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Trustee retaliated against employee for reporting interference with fund contributions, but permanent injunction against him vacated

By Ronald Miller, J.D.

A trustee of union trust funds violated ERISA by retaliating against a whistleblower who reported the trustee’s interference with fund contributions, ruled the Ninth Circuit, but the retaliatory act of placing the employee on administrative leave was not a breach of the trustee’s fiduciary duty. Accordingly, the appeals court vacated a district court’s permanent injunction of the trustee ever holding a fiduciary position with the trusts or an ERISA plan. Judge Schroeder filed a separate opinion dissenting in part (Acosta v. Brain, December 4, 2018, Smith, M., Jr.).

ERISA violations. The Secretary of Labor brought a civil enforcement action against a former trustee, Scott Brain, and former union counsel, Melissa W. Cook & Associates, of five employee benefit trust funds established under collective bargaining agreements between the two local Cement Mason unions and four employer associations. The suit alleged violations of two sections of ERISA—unlawful retaliation in violation of ERISA Section 510, 29 U.S.C. § 1140, and breach of fiduciary duty in violation of ERISA Section 404, 29 U.S.C. § 1104.

Brain was a business manager for one of the union locals, a trustee for each of the trust funds, and a member of a Joint Board. Beginning in 2006, Cheryle Robbins, the director of the trust funds audit and collections department, expressed her concerns to other trustees that Brain was interfering with the audit department’s collection efforts. He often interpreted certain agreements “in a manner that reduced the amount owed by covered contractors.”

In April and March of 2011, a joint delinquency committee (JDC), which oversaw the audit department, decided to hire an outside firm to audit the department. The JDC asked the Cook firm to prepare audit procedures and solicit bids from auditing firms. On October 13, 2011, the JDC decided on two finalists to perform the audit.

DOL investigation. By October 2011, the close relationship between Brain and Cook individually became romantic. They misled other trustees about their relationship, and Cook failed to disclose the relationship. On October 11, 2011, Robbins and Cory Rice, an employee of a third-party administrator, met with trustee David Allen about Brain’s purported misconduct. On October 14, a DOL investigator contacted Robbins and informed her that he was conducting a criminal investigation of Brain. The DOL investigation was initiated by a complaint by a union vice president. On October 26, Cook was informed of the DOL investigation.

After learning about Robbin’s contact with the DOL, Cook and Brain called a special joint board meeting for the purpose of discussing whether to outsource the audit department’s work. At some point in November 2011, Robbins asked the DOL investigator to issue a DOL subpoena for trust fund records because she had been instructed not to provide the records voluntarily and she feared she would lose her job. Following receipt of the subpoena, Robbins was placed on leave before the pending DOL matter was resolved. Rice was also terminated because of his role in efforts to report Brain to the union leadership.

Meanwhile, Cook engaged in an unauthorized investigation of Robbins; she also kept Brain apprised of her investigation. Ultimately, Cook encouraged the trustees to support outsourcing the audit department and to eliminate Robbins.

Permanent injunction. On May 21, 2014, the Secretary initiated the present action, arguing that the trust funds, joint board members, the third party administrator, and the Cook defendants retaliated against Robbins and Rice for attempting to raise concerns about Brain. The suit also alleged that Brain committed a breach of fiduciary duty and that the Cook defendants participated in Brain’s breach.

After conducting a bench trial, the district court found that Brain and the Cook defendants violated ERISA Section 510 by causing Robbins to be placed on administrative leave in retaliation for protected conduct and by terminating Rice. Additionally, Brain and the Cook defendants were found to have violated ERISA Section 404. The district court removed Brain as a trustee of all trust funds and permanently enjoined him from serving as a trustee or applying for or accepting ay fiduciary position with any ERISA-covered plan. It also terminated any attorney-client relationship between the Cook defendants and any trust funds, and it permanently enjoined them from providing any services to any trust funds.

Retaliation. On appeal, the Ninth Circuit affirmed the district court’s conclusion that Brain violated ERISA Section 510 by retaliating against Robbins. Robbins’s participation in the DOL investigation of Brain was unmistakably protected activity under ERISA and constituted an independently sufficient ground for the district court’s conclusion. The district court did not err in concluding that Robbins’s protected activity was the “but-for” cause of Robbins being placed on leave. Although Brain was not part of the group of trustees that voted to place Robbins on leave, he was responsible for setting the vote in motion. But for Brain’s orchestrating the vote to place Robbins on leave, the joint board would not have done so.

Injunction vacated. However, the appeals court found that the district court erred in concluding that Brain breached his fiduciary duty under Section 404 by placing Robbins on administrative leave. Rather, Brain correctly observed that the district court did not address the threshold question of whether he was wearing an ERISA fiduciary hat when he took the actions alleged in the Secretary’s complaint. Moreover, the text of Section 404 speaks plainly of fiduciary duties owed to participants and beneficiaries, but not to employees. Thus, the appeals court concluded that the Secretary’s contention that Brain’s fiduciary duty of loyalty extended to all of his dealings with people who served the plan and its administration was overbroad.

Further, the district court erred in basing the permanent injunction on ERISA section 409. Because Section 409 required a breach of fiduciary duty, and the Secretary did not prove that there was a breach of fiduciary duty in this case, the permanent injunction was vacated in its entirety as to Brain and the Cook defendants. ERISA section 502(a)(5) did not provide an alternative basis for the district court’s permanent injunction where no aspect of the district court’s injunction redressed or enforced a violation of ERISA section 510.

Partial dissent. Judge Schroeder disagreed with that portion of the majority’s opinion that vacated the permanent injunction against Brain returning to serve as a trustee. In Schroeder’s view, Brain was clearly acting as a fiduciary when he engaged in retaliatory conduct against Robbins. He pointed out that there was not the slightest indication in the record that the decision to place Robbins on administrative leave was for any reason other than to cover up Brain’s misconduct in cheating the funds. Nor did the dissent find any legal question that such misconduct was a breach of Brain’s fiduciary duty to administer the funds in the exclusive interest of beneficiaries and participants.