Firstier Bank, N.A. v. Zeller

• Decision Date: 18 April 1994
• Docket Number: No. 92-3595,92-3595
• Citation: 16 F.3d 907
• Parties: -1209, 62 USLW 2548, 17 Employee Benefits Cas. 2313 FIRSTIER BANK, N.A., Omaha, As Trustee of the Profit Sharing Plan and Employees Trust of Land Paving Company, Plaintiff-Appellee, v. James R. ZELLER; Patricia A. Olsen, Individually and as Personal Representative of the Estate of Duane H. Olsen; James E. Lonergan; Bryan Vercoe, Defendants-Third Party Plaintiffs-Appellants. LAND PAVING COMPANY; Anthony E. Dombrowski; Frank Bosanek; Eugene H. Hess; Richard J. O'Konsky; Profit Sharing Plan and Employees Trust of Land Paving Company, Defendants, v. George N. SILENCE; Management Consultant Services, Inc., Third Party Defendants-Appellees, and James E. Bachman, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 907

16 F.3d 907

73 A.F.T.R.2d 94-1209, 62 USLW 2548,

17 Employee Benefits Cas. 2313

FIRSTIER BANK, N.A., Omaha, As Trustee of the Profit Sharing

Plan and Employees Trust of Land Paving Company, Plaintiff-Appellee, v. James R. ZELLER; Patricia A. Olsen, Individually and as

Personal Representative of the Estate of Duane H.

Olsen; James E. Lonergan; Bryan

Vercoe, Defendants-Third Party

Plaintiffs-Appellants.

LAND PAVING COMPANY; Anthony E. Dombrowski; Frank Bosanek;

Eugene H. Hess; Richard J. O'Konsky; Profit

Sharing Plan and Employees Trust of Land

Paving Company, Defendants, v. George N. SILENCE; Management Consultant Services, Inc.,

Third Party Defendants-Appellees, and

James E. Bachman, Appellant.

No. 92-3595.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 16, 1993.

Decided Feb. 16, 1994.

Rehearing and Suggestion for Rehearing En Banc Denied April

18, 1994.

Counsel who presented argument on behalf of the appellant was James Bachman, Omaha, NE; additional attorney appearing on the brief was Paul R. Elofson.

Counsel who presented argument on behalf of the appellee was William J. Riley, Omaha, NE; additional attorneys appearing on the briefs were Daniel J. Wintz and D.C. Bradford.

Before FAGG, BOWMAN, and LOKEN, Circuit Judges.

LOKEN, Circuit Judge.

This appeal requires us to define the fiduciary duties of an ERISA ¹ plan trustee in carrying out an employer's direction to make loans to plan participants that are exempt from some ERISA prohibitions under 29 U.S.C. Sec. 1108(b)(1). We agree with the district court ² that the trustee retains certain fiduciary duties that were not violated by appellee FirsTier Bank, N.A., in this case. Accordingly, except for a Rule 11 sanction, we affirm.

I. Background.

Appellants James Zeller, Patricia Olsen, James Lonergan, and Bryan Vercoe, who will be referred to in this opinion as the "Participants," are former employees of bankrupt Land Paving Company ("LPC") and participants in and beneficiaries of LPC's Profit Sharing Plan and Employees Trust (the "Plan"). LPC has had a profit sharing plan since 1953. The current Plan, adopted in 1984, named FirsTier's predecessor, Omaha National Bank, trustee of the Plan assets.

In December 1986, LPC was deeply in debt, primarily to FirsTier, and in a precarious financial condition. Its president, Anthony Dombrowski, retained appellees George Silence and his firm, Management Consultant Services, Inc. (collectively "Silence"), as financial consultants. Silence advised that LPC needed to obtain new financing for the 1987 asphalt paving season; this required finding sources of cash to meet FirsTier's demand for a $600,000 debt repayment by March 31, 1987.

Dombrowski expected to raise $500,000 by collecting LPC receivables and selling patent rights, but that left a $100,000 shortfall. On March 27, Dombrowski had LPC's Board resolve to substitute Dombrowski for FirsTier as trustee of the Plan, intending to free up cash by funding the existing Plan accounts with annuities. However, Stanley A. Traub, Vice President of FirsTier's Trust Department, advised Dombrowski that the annuity proposal was impermissible. Traub also refused to accept FirsTier's removal as Plan trustee because he knew of LPC's heavy indebtedness and feared misuse of Plan assets. Traub explained to Dombrowski that the proposed successor trustee was not properly bonded under ERISA. See 29 U.S.C. Sec. 1112.

A few days later, Dombrowski met with the Participants and persuaded them that the company would close its doors unless they borrowed from their individual Plan accounts and reloaned the proceeds to LPC for the purpose of paying down LPC's debt to FirsTier. On April 2, 1987, Dombrowski as Plan Administrator wrote Traub, directing FirsTier to make loans to each Participant pursuant to paragraph 20 of the Plan, which provides that "[t]he Trustee may, and shall at the direction of the Company, make a loan or loans to a Participant." FirsTier promptly prepared loan documents, obtained the Participants' signatures on installment notes secured by their interests in the Plan, and disbursed loan proceeds totaling $93,950 to the individual Participants.

The Participants transferred the loan proceeds to Dombrowski's personal account at another bank, receiving promissory notes from LPC and Dombrowski in return. Dombrowski then wrote a $240,000 check on this account to LPC, which used the money to fund part of its March 31 loan payment to FirsTier and to pay Silence's consulting fee. LPC went into bankruptcy in June 1987 and its operating assets were sold. Both the Plan's loans to the Participants and their loans to LPC and Dombrowski remain unpaid.

FirsTier commenced this action in 1989, seeking a declaration of its status with respect to the Plan. The Participants asserted counterclaims and third party claims against FirsTier, Silence, and Dombrowski, alleging that they violated ERISA and RICO by knowingly making or permitting improper plan participant loans. Dombrowski defaulted and testified on behalf of the Participants at trial.

The district court dismissed the Participants' RICO claims and tried their ERISA claims and FirsTier's declaratory judgment claim to the court. The court found that LPC's direction to FirsTier and the subsequent loans of Plan assets to the Participants were proper under paragraph 20 of the Plan and ERISA; that FirsTier did not know the Participants would immediately lend the loan proceeds to LPC at the request of Dombrowski; and that FirsTier did not know that the participant loans funded a portion of LPC's March 31 loan payment to the bank. Based upon these findings, ³ the court concluded that FirsTier had not violated its fiduciary duties under ERISA. It declared that FirsTier was still the Plan trustee and awarded FirsTier $64,912.44 in attorneys' fees and expenses from the Plan, as authorized by the Plan. See 29 U.S.C. Sec. 1108(c)(2).

The district court also dismissed the Participants' claims against Silence based on its findings that Silence did not act as a Plan fiduciary, and was unaware of Dombrowski's scheme to use the proceeds of the plan participant loans to repay LPC's bank debts. It awarded Silence his fees and expenses as a Rule 11 sanction against the Participants and their attorney, James E. Bachman, because the third-party complaint was "not well-grounded in fact."

The Participants raise numerous issues on appeal, only four of which require discussion: (1) whether FirsTier breached its ERISA fiduciary duties in lending Plan assets to the Participants; (2) whether FirsTier is entitled to its fees and expenses from the Plan; (3) whether the ERISA claim against Silence was properly dismissed; and (4) whether the Rule 11 monetary sanction should be upheld. We affirm all but the Rule 11 sanction.

II. FirsTier's Alleged Breach of Fiduciary Duty.

"Borrowing from trust law, ERISA imposes high standards of fiduciary duty upon those responsible for administering an ERISA plan and investing and disposing of its assets." Martin v. Feilen, 965 F.2d 660, 664 (8th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 979, 122 L.Ed.2d 133 (1993). As the district court recognized, the critical legal issue in this case is the precise nature and extent of FirsTier's duty as trustee in lending Plan assets to the Participants.

A.

FirsTier argues that it had no fiduciary duty with respect to these participant loans because it made the loans "at the direction of the Company" under paragraph 20 of the Plan and therefore did not exercise fiduciary discretion. We disagree.

FirsTier is the named trustee under the Plan, authorized and directed to hold, manage, invest, and account for all Plan assets. ERISA provides that

a person is a fiduciary ... 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 [plan] assets....

29 U.S.C. Sec. 1002(21)(A). Note that this section imposes fiduciary duties only if one exercises discretionary authority or control over plan management, but imposes those duties whenever one deals with plan assets. This distinction is not accidental--it reflects the high standard of care trust law imposes upon those who handle money or other assets on behalf of another. See John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, --- U.S. ----, ----, 114 S.Ct. 517, 524, 126 L.Ed.2d 524 (1993) ("Congress commodiously imposed fiduciary standards on persons whose actions affect the amount of benefits retirement plan participants will receive").

It is true, as FirsTier notes, that a trustee's control of ERISA plan assets may be made "subject to proper directions" of another fiduciary if those directions "are made in accordance with the terms of the plan and ... are not contrary to this chapter." 29 U.S.C. Sec. 1103(a). This provision no doubt modifies, but we conclude it does not eliminate, the trustee's fiduciary duty when handling plan assets. When the direction comes from another fiduciary, as it did in this case, the law of trusts does not excuse a compliant trustee from all fiduciary responsibility:

[W]here the holder of the power [to direct the trustee] holds it as a fiduciary, the trustee is not justified in complying with his directions if the trustee knows or ought to know that the holder of the power is violating his duty to the beneficiaries as fiduciary in giving the directions.

IIA Scott on Trusts Sec. 185, at p. 574 (4th ed. 1987). We conclude from the limitation in Sec. 1103(a) to directions "not contrary to this chapter" that Congress adopted this standard in ERISA. Thus, an ERISA trustee who deals with plan assets in accordance with proper directions of another fiduciary is not relieved of its fiduciary duties to conform to the prudent man standard of care, see 29 U.S.C. Sec. 1104(a); to attempt to remedy known breaches of duty by other fiduciaries,...