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December 20, 1993

In re CONSOLIDATED WELFARE FUND ERISA LITIGATION; ROBERT REICH, Secretary of Labor, United States Department of Labor, et. al., Plaintiff,
BURTON GOLDSTEIN, et. al., Defendants.


The opinion of the court was delivered by: MILTON POLLACK

The Department of Labor ("DOL") brings suit against Burton Goldstein, a former trustee of an employee welfare benefit plan (the "Consolidated Local 867 Health and Welfare Fund ("the Fund")). Pursuant to Fed. R. Civ. P. 56, the DOL moved the Court for partial summary judgment on the issue of Goldstein's liability for violating the fiduciary duty provisions of ERISA. The Fund sold health insurance benefits through a network of "employer labor relations consultants," who were in fact nothing more than insurance agents. Plaintiff has established that defendant was a plan fiduciary; that he was also the sole owner of two companies that sold Fund insurance; that he incorporated one such company for the sole purpose of serving the Fund; that he alone set and approved the fees and commissions which his companies retained from payments paid by beneficiaries to the Fund which were simply "monthly contributions to the Fund"; and that he was compensated through these companies. Defendant has failed to demonstrate any genuine issue of material fact which controverts the otherwise inescapable conclusion that defendant's activities were in clear violation of the fiduciary standards of ERISA, and merit partial summary judgment in plaintiff's favor.

 I. Background

 Consolidated Local Union 867 was founded by William Loeb in July 1988. In October 1988, Local 867, through a Trust Agreement, established the Consolidated Local 867 Health and Welfare Fund ("the Fund"). The Fund purported to be a Taft-Hartley plan offering hospital and major medical coverage to its participants and beneficiaries. The DOL alleges that Local Union 867 was a "front" for selling health insurance. Beneficiaries were recruited to join Local 867 and the Fund by so-called "Employer Labor Relations Consultants," who were in fact nothing more than insurance agents.

 Defendant Burton Goldstein started out as one such agent. In 1988, Goldstein did business through a wholly-owned corporation, American Benefits Corporation ("ABC"), which acted as a broker for owners of small businesses and associations of small employers in obtaining coverage for health, medical and other employee benefits. In 1988, ABC entered into the following contractual arrangement with Local 867. ABC, on its own behalf, signed a "collective bargaining agreement" with Local 867. Pursuant to this collective bargaining agreement, any employers recruited by ABC could enroll their employees as "members" of Local 867, thereby making them eligible for benefit coverage under the Fund. The employers in turn signed so-called "Adoption Agreements" with ABC, pursuant to which their employees were guaranteed health insurance coverage. In essence, ABC functioned as a middleman between the Fund and the employers.

 The Trust Agreement which governed the Fund provided that employer contribution rates would be set by reference to the collective bargaining agreements between brokers (such as ABC) and the Union. Employers did not pay the Fund directly. Rather, they paid their premiums to brokers (such as ABC) according to rates which were set in the "Adoption Agreements" between the employers and ABC. The Adoption Agreements invariably included language expressly stating that the contribution rates were "monthly contributions for the Welfare Plan. " Upon receiving the employers' premiums, ABC would remit a portion of the money to the Fund. Defendant admits that ABC always retained part of the payment (usually about 15% of the premium) as a "commission" for its services. Defendant also concedes that the Adoption Agreements did not specifically inform the employers that their payments included a broker commission.

 In November 1988, one month after the Fund's creation, William Loeb invited Goldstein to serve as trustee of the Fund. Goldstein accepted and continued to serve as trustee through 1991. Throughout this period, he remained sole owner of ABC, and ABC continued to function as a insurance broker for the Fund, retaining a percentage of employer premiums as "commissions." Goldstein alone decided what ABC's "commissions" would be; no other fiduciaries of the Fund were involved in approving ABC's compensation. Plaintiff alleges that from January 1989 to March 1991, Goldstein caused ABC to be paid $ 139,282 in commissions; Goldstein admits that he caused ABC to be paid commissions, but he disputes the exact amount.

 In August 1990, Goldstein founded Business Marketing Consultants ("BMC"), a company which, like ABC, provided brokerage services to the Fund. Goldstein was the sole owner of BMC. BMC catered to all the non-New York employers insured through the Fund. *fn1" BMC billed these employers a monthly charge which, defendant acknowledges, included: (1) the contribution rates remitted to the Fund, (2) a commission paid to the enrolling agent, and (3) an undisclosed $ 20 per employee monthly charge that BMC retained as compensation for its "administrative services." Like ABC, BMC had entered into a "collective bargaining arrangement" with the Union; this collective bargaining arrangement however made no mention of a commission or an allowance for BMC's services. Again, the DOL alleges that Goldstein alone set this $ 20 service charge, and that no other fiduciary approved BMC's compensation. Plaintiff DOL alleges that from October 1990 to August 1991, Goldstein caused BMC to be paid $ 280,532 "from plan assets." Goldstein admits that he caused BMC to be paid, but he disputes the amount and contends that the monies were not "plan assets."

 II. Parties' Contentions

 ERISA Section 406(b) states as follows:

A fiduciary with respect to a plan shall not --
(1) deal with the assets of the plan in his own interest or for his own account,
(2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a whose interests are adverse to the interest of the plan or the ...

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