Reich v. Lancaster

• Decision Date: 22 June 1995
• Docket Number: No. 93-1953,93-1953
• Citation: 55 F.3d 1034
• Parties: , 19 Employee Benefits Cas. 1505, Pens. Plan Guide P 23910G Robert B. REICH, Secretary of the United States Department of Labor, Plaintiff-Appellee, v. Jerry D. LANCASTER, et al., Defendants. Jerry D. LANCASTER and Jerry D. Lancaster & Associates, Inc., Defendants-Appellants, v. PLUMBERS & PIPEFITTERS LOCAL 454 HEALTH & WELFARE FUND, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1034

55 F.3d 1034

64 USLW 2048, 19 Employee Benefits Cas. 1505,

Pens. Plan Guide P 23910G

Robert B. REICH, Secretary of the United States Department

of Labor, Plaintiff-Appellee, v. Jerry D. LANCASTER, et al., Defendants.

Jerry D. LANCASTER and Jerry D. Lancaster & Associates, Inc., Defendants-Appellants, v. PLUMBERS & PIPEFITTERS LOCAL 454 HEALTH & WELFARE FUND,

Defendant-Appellee.

No. 93-1953.

United States Court of Appeals Fifth Circuit.

June 22, 1995.

Anthony A. Petrocchi, Christopher M. Weil, Weil & Petrocchi, Dallas, TX, for Lancaster, et al.

Paul E. Coggins, U.S. Atty., Dallas, TX, for appellee.

Jordana W. Wilson, U.S. Dept. of Labor, Washington, DC, for Reich.

Janine M. Ames, Erin B. Ahearn, Youngdahl, Sadin & McGowan, Little Rock, AR, for Plumbers/Pipefitters.

Appeal from the United States District Court for the Northern District of Texas.

Before SMITH and BARKSDALE, Circuit Judges, and FITZWATER, District Judge. ^*

FITZWATER, District Judge:

An insurance agent and his agency appeal a judgment entered following a bench trial, holding each defendant liable for over $1.425 million in restitutionary relief, and permanently enjoining them from serving as fiduciaries or service providers to any ERISA ¹ plan, based on findings that they had breached various fiduciary duties and caused or engaged in prohibited transactions with respect to an ERISA employee welfare benefit plan. See Reich v. Lancaster, 843 F.Supp. 194 (N.D.Tex.1993). We affirm.

I

Plaintiff-Appellee Robert Reich (the "Secretary"), ² Secretary of the United States Department of Labor ("DOL"), brought this civil enforcement action alleging breaches of fiduciary duties imposed by 29 U.S.C. Sec. 1104, and the commission of transactions prohibited by 29 U.S.C. Sec. 1106, arising from purchases of individual permanent or whole life insurance policies by Plumbers & Pipefitters Local 454 Health & Welfare Fund (the "Fund"), a self-funded ERISA employee welfare benefit plan. The Secretary sued defendant-appellant Jerry D. Lancaster ("Lancaster"); defendant-appellant Jerry D. Lancaster and Associates, Inc. ("JDL"); Diversified Consultants, Inc. ("DCI"); Lancaster's three sons, Derek Lancaster ("Derek"), Daron Lancaster, and Aaron Lancaster; and eight Fund Trustees, including the Chairman of the Board, Kenneth Poole ("Poole"). ³ The Secretary also joined the Fund as a party-defendant pursuant to Fed.R.Civ.P. 19(a) so that complete relief could be granted.

In 1983 the Fund's Board of Trustees hired Lancaster, a licensed insurance agent, and his companies to provide insurance services to the Fund. The Trustees retained DCI as a consultant to the Fund, and JDL as claims administrator. Lancaster owned all the stock in and was Chairman of the Board of Directors of JDL. DCI was JDL's wholly-owned subsidiary. Lancaster's three sons were employees, officers, and directors of JDL and DCI.

At the time the Fund entered into its relationship with Lancaster, JDL, and DCI, the Trustees approved changes in the Fund's insurance contracts. The Fund had previously obtained group term life insurance for participants and beneficiaries. Lancaster proposed, and the Trustees approved, the purchase of individual whole life insurance policies with death benefits of $10,000 from Guaranty Income Life Insurance Company ("GILICO") for each member of Local 454 under age 71. Lancaster also recommended to the Trustees, and they agreed, to prepay three years of premiums in order to qualify for a discount on second and third year premiums. By persuading the Fund to pay these premiums in advance, Lancaster and JDL became entitled to commissions of 85% of premiums paid for the first year, 55% for the second year, and 10% for the third year. JDL received total commissions of $211,000 on the purchases of the 1983 GILICO policies. The Fund paid in excess of $390,000 in premiums, which amounted to more than 50% of its assets as of May 1983, and $100,000 more than the Fund had in excess of its net desired reserves. Lancaster neither disclosed to the Trustees the amount of his fees and commissions nor revealed that JDL was regional manager for GILICO, and was obligated to attempt to meet a production goal of at least $500,000 of first year life insurance premiums.

The following year, in 1984, Lancaster proposed, with the Board's approval, the purchase from GILICO of an additional $10,000 individual whole life policy for each plan participant. This entitled JDL to commissions equal to 80% of the premiums paid the first year, 50% of premiums paid for the second, and 20% of premiums paid for the third. The Fund expended the sum of $380,000 for these policies. JDL received commissions in an amount of no less than $195,000. As a result of the 1983 and 1984 purchases, the Fund had paid $770,000 in premium payments to GILICO as of August 1984. Lancaster and his companies received $406,000 of these expenditures as commissions.

In 1985 GILICO canceled Lancaster's agency and regional manager contracts for reasons unrelated to this case. Poole thereafter canceled the Fund's life insurance policies with GILICO and requested that the cash values and unearned and prepaid 1983 and 1984 policy premiums be refunded. The Fund then purchased $25,000 death benefit individual universal life insurance policies from American General Life Insurance Company ("AGLIC") for each plan participant. The Fund paid total premiums of $211,005 for these policies. AGLIC, in turn, paid commissions to JDL and Lancaster's sons in the total amount of $145,177. On September 1, 1986 the AGLIC policies lapsed due to nonpayment of premiums. The Fund lost the sum of approximately $109,000, calculated according to what the Fund paid AGLIC in excess of the cost of term insurance.

During 1983 and 1984 Lancaster also purchased stop loss, ⁴ group term life, and accidental death and dismemberment insurance on behalf of the Fund. He billed the Fund a higher amount in premiums than was remitted to the insurance companies. Lancaster kept these so-called "premium differentials"--that is, the difference between what the Fund paid to Lancaster and the sums that he in turn remitted to the insurance carriers. The companies also paid Lancaster, JDL, and DCI commissions and other fees on the purchase of this insurance.

By the end of 1985, approximately two and one-half years after Lancaster became the Fund's consultant, the Fund had expended nearly $1 million in life insurance premiums, of which Lancaster and his companies and employees had received in excess of $550,000 in commissions.

The Secretary predicated the instant civil enforcement action on two aspects of these transactions that are germane to this appeal. First, he alleged that the Fund had paid excessive and unwarranted premiums in purchasing individual permanent or whole life policies, when the Fund could have obtained the same or better benefits for Fund participants and beneficiaries by obtaining other types of insurance, such as group term life insurance, at far less cost. Second, the Secretary contended that Lancaster, his sons, JDL, and DCI had received more than reasonable compensation in connection with the insurance purchases.

On the basis of these two premises, the Secretary averred that the Trustees, Lancaster, JDL, and DCI had violated Sec. 1104(a)(1)(A) by failing to discharge their duties with respect to the Fund solely in the interest of the Fund's participants and beneficiaries, for the exclusive purpose of providing plan benefits and defraying reasonable expenses of plan administration; violated Sec. 1104(a)(1)(B) by failing to discharge their duties in compliance with the ERISA prudent man standard; violated Sec. 1104(a)(1)(D) by failing to discharge their duties in accordance with the Fund's plan documents and instruments; violated Sec. 1106(a)(1)(C) by causing the Fund to engage in transactions that they knew or should have known constituted a direct or indirect furnishing of goods, services, or facilities between the Fund and JDL, DCI, Lancaster, and Lancaster's sons, who were parties in interest; and violated Sec. 1106(a)(1)(D) by causing Fund assets to be transferred to, or used by or for the benefit of, JDL, DCI, and Lancaster's sons, who were parties in interest. The Secretary also maintained that Lancaster, JDL, and DCI had dealt with Fund assets in their own interest and for their own account, in violation of Sec. 1106(b)(1); acted in a transaction involving the Fund on behalf of a party, or represented a party, whose interests were adverse to those of the Fund's participants and beneficiaries, in violation of Sec. 1106(b)(2); and received consideration for their own personal account in connection with a transaction involving Fund assets, in violation of Sec. 1106(b)(3).

The Secretary alleged that Lancaster was a fiduciary within the meaning of Sec. 1002(21)(A), and a party in interest within Sec. 1002(14)(A) and (B), because he exercised discretionary authority and control with respect to the purchase of insurance by the Fund. He averred that JDL was a party in interest within Sec. 1002(14)(B) because JDL contracted to provide administrative, consulting, actuarial, and claims services to the Fund, and was a fiduciary within the meaning of Sec. 1002(21)(A) because, through Lancaster, JDL exercised discretionary authority and control with respect to the purchase of insurance by the Fund. The Secretary contended that DCI was a party in interest within Sec. 1002(14)(B) because its corporate identity was virtually identical to JDL and it provided consulting services to the Fund. He alleged that DCI was a fiduciary within the meaning of Sec. 1002(21)(A) because, through Lancaster, DCI exercised discretionary authority and control with respect to the purchase of insurance by the Fund. The Secretary maintained that Lancaster's sons were parties in interest within Sec. 1002(14)(F) because they were Lancaster's sons, and that Derek was a party...