Whitfield v. Lindemann

• Decision Date: 09 September 1988
• Docket Number: No. 87-1324,87-1324
• Citation: 853 F.2d 1298
• Parties: 9 Employee Benefits Ca 2657 Dennis E. WHITFIELD, Deputy Secretary of the United States Department of Labor, Plaintiff-Appellee, v. Oscar C. LINDEMANN and Henry Klepak, Defendants-Appellants, Theodore Shanbaum, the Estate of Ellis Carp and Lee Optical, Inc., Defendants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1298

853 F.2d 1298

9 Employee Benefits Ca 2657

Dennis E. WHITFIELD, Deputy Secretary of the United States Department of Labor, Plaintiff-Appellee, v. Oscar C. LINDEMANN and Henry Klepak, Defendants-Appellants Theodore Shanbaum, the Estate of Ellis Carp and Lee Optical Inc., Defendants.

No. 87-1324.

United States Court of Appeals Fifth Circuit.

Sept. 9, 1988.

Rehearing Denied Oct. 14, 1988.

G. Scott Damuth, Dallas, Tex., for Klepak.

Ron Edmondson, Corsicana, Tex., for Lindemann.

William W. Taylor, Leslie C. Perlman, U.S. Dept. of Labor, Office of the Sol., Plans Benefits Sec. Div., Washington, D.C., for plaintiff-appellee.

Appeals from the United States District Court for the Northern District of Texas.

Before VAN GRAAFEILAND, ^* JOHNSON and JOLLY, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

Oscar Lindemann and Henry Klepak appeal from a judgment of the United States District Court for the Northern District of Texas, Dallas Division, which followed a nonjury trial before Judge Buchmeyer. The other named defendants are not parties to the appeal. The action against Lee Optical, Inc. was dismissed by stipulation. The Estate of Ellis Carp permitted judgment to be taken against it by default. Theodore Shanbaum withdrew his appeal from the judgment entered against him and the appealing defendants.

The factual setting for the litigation may be summarized briefly. In 1951, Lee Optical, Inc. created a Pension Plan and a Profit Sharing Plan. Dal-Tex, Inc., a wholly-owned subsidiary of Lee Optical, was a sponsoring employer of the Plans, which were non-contributory. Shanbaum and Carp were the principal shareholders of Lee Optical, and they served as trustees of the two Plans. Among the investments they made for the Pension Plan was the purchase of a one-third interest in Grayson Enterprises, Inc., the remaining two-thirds of which was owned by Shanbaum and Carp. In 1981, Grayson was dissolved, and its assets were transferred to a joint venture known as SCP which, as its name indicates, also was owned one-third each by Shanbaum, Carp and the Pension Plan.

In 1980, the then Secretary of Labor, Ray Marshall, sued Shanbaum, Carp, Lee Optical and Dal-Tex, alleging violations of ERISA, 29 U.S.C. Secs. 1001 et seq. Included among them were the making of improper loans by the Plans to the defendant companies and the failure to enforce payment of rent, claims and loans in default. Such actions by the Secretary are authorized by 29 U.S.C. Sec. 1132(a)(2). Henry Klepak, a 75-year-old Dallas attorney who had represented Shanbaum, Carp and Lee Optical for many years, represented the defendants in that litigation.

On September 24, 1981, the 1980 action was settled with the signing of a Consent Order by Judge Higginbotham. Under the terms of the order, Shanbaum, the sole surviving trustee of the Plans, was discharged, and the defendant Lindemann was appointed as his successor. The order also provided in substance that Dal-Tex would pay interest due and owing the Profit Sharing Plan in the amount of $102,406.31 and interest and principal due and owing the Pension Plan in the amount of $1,058,986.07. If Dal-Tex did not make the payments within six months, Shanbaum and Carp were to be held jointly and severally responsible for making them. Shanbaum and Carp were given the option of offering the new trustee property or other assets of equivalent value in lieu of cash, and the trustee was authorized to accept it if he determined that its value was equivalent to the amounts owed and the proposed transaction would be in the best interests of the Plans.

It quickly became obvious that Dal-Tex could not pay its obligations to the Plans, and the burden of making payment fell on Shanbaum and Carp. So far as can be determined from the record, the only asset of any substance which they could offer the new trustee was their two-thirds interest in SCP, which owned a radio station in Honolulu, Hawaii, and a microwave telecommunications system in Oklahoma and Texas. Within hours of his appointment as trustee, Lindemann agreed to accept Shanbaum's and Carp's two-thirds interest in these two properties in full satisfaction of their indebtedness. For purposes of the transfer, the radio station was assigned a value of $950,000, and the microwave system was given a value of $1,338,927. The value of Shanbaum's and Carp's two-thirds interest then was computed to be $1,525,951. Because the total amount due the two Plans under the Consent Order was $1,161,392.38, the parties calculated that there had been an overpayment of $364,558.96, and this amount was repaid by the Pension Plan to SCP. The Pension Plan also paid the Profit Sharing Plan the $102,406.31 that was owed to it. Lindemann agreed to the transfer and the calculations relying solely on Klepak's erroneous assurances that they had been approved by all parties to the Consent Order and the district court prior to Lindemann's appointment. Lindemann never saw an appraisal of either property before accepting the transfer and, of course, made no personal determination as to their value. This litigation followed.

Accepting appraisals submitted by the Secretary and rejecting those submitted by the defendants, the district court found that the property had been overvalued by $775,551. ¹ The district court also found that the radio station and microwave system suffered operating losses of $347,514 during the first year of the Pension Plan's ownership. The district court held that because of Lindemann's "total abdication of fiduciary responsibility", he was liable for the overpayment and the operating losses but gave him a right of recovery over against Klepak. The court also held that both Shanbaum and Klepak were liable as knowing and active participants in Lindemann's breach of fiduciary duty. Judgment was entered against Lindemann, Shanbaum and Klepak for $2,083,628, of which $1,123,065 represented the total of the overvaluation and the operating losses and $960,563 represented prejudgment interest. The defendants also were required to make restitution in whole or in part for compensation they had received from the Plans. Other portions of the judgment are not of concern to us on this appeal.

The district court's decision to hold Klepak jointly liable with Lindemann, the named trustee, was correct and is affirmed. However, we reverse the district court's holding that Lindemann is entitled to complete indemnity against Klepak because of Klepak's "superior knowledge of the situation", because of "his role as an attorney", and because "as between the two of them, Klepak, rather than Lindemann, ought to discharge any liability to Plaintiff."

The ambiguous phrase "his role as an attorney" needs some explanatory factual background. The district court found that "shortly" after Lindemann's appointment as trustee, he "signed an agreement with Klepak, on behalf of the Plans, for Klepak to serve as their attorney." The district court also found that "on or about September 28, 1981, Lindemann authorized his own compensation as trustee at $3,000 per month", and "at the same time he set his own compensation", Lindemann hired Klepak as general counsel. The written "Employment Agreement", referred to by the district court, is dated September 28, 1981, and provides that the term of the Agreement is for a period beginning October 1, 1981 and terminating September 30, 1985.

Lindemann signed the agreement for transfer of the radio station and microwave system within hours of his appointment on September 24, 1981. Klepak had been the attorney for Shanbaum and Carp for many years and represented them in the litigation leading to the Consent Order. Our reading of the record satisfies us that he had not yet become the attorney for the Plans when the transfer agreement was signed on September 24, 1981. However, although Klepak was not a statutory fiduciary under 29 U.S.C. Secs. 1002(14)(A) and (21)(A), Yeseta v. Baima, 837 F.2d 380, 385 (9th Cir.1988), he was, as the district court held, jointly liable with Lindemann as a nonfiduciary who knowingly participated in a breach of trust. Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir.1988); Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1220 (2d Cir.1987); Foltz v. U.S. News & World Report, Inc., 627 F.Supp. 1143, 1167-68 (D.D.C.1986); Donovan v. Daugherty, 550 F.Supp. 390, 410-11 (S.D.Ala.1982).

We reject Klepak's argument that his liability should be limited to the amount of his personal gain. Although there are some dicta in the cases to this effect, e.g., Fremont v. McGraw-Edison Co., 606 F.2d 752, 759 (7th Cir.1979), cert. denied, 445 U.S. 951, 100 S.Ct. 1599, 63 L.Ed.2d 786 (1980); McDougall v. Donovan, 539 F.Supp. 596, 599 n. 6 (N.D.Ill.1982); Donovan v. Daugherty, supra, 550 F.Supp. at 411, most courts that have considered the issue on the merits hold to the contrary, e.g., Foltz v. U.S. News & World Report, Inc., supra, 627 F.Supp. at 1167-68; Wisconsin Real Estate Investment Trust v. Weinstein, 509 F.Supp. 1289, 1299-1300 (E.D.Wis.1981); Heit v. Bixby, 276 F.Supp. 217, 230 (E.D.Mo.1967).

Having said that, we hasten to add that we see no basis for holding that Klepak should indemnify Lindemann, the named trustee, for Lindemann's liability arising out of his own blatant breach of trust. When Lindemann became trustee of the Pension Plan on September 24, 1981, he assumed rigorous obligations and duties, not only under general principles of law, Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570-74, 105 S.Ct. 2833, 2840-42, 86 L.Ed.2d 447 (1985), but also as specifically prescribed in Judge Higginbotham's Consent Order. The district court found that Lindemann acted in complete disregard of that order and in violation of sections 404(a)(1)(A) and (B) of ERISA, 29 U.S.C. Secs. 1104(a)(1)(A) and (B), by acting imprudently and not solely in the interests of the Plans' participants and...