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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

TERRENCE M. HANLON §

§

VS. § ACTION NO. 4:03-CV-237-Y

§

ALFRED J. MELILLO, ET AL. §

MEMORANDUM OPINION

This case is before the Court following a nonjury trial.

Plaintiff Terrence M. Hanlon contends that the defendants breached

fiduciary duties they owed to participants, including Hanlon, in a

profit-sharing plan governed by the Employee Retirement Income

Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001-1461. After

careful consideration of the evidence and argument presented at

trial, the parties' post-trial briefs and the matters highlighted

therein, and the applicable law, the Court's findings and

conclusions are as follows:

I. Findings of Fact

Hanlon became an employee of the Harold Schnair Sales Company

in 1980 ("Schnair"), initially working in the sales department and

ultimately becoming executive vice-president. Schnair specialized

in aftermarket sales of automotive and other products to automotive

retailers, wholesalers, convenience stores, distributors, and

others. At the time Hanlon commenced working for Schnair,

defendant Alfred J. Melillo was the vice-president of sales.

Melillo became the company's president and sole shareholder in

1984. 
1

In 1994, Schnair commenced a defined-benefit plan and ceased contributions

to the profit-sharing plan.

2

Wake testified that she "believe[d her] duties started in 1995." (R. Vol.

III at 36.) The Court notes, however, that the pretrial order's stipulated-facts

section indicates that "[i]n 1989, the Plan was amended and Wake became Plan

Administrator." (Joint Pretrial Order [doc. 263] at 34, ¶ 13.)

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On April 1, 1984, Schnair established defendant Harold Schnair

Sales Company, Inc., Profit Sharing Plan ("the plan"), a profitsharing plan governed by ERISA. Hanlon and Melillo were the

primary investors in the plan, although several other employees

also participated.1 Melillo is the named trustee of both the plan

and defendant Harold Schnair Sales Company, Inc., Profit Sharing

Trust ("the trust"), which was made part of the plan. The plan was

administered by defendant Sharon Wake and Wake Financial Services,

Inc., until December 2000, at which time Wake resigned as

administrator.2 Schnair continues to maintain the plan and the

trust for the benefit of participants and beneficiaries. 

In 1993, Hanlon and Melillo executed an employment agreement

and a stock-purchase agreement under which Hanlon was to purchase

Schnair's stock sometime within the ensuing five years. In the

interim, Hanlon worked as Schnair's sales manager. The stockpurchase agreement expired by its terms in 1998, however, with the

sale never having been consummated. Because of the expected loss

of a major client, Chief Auto Parts, as a result of industry

consolidation, the stock-purchase agreement was essentially

nullified under the formula the agreement used to calculate the

company's value. 

Instead, Hanlon and Melillo ultimately entered into an asset-
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purchase agreement that was finalized in 2001. Hanlon purchased

all of the assets of Schnair and created a new company, Schnair

Sales and Service. Hanlon did not, however, purchase the plan or

the trust. The new company operated out of Schnair's Arlington,

Texas, location for a few months prior to moving to a new location

in June 2001. 

In March 1993, Melillo had opened an investment account for

the benefit of the plan with the predecessor firm of defendant RBC

Dain Rauscher, Inc. ("Dain Rauscher"). Robert McCarthy was

initially designated as the account's investment executive.

McCarthy tended to invest the plan's assets in mutual funds. In

the summer of 1995, McCarthy left Dain Rauscher to start a

business, and management of the plan's investment account, which

was valued at $522,778.97 on July 31, 1995, was transferred to

another representative of Dain Rauscher, defendant J. Everett

Airington (sometimes referred to herein jointly with Dain Rauscher

as "the Dain Rauscher defendants"). Airington also became the

broker on both Melillo's and Hanlon's personal accounts with Dain

Rauscher.

After Airington took over management of the account, he

recommended that Melillo sign agreements authorizing the use of

margin and option writing in the account, despite the fact that

Dain Rauscher's policies advised against the use of margin trading

in accounts covered by ERISA and deemed it inappropriate to charge

these types of accounts interest. Melillo had told Airington that

he wanted growth in the account, but he did not authorize or
3

Not counting any commissions that may have been charged when Airington

first liquidated the account's assets, Dain Rauscher charged the plan commissions

in the amount of $86,678.78 for 1996; $83,706.04 for 1997; $32,734.00 for 1998;

$24,256.00 for just the first half of the year in 1999. At the end of 1996, the

investment account's balance was $336,663.93; it was $299,037.74 by the end of

1997; $104,062.08 in 1998; and by 1999, $391,519.20. 

4

From August 1995 through July 1999, the plan paid Dain Rauscher $64,863.58

in margin interest.

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instruct him to divest the account of all of the mutual funds. A

few months later, however, Airington liquidated the entirety of the

account's assets. Instead of investing primarily in mutual funds

as McCarthy had done, Airington commenced investing the account's

assets in riskier, more aggressive stocks. Additionally, Airington

quickly began churning the account by engaging in frequent trading

and a high number of trades that generated fairly significant

commissions for Dain Rauscher relative to the amount of the

account's assets.3 He also used margin trading in the account, for

which the plan paid a significant amount of interest to Dain

Rauscher, and he often ended up having to sell stock at inopportune

times to cover margin calls.4

 

Melillo let Airington decide how to invest the assets in the

investment account and almost always accepted his recommendations

about stock purchases and sales. He relied solely on Airington to

provide strategy for investing the account's assets and to

determine where to invest the assets; and Airington understood

Melillo was relying on him as a primary--if not sole--basis for

investment decisions. Melillo was not informed by Airington or

anyone else at Dain Rauscher about what the use of margin loans

entailed, nor was he asked for authorization to sell stocks to
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cover the margin calls. Furthermore, prior to June 1999, Melillo

did not authorize most of the stock sales and purchases in the

account prior to their execution. Nevertheless, he never called

Dain Rauscher to complain about any of the sales and purchases made

in the account after he received statements reflecting the trades

that had been made. 

In spring of 1999, Wake requested that Melillo set up a

meeting between both of them and Airington. Wake had been

receiving copies of the Dain Rauscher account statements from

Schnair's bookkeeper, albeit on a sporadic basis. Over the

previous year, she had become increasingly concerned about the

plan's account with Dain Rauscher. Specifically, Wake was troubled

by the increasing use of margin loans in the account; the account's

lack of diversification, which appeared responsible for its having

suffered significant losses over the prior year; and the account's

significant value fluctuation on a month-to-month basis. She also

wanted Melillo to permit Dain Rauscher to send her copies of the

account statements directly, inasmuch as she had been having

trouble getting copies from Schnair's offices on a regular basis.

Additionally, Wake had received a letter from Hanlon dated May

12, 1999, in which he requested a detailed accounting of investment

transactions in the plan during the 1997 and 1998 plan years.

Hanlon sent her a second letter dated May 28, 1999, in which he

requested an annual report for the 1998 plan year and a list of the

plan's assets, liabilities, income, and expenses for the 1998 and

1999 plan years. Hanlon had received two statements of his
5

Indeed, Airington testified that "Melillo was very specific in making sure

that Mr. Hanlon receive everything that was sent out by [Dain Rauscher]." (R.

Vol. 2 at 69.) And Wake testified that Melillo "had always told [her] to give

[Hanlon] any information he wanted about the plan." (R. Vol. 3 at 69).

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interest in the plan within a relatively short period; both

statements showed losses in the value of his interest--the second

statement reflecting a loss of approximately $60,000--during a time

when he would have expected a gain based on the overall performance

of the market. As a result, he had become concerned about the

plan's investments and was attempting to discern what had caused

the losses.

The meeting requested by Wake was held in June 1999 at the

Schnair offices. Hanlon was not present at the meeting, but he was

present in the Schnair office at the time and knew the meeting was

taking place. At the meeting, Melillo explained to Airington that

Hanlon was upset about the significant losses that had occurred in

the investment account, and he asked Airington to talk to Hanlon

about it. Wake, Melillo, and Airington also discussed the fact

that margin trading had been used in the account. They agreed that

no additional margin trading would occur in the account. As a

result of the meeting, Dain Rauscher began sending account

statements directly to Wake and to Hanlon, in addition to those it

was already sending to Schnair.5 

At the conclusion of the meeting, it was uncertain whether

Airington and Dain Rauscher would continue handling the plan's

investment account. Melillo indicated that he wanted to discuss

all of the issues raised at the meeting with Hanlon and get his
6

Hanlon testified that he met with Airington a couple of times during the

spring of 1999 and discussed the poor performance in the plan's investment

account. Airington told him that "he felt [confident] that he could restore [the

account's value], bring it back to good health, but it would take time." (R.

Vol. 4 at 29.)

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help in making the final decisions. Airington expressed during the

meeting his belief that he could still accomplish the objectives of

the plan and that he would do everything he could to make up some

of the prior losses by investing in growth stocks and initial

public offerings ("IPOs") in which Dain Rauscher was involved. He

also made similar statements to Hanlon when they talked about the

plan's losses.6 But in neither instance did Airington guarantee

any particular result. Soon thereafter, however, the account's

balance trended upward. And, after the June 1999 meeting, Hanlon,

Melillo, and Wake started paying much more attention to the account

and how it was being invested.

Also during spring of 1999, Melillo hired Cynthia Stamer, an

attorney from Locke Liddell & Sapp, L.L.P. ("Locke Liddell"), to

investigate Dain Rauscher's handling of the plan's investment

account. Melillo had been referred to Stamer by Crawford Gates,

who was a financial advisor to Hanlon, the defined-benefit plan,

and even to Schnair for awhile. Rene Polk, a compliance officer

with Dain Rauscher, was in charge of formulating Dain Rauscher's

response to Locke Liddell's inquiries. On August 20, 1999, Polk

advised Airington that Locke Liddell had instructed Dain Rauscher

to cease using margin in the investment account, which instruction

was similar to the agreement reached by Melillo, Wake, and

Airington at their June 1999 meeting. No margin interest was
7

Specifically, Geron's email to Airington stated as follows: "[A]ll trades

henceforth should be supported by a fax confirming the transaction. Let's make

sure that we don't slip up on this point. If Melillo is out of town and wants

to trade, he needs to have someone fax us prior to entering the order." Pl.'s

Ex. 6.19 at DR 4631.

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incurred by the plan, and thus no margin trading occurred, after

July 1999. On August 24, 1999, Mickey Geron, Dain Rauscher's

branch manager, instructed Airington to cease making trades for

Melillo without a written confirmation of his authorization for the

trade prior to Airington's entering the order for the trade.7

Nevertheless, there were approximately 150 trades made by Airington

in the plan's investment account from September 1999 through 2000,

and Dain Rauscher produced written documentation reflecting

authorization for only five of those trades. Melillo admitted,

however, that he was asked for verbal authorization for trades much

more frequently after the June 1999 meeting. And neither Hanlon

nor Melillo have pointed to any specific trades made after June

1999 that were not authorized by Melillo.

Locke Liddell ultimately recommended to Melillo that the plan

sue Dain Rauscher. Locke Liddell was concerned about the level of

trading activity in the account, the use of margin investments,

whether trades were occurring at the discretion of the broker, and

the amount of commissions charged for the trading. Additionally,

it was unclear to Stamer whether any guidelines were being followed

in investing the account's assets; if they were, she believed they

were not appropriate for this type of account. 

Locke Liddell was not, however, willing to represent the plan

in any litigation against Dain Rauscher. As a result, Stamer
8

Specifically, Hanlon testified as follows: 

I do remember having some thoughts as to, with the losses that we

had suffered, wondering what we might do to recoup. If . . .

litigation was part of that thought process, yes, I did think about

it. At the same time, I did not consider pursuing litigation

because of the process of evaluation, plus or minus evaluations, if

you will, and given what we have today, my little understanding of

the law in terms of what a lawsuit is, what it entails, my

relationship with Dain Rauscher, Mr. Airington. So I weighed those

two and chose Mr. Airington.

(R. Vol. 4 at 95.)

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referred Melillo to attorney Ed Perrin. Perrin agreed to take the

case, but Melillo ultimately decided, after discussing the matter

with Hanlon and attempting to obtain a contingency agreement with

a few other law firms, not to sue Dain Rauscher.

At the time of Hanlon's meetings with Airington in the spring

of 1999, Hanlon expressed his displeasure with the account's

performance and his discomfort with the past use of margin trading

in the account. He also asked Airington for information about how

the plan's investment account was set up and what was being done in

the account. As a result, on June 22, 1999, Airington sent Hanlon

profit and loss statements for the account, which he reviewed.

These statements showed the stocks held by the plan, the dates on

which they were purchased and sold (and thus the length of time

they were held), the price paid for each stock bought and sold, and

the profit or loss made on each stock. Hanlon considered suing

Airington and Dain Rauscher in 1999, but ultimately decided against

it.8

Indeed, Hanlon had contacted his own attorneys about the

profit-sharing plan. He was friends with Mark Fankhauser, an

attorney with Little Pedersen Fankhauser, L.L.P. (the law firm
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currently representing Hanlon). Hanlon went to see Fankhauser on

May 27, 1999, soon after he initially requested information from

Wake about the profit-sharing plan. Fankhauser was initially

consulted regarding Hanlon's purchase of Schnair's assets, but

issues regarding the profit-sharing plan arose during the course of

their discussions. 

Fankhauser had several conversations with Crawford Gates about

the asset purchase and the profit-sharing plan. Fankhauser's notes

from his June 1 conversation with Gates reflect that he learned the

following information:

[Gates] asked to be allowed to manage p.s., but [Melillo]

didn't ok it

[Wake] called [Gates] after getting [Hanlon's] first letter.

[Gates] is going to see [Melillo] Thursday (6/3) & give

him atty.'s name

[Gates] concerned that Terry could have some liab. as an

officer.

UBIT–due to margin loans 800K stocks/options; 500K margin

debt

individual promissory note 25K 

62K IPO investment--carried at this value but no way to

ascertain value, so should be 0.

(Dain Rauscher Ex. 61 at TH 2405-06 (emphasis added).) Notes from

another conversation between Gates and Fankhauser dated March 17,

2000, indicate as follows:

Old PS plan--

potential breaches of fiduciary duty in this plan--

primarily because of investments

Stamer's ofc. did a bunch of work--said they had broker

dead to rights--sent letters to Dain Rauscher & account

suddenly began doing well. Has gone from 200K-580K since

last fall (thru 2/29) 

. . . .

Supposedly several hundred K interest expense for margin

loans inside PS plan. 

(Dain Rauscher Ex. 61 at TH2408 (emphasis added).)
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During the spring of 1999, Hanlon also learned that Melillo,

on behalf of the plan, had hired Stamer to review the plan's

investments. Hanlon and Melillo had a few conversations regarding

the plan's poor performance and whether to sue Dain Rauscher.

Melillo discussed Stamer's conclusions with Hanlon and suggested

that they join together for a possible lawsuit. He stressed,

however, that there were no guarantees and that a lawsuit would

cost a lot of money, with he and Hanlon possibly being forced to

relinquish their bonuses to cover the expenses. At this time,

Schnair was having difficulty financially due to the loss of the

Chief Auto Parts account. Hanlon indicated that he would pass on

foregoing his bonus to hire the attorneys. In addition to not

wanting to forego his bonus, Hanlon felt that because Melillo was

the plan's trustee, he should be responsible for paying for any

litigation regarding the plan's investments. But by September 3,

1999, Hanlon told Airington that he was comfortable going forward

with Airington and saw no need for the attorneys' further

involvement. By that time, the account's value had bounced back

and was doing fairly well.

In early 2000, however, the investment account's balance

starting declining again, which was consistent with the overall

performance of the market at this time. Airington telephoned

Melillo twice in the spring of 2000 to recommend that certain

stocks in the account be liquidated because he believed they were

overpriced. After discussing the matter each time, however,

Melillo decided to stay the course. The investment account's
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balance on February 29, 2000, was $535,065.60; by December 29,

2000, the account's balance had plummeted to $61,900.60. 

In addition to the Dain Rauscher account, the trust owned

certain other assets. These assets included the Sid Ali Benouard

promissory note and investments in National Digitronics, Concentric

Network ("Concentric"), and Redwood Leasing. 

In September 1995, Melillo authorized the acceptance of a

$25,000 promissory note from Sid Ali Benouard, who was opening a

restaurant. Melillo funded the loan by making a margin withdrawal

from the plan's investment account with Dain Rauscher. Benouard

made two or three small payments on the note, but the restaurant

closed approximately one year after opening. Nevertheless, the

full amount of the note remained on the listing of plan assets Wake

sent to Hanlon in June 1999, which listed the plan assets through

March 1998, even though Melillo knew by that time that the note was

uncollectible. The plan incurred 10.5 percent interest on the

margin loan, but Benouard was only supposed to pay 8.75 percent

interest under the promissory note.

Melillo also authorized McCarthy to withdraw $50,000 from the

plan's account for an investment in National Digitronics. In

return, the plan received a promissory note. Hanlon and Melillo

knew the people who owned the company, and both assured Wake when

she took over as administrator of the plan that it was a good

investment because National Digitronics was developing an ingenuous

new product for the automotive industry. On the listing of assets

Wake delivered to Hanlon in response to his May 1999 letters, the
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investment in National Digitronics was valued at $62,800. Again,

Wake obtained this value either from Melillo or Schnair's

bookkeeper. Ultimately, however, the plan lost its investment in

National Digitronics.

In February 1996, Melillo authorized Airington to make two

withdrawals from the investment account so Melillo could invest in

Concentric, the company that Robert McCarthy left Dain Rauscher to

start. A withdrawal of $103,000 was made on February 13, and

another withdrawal of $73,000 was made on February 15. These

amounts were used to purchase a bundle of Concentric's stock.

Because no promissory note was ever signed, Wake decided to treat

the withdrawals as if Melillo were making an investment for the

plan. The shares were never placed in the plan's account, but

instead were held in Melillo's personal account. Over three years

later, on March 17, 1999, Melillo deposited $160,000 back into the

Dain Rauscher account to pay back what he believed he had withdrawn

from the account to make the Concentric stock purchase. The money

came from the sale of restricted Concentric stock. Hanlon did not

learn the details of the Concentric transaction until the discovery

process in this lawsuit.

Redwood Leasing was supposed to be an income-generating

equipment-leasing program that was designed to take advantage of

lease-cap rates on industrial equipment. It was internally

diversified and, at the time the investment was made, appeared that

it would have a fairly decent yield with low risk. On the listing

of plan assets sent to Hanlon in response to his May 1999 letters,
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Wake listed the value of the investment as $60,000 as of March 31,

1998, which value she obtained from Melillo or Schnair's

bookkeeper. The 1997 partnership schedule K-1 for Redwood Leasing

reflects, however, that the company had a value of only $8,686.57

at the end of that year.

On the dates listed below, the plan's total assets were valued

as follows:

March 31, 1997--$790,406.42

March 31, 1998--$653,981.40

March 31, 1999--$327,117.48

March 31, 2000--$534,085.08

March 31, 2001--$ 38,661.15

March 31, 2002--$ 34,984.01

On the same dates, the plan's Dain Rauscher account balances were

as follows:

March 31, 1997--$278,835.05

March 31, 1998--$325,860.40

March 31, 1999-–$284,575.24

March 31, 2000--$502,256.88

March 31, 2001--$ 38,491.15

March 31, 2002--$ 34,814.01

From 1993 through the 1995 plan year, the plan gained in value. In

the 1996 plan year, the plan lost .03 percent. In the 1997 plan

year, the plan suffered a 17.3 percent loss, and for the 1998 plan

year, the plan suffered a 32.9 percent loss.

When Hanlon moved Schnair Sales and Services out of Schnair's
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facilities in Arlington in June 2001, he hired some temporary

workers to clean up the building for the new tenant. Melillo told

Hanlon to take whatever corporate records he wanted as long as

Melillo could access them if necessary. Hanlon identified the

records he wanted to keep and had his personnel move them to

Schnair Sales and Service's new offices. Melillo went through the

remaining files and separated them into several different piles and

marked them "storage," "personal,", "trash," and the like. When

Melillo and a neighbor subsequently arrived to remove the files

Melillo wanted to keep, however, the Arlington facility had already

been completely cleaned by Hanlon's cleaning crew. Unbeknownst to

Hanlon, they had discarded almost all of Melillo's files. Melillo

tried to retrieve them from the Arlington landfill, to no avail. 

Hanlon filed this suit against only the Melillo defendants

(Melillo, Schnair, the plan, and the trust) on March 21, 2003. His

claims against Airington and Dain Rauscher were added on October 7,

2003. However, Hanlon signed a tolling agreement with Airington

and Dain Rauscher on July 24, 2003. 

Hanlon's damages expert, Colin Henderson, testified that,

based upon "the prudent investor modern portfolio principles of

ERISA and Department of Labor Regulations and Guidelines," (R. Vol.

V at 109), he believed the Dain Rauscher account should have been

invested in a fifty/fifty mix of broadly diversified stocks and

intermediate government corporate bonds. He normally would have

placed the ratio at forty percent equities and sixty percent bonds,

but the plan seemed to indicate that a more risky position was
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preferable. Thus, in calculating his estimated damages, he assumed

fifty percent of the Dain Rauscher account's assets were invested

in stocks similar to those in the S&P 500 composite stock index,

and fifty percent were invested comparably to the Shearson Lehman

bond index. If invested in that manner from March 31, 2000, he

calculated that the plan's damages are $702,908. If, however, the

plan were not invested in this manner until July 31, 2000, the

plan's damages are $336,531.

II. Conclusions of Law

Hanlon contends that Melillo and the Dain Rauscher defendants

breached their fiduciary duties to the plan. ERISA requires that

a fiduciary discharge his duties with respect to a plan

solely in the interest of the participants and

beneficiaries and--

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses

of administering the plan;

(B) 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;

(C) by diversifying the investments of the

plan so as to minimize the risk of large

losses, unless under the circumstances it is

clearly prudent not to do so . . . .

29 U.S.C.A. § 1104(a) (West 1999). Melillo was a named fiduciary

of the plan, but the Dain Rauscher defendants were not. As a
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result, Hanlon must prove that Airington and Dain Rauscher became

plan fiduciaries.

ERISA provides that a person becomes a fiduciary to a plan if

he exercises control over the plan or its assets:

[A] person is a fiduciary with respect to a plan to the

extent (I) he exercises any discretionary authority or

discretionary control respecting management of such plan

or exercises any authority or control respecting

management or disposition of its assets, (ii) he renders

investment advice for a fee or other compensation, direct

or indirect, with respect to any moneys or other property

of such plan, or has any authority or responsibility to

do so, or (iii) he has any discretionary authority or

discretionary responsibility in the administration of

such plan.

29 U.S.C.A. § 1002(21)(A) (West 1999). "[T]he definition of

fiduciary under ERISA should be liberally construed." Thomas, Head

& Greisen Employees Trust v. Buster, 24 F.3d 1114, 1117 (9th Cir.

1994). To be a de facto fiduciary based upon management or

disposition of a plan's assets, Airington must have "caused

[Melillo] to relinquish [his] independent discretion in deciding

whether to sell the [plan's] stock and . . . follow instead the

course prescribed by [Airington]." Sommers Drug Stores Co.

Employee Profit Sharing Trust v. Corrigan Enters., Inc., 793 F.2d

1456, 1460 (5th Cir. 1986), cert. denied, 479 U.S. 1034 (1987). To

be a fiduciary as a result of providing investment advice for a fee

with respect to plan assets, Airington either must 

(A) Ha[ve] discretionary authority or control . . . with

respect to purchasing or selling securities or other

property for the plan; or

(B) [Have r]ender[ed investment advice] on a regular

basis to the plan pursuant to a mutual agreement,

arrangement or understanding, written or otherwise,

between [himself] and the plan or a fiduciary with
9

Because of the Court's conclusions regarding Hanlon's claims against

Airington, the Court need not determine whether Dain Rauscher actively and

knowingly participated in Airington's alleged breaches so as to give rise to

MEMORANDUM OPINION - Page 18

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respect to the plan, that such services will serve as a

primary basis for investment decisions with respect to

plan assets, and that such person will render

individualized investment advice to the plan based on the

particular needs of the plan regarding such matters as,

among other things, investment policies or strategy,

overall portfolio composition, or diversification of plan

investments.

29 C.F.R. § 2510.3-21(c)(1)(ii).

The Court concludes that Airington was a de facto fiduciary of

the plan prior to the June 1999 meeting, inasmuch as he executed

most of the trades in the plan's investment account without even

consulting Melillo until after the fact. The Court also concludes

that Airington assumed investment-advice-for-a-fee fiduciary status

during this time period as well; Melillo and Airington had an

unwritten mutual understanding that Airington would regularly

provide the primary basis for investment decisions and strategy

with respect to the plan's investment account, and he received

commissions for each trade. See Thomas, Head, 24 F.3d at 1120

(concluding that commissions constitute "fees or other

compensation" under 29 U.S.C. § 1002(21)(A)(ii)). After the June

1999 meeting, Airington ceased exercising authority or control over

plan assets, but he remained a fiduciary to the plan under the

investment-advice-for-a-fee prong of the test. 

Nevertheless, Hanlon's claims against Airington and Dain

Rauscher for any fiduciary breaches they committed prior to the

June 1999 meeting are barred by the applicable statute of

limitations.9 ERISA provides for a six-year statute of limitations
respondeat superior liability under ERISA. See Dain Rauscher Defs.' Reply to

Hanlon's Resp. to Mot. for Summ. J. [document number 239] at 13. 

MEMORANDUM OPINION - Page 19

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unless a claimant has actual knowledge of his claims, in which the

period is reduced to three years:

No action may be commenced under this subchapter with

respect to a fiduciary's breach of any responsibility,

duty, or obligation . . . 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[.]

29 U.S.C.A. § 1113 (West 1989). The term "actual knowledge" means

"'actual knowledge of all material facts necessary to understand

that some claim exists, which facts could include necessary

opinions of experts, knowledge of a transaction's harmful

consequences, or even actual harm.'" Maher v. Strachan Shipping

Co., 68 F.3d 951, 954 (5th Cir. 1995) (quoting Gluck v. Unisys

Corp., 960 F.2d 1168, 1177 (3d Cir. 1992)). By establishing actual

knowledge as the prerequisite for the shorter limitations period,

ERISA imposes a "stringent requirement." Gluck, 960 F.2d at 1176.

To benefit from the three-year limitations period, a defendant must

show that the plaintiff "'actually knew not only of the events that

occurred which constitute the breach or violation but also that

those events supported a claim for breach of fiduciary duty or

violation under ERISA.'" Maher, 68 F.3d at 954 (quoting Int'l

Union v. Murata Erie N. Am., 980 F.3d 889, 900 (3d Cir. 1992).
10The knowledge of Hanlon's counsel is attributable to him. See In re

Kensington Int'l Ltd., 368 F.3d 289, 315 (3d Cir. 2004) ("any facts known by the

attorney may generally be imputed to the client").

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The Court concludes that Hanlon had actual knowledge of most

of the breaches in which he alleges the Dain Rauscher defendants

engaged more than three years prior to filing suit against them.

Hanlon knew there had been margin trading in the account as early

as spring 1999, when he first began discussing the account's

precipitous decline with Airington. He knew that Airington had

engaged in frequent trading and churning of the account as well,

inasmuch as in June 1999 Airington gave him, in response to his

inquiries, the profit and loss statements from which he could glean

this information. And, Hanlon knew, through his attorney, that the

Locke Liddell lawyers had Airington and Dain Rauscher "dead to

rights" as a result of the trading going on in the account,

including the large amounts of margin interest charged to the

account.10 The Court concludes that Hanlon had actual knowledge of

his claims against the Dain Rauscher defendants, at the latest, by

March 17, 2000, the date his attorney discussed Locke Liddell's

findings with Crawford Gates. Indeed, Hanlon said it best: 

I do remember having some thoughts as to, with the losses

that we had suffered, wondering what we might do to

recoup. If . . . litigation was part of that thought

process, yes, I did think about it. At the same time, I

did not consider pursuing litigation because of the

process of evaluation, plus or minus evaluations, if you

will, and given what we have today, my little

understanding of the law in terms of what a lawsuit is,

what it entails, my relationship with Dain Rauscher, Mr.

Airington. So I weighed those two and chose Mr.

Airington.

(R. Vol. 4 at 95.) Hanlon weighed the prospects of a lawsuit in
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juxtaposition with his relationship with Airington and chose to

preserve the latter. Unfortunately, he stuck with that choice for

more than three years. As a result, all of Hanlon's claims against

Airington and Dain Rauscher based on events that occurred prior to

July 24, 2000 (three years prior to the July 24, 2003, tolling

agreement with the Dain Rauscher defendants), are time-barred.

Hanlon has attempted to invoke principles of equitable tolling

to avoid limitations. The Court concludes, however, that Hanlon

cannot escape the time bar as a result of any promises made to him

by Airington. Airington simply did not lull Hanlon into sitting on

his rights. See Roush Inv. Profit Sharing Plan v. The New England

Mut. Life Ins. Co., 311 F.3d 581, 587-88 (3d Cir. 2002) (reversing

district-court decision that ERISA claims were time-barred; noting

that even though the plaintiffs may have had actual knowledge

outside of the three-year limitations period, a letter from the

defendant's lawyer promising that "all would be corrected and

without prejudice to [the plaintiff's rights" lulled the plaintiff

into inaction.) Although Airington expressed his belief that he

could make up the losses in the plan if given enough time, he made

no guarantees to Hanlon. Cf. Ramirez v. City of San Antonio, 312

F.3d 178, 184 n.6 (5th Cir. 2002) ("An employer's promise to

review--and potentially rectify--an earlier employment decision

does not toll the limitations period.) Rather, Hanlon made a

conscious decision not to pursue his claims and to cease the

attorneys' involvement after the Dain Rauscher account again began

increasing in value.
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Regarding the period that is not barred by limitations (post

July 24, 2000), Hanlon has failed to prove that Airington and Dain

Rauscher engaged in any breaches of fiduciary duties during this

time. Although Hanlon complains of the Dain Rauscher defendants'

failure to diversify the account or implement stop-loss protection,

Hanlon has failed to prove that the Dain Rauscher defendants had

the authority to make those decisions during this time frame. And,

the Court notes that to the extent Hanlon complains about the lack

of diversification, he was fully aware and apparently condoned

Airington's suggestion that the account's assets be invested in

growth stocks and IPO's in order to attempt to re-gain value.

Furthermore, regarding stop-loss protection, Hanlon has failed to

demonstrate that a reasonably prudent fiduciary acting in like

circumstances during this time period would have employed those

types of measures to guard against loss in the account.

Except for his claims regarding the Concentric transaction,

the details of which Hanlon did not learn until after filing this

lawsuit, Hanlon's claims against Melillo regarding problems in the

Dain-Rauscher investment account prior to the June 1999 meeting

(i.e. margin trading, churning, etc.) are likewise time-barred.

Hanlon contends in his written closing argument, however, that

Melillo engaged in numerous fiduciary breaches after March 31, 2000

(three years prior to Hanlon's filing of suit against Melillo),

which the Court summarizes as follows: 

(1) failing to sue the Dain Rauscher defendants for their

handling of the investment account's assets, charging

unreasonable fees, and churning the account;
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(2) failing to disclose to the plan's participants and

beneficiaries the information he obtained from Locke

Liddell;

(3) failing to prudently invest the plan's assets and

diversify the investments so as to minimize the risk of

large losses, including failing to evaluate the

investments proposed by Airington and monitor his

performance;

(4) failing to pursue a claim against Sid Ali Benouard

based on his promissory note to the plan; and

(5) failing to accurately disclose to participants and

beneficiaries the values of plan assets, instead causing

them to be reported with inflated values.

See Hanlon's Closing Argument [doc. 237] at 17, 18-20.

With respect to Melillo's failure to sue the Dain Rauscher

defendants for their handling of the plan's investments, charging

unreasonable fees, and churning the plan's account, the Court

concludes that Hanlon has waived any right to recovery for those,

given that he was not only aware of these activities but also was

complicit in the decision not to pursue litigation regarding them.

And as for allegedly failing to disclose information from Locke

Lidell, the Court found that Melillo discussed Locke Liddell's

conclusions with Hanlon, but Hanlon was not willing to forego his

bonus to fund a lawsuit. In fact, once the investment account's

balance began growing again, Hanlon told Airington that the

attorneys should not be involved any longer. The Court is

disinclined to hold Melillo responsible to Hanlon for a decision in

which Hanlon was, at least at the time, in agreement. 

Regarding Hanlon's contention that Melillo failed to prudently

invest the plan's assets and diversify the investments so as to

minimize the risk of large losses, including failing to evaluate
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the investments proposed by Airington and monitor his performance,

the Court concludes that Hanlon has not demonstrated that Melillo

acted unreasonably under the circumstances. Hanlon has failed to

show that after March 2000, Melillo failed to exercise the care,

skill, prudence, and diligence that a prudent man acting in like

capacity and circumstances exercised at the time. Hanlon simply

has failed to demonstrate that a reasonably prudent trustee in a

similar situation would have implemented stop-losses or sold the

stocks as recommended by Airington prior to their rapid decline in

the volatile market that existed in 2000. And, as for the lack of

diversification of the account, again the Court concludes that

Hanlon was aware of and approved the methods being used by

Airington (i.e. investment in growth stocks and IPO's) to attempt

to rebuild the account's value.

Regarding the Sid Ali Benouard note, the Court found that it

was listed as a plan asset long after it became clear that Benouard

would not repay it. Hanlon has failed to demonstrate, however,

that Melillo likely could have collected anything from Benouard had

he sued. As a result, the Court cannot conclude that his failure

to do so was a breach of his duties or that it resulted in any

damages to the plan.

Hanlon also complains that Melillo failed to accurately

disclose the plan's assets to participants and beneficiaries. It

is clear that assets were listed on the plan's statements,

including the listing of assets Wake gave to Hanlon in June 1999,

either at inflated values or long after they should have been
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written off. Hanlon fails, however, to point to any particular

damages he or the plan suffered as a result of this inaccurate

reporting. 

Regarding the Concentric transaction, the Court agrees with

Hanlon that Melillo breached his fiduciary duty to act solely in

the interest of the participants and beneficiaries and for the

exclusive purpose of providing benefits to them. "ERISA expressly

prohibits the use of assets for purposes other than the best

interests of the beneficiaries, and the language of section 1109(a)

providing for disgorgement of profits from improper use of trust

assets is the appropriate remedy." Leigh v. Engle, 727 F.2d 113,

122 (7th Cir. 1984). Melillo withdrew $176,000 from the plan to

make the Concentric investment, but the shares for the investment

were held in Melillo's personal account. After Wake discovered

that no promissory note had been executed regarding the withdrawal,

she and Melillo decided to treat the withdrawal as an investment on

behalf of the plan. After Hanlon started making inquiries about

the value of the plan, however, Melillo deposited $160,000 back

into the account--less than the original amount withdrawn. 

Hanlon has wholly failed to demonstrate, however, whether any

profit was made on the Concentric transaction and, if so, how much.

Hanlon contends that "'the trustee has the burden of showing which

property and profits are his.'" (Hanlon's Reply to Defs.' Closing

Arguments [doc. 348] at 8 (quoting Leigh, 727 F.2d at 138).

Assuming there is evidence that a commingled transaction resulted

in a profit, the Court agrees. In this case, however, after full
11The Court has imposed a six-percent interest rate for the period the

money was missing from the plan. So, interest earned the first year is $10,560

($176,000 x 6%); for the second year, $11,193.60 ($186,560 x 6%); for the third

year, $11,865.21 ($197,753.60 x 6%); and $1,065.28 for the additional month

($209,618.81 x 6% = $12,577.13 ÷ 366 = $34.36 per day x 31 days), for a total of

$34,684.09. 

MEMORANDUM OPINION - Page 26

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pretrial discovery, Hanlon has failed to demonstrate that the

Concentric transaction resulted in any profit whatsoever. As a

result, the only damages the Court can determine with reasonable

certainty that the plan suffered as a result of Melillo's actions

is a reasonable amount of interest on the money Melillo removed

from the plan for the approximately three years and one month that

it was missing, coupled with the $16,000 difference between what

was withdrawn and the amount ultimately replaced. The Court

determines this amount to be $50,684.09.11 Prejudgment interest

shall accrue on this amount at a rate of six percent per annum

until paid. See Hansen v. Continental Ins. Co., 940 F.2d 971, 984-

85 (5th Cir. 1991); TEX. FIN. CODE ANN. § 304.003 (2006);

http://www.federalreserve.gov/releases/h15/Current (reflecting

current prime rate of six percent).

Finally, Melillo has contended throughout these proceedings

that any liability that might be imposed upon him should be

mitigated by the fact that Hanlon's cleaning crew destroyed most of

the documents he kept regarding the profit-sharing plan that would

support his defenses. To be entitled to an adverse inference as a

result of spoliation of documents, however, Melillo was required to

prove that the documents were destroyed in bad faith. See Consol.

Aluminum Corp. v. Alcoa, Inc., 244 F.R.D. 335, 340 (M.D. La. 2006)

("the Fifth Circuit only permits an adverse inference sanction
MEMORANDUM OPINION - Page 27

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against a destroyer of evidence upon a showing of 'bad faith' or

'bad conduct'). The Court found, however, that the cleaning crew

disposed of Melillo's documents without Hanlon's prior knowledge.

As a result, the Court concludes that Hanlon did not engage in bad

faith regarding the destruction of Melillo's documents, and Melillo

is therefore not entitled to an adverse inference or other sanction

as a result of the destruction of those documents.

SIGNED February 8, 2008.