C Evans Consulting LLC v. Sortino Financial, LLC

603 F.Supp.3d 246

C EVANS CONSULTING LLC, et al., Plaintiffs,

v.SORTINO FINANCIAL, LLC, et al., Defendants.

Civil Action No. GLR-21-2493

United States District Court, D. Maryland.

Signed May 16, 2022

Jason Herbert Ehrenberg, Ehrenberg Legal and Higher Ed Solutions PLLC, Washington, DC, Jennifer A. Sutherland, Gilman & Bedigian, LLC, Timonium, MD, William Stuart Heyman, Heyman Law Firm, Baltimore, MD, for Plaintiffs.

Andrew Gendron, Lewis Brisbois Bisgaard & Smith LLP, Baltimore, MD, for Defendants Sortino Financial, LLC, James H. Foster, Jr., Paul Sortino.

Cynthia L. Maskol, Wilson Elser Moskowitz Edelman and Dicker LLP, Baltimore, MD, for Defendants National Life Insurance Company, Life Insurance Company of the Southwest.

Katherine Burgess Kohn, Sean C. Abouchedid, Pro Hac Vice, Groom Law Group, Chartered, Washington, DC, for Defendant Pentegra Services, Inc.

Kelly M. Lippincott, Tiffany din Fagel Tse, Gordon Rees Scully Mansukhani, LLP, Alexandria, VA, for Defendants Lawrence R. Smith, Cornerstone Accounting Solutions, Inc.

MEMORANDUM OPINION

George L. Russell, III, United States District Judge

THIS MATTER is before the Court on Plaintiffs C Evans Consulting LLC ("Evans Consulting") and Cecelia Evans Laray's ("Evans") Motion to Remand (ECF No. 29). The Motion is ripe for disposition and no hearing is necessary. See Local Rule 105.6 (D. Md. 2021). For the reasons outlined below, the Court will deny the Motion.

I. BACKGROUND

A. Factual Background ¹

Plaintiffs bring this lawsuit against Defendants Sortino Financial, LLC ("Sortino Financial"), Paul Sortino, Cornerstone Accounting Solutions, Inc. ("Cornerstone"), Lawrence R. Smith, James H. Foster, Jr., Pentegra Services, Inc. d/b/a Pentegra Retirement Services ("Pentegra"), National Life Insurance Company ("National Life"), and Life Insurance Company of the Southwest ("LSW"). (Am. Compl. ¶¶ 3–10, ECF No. 5). Plaintiffs allege that Defendants owed a fiduciary duty to Plaintiffs and, notwithstanding that duty, recommended and sold to Plaintiffs a retirement plan, known as an Internal Revenue Code 412(e)(3) defined benefit plan (a "412(e)(3) plan"), that was "completely unsuitable and inappropriate for" Plaintiffs. (Id. at 4).

Evans founded Evans Consulting in January 2015. (Id. ¶ 14). Evans Consulting provides various services, including federal market advising and leadership coaching. (Id. ). Smith and Cornerstone began serving as Evans Consulting's certified public accountants at Evans Consulting's formation. (Id. ¶ 15). Smith and Cornerstone also prepared the company's tax returns and occasionally assisted with payroll tax reporting. (Id. ). In May 2018, when Evans began considering retirement plans for herself and Evans Consulting's employees, Smith recommended she meet with Sortino. (Id. ¶ 20).

Evans met with Sortino and Foster, who collectively did business as Sortino Financial, along with Smith on May 29, 2018. (Id. ¶ 21). Sortino suggested that Evans set up both a 401(k) and a 412(e)(3) plan and further suggested she could pay for his services for both plans on either a fee basis or a commission structure. (Id. ¶¶ 21–22). Sortino advised that most of his clients opted for a commission structure through which fees would be paid "based ‘on his success.’ " (Id. ¶ 22). This statement was false, as Sortino Financial would receive a fee "immediately upon the sale of the annuity and life insurance policy in the defined benefit plan he was pitching to Evans Consulting" and its "primary fee would not come from asset performance." (Id. ).

National Life and Pentegra both produced informational materials suggesting that 412(e)(3) plans were ideal for owners of small businesses with very few employees. (Id. ¶¶ 25–26). Sortino Financial did not provide Evans with these materials during their meeting and did not otherwise explain that the 412(e)(3) plan they were recommending may not be appropriate for a company like Evans Consulting, which already had eight employees and intended to grow quickly to more than twenty-five employees. (Id. ¶ 28). Several other factors also suggested that a 412(e)(3) plan would not be a good fit for Evans Consulting. (Id. ). Sortino and Smith nevertheless suggested that "instead of paying taxes to the IRS, Evans Consulting would be funding her retirement through the effective use of tax savings received through deductions from the plan." (Id. ¶ 30).

Over the coming months, Evans provided Sortino extensive materials about Evans Consulting's and her own finances. (Id. ¶¶ 33–34). After she provided these materials, Sortino continued to "extol[ ] the virtues of" a 412(e)(3) plan. (Id. ¶ 36). He "disclosed none of the risks involved with adopting a 412(e)(3) plan" or "the substantial fees that he and his firm would earn from the sale of life insurance products necessary to fund the plan." (Id. ). On or about August 15, 2018, Evans signed the required paperwork to implement the 401(k) and 412(e)(3) plans (collectively, the "Plan"). (Id. ¶ 42). National Life provided the 412(e)(3) plan that Sortino sold Evans Consulting and Pentegra administered it. (Id. ¶ 39). The Plan was initially funded by a life insurance policy purchased on Evans’ life with a face value of $2,200,689. (Id. ¶ 43). Sortino told Evans on or about September 11, 2018 that she would owe a payment of approximately $47,000 on the life insurance policy the following month. (Id. ¶ 44).

One week later, on September 18, 2018, Sortino emailed Evans and informed her that Evans Consulting would need to contribute $194,706 to the Plan for 2018 and that the likely 2019 contribution would be closer to $300,000. (Id. ¶ 45). In March 2019, Sortino emailed Smith in which he incorrectly stated that no employees other than Smith would be eligible to participate in the Plan until 2020. (Id. ¶ 47). That same month, on Sortino's instructions, "a flexible premium deferred annuity contract was purchased" for the Plan, with Evans as the annuitant and the Plan as the owner. (Id. ¶ 48). In December 2019, Sortino discussed the Plan with Evans and a senior Evans Consulting employee. (Id. ¶ 49). Sortino disclosed that Evans Consulting would have to pay several hundreds of thousands of dollars to fund policies on Plan participants who would become eligible on February 15, 2020. (Id. ). Sortino also said that although "he had not yet excluded anyone from the Plan, he would go ‘back to the drawing board,’ to attempt to find ways to exclude certain of the participants." (Id. ).

Evans was "complete[ly] surprise[d]" by the need to add so many participants and the accompanying cost because Sortino had repeatedly told her "that she would be able to exclude nearly all of Evans Consulting's employees from the Plan." (Id. ¶ 53). Contrary to the assurances Evans had received from Sortino, Foster, and Smith, "an additional eleven Evans Consulting employees became eligible to participate in the Plan" in February 2019 and "accrued benefits with a present value of $407,346 according to the Plan valuation as of February 15, 2020." (Id. ¶ 54). Sortino had not planned "what would happen with respect to paying the costs of additional employees’ insurance once they qualified for the Plan." (Id. ¶ 53).

Evans told Sortino that Evans Consulting could not afford the Plan and it "would need to be closed as expeditiously as possible." (Id. ¶ 49). Sortino assured Evans he would move quickly to close the Plan, but that he could not do so before February 15, 2020, when "certain employees would have to be added to the Plan for a one-month period." (Id. ¶ 50). Sortino said that the cost to add the participants to the Plan for that brief period would be "nominal." (Id. ). With Pentegra's approval, the Plan was "frozen" starting March 15, 2020. (Id. ¶ 51).

On or about March 19, 2020, Sortino Financial emailed Evans to inform her that Evans Consulting would need to make "a ‘small contribution’ ... to cover" the additional employees covered by the Plan. (Id. ¶ 56). But in July 2020, Sortino emailed Evans again to notify her that "the ‘numbers came back much higher than we anticipated’ with regard to Evans Consulting's required contributions." (Id. ¶ 57). Two days later, Sortino emailed Evans and notified her that Evans Consulting would have to contribute approximately $691,000 for the employees in the Plan to become fully vested before the company could close the Plan. (Id. ¶ 59). Plaintiffs now "face[ ] severe penalties and taxes from the IRS for failing to fund the Plan and for taking disallowed deductions in connection with terminating the Plan." (Id. ¶ 61).

In practice, the Plan did not meet the requirements of a 412(e)(3) plan. (Id. ¶ 64). Among other things, a 412(e)(3) plan is funded exclusively by the purchase of individual insurance contracts funded by premium payments extending not later than the retirement age for each individual participating in the plan. (Id. ). In the case of the Plan, the only participant for whom an insurance contract was purchased was Evans, and its premiums were payable for forty-five years, well past her retirement age. (Id. ). The failure of the Plan to satisfy the requirements of 412(e)(3) ultimately resulted in significant financial consequences. (Id. ¶¶ 65–66, 69).

B. Procedural History

On July 20, 2021, Plaintiffs filed this action in the Circuit Court for Baltimore County, Maryland. (ECF No. 3). Plaintiffs filed an Amended Complaint on August 13, 2021. (ECF No. 5). The Amended Complaint contains four counts: Professional Negligence Against all Defendants (Count I); Breach of Fiduciary Duty Against Defendants Sortino Financial Group, Sortino, Foster, Smith, and Cornerstone, National Life and Southwest (Count II); Declaratory Judgment (Count III); and Unjust Enrichment Against All Defendants that Received Fees, or Commissions and Premiums (Count IV). (Id. ¶¶ 71–99). Plaintiffs seek compensatory damages, disgorgement, attorneys’ fees and costs, and declaratory judgment. (Id. at 31–32). Defendants removed the case to ...