Harmon City, Inc. v. Nielsen & Senior, I-X
| Decision Date | 06 December 1995 |
| Docket Number | Nos. 940292,I-X,940428,s. 940292 |
| Citation | 907 P.2d 1162 |
| Court | Utah Supreme Court |
| Parties | , Pens. Plan Guide P 23927N HARMON CITY, INC., a Utah corporation; and Terry Harmon, individually, Plaintiffs and Appellants, v. NIELSEN & SENIOR, a Utah professional corporation; Michael Gottfredson, an individual; Nielsen, Henriod, Gottfredson & Peck, a Utah professional corporation; Nielsen, Conder, Henriod & Gottfredson, a Utah professional corporation; W. Waldan Lloyd, an individual; D. Jay Curtis, an individual; and John or Jane Does I through VI, Defendants and Appellees. NIELSEN & SENIOR, a Utah professional corporation; Michael Gottfredson, an individual; and D. Jay Curtis, an individual, Counterclaimants and Third-Party Plaintiffs, v. F. Ray GREEN; Lynda H. Green; Doreen Harmon; Irene M. Harmon; Richard H. Harwood; Niels Pedersen; Randy Buckner; Robert Morris; H. Sherwood & Company, a professional corporation; Kirton, McConkie & Poelman, a professional corporation; Brown, Smith & Hanna, a professional corporation; Robert Kent; Chester L. Murphy; John G. Wells; Chester Fassio; R. Brian De Haan; Robert L. Taylor; and Does, individuals, Third-Party Defendants. F. Ray GREEN and Lynda Green, Plaintiffs, Counterclaim Defendants, and Appellants, v. NIELSEN & SENIOR, a Utah professional corporation; Michael Gottfredson, an individual; and John or Jane Does I through X, Defendants, Counterclaim Plaintiffs, Third-Party Plaintiffs, and Appellees, v. Terry HARMON; Harmon City, Inc.; Doreen Harmon; Irene M. Harmon; Richard H. Harwood; Neils Pedersen; Randy Buckner; Robert Morris; H. Sherwood & Company, a professional corporation; Brown, Smith & Hanna, a professional corporation; Robert Kent; Chester L. Murphy; John G. Wells; Chester Fassio; R. Brian De Haan; Robert L. Taylor; and Does, individuals, Third-Party Defendants and Appellees. |
John K. Mangum, Robert A. Peterson, Jeffrey E. Nelson, Marvin D. Bagley, Craig W. Dallon, Salt Lake City, for Nielsen & Senior, Curtis, and Gottfredson.
Scott A. Call, Salt Lake City, for Lloyd George A. Hunt.
David W. Steffensen, Salt Lake City for the Greens.
Thomas S. Williamson, Jr., Allen H. Feldman, Nathaniel I. Spiller, Elizabeth Hopkins, Washington, DC, for amicus U.S. Department of Labor.
Plaintiffs Harmon City, Inc. (HCI), and Terry Harmon (collectively the Harmons) appeal from the district court's grant of summary judgment in favor of defendants Nielsen & Senior, Michael Gottfredson, and D. Jay Curtis and the grant of a motion to dismiss in favor of W. Waldan Lloyd. Similarly, plaintiffs Ray and Lynda Green appeal from the district court's grant of summary judgment in favor of defendants Nielsen & Senior, Gottfredson, Lloyd, and Curtis (collectively the lawyers). 1 These cases arise out of legal advice the lawyers gave to the Harmons and Ray Green from 1976 to 1986 concerning investments which plaintiffs were considering on behalf of an employee benefit plan. Because these cases involve the same factual background and substantially similar legal issues, we have consolidated them on appeal. We reverse and remand.
Before reciting the facts, we note that when reviewing a grant of summary judgment, "we view the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party." Higgins v. Salt Lake County, 855 P.2d 231, 233 (Utah 1993). We state the facts in this case accordingly. 2 See id.
HCI owns and operates a chain of grocery stores in Utah and is the sponsor and administrator of the Harmon City, Inc. Profit Sharing Plan (the Plan). From 1976 to about 1985, Terry Harmon and Ray Green were trustees of the Plan. In addition to being a Plan trustee, Harmon was president, shareholder, and a director of HCI and a director and shareholder of Midwest Realty & Finance, Inc. (Midwest), a publicly held company HCI retained the lawyers to perform legal services for HCI, Midwest, the Plan, and the Plan trustees, Harmon and Green. The lawyers also advised Green and Harmon individually. Gottfredson represented to the Harmons that he and other members of his law firm were experts on the Employee Retirement Income Security Act (ERISA). In about 1973, Gottfredson drafted the initial HCI Plan. In addition, the lawyers provided annual auditors' letters for both HCI and the Plan. Although the lawyers were neither Plan fiduciaries nor Plan administrators, both HCI and the Plan trustees frequently asked the lawyers whether the investments they were contemplating were legally permissible and sought general advice as to what types of investments they could legally make. The lawyers' advice, through Gottfredson, was not limited to ERISA issues; the lawyers gave advice regarding all laws that might impinge upon the appropriateness of Plan investments, including rules and regulations of the Securities and Exchange Commission (SEC) and various tax laws.
that developed and marketed real property until about 1985. Ray Green, in addition to being a Plan trustee, was the secretary-treasurer, chief financial officer, and a director of HCI and president, general manager, and a director of Midwest. The Greens and the Harmons owned just under fifty percent of the Midwest stock, which was sufficient to effectively control Midwest. Harmon and his family members owned more than forty percent of HCI's stock. Likewise, Ray and Lynda Green, together with their children, owned more than forty percent of HCI's stock.
Following institution of the Plan, the Plan trustees asked Gottfredson whether it would be appropriate for the Plan to make "real estate loans." Gottfredson responded, "Yes, just make sure they are well secured and check the applicant's credit like a bank would." Gottfredson said nothing about the need to diversify the loans, nor did he comment on prohibitions of lending to parties-in-interest or the self-dealing restrictions contained in ERISA. According to the uncontested opinion of the Harmons' ERISA expert, Marc Gertner, Gottfredson's advice was incorrect and fell below the standard of care for attorneys practicing ERISA law. In reliance on Gottfredson's advice that the Plan could make real estate loans as long as they were secured and the borrower had good credit, the Plan began to invest heavily in real-estate-secured loans to Midwest.
In 1977, Green specifically asked Gottfredson if it would be legally permissible for the Plan to make a $250,000 loan to Midwest and whether the Plan could purchase Midwest stock. Lloyd researched the issue. In a January 5, 1978, letter, Gottfredson responded:
The loan will not constitute a prohibited transaction by the Profit Sharing Plan as long as the total of stock owned by Harmon City, Inc. and by the officers and directors and shareholders of Harmon City, Inc. is less than 50% of the outstanding voting stock of Midwest Realty Corporation or less than 50% of the total value of all classes of stock of Midwest Realty Corporation.
Gottfredson made no mention of other ways in which the loans from the Plan to Midwest could constitute breaches of fiduciary duties, diversification requirements, or self-dealing restrictions contained in ERISA, or that the loans could create potential liability for Plan trustees. In reliance on this legal advice, the Plan loaned $250,000 to Midwest and additional amounts from time to time thereafter. Periodically, Green would discuss with Gottfredson various Plan loans, including additional loans to Midwest. Plaintiffs allege that they would not have approved loans from the Plan to Midwest if the lawyers had advised them about additional ERISA provisions restricting such Plan investments.
In 1982, concerns arose about how the SEC would view Midwest's ownership of certain properties which were collateral for debts Midwest owed to the Plan. Gottfredson advised the Plan trustees that as long as the transfer did not involve a substantial amount or a majority of Midwest's assets and if appropriate Board approvals were obtained, the Plan could accept the properties as partial satisfaction of its loans to Midwest. Again, in giving such legal advice, Gottfredson made no mention of diversification, self- In the fall of 1983, the Plan auditors, Coopers & Lybrand, requested that Green obtain an opinion letter to the effect that the Harmon and Green families owned less than fifty percent of Midwest's stock. Green asked Gottfredson to prepare an opinion letter to this effect. The lawyers provided the opinion letter, which went beyond merely addressing whether the Harmon and Green family members owned fifty percent or less of Midwest's stock. It stated that as long as the Harmons and the Greens owned less than fifty percent of Midwest's stock, loans from the Plan to Midwest would not be prohibited by law. The November 23, 1983, opinion letter was drafted by Curtis and signed by Gottfredson.
dealing, prohibited transactions, or reasonable-person requirements of ERISA.
In the summer of 1984, Gottfredson met with Harmon and Green to review the loans which HCI and the Plan had made to Midwest. After reviewing the loans, Gottfredson became concerned for the first time that the loans to Midwest from the Plan might have been prohibited under ERISA, and he advised the Plan trustees to transfer the properties securing the loans from Midwest to the Plan. The attempts to make the Plan whole were unsuccessful, and the Plan suffered losses even after the collateral transfers. Harmon and Green resigned as Plan trustees in 1986, and new trustees were appointed. The Plan, Harmon, Green, and HCI retained separate legal counsel. While representing plaintiffs prior to this time, the lawyers had failed to point out the conflict of interest arising from their simultaneous representation of HCI, the Plan, the Plan trustees, and Midwest.
According to Gertner, the Harmons' ERISA expert,...
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