Duffy v. Brannen

Decision Date17 April 1987
Docket NumberNo. 85-212,85-212
CourtVermont Supreme Court
PartiesVirginia DUFFY v. Richard D. BRANNEN, Dr. Richard D. Brannen Keogh Plan; First Vermont Bank & Trust Company.

Therese M. Corsones of Corsones & Hansen, Rutland, for plaintiff-appellee.

Paul S. Kulig of Keyser, Crowley, Banse & Facey, Rutland, for defendants-appellants.

Before ALLEN, C.J., HILL, PECK and GIBSON, JJ., and BARNEY, C.J. (Ret.), Specially Assigned.

HILL, Justice.

This is an appeal from a judgment entered, after trial to the court, in favor of plaintiff in an action in which plaintiff alleged wrongful deprivation by defendants of benefits due her under the terms of her employer-defendant's pension plan. In this appeal, defendants challenge the subject-matter jurisdiction of the trial court, as well as numerous specific aspects of the court's judgment. We affirm in part, reverse in part, and remand for further hearing on the issue of attorney's fees.

Plaintiff-appellee is a former employee of defendant-appellant Dr. Richard D. Brannen, an optometrist who has practiced his profession in Vermont since 1967. Plaintiff began working full-time as an optometric assistant in defendant's Rutland office in June of 1977. Beginning in April, 1968, and continuing throughout the relevant period, Dr. Brannen also operated a second office in Hanover, New Hampshire. During the fall of 1978, Dr. Brannen decided to adopt a Self-Employed Individual's Retirement Plan (hereinafter Keogh Plan) for himself and employees of his sole proprietorship in Rutland. The defendant First Vermont Bank & Trust Company (Bank) was the trustee of the Keogh Plan, and the Plan was a qualified employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461.

The Keogh Plan Adoption Agreement specified that an employee would become eligible to participate after three years of service with the employer. Thus, at the time the Keogh Plan was established, plaintiff was not an eligible participant, but did become one on June 1, 1980. For the 1978 and 1979 tax years, Dr. Brannen made contributions to the Keogh Plan on behalf of himself and two other employees who had become eligible participants.

In October of 1979, Dr. Brannen decided to incorporate his New Hampshire practice. After forming the corporation, for which he was the sole shareholder and director, as well as president and treasurer, Dr. Brannen decided to set up two corporate employee benefit plans--one profit-sharing plan and one pension plan--since the corporation could not establish a Keogh Plan. These two corporate plans, like the Keogh Plan, were prototypes marketed by the Bank, so that the Bank would in normal course act as trustee for the plans.

Unlike the case with the Keogh Plan, however, the circumstances surrounding the creation of the corporate plans were characterized by incomplete documentation, seeming indifference by Dr. Brannen to the legal requirements for establishment of such plans, as well as questionable performance by the Bank in its role as trustee for the plans. It was this allegedly questionable conduct of Dr. Brannen, his accountant, and the trustee Bank (discussed more specifically below) in setting up these corporate plans, and consummating certain transactions between these plans and the Keogh Plan, that formed the factual basis for part of plaintiff's claim that she had been wrongfully deprived of benefits due her under the Keogh Plan. The Plan Adoption Agreements for the corporate pension plan and profit-sharing plan were executed by Dr. Brannen in October of 1979, but neither document contained the required signature of the Bank as trustee. In fact, the Bank did not even receive copies of these documents until February, 1982. Moreover, Bank officers testified that they did not consider the Bank to be trustee of the two corporate plans until sometime in 1983 when the corporation finally furnished a corporate resolution for the execution of the plans.

Dr. Brannen made no contributions directly to the Keogh Plan for the period of time during which plaintiff was an eligible participant in that plan. 1 On March 1, 1981, however, defendant sent to the trustee Bank a check for $8,000, which he indicated was his corporate pension plan contribution for the tax year 1980. Since the Bank at that time had no documentation on the corporate plans, it deposited this money in the Keogh Plan account. After receiving the instruments of adoption for the two corporate plans from Dr. Brannen in February, 1982, the Bank in June, 1982, withdrew the $8,000 from the Keogh Plan account and deposited it in the corporate pension plan account.

Without any knowledge of her employer's recent activity with respect to the various benefit plans, plaintiff terminated her employment with Dr. Brannen by mutual agreement on December 31, 1981. When she did so, she inquired from Dr. Brannen about which benefits she would be entitled to under the Keogh Plan. Although defendant Brannen had never provided her with any statement or disclosure setting forth the terms of the Keogh Plan, or any annual reports or summaries pertaining to her interest in the plan assets, she expected to receive some benefits on termination of her employment for two reasons. First, she had been told by Dr. Brannen of her accruing benefits in the Plan in response to her earlier inquiries about pay increases, and second, she was aware that a fellow employee in the Rutland office had received benefits upon termination of her employment in March of 1981. Nevertheless, in response to her inquiries, she was told by Dr. Brannen that no funds had been contributed by him to the plan during the period of her employment in which she was a qualified participant, meaning she was not entitled to any benefits.

Plaintiff then contacted the Bank, and was told that Dr. Brannen had never informed the Bank of her eligibility to participate in the Keogh Plan. She also learned from the Bank that no contributions had been made by Dr. Brannen to the Keogh Plan since the time she had become eligible. The Bank explained that no contributions had been made for her because 1980 and 1981 were nonprofit years for defendant's Rutland office. The Bank made these statements because it felt that, despite its deposit of the $8,000 into the Keogh account in March of 1981, plaintiff had no right to any portion of this contribution because it had been designated by Dr. Brannen as his 1980 contribution to the corporate pension plan.

Plaintiff then filed an action against Dr. Brannen, the Bank, the two corporate plans, and the Keogh Plan to recover benefits due her under the Keogh Plan. She also sought compensatory and punitive damages against Dr. Brannen and the Bank for breach of their fiduciary duties under the Plan, as well as attorney's fees. The trial court ruled in favor of plaintiff, and ordered that she be awarded the benefits due her under the Keogh Plan for the period of time in which she was eligible to participate in the Plan. This part of the award was based on the terms of the Keogh Plan, which the court interpreted to require mandatory contributions by the employer on behalf of eligible employees, so that such an employee would be entitled to benefits whether contributions were actually made or not.

In addition, the court ordered that all payments made to the Bank by Dr. Brannen or his New Hampshire corporation during the period of plaintiff's eligible employment, regardless of their designation, were funds to which she was entitled an allocation. This part of the order was based on the court's conclusion that the corporate plans were "shams," which were created for the purpose of defrauding plaintiff of benefits due her under the Keogh Plan. In support of this conclusion, the court found that Dr. Brannen, in conjunction with his accountant, had used the New Hampshire corporation and the two corporate plans, through manipulation of income and expense documentation, to siphon income out of the Rutland proprietorship, into the New Hampshire corporation, and finally into the corporate plans rather than the Keogh Plan.

On the basis of these findings, the court ordered the Bank to provide it with an "accounting of all sums received from Dr. Brannen or from Dr. Brannen's New Hampshire corporation during the time of Mrs. Duffy's employment and all sums due and owing Mrs. Duffy under the subject Keogh plan...." The court's subsequent compensatory damage award, entered on a joint and severable basis against all defendants, was based on this accounting. Additionally, the court concluded that the Bank had breached its fiduciary duties as trustee under the Keogh Plan, and awarded $2,000 punitive damages against the Bank. The court also ordered Dr. Brannen to pay plaintiff's attorney's fees in the amount of $4,380.

Only defendant Brannen and the three Plans have appealed. The Bank has paid the punitive damage award, as well as the compensatory damage award. Only the attorney's fee portion of the trial court judgment remains unpaid.

The appealing defendants raise several issues on appeal. First, they argue that the trial court lacked subject-matter jurisdiction over the entire action because plaintiff's claims all arise under ERISA, which according to them gives federal courts exclusive jurisdiction over such actions. Second, they argue that the trial court's interpretation of the terms of the Keogh Plan to require mandatory contributions on behalf of plaintiff was erroneous. Third, they argue that the trial court's findings that the corporate plans were "shams" used to intentionally defraud plaintiff of pension benefits were clearly erroneous. Fourth, they attack the court's damage award on several grounds. Lastly, they challenge the award of attorney's fees.


Before addressing the merits of these arguments, we must first determine which are proper for resolution by this Court. As...

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