Copyright 1985 American Lawyer Newspapers Group Inc.  
Legal Times
March 25, 1985
SECTION: Pg.2

LENGTH: 869 words

HEADLINE: Prepaid Legal Plan Lawyers Face ERISA Charge

BYLINE: By Rich Arthurs, Legal Times Staff

BODY:
A recent Labor Department suit alleging that a small New York law firm "knowingly participated" in fiduciary violations by trustees of a union benefit plan marks the first time that Labor officials have sued providers of prepaid legal services.

An attorney representing the 11-lawyer firm complained that the suit represents an unwarranted intrusion into the operations of prepaid legal services plans and could have a chilling effect on the growth of such plans.

"This challenge . . . could affect many other existing prepaid legal services plans" if Labor's position is upheld in court, suggested Jules Bernstein of Washington, D.C.'s Connerton, Bernstein & Katz, who represents the lawfirm.
 
"Not Sui Generis'

Bernstein, who also serves as treasurer to the National Resource Center for Consumers of Legal Services, a nonprofit organization that works to promote the growth of prepaid legal services plans, maintained, "It's not a sui generis case by any means.

On March 5, the Labor Department filed suit against six trustees of the Mason Tenders District Council Legal Services Fund of New York City and New York's Levin & Weissman, as well as against firm partners Harold F. Levin and Roger M. Levin (Donovan v. Lupo, S.D.N.Y., No. 85 Civ. 1718).

The suit alleges that fund trustees breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by paying "excessive compensation" for legal services provided by the firm, and that the firm "actively promoted and knowingly participated" in those fiduciary violations by misrepresenting the number of hours of legal services provided to the plan.
 
Nepotism Alleged

Labor also alleges that fund trustee Louis Giardina violated ERISA's prohibitions on dealing with parties in interest by selecting the firm as service provider at a time when the firm was contemplating hiring his son, then a recent law school graduate.

The suit seeks reimbursement from both the firm and the trustees of excess fees allegedly paid to Levin & Weissman, the appointment of an independent trustee to oversee the plan's operation, and an injunction to bar Levin & Weissman from providing legal services to any ERISA plan for at least five years.

In a written statement, the firm responded that the "complaint reflects the Labor Department's lack of knowledge and experience concerning the field of pre-paid legal services, collective bargaining and other aspects of labor law and legal practice involved in the establishment and operation of such plans."

Bernstein questioned the relevance of he complaint's allegations of excessive billings and inflated hours, noting that providers such as Levin & Weissman are paid a flat rate per covered employee.
 
'A Relatively Modest Fee'

"They don't have hourly rates," said Bernstein. "That's one of the points here. Levin & Weissman probably gets under $50 per year per person [covered by the plan], and that is a relatively modest fee in the context of comparable existing prepaid legal services plans.

The firm added in its written statement that "contrary to the Labor Department's claim, the Plan has substantially underpaid the firm since 1979."

Bernstein called the allegation relating to the hiring of the trustee's son "a red herring." He added, "I don't know the circumstances of his being hired, but he was only with the firm a short time and left years ago."

Bernstein and Levin & Weissman suggested that the case raises significant issues for attorneys. "Here the Labor Department has suddenly decided it's going to start regulating the legal profession," Bernstein complained, suggesting that "the bar will be heard from on that issue."
 
"No Right to Dictate Standards'

In its prepared statement, Levin & Weissman argued that "the Labor Department has no right to dictate standards of performance for lawyers, or to second-guess the good faith conduct of trustees in the emerging field of prepaid legal services. Rather, the delivery of legal services is within the province of bar associations and other appropriate state authorities."

One attorney indicated that Labor's request for an injunction barring the firm from serving as a provider to union prepaid legal services plans "is part of an emerging pattern of Labor Department enforcement in which they are seeking fiduciary relief from parties who are not fiduciaries."

Steven J. Sacher of the D.C. office of Philadelphia's Pepper, Hamilton & Scheetz added that in a growing handful of cases over the past few years, Labor has relied on vague remedial provisions of ERISA and the common law of trusts to seek injunctive relief against attorneys and other plan professionals who are not fiduciaries but are parties in interest under ERISA.
 
'Bootstrapping Their Way'

"They are bootstrapping their way into a significant expansion of ERISA's relief provisions without statutory authority," Sacher argued.

Levin & Weissman has retained former federal judge Harold R. Tyler Jr. of New York's Patterson, Belknap, Webb & Tyler to handle its defense. Labor Department attorneys declined to elaborate on their allegations, saying only that the particulars will come to light in discovery.