Donovan v. Porter

• Decision Date: 30 March 1984
• Docket Number: Civ. No. Y-83-1516.
• Court: U.S. District Court — District of Maryland
• Parties: Raymond J. DONOVAN, Secretary of the United States Department of Labor v. John T. PORTER, et al.

584 F. Supp. 202

Raymond J. DONOVAN, Secretary of the United States Department of Labor v. John T. PORTER, et al.

Civ. No. Y-83-1516.

United States District Court, D. Maryland.

March 30, 1984.

Virginia C. Smith, Washington, D.C., and Peter D. Ward, Asst. U.S. Atty., Baltimore, Md., for plaintiff.

William G. Duvall, Salisbury, Md., for defendant John T. Porter.

Gary A. Goldstein, Baltimore, Md., for defendant David H. Clark.

MEMORANDUM

JOSEPH H. YOUNG, District Judge.

This case involves an action brought by Raymond J. Donovan, Secretary of the Department of Labor, pursuant to the Employment Retirement Income Security Act of 1974 ("ERISA") 29 U.S.C. § 1001 et seq. Plaintiff in his initial complaint alleged that defendants John T. Porter and David H. Clark, acting as fiduciaries to the Bay Steel Products Corporation Profit Sharing Plan ("Plan"), breached their duties to the Plan by causing the Plan to make an unsecured loan of $18,132.10 to Modu Crete Corporation, an alleged party in interest with respect to the Plan. In making this loan to an interested party, a corporation that subsequently entered bankruptcy proceedings and failed to repay the loan, the defendants allegedly violated § 404(a)(1)(A) & (B), § 406(a)(1)(B) & (D) of ERISA, 29 U.S.C. § 1104(a)(1)(A) & (B), § 1106(a)(1)(B) & (D). The complicated facts of the case will be discussed prior to any consideration of motions.

This seemingly simple case involving two defendants is made complicated by the corporate settings in which they operated. Three corporations are involved: Bay Steel Products Corporation of Delaware, a steel fabrication business and the company responsible for establishing the Plan which is the subject of the litigation; Bay Steel Products Corporation of Maryland, a holding company established by defendant Clark for the purpose of purchasing 100% ownership of Bay Steel of Delaware; and Modu Crete Corporation, a construction company in which Bay Steel of Maryland held a 51% interest.

The defendants Clark and Porter are involved with all three corporations. That involvement began in 1977 when Clark purchased Bay Steel of Delaware in the following transactions: Clark had his accountants establish Bay Steel of Maryland for tax purposes to facilitate his purchase of 100% of the shares of Bay Steel of Delaware. (Clark dep. p. 10). Bay Steel of Delaware was then sold to Bay Steel of Maryland in April of 1977. (Stip. fact). Clark owned 100% of the shares of Bay Steel of Maryland (Clark dep. p. 19) and thus owned 100% of Bay Steel of Delaware. On September 1, 1977, Bay Steel of Maryland bought 51% of Modu Crete, making Clark majority owner of that corporation. (Clark dep. p. 23) Ownership was slightly simplified in November, 1978, when Bay Steel of Delaware merged into Bay Steel of Maryland. (Clark dep. p. 24).

Defendant Porter's involvement with the corporations began concurrently with Clark's. Clark hired Porter to "run everything." (Clark dep. p. 29, Porter dep. p. 7). Clark and Porter were the top men in the operations of the two operating companies, Bay Steel of Delaware and Modu Crete and Porter functioned as general manager of both companies. His official position is unclear, as various documents list him as Vice President of Bay Steel of Delaware and President or Vice President of Modu Crete. (Porter dep. 24-27). He was, however, responsible for the day-to-day operations of both companies. (Clark dep. pp. 29, 37). Clark, as the owner of both companies, had final authority but left the management to Porter.

Clark, Porter, and Clark's wife are listed as directors of both Bay Steel of Delaware and Modu Crete on Delaware state tax forms. It seems clear, however, that there never were formal meetings of the boards of directors, and major decisions were made after consultation between Porter and Clark. (Porter dep. passim).

The relationship between the two operating companies, though not a formal one, was close. They were physically adjacent and Bay Steel provided services for Modu Crete such as accounting and payroll. Modu Crete used the office of Bay Steel for administration. (Porter dep. pp. 42-43).

The Plan which gave rise to this litigation was established by the prior owners of Bay Steel of Delaware for employee pensions. Clark and Porter became aware of the existence of the Plan shortly after Clark assumed ownership of Bay Steel when the prior owner, Ed Bounds, sought to withdraw his contributions to the Plan. (Clark dep. p. 28, Porter dep. pp. 55-58). While Porter and Clark knew that Bounds was trying to withdraw money from the Plan, both deny any real involvement in that transaction. Sometime following the Bounds transaction, Clark's accountant, Charles Habliston, prepared documentation designed to insure that the Plan was in full compliance with ERISA. The documents were never executed because the completed forms, sent to Bay Steel, were never returned by John Porter, and because Bay Steel had not paid the accounting fees on a timely basis. (Dep. of Habliston, pp. 68-76). Despite the failure of the firm to follow through, the Plan was still covered by ERISA. (Habliston dep. pp. 41-42).

Clark and Porter both deny any real knowledge of the nature of the Plan and of ERISA requirements. Neither is a contributor to the Plan. Porter's signature is on ERISA reporting forms 5500C as Plan administrator, beginning with a form for the year 1975, allegedly signed so that Bounds could obtain his money. (Porter dep. p. 58). Porter also signed forms relating to the Plan in the course of his duties as general manager. (Porter dep. p. 63).

Whatever the extent of the defendants' knowledge of the Plan, they were made aware of its assets in August, 1978. At that time, a Certificate of Deposit consisting of the Plan's assets matured, and the Peninsula Bank contacted Porter for instructions. At that time, the transaction giving rise to this litigation occurred.

Modu Crete was experiencing financial problems in the summer of 1978 and had chronic cash flow difficulties. When Porter was made aware of the assets of the Plan, he discussed with Clark the possibility of loaning them to Modu Crete. (Porter dep. p. 89). At this time, Modu Crete was bidding on a large construction job which, if it materialized, would solve its financial difficulties. (Porter dep. pp. 79-82).

Porter and Clark made the decision to loan the Plan money to Modu Crete. No other use of the money was discussed at this time. There was no perception that the loan to Modu Crete was improper. (Porter dep. pp. 87-89). Although Clark does not recall discussing the loan, Porter remembers that he discussed this transaction with Clark. Id. at 89.

The loan was accomplished by a check from Peninsula Bank to Bay Steel Products Profit Sharing Plan. The check was endorsed by Porter to Modu Crete Corporation and deposited in Modu Crete's account. Id. at 91-92. Porter also signed the loan document as President of Modu Crete. The unsecured loan was for two years with 10% simple interest and no payment until the loan was due. Id. at 99-102.

At the time the loan was made, no other investment possibilities for the Plan assets were discussed, nor was Porter aware that this constituted the sum total of the Plan's assets. Id. at 102, 109.

Modu Crete's big job never materialized, and the financial situation of the company deteriorated causing it to file for bankruptcy in October, 1979. (Stip. fact). No part of the loan was ever repaid.

Despite its small size and seeming inconsequence, the Plan is covered by the provisions of ERISA which was formulated to regulate, among other things, employee retirement plans. The purpose of ERISA is clearly stated in the language of the statute:

... owing to the lack of employee information and adequate safeguards concerning their benefit plans operation, it is desirable in the interests of the employees and their beneficiaries, and to provide for the general welfare ... that ... safeguards be provided with respect to the establishment, operation, and administration of such plans. 29 U.S.C. § 1001.

By its terms ERISA defines those in positions of authority in relation to plan assets, duty owed by such persons, and transactions they may not participate in. 29 U.S.C. § 1002(21) defines a fiduciary:

a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets....

29 U.S.C. § 1104 defines the duties of a fiduciary:

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

by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so....

Beyond this strict standard of care, ERISA defines certain prohibited transactions in 29 U.S.C. § 1106:

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 ... lending of money or other extension of credit between a plan and a party in interest....

A fiduciary with respect to a plan shall not ... in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan....

Plaintiff, alleging that the defendants have violated the provisions of ERISA relating to fiduciary duties and prohibited transactions has filed a motion for leave to file a first amended complaint, a motion for summary judgment, ...