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Schwartz v. Gordon

April 30, 1985

JEROME SCHWARTZ, AS PARTICIPANT IN PENSION TRUST ACCOUNT NUMBER 2564-01 WITH FIRST NATIONAL BANK OF LONG ISLAND, AN EMPLOYEE BENEFIT PLAN UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT, 29 U.S.C. 1001, ET SEQ., PLAINTIFF-APPELLANT
v.
DAVID GORDON, SHEARSON LOEB RHOADES, INC. AND FIRST NATIONAL BANK OF LONG ISLAND, DEFENDANTS-APPELLEES



Appeal from orders of the Southern District of New York, Richard Owen, J., granting summary judgment and dismissing plaintiff's action for damages based on alleged breach of fiduciary duties imposed upon defendants by Title I of the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461 (1982), in their management of a "Keogh" retirement plan account maintained by plaintiff, a self-employed individual who is the sole contributor to and beneficiary of the account. The district court held that Title I of ERISA was inapplicable.

Mansfield, Newman and Kearse, Circuit Judges.

Author: Mansfield

MANSFIELD, Circuit Judge:

The principal question raised by this appeal is whether the fiduciary duties imposed by Title I of the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461 (1982), apply to a "Keogh" retirement plan maintained by a self-employed individual who is the sole contributor to and beneficiary of the account. We hold that they do not.

Dr. Jerome Schwartz, a self-employed physician, appeals from orders of the Southern District of New York, Richard Owen, J., granting summary judgment dismissing his action for damages against the First National Bank of Long Island (Bank), and granting a motion to dismiss his suit against Shearson Loeb Rhoades, Inc. (Shearson) and David Gordon, a stockbroker employed by Shearson. Schwartz alleged that all three defendants breached their fiduciary duties under ERISA in the management of his Keogh pension account established by him for his own benefit upon retirement. The district court dismissed the claim against the Bank on the merits. Later, in dismissing the claim against the other defendants, it held that the account did not meet the definition of an "employee benefit plan" found in Title I of ERISA and that therefore the fiduciary duties imposed by Title I upon the managers of such plans did not apply. We agree and affirm.

The Self-Employed Individual Tax Retirement Act of 1962, Pub. L. 87-792, 76 Stat. 809 (codified as amended in scattered sections of 26 U.S.C.), permits a self-employed individual to establish his own pension plan (commonly called a "Keogh" plan*fn1 after the name of the author of the bill) and to qualify for certain favorable tax benefits. See S. Rep. No. 992, 87th Cong., 2d Sess. 1, reprinted in 1962 U.S. Code Cong. & Ad. News 2964. From 1972 to 1980 Dr. Schwartz maintained with the Bank his own individual Keogh retirement account, to which he was the sole contributor and of which he was the sole beneficiary.*fn2 Under bank policy such accounts were classified as "directed investment" accounts, over which the Bank had no authority or discretion. The Bank's Keogh Master Plan stated that the Bank would not be responsible for reviewing the merit of investments acquired at the direction of the participant or his agent. The contributor indemnified the Bank from all liability except that for willful misconduct and authorized the Bank to rely in good faith on written authorizations from the contributor and his agents.

The Bank credited Schwartz with all contributions to the account, investments made through use of the contributions, and earnings from the investments. Schwartz authorized David Gordon, a broker employed by Shearson, to execute purchases and sales of securities for his Keogh account pursuant to authorization cards signed by Schwartz for each trade. In 1979 Gordon, allegedly acting without an authorization card from Schwartz, invested most of the account funds in high risk, "deep discount" bonds of poor standing, issued by Texfi Industries, Inc., which declined in value, resulting in a loss to the account of approximately $40,000.

According to Schwartz, upon learning of the ill-fated investment he complained to the defendants. In September 1980, he brought the present action, claiming that they violated fiduciary duties allegedly imposed upon them by ERISA, Title I of which requires the fiduciary of an "employee benefit plan" to discharge his duties with the care, skill and diligence of a prudent man acting under the same circumstances, 29 U.S.C. § 1104(a)(1)(B), and to diversify the plan's investments in order to minimize the risk of large losses, 29 U.S.C. § 1104(a)(1)(C).*fn3

On January 7, 1983, the district court dismissed on the merits the claim against the Bank on the ground that, as Schwartz conceded, the Bank neither recommended the purchase of the Texfi bonds nor made any suggestions with respect to that transaction. Judge Owen found it to be undisputed that the Bank "acted solely in response to the orders given by Mr. Gordon and exercised no discretion in the investment of funds from the Schwartz account." On October 17, 1984, the district judge in a reasoned opinion concluded that the court lacked subject matter jurisdiction over the action for the reason that Schwartz' Keogh plan was not an "employee benefit plan" within the meaning of ERISA § 3(3), 29 U.S.C. § 1002 (3), because Schwartz, as a self-employed individual, was not an "employee" within the meaning of Title I of the Act.*fn4 He therefore held that Schwartz was not entitled to enforce the fiduciary requirements of Title I of ERISA.

Discussion

Title I of ERISA, 29 U.S.C. §§ 1001-1461, which was enacted in 1974, applies only to an "employee benefit plan," 29 U.S.C. § 1003(a). It establishes federal "standards of conduct, responsibility, and obligation," 29 U.S.C. § 1001 (b); see 29 U.S.C. §§ 1101-1114, that must be observed by the fiduciaries of such plans and violations of which are remediable in "Federal courts" and form the predicate of the present action. The statute authorizes the Secretary of Labor to "prescribe such regulations as he finds necessary or appropriate to carry out the provisions" of the Act, 29 U.S.C. § 1135.

The Act defines an "employee benefit plan" as "any plan ... established or maintained by an employer ... that ... (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment of beyond," 29 U.S.C. § 1002(2) (A) (emphasis supplied). The term "employee" is defined by the statute as "any individual employed by an employer," 29 U.S.C. § 1002(6).

Dr. Schwartz argues that in the absence of an express exclusion of plans established by self-employed individuals like himself (and Title I does exclude certain types of retirement plans) such persons must be deemed "employees: and their retirement plans "employee retirement plans" covered by Title I. We disagree. In the first place, in 1975, one year after Title I was enacted, the Secretary of Labor promulgated regulations pursuant to Congress' express delegation of rule-making authority to him. 40 Fed. Reg. 34526 (Aug. 15, ...


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