April 2017 FBA Labor and Employment Law Third Circuit Update
Stephen E. Trimboli, Esq.
Trimboli & Prusinowski, L.L.C.
The Secretary of Labor is not in privity with private litigants, and is therefore not bound by results reached by private litigants in ERISA enforcement actions.
Secretary, United States Department of Labor v. Kwasny, et al., 853 F.3d 87 (3d Cir. 2017), 2017 WL 1244852, C.A. 3, (E.D. Penna.), April 5 2017, available at www2.ca3.uscourts.gov/opinarch/161872-3.pdf
Richard Kwasny was the managing partner of dissolved law firm. Among his responsibilities as managing partner was serving as trustee and fiduciary of the firm’s 401(k) Profit Sharing Plan. Between September 2007 and November 2009, some $41,936.73 was withheld from employee compensation as contributions to the Profit Sharing Plan. However, the withholdings were never deposited into the Plan. Kwasny instead directed that the withholdings be deposited into the law firm’s general account and be used to pay employee wages, outstanding bills, and Kwasny’s own compensation. Contributions were forwarded to the Plan only after these general firm expenses had been paid. As a result, the Profit Sharing Plan sustained losses in the amount of $40,416.30 in contributions that were never paid, in addition to $2,099.06 that was paid late and without interest.
The Secretary of Labor received a substantiated complaint from a Plan member in 2011, which triggered an investigation that led ultimately to a 2014 enforcement action under the Employee Retirement and Income Security Act of 1974, (ERISA). The Secretary sought recovery of the lost funds, removal of Kwasny as trustee, and an injunction barring Kwasny from acting as a plan fiduciary in the future. While the Secretary’s action was pending, a former firm employee named Larry Haft successfully sued the dissolved firm for a money judgment based in part on his 401(k) contributions that had never been deposted.
The facts of the case were not seriously disputed, and both sides moved for summary judgment. Kwasny sought judgment in his favor based on the affimative defenses of untimeliness and res judicata. The District Court granted the Secretary’s motion and denied Kwasny’s. On appeal, the Third Circuit affirmed.
The record clearly established that Kwasny violated his obligations as trustee of an ERISA retirement plan, including his obligation to ensure that plan assets are held in a trust account, 29 U.S.C. Sec. 1103; to act solely in the interest of plan participants, 29 U.S.C. Sec. 1104(a)(1)(A); to act prudently, 29 U.S.C. Sec. 1104(a)(1)(B); to not divert plan assets, directly or indirectly, for the benefit or use of a party in interest, 29 U.S.C. Sec. 1106(a)(1); and, to refrain from dealing with plan assets for his own interest. 29 U.S.C. Sec. 1106(a)(2). Funds withheld from employee paychecks but not yet delivered to the benefit plan are subject to ERISA protection. 29 C.F.R. Sec. 2510.3-102. It was irrelevant that Kwasny was not the only trustee of the firm’s 401(k) Profit Sharing Plan because trustee liability is joint and several. He therefore could be held liable for the full amount of Plan losses.
Kwasny’s untimeliness defense, based on the ERISA statute of limitations, was properly rejected by the District Court. Actions alleging breach of fiduciary duties under ERISA must be brought within six years after the date of the last action constituting a part of the breach or violation, or within three years of the earliest date the plaintiff had actual knowledge of the breach or violation. 29 U.S.C. Sec. 1113. “Actual knowledge” requires “a showing that plaintiffs actually knew not only of the events that occurred which constitute the breach or violation but also that those events supported a claim of breach of fiduciary duty or violation under ERISA.” The record evidence revealed that Secretary did not have such actual knowledge of Kwasny’s violations until November 2011. Whether the firm’s employees had actual knowledge of the violations was legally irrelevant because the Secretary, not any of the employees, was the plaintiff. Kwasny’s self-serving, vague declaration that some unnamed representative of the Department of Labor allegedly had examined the law firm’s books at some unstated time in 2010 was insufficient to create a genuine issue of fact as to the Secretary allegedly having “actual knowledge” of the violations in that year.
The District Courts also properly rejected Kwasny’s res judicata defense. Res judicata encompasses both claim preclusion and issue preclusion. Kwasny argued that Haft’s successful litigation precluded the Secretary’s claim against Kwasny. The preclusive effect of state court judgment on a federal claim is determined by the Full Faith and Credit Statute, 28 U.S.C. Sec. 1738, which, in turn, gives the state court judgment the same “full faith and credit” in federal courts that the judgment would bear in the courts of that state. Federal courts thus look to state law to determine the preclusive effect of that state’s prior judgments. Pennsylvania law requires privity between the parties in the previous case and the current suit for claim preclusion to apply. Privity constitutes “mutual or successive relationships to the same right of property, or such an identification of interest of one person with another as to represent the same legal right.”
Citing precedent from the Fourth, Fifth, Seventh and Eleventh Circuits, the Kwasny Court held that the Secretary’s interests in bringing ERISA enforcement actions extend beyond the private interests of the wronged individuals, and include public concerns such as reinforcement of public confidence in the private pension system and supervision of the enforcement of ERISA to ensure the financial stability of the “billions of dollars of assets” held by ERISA plans across the country. “A private litigant cannot represent these interests.” As such, “ ‘private plaintiffs do not adequately represent, and are not charged with representing, the broader national public interests represented by the Secretary’ in ERISA suits.” Therefore, “in ERISA suits, the Secretary is not in privity with private litigants and is therefore not bound by the results reached in private litigation.”
However, Kwasny is entitled to an offset for any amounts previously paid to Haft that constitute losses arising from Haft’s 401(k) contributions that were never deposited. The case was remanded to determine whether such an offset was appropriate.