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PEDRE CO. v. ROBINS

September 29, 1995

THE PEDRE COMPANY, INC., THE PEDRE COMPANY PROFIT SHARING PLAN AND R. PETER GUNSHOR, Plaintiffs, against LEE ROBINS, STANLEY A. DEITCH, CPI ASSOCIATES, INC., WINDSOR ASSOCIATES, STEVEN BOUGHNER, EMERSON F. MARKHAM, MARTIN I. BLAUSTEIN AND CONCEPTUAL PLANNING, INC., Defendants.

SONIA SOTOMAYOR, U.S.D.J.


The opinion of the court was delivered by: SOTOMAYOR

SONIA SOTOMAYOR, U.S.D.J.

 Defendants move to dismiss the Complaint for lack of subject matter jurisdiction and, in the alternative, to dismiss the state law claims as being preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. For the reasons discussed below, the motion to dismiss is GRANTED in part and DENIED in part.

 Background

 The dispute underlying this action arises from a longstanding friendship and professional relationship between plaintiff Peter Gunshor and defendant Lee Robins. For the purposes of this motion to dismiss, the following facts are taken from the Complaint and will be presumed to be true. Gunshor is president of the Pedre Company, sole trustee of the Pedre Company Profit Sharing Plan ("the Plan"), and the Plan's primary beneficiary. Robins is an accountant who provided professional services to Gunshor and the Plan. *fn1"

 In 1982, Robins persuaded Gunshor to involve the Plan in a real estate tax shelter investment. Robins repeatedly assured Gunshor that he was familiar with the relevant law and that the scheme was legal and proper. To underscore his confidence, Robins told Gunshor that "in the unlikely event any problems arose in connection with the proposed transactions involving the Plan, he would 'take care of them' so that the Plan would not suffer or incur any liability." (First Am. Compl. at 7.) Gunshor agreed to the investment proposal, and Robins and his associates assumed day-to-day management and investment control over the Plan. As part of the deal, defendants retained 85% of the tax shelter's profits for themselves. Without telling Gunshor, however, defendants also sold shares in the scheme to some of their other clients.

 The Internal Revenue Service began an audit of the Plan in 1993. Since then, plaintiffs have incurred substantial legal bills to defend the IRS action. Plaintiffs believe their maximum exposure is $ 4 million in taxes and interest. Their Complaint against defendants alleges breach of fiduciary duty under ERISA and seven pendent state law claims.

 In this motion, defendants contend that no case or controversy exists at this time because the plaintiffs' injuries are wholly contingent on future action by the IRS. Alternatively, defendants argue that the state law claims are preempted by ERISA and that the fraud claims have not been pled with the required particularity.

 Discussion

 I. Subject Matter Jurisdiction: Case or Controversy

 The threshold issue is whether the Complaint states a case or controversy ripe for review. The standard for ripeness in a declaratory judgment action is "whether . . . there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 85 L. Ed. 826, 61 S. Ct. 510 (1941). The standard was further refined in Abbott Lab. v. Gardner, 387 U.S. 136, 18 L. Ed. 2d 681, 87 S. Ct. 1507 (1967), which holds that ripeness is a function of two factors: "the fitness of the issues for judicial decision" and "the hardship to the parties of withholding court consideration." Abbott, 387 U.S. at 149. Although the Second Circuit has cautioned that where administrative agency action is involved, courts "should not intervene unless the need for equitable relief is more than remote or speculative," Daley v. Mathews, 536 F.2d 519, 522 (2d Cir. 1976), it has also held that the immediacy of a claim must be judged, in large part, by "the hardship to the plaintiff which will flow from withholding judicial review," id. at 522. See also In re Combustion Equipment Assocs., Inc., 838 F.2d 35, 37 (2d Cir. 1988) ("The purpose of the [Declaratory Judgment Act, 28 U.S.C. § 2201] is to enable parties to adjudicate disputes before either side suffers great damage.").

 The defendants assert that because the IRS has not yet issued an unfavorable ruling -- and may never do so -- the plaintiffs have suffered no harm and the parties are not adverse. This argument is disingenuous and does not fully address the Complaint.

 The Complaint alleges not one, but two concrete claims between the parties, neither of which hinges even remotely on the outcome of the IRS audit. The first arises under ERISA, the second is a state law contract claim, and both are ripe controversies.

 The essence of the ERISA claim is easily summarized. *fn2" In the early 1980s, long before the IRS intervened, defendants breached their fiduciary duty to the Plan by embroiling it in a risky tax shelter scheme, by dividing the profits between the Plan and themselves in violation of tax and ERISA laws, and by secretly using the investment scheme to enrich their other clients. The Complaint alleges sufficient facts to support the claim that defendants were fiduciaries, including the fact that they took possession of the Plan's checkbook and assumed control over its day-to-day management and assets. *fn3" Although accountants (and other professionals) are not normally considered to be fiduciaries when they provide only routine professional services, their status may change if they acquire discretionary control over a plan. Mertens v. Hewitt Assocs., 948 F.2d 607, 610 (9th Cir. 1991), aff'd, Mertens v. Hewitt Assocs., 508 U.S. ...


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