Marshall v. Kelly, CIV-78-0070-E.
| Decision Date | 29 December 1978 |
| Docket Number | No. CIV-78-0070-E.,CIV-78-0070-E. |
| Parties | F. Ray MARSHALL, Secretary of Labor, Plaintiff, v. Arthur M. KELLY, Individually and as trustee and administrator of Mike Kelly Construction Company Profit Sharing Plan, Defendant. |
| Court | U.S. District Court — Western District of Oklahoma |
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Carin Ann Clauss, Sol. of Labor; Monica Gallagher, Associate Sol., Plan Benefits Security Div.; Norman P. Goldberg, for Litigation, Plan Benefits Security Div.; Robert N. Eccles, Atty., U. S. Dept. of Labor, Plan Benefits Security Div., Washington, D. C., John E. Green, Asst. U. S. Atty., Oklahoma City, Okl., for plaintiff.
Harvey L. Harmon, Sr. of Franklin, Harmon & Satterfield, Inc., Oklahoma City, Okl., for defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This action was brought by the Secretary of Labor on January 27, 1978 pursuant to 29 U.S.C. § 1132(a) against the defendant, Arthur M. Kelly, seeking relief for alleged violations of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. The defendant filed an answer denying any violations of ERISA and raising several affirmative defenses. Trial was had to the Court on December 4-7, 1978. The Court, having heard the evidence presented and read the briefs and findings and conclusions proposed by the parties, now makes the following findings of fact and conclusions of law pursuant to Rule 52, Federal Rules of Civil Procedure.
1. The Mike Kelly Construction Company (the Company) is an Oklahoma corporation which, in the years relevant here, specialized in the construction of fast food restaurants. Prior to their merger into the Company in early 1975, two affiliated corporations, Mike Kelly Manufacturing Co. and Mi-Kel Corp., also operated aspects of the construction business. The defendant, Arthur M. Kelly (known as Mike Kelly), is the sole shareholder (with his wife) of the Company and also serves as its president and chairman of its Board of Directors.
2. On December 29, 1969, effective as of January 1, 1969, the Company established a Profit Sharing Plan (the Plan) for the benefit of its employees and employees of the affiliated Mike Kelly companies. The Plan provides for annual discretionary contributions by the Company to a trust in an amount not to exceed the lesser of the Company's net profits or 15% of the total annual compensation paid by the Company. These employer contributions — along with forfeitures, any voluntary contributions by employees, and all income of the trust — are allocated annually to participants' individual accounts. Benefits equal to all or a part of the individual account balance are payable to a participant who terminates employment with the Company; the Plan's vesting schedule provides for partial vesting after two years of service, increasing by steps to full vesting after six years. At the end of 1976, the Plan had total assets, valued at cost, of $376,215.90; as of October 1, 1978, its assets were $235,240.16. The number of participants in the Plan has ranged from 95 in 1974 to 11 in 1978.
3. The defendant has served continuously as a trustee of the Plan since its inception and has been the sole trustee since early 1976. The defendant is the only member of the Plan Committee which is responsible for administration of the Plan.
4. On May 16, 1972, the Plan made a loan of $33,000 to the Company. On February 22, 1974 and May 22, 1974 the Plan made additional loans to the Company of $50,000 and $100,000, respectively. Each of these loans was originally for a one-year term, but was renewed annually on its due date by the defendant on behalf of the Plan. The loan notes in evidence show that the $33,000 loan bore 12% interest in 1974 and 8% in 1976; that the $50,000 loan was made at 10% interest in 1974, and renewed at 10% in 1975 and 8½% in 1977; and that the $100,000 loan was made at 12% in 1974 and renewed at 10% in 1975 and 8% in 1976. The defendant testified that these interest rates were comparable to those paid by the Company for its bank financing, except that the Plan's rate may have dropped as much as a point below the bank rate when the Company was financially distressed. Subsequent to the filing of this action, the interest rates on each of these loans was raised to 10%.
5. In the period after the loans from the Plan were made, the financial condition of the Company declined significantly. Robert VanDeventer, who was Controller of the Company, testified that, because of this decline, he had doubts by late 1975 about the Company's ability to repay the loans from the Plan both over the short and long terms. The defendant admitted that there had been a time when the Company, in fact, could not have repaid the loans.
6. In connection with these loans, the Plan and the Company entered into a security agreement which provided that the Company's "qualified accounts receivable" would secure all outstanding loans between the Plan and Company. Paragraph 2 of that agreement provided that the unpaid principal of all outstanding loans "shall not exceed" 66 2/3 % of the value of these "qualified accounts receivable". The defendant testified that he was not familiar with the terms of the security agreement, although he signed it on behalf of both the Plan and the Company.
7. The Plan's security interest in the Company's accounts receivable was recorded by filing of a UCC-1 financing statement on March 4, 1974 securing "all debtors trade accounts receivable". On March 15, 1974, 11 days after the Plan's security agreement was entered into, a financing statement was filed by the First National Bank of Bethany which covered all of the Company's "accounts receivable now existing and which hereafter come into existence". Although the Plan and the Bank were the two major sources of the Company's financing, and although the defendant signed both financing statements, he testified that he was unaware of this simultaneous pledging of the same assets to secure two obligations.
8. Accompanying the deterioration of the Company's finances was a decline in the value of the Company's accounts receivable which secured the loans from the Plan. The total value of the Company's accounts receivable dropped and remained below the $274,500 value of the accounts which was required to secure $183,000 of loans under the terms of the security agreement, thus jeopardizing the sizeable percentage of the Plan's assets invested in these loans. In addition, these accounts did not satisfy the definition of a "qualified" account under the security agreement. The defendant testified that he had never seen any schedules or certificates as to the value of the accounts receivable, and there was no evidence that such schedules were available as contemplated by paragraph 4 of the security agreement.
9. While the loans from the Plan to the Company were secured only by the Company's accounts receivable, the bank loans to the Company were also secured by the defendant's personal guarantee and a pledge of securities held by him personally. Although the principal balance due on Plan loans remained almost constant in amount, the defendant agreed to reduce the principal balance of the bank loans and to repay them fully prior to repayment of the Plan's loans. Principal repayments by the Company brought the balance of the Bank loans from around $660,000 in 1975 to about $160,000 in 1978 with further reduction and full repayment to be made from payments for completed construction jobs.
10. Article VIII, Paragraph 8.12 of the Plan document then in effect provided that loans to Plan participants shall be made on interest-bearing notes and that such loans "shall not exceed 75% of such participant's vested interest" in his employer contribution account "determined as of the last preceding plan anniversary date." As of December 31, 1974, the defendant was 80% vested in an account balance of $31,479.67 for a vested total of around $25,200. Even assuming that all of this total was in the employer contribution account as required under Article VIII and not attributable to forfeitures or voluntary contributions, the maximum amount loanable to the defendant under the Plan in November 1975 was 75% of $25,200 or $18,900. On September 3, 1975, the defendant received an $18,000 loan from the Plan which is still outstanding. The total principal amount of all loans from the Plan to the defendant is greater than the total amount of the Plan's loans to all other participants.
11. The defendant testified that, following the passage of ERISA, he was aware that the Plan was prohibited from making any new loans to the Company. On November 17, 1975, the defendant caused the Plan to make a $60,000 loan to himself and used the proceeds of this loan in the Company's business. Robert VanDeventer, former Controller of the Company and co-trustee of the Plan, testified, without refutation by the defendant, that he was instructed by the defendant to write a check for $60,000 to the defendant. He wrote the check but refused to sign it and advised the defendant that such a loan would be unlawful under ERISA. The defendant responded "If the house is on fire, you grab the nearest bucket of water" and signed and endorsed the Plan's check which was then deposited to the Company's bank account. The loan was repaid, with interest, three months later.
12. Bill Weaver is a personal and business acquaintance of the defendant and operates an insurance agency which writes insurance for the defendant and his business entities. In November 1975, Mr. Weaver approached the defendant for a loan and was granted a $25,000 loan from the Plan. This loan was made at the direction of the defendant despite a warning relayed from the Plan's attorney concerning the legality of the loan under ERISA. No loan note is in evidence, but the evidence does show that the loan was made at 8% interest and was not...
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