United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 97-2197

___________ Alexis M. Herman, Secretary of the * United States Department of Labor, * * Appellee, * * v. * * Mercantile Bank, N.A.; * * Defendant, * * Timothy J. Schwent; * Appeal from the United States * District Court for the Eastern Appellant. * District of Missouri. * Lenco, Inc., Employees Stock * Ownership Plan & Trust; * * Defendant, * * The Plan of Medical Care Benefits * of Lenco, Inc., * * Defendants. *

____________ Submitted: January 12, 1998 Filed: February 25, 1998

___________The Ho norable John B. Jones, United States Senior District Judge for th e 1 District of South Dakota, sitting by designation. The Employee Retirement Income Security Act, 29 U.S.C. §§ 1001-1461. 2 -2- Before BOWMAN and BRIGHT, Circuit Judges, and JONES , District Judge. 1

___________ BRIGHT, Circuit Judge. The Secretary of the Unite d States Department of Labor ("Secretary") filed suit against Timothy J. Schwent and several other officers of Lenco, Inc. ("Lenco"), a bankrupt company, because Lenco failed to pay certain health care claims. At the time in questio n, Schwent served as the administrator for Lenco's health plan. The district court ruled in favor of the Secretar y, entering judgment against Schwent in the amount
o f $137,770.41 and granting the Secretary part of the injunctive relief requested. On appeal, Schwent argues that the district co urt erred in (1) determining that he breached his fiduciary duty to the health plan under ERISA; (2) finding him personally liable for 2 a "loss to the plan;" and (3) taking judicial notice of another portion of this case. We
reverse an d conclude that the district court erred in determining the underlying fact s relating to the conclusion that Schwent breached his fiduciary duty.

I. BACKGROUND
Lenco sponsored a health plan for its employees from 1 952 until March 1, 1988. Lenco self-insured its employees from 1983 until March 1, 1988. General American Life Insurance Company provided administrative services and "stop-loss" coverage for yearly claims of any particular claimant exceeding $35,000 in the aggregate. Fro m mid-1 986 to September 14, 1989, Schwent, a vice president of Lenco, served as th e designated health plan administrator and trustee for Lenco's health plan.According to the joint stipulation of facts filed, Lenco deposited as part of the 3 Midland procedure at least one stop-loss check from General American to L enco to pay for health care claims. -3- Paul Leonard, one of Lenco's founders, owned and operated Lenco until hi s death on April 16, 1983. In 1983, Lenco's Board of Directors decided to sell Lenco, with t he asking price of $10 million. On April 5, 1984, Jerry Ford acquired th e controlling stock in Len co through a highly leveraged buy-out which left the company in a difficult financial position. The bu y-out caused Lenco's liabilities to increase from less than $2 million to over $6 million. As part of the buy-out, Ford obtained an assetbased l ine of credit eventually bought and serviced by Marine Midland Ban k ("Midland"). Under the terms of the Midland loan, Midl and required Lenco to have all cash coming in to Lenco first available to Midland through what amounted to a "lockbox" arrangement. Therefore, Lenco could only utilize funds for operating expenses includ ing the health care plan after the funds passed through the Midland procedure. 3

Ford occasionally made the business decision that Lenco would pay certai n opera ting expenses before paying health plan claims. Therefore, the health care trust account at times did not cover the amount due for medical claims.

Lenco e mployees received health care coverage at no charge. Employees , throu gh a payroll deduction, could also receive subsidized dependant coverage

. Employee payroll deductions totaled $66,775.22 for the 1986-88 plan years. Stop-loss p ayments and money from employee contributions obviously did not cover the entire expens e of the health plan. During the period at issue, Lenco deposited a total o f $979,061 into the health plan. Lenco designed the health plan to operate at a loss , providing it as a heavily subsidized benefit to Lenco's employees.

Ford infor med Schwent of his business decisions to pay other operating cost s before fully funding the health plan. Schwent did not bring a lawsuit or other legal-4-

claim on behalf of the health plan to recover unpaid claims. Instead, Schwent testified that he pressured Ford at least twice per week to pay the medic al claims. Ford testified that Schwent talked to him daily about making money available to pay health car e claims.

When L enco filed bankruptcy, $143,166.00 in health plan claims remaine d unpai d. Lenco's bankruptcy estate satisfied $5,395.59 of this amount leavin g $137,770.41 in unpaid medical claims.

The Secretary released Ford and Scott Goodson, vice president of financing of Lenco, from sui t when they agreed to consent judgments which required no monetary payment fr om them for the alleged health plan losses. On February 28, 1997, th e district court entered judgment again st Schwent for $137,770.41 and entered a portion of the injunctive relief requested by the Secretary.

II. DISCUSSION

The di strict court's determination that a breach of fiduciary duty occurre d
re presents a legal ruling reviewed de novo . Barker v. American Mobil Power Corp. , 64 F.3d 1397, 1402 (9th Cir. 1995). Here, the district court found that the failure of Schwent to sue his employer resolved the legal issue of a breach of a fiduciary duty. The underlying factual question whether Schwent should have filed a lawsuit against his employerconstitutes a fact question reviewed for clear error. Clear error exist s when "'although there is evidence to support it, the reviewing court on the entir e evide nce is left with the definite and firm conviction that a mistake has bee n committed .'" Anderson v. City of Bessemer City , 470 U.S. 564, 573 (1985) (quoting United States v. United States Gypsum Co. , 333 U.S. 364, 395 (1948)).

Federal law requires that ERISA fiduciaries perform "with the care, skill , prudence, and diligence under the circumstances then prevailing that a prudent man-5-

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 ERISA pr udent person standard is an objective standard. Roth v. Sawyer-Cleato r LumberC o. , 16 F.3d 915, 917 (8th Cir. 1994). When a fiduciary fails to satisfy th e prudent person standard, the fiduciary may bear personal liability for losses to the plan resulting from the breach of fiduciary duty. Id.

Schw ent served as the designated health plan administrator and trustee withi n the meaning of 29 U.S.C. §§ 1002(16)(A) and 1103(a). Schwent therefore served as an ERISA fiduciary wit

h respect to the health plan. See 29 C.F.R. § 2509.75-8(D-3).

The Secret ary argues Schwent breached his fiduciary duty by not bringing a lawsuit ag ainst Lenco for the unpaid health claims. At the district court, Schwen t responded that bringing a lawsuit against Lenco would not have been prudent for the following reasons:
(1) a lawsuit would have resulted in vendors insisting on their bill s being paid before providing additional materials or services;
(2) a laws uit would have triggered a default on Lenco's primary loan, and the bank had first priority on Lenco's assets in any event;
(3) a lawsui t would have been cumulative in that several employee s had already filed such a suit, and Schwent determined that the legal fees and expenses of a second lawsuit would deplete the company's resources;
(4) a lawsuit would have generated bad p ublicity for Lenco and would have resulted in health

care providers refusing to treat Lenco employees; and/orIn Ma rtin , this court ruled that the Secretary may sue a fiduciary for breach of 4 duty fo r a decision not to pursue a derivative claim. 965 F.2d at 667. This court required the Sec retary to prove a "breach of the ESOP fiduciaries' duties, andthat the deri vative suit would have prevailed." Id. (emphasis in original). The district court distinguished Martin from this case on the basis that Martin concerned a shareholder derivative suit that could be brought under state common law. Because this case did not pres ent an allegation that Schwent should have pursued a shareholder derivativ e action, the district court concluded that the Secretary did not need to prove Schwen t would have prevailed in a lawsu it against Lenco. We disagree with the district court's interpretation of Martin

. Although the district court took judicial notice of the Employee Stoc k 5 Ownership Plan ("ESOP") portion of this case in deciding that a lawsuit w ould not have prec ipitatedan earlier filing of bankruptcy, we will only consider the evidence an d testimony f

rom the health plan portion of this case. While we do not rule on th e proprietyof the district court's decision to take judicial notice of the ESOP portion of this case, we note, in passing, that this practice appears unfai r because the district court knew Schwent's attorney would not appear for the ESOP portion of the case. The first two days of the trial related to Schwent while the remaining thirteen days of the trial related to the Secretary's suit against Mercantile Bank for breach of its fiduciary duty to Lenco's ESOP during Ford's leveraged buy-out. The Secretary contended that the ESOP overpai d for Lenco stock bought a day after the ESOP sold its stock to Ford

. See Herman v. Mercantile Bank, N.A. , No. 1:91CV00011 (E.D. Mo. Feb. 23, 1997). At the conclusion of the health plan p ortion of the case, the district court on the record -6- (5) a lawsuit would have forced Lenco into bankruptcy even earlier.

The d istrict court rejected Schwent's arguments stating that evidence did no t support his arguments. Furthermore, the district court determined that under this court's decision in Martin v. Feilen , 965 F.2d 660, (8th Cir. 1992), the Secretary did not need to demons trate that Schwent would have won the lawsuit. The district court 4 nevertheless found that if Schwent had filed suit on behalf of the health pl an, "the health plan had a strong probabil ity of prevailing." Accordingly, the district court concluded that Schwent breached his fiduciary duty because he di d not file a lawsuit on the health plan's behalf against Lenco. 5stated that if the district court reopened the heal th plan evidence, it would be by formal

request and upon notification of counsel, which did not occur. Tr. Vol. III at 98-100, 112-14. -7- We conclude that in order to prove a breach of fiduciary duty for failure t o pursue any lawsuit, the Secretary must prove a lawsuit would be successful an d advantage the beneficiaries of the plan. If a fiduciary won a judgment in a lawsui t against an employer but remained unable to collect on that ju dgment, the lawsuit would waste the resources of both the plan and the employer. Therefore, in this case th e Secretary nee ded to prove that if Schwent pursued a lawsuit, the health plan woul d have benefitted.

After a review of the record, we conclude the district court clearly erred i n finding a lawsuit would hav e been prudent and successful in decreasing the amount of unpaid medical claims . The evidence does not support the Secretary's contention that a lawsuit would have in any way benefitted the health plan. The Se cretary did not offer any expert testimony that Lenco would have paid additional funds into the health plan. In fact, the evidence at trial showed that the restrictions from Lenco's loan agreement with Midland resulted in a severe cash cr unch. At the time in question, Lenco showed some increase in profits but the actual cash flow available did not improve.
In addition, Lenco began experie ncing severe financial difficulties in November 1986 and entered bankruptcy on June 20, 1989. Accordingly, the health plan woul d not have won a collectable judgment. A lawsuit would have taken much too long t o benef it the health plan. In this case, consisting of many of the same litigants, th e district court entered the lawsu it's final judgment on February 28, 1997, over six years from the date of filing.
Moreover, the evidence shows that Schwent in fact increased the amount o f money Lenco contributed. Schwent's actions slowly but steadily decreased the amount-8-

of unpaid medical claims during this time period. At the c lose of the health plan's 1987 fiscal year, the health plan had $341,90 6 in unpaid medical claims. On June 20, 1989, when L enco went into bankruptcy, $143,166 in health plan claims remained unpaid

. Sch went succeeded in decreasing significantly the amount of unpaid medical claim s with his entr

eaties to Ford. For example, on two occasions, Schwent convinced Ford to make personal loans of $25,000 which went directly to paying health care claims. In addition, Schw ent testified that he "could see light at the end of the tunnel as far as getting t hose payments." Tr. Vol. 1 at 165. Schwent stated that Ford remaine d optimistic about changing the financing arrangement which would in turn allow th e health plan to be fully funded.

In lig ht of the above situation, even if a lawsuit would possibly succeed i n increasing the amount Lenco contributed, a prudent plan administrator in Schwent' s situation could reasonabl y decide against filing a lawsuit. Furthermore, in our view, a lawsuit wou ld have made health care providers and vendors less willing to provid e materials and

services. Schwent testified he did not consider a lawsuit because a suit against Lenco in the small city where it is located would have been well publicize d thr oughout

the community. Schwent further stated that health care providers woul d have expected cash from their Lenco patients if he sued Lenco for unpaid medica l cla ims. In all likelihood, the business community would have reacted negatively to a law suit by a vice-president of Lenco because the lawsuit would show that insiders of Lenco had lost faith in Lenco's ability to meet its oblig ations. In turn, the lawsuit could have precipitated earlier bankruptcy proceedings.

We consider prudent the decision by Schwent to not file a lawsuit based upon the abov e reasons. Moreover, the evidence did not show that the health plan woul d have likely collected on any judgment in a la wsuit. Therefore, Schwent did not breach his fiduciary duty to the health plan. Because we conclude that Schwent did not breach his fiduciary duty, we do not reach Schwent's other arguments.-9- III. CONCLUSION

We con clude that to establish a breach of fiduciary duty for the failure o f S c hwent to institute a lawsuit against Lenco, the Secretary needed to prove that such suit would have succeeded and benefitted the plan participants. The evidence is to the contrary. The trial court’s finding on this issue favorable to the Secretary cannot stand. We, therefore, reverse the district court's judgment again st Schwent and remand for the district court to enter judgment to dismiss the case.
A true copy.

Attest:

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