Nat'l Sec. Sys., Inc. v. Iola

• Decision Date: 08 November 2012
• Docket Number: 10–4155.,Nos. 10–4154,s. 10–4154
• Citation: 700 F.3d 65
• Parties: NATIONAL SECURITY SYSTEMS, INC.; Steven Cappello; Universal Mailing Service, Inc.; Michael Maroney, Sr.; Michael Maroney, Jr.; Lima Plastics, Inc.; Jose M. Caria, also known as Joseph M. Caria; Margit Gyantor; Finderne Management Company, Inc.; Rocque Dameo; Daniel Dameo; Alloy Cast Products, Inc.; Kenneth Fisher; Frank Panico v. Robert L. IOLA, Jr.; James W. Barrett; Gerard T. Papetti; Cigna Financial Advisors Inc.; Lincoln National Life Insurance Company; U.S. Financial Services Corporation; Ronn Redfearn; Steven G. Shapiro; Tri–Core, Inc.; Commonwealth Life Insurance Company; Monumental Life Insurance Company; Peoples Security Life Insurance Company; Raymond J. Ankner; Beaven Companies, Inc.; CJA Associates, Inc.; Nationsbank Texas Trust; Riggs National Bank; PNC Bank N.A.; Bank of America Universal Mailing Service, Inc.; Michael Maroney, Sr.; Michael Maroney, Jr.; Lima Plastics, Inc.; Jose M. Caria, also known as Joseph M. Caria; Margit Gyantor; Finderne Management Company, Inc.; Rocque Dameo; Daniel Dameo; Alloy Cast Products, Inc.; Kenneth Fisher; Frank Panico, Appellants. National Security Systems, Inc.; Steven Cappello; Universal Mailing Service, Inc.; Michael Maroney, Sr.; Michael Maroney, Jr.; Lima Plastics, Inc.; Jose M. Caria, also known as Joseph M. Caria; Margit Gyantor; Finderne Management Company, Inc.; Rocque Dameo; Daniel Dameo; Alloy Cast Products, Inc.; Kenneth Fisher; Frank Panico v. Robert L. Iola, Jr.; James W. Barrett; Gerard T. Papetti; Cigna Financial Advisors Inc.; Lincoln National Life Insurance Company; U.S. Financial Services Corporation; Ronn Redfearn; Steven G. Shapiro; Tri–Core, Inc.; Commonwealth Life Insurance Company; Monumental Life Insurance Company; Peoples Security Life Insurance Company; Raymond J. Ankner; Beaven Companies, Inc.; CJA Associates, Inc.; Nationsbank Texas Trust; Riggs National Bank; PNC Bank N.A.; Bank Of America, James W. Barrett, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

700 F.3d 65

NATIONAL SECURITY SYSTEMS, INC.; Steven Cappello; Universal Mailing Service, Inc.; Michael Maroney, Sr.; Michael Maroney, Jr.; Lima Plastics, Inc.; Jose M. Caria, also known as Joseph M. Caria; Margit Gyantor; Finderne Management Company, Inc.; Rocque Dameo; Daniel Dameo; Alloy Cast Products, Inc.; Kenneth Fisher; Frank Panico
v.
Robert L. IOLA, Jr.; James W. Barrett; Gerard T. Papetti; Cigna Financial Advisors Inc.; Lincoln National Life Insurance Company; U.S. Financial Services Corporation; Ronn Redfearn; Steven G. Shapiro; Tri–Core, Inc.; Commonwealth Life Insurance Company; Monumental Life Insurance Company; Peoples Security Life Insurance Company; Raymond J. Ankner; Beaven Companies, Inc.; CJA Associates, Inc.; Nationsbank Texas Trust; Riggs National Bank; PNC Bank N.A.; Bank of America Universal Mailing Service, Inc.; Michael Maroney, Sr.; Michael Maroney, Jr.; Lima Plastics, Inc.; Jose M. Caria, also known as Joseph M. Caria; Margit Gyantor; Finderne Management Company, Inc.; Rocque Dameo; Daniel Dameo; Alloy Cast Products, Inc.; Kenneth Fisher; Frank Panico, Appellants.
National Security Systems, Inc.; Steven Cappello; Universal Mailing Service, Inc.; Michael Maroney, Sr.; Michael Maroney, Jr.; Lima Plastics, Inc.; Jose M. Caria, also known as Joseph M. Caria; Margit Gyantor; Finderne Management Company, Inc.; Rocque Dameo; Daniel Dameo; Alloy Cast Products, Inc.; Kenneth Fisher; Frank Panico
v.
Robert L. Iola, Jr.; James W. Barrett; Gerard T. Papetti; Cigna Financial Advisors Inc.; Lincoln National Life Insurance Company; U.S. Financial Services Corporation; Ronn Redfearn; Steven G. Shapiro; Tri–Core, Inc.; Commonwealth Life Insurance Company; Monumental Life Insurance Company; Peoples Security Life Insurance Company; Raymond J. Ankner; Beaven Companies, Inc.; CJA Associates, Inc.; Nationsbank Texas Trust; Riggs National Bank; PNC Bank N.A.; Bank Of America, James W. Barrett, Appellant.

Nos. 10–4154, 10–4155.

United States Court of Appeals,
Third Circuit.

Argued Nov. 16, 2011.
Filed: Nov. 8, 2012.

[700 F.3d 73]

Steven J. Fram, Esq. (Argued), Kerri E. Chewning, Esq., Archer & Greiner, Haddonfield, NJ, for Appellants/Cross–Appellees.

Edward M. Koch, Esq., White & Williams, Philadelphia, PA, Christopher P. Leise, Esq., (Argued), White & Williams, Cherry Hill, NJ, for Appellee/Cross–Appellant.

Before: FUENTES and CHAGARES, Circuit Judges, and RESTANI, Judge. ^*

OPINION
CHAGARES, Circuit Judge.

We are called upon once again to address litigation arising out of a tax avoidance scheme devised in the late 1980s.¹ Defendant James Barrett, a financial planner, induced the plaintiffs, four small New Jersey corporations and their respective owners, to adopt an employee welfare benefit plan known as the Employers Participating Insurance Cooperative (“EPIC”). EPIC's advertised tax benefits, the plaintiffs discovered years later, were illusory; the scheme masqueraded as a multiple employer welfare benefit plan, but in fact was a method of deferring compensation. After the Internal Revenue Service audited the plaintiffs' plans and disallowed certain deductions claimed on their federal income tax returns, the plaintiffs initiated this suit against Barrett and other entities involved in the scheme. They asserted claims under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001– 1461; the civil component of the Racketeer Influenced and Corrupt Organization Act (“RICO”), 18 U.S.C. §§ 1961– 1968; and New Jersey statutory and common law. A jury found Barrett liable on the plaintiffs' common law breach of fiduciary duty claim, but not liable on their RICO claim. The District Court held a bench trial on the ERISA claim and issued partial judgment for the plaintiffs.

The parties raise a litany of challenges to rulings made by the District Court over the course of the proceedings. Several of their claims present matters of first impression in this Circuit. For the reasons that follow, we will affirm the District Court in most respects. On the issues of whether the District Court properly deemed certain state law causes of action preempted by ERISA, properly held certain ERISA claims time-barred, and properly limited the jury's consideration of one theory of recovery under RICO, we will

[700 F.3d 74]

vacate and remand for further proceedings.

I.² A.

EPIC was a complex tax avoidance scheme designed to exploit 26 U.S.C. § 419A(f)(6), a tax code provision that exempts “10–or–more–employer plans” from limitations on employers' deductions for contributions to employee welfare benefit plans. SeeIRS Notice 95–34, 1995–1 C.B. 309. Promoters of EPIC marketed it to closely held corporations as a means of obtaining two attractive tax benefits: pre-retirement, it permitted employers to claim large deductions for contributions to employee benefit plans, and post-retirement, it promised owner-employees a stream of tax-free, annuity-like payments. Defendant Ronn Redfearn, a now-deceased insurance salesman, created EPIC. He formed defendant Tri–Core, Inc., a corporation that has since filed for bankruptcy protection, to administer employee benefit plans that conformed with EPIC's specifications.

EPIC purported to be a multiple employer welfare benefit plan and trust, but in fact was an umbrella structure within which discrete employee welfare benefit plans operated. To join EPIC, a participating corporation signed a standard form contract drafted by Tri–Core and titled the “EPIC Welfare Benefit Plan and Trust Adoption Agreement” (“Adoption Agreement”). An Adoption Agreement established an employee welfare benefit plan funded by employer contributions, set up a trust to hold plan assets, and generally bound the employer to the terms of participation in EPIC. It denominated the employer as the plan fiduciary and administrator, but also required the employer to delegate “substantial ministerial functions” to Tri–Core. In particular, Tri–Core was responsible for formulating rules necessary to administer the plans, determining employees' eligibility for benefits, processing claims, collecting and accounting for premiums, and directing others with respect to plan administration.

Tri–Core selected two group term life insurance policies as the only investment vehicles for the plans. The Inter–American Insurance Company of Illinois initially issued the policies, but after it declared bankruptcy in 1991, defendant Commonwealth Life Insurance Company (“Commonwealth”) began issuing the policies. One of the products, the Millennium Group 5 (“MG–5”) policy, provided participants with a fixed pre-retirement death benefit, charged premiums commensurate with risk, and extended to participants an option to convert to an individual life insurance policy upon retirement or termination of employment.

The second product was the continuous group (“C-group”) policy. A C-group policy consisted of two phases: an accumulation phase and a payout phase. In the accumulation phase, the employer made contributions (in the form of insurance premiums) to a group term life insurance policy that funded a guaranteed pre-retirement death benefit for an employee's beneficiaries. The policies were valued at a multiple of the employee's most recent annual salary. C-group premiums far exceeded premiums for conventional life insurance policies, often by a multiple of four to six. The portion of the premium necessary to fund the death benefit was set aside for that purpose. The remainder of the premium—the difference between the C-group premiums and the actual cost of insuring the employee's life—was reserved

[700 F.3d 75]

as so-called “conversion credits.” Conversion credits were maintained in a “premium stabilization reserve fund,” an account that guaranteed policy holders a minimum interest rate.

To transition to the payout phase, the employee could convert from the group term life insurance policy to an individual life insurance policy. Conversion could occur under five circumstances, including retirement or termination of employment. Upon conversion, the death benefit from the group policy would transfer to the employee's individual policy, as would conversion credits from the interest-bearing account. The value of the transferred conversion credits was calculated at the time of conversion and was not guaranteed. A portion of the conversion credits was earmarked for lowering the post-retirement premium to the premium associated with the employee's age at the time of entry into EPIC rather than at the time of conversion. Surplus conversion credits not necessary for keeping the policy in force were then made available to the employee, who could borrow against the policy at an interest rate identical to that of the interest-bearing account in which the conversion credits were held. That is, the employee could withdraw funds from the policy as a loan that would never be repaid. In this way, the employee could access, as tax-free income, excess funds paid as “contributions” by the employer to the plan.

As mentioned, EPIC called for establishment of a trust to hold and manage each plan's assets. A number of banks were designated trustees of EPIC plans over the course of EPIC's operation. In practice, Tri–Core, not the trustees, directed the management of plan assets; the trustee operated only as a pass-through entity. When an employer adopted an EPIC plan, Tri–Core instructed the trustee to purchase the mix of MG–5 and C-group life insurance products selected by the employer. The employer then deposited its contributions with the bank trustee on a biannual or quarterly schedule, and the trustee remitted the premiums to Commonwealth's general asset account. Commonwealth thereafter placed a portion of the payments in the premium stabilization reserve fund.

As the architect, promoter, and manager of EPIC, Tri–Core received a commission from Commonwealth on each C-group policy it sold. Commonwealth paid Tri–Core out of its general asset account and set...