Opinion ID: 217197
Heading Depth: 2
Heading Rank: 1

Heading: Lunde Electric Company Pension Plan

Text: Until 2005, when it ceased operations, Lunde Electric Company (Lunde Electric or the Company) of Seattle, Washington, was in the business of maritime electrical repair. Sigmund Eriksen (Sigmund) served as Lunde Electric's Chairman, and his son Raymond Eriksen (Raymond) was President and Chief Executive Officer. Sigmund purchased Lunde Electric in 1975. In 1979, the Company established the Lunde Electric Co., Inc., Profit Sharing Plan (the Plan) to provide retirement benefits for its union employees. Sigmund and Raymond served as the Plan's trustees. Initially, Lunde Electric was the sole financial contributor to the Plan, and the Plan's assets were held in a brokerage account at a local bank (the Plan Account). From 1979 until the mid-1990s, Earl Sommerfeld served as the Plan's bookkeeper. In 1999, Earl's son, Brad Sommerfeld, assumed those responsibilities. The Plan was amended in 1984 and 1991 (the 1991 Plan). The government and Defendants sharply disagree as to whether the Plan was subsequently amended. According to the government, the Plan was again amended in 1995 and then restated in 2002. Defendants contend that there is no evidence of either event.
According to the government, Article IV of the Plan, titled Contribution and Allocation, was amended in 1995 to add a 401(k) feature (the 1995 Amendment). The 1995 Amendment replaced contributions made exclusively by the Company with a system whereby Plan investors called Participantscontributed a percentage of their paycheckscalled elective deferralsinto the Plan. Lunde would then match fifty percent of each Participant's elective deferral with an employer contribution. Funds in the Plan Account were pooled and administered by the Eriksens. According to the government, when the Eriksens added the 401(k) feature, they did not redraft the 1991 Plan; instead, only Article IV of the 1991 Plan was amended. As evidence of this change, the government introduced two versions of the 1991 Plan. In the first version, which the government proffered as the original 1991 Plan, Article IV refers only to discretionary Employer's Contribution[s]: For each Plan Year, the Employer shall contribute to the Plan such amount as shall be determined by the Employer. However, in the second document, Article IV sets forth procedures for a Participant's Salary Reduction Election. Article 4.2 of that document provides, inter alia, that [e]ach Participant may elect to defer his Compensation which would have been received in the Plan Year, but for the deferral election, by up to 10 [percent]. In addition to the documentary evidence, the government presented testimony that the Plan was amended in 1995. For instance, the Plan's stockbroker testified that new trust certification papers were filed with the Plan's brokerage firm in 1995. On January 1, 2002, the Plan was restated and a new document titled Lunde Electric Company, Inc. 401(k) Profit Sharing Plan became operative (the 2002 Restatement). Although the date of the Plan's effectiveness was not written in one space provided in the document, several documents signed and dated by Sigmund and Raymond contained information about the 2002 Restatement's effective date. These included a Consent to Corporate Authorization, which RESOLVED that the form amended 401(k) Profit Sharing Plan and Trust effective January 1, 2002, presented to this meeting is hereby approved and adopted. Additionally, the 2002 Restatement included a Supplemental Participation Agreement dated January 1, 2002, and signed by Raymond as Participating Employer and by both Raymond and Sigmund as Trustees. This document also referred to a 401(k) plan.
In 1999, Lunde Electric began experiencing financial difficulties and was unable to pay its operating expenses with revenues. The government alleged that, as a result of these financial problems, the Eriksens caused the Company to stop remitting elective deferrals to the Plan. Brad Sommerfeld regularly reviewed the Trust's brokerage statements as part of his responsibilities as Plan accountant. Those statements reflected deposits into and withdrawals from the Plan Account. Sommerfeld noticed that regular deposits into the Plan Account were no longer made after October 1999. Indeed, the only deposit made to the Plan Account for the 2000 Plan Year was for $10,000, on December 27, 2000. Although money continued to be withheld from Participants' paychecks, no deposits were made into the Plan Account in 2001, in 2002, or from January through March 2003. From 1999 to 2002, Lunde Electric employed three different bookkeepersCynthia Halcomb (mid-1990s to 1999), Brad Mansker (May 2000 to December 2000), and Toni Wunsch (December 2000 to 2003). Both Halcomb and Mansker testified that they would meet with the Eriksens on a regular basis to decide which bills to pay. According to Mansker, within a few months of his starting work at the Company, he learned that elective deferrals were not being remitted to the Plan. Mansker testified that he raised the issue of the outstanding liability on several occasions, but that the Eriksens did not direct the Company to make payments to the Plan during his tenure. Moreover, starting in 1999, employees' elective deferrals were shown as Receivables on the Plan's balance sheet and reflected as a liability on Lunde Electric's books. From 1999 to December 2002, the Plan Account's Receivables grew from $35,156.62 to $97,374.68. By 2003, the Receivables had increased to $103,606; from 1999 to 2003, the Receivables ballooned from 1.47% of the Plan's assets to 15.01%. On December 5, 2001, the Eriksens participated in a conference call with attorney Ronald Braley. Defendants asked Braley about the consequences of not funding 401(k) trust accounts. Braley informed the Eriksens that they could be personally liable as fiduciaries and, in his own words, informed them that while the Department of Labor usually does not take a keen interest in plans with fewer than 100, if an employee knew about it and complained to the Department of Labor, that an investigation may open up and they would have a more serious issue. During the conference call, Braley emphasized that the Eriksens had to pay the unfunded liability as soon as possible. Thereafter, Braley memorialized the conversation in an email that reads, in part: Apparently, for the past year and one half, they have failed to contribute to the 401(k) . . . Plan after taking elective deferrals from employees. On May 2, 2002, Brad Sommerfeld wrote to bookkeeper Toni Wunsch concerning the Company's accounting: As you know the Company is significantly behind in depositing its 401K contributions. This is a huge problem because most of the money comes from employees' paychecks and the Officers of the Company and Trustees of the Plan have a fiduciary responsibility to deposit these funds timely (deposits are due monthly). This is possibly the worst liability to fall behind on in terms of legal and tax problems. Sommerfeld testified that he also had a conversation with Sigmund about the Plan's delinquency and that Sigmund stated, We're doing the best we can.
After 1995, Lunde Electric began providing yearly Participant's Valuation Reports to employees enrolled in the 401(k) Plan. These reports purported to show each Participant's assets in the Plan and contributions made for the prior Plan Year. The Valuation Reports were prepared by Brad Sommerfeld and signed by Raymond. Until 1999, a Statement of Net Assets, which detailed the total Plan assets, was also delivered to each Participant. After the 1999 Plan Year, Lunde Electric ceased providing Statements of Net Assets when it delivered copies of Valuation Reports to Participants. Nevertheless, Sommerfeld continued to prepare Statements of Net Assets for those years, which he provided to the Eriksens. Lunde Electric filed certain documents with the Internal Revenue Service (IRS), including a Form 5500, in connection with its operation of the Plan. Form 5500, titled, Annual Return/Report of Employee Benefit Plan, details contributions made to an ERISA fund. Brad Sommerfeld prepared the Form 5500 each year, and either Raymond or Sigmund, as Plan administrators, signed the document before submitting it to the IRS. Among other questions, Form 5500 asks: Was there a failure to transmit to the plan any participant contributions within the time period described in 29 [Code of Federal Regulations (C.F.R.)] 2510.3-102? The reference to the Code of Federal Regulations is to an ERISA regulation titled Definition of `plan assets' participant contributions (the Plan Asset Regulation), which provides: (a)(1) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets. . . . . (b) Maximum time period for pension benefit plans. (1) . . . [I]n no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than the 15th business day of the month following the month in which the participant contribution or participant loan repayment amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant's wages). 29 C.F.R. § 2510.3-102(a)(1), (b)(1). For the 1999, 2000, and 2001 tax years, the Form 5500s filed by Lunde Electric indicated that all Participant contributions had been transmitted. Sommerfeld testified that this was not true and that he had falsified the three forms because: The answer yes is a flag to the Internal Revenue Service that the plan is delinquent or behind on their contributions. And that mayor would result in either an IRS audit or a Department of Labor investigation. And I was afraid that I would be blamed for blowing the whistle or causing either one of those actions to take place and cause harm to the company.
In early 2003, bookkeeper Wunsch discussed her concerns about the 401(k) Plan with the Eriksens. Thereafter, Wunsch contacted the Department of Labor (DOL) and met with an investigator. In March 2003, the DOL issued a grand jury subpoena to Lunde Electric. After the April 2003 subpoena was served, Lunde Electric resumed remitting elective deferrals to the Plan. By October 2004, Lunde Electric had lowered its outstanding obligations to the Plan from approximately $105,000 to $1,000. When Lunde Electric ceased operations in April 2005, all Plan Participants received their full 401(k) distribution. In 2008, based on the events detailed supra, Sigmund and Raymond were indicted on one count of Conspiracy to Embezzle $70,120.55 from an ERISA Employee Plan, in violation of 18 U.S.C. § 371 (Count 1); seventeen counts of Embezzlement or Conversion from an ERISA Employee Benefit Plan, in violation of 18 U.S.C. §§ 664 and 2 (Counts 2-18), and three counts of Making False or Misleading Statements in an ERISA Benefit Plan Document that Federal Law Requires to be Kept, in violation of 18 U.S.C. §§ 1027 and 2 (Counts 19-21).