Pension Fund-Local 701 v. Omni Funding Group

• Decision Date: 15 February 1990
• Docket Number: Civ. No. 84-4326(GEB).
• Parties: PENSION FUND — MID JERSEY TRUCKING INDUSTRY — LOCAL 701, et al., Plaintiffs, v. OMNI FUNDING GROUP, et al., Defendants.
• Court: U.S. District Court — District of New Jersey

731 F. Supp. 161

PENSION FUND — MID JERSEY TRUCKING INDUSTRY — LOCAL 701, et al., Plaintiffs, v. OMNI FUNDING GROUP, et al., Defendants.

Civ. No. 84-4326(GEB).

United States District Court, D. New Jersey.

February 15, 1990.

COPYRIGHT MATERIAL OMITTED

Wilentz, Goldman & Spitzer by Marvin J. Brauth and Laura Studwell, Woodbridge, N.J., for plaintiffs.

Riker, Danzig, Scherer & Hyland by Benjamin P. Michel, Newark, N.J., for defendant Prudential-Bache Securities, Inc.

Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross by Thomas J. Demski and Mark E. Duckstein, Newark, N.J., for defendant Southeast Bank N.A. of Miami, Fla.

GARRETT E. BROWN, Jr., District Judge.

This memorandum and order resolves motions for summary judgment and attorney's fees made by defendant Prudential-Bache Securities, Inc. ("Pru-Bache") and Southeast Bank, N.A. of Miami, Florida ("Southeast Bank"). Plaintiff Pension Fund¹ filed this action on October 19, 1984, alleging that it was the victim of a conspiracy to misdirect and misappropriate over $20 million of its funds. Plaintiff has alleged that Southeast Bank and Pru-Bache are liable for a breach of fiduciary duty under ERISA, as well as state common law contract and negligence theories. Both Pru-Bache and Southeast Bank move for summary judgment as to plaintiff's ERISA claim and for attorney fees under 29 U.S.C. § 1132(g). Pru-Bache also moves for summary judgment as to plaintiff's state common law claims.

Summary judgment may be granted only if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). In a summary judgment motion, the nonmoving party receives the benefits of all reasonable doubts and any inferences drawn from the underlying facts. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). Fed.R. Civ.P. 56(e) also requires that when a nonmoving party bears the burden of proof at trial as to a dispositive issue, that party is required to go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial. Celotex Corp., 477 U.S. at 324, 106 S.Ct. at 2553. For an issue of fact to be genuine, the nonmoving party must do more than simply show that there is some metaphysical doubt as to the material facts. Matsushita, 475 U.S. at 586, 106 S.Ct. at 1355. Issues of material fact are genuine only "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

I. PRU-BACHE'S SUMMARY JUDGMENT MOTION

A. Factual Background

In its second amended complaint, Pension Fund alleges that it invested $20 million of its funds with defendant Omni Funding Group, Inc. ("Omni"), a Florida-based mortgage brokerage company, and its owner, defendant Joseph Higgins, on October 13, 1982. In June and July of 1983, Higgins approached Ray West, a broker at Pru-Bache, regarding investment of approximately $4 million of the Pension Fund monies into four Pru-Bache accounts. Two of the accounts, entitled "Omni Funding Group — Glades Citrus" and "Omni Funding Group — Mercer," were money market accounts and are not subjects of this litigation. The other two accounts, "Omni Funding Group 78, 79, 80" ("78, 79, 80") and "Omni-Holly Springs," ("Holly Springs") involved both risk arbitrage and money market accounts. Higgins opened the 78, 79, 80 account on July 28, 1983, with an investment of $2.3 million. At the time of opening, the arbitrage account of 78, 79, 80 was entitled "Omni Funding Group, Joseph J. Higgins, Pres." and the money market account was named "Omni Funding Group, in trust for Luis F. Vela." The subaccounts were later joined as 78, 79, 80. Higgins opened the Holly Springs account on August 29, 1983 with an investment of $930,000.00.

Higgins closed all four accounts in 1984 after sustaining a loss of $550,000 according to Pru-Bache, and over $1 million according to plaintiff. The parties dispute whether Mr. West of Pru-Bache knew or should have known, either through conversations with Mr. Higgins or otherwise, that Pru-Bache was investing Pension Fund monies. The parties also dispute whether Pru-Bache acted in a discretionary or ministerial manner in investing the monies and whether Pru-Bache acted in accordance with the investment objectives established for these accounts.

B. The ERISA Claim

Pension Fund seeks to hold Pru-Bache liable under ERISA for breach of its fiduciary duty. Alternatively, Pension Fund argues that Pru-Bache is liable under a theory of co-fiduciary liability for: (1) knowingly attempting to conceal Higgins' breaches of his fiduciary duty; (2) failing to comply with 29 U.S.C. § 1104(a)(1) and thus enabling Higgins to breach his fiduciary duty; and/or (3) failing to make reasonable efforts to remedy Higgins' breaches.

Pru-Bache argues that it cannot be a fiduciary of the Pension Fund assets under ERISA because it did not know and should not have known that Higgins had invested the funds on behalf of the Pension Fund. Pru-Bache further argues that, even if it were a fiduciary, it acted in accordance with investment objectives established by Mr. Higgins, and clearly informed him of the potential risks. In opposition to Pension Fund's co-fiduciary liability theory, Pru-Bache again argues that it had no knowledge that Higgins was a fiduciary of the Pension Fund assets.

1. Was Pru-Bache a Fiduciary?

ERISA provides that a person assumes fiduciary status with respect to an employee benefit plan to the extent:

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 1105(c)(1)(B) of this title.

29 U.S.C. § 1002(21)(A) (1987).

Implicit in the definition of "fiduciary" is the requirement that the putative fiduciary knows or reasonably should have known that he or she is acting in a fiduciary capacity. Such a requirement is established by Department of Labor regulations,² which deserve great weight in the interpretation of ERISA, cf., Helvering v. Winmill, 305 U.S. 79, 59 S.Ct. 45, 83 L.Ed. 52 (1938), and common law trust principles,³ which may be used in interpreting ERISA's provisions, see Lowen v. Tower Asset Management, Inc. 829 F.2d 1209, 1220 (2d Cir.1987). Thus, before it can determine whether Pru-Bache acted in a discretionary or ministerial manner with regard to the trust assets, the Court must first consider whether Pru-Bache has shown beyond a genuine issue of material fact that it did not know it was acting as a fiduciary for Pension Fund's assets.

Mr. Higgins testified at his deposition that he told Mr. West the Pension Fund was the source of the funds for the Omni accounts at Pru-Bache. Dep. of Joseph Higgins at 1762:9-20 (attached to Aff. of Marvin Brauth at Ex. B (June 30, 1989)). He further testified that he informed Mr. West that a portion of the monies going into the accounts represented security for Pension Fund loans. Id. at 1763:14-18. Mr. Higgins also stated that he told Mr. West that a portion of the funds represented holdbacks or collateral security for loans. Id. at 1764:2-9, that another portion represented construction funds, id. at 1764:10-14, and that another represented payment reserve. Id. at 1764:15-19. Mr. Higgins further stated that on July 28, 1983 he sent to Mr. West a letter that referred to the collateral pledge agreement for the Sanctuary Loan as the "collateral pledge agreement, the Omni Funding Group, a Florida Corporation ("Lender") and to Luis F. Vela, as trustee ("Borrower")." Id. at 1766:17-1767:15.

Mr. West's deposition testimony contradicts many of Mr. Higgins' assertions. Mr. West asserts that at the time the accounts were opened, Mr. Higgins did not inform him that a pension fund was providing the funds for the investments. West Dep. at 100:3-7 (attached to Pru-Bache App. at Ex. 5). Mr. West also admitted that, prior to the opening of the accounts, Mr. Higgins had mentioned that he might be doing business with a pension fund. Id. at 98:19-22. Mr. West was not sure when this conversation occurred, id. at 98:23-25, but estimated it to be one to three months prior to opening the first account. Id. at 100:8-15. Mr. West further testified that, with the exception of one meeting with trustees of the Pension Fund, he had no contact with anyone from the Fund. Id. at 117:23-118:25. He claims that, although he attended the meeting, nothing was asked of him and nothing discussed at the meeting pertained to him. Id. at 117:20-22. At the meeting, Mr. West was introduced by Higgins merely as being from Pru-Bache. Id. at 114:13-20. Mr. West also claimed he did not know why Mr. Higgins had asked him to attend the meeting. Id. at 114:9-12. Finally, Mr. West testified that, at the time the accounts for Omni were opened, he was not aware that the accounts were opened in connection with mortgage loans, id. at 144:1-4; that the accounts were being opened by Omni in connection with a business dealing it had with the Pension Fund, id. at 144:5-8; or that the accounts contained construction monies, or security for loans. Id. at 144:9-15.

Summary judgment generally is inappropriate when resolution of conflicting evidence depends on issues of credibility. 10A C. Wright, A. Miller and M. Kane, Federal Practice and Procedure (Civil 2d) § 2726 (1983). Pru-Bache...