HARRIS TRUST & SAV. BANK v. SALOMON SMITH BARNEY INC.
Section 406(a) of the Employee Retirement Income Security Act of 1974 (ERISA) bars a fiduciary of an employee benefit plan from causing the plan to engage in certain prohibited transactions with a "party in interest." Such a party encompasses entities that a fiduciary might be inclined to favor at the expense of the plan's beneficiaries. After the Ameritech Pension Trust (APT), an ERISA pension plan, allegedly entered into a transaction prohibited by ERISA with Salomon Smith Barney Inc., APT's fiduciaries sued Salomon under section 502(a)(3), which authorizes a fiduciary to bring a civil action to obtain appropriate equitable relief." Salomon arguing that section 502(a)(3) only authorizes a suit against the fiduciary who caused the plan to enter the prohibited transaction. Ultimately, the District Court held that ERISA provides a private cause of action against nonfiduciaries who participate in a prohibited transaction. In reversing, the Court of Appeals held that the authority to sue under section 502(a)(3) does not extend to a suit against a nonfiduciary "party in interest" to a transaction barred by section 406(a).
Does section 502(a)(3) of the Employee Retirement Income Security Act of 1974, which authorizes a "participant, beneficiary, or fiduciary" of a plan to bring a civil action to obtain "appropriate equitable relief" to redress violations of ERISA, extend to a suit against a nonfiduciary "party in interest" to a transaction barred by section 406(a)?
Legal provision: Employee Retirement Income Security
Yes. In a unanimous opinion delivered by Justice Clarence Thomas, the Court held that Section 502(a)(3)'s authorization to a plan "participant, beneficiary, or fiduciary" to bring a civil action for "appropriate equitable relief" extends to a suit against a nonfiduciary "party in interest" to a prohibited transaction barred by section 406(a). "We reject," wrote Justice Thomas that, "absent a substantive provision of ERISA expressly imposing a duty upon a nonfiduciary party in interest, the nonfiduciary party may not be held liable under [section 502(a)(3)]." Justice Thomas concluded that "[section 502(a)(3)] itself imposes certain duties, and therefore that liability under that provision does not depend on whether ERISA's substantive provisions impose a specific duty on the party being sued."
Argument of Robert A. Long, Jr.
Chief Justice Rehnquist: We'll hear argument next in Number 99-579, the Harris Trust and Savings Bank v. Salomon Smith Barney, Inc....
Mr. Long: Mr. Chief Justice, and may it please the Court:
The issue in this case is whether ERISA provides a cause of action for appropriate equitable relief against a party in interest who engages in a prohibited transaction with an ERISA plan.
The text of ERISA provides that such actions are available for two reasons, and they correspond to our two arguments today.
First, based on all the relevant statutory language, ERISA's prohibited transaction provisions apply to parties in interest as well as to fiduciaries and, second, ERISA's carefully crafted civil enforcement provisions in section 502 authorize actions for restitution of plan assets transferred in a prohibited transaction without regard to whether the party in interest is itself deemed a violator of ERISA.
Justice Scalia: If the provision allows suit against parties in interest, why wouldn't it also allow suits against persons who are not parties in interest?
Mr. Long: Well, again, we make two arguments, Justice...
Justice Scalia: Because I mean, the provision you're relying on doesn't say, parties in interest.
It neither says fiduciaries nor parties in interest, and if you're going to say that it doesn't matter who it says is the defendant, then I guess we have to say the defendants could be anybody.
Mr. Long: Well, our first argument is that outside of section 502(a)(3) ERISA does say in section 406 and section 502(i) and section 4975 that parties in interest are not to engage in prohibited transactions.
If they do, they're subject to punitive penalties and taxes, so that distinguishes the party-in-interest transactions from other sorts of nonfiduciary activity.
Justice Scalia: True, but those are not the sections that create the cause of action.
The section that creates the cause of action doesn't say whom it's against.
Mr. Long: Well, and that...
Justice Scalia: You say that it doesn't matter whether it says whom it's against.
I don't know why it couldn't be against anybody...
Mr. Long: That is our...
Justice Scalia: whenever it's equitable to get the money out of somebody's hide.
Mr. Long: And that is our second argument, and under our second argument, looking to the language of 502(a)(3), the plain language, it... you're correct, it does not matter when there is a violation of... any violation of any provision of title I, the plain language of 502(a)(3) is that there shall be a civil cause of action for appropriate, equitable relief to redress the violation, and the...
Justice Scalia: Any other instance where, you know, the United States Code, or even a State code, creates a cause of action without saying whom it's against?
Mr. Long: Well, I think, I mean, Congress... the Court has said several times that this is a very carefully crafted provision and the Court will not tamper with its language, and it's... what Congress did here was deliberate.
It's... if you look at other provisions, the preceding subsection 502(a)(2), that's limited to fiduciaries.
If you look at the preceding section...
Chief Justice Rehnquist: Where is that set forth in the briefs, 502(a)(2)?
Mr. Long: 50... the statutory provisions, Mr. Chief Justice, in the joint appendix, and 502(a)(2) is on page 254 of the joint appendix.
Chief Justice Rehnquist: Thank you.
Mr. Long: And that provision provides for an action by the Secretary or by a participant beneficiary or fiduciary for appropriate relief under section 409, and section 409, in turn, is limited to fiduciary breaches, and two other examples, if you look to section...
Justice Scalia: Excuse me.
Make the point again.
Mr. Long: The point...
Justice Scalia: 502(a)(2)...
Mr. Long: The point very simply, Justice Scalia, is that if Congress had meant to limit 502(a)(3) to any fiduciary who violates any provision of ERISA or any person who violates any provision of ERISA, it would have said so.
502(a)(2) is an example of a limitation to fiduciaries.
Another good example is the Federal Employee Retirement System statute that's cited in our reply brief, in footnote 1 of our reply brief.
That is a provision that is modeled directly on 502(a)(3).
Congress picked up precisely the language of 502(a)(3) with an important change.
Chief Justice Rehnquist: Where is that cited in your reply brief?
Mr. Long: It's... Mr. Chief Justice, it's on page 1, and it carries over onto page 2 in the first footnote.
Chief Justice Rehnquist: Thank you.
Mr. Long: And that provision says that a civil action may be brought by the Secretary of Labor or any participant beneficiary or fiduciary against any fiduciary to enjoin any act or practice which violates any provision, or to obtain any other appropriate equitable relief, so when Congress wanted to limit the cause of action to any fiduciary or any person, it knew how to do it.
Another provision which is not cited in our brief, and I apologize for this, section 501 of ERISA that precedes 502, that section provides that any person who wilfully violates any provision of the reporting and disclosure requirements is liable, so Congress was very deliberate about the language it used.
When it wanted to limit liability to any person or any fiduciary, it said so.
Justice Scalia: Or any person who's violated, so you really think that the best...
Mr. Long: Well...
Justice Scalia: reading of this provision is that you can bring the action against anyone, even someone who has not been in violation of the law.
Mr. Long: Yes, Your Honor.
It says any act or practice which violates a provision of ERISA, and then it says, for appropriate equitable relief to redress the violation, and that dovetails with the reference to any act or practice, because appropriate equitable relief certainly includes a constructive trust, and the nature of a constructive trust is that it follows the assets.
It doesn't look to whether the person in possession of the assets was a violator.
Justice Scalia: Well, but it doesn't say just constructive... I mean, it's an extraordinary, extraordinary intent to attribute to Congress, that it essentially left it up to the courts to decide who is liable.
Mr. Long: Well, it is based...
Justice Scalia: Because I mean, a court could say, somebody who knew of this violative transaction, who has no other connection with the thing at all, just knew about it and did not blow the whistle, presumably a court could say that person should cough up some money.
Mr. Long: Well, first, this is in the language of the statute.
We're attributing this to Congress because Congress expressly referred to appropriate equitable relief.
Justice Scalia: That's right.
Mr. Long: And second, it is a self-limiting type of relief.
The constructive trust only applies in limited situations where...
Chief Justice Rehnquist: Well, a constructive trust is pretty much of a gimmick, isn't it, that courts have made up to do something that they wanted to do and couldn't find any other reason for it?
Mr. Long: Well, I wouldn't call it a gimmick, Mr. Chief Justice.
It's expressly referred to by the Senate in the report that created this appropriate equitable relief provision.
It's a well-established...
Chief Justice Rehnquist: I thought you were seeking... your client was seeking restitution.
Mr. Long: Well, restitution pursuant to a constructive trust is a classic form of equitable relief, so that is... that's how a constructive trust gets into it.
Justice O'Connor: Where you allege unjust enrichment...
Mr. Long: Yes.
Justice O'Connor: on the basis that the respondent was employed as the investment advisor for this plan...
Mr. Long: Yes.
Justice O'Connor: and you allege knowingly sold worthless property.
Mr. Long: Yes, precisely, and again, to switch back to... we have the narrower argument and the broader argument.
Certainly in the context of a prohibited transaction what Congress expressly said, parties in interest are not to engage in these transactions.
If they do, they are subject to punitive taxes and civil...
Justice O'Connor: Well, it doesn't say that exactly, does it?
It says a fiduciary shall not cause the plan to engage in a transaction if he knows...
Mr. Long: Yes.
Justice O'Connor: and so forth.
Mr. Long: That is correct, Your Honor, but the Court has always refused, in construing ERISA and other statutes as well, to look simply to any single phrase, and when you look not only to 406 but to other provisions such as 3003, that's a provision of ERISA that says... it refers expressly to a part... a violation of section 406 by a party in interest, so there's an express statement in the text of the statute that a party in interest can violate section 406.
Justice Scalia: Mr....
Chief Justice Rehnquist: It provides penalties by the Secretary of Labor, doesn't it?
Mr. Long: Well, section 3003 simply is a reporting provision coordinating between the Labor and Treasury Departments.
It says whenever the Secretary of Labor has information that a party in interest is violating section 406, it shall report the information to the Secretary of the Treasury.
But Mr. Chief Justice, there are also section 502(i) and section 4975, which just as you say, impose on parties in interest these heavy taxes or civil penalties, which are really designed not only to keep the party in interest from entering into the transaction but, if it does, it's supposed to give the money back to the plan.
There's an incentive to correct the transaction.
That's a defined term that means, give the money back, so certainly in the narrow context of a prohibited transaction allowing a participant or a beneficiary or a fiduciary to sue for precisely that, that is, to get back the plan's...
Justice Ginsburg: But Mr. Long, why does that follow, because in other schemes... take title VII, for example, of the Fair Labor Standards Act.
When Congress means to create both a private right of action and an executive enforcement scheme it provides specifically for a private right of action, not in the air, but against the employer in the case of title VII and in the case of the Fair Labor Standards Act.
So the normal pattern, when Congress wants to create a private right of action against the person who could be subject to executive action, Congress makes that clear.
Mr. Long: Well, and our submission is that Congress did make it clear here in these carefully crafted provisions of section 502.
Justice Ginsburg: Well, the conspicuous absence is, here it says, executive, you can go after the party in interest.
Mr. Long: That's correct.
Justice Ginsburg: It doesn't say, private plaintiff, you can go against the party in interest, and that is what these other statutes that have dual enforcement schemes do say.
Mr. Long: Well, but in this statute, I mean, in each case the court's obligation, of course, is to follow the plain language as Congress wrote it, unless there's some strong reason to depart from it, and here the language of 502(a)(3) and 502(a)(5), which is a parallel provision that gives the Secretary of Labor authority to bring an action for appropriate equitable relief for any violation of ERISA, both of those provisions are broadly written.
What Congress did here was, it provided some specific... they're not really remedies, but taxes and civil penalties, and it also provided a general catch-all provision.
The Court addressed this in Varity and said the fact that Congress has addressed it narrowly does not mean that we shouldn't give the full effect to its broad language as well.
Justice Souter: Mr. Long, with respect to the catch-all I've been assuming, and tell me whether my assumption's right, that but for ERISA and its preemptive effect, you would be entitled to seek this kind of equitable remedy in a State court under its equity jurisdiction.
Mr. Long: That's correct.
Justice Souter: And so the real reason... I guess one of your reasons for saying you've got to find it in the catch-all here is that it would have been very odd for Congress in effect to take away a remedy for the benefit of the ERISA beneficiaries by preemption without allowing it under the Federal jurisdiction created by the statute.
Mr. Long: Yes, that's absolutely correct, but our argument is not simply that we don't think Congress in any respect could have cut back on any rights that participants or beneficiaries had pre-ERISA, and our argument is again based on the language of the statute, this carefully crafted language in section 502, and when you see how the pieces dovetail together it's just clear that Congress did not limit this to any person who violates ERISA, or any fiduciary who violates ERISA.
Justice Breyer: But if you're right... what... the thing... I'm having trouble with the case, and maybe it's only tangentially relevant, but if you're right, I thought stockbrokers are always selling investments to people, and companies hire stockbrokers and so do plans, and why wouldn't you do this.
If you ran a plan, you'd buy a lot of investments and then the ones that went up you'd keep, and then as soon as some went down you'd ask the stockbroker or the investment manager to give you your money back.
I mean, that would be a very good way of running a fund.
You couldn't lose.
Mr. Long: Well...
Justice Breyer: So there's something I'm missing in how this statute works.
Mr. Long: Well, I think... a few points.
One is, I mean, certainly there are the excise taxes and the civil penalties which apply to all these prohibited transactions, so to the...
Justice Breyer: My difficulty is probably something very basic.
I don't understand how the... you read the statute, and it seems to say you can't buy services from somebody who sells you services.
Mr. Long: Well...
Justice Breyer: It seems to say you can't buy computers from a computer servicing company.
Mr. Long: Right.
Justice Breyer: It seems to say you can't buy investments from a stockbroker, and yet I thought that's their job.
Mr. Long: And...
Justice Breyer: And so there's something basic I'm not understanding.
Mr. Long: Well...
Justice Breyer: Maybe it's not relevant, in which case just tell me that and don't answer.
Mr. Long: No, I mean, I think in part you're quite right, and it shows how serious Congress was about these prohibited transaction provisions.
It really wanted... it really was a shift.
It wanted to bar these transactions categorically, but then subject to exemptions, and I think a big part of the answer to the difficulty you're having is section 408 does create certain exemptions.
Justice Breyer: You're saying the real issue in this case is whether Salomon Brothers is or is not a party in interest.
Mr. Long: Well, I think if we get by the issue that's before the Court today, that will be an issue.
Whether this is, in fact, entitled to an exemption is an issue.
Justice Ginsburg: Well, isn't it... didn't Salomon say that if it loses here it does want to contest whether it's a party in interest and whether this is a prohibited transaction?
Mr. Long: Oh, yes.
That's... there are many... and Ameritech can attest that it's delegated its fiduciary responsibility here, so Ameritech's...
Justice Ginsburg: So we are supposed to assume for purposes...
Mr. Long: Yes.
Justice Ginsburg: of the decision two things that may be the case to be decided no matter what we said here.
That is, we're supposed to assume that we are dealing with a party in interest, that Salomon is a party in interest, and that this is a prohibited transaction.
Mr. Long: Yes, Your Honor.
Justice Ginsburg: Although neither may turn out to be the case.
Mr. Long: That's correct.
That's what the...
Justice Scalia: Although you say it doesn't matter whether Salomon Brothers is a party in interest.
Mr. Long: Well...
Justice Scalia: you say that you...
Mr. Long: Well, it...
Justice Scalia: You would have a cause of action under this provision whether or not.
Mr. Long: It... no.
It does matter and that's because, as the Court said in Mertens, there's not equitable relief at large.
There has to be equitable relief to address a violation of ERISA.
If there's not a prohibited transaction, there's no violation of ERISA, so no equitable relief would be appropriate, so it would matter.
Mr. Chief Justice, I'd like to reserve the balance of my time.
Argument of Beth S. Brinkmann
Chief Justice Rehnquist: Very well, Mr. Long.
Ms. Brinkmann, we'll hear from you.
Mr. Brinkmann: Mr. Chief Justice, and may it please the Court:
Congress enacted the prohibited transaction provisions of ERISA to protect plan assets from overreaching by parties and persons who deal with the plan.
Under section 502(a)(3) recovery of plan assets from parties in interest who obtained assets through a prohibited transaction is appropriate equitable relief.
The penalty and tax provisions of ERISA make clear that the preference is for disgorgement of such assets from a party in interest who receives such assets.
To enforce those provisions, the Secretary of Labor goes to court under a virtually identical provision, 502(a)(5) to enforce the restitution, and under (a)(6) to enforce the penalties.
Justice Breyer, you had been inquiring about the reach of the prohibited transactions.
I think it might be useful, to understand it, to take a look at some of the exemptions.
For example, at joint appendix page 246 there's a general exemption for contracting or making reasonable arrangements with a party in interest for things like office space, legal, accounting or other services, so long as it's no more than a reasonable compensation is paid.
Justice Breyer: Well, the part that was worrying me about that is that it says, other services necessary for the operation of the plan, and so I could imagine an enormous litigation growing up where the plans are saying in respect to a losing investment, well, the service wasn't actually necessary, it was sort of a frill, and therefore we get back the loss that we incurred.
And where you talk abut the other enforcement provisions, it's the Secretary doing it, so we have a screen that would screen out the legal claims that are not quite well-founded and just represent an effort to get your money back.
Mr. Brinkmann: Well, Your Honor, as it stands, however, the parties in interest and fiduciaries are all bound by these rules and regulations because they can be subject up to 100 percent penalty and tax on these transactions, but the structure of the law makes clear that the...
Justice Scalia: But that's up to an administrator to bring that suit, and I'm willing to, and I think Justice Breyer is willing to assume some good faith on the part of the Secretary or on the part of the Department of the Treasury in bringing a lawsuit.
I'm not willing to assume good faith on the part of a private litigant.
Mr. Brinkmann: Well, Your Honor, the Secretary of Labor in good faith needs to be able to come to court to also, to get restitution under the parallel provision of (a)(5).
That's crucial to the enforcement of the Secretary of Labor, and the language is identical in relevant respects, and the statute makes quite clear that that is the priority of recouping the assets to the plan.
The purpose was not to generate additional money for the public fisc.
One provision that makes that very clear is requiring the remarkable, quite frankly, provision that the Secretary of Treasury, before assessing the tax, must refer it to the Secretary of Labor to obtain a correction, and that is when the Secretary tries voluntary means to do that through negotiations and letters of notice and all, and then can go into court to sue for appropriate equitable relief to recoup those assets for the plan.
That's crucial to the Secretary's enforcements, and that's under the parallel provision of (a)(5).
Justice Scalia: Is it the Government's position, as it is petitioner's, that it is not only an interested person who can be sued under this provision but also anybody else, so long as there's a violative... a violation?
Mr. Brinkmann: So long as they are a person from whom appropriate equitable relief can be obtained to redress a violation, and that is quite a limiting principle, Your Honor.
As Justice O'Connor pointed out, it's based on unjust enrichment.
Justice Scalia: Well, who says it is?
All it says is appropriate, appropriate equitable relief.
I guess a court of equity can decide... I mean, I'm inclined to agree with you that the easiest reading of the whole statute is to assume that suit would be allowed here, but I'm... I am... I think maybe we should require something more than, you know, well probably the easier reading is this, in order to make me believe that Congress enacted a provision that just left it up to the courts who can be sued.
I think that's extraordinary.
Mr. Brinkmann: Your Honor, I think 25 years of experience or more would actually show that it's not a problem and not extraordinary.
Before this court of appeals entered the judgment in this case, at least six other circuits had held that there was this type of cause of action, and the Secretary has been bringing suits under (a)(5) since the seventies, so...
Justice Souter: Well, Ms. Brinkmann, isn't the... I'm searching for the same thing that Justices Breyer and Scalia are searching for, and is the answer maybe simpler than we tend to assume?
Is the answer to this seemingly ballooning liability the concept of the prohibited transaction, so that if, you know, they... the trustee buys lousy stock, that's not a prohibited transaction?
Mr. Brinkmann: That's correct.
Justice Souter: The stock goes down, nobody's going to be able to sue.
I mean, is that in effect the limitation that should satisfy us for what we're worrying about here?
Mr. Brinkmann: I do think the concerns Your Honor... were very well put by Your Honor that it may be the scope of the prohibited transaction...
Justice Breyer: All right, but in respect to that particularly, I guess that you can buy an investment from a broker-dealer provided that a certain number of conditions listed in the regulation are met.
Mr. Brinkmann: In addition...
Justice Breyer: And those are fairly technical, and therefore we're asking the brokers and the dealers to become ERISA experts, understand that regulation, and if they get it wrong, it's not just that the Secretary might sue them.
It's that any fund would be negligent not to... I mean, I'm not saying literally negligent, but I mean, a fund would say, sure, let's sue and get our money back.
Now, it's that kind of highly technical thing in the scope of the substantive duty that I guess produces some concern about who can enforce it.
Mr. Brinkmann: Your Honor, I can understand that.
I think a couple of things.
First of all, there are the statutory exemptions.
Second of all, there are some exemptions enacted, promulgated by regulation for certain classes of transactions, for instance, having to do with security dealers.
Third, there is a process for applying for exemptions to the Secretary.
Another point would be, Your Honor, is I come back to that these entities are still going to be liable for 100 percent of that transaction and a penalty if it is not recouped, and here the purpose is to have those assets go back to the plan, and then that diminishes the penalty or the taxes imposed.
Each of those provisions, 4975, 502(i), 502(l), have specific provisions for the Secretary to waive such penalties if the transaction is corrected, and that is the thrust of this, and the...
Justice O'Connor: Ms. Brinkmann, do you know what exemption is urged by Salomon Brothers to cover them?
Is it this contracting for legal, accounting, or other services necessary for the operation of the plan?
Mr. Brinkmann: I don't believe so, Your Honor, because the reason that the... the transaction in question is the selling of these interests in the hotel industry, the hotel...
Justice O'Connor: Do you know what exemption is urged?
Mr. Brinkmann: No, Your Honor.
That has not been litigated, I'm sorry.
That's being reserved for the case on... for the proceedings after this.
This issue was decided on summary judgment, Your Honor.
We think it's important, Your Honors, to recognize that to not permit the Secretary to bring this kind of suit under 502(a)(5) and other parties to bring it under (a)(3) would significantly undermine the purposes of the prohibited transactions.
Justice Ginsburg: Do the two go together?
Maybe the Secretary can but the private individual can't.
Mr. Brinkmann: That would be a difficult matter, I think, as far as statutory construction would go, Your Honor, but we would certainly urge that the Court find some...
Justice Ginsburg: Because the very same language is used in the provision allowing the Secretary to sue.
It also doesn't say whom, whom it may sue.
Mr. Brinkmann: That's correct, Your Honor.
That's in fact the structure of virtually all of the cause of actions under 502(a), but we think that's because the appropriate equitable relief goes to the main purpose of ERISA and that is, again, maintaining the financial soundness of the plans, recouping those assets to the plan, not generating money for the Federal Treasury.
Justice O'Connor: Yes, but you can't want to open it up to recovery of every bad investment that the plan makes.
Mr. Brinkmann: But it's not, Your Honor.
I think that the long history...
Justice O'Connor: That's what everybody is concerned about.
Mr. Brinkmann: I think the long history of this makes clear that it is not, Your Honor.
Party at interest is defined by the plan, and in order to have this type of cause of action there has to be a prohibited transaction violation, and that means it has to be one of the specifically identified statutory transactions between a fiduciary and a party in interest.
Justice O'Connor: What, in your view, would make this a prohibited transaction?
Mr. Brinkmann: Under subsections (a) and (d) there was an exchange of plan assets.
If you look at... the prohibited transactions are set forth in the joint appendix beginning on page 242.
This would come under 407(a)(1)(A), where there was a sale or exchange or leasing of property between a plan and a party in interest, or (D), a transfer to or use or of the benefit of a party in interest of any assets of the plan.
Chief Justice Rehnquist: Thank you, Ms. Brinkmann.
Mr. Brinkmann: Thank you, Your Honor.
Argument of Peter C. Hein
Chief Justice Rehnquist: Mr. Hein, we'll hear from you.
Mr. Hein: Mr. Chief Justice, and may it please the Court:
I'd like to address the two statutory provisions that are at issue.
The first, 406, prohibits conduct.
By its terms, the prohibition is directed at the fiduciary.
Salomon was ruled here not to be a fiduciary.
406 says a fiduciary shall not cause the plan to enter into particular transactions.
The second statute at issue, 502(a)(3), does not prohibit conduct.
It does not, by its terms, impose...
Justice Stevens: May I just ask you about 406?
Mr. Hein: Sure.
Justice Stevens: I've got to kind of go a little slow.
It speaks in terms of what the fiduciary can do, but is your adversary correct in saying that if the fiduciary did this it was a prohibited transaction?
Mr. Hein: If it was...
Justice Stevens: If it is... was the transaction at issue in this suit prohibited by 406(1)(a) or 406(1)(b), in your view?
Mr. Hein: That is an issue, Justice Stevens, that has yet to be determined.
I think Justice Ginsburg is correct that in the current procedural posture of this case, where we have the question of whether there's a right of action at all, one assumes, arguendo, as the court of appeals did...
Justice Stevens: That's what I mean.
For purposes of our decision... you may win later on, obviously, but for purposes of our decision there was a sale by a fiduciary which violated 406(a)(1)(A) and 406(a)(1)(D)?
Mr. Hein: Again, Justice Stevens, with the caveat that we will be disputing that in the future...
Justice Stevens: Correct.
No, no, I understand.
Mr. Hein: Yes, for present purpose...
Justice Stevens: But we're assuming that they may be able to prove whatever they have to prove on remand that would establish those facts, and your argument is, that doesn't matter, you still win?
Mr. Hein: That's correct.
Justice Souter: But you're not... you don't win because it was not a prohibited transaction.
Mr. Hein: At this level we win because there is no prohibition directed at the counterparty, whether it's a party in interest or not.
Justice Souter: I understand.
Mr. Hein: The statute is clear.
It says a fiduciary shall not.
By its terms, it does not impose a prohibition or create a duty on the part of the counterparty, which could be a party in interest, or a number of those subdivisions in section 406 do not even refer to party in interest at all.
If one looks at...
Justice Stevens: No, but the ones we're talking about do refer to a party in interest.
At least the 406(a)(1)(A), and (a)(1)(D), do depend on your being a party in interest.
Mr. Hein: Yes, Justice Stevens, those provisions do refer to the party in interest, but the entire section, 406, prohibited transactions, is structured to prohibit conduct by the fiduciary, so in section 406(a) there's a list of prohibitions that says the fiduciary shall not, and one of those does not even refer to party in interest.
Justice Stevens: Yes, but what you're only saying, it's a prohibited transaction because of misconduct by the fiduciary.
That's what your point is.
Mr. Hein: That's exactly correct, Justice Stevens.
Justice Stevens: It nevertheless is a prohibited transaction, and the argument by them is that a party in interest who engages in such a transaction knowingly may not keep the benefit of the transaction without being unjustly enriched.
Mr. Hein: Well, at the district court level petitioner's argument was strict liability.
They've now revised it to be a knew-or-should-have-known standard, and our alternative argument, which we don't believe this Court need reach, is that if one is going to recognize the cause of action here, the standard at least has to be equal to that in 405(a), because Congress... in section 405(a) Congress expressed addressly the question of whether or not participants in fiduciary breaches should have liability.
Justice Breyer: Why isn't what you've just said the answer to the problem that I earlier raised, or that we were talking about?
That is to say, if we decide with you now on this threshold issue, let's take a different case and get out of the case the problem as to whether you're a party in interest, imagine that a fiduciary or somebody else gives about a billion dollars of the trust's assets to a crooked employer, and the employer runs off with the billion, and what the trustee would like to do is to get the billion dollars back from the employer, who's in Mexico, or wherever.
Now, you're saying that Congress didn't want that to happen.
Well, I mean, that's... why not?
I mean, it's sort of like basic laws of any trust, et cetera, so you take the assets of the trust, you run off with them.
What you've done is unlawful.
You gave it to your cousin.
He was knowing.
You get it back from the cousin.
So why would we interpret this to be any different?
Mr. Hein: What we're saying, Justice Breyer, is that Congress made a deliberate choice, and this was a legislative compromise, a legislative compromise where there would be this administrative mechanism, civil penalties or excise taxes as an administrative mechanism that could be pursued to obtain a correction or restitution from the...
Justice Breyer: Why would Congress not have wanted to follow the more elementary sort of law of getting assets back for trusts in this kind of situation, where we get out of the case...
Mr. Hein: Well...
Justice Breyer: the party at interest issue...
Mr. Hein: I think...
Justice Breyer: so we focus on a clear case where there really is a party in interest and they shouldn't have done it and so forth?
Mr. Hein: Justice Breyer, let me address you in two ways, because I think that the first question that you're asking is, in effect, why would Congress have set it up this way?
It was a legislative compromise.
The House was saying no party-in-interest liability in civil suit.
Also, the House was not proposing to have excise taxes or other administrative sanctions against a party in interest.
The Senate wanted both.
The Senate bill provided for civil liability of parties in interest both for damages and for disgorgement.
The Senate bill also provided for an excise tax regime for administrative enforcement, so the Senate wanted both.
There was a compromise, and it's very clear that what happened is that the conference committee staff, and it's in the appendix, recommended that the House position be accepted on the issue of liability, that there should not be civil liability of parties in interest.
However, Congress did continue with the excise tax provisions that the Senate had proposed, providing an administrative sanction.
And the Government argues here that, well, they need the right to sue under (a)(5) as well, and that private parties have to have the right to sue under (a)(3) as well, but when one thinks about it, the logical consequence here of the Government's position... because the Government says that the excise tax and civil penalty mechanism is all set up to procure the restitution of the assets to the plan.
That's the whole purpose of it.
But if that is the case, then on the Government's theory and on petitioner's theory, if you allow an action under (a)(3) for a private party, or under (a)(5) for the Secretary to compel the restitution directly, as opposed to going through the administrative penalty and excise tax regime that Congress provided for, if you allow for the action directly, you basically render superfluous this complex penalty and excise tax regime that Congress arrived at as a part of a process of...
Justice Ginsburg: Mr. Hein, why, any more than many schemes where Congress has said, like the Fair Labor Standards Act, if the Secretary went out suing all the employers who violated the wage and hours law there would be no need for private suits, so I don't think that what you just said really holds up, because there are many times when Congress provides for executive action and penalties and still allows a private action.
Mr. Hein: Yes, but...
Justice Ginsburg: They're not inconsistent.
Mr. Hein: Justice Ginsburg, you're correct that they're not inconsistent.
However, here, if one accepts the Government's theory of what the purpose of excise tax and the penalty scheme is, i.e. to force restitution to the plan from the party in interest, in effect, if they can sue directly to compel that restitution, then this complex administrative scheme becomes essentially superfluous.
Justice Scalia: The difference here is that it is not just the allowance of suits by private individuals, but it is also an allowance of a suit by the Secretary herself for the restitution, which would make the other administrative remedies that the Secretary has available in order to coerce restitution superfluous.
Mr. Hein: That's correct, Justice Scalia.
Justice Ginsburg: So it's... 502(a)(5), you say these two travel together, and the Secretary no more than the private individual can bring a suit against anyone other than the fiduciary.
Mr. Hein: That's correct, with the caveat that you do have the excise tax and the civil penalty scheme, and...
Justice Ginsburg: But the Secretary's right is identical to the private person's right, and that is, it's only against the fiduciary under (a)(3) and (a)(5), is that...
Mr. Hein: That's I think substantially correct.
There are minor differences in the language of the two provisions and, of course, (a)(5) is not at issue here.
The second part of...
Justice Ginsburg: But I wanted to know what is your position.
I thought you would answer that with a firm, that's right, the Secretary can't sue the party in interest either, the only one against whom a suit would lie under 501(a)(3) or (a)(5) is the fiduciary.
Mr. Hein: That is correct in this situation.
There are a number of situations where suits could be brought against a nonfiduciary under (a)(3).
For example, if an employer, acting as a nonfiduciary, fired someone to deprive them of benefits, 510 of ERISA says that that is enforceable under 502.
Potentially one could be suing that employer under 502(a)(3).
Or one may have a situation where someone has violated the terms of a plan by refusing to make a reimbursement to the plan for medical expenses that they were paid and then got reimbursed for in a lawsuit, and that suit may be brought under (a)(3), so...
Justice Ginsburg: But I want... my question really was, you see the same limits on (a)(5) as (a)(3)?
That is, whatever a private individual could sue for under (a)(3), the Secretary can, but the Secretary can't sue anyone who would not be amenable to suit by a private party under (a)(5), as distinguished from (a)(6)?
Mr. Hein: Yes.
That is correct, and as I said, Justice Ginsburg, I don't mean to quibble, but there are minor differences in the language of the two and, for example, a suit to enforce the terms of a plan is under (a)(3) but not (a)(5), but for purposes of this case I think Your Honor's analysis is correct, that the two are substantially comparable.
Justice Ginsburg: Well, I asked if that was your position that the Secretary has no broader authority than the private suitor...
Mr. Hein: Under...
Justice Ginsburg: to bring this kind of suit against a party in interest...
Mr. Hein: Under...
Justice Ginsburg: or anyone who was allegedly unjustly enriched.
Mr. Hein: Under (a)(5), that is correct, but of course under (a)(6) they can bring an action to collect a civil penalty.
They do have a right to pursue an administrative penalty in appropriate cases involving welfare plans, and you have the excise tax regime established to cover pension plans, so there is a separate administrative mechanism.
The excise tax and the civil penalty mechanism is separate and apart from suits under (a)(5).
Justice Souter: But you couldn't get back the billion dollars that the employers made off with?
Mr. Hein: Well, you could...
Justice Souter: How?
Mr. Hein: if you were successful through the administrative mechanism of forcing the correction, assuming that the person who has made off with the money is a party in interest.
That is the whole purpose of this administrative mechanism, is to force the correction.
That's... and this is... whether or not it's elegant, this is what Congress agreed to.
This was the deal.
This is what the House and Senate compromised on, and I'm not here to defend the eloquence of the arrangement.
I'm here to defend that this was the arrangement they agreed upon.
Justice Kennedy: If you prevail on your principal argument here, are State causes of action for recovery preempted?
Mr. Hein: Our position is that if Salomon, for example... our position is, Salomon is not a party in interest.
Our position is there's no cause of action against us under ERISA, and we would acknowledge, as we did in the Seventh Circuit, that if one accepts that we are not a party in interest, and that there's no ERISA cause of action, there would be no preemption of State law claims.
Justice Kennedy: But if you are a party in interest, but prevail on your argument here, then what?
Mr. Hein: Then I think, Your Honor, there may be a closer question, because under Pilot Life there's a recognition that Congress... if Congress set up a remedial scheme to deal with parties in interest and the remedial scheme was to rely on administrative enforcement, the civil penalty and the excise tax, there would be an argument, I think, under Pilot Life that that is exclusive.
There may be an argument to the contrary as well.
This Court in Mertens I think quite correctly said that our job at hand is to deal with whether there's a right of action or whether there's a particular stated remedy, whatever the preemption consequences of that decision may be is for the future, and that is how the Court approached this problem in Mertens, saying preemption issues are for the future.
I think that was the proper analysis.
Just going back to Justice Breyer's question in terms of what would be the logic in saying that you can't sue the party in interest in a civil action, I think this case illustrates many of the pitfalls... apart from vindicating the congressional intent, many of the pitfalls about private suits.
For example, if one can sue under (a)(3) you have the specter of the fiduciaries who themselves violated the statute, who themselves caused the plan to enter into the prohibited transaction, or who knowingly participated in that conduct, being the ones who themselves are plaintiffs.
Here, Ameritech Corp., for 3 years running Ameritech Corp. represented to the United States Government no prohibited transactions, no nonexempt prohibited transactions.
Here, NISA, the investment manager... and Salomon was not the investment manager.
NISA, the investment manager, had an agreement with Ameritech that it would not knowingly participate in a prohibited transaction.
Chief Justice Rehnquist: But you have other doctrines that can take care of it, like the clean hands doctrine, if this was to be an equitable remedy, that would bar some people in the situation you're describing.
Mr. Hein: That may be, but Mr. Chief Justice, I would go back to the fact... and this is central here, that under 502(a)(3) there has to be... and this Court indicated this in Mertens, embraced it the next year in Central Bank.
There has to be a substantive right and duty.
Relief is a remedy, and as a remedy does not itself invoke a substantive right and duty, and I think this Court...
Justice Ginsburg: But Mr. Hein, why isn't it... if this is... the Secretary of the Treasury can get these stiff penalties against the party in interest specifically, why isn't it clear from that that this transaction is prohibited as to the party in interest, otherwise how could the... how could Congress say, Secretary, you can hit them with 100 percent?
So there is... there is a provision in this complex law that says the party in interest is subject to penalty for engaging in a prohibited transaction.
That's what... what is it?
4975 is all about.
Mr. Hein: Yes.
Justice Ginsburg, I think that proves my point.
In 4975 Congress was explicit that there would be an excise tax imposed on a disqualified person who participates in a prohibited transaction.
Congress knew how to use the words, participate in a prohibited transaction.
Justice Ginsburg: But I'm just trying to clarify the argument that you were making before, which seemed to say that the person, the party in interest is out of it, and that is certainly not the case, because 4975 puts the party in interest right into the position of being a violator of 406 prohibited transactions.
Mr. Hein: No, Justice Ginsburg, because 502(a)(3) refers to violations of title I.
4975 is part of title II.
It's a separate tax section of ERISA, so it is not...
Justice Ginsburg: But where does it pick up the word, prohibited transaction from?
Isn't that in title I?
Mr. Hein: 4975 is a self-contained excise tax provision, and was established as an excise tax provision quite deliberately.
That was the...
Justice Ginsburg: Does it or does it not hit a party in interest who engages in a prohibited transaction?
Does 4975 enable the Secretary of Treasury to go after a party in interest who has been on one side of a prohibited transaction?
Mr. Hein: With regard to certain parties in interest the answer is yes, but it does not create a duty or a liability under ERISA enforceable in suit under (a)(3) and (a)(5), both of which are confined to title I provisions, and 4975 in creating the excise tax mechanism, and yes, the Secretary of Treasury can go after a disqualified person, which is most parties in interest, if the other conditions of 4975 are met to collect the excise tax.
Justice Ginsburg: And... but in effect and in purpose, to get that party in interest to disgorge and return to make restitution, because if the party does, then they're not subject to the 100 percent tax.
Mr. Hein: Yes, Justice Ginsburg.
That is the purpose of the 4975 excise tax administrative mechanism of enforcement...
Justice Stevens: Mr. Hein...
Mr. Hein: relative to most parties in interest who qualify as disqualified persons and to me this proves our point, because, as is evident from the legislative history, the Senate was proposing both the administrative mechanism with excise taxes and expressly imposing a civil duty on the party in interest.
The Senate bill...
Justice Ginsburg: The only simple point I wanted to make is that you can't say the party in interest is not liable for entering a prohibited transaction.
They are under that section.
That was all.
Mr. Hein: Yes.
Justice Ginsburg: I think Justice Stevens had a question.
Justice Stevens: May I ask you one question about... it's a little bit of a variation of Justice Breyer's question, but the other appropriate relief language in 502(3), or... what about rescission?
The typical transaction that I recall being sort of the thing that Congress clearly wanted to prohibit was a fund, a pension fund using its assets to dissipate those assets by buying properties from someone who might be close to one of the trustees, or something like that, and a new set of trustees come in, they find out about the self-dealing, they get new trustees elected, they want to set aside the transaction, get their money back.
As I understand your position, they could not do that.
Even a new fiduciary couldn't bring an action.
Mr. Hein: That's correct, because 502(a)(3) does not create duties or liabilities.
Justice Stevens: Well, I understand, but I... but you would apply the same reasoning to the rescission suit as you would to the unjust enrichment claim.
Mr. Hein: Yes.
Our position would be there must be a substantive basis for liability for participation in the...
Justice Breyer: All right.
Now, understanding... I just want to be... what seems to me the bottom line of this, of what you're saying is, if you're right and we... it doesn't matter in terms of getting money back from the party in interest, because the Secretary can get the money back by suing under the provision that you and Justice Ginsburg were talking about.
It's called a penalty, but it's 100 percent if he doesn't pay back in a year, so he can get the money back.
So that helps you.
That doesn't hurt you.
But where it matters is, number 1, if you want to trace the assets further, you couldn't do it, and number 2 is if you want rescission.
So what this case really turns on is, does the Secretary and does the trustee have the power, under this statute, to get rescission and to trace the assets beyond the party in interest himself?
Am I right?
Mr. Hein: I think that is certainly...
Justice Breyer: The heart of it.
Mr. Hein: Yes.
Justice Breyer: I'm not saying the little... because you're an expert.
I know you know...
Mr. Hein: Yes.
Justice Breyer: all these extra things...
Mr. Hein: I think, Justice Breyer...
Justice Breyer: that I don't know, but I mean, is that the heart of it?
Mr. Hein: that may well be getting to the heart of it.
Justice Breyer: All right.
If that's the heart of it, then you have a statute which really doesn't talk about defendants.
It doesn't talk about them at all.
That's, you know, where they list it in 502(a)(3), it just says it may be brought.
So it must be assuming you could bring this action against somebody, and it just doesn't list defendants, so when we have a... traditional kind of remedies like rescission and asset-tracing, and we have a statute that doesn't mention defendants at all, why wouldn't we assume that traditional principles will apply?
Mr. Hein: I think the answer...
Justice Breyer: And you're back to your...
Mr. Hein: The answer is, there has to be a threshold duty and liability under ERISA to point to.
That's what this Court said in Mertens, reprised the next year in Central Bank.
There has to be this threshold duty and liability.
Where is the duty and liability under title I, because it's only violations of title I that can be enforced under (a)(3), so where is the threshold duty and liability under title I.?
Justice Scalia: Mr. Hein, about the tax.
Is it correct that the... as Justice Breyer assumes, that the 100 percent tax goes to the fund?
I thought it went to the Government.
Mr. Hein: The tax...
Justice Scalia: How does it get back to the fund?
Mr. Hein: Justice Scalia, the tax is the prospective sanction...
Justice Breyer: No, no, penalty.
He means the penalty.
Justice Scalia: A tax equal to 100 percent of the amount involved.
Mr. Hein: Yes.
Justice Scalia: That's a tax.
It goes to the Government, right?
Mr. Hein: Justice Scalia...
Justice Scalia: Does the Government turn around and give it to the defrauded...
Mr. Hein: Justice Scalia, the scheme that Congress came up with was one where this tax or penalty would be used as a lever by the Government to force correction.
Justice Scalia: I know, but you have an intransigent object, and he says, you know, I don't like this fund.
I'd rather give the money to the Government.
Mr. Hein: Then...
Justice Scalia: And so he coughs up the 100 percent.
What happens to it?
Mr. Hein: Then the Government...
Justice Scalia: The Government keeps it.
Mr. Hein: The Government would keep it, and again...
Justice Ginsburg: Has that ever happened in all the application of this penalty, that somebody has opted to give... in effect, to make restitution to the Government rather than to the trustee?
Mr. Hein: I would have two answers, Justice Ginsburg.
The first is, I personally don't know.
The second is, I believe the Government... the petitioners in their brief and the Government in their brief take the position that very, very little tax revenue is collected under this provision, so I would infer that if little tax revenue is collected, that it is very, very...
Justice Ginsburg: It's serving its purpose to get the money back to the plan, rather than in the coffers of the Treasury.
Mr. Hein: That would be my...
Justice Breyer: Yes, but still it's an important point, isn't it?
Because, in fact, I was wrong.
In fact, if this civil penalty is going to the Government, then if you're right there's no legal way to get the money back to the workers.
I mean, that's basically the upshot, isn't it, that I was wrong in saying it's just tracing.
It's tracing, plus it's restitution, plus it's the fact that you can't get the money they took and gave to their cousins or whatever.
You can't get it back to the workers.
You get it back to the Government.
So that's three problems, not two.
Mr. Hein: Justice Breyer, if it does not have its desired force as the sanction to force the correction... the whole theory of the excise tax and civil penalty was, it would force people to correct, and so the plan would get the money back, and I might add that the plan in a situation... take this situation.
The plan is not without its remedies.
If the fiduciary breaches, there is full recourse against that fiduciary.
If there's a fiduciary that knowingly participates in the breach, there is recourse against that knowing participant.
Justice Breyer: Yes, but...
Justice Stevens: If the fiduciary is solvent.
Justice Breyer: Yes.
Mr. Hein: There's provision in ERISA that a plan can insist that it's fiduciaries have insurance.
The plan can itself buy insurance against fiduciary breach, and again, there may be other... under Federal statutory law there may be remedies.
Conduct such as sending the money to some cousin, that would be criminal.
18 U.S.C. 664, it would be criminal, so the fiduciary would be engaged in a criminal act and the fiduciary would be liable, and if the plan had insisted that its fiduciaries have appropriate insurance, there could be compensation out of that...
Justice Ginsburg: But in this very case, the whole object of going after Salomon, I take it, is that they are the party that ended up with the money and nobody else and then the investment, when it was in the hands of the plan, went down the tube.
So the argument is, yeah, we could sue the fiduciary, who made nothing out of this deal.
The only one who made anything out of it is Salomon.
Mr. Hein: Well, here there are two fiduciaries, Ameritech Corp., which is the plan sponsor, and NISA, which was its appointed investment advisor, and Ameritech Corp. was actively involved in the transaction with NISA.
If there was a prohibited transaction that violated 406...
Justice Ginsburg: Yes, but just the simple point is, who ended up with the money and who had nothing as a result of this?
The allegation is that the... Salomon was paid before the market went bust on this kind of...
Mr. Hein: Yes, that is correct, Justice Ginsburg, but when you look at the potential for pernicious consequences with litigation, private litigation with the benefit of hindsight, I think this case illustrates such a situation.
Ameritech Corp., representing the...
Justice Ginsburg: This is not getting into the... I don't mean to get into the merits of it.
All I'm saying is, as you looked... if you were looking around for whom to sue, you would pick the person who got the gain.
Mr. Hein: But you can...
Justice Ginsburg: And then of course you would have to show that it was indeed a prohibited transaction, that you are dealing with a party in interest.
Mr. Hein: But you could also sue the fiduciary.
And one other point I would like to stress in this regard is, under the common law a trustee could transact with the service provider, with the trust, and there would not be any liability by the trustee.
There would not be liability by the service provider.
This whole regime in 406 is a pure statutory creation.
Justice Scalia: It's not displacing any common law liability if we don't find liability here.
Mr. Hein: That's correct.
Justice Souter: Well, is that so, because if you posit a common law situation in which there... let's leave ERISA out of it.
Let's just assume you had a State law case to keep it simple.
If you assume that there was, in fact, a State law that prohibited a transaction, a State equity court presumably would have authority to award the kind of relief that in fact is being claimed here, and it would do so, number 1, because there was a State law violation and number 2, the relief that it was awarding would in fact be for the benefit of those intended to be benefited by the State law.
So what you're saying is, well, there's... nothing is being displaced here simply because ERISA preempts any State law... I think you're assuming that ERISA preempts any State law jurisdiction to protect the benefited parties.
Mr. Hein: Well, Justice Souter, what I was referring to is here the act of a trustee for a trust dealing with... transacting with the service provider to that trust was not a breach by the trustee and was not a breach by the service provider under the common law, and I think this...
Justice Souter: Well, nobody's claiming it is.
I mean, the whole point here is that there was... the allegation is that there is a breach of the statutory duty, and equity ought to be in a position in effect to limit the harm by ordering restitution or rescission.
Mr. Hein: And Justice Souter, again I would point to this Court's opinion in Mertens, echoed the next year in Central Bank, where this Court indicated that there has to be a substantive duty and liability under ERISA, that there was no provision of ERISA that prohibited participation in the fiduciary breach...
Justice Souter: Well, that gets us perhaps back to Justice Ginsburg's question, but it... I guess the bottom line of your argument is the one that came out in your earlier answer to Justice Breyer.
There are certain circumstances in which people on your theory in effect can walk off with the money and no one can make a direct claim in equity to keep the money from being dissipated.
That's what it boils down to.
You can't do it... you can't do it under... in State law, because there's preemption.
You can't do it under ERISA because, in fact, the section does not expressly mention parties in interest versus trustees, and that's the bottom line, right?
Mr. Hein: Justice Souter, that's the legislative compromise that Congress worked out both as to the enforcement scheme as well as its decision on preemption.
Rebuttal of Robert A. Long, Jr.
Chief Justice Rehnquist: Thank you, Mr. Hein.
Mr. Long, you have 4 minutes remaining.
Mr. Long: Thank you, Mr. Chief Justice.
There was a question earlier about what exemption Salomon is relying on here.
It's prohibited transaction exemption 75-1, and that actually I think answers the question.
It is cited in respondent's brief... let's see... yes, it's in the Federal Register, but basically it shows how many of these transactions are clearly subject to an exemption, and it's not going to cause great difficulties.
Basically, under this exemption, if a security is sold at the market price you're basically in a safe harbor.
You can show that the plan didn't get a bad deal, and if the security goes down to a low level, as some have been doing recently, that's... the plan is out of luck.
This case is different.
These purchase fee agreements are sort of special things.
It's very difficult to value them, and that's exactly the situation where Congress wanted the parties in interest to be very careful.
And there are problems the other way.
That is... well, the other thing I'll say is, we've been living with this system now for years, and it has not caused great problems.
That is, the parties in interest are not only subject to the taxes and the civil penalties, but everywhere in the country, except now recently in the Seventh Circuit they have been subject to these suits by the Secretary and by fiduciaries, and by parties, participants and beneficiaries, and it has not caused great problems, so we've been essentially running an experiment with this, and it's been... it's not been a problem.
There are problems the other way.
That is, if you were to hold 502(a)(3) and 502(a)(5) don't apply according to their terms... you were exploring the issue about the billion dollars of assets that walks off.
Another situation that comes up is if assets are paid by mistake to a participant or a beneficiary, and this can... is supposed to be a one-time lump sum, and suppose the computer gets misprogrammed, and instead of paying out $100,000 once it starts paying out $100,000 every month.
That is, an annuity.
Well, if 502(a)(3) isn't available, there's no way that the plan can get that money back if the participant says, well, sorry, your mistake.
I've cashed the checks.
Of course, the fiduciary, if it's solvent, would have to make up the difference, but if it's not, the other plan participants and beneficiaries...
Justice Breyer: Would it be reasonable to say, this is equitable relief, so in an instance where the only violation of this reg you cited that makes it a prohibited transaction is a technical matter like failing to keep adequate records...
Mr. Long: Oh, yes.
Justice Breyer: then it is not equitable to get back the money?
Mr. Long: That's very important, and I mean, equity itself is self-limiting.
It has to be something that the party in interest knew or should have known, and if it's... might very well be unreasonable for parties in interest to inquire whether the fiduciary is keeping all the records, I would think it would be, and in that case this sort of equitable relief would not be available.
It would not be appropriate.
Justice Scalia: How would (a)(3) cover the situation if we find for you, of payments that were made excessive?
Is that an act or practice which violates any provision of the subchapter?
Mr. Long: That is a prohibited transaction, Justice Scalia.
When a service provider provides services to the plan and is paid excessive compensation, which means truly excessive, not just something over the market rate, that is a prohibited transaction, and it could be subject to equitable restitution.
Chief Justice Rehnquist: Thank you, Mr. Long.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinions of the Court in two cases will be announced by Justice Thomas.
Argument of Justice Thomas
Mr. Thomas: First case I have to announce is No. 99-579, Harris Trust & Savings Bank versus Salomon Smith Barney.
This case comes to us on a writ of certiorari to the United States Court of Appeals for the Seventh Circuit.
Section 406 of the Employee Retirement Income Security Act, ERISA, bars a fiduciary of an employee benefit plan from causing the plan to engage in certain prohibited transactions with a party in interest, a term which is defined to encompass entities that a fiduciary might be inclined to favor at the expense of the plan’s beneficiaries.
This case comes to us on the assumption that the Ameritech Pension Trust, an ERISA Plan, entered into a transaction prohibited by Section 406 with respondent Salomon Smith Barney, a non-fiduciary party in interest, whereby Salomon received assets from the plan.
The plan's fiduciaries, petitioners Harris Trust & Ameritech Corporation brought suit against Salomon under section 502(a)(3) which authorizes a fiduciary to bring a civil action to obtain appropriate equitable relief to redress violations of ERISA Title I.
Salomon moved for summary judgment, arguing that section 502(a)(3) authorizes suit only against parties upon whom a duty is expressly imposed by one of Title I’s substantive provisions, and asserting that Section 406 does not expressly impose such a duty on a nonfiduciary in interest.
The District Court rejected this argument and denied summary judgment.
The Court of Appeals for the Seventh Circuit reversed.
In an opinion filed with the Clerk today, we reverse the judgment of the Court of Appeals and remand for further proceedings.
While we agree with Salomon that Section 406 expressly imposes a duty only on a plan fiduciary, and not on a nonfiduciary party in interest, we reject Salomon’s assumption that a section 502(a)(3) suit is available only against a defendant upon whom a duty is expressly imposed by one of Title I’s substantive provisions.
Rather, we hold that section 502(a)(3) itself imposes certain duties; in this case, it imposes a duty on a nonfiduciary party in interest who has received plan assets in violation of Section 406.
This conclusion is supported by the language of Section 502(a)(3) which authorizes a suit for appropriate equitable relief to redress a violation of Title I, but does not specify which parties may be proper defendants.
Another provision of section 502(l) confirms this conclusion in so far as it contemplates a suit by the Secretary of Labor under Section 502(a)(5) against defendants upon whom a duty is not expressly imposed by one of Title I’s substantive provisions.
As we explained in our decision in Martin, Section 502(a)(5) and Section 502(a)(3) must be interpreted similarly in light of their similar language.
Although Section 502(a)(3) as noted does not expressly indicate who may be a defendant, it does effectively impose certain limits by virtue of its caveat that the retrospective relief sought the appropriate equitable relief.
The common law of trusts informs our understanding of this phrase, that common law, a fiduciary or beneficiary of a trust could bring suit against a transferee for value of planned assets that were obtained in breach of the trust unless the transferee lack actual or constructive knowledge of the circumstances giving rise to the breach.
Here, the antecedent breach is a violation of section 406, and Salomon received planned assets by virtue of that transaction.
But it remains to be decided on remand whether Salomon possessed actual or constructive knowledge of the circumstances giving rise to the violation of Section 406.
Accordingly, we reverse the Seventh Circuit’s judgment and remand for further proceedings.
The opinion of the Court is unanimous.