Narda, Inc. v. Rhode Island Hosp. Trust Nat. Bank

• Decision Date: 03 August 1990
• Docket Number: Civ. No. PN-88-783.
• Citation: 744 F. Supp. 685
• Parties: NARDA, INC., et al. v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, et al.
• Court: U.S. District Court — District of Maryland

744 F. Supp. 685

NARDA, INC., et al. v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, et al.

Civ. No. PN-88-783.

United States District Court, D. Maryland.

August 3, 1990.

Mark W. Foster, Stephen H. Glickman, Leslie M. Berger, Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Washington, D.C., for plaintiffs.

Arvid E. Roach, II, Stephen H. Marcus, Covington & Burling, Washington, D.C., for defendant Rhode Island Hosp. Trust Nat. Bank.

Stanley L. Lipshultz, Michael T. O'Bryant, Lipshultz & Hone, Silver Spring, Md., for defendants Stephen H. Gamp and SHG Associates, Inc.

William H. Hicks, R. Wayne Pierce, Niles, Barton & Wilmer, Baltimore, Md., for defendant Hartford Life Ins. Co.

Paul F. Newhouse, Eccleston & Wolf, Baltimore, Md., James S. Ray, Laurence E. Gold, Terese M. Connerton, Connerton, Ray & Simon, Washington, D.C., for defendants Roger Slotkin and NBA Group, Inc.

NIEMEYER, District Judge.

OPINION AND ORDER

An employee benefit plan established by NARDA, Inc. (the National Appliance and Radio-TV Dealer's Association) ("NARDA") to provide its members with medical benefits, life insurance, and related benefits became insolvent in May 1986 because the value of claims of participants for medical benefits exceeded the premiums collected. By September 1987 NARDA had accumulated more than $2 million in unpaid claims, and on October 31, 1987, it terminated altogether the benefits which it had been providing to members. This action, which is brought under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001, et seq., (1982), alleges that the defendants, who were retained by NARDA to provide services to the plan, mismanaged the funds and breached fiduciary duties imposed on them by ERISA.

Motions to dismiss and for summary judgment filed by various defendants present the following issues, some of which are unsettled, relating to defendants' responsibilities under ERISA:

1. When fiduciaries extend benefits under an employee benefit plan to persons not defined as beneficiaries, does the plan lose its status as an ERISA-regulated plan thereby depriving the Court of subject matter jurisdiction?

2. In the circumstances of their relationship to the plan, are several of the defendants fiduciaries who owe a duty to the plaintiffs?

3. Does ERISA provide for indemnification or contribution among culpable fiduciaries?

4. Are transactions in which NARDA retained fees for placing insurance on behalf of the plan and advanced monies to pay claims against the plan prohibited by ERISA?

I. BACKGROUND

NARDA, which is an Illinois corporation, is a trade association of retail electrical appliance dealers. Since the 1950's it has provided its members with group benefits for their employees by obtaining for them group insurance for medical benefits, disability, and death. The management and administration of the benefits plan had been under the direction of Steven H. Gamp and a corporation that he controlled, SHG Associates, Inc. ("SHG"), since the late 1960's. In May 1982 Gamp concluded that the premiums paid for medical benefits could be reduced if those particular benefits became "self-insured" and were no longer underwritten by an insurance company. NARDA agreed to the self-insured medical plan, and in May 1982 NARDA offered its self-funded medical benefits plan to its members. The Court has not been presented with any trust instrument that establishes that plan, although members of NARDA and participants in the plan received a summary plan description.

Almost a year later Gamp engaged Rhode Island Hospital Trust National Bank ("the Rhode Island Bank"), which provided ERISA plan services, to establish a trust to receive from plan participants payments for premiums for obtaining insurance policies as requested, including life insurance, accidental death and dismemberment insurance, and/or group health insurance. On April 14, 1983, Gamp caused NARDA to establish a formal trust ("the NARDA Trust") with the Rhode Island Bank as its trustee. He also caused NARDA to consent to having the Rhode Island Bank, as trustee, to enter into an administration agreement with SHG, who was to act as a liaison between NARDA and the Rhode Island Bank. Although the Rhode Island Bank contends that its charge was limited to receiving premiums and obtaining insurance as provided in the NARDA Trust, NARDA claims that the NARDA Trust also assumed responsibility for the preexisting plan by which NARDA provided medical benefits on a self-insured basis.

On August 1, 1985, over two years after the NARDA Trust was established, Gamp and SHG entered into an "Administrative Services Agreement" with Roger Slotkin and the entity he controlled, the NBA Group, Inc. ("NBA"), to form a new corporation named SHG Insurance Brokers, Inc. ("SHG Brokers"), to which they assigned all responsibility for administration of the NARDA account. Under the terms of the Administrative Services Agreement, SHG Brokers was to use the services of NBA to assist SHG Brokers in the administration of the NARDA Trust and the medical benefits plan. SHG Brokers was also used as a conduit through which Slotkin would gradually acquire Gamp's business.

The NARDA Trust initially obtained group life insurance from the United States Life Insurance Company, but later it switched companies and obtained the insurance from the Hartford Life Insurance Company ("the Hartford"). SHG Brokers negotiated the contract with the Hartford to provide life insurance for the NARDA Trust and also insurance against excessive losses and premiums for the self-funded medical benefits plan.

By May 1986 NARDA was unable to pay medical benefits from the cash that it had and was collecting from members as premiums. By September 1987 NARDA had accumulated more than $2 million in unpaid medical claims, and one month later, on October 31, 1987, NARDA announced the termination of all benefits. At the same time it notified the participating members that a "work-out plan" would be developed to resolve existing claims and a new fully insured plan was made available to participants. During the work-out period, NARDA advanced approximately $500,000 to an escrow fund for purposes of settling existing claims at less than 100% of their value.

NARDA, acting on behalf of its members and participants, and two individual beneficiaries, Georgia La Mendola and Mark Stelter, filed this action on March 17, 1988, naming as defendants most of the persons and entities who organized or provided services to NARDA, the plans, and the NARDA Trust. On September 2, 1988, Judge Alexander Harvey, II dismissed various counts of the complaint, and an amended complaint was filed on August 1, 1989, relying solely on ERISA for jurisdiction. The amended complaint names as defendants the Rhode Island Bank, SHG, Gamp, Slotkin, NBA, and the Hartford. All of the defendants have filed motions to dismiss or for summary judgment, which have been amply briefed. Following oral argument on October 20, 1989, additional submissions were received and have been considered.

For the reasons that are given hereafter, the motion of the Rhode Island Bank to be dismissed will be granted; the motions that challenge the right under ERISA to make claims for indemnification or contribution among fiduciaries will be granted; and all other motions to dismiss or for summary judgment will be denied.

II. JURISDICTION

Slotkin and NBA filed a motion to dismiss this action on the ground that the NARDA Trust is not an "employee welfare benefit plan" as defined by ERISA and that the Court therefore lacks subject matter jurisdiction. They contend that the NARDA Trust was not "established or maintained by an employer ... or an employee organization" because benefits were extended to anyone engaged in retailing or servicing consumer products and equipment, regardless of whether they were employers or whether they belonged to NARDA. Slotkin and NBA also contend that NARDA itself did not restrict membership in its association to employers and that therefore the employer-members did not exercise control over the plan. They rely on Wisconsin Educ. Ass'n Ins. Trust v. Iowa State Board, 804 F.2d 1059 (8th Cir. 1986), which held that a trust is not an "employee welfare benefit plan" if it is not restricted to "participants" as defined by ERISA, i.e. to employees of an employer or members of an employee organization.

The motion to dismiss is opposed by the plaintiffs and by the Hartford. They point to 1) NARDA's policy that only NARDA members were eligible to participate in the NARDA Trust, 2) the NARDA Trust language itself, and 3) other indicia that the NARDA Trust was intended for NARDA members only. The NARDA Trust is described as "a group insurance plan for the benefit of employees of employers who become Participants" in the plan. Beneficiaries of the NARDA Trust were advised, "Your Plan has been established and operates under the guidelines of ERISA." A summary plan description detailed how eligibility was established for those who worked at least 30 hours a week for a participating employer and would end when the employment relationship ended. Information was provided to the beneficiaries and participants regarding their rights under ERISA. Finally, the member applications for participation in the NARDA Trust provided a certification that the applicant was a member of NARDA. The plaintiffs do acknowledge, however, that by the time of the collapse of the plan in the fall of 1987, approximately 30% of the NARDA Trust participants were not NARDA members. NARDA claims that this was due to the unauthorized actions of the administrators in admitting participants who were not NARDA members, contrary to NARDA's instructions.

Jurisdiction of the Court over the claims alleged in the amended complaint is based solely on ERISA, 29 U.S.C. §§ 1132(e) and (f). The applicability of ERISA to an employee welfare plan is restricted to "any plan, fund, or program which was...