Shofer v. Stuart Hack Co.

RODOWSKY, Judge. This case presents issues of exclusive federal jurisdiction and of federal preemption of state law under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 through 1461. The action is brought by a retirement plan participant against a nonfiduciary consultant to the plan for loss, including liability for income taxes, interest and penalties, allegedly caused by tax advice negligently rendered by the consultant concerning loans from the plan. ⁹⁴ I ERISA preemption is created by a section in that statute providing that, with certain exceptions, ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. § 1144 (a) (1988). 1 This provision has been called “undoubtedly ... the most expansive preemption clause found in any federal statute.” Conison, The Federal Common Law of ERISA Plan Attorneys, 41 Syracuse L.Rev. 1049, 1083 (1990). “State law” is defined in ERISA as “all laws, decisions, rules, regulations, or other State action having the effect of law.” § 1144(c)(1). The Supreme Court has given the phrase “relate to” its “broad common-sense meaning, such that a state law ‘relate[s] to’ a benefit plan ‘in the normal sense of the phrase, if it has a connection with or reference to such a plan.’ ” Metropolitan Life Ins.

Co. v. Massachusetts, 471 U.S. 724, 739 , 105 S.Ct. 2380, 2389 , 85 L.Ed.2d 728, 740 (1985) (quoting Shaw v. Delta Air Lines, 463 U.S. 85, 97 , 103 S.Ct. 2890, 2900 , 77 L.Ed.2d 490, 501 (1983)). Indeed, some courts hold that ERISA preempts state common law remedies even though the result leaves the plaintiff with no remedy under ERISA either. See, e.g., Lee v. E.I. DuPont de Nemours & Co., 894 F.2d 755, 757-58 (5th Cir.1990) (state law action for negligent misrepresentation preempted, despite possible lack of remedy in ERISA, where retired employees sued former employer for additional benefits provided under early retirement plan adopted shortly after plaintiffs retired). On the other hand, there are limits to ERISA preemption.

The Supreme Court has stated that “[s]ome state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan.” Shaw, 463 U.S. at 100 n. 21, 103 S.Ct. at 2901 n. 21. Although the relationships to plans that have come before the Supreme Court frequently have not been ⁹⁵ “too tenuous, remote, or peripheral” to avoid preemption, there is a body of authority from other courts holding no preemption of state law claims that have some relationship to an ERISA benefit plan. The subject matter jurisdictional issue in the instant matter involves § 1132(e)(1). It reads: “Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter [Protection of Employee Benefit Rights §§ 1001 through 1168] brought by the Secretary or by a participant, beneficiary, or fiduciary.

State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under subsection (a)(1)(B) of this section.” The exception gives state and federal courts concurrent jurisdiction over a “civil action ... brought by a participant or beneficiary to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” § 1132(a)(1)(B). II Petitioner, Richard Shofer (Shofer), is an automobile dealer. He is the sole stockholder and president of Catalina Enterprises, Inc. (Catalina), which trades as Crown Motors. In 1971 Catalina adopted a pension plan which qualified under the Internal Revenue Code.

Shofer was and.is the plan’s sole trustee. Respondent, Stuart Hack (Hack), a Chartered Life Underwriter, is the president of respondent, The Stuart Hack Company (Hack Co.). Respondents are pension plan consultants. They prepared the Catalina plan and amendments thereto.

Hack Co. acts as a professional plan administra ⁹⁶ tor, and it is the administrator of the Catalina plan. 2 Respondents routinely rendered professional assistance to Catalina. This included advising Shofer or Catalina as to the tax implications of transactions that they were contemplating. That was a normal part of the business relationship between respondents, Shofer, and Catalina. Sometime prior to August 9, 1984, Shofer had a telephone conversation with Hack concerning the use of funds in Shofer’s account or accounts in the Catalina plan, either by way of a loan from the plan, or as security for a loan.

Hack replied in a four-paragraph, single-spaced, full-page letter of August 9, 1984. Shofer’s position in the instant litigation is that Hack failed to advise Shofer of the income tax consequences of borrowing from the plan. In nine transactions between August 9,1984, and September 30, 1986, Shofer borrowed $375,000 from the Catalina plan. Shofer used the loan proceeds to repay loans from Catalina, t/a Crown Motors, and to purchase and refurbish a property in the Virgin Islands.

Subsequently, Catalina’s and Shofer’s accountants, Grabush, Newman & Company, P.A. (Grabush), advised Shofer of income tax liability based on those loans. Shofer paid to the United States and to the State of Maryland for the years 1984, 1985 and 1986 income taxes, penalties, and interest totaling $120,428.19 because proceeds of the loans from the plan constituted income to him in those years. Shofer also incurred other consequential expenses.

Shofer sued Hack and Hack Co. in the Circuit Court for Baltimore City. Hack and Hack Co. impleaded Grabush as a third-party defendant. Shofer’s claims eventually were stated in a second amended complaint. During the evolution of that pleading the parties engaged in discovery. ⁹⁷ Shofer’s second amended complaint is in eight counts.

Counts I and II are Maryland law claims, sounding in tort and in contract, for malpractice. Count III alleges a special relationship of trust and confidence to have existed between Shofer and the respondents, giving rise to a fiduciary duty which was breached by the allegedly incomplete advice. Counts IV through VIII are expressly predicated on breaches of the ERISA plan. The compensatory damages sought under the ERISA counts are the same as those sought in the Maryland law causes of action.

In support of their motion to dismiss, respondents argued that the first three counts of the second amended complaint were predicated on Maryland common law which was preempted by ERISA. Thus, those counts did not state a claim upon which relief could be granted because the underlying substantive law relied on for the theory of the cause of action could not be applied to the claim. Respondents argued that the ERISA-based causes of action could be asserted only in a federal court. Respondents further submitted that, because all of the counts essentially involved a breach of fiduciary duty, the federal courts had exclusive subject matter jurisdiction over all of the counts.

The parties, both in their memoranda filed in, and in their oral arguments to, the circuit court went well beyond the four corners of the second amended complaint. They made free use of facts contained in discovery which appeared in the circuit court record. The joint record extract in this Court contains discovery material and an affidavit. Accordingly, we shall treat respondents’ motion to dismiss as one for summary judgment, governed by Maryland Rule 2-501.

See Md.Rule 2-322(c). The circuit court dismissed Shofer’s complaint with prejudice in its entirety. 3 Shofer appealed to the Court of Special ⁹⁸ Appeals. We issued the writ of certiorari on our own motion prior to consideration of this matter by the Court of Special Appeals. The docket of the Circuit Court for Baltimore City reflects that no judgment has ever been entered disposing of the third-party claim by respondents against Grabush.

Nor was the circuit court asked to certify its dismissal of Shofer’s second amended complaint as a final judgment pursuant to Maryland Rule 2-602. Thus, this case could be dismissed as a premature appeal. See Estep v. Georgetown Leather Design, 320 Md. 277 , 577 A.2d 78 (1990). Nevertheless, we exercise our discretion under Maryland Rule 8-602(e)(1)(C) and hereby enter as a final judgment the judgment of the Circuit Court for Baltimore City dismissing all of Shofer’s claims.

Ill For purposes of this appeal the respondents are not fiduciaries under the Catalina plan. 4 Section 1002(21)(A), in relevant part, provides that “a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation ... or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.” ⁹⁹ Absent such discretionary authority, a person is not a plan fiduciary. See 29 C.F.R. § 2509.75-8 , at 827 (1991). 5 In the instant matter Hack, on deposition, said that he did not have control over, and exercised no discretion over, either the plan or the plan’s assets. But it is not clear from the record precisely what Hack’s responsibilities were. He clearly was a consultant to the plan.

Both parties also ¹⁰⁰ characterize him as a “plan administrator.” Counsel for the respondents represented to the circuit court at one hearing in this matter that the respondents’ role with respect to the Catalina plan was to “fill out forms ... provide annual reports to employees, that sort of thing.” There are appellate cases holding that certain professionals who gave advice to, or performed ministerial services for, ERISA plans were not fiduciaries. See, e.g., Pappas v. Buck Consultants, Inc., 923 F.2d 531, 535-38 (7th Cir.1991) (actuary who gave bad advice to plan held not a fiduciary); Anoka Orthopaedic Assocs. v. Lechner, 910 F.2d 514 , 517 (8th Cir.1990) (attorney who performed “ministerial tasks” not a fiduciary); Painters of Philadelphia Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146 , 1151 (3d Cir.1989) (independent accounting firm that performed audits for ERISA plan not a fiduciary); Yeseta v. Baima, 837 F.2d 380, 385 (9th Cir.1988) (attorney for company who “reviewed” its plan not a fiduciary because he “did not exercise authority” over the plan). But there is “no per se rule that prevents professionals who render advice to an ERISA plan from becoming fiduciaries.” Pappas, 923 F.2d at 538 .

Compare Provident Life & Accident Ins. Co. v. Waller, 906 F.2d 985 , 988 n. 5 (4th Cir.) (plan administrator is clearly a fiduciary), cert. denied, — U.S. -, 111 S.Ct. 512 , 112 L.Ed.2d 524 (1990) and U.S. Steel Mining Co. v. District 17, United Mine Workers, 897 F.2d 149, 152 (4th Cir.1990) (same) with Narda, Inc. v. Rhode Island Hosp. Trust Nat’l Bank, 744 F.Supp. 685, 694-95 (D.Md.1990) (question of fact whether administrators were fiduciaries). The record before us does not reveal enough about Hack’s duties as “administrator” to resolve on summary judgment whether Hack was a fiduciary.

Respondents’ brief to us admits that “Hack’s fiduciary status is not clear in the instant case____” Brief for Appellees, Stuart Hack ¹⁰¹ and The Stuart Hack Company at 32. Under these circumstances there is a genuine dispute of material fact on this issue. Consequently, our analysis proceeds by treating the respondents as nonfiduciary consultants to the plan. IV Respondents submit, and the circuit court necessarily concluded, that the Maryland law of negligence and contract, as the foundation for the claims asserted in Counts I and II, “relate[s] to [Catalina’s] employee benefit plan,” and is preempted by § 1144(a).

Shofer contends that the Maryland law of contract and tort affects Catalina’s benefit plan “in too tenuous, remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. at 100 n. 21, 103 S.Ct. at 2901 n. 21. The law of ERISA preemption has been called a “ ‘morass,’ ” Capital Mercury Shirt Corp. v. Employers Reinsurance Corp., 749 F.Supp. 926, 929 (W.D.Ark.1990), and a black hole which swallows up garden variety claims, Jordan v. Reliable Life Ins. Co., 716 F.Supp. 582, 583 (N.D.Ala.1989), modified, 922 F.2d 732 (11th Cir.1991). A recent illustration in the Supreme Court of preemption is Ingersoll-Rand Co. v. McClendon, — U.S. -, 111 S.Ct. 478 , 112 L.Ed.2d 474 (1990).

Texas recognized an abusive discharge action where the employer’s motive was to defeat the employee’s ERISA-protected pension rights. Because “[t]he Texas cause of action makes specific reference to, and indeed is premised on, the existence of a pension plan,” the cause of action was preempted. — U.S. at-, 111 S.Ct. at 483 . Mackey v. Lanier Collection Agency & Serv., 486 U.S. 825 , 108 S.Ct. 2182 , 100 L.Ed.2d 836 (1988), illustrates a relationship between state law and a plan which does not result in preemption. The creditor of a plan participant garnished credits held by plan trustees for the participant.

The Court first held that ERISA preempted a special Georgia statute that exempted ERISA benefits from garnish ¹⁰² ment. “The state statute’s express reference to ERISA plans suffice[d] to bring it within the federal law’s preemptive reach.” Id. at 830 , 108 S.Ct. at 2185 . Next, the Court addressed whether the entire Georgia garnishment procedure was preempted, if used to seize ERISA benefits. Because specific provisions of ERISA contemplate judgments against plans, e.g., in favor of ■ a beneficiary for benefits, the Court reasoned that Congress must have intended for judgments to be enforceable by state law collection procedures, as provided by the Federal Rules of Civil Procedure. The Court further said: “ERISA plans may be sued in a second type of civil action, as well.

These cases—lawsuits against ERISA plans for run-of-the-mill state-law claims such as unpaid rent, failure to pay creditors, or even torts committed by an ERISA plan—are relatively commonplace. Petitioners ... concede that these suits, although obviously affecting and involving ERISA plans and their trustees, are not pre-empted by ERISA [§ 1144(a) ].” 486 U.S. at 833 , 108 S.Ct. at 2187 (footnote omitted). Out of the “morass” the decision which emerges as factually the most relevant to the case before us is Painters of Philadelphia Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146 (3d Cir.1989).

The plaintiffs were trustees of an ERISA plan. In a federal district court they sued the accounting firm that had performed for the plan several of the yearly audits which are required by § 1023(a)(3)(A). Alleging that the auditors had failed to uncover fraud exceeding $1 million by the fund administrator, the plan trustees presented four different legal theories: (1) violation of duties expressly imposed by ERISA on plan fiduciaries; (2) breach of a duty of care implied from ERISA; (3) state law breach of contract; and (4) state law negligence. Dismissal of the complaint by the district court was affirmed.

The appellate court held that the auditors were not fiduciaries, and the court would not imply a cause of action. The result was to relegate the plaintiffs to state court on their state law claims. Perhaps intending to ¹⁰³ influence the future state court action, the United States Court of Appeals for the Third Circuit, in considered dicta, said: “We acknowledge appellants’ argument that ERISA’s broad preemption provision, 29 U.S.C. § 1144 (a), preempts state professional malpractice claims as they relate to ERISA, but we are not persuaded by it. “[Here the Court quoted the passage, set forth above, from Mackey v. Lanier Collection Agency & Serv.] “We feel that professional malpractice actions brought by a plan are directly analogous to the situation in Mackey , and that, in the absence of an explicit corresponding provision in ERISA allowing a professional malpractice cause of action, Congress did not intend to preempt a whole panoply of state law in this area. Thus, we conclude that ERISA does not generally preempt state professional malpractice actions.” 879 F.2d at 1153 n. 7.

See also Pappas v. Buck Consultants, Inc., 923 F.2d at 540 & n. 1 (in dicta, apparently agreeing with Painters that ERISA does not preempt certain state law claims for malpractice). We agree with the foregoing reasoning and shall apply it here. Neither the auditors in Painters nor the respondents here are fiduciaries. The state law liability of the auditors in Painters would not have turned on, and that of the respondents does not turn on, the construction, interpretation or application of ERISA or of a plan; rather, those liabilities depend on duties arising from the nonfiduciary relationships.

But in Painters the plaintiff was the plan itself, and any recovery would have become an asset of the plan. That was not enough, however, for the state common law underlying the malpractice claims to “relate to” the plan. Here, Shofer is a plan participant, but he seeks to recover, for himself, personal funds expended for individual tax liabilities and consequential expenses. The state law claims of Counts I and II of Shofer’s second amended complaint are ¹⁰⁴ not as “related to” a plan as were the state law claims in Painters.

Most of the decisions which bear a factual analogy to the instant matter reach the same result as did Painters. See Capital Mercury Shirt Corp. v. Employers Reinsurance Corp., 749 F.Supp. 926 (W.D.Ark.1990) (state law action against administrator for negligence in providing information to medical reinsurer not preempted, in part because ERISA would not provide a federal law remedy against a nonfiduciary administrator); Quigley v. Unum Life Ins. Co., 688 F.Supp. 80 (D.Mass.1988) (state law claims against nonfiduciary insurer for incorrectly calculating amount of monthly annuity not preempted because relationship to pension plan too tenuous), aff'd, 887 F.2d 258 (1st Cir.1989); Duffy v. Cavalier, 215 Cal.App.3d 1517 , 264 Cal.Rptr. 740 (1989) (state law action by trustees of plan against stockbrokers for breach of fiduciary duty in handling plan assets not preempted, in part because duty from broker to customer exists independently of relationship to the plan); Sappington v. Covington, 108 N.M. 155 , 768 P.2d 354, 357-58 (Ct.App.1988) (state law action against insurance agents for negligently selecting an insolvent insurer not preempted because “grounded upon alleged conduct ... that has no reference to ERISA” and damages would not come from ERISA funds), cert. denied, 108 N.M. 115 , 767 P.2d 354 , cert. denied, 490 U.S. 1107 , 109 S.Ct. 3159 , 104 L.Ed.2d 1021 (1989). The United States Court of Appeals for the Fourth Circuit in Pizlo v. Bethlehem Steel Corp., 884 F.2d 116 (4th Cir.1989), pointed to a number of factors in that case which led the court to conclude that certain state law claims were not preempted.

The plaintiffs had been terminated by their employer, allegedly in breach of an oral contract for employment to age sixty-two. These same facts were pleaded as negligent misrepresentation as well. The plaintiffs also contended that there had been an unauthorized amendment of the pension plan, but that claim was held to be preempt ¹⁰⁵ ed. The breach of contract and misrepresentation claims, however, were not preempted.

The court reasoned: “The claims here would not submit Bethlehem to conflicting employer obligations and variable standards of recovery, determine whether any benefits are paid[,] nor directly affect the administration of benefits under the plan. The claims do not bring into question whether Plaintiffs are eligible for plan benefits, but whether they were wrongfully terminated from employment after an alleged oral contract of employment for a term. In their state law claims, the Plaintiffs seek from the corporation compensatory damages for wages