Summary
noting that Section 406(b) "suggests that a fiduciary, normally permitted to receive reasonable compensation for services rendered . . . may not if self-dealing is involved in the transaction securing the payment"
Summary of this case from Dezelan v. Voya Ret. Ins. & Annuity Co.Opinion
93-CV-982C(F).
July 23, 2004
On January 15, 2004, after careful consideration of the evidence presented at trial, the parties' arguments on summation, and the matters set forth in post-trial submissions, this court issued its findings of fact and conclusions of law in accordance with Rule 52(a) of the Federal Rules of Civil Procedure. The court concluded that, while the evidence in the case did not support a finding that defendant Santo Scrufari's conduct in taking regular salary increases as Plan Manager of the Niagara-Genesee Vicinity Carpenters Local 280 Welfare and Pension Funds without express approval of the Funds' Trustees amounted to a breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"), the same did not hold true with respect to defendant's unauthorized overtime and accompanying "weighted fringes." More specifically, the court found that defendant's payment to himself of four hours weekly overtime from the pay period ending March 26, 1989 to the pay period ending October 4, 1992, as well as his acceptance of additional weighted fringe benefits based on this inflated salary and his award to himself of retroactive weighted fringes from March 20, 1984 through January 1, 1989 — all without the approval of the Trustees — constituted a breach of his fiduciary duties under ERISA sections 404(a)(1) and 406(b)(1) (Item 201, at 28-32).
Defendant now moves for reconsideration of the court's finding that defendant was improperly credited with "compensation weighted fringes" retroactively for the period from 1985 to 1989 (Item 208). According to defendant, this issue was neither raised in the pleadings nor litigated before the court, and in any event the evidence establishes that the Trustees fully discussed and specifically authorized the granting of retroactive fringe benefit credit in order to comply with Section 413 of the Internal Revenue Code.
Defendant does not challenge in this motion the court's finding that the "overtime weighted fringes" attributable to the unauthorized four hours per week overtime was not approved by the Trustees.
Section 413 of the Internal Revenue Code and implementing Treasury Department regulations essentially provide that the employees of the union sponsoring a benefit plan, as well as the employees of the plan itself, are subject to the Code's protections against pension or welfare benefit calculations that discriminate in favor of highly compensated employees. See 26 U.S.C. § 413(b)(8); 26 C.F.R. § 1.413-1(i).
The court heard oral argument of defendant's motion for reconsideration on May 28, 2004. For the following reasons, defendant's motion is granted.
In its "Findings of Fact," the court determined that the question of "weighted fringes" first arose at the Funds' meeting of February 27, 1989 when Leonard O'Sullivan, one of the actuaries, suggested that the Trustees look into compliance with Section 89 of the Internal Revenue Code, which was enacted as part of the Tax Reform Act of 1986. The minutes of the Trustee meeting on June 12, 1989, indicated that the Trustees approved O'Sullivan's recommendation authorizing these benefits on behalf of Fund employees, retroactive to January 1, 1989. The court found that correspondence between defendant, Mr. O'Sullivan, and Funds' counsel David Herrmann in April and May of 1990 indicated that, "without any additional approval from the Trustees, [defendant] Scrufari subsequently awarded himself payment of these benefits retroactive to March 20, 1984, when he began employment with the actuary" (Item 201 at 12).
Section 89 was repealed before it ever took effect. Like Section 413, the thrust of Section 89 was to prevent employers (including unions and plans) from discriminating against lower-salaried employees by providing greater welfare benefits to higher-salaried employees ( see attachment to Item 210).
Based on these factual determinations, the court made the following findings in its "Conclusions of Law:"
The preponderance of the evidence . . . shows that, after the Trustees approved the payment of weighted fringe benefits to employees in the Fund office effective January 1, 1989, Scrufari accepted payment of these benefits retroactive to March 20, 1984, when he began employment with the actuary. There was no evidence to suggest that other Fund office employees were granted similar benefits retroactively. While the correspondence regarding this matter shows that both the actuary and the Fund attorney had knowledge of the retroactive payment to Scrufari ( see, e.g., Exs. 32-34), and that this information may have been submitted to the IRS in conjunction with a restatement of the Plan to conform to changes in the tax law, the record is otherwise devoid of evidence to suggest that this increase in Scrufari's compensation was approved, or even contemplated, by the Trustees themselves.
( Id. at 29).
In support of his motion for reconsideration, defendant cites the January 29, 1999 affidavit of Mr. Herrmann submitted in this case in opposition to plaintiffs' prior motion for summary judgment, in which Mr. Herrmann explained that the "weighted fringes" concept was his idea (Item, 121, ¶ 6). According to Mr. Herrmann, Local 280 and the Funds had been making the same level of hourly contributions to the welfare and pension funds on behalf of their office employees as the participating employers were making on behalf of union carpenters, who earned much higher hourly salaries but worked fewer hours per year. The result was that, due to limits on the amounts of pension and welfare benefits payable, the union and the Funds were contributing significant amounts for office employee pension and welfare benefits that would accrue but would never be received. To address this problem, Mr. Herrmann suggested the "weighted fringe" program as a means of making fringe benefit awards proportionate to the employee's compensation ( id. at ¶¶ 6-10).
Mr. Herrmann also related in his January 29, 1999 affidavit that some time in early or mid-1988, he met with defendant to discuss this problem. At that meeting, Mr. Hermann explained that the amounts deducted from the benefit contributions for lower paid Fund and union office workers could be applied to the pension and welfare fund contributions made on behalf of higher paid employees, including defendant. After obtaining the approval of Sarkee Sanoian (Local 280's General Business Agent), they contacted Mr. O'Sullivan, who eventually produced cost estimates and charts for presentation of the program to the Trustees ( see id; see also Ex. 78). According to Herrmann, "O'Sullivan reported back that there would be `no cost,' as the increase in contributions for the highly paid (Scrufari, Sanoian and . . . Gordon Knapp) was completely offset by the decrease for the lower paid" ( id. at ¶ 10).
In the meantime, at the Funds' meeting of November 3, 1988, Mr. Herrmann explained to the Trustees his "weighted fringes" recommendation as a way to bring the pension plan into compliance with the non-discrimination requirements of Section 413 of the Internal Revenue Code ( see Item 213, Attachment 2). The minutes of the meeting reflect that after Mr. Herrmann's presentation, a motion was passed to follow Mr. Herrmann's suggestions "as defined by his September 19, 1988 letter to the Trustees" ( id. at p. 6).
Item 213 is the May 18, 2004 affidavit of Russell Scrufari, submitted in support of defendant's motion for reconsideration. There are three attachments to the affidavit: Attachment 1 is a copy of the Local 280 Pension Plan Summary Plan Description ("SPD") dated September 1, 1989. Attachment 2 is a printout of the minutes of the November 3, 1988 Trustees meeting. Attachment 3 is a copy of a letter from Mr. Herrmann to defendant dated September 19, 1988, explaining the proposal for bringing the pension plan into compliance with Section 413 of the Internal Revenue Code. Apparently, these documents were not previously made part of the record before the court, nor were they entered into evidence at trial.
Mr. O'Sullivan's chart presentation took place at the meeting of February 27, 1989. The minutes of the meeting indicate that O'Sullivan presented two scenarios for the Trustees' consideration as a means of bringing the welfare plan into compliance with Section 89 ( see Ex. 15). The matter was deferred to give the union office the opportunity to discuss which scenario it wished to incorporate, and to give the Funds' office the opportunity to "evaluate its present employee compensation to determine if we are in compliance" with Section 89 ( id. at p. 2). The minutes further indicate that with respect to the pension plan, Mr. Herrmann "reviewed with the Trustees the charts submitted by . . . O'Sullivan showing the pension and welfare contributions by the Union Office and the Funds Office to conform with our prior approval of Internal Revenue Code Section 413" ( id. at p. 3).
As reflected in the minutes of the Welfare Fund Trustees' June 12, 1989 meeting, O'Sullivan's "scenario 2" proposal was ultimately adopted "as a means of attaining compliance with [Section 89]" (Ex. 56, p. 2).
The transcript of the February 27, 1989 meeting reflects that the issue of granting weighted fringe benefit credits to Fund and union office employees in order to comply with the tax laws was discussed at considerable length by O'Sullivan, Herrmann, and the Trustees ( see generally Ex. 57). Toward the conclusion of the discussion, defendant asked Mr. O'Sullivan whether weighted fringe benefit credit would be given to the Funds' office staff "going back to when they started . . .," and O'Sullivan replied, "I don't think you have any choice there." (Ex. 57, p. 15).
At trial, Mr. Herrmann was asked by plaintiff's counsel to describe documents attached to defendant's May 29, 1990 letter, referred to above, by which defendant transmitted to Herrmann information pertaining to the compensation and pension credits of Fund office and union office employees for tax purposes. The testimony is reported as follows:
Q Can you tell us what this document is, Mr. Herrmann?
A I had to submit a determination letter request for the pension plan to the Internal Revenue Service, and to complete that I had to fill out forms 5302, showing the compensation and the pension benefits of the employees in the Fund Office, which was treated as a separate pension plan, and the employees in the Union Office, that was treated as a separate pension plan, and Mr. Scrufari sent me these documents so that I could do that calculation.
. . . .
Q Mr. Herrmann, with respect to the third page of that document, are there calculations that were required that were made on that document in order for you to submit that to the Internal Revenue Service?
A Yes.
Q Would you tell us the nature of these calculations as far as why they were required by the I.R.S. in connection with the weighted fringes?
A Well, I needed this information to calculate the benefit that each person received, and what this is is it's a list of the hours credited to each person in each year, and the one we are looking at is the third page is Santo Scrufari, and it shows the hours that he credited himself for years going from 1965 to 1990, and off to the left he has written down the hours that were credited to him before he gave himself the compensated weighted fringes retroactively.
Q And were these calculations made for other individuals with respect to these weighted fringes?
A Yes, they were also made for Sarkee Sanoian and Gordon Knapp.
Q And were they made retroactively from 1989?
A Yes.
Q To the point where they [sic] contributing members of the pension fund?
A Well, Sarkee's go back, I think, the furthest, because his union employment started the earliest, and his goes back to 1981, Santo's calculation goes back to 1984, and Knapp's calculation goes back to . . . 1985. . . .
Q And just with respect to this document, would you describe to the Court how this weighted fringe works, and if there is a pivot point for measuring it?
A Yes, they decided that the, the trustees decided that the pivot point would be the journeyman's rate, and people who earned a salary more than journeyman's rate would have their compensation leveraged up proportionately, and those who earned, or had their fringes levered up proportionately to compensation, and those who earned less than journeyman's rate would have their fringes leveraged downward in proportion to compensation, and these people who got it retroactively are the people who had leveraged up.
. . .
Q These individuals who were beneficiaries of the weighted fringes being applied retroactively, how, were they done proportionate to their income, and the carpenter's rate?
A Yes, I checked these numbers for that, and Mr. Scrufari's compensation was leveraged up in proportion to general agent's rate, back to, I think, mid '85, and before that it was leveraged up in proportion to general foreman's rate, which is ten percent lower, that is for 1984, and the first part of 1985.
Q And how about Mr. Sanoian?
A Mr. Sanoian for the entire, well, not the entire period, his was leveraged up based on general agent's rate, ten percent above general foreman's I think, back through . . . sometime in 1983, and before that he was a general foreman as well.
(Tr. at 154-58).
In his May 14, 2004 affirmation submitted on behalf of plaintiffs in opposition to this motion for reconsideration, Mr. Herrmann states (among other things) that there was never any discussion among the Trustees, or between himself and defendant, about granting Fund and union office employees weighted fringes retroactively to the beginning of their service ( see Item 210, ¶ 14). However, this position is directly controverted by his testimony at trial and statements made in affidavits previously submitted to the court, as well as the transcript of the February 27, 1989 meeting, all of which suggest that the Trustees did, in fact, consider and approve compensation weighted fringe benefits retroactively for defendant and other highly paid Fund and union office employees. Accordingly, Mr. Herrmann's May 14, 2004 affirmation is entitled to little weight in determining the matters raised by the motion for reconsideration.
As this discussion demonstrates, although the issue was not fully litigated, the weight of the evidence in the record before the court and available to the parties at the time of trial supports the conclusion that the Trustees considered and approved the granting to defendant of compensation weighted fringe benefits retroactively to the beginning of his employment with the actuary. As a result, the court's previous finding that defendant breached his fiduciary duties by accepting retroactive credit for compensation weighted fringes without Trustee approval was erroneous.
Accordingly, defendant's motion to reconsider (Item 208) is granted. The court's January 15, 2004 findings of fact and conclusions of law are amended to reflect the matters set forth above. A telephone conference will be held with counsel on August 23, 2004 at 11 a.m. to discuss further proceedings in the case, including a schedule for submissions with respect to calculation of damages in accordance with the findings herein.
So ordered.