Dairy Fresh Corp. v. Poole

• Decision Date: 09 August 2000
• Docket Number: No. Civ.A. 96-0187-CB-C.,Civ.A. 96-0187-CB-C.
• Citation: 108 F.Supp.2d 1344
• Parties: DAIRY FRESH CORPORATION, as Plan Administrator of the Dairy Fresh Employee Stock Ownership Plan and in its corporate capacity, Plaintiff, v. Victor POOLE, in his capacity as the Trustee of the Dairy Fresh Employee Stock Ownership Plan, and the Dairy Fresh Employee Stock Ownership Plan, Defendants, Alexis M. Herman, Secretary of the United States Department of Labor, Plaintiff, v. Dairy Fresh Corporation, as Plan Administrator of the Dairy Fresh Employee Stock Ownership Plan and in its corporate capacity, Victor Poole, in his capacity as Trustee of the Dairy Fresh Employee Stock Ownership Plan, and the Dairy Fresh Employee Stock Ownership Plan, Defendants.
• Court: U.S. District Court — Southern District of Alabama

108 F.Supp.2d 1344

DAIRY FRESH CORPORATION, as Plan Administrator of the Dairy Fresh Employee Stock Ownership Plan and in its corporate capacity, Plaintiff, v. Victor POOLE, in his capacity as the Trustee of the Dairy Fresh Employee Stock Ownership Plan, and the Dairy Fresh Employee Stock Ownership Plan, Defendants, Alexis M. Herman, Secretary of the United States Department of Labor, Plaintiff, v. Dairy Fresh Corporation, as Plan Administrator of the Dairy Fresh Employee Stock Ownership Plan and in its corporate capacity, Victor Poole, in his capacity as Trustee of the Dairy Fresh Employee Stock Ownership Plan, and the Dairy Fresh Employee Stock Ownership Plan, Defendants.

No. Civ.A. 96-0187-CB-C.

United States District Court, S.D. Alabama, Northern Division.

August 9, 2000.

COPYRIGHT MATERIAL OMITTED

James H. Seale, III, Greensboro, AL, Matthew C. McDonald, Miller, Hamilton, Snider & Odom, Mobile, AL, Gary S. Tell, U.S. Dept. of Labor, Office of the Solicitor, Plan Benefits Security Division, Washington, D.C., for Dairy Fresh Corporation, plaintiff.

A. Clay Rankin, III, Douglas L. McCoy, Hand Arendall, L.L.C., Mobile, AL, for Lemuel Morrison, Beatrice Morrison, Lemuel, John L. Morrison, intervenors-plaintiffs.

Gary S. Tell, U.S. Dept. of Labor, Office of the Solicitor, Plan Benefits Security Division, Washington, D.C., Michael Schloss, Trial Attorney, U.S. Dept. of Labor, Office of the Solicitor, Plan Benefits Security Division, Washington, D.C., Timothy D. Hauser, U.S. Department of Labor, Plan Benefits Security Division, Washington, DC, for United States Department of Labor, intervenor-plaintiff.

Wade B. Perry, Jr., Johnstone, Adams, Bailey, Gordon & Harris, Mobile, AL, for Victor Poole, defendant.

Gary S. Tell, U.S. Dept. of Labor, Office of the Solicitor, Plan Benefits Security Division, Washington, D.C., for Alexis Herman, defendant.

MEMORANDUM OPINION AND ORDER

BUTLER, Chief Judge.

This matter is before the Court on motions for summary judgment filed by Alexis Herman, Secretary of Labor and by Dairy Fresh Corporation. At the heart of this case is whether plaintiff Dairy Fresh Corporation ("Dairy Fresh") can bring an action which, if successful, would drastically reduce the holdings of the Employee Stock Ownership Plan (hereinafter "the ESOP" or "the Plan") created by the company. The Secretary of Labor has filed a complaint in intervention on behalf of the Plan's participants and beneficiaries opposing the company's action. The Plan's trustee, Victor Poole, the defendant in this action, has taken inconsistent positions on the proposed reformation of the Plan sought by Dairy Fresh. Initially Poole agreed with Dairy Fresh that the percentage of the company held by the ESOP should be reduced by almost half. After the complaint in intervention, Poole aligned himself with the Secretary, taking the position that Dairy Fresh cannot divest the ESOP of a substantial portion of its assets.

Not only does the Secretary oppose the claims asserted by Dairy Fresh in this action, she also seeks the company's removal as Plan Administrator, claiming that the company breached its fiduciary duty to the Plan by bringing this action in the first instance. Furthermore, the Secretary seeks the removal of Poole as Plan Trustee, alleging that Poole has breached his fiduciary duty by failing to defend vigorously the Plan's assets from Dairy Fresh's attempted reformation.

Upon extensive review of the undisputed evidence and careful consideration of all of the issues raised in the numerous pleadings and briefs filed by the parties, the Court finds: (1) that Dairy Fresh has no cause of action against Poole, (2) that by actively seeking to divest the Plan of its assets Dairy Fresh has breached its fiduciary duty to the Plan and its participants and beneficiaries and (3) that Poole's initial acquiescence to Dairy Fresh's position in this action and his failure to investigate the underlying claim amounts to a breach of fiduciary duty. The factual and legal bases for the Court's conclusions are set out more fully below.

I. Findings of Fact

A. Background

In late 1988, Dairy Fresh Corporation established the Dairy Fresh Corporation Employee Stock Ownership Plan as an employee benefit plan within the meaning of the Employee Retirement Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. Prior to establishing the ESOP, Dairy Fresh enlisted the services of an attorney, Howard Neiswender of the law firm Tanner & Guin, to assist them. According to Willie E. Burt, who was president of Dairy Fresh at the time, the company relied completely on Neiswender to do whatever was necessary to create the ESOP. (Burt Oct. 8, 1997 Dep. at 15) The company had two equally important goals in creating the Plan. One was to provide a retirement plan for its employees. The other was to refinance the company's existing debt.¹ (Neiswender Dep. at 87-88)

Dairy Fresh, in its corporate capacity, established the ESOP on November 2, 1988, and named AmSouth Bank, N.A. as the trustee. The document governing the Plan ("Plan Document") vests the trustee with the power to control and manage plan assets: "The Trustee shall have the sole responsibility for management of the assets held under the Trust." Section 10.6(a) of the Plan Document, which deals with the diversion of the corpus or income of the trust, states as follows: "Except as provided below and otherwise specifically permitted by law, it shall be impossible for any part of the corpus or income maintained by any trust fund maintained by the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of the Participants, Retired Participants, or their Beneficiaries." Section 10.6(b) allows the return of excessive contributions paid by the employer.

Dairy Fresh became the Administrator of the Plan. As Plan Administrator, Dairy Fresh has "the primary responsibility ... to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan." (Plan Doc. § 2.6) The Administrator has the authority to determine all questions arising in connection with the administration, interpretation, and application of the Plan[,] ... [and] such determination[s] shall be conclusive and binding upon all persons." (Id.) The Administrator also has the power to establish procedures, correct any defect, supply any information or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedures, discretionary act, interpretation or construction ... shall comply with the terms of the Act and all regulations issued pursuant thereto." (Id.) Among the specific duties of the Administrator enumerated in the Plan Document are the duty "to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled [under the Plan]." (Id. § 2.6(b)) Concomitantly, the Plan Document requires that the Trustee "[a]t the direction of the Administrator, to pay benefits required under the Plan to be paid to Participants, or in the event of their death, to their Beneficiaries[.]" (Id. § 8.1). Finally, the Administrator has authority "to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with [its] terms[.]" Id. § 2.6(b), (e).

B. The ESOP Transaction — 1,247,002 Shares for $5.2 Million

Members of the Dairy Fresh Board of Directors intended that the ESOP would borrow $5.2 million from SouthTrust Bank, N.A. to purchase newly issued shares of Dairy Fresh stock and that the shares purchased would have a value of $5.2 million. (Pretrial Order at ¶¶ 8, 10) This transaction was accomplished, in part, through a document issued by Dairy Fresh in its capacity as Plan Administrator, entitled "Direction to Trustee of Dairy Fresh Employees Stock Ownership Plan", which states:

Pursuant to the terms and provisions of the Dairy Fresh Employees Stock Ownership Plan ("the Plan"), Dairy Fresh Corporation, as Plan Administrator of the aforesaid Plan, does hereby direct AmSouth Bank, N.A., as Trustee of the Plan to enter into that certain Loan Agreement between the Plan, SouthTrust Bank of Alabama, N.A., Dairy Fresh Corporation, and the Individual Guarantors, to purchase 1,247,002 shares of the voting common stock of Dairy Fresh Corporation from said corporation for a purchase price of $5,200,000.00, such purchase price having been determined in accordance with an independent appraisal as required by the appropriate regulations and the Plan.

(Dairy Fresh Ex. 20; Secretary's Ex. 13) (emphasis added).

Neiswender obtained an independent appraisal of Dairy Fresh from Gene Dilmore of Realty Researchers, Inc., a stock valuation firm. On December 16, 1988, Dilmore concluded that the market value of Dairy Fresh's 148,756 outstanding shares was $5,820,431, or $39.13 per share. (Secretary's Ex. 7) Based on Dilmore's valuation report, Neiswender calculated the number of shares to be issued and the price per share, taking into consideration the issuance of new shares. Neiswender subtracted $5.2 million, the value of stock sold to the ESOP, from Dilmore's valuation figure, then divided the result by the number of shares outstanding to arrive at a price per share of $4.17. (Neiswender Dep. at 135-36) Neiswender then divided the total amount to be paid by the ESOP ($5.2 million) by the price per share ($4.17) to determine that the ESOP would purchase 1,247,002 shares. (Id.)

Neiswender deliberately chose a conservative approach to arrive at the number of shares to be issued and the price per share. (Id. at 123-24) He felt that a more aggressive, or generous, valuation, would make the transaction susceptible to attacks from the Plan participants as well as the Department of Labor and the Internal Revenue Service. (Id.) The...