Flanagan Lieberman Hoffman v. Transamerica Life, Case No. C-3-98-255.
| Citation | 228 F.Supp.2d 830 |
| Decision Date | 26 August 2002 |
| Docket Number | Case No. C-3-98-255. |
| Parties | FLANAGAN LIEBERMAN HOFFMAN & SWAIM, et al., Plaintiffs, v. TRANSAMERICA LIFE AND ANNUITY COMPANY, Defendant. |
| Court | United States District Courts. 6th Circuit. United States District Courts. 6th Circuit. Southern District of Ohio |
Terence Leslie Fague, Coolidge, Wall, Wonsley & Lombard, Dayton, OH, for Plaintiffs.
Thomas Andrew Young, Porter, Wright, Morris & Arthur, Columbus, OH, Reid Alan Evers, Steven D. Weinberg, Transamerica Occidental Life Ins. Co., Law Department, Los Angeles, CA, Jonathan Hollingsworth, Washington & Hollingsworth, Dayton, OH, for Defendant.
DECISION AND ENTRY SETTING FORTH FINDINGS OF FACT AND CONCLUSIONS OF LAW; OPINION; JUDGMENT TO ENTER IN FAVOR OF DEFENDANT AND AGAINST PLAINTIFFS; TERMINATION ENTRY
The Plaintiffs in this case are the law firm of Flanagan Lieberman Hoffman & Swaim ("Plaintiff") and the firm's 401(k) pension plan ("Plan").1 The Defendant is Transamerica Life and Annuity Company ("Defendant"). The dispute stems from the faulty administration of the Plan, which was issued by the Defendant for the benefit of the Plaintiff's partners and employees. After having participated in the Plan for several years, the Plaintiff was informed by the Internal Revenue Service ("IRS") that an audit had revealed that the Plaintiff's partners' tax-deferred contributions to the Plan had exceeded the limit imposed by federal tax law. This fact gave rise to a tax liability and subjected the Plan's tax-deferred status to disqualification. To avoid disqualification, the Plaintiff negotiated a monetary settlement with the IRS.
Alleging that the Defendant had a duty to prevent this sort of occurrence, the Plaintiff brought this action against the Defendant on three grounds: 1) breach of fiduciary duty, arising under the Employee Retirement Income Security Act, 29 U.S.C. §§ 1104, 1109 & 1132(a)(2) ("ERISA") (Count I); 2) breach of contract arising under the common law of Ohio (Count II); and 3) negligent misrepresentation arising under the common law of Ohio (Count III). In addition to damages, the Plaintiff seeks attorney fees and costs (Count IV).
The Defendant raises several defenses. To begin with, it contends that it was not a fiduciary to the Plaintiff insofar as the Plan is concerned. It also contends that the Plan has no standing of its own to join as a Plaintiff, as it cannot be shown that it has suffered an injury or that it is even a party authorized to bring suit under ERISA. With respect to the common law claims, it argues that they are completely preempted by ERISA. Finally, as to fees and costs, it argues that the Plaintiff is not entitled to such even if it prevails on the merits.
This action was tried before the Court on its merits on December 10 & 11, 2001. Herein, the Court shall set forth its findings of fact and conclusions of law with respect thereto. For purposes of providing some context, it will first set out a very brief outline of the underlying tax law by which the Plan is governed. The Court will then set forth its findings of fact, followed by its opinion, which in turn will be followed by its conclusions of law. For reasons which will be made clear in the Court's opinion, the Court finds that certain of the Plaintiff's claims are barred by law, and that as to those which are not, the Plaintiff failed to prove by a preponderance of the evidence that it is entitled to relief. Accordingly, on all counts, judgment shall enter for the Defendant.
The Plan at issue is one organized pursuant to 26 U.S.C. § 401(k), commonly referred to as a 401(k) plan. Because the parties do not dispute how this law is relevant to the Plan, the Court will briefly summarize it herein. Section 401(k) allows an employer to establish a pension plan, into which employee participants may direct, on a tax-deferred basis, the deposit of up to a certain percentage of what would otherwise be taxable income. Participants are taxed on their contributions only when they make a withdrawal from the pension plan, which typically does not occur until later in life at or around the standard age of retirement (at which point individuals tend to be in lower tax brackets). Restrictions apply to how much an employer's highly compensated employees can contribute vis-a-vis the contributions of its non-highly compensated employees. Generally stated, whether an individual is a highly compensated employee is determined by reference to his ownership interest in the employer's business or to the amount of compensation he receives on account of his work for the employer. See generally 26 U.S.C. § 414(q). Several tests exist for determining whether the contributions of the highly compensated employees are within their legal limit, one of which requires a comparison of the percentage of deferred income contributed to the plan by the highly compensated employees (calculated as an average) with that contributed by the non-highly compensated employees (also calculated as an average). This is referred to as the actual deferral percentage ("ADP") test ("ADP test"). See id. § 401(k)(3)(A)(ii). Both parties to this litigation agree that with regard to the Plan at issue, the ADP of the Plaintiff's highly compensated employees was not supposed to exceed the ADP of its non-highly compensated employees by more than two (2) percentage points over any given year.
This litigation arose when it was determined by the IRS that the Plaintiff's highly compensated employees' ADP exceeded the ADP of its non-highly compensated employees by more than two (2) percentage points. This, the Plaintiff alleges, was something that the Defendant should have prevented.
1. The Plaintiff is a law firm organized as a general partnership. None of its attorneys practice ERISA law. (Doc. # 43 at 43.)
2. The Defendant is a life insurance company authorized to do business in the State of Ohio.
3. The Plaintiff approved the purchase of, and did purchase, a group pension benefits plan (i.e., the Plan) from the Defendant on February 24, 1992, which had an effective date of January 1, 1992. Under the Plan, the Plaintiff established four annuity investment accounts to fund its pension benefits. (PX38; PX39; PX40; PX97.)
4. There are four documents relevant to the relationship between the Plaintiff and the Defendant:
a) Prototype Agreement. The Prototype Agreement is a standardized document containing boilerplate language related to the Plan structure, its administration and management, limitations on eligibility and contributions, the legal rights of concerned parties, and so forth. It also sets forth the terms governing the establishment and maintenance of the Plan trust, i.e., the corpus of the tax-deferred contributions and the interest earned thereon, as invested pursuant to the Contract, from which pension annuities would be paid. The terms of the Prototype Agreement could only be executed by the independent execution of the Adoption Agreement. (Doc. # 45 at 16; PX3.)3
b) Adoption Agreement. The Adoption Agreement is the document through which the Plaintiff executed the terms of the Prototype Agreement. In addition, it sets forth for execution the particular details of the Plan as it relates to the Plaintiff and the Plan participants, including their respective rights and obligations. The execution of the Adoption Agreement was the act by which the Plan and the Plan trust were created. This document was signed by several partners on behalf of the Plaintiff, three of whom—Charles Slicer, Jr., Bradley Smith, and Don Kovich—were designated as the Plan trustees. The trustees were responsible for directing the investment of all Plan contributions. (Doc. # 43 at 66-67; Doc. # 45 at 16; PX39.)
c) Contract. The Contract sets forth the duties imposed upon the Defendant as the actual investor of the Plan contributions, and the rights of the Plaintiff and the Plan participants with respect to said investment(s). Whereas the Adoption Agreement (along with the Prototype Agreement) defines the rights of Plan participants under the Plan, the Contract governed the relationship between the Plan itself, by and through its trustees, and the Defendant. It was signed by the Plan trustees, Charles Slicer, Jr., and Don Kovich, on behalf of the Plan. (Doc. # 43 at 68-69; PX40.)
d) Service Agreement. The Service Agreement is a separate agreement between the administrator of the Plan, and the Defendant, which delineates the respective rights and obligations of the parties as to the administration of the Plan. It was signed by several partners on behalf of the Plaintiff, and the Plaintiff was designated therein as the Plan administrator. (Doc. # 43 at 64-65; Doc. # 45 at 35; PX38.)
5. The Plaintiff gave only a cursory reading, if any, to the Plan documents. (Doc. # 43 at 85-86; Doc. # 45 at 68-69.)
6. The Plaintiff and Defendant agreed that the Defendant would provide, among other things, annual ADP testing. In order for the Defendant to conduct such testing, the Plaintiff was required to report to it certain Plan participant information, particularly the participant's compensation. This information was commonly referred to as "census" information. With this information, the Defendant was to verify that the ADP of the highly compensated employees did not exceed that of the non-highly compensated employees by more than two (2) percentage points over any given year. (PX38; Doc. # 43 at 98-107.)
7. Other "non-routine services," such as year-end coverage testing and IRS audits, were available at additional cost.4 (PX38.)
8. For wage-earning employees, or common law employees, compensation is easily determined by reference to their W 2s. The calculus is more complex for self-employed individuals, a category which includes the general partners and associates of a law firm such...
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