William Faulman v. SECURITY MUTUAL FINANCIAL LIFE INSURANCE COMPANY Appeal from the United States…

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 08-4152
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WILLIAM FAULMAN;
MICHAEL FAULMAN;
U.S. INVESTMENT ADVISORS, INC.,
on behalf of themselves and others similarly situated,
Appellants
v.
SECURITY MUTUAL FINANCIAL
LIFE INSURANCE COMPANY
Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 04-cv-05083)
District Judge: Honorable Anne E. Thompson
Submitted Under Third Circuit LAR 34.1(a)
November 17, 2009
Before: RENDELL, BARRY and CHAGARES, Circuit Judges.
(Filed: December 3, 2009)
OPINION OF THE COURT
RENDELL, Circuit Judge.
Plaintiffs William and Michael Faulman urge on appeal that the District Court

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made a variety of errors in ruling on a motion for partial summary judgment and in its
conduct of the bench and jury trials that occurred thereafter in this ERISA case. We
disagree and will affirm the order of the District Court.
Background
This case concerns an employer-purchased term life insurance policy called the
Group Entry Age Reserve (“GEAR”), which was marketed by defendant Security
Financial Life Insurance Company (“Security”). Upon termination or retirement,
employees could convert the term coverage to a whole life insurance policy. After
conversion, employees were charged a discounted premium, which was based on the
employee’s age when he was first issued the GEAR policy, rather than his age when he
converted the term policy to the whole policy. According to Security, this feature was
made possible by allocating part of the pre-conversion premium to a “Rate Stabilization
Reserve.” The funds in that reserve then offset the cost of premiums after conversion.
The Employer’s Participating Insurance Cooperative (“EPIC”) plan was a life
insurance plan, which provided life insurance through the GEAR product. Initially, a
company called Tri-Core, which was an affiliate of Security, administered the EPIC plan.
After various changes, Security administered the successor to the EPIC plan that is
relevant here.
Plaintiffs William Faulman and Michael Faulman were the only employees of U.S.
Investment Advisors (“USIA”), a holding company created to manage several other

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corporations formed by the Faulmans. In 1992, the late Frank Speer, who was the
Faulmans’ insurance agent and an agent for Security, suggested that plaintiffs purchase
EPIC and GEAR. Although the brochures about these products principally described
them as life insurance products, plaintiffs claim that Speer characterized them as an
investment vehicle, much like a retirement plan, that would allow the Faulmans to
contribute to the Rate Stabilization Reserve and, ultimately, cash out their contributions
for a profit. Plaintiffs also claim that Speer stated that contributions to the GEAR product
would be tax-free. After considering the products for two years, and having their attorney
and accountant review them, plaintiffs purchased the EPIC and GEAR products in 1994.
USIA joined the EPIC plan, the Faulmans submitted life insurance applications, and
USIA made contributions of $420,000 to the plan over the next seven years.
In 2001, plaintiffs were informed that their premiums had increased. After
subsequent inquiries, they were told (for the first time, according to them) that they could
not cash out their contributions to the Rate Stabilization Reserve; rather, they could only
use those contributions to defray the cost of converting the term life insurance policy to a
whole policy, as described above. Plaintiffs ultimately converted their term policies to
whole policies. William Faulman’s premium for the whole policy was reduced by over
50% as a result of the GEAR conversion benefit.
Plaintiffs claim that Security misrepresented the nature of the Rate Stabilization
Reserve and the tax-deductibility of their contributions in order to induce them to

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purchase the GEAR product. In particular, plaintiffs claim that Security was aware of an
Internal Revenue Service ruling that the GEAR contributions were not tax-free, but that
Security never notified plaintiffs of this fact. Plaintiffs also claim that Security
improperly used plaintiffs’ contributions to the plan to pay commissions to Tri-Core and
to purchase the GEAR product.
Plaintiffs alleged that Security breached its fiduciary duties under ERISA, violated
the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-
68, violated Florida’s Unfair Insurance Trade Practices Act, Fla. Stat. §§ 626.951-626.99,
and committed common-law fraud, conversion, breach of contract, and breach of the duty
of good faith and fair dealing. The District Court granted partial summary judgment to
Security, finding that all of plaintiffs’ state law claims except the fraud claim were
preempted by ERISA. One year later, the District Court granted a second motion filed by
Security for partial summary judgment, rejecting certain of plaintiffs’ ERISA and RICO
theories.
The case was then brought to trial. The RICO and fraud claims were tried to a
jury, which found for defendant on both claims. The ERISA claims were tried to the
Court, which also found for defendant. Specifically, the Court found that Security did not
owe plaintiffs any fiduciary duties with respect to the disclosure of the plan’s tax status or
the payment of commissions to Tri-Core, and that Security did not breach its fiduciary
duties when it purchased the GEAR product for the USIA plan.

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Plaintiffs moved for a new jury trial. They argued that the Court had erred when it
limited the length of plaintiffs’ opening statements, interrupted their examination of a
witness named David Wallman, excluded certain evidence, and instructed the jury. The
Court denied the motion.
This appeal followed.
The District Court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction
under 28 U.S.C. § 1291.
The District Court’s Summary Judgment Decisions
Plaintiffs challenge various rulings made by the District Court in granting partial
summary judgment to defendant. Our review of a grant of summary judgment is plenary.
Gardner v. State Farm Fire & Cas. Co., 544 F.3d 553, 557 (3d Cir. 2008). “[W]e assess
the record using the same summary judgment standard that guides the district courts.” Id.
Thus, defendant must demonstrate that “there is no genuine issue as to any material fact
and that [it] is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2).
First, plaintiffs contend that a court must always consider fiduciary status in
determining whether ERISA preemption applies. Plaintiffs correctly state that the District
Court did not consider whether Security was a fiduciary when determining that plaintiffs’
state law claims “relate to” an ERISA claim and were therefore preempted. See 29
U.S.C. § 1144. However, none of the cases cited by plaintiffs support their position that
such an analysis is required. To the contrary, in Kollman v. Hewitt Associates, LLC, 487

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F.3d 139, 148 (3d Cir. 2007), we rejected the plaintiff’s contention that his state law
claim was “not subject to preemption because [the defendant] is supposedly a
nonfiduciary.” Instead, we emphasized, the preemption inquiry depends on whether a
state law claim implicates the plan’s “funding, benefits, reporting or administration.” Id.
at 149-50. Similarly, the court in Findern Management Co. v. Barrett, 809 A.2d 842, 856
(N.J. Super. Ct. App. Div. 2002), referred to fiduciary status only as one of several factors
used to assess whether the claims were actually related to an ERISA plan, rather than to
duties arising “outside of the ERISA context.” The courts in the other cases cited by
plaintiffs either did not consider fiduciary status at all or considered it only because such
an analysis was required by the specific facts of those cases.
Second, plaintiffs argue that when the District Court was evaluating the terms of
the USIA Plan, it improperly confined its analysis to the terms of a single document that
the court referred to as the “EPIC Plan Document.” JA0025. However, plaintiffs do not
identify what other documents the Court should have considered. Nonetheless, we have
examined other documents in the record that describe the USIA Plan, including a rider to
the Group Life Insurance Policy contract called the “Employers’ Rate Stabilization
Reserve Endorsement” and brochures regarding the EPIC and GEAR products. Even
assuming that the District Court should have considered these documents to be part of the
ERISA plan, they do nothing to substantiate plaintiffs’ claims.
Third, plaintiffs argue that the District Court erred when it concluded that Security

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had not misappropriated the funds in the reserve. We disagree. The Court properly
determined that plaintiffs had no right to the funds in the Rate Stabilization Reserve,
except to have the funds used to reduce their insurance premiums after conversion.
Section 5.2 of the Plan clearly provides that “[t]he Employer shall have no right, title, or
interest in and to the contributions made by it to the Trust; and, no part of the Trust
property . . . ever shall revert to the Employer.” JA0984. Thus, USIA had no right to the
reserve funds, and Security’s actions could not have constituted misappropriation or
conversion.
Fourth, plaintiffs contend that the District Court erred in finding that the EPIC plan
did not involve a reserve fund. We are unable to locate such a finding in the record. To
the contrary, the Court repeatedly referred to the reserve, both in its summary judgment
decisions and when it announced its findings after the bench trial.
Breach of Fiduciary Duties
Plaintiffs argue that the District Court erred in finding, after the bench trial, that
Security had not breached its fiduciary duties. “In an appeal from an ERISA bench trial,
we review findings of fact for clear error but have plenary review over the District
Court’s conclusions of law.” Vitale v. Latrobe Area Hosp., 420 F.3d 278, 281 (3d Cir.
2005).
Three sections of ERISA are relevant to this issue. 29 U.S.C. § 1106(b) provides
that a fiduciary may not “deal with the assets of the plan in his own interest” or receive

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consideration “in connection with a transaction involving the assets of the plan.” Under
§ 1101(b)(2), however, only certain assets are covered by § 1106: “In the case of a plan
to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall
be deemed to include such policy, but shall not . . . be deemed to include any assets of
such insurer.” Finally, § 1108 and Department of Labor guidance known as Prohibited
Transaction Exemption 84-24 (“PTE 84-24”) both provide exceptions to the prohibitions
contained in § 1106(b).
The District Court found that Security was a fiduciary with respect to the life
insurance policy owned by the USIA Plan, but not with respect to the contributions made
to the plan by plaintiffs. The distinction, according to the Court, lies in § 1101(b)(2).
The District Court found that plaintiffs’ contributions were deposited in Security’s
general account, rather than in the USIA Plan itself. Thus, according to the Court, these
funds were an asset of the insurer (i.e., Security), and were not plan assets under
§ 1101(b)(2). Thus, the fiduciary duties contained in § 1106 did not apply to plaintiffs’
contributions, but instead applied only to the life insurance policy.
On appeal, plaintiffs challenge the District Court’s legal and factual
determinations. They argue that Security engaged in self-dealing by arranging for the
USIA Plan to purchase GEAR, and then converted plan assets by misappropriating the
funds in the Rate Stabilization Reserve. Plaintiffs also argue that Security breached its
fiduciary duties by misrepresenting the tax-free status of contributions to GEAR.

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Plaintiffs further claim that Security violated PTE 84-24 by paying commissions to Tri-
Core and Speer and violated § 1108(b)(2) by paying itself excessive compensation.
Finally, they argue that the USIA Plan was not a “guaranteed benefit policy,” and
therefore is not covered by § 1101(b)(2). Thus, according to plaintiffs, the distinction
drawn by the District Court between the plan’s assets and Security’s assets cannot hold.
We see no reason to disturb the District Court’s determination that Security did not
breach its fiduciary duties. The Court properly found that it was plaintiffs, not Security,
who decided that the USIA Plan should purchase the GEAR product. Indeed, the USIA
Plan was created with the specific purpose of purchasing GEAR. Plaintiffs made this
decision after evaluating EPIC and GEAR for two years, and after consulting their
attorney and accountant. Thus, contrary to plaintiffs’ contention, it was not Security that
“arranged for” the GEAR product to be purchased. Nor is there any merit to plaintiffs’
claim that Security misappropriated the funds in the Rate Stabilization Reserve. Once
plaintiffs decided to stop participating in the plan, they were able to use the funds in the
Rate Stabilization Reserve to reduce their premiums, as Security had advertised. Finally,
we are not persuaded that we should disturb the District Court’s finding that Security did
not violate its fiduciary duties with respect to its representations regarding the tax status
of the GEAR contributions.
We therefore agree with the District Court that Security did not violate § 1106. As
a result, we need not reach plaintiffs’ arguments with respect to PTE 84-24, § 1108, or

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§ 1101(b)(2), all of which provide exemptions to the prohibitions contained in § 1106.
Rulings at Trial
Plaintiffs challenge several evidentiary rulings made by the Court during trial, and
the Court’s refusal to grant a new trial based on these same issues.
We review a district court’s evidentiary rulings for abuse of discretion. Acumed
LLC v. Advanced Surgical Servs., Inc., 561 F.3d 199, 211 (3d Cir. 2009). We also review
the denial of a motion for a new trial for abuse of discretion, but we exercise plenary
review over that denial to the extent that it is based on a question of law. Curley v. Klem,
499 F.3d 199, 205-06 (3d Cir. 2007).
Plaintiffs argue that the District Court improperly interfered with their questioning
of David Wallman, Security’s chief actuary. Plaintiffs complain that the Court
inappropriately interrupted and limited their examination when they tried to impeach
Wallman with purportedly contradictory testimony given eight years earlier. We disagree.
Plaintiffs’ questions appeared to be of little relevance, and the Court was properly
concerned that they could unduly prejudice jurors’ interpretation of Wallman’s testimony.
The Court’s attempts to limit this portion of this examination were well within its
discretion to manage the trial.
Plaintiffs also argue that the Court erred in refusing to admit certain documents
into evidence: a magazine article, letters from former EPIC participants, notes by
Security employees, and correspondence between the Internal Revenue Service and

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Security. The Court properly concluded that these documents contained information that
was either hearsay, irrelevant, or unduly prejudicial, especially in light of the fact that
defendant had already stipulated to the facts that plaintiffs were attempting to prove using
these documents. We find no abuse of discretion in the Court’s rulings.
Jury Instructions
Plaintiffs argue that the District Court’s jury instructions were flawed in several
respects.
Our review of jury instructions is plenary, and we reverse if the instructions, as a
whole, were capable of confusing and misleading the jury. Mosley v. Wilson, 102 F.3d
85, 94 (3d Cir. 1996).
First, plaintiffs argue that the Court should have instructed the jury that Security
was a fiduciary under ERISA, and that it therefore had certain disclosure obligations
under ERISA. However, at the close of the jury trial, the Court had not yet determined
whether Security was an ERISA fiduciary. Since that determination was irrelevant to the
common-law fraud and RICO claims that the jury was asked to decide, and since the
determination had not even been made, the Court did not error in refusing to give such an
instruction.
Second, plaintiffs argue that the Court should have informed the jury that the
GEAR policy contained an indemnification clause that was invalid under 29 U.S.C.
§ 1110(a), which provides that “any provision in an agreement or instrument which

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purports to relieve a fiduciary from responsibility or liability . . . shall be void as against
public policy.” The indemnification clause was not even being relied on by Security in
this litigation, however, and was therefore irrelevant to the case. An instruction to this
effect would have only served to confuse the jury.
Finally, plaintiffs argue that the Court improperly failed to instruct the jury that
plaintiffs could prevail on their misrepresentation claim on either of two theories: that
Security misrepresented how the reserve funds would be used, or that Security
misrepresented the tax-deductible nature of plaintiffs’ contributions. The Court was not
required to give such a specific instruction. The Court did instruct the jury that the
misrepresentation had to be of a material “statement of fact.” JA2042-43. This
instruction was broad enough to encompass both of plaintiffs’ theories.
We therefore conclude that the jury instructions were not erroneous in any of the
respects urged by plaintiffs.
Conclusion
We will AFFIRM the order of the District Court.

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