Joseph Rosenbaum, M.D., Inc. v. Hartford Fire Ins. Co.

Citation104 F.3d 258
Decision Date27 December 1996
Docket NumberNo. 94-55579,94-55579
Parties20 Employee Benefits Cas. 2321, 96 Cal. Daily Op. Serv. 9461, 96 Daily Journal D.A.R. 15,545, Pens. Plan Guide (CCH) P 23930U JOSEPH ROSENBAUM, M.D., INC., Defined Benefit Pension Plan; Joseph Rosenbaum, as Administrator and Trustee of the Joseph Rosenbaum, M.D., Inc., Defined Benefit Pension Plan, Plaintiffs-Appellants, v. HARTFORD FIRE INSURANCE COMPANY, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Michael A. Vanic, Reish & Luftman, Los Angeles, CA, for plaintiffs-appellants.

David T. DiBiase, Anderson, McPharlin & Conners, Los Angeles, CA, for defendant-appellee.

Appeal from the United States District Court for the Central District of California, Irving Hill, District Judge, Presiding. D.C. No. CV-93-02733-IH.

Before: HUG, Chief Judge, BEEZER, and KLEINFELD, Circuit Judges.

KLEINFELD, Circuit Judge:

This case deals with the scope of an employee dishonesty bond issued to an Employment Retirement Income Security Act (ERISA) plan. The district court granted summary judgment on the grounds that there was a concealment that would void the coverage. We affirm, but on different grounds.

FACTS

Dr. Joseph Rosenbaum established a pension plan for his professional corporation, naming his wife and himself as trustees. He and a firm called California Pension Administrators and Consultants, Inc., were administrators of the plan. Evidently, California Pension Administrators and Consultants only managed the paperwork. The authority to manage and invest the plan's money resided with Dr. and Mrs. Rosenbaum as trustees.

During the time periods relevant to this case, Dr. Rosenbaum caused some hundreds of thousands of dollars of plan money to be invested in second mortgages in California residential real estate. More precisely, the money was invested through Property Mortgage Company, Inc., managed by a man named Stanley Glickman, in fractional shares of second deeds of trust. The investment scheme called for Mr. Glickman to assign to investors fractional shares of notes and deeds of trust held by Property Mortgage Company, and guarantee payments to the investors, even if the debtors on the notes defaulted.

Dr. Rosenbaum developed a social relationship and a business relationship of trust with Mr. Glickman after receiving very high yields for a number of years. He states in his affidavit that he eventually trusted Mr. Glickman's judgment to the point that he "made no independent inquiry or evaluation" and "exercised no independent judgment in regard to the investments." When Mr. Glickman would recommend a purchase, Dr. Rosenbaum would simply send Property Mortgage Company a check and power of attorney, giving the Company authority to purchase and control an interest in a note and deed of trust. When the underlying debt was paid off, Mr. Glickman would automatically place the proceeds in a separately numbered account, pending reinvestment in another trust deed-at least that is what was supposed to happen. Two ways for Dr. Rosenbaum to lose money in this plan would be the inability of Property Mortgage to pay on its guarantees if its debtors defaulted, and misuse of cash held by Property Mortgage Company for investors pending rollover into new deeds of trust after old ones were paid off.

In 1991, Property Mortgage Company failed. Dr. Rosenbaum filed evidence in opposition to the motion for summary judgment suggesting that the failed company had engaged in fraud. Dr. Rosenbaum's theory is that the cause of the failure was not merely the collapse of California's inflated real estate market. He claims that Property Mortgage Company looted the cash accounts and ran a Ponzi scheme to cover the guarantees and defalcations. His evidence suggests that Mr. Glickman was paying off old investors with new investors' money, and commingled investors' money with company money, using it freely instead of reinvesting it. The truth of these averments has not been tested, so we intimate no judgment as to whether Mr. Glickman or Property Mortgage Company were dishonest. We assume without deciding, for purposes of summary judgment analysis, that Dr. Rosenbaum's ERISA plan lost money because of Mr. Glickman's dishonesty.

This lawsuit is Dr. Rosenbaum's attempt to shift the loss from his ERISA plan to the insurer which wrote his employee dishonesty bond. His theory is that Mr. Glickman is a person whose dishonesty was covered by the bond. The district court granted summary judgment in favor of the bonding company, and we affirm.

Hartford Fire Insurance Company issued the employee dishonesty bond. It promises to pay for loss resulting from employee dishonesty, and, as supplemented by an ERISA endorsement, defines "employee" more broadly than common law employees:

EMPLOYEE DISHONESTY COVERAGE FORM

A. Coverage

1. We will pay for loss of, and loss from damage to, Covered Property resulting directly from the Covered Cause of Loss.

2. Covered Cause of Loss: "Employee Dishonesty."

. . . . .

D. Additional Exclusions, Conditions and Definitions

3. Additional Definitions

a. "Employee Dishonesty" in paragraph A.2. means only dishonest acts committed by an "employee," whether identified or not, acting alone or in collusion with other persons, except you or a partner....

. . . . .

CRIME GENERAL PROVISIONS

C. GENERAL DEFINITIONS

1. "Employee" means:

a. Any natural person:

(1) While in your service (and for 30 days after termination of service); and (2) Whom you compensate directly by salary, wages or commissions; and

(3) Whom you have the right to direct and control while performing services for you; or

b. Any natural person employed by an employment contractor while that person is subject to your direction and control and performing services for you excluding, however, any such person while having care and custody of property outside the "premises."

But "employee" does not mean any:

(1) Agent, broker, factor, commission merchant, consignee, independent contractor or representative of the same general character; or

(2) Director or trustee except while performing acts coming within the scope of the usual duties of an employee.

The Hartford policy included an endorsement labeled "Welfare and Pension Plan ERISA Compliance." This endorsement broadens the definition of employee:

In compliance with certain provisions of the Employee Retirement Income Security Act (ERISA):

1. "Employee" also includes any natural person who is:

a. A trustee, an officer, employee, administrator or a manager, except an administrator or a manager who is an independent contractor, of any Employee Welfare or Pension Benefit Plan (hereafter called Plan) insured under this insurance, and

b. Your director or trustee while that person is handling funds or other property of any Plan insured under this insurance.

ANALYSIS

We review summary judgment de novo. Jesinger v. Nevada Federal Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994). The district court decided this case on a different theory from the one we use, but the issues discussed below are briefed, and we are free to affirm on any basis supported by the record. Wallis v. Simplot Co., 26 F.3d 885, 888 (9th Cir.1994).

I. Coverage.

Dr. Rosenbaum's theory of coverage is that Hartford sold him a bond covering anyone who had to be bonded under ERISA, Mr. Glickman fell within that class, so the bond covered him. To reach this conclusion under the language of the policy, he argues that Mr. Glickman was a trustee, so was covered by the extension of the definition of "employee" in the ERISA compliance endorsement to "any natural person who is a trustee."

Dr. Rosenbaum provided evidence in opposition to summary judgment that Mr. Glickman was a fiduciary who had to be bonded under ERISA. This raises three questions: (1) whether Mr. Glickman was a fiduciary; (2) whether a fiduciary is covered under the coverage for trustees under the Hartford bond; and (3) whether the requirement that Mr. Glickman be bonded implies that Hartford's bond covered him.

A. Fiduciary.

"Fiduciary" is defined functionally in ERISA, see 29 U.S.C. § 1002(21)(a), and includes those who render investment advice for a fee under certain circumstances. 29 C.F.R. § 2510.3-21(c); Thomas, Head & Greisen Employees Trust v. Buster, 24 F.3d 1114, 1117 (9th Cir.1994). We conclude that Dr. Rosenbaum established a genuine issue of fact as to whether Mr. Glickman was a fiduciary under Thomas, Head & Griesen. A reasonable finder of fact could conclude from the evidence submitted by Dr. Rosenbaum that, pursuant to a mutual understanding, Mr. Glickman provided individualized investment advice on a regular basis, that the advice consisted of recommendations as to the advisability of investing in second deeds of trust, that it was given in exchange for a fee, and that Mr. Glickman did not merely sell deed of trust notes to Dr. Rosenbaum's pension plan. This would satisfy the factors in Thomas, Head & Greisen. Id. at 1117-18.

B. Applicability of trustee coverage.

A determination that Mr. Glickman functioned as a fiduciary would not establish coverage under the bond. The bond does not "Employee" also includes any natural person who is:

say that it covers fiduciaries, just trustees and certain others:

a. A trustee, an officer, employee, administrator or a manager, except an administrator or a manager who is an independent contractor, of any Employee Welfare or Pension Benefit Plan (hereafter called Plan) insured under this insurance....

(emphasis added). Dr. Rosenbaum's plan expressly designates the trustees: his wife and himself:

e. TRUSTEE.

18. The trustee shall be (check one box):

CALPAC, Inc.'s master trust

----

XX June Rosenbaum and Joseph Rosenbaum, M.D.

---- (named individual(s) or holding institution with

trust powers).

June Rosenbaum and Joseph Rosenbaum, M.D. are the trustees covered by the bond because they are the only trustees th...

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