Chao v. Hall Holding Co., Inc.
| Decision Date | 03 April 2002 |
| Docket Number | No. 00-3041.,No. 99-4142.,99-4142.,00-3041. |
| Citation | 285 F.3d 415 |
| Parties | Elaine L. CHAO, Secretary of the United States Department of Labor, Plaintiff-Appellee, v. HALL HOLDING COMPANY, INC., David L. Goldman, Kathleen A. Keating, George A. Ahearn, Michael F. Shields, and Goldman Financial Group, Inc., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Allen H. Feldman, Edward D. Sieger (argued and briefed), Nathaniel I. Spiller (briefed), U.S. Dept. of Labor, Office of the Solicitor, Washington, DC, for Plaintiff-Appellee.
Katherine S. Kamen (briefed), LeBoeuf, Lamb, Greene & MacRae, Edward A. Scallet (argued and briefed), Groom Law Group, Washington, DC, Michael J. Frantz (briefed), Frantz Ward LLP, Cleveland, OH, for Defendants-Appellants.
Before: NORRIS and DAUGHTREY, Circuit Judges; ZATKOFF, Chief District Judge.*
Plaintiff Appellee Elaine L. Chao,1 Secretary of the United States Department of Labor, brought this action against Defendants Appellants, Hall Holding Company, Inc., David L. Goldman, Kathleen A. Keating, George A. Ahearn, Michael F. Shields, and Goldman Financial Group, Inc. In her complaint, the Secretary alleged that various components of an employee stock ownership plan (hereinafter "ESOP")2 for the benefit of employees of a subsidiary of Hall Holding Company violated the Employee Retirement Income Security Act (hereinafter "ERISA"), 29 U.S.C. § 1001, et seq. Specifically, the Secretary alleged that defendants breached their fiduciary duties by purchasing stock on the ESOP's behalf without adequate investigation and by overpaying for the stock. The district court agreed with the Secretary's position and granted her motion for summary judgment, finding inter alia: (1) defendants, as fiduciaries, failed to conduct a prudent and independent investigation to determine the fair market value of the stock; (2) a showing of harm or loss is not an element of a claim under 29 U.S.C. § 1106(a)(1); and (3) defendants owed the employee stock ownership plan $1,049,549.00, plus interest, which represented the difference between the amount originally paid for the stock and the fair market value of the stock as determined by the district court. For the reasons that follow, we AFFIRM the judgment of the district court.
Prior to 1986, defendant Goldman Financial Group, Inc. (hereinafter "defendant GFGI") was a broker that would help business entities buy and sell other businesses. However, in 1986, defendant GFGI began purchasing and holding companies for its own account. As alleged in the Secretary's complaint, the owners of defendant GFGI are David L. Goldman (hereinafter "defendant Goldman") and a trust benefitting defendant Goldman's children.
In the summer of 1988, defendant GFGI purchased Hall Chemical Company (hereinafter "Hall Chemical") through Hall Holding Company (hereinafter "Hall Holding") for approximately $21 million. Hall Holding is a subsidiary of defendant GFGI and a holding company whose primary asset is Hall Chemical. Defendant Goldman was the sole director of Hall Holding. The president of Hall Chemical was George A. Ahearn (hereinafter "defendant Ahearn") and its Vice-President of Finance and Chief Financial Officer was Michael F. Shields (hereinafter "defendant Shields"). Defendant Ahearn and defendant Shields were also the trustees of the Hall Chemical employee stock ownership plan (hereinafter "Hall Chemical ESOP"). After the acquisition of Hall Chemical, Hall Holding owned 95% of Hall Chemical, and defendant Ahearn had the right to acquire the remaining 5%.
The final defendant is Kathleen A. Keating (hereinafter "defendant Keating"), the Director of Human Resources for defendant GFGI. After the purchase of Hall Chemical, defendant Keating was tasked with analyzing its compensation programs. As a result of her analysis and a meeting with a benefits consulting firm, defendant Keating made a number of recommendations, including the establishment of the Hall Chemical ESOP. Although defendant Goldman did not want to sell any stock, he was eventually persuaded that creation of the Hall Chemical ESOP was a good idea.
In order to set up the Hall Chemical ESOP, defendant Keating retained attorney James Shumaker of Choate, Hall & Stewart in Boston, Massachusetts, whom she described as "very well regarded in the Boston area as sort of a senior ERISA specialist." Throughout the summer of 1990, defendant Keating and Shumaker spoke on a daily basis about the Hall Chemical ESOP. Shumaker advised defendant Keating that an independent appraisal should be completed by a qualified independent appraiser. Consequently, defendant Keating contacted James Cunningham about the appraisal. Although defendant Ahearn referred to Cunningham as "probably the premiere of analysts, Wall Street analyst of specialty chemical companies," Cunningham had never "perform[ed] a valuation with regard to a subject company where an ESOP was purchasing an interest."
By way of background, Cunningham was employed by The First Boston Corporation. During his employ, he was asked to value defendant GFGI and its various properties, which included Hall Chemical. This was several months prior to the formation of the Hall Chemical ESOP. Cunningham completed this valuation in the spring of 1990. Soon after completing his valuation, Cunningham left The First Boston Company. After leaving, he was again contacted by defendant GFGI about completing a second valuation of Hall Chemical. Cunningham stated that he would complete a second valuation, but that his main priority was to find a job. Cunningham also explained that he would not be willing to inflate his first valuation of Hall Chemical. Finally, Cunningham said that he would consider any new information, but that he did not expect that this would "materially change" the prior valuation. These terms were acceptable to defendant GFGI.
In completing the second valuation, Cunningham explained that he performed a valuation of 100% of Hall Chemical. Although someone may have mentioned something about an ESOP, Cunningham stated that his only job was to value Hall Chemical. Further, Cunningham stated that if he had been asked to determine "how much an ESOP should pay for stock in a company," his valuation would have been different. In any event, Cunningham completed his second valuation of Hall Chemical in August 1990. His valuation determined that Hall Chemical was worth between $32.4 and $37.4 million, exclusive of debt, which the district court noted was consistent with his first valuation. See Reich v. Hall Holding Co., Inc., 990 F.Supp. 955, 958 (N.D.Ohio 1998).
Upon receiving Cunningham's second valuation, defendant Keating distributed it to several people, including defendant Ahearn, defendant Shields, Shumaker, and other people at defendant GFGI, whom defendant Keating believed to include defendant Goldman. After some discussion with Shumaker, changes were made to the valuation so that it would comply with proposed regulations concerning stock purchases by ESOPs. A finalized version of Cunningham's report was signed and dated September 5, 1990.
At this point, defendant Keating was left to determine a price to pay for the shares to be purchased by the Hall Chemical ESOP. During her deposition, defendant Keating explained how the eventual purchase price of $3.5 million was determined. First, the numbers of the valuation range, $32.4 and $37.4 million, were added and then divided by two. The resultant figure, $34.9 million, was multiplied by the amount of stock to be purchased, which defendant Keating erroneously said was 9.9%.3 The product of these two numbers was $3.4551 million. However, instead of using $3.4551 million as the purchase price, it was determined to be $3.5 million. Defendant Keating explained:
Given these values, I would do exactly the same number today, which is almost directly in the middle except it's a round number, so for purposes of communication, purposes of the documentation, it just would work better at 3.5 million than 3.[4551], which is, after all, you know, you know, .1 percent of the transaction or something that we're talking about here.
When asked who was involved in determining the $3.5 million figure, defendant Keating responded that defendant Goldman and another person at defendant GFGI would have been involved. Defendant Keating was then specifically asked what defendant Goldman's involvement was in the determination of the $3.5 million figure, to which she responded: "He had to be willing to sell the stock at a price."
After the $3.5 million figure was decided upon, it was taken to defendant Goldman for his approval, which was given. The next step was to prepare the Hall Chemical ESOP documents, which were entitled The Hall Chemical Company Employee Stock Participation Plan. Once prepared, these documents provided that Hall Holding was the administrator and named fiduciary. As the sole member of Hall Holding's Board of Directors, defendant Goldman had the authority to appoint individuals to administer the Hall Chemical ESOP and to appoint trustees to invest plan assets. In this capacity, defendant Goldman appointed defendant Ahearn and defendant Shields as members of the committee which served as administrator of the Hall Chemical ESOP for purposes of ERISA. Further, defendant Ahearn and defendant Shields were appointed trustees of the Hall Chemical ESOP. In this capacity, they secured a loan4 in the amount of $3.5 million from a Master Trust5 sponsored by defendant GFGI. The loan amount was used to purchase 9.96%6 of the stock in Hall Holding, not Hall Chemical, the company valued by Cunningham.
On September 21, 1990, defendant Ahearn and defendant Shields offered to purchase, for the Hall Chemical ESOP, 110...
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