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Hugler v. Byrnes

United States District Court, N.D. New York

March 28, 2017

EDWARD HUGLER, [1] acting Secretary of Labor, Department of Labor, Plaintiff,

          UNITED STATES DEPARTMENT OF LABOR Office of the Solicitor Attorneys for Plaintiff

          DANIEL M. BYRNES Defendant pro se





         Plaintiff brought this action against Defendant Daniel M. Byrnes pursuant to § 404(a)-(c) of the Employee Retirement Income Security Act ("ERISA"). These ERISA provisions impose a duty of loyalty, a duty of prudence, and a duty to diversify on trustees of ERISA-covered plans. See 29 U.S.C. § 1104(a)(1)(A)-(C). Pending before the Court is Plaintiff's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. See generally Dkt. No. 40. Defendant opposes this motion. See Dkt. No. 45.


         Defendant owned and served as the president and CEO of Fort Orange Capital Management, Inc. ("Fort Orange") from 1996 until it went out of business in 2005. See Dkt. No. 40-2 at ¶¶ 1-5. The Fort Orange Capital Management, Inc. Profit Sharing Plan[2] ("the Plan") was established to provide retirement income for Fort Orange's employees. See Dkt. No. 40-1 at 2. Defendant was the Plan's sole trustee and exercised authority with respect to the management, administration, and disposition of the Plan's assets. See Dkt. No. 40-2 at ¶ 10. The Plan has not kept up with federal reporting requirements since 2002, nor has it issued individual benefits statements to plan participants since 2003. See id. at ¶¶ 12-13.

         The Plan's resources have been held at Wells Fargo and other financial institutions. See id. at ¶ 16; see also Dkt. No. 45-2 at ¶ 16. In 2010, the Plan's assets grew from $195, 616.01 to $221, 128.90. See Dkt. No. 40-2 at ¶ 20. In 2011, at the time of the first relevant investment, the Plan's assets totaled $227, 565.94. See Id. at ¶ 21.

         Sarissa Inc. ("Sarissa") is a development stage mining project that owns various assets, including property in Canada with a niobium[3] deposit. See Id. at ¶¶ 27, 39. Sarissa stock was traded on the over-the-counter market and was generally known as a "penny stock." See Id. at ¶¶ 50, 56. Sarissa was on Wells Fargo's list of banned securities in 2011 and 2012. See Id. at ¶ 54. Defendant has been a personal investor in Sarissa since 2008, and he and his family have more than $500, 000.00 invested in the company. See Id. at ¶¶ 59, 64.

         In March 2011, Sarissa was attempting to raise up to $200, 000.00 via a private placement. See Id. at ¶ 72. That same month, Defendant, in his capacity as trustee, used $100, 000.00 of the Plan's assets to purchase five million common shares of Sarissa at a subscription price of $0.02 per share. See Id. at ¶ 82. The five million shares were restricted securities, meaning they could not be sold for one year. See id. at ¶ 85. Defendant relied on his "personal knowledge" of Sarissa in making the investment decision. See id. at ¶ 88. Defendant claims that he also consulted geological reports from the company and read about niobium as an asset. See Dkt. No. 45-2 at ¶ 88.

         Again, in August 2012, Sarissa was attempting to raise up to $250, 000.00 by private placement. See Id. at ¶ 119. Defendant, acting as trustee, purportedly loaned[4] $120, 000.00 from the Plan to Fort Orange (himself) to purchase six million shares of common stock in Sarissa at $0.02 per share. See Id. at ¶ 129. However, the stock certificates named the Plan as the owner. Defendant claims that he structured the deal as a loan because he did not want all the Plan's assets in "one basket"; but, when the stocks came back with the Plan's name, he decided that he would just leave it as is because "it was [the Plan's] money, so [it] should get the shares." See Dkt. No. 40-5 at 233. In deciding to invest the Plan's funds in 2012, Defendant reviewed the following: "(1) the Dominion Gulf Columbium Process; (2) a non-disclosure agreement [Defendant] and Sarissa signed; (3) Subscription Agreement for Common Shares; and (4) a press release announcing Sarissa's letter of intent to form a joint venture." See Dkt. No. 45-2 at ¶ 135. Defendant believed that the 2012 investment was "basically a risk-free opportunity" because Sarissa management told him that a Chinese deal was all set to go through. See Dkt. No. 40-5 at 235.

         In total, the Plan has invested $220, 000.00, or more than 95% of the Plan's total asset portfolio with Sarissa. See Id. at ¶ 158. As of August 2012, only $8, 227.79 remained in the Plan's Wells Fargo account. See Dkt. No. 40-1 at 7. According to a report that Plaintiff furnished, "[a]s a result of [Defendant's] investments in Sarissa, the Plan has experienced an unrealized loss of principal totaling $171, 091.00 and another $143, 727.00 in lost opportunity cost, or a total loss of $314, 818.00." See Id. (citing Dkt. No. 40-17 at 11-14).

         Plaintiff initiated the instant action on January 26, 2015, alleging that Defendant "failed to discharge his fiduciary duty with respect to the Plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants of the Plan and their beneficiaries and defraying reasonable expenses of administering the Plan, in violation of 29 U.S.C. § 1104(a)(1)(A)(i)." See Dkt. No. 1 at ¶ 51(a). Furthermore, Plaintiff alleged that Defendant "failed to discharge his fiduciary duty with . . . the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person 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, in violation of 29 U.S.C. § 1104(a)(1)(B)." See Id. at ¶ 51(b). Finally, Plaintiff contended that Defendant "failed to diversify the Plan's investments so as to minimize the risk of large losses, in violation 29 U.S.C. § 1104(a)(1)(C)." See Id. at ¶ 51(c).

         In the pending motion, Plaintiff requests that the Court issue an Order holding Defendant liable to the Plan for $314, 818.00, as well as a permanent injunction removing Defendant as Trustee, appointing an independent trustee, and barring Defendant from serving as a trustee for this, or any other, ERISA-covered plan in the future. See Dkt. No. 40-1 at 26.


         A. Standard of review

         A court must grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The movant for summary judgment "always bears the initial responsibility of informing the district court of the basis for its motion" and identifying which materials "demonstrate the absence of genuine issues of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A fact is "material" if it "might affect the outcome of the suit under the governing law" and is genuinely in dispute "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). If the movant meets this burden, the nonmoving party must "'"set forth specific facts showing a genuine issue for trial."'" Id. (quotation omitted). The nonmoving party cannot rely on "mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986) (citing [Quarles v. Gen. Motors Corp., 758 F.2d 839, 840 (2d Cir. 1985) (per curiam)]). "[I]n ruling on a motion for summary judgment, the district court is not to weigh the evidence but is instead required to view the evidence in the light most favorable to the party opposing summary judgment, to draw all reasonable inferences in favor of that party, and to eschew credibility assessments[.]" Weyant v. Okst, 101 F.3d 845, 854 (2d Cir. 1996) (citations omitted).

         B. ERISA breach of fiduciary duty

         "The elements of a claim for breach of fiduciary duty under ERISA are '(1) that defendant was a fiduciary who, (2) was acting within his capacity as a fiduciary, and (3) breached his fiduciary duty.'" Bd. of Trustees of Aftra Ret. Fund v. JPMorgan Chase Bank, N.A., 806 F.Supp.2d 662, 679 (S.D.N.Y. 2011) (quotation omitted). The statute generally provides that "a person is a fiduciary with respect to a plan" and therefore subject to ERISA fiduciary duties, "to the extent [] he exercises any discretionary authority or discretionary control respecting management of such plan" or "has any discretionary authority or discretionary responsibility in the administration of such plan." 29 U.S.C. § 1002(21)(A). "'Under this definition, a person . . . has [fiduciary] status only "to the extent" that he has or exercises the described authority or responsibility.'" Flanigan v. Gen. Elec. Co., 242 F.3d 78, 87 (2d Cir. 2001) (quoting F.H. Krear & Co. v. Nineteen Named Trs., 810 F.2d 1250, 1259 (2d Cir. 1987)). There is no dispute in this case that Defendant was operating as a fiduciary for the Plan or that his decision to invest in Sarissa was made in his capacity as a fiduciary.

         ERISA imposes several fiduciary duties, three of which are relevant to this litigation: (1) the duty of loyalty, (2) the duty of prudence, and (3) the duty to diversify. See 29 U.S.C. § 1104(a)(1)(A)-(C). Generally, Plaintiff alleges that Defendant breached ERISA's (1) duty of loyalty by investing in a company in which he had a significant financial stake; (2) duty of prudence by failing properly to investigate whether investing in Sarissa was appropriate; and (3) duty to diversify by placing 95% of the Plan's assets in a single penny stock.

         1. Duty of loyalty

         Section 404(a)(1)(A) provides that "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries . . . for the exclusive purpose of [] providing benefits to participants and their beneficiaries . . . ." 29 U.S.C. § 1104(a)(1)(A)(i). This is commonly known as a fiduciary's duty of loyalty. Generally speaking, the fiduciary must make decisions "with an eye single to the interests of the participants and beneficiaries." Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982) ("Bierwirth II") (citations omitted) (emphasis added). However, "in the ERISA context, 'a conflict of interest alone is not a per se breach: "nowhere in the statute does ERISA explicitly prohibit a trustee from holding positions of dual loyalties."'" In re State St. Bank & Trust Co. Fixed Income Funds Inv. Litig., 842 F.Supp.2d 614, 649 (S.D.N.Y. 2012) ("State St. Bank & Trust") (quoting Tibble, 2010 WL 2757153, at *18 (quoting Friend v. Sanwa Bank of Cal., 35 F.3d 466, 468-69 (9th Cir. 1994))). "'Consistent with this rule, a fiduciary does not breach his duty of loyalty by pursuing a course of conduct which serves the interests of the plan's beneficiaries while at the same time "incidentally benefitting" the plan sponsor or even the fiduciary himself.'" Id. (quoting Tibble, 2010 WL 2757153, at *18). In short, any benefit to the plan's fiduciary must be incidental to a decision that is otherwise independently in the best interests of the plan participants. See id.

         The language of the statute, requiring that the fiduciary's "exclusive purpose" be for the benefit of plan participants, suggests that a court should use a subjective test when determining whether a defendant has breached his duty of loyalty. See 29 U.S.C. § 1104(a)(1)(A) (emphasis added); see also Tibble v. Edison, Int'l, No. 07 Civ. 5359, 2010 WL 2757153, *24 n.19 (C.D. Cal. July 8, 2010), vacated and remanded on other grounds, 843 F.3d 1187 (9th Cir. 2016) (stating that "a breach of th[e] duty [of loyalty] requires some showing that the fiduciaries' decisions were motivated by a desire to serve the interests of [the fiduciaries] over those of the beneficiaries" (citations omitted)); A.F. v. Providence Health Plan, 173 F.Supp.3d 1061, 1073 (D. Or. 2016) (citing [Peter J.] Wiedenbeck, [ERISA in the Courts], 165 [(Federal Judicial Center 2008)] ("In making the fiduciary's 'exclusive purpose' the touchstone, ERISA demands assessment of a conflicted decisionmaker's state of mind. Subjective purpose, of course, is necessarily inferred from objective facts.")). Under a subjective test, the court may rely ...

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