Opinion
Civil Action No. 01-1493.
April 22, 2002
MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION
I. RECOMMENDATION
For the reasons stated below, it is recommended that the District Court grant the Defendant's Motion to Dismiss (Doc. 6).
II. REPORT
BACKGROUND
The Plaintiff Mellon Bank, N.A. ("the Plaintiff," "the Successor Trustee," or "Mellon"), filed this lawsuit on August 7, 2001 in its capacity as Successor Trustee to the Weiss Packing Co., Inc., Profit Sharing Plan ("the Plan"). See generally Compl. (Doc. 1). Mellon was appointed as Successor Trustee through the Order of District Judge William L. Standish ("Judge Standish") dated June 13, 1997 in the case of Secretary of Labor, United States Dep't of Labor v. Selwyn W. Weiss, et al ., Civ. Action No. 97-939 (W.D.Pa.). See generally Compl. at ¶ 4; see also generally Order of Judge Standish in Civ. Action No. 97-939, dated June 13, 1997 (attached as Ex. A to Compl.).
Technically, Mellon "is the Successor Trustee of a trust [that] form[s] part of" the Plan. See generally id. at ¶ 2 (emphasis added). Because the trust forms part of the Plan, and for the sake of simplicity, the court hereinafter will refer to the trust and the Plan interchangeably as "the Plan."
Mellon was appointed as Successor Trustee based on Judge Standish's conclusion that the Secretary of Labor had "shown a probability of success on the merits" of his claims that the former trustees, Selwyn and Wilfred Weiss, had violated ERISA by, among other things, purchasing on behalf of the Plan an apartment building from Selwyn Weiss ("the Property") and taking out a mortgage on the Property that the Plan was obligated to repay. See generally Judge Standish's Jun. 13, 1997 Order in Civ. Action No. 97-939 at 1-3.
This litigation relates to the transaction just referenced, namely the Plan's having purchased the Property from former-trustee Selwyn Weiss and its taking out a mortgage on the Property with Union National Bank, predecessor-in-interest to National CityBank ("the Bank"). See generally Compl. at ¶ 11. The sole named Defendant in this case is Melvin H. Levy, Esq. ("the Defendant," "Attorney Levy," or "Mr. Levy"), the attorney who "purported to represent . . . Plan in connection with" the Transaction. See id. at ¶ 21.
At times hereinafter, the court will refer to the Plan's purchase of the Property and its taking out a mortgage collectively as "the Transaction."
The Plaintiff's Complaint indicates, and the public record appears to confirm, that the claims asserted in the Secretary of Labor's previous lawsuit have been settled and/or compromised. See generally Compl. at ¶¶ 30, 33 (stating that claims between the Bank and the Plan, as well as claims against Wilfred Weiss, "the sole remaining living original trustee," had been settled; the other original trustees, Selwyn and Seymour Weiss, "hav[e] died"); see also generally Doc. 38 in Civ. Action No. 97-939 (Judge Standish's entry of "Consent Judgment" on Oct. 24, 2000; the Court "retain[ed] jurisdiction . . . [only] for purposes of enforcing compliance with the terms of [the] Consent Judgment," and it "direct[ed] the entry of th[e] Consent Judgment as a final order").
The Successor Trustee asserts claims against Attorney Levy under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. ("ERISA"), and such claims form the basis of the court's subject matter jurisdiction. See generally Compl. at ¶¶ 6-7. The Plaintiff identifies two purported bases for liability under ERISA, namely Attorney Levy's violation(s) of ERISA as a "Party-In-Interest" (Count I) and his breach of duties owed as an ERISA fiduciary (Count II). See generally Compl. at Counts I-II. The Successor Trustee also asserts, pursuant to the court's supplemental jurisdiction, state law claims for "Professional Negligence" (Count III) and Breach of Contract (Count IV). See id. at Counts III-IV.
The factual averments giving rise to the Plaintiff's claims are as follows:
• [In] . . . May . . . 1989, Selwyn Weiss sold and transferred the Property to the Plan for the payment of $450,000. As an integral part of the sale, the Plan contemporaneously borrowed from [the Bank] the sum of $450,000 giving, in addition to its general credit, a mortgage on [the Property], by and through its then trustees Selwyn, Wilfred and Seymour Weiss, and executing a mortgage note . . . in favor of the Bank.
• Prior to loaning the money to the Plan . . ., the Bank demanded that the Plan provide to it an opinion of counsel that the sale . . . from Selwyn Weiss, . . . as owner of the [P]roperty, to the . . . Plan[,] for which Selwyn Weiss served as co-trustee, was not prohibited by applicable state and federal law. . . .
• It was known or should have been known to the then trustees, as well as [Attorney] Levy, that such opinion was essential in order to complete the [Transaction].
• [Attorney] Levy entered into a contract with the Plan to serve as [its] counsel and, in particular, to opine as to the legal authority of the Plan in connection with the purchase and transfer of [the] Property. . . .
• At the time of the [Transaction] . . ., [Attorney] Levy had been and continued to be counsel for Weiss Packing Company, Inc[,] as well as Selwyn Weiss personally, but [he] purported to represent only the Plan in connection with the sale and transfer.
• [A]t the express request of Selwyn Weiss, . . . [Attorney] Levy, acting in the capacity as counsel to the [Plan], issued an opinion letter addressed to the Bank [stating, among other things and subject to certain conditions, that the proposed transaction would not] . . . be in conflict with . . . any federal, state or local law . . . applicable to or affecting the [Plan].
• ERISA . . . prohibits a plan fiduciary [like Selwyn Weiss] from causing the plan to directly or indirectly sell or exchange property between the plan and a party-in-interest [, such as Selwyn Weiss]. . . . ERISA . . . [also] prohibits a trustee . . . from self-dealing. . . . [Thus, the Transaction was in] violation of . . . ERISA. . . .
• The sale and transfer between Selwyn Weiss and the Plan for which he acted as fiduciary . . . constituted a Prohibited Transaction under [relevant provisions of] . . . the Internal Revenue Code. . . . [In addition, the Transaction resulted in the Plan's receiving] . . . rents . . . from the Property [that] were subject to federal income tax, while other investment income is not subject to federal or state income taxation. . . .
• [Attorney] Levy is both an attorney at law and a Certified Public Accountant and has concentrated his practice for many years in the area of federal and state income tax law. . . . Levy's opinion failed to address the federal income tax consequences of the transaction which, due to his unique and special knowledge of the federal income tax laws, he knew or should have known would have resulted. As a result of this failure to advise, the [Plan] was unaware of its duties to report taxable income . . . and the reduction in the rate of return on the investment in the Property.
• The [T]ransaction . . . occurred and was concluded only as a result of the opinion of [Mr.] Levy. The issuance of a favorable opinion was known or should have been known by [Attorney] Levy to be a precondition to the [T]ransaction and that, but for his opinion, no sale or transfer would occur.
• The content and issuance of the opinion was solely in the exclusive discretion and control of [Attorney] Levy. [He] knew or should have known that the then trustees would not independently review the opinion but rather [would] furnish [it] as issued to the Bank in order to obtain the loan.
• On information and belief, absent the issuance of [Attorney] Levy's opinion, or had Mr. Levy acting as counsel to the Plan advised the Bank of the violation[s] of . . . ERISA . . ., the Bank would not have issued the mortgage . . .[,] the sale would have failed[,] and the . . . [T]ransaction would not have come to fruition.
• The action of [Attorney] Levy was a direct and known benefit to Selwyn Weiss, a party-in-interest, and [Mr.] Levy's client, and not for the benefit of the participants and beneficiaries of the Plan.See Compl. at ¶¶ 11-16, 19-22, 24, 26-28, 36-39, 42 (citations, internal quotations and emphasis omitted).
Based on these and related allegations, the Plaintiff seeks "equitable remedies" under ERISA "to redress violations and obtain restitution and other redress" from Attorney Levy as a "fiduciary and party-in-interest who participated directly and indirectly in prohibited transactions . . . and who breached fiduciary duties" owed under the statute. See id. at ¶ 6; see also id. at ¶ 23 (alleging that Mr. Levy's status as "counsel for the [P]lan" made him a "party-in-interest" under ERISA) and at ¶¶ 34, 40 (alleging that Mr. Levy was a "fiduciary" under ERISA "to the extent he exercise[d] . . . authority or control" over the "management or disposition of the Plan's assets").
In moving for dismissal, the Defendant asserts that the Plaintiff's ERISA claims fail because: (a) Attorney Levy was not a fiduciary as defined under the statute; and (b) the Defendant cannot be held liable under ERISA as a non-fiduciary based on allegations that he "knowingly participated in [former trustee Selwyn Weiss'] breach of [his] fiduciary duty. . . ." See generally Def.'s Br. in Supp. of Mot. to Dismiss (Doc. 7, hereinafter cited as "Def.'s Br.") at 3-5, 6-7.
This magistrate judge agrees that the Plaintiff's factual averments cannot support its theories of liability under ERISA. Accordingly, it is recommended that the District Court dismiss the Plaintiff's ERISA claims and decline to exercise supplemental jurisdiction over its state law claims. ANALYSIS I. The Defendant Was Not a "Fiduciary" As Defined Under ERISA.
In his Motion to Dismiss, the Defendant also argues that: (a) the Plaintiff's ERISA claims are barred by the applicable statute of limitations; (b) its legal malpractice claim is barred under Pennsylvania's two-year statute of limitations; and (c) the Plaintiff has failed to state a viable claim for breach of contract. See generally Def.'s Br. at 7-8, 8-10, 10-13. Because the Plaintiff's ERISA claims fail for the reasons addressed below, the District Court need not reach the Defendant's statute of limitations argument regarding ERISA. Similarly, this magistrate judge's recommendation that the District Court decline to exercise supplemental jurisdiction renders moot the Defendant's arguments for dismissal of the state law claims. See discussion infra regarding supplemental jurisdiction.
Under ERISA,
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.See 29 U.S.C. § 1002(21)(A).
The Department of Labor has promulgated regulations addressing whether professional service providers to an ERISA plan may be deemed fiduciaries. See generally 29 C.F.R. § 2509.75-5. These regulations, which essentially track the statutory definition of the term "fiduciary," state:
[A]n attorney, accountant, actuary or consultant who renders legal, accounting, actuarial or consulting services to an employee benefit plan (other than an investment adviser to the plan) [will not be] a fiduciary to the plan solely by virtue of the rendering of such services, [unless] . . . such consultant . . . exercises authority or control respecting management or disposition of the plan's assets. . . .See generally id., § 2509.75-5(D-1). Thus, absent the referenced scenarios, "attorneys, accountants, actuaries and consultants performing their usual professional functions will . . . not be considered fiduciaries." See id. (emphasis added).
The regulations also indicate that a professional service provider may be a fiduciary to the extent he or she "exercises discretionary authority or discretionary control respecting themanagement of the plan," "renders investment advice for a fee, direct or indirect, with respect to the assets of the plan, or has any authority or responsibility to do so," or "has any discretionary authority or discretionary responsibility in theadministration of the plan." See id. (emphasis added). The court has focused on the standard referenced in the text above ( i.e., the "exercise[of] authority or control respectingmanagement or disposition of the plan's assets") only because it seems most directly applicable to the Plaintiff's allegations. See discussion supra (emphasis added). This magistrate judge clarifies, though, that the Plaintiff's fiduciary claims are subject to dismissal for the reasons stated below regardless of which of the aforementioned standards is applied.
Under these standards, courts examine the "functions [the attorney] allegedly performed" to determine whether they "transcended the normal legal services rendered by plan counsel." See Custer v. Sweeney, 89 F.3d 1156, 1162-63 (4th Cir. 1996); see also, e.g., Painters of Phila. Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146, 1150 (3d Cir. 1989) ("accountants, attorneys, and other outside consultants [are] treated as plan fiduciaries only if they go beyond their normal roles and assume management or administrative responsibilities") (emphasis added); Useden v. Acker, 947 F.2d 1563, 1577 (11th Cir. 1991) (court must undertake "a functional examination of the law[yer's] conduct in connection with the [p]lan" to determine whether he "control[led] the plan in a manner other than by usual professional functions") (citation and internal quotations omitted), cert. denied, 508 U.S. 959 (1993).
The need to exclude from potential fiduciary liability an attorney's performance of his or her usual professional functions is aptly explained in Useden:
It cannot plausibly be considered consonant with the clear purpose of ERISA to deprive ERISA plans of access to ordinary legal advice. . . . Equally chilling would be a rule equating a law firm's advice in favor of a transaction with the named fiduciaries' actual decision to enter the transaction. . . . In short, ERISA does not contemplate an allocation of liability that will deter consultants such as attorneys from assisting plans.See id., 947 F.2d at 1578 (emphasis added); see also CSA 401(K) Plan v. Pension Prof'ls, Inc., 195 F.3d 1135, 1139 (9th Cir. 1999) ("The policy behind th[e professional services] exception to fiduciary status is to encourage professionals to provide their necessary services without fear of incurring fiduciary liability or feeling the need to charge a higher price to compensate for such risk.").
Consistent with the aforementioned standards and the policies underlying them, courts have held that mere "negligence in the provision of professional services does not create ERISA fiduciary status." See Custer, 89 F.3d at 1162 (citations omitted). Similarly, in referring to the terms "discretionary authority," "discretionary control," and "discretionary responsibility," ERISA's definition of "fiduciary" "speak[s] to actual decision-making power rather than to the influence that a professional may have over the decisions made by the plan trustees she advises." See Pappas v. Buck Consultants, Inc., 923 F.2d 531, 535 (7th Cir. 1991) (citations omitted, emphasis added). Thus, a professional service provider's "[m]ere influence over the trustee's . . . decisions . . . is not [the type of] effective control over plan assets" that creates fiduciary liability. See Schloegel v. Boswell, 994 F.2d 266, 271-72 (5th Cir.), cert. denied, 510 U.S. 964 (1993).
Turning to the allegations in the instant case, this magistrate judge cannot agree that "a functional examination of the [Defendant's] conduct in connection with the plan" reveals he "transcended the normal legal services rendered by plan counsel." The Plaintiff alleges that, upon the Plan's request, Attorney Levy provided an opinion regarding the legality of its purchase of the Property from Selwyn Weiss. See discussion supra. The court cannot think of a clearer or more obvious example of an attorney's "usual professional functions." Moreover, no other functions of Attorney Levy are alleged as a basis for fiduciary liability.
Although the Complaint alleges that the Defendant's opinion letter was issued upon "the express request of Selwyn Weiss," it later avers that Attorney Levy "entered into a contractwith the Plan . . . to opine as to the legal authority of the Plan in connection with the [proposed] purchase and transfer" of the Property. Compare Compl. at ¶ 22 with id. at ¶ 72. As discussed below, more important to the court's fiduciary analysis than who requested the opinion is the fact that Attorney Levy did not bring it to the Plan as an unsolicited proposal or recommendation. See discussion infra.
Perhaps recognizing the inherent weakness of its assertion that the described underlying conduct equated to that of a fiduciary, Mellon tries mightily to bolster its claims with a variety of allegations and arguments. Many of its assertions go toward counsel's attempt to establish that the Defendant exercised de facto or "effective" control over plan assets and/or that he caused "the trustees to relinquish their independent discretion" regarding the Transaction. See generally, e.g., Pl.'s Br. in Opp'n to Mot. to Dismiss (Doc. 10, hereinafter cited as "Pl.'s Opp'n Br.") at 16-17. The court remains unconvinced.
Nowhere in the Complaint does the Plaintiff allege that Attorney Levy had actual authority or control over the Plan's assets in connection with the proposed Property purchase. Thus, Mellon must argue that the Defendant was " effectively and realistically in control of the [Plan's] assets. . . ." See Pl.'s Opp'n Br. at 18 (emphasis in original, citation and internal quotations omitted).
Much of the case law addressing the " de facto" or "effective control" theory stems from a passage in ERISA's legislative history, which states:
While the ordinary functions of consultants and advisers to employee benefit plans . . . may not be considered as fiduciary functions, it must be recognized that there will be situations where such consultants and advisers may because of their special expertise, in effect, be exercising discretionary authority or control with respect to the management or administration of such plan or some authority or control regarding its assets. In such cases, they are to be regarded as having assumed fiduciary obligations within the meaning of the applicable definition.See Schloegel, 994 F.2d at 271 (internal quotations and citations to legislative history omitted).
This magistrate judge questions the extent to which the "specialized expertise" standard should apply, if at all, to the legal profession. As the Useden Court aptly observed:
In accordance with [the] legislative history [referenced above], we do not reject absolutely the proposition that consultants and advisors can, under some circumstances, assume fiduciary control. . . . Inquiring into the de facto control of a stock broker over an ERISA plan, the district court in Stanton . . . . similarly suggested that the dominant expertise of the consultant may be relevant: [`]Even though a client may have the final word on how his or her assets will be traded and is, thus, technically in control of the assets, it is the stock broker who is effectively and realistically in control of the assets when, for whatever reason, the client merely rubber stamps — follows automatically or without consideration — the investment recommendations of the broker.['] . . .
It is significant, though, that the Stanton [C]ourt was construing a regulation pertaining to stock brokers; that regulation is formulated so as to readily confer fiduciary status when the broker goes beyond acting on the clear instructions of the plan. . . . Any preference for such purely ministerial conduct would be misplaced in regard to the judgment-intensive services of legal counsel.See id., 947 F.2d at 1578 n. 18 (citations and internal quotations omitted, emphasis added).
Stanton v. Shearson Lehman/American Express, Inc., 631 F. Supp. 100 (N.D.Ga. 1986) is a seminal case at times cited in support of the de facto or effective control theory. As will be seen below, that decision is plainly distinguishable from the instant case on its facts. See discussion infra.
This magistrate judge agrees with the Useden Court that legal services, by nature, are not amenable to the "special expertise" or "rubber stamp" allegations suggested by the Plaintiff. First, the court joins Useden in concluding that the "judgment-intensive" nature of legal services prevents "[a]ny preference for . . . purely ministerial conduct" on the part of attorneys. See id. Second, and perhaps even more important, is the concern that any ERISA plaintiff could state a prima facie claim of fiduciary liability merely by alleging that it blindly relied on (or "rubber-stamped") the opinions of an attorney possessing specialized legal expertise. In this magistrate judge's view, permitting such claims would swallow the general rule that an attorney who performs his "usual professional functions" will not be considered a fiduciary under ERISA.
This observation dovetails with another shortcoming in the Plaintiff's pleadings: nowhere in the Complaint does the Plaintiff allege that Attorney Levy took action to cause the trustees to relinquish their independent discretion to him regarding the Transaction. In addressing the de facto and/or "effective control" theories of fiduciary liability, courts have recognized that an ERISA plaintiff "must demonstrate that [the defendant] caused [the] trustee[s] . . . to relinquish [their] independent discretion in investing the plan's funds and follow the course prescribed by" the professional service provider. See Schloegel, 994 F.2d at 271-72 (citation omitted, emphasis added); see also, e.g., Custer, 89 F.3d at 1163 (rejecting "allegations that [an attorney] usurped trustee decisionmaking authority by controlling information relevant to the propriety of the . . . [subject] transactions"; "[i]f true, the assertions establish at most that [counsel] violated legal duties arising from his representation of the ERISA plan[;] they do not satisfy the requirement that [counsel] caused the plan's trustees to relinquish [their] independent discretion . . . and follow the course [he] prescribed") (emphasis added); Pappas, 923 F.2d at 538 (implicitly recognizing that fiduciary liability determination is informed by whether "the consultant undertakes tasks that transcend the usual scope of a professional-client relationship") (citation omitted, emphasis added). In addition, this magistrate judge's review of the case law has failed to identify decisions applying these theories absent express allegations that the defendant undertook affirmative conduct that induced the Plan's agents to cede effective control to the professional service provider. Cf. generally, e.g., Carpenters' Local Union No. 964 Pension Fund v. Silverman, 1995 WL 378539, *3 (S.D.N.Y. Jun. 26, 1995) (plaintiffs' fiduciary claim survived dismissal because they alleged that defendant-attorneys "represented to the [f]und that they possessed, and held themselves out as possessing, special expertise in the areas of real estate and . . . ERISA" law, one of the attorneys "was a [fund] trustee" and "an insider," and the defendants "played a role in the investment decisions for the [f]und") (emphasis added); see also, e.g., Stanton, 631 F. Supp. at 104 (allowing fiduciary claim to proceed against attorney that "provid[ed] specific, unsolicited investment advice to a dependent client") (emphasis added).
None of the types of conduct upon which the courts have relied is present here. There are no allegations that Attorney Levy brought unsolicited investment proposals to the Plan. Cf.Stanton, 631 F. Supp. at 104. Rather, the Plaintiff's pleadings establish that the Defendant offered his legal opinions at the behest of the Plan. See discussion supra. And although the pleadings may be read to assert that Mr. Levy possessed specialized expertise, absent are any allegations that he represented or held himself out to the Plan as such. Cf.Carpenters' Local, 1995 WL 378539 at *3. Finally, there is a complete dearth of allegations that Attorney Levy exercised control regarding any other aspect of the Plan or its assets. In other words, the Plaintiff's allegations are limited to the Defendant's having rendered legal advice regarding the one and only Transaction identified in the Complaint. Cf., e.g., Reich v. Lancaster, 55 F.3d 1034, 1048 (5th Cir. 1995) (upholding finding of fiduciary liability where trustees accepted "[e]very recommendation made by [defendant-insurance agent] in regards to health and medical insurance, life insurance, and even where to invest the Fund's money"; "[g]iven the breadth of [the defendant's] discretion in the management and administration of the [f]und, we do not think the district court erred in elevating [him] to the status of [a] fiduciary").
Although the Carpenters' Local Court identified the plaintiffs' reliance on the defendant-attorneys' "self-proclaimed expertise in [matters of] real estate investment" as one factor supporting a claim of fiduciary liability, see discussion supra, the court is not convinced that this factor, alone, is sufficient to create liability under ERISA. Thus, even if Mellon had alleged that Mr. Levy held himself out as possessing special expertise, this averment would be insufficient to defeat the Defendant's Motion to Dismiss. Cf. generally discussion supra at 14 (doubting applicability of "special expertise" theory to lawyers) and at 9 (noting that fiduciary analysis requires "a functional examination of the law[yer's] conduct in connection with" the subject transaction) (emphasis added).
Although the Plaintiff cites Lancaster in support of its position, the court finds that case distinguishable based on "the breadth of [the defendant insurance agent's] discretion in the management and administration of the [f]und." See discussion in text supra. This magistrate judge questions how the Lancaster Court's reasoning could possibly apply here, where Attorney Levy was tasked to provide legal opinions regarding a single, discrete transaction, and he did so and nothing more. Many of the other cases cited by Plaintiff's counsel are distinguishable on this basis as well.
In sum, the Plaintiff's allegations establish no more than that Attorney Levy acted within his "usual professional [capacity]" in rendering legal opinions regarding the Transaction. Plaintiff's counsel identifies no additional conduct through which he induced "the trustees to relinquish their independent discretion." On the allegations presented, no valid claim of fiduciary liability exists.
As referenced above, requiring a professional to take express, affirmative action(s) to induce the trustees to relinquish their independent discretion appears to coincide with this court's observation that an ERISA plaintiff should not be permitted to establish fiduciary liability based on the trustees' own decision to blindly rely on the professional's opinions. Relatedly, it seems entirely improper to permit an attorney (or any other professional, for that matter) to incur fiduciary liability based solely on the degree of reliance that a trustee unilaterally chooses to bestow on the opinions provided, a factor completely outside of counsel's control. Thus, to the extent any previous court decision may be read to state or imply that an attorney may incur fiduciary liability under ERISA based solely on the degree to which a client chooses to rely on his legal opinions, the District Court should decline to follow such reasoning.
Nothing in the Plaintiff's opposition papers demonstrates the contrary. The only averments counsel identifies in support of fiduciary liability that have not been addressed above are as follows:
(a) Attorney Levy had a conflict of interest in allegedly "represent[ing] both the . . . Plan and Selwyn Weiss personally in the [T]ransaction";
(b) the Defendant "knew or should have known that the [T]ransaction violated ERISA and would adversely affect the . . . Plan";
(c) Attorney Levy's "opinion was solely [with]in [his] exclusive discretion and control"; and
(d) he "knew that his [legal] opinion dictated whether the transaction occurred" because the Bank conditioned its issuance of the loan on the same.See Pl.'s Opp'n Br. at 19 (citations omitted).
The Plaintiff also highlights its averments regarding Attorney Levy's credentials "in the area of federal and state taxes" and its claim that the Defendant "knew or should have known that the trustees would not independently review his opinion letter, but would simply rely on it to obtain the loan." See id. As best as this magistrate judge can discern, these allegations go to Mellon's assertion that Mr. Levy effectively controlled the Plan's assets. For the reasons explained above, however, such allegations fail to show that the Defendant caused the trustees to relinquish their independent discretion regarding the Transaction. Moreover, they do nothing to call into question the court's conclusion that Attorney Levy acted within the scope of his usual professional functions in rendering legal opinions regarding the Transaction.
As to the Defendant's purported conflict of interest in representing the Plan, Plaintiff's counsel has failed to identify a single case that identifies this factor as relevant to the fiduciary liability analysis. To the contrary, the case law is rife with examples of similar factual scenarios that had no bearing on the courts' ERISA fiduciary analyses. See, e.g.,Custer, 89 F.3d at 1160 (no fiduciary liability for an attorney who was nephew of "chairman" of relevant ERISA plan and president of plan's affiliated union); Useden, 947 F.2d at 1568 (same for law firm who "rendered services to both the [p]lan" and the company that established it). While Attorney Levy's alleged representation of both the Plan and Selwyn Weiss may (or may not) have violated his professional responsibilities as a lawyer, this inquiry has no bearing on the ERISA analysis. Cf. generally discussion supra (noting that "negligence in the provision of professional services does not create ERISA fiduciary status").
Next are the Plaintiff's allegations that Mr. Levy "knew or should have known that the [T]ransaction violated ERISA and would adversely affect the . . . Plan" and that his "opinion was solely [with]in [his] exclusive discretion and control." At best, these allegations are potentially relevant to a malpractice or professional negligence claim, matters that again fall outside the scope of the fiduciary liability analysis. See discussion supra.
Thus, Mellon is left only with its allegations to the effect that, absent Attorney Levy's favorable opinion, the Transaction would not have come to fruition. Unsurprisingly, the Plaintiff has identified no legal authority identifying this as a relevant consideration for the purposes of ERISA liability. In any event, this magistrate judge fails to see how the Plaintiff's allegations distinguish the instant circumstances from the multitude of other situations in which a financial deal stands or falls based on the opinions of the parties' attorneys. The court remains confident that these allegations do not remove Mr. Levy's actions from the scope of the "usual professional functions" performed by attorneys every day.
To the extent the Plaintiff argues that the trustees were required to relinquish to Mr. Levy their independent discretion because the Bank required a legal opinion, this allegation flows directly from the Plan's dealings with the Bank. Again, the court cannot agree that Mr. Levy's potential fiduciary liability properly may hinge upon the conduct or demands of the third-party Bank, and entity over which Mr. Levy had absolutely no control.
The only other argument warranting comment is Plaintiff counsel's suggestion that the fiduciary liability determination is "a . . . fact-intensive [one]" that cannot properly be resolved at the 12(b)(6) stage. See Pl.'s Opp'n Br. at 15-16 (citation and internal quotations omitted). To be sure, some courts have observed that the fiduciary liability analysis requires a "fact-intensive inquiry [regarding] whether the professional transcended her `ordinary functions.'" See, e.g., Pappas, 923 F.2d at 537. This does not mean, however, that a court cannot properly decide the issue at the 12(b)(6) stage where appropriate, and such decisions are by no means uncommon in the law. See, e.g., id. at 533, 537, 542 (noting "fact-intensive" nature of fiduciary liability analysis, but nevertheless affirming district court's dismissal for failure to state claim upon which relief could be granted); see also, e.g., Custer, 89 F.3d at 1160-61 (affirming 12(b)(6) dismissal of claim against attorney based on his alleged " de facto control over [the] arrangements" of subject transactions, including his "authoriz[ing] expenditures and approv[ing] payments . . . from pension plan funds" in furtherance of same; plaintiffs failed to show that defendant "caused the plan's trustees to relinquish [their] independent discretion") (citation and internal quotations omitted).
The Plaintiff has identified no basis for concluding that the fiduciary liability determination cannot now be properly made, and for the reasons stated above the Defendant's Motion to Dismiss should be granted.
II. The Plaintiff's Allegations Do Not Support a Viable ERISA Claim Based on the Defendant's Status As a Party In Interest .
Aside from trying to establish fiduciary liability, the Plaintiff also alleges the Defendant is liable under ERISA as a "party in interest." Mellon's Complaint reveals that the party in interest claims are based on the same factual predicates as are its purported fiduciary claims. See Compl. at ¶ 45 (incorporating by reference paragraphs of Complaint setting forth factual averments summarized herein, supra). Otherwise, the Plaintiff's party in interest Count states only that: Mr. Levy's status as counsel to the Plan rendered him a party in interest; the sale of the Property from former trustee Selwyn Weiss to the Plan was prohibited under ERISA; and the Defendant, "as a party-in-interest[,] knowingly enabled and caused the prohibited transaction to occur by issuing his legal opinion." See generally id. at ¶ 51.
Plaintiff's counsel is correct in stating that Mr. Levy meets the statutory definition of a "party in interest." Under ERISA, a "party in interest" includes "any fiduciary . . ., counsel, or employee of [an ERISA] plan," as well as "a[ny] person providing services to such plan. . . ." See 29 U.S.C. § 1002(14)(A)-(B) (emphasis added). Mr. Levy undoubtedly falls within this definition. See id.; see also, e.g., Nieto v. Ecker, 845 F.2d 868, 870, 873 (9th Cir. 1988) (holding that attorney who rendered professional services to ERISA plans fell within statutory definition of "party in interest") (citations omitted). Counsel is also correct in asserting that Mellon has sufficiently pled the Transaction was prohibited under ERISA. See, e.g., discussion supra (summarizing allegations that Selwyn Weiss, trustee and party in interest, sold the Property to the Plan); see also, e.g., 29 U.S.C. § 1106(a)(1)(A) ("[e]xcept [under circumstances not applicable here,] . . . [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 transactionconstitutes a direct or indirect . . . sale or exchange, or leasing, of any property between the plan and a party in interest") (emphasis added).
Where Mellon is wrong, however, is in its implicit assertion that Mr. Levy participated in a prohibited transaction so as to warrant relief under 29 U.S.C. § 1132(a)(3) ("Section 1132(a)(3)"). The reasons such a claim fails are best seen through an examination of the Court of Appeals for the Third Circuit's ("the Third Circuit Court's") decision in Reich v. Compton, 57 F.3d 270 (3d Cir. 1995).
29 U.S.C. § 1132 contains the "[c]ivil enforcement" provisions of ERISA, and subsection 1132(a)(3) authorizes "civil action[s] . . . by a participant, beneficiary, or fiduciary . . . to enjoin any act or practice which violates any provision of th[e relevant] subchapter or the terms of the plan, . . . to obtain other appropriate equitable relief . . . to redress such violations or . . . to enforce any provisions of th[e] subchapter or the terms of the plan. . . ." See id., § 1132(a)(3).
In Compton, the Secretary of Labor brought ERISA claims against nonfiduciaries on "two separate theories: first, that [ 29 U.S.C. § 1132](a)(5) authorize[d] him to sue [the] nonfiduciaries [because they] knowingly participate[d] in breaches of fiduciary duty by fiduciaries[;] and . . . second, that [ERISA] authorize[d] him to sue [the] nonfiduciaries [because they] participate[d] in transactions prohibited by section 406(a)(1)." See id., 57 F.3d. at 281 (emphasis added). The court concluded that the Secretary could not proceed under the first category, but could proceed under the latter. See id.
Although the Compton Court addressed Section 1132(a)(5), which authorizes suit by the Secretary of Labor, there is no reason to conclude that its teachings are inapplicable regarding Section 1132(a)(3). To the contrary, the Third Circuit Court's analysis borrowed heavily from the Supreme Court's discussion of Section 1132(a)(3) in Mertens v. Hewitt Assocs., 508 U.S. 248 (1993). See Compton, 57 F.3d at 282; see also id. ("Although the Supreme Court has not directly discussed the scope of section 502(a)(5), its discussion of section 502(a)(3) in Mertens providesconsiderable guidance due to the close relationship between those two provisions.") (emphasis added); see also generally discussion infra.
Regarding the claims based on nonfiduciaries' knowing participation in plan fiduciaries' breaches, the Compton opinion highlighted that the Supreme Court in Mertens "expressed considerable doubt that [S]ection [1132](a)(3) authorizes suits against nonfiduciaries who participate in fiduciary breaches." See id. at 282. After rejecting the Secretary's various arguments to the contrary, the court joined the Courts of Appeals of the First and Seventh Circuits in "reject[ing] the . . . argument that . . . a nonfiduciary [may be sued] under [S]ection[s 1132](a)(5) [or 1132(a)(3)] . . . for knowingly participating in a fiduciary breach." See id. at 282-84; see also id. at 284 ("we see little significance in the fact that . . . Mertens was discussing section [1132](a)(3) as opposed to section [1132](a)(5)"; "the analysis of the one provision should apply equally to the other with respect to the question at issue") (emphasis added).
As to the Secretary's second theory, the Third Circuit Court joined other federal courts in holding that nonfiduciaries indeed "may be held liable for their participation in prohibited transactions." See id. at 286 (emphasis added).
Plaintiff's counsel would have this court read the phrase "participation in prohibited transactions" with incredible breadth. Playing a game of analytical "ball and shell," counsel implicitly argues that Attorney Levy's "admitted involvement in [the T]ransaction," as described above, constitutes the "participation" discussed in Compton and the decisions with which it concurred. Nothing could be further from the truth.
In all of the cases cited by the Plaintiff, the nonfiduciaries who were held liable under ERISA "participated in" the prohibited transactions directly, i.e., they were either a party to or otherwise directly involved in the subject matter of the transaction. See generally Pl.'s Opp'n Br. at 9-11 ( citing Harris Trust Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000), Compton, and Nieto). In Compton, for example, the transactions at issue involved the ERISA plan's loan of $800,000 to one of the nonfiduciaries. See id. at 272. The second nonfiduciary also had substantial involvement in the transactions, and the plaintiff expressly alleged that the first nonfiduciary was merely "a shell corporation wholly controlled by" the second nonfiduciary and, thus, "all transactions with [the first nonfiduciary], were, in fact, transactions with" the second. See id. at 272-73.
Similarly, in Harris Trust, the Supreme Court held that a nonfiduciary broker company could be sued under Section 502(a)(3) as a party in interest where it "sold interests in several motel properties to [the plan] for nearly $21 million." See id., 530 U.S. at 241-42.
Last is the case of Nieto, a decision that perhaps best exemplifies why the Plaintiff here cannot state a party in interest claim under ERISA. In that case, the Ninth Circuit Court concluded that an attorney who rendered legal services to ERISA funds was not a fiduciary because his actions fell within the scope of his "usual professional functions." See id., 845 F.2d at 870-71 (citation and internal quotations omitted). The court held, though, that the attorney was not "free from potential [ERISA] liability" as a party in interest. See id. at 873 (citation omitted).
The types of allegations in Nieto that permitted such potential liability are particularly telling, however. The court noted that "[s]ome of the [plaintiffs'] allegations . . ., if true, establish that [the nonfiducary attorney] participated in . . . prohibited transactions with the [f]und by receiving excessive compensation for legal services, obtaining a loan from the [f]unds, and engaging in similar activities in violation of ERISA. . . ." See id. (internal quotations omitted, emphasis added). Thus, the Nieto Court concluded that the plaintiffs could pursue claims against the attorney for "engag[ing] in transactions prohibited by [ERISA]." See id. at 874 (emphasis added).
Nowhere in the Complaint does the Plaintiff allege that Attorney Levy was a party to, or was directly involved in, the underlying Transaction. To the contrary, the Plaintiff limits its allegations to the Defendant's having "knowingly enabled and caused the prohibited [T]ransaction to occur by issuing his legal opinion." See discussion supra (emphasis added). This very type of professional service has been expressly excluded from liability by Nieto and other courts under the ERISA fiduciary analysis. Thus, it is not the type of nonfiduciary "participation" that forms the basis for ERISA liability.
Notably, the only grievances in the Complaint regarding the contractual relationship between Mr. Levy and the Plan are stated in the Breach of Contract claim. See generally Compl. at Count IV. There is no allegation that Mr. Levy's contract with the Plan violated ERISA. Cf. Nieto, 845 F.2d at 873 (addressing allegation that attorney engaged in transaction prohibited under ERISA by "receiving excessive compensation for legal services").
In the end, Mellon's party in interest claims boil down to a thinly veiled attempt to circumvent the rule prohibiting fiduciary liability against professional service providers who act within the scope of their usual professional duties. Permitting the Plaintiff to state a party in interest claim based on the same allegations that fail under the fiduciary analysis would do nothing more than create an end run around the ERISA fiduciary liability analysis, thereby swallowing the rule.
The Plaintiff can state no claim for party in interest or nonfiduciary liability, and the Defendant's Motion to Dismiss should be granted.
III. The District Court Should Decline to Exercise Supplemental Jurisdiction Over the Plaintiff's State Law Claims .
The only basis for federal jurisdiction stated in the Complaint is the Plaintiff's ERISA claims. See Compl. at ¶ 7 ( citing ERISA § 1332(e)(1) as basis for subject matter jurisdiction). Because the Defendant is entitled to dismissal of those claims, it is within the District Court's discretion to "decline to exercise supplemental jurisdiction over" the Plaintiff's remaining state law claims. See Annulli v. Panikkar, 200 F.3d 189, 202 (3d Cir. 1999) ( citing and quoting 28 U.S.C. § 1367 (c)(3)).
This magistrate judge's review of the record has failed to identify any "extraordinary circumstances . . . warrant[ing] the exercise of jurisdiction over the [Plaintiff's pendent] state [law] claims. . . ." See Estate of Fortunato v. Handler, 969 F. Supp. 963, 974 (W.D.Pa. 1996) (citation and internal quotations omitted) (declining to exercise supplemental jurisdiction on same basis); see also id. ("[a]bsent extraordinary circumstances" regarding judicial economy, convenience, and/or fairness to the parties, when all "federal claims are dismissed . . ., the district court should ordinarily refrain from exercising pendent jurisdiction over . . . state law claims") (citations, internal quotations and alterations omitted). Accordingly, it is recommended that the District Court decline to exercise supplemental jurisdiction in this case.
CONCLUSION
For the reasons stated above, it is recommended that the Defendant's Motion to Dismiss (Doc. 6) be granted and that this case be dismissed.
In accordance with the Magistrates Act, 28 U.S.C. § 636 (b)(1)(B) and (C), and Rule 72.1.4(B) of the Local Rules for Magistrates, objections to this Report and Recommendation are due by May 8, 2002. Responses to objections are due by May 20, 2002.