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Employee Benefits Security Administration

Advisory Opinion

September 22, 1999

Theodore M. Lieverman, Esq.
Tomar, Simonoff, Adourian, O’Brien,
Kaplan, Jacoby & Graziano
Tomar Plaza
20 Brace Road
Cherry Hill, New Jersey 08034-0379

1999-12A
ERISA Sec. 404(a)

Dear Mr. Lieverman:

This is in response to your request on behalf of the Sheet Metal Workers International Association Local 25 of New Jersey Welfare Fund (Local 25 Welfare Fund)(1) and the Sheet Metal Workers International Association Local 27 of New Jersey Welfare Fund (Local 27 Welfare Fund), jointly referred to herein as the Welfare Funds. Specifically, you request an advisory opinion as to whether the Sheet Metal Workers International Association National Pension Fund (National Pension Fund) may honor a side bar agreement with the Welfare Funds to pay the Welfare Funds certain monies received in settlement of litigation, with respect to which the Welfare Funds and the National Pension Fund were co-plaintiffs, without contravening Title I of the Employee Retirement Income Security Act, as amended (ERISA).

The information provided indicates that, following the dismantling of the Sheet Metal Workers International Association Local 22 by the Sheet Metal Workers International Association, a dispute arose over the right to control the Sheet Metal Workers International Association Local 22 of New Jersey Welfare Fund (Local 22 Welfare Fund) and the Sheet Metal Workers International Association Local 22 of New Jersey Pension Fund (Local 22 Pension Fund), jointly referred to herein as the Local 22 Funds. This dispute resulted in litigation in which the Welfare Funds and the National Pension Fund, as co-plaintiffs, sued the Local 22 Funds.(2) The court of appeals described the dispute as follows:

This case arises from a dispute between two labor unions over the right to control a welfare fund and a pension fund. One union, an independent local [Local 22] seceded from the other, an international union, and asserted control over the local’s pension and welfare funds, which had previously been controlled by the international. After the secession, a subgroup within the independent returned to membership in locals affiliated with the international . . . . The plaintiffs sought to have control over the independent’s pension and welfare funds returned to the international. Further the plaintiffs sought to have the defendant funds disgorge to the plaintiff funds those assets in the defendant funds attributable to employees who left the independent to rejoin locals affiliated with the international.

960 F.2d at 1199.

In reversing and remanding the case to the district court, the court of appeals directed the district court to determine the extent to which the Local 22 Funds should transfer monies to the Welfare Funds and the National Pension Fund, the determinations to be based on findings as to the actual population changes in union membership.(3)

Following remand, the parties entered into settlement negotiations. You represent that, while the Welfare Funds expended time and effort in litigation on behalf of themselves and the other plaintiffs, the Local 22 Funds insisted on a settlement agreement that included a release of the Welfare Funds’ claims without any payment of monies by the Local 22 Funds to the Welfare Funds. You represent that the Welfare Funds and the National Pension Fund, taking into account the continued cost of litigation, entered into a sidebar agreement pursuant to which the Welfare Funds agreed to release their claims as part of a settlement with the Local 22 Funds, and, in exchange, the National Pension Fund agreed to pay over to the Welfare Funds ten percent of any proceeds it received pursuant to the settlement agreement with the Local 22 Funds. The sidebar agreement further provided that the National Pension Fund would hold the agreed-upon ten percent of settlement proceeds in escrow for the Welfare Funds and would pay such proceeds to the Funds when and if the Department of Labor issued guidance sanctioning the transaction.

At issue is whether the payment by the National Pension Fund to the Welfare Funds pursuant to the sidebar agreement would violate ERISA. We note, first, that sections 403(c) and 404(a) of ERISA require, among other things, that a plan fiduciary act prudently, solely in the interest of the plan’s participants and beneficiaries, and for exclusive purposed of providing benefits to their participants and beneficiaries.(4) In the situation presented, the propriety of the contemplated payment to the Welfare Funds depends, in part, on whether the fiduciaries of the National Pension Fund and the Welfare Funds discharged their duties prudently and solely in the interest of their respective participants and beneficiaries in entering into the sidebar agreement. Whether that action met those standards would depend, among other things, on whether the payment of ten percent of the settlement proceeds by the National Pension Fund to the Welfare Funds constituted adequate value for obtaining the release of the Welfare Funds’ claims. Given the inherently factual nature of such determinations, the Department expresses no opinion herein on those specific questions. If, however, the fiduciaries of the National Pension Fund and the Welfare Funds did properly discharge their duties in entering into the sidebar agreement, the answer to the question you pose turns only on whether payments pursuant to the sidebar agreement would violate ERISA’s prohibited transaction provisions.

Based on our understanding of the facts, including that there is no party-in-interest relationship between the National Pension Fund and the Welfare Funds, that the sidebar agreement predated the settlement agreement, and that execution of the sidebar agreement was a condition to the Welfare Funds’ execution of the settlement agreement, it is the view of the Department that the prohibited transaction provisions of ERISA would not preclude the National Pension Fund from paying the Welfare Funds amounts owing pursuant to the terms of the sidebar agreement.

This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.

Sincerely yours,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations


Footnotes

  1. The entity known as Sheet Metal Workers International Association Local 25 Welfare Fund was previously included within the Sheet Metal Workers International Association Local 28 Welfare Fund (Local 28 Welfare Fund). References to the Local 25 Welfare Fund, therefore, should be read to include the Local 28 Welfare Fund, as appropriate.

  2. See Sheet Metal Workers’ Local 28 of New Jersey Welfare Fund, et al v. Gallagher, 960 F.2d 1195 (3d Cir. 1992); Sheet Metal Workers’ Local 28 of New Jersey Welfare Fund v. Gallagher, 13 E.B.C. 1729 (D.N.J. 1990).

  3. See 960 F.2d at 1209 - 1217.

  4. The Department expresses no view on the propriety or merits of the litigation or settlement negotiations relating thereto.