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Porterfield v. Orecchio

January 9, 2008


The opinion of the court was delivered by: Judge Robert W. Gettleman


Plaintiff W. Scott Porterfield, as court appointed receiver for AA Capital Partners, Inc. ("AA Capital"), has sued AA Capital's shareholders, directors and officers, John Orecchio and Paul Oliver, Jr., for breach of their fiduciary duties under both the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., and Delaware state law. Counts I through III and VIII through XII allege claims only against Orecchio; Counts IV through VII allege claims only against Oliver. Both Oliver and Orecchio have moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. For the reasons discussed below, Oliver's motion is granted in part and denied in part. Orecchio's motion is denied.


Defendants formed AA Capital as a Delaware corporation in February 2002. Defendants were the only directors and shareholders. Orecchio was president and secretary and Oliver was chairman of the board and treasurer. AA Capital is registered with the Securities Exchange Commission ("SEC") as an investment advisor under the Investment Advisors Act.

AA Capital solicited six investor clients, each of which was an employee benefit plan as defined in § 3(2) of ERISA (the "client investors"). Each client investor entered into an investment management agreement with AA Capital. AA Capital created several investment funds: (1) AA Capital Equity Fund LP ("Fund I"); (2) AA Capital Equity Fund II ("Fund II:) and (3) Brush Monroe Partners LLP ("Brush Monroe Fund"). Each fund was set up as a Delaware limited partnership, with the client investors receiving limited partnership interests for their investments. Each fund/limited partnership had a Delaware limited liability company as its general partner. The members of the general partner were officers and employees of AA Capital. The general partners were managed by managing members which included Orecchio for each fund and Oliver for Fund I.

When each of the client investors became an AA Capital client, it deposited the full amount of its investment commitment with AA Capital. AA Capital set up and maintained separate investment trust accounts for each investor to hold the invested monies until such time as a fund in which AA Capital had placed that particular investor required money to meet an investment commitment or other cash flow needs. The funds could, under the management agreement, call capital from the investor trust accounts for three purposes: (1) investments by the fund; (2) management fees; or (3) overhead expenses of the fund.

On September 8, 2006, the SEC brought an emergency enforcement action against AA Capital and Orecchio, alleging that Orecchio and AA Capital defrauded AA Capital's investment clients by misappropriating at least $10.7 million from the investment accounts and using the money as their own. The court appointed plaintiff as receiver of AA Capital on September 13, 2006.


Both defendants have moved to dismiss the entire complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6). The purpose of such a motion to dismiss is to test the sufficiency of a complaint, not to decide the merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). Federal notice pleading "requires only a short and plain statement of the claim showing that the pleader is entitled to relief." Erickson v. Pardus, __ U.S. ___, 127 S.Ct. 2197, 2200 (2007) (citing Bell Atlantic Corp. v. Twombly, __ U.S. __, 127 S.Ct. 1955 (2007). Specific facts are not necessary and the statement need only give the defendant fair notice of what the claim is and the grounds on which it rests. Id. The court must accept as true all of the factual allegations contained in the complaint and draw all reasonable inferences in favor of the plaintiff. "Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic, 127 S.Ct. at 1964-65.

Oliver's Motion to Dismiss

In Count IV plaintiff alleges that Oliver violated ERISA by failing to ensure that :(1) AA Capital and Orecchio discharged their fiduciary duties for the exclusive purpose of providing benefits to ERISA governed plans managed by AA Capital; and (2) AA Capital and Orecchio exercised care, skill, and diligence in handling the assets of ERISA governed plans managed by AA Capital. Oliver has moved to dismiss Count IV, arguing that the claim is deficient for several reasons. First, Oliver argues that plaintiff has not and cannot allege that Oliver owed any fiduciary duty under ERISA to the investor funds. Next, Oliver argues that even if he was an ERISA fiduciary, his alleged failure to detect Orecchio's misconduct and to implement internal controls at AA Capital cannot constitute a breach of any duty owed to the investor plans.

Finally, Oliver argues that plaintiff, as receiver, does not have authority to invoke § 409 (29 U.S.C. § 1109) to seek damages on behalf of the investors. The court rejects each of these arguments.

First, ERISA provides that a person is a fiduciary with respect to a plan to the extent "(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets," or "(ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of such plan, or has any authority or responsibility to do so." 29 U.S.C. § 1002(21)(A)(i), (ii). AA Capital is undisputedly a fiduciary because it manages ERISA governed funds and rendered investment advice for a fee. Plaintiff has alleged that Oliver "as one of the corporate officers and directors who carried out the fiduciary functions of AA Capital, is himself a fiduciary . . . because he exercised discretionary authority and control over the assets of the ERISA governed plans managed by AA Capital."

Oliver argues that plaintiff's allegation is too general, merely tracking the language of the statute. According to Oliver, to be deemed a fiduciary an investment advisor must render advice pursuant to an agreement, be paid for the advice, and have influence approaching control over the plan's investment decisions. Oliver argues that the complaint makes no such allegations against him individually, and therefore seeks to deem Oliver a fiduciary merely because of his status as a corporate officer and director of AA Capital. Relying on Confer v. Custom Engineering Co., 952 F.2d 34, 37 (3d Cir. 1991), which held that "when an ERISA plan names a corporation as a fiduciary, the officers who exercise discretion on behalf of that corporation are not fiduciaries within the meaning of ยง 3(21)(A)(iii) unless it can be shown that these officers have individual discretionary roles as to plan administration," (emphasis in original), Oliver argues that his mere status as a corporate officer of a ...

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