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Comerica Bank v. Sea Nine Associates Inc.

United States District Court, C.D. California

April 22, 2014

SEA NINE ASSOCIATES INC., et al., Defendants.


JOSEPHINE L. STATON, District Judge.


Before the Court is Plaintiff Comerica Bank's unopposed Motion for Preliminary Injunction. (Mot., Doc. 9.)[1] The Court finds this matter appropriate for decision without oral argument. Fed.R.Civ.P. 78(b); C.D. Cal. L.R. 7-15. Accordingly, the hearing on the Motion, set for April 25, 2014, at 2:30 p.m., is VACATED. For the reasons set forth below, the Court GRANTS Plaintiff's Motion. The Court enters a preliminary injunction as set forth in the concurrently-filed Order.


Plaintiff is the directed trustee for six trust funds. (Cliff Langwith Decl. ¶ 1, Doc. 9-8; Compl. Exs. A, B, Doc. 1.) The trust funds are the funding mechanism for six corresponding employer welfare benefit plans, which are sponsored by associations of employees and are used to purchase life insurance contracts. (Langwith Decl. ¶¶ 1, 3; Compl., Exs. A, C-G.) The plans are administered by Defendant Sea Nine Associates, Inc. (Langwith Decl. ¶ 1.) An individual, Kenneth Elliott, serves as Sea Nine's agent and manager, and sends directives on behalf of Sea Nine to Plaintiff. ( Id. ¶ 5.)

The trust instruments and corresponding plan documents state they are voluntary employees' beneficiary association ("VEBA") programs. ( Id. ¶ 3; see, e.g., Compl. Exs. A, C.) The trust instruments and plan documents also state the trusts are intended to be tax-exempt under Internal Revenue Code section 501(c)(9), and be part of a multi-employer welfare benefit plan within the meaning of section 419A(f)(6), such that participants' contributions would be tax deductible. (Langwith Decl. ¶ 3.)

On October 9, 2013, the United States Department of Justice filed a lawsuit against Sea Nine, Kenneth Elliott, and another individual, Ramesh Sarva, alleging that Sea Nine's programs do not comply with the Internal Revenue Code and contributions to the programs are not tax deductible. United States of America v. Elliott, SACV 13-1582-JLS (JPRx) ("DOJ Lawsuit"); (RJN Ex. A, Doc. 9-3.)[2] According to Plaintiff, the DOJ Lawsuit has caused a run on trust assets by participating employers, many of whom have made demands for withdrawal of trust assets accompanied by directives from Sea Nine ordering Plaintiff to comply. (Langwith Decl. ¶ 6, Ex. 1.)[3]

Plaintiff has concerns that the directives from Sea Nine are improper and unlawful, as a piecemeal distribution of trust assets may deplete the trusts and improperly deprive remaining participants of trust assets or VEBA benefits. ( Id. ¶ 11.) This concern is based in part on the manner in which Sea Nine has administered the plans. (Mem. at 7, Doc. 9-1.) For example, Sea Nine has indicated to Plaintiff that several participating employers have not contributed sufficient amounts to the trust funds to cover their scheduled life insurance premiums, and the programs owe legal fees to law firms retained by Sea Nine in connection with ongoing IRS examinations of the programs. ( Id. ; Langwith Decl. ¶ 9, Ex. 4.) Elliott, on behalf of Sea Nine, has also provided conflicting assertions as to how the plans should be managed. (Mem. at 8; Langwith Decl. Ex. 5.)

Plaintiff filed the present action in response to the DOJ Lawsuit, seeking guidance as to, among other things, how to maintain and distribute trust assets, how to respond to Sea Nine's directives, and how to respond to customer requests. Plaintiff brings claims for declaratory relief under the Declaratory Judgment Act, 28 U.S.C. section 2201; for declaratory and injunctive relief under the Employee Retirement Income Security Act, 29 U.S.C. section 1132(a)(3); for a petition for instructions and other relief under California Probate Code section 17200; and for an injunction under California Civil Code sections 3368, 3420, 3422 and California Code of Civil Procedure section 527. (Compl. ¶¶ 29-48.) The action is brought against Sea Nine and the trusts and plans for which Plaintiff is trustee. ( Id. ¶¶ 10-13.)

Plaintiff is holding participants' demands and Sea Nine's directives in abeyance until it receives guidance from the Court and the United States Department of Labor. (Langwith Decl. ¶ 12.) Plaintiff has reached out on multiple occasions to the Department of Labor, which has yet to provide substantive guidance. (Richard Darwin Decl. ¶ 3, Doc. 9-7.) Plaintiff has also spoken with the attorneys of record for the Department of Justice in the DOJ Lawsuit. ( Id. ¶ 5.) Although Plaintiff has yet to receive substantive guidance from the Department of Justice, there apparently is a "consensus on the general issue that it is in the mutual interest of all parties to have an orderly disposition of the assets of the trusts...." ( Id. ) Plaintiff has sent copies of the Complaint and this Motion to the Secretary of Labor, the Secretary of Treasury, the Department of Labor, the Department of Justice, and participating employers in the VEBA plans for whom Plaintiff has a valid mailing address.[4] ( Id. ¶ 4; Suppl. Richard Darwin Decl. ¶¶ 3-4, Doc. 21-1; Suppl. Cliff Langwith Decl. ¶¶ 3-4, Ex. 6, Doc. 21-2.)

Plaintiff brings this Motion to preserve and maintain trust assets while the rights of participating employers and beneficiaries are determined in an orderly manner. (Mem. at 3.)


To succeed on a motion for a preliminary injunction, a plaintiff must establish (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm; (3) the balance of equities tips in plaintiff's favor; and (4) an injunction is in the public interest. Sierra Forest Legacy v. Rey, 577 F.3d 1015, 1021 (9th Cir. 2009) (citing Winter v. NRDC, Inc., 129 S.Ct. 365, 374 (2008)).[5] A plaintiff is required "to make a showing on all four prongs." Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011). The Ninth Circuit employs the "serious questions" version of the "sliding scale" approach when applying the four-element Winter test. Id. at 1134. "That is, serious questions going to the merits' and a balance of hardships that tips sharply towards the ...

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