Daniels v. Bursey, 03 C 1550.

CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
Citation313 F.Supp.2d 790
Decision Date14 April 2004
Docket NumberNo. 03 C 1550.,03 C 1550.
PartiesJohn DANIELS, et al., and similarly situated individuals, Plaintiffs, v. Wayne BURSEY, et al., Defendants.

Mark Edward Winters, Sanchez & Daniels, Clinton A. Krislov, Jason Patrick Stiehl, Krislov & Associates, Ltd., Lawrence Stuart Fischer, Anderson, Kill & Olick, P.C., Chicago, IL, John J. Koresko, Koresko & Associates, P.C., Bridgeport, PA, for Plaintiffs.

Timothy V. Hoffman, Sanchez & Daniels, Chicago, IL, pro se.

Jonathan William Coppess, Charles W. Webster, Freeborn & Peters, Lee Thomas Polk, Michael James Mueller, Barnes & Thornburg, John I. Grossbart, Sonnenschein, Nath & Rosenthal, LLP, Kevin Michael O'Hagan, Daniel B. Meyer, O'Hagan, Smith & Amundsen, L.L.C., Lynn Hagman Murray, Christine G. Lyons, Grippo & Elden, Martin G. Durkin, Jennifer Suzanne Oosterbaan, Christopher W. Carmichael, Holland & Knight LLC, Bruce Edward Braverman, Joel S. Feldman, Brian W. Bilcer, Sidley Austin Brown & Wood LLP, Steven A. Levy, Michael Lawrence Sullivan, Jon Eric Klinghoffer, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., Chicago, IL, Richard S. Order, Axinn, Veltrop & Harkrider LLP, Hartford, CT, Jack E. Robinson, Stamford, CT, Reid L. Ashinoff, Stephen McDougall, Sonnenschein, Nath & Rosenthal, LLP, New York City, Courtenay Cross Youngblood, Tucker Ellis & West, LLP, Cleveland, OH, for Defendants.

AMENDED MEMORANDUM OPINION AND ORDER1

KENNELLY, District Judge.

This case concerns the marketing and administration of a "severance trust executive program" (STEP) plan, a type of employee welfare benefit plan targeted to employers with highly compensated employees. John Daniels and Manuel Sanchez, along with other partners and employees of the Chicago-based Sanchez & Daniels law firm, and on behalf of a putative class of STEP Plan investors, sued Step Plan Services, Inc., its principals, and several insurance companies, alleging that the defendants violated the Employee Retirement Income Security Act (ERISA) and the Illinois Consumer Fraud Act and claiming fraudulent inducement and breach of fiduciary duty in connection with their actions in promoting or managing the STEP Plan. Several of the defendants filed a motion to dismiss the original complaint, which the Court granted in part and denied in part. Daniels v. Bursey, No 03 C 1550, 2003 WL 22053580 (N.D.Ill. Sept. 3, 2003).

Plaintiffs amended their complaint, pleading the same claims originally filed and adding four claims asserting violations of state insurance laws and the Racketeer Influenced and Corrupt Organizations Act (RICO). Defendants Wayne Bursey, Daniel Carpenter, STEP Plan Services, Inc., Benistar Insurance Group, Inc., Mellon Trust of New York, Teplitzky & Company, Benistar 419 Plan Services, Inc., Benistar 419 Admin Services, Inc., Benistar 419 Plan, Benistar Employer Services Trust Corp., and Benistar, Ltd. (collectively referred to as "Administrative Defendants"); U.S. Trust; National Life Insurance Co., Allmerica Financial Benefit Insurance Co., New York Life Insurance Co., Metropolitan Life Insurance Co., and Hartford Life Insurance Co. (collectively referred to as "the Insurance Companies"); Prudential Insurance Co. of America; and Thomas Murphy have each moved to dismiss Plaintiffs' second amended complaint. For the reasons stated below, the Court grants the motions in part and denies them in part.

Factual Background

For purposes of considering the five motions to dismiss before us, the Court accepts as true plaintiffs' well-pleaded factual allegations. Thompson v. Illinois Dept. of Professional Regulation, 300 F.3d 750, 753 (7th Cir.2002). Sanchez & Daniels is a Chicago law firm. In 1995 it adopted a STEP Plan, a type of employee benefit plan that Plaintiffs allege, at least in the alternative, is governed by ERISA. 2d Amended Compl. ¶¶ 139-40. In 1998 approximately 255 employers participated in the STEP Plan.2 Id. ¶ 90. The STEP Plan was administered by the Administrative Defendants and U.S. Trust. Id. ¶¶ 63-65. The Plan was devised as "a vehicle for employers to allegedly purchase life insurance on a tax deductible basis," id. ¶ 83, and was "designed to provide Participants with (1) death benefits, (2) disability benefits, and (3) severance benefits." Id. ¶ 86. A substantial amount of the Plan's assets were variable insurance policies issued and administered by the Insurance Companies and Prudential. Id. ¶ 68. Plaintiffs allege the Insurance Companies managed these policies negligently or with willful disregard, resulting in losses to the STEP Plan. Id. ¶ 74.

Sanchez & Daniels and its partners and employees allege that the Plan's promoters fraudulently induced them — through marketing materials and an opinion letter from a lawyer — to adopt the STEP Plan by falsely representing that contributions to the Plan would be tax deductible, could not be reached by creditors and could easily be withdrawn by Plan participants. Id. ¶¶ 96-97, 100, 112-17,123-24, 144, 146. According to Plaintiffs, the Plan was not tax deductible, the Plan's assets were not protected from creditors and participants could not easily make withdrawals from the Plan. Id. ¶¶ 132-33, 139-41, 145, 147, 272-75. The Plan promoters knew the IRS had found that contributions to the STEP Plan made by a Plan participant were not tax deductible, id. ¶¶ 272-75, and the Administrative Defendants used assets from the Plan to fund litigation challenging the IRS's determination that contributions to the STEP Plan were not tax deductible. Id. ¶ 278. The case ended in stipulations by the parties that 75 percent of the contributions to the STEP Plan for the years in question were not deductible, that fines would be assessed, and that employee participants in the Plan would be assessed with additional taxable income, penalties and interest. Id. ¶ 279. The IRS issued proposed regulations on July 11, 2002, stating that contributions to the STEP Plan were not tax deductible because the Plan did not qualify for deductions under Section 419A(f)(6) of the Internal Revenue Code. Id. ¶ 288. However, the Administrative Defendants never warned the Plan participants, such as Sanchez & Daniels, that the contributions were not deductible. Id. ¶¶ 282-87. Plaintiffs allege that they and other employers participated in the STEP Plan primarily for the promised tax advantages, and that if they had known of the IRS's ruling, they would have withdrawn from the Plan. Id. ¶¶ 284-86.

Plaintiffs argue the Insurance Companies not only marketed the STEP Plans long after learning their benefits were dubious, id. ¶¶ 132-33, 148, 281-83, they also discouraged Plan participants from using Plan assets to buy annuities, municipal bonds, other tax-free investments, or term insurance in lieu of permanent insurance, which yielded higher commissions to the Insurance Companies and their agents than did other types of investments. Id. ¶¶ 149-55, 243-52. Plaintiffs further allege that when the stock market began to decline, the Insurance Companies failed to allocate the Plan's insurance funds from variable accounts to safer accounts, resulting in substantial losses to the value of the Plan. Id. ¶¶ 253-55.

Plaintiffs further allege that because the STEP Plan purported to provide unemployment and insurance benefits to those participants who paid a premium for the benefits, the Plan constituted an insurance arrangement. Id. ¶ 161-64. Plaintiffs allege the Plan operated as an unlicensed insurance company in violation of state insurance codes. Id. ¶ 170-71. Plaintiffs claim the Insurance Companies should have known they were promoting operations of an unlicensed insurance carrier. Id. ¶¶ 256-57. Plaintiffs' final allegation against the Insurance Companies is that when Prudential demutualized,3 Prudential and Murphy allowed the proceeds that were paid to holders of its insurance policies to be distributed to the Plan's Trustees (the Administrative Defendants) without ensuring that the funds were actually credited to the Plan. Id. ¶¶ 264-71. Plaintiffs characterize this alleged lack of oversight as negligent and claim that Prudential and Murphy are responsible for allowing the Plan fiduciaries to loot the demutualization proceeds. Id.

Plaintiffs further allege that the Plan's fiduciaries, which Plaintiffs identify as the Administrative Defendants, mismanaged the Plan, amending its structure without authorization and misappropriating or looting its assets. Id. ¶¶ 63-64, 177-92. Plaintiffs allege that when control of the STEP Plan was assumed by Benistar, Plaintiffs were not informed that a Massachusetts jury had found that a Benistar affiliate and its principal Carpenter had breached their fiduciary duties, converted property of a trust and made intentional misrepresentations. Id. ¶¶ 225, 227. Carpenter had used money held by the Benistar Entities in trust to engage in risky options trading. Id. ¶ 235(g). On September 23, 2003, a Massachusetts Superior Court judge awarded the plaintiffs in that case $25,952,450. Id. ¶ 226, 228. The judge pierced the corporate veil, holding the Benistar Entities liable for the entire judgment.4 Id. ¶¶ 236-37.

In addition to administrating the STEP Plan, Benistar also operated the Benistar 419 Plan, which it marketed as a Section 419A(f)(6) arrangement funded with life insurance policies. Id. ¶ 196. Plaintiffs allege that the Administrative Defendants knew the Benistar 419 Plan did not comply with Section 419A(f)(6), because the IRS proposed regulations and issued a private ruling saying such, and two Tax Court decisions held that the Benistar 419 Plan is not a welfare benefit plan for tax purposes. Id. ¶¶ 198-99.

Plaintiffs assert that when they tried to remove their assets from the STEP Plan in 2001, the...

To continue reading

Request your trial
30 cases
  • Halperin v. Richards
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • July 28, 2021
    ...intended beneficiaries’ cause of action to match the Secretary's cause of action under § 502(a)(5)). See also Daniels v. Bursey , 313 F. Supp. 2d 790, 807–08 (N.D. Ill. 2004) (extending Harris ’s logic to a claim alleging participation in a breach of fiduciary duty). Nevertheless, even afte......
  • Spires v. Schools, Civil Action No. 2: 16–616–RMG
    • United States
    • United States District Courts. 4th Circuit. United States District Court of South Carolina
    • September 19, 2017
    ...(noting that 29 U.S.C. § 1132(a)(3)"admits of no limit ... on the universe of possible defendants"); see also Daniels v. Bursey, 313 F.Supp.2d 790, 808 (N.D. Ill. 2004) (concluding that to state a claim under 29 U.S.C. § 1132(a)(3), "the plaintiff must allege only that a fiduciary violated ......
  • Neil v. Zell
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • March 11, 2010
    ...of no limit . . . on the universe of possible defendants." Harris Trust, 530 U.S. at 246, 120 S.Ct. 2180; see also Daniels v. Bursey, 313 F.Supp.2d 790, 808 (N.D.Ill.2004) (to state a claim under § 502(a)(3), "the plaintiff must allege only that a fiduciary violated a substantive provision ......
  • Vulcan Golf, LLC v. Google Inc., 07 C 3371.
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • March 20, 2008
    ...June 29, 2004)) (citing Gallagher Corp. v. Mass. Mut. Life Ins. Co., 940 F.Supp. 176, 180 (N.D.Ill.1996)); see also Daniels v. Bursey, 313 F.Supp.2d 790, 801 (N.D.Ill.2004). However, at least one court in this district has concluded that the heightened pleading requirements under Rule 9(b) ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT