Kosloff et al v. Smith et al

Filing 71

MEMORANDUM AND ORDER denying 60 Motion for Reconsideration. Signed by Chief Judge J. Thomas Marten on 07/20/2015. (aa)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
DAVID KOSLOFF and
MICHAEL MCMAUDE as trustees
of the PREMIER HOSPICE PROFIT
SHARING 401(k) PLAN,
Plaintiffs,
v.

Case No. 13-1466-JTM

JEFFREY LEE SMITH, et al.,
Defendants.

MEMORANDUM AND ORDER
Before the court are plaintiffs David Kosloff and Michael McMaude’s Motion for
Leave to File and concurrently filed Motion to Reconsider (Dkt. 60) the court’s orders of
September 17, 2014, and February 11, 2015 (Dkts. 37, 54). This action is brought by
current fiduciaries of the Premier Hospice profit sharing 401(k) plan (“the Premier
plan”) against its former fiduciaries. Plaintiffs allege breach of contract, state-law
embezzlement,

and

ERISA

violations

stemming

from

defendants’

alleged

mismanagement of the Premier plan. Plaintiffs move the court to reconsider its
dismissal of ERISA breach of fiduciary duty claims arising before December 20, 2007,
citing an intervening change in controlling law. As discussed below, the motion is
denied.

I. Background
According to plaintiffs, the Premier plan is an ERISA-governed defined
contribution pension plan established in October 2004 by Premier Hospice, LLC.
Plaintiffs Kosloff and McMaude are the current fiduciaries of the Premier plan and have
served in that capacity since February 14, 2013. Defendant Jeffrey Lee Smith, the
founder and former owner of Premier Hospice, was named a fiduciary of the Premier
plan from its inception through January 1, 2013. Defendant Lucke & Associates served
as the plan administrator from September 20, 2004, through September 11, 2013, under a
third party administrator (“TPA”) contract between Premier Hospice and Lucke &
Associates. Defendant Jeffrey Lucke is the principal owner of Lucke & Associates.
Defendants allegedly transferred 100% of the Premier plan’s funds into a separate
ERISA-governed plan (“the SP plan”) in 2006.
Plaintiffs allege that defendants committed multiple violations of their fiduciary
and/or co-fiduciary duties under ERISA while serving as the Premier plan’s fiduciaries
from October 2004 to September 2013. Plaintiffs also allege that the 2006 transfer of
assets from the Premier plan to the SP plan is embezzlement under Kansas law.
Plaintiffs further allege that Lucke & Associates breached the TPA contract and denied
the Premier plan its expected contractual benefits.
On March 28, 2014, defendants filed a joint motion to dismiss all claims. (Dkt.
17). The court granted the motion in part, dismissing: (1) all ERISA breach of fiduciary
duty claims arising before December 20, 2007, because of plaintiffs’ failure to
sufficiently plead the fraud or concealment exception to the ERISA statute of repose; (2)
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plaintiffs’ claims under ERISA § 101(f) for lack of legal foundation; and (3) plaintiffs’
state-law embezzlement claims because they are preempted by ERISA. (Dkt. 37, at 4-9).
Plaintiffs sought leave to amend the complaint in an attempt to salvage the dismissed
ERISA breach of fiduciary duty claims. (Dkt. 40). They sought to amend the complaint
in a manner that would qualify the time-barred claims under the “fraud or
concealment” exception of the ERISA fiduciary duty statute of repose by pleading
affirmative acts of concealment. The court denied leave to amend on the ground of
futility because the proposed amended complaint also failed to plead affirmative acts of
concealment. (Dkt. 54).
Plaintiffs now seek reconsideration of the court’s order (Dkt. 37) dismissing
ERISA breach of fiduciary duty claims arising before December 20, 2007, and of the
court’s order (Dkt. 54) denying leave to amend the complaint on grounds of futility.
II. Leave to File is Granted
A party may move for reconsideration of a non-dispositive motion “within 14
days after the order is filed unless the court extends the time.” D. KAN. R. 7.3(b).
Plaintiffs moved for reconsideration 36 days after the court filed the second motion of
the two motions at issue here. The motion is thus filed out-of-time. However, the
motion was filed within one month of the publication of the Tenth Circuit decision on
which the motion relies – a reasonable time to discover the change in law and submit a
motion thereon – and is unopposed. Therefore, the court exercises its discretion to
extend the time to file; leave to file the Rule 7.3(b)(1) motion is GRANTED.

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III. Legal Standard
The purpose of a motion to reconsider “is to correct manifest errors of law or to
present newly discovered evidence.” Monge v. FG Petro-Machinery (Group) Co. Ltd., 701
F.3d 598, 611 (10th Cir. 2012) (brackets and internal quotation and citation omitted).
“Grounds warranting a motion to reconsider include (1) an intervening change in the
controlling law, (2) new evidence previously unavailable, and (3) the need to correct
clear error or prevent manifest injustice.” Servants of the Paraclete v. Does, 204 F.3d 1005,
1012 (10th Cir. 2000); accord D. KAN. R. 7.3(b). However, “[a] motion to reconsider
should not be used to revisit issues already addressed or advance arguments that could
have been raised earlier.” United States v. Christy, 739 F.3d 534, 539 (10th Cir. 2014)
(quoting Servants of Paraclete, 204 F.3d at 1012).
IV. Analysis
ERISA breach of fiduciary duty claims may not commence later than six years
after either the last act of the breach or the last opportunity to cure a breach by
omission, “except that in the case of fraud or concealment, such action may be
commenced not later than six years after the date of discovery of such breach or
violation.” 29 U.S.C. § 1113. Plaintiffs argue that the Tenth Circuit’s recent decision in
Fulghum v. Embarq Corp., 785 F.3d 395 (2015), clarifies that the “fraud or concealment”
exception applies to their breach of fiduciary duty claims arising before December 20,
2007.
Under Fulghum, the § 1113 “fraud or concealment” exception applies either when
the “alleged breach of fiduciary duty is based on a fraud theory” or “when the
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defendant conceals the alleged breach of fiduciary duty.” 785 F.3d at 415-16. Thus,
rather than a singular “fraud or concealment” theory, the exception recognizes fraud
and concealment as two distinct exceptions. The court addresses each exception in turn.
A. The § 1113 fraud exception does not apply to plaintiffs’ claims.
Under a “fraud theory,” the § 1113 exception applies “where the alleged breach
of fiduciary duty involves a claim the defendant made a false representation of a matter
of fact, whether by words or conduct . . . which deceives and is intended to deceive
another so that he shall act upon it to his legal injury.” Fulghum, 785 F.3d at 415 (internal
quotation and citation omitted). Thus, the § 1113 fraud exception is invoked only where
“the alleged breach of fiduciary duty is based on a fraud theory.” Id. at 416 (emphasis
added).
The claims at issue are expressed in Counts I-VIII and XI of the complaint and
are addressed in turn below.1
Count I alleges that defendants Smith and Lucke breached their fiduciary duties
by (1) limiting Premier plan participation to three ineligible participants in violation of
the plan documents, (2) causing the Premier plan to accept excessive employer
contributions per participant in violation of Internal Revenue Code (“IRC”) § 415, (3)
causing the Premier plan to transfer 100% of its assets to the SP plan without
explanatory documentation, (4) causing the Premier plan to incur excessive and
unreasonable expenses, and (5) failing to maintain a fidelity bond. These claims are not

Count X does not allege a breach of fiduciary duty and thus does not qualify for the § 1113
exception. All other ERISA claims have been dismissed on other grounds. (Dkt. 37).
1

5

based on a fraud theory; they do not allege that defendants made misrepresentations of
fact with the intent to deceive plaintiffs. To the contrary, plaintiffs allege that the three
participants, the amount of employer contributions, the transfer of 100% of the Premier
plan’s funds to the SP plan, and expenses were all disclosed on Forms 5500.2 Plaintiffs
also do not allege that defendants misrepresented their failures to maintain fidelity
bonds. Count I does not allege misrepresentations of material fact on which plaintiffs
relied to their legal injury.
Count II alleges the acts in Count I against defendant Lucke & Associates and is
likewise not based on a fraud theory.
Count III alleges that Smith breached his fiduciary duty by receiving
consideration for his personal account when 100% of the Premier plan’s assets were
transferred to the SP plan, of which the sole participants were allegedly Smith, his wife,
and his child. This claim also does not allege a misrepresentation. Further, plaintiffs
allege that the transfer in question was accurately disclosed on the 2006 Form 5500.
Plaintiffs thus patently allege that Smith accurately represented his alleged breach of
fiduciary duty. Accordingly, the claim is not based on a fraud theory.
Counts IV-VII allege co-fiduciary liability of various defendants for the fiduciary
breaches of other defendants as described above. The counts are factually predicated on
Counts I-III. They are likewise not based on a fraud theory.

Form 5500 is an annual financial disclosure document completed by ERISA plans. MERTENS
LAW OF FED. INCOME TAXATION § 25B-1:22 (2015).
2

6

Count XI alleges that the transfer of funds from the Premier plan to the SP plan is
a prohibited transaction under 29 U.S.C. § 1106 and seeks restitution of the funds.
However, plaintiffs allege that the improper transfer was accurately disclosed – not
misrepresented – in the 2006 Form 5500; the claim is not based on a fraud theory.
Plaintiffs fail to allege any breach of fiduciary duty based on a fraud theory.
Therefore, the § 1113 fraud exception does not apply to the ERISA breach of fiduciary
duty allegations in the complaint arising before December 20, 2007.
B. The § 1113 fraud exception does not apply to plaintiffs’ proposed first amended
complaint.
The court denied plaintiffs leave to amend the complaint because the proposed
amended complaint would have been subject to dismissal on the pleadings and was
thus futile. (Dkt. 54, at 4-5). Accordingly, the court will change that ruling only if
Fulghum would render the proposed amended complaint viable. Plaintiffs’ proposed
amended complaint (Dkt. 41-1) contains few differences in fact pleading as compared to
the complaint (Dkt. 1). The differences are as follows.
1. Plaintiffs’ proposed amended claims of wrongfully limiting plan participation
are not based on fraud.
Plaintiffs allege that defendants misrepresented the number of Premier plan
participants on Forms 5500 for years 2005, 2006, and 2007 by reporting three
participants when Smith was actually the sole participant. Plaintiffs accurately argue
that this is a misrepresentation of fact. However, it is immaterial. Plaintiffs allege that
defendants should have offered the Premier plan to nearly 100 eligible persons, but
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limited participation to only one. This claim is based on limiting the Premier plan to
fewer participants than were eligible – not misrepresenting the number of participants.
Defendants’ disclosure that only three persons participated demonstrates their alleged
breach in an equally damning manner as if they had disclosed only one participant. The
admission cannot be reasonably construed as a misrepresentation intended to mislead
plaintiffs into believing that no breach occurred and the claim is not based on the
misrepresentation. Further, plaintiffs would not plausibly have relied on the
misrepresentation of the number of participants to their legal injury. The claim is not
based on a misrepresentation; it is not based in fraud.
2. Plaintiffs’ proposed amended claims of Smith’s wrongful personal gain are not
based on fraud.
Plaintiffs also allege that, after 100% of the Premier plan’s funds were transferred
to the SP plan, all of the SP plan funds were transferred to Smith’s personal IRA.
Plaintiffs argue that the transfer to Smith’s IRA was not reported on the Premier plan’s
2006 Form 5500 and that certification of the Form 5500 was a misrepresentation
concerning a prohibited transaction – whereby Smith personally benefitted from the
Premier plan – that qualifies for the § 1113 fraud exception. However, the court
previously characterized such Form 5500 omissions as “Defendants’ failure to selfreport their alleged ERISA violations,” rather than misrepresentations. (Dkt. 37, at 6
n.1). A breach of fiduciary duty claim derived from the failure to self-report is thus not
based on a misrepresentation.

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Even to the extent that such allegation could be characterized as a
misrepresentation, it would not form the basis of the breach of fiduciary duty claim, as
follows. The alleged breach is a prohibited transaction whereby Smith personally
benefitted from the Premier plan. Plaintiffs allege that Smith was the sole participant in
the SP plan. Therefore, the act giving rise to such a breach of fiduciary duty is the
transfer from Premier to SP – not from the SP plan to Smith’s IRA. Smith’s alleged
breach of duty to the Premier plan was not accomplished by transferring funds to his
IRA. Rather, it was accomplished by transferring funds to the SP plan – a transaction
that was disclosed. Therefore, the breach of duty claimed here is unrelated to the
transfer from the SP plan to Smith’s IRA and any misrepresentation of the latter
transaction is not the basis of plaintiffs’ claim.3 Moreover, the Premier plan would have
no business reporting the SP plan’s transactions on its own Form 5500. 4
Accordingly, plaintiffs’ proposed first amended complaint (Dkt. 41-1) fails to
invoke the § 1113 fraud exception. The proposed amendment therefore remains futile
and plaintiff’s motion to reconsider the court’s order denying leave to amend is
DENIED.

The court also notes that a misrepresentation of the transfer of funds from the SP plan to
Smith’s IRA cannot form the basis of a breach of fiduciary duty by plaintiffs because they would
have no legally protected interest in the SP plan’s Form 5500 and would therefore lack standing
to make such a claim. See Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (standing requires
injury in fact of a legally protected interest).
4 The court further notes that plaintiffs could not base a claim of breach of fiduciary duty on
defendants’ alleged failure to disclose the transfer of funds from the SP plan to Smith’s IRA on
the Premier plan’s Form 5500 because the transaction was unrelated to the latter. Form 5500
only discloses exempt transactions from the subject plan.
3

9

C. The § 1113 concealment exception does not apply to either plaintiffs’ claims or
their proposed amended complaint.
The § 1113 “concealment” exception applies when a defendant acts to conceal a
breach of fiduciary duty. Fulghum, 785 F.3d at 415. The Fulghum court analyzed the
meaning of “concealment” at the time § 1113 was passed and determined that it also
included withholding something which one knows and is duty-bound to reveal. Id.
However, ERISA does not express a fiduciary duty to self-report or disclose one’s
breach of fiduciary duty. See Varity Corp. v. Howe, 516 U.S. 489, 506 (1996); Hockett v. Sun
Co., Inc., 109 F.3d 1515, 1525 n.4 (10th Cir. 1997). Therefore, in the context of ERISA
claims for breach of fiduciary duty, the § 1113 concealment exception cannot be invoked
through a failure to disclose; an act of concealment is required.
Moreover, the Fulghum court did not address the concealment exception beyond
merely identifying that it is independent of the fraud exception. This court twice denied
plaintiffs’ argument on grounds that they failed to plead affirmative acts of
concealment. Therefore, Fulghum does not change the concealment standard previously
applied by this court; it merely provides that plaintiffs may pursue a separate exception
– the “fraud exception” – as they do now. The court rests on its earlier reasoning in
denying the § 1113 concealment exception.

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IT IS ACCORDINGLY ORDERED this 20th day of July, 2015, that plaintiffs’
motion to reconsider (Dkt. 60) is DENIED.

s\ J. Thomas Marten
J. THOMAS MARTEN, JUDGE

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