Opinion
For Charly J Netel on behalf of the Administrative Committe of the Charly J. Netel CPA Profit Sharing Plan, Charly J Netal CPA an accountancy corporation, Plaintiffs: Bruce L Ishimatsu, LEAD ATTORNEY, Ishimatsu Law Group PC, Marina Del Rey, CA; M Cris Armenta, Armenta Law Firm APC, Los Angeles, CA.
For Lisa Netel, Co-Trustee of the Charly J. Netel, CPA Profit Sharing Plan and Trust, Defendant: Joel S Seidel, LEAD ATTORNEY, Joel S Seidel Law Offices, Encino, CA; Dale Wayne Jeffries, Nemecek & Cole, Sherman Oaks, CA; Jonathan Berres Cole, Nemecek & Cole PC, Sherman Oaks, CA; M Cris Armenta, Armenta Law Firm APC, Los Angeles, CA.
For Eric Rans as an individual, Defendant: Dale Wayne Jeffries, Nemecek & Cole, Sherman Oaks, CA; Jonathan Berres Cole, Nemecek & Cole PC, Sherman Oaks, CA; M Cris Armenta, Armenta Law Firm APC, Los Angeles, CA.
For Eric Rans as an individual, Cross Claimant: Dale Wayne Jeffries, Nemecek & Cole, Sherman Oaks, CA; Jonathan Berres Cole, Nemecek & Cole PC, Sherman Oaks, CA; M Cris Armenta, Armenta Law Firm APC, Los Angeles, CA.
For Eric Rans as an individual, ThirdParty Plaintiff: Dale Wayne Jeffries, Nemecek & Cole, Sherman Oaks, CA; Jonathan Berres Cole, Nemecek & Cole PC, Sherman Oaks, CA; M Cris Armenta, Armenta Law Firm APC, Los Angeles, CA.
OPINION
Fernando M. Olguin, United States District Judge.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
INTRODUCTION
This case arises out of a contentious divorce between plaintiff Charly Netel (" plaintiff" or " Charly") and defendant Lisa Netel (" defendant, " or " Lisa"). As part of the underlying dissolution action, plaintiff was required to make child and spousal support payments to defendant. Charly fell behind on those payments, and Lisa obtained a Writ of Execution against him in state court. Lisa hired Michelman and Robinson, LLP (" M& R") to act as collection counsel. M& R presented the Los Angeles County Sheriff (" Sheriff") with the Writ of Execution and requested that the Sheriff levy accounts belonging to Charly, including accounts held at Morgan Stanley Smith Barney (" MSSB"). The Sheriff levied the accounts, and Lisa received the proceeds from M& R. Charly filed a Complaint in this court on behalf of the Administrative Committee of the Charly J. Netel CPA Profit Sharing Plan (the " Plan") and Charly J. Netel CPA, an Accountancy Corporation, alleging that Lisa breached her fiduciary duty to the Plan under the Employee Retirement Income Security Act (" ERISA"), 29 U.S.C. § 1109(a), by having the Plan's assets removed from one of the MSSB accounts.
Because the parties share the same last name, the court refers to them by their first name.
Plaintiff also asserted claims against M& R for aiding and abetting breach of fiduciary duty under ERISA, against MSSB for negligence, and against Does 1-2 for constructive trust. (See Complaint). Plaintiff voluntarily dismissed MSSB from this case on February 16, 2012. (See Notice of Voluntary Dismissal of Defendant Morgan Stanley Smith Barney Without Prejudice by Plaintiff). On March 19, 2013, the court dismissed without prejudice all the M& R partners except Eric Rans. (See Court's Order of March 19, 2013). Plaintiff dismissed the claims against Eric Rans and M& R prior to trial. (See Pretrial Conference Order of January 23, 2014 (" PTO"), at 2).
A bench trial was held and the court, having heard live testimony and duly considered the evidence, the credibility of the witnesses, the entire file and the contentions and arguments of counsel, hereby makes the following findings of fact and conclusions of law in accordance with Rule 52(a) of the Federal Rules of Civil Procedure.
In addition to requiring the parties to submit proposed findings of fact and conclusions of law, the court requested the parties to address the following in their post-trial briefs: (a) the process under state law to collect judgments and whether a debtor has the right to object to specific collection efforts, including the methods of objection; (b) what relief plaintiffs are seeking, and whether plaintiffs have suffered an actual injury conferring Article III standing, given that Charly obtained a credit on his support obligations for the monies that Lisa obtained from the levy; (c) whether Charly violated his fiduciary duty to the Plan by seeking a credit against his personal debt with assets belonging to the Plan; (d) whether the Plan is a qualified plan under ERISA, and whether the court has the authority to determine whether the Plan is a qualified plan in the absence of a determination to that effect by the IRS; and (e) whether " acting within his capacity as a fiduciary" is an element of a breach of fiduciary duty under ERISA, and whether Lisa was so acting at the time of the levy. (See Court's Order of January 27, 2014).
FINDINGS OF FACT
1. Charly and Lisa married on July 7, 1991, and separated on September 3, 2004. (See PTO at 2, ¶ 5.a).
2. Charly, who is self-employed as a Certified Public Accountant, has an accountancy firm, Charly J. Netel, CPA, an Accountancy Corporation (" Corporation"). (See PTO at 2, ¶ 5.b).
3. From 1997 through May 2006, Charly was the Corporation's only officer and shareholder. During that time frame, Charly was the President, Secretary, and Treasurer/CFO of the Corporation. (See Reporter's Transcript (" RT") at 11:23-25, 12:21-24 & 45:19-21; Exhs. 2, 3 & 4).
4. Lisa has been a housewife, retail employee and personal shopper. She is a college graduate but has no accounting expertise or education. (See PTO at 3, ¶ 5.c). Lisa has never been a board member of any corporation, including a member of the board of Charly's Corporation. (See Declaration of Lisa Netel (" Def. Decl."), Document No. 149, at ¶ 7; RT at 15:9-16:2; 34:2-11; Exhs. 2 & 3). Lisa has also never served as the secretary of Charly's Corporation. (See RT at 15:25-16:2; Exhs. 2 & 3).
5. The Plan was created in 1997. (See Reporter's Transcript (" RT") at 11:14-16 & 56:19-57:11; Exhs. 3 & 4).
6. In September 2003, the Plan was amended and restated by the Corporation for the benefit of its employees. (RT at 44:12-46:16; Exhs. 28 & 29).
7. Charly signed the Plan documents, as amended and restated in September 2003. Charly was a trustee for the Plan. (RT at 44:6-46:22; Exhs. 28 & 29).
8. Lisa's signature appears to be affixed to a document dated June 27, 1997, identifying Lisa as a " Trustee." (Exh. 22). Although Charly testified that Lisa was a trustee of the Plan as of 1997, the court did not find his testimony credible on this point. (See RT at 57:9-58:10). Charly admitted that despite the documentary evidence, that Lisa was not a director or secretary of the Corporation. (See id. at 34:8-11). In addition, the 1997 plan documents are not part of the record. (See id. at 57:2-9). Moreover, Charly's 1997-1998 correspondence with Goldberg, Swedleson & Associates, who provided services for the plan, does not identify Lisa as a trustee. (See, generally, Exhs. 3 & 4).
In general, the court did not find any of Charly's testimony credible. In particular, the court was troubled by Charly's inconsistent representations regarding Lisa's alleged role with the Corporation, his apparent failure to timely update the Plan and to file Form 5500s with the IRS, and his withdrawal of $75,000 from the Plan. (See, e.g., RT at 25:1-26:12, 30:11-24 & 195:10-14; Exhs. 2, 3 & 34).
9. Lisa's signature appears to be affixed to a Plan document, entitled Charly J. Netel, CPA, Retirement Trust (Amended and Restated), which is dated September 14, 2003. (Exh. 29; RT at 45:22-46:25). Although Charly testified that Lisa's signature is genuine, he did not testify that Lisa signed the document on September 14, 2003. (See RT at 46:10-48:4-5). By contrast, Lisa testified that she did not sign the document and that she could not have signed the document on Sunday, September 14, 2013, because she took her children to religious school and the Los Angeles County Fair that day. (See id. at 118:23-119:25; Exh. 1). The court finds Lisa's testimony and evidence to be more credible than Charly's regarding the events of September 14, 2003. Therefore, the court concludes that Lisa did not sign the trust document, (Exh. 29), on September 14, 2003.
10. Lisa's signature also appears to be affixed to a Resolution of the Board of Directors of Charly J. Netel, CPA, an Accountancy Corporation, dated September 22, 2003 (" Resolution"). (See Exh. 33). The Resolution identifies Lisa as a director and secretary of the Corporation. (See id.). However, after reviewing this document, Charly admitted that Lisa was not a director or secretary of the Corporation. (See RT at 15:3-16:2). In addition, Lisa presented evidence that she did not attend a board meeting for the Corporation on September 22, 2003. (See Exh. 1; Def. Decl. at ¶ 6). The court finds that Lisa did not sign the Resolution, (Exh. 33), on September 22, 2003.
11. Goldberg, Swedelson & Associates were the pension plan consultants for the Plan, and provided compliance services. Charly was the Plan Administrator, and the Corporation was the Plan sponsor. (See Exhs. 2-4; RT at 22:23-23:5, 187:19-190:20 & 213:3-7).
12. When contributions were made to the Plan, most of the contributions went to Charly's benefit. (See RT at 28:7-11). During the period that Goldberg, Swedelson & Associates maintained records for the Plan, Charly owned 80-90+ percent of the funds in the Plan. (See id. at 202:8-23). In addition, in the course of the divorce proceedings, the state court found that Charly's ownership interest in the Plan included a community portion. (See Exh. 7). The state court directed the parties to " take all necessary steps and sign all necessary documents to effectuate an equal division of the community portion" of the MSSB account for the Plan, including " obtain[ing] a qualified domestic relations order if necessary." (Id.).
13. Charly did not file Form 5500s for the Plan from at least 2007 through mid-January 2014. (See RT at 25:1-26:12; Exh. 2).
14. Charly did not amend or restate the Plan from October 2003 through mid-January 2014. (See RT at 26:16-27:5; Exh. 3).
15. In May 2006, Charly withdrew, by check, $75,000 from the Plan. (RT at 29:2-33:7; Exh. 34). Charly provided evidence that he repaid $75,000 to the Plan account between May and June 2006. (See RT at 32:9-14; Exh. 34).
16. In May 2006, Marilyn Graham, who had been an employee of the Corporation, received a $11,200.61 distribution from the Plan. (See RT at 40:16-25 & 59:11-13; Exh. 34).
17. In 2007, LeeAn Ta, who had been an employee of the Corporation, requested the withdrawal of her vested interest in the Plan. (See Exhs. 15 & 24). On May 2, 2007, Lisa spoke with Mark Swedelson of Goldberg Swedelson & Associates, regarding LeeAnn Ta's request and the participants in the Plan. (See RT at 186:20-187:7 & 189:1-190:9).
18. On August 1, 2007, for the divorce proceedings, Lisa executed a declaration under penalty of perjury stating, " Until recently, I had no idea that I was a trustee of Petitioner's retirement plan. Thus, being asked to sign a check to Ms. Ta was a complete surprise to me. Since that time, I have verified the figures with the plan administrator and signed any and all documents necessary for Ms. Ta to receive her funds. It was never my intention to make this process difficult; I was simply unaware as to why I would need to sign a check for Ms. Ta to receive funds from Petitioner's retirement plan." (Exh. 31 at ¶ 13; RT at 132:18-136:19). Lisa signed documents to authorize the release of funds to LeAnn Ta. (See RT at 153:5-13; Exh. 31). In 2007, LeAnn Ta received at least $13,983.40 from the Plan. (See RT at 41:1-25; Exh. 16).
19. Lisa has never resigned as a co-trustee of the Plan. (RT at 145:8-10).
20. Charly was obligated to pay child and spousal support, attorney's and forensic accountant's fees, and an equalizing payment to Lisa pursuant to orders and a judgment in the divorce proceedings, Los Angeles Superior Court Case No. BD419954. (See PTO at 3, ¶ 5.d; Exhs. 6 & 7).
21. Lisa requested and received monthly brokerage statements for the Plan from MSSB for approximately five years prior to 2011. (See PTO at 3, ¶ 5.e). Lisa received and opened the MSSB brokerage statements, but she denies having read them. (RT at 128:12-129:18; Def. Decl. at ¶ 9).
22. Lisa hired M& R to act as her collection counsel sometime prior to March 23, 2011. (See PTO at 3, ¶ 5.f).
23. On March 23, 2011, Eric Rans, an attorney at M& R, received a report from a private investigator, Michael Santoni, who identified certain accounts at MSSB, including an account identified as a " Trust Retirement Account" with a balance of " $165,000.00+." (See PTO at 3, ¶ 5.g; Exh. 32; RT at 81:8-82:10; Declaration of Eric Rans, Document No. 149, (" Rans Decl.") at ¶ 6). 24. On April 18, 2011, the Los Angeles Superior Court issued a Writ of Execution against Charly, the individual, in the amount of $179,595.31, which represented arrearages for child and spousal support. (See PTO at 3, ¶ 5.h).
25. One of the attorneys at M& R instructed the Sheriff to levy two accounts held at MSSB and any other accounts belonging to Charly. (See PTO at 3, ¶ 5.i; Exh. 8).
26. One of the accounts listed in M& R's instructions, MSSB Account No. 549-00708, represented an account held in the name of the Charly J. Netel CPA Retirement Trust (the " Trust"). (See PTO at 3, ¶ 5.l; Exh. 13).
27. At the request of M& R, the Sheriff levied the accounts held at MSSB, including the MSSB account belonging to the Plan. (See PTO at 3, ¶ 5.j; Exh. 9).
28. The subject account at MSSB was not levied pursuant to a Qualified Domestic Relations Order (" QDRO"). (See PTO at 3, ¶ 5.k).
29. On May 16, 2011, M& R was informed in a Garnishee Memorandum that MSSB froze " trust account" funds in the amount of $167,255.22. (See PTO at 3, ¶ 5.m).
30. On June 6, 2011, Cary Kievman of MSSB called Charly and informed him of the Writ of Execution. Charly informed Mr. Kievman that it would be illegal to allow the levy on the pension funds from the Trust. Charly did not file a claim of exemption. (See PTO at 4, ¶ 5.n). Nor did Charly contact Lisa or her counsel to try to stop the levy. (See RT at 17:1-12).
31. On July 25, 2011, the Sheriff transmitted to M& R a check in the amount of $165,444.53, in addition to other checks that are not the subject of this litigation. The $165,444.53 constituted funds from the Plan account, MSSB Account No. 549-00708, and were deposited into the M& R's trust account. (See PTO at 4, ¶ 5.o; Exh. 13).
32. On July 28, 2011, M& R wrote a check to Lisa from its client trust account in the amount of $172,244.00, of which $165,444.53 were funds from the Plan account. (See PTO at 4, ¶ 5.p; Exh. 10). The M& R check did not identify the Plan account as a source of the funds. (Exh. 10). Lisa was unaware of the mechanics involved in the levy until early 2012. (Def. Decl. at ¶ 11).
33. Lisa spent the $165,444.53 on expenses unrelated to the Plan. (See PTO at 4, ¶ 5.q).
34. On December 15, 2011, Charly filed the instant action. (See Complaint; PTO).
35. After Lisa levied the funds in the Plan, she applied to the state court in 2012 for a QDRO, and her request was denied. (Declaration of Charly J. Netel (" Pl. Decl."), Document No. 150, at ¶ 28; RT at 60:20-61:5).
36. In the state court proceedings, Charly received a credit for his support obligations for the funds withdrawn from the Plan account. In April 2012, the state court set Charly's support arrearages at zero. (RT at 60:10-63:3; Def. Decl. at ¶ 16 & Exh. C). Charly has not repaid the Plan based on the credit received in state court. (RT at 63:9-64:2).
CONCLUSIONS OF LAW
37. The Plan is an employee benefit plan subject to the coverage of ERISA, 29 U.S.C. § 1003.
38. ERISA defines " fiduciary" not in terms of formal title but rather in " functional terms of control and authority over the plan." Mertens v. Hewitt Assocs, 508 U.S. 248, 262, 113 S.Ct. 2063, 2071, 124 L.Ed.2d 161 (1993) (emphasis in original); see Yeseta v. Baima, 837 F.2d 380, 386 (9th Cir. 1989) (individual was fiduciary since he exercised control by disposing of Plan assets, even though it was unclear whether he was authorized to do so). Lisa was a fiduciary for the Plan within the meaning of ERISA, § 3(21)(A), 29 U.S.C. § 1002(21)(A), from 2007 through mid-January 2014. (See Exh. 31; RT at 145:8-10 & 153:5-13).
39. Charly was a fiduciary to the Plan within the meaning of ERISA, § 3(21)(A), 29 U.S.C. § 1002(21)(A). For example, Charly exercised actual control over Plan assets by authorizing withdrawals of Plan assets. (See, e.g., Exhs. 15 & 34). In addition, Charly signed the Plan documents and exercised control over the Plan. (See, e.g., Exhs. 28 & 29).
40. The duty of fiduciary loyalty, codified in ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A), requires that the fiduciary discharge his or her duties as a trustee " solely in the interest of participants and beneficiaries" and for the " exclusive purpose" of providing benefits and defraying reasonable expenses of plan administration. As a fiduciary, Lisa was required to act in the interest of plan participants and their beneficiaries while acting as a trustee. See Cunha v. Ward Foods, Inc., 804 F.2d 1418, 1432 (9th Cir. 1986) (" [W]hen a fiduciary's actions that are taken in connection with the performance of his duties as trustee or administrator are in his own interest as well, we rigorously scrutinize the conduct.").
41. In addition to the general duty of loyalty, ERISA § 406(b) prohibits fiduciaries from dealing with the assets of a plan in their own interest or for their own account. 29 U.S.C. § 1106(b)(1). ERISA § 406(b)(2) also prohibits fiduciaries from acting, in any transaction involving the plan, on behalf of other parties whose interests are adverse to the interests of the plan. Id. at § 1106(b)(2).
42. ERISA also codifies trust law's " prudent man" standard, see 29 U.S.C. § 1104(a)(1)(B), which requires that a fiduciary discharge his or her duties in a fiduciary capacity " 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." See Harris v. Amgen, Inc., 770 F.3d 865, 875 (9th Cir. 2014). " [T]he test of prudence is one of conduct[.]" Kanawi v. Bechtel Corp., 590 F.Supp.2d 1213, 1230 (N.D. Cal. 2008).
43. Lisa was acting as a judgment creditor when she retained M& R as collection counsel to seek a levy of Charly's assets. Lisa was not acting as a fiduciary when she instructed M& R to levy funds from Charly's accounts. See Varity Corp. v. Howe, 516 U.S. 489, 498, 116 S.Ct. 1065, 1071, 134 L.Ed.2d 130 (1996) (deferring to district court finding that company was " wearing its 'fiduciary, ' as well as its 'employer' hat"); Friend v. Sanwa Bank Cal., 35 F.3d 466, 470 (9th Cir. 1994); Cunha, 804 F.2d at 1432 (defendant acted as a creditor, rather than in the capacity of ERISA fiduciary).
44. In her capacity as a judgment creditor, Lisa did not ask M& R to levy Plan assets. Nor did Lisa " actively misus[e] her trust powers to the detriment of the beneficiaries. Friend, 35 F.3d at 470. For instance, she did not withdraw funds by exercising her authority over Plan assets. Rather, she relied on counsel to identify the appropriate assets and to levy them. See Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 16 (1st Cir. 1998) (" [T]he judge determined that, even if the Bank knew or should have known of Hawthorne's indiscretions, co-fiduciary liability did not attach in the absence of an allegation that the Bank had participated actively in, or concealed, the breach."). M& R did not inform Lisa that it was levying the MSSB Plan Account. (See, e.g., Exh. 10; Def. Decl. at ¶ 11). Lisa's reliance on counsel was reasonable and may be considered in assessing whether there has been a breach of fiduciary duty. See Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th Cir. 1983) (finding that while reliance on counsel's advice is not a complete defense, it is a factor to be weighed).
45. Lisa did not breach her fiduciary duty under ERISA, as her actions were conducted as a judgment creditor, not as an ERISA trustee. Moreover, Lisa did not actively participate in M& R's collection efforts.
It is unnecessary to address Lisa's affirmative defenses of judicial estoppel, mitigation of damages, and laches.
46. Any conclusion of law that more correctly constitutes a finding of fact should be treated as such, and vice versa.
CONCLUSION
This Order is not intended for publication. Nor is it intended to be included in or submitted to any online service such as Westlaw or Lexis.
Based on the foregoing, IT IS ORDERED THAT plaintiff's action is dismissed with prejudice. Judgment shall be entered accordingly.