The opinion of the court was delivered by: Hon. Gonzalo P. Curiel United States District Judge
MEMORANDUM DECISION FOLLOWING TRIAL AND ORDER FOR ENTRY OF JUDGMENT
This case involves an accounting partnership breakup that ended much like a bad divorce, with acrimony, mistrust, and years of litigation. Plaintiffs are LYMS, Inc., the sponsor of an employee pension benefit plan under ERISA ("the Plan"), and Wendy Youngren and Cathy Means, the successor trustees of the Plan and certified accountants. Plaintiffs assert breach of fiduciary claims against the Plan's former trustees and certified accountants, defendants Bruce Millimaki ("Millimaki") and Michael Eggert ("Eggert"). Defendant Gary Berman ("Berman") was the third-party administrator ("TPA") for the Plan. Robert Lipsey is a certified accountant who practiced accounting with defendant Millimaki for approximately 15 years at the accounting firm Lipsey Millimaki & Co., LLP. Millimaki was general partner, officer and director with Lipsey from December 1989 until June 30, 2005.
The court conducted a seven-day bench trial from December 3 through December 12, 2012. The undisputed evidence proved a number of mistakes or omissions by each of the former trustee defendants. The principle issue includes whether the trustees' mistakes are breaches of fiduciary duty. If so, then the following issue is whether the breaches were willful so as to disqualify the trustees from being indemnified under the terms of the Plan. Finally, the question remains as to the amount of reasonable damages that may have resulted from any breaches of duty that are not subject to indemnity.
Having reviewed the evidence and the arguments of the parties, as presented at trial and in their written submissions, the Court finds that defendants Millimaki and Eggert breached fiduciary duties owed to the Plaintiffs; that the breaches caused some, but not all of the alleged damages; and that Millimaki and Eggert are not entitled to indemnity. The Plaintiffs are not entitled to declaratory relief because the matter is not ripe for the requested relief. On the counter-complaint, the Court finds against Millimaki and Eggert with respect to their claims for indemnity.
As to defendant Berman, the Court finds that the breach of contract action is barred by the statute of limitations but that Berman is liable to plaintiffs for negligence in performing his duties as TPA. The Court makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.
The plaintiffs initiated this action on July 7, 2008, alleging violations of the Employee Retirement Income Security Act ("ERISA"), codified at 29 U.S.C. §§ 1105, 1111 and 1132. ECF No. 1. They seek damages pursuant to 29 U.S.C. § 1132(a)(2) and equitable relief under 29 U.S.C. § 1132(a)(3). Jurisdiction by this court over the subject matter of this action is predicated on 28 USC § 1331. This Court has exclusive subject matter jurisdiction over these claims pursuant to 29 U.S.C. §1132(e)(1). In addition, plaintiffs allege state law claims based on contract and negligence theories.
On July 21, 2008, Plaintiffs filed an amended complaint. ECF No. 2. On August 12, 2008, Defendant Berman answered the amended complaint. ECF No. 11. On August 25, 2008, Defendants Millimaki and Eggert answered the amended complaint, and filed a counterclaim against LYMS, Inc., which alleges causes of action for breach of contract, indemnity and contribution. ECF No. 12. On September 15, 2008, Plaintiffs answered the counterclaim. ECF No. 18.
On May 8, 2009, Plaintiffs filed a second amended complaint. ECF No. 50. Counts One and Five are against Millimaki and Eggert and allege causes of action for breach of fiduciary duty (Count One) and fraud (Count Five). Count Two alleges a breach of fiduciary duty cause of action against Millimaki. Counts Three and Four are against Berman on causes of action for breach of contract (Count Three) and negligence (Count Four). On May 14, 2009, Defendant Berman answered the second amended complaint denying the material allegations in the complaint. ECF No. 49. On June 6, 2009, Defendants Millimaki and Eggert filed a third party complaint against Robert Lipsey and, shortly thereafter, filed a motion to dismiss portions of Plaintiffs' second amended complaint. ECF Nos. 56 and 58. On August 25, 2009, the Court granted in part and denied in part Defendants' motion to dismiss portions of Plaintiffs' second amended complaint, finding that the Plaintiffs' fraud claim (Count Five) was preempted by ERISA and therefore subject to dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6). ECF No. 68. On October 15, 2009, Defendants Millimaki and Eggert answered the second amended complaint. ECF No. 70.
On February 1, 2010, Defendants Millimaki and Eggert filed a motion for summary judgment. ECF No. 81. On March 29, 2010, Robert Lipsey filed a motion to dismiss or render judgment on the pleadings of the third party complaint. ECF No. 135. On February 22, 2011, the Court denied Defendants' motion for summary judgment, and granted Robert Lipsey's motion for judgment on the pleadings on the third party complaint for indemnification. ECF No. 160.
This dispute arises out of the management of the Plan which is currently referred to as the LYMOS 401(k) Plan, and sponsored by LYMS, LLP. The Plan is a tax-exempt qualified employee pension benefit plan under ERISA. The original predecessor employer of the Plan, Robert Lipsey & Company, LLP, first adopted the Plan as the Robert Lipsey & Company 401(k) Savings Plan, effective October 1, 1991. Pretrial Order Admitted Facts (hereinafter referred to as "Admitted Facts") at ¶ 15, ECF No. 208. The Plan was amended in 1995 to reflect the plan sponsor, Lipsey, Millimaki & Company, Inc. and the plan name of Lipsey, Millimaki & Company, Inc. 401(k) Savings Plan. Plan Amendment 5/24/95, Ex. 16; Resolution 5/24/95, Ex. 17.
Robert Lipsey testified regarding the decision to adopt the Plan. The Court finds that he was credible on matters in which he had personal knowledge. He recounted that in 1991, his accounting firm partner Millimaki suggested that their firm should create a 401(K) plan as a good employee benefit. Lipsey had little experience in defined benefit plans and told Millimaki that he did not want responsibility for the Plan and did not want to be a trustee or a fiduciary. Millimaki indicated that he had significant working experience with benefit plans and he was willing to take responsibility. Lipsey testified that both partners understood that Millimaki would be responsible for supervising lower employees regarding administration documents and forwarding documents to the third party administrator. The record shows that Millimaki signed nearly all of the Resolutions for changes in the Plan and Amendments to the Plan on behalf of the employer and in his capacity as trustee. Amendments and Resolutions, Exs. 16-29. In addition, Millimaki signed some forms as the Plan Administrator. 2004 Form 5500, Ex. 30; Participant Withdrawal Form, Ex. 36 at p. 252.
After the decision to create a Plan was made, Millimaki recommended Defendant Gary Berman to Lipsey as the third party administrator ("TPA") for the Plan. Berman, doing business as L&S Pension Services, was appointed as TPA, effective October of 1991 when the Plan was adopted. Admitted Facts at ¶ 28, ECF No. 208. Millimaki arranged for Berman to work on referrals rather than by the task or the hour. Lipsey agreed to this arrangement. As TPA for the Plan, Berman prepared and created Plan documents, such as annual accounting statements, and provided administrative services to the Trustees, the Employer and Plan Administrator for operation of the Plan. Admitted Facts at ¶¶ 28-31, ECF No. 208. Berman served as the TPA until he was replaced by Pam Means & Associates sometime prior to July 2006. Admitted Facts at ¶¶ 28-30, ECF No. 208.
In October 1991, another accountant at the firm, Rebecca Lures, was designated as co-trustee and served in this capacity until she left the firm in approximately 1994. Certificate of Resolution 10/9/91, Ex. 10; Adoption Agreement 10/10/91, Ex. 11. In 1994, an Amended Adoption Agreement for the Plan was adopted and designated Millimaki as sole trustee of the Plan and the employer as the Plan Administrator. Adoption Agreement 12/23/94, Ex. 15. The document was executed on December 23, 1994 by Millimaki as the sole trustee of the plan and on behalf of the employer Lipsey, Millimaki & Company, Inc.
In late 1998, Lipsey and Millimaki asked Eggert to assume the role as a co-trustee. Eggert testified that he was reluctant to accept responsibility. Lipsey and Millimaki assured Eggert that his role would be limited as a backup and further that he would be protected under the indemnity provision in the Plan. After considering the request over the weekend, Eggert accepted the role as co-trustee and he was designated co-trustee on December 14, 1998. Plan Amendment 12/14/98, Ex. 19.
The Plan provides that absent an appointment of an administrator, the employer is the plan administrator. Plan § 2.2, Ex. 2. Under the Plan, an administrator's primary responsibility is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries. Plan § 2.4, Ex. 2. The Administrator is charged with duties and powers, including "the discretion to determine all questions relating to the eligibility of an Employee to participate or remain a Participant hereunder and to receive benefits under the Plan," and "to maintain all necessary records for the administration of the plan." Plan § 2.4(a) and (e), Ex. 2.
The Plan further provides that the employer is empowered to appoint a trustee for the plan. Plan § 2(a), Ex. 2. Under § 7.2(a) of the Plan, a "trustee has the discretion and authority to invest, manage and control those Plan assets, except, however, with respect to those assets which are subject to the investment direction of a Participant." Plan § 7.2(a), Ex. 2. A trustee "may refuse to comply with any direction from the participant in the event the Trustee, in its sole and absolute discretion, deems such direction improper by virtue of applicable law. The Trustee shall not be responsible or liable for any loss or expense that may result from the Trustee's refusal or failure to comply with any direction from the Participant." Plan § 7.1(d), Ex. 2. In addition, a Trustee is required to "maintain records of receipts and disbursements and furnish to the Employer/and/or Administrator for each Plan Year a written annual report pursuant to Section 7.9." Plan § 7.1(e), Ex. 2.
B. Millimaki's Disassociation from the Firm
In December 2004, Millimaki advised Lipsey of his intent to disassociate from the firm the following year. In approximately May 2005, the firm informed the employees of the disassociation and permitted employees to choose to stay behind with Lipsey or leave with Millimaki. Eggert was one of seven employees who left with Millimaki. According to Millimaki, the acrimony between them began after seven employees elected to follow Millimaki to his new firm.
Berman testified at trial. The Court finds that Berman was generally credible except as otherwise indicated in the decision. Berman testified that when he learned of the planned disassociation, he sat down with Lipsey and Millimaki and suggested that they work together for a smooth transition. Email 5/17/05, Ex. CF. Such a suggested meeting never took place and no agreement was in place to divide the firm's work or permit an orderly transition to successor trustees for the Plan. As a result, a dispute arose almost immediately regarding Millimaki's efforts to obtain client files. Lipsey took the position that the firm could not release files to Millimaki for a period of four years. Following the dispute, on June 17, 2005, Bruce Millimaki filed a complaint for dissolution of Lipsey Millimaki & Co., LLP, in the California Superior Court. Complaint for Dissolution, Ex. 198. In the state action, LYMS was represented by the firm Solomon Ward and Robert Lipsey was represented by attorney William Calderelli.
On June 27, 2005, Robert Lipsey changed the company's name from Lipsey Millimaki & Co., LLP to Lipsey Youngren Means and Sandberg CPAs, LLP ("LYMS") and the Plan was amended to change the name of the Plan to the "Lipsey Youngren Means & Sandberg CPA's , LLP 401(K) Savings Plan." Amendment 6/27/05, Ex. 3. Plaintiffs Cathy Means and Wendy Youngren were named general partners in the new firm and appointed as successor trustees of the Plan in place of Eggert and Millimaki. Id. On June 30, 2005, Defendants Millimaki and Eggert formed a separate company, the Millimaki Eggert firm. After Millimaki Eggert was formed, Berman established a retirement plan for Millimaki Eggert and acted as third-party administrator for the newly created plan. Based on the departure of Millimaki and the other former Lipsey Millimaki employees, a partial termination of the Plan occurred.
C. Post-Disassociation Control of Plan
On July 8, 2005, Eggert directed an email to Berman and Cathy Means, among others, stating that Millimaki and Eggert were still the only trustees of the Lipsey, Millimaki & Co. Plan and would remain the sole trustees until all of the assets were transferred to their new plan. Email 7/8/05, Ex. 73. On July 21, 2005, LYMS provided Millimaki and Eggert written 30-day notice, under § 7.11(b) of the Plan, that that they were terminated as trustees of the Plan. Notice of Removal, Ex. 112. Based upon service of the notice on July 26, 2005, the termination date became effective on August 25, 2005. Id. The termination notice also specified that Millimaki and Eggert were required to return all Plan documents and records and provide the successor trustees with a final trust accounting of the Plan's assets. Id.Under ¶ 7.11(e) of the Plan, a removed trustee is required to prepare a statement of account no later than the due date of the annual statement. Millimaki and Eggert did not provide a statement of account.
Following their removal as trustees for the Plan, Defendants Millimaki and Eggert continued to act as Plan trustees by engaging in oversight of the Plan and signing and filing forms for the IRS, including the Form 5500 for the Plan. E.g., Admitted Facts at ¶ 45, ECF No. 208. As of February 2006, Millimaki and Eggert had yet to authorize the release of Plan brokerage statements to the Plaintiffs. Charles Schwab Documents, Ex.143. On August 17, 2006, Plaintiffs submitted the necessary paperwork to update the change in Plan name and the change in Trustees from Millimaki and Eggert to Kathy Means and Wendy Youngren. Letter to Schwab 8/17/06. Ex. 144.
D. Search for Plan Records
After Millimaki and Eggert refused to relinquish their roles as trustees in August 2005, the Plaintiffs sought to obtain Plan documents in order to evaluate the status of the Plan and its compliance with applicable law. Plaintiffs encountered difficulties and challenges in obtaining Plan documents.
On August 22, 2005, in response to a request by Lipsey for an accounting of the Plan, Berman replied that he would mail a summary of accounts from 1996 through 2004. Email 8/22/05, Ex. 83. Berman further stated that he was unsure if he had all records for the early years since the Lipsey firm had always provided year-end statements. Id. In an email dated July 26, 2005, Eggert responded to a request for plan documents from James Grutkowski and indicated that he understood that LYMS had taken control of Lipsey, Millimaki & Co. checking accounts, payroll records, and accounting records. Email 7/26/05, Ex. 86A-12.
In March 2006, the parties reached a draft settlement agreement in the state court dissolution action which provided, among other things, for Millimaki and Eggert to turn over all Plan accounting records and documents obtained in their capacity as trustees and to stop representing the Plan. Lipsey conditioned his signature of the settlement on receipt of the requested documents. In April 2006, Millimaki produced a large number of brokerage statements for the period of 2000 through early 2006. Email 04/09/06 and Brokerage Statements, Ex. 130. In addition, Berman located and provided to Lipsey most of the documents from 1996 through 2004 relating to the plan approval, annual administration and trust accounting. Letter 4/3/06, Ex. G; Letter 3/27/06, Ex. I. Ultimately, Lipsey was not satisfied that Millimaki and Eggert had provided all Plan documents as promised and refused to enter the settlement. Meanwhile, Millimaki and Eggert testified that they turned over all documents within their control. In addition, Millimaki testified that a number of Plan documents were maintained at the Lipsey accounting offices and were unavailable after Millimaki left the firm.
Lipsey testified that when he was unable to retrieve all Plan records, he became concerned with issues regarding status and ERISA compliance. After the dissolution settlement agreement failed in March 2006, LYMS and the Plan's Successor Trustees, Plaintiffs Cathy Means and Wendy Youngren, attempted to evaluate the status of the Plan, its accounting records, and its compliance with applicable laws and regulations. In March 2006, LYMS retained Means & Associates headed by Pam Means (no relation to Cathy Means) to conduct a preliminary document review for the Plan. According to Pam Means' testimony, the review would ensure that the Plaintiffs had all required documentation to support any 3rd party
examination of the Plan and make sure that the plan documents were complete, including all required amendments. Email 5/5/06, Ex. 96. On April 18, 2006, Means & Associates issued a preliminary report regarding the Plan. Preliminary Compliance Review Letter, Ex. 46. In the report, Pam Means identified a number of action items consisting of missing documents. Id. Among the missing documents were ones regarding a rollover involving a former employee Mark Schaim (the "Schaim rollover") where a $470,000 distribution did not match the amount rolled into the account. Id.
On May 11, 2006, Plaintiff Cathy Means emailed Berman to inquire whether he had had an opportunity to respond to the action items on the list provided by Means & Co. Email 5/17/06, Ex. 97. On May 17, 2006, Berman promised a package with supporting documents or explanations for the "action" items. Id. On June 6, 2006, Berman emailed Mark Schaim requesting any documentation for the subject rollover. Email 6/6/06, Ex. 98. On July 6, 2006, Berman emailed Cathy Means and provided available information for the Schaim rollover and revealed that he "was never aware of this outside investment until recently." Email 7/6/06, Ex. 101-4.
Berman testified at trial that he believed Millimaki had provided him with the Schaim rollover information at the time that it was admitted into the Plan. However, the July 6, 2006 email from Berman to Cathy Means contradicts the testimony and indicates that Millimaki and Eggert did not provide Berman with the Schaim rollover information at the time that it was received. Id. Berman also noted in a June 14, 2006 email that his practice was to have the client review the allocations for a year to ensure the reports contained correct information. Email 6/24/06, Ex. 113. The Court finds that Millimaki and Eggert failed to provide the Schaim rollover information to Berman and further failed to properly disclose the transaction on reporting forms.
The evidence shows that Plaintiffs contacted Schaim on July 6, 2006 in order to reconstruct the records regarding the rollover. Email 7/13/06, Ex. 118. Lipsey observed that the records were needed in order to determine whether the rollover was proper from the inception. Id.
E. Schaim Rollover and Investments
Following numerous efforts to locate Schaim rollover documents, Plaintiffs obtained a number of records that Pam Means reviewed to evaluate the Schaim transactions. On August 4, 2006, Pam Means reported a number of problems, inconsistencies and omissions regarding the Schaim transactions. Email 8/4/06, Ex. 106. The available records revealed that in January 2000, Mark Schaim, formerly associated with Soloman Schaim & Remmes, joined Lipsey, Millimaki & Co. Mark Schaim was employed by Lipsey Millimaki & Co. from 2000 until 2004. In 2001, Schaim took a $342,714 distribution from the Soloman Schaim & Remmes 401k plan. Approximately $187,666 of that Schaim distribution from the Soloman Schaim & Remmes 401k plan was rolled into the Plan.
Thereafter, on June 27, 2002, Eggert signed a subscription agreement for a $100,000 investment in the Judd and Dillard Otay, LP, real estate investment on behalf of the Plan, for the benefit of (FBO) Mark Schaim. Subscription Agreement, Ex. 168. Both Millimaki and Eggert authorized the transfer of funds into the Judd and Dillard Otay account. Letter of Authorization, Ex. 162. This investment was not reported on the Plan's 2002 IRS Form 5500. 2002 Form 5500, Ex. 183. The Judd and Dillard Otay, LP real estate investment was re-sold on or about July 15, 2003 for $17,000,000 with a taxable gain of $9,450,005. 2003 Form 1065, Ex.168-9. From the gain, $251,641 was distributed to the Plan, FBO Mark Schaim. 2003 Sch. K, Ex. 168-10. The IRS Form 5500 for Plan Year 2003 filed on the Plan's behalf does not list any limited partnership interest, nor did it include the taxable gain on this sale attributable to Schaim's LP interest in the amount of $159,726.00. 2003 Form 5500, Ex. 184.
On October 31, 2003, Millimaki signed a subscription agreement for a $250,000 investment in Judd and Dillard 310, LLC real estate investment on behalf of the Plan, FBO Mark Schaim. Subscription Agreement and Transfer Authorization, Ex. 168-13. Millimaki wire transferred $250,000 from the Plan's FBO Mark Schaim account at Charles Schwab to Judd and Dillard 310, LLC based on an authorization signed by both Millimaki and Eggert.
Id. The IRS Form 5500 later filed on behalf of Plan for 2003 did not list any membership investment in a LLC. 2003 Form 5500, Ex. 184. The Judd and Dillard 310, LLC offering materials stated that the entity would raise investor capital and borrow up to $7.5 million from lenders to finance a real estate purchase, and that the business plan was to hold the property for as short a period as possible and resell it.
In June 2004, Schaim left Lipsey Millimaki & Co. to form Schaim Hyde & Co. In January 2005, Schaim changed the name of investment in Judd and Dillard 310, LLC, from Lipsey Millimaki & Co. 401k Plan, FBO Mark Schaim, to Schaim Hyde & Co. 401k Plan, FBO Mark Schaim. Subsequently, the Plan issued an IRS Form 1099R for tax year 2005 to Mark Schaim, reporting a ...