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L.I. HEAD START CHILD DEVELOP. SERVICES v. KEARSE

March 3, 2000

L.I. HEAD START CHILD DEVELOPMENT SERVICES, INC., ANTHONY MACALUSO AND PAUL ADAMS, INDIVIDUALLY ON THEIR OWN BEHALF AND ON BEHALF OF ALL OTHER PERSONS SIMILARLY SITUATED, PLAINTIFFS,
V.
JOHN L. KEARSE AND ALPHONSO ANDERSON, AS TRUSTEES OF THE COMMUNITY ACTION AGENCIES INSURANCE GROUP, AND COMMUNITY ACTIONS AGENCIES INSURANCE GROUP, DEFENDANT.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

The fiduciary duty of loyalty imposed by ERISA is designed to ensure that fund assets are held and administered for the sole and exclusive benefit of plan participants.

O'Neil v. Retirement Plan for Salaried Employees of RKO General, Inc., 37 F.3d 55, 61 (2d Cir. 1994) (citing Levy v. Local Union Number 810, 20 F.3d 516, 519 [2d Cir. 1994]).

I. BACKGROUND

On April 1, 1993, this action was commenced by the plaintiffs L.I. Head Start Child Development Services, Inc. ("Head Start") and two class representatives, pursuant to the Employee Retirement Income Security Act ("ERISA"), 20 U.S.C. § 1000, et seq. The action was brought against individual trustees of the Community Action Agencies Insurance Group and the Community Action Agencies Insurance Group Fund (the "CAAIG Trust"), a health and welfare benefit fund in which the plaintiffs participated between the years of 1986 and 1992. Head Start is a not-for-profit corporation that operates a Head Start program under a direct guarantee of funds from the federal government. The program provides early childhood education to children from disadvantaged backgrounds.

On September 1, 1992, Head Start withdrew from the CAAIG Trust and formed a new health and welfare benefit fund. It is alleged by the plaintiffs that the CAAIG trustees were under a fiduciary duty imposed by ERISA, 29 U.S.C. § 1103, 1104, to hold the shares of the CAAIG Trust assets attributable to contributions made by Head Start employees for the exclusive purpose of providing benefits to those employees. The complaint further alleges that the defendant CAAIG trustees violated their fiduciary duties by refusing to transfer or return Head Start's past contributions so that they could augment Head Start's newly formed health and welfare benefit fund. The plaintiffs complaint seeks to compel the defendants to account for reserves in the CAAIG Trust that represent contributions made by Head Start on behalf of the plaintiff employees and to transfer those assets to the newly formed fund.

The plaintiff's complaint sets forth five separate causes of action. The first claim alleges that the CAAIG trustees violated the "exclusive benefits" rule of ERISA § 1104(a)(1)(A) by refusing to transfer Head Start's share of CAAIG's reserves held for the exclusive purpose of providing benefits to its participating employees. The second cause of action seeks an accounting by the trustees to ascertain the share of the CAAIG reserves attributable to Head Start's past contributions. The third claim alleges that by failing to return the portion of reserves attributable to Head Start's past contributions, the CAAIG Trust has been unjustly enriched and received a windfall to the extent of such share of reserves wrongfully retained. The fourth claim asserts that the trustees breached their fiduciary duties to the plaintiff class members under the "exclusive benefit" rule of ERISA § 1104(a) by refusing to act upon the demands of Head Start for the transfer of the reserves reflecting past contributions made to CAAIG on behalf of its employees. The fifth cause of action alleges that the trustees violated their fiduciary duties under ERISA § 1103 by failing to hold the portion of reserves attributable to past contributions made by Head Start for the exclusive purpose of providing benefits to Head Start's participating employees and their beneficiaries.

Based on these allegations, the plaintiffs seek an order directing the defendant trustees to transfer Head Start's portion of the reserves to a trust fund to be held for the exclusive benefit of Head Start's employees and their beneficiaries.

A non-jury trial was held on January 26, 27 and 28, February 12 and 19, April 9 and 30, and September 17, 1999.

II. THE TRIAL — FINDINGS OF FACT

This opinion and order includes the Court's findings of fact and conclusions of law as required by Fed.R.Civ.P. 52(a) See Rosen v. Siegel, 106 F.3d 28, 32 (2d Cir. 1997); Colonial Exchange Ltd. Partnership v. Continental Casualty Co., 923 F.2d 257 (2d Cir. 1991). During this portion of the opinion, the Court will make findings of fact which will be supplemented by additional findings later in the opinion. Most of the facts are not controverted and were set forth in the proposed findings of facts submitted by the respective parties upon the conclusion of the trial.

A. The Uncontested Facts

The plaintiff, Head Start is a not-for profit corporation organized and existing under the laws of the State of New York. Defendant CAAIG is an employee welfare benefit plan within the meaning of ERISA § 3(1), 29 U.S.C. § 1002(1). The CAAIG Trust was established for the sole and exclusive purpose of providing health and welfare benefits to employee participants and their beneficiaries within the meaning of ERISA §§ 1103(c)(1) and 1104(a)(1)(A), 29 U.S.C. § 1103(c)(1) and 1103(a)(1)(A). The CAAIG Trust was formerly known as the Community Action Agencies Trust Fund II.

The CAAIG Trust was established by a written trust agreement dated October 4, 1983. The fund was to provide health, medical, dental and other benefits for the employees of the Economic Opportunity Commission of Nassau County, Inc. ("Nassau EOC"), the Economic Opportunity Council of Suffolk, Inc. ("Suffolk EOC") and any other employer who became a participating employer. The agreement was signed by John Kearse, the chief executive officer of the Nassau EOC, and Lorenzo Merritt, the Director of the Suffolk EOC, on behalf of those organizations. Both Kearse and Merritt also signed as Trustees under the terms of the agreement.

Prior to November 30, 1985, the employees of Head Start were employed by Suffolk EOC and were covered under the CAAIG as such employees. On November 30, 1985 Head Start became a separate participating employer in the CAAIG Trust. From that time, the former employees of Suffolk EOC hired by Head Start were covered under the CAAIG Trust as participating employees of Head Start without any break in coverage. At the time that Head Start became a participating employer in the CAAIG Trust, Nassau EOC, Suffolk EOC and Yonkers Community Action Program, Inc. also were participating employers in the CAAIG Trust.

Pursuant to the terms of the October 4, 1983 Trust Agreement, the participating employers, including Head Start, were required to and did make payments to the CAAIG Trust on behalf of their covered employees. The monetary payments made by the participating employers were used to provide health and insurance benefits to the participating employees and to pay the administrative expenses of the CAAIG Trust. They did this by purchasing health coverage from private insurance carriers. On September 1, 1986, the CAAIG Trust began providing health, dental and hospitalization benefits on a self-insured basis while continuing to purchase life insurance and disability insurance from insurance carriers. The Nassau EOC Board of Directors approved participation in the self-insured benefits plan at its Board Meeting on September 25, 1986. The Yonkers Community Action Program, Inc. approved participation in the self-insured benefits plan at its September, 1986 Board of Directors Meeting. The Suffolk EOC Board of Directors also approved participation in the self-insured benefit plan at its Regular Board of Directors Meeting on November 20, 1986.

From November 30, 1985 through August 31, 1992, Head Start made payments to the CAAIG Trust on behalf of all its covered employees, including all of the members of this class action. During the entire period Head Start was a contributing employer, the CAAIG Trust accumulated reserves. As of August 31, 1992, the financial statements of the CAAIG Trust indicated that the total amount of the reserves for all contributors was $1,117,507.00. The portion of reserves attributable to Head Start's past contributions made on behalf of its employees, including interest, was $499,736 (Pl.Ex. 70).*fn1

On July 29, 1992, Head Start notified the CAAIG Trust that it was discontinuing its participation in the Fund as of September 1, 1992. In that notification, it requested the return of that portion of the remaining reserves attributable to past contributions made by Head Start on behalf of its participating employees. The letter stated:

please be informed that effective September 1, 1992, L.I. Head Start Child Development Services Inc., shall discontinue its participation in CAAIG's Health, Life AD & D, LTD. and DBL plans. We would appreciate the immediate return of our Health Insurance reserve funds held in escrow by CAAIG so that we may make the appropriate distribution.

(Pl.Ex. 46). On September 1, 1992, Head Start terminated its participation in the CAAIG Trust. On September 24, 1992, Head Start again requested the return of that portion of the assets attributable to its past contributions on behalf of its employees. The letter stated:

By our letter dated July 29, 1992, Mrs. Phyllis Simmons informed you that effective September 1, 1992, L.I. Head Start Child Development Services, Inc., would discontinue its participation in CAAIG's Health, Life, AD & D, LTD and DBL plans. She also asked for the immediate return of our health insurance reserve funds. To date, we have not received a response to our request. Please contact us as soon as possible. We would like to avoid turning this matter over to out attorney.

(Pl.Ex. 47). The defendants refused to transfer, relinquish or return any portion of the CAAIG Trust assets allocable to past contributions by Head Start.

Defendants John L. Kearse and Alphonso Anderson were trustees of the CAAIG Trust at the time the demands were made by Head Start for the transfer of the reserves and at the time this action was commenced. By Order dated October 26, 1994, this Court certified this action as a class action. The certified class consists of Head Start employees who were also past participants in the CAAIG Trust. By Order dated October 26, 1994, this Court approved the plaintiffs Anthony Macaluso and Paul Adams as representatives of the class.

B. The Contested Facts

The parties essentially disagree as to three material facts. The first material fact at issue is whether the CAAIG assets were held in a single pooled account in the name of CAAIG without segregating the contributions from the various employers. The second material fact requires a determination as to the validity of a modified Trust Agreement purportedly signed by Kearse and Meritt on October 6, 1983, which prohibits the transfer of reserves to any employer who withdraws from CAAIG. The third material fact, which is actually a mixed question of law and fact, concerns the validity of an alleged amendment to the original Trust Agreement, dated August 7, 1986, which prohibits the transfer of reserves to any employer who withdraws from CAAIG.

1. Were the Funds Segregated or Pooled?

The defendants claim that the CAAIG assets were held in a single pooled account in the name of CAAIG without segregating payments from various participating organizations. In other words, the defendants argue that the funds were pooled and not separately ear-marked.

The Court finds that the credible evidence presented at the trial demonstrates that the CAAIG was not a pooled fund and that each of the contributing employer's funds were segregated. The annual financial reports of CAAIG indicate that the funds were segregated. In addition, the financial reports reveal the direct allocation of benefits paid and the proportionate administrative expenses from each segregated portion of the fund. (Pl.Exhs.29-38).

The plaintiffs first witness at the trial was Michael Monteforte, Jr., the accountant for the CAAIG Trust from 1985 to 1992. Monteforte testified, in pertinent part, that:

Q: And you broke down under each agency, you allocated to each agency the gross billings, the premiums incurred, the professional fees, the bank charges and the interest to arrive at the reserves at the end of the fiscal year for each agency is that correct ?

A: Correct.

(Tr. at 48).*fn2

A: I take the information CAAIG gives me regarding the gross bills, the — billings, the cash receipts, disbursements, whether buying insurance or paying claims or other administrative expenses. And based on the information they give me, it is generally broken down by each of the individual participating agencies. Those items which are not directly given to me for each agency as in the case with expenses in some cases and the interest earned, they are allocated.
Q: You would determine the amount — you would calculate the amount at the end of the fiscal year, and after deducting the billings information they gave you and the expense information they give you, you would arrive at the ...

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