Kloots v. Amer Express Tax , 233 F. App'x 485 ( 2007 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 07a0342n.06
Filed: May 15, 2007
No. 06-3916
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
W. FRED KLOOTS, JR., TODD )
WITHAM, RICHARD K. )
MARTINDALE, GERALD STATEN, as )
Trustees of the Leonard Insurance )
Services Agency, Inc. Employee Stock )
Ownership Plan, LEONARD )
INSURANCE SERVICES AGENCY, )
)
Plaintiffs-Appellees, )
) ON APPEAL FROM THE UNITED
THE CINCINNATI INSURANCE ) STATES DISTRICT COURT FOR
COMPANY, assignee and partial ) THE NORTHERN DISTRICT OF
subrogee of Leonard Insurance Services ) OHIO
Agency )
)
Plaintiff-Appellee )
)
v. )
)
AMERICAN EXPRESS TAX AND )
BUSINESS SERVICES, INC. and PAUL )
STOLIC, )
)
Defendants-Appellants.
Before: SUHRHEINRICH and GIBBONS, Circuit Judges; HEYBURN, District Judge.*
JULIA SMITH GIBBONS, Circuit Judge. Defendants American Express Tax and
Business Services, Inc. (American Express) and Paul Stolic appeal the United States Magistrate
*
The Honorable John G. Heyburn, United States District Judge for the Western District
of Kentucky, sitting by designation.
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Judge’s dismissal without prejudice of four Ohio state law claims arising out of their valuation of
stock held in an employee stock ownership plan. They contend that the Employee Retirement
Income Security Act (ERISA) preempts those claims and the district court should have dismissed
them with prejudice. For the reasons stated below, we affirm.
I.
Plaintiffs, W. Fred. Kloots, Jr., Todd Witham, Richard K. Martindale, and Gerald Staten, are
trustees of the Leonard Insurance Services Agency, Inc. Employee Stock Ownership Plan (ESOP),
a plan maintained by plaintiff Leonard Insurance Services Agency, Inc. (Leonard) and governed by
ERISA.
Leonard created the ESOP in 1990. Between 1993 and 1994, Leonard retained Hausser &
Taylor (Hausser), an accounting firm, to conduct valuations of Leonard stock, and defendant Paul
Stolic was involved in providing those services in his capacity as an employee and director at
Hausser. The president of Leonard, Martin Evechik, had requested that Hausser prepare stock
valuation based upon a formula included in the buy-sell agreement contained in the employment
contract of all Leonard shareholders. That formula produced a per-share value by multiplying one
and a half times total income plus or minus the positive or negative book value of the company and
dividing by the number of existing shares. The buy-sell agreement governed Leonard’s repurchase
of the shares held by individuals leaving the organization. In 2000, defendant American Express Tax
and Business Services, Inc. (American Express) acquired Hausser, at which time Stolic became a
managing director at American Express. Between 1994 and 2002, defendants – specifically, Stolic
functioning as an employee of American Express, formerly Hausser – produced a series of valuation
letters for Leonard containing estimates of the value of Leonard stock.
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Stolic acknowledged during his deposition that Hausser maintained documents indicating that
the values set forth in the materials prepared by the firm for Leonard were being used for the ESOP.
He further testified that he never instructed anyone at Leonard that the valuations Hausser provided
should not be used for ESOP purposes. Stolic claimed that he first became aware that Leonard was
using Hausser’s valuations for the purposes of the ESOP after the first year Hausser took on the
valuation assignment.
On November 21, 1997, the United States Department of Labor (DOL) issued a letter to the
ESOP plan administrators notifying them that it was initiating an investigation to determine
compliance with the provisions of ERISA. In response to the DOL’s letter, Leonard transmitted the
stock valuations completed in the years ending December 31, 1994, 1995, and 1996 to the agency.
Following another letter, dated April 26, 1999, Leonard, with Hausser’s assistance, provided
information on the valuations prepared up to and through the year ending December 31, 1998.
On March 12, 2002, the DOL issued a second letter notifying the ESOP trustees of the close
of its investigation and its findings. It concluded that “[b]ased on the facts gathered in this
investigation, and subject to the possibility that additional information may lead us to revise our
views, it appears that, as Plan fiduciaries, you may have violated several provisions of ERISA.” The
DOL took issue with the method used in valuing Leonard stock, noting that the results did not reflect
“a good faith determination of the fair market value of the Leonard stock,” because it failed to take
into account a number of factors. According to the DOL letter, the ESOP trustees had committed
a series of violations of ERISA’s provisions and directed the trustees to take steps to correct the
violations. Defendants participated in remedial steps taken by Leonard in the face of the DOL’s
findings, including producing a second set of valuations. According to Stolic, the DOL refused to
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accept new valuations produced by defendants.
The DOL investigation resulted in a cost of $500,000 paid to the plan pursuant to an
agreement with the agency by Leonard and the trustees of the ESOP to bring the plan into
compliance. Leonard and the ESOP trustees made a claim to their insurer, Cincinnati Insurance
Company (CIC), for losses sustained. CIC paid the claim.
On October 26, 2004, plaintiffs, including CIC, filed a complaint in the United States District
Court for the Northern District of Ohio against American Express and Stolic, raising four claims:
(1) breach of fiduciary responsibility in violation of §§ 404 and 405 of ERISA; (2) professional
negligence; (3) breach of contract; and (4) negligent misrepresentation. The trustees and Leonard
sought contribution and CIC sought compensation as subrogee of the trustees and Leonard.
Defendants moved for summary judgment. The magistrate judge2 produced a written order
granting summary judgment on plaintiffs’ ERISA claim, concluding that plaintiffs did not have
standing to bring a claim under ERISA, ERISA did not allow for plaintiffs’ contribution claim, and
defendants were not acting in a fiduciary capacity when they provided valuation of ERISA stock.
The district court declined to exercise supplemental jurisdiction over plaintiffs’ remaining state law
claims under 28 U.S.C. § 1367. It nevertheless determined that ERISA preempted none of the state
law claims against defendants and, accordingly, dismissed those claims without prejudice.
Plaintiffs do not appeal the magistrate judge’s entry of judgment on their ERISA claim.
Defendants filed a timely notice of appeal to the magistrate’s preemption decision. They contend
on appeal that the court should have dismissed with prejudice plaintiffs’ remaining state law claims
2
In accordance with 28 U.S.C. § 636 and Fed. R. Civ. P. 73, the parties consented to the
magistrate judge’s management of the case.
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on preemption grounds. We limit our review to consideration of this issue.
II.
Whether the preemptive force of a federal statute precludes the pursuit of a state claim is a
question of law that we review de novo. Nester v. Allegiance Healthcare Corp., 315 F.3d 610, 613
(6th Cir. 2003). ERISA’s provisions “supersede any and all State laws insofar as they may now or
hereafter relate to any employee benefit plan” governed by ERISA’s terms. ERISA § 514(a), 29
U.S.C § 1144(a). Citing the difficulties posed by the language of § 514, courts have struggled to
determine the scope of ERISA’s preemption provision. See Penny/Ohlman/Nieman, Inc. v. Miami
Valley Pension Corp. (PONI), 399 F.3d 692, 697 (6th Cir. 2005) (noting that the Supreme Court had
dealt with the preemption provision’s “opaque language . . . approximately twenty times over the last
twenty-four years”) (internal quotation marks omitted).
The Sixth Circuit has identified three classes of state law claims subject to ERISA
preemption: claims based on “state laws that (1) mandate employee benefit structures or their
administration; (2) provide alternative enforcement mechanisms; or (3) bind employers or plan
administrators to particular choices or preclude uniform administrative practice, thereby functioning
as a regulation of an ERISA plan itself.” Briscoe v. Fine, 444 F.3d 478, 497 (6th Cir. 2006) (quoting
PONI, 399 F.3d at 698). We must determine, then, whether plaintiffs’ claims of professional
negligence, breach of contract, and negligent misrepresentation fit within any of the preempted
classes of state law claims. The first and third categories are plainly inapplicable here. Thus,
defendants are left to argue that plaintiffs’ state law claims constitute an attempt to seek an
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“alternative enforcement mechanism” for the legal duties imposed under ERISA.3
It is important, at the outset, to note the district court’s uncontested determination that
defendants are not fiduciaries relative to the ESOP or its beneficiaries, as that conclusion drives
much of our analysis. As plaintiffs point out, courts, including our own, have consistently declined
to hold that state law claims against non-fiduciary professional services providers constitute
impermissible attempts to enforce responsibilities governed by federal law. In PONI, the Sixth
Circuit evaluated claims of ERISA preemption advanced against state law claims of breach of
contract and negligent misrepresentation against a non-fiduciary “record keeper and . . . broker of
the life insurance policies held as assets” for an employee stock ownership plan. 399 F.3d at 695.
The court noted there that “other courts of appeals have . . . held that ERISA does not preempt state-
law claims brought against non-fiduciary service providers in connection with professional services
rendered to an ERISA plan.” 399 F.3d at 698. The court in PONI relied on a series of cases from
other circuits permitting state law claims to proceed on the ground that they were against
professional entities acting in a non-fiduciary capacity. 399 F.3d at 698-99. See, e.g., Gerosa v.
Savasta & Co., Inc., 329 F.3d 317, 330 (2d Cir. 2003) (determining that ERISA did not preempt
ERISA plan trustees’ state law claims against organization that provided actuarial services that
resulted in underfunding of ERISA plan); Ariz. State Carpenters Pension Trust Fund v. Citibank,
125 F.3d 715, 724 (9th Cir. 1997) (concluding that ERISA did not preclude a state law claim for
breach of a custodial agreement against a non-fiduciary bank); Coyne & Delany Co. v. Selman, 98
3
Plaintiffs also argue that defendants should be foreclosed from arguing that plaintiffs’
claims are preempted when, in a previous filing in the district court, defendants stated that
plaintiffs’ claims “neither arise under ERISA nor involve the ESOP.” Because plaintiffs’ claims
are not preempted, we do not address this claim.
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F.3d 1457, 1466-67 (4th Cir. 1996) (permitting plaintiffs to pursue in state court their “garden-
variety” professional malpractice claim against defendants “in their (non-fiduciary) capacities as
insurance professionals”); Airparts Co., Inc. v. Custom Benefit Servs. of Austin, Inc., 28 F.3d 1062,
1064 (10th Cir. 1994) (holding ERISA did not preempt professional negligence claim by trustees
against “outside consultant hired to advise the plan’s trustees”). In PONI, the court ultimately
determined that ERISA’s preemptive provision did not bar plaintiffs’ claims against the entity
providing record keeping services to the stock ownership plan. As the court noted, the defendant
in question was a “third-party service provider” performing services “no different than the
consulting, custodial, actuarial, or legal services provided to ERISA plans in which the courts have
found state-law causes of action to lie.” 399 F.3d at 701.
Defendants attempt unsuccessfully to distinguish these cases, including PONI. They argue,
in essence, that, because ERISA mandates the valuation they were called upon to perform, it
preempts any state law claims against them arising out of their work. They state, “[b]oth the
fiduciary duties of [plaintiffs] and the valuation criteria at issue are expressly set forth by ERISA.”
(Appellants’ Reply Br. at 4-5.) However, the duties imposed on the plaintiffs under ERISA are
largely irrelevant for the court’s purposes here, as this case does not involve a claim against plaintiffs
for breach of their fiduciary duties. The DOL’s letter notifying the ESOP of the results of its audit
does not speak to any obligations imposed on defendants in their valuation of Leonard stock. Rather,
it references plaintiffs’ “failure to obtain annual independent appraisals that properly determine the
fair market value of Leonard stock.” The DOL letter is clear that the agency’s concern arose from
plaintiffs’ failure to execute properly their duties as fiduciaries under the ESOP, not defendant’s role
in valuing ESOP stock. Defendants also assert that resolution of plaintiffs’ state law claims would
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require evaluation of the terms of ERISA and the ESOP. However, they point to no provision in
ERISA or the ESOP that could conceivably underlie plaintiffs’ suit.
Indeed, in this case, “a service agreement or contract separate and distinct from the ERISA
qualified plan,” PONI, 399 F.3d at 699, is the basis for plaintiffs’ claims. The record before us
establishes that the service agreement between plaintiffs and defendants was independent of the
terms of the ESOP. In a declaration, Stolic stated that defendants were “orally engaged by Leonard’s
president, on behalf of Leonard, to perform a specific calculation of the fair market value of Leonard
stock as of year end.” The plaintiffs’ complaint confirms this claim. This oral agreement, not the
ESOP, is the basis for the defendants’ actions on Leonard’s behalf and the origin of plaintiffs’ claim
for breach of contract.
Similarly, defendants’ obligations as certified public accountants are the basis for plaintiffs’
professional negligence claim, which is simply a malpractice claim by another name. See Airparts,
Co., 28 F.3d at 1067 (“Malpractice . . . and professional negligence are synonymous.”). Such claims
based on alleged breaches of professional responsibilities are generally subject to resolution under
state law. See Gerosa, 329 F.3d at 328 (“Regulating the professions, particularly under a rubric of
professional malpractice, is a traditional state function.”); Custer v. Sweeney, 89 F.3d 1156, 1166
(4th Cir. 1996) (noting that “the various circuit and district courts that have faced the preemption
question in cases involving professional negligence or malpractice claims against . . . service
providers to ERISA plans have declined to read ERISA’s preemptive scope so broadly” as to
preclude suits against these entities). Finally, as the court explained in PONI, a negligent
misrepresentation claim against a “non-fiduciary service provider” does not implicate ERISA, as it
does not require a court to evaluate whether the service provider violated the terms of an ERISA-
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governed plan. 399 F.3d at 703. A court would merely have to consider whether the service
provider “failed to perform as it represented.” Id.
In sum, the duties forming the bases for plaintiffs’ state law claims arise from sources entirely
distinct from the ESOP or ERISA and thus do not intrude upon ERISA’s exclusive enforcement
scheme. We accordingly conclude that the district court did not err in dismissing those claims
without prejudice to refiling in state court.
III.
For the foregoing reasons, we affirm the judgment of the district court.
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