Montgomery v. Aetna Plywood, Inc.

• Decision Date: 16 July 1998
• Docket Number: No. 95 C 3193.,95 C 3193.
• Citation: Montgomery v. Aetna Plywood, Inc., 39 F.Supp.2d 915 (N.D. Ill. 1998)
• Parties: Howard R. MONTGOMERY, for himself and for all others similarly situated for themselves and for Aetna Plywood, Inc. Profit Sharing Plan as successor to Aetna Plywood, Inc., Employee Stock Ownership Plan, Nominal Defendant, Plaintiffs, v. AETNA PLYWOOD, INC., a Delaware corporation, Jeffrey Davis, John Francione, Peter C. John, and Peter Thomsen, Defendants.
• Court: U.S. District Court — Northern District of Illinois

39 F.Supp.2d 915

Howard R. MONTGOMERY, for himself and for all others similarly situated for themselves and for Aetna Plywood, Inc. Profit Sharing Plan as successor to Aetna Plywood, Inc., Employee Stock Ownership Plan, Nominal Defendant, Plaintiffs, v. AETNA PLYWOOD, INC., a Delaware corporation, Jeffrey Davis, John Francione, Peter C. John, and Peter Thomsen, Defendants.

No. 95 C 3193.

United States District Court, N.D. Illinois, Eastern Division.

July 16, 1998.

COPYRIGHT MATERIAL OMITTED

Clinton A. Krislov, Sara Jane Wisenthal, Krislov & Associates, Ltd., Chicago, IL, Danlel A. Zazove, Barbara J. Yong, Chicago, IL, for plaintiffs.

Dean A. Dickie, Kathleen H. Klaus, D'Ancona & Pflaum, Chicago, IL, C. Barry Montgomery, Williams & Montgomery, Chicago, IL, Richard W. Culver, Barrington, IL, for defendants.

AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

HART, District Judge.

Following a bench trial, findings of fact and conclusions of law dated June 11, 1998 were issued. After issuance of the findings, the parties revealed that, during trial, defendants Peter John and Peter Thomsen had reached a settlement with the plaintiff class whereby they agreed to pay $800,000 to settle the claims against them. John and Thomsen are to pay this amount regardless of the outcome of the trial. The only contingency being that, because this is a class action, the settlement has to be approved by the court following notice to the class. The parties agreed that the existence of the settlement was not to be disclosed to the court until after findings of fact and conclusions of law had been issued. After the settlement had been reached, the parties continued to participate in the trial as if no settlement had occurred.

Because a settlement of a class action remains tentative until final approval by the court, the claims against John and Thomsen did not become moot upon the signing of the settlement agreement and this court did not lose jurisdiction to decide the case. Nevertheless, the need for entering findings and conclusions on the merits ceased absent disapproval of the settlement. Although John and Thomsen urge the court to leave the findings fully intact and enter judgment on them, that would be an inappropriate action. Since signing the settlement, the parties' common interest was in having the settlement approved. It was inappropriate to keep the settlement secret. The parties no longer being in a fully adversarial relationship, findings are no longer appropriate. Even if the findings were to remain untouched, no judgment could be entered on them since the only judgment that can now be entered (absent disapproval of the settlement) is a judgment based on the settlement.

The findings and conclusions that follow replace the now vacated June 11, 1998 findings and conclusions. Those findings and conclusions that were pertinent only to John and Thomsen have been eliminated. The findings also add additional information that has been provided enabling the court to calculate damages and prejudgment interest through July 16, 1998.

I. Introduction

This case is before the court after a bench trial for entry of findings of fact, conclusions of law and final judgment. Plaintiff Howard R. Montgomery brought this action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., on his own behalf and on behalf of former participants in the Aetna Plywood, Inc. Employee Stock Ownership Plan (the "ESOP"). Jurisdiction is not contested. Federal courts have exclusive jurisdiction over actions brought pursuant to ERISA. Supplemental jurisdiction exists with respect to a state law corporate fiduciary claim.

Named plaintiff claims that the individual defendants are ESOP fiduciaries by virtue of being members of an ESOP committee, as well as officers and the directors of Aetna Plywood, Inc. ("Aetna" or the "Company"). Named plaintiff alleges that, in a leveraged buy-out at an undervalued price of $85.75 per share, defendants sold to the Company the controlling block of Aetna stock held by the ESOP.

A class was certified consisting of "[a]ll participants in the Aetna Plywood, Inc. Employee Stock Ownership Plan as of the June 1992 sale of the ESOP's shares of Aetna Plywood, Inc. to Aetna Plywood, Inc., excluding all defendants." Montgomery v. Aetna Plywood, Inc., 1996 WL 189347 *6 (N.D.Ill. April 16, 1996) ("Montgomery I"), reconsideration denied, 1996 WL 189347 *2 (N.D.Ill. April 16, 1996).

Leave to amend was granted to add a stockholder fiduciary claim under Delaware law against defendants in their separate capacity as Aetna directors. See Montgomery v. Aetna Plywood, Inc., 956 F.Supp. 781, 787-88 (N.D.Ill.1997) ("Montgomery III"). The state law corporate claim, which is not based on defendants' ERISA fiduciary status, is not preempted by ERISA. Boston Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429, 439-40 (1st Cir.1996); Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 1468 (5th Cir.1986), cert. denied, 479 U.S. 1034, 107 S.Ct. 884, 93 L.Ed.2d 837 (1987).

Leave to add a federal securities law claim was denied for want of standing, Montgomery I, 1996 WL 189347 at *2; a state law unjust enrichment claim (Count III of the first amended complaint) was dismissed as preempted by ERISA, Order dated Sept. 7, 1995; defendants' motion for summary judgment on statute of limitations grounds was denied, Montgomery III, 956 F.Supp. at 785-86; and plaintiffs' motion for summary judgment as to liability was denied, Order dated April 29, 1997.

Count I of the third amended complaint alleges a violation of 29 U.S.C. § 1104(a)(1) which requires that an ERISA fiduciary discharge his or her duties of loyalty in a prudent manner for the exclusive purpose of providing benefits to the ESOP participants. Named plaintiff claims that the purpose of the stock transaction was not for the benefit of the ESOP stockholders, but rather was to reacquire the ESOP shares in order to vest sole control and ownership of the Company in defendant Davis at a price below market value. Named plaintiff also alleges that the price paid was based on a flawed valuation of the ESOP shares.

Count II of the third amended complaint alleges a violation of 29 U.S.C. § 1106 which prohibits self-dealing by ERISA fiduciaries. At the time of the transaction, all but 17 shares of Aetna were held by the ESOP. Defendant Jeffrey Davis, the president and a director of Aetna and a member of the ESOP committee, owned these remaining shares and became the sole owner of Aetna upon repurchase of the ESOP stock by the Company. However, the per se rules that prohibit fiduciary selfdealing are not applicable to all aspects of ESOP administration. There is a conditional exemption for the acquisition of employer securities if it is shown that the purchase was made for "adequate consideration." 29 U.S.C. § 1108(e). The parties agree that this exception provides an affirmative defense to what would otherwise be a prohibited transaction, but the burden shifts to the fiduciaries to prove that adequate consideration was paid. See Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996), cert. denied, 520 U.S. 1237, 117 S.Ct. 1838, 137 L.Ed.2d 1042 (1997). It must be shown that they arrived at their determination of adequate consideration in good faith by way of a prudent investigation and the application of sound business principles of evaluation. Donovan v. Cunningham, 716 F.2d 1455, 1467-68 (5th Cir. 1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839 (1984).

Count IV of the third amended complaint alleges that, because the defendant directors and officers are on both sides of the stock sale transaction, they are required, under applicable Delaware law, to demonstrate, under a test of careful scrutiny, their utmost good faith and the inherent fairness of the bargain to the shareholders whose interests were purchased. Named plaintiff alleges that the stock transaction cannot pass such a test. Defendants admit that they carry the burden of proof with respect to Count IV.

ERISA provides that the term "adequate consideration" means "the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary [of Labor]." 29 U.S.C. § 1002(18)(B).

The Secretary has issued a proposed defining regulation, Proposed Regulation Relating to the Definition of Adequate Consideration, 53 Fed.Reg. 17632 (to be codified at 29 C.F.R. § 2510.3-18) (proposed May 17, 1988) ("Proposed Regulation").¹ The Proposed Regulation incorporates applicable statutory and trust law standards and furnishes a useful paradigm for asset valuation and analysis. Pertinent parts of the Proposed Regulation are as follows:

(2) Fair Market Value. (i) Except as otherwise specified in this section, the term "fair market value" as used in section 3(18)(B) of the Act ... means the price at which an asset would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well informed about the asset and the market for such asset.

(ii) The fair market value of an asset for the purposes of section 3(18)(B) of the Act ... must be determined as of the date of the transaction involving that asset.

(iii) The fair market value of an asset for the purposes of section 3(18)(B) of the Act ... must be reflected in written documentation of valuation meeting the requirements set forth in paragraph (b)(4), of this section.

(3) Good Faith — (i) General Rule. The requirement in section 3(18)(B) of the Act ... that the fiduciary must determine fair market value in good faith establishes an objective, rather than a subjective, standard of conduct. Subject to the...