963 F.2d 1005 (7th Cir. 1992), 90-2780, Etter v. J. Pease Const. Co., Inc.

• Date: 13 May 1992
• Docket Number: 90-2780.
• Citation: 963 F.2d 1005
• Parties: Richard J. ETTER, Plaintiff-Appellant, v. J. PEASE CONSTRUCTION COMPANY, INCORPORATED; J. Pease Construction Company, Incorporated, Profit Sharing Trust; Jack Pease; et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

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963 F.2d 1005 (7th Cir. 1992)

Richard J. ETTER, Plaintiff-Appellant,

v.

J. PEASE CONSTRUCTION COMPANY, INCORPORATED; J. Pease

Construction Company, Incorporated, Profit Sharing

Trust; Jack Pease; et al., Defendants-Appellees.

No. 90-2780.

United States Court of Appeals, Seventh Circuit

May 13, 1992

Argued Sept. 11, 1991.

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[Copyrighted Material Omitted]

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Bernard M. Baum, Alan H. Auerbach (argued), Baum & Sigman, Chicago, Ill., for plaintiff-appellant.

Irving M. Geslewitz (argued), William Anspach, Karen K. Litscher, Much, Shelist, Freed, Denenberg, Ament & Eiger, Chicago, Ill., Louis W. Brydges, Jr., Brydges, Riseborough, Morris, Franke & Miller, Waukegan, Ill., for defendants-appellees J. Pease Const. Co., Inc., J. Pease Const. Co., Inc. Profit Sharing Trust, Jack Pease, Sharon Dust, Marvin Miller, Timothy F. Miller and Troy Miller, all individually and as Trustees of the J. Pease Construction Company, Incorporated Profit Sharing Trust.

Before WOOD, Jr., ^[*] FLAUM, and RIPPLE, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

Richard Etter, the plaintiff-appellant, was hired by J. Pease Construction Co., Inc., ("Company") a land and site developer, in May 1987 and became a participant in the Company's Profit Sharing Trust ("Plan") December 31, 1988, retroactive to January 1, 1988. He quit the Company in April 1989, at which time his calculated share in the Plan was $3,062.11, comprising $2,383.94 in Company contributions and $678.17 in earnings. ¹ A few months later he sued the Company, its president, Jack Pease, the Plan, and the Plan's trustees, including Pease: collectively, the defendants-appellees. He raised several claims under the Employee Retirement Income Security Act ("ERISA"): 29 U.S.C. §§ 1001 et seq. Relevant here are claims that the trustees engaged in two prohibited transactions and breached their fiduciary duty to diversify. He also claimed he had not been paid for some overtime work and had been underpaid, in cash, for other overtime work, both violations of the Fair Labor Standards Act: 29 U.S.C. §§ 201 et seq. After a bench trial the district court found for the defendants on all counts and set forth its findings of fact and conclusions of law.

The Plan was adopted April 1984, effective July 1, 1983, to replace a union pension fund after Company employees voted to terminate Local 150 of the Operating Engineers Union as their bargaining representative. All six of the Company's employees at that time were designated trustees; subsequently, each employee who participated in the Plan for five years would become a trustee; and each trustee could cast one vote for each year of participation in the Plan. The Plan is unusual in that many, potentially all, of the benefitted employees are also trustees, managing and investing mostly their own money.

On December 30, 1985, the Plan loaned $24,000 to James Tonyan, a 10-year business acquaintance of Pease and a partner with him in three property developments. The loan was at 12% interest, a rate higher than the then-current bank rates, was secured by a mortgage on Tonyan's residence, a property worth more than $24,000, and was fully repaid December 10, 1987. At trial Etter challenged the propriety of this loan because it came on the heels of a $25,000 loan, 13 days earlier, by Tonyan to Pease, which itself came but 7 days after Pease and Tonyan, as business partners, purchased a parcel of property, Spruce Lake. Tonyan and Pease each paid $20,000 and signed a $100,000 note and mortgage to purchase the undeveloped acreage from Tonyan's recently widowed aunt. Although it was never shown that the Plan's money was improperly invested in property in which trustee Pease had a personal stake, the district court found the loan was a prohibited transaction per se. This is because it was to a business partner of a plan trustee; thus, it was to a party in interest. 29 U.S.C. §§ 1002(14)(I),

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1106(a)(1)(B). The district court also found that Etter had not established a basis for relief because the Plan had suffered no loss or other injury and no fiduciary had profited from the loan.

On December 10, 1987, the same day Tonyan repaid his loan and shortly after the Plan cashed-in an account with E.F. Hutton, ² it invested $112,850 in a local property venture known as Glacier Ponds. This investment virtually destroyed any diversity the Plan had because its net assets at the time were $127,993.43. Pease and another Plan trustee, Marvin Miller, were partners with the Plan in the Glacier Ponds venture. Pease personally contributed 56% of the purchase price, Miller 7%, and the Plan 37%. Pease and the other trustees, although not "sophisticated" investors, were experienced in real estate and knew the local market and development potential in the county. All trustees visited the parcel personally, inquired about an adjacent golf course that was being constructed by a reliable developer, investigated the possibility of annexation by the Village of Woodstock, and reviewed both an aerial photograph of the area and relevant floodplain maps. The trustees also considered several other properties before deciding to invest in Glacier Ponds. Subsequently, the Company performed extensive site improvements on the property at no charge to the Plan. Eighteen months after purchasing Glacier Ponds for $520,206, the Plan, Pease, and Miller sold their interests for a total of $910,000. The Plan realized a profit of $109,567.68, a 97% return on its investment over the 18-month period. The district court found the Glacier Ponds investment was not a prohibited transaction and that there was no breach of the duty to diversify because under the circumstances it was prudent not to do so.

Etter appeals the above findings of fact and conclusions of law as well as the determination that the Company did not owe him overtime pay. Appellees in turn request sanctions--their costs and attorney's fees--under Fed.R.App.P. 38. The issues raised at trial are all federal questions over which the federal courts have jurisdiction. We have jurisdiction on appeal of the district court's final order. 28 U.S.C. § 1291. For the reasons given below we affirm but deny sanctions.

Neither party addresses what constitutes the appropriate standard or standards for reviewing a district court's findings of fact or conclusions of law--a situation we hope has been remedied by our recent adoption of Circuit Rule 28(k), effective February 1, 1992. Two standards are uncontroverted. First, a district court's "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous...." Fed.R.Civ.P. 52(a). Second, where the district court has decided pure questions of law, now including questions of resident-state law, review is de novo. Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991). In between lies the somewhat troublesome and unsettled milieu of mixed legal and factual issues. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 110 S.Ct. 2447, 2458-59, 110 L.Ed.2d 359 (1990). As is the case here, "deferential review of mixed questions of law and fact is warranted when it appears that the district court is better positioned than the appellate court to decide the issue in question or that probing appellate scrutiny will not contribute to the clarity of legal doctrine." Salve Regina College, 111 S.Ct. at 1222 (quotation marks and citations omitted). We need not decide how deferential that review should be because the district court's judgment on the mixed issues raised passes appellate review even under a standard less deferential than clearly erroneous. Contrast Leigh v. Engle, 727 F.2d 113, 124 (7th Cir.1984) ("Leigh I ") (review is less deferential), with David Berg and Co. v. Gatto International Trading Co., 884 F.2d 306, 309 (7th Cir.1989) (clearly erroneous).

First, Etter asks us to reverse the district court's denial of relief regarding

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the Plan's loan to Tonyan. He argues the Plan is entitled to some sort of remedy, that the court "must impose a remedy," because it found the loan was a prohibited transaction. Our case law is otherwise.

In Leigh v. Engle, 858 F.2d 361 (7th Cir.1988), cert. denied, 489 U.S. 1078, 109 S.Ct. 1528, 103 L.Ed.2d 833 (1989) ("Leigh II "), we affirmed the district court's awarding relief for only one of three prohibited transactions. All three transactions consisted of the administrators' using employees' trust funds to purchase takeover stocks in which the administrators had a personal stake: the investment decisions were personally motivated without "adequate provision for the trust's best interests." Id. at 364. Collectively, the prohibited transactions greatly benefitted the trust, garnering "a whopping 72 percent return over a relatively brief time span." Id. at 363. Only one of the three prohibited transactions was a poor but still profitable performer. It returned a four percent profit in one year, a return less than "from a prudent alternative investment." Id. The plaintiffs obtained relief only for the loss of profit caused by this last transaction.

The lesson of Leigh II is clear: the fact that a transaction is prohibited under ERISA does not necessarily mandate a remedy, although it is a very dangerous area for trustees to explore, let alone attempt to exploit. Rather, the decision to impose a remedy lies within the court's discretion and should be "in tune with the case's realities." Id. at 368 (citing Patton v. Mid-Continent Systems, Inc., 841 F.2d 742, 748 (7th Cir.1988)).

Here, the district court found that "[g]iven the rate of return and the value of the collateral pledged, the Tonyan loan was an objectively prudent and reasonable transaction by the trustees." The court went on to conclude that "Etter has not shown any loss or injury to the plan or profit to a fiduciary...