Opinion
00 Civ. 6143 (SAS).
November 8, 2000.
William F. Costigan, Esq., Costigan Company, P.C., New York, NY, for Plaintiffs.
John P. McConnell, Esq., Hargraves McConnell Costigan, P.C., New York, NY, for Defendants.
OPINION AND ORDER
On July 31, 2000, the law firm of Costigan Company, P.C. (f/k/a Costigan Hargraves McConnell, P.C.) ("Firm") and William F. Costigan commenced this action in the Supreme Court of the State of New York against Andrew J. Costigan, Daniel A. Hargraves, James D. McConnell, Jr., John P. McConnell (collectively "individual defendants") and Hargraves McConnell Costigan, P.C. ("HMC"). See Costigan Co. v. Costigan, No. 116489-00 (Sup.Ct. N.Y. Co. Jul. 31, 2000). The suit raises only state law claims. On August 17, 2000, defendants removed the case to federal court on the ground that the Complaint states a claim which is preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., and which falls within ERISA's civil enforcement provisions, 29 U.S.C. § 1132 (a). Plaintiffs now move to remand the case pursuant to 28 U.S.C. § 1447(c). For the reasons that follow, plaintiffs' motion is granted.
I. BACKGROUND
The following facts are taken from the Complaint and are assumed to be true. William Costigan, an attorney licensed to practice law in the State of New York, is the controlling shareholder of the Firm, a professional corporation organized under the laws of the State of New York, with offices in New York County. See Complaint ¶¶ 1, 2. The individual defendants, each of whom is licensed to practice law in the State of New York, were employees of the Firm until mid to late 1998. See id. ¶¶ 4-6.
Daniel Hargraves was terminated in May 1998. See Complaint ¶ 17. Andrew Costigan was terminated on June 15, 1998. See Id. ¶ 19. James McConnell and John McConnell continued as employees until November 15, 1998 and December 9, 1998, respectively. See id. ¶ 22.
Beginning in 1996. the Firm experienced a cash flow problem allegedly caused by the individual defendants' low productivity, delinquent time-keeping, development of slow- or non-paying clients, delinquent billing practices, and commitment of time to non-firm matters. See id. For instance, in 1997 and 1998, the individual defendants delayed billing the Firm's largest client for many months after the Firm rendered its services. See id. ¶ 14. Such delayed billing deprived the Firm of hundreds of thousands of dollars. See id. Additionally, the individual defendants limited their productivity by recording below-average billing hours. See id. ¶ 15. Plaintiffs contend that these acts were done in an effort to "rule or ruin" the Firm. See id. ¶ 10. Allegedly, the individual defendants sought to coerce plaintiff William Costigan to transfer shares of the Firm to them and to increase their compensation, or alternatively, to put the Firm out of business and divert its clients and assets to HMC, a new firm the individual defendants were forming. See id. ¶ 13.
Between June and August 1998, the individual defendants began to secretly intercept checks from the Firm's mail and to conceal them "in order to impair the Firm's ability to meet its expenses, including the funding of § 401(k) contributions." Id. ¶ 18. Plaintiffs maintain that the individual defendants were attempting "to lay a foundation for a pretextual ERISA claim against the plaintiffs." Id. By September 30, 1998, the individual defendants made restitution of the checks. See id. However, by that date, the Firm was between three and ninety-one days late in funding approximately $18,435.81 in § 401(k) contributions, including approximately $12,739.85 in deferred compensation. See id. Once plaintiffs received the concealed checks, they funded the overdue § 401(k) contributions. See id. On June 21, 2000, defendants John McConnell, James McConnell, and Andrew Costigan filed suit against plaintiffs in federal court, alleging an ERISA violation premised on the Firm's belated remittances of § 401(k) contributions. See id.
The individual defendants also seized incoming checks without concealing their acts. See Complaint ¶ 21. The individual defendants refused to turn over these funds unless the Firm applied them for their benefit. See id.
The case is currently pending before this Court. See McConnell v. Costigan, 99 Civ. 11710 (S.D.N.Y June 21, 2000).
Plaintiffs also allege that the individual defendants have attempted to undermine the Firm and divert staff and clients to HMC. For instance, the individual defendants "disparaged the Firm's financial responsibility and professional responsibility."Id. ¶ 22. Defendants hired key Firm staff, unlawfully copied and removed Firm files, and misused the Firm's credit accounts to pay HMC expenses. See id. ¶ 24. The individual defendants caused the United States Postal Service to divert the Firm's mail to HMC's new offices. See id. They also failed to reimburse personal expenses charged to the Firm. See id. ¶ 26. Furthermore, James McConnell and John McConnell caused the Firm to order legal materials which were then removed for the benefit of HMC. See id. ¶ 24. John McConnell and James McConnell also failed to bill time for the period leading up to their departure, thus preventing the Firm from billing and collecting approximately $40,000. See id. ¶ 25.
Plaintiffs assert seven state law claims against defendants. However, because the defendants rely on the conversion claim to justify removal — I shall now briefly describe that claim. Plaintiffs allege that the interception and concealment of checks by defendants Andrew Costigan, John McConnell, and James McConnell caused the Firm to make late § 401(k) contributions and impaired the Firm's ability to meet other financial obligations. See id. ¶¶ 35, 36. Plaintiffs seek compensation from defendants "for all damages, costs, fines, and penalties stemming for their interception and concealment of the . . . checks." Id. ¶ 36. Plaintiffs also seek punitive damages in excess of $1 million. See id. at 13.
The six claims not pertinent to this motion are: (1) breach of duty of loyalty, (2) breach of contract, (3) declaratory judgment, (4) tortious interference with business relations, (5) unjust enrichment, and (6) defamation. See Complaint at ¶¶ 28-33, 37-47.
II. LEGAL STANDARD
A district court is required to remand a case "[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). "In light of the congressional intent to restrict federal court jurisdiction, as well as the importance of preserving the independence of state governments, federal courts construe the removal statute narrowly, resolving any doubts against removability." Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269, 274 (2d Cir. 1994). The defendants bear the burden of establishing that removal is proper where plaintiffs have moved to remand the action. See United Food Commercial Workers Union v. CenterMark Properties Meriden Square, Inc., 30 F.3d 298, 301 (2d Cir. 1994).
III. DISCUSSION
Removal of actions from state to federal courts is authorized by 28 U.S.C. § 1441(a) which provides: "[A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court . . . where such action is pending." Where there is no diversity between the parties, a federal question is required for removal. Under the "well-pleaded complaint" rule, removal is proper only if the federal question appears plainly on the face of the complaint.See Franchise Tax Bd. of California v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 10 (1983);Fax Telecommunicaciones Inc. v. ATT, 138 F.3d 479, 486 (2d Cir. 1998). "Thus, a plaintiff may avoid federal jurisdiction by pleading only state law claims, even where federal claims are also available, and even if there is a federal defense [that a state law claim is preempted by federal law]." Fax Telecommunicaciones Inc., 138 F.3d at 486. However, a court may look beyond the complaint to determine whether it states a federal claim where a plaintiff has attempted to "defeat removal by clothing a federal claim in state garb." Travelers Indem. Co. v. Sarkisian, 794 F.2d 754, 758 (2d Cir. 1986). For instance, when Congress mandates "complete preemption" in a specific area of law, a complaint raising a state law claim in that area necessarily arises under federal law and permits removal to federal court. See Plumbing Indus. Bd. v. E.W. Howell Co., 126 F.3d 61, 66 (2d Cir. 1997).
Here, plaintiffs' state law conversion claim may be removed only if it is (1) preempted by ERISA, and (2) within the scope of the civil enforcement provisions of § 502(a) of ERISA, 29 U.S.C. § 1132(a). See Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 64-66 (1987); Plumbing Indus. Bd., 126 F.3d at 66.
A. Preemption
Section 514(a) of ERISA explicitly preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. § 1144(a). Although § 514(a) is broadly worded, the Supreme Court has instructed that a preemption analysis under ERISA must begin with the "starting presumption that Congress does not intend to supplant state law."New York State Conference of Blue Cross Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995). In Plumbing Indus. Bd. v. E.W. Howell Co., the Second Circuit, outlining the Supreme Court's preemption jurisprudence, described two ways in which the presumption against preemption can be overcome. First, preemption will apply where a state law "clearly refers to ERISA plans . . . or where the existence of ERISA plans is essential to the law's operation." 126 F.3d at 67. Second, a state law that "has a clear connection with a[n] [ERISA] plan in the sense that it . . . provide[s] alternative enforcement mechanisms" is preempted. Id. "Outside these areas, the presumption against preemption is considerable — state laws of general application that merely impose some burdens on the administration of ERISA plans . . . should not be disturbed." Id.
ERISA does not preempt plaintiffs' state law conversion claim. In Romney v. Lin, 105 F.3d 806, 811-12 (2d Cir. 1997), the Second Circuit found ERISA preemption where a New York statute provided that a corporation's ten largest shareholders are personally liable for employer contributions to pension or annuity funds. In reaching its holding, the court distinguished two earlier cases dealing with state laws of general applicability:
Veil-piercing and surety law are principles of general applicability, within a state's traditional purview, that bear on employment benefits only insofar as the underlying transactions happen to involve employment benefits. ERISA does not create federal law on veil-piercing . . . or on the enforcement of judgments generally. Nor does ERISA create federal law on the enforceability of surety contracts.Id. at 811. Because the New York statute designated new ERISA obligors not designated in the federal statute, the court found preemption appropriate. See id. at 812.
The two earlier cases distinguished by the court arePeacock v. Thomas, 516 U.S. 349 (1996) (veil piercing) andGreenblatt v. Delta Plumbing Heating Corp., 68 F.3d 561 (2d Cir. 1995) (surety law).
Plaintiffs' conversion claim has no clear connection with an ERISA plan. Rather, plaintiffs are suing defendants for the damages caused by their wrongful taking of plaintiffs' property. That the Firm's ability to fund its 401(k) contributions was impaired by defendants' conversion of incoming checks does not convert a state law claim into a federal ERISA claim. ERISA does not preempt laws of general applicability that have only an indirect effect on ERISA plans. See Greenblatt, 68 F.3d at 574 (like "tort or non-plan-related contract actions to which ERISA plans may be a party," surety laws have only an indirect effect on ERISA plans and do not interfere with ERISA's objective of national uniformity).
B. Within the Scope of § 502(a)
Defendants contend that plaintiffs' conversion claim is within the scope of the civil enforcement provision of § 502(a)(3), which permits a participant, beneficiary, or fiduciary to sue to redress ERISA violations. See Defendants' Memorandum in Opposition to Motion for Remand ("Def. Mem.") at 4-6. Although the Supreme Court recently stated that § 502(a)(3) "admits of no limit . . . on the universe of possible defendants," it is nonetheless limited insofar as it only applies to suits for "appropriate equitable relief." Harris Trust and Savings Bank v. Salomon Smith Barney, Inc., 120 S.Ct. 2180, 2187 (2000). Here, defendants have already returned the funds from the checks they allegedly intercepted and concealed. Plaintiffs' conversion claim seeks compensatory and punitive damages — not equitable relief as required by § 502(a)(3). See Mertens v. Hewitt Assocs., 508 U.S. 248, 255 (1993) (stating that "other appropriate equitable relief" does not include awards for compensatory or punitive damages). Accordingly, plaintiffs' suit does not fall within the civil enforcement provision of § 502(a)(3).
Section 502(a)(3) states:
A civil action may be brought . . . by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.29 U.S.C. § 1132(a).
Although ERISA does not explicitly cover plaintiffs' conversion claim, defendants implicitly ask the Court to recognize such a claim as part of the federal common law of ERISA. See Def. Mem. at 5 (citing In re Masters Mates Pilots Pension Plan, 957 F.2d 1020 (2d Cir. 1992)). In that case, the Second Circuit held that the federal common law of ERISA includes claims for indemnity and contribution. See In re Masters Mates, 957 F.2d at 1029. Even assuming that a claim for conversion is somehow analogous to a claim for indemnification or contribution, the federal common law right to contribution only extends to co-fiduciaries. See Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12, 16 (2d Cir. 1991) (holding that traditional trust law right of contribution among co-trustees is recognized as part of ERISA); Liss v. Smith, 991 F. Supp. 278, 305 (S.D.N.Y. 1998) (holding that there is no federal common law ERISA claim for money damages against non-fiduciaries who knowingly participate in a fiduciary's breach). To include within the federal common law of ERISA a claim for money damages against a non-fiduciary would broaden ERISA's scope beyond that intended by Congress. "[W]hile ERISA contains various provisions that can be read as imposing obligations upon nonfiduciaries, including actuaries, no provision explicitly requires them to avoid participation (knowing or unknowing) in a fiduciary's breach of fiduciary duty." Mertens, 508 U.S. at 253-54. Because the individual defendants did not — indeed, could not — allege that they were ERISA fiduciaries, the federal common law of ERISA does not include plaintiffs' conversion claim against them.
ERISA defines "fiduciary" broadly — as anyone who exercises discretionary control or authority over an ERISA plan's management, administration, or assets. See 29 U.S.C. § 1002 (21)(A). Nonetheless, any argument that an employee becomes a fiduciary by providing her employer with revenue from which the employer satisfies its ERISA obligations would unreasonably broaden the definition of fiduciary to include all employees.
IV. CONCLUSION
For the foregoing reasons, plaintiffs' motion to remand this action to New York State Supreme Court, New York County, is granted. The Clerk of the Court is directed to remand this action and close this case.
SO ORDERED: