Diduck v. Kaszycki & Sons Contractors, Inc.

SWEET, District Judge:

Plaintiff Harry J. Diduck (“Diduck”) has appealed from summary judgment dismissing his complaint against several parties that he alleges are liable for contributions an insolvent demolition contractor failed to make to pension and insurance funds of which Diduck is a beneficiary. In dismissing Diduck’s complaint, the Honorable Charles E. Stewart held that Diduck lacked standing to sue derivatively on behalf of the pension and insurance funds because the trustees of those funds had not breached a fiduciary duty, that Diduck could not maintain an action under the Racketeer Influenced and Corrupt Organizations law (RICO) because no criminal enterprise existed, and that the statute of limitations under the Employee Retirement Income Security Act (ERISA) barred his claims. Having dismissed the federal claims, Judge Stewart also held that he lacked jurisdiction to consider the pendent state claims. For the reasons set forth below, we reverse and remand.

The Facts

In 1979, the Trump Organization, Inc. (the “Trump Organization”) and the Equitable Life Assurance Company (“Equitable”) created a joint venture — called the Trump-Equitable Fifth Avenue Company (“Trump-Equitable”) — (collectively, with Donald J. Trump (“Trump”), the “Trump defendants”) to demolish the old Bonwit Teller building on Fifth Avenue and construct the building now known as Trump Tower (the “Trump Tower Project”). To perform the demolition, Trump-Equitable hired William Kaszycki (“Kaszycki”) and his company, Kaszycki and Sons Contractors, Inc. (the “Kaszycki Corporation”), (collectively, the “Kaszycki defendants”) pursuant to a written agreement signed January 30, 1980 (the “demolition agree*914ment”). The demolition agreement obligated Trump-Equitable to pay the Kaszycki Corporation $775,000 and made the Kasz-ycki Corporation responsible for providing labor, equipment, and supplies.

The Trump Tower Project was the Kasz-ycki Corporation’s first and only complete building demolition. Previously, Kaszycki —through a company called “Interstate Window Cleaning” — had engaged primarily in window cleaning, although he had performed some interior demolition work. Kaszycki testified at his deposition that the only reason he formed “Kaszycki and Sons Contractors, Inc.” was because “It didn’t sound good for a window cleaning company to do demolition work.”

To obtain workers for the Trump Tower Project, Kaszycki entered into a collective bargaining agreement on behalf of the Kaszycki Corporation with Housing Wreckers’ Union Local 95 (“the Union”) for the period from January 1, 1980 through June 30, 1981. Kaszycki’s signature on the collective bargaining agreement is undated. None of the Trump defendants signed this agreement.

The Kaszycki Corporation began the Trump Tower Project in January 1980 and continued the work until August 1980. During this period, the Kaszycki Corporation employed both Union and non-union workers. The non-union workers consisted primarily of some 200 Polish aliens — sometimes referred to as the “Polish Brigade”— whom the company paid less than Union workers. The Polish workers performed much of the demolition work.

The collective bargaining agreement obligated the Kaszycki Corporation to contribute eight percent of total wages to the Union’s Insurance Trust Funds and ten percent to its Pension Funds (the “Funds”) on behalf of both Union and non-union workers. To calculate the contributions to the Funds, the collective bargaining agreement provided for the Union’s shop steward and the Kaszycki Corporation to file weekly reports listing the workers on the job, the number of hours they worked, and their wages. Despite this requirement, the shop steward and employer reports for the Trump Tower Project listed the Union workers, but not the Polish workers.

Defendant John Senyshyn (“Senyshyn”), the Union’s president and a Trustee of the Funds, served as the Union’s shop steward on the Trump Tower Project for three weeks, beginning March 25, 1980. He filed his first shop steward report for the week ending March 26, 1980 and thereafter filed two other shop steward reports. After that, another Union member, John Osijuk (“Osijuk”), became shop steward and filed the weekly shop steward reports. Although Senyshyn ceased acting as shop steward in mid-April, the weekly shop steward and payroll reports listed Senysh-yn as receiving wages for working at the Trump Tower Project until at least August 12, 1980.

During the Trump Tower Project, the Kaszycki Corporation became financially insolvent and failed to pay the workers’ wages and to contribute to the Funds. In early June 1980, the Union notified Trump-Equitable of the Kaszycki Corporation’s failure to pay wages and Fund contributions.

In response, Thomas Macari (“Macari”), a vice president with the Trump Organization, sent the Kaszycki Corporation a letter on June 6, 1980 notifying it of the Union’s concerns and stating:

I urge you to take immediate action to correct this problem. Any delay in this job could mean hundreds of thousands of dollars in the cost of this building for which we will hold you responsible.

Despite Macari’s letter, the Kaszycki Corporation’s failure to contribute to the Funds persisted.

When the Funds’ Trustees (the “Trustees”) realized that the Kaszycki Corporation was failing to pay its contributions to the Funds, they voted in their June 16, 1980 meeting to impose work stoppages. To prevent work stoppages and the delays they would have caused, Trump-Equitable made a number of payments to the Funds during June and July. Along with the checks, Trump-Equitable sent the Funds receipts stating that it was making the payments “On behalf of Kaszycki & Sons *915Contractors, Inc.” The Funds treated the checks as payments from the Kaszycki Corporation — not from Trump-Equitable — in its records. Macari informed the Kaszycki Corporation about these payments and advised the company that Trump-Equitable would hold it responsible for them.

Because the employer and shop steward reports omitted the Polish workers’ wages, the Trustees threatened work stoppages to obtain — and Trump-Equitable paid — Fund contributions only on behalf of the Union members.

At his deposition, Kaszycki testified that, about midway through the Trump Tower Project:

I lost the control of paying. Trump Organization, they pay to everybody. They gave me no money and they were making the payroll.

This involved paying for supplies and equipment, as well as for labor. Some of the Polish workers testified that Macari gave them job instructions. The record also contains evidence that Macari fired some of the Kaszycki Corporation’s workers in late June 1980.

The demolition agreement obligated Trump-Equitable to make progress payments periodically to the Kaszycki Corporation. When the Kaszycki Corporation’s financial problems became apparent, Trump-Equitable opened a joint checking account with the company and deposited the progress payments into that account, allegedly to prevent the company from diverting the progress payments from the Trump Tower Project to other purposes. Checks could be drawn on the account only with signatures from representatives of both the Kaszycki Corporation and Trump-Equitable. Kaszycki testified that Macari would present a check to him each week for his signature. The check then was cashed and used to pay the costs associated with the Trump Tower Project, including wages for Union and non-union workers and fund contributions for Union workers.

By the time the Trump Tower Project was complete, Trump-Equitable had paid $425,740 in expenses that the Kaszycki Corporation should have paid, in addition to the $742,000 it paid directly to the Kaszycki Corporation under the demolition agreement. Trump-Equitable never sued the Kaszycki Corporation to recover the money it had contributed to the Funds. At his deposition, Trump stated that such a lawsuit “would not have been fruitful.”

As of December 8, 1980, the delinquencies to the Funds for the Union workers on the Trump Tower Project were satisfied. However, neither the Kaszycki Corporation nor Trump-Equitable contributed to the Funds on behalf of the Polish workers.

Diduck, the plaintiff in this action, is a member of the Union. Although he did not work on the Trump Tower Project, he had some suspicions about what was occurring there. In June 1980, Diduck ran unsuccessfully for Union office. In his campaign literature, he stated that the Trump Tower Project was “even worse than a scab job” and that Union labor was employed by day and “over thirty non-union men [were] working the night shift.” He also says in this literature that “John Senyshyn is the Shop Steward at the job, which is located on 56th Street.” In a June 16, 1980 letter apparently addressed to Mike Novak (“No-vak”), the Union’s business manager, Di-duck wrote: “and just remember, you had shop stewards on jobs, who did not list their non-union men to the Pension and Welfare Funds, in all their reports, which are supposed to be weekly.” At his deposition, Diduck admitted that the Trump Tower Project was one of the jobs to which this letter was referring.

Also in June 1980, Diduck helped one of the demolition workers employed by the Kaszycki Corporation file a complaint with the Labor Department. In response to this complaint, the Labor Department investigated and subsequently sued Kaszycki and his company under the minimum wage laws to collect wages due the Polish workers. See Donovan v. Kaszycki & Sons Contractors, Inc., 599 F.Supp. 860 (S.D.N.Y.1984). In that action, Judge Sprizzo ordered the Kaszycki defendants to pay a $570,000 judgment. When the Labor Department was unable to enforce the judgment, it instituted contempt proceedings. *916Judge Sprizzo entered an order permitting the Kaszycki defendants to pay the judgment in monthly installments of $3,000 over the next fifteen years.

Prior Proceedings

On August 25, 1983, Diduck sued the Kaszycki defendants and Senyshyn to recover an estimated $600,000 owed to the Funds for the Polish workers. The complaint contained three claims and did not purport to be a derivative or class action.

On June 27, 1984, Diduck filed a motion to amend his complaint, which was granted on August 9, 1984. The amended complaint added the Trump defendants and, as nominal defendants, the Trustees. It also sought relief derivatively and as a class action.

The amended complaint included seven claims. The first charged the Kaszycki Corporation with failing to contribute to the Funds in violation of ERISA, 29 U.S.C. § 1145. The second charged the Trump defendants with the same violation, alleging that Trump-Equitable had taken control of the Kaszycki Corporation and assumed its obligations under the collective bargaining agreement. The third charged the Kaszycki defendants, the Trump defendants, and Senyshyn with fraud for making false statements and concealing facts in documents required under ERISA, 29 U.S. C. § 1031; 18 U.S.C. § 1027. The fourth alleged that the Kaszycki defendants, the Trump defendants, and Senyshyn had committed fraud actionable under RICO, 18 U.S.C. § 1961(1)(B). The fifth sought recovery from the Trump defendants for unjust enrichment actionable under New York state common law. The sixth alleged that Senyshyn breached his fiduciary duty under ERISA, 29 U.S.C. § 1104, and engaged in transactions prohibited under ERISA, 29 U.S.C. § 1106, by defrauding the Funds and by concealing the Kaszycki Corporation’s and Trump-Equitable’s failure to contribute to the Funds. The seventh alleged that Diduck had met the requirements under Rule 23.1, Fed.R.Civ.P., for bringing a derivative action.

In a decision dated July 18, 1988, Judge Stewart granted the Trump defendants’ and Senyshyn’s motions for summary judgment dismissing the claims against them and entered a default judgment against the Kaszycki defendants. Diduck moved for reargument and the Trustees moved for summary judgment. Judge Stewart denied Diduck’s motion and granted the Trustees’ motion in a memorandum decision dated August 30, 1988. Diduck has appealed from Judge Stewart’s order dismissing his claims against the Trump defendants and Senyshyn.

Issues on Appeal

1. Derivative Action Against the Trump Defendants

Diduck brought a derivative claim against the Trump defendants under ERISA, 29 U.S.C. § 1145, to recover the delinquent contributions, alleging that the Trump defendants assumed the Kaszycki Corporation’s obligation to contribute to the Funds under the collective bargaining agreement. Judge Stewart dismissed this claim, holding that Diduck lacked standing to sue derivatively on behalf of the Funds because the Trustees had breached no fiduciary duty. For the reasons set forth below, this dismissal is reversed.

A participant in a fund governed by ERISA can sue derivatively on behalf of the fund “only if the plaintiff first establishes that the trustees breached their fiduciary duty.” Alfarone v. Bernie Wolff Constr. Corp., 788 F.2d 76, 80 (2d Cir.), cert. denied, 479 U.S. 915, 107 S.Ct. 316, 93 L.Ed.2d 289 (1986); see also McMahon v. McDowell, 794 F.2d 100, 108-11 (3d Cir.), cert. denied, 479 U.S. 971, 107 S.Ct. 473, 93 L.Ed.2d 417 (1986); Struble v. New Jersey Brewery Employees’ Welfare Trust Fund, 732 F.2d 325, 336-38 (3d Cir.1984). Under ERISA, trustees have a fiduciary duty to “act to ensure that a plan receives all funds to which it is entitled, so that those funds can be used on behalf of participants and beneficiaries.” Central States, Southeast & Southwest Areas Pension Fund v. Central Transp., Inc., 472 U.S. 559, 571, 105 S.Ct. 2833, 2841, 86 L.Ed.2d 447, reh’g denied, 473 U.S. 926, 106 S.Ct. 17, 87 L.Ed.2d 696 (1985).

*917In performing this duty, trustees have a range of options — including suing the delinquent employer, randomly auditing the employer’s records, threatening work stoppages, picketing the employer, or similar actions — depending upon the circumstances. There is no duty to take any particular course of action if another approach seems preferable. See Alfarone, 788 F.2d at 80; McMahon, 794 F.2d at 110. Rather, the trustees’ duty is to act with “care, skill, prudence, and diligence,” 29 U.S.C. § 1104(a)(1)(B), in attempting to recover delinquent contributions or in declining to take a particular course of action to recover those contributions.

Here, the Trustees acted prudently when they declined to sue the Kaszycki defendants, recognizing that they were insolvent and could not satisfy a judgment. However, the Trustees breached their fiduciary duty by limiting their threatened work stoppages to collecting delinquent contributions for Union workers and by failing even to investigate a possible lawsuit against the Trump defendants to recover the delinquent contributions for the non-union workers.

Judge Stewart correctly concluded that the Trustees did not breach their fiduciary duty by refraining from suing the Kaszycki defendants because they were insolvent and would be unable to pay a judgment. The evidence supports this decision. During the Trump Tower Project, the Kaszycki defendants failed to contribute to the funds, despite threats of a suit by Trump-Equitable and work stoppages by the Union. Later, the Labor Department obtained a judgment against the Kaszycki defendants, but was unable to collect it and had to institute contempt proceedings. As Judge Stewart stated: “ERISA contains no requirement that the Trustees expend Fund assets to bring a lawsuit against an insolvent employer.”

Although the Trustees acted prudently in opting for work stoppages instead of a lawsuit against the Kaszycki defendants, they breached their fiduciary duty by directing their threatened work stoppages only at collecting Fund contributions for the Union workers at the Trump Tower Project. The Union threatened work stoppages on at least four occasions during June and July of 1980, with considerable success. Each time, Trump-Equitable advanced the money the Kaszycki Corporation owed the Funds for Union members working on the Trump Tower Project. Ultimately, Trump-Equitable paid all of the contributions the Kaszycki defendants owed the Funds for the Union members, but it paid none of the contributions the company owed the Funds for the Polish workers.

The Trustees failed to collect delinquent contributions for non-union workers on the Trump Tower Project because they relied upon weekly employer and shop steward reports that omitted the Polish workers. The evidence indicates that the Trustees knew — or, with reasonable investigation, could have discovered — that these reports were inaccurate.

During an interview he gave to a Labor Department investigator on November 14, 1980 in connection with the Donovan action, Joseph Dektarovich (a.k.a. Dee) (“Dee”), the pension Fund’s administrator, stated that the Kaszycki Corporation’s hiring of the Polish workers was “common knowledge in the demolition field.” Sen-yshyn, a Trustee, served as union shop steward for three weeks in March and April and worked on the Trump Tower Project until August 1980. The weekly payroll reports themselves offered some evidence that the Kaszycki Corporation was not reporting the Polish Brigade — Dee stated during his Labor Department interview that, had the reports been accurate, they would have included a fifteen percent pay differential to reflect the fact that some of the Polish workers worked at night. In June 1980, Diduck stated in his campaign literature that non-union workers were working at the Trump Tower Project. Diduck distributed this literature to the Union’s membership, including the three Union-appointed Trustees of the Funds. Also in June 1980, Diduck helped one of the Polish workers prepare a statement describing the Polish workers on the Trump *918Tower Project, their non-union wage rates, and their failure to receive wages earned. Diduck claims that he showed this statement to Joseph Rodonich, one of the Union-appointed Trustees.

Despite the fact that the employer and shop steward reports omitted the Polish workers, the Trustees relied upon those reports when it threatened Trump-Equitable with work stoppages. Even when it became clear that Trump-Equitable was willing to pay the Kaszycki Corporation’s obligations, the Trustees neglected to seek contributions for the non-union workers. By failing to attempt to collect the contributions owed the Funds for both Union and non-union workers at the Trump Tower Project, the Trustees breached their fiduciary duty to “act to ensure that a plan receives all funds to which it is entitled....” Central States, Southeast & Southwest Areas Pension Fund v. Central Transp., Inc., 472 U.S. 559, 571, 105 S.Ct. 2833, 2841, 86 L.Ed.2d 447, reh’g denied, 473 U.S. 926, 106 S.Ct. 17, 87 L.Ed.2d 696 (1985).

The Trustees’ failure to investigate Trump-Equitable’s potential liability also raises some question about how prudent the Trustees were in recovering delinquent contributions. Although the Kaszycki Corporation was insolvent, Trump-Equitable was not, and its response to the threatened work stoppages demonstrated its willingness to pay the Kaszycki Corporation’s obligations. At least one Trustee — Dee—believed Trump-Equitable was making payments for the Kaszycki Corporation because of some agreement it had with the company. Moreover, Senyshyn worked at the Trump Tower Project from late March until August of 1980, which gave him am-pie opportunity to observe the degree of control Macari was exercising over the job.

Despite these facts, the record contains no indication that the Trustees discussed at their meetings the possibility of suing Trump-Equitable or consulted a lawyer to determine Trump-Equitable’s potential liability under federal or state law. Judge Stewart noted, for example, that the Trump defendants may be liable under the joint employer doctrine. See NLRB v. Browning-Ferris Indus. of Pa., Inc., 691 F.2d 1117 (3d Cir.1982); Hodgson v. Griffin & Brand of McAllen, Inc., 471 F.2d 235 (5th Cir.), cert. denied, 414 U.S. 819, 94 S.Ct. 43, 38 L.Ed.2d 51 (1973). Considering suing the Kaszycki defendants, but then deciding against it, represented prudent judgment. However, failing even to investigate the possibility of suing Trump-Equitable, despite its willingness to pay the Kaszycki Corporation’s obligations, demonstrates a lack of care.

This is not to say that the Trustees had a duty to sue Trump-Equitable. Rather, in light of the role Trump-Equitable had assumed, the Trustees had a duty to investigate the possibility of a lawsuit and make an informed decision whether or not to pursue that action.1

2. RICO Claims Against the Trump Defendants and Senyshyn

Diduck sued the Trump defendants and Senyshyn under RICO for their alleged fraud in the Trump Tower Project. Judge Stewart dismissed the RICO claim, holding that “[s]uch an attempt to defraud is too limited to constitute a continuing criminal enterprise under Second Circuit law, which was most recently articulated in Beauford v. Helmsley, 843 F.2d 103 (2d Cir.1988).” In an en banc decision, this Court recently *919overturned the panel’s decision in Beauford. See Beauford v. Helmsley, 865 F.2d 1386 (2d Cir.1989) (en banc). The dismissal of the RICO claim, therefore, is reversed and remanded for reconsideration in light of the more recent Beauford decision.2

3. Breach of Fiduciary Duty by Sen-yshyn

Diduck sued Senyshyn for breaching his fiduciary duty as Trustee, alleging that Senyshyn defrauded the Funds and concealed the Kaszycki Corporation’s and Trump-Equitable’s failure to contribute to the Funds by filing shop steward reports that omitted the Polish workers. Judge Stewart found that ERISA’s three-year statute of limitations, 29 U.S.C. § 1113, barred this claim because Diduck knew of Senyshyn’s alleged wrongdoing in June of 1980 but failed to file the complaint until September of 1983. Because ERISA provides a six-year statute of limitations for prosecuting breaches of fiduciary duty arising out of fraud or concealment, Judge Stewart’s decision is reversed.

ERISA’s statute of limitations applicable at the time Diduck filed this action provides:

(a) No action may be commenced under this title 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 (A) on which the plaintiff had actual knowledge of the breach or violation, or (B) on which a report from which he could reasonably be expected to have obtained knowledge of such breach or violation was filed with the Secretary under this title;
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.

For a breach of fiduciary duty involving fraud or concealment, the three-year exception for actual knowledge does not apply, and a party has six years from the time it discovers the breach to bring an action. For all other breaches of fiduciary duty, a party can commence an action within six years of the time the breach occurred, unless the party has actual knowledge of the breach, in which case it must bring the action within three years of the time it learned of the breach. See Fink v. National Sav. and Trust Co., 772 F.2d 951, 956 (D.C.Cir.1985).

Judge Stewart applied a three-year statute of limitations, noting that “[t]he gravamen of plaintiff’s ERISA claim against Senyshyn is that Senyshyn breached his fiduciary duty as Trustee by failing to collect money owing to the Funds, and by participating in the failure to report the non-union Polish workers in Shop Steward Reports to the Funds” and that Diduck had actual knowledge of this breach. Paragraph 64 of Diduck’s amended complaint-incorporated by reference into the breach of fiduciary duty claim — states that Sen-yshyn’s alleged breach of fiduciary duty involved:

a scheme or artifice to defraud the Funds by submission of Weekly Payroll Reports and Weekly Shop Steward Reports falsely stating the number of covered employees employed by Kaszycki Corporation and their total wages, and concealing and failing to disclose the true amount of such employees and their total wages.

Because the alleged breach of fiduciary duty involved fraud or concealment, Diduck had six years from when he discovered *920Senyshyn’s wrongdoing in June 1980 to file his complaint. Diduck filed his complaint in September 1983 so his claim is not time-barred.

Conclusion

For the reasons set forth above, we reverse and remand. On remand, the amended complaint’s second, third, fourth, fifth, sixth, and seventh counts remain for consideration on the merits. This Court’s conclusion that the Trustees breached their fiduciary duty, thereby permitting Diduck to prosecute this derivative action, has no bearing on the merits of Senyshyn’s alleged breach of fiduciary duty contained in the sixth claim.

. Judge Van Graafeiland's dissent suggests that Diduck’s derivative action should be dismissed because "[Judge Stewart] rejected as a matter of law plaintiffs contention that the [Trump-Equitable] defendants were joint employers,” Dissent Op. at 922, and because Diduck failed to make a pre-suit demand upon the trustees or show that such a demand would be futile. However, Judge Stewart reached no conclusion regarding whether Trump-Equitable in fact was a joint employer, stating that “[Diduck] has failed to show that the Trustees were aware of sufficient facts tending to show that the Trump defendants were joint employers with Kasz-ycki." Dist.Ct.Op. at 8 (emphasis added). Further, he dismissed the derivative action on the sole and “dispositive” ground that Diduck had failed to prove that the Trustees had breached their fiduciary duty. Id. at 3. The question of whether Diduck made a pre-suit demand or whether one would have proved futile is best left to Judge Stewart to resolve on remand.

. Judge Van Graafeiland dissents from this reversal, noting that the pre-suit demand requirement applies to RICO claims and stating that "I find no merit in Diduck’s substantive contention that the [Trump-Equitable] defendants committed a RICO violation.” Dissent Op. at 924. However, because Judge Stewart dismissed Diduck’s RICO claim on the narrow ground that the panel’s decision in Beauford barred it, consideration of the merits of that claim is best left to Judge Stewart on remand.