MCLAUGHLIN, District Judge.
TABLE OF CONTENTS
I. Summary Judgment Standard ....................................................267
II. Factual Background ...........................................................268
A. The REAL VEBA Employee Benefit Arrangement................................268
B. The Parties ..............................................................269
C. The Decor Plan, the Cetylite Plan, and the Castellano Plan................270
D. The Alleged Fiduciary Violations..........................................271
III. Threshold Questions ..........................................................274
A. ERISA Coverage............................................................274
B. Coverage of Fiduciary Responsibility Provisions The "Top Hat"
Exception...............................................................281
C. Fiduciary Status..........................................................284
IV. ERISA Fiduciary Duties .......................................................291
A. ERISA Section 403, 29 U.S.C. § 1103..................................292
B. ERISA Section 404, 29 U.S.C. § 1104..................................294
C. ERISA Section 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D)................295
D. ERISA Section 406(b)(1), 29 U.S.C. § 1106(b)(1)......................297
V. Relief.........................................................................297
This action arises out of alleged violations of fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., in connection with a multiple-employer employee death benefit arrangement. The Secretary of Labor (the "Secretary" or "DOL") moves for partial summary judgment as to three purported ERISA plans (collectively, the "Plans"): the Cetylite Industries Inc. Health and Welfare Benefit Plan (the "Cetylite Plan"), the Decor Coordinates Health and Welfare Benefit Plan (the "Decor Plan"), and the Domenic Castellano D.D.S., P.A. Health and Welfare Benefit Plan (the "Castellano Plan"). The Secretary brings her motion against only some of the defendants, namely: John J. Koresko, V ("Koresko"), Jeanne Bonney, PennMont Benefit Services, Inc. ("PennMont"), Koresko & Associates, P.C. ("KAPC"), and Koresko Law Firm, P.C. ("KLF"). The Court will refer to these defendants collectively as the "Koresko Defendants." The Secretary did not move for summary judgment against defendant Farmers & Merchants Trust Company of Chambersburg ("F & M Trust"), successor
The Secretary argues that the Plans are employee welfare benefit plans as defined by ERISA; that the Plans have plan assets in the form of employer contributions, insurance policy proceeds, and earnings therefrom; that the Koresko Defendants are ERISA fiduciaries with respect to those plan assets; and that the Koresko Defendants breached several of their fiduciary duties by failing to maintain plan assets in trust and transferring assets into non-trust accounts that they themselves controlled. The Court will grant the Secretary's motion as to defendants Koresko, Bonney, and PennMont for violations of ERISA Sections 403, 29 U.S.C. § 1103; 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A); and 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B) for all three Plans. The Court will grant the motion as to defendants Koresko, Bonney, and PennMont for violations of ERISA Section 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D) as to the Cetylite Plan, and deny without prejudice as to the Decor and Castellano Plans. The Court will deny the motion without prejudice as to KAPC and KLF, and as to violations of ERISA Section 406(b)(1), 29 U.S.C. § 1106(b)(1).
Summary judgment is appropriate if there is "no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(a). The moving party bears the initial burden of informing the court of the basis for its motion. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once a properly supported motion is made, the burden shifts to the nonmoving party to set forth specific facts showing that there is a genuine issue of material fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
A fact is "material" if it might affect the outcome of the suit under the governing law. Id. at 248, 106 S.Ct. 2505. A dispute is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. The court must view the facts in the light most favorable to the nonmoving party. See Sheridan v. NGK Metals Corp., 609 F.3d 239, 251 n. 12 (3d Cir.2010).
The Koresko Defendants' response to the Secretary's statement of undisputed facts purports to "dispute" the majority of the Secretary's factual recitations. However, their response is replete with legal arguments, lacks citations to the record, and generally does not comply with Federal Rule of Civil Procedure 56(c)(1) or this Court's procedures. See generally Koresko Stmt. Resp. (ECF No. 284). The Court considered properly supported facts genuinely disputed only where the Koresko Defendants provided citations to the record.
Defendant F & M Trust denied many of the Secretary's facts under Federal Rule of Civil Procedure 56(d), which states:
The Court of Appeals for the Third Circuit has interpreted this provision to require a
Thus, except where the defendants countered the Secretary's factual recitation with citations to the record, the Court considered any properly supported facts undisputed for the purposes of the motion pursuant to its discretion under Federal Rule of Civil Procedure 56(e)(2). The Court now sets forth those facts.
Defendant John J. Koresko ("Koresko") and his brother, Lawrence Koresko, run a loose, unincorporated association of unrelated employers called the Regional Employers Assurance Leagues ("REAL"). The REAL offers a program of employee welfare benefits, including death benefits, to employers through the Regional Employers Assurance Leagues Voluntary Employees' Beneficiary Association ("REAL VEBA") Trust, a multiple employer trust. Koresko and his brother sign documents and take actions on behalf of the REAL, which is neither an actual business entity nor a corporation. Koresko also wrote the plan and trust documents for the death benefit arrangement and the REAL VEBA Trust. Koresko Dep. 85-86 (Aug. 25, 2009) (GX 10); Koresko Aff. ¶¶ 3, 4, 5 (May 4, 2004) (GX 4); Master Trust Agreement, Whereas Cl. (GX 11).
Employers execute an adoption agreement in order to join the REAL. In doing so, they indicate their agreement to adopt the REAL VEBA "Plan" and subscribe to the REAL VEBA Trust. The adoption agreement allows employers to select the type and amount of benefits offered, and to set eligibility requirements. Eligible employees of adopting employers may then sign participation agreements to participate in the benefit arrangement. See, e.g., Castellano Adoption Agreement (GX 44); Castellano Participation Agreements (GX 46).
The REAL VEBA Plan Document ("Plan Document"), which governs the benefit arrangement, states that each adopting employer "shall in a timely manner contribute to the Trustee all amounts... necessary to provide all Benefits." Plan Document § 4.01(a)(1) (GX 14). Employer contributions are received into the REAL VEBA Trust to be held for the benefit of all employees covered in the arrangement. The Plan Document also permits the trustee to use employer contributions to purchase insurance policies on the lives of participating employees to fund the benefits. Master Trust Agreement
The REAL VEBA Master Trust Agreement ("Master Trust Agreement") provides that the plan administrator shall perform separate accounting of the balances in the entire REAL VEBA Trust allocable to employees of each adopting employer. But the agreement also states that separate accounting "shall not operate to prevent any portion of the Trust Fund from being available for the payment of any claim arising under the Plan." Master Trust Agreement § 4.4 (GX 11). See also Cetylite Summary Plan Description 5 (GX 35) ("Under the terms of the Plan, all assets of the Trust are available to pay all claims that are presented to the Trustee. This means that money contributed to the Plan by the Employer could be used to pay benefits of employees other than those of the Employer."). At the same time, under the Plan Document, benefits shall not be payable to any participant or beneficiary until the amount payable under the insurance policy that funds the benefit is received by the REAL VEBA Trust. Plan Document § 7.05(g) (GX 14).
The Plan Document provides that each adopting employer shall appoint a "Committee," which determines the beneficiaries to whom benefit payments are made, computes the amount of the benefits, and directs the trustee to pay benefits from the trust fund, among other responsibilities. However, the Plan Document also specifies that if an employer names a plan administrator in its adoption agreement, the administrator "shall assume and perform all and each and every [ ] duty and responsibility to the Committee," and that the term "Committee" in the Plan Document shall include the administrator. Plan Document §§ 5.05, 5.06, 6.01, 6.03 (GX 14).
PennMont is a Pennsylvania corporation that performs plan administrative services for the REAL VEBA Trust, but has no employees or physical assets of its own. Its work was and is performed by employees of the Koresko law firms, Koresko & Associates, P.C. ("KAPC"), and Koresko Law Firm, P.C. ("KLF"). PennMont maintains corporate offices at the same address as KAPC and KLF, functions like a division thereof, and operates on the premises thereof. 9/9/09 Tr. of Prelim. Injunction Hr'g 39-42 (GX 7); Bonney Dep. 95-96 (Aug. 19, 2009) (GX 8); Koresko Aff. ¶¶ 13-16 (May 4, 2004) (GX 4); DOL Stmt. ¶ 5; Koresko Stmt. Resp. ¶ 5.
John Koresko, a lawyer and certified public accountant, is the president of PennMont. He is also the sole shareholder of his law firms, KAPC and KLF. Jeanne Bonney was an employee of both KAPC and KLF and served as counsel to PennMont.
In March 2002, Community Trust Company ("CTC") became trustee of the REAL VEBA Trust. Subsequently, Farmers & Merchants Trust Co. of Chambersburg ("F & M Trust") became the trustee after merging with CTC on November 30, 2008. F & M Trust remained the trustee until January 15, 2011, when
John Koresko is the director, secretary treasurer, president, and counsel of the current REAL VEBA trustee, PPT. He manages PPT and directs all of its operations. PPT has no employees of its own; employees of the Koresko law firms perform PPT's operations. See Koresko Dep. 40-42, 45-48 (Aug. 25, 2009) (GX 10).
Decor Coordinates, Inc. ("Decor"), Cetylite Industries, Inc. ("Cetylite"), and Domenic M. Castellano, D.D.S., P.A. (the "Castellano Dental Practice") are among the many employers that adopted the benefit arrangement offered by the REAL VEBA Trust, or its predecessors.
The Adoption Agreements stated that the plan names would be the Decor Coordinates Inc. Health and Welfare Benefit Plan, the Cetylite Industries Inc. Health and Welfare Benefit Plan, and the Domenic M. Castellano, D.D.S. P.A. Health and Welfare Benefit Plan. Each agreement named PennMont as the plan administrator, provided death benefits to eligible employees, and did not require participant contributions. Each Adoption Agreement also defined the death benefit as calculated based on a set multiple of the participating employee's salary. Decor
Adoption Agreement §§ 2(a), 2(c), 4(a), 5(c) (GX 9); Cetylite Adoption Agreement §§ 2(a), 2(c), 4(a), 5(c) (GX 33); Castellano Adoption Agreement §§ 2(a), 2(c), 4, 5(c) (GX 44).
Each employer then subsequently made contributions into the REAL VEBA Trust on behalf of its participating employees. In 1995, 2000, and 2001, Decor wrote checks in the amounts of $100,000, $80,000, and $50,000 to the then REAL VEBA Trustee "f/b/o Decor Coordinates Inc. W.B.P." At least two Decor employees that did not own any portion of the company were listed in an inventory of insurance coverage sent from PennMont to Decor's president, Angelo Ferraro. See Decor Checks (GX 16); Ltr. from Jeanne Bonney to Angelo Ferraro (Nov. 15, 2001) (GX 18).
Cetylite sent multiple checks from 2000 through 2003 for payment into the master trust. Approximately 30 employees participated in Cetylite's arrangement with the REAL VEBA Trust. Cetylite Checks (GX 37); 9/3/09 Tr. of Prelim. Injunction Hr'g 5-6 (GX 36).
PennMont acknowledged receipt of at least one contribution check from the Castellano Dental Practice and indicated that future remittances should remain payable
The alleged fiduciary violations by the Koresko Defendants follow the same general pattern for each of the Plans. Life insurance policies were taken out on the lives of participating employees from Decor, Cetylite, and the Castellano Dental Practice. Following the deaths of these employees, proceeds from the insurance policies were paid to the REAL VEBA trustee, who transferred them into a business high performance money market account held by John Koresko and Jeanne Bonney.
CTC, the then-trustee of the REAL VEBA Trust, was not the account holder on these accounts. PennMont paid a certain amount of benefits to the intended beneficiary in its discretion as plan administrator. Most of the remaining policy proceeds were then transferred to the "Koresko Law Firm Death Benefit Escrow Account." The Court outlines these actions in more detail below.
In 1995, the United of Omaha Life Insurance Company issued a $2,500,000 life insurance policy on the life of Decor employee Angelo T. Ferraro. The insurance policy named "Commerce Bank, N.A., Trustee for Decor Coordinates, Inc. W.B.P." as the beneficiary and "Commerce Bank, N.A., Trustee" as the owner, with a listed address of "c/o Penn-Mont Benefit Svc." In 1997, policy ownership was assigned to "Corestates Bank, N.A., Trustee f/b/o Decor Coordinates W.B.P.," which also became the new beneficiary.
In 2001, Mr. Ferraro signed a beneficiary nomination form naming "The Trustee of the Ferraro Family Trust Dated April 26, 2001" as the beneficiary of any death benefits payable as a result of his participation in the Decor Plan. In January 2002, Mr. Ferraro died. After Mr. Ferraro's death, the Ferraro Family Trust submitted a REAL VEBA death benefit claim form to PennMont. Ferraro Beneficiary Nomination Form (GX 19); Ferraro Death Benefit Claim Form (GX 21).
On or about May 8, 2002, United of Omaha issued a check payable to "Community Trust Comp., Trustee" in the amount of $2,515,890.41, representing the proceeds from the policy that insured Mr. Ferraro. Later that month, PennMont deposited this check into a Commerce Bank account named the "Commerce Bank FBO REAL VEBA Trust, Community Trust Company Trustee," with Account No. Xxxxxx1638 ("CTC Trust Account"). DOL Stmt. ¶¶ 20, 21; Koresko Stmt. Resp. ¶¶ 20, 21; United of Omaha Check (GX 22); PennMont Record and Deposit Ticket (GX 23).
In November 2002, Koresko and Bonney opened a new business high performing
The Ferraro FUNB Account bank statement reflects that on or about November 14, 2002, CTC transferred $2,513,194.58 from Commerce Bank to the Ferraro FUNB Account. The bank statement recording this transfer referenced "EMPL DECOR COOR." FUNB Account Statement (GX 25). On or about November 18, 2002, shortly after opening the Ferraro FUNB Account, Jeanne Bonney issued a check in the amount of $2,027,723.94 from the Ferraro FUNB Account to the "Ferraro Family Trust dated 4/26/01." Bonney mailed the check to counsel for Mr. Ferraro's family. Ferraro Death Benefit Claim Form (GX 21); Ltr. and Check from Jeanne Bonney to Phillip Forbes (GX 26). On December 31, 2004, Koresko signed a check from the Ferraro FUNB Account for $494,166.53, payable to "Koresko Law Firm-Death Benefit Escrow Account." The cancelled check bears the endorsement "For Deposit Only xxxxx6507 Koresko Law Firm." GX 28.
Two more checks issued from the Ferraro FUNB Account: (1) a check for $1,213.35 to the U.S. Treasury dated April 14, 2004, and (2) a check for $3,041.48 to "Commerce Bank" dated March 10, 2006, which endorsement stated "xxxxx8992." At the time, Koresko and Bonney held a bank account in the name of "Angermeier Death Benefit Trust" with the account number xxxxx8992 (hereinafter the "Angermeier Account"). A Ferraro FUNB Account statement covering the period April 29, 2006 through May 31, 2006 showed a balance of zero dollars. GX 29; GX 30; GX 31; Account Statement (GX 32).
In 1995, the First Colony Life Insurance Company issued a $1,020,000 life insurance policy on the life of Cetylite employee Dale A. Kelling. The policy named "Trustee of the DE Valley League of Manufacturers Trust Under Trust Agreement dated 9/1/92" as the owner and beneficiary of the policy. In 1997, policy ownership was changed to "Corestates Bank, N.A., Trustee c/o Penn-Mont Benefit Services," which also became the new beneficiary. First Colony Pol'y (GX 38).
In 1995, Mr. Kelling executed a beneficiary nomination form naming his wife, Linda Kelling, as the beneficiary of any death benefits payable from his participation in the Cetylite Plan. Mr. Kelling died in June 2003. After Mr. Kelling's death, his wife submitted a REAL VEBA death benefit claim form to PennMont. Kelling Beneficiary Nomination Form (GX 39); Kelling Death Benefit Claim Form (GX 40).
In August 2003, First Colony Life Insurance Company wrote a check for $1,027,374.00, payable to the "Regional Employers Assurnce League Trst [sic] DTD 3/20/95 RESTATED 3/18/02." Shortly afterwards, PennMont employee Maggie Carroll submitted a premium payment request to the then REAL VEBA trustee: "Please cause the REAL VEBA Trustee to prepare payment as follows:... Kelling Family Death Benefit Trust $1,027,374.00." The payment request directed
A business high performance money market account with account number xxxxxxxx1675 was opened at Wachovia Bank, N.A., in the name of the "Kellig Gamily [sic] Death Benefit Trust" (hereinafter the "Wachovia Kelling Account"). Koresko and Bonney were listed as account holders and trustees. GX 42 at 8. On September 8, 2003, CTC, the REAL VEBA Trust trustee, issued a check in the amount of $1,027,374.00 payable to "Kelling Family Death Benefit Trust." The check was deposited into the Wachovia Kelling Account held by Koresko and Bonney. See GX 42 at 4, 8.
On October 24, 2003, Jeanne Bonney sent a letter to Linda Kelling, attaching a check from the Wachovia Kelling Account for $812,681.70, payable to Linda Kelling. GX 42 at 9-10. On December 31, 2004, Koresko signed a check drawn on the Wachovia Kelling Account for $216,115.61 payable to "Koresko Law Firm-Death Benefit Escrow Account." The cancelled check bears the endorsement: "For Deposit Only xxxxxx6507 Koresko Law Firm." GX 42 at 13.
Two more checks issued from the Wachovia Kelling Account: (1) a check for $236.18 to the U.S. Treasury, and (2) a check for $2,786.87 to "Commerce Bank," which endorsement indicated deposit to account number "xxxxx8992." The -8992 account number corresponded to that of the aforementioned Angermeier Account held by Koresko and Bonney. A Wachovia Kelling Account bank statement covering the period March 1, 2006 through March 31, 2006 showed a balance of zero dollars by the end of the period. GX 31; GX 42 at 16, 19, 20.
In 1995, Dr. Domenic M. Castellano, an employee of the Castellano Dental Practice, applied for a $750,000 life insurance policy from Chubb Life Insurance Company. The application named "Corestates Bank, N.A., Trustee f/b/o Dominic Castellano, D.D.S., W.B.P." as owner and beneficiary of the policy, with "PennMont Benefit Svcs." listed under owner address. The insurance company-subsequently renamed Jefferson Pilot Financial Insurance Company-issued the applied-for policy on Dr. Castellano's life in 1997. Castellano Application (GX 47); Jefferson Pilot Pol'y (GX 48).
Dr. Castellano executed a beneficiary nomination form naming his spouse, Gretchen Hutto Castellano, as the beneficiary of any death benefits payable from his participation in the Castellano Plan. Following the death of Dr. Castellano, a dispute developed between PennMont and Mrs. Gretchen Castellano regarding the payment of her benefit claim, which ultimately resulted in a lawsuit pending in this Court. Castellano Beneficiary Nomination (GX 49); REAL VEBA et al. v. Castellano, Case No. 2:03-cv-06903-MAM.
Koresko and Bonney opened a new business high performance money market account at Wachovia Bank in the name of "Castellano Death Benefit Trust" and with the account number xxxxxxxxx9604 (the "Wachovia Castellano Account"). The deposit account application lists Koresko and Bonney as trustees and authorized signatories. GX 50.
On July 9, 2003, the Jefferson Pilot Financial Insurance Company issued a check for $751,266.18 to the order of "REAL VEBA TRUST DTD 3/20/95, Jeanne Bonney as Trustee." The check indicated that it related to "Insured: Domenic M. Castellano."
On July 21, 2003, $751,266.18 was transferred from the Wachovia Castellano Account to the CTC Trust Account. The same amount was then redeposited back to the Wachovia Castellano Account the following day by CTC. GX 52; GX 53.
Subsequently, Koresko signed a check from the Wachovia Castellano Account for $759,112.98, payable to "Koresko Law Firm — Death Benefit Escrow Account." That check was negotiated and the endorsement on the check states "For Deposit Only xxxxx6507 Koresko Law Firm." GX 54. Two more checks issued from the Wachovia Castellano Account: (1) a check for $189.02 to the U.S. Treasury, and (2) a check for $3,318.72 to "Commerce Bank," which endorsement indicated deposit to account number "xxxxx8992." The -8992 account number corresponded to that of the aforementioned Angermeier Account held by Koresko and Bonney. GX 31; GX 55.
"ERISA is a comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans." Edwards v. A.H. Cornell & Son, Inc., 610 F.3d 217, 220 (3d Cir. 2010) (citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983)). Title I of ERISA covers "employee benefit plan[s]," of which there are two types: employee pension benefit plans or employee welfare benefit plans (hereinafter "EWBPs"). ERISA Section 3(3), 29 U.S.C. § 1002(3); ERISA Section 4(a), 29 U.S.C. § 1003(a).
ERISA imposes strict participation, vesting, and funding requirements for pension plans, but exempts welfare plans from those regulations. ERISA Section 201, 29 U.S.C. § 1051 (excepting welfare plans from provisions dealing with participation and vesting); ERISA Section 301, 29 U.S.C. § 1081 (excepting welfare plans from provisions dealing with funding). However, both pension and welfare plans are generally subject to ERISA's uniform rules concerning reporting, disclosure, and fiduciary responsibility. Edwards, 610 F.3d at 220; Deibler v. Local Union 23, 973 F.2d 206, 209 (3d Cir.1992).
The Secretary's motion presents two threshold questions: (1) First, whether and to what extent ERISA covers the REAL VEBA or the Plans at issue; and (2) Second, whether ERISA's fiduciary responsibility provisions apply and, if so, what fiduciary duties the Koresko Defendants had with respect to the Plans. The Court considers each question below.
The Court finds that the master REAL VEBA Trust is not an employee welfare benefit plan ("EWBP") as defined in ERISA, but that the Cetylite, Decor, and Castellano Plans are.
ERISA defines an EWBP as: (1) any "plan, fund, or program" (2) "established or maintained" (3) by an "employer or by an employee organization, or by both" (4) for the purpose of providing various benefits, including death benefits (5) for its participants or their beneficiaries.
ERISA does not define "plan, fund, or program." Whether a plan exists within the meaning of ERISA is "a question of fact, to be answered in light of all the surrounding facts and circumstances from the point of view of a reasonable person." Deibler v. Local Union 23, 973 F.2d 206, 209 (3d Cir.1992) (citing Wickman v. Nw. Nat'l. Ins. Co., 908 F.2d 1077, 1082 (1st Cir.1990)). The prevailing standard for determining the existence of a plan was set forth by the Eleventh Circuit in Donovan v. Dillingham, 688 F.2d 1367 (11th Cir.1982). The Donovan standard, since applied by the Third Circuit, provides that an ERISA plan exists if "from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits." Gruber v. Hubbard Bert Karle Weber, Inc., 159 F.3d 780, 789 (3d Cir. 1998) (emphasis added) (citing Deibler v. Local Union 23, 973 F.2d 206, 209 (3d Cir.1992)).
The "established or maintained" element seeks to ascertain whether the plan is part of an employment relationship by looking at the degree of participation by the employer in the establishment or maintenance of the plan. See Peckham v. Gem State Mut., 964 F.2d 1043, 1049 (10th Cir. 1992). "[N]o single act in itself necessarily constitutes the establishment of the plan, fund or program." Donovan v. Dillingham, 688 F.2d 1367, 1373 (11th Cir.1982). The decision to extend benefits, for example, is not itself the establishment of a plan or program. See id. at 1373.
Nevertheless, "[a]n employer ... can establish an ERISA plan rather easily." Gruber, 159 F.3d at 789 (citation omitted). An employer's payment of insurance premiums is substantial evidence of the existence of an ERISA-covered plan. See id. (citing Robinson v. Linomaz, 58 F.3d 365, 368 (8th Cir.1995)). The Third Circuit has also stated that the crucial factor in determining whether a plan has been established or maintained is whether the employer expressed an intention to provide benefits on a regular and long-term basis, and that it does not matter whether the employer did so by purchasing insurance or by subscribing to a multiple employer trust. Deibler, 973 F.2d at 209; Gruber, 159 F.3d at 789.
It is undisputed that the REAL VEBA Trust-that is, the master multiple employer trust into which all the employer contributions are deposited-is not itself an employee welfare benefit plan as defined in ERISA. The Third Circuit has held that there are two broad requirements for a multiple employer plan to constitute an EWBP. Gruber, 159 F.3d at 787. First, the group of employers that establishes and maintains the plan must be a "bona fide" association of employers tied by a common economic or representation interest, unrelated to the provision of benefits. Second, the employer-members of the organization that sponsors the plan must exercise control, either directly or indirectly, both in form and in substance, over the plan. Id.
At the very least, the employer members of the REAL lack commonality of interest apart from the provision of benefits
Nevertheless, the Secretary has established that the Cetylite, Decor, and Castellano Plans are single-employer EWBPs covered by ERISA. In Gruber, the Court of Appeals for the Third Circuit recognized that individual employer members of a program sponsored by an association that is not itself an "employer" or "employee organization" may yet establish a single employer welfare benefit plan covered by ERISA. See 159 F.3d at 786, 787, 789-90. This view is consistent with prior Department of Labor advisory opinions. See, e.g., DOL Advisory Op. No. 96-25A, 1996 WL 634362, at *3 (Oct. 31, 1996); DOL Advisory Op. No. 82-57A, 1982 WL 21240, at *2 (Nov. 2, 1982).
The Cetylite, Decor, and Castellano Plans qualify as "plans, funds, or programs" under the Donovan criteria. First, a reasonable person would determine that the intended benefits are death benefits, and that the class of beneficiaries includes each eligible employees of the employers that sign participation agreements. Second, a reasonable person would determine that the financing for the Plans comes from the REAL VEBA Trust, as reinsured through the purchase of life insurance policies on the lives of participating employees. Lastly, a reasonable person would determine that to receive benefits, beneficiaries must apply to the plan administrator, PennMont, upon the death of the insured.
That the Plans are ERISA EWBPs finds further support in Gruber's instruction that an employer's payment of insurance premiums is substantial evidence of the existence of an ERISA-covered plan. See Gruber, 159 F.3d at 789; see also Sipma v. Mass. Cas. Ins. Co., 256 F.3d 1006, 1012 (10th Cir.2001) (payment of premiums is substantial evidence that a plan has been established). The facts set forth above show that Decor, Cetylite, and the Castellano Dental Practice each made monetary contributions on behalf of their employees to the REAL VEBA Trust, and that some or all of those contributions were used to purchase life insurance policies on the lives of participating employees that then funded the death benefits. This fact is substantial evidence that these three employers established or maintained EWBPs covered by ERISA.
It is important to note that the Gruber court rejected the argument that the employers were not paying insurance premiums because they were not paying money directly to an insurer. In Gruber, individual employers made contributions to a trustee account, and a trustee then disbursed the pooled contributions to pay eligible medical expenses pursuant to the trust documents. 159 F.3d at 789. In this case, the organizational structure contains one additional level of complexity. Instead of paying benefits directly from contributions pooled from multiple employers, the REAL VEBA trustee reinsures the trust's
Finally, the Court notes that its conclusion — at least with respect to the Cetylite Plan-is consistent with and supported by the Summary Plan Description that was made available to the employee participants. The Cetylite Summary Plan Description flatly states that the Cetylite Plan "is covered by the Employee Retirement Income Security Act of 1974 (`ERISA') which was designed to protect employees' rights under benefit plans." Cetylite Summary Plan Description § 13 (GX 35). The document then explains that ERISA imposes duties upon people who are responsible for operations of the plan, and that these fiduciaries have a duty to act in the best interest of participants and their beneficiaries. Id. Although statements in summary documents do not constitute the terms of an ERISA plan,
The Koresko Defendants contend that fact issues regarding whether employers engaged in administrative activities preclude summary judgment. See Koresko Opp. 22-24. They rely mainly on two cases in support of their argument.
The Koresko Defendants cite a Fifth Circuit case that states that ERISA does not regulate "bare purchases of ... insurance where ... the purchasing employer neither directly nor indirectly owns, controls, administers or assumes responsibility for the policy or its benefits." Taggart Corp. v. Life & Health Benefits Admin., Inc., 617 F.2d 1208 (5th Cir.1980). First, the Eleventh Circuit in Donovan expressly rejected the implication from Taggart that an employer that only purchases insurance or subscribes to a multiple employer trust cannot be said to have established an EWBP. See Donovan, 688 F.2d at 1375. The Third Circuit applies the Donovan standard of what constitutes a "plan."
The Koresko Defendants also rely on Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987), for the proposition that ERISA is not implicated when an employer's obligation to pay a benefit is predicated on the occurrence of a single contingency that may never materialize. The issue in Fort Halifax was whether ERISA preempted a Maine statute requiring employers to provide a one-time severance payment to employees in the event of a plant closing. The Supreme Court held that the Maine statute was not preempted because it did not establish or require employers to establish an employee benefit plan. The Fort Halifax Court reasoned that there was no employee benefit plan because the employer:
Id. at 12, 107 S.Ct. 2211.
First, Fort Halifax itself recognizes that arrangements to provide death benefits can qualify as ERISA plans because "[w]hile death benefits may represent a one-time payment from the perspective of the beneficiaries, the employer clearly foresees the need to make regular payments to survivors on an ongoing basis." Id. at 14, 107 S.Ct. 2211.
Second, Koresko interprets Fort Halifax too broadly. This Court does not read Fort Halifax to stand for the proposition that the employer itself must be the one responsible for the ongoing administrative program in order to establish an employee benefit plan. The lack of employer involvement in ongoing administration does not establish the absence of an ERISA plan. See, e.g., Randol v. Mid-West Nat'l Life Ins. Co., 987 F.2d 1547, 1550 n. 5 (11th Cir.1993) (stating that there is no requirement that the employer play any role in administering the plan in order for it to be an ERISA EWBP); Custer v. Pan Am. Life Ins. Co., 12 F.3d 410, 417-18 (4th Cir.1993) (finding an ERISA plan where company obtained group insurance policy, determined the benefits to be provided, negotiated policy terms, and paid for half of the costs, but was not otherwise involved in plan administration); Brundage-Peterson v. Compcare Health Servs. Ins. Corp., 877 F.2d 509, 509-10 (7th Cir.1989) (finding that a "barebones plan" was an ERISA plan where employer contracted with two insurance companies to insure the employer's employees and paid the employees' share of insurance premiums). This reading of Fort Halifax accords with the statutory definition of an EWBP, which uses the disjunctive "established or maintained" and does not include any requirement that the employer administer or control the plan, fund, or program. ERISA Section 3(1), 29 U.S.C. § 1002(1) (emphasis added). Thus, Fort Halifax does not exclude from ERISA coverage an arrangement where, as here, employers face periodic demands on their assets in the form of employer contributions, but designate responsibilities and pay fees to an administrator,
Defendant F & M Trust raises one last argument: that section 10.19 of the Plan Document raises a genuine issue of material fact as to whether Cetylite, Decor, and the Castellano Dental Practice created their own individual plans. F & M Opp. 18-19. That provision states:
Plan Document § 10.19 (GX 14) (emphasis added). However, that provision does not appear to be referring to a "plan" for the purposes of ERISA. Rather, the context of the provision suggests that the language refers to the Internal Revenue Code and accompanying regulations. Because whether a plan is a single plan for tax purposes has no bearing on whether the employers formed an EWBP for the purposes of ERISA, the provision does not suffice to raise a genuine issue of material fact about whether the Plans are EWBPs under ERISA.
In sum, the Court finds that Cetylite, Decor, and the Castellano Dental Practice each established or maintained a plan, fund, or program under the prevailing Donovan criteria.
Federal regulations contain one additional requirement for a plan to be an "employee benefit plan" covered by Title I of ERISA. Under 29 C.F.R. § 2510.3-3(b), the term "employee benefit plan" does not include any plan, fund or program, under which no employees are participants. The regulation states that "[a]n individual and his or her spouse shall not be deemed to be employees with respect to a trade or business ... which is wholly owned by the individual or by the individual and his or her spouse." 29 C.F.R. § 2510.3-3(c). In other words, to be an EWBP covered by Title I of ERISA, the Plans must have at least one participant in the plan other than the owner or her spouse — that is, at least one "non-owner employee" ("NOE"). Yates v. Hendon, 541 U.S. 1, 21, 124 S.Ct. 1330, 158 L.Ed.2d 40 (2004).
There is undisputed record evidence that each of the Plans at issue originally involved at least one participating non-owner employee. Among the participants in the Decor Plan were Joseph Ferraro and Bruce Hall, who had life insurance policies for $520,000 and $604,500, respectively. The Cetylite Plan covered approximately
The Koresko Defendants argue that a purported July 29, 2009 Amendment executed by PennMont excluded any NOEs from the Plans. That amendment states:
July 2009 Amendment, Part III (DX 1). According to the Koresko Defendants, because the Plans no longer have any NOEs, they cannot be ERISA plans by operation of 29 C.F.R. § 2510.3-3(b), even if they were previously ERISA plans. Koresko Opp. 17. The Court agrees with the Secretary that the purported July 29, 2009 Amendment was not valid under the terms of the REAL VEBA Plan Document, for two reasons.
First, it appears that PennMont did not have authority to amend the plan. ERISA Section 402(b)(3), 29 U.S.C. § 1102(b)(3), states that every employee benefit plan shall "provide a procedure for amending such plan, and for identifying the persons who have authority to amend the plan." Section 9.03 of the REAL VEBA Plan Document governs the procedure for amendments to the Plan, and sets forth the actors with authority to amend the plan. It provides that employers have the right to "amend the Benefit structures in this Plan" and that "[t]he League shall have the right to amend this Plan, in its sole discretion, from time to time.... Such amendments shall be set forth in an instrument in writing executed by the amending party. An amendment may be current, retroactive or prospective."
The purported July 29, 2009 Amendment was not signed by the REAL, but rather by PennMont, the plan administrator, through Koresko's brother.
Id. There is a signature line for trustee F & M Trust (the successor to CTC) for "acknowledgment," but it is unsigned. Id.
The Koresko Defendants have not pointed the Court to anything in the Plan Document giving the plan administrator authority to amend the plan, or defining the "League" as the "Administrator." Nor do they assert that John Koresko signed the
Section 6.03 of the Plan Document does permit the "Committee" to "make any amendments to the Plan (except with respect to contribution rates) where necessary to meet the requirements of law or to protect the interests of the Participants." Plan Document § 6.03(h) (GX 14) (emphasis added). As a reminder, the Plan Document basically equates the "Committee" with the plan administrator when, as here, a plan administrator has been named. Id. § 6.03. However, the Koresko Defendants have not argued that authority for PennMont to amend stemmed from this provision. Nor have they contended that the July amendment was necessary to meet the requirements of law or to protect the interests of the participants.
In any case, the amendment is invalid for a second reason: the Plan Document limits the amendments that can be made by specifying that "no amendment shall ... [c]reate or effect any discrimination in favor of Participants who are highly compensated, who are officers or [sic] the Employer, or who are stockholders of the Employer." Id. § 9.03(c)(3); cf. id. § 3.01(b)(1) ("This Plan does not permit any condition for Eligibility which would limit eligibility or benefits to officers, shareholders, or highly compensated Employees."). Eliminating non-owner employees from the arrangement all together violates that prohibition.
In other words, even if John Koresko or PennMont had authority to amend the Plan Document, the Plan Document specifically prohibits amendments that create discrimination in favor of highly compensated employees, or officers or stockholders. Therefore, the provision eliminating NOEs from plan coverage flatly violates the Plan Document and is invalid.
Lastly, as a policy matter, it would be wholly contrary to the purposes of ERISA if ERISA-covered employee benefit plans could avoid subsequent enforcement of ERISA provisions that once applied by simply eliminating ERISA coverage by amendment.
ERISA's provisions regulating fiduciary responsibility are located in Part 4 of Subtitle B of Title I. ERISA Section 401, 29 U.S.C. § 1101, provides that these fiduciary responsibility provisions apply to any employee pension or welfare benefit plan, but with two exceptions. The Koresko Defendants argue that one of these exceptions, the so-called "top hat" exception, applies and exempts the Plans from ERISA fiduciary responsibility provisions all together.
Top hat plans are (1) "unfunded" and (2) "maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees."
Although the Third Circuit has not itself addressed the issue, most other courts have held that the burden of establishing the existence of a top hat plan rests on the party asserting that it is a top hat plan. See, e.g., MacDonald v. Summit Orthopedics, Ltd., 681 F.Supp.2d 1019, 1023 (D.Minn.2010); In re New Century Holdings, Inc., 387 B.R. 95, 110 (Bankr. D.Del.2008); Alexander v. Brigham & Women's Physicians Org., Inc., 467 F.Supp.2d 136, 142 (D.Mass.2006), aff'd, 513 F.3d 37 (1st Cir.2008); In re IT Grp., Inc., 305 B.R. 402, 407 (Bankr.D.Del.2004), order aff'd by In re IT Grp., Inc., 448 F.3d 661 (3d Cir.2006).
The Court need not decide whether the Plans were maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees because the Court finds that the Plans were funded.
The Court of Appeals for the Third Circuit recently set forth the two key factors in determining whether a plan is "funded" or "unfunded" under ERISA:
In re IT Grp., Inc., 448 F.3d 661, 669 (3d Cir.2006).
In IT Group, the employer agreed to establish a separate trust in connection with a deferred compensation plan, and to transfer over to the trust such assets for the plan as it determined in its discretion to be appropriate. In actuality, no funds were deposited into the trust. Id. at 665-66, 669. The plan and trust documents explicitly stated that the "Plan constitutes an unfunded plan" and that the establishment of the separate trust would not affect the status of the plan as unfunded. In particular, the trust document explained that assets contributed to the trust were held subject to the claims of the employer's creditors in the event of insolvency. Id. at 665-66. The Third Circuit held that even if funds had actually been deposited into the segregated trust, the plan was unfunded. The separate trust set up by the employer in IT Group was essentially a "rabbi trust," an irrevocable trust in which funds are held out of reach of the employer and separate from the employer's other assets, but subject to the claims of employer's creditors in the event of insolvency. Id. at 665.
Here, the REAL VEBA Trust assets are separate and set aside from the general assets of the adopting employers. But unlike in IT Group, there is no indication that the REAL VEBA Trust is a rabbi trust. The Koresko Defendants have not pointed to any plan or trust provision rendering REAL VEBA Trust assets vulnerable to the claims of the creditors of adopting employers in the event of employer insolvency.
The Koresko Defendants counter that the death benefits promised to the beneficiaries are uncertain and unvested, and that the beneficiaries therefore have no legal right greater than that of general unsecured creditors to the assets of the REAL VEBA Trust. In support, they cite plan provisions that confer absolute discretion on the plan administrator to designate the beneficiary to whom payment shall be made, the amount of payment, and that permit the trustee to pay benefits out of either insurance contracts or other funds held by the trustee. Plan Document §§ 5.04, 5.06(b), 6.03 (GX 14).
But whether the benefits are vested is not the relevant inquiry under In re IT Group. Again, the inquiry is whether there are funds separate from the general assets of the corporation-that is, the employer-for the payment of plan benefits, and whether the beneficiaries have a legal right greater than that of the employer's general unsecured creditors to those assets. 448 F.3d at 667, 669. Here, the corpus of the REAL VEBA Trust is the res separate from the general assets of the employer that beneficiaries look toward to satisfy their claims. The provisions cited by the Koresko Defendants have no bearing on whether creditors of adopting employers can reach the assets of the REAL VEBA Trust in the event of the employers' insolvency. The fact that the plan administrator has discretion to designate the beneficiary and determine the amount and source of benefit payments is irrelevant to the funding inquiry.
The Court's conclusion that the Plans are funded is bolstered by various provisions in the governing documents. For example, the Plan Document states:
Plan Document § 7.05(g) (GX 14) (emphasis added). Furthermore, section 6.09 of the Plan Document states:
Plan Document § 6.09 (GX 14) (emphasis added). The insurance policies that finance the benefits are owned by the REAL VEBA trustee, and thus are not merely general assets of the employer. Id. §§ 7.05(a), (f).
Thus, the Court concludes that the Plans were not "unfunded" top hat plans exempt from ERISA's fiduciary responsibility provisions. Because the fiduciary responsibility provisions apply to these Plans, the Court proceeds to analyze whether the Koresko Defendants are fiduciaries with respect to the Plans.
ERISA defines "fiduciary" not in terms of formal trusteeship, but in functional terms of control and authority over the plan. Srein v. Frankford Trust Co., 323 F.3d 214, 220 (3d Cir.2003). Under ERISA, even if a person
ERISA Section 3(21)(A), 29 U.S.C. § 1002(21)(A) (emphasis added). The statutory definition thus requires that a fiduciary "must be someone acting in the capacity of manager, administrator, or financial advisor to a plan." Pegram v. Herdrich, 530 U.S. 211, 222, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) (internal quotations omitted); Bd. of Trustees of Bricklayers and Allied Craftsmen Local 6 of N.J. Welfare Fund v. Wettlin Assocs., Inc., 237 F.3d 270, 272 (3d Cir.2001).
Discretion is a prerequisite to fiduciary status for a person generally managing an ERISA plan under the first clause of subsection (i) or administrating a plan under subsection (iii). However, under the second clause of subsection (i),
The Secretary relies primarily on this second clause of subsection (i) to argue that the Koresko Defendants are fiduciaries subject to ERISA's fiduciary responsibilities.
ERISA employee welfare benefit plans need not have plan assets.
Neither ERISA nor the Department of Labor regulations clearly define the term "plan assets." The statute provides, in relevant part, that plan assets are "plan assets as defined by such regulations as the Secretary may prescribe." ERISA Section 3(42), 29 U.S.C. § 1002(42). The regulations address the scope of "plan assets" in two specific contexts: (1) where an employee benefit plan invests in another entity, 29 C.F.R. § 2510.3-101, and (2) where contributions to a plan are withheld by an employer from employees' wages, 29 C.F.R. § 2510.3-102. Secretary of Labor v. Doyle, 675 F.3d 187, 203 (3d Cir.2012).
The Secretary makes two arguments as to why the Plans have plan assets: (1) that under ordinary notions of property law, a plan obtains a beneficial interest if the property is held in trust for the benefit of the plan or its participants and beneficiaries; and (2) that 29 C.F.R. § 2510.3-101(h)(2) applies and controls. The Court addresses each argument below.
The parties do not appear to dispute that the governing standard for defining "plan assets" is the one recently articulated by the Court of Appeals for the Third Circuit in Secretary of Labor v. Doyle, 675 F.3d 187 (3d Cir.2012).
The Third Circuit has instructed that the first step in identifying the property of an ERISA plan is to consult the documents establishing and governing the plan. A court should then, in light of these documents, consult contracts to which the plan is a party or other documents establishing the rights of the plan.
Per Doyle, the Court begins with the documents establishing and governing the Plans: the Plan Document, the Trust Agreement, and the Adoption Agreement. These documents make clear that the REAL VEBA trustee, not any individual employer, employee, beneficiary, or single-employer plan, has legal ownership over the insurance policies on the participating employees' lives, as well as the employers' contributions. For example, the Master Trust Agreement governing the REAL VEBA Trust states that:
Master Trust Agreement § 4.6 (emphasis added) (GX 11). See also Plan Document §§ 7.05(a), (f) (GX 14) (noting that insurance policies are contracts between the trustee and the insurer, and that policies are owned by the trustee). This provision vests legal title to all property received by the trustee-including employer contributions and income therefrom-solely and entirely in the trustee.
A welfare plan will have a beneficial interest in assets if the employer establishes a trust on behalf of a plan, or specifically indicates in the plan documents or instruments that separately maintained funds belong to the plan. See, e.g., DOL Advisory Op. 94-31A, 1994 WL 501646, at *2 (Sept. 9, 1994). See also, e.g., DOL Advisory Op. 99-08A, 1999 WL 343509, at *3 (May 20, 1999); DOL Advisory Op. 92-24A, 1992 WL 337539, at *2 (Nov. 6, 1992) (same). In this case, several provisions of the governing documents confirm that the assets in the REAL VEBA Trust are held in trust for the exclusive benefit of the participating employees and beneficiaries of employers that adopt the REAL VEBA benefit arrangement.
Master Trust Agreement § 2.1 (GX 11) (emphasis added). The Plan Document contains similar provisions providing that the trust corpus and income shall be used for the exclusive benefit of participating employees and their beneficiaries. See Plan Document §§ 2.01, 2.03, 2.04, 9.02 (GX 14). Section 4.6 of the Master Trust
This case does raise the question of whether the Decor, Cetylite, and Castellano Plans must have an individual beneficial ownership interest for the assets in the REAL VEBA Trust to qualify as assets of these Plans. In other words, in the context of a multiple employer trust, must there be a demonstration of intent to create a beneficial interest specifically as to that individual employer's plan, as opposed to other plans whose assets are also in the multiple employer trust?
There is little case law dealing with similar multiple employer trust arrangements, but under ordinary non-ERISA law, persons can hold property jointly in undivided interests. See, e.g., Restatement (Third) of Property (Servitudes) § 2.3 cmt. a (2000) ("An estate in land owned by more than one person is held in undivided interests."). Thus, following the principle articulated in Doyle that plan assets are to be identified on the basis of ordinary notions of property rights under non-ERISA law, the Court concludes that in the context of a multiple employer trust, funds as to one employer's plan need not be segregated from those of another employer's plan (as opposed to segregated from the employers' general corporate assets) to qualify as plan assets. ERISA plans can have assets by virtue of holding an undivided beneficial interest in commingled trust funds, even if other plans also own an undivided beneficial interest therein.
The RLJCS case cited by F & M Trust does not mandate a finding to the contrary. RLJCS Enterprises, Inc. v. Professional Benefit Trust Multiple Employer Welfare Benefit Plan & Trust ("RLJCS"), 487 F.3d 494 (7th Cir.2007). In that case, as here, the Professional Benefit Trust offered life and other benefits to small corporations-partly for tax reasons and also to spread risk. To fund the benefits, the Trust took out insurance on the lives of the participating employees. As here, the trust was named as the owner of the policy. The issue in RLJCS was whether former participants in the Trust were entitled to distributions of demutualized stock of insurers that had issued the policies on their lives. Judge Easterbrook held that because "only the Trust has any property interest in any particular policy ... [it] follows that distributions of cash or stock attributable to any policy also belong to the Trust." 487 F.3d at 497. He explained that the Trust does not buy insurance policies on behalf of beneficiaries; rather "it does so for its own security." Id. at 496. The participating employers contract and buy a promise of a death benefit to be paid by the Trust, and the Trust chooses where and how to reinsure that obligation. Because the Trust pays the policy premiums, the Trust owns the policies, and any demutualization proceeds therefrom. Id. at 498-99.
Although RLJCS presents similar facts to this case, that court examined a different legal issue than the one at bar. RLJCS addressed whether the individual insured or his employer had a property interest in the proceeds of the insurance policy taken on his life. By contrast, this case deals with whether the adopting employers' Plans had a beneficial ownership interest in the same. The difference is crucial. In this case, even though the Court finds that the Plans have an undivided beneficial interest in the employer contributions, the insurance policy proceeds, and income thereon, the benefits to which any individual beneficiary is entitled would still be determined by the plan administrator pursuant to the Plan Document and
A common refrain throughout the Koresko Defendants' briefing is that the beneficiaries have a mere expectancy, not a vested beneficial interest. Koresko Opp. 29. They argue that any potential beneficiaries' receipt of death benefits remains uncertain until the plan administrator exercises discretion in their favor to pay them benefits. The Koresko Defendants make a related argument that in a discretionary trust, the beneficiary has a mere expectancy until the trustee elects to make a payment. Koresko Op. 29 n. 20. But once again, the relevant inquiry regarding whether there are plan assets requires examining whether the plan, not any individual beneficiary, has a beneficial ownership interest. Doyle, 675 F.3d at 203-04.
Moreover, the record does not support the Koresko Defendants' mere assertion that the REAL VEBA Trust is a discretionary trust. A discretionary trust is one in which the settlor gives the trustee authority to use discretion in the timing and amount of income payments to the beneficiary. George T. Bogert & George G. Bogert, The Law of Trusts & Trustees § 228 (Westlaw 2011). The trustee in a discretionary trust may have sole, absolute, and uncontrolled discretion whether to pay or apply trust income or principal to or for the benefit of the beneficiary. Notwithstanding language in the Plan Document conferring sole and absolute discretion upon the plan administrator to interpret plan provisions, PennMont's discretion to pay benefits in this REAL VEBA arrangement is not unbridled: the administrator must pay benefits in accordance with the terms of Plan Document and the employer's Adoption Agreement. The Koresko Defendants have not cited any cases holding that an ERISA fiduciary's discretion to pay benefits according to a plan document somehow transforms assets from which the fiduciary pays claims to non-plan-assets. Nor would it make sense to find that any time a plan administrator has discretion to interpret plan documents while paying benefit claims, there are no plan assets under ERISA, since many ERISA plans confer such discretion on the plan administrator.
To summarize, the Court concludes that the Decor, Cetylite, and Castellano Plans have an undivided beneficial interest in the corpus of the REAL VEBA Trust (including employer contributions, insurance policy proceeds, and income therefrom) under the governing plan documents and are, therefore, plan assets to which fiduciary duties attach. The nature of any particular
Although the Court does not rely on this regulation, the Court's conclusion that the Plans have plan assets finds support in 29 C.F.R. § 2510.3-101. Section 2510.3-101(h)(2) states:
29 C.F.R. § 2510.3-101(h)(2) (emphasis added). The comments accompanying this regulation in the Federal Register suggest that the intention of this provision was "to apply primarily to so-called `multiple employer trusts.'" Final Regulation Relating to the Definition of Plan Assets, 51 Fed. Reg. 41262-01, 41263 (Nov. 13, 1986). Significantly, section 2510.3-101(j) sets forth the following example regarding how (h)(2) operates:
29 C.F.R. § 2510.3-101(j)(12) (emphasis added). To the extent this regulation applies to the REAL VEBA Trust, it supports the Court's conclusion above that (1) the Plans had an undivided beneficial interest in the assets of the REAL VEBA Trust, and (2) the Plans had plan assets, and (3) hence, anyone with authority or control respecting the management or disposition of such assets was an ERISA fiduciary subject to ERISA's fiduciary responsibility provisions.
Below, the Court turns to the question of whether each individual Koresko Defendant was a fiduciary.
The Court finds that the undisputed facts establish that PennMont, Koresko, and Bonney are fiduciaries subject to ERISA's fiduciary responsibility provisions. However, the record as it stands does not support a similar finding as to Koresko & Associates, P.C. ("KAPC") or Koresko Law Firm ("KLF").
It is undisputed that PennMont is the plan administrator of the Plans. As such, PennMont is necessarily a fiduciary because it exercises "discretionary authority or discretionary responsibility in the administration" of the Plans under ERISA Section 3(21)(A)(iii), 29 U.S.C. § 1002(21)(A)(iii).
As to the remaining Koresko Defendants-Koresko, Bonney, KAPC, and KLF-the relevant ERISA provision is section 3(21)(A)(i), which, to recap, states that a person is an ERISA fiduciary 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." ERISA Section 3(21)(A)(i), 29 U.S.C. § 1002(21)(A)(i). The Third Circuit has held that any control over the disposition of plan assets renders a person who has control a fiduciary. Bd. of Trustees of Bricklayers & Allied Craftsmen Local 6 v. Wettlin Assocs., Inc., 237 F.3d 270, 273 (3d Cir.2001).
As set forth in the facts section above, the record shows that: (1) Koresko and Bonney were listed as trustees and authorized signatories on the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account, into which CTC transferred monies from the CTC Trust Account; (2) Koresko and Bonney each signed at least one check from the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account. See supra. The Koresko Defendants do not genuinely dispute any of these facts with supporting factual citations. Indeed, in their opposition, they maintain that they had authority to perform these actions. Koresko Opp. 37-39. As such, the undisputed facts demonstrate that Koresko and Bonney exercised authority or control over the disposition of the Plans' assets, which were deposited into the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account.
The record is not so clear, however, with respect to KAPC or KLF. The facts indicate that certain amounts from the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account were paid into the "Koresko Law Firm-Death Benefit Escrow Account." However, there is nothing in the record to demonstrate who had authority or control over that account.
The Secretary argues that the law firms are fiduciaries because they performed all the work for PennMont and had full responsibility for plan administration, including handling and managing benefit claims. She suggests that since Bonney and Koresko worked as employees and agents of the law firms, the firms exercised authority and control over plan assets by extension. DOL Br. 21. But it is not clear to the Court based on the briefing submitted at this stage why this is the case. Cf. In re Bank of Am. Corp. Securities, 756 F.Supp.2d 330, 346-47 (S.D.N.Y.2010) (discussing a split in authority regarding whether the doctrine of respondeat superior provides an independently viable theory of recovery in the ERISA context). Discovery may well show that KAPC and KLF exercised authority or control over plan assets, but the record at this stage does not support summary judgment in the Secretary's favor as to these defendants.
Thus, for the purposes of this motion, the Court considers only whether PennMont, Koresko, and Bonney (the "Koresko fiduciaries") violated their fiduciary duties to the Plans.
The Supreme Court has found that Congress intended to incorporate the fiduciary standards of trust law into ERISA, and
The Secretary essentially relies on the same factual predicate for most of the alleged fiduciary violations: (1) Insurance proceeds on the lives of participating employees in the Plans were paid by the insurance company to CTC, the then trustee of the REAL VEBA Trust; (2) CTC transferred some or all of those proceeds to the Ferraro FUNB Account, the Wachovia Kelling Account, or the Wachovia Castellano Account;
Section 403 of ERISA requires that:
ERISA Section 403(a), 29 U.S.C. § 1103(a) (emphasis added). The record in this case shows that CTC was the trustee of the REAL VEBA Trust at the relevant time periods, but that John Koresko and Jeanne Bonney-and not CTC — were account holders and signatories on the Ferraro FUNB Account, the Wachovia Kelling Account, or the Wachovia Castellano Account into which assets of the Plans were transferred.
The Koresko Defendants' argument that the accounts were "trust accounts" is inapposite because Koresko and Bonney were not trustees named in the trust or plan instrument as required by ERISA. Nor were they appointed by a named fiduciary. Similarly, the Koresko Defendants' argument that section 4.4 of the Master Trust Agreement permits the
The Koresko Defendants also cite section 2.05 of the Plan Document and a Custodial Agreement between CTC and Koresko & Associates, P.C., dated March 21, 2002, for the proposition that CTC was permitted to and did in fact authorize Koresko and Bonney to serve as trustees on the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account. Koresko Opp. 39 (citing 9/9/09 Tr. of Prelim. Injunction Hr'g 168, where Jeanne Bonney discusses the Custodial Agreement). In the Custodial Agreement, CTC and Koresko & Associates, P.C. purported to agree that the latter would act as agent for the custody of certain insurance policies owned by the trustee. Custodial Agreement (GX 65).
However, although ERISA permits plans to allocate fiduciary responsibilities among named fiduciaries, or delegate responsibilities to persons other than named fiduciaries when the plan instrument expressly so provides, the statute specifies that trustee responsibilities cannot be so allocated or delegated.
Plan Document § 2.05 (GX 14) (emphasis added). There is no indication that CTC appointed Koresko or Bonney as investment managers, or that Koresko and Bonney acknowledged in writing that they were fiduciaries with respect to the trust. Thus, the purported delegation of authority to KAPC does not abrogate the statutory requirement in ERISA Section 403(a) that assets be held in trust by a trustee.
Section 404(a)(1)(A) of ERISA requires fiduciaries to discharge duties with respect to a plan "solely in the interest of the participants and beneficiaries" and "for the exclusive purpose of (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan." Relatedly, Section 404(a)(1)(B) of ERISA imposes on fiduciaries the duty to act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." ERISA Section 404(a)(1), 29 U.S.C. § 1104(a)(1).
The Secretary argues that by directing or permitting that plan assets be diverted into accounts subject to their sole control, the Koresko fiduciaries violated their duty of loyalty under (a)(1)(A) and duty of care, prudence, and diligence under (a)(1)(B). The Court agrees.
Trust law imposes a duty on trustees to avoid placing themselves in a position that may prevent their functioning with the complete loyalty demanded of them as trustees. In Donovan v. Bierwirth, an employer that offered a corporate pension plan was the target of a corporate takeover bid. The trustee-fiduciaries of the pension plan were officers of the employer company; the plan also owned shares therein. The fiduciaries not only took actions to defeat the takeover bid but caused the plan to purchase additional common stock in the employer company to thwart the takeover bid. 680 F.2d 263, 264, 266-269 (2d Cir.1982). The Second Circuit held that although ERISA permitted the plan to invest assets in securities issued by the employer company, the fiduciaries were obligated to avoid placing themselves in a position where their acts as officers of the corporation would prevent their functioning with complete loyalty to participants and beneficiaries. Id. at 271, 272; see also id. at 276 (noting that fiduciaries should have realized that their judgment could scarcely be unbiased and that they should have taken every feasible precaution to carefully consider the options). The court faulted the fiduciaries for failing to adequately investigate and calculate the
Furthermore, merely failing to segregate plan assets from personal or other corporate assets is, itself, a fiduciary violation. For example, in Corley v. Hecht Co., the district court found that a fiduciary violated its duty of care, prudence, and diligence when it failed to clearly differentiate between its own money and that belonging to the ERISA plan. 530 F.Supp. 1155, 1163 (D.D.C.1982). In that case, an employer serving as the fiduciary to an employee benefit group life insurance plan used dividends from the plan to recoup voluntary contributions that the employer made to the plan. In essence, the fiduciary made interest-free loans to the plan and subsequently reimbursed itself for those loans. Although the Corley court found no prohibited transaction under ERISA Section 406, the court held that "[i]nformal transactions between the fiduciary and the Plan, for whatever purpose, are barred under section 404." Id.
The Court finds the reasoning of Donovan, Leigh, and Corley persuasive. Although the facts in Donovan and Leigh involved fiduciaries in a corporate takeover, the legal principle still applies to this case. Here, it would be unrealistic to expect complete loyalty to the Plan beneficiaries where plan assets were transferred to accounts held out of the reach of the trustee and solely by Koresko and Bonney. Regardless of what use ultimately came of those assets, there is no evidence that there was ever a consideration by the Koresko fiduciaries of how putting the funds in an account not controlled by the trustee would impact the interests of the Plans' participants and beneficiaries. The Court sees no reason why the REAL VEBA trustee could not have served as the signatory or account holder on the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account. Likewise, the remainder of unpaid benefits could presumably have been deposited back into the REAL VEBA Trust as opposed to the Koresko Law Firm Death Benefit Escrow Account to be used for the benefit of other participating employees and their beneficiaries.
Therefore, the Court finds that the Koresko fiduciaries breached their duties of loyalty and prudence under ERISA Section 404.
Congress enacted ERISA Section 406, 29 U.S.C. § 1106, titled "Prohibited Transactions," with the goal of creating a categorical bar to certain types of transactions that were regarded as likely to injure a plan. Reich v. Compton, 57 F.3d 270, 275 (3d Cir.1995). ERISA Section 406(a)(1)(D) prohibits fiduciaries from causing the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect "transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan."
The Secretary argues that transfers of plan assets to parties in interest are per se violations of ERISA Section 406(a)(1)(D) regardless of the motivations of the parties involved in the transaction. The Court agrees.
In Reich v. Compton, the Court of Appeals for the Third Circuit considered whether a fiduciary violated (a)(1)(D)'s prohibition of the use of plan assets for the benefit of a party in interest. 57 F.3d 270, 275-76, 278-79 (3d Cir.1995). The Third Circuit held that proof of subjective intent to benefit a party in interest was required. Id. at 279. However, this Court does not read Compton as requiring the same showing of subjective intent for a transfer of plan assets to a party in interest. Such a reading comports with the statutory language itself, which uses the disjunctive "transfer to, or use by or for the benefit of" language. ERISA Section 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D) (emphasis added). Moreover, the Court's interpretation of Compton and (a)(1)(D) also finds support in the legislative history:
H.R.Rep. No. 93-1280 (1974), reprinted in 1974 U.S.C.C.A.N. 5038, 5089, 1974 WL 11542 (emphasis added). The legislative history expresses Congress's intent to prohibit several outcomes: transfer of plan assets to parties in interest, use of plan assets by parties in interest, or use of plan assets for the benefit of parties in interest. Compton's holding that subjective intent is required does not apply to the first outcome.
The evidence at this partial summary judgment stage does not establish that the Koresko fiduciaries caused plan assets to be used by or used "for the benefit of" parties in interest. It is not clear to the Court what became of the funds initially transferred into the Ferraro FUNB Account, the Wachovia Kelling Account, and the Wachovia Castellano Account, and ultimately deposited into either the Angermeier Account or the Koresko Law Firm Death Benefit Escrow Account. There is no evidence that plan assets were used for non-trust purposes-merely that they failed to be held in trust by a trustee named in the plan and trust documents.
Nevertheless, the undisputed record does establish that plan assets were "transfer[red] to" accounts held by Koresko and Bonney, parties in interest. However, except as to the Cetylite Plan, the Secretary has not proffered evidence that the Koresko fiduciaries caused the Plans to engage in these transactions. The record reflects that CTC wrote the checks from the CTC Trust Account to the three accounts held by Koresko and Bonney. The Secretary argues in her brief that the Koresko Defendants directed CTC to do so, but only submitted evidence of such direction as to the Cetylite Plan. PennMont, through Jeanne Bonney and Maggie
Thus, at this stage, the Court will grant summary judgment as to the violation of Section 406(a)(1)(D) as to the Cetylite Plan and deny without prejudice as to the Decor and Castellano Plans.
ERISA Section 406(b) prohibits a fiduciary from dealing with assets of the plan in his own interest or for his own account. ERISA Section 406(b)(1), 29 U.S.C. § 1106(b)(1). Section 406(b) prohibits a plan fiduciary from engaging in various forms of self-dealing and creates a per se ERISA violation even in the absence of bad faith. See Reich v. Compton, 57 F.3d 270, 287 (3d Cir.1995); Cutaiar v. Marshall, 590 F.2d 523 (3d Cir.1979); Lowen v. Tower Asset Mgmt., Inc., 829 F.2d 1209, 1213 (2d Cir.1987); Gilliam v. Edwards, 492 F.Supp. 1255, 1263 (D.N.J. 1980). At this stage, the Court denies summary judgment on the self-dealing claim without prejudice.
The Secretary cites several cases in support of her argument that the Koresko Defendants' conduct constitutes prohibited self-dealing. However, those cases are factually distinguishable. For example, in Patelco v. Sahni, the fiduciary (1) overcharged the employer for insurance premiums on a stop-loss insurance policy that the fiduciary purchased for the plan; determined his own administrative fees and collected them himself from the plan's funds; and (3) failed to account for two benefit checks meant for the plan. 262 F.3d 897, 901-02, 911 (9th Cir.2001). Similarly, the evidence in NYSA-ILA Med. & Clin. Servs. Fund v. Catucci showed that the fiduciary used plan assets to pay corporate expenses for a corporation in which he had a majority interest. 60 F.Supp.2d 194, 203-04 (S.D.N.Y.1999).
By contrast, the Secretary has not pointed to anything in this summary judgment record regarding the Koresko fiduciaries setting their own administrative fees,
Therefore, the Court cannot grant summary judgment on the self-dealing claim at this time.
ERISA Section 502(a)(5) permits the Secretary to bring an action to "enjoin any act or practice which violates any provision of this title," or obtain appropriate equitable relief to redress the violation and enforce
The Secretary requests that the Koresko fiduciaries be barred from serving as fiduciaries; that the Court appoint a Special Master to make an accounting of the Plans; that assets of the Plans be transferred to new fiduciaries; and that the Koresko fiduciaries be ordered to make the Plans whole.
At this time, the Court does not have sufficient information to decide whether the Secretary's requested relief is appropriate. The instant motion for partial summary judgment moves only as to three ERISA plans. The Secretary has also informed the Court that there are both ERISA and non-ERISA covered plans in the REAL VEBA Trust. Tr. of Oral Arg. 96. Furthermore, ongoing discovery may yet reveal additional facts that may bear on the Court's exercise of discretion regarding appropriate relief. The Court therefore defers a decision as to the Secretary's requested relief for the Plans until a later date.
Nevertheless, in the interim, the Court will consider any request for narrower, more limited injunctive relief that the Secretary may seek based on the Court's decision on the instant motion.
An appropriate order follows.
Decor initially signed an agreement to join the Southeast League of Merchants VEBA, and Cetylite to join the Delaware Valley League of Manufacturers VEBA. Decor and Cetylite then each later signed agreements to become party to the REAL VEBA Trust. Decor Waiver & Consent (GX 15); Cetylite Amendment (GX 34). The Delaware Valley League of Manufacturers VEBA no longer functions. Koresko Aff. ¶ 25 (GX 4).
Koresko argued to this Court that the Sidney Charles case was distinguishable because it involved a different trust arrangement and presented a different legal issue. Tr. of Oral Argument 37-40. The Court does not see how the issue of ERISA coverage differs between the two cases.
DOL Advisory Op. 99-08A (May 20, 1999) (emphasis added).
