Group v. Pentec Inc
| Decision Date | 14 December 2010 |
| Docket Number | NO. 3:10-cv-1470 (CFD),3:10-cv-1470 (CFD) |
| Court | U.S. District Court — District of Connecticut |
| Parties | ORTHOPAEDIC SPECIALTY GROUP, P.C, et al., Plaintiffs, v. PENTEC, INC. and MICHAEL E. CALLAHAN, Defendants. |
On August 16, 2010, the plaintiffs, Orthopaedic Specialty Group, P.C. ("OSG"), a comprehensive musculoskeletal medical practice; Orthopaedic Specialty Group, P.C. 401(k) Pension Plan (the "Plan"), a qualified retirement plan for the employees of OSG; and five individuals, Herbert I. Hermele, M.D., David F. Bindeglass, M..D., Robert V. Dawe, M.D., Dante A. Brittis, M..D., and Robert A. Stanton, M.D., who are both members and trustees of the Plan (collectively, the "Trustees"), filed a complaint in the Connecticut Superior Court alleging professional negligence and breach of contract under Connecticut law. On September 15, 2010, the defendants, Pentec, Inc. and Michael E. Callahan, President of Pentec, removed the case to federal court based on federal question jurisdiction pursuant to 28 U.S.C. § 1331. Pending are the plaintiffs' motion to remand and the defendants' motion to dismiss. For the reasons that follow, the motion to remand is granted and the motion to dismiss is denied, the latter without prejudice to reasserting in the Superior Court.
In March 2003, the plaintiffs hired Pentec to provide comprehensive advisory and consulting services regarding the design, structure, and administration of the Plan. The defendants continued to provide such advisory services to the plaintiffs until July 2009. For nearly twenty years, all of the assets of the Plan were invested with Bernard L. Madoff Investment Securities, LLC ("Madoff"). The Plan participants had invested approximately $10 million of their earnings into the Plan and as of November 30, 2008, Madoff estimated the Plan's total value at just under $34 million. On December 12, 2008, the Trustees learned of Madoffs now well-publicized ponzi scheme. As a result of Madoffs fraudulent scheme, the Plan lost nearly all of its value.
Following the discovery of Madoff's scheme and the losses resulting from it, the defendants advised the plaintiffs that they should, among other things, change the Plan to a participant-directed investment plan and engage an independent institutional trustee. The plaintiffs claim that, although the defendants advised the Trustees as to their fiduciary obligations to the Plan and its participants after discovery of the Madoff fraud, the defendants never previously had informed the Trustees that they could limit their personal liability by obtaining fiduciary liability insurance coverage or recommended that the plaintiffs change the Plan to a self-directed structure pursuant to § 404(c) of the Employment Retirement Income Security Act of 1974, 29 U.S.C. § 1104(c) ("ERISA").
II. Discussion
A defendant may remove an action originally filed in state court only if the case originally could have been filed in federal court, see 28 U.S.C. § 1441(a), and the defendant bears the burden of showing the propriety of that removal, see Grimo v. Blue Cross/Blue Shield of Vt., 34 F.3d 148, 151 (2d Cir. 1994). To determine whether federal question jurisdiction can be a basis for removal, courts are guided by the well-pleaded complaint rule, which provides that "federal question jurisdiction exists only when the plaintiff's own cause of action is based on federal law... and only when plaintiff's well-pleaded complaint raises issues of federal law." Marcus v. AT&T Corp., 138 F.3d 46, 52 (2d Cir. 1998) (internal citations omitted). Thus, a complaint that includes only state law claims generally cannot be removed to federal court on the basis of federal question jurisdiction.
The complete preemption doctrine, however, is a corollary to the well-pleaded complaint rule. Moscovitch v. Danbury Hosp., 25 F. Supp. 2d 74, 79 (D. Conn. 1998). Under the complete preemption doctrine, "Congress may so completely preempt a particular area that any civil complaint raising this select group of claims is necessarily federal in character." Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987). "Once an area of state law has been completely pre-empted, any claim purportedly based on that pre-empted state law is considered, from its inception, a federal claim, and therefore arises under federal law." Marcus, 138 F.3d at 53 (quoting Caterpillar, Inc. v. Williams, 482 U.S. 386, 393 (1987)). Removal is proper in such cases. Id. More specifically, "ERISA preemption provides a valid basis for removal jurisdiction only if (1) the state law cause of action is preempted by ERISA, and (2) that cause of action is 'within the scope' of the civil enforcement provisions of ERISA § 502(a), 29 U.S.C. § 1132(a)."
Plumbing Indus. Bd., Plumbing Local Union No. 1 v. E.W. Howell Co., Inc., 126 F.3d 61, 65 (2d Cir. 1997). "In other words, if a plaintiff's state law claim is within the scope of § 502(a)[,] it is completely preempted regardless of how he has characterized it." Moscovitch, 25 F. Supp. 2d at 79.
The Court must apply a two-prong analysis to determine whether a state law is preempted by ERISA. Plumbing Indus. Bd., 126 F.3d at 65. First, ERISA preempts a cause of action when a state law refers to ERISA plans "in the sense that the measure acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law's operation." Id. at 67 (internal quotations omitted). Second, ERISA also preempts a cause of action when a state law "has a clear connection with a plan in the sense that it mandates employee benefit structures or their administration or provides alternative enforcement mechanisms." Id. (internal quotations omitted). If neither of these prongs is satisfied, however, there is a considerable presumption against preemption. Id.
Here, the plaintiffs bring a claim for professional negligence and a claim for breach of contract under state law. Neither cause of action relies upon ERISA's existence and therefore the plaintiffs' claims do not "refer" to ERISA plans. See Collins v. SNET, 617 F. Supp. 2d 67, 82 (D. Conn. 2009) ().
As to the second prong of the ERISA preemption analysis—whether state law has a clear connection with a plan—the Second Circuit has held that ERISA does not preempt ordinary state-law claims against non-fiduciaries. See Gerosa v. Savasta & Co., Inc., 329 F.3d 317, 323 (2d Cir. 2003) (). Here, both professional negligence and breach of contract are typical state-law causes of action that do not, on their face, have a clear connection to ERISA. The defendants, however, claim that they are fiduciaries under the Plan and, therefore, that the plaintiffs' claims are preempted.
The executed engagement agreement between the parties explicitly states that the defendants "will not be providing legal, accounting, tax or investment advice and that the [defendants] do[ ] not act in a fiduciary capacity and [are] not [ ] fiduciaries] of the Plan." While contractual provisions are probative of the parties' intent, such provisions are not dispositive. See Mortg. Lenders Network USA, Inc. v. CoreSource, Inc., 335 F. Supp. 2d 313, 318 (D. Conn. 2004). Instead, courts employ a functional analysis in determining whether a fiduciary relationship exists. See Haddock v. Nationwide Fin. Servs., Inc., 262 F.R.D. 97, 122-23 (D. Conn. 2009); see also 29 U.S.C. § 1002(21)(A).
ERISA defines a fiduciary, in relevant part, as a person who "renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan...." 29 U.S.C. § 1002(21)(A)(ii). Thus, the focus is on whether the defendants rendered "investment advice." The Department of Labor's regulations for ERISA defines "investment advice" as:
(1) A person shall be deemed to be rendering "investment advice" to an employee benefit plan, within the meaning of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, only if:
(I) Such person renders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property; and(ii) Such person either directly or indirectly (e.g., through or together with any affiliate)—
(A) Has discretionary authority or control, whether or not pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan; or
(B) Renders any advice described in paragraph (c)(1)(I) of this section on a regular basis to the plan pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan or a fiduciary with respect to the plan, that such services will serve as a primary basis for investment decisions with respect to plan assets, and that such person will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as, among other things, investment policies or strategy, overall portfolio composition, or diversification of plan investments.
29 C.F.R. § 2510.3-21(c)(1). The defendants contend that because the plaintiffs allege in their complaint that the defendants "fail[ed] to advise [the plaintiffs] as to the risk inherent in keeping all Plan assets invested in a single account with Madoff, " Compl. ¶ 16, that the defendants rendered investment advice and, consequently, are fiduciaries under the Plan. Read in the context of the entire Complaint, however, this allegation does not relate to investment advice. Rather, the allegation goes to...
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