Reich v. Walter W. King Plumbing & Heating Contractor, Inc.
| Decision Date | 11 October 1996 |
| Docket Number | No. 95-2603,95-2603 |
| Citation | 98 F.3d 147 |
| Parties | 20 Employee Benefits Cas. 1923 Robert B. REICH, Secretary of Labor, Plaintiff-Appellant, v. WALTER W. KING PLUMBING & HEATING CONTRACTOR, INCORPORATED, Defendant-Appellee, and Walter W. King; Evelyn R. King; Walter W. King Plumbing & Heating Contractor, Incorporated Money Purchase Pension Plan; Walter W. King Plumbing & Heating Contractor, Incorporated Profit Sharing Plan; Walter W. King Plumbing & Heating Contractor, Incorporated Benefit Trust; Lynn Martin, Defendants. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Elizabeth Hopkins, United States Department of Labor, Washington, D.C., for Appellant. James Allan Rothschild, Anderson, Coe & King, Baltimore, Maryland, for Appellee. ON BRIEF: Thomas S. Williamson, Jr., Solicitor of Labor, Allen H. Feldman, Associate Solicitor for Special Appellate and Supreme Court Litigation, Nathaniel I. Spiller, Counsel for Appellate Litigation, United States Department of Labor, Washington, D.C., for Appellant. E. Scott Conover, Anderson, Coe & King, Baltimore, Maryland, for Appellee.
Before RUSSELL, WIDENER, and HALL, Circuit Judges.
Affirmed by published opinion. Judge RUSSELL wrote the majority opinion, in which Judge WIDENER joined. Judge HALL wrote a dissenting opinion.
The Secretary of Labor (the "Secretary") appeals an award of attorneys' fees and expenses under the Equal Access to Justice Act, 28 U.S.C. § 2412(d)(1)(A), arising out of an action brought by the Secretary against Walter W. King Heating and Plumbing Contractor, Inc. ("King Plumbing"), its employees' benefits plans, and the plans' trustees. We affirm the award of attorneys' fees and expenses.
In 1976, King Plumbing established a profit-sharing plan and a pension plan (collectively, the "Plan") for its employees. * Walter W. King and Evelyn King were the trustees of the Plan, and King Plumbing was the Plan's sponsor.
Beginning in 1983, Walter King, who has substantial knowledge and experience in the real estate market in western Maryland, began investing the Plan's assets in residential real estate mortgages, primarily in Frederick County. King reviewed each application for a mortgage loan, met with each borrower personally, and visited each property. He based the interest rate for the mortgage loans on the prevailing rates from local banks. Almost all of the mortgages were short term (five-year balloon) residential mortgages, amortized over 25 years. Most of the mortgages were for less than $100,000, and did not exceed 80% of the value of the property. Between 1985 and 1993, the Plan made approximately 83 mortgage loans, most of them for residential property in Frederick, Maryland.
During the period between June 30, 1984, through June 30, 1993, the Plan averaged better than a ten percent return, grew from $1,513,334 to $4,762,178, paid out benefits in excess of $1.5 million, and never had a return less than 8.67% in any single year. Of the loans made from the Plan's assets, only two defaulted but the Plan recouped the entire amount of principal, interest, and costs in foreclosure proceedings.
Because of the high percentage of assets invested in real estate mortgages, the Secretary began investigating King Plumbing in October 1990. The Secretary concluded that King Plumbing failed to diversify appropriately the assets of its Plan, in violation of § 404(a)(1)(C) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1104(a)(1)(C). It also concluded that King Plumbing had engaged in transactions prohibited by § 406(a)(1)(D) and § 406(b)(1) of ERISA, 29 U.S.C. §§ 1106(a)(1)(D) & (b)(1), by using the Plan's assets to make mortgage loans to individuals who used the loan proceeds to purchase land owned by King Plumbing and to pay King Plumbing to build homes on the land.
On July 29, 1992, the Secretary filed suit against King Plumbing, Walter and Evelyn King, and the Plan itself (collectively, "King Plumbing" or "the defendants"). The Secretary's complaint alleged both that the defendants had engaged in forty-seven prohibited transactions and that the investment of the Plan's assets failed to meet the diversification requirements of ERISA.
On December 7, 1993, the defendants deposed James Carroll, the government agent who had investigated King Plumbing. According to Carroll's testimony, he concluded that the Plan's mortgages constituted prohibited transactions because Evelyn King told him that the Plan had made mortgages to individuals who used the proceeds to purchase land owned by King Plumbing and to pay King Plumbing to build homes on the land. Carroll, however, knew that Mrs. King did not have personal knowledge of the nature of the mortgages. Furthermore, he made no review of the mortgage loans and land records to verify that King Plumbing owned the land prior to their being subject to the Plan's mortgages.
In February 1994, the parties settled the prohibited transaction claims. Although King Plumbing did not admit that it had engaged in any prohibited transactions, it agreed not to make loans from the Plan to be used for the purchase of property or services from King Plumbing. In return, the Secretary dismissed the forty-seven prohibited transaction claims against King Plumbing.
On the remaining claim for non-diversification, the district court denied cross-motions for summary judgment, and it held a bench trial on September 26, 1994. Richard Hinz, the Chief Economist and Director in the Office of Research and Economic Analysis for the Pension and Welfare Benefits Administration of the Department of Labor, testified as an expert witness for the Secretary. Hinz concluded that the Plan's lack of diversification was imprudent because the Plan could have achieved the same return with fewer risks by investing in Ginnie and Fannie Mae pooled mortgages. He also testified that the Plan could suffer large losses due to default risk, interest rate risk, inflation risk, and liquidity risk. However, Hinz had not investigated any of the particular loans in the Plan's portfolio, but based his analysis on general economic and investment theories.
The defendants called three expert witnesses: David E. Brock, the president of the Bank of Brunswick in Brunswick, Maryland; Alfred J. Morrison, a private investment management consultant; and William G. Psillas, an employee benefit consultant. Brock provided the best testimony for the defendants. He had analyzed each of the loans in the portfolios and in many cases visited the properties themselves. He concluded that the concentration of the Plan's assets in local residential loans did not create a risk of large losses. He based his opinion on the loans' low loan-to-value ratios, the fact that the loans were 5-year balloon mortgages, the good payment histories of the borrowers, and Walter King's knowledge of the local real estate market. Brock also testified that 60% of his bank's assets are invested in similar mortgage loans in the same geographic area, and that the loans are marketable. Brock also noted that the Plan received an 8.93% return on investments, 0.1% higher than his bank's return.
The district court entered judgment in favor of the defendants on November 17, 1994. Reich v. King, 867 F.Supp. 341 (D.Md.1994). The district court noted that ERISA required a plan's fiduciary to diversify the plan's investment "unless under the circumstances it is clearly prudent not to do so." 29 U.S.C. § 1104(a)(1)(C). The district court held that the defendants had met their heavy burden of proving that their non-diversification was prudent under the circumstances, and that the defendants had offered "convincing and credible evidence that the Plan does not face the risk of large losses due to nondiversification." Id. at 344. The district court found Brock's testimony particularly compelling because, of all the experts, only he had reviewed the particular loans at issue. The court discounted the testimony of Hinz, which it found was based on "textbook type theories that appeared far removed from the actual realities of mortgages in Frederick County." Id. at 345. The Secretary did not appeal the district court's decision.
On November 30, 1994, King Plumbing filed a motion for an award of attorneys' fees and expenses under the Equal Access to Justice Act, 28 U.S.C. § 2412(d)(1)(A). The district court granted the motion on August 3, 1995, and awarded attorneys' fees in the amount of $51,648.00 and expenses in the amount of $3,947.15. The Secretary has appealed the award of attorneys' fees and expenses.
The Equal Access to Justice Act provides:
Except as otherwise specifically provided by statute, a court shall award to a prevailing party other than the United States fees and other expenses ... unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.
28 U.S.C. § 2412(d)(1)(A). The party seeking fees bears the burden of proving that it was the prevailing party. The government, however, bears the burden of showing that its position was substantially justified. Thompson v. Sullivan, 980 F.2d 280, 281 (4th Cir.1992). We review the district court's award of attorneys' fees and expenses under an abuse of discretion standard. Pierce v. Underwood, 487 U.S. 552, 557-63, 108 S.Ct. 2541, 2546-49, 101 L.Ed.2d 490 (1988).
We turn first to the district court's decision to award attorneys' fees and expenses on the prohibited transaction claims. In challenging this award, the Secretary argues that King Plumbing was not the prevailing party in the settlement of the prohibited transaction claims, and that the Secretary's position on those claims was substantially justified.
The district court found that King Plumbing was the prevailing party in the settlement of the prohibited transaction claims because it...
To continue reading
Request your trial
-
Lowery v. Circuit City Stores, Inc.
...fees and costs. We review an award of costs and attorneys' fees for abuse of discretion. See Reich v. Walter W. King Plumbing & Heating Contractor, Inc., 98 F.3d 147, 151 (4th Cir.1996) (citing Pierce v. Underwood, 487 U.S. 552, 557-63, 108 S.Ct. 2541, 101 L.Ed.2d 490 Our court has recogniz......
-
N.C. Alliance for Transp. Reform v. D.O.T.
...The party seeking attorney's fees bears the burden of proving that it was the prevailing party. See Reich v. King Plumbing & Heating Contractor, Inc., 98 F.3d 147, 150 (4th Cir. 1996); see also House v. Hillhaven, Inc., 105 N.C.App. 191, 195-96, 412 S.E.2d 893, 896 (1992). In their complain......
-
Smyth ex rel. Smyth v. Rivero
...of discretion. See Pierce v. Underwood, 487 U.S. 552, 557-63, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988); Reich v. Walter W. King Plumbing & Heating, Inc., 98 F.3d 147, 151 (4th Cir.1996); 42 U.S.C.A. § 1988 (stating that "the court, in its discretion, may allow the prevailing party ... a reaso......
-
Am. Ass'n of Political Consultants, Inc. v. Wilkinson
...; see Pierce v. Underwood, 487 U.S. 552, 556–57, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988) ; Reich v. Walter W. King Plumbing & Heating Contractor, Inc., 98 F.3d 147, 150 (4th Cir. 1996) ; Roanoke River Basin Ass'n v. Hudson, 991 F.2d 132, 137 (4th Cir. 1993). "The party seeking fees bears the......