Northern California Record

Thursday, November 21, 2019

Judge won't let pension co-trustees add emotional distress claims against Pension Benefit Guaranty


By Scott Holland | Jun 3, 2019


SAN DIEGO – A federal judge has rejected the request of pension co-trustees to amend filings in a dispute with a government agency.

On May 14, Judge Michael Anello of the U.S. District Court for the Southern District of California denied defendants Ilana and Samuel Karps' motion to amend their answers and counterclaims.

The Pension Benefit Guaranty Corp. (PBGC) sued the Karps on March 30, 2018, in its role as statutory trustee of the pension plan for Kachay Homes. The complaint stated the Karps, who were co-trustees, breached their fiduciary duties under the Employee Retirement Income Security Act “by causing the plan to engage in transfers and loans that were not in the sole interest of participants and beneficiaries … and were prohibited transactions,” according to the opinion.

The Karps filed separate answers to the complaint on April 20, 2018. In September, Magistrate Judge Barbara Major issued a scheduling order setting a deadline of Oct. 23 for additional motions. On that day, the Karps each sought leave to file an amended answer in order to add counterclaims for intentional and negligent infliction of emotional distress over the way the agency federal agency managed the plan termination over three years.

Anello detailed the dispute in his opinion. Kachay paid an annual premium to PBGC to cover insurance in case the plan failed and couldn’t pay full benefits to participants. Trouble started during the 2007 recession, when Kachay held four large speculative houses for sale and was maintaining several bank loans to finance those projects.

When the banks cut off funding, the projects went into foreclosure. Kachay borrowed from the pension fund to pay for ongoing operations, but was unable to repay those loans before the plan terminated. The Karps said they put personal assets into Kachay to try to preserve solvency, but in August 2013 PBGC and Kachay agreed to end the plan as of the previous February, leading to a protracted period of communication about the plan, during with the Karps said they “suffered extreme concern over their fear that their pension benefits could be taken away,” the ruling states.

Anello said the Karps filed their motion in time, there is no indication of wrongful motive in bringing the counterclaims and they haven’t previously amended their answers. However, he pointed to a 9th Circuit U.S. Court of Appeals opinion in Johnson v. Buckley, which set forth that “futility alone can justify the denial of a motion to amend.”

In arguing against allowing the amendments, PBGC said the defendant in the counterclaims should be the federal government. Anello explained federal courts only have jurisdiction if the government consents to being sued, although the Federal Tort Claims Act (FTCA) grants federal district courts “exclusive jurisdiction over civil actions against the United States for damages ‘caused by the negligent or wrongful act or omission of any employee of the government while acting within the scope of his office or employment.’”

Since the PBGC is a federal agency that administers the ERISA Title IV pension plan termination insurance program, Anello explained, it can’t be made the defendant for the emotional distress tort claims. The agency further argued that even if the government could be named a counter defendant, the amendment still would be futile because the Karps haven’t exhausted their administrative remedies under the Federal Tort Claims Act.

Anello wrote the “emotional distress counterclaims allege that plaintiff acted outrageously by processing defendants’ pension and handling the distress termination for three years. … While all the claims generally relate to the plan, they relate to different time frames and a different set of facts. Further, it appears that none of the material facts of plaintiff’s claims would overlap with the material facts of defendants’ counterclaims. As such, the operative facts for these claims are not so logically connected that defendants’ counterclaims would be considered compulsory.”

Further, the PBGC said the proposed counterclaims are barred by the FTCA’s discretionary function exemption. Anello agreed, saying statutes governing the agency allow it to choose how to go about its business, and the Karps didn’t argue the agency acted outside of stated policy.

Determining the proposed amendments would be futile, Anello denied the Karps’ request for leave to amend.

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