Leckey v. Stefano ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
8-20-2001
Leckey v. Stefano
Precedential or Non-Precedential:
Docket 00-3698
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Recommended Citation
"Leckey v. Stefano" (2001). 2001 Decisions. Paper 186.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/186
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Filed August 20, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-3698
JANICE B. LECKEY; JANICE B. LECKEY, Executrix of the
Estate of Evelyn O. Knapp, a/k/a Evelyn Olliffe Knapp,
Deceased a/k/a JANICE BURGER LECKEY,
Appellants
v.
PAUL W. STEFANO; FRANK W. JONES, Administrators of
the Estate of William E. Knapp, Deceased, and Trustees
of the Insurance Trust of William Knapp, Deceased
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF PENNSYLVANIA
(Dist. Court No. 95-cv-00108)
District Court Judge: Robert J. Cindrich
Argued on July 12, 2001
Before: SLOVITER, ALITO, and GREENBERG,
Circuit Judges.
(Opinion Filed: August 20, 2001)
WILLIAM R. CAROSELLI (Argued)
Caroselli, Beachler, McTiernan &
Conboy
312 Boulevard of the Allies,
8th Floor
Pittsburgh, PA 15222
Edward C. Leckey
1035 5th Avenue
Pittsburgh, PA 15219
Counsel for Appellants
HARRY F. KUNSELMAN
DAVID A. STRASSBURGER (Argued)
Strassburger, McKenna, Gutnick &
Potter
322 Boulevard of the Allies,
Suite 700
Pittsburgh, PA 15222
Counsel for Appellees
OPINION OF THE COURT
ALITO, Circuit Judge:
Plaintiffs brought suit under the Employee Retirement
Income Security Act of 1974 ("ERISA"), 29 U.S.C. S 1001 et
seq., as amended by the Retirement Equity Act of 1984
("REA"), Pub. L. No. 98-397, challenging distributions made
by William Knapp ("William") from a Pension Plan and a
Profit Sharing Plan without the consent of his wife, Evelyn
Knapp ("Evelyn"). The District Court found that neither
plan was governed by ERISA and therefore dismissed the
suit for lack of subject matter jurisdiction. As both plans
were covered by ERISA, we reverse the order of the District
Court and remand for further proceedings.
I.
In 1985, William incorporated a family business named
American Carbyde ("AmCarb"). That same year, AmCarb
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established a Profit Sharing Plan and corresponding Profit
Sharing Trust. The Profit Sharing Trust was funded
through a rollover of William's assets from profit sharing
and pension plans from two prior jobs. The Profit Sharing
Plan provided that distributions from the plan were to be
made as a joint and survivor annuity, unless the
participant's spouse consented to waive that requirement.
In December 1986, AmCarb also adopted a Pension Plan.
AmCarb made contributions to the Pension Trust for 1986
and 1987. Like the Profit Sharing Plan, the Pension Plan
provided that, absent the written, attested consent of the
participant's spouse, distributions from the Pension Trust
were to be made as joint and survivor annuities.
In 1992, William, who served as administrator of the
Profit Sharing Trust, transferred trust assets to various
individual retirement accounts ("IRAs") without the consent
of his wife, Evelyn. William opened the IRAs in his own
name and designated as the beneficiary an Insurance Trust
that he had created. When William died on February 16,
1993, the assets from these IRAs were distributed to the
Insurance Trust, which provided Evelyn with an income
stream until her death.
Similarly, in 1992, William, who administered the
Pension Plan as president of AmCarb, transferred securities
and other assets from the Pension Trust to his personal
brokerage account. In May 1992, he returned $10,386 to
the Pension Plan's checking account and distributed this
sum to his step-daughter, Janice Leckey ("Janice"). He then
closed the Pension Trust's checking account, depositing the
remaining funds in his personal checking account. Evelyn
never consented to these transfers from the Pension Trust.
William obtained approval from the Internal Revenue
Service to terminate the Pension Plan effective December
31, 1991.
In January 1995, Evelyn, as William's spouse and the
remaining beneficiary of the Pension and Profit Sharing
Plans, and Janice, as the surviving trustee of the Profit
Sharing and Pension Trusts, brought suit under ERISA, as
amended by the REA. Plaintiffs claimed that William
violated Section 205 of ERISA, 29 U.S.C. S 1055, by
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withdrawing funds from the Pension and Profit Sharing
Plans without Evelyn's consent and without using a joint
and survivor annuity. Section 205 requires, as a general
rule, "that a participant's benefits be paid in the form of a
joint/survivor annuity unless the participant's spouse
consents in writing to a different mode of payment."
Appendix at 4a-5a ("App."); see 29 U.S.C. S 1055(a), (c), (g),
(k). Plaintiffs also alleged that these unlawful withdrawals
violated William's statutory duties to Evelyn and his
fiduciary duties as administrator of the plans. Plaintiffs
requested an order requiring the return of the assets that
William had unlawfully distributed from the Profit Sharing
Trust, as well as an order compelling the trustees of the
Insurance Trust to obtain a refund of inheritance taxes
paid on the assets that were transferred to William's IRAs.
Plaintiffs likewise sought the funds that William transferred
from the Pension Trust, together with interest on those
funds.1 Plaintiffs named Paul Stefano and Frank Jones, the
administrators of William's estate and trustees of the
Insurance Trust, as defendants.
After one unsuccessful attempt to obtain summary
judgment, the defendants moved for reconsideration of their
motion for summary judgment. In response, the District
Court held that neither the Profit Sharing Plan nor the
Pension Plan was governed by ERISA and dismissed the
case for lack of subject matter jurisdiction by order entered
August 15, 2000. Plaintiffs' motion to alter or amend this
order was denied on October 3, 2000, whereupon plaintiffs
filed this appeal.2
_________________________________________________________________
1. After Evelyn died on December 13, 1997, Janice, in her capacity as
executrix of Evelyn's estate, was substituted for Evelyn as a plaintiff.
2. The defendants assert that plaintiffs improperly included and rely on
documents in the appendix that were submitted after summary
judgment was granted. Appellees' Brief at 6. Plaintiffs reply by arguing
that the District Court accepted and responded to facts supported by
these documents, thereby incorporating subsequently submitted
documents into the record. Reply at 3-4. We need not dwell on this issue
since defendants concede certain facts regarding AmCarb's ownership
and the participants in the plans that are sufficient to resolve this
appeal.
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II.
Plaintiffs' suit was brought under Title I of ERISA. See,
e.g., 29 U.S.C. S 1055. The Department of Labor has issued
regulations to help identify plans that qualify as"employee
benefit plans" covered by Title I. 29 C.F.R.S 2510.3-3(a).
Those regulations define "employee benefit plan" to exclude
"any plan . . . under which no employees are participants
covered under the plan." 29 C.F.R. S 2510.3-3(b). In
determining whether there are employees covered by a
plan, the regulations mandate that "[a]n individual and his
or her spouse shall not be deemed to be employees with
respect to a trade or business . . . which is wholly owned
by the individual or by the individual and by his or her
spouse." 29 C.F.R. S 2510.3-3(c)(1). This appeal turns on
the interpretation of this final provision.
Under the regulation, we must determine whether both
the Pension Plan and the Profit Sharing Plan had at least
one employee-participant. With respect to the Profit Sharing
Plan, the defendants contend that, when the alleged
distributions occurred,3 William was the only participant
and had been the only participant since 1988. Appellees'
Brief at 5, 8, 11, 19; see also Appellants' Brief at 22; App.
at 3a. With respect to the Pension Plan, both sides agree
that William and Janice were participants in the Pension
Plan. Appellants' Brief at 22; Appellees' Brief at 5, 11, 19;
App. at 4a. Thus, in order for the Profit Sharing Plan to be
covered by ERISA, William must be counted as an
employee, and in order for the Pension Plan to be covered
either William or Janice must be counted as an employee.
William and Janice were participants in both plans as a
result of their employment with AmCarb but, as noted,
under the regulation, an individual and the individual's
spouse are not counted as employees for purposes of
identifying an ERISA plan if the trade or business is "wholly
_________________________________________________________________
3. Defendants urge us to determine whether the plans are covered by
ERISA at the time of the alleged distributions rather than at some earlier
point, as the plans may have covered other employees at an earlier time.
We need not decide when a plan's ERISA status ought to be determined
or whether a plan may lose its ERISA status by attrition as we conclude
that even at the time of the alleged distributions, both plans were
governed by ERISA.
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owned by the individual or by the individual and his or her
spouse." 29 C.F.R. S 2510.3-3(c)(1). Here, at the time of the
alleged distributions, AmCarb was owned by William, his
wife Evelyn, and his step-daughter Janice. Appellees' Brief
at 5, 19. If we read the regulation literally to apply only
when a company is owned by an individual or by spouses,
Janice's ownership requires that both she and William be
counted as employees and means that both plans are
covered by ERISA.
The District Court, however, concluded that neither plan
was governed by ERISA at the time of the distributions
because AmCarb was wholly owned by "immediate family
members." In reaching this decision, the court relied on
this Court's opinion in Matinchek v. John Alden Life Ins.
Co., 93 F.3d 96 (3d Cir. 1996). In Matinchek , Mr. and Mrs.
Matinchek were the sole owners of a funeral home.
Matinchek, 93 F.3d at 102. Mr. Matinchek enrolled in a
group health insurance plan provided by the John Alden
Life Insurance Company. Id. at 97-98. In his application,
Mr. Matinchek made several misrepresentations regarding
his medical history and condition. Id. at 98. Based on this
application, John Alden issued a policy covering Mr. and
Mrs. Matinchek. Id. After discovering Mr. Matinchek's
misrepresentation, John Alden rescinded the policy and
refused to pay Mr. Matinchek's claims arising from his
February 1992 hospitalization and a May 1992 accident. Id.
at 98-99. Mr. Matinchek sued. The District Court found
that the suit was governed by ERISA. Id. at 99.
A panel of our Court disagreed. The Court noted that
Department of Labor regulations exclude from ERISA's
coverage those plans that do not cover any employees. Id.
at 100. The Court also noted the rule that "[a]n individual
and his or her spouse [are] not . . . deemed to be employees
with respect to a trade or business . . . which is wholly
owned by the individual or by the individual and his or her
spouse." Id. (quoting 29 C.F.R. S 2510.3-3(c)(1)). In light of
these regulations, the Court held "that an insurance
coverage plan covering only a sole business owner and his
or her immediate family members cannot qualify as an
employee welfare benefit plan covered by ERISA." Id. at
101. In a footnote, the Court went on to "note that this
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holding applies to all businesses solely-owned by immediate
family members, regardless of whether the owners are sole
proprietors, sole shareholders, or partners." Id. at 101 n.3.
Based on this footnote, the District Court concluded that
our Court had expanded 29 C.F.R. S 2510.3-3(c)(1) to
exclude owners who were immediate family members from
being counted as employees. Although the District Court
questioned this holding, it felt bound by it. The District
Court therefore concluded "that shareholders of a company,
all of whom are immediate family members, are owners, not
employees for purposes of determining whether a plan is
covered by ERISA" and held that the Pension and Profit
Sharing Plans were not covered by ERISA. App. at 13a, 17a.
The District Court misinterpreted Matinchek. The Court
in Matinchek was called upon to decide only whether ERISA
governed an insurance plan covering a husband and wife
who co-owned a business. It was not asked to decide
whether ERISA would also govern a policy that covered
other immediate family who jointly owned a business. As a
result, even if the Court's footnote is read as suggesting
that immediate family members who jointly own a company
do not count as employees, that assertion is merely dictum.
Moreover, the Matinchek Court did not hold that 29
C.F.R. S 2510.3-3(c)(1) applies to immediate family
members other than spouses. The Court stated "that an
insurance coverage plan covering only a sole business
owner and his or her immediate family members cannot
qualify as an employee welfare benefit plan." Matinchek, 93
F.3d at 101. This statement is uncontroversial. A sole
business owner would not be counted as an employee
under 29 C.F.R. S 2510.3-3(c)(1). If he or she bought an
insurance policy covering immediate family members who
were not employees or owners, the policy would not cover
any employees and therefore would not be governed by
ERISA. The same result would follow if the business were
wholly owned by an individual and his or her spouse.
The footnote in question merely explains that this
principle does not change with the type of business
organization at issue. If an individual is a sole proprietor,
he or she may purchase insurance for immediate family
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members who are not employees without the plan being
subject to ERISA. The result is the same if the individual or
the individual and his or her spouse are the sole
shareholders. And if the owners are partners, they will not
be counted as employees of the partnership even if they are
not spouses, because 29 C.F.R. S 2510.3-3(c)(2) states that
"[a] partner in a partnership and his or her spouse shall
not be deemed to be employees with respect to the
partnership." The footnote in Matinchek thus does not
stand for the proposition that immediate family members,
other than spouses, who wholly own a business are not to
be counted as employees.
Since Matinchek did not expand the reach of 29 C.F.R.
S 2510.3-3(c)(1) beyond its plain language, we are left to
apply the regulation as written. As noted, section 2510.3-
3(c)(1) states:
An individual and his or her spouse shall not be
deemed to be employees with respect to a trade or
business, whether incorporated or unincorporated,
which is wholly owned by the individual or by the
individual and his or her spouse.
The regulation only prevents spouses who wholly own a
business from being counted as employees. See In re Metz,
225 B.R. 173, 177 (9th Cir. B.A.P. 1998) (plan covered by
ERISA where former spouses were sole shareholders of
corporation sponsoring plan); Provident Life & Accident Ins.
Co. v. Cohen, 137 F. Supp. 2d 631, 635, 636 (D. Md. 2001)
(noting that 29 C.F.R. S 2510.3-3(c)(1) "limits its reach to
individuals (and their spouses) who ``wholly' own a
business" but does not address "a corporation's co-owners
who are not married to each other," and holding that
unmarried co-owners "were not explicitly excluded by the
DOL regulation" from being counted as employees); Melluish
v. Provident Life & Accident Ins. Co., 2001 U.S. Dist. Lexis
4595, at *9, *14-15 (W.D. Mich. Feb. 26, 2001) (person who
was one of three owners of a corporation properly counted
as an employee). Indeed, in a 1976 advisory opinion, the
Department of Labor made clear that a pension or profit
sharing plan covering only the shareholders of a company
or their spouses would lie outside ERISA's scope"only
where the stock of the corporation is wholly owned by one
8
shareholder and his or her spouse and the shareholder or
the shareholder and his or her spouse are the only
participants in the plan." Department of Labor, Pension &
Welfare Benefit Programs, Opinion 76-67, 1976 ERISA
Lexis 58 (May 21, 1976).
It is undisputed that Janice was William's step-daughter,
not his spouse. Because William and Janice were not
spouses, they could be counted as employees, even though
they were also owners. As a result, at the time of the
distributions, both plans had at least one employee-
participant. William was a participant in the Profit Sharing
Plan, while both William and Janice were participants in
the Pension Plan. Accordingly, both plans qualified as
employee benefit plans under ERISA. See Vega v. Nat'l Life
Ins. Servs., Inc., 188 F.3d 287, 294 (5th Cir. 1999) (The
company's "employee benefit plan is an ERISA plan
because it does not solely cover the Vegas, co-owners of the
company; rather, it includes their employees, and[the
company] employs at least one other person besides the
Vegas."); Robinson v. Linomaz, 58 F.3d 365, 368 (8th Cir.
1995) (Where group insurance policy purchased by
company required that "non-owner, common law employee"
be covered, the plan was governed by ERISA.).4
III.
Because both the Profit Sharing and Pension Plans were
governed by ERISA, the District Court erred in dismissing
plaintiffs' claims arising under Title I of ERISA. Accordingly,
we reverse the District Court's order of dismissal and
remand the case for further proceedings.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
4. Given our resolution of the case, we need not address plaintiffs'
argument that 29 C.F.R. S 2510.3-3(c)(1) should not apply because it
predated the REA and has not been amended since the REA was enacted
in 1984.
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