Delphi Beta Fund, LLC v. Univest Bank & Trust Co.
| Decision Date | 27 March 2015 |
| Docket Number | CIVIL ACTION NO. 14-2404 |
| Court | U.S. District Court — Eastern District of Pennsylvania |
| Parties | DELPHI BETA FUND, LLC, et al. v. UNIVEST BANK AND TRUST CO., et al. |
OPINION
Plaintiff hedge fund's former manager signed a bank promissory note and a bank guarantee to support its sizable investment in a hotel project. The hedge fund is partially comprised of qualified money under the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §1001 et seq. The novel issue is whether, under an ERISA regulation known as the "Look Through Rule", defendant banks that collect on the hedge fund's defaulted loan obligations become ERISA fiduciaries and may collect on the loan obligations admittedly signed by the hedge fund. Although Plaintiffs, as the hedge fund's new managing members, may have an ERISA claim against their hedge fund's former managers, neither Congress nor any other court has extended fiduciary duties to lenders in this context. After studying the Amended Complaint's substantial detail, briefing and oral argument, we grant the Defendants' motions to dismiss as we will not extend ERISA's comprehensive statutory scheme to craft fiduciary duties upon lenders to non-ERISA hedge funds partially comprised of ERISA money. We also find, based on the specific allegations, that Plaintiffs cannot state a claim that the lenders knowingly assisted in a prohibited transaction.
Plaintiff Delphi Beta Fund LLC ("Beta Fund") is an investment fund - or "hedge fund"-into which some private investors invested "retirement money" through IRA and 401K savings. (Id. at ¶5) Since late 2013, Plaintiffs Bruce J. Berg ("Berg") and Edward Budriss ("Budriss") have acted as Beta Fund's present managers. (Id. at ¶¶6-7) Plaintiff Raymond J. Battaglia ("Battaglia") is a member of Beta Fund and is a "participant, fiduciary and beneficiary of the James Doorcheck, Inc. 401(k) Profit Sharing Plan which is also a member of Beta Fund" (the "Doorcheck plan"). (Id. at ¶8) The Doorcheck plan did not sue.
Non-party CoreStates Investment Advisors, LLC ("CoreStates")1 managed Beta Fund until November 2013, shortly after Corestates' President and CEO William Spiropoulos ("Spiropoulos") died. (Id. at ¶¶11, 13) CoreStates then turned control of Beta Fund over to "Beta Fund Members," who dismissed CoreStates and elected a management committee consisting of "Fund Members." (Id. at ¶12) Beta Fund then discovered "improprieties" concerning a promissory note and guarantees signed by Beta Fund, through Spiropoulos.
In or around 2007 to 2008, Spiropoulos directed Beta Fund's purchase of a 22.5% equity interest in Pheasant Run Hotel, LLC ("Pheasant Run").2 (Id. at ¶17) Pheasant Run constructed, and owns and operates, a Homewood Suites hotel in Newtown, Pennsylvania. (Id. at ¶15)
In August 2008, Pheasant Run signed a $12,500,000 promissory note payable to Univest Bank and Trust Co. ("Univest") (the "Construction Loan"). (Id. at ¶18) Spiropoulos agreed to personally guarantee the entire amount.3 (Ex. A. to Am. Compl., ECF Doc. No. 15). Beta Fund is not mentioned in the Construction Loan.
Over three years later, on December 29, 2011, Beta Fund signed a $625,000 promissory note payable to Univest based on Beta Fund's "Authorization" signed by its manager Spiropoulos. ("625K Loan"). (Am.Compl. at ¶¶22-23 and Ex. B.) Spiropoulos represented that Beta Fund borrowed the money for "business investment purposes." (Id. at ¶24) Spiropoulos allegedly misrepresented this loan's true purpose and concealed the 625K Loan from Beta Fund, its auditors, CoreStates' personnel, and regulators from the Securities and Exchange Commission. (Id. at ¶¶25-26) Although Spiropoulos, as Beta Fund's Manager, represented the borrowing as a "general purpose 'line of credit'" for Beta Fund, Univest demanded payment of $625,000 on the Construction Loan by December 31, 2011. (Id. at ¶¶26-30) Univest tendered a $625,000 check to Beta Fund, but Spiropoulos endorsed the check over to Pheasant Run and deposited the check in Pheasant Run's account. (Id. at ¶¶31-33) He then authorized Univest to immediately pay $625,000 in principal on the Construction Loan.4 (Id.) Plaintiffs plausiblyallege that Spiropoulos abused Beta Fund to borrow $625,000 in December 2011 to pay down a construction loan for a non-party hotel in which Beta Fund is a 22.5% investor.
On April 25 and April 27, 2012, Pheasant Run borrowed $1,825,000 from MileStone Bank ("MileStone" and "MileStone Loan").5 (Id. at ¶¶57-58) MileStone recorded a second mortgage against Pheasant Run behind Univest's Construction Loan. (Id. at ¶59) Beta Fund, under Spiropoulos' signature, signed a guaranty of the MileStone Loan. (Id. at ¶61) Beta Fund agreed to maintain $1,825,000 in a MileStone account. (Id. at ¶62) Beta Fund now alleges that Spiropoulos concealed this guaranty from Beta Fund, even though he was Beta Fund's manager. (Id. at ¶ 63) Spiropoulos signed a "Resolution of Limited Liability Company Member" stating that CoreStates is a member of Beta Fund and that the Beta Fund members met and approved the guaranty. (Id. at ¶68) As alleged, CoreStates was not a member of Beta Fund and Beta Fund's members did not meet to approve the guaranty. (Id.) When Spiropoulos died in June 2013, MileStone treated his death as a loan default and seized Beta Fund's $1,825,000 deposit. (Id. at ¶¶69-72)
Plaintiffs attempt to craft fiduciary obligations on lenders through a regulation known as the "Look Through Rule" which defines "plan assets" under ERISA. See 29 C.F.R. §2510.3-101(a)(2). Plaintiffs allege that the "Look Through Rule" applies to Beta Fund, thus granting it fiduciary status to bring ERISA breach of fiduciary claims against Univest and MileStone, two banks that entered into loan transactions with the now deceased manager of Beta Fund. Whilethe "Look Through Rule" may impose ERISA's fiduciary duties upon the Plaintiffs to certain ERISA-qualified plans invested in it, Plaintiffs provide no legal authority to the Court that the Look Through Rule's definition of "plan assets" is a vehicle to assert ERISA fiduciary duty claims against two banks with no relationship to an ERISA plan. As such, the Court declines to take this leap with Plaintiffs.
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim satisfies the plausibility standard when the facts alleged "allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Burtch v. Millberg Factors, Inc., 662 F.3d 212, 220-21 (3d Cir. 2011) (citing Iqbal, 556 U.S. at 678). While the plausibility standard is not "akin to a 'probability requirement,'" there nevertheless must be more than a "sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.'" Id. (quoting Twombly, 550 U.S. at 557).
The Court of Appeals requires us to apply a three-step analysis under a 12(b)(6) motion: (1) "the court must 'tak[e] note of the elements a plaintiff must plead to state a claim;'" (2) "the court should identify allegations that, 'because they are no more than conclusions, are not entitled to the assumption of truth;'" and, (3) "where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief." Santiago v. Warminster Township, 629 F.3d 121, 130 (3d Cir. 2010)(quoting Iqbal, 556 U.S. at 675, 679) (footnote omitted)6; see also, Burtch, 662 F.3d at 221; Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011) ()
Individual plaintiffs assert ERISA claims. ERISA is a "comprehensive and reticulated statute" containing a "carefully integrated civil enforcement provision" set out in §502(a), 29 U.S.C. §1132(a). See Mass. Mutual Life Ins. Co v. Russell, 473 U.S. 134, 146-47 (1985) (citations omitted). Plaintiffs here must be participants, beneficiaries or fiduciaries of an ERISA plan to have standing to bring a civil action under ERISA. See 29 U.S.C. §1132(a)(1), (2), and (3). Plaintiffs assert that they are ERISA fiduciaries, by application of the "Look Through Rule," to certain unnamed ERISA plans as well as the Doorcheck plan, and, based solely on the application of the "Look Through Rule," have standing to assert various breach of fiduciary duty claims under ERISA against Univest and MileStone and to impose upon Univest and MileStone ERISA's fiduciary duties.
The "Look Through Rule" under Department of Labor ("DOL") regulation, 29 C.F.R. §2510.3-101, defines an ERISA "plan asset."7 It describes when assets of an entity in which a plan invests will be considered to include ERISA "plan assets" so that the managers of the entity are subject to the fiduciary responsibility rules of ERISA.
The regulation is expressed in the form of a general rule, with a carved out exception:
Generally, when a plan invests in another entity, the plan's assets include its investment, but do not,...
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