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1999 Term, Number 9 / January 7, 2000

Today the Supreme Court granted certiorari in one case of potential interest to the business community. Amicus briefs in support of the petitioner are due on Tuesday, February 22, 2000, and amicus briefs in support of the respondents are due on Thursday, March 23, 2000. Any questions about this case should be directed to Donald Falk (202-263-3245) or Eileen Penner (202-263-3242) in our Washington office.

ERISA — Private Right of Action — Action Against Non-Fiduciary Participant in Prohibited Transaction. The Employee Retirement Income Security Act ("ERISA") prohibits employee pension plans from purchasing investments from, and engaging in other financial transactions with, service providers and other entities that are deemed "parties in interest" under the Act. The Supreme Court granted certiorari in Harris Trust & Savings Bank v. Salomon Brothers, Inc., No. 99-579, to resolve a conflict among the circuits concerning whether ERISA creates a private right of action against a non-fiduciary party in interest for engaging in a prohibited transaction with a pension plan. Petitioner Harris Trust & Savings Bank ("Harris") is trustee for Ameritech Pension Trust ("APT"), which holds assets for Ameritech Corporation's employee pension plans. Respondent Salomon Brothers ("Salomon") provided broker-dealer services to APT. While it was serving as a broker-dealer to APT, Salomon sold APT its participation interests in the income and appreciation of certain motel properties. APT suffered significant losses on this investment when the market for motel real property collapsed in the early 1990's.

In 1992, Harris was appointed trustee of APT and sued Salomon on behalf of APT in federal district court in Illinois. Among other theories, Harris sought to hold Salomon liable for APT's losses on the ground that Salomon had violated ERISA by participating in a transaction barred by 29 U.S.C. § 1106. Section 1106 provides, in pertinent part:

(a)(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect—
(A) sale or exchange, or leasing, of any property between the plan and a party in interest;

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(D) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan[.]

A "party in interest" includes "a person providing services to such plan." 29 U.S.C. § 1002(14)(B). Under 29 U.S.C. § 1132(a)(3), a plan participant, beneficiary, or fiduciary may bring a civil action for "appropriate equitable relief" to redress violations of Section 1106, among other ERISA provisions. APT claimed that Salomon was a "party in interest," and that its sale of the participation interests to the plan was a prohibited transaction that subjected it to a private action for restitution under Section 1132(a)(3).

Salomon moved for summary judgment, arguing that, under the plain language of the statute, only fiduciaries that cause plans to enter into prohibited transactions, and not non-fiduciary parties in interest that participate in such transactions, can be sued for violating Section 1106. The district court denied the motion in an unpublished order. The district court held that Section 1106 imposes on nonfiduciary parties in interest a duty to avoid prohibited transactions, but certified its order for interlocutory review under 28 U.S.C. § 1292(b).

The Seventh Circuit accepted the appeal and reversed. 184 F.2d 646 (1999). The court of appeals held that Section 1106 imposes a duty only on fiduciaries, not on non-fiduciary parties in interest. According to the Seventh Circuit, "[t]he mere fact that § 1106 mentions 'parties in interest' when it describes the transactions that fiduciaries must avoid does not mean that parties in interest are liable when a fiduciary does engage in a prohibited transaction." Id. at 651. The court noted that the Act permits the Secretary of Labor to impose a civil penalty on parties in interest in such circumstances, but reasoned that the inclusion of an express penalty provision "only makes the absence of a specific provision imposing civil liability on parties in interest all the more striking." Id. The decision of the Seventh Circuit appears to conflict with decisions from six other circuits. This case should be of great interest to businesses that provide services — particularly financial services — to employee benefit plans, because an affirmance would limit the risk that private litigation will arise from their dealings with ERISA plans. On the other hand, firms that sponsor or serve as trustees for employee benefit plans may wish to support an interpretation of ERISA that provides plan assets with additional protection

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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