:: Court Rejects Imputation Of Counsel’s Knowledge To Plaintiff Class In ERISA Fiduciary Action

[This case was affirmed in 710 F.3d 57 (2d Cir. 2013) (explaining that “a new cause of action accrues for each violation where separate violations of the same type, or character, are repeated over time”).]

The thrust of the plaintiffs’ claims in the present case are that not only did the defendants fail to return reserves attributable to plaintiffs, but they used that money to pay the claims of the employees of the defendant agencies and, also to pay certain other CAAIG administrative expenses and for other improper purposes, constituting fiduciary violations. . . .

In this case, the primary issue raised by the defendants is the question of whether the plaintiffs claims are barred by the applicable statute of limitations. ERISA provides an express statute of limitation for actions arising from a breach of fiduciary duty or any other violation of ERISA’s fiduciary and prohibited transactions provisions.

Start v. Econ. Opportunity Comm’n of Nassau County, Econ. Opportunity Council of Suffolk, Yonkers Cmty. Action Program, & Stella B. Kearse As Representative of the Estate of John L. Kearse, 2008 U.S. Dist. LEXIS 43467 (E.D.N.Y. June 3, 2008)

Aside from demonstrating once again the hazards of multiple employer pooling arrangements to provide health care benefits, this case provides an excellent overview of the operation of the ERISA statute of limitation provisions, replete with examples of common exceptions to those rules.

The Facts

Several non-profit organizations joined to provide health benefits to low-income people.

The plaintiff L.I. Head Start Child Development Services, Inc. (”L.I. Head Start”) was a participating agency in the Community Action Agencies Insurance Group (”CAAIG”) from November 30, 1985 to September 1, 1992. The purpose of CAAIG was to provide health benefits to the participants who were minorities and low and middle income persons and families. This was an attempt to provide quality health services to low income people.

The details of the first action aren’t that important to the issues in the second action which is the subject of this post. For background, however, note that the underlying claim in that first action related to L.I. Head Start’s demand for the return of its reserves that CAAIG held upon its withdrawal from CAAIG.

In the decision in the first action, the Court determined that CAAIG segregated the contributions of each of the participating employers. CAAIG and the trustees of CAAIG were directed to transfer the sum of $ 497,736, to a trust fund for the benefit of the class plaintiffs within 60 days from March 3, 2000.

On May 25, 2000, judgment was entered by the Clerk of the Court against the defendants in the CAAIG action in the sum of $ 802,831.57, which sum includes the principal sum of $ 497,736 plus pre-judgment interest in the sum of $ 131,271.79, attorneys fees in the sum of $ 151,375 and costs in the sum of $ 22,448.78. Apparently, no appeal was taken from this judgment. According to the complaint in the present action, this judgment remains unpaid, except for the sum of $ 45,375.19, leaving a balance due of $ 757,456.38 plus interest.

No Funds To Refund

As it turned out, however, the defendants did not have the funds to pay the judgment. The court quoted from plaintiffs’ counsel in explaining the problem:

Plaintiffs’ counsel, Alexander A. Miuccio, Esq., explained the nature of the second proceeding in his own words:

And that’s what I thought the monies were, retained – – not spent, not disbursed, retained – – because I did not have, and neither did the plaintiffs have, any information along those lines.

And if I may, my wherefore clause and my relief requested a constructive trust on the monies which we were under the impression were retained by the CAAIG fund. Again, no knowledge at that point. I can’t point to any actual knowledge, which is what is necessary, that before 1993 the plaintiffs knew that the monies were being used to pay expenses of the other employees.

Too Late To Complain?

So, the plaintiffs moved to amend their complaint to assert fiduciary violations to which the defendants responded with motions to dismiss based upon the statutory limitations period.

In this case, the primary issue raised by the defendants is the question of whether the plaintiffs claims are barred by the applicable statute of limitations. ERISA provides an express statute of limitation for actions arising from a breach of fiduciary duty or any other violation of ERISA’s fiduciary and prohibited transactions provisions.

The statute, 29 U.S.C. § 1113, provides:

§ 1113. Limitation of actions

No action may be commenced under this subchapter with respect to a fiduciary’s breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of –

(1) six years after (A) the date of the last action which constituted a part of, or the breach or violation, or (B) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation, or

(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.

(emphasis added)

Differences In Time Periods

The court noted that the statute is clear that actual knowledge of the breach of fiduciary duty is required before the three-year limitation period begins to run. In effect, this three-year statute of limitation requiring proof of “actual knowledge” operates as an exception to the otherwise controlling six-year time period.

“Actual Knowledge” Defined

This question is answered as follows: A plaintiff can be considered to have actual knowledge of a breach of fiduciary duty when he or she has knowledge of all the material facts necessary to understand that a fiduciary has breached such a duty or otherwise violated the Act. Caputo v. Pfizer, Inc., 267 F.3d 181, 193 (2d Cir. 2001).

Constructive knowledge will fail to satisfy the actual knowledge requirement. From New York State Teamsters, et al., v. Estate of Rocco F. DePerno, 816 F. Supp. 138, 143-44 (N.D.N.Y. 1993), the court noted:

The Statute is clear that actual knowledge of the fiduciary breach is required before the three year limitation period begins to run. “[T]he key to the ERISA statute of limitations . . . is ‘actual knowledge’ of the ERISA breach or violation.” Ziegler v. Connecticut General Life Ins. Co., 916 F.2d 548, 552 (9th Cir. 1990). “ERISA requires actual knowledge of all the elements of the violation alleged here.” Gluck v. Unisys Corp., 960 F.2d 1168, 1176 (3d Cir. 1992). The three year statute of limitations is an exception to the six year time period. “The six year time period reflects Congress’ determination to impress upon those vested with control of pension funds the importance of the trust they hold. Thus, Congress evidently did not desire that those who violate the trust could easily find refuge in a time bar.” Brock v. Nellis, 809 F.2d 753, 754 (11th Cir.), cert. dismissed, 483 U.S. 1057, 108 S.Ct. 33, 97 LEd.2d 821 (1987).

The actual knowledge required does not consist of legal knowledge:

While a plaintiff need not have knowledge of the relevant law, Blanton v. Anzalone, 760 F.2d 989, 992 (9th Cir. 1985), he or she must have knowledge of all facts necessary to constitute a claim. See also Martin v. Consultants & Administrators, Inc., 966 F.2d 1078, 1086 (7th Cir. 1992) (”The relevant knowledge for triggering the statute of limitations is knowledge of the facts or transaction that constituted the alleged violation. Consequently, it is not necessary for a potential plaintiff to have knowledge of every last detail of a transaction or knowledge of its illegality.”).

Further, the knowledge must be specific.

[T]here must be actual knowledge, not “speculation that something is awry, but specific knowledge of the actual breach of duty upon which (plaintiff) later sues.” Mason Tenders District Counsel Pension Fund v. Massera, 958 F. Supp. 869, 882 (S.D.N.Y. 1997); quoting Benvenuto v. Taubman, 690 F. Supp. 149, 153 (E.D.N.Y. 1988). See also Brock v. Nellis, 809 F.2d 753, 755 (11th Cir. 1987).

Imputation Of Knowledge

The case presented an interesting turn, however, since the plaintiffs’ counsel had obtained knowledge of facts that his clients did not have. So the question of imputation arose.

The legal support for the issue arises from the law agency:

The Supreme Court commented on the knowledge imparted to a party’s counsel in Link v. Wabash R.R. Co., 370 U.S. 626, 634, 82 S.Ct. 1386, 1390, L.Ed. 734 (1962) (”[In] our system of representative litigation, . . . each party is . . . considered to have notice of all facts, notice of which can be charged upon the attorney”). In Burns v. Imagine Films Entertainment, Inc., 165 F.R.D. 381 (W.D.N.Y. 1996), the court ruled that agency/principal law applies to the attorney-client relationship, and that any knowledge acquired by counsel is imputed to plaintiffs at the time that their counsel receives said information – regardless as to when counsel reads such information or makes any decisions based on same. The Burns court rejected a party’s argument that they should be permitted to raise a late affirmative defense after a four-year delay, based on their attorneys’ failure to apprise them properly. The Court held such delay by counsel to be fatal to the client’s efforts to assert such affirmative defense . . .

The facts were developed by the court on this issue with some drama as it quoted from the transcript:

THE COURT: Let me understand.

Are you conceding, for the purpose of the defense of the statute of limitations, that the issues were known to you in the prior action, all these issues, as to the CEDC, Yonkers CAP, as to the Profile, and as to the other one involving the names I can’t remember.

MR. MIUCCIO: Grayback.

THE COURT: You’re conceding that you knew that in the prior action?

MR. MIUCCIO: I concede that I knew that.

THE COURT: You, meaning the plaintiffs?

MR. MIUCCIO: Yes, your Honor.

THE COURT: Okay.

MR. MIUCCIO: I knew of it, and I can assure you my clients didn’t know about it. None of the class members would know about it. I knew about it because I got it in discovery. I’m willing to concede that, your Honor.

THE COURT: You’re conceding you knew, but not the plaintiffs?

And so the following exception involving class action cases became important to the plaintiffs’ case.

Class Action Distinction

The imputation rule has an exception in the class action context. The court had issued a ruling during trial that the plaintiffs’ counsel’s knowledge was not imputed to the plaintiffs. The court based its ruling on Schwab v. Phillip Morris USA, No. 04 CV 1945 2005 WL 2467766 (E.D.N.Y. Oct 6, 2005) where such knowledge was not imputed in a class action lawsuit.

The court held to its view of the matter in reviewing the motions before it, stating:

A closer look at Schwab and other class action cases leads the Court to confirm its prior ruling and hold that Miuccio’s knowledge is not imputed to the class action plaintiffs in this case. In Schwab, Judge Weinstein held that without discovery it was premature to determine whether counsel’s knowledge – derived from his representation of a class comprised of plaintiffs apparently numbering in the tens of millions, should be imputed to the Schwab plaintiffs. Id.

In Schwab, Judge Weinstein stated:

In some cases it is appropriate for an attorney’s knowledge to be imputed to the client, particularly where there is a single attorney and a single known client in an ongoing relationship. That is not the situation now presented. In the instant case defendants seek to impute the knowledge of counsel to a class of unidentified plaintiffs numbering in the tens of millions who claim they were defrauded for decades. Principles of agency applicable in the single-attorney single-client relationship cannot be transposed into the class action context under present circumstances. Id. at 3.

A “Close Call”

The size of the plaintiffs’ class in the case at bar presented a close call for the court. The cases on which it relied encompassed larger groups, but the principle seemed applicable even if with lesser force than in a large class action case. The court observed:

This issue of “actual knowledge” by plaintiffs’ counsel Miuccio in this case is a close call. On the one hand there is the enunciated law that, generally, the “actual knowledge” of plaintiffs’ counsel in a class action of numerous members will not be imputed to the individual class members. On the other hand, here we have a relatively small class action consisting of 77 members. Should the same rule apply to them, as is available to a class action numbering in the thousands? When the basic reason for the rule is analyzed, the answer to that question is “Yes.” It would be unfair not to apply the rule in this case. The plaintiff class members are involved in a not-for-profit organization, designed to assist and support persons of limited financial ability. There is no evidence in this case that any of the 77 plaintiffs had any knowledge of the facts that would constitute any knowledge, no less actual knowledge, of any of the material facts.

Note: The court provided the following policy analysis of the limitations periods:

An excellent discussion of the reasons for a statute of limitation and the rules in an ERISA case is set forth in Carey v. International Brotherhood of Electrical Workers, 201 F.3d 44 (2d Cir. 1999). In Carey, the Second Circuit noted the reasoning by the Supreme Court in Johnson v. Railway Express Agency, Inc. 421 U.S. 454, 463-64, 95 S.Ct. 1716, 44 L.Ed 2d 295 (1975), which stated that the length of a limitation period in federal court “inevitably reflects a value judgment concerning the point at which the interests in favor of protecting valuable claims are outweighed by the interests in prohibiting the prosecution of stale ones.” In Carey, the basis for the statute of limitations rules was stated:

Statutes of limitation serve several important policies, including rapid resolution of disputes, repose for those against whom a claim could be brought, and avoidance of litigation involving lost evidence or distorted testimony of witnesses. See, e.g., Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 85 LEd.2d 254 (1985). For these reasons, statutes of limitation “are not to be disregarded by courts out of a vague sympathy for particular litigants.” Baldwin County Welcome Ctr. v. Brown, 466 U.S. 147, 152, 104 S.Ct. 1723, 80 LEd.2d 196 (1984) (per curiam). Indeed, strict adherence to limitation periods “is the best guarantee of evenhanded administration of the law.” Mohasco Corp. v. Silver, 447 U.S. 807, 826, 100 S.Ct. 2486, 65 L.Ed.2d 532 (1980).

Continuing Violation Doctrine – Some of the plaintiffs’ claims were time-barred and some were not – the sorting of them would simply complicate the synopsis offered here beyond any commensurate benefit. As an argument against the limitations period argument, the plaintiff advanced the interesting theory of continuing violation.

That argument was rejected, but the analysis is worth review:

The plaintiffs’ reliance on the continuing violation doctrine is misplaced. The case law is devoid of any cases applying the continuing claims doctrine to fiduciary breaches arising from different activities.

In the ERISA context, the continuing violation doctrine is used for statute of limitations purposes to analyze when a cause of action accrues. In certain instances, a new cause of action accrues for each violation where separate violations of the same type, or character, are repeated over time. These cases are marked by repeated decision-making, of the same character, by the fiduciaries. For example, in Bona v. Barasch, No. 01CV2289, 2003 WL 1395932 (S.D.N.Y. March 20, 2003), the plaintiffs claimed a fiduciary violation for defendants’ entry into improper investment services contracts, which were renewed within the statute of limitations period. Id. at *2-5. The defendants argued that the statute of limitations ran from the time of the first violation, the initial contract, and did not run anew for successive violations that merely maintained the status quo. Id. at *19. The court found that if the facts alleged were proven, the fiduciary duty “was violated each time defendants renewed imprudent contracts with fund administrators.” Id. at 19; see also Martin, 966 F.2d at 1078, 1087-88 (finding that renewal of a contract gave rise to a new independent cause of action because to relegate the date of accrual to the first date the contract was agreed upon would ignore “the continuing nature of a trustee’s duty under ERISA to review plan investments and eliminate imprudent ones”). Koch v. Dywer, No. 98CV5519, 1999 WL 528181, at (S.D.N.Y. July 22, 1999)(finding that the plaintiff may pursue a claim for breach of fiduciary duty based on continued retention of an imprudent investment); NYSA-ILA Medical & Clinical Services Fund v. Catucci, 60 F. Supp. 2d 194, 199-200 (S.D.N.Y. 1999) (finding that successive inappropriate payments would give rise to a new cause of action “each time a fiduciary made an improper payment with Fund assets”); Gruby v. Brady, 838 F. Supp. 820 (S.D.N.Y. 1993) (holding that each time an excessive benefit payment was made, the fund was injured, giving rise to a new cause of action); Buccino, 578 F. Supp. at, 1521-22) (holding that the fiduciaries’ retention of an unlawful insurance plan was a continuous and repeated violation of the duty to review the plan investments).

On the other hand:

Distinguished from those situations, where fiduciaries repeat violations of the same character over and over, are cases where the plaintiffs’ claims are based on a single decision that results in lasting negative effects. The former results in a continuing violation, the latter does not. For example, in the case relied on by the plaintiffs, Miele v. Pension Plan of New York State Teamsters Conference Pension & Retirement Fund, 72 F. Supp. 2d 88 (E.D.N.Y. 1999), the plaintiff sued for breach of fiduciary duty based upon the manner in which his benefits were calculated. Id.

The defendants argued that the plaintiff’s claims were time barred because he filed suit more than six years after the date on which the defendants sent a final accounting of his benefits. Id. at 97. The plaintiff contended that his cause of action was preserved by the continuing claims doctrine because a new statute of limitations began to run upon each monthly payment of the miscalculated benefit. Id. at 100. The court held that there was no continuing violation-the date of the accounting was the only date on which his cause of action accrued-because “[i]t was entirely clear to both parties that the defendants’ calculation would apply to each and every monthly payment in perpetuity.” Id. at 101.