Reich v. Lancaster

• Citation: 843 F. Supp. 194
• Decision Date: 18 September 1993
• Docket Number: No. 3:89-CV-1296-P.,3:89-CV-1296-P.
• Parties: Robert REICH, Secretary of the United States Department of Labor, Plaintiff, v. Jerry D. LANCASTER, et al., Defendant.
• Court: U.S. District Court — Northern District of Texas

843 F. Supp. 194

Robert REICH, Secretary of the United States Department of Labor, Plaintiff, v. Jerry D. LANCASTER, et al., Defendant.

No. 3:89-CV-1296-P.

United States District Court, N.D. Texas, Dallas Division.

September 18, 1993.

Jordana Wilson, U.S. Dept. of Labor, Office of the Sol. Plan Benefits Securities Div., Washington, DC, for plaintiff.

Mark Weitz, Law Office of Mark Weitz, Austin, TX, for defendant.

MEMORANDUM OPINION AND ORDER

SOLIS, District Judge.

This is an action brought by the Secretary of Labor pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq., as amended. The Defendants remaining in the case are Jerry D. Lancaster, JDL & Associates (JDL), Diversified Consultants, Inc. (DCI), Derek Lancaster, Daron Lancaster, Aaron Lancaster, and Kenneth Poole, a trustee of the ERISA Fund at issue in this case, The Plumbers and Pipefitters' Local 454 and Local 665 Health and Welfare Fund ("the Fund").¹

The Secretary seeks injunctive relief, restitution and compensatory damages for the Fund. As to the Defendants Jerry D. Lancaster, JDL & Associates, DCI and Kenneth Poole, the Secretary alleges they are liable to the Fund for breaches of fiduciary duties under 29 U.S.C. §§ 1104, 1105, 1106(b) and 1109, as parties in interest engaging in nonexempt prohibited transactions, under 29 U.S.C. § 1106(a), and as non-fiduciary knowing participants in breaches by fund fiduciaries of their duties. The government alleges that Derek, Daron and Aaron Lancaster are liable under 29 U.S.C. § 1106 as parties in interest who engaged in non-exempt prohibited transactions. The government also alleges that Derek Lancaster is liable as a non-fiduciary knowing participant in breaches of duty by fund fiduciaries, namely the Board of Trustees of the Fund.

The parties waived trial by jury, and the case was tried before the Court. This Memorandum Opinion and Order will serve as the Court's findings of fact and conclusions of law. Rule 51(a), Fed.R.Civ.P.

Jerry D. Lancaster is a licensed insurance agent in Dallas, Texas. He is the owner and Chairman of the Board of Directors of JDL & Associates. DCI is a wholly-owned subsidiary of JDL & Associates. Jerry D. Lancaster controlled both companies during the time periods relevant to this lawsuit. Defendants Derek, Daron and Aaron Lancaster are sons of Jerry D. Lancaster, and are employees, officers and directors of JDL and DCI.

The Plumbers and Pipefitters' Local 454 and Local 665 Health and Welfare Fund (the Fund) was established pursuant to a trust instrument. Among the purposes of the Fund was to provide to eligible employees and their dependents' life and medical insurance.

I. Facts

Defendant Kenneth Poole was a trustee of the Fund, and in 1983, contacted Jerry Lancaster about rendering services to the Board of Trustees in connection with the insurance needs of the Fund.

Prior to May 1983, Martin E. Segal Company provided consulting services to the Fund. As of July 1, 1982, the Fund elected to become self-insured, and to insure against incurring more than $250,000.00 in claims, the Fund purchased stop-loss insurance. United of Omaha Life Insurance Co. was hired by the Fund as claims administrator, and the Fund purchased from Omaha stop-loss insurance and group term life insurance with a death benefit of $5,000.00 for eligible employees. At the time the Fund elected to self insure, it had accumulated $513,613.00 in assets. By May 31, 1983, the Fund had accumulated assets of $779,216.00.

Before May, 1993, there were complaints about the claims administration work being done by Omaha. Kenneth Poole, as Chairman of the Board of Trustees of the Fund, began looking for other options for the Fund. Poole contacted Lancaster, and based on what he had heard about him brought him to the attention of the Board of Trustees. At the first meeting of the board that Lancaster attended on May 17, 1983, the trustees voted to hire Lancaster and his companies. DCI was hired as consultant, replacing the Segal Company, and JDL was hired as claims administrator, replacing United of Omaha. At this same meeting Lancaster proposed, and the trustees approved, changing their stop loss and group term life insurance from Omaha to Life Insurance Company of the Southwest. Lancaster also proposed purchasing a $10,000 whole life insurance policy from Guaranty Income Life Ins. Co. for each member of Locals 454 and 665. The trustees approved this proposal as well. The purchase of the whole life policies required a large outlay of cash by the Fund. At the time Lancaster made this proposal to the trustees, he did not disclose what his fees or commissions were, nor did he disclose that JDL was the regional manager for Guaranty Income with an obligation to attempt to meet a production goal of at least $500,000.00 of first year life insurance premiums.

In May 1984, Lancaster proposed, and the trustee approved, the purchase of an additional $10,000.00 whole life insurance policy from Guaranty Income for each member. Together, the policies purchased from Guaranty Income in 1983 and 1984 obligated the Fund to pay almost $300,000.00 per year in premiums. As of August, 1984, by virtue of prepaying premiums for subsequent years, the fund had spent over $700,000.00 in premiums to Guaranty Income. Of this amount, over $400,000.00 was paid to Lancaster and his companies as commissions.

By letter dated June 26, 1985, Guaranty Income canceled Jerry Lancaster's agency contract and the Regional Manager contract (Ex. 125).

On August 14, 1985, Kenneth Poole wrote Guaranty Income a letter cancelling the Funds' life insurance policies with Guaranty.

On September 1, 1985, the Fund purchased from American General individual universal life insurance policies for each member of Locals 454 and 665 with a death benefit of $25,000.00. For these policies the Fund paid premiums totalling over $211,000.00. The Defendants Derek, Daron and Aaron Lancaster and JDL received commissions totalling $146,015.00.

Thus by the end of 1985, a little over two and one-half years after Lancaster became the Fund's consultant, the Fund had spent nearly $1,000,000.00 in premiums to purchase life insurance, and Lancaster and his companies and employees had received over $550,000.00 in commissions.

II. Liability as Fiduciaries

It is undisputed that Defendant Kenneth Poole as a member of the Board of Trustees, was a fiduciary with respect to the Fund. The Secretary contends that Jerry Lancaster, JDL & Associates, and DCI were also fiduciaries and therefore liable under §§ 404, 405, 406 and 409 of ERISA. 29 U.S.C. § 1104, 1105, 1106 and 1109.

Title 29, United States Code, § 1002(21)(A) provides: "a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan."

In American Federation of Unions v. Equitable Life Assurance Society, 841 F.2d 658 (5th Cir.1988), the Fifth Circuit held that a claims administrator of a union health and welfare fund was a plan fiduciary under ERISA. The court held that the administrator's authority to "grant or deny claims, to manage and disburse fund assets and to maintain claim files clearly qualifies as discretionary control respecting management of a plan or its assets within the meaning of § 1002(21)(A)." Defendants argue that they are not fiduciaries in this respect because the Fund's Board of Trustees had the power to review JDL's decisions on payment of claims. That argument, however, was rejected by the Fifth Circuit in American Federation, stating that "the term fiduciary includes those to whom some discretionary authority has been given." Id. at 663. The Defendants themselves, in an effort to justify the fees charged by JDL as reasonable, take the position that JDL did more as a claims administrator than had been done by the Fund's previous claims administrator. Pursuant to the 1983 Administrative Service Agreement with the Fund, JDL was to perform administrative, actuarial, and claims processing services. (Ex. 29). A review of the 1983 Agreement and an April 4, 1983 letter from JDL & Associates reveals that the functions performed by JDL are similar to the functions of the plan administrator in the American Federation case. The Court, therefore, finds that JDL & Associates was a fiduciary with respect to the Fund.

The Court also finds that Jerry Lancaster controlled both JDL & Associates and DCI. The trustees of the Fund were dealing with Jerry Lancaster and hired him to give advice and to handle all of the Fund's health, medical and life insurance needs. JDL and DCI were the means by which Lancaster performed the services he provided to the Fund. The two companies shared the same office, shared employees, had the same telephone numbers, and were run by Jerry Lancaster and his sons. The Court, therefore, finds that for purposes of ERISA, Jerry D. Lancaster, JDL & Associates, and DCI are one and the same and that each is a fiduciary within the meaning of § 1002(21)(A). As the Second Circuit has stated, "Neither the separate corporate status of ... corporations, nor the general principle of limited shareholder liability afford protection where exacting obeisance to the corporate form is inconsistent with ERISA's remedial purposes. Parties may not use shell-game-like maneuvers to shift fiduciary obligations to one legal entity while channeling profits from self-dealing to a separate legal entity under their control." Lowen v. Tower Asset Management, Inc., 829 F.2d 1209 (...