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BROCK v. GERACE

April 21, 1986

WILLIAM E. BROCK, Secretary of the United States Department of Labor, Plaintiff,
v.
FRANK GERACE, EDWARD T. HANLEY, JOHN C. KENNEALLY, HERMAN LEAVITT, VITO PITTA, RONALD RICHARDSON, VINCENT SIRABELLA, MARIO VACCARINO, GAIL FABIAN, FLORENCE FARR, LEWIS COHEN, JOHN CULLERTON, DONALD J. DePORTER, PAUL DiAMICO, PATRICK KANE, DOMINIC P. LUONGO, A. M. QUARLES, WILLIAM SCHUMAN, DONALD R. WILLIAMS, JOSEPH BELARDI, FRANK MAROLDA, JERRY BURNS, BEN SCHMOUTEY, HERBERT TRIPLETT, MICHAEL GAUGHAN, BRIAN HANDLEMAN, A. W. MITCHELL, JEFF McCOLL, DALE STORMER, FREDERICK N. RICHMAN, THE HOTEL EMPLOYEES AND RESTAURANT EMPLOYEES INTERNATIONAL UNION WELFARE FUND, WILLIAM L. MEYERS, INC., HEALTH CORPORATION OF AMERICA, CYTEX CORPORATION, NORTH AMERICAN DENTAL ADMINISTRATORS, INC., LAWRENCE A. SMITH, EASTERN STATES CASUALTY AGENCY, INC., COMPUTACCOUNTS, TEX-COM, INC., JAMES V. MERLO and FRANK PETTISANI, Defendants



The opinion of the court was delivered by: GERRY

 On July 25, 1985, William E. Brock, Secretary of the United States Department of Labor (the Secretary), filed this action under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. The defendants are the trustees and certain service providers or third-party service providers of a dental plan operated on behalf of the Hotel Employees and Restaurant Employees International Union (HEREIU) Local 54, which is located in Atlantic City, New Jersey. The Secretary alleges that the defendant trustees of the Local 54 dental plan breached their fiduciary duties under § 404 of ERISA, 29 U.S.C. § 1104, by failing to act, inter alia, solely for the interests of the dental plan's beneficiaries and by causing the plan to suffer ongoing financial losses. The Secretary further alleges that the non-fiduciary defendants, who have provided services with respect to the plan, have knowingly participated in these fiduciary breaches for their own undue profit and have thereby caused the plan to suffer ongoing losses.

 According to the complaint, HEREIU Local 54 is a labor organization which represents approximately 18,500 hotel and restaurant employees in Southern New Jersey. Most of these employees work at the casino hotels in Atlantic City. Since 1975, these employees have received dental benefits through the HEREIU Welfare Fund, which was established by the international union and serves other locals, as well as Local 54. The defendant trustees act as the "named fiduciaries" to the nationwide plan within the meaning of 29 U.S.C. § 1102. On January 17, 1975, defendant William L. Meyers, Inc. contracted with the plan to act as its "contract administrator" on behalf of the trustees.

 In June of 1980, defendant William L. Meyers, Inc. allegedly solicited bids for the provision of dental services on behalf of Local 54 employees. The trustees initially selected American Dental Consultants, but this organization failed to obtain the certificate of authority required under New Jersey state law. Ultimately, the plan reached an agreement with defendant North American Dental Plans, Inc. of Pennsylvania (NADP), a subsidiary of defendant Health Corporation of America (HCA). Later, in 1982, the plan trustees determined to enter into a long-term agreement with NADP "and/or" North American Dental Administrators, Inc. (NADA), another wholly-owned subsidiary of defendant HCA.

 Under its agreement with the Welfare Fund, NADP allegedly received $15.85 per month per member, with a guaranteed payment for 6,000 participants per month and a built-in increase of 8% in the monthly fee each year. Of this amount, defendants HCA/NADP allegedly kept $4.00 per member per month for administrative fees and paid the rest to dental service providers such as defendant Dr. Frank Pettisani. Plaintiff alleges that these administrative fees paid to HCA and its subsidiaries were in excess of the value of the services rendered.

 In addition to the foregoing, the complaint alleges that since 1975 HCA and NADP had been parties to an agreement with Rittenhouse Consulting Enterprises, Ltd. (Rittenhouse), a corporation owned and operated by defendant Lawrence A. Smith, pursuant to which Rittenhouse promised to act on behalf of HCA and its subsidiaries as a "marketing representative" and "marketing consultant." On November 24, 1981, Lawrence A. Smith and HCA signed an "addendum" to this contract pursuant to which Rittenhouse agreed to provide NADP "secretarial" and "complaint" services with respect to the Local 54 dental plan. NADP agreed to pay Rittenhouse $2.00 per month per member for these services. In addition, by a separate oral agreement with defendant Lawrence A. Smith, NADP was allegedly required to pay Rittenhouse a "finder's fee" in the amount of $100,000 per year. In February 1983, the HCA/NADP contract with Rittenhouse was transferred to defendant Eastern States Casualty, Inc., another company owned by defendant Lawrence A. Smith. Subsequently, Lawrence A. Smith transferred his business with HCA/NADP to a partnership, defendant Computaccounts, located in Cherry Hill, New Jersey. According to plaintiff, Eastern States and Lawrence A. Smith (through Eastern States) reaped undue rewards from the Local 54 dental plan through these series of transactions.

 In early 1982, defendant Lawrence A. Smith and Joseph Cusumano, President of HCA, interviewed a dentist named Dr. Frank Pettisani and offered him the Local 54 dental business. It was "recommended" to Dr. Pettisani that he contract with defendant Tex-Com, Inc. for the computer services. Tex-Com is allegedly wholly owned by Molly Smith, Lawrence A. Smith's mother. Pursuant to an agreement entered into in April 1982, Dr. Pettisani agreed to pay Tex-Com, Inc. a "conversion fee" of $25,000 within sixty (60) days, plus a "monthly service fee" at a rate of $ 2,393 for each Local 54 "member file" for the first 6,500 members and $2.50 for each member over 6,500. Here, too, the plaintiff alleges that the contractual arrangement resulted in the undue enrichment of Tex-Com.

 In sum, based upon the foregoing factual recitation, the plaintiff alleges, inter alia, that defendants Lawrence A. Smith, Eastern States Casualty Agency, Inc., and Tex-Com, Inc. were unduly enriched, and that all three knowingly participated in breaches of fiduciary duties owed to the HEREIU Welfare Fund.

 This case is presently before the court on motions by defendants Lawrence A. Smith, Eastern States Casualty Agency, Inc. and Tex-Com, Inc. to dismiss the complaint against them pursuant to F.R. Civ. P. 12(b)(6). These defendants contend that the complaint fails to state a claim upon which relief can be granted against them because they fall outside the class of persons whose conduct is governed by and subject to the provisions of ERISA. Not surprisingly, the Government maintains that the spirit, if not the letter, of ERISA is broad enough to apply to the moving defendants.

 In order to resolve the pending motions, it is important to focus clearly on the narrow area of dispute among the parties. There is no allegation here that the moving defendants are either fiduciaries or parties in interest as those terms are defined by ERISA, 29 U.S.C. §§ 1002(21)(A) and (14). What plaintiff does allege is that the defendants knowingly participated in the breaches of fiduciary duties committed by others, and that this participation resulted in their own undue enrichment. The primary issue before this court can therefore be summed up as follows: can non-fiduciaries be held liable under ERISA for knowingly participating in a breach of trust by a fiduciary? The Secretary answers the question in the affirmative, noting that under common law trust principles, which courts have often used to interpret and enforce ERISA, knowing participation in a breach of a fiduciary's duties renders a non-fiduciary liable to the trust. Defendant Lawrence A. Smith agrees that under ERISA liability may be imposed upon a non-fiduciary for knowingly participating with a fiduciary in a breach of trust. However, Smith argues that the case law does not extend liability to a third-party consultant or provider to a plan, whose sole compensation for such services has come from the direct service provider. Smith claims that since there is no allegation that he directly received assets from the Welfare Fund, he is not liable under ERISA. Defendants Eastern States Casualty Agency, Inc. and Tex-Com, Inc. take a third approach. According to these defendants, non-fiduciaries cannot be held liable at all under ERISA for knowingly participating in breaches of fiduciary duties committed by others. Eastern States and Tex-Com assert that the cases which hold to the contrary are wrongly decided, fail to comport with the intent of Congress and should not be followed here.

 Although there is no Third Circuit precedent which squarely addresses the issue presented here, this court does not write on a clean slate. In order to evaluate the positions taken by the parties, it is instructive to examine ERISA and its legislative history, as well as the out-of-circuit case law which treats with the liability of non-fiduciaries under ERISA. ERISA itself is a comprehensive remedial statute designed to protect the interests of participants and beneficiaries of employee benefit plans. Eaves v. Penn, 587 F.2d 453, 457 (10th Cir. 1978); 29 U.S.C. § 1001(b). Like other remedial legislation, ERISA should be given a liberal construction in order to carry out its purposes of protecting the employees' interests and preserving the integrity of plan assets. Marshall v. Kelly, 465 F. Supp. 341, 349 (W.D. Okla. 1978). The legislative history clearly demonstrates that in enacting ERISA Congress intended

 
to provide both the Secretary and participants and beneficiaries with broad remedies for redressing or preventing violations of [Title I of ERISA] . . . . The intent of the Committee [on Labor and Public Welfare] is to provide a full range of legal and equitable remedies.

 S.Rep. No. 127, 93rd Cong., 2nd Sess., reprinted in 1974 U.S. Code Cong. & Ad. News, 4639, 4871. The statute itself explicitly confers upon the Secretary broad authority to bring civil actions to remedy ERISA violations. In pertinent ...


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