SECRETARY OF LABOR v. DOYLE et al, No. 1:2005cv02264 - Document 301 (D.N.J. 2014)
Court Description: OPINION. Signed by Judge Joseph H. Rodriguez on 11/28/2014. (drw)
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SECRETARY OF LABOR v. DOYLE et al Doc. 301 UNITED STATES DISTRICT COURT DISTRICT OF NEW J ERSEY SECRETARY OF LABOR, Plaintiff, v. : Hon. J oseph H. Rodriguez : Civil Action No. 0 5-cv-2264 : OPINION J AMES DOYLE, CYNTHIA HOLLOWAY, et al., : Defendants. This m atter is before the Court on rem and from the United States Court of Appeals for the Third Circuit pursuant to its Opinion in Secretary of Labor v. Doyle, 675 F.3d 187 (3d Cir. 20 12). The case concerns an action by the Secretary of Labor against J am es Doyle, Cynthia Holloway, and others, arising from their alleged breach of fiduciary duties to the Professional Industrial Trade Workers Union (PITWU) Health & Welfare Fund (Fund), a health ben efit plan governed by the Em ployee Retirem ent Incom e Security Act (ERISA). After a bench trial, this Court entered judgm ent for Doyle and Holloway. The Secretary appealed the Court’s judgm ent, arguing that the Court failed to adequately address the breach of fiduciary duty argum ents and to consider whether the Defendants were responsible for diversion of plan assets held by the Fund. The Circuit vacated this Court’s Opinion and rem anded the case for additional factual findings. I. Backgro u n d The background of the case was laid out thoroughly in the Circuit’s Opinion. It is repeated here for ease of reference. In April 20 0 5, the Secretary brought this action for breach of fiduciary duty against Holloway, Doyle, the PITWU Fund, and two other defendants, Michael Garnett and Mark Maccariella. The Secretary’s com plaint alleged 1 Dockets.Justia.com that PITWU had established a health benefit plan that was a “m ulti-em ployer welfare arrangem ent” (MEWA) governed by ERISA. Two com panies, Privileged Care, Inc. (PCI) and NorthPoint PEO (NP), enabled sm all businesses to obtain health benefits for their em ployees by enrolling the em ployees in the Fund, even though the em ployees never joined the union. Privileged Care Marketing Group (PCMG) m arketed this arrangem ent to sm all businesses. Businesses that chose to enroll their em ployees in the Fund were required to m ake benefit paym ents to PCMG. PCMG retained a portion of the paym ents as com pensation and rem itted the balance to PCI and NP. PCI and NP also retained a portion of the paym ents as com pensation and rem itted the rem ainder to claim s adm in istrators established by the Fund. The com plaint alleged that these paym ents were assets of the Fund im properly diverted by PCI, NP, and PCMG and that PCI, NP and PCMG were required by ERISA to use the assets only for the purpose of defraying reasonable plan expen ses for the benefit of plan participants. 675 F.3d at 189-90 . The com plaint alleged that Garnett and Maccariella at various tim es owned an d operated PCI and NP and were fiduciaries under ERISA because the paym ents they received from their business clients were assets of the Fund under their control. Garnett and Maccariella allegedly breached their fiduciary duties to the Fund by using assets of the Fund for purposes other than defraying reasonable plan expenses for the benefit of plan participants. The com plaint sim ilarly alleged that Doyle had owned and operated PCMG and that he was a fiduciary because he exercised discretionary control over paym ents that were assets of the Fund. It further alleged that Doyle had breached his fiduciary duties to the Fund by im properly using plan assets for his own benefit. Finally, the com plaint alleged that Holloway was a n am ed trustee of the Fund, had breached her fiduciary duties to the Fund, and was liable both directly an d as a co-fiduciary for failing 2 to detect and prevent the diversion of Fund assets by Garnett, Maccariella, an d Doyle. The com plaint sought restitution of losses to the plan, a perm anent injunction against any of the defendants serving as a fiduciary or service provider to an ERISA plan, appointm ent of an independent fiduciary to m anage the Fund, an accounting, costs, an d other appropriate equitable relief. 675 F.3d at 190 . The case proceeded to a bench trial in October 20 0 9. Solis v. Doyle, No. 0 5– 2264, 20 10 WL 2671984, at *3 (D.N.J . J une 30 , 20 10 ). At the begin ning of the trial, Maccariella accepted a consent judgm ent enjoining him from serving as fiduciary or service provider to an ERISA plan and requiring him to pay $ 195,317. A default judgm ent was entered against Garnett at the close of trial because he failed to appear at trial “[d]espite num erous continuances granted at his request.” This Court m ade the following factual findings based on the bench trial. 675 F.3d at 190 . In 20 0 0 , David Weinstein established PITWU. Holloway owned and operated Em ployers Depot, Inc. (EDI), a professional em ployer organization (PEO) that she had established in 1989. 1 At som e point in 20 0 0 , she learned of PITWU from a health insurance broker. An attorney, Neil Goldstein, who later becam e counsel to the Fund, provided Holloway with verification of PITWU’s union status. On May 1, 20 0 1, Holloway and three other trustees established the PITWU Fund by an Agreem ent and Declaration of Trust. The Fund initially had two em ployer m em bers, EDI and A professional em ployer organization (PEO) provides hum an resources and adm in istrative services to business clients—typically sm all to m edium size businesses— and often handles its clients' payroll, workers' com pensation, and health and retirem ent benefits. See generally United States v. J ennings, 599 F.3d 1241, 1245 (11th Cir. 20 10 ); Tri– State Em p’t Servs., Inc. v. Mountbatten Sur. Co., Inc., 295 F.3d 256, 263 (2d Cir. 20 0 2). PEOs often arrange with their clients to be considered as co-em ployers of their clients’ em ployees to facilitate m anagem ent of hum an resource functions for their clients. 1 3 Em ployers Consortium , Inc. (ECI). The EDI and ECI em ployees were enrolled as participants in the Fund. The Trust Agreem en t obligated EDI and ECI to m ake regular contributions to the Fund for each of their em ployees covered by the Fund. The Fund m ade annual filings with the federal governm ent, had trustees, counsel, an actuary, and claim s adm inistrators. Counsel for the Fund never expressed a concern that PITWU was not a valid union or that the Fund was not a valid m ulti-em ployer fund. 675 F.3d at 190 91. In J anuary 20 0 2, ECI term inated its relationship with PITWU. PCI and NP then becam e em ployer m em bers of the PITWU Fund. PCI and NP entered into identical collective bargain ing agreem ents (CBA) with PITWU in which they agreed to m ake contributions to the Fund so that their em ployees could receive health benefits under the Fund. 2 The CBAs provided that PITWU had “been designated by a m ajority of em ployees in certain client com panies of [PCI/ NP] as their exclusive bargain ing representative for those term s and conditions of em ploym ent controlled by [PCI/ NP] as per its ‘client Service Agreem ent.’” The “client Service Agreem ent” referred to a PEO Services Contract, which was executed by clients of PCI/ NP who wished to obtain health benefits for their em ployees. 3 Once an em ployer executed the contract and began m aking contribution paym ents, its em ployees would becom e m em bers of the PITWU “PCI and [NP] were effectively the sam e organization in that they shared consultants, office space, owners, and em ployees.” Solis v. Doyle, 20 10 WL 2671984, at *4. 2 PCI/ NP’s PEO Services Contract contained a co-em ploym ent clause stating that PCI or NP “and Client shall be considered co-em ployers for those em ployees provided to the Client by [PCI or NP] (designated em ployees) for . . . purposes” of com pliance with certain federal civil rights laws, ERISA, an d the Federal Drug Free Workplace Act or any state equivalent. 3 4 union and obtain access to health benefits from the Fund. Although the contract allowed clients to choose not to join the PITWU union, clients were required to select the union option to obtain health benefits for their em ployees through PCI/ NP’s CBAs with the Fund. Sim ilarly, the contract listed a num ber of additional PEO services, but the only service consistently offered by PCI/ NP was health benefits through the PITWU Fund. 4 675 F.3d at 191. After PCI/ NP becam e an em ployer m em ber of the Fund, Holloway and another trustee appointed Weinstein as a trustee of the Fund. Later in May, Weinstein sold PCI/ NP to Garnett, resigned as trustee, and was replaced by Garnett. 5 675 F.3d at 191. Doyle’s com pany, PCMG, m arketed the services of a variety of entities, including PCI/ NP. 6 In J anuary of 20 0 2, Doyle signed a Marketing Service Agreem ent with PCI, in which PCMG agreed to m arket PCI’s services for a fee. PCMG also collected paym ents from PCI/ NP’s clients. Clients m ade paym ents by two checks, on e to PCI/ NP for participation in the Fund (Check 1), and one to PCMG for adm inistrative service fees (Check 2). PCMG received both checks and would forward the first on to PCI/ NP. It retained the second check to cover its expenses, which included sales com m issions paid to PCMG’s sales consultants and fees for additional services selected by the client, such 4 PCI/ NP attem pted at som e point to offer payroll services—paym ent of em ployees’ checks and paym ent of payroll taxes—but one business owner that selected this service testified at trial that he discontinued it after several m onths because PCI/ NP had failed to m ake the necessary tax paym ents, subjecting the business to significant pen alties. Garnett operated the com pany until August 20 0 2, when Maccariella took over. Maccariella operated PCI/ NP until it ceased operations in March 20 0 3. 5 PCI/ NP did not m arket its services exclusively through PCMG. For exam ple, Weinstein’s wife also brought a num ber of clients to PCI/ NP. 6 5 as gap insurance. 7 PCMG also provided m onthly reports to PCI/ NP regarding funds received and paid certain union dues. 675 F.3d at 191-92. At som e point, PCMG stopped m arketing for PCI/ NP, but continued to provide billing and adm in istrative services until May 20 0 3. PCMG received $ 4.5 m illion in Check 1 funds, and $ 2.1 m illion in Check 2 funds. 8 PCMG forwarded $ 3.1 m illion of the Check 1 funds to PCI/ NP, and paid $ 645,0 0 0 directly to claim adm inistrators and m edical providers. 9 In addition to the $ 3.1 m illion received from PCMG, PCI/ NP also directly received $ 816,0 0 0 from em ployers enrolled in the Fund through Weinstein's wife. Of this roughly $ 3.9 m illion, PCI/ NP sent $ 2.1 m illion to claim s adm inistrators to pay em ployee health benefit claim s. Thus, in total, PCMG and PCI/ NP collected $ 7.4 m illion in paym ents relating to the Fund, but only $ 2.7 m illion was sent to claim adm in istrators for the paym ent of health ben efit claim s. The rem ain ing $ 4.7 m illion was retained by PCMG or PCI/ NP. 675 F.3d at 192. The Fund retain ed a third-party claim s adm inistrator to pay health benefit claim s by em ployees covered by the Fund. The Fund’s first claim s adm inistrator was Union Privileged Care (UPC), which was owned by Weinstein. Oak Tree Adm inistrators (Oak Tree) replaced UPC as claim s adm inistrator and served in that capacity from March to Gap insurance is purchased to cover potential gaps in insurance coverage, for exam ple when an em ployee is between jobs. PCMG m ade between $ 20 ,0 0 0 and $ 33,0 0 0 in paym ents for gap insurance. Solis v. Doyle, 20 10 WL 2671984, at *4 n.4. 7 Doyle testified that PCMG m ade a n et profit of $ 112,788.13. A substantial portion of the Check 2 m onies was used to pay PCMG’s sales consultants, who received $ 1.3 m illion in total (although not all of this m oney was related to prom otion of PCI/ NP). 8 The record indicates that this $ 645,0 0 0 was sent after Novem ber 20 0 2. At that tim e, PCI/ NP stopped m aking required contributions to the Fund and Doyle was instructed by Fund's trustees to send Check 1 m onies directly to claim s adm in istrators. 9 6 J une of 20 0 2. 10 In a m eeting with Oak Tree in April 20 0 2, Holloway learned of m any pending claim s and of Oak Tree’s concern that claim s m ay not have been paid since Novem ber 20 0 1. The m eeting m inutes, prepared by Holloway, report that: It was discussed that several boxes of unpaid claim s had been shipped from Union Privilege and that Oak Tree was inputting all the claim s to determ ine the m agnitude of requirem ents. It was noted that m any claim s were very old and dated back to m id 20 0 1 with no claim s reflecting paym ent since Novem ber 20 0 1. Cindy Holloway requested a date for the all [sic] claim s to be entered into the data base. Oak Tree advised that this would be com pleted by the following Tuesday, April 30 . 675 F.3d 192, 197. In May 20 0 2, Oak Tree reported that it had still not obtained necessary docum ents an d financial inform ation from UPC and therefore could not provide the trustees with a financial report; m oreover, the Fund’s actuary could not perform a study on the financial condition of the Fund. Additionally, Oak Tree noted that enrollm ent applications subm itted by PCI/ NP were not com plete. A week after this m eeting, in May 20 0 2, Holloway and the other trustees agreed to appoint Weinstein, the owner and operator of UPC and PCI/ NP, as a trustee of the Fund despite “general concerns” Holloway had about him . 11 675 F3d 198. The trustees held another m eeting on May 30 , 20 0 2. A draft of the m inutes from the m eeting prepared by the Fund’s attorney indicates that Weinstein resigned at that A claim s adm inistrator is an entity that processes em ployee benefit claim s to ensure that they are legitim ate and consistent with plan docum ents, and then arranges for paym ent of valid claim s. 10 Holloway did not investigate Weinstein’s qualifications before agreeing to appoint him . But at som e point prior to resigning as trustee, Holloway learned from the Fund's attorney that Weinstein had been the subject of a cease and desist order from the state of Florida in connection with an organization called “NAPT.” Holloway could not recall whether she learned this before or after agreeing to appoint him as trustee to the Fund. 11 7 m eeting an d was replaced by Garnett, who succeeded him as owner and operator of PCI/ NP. The Fund’s accountant inform ed the trustees that he could not prepare a financial statem ent for the Fund because certain financial inform ation he had requested from UPC had not yet been provided. The Fund’s actuary reported to the trustees that he had received som e inform ation from Weinstein but was still m issing necessary inform ation about the num ber of claim s for prescription benefits subm itted by plan participants and the n um ber of participants enrolled per plan per m onth. Without this data, he was unable to offer an opinion as to whether the Fund’s “reserves were adequate to m eet its ongoing needs.” Oak Tree also reported that it was awaiting additional inform ation from Weinstein and UPC. Weinstein then joined the trustees’ m eeting and they developed a list of inform ation that Weinstein would provide; the trustees directed UPC and Oak Tree to provide all necessary data to the Fund’s accountant and actuary within two weeks. According to Holloway, the Fund’s attorney sent Weinstein a letter after the m eeting to confirm the request for inform ation. 675 F.3d 198 . On Septem ber 20 , 20 0 2, the Fund’s new claim s adm inistrator, Brokerage Concepts, Inc., inform ed Holloway of problem s relating to lack of funding because of PCI/ NP’s failure to m ake contributions to the Fund and other problem s arising from inadequate paperwork. 12 675 F.3d at 192. These problem s were illustrated by the testim ony of five business owners who had obtain ed access to the Fund through PCI/ NP. They testified that they had difficulty presenting claim s and did not have claim s paid to their satisfaction. Additionally, In Decem ber 20 0 2, Southern Plan Adm inistrators replaced Brokerage Concepts, Inc. as claim s adm inistrator for the Fund. 12 8 several of these witnesses testified that they did not consider their em ployees unionized or part of the PITWU union. One em ployer was assured by PITWU union officials that PITWU brought sm all businesses “under its um brella for purposes of m edical benefits and payroll, but that there was no interest in unionizing the em ployees.” 675 F.3d at 193. In response to these problem s, Holloway asked Goldstein, the Fund’s attorney, “to bring som e accountability to the Fund, but he asked [Holloway] to talk to the trustees about that.” She also asked Goldstein to obtain m em bership inform ation from PCI. 675 F.3d 193, 198. On Septem ber 27, 20 0 2, Holloway resigned as trustee. She identified several reasons leading to her resignation, including the lack of financial accountability for contributions to the Fund and resulting lack of funding to pay claim s. She described the “vulnerability of the Fund due to actions taken by m em bership that has created insolvency of the Fund.” Holloway also noted that several states had issued cease an d desist orders “based on the representation by other m em bership/ trustees that PITWU [was] an insurance program .”13 675 F.3d at 193. Holloway listed fifteen specific reasons for resigning, which she explained were “exam ples and are not representative of all the issues related to m y resignation.” Many of these reasons related to disagreem ents with other trustees about their approach to Fund m anagem ent. For exam ple, she strongly disagreed with the other trustees’ dism issal of Oak Tree Adm inistrators without consulting her. Her reasons for resigning also included: e. Lack of continuity or com m unication by the Union representatives. The Fund’s attorney would draft responses to these orders stating, as Holloway put it, “this is a union-sponsored plan, it is not insurance, you state com m issioners don't have jurisdiction over this.” 13 9 f. No financial accountability for contributions to the Health and Welfare Fund by other m em bership. Em ployers Depot [Holloway’s com pany] provided m onthly audits and accountability sin ce the inception of the program . g. Lack of proper follow through to ensure that Union Privilege provided required financial records to the accountants an d actuary that determ ined the financial solvency of the fund. h. Establishm ent of two additional plans without the consent of the Trustees. i. Contribution rates established for two additional plans without the expressed consent of the Trustees or approval by actuary. j. Vulnerability of the fund due to actions taken by m em bership that has created insolvency of the fund. k. The consensual approach by the PITWU to allow staff of certain m em bership to m ake decisions, develop program s and direct the outcom e of contracts and TPA activity. l. Cease and desist orders in m ultiple states based on the representation by other m em bership/ Trustees that PITWU is an insurance program . m . Legal issues with the Departm ent of Insurance in m ultiple states due to the representation by other m em bership that PITWU is an insurance program . n. Lack of follow through by responsible parties to ensure the structure, insurance program s and related requirem ents are m anaged tim ely and effectively. Holloway expressed concern about “the chaotic state of affairs of the Fund,” which had “brought undue dam age in m ultiple states, created credit dam age to the m em bership due to claim s that are in excess of 9 m onths old and generally has ruined the credibility of the Union and its associated fiduciaries.” 675 F.3d 198 -99. Holloway did not seek m ediation of disputes with other trustees regarding the m anagem ent of the Fund or seek to rem ove any trustee. Nor did she dem and an audit of PCI/ NP or PCMG or contact the Departm ent of Labor to com plain about the lack of funding, lack of financial accountability, or “chaotic state of affairs.” Holloway did not 10 find another person to replace her as trustee before resigning, nor was she im m ediately replaced. 675 F.3d 193, 199. Holloway did, however, continue to participate in the adm in istration of the Fund after her resignation. In October 20 0 2, for exam ple, Holloway m et with Brokerage Concepts to discuss the Fund’s lack of funding. She agreed that contribution rates should be increased. EDI, Holloway’s com pany, used its own funds to satisfy claim s by its clients’ em ployees that were not paid by the Fund. Holloway also sought to resolve outstanding claim s with health care providers and sought paym ent of claim s from Southern Plan Adm inistrators. 675 F.3d at 193. This Court concluded that the Secretary had failed to show that Holloway or Doyle breached their fiduciary duties to the Fund. On appeal, the Circuit found significant the cease and desist orders issued by insurance com m issioners of seven states against PCI/ NP, PCMG, Doyle, and in som e cases, the PITWU Fund and Holloway. The Circuit expressed concern that even though the Fund was properly considered a “m ulti-em ployer welfare arrangem ents” (MEWA) under ERISA, see 29 U.S.C. § 10 0 2(40 )(A), subject both to ERISA standards and to state insurance regulation, see id. § 1144(b)(6), PCI/ NP and PCMG m arketed the Fund as a self-insured union sponsored plan, exem pted from state regulation. This connection to the union was reinforced by a form that PCI/ NP required its clients to sign entitled “Professional Industrial Trade Workers Union Health & Welfare Fund Plan “B” Disclosure Form ,” which stated: This health & welfare plan is sponsored by the Professional Industrial Trade Workers Union (P.I.T.W.U.). The plan is self-funded and exem pt from state regulation, as outlined in the Em ploym ent Retirem ent Incom e Security Act (ERISA) of 1974. The plan is under the jurisdiction of the United States 11 Secretary of Labor. This plan is not regulated by any state departm ent of insurance. The plan being self-funded is not covered by any state or federal guarantee fund in the event of fund insolvency. PCI/ NP and PCMG thus relied on the Fund’s relationship with PITWU to claim that ERISA exem pted the Fund, and their m arketing of the Fund, from state regulation. 675 F.3d at 194-95. In J anuary 20 0 2, less than a m onth after PCI/ NP and PCMG were created, the Oklahom a Insurance Com m issioner entered a cease an d desist order against PCI, PCMG, and two of its m arketing affiliates, finding that they were engaging in the unauthorized sale of insurance and ordering them to cease and desist from any further sales or m arketing of insurance in the state. 675 F.3d at 195. In J une 20 0 2, the Louisiana Insurance Com m issioner issued a cease and desist order based on its finding that PCI and PCMG were selling health insurance without authorization. The Louisiana Com m issioner found that PCI purported to offer PEO services, including health benefits, to its clients. PCI “allegedly assum es the role of ‘coem ployer’ to the em ployees of its client em ployers” and thereby provided these em ployees access to the Fund, pursuant to a CBA between PCI and the Fund. However, the Com m issioner found, inter alia, that [T]here is no collective bargain ing for wages or im proved working conditions as in a bona fide union agreem ent . . . . Em ployees of the em ployers contracting with PCI . . . do not directly join the union, and receive no representation or benefit from PITWU other than access to the union sponsored health plan. One “em ployer” from Louisiana who contracted with PCI and enrolled in the health and welfare fund did not include em ployees or activate any PEO services other than the health benefits. 675 F.3d at 195. 12 The Com m issioner concluded that PITWU was a self-insurance plan covering em ployees of m ultiple em ployers and had not acquired the necessary authorization to sell insurance in Louisiana. 14 The Com m issioner sum m arized several of PCI, PCMG, and their affiliates’ m arketing practices as follows: The individuals and entities nam ed above have been involved directly or indirectly in m aking, issuing, circulating, or causing to be m ade, issued, or circulated written and oral statem ents in the form of sales presentations and m arketing m aterials used to solicit potential m arketing agents and prospective client em ployers for PCI by, 1) m isrepresenting to the public, and on an official docum ent filed with the Louisiana Departm ent of Insurance, that the PITWU or Privilege Care Em ployee Health and Welfare Fund is not insurance and therefore exem pt from regulation under state laws governing insurance an d insurance agents; 2) deceptively claim ing that PCI’s “health benefit services” have been approved by the Louisiana Departm ent of Insurance; 3) falsely claim ing that a [sic] official representative of the Louisiana Departm ent of Insurance had been invited and wanted to attend a “com pliance and training” m eeting held by PCMG and PCI in Louisiana on May 16, 20 0 2; an d 4) falsely claim ing that PCI had been licensed by the Louisiana Departm ent of Labor as a PEO doing business in this state; 5) falsely representing that PCMG had not been issued a cease an d desist order prior to April 20 , 20 0 2; and 6) violating several prohibitory laws of this state. The Com m issioner accordingly ordered PCI, PCMG, the PITWU Fund, Weinstein, Doyle, Garnett, Oak Tree Adm inistrators, an d several affiliates to cease an d desist from m arketing or providin g health care services in the state. 675 F.3d at 195-96. By the tim e the Fund ceased operations in May 20 0 3, five other states—North Carolina, Texas, Massachusetts, Colorado, and Illinois—had entered sim ilar orders ERISA exem pts from state insurance regulation certain self-insured em ployee health benefit plans m aintain ed by a single em ployer for its em ployees or by a union for its m em bers. See 29 U.S.C. §§ 10 0 3(a), 1144(a)-(b). Benefit plans established for em ployees of m ultiple em ployers, however, are not exem pted from state regulation. See id. § 1144(b)(6). 14 13 against PCI/ NP, the PITWU Fund, PCMG, Doyle, and others. Several of these orders were based on hearings before state insurance com m issioners at which it em erged that, as in Louisiana, PCI/ NP purported to offer PEO services but actually offered alm ost exclusively health benefits through the Fund by enabling its clients’ em ployees to obtain health benefits from the Fund without union m em bership. Several of the later cease an d desist orders also noted that the Fund had num erous unpaid claim s—for exam ple, Colorado’s Insurance Com m ission er noted that as of Decem ber 9, 20 0 2, the Fund had over $ 7 m illion in unpaid claim s. 675 F.3d at 196. Indeed, PCI/ NP required its clients to sign a disclosure form in which it represented that the PITWU Fund was “exem pt from state regulation, as outlined in the Em ploym ent Retirem ent Incom e Security Act (ERISA) of 1974.” At trial, five m anagers whose businesses contracted with PCI/ NP testified that their em ployees were not unionized. One witness stated that he had been assured by PITWU officials that the union had no interest in unionizing em ployees—it was m erely a m eans of providing health insurance and other benefits. The business owners also testified to problem s resulting from unpaid claim s for health benefits from the Fund. Financial data presented by the Secretary supports this testim ony, showing that the Fund had $ 7.6 m illion in unpaid claim s on October 31, 20 0 2. 675 F.3d at 196. Both Doyle and Holloway were aware of at least som e of the cease and desist orders. Doyle had contact with insurance com m issioners in som e states and participated in som e of the related proceedings. 15 He is nam ed in each of the orders, and in several The Louisiana Insurance Com m issioner noted that Doyle had falsely represented in filings before the Com m ission that PCMG had not been “subject to regulatory action including cease an d desist orders, revocations of license, or sim ilar 15 14 cases the record contains certified m ail slips confirm ing that he or PCMG received copies of the orders. 16 Holloway also learned of som e of the cease and desist orders while serving as trustee, m entioning them in her resignation letter as one of her reasons for resigning. But the extent of her knowledge about the orders is unclear, and the orders with the m ost troubling findings were issued after her resign ation. In addition, the Fund’s attorney assured Holloway that he would respond to these orders, arguing that “this is a union-sponsored plan, it is not insurance, you state com m ission ers don't have jurisdiction over this.” 675 F.3d at 196-97. The Circuit found it significant that PCI/ NP’s prom otion of the Fund was sim ilar to the type of “schem e” that ERISA’s MEWA provisions were specifically design ed to prevent: an aggressively m arketed, but inadequately funded health benefit plan m asquerading as an ERISA-exem pt plan in order to evade the solvency controls im posed by state insurance regulation. 17 “Although the record is not entirely clear on actions,” even though PCMG had received a cease and desist order from the Oklahom a Insurance Com m ission only two m onths before filing its application. Although not clearly related to this case, on October 27, 20 0 7, Doyle pleaded guilty to a felony violation of Texas laws again st selling unauthorized insurance, was sentenced to five years of com m unity supervision, and agreed to pay $ 38 0 ,788.39 in restitution to unspecified victim s. The indictm ent to which Doyle pleaded guilty is not included in the record, however, and the judgm ent of conviction states that the offense was com m itted on February 1, 20 0 1, several m onths before the Fund was created an d nearly a year before PCMG began m arketing for PCI/ NP. 16 17 The Circuit cites the Legislative Hearing on Pension Issues, Hearing on Hr. 1641, H.R. 3632, H.R. 6462 Before the Subcom m . on Labor– Managem ent Relations of the H Com m . on Education and Labor, 97th Cong. 1– 2 (1982) (statem ent of Rep. Burton explain ing that MEWA am endm ents were m ade to prevent “fraudulent” insurance trusts from using ERISA preem ption to sell health insurance to sm all busin esses without “com ply[ing] with the basic solvency controls which each State establishes to protect health care consum ers”). 15 this point, it appears that the ultim ate result of this arrangem ent was that which Congress feared: the Fund was ultim ately unable to pay all em ployee claim s, and thus em ployees participatin g in the Fund were not provided prom ised health benefits. Doyle and Holloway were not the principal architects of this schem e, and the question presented by this case is the extent of their awareness of the schem e and liability for its consequences.” 675 F.3d at 197. The Circuit found that this Court erred in failing to determ ine whether paym ents collected by PCI/ NP and PCMG were plan assets subject to ERISA. 18 The Circuit ordered this Court to “m ake detailed factual findings concerning the nature of the funds received and controlled by Doyle to determ in e which, if any of these funds, were plan assets. The court should specifically address whether Check 1 and Check 2 m onies were ‘plan assets,’ considering in particular those m onies sent at the direction of the trustees directly to claim s adm inistrators. If the District Court determ ines on rem and that som e or all of these m onies are ‘plan assets,’ it should then consider whether Doyle had sufficient control over these assets to support a finding of fiduciary status. If the District Court finds that Doyle is a fiduciary with respect to certain plan assets, it should then consider whether Doyle breached his fiduciary duties to the Fund.” 675 F.3d at 20 1 18 “The identification of plan assets in this case determ ines ERISA’s reach. If, as the Secretary claim s, all of the m oney collected from em ployers by PCI/ NP and PCMG were plan assets from the m om ent of collection, then Doyle m ay be a fiduciary by virtue of exercising control over those assets, see 29 U.S.C. § 10 0 2(21)(A)(i), and, if he is a fiduciary, he and Holloway m ay be liable for breaching their fiduciary duties with respect to those assets. See 29 U.S.C. §§ 110 4(a), 110 5(a), 110 9(a). But if, as Doyle and Holloway claim , the paym ents collected by PCI/ NP and PCMG were not plan assets, an d the only assets of the Fund were those paym ents received by the Fund’s claim s adm in istrators, then Doyle did not handle any plan assets, an d could not be a fiduciary under ERISA, and Holloway’s duties as a fiduciary were not im plicated by PCI/ NP’s an d PCMG’s disposition of the paym ents they collected from em ployers.” 675 F.3d at 20 0 . 16 (citations om itted). Further, “[i]f on rem and the District Court finds that any of the m onies retained by PCMG or PCI/ NP were plan assets, it should then consider whether Holloway breached her fiduciary duties relating to those assets and is liable for any resulting losses to the plan.” Id. at 20 3. In doing so, the Court m ust “address whether Holloway had a duty to investigate, how exten sive an investigation would have been required, or whether an adequate investigation would have revealed the Fund’s potential insolvency and/ or the diversion of assets.” Id. at 20 2. 19 II. D is cu s s io n A. D e te rm in atio n o f Plan As s e ts ERISA does not define the term “plan assets.” The statute provides, in relevant part, that plan assets are “plan assets as defined by such regulations as the Secretary m ay prescribe.” 29 U.S.C. § 10 0 2(42). The regulations address the scope of “plan assets” in two specific contexts: (1) where an em ployee benefit plan invests in another entity, 29 C.F.R. § 2510 .3– 10 1, and (2) where contributions to a plan are withheld by an em ployer from em ployees’ wages, 29 C.F.R. § 2510 .3– 10 2. Secretary of Labor v. Doyle, 675 F.3d at 20 3. Neither of those descriptions is applicable here. However, “[t]he Secretary of Labor has repeatedly defin ed ‘plan assets’ consistently with ‘ordinary notions of property rights,’ including in the definition any funds in which a plan has obtained a ‘beneficial interest.’” Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 647 (8th Cir. 20 0 7) (finding that “[w]hether a plan has acquired a beneficial interest in particular funds depends on whether the plan sponsor expresses an intent to grant such a ben eficial interest or has acted or m ade representations sufficient to lead “[A] trustee has a duty to m aintain financial records and to preserve and protect the assets of the plan, in cluding from diversion or em bezzlem ent.” Id. 19 17 participants and beneficiaries of the plan to reasonably believe that such fund separately secure the prom ised benefits or are otherwise plan assets”). The Suprem e Court has endorsed the Secretary’s position that “in situations not covered by the plan asset regulations, ‘the assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law.’” See J ackson v. United States, 555 U.S. 1163 (20 0 9), which adopted the position asserted by the Solicitor General in his brief for the United States, 20 0 9 WL 133443, at *11-*12 (citing DOL Advisory Op. No. 93-14A (May 5, 1993) (AO); see AO No. 20 0 5-0 8A (May 11, 20 0 5); AO No. 94-31A (Sept. 9, 1994); AO No. 92-22A (Oct. 27, 1992)). The assets of a welfare plan thus “include any property, tangible or in tangible, in which the plan has a ben eficial ownership interest.” Secretary of Labor v. Doyle, 675 F.3d at 20 3 (quoting DOL Advisory Op. No. 93-14A, 1993 WL 18 8473, at *4 (May 5, 1993)). “As a gen eral rule, the first step in identifying the property of an ERISA plan is to consult the docum ents establishing and governing the plan.” Secretary of Labor v. Doyle, 675 F.3d at 20 4. In light of these docum ents, a court should then “consult contracts to which the plan is a party or other docum ents establishin g the rights of the plan.” Id. (citations om itted). Representations m ade to a business that purchased benefits are relevant only to the extent that they affect property rights under ordinary property law principles. Id. The governing docum ents and related contracts in this case include the Declaration of Trust establishing the PITWU Health and Welfare Fund, P-1, and the form s which each em ployer executed to adopt the Fund, and the instructions for com pleting those form s, P-12, P-13, P-14, P-22, P-23. Although the Declaration of Trust references CBAs, the Circuit has cautioned: “The record shows that the CBAs between 18 PITWU and PCI/ NorthPoint were bogus—they were not the result of bona fide collective bargaining, and the em ployees it enrolled in the union by PCI/ NorthPoint were not genuine union m em bers—but no sim ilar evidence was presented concerning the CBAs between PITWU and its other em ployer m em bers, ECI and EDI.” 675 F.3d at 197 n.23. Further, em ployers that participated in the Fund were not given copies of the CBAs. Tr. 31:20 -25, 49:23-24, 10 1:10 -15, 294:23-25. As such, the CBAs cannot form the basis for defining plan assets. Instead, as discussed below, em ployers “agreed in writing” to participate in the Fund by executing a packet of form s, and by subm itting checks in response to invoices they received. These latter docum ents, and not the CBAs, will be read in conjunction with the Declaration of Trust to determ ine the assets of the Fund. The Declaration of Trust provided: There is hereby established a Trust Fund into which shall be paid on or after May 1, 20 0 1 any and all contributions payable by EMPLOYERS or any other eligible EMPLOYER who has agreed, in writing, to be bound by the term s of this Agreem ent. P-1 at p. 2, ¶1. Thus, the Declaration of Trust created the Fund and identified the Fund’s assets as “any and all contributions payable by EMPLOYERS.” The Declaration of Trust itself does not, however, specify who these em ployers were, or what their contributions were to be; instead it referenced related docum ents in which the em ployers “agreed in writing” to be bound by the term s of the Declaration of Trust. The related docum ents consisted of a packet of form s, signed by the em ployer, which reflected his intent to participate in the Fund and the rate he would pay for benefits. P-12, P-13, P-14, P-22, P-23; Tr. 68:12-69:2. By checking the “health ben efit” box and the “union” box on the form titled “Client Services Agreem ent,” the em ployer agreed in writing to participate in the Fund. Tr. 66:6-14, 68:3-6, 198:14-22, 20 5:6-10 ; P- 19 12, P-13, P-139 at 36:5-16. Although the “Client Services Agreem ent” did not identify the Fund by nam e, another page of the form stated that “[t]his health and welfare plan is sponsored by the Professional Industrial Trade Workers Union (P.I.T.W.U.);” the em ployer executed this page as well. P-22 at 7; P-23 at 7; P-14 (referencing “Disclosure Form ”); Tr. 70 :13-20 . Another page of the form packet, the “New Business Turn-in Form ,” stated the m onthly contributions per em ployee that the em ployer was obligated to tender in order to m aintain health coverage for those em ployees. P-22 at 1 (under colum n “PEO Am ount” and “Total Am ount”). The em ployer executed this page as well. Tr. 68:24-69:4, 69:21-70 :8; P-22. The contributions per em ployee listed on the New Business Turn-in Form set forth a “lum p-sum ” of per-em ployee m onthly contribution, at three different rates depending on whether the coverage was for the em ployee only ($ 334), em ployee plus one depen dent ($ 560 ) or em ployee plus fam ily ($ 714). P-22 at 1; Tr. 74:11-25. The em ployer was required to subm it a check for the total contribution am ount with this packet of form s. P-14 (“Collect a check for the first m onth’s prem ium ”). Defendant Doyle testified: Q. Okay. Was there an y check which typically accom panied this package of form s? A. In m ost cases there would have been a check or checks. Q. Okay. And when you say there would have been a check, looking at the first page of the form again, I know this is an exam ple, is there a lin e on the first page of the form that would reflect how m uch that initial check would be? A. “Total check am ount.” Q. Okay. Now, for total check am ount, we're looking about two-thirds of the way down the form , there is a line labeled “total check am ount.” On 20 that line on this particular form I see 1,858. Is that correct, is that the num ber you are referring to? A. That is correct. Tr. 70 :25-71:13. See also P-23 at 2 (photocopy of check with packet of form s; check am ount equals “total am ount” listed on P-23 at 1.) From the em ployers’ point of view, the com bined am ount was the cost of the insurance for each of his em ployees. Tr. 73:1125, 28 :21-29:3, 43:19-44:1, 44:23-45:11, 48:2-5, 10 3:15-10 4:7, 296:3-15; P-139 at 96:198 :10 . That the cost of procuring health insurance was later broken apart by invoice into two checks does not defeat the conclusion that the em ployer paym ents constituted Fund assets within the m eaning of ERISA. The form s signed by the em ployer to adopt the Fund as a health plan for his em ployees did not parcel the prem ium into Fund assets and other m onies. P-22, P-23. The only fees broken out were the one-tim e processing fee and a $ 10 m onthly billing fee. P-22 at 1; P-23 at 1. Neither the Declaration of Trust nor the agreem ents signed by the em ployers set forth how m uch m oney will be forwarded to claim s adm inistrators. Given that the Declaration of Trust directs that “any and all contributions payable by […] any other eligible EMPLOYER” be paid “into” the Trust Fund, a clear reading of the relevant docum ents is that the total am ount of the em ployer’s contribution is the property of the Fund. In conclusion, the relevant docum ents, when read together, establish the Fund’s property interest in all of the m oney which em ployers forwarded to PCMG (“Check 1” and “Check 2”). The Declaration of Trust created the Fund. The form s which the em ployer executed established their relationship with the Fund, and showed the paym ents which they were required to m ake to participate in the Fund. As such, the 21 com bined am ount will be considered plan assets under ordinary notions of property rights. B. D e te rm in atio n o f Fid u ciary Statu s an d D u tie s i. Fid u ciary Statu s ERISA defines “fiduciary” not in term s of form al trusteeship, but in functional term s of control and authority over the plan. Srein v. Frankford Trust Co., 323 F.3d 214, 220 (3d Cir. 20 0 3). Under ERISA, even if a person is not nam ed as a fiduciary in plan docum ents, he or she m ay still be a fiduciary with respect to a plan to the extent: (i) (ii) (iii) he exercises any discretionary authority or discretionary control respecting m anagem ent of such plan or exercises any authority or control respecting m anagem ent or disposition of its assets, ... he has any discretionary authority or discretionary responsibility in the adm inistration of such plan. 29 U.S.C. § 10 0 2(21)(A) (em phasis added). The statutory definition thus requires that a fiduciary “m ust be som eone acting in the capacity of m anager, adm inistrator, or financial advisor to a plan.” Pegram v. Herdrich, 530 U.S. 211, 222 (20 0 0 ) (internal quotations om itted); Board of Trustees of Bricklayers an d Allied Craftsm en Local 6 of N.J . Welfare Fund v. Wettlin Assocs., Inc., 237 F.3d 270 , 272 (3d Cir. 20 0 1). Discretion is a prerequisite to fiduciary status for a person generally m anaging an ERISA plan under the first clause of subsection (i) or adm inistrating a plan under subsection (iii). However, under the second clause of subsection (i), any control over the disposition of “plan assets” m akes the person who has such control a fiduciary. In other words, for those who m anage plan assets, control over such assets—even without discretion—is sufficient to confer fiduciary status. Bricklayers, 237 F.3d at 273. The 22 statute recognizes the high standard that trust law im poses on those who handle m on ey or assets on behalf of another. Id. ERISA describes a fiduciary's duties to a plan as follows: a fiduciary shall discharge his duties with respect to a plan in the interest of the participants and beneficiaries an d— (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying the reasonable expenses of adm inistering the plan; (B) with the care, skill, prudence and diligen ce under the circum stances then prevailing that a prudent m an acting in a like capacity and fam iliar with such m atters would use in the conduct of an enterprise of a like character an d with like aim s; (C) by diversifying the investm ents of the plan so as to m in im ize the risk of large losses, unless under the circum stances it is clearly prudent not to do so; an d (D) in accordance with the docum ents and in strum ents governing the plan insofar as such docum ents and instrum ents are consistent with the provisions of this subchapter and subchapter III of this chapter. 29 U.SC. § 110 4(a). ii. D u ty o f Lo yalty The fundam ental obligation of a fiduciary in discharging his duties is to act with an “eye single” to the interest of a plan’s participants and beneficiaries. Fisher v. Philadelphia Electric Co., 994 F.2d 130 , 132 (3d Cir. 1993). This rule of loyalty is design ed to deter fiduciaries “from all tem ptation,” and “m ust be enforced with ‘uncom prom ising rigidity.’” NLRB v. Am ax Coal Co., 453 U.S. 322, 329-30 (1981). The duty of loyalty is spelled out in ERISA section 40 4(a)(1)(A), which provides in relevant part: . . . a fiduciary shall discharge his duties with respect to a plan solely in the interests of the participants and beneficiaries and— (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of adm inistering the plan. 23 29 U.S.C. § 110 4(a)(1)(A) (em phasis added). That is, the use of plan assets for any purpose other than (1) to pay benefits; or (2) to pay reasonable expenses that are necessary to the adm inistration of the plan constitutes a per se breach of the duty of loyalty. Srein v. Soft Drink Workers Union, Local 8 12, 93 F.3d 10 88, 10 97 (2d Cir. 1996) (“[a]n ERISA fiduciary m ust discharge its duties ‘for the exclusive purpose’ of providing benefits to plan participants and their ben eficiaries and of defraying reasonable adm in istrative expenses”); Martin v. Walton, 773 F. Supp. 1524, 1527 (S.D. Fla. 1991) (ERISA § 40 4(a)(1)(A) “m andates that the expenditure of plan assets m ust be exclusively for providing benefits an d defraying reasonable expenses of adm inistering the plan”). iii. D u ty o f Pru d e n ce The duty of prudence is spelled out in ERISA section 40 4(a)(1)(B), which provides that a fiduciary m ust discharge his/ her duties with the care, skill, prudence, and diligence under the circum stances then prevailing that a prudent m an acting in like capacity and fam iliar with such m atters would use in the conduct of an enterprise of a like character and with like aim s. 29 U.S.C. § 110 4(a)(1)(B). The prudence standard contained in ERISA incorporates, but m akes “m ore exacting the requirem ents of the com m on law of trusts relating to em ployee benefit trust funds.” Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983). 24 iv. Co -fid u ciarie s Fiduciaries cannot turn a blind eye to the activities of their co-fiduciaries; they have a duty to m onitor. This fundam ental principle of the law of trusts is codified in section 40 5(a) of ERISA, which provides in relevant part as follows: In addition to any liability which he m ay have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the sam e plan in the following circum stances: (1) if he participates knowingly in, or knowingly undertakes to conceal, an act or om ission of such other fiduciary, knowing such act or om ission is a breach; (2) if, by his failure to com ply with [the duty of loyalty or prudence] in the adm inistration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to com m it a breach; or (3) if he has knowledge of a breach by such other fiduciary, unless he m akes reasonable efforts under the circum stances to rem edy the breach. See also Leigh v. Engle, 727 F.2d at 135; Free v. Briody, 732 F.2d 1331, 1334-35 (7th Cir. 198 4); In re Enron Corp. Sec., Derivative & ERISA Litig., 284 F. Supp. 2d 511, 553 (S.D. Tex. 20 0 3). By enacting these provisions for co-fiduciary liability, “Congress expressly rejected the defense of the inactive fiduciary.” Zanditon v. Feinstein, 7 Em p. Ben. Cas. (BNA) 18 96 (D.Mass. 1986). See Mazur v. Gaudet, 8 26 F. Supp. 188, 190 -192 (E.D. La. 1992) (when a fiduciary allow other fiduciaries to em bezzle funds, thus breaching his fiduciary duties under § 40 4(a)(1), the fiduciary is liable under § 40 5(a)(2) as well); Briody, 732 F.2d at 1336 (a defendant, “having accepted a position as trustee, could not avoid liability by doing nothing”). 25 iv. D o yle The Secretary argues that Doyle was a fiduciary because all or part of the paym ents that PCMG collected from PCI/ NP’s clients were plan assets and Doyle, as head of PCMG, exercised discretionary control over those assets. Doyle contends that the paym ents PCMG collected from em ployers who enrolled their em ployees in the Fund were not plan assets and that the only plan assets were funds rem itted to the Fund’s claim adm inistrators pursuant to the collective bargaining agreem ents between PITWU and PCI/ NP. Having found that all of the m onies under Doyle’s control were plan assets, the Court finds that Doyle was a fiduciary, as he exercised “discretionary authority or discretionary control . . . respecting m anagem ent or disposition of [the Fund’s] assets.” 29 U.S.C. § 10 0 2(21)(A). His role went beyond that of a service provider; he received all em ployer contributions and decided how they should be disbursed, including deciding how m uch m oney PCMG would take in com m issions. P-24, Tr. 76:14-18. Individuals who set up the contribution rates and com m ission schedules that participants have to pay to receive benefits have been held to be functional fiduciaries. Metzler v. Solidarity of Labor Organizations Health & Welfare Fund, No. 95– CV– 7247, 1998 WL 477964, at *7 (S.D.N.Y. 1998) (“Because the Court finds that the am ount of the em ployers’ contributions paid . . . constitute assets of the Fund and because defendants had set the total sum of the contribution em ployers had to pay (over and above the coverage rate set by the Fund and the union m em bership fee set by [the union]) to receive benefits through the Fund, the Court further concludes that defendants are fiduciaries within the m eaning of ERISA.”) In fact, the Ninth Circuit has found that an 26 insurance broker was a fiduciary with respect to a credit union’s ERISA plan when broker determ ined the am ount of m onthly plan paym ents m ade by credit union, deposited those paym ents into account under his sole control an d then, at his own initiative, transferred som e of those funds to different account from which he wrote checks to pay credit union em ployees’ claim s. Patelco Credit Union v. Sahni, 262 F.3d 8 97, 90 9 (9th Cir. 20 0 1) (defendant deem ed to be a fiduciary where, inter alia, he transferred portions of funds to separate account as his “adm inistrative fees”). The Court is persuaded by these cases that have recognized that by designating a portion of contributions as the “coverage rate,” and other portions as com m issions, fees, union dues, etc., one necessarily exercises control over the m anagem ent or disposition of plan assets. Doyle conceded at trial that he set the com m issions an d billing fees for PCMG and its m arketing agents, virtually unilaterally. He signed all the checks sent out by PCMG and kept close control over the com pany. J oint PreTrial Order, II.B, “Additional Facts Which Doyle Stipulates,” at 8 ¶ 10 4. Significantly, Doyle decided how m uch m oney was to be forwarded to PCI/ NP, how m uch was to be forwarded directly to TPAs and m edical providers, and how m uch was to constitute “com m issions” and “adm in istrative expenses” for his em ployees and contracted m arketing agents. P-24, Tr. 76:14-18 ; Tr. 8 5:3-17; Tr. 8 7:2 – 88:16; J oint PreTrial Order, II.B, “Additional Facts Which Doyle Stipulates,” at 8 ¶ 10 4. The sales com m issions charged by PCMG for each account were not negotiated with PCI/ NP, the Union, or the Fund; rather, they were created by Doyle in consultation with his PCMG’s contracted sales consultants. P-24, Tr. 558:7-559:9 . Doyle was a functional fiduciary. 27 Doyle’s com pany, PCMG, “received $ 4.5 m illion in Check 1 funds, an d $ 2.1 m illion in Check 2 funds.” 675 F.3d at 192. Regarding the $ 4.5 m illion in Check 1 m onies, $ 3.1 m illion was forwarded to PCI/ NP and $ 645,0 0 0 was sent directly to the Fund’s claim adm inistrator pursuant to instructions from the Fund’s trustees after PCI/ NP stopped m aking contributions in Novem ber 20 0 2. 20 10 WL 2671984, at *4. For the purpose of this litigation, the Secretary stipulates that all of the m onies forwarded to claim s adm inistrators by PCMG and PCI/ NP was used for the paym ent of legitim ate claim s an d to defray reasonable costs of adm inistering the health plan. Thus, the Secretary does not allege a fiduciary breach with respect to $ 2.1 m illion reforwarded to claim s adm inistrators, P-46 at col. 1, rows 4, 9, 14 and 19, or with respect to the $ 645,0 0 0 which PCMG sent directly to claim s adm inistrators. Also from the initial $ 3.1 m illion, however, PCMG received $ 196,998.26 back from PCI/ NP as “com m issions/ refunds,” P-45 at col. 8 and 9, row 20 , and PCI/ NP sent $ 429,310 to the PITWU Union as “union dues,” P-44 at col. 1, row 16. Beside the $ 755,0 0 0 of the $ 4.5 m illion collected by Doyle that is unaccounted for, 675 F.3d at 20 0 , it appears that the difference of approxim ately $ 374,0 0 0 cam e to rest at PCI/ NP . There is no evidence in the record that PCI/ NP or PCMG used any of the Fund assets which they retained for the purpose of providing ben efits or necessary services. Defendant Doyle therefore breached his duty of loyalty with respect to: 1) the approxim ately $ 952,0 0 0 total which PCMG retained from Check 1; 2) the $ 374,0 0 0 which PCI/ NP retained from Check 1 (because he knew that PCI/ NP was not forwarding all of Check 1 to claim s adm inistrators); and 3) the $ 429,310 in “union dues” forwarded on behalf of em ployees “who were not genuin e union m em bers” pursuant to a “bogus” CBA. See 675 F.3d at 197. 28 With respect to Check 2, the Circuit held that: Doyle’s unrefuted testim ony that the Check 2 funds he collected for m arketing fees were custom ary or reasonable does not m ean that he did not violate any fiduciary duties under ERISA. If Check 2 m onies were plan assets and Doyle was a fiduciary, he was required to use these m onies “for the exclusive purposes of providing benefits to participants in the plan an d their beneficiaries [and] defraying reason able expenses of adm inistering the plan.” 29 U.S.C. § 110 4(a)(1)(A). The Check 2 m onies retained by PCMG were used to pay expenses it incurred in m arketing the Fund. It is far from obvious how plan participants ben efitted from PCMG’s m arketing of the Fund to other businesses with whom they had no conn ection or why the Fund would reasonably incur such expenses. Moreover, as we have explain ed above, the “PEO services” of PCI/ NP that PCMG was prom oting were actually part of a schem e to abuse ERISA preem ption and avoid state insurance regulations through a sham collective bargain ing relationship with PITWU. At a m inim um , expen ditures for m arketing this illegal schem e were not reasonable expenses for the benefit of plan participants. 675 F.3d at 20 1. Given this Court’s determ ination that the Check 2 m onies were plan assets and the Third Circuit’s holding that Check 2 was used to pay m arketing fees but “expen ditures for m arketing this illegal schem e were not reasonable expenses,” id., this Court finds that Doyle breached the duty of loyalty by diverting Fund assets to PCI/ NP, an entity that served n o discernable purpose with regard to the Plan . In addition, courts have held that paym ent of excessive fees and adm inistrative expen ses, potentially jeopardizing the solvency of the plan, constitutes a breach of the duty of prudence. See Whitfield v. Tom asso, 682 F. Supp. 1287, 1298 -99 (E.D.N.Y. 198 8) (adm inistrative expen ses for all expen ditures other than the paym ent of benefits of union-sponsored welfare plan should have am ounted to no m ore than ten percent of the plan’s incom e); Brock v. Crapanzano, Civ. A. No. 8 4– 1899, 1986 WL 15752 (S.D. Fla. J uly 23, 1986) (fees in excess of fifteen percen t of plan incom e were excessive). Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982). In this case, the portion of plan assets 29 that PCMG and PCI/ NP used for purposes other than the paym ent of legitim ate claim s or necessary plan expenses is a diversion of over 60 % of the assets. Doyle should have been aware that PCI/ NP provided no legitim ate service, but he nonetheless forwarded $ 3.3 m illion to that organization. In so doing, Defendant Doyle was cognizant that a portion of this m oney would in turn be used to pay “bogus” dues to a union, and that a portion would go toward paying for PCI/ NP’s salaries an d business expenses. Tr. 64:10 15, 71:24-72:5, 8 5:6-22, 8 8:317, 138 :2-12. By perm itting such diversion of over 60 % of the Plan’s assets as paym ents for sales com m issions, service fees, adm inistrative charges, and union dues – not including the adm in istrative expenses which the legitim ate TPAs charged for claim s processing, Doyle breached his duty of prudence. v. H o llo w ay It is undisputed that, as a trustee, Holloway was a n am ed fiduciary, and thus was obligated to discharge her duties to the Fund “with the care, skill, prudence, and diligence under the circum stances then prevailing that a prudent m an acting in a like capacity an d fam iliar with such m atters would use in the conduct of an enterprise of a like character and with like aim s.” 29 U.S.C. § 110 4(a)(1)(B). The Secretary argues that Holloway failed to act prudently to prevent the im proper diversion of Check 1 and Check 2 m onies by PCI/ NP and PCMG. A trustee has a duty to m aintain financial records and to preserve and protect the assets of the plan, in cluding from diversion or em bezzlem ent. See Restatem ent (Third) of Trusts §§ 76(2)(b), 83; Ream v. Frey, 10 7 F.3d 147, 156 (3d Cir. 1997). See, e.g., Russo v. Unger, 8 45 F. Supp. 124, 128 -129 (S.D.N.Y. 1994) (fiduciary’s failure to protect the participants by turning a blind eye to her cofiduciary’s action constitutes “gross delinquency,” despite lack of willfulness or actual knowledge on her part). In addition, a 30 trustee m ust also take prudent precautions, such as by providing for a “suitable and trustworthy replacem ent,” to ensure that his resignation does not harm the Fund or its beneficiaries. See Ream v. Frey, 10 7 F.3d at 154. Finally, when confronted with suspicious circum stances, a trustee m ay be required to investigate potential risks to a plan. See Chao v. Merino, 452 F.3d 174 (2d Cir. 20 0 6). Holloway’s inaction (both before and after her resignation) constitutes a breach of her duty of prudence under §40 4(a)(1)(B). The first paragraph of the Trust Agreem ent she signed refers to a collective bargaining agreem ent between the PITWU Union and various PEOs whose stated purpose was to “govern the hours of work, wages and working condition s” of those PEOs’ em ployees. P-1, p. 1. Holloway knew that the Union perform ed no representation or collective bargaining function apart from collecting dues. Tr. 38 3:17 – 38 4:15. Indeed, the collective bargaining agreem ents referred to in the Trust Agreem ent—i.e. the docum ent “govern[ing] the hours of work, wages an d working conditions”—sim ply incorporated the em ployers’ existing work hours, holidays, vacation policy, sick leave an d wage rates by reference. Tr. 50 :24 – Tr. 51:1; Tr. 192:4-12; Tr. 193:1-13; 193:17-23; 197:6-9; Tr. 295:3-13. Holloway knew or should have known the facts upon which the Circuit based its con clusion that the CBAs “were not the result of bona fide collective bargaining.” 675 F.3d at 197. During her trusteeship, several states issued cease and desist orders negatively reflecting the legitim acy of the Union and the legality of the plan. 675 F.3d at 195-197. At least one of the cease and desist orders contained an express finding that the PITWU Union was not a bona fide labor union. 675 F.3d at 195. In response, Holloway forwarded the orders to Neil Goldstein, who would then write a letter to the state 31 insurance com m issioners explaining that they lacked jurisdiction over the m atter because PITWU was a “union-sponsored plan.” 675 F.3d at 197. Additionally, Holloway breached her duty of prudence by ignoring eviden ce that the Fund was being m ism anaged. From nearly the inception of her trusteeship, Holloway was aware that: there were “boxes” of claim s that had not been processed; that there were large num bers of unpaid health claim s; fin ancial reports could not be prepared because of the lack of financial data; the TPA reported insufficient funding to pay adjudicated and valid claim s; an d a num ber of states had issued cease an d desist orders forbidding the PITWU Fund from operating within their borders, three of which nam ed her as a party. 675 F.3d at 195-198. In response, Holloway did not do enough. Although she took several steps to rectify recordkeeping problem s, she had a duty to m ore fully investigate, which would have revealed the Fund’s potential insolvency and/ or the diversion of assets. Faced with eviden ce of m ism anagem ent and the inexplicable lack of financial data from her cofiduciaries, Holloway did not ask for the financial records of PCI/ NP and PCMG to try to find out how m uch of the em ployer contributions PCMG was keepin g as sales com m issions, how m uch the PITWU Union was taking in dues, or how m uch PCI/ NP was paying to itself as salaries and business expenses. Tr. 394:10 -23. If she had reviewed PCMG’s and PCI/ NP’s bank records for the m onths of J anuary through August 20 0 2, she would have learned that PCMG received a total of $ 4.48 m illion from participating em ployers during that tim e period, and that only $ 1.3 m illion of that m oney was paid to third party adm inistrators and benefit claim s. P-46, rows 1-10 . 20 20 Row 1, Colum n 3 + Row 6, Colum n 3 show that a total of $ 4.48 m illion was received; Row 4, Colum n 1 and Row 9, Colum n 1 show that a total of $ 1.3 m illion was the “Total 32 Further, Holloway was em powered by both the Fund’s Declaration of Trust and ERISA to investigate and rem ediate the problem s she later described as a “chaotic state of affairs.” The Declaration of Trust required the nam ed trustees to retain an im partial, com petent public accountant to audit the Trust Fund and to m ake available a statem ent of the audit for review by any interested party. P-1 at p. 4, ¶6. Pursuant to the Declaration of Trust, nam ed trustees could also dem and the appointm ent of an independent arbitrator in the event of a dispute regarding the adm in istration of the Trust. Tr. 38 7:14-20 ; P-1 at p. 4, ¶5. Holloway did not com pel an accounting or invoke the m andatory arbitration clause in the Trust Declaration. Tr. 387:21-24; 391:1-7. If those efforts failed, it was Holloway’s duty to sue her co-trustees. The Declaration of Trust authorized each nam ed trustee to sue any party to recover m oney belonging to the Trust. Tr. 386:5-7; P-1 at p. 6, ¶9(e). Indeed, ERISA specifically grants trustees the power to sue their co-trustees or any other entity for appropriate equitable relief on behalf of the Fund. See ERISA § 50 2(a)(3), 29 U.S.C. § 1132(a)(3). Holloway did not com m ence litigation again st the other three defen dants to dem and an accounting. Tr. 386:8 – 387:13; Tr. 397:1-7. Nor did she advise the relevant governm ent authorities, i.e., the Em ployee Benefit Security Adm inistration of the U.S. Departm ent of Labor. Tr. 387:25 – 388 :3; P-1, p. 4. Paid TPAs & Benefits.” Mar. 19, 20 0 7 Seigert Decl., p. 18 -21 (setting forth the underlying docum ents for P-46 (Sum m ary Chart 8 ); prim ary sources include bank account statem ents for PCMG’s accounts and for the third party adm inistrators’ accounts). 33 Holloway’s failure to take these steps allowed PCMG and PCI/ NP to divert over $ 3 m illion during her trusteeship, in violation of ERISA section 40 5(a)(2). 21 Rather, Holloway resigned. But as the Third Circuit has concluded, an ERISA fiduciary’s obligations to a plan are extinguished only when adequate provision has been m ade for the continued prudent m anagem ent of plan assets. Glaziers and Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Sec., Inc., 93 F.3d 1171, 1138 (3d Cir. 1996). Accord Ream v. Frey, 10 7 F.3d 147, 155 (3d Cir. 1997). Holloway expressed concern about “the chaotic state of affairs of the Fund,” which had “brought undue dam age in m ultiple states, created credit dam age to the m em bership due to claim s that are in excess of 9 m onths old and generally has ruined the credibility of the Union and its associated fiduciaries.” However, Holloway did not find another person to replace her as trustee before resigning, nor was she im m ediately replaced with a “suitable an d trustworthy” person. 675 F.3d at 198 -199. Moreover, her resignation and failure to m onitor the diversions by PCI/ NP and PCMG in violation of her duty under section 40 5(a)(2) and (3) did not prevent those entities from diverting an additional $ 1.7 m illion after her resignation. Thus, Holloway is not only liable for the diversions which occurred during her trusteeship, but for the losses which occurred after her resignation which were enabled by her inaction. The Secretary argues that Holloway is both directly liable for losses to the plan under ERISA § 40 9, 29 U.S.C. § 110 9, and liable as co-fiduciary under ERISA § 40 5(a), 29 U.S.C. § 110 5(a). As a nam ed trustee, Holloway cannot evade liability by Section 40 5(a)(2) provides that a fiduciary is liable for a breach by her cofiduciary where her failure to discharge her duty of prudence under § 40 4(a)(1)(B) has enabled the cofiduciary’s breach. 21 34 ignoring the obvious signs of m ism anagem en t and diversions by her co-fiduciaries; rather, she owed a duty of undivided loyalty to the plan. See Fisher v. Phila. Elec. Co., 994 F.2d 130 , 132 (3d Cir. 1992). While it is true that a trustee does not have the responsibility to affirm atively m onitor day-to-day operations, see Arakelian v. Nat’l Western Life Ins. Co., 755 F. Supp. 10 80 , 10 84 n. 3 (D.D.C. 1990 ), she cannot ignore the kind of inform ation that was being presented to her and sim ply walk away. See Chao v. Merino, 452 F.3d 174, 184 (2d Cir. 20 0 6) (“Knowing – and having expressed the viewpoint m ore than once – that the [plan adm inistrator] could not be trusted, [defendant] did not exercise reasonable care when she sim ply proceeded to trust him ”). As Holloway is a nam ed trustee, she faces full liability for all breaches by her codefendants which occurred after the effective date of her trusteeship. Her lack of prudence enabled others to com m it a breach, of which she had knowledge, an d she did not m ake reasonable efforts to rem edy that breach. III. Co n clu s io n ERISA section 40 9(a) provides that “a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties im posed upon fiduciaries by this title shall be personally liable to m ake good to such plan any losses to the plan resulting from each such breach . . . .” Struble v. New J ersey Brewery Em ployees Welfare Benefit Fund, 732 F.2d 323, 332 (3d Cir. 1984). Where several fiduciaries are involved in ERISA-violative conduct, the liability is joint and several. Davidson v. Cook, 567 F. Supp. 225, 240 (E.D. Va. 1983); Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 644 (W.D. Wis. 1979). Further, ERISA section 40 9(a) specifies that “[a]ny person who is a fiduciary with respect to a plan who breaches any of [his] duties shall be subject to such 35 other equitable or rem edial relief as the court m ay deem appropriate, including rem oval of such fiduciary.” 29 U.S.C. § 110 9(a). In fashioning a rem edy, this Court is m indful of the Circuit’s Opinion: We find it significant that PCI/ NP’s prom otion of the Fund bears striking sim ilarities to the type of schem e that ERISA’s MEWA provisions were specifically designed to prevent: an aggressively m arketed, but inadequately funded health benefit plan m asquerading as an ERISAexem pt plan in order to evade the solvency controls im posed by state insurance regulation. Although the record is not entirely clear on this point, it appears that the ultim ate result of this arrangem ent was that which Congress feared: the Fund was ultim ately unable to pay all em ployee claim s, and thus em ployees participating in the Fund were not provided prom ised health benefits. . . . [W]e think it is im portant to keep the nature of the schem e firm ly in m in d. 675 F.3d at 197. (1) For the reasons set forth above, Defendant Holloway is jointly and severally liable along with the other defen dants to restore and m ake restitution to the Fund in the am ount of $ 4,698,871.98, plus prejudgm ent interest, which represents the difference between the m oney that em ployers paid in for benefits an d the m oney that was paid out to claim s adm inistrators to adm inister and pay benefits – plan assets diverted from the Fund. (2) Defendant Doyle is jointly and severally liable along with the other defendants to restore and m ake restitution to the Fund in the lesser included am ount of $ 3,8 82,867.98, plus prejudgm ent interest. The difference is the am ount of m oney received by PCI/ NP from em ployers who were not recruited through PCMG; accordingly, none of this m oney passed through PCMG. P-47a, col. 23, row 17; Tr. 20 9:17 – 210 :4. (3) The restored losses to the Plan are subject to com putation of prejudgm ent interest by the Secretary to the date of judgm ent in this case at the § 6621 IRS underpaym ent rate. (4) Defendants are to be enjoined from serving as fiduciaries or service providers for any ERISA-covered em ployee benefit plan. (5) An independent fiduciary shall be appointed to supervise the distribution of assets and term ination of the Fund. 36 The Secretary should subm it a proposed form of J udgm ent for the Court’s consideration. Dated: Novem ber 28, 20 14 / s/ J oseph H. Rodriguez J OSEPH H. RODRIGUEZ U.S.D.J . 37
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