Summary
denying plaintiffs' motion for partial summary judgment
Summary of this case from Martinez v. BaraschOpinion
01 Civ. 2289 (MBM)
May 22, 2003
THOMAS M. KENNEDY, ESQ., SUSAN M. JENNIK, ESQ., (Attorneys for Individual Plaintiffs), Kennedy, Schwartz Cure, New York, NY.
ROLAND R. ACEVEDO, ESQ., J. BRUCE MAFFEO, ESQ., (Attorneys for Plaintiff George Miranda), Seiff, Kretz Maffeo, New York, New York.
MICHAEL B. HIMMEL, ESQ., ROBERT J. KIPNEES, ESQ., (Attorneys for Defendants George Barasch, Linda Barasch Glazer, Richard Glazer, Financial Administrators, Inc., and Barton, Babcock Blair, Inc.), Greenbaum, Rowe, Smith, Ravin, Davis Himmel, Iselin, NJ.
WILLIAM K. WOLF, ESQ., ERINN WEEKS WALDNER, (Attorney for Defendant Allied Trades Council and Jack Siebel, Reginald Rosado, and James Crowley as Officers of ATC), Friedman Wolf, New York, NY.
KATHERINE H. PARKER, ESQ., MYRON D. RUMELD, ESQ., NEAL SCHELBERG, ESQ., (Attorneys for Defendants Trustees of the Union Mutual Medical Fund; Trustees of the Allied Welfare Fund; and Trustees of the Vacation Fringe Benefit Fund), Proskauer Rose, LLP, New York, NY.
PETER ALTIERI, ESQ., JOHN HARRIS, ESQ., J. WILLIAM COOK, ESQ., (Attorneys for Defendant Trustees of the Allied Educational Foundation and the Union Mutual Fund Pension Plan), Epstein, Becker Green, New York, NY.
DANIEL RIESEL, ESQ., STEVEN RUSSO, ESQ., HILARY SEMEL, ESQ., (Attorneys for Defendants Stephen Barasch and Churchill Administrators, Inc.), Sive, Paget Reisel, New York, NY.
OPINION AND ORDER
Plaintiffs in this case are George Miranda and participants in several employee benefit funds open to members of the Allied Trades Council, a union. Defendants are trustees of the funds, companies and persons who provide services to those funds, a related private foundation, and persons who control those entities. Plaintiffs claim, inter alia, that defendants have manipulated contracts between service providers and the employee benefit funds in order to enrich themselves, and have failed to manage the funds prudently.
Based on these allegations, plaintiffs have claimed breach of fiduciary duty and self-dealing under the Employee Retirement Income Act of 1974 ("ERISA"). In addition, Individual Plaintiffs allege that certain defendants constitute a racketeering enterprise within the meaning of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and that their activities constitute a pattern of racketeering activity within the meaning of that statute. Finally, Individual Plaintiffs seek permission to file a claim pursuant to the Labor Management Reporting Disclosure Act (the "LMRDA") against certain defendants for breach of fiduciary duties to the union.
As in the previous opinion, fund participants are called "Individual Plaintiffs." Miranda, who is principal officer of International Brotherhood of Teamsters Local 815 and a trustee of the Union Mutual Fund Pension Plan, the Allied Welfare Fund, and the Vacation Fringe Benefit Fund, joins in the ERISA claims only.
Defendants responded to these claims with a motion to dismiss the complaint on various grounds. In a previous opinion, familiarity with which is assumed, I dismissed the RICO claims in their entirety for lack of standing. Further, I dismissed two named plaintiffs' ERISA claims and the ERISA claims against the trustees of the Union Mutual Medical Fund for lack of standing. The ERISA claims were also dismissed for lack of standing to the extent that plaintiffs seek monetary relief on their own behalf. Finally, I concluded that the ERISA claims are time-barred except insofar as they arise from the renewal of service contracts within six years of the complaint. At the same time, I granted plaintiffs' application for leave to file a claim under LMRDA § 501 and denied defendants' motion to strike plaintiffs' jury demand. See Bona v.Barasch, No. 01 Civ. 2289, 2003 WL 1395932 (S.D.N.Y. Mar. 20, 2003). After the motion to dismiss was decided, I permitted plaintiffs to amend their complaint to include ERISA claims against Financial Administrators, Inc. ("Financial") and Churchill Administrators, Inc. ("Churchill"). (See Order of Apr. 15, 2003)
Notably, defendants did not move to dismiss the ERISA claims on the ground that plaintiffs failed to comply with ERISA's demand requirement. Nevertheless, the trustees of the Welfare Fund and the Vacation Fund now argue, in response to plaintiffs' cross motion for partial summary judgment, that the motion should be denied because the ERISA claims are dismissible for failure to serve a demand. I will not address that argument here, both because the motion for partial summary judgment is denied on other grounds and because defendants have not moved to dismiss or for summary judgment on the ERISA claims for failure to serve a demand.
At an April 15, 2003 conference, plaintiffs represented to the court that they had omitted those defendants from their Second Amended Complaint by mistake.
Before the omnibus motion to dismiss was even fully submitted, plaintiffs filed this motion for partial summary judgment on the ERISA claims. They asked court to declare that the trustees of the Union Mutual Medical Fund, the Allied Welfare Fund, the Vacation Fund, and the Union Mutual Fund Pension Plan ("Benefit Fund Trustees") have breached their fiduciary obligations under ERISA; to enjoin enforcement of the service agreements in place between the Benefit Funds and Barasch-controlled entities including Churchill, Financial, and Barton, Babcock Blair; to remove the trustees from any position of fiduciary responsibility for any ERISA funds; and to enjoin the Barasch Family as well as the entities they control from serving as service providers to any ERISA plan. Plaintiffs request also that the court order an inquest into the damages assessable against the Benefit Fund Trustees and order prompt discovery on the issue of the ERISA fiduciary status of the other defendants. In short, plaintiffs ask the court to decide, based solely on the agreements between the trustees and the service providers and without the benefit of further factual development, that defendants violated ERISA §§ 404(a) and 406(a).
For the purposes of this motion, the "Barasch Family" consists of George Barasch, his children Stephen Barasch and Linda Barasch Glazer, and his son-in-law Richard Glazer.
Plaintiffs allege that the Barasch Family, along with Financial and Churchill, are not just parties-in-interest to the funds but fiduciaries of the funds. In the previous opinion, I found that the ERISA claims against the Barasch Family could not be dismissed under Fed.R.Civ.P. 12(b)(6), despite the Family's contention that they are not fiduciaries under ERISA. See Bona, 2003 WL 1395932, at *19-22.
Plaintiffs have not moved for summary judgment on their § 405(a) claim or their § 406(b) claim.
Because the claims against the trustees of the Union Mutual Medical Fund have been dismissed, and plaintiffs have not stated an ERISA claim against Barton, Babcock Blair, the motion for summary judgment will be construed to apply only to the trustees of the three remaining funds, the Barasch Family, Churchill, and Financial. Moreover, because plaintiffs Bona and Thomas have been dismissed from this action, the motion will be construed to be brought on behalf of the other individual plaintiffs and Miranda only. The substance of the motion remains unchanged. For the reasons set forth below, the motion is denied.
I.
Because plaintiffs move for partial summary judgment before the parties have conducted discovery, the factual record is sparse. It is undisputed that administrative service agreements (collectively "the agreements") existed between the Vacation Fringe Benefit Fund ("Vacation Fund") and Churchill, the Allied Welfare Fund ("Welfare Fund") and Churchill, and the Union Mutual Fund Pension Plan and Financial. The content of these agreements is also undisputed. To the extent that specific provisions of the agreements are relevant, they are described below.
Plaintiffs' allegations are laid out in detail in the previous opinion. See Bona, 2003 WL 1395932, at *1-8.
These agreements will be called the Vacation Agreement, the Welfare Agreement, and the Pension Agreement respectively. The agreement between Churchill and the trustees of the Union Mutual Medical Fund is no longer at issue because the Union Mutual Medical Fund is no longer a defendant in this action.
Aside from the content of the agreements, little else has been established. Plaintiffs' Rule 56.1 Statement, which is supposed to be a "short and concise statement of the material facts as to which the moving party contends there is no genuine issue to be tried," S.D.N.Y. E.D.N.Y. R. 56.1(a), merely restates the legal conclusions of Marc Gertner, a purported expert on ERISA. In his Declaration, Gertner opines that the agreements, on their face, violate ERISA because, inter alia, the agreements are unduly long in duration, and the agreements give excessive discretion to service providers. (See Gertner Decl.)
The Second Circuit, like other circuits, has held that expert testimony on the law is unnecessary and should be excluded. United States v.Duncan, 42 F.3d 97, 101 (2d Cir. 1994); Marx Co., Inc. v. Diners' Club Inc., 550 F.2d 505, 509-10 (2d Cir. 1977). The Gertner Declaration is essentially a brief without citations. As Gertner himself admits, he has no special knowledge of the facts and circumstances surrounding the agreements; instead, he simply offers a legal opinion as to whether individual provisions in the agreements constitute per se violations of ERISA. (See Parker Aff. Ex. A, Gertner Dep. at 99-102, 117) Because it is not admissible evidence, Gertner's expert testimony, along with Frederic Singerman's expert testimony — which is essentially an opposition brief without citations — will not be considered as evidence.
II.
Once the dueling expert opinions are put aside, the issues presented are straightforward. Plaintiffs claim that they are entitled to summary judgment because certain provisions in the agreements constitute per se violations of ERISA. According to plaintiffs, the agreements are facially unlawful in two ways. First, plaintiffs claim that the duration of the agreements is too long and that the agreements do not contain an express provision allowing the trustees to terminate the agreements on short notice. Second, plaintiffs claim that the agreements delegate the trustees' non-delegable fiduciary responsibilities to Churchill and Financial. Defendants retort that the relevant provisions are not per se violations of the statute, and that, in any event, plaintiffs are not entitled to the onerous relief they seek.
Despite language in plaintiffs' initial memorandum suggesting that the fee schemes contained in the agreements are facially invalid to the extent that they prescribe minimum fees, plaintiffs do not move for partial summary judgment on their claim that the compensation provisions of the agreements are unreasonable. (See Pl.'s Reply Mem. of L. at 18 (conceding that "the reasonability of the fees . . . may rest upon an examination of the facts and circumstances facing these Funds" and stating that a challenge to the fees was not part of the motion for partial summary judgment)).
Partial summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); see also Fed.R.Civ.P. 56(d) (allowing parties to move for an order specifying the facts that appear without controversy even when that order would not fully adjudicate the case). The movant for partial 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). Once this burden has been met, the burden shifts to the non-movant who "must set forth facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). Although a plaintiff may move for summary judgment "at any time after the expiration of 20 days from the commencement of the action," Fed.R.Civ.P. 56(a), summary judgment is granted before discovery "[o]nly in the rarest of cases." Hellstrom v. U.S. Dep't of Veterans Affairs, 201 F.3d 94, 97 (2d Cir. 2000).
A. Duration and Renewability
Plaintiffs argue first that the duration of the agreements, along with the absence of a term in the agreements allowing the trustees to terminate on short notice, constitute per se violations of ERISA § 406(a). At the time this lawsuit commenced, paragraph 6 of the Vacation Agreement provided:
This Agreement shall go into effect as of the 1st day of January, 1981, and shall continue for a period of Ten (10) years, terminating on the 31st day of December, 1990, subject, however, to an absolute option on the part of either party to renew this Agreement for an additional period of Ten (10) Years, commencing on the 1st day of January, 1991, and terminating on the 31st day of December, 2000; provided, however, that such option will be automatically renewed and extended and go into full force and effect unless either party gives notice to the other at least (6) months prior to the expiration date of each term of the Agreement, as set forth herein.
(Kennedy Decl. Ex. A, at 6) Paragraph 5 of the Welfare Agreement provided:
This Agreement shall go into effect as of the let day of January, 1999 and shall continue for a period of Six (6) years, terminating the 31st day of December, 2004, subject, however, to the absolute option of either Churchill or the Trustees to renew this Agreement for Two (2) additional periods of Five (5) Years, commencing on the 1st day of January, 2005 and terminating the 31st day of December, 2009, and commencing the 1st day of January, 2010 and terminating the 31st day of December, 2014. Either party may notify the other, in writing, by Certified Mail at least Six (6) months prior to the expiration date of the initial term and Five (5) year renewal period of its intention to exercise the option and renew this Agreement. If no notice is given, this Agreement shall automatically renew itself. This agreement may be terminated at the option of the Trustees, upon the filing of a Petition in Bankruptcy by or against Churchill, except if such Petition is vacated within ninety (90) days of the date of filing.
(Kennedy Decl. Ex. C, at 4-5) Finally, Paragraph VI of the Pension Agreement provided:
This agreement shall go into effect as of the 1st day of July 1991, and shall continue for a period of ten (10) years, terminating on the 1st day of July 2001, subject however to an option on the part of either party to renew this agreement for an additional period of ten (10) years commencing on the 1st day of July 2011. This agreement shall be automatically renewed, extended and continue in full force and effect unless either party notifies the other by registered mail at least six (6) months prior to the expiration date of intention to terminate this agreement.
(Kennedy Decl. Ex. D, at 6)
On March 6, 2002, the trustees of the Welfare Fund entered into an Amended and Restated Agreement with Churchill (the "Amended Welfare Agreement"). Paragraph 5 of the Amended Welfare Agreement states: "This Agreement shall go into effect as of the 1st day of March, 2002 and shall continue for a period of Three (3) Years, terminating on the 28th of February, 2005. Either party shall have the right to terminate this Agreement upon Six (6) months notice." (Herskowitz Aff. Ex. A, at 4) On March 6, 2002, the trustees of the Vacation Fund likewise entered into an Amended and Restated Agreement with Churchill (the "Amended Vacation Agreement"). Paragraph 5 of the Amended Vacation Agreement states: "This Agreement shall go into effect as of the 1st day of March, 2002 and shall continue for a period of Three (3) Years, terminating on the 28th of February, 2005. Either party shall have the right to terminate this Agreement upon Six (6) months notice." (Herskowitz Aff. Ex. B, at 4) Finally, on June 5, 2002, the trustees of the Union Mutual Fund Pension Plan entered into an Amended and Restated Agreement with Financial (the "Amended Pension Agreement"). Paragraph VI of the Amended Pension Agreement provides: "This agreement shall remain in effect through June 4, 2005. Notwithstanding the foregoing, this agreement may be terminated on sixty (60) days advance written notice by the Trustees in the event the agreement, as determined by the Trustees, becomes disadvantageous or as a result of a material change in the financial impact of the agreement to the Trust Fund. . . ." (Glazer Certification Ex. A, at 3)
Plaintiffs assert that the duration of the agreements, along with the absence of a provision in the agreements allowing the trustees to terminate the agreements on short notice and without penalty, constitute per se violations of ERISA § 406(a). That section provides, in relevant part, that: "Except as provided in section 1108 of this title: (1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect . . . (C) furnishing of goods, services, or facilities between a plan and a party in interest." 29 U.S.C. § 1106 (a) (2000). It is undisputed that Churchill and Financial are "parties in interest."
Section 408(b)(2) creates an exception to section 406(a) for "[c]ontracting or making reasonable arrangements with a party in interest for . . . services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor." 29 U.S.C. § 1108 (b)(2) (2000). According to plaintiffs, the agreements at issue do not fall within the exception created by § 408(b)(2) because they are too long in duration and they do not permit termination without penalty on short notice.
The agreements cannot be declared invalid based on their duration alone. ERISA and its regulations do not prescribe a maximum duration for service provider contracts. Rather, the duration of an agreement must be reasonable based on the facts and circumstances of a particular case.See 29 C.F.R. § 2550.408b-2 (c). To determine whether the terms of the agreements at issue are unreasonably long, various factors must be considered. They include: the working relationship between the parties to the agreement; the quality of the services provided; the scope of the services provided; the cost of such services relative to the market; and the ability of the trustees to find other service providers who could perform similar services. Reliance on counsel is also a factor in determining whether trustees have breached their duty of prudence. See, e.g., LNC Inv., Inc. v. Charter Nat'l Life Ins. Co., No. 92 Civ. 7584, 1997 U.S. Dist. LEXIS 12858, at *86-87 (S.D.N.Y. Aug. 27, 1997). Plaintiffs have addressed none of these factors. The trustees, on the other hand, have submitted affidavits explaining why, under the circumstances, the original agreements between the trustees and the service providers were not too long. (See Herskowitz Aff. ¶¶ 11-13; Levine Aff. ¶¶ 15-16; Fishbein Aff. ¶¶ 5-6; Barasch Aff. ¶ 16; Gelfand Aff. ¶ 16)
ERISA itself also does not dictate that an agreement with a service provider must be terminable on short notice. However, 29 C.F.R. § 2550.408b-2 (c) provides, in relevant part, that: "No contract or arrangement is reasonable within the meaning of [ 29 U.S.C. § 1108 (b)(2)] . . . if it does not permit termination by the plan without penalty to the plan on reasonably short notice under the circumstances to prevent the plan from becoming locked into an arrangement that has become disadvantageous." 29 C.F.R. § 2550.408b-2 (c). Plaintiffs contend that, pursuant to this regulation, the agreements violate ERISA, under any circumstances and regardless of the parties' understanding of the contracts, because they do not expressly grant the trustees a right to terminate on short notice without penalty. I disagree.
First, to the extent that plaintiffs ask the court to enjoin the enforcement of existing agreements, plaintiffs' motion is now moot. As described above, each of the agreements at issue has been amended to include a provision expressly permitting the trustees to terminate the agreement on short notice and without penalty. (See Herskowitz Aff. Ex. A, at 4; Herskowitz Aff. Ex. B at 4; Glazer Certification Ex. A, at 3). Any facial challenge to the agreements in their current form is untenable. If plaintiffs maintain that defendants are in continued breach of ERISA § 406(a), they will have to prove that the new agreements cannot be terminated quickly enough under the circumstances.
Plaintiffs do not directly dispute that the termination issue is moot; instead, plaintiffs assert that the process by which the Amended Welfare Agreement and Amended Vacation Agreement were adopted was flawed and that the amended agreements contain fee increases that are themselves violative of ERISA. These new allegations, to which defendants have not yet had an opportunity to respond, have no bearing on the issue of termination rights.
To the extent plaintiffs seek other relief, partial summary judgment is also inappropriate because plaintiffs have not established that the trustees could not terminate the original agreements on short notice and without penalty if they were obligated to do so. Absent evidence of an intent to violate the law, the parties to a contract are presumed to have accepted all obligations imposed on their relationship by state or federal law. Relevant statutes and regulations are incorporated into each contract as implied terms. See Norfolk W.R. Co. v. Am. Train Dispatchers' Ass'n, 499 U.S. 117, 130 (1991) ("`Laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as fully as if they had been expressly referred to or incorporated in its terms. This principle embraces alike those laws which affect its construction and those which affect its enforcement or discharge.'") (quoting Farmers and Merchs. Bank of Monroe v. Fed. Reserve Bank of Richmond, 262 U.S. 649, 660 (1923));Resolution Trust Corp. v. Diamond, 45 F.3d 665, 673 (2d Cir. 1995) ("When parties enter into a contract, they are presumed to accept all the rights and obligations imposed on their relationship by state (or federal) law."); 2 Tudor City Place Assocs. v. 2 Tudor City Tenants Corp., 924 F.2d 1247, 1254 (2d. Cir. 1991) ("Laws and statutes in existence at the time a contract is executed are considered a part of the contract, as though they were expressly incorporated therein."); Skandia Am. Reins. Corp. v. Schenck, 441 F. Supp. 715, 724 (S.D.N.Y. 1977) ("Unless the contract provides otherwise, the law in force at the time it is entered into becomes a part of the contract. It is presumed that the parties had that law in contemplation when the contract was made, and the contract must be construed in that light."); see generally Margaret N. Kniffin, 5Corbin on Contracts § 24.26 (rev. ed. 1998) (describing the rule of construction and collecting numerous citations).
Neither plaintiffs nor defendants address whether New York or New Jersey contract law should apply. However, defendants cite several New York state cases and numerous federal cases applying New York law to support their reading of the agreements. In their Reply, plaintiffs citeSeiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992), a case applying New York contract law. As a general rule, where the parties briefs assume that a state's law applies to the case, "such implied consent . . . is sufficient to establish choice of law."Tehran-Berkeley Civil Envtl. Eng'rs v.Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989). In any event, both New York and New Jersey courts have recognized that existing law is incorporated into contracts. See Shedlinsky v. Budweiser Brewing Co., 57 N.E. 620, 620, 163 N.Y. 437, 439 (1900); Telemark Constr. v. Greenberg, 205 A.D.2d 438, 440, 613 N.Y.S.2d 900, 902 (1st Dep't 1994); Silverstein v. Keane, 19 N.J. 1, 13, 115 A.2d 1, 7 (1955);Class v. Am. Roller Die Corp., 683 A.2d 595, 603 (N.J.Super.Ct. Law Div. 1996), rev'd on other grounds, 705 A.2d 390 (N.J.Super.Ct. A.D. 1998).
Thus, to the extent that short-term termination provisions are mandated by ERISA § 406(a), they are properly read into the agreements between the trustees and the service providers. Nothing in the three original agreements is inconsistent with an implied term allowing the trustees to terminate the agreements on short notice if the agreements were to become disadvantageous to the funds. Moreover, plaintiffs have not established that the parties to the agreements intended to violate ERISA. Rather, defendants have submitted affidavits saying that the trustees and the service providers understood that, consistent with ERISA, the trustees could cancel the contracts on reasonably short notice and without penalty if their fiduciary obligations compelled them to do so. (See Herkowitz Aff. ¶¶ 11-12; Levine Aff. ¶ 15; Barasch Aff. ¶ 16; Gelfand Aff. ¶¶ 14-15) Miranda contests the assertions in these affidavits (see Miranda Aff. ¶ 27), but, at the summary judgment stage, the facts must be interpreted in the light most favorable to the nonmovant.
The provision in the Welfare Agreement allowing the trustees to terminate in the event of a bankruptcy filing is in no way inconsistent with an implied term allowing termination in situations in which the trustees' fiduciary obligation to terminate is implicated.
Contrary to plaintiffs' view, this evidence of intent may be considered, notwithstanding the parol evidence rule. Under the parol evidence rule, evidence of prior understandings and negotiations will not be admitted for the purpose of varying or contradicting the terms of a written contract. However, parol evidence is admissible to assist in interpreting a contract that is susceptible to more than one meaning.See 2 E. Allan Farnsworth, Farnsworth on Contracts § 7.12 (2d ed. 1998). Here, in light of the rule that existing laws are incorporated into contracts, evidence of the parties' intent does not contradict or vary the terms of the contract.
Plaintiffs argue that implying a term into the agreements would be inconsistent with this court's holding in Nat'l Health Plan Corp. v. Road Carriers Local 707, Welfare and Pension Fund, No. 90 Civ. 4415, 1991 Dist. LEXIS 4816 (S.D.N.Y. Apr. 15, 1991). National Health involved a breach of contract action brought by a service provider to enforce an agreement requiring a fund to give 90-days notice before cancelling the agreement. The pension fund defendant removed the case to federal court and then moved for summary judgment on the ground that the 30-day notice of termination it actually provided to the service provider constituted "reasonably short notice under the circumstances" as defined by 29 C.F.R. § 2550.408b-2 (c). I concluded that this court lacked subject-matter jurisdiction over the action because 29 C.F.R. § 2550.408b-2 (c), which defines the duties of fiduciaries, does not define the rights of non-fiduciary parties-in-interest. Id. at *11-16. In reaching the conclusion that there was no federal question, I said nothing about how the agreement — which, unlike the original agreements at issue here, contained an express term restricting the fund's right to cancel within 90 days — should be construed under state contract law. I also had no occasion to determine whether the 90-day notice requirement was reasonable under the circumstances.
International Union of Bricklayers and Allied Craftsmen v. Gallante, 912 F. Supp. 695 (S.D.N.Y. 1996), also does not compel a different result in this case. In Gallante, the Court found that a three-and-a-half year consulting contract without a termination clause under which a former trustee would receive $1080/week plus expenses for consulting on an as-needed basis was, on its face, unreasonable. See id. at 703-04. Unlike the agreements in this case, the contract in Gallante was the product of self-dealing, as it was awarded to an outgoing trustee before that trustee resigned. See id. at 698. Moreover, the defendant in Gallante apparently did not argue that ERISA's mandatory rules should be read into the consulting contract as implied terms. Finally, the remedy granted to plaintiffs on summary judgment in Gallante, i.e., voidance of the invalid contract, is unavailable here because defendants have added termination clauses to the agreements on their own initiative. Thus, Gallante is distinguishable from this case in several ways. However, to the extent the case can be read to suggest that the absence of a termination clause is conclusive proof of an ERISA violation under all circumstances and regardless of the intentions of the parties, I respectfully disagree with Gallante.
Gilliam v. Edwards, 492 F. Supp. 1255 (D.N.J. 1980), is distinguishable as well. First, like Gallante, Gilliam involved self-dealing that violated both ERISA § 406(a), which bars unreasonable transactions with parties-in-interest, and ERISA § 406(b), which prohibits transactions between a fund and its fiduciaries. Second, the decision in Gilliam was rendered after a full bench trial. Finally, like Gallante, Gilliam does not address the question of whether there was an implied cancellation provision in the contract at issue.
If plaintiffs can prove that the agreements actually could not be terminated on reasonably short notice even when the agreements became disadvantageous to the funds, they can hold plan fiduciaries liable under § 406(a). However, based solely on the text of the agreements, there is no basis on which to depart from the well-established rule of construction that an applicable regulation is incorporated into a contract unless the parties to the contract intended to violate the regulation. Indeed, even plaintiffs' ERISA expert appears to agree that a termination clause can be read into the agreements. (See Parker Aff. Ex. A, Gertner Dep. at 158) Plaintiffs are not entitled to summary judgment based on the duration and the renewability of the agreements; thus, I need not decide whether the remedies requested by plaintiffs would be appropriate if summary judgment on the threshold issue of liability were granted.
B. Delegation
Plaintiffs argue next that, in violation of their duty of prudence under ERISA § 404(a), the trustees — the named fiduciaries of the funds under ERISA § 402(a) — have assigned non-delegable fiduciary duties to Churchill and Financial. Several provisions in the original agreements are relevant to this claim. Paragraph 8 of the Vacation Agreement provides:
ERISA § 404(a)(1)(B) requires that fiduciary duties be exercised "solely in the interest of the participants and beneficiaries" and "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104 (a)(1)(B) (2000).
Nothing herein contained shall authorize the Trustees, as Trustees, to manage, direct or control the operations of Churchill and it is agreed that all of the functions of Churchill, as described above, shall be carried out by the officers and employees of Churchill in their discretion and in their exclusive knowledge and ability.
(Kennedy Decl. Ex. A, at 7) Paragraph 7 of the Welfare Agreements is identical to Paragraph 8 of the Vacation Agreement and Paragraph IX of the Pension Agreement (with Financial substituted for Churchill) is similar to Paragraph 8 of the Vacation Agreement. (See Kennedy Decl. Ex. C, at 5; Kennedy Decl. Ex. D, at 7-8)
Paragraph 1(g) of the Vacation Agreement and Paragraph 1(i) of the Welfare Agreement require Churchill to provide "research and educational services as deemed necessary by Churchill." (Kennedy Decl. Ex. A, at 2; Kennedy Decl. Ex. C, at 2) Likewise, Paragraph 1(f) requires Financial to provide "[r]esearch and educational services as deemed necessary by Financial." (Kennedy Decl. Ex. D, at 2)
Several provisions challenged by plaintiffs are unique to the Vacation Agreement. Paragraph 1(d) of the Vacation Agreement requires Churchill to provide "[a]ll accounting and other professional services, including the preparation of periodic financial reports, filing of any documents for which an accountant's services are needed and initiation, prosecution and defense of all law suits, as necessary, obtaining of legal opinion and preparation of all agreements and other legal documents." (Kennedy Decl. Ex. A, at 2) Moreover, Paragraph 1(k) requires Churchill to provide "[i]nvestment counseling and service" to the trustees of the fund. (Kennedy Decl. Ex. A, at 3)
Paragraph 1(f) of the Welfare Agreement, by contrast, excludes "litigation and legal services as same pertains to the fiduciary responsibilities of the Trustees" from Churchill's responsibilities. (Kennedy Decl. Ex. C, at 2)
Paragraph 1(m) of the Welfare Agreement, by contrast, requires Churchill to provide "[a]dministration of the Investment Account in accordance with instructions and investment decisions of the Trustees." (Kennedy Decl. Ex. C, at 2)
Paragraph 9 of the Vacation Agreement is a severability clause. The clause provides:
In the event that any portion of this Agreement or any of the functions assigned to Churchill above are held to be ultra vires and beyond the powers of the Trustees, then and in that event only, such provision or section of this Agreement shall be deemed null and void and severable from this Agreement and the remainder, balance and residue of this Agreement shall nevertheless continue, it being the intent of the parties that this Agreement and the compensation paid to Churchill shall cover all services that Churchill may legally perform and the fact that anyone or more of the services described above shall be held to be non-assignable or non-delegable shall not alter or vary the remainder of this Agreement nor shall it be reason for a lower compensation to be paid hereunder.
(Kennedy Decl. Ex. A, at 7) Paragraph X of the Pension Agreement is similar to Paragraph 8 of the Vacation Agreement. (Kennedy Decl. Ex. D, at 8) Paragraph 8 of the Welfare Agreement is also similar, although it does not specifically state that compensation under the agreement will remain the same if sections of the agreement are voided. (Kennedy Decl. Ex. C, at 5)
Paragraph 11 of the Vacation Agreement says that nothing in the agreement "shall further limit the right of Churchill to assign" the agreement. (Kennedy Decl. Ex. A, at 9) Paragraph 11 of the Welfare Agreement, as well as Paragraph XII of the Pension Agreement, contain the same language. (Kennedy Decl. Ex. C, at 6; Kennedy Decl. Ex. D, at 9)
Finally, Paragraph 7 of the Vacation Agreement provides: "Nothing herein contained shall be deemed to bind the discretion of the Trustees in regard to the management and operation of the Trust Fund or the exercise of the duties given to such Trustees under the Trust Indenture setting up the Trust, but shall be deemed only the employment of Churchill for the sole purpose of providing ministerial and expert services in connection with the operation and administration of the Fund." (Kennedy Decl. Ex. A, at 6-7) Paragraph 6 of the Welfare Agreement contains the same language, and Paragraph VIII of the Pension Agreement contains similar language. (Kennedy Decl. Ex. C, at 5; Kennedy Decl. Ex. D, at 7)
Plaintiffs appear to argue that Paragraph 8 of the Vacation Agreement and the analogous provisions in the other agreements require the trustees to delegate fiduciary functions to service providers because these provisions say that the "functions of [Churchill/Financial], as described above, shall be carried out by the officers and employees of [Churchill/Financial] in their discretion and in their exclusive knowledge and ability." (Kennedy Decl. Ex. A, at 7; Kennedy Decl. Ex. C, at 5; Kennedy Decl. Ex. D, at 7-8). This is a tortured reading of the provision, which begins by stating that the trustees have no authority "to manage, direct or control the operations of [Churchill/Financial]." (Id.) According to defendants, Paragraph 8 and the analogous provisions in the other agreements simply reserve to service providers the right to direct and supervise their own internal operations. (See Barasch Aff. ¶ 12) Unlike plaintiffs' interpretation of the provision, that interpretation is consistent with the provisions in each agreement stating that the agreement does not bind the discretion of the trustees to manage the funds. (Kennedy Decl. Ex. A, at 6-7; Kennedy Decl. Ex. C, at 5; Kennedy Decl. Ex. D, at 7) Paragraph 8 and the analogous provisions in the other agreements are, at worst, ambiguous. They are not facially violative of ERISA.
Plaintiffs argue also that the Vacation Agreement violates ERISA by delegating to Churchill the obligation to provide "investment counseling and advice" to the trustees. ERISA allows funds to delegate ministerial responsibilities to an administrator and other professionals. See 29 U.S.C. § 1102 (b)-(c) (2000); 29 C.F.R. § 2509.74-8. However, the investment of fund assets is a non-delegable function that must be performed by the trustees in their capacity as named fiduciaries of the plan. See 29 U.S.C. § 1105 (c)(3) (2000). Whether or not a person acts as a fiduciary is determined by the functions performed by that person, not by his or her title. Blatt v. Marshall Lassman, 812 F.2d 810, 812 (2d Cir. 1987) see also 29 C.F.R. § 2509.75-8 (explaining that someone who performs "purely ministerial functions" is not a fiduciary because that person does not "render investment advice with respect to any money or other property of the plan"). Churchill and the Vacation Fund trustees assert that Churchill in fact never made decisions concerning fund investments. (See Barasch Aff. ¶¶ 11-12; Levine Aff. ¶ 17; Herkowitz Aff. ¶ 5) This sworn assertion presents an issue of material fact regarding Churchill's function as an investment advisor, and therefore plaintiffs are not entitled to summary judgment.
An exception to the rule against delegation is that the named fiduciaries of a plan may delegate to an "investment manager" the duty to manage the assets of the plan. See 29 U.S.C. § 1102 (c)(3) (2000);see also id. § 1105(d) (shielding trustees from liability for investment manager's acts). Plaintiffs claim, and Churchill does not dispute, that Churchill is not an investment manager as the term is defined in ERISA § 3 (38), 29 U.S.C. § 1002 (38).
For the same reason, Paragraph 1(d) of the Vacation Agreement, under which Churchill is obligated to provide accounting and legal services to the Vacation Fund, is not a per se violation of ERISA. Similarly, the provisions in the agreements granting the service providers discretion to decide if education services are needed are not per se violations of ERISA. Plaintiffs must prove that service providers performed nonministerial duties before they can hold the trustees liable for assigning nondelegable duties to service providers.
Finally, plaintiffs contend that both the provisions in the agreements allowing service providers to assign their duties and the severability clauses in the agreements violate ERISA § 404(a). With respect to the assignment provisions, each of the agreements says only that nothing in the agreements should be construed to "further limit" the service providers' ability to assign. (Kennedy Decl. Ex. A, at 9; Kennedy Decl. Ex. C, at 6; Kennedy Decl. Ex. D, at 9) Thus, the parties acknowledged that some of the terms in the agreement, as well as certain laws, might already limit the power to assign. The assignment provisions, on their own, do not constitute per se violations of ERISA and, in any event, the agreements have never been assigned. (See Levine Aff. ¶ 18; Barasch Aff. ¶ 14)
The severability provisions also are not facially unlawful, notwithstanding plaintiffs' bald assertion that they are "plainly one-sided and unfair." (Pl.'s Mem. at 6) On their face, those provisions simply confirm that the parties' obligations under the agreements do not disappear if any individual part of the agreements is invalidated. The severability provisions in the Vacation Agreement and the Pension Agreement state also that the service providers' compensation will not be reduced if a particular service is deemed nondelegable. Whether that term is reasonable cannot be considered in isolation, but must be considered along with the over all reasonableness of the administrative fees.
Plaintiffs are not entitled to summary judgment on the ground that the trustees unlawfully delegated their fiduciary duties. Thus, once again, I need not decide whether the remedies requested by plaintiffs would be appropriate if summary judgment on the threshold issue of liability were granted.
* * *
For the reasons stated, plaintiffs' motion for partial summary judgment is denied. Plaintiffs have not established, based on the text of the agreements alone, that defendants violated ERISA. This action will proceed in accordance with the schedule set forth in this court's April 16, 2003 order and the decisions announced in this court's March 20, 2003 opinion.
SO ORDERED: