Chao v. Malkani, S-00-3941.

• Decision Date: 09 July 2002
• Docket Number: No. S-00-3941.,S-00-3941.
• Citation: 216 F.Supp.2d 505
• Parties: Elaine L. CHAO, Secretary of Labor, United States Department of Labor, Plaintiff, v. Roma MALKANI, et. al, Defendants.
• Court: U.S. District Court — District of Maryland

216 F.Supp.2d 505

Elaine L. CHAO, Secretary of Labor, United States Department of Labor, Plaintiff, v. Roma MALKANI, et. al, Defendants.

No. S-00-3941.

United States District Court, D. Maryland.

July 9, 2002.

COPYRIGHT MATERIAL OMITTED

Joan M. Roller, Richard T. Buchanan, U.S. Department of Labor GA, Philadelphia, PA, Natalie A. Appetta, U.S. Department of Labor GA, Philadelphia, PA, Evert H. Van Wijk, U.S. Department of Labor, Kansas City, MO, for Plaintiff.

John C. Hayes, Jr., Leslie P. Machado, Nixon Peabody LLP, David W. O. Brien, Crowell and Moring LLP, Washington, DC, Glenn William Darrow Golding, Information Systems & Networks Corporation, Bethesda, MD, for Defendants.

MEMORANDUM OPINION

SMALKIN, Chief Judge.

This case is before the Court on cross-motions for partial summary judgment on the plaintiff's second amended complaint, which charges the defendants with numerous violations and attempted violations of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq. (1999). The plaintiff claims that, starting in November 2000, the defendants, Roma Malkani and the Information Systems and Network Corporation (ISN), unlawfully attempted to transfer to ISN over $2.5 million of the assets of an ISN Employees' Pension Plan (the Plan). The plaintiff also argues that the defendants unlawfully ordered a third-party administrator to forfeit the pension accounts of several ex-ISN employees, based on an improper and unjustified interpretation of the Plan's vesting provisions.

The plaintiff asks this Court to find that Malkani's and ISN's actions constitute a breach of their fiduciary duties and warrant their removal as Plan fiduciaries. The plaintiff also requests a permanent injunction, barring the defendants from serving as a fiduciary to any ERISA-covered plan in the future. The plaintiff also requests the return of any monies transferred from the Plan to ISN as a result of these attempted violations of ERISA. The parties have briefed the issues fully and no oral hearing is necessary. Local Rule 105.6 (D.Md.2002). For the reasons set forth below, the Court will DENY the defendants' motion for partial summary judgment and GRANT the plaintiff's cross-motion for partial summary judgment.

I. Background

ISN is a government engineering services firm located in Bethesda, Maryland, which has been in business since October 1, 1980. Roma Malkani is, and has been, the sole shareholder and Chief Executive Officer of ISN. The ISN Employees' Pension Plan was created in 1982. Malkani is chairperson of ISN's Pension Plan Committee, which is comprised of members of ISN's management personnel and employee participants in the Plan. The Plan's documents name the Committee as the Plan Administrator, which "shall construe and interpret the Plan, and shall determine all questions arising in the administration, interpretation and application of the Plan." The Administrator is a named fiduciary for the purposes of Title I of ERISA. See ERISA § 402(a)(1) & (2), 29 U.S.C. § 1102(a)(1) & (2).

The Plan is a defined contribution plan under which ISN is required to make yearly contributions for each eligible ISN employee who completes more than 1000 hours of service during a Plan year in an amount equal to a percentage of the employee's compensation. From 1982 until the end of 1988, the Plan had a graduated vesting schedule whereby participants became vested in greater percentages of their account balances the longer they worked for the company. Since 1989, the Plan has had a "cliff" vesting provision whereby participants are not vested in any of their account balances until they complete five years of service with ISN, at which point they become 100 percent vested. A participant who terminates employment prior to vesting forfeits the nonvested portion of her account balance. The annual amount of forfeitures is applied to reduce ISN's annual required cash contribution to the Plan.

Throughout the life of the Plan, ISN performed limited administrative duties, but the Committee also hired "third-party administrators." In addition to various other duties, these administrators were responsible for calculating the amount of ISN's required annual contribution to the Plan and the participants' account balances at the end of each year.

A. Grounds for the Original Complaint

In November 2000, the plaintiff filed her original complaint, alleging that defendant Malkani violated Sections 404 and 406 of ERISA, 29 U.S.C. §§ 1104 and 1106, by failing to take any measures to ensure that ISN, the Plan Sponsor, made the required contributions to the Pension Plan in 1995 and 1996. According to the complaint, in April 1997, ISN made a contribution to the Pension Plan for 1995 in the amount of $204,367, seven months after the date it was required to make its 1995 contribution. The plaintiff argues that this contribution was deficient by approximately $70,000. The plaintiff also alleged that ISN was required to make a contribution to the Plan of approximately $90,000 for 1996, but made no contribution at all. The plaintiff further alleged that, regarding the payments ISN did make for 1995 and 1996, Malkani failed to allocate those contributions among the accounts of the Plan's participants.

The plaintiff's original complaint also alleged that the defendants had failed properly to allocate money to participants of ISN's Profit Sharing Plan, which was a separate defined contribution plan, established in 1984, pursuant to Section 401(k) of the Internal Revenue Code. In January 1996, the Pension and Welfare Benefits Administration (PWBA) commenced an investigation of the Profit Sharing Plan. As a result of its investigation, PWBA determined that ISN had failed to make timely deposits of participant contributions to the Profit Sharing Plan from January 1993 through August 1996. While ISN ultimately deposited the contributions, PWBA determined that the Profit Sharing Plan was owed $24,123 in lost interest because of the delinquencies and requested, inter alia, that ISN pay that amount to the Plan. After the investigation's findings were presented to ISN, it forwarded $24,123 for deposit in the Profit Sharing Plan's trust fund on or about January 15, 1998. The plaintiff's complaint alleges that the $24,123 was not allocated among participants' accounts for almost two years, until December 1999, despite repeated inquires from PWBA to ISN concerning the allocation.

B. Temporary Injunctive Relief and the First Amended Complaint

The Plan documents state that an employee becomes fully vested upon the completion of five years of service to ISN. In April 2000, ISN directed Principal Financial Group (Principal), the Plan's record-keeper and custodian of assets at the time, to forfeit the account balance of any terminated employee who had left the employment of ISN prior to participating in the Plan for five years, even if the employee had been employed with the company for five years. Principal did so, and the forfeited amounts were allocated to a separate account.

On November 29, 2000, the day after this lawsuit was filed, ISN's Chief Financial Officer, at Malkani's instruction, directed Principal to pay $435,761.52 to ISN for "plan administration expenses" for Plan years 1994 through 2000. This request, however, was accompanied by little supporting documentation, and Principal refused to pay ISN. Malkani again demanded payment to ISN, but Principal again refused and voiced concerns to ISN's counsel about the retroactive nature of the payments and their probable effect on participants' account balances. ISN subsequently submitted a more detailed invoice for Plan year 2000, in the amount of $62,888.05, which Principal paid. Despite Principal's refusal to release any more money, on May 24, 2001, ISN demanded $706,264.54, for administrative expenses in addition to the $62,888.05 already paid. Principal refused to make payment, and ISN terminated its contract with Principal.

At the defendants' direction, on August 17, 2001, the entire assets of the Plan, $6,404,738.65, were wired from Principal to Salomon Smith Barney, Inc. (SSB), and Malkani became trustee of the account. As trustee, Malkani would have had the authority to withdraw money from the account to pay ISN for the claims Principal repeatedly had refused.

Upon learning of the above activity, the plaintiff moved for a temporary restraining order to prevent ISN from gaining unrestricted access to the Plan's assets. The plaintiff also moved to amend her complaint, arguing that the attempted transfer of funds to reimburse the defendant for administrative costs violated ERISA. Also, the plaintiff argued that the defendants' order to Principal to forfeit the accounts of certain employees was illegal because ERISA requires that all of an employee's years of service be considered when an employer applies the vesting provisions of a pension plan. The plaintiff argued that both actions were further grounds for relieving Malkani and ISN of their fiduciary responsibilities.

This Court permitted the amendments and entered a temporary restraining order prohibiting the transfer of the Plan's funds to ISN. On September 5, 2001, this Court entered a consent order enjoining ISN from receiving any payment from the Plan until the case was resolved or the parties agreed to the payment.

C. The "Overpayments" Demand and the Second Amended Complaint

On September 13, 2001, just one week after this Court entered the consent order, the defendants again attempted to transfer money from the Plan to ISN. This time, Malkani sent a letter to SSB directing the transfer of over $1.8 million of the Plan's assets to an ISN corporate account at SSB. SSB reported this activity to the plaintiff. The defendants asserted that ISN was entitled to the $1.8 million because it had been over-funding the Plan since its inception as a result of miscalculations by third-party administrators. The parties' counsel met...