Shofer v. Stuart Hack Co., 165

• Decision Date: 01 September 1990
• Docket Number: No. 165,165
• Citation: 595 A.2d 1078,324 Md. 92
• Parties: , 14 Employee Benefits Cas. 1350 Richard SHOFER v. The STUART HACK COMPANY et al. ,
• Court: Maryland Court of Appeals

Page 92

324 Md. 92

595 A.2d 1078, 14 Employee Benefits Cas. 1350

Richard SHOFER v. The STUART HACK COMPANY et al.

No. 165, Sept. Term, 1990.

Court of Appeals of Maryland.

Sept. 17, 1991.

Anthony P. Palaigos (Thomas A. Bowden, Blum, Yumkas, Mailman, Gutman & Denick, P.A., all on brief), Baltimore, for appellant.

Janet M. Truhe (Lee B. Zaben, Semmes, Bowen & Semmes, Linda M. Schuett, John J. Ryan, Frank, Bernstein, Conaway & Goldman, all on briefs), Baltimore, for appellees.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, McAULIFFE, CHASANOW and KARWACKI, JJ.

RODOWSKY, Judge.

This case presents issues of exclusive federal jurisdiction and of federal preemption of state law under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 through 1461. The action is brought by a retirement plan participant against a nonfiduciary consultant to the plan for loss, including liability for income taxes, interest and penalties, allegedly caused by tax advice negligently rendered by the consultant concerning loans from the plan.

I

ERISA preemption is created by a section in that statute providing that, with certain exceptions, ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. § 1144(a) (1988). ¹ This provision has been called "undoubtedly ... the most expansive preemption clause found in any federal statute." Conison, The Federal Common Law of ERISA Plan Attorneys, 41 Syracuse L.Rev. 1049, 1083 (1990). "State law" is defined in ERISA as "all laws, decisions, rules, regulations, or other State action having the effect of law." § 1144(c)(1). The Supreme Court has given the phrase "relate to" its "broad common-sense meaning, such that a state law 'relate[s] to' a benefit plan 'in the normal sense of the phrase, if it has a connection with or reference to such a plan.' " Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739, 105 S.Ct. 2380, 2389, 85 L.Ed.2d 728, 740 (1985) (quoting Shaw v. Delta Air Lines, 463 U.S. 85, 97, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490, 501 (1983)). Indeed, some courts hold that ERISA preempts state common law remedies even though the result leaves the plaintiff with no remedy under ERISA either. See, e.g., Lee v. E.I. DuPont de Nemours & Co., 894 F.2d 755, 757-58 (5th Cir.1990) (state law action for negligent misrepresentation preempted, despite possible lack of remedy in ERISA, where retired employees sued former employer for additional benefits provided under early retirement plan adopted shortly after plaintiffs retired).

On the other hand, there are limits to ERISA preemption. The Supreme Court has stated that "[s]ome state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." Shaw, 463 U.S. at 100 n. 21, 103 S.Ct. at 2901 n. 21. Although the relationships to plans that have come before the Supreme Court frequently have not been "too tenuous, remote, or peripheral" to avoid preemption, there is a body of authority from other courts holding no preemption of state law claims that have some relationship to an ERISA benefit plan.

The subject matter jurisdictional issue in the instant matter involves § 1132(e)(1). It reads:

"Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter [Protection of Employee Benefit Rights §§ 1001 through 1168] brought by the Secretary or by a participant, beneficiary, or fiduciary. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under subsection (a)(1)(B) of this section."

The exception gives state and federal courts concurrent jurisdiction over a "civil action ... brought by a participant or beneficiary to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." § 1132(a)(1)(B).

II

Petitioner, Richard Shofer (Shofer), is an automobile dealer. He is the sole stockholder and president of Catalina Enterprises, Inc. (Catalina), which trades as Crown Motors. In 1971 Catalina adopted a pension plan which qualified under the Internal Revenue Code. Shofer was and is the plan's sole trustee.

Respondent, Stuart Hack (Hack), a Chartered Life Underwriter, is the president of respondent, The Stuart Hack Company (Hack Co.). Respondents are pension plan consultants. They prepared the Catalina plan and amendments thereto. Hack Co. acts as a professional plan administrator and it is the administrator of the Catalina plan. ² Respondents routinely rendered professional assistance to Catalina. This included advising Shofer or Catalina as to the tax implications of transactions that they were contemplating. That was a normal part of the business relationship between respondents, Shofer, and Catalina.

Sometime prior to August 9, 1984, Shofer had a telephone conversation with Hack concerning the use of funds in Shofer's account or accounts in the Catalina plan, either by way of a loan from the plan, or as security for a loan. Hack replied in a four-paragraph, single-spaced, full-page letter of August 9, 1984. Shofer's position in the instant litigation is that Hack failed to advise Shofer of the income tax consequences of borrowing from the plan.

In nine transactions between August 9, 1984, and September 30, 1986, Shofer borrowed $375,000 from the Catalina plan. Shofer used the loan proceeds to repay loans from Catalina, t/a Crown Motors, and to purchase and refurbish a property in the Virgin Islands.

Subsequently, Catalina's and Shofer's accountants, Grabush, Newman & Company, P.A. (Grabush), advised Shofer of income tax liability based on those loans. Shofer paid to the United States and to the State of Maryland for the years 1984, 1985 and 1986 income taxes, penalties, and interest totaling $120,428.19 because proceeds of the loans from the plan constituted income to him in those years. Shofer also incurred other consequential expenses.

Shofer sued Hack and Hack Co. in the Circuit Court for Baltimore City. Hack and Hack Co. impleaded Grabush as a third-party defendant. Shofer's claims eventually were stated in a second amended complaint. During the evolution of that pleading the parties engaged in discovery.

Shofer's second amended complaint is in eight counts. Counts I and II are Maryland law claims, sounding in tort and in contract, for malpractice. Count III alleges a special relationship of trust and confidence to have existed between Shofer and the respondents, giving rise to a fiduciary duty which was breached by the allegedly incomplete advice. Counts IV through VIII are expressly predicated on breaches of the ERISA plan. The compensatory damages sought under the ERISA counts are the same as those sought in the Maryland law causes of action.

In support of their motion to dismiss, respondents argued that the first three counts of the second amended complaint were predicated on Maryland common law which was preempted by ERISA. Thus, those counts did not state a claim upon which relief could be granted because the underlying substantive law relied on for the theory of the cause of action could not be applied to the claim. Respondents argued that the ERISA-based causes of action could be asserted only in a federal court. Respondents further submitted that, because all of the counts essentially involved a breach of fiduciary duty, the federal courts had exclusive subject matter jurisdiction over all of the counts. The parties, both in their memoranda filed in, and in their oral arguments to, the circuit court went well beyond the four corners of the second amended complaint. They made free use of facts contained in discovery which appeared in the circuit court record. The joint record extract in this Court contains discovery material and an affidavit. Accordingly, we shall treat respondents' motion to dismiss as one for summary judgment, governed by Maryland Rule 2-501. See Md.Rule 2-322(c).

The circuit court dismissed Shofer's complaint with prejudice in its entirety. ³ Shofer appealed to the Court of Special Appeals. We issued the writ of certiorari on our own motion prior to consideration of this matter by the Court of Special Appeals.

The docket of the Circuit Court for Baltimore City reflects that no judgment has ever been entered disposing of the third-party claim by respondents against Grabush. Nor was the circuit court asked to certify its dismissal of Shofer's second amended complaint as a final judgment pursuant to Maryland Rule 2-602. Thus, this case could be dismissed as a premature appeal. See Estep v. Georgetown Leather Design, 320 Md. 277, 577 A.2d 78 (1990). Nevertheless, we exercise our discretion under Maryland Rule 8-602(e)(1)(C) and hereby enter as a final judgment the judgment of the Circuit Court for Baltimore City dismissing all of Shofer's claims.

III

For purposes of this appeal the respondents are not fiduciaries under the Catalina plan. ⁴

Section 1002(21)(A), in relevant part, provides that

"a person is a fiduciary with respect to a 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 ... or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan."

Absent such discretionary authority, a person is not a plan fiduciary. See 29 C.F.R. § 2509.75-8, at 327 (1991). ⁵

In the instant matter Hack, on deposition, said that he did not have control over, and exercised no discretion over, either the plan or the plan's assets. But it is not clear...