Ershick v. United Missouri Bank of Kansas City, N.A.

• Decision Date: 04 November 1991
• Docket Number: No. 90-3283,90-3283
• Parties: , 14 Employee Benefits Cas. 1848 James R. ERSHICK; Gary R. Frost; Forrest D. Jackson; Harold Luttrell; Kenneth L. Lutjen; Paul Matthews; Adrian T. Peeler; Teddy Link Pittman; Robert K. Rusk; Ernest D. Smith; Michael T. Walter; Alan D. Weiss and David A. Lindblade, Plaintiffs-Appellants, v. UNITED MISSOURI BANK OF KANSAS CITY, N.A., Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 660

948 F.2d 660

60 USLW 2387, 14 Employee Benefits Cas. 1848

James R. ERSHICK; Gary R. Frost; Forrest D. Jackson;

Harold Luttrell; Kenneth L. Lutjen; Paul Matthews; Adrian

T. Peeler; Teddy Link Pittman; Robert K. Rusk; Ernest D.

Smith; Michael T. Walter; Alan D. Weiss and David A.

Lindblade, Plaintiffs-Appellants, v. UNITED MISSOURI BANK OF KANSAS CITY, N.A., Defendant-Appellee.

No. 90-3283.

United States Court of Appeals, Tenth Circuit.

Nov. 4, 1991.

Bruce Keplinger of Payne & Jones, Chartered, Overland Park, Kan., for plaintiffs-appellants.

Gardiner B. Davis (Therese M. Schuele with him, on the brief) Kansas City, Mo., for defendant-appellee.

Before SEYMOUR, BARRETT and BRORBY, Circuit Judges.

BARRETT, Senior Circuit Judge.

James R. Ershick, et al., plaintiffs below, appeal from an order and judgment entered in favor of United Missouri Bank of Kansas City (UMB) following trial to the court. A summary of the relevant facts will facilitate our review.

Gordon Greb founded Greb X-Ray Company (Greb X-Ray), a closely held corporation engaged in selling and servicing medical diagnostic equipment, in the 1950's. Greb X-Ray was a Missouri corporation with its principal place of business in Lenexa, Kansas. Gordon Greb served as the chief executive officer and chairman of the board of Greb X-Ray until his death in 1981. Donald Curtright (Curtright) succeeded Gordon Greb as chief executive officer and chairman of the board.

In 1959, Greb X-Ray established the Greb X-Ray Profit Sharing Plan. In 1982, after Gordon Greb's death, the Greb X-Ray shareholders unanimously approved the adoption of the Greb X-Ray Company Employee Stock Ownership Plan (ESOP) to replace the Profit Sharing Plan. Appellants are all former employees of Greb X-Ray, who are fully vested in the ESOP.

The ESOP was established pursuant to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001, et seq. The ESOP provided that "This Plan ... is intended to invest primarily in Company stock ... and shall be construed accordingly to permit investment of up to 100% of the Trust Fund therein." (R., Vol. VII, Tab 164 at p. 3). The ESOP also provided for two fiduciaries, a trustee and an administrator. At all times relevant hereto, Greb X-Ray served as the administrator and UMB served as trustee. In addition to serving as trustee, UMB was also a major secured creditor of Greb X-Ray and was the executor of the Gordon Greb estate.

The ESOP provided how the administrator would administer the plan:

3. The Administrator shall administer this Plan and shall construe this Plan and Trust Agreement and determine all questions of interpretation or policy in a manner not inconsistent with this Agreement, and the Administrator's construction or determination in good faith shall be final and conclusive.... The Administrator may correct any defect, supply any omission or reconcile any inconsistency in this Agreement in such manner and to such extents as shall be deemed necessary or advisable by it to carry out the purpose of this Agreement....

4. The Administrator shall have all powers necessary or appropriate to accomplish its duties under this agreement. Specifically, the Administrator shall have the following duties:

* * * * * *

(h) To pass upon administrative matters relative to this Plan and Trust;

* * * * * *

(1) To direct the Trustee(s) with regard to purchases of Company stock and the fair market value thereof.

(Addendum to Brief of Appellants, Vol. I, Tab 1 at pp. 38-39).

The ESOP also detailed the duties of the trustee, including:

[T]he Trustee shall have the following powers in addition to those vested elsewhere in the plan or by law ...:

* * * * * *

(1) To invest any or all of the Trust Fund in Company Stock.... All purchases and sales of Company Stock shall be made only at the direction of the Administrator. The Administrator shall determine the terms upon which all purchases of Company stock shall be made. All purchases shall be at prices which, in the best judgment of the Administrator, do not exceed the fair market value of the securities in question.

(Addendum to Brief of Appellants, Vol. I, Tab 1 at p. 30).

Following Gordon Greb's death in 1981, Greb X-Ray's fortunes declined precipitously under the direction of Curtright. (R., Vol. VII, Tab 164 at p. 4). By the summer of 1983, Greb X-Ray's prospects were undermined by a number of factors, including: Curtright's management style, which had alienated Greb X-Ray's employees and customers; Greb X-Ray's obligation to purchase company stock from Gordon Greb's estate; UMB's lowering of Greb X-Ray's borrowing limit to three and one-half million dollars; Greb X-Ray's spending of $50,000 per month for a company airplane; and Greb X-Ray loans made to Curtright at Curtright's direction totalling approximately $120,000. Id. at 4-5.

The ESOP did not purchase any Greb X-Ray stock in 1982. However, the ESOP did purchase 410 shares in 1983 at a price of $300 per share and 899 shares in 1984 at a price of $285 per share. The stock was purchased from Greb X-Ray employees. With these stock purchases, the ESOP became the majority shareholder in Greb X-Ray. ¹ The ESOP did not purchase any Greb X-Ray shares after 1984.

These stock purchases were all made by UMB at the direction of Greb X-Ray as the ESOP's administrator. Before implementing these purchase directives, UMB ascertained that a current stock valuation was on file and that it was used to fix the purchase price of the stock acquired. (R., Vol. VII, Tab 164 at p. 5). The stock valuations ($300 in 1983 and $285 in 1984) were established annually by an independent appraiser not affiliated with Greb X-Ray. Id.

From 1982 to 1985, the net asset balance of the ESOP fluctuated from a high of $2,430,658 in 1983 to a low of $1,062,668 in 1985. (R., Vol. IX at p. 308). Similarly, the ESOP's general (non-Greb X-Ray stock) investments declined from $936,206 in 1982 to $117,061 in 1985. Id. During this same period, Greb X-Ray's net pre-tax profits were: 1982, profit of $532,472; 1983, loss of $264,709; 1984, profit of $129,852; 1985, loss of $829,793. (R., Vol. VII, Tab 164 at p. 4).

Between March, 1985, and January, 1986, the appellants left the employ of Greb X-Ray. As fully vested ESOP participants, each appellant received an annual statement from UMB relative to their individual accounts. The 1986 statement reflected that their account values had declined by approximately 75% of their former values. (R., Vol. VIII at p. 128; Plaintiff's Exhibits 10, 56-67).

Appellants filed this action in 1987 alleging that Greb X-Ray, UMB, the ESOP, and Curtright had violated their fiduciary duties under Section 404(a) of ERISA, 29 U.S.C. § 1104(a) by imprudently investing in Greb X-Ray stock (Count I), and by participating in prohibited transactions in violation of Section 406 of ERISA, 29 U.S.C. § 1106 (Count II). Appellants sought damages representing "the value of what their plan assets would have been worth, had they been prudently and properly invested" (R., Vol. I, Tab 4 at p. 4), interest, punitive damages, and attorney fees. Appellants also sought immediate distribution of benefits from the ESOP (Count III).

All parties moved for summary judgment. The district court entered an order in which it: denied appellants' motion for summary judgment; granted summary judgment to Greb X-Ray, the ESOP, and Curtright as to Count III; granted UMB's motion for summary judgment in full. Thereafter, appellants moved for reconsideration and Greb X-Ray, the ESOP, and Curtright moved for summary judgment on Counts I and II.

Subsequent thereto, the district court entered an order in which it granted appellants' motion for reconsideration in part by reinstating their Count I claim against UMB. The court also granted summary judgment to Greb X-Ray, the ESOP, and Curtright on Count II but denied their motion for summary judgment on Count I.

Prior to trial, appellants settled with Greb X-Ray, the ESOP, and Curtright. Thereafter, a two-day trial to the court proceeded on appellants' Count I claim against UMB within which appellants alleged that UMB had violated § 1104(a) ² by imprudently investing in Greb X-Ray during a time when the financial condition of Greb X-Ray was deteriorating and by failing to attempt to sell some or all of the Greb X-Ray stock held by the ESOP as it learned that the financial condition of Greb X-Ray was deteriorating.

UMB defended on the basis that it did not make or participate in any imprudent investments in violation of § 1104. UMB argued that it purchased the Greb X-Ray stock at the direction of Greb X-Ray as the ESOP's administrator in accordance with the specific provisions of the ESOP.

Following trial to the court, the district court entered a memorandum order, finding that UMB had not violated any duty it owed appellants under ERISA. In so doing, the court found, inter alia, that: UMB purchased Greb X-Ray stock for the ESOP from Greb X-Ray employees who wished to sell their stock, which purchases were made at the direction of ESOP administrator; the value of the stock was determined annually by an independent appraiser not affiliated with Greb X-Ray; the credible evidence shows that the valuations were not done improperly; there was no credible evidence to show any prospective buyers, other than Greb X-Ray, its employees, or the ESOP for Greb X-Ray stock in the mid-1980's; UMB was not informed of any potential buyers for Greb X-Ray stock nor did it make any inquiries concerning the existence of potential buyers; in 1985, unbeknownst to UMB, five employees attempted to oust Curtright; UMB routinely gave its proxy to Curtright; there was no evidence to indicate that UMB's motive in giving Curtright its proxy was to perpetuate Curtright's control of Greb X-Ray; and plaintiffs (appellants) introduced no credible evidence to show that UMB was aware of Curtright's mismanagement.

The court concluded that: UMB, as a directed t...