Solis v. Malkani ( 2011 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1383
HILDA L. SOLIS, Secretary of Labor, United States Department
of Labor,
Plaintiff – Appellee,
CLARK CONSULTING,
Party-in-Interest – Appellee,
v.
ROMA P. MALKANI; INFORMATION SYSTEMS AND NETWORKS
CORPORATION EMPLOYEES’ PENSION PLAN; INFORMATION SYSTEMS AND
NETWORKS CORPORATION PROFIT SHARING PLAN; INFORMATION
SYSTEMS & NETWORKS CORPORATION,
Defendants - Appellants.
No. 10-1061
HILDA L. SOLIS, Secretary of Labor, United States Department
of Labor,
Plaintiff – Appellee,
CLARK CONSULTING,
Party-in-Interest – Appellee,
v.
ROMA P. MALKANI; INFORMATION SYSTEMS AND NETWORKS
CORPORATION EMPLOYEES’ PENSION PLAN; INFORMATION SYSTEMS AND
NETWORKS CORPORATION PROFIT SHARING PLAN; INFORMATION
SYSTEMS & NETWORKS CORPORATION,
Defendants – Appellants,
and
SALOMON SMITH BARNEY, INCORPORATED,
Defendant - Appellee.
Appeals from the United States District Court for the District
of Maryland, at Greenbelt. William D. Quarles, Jr., District
Judge. (8:00-cv-03491-WDQ)
Argued: October 27, 2010 Decided: February 4, 2011
Before WILKINSON, GREGORY, and WYNN, Circuit Judges.
Affirmed by unpublished opinion. Judge Gregory wrote the
opinion, in which Judge Wilkinson and Judge Wynn joined.
ARGUED: Norman Henry Singer, SINGER & ASSOCIATES, PC, Bethesda,
Maryland, for Appellants. Edward D. Sieger, UNITED STATES
DEPARTMENT OF LABOR, Washington, D.C., for Appellee Secretary of
Labor; Gregory L. Skidmore, KIRKLAND & ELLIS, LLP, Washington,
D.C., for Appellee Clark Consulting. ON BRIEF: M. Patricia
Smith, Solicitor of Labor, Timothy D. Hauser, Associate
Solicitor for Plan Benefits Security, Nathaniel I. Spiller,
Counsel for Appellate and Special Litigation, UNITED STATES
DEPARTMENT OF LABOR, Washington, D.C., for Appellee Secretary of
Labor. Christopher Landau, KIRKLAND & ELLIS, LLP, Washington,
D.C., for Appellee Clark Consulting.
Unpublished opinions are not binding precedent in this circuit.
2
GREGORY, Circuit Judge:
This appeal arises out of a successful enforcement action
brought under the Employee Retirement Income Security Act of
1974 (“ERISA”) by the Secretary of Labor (hereinafter the
“Secretary”) against the defendants-appellants, Information
Systems and Networks and Roma Malkani, its president and sole
owner (hereinafter, collectively, “ISN”).
On appeal, ISN asks us to reverse several district court
orders, wherein the court ruled in favor of the Secretary, the
appellee-plaintiff, and Clark Consulting (hereinafter “Clark”),
the appellee-party-in-interest. We must decide (1) whether ISN
waived its objections to a magistrate judge report by failing to
appeal for district court review within the statutorily
prescribed ten day period; (2) whether the court abused its
discretion by authorizing the independent fiduciary who replaced
Clark to terminate the pension plan; and (3) whether ISN’s
objections to the refusal of the district court to stay its
order requiring ISN to pay the replacement fiduciary are now
moot. For the following reasons, we affirm the decisions of the
district court.
I.
In November 2000, the Secretary initiated an ERISA lawsuit
against ISN on behalf of the beneficiaries of ISN’s defined
3
contribution pension and profit sharing plan. The lawsuit
alleged that ISN had violated its fiduciary duty to properly
administer the plan. See generally Chao v. Malkani, 216 F.
Supp. 2d 505, 508 (D. Md. 2000), aff’d., 452 F.3d 290 (4th Cir.
2006).
In July 2002, the district court granted partial summary
judgment in favor of the Secretary. The court specifically held
that ISN, at Malkani’s instruction, had violated section
406(a)(1)(D) of ERISA when it had monies totaling $62,888.05
transferred from the plan to it, ostensibly to pay for “plan
administration expenses.” 216 F. Supp. 2d at 518. The court
also noted that, both before and after that illegal transfer,
ISN had similarly attempted to have $435,761.52 and $706,264.54
transferred from the plan to it. Id. at 509. The court
therefore ordered that ISN be removed as the administrative
fiduciary of the plan; and asked the Secretary to name a
replacement independent fiduciary, with all of the costs and
expenses incurred by that fiduciary to be paid by ISN. Id. at
518-19.
A.
In March 2003, the Secretary filed a motion asking that
Clark be appointed as the independent fiduciary for the pension
plan. Attached to the motion was a proposal outlining Clark’s
expertise, the work to be performed, and the conditions under
4
which Clark could terminate the agreement (hereinafter the
“Proposal”). In May 2003, over the objections of ISN, the court
appointed Clark as the independent fiduciary, and again
confirmed that ISN would be liable for all costs incurred by
Clark.
In October 2004, the district court held a three-day bench
trial to determine whether ISN had violated ERISA. On March 30,
2005, the court issued a decision that found ISN liable for
breaching its fiduciary duties under ERISA and ordered ISN to
reimburse the pension plan. After ISN appealed that decision to
this Court, we wholly affirmed the district court. We held that
“defendants’ repeated and questionable conduct established their
breach of ERISA’s standards;” and that ISN had “continually
acted in an objectively unreasonable manner that conflicted with
their duties of loyalty and care.” 452 F.3d at 298.
B.
On July 24, 2006, following this Court’s decision upholding
the merits of the underlying action, the Secretary filed an
unopposed motion asking the district court to refer Clark’s
pending fee request to a magistrate judge. Three days later, on
July 27, the district court granted the referral request. The
order did not specify whether the referral called for the
magistrate judge to issue recommendations on a dispositive
motion or a formal order on a non-dispositive motion.
5
On July 11, 2007, the magistrate judge found that ISN owed
Clark approximately $498,116 in fees and costs. The findings of
the magistrate judge were entered on the docket as an “order of
the Court.” Joint Appendix (“J.A.”) 410. Rather than bringing
its objections to these findings before the district court, ISN
instead immediately appealed the “order” to this Court.
On June 5, 2008, we dismissed ISN’s appeal for lack of
appellate jurisdiction. We held that the “order” was not
directly appealable because it was issued as a recommendation
under 28 U.S.C. § 636(b). We further held that, before
appealing to this Court, ISN should have first challenged the
recommendation in the district court. We declined to rule on
whether ISN had waived its right to district court review by not
seeking review within ten days, 1 and remanded the case for
further proceedings.
On remand, the district court issued a February 25, 2009
opinion, which addressed whether ISN had waived district court
review of the findings of the magistrate judge. Consistent with
our ruling, the district court found that the issue of fees had
been referred to the magistrate judge as a dispositive motion
1
The current version of 28 U.S.C. § 636(b), which became
effective on December 1, 2009, provides a party with fourteen
days to file written objections to the recommendations issued by
a magistrate judge for review by the district court.
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and that, although not styled as such, the “order” was in fact a
recommendation under § 636(b). Further, the district court
found that, by failing to object to the recommendation within
ten days, ISN had waived its right to district court review of
these recommendations. For these reasons, the court wholly
adopted the recommendations of the magistrate judge without
modification.
C.
On April 23, 2009, Clark filed a motion to withdraw as the
independent fiduciary. Clark had recently restructured its
business, and was no longer able or willing to act as an
independent fiduciary. Clark noted that the Proposal permitted
it to terminate its engagement at any time with sixty days prior
notice and preapproval by the court. In response, the Secretary
requested that the court not release Clark until the appointment
of a proper replacement. Given Clark’s continuing struggles to
receive payment from ISN, the Secretary requested that ISN pay
all of the costs of the replacement fiduciary upfront. The
Secretary also asked the court to terminate the now-effectively
defunct plan.
On October 16, 2009, the district court issued a memorandum
and order allowing Clark to withdraw within thirty days, pending
the appointment of its replacement, and denied the Secretary’s
request that the pension plan be terminated. ISN was also
7
ordered to “advance the successor trustee’s annual fee and
estimated expenses” within sixty days. J.A. 72.
On November 16, 2009, the Secretary offered Nicholas
Saakvitne as the replacement fiduciary. A month later, on
December 16, 2009, the court accepted the replacement fiduciary.
In its December 16, 2009 order, the court directed ISN to pay
Saakvitne within fifteen days an upfront fee, plus the expected
costs of the 2009 and 2010 audits of the pension plan. The
court conditioned the concurrent appointment of Saakvitne and
the withdrawal of Clark on the payment by ISN of the upfront
fee. The court also adopted the proposed fiduciary agreement
for Saakvitne, which gave him the exclusive power to terminate
the pension plan.
ISN failed to pay Saakvitne within fifteen days. Instead,
a week after the deadline passed, ISN appealed the December 16,
2009 order of the district court. ISN asked the court to
approve a stay of the order upon the posting by ISN of a
supersedeas bond pursuant to Federal Rule Civil Procedure 62(d).
On January 15, 2010, in response to the motion for a stay,
Clark filed an emergency motion for contempt against ISN. The
same day, the district court ordered that ISN be held in civil
contempt and fined $250 a day until it paid Saakvitne’s fees and
expenses. The court explained that ISN could not suspend its
payment of expenses through a supersedeas bond because the
8
December 2009 order was not a final judgment, but an “injunctive
type” of remedy enforceable by contempt. Supplemental Appendix
(“S.A.”) 185-86. The court also noted that the bond posted by
ISN “may protect Saakvitne from non-payment; but, it does not
relieve the current fiduciary, Clark, who [only] may be removed
as trustee following the appointment of its replacement.” S.A.
186.
ISN did not appeal the January 15, 2010 order where the
court found ISN in contempt. Instead, ISN paid Saakvitne on
January 29, 2010; thereby, simultaneously confirming both the
withdrawal of Clark as the independent fiduciary and the
appointment of Saakvitne as the same.
II.
Here, we are called upon to address three issues: (1)
whether the district court erred in wholly adopting the
recommendations of the magistrate judge without review; (2)
whether the district court erred in issuing its December 2009
order requiring ISN to pay Saakvitne; and (3) whether the
district court abused its equitable powers under ERISA by
extending to Saakvitne the power to terminate the plan.
A.
Whether ISN waived its right to challenge the findings of
the magistrate judge by failing to file its objections with the
9
district court within ten days is a question of law subject to
de novo review. See United States v. Schronce, 727 F.2d 91, 93-
94 (4th Cir. 1984); see also United States v. General, 278 F.3d
389, 399 (4th Cir. 2002) (“Whether a defendant has effectively
waived his statutory right to appeal . . . is a question of law
subject to de novo review.”).
ISN waived its right to full district court review of the
recommendations when it failed to object within ten days of
their issuance by the magistrate judge. In the last appeal, we
determined that the fees issue had been referred to the
magistrate judge under § 636(b)(1)(B), and, as such, had been
issued by the magistrate judge as a recommendation. Although we
declined to decide whether ISN had waived its right to review of
the recommendations by failing to file any objections with the
district court within ten days of the issuance of the
recommendations, the law at the time was clear: ISN had only
ten days to request further review. See 28 U.S.C. § 636(b)(1)
(West 2008) (“Within ten days after being served with a copy,
any party may serve and file written objections to such proposed
findings and recommendations . . . .”). Moreover, we note that
a party’s failure to object to a magistrate judge’s
recommendations within ten days in either a nondispositive, Fed.
R. Civ. P. 72(a), or a dispositive matter, Fed. R. Civ. P.
72(b), waives further review. “In this circuit, as in others,
10
‘a party “may” file objections within ten days or he may not, as
he chooses, but he “shall” do so if he wishes further
consideration.’” Wells v. Shriners Hospital, 109 F.3d 198, 199
(4th Cir. 1997) (quoting Park Motor Mart v. Ford Motor Co., 616
F.2d 603, 605 (1st Cir. 1980)).
ISN also argues that the district court erred by failing to
inform ISN that it had ten days to request further review.
However, this Court has clearly stated that, although pro se
litigants are entitled to such a warning, the rule is different
for counseled parties:
A court is under no obligation to advise every lawyer
of every deadline for every proceeding – much less
every consequence should the deadline be missed or
ignored. The 10 day deadline is hardly obscure
. . . . [T]he Magistrates Act, the Federal Rules, and
Fourth Circuit precedent provide[] more than
sufficient notice . . . .
Wells, 109 F.3d at 200. Counsel for ISN chose not to file any
objections, and, instead, injudiciously appealed to this Court.
Counsel should have known that their failure to act waived the
right of their clients to district court review of the
recommendations, and that, thereafter, the court would be free
to adopt the recommendations wholesale. See Camby v. Davis, 718
F.2d 198, 200 (4th Cir. 1983) (“Absent objection, we do not
believe any explanation need be given before adopting the
[magistrate judge’s] report.”).
11
Therefore, there was no error when -- in accordance with
our earlier decision, which declared that the magistrate judge
had issued a recommendation –- the district court found that ISN
had only ten days to raise its objections, and, by failing to do
so, it had waived its right to any further review.
B.
“We review a district court’s award of equitable relief for
abuse of discretion, accepting the court’s factual findings
absent clear error, while examining issues of law de novo.”
Dixon v. Edwards, 290 F.3d 699, 710 (4th Cir. 2002) (citations
omitted).
“A federal court enforcing fiduciary obligations under
ERISA is . . . given broad equitable powers to implement its
remedial decrees.” Delgrosso v. Spang & Co., 769 F.2d 928, 937
(3d Cir. 1985). These necessarily include the power to order
the termination of a plan. Indeed, § 1109(a) of ERISA states
that:
Any person who is a fiduciary with respect to a plan
who breaches any of the responsibilities, obligations,
or duties imposed upon fiduciaries by this subchapter
shall be . . . subject to such other equitable or
remedial relief as the court may deem appropriate,
including removal of such fiduciary.
29 U.S.C. § 1109(a). In cases initiated by the Secretary, a
court is further authorized to provide other “appropriate
relief” where necessary. 29 U.S.C. §§ 1132(a)(2), 1132(a)(5).
12
Thus, in certain narrow circumstances, it is wholly appropriate
for a court to provide an appointed independent fiduciary with
the power to terminate a plan. Delgrosso, 769 F.2d at 937-38 &
n.12.
Here, in light of the deteriorating state of the pension
plan, the district court did not err in using its equitable
powers to extend to the replacement fiduciary, Saakvitne, the
authority to terminate the plan. Importantly, the pension plan
is now almost completely dormant, as only seven of its original
309 participants remain active. S.A. 47. See, e.g., Solis v.
Vigilance, Inc., No. C 08-05083 JW, 2009 WL 2031767, *3 (N.D.
Cal. July 9, 2009) (removing employer-fiduciaries who abandoned
plan and authorizing independent fiduciary to terminate the
plan); Chao v. Wagner, 2009 WL 102220, *3 (N.D. Ga. Jan. 13,
2009) (similar). In the event that the pension plan is formally
terminated, the statute requires that participants have their
contributions returned, with any surplus assets allocated by the
independent fiduciary to the appropriate participants. See 29
U.S.C. § 1344(a); Delgrosso, 769 F.2d at 937-38.
Notably, nowhere in its briefing and at no time during oral
argument could ISN articulate why it insisted on continuing the
pension plan. Indeed, given the unfortunate history of ISN’s
mismanagement of the plan and repeated attempts to
misappropriate its funds, see Malkani, 216 F. Supp. 2d at 509,
13
518, further continuation of the plan would likely only
perversely benefit ISN.
Therefore, given these circumstances, the court acted
within its discretion when it allowed the replacement fiduciary
to formally terminate the plan. 2
C.
The issue of whether ISN’s request for a stay is moot is a
question of law to be reviewed de novo. Green v. City Of
Raleigh, 523 F.3d 293, 298 (4th Cir. 2008). Similarly, whether
the district court order requiring ISN to pay Saakvitne was one
for injunctive or monetary relief is also subject to de novo
review.
Because ISN has already paid Saakvitne and ISN did not
appeal the district court’s denial of its request for a stay
under Fed. R. App. P. 8(a)(2), ISN’s appeal of the earlier
December 2009 order is now moot. See, e.g., Koger v. United
States, 755 F.2d 1094, 1096-98 (4th Cir. 1985) (holding that an
appeal by taxpayers in a lawsuit seeking to enjoin the
2
Despite arguments by ISN to the contrary, as a defined
contribution plan, Malkani, 452 F.3d at 291, the pension plan is
not covered by § 1341. See 29 U.S.C. § 1321(b)(1) (individual
account plans are not covered); 29 U.S.C. § 1002(34) (individual
account plan is a defined contribution). Nonetheless, even if
§ 1341 were applicable here, so long as the proper procedures
are followed, that section also permits a fiduciary to terminate
a plan. 29 U.S.C. § 1341(b).
14
government from collecting income tax deficiencies was mooted
because the taxpayers had paid the deficiencies pending the
appeal).
Furthermore, the posting of a supersedeas bond may only
stay a monetary judgment pending an appeal, Fed. R. Civ. P.
62(d), and does not permit a party to stay injunctive relief,
see Illinois Bell Tel. Co. v. WorldCom. Techs., Inc., 157 F.3d
500, 502 (7th Cir. 1998) (where a court issues “an order to do,
rather than an order to pay, . . . the rationale as well as the
text of Rule 62(d) is inapplicable” (citation and internal
quotations omitted)). And, as the district court correctly
recognized:
The bond posted by [ISN] may protect Saakvitne
from non-payment; but it does not relieve the current
fiduciary, Clark, who may be removed as trustee [only]
following the appointment of its replacement . . . .
[T]he bond does not serve [Federal Rule of Civil
Procedure] 62(a)(1) by relieving Clark of its duties
during the pendency of the appeal.
The Court’s order for prepayment of Saakvitne is
. . . an “affirmative injunction” because it is
directed to [ISN], is enforceable by contempt, and was
designed to protect the beneficiaries of the Plan for
the next year. Because the order to prepay Saakvitne
was injunctive relief, it was not stayed by the filing
of a supersedeas bond . . . .
15
S.A. 186-187. The court properly exercised its equitable powers
to force ISN to pay Saakvitne. Thus, despite ISN’s payment of a
bond, the court committed no error in denying the stay. 3
III.
We hold that -- by failing to object to the recommendations
of the magistrate judge regarding payment of fees to Clark
within ten days as then required by 28 U.S.C. § 636(b) -- ISN
waived its right to further review of the recommendations.
Similarly, under these circumstances, the district court was
within its equitable powers to authorize the replacement
fiduciary, Saakvitne, to terminate the pension plan. Finally,
the motion by ISN seeking to stay the payment of fees to
Saakvitne is moot. Accordingly, the decisions of the district
court are
AFFIRMED.
3
Notably, Saakvitne is also not a party in this appeal, nor
was the initial enforcement action brought for his monetary
benefit. Under these circumstances, it is patently absurd of
ISN to argue that the court’s order was anything other than an
exercise of its equitable powers.
16