Kuper v. Iovenko

• Decision Date: 04 October 1995
• Docket Number: No. 94-3688,94-3688
• Parties: 19 Employee Benefits Cas. 1969, Pens. Plan Guide P 23913R Glenn KUPER and Cliff Jones, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. Michael IOVENKO and H. Weston Clarke, Jr., Defendants-Appellees, Quantum Chemical Corporation, et al., Defendants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1447

66 F.3d 1447

19 Employee Benefits Cas. 1969, Pens. Plan Guide P 23913R

Glenn KUPER and Cliff Jones, on behalf of themselves and all

others similarly situated, Plaintiffs-Appellants, v. Michael IOVENKO and H. Weston Clarke, Jr., Defendants-Appellees, Quantum Chemical Corporation, et al., Defendants.

No. 94-3688.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 11, 1995.

Decided Oct. 4, 1995.

Russell A. Kelm (argued and briefed), Juan Jose Perez, Schwartz, Kelm, Warren & Ramirez, Columbus, OH, for plaintiffs-appellants.

David T. Croall (briefed), James R. Adams, Frost & Jacobs, Cincinnati, OH, for Quantum Chemical Corp.

Eric M. Nelson (argued), Whitman, Breed, Abbott & Morgan, New York City, for Michael Iovenko, H. Weston Clarke, Jr.

Before: WELLFORD, MILBURN, and SUHRHEINRICH, Circuit Judges.

MILBURN, Circuit Judge.

Plaintiffs Glenn Kuper, Cliff Jones, and the class they represent, appeal the judgment of the district court for defendants Michael Iovenko and H. Weston Clarke, Jr. in this action, brought under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. Secs. 1001, et seq., in which plaintiffs allege that defendants breached their fiduciary duties. On appeal, the issues are (1) whether plaintiffs stated a claim for breach of fiduciary duty under 29 U.S.C. Sec. 1109 where the plaintiff class was only a subclass of the employee benefit plan's beneficiaries, (2) whether defendants breached their fiduciary duty to plaintiffs by failing to make an immediate distribution under the terms of the Plan of plaintiffs' Employee Stock Ownership Plan ("ESOP") shares following the sale of Quantum Chemical Corporation's Emery Division to Henkel Corporation, (3) whether the district court erred in finding that defendants did not breach their fiduciary duty to plaintiffs by failing to exercise their discretion to distribute plaintiffs' ESOP shares during the eighteen month period between the sale to Henkel and the date that plaintiffs' ESOP shares were transferred to Henkel, and (4) whether the district court erred in finding that defendants did not breach their fiduciary duty to plaintiffs by failing to diversify or liquidate the ESOP funds after the sale of the Emery Division. For the reasons that follow, we affirm.

I.

A.

Plaintiffs are former salaried employees of the Emery Division ("Emery") of Quantum Chemical Corporation ("Quantum") who participated in the Quantum Savings and Stock Ownership Plan ("the Plan"). The Plan consisted of two components: (1) a voluntary retirement plan qualified under Sec. 401(k) of the Internal Revenue Code and (2) an Employee Stock Ownership Plan ("ESOP"), which consisted of Quantum's matching contributions of Quantum stock, based upon each employee's 401-K contribution level, and occasional ESOP bonuses authorized by Quantum's Board of Directors. Employees could not contribute their own funds to the ESOP. The Plan provided that the ESOP feature was "designed to invest primarily in qualified" Quantum securities. Sec. 5.01(a), J.A. 581.

Eligible Quantum employees were offered an opportunity to participate in the ESOP pursuant to a prospectus dated February 8, 1988. Under the terms of the Plan, employees hired prior to April 1, 1988 were fully vested in their ESOP accounts, while employees hired on or after April 1, 1988 would become fully vested in their ESOP accounts after two years of service. Once vested, the ESOP funds were not forfeited upon an employee's termination of employment with Quantum, and the Plan required immediate distribution of an employee's ESOP funds upon the employee's termination. Sec. 10.01(a), Sec. 10.03(a); J.A. 595, 597. The Plan also granted its fiduciaries discretion to distribute an employee's ESOP account upon the sale by Quantum of substantially all of its assets or of one of its subsidiaries, provided that the employee continued employment with the buyer. Sec. 10.01(b), J.A. 595.

The Plan provided that Quantum's Board of Directors was to appoint a benefits committee, made up of not less than three members, to administer the Plan. The Board of Directors appointed separate trustees for the ESOP component of the plan. Defendant H. Weston Clarke, Jr. was Quantum's Vice President of Human Resources and chairperson of the three-member committee that administered the Plan. Defendant Michael Iovenko served as one of three trustees of the ESOP from January 1988 to February 1990. Both the benefits committee and the ESOP trustees prepared minutes of their periodic meetings from April 1989 to November 1990 and from April 1989 to February 1990, respectively.

On December 27, 1988, as part of a recapitalization plan, Quantum's Board of Directors approved and announced a $50.00 per share special cash dividend that would be paid to each record shareholder as of January 7, 1989. In connection with the recapitalization, on March 11, 1989, Quantum entered into an Asset Sale Agreement to sell its Emery Division to Henkel Corporation ("Henkel"), effective April 17, 1989. At that time, Quantum and Henkel also negotiated an Employment Agreement in which Henkel agreed to continue to employ existing Emery employees under comparable terms and conditions. The Employment Agreement provided that Henkel would accept from Quantum a trust-to-trust transfer of the Plan assets, including the 401(k) and ESOP funds, of those Quantum employees who continued employment with Henkel after the sale.

Although the sale of Emery to Henkel was effective on April 17, 1989, the trust-to-trust transfer of Plan assets was not completed until approximately eighteen months later. Plaintiffs claim that this delay was caused in part by Quantum's failure to obtain a determination letter from the Internal Revenue Service regarding the qualification of the Plan in a timely manner. Defendants assert that a number of unforeseen events delayed the trust-to-trust transfer, including Henkel's decision not to accept a transfer on behalf of the hourly employees. The trust-to-trust transfer finally occurred on September 20, 1990, when the Quantum stock in the ESOP was transferred to the Henkel Investment Plan. Henkel credited the Quantum ESOP accounts to individual Emery employee accounts on November 1, 1990.

From April 1989 through October 1990, the period during which the transfer was pending, the value of Quantum stock declined from a trading value of more than $50.00 per share to slightly more than $10.00 per share. Although the value of Quantum stock decreased substantially during this period, defendants point out that Quantum stock closed at or above the previous day's trading price on 181 of the 402 trading days during the period. In addition, there were some periods during which the stock price increased. Members of the Quantum benefits committee testified that they did not consider diversifying or liquidating the ESOP at any time during this period. However, they were aware of or had access to information about several events that occurred during the eighteen months following the sale of the Emery Division that were likely to impact the value of Quantum's stock. These events included: Quantum's recapitalization, which adversely affected Quantum's financial condition by increasing its debt burden, interest expense, and principal repayment; Quantum's decreased operational diversity; a major fire at one of Quantum's plants that hindered the company's production capacity; and a decline in Quantum's net sales and income.

B.

Plaintiffs filed a purported class action complaint on December 27, 1991, alleging federal securities law fraud, ERISA violations, RICO claims, and common law claims. Plaintiffs named as defendants Quantum, certain Quantum directors and officers, and the fiduciaries of Quantum's employee benefits plans. On May 7, 1992, plaintiffs moved for certification of a class including all salaried employees of Quantum who participated in Quantum's stock ownership plan between December 28, 1988, and November 1, 1990.

On August 27, 1992, the district court granted judgment for defendants, on statute of limitations and other grounds, as to all claims set forth in plaintiffs' complaint except for plaintiffs' ERISA claims. Plaintiffs' ERISA claims were based upon the significant diminution in the value of plaintiffs' Quantum stock over the eighteen month period between the sale of Emery and the trust-to-trust transfer.

On November 3, 1992, the district court denied plaintiffs' motion for class certification due to a potential conflict of interest of designated class counsel. Plaintiffs subsequently filed a renewed motion for class certification, and on April 2, 1993, the district court certified plaintiffs' class consisting of all former salaried employees of Quantum's Emery Division between the dates of December 28, 1988, and November 1, 1990, who participated in Quantum's Savings and Stock Ownership Plan and/or Quantum's ESOP, and who continued their employment with Henkel after the sale.

Defendants filed a motion for summary judgment as to plaintiffs' remaining ERISA claims on February 17, 1993. On July 21, 1993, the district court held that plaintiffs had standing to pursue their ERISA claims. However, on October 27, 1993, the district court found that plaintiffs had failed to present sufficient evidence demonstrating that Quantum and its Board of Directors acted in a fiduciary capacity with respect to the ESOP funds and thus granted summary judgment to those defendants. The district court also granted summary judgment to two defendants who were fiduciaries of the ESOP because plaintiffs failed to show cause why those defendants had not received service of process in a timely manner. The district court denied summary judgment, however, to defendants Clarke and Iovenko.

The remaining claims against Clarke and Iovenko were submitted to the district court for a decision based on the parties' trial briefs, reply briefs, proposed findings of fact and...