Smith v. Prager

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT

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No. 96-50372

(Summary Calendar)
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JAMES JERRY SMITH, Estate of John Terry Smith,

Plaintiff - Appellant,

versus

MARTIN PRAGER, ET AL,

Defendants

MARTIN PRAGER; RHETA PRAGER

Defendants - Appellees.

Appeal from the United States District Court
For the Western District of Texas
(A-93-CA-772)

January 27, 1997
Before DAVIS, EMILIO M. GARZA, and STEWART, Circuit Judges.

PER CURIAM:*

James Jerry Smith, in his capacity as executor of the estate of

John Terry Smith and pro se, appeals the district court’s grant of

*
Pursuant to Local Rule 47.5, the Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in Local Rule
47.5.4.
summary judgment dismissing his civil ERISA suit against Martin

Prager, president of BPR Grouting and Engineering, Inc. (“BPR”).

Because genuine issues of material fact remain, we vacate the order

of the magistrate judge and remand for further determination.

The record below presents a less-than-clear picture of the

facts in this case; however, a rough outline of what is alleged is

discernible from the pleadings. John Terry Smith was a member of

BPR’s Employee Profit Sharing Plan and Trust (the “plan”).

Administration of the plan is governed by 29 U.S.C. § 801 et seq.,

the Employment Retirement Income Security Act of 1974 (“ERISA”).

Smith executed a promissory note secured by his share in the

retirement plan. When he was no longer able to make payments on

the note, Smith requested that it be paid from his share in the

plan.

Smith left the employ of BPR in July 1987. A few months

later, administrators told Smith that the plan could not distribute

assets to pay his note until June 30, 1988, roughly one year after

his termination. As that date approached, BPR informed Smith by

letter that the value of his shares was $67,018.81, more than

enough money to cover the note. Nonetheless, Smith encountered

difficulty extracting any money from the plan, although it

apparently never explicitly denied him a distribution.

In December 1988, Smith received notice of the termination of

the retirement plan. Because the major investment of the plan was

the real estate comprising the situs of BPR’s offices and

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surrounding unimproved property, administrators set up a

corporation, Luna Realty, Inc., to hold title to the property.

Participants in the plan would receive shares of Luna Realty stock

in proportion to the value of their accounts. Luna would sell the

property as soon as possible so that the participants could receive

cash for their shares. According to lawyers for the fiduciaries,

the trustees of the plan intended to make a distribution within the

first few months of 1989. On December 14, 1988, Smith’s brother,

James Jerry Smith, expressed his concern in a letter to BPR’s

counsel that the plan was delaying payment to his brother, as well

as his opinion that BPR management was concealing and stripping the

assets of the company. John Terry Smith died one month later, and

James Jerry Smith began to seek distribution from the plan on

behalf of his brother’s estate.

As John Terry Smith’s life ended, BPR’s legal problems began

in earnest. In November 1989, the Internal Revenue Service

informed BPR that its practice of renting its office space from

its employee security plan was prohibited by tax law. The Service

assessed an excise tax, and the plan lost $47,850 in lease payments

and $9,365 of interest due. BPR filed Chapter Seven bankruptcy in

June 1991, revealing an outstanding loan to BPR President Martin

Prager for $49,000.

James Jerry Smith, on behalf of his late brother’s estate,

filed a “Motion for Declaratory Judgment” in the Western District

of Texas. He alleged that Prager, acting as trustee of the plan,

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violated his fiduciary duties under 29 U.S.C. §§ 1104(a) and

1103(c) by allowing the assets of the plan to inure to his and his

wife Rheta Prager’s benefit. The motion alleged that the Pragers

failed to pay rent due for the use of the plan’s property, borrowed

from the plan, and refused to pay the loan or interest. The

complaint further alleged that the company’s lease agreement and

subsequent failure to pay rent made BPR a borrower of the plan in

violation of 29 U.S.C. § 1106. Finally, Smith asserted that the

trustees failed to diversify the investments of the plan’s assets,

effectively removing assets from the plan through personal loans

and failure to pay rent. Smith sought actual damages, interest,

and punitive damages on behalf of his brother’s estate.

The parties agreed to proceed before a magistrate judge.

Defendants Martin and Rheta Prager filed a motion for summary

judgment and a motion to dismiss for failure to state a claim upon

which relief could be granted. The motion and accompanying

affidavit stated that Rheta Prager, a BPR director, had no

connection with the plan at any time, that Smith’s complaint was

time barred, and that the plan had made payment to the estate in

full. Smith answered that Martin Prager’s breach of fiduciary duty

caused the plan to be unable to meet its obligation to his

brother’s estate. The magistrate entered an order dismissing the

claims against Rheta Prager and dismissing the action as untimely.

Smith filed a timely notice of appeal, contending that the

magistrate misapplied the statute of limitations. Smith argues

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that the relevant statute of limitations under ERISA is six years,

not three, because of a statutory extension for fraud cases. Smith

does not contest the magistrate judge’s dismissal of his claims

against Rheta Prager. Therefore we address only his challenge to

the magistrate’s dismissal under the statute of limitations.

Brinkman v. Dallas County Deputy Sheriff Abner, 813 F.2d 744, 748

(5th Cir. 1987).

In an appeal from summary judgment, we review the record de

novo, examining the evidence in the light most favorable to the

nonmoving party. Duckett v. City of Cedar Park, Tex., 950 F.2d

272, 276 (5th Cir. 1992). Summary judgment is appropriate when

“there is no genuine issue as to any material fact and . . . the

moving party is entitled to a judgment as a matter of law.” Fed.

R. Civ. P. 56(c). When ruling on summary judgment motions, we

credit the evidence of the nonmovant and draw all justifiable

inferences in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 255, 106 S.Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986). The

moving party must demonstrate that there is no genuine issue of

material fact, but it need not negate the elements of the other

party’s case. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th

Cir. 1994) (en banc). If the moving party fails to meet this

burden, the deciding judge should deny the motion for summary

judgment regardless of the nonmovant’s response. Id.

At issue in this case is the statute of limitations for ERISA

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claims, set forth in section 1113, which states:

No action may be commenced under this subchapter with
respect to a fiduciary’s breach of any responsibility,
duty, or obligation under this part, or with respect to
a violation of this part, after the earlier of))

(1) six years after (A) the date of the last action
which constituted a part of the breach or
violation, or (B) in the case of an omission, the
latest date on which the fiduciary could have cured
the breach or violation, or

(2) three years after the earliest date on which
the plaintiff had actual knowledge of the breach or
violation;

except that in the case of fraud or concealment, such
action may be commenced not later than six years after
the date of discovery of such breach or violation.

29 U.S.C. § 1113 (emphasis added). Under this statutory scheme, the

limitations period for ERISA claims is generally six years, unless

defendants can show that the plaintiffs had actual knowledge of

alleged wrongdoing, in which case section 1113(2) extinguishes the

claim after three years. The last clause of the statute is an

exception to section 1113(1) and (2), extending the limitations

period to six years from discovery for cases of fraud or

concealment. Prager contends that Smith actually knew the relevant

facts as early as June 1987 and no later than December 14, 1988,

when BPR notified John Terry Smith that the plan would be

terminated. James Jerry Smith filed this action on December 8,

1993.

We have held that actual knowledge sufficient to trigger the

three-year limitations period of section 1113(2) is a “stringent

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requirement” and that section 1113 “sets a high standard for

barring claims against fiduciaries prior to the expiration of the

section’s six-year limitations period.” Reich v. Lancaster, 55

F.3d 1034, 1057 (5th Cir. 1995).

Viewing the evidence in the light most favorable to Smith, the

nonmoving party, we find that the magistrate judge erred as a

matter of law in granting summary judgment in favor of Martin

Prager. Two considerations inform our holding. First, Smith

introduced evidence of fraud and concealment that Prager did not

sufficiently refute for purposes of summary judgment. The

magistrate judge held that the limitations period for fraud did not

apply because Smith “failed to present any specific evidence of

fraudulent activity or concealment.” However, at the hearing on

Prager’s motion for summary judgment, Smith used exhibits to show

that cash distributions had been made to a corporate officer who

had been a trustee of the plan, to the exclusion of other

participants. Smith also suggested that Prager’s bankruptcy

discharge of over $100,000 owed to the plan was evidence that

Prager defrauded the participants. We find that Smith’s exhibits

and evidence are sufficient to create a fact issue. The nonmoving

party need not produce a preponderance of evidence, or evidence in

a form that would be admissible at trial, to avoid summary

judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S. Ct.

2548, 2553, 91 L. Ed. 2d 265 (1986).

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 Prager did not produce sufficient rebuttal evidence to take

these issues of fraud or concealment out of factual dispute. At

the hearing, Prager offered some evidence that the fiduciaries

committed no fraud. He alleged that the issuance of shares met the

plan’s obligation to Smith. Prager also claimed that BPR’s ill-

conceived rental scheme was not fraudulent. Prager did not address

evidence that he allowed plan assets to inure to his benefit, nor

that his conduct led to the termination of the plan. Significant

fact issues remain, involving the propriety of personal loans taken

by the Pragers, the couple’s self-dealing of Luna Realty shares,

the destruction of relevant records in a fire, and whether BPR’s

office rental scheme defrauded the plan. We express no opinion on

the merits of those issues, but we note that they are not resolved

by the incomplete record below.

Second, Prager has not shown that there is no issue of

material fact concerning when or whether Smith and his estate had

actual knowledge of the breach. The presumption in this circuit is

for a limitations period of six years in ERISA cases, subject to an

exception where the defendant can make a stringent showing of

actual knowledge. Reich, 55 F.3d at 1057. Prager points to the

December 14, 1988, letter in which Smith expressed his concern that

BPR management was concealing and stripping the assets of the

company. However, this letter does not indicate that Smith was

aware of “all material facts necessary to understand that some

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claim exists.” Reich, 55 F.3d at 1057. The entire allegation of

the letter is contained in the following sentence: “It appears to

me that all of the evasive activity by BPR has only allowed

management to conceal and strip the company of its assets.” This

statement alone is insufficient to meet our stringent requirements

for actual knowledge.

Construing the incomplete record in the light most favorable

to Smith, the brothers were unaware of personal loans taken out by

the Pragers, unaware of the fact that the IRS would force

restructuring of BPR’s lease, and unaware of the ultimate value of

their shares of the plan. Prager has not shown actual knowledge of

these facts. Therefore the magistrate erred in applying the three-

year limitations period of section 1113(2) in the face of

unresolved fact issues regarding Smith’s actual knowledge. The

magistrate also erred in using December 14, 1988, as the date on

which the limitations period began to run, because the record does

not establish when Smith and his estate became aware of certain

material facts. Because we find that neither Smith’s letter nor

the letter announcing termination of the plan afforded knowledge of

all necessary and material facts, the magistrate on remand should

review the evidence to establish exactly when Smith’s cause of

action accrued.

We therefore VACATE the order of the magistrate judge

dismissing Smith’s suit as untimely and REMAND the case for further

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proceedings. Accordingly, we DENY Smith’s various subsequent

motions as moot.

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