West v. Clarke Murphy Jr Sel ( 1996 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
BRIAN G. WEST,
Plaintiff-Appellant,
v.
No. 95-1745
CLARKE MURPHY, JR. SELF EMPLOYED
PENSION PLAN; CLARKE MURPHY, JR.,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Joseph H. Young, Senior District Judge.
(CA-93-95-Y)
Argued: April 4, 1996
Decided: November 5, 1996
Before WILKINSON, Chief Judge, ERVIN, Circuit Judge, and
BUTZNER, Senior Circuit Judge.
_________________________________________________________________
Affirmed by published opinion. Senior Judge Butzner wrote the opin-
ion, in which Chief Judge Wilkinson and Judge Ervin joined.
_________________________________________________________________
COUNSEL
ARGUED: Paul Frederick Newhouse, Towson, Maryland, for Appel-
lant. Robert Richardson Bowie, Jr., BOWIE & JENSEN, Towson,
Maryland, for Appellees.
_________________________________________________________________
OPINION
BUTZNER, Senior Circuit Judge:
In this case we must determine whether a pension plan established
by Clarke Murphy, Jr., was an employee plan in which Brian G. West
was entitled to benefits under Title I of the Employment Retirement
Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq.
West alleged that he was eligible to participate in the plan as an affili-
ated employee of Murphy. He sought a portion of the plan's accrued
benefits along with statutory penalties. After a bench trial, the district
court dismissed West's complaint. We accept the district court's find-
ings of historical fact, and we affirm its judgment. We affirm, how-
ever, for a somewhat different reason. We find that, because West
was never employed by Murphy, he does not qualify as a participant
in Murphy's plan.
Jurisdiction is based on 28 U.S.C. § 1331 (federal question), 29
U.S.C. § 1132(a)(1)(B) (civil enforcement of ERISA), and 28 U.S.C.
§ 1291 (final decision). The appropriate standards of review are: mat-
ters of law, de novo; factual findings, clearly erroneous; imposition of
penalties and award of attorney's fees, abuse of discretion.
I
On January 1, 1986, Murphy, Theodore J. Potthast, Jr., P.A., and
Koehler, West & Associates, Chartered, formed a partnership, known
as White, Page & Lentz (WPL), for the purpose of practicing law.
Murphy joined WPL in his individual capacity. Koehler and Potthast
held their partnership interests through professional corporations.
West, who was an employee of Koehler, West & Associates at the
time of WPL's formation, became an employee of WPL.
In December 1986, Murphy created a pension benefit plan with a
retroactive effective date of January 1, 1986. The plan documents des-
ignated Murphy as plan sponsor, administrator, trustee, employer, and
sole-proprietor. Murphy did not notify WPL or West of the plan's
existence, and he was responsible for all contributions to the plan.
2
The district court found that in mid-December 1986, Murphy, Pott-
hast, and Koehler agreed to dissolve the WPL partnership as of Janu-
ary 1, 1987. The court found that the partnership was dissolved by
July 1987. From July 1987 until 1990, the former partners continued
to share office space, equipment, and expenses, but not profits. To
facilitate the sharing of expenses, WPL maintained a separate
accounting system until 1988. WPL also filed partnership tax returns
until 1988. In addition, the former partners continued to use common
malpractice insurance policies and the WPL letterhead until 1990.
In 1990, Murphy terminated the plan. In 1991, West contacted
Murphy to request copies of the plan documents and an appraisal of
his rights under the plan. Murphy, acting as plan administrator, noti-
fied West that he had not been eligible to participate in the plan
because he had never been an employee of Murphy.
Murphy argued that during 1986, when WPL existed, he had had
no separate employees. Murphy claimed that from 1987 to 1990, he
had been a sole-proprietor with no employees. West contended that
the WPL partnership had existed until 1990, and that he had been an
affiliated employee of Murphy until that time. He alleged that as an
affiliated employee he had been entitled to participate in the plan.
The district court found that after January 1, 1987, it was reason-
able for Murphy to conclude that WPL had dissolved for ERISA pur-
poses. Continuing, the court held that Murphy, therefore, did not
abuse his discretion as plan administrator in determining that West
had not been an eligible participant after December 31, 1986. With
respect to West's eligibility during the period that WPL existed (Janu-
ary 1, 1986, until December 31, 1986), the court held that West had
failed to prove that he would have participated in the plan had he
known about it.
II
We begin our analysis by examining the language of the statute.
See Madonia v. Blue Cross & Blue Shield of Virginia , 11 F.3d 444,
446 (4th Cir. 1993). The essence of an employee pension benefit plan
covered by ERISA is an employer-employee relationship. Stripped to
its bare essentials, the gist of ERISA's definition of such a plan is the
3
employer's establishment or maintenance of a plan for the retirement
or income deferral of the employer's employees. See § 1002(2)(A).
In order to be a participant in an ERISA plan, an individual must
be an "employee or former employee of [the] employer." § 1002(7).
Although the Supreme Court has elaborated on the definition of a par-
ticipant, the Court has retained the requirement that the individual be
an employee or former employee. Firestone Tire and Rubber Co. v.
Bruch, 489 U.S. 101, 117-18 (1989). ERISA defines an employee as
an "individual employed by an employer." § 1002(6). The Supreme
Court has also elaborated on this definition by adopting "a common-
law test for determining who qualifies as an `employee' under ERISA
. . . ." Northwestern Mut. Ins. Co. v. Darden , 503 U.S. 318, 323-24
(1992).
Pursuant to statutory mandate, the Secretary of Labor has issued
regulations clarifying these definitions and filling in the gaps left by
Congress. See § 1135; see also 29 C.F.R. § 2510.3-3 (1995). The reg-
ulations provide that Title I and its fiduciary and enforcement provi-
sions apply only to employee benefit plans. The regulations explicitly
exclude "any plan, fund or program, other than an apprenticeship or
other training program, under which no employees are participants
covered under the plan . . . ." 29 C.F.R. § 2510.3-3(b); see Schwartz
v. Gordon, 761 F.2d 864, 867-69 (2d Cir. 1985).
III
We must also examine both the express terms of Murphy's Plan
and the surrounding circumstances to determine whether West was a
covered employee under the plan. Cf. Donovan v. Dillingham, 688
F.2d 1367, 1373 (11th Cir. 1982) (en banc). Murphy's plan designates
who the employer is. The plan was entitled the "Clarke Murphy, Jr.
Self-Employed Pension Plan and Trust." Section 1.21 of the plan
defines "employer" as Clarke Murphy, Jr.,"and any entity which shall
have assumed in writing the obligations of this Plan. . . ." It is undis-
puted that neither WPL nor any other entity assumed the obligations
of the plan. In addition, the plan documents designated Murphy as
employer, administrator, sponsor, trustee, and sole proprietor.
§§ 1.05, 1.42, 1.59.
4
The plan also defines the term employee for purposes of the plan.
According to § 1.19, an "employee" is"any individual employed by
the Employer either as a common-law employee or a Self-Employed
Individual." It is undisputed that West was never employed by Mur-
phy in any capacity. At all pertinent times he was employed by WPL.
Although WPL had existed for almost a year by the time Murphy cre-
ated the plan, neither WPL nor any other individual or organization
was mentioned in the documents. See Spann v. Northwestern Mut.
Life Ins. Co., 795 F. Supp. 386, 389 (M.D. Ala. 1992) (relevant, as
a surrounding circumstance, that the plan documents mentioned only
the sole-proprietor.)
West makes two basic arguments in support of his contention that
he was an employee covered under the plan. The first argument is
based on his interpretation of the plan's language, found in the fol-
lowing sections of the plan:
Section 1.21--Employer
The term "Employer" means Clarke Murphy, Jr. and any
entity which shall have assumed in writing the obligations
of this Plan and Trust.
[For] purposes of determining service for eligibility and
vesting, the term "Employer" shall include all Affiliates
regardless of whether such Affiliates have adopted this Plan.
Section 1.06 - Affiliate
The term Affiliate means any
...
C. business entity which is part of an affiliated
service group of the Employer as defined in [Tax]
Code section 414(m).
5
Section 3.01 - Qualifications for Eligibility
Each Employee who has completed at least one thousand
(1,000) Hours-of-service during the twelve (12) month
period immediately preceding the Effective Date shall
become a Participant in this Plan on the Effective date; . . . .
Relying on these provisions, West reasons as follows: he was an
employee of WPL; WPL was Murphy's affiliate; therefore, Murphy
was his employer, and he was entitled to participate in the plan.
We reject this argument. It is clear that the second sentence of
§ 1.21 expanded the definition of "Employer" only for the "purpose[ ]
of determining service for eligibility and vesting." (emphasis added).
In other words, when calculating whether an employee had satisfied
the 1,000 hours of service requirement, the employee could count
hours that he or she worked for Murphy, who sponsored the plan, or
an affiliate. Neither the expanded definition of employer nor the 1,000
hour qualification made an individual who was not Murphy's
employee eligible to participate in the plan.
West's second argument is based on a statute, but not ERISA. He
argues that he should be considered Murphy's employee by virtue of
several sections of the Internal Revenue Code, including §§ 401, 410,
411, 414, 761, and 7701.
West's reliance on these sections is misplaced. Generally speaking,
these sections deal with minimum participation, vesting, and funding
standards that must be satisfied in order for an employee pension ben-
efit plan to receive favorable tax treatment. For tax purposes,
§ 414(m) expands the scope of the term employer by defining affili-
ated service groups. These provisions of the Tax Code, however, do
not vary ERISA's definition of participant or its requirement of an
employer-employee relationship. In Reklau v. Merchants Nat. Corp.,
808 F.2d 628, 630-31 (7th Cir. 1986), the court held expressly that
§ 401 of the Internal Revenue Code and, by implication, other parts
of the Code (except those that refer to minimum participation, vest-
ing, and funding) do not alter ERISA's requirements. Employee status
under ERISA is determined not by the tax code but by the common
law of agency. Darden, 503 U.S. at 322-24.
6
Other circumstances also weigh in Murphy's favor. West admits
that neither he, nor WPL, ever contributed to the plan. The record
indicates that from the beginning Murphy assumed sole responsibility
for financing the plan. Murphy's funding is consistent with his tax
documents that appear in the record. They provide additional evi-
dence that Murphy did not intend to create an employee pension ben-
efit plan open to WPL's employees. WPL's tax documents make no
mention of any employee pension or welfare benefit plans. Also,
beginning in 1986, when filing his individual tax returns, Murphy
sought a "Keogh retirement plan and self-employed SEP [Simplified
Employee Pension] deduction" equal to the amount of his yearly con-
tribution to the plan. Murphy consistently specified on each tax form
that there was only one participant in his plan. We note that we are
considering the tax documents only for the purpose of analyzing
West's claim. We take no position on whether Murphy's returns com-
plied with the Tax Code. See Diak v. Dwyer, Costello & Knox, P.C.,
33 F.3d 809, 813 (7th Cir. 1994).
After considering both the express language of the plan and the
surrounding circumstances, we conclude that West was not eligible to
participate in Murphy's plan. At no time was West Murphy's
employee. In the absence of the statutorily required employer-
employee relationship, West has no right to any benefits. Because
West was not a participant as defined by § 1002(7), he cannot recover
penalties or attorneys' fees. § 1132(c)(1) and (g)(1). We affirm the
district court's dismissal of West's complaint.
AFFIRMED
7