# United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 96-2256

___________ Melody Ann Felber; Estate of * William Marion Donelson, * * Plaintiffs - Appellees, * * v. * Appeal from the United States * District Court for the Estate of Robert J. Regan; * District of Minnesota. Profit Sharing Plan of Osseo- * Brooklyn School Bus Company; * Osseo-Brooklyn School Bus * Company, * * Defendants - Appellants. *

___________ Submitted: February 14, 1997 Filed: July 1, 1997

___________ Before MAGILL, BEAM, and LOKEN, Circuit Judges.

___________ LOKEN, Circuit Judge.

A Department of Labor investigation concluded that Robert Regan , trustee of the Osseo-Brooklyn School Bus Company Profit Sharing Plan (“the Plan”), had engaged in prohibited and imprudent transactions that violated his fi duciary duties under the Employee Retirement Income Security Ac t (“ERISA”), 29 U.S.C. §§ 1001 et seq . After the Department acquiesced in voluntary compliance efforts, including appointment of a new, independent trustee, certain Plan beneficiaries commenced this private action against Regan and the Bus Company seeking compensatory relief on behalf of th e Plan.

### The HONORABLE WARREN K. URBOM, United States District Judge 1 

### for the District of Nebraska, sitting by designation.
2 When Rega n died before trial, his estate was substituted as a part y defendant. After the bench trial, the district court conclude d that Regan 1 twice breached fiduci ary duties as trustee and awarded $287,269.27 to the Plan and $146,750 to plaintiffs for their attorneys’ fees. Defendant s appeal, challenging only the relief awarded. We affirm.

I. The Relief Afforded to the Plan.

ERISA imposes exacting duties on the fiduciaries who control em ployee benefi t plans to protect the interests of plan participants an d beneficiaries. In investing plan assets, for example, ERISA fiduciaries must act solely in th e interest of plan beneficiaries and “with the care, skill, prudence, and diligence [of] a prudent man acting in a like capacit y and familiar with such matters.” 29 U.S.C. § 11 04(a)(1)(B). In addition, fiduciaries must avoi d engaging in prohibited transactions, such as selfdealing. See 29 U.S.C. § 1106. When these duti es are breached, 29 U.S.C. § 1109(a) provides th at the fiduciary “shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to suc h plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary.” The principal issu e on this appeal is whether the district court correctly applie d § 1109( a) to two transactions in which Regan improperly invested Pla n assets.

### 3 A. The School District Transaction.

In November 1988, Regan bought a sch ool bus terminal for $820,000 at
a bankruptcy auction, planning to resell the property to Independent Schoo l Distri ct #196 (the “School District”). After financing the initia l purchase with an $820,000 “bridge loan” from First Bank Robbinsdale (“Firs t Bank”), Regan began negotiating a lease/purchase agreement with the School District and long ter m financing with First Bank. In January 1989, First Bank offered Regan a long-term $820,000 loan, bearing interest at 11.0% th e first year and at a floating rate thereafter, an d secured by a mortgage on the terminal property, a corporate guaranty from the Bus Company, a pledge of $200,000 of certificates of deposit owned by Regan, and assignment of the School District’s lease payments. In Apri l 1989, Regan and the School District entered into a lease/ purchase agreement. The School District leased the terminal fo r $17,969 pe r month for the fifty months commencing May 1,1989, and wa s granted an option to buy the property for $594,292 at the end of the lease

. Wit h this commitment in place, Regan turned down First Bank’s permanen t loan offer and obtained his financing from the Plan. On May 1, 1989, he caused the Plan to re pay the $820,000 bridge loan. No document evidenced this $820,000 “loan.” During each month of the lease, Regan received the $17,969 rent payment from the School District. For the first thirty eight months, h e remitted $9,969 to the Plan, keeping $8,000 per month as hi s pro fit in the transaction. He remitted all of the last twelve renta l payments to the Plan. When the School District exercised its option t o purchase, the Plan re ceived the full $594,292 purchase price. During the fifty-month lease, Re gan held unencumbered title to the terminal and made a gross profit of $304,000 ($8,000 per

### 4

month for thirty-eight months). The Plan earned 11.75% annual interest, and its $820,000 loan was repaid in full.
The district court concluded that this self-dealing between Reg an and the Pl an breached Regan’s fiduciary duties as defined in ERISA , specifically, 29 U.S.C. §§ 1104(a)(1)(B) and 1106(b)(1). Defendants do no t challenge that conclusion on appeal, and rightly so. Even if Rega n intended to benefit the Plan, ERISA flatly “prohibits transactions in whic h the potential for mis use of plan assets is particularly great.” Leigh v. Eng le , 727 F.2d 113, 123 (7th Cir. 1984). Though Regan invested Pla n assets in a “loan” that earned 11.75% interest - - much better than the 4%- 6% return then being earned on the Plan’s investments -- he did not protec t the Plan, as an independent trustee surely would have, by documenting that the Plan was a lender, not an investor, and by o btaining adequate security for the Plan’s loan, such as the collateral demanded in First Bank’ s proposal. Regan evidently knew his self-dealing was suspect because, by reporting that the Plan had made a secured loan to the School District , he concealed the true na ture of the transaction from Plan beneficiaries, the Plan’s auditors, and the Internal Revenue Service.

Thus, the issue here is remedy. Because the Plan suffered no loss, the question is whether Regan (now his estate) must disgorge to the Plan “profits . . . made through use of assets of the plan by the fiduciary.” 29 U.S.C. § 1109(a). When a fiduciary has invest ed his own assets and made use of plan assets in a prohibited transaction, “section 1109 only allows recovery [for the plan] where there is a causal connection between the use of the plan’s assets and the profits made by fid uciaries on the investment of their own assets.” Leigh v. Engle , 858 F.2d 361, 366 (7th Cir.

### See also Etter v. J. Pease Constr. Co. , 963 F.2d 1005, 1009 2 

### (7th Cir. 1992) (“the fact that a transaction is prohibited under ERISA does not necessarily mandate a remedy, although it is a very dangerous area for trustees to explore, let alone attempt to exploit”).
5 1988), cert. denied , 489 U.S. 1078 (1989). Defendants argue that Rega n 2 did not profit by “using” Plan assets because his profit was locked in whe n he reached agreement with the School District in April 1989, and because he could have financed the lease/purchase with his own liquid assets, or with a long-term loan from First Bank. The district court rejected that argument and awarded the Plan $275,652.27, Regan’s entire net profit from the transaction including prejudgment interest.

On appeal, defendants renew their argument that Regan’ s entrepreneurial profit was fixed once he had negotiated terms with both th e School District and First Bank, before the Plan became involved. The most obvious problem with this argument is that Regan obtained financing from the Plan on different terms than First Bank had offered. Appellants focus only on the fact that the initial interest rate offered by First Bank woul d have been less than the 11.75% paid to the Plan. But First Bank financing would have involved not only the risk of a floating interest rate, but als o extens ive collateral requirements -- a first mortgage on the termina l property, assignment of the School District’s lease payments, a guaranty fro mthe Bus Company, and a continuing pledge by Regan of $200,000 o f highly liquid assets. There is no evidence in the record that explains th e financial cost of these terms to Regan as borrower at that time. Had Rega n lived to testify at trial, he might have convinced the finder of fact that , despite hi s efforts to cover up the Plan’s involvement, he really di d transfer all of the “lender’s profit” from First Bank to the Plan, derivin g no personal profit from his unlawful use of Plan assets. But on

### 6

this record, the district court was clearly justified in drawing a contrar y conclusion -- that Regan surreptitiously made use of the Plan’s $820,000 at least in part to improve his own financial circumstances and thereb y increase his profit from the purchase and resale of the terminal property.

That conclusion resolves this part of the case. Defendants argu e only that Regan made no profit through use of the Plan’s assets. They do not raise the more complex question whether Regan’s entire profit should be attributed to his unlawful use of the Plan’s assets. We do not address that qu estion, except to remind future litigants that “once the ERIS A plaintiff has proved a breach of fiduciary duty and a prima facie case of . . . ill-gotten prof it to the fiduciary, the burden of persuasion shifts to the fiduciary to prove that . . . his profit was not attributable to th e breach of duty.” Martin v. Feilen , 965 F.2d 660, 671 (8th Cir. 1992), cer t denied , 506 U.S. 1054 (1993).

B. The Reco Loans.

In Octo ber 1985, Regan lent $200,000 of Plan assets to Reco, Inc. , a competing school bus company owned beneficiall y by several of his nieces

an d nephews. This term loan was repayable in semiannual $10,00 0 installme nts, with the balance due in July 1988. It was secured by a jun ior mortgage on Reco’s new bus terminal. Regan caused the Plan t o extend this loan beyo nd July 1988 and to lend Reco an additional $450,000 in October 1990. Reco repeatedly missed install ment payments of principal and interest over the years, but there was evidence that the Plan’s loan

was always fully secured. In January 1992, at Reco’s request, Regan cause d the Plan to reduce the interest rate on the unpa id loan balance from 11.0% to 9.5%. Reco repaid the Plan in full in January 1993.

### 7 This was not a prohibited transaction, but the district cour t nonetheless concluded that Regan breached his fiduciary duty of care to th e Plan by acting imprud ently and by not acting solely in the best interests of the Plan. See 29 U.S.C. § 1104 (a)(1)(A) and (B). Again, defendants do not contest this conclusion on appeal. Turning to the question o f remedy, the district court awarded $11,617 to reimburse the Plan for the loss attributable to the 1992 interest rate reduction. Defendants argue tha t this was an improper remedy under § 1109(a), pointing t o “uncontradicted and apparently credible” testimony by Patrick Regan, a Rec o officer, and Scott Regan, Regan’s son, that interest rates declined i n 1991, that Reco threatened to refinance elsewhere if the Plan did no t reduce its interest r ate to 9.5%, and that Regan reasonably acquiesced in thi s demand because alternative Plan investments did not offer a retur n better than 9.5%. This is a plausible theory, b ut lacking proof that Reco had a willing alterna tive lender waiting in the wings, the district court found that Reco’s “th reat to [refinance was] an empty one.” This finding is not clearly erroneous, and therefore defendan ts failed to satisfy their burden to rebut plaintiffs’ prima facie showing of loss to the Plan.

II. The Award of Attorney’s Fees.

ERISA provides that in any action by plan participants o r benefi ciaries “the court in its discretion may allow a reasonabl e attorney’s fee.” 29 U.S.C. § 1132(g). In this case, plaintiffs’ two law fir ms requested a total fee award of $222,332. The district cour t
con ducted a thorough review of the litigation, applying the factors se t forth in Lawrence v. Westerhaus , 749 F.2d 494, 4 95-96 (8th Cir. 1984), and concluded that plaintiffs were entitled to a reasonable fee award. It the n carefully analyzed the fee requests, rejecting substantial portions becaus e they

### 8

reflected work that was excessive, duplicative, or unnecessary. The court awarded plaintiffs at torneys’ fees of $146,750, payable by Regan’s estate and t he Bus Company. Because defendants concede the court applied th e correct legal standard, we review this award for abuse of discretion. See Jacobs v. Pickands Mather & Co. , 933 F.2d 652, 659 (8th Cir. 1991).

Defendant s argue that the fee award is excessive because plaintiffs succeeded on only fou r of the thirteen claims in their complaint, because plaintiffs recovered only a fraction of the total damages they wer e seeking, and because it “cannot be disputed that Mr. Regan was acting in good faith,” which is one of the Westerhaus fact ors. Although plaintiffs’ excessive fee requests and questionable billing practices concern us, as they did the district court, the lawsuit has resulted in a substantia l recovery for the Plan that is significantly greater than the court’s fee award. After carefully reviewing the record and the district court’ s meticulous analysis of the fee issue, we conclude that the fees awarde d were well within its considerable discretion.
The amended judgment of the district court is affirmed.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.