The opinion of the court was delivered by: DAVID N. HURD
This action was commenced on October 4, 1988, by plaintiffs alleging violations of the Employee Retirement Income Security Act ("ERISA") during the period of October 1981, through March 1986. The court, after conducting a four day bench trial and upon receipt of post trial briefs, concluded that defendants Rocco F. DePerno ("Trustee DePerno") and Rocco A. DePerno ("Attorney DePerno") had violated several sections of ERISA. New York State Teamsters Council Health & Hosp. Fund v. Estate of DePerno, 816 F. Supp. 138 (N.D.N.Y. 1993) [hereinafter Teamsters I]. The court also held that plaintiffs failed to prove any damages resulting from defendants' breach of their fiduciary duties, and thus awarded One Dollar in nominal damages. Id. at 150-51.
On appeal, the Second Circuit affirmed as to the liability of defendants, but reversed on the damage award. New York State Teamsters Council Health & Hosp. Fund v. Estate of DePerno, 18 F.3d 179 (2d Cir. 1994) [hereinafter Teamsters II]. The Circuit held, for the first time, that the principles of trust and fiduciary law should be applied in the ERISA context. Id. at 182. Once the Fund trustees establish a prima facie case of an ERISA violation, it is the party to the self-dealing who bears the burden of proving that their breach did not cause damage to the ERISA fund. Id. at 183. In the instant case then, the issue on remand is whether or not under all the circumstances, the defendants have carried their burden of proving "that the services rendered by the two additional maintenance workers were reasonably necessary. " Id. (emphasis added).
At all relevant times, Carmen DePerno, who was Trustee DePerno's brother and is Attorney DePerno's uncle, was the head of the security and maintenance department at the Health and Hospital Fund's ("Fund") administrative offices. Prior to July 1981, there were two full-time maintenance workers for the care of the building. In July 1981, one of these men, Joseph Pendolf, was fired by Trustee DePerno. There is no evidence that this firing was done for the purpose of opening a temporary position for a cook from Attorney DePerno's Sea Shell Inn ("Sea Shell").
In any event, after the firing, Carmen DePerno was left with only one full-time experienced maintenance worker. He complained bitterly to Trustee DePerno about being unable to do the job with only one man, and he even threatened to quit. Therefore, in September 1981, the Fund hired one Sea Shell cook, Charles DeCosty, and in December 1991, a second cook, Joseph Longo, as temporary maintenance workers. These two temporary maintenance workers left the employment of the Fund in March 1982, and returned as cooks at the Sea Shell.
Thereafter, in April 1982, a second full-time maintenance worker was hired by the Fund. Replacing an experienced full-time maintenance worker over the winter of 1981/82 with two temporary inexperienced maintenance workers was reasonably necessary. Further, the value of services rendered by these men were at least equal to the sums paid by the Fund. Therefore, the defendants have met their burden of proving that the employment of these two cooks and the corresponding expense for that first winter was reasonably necessary under all the circumstances.
The Fund had always operated with two full-time maintenance workers. The two full-time maintenance workers, Larry Pendolf and James Brockway, have continued to work for the Fund from that time until the present.
In the years 1982-1985, two cooks from the Sea Shell continued to be rehired as maintenance workers at the Fund's administrative office building each fall upon the seasonal closing of the Sea Shell. Charles DeCosty and Joseph Longo returned for the 1982/83 and 1983/84 winter months. William Dyer and John VandenBosch were hired for the 1984/85 winter months, and returned for the 1985/86 winter months. In the Fall of 1986, Sgaglione, who had objected to hiring additional maintenance workers at the beginning, decided, most likely because of Trustee DePerno's declining influence at the Fund, that it was unnecessary to hire any additional maintenance workers for the upcoming winter months. Since that time, no additional maintenance workers have been hired for the winter months.
This court held in Teamsters I that Trustee DePerno did not act "solely in the interest of the participants and beneficiaries of the Fund" when he hired the Sea Shell cooks, thereby breaching his fiduciary duties to the Fund in violation of 29 U.S.C. § 1104(a). Trustee DePerno furnished a service and caused Fund assets to be transferred to parties in interest in violation of 29 U.S.C. § 1106 (a)(1)(C & D) when he hired the Sea Shell cooks. Trustee DePerno further violated 29 U.S.C. § 1106(b) because the hiring of the Sea Shell cooks caused a conflict of interest between the Fund and his fiduciary duty. Teamsters I, 816 F. Supp. at 144-47. Attorney DePerno was found to have violated ERISA because he knowingly participated in his father's fiduciary breach. Id. at 148-49.
Faced with the question of damages, this court further clarified its reasons for finding ERISA violations. The violations were "not because [Trustee DePerno] knowingly hired maintenance workers who did not provide services and benefits to the Fund," Id, at 151 n. 6, but "because of who he hired (i.e., employees of his son - parties in interest), and why he hired them (because they were referred to Carmen DePerno by his son)." Id. at 151 (emphasis in original). Liability under ERISA attached then, not because Trustee DePerno hired unnecessary maintenance workers, but because he hired employees of his son that were referred to him by his brother. "It would not have been improper if [Trustee DePerno] had hired others to do the same tasks." Id.
In deciding the amount of compensatory damages to be awarded, if any, this court held that "the work of the seasonal maintenance workers (i.e., the Sea Shell cooks) was reasonable, beneficial, helpful, and useful to the Fund; and they were hired for reasonable compensation." Id. at 151. In each year in question, defendants proved that the Sea Shell cooks were paid only for the days that each worked, i.e., these were not no-show jobs. The Sea Shell cooks performed routine maintenance duties such as "vacuuming floors and carpets, mopping floors, sweeping floors, stripping and rewaxing floors, cleaning mirrors and glass, cleaning bathrooms, salting and shoveling steps and sidewalks, rearranging storage rooms . . . and other general duties." Id. at 150. Since there was no proof that the Sea Shell cooks did not perform maintenance duties, their employment did not create any tangible loss to the Fund.
The Circuit's remand requires this court to determine whether the employment of the two additional maintenance workers, and the corresponding expense was "fair and reasonable under all of the circumstances." Teamsters II, 18 F.3d at 183. In order to meet their burden of proving that the employment of the cooks was fair and reasonable, defendants must prove that the "services rendered by the two additional maintenance workers were reasonably necessary." Id. Unlike the liability stage, which focused on who and why parties in interest were hired, the focus at the damages stage is whether it was reasonably necessary to hire additional maintenance workers, and whether they actually rendered services to the Fund.
At this point, a matter of clarification is in order. In Teamsters I, in deciding whether Trustee DePerno was entitled to take advantage of the exemption contained in 29 U.S.C. § 1108(b), this court held that Trustee DePerno had "not proven that additional maintenance workers were needed during the winter months." Teamsters I, 816 F. Supp. at 146. That is, defendants did not meet their burden of Proving that hiring additional maintenance workers was necessary during the winter months. In order to avoid ERISA liability, a breaching party must prove that their actions with a party in interest was "for services necessary for the operation . . . of the plan," 29 U.S.C. § 1108(b), if no more than reasonable compensation was paid. This implies that to avoid liability, in each year they rehired the cooks, the defendants must justify that it was necessary for the operation of the plan that these cooks be employed as maintenance workers. As stated in Teamsters I, there was no evidence that the hiring of these particular cooks was necessary during the winter months because they possessed some unique skill or special qualities "that made them indispensable for the job." 816 F. Supp. at 146.
On the other hand, in order to prove that the Fund suffered no damages because of the breach, the party to the self-dealing must prove that the services rendered by the additional maintenance workers were reasonably necessary. This means that in order to prove that the additional maintenance workers were reasonably necessary, the defendants must show that there was a legitimate reason to rehire the cooks in each year, and that they actually rendered services to the Fund. It is only because the court previously found that Trustee DePerno violated his fiduciary duty to the Fund when he hired parties in interest, that the court must decide whether ...