Leckey v. Stefano

• Decision Date: 31 August 2007
• Docket Number: No. 06-2483.,No. 06-3161.,No. 06-3162.,06-2483.,06-3161.,06-3162.
• Parties: Janice B. LECKEY; Janice B. Leckey, Executrix of the Estate of Evelyn O. Knapp, a/k/a Evelyn Olliffe Knapp, Deceased also known as Janice Burger Leckey, Appellant v. Paul W. STEFANO; Frank W. Jones, Administrators of the Estate of William E. Knapp, Deceased, and Trustees of the Insurance Trust of William Knapp, deceased.
• Court: U.S. Court of Appeals — Third Circuit

501 F.3d 212

Janice B. LECKEY; Janice B. Leckey, Executrix of the Estate of Evelyn O. Knapp, a/k/a Evelyn Olliffe Knapp, Deceased also known as Janice Burger Leckey, Appellant v. Paul W. STEFANO; Frank W. Jones, Administrators of the Estate of William E. Knapp, Deceased, and Trustees of the Insurance Trust of William Knapp, deceased.

No. 06-2483.

No. 06-3161.

No. 06-3162.

United States Court of Appeals, Third Circuit.

Argued April 24, 2007.

Opinion filed: August 31, 2007.

William R. Caroselli, Esquire, Caroselli, Beachler, McTiernan & Conboy, Edward C. Leckey, Esquire (Argued), Pittsburgh, PA, Counsel for Appellant.

David A. Strassburger, Esquire (Argued), Harry F. Kunselman, Esquire, Strassburger, McKenna, Gutnick & Potter, Pittsburgh, PA, Counsel for Appellee.

Mary Beth Buchanan, United States Attorney, Eileen J. O'Connor, Assistant Attorney General, Kenneth L. Greene, Esquire, Michelle B. Smalling, Esquire (Argued), Department of Justice, Tax Division, Washington, D.C., Counsel for Amicus Curiae, Commission of Internal Revenue.

Before: McKEE and AMBRO, Circuit Judges, ACKERMAN,^* District Judge.

OPINION OF THE COURT

AMBRO, Circuit Judge.

This is a battle for William Knapp's estate. It is in federal court because he kept much of his wealth in employee benefit trusts that were subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461. Boiled down, plaintiff Janice Leckey, on behalf of herself and the estate of her deceased mother Evelyn Knapp (who initiated this suit before she died), claims that both ERISA and the terms of the various plans gave Evelyn¹ an interest in her husband's ERISA benefits. He, however, took lump-sum distributions of almost all of his plan assets before he died without Evelyn's consent and placed them in trusts that paid her some—but not all—of the money. The remainder went, through William's estate plan, to his children from a previous marriage.

In two orders—one granting partial summary judgment and one entering final judgment after a bench trial—the District Court denied Leckey any relief. This is a complicated case because it involves two different ERISA plans and three different kinds of ERISA causes of action.

One, brought under 29 U.S.C. § 1132(a)(2), is a derivative suit to redress the loss to the plan itself when William (allegedly) withdrew assets improperly. A threshold question in this claim is whether he had a duty to seek Evelyn's consent before taking a distribution at all. The District Court concluded that he did as a matter of law under the Retirement Equity Act of 1984 ("REA"), Pub. L. No. 98-397, 98 Stat. 1426 (codified in scattered sections of titles 26 and 29), an amendment to ERISA. We disagree because we give effect to a Treasury Department regulation that interprets the Act differently. We hold, rather, that whether the duty attached is a fact issue that depends on the contents of the plan instrument. Unfortunately, because the plan instrument has been lost and the parties offer different versions, both of which are supported by some evidence, we must remand for a factual finding on this issue. We also vacate the District Court's findings that the plan itself suffered no loss because it is contrary to our holding in In re Schering-Plough Corp. ERISA Litigation, 420 F.3d 231, 235-36 (3d Cir.2005), and we vacate the Court's finding that William's actions did not damage Evelyn or Leckey because it is clearly erroneous.

The second cause of action, brought under 29 U.S.C. § 1132(a)(3), seeks equitable relief for William's improper withdrawal from a different ERISA plan. On this claim, the District Court granted summary judgment to Leckey on the issue of liability but did not believe it could grant a remedy after the bench trial. Having examined the record and the law, we see no legal or factual impediment to imposing a constructive trust on traceable assets that were wrongfully withdrawn, and so we remand for consideration of that remedy.²

I. Facts & Procedural History

As noted, Janice Leckey sues both in her personal capacity and as executrix of the estate of her mother Evelyn Knapp. The nominal defendants are Paul Stefano and Frank Jones as administrators of the estate of William Knapp and trustees of his residuary trust, both of which are part of his unified estate plan. Stefano and Jones are Pittsburgh attorneys appointed by the state probate court to act in these capacities. The real parties-in-interest are Charles Knapp and Linda Sumser, William's children by his first marriage and the primary beneficiaries of the residuary trusts. (For ease of use, we refer to the defendants collectively as the "Residual Beneficiaries" throughout this opinion.)

This dispute centers on the propriety of William removing certain assets from two employee-benefit-plan trusts without Evelyn's written consent. The plans were operated by the American Carbyde Corporation ("AmCarb"), which William formed in 1985. Initially, AmCarb had three owners: William (71%), Charles Knapp (20%), and Leckey (9%). In November 1985, Charles Knapp withdrew his interest by having AmCarb buy back his interest, and William's share rose to 88%, Leckey's to 12%.

Before he formed AmCarb, William had significant assets invested in the employee benefit plans of two former employers, both of which were in Chapter 7 bankruptcy liquidation in 1985. All four plans in which William had assets were set to terminate, and so he created the AmCarb Profit Sharing Plan (and a related AmCarb Profit Sharing Trust) to allow him to continue deferring tax on his assets. He named himself administrator of the Plan and trustee of the Trust. He also named Leckey a trustee of the Trust, though she later testified that her role was almost entirely passive.

William transferred just over $500,000-worth of assets into the Profit Sharing Trust, all of which derived from his former employee benefit plans.³ He effected this by taking a lump-sum distribution of his accrued benefits in all previous plans, in effect rolling over assets in one set of plans to another. Evelyn signed a written consent to the election, thus waiving her right to receive the benefits in the form of a qualified joint and survivor annuity ("qualified annuity"). William was the only participant in the AmCarb Profit Sharing Plan, and AmCarb never contributed anything to it, as it never achieved commercial success.

In 1985, William withdrew some $50,000⁴ from the Trust and placed the money in individual accounts. In 1992, when he began winding up AmCarb, he withdrew the balance and again placed the money in individual accounts. To effect the 1992 transfer, William hired attorney James Wirtz. Using the copy of the Profit Sharing Plan and Profit Sharing Trust instruments that William provided,⁵ Wirtz concluded that nothing prevented William from withdrawing the assets at his leisure. At William's direction, Wirtz developed a three-part estate plan. Important for our purposes is that William removed substantially all of the assets from the Profit Sharing Trust (though he did not formally wind it up) and placed them in "Insurance Trust B," a residuary trust that, upon his death, provided Evelyn with income for life. After her death, the trust corpus was to go to the Residual Beneficiaries (to repeat, William's children from a previous marriage). The trust corpus is largely intact and will remain so until this litigation is resolved.

In 1986, AmCarb created a pension plan (the "AmCarb Pension Plan") and a related trust (the "AmCarb Pension Trust"). William named himself administrator of the Pension Plan and trustee of the Pension Trust. He and Leckey were the only eligible participants. AmCarb contributed a total of $72,000 to the Pension Trust between 1986 and 1987. In 1992, William withdrew all of the money from the Trust and placed it in individual accounts. Upon realizing that Leckey was entitled to some of the money, he transferred $10,386 from his personal brokerage account back into the Trust account (and subsequently caused the Trust to pay her that money). That same year he formally wound up AmCarb, and the IRS approved the termination of the Pension Plan effective December 31, 1991.

William died in 1993, and Evelyn and Leckey brought this action in 1995. The essential claim is that William wrongfully withdrew funds from both AmCarb trusts and deposited them in personal accounts, which had the effect of depriving Evelyn of the death benefits that she would have received had the funds remained in the trusts. This claim is based both on an ERISA requirement that distributions be paid out in the form of a qualified annuity unless the spouse signs a written consent to an alternate form of distribution, as well as plan language to that effect. It is undisputed that William's distributions did not take the form of qualified annuities. It is similarly undisputed that Evelyn did not consent in writing to these alternate forms of distribution.

As noted, Leckey translates these facts and allegations into three causes of action: (1) wrongful denial of benefits, 29 U.S.C. § 1132(a)(1)(B); (2) breach of fiduciary duty causing a loss to the plan, 29 U.S.C. § 1132(a)(2); and (3) a request for individual, equitable relief to redress a violation of the REA's qualified annuity requirement, 29 U.S.C. § 1132(a)(3). The District Court granted summary judgment in Leckey's favor on the issue of whether the plans were subject to the ERISA qualified annuity requirement. It then held a bench trial on the issues of whether William breached his fiduciary duties in bad faith, caused a loss to the plan, and damaged Evelyn or Leckey. Following that trial, it concluded that William's actions caused losses neither to the plan nor to the plaintiffs. Therefore, it entered judgment in favor of the Residual Beneficiaries, and Leckey appealed.⁶

II. The § 1132(a)(1)(B) Claim

Section 1132(a)(1)(B) allows ERISA plan beneficiaries to sue...