Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc.
| Citation | 793 F.2d 1456 |
| Decision Date | 14 July 1986 |
| Docket Number | No. 85-2377,85-2377 |
| Parties | , 7 Employee Benefits Ca 1782 The SOMMERS DRUG STORES CO. EMPLOYEE PROFIT SHARING TRUST, Plaintiff-Appellee, Cross-Appellant, v. CORRIGAN ENTERPRISES, INC. and Walter N. Corrigan, Defendants-Appellants, Cross-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Shannon H. Ratliff, Mark O. Knisely, Jill Beckett Cochran, Austin, Tex., for defendants-appellants, cross-appellees.
Charles B. Gorham, Charles R. Shaddox, Stephen E. Walraven, San Antonio, Tex., for plaintiff-appellee, cross-appellant.
Appeals from the United States District Court for the Western District of Texas.
Before THORNBERRY, POLITZ, and RANDALL, Circuit Judges.
The Sommers Drug Stores Company Employee Profit Sharing Trust sued Walter N. Corrigan and Corrigan Enterprises, Inc., in United States District Court for the Western District of Texas, alleging that the defendants had breached their fiduciary duty to the Trust under ERISA and under state common law. Following a jury verdict in favor of the Trust and a remittitur, the district court entered a judgment awarding the Trust $552,611.87 actual damages and $1,250,000 punitive damages. Corrigan and Corrigan Enterprises appeal, asserting that the district court committed numerous errors. The Trust cross-appeals. We reverse the judgment of the district court and remand for new trial on both liability and damages.
The Sommers Drug Store Company was incorporated in Delaware in 1947. Until its sale in 1977, the company engaged primarily in the retail pharmaceutical business. Its principal offices were in San Antonio, Texas.
Walter N. Corrigan became president of Sommers and a member of its board of directors in the mid-1950s. At about the same time, Sommers established a pension plan for its employees, consisting of an Employee Profit Sharing Plan and the Employee Profit Sharing Trust. Under the terms of the pension plan agreement as amended in 1976, Sommers, acting through its board of directors, had the power to appoint the plan administrator and the trustees of the Trust. The plan administrator had the power to value the assets held by the Trust. The trustees had the power to "manage, control, sell, exchange or lease" assets held by the Trust "at such prices and upon such terms and conditions as they deem desirable." Sommers retained the power to "suspend or discontinue its contributions under the Plan, and to terminate, at any time, the Trust created under this Agreement." Walter Corrigan served as a trustee of the Trust from its inception until May 27, 1976. He became a trustee again on January 1, 1978.
During the period of his employment at Sommers, Walter Corrigan gradually acquired the company's stock. By 1977 he owned approximately 47% of the outstanding shares. The Trust held about 16% of the outstanding shares. Sommers operated forty drug stores in San Antonio, Austin, and Beaumont, Texas. The company's wholly owned subsidiary, Crockett Realty Company, owned three tracts of land, the East Houston Street and Gembler Road properties in San Antonio and a coast house in Port Aransas, Texas.
In the early and mid-1970s Sommers' board of directors explored the possibility of merging the company with or selling it to one of several national drug store companies that had expressed interest. These explorations did not bear fruit until 1977, when the board entered into negotiations with Malone & Hyde, Inc., a Tennessee corporation. To facilitate a deal with Malone & Hyde, the board decided to recommend shareholder approval of a reverse stock split, under which 250 shares of $1 par stock would be converted into one share of $250 par stock, with Sommers purchasing fractional shares. The shareholders approved this plan on June 27, 1977. The reverse split reduced the number of shareholders from 66 to 16. Sommers paid $40 per pre-split share for the fractional shares. Following the split, Walter Corrigan held approximately 52% of Sommers' outstanding shares, and the Trust held roughly 20%.
In July 1977 Malone & Hyde reached an agreement with Sommers under which Malone & Hyde would purchase all of Sommers' drug store assets and its trade name. Sommers would remain responsible for its debts. Sommers also would retain ownership of the Crockett Realty Company, which was to lease the East Houston Street property to Malone & Hyde for three years. Malone & Hyde was to hire Walter Corrigan for ten years at $100,000 per year.
The Sommers shareholders, including the Trust, approved the proposed sale in August 1977. The transaction was consummated not long afterward; Sommers received cash in excess of five million dollars and was responsible for debts exceeding two million dollars. Sommers changed its name to Corrigan Enterprises, Inc., in accordance with the agreement to surrender its trade name.
Sometime after the reverse stock split, Walter Corrigan and Sommers/Corrigan Enterprises began offering to buy the stock held by the other fifteen shareholders at $40 per pre-split share, or $10,000 per post-split share. Several shareholders took advantage of this offer. After the sale of Sommers' assets to Malone & Hyde, the Trust's trustees began considering whether to sell the Trust's shares. A debate ensued among the Trust beneficiaries over whether the offered price was adequate. Ultimately, the trustees decided to accept the offer. The beneficiaries approved this decision at a meeting on December 16, 1977. The sale was consummated on March 6, 1978.
This action was filed in October 1980. The original complaint stated causes of action for securities fraud and breach of fiduciary duty under ERISA. Subsequent amendments added claims for breach of common-law fiduciary duty and for RICO violations. The plaintiffs' fourth amended complaint, filed during trial, dropped all except the ERISA and common-law claims. The common-law claim was amended to allege that the defendants had breached a duty to the Trust to liquidate Corrigan Enterprises and distribute the proceeds pro rata to the shareholders. 1 Both the ERISA and the common-law counts retained the allegation that the defendants had breached a duty to disclose material information to the plaintiffs. The district court held that ERISA preempted the state law claim, and the case was submitted to the jury on the ERISA claim alone.
The jury found that both Walter Corrigan and Corrigan Enterprises had breached their fiduciary duty to the Trust under ERISA. The jury fixed the fair market value of the Trust's stock at $1,146,846 and assessed punitive damages of $1,000,000 against Walter Corrigan and $1,500,000 against Corrigan Enterprises. The district court granted defendants' motion for a remittitur and entered judgment in favor of the Trust for $552,611.87 actual damages and $1,250,000 punitive damages, $500,000 against Walter Corrigan and $750,000 against Corrigan Enterprises.
On this appeal, we reverse the district court's judgment on liability because of an improper jury instruction, on actual damages because of insufficient evidence, and on punitive damages because under ERISA the Trust may not recover such damages. We discuss the ERISA preemption issue raised by the Trust's cross-appeal to guide the district court on remand. We pretermit consideration of the other issues raised by the parties.
The district court instructed the jury as follows on the issue of the appellants' fiduciary duty under ERISA:
For purposes of ERISA, a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of its assets. Under ERISA the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan. Whether Walter Corrigan or Corrigan Enterprises, Inc. exercised any authority or control respecting management or disposition of the plan's assets, depends, therefore, upon whether either Defendant exercised authority or control over the trustees.
Appellants contend that this instruction permitted the jury to find that Corrigan and Corrigan Enterprises were fiduciaries with respect to the sale of the Trust's stock merely by virtue of their status as, respectively, officer, director, and principal shareholder of Corrigan Enterprises and former employer of the trustees. In reviewing a jury instruction, Pierce v. Ramsey Winch Co., 753 F.2d 416, 425 (5th Cir.1985) (quoting McCullough v. Beech Aircraft Corp., 587 F.2d 754, 759 (5th Cir.1979)). Applying this standard to the charge before us, we conclude that the district court committed reversible error.
ERISA Sec. 3(21)(A), 29 U.S.C. Sec. 1002(21)(A) (1982), states:
[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets ... or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. (Emphasis added.)
The phrase "to the extent" indicates that a person is a fiduciary only with respect to those aspects of the plan over which he exercises authority or control. See Brandt v. Grounds, 687 F.2d 895, 897 (7th Cir.1982). For example, if an employer and its board of directors have no power with respect to a plan other than to appoint the plan administrator and the trustees, then their fiduciary duty extends only to those functions. See ...
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