Wright v. Nimmons

• Decision Date: 18 August 1986
• Docket Number: Civ. A. No. H-83-6906.
• Citation: 641 F. Supp. 1391
• Parties: Lewis A. WRIGHT, et al. v. Donald S. NIMMONS, Trustee.
• Court: U.S. District Court — Southern District of Texas

641 F. Supp. 1391

Lewis A. WRIGHT, et al. v. Donald S. NIMMONS, Trustee.

Civ. A. No. H-83-6906.

United States District Court, S.D. Texas, Houston Division.

August 18, 1986.

Roger B. Greenberg and Jane Cooper-Hill, Richie & Greenberg, Houston, Tex., for plaintiffs.

William T. Green, III and Mark Alexander, Green, Downey, Patterson & Schultz, Houston, Tex., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

CARL O. BUE, Jr., District Judge.

I. Introduction

This is an action for equitable relief and statutory damages arising under the Employee Retirement Income Security Act of 1974 ("ERISA"). 29 U.S.C. § 1001 et seq. Following the acquisition of four related closely-held corporations by Defendant, Donald S. Nimmons ("Nimmons"), the Plaintiffs, who are former shareholders, officers, and directors of the corporations, and participants and beneficiaries of the corporations' defined benefit pension plan, commenced suit against Defendant alleging breaches of fiduciary duty and seeking to protect their rights under ERISA. In his capacity as Trustee of the plan, Defendant has filed counterclaims seeking damages for violation of ERISA's prohibited transactions provisions which occurred prior to the change in corporate ownership. The controversy between the parties concerns the validity of two competing pension plans. Specifically, the proponents of the competing plans claim entitlement to the residual assets which are to be distributed as a consequence of the corporations' cessation of business.

This case came on for trial before the Court sitting without a jury. Having heard all of the testimony and reviewed the documentary evidence, this Court concludes that Plaintiffs are entitled to recover statutory damages, and to obtain equitable relief as a consequence of Defendant's breach of his fiduciary duty, and hereby enters its Findings of Fact and Conclusions of Law consistent therewith.

II. Findings of Fact

A. The Formation of the Pension and Profit Sharing Plans

1. In 1971, Lewis Alvin Wright ("L.A. Wright") and Shelley V. Pate ("S.V. Pate") formed W.P. Constructors, Inc. ("W.P."), a construction company that specialized in the construction of underground water and sewage systems. For many years prior to the formation of the corporation, the business was operated as a partnership. The corporation was formed upon the advice of Nimmons who served as an accountant and financial consultant to the partnership.

2. The principals also incorporated three related companies: Pate Construction Company, Inc. ("Pate Co."), Aldine Construction Company, Inc. ("Aldine") and W.P. Leasing Corporation, Inc. ("Leasing"). Both Pate Co. and Aldine provided contract labor to W.P., while Leasing provided heavy equipment.

3. At about the same time that the businesses were incorporated, Nimmons advised L.A. Wright and S.V. Pate to establish pension and profit sharing plans for the employees of the corporations. Nimmons acted as agent in dealing with the attorney who prepared the initial pension plan for W.P., and the profit sharing plans for Pate Co. and Aldine. On Nimmons' recommendation, the corporations adopted the respective plans in 1971.

4. The original trustees were S.V. Pate and L.A. Wright. The original plan administrative committee consisted of Wright, Pate, and Clarice Cantrell ("C. Cantrell"). None of these individuals had experience, expertise, or knowledge concerning the administration of pension or profit sharing plans. Thus, they relied in all respects on Nimmons, who held himself out as a knowledgeable pension plan advisor.

5. W.P. was a closely-held corporation and essentially a family business. Consequently, the pension plan beneficiaries are primarily family members. However, the instant cause of action was also brought on behalf of the beneficiaries of the profit sharing plan, former employees of Pate Co. and Aldine, who comprised the labor force for the work performed by W.P.

B. Administration of the Original Pension and Profit Sharing Plans

6. Although the employer, W.P., assumed certain administrative duties for the plan, Nimmons was consulted regularly regarding plan administration. Nimmons' duties on behalf of the plans included the following: (1) keeping the books; (2) compiling employee data; (3) calculating employer contributions; (4) preparing required governmental reports and financial statements, and (5) preparing annual reports.

7. In addition to these specific tasks, Nimmons had an informal relationship of longstanding with the principals of the corporations. Due to this informal relationship of trust, Nimmons was provided with keys to the corporate offices so that he would have immediate access to the corporate books and records, including the books of the plans.

8. Nimmons rendered investment advice to the corporations, and served as a paid consultant from 1971 until 1981. The corporate principals, who were also trustees of the pension and profit sharing plans, relied extensively upon Nimmons' expertise and advice regarding the administration of the plans.

C. The Original Pension and Profit Sharing Plans' Loss of Qualified Tax Status

9. Nimmons served as the enrolled agent for the pension and profit sharing plans. In this capacity, he was empowered to appear before the Internal Revenue Service ("IRS") on behalf of the plans.

10. The passage of ERISA in 1974 imposed new requirements on employee benefits plans. Plans which did not meet the new requirements were threatened with severe consequences. Contributions made to a plan which loses its qualified status are not tax deductible by the corporation, and are taxable as ordinary income to the beneficiaries.

11. As the enrolled agent for the plans, Nimmons was charged with the duty of cooperating with the IRS on matters of plan qualification. By 1978, the IRS had still not received indication that the plans had been restated to comply with ERISA. Pursuant to an inquiry in December of 1978, Nimmons informed the IRS that the plans had been amended to comply with ERISA, and that an application for a determination letter would be forthcoming. However, the application for determination and amended plans were not sent. In August of 1979, the IRS conducted an investigation of the 1977 and 1978 annual returns. During that investigation, Nimmons provided the IRS with a prototype plan, but the plan had not been executed by the corporate officers or trustees.

12. Despite requests by the IRS for executed copies of a plan conforming to ERISA, and for a copy of the application for determination that had allegedly been filed, these were never received. Finding that the original plan documents were the operative plans, the IRS proceeded to review those plans for compliance with ERISA, but many deficiencies were noted.

13. A request by the IRS for corrective amendments and data sufficient to entitle the plans to ENCEP relief was made on August 20, 1981, but no response was received. The ENCEP program was designed to permit the IRS to qualify a plan retroactively if the plan had been administered in accordance with ERISA, even if plan documents in existence during the period did not conform with ERISA requirements.

14. In an attempt to comply with the requirements of ERISA so that the plans could retain their qualified status, Nimmons hired Hand and Associates in the Spring of 1980 to prepare "Schedule B's" for the plan years ending on May 31, 1977, 1978, and 1979.

15. A "Schedule B" is a computation of actuarial liabilities which must be signed by an enrolled actuary and filed each year with the plan's annual reports. For several years, Nimmons filed annual reports (Form 5500-C) without attaching the required "Schedule B's."

16. Margaret Young, an enrolled actuary employed by Hand and Associates, prepared "Schedule B's" for the years 1977-79. She also requested current information so that she could prepare the "Schedule B" for the plan year ending May 31, 1980. Although Nimmons promised to provide the information, he never sent it to Young. Instead, he once again prepared Form 5500-C without a "Schedule B," erroneously indicating on the form that a "Schedule B" was not required.

17. Throughout the years of investigation, the IRS dealt exclusively with Nimmons on behalf of the plans. Having determined that the original plan documents failed to comply with ERISA, and based upon the lack of response to repeated requests for conforming documents, the IRS assumed that the taxpayer did not desire to comply with ERISA requirements. Consequently, a final revocation letter was sent by the IRS on December 3, 1981, which resulted in the loss of the plans' qualified status.

18. Nimmons did not advise the trustees and plan administrators concerning the repeated requests by the IRS for amendments, even though they were not aware of ERISA or its requirements, and depended exclusively upon him for compliance with governmental regulations.

19. As a consequence of Nimmons' misfeasance, the qualified status of the plans was revoked, and the corporation and participants have incurred tax liability for the years that the plans were unqualified.

D. The Stark and Frahm Plan

20. Upon receipt of the final revocation letter from the IRS, dated December 3, 1981, L. Anthony Wright ("A. Wright") called Nimmons to question him about its significance. Nimmons assured him that there was no cause for alarm.

21. Upon the advice of their bonding agent, Roy Simmons, in February of 1982, however, the corporate directors retained the law firm of Stark and Frahm to counsel them with respect to Nimmons' failure to maintain the qualified status of the plan.

22. In February of 1982, A. Wright, then vice-president of the corporations, and Steve Pate ("S. Pate"), secretary/treasurer of the corporations, met with a representative of Stark and Frahm at Simmons' office. They explained the corporate structure and history of the plans, as they understood them, and requested Stark and...