138 F.3d 98 (2nd Cir. 1998), 768, Silverman v. Mutual Ben. Life Ins. Co.

Docket Nº:768, Docket 96-7795.
Citation:138 F.3d 98
Party Name:David W. SILVERMAN, as Independent Fiduciary of The Unitron Graphics, Inc. Profit Sharing Trust and Unitron Graphics, Inc. Profit Sharing Trust-Union and Non-Union Division, Plaintiff-Appellant, v. MUTUAL BENEFIT LIFE INSURANCE COMPANY, Principal Mutual Life Insurance Company And Helene Gorny, Defendants-Appellees, Jacob Zucker and Aaron Fertig, De
Case Date:March 10, 1998
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 98

138 F.3d 98 (2nd Cir. 1998)

David W. SILVERMAN, as Independent Fiduciary of The Unitron

Graphics, Inc. Profit Sharing Trust and Unitron

Graphics, Inc. Profit Sharing

Trust-Union and Non-Union

Division, Plaintiff-Appellant,



Insurance Company And Helene Gorny, Defendants-Appellees,

Jacob Zucker and Aaron Fertig, Defendants.

Nos. 768, Docket 96-7795.

United States Court of Appeals, Second Circuit

March 10, 1998

        Argued June 2, 1997.

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        David W. Silverman, New City, NY (Christopher P. Tirro, Granik Silverman, et al., New City, NY, of counsel), for Plaintiff-Appellant.

        George Berger, New York City (Bruce J. Turkle, Phillips Nizer, Benjamin Krim & Ballon, LLP, New York City, of counsel), for Mutual Benefit Life Insurance Company and Helene Gorny.

        Howard S. Wolfson, New York City (Patricia Anne Kuhn, Whitman Breed Abbott & Morgan, New York City, of counsel), for Principal Mutual Life Insurance Company.

        Gary S. Tell, Washington, DC (J. Davitt McAteer, Marc. I. Machiz and Karen L. Handorf, Atty's for the Secretary of Labor, Washington, DC), Amicus Curiae, Department of Labor.

        Thomas S. Gigot, Kathryn A. English, Groom and Nordberg, Chtd., Washington, DC, Amicus Curiae, The Insurance Company Benefits Group.

        Beth Heifetz (counsel of record), Patricia Dunn, Jones, Day, Reavis & Pogue, Washington, DC, Philip E. Stano, American Council of Life Insurance, Washington, DC, Amicus Curiae, The American Council of Life Insurance.

        Before: MESKILL, JACOBS, and LEVAL, Circuit Judges.

        LEVAL, Circuit Judge:

        David Silverman ("Silverman"), independent fiduciary of the Unitron Graphics, Inc. Profit Sharing Trust and the Unitron Graphics, Inc. Profit Sharing Trust--Union and

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Non-Union Division (the "plan"), 1 brought this suit against Mutual Benefit Life Insurance Company ("Mutual Benefit"), a Mutual Benefit employee named Helene Gorny ("Gorny"), and Principal Mutual Life Insurance Company ("Principal"), pursuant to the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq. Mutual Benefit administered the plan and invested its funds under contract with the plan. Principal took over plan administration and investment after Mutual Benefit's contract was terminated. After Mutual Benefit's administration was terminated, but before Principal received the plan funds, Jacob Zucker and Aaron Fertig, the two plan trustees, embezzled $130,000 in plan funds. Silverman sued Mutual Benefit, Gorny, and Principal on the theory that their violation of various ERISA provisions allowed the embezzlement to occur and prevented recovery of plan funds after the embezzlement. 2 The United States District Court for the Eastern District of New York (Ross, J.) granted summary judgment in favor of defendants on all counts.

        Silverman alleges that Mutual Benefit and Gorny are personally liable for loss to the plan because, when Mutual Benefit's contract was terminated, they returned the plan's funds to Zucker upon his written request. Mutual Benefit's actions were required under the terms of the plan and Mutual Benefit's contract with the plan. Mutual Benefit's return of plan funds was consistent with the summary plan description (the "SPD") and complied with all relevant Department of Labor ("DOL") regulations. The return of the funds cannot constitute the basis for a finding that Mutual Benefit or Gorny breached their ERISA fiduciary duties, and summary judgment in their favor was properly granted.

        Silverman contends Principal should be liable under 29 U.S.C. § 1109(a) because it failed to take steps to remedy the fiduciary breach committed by Zucker and Fertig in violation of 29 U.S.C. § 1105(a)(3). The district court granted summary judgment to Principal because Silverman had failed to produce evidence from which a jury could find that, at the time of Principal's alleged breach, Zucker or Fertig had money that might have remedied the loss. The majority of our panel agrees. The grant of summary judgment in favor of Principal is therefore affirmed as well.


        The parties do not dispute the facts giving rise to this action. In 1988, Unitron Graphics, Inc. ("Unitron") established the plan for employee profit-sharing. It was established as an "individual account" or "defined contribution" ERISA plan under 29 U.S.C. § 1002(34). Each participating employee could elect to have Unitron set aside part of his salary as a contribution to the plan; in addition, the company could make matching and discretionary contributions.

        The plan had two named trustees: Jacob Zucker and Aaron Fertig, who were owners and officers of Unitron. The plan provided that joint trustees "shall act by a majority of their number but may authorize one or more of them to sign all papers on their behalf." It further provided that Mutual Benefit "may rely on the signature of any Trustee on ... any document used in connection with" a plan-related contract.

        The plan's assets were invested pursuant to a group annuity contract between the trustees and Mutual Benefit. The trustees retained the right to cancel the contract at any time.

        Mutual Benefit experienced well-publicized financial problems in the Spring and Summer of 1991, which culminated in a July 16, 1991, order of the Superior Court of New Jersey placing Mutual Benefit into court-supervised rehabilitation.

        On July 1, 1991, Zucker wrote to Mutual Benefit to cancel the contract. The letter was on Unitron stationery and was signed by Zucker as trustee. The letter requested that Mutual Benefit return the plan funds to Unitron,

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along with an accounting breakdown for each plan participant. Mutual Benefit did not send the funds to Unitron, apparently because the funds could not properly be paid to the company but only to the trustees in their fiduciary capacity.

        On August 15, 1991, Zucker, as plan trustee, wrote a second letter to Mutual Benefit. This letter instructed that the assets of the plan 3 be remitted to the Unitron Graphics Inc. Profit Sharing Trust with a breakdown by participant.

        Accordingly, Mutual Benefit liquidated the fund's investments and defendant Gorny, a Mutual Benefit customer service supervisor, approved a check requisition. On August 30, 1991, Mutual Benefit sent Zucker a check for the proceeds in the amount of $239,811.28 payable to the plan.

        Zucker deposited the check in the plan's bank account on September 6, 1991. Over the next few weeks, Zucker and Fertig embezzled $130,000 from the account.

        On July 2, 1991, prior to receiving plan funds from Mutual Benefit but after sending the first letter cancelling Mutual Benefit's contract, Zucker entered into a new group annuity contract with Principal under which Principal agreed to manage the plan. Zucker and Fertig were named trustees under the contract.

        On September 17, 1991, Howard Lowett, Unitron's Vice President of Administration, sent Principal a letter stating that "I am enclosing a breakdown of the check that was sent to us by Mutual Benefit Life," and detailing each plan participant's assets. The breakdown totalled $239,811.28, the amount of the check remitted by Mutual Benefit to Zucker.

        On October 8, 1991, Principal received a wire transfer in the amount of $109,811.28. Principal was unable to allocate the money among plan participants because the amount transferred did not correspond with the breakdown sent by Lowett.

        On November 5, 1991, Principal sent a letter to Unitron, addressed to Zucker and Fertig as trustees of the plan. Principal stated that it had "received, from what limited recordkeeping data we have, only a portion" of the plan assets liquidated by Mutual Benefit. Principal noted that "[i]t is our understanding that we are to be the only investment manager for your profit sharing plans," and requested that Zucker and Fertig forward the balance of the funds. Principal also noted that employee salary deferral contributions had not been forwarded in the four months since the plan entered into its contract with Principal, although DOL regulations required that they be forwarded within ninety days of their receipt. Principal received no answer.

        On November 14, 1991, Principal sent a second letter to Lowett, explaining that "[u]ntil this deposit's allocation is complete, we will place your deposit into an unallocated account." Once again, Principal did not receive a response.

        Internal memos indicate that by mid-November Principal recognized the possible existence of a legal problem arising from the missing $130,000 and the apparent failure to submit employee deferral contributions. On January 28, 1992, Principal sent another letter to Zucker and Fertig, in which it noted that the missing $130,000 "must be accounted for," and threatened to refuse to accept additional funds if Zucker and Fertig did not produce the $130,000 or explain its absence within five business days. The letter also noted the failure to remit outstanding employee deferral amounts as required by federal regulation, and asserted that ERISA § 502(l) would require notification to the Secretary of Labor if the funds were not turned over within five business days.

        Several days later, Principal received a phone call from a Arnold Freilich ("Freilich"), a consultant acting as representative for Unitron. Freilich advised that Unitron had filed for Chapter 11 bankruptcy and requested that Principal delay informing the DOL about the delinquency in forwarding employee deferral amounts until a buyer could be found for the business. Freilich informed Principal that Zucker had used the

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employee deferral funds to meet the company's operating and payroll expenses. Principal told Freilich that...

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