Appeals from the United States District Court for the Northern District of California. D.C. No. CV-89-03500-SBA. Saundra B. Armstrong, District Judge, Presiding.
Before: Herbert Y.c. Choy, Cecil F. Poole, and Stephen Reinhardt, Circuit Judges. Opinion by Judge Choy.
I. FACTUAL AND PROCEDURAL BACKGROUND
This appeal arises out of an action brought by Plaintiffs under the Employee Retirement Income and Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., on behalf of beneficiaries and participants of the Pacific Lumber Company Pension Plan ("the Plan"). Plaintiffs are former employees, or eligible spouses of former employees of Pacific Lumber Company ("PLC") or of its subsidiaries. Defendant Charles Hurwitz is principal owner of Maxxam, Inc. ("Maxxam"), which owns Maxxam Group Inc. ("MGI"), which in turn owns PLC. Maxxam and MGI are also defendants. Defendant William Leone is the former President and CEO of PLC, and former director of Maxxam and MGI. Defendants Schwartz and Iaco are present or former executives of Maxxam or MGI.*fn1
This action was filed in response to the termination in 1986 of the Plan, and the subsequent purchase by PLC of a group annuity contract from Executive Life Insurance Company ("ELIC"). The Plan termination followed the successful hostile takeover of PLC by MGI in the fall of 1985. The takeover was financed by $450 million in "junk" bonds, nearly $100 million of which were purchased by ELIC.
Effective March 31, 1986, PLC terminated the Plan. Pursuant to the Plan's terms, the Plan's fiduciaries chose to pay lump sums to Plan participants with less than $3,500 in vested benefits. For the rest of the participants and beneficiaries, PLC initiated a bidding procedure to obtain a group annuity contract to pay vested retirement benefits. ELIC was added to the list of potential bidders at Hurwitz's insistence. On October 1, 1986, despite negative evaluations (the details of which are relevant to the underlying lawsuit, but not to the outcome of this appeal), ELIC was selected to provide the group annuity. ELIC's bid was the lowest offered, $2.7 million lower than the next lowest bid. In accepting this bid, $62 million in "surplus" Plan assets were captured by defendants pursuant to the terms of the Plan.
Plaintiffs filed this suit on September 25, 1989, contending that the above transactions were in violation of the fiduciary duties of ERISA § 404, 29 U.S.C. § 1104, and constituted prohibited transactions under ERISA § 406, 29 U.S.C. § 1106.
ELIC was taken over by the State of California on April 11, 1991, due to its precarious financial condition. Payments were suspended for a short time, and resumed at 70% in May. Subsequently, a Stipulated Order was entered on August 14, 1991, under which PLC agreed to make up retroactively and progressively any shortfall in payments due from ELIC, provide Plaintiffs' counsel with 45 days notice prior to termination of such payments, and notify all Plan participants of pendency of the litigation and of the terms of the agreement.*fn2 The California conservatorship concluded with the transferring of all of ELIC's "restructured" liabilities to a newly formed Aurora Life Assurance Co. Aurora's financial stability is undetermined at this point.
On June 12, 1991, the Secretary of Labor filed an action against the same defendants alleging violations of ERISA §§ 404 & 403, 29 U.S.C. §§ 1104 & 1103, based on the purchase and selection of an annuity. Reich v. Pacific Lumber Co., No. C-91-1812-SBA (N.D. Cal. filed June 12, 1991). The two actions were not formally consolidated, but were treated as related cases and proceeded concurrently pursuant to the same pretrial order.
On March 8, 1993, Defendants moved for summary judgment on the grounds that ERISA's fiduciary duty provisions are inapplicable to the selection of an annuity provider, and that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, precludes relief. The district court rejected both these assertions. PLC has filed a cross-appeal solely as to the holding regarding the McCarran-Ferguson Act.
On April 14, 1993, the district court denied Plaintiffs' request for class certification, finding that the action instead had to be maintained as a derivative suit pursuant to Fed. R. Civ. P. 23.1, and ordered Plaintiffs to file an amended complaint. The district court also dismissed certain named plaintiffs as inadequate representatives, and ordered Plaintiffs' counsel to withdraw from representing certain persons and entities with whom it found potential for conflicts of interest. Plaintiffs appeal this order in its entirety.
On May 11, 1993, Defendants moved for summary judgment on the two § 406 prohibited transactions claims. This motion was granted. Plaintiffs appeal this judgment.
On May 17, 1993, the district court held that PLC, Hurwitz, and Leone were fiduciaries as a matter of law, and that summary judgment as to the fiduciary status of the other defendants could not be determined as a matter of law due to unresolved issues of fact. PLC cross-appeals this order. In the same order, the district court held that Plaintiffs were no longer participants or beneficiaries under ERISA because the group annuity purchase provided them with an irrevocable commitment to payment of all vested benefits. Therefore, the district court held that they lacked standing to sue for any breach of fiduciary duty in the choice of the group annuity. On July 17, 1993, this holding was affirmed on reconsideration. Plaintiffs appeal this order.
Plaintiffs made two motions for interim attorneys fees, on June 13, 1992 and on July 26, 1993. Both were denied on the basis that they were premature; the second was also denied for lack of standing. Plaintiffs appeal this holding.
The district court held that Plaintiffs lacked standing to sue within the meaning of 29 U.S.C. § 1132(a)(2) as they were no longer "participants" of a pension plan because the Plan had terminated prior to their commencing this action. Standing is a question of law which we review de novo. Ellis v. City of La Mesa, 990 F.2d 1518, 1523 (9th Cir. 1993), cert. denied, 114 S. Ct. 2707 (1994).
ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2), provides: "A civil action may be brought - (2) by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title." A participant is defined as "any employee or former employee of an employer or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan." ERISA § 3(7), 29 U.S.C. § 1002(7). The district court followed this court's reasoning in Kuntz v. Reese, 785 F.2d 1410 (9th Cir.) (per curiam), cert. denied, 479 U.S. 916, 93 L. Ed. 2d 291, 107 S. Ct. 318 (1986), which held that former pension plan participants and beneficiaries who had received all of the vested benefits owed to them under the plan no longer had standing to sue on behalf of the terminated plan. The Kuntz court reasoned:
Kuntz plaintiffs are not participants because, as former employees whose vested benefits under the plan have already been distributed in a lump sum, the Kuntz plaintiffs were not "eligible to receive a benefit," and were not likely to become eligible to receive a benefit, at the time that they filed the suit. Because, if successful, the plaintiffs' claim would result in a damage award, not in an increase of vested benefits, they are not plan participants . . . . any recoverable damages would not be benefits from the plan.
Id. at 1411. The district court declined to apply an exception to the Kuntz holding created in Amalgamated Clothing & Textile Workers Union, AFL-CIO v. Murdock, 861 F.2d 1406, 1408 (9th Cir. 1988), which permitted former plan participants to pursue the equitable remedy of a constructive trust imposed on the plan fiduciary's ill-gotten profits.
Congress has since directly addressed the ability of former pension plan participants and beneficiaries to bring suit under ERISA. The Pension Annuitants Protection Act of 1994 ("PAPA"), Pub. L. No. 103-401 (Oct. 22, 1994), amends ERISA § 502(a), 29 U.S.C. § 1132(a), to clarify that former participants or beneficiaries of terminated pension plans have standing to seek relief where, as here, a fiduciary breach has occurred involving the purchase of insurance contracts or annuities in connection with their termination as plan participants.*fn3 Section 2 of PAPA, 29 U.S.C. § 1132(a)(9), provides:
[(a) A Civil action may be brought . . .]
(9) in the event that the purchase of an insurance contract or insurance annuity in connection with the termination of an individual's status as a participant covered under a pension plan with respect to all or any portion of the participant's pension benefit under such plan constitutes a violation of part 4 of this title or the terms of the plan, by the Secretary, by any individual who was a participant or beneficiary at the time of the alleged violation, or by a fiduciary, to obtain appropriate relief, including the posting of security if necessary, to assure receipt by the participant or beneficiary of the amounts provided or to be provided by such insurance contract or annuity, plus reasonable prejudgment interest on such amounts.
(emphasis added). PAPA represents, in part, a negative response to the district court's ruling in this case. As Representative Williams asserted:
S. 1312 does not represent a change from current law, but rather a clarification made necessary because of recent court decisions. The courts have wrongly held that annuitants are not plan participants and therefore lack standing under ERISA to challenge the decision of the plan fiduciary to dispose of plan assets by purchasing annuities. . . S. 1312 is designed to overturn this line of specific court cases.
130 Cong. Rec. H 10621 (Oct. 3, 1994).*fn4
Accordingly, under ERISA § 502(a)(9), 29 U.S.C. § 1132(a)(9), Plaintiffs have standing to sue for "appropriate relief, including the purchase of a back-up annuity to remedy the breach." 139 Cong. Rec. S 9874, 9874 (July 29, 1993) (Sen. Metzenbaum). We reverse the dismissal of Plaintiffs' suit.
B. The Application of the McCarran-Ferguson Act to ERISA
In its cross-appeal, PLC argues that the district court erred in holding that Plaintiffs' claims are not barred by the McCarran-Ferguson Act. They claim that the McCarran-Ferguson Act prohibits the construction of ERISA upon which Plaintiffs' suit is based. Specifically, Defendants argue that Plaintiffs' construction of ERISA violates McCarran-Ferguson because it would impose liability for selecting ELIC as an annuity provider even though ELIC is licensed and regulated by California's comprehensive insurance regulatory system. The McCarran-Ferguson Act, in relevant part, states: "No Act of Congress shall be construed to invalidate, impair, or supercede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance." 15 U.S.C. § 1012(b). The applicability of the McCarran-Ferguson Act to ERISA is a question of law, which we review de novo. See General Motors Corp. v. California Bd. of Equalization, 815 F.2d 1305, 1309 (9th Cir. 1987), cert. denied, 485 U.S. 941, 99 L. Ed. 2d 282, 108 S. Ct. 1122 (1988); United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 83 L. Ed. 2d 46, 105 S. Ct. 101 (1984).
The McCarran-Ferguson Act, by its own terms, does not preclude a construction of a federal statute that would affect state law if the congressional act "specifically relates to the business of insurance." 15 U.S.C. § 1012(b). Therefore, it must first be determined whether ERISA in general, or the section of ERISA relied upon by Plaintiffs in particular, "specifically relates to the business of insurance." Id.
In Hewlett-Packard Co. v. Barnes, 571 F.2d 502, 505 (9th Cir.), cert. denied, 439 U.S. 831, 58 L. Ed. 2d 125, 99 S. Ct. 108 (1978), we held that California's Knox-Keene Act was preempted by ERISA to the extent that it attempted to regulate ERISA covered employee benefit plans as part of its comprehensive health care service legislation. It was claimed that because the Knox-Keene Act is a state law regulating insurance, construing ERISA to preempt it would violate the McCarran-Ferguson Act. We rejected that argument:
Appellant's argument not only ignores those ERISA sections that undeniably "specifically relate" to the business of insurance, but also overlooks ERISA's "deemer" clause, which states that an employee benefit plan shall not be deemed to be engaged in the business of insurance for the purposes of state law. If McCarran-Ferguson applies, therefore, ERISA falls within the clause excepting federal laws that "specifically relate" to the business of insurance.
Id. at 505 (citations omitted). PLC asserts that the pronouncement in Hewlett-Packard that ERISA falls within the "specifically relates" exception does not indicate that ERISA in its entirety relates to the business of insurance. Rather, it contends that Hewlett-Packard holds only that the portion of ERISA which prohibits state laws from regulating employee benefit plans by treating them as insurance companies falls within the "specifically relates" exception.
The resolution of this issue turns on whether ERISA in its entirety "specifically relates" to insurance, or whether only those sections of ERISA which explicitly deal with insurance should be deemed to "specifically relate" to insurance. We find guidance in the Supreme Court's opinion in John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 114 S. Ct. 517, 126 L. Ed. 2d 524 (1993). The issue in Harris Trust was whether the contract was a "guaranteed benefit policy" under ERISA § 401(b)(2), 29 U.S.C. § 1101(b)(2). As a preliminary matter, the Supreme Court held that the McCarran-Ferguson Act did not preclude application of ERISA's fiduciary standards to the insured's management of assets held under the contract. "Instead, we hold, ERISA leaves room for complementary or dual federal and state regulation, and calls for federal supremacy when the two regimes cannot be harmonized or accommodated." Id. at 525. In rejecting the McCarran-Ferguson Act preclusion, the Court stated:
But as the United States points out, "ERISA, both in general and in the guaranteed benefit policy provision in particular, obviously and specifically relates to the business of insurance." Thus, the McCarran-Ferguson Act does not surrender regulation exclusively to the States so as to preclude the application of ERISA to an insurer's actions under a general account contract.
PLC contends that just as in Hewlett-Packard, the Court's holding in Harris Trust is not conclusive on this issue, because the Court was primarily concerned with the scope of ERISA § 401(b)(2), 29 U.S.C. § 1101(b)(2), which specifically refers to the business of insurance.*fn5 There are two flaws in PLC's argument. First of all, it is refuted by the broad language used by the Supreme Court. The Court states that " both in general and . . . in particular" ERISA relates to the business of insurance. Id. (emphasis added).*fn6 Secondly, PLC misreads the saving clause in ERISA § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A), to be evidence that the McCarran-Ferguson Act reserves the business of insurance to the states.*fn7 It is true that this court has held, and the Supreme Court has implied, that the effect of ERISA's saving clause was to preserve the McCarran-Ferguson Act's reservation of insurance regulation to the state. See General Motors Corp., 815 F.2d at 1310; Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 744 n.21, 85 L. Ed. 2d 728, 105 S. Ct. 2380 (1985). However, in Harris Trust the Court rejected the argument that the saving clause always prevents application of ERISA:
We discern no basis for believing that Congress, when it designed ERISA, intended fundamentally to alter traditional preemption analysis. State law governing insurance generally is not displaced, but "where [that] law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress," federal preemption occurs. . . . As the United States recognizes, "dual regulation under ERISA and state law is not an impossibility[;] many requirements are complementary, and in the case of a direct conflict, federal supremacy principles require that state law yield."
114 S. Ct. at 526 (citations omitted).
"No decision of this Court has applied the saving clause to supercede a provision of ERISA itself." Id. at 526 n.9. If this court were to accept PLC's argument, it would be the first decision of any court to apply the McCarran-Ferguson Act to supercede a provision of ERISA.
We find that the saving clause was inserted into ERISA specifically because ERISA relates to insurance, and Congress intended to prevent ERISA from preempting state insurance laws. The logical reading of the statutes and the Court's opinion in Harris Trust is that ERISA is not subject to the McCarran-Ferguson Act because ERISA relates to insurance. Although the saving clause generally precludes the application of ERISA's broad preemption provision to state insurance laws, that clause does not prevent the application of ERISA's fiduciary standards in areas governed by ...