Harris Trust & Savings Bank v. Salomon Brothers, Inc., et al. (06/12/2000)

By: Janice Revell, Medill News Service

Questions presented

Whether employee benefit plans can sue brokers and others for sales that are prohibited transactions under the Employment Retirement Income and Security Act (ERISA).

Brief

During the economic heydays of the late 1980s, the travel business was booming and ""no vacancy"" signs were popping up at lodging establishments across the country.

So when the Ameritech Pension Trust decided to invest more than $20 million in two motel chains, it seemed like a good idea.

Ameritechs venture into the motel business came at the suggestion of brokerage firm Salomon Brothers. At the time, Salomon had been acting as an investment advisor to Ameritechs pension plan, established for the Chicago-based companys 118,000-plus employees.

Salomon itself had already been active in the motel industry, arranging financing for two motel chains, Motels of America, Inc. and Best Inns, Inc. Both chains had embarked on massive buying sprees, snapping up new properties across the country.

In return for its services, Salomon had received from each chain the right to collect a percentage of the cash generated by the new motels, and to share in any increase in the properties values. But instead of waiting to collect on these fee agreements, Salomon offered to sell them to the Ameritech Pension Trust.

Ameritech took Salomon up on its offer, and between 1987 and 1989, the pension plan paid Salomon more than $20 million for the fee agreements.

Then the recession hit.

During the early 1990s, the market for motel properties collapsed, and both Motels of America and Best Inns declared bankruptcy. The Ameritech pension fund was left holding two virtually worthless investments.

In 1992, Harris Trust and Savings Bank, theee for the Ameritech Pension Trust, filed suit against Salomon in federal court, seeking to hold the brokerage firm liable for the pension funds losses on the motel investments. Harris argued that Solomon had entered into a ""prohibited transaction"" under Title 29 U.S.C. sec. 1106 of the Employee Retirement Income Security Act (ERISA) because it had acted under a clear conflict of interest: Solomon had profited from the sale of its own property by advising one of its clients to buy it.

Harris also claimed that Salomon knew before selling the motel investment to Ameritech that the motels finances were in a precarious condition, but it hid that information from Ameritech.

Salomon, in turn, argued that under ERISA, it could not be held liable for the motel transactions, since its relationship with Ameritech was ""nonfiduciary, "" in that Salomon did not have control over the assets in Ameritechs pension fund. Therefore, it argued, it could not be held accountable for the pension plans investment decisions.

On June 13, 1996, U.S. Magistrate Joan Humphrey Lefkow denied Salomons motion for summary judgment, ruling that under sec. 1106 of ERISA, even nonfiduciaries could be sued for participation in prohibited transactions.

On July 6, 1999, a unanimous panel of the 7th Circuit Court of Appeals reversed, in apparent conflict with five other federal circuits. While the court presumed that the sale of the motels was indeed a prohibited transaction, it nonetheless held that Salomon could not be sued for its role in the deal.

In its opinion, the appeals court recounted the legislative history of ERISA, which had included a recommendation by a Congressional committee to include ""parties in interest"" (nonfiduciaries) along with fiduciaries under sec. 1106 of the Act, implying that both would be liable. But, the court pointed out, when Congress passed the final bill, the recommendation was dropped.

""If Congress had wanted to place remedial power against nonfiduciaries in the hands of private parties it would have done so more explicitly as it did in the case of fiduciaries and cofiduciaries,"" wrote Appeals Judge Terence T. Evans. ""The fact of the matter is that the (ERISA) section does not regulate their conduct.""

The appeals court also relied on the 1993 U.S. Supreme Courts opinion in Mertens v. Hewitt Associates, in which the Court expressed its ""doubts"" that nonfiduciaries could be sued for participating in a fiduciary breach. The appeals court acknowledged, however, that the Supreme Courts 1996 opinion in Lockheed Corp. v Spink ""seemed to leave open the possibility"" that a nonfiduciary could be held liable for a prohibited transaction.

The 7th Circuits ruling puts it in conflict with five other federal appeals courts. The 1st, 3rd, 9th, 10th and 11th circuits have all ruled that ERISA allows lawsuits against nonfiduciaries.

The U.S. Supreme Court granted certiorari on January 7, 2000. The American Council of Life Insurance filed an amicus brief in the case.

On June 12, 2000, a unanimous Court reversed, holding in favor of Harris Trust & Savings Bank. The case had been closely watched by brokerage firms, life insurance companies and other nonfiduciaries that deal with employee benefit plans.

Justice Clarence Thomas wrote for the Court that the ERISA provision also extends to a suit against a nonfiduciary “party in interest.”

In so holding, the Court rejected the 7th Circuits conclusion that, absent a substantive ERISA provision expressly imposing a duty on a nonfiduciary party in interest, the nonfiduciary party may not be held liable under one of ERISAs remedial provisions.