Mandatory Class Action to Resolve the Problem of the Mass Tort Case, 40 Emory L.J. 665, 714-16 (1991).
In a mandatory class action settlement efforts may be enhanced because it allows the parties to achieve a comprehensive global settlement of the litigation. The relative disadvantages of the procedure, such as the suppression of litigant autonomy, and the fact that so-called "marginal" plaintiffs participate in the recovery, are not relevant to the instant case where there are no complex problems of proof, and recovery will be limited to monies owed to health care providers, participants and beneficiaries pursuant to the terns of the plan.
There are, however, compelling reasons for the court to avoid even this more desirable class action format. A mandatory national class action would trigger the expensive procedural safeguards that Rule 23 demands. See generally 7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure §§ 1785-1787 (2d ed. 1986). Class certification hearings and notice requirements are time-consuming and involve considerable expense. In the event a settlement is ultimately reached, fairness hearings would cause additional delay. Should the class action be appealed, further delays and additional transaction costs can be anticipated. Legal fees will mount. See generally 1 Herbert B. Newberg, Class Actions, § 5.05 et seq. (2d ed. 1985) (discussing delays).
3. Use of Subclasses
Even in the absence of a formal class action, the use of subclasses to classify claims or interests is desirable. See 11 U.S.C. § 1122. "If a . . . settlement is to be permitted in the insolvency context, in which adjustment of creditors' rights would normally be accomplished pursuant to the Bankruptcy Code, there must be careful observance of subclass requirements." In re Joint E. & S. Dists. Asbestos Litig., 982 F.2d 721, 744 (2d Cir. 1992). Subclassing ensures that like claims will be treated similarly and that transactional costs will be minimized. It comports with the overall policy of the ERISA -- to protect participants' expected payments. See Outzen v. Fed. Deposit Ins. Corp. ex rel. State Examiner of Banks of the State of Wyoming, 948 F.2d 1184, 1188 (10th Cir. 1991).
E. Quasi Bankruptcy as a Federal Common Law Remedy
"It is well-settled that ERISA grants the court wide discretion in fashioning equitable relief to protect the rights of pension fund beneficiaries." Katsaros v. Cody, 744 F.2d 270, 281 (2d Cir.), cert. denied sub nom. Cody v. Donovan, 469 U.S. 1072, 83 L. Ed. 2d 506, 105 S. Ct. 565 (1984). It follows logically that the court should be able to afford similar protection to those who are in danger of losing valuable health care protection.
ERISA has its roots in the common law of trusts. See Mertens et al. v. Hewitt Assoc., 113 S. Ct. 2063, 124 L. Ed. 2d 161 (1993). The Supreme Court has authorized courts "to develop a federal law of rights and obligations under ERISA-obligated plans." Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989) (citation omitted). In developing federal common law under ERISA, courts "are to be guided by the principles of traditional trust law." Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12, 16 (2d Cir. 1991), cert. denied sub nom. Fairway Spring Co. v. Sovran Bank/Maryland, 120 L. Ed. 2d 887, 112 S. Ct. 3014 (1992). See Specialty Cabinets & Fixtures, Inc. v. American Equitable Life Insur. Co., 140 F.R.D. 474, 478 (S.D. Ga. 1991) (approving class certification in suit to recover benefits from insolvent ERISA welfare benefit plan).
Federal courts have historically asserted jurisdiction over trusts for the protection of the interests of their beneficiaries. See generally 3 Austin Wakeman Scott, The Law of Trusts, § 199.4 (3d ed. 1967). See, e.g., involving employee benefit funds, Brotherhood of Locomotive Firemen & Engineermen et al. v. Pinkston, 293 U.S. 96, 99, 79 L. Ed. 219, 55 S. Ct. 1 (1934) (suit in equity brought by beneficiaries for an accounting, determination of priorities and proper liquidation of the funds); Hood v. Journeymen Barbers, et al., 454 F.2d 1347, 1349 (7th Cir. 1972) (assets of "functionally insolvent" pension fund properly frozen pending hearing as to whether receiver should be appointed); Specialty Cabinets & Fixtures v. American Equitable Life Insur. Co., 140 F.R.D. 474, 475 (S.D. Ga. 1991) (noting that insurance company covering ERISA employee benefit plan had been placed in receivership).
Federal courts have the power to develop federal common law-equity remedies where "the particular facts of a case . . . fall outside the literal coverage of a federal statute, but the use of common law will fill gaps in the congressional statutory patterns or otherwise make that pattern effective." Quasar Co. v. Atchison, Topeka & Santa Fe Ry. Co., 632 F. Supp. 1106, 1112 (N.D. Ill. 1986). In fashioning a federal common law remedy, the court may look to a wide variety of sources. See, e.g., Chuidian v. Philippine Nat'l. Bank, 976 F.2d 561, 564 (9th Cir. 1992) (federal common law rules for choice of law follow the approach of the Restatement of Conflicts of Laws); First Amer. Title Ins. Co. v. United States, 848 F.2d 969, 971 (9th Cir. 1988) (adopting state law to create uniform federal common law for determining effect of federal tax lien on property interest). See generally Martha A. Field, Sources of Law: The Scope of Federal Common Law, 99 Harv. L. Rev. 883, 893 ("Either constitutional or statutory sources can provide the basis for the power for the federal court to make common law.")
Federal statutes themselves are often a source for federal common law. Quasar Co. v. Atchison, Topeka & Santa Fe Ry. Co., 632 F. Supp. 1106, 1112 (1986). It is appropriate for a court to look to the legislative policy underlying the statute and fashion a remedy to effectuate that policy. Id. See, e.g., Society of Professional Eng'rs v. United States, 435 U.S. 679, 688 (1979) (federal courts may develop a common law of antitrust "giving shape" to the "broad mandate" of the Sherman Act); Textile Workers Union of Amer. v. Lincoln Mills of Alabama, 353 U.S. 448, 456, 1 L. Ed. 2d 972, 77 S. Ct. 912 (1957) ((Taft-Hartley Act is source of federal common law governing validity of labor arbitration awards); Gaff v. Federal Deposit Insur. Corp., 919 F.2d 384, 395 (6th Cir. 1990) (looking to FIRREA and the Bankruptcy Code to formulate federal common law principle governing priority of stockholders' claims against insolvent bank after FDIC takeover); United States of America v. Burnette-Carter Co., 575 F.2d 587, 590 (5th Cir.), cert. denied, 439 U.S. 996, 58 L. Ed. 2d 669, 99 S. Ct. 596 (1978) (Uniform Commercial Code and state law precedents are source for federal common law governing FHA secured transactions).
Even if the trust is not eligible for bankruptcy protection, "the [Bankruptcy] Code is instructive here." In re Consolidated Welfare Fund "ERISA" Litig., 798 F. Supp. 125, 128 n.4 (S.D.N.Y. 1992) (ordering stay, analogous to automatic stay pursuant to 11 U.S.C. § 362, of all suits against insolvent welfare fund). See also, utilizing "quasi bankruptcy" approach when case does not fall neatly within federal bankruptcy law, Lee v. Koppel Indust. Car & Equip. Co., 295 F. 23, 25 (1st Cir.), cert. denied, 265 U.S. 584 (1924).
A "quasi bankruptcy" approach may be desirable for several reasons. A race for the debtors' assets, where some creditors are fully satisfied and others receive nothing can be avoided. Rather than acting on their own, creditors' actions can be stayed so they will receive their pro rata share. Like a bankruptcy proceeding, quasi bankruptcy will enable the court to maximize the assets available for the satisfaction of creditor claims and distribute those assets equitably among those creditors. See Barry L. Zaretsky, Insurance Proceeds in Bankruptcy, 55 Brooklyn L. Rev. 373, 377-78 (1989). Since the court has the power to appoint a receiver, it appears to have the power, a fortiori, to utilize a less stringent method to allow the parties to resolve the matter themselves.
In adopting an equitable bankruptcy remedy a court is "not creating a right from whole cloth. [It is] simply following the legislative directive to fashion, here congress has not spoken, a federal common law for ERISA by incorporating what has long been embedded in traditional trust law and equity jurisprudence." Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12, 16 (2d Cir. 1991), cert. denied sub nom. Fairway Spring Co. v. Sovran Bank/Maryland, 120 L. Ed. 2d 887, 112 S. Ct. 3014 (1992). The large number of people involved and the public interest at stake would support such action.
F. Negotiated Settlement
The court can also encourage the parties to achieve a negotiated settlement. Negotiated settlements may be accomplished through the efforts of a court appointed mediator, a settlement judge or a Special Master. See generally Manual for Complex Litigation § 23 (2d ed. 1985). The benefits of this procedure are obvious. Delays and costs are minimized, direct and early communication among the parties is facilitated and litigant satisfaction is enhanced. See Dispute Resolution Procedures in the Eastern District of New York (E.D.N.Y. 1992).
III. APPLICATION OF LAW TO FACTS
A stay of all federal and state pending cases against the Fund is necessary in aid of the court's jurisdiction. The court's authority to stay all cases is enhanced by the involvement of the Department of Labor in the case. Only by staying all other proceedings can the court achieve the federal policy of maximizing the assets of the Fund for the benefit of all creditors and preventing recovery from its assets in an inequitable manner. A "race to the courthouse" would result in attorneys' fees and transaction costs depleting the Fund's remaining assets. See In re Consolidated Welfare Fund "ERISA" Litig., 798 F. Supp. 125, 128 (S.D.N.Y. 1992).
Even if in the absence of a stay, there is some question as to whether the assets of this trust would be reachable by judgment creditors. Under New York law, unless specifically designated otherwise, all trusts are afforded spendthrift protection. N.Y.EPTL 7-1.5. Creditors are prevented from reaching the interest of a trust, unless the trust is created by the judgment debtor for his own use. N.Y.EPTL 7-3.1. This rule is most commonly applied to inter vivos and testamentary trusts. Certain funds deposited in ERISA trusts may be reached by creditors, absent application of the exception to the spendthrift rule. See Planned Consumer Marketing, Inc. v. Coats & Clark, Inc., 71 N.Y.2d 442, 527 N.Y.S.2d 185, 191-92, 522 N.E.2d 30 (Ct. App. 1988) (ERISA trust created to defraud creditors subject to exception to spendthrift protection but ERISA trust exempt from attachment by creditors where employer attempts to reach assets of employee in satisfaction of a judgment); National Bank of North Amer. v. Intern'l. Brotherhood of Elect. Workers Local #3, Pension and Vacation Funds, 69 A.D.2d 679, 419 N.Y.S.2d 127, 130 (2d Dep't), appeal dismissed, 48 N.Y.2d 750, 422 N.Y.S.2d 666, 397 N.E.2d 1333 (Ct. App. 1979) (ERISA plans not exempt from state statute governing enforcement of money judgments). Liquidating trusts, such as the Manville Personal Injury Settlement Trust, and business trusts evidenced by certificates of beneficial interest, are not "trusts" for the purposes of the Fiduciary Powers Act as used in the New York Estates, Powers and Trusts Laws. N.Y.EPTL 11-1.1(a).
It is unclear whether the Fund would be eligible for bankruptcy protection as a business trust under a federal common law analysis. The trust in issue has many similarities to the benefit plan approved as a business trust in In re Affiliated Food Stores, Inc., Group Benefit Trust, 134 Bankr. 215 (Bankr. N.D. Tex. 1991). Like the trust in Affiliated, under the terms of the Amended Declaration of Trust, the Fund's stated purpose is "to pay or provide for the payment of welfare benefits specified in the Plan to employees . . . to establish and accumulate such reserve funds [as deemed necessary] . . . to pay the reasonable and necessary expenses of administering the Plan and the Trust Fund." (Art. II, § 2.1(b)). Its business activity, too, involves collecting and receiving employer contributions and paying claims of beneficiaries. Although the Fund does not currently utilize the services of a third party administrator to secure a financial discount for its beneficiaries, it did take advantage of such reduced rate medical care in the recent past. It is unclear whether, in fact, the Fund's approach to health care benefits resulted in the kind of tangible financial benefit and control of costs that qualified the Affiliated plan as a business trust, but arguably many of those who agreed to setting up the trust hoped that this would be the result. Given the uncertainty of the Fund's eligibility for bankruptcy relief and the expense and delay associated with a formal bankruptcy proceeding, the parties should probably look to other options available to meet their needs.
In deciding upon a procedure to resolve the Fund's problems, the court's chief concern must be which procedure will best serve the interests of debtors and creditors and will afford the protections of bankruptcy, receivership and the class action. One practical solution for the reasonable people involved here is a quasi bankruptcy.
The speed and flexibility of a quasi bankruptcy, with some of the attributes of statutory bankruptcy, receivership and class action, may be preferable in the instant case where all parties appear to be cooperating to obtain a quick and inexpensive resolution of the case.
By staying all federal and state actions and concentrating the resolution of the matter in the hands of the Special Master together with attorneys representing the various subclasses, the parties may achieve many of the benefits of a mandatory class action. Costs can be greatly reduced. Legal fees can be held to a minimum. All creditors can be treated equitably. Settlement can be achieved quickly.
By appointing a Special Master to work with the various groups of creditors to enhance the Fund's assets and to arrange for their equitable dissolution, the beneficiaries will have a voice in the process, ensuring that the Fund is properly handled. Much like the trustee in bankruptcy, the Special Master can help serve as the representative of all creditors. Much like the independent receiver, the Special Master can ensure that the current management team continues to protect and preserve the Fund's assets for the benefit of creditors. Unlike receivership, however, the Fund will not lose control of its assets.
Given the vast experience and the extraordinary talents of Special Master Mollen, the court has confidence that he will able to negotiate a settlement among all the parties. This is clearly the most desirable option for all concerned.
All action against the Fund or its participants or beneficiaries is stayed. Special Master Milton Mollen will assist the classes of creditors in enhancing the Fund's assets and providing for their equitable distribution. As needed, the court, on application, will take appropriate action to assist the parties in the prompt resolution of the matter.
Jack B. Weinstein
Senior United States District Judge
Dated: Brooklyn, New York
June 30, 1993
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