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Corman v. The Nationwide Life Insurance Co.

United States District Court, E.D. Pennsylvania

July 12, 2019

JAMES CORMAN, ENERGY ALTERNATIVE STUDIES, INC. AND THE ENERGY ALTERNATIVE STUDIES INC. HEALTH AND WELFARE PLAN, Plaintiffs,
v.
THE NATIONWIDE LIFE INSURANCE COMPANY, Defendant.

          MEMORANDUM OPINION

          WENDY BEETLESTONE, J.

         John Koresko was the mastermind behind a large-scale endeavor to convert welfare benefit funds to his own use, which has spawned years of litigation. See generally Perez v. Koresko, 86 F.Supp.3d 293 (E.D. Pa. 2015); Solis v. Koresko, 884 F.Supp.2d 251 (E.D. Pa. 2012), aff'd, 646 Fed.Appx. 230 (3d Cir. 2016).

         Following the revelation of the scheme, Plaintiffs James Corman, Energy Alternative Studies, Inc. (“EAS”), and the Energy Alternative Studies Inc. Health and Welfare Plan (the “EAS Plan”) filed a complaint in August 2017 against Defendant Nationwide Life Insurance Company (“Nationwide”), which was dismissed without prejudice. Corman v. Nationwide Life Ins. Co., 347 F.Supp.3d 248, 258 (E.D. Pa. 2018). Plaintiffs filed an Amended Complaint to which Defendant has filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The Amended Complaint alleges that Defendant: (1) breached its fiduciary duty and engaged in prohibited transactions in violation of Section 1132(a)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”); (2) knowingly participated in fiduciary breaches and in prohibited transactions in violation of Section 1132(a)(3) of ERISA; (3) conducted the affairs of an enterprise through a pattern of racketeering activity in violation of Section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act (“RICO”); (4) benefited from the RICO violations of Koresko and his associates in violation of Section 1962(c) of RICO under a respondeat superior theory of liability; and, (5) violated Section 1962(d) of RICO by conspiring to violate Section 1962(c) of RICO. For the reasons that follow, the motion will be denied.

         I. BACKGROUND

         Before addressing the facts themselves, a preliminary question arises: Which facts and documents may be considered in resolving this motion to dismiss? As a general rule, courts may consider “documents that are attached to or submitted with the complaint, and any matters incorporated by reference or integral to the complaint, items subject to judicial notice, matters of public record, orders, and items appearing in the record of the case.” Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006); see also Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010) (on motion to dismiss, consideration may be given to “the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents”). The Third Circuit has explained that “[t]he rationale underlying this [rule] is that the primary problem raised by looking to documents outside the complaint [is] lack of notice to the plaintiff, ” and that this problem “is dissipated where the plaintiff has actual notice and has relied upon these documents in framing the complaint.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997).

         In Defendant's prior motion to dismiss, it attached two documents central to this case: the “Plan Documents, ” which established the welfare benefit plan at issue here, and the “Policy, ” which insured Plaintiff James Corman and his wife Mary Corman's lives. Defendant did not, however, attach these documents to its currently pending motion to dismiss. Noticing this discrepancy, the Court ordered the parties to show cause why the Court should not take judicial notice of the documents submitted with the initial motion to dismiss. While ultimately not dispositive to the pending motion, the Court concludes based on the parties' responses that the Plan Documents and the Policy may appropriately be considered, for several reasons.

         First, the documents are “undisputedly authentic, ” Mayer, 605 F.3d at 230, insofar as when they were attached to the prior motion to dismiss, Plaintiffs did not contest their authenticity. And here, Plaintiffs offer no argumentation to suggest otherwise.

         Second, these documents are “integral to the complaint.” Buck, 452 F.3d at 260. The “integral” criterion is met where “the claims in the complaint are ‘based' on an extrinsic document.” Burlington Coat Factory, 114 F.3d at 1426. Plaintiffs state that their claims are not “based” on the documents because the documents are “referenced to establish the confusion, ambiguity, and false impressions created by them.” Plaintiffs' contention is partly true; the Complaint certainly does allege some confusion relating to the documents. But the Amended Complaint also “base[s]” its ERISA claims on the supposition that Defendant breached its fiduciary duties by engaging in actions not authorized by the terms of the Plan Documents or the Policy (including, as will be discussed at length below, issuing an unauthorized loan). Therefore, the documents are sufficiently “integral” to the Amended Complaint that they may be considered here.

         Third, these documents are “items appearing in the record of the case.” Buck, 452 F.3d at 260. Plaintiffs, in response, largely rely on Hoefling v. City of Miami, 811 F.3d 1271 (11th Cir. 2016), an Eleventh Circuit decision that held that a district court, when ruling on a motion to dismiss a second amended complaint, had erred by considering documents attached only to the first amended complaint. The panel explained: “[W]hen [the plaintiff] filed the second amended complaint, the first amended complaint (and its attached exhibits) became a legal nullity.” Id. at 1277. But that case does not govern here primarily because the Hoefling court's reasoning was based on the plaintiff having “expressly disavowed or rejected” the previously attached exhibit in question-whereas here Plaintiffs' Amended Complaint continues to rely on the documents in question. In any event, to the extent Hoefling counsels differently from Buck, persuasive Eleventh Circuit authority must give way to binding Third Circuit precedent.

         Fourth, Plaintiffs were on notice that these documents were central to their claims and that they could be relied upon in resolving the motion to dismiss. Plaintiffs aver otherwise-but do not offer any affirmative argument to support that position. Regardless, Plaintiffs are mistaken: The Amended Complaint quotes the Plan Documents extensively and makes repeated and extensive reference to the Policy, making plain that Plaintiffs did have notice that they could and would be relied upon in resolving this motion to dismiss. Therefore, the Plan Documents and Policy are appropriately considered in resolving this motion to dismiss.

         In addition to the Plan Documents and Policy, two more documents-one entitled “Verification of Trust and Warrant of Authority” (“the Verification”) and another referred to by the parties as the “Custodial Agreement”-are central to this case. These documents are not attached to any of the parties' briefs or pleadings, but they are excerpted and otherwise described in the Amended Complaint. These excerpts and descriptions are part of the factual allegations of the Amended Complaint, and therefore they may be considered in resolving the pending motion. See Ruggiero v. Mount Nittany Med. Ctr., 736 Fed.Appx. 35, 37 n.1 (3d Cir. 2018) (citing Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014)) (“To the extent passages are excerpted from documents not attached to the complaint, we consider them because the documents were integral to and explicitly relied upon in the complaint.”); see also Badillo v. Stopko, 2012 WL 1565303, at *5 (D.N.J. May 2, 2012) (considering, on a motion to dismiss, excerpts of a document that was a part of the underlying complaint even though the document itself was not attached to the complaint, because “portions of [the document] are quoted at length” and because “Plaintiffs' claims rely on it”).

         A. The Arrangement

         Between 2002 and 2013, John Koresko and others operated a multiple employer welfare arrangement (the “Arrangement” or the “Koresko Arrangement”) that allowed employers to purchase cash value life insurance policies and take a tax deduction for the premiums as a business expense. Koresko systematically converted and misused the assets of the participating welfare benefit plans, which was described extensively in Perez, supra.

         As relevant here, the Arrangement was run by PennMont Benefit Services (“PennMont”), a corporation whose officers included John Koresko and his brother Lawrence Koresko (throughout this opinion, unless otherwise noted, “Koresko” refers to John). PennMont recruited participants and administered the individual plans, including the Plaintiff EAS Plan. In its recruitment materials, PennMont explained to prospective participants that in order to take advantage of the Arrangement's purported tax benefits, an employer needed to sign an adoption agreement that established the employer's own welfare benefit plan according to terms dictated by Koresko. Employers, including Plaintiff EAS here, then paid insurance premiums into a trust, and a trustee passed those payments on to insurance companies, including Nationwide. As a general rule, the trustee-not the insured-was the owner and beneficiary of the policies, although the Plan Documents (which established the plans) stated that the plans and the trust were to be managed for the exclusive benefit of the insureds and that contributions made to the plans would be used to pay the life insurance premiums.

         B. The Parties' Relationship with the Arrangement

         The EAS Plan was a plan participating in the Arrangement; EAS was the sponsoring employer; and James Corman was a participant in the EAS Plan whose life (and whose wife's life) was insured by the Policy purchased through the Trust and issued by Defendant Nationwide. Plaintiffs joined the Arrangement in early 2000, at which time the Policy was purchased from Nationwide. From the time the Policy was purchased, EAS contributed $865, 000 to pay premiums to the Trust and the Trustee passed those payments on to Defendant.

         According to the Amended Complaint, the relationships among these parties were governed by the Plan Documents, the Policy, the Verification, and the Custodial Agreement.

         The Plan Documents established the EAS Plan, and stated that insurance policies purchased under the Plan and the cash value contained in those policies “shall be owned by the Trustee.” The Plan Documents also granted wide-ranging authority to the Trustee to control those policies:

The Trustee may purchase Policies on each Participant. . . . The policy shall be a contract between the Trustee and the Insurer and shall reserve to the Trustee all rights, options and Benefits provided by the Policy and permitted by the Insurer, except that the right to name and change the Beneficiary shall be exercised . . . in writing pursuant to a power of attorney or other document.

         The Policy, although it insured the Cormans' lives, made clear that it was “a legal contract between the Owner [the Trustee of the Plan] and Nationwide, ” that “all rights in [the] Policy belong to [the Owner], ” and that the Owner “may assign any or all rights under [the] Policy.”

         While it is not entirely clear from the Amended Complaint who the Trustee was during the first two years of Plaintiffs' participation in the Arrangement, [1] on or around April 15, 2002 Community Trust Company (“CTC”) became the Trustee.[2] The Amended Complaint also alleges that on or around March 20, 2002-that is, before CTC became Trustee-CTC “executed” the Verification, which designated Jeanne Bonney, a Koresko associate, as “Appointed Signator” on behalf of CTC with “authority to sign Arrangement-related documents on behalf of CTC.” The Verification further stated:

The trust empowers the trustee to exercise any and all rights associated with owning life insurance policies and the trustee can exercise these rights without the consent of the insured. These rights include but are not limited to: surrendering the policy, withdrawing policy values, borrowing against the policy, transferring ownership, and changing the beneficiary.

         CTC also “executed” a document entitled “Custodial Agreement, ” which purported to “designate[] the Koresko Law Firm as CTC's agent and gave the firm possession of the 1200 insurance policies CTC was to own as trustee” for benefit of the employer welfare benefit plans within the Arrangement-including the Policy issued by Defendant on James and Mary Cormans' lives. The “Custodial Agreement” also gave the Koresko Law Firm the same “powers listed in the Verification, i.e., the authority to change ownership and beneficiaries of the insurance policies, surrender policies, and remove cash value through withdrawals or policy loans, ” and also “[p]urported to release the Koresko Law [F]irm from any liability other than liability arising from ‘willful or gross negligence[.]”

         The Custodial Agreement and the Verification were both executed before CTC became Trustee on April 15, 2002, and both documents were provided to Defendant at some point after March 20, 2002. The allegations of the Amended Complaint are that Nationwide knew that the Verification was invalid and knew that the Custodial Agreement was incompatible with the Plan Documents and the trust agreement.

         Later that year, according to the Amended Complaint, Koresko or one of his associates instructed Nationwide, based on the purported authority of the Verification, to “change the name of the owner/beneficiary . . . to REAL VEBA TRUST DATED 3/20/95.” According to the Amended Complaint, knowing that Koresko lacked the authority to make the changes, Nationwide followed these instructions.

         Sometime in 2009, Koresko requested that Defendant make eight loans to him secured against the cash value of various policies in the Arrangement, including a loan for $578, 777.52 collateralized by Plaintiffs' Policy, which was made on August 26, 2009. The loan requests were made by Koresko “the individual” in the “purported role of director-trustee of Penn Public Trust, ” who signed the loan applications as “Director - Trustee.” When Koresko requested the loans, he also submitted to Defendant “an affidavit signed by Koresko that asserted that CTC no longer existed as the result of a merger into F&M [Farmers & Merchants Trust Company] and that F&M was subsequently removed in favor of Penn Public Trust as Trustee[, ]” and that Koresko “had the right to request the loan as the ‘sole Director of Penn Public Trust.'” The loans were made to “Single Employer Welfare Plan C O Pennmont Benefit SRVC.”[3]

         Three months after the loan secured by Corman's Policy was requested, and then at least one more time after that, Plaintiffs requested information from Nationwide and Koresko-affiliated entities about the status of the Policy-but Nationwide did not respond. Accordingly, Plaintiffs did not learn of the 2009 loan until much later-sometime in mid-2014. Plaintiffs filed this lawsuit on August 31, 2017.

         II. ...


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