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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

JAMES P. DEFAZIO, et al.,

NOS. CIV. 2:04-1358 WBS GGH

Plaintiffs, 2:05-0559 WBS GGH

2:05-1726 WBS GGH

CONSOLIDATED

v.

HOLLISTER, INC., et al., MEMORANDUM OF DECISION

Defendants.

 /

----oo0oo----

After conducting a fifteen-day bench trial and

providing the parties with extended time to submit post-trial

briefing, the court finds in favor of all defendants on all of

plaintiffs’ claims under the Employee Retirement Income Security

Act (“ERISA”), 29 U.S.C. §§ 1001-1461. This memorandum

constitutes the court’s findings of fact and conclusions of law

pursuant to Federal Rule of Civil Procedure 52(a). 

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I. Factual and Procedural Background 

Defendant Hollister, Inc. (“Hollister”) is a privatelyheld Illinois corporation that develops, manufactures, and

markets medical devices in the fields of ostomy, continence care,

and wound care. Hollister is the wholly-owned and operating

subsidiary of defendant The Firm of John Dickinson Schneider

(“JDS”). JDS is an Illinois close corporation that holds all of

Hollister’s capital stock. 

John D. Schneider, who only had a high school education

and initially began a printing business, founded JDS and

developed Hollister into a prosperous company. Schneider desired

for JDS and Hollister to remain independent and employee-owned

companies and wanted his employees to share in their success. 

Schneider accomplished these goals through a direct shareholder

program and the Hollister Employee Share Ownership Trust

(“HolliShare” or “Plan”).

HolliShare is a non-contributory, tax qualified defined

contribution profit sharing plan designed to provide retirement

benefits to Hollister’s non-union employees in the United States. 

It is governed by a written instrument, the HolliShare Employee

Share Ownership Trust (“Plan Instrument”). HolliShare’s

predominant asset, which totals approximately 95% of its total

value, is its JDS common shares. The Plan Instrument mandates

that HolliShare’s assets be invested in JDS shares to the maximum

extent practicable. When initially funded in 1974, HolliShare

received 11,950 common shares of JDS that were purchased from

shareholders. In exchange, HolliShare assumed the obligation to

pay the long-term promissory notes issued to the shareholders to

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purchase the shares. In late 1974, the Plan transferred 4,007

shares back to JDS along with the related promissory note

obligations, leaving the Plan with 7,943 shares. HolliShare has

not purchased JDS shares since 1975, but the number of its total

shares has increased due to two 100-for-1 stock splits and a

9-for-1 stock dividend. 

HolliShare’s ownership of JDS shares has proved to be

an extraordinary investment, and the annual increases in value of

JDS shares according to JDS’s valuations exceeded most publiclytraded investments. For example, from 1977 through 2010, the

mean average increase in JDS’s share price was 26.79% each year,

whereas the mean average increase for the Standard & Poors 500

index was 8.8% per year, the mean average increase for the MidCap Index was 14.09% per year, and the mean average increase for

the Small-Cap Index was 15.24% per year. 

HolliShare participants are neither required nor

permitted to contribute to HolliShare. HolliShare primarily

raised the liquidity to pay benefits to participants through

annual cash contributions from Hollister and cash paid by JDS for

the repurchase of the Plan’s stock. Hollister is required to

contribute 5% of the aggregate compensation of participants to

HolliShare each year, but, in recent years, Hollister has

contributed between 7.5% to 8.5% of the aggregate compensation,

totaling approximately $33 million in contributions since 1990. 

Because HolliShare invests primarily in JDS common shares, the

principal factor that determines the change in value of each

HolliShare participant’s account is the annual decline or

appreciation in the value of the Plan’s JDS common shares, and

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the balance in each participant’s account is generally based on

the participant’s pro-rata percentage of the value of HolliShare. 

Participants in HolliShare learned about the Plan and its

financial condition in annual reports, which were referred to by

the parties as and often bore the title of “HolliShare

Highlights.” 

JDS has two classes of shares, preferred and common, 1

neither of which has a generally recognized public market. The

JDS Articles of Incorporation (“JDS Articles”) provide several 2

restrictions on JDS shares relevant to this case. First, under 

Article Five, only certain persons and entities are entitled to

own JDS shares, including holders of shares as of May 5, 1978,

select directors and officers of JDS or Hollister, select JDS or

Hollister employees, and any deferred benefit plan maintained by

HolliShare does not own any preferred shares and all of 1

the preferred shares, which have the controlling interest, were

originally owned by Schneider. Schneider placed all of his

outstanding preferred shares in the 1977 Preferred Share Trust,

which was set to expire in 2001. Upon its expiration, the 1977

Preferred Share Trust provided for the shares to be distributed

to the Hollister employees who owned common shares and agreed in

writing to abide by Schneider’s principles. Instead of allowing

the shares to be distributed, a new trust, the 1999 Preferred

Share Trust, was created and, with the consent of the employees

who would have received preferred shares upon expiration of the

1977 Preferred Share Trust, the JDS preferred shares were

transferred to the 1999 Preferred Share Trust. 

Although plaintiffs asserted claims based on these trust

transactions, the court entered summary judgment in favor of

defendants on these claims prior to trial in its June 26, 2009

Order (“June 2009 Order”). See DeFazio v. Hollister, Inc., 636

F. Supp. 2d 1045, 1052-54, 1072-77 (E.D. Cal. 2009). 

 The JDS Articles were amended multiple times between 2

1978 and 1999. (See Exs. 531-36.) Unless otherwise noted, the

cited paragraphs of JDS Articles are common to all of the

versions.

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JDS and/or Hollister. (Ex. 533, Art. V, ¶ II.C.) 3

Second, Article Five restricts the manner in which

holders of JDS stock may transfer ownership. Specifically,

subparagraph II.D.2.a gives JDS a right of first refusal by

requiring that any holder of JDS stock who intends to transfer

one or more shares must first offer to sell those shares to JDS. 

Subparagraph II.D.3.b further provides that the price paid for

any common share purchased by JDS under its right of first

refusal “shall be its book value as of the end of the calendar

month in which the Repurchase Date occurs . . . computed in

accordance with generally accepted accounting principles.” (Ex. 4

531, Art. V, ¶ II.D.3.b.) 

The JDS Articles also provide that when JDS repurchases

shares pursuant to its right of first refusal, it is obligated to

pay only a minimal amount in cash (set originally at $5,000 and

then increased to $250,000 in 1999) and can pay the remainder

with a promissory note. Not only did HolliShare’s cash needs

always exceeded the $5,000 and $250,000 minimums, it could not

Subparagraph II.C was amended in 1984 to allow a non- 3

employee director or officer of JDS or Hollister, such as

defendant Richard T. Zwirner, to own stock if the individual had

“performed substantial and continuing services” for JDS or

Hollister. The JDS Articles were amended again in 1999 to allow

The 1999 Preferred Share Trust to hold shares. 

As noted in an earlier Order, “book value” refers to a 4

method used to value corporate stock, but the term has no

generally accepted definition. DeFazio v. Hollister Emp. Share

Ownership Trust, 406 F. Supp. 2d 1085, 1087 n.2 (E.D. Cal. 2005)

(Karlton, J.) (citing 51 A.L.R. 2d 606 § 2). “[T]he term

contemplates a theoretical value resulting from depreciation or

appreciation as computed upon an originally determined base.” 

Id. Albeit a simplified explanation, book value is generally

calculated by subtracting a company’s liabilities from its

assets. 

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receive a promissory note for its sale of JDS stock because ERISA

prohibited it from accepting a promissory note as payment from an

employer. See 29 U.S.C. § 1106(a)(1)(B). 

In addition to the right of first refusal, subparagraph

II.D.7.a provides for the sale of JDS shares under “exceptional

circumstances”:

Under exceptional circumstances and in the discretion of

the Corporation’s Board of Directors, shares may be

repurchased by the Corporation at such other times, upon

such other terms, in such other manners, over such other

periods of time, or on such other conditions as the

Corporation and the owner or holder of such shares may

from time to time agree.

(Ex. 531, Art. V, ¶ II.D.7.a.)

The Plan Instrument permits the sale of the Plan’s JDS

stock and does not set the price for such sales but requires that

the sales be conducted in accordance with the JDS Articles. (Ex.

9-9.14, § 11.01(2).) Defendants testified at trial that, since

the mid-1980s, HolliShare has sold its holdings of JDS common

shares to JDS pursuant to the “exceptional circumstances”

provision of subparagraph II.D.7.a, not the right of first

refusal embodied in subparagraph II.D.2.a. Defendants testified

that HolliShare and JDS entered into an agreement in the mid1980s (“mid-80s agreement”) that has since governed JDS’s 5

repurchases of common shares from HolliShare. Neither the mid80s agreement nor its terms were memorialized in writing. 

Defendants testified that the terms of the agreement were that

HolliShare would provide advance projections of the Plan’s cash

As this litigation progressed, counsel referred to this 5

agreement as the “mid-80s agreement,” (Tr. 862:16-21), and the

court will refer to it as such in this Order as well. 

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needs, HolliShare would sell shares back to JDS once a year, the

purchase price would be the audited book value from December 31

of the prior year, JDS would purchase all of the shares

HolliShare sought to sell, and JDS would pay all cash for the

shares. 

Although the theories underlying plaintiffs’ claims

have evolved as this case has progressed, the heart of

plaintiffs’ case at trial was that the price JDS paid for

HolliShare’s sales of its JDS stock should have been 1) the

current month-end book value from the month in which the sale

took place (“month-end book value”); or 2) a price determined to

be the fair market value of the shares. Plaintiffs contend that,

by selling at the December 31 book value from the year prior to

the sale (“December 31 book value”) instead of the month-end book

value or the fair market value, the HolliShare fiduciaries

breached their duties under ERISA and caused the Plan to suffer

extraordinary losses. 

The parties have stipulated as to a variety of details

concerning the challenged transactions, including the sale date,

the December 31 book value that was used for the sale price, the

number of shares sold, and, for almost all of the sales, the

month-end book value for the month in which the challenged

transactions occurred. (See Docket No. 630 (“Stipulation of

Facts”).) Between 1981 and 2007, HolliShare sold its shares to

JDS on nineteen occasions. The years in which sales took place,

the number of shares sold, and the cash proceeds generated were

as follows: 1981 (69,300 shares for $997,227.00); 1982 (38,000

shares for $723,140.00); 1985 (20,000 shares for $1,368,400.00);

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1986 (180,000 shares for $12,619,800.00); 1987 (100,000 shares

for $9,756,000.00); 1993 (75,000 shares for $25,830,000.00); 1995

(30,000 shares for $14,697,300.00); 1996 (166,973 shares for

$10,000,012.97); 1997 (135,000 shares for $9,863,100.00); 1998

(250,000 shares for $21,262,500.00); 1999 (200,000 shares for

$21,332,000.00); 2000 (150,000 shares for $18,679,500.00); 2001

(220,000 shares for $29,590,000.00); 2002 (46,250 shares for

$7,174,300.00); 2003 (44,750 shares for $8,490,417.50); 2004

(50,000 shares for $11,908,000.00); 2005 (22,000 shares for

$6,335,120.00); 2006 (26,500 shares for $8,717,400.00); and 2007

(85,500 shares for $34,006,770.00). (Id. ¶¶ 28-46.)

A. The Parties 

1. Plaintiffs 

With the exception of plaintiff James P. DeFazio, all

of the plaintiffs in this case are former employees of Hollister

and former participants in HolliShare. The former HolliShare

participant plaintiffs and the years in which they ended their

Hollister employment and received the distribution of their

HolliShare accounts include: DeLane Humphries (1998); Brenda

Dimaro (1999); Judy Seay (1999); Hallie Lavick (2000); Michael

McNair (2002); Nancy Russell Stanton (2002); Sonya Pace (2003);

Kathleen Ellis (2004); Theresa Beetham (2006); and Cindy Worth

(2006). All of these plaintiffs had terminated their employment

and received lump sum distributions of their HolliShare accounts

before commencing or joining this action. James P. DeFazio is

Ellis’s former husband and is an alternate payee on an account

created with funds from Ellis’s HolliShare distribution.

 In a fourteen-month period between 2004 and 2005, three

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subsets of the current plaintiffs independently filed complaints

against Hollister, JDS, the HolliShare Trustees, and various

members of the boards of directors of both companies. The cases 6

were consolidated by court order on May 25, 2006. (Docket No.

87.) All of the plaintiffs except Ellis (“DeFazio/Dimaro

plaintiffs”) are represented by the same counsel and filed their

Fifth Amended Complaint on July 22, 2008. (Docket No. 368.) 

Ellis, the only plaintiff represented by separate counsel, filed

her Fourth Amended Complaint on January 23, 2008. (Docket No. 7

314.) The allegations asserted against defendants are

substantially similar in both operative complaints, and counsel

for the DeFazio/Dimaro plaintiffs and Ellis tried the case

together, with Ellis’s counsel taking the lead at trial and in

the post-trial briefing. 

2. Defendants

a. HolliShare Trustee Defendants

Defendant Richard T. Zwirner has performed legal work

for Hollister and JDS since 1969, and he has been a HolliShare

Trustee since 1976. He has also provided consulting services to

Hollister since the late 1970s and served as the Corporate

This case was not brought as a class action on behalf 6

of all past or current members of HolliShare. The DeFazio/Dimaro

plaintiffs included class allegations in their Fourth and Fifth

Amended Complaints, but then filed a statement of non-opposition

to defendants’ motion to strike those allegations, (Docket No.

533), and thus the court granted defendants’ motion to strike the

class allegations. DeFazio, 636 F. Supp. 2d at 1055-56. 

Plaintiffs also named HolliShare as a defendant, but

have never treated it as a defendant and did not propose findings

of fact or conclusions of law addressing its liability. Thus the

court will enter judgment in favor of HolliShare.

As used in this Order, the term “plaintiffs” refers 7

collectively to all eleven plaintiffs unless otherwise noted.

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Secretary of JDS from 1974 to 1981, a Director of JDS and

Hollister since 1978, Hollister’s Vice President of Marketing and

Sales from 1991 to 1994, and General Counsel to Hollister since

1977. 

Hollister’s chief financial officers also served as

HolliShare Trustees, which, in succession, were defendants

Charles H. Gunderson, James J. McCormack, and Samuel P. 8

Brilliant. McCormack served as a HolliShare Trustee from 1989 to

June 2000 and was also Hollister’s Treasurer and Chief Financial

Officer from 1981 to 2000, Vice President of Finance from 1981 to

1993, and a Senior Vice President from 1993 to 2000. Brilliant

became a HolliShare Trustee in July of 2000 and was still a

Trustee at the time of trial. Brilliant also served as

Hollister’s Vice President of Finance and Treasurer from October

1998 to July 2000 and became its Chief Financial Officer and a

Vice President of Hollister in 2000. 

Hollister’s heads of the human resources department

also served as HolliShare Trustees, which, in succession, were

defendants Charles C. Schellentrager, James A. Karlovsky, and

Lori Kelleher. Although it is unclear from the testimony at

trial when Schellentrager became a Trustee, his term ended in

1990 at the latest when Karlovsky succeeded him. Karlovsky

served as a Trustee from 1990 to July 2004 and also served as

Although plaintiffs indicate in their proposed findings 8

of fact that Gunderson was a Trustee before McCormack (Docket No.

647 at 13:20-21), the only testimony at trial was that Gunderson

was the “vice president and treasurer of the corporation” prior

to his termination. (Tr. 245:5-8.) More importantly, the court

dismissed Gunderson as a defendant in this action in the June

2009 Order. See DeFazio, 636 F. Supp. 2d at 1059, 1080. 

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Hollister’s Vice President of Human Resources from 1989 to 2003

and Executive Assistant to the President from 2003 to 2004. 

Kelleher succeeded Karlovsky as a Trustee in 2004 and continued

to serve as a Trustee until 2011.

Defendant Loretta A. Stempinski also served as a

HolliShare Trustee from 1980 to 2001, held various positions in

Hollister from 1961 to 1980, and served as a Director of JDS and

Hollister from 1980 to 2001. Ellis has not asserted claims 9

against Stempinski. 

b. Non-Trustee Defendants

Defendant Michael C. Winn served as a Director of JDS

and Hollister from 1979 to May 2001 and as Hollister’s Vice

President of Legal Affairs from 1974 to 1977, President from 1977

to 2001, and Chairman and CEO from 1981 until 2001. Ellis has

not asserted claims against Winn. Defendant Alan F. Herbert

served on the Boards of Directors of Hollister and JDS from 1998

to May 2011 and also served as Hollister’s President and Chief

Operating Officer from 1997 to 2001, President from 2001 to 2007,

and Chairman and CEO from 2007 until 2011. 

Plaintiffs also named Donald J. Groneberg, Richard I.

Fremgen, and Donna J. Matson as defendants. The only testimony

about Groneberg at trial was that he was a member of the finance

department at Hollister. (Tr. 2153:21-2154:2, 2374:24-2375:1.)

Plaintiffs did not offer evidence at trial establishing that

Groneberg owed fiduciary duties to the HolliShare beneficiaries

Defendants contend that plaintiffs did not adduce any 9

evidence at trial with respect to Stempinski. However, Winn

testified that she was a HolliShare Trustee and a Hollister and

JDS board member. (Tr. 46:4-11, 62:11-14, 117:7-11.)

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and have not proposed findings of fact or conclusions of law

addressing his liability. Similarly, while there was limited

testimony about Fremgen being on the Hollister Board of Directors

(Tr. 315:14-316:5, 1546:25-1547:4) and defendants have indicated

that he was on the board from 1999 until 2010, there was no

testimony about his conduct at trial and plaintiffs did not

propose any findings of fact or conclusions of law with respect

to claims against him. Lastly, based on two passing references

to her at trial, it appears Matson may have been a HolliShare

Trustee. (See Tr. 306, 1913.) While the clerk’s office has not

terminated her as a defendant in this action, it appears she was

dismissed in an early order in this case and neither party

appears to believe claims are still pending against her. The

court will therefore enter judgment in favor of Groneberg,

Fremgen, and Matson. 

B. Plaintiffs’ Claims

Because plaintiffs failed to sufficiently identify

their claims remaining for trial in their pretrial statement, the

Final Pretrial Order required plaintiffs to file “an amended

statement of the remaining claims that identifies, for each

claim, 1) the statutory or common law basis for the claim; 2) the

elements plaintiff must prove in order to prevail on the claim;

3) the plaintiff or plaintiffs asserting the claim; and 4) the

defendant or defendants that the claim is asserted against.” 

(Docket No. 583 at 3:23-28.) In their amended statement,

plaintiffs identified twelve ERISA claims under various

subsections of 29 U.S.C. §§ 1103-1106, 1110, 1140, and 1056. 

(Docket No. 588.) 

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II. Analysis

A. Statutory Standing

ERISA provides for a civil action to be brought only by

the Secretary of Labor, a participant, a beneficiary, or a 10

fiduciary. 29 U.S.C. § 1132. In the context of ERISA, a

“participant” means “any employee or former employee of an

employer . . . who is or may become eligible to receive a

benefit of any type from an employee benefit plan which covers

employees of such employer.” Id. § 1002(7). “The Supreme Court

has interpreted this section as conferring standing on former

employees who ‘have a reasonable expectation of returning to

covered employment or . . . a colorable claim to vested

benefits.’” Vaughn v. Bay Envtl. Mgmt., Inc., 567 F.3d 1021,

1025 (9th Cir. 2009) (quoting Firestone Tire & Rubber Co. v.

Bruch, 489 U.S. 101, 117 (1989)).

Relying on Kuntz v. Reese, 785 F.2d 1410, 1411 (9th

Cir. 1986), defendants have repeatedly argued during the course

of this litigation that plaintiffs lack statutory standing under

ERISA because, as retirees who have withdrawn their full account

balances, they no longer have a colorable claim to vested

benefits and thus are not “participants.” In 2006, however,

Judge Karlton rejected defendants’ argument, concluding that the

Ninth Circuit has “allowed suit even when plaintiffs have

received their vested benefits if they allege that fiduciaries

‘personally profited’ from a breach of their duty of loyalty to

Defendants concede that, as an “alternate payee,” 10

DeFazio is deemed to be a “beneficiary” under 29 U.S.C. §

1056(d)(3)(J). (Docket No. 658 at 20 n.8.)

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the plan.” Ellis v. Hollister, Inc., Civ. 05-559 LKK GGH, 2006

WL 988529, at *4 (E.D. Cal. Apr. 14, 2006) (citing Amalgamated

Clothing & Textile Workers Union, AFL-CIO v. Murdock, 861 F.2d

1406, 1418 (9th Cir. 1988)). Defendants requested this court to

reconsider Judge Karlton’s ruling in 2007, and the court declined

to do so because the ruling was not clearly erroneous. See

DeFazio v. Hollister, Inc., Civ. No. 04-1358 WBS GGH, 2007 WL

3231670, at *3-4 (E.D. Cal. Nov. 1, 2007). The court again

declines defendants’ suggestion that the court should depart from

Judge Karlton’s 2006 decision.

Moreover, the Ninth Circuit has more recently

distinguished Kuntz and held that a “former employee who has

received a full distribution of his or her account balance under

a defined contribution pension plan has standing as a plan

participant to file suit under [ERISA] to recover losses

occasioned by a breach of fiduciary duty that allegedly reduced

the amount of his or her benefits.” Vaughn, 567 F.3d at 1023,

1025-26; accord Harris v. Amgen, Inc., 573 F.3d 728, 733 (9th

Cir. 2009). In Vaughn, the Ninth Circuit did not require that

the trustees had personally profited from their breaches in order

for the participants to have standing, which Judge Karlton had

previously found would be required under the pre-Vaughn

precedent. 

11

Whether the Trustees personally profited as a result of 11

their breaches would be relevant if plaintiffs were seeking a

constructive trust on any ill-gotten profits. See Amalgamated

Clothing & Textile Workers Union, AFL-CIO, 861 F.2d at 1414

(“[T]he imposition of a constructive trust on a fiduciary’s

ill-gotten profits in favor of all plan participants and

beneficiaries is an important, appropriate, and available form of

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B. Statute of Limitations

1. “Fraud or Concealment” Exception

ERISA’s statute of limitations provides:

No action may be commenced under this subchapter with

respect to a fiduciary’s breach of any responsibility,

duty, or obligation under this part, or with respect to

a violation of this part, after the earlier of--

(1) six years after (A) the date of the last action which

constituted a part of the breach or violation, or (B) in

the case of an omission the latest date on which the

fiduciary could have cured the breach or violation, or 

(2) three years after the earliest date on which the

plaintiff had actual knowledge of the breach or

violation; 

except that in the case of fraud or concealment, such

action may be commenced not later than six years after

the date of discovery of such breach or violation.

29 U.S.C. § 1113 (emphasis added). While § 1113 requires a

plaintiff to file a claim within six years of the date of the

last act constituting a part of the alleged violation, regardless

of when the plaintiff actually learned of the violation, the

“‘fraud or concealment’ exception tolls the running of the

limitations period for six years from the date of discovery.” 

Barker v. Am. Mobil Power Corp., 64 F.3d 1397, 1401 (9th Cir.

1995). “Plaintiffs bear the burden of proving ‘fraud or

concealment’ under 29 U.S.C. § 1113.” Harris v. Koenig, --- F.

Supp. 2d ----, ----, No. 02–618, 2011 WL 4542973, at *5 (D.D.C.

2011); accord Barker, 64 F.3d at 1401 (finding the “fraud or

concealment” exception inapplicable “because the plaintiffs have

not produced specific evidence of fraudulent activity or

concealment” by defendants).

relief under ERISA § 409(a).”) Plaintiffs have not, however,

sought such a remedy. (See Docket Nos. 650-53, 662.)

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Here, plaintiffs rely on the “fraud or concealment”

exception to assert claims based on defendants’ alleged breaches

of fiduciary duties beginning in 1982. The “fraud or

concealment” exception applies only when an ERISA fiduciary

either “made knowingly false misrepresentations with the intent

to defraud the plaintiffs” or took “affirmative steps . . . to

conceal any alleged fiduciary breaches.” Barker, 64 F.3d at

1401; accord Radiology Ctr., S.C. v. Stifel, Nicolaus & Co., 919

F.2d 1216, 1220 (7th Cir. 1990) (“An ERISA fiduciary can delay a

wronged beneficiary’s discovery of his claim [meriting

application of the ‘fraud or concealment’ exception] either by

misrepresenting the significance of facts the beneficiary is

aware of (fraud) or by hiding facts so that the beneficiary never

becomes aware of them (concealment).”). 

 Courts have recognized that the “fraud or concealment”

exception to § 1113 incorporates the common law doctrine of

fraudulent concealment. Barker, 64 F.3d at 1402. Under that

common law doctrine, passive concealment alone may toll the

statute of limitations if the defendant has a duty to disclose

material information. Thorman v. Am. Seafoods Co., 421 F.3d

1090, 1092 (9th Cir. 2005). Courts that have considered the

issue, however, have held that the doctrine of passive

concealment does not apply to § 1113. See, e.g., Ranke v.

Sanofi-Synthelabo Inc., 436 F .3d 197, 204 (3d Cir. 2006)

(stating that an ERISA fiduciary must “have taken affirmative

steps to hide an alleged breach of fiduciary duty from a

beneficiary in order for the ‘fraud or concealment’ exception to

apply”); Larson v. Northrop Corp., 21 F.3d 1164, 1174 (D.C. Cir.

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1994) (“While a fiduciary’s mere silence could, in some

circumstances, amount to fraud, it would still fall short of the

fraudulent concealment that courts have required for purposes of

§ 1113.”); Schafer v. Ark. Med. Soc’y, 853 F.2d 1487, 1491 (8th

Cir. 1988) (holding that active concealment under § 1113 requires

“more than merely a failure to disclose”).

The Ninth Circuit in Barker implicitly found passive

concealment insufficient to toll the statute of limitations. 

There, the Ninth Circuit recognized that an ERISA fiduciary

generally has a duty to disclose “complete and accurate

information material to the beneficiary’s circumstances,” but

focused only on whether the defendants had affirmatively

concealed their breach when holding that the defendants did not

engage in “fraud or concealment” under § 1113. See Barker, 64

F.3d at 1401, 1403. An ERISA fiduciary’s mere failure to

disclose material information thus does not merit tolling under §

1113.

The “fraud or concealment” exception tolls the statute

of limitations only “until the plaintiff in the exercise of

reasonable diligence discovered or should have discovered the

alleged fraud or concealment.” J. Geils Band Emp. Ben. Plan v.

Smith Barney Shearson, Inc., 76 F.3d 1245, 1252 (1st Cir. 1996)

(citing Larson, 21 F.3d at 1172-74). Defendants first argue 12

that plaintiffs cannot rely on the “fraud or concealment”

In cases of active concealment, some courts have held 12

that a plaintiff can rely on the “fraud or concealment” exception

even in the absence of diligence by the plaintiff. See J. Geils

Band Emp. Ben. Plan, 76 F.3d at 1254 n.10; Martin v. Consultants

& Adm’rs, Inc., 966 F.2d 1078, 1096 n.19 (7th Cir. 1992). 

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exception because none of the plaintiffs testified at trial or

submitted evidence establishing that they exercised reasonable

diligence. 

When addressing a similar tolling provision in the

statute of limitations for federal securities fraud claims (28

U.S.C. § 1658(b)), however, the Supreme Court held that “the

limitations period does not begin to run until the plaintiff

thereafter discovers or a reasonably diligent plaintiff would

have discovered ‘the facts constituting the violation,’ . . .

irrespective of whether the actual plaintiff undertook a

reasonably diligent investigation.” Merck & Co., Inc. v.

Reynolds, --- U.S. ----, ----, 130 S. Ct. 1784, 1798 (2010)

(emphasis added). The Court’s holding applies equally to § 1113,

especially because the Court’s analysis in Merek is centered

around concepts embodied in the general “discovery rule.” See

id. at 1793-98. Holding otherwise could fault plaintiffs for

failing to exercise reasonable diligence even when the exercise

of reasonable diligence would not have alerted them to their

claims because the defendants had concealed their misconduct. 

Therefore, assuming plaintiffs in this case were not reasonably

diligent, they would be precluded from relying on the “fraud or

concealment” exception only if a reasonably diligent plaintiff

would have discovered the misconduct. 

13

When addressing tolling in the context of federal 13

securities fraud claims, the Supreme Court “held that the

ultimate burden is on the defendant to demonstrate that a

reasonably diligent plaintiff would have discovered the facts

constituting the violation.” Strategic Diversity, Inc. v.

Alchemix Corp., 666 F.3d 1197, 1206 (9th Cir. 2012) (discussing 

Merck & Co., 130 S. Ct. at 1798). In contrast, the First Circuit

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2. HolliShare Highlights

Plaintiffs contend that defendants concealed the sales

price of HolliShare’s JDS shares in the HolliShare Highlights,

which were the annual reports distributed to participants to

inform them about HolliShare’s funding and financial condition.14

In the June 2009 Order, this court held that, based on language

in the HolliShare Highlights, a participant could have reasonably

believed that HolliShare’s shares of JDS stock were sold to JDS

held that, for tolling under § 1113, the plaintiff has the burden

of showing reasonable diligence unless the plaintiff alleges that

the statute is tolled based on the defendant’s self-concealing

wrong. J. Geils Band Emp. Ben. Plan, 76 F.3d at 1259; see also

Truck Drivers & Helpers Union, Local No. 170 v. N.L.R.B., 993

F.2d 990, 996 (1st Cir. 1993) (“[A] plaintiff may establish a

self-concealing wrong by demonstrating that the defendant

‘engage[d] in some misleading, deceptive or otherwise contrived

action or scheme, in the course of committing the wrong, that is

designed to mask the existence of a cause of action.’” (quoting

Hobson v. Wilson, 737 F.2d 1, 34-35 (D.C. Cir. 1984) (alteration

in original)). 

The parties have not addressed which party has the

burden to establish either the existence or absence of reasonable

diligence. Nonetheless, because the court finds that the

exercise of diligence would not have uncovered the alleged

breaches, the court’s conclusion about reasonable diligence would

be the same regardless of which party had the burden on that

issue. 

The Ninth Circuit has held that the “fraud or 14

concealment” exception applies “only when the defendant himself

has taken steps to hide his breach of fiduciary duty.” Barker,

64 F.3d at 1402. As a result, “[p]laintiffs may not generally

use the fraudulent concealment by one defendant as a means to

toll the statute of limitations against other defendants.” Id.

(quoting Griffin v. McNiff, 744 F. Supp. 1237, 1256 n.20

(S.D.N.Y. 1990), aff’d, 996 F.2d 303 (2d Cir. 1993)) (internal

quotation marks omitted). The testimony from at least some of

the Trustees in this case was that they read and reviewed the

HolliShare Highlights before they were distributed to the

participants. (See Tr. 371:14-16, 372:9-12 (Karlovsky), 2452:16-

23 (Zwirner).) From this testimony--and in light of the fact

that defendants have not argued that any of the Trustees did not

read or review the HolliShare Highlights--the court finds that

each Trustee approved the HolliShare Highlights and is

responsible for the information provided to the beneficiaries in

them.

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at the month-end book value from the month in which a sale

occurred. DeFazio, 636 F. Supp. 2d at 1061. Specifically, from

1993 to 2000, the HolliShare Highlights informed participants of

the following:

JDS common shares, which are valued at their book

value, are not publicly traded. They are for all

practical purposes not transferable to any person or

entity other than JDS itself. They are subject to severe

transfer restrictions which require that the Trust first

offer them to JDS, the parent company of Hollister

Incorporated, at their book value.

To date, JDS has repurchased common shares from the

Trust at their book value to provide the plan with the

needed cash.

(Exs. 4-4.18 at 7, 4-4.19 at 7, 4-4.20 at 7, 4-4.21 at 7, 4-4.22

at 7, 4-4.23 at 7, 4-4.24 at 7, 4-4.25 at 7.) Based on this 15

information, a reasonable participant could have believed that

HolliShare sold its holdings of JDS common shares pursuant to the

sale price specified for sales made pursuant to the “right of

first refusal” in subparagraph II.D.2.a of Article 5 of the JDS

Articles. 

Specifically, subparagraph II.D.2.a provides:

If any . . . trust . . . desires or intends to transfer

any one or more shares of the Corporation, . . . such

holder shall first offer in writing, . . . to sell to the

Corporation all shares of the Corporation which such

holder desires or intends to transfer . . . at the price

and in the manner set forth in subparagraphs 3 and 4 of

this paragraph D. 

(Ex. 531, Art. V, ¶ II.D.2.a.) Subparagraph II.D.3.b of Article

Beginning in 1998 and continuing through 2000, the 15

following underscored language was omitted: “They are subject to

severe transfer restrictions which require that the Trust first

offer them to JDS, the parent company of Hollister Incorporated,

at their book value.” (See Exs. 4.4-23 at 7, 4.4-24 at 7, 4-4.25

at 7 (emphasis added).) This omission does not affect the

court’s analysis. 

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Five then mandates that, for sales pursuant to the right of first

refusal, “[t]he price of each common share shall be its book

value as of the end of the calendar month in which the Repurchase

Date occurs . . . .” (Id. Art. V, ¶ II.D.3.b.) When the

explanation in the HolliShare Highlights that the transfer

restrictions on its JDS shares “require that the Trust first

offer them to JDS . . . at their book value” is read in

conjunction with the right of first refusal in the JDS Articles,

a participant could reasonably conclude that the shares were sold

at the month-end book value dictated in subparagraph II.D.3.b. 

Defendants argue, however, that a reasonable

beneficiary would not draw this conclusion because the JDS

Articles also provide for JDS to pay the purchase price for sales

pursuant to the right of first refusal with a limited amount of

cash and the remainder in a subordinated promissory note. (See

id. Art. 5, ¶ II.D.4.a.) In contrast to this provision, they

point out that HolliShare always received payment for its shares

from JDS in cash, suggesting that the sales were not conducted

under the terms of the right of first refusal. In the HolliShare

Highlights, however, beneficiaries were told that “JDS has

repurchased common shares from the Trust at their book value to

provide the plan with the needed cash.” Although this suggests

that payments may have been in cash, it does not preclude the

possibility that HolliShare received a promissory note,

especially because a promissory note could have been sold to a

bank to obtain cash. (See Tr. 663:10-664:2.) That HolliShare’s

receipt of cash only payments for its JDS stock is inconsistent

with the terms of payment for a sale conducted pursuant to the

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right of first refusal would therefore not prevent a reasonable

participant from concluding that HolliShare’s sales were

conducted under the terms and at the price provided for in the

right of first refusal provision. 

Before 1993, however, the HolliShare Highlights did not

contain similar language suggesting that HolliShare’s sales of

its JDS stock were pursuant to and according to the terms of the

right of first refusal. Specifically, from 1983 to 1992, the

HolliShare Highlights stated: 

JDS common shares, which are valued at their book

value, are not publicly traded. They are subject to

severe transfer restrictions and can only be sold to JDS,

the parent company of Hollister Incorporated. 

To date, JDS has repurchased common shares from the

Trust at their book value to provide the plan with needed

cash.

(Exs. 4-4.8 at 9, 4-4.9 at 10, 4-4.10 at 10, 4-4.11 at 6, 4-4.12

at 6, 4-4.13 at 7, 4-4.14 at 7, 4-4.15 at 7, 4-4.16 at 7, 4-4.17

at 7.). Similarly, the 1982 HolliShare Highlights explained: 16

In evaluating these comparisons, it must be

recognized that JDS common shares, which are valued at

their book value, are not publicly traded and are subject

to very severe transfer restrictions. As a practical

matter, they can only be sold to JDS, the parent company

of Hollister Incorporated. 

To date, JDS has repurchased common shares from the

Trust at their book value in order to provide the Trust

with needed cash.

(Ex. 4-4.7 at 7.) 

The explanations from 1982 to 1992 are silent with

From 1983 to 1987, the first sentence of the 16

explanation varied slightly. (See Exs. 4-4.8 at 9, 4-4.9 at 10,

4-4.10 at 10 (“As you evaluate these comparisons, remember that

JDS common shares, which are valued at their book value, are not

publicly traded.”); Exs. 4-4.11 at 6, 4-4.12 at 6 (“Remember that

JDS common shares, which are valued at their book value, are not

publicly traded.”).) 

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respect to whether “book value” refers to the December 31 book

value or month-end book value and lack any language suggesting

one or the other. Based on the explanations, it is equally

plausible that HolliShare sold its shares under the exceptional

circumstances provision. At most, the HolliShare Highlights from

1982 to 1992 omit arguably material information, which is

insufficient to trigger the “fraud or concealment” exception. 

Plaintiffs have not satisfied the court that defendants committed

any other affirmative acts of concealment during that ten-year

period that would have led a reasonable participant to believe

that HolliShare’s sales of its JDS stock were at the month-end

book value. 

Accordingly, because plaintiffs are unable to rely on

the “fraud or concealment” exception for any alleged misconduct

between 1982 to 1992, their claims based on HolliShare’s sale of

JDS stock from 1982 to 1992 are time barred and the court will

enter judgment in favor of defendants on those claims.17

Further, because Schellentrager’s tenure as trustee ended when

Karlovsky replaced him in 1990, (Tr. 345:1-5), the entirety of

plaintiffs’ claims against him are untimely and the court will

enter judgment in his favor. 

Returning to plaintiffs’ claims based on HolliShare’s

sale of JDS stock beginning in 1993, defendants further contend

that the following language in the Plan Instrument disclosed the

If the court’s finding that plaintiffs’ claims based on 17

defendants’ conduct from 1982 to 1992 is reversed for any reason,

the remainder of the court’s analysis in this Order of

plaintiffs’ post-1992 claims would apply equally to their timebarred claims. 

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use of the December 31 book value:

The assets in the Trust Fund shall be valued by the

Trustees at their respective fair market values as of

each December 31st. The fair market value of Common

Shares of JDS Inc. held in the Trust Fund shall, subject

to the provisions of the remainder of this Section 7.03,

be their book value as of the valuation date as reflected

on the books of JDS Inc. The Trustees shall accept such

book value as the fair market value if such book value is

computed in accordance with generally accepted accounting

principles. 

(Ex. 501 § 7.03.) Article VII of the Plan Instrument, which 18

this explanation is a part of, however, is titled “Accounts and

Allocations of Funds” and addresses valuing each participant’s

account in detail, not valuing JDS stock for the purpose of a

sale. 

Because the first sentence addresses the “assets in the

Trust Fund” more broadly, the reference to the December 31 value

in that sentence could be interpreted as referring to the

valuation of all assets in the trust for purposes of determining

the value of each participant’s account. This is consistent with

the use of December 31 as the date of evaluation for

participant’s accounts regardless of when they retire in the

following year. On the other hand, the second sentence, which

specifically refers to the “fair market value of Common Shares of

JDS Inc.,” omits any reference to December 31 and states that the

value shall be “their book value as of the valuation date.” 

Based on the use of “valuation date” in that sentence, a

The explanation was also included in the letter sent to 18

DeFazio, which is discussed below. (Ex. 176.) Although

defendants have not relied on this evidence, all of the

HolliShare Highlights before the court also included

substantially similar language in the endnotes following the

breakdown of HolliShare’s financial information.

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participant could reasonably conclude that the book value of JDS

stock would vary depending on when the valuation and sale

occurred and thus would not remain stagnant for the entire year

at the December 31 book value. Although the correct

interpretation of this explanation is not clear, a reasonable

participant could still believe that HolliShare’s sales of JDS

stock were set at the right of first refusal price of month-end

book value and that only the accounts were valued annually as of

December 31.

Plaintiffs have thus persuaded the court that the

potential inconsistency between HolliShare’s receipt of cash

payments and the provision for a promissory note in the right of

first refusal and the disclosure setting the valuation date for

HolliShare accounts at December 31 did not amount to “storm

warnings” putting the plaintiffs on notice about defendants’

alleged breaches. Even assuming these inconsistencies would have

alerted a reasonably diligent participant to defendants’ alleged

breaches, the most a reasonable participant could be expected to

do in receipt of potentially conflicting information would be to

inquire further about the terms of the sales. While the court

doubts that a reasonably diligent participant would have done

more than review the annual HolliShare Highlights, the court

finds that even additional efforts would not have led a

participant to discover the alleged misconduct.

For example, a reasonably diligent participant might

have inquired about the details pertaining to the Plan’s sale of

JDS stock. In this case, however, DeFazio made such an inquiry. 

In a letter dated November 3, 1997, he was told that, since 1973,

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“every transfer by JDS Inc[.] has been at book value; and JDS

Inc[.] has always exercised its right of first refusal and

repurchased such shares at book value.” (Ex. 176 at 3.) As

previously discussed, the express reference to the “right of

first refusal” in this letter when read in conjunction with the

JDS Articles indicates that the price for the JDS stock would

have been the “book value as of the end of the calendar month in

which the Repurchase Date occurs.” (Ex. 531.)

Additionally, if plaintiffs had pursued an

investigation beyond inquiring from Hollister or HolliShare, the

evidence suggests they would not have discovered the precise

terms of HolliShare’s sales of JDS stock. In response to a

Department of Labor investigator’s request for documents

evidencing HolliShare’s sales of its shares to JDS, (Ex. 54 at

8), HolliShare indicated sales prices for sales from 1994 to 1998

that were the December 31 book value, but also indicated that

each of the sales took place on January 1, (id. at 10). From the

information provided to the Department of Labor and available to

the participants, it would be unlikely that a reasonably diligent

participant would have known that the sales in 1994 to 1998

actually took place in March of each year, with a sales price

that is allegedly three months, not one day, “old.” 

The court also doubts that additional efforts or

inquiries by plaintiffs could have unveiled the dynamics and

purported terms of the Plan’s sales of JDS stock because even

defendants’ counsel seemed unaware of the terms of such sales for

at least the first three years of this litigation. In a

memorandum in support of their motion to dismiss plaintiffs’

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First Amended Complaint filed in October 2006, counsel for seven

of the defendants stated, “It cannot seriously be argued that a

routine and commonplace sale by HolliShare of JDS common shares

involves any ‘extraordinary circumstances.’” (Docket No. 148 at

11:15-17.) A year later, the same counsel again explained that

sales could not have been pursuant to the “exceptional

circumstances” provision. (See Docket No. 282 at 12:3-6

(“Plaintiffs do not suggest what ‘exceptional circumstances’

exist that would – or even may – justify a decision by the JDS

Board to treat HolliShare’s periodic offers to sell some of its

JDS common shares differently from offers to sell made by all

other JDS shareholders.”).) If it was unclear to at least some

of defendants’ counsel that the sales were pursuant to the

exceptional circumstances provision, it would be unreasonable to

conclude that a reasonably diligent participant would have

discovered that fact about HolliShare’s sales of JDS stock. 

Accordingly, the court finds that a reasonably diligent

participant would not have discovered the alleged misconduct at

issue in this case before the plaintiffs in this case did and

therefore any lack of diligence or inquiry by plaintiffs does not

preclude them from relying on the “fraud or concealment”

exception. Because § 1113 tolls the statute of limitations to

six years after the discovery date and the true sales prices and

terms were not revealed until after this case was filed,

plaintiffs’ ERISA claims beginning in 1993 and continuing through

2011 are timely. 

C. Sales of JDS Shares at December 31 Book Value

1. Breach of Fiduciary Duties

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a. Prohibited Transactions under ERISA

ERISA establishes a blanket prohibition on certain

transactions that “entail a high potential for abuse,” including

the sale or exchange of property between an ERISA plan and a

“party in interest.” Donovan v. Cunningham, 716 F.2d 1455, 1465

(5th Cir. 1983) (discussing 29 U.S.C. § 1106(a)(1)). As used in

§ 1106(a)(1), a “party in interest” includes the employer of the

employees covered by the ERISA plan in question. 29 U.S.C. §

1002(14). 

Nevertheless, ERISA provides an exemption for

prohibited transactions that meet certain requirements, and §

1108(e) allows the sale or acquisition by a plan of employer

stock if three criteria are met: 

(1) if such acquisition, sale, or lease is for adequate

consideration (or in the case of a marketable obligation,

at a price not less favorable to the plan than the price

determined under section 1107(e)(1) of this title), (2)

if no commission is charged with respect thereto, and (3)

if-- (A) the plan is an eligible individual account plan

(as defined in section 1107(d)(3) of this title) . . . . 

Id. § 1108(e). The parties stipulated that HolliShare is an

eligible individual account plan under ERISA, (Stipulation of

Facts ¶ 26), and plaintiffs have not alleged that a commission

was charged. Therefore, the only dispute at trial to determine

whether HolliShare’s sales of JDS stock to JDS came within the

exception in § 1108(e) was whether the sales were for “adequate

consideration.” 

When a security has no generally recognized market, the

term “adequate consideration” means “the fair market value of the

asset as determined in good faith by the trustee or named

fiduciary pursuant to the terms of the plan and in accordance

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with regulations promulgated by the Secretary [of Labor].” 29

U.S.C. § 1002(18); see also 29 C.F.R. § 2550.408e (crossreferencing § 1002(18) in defining “adequate consideration” for

purposes of § 1108(e)). The Secretary of Labor has yet to

promulgate regulations guiding a trustee’s determination of fair

market value. 

19

In 1988, the Department of Labor proposed a regulation 19

that elaborated on the definition of “adequate consideration.” 

It states: 

First, the value assigned to an asset must reflect its

fair market value . . . . Second, the value assigned to

an asset must be the product of a determination made by

the fiduciary in good faith . . . . The Department will

consider that a fiduciary has determined adequate

consideration in accordance with section 3(18)(B) of the

Act . . . only if both of these requirements are

satisfied.

53 Fed. Reg. 17632 (May 17, 1988). “Although proposed

regulations have no legal effect, numerous circuit courts have

adopted the DOL’s proposed definition of adequate consideration.” 

Henry v. Champlain Enters., Inc., 445 F.3d 610, 619 (2d Cir.

2006). Relying on language in Howard v. Shay, 100 F.3d 1484 (9th

Cir. 1996), that is similar to the proposed regulation, the

Second Circuit has indicated that the Ninth Circuit adopted the

proposed regulation. See Henry, 445 F.3d. at 619 (“To enforce

[ERISA fiduciary rules], the court focuses not only on the merits

of the transaction, but also on the thoroughness of the

investigation into the merits of the transaction.” (quoting

Howard, 100 F.3d at 1488 (internal quotation marks omitted))). 

Although the Ninth Circuit applies a standard similar to the

proposed regulation, it has not expressly adopted the proposed

regulation. 

As this court previously explained, courts “decline to

take cognizance of the proposed regulations . . . because a

proposed regulation does not represent an agency’s considered

interpretation of its statute.” DeFazio, 2007 WL 3231670, at

*10; see Draper v. Baker Hughes Inc., 892 F. Supp. 1287, 1293

(E.D. Cal. 1995) (disregarding a proposed regulation issued by

the Department of the Treasury relating to the COBRA statute,

noting that “almost a decade has passed since COBRA’s Enactment,

and the promised regulatory guidelines have not materialized”). 

The court will therefore rely on Ninth Circuit precedent, not the

Department of Labor’s proposed regulation that has not, for some

reason or no reason at all, been adopted since its proposal over

twenty years ago. 

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In addition to prohibiting certain transactions, ERISA

also imposes on fiduciaries the “highest” duties known to law. 

Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996). 

Specifically, § 1104(a)(1) requires an ERISA fiduciary to “act

for the exclusive benefit of plan beneficiaries” and §

1104(a)(1)(B) requires the fiduciary to act “with the care,

skill, prudence, and diligence under the circumstances then

prevailing that a prudent man acting in like capacity and

familiar with such matters would use in the conduct of an

enterprise of a like character and with like aims.” Id. (quoting

§ 1104(a)(1)(B)) (internal quotation marks omitted). When an

ERISA plan transacts in employer securities, its fiduciaries thus

bear the “heavy” burden of showing that the transaction satisfies

the requirements of § 1108(e) and that the fiduciaries fulfilled

their duties of loyalty and care under § 1104(a)(1) and

(a)(1)(B). See id. 

Whether a particular transaction with an interested

party complies with §§ 1104(a)(1), (a)(1)(B), and 1108(e) depends

upon the conduct of the fiduciaries. See id. (citing Cunningham,

716 F.2d at 1467-68). Fiduciaries “are obliged at a minimum to

engage in an intensive and scrupulous independent investigation

of their options.” Id. at 1488-89; see Cosgrove v. Circle K

Corp., 915 F. Supp. 1050, 1064 (D. Ariz. 1995) (“Good faith

requires that the trustees of the Plan have used a prudent method

of determining value.”), aff’d, 107 F.3d 877 (9th Cir. 1997). 

The precise scope and nature of the required investigation

depends upon the circumstances surrounding the transaction and

the asset. See Keach v. U.S. Trust Co., 419 F.3d 626, 637 (7th

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Cir. 2005) (evaluating the sufficiency of the fiduciary’s

investigation “within the context of the totality of the

circumstances”); Cunningham, 716 F.2d at 1467-68 (noting that

fiduciaries may satisfy their burden by showing they determined

fair market value based upon “a prudent investigation in the

circumstances then prevailing”); see also Henry v. Champlain

Enters., Inc., 445 F.3d 610, 619 (2d Cir. 2006) (“Whether a

fiduciary has made a proper determination of fair market value

depends on whether the parties are ‘well-informed about the asset

and the market for that asset.’” (quoting Cunningham, 716 F.2d at

1467)). Failure to “investigate suspicions that one has with

respect to the funding and maintenance of the plan constitutes a

breach of” the duty to act in the best interests of the plan

participants. Barker, 64 F.3d at 1403. 

b. Firestone and the Moench Presumption

Relying on Firestone, 489 U.S. 101, defendants argue

that the Trustees’ decision to enter into and perform under the

terms of the mid-80s agreement–-including the purported setting

of “fair market value” of JDS common stock in the mid-80s

agreement--is entitled to a presumption that the Trustees acted

prudently and reasonably because the Plan Instrument vested the

Trustees with broad discretion. In Firestone, the Supreme Court

held that “a denial of benefits challenged under § 1132(a)(1)(B)

is to be reviewed under a de novo standard unless the benefit

plan gives the administrator or fiduciary discretionary authority

to determine eligibility for benefits or to construe the terms of

the plan.” Id. at 115; accord Burke v. Pitney Bowes Inc.

Long-Term Disability Plan, 544 F.3d 1016, 1023-24 (9th Cir. 2008)

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(recognizing the holding from Firestone and explaining that,

“[w]hen a plan unambiguously gives the plan administrator

discretion to determine eligibility or construe the plan’s terms,

a deferential abuse of discretion standard is applicable” to a

denial of benefit claim).

Section 1132, however, lays out several claims for

relief and plaintiffs’ claims are brought under subsections

(a)(2) and (a)(3), not subsection (a)(1)(B). Not only was 20

Firestone’s holding limited to claims under § 1132(a)(1)(B), the

Court explicitly indicated that its discussion was “limited to

the appropriate standard of review in § 1132(a)(1)(B) actions

challenging denials of benefits based on plan interpretations”

and that it “express[ed] no view as to the appropriate standard

of review for actions under other remedial provisions of ERISA.” 

Firestone, 489 U.S. at 108. Accordingly, Firestone does not

govern the conduct at issue in this case because plaintiffs are

not seeking relief for a denial of their benefits under §

Section 1132(a) provides: 20

Persons empowered to bring a civil action. A civil

action may be brought--

(1) by a participant or beneficiary-- . . .

(B) to recover benefits due to him under the

terms of his plan, to enforce his rights under the terms

of the plan, or to clarify his rights to future benefits

under the terms of the plan; 

(2) by the Secretary, or by a participant,

beneficiary or fiduciary for appropriate relief under

section 1109 of this title; 

(3) by a participant, beneficiary, or fiduciary (A)

to enjoin any act or practice which violates any

provision of this subchapter or the terms of the plan, or

(B) to obtain other appropriate equitable relief (I) to

redress such violations or (ii) to enforce any provisions

of this subchapter or the terms of the plan . . . .

29 U.S.C. § 1132(a).

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1132(a)(1)(B). See John Blair Commc’ns, Inc. Profit Sharing Plan

v. Telemundo Grp., Inc. Profit Sharing Plan, 26 F.3d 360, 369 (2d

Cir. 1994) (“[W]e decline to apply the arbitrary and capricious

standard [from Firestone] to the fiduciary conduct at issue here

because this case does not involve a simple denial of benefits,

over which the plan administrators have discretion. . . .

[D]ecisions that improperly disregard the valid interests of

beneficiaries in favor of third parties remain subject to the

strict prudent person standard articulated in § 404 of ERISA.”). 

Nonetheless, courts have extended application of the

deferential review applied in Firestone to claims other than

those for a denial of benefits under § 1132(a)(1)(B). In Moench

v. Robertson, 62 F.3d 553 (3d Cir. 1995), the plaintiffs sought

relief under § 1132(a)(2), alleging that the fiduciaries of their

employee stock option plan (“ESOP”) breached their duties when

they invested solely in employer common stock even though the

employer was deteriorating financially. Recognizing that “the

arbitrary and capricious standard of review allowed in Firestone

should not be applied mechanically to all ERISA claims,” the

Third Circuit reasoned that “the Court’s mode of analysis is

certainly relevant to determine the standard of review pertaining

to all claims filed under ERISA challenging a fiduciary’s

performance.” Moench, 62 F.3d at 565. Developing what has been

coined as the “Moench presumption,” the Third Circuit held:

[A]n ESOP fiduciary who invests the assets in employer

stock is entitled to a presumption that it acted

consistently with ERISA by virtue of that decision. 

However, the plaintiff may overcome that presumption by

establishing that the fiduciary abused its discretion by

investing in employer securities.

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Id. at 571. 

Consistent with every circuit that has evaluated the

Moench presumption, the Ninth Circuit recently adopted the

presumption in Quan v. Computer Scis. Corp., 623 F.3d 870 (9th

Cir. 2010). Similar to Moench, the plaintiffs in Quan asserted

claims under § 1132(a)(2), alleging that the fiduciaries of their

eligible individual account plan (“EIAP”) made imprudent

investments in their employer’s common stock. 

The Third Circuit’s development of the Moench

presumption, and the Ninth Circuit’s adoption of it in Quan,

centered around the fact that the plaintiffs challenged the

fiduciaries’ decisions to invest in employer stock even though

the plans in both cases required or encouraged the fiduciaries to

invest in employer stock and ERISA exempted the fiduciaries of

the plans from the general duty to diversify plan investments. 

See 29 U.S.C. § 1104(a)(2) (“In the case of an eligible

individual account plan (as defined in section 1107(d)(3) of this

title), the diversification requirement of paragraph (1)(C) and

the prudence requirement (only to the extent that it requires

diversification) of paragraph (1)(B) is not violated by

acquisition or holding of qualifying employer real property or

qualifying employer securities.”); Quan, 623 F.3d at 881

(“Congress has granted favored status to ESOPs and other EIAPs by

exempting them from certain ERISA requirements. . . . We adopt

the Moench presumption because it provides a substantial shield

to fiduciaries when plan terms require or encourage the fiduciary

to invest primarily in employer stock.”). In Moench and Quan,

the plaintiffs did not allege that the conduct at issue

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constituted prohibited transactions under ERISA or that adequate

consideration was not paid for the employer stock. 

Unlike the plans and claims at issue in Moench and

Quan, plaintiffs’ claims do not conflict with ERISA, the terms of

the Plan Instrument, or the Congressional policy in favor of

plans that “tie employee compensation to the company’s

success.” Quan, 623 F.3d at 881. Section 1106(a)(1) 21

unequivocally prohibits the sale of HolliShare’s JDS stock to JDS

unless the sale was for adequate consideration. 29 U.S.C. §§

1106(a)(1), 1108(e). ERISA then defines “adequate consideration”

as “the fair market value of the asset as determined in good

faith by the trustee or named fiduciary pursuant to the terms of

the plan and in accordance with regulations promulgated by the

Secretary [of Labor].” Id. § 1002(18) (emphasis added). As the

Ninth Circuit has explained, this places a heavy burden on the

fiduciaries “to engage in an intensive and scrupulous independent

investigation of their options to insure that they act in the

best interests of the plan beneficiaries.” Howard, 100 F.3d at

1488-89. 

Not only have defendants failed to cite a single case

in which plaintiffs challenged a transaction as prohibited under

ERISA and the court applied the more deferential standard of

review, applying the more lenient standard would be inconsistent

with ERISA’s explicit requirement of a good faith determination

and courts’ application of the more exacting standard. For

Understandably in light of Hollister and JDS’s 21

exceptional performance, plaintiffs do not attack the Trustees’

decision to primarily invest the Plan assets in JDS common stock. 

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example, when evaluating whether a plan received adequate

consideration under § 1002(18) in Howard, the Ninth Circuit

stated that a fiduciary had “the burden of proving that he

fulfilled his duties of care and loyalty” and discussed the

various inquiries the fiduciary must have undergone to fulfill

his burden. Id. at 1488-89. The court ultimately found in favor

of plaintiffs because, even though the fiduciaries obtained an

independent assessment from a financial advisor, the fiduciaries

failed to “meaningfully review, discuss, or question the

valuation” or assumptions used. Id. at 1489-90. The Ninth

Circuit neither considered nor applied a more deferential

standard, and the breaches at issue in Howard are similar to the

alleged breaches in this case. 

It could still be argued that, because § 1002(18)

contemplates adherence to the ERISA plan in determining fair

market value, if a plan vests the fiduciary with discretion in

arriving at the fair market value, the fiduciary’s valuation

would be subject to the less stringent abuse of discretion

review. See 29 U.S.C. § 1002(18) (“[T]he fair market value of

the asset as determined in good faith by the trustee or named

fiduciary pursuant to the terms of the plan and in accordance

with regulations promulgated by the Secretary [of Labor].”

(emphasis added)). As the Second Circuit explained, however,

reviewing “decisions that improperly disregard the valid

interests of beneficiaries in favor of third parties” under a

standard less stringent than the “the strict prudent person

standard articulated in § 404 . . . would allow plan

administrators to grant themselves broad discretion over all

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matters concerning plan administration, thereby eviscerating

ERISA’s statutory command that fiduciary decisions be held to a

strict standard.” John Blair Commc’ns, Inc. Profit Sharing Plan,

26 F.3d at 369; cf. 29 U.S.C. § 1104(a)(1)(D) (requiring a

fiduciary to discharge his duties “in accordance with the

documents and instruments governing the plan insofar as such

documents and instruments are consistent with the provisions of

[ERISA]”).

Lastly, even assuming the Plan Instrument vested the

Trustees with discretion to determine the fair market value and

that, under the reasoning of Firestone, their determination

should be reviewed only for an abuse of that discretion,

defendants’ conduct in this case would still not be reviewed

under the less stringent standard of review. As the Moench Court

recognized in response to the argument that the plan gave the

trustees the discretion to interpret the plan, “the deferential

standard of review of a plan interpretation ‘is appropriate only

when the trust instrument allows the trustee to interpret the

instrument and when the trustee has in fact interpreted the

instrument.’” Moench, 62 F.3d at 567 (quoting Trustees of Cent.

States, Se. & Sw. Areas Health & Welfare Fund v. State Farm Mut.

Auto Ins. Co., 17 F.3d 1081, 1083 (7th Cir. 1994)); see also

Moench, 62 F.3d at 567-68 (“[T]his is not a case implicating the

arbitrary and capricious standard of review. The Committee

points to nothing in the record indicating that it--the

Committee--actually deliberated, discussed or interpreted the

plan in any formal manner. . . . ‘Thus, if the trustee without

knowledge of or inquiry into the relevant circumstances and

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merely as a result of his arbitrary decision or whim exercises or

fails to exercise a power, the court will interpose.’” (quoting

Restatement (Second) of Trusts § 187, comment (h))). 

As discussed in greater detail below, however, there

was no testimony that the Trustees used the December 31 book

value because they determined that it reflected the “fair market

value” of the JDS stock. Without having exercised the discretion

presumably afforded the Trustees in the Plan Instrument, any

argument that the determination is subject to review only for an

abuse of that discretion must fail. 

c. Trustees’ Lack of Investigation

The court must therefore determine whether, at trial,

the fiduciaries carried their burden of proving that they 

fulfilled their duties under §§ 1104(a)(1), (a)(1)(B), and

1108(e), which required them “at a minimum to engage in an

intensive and scrupulous independent investigation of their

options to insure that they act in the best interests of the plan

beneficiaries.” Howard, 100 F.3d at 1488-89 (quoting Leigh v.

Engle, 727 F.2d 113, 125-26 (7th Cir. 1984)) (internal quotation

marks omitted). At trial, plaintiffs’ central focus was that the

Trustees breached their duties when they sold HolliShare’s JDS

shares to JDS at the December 31 book value from the prior year

without determining that the sale price was for “adequate

consideration” and, consequently, sold the Plan’s JDS stock to

JDS for less than “adequate consideration.”

The consistent testimony from the Trustees who

testified at trial was that, after the mid-80s agreement, the

Trustees used the December 31 book value as the sale price for

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HolliShare’s JDS stock. At trial, Winn and Zwirner testified at

length about the arguably “exceptional” circumstances that led to

the mid-80s agreement, including Hollister’s six-year arbitration

with its international distributor that put severe financial

strains on the company, (Tr. 644-46, 2376), uncertainty in

predicting HolliShare’s liquidity needs in upcoming years, and

concerns about whether JDS could satisfy HolliShare’s increasing

cash needs, (Tr. 656-58, 2071:15-22). Because the controlling

inquiry examines “how the fiduciary acted viewed from the

perspective of the time of the [challenged] decision rather than

from the vantage point of hindsight,” Roth v. Sawyer-Cleator

Lumber Co., 16 F.3d 915, 918 (8th Cir. 1994) (alteration in

original) (internal quotation marks omitted), the circumstances

in the mid-80s may very well have merited use of the agreement

JDS and HolliShare reached. The agreement, however, neither

demonstrates that the Trustees sought to determine the fair

market value of the JDS shares nor justifies the Trustees’

unquestioning adherence to its terms. 

Although the Trustees relied on the December 31 book

value to set the sales price of HolliShare’s JDS shares, the

evidence at trial established that they never attempted to

determine whether the December 31 book value was the fair market

value for the Plan’s stock. Specifically, Karlovsky testified

that it was his understanding that the fair market value in the

month of sale was the December 31 book value regardless of when

the sale took place. (Tr. 406:22-407:5.) He explained that his

“recollection is that [the Trustees] accepted the audited year

end valuation according to the plan as the book value and [] used

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it.” (Tr. 471:12-18.) Karlovsky also testified that he “didn’t

have the ability or skills or the basis to determine” the fair

market value of JDS stock in the month of the sale because he

lacked “access to understanding and the ingredients to do our

book value valuation,” which was done by the finance department. 

(Tr. 406:9-16.) He testified that he “did not attempt to

calculate any other valuation” and is not aware that any of the

other Trustees did either. (Tr. 471:12-18.) As Judge

O’Scannlain has explained, “[i]f [fiduciaries] do not have all of

the knowledge and expertise necessary to make a prudent decision,

they have a duty to obtain independent advice.” Howard, 100 F.3d

at 1490 (O’Scannlain, J., dissenting on other grounds). 

In addition to never attempting to determine the “fair

market value” of HolliShare’s JDS shares, the Trustees never

requested or obtained an independent valuation of the stock by an

outside auditor. Zwirner, who has been a Trustee since 1976,

recognized that it was within the prerogative of the Trustees to

obtain an outside appraisal, but did not recall a single time

that the Trustees obtained an independent appraisal to value the

Plan’s JDS stock. (Tr. 1889:10-17, 2101:3-8; accord Tr.

393:21-23 (Karlovsky testifying that he never asked for or

requested an appraisal of the JDS stock).) It appears that the

first outside appraisal performed of HolliShare’s JDS stock in

the history of HolliShare was done at the request of defense

counsel after this litigation commenced, and Zwirner, who is

still a HolliShare Trustee and was aware of the appraisal, did

not even request to review it. (Tr. 2495:14-25.)

Although § 1108(e) and caselaw interpreting it have

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never required trustees to obtain an independent audit, the Ninth

Circuit has recognized that “securing an independent assessment

from a financial advisor or legal counsel is evidence of a

thorough investigation.” Howard, 100 F.3d at 1489 (citing Martin

v. Feilen, 965 F.2d 660, 670-71 (8th Cir. 1992)); see also

Katsaros v. Cody, 744 F.2d 270, 275 (2d Cir. 1984) (finding that

fiduciaries breached their duties when “[t]hey lacked any

expertise in such important matters as capital adequacy, quality

of assets, liquidity, the value of the bank’s stock, and the

like” and “[n]o effort was made to obtain independent

professional assistance or analysis of the financial data

presented to them”). In explaining that obtaining an independent

assessment is “not a complete defense to a charge of imprudence,”

the Ninth Circuit has also held that a trustee must “(1)

investigate the expert’s qualifications, (2) provide the expert

with complete and accurate information, and (3) make certain that

reliance on the expert’s advice is reasonably justified under the

circumstances.” Howard, 100 F.3d at 1489 (internal citations

omitted). In light of the Howard court’s criticism of the

trustees’ failure to “meaningfully review, discuss, or question

the valuation” they obtained, it would go against reason for the

court to conclude that trustees who did not even obtain an

independent audit or perform a sufficiently similar inquiry had

fulfilled their duties. 

In assessing the thoroughness of trustees’

investigation of an asset’s fair market value, the Ninth Circuit

has also found fault when the trustees “completed the transaction

without negotiation.” Id. at 1484; accord Chao v. Hall Holding

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Co., Inc., 285 F.3d 415, 432, 434 (6th Cir. 2002) (holding that

plan fiduciaries failed to prove that they had made a good faith

inquiry into fair market value when they, inter alia, did not

engage in a negotiation to set the price of the stock). The

evidence at trial in this case confirmed that, after the mid-80s

agreement, the Trustees never attempted to negotiate a different

price with JDS for the sale of its stock. (See Tr. 898:12-899:1

(McCormack testifying that he never attempted to negotiate the

price); Tr. 1299:22-1300:2 (Brilliant testifying that he never

suggested negotiating the price).) In fact, Zwirner testified

that, “a few times over [his] 30 some years as trustee,”

HolliShare considered the possibility of selling JDS shares at a

price higher than book value, but the Trustees always concluded

that “JDS Inc. always repurchases at book and would not – just

would not entertain that.” (Tr. 2373:6-20.) Although Zwirner’s

conclusion could have ultimately been correct, the Trustees 22

never attempted to determine whether § 1108(e) demanded a higher

price or, assuming it did, present information to JDS in an

effort to negotiate. 

The Trustees also seemed to accept the terms of the

mid-80s agreement without question or a consistent understanding

of its terms or justifications for them. At its inception, the

mid-80s agreement did not appear to come about as a result of

meaningful negotiations between JDS and HolliShare. With respect

to the price, the testimony was that JDS suggested the use of the

The parties never addressed the implications under 22

ERISA and for HolliShare if JDS refused to repurchase

HolliShare’s shares at the fair market value or even at the

December 31 book value. 

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December 31 book value from the prior year, (Tr. 2059:25-2060:7),

and Zwirner testified that, when sales were pursuant to the

“exceptional circumstances” provision, the practice was that JDS

set the terms of the sale and there was no room for negotiation. 

(See Tr. 2114:20-22, 2115:4-7 (“When JDS’s board uses its

discretion and uses the exceptional circumstances clause to

deviate, there’s not necessarily a negotiation. . . . JDS can

determine they’ll permit the exceptional circumstances under

conditions they specify, and then the person wanting the

exception either says yes or no. That’s the way it worked in

practice.” ).) Karlovsky also testified that he did not know how

the mid-80s agreement came about and that Zwirner had simply told

him it was the existing practice without explanation. (Tr.

370:23-371:2.) 

Not only were the Trustees unable to produce a single

document memorializing the terms of the mid-80s agreement or even

pinpointing the year it was consummated, but the Trustees also

lacked a consistent understanding of it. For example, defendants

suggested that if the month-end book value in the month of a sale

was actually lower than the December 31 book value from the prior

year, HolliShare would have received the benefit of the higher

value and been able to sell at the December 31 book value. 

Winn, on the other hand, testified that it was not his

understanding that JDS would have paid the higher price if the

book value in the month of sale had fallen below the December 31

book value. (Tr. 659:19-22.) Additionally, although one of the

“terms” of the mid-80s agreement was that JDS would purchase all

of the shares HolliShare offered, the Trustees felt the need to

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obtain a commitment from JDS that it would continue to purchase

shares in 1999. (See Ex. 41 at 68.) After discussing the fact

that the commitment would not be binding on JDS, the JDS Board

agreed to make a commitment to HolliShare that included a

“restatement of the historic commitment of the company to

repurchase its stock and . . . a new, three-year commitment that

is subject to renewal annually.” (Id.) The Trustees’

unquestioning acceptance of an amorphous verbal agreement that

set the price of the Plan’s most valuable asset underscores their

failure to perform a thorough investigation. 

The Trustees also accepted the use of the December 31

book value without question even though they knew that the monthend book value during the month of each sale was almost always

greater than the December 31 book value. Not only did Zwirner

and Stempkinski receive monthly financial statements that

included the current month-end book value for JDS because of

their roles as Hollister and JDS board members, (Tr. 1107:5-11),

Zwirner, McCormack, Karlovsky, and Brilliant all testified that

they knew the December 31 book value was less than the month-end

book value, (Tr. 2016:6-9 (Zwirner), 767:17-19, 1034:6-9

(McCormack), 404:13-23 (Karlovsky), 1325:2-10 (Brilliant)). 

Brilliant also testified that he did not recall having

discussions with anyone about whether selling for less than

month-end book value was reducing the value of HolliShare. (Tr.

1344:7-14.) In Cunningham, the Fifth Circuit held that

fiduciaries did not fulfill their duties when, similar to

HolliShare’s use of an out-dated book value, the fiduciaries

relied on an appraisal that was “out of date” at the time of the

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transaction because “the factual assumptions upon which it was

based were no longer valid.” Cunningham, 716 F.2d at 1469. 

The evidence at trial also revealed that at least

Zwirner knew that an outside appraisal of JDS had been conducted

as part of a capitalization study in anticipation of the

termination of the 1977 Preferred Share Trust and that the

outside appraisal suggested that the market value of JDS stock

without any ownership or transfer restrictions was at least 3.4

times book value. (Tr. 102:14-18, 122:24-123:22.) Of course, a

valuation of JDS stock without ownership restrictions was

entirely hypothetical because the shares of JDS stock could not

be sold on the public market. In receipt of such information,

however, a prudent fiduciary would at least inquire whether an

outside appraiser would value JDS stock above book value even

with the restrictions. 

 Not only did ERISA require the Trustees to ensure they

were receiving adequate consideration to sell HolliShare’s shares

to JDS, the use of the December 31 book value should have

prompted a thorough inquiry by the Trustees because, when the

Plan sold its shares to JDS at the December 31 book value, the

evidence suggests the Trustees may have personally benefitted as

individual shareholders. Zwirner acknowledged that, when

HolliShare sold below month-end book value and JDS retired the

purchased shares, the current book value for each outstanding

share increased and, as an owner of outstanding shares, the value

of his shares also increased. (Tr. 2050:6-14.) At a minimum, a

prudent fiduciary would have questioned and assessed the

justifications for this “transfer of value” that occurred when

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HolliShare sold its shares for less than the month-end book

value. 

It appears the only Trustee who ever questioned the use

of the December 31 book value was Karlovsky. When he first

became Trustee, he wondered whether the use of the December 31

book value affected the Plan and “went back and [] used [his]

mathematical modeling capabilities and [] work experience in

benefits to do some simulation and sensitivity analysis to see if

[the use of the December 31 book value] had a significant impact

on the plan.” (Tr. 354:9-13.) Based on the results of his

simulation, Karlovsky concluded that it did not. Tellingly,

however, Karlovsky’s concern was whether use of the December 31

book value from the prior year had made “a significant difference

to the overall operation of the plan,” (Tr. 352:6-7), not whether

the price constituted the “fair market value” of the Plan’s JDS

stock. Even assuming Karlovsky’s simulation was accurate,

determining that a price does not have a long-term detrimental

effect on the plan does not fulfill the trustee’s duty to ensure

that the plan receives adequate consideration under § 1108(e) for

each sale. 

All of the Trustees were also individual shareholders

under the direct shareholder program and thus knew that they

received month-end book value when they sold their shares to JDS

under the right of first refusal provision. The court’s overall

impression from the testimony was that the Trustees never

meaningfully questioned the disparity in price between

HolliShare’s sales and individual shareholders’ sales that

occurred in the same month. As an explanation for the use of the

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December 31 book value from the prior year for the sale of

HolliShare’s shares and the month-end book value for the sales of

the individual shareholders’ shares, defendants explain that

HolliShare received the lower price because the December 31 book

value was the only audited number and HolliShare received all

cash. The court recognizes that a prudent trustee would

generally prefer to use an audited value. Here, however, nothing

precluded the Trustees from obtaining an audit of a month-end

book value and, because a sale generally occurred only once a

year, the burden of obtaining a single updated valuation based on

the annual audited valuation would not have been unbearably

burdensome. Moreover, the Trustees’ justification for using the

December 31 book value because it was audited was not entirely

convincing in light of Zwirner’s testimony that he could not

recall a single month in his tenure as Trustee when the audited

December 31 book value differed from the December 31 book value

JDS calculated and submitted to the auditors. (Tr. 2144:8-13.) 23

JDS also tracked its monthly book value and McCormack testified

that, in his over ten years with Hollister, he does not recall a

single month when JDS determined its calculation of a month-end

book value had to be adjusted or was calculated incorrectly. 

(Tr. 1105:7, 1106:7-13.) 

It appears that the book value for 1983 was adjusted 23

because the 1984 HolliShare Highlights state, “A change in

Financial Accounting Standards Board requirements, implemented in

JDS’ 1983 financial statements audited by Arthur Andersen & Co.,

resulted in an increase in the book value of JDS common shares

from $39.21 to $41.08 per share as of December 31, 1983.” (Ex.

4-4.9.) Zwirner testified that he has “no recollection of this

discrepancy between the company’s books and the audited figure.” 

(Tr. 2456:7-9.) 

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With respect to the fact that HolliShare required cash

payments for JDS’s purchases of its shares and the JDS Articles

provided for the individual shareholders to receive a promissory

note for sales over a certain sum, the court agrees with

defendants that the cash payment could detrimentally affect the

value of HolliShare’s shares and that the Trustees would be

required to consider this factor in determining the fair market

value of the Plan’s shares. Nonetheless, while a prudent trustee

may have determined that the significant cash need decreased the

fair market value of HolliShare’s stock, the evidence shows that

the Trustees never attempted to quantify how HolliShare’s cash

needs affected the value of its stock. Depending on the year and

the month of a sale, the difference between the December 31 book

value and month-end book value inevitably varied. Defendants

have not satisfied the court that the Trustees determined that

the difference between the December 31 book value and the monthend book value of each sale had any correlation to the decrease

in value of HolliShare’s stock because of their need for cash

payments. 

d. Transfer and Ownership Restrictions

The Trustees emphasize that they were familiar with the

JDS Articles and transfer and ownership restrictions on JDS stock

and considered these restrictions when they sold for the December

31 book value. With the exception of Brilliant, who had not 24

Judge Karlton originally rejected defendants’ argument 24

that the settlor doctrine bars plaintiffs’ claims, Ellis, 2006 WL

988529, at *5-6, and the undersigned declined to reconsider it a

year later. See DeFazio, 2007 WL 3231670, at *4. As has been

previously discussed in two prior orders in this case, the

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even read the JDS Articles before this litigation commenced, (Tr.

1276-78, 1295:14-1296:1, 1280:22-24), the other Trustees were

generally familiar with the JDS Articles and the transfer and

ownership restrictions on JDS stock. Although nothing in the

HolliShare Trust or JDS Articles required the Trustees to sell

HolliShare’s shares at the December 31 book value, defendants

contend that the ownership and transfer restrictions in the JDS

Articles limited the value of JDS stock. 

It is without question that the fair market value of

JDS stock was affected by the restrictions in the JDS Articles

that limited ownership to HolliShare, select employees, and the

preferred share trusts and the transfer restrictions that gave

JDS the right of first refusal. As the Cunningham court

explained, “[a]ppraisal of closely-held stock is a very inexact

science” that has a “level of uncertainty inherent in the process

and [a] variety of potential fact patterns.” Cunningham, 716

F.2d at 1473; accord Rhodes v. Amoco Oil Co., 143 F.3d 1369, 1372

(10th Cir. 1998) (“[T]here is no universally infallible index of

fair market value.” (quoting Amerada Hess Corp. v. Comm’r, 517

F.2d 75, 83 (3d Cir. 1975) (alteration in original) (internal

quotation marks omitted)). 

Defendants rely heavily on Krueger International, Inc.

v. Blank, 225 F.3d 806 (7th Cir. 2000), to argue that defendants

complied with their fiduciary duties. In Krueger, an employee at

a privately held company had stock as part of the company’s

settlor doctrine does not preclude plaintiffs’ claims. Moreover,

even assuming the design of the HolliShare Plan dictated the use

of book value, it did not dictate the use of December 31 book

value. 

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Salaried Employees Retirement Plan. Krueger, 225 F.3d at 808. 

The company’s Stockholders Agreement provided for the company to

have the “option to redeem all” of its stock when an employee

died and set the purchase price for redeemed stock at “the

proportionate value of the Appraised Value of all shares [of its

stock] as of the last day of the fiscal period . . . ending on or

immediately proceeding the date of notice of exercise of the

option.” Id. (quoting subsections 4.4 and 6.1 of the

Shareholders Agreement) (internal quotation marks omitted). When

one of the company’s employees died in 1996, a dispute arose

between the potential beneficiaries, and the company notified the

beneficiaries that it intended to redeem all of the employee’s

shares, but would not disburse any proceeds until the appropriate

beneficiaries were determined. Id. at 808-09. When the state

supreme court resolved the entitlement disputes between the

beneficiaries four years later, the price of the company’s stock

had increased substantially. Id. at 809. The beneficiaries and

company therefore disputed whether the “fair market value” of the

stock should be set at the 1996 price when the company exercised

its option or the 2000 price when the transaction was completed

and the benefits were paid. 

The Seventh Circuit explained that the “repurchase

option is an inseparable part of owning” the company stock and

that, because the stock was encumbered by a purchase option at

the time of the employee’s death, if the company exercised that

option, then, under the Shareholders Agreement, the purchase

price was set in 1996. Id. at 812-13. It explained, “[b]ecause

the fair market value of stock that someone else has the right to

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purchase for $258.70 is just $258.70 (at least as long as the

stock alone is worth more than that), there would be no violation

of the ERISA ‘adequate consideration’ rules for [the company] to

pay that amount per share (plus the interest, of course) to the

beneficiaries.” Id. at 813. 

Although the reasoning from Krueger that the

restrictions in a Shareholders Agreement–-or here, the JDS

Articles–-affects the price of the stock, the case is

distinguishable. In Krueger, the parties disputed whether

adequate consideration was determined at the time the call was

exercised or at the time the transaction was completed. The

parties did not dispute the valuation method used to determine

the price of each share in 1996 or 2000. Krueger therefore did

not engage in the inquiry that is dispositive to plaintiffs’

claims under § 1108(e)--whether the Trustees engaged in a

sufficient investigation to determine the fair market value of

the Plan’s JDS stock. In Krueger, because the appraised value of

the stock was not at issue, the Shareholders Agreement set the

purchase price of the stock at the time of the call. In this

case, while the JDS Articles undeniably affect the fair market

value of JDS Stock, they never set it at the December 31 book

value. 

As the Second Circuit has explained, “[t]he court’s

task is to inquire whether the individual trustees, at the time

they engaged in the challenged transactions, employed the

appropriate methods to investigate the merits of the investment

and to structure the investment.” Henry, 445 F.3d at 618

(quoting Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 1984)

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(alteration in original) (internal quotation marks omitted)). 

Here, the Trustees never attempted to quantify the amount by

which the transfer and ownership restrictions affected the value

of the Plan’s JDS stock. Even assuming that use of the book

value system was appropriate to value JDS, an inquiry into and 25

correlation between the use of the December 31 book value versus

the month-end book value never occurred. 

e. Hypothetical Prudent Fiduciary 

Lastly, defendants argue that the court should follow

the Eighth Circuit’s holding in Roth, 16 F.3d 915. In Roth, the

Eighth Circuit held that, “[e]ven if a trustee failed to conduct

an investigation before making a decision, he is insulated from

liability if a hypothetical prudent fiduciary would have made the

same decision anyway.” 16 F.3d at 919; accord Bussian v. RJR

Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000); Herman v. Mercantile

Bank, N.A., 143 F.3d 419, 421 (8th Cir. 1998). The Eighth

Circuit reasoned that such an exception was justified because, if

the Trustees actually sold assets for fair market value even in

the absence of an investigation to determine fair market value,

“there was no causal connection between their allegedly deficient

conduct and a loss to the ESOP.” Roth, 16 F.3d at 919.

The court is not suggesting that the use of book value 25

was per se imprudent or violated ERISA. In a closed-corporation,

it may very well be that book value is the most reliable and 

accurate method to assess the fair market value. In this case,

use of book value was also consistent with the JDS Articles,

Schneider’s principles, and the 1999 Preferred Share Trust. 

Here, however, the fiduciaries never investigated whether the use

of book value was appropriate and ERISA unquestionably required

them to do so. Putting aside the Trustees’ failure to use the

month-end book value, they failed to investigate whether

discounts or increases had to be made to the book value in order

to arrive at the fair market value of the closely held stock. 

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When it first introduced the “hypothetical prudent

fiduciary” standard, the Eighth Circuit relied on a concurring

opinion from then-Judge Scalia in Fink v. National Savings and

Trust Co., 772 F.2d 951 (D.C. Cir. 1985). Specifically, in Fink,

Judge Scalia commented that he did not know of a “case in which a

trustee who has happened--through prayer, astrology or just blind

luck--to make (or hold) objectively prudent investments (e.g., an

investment in a highly regarded ‘blue chip’ stock) has been held

liable for losses from those investments because of his failure

to investigate and evaluate beforehand.” Id. at 962. Judge

Scalia explained that “[i]t is the imprudent investment rather

than the failure to investigate and evaluate that is the basis of

suit.” Id. 

While reasoning that a fiduciary who happens to make a

prudent investment despite his lack of investigation is not

liable in “an action for damages arising from losing

investments,” Judge Scalia nonetheless recognized that such a

“[b]reach of the fiduciary duty to investigate and evaluate would

sustain an action to enjoin or remove the trustee or perhaps even

to recover trustee fees paid for the investigative and evaluative

services that went unperformed.” Id. (citation omitted). While

the “hypothetical prudent fiduciary” inquiry may therefore limit

an award of damages against a fiduciary who fails to investigate

but nonetheless makes a prudent investment, Judge Scalia’s

concurring opinion in Fink does not support the conclusion that

the fiduciary is absolved from all liability under ERISA. 

The Seventh Circuit similarly concluded that a plan was

not entitled to damages based on a fiduciary’s “imprudent but

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harmless conduct,” but could nonetheless seek appropriate

equitable relief, such as an injunction. Brock v. Robbins, 830

F.2d 640, 647 (7th Cir. 1987); see also id. at 647 (“[N]o court

has held trustees liable in money damages for imprudent conduct

which resulted in no loss or damages to the ERISA plan and no

benefit or gain to the trustees and did not put the assets of the

plan at risk.” (emphasis added) (internal quotation marks

omitted)); cf. Donovan v. Bierwirth, 754 F.2d 1049, 1052 n.3 (2d

Cir. 1985) (“[T]here can be a breach of duty without any ‘loss’

to a plan.”). Consistent with numerous other circuits, the Ninth

Circuit has also emphasized that the inquiry under §§ 1108(e) and

1104(a)(1)(B) is focused on the defendants’ conduct, not the

result. See Howard, 100 F.3d at 1488; see also Cunningham, 716

F.2d at 1467 (“[I]t is especially significant that the adequate

consideration test, like the prudent man rule, is expressly

focused upon the conduct of the fiduciaries.”) (emphasis added);

Henry, 445 F.3d at 619 (“[I]n practice, the ‘fair market value’

inquiry overlaps considerably with the ‘good faith’ inquiry; both

are ‘expressly focused upon the conduct of the fiduciaries.’”

(quoting Cunningham, 716 F.2d at 1467)); Eyler v. Comm’r of

Internal Revenue, 88 F.3d 445, 455 (7th Cir. 1996) (“ESOP

fiduciaries will carry the burden of proving that adequate

consideration was paid ‘by showing that they arrived at their

determination of fair market value by way of a prudent

investigation in the circumstances then prevailing.’ Thus, the

adequate consideration test focuses on the conduct of the

fiduciaries in determining the price, not the price itself.”

(quoting Cunningham, 716 F.2d at 1467 (citation omitted)). 

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Accordingly, while determining whether the Trustees’ 

failure to investigate the fair market value of JDS stock caused

monetary loss to plaintiffs and HolliShare would affect an award

of damages, financial loss is not required to prove a breach of a

fiduciary duty under §§ 1108(e) and 1104(a)(1)(B) and the court

will not apply the “hypothetical prudent investor” exception to

absolve defendants from liability. Chao, 285 F.3d at 436

(rejecting application of the “hypothetical reasonable fiduciary”

standard because doing so would “ignore” the second part of the

“adequate consideration” definition, which requires that the fair

market value is “determined in good faith by the trustee”). 

2. Claims Against Hollister Board Members & JDS

To qualify as an ERISA fiduciary, an individual or 

entity may either be named as a fiduciary under the terms of an

ERISA plan, see 29 U.S.C. § 1102(a), or act as a functional or de

facto fiduciary by exercising discretionary control over the

management or administration of the plan or its assets, see id. §

1002(21)(A). When an individual or entity is a named fiduciary,

that fiduciary’s liability may be limited pursuant to provisions

of a plan instrument that allocates responsibility among named

fiduciaries. See Walker v. Nat’l City Bank of Minneapolis, 18

F.3d 630, 633 (8th Cir. 1994) (“[U]nless ERISA mandates

otherwise, division of authority in the plan determines the

duties of the various fiduciaries.”); 29 C.F.R. § 2509.75–8(D–4)

(noting that a plan instrument may allocate responsibility among

named fiduciaries).

Here, the Trust Instrument specifies Hollister, the

HolliShare Trustees, and the Hollister Board as named

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fiduciaries. (Ex. 9-9.14, § 11.11.) Hollister is responsible

for administration of the Plan, (id.), the Trustees are 26

responsible for management of the Plan’s assets, (id. §§ 11.01,

11.02), and the Hollister Board has the authority to appoint and

remove the Trustees, (id. §§ 11.05-11.07). The Board also has

the authority to inspect and audit HolliShare’s records and

receive reports from the Trustees. (Id. § 11.04.) 

a. Hollister Board Members

The Trustee defendants who also served on the Hollister

Board are Zwirner and Stempinski and the non-trustee defendants

who served on the Hollister Board are Winn and Herbert. 

Plaintiffs do not dispute that the Hollister Board appointed

competent individuals to serve as the HolliShare Trustees, but

alleges that the Board breached its duty to monitor the Trustees

it appointed. The Hollister Board’s potential liability

therefore arises only from its fiduciary duty to appoint and

monitor the HolliShare Trustees. See 29 C.F.R. § 2509.75-8 27

Plaintiffs neither presented evidence at trial nor 26

submitted proposed findings of fact and conclusions of law with

respect to any claims against Hollister as the plan

administrator. Although Ellis requested the court appoint a new

plan administrator, the DeFazio/Dimaro plaintiffs’ proposed order

would have Hollister remain as the plan administrator. (Docket

Nos. 650-53, 662.) The court will therefore enter judgment in

favor of Hollister. 

After trial, defendants argued in a footnote that there 27

“is conflicting Ninth Circuit authority regarding whether the

persons who appoint fiduciaries of an ERISA plan have a fiduciary

duty to monitor reasonably the actions of their appointees” and

that various courts have rejected imposition of a duty to monitor

appointed fiduciaries. (See Defs.’ Proposed Findings &

Conclusions at 167 n.397.) This position is the exact opposite

of the position defendants argued in their motion for summary

judgment: “Moreover, while the power to appoint plan trustees

carries with it the duty to monitor the trustees’ activities, the

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(FR-17) (“[T]rustees and other fiduciaries should be reviewed by

the appointing fiduciary in such manner as may be reasonably

expected to ensure that their performance has been in compliance

with the terms of the plan and statutory standards . . . .”); In

re Calpine Corp., No. 03-1685, 2005 WL 1431506, at *3 (N.D. Cal.

Mar. 31, 2005) (noting that the “power of appointment gives rise

to a limited duty to monitor”).

Here, the vast majority of HolliShare’s holdings

consisted of JDS common shares, meaning that almost all of the

Plan’s transactions fell explicitly within ERISA’s prohibited

transaction provision. ERISA unequivocally required the Trustees

to conduct a good faith investigation to determine the fair

market value of the Plan’s shares of JDS stock and sell those

shares at that value. The evidence at trial established that the

Hollister Board knew that HolliShare had been selling its shares

at the December 31 book value since at least the mid-80s and that

the December 31 book value was less than the month-end book

Hollister Board did so as a matter of undisputed fact.” (Docket

No. 484 at 3:24-25.)

The court recognizes that there is authority suggesting

that the limited duty to appoint trustees might not give rise to

a duty to monitor those trustees. See Gelardi v. Pertec Computer

Corp., 761 F.2d 1323, 1325 (9th Cir. 1985) (per curiam) (holding

that an employer who appointed the plan administrator was only a

fiduciary and liable as such with respect to the selection of the

administrator). The court, however, previously adhered to the

position both parties advanced and will not hold otherwise when

there has not been a change in the controlling law. Moreover, in

addition to the duty to appoint trustees, the Hollister Board

also has the authority to inspect and audit HolliShare’s records

and receive reports from the Trustees. These powers are

consistent with an oversight and monitoring role. 

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value. Not only did the Trustees fail to perform an adequate 28

investigation to determine the fair market value, the Hollister

board members understood that the December 31 book value was

always used and had no reason to conclude that an investigation

to determine the fair market value of the JDS shares led to that

price. (See Tr. 1881:11-1883:22.) The continual use of a preset

sales price and lack of any document or discussion suggesting

that the Trustees had performed an investigation to determine the

fair market value of the Plan’s shares should have served as a

red flag to the Hollister board members that the Trustees were

not fulfilling their duties under ERISA. The court thus finds

that the Hollister board members breached their duty to

adequately monitor the HolliShare Trustees. Cf. Leigh, 727 F.2d

at 135-36 (holding that appointing fiduciaries who were aware of

the plan trustees’ conflicting loyalties in certain transactions

were obliged to take extra measures to monitor the trustees’

actions).

b. JDS

Unlike the Hollister Board, the Trust Instrument does

not name JDS as a fiduciary. Plaintiffs contend, however, that

JDS was a de facto, or functional, fiduciary of HolliShare based

on the discretionary control and authority it exercised over the

management of HolliShare’s main asset. Plaintiffs rely on the

evidence at trial establishing that JDS, through the mid-80s

Winn also testified that he knew that JDS “had a value 28

in the outside world higher than book value.” (Tr. 140:18-20.) 

He gained this knowledge as a result of the capitalization study,

but never shared the information with Karlovsky, one of the

Trustees. (Tr. 391:22-393:23.) 

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agreement, proposed and established the practice of HolliShare

selling its shares to JDS once per year at the December 31 book

value. At least one HolliShare Trustee testified that he did not

feel HolliShare could negotiate for a higher price because JDS

had always paid the December 31 book value and he did not feel

that the price was open to negotiation. (Tr. 2114:20-22, 2115:4-

7.) 

When determining whether a person is a de facto

fiduciary, “the threshold question is not whether the actions of

some person . . . adversely affected a plan beneficiary’s

interest, but whether that person was acting as a fiduciary (that

is, was performing a fiduciary function) when taking the action

subject to complaint.” Pegram v. Herdrich, 530 U.S. 211, 226

(2000). “An individual or entity performs a ‘fiduciary’ function

with respect to a pension plan when ‘exercis[ing] any

discretionary authority or discretionary control respecting

management of such plan or exercis[ing] any authority or control

respecting management or disposition of its assets’ under ERISA.” 

Wright v. Or. Metallurgical Corp., 360 F.3d 1090, 1101 (9th Cir.

2004) (quoting 29 U.S.C. § 1002(21)(A)). 

The strongest theory suggesting that JDS had

discretionary control over HolliShare’s shares of JDS stock is

that JDS was--at least in practice--the only buyer for

HolliShare’s shares and therefore could render HolliShare unable

to meet its cash needs by refusing to purchase its shares. This

dynamic, however, is part in parcel of the design of the

HolliShare plan as a profit-sharing plan and JDS as a closely

held corporation with severe ownership restrictions. While JDS

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may have proposed the price and been reluctant to negotiate for a

higher price, it was acting as a corporation making business

decisions in doing so, not a fiduciary to HolliShare. Assuming

the mid-80s agreement was a binding agreement between JDS and

HolliShare, it was the Trustees who had the power to negotiate

the terms and agree to them on behalf of the beneficiaries. It

was the Trustees who had the power and obligation to ensure that

the sales were for fair market value and to negotiate on behalf

of the beneficiaries. It was also the Trustees who had the power

to assess their cash needs for the year and decide how many

shares to sell. 

Judge Karlton previously held in this case that JDS

would be an ERISA fiduciary only if it “in fact exercised any

discretionary authority over plan assets.” Ellis, 2006 WL

988529, at *7. The court is not convinced from the evidence at

trial that JDS had discretion or authority to make HolliShare

sell shares at a given time or that it sought to exercise

authority to limit the number of shares HolliShare sold. See

Assocs. In Adolescent Psychiatry, S.C. v. Home Life Ins. Co., 941

F.2d 561, 570 (7th Cir. 1991) (“[T]he power to act for the plan

is essential to status as a fiduciary under ERISA.”); Farm King

Supply, Inc. Integrated Profit Sharing Plan & Trust v. Edward D.

Jones & Co., 884 F.2d 288, 292 (7th Cir. 1989) (“[C]ases which

hold that the person or firm was a fiduciary have a common theme

conspicuously absent here, viz., the authority to exercise

control unilaterally over a portion of a plan’s assets, not

merely to propose investments.”). The evidence at trial was that

the Trustees calculated how many shares they wanted to sell and

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JDS bought the shares on every occasion and has provided

commitments to continue to do so. (See Ex. 41 at 68.) The

weight of the evidence does not persuade the court that JDS ever

attempted to exercise control over HolliShare’s sales. 

Accordingly, because the court is not convinced that JDS

exercised discretionary control over the Plan’s assets sufficient

to render it a de facto fiduciary, the court will enter judgment

in favor of JDS. 

3. Co-Fiduciary Liability for Breaches under § 1104

Section 1105(a) provides for liability of a fiduciary

based on a breach of duty by a co-fiduciary:

In addition to any liability which he may have under any

other provisions of this part, a fiduciary with respect

to a plan shall be liable for a breach of fiduciary

responsibility of another fiduciary with respect to the

same plan in the following circumstances:

(1) if he participates knowingly in, or knowingly

undertakes to conceal, an act or omission of such other

fiduciary, knowing such act or omission is a breach; 

(2) if, by his failure to comply with section 1104(a)(1)

of this title in the administration of his specific

responsibilities which give rise to his status as a

fiduciary, he has enabled such other fiduciary to commit

a breach; or 

(3) if he has knowledge of a breach by such other

fiduciary, unless he makes reasonable efforts under the

circumstances to remedy the breach. 

29 U.S.C. § 1105(a). Section 1105(a) “effectively imposes on

every ERISA fiduciary an affirmative duty to prevent other

fiduciaries from breaching their duties for which they are

jointly and severally liable.” Stewart v. Thorpe Holding Co.

Profit Sharing Plan, 207 F.3d 1143, 1157 (9th Cir. 2000).

Plaintiffs appear to rely on § 1105(a)(2) and seek to

hold defendants jointly liable as co-fiduciaries for losses

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caused by the fiduciaries’ breaches of the duty of loyalty under

§ 1104(a)(1) and duty of prudence under § 1104(a)(1)(B). Given

the court’s findings that the fiduciary defendants breached their

duties under § 1104(a)(1) and (a)(1)(B), it follows that their

conduct enabled their co-fiduciaries to breach the same duties. 

See Springate v. Weighmasters Murphy, Inc. Money Purchase Pension

Plan, 217 F. Supp. 2d 1007, 1025 (C.D. Cal. 2002) (holding that,

because “each Defendant failed to comply with Section 1104(a)(1),

and in doing so, each Defendant enabled the other fiduciaries to

commit a breach,” each Defendant is liable for the breaches of a

co-fiduciary under § 1105(a)). 

Nonetheless, because § 1105(a) requires that the

fiduciary’s breach “enabled such other fiduciary to commit a

breach,” a fiduciary’s liability for any losses caused by a

breach would be limited to the time in which that defendant

served as a fiduciary. ERISA clearly limits liability to the

time in which a defendant served as a fiduciary, stating, “No

fiduciary shall be liable with respect to a breach of fiduciary

duty under this subchapter if such breach was committed before he

became a fiduciary or after he ceased to be a fiduciary.” 29

U.S.C. § 1109(b). Plaintiffs thus cannot simply group all the

fiduciaries together when they each served different terms, and

any award of damages would need to be broken down by the years in

which the various defendants served as fiduciaries. 

D. Requested Relief

Plaintiffs brought their claims under subsections

(a)(2) and (a)(3) of § 1132. Subsection 1132(a)(2) provides for

a participant to bring a civil action “for appropriate relief”

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under § 1109, which provides: 

Any person who is a fiduciary with respect to a plan who

breaches any of the responsibilities, obligations, or

duties imposed upon fiduciaries by this subchapter shall

be personally liable to make good to such plan any losses

to the plan resulting from each such breach, and to

restore to such plan any profits of such fiduciary which

have been made through use of assets of the plan by the

fiduciary, and shall be subject to such other equitable

or remedial relief as the court may deem appropriate,

including removal of such fiduciary. A fiduciary may

also be removed for a violation of section 1111 of this

title.

29 U.S.C. § 1109(a). “Under 29 U.S.C. §§ 1109(a) and 1132(a)(2),

ERISA beneficiaries may bring an action against fiduciaries who

breach their duties to the plan, and may recover both damages and

equitable relief from them.” Landwehr v. DuPree, 72 F.3d 726,

733 (9th Cir. 1995). “The Supreme Court has held that recovery

for a violation of 29 U.S.C. § 1109 for breach of fiduciary duty

inures to the benefit of the plan as a whole, and not to an

individual beneficiary.” Paulsen v. CNF Inc., 559 F.3d 1061,

1073 (9th Cir. 2009); see also LaRue v. DeWolff, Boberg &

Assocs., Inc., 552 U.S. 248, 256 (2008) (“[A]lthough § 502(a)(2)

does not provide a remedy for individual injuries distinct from

plan injuries, that provision does authorize recovery for

fiduciary breaches that impair the value of plan assets in a

participant’s individual account.”).

“Neither section 409(a) [of ERISA, 29 U.S.C. § 1109(a)]

nor any other section of ERISA discloses the methods which are to

be used in measuring the ‘losses’ for which breaching fiduciaries

are to be held liable.” Kim v. Fujikawa, 871 F.2d 1427, 1430

(9th Cir. 1989). “The reports of the various committees

concerning this section of ERISA make it clear that Congress

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intended to provide the courts with broad remedies for redressing

the interests of participants and beneficiaries when they have

been adversely affected by breaches of a fiduciary duty.” Eaves

v. Penn, 587 F.2d 453, 462 (10th Cir. 1978); see also id. at 462-

63 (“Among the factors which the court may consider in selecting

a remedy are: (1) the purposes of the trust; (2) the relative

pecuniary advantages to the trust estate of the various remedies;

(3) the nature of the interest of each beneficiary; (4) the

practical availability of the various remedies; and (5) the

extent of the deviation from the terms of the trust required by

the adoption of each of the remedies.”).

Subsection 1132(a)(3) provides for a participant to

bring a civil action “(A) to enjoin any act or practice which

violates any provision of this subchapter or the terms of the

plan, or (B) to obtain other appropriate equitable relief (I) to

redress such violations or (ii) to enforce any provisions of this

subchapter or the terms of the plan.” 29 U.S.C. § 1132(a)(3). 

The Supreme Court has “interpreted the term ‘appropriate

equitable relief’ in § 502(a)(3) [of ERISA, 29 U.S.C. §

1132(a)(3),] as referring to those categories of relief that,

traditionally speaking (i.e., prior to the merger of law and

equity) were typically available in equity.” CIGNA Corp. v.

Amara, --- U.S. ----, ----, 131 S. Ct. 1866, 1878 (2011) (quoting 

Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356, 361 (2006))

(internal quotation marks omitted). Because § 1132(a)(3) is

limited to equitable relief, compensatory damages are not

available under this subsection. Mertens v. Hewitt Assocs., 508

U.S. 248, 255-56 (1993). 

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In Cigna Corp., however, the Supreme Court discussed,

in dicta, the ability to award equitable relief under §

1132(a)(3) that would require a plan administrator to award

monetary compensation to already retired beneficiaries “for a

loss resulting from a trustee’s breach of duty, or to prevent the

trustee’s unjust enrichment.” Cigna Corp., 131 S. Ct. at 1880.29

The court referred to this as an equitable “surcharge remedy” and

recognized that “[t]he relevant substantive provisions of ERISA

do not set forth any particular standard for determining harm.” 

Id. at 1880-81. 

 As the final week of trial came to a close in this 

case, plaintiffs could not articulate the remedy they were

seeking, and suggested that the court could simply fashion

appropriate equitable relief. The court is not in the business

of divining appropriate relief absent a request from plaintiffs. 

In five different proposed orders submitted with their post-trial

briefing, (see Docket Nos. 650-53, 662), plaintiffs have, for 30

the first time, identified the relief they are seeking, which

includes:

1. Removing Existing Trustees and Appointing a New Trustee: 

Plaintiffs request the court to issue a preliminary and permanent

injunction removing the HolliShare Trustees and barring them from

In Cigna Corp., the Court was addressing violations of 29

§§ 1022(a) and 1024(b) and the surcharge that might be awarded

based on the district court’s reformation of the plan documents. 

Cigna Corp., 131 S. Ct. at 1880-81. Nothing in the Court’s

opinion suggests that its discussion would not apply equally to

the breaches at issue in this case. 

In their five proposed orders, plaintiffs do not 30

request damages based on any profits the fiduciaries allegedly

received as a result of their breaches. 

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serving as Plan Trustees in the future. Plaintiffs then request

the court to appoint an independent trustee “to carry out the

orders of the Court to calculate the losses of the Plan and to

correct the fiduciary breaches and prohibited transactions.” 

2. Damages: Plaintiffs request an award of damages against

the fiduciaries individually for restitution or a surcharge from

1992 through the present. Plaintiffs’ calculations are based 31

on the difference between the actual price paid by JDS in each

prohibited transaction (December 31 book value from the year

prior to the sale) and (a) the month-end book value in the month

the transaction took place or (b) the fair market value of the

shares in the month the sale occurred as determined by an

independent appraiser retained by the court-appointed trustee. 

If the month-end book value is used, Ellis calculates the amount

of damages at $30,674,599.56, plus interest. (Docket No. 650.) 32

The DeFazio/Dimaro plaintiffs used a “slightly different damage

calculation” than Ellis, and are requesting an award of

Although fiduciaries can be jointly and severally 31

liable for harms resulting from their breaches, see Stewart, 207

F.3d at 1157, plaintiffs erroneously seek to hold all of

HolliShare’s fiduciaries liable for all losses regardless of when

each defendant served as a fiduciary. See 29 U.S.C. § 1109(b)

(“No fiduciary shall be liable with respect to a breach of

fiduciary duty under this subchapter if such breach was committed

before he became a fiduciary or after he ceased to be a

fiduciary.”). Assuming the breaches caused loss to the Plan,

damages would have be broken down by year and only the defendants

who breached fiduciary duties in a particular year could be

liable for losses caused that year. 

Of the $30,674,599.56, plaintiffs claim that Ellis is 32

entitled to $108,917.87. (Docket No. 650.) 

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$244,382,485.00. (Docket No. 654.) 33

3. Recovery of Excess Shares: As an alternative to an award

of damages, plaintiffs seek an order against the fiduciaries

individually requiring them to recover the excess shares redeemed

by JDS in the transactions from 1992 to the present and restore

the shares to HolliShare, with the value of the excess shares

distributed to each participant’s account for each of the years. 

The excess shares would be calculated based upon the difference

between the actual shares sold in each prohibited transaction and

(a) the number of shares that would have been sold in each

prohibited transaction if the shares were valued at the month-end

book value or (b) the number of shares that would have been sold

in each prohibited transaction if the shares were valued at the

fair market value as determined by an independent appraiser

retained by the court-appointed trustee. The DeFazio/Dimaro

plaintiffs have calculated what they believe was the loss to the

Plan as the result of selling an excessive number of shares due

to the use of the December 31 book value. They have calculated

this loss to the Plan at $729,912,295.00. (Docket No. 654 at 4.)

The court now addresses each of the remedies plaintiffs

seek. 

1. Removal of Existing Trustees and Appointment of a

New Trustee 

Of the $244,382,485.00, plaintiffs claim that Beetham 33

is entitled to $78,032.68; DiMaro is entitled to $10,430.00;

Humphries is entitled to $41,537.00; Lavick is entitled to

$4,212.00; McNair is entitled to $980.00; Pace is entitled to

$100,345.00; Seay is entitled to $882,055.00; Stanton is entitled

to $110,803.00; Wirth is entitled to $23,414.00; and DeFazio and

Ellis are entitled to $5,634,083.00. (Docket No. 654 at 4.) The

remainder would be awarded to the Plan. 

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At the close of trial during discussions with counsel

about post-trial briefing, the court unequivocally raised its

concerns with plaintiffs’ counsel about the court’s ability to

grant any prospective injunctive relief, stating:

[Y]ou better be able to explain to me why any of the

plaintiffs, any one [] of them is entitled to any

equitable relief when they no longer have an interest in

the plan. I referenced that in my ruling on the motion

for summary judgment, and I still fail to see how any

modifications to the plan or putting money in the plan or

changing how the plan is administered or changing the

articles or anything else is going to inure to the

benefit of any plaintiff in this case. I fail to see an

Article III context how they even have standing to ask

for that kind of relief when they no longer have an

interest in the fund.

(Tr. 2658:7-17; see also DeFazio, 636 F. Supp. 2d at 1076-77

(citing Bendaoud v. Hodgson, 578 F. Supp. 2d 257, 267–68 (D.

Mass. 2008), for the holding that a plaintiff who was no longer a

participant in a defined contribution plan had no standing to

seek purely prospective relief); see generally Cent. States Se. &

Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care,

L.L.C., 433 F.3d 181, 199-203 (2d Cir. 2005) (discussing Article

III standing in the context of ERISA claims). Every single

plaintiff that was a HolliShare participant had terminated his or

her employment with Hollister and received a full lump sum

distribution of his or her HolliShare account before commencing

or joining this action. 

Although plaintiffs’ proposed orders request

prospective injunctive relief, their over 350 pages of post-trial

submissions are devoid of any substantive discussion addressing

the court’s concerns about their ability to seek such relief. 

When defendants pointed out the deficiency in plaintiffs’ briefs

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on this issue, plaintiffs still failed to address the issue in

their reply brief. In the face of the court’s clear and direct

request for authority supporting any request for injunctive

relief, the court can only construe plaintiffs’ silence on this

issue as an admission that their requests for injunctive relief

are not “warranted by existing law or by a nonfrivolous argument

for extending, modifying, or reversing existing law or for

establishing new law.” Fed. R. Civ. P. 11(b)(2). 

Not only would it be inappropriate in this case to

order removal of the existing Trustees and appoint a new trustee,

the court is quite certain that appointing a new trustee as

plaintiffs request would only prolong what has already been a

painfully protracted case. The court has every reason to believe

that an independent trustee will be unable to render decisions

that both sides will believe are acceptable, thus requiring the

parties to return to court in the same position they are in

today, only several years later. As the court explained at

trial, it is neither its role nor its desire to “step in, roll up

[its] sleeves and decide how to run this company or this ERISA

plan.” (Tr. 2658:24-25.) 

Moreover, plaintiffs do not merely request the court to

appoint an independent trustee, plaintiffs also request the court

to order the trustee “to calculate the losses of the Plan and to

correct the fiduciary breaches and prohibited transactions.” 

(Docket Nos. 650-53.) The purpose of the trial was for

plaintiffs to put on evidence that would allow the court to

“calculate the losses of the Plan and to correct the fiduciary

breaches and prohibited transactions.” Plaintiffs are

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essentially asking for a second chance to do what they should

have done at trial.

This case has been pending in this court since 2004 and

the various judges assigned to it have issued over thirty 

substantive orders. Plaintiffs have had more than ample time and

opportunity to prove their case and could have retained experts

to testify at trial about the exact calculations they are asking

a court-appointed trustee to calculate. Accordingly, the court

will deny plaintiffs’ request for an injunction removing the

existing Trustees and appointing a new trustee. 

2. Damages

To seek damages under § 1132(a)(2) and (a)(3),

plaintiffs generally have the burden of proving the harm caused

by defendants’ breaches of their fiduciary duties by a

preponderance of the evidence. See Cigna Corp., 131 S. Ct. at

1881 (“[A] fiduciary can be surcharged under § 502(a)(3) only

upon a showing of actual harm—proved (under the default rule for

civil cases) by a preponderance of the evidence.”). However,

“once the ERISA plaintiff has proved a breach of fiduciary duty

and a prima facie case of loss to the plan or ill-gotten profit

to the fiduciary, the burden of persuasion shifts to the

fiduciary to prove that the loss was not caused by, or his profit

was not attributable to, the breach of duty.” Martin v. Feilen,

965 F.2d 660, 671 (8th Cir. 1992); accord Roth, 61 F.3d at 602. 

“In determining the amount that a breaching fiduciary must

restore to the [ERISA plan] as a result of a prohibited

transaction, the court ‘should resolve doubts in favor of the

plaintiffs.’” Kim, 871 F.2d at 1430-31; accord Sec’y of U.S.

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Dep’t of Labor v. Gilley, 290 F.3d 827, 830 (6th Cir. 2002)

(“[T]o the extent that there is any ambiguity in determining the

amount of loss in an ERISA action, the uncertainty should be

resolved against the breaching fiduciary.”); Patelco Credit Union

v. Sahni, 262 F.3d 897, 912 (9th Cir. 2001). 

34

In finding that defendants breached their duties under

§§ 1104(a)(1), (a)(1)(B), and 1108(e) by failing to perform an

investigation to determine the fair market value of HolliShare’s

JDS stock, the court did not have to find--and did not find--that

the fair market value of the JDS shares at the time of each

prohibited transaction could not have been the December 31 book

value. Surprisingly, after four weeks of trial, the court did

not hear a single expert witness estimate the value of the JDS

stock at the time of each prohibited transaction. While

plaintiffs have suggested that the fair market value could be the

month-end book value, which was the valuation used for individual

shareholders when they sold their shares, they have alternatively

suggested that the court-appointed trustee could appoint an

appraiser to determine the fair market value of HolliShare’s JDS

shares at the time of each prohibited sale. Even plaintiffs 35

In Vaughn, 567 F.3d 1021, the Ninth Circuit explained 34

that it has “never required that [an ERISA] claim be for an

‘ascertainable amount,’” but declined to determine whether it

“should apply such a requirement, because in [the case], the

amount sought is ascertainable, despite the fact that it is not

readily apparent on the face of the First Amended Complaint.” 

Id. at 1026-27. 

For the same reasons that the court declines to appoint 35

a trustee, the court declines to invite a second trial in this

case so that an expert can value the JDS stock at the time of

each prohibited transaction to determine the fair market value. 

Any evidence the outside appraiser would consider could have been

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are unsure what value should have been used to ensure HolliShare

received adequate consideration.

Not only did the parties present insufficient evidence

to establish the fair market value of the JDS shares for each

prohibited transaction, the weight of the evidence presented at

trial does not persuade the court that the fair market value

exceeded the December 31 book value. Most significantly, the JDS

Articles severely restricted who could purchase JDS shares and

thus the only market for HolliShare’s sales was JDS or one of the

select individuals authorized to purchase shares under the direct

shareholder program. (See Ex. 531-36 Art. 5, ¶ II.C.) Each

year, offering circulars were distributed to the eligible direct

shareholders in the second or third quarter that provided them

with options to purchase JDS stock at the audited December 31

book value from the prior year. (Tr. 558:6-559:1, 725:3-731:4,

1272:20-1273:14, 1710:5-7; see also Tr. 557:22-559:5 (Karlovsky

explaining that the ability to purchase JDS shares at the

December 31 book value even when sales were made during the

following year “was considered to be one of the benefits of the

direct share program”).) It would therefore be unreasonable to 36

presented at trial and used to guide the court in its

determination. 

The Trustees never investigated whether any individuals 36

eligible to purchase JDS shares were interested in purchasing

shares from HolliShare. Brilliant testified that his “best

logic” was that there was not an eligible buyer who had

sufficient funds to purchase the amount of JDS stock HolliShare

sold each year, but recognized that nothing precluded the

Trustees from selling smaller quantities of its JDS stock to

multiple buyers. (Tr. 1304:20-1305:19.) The court agrees with

plaintiffs that a prudent trustee would have at least explored

the option of selling shares to individual shareholders,

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conclude that the direct shareholders would have been willing to

purchase stock from HolliShare at a price that exceeded the

December 31 book value. When the only other “market” for JDS

shares was set at the December 31 book value, it is at least

possible that the fair market value of those shares was the

December 31 book value. Cf. Krueger Int’l, Inc., 225 F.3d at

812-13. 

Furthermore, the fact that individual shareholders who

were part of the direct shareholder program were able to sell

their shares at the month-end book value does not invariably lead

to the conclusion that the fair market value of HolliShare’s

shares was also the month-end book value. The direct

shareholders sold their shares pursuant to the right of first

refusal provision in the JDS Articles, which set the sales price

at the month-end book value, but also required the seller to

receive most of the payment in the form of a promissory note. In

contrast to the individual shareholders who sold their shares

under the right of first refusal, HolliShare received payment in

all cash. Winn testified about an occasion in the 1980s when he

sold shares to JDS and received $5,000 in cash and the balance in

a promissory note. (Tr. 663:11-14.) Because he needed all cash

to satisfy an obligation, he sold the promissory note to a bank

that was familiar with Hollister. (Tr. 663:20-25.) The bank,

especially because nothing precluded HolliShare from selling

smaller quantities of shares to multiple buyers. Nonetheless,

because eligible employees were offered options to purchase

shares at the December 31 book value around the same time

HolliShare sold its shares, the court finds it unlikely that an

eligible employee would have paid more than the December 31 book

value for HolliShare’s shares. 

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nonetheless, only paid Winn around 90% of the note’s principal

amount, thus illustrating that the receipt of all cash gave a

significant benefit to HolliShare that direct shareholders did

not receive. (Tr. 663:15-664:2, 2393:20-2394:8.) Defendants’ 37

expert, Roger Grabowski, also testified at trial that the value

the direct shareholders received would have to be discounted to

its cash equivalent in order to compare it to the price

HolliShare received. (Tr. 2537:9-23, 2543:8-15.) 

Moreover, the only testimony at trial valuing JDS stock

during the time-period at issue came from defendants’ expert,

Grabowski. Grabowski is an accredited senior appraiser with the

American Society of Appraisers who has been performing business

appraisals for about thirty-five years and is currently a

managing director at a valuation and financial consulting firm. 

(Tr. 2510:1-7, 2512:6-11, 2518:15-17.) Grabowski had also been a

finance professor at a university and has authored five books

pertaining to valuation, including one about valuation of closely

held entities that was used in a course he taught for continuing

education for certified public accountants. (Tr. 2517:9-22,

2518:25-2519:4.) 

Grabowski was asked to “render an opinion of the fair

It is worth noting that the increase in the book value 37

of JDS stock from the December 31 book value to the month-end

book value in the month of each prohibited transaction between

1993 to 2007 was almost always under ten percent. Specifically,

for the years in which the parties stipulated to the month-end

book value in the month HolliShare sold shares, the book value of

JDS stock had increased by the following percentages from 

December 31 to the month-end at the time of the sale: 1993 (1.2%

increase); 1996 (7.88% increase); 1998 (4.16% increase); 1999

(5.34% increase); 2000 (3.6% increase); 2001 (3.24% increase);

2002 (9.7% increase); 2003 (9.45% increase); 2005 (7.21%

increase); 2006 (8.33% increase); and 2007 (11.55% increase). 

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market value of the common shares of JDS that were held by the

HolliShare plan for the period ‘74 through 2007.” (Tr. 2527:19-

25.) He concluded that the fair market value was the “formula

price, which was book value,” explaining: 

It is our opinion that the fair market value in this case

is determined by and is equal to generally accepted

accounting principles, GAAP, book value of the subject

shares pursuant to the stipulated formula pricing in

place and corroborated by the historical practice. . . . 

Formula, practice and right of first refusal at book

value establish and limit the market. No reasonable

financial investor [] would pay more. It is our opinion

that the fair market value of the subject shares from ‘74

through 2007 is equal to their book value.

(Tr. 2528:18-2529:8 (reading from the “Summary of Conclusions” in

Grabowski’s expert report).) 

38

The only expert testimony plaintiffs offered about the

fair market value of HolliShare’s shares of JDS stock came from

their expert, John Calvin Korschot. Korschot’s appraisal,

however, was limited to the fair market value of JDS stock as of

December 31, 2003. To appraise the JDS stock, Korschot relied on

the market and income approaches to come up with an initial value

and then discounted that value by fifteen percent to account for

the lack of marketability of JDS stock. The resulting value,

however, relied on two “critical” assumptions. (Tr. 1975:11-12.) 

Grabowski’s valuation does not distinguish between the 38

December 31 book value or the month-end book value because, at

the time defendants requested his opinion, plaintiffs’ theory did

not distinguish between the two book values. His explanation

about favors affecting his valuation are nonetheless relevant.

Grabowski also testified about a “hypothetical fair

market value” of JDS shares from 1997 to 2007, which he estimated

exceeded the book value by 1.1 to 1.8 times depending on the

year. This valuation is not relevant because Grabowski

calculated this “hypothetical fair market value” as if the

restrictions in the JDS Articles did not exist and there could be

“freely open trading” of the stock. (Tr. 2572:7-10.) 

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First, Korschot assumed the use of book value for HolliShare’s

sales of JDS shares would not be required, but would still be

used for sales from individual shareholders under the right of

first refusal. (See Tr. 1701-1706, 1729:6-10, 1795:7-12.) 

Second, Korschot assumed that JDS would continue its practice of

buying back shares on a regular basis from the Plan at the

determined “fair market value.” (Tr. 1692:10-12, 1730:19-

1731:4.) Not only did Korschot appraise HolliShare stock as of a

single date, but the court also finds his assumptions to be 39

flawed and is not persuaded that an evaluation of JDS stock could

vary so drastically for sales by HolliShare at his estimated

“fair market value” and sales by direct shareholders set at the

book value.

Plaintiffs recognize that, “[t]he testimony of the

experts does not provide a complete analysis of the difference

between the previous December 31 book value and the properly

appraised fair market value on the dates of the transactions from

years 1982 through the present.” (Pls.’ Proposed Findings &

Even if the court found Korschot’s testimony and 39

appraisal credible, his evaluation of the fair market value of

JDS stock on December 31, 2003 is barely relevant to calculating

damages because, in 2003, HolliShare sold shares to JDS in June,

not December. (See Stipulation of Facts ¶ 42.) At most,

Korschot’s testimony established that the fair market value of

JDS stock as of December 31, 2003 exceeded the audited book value

for that month, which could support the inference that the “fair

market value” of JDS stock exceeded the book value during other

months. 

An additional flaw is that a persuasive explanation was

not offered about how JDS’s purchase of shares from HolliShare at

the increased fair market value Korschot calculated would have

affected the fair market value of JDS shares in subsequent years. 

Simple math reveals that even the book value of JDS would have

decreased if it was paying a significantly higher price for its

shares. 

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Conclusions 57:24-58:1.) With both parties’ experts, the

insufficiency of the evidence stemmed not from a lack of

qualifications, but from the counsels’ failure to request

opinions on the relevant issues and ensure that the experts did

not rely on assumptions that rendered their opinions irrelevant. 

Although the court must resolve any ambiguities in favor of

plaintiffs, the inadequacy of the evidence on this issue resulted

not from ambiguities or difficulty in computations but from the

parties’ failure to ask their experts the appropriate

questions. 

40

With these considerations in mind, the court is not

persuaded from the evidence at trial that the fair market value

of HolliShare’s JDS shares at the time of each prohibited

transaction was anything more than the preceding December 31 book

value. Moreover, even if the court were to assume that the fair

market value of HolliShare’s sales at the time of each prohibited

transaction exceeded the December 31 book value, the court still

finds that the sales at the December 31 book value did not cause

harm to the Plan. The court is persuaded that the use of the

December 31 book value did not have a detrimental effect on

HolliShare when evaluated over an extended duration of time. As

discussed in more detail below, four defendants and one expert

credibly and consistently testified that, based on the dynamics

The fact that this issue was not appropriately 40

addressed with the experts stems from the fact that plaintiffs’

theory in this case has changed over the course of this

litigation.

Along this same vein, because the court ultimately

finds in favor of defendants on damages, defendants’ argument

that plaintiffs failed to timely disclose their surcharge theory

or damages calculations is moot. 

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of the HolliShare Plan, the closely held nature of JDS, and the

fact that JDS retired shares it purchased, HolliShare’s sale of

its JDS stock at the December 31 book value did not cause a

material loss to HolliShare. 

As a threshold matter, the court agrees with defendants

that any loss to the Plan must be assessed on a long-term basis,

not isolated annual inquiries that ignore the dynamics of the

Plan and various factors affecting its growth. When determining

whether trustees’ purchase of employer stock in an attempt to

prevent a tender offer by another company caused a loss to a

plan, the Second Circuit held that the appropriate measure of

loss compared what the plan earned on the challenged investment

and what it would have earned if the funds had been available for

other purposes. Donovan v. Bierwirth, 754 F.2d 1049, 1056-57 (2d

Cir. 1985). In performing this inquiry, the Second Circuit

explained that the comparisons of the respective investments must

be considered over an extended period of time and not limited to

the date of the challenged transaction. Id. “Donovan thus

stands squarely for the proposition that loss must be determined

by examining the assets of the plan as a whole, not at an instant

. . . , but over a period of time.” Roth, 61 F.3d at 604; see

also id. at 602-03 (rejecting the district court’s “snapshot”

assessment of loss and explaining that it “failed to consider the

time frame component of the loss calculation, and so doing

implicitly focused upon too narrow a time frame”). 

Turning to the evidence presented at trial, Karlovsky

first testified about the simulation he performed to determine

whether the use of the December 31 book value had an impact on

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the Plan. Karlovsky has a Bachelor of Arts in systems

engineering and a Master’s degree in industrial engineering

management, had previously worked as a strategic planning

analyst, and had performed extensive research dealing with

employee relations and compensation. (Tr. 336:1-337:25.) He

explained: 

So when I joined the company and was evaluating the

plan, I went back and used, for my own satisfaction, I

went back and I used my mathematical modeling

capabilities and my work experience in benefits to do

some simulation and sensitivity analysis to see if it had

a significant impact on the plan. . . . 

[T]he plan has a plan design that’s almost -- first

of all, it’s very elegantly simple. You’re taking the

profits of the company and spreading it across the

ownership shares. It’s reciprocating, in that if you

were to sell [] too many shares, for example, we would

have cash left over at the end of the year. The price

would be affected for the following year if we [sold] too

much shares because the profits of the coming year would

be spread over fewer shares. So the price within the

plan goes up for the next year. 

And if we had [sold] too many shares, as we estimate

the next year, we would have cash in the plan and we

would have a higher price for it and we would be selling

fewer shares -- we would be asking to sell fewer shares

the following year.

If you simulate that over time and you look at the

decisions that may be affected by the associates as well

because there’s behavioral impact in the dynamics of the

plan, you find that when you’re looking at a retirement

plan, that isn’t a one year event. You’re looking at

someone working 15, 20, 25 years to receive a benefit.

The plan will moderate itself so that the

individuals are receiving a just benefit over time, and

materially it doesn’t have a significant impact. . . .

In my simulation that I had done, . . . what would happen

if we sold fewer shares in the middle of the year or the

converse was what I did, I said we sold more shares, that

would affect succeeding years in terms of the number of

shares we would be buying back.

You can’t just add them independently year after

year. One year has an impact on the others. They

reciprocate for each other because the price has gone up

and we need fewer shares at a higher price the following

year.

It’s kind of a self-correcting model over time where

one year makes an adjustment for the prior year, and the

simulation process is what you would have to do. You

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cannot just do an additive of one year on top of the

other on top of the other without involving the dynamics.

(Tr. 354:8-355:13, 361:1-14.) Karlovsky ultimately concluded

that use of the December 31 book value did not cause a “material 

difference” to the Plan. (Tr. 357:15-16, 435:2-4, 438:1-8.)

McCormack, who has a Bachelor of Arts in social studies

with a focus in economics and a Masters in Business

Administration with an emphasis in finance, explained that, based

on the closely held nature of JDS and the fact that JDS was not

reissuing new shares, the financial effect of selling more shares

one year (because the December 31 book value was used) evened out

over time because there would be fewer outstanding shares the

following year:

[I]n public companies we have a dilution of

shareholder interest or a shareholder stock value,

because in public companies, the shares are -- you have

an initial public offering and then you issue new shares,

and that happens.

And then what happens, it dilutes the share

ownership interest and the value of stock over time,

everything else being equal.

At Hollister it was a very unique situation. We had

the reverse dilution effect that we were always, as we

have discussed, sir, retiring the shares over time. So

therefore, the more shares that we sold, the more shares

that we retired. You add the impact of earnings of the

corporation plus the number of shares being reduced and

you’ve got a higher value.

However, at Hollister, there was what we call the

counterintuitive reverse dilution effect, and if I can

attempt to explain that. The people in the plan would

plan their account, would have a target, if you will, for

the account balance they wanted to retire at. That

retirement balance would be such that they would make a

decision each year on whether or not they would leave,

leave early or when they wanted to do. 

On the other hand, if we sold the shares at June

30th [month-end book value for a sale in June], we have

to sell them at a higher price, and the consequence would

be that they would receive a lesser benefit over time.

What we discovered through various analysis in

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discussion with my treasury department, that this

counterintuitive effect based upon the number of shares

outstanding -- and this also took into consideration the

direct share ownerships also -- over time, this would

balance out.

So I understand where you’re coming from because

you’re coming from a public company knowledge. But the

uniqueness of Hollister and the HolliShare plan and the

direct ownership plan makes your conclusion [that selling

at the December 31 book value harmed the plan], I think,

erroneous.

(Tr. 768:9-769:20.)

Brilliant, who has a Bachelor of Arts in industrial

management and a Masters in Business Administration from the

Wharton Business School and had been a certified public

accountant since 1975, (Tr. 1264:3-7, 1356:11-12), reached the

same conclusion as McCormack, explaining: 

By selling shares at the December 31st book value,

as has been stated several times, versus the current book

value, there are more shares that the plan is selling. 

At the end of the subsequent year, the next December

31st, there will be -- by selling more shares back to the

company, there will be less outstanding -- there would be

less outstanding common shares as of 12/31.

And when those outstanding shares are then divided

into the shareholders’ equity, which was unchanged

because the dollar amount had already been subtracted

under any share -- at any share price or book value

price, mathematically it would have the book value per

share going up as of 12/31 because you’d have less shares

in the denominator. So all common shareholders, both

direct and the plan, would have a higher book value than

they would have otherwise had if they had sold -- if they

had sold less shares.

And the plan participation account, the account

balances from year to year, the dollar amount of a

participant’s account balance is increased by the change

in the value, the total value of the company. The

predominant portion of that is the -- of the change in

the assets of the plan, and the predominant asset is the

JDS -- their ownership of the stock.

So if the book value increases 18 percent, and that

same calculation at a different share value would have

been 17 and a half percent, the participants, at the end

of the following year, their individual account balance

in that example would go up by 18 percent instead of

going up by 17 percent.

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(Tr. 1367:19-1368:22.) 

Zwirner who has a Bachelor of Arts in economics and a

Juris Doctorate, (Tr. 1982:20-23), echoed McCormack and

Brilliant’s conclusion: 

[I]f you were to use the month end value, in the

first year you would be selling back fewer shares, and at

the end of that calendar year the plan would own more

shares, which means it would own a larger percentage of

the net equity of the company, which means the plan would

be worth more and the account balances would be worth

more.

What starts to happen in the second and subsequent

years, however, is that when those -- with those larger

account balances, when people retire, the amounts

required to pay out benefits are higher, which would then

require HolliShare to sell back more shares than they do

today, and that would have the opposite effect of

reducing their ownership interest. 

Also, to the extent of the incremental cash required

to pay the higher benefits, there would be a permanent

reduction in the net equity of JDS Inc., which would

again, at the end of the year, reduce the value of the

company and the value, percentage value owned by the

plan.

(Tr. 2384:7-23.) Zwirner testified that it was his belief that,

“over a period of time,” the use of the December 31 book value

instead of the month-end value had “no effect” on HolliShare. 

(Tr. 2385:24-25.)

Lastly, defendants’ expert, Grabowski, performed an 

extensive analysis in which he examined the effect on the Plan if

it was assumed that the fair market value of HolliShare’s shares

was two or three times the December 31 book value and HolliShare

sold its shares at the increased price. He concluded that the

benefits the participants received would have ultimately been the

same regardless of whether the book value was used or a

hypothetical fair market value of two or three times book value

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was used: 

Q. Is it your understanding what really drives the

incremental changes in the actual benefits and cash money

that HolliShare participants walk out of the plan with,

the principal driver is not what the values are, but what

the incremental changes are from year to year in the

values are?

A. Yes, it is. It took awhile for that sink in for me,

but that’s the driver of the value of the participants.

Q. Is this showing us that whether you value at book

value and you do it consistently or value two times book

value and do it consistently, if you assume that the

rates of return on the shares is going to be the same

percentage rates of return, you’re going to generate the

same dollars for the participants?

A. Yes.

Q. Let’s to go the chart, the next page, paragraph three.

Same analysis as the prior one except this one is at

three times book?

A. Yes.

Q. You’re, again, generating on the “dollars redeemed”

line exactly the same amount of dollars?

A. Yes.

Q. This is saying if it’s three times book at the

beginning and three times book at the end, what the

HolliShare participants are going to walk away with when

they retire from this company is the same amount of

dollars?

A. That’s correct. On the previous page, going back to

that, one of the things we did determine was the

variability that actually occurred in the book value

increases in HolliShare, in the JDS common stock was, in

fact, a lot lower volatility than what the public shares

of the guideline companies were. So its not just a

matter of the average over a period of time, it’s -- the

volatility is different and it’s lower, so that those are

two factors that need to be taken into account.

Q. If I can translate that into terms I think I can

understand, is what you’re telling us is you’re going to

come out with the same dollars, but you’re going to have

more stability using the book value than a market-based

valuation method?

A. Yes. That’s not based on theory, but based on looking

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at the guideline company, change in market values each

year. They go up and down. There is a lot of

volatility. The JDS stock book value has not had that

kind of volatility.

(Tr. 2557:2-2558:20.) Grabowski further explained, “So there’s a

continuous change in how the value of the plan changes, but it’s

really the incremental change. If book value goes up the same

amount in percentage terms as market value goes up, the relative

wealth at the end will be the same, the relative benefit to the

participants.” (Tr. 2555:14-18.)

All of these witnesses were well-educated and had

training relevant to understanding the effect of using the

December 31 book value for HolliShare’s sales under all of the

circumstances and dynamics relevant to HolliShare and JDS. Their

consistent, credible, and unchallenged testimony was that the use

of the December 31 book value did not cause long-term harm to the

Plan. Based on their testimony and the evidence presented at

trial, including the dynamics of the Plan and JDS, the court is

persuaded that HolliShare’s sale of JDS stock at the December 31

book value did not cause a material loss to HolliShare even if

the December 31 book value was something less than the fair

market value of the Plan’s JDS shares at the time of each sale. 

In Cigna Corp., the Supreme Court explained that “just

as a court of equity would not surcharge a trustee for a

nonexistent harm, a fiduciary can be surcharged under § 502(a)(3)

only upon a showing of actual harm--proved (under the default

rule for civil cases) by a preponderance of the evidence.” Cigna

Corp., 131 S. Ct. at 1881 (citation omitted); accord Eaves, 587

F.2d at 463 (“The law clearly permits approximations as to the

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extent of damage, so long as the fact of damage or ‘lost profits’

is certain.” (emphasis added)); Brock, 830 F.2d at 647

(“[M]onetarily penalizing an honest but imprudent trustee whose

actions do not result in a loss to the fund will not further the

primary purpose of ERISA.”). Accordingly, because the court

finds that the fiduciaries’ breaches of their duties did not

cause a material harm to the Plan, plaintiffs are not entitled to

damages. 

3. Recovery of Excess Shares

Consistent with the court’s finding that the Trustees’

sale of HolliShare’s JDS shares at the December 31 book value did

not cause a loss to the Plan over an extended period of time, the

court is also convinced that use of the December 31 book value

did not cause HolliShare to retain fewer shares than it would

have if a higher price was used. As McCormack, Brilliant, and

Zwirner testified, while use of a value lower than fair market

value would have caused HolliShare to sell more shares to raise

its cash requirements in the first year, when those shares were

retired, it would decrease the number of outstanding shares and

therefore increase the book value per share of the outstanding

shares in the following year. As a result, HolliShare’s

remaining shares would have a higher value in subsequent years

and HolliShare would need to sell fewer shares to meet its cash

needs. Any loss in shares during the first year would therefore

even out in subsequent years. The weight of the evidence

therefore persuades the court that the use of the December 31

book value did not cause HolliShare to incur a material reduction

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in the number of JDS shares it owned.41

Accordingly, because plaintiffs lack standing to seek

prospective injunctive relief and the court finds that the

fiduciary defendants’ breaches of ERISA in failing to investigate

the fair market value of HolliShare’s JDS shares did not cause a

loss to the Plan or plaintiffs, the court will enter judgment in

favor of defendants on plaintiffs’ claims under §§ 1104(a)(1),

(a)(1)(B), and 1108(e). 

E. Remaining Claims of Breach 

At trial, plaintiffs’ claims based on HolliShare’s sale

of its JDS shares at the December 31 book value from the prior

year revealed itself to be the heart of plaintiffs’ case, and the

damages and surcharge remedy plaintiffs seek is based entirely on

those prohibited transactions. Plaintiffs have nonetheless

alleged numerous other claims, which the court will briefly

address. 

First, plaintiffs allege that the Trustees breached

their fiduciary duties and violated § 1104(a)(1)(D) by failing to

follow the Plan’s requirement to invest Plan assets in JDS shares

For purposes of discussion, the court refers to the 41

“number of shares,” but recognizes that comparing the number of

shares from year to year is an oversimplification. Since JDS

stock was issued, there has been at least two 100-for-1 stock

splits and a 9-for-1 stock dividend. Even assuming the court

found that the use of the December 31 book value caused loss to

HolliShare, simply calculating the number of extra shares sold in

a given year and requiring the Trustees to replace those shares

would be misguided because it would ignore the fact that one

share in 1992 is not the same as one share in 2012 because,

during that time, two stock splits occurred and one dividend was

declared. 

The testimony at trial was that, even though it is

continually selling shares, HolliShare can infinitely extend its

ownership of JDS stock through stock splits. (See Tr. 554:16-

555:7.) 

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to the maximum extent possible when they sold more shares of JDS

stock than necessary to meet HolliShare’s cash requirements in

1982, 1987, and 1993. Plaintiffs did not, however, propose or

seek a remedy with respect to this claim. The evidence at trial

also does not persuade the court that these sales were concealed

from the beneficiaries, thus plaintiffs are unable to rely on the

“fraud or concealment” exception in § 1113 and the claims are

untimely. 

Second, plaintiffs allege that the Trustees breached

duties owed to HolliShare when they voted HolliShare’s shares in

favor of various amendments to the JDS Articles in 1978, 1980,

1984, and 1999. In the June 2009 Order, the court held that the

statute of limitations foreclosed all of plaintiffs’ claims based

on the votes in 1978, 1980, and 1984 and plaintiffs’ direct

claims against the fiduciaries based on the votes in 1999. See

Defazio, 636 F. Supp. 2d at 1058-59. The court nonetheless held

that plaintiffs’ co-fiduciary liability claims under § 1105(a)(3)

based on the votes in favor of the 1999 amendments were not time

barred. As the court explained in the June 2009 Order, §

1105(a)(3) “makes a fiduciary liable for the breach of another

fiduciary if ‘he has knowledge of a breach by such other

fiduciary, unless he makes reasonable efforts under the

circumstances to remedy the breach,’” and “[o]ne form of

remedying the breaches of a co-fiduciary would be to file a suit

against the breaching co-fiduciary to restore the losses to the

plan or redress any violations of ERISA.” Id. (quoting §

1105(a)(3)). The court therefore concluded in the June 2009

Order that, if “HolliShare fiduciaries had actual knowledge of

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the votes at the time they were cast and [] such votes

constituted ERISA violations,” the fiduciaries would have had

three years to file suit and thus the claims were timely under §

1132(2). Id. at 1059. 

The 1999 amendments prohibited natural persons from

owning more than 10% of JDS stock, which plaintiffs contend

eliminated a potential market for HolliShare to sell its common

stock. The 1999 amendments also added a limited indemnity

provision to the JDS Articles that indemnified directors from

personal liability to shareholders for certain breaches. (See

Ex. 535 at 5.) Even assuming these amendments constituted

fiduciary breaches and thus give rise to § 1105(a)(3) claims

against the appropriate fiduciaries, plaintiffs neither offered 42

In holding that plaintiffs’ § 1105(a)(3) claims 42

relating to the 1999 amendments were timely, the court did not

clarify which fiduciaries plaintiffs had viable § 1105(a)(3)

claims against based on the 1999 amendments. Plaintiffs seem to

suggest they are alleging the claim based on the limitation of

ownership against Brilliant, Kelleher, and Zwirner and the claim

based on the indemnity provision against Zwirner, McCormack, and

Karlovsky. (See Pls.’ Proposed Findings & Conclusions at 98:9-

15.) Defendants appear to believe both claims are against only

Brilliant and Kelleher. (See Defs.’ Proposed Findings &

Conclusions at 141-44.)

In discussing liability in the June 2009 Order, the

court stated that plaintiffs had viable claims under § 1105(a)(3)

only if the fiduciary had “knowledge of the votes at the time

they were cast.” DeFazio, 636 F. Supp. 2d at 1059. Here,

Brilliant did not become a trustee until 2000 and Kelleher did

not become a trustee until 2004. Even assuming Brilliant and

Kelleher had a duty to remedy a fiduciary breach that occurred

before they were fiduciaries, but see 29 U.S.C. § 1109(b) (“No

fiduciary shall be liable with respect to a breach of fiduciary

duty under this subchapter if such breach was committed before he

became a fiduciary or after he ceased to be a fiduciary.”), there

was no testimony showing that they had knowledge that the votes

in favor of the 1999 amendments violated ERISA. See Cunningham,

716 F.2d at 1475 (“Section 405 does not impose vicarious

liability--it requires actual knowledge by the co-fiduciary. . .

. ‘[T]he fiduciary must know the other person is a fiduciary with

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evidence that the amendments caused harm to the Plan or their

individual accounts nor requested or proposed a remedy for any

such harm. See Silverman v. Mut. Ben. Life Ins. Co., 138 F.3d

98, 104 (2d Cir. 1998) (“[Section 1109(a)] requires a plaintiff

to demonstrate in a suit for compensatory damages that the plan’s

losses ‘result[ed] from’ [the fiduciary’s] breach of §

1105(a)(3).” (second alteration in original)). Presumably,

plaintiffs would suggest that their requested relief is included

in their request that the court appointed trustee simply “correct

the fiduciary breaches.” Any such relief, however, would be

prospective in nature, which the court has held plaintiffs lack

standing to seek. See DeFazio, 636 F. Supp. 2d at 1076-77.

Accordingly, the court will enter judgment in favor of defendants

on plaintiffs’ § 1105(a)(3) claims relating to the 1999

amendments. 

Third, based on the fact that many of the Trustees were

individual shareholders and served on the JDS and Hollister

Boards, plaintiffs allege that the fiduciaries breached various

other duties and had numerous conflicts of interest. See

generally Pegram v. Herdrich, 530 U.S. 211, 224 (2000) (“[T]he

respect to the plan, must know that he participated in the act

that constituted a breach, and must know that it was a breach.’”

(quoting H.R. Rep. No. 1280, 1974 U.S. Code Cong. & Ad. News at

5083)).

It therefore appears that the proper defendants would

have been Zwirner, McCormack, and Karlovsky, who were all

trustees in 1999 at the time of HolliShare’s vote in favor of the

1999 amendments. Nonetheless, the court’s conclusion that

plaintiffs failed to offer evidence of harm or seek a remedy with

respect to their § 1105(a)(3) claims based on the 1999 amendments

applies equally regardless of which defendants the claims are

against. 

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trustee under ERISA may wear different hats, . . . [but ERISA

requires that] the fiduciary with two hats wear only one at a

time, and wear the fiduciary hat when making fiduciary

decisions.”); Cunningham, 716 F.2d at 1465 (“ERISA clearly

provides that a fiduciary may be an officer or employee of the

company whose securities he purchases on behalf of a plan.”

(citing 29 U.S.C. § 1108(c)(3))). For example, plaintiffs

contend that, when HolliShare allegedly sold shares below the

fair market value, the difference remained on the books of the

company and was therefore spread equally amongst the remaining

shares, including the individual shareholders. In doing so,

plaintiffs contend that the Trustees breached their duty of

loyalty under § 1104(a)(1)(A) and violated § 1106(b)(1), which

prohibits a fiduciary from benefitting from any transaction that

harms a plan. Plaintiffs base additional claims on the

fiduciaries’ alleged conflicts of interest and concealment of

other potential markets for HolliShare’s JDS shares. 

The court has already determined that, in failing to

perform a good faith investigation to determine the fair market

value of the Plan’s JDS shares, the fiduciaries breached their

duties under §§ 1104(a)(1), (a)(1)(B), and 1108(e). This finding

is sufficient to award plaintiffs the entirety of the relief they

requested and have standing to seek. The court unequivocally

informed plaintiffs at trial that it would only consider the

relief plaintiffs requested, and plaintiffs have not sought any

relief based on any alleged profit the fiduciaries gained from

their breaches. The court will therefore enter judgment in favor

of defendants on plaintiffs’ claims relating to the fiduciaries’

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alleged conflicts and personal profits. 

Lastly, in their amended statement purporting to 

identify all of their claims for trial, plaintiffs identified

several claims that they declined to address at trial, in their

post-trial briefing, or in their proposed findings of fact and

conclusions of law. The court can only assume that plaintiffs

have abandoned those claims, and in any event for the reasons

discussed above plaintiffs are not entitled to any relief on

those claims. The court will therefore enter judgment in favor

of defendants on those claims. Specifically, the court will

enter judgment in favor of defendants on the following abandoned

claims: 1) plaintiffs’ claim under § 1103 for defendants’ alleged

failure to hold HolliShare assets in trust for the participants

and beneficiaries; 2) plaintiffs’ claim under § 1104(a)(1)(C) for

defendants’ alleged failure to diversify HolliShare’s

investments; and 3) plaintiffs’ claim under § 1110(a), which

declares void any plan provision that relieves ERISA fiduciaries

from liability.43

During the course of trial, the court also ruled in

favor of defendants on Defazio’s and Ellis’s claims under §

1056(d)(3) relating to payment of Defazio’s benefits pursuant to

the qualified domestic relations orders and Defazio’s and Ellis’s

claims under § 1140 relating to defendants’ filing of a motion in

The plaintiffs may have based their § 1110 claim on the 43

indemnity provision added to the JDS Articles via the 1999

amendments, but their post-trial submissions do not reflect such

an intent. Even if plaintiffs intended to attack the indemnity

provision added via the 1999 amendments, the court’s conclusion

that the breach did not cause harm to plaintiffs would be the

same. 

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their divorce proceeding. (See Tr. 2171:3-2174:8, 2175:20-

2176:8); see generally Defazio, 636 F. Supp. 2d at 1077-79.

F. Attorneys’ Fees

Both parties have requested an award of attorneys’ fees

in this action. Pursuant to 29 U.S.C. § 1132(g)(1), “the court

in its discretion may allow a reasonable attorney’s fee and costs

of action to either party.” The Supreme Court has recently held

that “a fee claimant need not be a ‘prevailing party’ to be

eligible for an attorney’s fees award under § 1132(g)(1).” Hardt

v. Reliance Standard Life Ins. Co., 560 U.S. ----, ----, 130 S.

Ct. 2149, 2156 (2010). Because Congress did not clearly indicate

that it intended to abandon the American Rule, which provides for

each litigant to pay his or her own fees, “a fees claimant must

show ‘some degree of success on the merits’ before a court may

award attorney’s fees under § 1132(g)(1).” Id. at 2158 (quoting

Ruckelshaus v. Sierra Club, 463 U.S. 680, 694 (1983)). “A

claimant does not satisfy that requirement by achieving ‘trivial

success on the merits’ or a ‘purely procedural victor[y],’ but

does satisfy it if the court can fairly call the outcome of the

litigation some success on the merits without conducting a

‘lengthy inquir[y] into the question whether a particular party’s

success was “substantial” or occurred on a “central issue.”’” 

Id. (quoting Ruckelshaus, 463 U.S. at 688 n.9).

After Hardt, the Ninth Circuit held that a district

court “must consider the Hummell factors after they have

determined that a litigant has achieved ‘some degree of success

on the merits.’” Simonia v. Glendale Nissan/Infiniti Disability

Plan, 608 F.3d 1118, 1119 (9th Cir. 2010); see Hardt, 130 S. Ct.

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at 2158 n.8 (“We do not foreclose the possibility that once a

claimant has satisfied this requirement, and thus becomes

eligible for a fees award under § 1132(g)(1), a court may

consider the five factors adopted by the Court of Appeals, in

deciding whether to award attorney’s fees.”). The Hummell

factors include: 

(1) the degree of the opposing parties’ culpability or

bad faith; (2) the ability of the opposing parties to

satisfy an award of fees; (3) whether an award of fees

against the opposing parties would deter others from

acting under similar circumstances; (4) whether the

parties requesting fees sought to benefit all

participants and beneficiaries of an ERISA plan or to

resolve a significant legal question regarding ERISA; and

(5) the relative merits of the parties’ positions. 

Hummell v. S. E. Rykoff & Co., 634 F.2d 446, 453 (9th Cir. 

1980). 

Here, the court found that the Trustees breached their

duties under §§ 1104(a)(1), (a)(1)(B), and 1108(e) in failing to

perform a good faith investigation to determine the fair market

value of HolliShare’s JDS stock and that the Hollister board

members failed to adequately monitor the Trustees in this

respect. In the abstract, this was a significant finding in

favor of plaintiffs and an issue that the parties deeply

disputed. The court ultimately concluded, however, that

plaintiffs lacked standing to seek prospective injunctive relief

and that the sales at the December 31 book value did not cause

harm to HolliShare or plaintiffs’ HolliShare accounts. This

finding deflates the sails of any “victory” plaintiffs achieved

in proving that defendants breached their fiduciary duties. 

The outcome in this case is analogous to Farrar v.

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Hobby, 506 U.S. 103 (1992), in which the Supreme Court explained

that a plaintiff who sought compensatory damages, but failed to

prove “actual, compensable injury” and was awarded only nominal

damages in the amount of $1.00 based on the violation of his

procedural due process rights was not entitled to attorneys’

fees. Farrar, 506 U.S. at 115. When evaluating the plaintiffs’

“degree of success,” the Court explained that plaintiffs

“received nominal damages instead of the $17 million in

compensatory damages that they sought,” and thus the “litigation

accomplished little beyond giving petitioners ‘the moral

satisfaction of knowing that a federal court concluded that

[their] rights had been violated.’” Id. at 114 (quoting Hewitt

v. Helms, 482 U.S. 755, 762 (1987)) (alteration in original). 

The Court held, “[w]hen a plaintiff recovers only nominal damages

because of his failure to prove an essential element of his claim

for monetary relief, the only reasonable fee is usually no fee at

all.” Id. at 115; see also id. at 116 (“If ever there was a

plaintiff who deserved no attorney’s fees at all, that plaintiff

is Joseph Farrar. He filed a lawsuit demanding 17 million

dollars from six defendants. After 10 years of litigation and

two trips to the Court of Appeals, he got one dollar from one

defendant. As the Court holds today, that is simply not the type

of victory that merits an award of attorney’s fees.”) (O’Connor,

J., concurring). 

Here, plaintiffs sought extraordinary damages, ranging

from $30,674,599.56 to $244,382,485.00, but are not entitled to

any award of damages. Plaintiffs’ proof of defendants’ breaches

may give them some level of moral satisfaction, but their

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inability to prove any harm or obtain injunctive relief prevented

them from achieving “some degree of success on the merits.” 

Accordingly, the court finds that plaintiffs are not entitled to

fees under § 1132(g)(1). See Simonia, 608 F.3d at 1121 (“Only

after passing through the ‘some degree of success on the merits’

door is a claimant entitled to the district court’s discretionary

grant of fees under § 1132(g)(1).”).

Defendants ultimately prevailed in this case and are

entitled to seek fees under § 1132(g)(1); thus the court must

determine whether to award defendants their attorneys’ fees in

light of the Hummell factors. 

(1) the degree of the opposing parties’ culpability or

bad faith;

Based on the court’s conclusion that the fiduciary

defendants breached their duties, the court finds that this

factor weighs in favor of plaintiffs and merits against awarding

defendants their attorneys’ fees. Although harm did not result

from the fiduciaries’ breaches, it does not make their conduct

acceptable. Defendants also argue that plaintiffs engaged in bad

faith in pursuing this lawsuit and that plaintiffs’ counsel’s

characterization of the defendants throughout this litigation

amounted to bad faith. This case unquestionably did not proceed

in an expeditious fashion, the theories of liability often

appeared to be a moving target, and the growing animosity between

counsel were palpable. The court finds, however, that both sides

were responsible for the prolonged litigation and levied arguably

personal attacks against their adversaries. 

(2) the ability of the opposing parties to satisfy an

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award of fees; 

Although the court lacks evidence about each of 

the plaintiffs’ ability to satisfy an award of fees, nothing in

the record suggests that they have significant financial

resources. With the exception of Ellis, even the balances of

plaintiffs’ HolliShare accounts were minimal when compared to the

proceeds many of the defendants received from the sales of their

JDS shares. For example, in order to keep his holding of JDS

shares below ten percent, Winn sold $20 million in shares on one

occasion, (Tr. 1858:14-15), and Herbert ultimately sold his

shares for about $18 million, (Tr. 19823:9-12). Most

significantly, Zwirner, who, as an attorney might be expected to

help his fellow Trustees understand and comply with ERISA, was

estimated to have JDS shares value in excess of $45 million, (Tr.

1925:2-6), and, when asked how much he had sold in the last six

years to keep his holdings under ten percent, he answered that it

was in the “range” of five to twenty million dollars. (Tr.

2017:2-18.) The court’s impression at trial was that, even

though defendants’ fees will undoubtedly be significant,

defendants are fully capable of paying them and plaintiffs are

not. The burden of defendants’ fees should not be shifted from

the defendants, who breached their fiduciary duties and appear to

have more than adequate resources to pay their attorneys, to the

plaintiffs. 

(3) whether an award of fees against the opposing

parties would deter others from acting under similar

circumstances; 

An award of fees may undoubtedly deter plaintiffs from

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pursuing such complicated and contorted ERISA cases in the

future. Given that the court found that the fiduciary defendants

breached their duties under ERISA, however, the court cannot

conclude that such cases should be entirely discouraged because

there was at least some merit to plaintiffs’ claims even if there

was ultimately no harm. Similar to the Court’s concern in

Farrar, however, counsel might be more reluctant to pursue a case

for almost a decade in the absence of clear loss to the Plan or a

plaintiff that has standing to seek prospective injunctive

relief. This factor therefore weighs in favor of defendants. 

(4) whether the parties requesting fees sought to

benefit all participants and beneficiaries of an ERISA

plan or to resolve a significant legal question

regarding ERISA; 

Here, plaintiffs sought relief in favor of the Plan,

but clearly lacked standing to obtain an injunction affecting the

future management of the Plan, and the evidence at trial

convinced the court that the Plan did not suffer harm. It is

unclear to the court why plaintiffs did not address these

deficiencies early in the litigation. HolliShare was extremely

successful and provided returns in excess of publicly traded

stock and, to the extent that this action could have rendered

HolliShare’s primary investment worthless by bankrupting JDS or

caused Hollister to think twice about continuing to offer the

Plan to its employees, the lawsuit would arguably be against 44

In enacting ERISA, “Congress sought ‘to create a system 44

that is [not] so complex that administrative costs, or litigation

expenses, unduly discourage employers from offering [ERISA] plans

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the interests of current participants. The court therefore finds

that this factor weights slightly in favor of defendants. 

(5) the relative merits of the parties’ positions. 

Lastly, the court finds that the factor evaluating the

relative merits of the parties does not weigh in favor of either

party. As previously discussed, plaintiffs proved that

defendants breached their fiduciary duties and, if any one of the

plaintiffs had standing to seek injunctive relief, the court may

have removed the Trustees from their positions. At the same

time, however, defendants ultimately proved that their conduct

did not cause harm to the Plan. At the end, this litigation

resulted in more of a wash than a victory for either side. 

When balancing the factors, the court concludes that

the considerations weigh heavily in favor of denying defendants’

fees under § 1132(g)(1). Although defendants prevailed in

establishing that they did not cause harm to the Plan, they

breached their duties and should not be able to shift the burden

of their defense to plaintiffs. Accordingly, the court declines

to award either side their attorneys’ fees. 

For the foregoing reasons, THE COURT HEREBY FINDS in

favor of all defendants on all claims by all plaintiffs. Each

side shall bear their own attorneys’ fees. 

The Clerk of the Court is instructed to enter judgment

accordingly.

in the first place.’” Conkright v. Frommert, --- U.S. ----, ----

, 130 S. Ct. 1640, 1649 (2010) (quoting Varity Corp. v. Howe, 516

U.S. 489, 497 (1996)) (alterations in original). This case is

only one illustration suggesting that Congress may not have

succeeded in this aim. 

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DATED: April 5, 2012

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