IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
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____________________________________________ Laborers' Pension Fund;
) Health and Welfare
) Department of the Construction and )
) General Laborers' District Council ) of Chicago and Vicinity; Joseph ) Coconato: Charles Cohen; James P. ) Connolly; Randy Dalton; Mark Deetjen;
) Martin T. Flanagan; Charles J. ) Gallagher; Wayne E. Healy; J. Michael ) Lazzaretto; David Lorig; Gary Lunds‑ ) berg; Robert J. Madden; Tod Masters; ) Liberato Naimoli; Dennis Passarelli; ) Scott Pavlis; Frank Riley; Roger ) Vignocchi; Sam Vinci; and James ) S. Jorgensen ) Plaintiffs, ) v. ) Hugh B. Arnold; and ) Arnold & Kadjan, a partnership, ) Defendants. ) |
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FIRST
AMENDED COMPLAINT |
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1. Plaintiffs
Joseph Coconato, Charles Cohen, James P. Connolly, Randy Dalton, Mark Deetjen,
Martin T. Flanagan, Charles J. Gallagher, Wayne E. Healy, J. Michael
Lazzaretto, David Lorig, Gary Lundsberg, Robert J. Madden, Tod Masters,
Liberato Naimoli, Dennis Passarelli, Scott Pavlis, Frank Riley, Roger
Vignocchi, Sam Vinci; and James S. Jorgensen (hereinafter collectively referred
to as "Plaintiffs") bring this action on behalf of two employee
benefit trusts, seeking redress for violations of the Employee Retirement Income
Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq. ("ERISA"),
pursuant to 29 U.S.C. § 1132(a)(2) and (3), as well as violations of common law
duties to Plaintiffs under Illinois law, in connection with Defendants'
legal representation of the Laborers' Pension Fund
and the Health and Welfare Department of the Construction and General Laborers'
District Council of Chicago and Vicinity.
JURISDICTION AND VENUE
2. This Court has
jurisdiction over this action pursuant to 29 U.S. C. § 1132(e), 28 U.S.C. §
1331, and 28 U.S.C. § 1367(a).
3. Venue in this District is proper pursuant to 29 U.S.C. §
1132(e)(2) and 28 U.S.C. § 1391(b).
PARTIES
4. Plaintiff Laborers' Pension Fund ("Pension Fund") is an employee pension benefit plan as defined in 29 U.S.C. § 1002(2)(A), and a multiemployer plan as defined in 29 U.S.C. § 1002(37)(A).
5. Plaintiff Health and Welfare Department of the
Construction and General Laborers District Council of Chicago and Vicinity
("Welfare Fund") is an employee welfare benefit plan as defined in 29
U.S.C. § 1002(1), and a multiemployer plan as defined in 29 U.S.C. §
1002(37)(A).
6. Plaintiffs Joseph Coconato, Charles Cohen, James P.
Connolly, Wayne E. Healy, J. Michael Lazzaretto, Gary Lundsberg, Robert J.
Madden, Tod Masters, Dennis Passarelli, Frank Riley, Roger Vignocchi, and Sam
Vinci (collectively referred to as "Pension Trustees") are trustees
of the Pension Fund. They administer the Pension Fund pursuant to the terms of
a Trust Agreement entered into by and between the Construction and General
Laborers District Council of Chicago and Vicinity, A.F.L.C.I.O., and a number
of employer associations in the building and construction
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industry.
Plaintiff Pension Trustees are fiduciaries of the Pension Fund as defined in 29
U.S.C. § 1002(21)(A).
7. Plaintiffs
Charles Cohen, James P. Connolly, Randy Dalton, Mark Deetjen, Martin T.
Flanagan, Charles J. Gallagher, David Lorig, Liberato Naimoli, Scott Pavlis,
Frank Riley, Roger Vignocchi, and Sam Vinci (collectively referred to as
"Welfare Trustees") are trustees of the Welfare Fund. They administer
the Welfare Fund pursuant to the terms of a Trust Agreement entered into by and
between the Construction and General Laborers District Council of Chicago and
Vicinity, A.F.L.C.I.O., and a number of employer associations in the building
and construction industry. Plaintiff Welfare Trustees are fiduciaries of the
Welfare Fund as defined in 29 U.S.C. § 1002(21)(A).
8. Plaintiff
James S. Jorgensen is the Administrator of the Pension Fund and the Welfare
Fund. He is a fiduciary of both funds as defined in 29 U.S.C. § 1002 (21)(A).
9. The
Pension Trustees and Welfare Trustees bring this action in their capacities as
trustees, on behalf of the participants and beneficiaries, respectively, of the
Pension Fund and the Welfare Fund and on behalf of the respective Funds.
Plaintiff Jorgensen brings this action in his capacity as Administrator on
behalf of the participants and beneficiaries of the Pension Fund and the
Welfare Fund, and on behalf of both Funds.
10. Defendant
Hugh B. Arnold ("Arnold") is an attorney whose principal place of
business is in Chicago, Illinois, within the Northern District of Illinois. He
is a partner in the law firm of Arnold & Kadjan.
11. Defendant
Arnold & Kadjan is a partnership engaged in the practice of law. Its
principal location is Chicago, Illinois, within the Northern District of
Illinois.
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STATEMENT OF FACTS
12. More
than 1,700 employers participate in the Pension Fund and the Welfare Fund
(collectively referred to as "the Funds"). More than 16,500 laborers
are receiving, or are entitled to receive, pension, health, disability, or
other benefits from the Funds.
13. Each
of the participating employers is a party to a collective bargaining agreement
with a union that is affiliated with the Laborers' International Union of North
America. Those collective bargaining agreements require each participating
employer to contribute to each Fund a specified dollar amount for each hour
worked by an employee who is covered by the collective bargaining agreement.
14. The
trust agreements described in paragraphs 6 and 7 provide that employers'
contributions are due on the date prescribed by their collective bargaining agreements,
and that the Trustees may establish a grace period within which such
contributions may be remitted to the Funds. Pursuant to that provision the
Trustees have established a grace period under which contributions may be
remitted to the Funds on or before the 10th day
of the second month following the month in which the covered work is performed.
15. The
trust agreements further provide that if an employer has not remitted its
required contributions by the end of the grace period (hereinafter referred to
as the "due date"), the employer incurs liability for liquidated
damages equal to 10% of the unpaid contributions, plus interest from the date
the contributions were due until they are totally paid. Those trust agreements
further provide that if the delinquent account is placed with legal counsel for
collection, the employer is also liable for the attorneys' fees incurred by the
Funds and collection costs.
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16. The
collective bargaining agreements described in paragraph 13 contain parallel
provisions defining a delinquent employer's liability for liquidated damages,
interest, attorneys' fees and other collection costs.
17. Beginning
no later than 1971, Defendant Arnold served as collections counsel for the
Plaintiff Funds. In approximately 1979, Defendant Arnold was given the
additional role of co‑counsel to the Plaintiff Funds. In approximately
1985, defendant Arnold became the sole counsel to the Plaintiff Funds and
served in that capacity until February 19, 1998, when he resigned.
18. Defendants
Arnold and Arnold & Kadjan were compensated for their services pertaining
to collection of delinquent employer contributions. Their principal
compensation for that work was contingent fees calculated as a percentage of
all money collected.
19. Arnold
stated in an affidavit dated April 8, 1998, that the terms of this contingent
fee representation were set forth in a letter that he wrote to Samuel Shapiro
(who was then counsel to the Funds) on May 6, 1977. The letter provided for a
15% or 20% contingent fee if no suit was filed; a 25% fee if a suit was filed;
and a 33‑1/3% fee if trial began, complete trial preparation was done, or
an employer defaulted on a note.
20. Arnold's
affidavit dated April 8, 1998, stated that he and the Funds "have operated
pursuant to" the May 6, 1977, letter "[s]ince 1977."
21. The
Funds have located no record that this letter was presented to or approved by
the Trustees in 1977 or any later year; that any written contingent fee agreement
with Arnold or Arnold & Kadjan was ever proposed by defendants or signed by
or on behalf of the Trustees or the Funds; or that the Trustees approved any
other
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statement of the
terms on which defendants were paid a percentage of money they collected from
delinquent employers.
22. For the period beginning in or about
1985, and continuing until February 1998, Arnold or Arnold & Kadjan
received an annual retainer from each Fund for work as Fund counsel and also
billed the Funds for certain matters on an hourly basis. Arnold & Kadjan
was paid contingent fees for collection of delinquent contributions, and hourly
fees for efforts to collect amounts due from injured participants of the
Welfare Fund who received third‑party payments for their injuries and were
obligated to reimburse the Welfare Fund for benefits it had paid them (herein
referred to as "subrogation claims").
23. The total fees paid to Arnold and
Arnold & Kadjan, on average, exceeded $1 million per year for the last
three full plan years in which he was Fund counsel ‑the plan years ending
in 1995 through 1997.
Defendants'
Practices in Regard to Delinquent Contributions
24. At all times between 1985 and February
1998, the Pension Trustees and the Welfare Trustees (collectively 'the
Trustees") reasonably relied upon Arnold for legal advice and
recommendations relating to the policies and procedures the Funds employed in
the collection of delinquent contributions.
25. At all times between 1985 and February
1998, the policies and procedures that were employed on the Funds' behalf in
the collection of delinquent contributions were largely, if not entirely, the
product of Arnold's practices and his recommendations to the Trustees.
26. In the May 6,
1977, letter and in subsequent conversations with the Trustees, Arnold stated
that the contingent fees for collections work were justified because he pursued
every delinquency claim diligently ‑ no matter how small or
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unlikely to result
in recovery ‑ and that his large fees on successful collections were balanced
by many hours spent on cases that yielded no fees.
27. These statements were not true and
misrepresented the extent of the actual collection efforts that were made by
Arnold and by Arnold & Kadjan.
28. Contrary to the representations that
Arnold made to the Trustees as justification for the contingent fees, Arnold
and Arnold & Kadjan failed to make diligent efforts to collect delinquent
contributions in substantial numbers of delinquency cases that were referred to
Arnold for collection. Arnold did not tell the Trustees that he was not
pursuing those particular delinquency cases nor did he seek or obtain their
permission not to pursue those cases diligently.
29. Arnold charged the Funds contingent
fees in amounts that were not authorized by the May 6, 1977, letter, without
disclosing material facts to the Trustees and without obtaining either written
or oral agreement to the additional amounts. Examples of such unauthorized fees
include:
(a)
At times employers remitted contributions to Arnold instead of to the Funds on
or before the due date for those contributions. Arnold billed the Funds for a
contingent percentage of these timely contributions, even though he had
collected no delinquency for which a contingent fee could properly be charged
under the May 6, 1977, letter.
(b)
Arnold negotiated agreements with employers by which they would pay delinquent
contributions over a period of time, and included in those agreements
contributions for months that were not delinquent at the time the agreement was
signed. Arnold billed the Funds for a
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contingent
percentage of the entire amount he collected under those installment
agreements.
(c)
Arnold sometimes filed suit without making any attempts to collect the
delinquency prior to litigation. By initiating litigation in this manner,
Arnold moved these cases up immediately from a 15% or 20% fee to a higher
percentage fee of 25%, thus improperly increasing the amounts he charged to the
Ponds.
(d)
Arnold regularly charged contingent fees at 33‑1/3% in cases in which he
collected contributions from an employer's general contractor, no matter what
stage the case was in when it was resolved, even though fees at that rate were
not authorized by his May 6, 1977, letter.
30. Upon Arnold's recommendation, the
Trustees delegated to Arnold the authority to exercise discretion in the
collection process in two respects: (a) to accept, and set the terms of,
installment agreements under which employers agreed to pay their delinquent
contributions over periods as long as 24 months, and (b) to accept what Arnold
judged to be the maximum amount of the prescribed 10% liquidated damages that
could be collected from employers on delinquencies more than five years old.
Pursuant to these intentional delegations of authority, Arnold exercised
discretion in determining the terms of installment agreements for repayment
periods of 24 months or less, and in accepting compromises of amounts claimed
as liquidated damages in cases over five years old.
31. In other respects Arnold exercised discretion
in the collection process without disclosing his exercise of discretion to the
Trustees, and made affirmative misrepresentations denying his exercise of
discretion:
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(a) Arnold repeatedly told the Trustees that he
never entered into any compromises that accepted less than 100% of the
principal contributions owed by an employer.
(b) Arnold
repeatedly told the Trustees that his law firm regularly maintained in its
files documentation supporting employer challenges that he or the law firm
accepted as satisfactory evidence that the employer owed less than the amount
of unpaid principal contributions that had been identified by the Funds'
auditors and claimed by the Funds.
(c) Contrary to the representations described in
(a) and (b), Arnold regularly accepted challenges from employers and reduced
the principal amounts claimed to be due in contributions, without obtaining
Trustee approval or maintaining appropriate documentation justifying those
reductions.
(d) Arnold repeatedly told the Trustees that he
never entered into any compromises that accepted less than all of the 10%
liquidated damages owed on cases less than five years old.
(e) Contrary to the representations described in
(d), Arnold regularly settled cases without collecting the full 10% liquidated
damages owed on delinquent contributions in cases less than five years old.
(f) Arnold repeatedly told the Trustees that he
always included 8% interest on installment agreements, calculated from the date
the agreement was signed and continuing until the final payment was due, except
in a few cases where a court required the rate of 7%.
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(g) Contrary to the representations described in (f), many of the installment agreements Arnold and his law firm accepted from employers included either no interest or interest at a rate far lower than 7%.
(h) Arnold also regularly gave the Trustees misinformation when he reported
particular settlements to them (for installment periods of 24 months or less)
or sought their approval for particular installment periods longer than 24
months, regularly stating that particular agreements included an interest rate
of 8%, when they actually did not.
32. Arnold systematically failed to demand
and attempt to collect interest from delinquent employers for the period
between the original due date of delinquent contributions and the date of
payment. In the case of agreements providing for payment in installments, he
systematically failed to demand and attempt to collect interest from the
original due date until the date the installment agreement was signed.
33. The Trustees asked Arnold about the
possibility of recovering interest from delinquent employers from the date that
contributions were due until they were paid, or until an installment agreement
was signed. Arnold advised the Trustees that attempting to collect such
interest generally would not be in the interest of the Funds.
34. Contrary to that advice, it is common
practice for multiemployer funds to charge interest to employers who frequently
pay late, whose contributions are delinquent for long periods, or who remit
contributions only after being sued. ERISA provides for recovery of such
interest and courts routinely award it in judgments for delinquent
contributions. A practice of not attempting to collect interest on such
10
delinquent
contributions effectively allows delinquent employers to grant themselves
interest‑free loans from the fund, depriving the fund of the time value
of that money and generally encouraging employer delinquencies.
35. Arnold and his law firm failed to
demand and attempt to collect reimbursement of the Funds' audit costs from many
delinquent employers, although the trust agreements and collective bargaining
agreements made delinquent employers liable for those costs.
36. Arnold and his law firm systematically
failed to demand and attempt to collect reimbursement of his attorneys' fees
and other collection costs from delinquent employers whose accounts were placed
with him for collection.
37. The Trustees asked Arnold about the
possibility of the Funds recovering his attorneys' fees from delinquent
employers, but Arnold told them that he was not aware of any funds that
collected attorneys' fees on delinquencies and that the only responsibility of
the Funds was to collect the principal contributions and the 10% liquidated
damages. He advised against trying to collect attorneys' fees from employers
except in cases where a suit was filed.
38. Arnold's statements described in
paragraph 37 were false. It is standard practice for multiemployer funds to demand
reimbursement of their attorneys' fees and collection costs from delinquent
employers. ERISA provides for recovery of such fees and costs, and courts
routinely award reasonable fees and costs in judgments for delinquent
contributions. Arnold himself obtained attorney's fee awards in isolated cases.
Conflicts of
Interest
39. Arnold exercised discretion in
entering into compromises of the Welfare Fund's subrogation claims.
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40. Arnold
negotiated compromises between the Funds and certain participating employers
whom he represented in delinquency cases, and between the Funds and certain
laborers whom he or Arnold & Kadjan represented in subrogation cases. He
acted for both sides of these transactions, with clear conflicts of interest.
41. In
the conflict‑of‑interest cases described in paragraph 40, Arnold
failed to collect the full amounts due to the Funds in delinquent contributions
and interest, or on subrogation claims, and thus benefited his other clients at
the expense of the Funds.
Lawsuit
for Files, and Escrow Account for Fees Claimed by Defendants
42. In
March 1998, after Arnold resigned as counsel to the Funds, he refused to turn
over the Funds' legal files unless the Funds paid his outstanding legal fees.
He also refused to turn over records showing time spent and expenses incurred
on cases in which he was demanding fees. The Trustees filed a lawsuit on April
6, 1998, against Arnold and Arnold & Kadjan, to obtain the release of files
on matters then pending so that the Funds' new counsel would have information
they needed to represent the Funds in those matters. The Trustees also sought
disclosure of defendants' time and expense records so that they could evaluate
whether the claimed fee amounts were reasonable.
43. The
lawsuit described in paragraph 42 resulted in an agreement of the parties on
April 9, 1998, and an Order was entered approving dismissal of the lawsuit
based upon the agreement.
44. Pursuant
to the agreed settlement, the Funds placed $345,000 in an interest‑bearing
escrow account. That amount represented Arnold's estimate of fees owed on cases
pending in litigation, plus the contingent fees that would
be earned if every employer then remitting payments under an installment
agreement that had
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been previously
negotiated in a delinquent contribution case paid the full amount that it owed
under that agreement, and if the Funds paid contingent fees to Arnold &
Kadjan on those collected amounts based upon the percentage fees claimed by
defendants.
45. An escrow agreement was signed by the
parties, dated May 8, 1998.
46. After the money was placed in the
escrow account, Arnold disclosed that defendants had no time and expense
records showing the work done on delinquency cases, and disavowed any claim for
fees on cases not yet brought to judgment or settlement. As a result of that
disavowal, the amount in the escrow account greatly exceeds even the amount of
fees that defendants claim are owed by the Funds.
47. The files and documents that
defendants subsequently provided to the Funds do not include time and expense
records from which the Trustees can determine whether the fee amounts still
claimed by defendants are reasonable.
48. In many of the delinquency cases in
which defendants had negotiated settlement agreements providing for installment
payments that were scheduled to continue after Arnold's resignation as counsel,
the delinquent employers have since defaulted on their installment agreements.
As a result, the Funds have had to incur additional collection costs, including
attorneys' fees, to collect many of those delinquencies.
49. Under the May 8, 1998, escrow
agreement the money in the escrow account cannot be released without either a
joint direction signed on behalf of Arnold and the Funds, or a court order.
50. Since May 8, 1998, defendants have not
agreed to release any part of the escrow account and there has been neither a
joint direction nor a court order for release of the money in escrow.
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51. As the result of information they
learned after obtaining Arnold's files, the Trustees initiated an investigation
into his practices. As a result of that investigation, they learned for the
first time of the falsity of the representations described in paragraphs 26,
31, 33, and 37, and of the fact that Arnold's actual collection practices were
different from what he had repeatedly told the Trustees.
COUNT I
Claim Against Arnold for
Breach
of Fiduciary Duty in Violation of 29 U.S.C. § 1104(x) (1) (A)
52. Paragraphs 1 through 41 are
incorporated herein by reference as if fully set forth.
53. The Funds' claims against participating
employers for delinquent contributions, interest, liquidated damages and
attorneys' fees are assets of the Funds.
54. In making discretionary decisions to
accept less than the full amount of delinquent contributions, interest,
liquidated damages and attorneys' fees that participating employers owed,
Arnold acted as a fiduciary with respect to the Funds within the meaning of 29
U.S.C. § 1002(21)(A).
55. In making discretionary decisions to
accept employers' agreements to pay their delinquent contributions to the Funds
in installments, and in setting the terms for such installment payments, Arnold
acted as a fiduciary with respect to the Funds within the meaning of 2 9 U.S.C.
§ 1002 (21) (A) .
56. The Welfare Fund's subrogation claims
against participants are assets of the Welfare Fund.
14
5?.
In making discretionary decisions
to accept less than the full amount of the Welfare Fund's subrogation claims
from participants, Arnold acted as a fiduciary with respect to the Welfare Fund
within the meaning of 29 U.S.C. § 1002(21)(A).
58.
Arnold failed to discharge his
fiduciary duties with respect to the Funds solely in the interests of the
Funds' participants and beneficiaries, thereby violating 29 U.S.C. §
1104(a)(1)(A), in at least the following respects:
(a) misrepresenting to the Trustees the
terms of settlements he entered into;
(b)
misrepresenting to the Trustees
the extent of his collection efforts, in false justification of his large
contingent fees that greatly exceeded the value of the legal services provided
on many specific cases and in the aggregate;
(c) misrepresenting to the Trustees the
advisability of demanding and attempting to collect interest from delinquent
employers for the entire period that contributions were delinquent and unpaid;
(d)
misrepresenting to the Trustees
the prospects of obtaining reimbursement of the Funds' attorneys' fees from
delinquent employers;
(e) systematically
failing to demand or attempt to collect the full amounts of interest,
liquidated damages, and attorneys' fees and other collection costs that were
due on delinquent contributions;
(f) charging
or attempting to charge contingent fees in excess of those provided by the only
existing description of his contingent fee arrangement;
15
(g)
failing to make diligent
collection efforts in many delinquency cases referred to him for collection;
(h)
causing the Funds to adopt and
continue practices that did not maximize the Funds' recovery in delinquency cases
or provide incentives for employers to remit contributions when they were due,
but instead tended to encourage employers to remit contributions late and
thereby enabled defendants to collect large amounts of fees in collections
cases; and
(i)
acting on behalf of other
parties with interests opposed to the Funds.
Claim
Against Arnold for
Breach of Fiduciary Duty
In Violation of 29 U.S.C. § 1104(a1(1)(B1
59. Paragraphs
1 through 38 are incorporated herein by reference as if fully set forth.
60. Arnold
failed to exercise his discretionary authority in regard to delinquency
collection with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of alike
character and with like aims, thereby violating 29 U. S. C. § 1104(a)(1)(B), in
at least the following respects:
(a) failing
to make diligent efforts to collect substantial numbers of delinquency claims
that were referred to him for collection;
(b) systematically
failing to demand or attempt to collect the full amounts of interest,
liquidated damages, and attorneys' fees and other collection costs that were
due on delinquent contributions;
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(c) giving
the Trustees inaccurate information and advice on the prospects of obtaining
reimbursement of his attorneys' fees from delinquent employers; and
(d) failing
to obtain or maintain adequate documentation of the factual grounds for
employer challenges to audits that resulted in reducing the principal amount of
contributions claimed by the Funds. COUNT
III
Claim Against Arnold for
Breach of Fiduciary Duty in Violation of 29 U.S.C. 9 1104 (a (1) (D)
61. Paragraphs
1 through 38 are incorporated herein by reference as if fully set forth.
62. The
trust agreements described in paragraphs 6 and 7 vest in the Trustees the
discretionary authority to set the terms upon which claims belonging to the
Funds may be compromised and to determine the terms upon which counsel to the
Funds will be retained and compensated.
63. Arnold
failed to exercise his discretionary authority in regard to delinquency
collection in accordance with the documents and instruments governing the plan
insofar as such documents and instruments are consistent with ERISA, thereby
violating 29 U.S.C. § 1104(a)(1)(D), in at least the following respects:
(a) accepting
settlements from employers that did not include the full interest, liquidated
damages, attorneys' fees and other collection costs that were due under the
trust agreement, without the knowledge or consent of the Trustees;
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(b) giving
the Trustees inaccurate information that deprived them of the opportunity to
exercise properly the discretion and authority that the trust agreements gave
them in relation to settlements; and
(c) establishing
reporting and billing practices that deprived the Trustees of information they
needed to evaluate defendants' performance in collection cases and to determine
whether defendants' fees for collections were reasonable.
Claim
Against Arnold as a Fiduciary for
Causing
the Funds to Engage in Prohibited Transactions
In
Violation of 29 U.S.C. $ 1106(al(1)(B)
64. Paragraphs
1 through 38 are incorporated herein by reference as if fully set forth.
65. The
employers participating in the Funds with whom Arnold entered into settlement
agreements on behalf of the Funds were parties in interest within the meaning
of ERISA, as defined in 29 U.S.C. § 1002(14)(C).
66. Arnold,
acting as a fiduciary as alleged in paragraph 55, caused the Funds to engage in
prohibited transactions that violated 29 U. S. C. § 1106 (a) (1) (B) by causing
the Funds to enter into agreements that improperly extended credit to
participating employers, in that the agreements systematically failed to
require payment of appropriate amounts of interest, liquidated damages, and/or
attorneys' fees on delinquent contributions.
67. The
prohibited transactions described in paragraph 66 have not been corrected.
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Claim
Against Arnold as a Fiduciary for
Causing
the Funds to Engage in Prohibited Transactions
In
Violation of 29 U. S. C. § 1106 (a) (1) (C)
68. Paragraphs
1 through 31 are incorporated herein by reference as if fully set forth.
69. As
persons providing services to the Funds, Arnold and the law firm Arnold &
Kadjan were both parties in interest within the meaning of ERISA, as defined in
29 U.S.C. § 1002(14)(B).
70. Arnold,
acting as a fiduciary as alleged in paragraph 55, caused the Funds to engage in
prohibited transactions that violated 29 U.S.C. § 1106(a)(1)(C), and that were
not exempt under 29 U.S.C. § 1108(b)(2), by causing the Funds to pay more than
reasonable compensation for the legal services he and his law firm performed in
relation to the collection of delinquent contributions.
71. The
prohibited transactions described in paragraph 70 have not been corrected.
Claim
Against Arnold as a Fiduciary for
Causing
the Funds to Engage in Prohibited Transactions
In
Violation of 29 U.S.C. .4 1106 (a) (1) (B) and (D)
72. Paragraphs
1 through 31 are incorporated herein by reference as if fully set forth.
73. Arnold,
acting as a fiduciary as alleged in paragraph 55, caused the Funds to engage in
prohibited transactions that violated 29 U.S.C. § 1106(a)(1)(B) and (D) by
causing the Funds to enter into agreements that systematically accepted
reductions in the amount of contributions claimed by the Funds without
complying with the requirements of Prohibited Transaction Class Exemption 76‑1
(e.g., without
19
first making
diligent, systematic efforts to collect, without creating or maintaining
adequate records of the grounds for accepting employer challenges, and without
making a reasonable determination in writing that all or part of the amounts
due were uncollectible or could not be collected at reasonable expense).
74. The prohibited transactions described in
paragraph 73 have not been corrected.
COUNT
VII
Claim Against Arnold as a Fiduciarv for
Engaging
in Prohibited Transactions
In
Violation of 29 U.S.C. § 1106 (b) (1)
75. Paragraphs 1 through 38 are incorporated
herein by reference as if fully set forth.
76. Arnold, acting as a fiduciary as alleged
in paragraph 55, engaged in prohibited transactions by dealing with the assets
of the Funds in his own interest, in violation of 29 U. S. C. § 1106 (b) (1),
in at least the following respects:
(a) by exercising discretionary authority as a
fiduciary to settle claims for delinquent contributions in such a manner as to
influence the amount and timing of his contingent fees from the Funds;
(b) by
systematically failing to demand that employers reimburse the Funds for his law
firm's attorneys' fees, in circumstances where demanding full reimbursement of
such fees would have created a risk of exposing the unreasonable level of his
contingent fees to the Trustees;
(c) by
systematically failing to demand that employers reimburse the Funds for his law
firm's attorneys' fees, thus making it easier for Arnold and his law firm to
settle cases and collect large amounts of
20
fees from the Funds
without having to invest the time and effort
normally required to
resolve contested cases;
(d) by systematically failing to demand or attempt to collect full
amounts
of interest and liquidated
damages due on delinquent contributions,
where a change in these
aspects of his collection practice could have
reduced the volume of
employer delinquencies and thus reduced the
contingent fees paid to
Arnold and Arnold & Kadjan; and
(e) by causing the Trustees to adopt practices regarding delinquency
collection that maximized
the number of delinquency cases that
would be referred to
defendants for collection and thereby increased
the fees payable to
defendants.
77. The
prohibited transactions described in paragraph 76 have not been
corrected.
COUNT VIII
Claim
Against Arnold as a Fiduciary for
Engaging in
Prohibited Transactions
In Violation
of 29 U. S. C. § 1106 (b) (2)
78. Paragraphs
1 through 31 and 39 through 41 are incorporated herein by
reference
as if fully set forth.
79. Arnold, acting as a fiduciary as
alleged in paragraphs 55 and 57, engaged in prohibited transactions in
violation of 29 U.S.C. § 1106(b)(2), by dealing with the Funds on behalf of
parties with opposing interests, namely, by negotiating compromises of claims
for delinquent contributions and subrogation claims owed to the Funds by other
clients that he or Arnold & Kadjan represented.
80. The prohibited transactions described
in paragraph 79 have not been corrected.
21
Claim
Against Both Defendants for Participating in Prohibited Transactions in
Violation of 29 U.S.C. q 1106(a)(1)(C)
81. Paragraphs
1 through 29 and 69 are incorporated herein by reference as if fully set forth.
82. As
the result of Arnold's pattern of misrepresentation to the Trustees regarding
material facts pertaining to the activities of Arnold and Arnold & Kadjan
in the collection of delinquent contributions from employers, Arnold and Arnold
& Kadjan received excessive compensation from the Funds for their
collection services.
83. The
payment of this excessive compensation to Arnold and to Arnold & Kadjan
constituted prohibited transactions in violation of 29 U.S.C. § 1106 (a) (1)
(C) that were not exempt under 29 U.S.C. § 1108(b)(2).
84. The prohibited
transactions described in paragraph 83 have not been
corrected.
Claim
Against Both Defendants for
Participating
in Prohibited Transactions
in
Violation of 29 U. S. C. § 1106 (a) (1) (C)
85.Paragraphs 1 through 38 and 69 are incorporated
herein by reference as
if fully set forth.
86. As
the result of Arnold's pattern of billing for fees that were not properly
chargeable under the terms of the 1977 letter, which was the only written
description of the contingent fee arrangement, as detailed in paragraph 29,
Arnold and Arnold & Kadjan received excessive compensation for their
services in the collection of delinquent contributions from certain employers.
22
87. As the result of defendants' own
collection practices and policies that were adopted by the Funds upon Arnold's
recommendation, which had the effect of maximizing the volume of delinquent
contributions that were referred to defendants for collection, as detailed in
paragraphs 31 through 38, Arnold and Arnold & Kadjan received excessive
compensation for their services in the collection of delinquent contributions
generally.
88. The payment of this excessive
compensation to Arnold and to Arnold & Kadjan constituted prohibited
transactions in violation of 29 U.S.C. § 1106 (a) (1) (C) that were not exempt
under 29 U.S.C. § 1108(b)(2).
89. The prohibited transactions described
in paragraph 88 have not been corrected.
Claim Against Both Defendants for
Breach
of Contract under the
Common
Law of Illinois
90. Paragraphs 1 through 28 are
incorporated herein by reference as if fully set forth.
91. The terms of the contingent fee
agreement pursuant to which Arnold and Arnold & Kadjan were paid for their
collection efforts on behalf of the Funds were set forth in Arnold's May 6,
1977, letter to Samuel Shapiro, who was then counsel to the Funds.
92. That contingent fee agreement provided
for large fees to be paid on successful collections in exchange for Arnold's
promise to make diligent collection efforts on all delinquency claims ‑‑
no matter how small or unlikely to result in recovery.
23
93. Neither
Arnold nor Arnold & Kadjan performed as required by the terms of the
contingent fee agreement. To the contrary, rather than make diligent collection
efforts on all delinquency claims, Arnold and his law firm failed to make
diligent efforts to collect delinquent contributions in substantial numbers of
delinquency cases that were referred to Arnold for collection, without the
knowledge or consent of the Trustees.
94. By
this failure to diligently pursue collection efforts in a substantial number of
the delinquency cases referred to them, Arnold and Arnold & Kadjan breached
the terms of the contingent fee agreement.
95. Because
Arnold did not perform as required by the contingent fee agreement, he and
Arnold & Kadjan were not entitled to the high fees they were paid on
successful collections.
COUNT
XII
Claim
Against Arnold for
Fraudulent
Misrepresentation
under
the Common Law of Illinois
96. Paragraphs 1 through 38 are incorporated
herein by reference as if fully
set forth.
97. Arnold knowingly made false representations to
the Trustees about facts
material to the collection services he
rendered and material to his own compensation
for collection work. He also knowingly
billed the Funds for payment of contingent fees
without telling the Trustees that he
was not entitled to the fees he was requesting.