PWBA v. Schneiderman's Furniture, Inc., 2000-RIS-40 (ALJ Mar. 23, 2001)

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PWBA v. Schneiderman's Furniture, Inc., 2000-RIS-40 (ALJ Mar. 23, 2001)

U.S. Department of Labor Office of Administrative Law Judges
800 K Street, NW, Suite 400-N
Washington, DC 20001-8002 DOL Seal

Date: March 23, 2001
Case No.: 2000-RIS-40

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In The Matter of:

United States Department of Labor
Pension and Welfare Benefits Administration,
Complainant

Schneiderman's Furniture, Inc.,
Respondent

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Appearances:

For the Complainant: Stevan Durovic, Esq.

For the Respondent: Alok Vidyarthi, Esq.

Before: Alice M. Craft
Administrative Law Judge

DECISION AND ORDER GRANTING PWBA'S MOTION FOR SUMMARY DECISION

This case arises under § 502(c)(2), 29 U.S.C. §1132(c)(2), of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. §§ 1001, et seq. The Complainant, U.S. Department of Labor, Pension and Welfare Benefits Administration ("DOL", "PWBA") assessed an abated $2500 penalty against the Respondent, Schneiderman's Furniture, Inc. ("Schneiderman's"), as plan administrator of the Schneiderman's Furniture, Inc., 401(k) Profit Sharing Plan 001, an employee retirement benefit plan, for reporting deficiencies in connection with the 1997 plan year annual report. The key deficiency consisted of a qualification to the report of an independent qualified public accountant ("IQPA report") required by ERISA § 103(a)(3)(A), 29 U.S.C. §1023(a)(3)(A), and the implementing regulations. The deficiencies in the report have been corrected, and the sole issue before me is the appropriateness of the penalty.

[Page 2]

The facts in this case are essentially undisputed. Although the parties may differ on the exact content and import of a December 1996 telephone conversation between a representative of the accounting firm who prepared the audit and an employee of the Department of Labor, for the reasons stated below, I find that the differences are not material to the issue of the appropriateness of the penalty. Thus I find that there is no genuine issue of material fact. The case is therefore ready for ruling. Pursuant to 29 CFR §§ 18.40 and 2570.67, I further find that the PWBA is entitled to summary decision as a matter of law.

FINDINGS OF FACT

Based on the evidentiary submissions of the parties, I hereby make the following findings of fact on which this Decision is based. Where appropriate, these findings have been adopted from PWBA's Statement of Facts Not in Dispute. I have considered all of the evidence submitted by both parties in making these findings.

1. Schneiderman's is the plan administrator of the Schneiderman's Furniture, Inc., 401 (k) Profit Sharing Plan 001 ("Plan"). GX 1, 5; RX B.

2. The Plan, as of the 1995 plan year, had in excess of 100 participants and held assets in a trust. GX 5, 7; RX B, D.

3. Schneiderman's engaged a firm of Certified Public Accountants ("CPA"), Kolquist, Seitz & Goldman, Ltd. ("KSG") to audit the Plan. GX 2; RX F.

4. During a telephone conversation on December 5, 1996, a representative of KSG, Dale B. Larson, told a representative of the PWBA, Mark Underwood, that due to insufficient data, KSG would be unable to audit the Plan's balances as of January 1, 1995, and would therefore be required to issue a "qualified except for' opinion." Mr. Larson understood Mr. Underwood's response to be that a qualified report should not be a problem or result in automatic rejection of the report. GX 10; RX F.

[Page 3]

We were not able to perform sufficient auditing procedures with respect to the participants' individual account balances accumulated from inception of the plan to December 31, 1994 and therefore are unable to form an opinion regarding the balances at December 31, 1996 and 1997, or the propriety of the distributions to terminated participants during the year ended December 31, 1997.

GX 2.

6. A similar qualification had been included in the 1995 and 1996 plan year IQPA reports. GX 7; RX D.

7. PWBA issued a Notice of Rejection to Schneiderman on or about October 29, 1999, rejecting the Plan's 1997 IQPA report as deficient because (i) the scope of the IQPA audit was inappropriately limited; and (ii) the audit report did not reference the independence of the auditor. The Notice of Rejection also advised Schneiderman's that it had 45 days within which to comply without incurring a penalty. GX 3; RX A.

8. Bill Seitz, a CPA from KSG, responded to the Notice of Rejection on behalf of Schneiderman's by a telefax dated November 10, 1999, adding "Independent" to the title of the IQPA report, and explaining that the qualification issue had been addressed in the KSG's engagement memo and that, pursuant to a telephone call from a staff member of KSG, a DOL employee had concurred in the filing of a qualified opinion. GX 4; RX B.

9. By letter dated December 10, 1999, Seitz again referenced the December 5, 1996, telephone conversation. The letter further explained that the Plan, established in 1974, had used Northwestern Mutual Life Insurance Company as consultant and record keeper through 1984, and thereafter employed a third party administrator, Benefit Plan Consultants, through 1994. Records from Northwestern and Benefit Plan Consultants covering that time period were determined to no longer exist. The letter also reiterated the firm's prior awareness of the qualification problem, cited information from Schneiderman's controller that payroll records prior to 1992 were no longer available, and repeated that, without such records, the CPA could not issue an unqualified 1997 IQPA report. GX 5; RX B.

10. PWBA issued a Notice of Intent to Assess a Penalty on or about January 14, 2000, reiterating that the 1997 IQPA report was deficient because the scope of the audit was inappropriately limited,¹ and proposing a penalty of $50,000 against Schneiderman's for its failure to file an unqualified 1997 IQPA report. The Notice of Intent to Assess a Penalty further advised Schneiderman's that it had thirty days within which to submit a Statement of Reasonable Cause for the failure to file an acceptable 1997 IQPA report or why the penalties, as calculated, should not be assessed. GX 6; RX C.

[Page 4]

12. On or about February 29, 2000, KSG issued and submitted a revised 1997 IQPA report that was unqualified, removing the impermissible scope limitation as a result of performing the additional auditing procedures, thus bringing the 1997 IQPA report into compliance. GX 8; RX E.

13. PWBA issued a Notice of Determination on Statement of Reasonable Cause to Schneiderman on or about April 7, 2000, abating 95% of the penalty proposed in the Notice of Intent to Assess a Penalty, but assessing 5% or $2,500, which the notice characterized as the typical penalty for failing to provide the corrected filing within the 45 days stated in the Notice of Rejection. GX 9.

DISCUSSION AND CONCLUSIONS OF LAW

ERISA is a remedial statute designed to protect the integrity of employee benefit plans maintained by employers. ERISA § 2, 29 U.S.C. § 1001. The Act includes extensive reporting and disclosure provisions to accomplish that purpose, including the requirement of financial statements and audit and opinion of an IQPA in an annual report, referred to as Form 5500. Under ERISA §§ 102 and 104, 29 U.S.C. §§ 1021 and 1024, the plan administrator is responsible for ensuring that the Form 5500 is properly completed and timely filed. ERISA § 103, 29 U.S.C. § 1023, sets forth the requirements as to what the IQPA opinion should include. ERISA § 104, 29 U.S.C. § 1024 authorizes the Secretary of Labor ("Secretary") to reject annual reports that do not comply with the statutory requirements. If the Secretary rejects an annual report and an acceptable report is not filed within 45 days of the rejection, the Secretary is empowered to, among other things, retain an IQPA on behalf of a plan (at the plan's expense) to perform the required audit and report, bring an action for appropriate legal or equitable relief, or take other action authorized by title 1 of ERISA. In 1987, Congress amended ERISA, adding § 502(c)(2), 29 U.S.C. §1132 (c)(2), giving PWBA discretionary authority to assess a penalty on the administrator of an employee benefit plan for filing late or defective annual reports. Thereafter the Secretary promulgated regulations at 29 CFR § 2560.502c-2, setting forth the administration and procedures governing the assessment of civil penalties under § 502(c)(2). These procedures were followed in the chronology of events recited in the Findings of Fact.

[Page 5]

² These arguments misapprehend Schneiderman's responsibilities as the administrator of the Plan, and the Secretary's role in enforcing the requirements of ERISA.

At the outset, the "impossibility" of filing an unqualified report is negated by the fact that an alternative was found which enabled KSG to file an unqualified audit report based on sampling (see "Respondent's Memorandum in Opposition to Complainant's Motion for Summary Decision" at 3, fn. 1) despite the continued absence of complete records. This argument therefore fails.

Schneiderman's next argues that during a telephone conversation in 1996, Mark Underwood, an employee of the PWBA in Kansas City, Missouri, "concurred" with the filing of a qualified report. Although Underwood does not recall the details of the conversation, see "PWBA's Memorandum in Support of Summary Decision" at18, fn. 9, accepting the content of the conversation as it is reported in the Affidavit of Dale B. Larson, RX F, as PWBA points out, it is susceptible of more than one interpretation. See PWBA's Memorandum in Support of Summary Decision at 17-18. Moreover, even accepting as true the characterization by Schneiderman's that Underwood "concurred" with the filing of a qualified report, it does not follow that Schneiderman's was entitled to leave the question of the accuracy of account balances open indefinitely based on that one telephone conversation. Essentially, Schneiderman's is suggesting that PWBA was estopped from enforcing the reporting requirements of ERISA because of the oral representation of an employee in response to a telephone inquiry. That is not the state of the law. See, e.g., Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51 (1984) (United States not estopped from recovering overpayment of medicare reimbursement due to erroneous oral statement by agent of Department of Health and Human Services that expense was reimbursable.) Construing any differences between the parties' view of the facts relating to that conversation in Schneiderman's favor, I find that Schneiderman's was not entitled to rely on it to escape a penalty for failing to file an unqualified report for the 1997 Plan year.

[Page 6]

U.S. Dept. of Labor, PWBA, v. Bricklayers & Allied Craftsmen, Local 7, Pension Plan, 1994-RIS-54 at 14 (ALJ April 28, 1995).

The Notice of Rejection gave Schneiderman's 45 days to bring the report into compliance. In Schneiderman's statement of reasonable cause filed in response to the Notice of Rejection, RX D, CPA Seitz stated that after discussion with Mr. Lam about the missing records, he had been expecting to hear from PWBA as to how to proceed to correct the report, when instead he received the Notice of Intent to Assess a Penalty. Schneiderman's implies that it was unfairly taken by surprise by the Notice of Intent to Assess a Penalty. Accepting this position would allow Schneiderman's to evade its responsibility to produce an accurate and complete report and unqualified audit by placing the onus on PWBA to come up with a solution. This would be inconsistent with the intent of the reporting and enforcement provisions of ERISA and the implementing regulations.

The crux of Schneiderman's argument that no penalty should be assessed is that the report was not in compliance due to circumstances beyond the control of either Schneiderman's or KSG. As PWBA has pointed out throughout its briefs, however, Schneiderman's, as the Plan's administrator, was always in control of the information necessary to file a compliant report. Furthermore, it appears that KSG was able to remove the qualification by using another audit method. Under the facts of this case, it cannot be said that the failure to file an unqualified report was due to circumstances beyond the Respondent's control. The basic underpinning of Schneiderman's arguments therefore must fail. The fact that Schneiderman's was able to bring the report into compliance when forced to do so by PWBA's action, supports the conclusion that some penalty was warranted for the delay. Indeed, had Schneiderman's brought the Plan into compliance within the 45-day period allotted in the Notice of Rejection, it appears no penalty would have been assessed at all. Furthermore, although the original penalty was assessed at $50,000.00, that amount was abated by 95% to $2500.00 when all the circumstances, including Schneiderman's eventual compliance, were taken into account by PWBA.

In its own Motion for Summary Judgment, Schneiderman's argues that PWBA failed to consider important aspects of the problem; that PWBA failed to offer a reasonable explanation for its decision to maintain the abated penalty (implying that the failure to meet the 45-day time limit was insufficient reason); that the decision to impose a penalty runs counter to the evidence; that there is no rational basis for imposition of a penalty; and that the decision to maintain the penalty is arbitrary, capricious and an abuse of discretion. PWBA counters that it considered all of the aspects of the case raised by Schneiderman's, but did not accept all of Schneiderman's representations as reasonable cause for the failure to file an unqualified report or correct it in a timely manner; and that it was Schneiderman's responsibility to offer a reasonable explanation for failing to comply with the requirements of ERISA in a timely manner, not PWBA's to provide one for imposing the penalty. ERISA places the responsibility for accurate, complete, and timely reporting on the plan administrator. Schneiderman's was given 45 days to come into compliance without a penalty but took an

[Page 7]

ORDER

IT IS THEREFORE ORDERED that PWBA's determination to assess a penalty of $2500.00 against Schneiderman's Furniture, Inc., is AFFIRMED.

Alice M. Craft
Administrative Law Judge

NOTICE OF APPEAL RIGHTS: Pursuant to 29 CFR § 2570.69, a notice of appeal must be filed with the Secretary of Labor within 20 days of the date of issuance of this Decision and Order or the decision of this court will become the final agency action within the meaning of 5 U.S.C. § 704.

[ENDNOTES]

¹PWBA concedes that the lack of reference to "independent" audit had been corrected by Seitz's telefaxed submission of November 19.

²Schneiderman's also argues that PWBA's arguments were not included in the documents in the evidentiary record up to and including the Notice of Determination on Statement of Reasonable Cause and must therefore be disregarded, see "Respondent's Memorandum in Opposition to Complainant's Motion for Summary Decision" at 4-6. This novel proposition is unsupported by logic or apposite authority and is rejected. Although Schneiderman's cited two cases in support of its argument, neither is on point. The first, Environmental Defense Fund, Inc. v. Costle, 657 F.2d 275, 284 (D.C. Cir. 1981), addresses the appropriate contents of the record for judicial review of final agency action and cannot be applied to the case at hand in the manner Schneiderman's suggests. The second, Midtec Paper Corp. v. U.S., 857 F.2d 1487, 1498 (D.C. Cir. 1988) does not address the contents of the record of an administrative proceeding at the page cited, nor can I find any language supporting Schneiderman's position anywhere else in the decision.