Feds sue UA over Diplomat

BY ROBERT P. MADER Of CONTRACTORs staff WASHINGTON The U.S. Department of Labor has filed suit against the trustees of the United Association Plumbers and Pipefitters National Pension Fund, seeking to have them removed as trustees and to recover any losses associated with the funds investment in the Westin Diplomat Hotel & Resort in Hollywood, Fla. This case is about the trustees failure to prudently

BY ROBERT P. MADER

Of CONTRACTOR’s staff

WASHINGTON — The U.S. Department of Labor has filed suit against the trustees of the United Association Plumbers and Pipefitters National Pension Fund, seeking to have them removed as trustees and to recover any losses associated with the fund’s investment in the Westin Diplomat Hotel & Resort in Hollywood, Fla.

“This case is about the trustees’ failure to prudently manage and invest their members’ pension funds through its involvement in the Diplomat Resort project,” said Ann Combs, assistant secretary for the U.S. Department of Labor’s Pension and Welfare Benefits Administration. “Pension trustees purchased and developed the property without the slightest due diligence to determine the financial viability of the project. The Department of Labor even had to require independent management of the project to bring it to proper completion, but the damage had already been done by the trustees’ mismanagement.”

Trustees named in the suit include labor pension plan trustees Martin J. Maddaloni, general president of the UA, and union officials Thomas Patchell and Patrick Perno. Also named as defendants are management trustees Charles H. Carlson of Industrial Piping Co. in Marquette, Mich., and James A. House, former owner of J.A. House Inc. in Indianapolis. Both are past presidents of the Mechanical Contractors Association of America.

“It’s a matter of policy not to comment on litigation,” said Edward Mackiewicz, the Washington-based attorney for the management trustees.

The UA issued a strongly worded response to the suit.

“The United Association trustees of the National Pension Fund deny that the investment was imprudent and affirmatively maintain that the facts will show that the investment was fully justified,” the UA said in a written statement. “Furthermore, the trustees assert that the Department of Labor allegations are not only incorrect but misguided.

The record will show that the Department of Labor was involved in the project from the beginning. In fact, the trustees reviewed the project with the Department of Labor before the trustees decided to invest in the Diplomat. The record will also show that the Diplomat project has been under the complete control of independent fiduciaries approved by the Department of Labor since November 1999.

“This matter is now in the judicial system and the United Association fully expects that the trustees’ position will be vindicated in time.”

The suit, filed in federal district court in Fort Lauderdale, Fla., alleges that the trustees violated the federal Employee Retirement Income Security Act by imprudently proceeding with the Diplomat project without any feasibility studies, market analyses, market-tested construction budgets, construction schedules, economic models, financing arrangements or other information with which to make an informed decision.

The suit also alleges that the trustees failed to maintain adequate financial controls over construction costs and paid excessive fees to service providers on the project.

At a September 1997 board meeting, the pension plan trustees voted to buy the Diplomat property on behalf of the pension plan from Union Labor Life Insurance Co. At that time, the property was abandoned and in a state of disrepair. The United Association purchased the property with the intention of subsequently selling it to the pension plan, according to the lawsuit.

The sale of the real estate from the union to the pension plan was prohibited under the Employee Retirement Income Security Act, because of the relationship between the union and its pension plan, without an exemption from the Department of Labor. In their exemption application, the trustees failed to disclose that the anticipated development would require the further investment of hundreds of millions of dollars of the plan’s assets.

The exemption approved by the department covered only the terms of the $40 million sale of the property from the union to the pension plan, not the prudence of the property’s subsequent redevelopment using union pension funds. The plan invested more than $800 million in the Diplomat project.

Under the lawsuit, the department is seeking a court order to require the defendants to reimburse the plan for losses, remove the trustees from their positions with the plan and permanently bar them from serving as a fiduciary or service provider for any employee benefit plan governed by Employee Retirement Income Security Act.

The case is Chao v. Maddaloni, Civil Action No. 02-61289CIV.