IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

________________________________________

Laborers' Pension Fund, et al., )

Plaintiffs, )

) Case No. OOC 4113

v. )

)

Hugh B. Arnold, et al., ) DOCKETED

Defendants. ) AUG 1 6 2000

NOTICE OF FILING

T0: Hugh B. Arnold

Arnold & Kadjan

19 West Jackson Blvd., Ste. 300

Chicago, IL 60604

PLEASE TAKE NOTICE that on August 15, 2000, we filed with Clerk of the United States District Court for the Northern District of Illinois PLAINTIFFS' MEMORANDUM OF POINTS AND AUTHORITIES REGARDING THIS COURT'S JURISDICTION, a copy of which was previously served on you.

Jeffrey Freund

Julia Penny Clark

Margo Pave

BREDHOFF & KAISER, P.L.L.C.

805 15TH Street, N. W.

10' Floor

Washington, DC 20005

(202) 842-2600

Marc O. Beem

Thomas M. Staunton

Daniel M. Feeney

Miller Shakman & Hamilton,

208 South LaSalle Street

Suite 1100

Chicago, Illinois 60604

(312) 263-3700

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

__________________________________________

Laborers' Pension Fund, et al., )

Plaintiffs, )

)

) Case No. OOC 4113 (DHC)

Hugh B. Arnold, et al., )

)
) DOCKETED

Defendants. ) AUG 1 6 2000

PLAINTIFFS' MEMORANDUM OF POINTS AND AUTHORITIES
REGARDING THIS COURT'S JURISDICTION

Plaintiffs Joseph Coconato, Charles Cohen, James P. Connolly, Randy Dalton, Mark Deetjen, Martin T. Flanagan, Charles J. Gallagher, Wayne E. Healy, J. Michael Lazzaretto, David Lorig, Gary Lundsberg, Robert J. Madden, Tod Masters, Liberato Naimoli, Dennis Passarelli, Scott Pavlis, Frank Riley, Roger Vignocchi, Sam Vinci; James S. Jorgensen; the Laborers' Pension Fund ("Pension Fund"); and the Health and Welfare Department of the Laborers' District Council of Chicago and Vicinity ("Welfare Fund") (collectively, "plaintiffs"), submit this Memorandum of Points and Authorities in response to the Court's Minute Order of July 17, 2000. As requested by that Order, plaintiffs demonstrate below that this Court has jurisdiction of plaintiffs' claims against defendants Hugh B. Arnold and Arnold & Kadjan ("defendants") pursuant to 29 U.S.C. § 1132(e), 28 U.S.C. § 1331, and 28 U.S.C. § 1367(a).

INTRODUCTION

Plaintiffs have alleged three types of claims against the defendants. The first set of claims -- Counts I through VIII -- allege that defendant Arnold acted as a fiduciary with respect to plaintiffs Pension Fund and Welfare Fund in certain particulars and breached his fiduciary duties, in violation of the Employee Retirement

Income Security Act of 1974, as amended, 29 U. S. C. § 1001 et seq. ("ERISA"). These claims are brought pursuant to § 502 (a) (2) of ERISA, 29 U. S. C. § 1132 (a) (2). The second set of claims -Counts IX and X -- allege that both defendant Arnold and defendant Arnold & Kadjan violated ERISA's ban on prohibited transactions, allegations which are not dependent upon the defendants' status as ERISA fiduciaries. This set of claims is brought pursuant to § 502(a)(3)(B) of ERISA, 29 U.S.C. § 1132(a)(3)(B). The final set of claims -- Counts XI through XV -- allege that plaintiffs are also entitled to remedies under Illinois common law arising from the same core of facts that support the ERISA claims.

As we show below, this Court has proper jurisdiction over all claims set forth in plaintiffs' Complaint. It has jurisdiction over both the fiduciary and non-fiduciary-based ERISA claims pursuant to § 502(e)(1) of ERISA, 29 U.S.C. § 1132(e)(1), which grants federal district courts exclusive jurisdiction over such claims when brought by, inter alia, a Plan fiduciary: The court also has federal question jurisdiction of these claims pursuant to 28 U.S.C. § 1331. And, because the Illinois common law claims involve the same nucleus of operative facts as the ERISA claims, this Court has supplemental jurisdiction over these claims pursuant to 28 U.S.C. § 1367.

I. ERISA § 502(e)(1) AND 28 U.S.C. § 1331 VEST THE COURT WITH EXCLUSIVE JURISDICTION OVER PLAINTIFFS' CLAIMS AGAINST DEFENDANTS ARNOLD AND ARNOLD & KADJAN FOR VIOLATIONS OF ERISA

In determining whether a federal court has jurisdiction over a complaint, "it is axiomatic that a court must accept all well-pleaded factual allegations of a complaint as true." Sladek v. Bell System Management Pension Plan, 880 F.2d 972, 974-75 (7th Cir. 1989); Ed Miniat, Inc. v. Globe Life Iris. Group. Inc., 805 F.2d 732, 735 (7th Cir. 1986). See also Franchise Tax Bd. v. Const. Laborers Vac. Trust, 463 U.S. 1, 10 (1983) ("`whether a case is one arising under the Constitution or a law or treaty of the

United States, in the sense of the jurisdictional statute .... must be determined from what necessarily appears in the plaintiffs statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose') (quoting Taylor v. Anderson, 234 U.S. 74, 75-76 (1914)). In this case, plaintiffs have properly pleaded factual allegations in their Complaint that bring their claims within the jurisdictional reach of ERISA and thus within the jurisdiction of this court.

A. The Court Has Jurisdiction Over Plaintiffs' Claims Against
Defendant Arnold for Breach of Fiduciary Duties in Violation
of ERISA (Counts I through VIII)

Counts I through VIII of plaintiffs' Complaint allege that defendant Arnold acted as a fiduciary within the meaning of ERISA in certain particulars with respect to plaintiffs Pension Fund and Welfare Fund (collectively "the Funds"), see Complaint ~[~[ 30, 31, 39, 53, 54, 55, 56, 57, and that he violated ERISA by breaching his fiduciary duties toward the Funds. See id. at 11 58, 60, 63, 66, 70, 73, 76, 79. The claims made in these eight Counts fall squarely within the jurisdiction of this court as provided for by ERISA.

Pursuant to ERISA § 3(21)(A)(i), a person is a fiduciary with respect to a plan "to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. 1002(21)(A)(i). Those plan assets include the Funds' claims for delinquent employer contributions and the Welfare Fund's claims for reimbursement of benefits out of participants' recovery from third party tortfeasors under subrogation agreements. Such claims are plan "assets" within the meaning of ERISA. Liss v. Smith, 991 F. Supp. 278, 290-91 (S.D.N.Y. 1998).

Plaintiffs' complaint alleges that Arnold exercised substantial discretionary control over the settlement and disposition of the Funds' claims for delinquent contributions and subrogation. It alleges that his control over these claims exceeded the normal authority of a plan's counsel, in that he regularly decided in his own discretion the amounts to accept in settlement and the terms of payment under installment agreements. See Complaint 11 30, 31, 39, 53-57. Such an exercise of discretion constituted "authority or control respecting management or disposition of (plan) assets," and thus made Arnold a fiduciary "to the extent" of that discretionary authority under ERISA § 3 (21) (A) (i). These allegations that Arnold exercised substantial discretion also set him apart from the usual fund counsel. Most attorneys who provide services to an ERISA fund do not meet the definition of an ERISA fiduciary because they "do not exercise any decision-making authority over the plan or plan assets." Health Cost Controls of Illinois, Inc. v. Washington, 187 F.3d 703, 709 (7th Cir. 1999). In this case, however, Arnold is alleged to have exercised precisely such decision-making authority. Indeed, the control Arnold is alleged to have exercised -- determining in his sole discretion which (if any) delinquent contributions to pursue diligently, as well as the amounts to accept in settlement of both contribution and subrogation claims -- is similar to that exercised by Health Cost Controls, which the Seventh Circuit found sufficient to make Health Cost Controls an ERISA fiduciary. Id. See also Chicago Bd. Options Exch. v. Conn. Gen. Life Ins., 713 F.2d 254, 260 (7th Cir. 1983) (ability to amend annuity contract renders party an ERISA fiduciary); Liss, 991 F. Supp. at 302-304 (the determination of fiduciary status under ERISA "is functional and focuses on the nature of the duties performed rather than the title held by an individual" and an attorney who exercises sufficient authority

over plan assets will be found an ERISA fiduciary) (reviewing cases); 29 C.F.R. § 2509.75-5 D-1.

Those who serve as ERISA fiduciaries of pension and welfare funds are required to meet the standards of fiduciary behavior codified in the statute. And to put some teeth into those standards, Congress created a framework for enforcing them -- a framework that includes a federal forum to hear claims alleging violations of these standards. The initial step in the enforcement framework is § 409, which establishes liability for a fiduciary's breach of duty. Section 409 provides 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 personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and 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).

Here, plaintiffs allege that Arnold, in exercising the discretion that made him a fiduciary, breached ERISA fiduciary duties as follows: violated his duty of loyalty to the Funds (Count I), failed to exercise his discretionary authority prudently (Count II), failed to discharge his duties in accordance with the documents governing the Funds (Count III), caused the Funds to engage in various prohibited transactions (Counts IV and V), dealt with the assets of the Funds in his own interest (Count VII), and dealt with the Funds on behalf of parties with opposing interests (Count VIII). Plaintiffs also allege that Arnold's multiple breaches of fiduciary duty resulted in losses to the Funds which Arnold must make good. See Complaint 1123, 32, 34, 35, 36, 41. Taken as true, as they must be at this stage, Sladek, 880 F.2d at 974-75; Ed Miniat, Inc., 805 F.2d at 735, the facts alleged in the first eight Counts of plaintiffs' Complaint properly

allege that Arnold violated his fiduciary duties toward the Funds and must make good those losses to the Funds, thereby bringing these claims within the scope of ERISA § 409(a).

ERISA provides a specific vehicle for obtaining relief for a fiduciary's breach of the duties imposed upon him by § 409. Civil actions are authorized by § 502(a)(2), which permits the Secretary of Labor or a participant, beneficiary or fiduciary to bring an action against a fiduciary "for appropriate relief under § 409." 29 U.S.C. § 1132(a)(2). As properly alleged in plaintiffs' Complaint, see Complaint IT 6 - 8, the plaintiff Fund Trustees and Administrator who have brought this civil action are all fiduciaries of the Funds within the meaning of ERISA, and are thereby entitled to bring this action against Arnold pursuant to § 502 (a)(2).

The final step in ERISA's enforcement framework is the statute's grant of jurisdiction to the federal courts. Under § 502(e)(1), claims brought by a fiduciary under § 502 (a) (2) "for appropriate relief under § 409" are subject to the federal district courts' exclusive jurisdiction. That section states that:

[e]xcept for actions under subsection (a) (1) (B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by . . . a fiduciary.

29 U.S.C. § 1132(e)(1).¹ [1]Pursuant to this section, when a person is alleged to have been acting as a fiduciary and to have committed breaches of fiduciary duty under § 409, the federal district court has subject matter jurisdiction over that claim. In the case at bar, plaintiffs have alleged that Arnold, acting as a fiduciary of the Funds in certain respects, violated his fiduciary duties toward the Funds. Because these

__________________________

B. The Court Has Jurisdiction Over Plaintiffs' Claims A Against
Defendants Arnold and Arnold & Kadjan for Participating in
Prohibited Transactions in Violation of ERISA (Counts IX and X)

Counts IX and X allege that Arnold and Arnold & Kadjan were both "parties in interest" within the meaning of ERISA (which defines "party in interest" to include "a person providing services to [the] plan," 29 U.S.C. § 1002(14)(B)), see Complaint 1 69; that both received excessive compensation from the Funds, see id. at IT 82, 86, 87; and that payment of this excessive compensation constituted "prohibited transactions" within the meaning of and forbidden by ERISA. Id. at T1 83, 88. These counts, too, fall within the subject matter jurisdiction of this Court, as the Supreme Court confirmed recently in Harris Trust & Say. Bank v. Salomon Smith Barnet/ Inc., 120 S.Ct 2180 (2000).

The allegations that Arnold and Arnold & Kadjan received excessive compensation and thereby participated in prohibited transactions in violation of ERISA are brought by plaintiffs pursuant to ERISA § 502(a)(3)(B), rather than § 502(x)(2). As discussed in Section I.A, supra, § 502(x)(2) provides for civil actions by fiduciaries "for appropriate relief under § 409." Because liability under § 409 is limited to fiduciaries, only fiduciaries may be sued pursuant to § 502(x)(2). Section 502 (a)(3)(B), by contrast, is not limited to suits for relief under a single section of ERISA. Rather, it authorizes civil actions by fiduciaries to obtain "appropriate equitable relief" for violations of any provision of ERISA Title I. 29 U.S.C. § 1132(a)(3)(B).

In the recent Harris Trust decision, the Supreme Court held that § 502 (a) (3) creates a cause of action against nonfiduciaries who take part in prohibited

transactions that violate ERISA's provisions. Harris Trust, 120 S.Ct at 2186. Noting that the focus of § 502 (a) (3) is to "redress( ) the act or practice which violates any provision of ERISA Title I," the Court held that nonfiduciary parties to a prohibited transaction, within the meaning of ERISA, properly may be held liable in an action under § 502(a)(3). Id. at 2187.

Moreover, an action under § 502(a)(3) is subject to the same exclusive federal court jurisdiction as are actions under § 502(a)(2). Section 502(e)(1) provides that "the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by . . . a fiduciary." 29 U.S.C. § 1132(e)(1). Section 502(e)(1) thus vests this Court with subject matter jurisdiction over claims under § 502(a)(3) as well as those under § 502(a)(2).

Harris Trust, therefore, establishes this Court's jurisdiction over plaintiffs' claims that Arnold and Arnold & Kadjan participated in prohibited transactions. While plaintiffs have properly alleged facts supporting Arnold's status as an ERISA fiduciary and believe that the evidence will establish that he was acting as a fiduciary, plaintiffs' prohibited transaction claims would stand against both Arnold and Arnold & Kadjan -- and are sufficient to give the Court jurisdiction over this action -- even were Arnold not a fiduciary.

II. 28 U.S.C. § 1367(a) VESTS THE COURT WITH SUPPLEMENTAL JURISDICTION OVER PLAINTIFFS' CLAIMS AGAINST DEFENDANTS ARNOLD AND ARNOLD & KADJAN UNDER ILLINOIS COMMON LAW (COUNTS XI THROUGH XV)

In Counts XI through XV, plaintiffs allege claims against Arnold and Arnold & Kadjan under Illinois common law. The actions by which the defendants are alleged to have violated the state's common law are the same actions that serve as the basis for plaintiffs' ERISA claims against them. The state law claims thus fall within this Court's supplemental jurisdiction under 28 U.S.C. § 1367(a).

A federal court's supplemental jurisdiction is properly exercised over state claims when the state and federal claims asserted in the Complaint "derive from a common nucleus of operative fact" such that the plaintiffs "would ordinarily be expected to try them all in one judicial proceeding." United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966). Even a "loose factual connection" between the federal and state claims is sufficient to impart federal court jurisdiction over the state claims. Ammerman v. Sween, 54 F.3d 423, 424 (7th Cir. 1995).

In this case, there is far more than a "loose factual connection" between plaintiffs' federal ERISA claims and their state common law claims. Here, the same factual allegations regarding Arnold's exercise of discretionary authority, see Complaint 11 30, 31, 39, the same contingent fee agreement, id. at IT 18-22, the same false representations Arnold made about defendants' collection efforts and services, id. at 11 26-29, 31, 33, 34, 37, 38, and the same failure to diligently pursue those efforts, id. at 11 32, 35, 36, 41, are the basis for both the federal and state claims in plaintiffs' Complaint. The link between plaintiffs' ERISA claims and their state common law claims is thus extremely strong.

Indeed, the factual connection between these sets of claims is perhaps even stronger than in Herman v. Wolfe, 1998 WL 30706 (N.D.Ill. Jan. 26, 1998) (Coar, J.), where this Court held that the presence of ERISA claims gave it supplemental jurisdiction over state law claims against an attorney who had served as general counsel to the entity involved in the ERISA claims. In Wolfe, the Secretary of Labor brought ERISA claims against a set of defendants, including trustees of the International Professional, Craft and Maintenance Employees Association Trust ("IPCMEAT), for inter alia, self-dealing and violation of fiduciary duties of loyalty, violation of fiduciary duty of care, violation of fiduciary duty to act in accordance with

plan documents, violation of fiduciary duty by causing IPCMEAT to engage in prohibited transactions, and misappropriation of assets and self-dealing. Id. at *1. The Independent Fiduciary of IPCMEAT then brought a third-party claim under state law against the attorney who had served as IPCMEAT's general counsel and against that attorney's law firm, alleging that the attorney had committed malpractice in connection with the services performed for IPCMEAT by failing to alert IPCMEAT that it was violating ERISA. In holding that the state law claims were within the Court's supplemental jurisdiction, this Court noted that "the key allegations" in the Independent Fiduciary's Complaint were "all at issue in the DOL Complaint." Id. at 3. In the case at bar, the key allegations made in plaintiffs' ERISA claims are the very same allegations made in plaintiffs' state law claims. Moreover, here a single set of plaintiffs are making the claims against a single set of defendants, making the link between the claims even closer.

Because this Court properly has jurisdiction over plaintiffs' ERISA claims and because plaintiffs' Illinois common law claims derive from the same "nucleus of operative facts" as their ERISA claims, this Court has subject matter jurisdiction over plaintiffs' state law claims pursuant to the federal supplemental jurisdiction statute, 28 U.S.C § 1367.

CONCLUSION

For the reasons set forth above, plaintiffs' claims against defendants are properly within the subject matter jurisdiction of this Court.

CERTIFICATE OF SERVICE

I hereby certify that on this 14th day of August, 2000, the foregoing Plaintiff's Memorandum of Points and Authorities Regarding This Court's Jurisdiction was served by overnight delivery on:

Hugh B. Arnold

Arnold & Kadjan

19 W. Jackson Blvd.

Chicago, IL 60604

[1] ¹ section 502(e)(1)'s exception for "actions under subsection (a)(1)(B) of this section" is inapplicable to the claims brought by Plaintiffs, as none are under that subsection.