Hofco, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa.

• Decision Date: 18 March 1992
• Citation: 482 N.W.2d 397
• Parties: , 15 Employee Benefits Cas. 1155 HOFCO, INC., Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Appellee. 90-1801.
• Court: Iowa Supreme Court

Page 397

482 N.W.2d 397

60 USLW 2611, 15 Employee Benefits Cas. 1155

HOFCO, INC., Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Appellee.

90-1801.

Supreme Court of Iowa.

March 18, 1992.

Rehearing Denied April 17, 1992.

Thomas W. Andrews of Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, for appellant.

W. Don Brittin, Jr. and Hayward L. Draper of Nyemaster, Goode, McLaughlin, Voigts, West, Hansell & O'Brien, P.C., Des Moines, for appellee.

Considered by HARRIS, P.J., and LARSON, LAVORATO, NEUMAN, and ANDREASEN, JJ.

LAVORATO, Justice.

The issue here is whether a liability insurance policy covers an excise tax levied against an employer because of a transaction between the employer and its employee profit sharing plan and trust. Because we think the "tax" is a penalty and therefore not a loss as defined by the policy, we affirm the district court's grant of summary judgment to the insurer.

I. Factual Background.

The following undisputed facts are gleaned from the summary judgment record.

In 1979 James Wieder purchased all the stock of Hofco from the Hockenberg family and became the company's president, chairman of the board of directors, and sole stockholder. Hofco was a holding company, owning four smaller Hockenberg companies that sold and installed restaurant equipment and supplies. Wieder financed the purchase in part by a promissory note to the Hockenberg family, payable in yearly installments of approximately $400,000. These payments were secured by letters of credit from Iowa-Des Moines National Bank.

Wieder and his wife became cotrustees of the Hockenberg companies employees' profit sharing plan and trust (plan). The beneficiaries of the plan were employees or former employees of Hofco or the Hockenberg companies. Hofco was a sponsor of the plan but was never a trustee of it.

Eventually Wieder hired an insurance consultant to advise him--as president of Hofco--concerning appropriate insurance coverage for the company. Hofco settled on a pension trust liability policy purchased from National Union Fire Insurance Company of Pittsburgh, Pennsylvania. The policy coverage started on February 1, 1982, and ended February 1, 1985.

In 1982 Hofco developed financial problems and experienced significant losses. In January 1983, as the yearly payment on the promissory note to the Hockenbergs was approaching, Iowa-Des Moines told Wieder it had concerns about Hofco's cash flow and ability to make the payment. So the bank told Hofco it would extend it no further credit and asked Hofco to liquidate the companies.

Late in January 1983, Wieder submitted unaudited financial statements to United Central Bank and obtained new financing from that bank. United Central, however, required infusion of $400,000 of new capital into Hofco as a condition for the new financing. Wieder was able to raise $100,000 of this amount on his own. And on February 1, Wieder obtained the remaining $300,000 by selling 10,000 shares of Hofco stock to the plan for that amount of money.

As part of the stock transaction, Hofco gave the plan "put" options evidenced by a promissory note. (A "put" is an option permitting the holder to sell a certain stock or commodity at a fixed price for a stated quantity and within a stated period. Black's Law Dictionary 1112 (5th ed. 1979).) The note was secured by a second mortgage to the plan on Hofco's office building in Des Moines. Hofco and the plan's trustees signed the mortgage.

Wieder and his wife acted as trustees for the plan in purchasing the stock. Wieder also acted on behalf of Hofco as its president. Wieder maintains the transaction was conducted on the advice of his lawyers.

In April, United Central received the preliminary report of Hofco's financial condition for the fiscal year ending January 31, 1983. The audit report disclosed discrepancies from the unaudited information Wieder had previously provided. The audit report prompted United Central to withdraw its financing of Hofco. As a result, Hofco was forced to liquidate its business.

In May, Hofco--again allegedly on the advice of counsel--repurchased the stock it had previously sold the plan. The purchase price was $309,375 and payment was by a promissory note to the plan. The note provided for interest payments only until February 1, 1987; beginning March 1, 1987, principal payments were to begin. The principal payments were on a fixed, fifteen-year monthly schedule. The promissory note was secured by a different second mortgage on Hofco's office building in Des Moines.

Only a few interest payments on the note were made. None of the principal payments were made.

By December Hofco ceased doing business although the corporation was never formally dissolved. The promissory note held by the plan proved worthless. Payment of the $1 million first mortgage on Hofco's office building devoured the equity Hofco had in the building and deprived the plan beneficiaries of any recoupment.

By now the Wieders and Hofco enjoyed a high profile. Two federal lawsuits and an internal revenue investigation resulted.

On April 17, 1985, several of the largest beneficiaries of the plan sued the Wieders. They alleged that the Wieders had breached their fiduciary duties to the plan as trustees when they engaged in the stock sale-and-buy-back transactions. The Wieders' lawyers were also named as defendants for their alleged advice to the Wieders in their capacity as trustees.

The following month, the United States department of labor sued the Wieders in their capacity as plan trustees. The department alleged that the Wieders had violated several provisions of the Employee Retirement Income Security Act of 1974 (ERISA). See 29 U.S.C. §§ 1001-1461 (1982). Four specific violations of ERISA were alleged: (1) breach of fiduciary duties to act prudently and solely in the interest of the beneficiaries of the plan, (2) engaging in the prohibited sale of stock between the plan and a party in interest (Hofco), (3) causing the plan to extend credit to a party in interest (Hofco), and (4) dealing with the plan's assets in the Wieders' personal interest.

The two cases were eventually consolidated. They sought damages for the losses suffered by the plan from (1) the stock transactions with Hofco, and (2) the failure of Hofco to pay the promissory note to the plan.

Litigation ceased on April 25, 1988, when a consent order was entered in the consolidated action. The order decreed that $260,000 was to be paid to a settlement administrator who would then distribute that fund to the plan beneficiaries. National Union paid one-half of the settlement and the malpractice carrier for the Wieders' lawyers paid the other half. The plan was then liquidated and dissolved.

In addition to its payment of one-half the settlement, National Union paid all legal fees the Wieders had incurred in defending against the two lawsuits. The settlement and fee payments were made under the pension trust liability policy that Hofco had purchased from National Union.

At this juncture the IRS began an investigation of Hofco for its stock transactions with the plan. The IRS ultimately determined that these were prohibited transactions under 26 U.S.C. § 4975. Prohibited transactions under this section include: (1) the sale of property by an employer to its profit sharing plan, and (2) the loaning of money or the extension of credit by the profit sharing plan to the employer company.

In September 1988, under section 4975(a), the IRS assessed $39,474.72 in excise taxes against Hofco for tax years ending January 31, 1984, through January 31, 1988. Hofco asked National Union to reimburse it for legal expenses, costs, and taxes in connection with the IRS excise tax assessment. National Union refused, claiming the excise tax levied against Hofco was not covered by the policy.

In November 1989 Hofco agreed to the IRS excise tax assessment in the amount of $24,474.42. Unbeknownst to National Union, Hofco subsequently settled its claim against its lawyers for the excise tax. The lawyers paid $18,000 in return for a release of liability from the claim.

Hofco then pressed National Union again for reimbursement of the full amount of the IRS assessment and all attorney fees and costs incurred in the tax dispute. National Union again refused to pay. National Union finally learned of Hofco's $18,000 settlement with its attorneys in January 1990.

II. Procedural Background.

In February 1990 Hofco filed the present suit seeking indemnification from National Union for the excise tax, attorney fees, and costs under the terms of the policy. Hofco moved for partial summary judgment. Later National Union moved for summary judgment. After a hearing on the motions, the district court denied Hofco's motion and granted National Union's.

III. Scope of Review.

Our review of summary judgment is at law. Iowa R.App.P. 4. Summary judgment is proper under Iowa Rule of Civil Procedure 237 only when the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Colton v. Branstad, 372 N.W.2d 184, 187 (Iowa 1985).

The party moving for summary judgment has the burden of showing the nonexistence of a genuine issue of material fact. First Nat'l Bank v. Kenny, 454 N.W.2d 589, 591 (Iowa 1990). The party resisting should be afforded every legitimate inference that can reasonably be deduced from the evidence. Northrup v. Farmland Indus., Inc., 372 N.W.2d 193, 195 (Iowa 1985). A fact question is generated if reasonable minds can differ on how the issue should be resolved. Id. There is no fact question if the only conflict concerns legal consequences flowing from undisputed facts. Brown v. Monticello State Bank, 360 N.W.2d 81, 84 (Iowa 1984). In those circumstances, summary judgment is proper. Jacobs v. Stover, 243 N.W.2d 642, 643 (...