WILLIAM B. SHUBB, District Judge.
After conducting a fifteen-day bench trial and providing the parties with extended time to submit post-trial briefing, the court finds in favor of all defendants on all of plaintiffs' claims under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1461. This memorandum constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).
Defendant Hollister, Inc. ("Hollister") is a privately-held Illinois corporation that develops, manufactures, and markets medical devices in the fields of ostomy, continence care, and wound care. Hollister is the wholly-owned and operating subsidiary of defendant The Firm of John Dickinson Schneider ("JDS"). JDS is an Illinois close corporation that holds all of Hollister's capital stock.
John D. Schneider, who only had a high school education and initially began a printing business, founded JDS and developed
HolliShare is a non-contributory, tax qualified defined contribution profit sharing plan designed to provide retirement benefits to Hollister's non-union employees in the United States. It is governed by a written instrument, the HolliShare Employee Share Ownership Trust ("Plan Instrument"). HolliShare's predominant asset, which totals approximately 95% of its total value, is its JDS common shares. The Plan Instrument mandates that HolliShare's assets be invested in JDS shares to the maximum extent practicable. When initially funded in 1974, HolliShare received 11,950 common shares of JDS that were purchased from shareholders. In exchange, HolliShare assumed the obligation to pay the long-term promissory notes issued to the shareholders to purchase the shares. In late 1974, the Plan transferred 4,007 shares back to JDS along with the related promissory note obligations, leaving the Plan with 7,943 shares. HolliShare has not purchased JDS shares since 1975, but the number of its total shares has increased due to two 100-for-1 stock splits and a 9-for-1 stock dividend.
HolliShare's ownership of JDS shares has proved to be an extraordinary investment, and the annual increases in value of JDS shares according to JDS's valuations exceeded most publicly-traded investments. For example, from 1977 through 2010, the mean average increase in JDS's share price was 26.79% each year, whereas the mean average increase for the Standard & Poors 500 index was 8.8% per year, the mean average increase for the Mid-Cap Index was 14.09% per year, and the mean average increase for the Small-Cap Index was 15.24% per year.
HolliShare participants are neither required nor permitted to contribute to HolliShare. HolliShare primarily raised the liquidity to pay benefits to participants through annual cash contributions from Hollister and cash paid by JDS for the repurchase of the Plan's stock. Hollister is required to contribute 5% of the aggregate compensation of participants to HolliShare each year, but, in recent years, Hollister has contributed between 7.5% to 8.5% of the aggregate compensation, totaling approximately $33 million in contributions since 1990. Because HolliShare invests primarily in JDS common shares, the principal factor that determines the change in value of each HolliShare participant's account is the annual decline or appreciation in the value of the Plan's JDS common shares, and the balance in each participant's account is generally based on the participant's pro-rata percentage of the value of HolliShare. Participants in HolliShare learned about the Plan and its financial condition in annual reports, which were referred to by the parties as and often bore the title of "HolliShare Highlights."
JDS has two classes of shares, preferred
Second, Article Five restricts the manner in which holders of JDS stock may transfer ownership. Specifically, subparagraph II.D.2.a gives JDS a right of first refusal by requiring that any holder of JDS stock who intends to transfer one or more shares must first offer to sell those shares to JDS. Subparagraph II.D.3.b further provides that the price paid for any common share purchased by JDS under its right of first refusal "shall be its book value as of the end of the calendar month in which the Repurchase Date occurs ... computed in accordance with generally accepted accounting principles."
The JDS Articles also provide that when JDS repurchases shares pursuant to its right of first refusal, it is obligated to pay only a minimal amount in cash (set originally at $5,000 and then increased to $250,000 in 1999) and can pay the remainder with a promissory note. Not only did HolliShare's cash needs always exceeded the $5,000 and $250,000 minimums, it could not receive a promissory note for its sale of JDS stock because ERISA prohibited it from accepting a promissory note as payment from an employer. See 29 U.S.C. § 1106(a)(1)(B).
In addition to the right of first refusal, subparagraph II.D.7.a provides for the sale of JDS shares under "exceptional circumstances":
(Ex. 531, Art. V, ¶ II.D.7.a.)
The Plan Instrument permits the sale of the Plan's JDS stock and does not set the price for such sales but requires that the sales be conducted in accordance with the JDS Articles. (Ex. 9-9.14, § 11.01(2).) Defendants testified at trial that, since the mid-1980s, HolliShare has sold its holdings of JDS common shares to JDS pursuant to the "exceptional circumstances" provision of subparagraph II.D.7.a, not the right of first refusal embodied in subparagraph II. D.2.a. Defendants testified that HolliShare and JDS entered into an agreement in the mid-1980s ("mid-80s agreement")
Although the theories underlying plaintiffs' claims have evolved as this case has progressed, the heart of plaintiffs' case at trial was that the price JDS paid for HolliShare's sales of its JDS stock should have been 1) the current month-end book value from the month in which the sale took place ("month-end book value"); or 2) a price determined to be the fair market value of the shares. Plaintiffs contend that, by selling at the December 31 book value from the year prior to the sale ("December 31 book value") instead of the month-end book value or the fair market value, the HolliShare fiduciaries breached their duties under ERISA and caused the Plan to suffer extraordinary losses.
The parties have stipulated as to a variety of details concerning the challenged transactions, including the sale date, the December 31 book value that was used for the sale price, the number of shares sold, and, for almost all of the sales, the month-end book value for the month in which the challenged transactions occurred. (See Docket No. 630 ("Stipulation of Facts").) Between 1981 and 2007, HolliShare sold its shares to JDS on nineteen occasions. The years in which sales took place, the number of shares sold, and the cash proceeds generated were as follows: 1981 (69,300 shares for $997,227.00); 1982 (38,000 shares for $723,140.00); 1985 (20,000 shares for $1,368,400.00); 1986 (180,000 shares for $12,619,800.00); 1987 (100,000 shares for $9,756,000.00); 1993 (75,000 shares for $25,830,000.00); 1995 (30,000 shares for $14,697,300.00); 1996 (166,973 shares for $10,000,012.97); 1997 (135,000 shares for $9,863,100.00); 1998 (250,000 shares for $21,262,500.00); 1999 (200,000 shares for $21,332,000.00); 2000 (150,000 shares for $18,679,500.00); 2001 (220,000 shares for $29,590,000.00); 2002 (46,250 shares for $7,174,300.00); 2003 (44,750 shares for $8,490,417.50); 2004 (50,000 shares for $11,908,000.00); 2005 (22,000 shares for $6,335,120.00); 2006 (26,500 shares for $8,717,400.00); and 2007 (85,500 shares for $34,006,770.00). (Id. ¶¶ 28-46.)
With the exception of plaintiff James P. DeFazio, all of the plaintiffs in this case are former employees of Hollister and former participants in HolliShare. The former
In a fourteen-month period between 2004 and 2005, three subsets of the current plaintiffs independently filed complaints against Hollister, JDS, the HolliShare Trustees, and various members of the boards of directors of both companies.
Defendant Richard T. Zwirner has performed legal work for Hollister and JDS since 1969, and he has been a HolliShare Trustee since 1976. He has also provided consulting services to Hollister since the late 1970s and served as the Corporate Secretary of JDS from 1974 to 1981, a Director of JDS and Hollister since 1978, Hollister's Vice President of Marketing and Sales from 1991 to 1994, and General Counsel to Hollister since 1977.
Hollister's chief financial officers also served as HolliShare Trustees, which, in succession, were defendants Charles H. Gunderson,
Hollister's heads of the human resources department also served as HolliShare Trustees, which, in succession, were defendants Charles C. Schellentrager, James A. Karlovsky, and Lori Kelleher. Although it is unclear from the testimony at trial when Schellentrager became a Trustee, his term ended in 1990 at the latest when Karlovsky succeeded him. Karlovsky served as a Trustee from 1990 to July 2004 and also served as Hollister's Vice President of Human Resources from 1989 to 2003 and Executive Assistant to the President from 2003 to 2004. Kelleher succeeded Karlovsky as a Trustee in 2004 and continued to serve as a Trustee until 2011.
Defendant Loretta A. Stempinski also served as a HolliShare Trustee from 1980 to 2001, held various positions in Hollister from 1961 to 1980, and served as a Director of JDS and Hollister from 1980 to 2001.
Defendant Michael C. Winn served as a Director of JDS and Hollister from 1979 to May 2001 and as Hollister's Vice President of Legal Affairs from 1974 to 1977, President from 1977 to 2001, and Chairman and CEO from 1981 until 2001. Ellis has not asserted claims against Winn. Defendant Alan F. Herbert served on the Boards of Directors of Hollister and JDS from 1998 to May 2011 and also served as Hollister's President and Chief Operating Officer from 1997 to 2001, President from 2001 to 2007, and Chairman and CEO from 2007 until 2011.
Plaintiffs also named Donald J. Groneberg, Richard I. Fremgen, and Donna J. Matson as defendants. The only testimony about Groneberg at trial was that he was a member of the finance department at Hollister. (Tr. 2153:21-2154:2, 2374:24-2375:1.) Plaintiffs did not offer evidence at trial establishing that Groneberg owed fiduciary duties to the HolliShare beneficiaries and have not proposed findings of fact or conclusions of law addressing his liability. Similarly, while there was limited testimony about Fremgen being on the Hollister Board of Directors (Tr. 315:14-316:5, 1546:25-1547:4) and defendants have indicated that he was on the board from 1999 until 2010, there was no testimony about his conduct at trial and plaintiffs did not propose any findings of fact or conclusions of law with respect to claims against him. Lastly, based on two passing references to her at trial, it appears Matson may have been a HolliShare Trustee. (See Tr. 306, 1913.) While the clerk's office has not terminated her as a defendant in this action, it appears she was dismissed in an early order in this case and neither party appears to believe claims are still pending against her. The court will therefore enter judgment in favor of Groneberg, Fremgen, and Matson.
Because plaintiffs failed to sufficiently identify their claims remaining for trial in their pretrial statement, the Final Pretrial Order required plaintiffs to file "an amended statement of the remaining claims that identifies, for each claim, 1) the statutory
ERISA provides for a civil action to be brought only by the Secretary of Labor, a participant, a beneficiary,
Relying on Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir.1986), defendants have repeatedly argued during the course of this litigation that plaintiffs lack statutory standing under ERISA because, as retirees who have withdrawn their full account balances, they no longer have a colorable claim to vested benefits and thus are not "participants." In 2006, however, Judge Karlton rejected defendants' argument, concluding that the Ninth Circuit has "allowed suit even when plaintiffs have received their vested benefits if they allege that fiduciaries `personally profited' from a breach of their duty of loyalty to the plan." Ellis v. Hollister, Inc., Civ. 05-559 LKK GGH, 2006 WL 988529, at *4 (E.D.Cal. Apr. 14, 2006) (citing Amalgamated Clothing & Textile Workers Union, AFL-CIO v. Murdock, 861 F.2d 1406, 1418 (9th Cir. 1988)). Defendants requested this court to reconsider Judge Karlton's ruling in 2007, and the court declined to do so because the ruling was not clearly erroneous. See DeFazio v. Hollister, Inc., Civ. No. 04-1358 WBS GGH, 2007 WL 3231670, at *3-4 (E.D.Cal. Nov. 1, 2007). The court again declines defendants' suggestion that the court should depart from Judge Karlton's 2006 decision.
Moreover, the Ninth Circuit has more recently distinguished Kuntz and held that a "former employee who has received a full distribution of his or her account balance under a defined contribution pension plan has standing as a plan participant to file suit under [ERISA] to recover losses occasioned by a breach of fiduciary duty that allegedly reduced the amount of his or her benefits." Vaughn, 567 F.3d at 1023, 1025-26; accord Harris v. Amgen, Inc., 573 F.3d 728, 733 (9th Cir.2009). In Vaughn, the Ninth Circuit did not require that the trustees had personally profited from their breaches in order for the participants to have standing, which Judge Karlton had previously found would be required under the pre-Vaughn precedent.
ERISA's statute of limitations provides:
29 U.S.C. § 1113 (emphasis added). While § 1113 requires a plaintiff to file a claim within six years of the date of the last act constituting a part of the alleged violation, regardless of when the plaintiff actually learned of the violation, the "`fraud or concealment' exception tolls the running of the limitations period for six years from the date of discovery." Barker v. Am. Mobil Power Corp., 64 F.3d 1397, 1401 (9th Cir.1995). "Plaintiffs bear the burden of proving `fraud or concealment' under 29 U.S.C. § 1113." Harris v. Koenig, 815 F.Supp.2d 12, 20 (D.D.C.2011); accord Barker, 64 F.3d at 1401 (finding the "fraud or concealment" exception inapplicable "because the plaintiffs have not produced specific evidence of fraudulent activity or concealment" by defendants).
Here, plaintiffs rely on the "fraud or concealment" exception to assert claims based on defendants' alleged breaches of fiduciary duties beginning in 1982. The "fraud or concealment" exception applies only when an ERISA fiduciary either "made knowingly false misrepresentations with the intent to defraud the plaintiffs" or took "affirmative steps ... to conceal any alleged fiduciary breaches." Barker, 64 F.3d at 1401; accord Radiology Ctr., S.C. v. Stifel, Nicolaus & Co., 919 F.2d 1216, 1220 (7th Cir.1990) ("An ERISA fiduciary can delay a wronged beneficiary's discovery of his claim [meriting application of the `fraud or concealment' exception] either by misrepresenting the significance of facts the beneficiary is aware of (fraud) or by hiding facts so that the beneficiary never becomes aware of them (concealment).").
Courts have recognized that the "fraud or concealment" exception to § 1113 incorporates the common law doctrine of fraudulent concealment. Barker, 64 F.3d at 1402. Under that common law doctrine, passive concealment alone may toll the statute of limitations if the defendant has a duty to disclose material information. Thorman v. Am. Seafoods Co., 421 F.3d 1090, 1092 (9th Cir.2005). Courts that have considered the issue, however, have held that the doctrine of passive concealment does not apply to § 1113. See, e.g., Ranke v. Sanofi-Synthelabo Inc., 436 F.3d 197, 204 (3d Cir.2006) (stating that an ERISA fiduciary must "have taken affirmative steps to hide an alleged breach of fiduciary duty from a beneficiary in order for the `fraud or concealment' exception to apply"); Larson v. Northrop Corp., 21 F.3d 1164,
The Ninth Circuit in Barker implicitly found passive concealment insufficient to toll the statute of limitations. There, the Ninth Circuit recognized that an ERISA fiduciary generally has a duty to disclose "complete and accurate information material to the beneficiary's circumstances," but focused only on whether the defendants had affirmatively concealed their breach when holding that the defendants did not engage in "fraud or concealment" under § 1113. See Barker, 64 F.3d at 1401, 1403. An ERISA fiduciary's mere failure to disclose material information thus does not merit tolling under § 1113.
The "fraud or concealment" exception tolls the statute of limitations only "until the plaintiff in the exercise of reasonable diligence discovered or should have discovered the alleged fraud or concealment." J. Geils Band Emp. Ben. Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245, 1252 (1st Cir.1996) (citing Larson, 21 F.3d at 1172-74).
When addressing a similar tolling provision in the statute of limitations for federal securities fraud claims (28 U.S.C. § 1658(b)), however, the Supreme Court held that "the limitations period does not begin to run until the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered `the facts constituting the violation,' ... irrespective of whether the actual plaintiff undertook a reasonably diligent investigation." Merck & Co., Inc. v. Reynolds, ___ U.S. ___, ___, 130 S.Ct. 1784, 1798, 176 L.Ed.2d 582 (2010) (emphasis added). The Court's holding applies equally to § 1113, especially because the Court's analysis in Merck is centered around concepts embodied in the general "discovery rule." See id. at 1793-98. Holding otherwise could fault plaintiffs for failing to exercise reasonable diligence even when the exercise of reasonable diligence would not have alerted them to their claims because the defendants had concealed their misconduct. Therefore, assuming plaintiffs in this case were not reasonably diligent, they would be precluded from relying on the "fraud or concealment" exception only if a reasonably diligent plaintiff would have discovered the misconduct.
Plaintiffs contend that defendants concealed the sales price of HolliShare's JDS shares in the HolliShare Highlights, which were the annual reports distributed to participants to inform them about HolliShare's funding and financial condition.
(Exs. 4-4.18 at 7, 4-4.19 at 7, 4-4.20 at 7, 4-4.21 at 7, 4-4.22 at 7, 4-4.23 at 7, 4-4.24 at 7, 4-4.25 at 7.)
Specifically, subparagraph II.D.2.a provides:
(Ex. 531, Art. V, ¶ II.D.2.a.) Subparagraph II.D.3.b of Article Five then mandates that, for sales pursuant to the right of first refusal, "[t]he price of each common share shall be its book value as of the end of the calendar month in which the Repurchase Date occurs...." (Id. Art. V, ¶ II.D.3.b.) When the explanation in the HolliShare Highlights that the transfer restrictions on its JDS shares "require that the Trust first offer them to JDS ... at their book value" is read in conjunction with the right of first refusal in the JDS Articles, a participant could reasonably conclude that the shares were sold at the month-end book value dictated in subparagraph II.D.3.b.
Defendants argue, however, that a reasonable beneficiary would not draw this conclusion because the JDS Articles also provide for JDS to pay the purchase price for sales pursuant to the right of first refusal with a limited amount of cash and the remainder in a subordinated promissory note. (See id. Art. 5, ¶ II.D.4.a.) In contrast to this provision, they point out that HolliShare always received payment for its shares from JDS in cash, suggesting that the sales were not conducted under the terms of the right of first refusal. In the HolliShare Highlights, however, beneficiaries were told that "JDS has repurchased common shares from the Trust at their book value to provide the plan with the needed cash." Although this suggests that payments may have been in cash, it does not preclude the possibility that HolliShare received a promissory note, especially because a promissory note could have been sold to a bank to obtain cash. (See Tr. 663:10-664:2.) That HolliShare's receipt of cash only payments for its JDS stock is inconsistent with the terms of payment for a sale conducted pursuant to the right of first refusal would therefore not prevent a reasonable participant from concluding that HolliShare's sales were conducted under the terms and at the price provided for in the right of first refusal provision.
Before 1993, however, the HolliShare Highlights did not contain similar language suggesting that HolliShare's sales of its JDS stock were pursuant to and according to the terms of the right of first refusal. Specifically, from 1983 to 1992, the HolliShare Highlights stated:
(Exs. 4-4.8 at 9, 4-4.9 at 10, 4-4.10 at 10, 4-4.11 at 6, 4-4.12 at 6, 4-4.13 at 7, 4-4.14 at 7, 4-4.15 at 7, 4-4.16 at 7, 4-4.17 at 7.).
(Ex. 4-4.7 at 7.)
The explanations from 1982 to 1992 are silent with respect to whether "book value" refers to the December 31 book value or month-end book value and lack any language suggesting one or the other. Based on the explanations, it is equally plausible that HolliShare sold its shares under the exceptional circumstances provision. At most, the HolliShare Highlights from 1982 to 1992 omit arguably material information, which is insufficient to trigger the "fraud or concealment" exception. Plaintiffs have not satisfied the court that defendants committed any other affirmative acts of concealment during that ten-year period that would have led a reasonable participant to believe that HolliShare's sales of its JDS stock were at the month-end book value.
Accordingly, because plaintiffs are unable to rely on the "fraud or concealment" exception for any alleged misconduct between 1982 to 1992, their claims based on HolliShare's sale of JDS stock from 1982 to 1992 are time barred and the court will enter judgment in favor of defendants on those claims.
Returning to plaintiffs' claims based on HolliShare's sale of JDS stock beginning in 1993, defendants further contend that the following language in the Plan Instrument disclosed the use of the December 31 book value:
(Ex. 501 § 7.03.)
Because the first sentence addresses the "assets in the Trust Fund" more broadly, the reference to the December 31 value in that sentence could be interpreted as referring to the valuation of all assets in the trust for purposes of determining the value of each participant's account. This is consistent with the use of December 31 as the date of evaluation for participant's accounts regardless of when they retire in the following year. On the other hand, the second sentence, which specifically refers
Plaintiffs have thus persuaded the court that the potential inconsistency between HolliShare's receipt of cash payments and the provision for a promissory note in the right of first refusal and the disclosure setting the valuation date for HolliShare accounts at December 31 did not amount to "storm warnings" putting the plaintiffs on notice about defendants' alleged breaches. Even assuming these inconsistencies would have alerted a reasonably diligent participant to defendants' alleged breaches, the most a reasonable participant could be expected to do in receipt of potentially conflicting information would be to inquire further about the terms of the sales. While the court doubts that a reasonably diligent participant would have done more than review the annual HolliShare Highlights, the court finds that even additional efforts would not have led a participant to discover the alleged misconduct.
For example, a reasonably diligent participant might have inquired about the details pertaining to the Plan's sale of JDS stock. In this case, however, DeFazio made such an inquiry. In a letter dated November 3, 1997, he was told that, since 1973, "every transfer by JDS Inc[.] has been at book value; and JDS Inc[.] has always exercised its right of first refusal and repurchased such shares at book value." (Ex. 176 at 3.) As previously discussed, the express reference to the "right of first refusal" in this letter when read in conjunction with the JDS Articles indicates that the price for the JDS stock would have been the "book value as of the end of the calendar month in which the Repurchase Date occurs." (Ex. 531.)
Additionally, if plaintiffs had pursued an investigation beyond inquiring from Hollister or HolliShare, the evidence suggests they would not have discovered the precise terms of HolliShare's sales of JDS stock. In response to a Department of Labor investigator's request for documents evidencing HolliShare's sales of its shares to JDS, (Ex. 54 at 8), HolliShare indicated sales prices for sales from 1994 to 1998 that were the December 31 book value, but also indicated that each of the sales took place on January 1, (id. at 10). From the information provided to the Department of Labor and available to the participants, it would be unlikely that a reasonably diligent participant would have known that the sales in 1994 to 1998 actually took place in March of each year, with a sales price that is allegedly three months, not one day, "old."
The court also doubts that additional efforts or inquiries by plaintiffs could have unveiled the dynamics and purported terms of the Plan's sales of JDS stock because even defendants' counsel seemed unaware of the terms of such sales for at least the first three years of this litigation. In a memorandum in support of their motion to dismiss plaintiffs' First Amended Complaint filed in October 2006, counsel for seven of the defendants stated, "It cannot seriously be argued that a routine
Accordingly, the court finds that a reasonably diligent participant would not have discovered the alleged misconduct at issue in this case before the plaintiffs in this case did and therefore any lack of diligence or inquiry by plaintiffs does not preclude them from relying on the "fraud or concealment" exception. Because § 1113 tolls the statute of limitations to six years after the discovery date and the true sales prices and terms were not revealed until after this case was filed, plaintiffs' ERISA claims beginning in 1993 and continuing through 2011 are timely.
ERISA establishes a blanket prohibition on certain transactions that "entail a high potential for abuse," including the sale or exchange of property between an ERISA plan and a "party in interest." Donovan v. Cunningham, 716 F.2d 1455, 1465 (5th Cir.1983) (discussing 29 U.S.C. § 1106(a)(1)). As used in § 1106(a)(1), a "party in interest" includes the employer of the employees covered by the ERISA plan in question. 29 U.S.C. § 1002(14).
Nevertheless, ERISA provides an exemption for prohibited transactions that meet certain requirements, and § 1108(e) allows the sale or acquisition by a plan of employer stock if three criteria are met:
Id. § 1108(e). The parties stipulated that HolliShare is an eligible individual account plan under ERISA, (Stipulation of Facts ¶ 26), and plaintiffs have not alleged that a commission was charged. Therefore, the only dispute at trial to determine whether HolliShare's sales of JDS stock to JDS came within the exception in § 1108(e) was whether the sales were for "adequate consideration."
When a security has no generally recognized market, the term "adequate consideration" means "the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary [of Labor]." 29 U.S.C. § 1002(18); see also 29 C.F.R. § 2550.408e (cross-referencing § 1002(18) in defining "adequate consideration" for purposes of § 1108(e)). The Secretary of Labor has yet to promulgate
In addition to prohibiting certain transactions, ERISA also imposes on fiduciaries the "highest" duties known to law. Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996). Specifically, § 1104(a)(1) requires an ERISA fiduciary to "act for the exclusive benefit of plan beneficiaries" and § 1104(a)(1)(B) requires the fiduciary to act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Id. (quoting § 1104(a)(1)(B)) (internal quotation marks omitted). When an ERISA plan transacts in employer securities, its fiduciaries thus bear the "heavy" burden of showing that the transaction satisfies the requirements of § 1108(e) and that the fiduciaries fulfilled their duties of loyalty and care under § 1104(a)(1) and (a)(1)(B). See id.
Whether a particular transaction with an interested party complies with §§ 1104(a)(1), (a)(1)(B), and 1108(e) depends upon the conduct of the fiduciaries. See id. (citing Cunningham, 716 F.2d at 1467-68). Fiduciaries "are obliged at a minimum to engage in an intensive and scrupulous independent investigation of their options." Id. at 1488-89; see Cosgrove v. Circle K Corp., 915 F.Supp. 1050, 1064 (D.Ariz.1995) ("Good faith requires that the trustees of the Plan have used a prudent method of determining value."), aff'd, 107 F.3d 877 (9th Cir.1997). The precise scope and nature of the required investigation depends upon the circumstances surrounding the transaction and the asset. See Keach v. U.S. Trust Co., 419 F.3d 626, 637 (7th Cir.2005) (evaluating the sufficiency of the fiduciary's investigation "within the context of the totality of the circumstances"); Cunningham, 716 F.2d at 1467-68 (noting that fiduciaries may satisfy their burden by showing they
Relying on Firestone, 489 U.S. 101, 109 S.Ct. 948, defendants argue that the Trustees' decision to enter into and perform under the terms of the mid-80s agreement — including the purported setting of "fair market value" of JDS common stock in the mid-80s agreement — is entitled to a presumption that the Trustees acted prudently and reasonably because the Plan Instrument vested the Trustees with broad discretion. In Firestone, the Supreme Court held that "a denial of benefits challenged under § 1132(a)(1)(B) is to be reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan." Id. at 115, 109 S.Ct. 948; accord Burke v. Pitney Bowes Inc. Long-Term Disability Plan, 544 F.3d 1016, 1023-24 (9th Cir.2008) (recognizing the holding from Firestone and explaining that, "[w]hen a plan unambiguously gives the plan administrator discretion to determine eligibility or construe the plan's terms, a deferential abuse of discretion standard is applicable" to a denial of benefit claim).
Section 1132, however, lays out several claims for relief and plaintiffs' claims are brought under subsections (a)(2) and (a)(3), not subsection (a)(1)(B).
Nonetheless, courts have extended application of the deferential review applied in Firestone to claims other than those for a denial of benefits under § 1132(a)(1)(B). In Moench v. Robertson, 62 F.3d 553 (3d Cir.1995), the plaintiffs sought relief under § 1132(a)(2), alleging that the fiduciaries of their employee stock option plan ("ESOP") breached their duties when they invested solely in employer common stock even though the employer was deteriorating financially. Recognizing that "the arbitrary and capricious standard of review allowed in Firestone should not be applied mechanically to all ERISA claims," the Third Circuit reasoned that "the Court's mode of analysis is certainly relevant to determine the standard of review pertaining to all claims filed under ERISA challenging a fiduciary's performance." Moench, 62 F.3d at 565. Developing what has been coined as the "Moench presumption," the Third Circuit held:
Id. at 571.
Consistent with every circuit that has evaluated the Moench presumption, the Ninth Circuit recently adopted the presumption in Quan v. Computer Scis. Corp., 623 F.3d 870 (9th Cir.2010). Similar to Moench, the plaintiffs in Quan asserted claims under § 1132(a)(2), alleging that the fiduciaries of their eligible individual account plan ("EIAP") made imprudent investments in their employer's common stock.
The Third Circuit's development of the Moench presumption, and the Ninth Circuit's adoption of it in Quan, centered around the fact that the plaintiffs challenged the fiduciaries' decisions to invest in employer stock even though the plans in both cases required or encouraged the fiduciaries to invest in employer stock and ERISA exempted the fiduciaries of the plans from the general duty to diversify plan investments. See 29 U.S.C. § 1104(a)(2) ("In the case of an eligible individual account plan (as defined in section 1107(d)(3) of this title), the diversification requirement of paragraph (1)(C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by acquisition or holding of qualifying employer real property or qualifying employer securities."); Quan, 623 F.3d at 881 ("Congress has granted favored status to ESOPs and other EIAPs by exempting them from certain ERISA requirements.... We adopt the Moench presumption because it provides a substantial shield to fiduciaries when plan terms require or encourage the fiduciary to invest primarily in employer stock."). In Moench and Quan, the plaintiffs did not allege that the conduct at issue constituted prohibited transactions under ERISA or that adequate consideration was not paid for the employer stock.
Unlike the plans and claims at issue in Moench and Quan, plaintiffs' claims do not conflict with ERISA, the terms of the Plan Instrument, or the Congressional policy in favor of plans that "tie employee compensation
Not only have defendants failed to cite a single case in which plaintiffs challenged a transaction as prohibited under ERISA and the court applied the more deferential standard of review, applying the more lenient standard would be inconsistent with ERISA's explicit requirement of a good faith determination and courts' application of the more exacting standard. For example, when evaluating whether a plan received adequate consideration under § 1002(18) in Howard, the Ninth Circuit stated that a fiduciary had "the burden of proving that he fulfilled his duties of care and loyalty" and discussed the various inquiries the fiduciary must have undergone to fulfill his burden. Id. at 1488-89. The court ultimately found in favor of plaintiffs because, even though the fiduciaries obtained an independent assessment from a financial advisor, the fiduciaries failed to "meaningfully review, discuss, or question the valuation" or assumptions used. Id. at 1489-90. The Ninth Circuit neither considered nor applied a more deferential standard, and the breaches at issue in Howard are similar to the alleged breaches in this case.
It could still be argued that, because § 1002(18) contemplates adherence to the ERISA plan in determining fair market value, if a plan vests the fiduciary with discretion in arriving at the fair market value, the fiduciary's valuation would be subject to the less stringent abuse of discretion review. See 29 U.S.C. § 1002(18) ("[T]he fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary [of Labor]." (emphasis added)). As the Second Circuit explained, however, reviewing "decisions that improperly disregard the valid interests of beneficiaries in favor of third parties" under a standard less stringent than the "the strict prudent person standard articulated in § 404 ... would allow plan administrators to grant themselves broad discretion over all matters concerning plan administration, thereby eviscerating ERISA's statutory command that fiduciary decisions be held to a strict standard." John Blair Commc'ns, Inc. Profit Sharing Plan, 26 F.3d at 369; cf. 29 U.S.C. § 1104(a)(1)(D) (requiring a fiduciary to discharge his duties "in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA]").
Lastly, even assuming the Plan Instrument vested the Trustees with discretion to determine the fair market value and that, under the reasoning of Firestone, their determination should be reviewed only for an abuse of that discretion, defendants' conduct in this case would still not
As discussed in greater detail below, however, there was no testimony that the Trustees used the December 31 book value because they determined that it reflected the "fair market value" of the JDS stock. Without having exercised the discretion presumably afforded the Trustees in the Plan Instrument, any argument that the determination is subject to review only for an abuse of that discretion must fail.
The court must therefore determine whether, at trial, the fiduciaries carried their burden of proving that they fulfilled their duties under §§ 1104(a)(1), (a)(1)(B), and 1108(e), which required them "at a minimum to engage in an intensive and scrupulous independent investigation of their options to insure that they act in the best interests of the plan beneficiaries." Howard, 100 F.3d at 1488-89 (quoting Leigh v. Engle, 727 F.2d 113, 125-26 (7th Cir.1984)) (internal quotation marks omitted). At trial, plaintiffs' central focus was that the Trustees breached their duties when they sold HolliShare's JDS shares to JDS at the December 31 book value from the prior year without determining that the sale price was for "adequate consideration" and, consequently, sold the Plan's JDS stock to JDS for less than "adequate consideration."
The consistent testimony from the Trustees who testified at trial was that, after the mid-80s agreement, the Trustees used the December 31 book value as the sale price for HolliShare's JDS stock. At trial, Winn and Zwirner testified at length about the arguably "exceptional" circumstances that led to the mid-80s agreement, including Hollister's six-year arbitration with its international distributor that put severe financial strains on the company, (Tr. 644-46, 2376), uncertainty in predicting HolliShare's liquidity needs in upcoming years, and concerns about whether JDS could satisfy HolliShare's increasing cash needs, (Tr. 656-58, 2071:15-22). Because the controlling inquiry examines "how the fiduciary acted viewed from the perspective of the time of the [challenged] decision rather than from the vantage point of hindsight," Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 918 (8th Cir.1994) (alteration in original) (internal quotation marks omitted), the circumstances in the mid-80s may very well have merited use of the agreement JDS and HolliShare reached. The agreement, however, neither demonstrates that the Trustees sought to determine the fair market value of the JDS shares nor justifies the Trustees' unquestioning adherence to its terms.
In addition to never attempting to determine the "fair market value" of HolliShare's JDS shares, the Trustees never requested or obtained an independent valuation of the stock by an outside auditor. Zwirner, who has been a Trustee since 1976, recognized that it was within the prerogative of the Trustees to obtain an outside appraisal, but did not recall a single time that the Trustees obtained an independent appraisal to value the Plan's JDS stock. (Tr. 1889:10-17, 2101:3-8; accord Tr. 393:21-23 (Karlovsky testifying that he never asked for or requested an appraisal of the JDS stock).) It appears that the first outside appraisal performed of HolliShare's JDS stock in the history of HolliShare was done at the request of defense counsel after this litigation commenced, and Zwirner, who is still a HolliShare Trustee and was aware of the appraisal, did not even request to review it. (Tr. 2495:14-25.)
Although § 1108(e) and caselaw interpreting it have never required trustees to obtain an independent audit, the Ninth Circuit has recognized that "securing an independent assessment from a financial advisor or legal counsel is evidence of a thorough investigation." Howard, 100 F.3d at 1489 (citing Martin v. Feilen, 965 F.2d 660, 670-71 (8th Cir.1992)); see also Katsaros v. Cody, 744 F.2d 270, 275 (2d Cir.1984) (finding that fiduciaries breached their duties when "[t]hey lacked any expertise in such important matters as capital adequacy, quality of assets, liquidity, the value of the bank's stock, and the like" and "[n]o effort was made to obtain independent professional assistance or analysis of the financial data presented to them"). In explaining that obtaining an independent assessment is "not a complete defense to a charge of imprudence," the Ninth Circuit has also held that a trustee must "(1) investigate the expert's qualifications, (2) provide the expert with complete and accurate information, and (3) make certain that reliance on the expert's advice is reasonably justified under the circumstances." Howard, 100 F.3d at 1489 (internal citations omitted). In light of the Howard court's criticism of the trustees' failure to "meaningfully review, discuss, or question the valuation" they obtained, it would go against reason for the court to conclude that trustees who did not even obtain an independent audit or perform a sufficiently similar inquiry had fulfilled their duties.
The Trustees also seemed to accept the terms of the mid-80s agreement without question or a consistent understanding of its terms or justifications for them. At its inception, the mid-80s agreement did not appear to come about as a result of meaningful negotiations between JDS and HolliShare. With respect to the price, the testimony was that JDS suggested the use of the December 31 book value from the prior year, (Tr. 2059:25-2060:7), and Zwirner testified that, when sales were pursuant to the "exceptional circumstances" provision, the practice was that JDS set the terms of the sale and there was no room for negotiation. (See Tr. 2114:20-22, 2115:4-7 ("When JDS's board uses its discretion and uses the exceptional circumstances clause to deviate, there's not necessarily a negotiation.... JDS can determine they'll permit the exceptional circumstances under conditions they specify, and then the person wanting the exception either says yes or no. That's the way it worked in practice.").) Karlovsky also testified that he did not know how the mid-80s agreement came about and that Zwirner had simply told him it was the existing practice without explanation. (Tr. 370:23-371:2.)
Not only were the Trustees unable to produce a single document memorializing the terms of the mid-80s agreement or even pinpointing the year it was consummated, but the Trustees also lacked a consistent understanding of it. For example, defendants suggested that if the month-end book value in the month of a sale was actually lower than the December 31 book value from the prior year, HolliShare would have received the benefit of the higher value and been able to sell at the December 31 book value. Winn, on the other hand, testified that it was not his understanding that JDS would have paid the higher price if the book value in the month of sale had fallen below the December 31 book value. (Tr. 659:19-22.) Additionally, although one of the "terms" of the mid-80s agreement was that JDS would purchase all of the shares HolliShare offered, the Trustees felt the need to obtain
The Trustees also accepted the use of the December 31 book value without question even though they knew that the month-end book value during the month of each sale was almost always greater than the December 31 book value. Not only did Zwirner and Stempkinski receive monthly financial statements that included the current month-end book value for JDS because of their roles as Hollister and JDS board members, (Tr. 1107:5-11), Zwirner, McCormack, Karlovsky, and Brilliant all testified that they knew the December 31 book value was less than the month-end book value, (Tr. 2016:6-9 (Zwirner), 767:17-19, 1034:6-9 (McCormack), 404:13-23 (Karlovsky), 1325:2-10 (Brilliant)). Brilliant also testified that he did not recall having discussions with anyone about whether selling for less than month-end book value was reducing the value of HolliShare. (Tr. 1344:7-14.) In Cunningham, the Fifth Circuit held that fiduciaries did not fulfill their duties when, similar to HolliShare's use of an out-dated book value, the fiduciaries relied on an appraisal that was "out of date" at the time of the transaction because "the factual assumptions upon which it was based were no longer valid." Cunningham, 716 F.2d at 1469.
The evidence at trial also revealed that at least Zwirner knew that an outside appraisal of JDS had been conducted as part of a capitalization study in anticipation of the termination of the 1977 Preferred Share Trust and that the outside appraisal suggested that the market value of JDS stock without any ownership or transfer restrictions was at least 3.4 times book value. (Tr. 102:14-18, 122:24-123:22.) Of course, a valuation of JDS stock without ownership restrictions was entirely hypothetical because the shares of JDS stock could not be sold on the public market. In receipt of such information, however, a prudent fiduciary would at least inquire whether an outside appraiser would value JDS stock above book value even with the restrictions.
Not only did ERISA require the Trustees to ensure they were receiving adequate consideration to sell HolliShare's shares to JDS, the use of the December 31 book value should have prompted a thorough inquiry by the Trustees because, when the Plan sold its shares to JDS at the December 31 book value, the evidence suggests the Trustees may have personally benefitted as individual shareholders. Zwirner acknowledged that, when HolliShare sold below month-end book value and JDS retired the purchased shares, the current book value for each outstanding share increased and, as an owner of outstanding shares, the value of his shares also increased. (Tr.2050:6-14.) At a minimum, a prudent fiduciary would have questioned and assessed the justifications for this "transfer of value" that occurred when HolliShare sold its shares for less than the month-end book value.
It appears the only Trustee who ever questioned the use of the December 31 book value was Karlovsky. When he first became Trustee, he wondered whether the use of the December 31 book value affected
All of the Trustees were also individual shareholders under the direct shareholder program and thus knew that they received month-end book value when they sold their shares to JDS under the right of first refusal provision. The court's overall impression from the testimony was that the Trustees never meaningfully questioned the disparity in price between HolliShare's sales and individual shareholders' sales that occurred in the same month. As an explanation for the use of the December 31 book value from the prior year for the sale of HolliShare's shares and the month-end book value for the sales of the individual shareholders' shares, defendants explain that HolliShare received the lower price because the December 31 book value was the only audited number and HolliShare received all cash. The court recognizes that a prudent trustee would generally prefer to use an audited value. Here, however, nothing precluded the Trustees from obtaining an audit of a month-end book value and, because a sale generally occurred only once a year, the burden of obtaining a single updated valuation based on the annual audited valuation would not have been unbearably burdensome. Moreover, the Trustees' justification for using the December 31 book value because it was audited was not entirely convincing in light of Zwirner's testimony that he could not recall a single month in his tenure as Trustee when the audited December 31 book value differed from the December 31 book value JDS calculated and submitted to the auditors.
With respect to the fact that HolliShare required cash payments for JDS's purchases of its shares and the JDS Articles provided for the individual shareholders to receive a promissory note for sales over a certain sum, the court agrees with defendants that the cash payment could detrimentally affect the value of HolliShare's shares and that the Trustees would be required to consider this factor in determining the fair market value of the Plan's shares. Nonetheless, while a prudent trustee may have determined that the significant cash need decreased the fair
The Trustees emphasize that they were familiar with the JDS Articles and transfer and ownership restrictions on JDS stock and considered these restrictions when they sold for the December 31 book value.
It is without question that the fair market value of JDS stock was affected by the restrictions in the JDS Articles that limited ownership to HolliShare, select employees, and the preferred share trusts and the transfer restrictions that gave JDS the right of first refusal. As the Cunningham court explained, "[a]ppraisal of closely-held stock is a very inexact science" that has a "level of uncertainty inherent in the process and [a] variety of potential fact patterns." Cunningham, 716 F.2d at 1473; accord Rhodes v. Amoco Oil Co., 143 F.3d 1369, 1372 (10th Cir.1998) ("[T]here is no universally infallible index of fair market value." (quoting Amerada Hess Corp. v. Comm'r, 517 F.2d 75, 83 (3d Cir.1975) (alteration in original) (internal quotation marks omitted))).
Defendants rely heavily on Krueger International, Inc. v. Blank, 225 F.3d 806 (7th Cir.2000), to argue that defendants complied with their fiduciary duties. In Krueger, an employee at a privately held company had stock as part of the company's Salaried Employees Retirement Plan. Krueger, 225 F.3d at 808. The company's Stockholders Agreement provided for the company to have the "option to redeem all" of its stock when an employee died and set the purchase price for redeemed stock at "the proportionate value of the Appraised Value of all shares [of its stock] as of the last day of the fiscal period ... ending on or immediately proceeding the date of notice of exercise of the option." Id. (quoting subsections 4.4 and 6.1 of the Shareholders Agreement) (internal quotation marks omitted). When one of the company's employees died in 1996, a dispute arose between the potential beneficiaries, and the company notified the beneficiaries that it intended to redeem all of the employee's shares, but would not disburse any proceeds until the appropriate beneficiaries were determined. Id. at 808-09.
The Seventh Circuit explained that the "repurchase option is an inseparable part of owning" the company stock and that, because the stock was encumbered by a purchase option at the time of the employee's death, if the company exercised that option, then, under the Shareholders Agreement, the purchase price was set in 1996. Id. at 812-13. It explained, "[b]ecause the fair market value of stock that someone else has the right to purchase for $258.70 is just $258.70 (at least as long as the stock alone is worth more than that), there would be no violation of the ERISA `adequate consideration' rules for [the company] to pay that amount per share (plus the interest, of course) to the beneficiaries." Id. at 813.
Although the reasoning from Krueger that the restrictions in a Shareholders Agreement — or here, the JDS Articles — affects the price of the stock, the case is distinguishable. In Krueger, the parties disputed whether adequate consideration was determined at the time the call was exercised or at the time the transaction was completed. The parties did not dispute the valuation method used to determine the price of each share in 1996 or 2000. Krueger therefore did not engage in the inquiry that is dispositive to plaintiffs' claims under § 1108(e) — whether the Trustees engaged in a sufficient investigation to determine the fair market value of the Plan's JDS stock. In Krueger, because the appraised value of the stock was not at issue, the Shareholders Agreement set the purchase price of the stock at the time of the call. In this case, while the JDS Articles undeniably affect the fair market value of JDS Stock, they never set it at the December 31 book value.
As the Second Circuit has explained, "[t]he court's task is to inquire whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment." Henry, 445 F.3d at 618 (quoting Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984) (alteration in original) (internal quotation marks omitted)). Here, the Trustees never attempted to quantify the amount by which the transfer and ownership restrictions affected the value of the Plan's JDS stock. Even assuming that use of the book value system was appropriate to value JDS,
Lastly, defendants argue that the court should follow the Eighth Circuit's holding
When it first introduced the "hypothetical prudent fiduciary" standard, the Eighth Circuit relied on a concurring opinion from then-Judge Scalia in Fink v. National Savings and Trust Co., 772 F.2d 951 (D.C.Cir.1985). Specifically, in Fink, Judge Scalia commented that he did not know of a "case in which a trustee who has happened-through prayer, astrology or just blind luck-to make (or hold) objectively prudent investments (e.g., an investment in a highly regarded `blue chip' stock) has been held liable for losses from those investments because of his failure to investigate and evaluate beforehand." Id. at 962. Judge Scalia explained that "[i]t is the imprudent investment rather than the failure to investigate and evaluate that is the basis of suit." Id.
While reasoning that a fiduciary who happens to make a prudent investment despite his lack of investigation is not liable in "an action for damages arising from losing investments," Judge Scalia nonetheless recognized that such a "[b]reach of the fiduciary duty to investigate and evaluate would sustain an action to enjoin or remove the trustee or perhaps even to recover trustee fees paid for the investigative and evaluative services that went unperformed." Id. (citation omitted). While the "hypothetical prudent fiduciary" inquiry may therefore limit an award of damages against a fiduciary who fails to investigate but nonetheless makes a prudent investment, Judge Scalia's concurring opinion in Fink does not support the conclusion that the fiduciary is absolved from all liability under ERISA.
The Seventh Circuit similarly concluded that a plan was not entitled to damages based on a fiduciary's "imprudent but harmless conduct," but could nonetheless seek appropriate equitable relief, such as an injunction. Brock v. Robbins, 830 F.2d 640, 647 (7th Cir.1987); see also id. at 647 ("[N]o court has held trustees liable in money damages for imprudent conduct which resulted in no loss or damages to the ERISA plan and no benefit or gain to the trustees and did not put the assets of the plan at risk." (emphasis added) (internal quotation marks omitted)); cf. Donovan v. Bierwirth, 754 F.2d 1049, 1052 n. 3 (2d Cir.1985) ("[T]here can be a breach of duty without any `loss' to a plan."). Consistent with numerous other circuits, the Ninth Circuit has also emphasized that the inquiry under §§ 1108(e) and 1104(a)(1)(B) is focused on the defendants' conduct, not the result. See Howard, 100 F.3d at 1488; see also Cunningham, 716 F.2d at 1467 ("[I]t is especially significant that the adequate consideration test, like the prudent man rule, is expressly focused upon the conduct of the fiduciaries.") (emphasis added); Henry, 445 F.3d at 619 ("[I]n practice, the `fair market value' inquiry overlaps considerably with the `good faith' inquiry; both are `expressly focused upon the conduct of the fiduciaries.'" (quoting Cunningham, 716 F.2d at 1467)); Eyler v. Comm'r of Internal Revenue, 88 F.3d 445, 455 (7th Cir.1996) ("ESOP fiduciaries will carry the burden of proving that adequate
Accordingly, while determining whether the Trustees' failure to investigate the fair market value of JDS stock caused monetary loss to plaintiffs and HolliShare would affect an award of damages, financial loss is not required to prove a breach of a fiduciary duty under §§ 1108(e) and 1104(a)(1)(B) and the court will not apply the "hypothetical prudent investor" exception to absolve defendants from liability. Chao, 285 F.3d at 436 (rejecting application of the "hypothetical reasonable fiduciary" standard because doing so would "ignore" the second part of the "adequate consideration" definition, which requires that the fair market value is "determined in good faith by the trustee").
To qualify as an ERISA fiduciary, an individual or entity may either be named as a fiduciary under the terms of an ERISA plan, see 29 U.S.C. § 1102(a), or act as a functional or de facto fiduciary by exercising discretionary control over the management or administration of the plan or its assets, see id. § 1002(21)(A). When an individual or entity is a named fiduciary, that fiduciary's liability may be limited pursuant to provisions of a plan instrument that allocates responsibility among named fiduciaries. See Walker v. Nat'l City Bank of Minneapolis, 18 F.3d 630, 633 (8th Cir.1994) ("[U]nless ERISA mandates otherwise, division of authority in the plan determines the duties of the various fiduciaries."); 29 C.F.R. § 2509.75-8(D-4) (noting that a plan instrument may allocate responsibility among named fiduciaries).
Here, the Trust Instrument specifies Hollister, the HolliShare Trustees, and the Hollister Board as named fiduciaries. (Ex. 9-9.14, § 11.11.) Hollister is responsible for administration of the Plan, (id.),
The Trustee defendants who also served on the Hollister Board are Zwirner and Stempinski and the non-trustee defendants who served on the Hollister Board are Winn and Herbert. Plaintiffs do not dispute that the Hollister Board appointed competent individuals to serve as the HolliShare Trustees, but alleges that the Board breached its duty to monitor the Trustees it appointed. The Hollister Board's potential liability therefore arises only from its fiduciary duty to appoint and monitor
Here, the vast majority of HolliShare's holdings consisted of JDS common shares, meaning that almost all of the Plan's transactions fell explicitly within ERISA's prohibited transaction provision. ERISA unequivocally required the Trustees to conduct a good faith investigation to determine the fair market value of the Plan's shares of JDS stock and sell those shares at that value. The evidence at trial established that the Hollister Board knew that HolliShare had been selling its shares at the December 31 book value since at least the mid-80s and that the December 31 book value was less than the month-end book value.
Unlike the Hollister Board, the Trust Instrument does not name JDS as a fiduciary. Plaintiffs contend, however, that JDS was a de facto, or functional, fiduciary of HolliShare based on the discretionary
When determining whether a person is a de facto fiduciary, "the threshold question is not whether the actions of some person ... adversely affected a plan beneficiary's interest, but whether that person was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint." Pegram v. Herdrich, 530 U.S. 211, 226, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000). "An individual or entity performs a `fiduciary' function with respect to a pension plan when `exercis[ing] any discretionary authority or discretionary control respecting management of such plan or exercis[ing] any authority or control respecting management or disposition of its assets' under ERISA." Wright v. Or. Metallurgical Corp., 360 F.3d 1090, 1101 (9th Cir.2004) (quoting 29 U.S.C. § 1002(21)(A)).
The strongest theory suggesting that JDS had discretionary control over HolliShare's shares of JDS stock is that JDS was — at least in practice — the only buyer for HolliShare's shares and therefore could render HolliShare unable to meet its cash needs by refusing to purchase its shares. This dynamic, however, is part in parcel of the design of the HolliShare plan as a profit-sharing plan and JDS as a closely held corporation with severe ownership restrictions. While JDS may have proposed the price and been reluctant to negotiate for a higher price, it was acting as a corporation making business decisions in doing so, not a fiduciary to HolliShare. Assuming the mid-80s agreement was a binding agreement between JDS and HolliShare, it was the Trustees who had the power to negotiate the terms and agree to them on behalf of the beneficiaries. It was the Trustees who had the power and obligation to ensure that the sales were for fair market value and to negotiate on behalf of the beneficiaries. It was also the Trustees who had the power to assess their cash needs for the year and decide how many shares to sell.
Judge Karlton previously held in this case that JDS would be an ERISA fiduciary only if it "in fact exercised any discretionary authority over plan assets." Ellis, 2006 WL 988529, at *7. The court is not convinced from the evidence at trial that JDS had discretion or authority to make HolliShare sell shares at a given time or that it sought to exercise authority to limit the number of shares HolliShare sold. See Assocs. In Adolescent Psychiatry, S.C. v. Home Life Ins. Co., 941 F.2d 561, 570 (7th Cir.1991) ("[T]he power to act for the plan is essential to status as a fiduciary under ERISA."); Farm King Supply, Inc. Integrated Profit Sharing Plan & Trust v. Edward D. Jones & Co., 884 F.2d 288, 292 (7th Cir.1989) ("[C]ases which hold that the person or firm was a fiduciary have a common theme conspicuously absent here, viz., the authority to exercise control unilaterally over a portion of a plan's assets, not merely to propose investments."). The evidence at trial was that the Trustees calculated how many shares they wanted to sell and JDS bought the shares on every occasion and has provided commitments to continue to do so. (See Ex. 41 at 68.) The weight of the evidence does not persuade the court that
Section 1105(a) provides for liability of a fiduciary based on a breach of duty by a co-fiduciary:
29 U.S.C. § 1105(a). Section 1105(a) "effectively imposes on every ERISA fiduciary an affirmative duty to prevent other fiduciaries from breaching their duties for which they are jointly and severally liable." Stewart v. Thorpe Holding Co. Profit Sharing Plan, 207 F.3d 1143, 1157 (9th Cir.2000).
Plaintiffs appear to rely on § 1105(a)(2) and seek to hold defendants jointly liable as co-fiduciaries for losses caused by the fiduciaries' breaches of the duty of loyalty under § 1104(a)(1) and duty of prudence under § 1104(a)(1)(B). Given the court's findings that the fiduciary defendants breached their duties under § 1104(a)(1) and (a)(1)(B), it follows that their conduct enabled their co-fiduciaries to breach the same duties. See Springate v. Weighmasters Murphy, Inc. Money Purchase Pension Plan, 217 F.Supp.2d 1007, 1025 (C.D.Cal.2002) (holding that, because "each Defendant failed to comply with Section 1104(a)(1), and in doing so, each Defendant enabled the other fiduciaries to commit a breach," each Defendant is liable for the breaches of a co-fiduciary under § 1105(a)).
Nonetheless, because § 1105(a) requires that the fiduciary's breach "enabled such other fiduciary to commit a breach," a fiduciary's liability for any losses caused by a breach would be limited to the time in which that defendant served as a fiduciary. ERISA clearly limits liability to the time in which a defendant served as a fiduciary, stating, "No fiduciary shall be liable with respect to a breach of fiduciary duty under this subchapter if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary." 29 U.S.C. § 1109(b). Plaintiffs thus cannot simply group all the fiduciaries together when they each served different terms, and any award of damages would need to be broken down by the years in which the various defendants served as fiduciaries.
Plaintiffs brought their claims under subsections (a)(2) and (a)(3) of § 1132. Subsection 1132(a)(2) provides for a participant to bring a civil action "for appropriate relief" under § 1109, which provides:
29 U.S.C. § 1109(a). "Under 29 U.S.C. §§ 1109(a) and 1132(a)(2), ERISA beneficiaries may bring an action against fiduciaries who breach their duties to the plan, and may recover both damages and equitable relief from them." Landwehr v. DuPree, 72 F.3d 726, 733 (9th Cir.1995). "The Supreme Court has held that recovery for a violation of 29 U.S.C. § 1109 for breach of fiduciary duty inures to the benefit of the plan as a whole, and not to an individual beneficiary." Paulsen v. CNF Inc., 559 F.3d 1061, 1073 (9th Cir.2009); see also LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248, 256, 128 S.Ct. 1020, 169 L.Ed.2d 847 (2008) ("[A]lthough § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account.").
"Neither section 409(a) [of ERISA, 29 U.S.C. § 1109(a)] nor any other section of ERISA discloses the methods which are to be used in measuring the `losses' for which breaching fiduciaries are to be held liable." Kim v. Fujikawa, 871 F.2d 1427, 1430 (9th Cir.1989). "The reports of the various committees concerning this section of ERISA make it clear that Congress intended to provide the courts with broad remedies for redressing the interests of participants and beneficiaries when they have been adversely affected by breaches of a fiduciary duty." Eaves v. Penn, 587 F.2d 453, 462 (10th Cir.1978); see also id. at 462-63 ("Among the factors which the court may consider in selecting a remedy are: (1) the purposes of the trust; (2) the relative pecuniary advantages to the trust estate of the various remedies; (3) the nature of the interest of each beneficiary; (4) the practical availability of the various remedies; and (5) the extent of the deviation from the terms of the trust required by the adoption of each of the remedies.").
Subsection 1132(a)(3) provides for a participant to bring a civil action "(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (I) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan." 29 U.S.C. § 1132(a)(3). The Supreme Court has "interpreted the term `appropriate equitable relief' in § 502(a)(3) [of ERISA, 29 U.S.C. § 1132(a)(3),] as referring to those categories of relief that, traditionally speaking (i.e., prior to the merger of law and equity) were typically available in equity." CIGNA Corp. v. Amara, ___ U.S. ___, ___, 131 S.Ct. 1866, 1878, 179 L.Ed.2d 843 (2011) (quoting Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356, 361, 126 S.Ct. 1869, 164 L.Ed.2d 612 (2006)) (internal quotation marks omitted). Because § 1132(a)(3) is limited to equitable relief, compensatory damages are not available under this subsection. Mertens v. Hewitt Assocs., 508 U.S. 248, 255-56, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993).
In CIGNA Corp., however, the Supreme Court discussed, in dicta, the ability to award equitable relief under § 1132(a)(3) that would require a plan administrator to
As the final week of trial came to a close in this case, plaintiffs could not articulate the remedy they were seeking, and suggested that the court could simply fashion appropriate equitable relief. The court is not in the business of divining appropriate relief absent a request from plaintiffs. In five different proposed orders submitted with their post-trial briefing,
1.
2.
The court now addresses each of the remedies plaintiffs seek.
At the close of trial during discussions with counsel about post-trial briefing, the court unequivocally raised its concerns with plaintiffs' counsel about the court's ability to grant any prospective injunctive relief, stating:
(Tr. 2658:7-17); see also DeFazio, 636 F.Supp.2d at 1076-77 (citing Bendaoud v. Hodgson, 578 F.Supp.2d 257, 267-68 (D.Mass.2008), for the holding that a plaintiff who was no longer a participant in a defined contribution plan had no standing to seek purely prospective relief); see generally Cent. States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care, L.L.C., 433 F.3d 181, 199-203 (2d Cir.2005) (discussing Article III standing in the context of ERISA claims). Every single plaintiff that was a HolliShare participant had terminated his or her employment with Hollister and received a full lump sum distribution of his or her HolliShare account before commencing or joining this action.
Although plaintiffs' proposed orders request prospective injunctive relief, their over 350 pages of post-trial submissions are devoid of any substantive discussion addressing the court's concerns about their ability to seek such relief. When defendants pointed out the deficiency in plaintiffs' briefs on this issue, plaintiffs still failed to address the issue in their reply brief. In the face of the court's clear and direct request for authority supporting any request for injunctive relief, the court can only construe plaintiffs' silence on this issue as an admission that their requests for injunctive relief are not "warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law." Fed.R.Civ.P. 11(b)(2).
Moreover, plaintiffs do not merely request the court to appoint an independent trustee, plaintiffs also request the court to order the trustee "to calculate the losses of the Plan and to correct the fiduciary breaches and prohibited transactions." (Docket Nos. 650-53.) The purpose of the trial was for plaintiffs to put on evidence that would allow the court to "calculate the losses of the Plan and to correct the fiduciary breaches and prohibited transactions." Plaintiffs are essentially asking for a second chance to do what they should have done at trial.
This case has been pending in this court since 2004 and the various judges assigned to it have issued over thirty substantive orders. Plaintiffs have had more than ample time and opportunity to prove their case and could have retained experts to testify at trial about the exact calculations they are asking a court-appointed trustee to calculate. Accordingly, the court will deny plaintiffs' request for an injunction removing the existing Trustees and appointing a new trustee.
To seek damages under § 1132(a)(2) and (a)(3), plaintiffs generally have the burden of proving the harm caused by defendants' breaches of their fiduciary duties by a preponderance of the evidence. See CIGNA Corp., 131 S.Ct. at 1881 ("[A] fiduciary can be surcharged under § 502(a)(3) only upon a showing of actual harm — proved (under the default rule for civil cases) by a preponderance of the evidence."). However, "once the ERISA plaintiff has proved a breach of fiduciary duty and a prima facie case of loss to the plan or ill-gotten profit to the fiduciary, the burden of persuasion shifts to the fiduciary to prove that the loss was not caused by, or his profit was not attributable to, the breach of duty." Martin v. Feilen, 965 F.2d 660, 671 (8th Cir.1992); accord Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 602 (8th Cir.1995). "In determining the amount that a breaching fiduciary must restore to the [ERISA plan] as a result of a prohibited transaction, the court `should resolve doubts in favor of the plaintiffs.'" Kim, 871 F.2d at 1430-31; accord Sec'y of U.S. Dep't of Labor v. Gilley, 290 F.3d 827, 830 (6th Cir.2002) ("[T]o the extent that there is any ambiguity in determining the amount of loss in an ERISA action, the uncertainty should be resolved against the breaching fiduciary."); Patelco Credit Union v. Sahni, 262 F.3d 897, 912 (9th Cir.2001).
In finding that defendants breached their duties under §§ 1104(a)(1), (a)(1)(B), and 1108(e) by failing to perform an investigation to determine the fair market value
Not only did the parties present insufficient evidence to establish the fair market value of the JDS shares for each prohibited transaction, the weight of the evidence presented at trial does not persuade the court that the fair market value exceeded the December 31 book value. Most significantly, the JDS Articles severely restricted who could purchase JDS shares and thus the only market for HolliShare's sales was JDS or one of the select individuals authorized to purchase shares under the direct shareholder program. (See Ex. 531-36 Art. 5, ¶ II.C.) Each year, offering circulars were distributed to the eligible direct shareholders in the second or third quarter that provided them with options to purchase JDS stock at the audited December 31 book value from the prior year. (Tr. 558:6-559:1, 725:3-731:4, 1272:20-1273:14, 1710:5-7; see also Tr. 557:22-559:5 (Karlovsky explaining that the ability to purchase JDS shares at the December 31 book value even when sales were made during the following year "was considered to be one of the benefits of the direct share program").)
Furthermore, the fact that individual shareholders who were part of the direct shareholder program were able to sell their shares at the month-end book value does not invariably lead to the conclusion
Moreover, the only testimony at trial valuing JDS stock during the time-period at issue came from defendants' expert, Grabowski. Grabowski is an accredited senior appraiser with the American Society of Appraisers who has been performing business appraisals for about thirty-five years and is currently a managing director at a valuation and financial consulting firm. (Tr. 2510:1-7, 2512:6-11, 2518:15-17.) Grabowski had also been a finance professor at a university and has authored five books pertaining to valuation, including one about valuation of closely held entities that was used in a course he taught for continuing education for certified public accountants. (Tr. 2517:9-22, 2518:25-2519:4.)
Grabowski was asked to "render an opinion of the fair market value of the common shares of JDS that were held by the HolliShare plan for the period '74 through 2007." (Tr. 2527:19-25.) He concluded that the fair market value was the "formula price, which was book value," explaining:
(Tr. 2528:18-2529:8 (reading from the "Summary of Conclusions" in Grabowski's expert report).)
Plaintiffs recognize that, "[t]he testimony of the experts does not provide a complete analysis of the difference between the previous December 31 book value and the properly appraised fair market value on the dates of the transactions from years 1982 through the present." (Pls.' Proposed Findings & Conclusions 57:24-58:1.) With both parties' experts, the insufficiency of the evidence stemmed not from a lack of qualifications, but from the counsels' failure to request opinions on the relevant issues and ensure that the experts did not rely on assumptions that rendered their opinions irrelevant. Although the court must resolve any ambiguities in favor of plaintiffs, the inadequacy of the evidence on this issue resulted not from ambiguities or difficulty in computations but from the parties' failure to ask their experts the appropriate questions.
As a threshold matter, the court agrees with defendants that any loss to the Plan must be assessed on a long-term basis, not isolated annual inquiries that ignore the dynamics of the Plan and various factors affecting its growth. When determining whether trustees' purchase of employer stock in an attempt to prevent a tender offer by another company caused a loss to a plan, the Second Circuit held that the appropriate measure of loss compared what the plan earned on the challenged investment and what it would have earned if the funds had been available for other purposes. Donovan v. Bierwirth, 754 F.2d 1049, 1056-57 (2d Cir.1985). In performing this inquiry, the Second Circuit explained that the comparisons of the respective investments must be considered over an extended period of time and not limited to the date of the challenged transaction. Id. "Donovan thus stands squarely for the proposition that loss must be determined by examining the assets of the plan as a whole, not at an instant ..., but over a period of time." Roth, 61 F.3d at 604; see also id. at 602-03 (rejecting the district court's "snapshot" assessment of loss and explaining that it "failed to consider the time frame component of the loss calculation, and so doing implicitly focused upon too narrow a time frame").
Turning to the evidence presented at trial, Karlovsky first testified about the simulation he performed to determine whether the use of the December 31 book value had an impact on the Plan. Karlovsky has a Bachelor of Arts in systems engineering and a Master's degree in industrial engineering management, had previously worked as a strategic planning analyst, and had performed extensive research dealing with employee relations and compensation. (Tr. 336:1-337:25.) He explained:
(Tr. 354:8-355:13, 361:1-14.) Karlovsky ultimately concluded that use of the December 31 book value did not cause a "material difference" to the Plan. (Tr. 357:15-16, 435:2-4, 438:1-8.)
McCormack, who has a Bachelor of Arts in social studies with a focus in economics and a Masters in Business Administration with an emphasis in finance, explained that, based on the closely held nature of JDS and the fact that JDS was not reissuing new shares, the financial effect of selling more shares one year (because the December 31 book value was used) evened out over time because there would be fewer outstanding shares the following year:
(Tr. 768:9-769:20.)
Brilliant, who has a Bachelor of Arts in industrial management and a Masters in Business Administration from the Wharton Business School and had been a certified public accountant since 1975, (Tr. 1264:3-7, 1356:11-12), reached the same conclusion as McCormack, explaining:
(Tr. 1367:19-1368:22.)
Zwirner who has a Bachelor of Arts in economics and a Juris Doctorate, (Tr. 1982:20-23), echoed McCormack and Brilliant's conclusion:
(Tr. 2384:7-23.) Zwirner testified that it was his belief that, "over a period of time," the use of the December 31 book value instead of the month-end value had "no effect" on HolliShare. (Tr. 2385:24-25.)
Lastly, defendants' expert, Grabowski, performed an extensive analysis in which he examined the effect on the Plan if it was assumed that the fair market value of HolliShare's shares was two or three times the December 31 book value and HolliShare sold its shares at the increased price. He concluded that the benefits the participants received would have ultimately been the same regardless of whether the book value was used or a hypothetical fair market value of two or three times book value was used:
(Tr. 2557:2-2558:20.) Grabowski further explained, "So there's a continuous change in how the value of the plan changes, but
All of these witnesses were well-educated and had training relevant to understanding the effect of using the December 31 book value for HolliShare's sales under all of the circumstances and dynamics relevant to HolliShare and JDS. Their consistent, credible, and unchallenged testimony was that the use of the December 31 book value did not cause long-term harm to the Plan. Based on their testimony and the evidence presented at trial, including the dynamics of the Plan and JDS, the court is persuaded that HolliShare's sale of JDS stock at the December 31 book value did not cause a material loss to HolliShare even if the December 31 book value was something less than the fair market value of the Plan's JDS shares at the time of each sale.
In CIGNA Corp., the Supreme Court explained that "just as a court of equity would not surcharge a trustee for a nonexistent harm, a fiduciary can be surcharged under § 502(a)(3) only upon a showing of actual harm — proved (under the default rule for civil cases) by a preponderance of the evidence." CIGNA Corp., 131 S.Ct. at 1881 (citation omitted); accord Eaves, 587 F.2d at 463 ("The law clearly permits approximations as to the extent of damage, so long as the fact of damage or `lost profits' is certain." (emphasis added)); Brock, 830 F.2d at 647 ("[M]onetarily penalizing an honest but imprudent trustee whose actions do not result in a loss to the fund will not further the primary purpose of ERISA."). Accordingly, because the court finds that the fiduciaries' breaches of their duties did not cause a material harm to the Plan, plaintiffs are not entitled to damages.
Consistent with the court's finding that the Trustees' sale of HolliShare's JDS shares at the December 31 book value did not cause a loss to the Plan over an extended period of time, the court is also convinced that use of the December 31 book value did not cause HolliShare to retain fewer shares than it would have if a higher price was used. As McCormack, Brilliant, and Zwirner testified, while use of a value lower than fair market value would have caused HolliShare to sell more shares to raise its cash requirements in the first year, when those shares were retired, it would decrease the number of outstanding shares and therefore increase the book value per share of the outstanding shares in the following year. As a result, HolliShare's remaining shares would have a higher value in subsequent years and HolliShare would need to sell fewer shares to meet its cash needs. Any loss in shares during the first year would therefore even out in subsequent years. The weight of the evidence therefore persuades the court that the use of the December 31 book value did not cause HolliShare to incur a material reduction in the number of JDS shares it owned.
At trial, plaintiffs' claims based on HolliShare's sale of its JDS shares at the December 31 book value from the prior year revealed itself to be the heart of plaintiffs' case, and the damages and surcharge remedy plaintiffs seek is based entirely on those prohibited transactions. Plaintiffs have nonetheless alleged numerous other claims, which the court will briefly address.
First, plaintiffs allege that the Trustees breached their fiduciary duties and violated § 1104(a)(1)(D) by failing to follow the Plan's requirement to invest Plan assets in JDS shares to the maximum extent possible when they sold more shares of JDS stock than necessary to meet HolliShare's cash requirements in 1982, 1987, and 1993. Plaintiffs did not, however, propose or seek a remedy with respect to this claim. The evidence at trial also does not persuade the court that these sales were concealed from the beneficiaries, thus plaintiffs are unable to rely on the "fraud or concealment" exception in § 1113 and the claims are untimely.
Second, plaintiffs allege that the Trustees breached duties owed to HolliShare when they voted HolliShare's shares in favor of various amendments to the JDS Articles in 1978, 1980, 1984, and 1999. In the June 2009 Order, the court held that the statute of limitations foreclosed all of plaintiffs' claims based on the votes in 1978, 1980, and 1984 and plaintiffs' direct claims against the fiduciaries based on the votes in 1999. See DeFazio, 636 F.Supp.2d at 1058-59. The court nonetheless held that plaintiffs' co-fiduciary liability claims under § 1105(a)(3) based on the votes in favor of the 1999 amendments were not time barred. As the court explained in the June 2009 Order, § 1105(a)(3) "makes a fiduciary liable for the breach of another fiduciary if `he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach,'" and "[o]ne form of remedying the breaches of a co-fiduciary would be to file a suit against the breaching co-fiduciary to restore the losses to the plan or redress any violations of ERISA." Id. (quoting § 1105(a)(3)). The court therefore concluded in the June 2009 Order that, if "HolliShare fiduciaries had actual knowledge of the votes at the time they were cast and [] such votes constituted ERISA violations," the fiduciaries would have had three years to file suit and thus the claims were timely under § 1132(2). Id. at 1059.
The 1999 amendments prohibited natural persons from owning more than 10% of JDS stock, which plaintiffs contend eliminated a potential market for HolliShare to sell its common stock. The 1999 amendments also added a limited indemnity provision to the JDS Articles that indemnified directors from personal liability to shareholders for certain breaches. (See Ex. 535 at 5.) Even assuming these amendments constituted fiduciary breaches and thus give rise to § 1105(a)(3) claims
Third, based on the fact that many of the Trustees were individual shareholders and served on the JDS and Hollister Boards, plaintiffs allege that the fiduciaries breached various other duties and had numerous conflicts of interest. See generally Pegram v. Herdrich, 530 U.S. 211, 224, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) ("[T]he trustee under ERISA may wear different hats, ... [but ERISA requires that] the fiduciary with two hats wear only one at a time, and wear the fiduciary hat when making fiduciary decisions."); Cunningham, 716 F.2d at 1465 ("ERISA clearly provides that a fiduciary may be an officer or employee of the company whose securities he purchases on behalf of a plan." (citing 29 U.S.C. § 1108(c)(3))). For example, plaintiffs contend that, when HolliShare allegedly sold shares below the fair market value, the difference remained on the books of the company and was therefore spread equally amongst the remaining shares, including the individual shareholders. In doing so, plaintiffs contend that the Trustees breached their duty of loyalty
The court has already determined that, in failing to perform a good faith investigation to determine the fair market value of the Plan's JDS shares, the fiduciaries breached their duties under §§ 1104(a)(1), (a)(1)(B), and 1108(e). This finding is sufficient to award plaintiffs the entirety of the relief they requested and have standing to seek. The court unequivocally informed plaintiffs at trial that it would only consider the relief plaintiffs requested, and plaintiffs have not sought any relief based on any alleged profit the fiduciaries gained from their breaches. The court will therefore enter judgment in favor of defendants on plaintiffs' claims relating to the fiduciaries' alleged conflicts and personal profits.
Lastly, in their amended statement purporting to identify all of their claims for trial, plaintiffs identified several claims that they declined to address at trial, in their post-trial briefing, or in their proposed findings of fact and conclusions of law. The court can only assume that plaintiffs have abandoned those claims, and in any event for the reasons discussed above plaintiffs are not entitled to any relief on those claims. The court will therefore enter judgment in favor of defendants on those claims. Specifically, the court will enter judgment in favor of defendants on the following abandoned claims: 1) plaintiffs' claim under § 1103 for defendants' alleged failure to hold HolliShare assets in trust for the participants and beneficiaries; 2) plaintiffs' claim under § 1104(a)(1)(C) for defendants' alleged failure to diversify HolliShare's investments; and 3) plaintiffs' claim under § 1110(a), which declares void any plan provision that relieves ERISA fiduciaries from liability.
During the course of trial, the court also ruled in favor of defendants on Defazio's and Ellis's claims under § 1056(d)(3) relating to payment of Defazio's benefits pursuant to the qualified domestic relations orders and Defazio's and Ellis's claims under § 1140 relating to defendants' filing of a motion in their divorce proceeding. (See Tr. 2171:3-2174:8, 2175:20-2176:8); see generally DeFazio, 636 F.Supp.2d at 1077-79.
Both parties have requested an award of attorneys' fees in this action. Pursuant to 29 U.S.C. § 1132(g)(1), "the court in its discretion may allow a reasonable attorney's fee and costs of action to either party." The Supreme Court has recently held that "a fee claimant need not be a `prevailing party' to be eligible for an attorney's fees award under § 1132(g)(1)." Hardt v. Reliance Standard Life Ins. Co., 560 U.S. ___, ___, 130 S.Ct. 2149, 2156, 176 L.Ed.2d 998 (2010). Because Congress did not clearly indicate that it intended to abandon the American Rule, which provides for each litigant to pay his or her own fees, "a fees claimant must show `some degree of success on the merits' before a court may award attorney's fees under § 1132(g)(1)." Id. at 2158 (quoting Ruckelshaus v. Sierra Club, 463 U.S. 680, 694, 103 S.Ct. 3274, 77 L.Ed.2d
After Hardt, the Ninth Circuit held that a district court "must consider the Hummell factors after they have determined that a litigant has achieved `some degree of success on the merits.'" Simonia v. Glendale Nissan/Infiniti Disability Plan, 608 F.3d 1118, 1119 (9th Cir.2010); see Hardt, 130 S.Ct. at 2158 n. 8 ("We do not foreclose the possibility that once a claimant has satisfied this requirement, and thus becomes eligible for a fees award under § 1132(g)(1), a court may consider the five factors adopted by the Court of Appeals, in deciding whether to award attorney's fees."). The Hummell factors include:
Hummell v. S.E. Rykoff & Co., 634 F.2d 446, 453 (9th Cir.1980).
Here, the court found that the Trustees breached their duties under §§ 1104(a)(1), (a)(1)(B), and 1108(e) in failing to perform a good faith investigation to determine the fair market value of HolliShare's JDS stock and that the Hollister board members failed to adequately monitor the Trustees in this respect. In the abstract, this was a significant finding in favor of plaintiffs and an issue that the parties deeply disputed. The court ultimately concluded, however, that plaintiffs lacked standing to seek prospective injunctive relief and that the sales at the December 31 book value did not cause harm to HolliShare or plaintiffs' HolliShare accounts. This finding deflates the sails of any "victory" plaintiffs achieved in proving that defendants breached their fiduciary duties.
The outcome in this case is analogous to Farrar v. Hobby, 506 U.S. 103, 113 S.Ct. 566, 121 L.Ed.2d 494 (1992), in which the Supreme Court explained that a plaintiff who sought compensatory damages, but failed to prove "actual, compensable injury" and was awarded only nominal damages in the amount of $1.00 based on the violation of his procedural due process rights was not entitled to attorneys' fees. Farrar, 506 U.S. at 115, 113 S.Ct. 566. When evaluating the plaintiffs' "degree of success," the Court explained that plaintiffs "received nominal damages instead of the $17 million in compensatory damages that they sought," and thus the "litigation accomplished little beyond giving petitioners `the moral satisfaction of knowing that a federal court concluded that [their] rights had been violated.'" Id. at 114, 113 S.Ct. 566 (quoting Hewitt v. Helms, 482 U.S. 755, 762, 107 S.Ct. 2672, 96 L.Ed.2d 654 (1987)) (alteration in original). The Court held, "[w]hen a plaintiff recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief, the only reasonable fee is usually no fee at all." Id. at 115, 113 S.Ct. 566; see also id. at 116, 113 S.Ct. 566 ("If ever there was a plaintiff who deserved no attorney's fees at all, that plaintiff is Joseph Farrar. He filed a lawsuit demanding 17 million dollars from six defendants. After 10 years of litigation
Here, plaintiffs sought extraordinary damages, ranging from $30,674,599.56 to $244,382,485.00, but are not entitled to any award of damages. Plaintiffs' proof of defendants' breaches may give them some level of moral satisfaction, but their inability to prove any harm or obtain injunctive relief prevented them from achieving "some degree of success on the merits." Accordingly, the court finds that plaintiffs are not entitled to fees under § 1132(g)(1). See Simonia, 608 F.3d at 1121 ("Only after passing through the `some degree of success on the merits' door is a claimant entitled to the district court's discretionary grant of fees under § 1132(g)(1).").
Defendants ultimately prevailed in this case and are entitled to seek fees under § 1132(g)(1); thus the court must determine whether to award defendants their attorneys' fees in light of the Hummell factors.
Based on the court's conclusion that the fiduciary defendants breached their duties, the court finds that this factor weighs in favor of plaintiffs and merits against awarding defendants their attorneys' fees. Although harm did not result from the fiduciaries' breaches, it does not make their conduct acceptable. Defendants also argue that plaintiffs engaged in bad faith in pursuing this lawsuit and that plaintiffs' counsel's characterization of the defendants throughout this litigation amounted to bad faith. This case unquestionably did not proceed in an expeditious fashion, the theories of liability often appeared to be a moving target, and the growing animosity between counsel were palpable. The court finds, however, that both sides were responsible for the prolonged litigation and levied arguably personal attacks against their adversaries.
Although the court lacks evidence about each of the plaintiffs' ability to satisfy an award of fees, nothing in the record suggests that they have significant financial resources. With the exception of Ellis, even the balances of plaintiffs' HolliShare accounts were minimal when compared to the proceeds many of the defendants received from the sales of their JDS shares. For example, in order to keep his holding of JDS shares below ten percent, Winn sold $20 million in shares on one occasion, (Tr. 1858:14-15), and Herbert ultimately sold his shares for about $18 million, (Tr. 19823:9-12). Most significantly, Zwirner, who, as an attorney might be expected to help his fellow Trustees understand and comply with ERISA, was estimated to have JDS shares value in excess of $45 million, (Tr. 1925:2-6), and, when asked how much he had sold in the last six years to keep his holdings under ten percent, he answered that it was in the "range" of five to twenty million dollars. (Tr. 2017:2-18.) The court's impression at trial was that, even though defendants' fees will undoubtedly be significant, defendants are fully capable of paying them and plaintiffs are not. The burden of defendants' fees should not be shifted from the defendants, who breached their fiduciary duties and appear to have more than adequate resources to pay their attorneys, to the plaintiffs.
An award of fees may undoubtedly deter plaintiffs from pursuing such complicated
Here, plaintiffs sought relief in favor of the Plan, but clearly lacked standing to obtain an injunction affecting the future management of the Plan, and the evidence at trial convinced the court that the Plan did not suffer harm. It is unclear to the court why plaintiffs did not address these deficiencies early in the litigation. HolliShare was extremely successful and provided returns in excess of publicly traded stock and, to the extent that this action could have rendered HolliShare's primary investment worthless by bankrupting JDS or caused Hollister to think twice about continuing to offer the Plan to its employees,
Lastly, the court finds that the factor evaluating the relative merits of the parties does not weigh in favor of either party. As previously discussed, plaintiffs proved that defendants breached their fiduciary duties and, if any one of the plaintiffs had standing to seek injunctive relief, the court may have removed the Trustees from their positions. At the same time, however, defendants ultimately proved that their conduct did not cause harm to the Plan. At the end, this litigation resulted in more of a wash than a victory for either side.
When balancing the factors, the court concludes that the considerations weigh heavily in favor of denying defendants' fees under § 1132(g)(1). Although defendants prevailed in establishing that they did not cause harm to the Plan, they breached their duties and should not be able to shift the burden of their defense to plaintiffs. Accordingly, the court declines to award either side their attorneys' fees.
For the foregoing reasons, THE COURT HEREBY FINDS in favor of all defendants on all claims by all plaintiffs. Each side shall bear their own attorneys' fees.
The Clerk of the Court is instructed to enter judgment accordingly.
Plaintiffs also named HolliShare as a defendant, but have never treated it as a defendant and did not propose findings of fact or conclusions of law addressing its liability. Thus the court will enter judgment in favor of HolliShare.
The parties have not addressed which party has the burden to establish either the existence or absence of reasonable diligence. Nonetheless, because the court finds that the exercise of diligence would not have uncovered the alleged breaches, the court's conclusion about reasonable diligence would be the same regardless of which party had the burden on that issue.
53 Fed. Reg. 17632 (May 17, 1988). "Although proposed regulations have no legal effect, numerous circuit courts have adopted the DOL's proposed definition of adequate consideration." Henry v. Champlain Enters., Inc., 445 F.3d 610, 619 (2d Cir.2006). Relying on language in Howard v. Shay, 100 F.3d 1484 (9th Cir.1996), that is similar to the proposed regulation, the Second Circuit has indicated that the Ninth Circuit adopted the proposed regulation. See Henry, 445 F.3d. at 619 ("To enforce [ERISA fiduciary rules], the court focuses not only on the merits of the transaction, but also on the thoroughness of the investigation into the merits of the transaction." (quoting Howard, 100 F.3d at 1488 (internal quotation marks omitted))). Although the Ninth Circuit applies a standard similar to the proposed regulation, it has not expressly adopted the proposed regulation.
As this court previously explained, courts "decline to take cognizance of the proposed regulations ... because a proposed regulation does not represent an agency's considered interpretation of its statute." DeFazio, 2007 WL 3231670, at *10; see Draper v. Baker Hughes Inc., 892 F.Supp. 1287, 1293 (E.D.Cal.1995) (disregarding a proposed regulation issued by the Department of the Treasury relating to the COBRA statute, noting that "almost a decade has passed since COBRA's Enactment, and the promised regulatory guidelines have not materialized"). The court will therefore rely on Ninth Circuit precedent, not the Department of Labor's proposed regulation that has not, for some reason or no reason at all, been adopted since its proposal over twenty years ago.
(2) by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title;
(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or
29 U.S.C. § 1132(a).
The court recognizes that there is authority suggesting that the limited duty to appoint trustees might not give rise to a duty to monitor those trustees. See Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1325 (9th Cir.1985) (per curiam) (holding that an employer who appointed the plan administrator was only a fiduciary and liable as such with respect to the selection of the administrator). The court, however, previously adhered to the position both parties advanced and will not hold otherwise when there has not been a change in the controlling law. Moreover, in addition to the duty to appoint trustees, the Hollister Board also has the authority to inspect and audit HolliShare's records and receive reports from the Trustees. These powers are consistent with an oversight and monitoring role.
Grabowski also testified about a "hypothetical fair market value" of JDS shares from 1997 to 2007, which he estimated exceeded the book value by 1.1 to 1.8 times depending on the year. This valuation is not relevant because Grabowski calculated this "hypothetical fair market value" as if the restrictions in the JDS Articles did not exist and there could be "freely open trading" of the stock. (Tr. 2572:7-10.)
An additional flaw is that a persuasive explanation was not offered about how JDS's purchase of shares from HolliShare at the increased fair market value Korschot calculated would have affected the fair market value of JDS shares in subsequent years. Simple math reveals that even the book value of JDS would have decreased if it was paying a significantly higher price for its shares.
Along this same vein, because the court ultimately finds in favor of defendants on damages, defendants' argument that plaintiffs failed to timely disclose their surcharge theory or damages calculations is moot.
The testimony at trial was that, even though it is continually selling shares, HolliShare can infinitely extend its ownership of JDS stock through stock splits. (See Tr. 554:16-555:7.)
In discussing liability in the June 2009 Order, the court stated that plaintiffs had viable claims under § 1105(a)(3) only if the fiduciary had "knowledge of the votes at the time they were cast." DeFazio, 636 F.Supp.2d at 1059. Here, Brilliant did not become a trustee until 2000 and Kelleher did not become a trustee until 2004. Even assuming Brilliant and Kelleher had a duty to remedy a fiduciary breach that occurred before they were fiduciaries, but see 29 U.S.C. § 1109(b) ("No fiduciary shall be liable with respect to a breach of fiduciary duty under this subchapter if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary."), there was no testimony showing that they had knowledge that the votes in favor of the 1999 amendments violated ERISA. See Cunningham, 716 F.2d at 1475 ("Section 405 does not impose vicarious liability — it requires actual knowledge by the co-fiduciary.... `[T]he fiduciary must know the other person is a fiduciary with respect to the plan, must know that he participated in the act that constituted a breach, and must know that it was a breach.'" (quoting H.R.Rep. No. 1280, 1974 U.S.Code Cong. & Ad. News at 5083)).
It therefore appears that the proper defendants would have been Zwirner, McCormack, and Karlovsky, who were all trustees in 1999 at the time of HolliShare's vote in favor of the 1999 amendments. Nonetheless, the court's conclusion that plaintiffs failed to offer evidence of harm or seek a remedy with respect to their § 1105(a)(3) claims based on the 1999 amendments applies equally regardless of which defendants the claims are against.
