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SILVERMAN v. MUTUAL BEN. LIFE INS. CO.

May 16, 1996

David W. SILVERMAN, Plaintiff, against MUTUAL BENEFIT LIFE INSURANCE CO. et al., Defendants.


The opinion of the court was delivered by: ROSS

 ROSS, United States District Judge:

 In this action, a court-appointed fiduciary of an employee benefit plan seeks to hold an insurance company that acted as the plan's investment manager liable for the theft of assets by the plan's trustees. Plaintiff, David Silverman, argues that the insurance company, defendant Principal Mutual Life Insurance Co. ("Principal"), is liable as a co-fiduciary for the actions of the trustees under § 405(a) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1105(a). Principal and plaintiff have cross-moved for summary judgment. For the reasons stated herein, Principal's motion is granted, and plaintiff's motion is denied.

 FACTUAL BACKGROUND

 Many of the facts relating to this action were outlined in the court's opinion and order of April 19, 1996, granting summary judgment for defendants Mutual Benefit Life Insurance Co. ("Mutual Benefit") and Helene Gorny, and dismissing plaintiff's claims against them. On July 15, 1988, Unitron Graphics, Inc. ("Unitron Graphics") established two profit-sharing plans (collectively, the "Plan") for the benefit of its employees. *fn1" Zucker and Fertig, both officers of Unitron Graphics, were the trustees of the Plan and the named fiduciaries pursuant to § 402 of ERISA, 29 U.S.C. § 1102.

 The Plan was what is known under ERISA as an "individual account plan" or a "defined contribution plan." See 29 U.S.C. § 1002(34). Each participating employee could elect to have Unitron set aside part of his salary and contribute it to the Plan. In addition, the company could make matching contributions and discretionary contributions. Prior to July 1, 1991, the Plan's assets were invested in a group annuity contract with Mutual Benefit. That contract provided that Mutual Benefit would maintain a separate account for each participant in the plan, and allowed each participant to allocate the money in his account among several different investment accounts that Mutual Benefit offered.

 On July 1, 1991, Zucker wrote to Mutual Benefit and discontinued the Plan's group annuity contract. On that same day, he and Fertig entered into two new group annuity contracts with defendant Principal. Like the contract with Mutual Benefit, the contracts with Principal offered participants a choice of several investment options, and provided for individual recordkeeping for each participant's account. They also explicitly provided that:

 
Application for and issuance of this contract constitutes appointment of and acceptance and affirmation by us [Principal] that (i) we are an Investment Manager as described under [ERISA] with respect to Plan assets held under this contract . . . and (ii) we are qualified to accept such appointment and acknowledge that by virtue of such appointment we are a fiduciary of the Plan, within the meaning of [ERISA] with respect to our responsibilities as Investment Manager.

 Saunders Aff., Ex. A, at 241; Saunders Aff. Ex B, at 298. The contracts did not specify that Principal was to be the sole investment manager of the Plan's assets. They did, however, set forth explicit procedures that the trustees were to follow in the event they decided to transfer any of the Plan's assets to an "alternate funding agent." Saunders Aff., Ex. A, at 235; Saunders Aff. Ex B, at 292.

 For reasons that are not entirely clear, Mutual Benefit did not release the Plan's funds immediately after Zucker's letter of July 1, 1991. On August 15, 1991, Zucker again wrote to Mutual Benefit, requesting release of certain of the funds held in certain of Mutual Benefit's investment accounts. *fn2" On August 30, 1991, Mutual Benefit issued a check made payable to the order of the Unitron Graphics, Inc. Profit Sharing Trust in the amount of $ 239,811.28. That check was deposited in the Plan's bank account at Citibank, N.A., on September 6, 1991.

 Between September 20 and October 8, 1991, Zucker and Fertig embezzled $ 130,000 from the Plan by drawing three checks on the Citibank account. Two of the three checks were made payable to Zucker, and the third was made payable to his son. All three checks were signed by Zucker. See Wolfson Aff. Ex. D. The balance of the payment from Mutual Benefit, $ 109,811.28, was forwarded to Principal by wire transfer on October 8, 1991.

 On November 5, 1991, Principal wrote to Zucker and Fertig. That letter raised two concerns that Principal had about the Plan. First, it noted that, with the exception of one payment, Principal had not received any of salary deferral contributions that Unitron was required to make to the Plan. Pursuant to a Department of Labor ("DOL") regulation, such salary deferrals become part of a plan's assets no later than 90 days after they are withheld from an employee's paycheck. See 29 C.F.R. § 2510.3-102 (1989). Second, it inquired about the missing $ 130,000. The letter stated, in relevant part:

 
We have learned that Mutual Benefit . . . has liquidated and transferred to the Plans' Trustees all separate account assets that had been held by them. In turn, we have received, from what limited recordkeeping data we have, only a portion of those separate account assets. The balance of these assets must be accounted for. It is our understanding that we are to be the only investment manager for your profit sharing plans. Given this, please forward the balance of these funds.
 
If you have no intention of forwarding these funds in their entirety to us, contact us immediately in writing via the FAX number indicated below. On that basis, we will need to make an internal decision on whether we can continue to be associated with the Unitron Graphics, Inc. Profit Sharing Plans.

 Saunders Aff. Ex. G; Pl. Ex. 6. Zucker and Fertig did not reply to this letter.

 Principal did not take any further immediate action. Several internal memoranda submitted by plaintiff, however, disclose that Principal was aware of a potential legal problem with respect to the Plan. For example, one such memorandum, written by Maria Gowdey, an assistant analyst with Principal, and dated November 13, 1991, reads:

 
Spoke to John Lee on 11/13/91. He told me that there may be a legal issue/problem on this case. We discussed that I probably should not call the client about anything until I hear from him.
 
The client has received $ 130,000 transfer money from Mutual Benefit and is holding on to it instead of submitting it to us. They also have not been submitting regular contributions to us. The group rep and legal department are involved and a letter has been sent to the client requesting immediate deposit of funds.

 Pl. Ex. 9. Two memoranda also indicate that, on January 14, 1992, a participant in the Plan named Lance Burt called Gowdey to request information about his account.

 On January 28, 1992, Principal, through its assistant counsel, Randy Bolin, wrote again to Zucker and Fertig. The second letter reiterated the points made in the first letter in somewhat stronger language:

 
To date we have received no response to [the November 5] letter. Your failure either to forward the requested funds to us or to notify us in writing of your intention not to forward these funds has forced us once again to address these issues with you.
 
. . . .
 
. . . We have learned that Mutual Benefit recently transferred these separate account assets to you in your capacity as the plan trustees. Our records indicate, however, that we have only received a portion of these separate account assets from you since their release by Mutual Benefit. The balance of these assets must be accounted for. Within five business days after receipt of this letter, we request that you forward to us the balance of the separate account assets that were released to you by Mutual Benefit.
 
. . . .
 
If you have no intention of forwarding the requested funds in their entirety to us within five business days, please contact me immediately in writing via the FAX number indicated below. If we do not receive the requested funds from you, or a written response indicating your intended actions with respect to these funds within five business days after your receipt of this letter, we will be forced to provide you with the required written notice pursuant to our contracts that we will refuse any further contributions from you under the contracts.

 Bolin Aff. Ex. A; Pl. Ex. 12.

 Bolin's letter also addressed the delinquent contributions that Unitron was required to make to the Plan. With respect to that issue, he wrote:

 
It is our opinion that Section 502(l) of [ERISA] will require us to notify the Secretary of Labor of the fact that, according to our records, you do not appear to be currently complying with the requirements of DOL regulation 2510.3-102 in connection with the operation of your 401(k) plans. Under § 502(l) of ERISA, the Secretary of Labor has the authority to assess a 20% penalty against any fiduciary who breaches his or her fiduciary duty or against any other person who knowingly participates in such a breach. . . .
 
Knowledge of your apparent failure to comply with Regulation 2510.3-102 subjects Principal Mutual Life Insurance Company to potential penalties under Section 502(l) of ERISA if we do not act reasonably and in good faith. It is our opinion that to allow the current situation with respect to the employee deferrals to your 401(k) plans to exist any longer would not be ...

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