National Security Systems Inc. v. Iola, No. 10-4154; Third Circuit; opinion by Chagares, U.S.C.J.; filed November 8, 2012. Before Judges Fuentes, Chagares and Restani, International Trade Judge, sitting by designation. On appeal from the District of New Jersey. [Sat below: Judge Thompson.] DDS No. 25-8-8165 [64 pp.]

This litigation arises out of a tax avoidance scheme devised in the late 1980s. Defendant James Barrett, a financial planner, induced plaintiffs to adopt an employee welfare benefit plan known as the Employers Participating Insurance Cooperative (EPIC). Promoters of EPIC marketed it to closely held corporations as a means of obtaining tax benefits. EPIC’s advertised tax benefits, as plaintiffs discovered years later, were illusory; the scheme masqueraded as a multiple employer welfare benefit plan, but, in fact, was a method of deferring compensation.

Ronn Redfearn, a now-deceased insurance salesman, created EPIC and formed defendant Tri-Core Inc. to administer employee benefit plans that conformed with EPIC’s specifications. Redfearn also enlisted Barrett to market EPIC. EPIC purported to be a multiple employer welfare benefit plan and trust, but, in fact, was an umbrella structure within which discrete employee welfare benefit plans operated. Tri-Core selected two group term life insurance policies as the only investment vehicles for the plans. Defendant Commonwealth Life Insurance Company began issuing the policies in 1991.

After the Internal Revenue Service audited plaintiffs’ plans and disallowed certain deductions claimed on their federal income tax returns, plaintiffs filed suit. Plaintiffs asserted claims under the Employee Retirement Income Security Act of 1974 (ERISA), the civil component of the Racketeer Influenced and Corrupt Organizations Act (RICO), and New Jersey statutory and common law. Plaintiffs alleged that Tri-Core and Barrett intentionally misrepresented or failed to disclose material information about EPIC.

A jury found Barrett liable on plaintiffs’ common-law claim of breach of fiduciary, but not liable on their RICO claim. The district court held a bench trial on the ERISA claim and issued partial judgment for the plaintiffs.

Held: On the issues of whether the district court properly deemed certain state law causes of action pre-empted by ERISA, properly held certain ERISA claims time-barred, and properly limited the jury’s consideration of a theory of recovery under RICO, the circuit panel vacates and remands. The panel affirms in all other respects.

Plaintiffs first challenge the grant of partial summary judgment in favor of Barrett on the basis that ERISA pre-empts a subset of the state law claims. The circuit panel finds that the district court correctly held the plaintiffs’ common-law claims were pre-empted under § 514(a) to the extent they relate to Barrett’s alleged misrepresentations, made after the plans’ adoption, about commissions and the accessibility of conversion credits within a purported reserve fund. Those claims have “a connection with” the ERISA plans because they are premised on the existence of the plans. To prevail on those claims, the plaintiffs would have had to plead, and the court to find, that the plans were, in fact, adopted. The court would then assess Barrett’s representations in light of the plaintiffs’ benefits and rights under the plans. This type of analysis — concerning the accuracy of statements made by an alleged (state law) fiduciary to plan participants in the course of administering the plans — fall within the scope of ERISA. Therefore, plaintiffs’ common-law claims are pre-empted to the extent they relate to Barrett’s conduct after he enrolled the plaintiffs in EPIC.

However, plaintiffs’ common-law claims concerning Barrett’s representations about the presence of a reserve fund, the accessibility of conversion credits, and the nature of his commissions made before the establishment of the plans — which plaintiffs allege, induced them to participate in EPIC — are not pre-empted by ERISA. These sorts of claims rest on misrepresentations made about an ERISA plan before that plan’s existence. They are not premised on a challenge to the actual administration of the plan. To the extent that a reviewing court would need to examine the provisions of the plan in considering the claims, it would be only to determine whether the representations made by Barrett regarding plan structure and benefits were at odds with the plan itself, or with the plaintiffs’ understanding of the benefits afforded by the plans. Nor do these claims strike at that area of core ERISA concern — “funding, benefits, reporting, and administration” — in which the use of state law threatens to undermine the goals of Congress in enacting ERISA. ERISA does not pre-empt the plaintiffs’ state law claims to the extent they allege that Barrett misrepresented the existence of a reserve fund, the availability of conversion credits, and the nature of his commissions before adoption of the EPIC plans. The district court’s ruling granting partial summary judgment to Barrett on those theories of recovery is vacated and remanded.

Barrett’s cross-appeal challenges the district court’s threshold determination that Barrett is amenable to suit under ERISA § 502(a)(3) as a nonfiduciary who knowingly participated with Tri-Core in transactions forbidden by § 406(b)(3). The circuit panel finds that Barrett is amenable to suit under § 502(a)(3). Tri-Core’s receipt of compensation from Commonwealth in connection with its directed purchase of plan assets from Commonwealth was an act or practice prohibited by ERISA. Operating in concert with Tri-Core, Barrett actively facilitated that act or practice. Section 502(a)(3) provides a right of action against a transferee of ill-gotten trust assets who is a knowing participant in an ERISA violation. It is of no consequence that Barrett was not a fiduciary and that his receipt of commissions was not itself a statutory violation.

Plaintiffs next object to the district court’s post-trial ruling that ERISA’s statute of limitations barred the claims asserted by the Universal Mailing and Alloy Cast plaintiffs against Barrett. The court determined that, in 1990, the principals of those corporations signed a disclosure form that notified them of Tri-Core’s commissions from Commonwealth. Barrett’s liability under § 502(a)(3) was premised on his knowing participation in Tri-Core’s receipt of commissions. The disclosure form gave actual knowledge in 1990 of all facts necessary to understand that an ERISA claim could be lodged against Tri-Core. The district court did not consider when the Universal Mailing and Alloy Cast plaintiffs acquired actual knowledge that Barrett participated, knowingly, in Tri-Core’s receipt of compensation from Commonwealth. Thus, the district court erred in finding that, by 1990, plaintiffs had actual knowledge of all facts necessary to establish a § 502(a)(3) claim against Barrett. The district court’s partial grant of Barrett’s motion to amend the judgment on the Universal Mailing and Alloy Cast plaintiffs’ ERISA claims is vacated and remanded for consideration of when they acquired actual knowledge of Barrett’s knowing participation in Tri-Core’s breach of § 406(b)(3).

Plaintiffs further challenge rulings made by the district court with respect to the civil RICO claim. The circuit panel vacates the verdict on the RICO claim and remands for retrial. There was conflicting evidence about whether Tri-Core and Barrett made sufficient disclosures to the plaintiffs about the source and quantity of their compensation. And there was an adequate evidentiary basis on which a jury could find that Tri-Core and Barrett were not truthful about their commissions. Under the circumstances, it was an abuse of discretion for the district court to refuse to instruct the jury that this evidence could constitute a scheme to defraud under the mail and wire fraud statutes.

For appellants/cross-appellees — Steven J. Fram and Kerri E. Chewning (Archer & Greiner). For appellee/cross-appellant — Edward M. Koch and Christopher P. Leise (White & Williams).