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September 3, 2003


The opinion of the court was delivered by: Mathew Kennelly, District Judge


This case concerns the marketing and administration of a "severance trust executive program" (STEP) plan, a type of employee welfare benefit plan targeted to employers with highly compensated employees. John Daniels and Manuel Sanchez, along with other partners and employees of the Chicago-based Sanchez and Daniels law firm, and on behalf of a putative class of STEP plan investors, have sued Step Plan Services, Inc., its principals, and several insurance companies, alleging violations of the Employee Retirement Income Security Act (ERISA) and the Illinois Consumer Fraud Act and claims for fraudulent inducement and breach of fiduciary duty arising from the defendants' actions in promoting or managing the Sanchez and Daniels STEP Plan and other similar plans. Several of the insurance companies named in the complaint now move to dismiss plaintiffs' breach of duty and Consumer Fraud Act claims.

Factual Background

For purposes of this motion to dismiss we accept as true plaintiffs' well-pleaded factual Page 2 allegations. Thompson v. Illinois Department of Professional Regulation, 300 F.3d 750, 753 (7th Cir. 2002). Sanchez and Daniels is a Chicago law firm. In December 1995, it adopted a STEP Plan, a type of employee benefit plan governed by ERISA. See Complaint, Ex. D. In their complaint, Sanchez and Daniels and its partners and employees allege that they were fraudulently induced to adopt the STEP Plan, saying that the Plan's promoters falsely represented that contributions to the plan would be tax deductible and that employers participating in the plan could easily withdraw plan assets. Complaint, ¶¶ 68, 79. According to plaintiffs, recent United States Tax Court rulings and a proposed revision to the tax laws indicate that the type of STEP Plan in which they invested does not qualify for favorable tax treatment; they allege that defendants were aware when they persuaded plaintiffs to adopt the Plan that it was not what it purported to be-a plan described in Section 419A(f) (6) of the Internal Revenue Code. Complaint, ¶¶ 99, 125-130. Plaintiffs further allege that the Plan's fiduciaries (which plaintiffs identify as Benistar Insurance Group, Inc., Step Plan Services, Inc. and their principals, Mellon Trust of New York, and Teplitzky & Company, P.C., see Complaint, ¶¶ 48-55) mismanaged the Plan, amending its structure without authorization and misappropriating its assets. Complaint, ¶¶ 56-139.

In addition, plaintiffs have sued several major insurance companies whose life insurance policies were purchased to fund the Sanchez and Daniels Plan or other STEP Plans. The allegations against the insurance companies fall into two separate categories. First, plaintiffs allege that Prudential Insurance Co., CLU & Associates, and Thomas Murphy, an alleged agent of both CLU and Prudential, allowed the proceeds of Prudential's demutualization that were paid to holders of its of insurance policies to be distributed to the Plan's Trustees (Benistar et al.), without ensuring that the funds were actually credited to the Plan. Complaint, ¶¶ 221-234. Plaintiffs characterize this alleged lack of oversight as negligent, Page 3 and they claim that Prudential, CLU and Murphy are responsible for allowing the Plan fiduciaries to "loot" the demutualization proceeds. Id. Second, plaintiffs allege that Prudential, CLU, Murphy, and Bruce Levy (who plaintiffs credit with developing the idea of a STEP Plan), along with five other insurance companies (National Life Insurance Co., Allmerica Financial Benefit Insurance Co., New York Life Insurance Co., Metropolitan Life Insurance Co., and Hartford Life Insurance Co.) whose life insurance policies were allegedly procured to fund STEP plans other than Sanchez and Daniels' Plan, violated the Illinois Consumer Fraud Act by making false assurances through certain marketing materials that the STEP plans they promoted qualified as tax deductible welfare benefit plans under Internal Revenue Code and ERISA provisions. Complaint, ¶¶ 235-249.

The motions to dismiss currently before the Court concern only the common law breach of duty allegations against Prudential, CLU and Murphy, and the Illinois Consumer Fraud Act allegations against Murphy, Levy and the insurance companies.


1. Breach of duty of care (count 3)

In count 3 of the complaint, plaintiffs allege that Prudential, CLU and Murphy breached a common law duty of care by failing to ensure that demutualization proceeds attributable to the STEP Plan as an insurance policyholder were actually paid over to the Plan.*fn1 Plaintiffs do not allege that defendants erred in paying out shares of Prudential stock (the demutualization compensation) to the Page 4 Plan's Trustee, but rather that they knew or should have known that the Plan's fiduciaries would misappropriate the stock and should have taken steps to avert this alleged fraud. See Complaint, ¶¶ 230-232 (Prudential Murphy, and CLU negligently "failed to fully investigate the nature of the payment of the demutualization proceeds to the Step Plans," "allowed the demutualization proceeds to be credited to entities other than the Step Plans," and "failed to stop [the Plan fiduciaries] from perpetrating their scheme to loot STEP Plan demutualization proceeds").

Prudential and Murphy move to dismiss count 3 for failure to state a claim. They argue that plaintiffs have conceded in the complaint that Prudential was not itself a Plan fiduciary and that as a result, it owed no duty to protect the Plan's assets. See Complaint, "Fiduciary Status of Certain Defendants," ¶¶ 48-55 (distinguishing between "fiduciary defendants" (whom plaintiffs identify as Step Services, Benistar, Benistar Adminstrative Services, Mellon Trust, and their agents) and the remaining named defendants (the insurance companies and their agents), none of whom are identified as fiduciaries). Defendants contend that the claim in count 3 is based on a non-existent legal duty to inquire into how an insurance policyowner plans to allocate proceeds from its insurance policies.

In response, plaintiffs attempt to extend the allegations in the complaint, arguing that Prudential and Murphy were indeed plan fiduciaries because they "marketed and sold the STEP plan to Plaintiffs." Pl's Resp. at 6. But this theory is without legal support. As plaintiffs themselves acknowledge, a fiduciary of an ERISA plan must at least exercise some discretionary authority or control over a Plan's management or the disposition of its assets. See 29 U.S.C. § 1002(21) (A); Pappas v. Buck Consultants, Inc., 923 F.2d 531, 535 (7th Cir. 1991); see also American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Society of the United States, Page 5 841 F.2d 658, 664 (5th Cir. 1988) ("Simply urging the purchase of its products does not make an insurance company an ERISA fiduciary with respect to those products"). There are no allegations in the complaint that Prudential (or its agents) exercised this type of influence over plaintiffs' STEP Plan. As defendants argue, therefore, count 3 does not state a claim for breach of fiduciary duty, but rather appears to assert a novel claim based on an insurance company's alleged duty to monitor the financial dealings of its policyholders. Because plaintiffs offer no support for the existence of such a duty, and because plaintiffs have failed generally to identify a cognizable duty of care to support a claim for negligence, count 3 is dismissed.

2. Illinois Consumer Fraud and Deceptive Practices Act (count 4)

In count 4 of the complaint, plaintiffs assert claims under the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/10a, against each of the named insurance companies (National Life, Allmerica, New York Life, Metropolitan Life, Hartford Life, Prudential, and CLU), Murphy as an alleged agent of CLU and Prudential, and Levy, an alleged developer of the STEP Plan concept. Plaintiffs allege that through marketing materials, defendants Prudential, Murphy and Levy made false or misleading statements regarding the tax and ERISA status of the STEP Plan that plaintiffs adopted, and that they relied on these statements in deciding to invest in the Plan. See Complaint, ¶ 4. Plaintiffs advance the same allegations against all of the insurance companies, Murphy, and Levy on behalf of the putative class, stating that defendants made similarly false or misleading statements through marketing materials sent to other prospective STEP Plan investors. Defendants have moved to dismiss this claim on several grounds.

To state a claim under the Illinois Consumer Fraud Act, plaintiffs must allege (1) a deceptive act Page 6 or practice by the defendants, (2) the defendants' intent that plaintiffs rely on the deception, (3) the occurrence of the deception in the course of conduct involving trade or commerce, and (4) actual damage to the plaintiffs (5) proximately caused as a result. Oliveira v. Amoco Oil Co., 201 Ill.2d 134, 149, 776 N.E.2d 151, 160 (2002). Defendants first argue that count 4 fails to state a claim in that plaintiffs fail to allege proximate cause and actual damages as a result of the allegedly misleading marketing information. Relying on Oliveira, they insist that plaintiffs were required to plead that they actually heard or read defendants' allegedly misleading statements. The Court disagrees. Plaintiffs are not required to plead proximate cause with any particular degree of specificity. Oliveira simply holds that a plaintiff attempting to assert a claim under the Illinois Consumer Fraud Act must allege that he was "in some manner deceived." See Oliveira, 201 Ill.2d at 155, 776 N.E.2d at 164 (rejecting Consumer Fraud Act claim based on a "market theory" of causation in which plaintiff alleged that he was damaged by advertisements that created an artificially inflated price for the gasoline he purchased-irrespective of whether plaintiff or other members of a putative class saw or heard the specific advertisements in question). It is thus adequate for plaintiffs to allege, as they have here, that they and the other members of the putative class would not have participated in STEP Plans without defendants' allegedly false assurances. See Complaint, ¶¶ 246-248. Plaintiffs ultimately must prove that they read and were affected by defendants' marketing materials. See Oliveira, 201 Ill.2d at 154-155, 776 N.E.2d at 163-164; Zekman v. Direct Marketers Inc., 182 Ill.2d 359, 375, 695 N.E.2d 853, 861 (1998) (granting summary judgment for defendant on Consumer Fraud Act ...

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