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Secretary of Labor v. James Doyle; Cynthia Holloway; Michael Garnett; Mark Maccariella

March 27, 2012

SECRETARY OF LABOR, APPELLANT
v.
JAMES DOYLE; CYNTHIA HOLLOWAY; MICHAEL GARNETT; MARK MACCARIELLA; PITWU HEALTH AND WELFARE; TIM FOSTER; FREEDMAN & LORRY; DANTE GEORENO; NEIL S. GOLDSTEIN, ESQ.; FRANKLIN MILITELLO; THE MCKEOUGH COMPANY; UNION PRIVILEGE CARE, INC.; DAVID WEINSTEIN



On Appeal from the United States District Court for the District of New Jersey (D. C. No. 1-05-cv-02264) District Judge: Honorable Joseph H. Rodriguez

The opinion of the court was delivered by: Roth, Circuit Judge:

PRECEDENTIAL

Argued on April 27, 2011

Before: SLOVITER, GREENAWAY, JR., and ROTH, Circuit Judges

OPINION

This case concerns an action by the Secretary of Labor (the Secretary) against James Doyle, Cynthia Holloway, and others, arising from their alleged breach of fiduciary duties to the Professional Industrial Trade Workers Union (PITWU) Health & Welfare Fund (Fund), a health benefit plan governed by the Employee Retirement Income Security Act (ERISA). After a bench trial, the District Court entered judgment for Doyle and Holloway. The Secretary appeals the District Court's judgment, contending that the District Court failed to adequately address its breach of fiduciary duty arguments and to consider whether the defendants were responsible for diversion of plan assets held by the Fund.*fn1

For the reasons that follow, we will vacate the judgment of the District Court and remand for additional factual findings.

I. Background

A. Procedural History

In April 2005, the Secretary brought this action for breach of fiduciary duty against Holloway, Doyle, the PITWU Fund, and two other defendants, Michael Garnett and Mark Maccariella. The Secretary's complaint alleged that PITWU had established a health benefit plan that was a "multi-employer welfare arrangement" (MEWA) governed by ERISA. Two companies, Privileged Care, Inc. (PCI) and NorthPoint PEO (NorthPoint or NP), enabled small businesses to obtain health benefits for their employees by enrolling the employees in the Fund, even though the employees never joined the union. Privileged Care Marketing Group (PCMG) marketed this scheme to small businesses. Businesses that chose to enroll their employees in the Fund were required to make benefit payments to PCMG. PCMG retained a portion of the payments as compensation and remitted the balance to PCI and NP. PCI and NP also retained a substantial portion of the payments as compensation and remitted the remainder to claims administrators established by the Fund. The complaint alleged that these payments were assets of the Fund improperly diverted by PCI, NP, and PCMG and that PCI, NP and PCMG were required by ERISA to use the assets only for the purpose of defraying reasonable plan expenses for the benefit of plan participants.

The complaint alleged that Garnett and Maccariella at various times owned and operated PCI and NorthPoint and were fiduciaries under ERISA because the payments they received from their business clients were assets of the Fund under their control. Garnett and Maccariella allegedly breached their fiduciary duties to the Fund by using assets of the Fund for purposes other than defraying reasonable plan expenses for the benefit of plan participants. The complaint similarly alleged that Doyle had owned and operated PCMG and that he was a fiduciary because he exercised discretionary control over payments that were assets of the Fund. It further alleged that Doyle had breached his fiduciary duties to the Fund by improperly using plan assets for his own benefit. Finally, the complaint alleged that Holloway was a named trustee of the Fund, had breached her fiduciary duties to the Fund, and was liable both directly and as a co-fiduciary for failing to detect and prevent the diversion of Fund assets by Garnett, Maccariella, and Doyle. The complaint sought restitution of losses to the plan, a permanent injunction against any of the defendants serving as a fiduciary or service provider to an ERISA plan, appointment of an independent fiduciary to manage the Fund, an accounting, costs, and other appropriate equitable relief.

After extensive discovery, the case proceeded to a bench trial in October 2009. Solis v. Doyle, No. 05-2264, 2010 WL 2671984 *3 (D.N.J. June 30, 2010). At the beginning of the trial, Maccariella accepted a consent judgment enjoining him from serving as fiduciary or service provider to an ERISA plan and requiring him to pay $195,317. A default judgment was entered against Garnett at the close of trial because he failed to appear at trial "[d]espite numerous continuances granted at his request."

B. The District Court's Findings

The District Court made the following factual findings based on the bench trial. In 2000, David Weinstein established PITWU. Holloway owned and operated Employers Depot, Inc. (EDI), a professional employer organization (PEO) that she had established in 1989.*fn2 At some point in 2000, she learned of PITWU from a health insurance broker. An attorney, Neil Goldstein, who later became counsel to the Fund, provided Holloway with verification of PITWU's union status. On May 1, 2001, Holloway and three other trustees established the PITWU Fund by an Agreement and Declaration of Trust. The Fund initially had two employer members, EDI and Employers Consortium, Inc. (ECI). The EDI and ECI employees were enrolled as participants in the Fund. The Trust Agreement obligated EDI and ECI to make regular contributions to the Fund for each of their employees covered by the Fund. The Fund made annual filings with the federal government, had trustees, counsel, an actuary, and claims administrators. The District Court found that counsel for the Fund never expressed a concern that PITWU was not a valid union or that the Fund was not a valid multi-employer fund.

1. PCI/NP and PCMG

In January 2002, ECI terminated its relationship with PITWU. PCI and NP then became employer members of the PITWU Fund. PCI and NP entered into identical collective bargaining agreements (CBA) with PITWU in which they agreed to make contributions to the Fund so that their employees could receive health benefits under the Fund.*fn3

The CBAs provided that PITWU had "been designated by a majority of employees in certain client companies of [PCI/NP] as their exclusive bargaining representative for those terms and conditions of employment controlled by [PCI/NP] as per its 'client Service Agreement.'" The "client Service Agreement" referred to a PEO Services Contract, which was executed by clients of PCI/NP who wished to obtain health benefits for their employees.*fn4 Once an employer executed the contract and began making contribution payments, its employees would become members of the PITWU union and obtain access to health benefits from the Fund. Although the contract allowed clients to choose not to join the PITWU union, clients were required to select the union option to obtain health benefits for their employees through PCI/NP's CBAs with the Fund. Similarly, the contract listed a number of additional PEO services, but the only service consistently offered by PCI/NP was health benefits through the PITWU Fund.*fn5

After PCI/NP became an employer member of the Fund, Holloway and another trustee appointed Weinstein as a trustee of the Fund. Later in May, Weinstein sold PCI/NP to Garnett, resigned as trustee, and was replaced by Garnett.*fn6

Doyle's company, PCMG, marketed the services of a variety of entities, including PCI/NP.*fn7 In January of 2002, ariety of entities, including PCI/NP.*fn8 In January of 2002, Doyle signed a Marketing Service Agreement with PCI, in which PCMG agreed to market PCI's services for a fee. PCMG also collected payments from PCI/NP's clients. Clients made payments by two checks, one to PCI/NP for participation in the Fund (Check 1), and one to PCMG for administrative service fees (Check 2). PCMG received both checks and would forward the first on to PCI/NP. It retained the second check to cover its expenses, which included sales commissions paid to PCMG's sales consultants and fees for additional services selected by the client, such as gap insurance.*fn9 PCMG also provided monthly reports to PCI/NP regarding funds received and paid certain union dues.

At some point, PCMG stopped marketing for PCI/NP, but continued to provide billing and administrative services until May 2003. PCMG received $4.5 million in Check 1 funds, and $2.1 million in Check 2 funds.*fn10 PCMG forwarded $3.1 million of the Check 1 funds to PCI/NP, and paid $645,000 directly to claim administrators and medical providers.*fn11 In addition to the $3.1 million received from PCMG, PCI/NP also directly received $816,000 from employers enrolled in the Fund through Weinstein's wife. Of this roughly $3.9 million, PCI/NP sent $2.1 million to claims administrators to pay employee health benefit claims. Thus, in total, PCMG and PCI/NP collected $7.4 million in payments relating to the Fund, but only $2.7 million was sent to claim administrators for the payment of health benefit claims. The remaining $4.7 million was retained by PCMG or PCI/NP.

2. Management of the Fund

The Fund retained a third-party claims administrator to pay health benefit claims by employees covered by the Fund. The Fund's first claims administrator was Union Privileged Care (UPC), which was owned by Weinstein. Oak Tree Administrators (Oak Tree) replaced UPC as claims administrator and served in that capacity from March to June of 2002.*fn12 In a meeting with Oak Tree in April 2002, Holloway learned of many pending claims and of Oak Tree's concern that claims may not have been paid since November 2001. In May 2002, Oak Tree reported that it had still not obtained necessary documents and financial information from UPC and therefore could not provide the trustees with a financial report; moreover, the Fund's actuary could not perform a study on the financial condition of the Fund. Holloway also decided in May 2002 to appoint Weinstein as trustee of the Fund despite "general concerns" she had about him. On September 20, 2002, the Fund's new claims administrator, Brokerage Concepts, Inc., informed Holloway of problems relating to lack of funding because of PCI/NP's failure to make contributions to the Fund and other problems arising from inadequate paperwork.*fn13

These problems were illustrated by the testimony of five business owners who had obtained access to the Fund through PCI/NP. They testified that they had difficulty presenting claims and did not have claims paid to their satisfaction. Additionally, several of these witnesses testified that they did not consider their employees unionized or part of the PITWU union. One employer was assured by PITWU union officials that PITWU brought small businesses "under its umbrella for purposes of medical benefits and payroll, but that there was no interest in unionizing the employees."*fn14

In response to these problems, Holloway asked Goldstein, the Fund's attorney, "to bring some accountability to the Fund, but he asked [Holloway] to talk to the trustees about that." She also asked Goldstein to obtain membership information from PCI. However, Holloway did not seek mediation of disputes with other trustees regarding the management of the Fund or seek to remove any trustee.*fn15

Nor did she demand an audit of PCI/NP or PCMG or contact the Department of Labor to complain about the lack of funding, lack of financial accountability, or "chaotic state of affairs." Instead, on September 27, 2002, Holloway resigned as trustee. She identified several reasons leading to her resignation, including the lack of financial accountability for contributions to the Fund and resulting lack of funding to pay claims. She described the "vulnerability of the Fund due to actions taken by membership that has created insolvency of the Fund." Holloway also noted that ...


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