Martin v. Feilen
| Decision Date | 03 June 1992 |
| Docket Number | Nos. 91-1086,91-1295,s. 91-1086 |
| Parties | , 15 Employee Benefits Cas. 1545 Lynn MARTIN, Secretary of Labor, United States Department of Labor, Plaintiff-Appellant, v. Harvey N. FEILEN, Armin P.W. Thielking, Paul W. Thielking, Stephen K. Thielking, John L. Henss, R & N Garage Company, Lakewood Marine Ltd., Paul W. Thielking, O.D., P.C., John L. Henss, C.P.A., Oden, Henss & Thielking, and Capitol Resources Corporation, Defendants-Appellees. Lynn MARTIN, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. Harvey N. FEILEN; Armin P.W. Thielking; Defendants, Paul W. Thielking, Stephen K. Thielking, John L. Henss, Defendants-Appellants, R & N Garage Company, Lakewood Marine Co., Defendants, Paul W. Thielking, O.D., P.C., Stephen K. Thielking, C.P.A., P.C., John L. Henss, C.P.A., Oden Henss, & Thielking, Capitol Resources Corporation, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Eighth Circuit |
James L. Craig, Washington, D.C., argued (Robert P. Davis, Marc I. Machiz, Karen L. Handorf and Marcia E. Bove, on the brief), for plaintiff-appellant.
Steven Udelhofen, Des Moines, argued (A.P.W. Thielking, on the brief), for defendants-appellees.
Before WOLLMAN, Circuit Judge, ROSS, Senior Circuit Judge, and LOKEN, Circuit Judge.
In this case the Secretary of Labor urges us to conclude that controlling stockholders and directors of Feilen Meat Company ("FMC"), and the company's accountants, breached their fiduciary duties under ERISA 1 when they engaged in complex financial transactions that destroyed the company, thereby wiping out the employees' stock ownership plan. The Secretary appeals the district court's judgment that defendants committed many breaches of fiduciary duty but did not cause money damage to the plan. We construe defendants' fiduciary duties more narrowly than did the district court. However, we also conclude that the Secretary may recover money damages on behalf of the plan for the breaches of duty that did occur. Accordingly, we affirm in part, reverse in part, and remand for further proceedings.
FMC conducted beef boning and breaking operations in Des Moines, Iowa. Before the events in question, FMC employed approximately fifty unionized workers, posted modest annual profits, and carried little if any debt. FMC established an employee profit-sharing plan in the late 1960s. In May 1974, with the employees' approval, FMC created the Feilen Meat Co. Employee Stock Ownership Plan (the "ESOP") which soon took over the assets of the profit-sharing plan. By 1981, the ESOP owned twenty-eight percent of FMC's stock. That stock was the ESOP's only asset.
Harvey Feilen founded FMC and was its primary stockholder and the ESOP's sole trustee until the fall of 1977, when he sold his controlling interest to his son Nick and defendants A.P.W. Thielking and Dr. Paul W. Thielking. Neither A.P.W., a retired insurance broker, nor Paul, an optometrist, had any experience in the meat industry, and neither participated in the daily operations of FMC as directors. This leveraged buy-out transaction was proposed and structured by FMC's accountant, defendant John Henss, who had also proposed and structured the ESOP. A.P.W. and Paul are the father and uncle of defendant Stephen Thielking, Henss's partner at defendant Oden, Henss & Thielking ("OHT"), the accounting firm that served FMC throughout the period in question. 2
Nick Feilen became the ESOP's sole trustee in November 1977. A.P.W. became a co-trustee in May 1982. Nick settled separately with the Secretary and was the government's lead trial witness. Nick testified that he had no real understanding of an ESOP trustee's duties and relied heavily on Henss's advice, and that the OHT accountants made all valuation decisions relating to the ESOP's transactions in FMC's stock.
Beginning with the leveraged buy-out in 1977, and ending with FMC's demise in February 1985, the corporate insiders engaged in a complex series of transactions involving FMC, its stockholders, related entities, and in some cases the ESOP. The transactions challenged by the Secretary were done at the recommendation of Henss and Stephen Thielking, who had personal financial interests in many of the transactions in addition to their role as FMC's outside accountants. A.P.W. and Paul Thielking were FMC directors who also stood to gain personally from many of the transactions, but the record does not otherwise reflect their personal involvement in managing or investing the ESOP's assets.
The various self-dealing transactions were intended to provide diversification and tax benefits to FMC and its stockholders, including the ESOP. Instead they brought ruin, although defendants insist that FMC failed because of adverse conditions in the meat industry. When FMC closed its doors, its employees lost both their jobs and the entire value of their retirement accounts in the ESOP.
The Secretary brought this action in February 1988, charging that defendants breached their fiduciary duties under §§ 404, 405 and 406 of ERISA, 29 U.S.C. §§ 1104-06. 3 After a two-week trial, the district court held that all of the defendants were ERISA fiduciaries who had breached their fiduciary duties of undivided loyalty and prudence with respect to many of the transactions at issue. The court rejected the Secretary's claim that defendants had engaged in prohibited transactions in violation of § 1106 because "the transactions in which the ESOP purchased or sold shares of FMC stock ... were for adequate consideration"; the Secretary has not appealed that ruling. The district court declined to award damages because the Secretary failed to prove that the breaches of fiduciary duty proximately caused measurable monetary loss to the ESOP. The court permanently enjoined defendants "from serving directly or indirectly as fiduciaries of any ESOP" but did not enjoin the accountant defendants from acting as service providers to ERISA plans.
Both sides timely appealed. The Secretary argues (i) that A.P.W. and Paul Thielking breached their ERISA fiduciary duties in misappropriating a stock option belonging to FMC, an issue the district court did not address; and (ii) that the district court erred in failing to award money damages for losses to the ESOP, and in declining to enjoin Henss, Stephen Thielking, and OHT from acting as service providers to any ERISA plan. In their cross appeal, appellees argue that they were not ERISA fiduciaries, that ERISA does not apply to FMC business transactions, and that no fiduciary duties were breached.
Borrowing from trust law, ERISA imposes high standards of fiduciary duty upon those responsible for administering an ERISA plan and investing and disposing of its assets. The ERISA fiduciary is subject to a strict standard of care, 29 U.S.C. § 1104(a)(1); 4 is liable for known breaches of co-fiduciaries, § 1105; and may not engage in prohibited transactions, § 1106.
An ESOP is an ERISA plan which invests primarily in "qualifying employer securities," typically stock of the employer creating the plan. § 1107(d)(6)(A). Congress expressly intended that the ESOP would be both an employee retirement benefit plan and a "technique of corporate finance" that would encourage employee ownership. See 129 Cong.Rec. S16629, S16636 (Daily ed. Nov. 7, 1983) (statement of Sen. Long). The concept has been roundly criticized, particularly because, as this case graphically illustrates, an ESOP places employee retirement assets at much greater risk than does the typical diversified ERISA plan. See generally Note, The False Promise of Worker Capitalism: Congress and the Leveraged Employee Stock Ownership Plan, 95 Yale L.J. 148, 154 (1985). But that is a question for Congress.
To promote and subsidize use of ESOPs, Congress included specific ESOP provisions in both ERISA and the Internal Revenue Code. 5 In 1979, in issuing proposed regulations the Secretary stated that the statutory exemptions for ESOPs in ERISA
do[ ] not relieve a fiduciary ... from the general fiduciary responsibility provisions of [§ 1104] which, among other things, require a fiduciary to discharge his duties respecting the plan solely in the interests of plan participants and beneficiaries and in a prudent fashion ... nor does it affect the requirement ... that a plan must be operated for the exclusive benefit of employees and their beneficiaries.
44 Fed.Reg. No. 168, at p. 50369 (Aug. 28, 1979). In general, that may be true. But the special statutory rules applicable to ESOPs inevitably affect the fiduciary's duties under § 1104. For example, an ESOP is exempted from ERISA's duty to "diversify the investments of the plan," §§ 1104(a)(1)(C) & (2). Without this exemption, an ESOP fiduciary would breach a statutory duty to diversify by investing only in the employer's stock. Of great significance to this case, § 1108(e)(3)(A) exempts an ESOP's transactions in the employer's stock from ERISA's strict prohibitions against dealing with a party in interest, and against self-dealing, that is, "deal[ing] with the assets of the plan in his own interest or for his own account." 29 U.S.C. § 1106(b)(1); see also 29 C.F.R. § 2550.408e(a). Indeed, an ESOP may borrow from the employer to buy the employer's stock, § 1108(b)(3), another type of transaction from which ERISA prohibits non-ESOP fiduciaries. See Donovan v. Cunningham, 716 F.2d 1455, 1464-66 & n. 24 (5th Cir.1983).
The Secretary's approach to the ESOP issues in this case is fundamentally flawed. On the one hand, she ignores the statutory ESOP exemptions, arguing broadly that defendants violated their fiduciary duties simply by engaging in "self dealing" and "conflicts of interest." On the other hand, because the ESOP's only asset was FMC stock, the Secretary argues that defendants' ERISA fiduciary duties were implicated by every FMC corporate...
To continue reading
Request your trial
-
Cook Techs., Inc. v. Panzarella, CIVIL ACTION NO. 15-CV-1028
...complete defense to a charge of imprudence." Howard v. Shay, 100 F.3d 1484, 1489 (9th Cir. 1996)(citing, inter alia, Martin v. Feilen, 965 F.2d 660, 670-671 (8th Cir. 1992), Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th Cir. 1983) and Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cir. 1982)). ......
-
Spear v. Fenkell, CIVIL ACTION NO. 13-2391
...plan (ESOP)1. See 26 U.S.C. § 133. This section was designed to promote and subsidize the use of ESOPs. See, e.g., Martin v. Feilen, 965 F.2d 660, 664 n. 5 (8th Cir. 1992) (discussing the "lure of tax benefits" that drove these transactions). This favorable tax treatment was repealed on Aug......
-
Ramos v. Banner Health
...must exercise its equitable powers to "fashion the remedy best suited to the harm." Tussey I , 850 F.3d at 960 (citing Martin v. Feilen , 965 F.2d 660, 670 (8th Cir. 1992) ); see also Donovan II , 754 F.2d at 1055 ("Since we have rejected the three measures of loss proposed to us, our task ......
-
Wit v. United Behavioral Health
...request that remedy here. Id. at 28-29 (citing 29 U.S.C. § 1109(a); Restatement (Third) of Trusts § 37, cmt. D (2003); Martin v. Feilen, 965 F.2d 660, 673 (8th Cir. 1992); Donovan v. Bryans, 566 F. Supp. 1258, 1268 (E.D. Pa. 1983)). Plaintiffs ask that a special master be appointed to overs......