Donovan v. Cunningham

• Decision Date: 21 May 1982
• Docket Number: Civ. A. No. H-80-87.
• Citation: 541 F. Supp. 276
• Parties: Raymond J. DONOVAN, Successor to Ray Marshall, Secretary of the United States Department of Labor, v. Kenneth R. CUNNINGHAM et al.
• Court: U.S. District Court — Southern District of Texas

541 F. Supp. 276

Raymond J. DONOVAN, Successor to Ray Marshall, Secretary of the United States Department of Labor, v. Kenneth R. CUNNINGHAM et al.

Civ. A. No. H-80-87.

United States District Court, S. D. Texas, Houston Division.

May 21, 1982.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Anna E. Stool, Asst. U. S. Atty., Local Counsel, Houston, Tex., Samuel W. Halpern, in charge, U. S. Dept. of Labor, Washington, D. C., for plaintiff.

C. Leland Hamel, Dickerson, Hamel, Early, Pennock, Van E. McFarland, Co-counsel, McFarland & Tondre, Morton L. Susman, Susman & Kessler, Larry D. Thompson, Atty. in Charge, Lorance & Thompson, Tom M. Davis, Jr., Butler, Binion, Rice, Cook & Knapp, Houston, Tex., for defendants.

MEMORANDUM AND ORDER

SINGLETON, Chief Judge.

This cause was filed January 14, 1980 by the Secretary of the United States Department of Labor against the members of the Administrative Committee of the Employee Stock Ownership Plan (ESOP) of Metropolitan Contract Services, Inc. (MCS). The defendants were either members of the Administrative Committee at the time of the two stock transactions which form the basis of the complaint or became members shortly afterwards.

The action arises under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. 1001 et seq. The plaintiff, Secretary of the Department of Labor, bases his case on various specific provisions of ERISA.

The plaintiff seeks comprehensive relief; that the defendants be enjoined from any acts in violation of their fiduciary duties under ERISA; that the defendants restore the Plan to its rightful economic place by rescission of the stock sales in question, and that the money paid to Defendant Cunningham by the Plan be returned to the Plan together with interest; that the Defendants Cunningham, Carter, Hairell, Perrin, and Robertson be removed as fiduciaries of the Plan and that all defendants be permanently enjoined from serving as fiduciaries with respect to this Plan, and for an additional period of five years that they be enjoined from serving as fiduciaries of any other employee benefit plan covered by ERISA and that the court appoint an independent successor fiduciary to administer and manage the Plan assets and for costs and general relief.

Defendants L. J. Carter and Mark W. Perrin brought a third-party action against Allied Bank of Texas (Allied), the Plan trustee at all times relevant to this lawsuit, on the grounds that if they were found liable for violations of ERISA, then in that event Allied would be liable to them on various theories; also Defendants Salvadore Esparza, Edward F. Fritcher, Perrin and Carter brought third-party actions against MCS and a cross-action against Defendant Cunningham claiming in essence that they were indemnified by certain documents and instruments in the event they were found liable for fiduciary breaches.

Allied, as counter-plaintiff and third-party plaintiff, brought suit against MCS and its ESOP as third-party defendants and against Defendants Cunningham, Wilford H. Hairell, A. Michael Robertson, Perrin and Carter, as counter-defendants, claiming indemnity under an agreement entered into between Defendant Cunningham and Allied with respect to a loan made to the ESOP to finance one of the stock purchases in question and based on Plan indemnification provisions which Allied claims indemnifies it generally in connection with its service as trustee of the MCS ESOP.¹ Additionally, Allied seeks recovery of its fees and ex penses incurred in defense of this suit under the indemnity agreements and under section 502(g)(1) of ERISA, 29 U.S.C. 1132(g)(1).²

The defendants except Cunningham have applied under the newly enacted Equal Access to Justice Act, 28 U.S.C. 2412(d)(1)(A)³ for fees and expenses incurred in this suit. Defendant Cunningham has applied for attorney's fees and expenses under section 502(g)(1) of ERISA, 29 U.S.C. 1132(g)(1) and 28 U.S.C. 2412(a) and (b).⁴

Essentially, plaintiff claims that, by causing the ESOP to purchase 1440 shares of MCS on August 11, 1976 and 5000 shares of MCS on February 18, 1977 from Kenneth R. Cunningham for $200.00 per share, defendants (excepting Perrin and Carter) violated ERISA. Specifically plaintiff alleged that Defendants Cunningham, Esparza, Fritcher, Hairell, and Robertson breached their fiduciary obligations by failing to discharge their duties with respect to the ESOP solely in the interest of its participants and with the proper care in violation of section 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. 1104(a)(1)(A) and (B) by:

1. failing to follow the procedures necessary to determine the fair market value of the shares of MCS sold to the ESOP and

2. causing the ESOP to pay defendant Cunningham more than adequate consideration for the purchase of the shares.

Section 404(a)(1) of ERISA 29 U.S.C. 1104(a)(1) provides in pertinent part that:

... a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and —

A. for the exclusive purpose of

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

B. with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Plaintiff also alleged that Defendants Cunningham, Esparza, Fritcher, Hairell, and Robertson failed to discharge their fiduciary duties in accordance with the documents of the ESOP in violation of section 404(a)(1)(D) of ERISA, 29 U.S.C. 1104(a)(1)(D).

Plaintiff further alleged that Defendants Cunningham, Esparza, Fritcher, Hairell, and Robertson caused the ESOP to engage in transactions which constituted sales of property between the ESOP and a party in interest in violation of section 406(a)(1)(A) of ERISA, 29 U.S.C. 1106(a)(1)(A) and which constituted transfers of the ESOP assets to a party in interest in violation of section 406(a)(1)(D) of ERISA, 29 U.S.C. 1106(a)(1)(D) by causing the ESOP to purchase the MCS stock from Defendant Cunningham for more than adequate consideration. Section 406(a)(1) of ERISA, 29 U.S.C. 1106(a)(1), entitled "Prohibited transactions," provides in pertinent part that;

... a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect —

A) sale or exchange, or leasing, of any property between the plan and a party in interest; or

B)-C) ...

D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan ...

Plaintiff further alleged that Defendant Cunningham dealt with the assets in his own interest or for his own account in violation of section 406(b)(1) of ERISA, 29 U.S.C. 1106(b)(1), and acted on behalf of a party whose interests are adverse to the interests of the Plan or the interests of its participants or beneficiaries in violation of section 406(b)(2) of ERISA, 29 U.S.C. 1106(b)(2) by his participation in causing the ESOP to purchase the MCS stock from him for more than adequate consideration.⁵

Finally Plaintiff alleged that Defendants Carter and Perrin are liable pursuant to section 405(a)(1) and (3) of ERISA, 29 U.S.C. 1105(a)(1) and (3) for breaches committed by the other defendants.

Section 405(a) of ERISA, 29 U.S.C. 1105(a) provides, in pertinent part, that;

.... a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:

1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach; or

2) ...

3) if he has knowledge of a breach by such other fiduciary unless he makes reasonable efforts under the circumstances to remedy the breach.

The cause was tried to the bench for six days beginning December 16, 1981. Based upon the evidence adduced at trial, including depositions cited to the court by plaintiff, and upon a thorough review of the file along with relevant precedent, this court makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

Metropolitan Contract Services, Inc. (MCS) is a contract trucking company which, at all times relevant to this action, has provided delivery services for department stores in the southern and western parts of the country. The business was started in 1964 by Defendant Kenneth R. Cunningham and was subsequently sold to a separate corporation called Illustrated World Encyclopedia, Inc. In May, 1973 Defendant Cunningham repurchased the assets of MCS for approximately $500,000. By the close of the fiscal year ended June 30, 1974, the company's business primarily entailed bulk deliveries of retail merchandise such as furniture, appliances and other goods too large to be delivered as packages by a common carrier. The bulk deliveries typically were made from department stores, where the goods were purchased, to the consumers who purchased those goods. The deliveries were made pursuant to contracts between the department stores and MCS.

As of June 30, 1975, Defendant Cunningham was chairman of the board, chief executive officer, president, and sole shareholder of MCS. Defendant Fritcher was secretary/treasurer and comptroller of MCS; Defendants Hairell and Robertson were vice presidents; and Defendant Perrin was counsel to MCS. In 1975, 1976, and 1977, Defendants Cunningham, Esparza, Fritcher, Hairell, and Robertson were also members of the MCS board of directors. In late 1976 or early 1977, Defendant Carter became comptroller of MCS.

From 1972 until mid-1977, Defendant Cunningham was sole shareholder of a separate company called Metro Contract Services, Inc. (Metro). Metro provided logistical support to government...