Brown v. Roth

• Citation: 729 F. Supp. 391
• Decision Date: 31 January 1990
• Docket Number: Civ. A. No. 89-518.
• Parties: Francis P. BROWN, etc., Plaintiffs, v. Lawrence ROTH, et al., Defendants.
• Court: U.S. District Court — District of New Jersey

729 F. Supp. 391

Francis P. BROWN, etc., Plaintiffs, v. Lawrence ROTH, et al., Defendants.

Civ. A. No. 89-518.

United States District Court, D. New Jersey.

January 31, 1990.

Barry A. Kozyra, Walder, Sondak, Berkeley & Brogan, Roseland, N.J., for plaintiffs.

Christopher J. Bednarz, Voorhees & Acciavatti, Morristown, N.J., for defendant Roth.

Gerald T. Ford, Siff, Rosen & Parker, Newark, N.J., for defendants Lipman, Cestare & Selznick.

OPINION

WOLIN, District Judge.

This matter arises under the Employment Retirement Income Security Act ("ERISA" or "the Act"), 29 U.S.C. § 1001, et seq. and requires the Court to probe the definitional boundaries of that shadowy figure, the "fiduciary." Plaintiff Francis P. Brown, as trustee and beneficiary on behalf of Alpha Profit Sharing Trust ("the Trust") has filed suit against Lawrence Roth, a certified public accountant, and the accounting firm of Lipman, Cestare & Selznick ("LCS"), alleging negligence (Count One), professional malpractice (Count Two) and breach of fiduciary duties to the Trust (Counts Three through Six). Defendant Roth now moves for summary judgment dismissing the complaint and all claims, or in the alternative for dismissal of plaintiff's claims for punitive and/or treble damages; defendant LCS joins in defendant Roth's motion and alternatively seeks dismissal of the state law claims, the striking of the jury trial demand and dismissal of the punitive damages claim.

For the reasons that follow, the Court finds that defendant Roth is not a fiduciary under ERISA and is therefore not subject to suit under that statute. The Court further finds that the connection between LCS and Roth is insufficient to render LCS liable, under any legal theory, for the acts of Roth. Thus, the federal claims against both defendants will be dismissed with prejudice. The Court declines to accept jurisdiction over the pendent state claims and will dismiss them without prejudice for lack of subject matter jurisdiction.

I. BACKGROUND

The facts not in dispute are as follows: from January, 1980 until August 9, 1987 Lawrence Roth was the certified public accountant for Alpha Aviation Insurance Agency ("Alpha"). Francis P. Brown is the president of Alpha and a Trustee and beneficiary of the Trust. In 1984 Roth and Brown discussed the creation of a profit sharing/retirement plan for Alpha's employees. Subsequently, Brown retained EPB Pension Consultants to draft a suitable plan and the Trust was created. Brown and Eugene Duflo were named Trustees of the Trust.

The Trustees initially placed the assets of the Trust in a non-interest bearing account. Roth suggested a transfer of the assets to a money market account. When requested to supply the name of a broker for such a transaction, Roth recommended his broker at Smith Barney, a national brokerage firm.

In late 1986, Roth explored the possibility of purchasing second mortgages as a personal investment and decided to invest with Michael Clott. During a subsequent discussion Roth told Brown of his investment decision and Brown decided to make a similar investment as Trustee on behalf of the Trust. Although Brown initially wanted to invest all the Trust monies, $50,000, Roth convinced the Trustee to limit the investment to $25,000. In January of 1987, Brown issued a check from the Smith Barney account payable to the Rockwood Insurance Company and forwarded the check to Roth for delivery to Clott. One month later, Roth called Brown to inform him that the mortgages had "matured" and to request further instructions. Brown Certif., ¶ 16. After a discussion of Roth's decision to "roll over" his personal investment, Brown told "Roth to do the same thing with the Trust's money." Id.

During April, 1987, Roth discovered that his and the Trust's investments in Clott's second mortgages were worthless and furthermore that Clott, principal of the fraudulent investment scheme, had been arrested and was in custody. On February 9, 1989 Brown filed the current complaint against Roth and LCS alleging, among other things, breaches of fiduciary duty.

II. DISCUSSION

ERISA was enacted to "protect ... the interests of participants in employee benefit plans and their beneficiaries ... by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans." 29 U.S.C. § 1001(b) (1982). The statute provides that a civil action may be brought "by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title." 29 U.S.C. § 1132(a)(2). Section 1109 imposes personal liability on fiduciaries for breaches of their fiduciary duty.¹ ERISA defines "fiduciary" in section 1002(21):

(A) Except as otherwise provided in subparagraph (B) addressing plan assets invested in securities issued by an investment company registered under 15 U.S.C. § 80a-1 et seq., 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 discretionary authority or discretionary responsibility in the administration of such a plan. Such term includes any person designated under section 1105(c)(1)(B)² of this title.

29 U.S.C. § 1002(21)(A).

The following oft-quoted legislative history sheds light on the meaning of this provision:

Under this definition, fiduciaries include officers and directors of a plan, members of a plan's investment committee and persons who select these individuals. Consequently, the definition includes persons who have authority and responsibility with respect to the matter in question, regardless of their formal title. The term "fiduciary" also includes any person who renders investment advice for a fee and includes persons to whom "discretionary" duties have been delegated by named fiduciaries.

While the ordinary functions of consultants and advisers to employee benefit plans (other than investment advisers) may not be considered as fiduciary functions, it must be recognized that there will be situations where such consultants and advisers may because of their special expertise, in effect, be exercising discretionary authority or control with respect to the management or administration of such plan or some authority or control regarding its assets. In such cases, they are to be regarded as having assumed fiduciary obligations within the meaning of the applicable definition.

H.R.Cong.Rep. No. 1280, 93d Cong., 2d Sess. 323, reprinted in 1974 U.S.Code Cong. & Admin.News 4639, 5038, 5103.

A. Fiduciary Analysis as to Defendant Roth

Plaintiff urges the Court to hold that Roth is a fiduciary under either of two theories: first, that Roth is a fiduciary under section 1002(21)(A)(i), and (iii), because he exercised discretionary authority, control and responsibility over the Trust, and secondly, that he is a fiduciary under section 1002(21)(A)(ii) because he rendered investment advice to the Trust and was indirectly compensated, or because he has the authority or responsibility to render such advice. The Court will analyze each theory separately.

1. Authority and Control Under § 1002(21)(A)(i), (iii)

Under plaintiff's first theory, Roth allegedly provided tax, financial and investment advice to Brown; Brown, in reliance upon that advice, invested the Trust assets in a now worthless enterprise. Distilled to its essence, plaintiff's argument is that Roth exercised discretionary authority, control and responsibility over the Trust indirectly through Brown who did not exercise his own discretion and authority without the imprimatur of Roth.

It is undisputed that any discretion exercised by Roth arose through his dealings with Brown from his position as Alpha's accountant, not from his status as a "named" fiduciary under 29 U.S.C. § 1102(a). Complt., ¶¶ 56-58. Roth was not designated under authority of section 1105(c)(1)(B) and Trust Art. XII § 20, to carry out fiduciary responsibilities of the Trust. Thus, the question before the Court is whether Roth performed any function beyond his role as accountant, for the Third Circuit has clearly indicated, "accountants, attorneys, and other outside consultants are to be treated as plan fiduciaries only if they go beyond their normal roles and assume management or administrative responsibilities." Painters of Philadelphia District Council v. Price Waterhouse, 879 F.2d 1146, 1150 (3d Cir.1989).

Under this functional approach the Court's examination of Roth's duty to the retirement plan is guided by principles established by the Department of Labor ("the Department"), the agency charged by statute with the interpretation of ERISA.³ The Court accords substantial deference to its views. National Freight, Inc. v. Larson, 760 F.2d 499, 505 (3d Cir.), cert. denied, 474 U.S. 902, 106 S.Ct. 228, 88 L.Ed.2d 227 (1985).

The Department regulations provide an example of an accountant rendering actuarial or consulting advice to a plan. The regulations indicate that absent a showing of "control respecting the management of the plan," or the "plan's assets," investment advice for a fee, or "discretionary responsibility in the administration of the Plan," an accountant is not a fiduciary.⁴See also Interpretive Bulletin 75-8, 29 C.F.R. § 2509.75-8 (1988) (persons who have no power to make any decision as to plan policy, interpretation, practices or procedures but who perform purely ministerial duties such as making recommendations to others for decisions with respect to plan administration are not fiduciaries; a named fiduciary may not delegate responsibility for management and control of plan assets to any one other than an investment manager as...