National Security Systems, Inc. v. Iola
700 F.3d 65
| 3rd Cir. | 2012Background
- EPIC was a tax-avoidance scheme marketed to closely held NJ corporations, purporting to be an ERISA multiple-employer plan but functionally a vehicle for deferred compensation.
- Tri-Core administered EPIC plans; unions and Tri-Core controlled plan rules, eligibility, claims processing, and asset flows, while Tri-Core paid commissions to Tri-Core and Barrett.
- Barrett marketed EPIC to the four corporate plaintiffs and advised eight individuals; commissions were substantial and undisclosed in detail to investors.
- IRS Notice 95-34 warned EPIC-style arrangements pre-plan were not 10-or-more-employer plans and deductions could be disallowed; IRS audits later disallowed deductions for the corporate plaintiffs.
- District Court bifurcated claims (jury FO for RICO/state law, bench for ERISA); jury found Barrett liable on common-law breach but not on RICO; ERISA claims pursued in bench trial.
- Court later held certain state-law claims preempted, others could proceed, and Tri-Core’s §406(b)(3) self-dealing violated ERISA, with Barrett held liable for knowing participation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| ERISA preemption of state-law claims | Plaintiffs contend state claims relating to Barrett’s misrepresentations pre-plan and commission disclosures relate to ERISA plans and are preempted. | Barrett argues state claims predate ERISA plan formation or concern pre-plan conduct not within ERISA’s core areas, thus not preempted. | ERISA preempts post-adoption misrepresentation claims; pre-plan misrepresentations may not be preempted if they concern non-plan handling. |
| Barrett’s amenability to suit under ERISA §502(a)(3) | Plaintiffs seek equitable relief against Barrett as a nonfiduciary who knowingly participated in a fiduciary’s prohibited conduct under §406(b)(3). | Renfro limits §502(a)(3) to fiduciaries or cofiduciaries; Barrett as nonfiduciary may not be liable under §502(a)(3). | Barrett is amenable to suit under §502(a)(3) for knowing participation in Tri-Core’s §406(b)(3) violation; Harris Trust controls. |
| Reasonableness defense under §408(c)(2) vs. §406(b)(3) | Commission reasonableness does not excuse §406(b)(3) per se violation; self-dealing prohibited regardless. | Reasonable compensation could exempt under §408(c)(2) or create a defense to §406(b)(3). | §408(c)(2) provides no independent defense; §408(c)(2) ambiguous but Department of Labor view does not shield Barrett; no defense. |
| Remedies and apportionment in ERISA §502(a)(3) claim | Disgorgement of full commissions appropriate; prejudgment interest and fees should be awarded; punitive damages not sought under ERISA. | Partial disgorgement and limited prejudgment interest are appropriate; fees should be denied. | Court may award partial disgorgement and prejudgment interest; Ursic factors weighed; fees denied. |
| RICO charge and jury instruction | RICO claim supported by scheme to defraud including concealment of commissions; jury should consider concealed commissions. | District Court properly excluded commissions from RICO instruction to avoid duplicative theory with ERISA claims. | Vacate RICO verdict for retrial due to error in excluding commission-based theories from the jury charge. |
Key Cases Cited
- Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (Supreme Court 2000) (establishes nonfiduciaries can be liable under §502(a)(3) for participation in prohibited transactions)
- Mertens v. Hewitt Assocs., 508 U.S. 248 (Supreme Court 1993) (discusses scope of §502(a)(3) and nonfiduciary liability; dicta on nonfiduciaries)
- Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011) (limits §502(a)(3) liability for nonfiduciaries in §404 breach contexts; distinguished)
- In re. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (Supreme Court 1990) (expansive preemption analysis; 'relate to' standard for ERISA preemption)
- Travelers Ins. Co. v. Blue Cross & Blue Shield Plans, 514 U.S. 645 (Supreme Court 1995) (ERISA preemption breadth and scope guidance)
- Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (Supreme Court 1987) (ERISA preemption and relation to plan administration)
- Compton v. Reich, 57 F.3d 556 (3d Cir. 1995) (analyzed §502(a)(5) and nonfiduciary liability; antecedent to Harris)
- John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86 (Supreme Court 1993) (statutory interpretation guiding §408 exemptions interplay with §406)
- Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (Supreme Court 2002) (defines ‘appropriate equitable relief’ under §502(a)(3))