Lee v. Equity Props. Asset Mgmt., Inc., Case No. 8:13-cv-2239-T-30EAJ

JACK LEE, Plaintiff, v. EQUITY PROPERTIES ASSETMANAGEMENT, INC., et al., Defendants.

Case No. 8:13-cv-2239-T-30EAJ

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA TAMPA DIVISION

November 10, 2015

ORDER

In this ERISA action, Jack Lee sues his former employer, Equity Properties Asset Management, Inc. ("EPAM"), EPAM's Defined Benefit Pension Plan, and EPAM's sole owner, Jacqueline S. Chang. Currently pending are the parties' cross-motions for summary judgment (Dkts. 126, 127) and related motions to strike (Dkts. 137, 138, 146, 153).

The parties' dispute centers on whether Lee qualifies as a "Male direct owner," entitling him to EPAM's highest pension benefit. Defendants argue that Lee is not a direct owner because he owns no EPAM stock and, in fact, has previously disclaimed any ownership interest in EPAM. Defendants suggest that Lee had two reasons for avoiding ownership. First, Lee did not want EPAM profits contributed toward the $1.5 million that Lee owes in restitution for prior federal felony convictions. Second, Lee's convictions would have disqualified EPAM from obtaining a lucrative federal contract.

Lee maintains that he qualifies as a "Male direct owner" because he had a stock option for EPAM, and he exercised that option on the day he was fired. Lee also argues that he and Chang always operated as equal partners and intended that Lee receive pension benefits commensurate with his significant role in EPAM.

A close review of the record suggests that Lee and Chang were, at the very least, partners in a scheme to obscure Lee's control over EPAM, to their mutual advantage. Nonetheless, in this ERISA action, the dispositive question is whether Defendants' decision to deny Lee the advantageous "Male direct owner" classification was arbitrary and capricious in violation of 29 U.S.C. § 1132(a)(1). For the reasons that follow, the Court finds that the decision was arbitrary and capricious.

Background

Establishment of EPAM

Chang met Lee at a real estate investment seminar. (Dkt. 128-10, "Chang Dep." at 47). Lee later hired Chang to work with him at Home Buying Investors, Inc. ("HBI"), a company owned by Tom Camden, who is not a party to this action. (Id. at 51). While Chang and Lee were working at HBI, one of Camden's other business ventures, Equity Property Management ("EPM"), negotiated a contract with the National Credit Union Administration ("NCUA") to manage foreclosed houses. (Id. at 73-77). Lee made the initial contact with the NCUA. (Dkt. 142-10, "Lee Dep." at 59).

In August 2007, Chang formed EPAM in order to take over the NCUA contract from EPM. (Chang Dep. at 73-74, 77). The NCUA contract resulted in EPAM making substantialprofits. (Id. at 85, 93). By December 2008, EPAM was worth several million dollars. (Id. at 126).

The NCUA contract specifically prohibited the government from contracting with a business owned by a convicted felon or that employed a convicted felon. (Id. at 86). Lee had federal convictions for bank fraud, money laundering, wire fraud, and perjury. (Lee Dep. at 26-31). Lee was also subject to a $1.5 million restitution order. (Id. at 31). Chang knew of Lee's felony convictions. (Chang Dep. at 53).

Lee and Chang jointly decided to incorporate EPAM, they both participated in the initial hiring of employees and vendors, and EPAM was initially funded from Lee's credit card. (Dkt. 142-1 at ¶¶ 5-8). Chang was listed as the sole owner of EPAM, while Lee ran the accounting department. (Chang Dep. at 80-81). According to Lee, he was always considered a fifty-fifty partner, and he and Chang routinely held themselves out as joint owners and partners. (Dkt. 142-1 at ¶¶ 21-23; Lee Dep. at 70). However, Lee had no stock ownership interest in EPAM because, had he held stock, EPAM could not have obtained the NCUA contract. (Lee Dep. at 106-111, 134-35).

Although Lee had a significant role in EPAM, he was paid through Camden's company, HBI, which was not related to EPAM. (Chang Dep. at 198-99). HBI and EPAM had a verbal agreement for EPAM to send a check to HBI for the work Lee did for EPAM. (Id. at 87-88).

While Lee was working for EPAM and being paid by HBI, a portion of Lee's earnings were garnished for restitution payments. (Dkt. 141-2 at 1-2). In a letter to the U.S.Attorney's Office dated June 29, 2009, Lee's attorney, L. Lee Smith, acknowledged that "[s]ome confusion may exist because restitution payments continued on behalf of the garnishee (HBI) after Mr. Lee's work was transferred to EPAM." (Id. at 2). Although Smith admitted that Lee worked for EPAM, he also stated that Lee "has never had an ownership interest in HBI, EPM, or EPAM." (Id.).

Smith's letter did not mention the fact that Lee and Chang had previously entered into a written agreement providing Lee with an option to purchase 50% of EPAM's stock. Lee also failed to disclose the option in subsequent financial disclosures to the government. (Lee Dep. at 102-06).

The stock option was memorialized in a Stock Purchase Agreement ("the Option Agreement") between Lee and The Chang Group, Inc. (Chang Dep. at 123; Dkt. 128-14). The Option Agreement defined The Chang Group, Inc. to include EPAM and four other companies. (Dkt. 128-14 at 3). Lee had the option to purchase 50% of the common stock of The Chang Group, Inc. for $100.00. The option could be exercised at any time during Lee's employment by The Chang Group, Inc. or an affiliated company, prior to 2020. If The Chang Group, Inc. terminated Lee, he maintained the right to exercise the option within one year of termination. To exercise the option, Lee was required to "provide Chang with 5 days notice and a certified check for $100. On tender of the check, Lee shall be considered a 50% shareholder." Chang and Lee signed the Option Agreement on March 17, 2009, but the Agreement specified that it was executed as of December 1, 2008. (Id. at 3-4).

Establishment of the Pension Plan

In 2008, EPAM decided to investigate the creation of a defined benefit plan. (Chang Dep. at 94-95). One of Lee's goals in establishing a pension plan was to avoid the imposition and enforcement of restitution orders. (Lee Dep. at 82-83).

EPAM selected BSP Consulting, Inc. ("BSP") to prepare the plan and to act as third-party administrator for the plan. (Chang Dep. at 100-01; Dkt. 142-1 at ¶ 17). BSP is not a party to this action, although both sides present substantial evidence concerning their communications with BSP. The majority of those communications were with Janet Panebianco, a partner at BSP and a certified public accountant. (Dkt. 128-1, "Panebianco Dep." at 17-19).

Lee informed Panebianco that the purpose of the plan was to maximize benefits for himself and Chang and to minimize the contribution requirements for other rank-and-file employees. (Id. at 20). BSP prepared illustrations with the names of participants, estimated contribution amounts, and the estimated tax benefit created by the plan. (Id. at 22). The illustrations were based on information provided by Lee and assumed that both Lee and Chang were owners of EPAM. (Id. at 23-25). According to Panebianco, Lee provided a spreadsheet identifying himself as 50% owner and Chang as 50% owner. (Id. at 33, 109-11).

BSP hired Haness & Associates ("Haness"), an actuarial firm, to prepare the plan documents. (Id. at 26, 29). Haness drafted the plan so that it closely approximated the estimated benefits on the illustrations. (Id. at 29). In particular, the plan provided that a participant's normal retirement benefit would be determined by applying the appropriatebenefit percentage to the participant's average monthly compensation multiplied by years of service. (Dkt. 127-3 at 27). With respect to the benefit percentage, Section 2.3.2 provided three employee classifications, each with a corresponding benefit percentage:

Employee Classification

Benefit Percentage

A

6.25%

B

10.5%

C

0.5%

(Id.). The plan described the employee classifications as follows:

Employee Classification

Description

A

Female direct owners

B

Male direct owners

C

All others not listed in class A or B

(Id.). The central issue in this case is whether Lee fits the description of "Male direct owners" and is therefore entitled to the highest benefit percentage of 10.5%.

Haness created the descriptions based on the census information and illustrations produced by BSP, which listed Chang and Lee as owners. (Panebianco Dep. at 33). According to Panebianco, the term "Female direct owners" was intended to apply to Chang and the term "Male direct owners" was intended to apply to Lee. (Id. at 135-36). Class B had a higher benefit percentage than Class A because Lee is older than Chang. (Id. at 31).

On July 3, 2008, Chang signed the Equity Properties Asset Management, Inc. Defined Benefit Pension Plan ("the Pension Plan") as owner and trustee. (Chang Dep. at 108; Panebianco Dep. at 36; Dkt. 127-4 at 45). EPAM was the plan administrator, and Chang controlled EPAM as the plan administrator. (Chang Dep. at 165).Lee's termination

Chang terminated Lee on April 10, 2012.¹ (Chang Dep. at 134-35). According to Chang, she terminated Lee because he was writing company checks to himself and his family members. (Id. at 131). Chang also terminated Lee because "[b]usiness ventures that the company was about to embark on would have had no chance, given he's a convicted felon." (Id.).

On the day he was terminated, Lee exercised his stock option. (Chang Dep. at 143-44; Dkt. 142-1 at ¶ 26). By letter dated April 13, 2012, The Chang Group, Inc.'s attorney, Joshua Dorcey, stated that the option had been "properly exercise[d]" as to EPAM and three other companies, but disputed the validity of the exercise as to other companies owned by The Chang Group, Inc. (Chang Dep. at 144-45; Dkt. 142-1 at ¶ 27; Dkt. 128-14 at 7-8). By letter dated April 30, 2012, a different attorney, Theodore Tripp, stated that Chang did not dispute the tender of the $100.00 check, dated April 10, 2012, but declined to accept it....