Grindstaff v. Green

• Citation: 133 F.3d 416
• Decision Date: 08 January 1998
• Docket Number: CLC,Nos. 2207 and 2614,P,No. 96-5628,AFL-CI,s. 2207 and 2614,96-5628
• Parties: 21 Employee Benefits Cas. 2249, Pens. Plan Guide (CCH) P 23940B Karl GRINDSTAFF, Individually and as a Member, North American Rayon Corporation/North American Corporation ESOP Administrative Committee; Bill McKinney, Ray Davis, Roy Miller, Gary Williams, and Shirlene White, on their own behalf and on behalf of others similarly situated as Employee Owners of North American Corporation/North American Rayon Corporation, and as Participants and Beneficiaries of North American Rayon Corporation/North American Corporation ESOP; and United Textile Workers of American,and its subordinate Local Unionlaintiffs-Appellants, v. Charles GREEN, President and Director, North American Corporation and Member, North American Rayon Corporation/North American Corporation ESOP Administrative Committee; Tony Butts, Vice President and Director, North American Corporation and Member, North American Rayon Corporation/North American Corporation ESOP Administrative Committee; William E. Andersen, Director, North American Corporation; David Henry, Director, North American Corporation; North American Corporation, a Tennessee Corporation; North American Rayon Corporation, a Tennessee Corporation, Defendants-Appellees, First American National Bank, in its capacity as Trustee of the North American Corporation Employee Stock Ownership Plan, Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 416

133 F.3d 416

21 Employee Benefits Cas. 2249,

Pens. Plan Guide (CCH) P 23940B

Karl GRINDSTAFF, Individually and as a Member, North

American Rayon Corporation/North American Corporation ESOP

Administrative Committee; Bill McKinney, Ray Davis, Roy

Miller, Gary Williams, and Shirlene White, on their own

behalf and on behalf of others similarly situated as

Employee Owners of North American Corporation/North American

Rayon Corporation, and as Participants and Beneficiaries of

North American Rayon Corporation/North American Corporation

ESOP; and United Textile Workers of American, AFL-CIO, CLC and its subordinate Local Union Nos. 2207 and 2614, Plaintiffs-Appellants, v. Charles GREEN, President and Director, North American

Corporation and Member, North American Rayon

Corporation/North American Corporation ESOP Administrative

Committee; Tony Butts, Vice President and Director, North

American Corporation and Member, North American Rayon

Corporation/North American Corporation ESOP Administrative

Committee; William E. Andersen, Director, North American

Corporation; David Henry, Director, North American

Corporation; North American Corporation, a Tennessee

Corporation; North American Rayon Corporation, a Tennessee

Corporation, Defendants-Appellees,

First American National Bank, in its capacity as Trustee of

the North American Corporation Employee Stock

Ownership Plan, Defendant.

No. 96-5628.

United States Court of Appeals, Sixth Circuit.

Argued Aug. 7, 1997.

Decided Jan. 8, 1998.

David M. Cook (briefed), Manley, Burke, Lipton & Cook, Cincinnati, OH, Donald F. Mason, Jr. (briefed), D. Bruce Shine (argued and briefed), Shine & Mason, Kingsport, TN, for Plaintiffs-Appellants.

David Randolph Smith (argued and briefed), David Randolph Smith & Associates, Nashville, TN, for Charles Green, Tony Butts, William E. Andersen and David Henry.

Judge B. Wilson, II (briefed), Penny R. Warren (argued), Gayle B. McGrath (briefed), Wyatt, Tarrant & Combs, Lexington James L. Craig, Jr. (briefed), U.S. Department of Labor, Washington, DC, for Amicus Curiae.

KY, for North American Rayon Corporation.

Before: KRUPANSKY and SUHRHEINRICH, Circuit Judges, ROSEN, District Judge. ^*

ROSEN, J., delivered the opinion of the court, in which SUHRHEINRICH, J., joined. KRUPANSKY, J. (pp. 426-33), delivered a separate dissenting opinion.

ROSEN, District Judge.

This is an ERISA "breach of fiduciary" action brought by employees of North American Rayon Corporation ("NAR") and their Union, the United Textile Workers of America, against members of the Board of Directors of North American Corporation ("NAC"), the parent company of NAR; members of the NAR Employee Stock Ownership Plan Administrative Committee (the "ESOP Committee"); and the ESOP Plan Trustee, First American National Bank. ¹ The District Court for the Eastern District of Tennessee dismissed the Plaintiffs' ERISA claims on Defendants' Rule 12(b) and (c) motions finding that Plaintiffs failed to state any legally cognizable ERISA claim for breach of fiduciary duties. See Grindstaff v. Green, 946 F.Supp. 540, 555 (E.D.Tenn.1996) ² Plaintiffs now appeal.

For the reasons set forth below, we affirm the District Court's ruling.

I. PERTINENT FACTS

This action centers around an Employee Stock Ownership Plan (an "ESOP"). An ESOP is an ERISA plan that invests primarily in "qualifying employer securities," which typically are shares of stock in the employer that created the plan. See 29 U.S.C. § 1107(d)(6)(A).

The ESOP plan at issue was created in 1985. The Plan called for 85% of North American Rayon Corporation to be held by an ESOP Trust, with the remaining 15% of NAR stock going to management employees. In 1990, North American Corporation ("NAC") was formed as a holding company for NAR and several related entities. With this change, NAC stock replaced the NAR stock as the stock held by the ESOP Trust. The shares of NAC held by the ESOP Trust are voted by the Trustee, First American National Bank, as directed by the ESOP Administrative Committee. This includes voting for members of the NAC Board of Directors at the company's annual meeting.

Control and management of the operation and administration of the ESOP lies in the hands of the three-member ESOP Administrative Committee which is appointed by the five-member NAC corporate Board of Directors. One of the three ESOP Committee appointees is recommended to the Board of Directors by the Union.

Defendants Charles Green and Tony Butts currently are, and at all times relevant to this action were, members of the ESOP Administrative Committee. ³ Green and Butts are also President and Vice-President of NAR and members of the NAR Board of Directors. They held these positions even before the formation of NAC. When NAC was formed in 1990, Green and Butts became President and Vice-President of the new company, and two of the members of the NAC Board of Directors. Defendant William Andersen, NAR/NAC's labor counsel and labor negotiator, is also a member of both the NAR and NAC Boards of Directors. Defendant David Henry is the fourth Director The four defendants who are members of the NAC Board of Directors--Green, Butts, Andersen, and Henry--have been re-elected to the Board without opposition every year at the NAC annual meeting since 1990 and, until this action was filed after a bitter two-month long labor strike at NAR in 1994, the re-election of the four Defendants was without controversy.

of NAC. The fifth member of the NAC Board is Raymond Broyles, the employee nominee. ⁴

The ESOP was originally created in 1985 as a result of collective bargaining between NAR and the UTWA, and appears to have been, since its creation, a topic of regular labor contract negotiations. In 1991, NAR ESOP employee-participants began regularly attempting, without success, to have the terms of the ESOP amended to allow "pass-through voting", whereby each plan participant would instruct the ESOP Administrative Committee as to the manner in which shares of company stock allocated to that participant's ESOP account would be voted. ⁵

Most recently, "pass through voting" was an issue in labor negotiations at NAR/NAC in 1994. In 1994, NAR employees were working under a collective bargaining agreement that expired October 4, 1994. During negotiations for a new agreement in September 1994, the Union offered to present in a positive light NAR's economic contract offer to the Union membership if NAR and NAC would agree to amend the ESOP to allow for "pass through voting". NAC labor negotiator Andersen presented this proposal to the NAC Board of Directors, but all five members of the NAC Board, including the employee-nominated Union member, Raymond Broyles, unanimously rejected the proposal. The Board members stated that the proposal was rejected because they believed that NAC's lenders would not agree to this proposal. After this "pass through voting" proposal was rejected, a bitter two-month long strike ensued. When after two months the strike did not change the company's position about "pass through voting", the UTWA unilaterally called off the strike and this lawsuit was filed.

II. ISSUES PRESENTED

This action focuses upon the roles of Defendants Green, Butts, and Andersen as members of the ESOP Administrative Committee and the NAC Board of Directors. As indicated, Green, Butts and Andersen are all members of the NAC Board of Directors. Green and Butts are also members of the ESOP Committee. Specifically, Plaintiffs complain that the NAC Board of Directors' appointment of the ESOP Committee and the ESOP Committee's directing the vote for the NAC Board constitutes a breach of ERISA-mandated fiduciary duties to the ESOP and its participants and beneficiaries by both the NAC Board and its individual members. Underlying this complaint is the Board of Directors' refusal to accept the UTWA's contract proposal for the amendment of the ESOP Plan to provide for pass-through voting.

Plaintiffs contend that management "entrenchment" (i.e., management holding absolute control of a 100% employee-owned company) in an ESOP-owned company necessarily implicates a violation of ERISA-mandated fiduciary duties when the "entrenched" management appoints members of the administrative committee that controls the stock voting rights of the ESOP. These ERISA claims principally revolve around two alleged fiduciary violations: (1) the voting of the ESOP Plan's shares to elect the Board of Directors and (2) the Board of Director's' rejection of pass-through voting. The specific ERISA fiduciary duties alleged by Plaintiffs to have been breached in this case are set forth in Sections 1104(a) and 1106(b) of the Act.

Section 1104(a) provides, in pertinent part:

(a) Prudent man standard of care

(1) ... [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; [and]

* * *

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter or subchapter III of this chapter.

29 U.S.C. § 1104(a)(1)(A), (B), and (D).

Section 1106(b) provides:

Prohibited transactions

* * *

(b) Transactions between plan and fiduciary

A fiduciary with respect to a plan shall not--

(1) deal with the assets of the plan in his own interest of for his own account, [or]

(2) in his individual or 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...