphasis added). The Solicitor General acknowledges that

“such a conflict could lead to preemption of state-law claims

against the fiduciaries.” U.S. Br. 14 (citing Egelhoff v.

Egelhoff, 532 U.S. 141, 150 (2001)) (emphasis added).”

4. The Solicitor General nonetheless concludes that

“{wjhether the court of appeals erred in finding no

preemption under Section 514(a)” does not affect the court’s

conclusion that the case was not subject to removal under the

complete preemption doctrine, U.S. Br. 14, “[bJecause

respondents are not asserting rights they enjoy as participants

in or beneficiaries of an ERISA plan, [and] their claims do

not arise under Sections 502(a)(2) or (3),” U.S. Br. 9. This

“analysis” is fundamental to the Solicitor General’s position

and it is fundamentally wrong.

In ERISA preemption cases, plan participants

generally assert state-law claims in some capacity other than

that of a participant in an ERISA plan, for example, as an

employee, see, e.g., Metropolitan Life Ins. Co. v. Taylor, 481

U.S. 58 (1987); a patient, see, e.g., Hull v. Falion, 188 F.3d

939 (8th Cir. 1999); or a party to a contract, see, e.g., Smith v.

Dunham-Bush, Inc., 959 F.2d 6 (2d Cir. 1992). Despite such

assertions, courts — including this Court did in Taylor and the

Second and Eighth Circuits in Smith and Hull — hold that the

plaintiffs’ state-law claims are completely preempted by

ERISA.

The Solicitor General acknowledges, see U.S. Br. 4,

but then ignores the key fact in this case: 44 plaintiffs not

only could but actually did sue in their capacity as ERISA

plan participants. Their parallel action in federal court

asserted that the defendants had violated their fiduciary duty

under ERISA by engaging in the very same actions

? The “would appear” and “could . . . preempt” qualifications are

baseless. The conflict is clear and federal law clearly preempts

conflicting state law. See Fidelity Fed. Sav. & Loan Ass'n v. de la

Cuesta, 458 U.S. 141, 153 (1982).

Se

challenged in the state-court action. Obviously, this case

could not have been removed if the ERISA plan participants

had stayed out of the state-court action, because Section 502

“does not provide anyone other than participants,

beneficiaries, or fiduciaries with an express cause of action.”

Franchise Tax Bd. v. Construction Laborers Vacation Trust,

463 US. 1, 27 (1983). But the plan participants chose

instead to take two bites at the apple by suing for breach of

state-law fiduciary duties in state court and breach of ERISA

fiduciary duties in federal court.

Congress has provided that federal courts have

exclusive jurisdiction over claims of breach of a fiduciary

duty imposed by ERISA. See ERISA § 502(e)(1), 29 U.S.C.

§ 1132(e\1).2 Under the Solicitor General’s approach,

ERISA plan participants can bring separate actions in state

and federal court challenging the very same act of an ERISA

fiduciary as a violation of (1) fiduciary duties imposed by

ERISA and (2) additional fiduciary duties imposed by state

law — even if the plan participant’s state-law claims are

preempted by ERISA. Thus, for example, plan participants

could litigate their claim for breach of a state-law fiduciary

duty to noteholders in state court, and if they lost could

pursue their ERISA action in federal court.* This hardly

effectuates Congress’s intent to create a uniform body of

> In contrast, state and federal courts have concurrent jurisdiction over

claims for benefits. See id.

* In most cases, plaintiffs who split their cause of action between state

and federal courts will be precluded by the first action to come to

See Restatement (Second) of Judgments §§ 18, 19, 24

(preclusion of all claims that were brought or could have been brought

arising from the same transaction). However, the 44 ERISA plaintiffs

could seek to avoid preclusion on the ERISA claim because federal courts

have exclusive jurisdiction over such claims, ERISA § 502(e\1), 29

U.S.C. § 1132(e)(1), and thus the claim could not have been brought in

state court.

federal law governing the duties of ERISA fiduciaries, and to

centralize adjudication of fiduciary breach claims in the

federal courts.

The Solicitor General’s reliance on this Court’s

decision in Caterpillar, Inc. v. Williams, 482 U.S. 386

(1987), is unwarranted. Caterpillar differs from this case in

at least two crucial respects. First, it concerned complete

preemption under Section 301 of the Labor Management

Relations Act (LMRA) rather than ERISA. Complete

preemption under Section 301 is limited to claims that

require the court to interpret a collective bargaining

agreement. See Livadas v. Bradshaw, 512 U.S. 107, 122-24

(1994); Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 220

(1985). Applying this limitation, the Court held that

“Caterpillar’s basic error [was] its failure to recognize that a

plaintiff covered by a collective bargaining agreement is

permitted to assert rights independent of that agreement,

including state-law contract rights, so long as the contract

relied upon is not a _ collective-bargaining agreement.”

Caterpillar, 482 U.S. at 396 (emphasis in original). The

same is not true under ERISA.

“Unlike the LMRA, ERISA explicitly authorizes suits

against fiduciaries and plan administrators to remedy

statutory violations, including breaches of fiduciary duty.”

Firestone, 489 U.S. at 110. Consequently, an ERISA plan

participant’s breach of fiduciary duty claim may be

completely preempted, even if it does not require the court to

interpret the ERISA plan. See, e.g., Dudley Supermarket,

Inc. v. Transamerica Life Ins. & Annuity Co., 302 F.3d 1 (ist

Cir. 2002) (state-law breach of fiduciary duty claim

completely preempted even though it did not require

interpretation of ERISA plan); Smith v. Provident Bank, 170

F.3d 609 (6th Cir. 1999) (same).

Caterpillar also differs from this case in that the

plaintiffs “could have brought suit under § 301” but “they

~

chose not to do so.” 482 U.S. at 395. Here, as noted above,

the plaintiffs made the opposite choice: they brought suit

under ERISA alleging a breach of ERISA’s fiduciary duties.

Courts have observed that “the term ‘complete

preemption’ is unfortunate, since the complete preemption

doctrine is not a preemption doctrine but rather a federal

jurisdiction doctrine.” Jass v. Prudential Health Care Plan,

Inc., 88 F.3d 1482, 1486-87 (7th Cir. 1996) (internal

quotation and citation omitted). “This jurisdictional doctrine

provides that to the extent that Congress has displaced a

plaintiffs state law claim, that intent informs the well-

pleaded complaint rule, and a plaintiffs attempt to utilize the

displaced state law is properly recharacterized as a complaint

arising under federal law.” Jd. at 1487 (internal quotations

and citations omitted). In this case, ERISA plan participants

challenged actions of ERISA fiduciaries that lie at the very

core of a fiduciary’s responsibilities under ERISA — voting

shares held by the plan for or against a proposed corporate

transaction. This is miles removed from the zoning law

decisions and other state or local law issues that ERISA

trustees confront on a daily basis. Compare U.S. Br. 12. The

plan participants argue that the ERISA fiduciaries owed plan

participants fiduciary duties under ERISA and owed them

additional fiduciary duties under state law. But Congress

intended ERISA to provide the sole source of fiduciary duties

with respect to such actions, and thus it completely

preempted this area of the law. See Smith v. Provident Bank,

170 F.3d at 613, 614; Dudley Supermarket, 302 F.3d at 3.

5. The Solicitor General asserts that the state-law

fiduciary duties at issue in this case pre-date, and are

independent of, Respondents’ nghts under ERISA as plan

participants. See U.S. Br. 11, 14, 17-20. This is inaccurate.

Respondents’ sale of stock to Norcal, the issuance of the

notes, and the creation of the ESOP, were all parts of a single

unified transaction. More generally, the Solicitor General

asserts that an ERISA fiduciary “may reasonably be held

sin

eee ——————— eee esis sie

liable for breach of both ERISA and state-law duties in at

least some circumstances, . . . and can generally take steps —

such as resigning from the ERISA role — to avoid conflicts.”

U.S. Br. 13.” The Solicitor General greatly underestimates

the difficulties of reconciling conflicting federal and state

fiduciary duties. If a corporate officer or director subject to a

fiduciary duty seeks to delegate her powers to someone else,

the person to whom the power is delegated may become

subject to the fiduciary duty. See Smith v. Provident Bank,

170 F.3d at 613. Thus, if fiduciaries such as the members of

the ESOP Administrative Committee were to resign and

appoint others to take their places, the newly-appointed

fiduciaries would still have responsibilities under ERISA,

and the Solicitor General offers no reason to believe they

would escape conflicting state-law fiduciary duties.

6. The Solicitor General does not dispute that so-

called “exempt” transactions by ESOPs remain heavily

regulated under ERISA. Although he concludes that the

Ninth Circuit did not base its decision on the exempt nature

of the transactions, in fact the court cited that factor

repeatedly in support of its decision. See Bank of America

Reply 3 (collecting multiple statements from Ninth Circuit’s

opinion). The Solicitor General mistakenly asserts that this

* See also id. at 14 (stating that “there may be more room for the

operation of state law” where ERISA fiduciaries are alleged to have

“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”). The Solicitor General’s multiple

qualifications - ERISA fiduciaries “may” (or may not) be held liable “in

at least some [unspecified] circumstances” but not others, while ERISA

fiduciaries “generally” (but not always) can act consistently with both

sets of duties — ignore this Court’s recognition that ERISA fiduciaries

should be able to “predict the legality of proposed actions without the

necessity of reference to varying state laws.” Pilot Life Ins., 481 U.S. at

56.

aspect of the Ninth Circuit’s opinion was relevant only to its

holding on preemption, not complete preemption. The

structure of the Ninth Circuit’s opinion (the analysis of

preemption preceded and guided the analysis of complete

preemption) and the Ninth Circuit’s own statement, in its

discussion of the complete preemption issue, that “the

leveraged buyout is an exempted transaction” under ERISA,

Pet. 19a, both show that the Ninth Circuit’s misplaced.

reliance on the exempt nature of the transactions infected its

entire opinion, including the complete preemption ruling.

7. The Solicitor General concludes that no other

court of appeals has addressed “whether ERISA completely

preempts state-law claims by ERISA participants based on _

alleged violations of pre-existing and independent state-law

duties.” U.S. Br. 17. As noted above, however, the Solicitor

General is simply wrong. Petitioners’ fiduciary duties to

former shareholders and current noteholders arose out of the

very same transaction that gave rise to their fiduciary duties

under ERISA. These state-law fiduciary duties are no more

“pre-existing” or “independent” of ERISA fiduciary duties

than the state-law duties at issue in decisions of other courts

of appeals that have found complete preemption.

In Smith v. Provident Bank, 170 F.3d at 612, for

example, the plaintiff, in advancing a state-law claim for

breach of fiduciary duty in a securities transaction, was not

asserting rights as a participant in an ERISA plan, but instead

was asserting rights under state law as a brokerage customer.

The state-law fiduciary duties applied to all brokerage

accounts, not just ERISA accounts. If similar state-law

claims had been asserted solely by plaintiffs who were not

ERISA participants or beneficiaries, the case could not have

been removed. Nonetheless, the Sixth Circuit held 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. See also Dudley Supermarket, Inc., 302 F.3d at

3 (“There can be no doubt that if appellants’ purported state

oe.

law claims in fact charged [the defendant] with breach of

fiduciary duty while acting as an ERISA fiduciary, ERISA

would preempt completely their claims which would thus

have to be asserted, if at all, under ERISA.”); id. at 5 (where

the defendant “is on the fiduciary side of the line . . . we are

dealing with complete preemption”).

Similarly, in Smith v. Dunham Bush, Inc., 959 F.2d at

7, the plaintiff sued as a party to a contract and an employee;

he could have advanced the same state-law claim even if he

had not been a participant in the employer’s ERISA plan (or

if the employer had no U.S. pension plan at all). The Second

Circuit nevertheless held that the plaintiff was, in essence,

claiming pension benefits and therefore his state-law claim

was completely preempted. Jd. at 11.

8. Finally, the Solicitor General suggests that review

is not warranted because all the defendants, except Bank of

America, settled with the plaintiffs prior to the Ninth

Circuit’s ruling. U.S. Br. 15. Petitioners retain a vital

interest in this case, however, because Bank of America

prevailed after a lengthy trial in district court and thereby

resolved more than $20 million of liability claims against it.

That victory was erased by the Ninth Circuit’s ruling that that

the federal court lacked jurisdiction, thus subjecting both

Bank of America and the ESOP to potential liability.®

Apart from its effects on the parties to this case, the

Ninth Circuit’s ruling creates great uncertainty for ERISA

plan fiduciaries, who now must be concerned that they are

subject to fiduciary duties under the law of one or more

States, as well as under ERISA, whenever a plaintiff elects to

sue them in a capacity other than that of a plan participant or

* Although the Norcal ESOP has settled with the Respondents, it may be

liable to the Bank in the event that the Bank is held liable to the

Respondents.

beneficiary. The brief of the United States actually increases

this uncertainty. Review by this Court is warranted to

resolve the conflict between the Ninth and other Circuits and

to provide ERISA fiduciaries with renewed assurance that

they can “predict the legality of proposed actions without the

necessity of reference to varying state laws.” Pilot Life Ins., .

481 U.S. at 56.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

James B. Wright E. Edward Bruce

BUCHALTER, NEMER, Counsel of Record

FIELDS & YOUNGER Robert A. Long, Jr.

333 Market Street, 29th Floor Keith A. Noreika

San Francisco, CA 94105 COVINGTON & BURLING

(415) 227-0900 1201 Pennsylvania Ave., NW

Washington, DC 20004-2401

(202) 662-6000

Counsel for Bank of America

November 2002

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