Nagy v. Dewese

• Decision Date: 23 February 2011
• Docket Number: Civil Action No. 09–3995.
• Citation: 771 F.Supp.2d 502,51 Employee Benefits Cas. 1273
• Parties: Gabriel F. NAGY, Plaintiff,v.Harris M. DeWESE, et al., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

771 F.Supp.2d 502

51 Employee Benefits Cas. 1273

Gabriel F. NAGY, Plaintiff,

v.Harris M. DeWESE, et al., Defendants.

Civil Action No. 09–3995.

United States District Court, E.D. Pennsylvania.

Feb. 23, 2011.

Gerald S. Berkowitz, Berkowitz and Klein LLP, Malvern, PA, for Plaintiff.Adrienne Roth, Albert Anthony Ciardi, III, Holly Smith, Jennifer E. Cranston, Nicole M. Nigrelli, Ciardi Ciardi & Astin, William E. Mahoney, Jr., Joshua R. Dutill, William T. Mandia, Stradley, Ronon, Stevens & Young, Philadelphia, PA, for Defendants.

MEMORANDUM

YOHN, District Judge.

Plaintiff, Gabriel F. Nagy, seeks to recover the assets of the Compass Capital Partners Ltd. Defined Benefit Retirement Plan (the “Plan”). Plaintiff contends that the Plan's assets were misappropriated by defendants Harris M. DeWese (“DeWese”), the Plan administrator, and Compass Capital Partners, Ltd. (“Compass”), the Plan's sponsor, and that Morgan Stanley Smith Barney LLC (“Smith Barney”) facilitated their misappropriation. Plaintiff asserts claims for breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., and state law.

Plaintiff and defendant Smith Barney have now filed cross-motions for summary judgment under Federal Rule of Civil Procedure 56. Plaintiff seeks summary judgment against all defendants for breach of fiduciary duty under ERISA (Count I), and against Smith Barney for breach of fiduciary duty under state law (Count III). Smith Barney seeks summary judgment as to all of plaintiff's claims against Smith Barney.

Because the evidence shows that the sole genuine issue of material fact with respect to plaintiff's claim in Count I against DeWese for breach of fiduciary duty under section 502(a)(2) of ERISA is the amount of damages, I will grant plaintiff's motion for summary judgment as to liability on that claim. However, plaintiff has not demonstrated—or even argued—Compass's liability under Count I, so plaintiff's motion for summary judgment will be denied as to Compass. Plaintiff has also provided no argument with respect to his claim for equitable relief in Count II, so I will not consider that claim.

Although the undisputed evidence shows that Smith Barney was a fiduciary with respect to providing investment advice to the Plan for a fee, it also establishes that Smith Barney did not act as a fiduciary when engaged in the conduct subject to complaint, and therefore did not directly violate its fiduciary duties under ERISA. Smith Barney is thus entitled to summary judgment on plaintiff's claim in Count I to the extent plaintiff seeks to recover for direct breach of fiduciary duty. However, neither Smith Barney nor plaintiff is entitled to summary judgment on plaintiff's claim in Count I that Smith Barney is liable as a co-fiduciary under section 405 of ERISA, because genuine issues of triable fact remain to be decided as to that claim.

Finally, because Smith Barney was an ERISA fiduciary with respect to the Plan, Plaintiff's state-law claim in Count III for breach of fiduciary duty against Smith Barney is preempted.

I. Factual and Procedural Background ¹

DeWese and plaintiff purchased Compass around January 1998. (Pl.'s Mot. Summ. J. (“Pl.'s Mot.”) ¶ 2; Smith Barney's Resp. to Pl.'s Mot. Summ. J. (“Smith Barney Resp.”) ¶ 2.) Plaintiff owned 40% of the voting stock of Compass and was its president and chief operating officer until his resignation on November 30, 2003. (Pl.'s Mot. ¶¶ 4, 16.) DeWese owned the remaining 60% of Compass's voting stock and was its chairman and chief executive officer. ( Id. ¶ 3.) DeWese provided merger and acquisition investment-banking advice to Compass's clients, specializing in the printing industry. ( Id. ¶ 5.) Plaintiff managed the day-to-day affairs of Compass and provided business valuation services to its clients. ( Id. ¶ 6.)

The Plan was formed on January 1, 1998, and was a defined benefit plan that provided retirement benefits to participants at age 62. ( Id. ¶¶ 7–8; DeWese/Compass Resp. to Pl.'s Mot. Summ. J. (“DeWese Resp.”) ¶ 7.) DeWese, plaintiff, and three other Compass employees were all participants in the Plan, but DeWese has renounced any interest in the Plan. (Pl.'s Mot. ¶¶ 11–12.) Plaintiff served as the Plan's administrator until his resignation as trustee on February 13, 2003. ( Id. ¶ 9.)

After plaintiff's resignation as trustee and administrator, DeWese assumed both roles with respect to the Plan. ( Id. ¶¶ 10, Pl.'s Mot. Ex. A (“DeWese Dep.”) 95:25–96:2.) After becoming the administrator and trustee of the Plan, DeWese moved the Plan's assets to an account at Legg Mason Wood Walker, Inc., where his son Andrew DeWese was a trainee, and Smith Barney came to hold the Plan's assets as successor to Legg Mason Wood Walker. (Pl.'s Mot. ¶ 14; Smith Barney's Mot. Summ. J. (“Smith Barney Mot.”) 1.)

John Jason Bish (“Bish”), a Smith Barney employee, was at all relevant times assigned to the Plan's account, and Smith Barney characterizes his role as that of “financial advisor” to the account. (Smith Barney's Statement of Undisputed Facts ¶ 8.) In that capacity Bish recommended securities for the Plan to buy and sell, and DeWese always accepted those recommendations. ( Id. ¶ 14; Smith Barney Resp. ¶ 31.)

Plaintiff decided to retire in late 2003, and on October 6, 2003, DeWese accepted plaintiff's retirement proposal pursuant to which plaintiff resigned as an officer and director of Compass and transferred his shares in Compass back to the company. (Pl.'s Mot. ¶ 16.) Plaintiff claims to have performed part-time work as a consultant for Compass from time to time thereafter. ( Id. ¶ 17.)

In February 2005, plaintiff elected to receive retirement benefits from the Plan in the form of a stream of monthly payments of $2,111.07 to continue until the later of his death or the death of his wife. ( Id. ¶ 22.) DeWese then instructed Smith Barney to send a monthly payment to plaintiff for that amount. ( Id. ¶ 23.) Until December 2007, these payments were made on schedule. ( Id. ¶ 63.)

In April 2005 DeWese acquired stock in a Tampa, Florida-based company known as Hillsboro Printing (“Hillsboro”), in lieu of cash payment for investment-banking services he provided to Hillsboro. ( Id. ¶ 33.) The following year DeWese purchased additional shares of Hillsboro stock, bringing his total share in that company to at least 40%. ( Id. ¶ 34.)

Hillsboro was experiencing financial difficulties, and was unsuccessful in its attempts to borrow money from banks in Florida.² ( Id. ¶¶ 35–36; Smith Barney Resp. ¶ 36.) In order to allow Hillsboro to weather its cash-flow problems, DeWese lent the company approximately $800,000, using both his personal funds and funds from the Plan. (Pl.'s Mot. ¶¶ 37–38.)

DeWese accessed the Plan's funds by requesting that Smith Barney issue checks to him. ( Id. ¶ 42; Smith Barney Resp. ¶ 42.) Over a period of approximately one year, from October 2006 to October 2007, Smith Barney issued eight checks representing Plan funds, totaling $536,417.53, to DeWese. (Pl.'s Mot. ¶ 40; Smith Barney Resp. ¶¶ 40, 59; Pl.'s Mot. Ex. G (checks and deposit slips).) ³ All of the checks from the Plan were made payable to “Harris M. DeWese TTE.” (Pl.'s Mot. ¶ 41; Smith Barney Resp. ¶ 41.) The checks were either deposited into the Compass bank account or into DeWese's personal account. (Pl.'s Mot. ¶ 50; DeWese Resp. ¶ 50.) Some of the funds were then used in the operation of Compass, and the rest were transferred to Hillsboro. (Pl.'s Mot. ¶ 50; DeWese Resp. ¶ 50.) ⁴ After the last check was issued to DeWese, there remained $3,804.41 in the Plan's Smith Barney account. (Pl.'s Mot. ¶ 61; Smith Barney Resp. ¶ 61.)

Hillsboro's financial troubles subsequently resulted in its collapse. (Pl.'s Mem. in Support of Pl.'s Mot. (“Pl.'s Mem.”) 7; DeWese Dep. 95:9–11.) After December 2007, because there were insufficient funds in the Plan's Smith Barney account to make plaintiff's scheduled monthly payments those payments became irregular and were made only as DeWese periodically transferred sufficient funds to Smith Barney to make the payments. (Pl.'s Mot. ¶¶ 63, 65; Smith Barney Resp. ¶ 65.)

Plaintiff tried but was unable to obtain information from Smith Barney as to why his payments were not being made on time, because Smith Barney followed a policy of communicating only with the named account holder (DeWese) and refused to discuss details of the account with plaintiff. (Pl.'s Mot. ¶¶ 71–72.) DeWese eventually admitted to plaintiff that he had emptied the Plan account at Smith Barney and that the Plan was “broke.” (Pl.'s Mot. Ex. E, Doc. SB0008 (“DeWese Email” to Pl., July 7, 2008).) DeWese claimed that he would restore the Plan's funds using fees he expected to earn in 2008. (Pl.'s Mot. Ex. C at 124 (email from DeWese to Pl., July 15, 2008).) After giving DeWese one year to replace the Plan funds, plaintiff initiated this litigation. (Pl.'s Mot. ¶ 82; Smith Barney Resp. ¶ 82.)

Plaintiff filed this civil action in September 2009 and, by consent of the parties, filed an amended complaint in November 2009. Defendants—including former defendant Bish, who has been dismissed as a defendant by consent of the parties—filed various motions to dismiss under Federal Rules of Civil Procedure 12(b)(6) and 12(c), which I disposed of by order dated April 7, 2010, Nagy v. De Wese, 705 F.Supp.2d 456 (E.D.Pa.2010). Pursuant to that order, the claims that remain before the court are (a) plaintiff's claims in Count I for breach of fiduciary duty under ERISA against DeWese, Compass and Smith Barney under section 502(a)(2) of ERISA (b) plaintiff's claims in Count II for equitable relief based on unjust enrichment, under section 502(a)(3)(B) of ERISA, against DeWese and Compass, and (c) plaintiff's claim in Count III against Smith Barney for breach of fiduciary duty to the Plan ⁵ under Pennsylvania law. See Nagy, 705 F.Supp.2d at 470.

Plaintiff now seeks summary...