No. 01 C2963 Page 19

Co._N.A., 235 F.Supp. 2d 886, 898-99 (C.D. Ill. 2002), plaintiffs argue the adequate
consideration exemption allowed under § 1108(e) is an affirmative defense, for which
defendants bear the burden. Yet, in emphasizing the harm of defendants’ alleged prohibited
transactions, plaintiffs focus not on the transaction — the payment of benefits to plan
participants — but, rather, on the alleged overpayment resulting from LaSalle’s faulty
valuation.. They argue that this overpayment was potentially harmful to the plan, like other
prohibited transactions; was not pursuant to the terms of the plan; and was not sanctioned by
ERISA, but rather, was in violation of 29 U.S.C. § 1104, While it is true that a fiduciary’s
imprudent valuation of company stock would be potentially harmful to an ESOP, would not
be condoned by a benefits plan, and would be in violation of § 1104, that does not change the
scope of prohibited transactions under § 1106.

In Lockheed Corp., the Supreme Court established that the payment of benefits to plan
participants is outside the boundaries of § 1106(a)(1)(D), stating: “{W]hatever the precise
boundaries of the prohibition in § 406(a)(1)(D), there is one use of plan assets that it cannot
logically encompass: a guid pro quo between the employer and plan participants in which the
plan pays out benefits to the participants pursuant to its terms.” 517 U.S. 882, 895 (1996).
Though plaintiffs assert that retired employees were paid too much as a result ofan imprudent
valuation, the payment to the ESOP participants was in accordance with the terms of the
ESOP.

We also apply the Court’s exclusion to transactions under § 1106(a)(1)(A). As
highlighted above, the Court found payments to participants in accordance with plan terms
not to be transactions within the meaning of § 1106(a)(1). Lockheed Corp., 517 U.S. at 1792.

Excluding these types of transactions from the scope of this prohibition comports with the


No. 01 € 2963 Page 13

participants’ ESOP accounts, and the increase in the average age of the workforce (Ellis Dep.
244-45).

Plaintiffs also argue that Amsted’s assumption of a 9 per cent turnover rate in
forecasting its obligation was imprudent. Until 1995, the average annual turnover rate for
shares of the ESOP‘ was 7.8 per cent. In 1996 it rose to 10.9 per cent (apparently impacted by
the closing of a facility), and in 1997 and 1998 respectively, it was 9.0 per cent and 9.4 per cent.
Ellis testified that the increased turnovers after 1995 should have alerted Amsted to re-
examine its assumptions regarding share turnover (Ellis Dep. 244). Newman continued to use
the 9 per cent turnover rate ~ a standard assumption that had been used for years — in his
formulas for projecting the repurchase obligation.

Plaintiffs attack assumptions made in the use of PERLS software, as well. Amsted
began using PERLS software in 1997 and reported some problems with its forecasts, Plaintiffs
argue that Amsted’s perception that the PERLS software was subject to big variations in its
assumptions resulted from Amsted’s failure to use realistic assumptions in its own forecasts,
They further maintain defendants relied on unrealistic assumptions when using the PERLS
software.

Defendants contend no reasonable factfinder could conclude that its repurchase
obligation analysis was imprudent. They argue Amsted was well aware of the significance of
the repurchase obligation and continually monitored the situation, They also maintain
plaintiffs lack evidence that a hypothetical, objective, prudent fiduciary would have come to

a different conclusion regarding Amsted’s repurchase obligation, much less to the conclusion

“The share turnover rate is distinct from the employee turnover rate. Of course, the two rates are
interrelated because shares are turned over by departing employees. The share turnover rate is the number
of vested shares redeemed by departing employees divided by the total number of outstanding shares,


4

No. 01 C2963 Page 23

did not breach duty by failing to block plan sponsor’s decision to transfer ESOP assets from
one trust ¢o another); Martin y, Feilen, 965 F.2d 660, 666 (8" Cir. 1992)(holding that though
an employer’s business decisions affect stock value and, therefore, pension benefits, an ESOP
fiduciary does not become liable for these decisions),

As LaSalle points out, a requirement that ESOP trustees conduct independent
investigations into employers’ business transactions that do not involve ESOP assets would be
unduly burdensome. See Keach v. U.S. Trust Co., N.A., 313 F.Supp.2d 818, 870 (C.D. Ii.
2004)(finding no legal requirement that a trustee hire a CPA firm to review an ESOP
transaction and noting that such expert assistance would be cost-prohibitive in many ESOP
transactions). An independent investigation was especially unnecessary in this case, where the
sole owners of Amsted were ESOP participants, and Amsted hired an independent firm,
Salomon, Smith, Barney, to assess its purchase of Varien.

The parties’ factual disputes over LaSalle’s review of the Varlen transaction are
inconsequential, given that it had no fiduciary duty to review or approve this business decision.
Nonetheless, the undisputed facts establish that LaSalle did monitor Amsted’s purchase.
Vaughn Gordy, the LaSalle trust officer principally in charge of the Amsted ESOP, attended
an April 1999 Amsted board meeting during which Salomon presented its report on the Varien
purchase (Defs’ Facts 60). Following this presentation, LaSalle consulted with Duff & Phelps,
its financial advisor, and legal advisors, regarding the purchase (Defs’ Facts 61). Gordy was
updated on the Amsted transaction from the beginning of negotiations until the close of the
deal. He discussed the transaction with Amsted’s general counsel, Thomas Berg; reviewed
Salomon’s fairness report; and had Duff & Phelps review it. Thus, even though LaSalle did

not have a fiduciary obligation with regard to Amsted’s business decision, it took measures to


>

No. 01 C2963 Page 4

September 30, 1999, reflecting a 32 per cent increase from its 1998 value. During the same time
period, the Dow Jones average was up 31.8 per cent and the Standard & Poor 500 was up 26.1
per cent. Under the then current terms of the ESOP plan document, a participant terminating
work at Amsted was entitled to a lump sum cash payment for his vested shares. The annual
stock price established by LaSalle determined the value of a departing employee's red lemption
payout.

Following the announcement of the 1999 valuation, ESOP distribution requests began
to surpass expectations. The parties dispute how much Amsted estimated it would pay in
redemptions and how those estimates evolved as the redemption requests increased, but it is
clear that by late January 2000, Amsted believed it would have to pay $68 million more than
it forecast in its business plan for fiscal year 2000. At Amsted’s directors mecting on January
27, 2000, the company began to consider ways in which to protect its cash reserves. Following
the meeting Amsted explored different avenues for addressing its mounting repurchase liability,
including decreasing expenditures for the expansion of a manufacturing plant, employing
Salomon to investigate the possibility of an initial public offering, and retaining an ESOP
consulting firm and Amsted’s legal counsel to determine ways to decrease the amount of
repurchases and its impact on the company’s cash flow. On March 14, 2000, Amsted’s legal
counsel suggested that the plan administrators amend the ESOP plan document to allow for
quarterly share valuations instead of annual valuations, limitations on participants’ rights to
lump sum cash payouts, and deferred payments for ESOP shares, By April 2000, Amsted was
obligated to pay $180 million to repurchase ESOP shares for the first three quarters of the
fiscal year. Its forecast for the whole yearwas adjusted to $240 million. At a special directors’

meeting on April 25, 2000, Amsted’s board unanimously voted to adopt two amendments to the


No. Of C 2963 Page 20

section’s general purpose, which is to “prevent plan fiduciaries from engaging in certain
transactions that benefit third parties at the expense of plan participants and beneficiaries.”
Laborers’ Pension Fund v. Arnold, 2001 WL 197634 at *8 (2001) (citing Marks y,
Independence Blue Cross, 71 F.Supp.2d 432, 437 (E.D. Pa. 1999)). Amsted’s purchase of plan
participants’ shares in accordance with the terms of the plan was not benefitting third parties
at the expense of the participants,

yl ion for Summary Jud:

Plaintiffs allege that LaSalle, like the Amsted defendants, violated both 29 U.S.C. § 1104
and 29 U.S.C. § 1106. LaSalle’s alleged breach stems from its failure to investigate Amsted’s
purchase of Varlen and analysis of its repurchase obligation; its imprudent valuation of
Amsted’s stock; and its inaction as the value of the ESOP’s assets plummeted. LaSalle moves
for summary judgment on all counts,

The parties begin by debating the proper standard that the court should apply in
reviewing LaSalle’s actions for breach of fiduciary duty. LaSalle argues that as an
independent and experienced trustee its decisions are entitled to deference and the court
should not substitute its judgment for that of the trustee. It relies on several cases in which
courts reviewed a fiduciary’s investment decisions under the arbitrary and capricious
standard. Kuper v. Iovenko, 66 F.3d 1447, 1459 (6" Cir. 1995); Moench v. Robertson, 62 F.3d

553, 571 (3d Cir. 1995); Ershick y. United Missouri Bank of Kansas City, N.A,, 948 F.2d 660,

666-67 (10 Cir. 1991). Plaintiffs counter that the Seventh Circuit demonstrated in Eyler v,

Commissioner of Internal Revenue, 88 F.3d 445, 454-55 (7" Cir. 1996), that the prudent person

standard is the proper standard to apply in this case. Though Eyler did not involve a claim

for breach of fiduciary duty, the Seventh Circuit stated that courts employ the prudent person


4

No. 01 C 2963 Page 26

conduct an independent investigation into the acquisition. Therefore, plaintiffs argue that
D&P’s assumption that fair market value was paid for Varlen, and its conclusion that the
purchase had a neutral effect on Amsted’s stock price, was imprudent. While Elyse Bluth,
the D&P manager in charge of the Amsted valuation, admits D&P did not conduct an
independent investigation of the Varlen acquisition, this does not establish that their
conclusion regarding its effect on the stock price was unreliable. In an arm’s-length
transaction, such as Amsted’s purchase of Varlen at auction, the value of the asset is best
determined by the purchase price. See In re: The Two S Corporation, 875 F.2d 240, 244 o*
Cir. 1989), Thus, D&P’s assumption that fair market value was paid was not unsound, Upon
review of the valuation, it was not imprudent for LaSalle to accept D&P’s assessment that the
acquisition of Varlen, offset by the debt Amsted incurred for the purchase, did not affect
Amsted’s stock price.

Plaintiffs also assert that D&P ignored Amsted’s repurchase obligation in its valuation.
They point to Bluth’s testimony that she did not recall receiving any PERLS sheets (Bluth
Dep. 55-56), and also highlight the testimony of Jeff Schiedemeyer, a D&P employee who
worked on the Amsted valuation — that he did not recall receiving any “specific repurchase
obligation forecast” from Amsted (Schiedemeyer Dep. 67). Though D&P may not have
received separate reports dealing only with Amsted’s repurchase obligation, the undisputed
facts reveal that D&P was informed of the obligation through financial and cash flow
statements that included information on the cost of shares repurchased from the ESOP (Bluth
Dep. 39, 77-78). While the 1999 valuation report did not specifically address the repurchase
obligation, it did take it into account as part of Amsted’s projected future cash flows — flows

that would be affected by the number of stock shares redeemed by terminating employees.


No, 01 C 2963 Page 22

a triable issue regarding self-dealing.

Besides the fact that the claims against LaSalle are more akin to those in Kuper and
Moench than Horn, there is another reason to apply a deferential standard to LaSalle’s
decisions in this case. We agree with LaSalle that the explanation for the standard applied in
Kuper and Moench, on the one hand, and the standard applied in Eyler and Horn, on the
other, relates to the independence of the fiduciary. The decisions of independent and
experienced fiduciaries garner deferential review, while the decisions of fiduciaries with a
conflict of interest or engaged in suspect transactions do not receive such deference. Before
determining whether a defendant breached a fiduciary duty in Steinman v. Hicks, 252
F.Supp.2d 746, 760 (C.D.IH. 2003), the court noted that its determination of whether the
defendant acted as a “hypothetical prudent fiduciary” would have in the given circumstances,
involves a “highly deferential” review of the fiduciary’s acts. As in Steinman, our review of
whether LaSalle met the prudent person standard will be deferential to the decisions it made
as an independent trustee.

Varlen Purchase and Repurchase Obligation

Plaintiffs maintain LaSalle breached its fiduciary duty with regards to Amsted’s
purchase of Varlen. They argue that LaSalle had an obligation to conduct an independent
investigation of the purchase or to contract a firm to conduct an investigation, Plaintiffs
further contend the steps that LaSalle did take to review the purchase were inadequate to meet
its fiduciary obligation, As discussed above, Amsted’s purchase of Varlen was not a fiduciary
act to which ERISA applies. The Varlen purchase was a business decision and LaSalle cannot
be held liable for breach of fiduciary duty to plaintiffs for failure to override an employer’s

business decision. Kuper v. Jovenko, 66 F.3d 1447, 1460 (6 Cir. 1995)(holding that fiduciaries


No. 01 C 2963 : Page 17

December 1999 or early January 2000, they “did not take action until April 2000 — five months
later ....” (Plfs’ Reply 65). Besides adding at least a month to this alleged delay, plaintiffs
ignore the undisputed fact that the Amsted defendants did take action. They began to research
possible responses to the situation. While it is true that defendants did not amend the ESOP
until three months after their January board meeting, when they first proposed responses to
the increase in redemptions, this does not evidence the Amsted defendants’ imprudence, To
the contrary, hiring legal experts, ESOP consultants and financial advisors to investigate
measured responses (as opposed to making rash decisions), evidences prudence on the part of
Amsted. Nor does Amsted’s decision not to make more drastic changes in April 2000,
constitute evidence of imprudence. With the benefit of hindsight it is apparent that the April
amendments did not slow the number of redemptions, thus necessitating more amendments
in July 2000. Yet, our knowledge of what transpired after Amsted’s decisions does not render
its course of action at the time imprudent. Plaintiffs have not produced any evidence to show
that the board of directors’ decision to make only two amendments in April 2000 amounted
to a breach of fiduciary duty.

Prohibited Transactions-29 U.S.C. § 1106(a)(1)(A) and (D)

Plaintiffs argue that both Amsted and LaSalle caused the ESOP to engage in prohibited
transactions in violation of § 404(a)(1)(A) and (D) of ERISA, 29 U.S.C. § 1106(a)(1)(A) and (D).
Section 1106(a) states, in part:

Except as provided in section 1108 of this title:
(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction,
if he knows or should know that such transaction constitutes a direct or indirect —
(A) sale or exchange, or leasing, of any property between the plan and
a party in interest; ...
() transfer to, or use by or for the benefit of a party in interest, of any
assets of the plan;....


No. 01 C 2963 Page 9

discretionary authority or discretionary control respecting management of such plan or
exercises any authority or control respecting management or disposition of its assets...” 29
U.S.C. § 1002(21)(A). ERISA allows an individual to serve both as a fiduciary and an officer
or representative of a plan sponsor, thus creating dual roles with different duties and
responsibilities. See 29 U.S.C, § 1108(c)(3). The Supreme Court has found that a plan
administrator is uot acting as a fiduciary when adopting, amending, or terminating a benefit
plan. Lockheed Corp. y. Spink, 517 U.S. 882, 890-91 (1996). Moreover, plan administrators
who are also officers of the plan’s sponsoring employer, assume fiduciary status only when and
to the extent they act as plan administrators, not when they conduct business unregulated by
ERISA. Canale y. Yegen, 782 F.Supp. 963, 967 (D.N.J. 1992)(quoting Payonk v. HMW
Industries, Inc., 883 F.2d 221, 227 (3d Cir. 1989)); see also Martin v. Feilen, 965 F.2d 660, 666
(8" Cir. 1992)(Rejecting the Secretary of Labor’s argument for a broad application of
ERISA’s fiduciary duty, the court stated that even though “[v]irtually all of an employer’s
significant business decisions affect the value of its stock, and therefore the benefits that ESOP
plan participants will ultimately receive,” ERISA fiduciary duties only attach when an
individual invests the ESOP’s assets or administers the plan). Even when a
fiduciary/corporate representative undertakes day-to-day business operations that may have
a collateral effect on employee benefits, ERISA does not require that he operate solely in the
interest of plan participants. Hickman _v. Tosco Corp,, 840 F.2d 564, 566 (8" Cir.
1988)(quoting Phillips v. Amoco Oil Co., 614 F.Supp. 694, 718 (N.D. Ala. 1985), aff'd, 799 F.2d
1464 (11" Cir. 1986)). Thus, to find Amsted defendants liable for breach of fiduciary duty,

we must first find that they were fiduciaries as to the activities at issue.


¢

No, 01 C2963 Page 29

are told that the stock evaluation was too high, primarily because it did not take into account
a presumed likelihood that a higher value would impact the repurchase obligation, although
that “too high” is not quantified. But prior increased valuations, some of similar dimensions,
had not triggered any significant change in stock or employee turnover. The cash crunch
resulted from a turnover increase from 9 or 10 per cent to over 32 per cent, an extraordinary
and wholly unexpected surge. When the dimensions of that cash crisis began to emerge, the
measures taken to stem the hemorrhaging were not imprudent. We recognize that the changes
in Amsted’s fortunes had a far-reaching adverse impact on at least many in the class and
bitterly disappointed their expectations, but that adverse impact is not, by itself, the predicate
of legal liability.
Other Issues and Motions

Given that we have granted summary judgment on all claims discussed above for both
the Amsted defendants and LaSalle, it follows that defendants are also granted summary
judgment for plaintiffs’ § 1105 claims seeking liability against defendants for their co-
fiduciaries’ violations. Plaintiffs’ motion for summary judgment is denied and defendants
Berg, Sopranos and Chiappetta’s motion for summary judgment is moot.

co) SION

For the foregoing reasons, the Amsted defendants’ and LaSalle’s motions for summary

judgment are granted, Plaintiffs’ motion for summary judgment is denied. Defendants Berg,

Sopranos and Chiappetta’s motion for summary judgment is moot, and is therefore denied.

JAMES B. MORAN
Senior Judge, U. S. District Court

Nabe D4V_, 2004,


*

No, 01 C 2963 Page

summary judgment does not mandate the success of the other party’s motion.

In over 200 pages of briefs the parties present their arguments for summary judgment
on plaintiffs’ claims for breach of fiduciary duty, which they allege resulted in a $167 million
to $202 million loss for Amsted’s ESOP. Plaintiffs’ first amended complaint alleges five counts
against defendants. Count I alleges defendants are liable for numerous breaches of fiduciary
duty under 29 U.S.C. § 1109. In Count II, plaintiffs allege that defendants wrongfully denied
their claims and benefits in violation of 29 U.S.C. § 1132. Plaintiffs argue that defendants made
unlawful amendments to the ESOP in Count II. Counts IV and V, brought on behalf of a
subclass for breach of contract and conversion, were dismissed as to all defendants. Count II
was also dismissed against LaSalle. Both Counts II and III were dismissed for certain plaintiffs
who filed their suits after the prescribed ESOP time limit for challenging the plan
administrator’s final decision.

Since plaintiffs filed their complaint their theories have undergone some transformation,
causing them to drop their claim that defendants unlawfully amended the ESOP. Plaintiffs now
maintain that the amendments were necessary (and in fact should have been enacted sooner),
but only due to defendants’ earlier breaches of duty resulting in significant losses to the ESOP
assets, As plaintiffs’ view of the amendments have changed, Count II, alleging wrongful denial
of benefits, has apparently also been disregarded.

Plaintiffs do not contend that any defendant acted dishonestly or engaged in self-dealing

or was guilty of disloyalty.’ This is not a case about insiders acting for their own benefit or

‘Plaintiffs do suggest that any analysis of the Varlen acquisition by Amsted is somehow tainted
because it was not expressly for the ESOP participants. Who did what for whom may well affect the
standard of judicial review, but undertakings for Amsted are undertakings for Amsted’s stockholders and the
Amsted stockholders are the ESOP participants, Further, plaintiffs seek to question the independence of the
trustee and consultants because they were paid for their efforts. But so long as what they were paid is
reasonable and customary, that cannot provide a basis for challenge — otherwise every trustee and expert has
a conflict.


a

>

No. 01 C 2963 Page S

ESOP, eliminating the right to a lump sum cash payout and eliminating the joint and survivor
annuity option, Amsted now bought terminating employees’ company shares with promissory
notes, which paid out in annual installments over four years. As the redemption rate continued
to increase, Amsted’s board of directors voted unanimously to further amend the ESOP plan
document at its regularly scheduled meeting on July 18, 2000. Share valuations were now made
quarterly, not annually. To become immediately eligible for an ESOP distribution,
participants had to retire at age 65, be 55 with 30 years of service, or be permanently disabled
Those not immediately eligible had to wait five years after terminating employment, or until
the ESOP loan was repaid, whichever occurred last. Also, Amsted’s contributions to
participants’ accounts were reduced.
DISCUSSION
The function of the court in ruling on a motion for summary judgment is to determine

if there is a genuine issue of material fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S,

242, 249 (1986). If the evidence on file shows that no such issue exists and that the moving party
is entitled to judgment as a matter of law, we will grant the motion, Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986); Bennett v. Roberts, 295 F.3d 687, 694 (7* Cir. 2002). A
“metaphysical doubt as to the material facts” is not enough to create a genuine issue of fact for

trial, Matsushita Elec, Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585 (1986); the

evidence must allow for a reasonable trier of fact to find for the non-movant. Buscaglia v.
United States, 25 F.3d 530, 534 (7" Cir. 1994). When reviewing a motion for summary

judgment we draw all inferences in the light most favorable to the non-movant. DeValk

Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326, 329 (7" Cir, 1987). The court considers

plaintiffs’ and defendants’ cross-motions independently — the failure of one party’s motion for


2

No. 01 € 2963 Page 18

Section 1108 provides that these transactions are permitted as long as they are made for
adequate consideration. 29 U.S.C. § 1108(e)(1).. Defendants argue that this section does not
apply to the benefits payments that were made to retired employees who opted for a cash
payout on their ESOP holdings. We agree.

We need not address whether the retired employees were parties in interest because
even if they are, § 1106 does not implicate these payouts. The Supreme Court has stated that
the common thread among § 1106's prohibited transactions is that they “generally involve uses
of plan assets that are potentially harmful to the plan.” Lockheed Corp. v. Spink, 517 U.S.
882, 893 (1996). This assessment explains why the burden of proof shifts to the fiduciary to
show that adequate compensation was provided, once it is established that a transaction falls
under § 1106.

Not all payments by an ERISA plan are transactions under § 1106(a)(1). In Lockheed
Corp., the Court held that the payment of benefits to a plan participant in accordance with the
terms of a pension benefit plan did not violate § 406(a)(1)(D), prohibiting the transfer of plan
assets to a party in interest. The Supreme Court explained, “[T]he payment of benefits in
exchange for the performance of some condition by the employee is not a ‘transaction’ within
the meaning of § 406(a)(1).” Lockheed Corp., 517 U.S. at 1792. Asin Lockheed Corp., Amsted
employees received benefits under the Amsted ESOP in exchange for their service to the
company.

In an attempt to distinguish their prohibited transaction claim from the one in
Lockheed Corp., plaintiffs present two different views of the elements of a § 1106 claim. First,
plaintiffs maintain that to establish a § 1106 claim they need only show that a fiduciary used

plan assets to purchase employer stock from a party in interest. Citing Keach v. U.S. Trust


»

No. 01 C2963 Pages

the ESOP committee members and the plan administrators, they were fiduciaries of the ESOP.”
Section 404 of ERISA, 29 U.S.C. § 1104, imposes duties upon fiduciaries managing plan assets.
It states, in part:

[A] fiduciary shall discharge his duties with respect to a plan solely in the
interest of the participants and beneficiaries and —
(A) for the exclusive purpose of:

(@® 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 pradent man acting in a 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
Josses, unless under the circumstances it is clearly prudent not to do so; and
(@) in accordance with the documents and instruments governing the plan
insofar as such documents and instruments are consistent with the provisions
of this subchapter and subchapter III of this chapter.

Due to the nature and purpose of the ESOP, a fiduciary does not violate the
diversification requirement or the prudence requirement (to the extent. it requires
diversification) when an ESOP acquires or holds shares of the plan sponsor’s stock. See 29
U.S.C. § 1104(2), Plaintiffs do not allege that the Amsted defendants failed to diversify; rather,
they allege defendants did not act for the exclusive benefit of the ESOP participants and that
they acted imprudently. Plaintiffs bring their claims pursuant to § 409 of ERISA, which
imposes liability on a plan’s fiduciary for any losses to the plan resulting from the fiduciary’s
breach of duties or obligations. 29 U.S.C. § 1109(a).

Under ERISA, a person may be a fiduciary for some purposes, but not for others. See

Plumb v. Fluid Pump Service, Inc., 124 F.3d 849, 854 (7" Cir. 1997). Section 1002(21)(A) states

that “[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any

2 In their response to the motion by Berg, Chiappetta and Sopranos, plaintiffs agree to dismiss their
complaint against Sopranos.


2

No. 01 C2963 Page 24

monitor the transaction.

Plaintiffs allege that LaSalle also breached its fiduciary duty with regard to Amsted’s
repurchase obligation by both failing to properly monitor and evaluate Amsted’s projections,
and failing to take the obligation into account in its valuation of Amsted’s stock. Plaintiffs’
maintain that LaSalle’s alleged failure to monitor Amsted’s repurchase obligation forecasts
constitutes a breach of fiduciary duty. This claim fails for the same reason plaintiffs’
repurchase obligation claim failed against the Amsted defendants — there is no evidence that,
even if Amsted had used less conservative assumptions in its forecasts, it would have
predicted an increase in redemptions that would threaten its cash flow.

Amsted Stock Valuation

Plaintiffs’ central complaint against LaSalle is its alleged breach of fiduciary duty in
valuing Amsted’s stock. Under the terms of the plan document, LaSalle, as trustee of the
Amsted ESOP, was responsible for determining the fair market value of the company’s stock.
Plaintiffs argue that LaSalle breached this duty as trustee of the ESOP by (1) failing to ensure
that Duff & Phelps (D&P), the valuation company it hired, had complete and correct
information, and made proper assumptions for its valuation, especially regarding the Varlen
acquisition and Amsted’s repurchase obligation; and (2) failing to apply a marketability
discount.

eli Valu:

LaSalle maintains it is both appropriate and customary for a trustee to hire an
independent expert, such as D&P, to value a plan sponsor’s stock, and that LaSalle’s reliance
on D&P’s finding was not imprudent. Plaintiffs recognize that securing an independent

assessment of a stock valuation from a financial advisor or legal counsel is evidence of a


2 Rhtite Orie Form (0697)
4 nited States District Court, Northern District of Mlinois

Nameefei@easwiee | Tames B. Moran | Seder One
CASE NUMBER 01 C 2963 (MDL 1417) DATE 7/29/2004
CASE JUAN ARMSTRONG, et al vs. AMSTED INDUSTRIES, INC., et al
TITLE
[in the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
Motion: of the motion being presented.)
MEMORANDUM OPINION AND ORDER
DOCKET ENTRY:
qQ) dD Filed motion of [ use listing in “Motion” box above.) Y
(2) mi Brief in support of motion due___. . ,
(3) Qo Answer brief to motion due. . Reply to answer brief due__.
4) a Ruling/Hearingon set for_____at
(5) QO Status hearing[held/continued to) [set for/re-set for]on___setfor__at
(6) Qo Pretrial conference[held/continued to] [set for/re-set for]on____—ssetfor_——sat_
mM .0 Trial[set for/re-set for]on___—_at.
(8) dD [Bench/Jury trial] [Hearing] held/continuedto_——sat_—
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OFRCP4(m) O Local Rule 41.1 OFRCP41(a)(1) [4 FRCP41(a)(2).

(0) xB {Other docket entry} | Enter Memorandum Opinion And Order. The Amsted defendants’ and
LaSalle’s motions for summary judgment are granted. Plaintiffs’ motion for summary judgment is denied.
Defendants Berg, Sopranos and Chiappetta’s motion for summary judgment is moot, and is therefore
denied. All pending motions and dates are now moot.

(i) [For further detail see order attached to the original minute order.)

No notices required, advised in open court.
‘No notices required. umber of notices
Notices mailed by judge's staff. JUL 3 0 2008
Notified counsel by telephone. docketed
wv | Docketing to mail notices.
A Mail AO 450 form. uisia “sn fi i.
coven pun jas fi)
courtroom SOlk P4002 Sane nape novice
Le deputy's as :OlkW O€ TH o
initials Paine Gara ta
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No. 01 C 2963 Page ll

over the plan’s assets. Amsted did not use ESOP assets to purchase Varlen.

Reich reaffirms that an individual must be dealing with a plan’s assets to be subject to
ERISA’s fiduciary duty. Though plaintiffs argue that there was a general failure on the part
of defendants to assume their role as fiduciaries, they appear to recognize that the Amsted
defendants only need to don their “fiduciary hat” when they are exercising authority or
control over ESOP assets or administering the plan. Though the Amsted ESOP’s assets are
the shares of Amsted, properties acquired and owned by Amsted are not plan assets.
Department of Labor Regulations, 29 C.F.R. § 2510.3-101(a)(2). Therefore, Amsted’s
acquisition of Varlen did not involve authority or control over plan assets.

‘epurchase Obligatio:

Plaintiffs also allege that the Amsted defendants violated their fiduciary duties with
regard to forecasting their obligation to repurchase stock from retiring ESOP participants.’
Amsted defendants respond that, as with the Varlen purchase, no fiduciary duty applies to the
analysis of their repurchase obligation. However, these forecasts are not as easily classified
as business decisions or transactions, If an employer sponsors an ESOP that distributes shares
not traded on the open market, the Internal Revenue Code requires that the ESOP
participants have the right to sell their shares to the employer for a fair price. 26 U.S.C. §
409(h)(1)(B). The ESOP participant’s right to redemption is called a “put option” and the
burden created for the employer/plan sponsor is its “repurchase obligation.” Up until the

Amsted ESOP was amended in 2000, participants had the right to a lump sum cash payment

3 This allegation is entwined with the Varlen allegation, for plaintiffs are arguing in part that
defendants’ breach stems from their failure to recognize that the Varlen purchase created a significant risk
that Amsted would not be able to meet its obligation to the ESOP participants. While recognizing the
interplay between the allegations, they can be separated Into distinct claims and should be for the sake of
clarity.


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No, 01 C2969 Page @

Varlen Acquisition

The Amsted defendants argue that their decision to purchase the Varlen Corporation
and their forecasting of their repurchase obligation are business decisions and activities that
do not trigger a fiduciary duty under ERISA. Plaintiffs recognize that the Varlen acquisition
was not a fiduciary act (‘Amsted Defendants argue they cannot be liable for participating in
the decision to acquire Varlen. Plaintiffs do not claim that they are” (Class Plaintiffs’ Brief
14)), but claim that the Amsted defendants still breached their duty in regards to this matter
by “never put[ting] on their fiduciary hat.”

Plaintiffs rely on Reich v. Hall Holding Co., 990 F. Supp. 955 (N.D. Ohio 1998), aff'd
285 F.3d 415 (6 Cir. 2002), to support their contention that the Amsted defendants’ purchase
of Varlen, and analysis of its repurchase obligation, triggered fiduciary obligations that the

defendants chose to ignore. In Reich, ESOP fiduciaries were sued for breach of duty after the

ESOP purchased stock in the plan sponsor for $3.5 million, allegedly more than adequate
consideration. The court rejected defendants’ argument that the decision to purchase this
stock was not a fiduciary decision because it was part of the establishment of the ESOP. The
court distinguished the acquisition of these assets from the establishment of the ESOP and
stated that ERISA fiduciary provisions apply in this case because “a person is a fiduciary to
the extent... he exercises any authority or control respecting management or disposition of
[a plan’s] assets.” Id. at 960 (quoting 29 U.S.C. § 1002(21)(A)). The court further noted that
an ESOP’s purchase of employer stocks requires the plan fiduciaries to investigate the fair
market value of the stock to ensure that adequate compensation is paid, The circumstances
in Reich are too distinct from those in this case to provide support for plaintiffs’ argument.

In Reich, fiduciaries used ESOP assets to purchase employer stock — clearly exercising control


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No. 01 C 2963 Page?

corrupt intent or greed. Plaintiffs also recognize that the financial or business advisors upon
whom various defendants relied were independent, reputable, experienced and expert in the
areas in which they were here involved. Even so, they contend that the defendants are liable
for what was, indisputably, a precipitous decline in the value of the employees” ESOP shares,
Plaintiffs focus on their theories of defendants’ breach of fiduciary duties. They argue that
defendants breached 29 U.S.C. § 1104, which establishes a fiduciary’s general duties; § 1105,
which establishes liability for the breach of a co-fiduciary; and § 1106, which prohibits certain
transactions likely to injure a pension plan. We will address each parties’ summary judgment

motion in turn.

Amsted Defendants’ Motion for Summary Judgment

An ESOP is an ERISA plan allowed to invest primarily in “qualifying employer
securities,” typically shares of the employer’s stock. 29 U.S.C. § 1107(d)(6)(A). Since the ESOP
acts as both an employee retirement benefit plan and a method of corporate finance through

employee ownership, it is not designed to guarantee retirement benefits. See Moench v.

Robertson, 62 F.3d 553, 568 (3d Cir. 1995). By its nature, the ESOP puts its assets at greater
risk than a typical diversified ERISA plan. Kuper vy. Iovenko, 66 F.3d 1447, 1457 (6" Cir.
1995), While ERISA provisions cannot eliminate the risk inherent in an ESOP, they seek to
ensure that ESOP fiduciaries properly manage a plan’s assets for the benefit of its participants.
Plaintiffs maintain that Amsted defendants violated ERISA provisions in the breach of their
fiduciary duty, thus placing the ESOP’s assets at risk.

Other than Berg, Chiappetta and Sopranos, who filed a separate motion of summary

judgment which will be discussed later, the Amsted defendants agree that as the plan sponsor,


No. 01 C2963 Page 21

standard in reviewing a fiduciary’s determination of a fair market price for a prohibited
transaction, such as the sale of the fiduciary’s own stock to the ESOP. Jd.

Plaintiffs also rely on Horn v. McQueen, 215 F.Supp. 2d 867 (W.D. Ky. 2002), to explain
why a deferential standard was used in Kuper and Moench, but should not be used in
LaSalle’s case. In Horn, the court acknowledged the application of the arbitrary and
capricious standard in the circuit court cases, but applied the prudent man standard because
the allegations against the fiduciary did not involve investment decisions but, rather, involved
overpayment for employer securities. Id. at 374-75.

Like in Horn, plaintiffs have attempted to fashion a §1106 claim for prohibited
transactions against LaSalle. However, LaSalle’s alleged breaches are more akin to those in
Kuper and Moench than those in Eyler and Horn. LaSalle is an independent trustee accused
of failing to rigorously and prudently review the valuation of Amsted’s stock. It is not a
fiduciary/employer representative accused of inflating the value of its own stock and then
selling it to the ESOP, or buying stock from the ESOP at a discounted rate. Nor is there
sufficient evidence for a reasonable factfinder to determine that LaSalle was engaged in self-
dealing. According to plaintiffs, LaSalle’s alleged failure to question Amsted’s purchase of
Varlen was motivated by a desire to preserve its annual trustee fee and ensure good corporate
relations. Thus, plaintiffs argue, LaSalle’s inaction amounts to “deal[ing] with the assets of
the plan in [its] own interest or for [its] own account....” See 29 U.S.C. § 1106(b). As we
explained above, and will discuss further below, the Varlen purchase did not implicate
fiduciary duties. Furthermore, even if there was a question of LaSalle’s fulfillment of its duties
as the ESOP trustee, plaintiffs provide no facts that create a question of self-dealing by

LaSalle. The mere fact that LaSalle was compensated for its services as trustee does not raise


4

No. 01 C 2963 Page 27

In their arguments that LaSalle was not vigilant enough in its review of D&P’s
valuation, plaintiffs rely heavily on Donovan v. Cunningham, 716 F.2d 1455 (5” Cir. 1983).
As in Eyler, the defendant fiduciary in Cunningham sold shares of the sponsor company’s
stock to the ESOP. Id. at 1474. The sale price was found not to be adequate consideration
but, rather, in excess of fair market value. Jd. The fiduciaries in Cunningham argued that
the sale price was taken from an investment firm’s independent valuation of the stock.
However, the transactions at issue took place over a year after the valuation. Id, at 1468-69.
Not only was the valuation out of date, it was based on expectations of revenues that had
clearly not materialized by the time of the stock sales. Jd. LaSalle’s reliance on D&P’s
valuation does not equate with the Cunningham fiduciaries’ reliance on an out-of-date
valuation that contained information which time had conclusively proven false. D&P’s
valuation contained assumptions that experts may have differed on, but that does not render
LaSalle’s reliance on the valuation a breach of fiduciary duty.

Marketability Discount

Plaintiffs rely on Eyler for the proposition that LaSalle’s failure to apply a
marketability discount was imprudent. In Eyler, the defendant appealed a tax court’s
holding that a marketability discount should have been applied to the price of his company’s
stock, shares of which were sold to the company ESOP. Eyler v. Commissioner of Internal
Revenue, 88 F.3d 445, 453 (7" Cir. 1996). The Seventh Circuit rejected defendant’s argument
that no marketability discount should apply because ESOP participants had a “put option,”
allowing them to sell the shares to the company. Jd. The court rejected this argument “for
the fundamental reason that as of the date of the ESOP transaction, [the company] had no

history of paying ESOP distributions in cash.” Jd, The court’s fundamental reason for


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No. 01-C 2963 Page 3

purchase, Amsted had approximately $200 million in available credit.

About a month after Amsted purchased Varlen, the annual value of Amsted stock was
determined. Under the then current terms of Amsted’s ESOP plan document, the ESOP trustee
was responsible for setting the fair market value of Amsted’s stock annually on the last day of
the fiscal year. LaSalle, the ESOP trustee, hired an independent investment banking firm to
perform the valuation. For many years William Blair & Company valued the shares, but in
1998 LaSalle hired Duff & Phelps to perform the valuations, From the inception of the ESOP
through 1998, the percentage change in annual stock value ranged from -11.7 per cent from
1989 to 1990, to 32.1 per cent from 1987 to 1988. To determine the value of Amsted’s stock,
Duff & Phelps performed due diligence review of the company by evaluating financial forecasts
and cash flow projections, and meeting with executives in key operating divisions to discuss
financial reporting and business plans. While defendants maintain that Duff & Phelps’
workpapers reflect that their valuation took into account a forecast of Amsted’s repurchase
obligation, plaintiffs contend that Amsted never supplied Duff & Phelps with information on
this obligation and the financial analysts never considered it in performing their valuation.
Duff & Phelps did not conduct an independent analysis into the price paid for Varlen — its
valuation assumes that fair market value was paid. Nor did the firm discount the valuation for
Jack of marketability — the inability to sell the stocks on the open market.

On October 25, 1999, Duff & Phelps presented its valuation of Amsted stock at $184.41
per share to LaSalle’s ESOP fiduciary committee for review and approval. Duff & Phelps
provided summaries that indicated the share price was the same regardless of whether or not
the Varlen acquisition was considered. LaSalle approved the valuation, after which neither

Amsted nor the ESOP committee could reject it. The stock value was set at $184.41 as of


No. 01 C2963 Page 14

that share redemptions would increase to over 30 per cent between 1999 and 2000.

Despite the fact Amsted’s repurchase obligation estimates were wrong, its treatment
of this issue did not constitute imprudence. Indeed, plaintiffs’ expert, Clawson, admits that
the forecast of a pradent analysis may be followed by a higher turnover rate than predicted.
The two primary factors Clawson identified, the historical share turnover rate and the
assessment of employee attitudes toward the ESOP, would not have indicated that the Amsted
defendants should have predicted a redemption rate of over 30 per cent in 2000. Ellis, another
plaintiffs’ expert, admits that “[i]t was not knowable in advance what the percentage increase
would be or even with certainty that there would be an increase...” (Ellis Dep. 244).
Defendants’ expert, Larry Levine, supports this assertion with his statistical survey, finding
there was less than a one percent probability that the 2000 turnover rate would have occurred
(Levine Report 14-15). After the Varlen purchase, Amsted had $200 million in unused credit
from its unsecured Citibank loan. There is no indication from plaintiffs’ or defendants’
experts that the most prudent of fiduciaries would have determined that this cash cushion
would not suffice to meet Amsted’s repurchase obligation.

In support of their argument that Amsted abdicated its duty with regards to forecasts
of its repurchase obligation, plaintiffs highlight a comment by Joseph Newman, former
Amsted controller. During his deposition, Newman stated that an evaluation of the repurchase
obligation is an “exercise in futility” (Newman Dep. 177-78). Despite plaintiffs’ claim, this is
not evidence of defendants’ disregard of Amsted’s obligation. Newman’s deposition clearly
illustrates that he was using “repurchase obligation” to mean not just Amsted’s obligation to
satisfy quarterly or annual redemptions, but the obligation it would have if all the outstanding

shares were redeemed ~ an obligation that “is not going to come into being unless the entire


No. 01 C 2963 Page 16

experts’ standards and uses their assumptions, would have led Amsted to predict the

redemption crisis and take proper precautions. The Amsted plan participants fail to provide

sufficient evidence that a proper forecast, even with an increased turnover rate, would have

caused a reasonable fiduciary to question whether Amsted’s cash cushion was adequate.
Plan Amendments

Though plaintiffs originally argued that Amsted’s amendments to the ESOP plan
document were breaches of fiduciary duty, they now argue that defendants’ failure to take
such action sooner was the breach. For plaintiffs to support this claim, they must evidence
more than just defendants’ failure to predict this cash flow crisis (which, as discussed above,
is not a failure that constitutes a violation of the prudent person standard), Plaintiffs must
show that the Amsted defendants sat by, ignoring ESOP participants’ interests, as the higher
than expected redemption rate caused a financial crisis, The evidence cannot support such a
finding.

Defendants argue that plaintiffs cannot bring a breach of fiduciary duty claim for
failure to amend the plan document because amending a plan is an administrator’s settlor
function, not a fiduciary function, and therefore not subject to claims of breach of duty.
Amending a plan is a settlor function. See Lockheed Corp. v. Spink, 517 U.S. 882, 890-91
(1996). Nonetheless, plaintiff's contend that the ESOP plan and trust documents, relevant at
the time of the ESOP’s escalating redemption rates, imposed a fiduciary duty on defendants
even when making amendments to the plan. Assuming that defendants had a fiduciary duty,
stemming not from ERISA law but from the Amsted ESOP’s plan document, there is no
evidence that defendants breached this duty by ignoring remedial actions,

Plaintiffs maintain that once the liquidity crisis became clear to Amsted in late


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No. 01 C 2963 Page 2

2002 WL 31818964 (N.D.IL. 2002).

Amsted, a manufacturer of industrial products, was a publicly-traded company until
1986, when it became wholly employee-owned through an ESOP. The ESOP distributes shares
of the corporation into Amsted employees’ individual retirement accounts at the end of each
fiscal year. The addition of new shares and changes in Amsted’s stock price causes the value
of the accounts to fluctuate. The ESOP’s named fiduciary is Amsted’s ESOP Committee,
though the Committee may delegate authority to other individuals, plan administrators, who
then also assume fiduciary responsibility. Plaintiffs’ claims stem from three central concerns:
Amsted’s purchase of Varlen Corporation (Varlen), Amsted’s obligation to repurchase ESOP
stock from its retiring employees, and LaSalle’s valuation of the ESOP stock.

In early 1999, Amsted’s president, Arthur Goetchel, seriously began to consider
acquiring the publicly-traded company, Varlen. After receiving advice from the investment
banking firm, Salomon Smith Barney (Salomon), and meeting with its board of directors,
Amsted attempted a friendly acquisition of Varlen. Amsted’s initial offer of $33 per share was
rejected, after which the company participated in an auction , purchasing the Varlen shares for
$42 per share ~ 50 cents more than the next highest bidder. During this process, Amsted, its
lenders, and Salomon, analyzed the effects of purchasing Varlen at various costs. Plaintiffs
maintain that Amsted did not, however, sufficiently consider the effect on the ESOP.
Specifically, plaintiffs allege that Amsted created a significant risk that it would not be able to
meet its obligation to repurchase ESOP shares after taking on the debt of the Varlen purchase.
Before Amsted’s purchase of Varlen was finalized on August 16, 1999, Salomon issued a
fairness opinion on the transaction which found that the price to be paid for the stock was fair.

Amsted financed the purchase with a $1 billion unsecured loan from Citibank. Following the


*

No, 01 C 2963 Page 25

thorough investigation, but argue that it is not a complete defense to a claim of imprudence
against a fiduciary responsible for the valuation. Citing Howard v. Shay, 100 F.3d 1484, 1489
(9" Cir. 1996), they argue the fiduciary must also (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. Shay involved
a fiduciary accused of self-dealing who had the burden of proving that he fulfilled his
fiduciary duties and that the ESOP received adequate consideration for its assets. Id, at 1488.
As we have explained above, this is not a case of self-dealing — plaintiffs have not offered any
evidence of self-dealing by Amsted or LaSalle,° nor does the ESOP’s purchase of retiring
participants’ shares amount to prohibited transactions, LaSalle does not bear the burden
of showing that adequate consideration was paid for the shares, Rather, plaintiffs must show
that LaSalle’s valuation was in some way imprudent, and thus a breach of fiduciary duty.
Even if the standard developed in Howard applies to LaSalle, who was not involved in self
dealing or a prohibited transaction, a reasonable trier of fact could not find that this trustee
violated it.

D&P’s credentials as an expert in valuation are not at issue — plaintiffs did not dispute
that D&P was “one of the premier ESOP valuation firms in the United States” (Defs’ 19).
Plaintiffs do dispute that LaSalle ensured that D&P had accurate information and made
proper assumptions when performing its valuation. Plaintiffs argue that D&P did not have

full access to documentation on Varlen or Amsted’s acquisition of the company, nor did it

®This distinction between Shay and the Amsted case can be made with the other cases on which
plaintiffs primarily rely, Donovan vy. Cunningham, 716 F.2d 1455 (5" Cir. 1983), and Eyler v. Commissioner
of Internal Revenue, 88 F.3d 445 (7 Cir. 1996). It is a significant distinction because the scrutiny of a
fiduciary’s decisions are justifiably stricter when it is involved in a transaction that provides personal benefit,
The suspect nature of such transactions also explains why the burden of proof transfers to the fiduciary in
such cases,


s

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

DOCKETED
JUAN ARMSTRONG, et al., )

) Jur 3.0 2004
Plaintiffs, )
)

vs. ) No, 01 C 2963
) MDL 1417

AMSTED INDUSTRIES, INC., etal, —)
)
Defendants, )

MEMORANDUM OPINION AND ORDER

Plaintiff class brought this action against Amsted Industries, Inc. (Amsted), the Amsted
Employee Stock Ownership Plan (ESOP), Amsted ESOP committee members, Amsted plan
administrators, two Amsted vice-presidents, and LaSalle Bank (LaSalle), for violations of the
Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq., (ERISA).
Plaintiffs; the Amsted defendants (all defendants except LaSalle); LaSalle; and defendants,
Thomas Berg, O.J. Sopranos, and Robert Chiapetta, have all filed motions for summary
judgment. The Amsted defendants’ and LaSalle’s motions for summary judgment are granted.
Plaintiffs’ motion is denied, and Berg, Sopranos and Chiapetta’s motion is moot.

BACKGROUND

This action arises from defendants’ management of Amsted’s Employee Stock
Ownership Plan (ESOP). Complaints were filed separately, but then consolidated and
transferred to this court by the multi-district litigation panel. We ordered plaintiffs to file two
amended complaints: one for Amsted retirees and one for non-retirees. These motions for
summary judgment relate to the claims of the non-retirees, whom we certified as a class

(Armstrong class) on December 16, 2002. In re Amsted Industries, Inc. “ERISA” Litigation,

q\\


No, 01 2963 Page 28

requiring a marketability discount does not apply in LaSalle’s case. Amsted did have a
history of paying cash for ESOP participants’ redeemed shares.

In his deposition, plaintiffs’ expert, Kace Clawson, stated the application of a
marketability discount is a “subjective determination by the valuation appraiser” (Clawson
Dep. 12). D&P applied a zero per cent marketability discount to its October 1999 valuation
of Amsted stock. Given Amsted’s history of paying terminated participants their benefits
quickly, and in full, its bylaws calling for the stock to be treated as if sold on the open market,
and its precedent of not applying a marketability discount, no reasonable trier of fact could
find that LaSalle breached its duty in accepting D&P’s expert opinion.

Plan Amendments

Plaintiffs also seek to impose co-fiduciary liability on LaSalle for failure to amend the
ESOP plan document sooner. This fails both because amending the plan is a settlor function’,
for which the ESOP plan committee was responsible, and because, as explained above, the
Amsted defendants did not violate the prudent person standard in reaching their decisions to
amend the plan.

The Varien acquisition resulted in a very sizable debt, but that was not the source of
Amsted’s cash flow problems. We are told that the business plan contemplated the servicing
of that debt from the Varlen operations, and we are not directed to any evidence that they did
not—or, more importantly, that it was imprudent to believe that those operations could service
that debt. That acquisition still left about $200 million credit available for the repurchase of

ESOP shares from its retiring employees, far more than historically had been necessary. We

“Even if the plan documents imposed fiduciary liability on the administrators when making plan
amendments (as discussed in our analysis of the Amsted defendants’ motion), that does not mean amendments
are no longer a settlor function, only that the settlor is now subject to fiduciary responsibilities.


No. 01 C 2963 Page 12

when they exercised their “put option.” As fiduciaries to the plan, the Amsted defendants
could not ignore this obligation - imposed by law and the terms of plan — to the ESOP
participants. Thus, they had a duty to prudently manage their repurchase obligation.

Under the prudent person standard, a fiduciary must act “with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent man acting
in a like capacity and familiar with such matters would use in the conduct of an enterprise of
a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B). The prudence of a fiduciary’s
actions must be evaluated from the perspective of the time of his actions, not with the benefit
of hindsight. Katsaros y. Cody, 744 F.2d 270,279 (2d. Cir. 1984); Metzler y. Graham, 112 F.3d
207, 209 (5" Cir. 1997). As the Seventh Circuit has noted, “[F]iduciary duty of care requires
prudence, not prescience.” DeBruyne v. Equitable Life Assurance Society, 920 F.2d 457, 465
(7 Cir. 1990).

Plaintiffs argue the Amsted defendants were not making proper assumptions in their
analysis of the repurchase obligation, nor monitoring important factors for the analysis, such
as the age of ESOP participants, but rather were relying only on historical data. Plaintiffs’
expert Kace Clawson testified that a repurchase obligation analysis focuses primarily on stock
value, the company’s turnover rate and the ESOP terms for repurchase of the stock, but it also
involves “a complete survey of the company, its employees, their ages, estimates of turnover
rates” (Clawson Dep. 18). Clawson affirmed that estimates of future turnover are subjective,
based on historical turnover and the company’s assessment of the attitude of its current
employees (Clawson Dep. 19-20). Wilson Ellis, another plaintiffs’ expert, testified that Amsted
should have taken more information into account in forecasting its repurchase obligation, such

as the increase in redemptions in the years immediately prior to 1999, the value of


No. 01 C 2963 Page 1

company — every employee inputs his shares”* (Newman Dep. 178). The “exercise in futility”
is not forecasting what Amsted will have to pay in any given year for share redemptions, but
determining what it would have to pay if every plan participant redeemed his shares.

Even if plaintiffs have evidenced that Amsted’s assumptions and analysis regarding its
repurchase obligation were too conservative, they have not evidenced that defendants’
misjudgment caused harm to the ESOP. A causal connection between plan losses and the
breach of fiduciary duty is necessary. Kuper v. lovenko, 66 F.3d 1447, 1459-60 (6" Cir. 1995).
In Kuper, participants in an ESOP brought an ERISA action for breach of fiduciary duty
against the plan fiduciaries for failure to investigate and evaluate the appropriateness of the
ESOP’s assets after a substantial decline in the value of its primary holding, Id, at 1459. The
court affirmed summary judgment for the defendant, explaining, “[T]o show that an
investment decision breached a fiduciary’s duty to act reasonably in an effort to hold the
fiduciary liable for a loss attributable to this investment decision, a plaintiff must show a
causal link between the failure to investigate and the harm suffered by the plan.” Jd. (citing
Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 279 (2d Cir. 1992)). The court
determined that plaintiffs had failed to demonstrate this causal connection — there was no
showing that “an adequate investigation would have revealed to a reasonable fiduciary that
the investment at issue was improvident.” Jd. at 1460. Though plaintiffs do not allege a failure
to investigate ESOP investments, their allegations are similar. They maintain that the
defendants failed to properly investigate and forecast their repurchase obligation to ESOP

participants, But, plaintiffs have not shown that an investigation, which conforms to their

5 Earlier in his deposition Newman states, “A repurchase obligation is the total valuation of all shares
that bave not been tendered for distribution. The shares held by the — the value of the shares held by the
participants who are still active in the plan” (Newman Dep. 55).