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LISS v. SMITH

January 12, 1998

MARK LISS, as Chairman of the Trustees of the 966 Health Plan and the 966 Pension Plan, and MIGUEL MILLET, Plaintiffs, against STEVEN SMITH, JOSEPH PASQUALONE, FRANK FLORES, LAWRENCE FINLEY, EDWIN GONZALEZ, STEPHEN ZACCHERIO, VINCENT SOMBROTTO, and BRYAN McCARTHY, personally and in their capacities as plan fiduciaries, Defendants.


The opinion of the court was delivered by: BAER

 TABLE OF CONTENTS

 BACKGROUND

 I. Introduction

 II. Local 966

 III. The Amended Complaint

 IV. The Motions and the Settlement

 DISCUSSION

 I. The Trustee Defendants

 
A. Failure to Collect Delinquent Contributions
 
B. Travelers Insurance Plan
 
1. Breach of Fiduciary Duty: ERISA Section 404
 
2. Prohibited Transactions: ERISA Section 406
 
C. Fiduciary Breaches: Investments
 
1. Loss
 
2. Investment Policy and Guidelines
 
3. Investment Advisers
 
4. Investigation of Fund Investments
 
5. Monitoring the Pension Fund's Solvency
 
D. Selecting Service Providers
 
E. Diversification of Fund assets

 II. Bryan McCarthy

 
A. Fiduciary Liability
 
B. Non-fiduciary Liability
 
1. Fiduciary Breaches
 
2. Prohibited Transactions
 
a. Travelers Arrangement
 
b. Delinquent Contributions
 
C. Malpractice

 III. Vincent Sombrotto

 IV. Equitable Relief

 
A. General Standards
 
B. Current Employer Trustees: Smith and Pasqualone
 
C. Bryan McCarthy

 CONCLUSION

 HAROLD BAER, JR., District Judge:

 BACKGROUND

 I. Introduction

 This case involves the administration of Teamster Local 966's Health and Pension Funds. Plaintiffs are Chairman of the Boards of Trustees of the Local 966 Health and Pension Funds (the "Funds" or the "Plans") and a plan participant. They bring this action under the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001 et seq. ("ERISA") against current and former Employer Trustees of both Plans; *fn2" two former Union Trustees; *fn3" the Local's past President, Vincent Sombrotto; and the Funds' former counsel and current counsel to the Employer Trustees, Bryan McCarthy. *fn4" The Amended Complaint asserts breaches of fiduciary duty by the defendants in violation of ERISA Section 404, 29 U.S.C. § 1104, as well as prohibited transactions in violation of ERISA Section 406, 29 U.S.C. § 1106. It seeks to assert liability for these breaches against defendants Sombrotto and McCarthy as well, alleging that while neither is a trustee, they are nonetheless liable as fiduciaries pursuant to 29 U.S.C. § 1002(21)(A). Plaintiffs also assert a pendant state-law legal malpractice claim against defendant McCarthy. The Amended Complaint seeks money damages as well as equitable relief, which, if granted, would remove the current Employer Trustees from their positions and remove Bryan McCarthy as counsel to the Employer Trustees pursuant to ERISA Section 502(a). 29 U.S.C. § 1132(a).

 In essence, plaintiffs' allegations paint a picture of gross mismanagement, if not worse. Plaintiffs assert--and to a considerable extent have established--that the defendants abdicated their responsibility to act prudently and in the best interests of the Funds' participants. *fn5" Moreover, this failure appears to have benefitted the friends, colleagues and family of defendant Bryan McCarthy. To all those who thought that Senator McClellan, Robert Kennedy and their colleagues fashioned legislation that would herald the end to such activity, the papers on this motion are a stark reminder that the success of their efforts requires eternal vigilance.

 II. Local 966

 The Funds are affiliated with Local 966 of the International Brotherhood of Teamster ("IBT"). As a result of a lawsuit alleging corruption in the IBT and a consent agreement entered into between the IBT and the United States government, an Independent Review Board ("IRB") was created to help root out corruption in the Union. After conducting an investigation into Local 966, the IRB alleged that (i) "the financial condition of Local 966 [was] deteriorating and that membership [was] declining," (ii) "Local Union 966 officers [had] engaged in dual unionism by organizing several non-IBT locals," and (iii) "Local 966 officers [had] engaged in financial malpractice including embezzlement of Local Union Funds." Notice of Trusteeship, Pl. Ex. B; see also Memo from IRB to Ron Carey, April 12, 1994, Pl. Ex. A. In light of these allegations, the IRB recommended that Local 966 be placed in Trusteeship. Memo from IRB to Ron Carey, April 12, 1994, Pl. Ex. A. IBT General President Ron Carey placed Local 966 into temporary trusteeship effective April 27, 1994 and appointed Gene Moriarty to serve as Trustee. See Notice of Trusteeship, Pl. Ex. B. At that time, defendant Sombrotto was removed from office as the Local's president. The new Local Trustee, Gene Moriarty, appointed himself and another individual as the Funds' Union Trustees to replace defendants Zaccherio and Gonzalez. Moriarty, who brought this action on behalf of the Funds, has since been succeeded by plaintiff Mark Liss.

 III. The Amended Complaint

 The Amended Complaint asserts eleven causes of action. First, plaintiffs allege that defendants failed to adequately go about the collection of delinquent contributions or the interest due on such delinquent contributions and specifically implicates defendant Bryan McCarthy in this practice. In essence, plaintiffs allege that the defendant trustees--with McCarthy as their counsel, colleague and collaborator--had a practice of regularly waiving interest on delinquent contributions from employers as long as the payments were ultimately made before suit was filed. This practice amounted to interest regularly being waived on contributions three or more months late, without any investigation by the trustees or McCarthy as to whether such interest was in fact collectible and without any apparent consideration of the availability of attorney's fees and liquidated damages as additional remedies in suits to collect delinquent contributions, see 29 U.S.C. §§ 1132(g), 1145. Moreover, and more troubling, some of these delinquent employers were represented by, and had business dealings with, Bryan McCarthy's brothers through the brothers' various consulting and other businesses. Plaintiffs allege this practice violates ERISA Sections 406(a)(1) & 406(b)(2), 29 U.S.C. §§ 1106(a)(1) & 1106(b)(2), which prohibit the extension of credit to parties-in-interest. Plaintiffs also assert that such conduct is violative of defendants' fiduciary duty. See ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1).

 Second, plaintiffs assert that defendants engaged in prohibited transactions and breached their fiduciary duty, again in violation of ERISA Sections 404 and 406, by allowing the Health Fund to enter into a certain arrangement with the Travelers Insurance Company ("Travelers"). The Travelers allegations implicate defendants McCarthy and Sombrotto in even more conflicts of interest involving additional union locals.

 Locals 912 and 1019 were organized by defendant McCarthy and others, apparently for the sole purpose of selling the Travelers insurance at a profit. The arrangement worked as follows. Small businesses were solicited--primarily if not solely for the purpose of providing their employees with health insurance--by two employer organizations, the Association for Organized Services, Inc. ("AOS") and National Plan Administrators, Ltd. ("NPA"). The businesses would join one of these employer organizations. AOS or NPA in turn would each enter into a purported "collective bargaining agreement," on behalf of itself and its member companies, with one of the unaffiliated Locals. See, e.g., Pl. Exh. V. *fn7" These agreements recognized the Local in question (912 or 1019) as the collective bargaining agent for all full-time employees of each member company, *fn8" set forth certain basic working terms and conditions and provided health care coverage for member businesses' employees. Apparently, the agreements were dependent on the provision of health care coverage to member businesses' employees and concomitantly a profit to the McCarthy family. Indeed, the agreements were terminable for failure to pay the health care premium. See, e.g., Pl. Exh. V, Art. XII, § 3. AOS was organized by Peter Zappasodi, a service provider to the Local 966 Health Fund who was also making periodic payments to Bryan McCarthy's brothers. McCarthy's conflicts of interest expand further with the revelation that McCarthy himself was counsel to Locals 912 and 1019 and in fact drafted the letters that sought their participation in the 966 Health Fund. *fn9"

 The employer-members of AOS and NPA paid AOS and NPA up to double the premium cost that Travelers was charging Local 966. AOS (the organization through which kickbacks were funneled to the McCarthy family) and NPA kept most of this excess, with the unaffiliated locals, 912 and 1019, keeping the rest. The remainder--the "net premiums" charged by Travelers--was passed on to Travelers via Local 966.

 These excess charges are the gist of this claim, as plaintiffs allege the skimmed profits rightfully belong to the Health Fund. More specifically, plaintiffs allege the money is a "plan asset" of Local 966's Health Fund under ERISA Section 406(a). They allege further that this "plan asset" went into the pockets of certain parties-in-interest: AOS and Defendant McCarthy, who received payments of $ 500 per month for the services he performed as counsel to Locals 912 and 1019. Thus, they claim the arrangement violated ERISA's prohibited transaction provisions, which forbid certain transactions involving plan assets and parties in interest. 29 U.S.C. § 1106.

 Travelers ultimately cancelled the program in November 1993, after less than a year, because of a failure to meet the minimum enrollment requirements and because non-966 participants were enrolled. See Pl. Exh. OO. As can be expected, the enrollment of non-966 participants changed the applicable premiums on the policy (which were calculated to cover 966 participants). Travelers has sought reimbursement of some $ 600,000 from the Health Fund as a result of the recalculated premiums. Peculiarly, Travelers has not instituted suit to collect the alleged deficiency.

 Plaintiffs' third through seventh, and ninth, causes of action allege breaches of fiduciary duty for the following acts (or omissions) of the defendants relating to Fund assets: failure to implement an investment policy and guidelines (III); failure to diversify Fund assets (IV); failure to retain investment advisers for the management of Fund assets (V); failure to properly investigate Fund investments (VI); failure to monitor the Pension Fund's solvency (VII); and failure to exercise due diligence in selecting service providers for the Funds (IX). *fn10" As discussed in greater detail below, these allegations relate to the trustees' complete and total failure to take even the most minimal and basic steps to ensure that Fund assets were invested and spent properly. The list of omissions is a prototype for breached fiduciary duty: the trustees failed to investigate the risks and propriety of investments, and instead accepted their broker's recommendations blindly; they failed to question or learn the extent of the commissions this same broker was charging them; they never compared such charges to the charges of other brokers or investment advisers; they never adopted an investment policy or guidelines; they never hired a professional money manager; they never considered their statutory duty to diversify investments; they failed to take any action for years in light of evidence of the Pension Fund's growing insolvency; and they failed to conduct any investigation into the Health Fund's service providers, most of whom were making regular payments to the McCarthy family. All the while, they were represented by McCarthy, who apparently failed to advise the trustees as to their duty to do any of the above or of any of his numerous conflicts of interest. Defendant Sombrotto, who attended virtually all of the Funds' meetings, and who as Local President had the power to appoint and remove the Union Trustees and the concomitant duty to monitor their performance, never took any action either.

 Plaintiffs' eleventh cause of action asserts a state-law legal malpractice claim against defendant McCarthy for, inter alia, his failure to advise the trustees as to their obligations to perform the acts described above.

 Finally, plaintiffs' eighth cause of action alleges that defendants breached their fiduciary duties by taking actions allegedly intended to ensure their continued control of the Funds in the face of the impending IRB/IBT Trusteeship. Plaintiffs' tenth cause of action asserts a breach of fiduciary duty by defendants for allowing defendant Smith to be appointed as an Employer Trustee, even though his status as a Union member rendered him disqualified from so serving. Plaintiffs have not moved for summary judgment on these claims. Defendants have moved for summary judgment on these claims.

 IV. The Motions and the Settlement

 Plaintiffs have moved for summary judgment on liability on counts one through seven, nine and eleven of the Amended Complaint and ask the Court to exercise its power to remove the current Employer Trustees and McCarthy from their positions. All of the defendants have moved for summary judgment dismissing the Amended Complaint. Oral argument on the motions was held on July 22, 1997.

 Since that time, the four former trustee defendants and the plaintiffs have settled all the claims asserted against the former trustees. The current Employer Trustees, Stephen Smith and Joseph Pasqualone, who have equitable as well as legal claims pending against them, have not agreed to a settlement. The settlement by its terms, however, dismisses all claims for money damages against the current Employer Trustees. The settlement is subject to notification to the Plan Participants and Court approval. For purposes of deciding the motions, however, the Court deems all claims against the former trustees dismissed and all but the equitable claims against the current Employer Trustees dismissed.

 DISCUSSION

 I. The Trustee Defendants13

 Ten of the causes of action are brought against the Trustee defendants. As noted above, the former trustee defendants have settled all claims against them. In exchange for this settlement, the plaintiffs have also released all claims for money damages against the current Employer Trustees. The only remaining claims against the trustee defendants, therefore, are the equitable claims against the current Employer Trustees. *fn14" Furthermore, as noted above, the claims against defendants McCarthy and Sombrotto are largely dependent on the trustee defendants' actions. Accordingly, and notwithstanding the settlement of the legal claims against the former trustees and the dismissal of the legal claims against the current Employer Trustees, the Court must still address plaintiffs' motion as it ...


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