Bruner v. Boatmen's Trust Co.

• Decision Date: 26 March 1996
• Docket Number: No. 4:92CV1850 CDP.,4:92CV1850 CDP.
• Parties: Richard W. BRUNER, et al., Plaintiffs, v. BOATMEN'S TRUST COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Missouri

918 F. Supp. 1347

Richard W. BRUNER, et al., Plaintiffs, v. BOATMEN'S TRUST COMPANY, Defendant.

No. 4:92CV1850 CDP.

United States District Court, E.D. Missouri, Eastern Division.

March 26, 1996.

COPYRIGHT MATERIAL OMITTED

Charles A. Seigel, III, Partner Seigel and Wolff, P.C., St. Louis, MO, for plaintiffs.

Elizabeth C. Carver, Associate David S. Slavkin, Bryan Cave, St. Louis, MO, for Boatmen's Trust Company.

Harold S. Goodman, Gallop and Johnson, St. Louis, MO, David T. Hamilton, Partner, Saale and Bailey, St. Peters, MO, for Allied Construction Equipment Company.

MEMORANDUM OPINION

PERRY, District Judge.

This case comes before the Court for decision following a non-jury trial. Plaintiffs, who are participants in a profit sharing plan, allege that their plan trustee breached ERISA's fiduciary duties by investing a large portion of the plan assets in a single guaranteed investment contract issued by one now-insolvent insurance company. The Court finds that defendant breached its fiduciary duties and will therefore enter judgment for plaintiffs.

Findings of Fact

1. Plaintiffs are participants in the Profit Sharing Plan and Trust (the "Plan") of Allied Construction Equipment Company ("Allied"), a Missouri corporation in the business of selling and leasing equipment to the construction industry. Allied is the Administrator and Named Fiduciary of the Plan. Defendant Boatmen's Trust Company ("Boatmen's") was the plan trustee at the time of the investment at issue here.

2. Under the Plan, Allied makes contributions to the trustee from time to time and participants receive distribution of their vested benefits upon death, retirement, disability or termination.

3. Allied first established the plan in 1968, and for approximately six years its investments were handled by the Associated Equipment Distributors Association ("AEDA"). The AEDA engaged John Hancock Insurance Company to render investment advice for the participating plans' assets. Allied was unhappy with the low rate of return on plan investments achieved by John Hancock and AEDA, and in approximately 1974, Allied moved the assets to a St. Louis bank with whom it did its banking business, Tower Grove Bank. In 1984, Tower Grove Bank merged with a much larger bank, Commerce Bank, who then became the successor trustee of the Plan. While Commerce Bank managed the funds, the Plan assets were heavily invested in bond funds, and Allied was somewhat dissatisfied with the performance of the plan portfolio. Allied had also become dissatisfied with Commerce's handling of its banking business, and had established a banking relationship with Boatmen's National Bank, then one of the largest banks in St. Louis and a related company of defendant Boatmen's Trust Company. In January 1988, Allied decided to investigate the possibility of appointing Boatmen's as the Plan trustee, believing that it was prudent to have the Plan investments handled by the same institution with whom it did its commercial banking.

4. On January 8, 1988, plaintiffs John Gammon, Tom Held, and Stan Novak met with Stephen Mace and Charles Wetzel of Boatmen's to discuss transferring the Plan assets. Mace's job at Boatmen's was marketing or new business development, and Wetzel was the commercial loan officer with whom Allied had a relationship. This January 8, 1988 meeting lasted for approximately one hour and was the first time that the Allied representatives had discussed the Plan investments with Boatmen's.

At the meeting, Mace recommended to Allied that 75% of the Plan assets be invested in Boatmen's G Fund, and the remaining 25% be invested in the Boatmen's Institutional Liquid Asset Fund. Mace told Allied that the Boatmen's G Fund would have a five year maturity and pay an effective interest rate of 8.5% compounded annually.

Before making this recommendation, Boatmen's inquired generally about the size of the assets and learned that Allied wanted a stable investment that would provide a good return without being subject to frequent market changes. Boatmen's did not obtain any documentation about the fund before the meeting, and at the meeting did not inquire about the specifics of the fund, its history, or about anticipated contributions or payouts. Because no one asked, Boatmen's did not learn that a retirement payment in excess of ten percent of total fund assets would be payable in the next few months. Boatmen's did not obtain any written statement of the clients' investment objectives, nor did it inquire into the principals' investment experience.

Although Boatmen's had internal policies that plans should be given written descriptions of the purchased products and should provide written statements that they understood the risks and restrictions involved in their investments, no such writings were used in this case. Boatmen's did not provide any written description of the G Fund, and did not tell the Allied representatives that the G Fund invested in insurance contracts, but told them simply that it was a Guaranteed Investment Contract fund with a five year maturity and an effective interest rate of approximately 8.5%. Because of the Allied representatives' negative feelings about the performance of their fund when John Hancock was the advisor, the mention of an insurance company would have been a red flag to them. Because no one from Boatmen's mentioned that the G Fund invested in insurance companies, however, the parties did not discuss this issue. The Allied representatives believed that Boatmen's was guaranteeing the investment in the G Fund.

5. In late January of 1988, Allied formally appointed Boatmen's as the successor trustee. Boatmen's assigned Michael Kenneally as the investment manager and James Clement as the administrative officer of the Plan assets.¹ On February 8, 1988, Allied transferred Plan assets in the amount of $322,642.09 to Boatmen's. On March 11, 1988, all remaining funds at Commerce were transferred, in the amount of $9,131.34.

6. When it received the Plan assets on February 8, 1988, Boatmen's temporarily invested all the funds in the Liquid Asset account, which was simply an interest bearing fund from which money could be withdrawn on demand. The next day, February 9, 1988, Boatmen's invested $249,986.23, approximately 77% of the Plan assets, in the Boatmen's G Fund. The G Fund applied these funds toward the purchase of units in a GIC issued by Executive Life Insurance Company of California ("Executive Life"). The Executive Life GIC was to mature on March 1, 1993 and was to pay an effective annual interest rate of 8.65%. The remaining funds were left in the Liquid Asset money market account.

7. Boatmen's G Fund is a collective investment fund which invests in guaranteed investment contracts ("GICs") issued by various insurance companies. The G Fund accumulates funds from employee benefit plan contributions until a sufficient amount is available for investment, and then purchases a GIC issued by an insurance company. A GIC is an agreement with an insurance company by which the purchaser of the GIC is entitled to the repayment of the purchase price plus a stated amount of interest at the maturity date specified in the GIC. A GIC is not a marketable commodity and cannot be redeemed prior to maturity except in limited circumstances or at substantial penalty as specified in the GIC. The GIC is guaranteed only by the insurance company.

8. Boatmen's first established its G Fund in approximately 1985, and had purchased ten GICs before the one involved here. Boatmen's engaged an outside consulting firm, William M. Mercer-Meidinger, Incorporated, to assist in the purchase of GICs for Boatmen's G Fund, and Boatmen's and Mercer-Meidinger together made the selection of the insurance company for each GIC. Their practice, followed in this case and in the preceding ten, was to send Boatmen's GIC specifications out for bids to interested insurance companies, and then to select the particular insurance company based on a variety of factors, including the rate of return offered by the insurance company, the other terms agreed to, and the "quality" of the insurance company.

9. At the time Boatmen's G Fund purchased the Executive Life GIC, Boatmen's knew that Executive Life invested heavily in below investment grade securities (junk bonds). It also knew that a related company, Executive Life Insurance Company of New York, had been required by the New York Insurance Commissioner to stop adding junk bonds to its portfolio. In fact, in the two prior GIC purchases for Boatmen's G fund in 1987, Mercer-Meidinger and Boatmen's had rejected GIC bids by Executive Life because of "quality considerations" and Executive Life's refusal to agree to a buy-back provision if Executive Life's industry ratings fell At trial the Boatmen's witnesses testified that they did not believe that Executive Life was any riskier than other insurance companies, but that their concern had been that it suffered from bad publicity, because of the negative connotations then attached to junk bonds and because of the New York Insurance Commissioner situation. Both concerns about Executive Life were well known in the industry at the time. None of this, of course, was disclosed to plaintiffs, as plaintiffs were not even told that the GIC invested in an insurance company.

10. At the time of the GIC purchase, Executive Life carried a rating of A+ from A.M. Best, a service that rates insurance companies. Part of the bid specification stated that Boatmen's would only purchase GICs from companies having an A or better rating from Best's, and the ten previous GICs contained language that the insurance company would allow Boatmen's to withdraw its investment at book value if the company's rating fell to B+ or below at any time. Although this was requested for the GIC at issue here, the Executive Life GIC purchased by Boatmen's G Fund on February 9, 1988 did not contain such a clause because Executive Life...