USDOL v. Compgraphix, Inc., 1999-RIS-53 (ALJ Oct. 14, 1999)

U.S. Department of Labor

Office of Administrative Law Judges Heritage Plaza Bldg. - Suite 530 111 Veterans Memorial Blvd Metairie, LA 70005 (504) 589-6201 (504) 589-6268 (FAX)

DATE: October 14, 1999

CASE NO.: 1999-RIS-53

In the Matter of

U.S. DEPARTMENT OF LABOR,
PENSION AND WELFARE BENEFITS ADMINISTRATION,
    Complainant

    v.

COMPGRAPHIX, INC.
    Respondent.

   This case arises under §502(c)(2), 29 U.S.C. §1132(c)(2), of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§1001, et seq. Complainant, U.S. Department of Labor, Pension and Welfare Benefits Administration, (PWBA), assessed a $50,000 penalty on Respondent, Comgraphix, Inc. (Comgraphix) as plan administrator of the Comgraphix, Inc., Employee Stock Ownership Plan 001 (Plan 001) for reporting deficiencies in connection with Plan 001's 1996 plan year report. The alleged deficiency is the failure to include the report of an independent qualified public accountant (IQPA) under ERISA §103(a)(3)(A), 29 U.S.C.§1023(a)(3)(A), and the regulations at 29 C.F.R.

   PWBA has filed a Motion for Summary Decision with attached exhibits, a Statement Of Facts Not In Dispute and a supporting memorandum. Comgraphix has filed a Motion to Dismiss. On August 23, 1999, I held a telephone conference with counsel for both parties. Both counsel desired to submit a response to the pending motions and counsel for Comgraphix desired to submit documents in support of its motion. I indicated that I would treat Comgraphix's Motion to Dismiss as a Motion for Summary Decision. Because of the need for additional time to file their responses to the pending motions, the parties agreed that the hearing scheduled for August 31, 1999, should be canceled. The parties' responses and additional documents have been received.

   With its Motion for Summary Decision, PWBA filed a Statement Of Facts Not In Dispute. Comgraphix has not challenged these facts. Comgraphix, in its Motion and in its Response, argues that Comgraphix has demonstrated reasonable cause for its failure to file a 1996 IQPA report for Plan 001. Comgraphix notes that the auditor's fee is a plan expense payable out of plan assets and Comgraphix's exhibits demonstrate that the Plan had no assets with which to pay for the audit, making it impossible for Comgraphix to file the 1996 IQPA report for Plan 001. Comgraphix submits that this impossibility is a reasonable cause.

   On August 16, 1999, the Court received Comgraphix's Pre-Hearing Submission which included a summary of the testimony of proposed witnesses and the exhibits that Comgraphix intended to introduce at the hearing. It is noted that the exhibits listed in the Pre-Hearing Submission are the same exhibits that are part of Comgraphix's Motion for Summary Decision. It is also noted that these exhibits and the Statement Of Facts Not In Dispute encompass the expected testimony of witnesses as summarized in the Pre- Hearing Submission. Accordingly, I find no issue of a material fact has been raised and that summary decision is appropriate on the issue of whether Comgraphix has demonstrated reasonable cause for its failure to file the 1996 IQPA report for Plan 001.

   In its Response to Respondent's Motion to Dismiss, PWBA, for the first time, asks the Court to pierce the corporate veil and impose liability on Comgraphix's officers and directors. As discussed infra, summary decision is not appropriate on this issue at this time.

   Based on the record, I make the following Findings of Fact and Conclusions of Law under 29 C.F.R. §2570.67.

   1. Comgraphix is the plan administrator of Plan 001. (CX. 2, 4, 6).

   2. Under ERISA, the plan administrator of an employee benefit plan is required to file an annual report with the federal government within 120 days after the end of the plan year.

   3. Plan 001, as of the 1996 plan year, had in excess of 100 participants and held assets in trust. (CX. 2).

   4. Under ERISA, a plan with more than 100 participants that holds assets in trust is required to have an annual audit performed on the plan and to attach the report of an independent qualified public accountant (IQPA) to the plan's annual report. (CX. 1, 2).

   5. Comgraphix filed the 1996 Form 5500 annual report for Plan 001 in or about March 1997 without attaching an IQPA report, although item 26(a) of the 1996 Form 5500 was marked to indicate that Plan 001 was not exempt from the audit requirement. (CX.2).

   6. PWBA issued a "ten day" notice letter to Comgraphix on or about October 21, 1998, requesting submission of the missing 1996 IQPA report for Plan 001. (CX. 3).

   7. Comgraphix responded by letter dated November 10, 1998, stating that Plan 001 was terminated, the business suspended its operations and there was no money to pay for an audit. (CX.4).

   8. PWBA issued a Notice of Rejection (NOR) to Comgraphix on or about November 19, 1998, which reiterated the request for the 1996 IQPA report and advised Comgraphix that it had 45 days within which to comply without incurring a penalty. (CX. 5).

   9. Comgraphix responded by letter of November 27, 1998, from Gregory L. Pfirman, stating that Plan 001 was terminated, all assets were distributed, Comgraphix sold substantially all of its assets and is only a shell corporation, and that Mr. Pfirman resigned as plan administrator. The letter further stated that Mr. Pfirman was contacting the Lauterbach, Borschow & Co. Accounting firm to determine whether an audit was performed and, if not, whether one could be performed, without resolving the issue of how to pay for the audit. (CX. 6).

   10. By letter dated December 14, 1998, the attorney for Comgraphix, Robert Zaboroski, stated that Mr. Pfirman's reference in the November 27, 1998 letter to his resignation as plan administrator was the result of his confusion. Mr. Pfirman was never the plan administrator and Comgraphix was at all times the plan administrator. (CX. 7).

   11. PWBA issued a Notice of Intent to Assess a Penalty (NOI) on or about February 5, 1999, again requesting submission of the 1996 IQPA report for Plan 001 and proposing a penalty against Comgraphix for its failure to file the 1996 IQPA report. The NOI further advised Comgraphix that it had thirty days within which to submit a statement of reasonable cause --which requires setting forth the facts alleged as reasonable cause in writing and under penalty of perjury--for the failure to file the 1996 IQPA report or why the penalties, as calculated, should not be assessed. (CX. 8).

   12. Comgraphix responded by letter dated March 2, 1999, from Gregory L. Pfirman, stating that subsequent to a January 1997 valuation, Comgraphix stock became worthless and the company discontinued operations in June 1997, entering into negotiations with Racom Information Technologies (Racom) for the sale of its assets to Racom. The letter further stated that, at the time, Comgraphix had engaged the Lauterbach accounting firm to perform the 1996 audit, but shortly thereafter, Ben Marmande, CFO of Racom, told Comgraphix representatives that he had consulted with an ERISA attorney and had been advised that, under the circumstances, the annual report could be filed without an audit report. Accordingly, Comgraphix halted the 1996 audit. (CX. 9).

   13. PWBA issued a Notice of Determination on Statement of Reasonable Cause (NOD) to Comgraphix on or about March 12, 1999, rejecting its reasons for its failure to file a 1996 IQPA report for Plan 001 and assessing a $50,000 penalty against Comgraphix for the failure to file the 1996 IQPA report. (CX. 10).

   14. The 1996 Form 5500 annual report was signed by Gregory L. Pfirman, the president of Comgraphix. (CX. 2, 13).

   15. At all relevant times, the financial condition of Comgraphix was extremely volatile and Comgraphix was contemplating filing for bankruptcy. (RX. A-F; CX. 9).

   16. The appraised value of the forty-four thousand sixty-nine issued and outstanding shares of common stock of Comgraphix on September 30, 1996 was .00 per share or $44,069.00. (RX. A).

   17. Thirty-three thousand one hundred sixty-one shares of the common stock of Comgraphix was held by Plan 001. As of September 30, 1996, the appraised value of the common stock of Comgraphix held by Plan 001 was $33,161.00. (RX. A).

   18. Because of the deteriorating financial condition of Comgraphix and the settlement of a lawsuit filed by the former president of Comgraphix, Comgraphix was deemed to be insolvent and its common equity determined to have no positive value as of December 31, 1996 and as of June 30, 1997. (RX. B).

   19. On or about June 30, 1997, Comgraphix discontinued operations and sold its remaining assets to Racom. The purchase price was $4,903,818.00 Of this, $3,484,856.00 was payable at closing into an escrow account to be dispersed to certain creditors. Racom also accepted certain obligations totally approximately $343,000.00 and the obligation to provide services to all uncompleted contracts (estimated at ,075,617.00). (RX. C)

   20. As additional consideration for the sale, Racom was to contribute all the capital necessary for the formation of Racom SW. 20,000 shares (twenty percent of the ownership) of Racom SW was to be distributed to a to-be-defined group of Comgraphix employees. (RX. C)

   21. Prior to the sale, Comgraphix had engaged Lauterbach, Borschow & Co. to audit Plan 001. (CX. 9).

   22. Mr. Ben Marmande, chief financial officer of Racom, consulted an ERISA attorney and was advised that, under the circumstances, the audit was not required. (CX. 9).

   23. Based on this information and instruction from Mr. Marmande, Comgraphix representatives stopped the audit and paid Lauterbach their fees incurred to date. (CX. 9).

   24. The proceeds of the sale to Racom were paid to secured creditors who received $.70 for each dollar owed. (RX. F).

   Summary Decision may be granted where it is shown that the non-moving party cannot prove an essential element of his claim, so that there is no genuine issue of fact to be determined at trial. A genuine issue of material fact is presented when the record, taken as a whole, could lead a rational trier-of-fact to find for the non-moving party. Celotex Corp. v. Catrett, 477 U.S. 317 (1986); 29 C.F.R. §18.41.

   The moving party has the burden of production to prove that the non-moving party cannot make a showing sufficient to establish an essential element of his case. Once the moving party has met its burden of production, the non-moving party must show by evidence beyond the pleadings themselves that there is a genuine issue of material fact. Celotex at 324.

   The Employee Retirement Income Security Act of 1974 (ERISA), as amended 29 U.S.C. §§1001, et seq., is a comprehensive statute adopted by Congress after careful study of employee benefit plans. Alessi v Raybestos-Manhattan, Inc., 451 U.S. 504 (1981). Its provisions are remedial in nature and designed to carry out the important purpose of protecting these plans. Among the means employed to accomplish this purpose are the extensive report and disclosure provisions.

   Under §104(a)(1)(A) of ERISA, the administrator of an employee benefit plan is required to file an annual report within 210 days of the close of the plan year. The form and content of the annual report are set forth in ERISA §103, 29 U.S.C. §1023. Paragraph (a)(3) specifies the requirement for an annual audit of an employee benefit plan and the report or opinion thereon to be performed by an IQPA.

   ERISA also provides for the imposition of penalties against a plan administrator for failure or refusal to file a required annual report. ERISA §502(c)(2) provides:

(2) The Secretary may access a civil penalty against any plan administrator of up to $1000 a day from the date of such plan administrator's failure or refusal to file the annual report required to be filed with the Secretary under section 101(b)(4). For purposes of this paragraph, an annual report that has been rejected under section 104(a)(4) for failure to provide material information shall not be treated as having been filed with the Secretary.

   ERISA 505, 29 U.S.C. §1135, provides that the Secretary of Labor may prescribe such regulations as she finds necessary or appropriate to carry out the provisions of ERISA. Pursuant to this authority, the Secretary promulgated regulation 29 C.F.R. §2560.502c-2, which sets forth the administration and procedures governing assessment of civil penalties under §502(c)(2). Paragraph (d) provides that all or part of the penalty to be assessed may be waived upon a showing by the plan administrator that there was reasonable cause for the failure to file a proper annual report.

   Comgraphix has presented no argument that the Secretary has failed to follow the procedures outline in 29 C.F.R. §2560.502c-2. I find that PWBA has observed the procedures of the regulation and Comgraphix has been afforded all the procedural opportunities available under the statute and regulation to cure the filing deficiencies without incurring a penalty.

   For the reason discussed in more detail infra, I further find that the IQPA report is "material information" as that phrase is used in §104(a)(4). Accordingly, PWBA properly treated the failure to file an IQPA report as a failure to file a proper annual report.

   In promulgating the regulations underlying ERISA, the Secretary declared that "the Department anticipates that [ERISA section] 502(c) penalties will be waived to the extent that reasonable cause is demonstrated by the plan administrator." See Final Regulation Relating to Civil Penalties Under ERISA Section 502(c)(2), 54 Fed. Reg. 26,892 (1989). The regulations for considering reasonable cause do not define the specific circumstances under which reasonable cause would exist and are sufficiently flexible to ensure that appropriate consideration is given to good faith and diligent efforts by the administrator to comply with the annual reporting requirement. Id. Thus, the amount assessed under ERISA section 502(c)(2) is determined taking into consideration the degree of willfulness of the failure to file the annual report. 29 C.F.R. §2560.502c-2(b)(1).

Has Comgraphix demonstrated reasonable cause for its failure to file a 1996 IQPA report for Plan 001?

    Pursuant to the February 5, 1999 NOI, PWBA proposed a $50,000 penalty against Comgraphix for its failure to file the 1996 IQPA report and advised Comgraphix that it had thirty days within which to submit a statement of reasonable cause. Comgraphix responded that subsequent to a January 1997 valuation, Comgraphix stock became worthless and the company discontinued operations in June 1997, entering into negotiations with Racom Information Technologies (Racom) for the sale of its assets to Racom. The letter further stated that, at the time, Comgraphix had engaged the Lauterbach accounting firm to perform the 1996 audit, but shortly thereafter, Ben Marmande, CFO of Racom, told Comgraphix representatives that he had consulted with an ERISA attorney and had been advised that, under the circumstances, the annual report could be filed without an IQPA report. Accordingly, Comgraphix halted the 1996 audit.

    Comgraphix reasserts in its Motion for Summary Decision and Response that it has demonstrated reasonable cause for its failure to file a 1996 IQPA report for Plan 001. Comgraphix asserts Plan 001 had no assets to pay for an audit, making it impossible for Comgraphix to file the 1996 IQPA report.

Incorrect Legal Advice

    Although it appears that Comgraphix is no longer relying on the legal advice passed through Ben Marmande as reasonable cause for its failure to file the IQPA report, in an abundance of caution, I will briefly discuss this issue. In its statement of reasonable cause, Comgraphix states its representatives were told by Ben Marmande, CFO of Racom, that he had consulted with an ERISA attorney and had been advised that, under the circumstances, the annual report could be filed without an audit report. I find that Comgraphix is not entitled to relief on the basis of this incorrect legal advice for three reasons.

    First, the advice was at best secondhand. Comgraphix does not assert that it sought legal advice or that the advice was directed to Comgraphix. While it is unclear whether Racom paid for this legal advice, it is certainly implied that Comgraphix did not pay for this legal advice. Given the fact that Mr. Marmande worked for the potential purchaser of the assets of Comgraphix (who might be interested in limiting expenses) I find that Comgraphix did not act reasonably in relying on this "free legal advice."

    Second, even had the advice been rendered directly to Comgraphix, "a client is not generally excused from the consequences of his attorney's nonfeasance or negligence." Sasso v. M.Fine Lumber Co., Inc., 144 F.R.D. 185 (E.D. N.Y. 1992); Alton OB-GYN, Ltd. v. U.S., 789 F.2d 515 (7th Cir. 1986).

    Third (and which I find most significant), Comgraphix was advised by PWBA that the IQPA report was required. To date, despite being advised that the IQPA report was required, Comgraphix has not filed the IQPA report nor is there any evidence that Comgraphix has made any attempt to comply. Considering the extraordinary length of time that has transpired since PWBA advised Comgraphix that the IQPA report was required, I can give little weight to any argument that any part of the penalty should be waived because Comgraphix relied on incorrect legal advice.

Impossibility As Reasonable Cause

    In its statement of reasonable cause, in its Motion for Summary Decision and in its Response to the PWBA's Motion for Summary Decision, Comgraphix's main defense is that Plan 001 had no assets to pay for an audit, making it impossible for Comgraphix to file the 1996 IQPA report. This defense fails for both legal and factual reasons.

    On the Form 5500 filed by Comgraphix for the year ending 1996, dated March 14, 1997, Plan 001's assets are listed at $47,014.00. Of these assets, $13,853.00 was interest-bearing cash. The remaining assets ($33,161.00) were employer securities. (CX. 2, p.5). It is further noted that the business valuation analysis indicates that the plan participants had a put option available. (RX. A, pp. 36, 37). The undisputed evidence shows, and I find, that at the time Comgraphix, as plan administrator, was required to file the annual report for Plan 001 and chose not to file the IQPA report for Plan 001, there were assets available to pay for the audit.

    The fact that Plan 001 had assets available at the end of 1996 but soon thereafter did not have sufficient assets to pay for an audit underscores the importance of ERISA's reporting and

disclosure provisions. In Vartanian v. Monsanto Company, 131 F.3d 264 (1st Cir. 1997), the Court of Appeals stated that:

It has been said that employers who offer benefit plans wear "two hats," because of the "distinction between an employer's prerogative to initiate discretionary policy decisions such as creating, amending, or terminating a particular plan as compared to its fiduciary responsibilities to administer an existing plan for the benefit and interests of its participant-employees." Drennan v. General Motors Corp., 977 F.2d 246, 251 (6th Cir. 1992) . . . "When acting on behalf of the pension fund, there is no doubt that [the employer] must act solely to benefit participants and beneficiaries . . . " [citing Sutton v. Weirton Steel Div. Of Nat'l Steel Corp., 567 F. Supp. 1184, 1201 (N.D.W. Va.), aff'd 724 F.2d 406 (4th Cir. 1983)].

    Without an independent audit, it is impossible to ascertain whether there were fiduciary breeches in the administration of Plan 001. Questions remain such as what became of the cash assets in Plan 001; why was the put option not exercised; what "to-be-defined group of Comgraphix employees" benefitted from the distribution of 20 percent of the ownership of Racom SW. While some of the questions may be more properly addressed in a termination report, they highlight the vital importance of ERISA's reporting and disclosure provisions to protect employee benefit plans. The fact that both Plan 001 and Comgraphix may now be insolvent does not relieve Comgraphix of its duties as plan administrator and should not influence the decision whether the penalty should be assessed for the reporting violation.

    In conclusion, I find that Comgraphix's failure to file the required IQPA report for Plan 001's 1996 annual report is a failure to provide material information. Considering the fact that the IQPA report has never been filed, I further find that Comgraphix has not shown reasonable cause to justify setting aside or modifying the penalty.

    Since there are no material factual issues, PWBA's Motion for Summary Decision is granted. Accordingly, the assessment of the $50,000 penalty against Comgraphix is upheld.

Should the Corporate Veil Be Pierced and Liability Imposed on Comgraphix's Officers and Directors

    PWBA asks the Court to pierce the corporate veil and impose liability on Comgraphix's officers and directors. PWBA argues that to the extent the officers and directors exercised their authority and discretion in supporting or affirming the plan administrator's failure to have the 1996 audit conducted, the members of the company's board of directors also will have personal liability on behalf of Comgraphix as plan sponsor and plan administrator.

    While PWBA might be correct in their statement of the law regarding the liability of corporate officers and directors, it has presented no facts which would warrant piercing the corporate veil as to any corporate officer or director, with the possible exception of Gregory L. Pfirman. In fact, with the exception of Mr. Pfirman, the Court is unaware of the identity of the corporate officers and directors upon whom PWBA wishes to impose liability.

    The Court also notes that there is no indication in the record that any corporate officer or director (with the exception of Mr. Pfirman) was made aware that PWBA was seeking to establish joint, several, personal liability against him. In my opinion, prior to imposition of such liability, each such corporate officer or director is entitled to notice and the right to be heard. On October 6, 1999, a telephone conference was held to address this concern. I informed the parties of my concern and advised PWBA that if it wished to pursue liability on the part of any officer or director (other than Mr. Pfirman) that I would issue an order to show cause to such officer or director. PWBA indicated that at this time it was not seeking to impose liability of any officer or director other than Mr. Pfirman. Accordingly, except as to Mr. Pfirman, this issue is moot and will not be further addressed by the Court.

    As to Mr. Pfirman, I note that it is in PWBA's Response that it first specifically seeks to impose liability upon Mr. Pfirman. While PWBA argues in its Response that Mr. Pfirman "runs the company both in its commercial function and in its plan administration function" this argument is not necessarily supported by the evidence presented with the Motions. I find that summary decision is not appropriate at this time regarding the imposition of liability upon Mr. Pfirman.¹

    In conclusion, I find the PWBA's assessment of a $50,000.00 penalty against Comgraphix was reasonable and was not an abuse of discretion.

    1. Respondent, Comgraphix, Inc., is hereby ORDERED to conduct and pay for an acceptable 1996 audit of Comgraphix, Inc., Employee Stock Ownership Plan 001.

    2. Respondent, Comgraphix, Inc., is ORDERED to pay to the United States Department of Labor a civil penalty in the total amount of $50,000.00 within thirty (30) days from the date of service of this Decision and Order for its violations of ERISA, as set forth hereinabove.

    3. Any portion of this penalty amount that is not paid by that date shall be subject to such penalties and interest as ERISA and its implementing regulations have provided.

    So ORDERED.

      LARRY W. PRICE
      Administrative Law Judge

APPEALS:

The decision of the administrative law judge shall become final agency action unless any dissatisfied party files an appeal with the Secretary within 20 days after issuance of the decision of the administrative law judge. The final decision of the Secretary constitutes final action within the meaning of 5 U.S.C. 704.

¹ At the telephone conference held on October 6, 1999, PWBA suggested to the Court that it might be appropriate to bifurcate the proceeding to first address the issue of liability of Comgraphix. Then, if Comgraphix is found liable and Comgraphix fails to comply with the decision of the Court, further proceedings could be brought to pierce the corporate veil. I agree and, accordingly, I have advised Comgraphix of its appellate rights.