Opinion
Civil Action No. 3:97-CV-0011-J
March 29, 2002
MEMORANDUM OPINION AND ORDER
This is a suit concerning a loan contract entered into between Billy Lewis and NationsBank to finance Lewis' son's business. Pursuant to the contract, Billy Lewis withdrew funds from his Billy Lewis Sales Company Defined Benefit Plan and from his General Wire and Cable Company 401(k) and deposited the funds in NationsBank as collateral for loans to his son's business. Plaintiff claims that the Defendants represented that the funds would be placed in tax-deferred CDs.
Plaintiff alleges that NationsBank placed the funds in regular CDs and not in tax-deferred IRA CDs. As a result, Plaintiff alleges he suffered significant adverse tax consequences, penalties, and interest. Defendants deny that they agreed to put the funds in tax-deferred accounts.
A jury found that the Defendants had fraudulently induced Plaintiff to deposit the funds in NationsBank and that Defendants had agreed to place those funds in tax-deferred accounts. The jury found damages in the amount of $296,461.31 related to the transfer of funds withdrawn from the Billy Lewis Sales Company Defined Benefit Plan, and damages in the amount of $83,640.45 related to the transfer of funds from the General Wire and Cable Company 401(k).
Background
The Court must first determine if any cause of action is completely preempted by ERISA because the funds in question were withdrawn from ERISA accounts. The Court will address the two accounts separately.
1). The Billy Lewis Sales Company Defined Benefit Plan
The Billy Lewis Sales Company Defined Benefit Plan was an employee benefit plan covered by the provisions of the Employee Income Retirement Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et. seq. Billy Lewis had created the Plan and was the trustee of the Plan. Smith Barney, Inc. was the custodian of the funds in the Billy Lewis Sales Company Defined Benefit Plan.
During his loan negotiations with Defendant, Plaintiff took six premature withdrawals from the Defined Benefit Plan. Plaintiff knew that the funds could only be withdrawn as premature withdrawals. Plaintiff timely deposited the funds in the Defendant Bank in less than sixty days after withdrawal. Plaintiff contends that Defendant induced him to deposit the funds in Defendant Bank by representing that it intended to place the funds in tax-deferred accounts and that Defendant agreed to place the funds in tax-deferred accounts.
Defendant Bank contends that Plaintiffs cause of action, if any, is completely preempted by ERISA.
When Plaintiff withdrew money from his Defined Benefit Plan, the funds were no longer in an ERISA plan and were not ERISA funds. Even if the funds had been placed in an IRA, it would not have been an ERISA plan. See Boggs v. Boggs, 89 F.3d 1169, 1173 n. 11 (5th Cir. 1996); see also Johns v. Rozet, 826 F. Supp. 565, 567 (D.D.C. 1993). The fact that funds were withdrawn from an ERISA plan does not make a cause of action concerning the disposition of those funds related to an ERISA Plan.
2). The General Wire and Cable Company 401(k) Plan
The General Wire and Cable Company 401(k) was an employee benefit plan created by Lewis' former employer and covered by provisions of the Employee Income Retirement Act of 1974 (ERISA), 29 U.S.C. § 1001 et. seq., and managed by NationsBank of Georgia, a separate entity from Defendant.
Plaintiff alleges, and offered evidence, that he took the necessary steps to rollover his 401(k) to CDs in a tax-deferred IRA at Defendant NationsBank of Texas. NationsBank of Georgia sent the funds in question by a check payable to Defendant NationsBank of Texas fbo Billy Lewis. Lewis delivered the check to the Defendant Bank. The Bank deposited the funds in non-tax deferred CDs.
Defendant Bank claims that any cause of action concerning the placement of these funds in non-tax deferred CDs is completely preempted by ERISA.
The "rollover" of an ERISA covered plan into an IRA at a bank does not create a new ERISA plan. Even if Defendant had placed the funds in an IRA, it would not have been an ERISA plan, because such an IRA is not covered by ERISA. See Boggs at 1173. Because the rollover of the funds in question would not have created a new ERISA plan, and because a cause of action related to the failure to place the funds in an IRA is not a cause of action related to an ERISA plan, it is not preempted by ERISA. See Mackey v. Lanier Collection Agency Serv., Inc., 486 U.S. 825, 833, 108 S.Ct. 2182, 2187, 100 L.Ed.2d 836 (1988).
Supplemental Jurisdiction
This case was originally filed in state court in Dallam County, Texas, on August 1, 1996. On December 4, 1996, Plaintiff filed his Third Amended Original Petition, naming, among others, Smith Barney, Inc., as a defendant. On January 21, 1997, Defendants removed the case to this Court. Removal was proper because Smith Barney was a named fiduciary of the Billy Lewis Sales Company Defined Benefit Plan, and Plaintiff alleged a cause of action against Smith Barney for breach of fiduciary duty under ERISA, as well as ERISA allegations against all Defendants.
Eventually, all named fiduciaries and all others charged with breach of fiduciary duties, except NationsBank and the Defendant NationsBank employees, were dismissed from the case. However, it was not until March 5, 2002, just one week before trial, that Smith Barney was finally dismissed from the case. At that point, Plaintiff was still contending that it had an ERISA cause of action against Defendants but plead in the alternative a number of causes of action under state law. It was not apparent before actual trial whether the action, in fact, related to an ERISA plan.
The Court therefore impaneled a jury and proceeded to trial. At the end of Plaintiffs case, Plaintiff abandoned any ERISA allegations, and Defendant closed without offering evidence.
This Court has chosen to exercise supplemental jurisdiction pursuant to 28 U.S.C. § 1367. As a general rule, the Court declines to exercise jurisdiction over pendent state law claims when all federal claims are dismissed or otherwise eliminated from the case prior to trial. This case presents an exception to the rule. The values of judicial economy, convenience, fairness, and comity all militate for the exercise of jurisdiction over this long pending case. To remand this ease to state court after parties have spent much time and effort in preparing for trial in federal court and where the last ERISA defendant was just dismissed a week before trial would not promote judicial economy. Further, the questions of state law are not so novel as to require dismissal of the state court causes of action.
The Court will next discuss the state court causes of action.
State Law Fraud In The Inducement
Beginning in 1992, Lewis' son started the business known as Eau De Vie, Inc. under the name of Spirits Liquors. It was organized as a wholesale and retail liquor business. Lewis wished to help his son and his business and undertook to find financing for the business. Beginning in December 1992, there were discussions between Lewis and Mark Thomason, a representative of the Bank. The bank declined to take inventory or land owned by Lewis as collateral. Lewis and Thomason reached a loan contract whereby the Bank would make required loans. As a part of the agreement, Lewis would withdraw funds from the Billy Lewis Sales Company Defined Benefit Plan and place them in the Bank as collateral for the loans. There is evidence that Lewis was not willing to make the loan contract unless his funds would be maintained in tax-deferred CDs.
It was agreed between the Bank, Eau De Vie, Inc. and Lewis that interest on the loans would be two percent more than the rate of return on the Certificates of Deposit. The Bank placed the deposits in non-IRA CDs which were not tax-deferred. As a result, Lewis suffered damages in taxes, penalty, and interest. There is evidence from which the jury could reasonably conclude 1) that the Bank knew that Lewis would not enter the loan contract, withdraw the funds from his tax-deferred plan, and place them in CDs at NationsBank unless the funds placed in the Bank would be tax deferred; 2) that Thomason knew at the time the agreement was made that IRA CDs could not be used as collateral for a loan without losing their tax-deferred status; and 3) that neither the Bank nor its representatives ever intended to place the CDs in a tax-deferred LIRA.
Later, but before he knew the earlier CDs were not tax deferred, Lewis attempted to rollover the General Wire and Cable Company 401(k) Plan. The Bank also placed those funds in non-IRA CDs. Lewis incurred tax, penalty, and interest damages.
The jury findings that the Defendant fraudulently induced Lewis to place funds from the Billy Lewis Sales Company Defined Benefit Plan and the General Wire and Cable 401(k) Plan in non-tax deferred CDs in NationsBank are supported by evidence.
Plaintiff, through his accountants, was able to negotiate with the IRS a reduction in the taxes, penalty, and interest resulting in a substantial mitigation of damages. The jury returned a verdict for the reduced amount plus the accountant's fees in obtaining a reduction.
The Court will enter judgment on the verdict for $380,101.75, plus pre-judgment interest of $209,732.86, post-judgment interest at the rate of 2.66%, computed daily and compounded annually from the date of this Judgment until paid in full as provided by 28 U.S.C. § 1961, and costs.
See Texas Finance Code , § 304.003.
IT IS SO ORDERED.