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BORRELLI v. SECRETARY OF TREASURY

November 16, 2004.

MICHAEL BORRELLI, ET. AL., Plaintiffs,
v.
THE SECRETARY OF TREASURY, ET. AL., Defendants.



The opinion of the court was delivered by: SIDNEY STEIN, District Judge

OPINION AND ORDER

This action represents the latest iteration in a long line of suits challenging the propriety of the establishment and funding of Variable Supplement Funds ("VSFs") by New York City for its police officers, firefighters and other public employees. See McDonough v. City of New York, 99 Civ. 12307, 2000 WL 1804137 at *2-4 (S.D.N.Y. Dec. 8, 2000) (describing the history of four previous litigations in federal and New York state courts). The gravamen of the complaint, which asserts 40 claims seeking, inter alia, declaratory and injunctive relief, an accounting, and the removal of certain public pension funds trustees, is that the three defendant pension funds — the New York City Employees Retirement System (the "NYCERS"), the New York City Police Pension Fund (the "Police Fund"), and the New York City Fire Department Pension Fund (the "Fire Department Fund") — violated Section 503 of the Internal Revenue Code, 26 U.S.C. § 503, by transferring assets to non-pension entities.

Plaintiffs are "active or retired members of the New York City Employees Retirement System, the Police Department Pension Fund or the Fire Department Pension Fund." (Complaint at ¶ 5). The defendants can be divided into two groups for convenience: the federal defendants — consisting of the Secretary of Treasury and the Commissioner of the Internal Revenue Service in their official capacities; and the New York defendants — consisting of the City of New York, the three pension funds, and various trustees of those funds. Three motions are currently pending before this Court: the federal defendants and the New York defendants have each moved to dismiss the complaint for lack of subject matter jurisdiction and plaintiffs have cross-moved for summary judgment in their favor.

  Because plaintiffs have failed to demonstrate the existence of a valid waiver of the federal defendants' sovereign immunity, the motion of those defendants to dismiss the complaint for lack of subject matter jurisdiction is granted. As to the claims asserted against the New York defendants, no independent basis for federal subject matter jurisdiction exists. Furthermore, because the interests of judicial economy and comity also do not favor the retention of supplemental jurisdiction over those claims pursuant to 28 U.S.C. § 1367, the New York defendants' motion to dismiss the complaint is granted as well. Finally, plaintiffs' cross-motion for summary judgment is dismissed as moot.

  BACKGROUND

  The facts relevant to the establishment and operation of VSFs by the City of New York have been set forth in numerous prior judicial opinions and do not require yet another retelling. See e.g., Castellano v. City of New York, 142 F.3d 58, 63-66 (2d Cir. 1998); Gagliardo v. Dinkins, 89 N.Y.2d 62, 68-72, 674 N.E.2d 298, 651 N.Y.S.2d 368 (1996); Castellano v. Bd. of Trustees of Police Officers' Variable Supplements Fund, 937 F.2d 752, 754-55 (2d Cir. 1991); Poggi v. City of New York, 109 A.D.2d 265, 266-71, 491 N.Y.S.2d 331 (1st Dept. 1985), aff'd 67 N.Y.2d 794 (1986). Instead, this Court will only provide a brief summary of the factual allegations relevant to the resolution of the pending motions and any background information that will assist in understanding the issues at stake. The NYCERS, the Police Fund, and the Fire Department Fund are, respectively, the retirement funds for New York City employees, police officers, and firefighters. They were established as "qualified trust[s] within the meaning of § 401(a) of the Internal Revenue Code, 26 U.S.C. § 401(a)," thereby entitling their "members and retirees to exemptions from taxes under 26 U.S.C. § 501." (Compl. at ¶¶ 46, 186, 318).

  A Variable Supplement Fund provides supplemental benefits "to certain city retirees in addition to regular pension or retirement benefits." See Castellano v. City of New York, 142 F.3d at 63 (internal citation omitted). In 1970, the relevant trust instruments for the Police Fund and the Fire Department Fund were amended to create VSFs, (Complaint at ¶¶ 186-88; 318-20), and in 1987 and 1999, similar amendments were made to the trust instrument for the NYCERS. (Id. at ¶¶ 46-49). As a result of those amendments, assets were transferred from the three pension funds to both their respective VSFs and defendant New York City. (Id. at ¶¶ 50-72; 189-210; 321-341). According to plaintiffs, well over $100 million of assets were removed from the corpus of the three pension funds as the result of those asset transfers.

  Plaintiffs allege that those transfers of assets from the three pension funds violated the "exclusive benefit rule" applicable to public pension funds and thus constituted "prohibited transactions" as defined in Sections 401(a)(2) and 503(a)(1)(b) of the Internal Revenue Code, 26 U.S.C. §§ 401(a)(2), 503(a)(1)(b). (Compl. at ¶¶ 54-67; 191-209; 323-340). In January 2003, the City of New York entered into a Closing Agreement with the Internal Revenue Service (the "I.R.S.") relating to the creation and funding of the VSFs at issue.

  That Closing Agreement acknowledges that the transfers of assets had been made in violation of 26 U.S.C. § 401(a)(2). (Closing Agreement at 3, attached to Compl. at Exhibit 1). However, the I.R.S. also agreed to "waive any sanction due from the City of New York as a result of the [violation of 26 U.S.C. § 401(a)(2)]" due to the unexpected financial crisis triggered by the September 11, 2001 attacks. (Id. at 4). Thus, the Closing Agreement stipulated that defendant public pension funds would be treated "as not having been disqualified as a result of the [transfers of assets];" instead, as an alternative remedy, the I.R.S. agreed to "treat subsequent contributions by the City of New York to [defendant public pension funds] as repayment of the [assets previously transferred]. (Id.) That agreement also required timely submission of proposed amendments to relevant New York State statutes to ensure future compliance with 26 U.S.C. § 401(a)(2). (Id. at 5).

  Plaintiffs contend that, by entering into the January 2003 Closing Agreement with New York City, the federal defendants acted beyond the scope of their authority because they were mandated, as a matter of law, to disqualify the tax-exempt status enjoyed by the defendant public pension funds. (Compl. at ¶¶ 147-152) Thus, plaintiffs assert they are entitled to injunctive and declarative relief to compel the federal defendants to disqualify the funds and to a writ of mandamus to compel the Commissioner of the I.R.S. to issue a letter of determination as to the tax-exempt status of NYCERS.

  Plaintiffs further allege that the individual defendants — who were the trustees of the pension funds — violated their fiduciary duties by permitting the transfers of assets from those funds to New York City and the VSFs. (Compl. at ¶¶ 161-64). On that basis, plaintiffs seek an accounting and injunctions compelling those individual defendants to seek reimbursement of the transferred assets as well as determination letters from the I.R.S. (Id. at ¶¶ 166-67). Plaintiffs also seek the removal of the individual defendants from the boards of trustees of the funds. (Id. at ¶¶ 173-78). LEGAL STANDARDS

  A. Sovereign Immunity and Subject Matter Jurisdiction

  Where a defendant moves to dismiss a complaint for lack of subject matter jurisdiction on the basis of sovereign immunity, "the plaintiff bears the burden of proving by a preponderance of the evidence that jurisdiction exists." Chayoon v. Chao, 355 F.3d 141, 143 (2d Cir. 2004) (per curiam). The principle of sovereign immunity dictates, as the United States Court of Appeals for the Second Circuit recently noted, "that the United States may not be sued without its consent and that the existence of consent is a prerequisite for jurisdiction." Adeleke v. United States, 355 F.3d 144, 150 (2d Cir. 2004). For the purpose of sovereign immunity, a suit maintained against federal employees in their official capacities, as is the case with the federal defendants in this action, is deemed "a suit against the government" itself. See King v. Simpson, 189 F.3d 284, 287 (2d Cir. 1999). Thus, a plaintiff must demonstrate that jurisdiction over a claim for declaratory ...


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