CORE TERMS: pension fund,
fiduciary, duty, summary judgment, prudence, independent investigation,
appraisal, prudent, advice, trust funds, moving party, partial,
fiduciary duties, valued, seller, breach of fiduciary, prudent person,
pension, dollar, real estate, failed to obtain, months earlier, purchase
price, cross-motion, unanimously, valuation, breached, genuine issue of
material fact, objective standard, employee benefit
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COUNSEL: HON. MARY JO WHITE, United States Attorney for the
Southern District of New York, Attorney for United States of America,
New York, NY, By: ALLAN N. TAFFET, ESQ., MANVIN S. MAYELL, ESQ., AIMEE
B. WOLFSON, ESQ., Of Counsel.
DOMINIC F. AMOROSA, ESQ., Attorney for Defendant James Lupo, New York,
NY.
ANDREW M. LAWLER, P.C., Attorney for Defendant Joseph Fater, New York,
NY, By: ANDREW M. LAWLER, ESQ., MAURICE M. McDERMOTT, ESQ., Of Counsel.
JUDGES: ROBERT W. SWEET, U.S.D.J.
OPINIONBY: ROBERT W. SWEET
OPINION: [*884]
OPINION
Sweet, D.J.
Plaintiffs, the United States of America and Robert B. Reich, Secretary
of the United States Department of Labor (collectively the "Government")
moved for an order pursuant to
Rule 56, Fed. R. Civ. P., granting them partial summary judgment on
Claim V (against defendants James Lupo ("Lupo") and Joseph Fater
("Fater"), and Claim VII (against Fater), which charge ERISA violations
based on the Pension and Welfare Funds' purchase of the 18th Street
building in Manhattan and 6060 Indian Creek in Miami Beach, Florida.
Defendant Fater has moved for partial summary judgment on the Fifth and
Seventh Claims for Relief sought by the complaint, insofar as the
claims
[**2] allege
that he breached his fiduciary duties as a trustee of the Mason Tenders
District Council's Pension Fund and Welfare Fund.
For the following reasons, the Government's motion is granted and
Fater's cross-motion is denied.
The Parties
Lupo and Fater are two former Trustees of the Mason Tenders District
Council of Greater New York Pension and Welfare Fund (collectively the
"Trust Funds").
The Mason Tenders District Council represents workers throughout New
York City and on Long Island who perform numerous laborer jobs including
general labor, brick hauling, and asbestos removal. The District Council
also holds and administers, jointly and with contributing employers,
seven multi-million dollar trust funds. The Trust Funds are "employee
benefit plans" within the meaning of the Employee Retirement Income
Security Act ("ERISA") § 3(3),
29 U.S.C. § 1002(3). The District Council Pension and Welfare Fund
are two of the largest Trust Funds. The Pension Fund collects
contributions from employers in order to provide pensions to retired
members of the Locals. As of 1992, the Pension Fund covered more than
6,600 current and retired union members and had assets of more than
[**3] $ 180
million. The Welfare Fund pays medical benefits to members and retirees
of the Locals and their families. In 1987, the Welfare Fund had net
assets of approximately $ 30 million; by 1992, the Welfare Fund had net
assets of less than $ 15 million.
Prior Proceedings
The complaint in this action was filed in September 1994. Summary
judgment against these defendants on these counts was requested in a
motion filed by the Government on November 1, 1994. On consent of all
parties the argument on these claims against Fater and Lupo were
adjourned until February, 1994.
On January 6, 1994 Fater filed a cross-motion for partial summary
judgment with respect to the same claims, five and seven.
Argument was heard on these motions on February 22, 1995 and the motions
were considered fully submitted as of that date.
Facts
The West 18th Street Property
The Fifth Claim alleges that Fater and Lupo and the other Pension Fund
trustees "caused the Pension fund to purchase the 18th Street Property
from [the seller] for $ 24 million, which was $ 16.5 more that the
seller had paid for the building less than ten months earlier."
A report from DiFranco
[**4] Realty
dated December 29, 1989 appraised the value of the property at $
15,950,000. A report from Diane Mistretta dated January 2, 1990
appraised the value of the property at $ 15,850,000. A report from
Wasserman Realty Service
[*885] dated
January 4, 1990 valued the property at $ 8,300,000.
On February 1, 1990 the Pension Fund loaned $ 15,850,000 to Ronald
Miceli ("Miceli") to purchase the 18th Street building. On that same
date Miceli purchased the building for $ 7,465,000.
On November 13, 1990 the Pension Fund trustees met and approved
unanimously the purchase of the 18th Street Property from Miceli,
established a realty corporation to hold title to the property, named
Fater President of the Corporation and authorized Gerard W. Cunningham
("Cunningham") to execute the purchase.
Lupo attended the November 13 meeting. Fater was not present at the
meeting and took no part in the vote. His counsel, Cunningham, was
present at the meeting and presented the Real Estate Committee report
which included the discussion of the 18th Street property. Fater was on
the Real Estate Committee at that time.
The building was purchased by the Pension Fund on November 27, 1990 for
$ 24,000,000.
[**5] The
Florida Property
The complaint alleges that "...trustee...Fater ...approved the Welfare
Fund's purchase of 6060 Indian Creek [Drive, Miami Beach, Florida] for
the price of $ 1.45 million, $ 600,000 more than the valuation contained
in any contemporaneous valuation of the property."
A June 10, 1987 appraisal letter from Appraisal Professionals, Inc.
addressed to Frank Lupo, Trustee, Mason Tenders District Council,
estimated that the market value of the property was between $ 750,000.00
and $ 850,000.00.
The purchase of the property for $ 1,400,000 was approved unanimously at
the October 28, 1987 trustees' meeting. Fater was not present at the
meeting. His counsel, Gerard W. Cunningham ("Cunningham"), was present
and gave the Real Estate Committee report including a discussion of the
Florida property. Fater was a member of the Real Estate Committee.
At a meeting of the trustees on April 6, 1988, at which Fater was
present, minutes of the October 28, 1987 meeting, including discussion
of the Florida property, were approved unanimously without alteration.
Discussion
Defendants Breached their Fiduciary Duties as Trustees
A motion for summary
[**6] judgment
may be granted only when there is no genuine issue of material fact
remaining for trial and the moving party is entitled to judgment as a
matter of law. See
Fed. R. Civ. P. 56(c);
Silver v. City Univ., 947 F.2d 1021, 1022 (2d Cir. 1991). The moving
party bears the burden of proving that no genuine issue of material fact
exists.
Brady v. Town of Colchester, 863 F.2d 205, 210 (2d Cir. 1988);
Pittston Warehouse Corp. v. American Motorists Ins. Co., 715 F. Supp.
1221, 1224 (S.D.N.Y. 1989), aff'd,
954 F.2d 62 (2d Cir. 1992).
The Second Circuit has repeatedly noted that "as a general rule, all
ambiguities and inferences to be drawn from the underlying facts should
be resolved in favor of the party opposing the motion, and all doubts as
to the existence of a genuine issue for trial should be resolved against
the moving party."
Brady, 863 F.2d at 210; see also
Cartier v. Lussier, 955 F.2d 841, 845 (2d Cir. 1992);
Burtnieks v. City of New York, 716 F.2d 982, 983-84 (2d Cir. 1983);
Swan Brewery Co. v. United States Trust Co., 832 F. Supp. 714, 717
(S.D.N.Y. 1993).
The remedy of summary judgment is viewed "as an integral part of the
Federal rules
[**7] as a
whole, which are designed 'to secure the just, speedy and inexpensive
determination of every action.'"
Celotex Corp. v. Catrett, 477 U.S. 317, 327, 91 L. Ed. 2d 265, 106 S.
Ct. 2548 (1986) (citations omitted). Once the moving party has met
its burden of coming forward with evidence to show that no material fact
exists for trial, the nonmoving party must do more than "simply show
that there is some metaphysical doubt as to the material facts."
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89
L. Ed. 2d 538, 106 S. Ct. 1348 (1986).
[*886] The
Government contends that Fater and Lupo breached their fiduciary duties
under ERISA in connection with the purchase of the 18th Street property
and additionally that Fater breached his duty in connection with the
Florida property.
ERISA requires a pension fund fiduciary to act "solely in the interest"
of a plan's participants and beneficiaries, and to discharge his duties
"with the care, skill, prudence, and diligence ... that a prudent man
acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of like character ...."
29 U.S.C. § 1104(a)(1)(B).
In
Katsaros v. Cody, [**8] 744 F.2d 270
(2d Cir.), cert. denied,
469 U.S. 1072 (1984), the Court of Appeals described the now
well-settled standards for evaluating the prudence of a trustee's acts:
Prudence is measured according to the objective "prudent person"
standard developed in the common law of trusts.
Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983), cert.
denied,
464 U.S. 1040 [104 S. Ct. 704, 79 L. Ed. 2d 169] (1984); S.Rep.
No. 127, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. &
Ad.News 4639, 4838, 4865 (the fiduciary responsibility section, in
essence, codifies and makes applicable to these fiduciaries certain
principles developed in the evolution of the law of trusts.) The
court's task is to inquire "whether the individual trustees, at the
time they engaged in the challenged transactions, employed the
appropriate methods to investigate the merits of the investment and
to structure the investment."
Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir.1983), cert.
denied,
464 U.S. 1040 [104 S. Ct. 704, 79 L. Ed. 2d 169] (1984);
Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir.1983)
("courts have focused the inquiry under the 'prudent man' rule on a
review [**9] of the
fiduciary's independent investigation of the merits of a particular
investment"). A trustee's lack of familiarity with investments is no
excuse: under an objective standard trustees are to be judged
"according to the standards of others 'acting in a like capacity and
familiar with such matters.'"
Marshall v. Glass/Metal Ass'n, 507 F. Supp. 378, 384 (D.Haw 1980).
Katsaros
v. Cody, 744 F.2d at 279; see also
Fink v. National Savings and Trust Co., 249 U.S. App. D.C. 33, 772 F.2d
951, 955 (D.C. Cir. 1985).
ERISA's prudence standard "is not that of a prudent lay person but
rather that of a prudent fiduciary with experience dealing with a
similar enterprise."
Marshall v. Snyder, 1 Empl. Ben. Cases (BNA) 1878, 1886 (E.D.N.Y. 1979);
see
Donovan v. Mazzola, 716 F.2d at 1231-32 ("Courts have also
recognized that in enacting ERISA Congress made more exacting the
requirements of the common law of trusts relating to employee benefit
trust funds."); indeed, the Second Circuit has recognized that the
duties of an ERISA trustee are "the highest known to the law."
Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir.), cert. denied,
459 U.S. 1069, 74 L. Ed. [**10] 2d 631,
103 S. Ct. 488 (1982). In sum, courts have construed the "prudent
person standard" under ERISA as an "objective standard, requiring the
fiduciary (1) to employ proper methods to investigate, evaluate and
structure the investment; (2) to act in a manner as would others who
have a capacity and familiarity with such matters; and (3) to exercise
independent judgment when making investment decisions."
Lanka v. O'Higgins, 810 F. Supp. 379, 387 (N.D.N.Y. 1992) (citations
omitted).
The test of prudence focuses on the trustee's conduct in investigating,
evaluating and making the investment. See
Fink v. National Savings and Trust Co., 772 F.2d at 957 (D.C. Cir. 1985)
("A fiduciary's independent investigation of the merits of a particular
investment is at the heart of the prudent person standard."). While a
trustee has a duty to seek independent advice where he lacks the
requisite education, experience and skill,
Donovan v. Bierwirth, 680 F.2d at 272-73, the trustee, nevertheless,
must make his own decision based on that advice.
Donovan v. Mazzola, 716 F.2d at 1234;
Withers v. Teachers' Retirement System of the City of New York, 447 F.
Supp. 1248, 1254 (S.D.N.Y. 1978), [**11] aff'd.
mem.,
595 F.2d 1210 (2d Cir. 1979) ("In the area of investment decisions,
the obligation to exercise prudence [includes]
[*887] an
obligation to ... make independent inquiry into the merits of particular
investments rather than to rely wholly on the advice of others.").
The failure to make any independent investigation and evaluation of a
potential plan investment is a breach of fiduciary obligations,
Fink v. National Savs. & Trust Co., 772 F.2d at 957, that may
warrant an injunction against or the removal of the trustee and possibly
the recovery of trustee fees paid for the investigative and evaluative
services that went unperformed. Id. at 962. cHaving found that a trustee
has failed to investigate a particular investment adequately, however, a
court must then examine whether, considering the facts that an adequate
and thorough investigation would have revealed, the investment was
objectively imprudent. Id. (Scalia, J., concurring in part and
dissenting in part); see also
Katsaros v. Cody, 744 F.2d at 279-80;
Withers v. Teachers Retirement System of the City of New York, 447 F.
Supp. at 1254.
Lupo was a trustee at the time that the 18th Street property was
[**12]
purchased and Fater was a trustee at the time that both properties were
purchased. Applying the above principles to the facts of this case, the
lack of any independent investigation of the purchase of these
properties failed the careful inquiry required of a trustee. In response
to this motion neither Lupo or Fater claimed that they made the
independent investigation required.
Specifically, in relation to the 18th Street property, the Government
alleges in its papers, and the defendants have not refuted the
following:
-- the Trustees failed to obtain, let alone scrutinize, any
valuation or appraisal of the building in or about November 1990
before approving of the Pension Fund's $ 24 million purchase of the
18th Street building;
-- the Trustees failed to ascertain the identity of the seller --
which would have revealed that the seller was the identical person
who had received the $ 15.85 million loan from the Pension Fund to
purchase the building ten months earlier;
-- the Trustees did not review the two appraisals done by Mistretta
and DiFranco ten months earlier, which valued the building at an
inflated price, but one that was still $ 8 million dollars lower [**13] than
the purchase price the Trustees approved in November 1990;
-- the Trustees failed to review the Wasserman Realty appraisal,
prepared less than a year earlier, which valued the building at $
8.34 million;
-- the Trustees failed to participate in, or in any way monitor, the
negotiations over the purchase price for the building -- or even to
learn whether any such negotiations had occurred; and
-- the Trustees failed to compare the price paid -- $ 24 million --
with the price of other comparable buildings to ensure that the
price was reasonable.
The Government further alleges that less than one year after the Pension
Fund's $ 24 million dollar purchase, the Pension Fund retained Cushman &
Wakefield to conduct a comprehensive analysis of the 18th Street
building. Following its review, Cushman & Wakefield determined that as
of September 1991, the building was worth only $ 5 million. The
Government argues that this is true despite the Pension Funds'
expenditure of an additional $ 5.62 million in renovations at 18th
Street in the ten months following its purchase. (As of December 31,
1992, the Pension Fund itself valued the 18th Street building as having
a "fair value"
[**14] of
only $ 5 million).
Finally, the Trustees' further breach of their fiduciary duties is
established by a single omission on their collective part: they approved
of the purchase of the 18th Street building for $ 24 million without
securing the advice or approval of a "Qualified Professional Asset
Manager" ("QPAM"). In so doing, the Trustees lost $ 10 million in
insurance coverage for their investment. The Pension Fund's insurance
carrier expressly excluded insurance coverage for real estate
investments unless the real estate investment was:
Specifically directed or approved by and managed by a Qualified
Professional Asset Manager ("QPAM") as defined by Prohibited [*888]
Transaction Class-Exemption 84-14 (March 8, 1984), with substantial
experience in real estate and/or mortgages, and which either does
not violate the prohibited transaction provisions of Section 406(a)
and (b) of ERISA,
29 U.S.C. § 1106(a) and (b), or is exempted from those
provisions[.]
The Trustees entered into this $ 24 million purchase, having failed to
obtain a contemporaneous appraisal, and having failed to obtain the
services of any outside real estate expert advisor, or a "QPAM" as
required by the
[**15]
Pension Fund's insurance policy. None of the allegations involving the
lack of investigation or the failure to obtain a "QPAM" are disputed by
defendants.
With regard to the Florida property, the Government alleges and Fater
does not deny that the property, with a market value of $ 750,000 to $
850,000, was purchased for $ 1,450,000 by the Fund. Nor does Fater deny
that he made no independent inquiry into the property nor did he review
the certified letter assessing the value of the property at $ 600,000
less than the purchase price.
Lupo argues that he acted under advice of counsel and approved the
transaction while doing his "good-faith best to represent the Fund in
these transactions in a prudent way." The duty of trustees to conduct
independent investigations of the merits of the investment is clear
under ERISA. See
Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir.), cert. denied,
459 U.S. 1069, 74 L. Ed. 2d 631, 103 S. Ct. 488 (1982);
Whitfield v. Cohen, 682 F. Supp. 188, 195 (S.D.N.Y. 1988) ("The
failure to make any independent investigation and evaluation of a
potential plan investment is a breach of fiduciary obligations.").
Good faith alone is not recognized
[**16] as a
defense to a breach of fiduciary duties. See
Reich v. King, 867 F. Supp. 341, 343 (D. Md. 1994) ("a fiduciary's
subjective good faith belief of his prudence will not insulate him from
liability");
Lanka v. O'Higgins, 810 F. Supp. 379, 387 (N.D.N.Y. 1992) (same).
Further, fiduciary obligations under ERISA cannot be avoided by
asserting misplaced reliance on counsel. See
Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th Cir. 1983) ("reliance
on counsel's advice, without more, cannot be a complete defense to an
imprudence charge"), cert. denied,
464 U.S. 1040, 79 L. Ed. 2d 169, 104 S. Ct. 704 (1984);
Katsaros v. Cody, 568 F. Supp. 360, 369 n.12 (E.D.N.Y. 1983) ("the
retention of counsel...does not relieve a fiduciary of his duty to
investigate"), aff'd,
744 F.2d 270 (2d Cir.), cert. denied,
469 U.S. 1072 (1984). In this case a review of the appraisals alone
would have raised questions in a prudent trustee's mind.
While bad advice from counsel may provide a cause of action against the
counsel, it does not shield the trustee from liability under ERISA.
There are no claims by Lupo that he independently investigated the
purchase of the 18th Street Property. Absent such a claim and in the
face
[**17] of the
imprudent purchase, partial summary judgment on liability is granted.
Fater's 3-G statement states that he was not present at the Trustee's
meetings where the purchases of the West 18th Street and Florida
properties were approved. This does not relieve Fater of his fiduciary
duty to the Funds with respect to these properties. Fater was
represented at both meetings by Cunningham, he was also a member of the
Real Estate Committee that recommended the purchases. Finally, his
fiduciary duty under ERISA is continuous. See
Cohen, 682 F. Supp. at 196 (fiduciary "had a duty to monitor
performance with reasonable diligence and to withdraw the investment if
it became clear or should have become clear that the investment was no
longer proper for the Plan"). Liability for the breach of this duty is
apparent on Fater's part regarding the two purchases discussed in this
Opinion and found in Counts Five and Seven of the Government's amended
complaint. In his declaration attached to his counsel's Reply
Declaration, Fater states that he was not aware of the purchases until
after they were made. His duty continues such that, at the very least,
once he knew of the purchases he should have
[**18] acted
to ensure that they were prudent investments. He did not.
[*889]
Conclusion
For the reasons set forth above, the Government's motion for summary
judgment on liability on Claim V as it pertains to Lupo and Fater and
Claim VII as it pertains to Fater is granted. Fater's cross-motion is
denied.
It is so ordered.
New York, N. Y.
May 15, 1995
ROBERT W. SWEET
U.S.D.J