Four businesses ensnared in a tax-avoidance scheme purporting to administer employee benefit plans will get a second chance to pursue state-law and racketeering claims against the defendants.

The U.S. Court of Appeals for the Third Circuit held on Nov. 8 in National Security Systems Inc. v. Iola, 10-4154, that their state law claims aren’t pre-empted by the Employee Retirement Income Security Act.

The panel also said a financial planner who brokered the deals may be sued for equitable remedies, even though he was not a fiduciary, and upended a trial judge’s preclusion of racketeering claims.

Employers Participating Insurance Cooperative (EPIC) purported to be a multiple-employer benefit plan and trust but actually amounted to a tax-avoidance scheme.

EPIC’s founder, Ronn Redfearn, formed Tri-Core Inc. to administer the plans, and in 1989 hired James Barrett to market EPIC.

Barrett introduced EPIC to closely held corporations with few employees, including Universal Mailing Service Inc., Lima Plastics Inc., Finderne Management Co. Inc. and Alloy Cast Products Inc., who ultimately signed contracts.

He touted the supposed tax benefits, telling owners that contributions were fully deductible, and in some instances would generate retirement income and could allow participants to take tax-free loans.

Tri-Core received commissions from insurers whose policies were purchased through the businesses’ participation in EPIC.

Barrett allegedly kept the businesses in the dark about how much Tri-Core was earning in commissions, the lack of a guarantee for a source of retirement income and other aspects of the plan. He was not a fiduciary of the plans nor was he authorized to manage plan assets.

Between 1990 and 1997, the plaintiffs each made total contributions of $336,592 to $755,819, which they deducted on their federal income tax returns as business expenses.

The Internal Revenue Service initially warned the companies in 1995 that the deductions would be disallowed because the plans amounted to deferred compensation.

In subsequent IRS audits, the companies each incurred more than $100,000 in fees and penalties.

The four sued in 2000, alleging, among other things, that Tri-Core and Barrett made misrepresentations and concealed information. They asserted claims under ERISA, the Racketeer Influenced and Corrupt Organizations Act and New Jersey common law.

District Judge Anne Thompson denied Barrett’s motion for summary judgment based on his status as a nonfiduciary because ERISA permits claims for equitable relief against knowing participants in a fiduciary’s breach of duty. She struck some state-law claims based on ERISA pre-emption but let others stand.

Thompson bifurcated the claims for a jury trial on the RICO and state-law counts and a bench trial on the ERISA counts.

The jury returned a verdict for Barrett on the RICO claim and for the plaintiffs on the state-law claims. The panel awarded each one an amount equal to what it lost paying the IRS fees but apportioned half the loss to Tri-Core and Redfearn, thus cutting the damages in half.

Thompson found Barrett liable under ERISA and disgorged half of his commissions, ordering payments totaling about $112,000 to the four plaintiffs.

She later reversed a ruling as to Alloy Cast and Universal Mailing, finding their ERISA claims time-barred because they should have known in 1990 that Tri-Core violated an ERISA provision prohibiting a fiduciary from receiving consideration in connection with a transaction involving plan assets.

Both sides appealed and on Nov. 8, Circuit Judges Michael Chagares and Julio Fuentes — along with U.S. Court of International Trade Judge Jane Restani, sitting by designation — issued a decision that will send the case back for more proceedings.

Thompson correctly held that ERISA pre-empts the state-law claims as to Barrett’s alleged misrepresentations made after the plans’ adoption, the court said, pointing to section 514(a) of the law, which supersedes state-law claims that “relate to” a benefit plan.

But claims tied to statements Barrett made prior to their signing on with EPIC are not pre-empted, because at that time the plans didn’t exist, the court said.

“Several Courts of Appeals have held that an insurance agent who makes fraudulent or misleading statements to induce participation in an ERISA plan is amenable to suit under state law theories of recovery,” Chagares said.

Those claims “are not premised on a challenge to the actual administration of the plan,” Chagares wrote, vacating Thompson’s partial dismissal and remanding for possible retrial.

The court upheld Thompson’s ruling that Barrett, though a nonfiduciary, is “amenable to suit” under ERISA, which he violated by taking compensation from an insurer in connection with Tri-Core’s purchase of plan assets.

“Operating in concert with Tri-Core, Barrett actively facilitated that act or practice,” Chagares said, citing section 502(a)(3) of ERISA, which permits suits to address any violative “act or practice.”

As the U.S. Supreme Court held in Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238 (2000), that section “provides a right of action against a transferee of ill-gotten trust assets who is a knowing participant in an ERISA violation,” Chagares said.

Another provision that allows for reasonable compensation for services provides Barrett no defense to liability under ERISA, the court said.

Construing that provision “to shield self-dealing fiduciaries with a defense whenever reasonable sums change hands would undercut Congress’ goal of stamping out conflict-of-interest tainted behavior,” Chagares said. “This case illustrates the point.”

The court also revived the RICO claim. Thompson abused her discretion by instructing the jury not to consider “the mountain of evidence pertaining to Tri-Core and Barrett’s commissions” that could constitute a scheme to defraud, Chagares said.

The court also reversed rulings by Thompson that Universal Mailing’s and Alloy Cast’s ERISA claims were time-barred. A 1990 disclosure that Tri-Core would receive commissions does not necessarily mean that those plaintiffs had actual knowledge of an ERISA violation at that time, the panel said.

Christopher Leise of White & Williams in Cherry Hill, who argued for the defendants, says they are considering another appeal but declines further comment.

Steven Fram of Archer & Greiner in Haddonfield, the plaintiffs’ lawyer, did not return a call.