Carson FRIEND; Collene Friend; Brad Friend; Trav Friend; Carson Lighting, Inc.; Carson Lighting, Defined Benefit Pension Plan, Plaintiffs-Appellants, v. SANWA BANK CALIFORNIA, Defendant-Appellee.
No. 92-55641
United States Court of Appeals, Ninth Circuit
Decided Sept. 13, 1994.
Argued and Submitted March 9, 1994.
35 F.3d 466
For us to undertake that lengthy and scholarly task here is unnecessary. It has been done in the well-reasoned opinion of a respected bankruptcy judge, concurred in by six other veteran and respected bankruptcy judges. See In re Norman, 157 B.R. 460 (Bankr.C.D.Cal.1993). The opinion in Norman convincingly documents the misconstruction of the California statutes by the district court in the instant case.
C. THE DISTRICT COURT‘S RELIANCE ON SPENCER v. LOWERY.
The district court‘s opinion places great emphasis on a 1991 decision by the California Court of Appeals, Spencer v. Lowery, 235 Cal.App.3d 1636, 1 Cal.Rptr.2d 795 (1991). The court below used the Spencer case to buttress its conclusion, but gave it even greater stature by observing that Spencer “reached the same conclusions on similar facts” and represented “controlling authority” which mandated the result it reached. We disagree on both counts. The facts of Spencer are quite different and the case is in no way controlling. Therefore, the rule that federal courts generally are required to follow state appellate holdings on matters of state law does not apply to the opinion in Spencer.
In Spencer, the beneficiary under a deed of trust foreclosed on a home when the Lowerys, the homeowners, defaulted on the underlying note. The plaintiff, Spencer, held a money judgment against the Lowerys arising from a totally different dispute. The foreclosure sale yielded $7,000.00 in excess of the unpaid portion of the trust deed note, and Spencer, the judgment creditor, sought to reach the excess under a writ of execution for his money judgment. The Lowerys claimed that they were entitled to the $7,000 by virtue of the homestead exemption provided to judgment debtors in
The state court of appeals held that a homestead exemption may not be claimed by homeowners whose home is sold at a foreclosure sale. Spencer, 235 Cal.App.3d at 1638. The judgment creditor was therefore allowed to execute on the $7,000.00. Spencer did not involve a bankruptcy debtor or the availability of the homestead exemption in bankruptcy. Thus, Spencer is in no way controlling in the instant case and it was decided on totally different facts.
In the Spencer opinion, the California court criticized a 1988 Bankruptcy Appellate Panel (“BAP“) decision in In re Cole, 93 B.R. 707 (9th Cir. BAP 1988). This criticism seems to have impressed the district court and it read the criticism as rejecting outright the allowance of any homestead exemption to any bankruptcy debtor. In Cole, the BAP held that the California homestead exemption is available to Chapter 11 bankruptcy debtors. The California court called that holding “flawed“. We give no effect to the California court‘s criticism of Cole because it was pure dicta, gratuitous and misguided dicta, with which we disagree. Federal courts are not bound by dicta of state appellate courts. See Hillery v. Rushen, 720 F.2d 1132, 1138 n. 5 (9th Cir.1983). We thus regard both the holding of Spencer and its criticism of Cole as not even slightly relevant or persuasive on the question before us.
CONCLUSION
For the foregoing reasons, the decision below is reversed.
REVERSED.
Aaron P. Morris, Good, Wildman, Hegness & Walley, Newport Beach, CA, for plaintiffs-appellants.
Angel Gomez, III, and Anthony J. Oncidi, Hill, Wynne, Troop & Meisinger, Los Angeles, CA, for defendant-appellee.
Before: PREGERSON, O‘SCANNLAIN, and FERNANDEZ, Circuit Judges.
O‘SCANNLAIN, Circuit Judge:
Carson Friend was the sole trustee of the Carson Lighting, Inc. Profit Sharing and Pension Plans (“Plans“) until 1990. He was the sole beneficiary of the profit sharing provisions. He and his family were the beneficiaries of the pension provisions.
For at least ten years, until 1991, the Plans invested $796,000 in unsecured promissory notes issued by Supreme Finance, Inc. (“Supreme“), a corporation that financed the purchase of used cars. During this time, Sanwa Bank California (“Sanwa“) extended a secured line of credit to Supreme worth $3 million. All other debts owed by Supreme were subordinated to Sanwa‘s line of credit. In 1987, Supreme began to experience financial problems, and in 1990 it agreed with Sanwa to deposit all its receivables with Sanwa. Sanwa would keep $8,000 in principal plus interest each week and return the excess to Supreme.
In 1990, Friend asked his banker at Sanwa for help administering the Plans and in due course a representative of Sanwa‘s trust department contacted him. Friend told the trust representative that the Plans were invested in Supreme. According to Friend, Sanwa officials discussed internally the potential for a conflict of interest but did not mention their concerns to Friend. In July 1990, Sanwa became the trustee of the Plans.
In December 1990, Sanwa informed Supreme that it would not extend its line of credit after February 1991. Also in December, Friend‘s attorney advised Sanwa of its conflict of interest, and Sanwa immediately gave notice of resignation of trustee, effective in April 1991. On June 19, 1991, Supreme filed for bankruptcy. It had only enough assets to cover Sanwa‘s loan.
The appellants sued Sanwa in state court for breach of fiduciary duty under state law and the Employee Retirement Income Security Act (“ERISA“). Sanwa removed the case to federal court, and the state claims were severed. Both parties moved for summary judgment. The district court granted summary judgment to Sanwa, concluding that neither Sanwa‘s acceptance of the trusteeship nor its refusal to extend Supreme‘s credit violated ERISA, and that in any case, there was no harm to the Plans because Sanwa would have refused the credit extension even if it had not been the trustee.
II
Friend first argues that it was a per se violation of ERISA for Sanwa to agree to become the trustee of the Plans because the statute prohibits trustees to have positions of dual loyalties, except for express exceptions. He relies on
We can find no cases specifically addressing the question of whether the act of accepting a trusteeship, which places a trustee in a position of conflicting loyalties, is a per se violation of ERISA.1 The cases Friend cites to support his position are inapposite because they discuss whether transactions the trustee conducted after it became a trustee violated ERISA. See Donovan v. Mazzola, 716 F.2d 1226 (9th Cir.1983), cert. denied, 464 U.S. 1040, 104 S.Ct. 704, 79 L.Ed.2d 169 (1984); Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 74 L.Ed.2d 631 (1982). Further, nowhere in the
A bank does not commit a per se violation of
Friend also argues that even if there is no per se ERISA rule against a trustee with dual loyalties, in this particular case the district court erred in granting summary judgment because there are disputed issues of material fact regarding his consent to Sanwa‘s conflicting interests as trustee.
The district court concluded that “[a]ll facts upon which any potential conflict rested were known to Carson Friend at the time Sanwa became trustee.” However, the record illustrates that the facts surrounding Friend‘s understanding of Sanwa‘s dual loyalties are disputed. In a declaration before the district court, Friend stated that Sanwa Bank never informed him of the potential conflict and that “the thought of a conflict of interest never entered [his] mind.” Sanwa admits that the bank officials handling the trusteeship knew of the potential conflict and did not release the information to Friend.
Although it is disputed whether or not Friend was fully aware of the potential conflict, this fact is not material to the district court‘s grant of summary judgment. Even if Sanwa had breached
Since ERISA does not expressly prohibit a trustee from having dual loyalties and since there is no showing that harm resulted from Sanwa‘s acceptance of the trusteeship, the district court did not err in granting summary judgment to Sanwa.
III
Friend argues that Sanwa‘s decision not to renew Supreme‘s line of credit violated ERISA‘s provision against a trustee “deal[ing] with the assets of the plan in his own interest or for his own account.”
In Bierwirth, the trustees of the company‘s pension plan were also officers of the corporation. 680 F.2d at 265. The court held that they had violated section 1104(a)(1) by using plan assets to buy company stock in order to defeat a takeover bid. Id. at 276. In Mazzola, two different plans shared the same trustees. 716 F.2d at 1228. The court held that the trustees had violated section 1106(b)(2) by using the assets of one plan to
These decisions are inapposite. As the district court concluded, Mazzola and Bierwirth “involve fiduciaries actively misusing their trust powers to the detriment of the beneficiaries.” In both cases the defendants, acting in their capacities as trustees, spent plan money to benefit themselves or another trust. Here, Sanwa did not act as a trustee and did not spend trust money when it refused to renew Supreme‘s loan. Rather, it acted as Supreme‘s creditor. Sanwa did not “deal with the assets of the plan,”
The appellees and the district court cite Cunha v. Ward Foods, Inc., 804 F.2d 1418, 1432-33 (9th Cir.1986) and Amato v. Western Union Int‘l, Inc., 773 F.2d 1402, 1417 (2d Cir.1985), cert. dismissed, 474 U.S. 1113, 106 S.Ct. 1167, 89 L.Ed.2d 288 (1986), to support the argument that a trustee serving in both fiduciary and corporate capacities may make decisions to benefit its own interests without violating its fiduciary duty to the plan, when it acts in its corporate capacity. According to this reasoning, Sanwa was acting as a bank in dealing with Supreme, not as a trustee to the Plans. Under such theory, its refusal to renew the loan, although a decision benefiting Sanwa‘s interests, did not violate Sanwa‘s fiduciary duty to the Plans.
Friend maintains that Cunha, Amato, and other employer cases are not applicable here because ERISA makes a conflict of interest exception for employers serving as trustees,
Finally, Friend argues that there is an issue of fact concerning whether Sanwa Bank could have “negotiated with itself,” as trustee and creditor, to arrange a plan that would have protected both Sanwa‘s and the Plans’ beneficiaries’ interests, rather than have refused to renew the loan. Friend maintains that Sanwa did not do enough as trustee to protect the Plans.
While Sanwa as creditor may have had other options in handling the Supreme loan, Friend has not presented a genuine issue of material fact that Sanwa actually would have pursued another option. As discussed above, there is no evidence, or even allegations, suggesting that Sanwa acting as creditor would not have called in the loan, even if Sanwa as the trustee, or another trustee, had negotiated with it. Friend simply has not alleged facts suggesting that Sanwa‘s failure to negotiate with itself caused the Plans any losses. See
Since Sanwa did not deal with the Plans’ assets in its own interests, it did not violate section 1106(b) when it refused to renew Supreme‘s loan. Summary judgment was appropriate.
AFFIRMED.
PREGERSON, Circuit Judge, concurring:
I agree with the majority opinion that there has been no violation of the fiduciary duties under ERISA. Nonetheless, I write separately because I am troubled by Sanwa‘s dual status as trustee and creditor (with priority over the pension and profit sharing plans). The problem is that the debt owed by Supreme to Sanwa has priority over the plans’ claim; and there are only enough assets in Supreme to pay Sanwa. This dual loyalties problem will arise whenever a secured creditor becomes trustee to a plan that
I would prefer to resolve this case by focusing on the ERISA requirements for establishing an employee benefit plan.1 An employee benefit plan must be established by a written instrument that provides for one or more “named fiduciaries.”
In this case, Friend was trustee of the plans from their creation in 1977, and he apparently “appointed” Sanwa as trustee in July 1990. According to his declaration, Friend knew that, as compared to the plans, Sanwa‘s claim against Supreme‘s assets was superior to the plans’ claim, but he did not understand that Sanwa‘s creditor status created a conflict of interest. (Friend Decl. ¶¶ 20, 24, 46).
As a preliminary matter in every case, we should focus on whether the terms of the trust agreement allow the original trustee to appoint a particular entity as successor trustee. In this case, the record reveals that Sanwa‘s appointment as successor trustee might have constituted a breach of the trust agreement. The trust agreement provides that the employer (Carson Lighting) shall appoint a trustee and that the Board shall designate any successor trustee upon death, removal or resignation of a trustee. (Retirement Trust, Art. II, § 2.1; Art. VI, § 6.2). Nowhere do the documents grant Friend, as named fiduciary and trustee, authority to appoint a new trustee. If Carson Lighting agreed to Sanwa‘s appointment as successor trustee, there would be no breach, and there would be no conflict of interest problem because the trustor may appoint a trustee with divided loyalties.
The conflict of interest problem will arise when a named fiduciary (e.g., a trustee) appoints a successor trustee, and the trust agreement does not specify any guidelines for the selection procedure. In such cases, where
A disclosure requirement makes sense especially because the original trustee would remain accountable as a fiduciary for having selected a successor trustee. The original trustee would be liable to the beneficiaries and the plan for giving consent, if consent amounted to a violation of the
Notes
The district court also cited Brock v. Citizen Bank of Clovis, 841 F.2d 344 (10th Cir.), cert. denied, 488 U.S. 829, 109 S.Ct. 82, 102 L.Ed.2d 59 (1988). However, that case addressed whether a particular transaction conducted after accepting a trusteeship violated the trustee‘s fiduciary duties. The profit sharing and defined benefit pension plans in this case are employee benefit plans. An employee benefit plan is “any plan, fund, or program ... established or maintained by an employer ... to the extent that [it]—(i) provides retirement income to employees, or (ii) results in a deferral of income by employees....”