Ehlen Floor Covering, Inc. v. Lamb

Citations: 859 F. Supp. 2d 1285; 53 Employee Benefits Cas. (BNA) 2728; 2012 U.S. Dist. LEXIS 53635; 2012 WL 1326823Docket: Case No. 2:07-cv-666-FtM-29DNF

Court: District Court, M.D. Florida; April 17, 2012; Federal District Court

SummaryOriginalCytator Case TreatmentAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Three motions for summary judgment have been filed in this case: 1) Pacific Life Insurance Company's Amended Dispositive Motion, 2) Innovative Pension Strategies, Inc.'s Motion, and 3) a joint motion from The Graduate Group, Inc., Eugene Gordon, and Joseph Penchansky. Plaintiffs submitted responses along with affidavits, depositions, and other supporting exhibits.

Summary judgment is deemed appropriate when there is no genuine dispute over material facts, allowing the moving party to secure judgment as a matter of law, as outlined in Federal Rule of Civil Procedure 56(c). A "genuine" issue exists if a rational trier of fact could side with the nonmoving party, and a "material" fact affects the case's outcome under the law. The moving party must identify evidence demonstrating the absence of such issues, while the opposing party must provide sufficient extrinsic evidence to establish essential case elements.

In considering these motions, the Court must view all evidence and draw reasonable inferences in favor of the nonmoving party. The plaintiffs' original twelve-count complaint was previously dismissed as preempted by the Employee Retirement Income Security Act (ERISA). Subsequently, they filed a four-count Second Amended Complaint alleging breach of fiduciary duty under ERISA (Count I) against all defendants for failing to perform required administrative responsibilities related to the Ehlen Floor Coverings Retirement Plan. Counts II through IV, which are alternative claims against IPS, include state law negligence, violation of Florida's Deceptive and Unfair Trade Practices Act, and misrepresentation. The plaintiffs, Edward and Thomas Ehlen, are associated with Ehlen Floor Coverings, Inc., and had prior accountants, including Thomas Wanderon and Jeffery Lamb, who introduced them to financial advisor Brian Youngs.

Wanderon oversees defendants Lamb and Youngs, who are also principals of LWY Associates, Inc. (formerly Tax, Accounting and Financial Associates, Inc. - TAFA) and its subsidiary, Independent Advisors of Florida, Inc. (formerly Financial Asset Management - FAM). Both TAFA and FAM are jointly owned by Wanderon, Lamb, and Youngs. In around 2000, Ehlen Floor sought alternatives to its Welfare Benefit Plan due to non-deductible deductions. Lamb and Youngs recommended implementing a 412(i) plan, effective January 1, 2002. Youngs contacted a representative from Pacific Life Insurance Company, which specializes in insurance products for funding 412(i) plans, as he was unfamiliar with the process.

Pacific Life asserts it does not market 412(i) plans directly, while plaintiffs claim it marketed its products specifically for these plans and assured legality. Pacific Life provided an opinion letter suggesting compliance with IRS regulations. To use Pacific Life's products in a 412(i) plan, engagement of a third-party administrator was required, and Pacific Life maintained a list of approved administrators, including The Graduate Group (TGG) and Innovative Pension Strategies, Inc. (IPS). TGG, owned by Eugene Gordon, assisted in marketing insurance products for 412(i) plans, while Joseph Penchansky, a TGG employee, acted on behalf of TGG regarding the plan.

Youngs engaged TGG to design the pension proposal, which was presented to Ehlen Floor. TGG created the initial plan design, selected Pacific Life products, and allocated contributions, with Youngs relying on TGG due to his lack of knowledge about 412(i) plans. Youngs received 90% of commissions from the sale of Pacific Life products, while Gordon received 10% for assisting with the sale. Penchansky, as an independent contractor for TGG, prepared the owner's report for the plan. Although TGG had no direct contact with Ehlen Floor, most communications regarding the plan were routed through TGG, though it is disputed whether TGG mandated this process. In 2003, IPS began providing administrative services for the plan, with TGG presenting an Administrative Services Agreement with IPS for these services.

Ehlen Floor and IPS entered into an agreement on December 20, 2002, for IPS to provide administrative services related to the Plan, with specific services outlined in Section VI, which is absent from the submitted agreement. IPS created the Plan Document and Summary Plan Description, approved by Ehlen Floor on the same date. The Plan identifies Ehlen Floor as the employer and Plan Administrator, with Edward Ehlen as Trustee. An "Investment Manager" is defined as an entity with fiduciary responsibility for managing Plan assets, required to be registered as an investment advisor under relevant regulations.

In February 2003, IPS began administering the Plan and noted potential design flaws that could lead to tax consequences, prompting IPS to draft amendments to remedy these issues and facilitate compliance with IRS regulations. On February 10, 2003, IPS delivered these proposed amendments to TGG for adoption. New IRS guidelines in February 2004 classified certain 412(i) plans as listed transactions, introducing reporting requirements and potential penalties. Despite these changes, no penalties were ever assessed against the plaintiffs or the Plan.

Pacific Life delayed notifying TGG or the plaintiffs about the new IRS guidelines and necessary actions. In early 2004, Pacific Life issued a letter indicating the guidelines might affect its 412(i) plan products. Subsequently, after discussions with TGG and IPS, Pacific Life revised premium amounts accordingly. When Youngs inquired about the implications of the new rulings, he was reassured by TGG that the Plan was compliant.

IPS prepared additional amendments to align with the new IRS guidelines, which were sent to TGG for transmission to Ehlen Floor. However, TGG claimed it did not routinely receive amendments and did not obtain these specific ones. The plaintiffs were unaware of the Plan's flaws or the nature of the amendments. IPS assumed that all communications went through TGG, believing the amendments had been adopted, and continued its administrative services under that assumption. Nonetheless, the proposed amendments were never implemented.

In 2005, the IRS offered Ehlen Floor a settlement regarding its pension plan. Lamb and Youngs advised the plaintiffs that the Plan complied with IRS regulations, leading them to reject the settlement offer based on this guidance.

On March 6, 2006, the IRS informed Ehlen Floor that its Plan was selected for a 2003 audit, during which the IRS identified various violations of the Internal Revenue Code, though no sanctions have been imposed thus far. The Court addressed IPS's argument that state law claims in Counts II-IV of the Second Amended Complaint are preempted by ERISA, leading to their dismissal. Under 29 U.S.C. § 1144(a), ERISA supersedes state laws relating to employee benefit plans, effectively displacing claims like breach of contract and negligent misrepresentation. The Eleventh Circuit employs the complete preemption test from Aetna Health Inc. v. Davila, determining a claim is completely preempted if it could be brought under ERISA and lacks any independent legal duty. The Court confirmed that plaintiffs' claims fall within ERISA's scope and that they have standing as beneficiaries. The claims pertain to the administration of the Plan and IPS’s failure to disclose issues regarding the Plan’s flaws, indicating duties imposed by ERISA. As such, Counts II-IV are completely preempted, granting IPS's motion to dismiss these counts. Additionally, several defendants contended they were not fiduciaries and therefore not liable for breach of fiduciary duty, while plaintiffs argued that they were "functional fiduciaries." The determination of fiduciary status under ERISA involves both legal and factual considerations.

The term 'fiduciary' under ERISA is defined functionally rather than through formal trusteeship, encompassing individuals with control or authority over a plan. Fiduciaries can be named or "functional." The court must determine if defendants not named as fiduciaries are functional fiduciaries based on evidence. Under 29 U.S.C. 1002(21)(A), a fiduciary is someone who exercises discretionary authority in managing a plan, gives investment advice for compensation, or has discretion in plan administration. Fiduciary status is not absolute; it applies only to specific actions. 

In this context, the activities in question include the initial plan design, failure to amend the plan to comply with IRS guidelines, and providing assurances about compliance. Pacific Life claims it is not a fiduciary, asserting its role was limited to issuing life insurance policies and annuity contracts, supported by signed disclosures from plaintiffs. Conversely, plaintiffs argue Pacific Life is a functional fiduciary due to its involvement in creating and marketing products for 412(i) plans and failing to adequately address compliance issues when concerns arose. However, simply promoting its products does not confer fiduciary status. The court cites precedent indicating that an insurer's marketing efforts alone do not establish fiduciary duty. Ultimately, the court concludes that Pacific Life is not an ERISA fiduciary and thus cannot be liable for breaching fiduciary duty.

Plaintiffs argue that their case is similar to Rapides Reg. Med. Ctr. v. Am. United Life Ins. Co., where a court ruled that an insurer was a fiduciary under ERISA due to its authority to amend an insurance contract considered a plan asset. However, they have not shown that Pacific Life possessed the authority to amend their specific Plan assets, only that it provided general advice to third-party administrators regarding compliance with IRS guidelines. Unlike the insurer in Rapides Reg. Med. Ctr., Pacific Life merely created products that funded the Plan, thus lacking fiduciary status. Plaintiffs' co-fiduciary liability claim against Pacific Life fails since it is not deemed a fiduciary, aligning with Useden v. Acker, which states that non-fiduciaries cannot be held liable for fiduciary breaches. Consequently, summary judgment will be granted in favor of Pacific Life.

Regarding Thomas Wanderon, plaintiffs claim he is a functional fiduciary due to his supervisory role over Lamb and Youngs, who provided investment advice for a fee. Wanderon contends there is no evidence he offered such advice or functioned as a fiduciary. Previously, he served as the accountant for Edward Ehlen, and after Lamb took over, plaintiffs had minimal interactions with him. They assert that his role as a principal in TAFA and FAM implies he indirectly provided investment advice for a fee. Under 29 U.S.C. 1002(21)(A)(ii), a functional fiduciary is defined as one who renders investment advice for compensation or has authority in that regard. The regulations specify that investment advice involves recommendations on securities or property value, discretionary authority in transactions, or regular advice based on an agreement with the plan.

An individual providing regular investment advice for a fee, with discretionary authority or control over a plan, qualifies as a functional fiduciary. In this case, there is no evidence indicating that Wanderon had any involvement with the Plan or acted as a fiduciary, as he ceased being Ehlen Floor's accountant years before the Plan's implementation. Consequently, the court will grant summary judgment for Wanderon regarding Count I.

Lamb, who succeeded Wanderon as Ehlen's accountant, engaged in discussions with Ehlen Floor about implementing a 412(i) plan. Plaintiffs argue that Lamb should be considered a functional fiduciary due to his advisory role, alleging he provided improper advice regarding the Plan's design and administration, including a 2005 IRS settlement proposal. Lamb contends that he relied on experts for investment advice and did not hold discretionary authority over the Plan. However, the possibility that he offered recommendations as Ehlen Floor's accountant creates a factual dispute, preventing summary judgment on Count I.

Plaintiffs assert that IPS acted as a fiduciary by identifying flaws in the Plan and creating amendments without ensuring their implementation. IPS counters that it served as a third-party administrator, performing only ministerial tasks. IPS communicated potential tax concerns related to the plans to TGG, expecting those issues to be relayed to the plan sponsor, and suggested amendments based on that understanding.

IPS contends that its contract with Ehlen Floor clearly designated it as a third-party administrator, asserting that it acted solely in that capacity. The Court emphasizes that a party cannot be deemed a fiduciary under ERISA unless they are fully aware of their fiduciary status. The Agreement explicitly states that IPS is not a fiduciary; however, such disclaimers do not conclusively determine fiduciary status. Disputes exist regarding IPS's role in administering the Plan, including the lack of specification of the services it was to provide. IPS claims it was uninvolved in the Plan's design and only communicated issues to TGG, which was responsible for relaying those concerns to relevant parties. However, no communication about the Plan's issues occurred, raising questions about who was accountable for implementing Plan amendments. The Court finds the factual disputes regarding IPS's discretionary authority significant enough to deny its motion for summary judgment.

Similarly, the TGG Defendants assert they lacked authority over Plan management or assets, denying any discretionary authority. Plaintiffs argue that TGG's administrative actions established a functional fiduciary relationship, alleging TGG misrepresented the Plan's compliance status and failed to deliver necessary amendments from IPS for implementation. This conduct is viewed as infringing upon the plaintiffs' authority over the Plan. Given the disputed material facts surrounding the TGG Defendants' involvement in the Plan's design and amendments, the Court denies their summary judgment motion as well.

In summary, the Court's rulings include: IPS's motion for summary judgment is partially granted (Counts II-IV dismissed with prejudice) and denied regarding Count I; Pacific Life Insurance Company's motion is granted; the motion for summary judgment for Thomas Wanderon is granted, while it is denied for Jeffrey Lamb; and the motion for the TGG Defendants is denied. No motions for summary judgment were filed by other defendants.

The matter was previously stayed pending an appeal to the Eleventh Circuit Court of Appeals, which issued a mandate on December 1, 2011, affirming the lower court's July 14, 2010, decision that denied Innovative Pension Strategies, Inc.'s Motion to Compel Arbitration and Stay Plaintiffs' Claims. The stay was lifted on December 7, 2011. The Second Amended Complaint references most factual allegations from the original Complaint and introduces new defendants, IPS, Eugene Gordon, and Joseph Penchansky, along with new plaintiffs, Francis and Delores Ehlen. Dolores Ehlen was voluntarily dismissed without prejudice on March 12, 2010. The document also explains the nature of a 412(i) plan, an employer-sponsored defined benefit plan that provides retirement and death benefits, which was governed by the Internal Revenue Code (IRC) section 412(i) until it was amended by the Pension Protection Act of 2006, renumbering it as section 412(e)(3) while keeping the language unchanged. To establish a 412(i) plan, an employer sets up a trust to hold its assets, using tax-deductible contributions to buy life insurance and/or annuity policies. The plans must comply with specific rules, including the "100 Times Rule," the "Less Than 50% Rule," and restrictions on "springing cash values." The Ehlen Floor Coverings Retirement Plan is also a plaintiff in this case. Under ERISA section 502(d), employee benefit plans can sue or be sued as entities, and the plaintiffs were not informed about the requirement to file IRS Form 8886 for each listed transaction.