Lowen v. Tower Asset Management, Inc.
| Decision Date | 17 September 1987 |
| Docket Number | 1260,Nos. 1259,D,s. 1259 |
| Citation | 829 F.2d 1209 |
| Parties | 8 Employee Benefits Ca 2457 Robert J. LOWEN, Allen C. Scott, Lloyd M. Martin, Francis E. Kyser, David Boyle, Robert Murphy, James R. Hammer, Edmund Davis, Franklin K. Riley, Anthony Naccarato, Michael Swayne, Richard Evans, and Allen Taylor, as Trustees of the MM & P Ind. Ret. Acct. Plan and/or MM & P Pension Plan, Plaintiffs-Appellees, v. TOWER ASSET MANAGEMENT, INC., Tower Capital Corporation, Tower Securities, Inc., Andrew A. Levy, Samuel Kovnat, W. Randolph Wheeler, and Walter Levering, Defendants, Tower Asset Management, Inc., Tower Capital Corporation, Tower Securities, Inc., Andrew A. Levy, and W. Randolph Wheeler, Defendants-Appellants. The Secretary of the United States Department of Labor, Intervenor. ockets 87-7205, 87-7289. |
| Court | U.S. Court of Appeals — Second Circuit |
Seham, Klein & Zelman, New York City, on the brief, for plaintiffs-appellees Murphy, Hammer, Davis, Riley, Naccarto, Swayne, Evans and Taylor.
Burton M. Epstein, Steinberg & Tugendrajch, New York City, on the brief, for plaintiffs-appellees Lowen, Scott, Martin, Kyser and Boyle.
Bernice K. Leber, New York City (William A. Alper, Steven Marshall, James Keneally, Summit Rovins & Feldesman, New York City, of counsel), for defendants-appellants.
Jane M. Kheel, Washington, D.C. (George R. Salem, Solicitor of Labor, Patricia Rodenhausen, Regional Solicitor of Labor, Robert N. Eccles, Associate Solicitor, Plan Benefits Sec. Div., Louis L. Joseph, Counsel for Fiduciary Litigation, Plan Benefits Sec. Div., Lois R. Zuckerman, Atty., Plan Benefits Sec. Div., Office of the Solicitor, U.S. Dept. of Labor, of counsel), for intervenor.
Bettina B. Plevan, New York City (Myron D. Rumeld, Kevin G. Chapman, Proskauer Rose Goetz & Mendelsohn, New York City, of counsel), for plaintiffs-appellees.
Before LUMBARD, WINTER and MINER, Circuit Judges.
Defendants-appellants Tower Asset Management, Inc. ("Tower Asset"), Tower Capital Corporation ("Tower Capital"), Tower Securities, Inc. ("Tower Securities"), Andrew A. Levy and W. Randolph Wheeler appeal from Judge Broderick's grant of summary judgment in favor of plaintiffs-appellees, the Trustees of the International Organization of Masters, Mates & Pilots' Pension Plan ("Pension Plan") and Individual Retirement Account Plan ("IRAP") (collectively, the "Plans"), 653 F.Supp. 1542. Judge Broderick held that the corporations and their three shareholders 1 violated the prohibited transaction provisions of the Employee Retirement Income Security Act
of 1974, 29 U.S.C. Secs. 1001-1461 (1982) ("ERISA"), by causing the investment of approximately $30 million of the Plans' assets in companies in which one or more defendants owned an interest and/or from which one or more defendants received fees or other consideration. The investments caused the Plans to lose more than $20 million. Defendants concede that the transactions occurred, and there are in our view no material facts in dispute. We therefore hold that: (1) the investment of the Plans' assets in companies in which one or more defendants owned an equity interest and/or from which one or more received compensation in connection with the investments violated Section 406 of ERISA; (2) Tower Asset is liable as a fiduciary under ERISA because of its position as investment manager for the Plans; and (3) Tower Capital, Tower Securities and the firms' shareholders are jointly and severally liable with Tower Asset. Accordingly, we affirm the grant of summary judgment.
Samuel Kovnat, Andrew Levy and W. Randolph Wheeler owned 50%, 25% and 25%, respectively, of the defendant corporations and directly controlled corporate activities as the firms' directors and officers. Tower Asset was an investment manager to the Plans, Tower Capital was an investment banking corporation, and Tower Securities was a registered broker-dealer.
In early 1983, the Trustees of the Masters, Mates & Pilots' IRAP selected Tower Asset as the investment manager for $15 million of IRAP assets. The IRAP is an individual account or defined contribution plan within the meaning of Section 3(34) of ERISA, 29 U.S.C. Sec. 1002(34). Pursuant to the Discretionary Investment Management Agreement between the Trustees and Tower Asset, the Trustees appointed Tower Asset as "Investment Manager to provide continuous investment advice for the Trust and to have full discretion and authority to manage, invest and reinvest the Investment Account Assets ... as fully as the Trustees themselves could do." Tower Asset's fee was equal to one-half of one percent of the market value of the IRAP assets under its management. Prior to the signing of this agreement, the IRAP entrusted an additional $10 million of its assets to Tower Asset's management. In November 1984, $6.5 million of Pension Plan assets was entrusted to Tower Asset for management pursuant to a similar "Discretionary Investment Management Agreement." The Pension Plan is a defined benefit plan within the meaning of Section 3(35) of ERISA, 29 U.S.C. Sec. 1002(35).
Tower Asset managed the approximately $30 million of IRAP and Pension Plan assets until November 1985. During that time, it invested the two Plans' assets in risky ventures, most of which involved companies in the maritime industry. Many of these companies had no capital and were burdened by debt far in excess of their assets. Some have since ceased operations.
One or more of the individual and corporate defendants owned substantial equity interests in some of the companies in which Tower Asset invested the Plans' assets. These transactions are summarized in Appendix A. Many of the companies in which Tower Asset invested the Plans' assets had agreed to pay Tower Capital or Tower Securities commissions, fees and securities in return for investment banking services, including the raising of capital. In most cases, these agreements were executed at or immediately prior to the time that Tower Asset made the particular investments on behalf of the Plans. Also in most cases, the Plans' investments constituted the bulk or all of the capital raised by Tower Capital or Tower Securities. These transactions are summarized in Appendix B.
In early 1986, the value of the Plans' assets managed by Tower Asset was estimated at only $9.5 million, having declined from approximately $30 million in November 1984. Plaintiffs began the present action under ERISA Section 502(e)(1), 29 U.S.C. Sec. 1132(e)(1), in December 1985, shortly after the dismissal of Tower Asset as investment manager. In April 1986, plaintiffs moved for summary judgment on Provided with extensive documentation of the transactions described supra, Judge Broderick held that the investments in question violated ERISA Section 406(b)(1), which prohibits a fiduciary from "deal[ing] with the assets of the Plan in his own interest or for his own account," 29 U.S.C. Sec. 1106(b)(1), and ERISA Section 406(b)(3), which prohibits a fiduciary from receiving "any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan," 29 U.S.C. Sec. 1106(b)(3). Because Judge Broderick found that Tower Asset, Tower Capital and Tower Securities were ERISA fiduciaries and that the "close and intimate relationship between the corporate and individual defendants" justified piercing the corporate veil, he held all of the defendants jointly and severally liable.
those of its claims that alleged prohibited transactions.
Judge Broderick ruled that the defendants were required both to disgorge all profits and other consideration received in violation of Section 406 and to make good to the Plans the investment losses resulting from the prohibited transactions. A final judgment was entered with respect to the claim for restitution of fees and other compensation. Tower Asset, Tower Capital, Tower Securities, Levy, and Wheeler filed this appeal from that final judgment. The determination of the damages resulting from losses to the Plans was referred to Magistrate Buchwald.
Subsequently, the district court granted a motion to intervene by the Secretary of Labor, who urges us to affirm. The Secretary had brought a similar action, naming as defendants Tower Asset, Tower Capital, Tower Securities, the individual owners of the Tower entities, the Trustees of the Plans who selected Tower Asset as investment manager, and the Plans themselves.
The principal issues before us are whether the Tower Asset investments described above violated Section 406 of ERISA and, if so, which defendants are liable for those violations.
The threshold question is whether, assuming for the moment all of the corporate and individual defendants to be a single enterprise for purposes of ERISA, the transactions in question were prohibited by that statute. We conclude that they were.
ERISA establishes both a duty of loyalty and a duty of care. The Act's legislative history indicates that the "crucible of congressional concern was the misuse and mismanagement of plan assets," particularly self-dealing by plan managers. Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 141 n. 8, 105 S.Ct. 3085, 3090 n. 8, 87 L.Ed.2d 96 (1985) (describing legislative history). At issue in the present case is the duty of loyalty as codified in ERISA Section 406(b), which provides in pertinent part:
A fiduciary with respect to a plan shall not--(1) deal with the assets of the plan in his own interest or for his own account, ... or (3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.
29 U.S.C. Sec. 1106(b). This rule both assures protection to plan beneficiaries and provides notice to plan fiduciaries of their obligations. It protects beneficiaries by...
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