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Rispler v. Sol Spitz Co.

June 6, 2007


The opinion of the court was delivered by: Dora L. Irizarry, U.S. District Judge


On July 14, 2006, plaintiffs, Arnold Rispler, Joyce Erkus, Ellen Keller, Oral Walwyn, George Brosseau, William G. Reynolds, Dennis A. Dunlop, Gary Ingoldsby, Claudia McGee and Carol Lanzarone Rippe (collectively referred to as "plaintiffs"), filed a Second Amended Complaint in the above-captioned action. The Second Amended Complaint alleges that the plaintiffs were participants, within the meaning of § 3(7) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1002(7), of defendant Sol Spitz Co., Inc. Profit Sharing Plan ("the Plan"), which was sponsored and administered by defendant Sol Spitz Co., Inc. ("SSCI"). The sole trustee of the Plan and of another entity, defendant Sol Spitz Co., Inc. Retirement Trust ("the Trust"), is defendant Sheldon Spitz ("Spitz"). The Second Amended Complaint contains fourteen causes of action, ten of which are against Sptiz and SSCI for various violations of their fiduciary duties. Specifically, the Second Claim for Relief alleges that Spitz breached his fiduciary duty by transferring assets of the Plan to Andrew B. Schultz ("Schultz"), Scott M. Zucker ("Zucker"), Chris G. McDonough ("McDonough") and Danziger & Markhoff, LLP (collectively referred to as the "Attorney Defendants"), all of whom are attorneys for Spitz, SSCI, the Plan and the Trust, respectively. Three of the causes of action are against Schultz, Zucker, McDonough and Danziger & Markhoff alleging breach of fiduciary duty (Third Claim for Relief), equitable damages for aiding Spitz's and SSCI's breach of fiduciary duty as non-fiduciaries (Fourth Claim for Relief) and for common law conversion (Fifth Claim for Relief). In the instant motions, Spitz, the Plan and the Trust move pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the Second Claim for Relief (ECF Docket No. 146), while Schultz, Zucker and McDonough move, also pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the Third, Fourth and Fifth Claims for Relief. (ECF Docket Nos. 144 and 156). Danziger & Markhoff have chosen not to participate in this motion. Spitz, the Plan and the Trust also move to dismiss all of Brosseau's and Rippe's causes of action. For the reasons set forth below, the motions are denied.


The facts, as alleged in the complaint, are as follows. The Trust was formed in 1979. Second Amended Complaint ("Compl.") ¶ 24. The Plan, as well a "Money Purchase Plan," (which is not at issue in this litigation), was formed as part of the Trust, and the Trustees of the Trust (Spitz) were given "sole and absolute" discretion to manage the assets of the Plan and the Money Purchase Plan. Compl. ¶ 25. In 1993, the Money Purchase Plan was terminated, and, in 1995, all its asserts were folded into the Plan. Compl. ¶ 26. The participants in the plan, including plaintiffs, were not provided notice of the termination of the Money Purchase Plan by the trustees. Compl. ¶ 29.

In 1995, the assets of SSCI were sold. Compl. ¶ 30. SSCI continued to exist, however, with Spitz as its sole employee. Id. At the time the assets were sold, all the participants in the plan who chose to leave SSCI were told that they would receive a distribution of their benefits from the Plan. Compl. ¶ 31. The distribution never arrived. Id. There have been no contributions to the Plan since 1994. Compl. ¶ 33. Although no distributions were made, in 1996, Sptiz sent a letter to the Plan participants, on Trust letterhead, requiring the participants to elect whether to place their contributions in a "money market account" or a "growth and income" account. Compl. ¶¶ 34-35. The letter appeared to strongly urge participants to place their contributions into the growth and income account. Id. Plaintiffs Rispler, Keller and Ingoldsby selected the growth and income account, while Brosseau elected to maintain his funds in the money market account. Compl. ¶¶ 37-38. Sometime later, without notification to the Plan participants, Spitz moved the funds from the participant's selected asset type (money market or income and growth) and changed the firm managing the Plan's assets. According to the Complaint, Sptiz's manipulation led to losses and expenses for the Plan. In 1998, there were $513,134 in losses. In 1999, there were $87,023 in expenses. In 2000, there were $81,210 in expenses, and $28,404 was paid to the Plan participants. In 2001, there were $292,594 in losses and $100,358 in expenses. For 2001, participants were paid $41,129, and $58,391 was paid out as a "corrective distribution." In 2002, the Plan lost $434,780 and incurred expenses of $72,806. Compl. ¶¶ 342-46. In order to make the plan appear to be performing better, Spitz amended the plan to allow him to set the annual valuation date. Compl. ¶ 49.

In July 2003, Spitz gave the Plan's participants, including plaintiffs, an option to withdraw 50% of their vested contributions (valued as of December 31, 2002) so long as they signed a release essentially waiving their rights to the rest of their vested contributions. Compl. ¶¶ 48-49. Under the Plan, the 50% not withdrawn by the participant, including plaintiffs, would be considered forfeited in favor of the Plan's only active member: Spitz. Plaintiffs did not opt for the withdrawal and left their contributions in the Plan. Spitz has failed to respond to document requests related to the Plan. Compl. ¶ 52.

Partially in reaction to Spitz's request that participants forfeit 50% of their contributions to the plan, Plaintiffs retained counsel and began negotiating with Sptiz, SSCI, the Plan and the Trust to make a final distribution of all of the Plan's assets. Spitz was reluctant to do so, and threatened that, if plaintiffs were to commence litigation, he would use the Plan's assets to defend himself and the Plan. Compl. ¶¶ 54, 58. Spitz made the threat both in writing and orally. Id. According to Spitz, Danziger & Markhoff advised him that it was appropriate to use Plan assets to defend himself from charges of breaches of fiduciary duty and to defend the Plan against plaintiffs' lawsuit. Declaration of Spitz in Support of Motion to Dismiss ("Sptiz Decl.") ¶¶ 6-7. Spitz took Danziger & Markhoff's advice to heart, and, prior to August 2004, transferred $166,000 to Zucker, $59,670 to Danziger & Markhoff, $12,500 to McDonough. Compl. ¶¶ 63-66. In August 2004, Spitz transferred $548,847 into a separate account for his own benefit, but continued to pay legal fees out of a pooled account consisting of the contributions made by every plaintiff except for Brosseau and Rippe, who had their own segregated accounts. Compl. ¶¶ 66-68. In 2005, Spitz made the following transfers from the pooled account, belonging to plaintiffs: $656,300 to Zucker, $24,000 to Schultz, $44,150 to Danziger & Markhoff, and $44,000 to McDonough. Compl. ¶¶ 69-73. On November 9, 2005, the court ordered the Plan frozen so that no further disbursements could be made. Compl. ¶ 69. With the exception of certain emergency distributions, no distributions have been made to plaintiffs.*fn1


Legal Standard

In deciding a motion to dismiss made pursuant to Fed. R. Civ. P. 12(b)(6) the court must assess the legal feasibility of the plaintiff's claims. E.g., Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998); Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). The court must accept as true all well-pleaded factual allegations and draw all reasonable inferences in the plaintiff's favor. Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). A motion to dismiss under Rule 12(b)(6) must be denied if the claim has been stated adequately and can be "supported by showing any set of facts consistent with the allegations in the complaint." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1968 (2007). However, "[c]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." 2 James Wm. Moore et al., Moore's Federal Practice § 12.34[1][b] (3d ed.1997); see also Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir. 1995). In ERISA actions, "to survive [a] motion to dismiss, the Complaint must include only a 'short and plain statement of the claim showing that the pleader is entitled to relief.'" In re Marsh Erisa Litigation, 04 CV. 8157, 2006 WL 3706169, *2 (S.D.N.Y. Dec. 14, 2006)(quoting Fed.R.Civ.P. 8(a)).

Plaintiffs' Second Claim for Relief Spitz, SSCI, the Plan and the Trust each move to dismiss plaintiffs' Second Claim for relief, claiming that, as a matter of law, Spitz could not have breached his fiduciary duty to the Plan by authorizing the Plan to pay its legal fees, as well as his own, because (1) the payments were made "in good faith" based on the advice giving to him by counsel, (2) the plan is a defendant and must pay its own fees and (3) under the circumstances, the Plan's documents authorize the Plan to pay its own and Spitz's legal fees. Memorandum of Law in Support of Spitz's, SSCI's, the Plan's and the Trust's Motion to Dismiss ("Spitz Memo in Support") 3.

As an initial matter, whether a fiduciary breached his duty to an ERISA plan is inherently a factual analysis, and one that is not properly addressed in a motion to dismiss. See, e.g. Lively v. Dynegy, Inc., 420 F.Supp.2d 949, 952 (S.D. Ill. 2006) ("[d]ismissal under Fed.R.Civ.P. 12(b)(6) is inappropriate if plaintiffs can prove any set of facts showing a breach of fiduciary duty by defendants and whether any relief can be granted under such facts."). Under ERISA Section 404 "[a] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). Whether or not Spitz discharged his fiduciary duties "solely in the interest of the participants . . . with . . . care, skill, prudence and diligence" by transferring over 40% of the Plan's pooled assets to his counsel, on their advice, is a factual issue. The fact that counsel-- the very same counsel who received a portion of the transferred funds-- advised him that such a transfer was permissible is only one factor in the analysis. Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th Cir. 1983) ("reliance on counsel's advice is, at most, a single factor to be weighed in determining whether a trustee has breached his or her duty."). The issue of whether Spitz acted "in good faith" when accepting his counsel's advice is likewise an issue of fact. See Craig v. Bank of New York, 00 CV. 8154, 2002 WL 1543893, *1 (S.D.N.Y. July 12, 2002). Finally, whether or not Spitz breached his fiduciary duty by moving $548,847 from the pooled account to a new, segregated account, is also an issue of fact that cannot be resolved at this stage of the litigation.

Spitz argues that he could not have breached his fiduciary duties to the Plan because the Plan authorized the payment of attorney fees for his defense. As an initial matter, the court is not convinced that Spitz is properly interpreting the relevant provisions of the plan. Paragraph 9.11 of the Plan documents specifically requires the employer (SSCI), and not the Plan, to pay Spitz's legal fees. See Spitz Decl. Exhibit B. Paragraph 7.04 of the Plan reiterates that it is SSCI, and not the Plan, that is required to pay the Plan's expenses, except that "[i]n the event that liability for such expenses is not accepted by the Employer, said expenses shall be paid by the Trust." Id. Spitz treats Paragraph 7.04 as a default provision meaning that if SSCI is not able to pay the Plan's expenses, then the Plan must pay its own way, including the legal fees of its trustee, Spitz. However, since the Plan documents do not explain what happens if SSCI cannot accept payment because it is no longer operating, Spitz's interpretation may not be reasonable.*fn2

It is within the province of the court to determine whether the plan documents permit the Plan to pay Spitz's expenses. See Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002) ("[u]nder New York law, the initial interpretation of a contract is a matter of law for the court to decide . . . If the court finds that the contract is not ambiguous it should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence . . . If an ambiguity is found, 'the court may accept any available extrinsic evidence to ascertain the meaning intended by the parties during the formation of the contract.'")(internal citations and punctuation omitted). Absent further briefing and discovery, the court cannot determine whether or not the Plan documents authorize Spitz to pay his legal fees from Plan assets in the absence of SSCI rejecting payment. Absent such authorization, the court must find that Spitz breached his fiduciary duty by using Plan funds to pay his own legal expenses since such payments were not allowed under the ...

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