US District Judge Paul Cassell of the US District Court for the District of Utah decided that Ted Madsen’s actions with respect to the David Coldesina, D.D.S., P.C. Employee Profit Sharing Plan & Trust for whom Madsen worked as an accountant and administrator constituted a breach of Madsen’s fiduciary duties.
According to Cassell’s ruling, Madsen had sent checks from plan contributions to plan advisor Gregg Simper without properly verifying their receipt into the plan.
“A prudent man of ordinary skill and care would have confirmed at least once in seven years that the funds he dispersed wound up in their intended repository,” Cassell declared in his opinion.
The court also said Madsen violated the prohibited transaction rules of the Employee Retirement Income Security Act (ERISA) by writing checks payable to Simper. According to the court, by writing checks to the advisor’s company, the accountant directly or indirectly transferred plan assets to another plan fiduciary, which is prohibited by ERISA Section 406(a)(1)(D).
Cassell’s opinion gives this background:
Coldesina established a profit-sharing plan for his dental practice in the early 1980s. In 1992, Coldesina met with Simper, his personal friend, about changing the plan’s investment strategy. Simper, a licensed broker-dealer for Sunset Financial Services Inc., an affiliate of Kansas City Life Insurance Co., became the plan’s investment advisor. According to Cassell, while working as the investment adviser, Simper also owned Greystone Marketing Inc.
Further, Cassell wrote, Simper advised Coldesina to hire Madsen, the owner of Flexible Benefits Administrators. As accountant and administrator, Madsen prepared the plan’s tax returns and other documents concerning participants’ accounts and benefits. He was involved in making disbursements to participants and tracking plan loans to ensure repayment.
According to the court, Coldesina wrote checks from the plan payable to Flexible Benefits, and Madsen would deposit the checks into his business account. The court noted that Madsen dealt almost exclusively with Simper.
When the arrangement with Flexible Benefits began, Madsen also transmitted plan funds payable to Kansas City Life for Kansas City Life’s insurance products. This arrangement changed when, at the direction of Simper, Madsen began writing checks on behalf of the plan payable to Simper’s company, Greystone Marketing.
According to the court history, Coldesina asked Simper, to rechannel the plan’s assets to other investments in 1999, a request to which Simper agreed. However, on the day Simper was supposed to change the investments, he committed suicide, according to the court, leaving a note confessing that he had stolen more than $600,000 from the plan.
The Plan Goes to Court
The plan then filed suit against Simper’s estate, Kansas City Life, Sunset Financial, Greystone Marketing, Madsen and Flexible Benefits. The plan alleged violations of ERISA and various state laws.
Although a court originally declared that Madsen was not an ERISA fiduciary, the ruling was later overturned by the 10th US Circuit Court of Appeals. The appellate judges decided that Madsen was a fiduciary because he wrote the unauthorized checks to Simper.
After getting the case back from the 10th Circuit, Cassell found that Madsen had engaged in transactions prohibited by ERISA Section 406 when he wrote checks representing plan assets that were made payable to Greystone Marketing. That, the court ruled, constituted a direct or indirect transfer of plan assets to a party in interest.
In addition, the district court found that Madsen breached his fiduciary duties because he did not meet the prudent man standard of care that ERISA Section 404(a) requires. The court noted that Coldesina had never instructed Madsen to make checks payable to Greystone Marketing and that Madsen had done only on the oral instructions of Simper.
Cassell rejected Madsen’s contention that he was “duty-bound” to follow Simper’s instructions.
“Regardless of any understanding between Madsen, Coldesina, and Simper as to how the funds were to be handled, ERISA imposed an independent duty on Madsen to ensure that instructions coming from Coldesina or Simper were in the plan participants’ best interest,” Cassell wrote.
The case is David P. Coldesina D.D.S., P.C. Employee Profit Sharing Plan & Trust v. Estate of Simper, D. Utah, No. 2:00-CV-927-PGC, 6/16/06.