Reich v. Hall Holding Co., Inc.

• Decision Date: 09 January 1998
• Docket Number: No. 1:94CV2236.,1:94CV2236.
• Citation: 990 F.Supp. 955
• Parties: Robert B. REICH, Secretary of the United States Department of Labor,<SMALL><SUP>1</SUP></SMALL> Plaintiff, v. HALL HOLDING COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

990 F.Supp. 955

Robert B. REICH, Secretary of the United States Department of Labor,¹ Plaintiff, v. HALL HOLDING COMPANY, INC., et al., Defendants.

No. 1:94CV2236.

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

January 9, 1998.

Memorandum Granting Reconsideration March 10, 1998.

Glenn M. Loos, Department of Labor, Alexander Fernandez, Susan M. Greene, U.S. Department of Labor, Washington, DC, for Alexis M. Herman, Secretary of Labor, United States Department of Labor a/k/a Robert B. Reich, plaintiff.

Anthony J. DiVenere, Sr., McDonald, Hopkins, Burke & Haber, Cleveland, OH, Edward A. Scallet, Katherine S. Kamen, Le-Bouef, Lamb, Green & McRae, Washington, DC, for Hall Holding Company, Inc., David L. Goldman, Kathleen A. Keating, Goldman Financial Group, Inc.

Thomas Jeffrey Piatak, Arter & Hadden, Michael J. Frantz, Thompson, Hine & Flory, Cleveland, OH, for George A. Ahearn.

Thomas Jeffrey Piatak, Arter & Hadden, Michael J. Frantz, Thompson, Hine & Flory, Cleveland, OH, Anthony J. DiVenere, Sr., McDonald, Hopkins, Burke & Haber, Cleveland, OH, Edward A. Scallet, Katherine S. Kamen, LeBouef, Lamb, Green & McRae, Washington, DC, for Michael F. Shields.

MEMORANDUM AND ORDER

ALDRICH, District Judge.

This action arises under Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et. seq., as amended. The Secretary of the United States Department of Labor (the "Secretary") is suing Hall Holding Company, Inc., David L. Goldman, Kathleen A. Keating, George P. Ahearn, Michael F. Shields, and Goldman Financial Group, Inc. ("defendants") for allegedly violating various provisions of ERISA. The Secretary claims that the defendants breached their duties as fiduciaries by purchasing stock on behalf of an employee stock ownership plan ("ESOP") for more than adequate consideration as defined by ERISA. The defendants have moved for summary judgment, or in the alternative, partial summary judgment (doc. 54), and the Secretary has moved for partial summary judgment (doc. 59). Both motions are opposed. For the following reasons, this Court denies both motions.

I.

ERISA is a "comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). ERISA regulates employee benefit plans, in part, by establishing strict standards of conduct, responsibilities and obligations for fiduciaries of the plans. 29 U.S.C. § 1001(b). A type of plan covered by the provisions of ERISA is an employee stock ownership plan ("ESOP").

"An ESOP is a type of ERISA plan that invests primarily in the stock of the employer creating the plan." Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir.1994); see also 29 U.S.C. § 1107(d)(6). ERISA governs the creation, maintenance and administration of ESOPs through a number of somewhat complex and interrelated rules. An employer desiring to create an ESOP is required to execute a written document to define the terms of the plan and the rights of the beneficiaries under it. 29 U.S.C. § 1102(a). This plan must also name one or more fiduciaries who are "to control and manage the operation and administration of the plan." Id. A trust is established to hold the assets of the ESOP. 29 U.S.C. § 1103(a). An ESOP's assets are often derived from tax-deductible contributions from the employer to the plan in the form of the employer's own stock or cash. If cash is contributed, the ESOP then purchases stock in the sponsoring company. An ESOP may also borrow money from a third party in order to invest in the employer's stock. 29 U.S.C. § 1108(b)(3). This type of ESOP is called a leveraged ESOP and is the type of ESOP at issue in the present case. If a leveraged ESOP is created, the employer is obligated to make cash contributions to the ESOP, which in turn uses the cash to retire the loan debt. Donovan v. Cunningham, 716 F.2d 1455, 1459 (5th Cir.1983). In the present case, after the ESOP borrowed money for the amount of the stock purchase, the stock was placed in a "suspense account." As the ESOP makes loan payments using the cash contributions from the corporate sponsor, stock is released from the suspense account and placed into the ESOP participants' individual accounts.

Defendant Goldman Financial Group, Inc. ("GFGI") is a corporation which manages several different businesses, including Hall Chemical Company ("Hall Chemical"). GFGI owns Hall Chemical through the defendant Hall Holding Company, Inc. ("Hall Holding"), a holding company and subsidiary of GFGI. Hall Holding's primary asset is Hall Chemical.

During the relevant time period, defendant David L. Goldman ("Goldman") was chairman and president of GFGI. He was also the sole member of the Board of Directors of Hall Chemical, as well as the sole director of Hall Holding. Goldman authorized the establishment of the Goldman Financial Group, Inc. Master Trust ("Master Trust"), which is a trust containing assets of several ERISAcovered plans sponsored by GFGI and/or its affiliates.

Since May of 1989, defendant Kathleen A. Keating ("Keating") has been the Director of Human Resources for GFGI. In September of 1990, she also directed the Master Trust trustee on how to invest the assets held in the Master Trust.

Defendant George P. Ahearn ("Ahearn") was the president and chief operating officer of Hall Chemical from July 1988 until he was terminated in July 1991. Defendant Michael F. Shields ("Shields") acted as Hall Chemical's vice president of finance and chief financial officer from June 1988 through June 1992.

In August of 1990, GFGI, acting primarily through Keating and GFGI's outside ERISA counsel, James Shumaker, began designing a new ESOP for the employees of Hall Chemical. GFGI decided to create a leveraged ESOP. The ESOP, upon being established, would borrow money which it would use to purchase qualifying employer securities. GFGI paid James Cunningham, a person whom Keating and other GFGI officials believed to be well-qualified, to perform a valuation of Hall Chemical stock.

Approximately four months earlier, Cunningham, while still a partner at an investment banking firm named First Boston Corporation, had been involved in a valuation of Hall Chemical for purposes unrelated to the ESOP. Not surprisingly, the results of Cunningham's valuation report were consistent with those of First Boston. On September 5, 1990, based upon information provided by GFGI, Cunningham concluded that the estimated value of Hall Chemical excluding net debt was $32.4 — $37.4 million.

At the time GFGI retained Cunningham, Keating and other GFGI officials believed the ESOP would purchase Hall Chemical stock. However, after Cunningham had completed his valuation of Hall Chemical, it was decided that the ESOP should purchase stock in Hall Holding, the company which owned Hall Chemical. Considering that Hall Chemical was Hall Holding's primary asset, GFGI officials believed it was appropriate to rely on Cunningham's valuation of Hall Chemical to determine the value of Hall Holding. GFGI officials established the value of all Hall Holding stock at $35 million, which is the approximate mid-point of Cunningham's estimated range. Based on this $35 million figure, Goldman, in his capacity as sole director of the seller (Hall Holding), agreed that Hall Holding would sell 9.9% of its stock (110 shares) to the ESOP in exchange for $3.5 million.

After the terms of the loan needed to finance the above-described stock purchase were reviewed and discussed, Keating, after consulting with Shumaker, determined that the ESOP, after its establishment, could borrow money from the Master Trust in the amount of $3.5 million, the appropriate purchase price of the 110 Hall Holding shares as determined by GFGI officials. The trustee of the Master Trust, Boston Safe Deposit and Trust Company ("BSDT"), although it had initial concerns regarding the relationship between the parties (the Master Trust held assets of other GFGI-related plans), ultimately agreed to the transaction.

Finally, in September of 1990, the ESOP for the employees of Hall Chemical was established. The ESOP is entitled the Hall Chemical Company, Inc. Employee Stock Participation Plan ("Hall ESPP"). On September 12, 1990, Goldman, in his capacity as sole director of Hall Holding, appointed Ahearn and Shields as members of the Hall ESPP Committee, which serves as Plan Administrator for the Hall ESPP. According to the Hall ESPP Plan Document, the Plan Administrator has the authority to control and manage the operation and administration of the ESPP. Ahearns and Shields also acted as trustees of the Hall ESPP from September 1990 through April 1991.

On September 18, 1990, Keating, on behalf of GFGI, directed BSDT to loan $3.5 million from the Master Trust to the Hall ESPP. On that same day (according to the date on the promissory note), Ahearn and Shields, as trustees of the Hall ESPP, signed the promissory note containing the terms previously established by Keating and other GFGI representatives. On September 20, the loan was approved.

On September 21, 1990, after the Hall ESPP received the $3.5 million in loan proceeds, Ahearn and Shields signed a subscription which "consummated [the stock purchase] in accordance with GFGI's prior decisions by purchasing 110 shares, or 9.9%, of Hall Holding stock at a price of $3.5 million." Memorandum in Support of Defendants' Motion for Summary Judgment at 12. Upon purchase, the 110 shares of Hall Holding stock were placed in a "suspense account" to be released as the loan payments were made. Hall Chemical was responsible for making cash contributions to the Hall ESPP, who, in turn, was to use the contributions to make the loan payments. As the Hall ESPP made loan payments using the cash contributions from Hall Chemical, the Hall Holding stock was to be released from the suspense account and placed...