The opinion of the court was delivered by: LANGFORD
This case was tried before the court on June 17 and 18, 1996. Appearing for Plaintiff was Lawrence Koncz, Esq. Appearing for Defendant was Peter Huppert, Esq. The parties presented arguments and exhibits and both parties testified as witnesses. The record in the case having been fully considered, and good cause appearing,
IT IS HEREBY ORDERED that Defendant shall pay to Plaintiff the sum of $ 26,415.25 for attorney's fees, or such greater amount as shall be established by motion, $ 1,650 for accounting fees and $ 3,850 for actuarial expenses and $ 7,500 for the penalty paid to the Internal Revenue Service. Plaintiff shall formally discharge Defendant as trustee of the plans, in writing.
This case is an action under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. section 1001, et seq. and specifically, §§ 409, 1109(a) and 1132(a)(3), for breach of fiduciary duty, an accounting of approximately $ 220,000.00 in pension fund assets which were allegedly misappropriated by defendant, and for an award of attorney fees and costs.
The parties were friends and have known each other for over 35 years. Dr. Raff, D.D.S. (Plaintiff), incorporated his dental practice and set up the pension fund for himself and his employees (usually 3 or 4 in number) and named his wife Marsha as co-trustee, with Defendant. When the Raffs were divorced, Plaintiff and Defendant became co-trustees. Dr. Raff has three roles with the plan: he is the sole shareholder of the employer, the dental corporation, he is a beneficiary, and he is a fiduciary.
The complaint was filed on June 21, 1993. The default entered on August 17, 1993, was subsequently set aside on September 13, 1993 by Hon. William H. Orrick.
Defendant filed his answer on September 15, 1993 which affirmatively alleged that he was completing a full accounting as requested by Plaintiff.
Plaintiff obtained a Writ of Attachment against Defendant's home in October, 1993. This was still in place at the time of trial.
A Stipulated Discovery Order was issued on November 17, 1993. Discovery of relevant bank statements, cancelled checks, evidence of withdrawals, etc., was ordered.
A status conference was held on December 22, 1993 before Judge Orrick. At that time, Defendant had not provided the preliminary accounting. Counsel for the Defendant indicated that the preliminary accounting was almost complete. As of February 3, 1994, Plaintiff had not yet received an accounting.
At the beginning of trial, Defendant moved to dismiss Plaintiff's claims for failure to state a claim upon which relief can be granted. (Fed.R.Civ.P. 12(b)(6)).
Defendant argues that the law as enunciated by the Supreme Court is that in an action to recover damages for breach of fiduciary obligations by a trustee under a retirement plan governed by the provisions of ERISA, only the plan itself may recover for damages sustained by it, not for damages claimed between fiduciaries. Massachusetts Mut. Life Ins. Co. v. Russell 473 U.S. 134, 141-2; 105 S. Ct. 3085, 87 L. Ed. 2d 96 (1984); see also Total Plan Services, Inc. v. Texas Retailers Assn., 932 F.2d 357 (5th Cir. 1991).
Defendant claims that because Plaintiff's dental corporation, rather than the Plan, paid the expenses allegedly caused by Defendant's breach, i.e. the accounting and actuarial expenses, Internal Revenue Service (IRS) penalty and attorney's fees, that Plaintiff may not recover these expenses from Defendant.
Plaintiff responds that he was reluctant to expend plan funds, which had been depleted by Defendant. The balance in the plan bank accounts when he discovered the withdrawals was $ 8,000 and the records were not in order. Since he was the sole shareholder of the employee dental corporation, as well as fiduciary of the plan, he chose to expend the corporation's funds to protect the interests of the plan.
Furthermore, he is authorized by the Agreement of Trust to act on behalf of the plan, as provided in Article II, subsection (f), page 5, i.e. that the Trustee shall have the power to sue or to defend or otherwise deal with and settle claims in favor of or against the trust and the policies held in trust. Subsection (h) grants the Trustee power to employ such agents and counsel in connection with the administration of the trust as in his absolute discretion he may deem advisable, to pay the reasonable expenses and compensation from the Trust Estate.
Defendant relies on cases which are distinguishable from this case.
In one case, the Court of Appeals affirmed the district court ruling dismissing a complaint and refused to find that ERISA preempted state court jurisdiction over a suit involving pension and fiduciary claims and denied the motion of plaintiff-appellants, who were fiduciaries, for the federal court to enjoin state court proceedings. The district court had stated its intention to award attorney's fees to defendants, but had not rendered a decision, so the Court of Appeals remanded for that determination. Total Plan Services, Inc. v. Texas Retailers Ass'n., Inc., 925 F.2d 142 (5th Cir. 1991). The Court of Appeals also affirmed the district court's subsequent decision to deny the plaintiff-appellants' claim for compensation under ERISA for their expenses. Total Plan Services v. Texas Retailers Ass'n, 932 F.2d 357, 358 (5th Cir. 1991). The Court held that Total Plan only raised a state law claim for breach of contract. The Court stated in dicta that, even if ERISA governed Total Plan's claim, that Total Plan could not recover under 29 U.S.C. § 1109(a), because its expenses were not "losses to the plan."
This statement by the court is gratuitous, not part of the substantive decision in this case. The Total Plan decision (the first one) was primarily focussed on the history and effect of the Anti-Injunction Act and had very little to do with ERISA.
In the other case on which Defendant relies, the Supreme Court held that "Congress did not intend the judiciary to imply a cause of action for extra-contractual damages caused by improper or untimely processing of benefits claims." Massachusetts Mutual Life Ins. Co. v. Russell 473 U.S. at 148. In that case a beneficiary of a benefit plan governed by ERISA successfully sued for damages caused by interruption of disability benefits when her benefits were terminated. Although she prevailed on that claim, the Court found that she was not entitled under ERISA to compensatory and punitive damages.
In the case at bar, a co-trustee, Dr. Raff, has sued another co-trustee, Mr. Belstock, to obtain an accounting and repayment of plan assets wrongfully borrowed or invested by the co-trustee, in violation of § 409. Defendant is attempting to block reimbursement of the trustee, who advanced funds in order to protect the benefits of all employees of the corporation and the plan as a whole. Plaintiff acted to further the intent of Congress as stated by the Supreme Court.
To order Defendant to repay these expenses would be entirely consonant with the intent of the drafters of § 409. As stated by the Court in Massachusetts Mutual:
A fair contextual reading of the statute makes it abundantly clear that its draftsmen were primarily concerned with the possible misuse of plan assets, and with remedies that would protect the entire plan, rather than with the rights of an individual beneficiary.
In this case, Defendant misused plan assets, and Plaintiff was forced to turn to the court to recover them. Defendant did not render an accounting or repay funds until after Plaintiff filed Suit. To permit Plaintiff to be reimbursed for his expenses caused by Defendant's breach would further the interests of the plan, rather than those of merely one beneficiary. Plaintiff is himself a plan beneficiary, it is true, the majority beneficiary, but his action against Defendant ...