Herman v. South Carolina Nat. Bank, 97-6058.
| Decision Date | 15 May 1998 |
| Docket Number | No. 97-6058.,No. 97-6154.,97-6058.,97-6154. |
| Citation | 140 F.3d 1413 |
| Parties | Alexis HERMAN, Secretary of the United States Department of Labor, Plaintiff-Appellant, v. SOUTH CAROLINA NATIONAL BANK; William A. Fickling, Jr., et al., Defendants-Appellees. Frances J. KNOP; et al., Plaintiffs, v. CHARTER MEDICAL CORPORATION, et al., Defendants. SOUTH CAROLINA NATIONAL BANK, Defendant-Third Party Plaintiff-Appellee, v. Alexis HERMAN, Secretary of the United States Department of Labor, et al., Third Party Defendants-Appellants. SOUTH CAROLINA NATIONAL BANK, Plaintiff-Appellee, William A. Fickling, Jr., et al., Intervenor-Plaintiffs-Appellees, v. Alexis HERMAN, Secretary of the United States Department of Labor, et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Appeals from the United States District Court for the Northern District of Alabama.
Before EDMONDSON and HULL, Circuit Judges, and CLARK, Senior Circuit Judge.
These three consolidated cases concern an ERISA trustee's paying $80 million from the assets of an employee stock ownership plan to purchase allegedly worthless stock from a closely held corporation's owner, his relatives, and related entities. Claiming ERISA expressly prohibits this stock purchase, the Secretary of Labor appeals the district court's grant of summary judgment to the plan's trustee and the stock sellers.1 After review, we reverse.
In 1990, South Carolina National Bank ("SCNB") was the trustee of the Charter Medical Corporation Employee Stock Ownership Plan ("the Plan"). Trustee SCNB paid $80 million from Plan assets to William A. Fickling, Jr., his relatives, and related entities (the "Ficklings") to purchase their common stock in Charter Medical Corporation ("Charter"). Mr. Fickling was the President and Chairman of the Board of Directors at Charter, a closely held corporation. The Secretary contends that the Ficklings, as "parties in interest" under ERISA § 3(14), and SCNB, as the Plan trustee, violated ERISA § 406 when SCNB paid $80 million in Plan assets, or more than adequate consideration, to purchase the Ficklings' essentially worthless Charter stock.
To avoid conflicts of interest and self-dealing, ERISA prohibits stock transactions between a "party in interest" and a plan trustee. Although employee stock ownership plans ("ESOPs") invest in their employers' securities and generally are exempt from this prohibition, the exemption applies only if the transaction is for "adequate consideration."2 Before addressing further the Secretary's action against SCNB and the Ficklings, we review the two other lawsuits about this stock purchase that became consolidated with the Secretary's action.
In 1991, private litigants brought a class action against Charter, the Ficklings, SCNB, and others (the "Knop action").3 The plaintiff class consisted of the Plan's beneficiaries, who alleged violations of ERISA, federal securities laws, and state law in both this $80 million stock purchase in 1990 and an earlier $375 million stock purchase in 1988. The Secretary was not a party to the Knop class action.
In March 1992, the Secretary was advised that the private litigants were settling with all defendants. The Secretary responded that she was conducting her own investigation of the stock transactions and was not bound by the private litigants' settlement. The Secretary received the formal settlement documents on April 6, 1992. By this time, the Secretary's expert had advised that Charter's significant debt of one and one-half billion dollars and the stock valuation errors during the 1990 purchase made the stock essentially worthless. On April 9, 1992, the Secretary again advised the Knop parties that the Secretary was continuing her investigation, may bring suit, and was not bound by the Knop settlement. None of the parties sought to join the Secretary in the Knop action.
At the Knop fairness hearing on April 30, 1992, the district court approved the settlement. Charter made a $12.3 million financial contribution to the settlement, but the Ficklings and SCNB did not contribute any money to the settlement.4 Nonetheless, the private litigants dismissed with prejudice all claims against the Ficklings and SCNB. Knop counsel informed the district court that the Secretary had advised the parties that the Department of Labor "had no desire to impede the proposed settlement but that their silence should not be taken as restricting whatever they might do in the future."
Immediately after the Knop settlement, SCNB filed a new lawsuit against the Secretary on July 7, 1992, and simultaneously moved in Knop to file a third party complaint against the Secretary.5 Each case sought a declaration that the Secretary was in privity with the private Knop plaintiffs and that the Knop settlement precluded the Secretary from additional relief in any future lawsuit.
On July 24, 1992, the Secretary filed her own action against the Ficklings and SCNB.6 The Secretary did not sue Charter or any parties contributing monetarily to the Knop settlement, but sued only the Ficklings and SCNB, who paid nothing. The Secretary sought to recover from the Ficklings and SCNB $80 million (offset by sums already recovered), ERISA's statutory civil penalties, equitable relief for recission and disgorgement of profits, and injunctive relief.
In late 1992, the three lawsuits were consolidated because each involved whether the Secretary was bound by the private Knop settlement. In early 1993, the Ficklings and SCNB moved for summary judgment. In a June 25, 1993 order, the district court granted summary judgment for the Ficklings in a single sentence without analysis, citing only Useden v. Acker, 947 F.2d 1563 (11th Cir. 1991). However, as discussed infra, Useden supports, not defeats, the Secretary's claim against the Ficklings.
In contrast to the Ficklings' motion, the district court held in abeyance SCNB's motion for partial summary judgment and permitted discovery only on the narrow issue of whether SCNB had breached its fiduciary obligations. The Secretary was prohibited from conducting discovery on SCNB's claims of laches, res judicata, and release and other issues. In 1996, the district court granted SCNB's 1993 motion for partial summary judgment, finding that laches, res judicata, and release barred the Secretary's claims. The district court did not distinguish between the Secretary's legal claims for money damages, equitable claims for disgorgement of profits, or right to assess ERISA's civil penalties, but treated all as claims for monetary relief.
Subsequently, the Secretary and SCNB settled her claims for injunctive relief, making the case final.7 The Secretary then appealed the district court's grant of summary judgment for the Ficklings and SCNB on the Secretary's remaining legal and equitable claims and right to assess civil penalties.8
We first examine the ERISA violation in issue. The Secretary alleges that the Ficklings are "parties in interest," as defined under ERISA § 3(14), and that they violated ERISA § 406 by engaging in a prohibited stock transaction with SCNB.
As alleged by the Secretary, ERISA § 406 does prohibit stock transactions between an ERISA plan and a "party in interest", as follows:
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 —
(A) sale or exchange, or leasing, of any property between the plan and a party in interest;
...
(D) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan;....
29 U.S.C. § 1106(a)(1)(A),(D) (ERISA § 406(a)(1)(A),(D)) (emphasis supplied).
Also, the Ficklings may be considered "parties in interest" under a number of § 3(14)'s definitions.9 ERISA § 3(14) defines a "party in interest" to include fiduciaries, plan employees, service providers, employers whose employees are covered by ERISA plans, employee organizations whose members are covered by a plan, and owners of 50% or more of stock in these employers and employee organizations, or a relative of such an owner. 29 U.S.C. § 1002(14) (ERISA § 3(14)). A "party in interest" also includes employees, officers, and directors, as well as shareholders, partners, and joint venturers owning ten percent or more of entities that are themselves "parties in interest." Id.
ERISA prohibits stock transactions between a plan and a "party in interest" because of the obvious conflicts of interest and the high potential for abuse and injury to the plan. See 29 U.S.C. § 1106(a)(1)(A), (D) (ERISA § 406(a)(1)(A),(D)). The Supreme Court noted that in enacting § 406(a) barring transactions between a "party in interest" and an ERISA plan, "Congress' goal was to bar categorically a...
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