Thomas, Head & Greisen Employees Trust Ronald E. Greisen Henry P. Head v. Jack Buster, and Terry D. Parks and Northern Financial

FERGUSON, Circuit Judge,

dissenting:

In this ease, a professional corporation of certified public accountants formed an ERISA trust in which its members were the major beneficiaries. The Trust made returns of 20% per annum on its money by gambling on the Alaskan real estate market. When the market dropped, the Trustees succeeded in convincing the district court that it was not their mismanagement of the Trust that was to blame for not making a 20% profit on three real estate transactions, but rather the fault of real estate mortgage brokers Jack Buster and Terry Parks, the persons who sold them the mortgage investments. 1 Instead of granting the Trustees’ claims on common law fraud, the district court federalized their state tort claims by concluding that one who sells his own property to an ERISA trust is a financial advisor.

In 1977, Buster formed with another person the limited partnership Kavik Mortgage Investors for the purpose of investing in notes secured by real estate deeds of trust. The ERISA trust invested $50,000 and became a limited partner. The partnership agreement followed standard partnership law, providing that the general partner was a fiduciary to the limited partners. See generally 1916 Uniform Limited Partnership Act, codified in Alaska Statute § 32.11.010 (1993), et seq.

Subsequently, Buster and Parks formed the Northern Financial partnership. Northern Financial bought deed of trust notes at a discount to sell to others for profit. From *1122 1983 to 1986, Northern Financial sold to the Trust thirty-six notes at a cost of $727,000. These investments comprised about 40% of the trust assets.

Buster made significant and overly speculative reports regarding the value of at least four of the notes. When these four notes failed to yield a 20% return after the collapse of the Alaska real estate market, the Trust brought this action alleging violations of RICO, mail and securities fraud, state law causes of action, common law fraud and ERISA. The action on one note was settled because Buster promised to make good on his guarantee of a 20% return on that note. On the other three notes, the district court ruled solely on the ERISA claim.

The majority errs in three major respects. First, it applies the wrong standard of review to the district court’s conclusion that Buster is an investment advisor under ERISA. Second, it erroneously assumes that Buster was an investment advisor under ERISA because of his status as a general partner and fiduciary in the Kavik Mortgage Investors partnership. Third, it creates an inter-circuit conflict with the Fifth, Seventh, and Eighth Circuits.

Standard of Review

The majority errs in applying the clear error rule to the district court’s finding that Buster was an investment advisor under ERISA. The clear error rule governs only historical facts, not the legal conclusions to be drawn from those facts. In re J.A. Thompson & Son, Inc., 666 F.2d 941 (9th Cir.1982). This court must review the legal conclusion that Buster was an investment advisor under ERISA de novo. Batchelor v. Oak Hill Medical Group, 870 F.2d 1446, 1447 (9th Cir.1989) (citing Trustees of Amalgamated Ins. Fund v. Geltman Indus., Inc., 784 F.2d 926 , 929 (9th Cir.), cert. denied, 479 U.S. 822 , 107 S.Ct. 90 , 93 L.Ed.2d 42 (1986)). For the reasons stated below, upon a de novo review of the district court record, the majority should have concluded that Buster was not an investment advisor for a fee pursuant to 29 U.S.C. § 1002 (21)(A)(ii) and thus is not subject to ERISA.

Investment Advisor Status

The majority incorrectly assumes that a fiduciary under state law to a trust protected under ERISA is necessarily also an ERISA fiduciary. The earlier partnership agreement between the parties expressly provided that the general partners were fiduciaries of the limited partners. The district court and the majority assert that once a fiduciary relationship is formed, it exists forever. Assuming that to be true, the fact that a person is a fiduciary under state law does not make him an investment advisor under ERISA. 29 C.F.R. 2510.3-21(c)(l) (1992). See also Farm King Supply, Inc. v. Edward D. Jones & Co., 884 F.2d 288 , 293 (7th Cir.1989). An investment advisor is always a fiduciary. But a fiduciary is not always an investment advisor. Id. The majority and district court simply put the cart before the horse.

The majority’s analysis fails at two levels. First, one who sells his own property does not become an investment advisor for a fee under ERISA. See e.g. Consolidated Beef Indus., Inc. v. New York Life Ins. Co., 949 F.2d 960, 965 (8th Cir.1991), cert. denied, - U.S.-, 112 S.Ct. 1670 , 118 L.Ed.2d 390 (1992).

In Consolidated Beef, the Eighth Circuit concluded as a matter of law that the seller of a 401(k) turnkey plan “was not providing investment advice ... [but rather] was merely a salesperson earning commissions and not a fiduciary under ERISA.” 949 F.2d at 966 . Like the Consolidated Beef sales agent, Buster worked on a commission basis and recommended the purchase of his company’s “products” only, rather than that of many companies. Id. Buster sought to sell only those investments which the Northern Financial partnership acquired. His self-interest and loyalties should have been obvious to all parties involved.

Second, viewed on a more general level, a sales broker should not be considered an ERISA fiduciary simply because he is good at his job, “matching the customer’s desires with available inventory,” even where the sales broker promotes the products of many companies. Farm King Supply, Inc. v. Ed *1123 ward Jones & Co., 884 F.2d 288 , 292 (7th Cir.1989).

In Farm King, the Seventh Circuit concluded that the seller was not an ERISA investment advisor. The court held that all the seller did was “select a few securities from its limited pool of commissionable securities and propose to the trustees that the Plan purchase from among this select group.” 884 F.2d at 292. It considered appellant’s “discretionary authority or control” argument under 29 U.S.C. § 1002 (21)(A)(i) and its “rendering investment advice” argument under 29 U.S.C. § 1002 (21)(A)(ii) and found that the seller was not a fiduciary under either prong.

The Farm King court noted that “stock brokers or dealers who recommend certain securities and then participate in the acquisition or disposition of those securities. and receive a commission for their services” could be found to be ERISA fiduciaries, but only where there existed “some sort of an agreement or understanding ... that [the broker/dealer] would provide to the Plan individualized investment advice which would be the primary basis for the Plan’s investment decisions.” Id. at 293 .

The court rejected Farm King’s “rendering investment advice” argument, determining that the district court did not clearly err in finding that “there was no mutual understanding that Jones’ advice would be the primary basis for Plan investments.” Id. The court noted that:

[t]here is nothing in the record to indicate that Jones or its employees had agreed to render individualized investment advice to the Plan, nor that the trustees so agreed. The only ‘agreement’ between the parties was that the trustees would listen to Jones’ sales pitch and if the trustees liked the pitch, the Plan would purchase from among the suggested investments, the very cornerstone of a typical broker-client relationship.

Id.

The same is true in the case at hand. For all the majority makes of the frequency of the parties’ meetings and the volume of investments, there is absolutely no indication that Buster or Northern Financial agreed to serve as the primary source of investment advice to the Trustees. Additionally, there is nothing in the record which suggests that the Trustees intended such a mutual agreement or relied on Buster and Northern Financial as their primary basis for investment decisions. See 29 C.F.R. § 2510.3-21 (e)(l)(B).

Thus, to the extent the district court found that the parties entered into a mutual agreement under 29 U.S.C. § 1002 (21)(A)(ii), it clearly erred. To the extent that it concluded that Buster and Northern Financial had a mutual agreement based on the fact that Buster and Northern Financial were persuasive, sellers of investments to the Trust, the court also erred as a matter of law.

Furthermore, the factual situation in the ease at hand is even more compelling than that of Farm King. The Seventh Circuit held that the district, court correctly found that Jones was not an ERISA fiduciary where (1) Farm King invested approximately 99% of its assets in investments recommended and purchased through Jones; (2) Jones advised the trustees as to which investments “to hold and which to sell and offer[ed] the trustees a choice of recommended investments”; (3) the trustees never granted to Jones, and Jones never exercised, any control or influence over how the Plan’s assets were managed or disposed; and (4) the trustees never supplied Jones with its investment portfolio. . 884 F.2d 288 (7th Cir. 1989).

In the instant case, only 40% of the Trust’s assets were invested through Buster and Northern Financial. Thus, while 99% of Farm King’s investment portfolio was related in some way to its broker, a much smaller percentage of the Trust’s economic welfare depended on Buster and Northern Financial’s representations. Moreover, as in Farm King, the Trust never supplied Buster or Northern Financial with its investment portfolio. Without it, “individualized investment advise to the plan based on the particular needs of the plan” could not have been provided. 29 C.F.R. 2510.3 — 21(c)(l)(ii)(B).

Finally, Buster was compensated for his “services” through commissions. The Trust knew of this arrangement and was aware of *1124 the conflict in promoting Buster’s interests and that of the Trust. In supporting its conclusion that Buster rendered investment advice for a fee, under 29 U.S.C. § 1002 (21)(A)(ii), the majority relies on the district court’s findings that

Buster ... provided information to the Trustees as to the value of various deed of trust notes by virtue of the yield calculations, mortgage analyses, and price information. He also provided descriptions of the property, and information pertaining to the payor’s payment history and the pay- or’s employment.

Maj. Op. at 1120.

These findings are not at all dispositive. Buster took steps that every effective mortgage broker would take in making a “sales pitch” to a client. Buster had a clear interest in providing this information in order to enhance the attractiveness of the investments to the Trust and to sell the investments.

As in Farm King, the Trustees relied on a number of Buster’s recommendations because of the strong performance of past recommendations. However, neither Buster nor the Trustees interpreted this situation as an agreement for Buster to provide individualized advice upon which the trustees would rely as a primary basis for the plans’ investment decisions. The relationship between the parties was simply one of broker-client.

It is especially true in this case because neither Northern Financial nor Buster rendered individual investment advice or made recommendations based on the particular needs of the Trust. In fact, neither Northern Financial nor Buster had any information concerning the assets of the Trust except for the deed of trust and notes which they sold to the Trust.

In concluding to the contrary, the majority applies an inordinately low standard in assessing the applicability of ERISA. Accord Stanton v. Shearson Lehman/American Exp., Inc., 631 F.Supp. 100, 103-04 (N.D.Ga.1986).

In Stanton, the defendants were found to be ERISA fiduciaries because they went “far beyond this limited involvement,” in making “specific, unsolicited recommendations where the client is dependent upon and relies on the broker’s special expertise ... [and where] the client merely ‘rubber stamps’ — follows automatically or without consideration — the investment recommendations of the broker.” Id. The broker in Stanton played a qualitatively different and much more influential role in her client’s investment decisions than Buster did in the Trust’s investment portfolio. Notably, the certified public accountants administering the Trust in this case had previously entered into a partnership which sold the same kind of real estate securities which they now bought.

Finally, to the extent the majority categorizes Buster’s actions in promoting his investment packages as rendering individualized investment advice, and his commissions from the sale of these investments as compensation for rendering investment advice, it unnecessarily creates an inter-circuit conflict with the Seventh Circuit and the other circuits which have followed Farm King and its rationale. See Schloegel v. Boswell, 994 F.2d 266 (5th Cir.), cert. denied, - U.S. -, 114 S.Ct. 440 , 126 L.Ed.2d 374 (1993); Olson v. E.F. Hutton & Co., Inc., 957 F.2d 622, 626 (8th Cir.1992); Consolidated Beef Indus., Inc. v. New York Life Ins. Co., 949 F.2d 960 (8th Cir.1991), cert. denied, - U.S. -, 112 S.Ct. 1670 , 118 L.Ed.2d 390 (1992); Brown v. Roth, 729 F.Supp. 391, 397 (D.N.J.1990).

Conclusion

In summary, the district court and the majority erred in deciding to federalize state common law claims. I would reverse and remand the case to the district court to decide it on state and common law fraud claims.

. The Trust did not lose money on the transactions. It made a net gain of 6%.