Foltz v. US News & World Report, Inc.

• Decision Date: 14 June 1985
• Docket Number: Civ. A. No. 84-0447.
• Citation: 613 F. Supp. 634
• Court: U.S. District Court — District of Columbia
• Parties: Charles S. FOLTZ, et al., Plaintiffs, v. U.S. NEWS & WORLD REPORT, INC., et al., Defendants.

613 F. Supp. 634

Charles S. FOLTZ, et al., Plaintiffs, v. U.S. NEWS & WORLD REPORT, INC., et al., Defendants.

Civ. A. No. 84-0447.

United States District Court, District of Columbia.

June 14, 1985.

Alan Raywid, John D. Seiver, Susan P. Baxter, Cole, Raywid & Braverman, Washington, D.C., for plaintiffs Foltz, Handleman, Price, Williamson.

Richard J. Leighton, Avis Black, Washington, D.C., for Save the Fund.

Leslie A. Nicholson, Jr., Hannah E.M. Lieberman, Washington, D.C., for defendants U.S. News, Madana Realty.

Lawrence Latto, William Galeota, Julie Melamud, Shea & Gardner, Washington, D.C., for Profit-Sharing Plan.

Richard J. Wertheimer, Hadrian Katz, Edward Wolf, Washington, D.C., for defendants Sweet, Stone, Dunn, Keker.

Willis B. Snell, Willard K. Tom, Steuart H. Tomsen, Washington, D.C., for defendant The American Appraisal Co.

MEMORANDUM OPINION

BARRINGTON D. PARKER, District Judge.

INTRODUCTION

On March 28, 1985, this Court denied the plaintiffs' motion for a preliminary injunction prohibiting the distribution of funds by defendants U.S. News and World Report, Inc. ("U.S. News") and the Profit-Sharing Plan of U.S. News ("Plan"), and issued a Memorandum Opinion in support of its decision, 608 F.Supp. 1332. The plaintiffs are former employees of U.S. News who challenge the undervaluation of their interests in the company and the Plan. The Court of Appeals affirmed this Court's decision in part, vacated it in part and remanded the proceedings to this Court for further proceedings, "in light of the fuller explication of the legal issues on this appeal." Foltz v. U.S. News & World Report, Inc., 760 F.2d 1300, 1301-02 (D.C.Cir.1985).

At this time, the Court determines that the plaintiffs are entitled to some equitable relief against the Plan under the provisions of section 1132(a)(1)(B) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1461. The reasons for this determination are set forth below. Before embarking on this discussion, the Court will address a few preliminary matters.

Following remand, the parties have expressed some disagreement about the meaning and breadth of this Court's initial opinion as it relates to the scope of the inquiry which the Court of Appeals directed this Court to undertake after remand. To dispel any remaining confusion or doubt, the Court will briefly summarize its initial findings and conclusions, and then turn to the questions raised by the Court of Appeals. Because the factual background of this litigation was discussed in great detail in both opinions, it will not be repeated here, except where it serves to clarify any additional findings and conclusions.

After remand, only the question of the propriety of injunctive relief against the Plan need be addressed. 760 F.2d at 1301, 1306-07. During the relevant period represented by the class plaintiffs, the Plan Committee, appointed by the U.S. News' Board of Directors, had responsibility for overseeing the daily activities of the Plan. The Committee continues to exercise this responsibility, and is the named fiduciary under the Plan. The Mercantile Safe Deposit & Trust Company is the trustee. The Court's March 28, 1985 opinion, of course, addressed the propriety of injunctive relief under ERISA against both U.S. News and the Plan. The findings and conclusions expressed in that opinion will be discussed in the context of the equitable relief which is available against the Plan. Such an inquiry, however, should also assess the damages which may ultimately be recovered from defendants other than the Plan.

A. Memorandum Opinion of March 28, 1985

In its initial opinion, the Court canvassed the four factors which traditionally govern the issuance of a preliminary injunction: "the likelihood of success on the merits, the possibility that the plaintiffs will suffer irreparable injury in the absence of equitable relief, the balance of hardships between the parties, and the public interest." 608 F.Supp. at 1340. The plaintiffs' request for injunctive relief was disallowed because, in the Court's view, they had not "made the requisite showing of irreparable harm." Id. at 1343. In reaching that conclusion, the Court primarily relied on two factors: first, the well established rule that except in unusual circumstances, "monetary relief in a legal action may not be ordered prior to a final determination of liability and computation of damages," id. at 1341 (citing Friends for All Children, Inc. v. Lockheed Aircraft Corp., 746 F.2d 816 (D.C.Cir.1984)), and second, the plaintiffs' inability to demonstrate that "the substantial assets of the individual and corporate defendants would be insufficient or unavailable to satisfy a judgment." Id. at 1343.

Before reaching this conclusion, the Court examined the basis for the plaintiffs' claims that their interests in the company were liquidated at grossly undervalued rates. They supported their charges by arguing that five policies and practices of various defendants resulted in undervaluation: "failure to properly value U.S. News' significant real estate holdings, improper application of a marketability discount to reflect the fact that the stock was owned by a closely-held corporation, valuation of the stock on a minority basis rather than on a control premium basis, the inclusion of certain items as liabilities,¹ and manipulation of the appraisals to match certain predetermined values fixed by U.S. News." Id. at 1337. These practices were criticized in an affidavit in which Mr. John Hempstead, the plaintiffs' expert, gave his opinion as to the proper fair market value of U.S. News' stock during the class period. His calculations were based on the crucial assumption that the sale price of the company in 1984, along with other financial indicia, should be utilized to determine the value of the company in previous years. These values, in turn, determined the fair market value of U.S. News' stock during that period. The plaintiffs utilized these figures to determine the amount by which their interests in the Plan were undervalued. This amount, plus prejudgment interest, equaled the plaintiffs' claimed damages. At the initial stage of the proceedings, the plaintiffs' claimed maximum damages of approximately $75 million from the Plan, including prejudgment interest.

Next, the Court discussed in some detail the basis for two of the allegedly improper appraisal practices identified by the plaintiffs: the claim that U.S. News' real estate holdings were undervalued and the claim that a marketability discount was improperly applied. The Court found that these practices supported the plaintiffs' claims that at least some of the non-Plan defendants breached the fiduciary duties imposed by ERISA. Id. at 1338, 1345. With respect to the question of the plaintiffs' likelihood of succeeding on their cause of action for breach of fiduciary duty against the non-Plan defendants, the Court stated that "the plaintiffs have raised serious legal questions concerning whether some of the parties to this action have complied with the strict standard of care imposed by ERISA 29 U.S.C. § 1109." Id. at 1345. The propriety of the minority discount and the validity of including certain items as liabilities on the balance sheet was left unanswered. This latter practice allegedly affected U.S. News' applicable earning ratios, and resulted in the undervaluation of its stock.

Nor did the Court reach any conclusions about the amount of damages which might be attributed to the various components of the plaintiffs' undervaluation claims. These elements of the plaintiffs' damages rested in part on the appraisal policies and practices which have already been discussed: the minority and marketability discounts, real estate undervaluation, and the failure to make the appropriate adjustments to U.S. News' income.² A detailed analysis of the damage estimates was unnecessary because the Court found that the distribution of the Plan's assets would not irreparably injure the plaintiffs under any likely scenario. In the Court's view, the creditworthiness of the non-Plan defendants meant that a later judgment in favor of the plaintiffs would not go unsatisfied, even if that judgment equalled the plaintiffs' most generous damage estimates. In short, the Court viewed the assets of the Plan as a potential deep pocket source of damages whose dispersion did not threaten irreparable injury.

B. Court of Appeals Opinion

The scope of this Court's inquiry on remand is clearly articulated in the thorough opinion issued by the Court of Appeals. First and foremost, the Court of Appeals distinguished the cause of action asserted against the Plan under section 1132(a)(1)(B) from the cause of action for breach of fiduciary duty against the non-Plan defendants asserted under section 1109(a). Based on this analysis, the Court of Appeals directed this Court to

examine whether the former employees would lose a potential legal claim against the Plan under ERISA were the Plan to pay out all or virtually all of its assets, and if so, whether the loss of a congressionally provided cause of action would work irreparable injury to the class.

760 F.2d at 1302. For purposes of this analysis, the Court of Appeals noted that

the district court will be called upon to determine whether plaintiffs have demonstrated a substantial likelihood of success on the merits on their claim for benefits due under a covered plan, 29 U.S.C. § 1132(a)(1)(B). If, moreover, the court finds on remand that irreparable injury would occur, then the more modest question is whether the plaintiffs have raised a serious legal question in this respect.

Id. at 1308 n. 7. Finally, the Court of Appeals stated:

This is, emphatically, not to say that injunctive relief should in fact be afforded against the Plan. We make no such determination. To the contrary, we leave that question for the District Court to determine expeditiously on remand, in light

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