Newton v. Van Otterloo

• Decision Date: 11 January 1991
• Docket Number: No. S89-610.,S89-610.
• Citation: 756 F. Supp. 1121
• Parties: Robert B. NEWTON, et al., Plaintiffs, v. John N. VAN OTTERLOO, et al., Defendants.
• Court: U.S. District Court — Northern District of Indiana

756 F. Supp. 1121

Robert B. NEWTON, et al., Plaintiffs, v. John N. VAN OTTERLOO, et al., Defendants.

No. S89-610.

United States District Court, N.D. Indiana, South Bend Division.

January 11, 1991.

COPYRIGHT MATERIAL OMITTED

Ian D. Lanoff, Jeffrey Freund, John M. West, Washington, D.C., Allan J. Mindel, Merrillville, Ind., for plaintiffs.

Timothy W. Woods, South Bend, Ind., for defendants John K. Van Otterloo, James A. Carr, Maurice Gallaher, Kenneth P. Fedder, Gary C. Belting, Gerald F. Vogel, Arlene L. Heim, South Bend Lathe, Inc., South Bend Lathe, Inc. Employee Stock Ownership Plan and Donald E. Neuerburg.

James H. Ham, III, Douglas D. Powers, Fort Wayne, Ind., John Purcell, Indianapolis, Ind., for defendant First Source Bank.

MEMORANDUM AND ORDER

MILLER, District Judge.

This cause is before the court on three motions for summary judgment pursuant to Fed.R.Civ.P. 56. All parties appear to agree that no genuine issue of material fact exists in this unusual case under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq., and the court has identified no material fact issues. It remains to determine which parties are entitled to judgment as a matter of law. The court has jurisdiction pursuant to 29 U.S.C. § 1132(e)(1).

I. History

The South Bend Lathe Employee Stock Ownership Plan ("ESOP") was created in 1975 when the Industrial Revolving Fund ("the Fund") made a $5,013,500.00 loan to the ESOP to enable South Bend Lathe employees to purchase all the capital stock of what had been the South Bend Lathe Division of Amsted Industries and prevent the plant's closing. The parties agree that the ESOP is an employee pension benefit plan within the meaning of 29 U.S.C. § 1002(2) and is subject to ERISA pursuant to 29 U.S.C. § 1003(a). South Bend Lathe, Inc. ("SBL") was created as a result of this transaction.

The ESOP Committee holds the stock in trust for the SBL employees, and the stock serves as collateral for the Fund loan. SBL agreed to make annual cash contributions to the ESOP so the ESOP could make its loan payments to the Fund. When the ESOP makes a loan payment, it redeems the shares that serve as collateral and allocates them to individual employees' accounts. The ESOP's holdings consist almost entirely of SBL stock. In November, 1989, the ESOP held eighty-one percent of SBL's outstanding stock, defendant John Van Otterloo owned eighteen percent, and eleven other individuals owned the remaining one percent.

The plaintiffs are four present or former hourly SBL employees. The defendants consist of SBL management, some of whom serve on the ESOP Committee, and the ESOP's voting trustee. The amended complaint consists of a surfeit of alleged ERISA violations loosely organized into thirteen counts. Most defendants have responded with a principal argument that seems to say that this case is truly a labor-management dispute wearing ERISA clothing and suggesting that the plaintiffs are trying to wedge a square peg into a round hole. The plaintiffs respond with intemperate language.^* While the plaintiffs make numerous arguments in support of the various claimed ERISA violations, the case revolves around three transactions:

1. In the 1989 SBL shareholder election, the Committee chose not to solicit proxies from former SBL employees and denied proxies to at least two plaintiffs who requested proxies. The Committee then abstained from voting the majority of the ESOP-held SBL shares, allowing retention of the management slate and the passage of a provision staggering the terms of SBL directors.

2. SBL decided not to make its annual payment to the ESOP, rendering the ESOP unable to make its loan repayment installment to the Fund. The failure to make that installment resulted in litigation, since settled on terms supposedly favorable to the ESOP, brought against the ESOP by the Fund.

3. SBL directors removed plaintiff Robert Newton from the Committee as a result of his filing of this lawsuit.

Additional facts are set forth as necessary to explain and discuss these three claims.

II. Decisions Concerning the 1989 Shareholders' Meeting

From 1975 to 1989, the Committee consisted exclusively of SBL employees; SBL management comprised a Committee majority for most of those years. The Committee's membership has changed since the events at issue here, but in 1989, the Committee consisted of five members: Robert Newton and Richard Stanton were hourly SBL employees; Gary Belting was SBL's Chief Financial Officer; Gerald Vogel was its Personnel Manager; Arlene Heim was Mr. Vogel's secretary. Mr. Newton and Mr. Stanton are plaintiffs here. Mr. Belting, Mr. Vogel, and Mrs. Heim are among the defendants.

After a discussion at some unstated time with SBL's then-president and chief executive officer, John Van Otterloo, Mr. Belting decided that the Committee would not solicit proxies from SBL retirees, believing that the ESOP documents did not require such solicitation. In 1988, Mr. Van Otterloo had recommended that the Committee direct its voting trustee to abstain from voting the ESOP's unallocated shares, as well as shares that were not voted by individual participants. The Committee followed this course of action in 1989, and defendant 1st Source Bank, then the ESOP's voting trustee, voted as directed at the shareholder meeting that considered the election of a slate of directors and a proposal to change the directors' tenure to staggered terms.

As a result, 15,500 ESOP-held shares — nearly seventy percent of the plan's holdings — were not voted in 1989. The voting ESOP participants cast 5,100 shares against, and 1,900 shares for, the management slate. On the strength of Mr. Van Otterloo's vote of his own 5,000 shares, he was reelected to the SBL Board of Directors, along with defendants James Carr and Maurice Gallaher, and SBL's Articles of Incorporation were amended to provide staggered three-year terms for directors.

The plaintiffs allege that the Committee and Mr. Van Otterloo manipulated the voting of these shares to retain incumbent management, that the SBL Board of Directors imposed their will on the Committee as to how the committee should vote its shares, and that 1st Source, as voting trustee, followed the Committee's instructions in voting the Plan shares, knowing this was not in the ESOP participants' best interest.

The plaintiffs claim that the Committee and Mr. Van Otterloo breached their fiduciary duties by failing to act solely in the ESOP participants' interest as required by 29 U.S.C. § 1104(a). It was upon Mr. Van Otterloo's suggestion or direction that proxies were not sent to retirees, the plaintiffs contend, although retirees had received proxies in past elections. It was upon Mr. Van Otterloo's recommendation that three Committee members voted to abstain the unallocated and unvoted shares, although they had not done so in the past. The plaintiffs contend that the Committee defendants were interested in preserving their management level jobs and, thus, had a conflict of interest that prevented them from acting with the level of care and loyalty that ERISA demands.

Eight counts of the amended complaint relate to the decisions concerning the 1989 shareholders' meeting. The claims may be grouped by the overlapping categories of defendants. Accordingly, the court first considers, in Part II-A, the claims against the defendant Committee members (Mr. Belting, Mr. Vogel, and Mrs. Heim); then, in Part II-B, the claims against Mr. Van Otterloo for his individual actions; in Part II-C, the claims against the SBL Board of Directors (Mr. Van Otterloo, James Carr, Maurice Gallaher, and Kenneth Fedder); and finally, in Part II-D, the claim against the ESOP's voting trustee, 1st Source Bank.

A. The Committee Defendants

Five counts of the plaintiffs' amended complaint address the Committee defendants' decisions with respect to the voting at the 1989 shareholders' meeting:

Count I alleges that the Committee defendants breached their fiduciary duties under 29 U.S.C. § 1104(a)(1)(A), (B), and (D) by deciding to abstain from voting the ESOP's shares;

Count II alleges that the Committee defendants breached their fiduciary duties under 29 U.S.C. § 1104(a)(1)(A), (B), and (D) by their decision not to solicit proxies from ESOP participants with allocated, vested shares;

Count III alleges that the Committee defendants violated IND.CODE 23-1-30-2 by failing to provide notice of the 1989 shareholders' meeting to certain former employees;

Count IX alleges that the Committee defendants breached their fiduciary duties under 29 U.S.C. § 1104(a)(1)(A), (B), and (D) by engaging in a course of conduct intended to consolidate the positions of Mr. Van Otterloo and his allies; and

Count X alleges, among other things, that the Committee defendants violated 29 U.S.C. § 1106(a)(1)(D) by using plan assets for the benefit of parties in interest through their decisions with respect to the shareholders' meeting.

1. Discretion as to Solicitation of Proxies

According to § 8 of the Plan document, the trustee shall vote stock held in trust only in accordance with instructions from the Committee, which must solicit voting instructions from participants whose shares are vested. The Committee may determine how to instruct the trustee to vote shares as to which the Committee has not received the participant's instruction. The last sentence of § 8 provides: "The solicitation of voting instructions from Participants by the Committee shall be required only with respect to Participants who are Employees of the Company as of the record date for voting at a shareholder meeting."

The plaintiffs claim that 29 U.S.C. § 1002(7) makes "participants" of employees and former employees alike, and that under ERISA former employees cannot be denied voting rights regardless of the language of the plan document. The Committee defendants rely on the plan document's language defining a "participant" as an employee, §§ 2 and 3.

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