Cornell Mfg. Co., Inc. v. Mushlin

• Decision Date: 10 September 1979
• Citation: 70 A.D.2d 123,420 N.Y.S.2d 231
• Court: New York Supreme Court — Appellate Division
• Parties: CORNELL MANUFACTURING COMPANY, INC., Plaintiff-Respondent, v. Sidney B. MUSHLIN, Muriel A. Mushlin and Bank of America National Trust& Savings Association, as Trustee of the Cornell Manufacturing Company, Inc. Employees Pension Trust, Defendants-Appellants.

Page 231

420 N.Y.S.2d 231

70 A.D.2d 123

CORNELL MANUFACTURING COMPANY, INC., Plaintiff-Respondent, v. Sidney B. MUSHLIN, Muriel A. Mushlin and Bank of America National Trust& Savings Association, as Trustee of the Cornell Manufacturing Company, Inc Employees Pension Trust Defendants-Appellants.

Supreme Court, Appellate Division, Second Department.

Sept. 10, 1979.

Cleary, Gottlieb, Steen & Hamilton, New York City (Edwin B. Mishkin, New York City, of counsel), for defendants-appellants Sidney B. Mushlin and Muriel A. Mushlin.

Seward & Kissel, New York City (Daniel P. Fitzgerald and Darya Aberback, New York City, of counsel), for defendant-appellant Bank of America Nat. Trust & Sav. Ass'n.

Squadron, Ellenoff, Plesent & Lehrer, New York City (Neal M. Goldman and Judith R. Cohen, New York City, of counsel), for plaintiff-respondent.

Before MOLLEN, P. J., and RABIN, GULOTTA and O'CONNOR, JJ.

MOLLEN, Presiding Justice.

In an action to recover damages for self-dealing and waste of corporate assets, (1) the defendants Sidney and Muriel Mushlin appeal from so much of an order as denied their motion to dismiss the amended complaint insofar as it relates to their "management of, and/or receipt of benefits under," the Cornell Manufacturing Company, Inc. Employees Pension Trust and (2) the defendant Bank of America National Trust & Savings Association, Trustee of the Cornell Manufacturing Company, Inc. Employees Pension Trust appeals from so much of the same order as denied its cross motion to dismiss the amended complaint insofar as it joins the Bank as a party to the action.

This appeal concerns the scope of the Federal Employee Retirement Income Security Act of 1974 (ERISA) (U.S.Code, tit. 29, § 1001, Et seq.) and presents the question of whether, in the circumstances of this case, it preempts an otherwise valid State cause of action for misconduct brought against a corporate officer who, at the time of the alleged wrongdoing, was also the sole trustee of the corporation's pension plan.

Beginning in 1941 and continuing for over 27 years, the assets and business of the plaintiff Cornell Manufacturing Company, Inc., (Cornell), were wholly owned by defendants Sidney B. Mushlin and Muriel A. Mushlin. In 1959 they established an employees pension plan which was funded solely by the company. The Mushlins and other eligible persons participated in the plan, and Sidney Mushlin was its sole trustee. He and his wife, Muriel, served as the only members of the pension committee.

In or about February, 1969, the Mushlins sold the enterprise to National Screw & Manufacturing Company, now a division of Monogram Industries, Inc. Sidney Mushlin was asked to stay on as president and general manager of Cornell, and he signed an employment agreement to that effect. He also continued as sole trustee of the pension plan and, with his wife, remained a member of the pension committee. In August, 1974, Mrs. Mushlin, who was still in Cornell's employ, joined her husband as cotrustee of the pension plan.

Two years later, in August, 1976, the Mushlins were removed as trustees of the plan and their employment by Cornell was terminated. In February of the following year Cornell commenced this lawsuit against the Mushlins claiming that they had wasted corporate assets by, among other things, causing excessive payments to be made into the pension plan over which they had exclusive control.

As set forth in plaintiff's amended complaint, the specific allegations of wrongdoing were as follows:

"8. During the period March 15, 1969 through July 31, 1976, MUSHLIN caused CORNELL to pay to MURIEL sums of money aggregating approximately $79,219.04 exclusive of payroll related expenses and to make contributions to the Cornell Manufacturing Co., Inc. Employees Pension Trust ('the Pension Plan') for Muriel's account in sums approximating $60,000.00.

"15. MUSHLIN violated his fiduciary duty to CORNELL by wrongfully computing his cash compensation to be used as the basis for computing his monthly benefit, and by reporting to the Pension Plan administrator earnings for the year 1965 of $100,000. In so doing, he wrongfully failed to report his average earnings for the years 1960-1965 and he wrongfully included bonuses which are to be excluded by the terms of the Pension Plan from the computation of earnings. In addition, MUSHLIN, aided and abetted by MURIEL, forbade the administrator of the Pension Plan from using the lower current annuity purchase costs in computing the actuarial liability of the Pension Plan, but insisted on the use of the higher costs, resulting in contributions by CORNELL to the Pension Plan far in excess of those required to fund the Pension Plan.

"16. In December, 1975, MUSHLIN and MURIEL, as the sole members of the pension committee, wrongfully permitted MUSHLIN to take his pension benefits in a lump sum. On the basis of the improper earnings calculation and the inflated annuity costs described in paragraph 15 hereof, defendants caused the Pension Plan to pay MUSHLIN the sum of $520,566.00 plus interest of $6,940.88 in a lump sum payment instead of the monthly pension to which MUSHLIN was entitled.

"18. Between February 1, 1969 and July 31, 1976, in violation of his agreement and duty to devote his full time and attention to CORNELL's affairs and to render business services solely and exclusively for CORNELL, MUSHLIN, aided and abetted by MURIEL, engaged in a separate business entity known as 'Argo Advertising Agency'/'Argo Agency, Inc.' During said period, among other things, defendants wrongfully caused CORNELL to designate such entity to receive commissions from media in which CORNELL placed advertising, the benefit of which properly belonged to CORNELL.

"19. During the period from January 1, 1974 through July 31, 1976, defendants wrongfully converted substantial sums of money, believed to be in excess of $9,765.00, from CORNELL by causing CORNELL to pay defendants' personal non-business related expenses for personal purchases and by causing CORNELL to pay MUSHLIN petty cash for which he submitted no justification.

"20. As alleged in paragraph 8 above, during the period from February 1, 1969 through July 31, 1976, defendants caused CORNELL to pay MURIEL monies aggregating $79,219.04 for services allegedly rendered on a continuing basis despite the fact that MURIEL was rarely and sporadically present for work, and, when she did appear for work, the services she performed were of little or no value. In addition, defendants caused CORNELL to pay payroll taxes and to make contributions to the Pension Plan in excess of $60,000.00 to which MURIEL was not entitled."

Initially, the Mushlins moved to dismiss the original complaint insofar as it related to the pension plan. In the alternative, they sought to have the plan itself joined as a party plaintiff. Special Term denied that branch of the motion which sought to dismiss part of the complaint, without prejudice to renew. However, the alternative request for joinder was granted and it was ordered that the pension plan be joined either as a party plaintiff or, if it refused to be so joined, as a party defendant. The plan's recently appointed trustee, the Bank of America National Trust & Savings Association (the Bank), declined to participate as a party plaintiff, and consequently an amended complaint, naming the Bank as a party defendant, was drawn and served.

Thereafter, the Mushlins renewed their motion to dismiss the amended complaint "insofar as it relates to the * * * ('Pension Plan') and defendants' * * * management of and/or receipt of benefits under the Pension Plan," on the ground that ERISA preempts any State cause of action with respect thereto. The Bank cross-moved for dismissal of the amended complaint insofar as it named the Bank as a party to the action. Special Term denied both the motion and the cross motion, and these appeals followed.

We turn first to the Mushlins' contention that the portion of the plaintiff's claim pertaining to alleged excessive payments to the pension plan is preempted by ERISA and must be dismissed on the ground that such claim is "related" to the plan.

ERISA was enacted to prevent the loss of anticipated retirement benefits by providing adequate safeguards to assure the equitable character and financial soundness of employee benefit plans (see U.S.Code, tit. 29, § 1001 subds. (b) and (c)). The broad purpose of the Act was "to assure American workers that they may look forward, with anticipation, to a retirement with financial security and dignity, and without fear that this period of life will be lacking in the necessities to sustain them as human beings within our society" (H.Conf.Rept. 93-533, 1974 U.S.Code Cong. & Admin.News, pp. 4639, 4646).

To assure uniformity in the application of the minimum standards of conduct established by the Act, Congress felt it necessary to eliminate the threat posed by conflicting or inconsistent State or local regulation of employee benefit plans. ¹ Accordingly, a supersedure section was added providing in pertinent part that:

"the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" (U.S.Code, tit. 29, § 1144 subd. (a)).

The gravamen of the Mushlins' argument on this appeal is that this provision preempts the plaintiff's case of action insofar as it relates to the pension plan. We disagree.

The question of the precise boundaries of ERISA's preemption is by no means free of doubt and has given rise to substantial litigation. The clearest cases involve State laws which operate directly upon employee benefit plans. Thus, a State statute imposing a tax upon benefits paid under a plan is plainly preempted by ERISA (see National Carriers' Conference Committee v. Heffernan, 454 F.Supp. 914). The more difficult cases involve statutes which bear only indirectly upon employee...