Associates in Adolescent Psychiatry v. Home Life

Decision Date19 December 1989
Docket NumberNo. 82 C 4706.,82 C 4706.
Citation729 F. Supp. 1162
PartiesASSOCIATES IN ADOLESCENT PSYCHIATRY, S.C., Marvin J. Schwarz and Joanne G. Schwarz, Trustees of the Defined Benefit and Defined Contribution Pension Plans and Trusts of Associates in Adolescent Psychiatry, S.C. and All Beneficiaries and Participants Thereunder, Plaintiffs, v. HOME LIFE INSURANCE COMPANY OF NEW YORK, a New York corporation, individually and d/b/a Qualified Pension/Profit Sharing Consultants, Inc.; Hospital Trust National Bank, a National Banking Association, Canapary Financial Corp., a corporation; Robert Canapary, individually and d/b/a Qualified Pension/Profit Sharing Consultants, Inc.; Ronald Aure, individually and d/b/a Qualified Pension/Profit Sharing Consultants, Inc.; Pension Actuaries, Inc., a corporation; Eric Kranke; Levenfeld, Kanter, Baskes and Lippitz, a partnership; and Jerry H. Biederman, Defendants.
CourtU.S. District Court — Northern District of Illinois

COPYRIGHT MATERIAL OMITTED

Gregory Friedman, Coffield, Ungaretti, Harris & Slavin, Chicago, Ill., for Associates in Adolescent Psychiatry.

Ernest Irons, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., for Home Life Ins. Co. of New York.

Phillip L. Harris, Winston & Strawn, J. Scott Meyers, Williams & Montgomery, Ltd., Chicago, Ill., for Hospital Trust Nat. Bank.

Barbara A. McDonald, Lord, Bissell & Brook, Chicago, Ill., for Robert Canapary and Canapary Financial Corp.

Robert Radasevich, Neal, Gerber, Eisenberg & Lurie, Chicago, Ill., for Pension Actuaries, Inc.

James O. Nolan, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., for Eric Kranke.

Eugene L. Mahoney, Mahoney & Zdeb, Ltd., Kenneth R. Gaines, Altheimer & Gray, Chicago, Ill., for Levenfeld, Kanter, Baskes, Lippitz and Biederman.

MEMORANDUM OPINION AND ORDER

NORDBERG, District Judge.

I. INTRODUCTION

This case concerns three of the most fecund sources of federal litigation: securities regulation, ERISA and RICO. The Court has determined that the securities and ERISA counts are stillborn; it orders further briefing of the RICO claims to see if they survive.

The plaintiffs are Associates in Adolescent Psychiatry, S.C. ("AAP"); AAP's owner, Marvin Schwarz, and his wife, Joanne, the trustees of AAP's defined benefit and defined contribution pension plans and trusts; and all of the participants in the plans and their beneficiaries. In 1977, AAP established a defined benefit plan to complement its previously established defined contribution plan. The plans then purchased insurance contracts from Home Life Insurance Company of New York to fund their benefit guarantees.

Complaining of various misrepresentations in the sale of these insurance products, plaintiffs brought a multi-count complaint against Home Life and several other defendants. The other defendants are two Home Life field underwriters, Robert Canapary and Ronald Aure, as well as Canapary's business, Canapary Financial Corp. ("Canapary defendants"); Rhode Island Hospital Trust National Bank ("HTNB"); Eric Kranke and his wholly owned company, Pension Actuaries, Inc. ("Kranke defendants"); and AAP's former lawyers, Levenfeld, Kanter, Baskes & Lippitz, and one of the firm's attorneys at the time, Jerry Biederman ("Levenfeld defendants" or "group").

Plaintiffs allege that all of the defendants breached fiduciary duties and related-party rules under §§ 3(21)(A) and 3(14) of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1002(21)(A) and 1002(14). With respect to the defendants other than the Levenfeld group, plaintiffs allege violations of §§ 5, 12 and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l and 77q, as well § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and related Rule 10b-5, 12 C.F.R. 240.10b-5. Similarly, with respect to the defendants other than the Levenfeld group, plaintiffs allege various violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962(a)-(d), as well as conspiracy to violate RICO. The Levenfeld defendants are named in a separate count of professional malpractice.

Each of the defendants has moved for summary judgment pursuant to Fed.R. Civ.P. 56. Plaintiffs have cross-moved for summary judgment, seeking a determination that one of the insurance contracts involved in the case is a security and that Home Life and HTNB are ERISA fiduciaries.

For the reasons explained below, the Court concludes that the insurance contracts are not securities under the 1933 and 1934 acts. It also concludes that none of the defendants is an ERISA fiduciary.

II. FACTS

Under Rule 56, the Court may grant judgment as a matter of law provided that the material facts are not in genuine dispute. See generally Wolf v. City of Fitchburgh, 870 F.2d 1327, 1329-30 (7th Cir. 1989); Spring v. Sheboygan Area School District, 865 F.2d 883, 886 (7th Cir.1989). The rule requires that all reasonable inferences be drawn in favor of the nonmoving party; in the case of cross-motions for summary judgment, this means that the Court draws all reasonable inferences in favor of the party that is the nonmovant with respect to the particular motion being considered. Therefore, the facts (which will be supplemented as necessary in the Court's analysis of the law) are as follows.

Marvin Schwarz practiced psychiatry in the Chicago area through his wholly owned professional corporation, AAP.1 In April or May 1977, prompted by recent changes in the tax laws, Schwarz began to consider setting up a defined benefit pension plan to supplement AAP's defined contribution and profit-sharing plans. In July of that year, after having received a written pension plan proposal from William M. Mercer, Inc., Schwarz ran into an acquaintance, David Cooper, a field underwriter for Home Life Insurance Co. of New York. This chance meeting led to a subsequent session later in the month with both Cooper and Robert Canapary, another field underwriter for Home Life (as well as a registered representative for the sale of securities).

At this meeting, Schwarz showed Canapary a copy of the Mercer proposal. Canapary suggested that a different plan might allow AAP to make larger contributions than the Mercer plan permitted. With Schwarz's agreement to look at any proposal he might put forward, Canapary arranged for Eric Kranke, president and sole shareholder of Pension Actuaries, Inc., to prepare cost-illustrations for a defined benefit pension plan that would allow the maximum tax-deductible contributions. After considering one of Kranke's cost-illustrations later in the month, Schwarz gave the go-ahead to Canapary, leading to AAP's adoption of the Home Life Prototype Defined Benefit Plan and Trust.

Schwarz and his wife, Joanne, completed documents for the prototype plan and trust, as well as a participation agreement, on the last business day of July 1977 in the Chicago offices of Levenfeld, Kanter, Baskes & Lippitz, who had been AAP's lawyers since 1968. The prototype plan named the Schwarzes as plan trustees, and AAP as plan administrator. The plan also provided for the appointment of an investment manager, but stated that if none were named in the participation agreement or trust agreement, this responsibility would shift to the named trustees. The first participation agreement listed the Schwarzes (in their role as trustees) as the "Plan Investment Manager." Final Pretrial Order, Agreed Statement of Uncontested Facts ("UF") paras. 73-74. The participation agreement further indicated that AAP planned to fund the plan through the purchase of life insurance and flexible or variable annuities (or both types of annuities). Upon adoption of the defined benefit plan, AAP terminated the profit-sharing plan.

Canapary and Cooper, along with Ronald Aure, another Home Life field underwriter and Cooper's supervisor, sold two Home Life contracts to fund the new AAP defined benefit plan. One was the Home Life Flexible Annuity ("FA"), a contract which allowed participants to accumulate retirement funds at guaranteed interest plus a variable rate to be set at the beginning of each year (the variable rate was later adjusted more frequently, as will be discussed below). The other was the Pension Series Whole Life ("PSWL") contract, a policy providing for a $10,000 death benefit and accumulating cash value for use upon retirement or withdrawal from the plan. The FA was used to fund AAP's defined contribution plan as well. Canapary and Aure received commissions on contributions made to the FA and premiums paid on the PSWL. Prior to July 1977, Schwarz, as trustee of the defined contribution and profit-sharing plans, had handled their investment portfolios, purchasing such investments as equity securities, bonds and real estate.

Home Life is a mutual life insurance company incorporated under New York law. Its development of the FA in 1974-75 was an attempt to meet competition in the tax-sheltered annuity market and respond to the demand for tax-favored retirement programs created by the passage of ERISA in 1974. UF 115. AAP's plans purchased the first version of the FA, offered in 1975. This version permitted two ways of making contributions under the contract. Under the "periodic contribution" form of the FA, contributions were made on a regular yearly basis; the minimum contribution was $240 and the maximum was 300% of the scheduled contribution stipulated in the contract. Each annual contribution bore an administration charge of 6.75% per year, $15 per year and $1 for each contribution payment. The alternate funding method permitted minimum lump-sum contributions of $2,000; there was a one-time charge of $25 per participant, plus 5% of the first $50,000 contributed, 2% of the next $50,000, 1% of the next $100,000, and ½% of any excess over $200,000. All contributions were held in Home Life's general asset account, rather than in separate accounts.

During this initial accumulation phase of the 1975 FA, Home Life guaranteed the...

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