USDOL, PWBA v. T.W. Taggert, 1993-RIS-18 (ALJ Aug. 25, 1995)
DATE: AUGUST 25, 1995
In the Matter of
UNITED STATES DEPARTMENT OF LABOR,
Pension and Welfare Benefits Administration,
Complainant,
v.
T. W. TAGGART,
Respondent,
Case No.: 93-RIS-18
AND
In the Matter of
UNITED STATES DEPARTMENT OF LABOR,
Pension and Welfare Benefits Administration,
Complainant,
v.
ASSOCIATION MARKETING CONSULTANTS, INC.,
Respondent.
Case No.: 93-RIS-19
Appearances:
Barbara A. Matthews, Esquire
For the Complainant
Franklin R. Sears, Esquire
and
Frank D. McCown, Esquire
For the Respondents
BEFORE: RICHARD D. MILLS
Administrative Law Judge
DECISION AND ORDER[PAGE 2]
ERISA is a comprehensive statute adopted by Congress after
careful study of employee benefit plans. Alessi v. Raybestos-
Manhattan, Inc., 451 U.S. 504, 510 (1981). Its provisions
are remedial in nature and were designed to carry out the vitally
important purpose of protecting those plans. Brink v.
DaLesio, 667 F.2d 420, 427 (4th Cir. 1981). SeeBarrowclough v. Kidder Peabody & Co., 752 F.2d 923, 929
(3rd Cir. 1985).
Among the means employed to accomplish this purpose are the
fiduciary responsibility provisions of ERISA §§ 404-
406, 29 U.S.C. §§ 1104-1106. These sections
incorporate and codify the traditional common law, fiduciary
duties of absolute loyalty and utmost prudence. Donovan v.
Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983), cert.denied, 464 U.S. 1040 (1984); Donovan v. Bierwirth,
680 F.2d 263; 271 (2d Cir. 1982), cert.denied, 459
U.S. 1069 (1982).
In particular, ERISA § 406, 29 U.S.C. § 1106,
expressly prohibits certain types of transactions between an
employee benefit plan and a party-in-interest with respect to the
plan. The term "party-in-interest" with respect to a plan is
defined at ERISA § 3(14), 29 U.S.C. § 1002(14).
Transactions prohibited by ERISA § 406, 29 U.S.C.
§ 1106, include (i) any transfer of plan assets to, or use
by or for the benefit of, a party-in-interest; ERISA §
406(a)(i)(D), 29 U.S.C. § 1006(a)(i)(D); (ii) any
transaction in which a fiduciary deals with plan assets in his
interest or for his own account; ERISA § 406(b)(i), 29
U.S.C. § 1106(b)(i); or (iii) any transaction involving the
plan where a fiduciary acts on behalf of a party whose interests
are adverse to the interest of the plan or the plan's
participants and beneficiaries. ERISA § 406(b)(2), 29
U.S.C. § 1106(b)(2).
Enforcement of the fiduciary responsibility provisions is
primarily the responsibility of the Secretary of Labor, acting
through the PWBA. With respect to transactions prohibited under
ERISA § 406, 29 U.S.C. § 1106, PWBA may seek correction
of the transactions, restoration of any loses suffered by the
plans and other appropriate equitable relief. ERISA §
502(a)(2) and (5), 29 U.S.C. § 1132(a)(2) and (5).
SeeNieto v. Ecker, 845 F.2d 868, 873-874 (9th Cir.
1988).
In addition, ERISA §§ 502(i) and 2003, 29 U.S.C.
§ 1132(i) and 26 U.S.C. § 4975, impose a civil penalty
or, alternatively, an excise tax on a party-in-interest that
engages in a prohibited transaction. The excise tax imposed by
section 4975 of the Internal Revenue Code (IRC) is imposed by the
Internal Revenue
[PAGE 3]
Service and applies when the prohibited transaction involves a
tax exempt pension or profit sharing plan. 26 U.S.C.
§4975(e)(1). The civil penalty at ERISA §502(i), 29
U.S.C. § 1132(i), is imposed by the Secretary of Labor and
applies to transactions with respect to all other plans covered
by ERISA, such as the plan at issue here.
The Secretary has delegated the authority to access civil
penalties under section 502(i) of ERISA to the Assistant
Secretary for Pension and Welfare Benefits Administration (PWBA).
Secretary of Labor's Order 1-87, 52 Fed. Reg. 13, 131 (April 21,
1987), updating and amending Secretary of Labor's Order 1-84 and
Secretary of Labor's Order 1-86.
The penalty under ERISA § 502(i), 29 U.S.C. §
1132(i), is up to five percent of the amount involved in the
prohibited transaction, except that if the transaction is not
corrected within 90 days after notice from the Secretary, such
penalty may be in an amount not more than 100% of the amount
involved.
ERISA § 505, 29 U.S.C. § 1135, authorizes the
Secretary to issue regulations to carry out the provisions of
ERISA, including regulations defining and interpreting terms
under section 502(i) and establishing administrative procedures
for assessment of penalties. Terms pertaining to section 502(i)
have been defined by regulations at 29 C.F.R. § 2560.502i-1,
effective October 26, 1988. PWBA has also promulgated, at 29
C.F.R. § 2570, procedural regulations for assessing civil
penalties under section 502(i). With certain modifications,
these procedural regulations adopt the rules of practice and
procedure for administrative hearings before the Office of
Administrative Law Judges at 29 C.F.R. Part 18.
This matter arose after the Complainant Pension and Welfare
Benefits Administration (PWBC), pursuant to its authority under
Section 502(i) of the Employee Retirement Income Security Act
(ERISA) 29 U.S.C. 1132(i), assessed civil penalties in the amount
of $42,500.00 each against Respondents T.W. Taggart and
Association Marketing Consultants, Inc. (AMCI).
On February 19, 1993, PWBA served notices of these
assessments on the Respondents. The assessments were based on
findings that, in entering into a consulting agreement with
Missouri Pacific Employees' Health Association (MPEHA), the
Respondents, who were parties-in-interest with respect to MPEHA,
engaged in a transaction prohibited by Title I of ERISA, thereby
subjecting themselves to the monetary penalty imposed by ERISA
[PAGE 4]
§502(i), 29 U.S.C. §1132(i).
Rather than pay the penalty, the Respondents filed answers
pursuant to 29 C.F.R. §18.5. The answers challenged the
assessments of the penalty on various legal grounds. The cases
were consolidated on December 8, 1993. On December 8, 1994 a
hearing of these consolidated cases was held in Dallas, Texas.
Both parties have submitted proposed Findings of Fact and a
Proposed Decision and Order.
Pursuant to my order of August 17, 1994, PWBA, Taggart and
AMCI filed a list of Joint Exhibits and a Stipulation of Facts.
(Jt. X 1). The parties agree that the issue for decision is
whether the Respondents are liable for the penalty imposed by
Section 502(i) of ERISA. In order to find the Respondents liable
for the Section 502(i) penalty for the years in issue, I must
find that:
1. MPEHA was a plan or an entity holding plan
assets to which Title I of ERISA applied;
2. Respondents were parties-in-interest under
the definition set forth in ERISA
§3(14); and
3. The entering into a consulting agreement
between MPEHA and Taggart/AMCI was a
transaction prohibited by ERISA §406 for
which there was no exemption.
Each of the just noted elements necessary to establish
liability for the Section 502(i) penalty is in dispute. The
Respondents assert that if I find that Numbers 1, 2 and 3 are
applicable, then I must still address the following additional
issues:
1. Whether the Complainant has the authority to
assess a penalty against the Respondents.
2. If the Complainant has the authority to
assess the penalty against the Respondents,
whether the Complainant correctly computed
the penalty.
3. Whether MPEHA had reasonable cause to believe
that it was not a plan under Title I of
ERISA.
[PAGE 5]
4. Whether MPEHA had reasonable cause to believe
that AMCI was not a party-in-interest as that
term is defined in ERISA §3(14).
5. Whether T. W. Taggart had reasonable cause to
believe that he was not a party-in-interest
as that term is defined in ERISA §3(14).
A reading of the applicable statute and regulations
establishes that the complainant has the authority to assess the
penalty, the amount of the penalty (See also, Penalty Computation
Sheet in ALJ X 1), and that reasonable cause or a subjective
belief that conduct does not violate ERISA is not a defense to
the imposition of this penalty. Consequently, these "issues" are
found to be statutorily inapplicable to this proceeding.
FINDINGS OF FACT
I am in substantial agreement with the proposed Findings of
Fact submitted by the Complainant. The following are hereby
adopted as Findings of Fact in this matter:
1. Prior to the merger with MPEHA, the Texas Pacific
Employees' Hospital Association (TPEHA) was a non-profit
corporation which provided medical and surgical treatment and
care to the employees of the Union Pacific - Missouri Pacific
Railroad Companies and its affiliated lines and companies.
(Jointly stipulated Fact 1 contained in Joint Exhibit 1
(hereinafter, "J-Ex. ___")).
2. TPEHA was administered by a Board of Managers. (Stip.
Fact 2; J-Exs. 1-2).
3. From January 1, 1987 until the merger with the Missouri
Pacific Employees' Hospital Association, the TPEHA Board of
Managers consisted of a general chairman, a member representing
each labor organization representing active employees, and a
member designated by the general chairman to represent the TPEHA
members
not represented by a labor organization. (Stip. Fact 3; J-Ex.
3).
4. From January 1, 1987 until the merger with the Missouri
Pacific Employees' Hospital Association, TPEHA was an ERISA
covered plan because it was an employee welfare benefit plan
established or maintained by an employer, an employee
organization or both. (J-Exs. 2, 69-70).
[PAGE 6]
5. Respondent Taggart was the General Chairman of TPEHA
Board of Managers from at least November 5, 1985 until the merger
with the Missouri Pacific Employees' Hospital Association.
(Stip. Fact 4; J-Ex. 1; J-Exs. 3-5).
6. During 1987, the members of the TPEHA Board of Managers
were Respondent Taggart, J.A. Bullock, C.A. Murdock, Joe Bay, and
Larry Borden. (Stip. Fact 5; J-Exs. 3-5).
7. Prior to the merger with TPEHA, the Missouri Pacific
Employees' Hospital Association was a non-profit corporation
which provided medical and surgical treatment and care to the
employees of the Union Pacific Railroad and its transportation
subsidiaries as well as certain union employees of the Terminal
Railroad Association (TRA) and the Manufacturers Railway Company
(MRA). (Stip. Fact 6; J-Ex. 69).
8. Prior to the merger with TPEHA, Missouri Pacific
Employees Hospital Association was an entity that managed and
controlled the assets of three ERISA covered employee welfare
benefit plans: one plan that was maintained by Union Pacific
Railroad and the union organizations whose members were employed
by that railroad; one plan that was maintained for certain TRA
union employees; and one plan that was maintained for certain MRA
union employees. (J-Exs. 69-70).
9. The Missouri Pacific Employees' Hospital Association was
administered by a Board of Managers. (Stip. Fact 7; J-Ex. 69).
10. From January 1, 1987 until the merger with TPEHA, the
Missouri Pacific Employees' Hospital Association Board of
Managers consisted of 12 managers. Nine of these managers were
the general chairman of the following union organizations at the
Missouri Pacific Railroad: Conductors; Brakeman; Switchmen and
other Trainmen; Engineers; Firemen; Station Agents, Telegraphers
and Levermen; Boilermakers and Blacksmiths; Firemen and Oilers;
Bridge Building, and Construction and Trackmen; and Clerks,
General Office, Store and Station Employees. Two of these
managers were representative of the Union Pacific System. One of
these managers was a manager-at-large who was elected to
represent MPEHA members employed by the Missouri Pacific Railroad
Company, but not represented by any of the other managers.
(Stip. Fact 8; J-Ex. 10).
11. Respondent Taggart was a member of the Missouri Pacific
Employees' Hospital Association Board of Managers from at least
[PAGE 7]
January 1, 1987 until July 20, 1988. (Stip. Fact 9; J-Exs. 25-
31).
12. In his capacity as a member of the Missouri Pacific
Employees' Hospital Association Board of Managers, Respondent
Taggart signed a conflict of interest statement, dated March 17,
1987. (Stip. Fact 10; J-Exs. 26-27).
13. On or about September 17, 1987, the TPEHA Board of
Managers passed a resolution approving a merger between TPEHA and
the Missouri Pacific Employees' Hospital Association. (Stip.
Fact 11; J-Ex. 5).
14. On or about October 14, 1987, the Missouri Pacific
Employees' Hospital Association Board of Managers passed a
resolution approving a merger between TPEHA and the Missouri
Pacific Employees' Hospital Association. (Stip. Fact 12; J-Ex.
28).
15. Under the terms of the merger agreement, the Missouri
Pacific Employees' Hospital Association and TPEHA merged into a
single non-profit corporation. The new name of the surviving
corporation was the Missouri Pacific Employees' Health
Association. (MPEHA). (Stip. Fact 13; J-Exs. 6-8).
16. The Missouri Pacific Employees' Hospital Association and
TPEHA were merged as of December 28, 1987. (J-Ex. 7).
17. After the merger with TPEHA, MPEHA was an entity that
managed and controlled the assets of three ERISA covered employee
welfare benefit plans: one plan that was maintained by Union
Pacific Railroad and the union organizations whose members were
employed by that railroad; one plan that was maintained for
certain TRA union employees; and one plan that was maintained for
certain MRA union employees. (J-Exs. 11, 69-70).
18. After the merger with TPEHA, MPEHA was administered by a
Board of Managers. (Stip. Fact 14; J-Ex. 11).
19. After the merger with TPEHA, the MPEHA Board of Managers
consisted of 13 managers. Ten of these managers were
representatives of the following union organizations: one from
the Brotherhood of Locomotive Engineers; four from the United
Transportation Union (two from the Missouri Pacific UTUTYC, one
from the Missouri Pacific UTU-E, and one form the former Texas
and Pacific UTU-E; one from the Boilermakers and Blacksmiths; two
from the Transportation-Communication Union; one from the
[PAGE 8]
International Brotherhood of Firemen and Oilers; and one form the
Brotherhood of Maintenance-of-Way Employees. Three of these
managers were manager-at-large representing officers and non-
union employees of Union Pacific and affiliated entities whose
employees were MPEHA members. (Stip. Fact 16; J-Ex. 11).
20. The MPEHA Board of Managers were ERISA fiduciaries
because (i) they exercised discretionary authority or control
respecting the management of MPEHA; (ii) they exercised authority
or control respecting the management or disposition of MPEHA
assets; and (iii) they had discretionary authority or
responsibility in the administration of MPEHA. (J-Ex. 11).
21. After the merger with TPEHA, Respondent Taggart was a
member of the MPEHA Board of Managers until July 20, 1988.
(Stip. Fact 16; J-Exs. 29-31).
22. After the merger with TPEHA, Respondent Taggart was an
ERISA fiduciary until he resigned from the MPEHA Board of
Managers on July 20, 1988. (J-Ex. 11).
23. On or about December 9, 1989, Respondent AMCI was
incorporated in the State of Missouri. (Stip. Fact 18; J-Ex.
12).
24. From December 9, 1987 through December 31, 1989,
Respondent Taggart was the president and a director of Respondent
AMCI. (Stip. Fact 19; J-Exs. 13-16).
25. From December 9, 1987 through December 31, 1989,
Respondent Taggart owned 91.2% of the stock of Respondent AMCI.
(Stip. Fact 20; J-Exs. 19-21).
26. Effective as of January 1, 1988, Respondent AMCI entered
into a consulting agreement with MPEHA. (Stip. Fact 21; J-Ex.
16).
27. Under the terms of the consulting agreement, Respondent
AMCI provided services to MPEHA, which was an entity consisting
of three ERISA covered plans. (J-Exs. 11, 16, 69-70).
28. The consulting agreement entered into between Respondent
AMCI and MPEHA was never authorized by the MPEHA Board of
Managers. (Hearing Tr. of December 8, 1994 at pp. 69-70).
29. At the time Respondent AMCI entered into the consulting
agreement with MPEHA, Respondent Taggart was aware that this
[PAGE 9]
agreement created a conflict of interest. (Stip. Fact 10; J-Exs.
26-27).
30. The MPEHA Board of Managers did authorize Grant Thornton
to perform the consulting services allegedly performed by
Respondent AMCI. (Tr. pp. 72-74; J-Exs. 32-35).
31. From December 9, 1987 through December 31, 1989,
Respondent Taggart owned 50% or more of the voting power of
Respondent AMCI, which was a corporation that provided services
to MPEHA, which was an entity consisting of three ERISA covered
plans. (Stip. Fact 20; J-Exs. 11, 19-21, 69-70).
32. At the time Respondent AMCI entered into the consulting
agreement with MPEHA, Respondent Taggart was a member of the
MPEHA Board of Managers. (Stip. Fact 22; J-Exs. 28-29).
33. At the time Respondent AMCI entered into the consulting
agreement with MPEHA, Respondent Taggart was an ERISA fiduciary.
(Stip. Facts 16, 26; J-Exs. 11 16, 29-31).
34. Despite the fact that Respondent Taggart was an ERISA
fiduciary, he participated in the decision to enter into the
consulting agreement with Respondent AMCI. (Tr. pp. 38-40).
35. Under the terms of the consulting agreement, MPEHA was
required to pay Respondent AMCI $100,000.00 per year for five
calendar years beginning with the 1988 calendar year. (Stip.
Fact 23; J-Ex. 16).
36. Under the terms of the consulting agreement, MPEHA was
required to reimburse Respondent AMCI for reasonable and
necessary travel and other expenses. (Stip. Fact 24; J-Ex. 16).
37. The amounts reimbursed to Respondent AMCI for reasonable
and necessary travel and other expenses were in addition to the
amounts that MPEHA was required to pay for consulting services.
(J-Ex. 16).
38. Under the terms of the consulting agreement, MPEHA was
only required to pay Respondent AMCI if it performed the services
set forth in the consulting agreement. (Tr. pp. 33-36; J-Ex.
16).
39. During 1988, MPEHA paid Respondent AMCI $100,000.00.
This was the only income received by Respondent AMCI during its
1988 taxable year. (Stip. Fact 25; J-Ex. 19; J-Ex. 66).
[PAGE 10]
40. During 1988, neither Respondent AMCI nor Respondent
Taggart performed any of the services set forth in the consulting
agreement. (Tr. pp. 21-28, 67, 71-72; J-Ex. 58).
41. During 1989, MPEHA paid Respondent AMCI $50,000.00.
This was the only income received by Respondent AMCI during its
1987 taxable year. (Stip. Fact 26; J-Ex. 20; J-Ex. 66).
42. During 1989, neither Respondent AMCI nor Respondent
Taggart performed any of the services set forth in the consulting
agreement. (Tr. pp. 21-28; 67, 71-72).
43. Some of the proceeds of the payments made to Respondent
AMCI by MPEHA were paid to Respondent Taggart. (Stip. Fact 27;
J-Exs. 19-20).
44. Except for the $100,000.00 payment made in 1988 and the
$50,000.00 payment made in 1989, MPEHA made no further payments
to Respondent AMCI under the consulting agreement. (Stip. Fact
28; J-Ex. 66).
45. MPEHA was a plan or an entity holding plan assets to
which Title I of ERISA applies. (J-Exs. 11, 69-70).
46. Respondent Taggart was a party-in-interest with respect
to MPEHA because he was a fiduciary of MPEHA and because he owned
50% or more of a corporation that was a party-in-interest with
respect to MPEHA.
47. Respondent AMCI was a party-in-interest with respect to
MPEHA because it provided services to MPEHA. (Stip. Fact 26; J-
Ex. 16).
CONCLUSIONS OF LAW
With some modifications, I am in agreement with the legal
conclusions reached by the Solicitor. I will address each issue
individually.
I
It must first be determined whether or not MPEHA was a plan
or an entity holding plan assets to which Title I of ERISA
applies. The fiduciary responsibility provisions of Title I of
ERISA apply, with certain exceptions not relevant here, to
employee benefit plans that are maintained by employers, employee
organizations, or both. ERISA § 4(a), 29 U.S.C. §
1003(a). ERISA defines an employer as any person acting directly
as an
[PAGE 11]
employer, or indirectly in the interest of an employer, in
relation to an employee benefit plan. ERISA § 3(5), 29
U.S.C. § 1002(5).
Union Pacific Railroad, the entity that employed many of the
MPEHA members, was an employer under this definition. ERISA
defines an employee organization as any labor union or any
organization of any kind in which employees participate and which
exists for the purpose, in whole or in part, of dealing with
employers concerning an employee benefit plan or other matters
incidental to employment relationships. ERISA §3(4), 29
U.S.C. § 1002(4). The various unions whose members were
covered by MPEHA were employee organizations under this
definition.
Only employee benefit plans are regulated by Title I of
ERISA. Employee benefit plans are defined to include employee
welfare benefit plans, employee pension benefit plans, or plans
that are both employee welfare benefit plans and employee pension
benefit plans. ERISA § 3(3), 29 U.S.C. §1002(3). An
employee welfare benefit plan is:
any plan, fund, or program which was
heretofore or is hereafter established or
maintained by an employer or by an employee
organization, or both, to the extent that
such plan, fund or program was established or
is maintained for the purpose of providing it
participants or their beneficiaries, through
the purchase of insurance or otherwise, (A)
medical, surgical, or hospital care or
benefits, ... ERISA § 3(1), 29 U.S.C.
§ 1002(1).
On April 25, 1990, Complainant PWBA issued Advisory Opinion
90-11A to MPEHA in which it concluded that MPEHA was not itself
an employee welfare benefit plan. Sometimes after the issuance
of Advisory Opinion 90-11A, MPEHA made changes in its structure.
Based principally upon these changes, Complainant modified its
position and issued Advisory Opinion 94-37A to MPEHA on November
10, 1994. In that advisory opinion, Complainant concluded that
as of January 1, 1993, MPEHA was an employee welfare benefit plan
covered by Title I of ERISA. Complainant reached this conclusion
by determining that (i) MPEHA was not established or maintained
by an employer because there was no indication that the
participant's employers controlled MPEHA or the benefit program
and (ii) based on various grounds, MPEHA was not maintained or
established by an employee organization.
[PAGE 12]
Although the advisory opinion concluded that MPEHA was not a
single plan, the advisory opinion implied that the employers and
unions that had adopted MPEHA had each established separate
employee welfare benefit plans for their employees or members.
Moreover, because MPEHA managed and controlled the assets of
these employee welfare benefit plans, MPEHA was a fiduciary with
respect to each of these plans. Although MPEHA was not a plan
during the period in issue, the prohibited transaction provisions
(including the section 502(i) penalty provisions) still apply.
During the years in issue, MPEHA was maintained for the
employees of Union Pacific railroad and the union organizations
whose members were employed by that railroad. In addition,
certain TRA and MRC union employees were also covered by MPEHA.
TRA served the railroads that used the switching facilities and
railyards in metropolitan St. Louis. MRC was a wholly-owned
subsidiary of Anheuser-Busch which provided shortline service and
rail support to connect Anheuser-Busch with the Union Pacific
railroad. Therefore, MPEHA managed and controlled the assets of
three employee welfare benefit plans that were covered by Title I
of ERISA: (i) one plan that was maintained by Union Pacific
railroad and union organization whose members were employed by
that railroad; (ii) a second plan that was maintained for the
union employees of TRA; and (iii) a third plan that was
maintained for the union employees of MRC.
Under the consulting agreement that is at issue in this
case, Taggart and AMCI provided services to what was in effect a
group of employee benefit plans.
II
It must next be determined whether or not the respondents
were parties-in-interest under the definition set forth in ERISA
§ 3(14). ERISA § 3(21)(A)(i), (iii); 29 U.S.C. §
1002(21)(A)(i), (iii), defines a fiduciary with respect to a plan
as a person who either (i) exercises any discretionary authority
or discretionary control respecting control respecting management
of the plan or exercises any authority or control respecting
management or disposition of is assets or (iii) has discretionary
authority or discretionary responsibility in the administration
of such plan. As the parties have stipulated, during the
relevant periods, MPEHA was administered by a Board of Managers
of which Taggart was a member. Consequently, both the Board of
Managers and Taggart were fiduciaries with respect to MPEHA.
ERISA §3(14)(A), 29 U.S.C. § 1002(14)(D) defines a
"party-in-interest" for the purpose of section 502(i) to include
a fiduciary. I find that because Respondent Taggart was a
fiduciary of MPEHA, he was also a party-in-interest.
ERISA § 3(14)(B); 29 U.S.C. § 1002(14)(B), defines
a party-in-interest, for the purposes of section 502(i) to
include a person providing services to such plan. Additionally,
ERISA § 3(14)(G), 29 U.S.C. § 1002(14)(G), defines a
party-in-interest for the purposes of section 502(i) to include a
corporation in which 50 percent or more of the voting stock is
owned by a fiduciary.
I find that AMCI is also a party-in-interest because it
provided services to MPEHA under the consulting agreement and
because AMCI was more than 50 percent owned by Respondent
Taggart.
Finally, Taggart resigned from the MPEHA Board of Managers
on July 20, 1988. Although he was no longer a fiduciary after
that date, Taggart was still a party-in-interest. ERISA §
3(14)(E), 29 U.S.C. § 1002(14)(E), defines a party-in-
interest for the purposes of section 502(i) to include a direct
or indirect owner of 50 percent or more of the voting stock of a
party-in-interest. I find that because AMCI provided services to
MPEHA under the consulting agreement, it was a party-in-interest.
I find that because AMCI provided services to MPEHA under the
consulting agreement, it was a party-in-interest under ERISA
§ 3(14)(B), 29 U.S.C. § 1002(14)(B). Additionally, I
find that because Taggart owned more than 50 percent of that
party-in-interest, Respondent Taggart was also a party-in-
interest.
Respondents have argued that Mertens v. Hewitt
Associates, 113 S.Ct. 2063, at 2067; and Reich v.
Continental Casualty Co., 17 E.B.C. 1099 (N.D. Ill. 1993),
aff'd 33 F.3d 754 (7th Cir. 1994) are applicable and that
the Court intended to prohibit causes of action against
nonfiduciaries under ERISA Section 502(A)(3). However, the
specific issue in those cases was whether or not ERISA provided
for penalties against nonfiduciaries for knowingly participating
in a fiduciary's breach of duty. Specifically, in
Continental the insurer could not be held liable for
allegedly arranging with a trustee of the ERISA plan for
extension of coverage to the trustee at a price disproportionate
to any possible benefit to the plan.
[PAGE 2]
Thus, these cases are distinguishable from the instant case.
III
It next must be determined whether or not the entering into
a consulting agreement between MPEHA and Taggart/AMCI was a
transaction prohibited by ERISA § 406 for which there was no
exemption. The parties have stipulated that on or about January
1, 1988, MPEHA entered into a consulting agreement with
Respondent AMCI. Pursuant to that agreement, MPEHA paid over
$150,000.00 in plan assets to Respondent AMCI. AMCI paid some
portion of those plan assets to Taggart. Moreover, at the time
the consulting agreement was entered into, Taggart was a
fiduciary of MPEHA who participated in the decision to enter into
the consulting agreement. Based on the foregoing, Taggart, in
his capacity as a fiduciary of MPEHA, caused a transfer of plan
assets to AMCI, a party-in-interest with respect to MPEHA.
ERISA § 406(a)(1)(D); 29 U.S.C. § 1106(a)(1)(D),
provides:
(a) Except as provided in section 408:
(1) A fiduciary with respect to a
plan shall not cause the plan to
engage in a transaction, if he
knows or should know that such
transaction constitutes a direct or
indirect - -
(D) transfer to, or use by or for
the benefit of a party-in-interest,
of any assets of the plan; . . .
Respondents have argued that certain assets can be
considered plan assets for general fiduciary duty purposes but
not for prohibited transaction purposes. John Hancock Mutual
Life Ins. Co. v. Harris Trust and Savings Bank, 14 S.Ct. 517
(1993), citing 970 F.2d 1138 at 1145.
In Hancock there was an existing defined ERISA plan.
At issue was whether certain assets were "plan assets" with
respect to general fiduciary responsibilities. In
Hancock, the Court held that a group annuity contract
between an insurer and trustee of the employer's retirement plan
did not qualify for ERISA's guaranteed benefit policy exclusion
to the extent that "free funds" in excess of those necessary to
provide guaranteed benefits were subject to the discretionary
management of the
[PAGE 3]
insurer, subjecting the insurer to ERISA fiduciary obligations
with regard to such funds.
In other words, Hancock dealt with whether assets
could be considered plan assets for general fiduciary duty
purposes but not for the prohibited transaction purpose of
guaranteed benefit policy exclusion. In fact, Interpretive
Bulletin 72-2 (29 C.F.R. § 2509.75-2) is specifically
concerned with whether a party-in-interest has engaged in a
prohibited transaction with an employee benefit plan where the
party in interest has engaged in a transaction with a corporation
or partnership in which the plan has invested. Thus,
Hancock is distinguishable from the case at hand.
Section 408 provides for a number of specific statutory
exemptions, none of which are applicable here, and for an
administrative process whereby the Secretary may grant additional
exemptions in response to specific requests. The Department of
Labor has published an application procedure for individual
prohibited transaction exemptions. ERISA Procedure No. 75-1.
Thus, five elements are necessary to establish a section
406(a)(1)(D) violation: a transaction (1) not otherwise exempted
by statute or by administrative exemption (2) involving a
transfer of plan assets (3) from a covered plan (4) to a party-
in-interest to the plan (5) knowingly caused by a fiduciary to
the plan.
Complainant has established each of these elements:
(1) The payment of over $150,000.00 in plan assets to AMCI
is not covered by any of the statutory exemptions contained in
ERISA § 408, 29 U.S.C. § 1108. No administrative
exemption regarding this transaction has been granted by the
Secretary nor did any of the parties make application to the
Department for an exemption.
(2) The funds paid to AMCI are clearly plan assets,
resulting either from employer contributions or employee
contributions to MPEHA.
(3) MPEHA was an entity consisting of three employee
benefit plans and an entity holding plan assets;
(4) AMCI was a party-in-interest to MPEHA; and
(5) Taggart, a fiduciary of MPEHA, knowingly caused the
transfer of over $150,000.00 in plan assets to party-in-interest
[PAGE 4]
AMCI.
The actions of Taggart in causing MPEHA to enter into a
consulting agreement with a party-in-interest violated ERISA, 29
U.S.C. § 1106, for which there was no exemption. By
engaging in a prohibited transaction for which there is no
exception, AMCI is liable for the penalty imposed by ERISA
§502(i), 29 U.S.C. § 1132(i). By engaging in a
prohibited transaction for which there is no exception, Taggart
is liable for the penalty imposed by ERISA § 502(i), 29
U.S.C. § 1132(i). Consequently, all the elements of a
primafacie prohibited transaction described in
ERISA § 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D) are
present here.
Furthermore, it is noted that PWBA also informed the
respondents that entering into the consulting agreement violated
ERISA § 406(b)(1) and (2), 29 U.S.C. § 1106(b)(1) and
(2), which provides:
(b) A fiduciary with respect to a plan shall not - -
(1) deal with the assets of the plan in
his own interest or for his own
account,
(2) in his individual or any other
capacity act in any transaction
involving the plan on behalf of a
party (or represent a party) whose
interests are adverse to the
interests of the plan or the
interests of its participants or
beneficiaries, . . .
Sections 406(b)(1) and (2) are also perse or
"blanket" prohibitions against the type of transaction described
therein. Cutaiar v. Marshall, 590 F.2d 523, 530 (3rd Cir.
1979); Marshall v. Kelly, 465 F. Supp. at 354.
Taggart owned 91.2 percent of Respondent, AMCI. By causing
this transaction, Respondent Taggart effectively acted on his
behalf as well as on behalf of the MPEHA Board of Managers.
These conflicting loyalties meant that he could not exercise his
best judgment solely in the interest of MPEHA. Cutaiar,
590 F.2d at 530; Davidson v. Cook, 567 F. Supp. 225, 237
(E.D. Va. 1983). Moreover, despite the fact that $150,000.00 of
plan assets were transferred to them, AMCI and Taggart performed
none of the consulting services specified in the contract.
Section 406 and
[PAGE 5]
the section 502(i) penalty were enacted by Congress specifically
to thwart this type of transaction.
ORDER
It is hereby ORDERED that Respondents, Taggart and AMCI each
pay to the U.S. Department of Labor civil penalties in the amount
of $42,500.00 for violations of the Employee Retirement Income
Security Act of 1924. Respondents are directed to pay the above
stated penalties within thirty (30) days from the date of service
of this decision. Amounts not paid by that time shall be subject
to penalties and interest provided for by the Act and
Regulations.
_____________________________
RICHARD D. MILLS
Administrative Law Judge
NOTICE OF APPEAL RIGHTS
Pursuant to 29 C.F.R. Section 2570.69 a notice of appeal
must be filed with the Secretary of Labor within twenty (20) days
of the date of service of this decision or the decision of this
Court shall become the final agency action within the meaning of
5 U.S.C Section 704.
ERISA §3(14)(A), 29 U.S.C. § 1002(14)(D) defines a
"party-in-interest" for the purpose of section 502(i) to include
a fiduciary. I find that because Respondent Taggart was a
fiduciary of MPEHA, he was also a party-in-interest.
ERISA § 3(14)(B); 29 U.S.C. § 1002(14)(B), defines
a party-in-interest, for the purposes of section 502(i) to
include a person providing services to such plan. Additionally,
ERISA § 3(14)(G), 29 U.S.C. § 1002(14)(G), defines a
party-in-interest for the purposes of section 502(i) to include a
corporation in which 50 percent or more of the voting stock is
owned by a fiduciary.
I find that AMCI is also a party-in-interest because it
provided services to MPEHA under the consulting agreement and
because AMCI was more than 50 percent owned by Respondent
Taggart.
Finally, Taggart resigned from the MPEHA Board of Managers
on July 20, 1988. Although he was no longer a fiduciary after
that date, Taggart was still a party-in-interest. ERISA §
3(14)(E), 29 U.S.C. § 1002(14)(E), defines a party-in-
interest
[PAGE 6]
for the purposes of section 502(i) to include a direct or
indirect owner of 50 percent or more of the voting stock of a
party-in-interest. I find that because AMCI provided services to
MPEHA under the consulting agreement, it was a party-in-interest.
I find that because AMCI provided services to MPEHA under the
consulting agreement, it was a party-in-interest under ERISA
§ 3(14)(B), 29 U.S.C. § 1002(14)(B). Additionally, I
find that because Taggart owned more than 50 percent of that
party-in-interest, Respondent Taggart was also a party-in-
interest.
Respondents have argued that Mertens v. Hewitt
Associates, 113 S.Ct. 2063, at 2067; and Reich v.
Continental Casualty Co., 17 E.B.C. 1099 (N.D. Ill. 1993),
aff'd 33 F.3d 754 (7th Cir. 1994) are applicable and that
the Court intended to prohibit causes of action against
nonfiduciaries under ERISA Section 502(A)(3). However, the
specific issue in those cases was whether or not ERISA provided
for penalties against nonfiduciaries for knowingly participating
in a fiduciary's breach of duty. Specifically, in
Continental the insurer could not be held liable for
allegedly arranging with a trustee of the ERISA plan for
extension of coverage to the trustee at a price disproportionate
to any possible benefit to the plan.
Thus, these cases are distinguishable from the instant case.
III
It next must be determined whether or not the entering into
a consulting agreement between MPEHA and Taggart/AMCI was a
transaction prohibited by ERISA § 406 for which there was no
exemption. The parties have stipulated that on or about January
1, 1988, MPEHA entered into a consulting agreement with
Respondent AMCI. Pursuant to that agreement, MPEHA paid over
$150,000.00 in plan assets to Respondent AMCI. AMCI paid some
portion of those plan assets to Taggart. Moreover, at the time
the consulting agreement was entered into, Taggart was a
fiduciary of MPEHA who participated in the decision to enter into
the consulting agreement. Based on the foregoing, Taggart, in
his capacity as a fiduciary of MPEHA, caused a transfer of plan
assets to AMCI, a party-in-interest with respect to MPEHA.
ERISA § 406(a)(1)(D); 29 U.S.C. § 1106(a)(1)(D),
provides:
(a) Except as provided in section 408:
(1) A fiduciary with respect to a
plan shall not cause the plan to
engage in a transaction, if he
[PAGE 7]
knows or should know that such transaction constitutes a direct
or indirect - -
(D) transfer to, or use by or for
the benefit of a party-in-interest,
of any assets of the plan; . . .
Respondents have argued that certain assets can be
considered plan assets for general fiduciary duty purposes but
not for prohibited transaction purposes. John Hancock Mutual
Life Ins. Co. v. Harris Trust and Savings Bank, 14 S.Ct. 517
(1993), citing 970 F.2d 1138 at 1145.
In Hancock there was an existing defined ERISA plan.
At issue was whether certain assets were "plan assets" with
respect to general fiduciary responsibilities. In
Hancock, the Court held that a group annuity contract
between an insurer and trustee of the employer's retirement plan
did not qualify for ERISA's guaranteed benefit policy exclusion
to the extent that "free funds" in excess of those necessary to
provide guaranteed benefits were subject to the discretionary
management of the insurer, subjecting the insurer to ERISA
fiduciary obligations with regard to such funds.
In other words, Hancock dealt with whether assets
could be considered plan assets for general fiduciary duty
purposes but not for the prohibited transaction purpose of
guaranteed benefit policy exclusion. In fact, Interpretive
Bulletin 72-2 (29 C.F.R. § 2509.75-2) is specifically
concerned with whether a party-in-interest has engaged in a
prohibited transaction with an employee benefit plan where the
party in interest has engaged in a transaction with a corporation
or partnership in which the plan has invested. Thus,
Hancock is distinguishable from the case at hand.
Section 408 provides for a number of specific statutory
exemptions, none of which are applicable here, and for an
administrative process whereby the Secretary may grant additional
exemptions in response to specific requests. The Department of
Labor has published an application procedure for individual
prohibited transaction exemptions. ERISA Procedure No. 75-1.
Thus, five elements are necessary to establish a section
406(a)(1)(D) violation: a transaction (1) not otherwise exempted
by statute or by administrative exemption (2) involving a
transfer of plan assets (3) from a covered plan (4) to a party-
in-interest to the plan (5) knowingly caused by a fiduciary to
the plan.
[PAGE 8]
Complainant has established each of these elements:
(1) The payment of over $150,000.00 in plan assets to AMCI
is not covered by any of the statutory exemptions contained in
ERISA § 408, 29 U.S.C. § 1108. No administrative
exemption regarding this transaction has been granted by the
Secretary nor did any of the parties make application to the
Department for an exemption.
(2) The funds paid to AMCI are clearly plan assets,
resulting either from employer contributions or employee
contributions to MPEHA.
(3) MPEHA was an entity consisting of three employee
benefit plans and an entity holding plan assets;
(4) AMCI was a party-in-interest to MPEHA; and
(5) Taggart, a fiduciary of MPEHA, knowingly caused the
transfer of over $150,000.00 in plan assets to party-in-interest
AMCI.
The actions of Taggart in causing MPEHA to enter into a
consulting agreement with a party-in-interest violated ERISA, 29
U.S.C. § 1106, for which there was no exemption. By
engaging in a prohibited transaction for which there is no
exception, AMCI is liable for the penalty imposed by ERISA
§502(i), 29 U.S.C. § 1132(i). By engaging in a
prohibited transaction for which there is no exception, Taggart
is liable for the penalty imposed by ERISA § 502(i), 29
U.S.C. § 1132(i). Consequently, all the elements of a
primafacie prohibited transaction described in
ERISA § 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D) are
present here.
Furthermore, it is noted that PWBA also informed the
respondents that entering into the consulting agreement violated
ERISA § 406(b)(1) and (2), 29 U.S.C. § 1106(b)(1) and
(2), which provides:
(b) A fiduciary with respect to a plan shall not - -
(1) deal with the assets of the plan in
his own interest or for his own
account,
(2) in his individual or any other
capacity act in any transaction
involving the plan on behalf of a
party (or represent a party) whose
interests are adverse to the
interests of the plan or the
interests of its participants or
beneficiaries, . . .
Sections 406(b)(1) and (2) are also perse or
"blanket" prohibitions against the type of transaction described
therein. Cutaiar v. Marshall, 590 F.2d 523, 530 (3rd Cir.
1979); Marshall v. Kelly, 465 F. Supp. at 354.
Taggart owned 91.2 percent of Respondent, AMCI. By causing
this transaction, Respondent Taggart effectively acted on his
behalf as well as on behalf of the MPEHA Board of Managers.
These conflicting loyalties meant that he could not exercise his
best judgment solely in the interest of MPEHA. Cutaiar,
590 F.2d at 530; Davidson v. Cook, 567 F. Supp. 225, 237
(E.D. Va. 1983). Moreover, despite the fact that $150,000.00 of
plan assets were transferred to them, AMCI and Taggart performed
none of the consulting services specified in the contract.
Section 406 and the section 502(i) penalty were enacted by
Congress specifically to thwart this type of transaction.
ORDER
It is hereby ORDERED that Respondents, Taggart and AMCI each
pay to the U.S. Department of Labor civil penalties in the amount
of $42,500.00 for violations of the Employee Retirement Income
Security Act of 1924. Respondents are directed to pay the above
stated penalties within thirty (30) days from the date of service
of this decision. Amounts not paid by that time shall be subject
to penalties and interest provided for by the Act and
Regulations.
_____________________________
RICHARD D. MILLS
Administrative Law Judge
NOTICE OF APPEAL RIGHTS
Pursuant to 29 C.F.R. Section 2570.69 a notice of appeal
must be filed with the Secretary of Labor within twenty (20) days
of the date of service of this decision or the decision of this
Court shall become the final agency action within the meaning of
5 U.S.C Section 704.
