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JOHN G v. WILLIAM MASON & CO.

August 29, 1997

JOHN G, GREEN, et al., Plaintiffs,
v.
WILLIAM MASON & CO., et al., Defendants.



The opinion of the court was delivered by: WALLS

 This matter comes before the Court upon plaintiffs' motion to dismiss the counterclaim of defendants Pension Fund Evaluations, Inc. ("PFE") and George W. Phillips. Pursuant to Rule 78 of the Federal Rules of Civil Procedure, the Court decides this motion without oral argument. For the following reasons, plaintiffs' motion is denied.

 BACKGROUND

 Plaintiffs are trustees of the Elevator Constructors Union Local No. 1 Annuity and 401(K) Fund ("Fund"), an employee benefit pension plan established for the benefit of elevator constructors and elevator constructor mechanics in the New York metropolitan area, and the Fund itself. In 1991, plaintiffs retained PFE to perform certain services for the Fund, including the preparation of quarterly reports analyzing the aggregate performance of portfolios managed by each of the Fund's investment managers. Plaintiffs further claim that PFE provided general investment advice to the Fund and analyzed the suitability of particular investment decisions.

 In 1991, the Fund retained defendant William Mason & Co., Inc. ("WMC") as one of its investment managers. Plaintiffs allege that between 1991 and 1994, WMC invested in derivative securities on behalf of the Fund which were inappropriate. In August 1994, WMC reported a substantial loss on those investments. Shortly thereafter, WMC was terminated as the Fund's investment manager.

 On April 19, 1996, plaintiffs brought this lawsuit in the United States District Court of New Jersey. They allege that defendants WMC, its principal William Mason, and its parent company Heritage Asset Management, Inc. have violated various provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C.A. §§ 1001-461 by making inappropriate investments. Plaintiffs have also sued PFE and its director, George W. Phillips (collectively "PFE"), for breach of fiduciary duties. Plaintiffs allege that PFE knew or should have known that WMC's investment in derivative securities was inappropriate and that it violated its duties under ERISA by failing to disclose that information to plaintiffs. In addition to ERISA violations, plaintiffs assert common law fraudulent misrepresentation, conspiracy, negligence, and breach of contract claims against the defendants.

 In response to the Complaint, PFE denies that it played any role in WMC's investment activities and claims that it fully performed its responsibilities under ERISA as well as the terms of its agreement with the Fund. Further, PFE has asserted a counterclaim against the trustee plaintiffs seeking indemnification or contribution from them for any damages assessed against it based on the plaintiffs' ERISA and state law claims. PFE argues that it is entitled to indemnification or contribution because the trustee plaintiffs were aware of the nature of WMC's trades and had access to essentially the same information it did concerning WMC's investment activities. Therefore, PFE argues that if it is found to have breached its duties to the Fund under ERISA, the trustees must also have violated their duties to the Fund by authorizing or acquiescing in WMC's activities and failing to take action to prevent or limit the Fund's losses.

 Plaintiffs now move to dismiss PFE's counterclaim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds that neither ERISA's statutory scheme nor federal common law permits contribution and indemnification between co-fiduciaries. In response, PFE argues that its counterclaim is authorized by federal common law of trusts underlying ERISA or alternatively, by § 502 (a)(3) of ERISA.

 DISCUSSION

 A. Legal Standard

 B. Analysis

 Congress enacted ERISA to provide employee benefit plan participants and beneficiaries with a comprehensive system for adjudicating claims brought against fiduciaries responsible for overseeing the administration of the various plans protected by the statute. See 29 U.S.C. § 1001(b). The United States Supreme Court has explained that the right to seek contribution or indemnification under a federal statute may arise either (1) where Congress has expressly or by clear implication created such a right, or (2) where federal courts have fashioned such a remedy under federal common law. Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 638-640, 68 L. Ed. 2d 500, 101 S. Ct. 2061 (1981). As plaintiffs correctly observe, ERISA does not expressly provide for contribution and indemnification between co-fiduciaries. While there is no general federal common law, the Supreme Court has explained that the federal courts have the authority to create such law when a "federal rule of decision is necessary to protect uniquely federal interests" and when "Congress has given the courts the power to develop substantive law." Id. at 640.

 The Third Circuit has not yet addressed whether ERISA permits claims for contribution or indemnity among fiduciaries. In Cohen v. Baker, 845 F. Supp. 289 (E.D.Pa. 1994), the only district court within this circuit to consider this issue held that claims for contribution among breaching fiduciaries of an employee benefit plan are cognizable under federal common law. In so ruling, the court primarily relied upon the Second Circuit's analysis in Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12 (2d Cir. 1991). In Chemung, the Second Circuit held that ERISA does not preclude fiduciaries from seeking contribution or indemnity from other fiduciaries. The Second Circuit observed that the United States Supreme Court has directed federal courts "'to develop a federal common law of rights and obligations under ERISA-regulated plans'" and explained that ERISA's legislative history "confirms that its fiduciary responsibility provisions . . . 'codify and make ...


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