IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
________________________________________
Laborers' Pension Fund, et
al., )
Plaintiffs, )
) Case No.
00C 4113
v. )
)
Hugh B. Arnold, et al., ) DOCKETED
Defendants. ) AUG 1 6 2000
NOTICE OF FILING
T0: Hugh B. Arnold
Arnold & Kadjan
19 West Jackson Blvd., Ste. 300
Chicago, IL 60604
PLEASE TAKE NOTICE that on August 15, 2000, we filed with
Clerk of the United
States District Court for the Northern District of
Illinois PLAINTIFFS' MEMORANDUM OF
POINTS AND AUTHORITIES REGARDING THIS COURT'S
JURISDICTION,
a copy
of
which was previously served on you.
|
Jeffrey Freund Julia Penny Clark Margo Pave BREDHOFF & KAISER, P.L.L.C. 805 15TH Street, N. W. 10' Floor Washington, DC 20005 (202) 842-2600 |
Marc O. Beem Thomas M. Staunton Daniel M. Feeney Miller Shakman & Hamilton, 208 South LaSalle Street Suite 1100 Chicago, Illinois 60604 (312) 263-3700 |
|
|
|
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
__________________________________________
Laborers' Pension Fund, et al., )
Plaintiffs, )
)
) Case No.
00C 4113 (DHC)
Hugh B. Arnold, et al., ) DOCKETED
Defendants. ) AUG 1 6 2000
PLAINTIFFS' MEMORANDUM OF POINTS AND AUTHORITIES
REGARDING THIS COURT'S JURISDICTION
Plaintiffs Joseph Coconato, Charles Cohen, James P. Connolly, Randy Dalton, Mark Deetjen, Martin T. Flanagan, Charles J. Gallagher, Wayne E. Healy, J. Michael Lazzaretto, David Lorig, Gary Lundsberg, Robert J. Madden, Tod Masters, Liberato Naimoli, Dennis Passarelli, Scott Pavlis, Frank Riley, Roger Vignocchi, Sam Vinci; James S. Jorgensen; the Laborers' Pension Fund ("Pension Fund"); and the Health and Welfare Department of the Laborers' District Council of Chicago and Vicinity ("Welfare Fund") (collectively, "plaintiffs"), submit this Memorandum of Points and Authorities in response to the Court's Minute Order of July 17, 2000. As requested by that Order, plaintiffs demonstrate below that this Court has jurisdiction of plaintiffs' claims against defendants Hugh B. Arnold and Arnold & Kadjan ("defendants") pursuant to 29 U.S.C. § 1132(e), 28 U.S.C. § 1331, and 28 U.S.C. § 1367(a).
Plaintiffs have alleged three types of claims against the defendants. The first set of claims -- Counts I through VIII -- allege that defendant Arnold acted as a fiduciary with respect to plaintiffs Pension Fund and Welfare Fund in certain particulars and breached his fiduciary duties, in violation of the Employee Retirement
Income
Security Act of 1974, as amended, 29 U. S. C. § 1001 et seq.
("ERISA"). These claims are brought pursuant to § 502 (a) (2) of
ERISA, 29 U. S. C. § 1132 (a) (2). The second set of claims -Counts IX and X --
allege that both defendant Arnold and defendant Arnold & Kadjan violated
ERISA's ban on prohibited transactions, allegations which are not dependent
upon the defendants' status as ERISA fiduciaries. This set of claims is brought
pursuant to § 502(a)(3)(B) of ERISA, 29 U.S.C. § 1132(a)(3)(B). The final set
of claims -- Counts XI through XV -- allege that plaintiffs are also entitled
to remedies under Illinois common law arising from the same core of facts that
support the ERISA claims.
As
we show below, this Court has proper jurisdiction over all claims set forth in
plaintiffs' Complaint. It has jurisdiction over both the fiduciary and non-fiduciary-based
ERISA claims pursuant to § 502(e)(1) of ERISA, 29 U.S.C. § 1132(e)(1), which
grants federal district courts exclusive jurisdiction over such claims when
brought by, inter alia, a Plan fiduciary: The court also has federal
question jurisdiction of these claims pursuant to 28 U.S.C. § 1331. And,
because the Illinois common law claims involve the same nucleus of operative
facts as the ERISA claims, this Court has supplemental jurisdiction over these
claims pursuant to 28 U.S.C. § 1367.
WITH EXCLUSIVE
JURISDICTION OVER PLAINTIFFS' CLAIMS
AGAINST DEFENDANTS
ARNOLD AND ARNOLD & KADJAN
FOR VIOLATIONS OF ERISA
In
determining whether a federal court has jurisdiction over a complaint, "it
is axiomatic that a court must accept all well-pleaded factual allegations of a
complaint as true." Sladek v. Bell System Management Pension Plan,
880 F.2d 972, 974-75 (7th Cir. 1989); Ed Miniat, Inc. v. Globe Life Iris.
Group. Inc., 805 F.2d 732, 735 (7th Cir. 1986). See also Franchise Tax
Bd. v. Const. Laborers Vac. Trust, 463 U.S. 1, 10 (1983) ("`whether a
case is one arising under the Constitution or a law or treaty of the
2
United States,
in the sense of the jurisdictional statute .... must be determined from what
necessarily appears in the plaintiffs statement of his own claim in the bill or
declaration, unaided by anything alleged in anticipation of avoidance of
defenses which it is thought the defendant may interpose') (quoting Taylor
v. Anderson, 234 U.S. 74, 75-76 (1914)). In this case, plaintiffs have
properly pleaded factual allegations in their Complaint that bring their claims
within the jurisdictional reach of ERISA and thus within the jurisdiction of
this court.
A.
The
Court Has Jurisdiction Over Plaintiffs' Claims Against
Defendant Arnold for Breach of Fiduciary Duties in Violation
of ERISA (Counts I through VIII)
Counts
I through VIII of plaintiffs' Complaint allege that defendant Arnold acted as a
fiduciary within the meaning of ERISA in certain particulars with respect to
plaintiffs Pension Fund and Welfare Fund (collectively "the Funds"),
see Complaint ¶¶ 30, 31, 39, 53, 54, 55, 56, 57, and that he violated ERISA
by breaching his fiduciary duties toward the Funds. See id. at ¶¶ 58, 60, 63, 66, 70, 73, 76, 79. The
claims made in these eight Counts fall squarely within the jurisdiction of this
court as provided for by ERISA.
Pursuant
to ERISA § 3(21)(A)(i), a person is a fiduciary with respect to a plan "to
the extent he exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any authority or control
respecting management or disposition of its assets." 29 U.S.C.
1002(21)(A)(i). Those plan assets include the Funds' claims for delinquent
employer contributions and the Welfare Fund's claims for reimbursement of
benefits out of participants' recovery from third party tortfeasors under subrogation
agreements. Such claims are plan "assets" within the meaning of
ERISA. Liss v. Smith, 991 F. Supp. 278, 290-91 (S.D.N.Y. 1998).
3
Plaintiffs'
complaint alleges that Arnold exercised substantial discretionary control over
the settlement and disposition of the Funds' claims for delinquent
contributions and subrogation. It alleges that his control over these claims
exceeded the normal authority of a plan's counsel, in that he regularly decided
in his own discretion the amounts to accept in settlement and the terms of
payment under installment agreements. See Complaint 11 30, 31, 39, 53-57. Such
an exercise of discretion constituted "authority or control respecting
management or disposition of (plan) assets," and thus made Arnold a
fiduciary "to the extent" of that discretionary authority under ERISA
§ 3 (21) (A) (i). These allegations that Arnold exercised substantial
discretion also set him apart from the usual fund counsel. Most attorneys who
provide services to an ERISA fund do not meet the definition of an ERISA
fiduciary because they "do not exercise any decision-making authority over
the plan or plan assets." Health Cost Controls of Illinois, Inc. v.
Washington, 187 F.3d 703, 709 (7th Cir. 1999). In this case, however,
Arnold is alleged to have exercised precisely such decision-making authority.
Indeed, the control Arnold is alleged to have exercised -- determining in his
sole discretion which (if any) delinquent contributions to pursue diligently,
as well as the amounts to accept in settlement of both contribution and
subrogation claims -- is similar to that exercised by Health Cost Controls,
which the Seventh Circuit found sufficient to make Health Cost Controls an
ERISA fiduciary. Id. See also Chicago Bd. Options Exch. v. Conn. Gen. Life
Ins., 713 F.2d 254, 260 (7th Cir. 1983) (ability to amend annuity contract
renders party an ERISA fiduciary); Liss, 991 F. Supp. at 302-304 (the
determination of fiduciary status under ERISA "is functional and focuses
on the nature of the duties performed rather than the title held by an
individual" and an attorney who exercises sufficient authority
4
over plan assets will be found an ERISA
fiduciary) (reviewing cases); 29 C.F.R. § 2509.75-5 D-1.
Those who serve as
ERISA fiduciaries of pension and welfare funds are required to meet the
standards of fiduciary behavior codified in the statute. And to put some teeth
into those standards, Congress created a framework for enforcing them -- a
framework that includes a federal forum to hear claims alleging violations of
these standards. The initial step in the enforcement framework is § 409, which
establishes liability for a fiduciary's breach of duty. Section 409 provides
that:
Any person who is a
fiduciary with respect to a plan who breaches any of the responsibilities,
obligations, or duties imposed upon fiduciaries by this subchapter shall be
personally liable to make good to such plan any losses to the plan resulting
from each such breach, and to restore to such plan any profits of such
fiduciary which have been made through use of assets of the plan by the
fiduciary, and shall be subject to such other equitable or remedial relief as
the court may deem appropriate, including removal of such fiduciary.
29 U.S.C. § 1109(a).
Here, plaintiffs
allege that Arnold, in exercising the discretion that made him a fiduciary,
breached ERISA fiduciary duties as follows: violated his duty of loyalty to the
Funds (Count I), failed to exercise his discretionary authority prudently
(Count II), failed to discharge his duties in accordance with the documents
governing the Funds (Count III), caused the Funds to engage in various
prohibited transactions (Counts IV and V), dealt with the assets of the Funds
in his own interest (Count VII), and dealt with the Funds on behalf of parties
with opposing interests (Count VIII). Plaintiffs also allege that Arnold's
multiple breaches of fiduciary duty resulted in losses to the Funds which
Arnold must make good. See Complaint 1123, 32, 34, 35, 36, 41. Taken as true,
as they must be at this stage, Sladek, 880 F.2d at 974-75; Ed Miniat,
Inc., 805 F.2d at 735, the facts alleged in the first eight Counts of
plaintiffs' Complaint properly
5
allege that
Arnold violated his fiduciary duties toward the Funds and must make good those
losses to the Funds, thereby bringing these claims within the scope of ERISA §
409(a).
ERISA
provides a specific vehicle for obtaining relief for a fiduciary's breach of
the duties imposed upon him by § 409. Civil actions are authorized by §
502(a)(2), which permits the Secretary of Labor or a participant, beneficiary
or fiduciary to bring an action against a fiduciary "for appropriate
relief under § 409." 29 U.S.C. § 1132(a)(2). As properly alleged in
plaintiffs' Complaint, see Complaint IT 6
- 8, the plaintiff Fund Trustees and Administrator who have brought this civil
action are all fiduciaries of the Funds within the meaning of ERISA, and are
thereby entitled to bring this action against Arnold pursuant to § 502 (a)(2).
The final step in ERISA's enforcement framework is the statute's grant of jurisdiction to the federal courts. Under § 502(e)(1), claims brought by a fiduciary under § 502 (a) (2) "for appropriate relief under § 409" are subject to the federal district courts' exclusive jurisdiction. That section states that:
[e]xcept for actions under subsection (a) (1) (B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by . . . a fiduciary.
29 U.S.C. §
1132(e)(1).1 [1]Pursuant
to this section, when a person is alleged to have been acting as a fiduciary
and to have committed breaches of fiduciary duty under § 409, the federal
district court has subject matter jurisdiction over that claim. In the case at
bar, plaintiffs have alleged that Arnold, acting as a fiduciary of the Funds in
certain respects, violated his fiduciary duties toward the Funds. Because these
__________________________
6
allegations
plainly fall within § 409, they are subject to this Court's exclusive
jurisdiction under § 502(e)(1).
B.
The
Court Has Jurisdiction Over Plaintiffs' Claims A Against
Defendants Arnold and Arnold & Kadjan for Participating in
Prohibited Transactions in Violation of ERISA (Counts IX and X)
Counts
IX and X allege that Arnold and Arnold & Kadjan were both "parties in
interest" within the meaning of ERISA (which defines "party in
interest" to include "a person providing services to [the]
plan," 29 U.S.C. § 1002(14)(B)), see Complaint 1 69; that both received
excessive compensation from the Funds, see id. at IT
82, 86, 87; and that
payment of this excessive compensation constituted "prohibited
transactions" within the meaning of and forbidden by ERISA. Id. at T1
83, 88. These counts, too,
fall within the subject
matter jurisdiction of
this Court, as the Supreme Court confirmed recently in Harris Trust &
Say. Bank v. Salomon Smith Barnet/ Inc., 120 S.Ct 2180 (2000).
The
allegations that Arnold and Arnold & Kadjan received excessive compensation
and thereby participated in prohibited transactions in violation of ERISA are
brought by plaintiffs pursuant to ERISA § 502(a)(3)(B), rather than §
502(x)(2). As discussed in Section I.A, supra, § 502(x)(2) provides for
civil actions by fiduciaries "for appropriate relief under § 409."
Because liability under § 409 is limited to fiduciaries, only fiduciaries may
be sued pursuant to § 502(x)(2). Section 502 (a)(3)(B), by contrast, is not
limited to suits for relief under a single section of ERISA. Rather, it
authorizes civil actions by fiduciaries to obtain "appropriate equitable
relief" for violations of any provision of ERISA Title I. 29 U.S.C. §
1132(a)(3)(B).
In
the recent Harris Trust decision, the Supreme Court held that § 502 (a)
(3) creates a cause of action against nonfiduciaries who take part in prohibited
7
transactions
that violate ERISA's provisions. Harris Trust, 120 S.Ct at 2186. Noting
that the focus of § 502 (a) (3) is to "redress( ) the act or practice
which violates any provision of ERISA Title I," the Court held that
nonfiduciary parties to a prohibited transaction, within the meaning of ERISA,
properly may be held liable in an action under § 502(a)(3). Id. at 2187.
Moreover,
an action under § 502(a)(3) is subject to the same exclusive federal court
jurisdiction as are actions under § 502(a)(2). Section 502(e)(1) provides that
"the district courts of the United States shall have exclusive
jurisdiction of civil actions under this subchapter brought by . . . a
fiduciary." 29 U.S.C. § 1132(e)(1). Section 502(e)(1) thus vests this
Court with subject matter jurisdiction over claims under § 502(a)(3) as well as
those under § 502(a)(2).
Harris
Trust, therefore,
establishes this Court's jurisdiction over plaintiffs' claims that Arnold and
Arnold & Kadjan participated in prohibited transactions. While plaintiffs
have properly alleged facts supporting Arnold's status as an ERISA fiduciary
and believe that the evidence will establish that he was acting as a fiduciary,
plaintiffs' prohibited transaction claims would stand against both Arnold and
Arnold & Kadjan -- and are sufficient to give the Court jurisdiction over
this action -- even were Arnold not a fiduciary.
In
Counts XI through XV, plaintiffs allege claims against Arnold and Arnold &
Kadjan under Illinois common law. The actions by which the defendants are
alleged to have violated the state's common law are the same actions that serve
as the basis for plaintiffs' ERISA claims against them. The state law claims
thus fall within this Court's supplemental jurisdiction under 28 U.S.C. §
1367(a).
8
A federal
court's supplemental jurisdiction is properly exercised over state claims when
the state and federal claims asserted in the Complaint "derive from a
common nucleus of operative fact" such that the plaintiffs "would
ordinarily be expected to try them all in one judicial proceeding." United
Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966). Even a "loose factual
connection" between the federal and state claims is sufficient to impart
federal court jurisdiction over the state claims. Ammerman v. Sween, 54
F.3d 423, 424 (7th Cir. 1995).
In this case,
there is far more than a "loose factual connection" between
plaintiffs' federal ERISA claims and their state common law claims. Here, the
same factual allegations regarding Arnold's exercise of discretionary
authority, see Complaint 11 30, 31, 39, the
same contingent fee agreement, id. at IT 18-22,
the same false representations Arnold made about defendants' collection efforts
and services, id. at 11 26-29, 31, 33, 34, 37, 38, and the same failure to
diligently pursue those efforts, id. at 11 32,
35, 36, 41, are the basis for both the federal and state claims in plaintiffs'
Complaint. The link between plaintiffs' ERISA claims and their state common law
claims is thus extremely strong.
Indeed, the
factual connection between these sets of claims is perhaps even stronger than
in Herman v. Wolfe, 1998 WL 30706 (N.D.Ill. Jan. 26, 1998) (Coar, J.),
where this Court held that the presence of ERISA claims gave it supplemental
jurisdiction over state law claims against an attorney who had served as
general counsel to the entity involved in the ERISA claims. In Wolfe,
the Secretary of Labor brought ERISA claims against a set of defendants,
including trustees of the International Professional, Craft and Maintenance
Employees Association Trust ("IPCMEAT), for inter alia, self-dealing
and violation of fiduciary duties of loyalty, violation of fiduciary duty of
care, violation of fiduciary duty to act in accordance with
9
plan
documents, violation of fiduciary duty by causing IPCMEAT to engage in
prohibited transactions, and misappropriation of assets and self-dealing. Id.
at *1. The Independent Fiduciary of IPCMEAT then brought a third-party claim
under state law against the attorney who had served as IPCMEAT's general
counsel and against that attorney's law firm, alleging that the attorney had
committed malpractice in connection with the services performed for IPCMEAT by
failing to alert IPCMEAT that it was violating ERISA. In holding that the state
law claims were within the Court's supplemental jurisdiction, this Court noted
that "the key allegations" in the Independent Fiduciary's Complaint
were "all at issue in the DOL Complaint." Id. at 3. In the case at
bar, the key allegations made in plaintiffs' ERISA claims are the very same
allegations made in plaintiffs' state law claims. Moreover, here a single set
of plaintiffs are making the claims against a single set of defendants, making
the link between the claims even closer.
Because
this Court properly has jurisdiction over plaintiffs' ERISA claims and because
plaintiffs' Illinois common law claims derive from the same "nucleus of
operative facts" as their ERISA claims, this Court has subject matter
jurisdiction over plaintiffs' state law claims pursuant to the federal supplemental
jurisdiction statute, 28 U.S.C § 1367.
For the
reasons set forth above, plaintiffs' claims against defendants are properly
within the subject matter jurisdiction of this Court.
10
CERTIFICATE
OF SERVICE
I hereby certify
that on this 14th day of August, 2000, the foregoing Plaintiff's Memorandum of
Points and Authorities Regarding This Court's Jurisdiction was served by
overnight delivery on:
Hugh
B. Arnold
Arnold
& Kadjan
19
W. Jackson Blvd.
Chicago,
IL 60604
[1] 1 section 502(e)(1)'s exception for "actions under subsection (a)(1)(B) of this section" is inapplicable to the claims brought by Plaintiffs, as none are under that subsection.