PEREZ v. KWASNY et al

Filing 54

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE EDUARDO C. ROBRENO ON 2/8/16. 2/10/16 ENTERED AND COPIES E-MAILED.(mbh, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
THOMAS E. PEREZ, Secretary of Labor:
United States Department of Labor

CIVIL ACTION
NO. 14-4286

Plaintiff,
v.

RICHARD J. KWASNY, et al.
Defendants.

MEMORANDUM
EDUARDO C. ROBRENO, J.

February 8, 2016

Presently before the Court is the Secretary of Labor's
(the "Secretary") motion for default judgment against the law
firm of Kwasny and Reilly, P.C.

(the "Firm").

The Secretary

seeks a default judgment ruling that the Firm violated Title I
of the Employee Retirement and Income Security Act of 1974, as
amended 29 U.S.C.

§

1001, et seq.

("ERISA") due to its failure

to forward employee contributions to the Kwasny and Reilly,
40l(k) Profit Sharing Plan (the "Plan'') in violation of ERISA.

I.

~ROCEDURAL

HISTORY

The Secretary filed this ERISA action on July 16,
2014.

The Firm was served with a complaint and summons in

compliance with Federal Rule of Civil Procedure 4(e) on

September 8, 2014.

The Plaintiff filed the proof of service on

September 19, 2014.
On October 24, 2014, Richard Kwasny, representing all
of the Defendants in the case pro se, filed an answer to the
Secretary's complaint.

The Secretary filed a motion to strike

the answer asserting that Kwasny could not represent the other
Defendants (having previously had his license to practice
suspended).

On November 19, 2014, the Court granted the

Secretary's motion to strike.

On November 21, 2014, Kwasny

filed a response to the motion to strike in which he stated that
he intended to file the answer only on his behalf and agreed to
withdraw the answer on behalf of the Firm and the Plan.

Kwasny

requested an opportunity to address the Court prior to the entry
of any default judgment.

He stated that neither the Firm nor

the Plan have any assets and cannot defend the action.

He noted

that the causes of action are identical against all Defendants,
and "judgment against one would result in judgment against all."
Therefore, he requested that judgment not be entered against the
Plan and the Firm.
On December 1, 2014, the Secretary filed a request for
default under Rule 55 against the Firm, since it failed to plead
or otherwise defend itself.
the same day.

The Clerk of Court entered default

On January 22, 2015, the Court held a conference

regarding, inter alia, Kwasny's response to the motion to strike
2

and the Secretary's request for default. On August 12, 2015, the
Secretary filed the instant motion for default judgment against
the Firm.

The Firm failed to respond to the motion and at no

time has it entered an appearance, filed a pleading, or
participated in the litigation in any way.

II.

ALLEGATIONS IN THE COMPLAINT
In his complaint, the Secretary alleges that the Firm

and Richard Kwasny, a partner at the Firm, established the ERISA
Plan so that Firm employees could contribute a portion of their
pay to the Plan through payroll deductions. 1

He asserts that,

beginning January 2007 through 2009, the Firm and Kwasny
withdrew contributions from employees' paychecks but
purposefully failed to deposit those contributions into the Plan
in a timely manner. 2

He alleges that the contributions were

1

A defined contribution ERISA employee benefit plan
such as the one at issue allows plan members to contribute a
portion of their salary, pre-tax, into individual retirement
accounts.
See 29 U.S.C. § 1002(34). ERISA was enacted to
create "complex and far-reaching rules designed to protect the
integrity of [employee benefit] plans and the expectations of
their participants and beneficiaries." Barrowclough v. Kidder,
Peabody & Co., 752 F.2d 923, 929 (3d Cir. 1985), overruled on
other grounds, Pritzker v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 7 F.3d 1110, 1111 (3d Cir. 1993).
2

The Secretary alleges that $40,416.30 in employee
contributions were never deposited into the Plan, while
$2,099.06 in contributions were eventually deposited late and
without interest.
He seeks from the Firm the $40,416.30 in
3

commingled with Firm general assets and used to pay the Firm's
expenses; in other words, used for the Firm's own interests.
The Secretary further alleges that at all relevant times, the
Firm exercised authority and control respecting management and
disposition of the Plan's assets and had discretionary authority
and discretionary responsibility in the administration of the
Plan.

III. LEGAL STANDARD

The Court may enter default judgment pursuant to
Federal Rule of Civil Procedure 55(b).

Its decision to do so

"is left primarily to the discretion of the district court."
Hritz v. Woma Corp., 732 F.2d 1178, 1180 (3d Cir. 1984).

That

discretion is not without limits, however, and the Court is
required to make specific factual determinations before entering
the default judgment.
71, 73

See Emasco Ins. Co. v. Sambrick, 834 F.2d

(3d Cir. 1987); Hritz, 732 F.2d at 1181.

"A consequence

of the entry of a default judgment is that the factual
allegations of the complaint, except those relating to the
amount of damages, will be taken as true."
Corbin,

908 F.2d 1142, 1149 (3d Cir. 1990)

Comdyne I, Inc. v.
(internal citations

omitted).

withheld contributions along with $9,798.85 in pre-judgment
interest.
4

IV.

DISCUSSION

A.

The ERISA Violations
The Secretary asserts that the allegations described

above establish that the Firm breached its duties under ERISA
to:

(1)

29 U.S.C.

ensure that Plan assets are held in a trust account,
§

1103;

(2) act solely in the interest of the Plan

participants and their beneficiaries, 29 U.S.C.
1104 (a) (1) (A));

(3) act prudently, 29 U.S.C.

§

§

1104 (a) (1) (B);

(4) prevent the Plan from engaging in a direct or indirect
transfer of Plan assets for the benefit or use of a party in
interest, 29 U.S.C.

§

1106 (a) (1) (D); and (5) refrain from

dealing with the Plan's assets for the fiduciary's own interest,
29 U.S.C.

§

1106(b) (1).

The Court agrees with the Secretary's

assessment of the violations.
B.

The Entry of Default Judgment
Before entering default judgment, the court must

consider "some or all of the six-part test enunciated in Poulis
v. State Farm Fire and Casualty Co., 747 F.2d 863, 868
1984) ."

(3d Cir.

Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912, 919

(3d Cir. 1992)

(internal citations omitted); see also Anchorage

Assocs. v. Virgin Islands Bd. of Tax Review, 922 F.2d 168, 177
(3d Cir. 1990)

(providing that "[d]epending on the record before

the court, consideration of one or more of the Poulis factors

5

may be required when a party moves under .

. Rule 55(b) for a

default judgment as a sanction for a failure to plead or
otherwise defend").
Those factors are:
(1)
the extent of the party's personal
responsibility;
(2)
the prejudice to the
adversary
.,
(3)
a
history
of
dilatoriness; (4) whether the conduct of the
party or the attorney was willful or in bad
faith;
(5) the effectiveness of sanctions
other
than
dismissal,
which
entails
an
analysis of alternative sanctions; and (6)
the meritoriousness of the claim or defense.
Poulis, 747 F.2d at 868 (emphasis omitted).

Here, the Firm

appears to be completely responsible for its failure to defend.
It was properly served and one of its named partners has been
litigating the case on his own behalf.
also appears to have been willful.

As a result, its conduct

The prejudice to the

Secretary is great given that it has been deprived of its
ability to litigate the ERISA violations against the Firm.

For

this reason, no other alternative sanctions appear appropriate.
In that the Firm has not entered an appearance, responded to any
motion or pleading, or in any way been involved in the case,
there is a complete history of dilatoriness.

Finally, based on

the Secretary's allegations, it appears that his claim is
meritorious while the Firm lacks a valid defense.
the entry of default judgment is warranted.

6

As a result,

C.

Relief Requested
In his motion, the Secretary requests the following

relief against the Firm:

(1) restitution of the $40,416.30 in

withheld employee contributions as well as $9,798.85 in prejudgment interest for a total of $50,215.15;

(2) removal of the

Firm as a Plan administrator and the appointment of an
independent Plan fiduciary, paid for by the Firm, to manage and
dispose of the Plan assets; and (3) a permanent injunction
against the Firm ever serving as a fiduciary of any other ERISA
plan.
When an ERISA fiduciary breaches his duties, it is:
personally liable to make good to such plan
any losses to the plan resulting from each
such breach, and to restore to such plan any
profits of such fiduciary which have been
made through use of assets of the plan by
the fiduciary, and shall be subject to such
other equitable or remedial relief as the
court
may
deem
appropriate,
including
removal of such fiduciary.
29 U.S.C.

§

1109(a).

The Court must require a breaching

fiduciary to restore a plan to the position it would have been
in but for that fiduciary's illegal conduct.
86 F. Supp. 3d 293, 392-93 (E.D. Pa. 2015)

Perez v. Koresko,

(citing Donovan v.

Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985)).

"A federal

court enforcing fiduciary obligations under ERISA is thus given
broad equitable powers to implement its remedial decrees."
Delgrosso v. Spang & Co., 769 F.2d 928, 937 (3d Cir. 1985).
7

Because the Firm withheld employee contributions from
the Plan, restitution of those funds is the obvious first step
in the restoration of the Plan.

Moreover, the availability of

prejudgment interest on those amounts "exists to make plaintiffs
whole and to preclude defendants from garnering unjust
enrichment."

Nat'l Sec. Sys.,

Inc. v.

Iola,

700 F.3d 65,

(3d Cir. 2012); Anthuis v. Colt Indus. Operating Corp.,
999, 1010

(3d Cir. 1992)

102

971 F.2d

(providing that "in the district

court's discretion, prejudgment interest may be awarded for a
denial of pension benefits").
the funds into the Plan,

When the Firm failed to deposit

it deprived the participants of the

interest on their investment.

In order to place the Plan and

its participants in the same position that they would have been
in, but for the breaches, the Firm must also remit interest on
the withheld funds.
The Secretary suggests that the appropriate interest
rate is the rate that the IRS charges taxpayers who underpay
their taxes.
Supp.

454,

458

See 26 U.S.C. § 6621; McLaughlin v. Cohen,
(S.D.N.Y. 1988)

686 F.

(applying the IRS rate from

Section 6621 and noting that "the interest rate allowable in
ERISA cases is like other elements of an equitable recovery,
subject to the discretion of the Court")
marks omitted)

(internal quotation

The Court concludes that the IRS rate is

equitable.
8

Among the Court's equitable powers is the power to
remove fiduciaries.

29 U.S.C.

1109(a).

§

Indeed, removal of

fiduciaries is regularly recognized as an appropriate remedy
upon findings of imprudence, divided loyalties and prohibited
transactions.

Reich v. Lancaster, 55 F.3d 1034, 1054 (5th Cir.

1995); Donovan v. Mazzola, 716 F.2d 1226, 1238-39 (9th Cir.
1994); Beck v. Levering, 947 F.2d 693, 641 (2nd Cir. 1991).
With the Firm's removal, a new Plan fiduciary must be installed.
This is an expense that would not have accrued but for the
Firm's breaches.

Therefore, it is just that it pay the costs

associated with the fiduciary in order to make the Plan whole.
See Chao v. Malkani, 216 F. Supp. 2d 505, 518-19 (D. Md. 2002),
aff'd, 452 F.3d 290

(4th Cir. 2006)

(ordering the defendants to

pay the costs associated with an independent trustee); see also
Mazzola, 716 F.2d at 1238 (affirming the district court's
decision to appoint an investment manager) .
Finally, the broad authority granted the Court to
provide relief under ERISA permits it to bar serious ERISA
violators from serving as fiduciaries or service providers to
ERISA-covered plans.

Serious misconduct is grounds for a

permanent injunction without a showing of future harm.
Lancaster, 55 F.3d at 1054; Beck, 947 F.2d at 641.

See

The Firm has

failed to fulfill its duties as an ERISA fiduciary and has used
Plan assets for its own benefit. In that the Firm cannot be
9

entrusted managing ERISA-covered plans or their assets,

a

permanent injunction barring the Firm as a fiduciary is
justified.

V.

CONCLUSION
For the reasons set forth above, the Court will grant

the Secretary's motion for default judgement, entering judgment
in his favor and against the Firm, and award the remedies
discussed above.
An appropriate order entering judgment follows.

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