Keach v. U.S. Trust Co. N.A.
| Decision Date | 12 February 2004 |
| Docket Number | No. 01-1168.,01-1168. |
| Citation | 313 F.Supp.2d 818 |
| Court | U.S. District Court — Central District of Illinois |
| Parties | Debra KEACH and Patricia Sage, Plaintiff, v. U.S. TRUST COMPANY, N.A., f/k/a/ U.S. Trust Company of California, N.A., Ellen D. Foster, as Executrix of the Estate of Thomas S. Foster and as Co-Trustee of the Thomas S. Foster Trust executed on April 14, 1994, the Northern Trust Company, an Illinois Corporation, as Co-Trustee of the Thomas S. Foster Trust executed on April 14, 1994, Melvin R. Regal, individually, as trustee or agent of the Steven Jay Regal Trust, as trustee or agent of the Judi Lynn Regal Trust, and as trustee or agent of the John E. Regal Trust, A. Robert Pellegrino, Valuemetrics, Inc., Houlihan, Lokey, Howard & Zukin, Inc., Robert A. Ostertag, Jr., Terry P. Cole, Alan R. Dix, Jon D. Elletson, Stephen P. Bartley, Lyle T. Dickes, James N. Freid, Dale Fujimoto, William J. Gehring, Henry R. Gregory II, John F. Halpin, Richard S. Hodgson, James H. Kyle, John Lappegaard, Gregory K. McAllister, George McKittrick, Michael F. Norbutas, Clayton Patino, Jerry L. Rathmann, Frederick J. Stuber, W. Thomas Stumb, Mark Swedlund, Leo A. Vandervlugt, Robert J. Wilson, Bruce B. Wright, and Ashley Anne Foster, as trustee or agent of the Ashley Anne Foster Irrevocable Trust, Defendant. |
Dean B. Rhoads, Robert Rhode, Edward Sutkowski, Steven Oates, Sean Anderson, Sutkowski & Rhoads, Peoria, IL, for Plaintiffs Debra Keach and Patricia Sage.
Timothy Bertschy, Heyl, Royster, Voelker & Allen, Peoria, IL, Robert Eccles, Shannon M. Barrett, O'Melveny & Myers LLP, Washington, DC, for Defendant U.S. Trust Company, NA, fka U.S. Trust Company of California.
Richard J. Pautler, Jennifer Baetje, Thompson & Coburn, St. Louis, MO, for Defendants Robert A. Ostertag, Jr., Terry P. Cole, Alan R. Dix, Jon Elletson, A. Robert Pellegrino.
James Bailey, Paul Ondrasik, Jr., Steptoe & Johnson, Washington, DC, Roy Davis, David Lubben, Davis & Campbell LLC, Peoria, IL, for Defendants Valuemetrics, Inc.
Mark Casciari, Ian Hugh Morrison, Sari M. Alamuddin, Seyfarth Shaw, Chicago, IL, for Defendant Houlihan, Lokey, Howard & Zukin, Inc.
Charles Roth, James Springer, Kavanagh Scully Sudow White & Frederick, Peoria, IL, for Defendants Stephen P. Bartley, Dale Fujimoto.
Stephen Gay, Jeffrey Alan Ryva, Husch & Eppenberger LLC, Peoria, IL, for Defendant Lyle Dickes.
Jeffrey Rock, Hasselberg Rock Bell & Kuppler, Peoria, IL, for Defendants James Freid, Richard Hodgson.
John Elias, Robert Riffle, Cynthia Elias, Elias Meginnes Riffle & Seghetti, Peoria, IL, for Defendant William Gehring, Henry Gregory, II, John F. Halpin, James Kyle, John Lappegaard, George McKittrick, Clayton Patino, Jerry Rathmann, W. Thomas Stumb, Mark Swedlund, Leo Vanderlugt, Robert Wilson, Bruce Wright.
Dean Essig, Washington, IL, for Defendant Gregory McAllister.
Charles Roth, James Springer, Joseph Sudow, Kavanagh Scully Sudow White & Frederick, Peoria, IL, for Defendants Michael Norbutas, Frederick Stuber, and for Defendant Ashley Anne Foster, as trustee or agent of the Ashley Anne Foster Irrevocable Trust, and Melvyn R. Regal, individually, as trustee or agent of the Steven Jay Regal Trust, as trustee or agent of the Judi Lynn Regal Trust, and as trustee or agent of the John E. Regal Trust.
In 1995, Foster & Gallagher, Inc. ("F & G") was enjoying multiple years of record profits, and the management forecast projected additional years of record profit into the future. On December 20, 1995, the F & G Employee Stock Ownership Plan ("ESOP"), with U.S. Trust Co. ("U.S. Trust") as its trustee, purchased 3,589,743 shares of F & G stock from Thomas Foster ("Foster"), Melvyn Regal ("Regal"), A. Robert Pellegrino ("Pellegrino"), and several other officers and directors at a price of $19.50 per share. For the next two years, F & G continued to enjoy record profits, even exceeding the projections in the management forecast. However, in 1998, F & G's profits began a steady decline that ended when the company declared bankruptcy in 2001. This trial looked at what happened to cause F & G to go from boom to bust and addressed the question of whether any of the Defendants breached a fiduciary duty to the ESOP that resulted in the loss of the value of the F & G stock held by the ESOP.
By the end of the 14-day bench trial in this matter, essentially four claims were left on the table for judicial determination: (1) whether Foster, Regal, and Pellegrino breached a fiduciary duty by failing to disclose material information in connection with the 1995 stock purchase transaction; (2) whether Foster, Regal, and Pellegrino breached a fiduciary duty by causing the ESOP to enter into a prohibited transaction; (3) whether U.S. Trust breached a fiduciary duty by causing the ESOP to enter into a prohibited transaction; and (4) whether U.S. Trust breached a fiduciary duty by failing to take action to investigate and pursue claims against participants in the 1995 stock purchase transaction after the value of F & G stock precipitously declined.
Based on the evidence presented at trial, the Court finds that neither Foster, Regal, nor Pellegrino attempted to conceal material information or knowingly made anything less than full disclosure of such information to U.S. Trust and its due diligence team in connection with the 1995 stock purchase transaction. Accordingly, no duty to disclose material information was breached.
The Court further finds that the ESOP did not pay more than adequate consideration for the stock purchased on December 20, 1995. Although Plaintiffs argued that the fair market value of the F & G stock was substantially less than the $19.50 price that was paid per share and that U.S. Trust did not conduct a good faith/adequate investigation, these arguments were premised on the presumption that information concerning dependency on sweepstakes marketing and increased governmental regulation of the sweepstakes marketing industry posed either a material risk to F & G in 1995 or a future material risk that was reasonably foreseeable at the time. The weight of the evidence indicated that F & G's officers and directors did not consider these issues to be material at the time, as evidenced by the following: (1) an otherwise inexplicable conversion to a Subchapter S corporation in 1997 (which would only have had positive tax consequences for a company expecting continued profitability); (2) the undersubscription of another stock purchase transaction by the ESOP in 1997 because many officers and directors believed that the stock was worth much more and would continue to increase in value; (3) the immediate refusal of Foster and Regal to sell their remaining shares to the company at $25.00 per share in 1997; and (4) an unsecured $10 million loan from Regal and the Foster Estate to F & G in 1999 in order to assist the recovery of the company. Nor were such issues deemed material by the four lenders that performed their own due diligence investigation prior to loaning F & G $70 million to finance the 1995 stock purchase transaction at favorable interest rates and without requiring collateral. Some of those same lenders agreed to loan an additional $100 million on the same terms in 1997. Uncontroverted and credible testimony at trial from an industry expert also established that such issues were not material at the time of the 1995 stock purchase transaction and did not present a reasonably foreseeable material risk of future harm to F & G. Given these findings, in conjunction with three expert valuations placing the fair market value of F & G stock well in excess of $19.50 per share and the less credible valuation supporting Plaintiffs' position that the value of the stock was substantially less than $19.50 per share, the Court must conclude that the 1995 stock purchase transaction was for adequate consideration and that Foster, Regal, Pellegrino, and U.S. Trust are entitled to the protection of an exemption under § 408(e) of ERISA on Plaintiffs' prohibited transaction claims.
Finally, as the evidence of record established that the cause of the loss to the ESOP was not any material risk to the value of F & G stock due to sweepstakes dependency or governmental regulation of the sweepstakes industry in connection with the stock purchase by the ESOP on December 20, 1995, the investigation and preservation of claims against participants in the 1995 stock purchase transaction as requested by the Plaintiffs would have been fruitless and futile. Thus, U.S. Trust could not have breached any fiduciary duty by failing to take the requested action.
This is an important case to the parties involved, and is also important to many people who have not been directly involved in the litigation but were participants in the F & G ESOP. It is important to the Plaintiffs, who lost their jobs, benefits, and funds expected to provide for their retirement when F & G closed its doors in 2001. It is important to the Defendants, whose professional reputations and personal integrity have been called into question and some of whom also lost their jobs and investments when F & G declared bankruptcy. This case is also important to the community, as F & G was a Peoria institution for many years, and its former officers and employees are well known in this community as neighbors, friends, and personal acquaintances. The Court recognizes the importance of this case and has immersed itself in the facts and arguments of record in order to give this litigation the scrupulous care and attention that it deserves.
The loss of F & G was tragic, and it is completely reasonable for the people who suffered from its demise to want to understand what happened and assign blame to anyone who could have caused the loss. The Court is very sympathetic to the Plaintiffs and the losses that they...
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