Source: https://law.justia.com/cases/federal/district-courts/FSupp/465/341/1420690/
Timestamp: 2019-10-22 21:04:58
Document Index: 598329853

Matched Legal Cases: ['§ 1132', '§ 1132', '§ 1132', '§ 1002', '§ 1003', '§ 1002', '§ 1104', '§ 1104', '§ 1104', '§ 1002', '§ 1002', '§ 1106', '§ 1106', '§ 1108', '§ 1108', '§ 1108', '§ 2550', '§ 1108', '§ 2550', '§ 1114', '§ 1106', '§ 1106', '§ 1106', '§ 1108', '§ 2550']

Marshall v. Kelly, 465 F. Supp. 341 (W.D. Okla. 1978) :: Justia
Justia › US Law › Case Law › Federal Courts › District Courts › Oklahoma › Western District of Oklahoma › 1978 › Marshall v. Kelly
Marshall v. Kelly, 465 F. Supp. 341 (W.D. Okla. 1978)
U.S. District Court for the Western District of Oklahoma - 465 F. Supp. 341 (W.D. Okla. 1978)
465 F. Supp. 341 (1978)
F. Ray MARSHALL, Secretary of Labor, Plaintiff,
Arthur M. KELLY, Individually and as trustee and administrator of Mike Kelly Construction Company Profit Sharing Plan, Defendant.
*342 *343 *344 Carin Ann Clauss, Sol. of Labor; Monica Gallagher, Associate Sol., Plan Benefits Security Div.; Norman P. Goldberg, for Litigation, Plan Benefits Security Div.; Robert N. Eccles, Atty., U. S. Dept. of Labor, Plan Benefits Security Div., Washington, D. C., John E. Green, Asst. U. S. Atty., Oklahoma City, Okl., for plaintiff.
Harvey L. Harmon, Sr. of Franklin, Harmon & Satterfield, Inc., Oklahoma City, Okl., for defendant.
2. On December 29, 1969, effective as of January 1, 1969, the Company established a Profit Sharing Plan (the Plan) for the benefit of its employees and employees of the *345 affiliated Mike Kelly companies. The Plan provides for annual discretionary contributions by the Company to a trust in an amount not to exceed the lesser of the Company's net profits or 15% of the total annual compensation paid by the Company. These employer contributions along with forfeitures, any voluntary contributions by employees, and all income of the trust are allocated annually to participants' individual accounts. Benefits equal to all or a part of the individual account balance are payable to a participant who terminates employment with the Company; the Plan's vesting schedule provides for partial vesting after two years of service, increasing by steps to full vesting after six years. At the end of 1976, the Plan had total assets, valued at cost, of $376,215.90; as of October 1, 1978, its assets were $235,240.16. The number of participants in the Plan has ranged from 95 in 1974 to 11 in 1978.
4. On May 16, 1972, the Plan made a loan of $33,000 to the Company. On February 22, 1974 and May 22, 1974 the Plan made additional loans to the Company of $50,000 and $100,000, respectively. Each of these loans was originally for a one-year term, but was renewed annually on its due date by the defendant on behalf of the Plan. The loan notes in evidence show that the $33,000 loan bore 12% interest in 1974 and 8% in 1976; that the $50,000 loan was made at 10% interest in 1974, and renewed at 10% in 1975 and 8½% in 1977; and that the $100,000 loan was made at 12% in 1974 and renewed at 10% in 1975 and 8% in 1976. The defendant testified that these interest rates were comparable to those paid by the Company for its bank financing, except that the Plan's rate may have dropped as much as a point below the bank rate when the Company was financially distressed. Subsequent to the filing of this action, the interest rates on each of these loans was raised to 10%.
6. In connection with these loans, the Plan and the Company entered into a security agreement which provided that the Company's "qualified accounts receivable" would secure all outstanding loans between the Plan and Company. Paragraph 2 of that agreement provided that the unpaid principal of all outstanding loans "shall not exceed" 66 2/3 % of the value of these "qualified accounts receivable". The defendant testified that he was not familiar with the terms of the security agreement, although he signed it on behalf of both the Plan and the Company.
8. Accompanying the deterioration of the Company's finances was a decline in the value of the Company's accounts receivable which secured the loans from the Plan. The total value of the Company's accounts receivable dropped and remained below the $274,500 value of the accounts which was *346 required to secure $183,000 of loans under the terms of the security agreement, thus jeopardizing the sizeable percentage of the Plan's assets invested in these loans. In addition, these accounts did not satisfy the definition of a "qualified" account under the security agreement. The defendant testified that he had never seen any schedules or certificates as to the value of the accounts receivable, and there was no evidence that such schedules were available as contemplated by paragraph 4 of the security agreement.
On March 4 and May 5, 1976, the defendant as sole trustee caused the Plan to make new loans of $25,000 and $10,000 to Mr. Weaver. These loans were evidenced by notes, bearing interest at 8% without any security or collateral. The loans were for three month terms and were renewed on *347 their due dates. By the time that the defendant and his attorneys were notified of the Department of Labor investigation in mid-March 1977, Mr. Weaver had paid only a small portion of the interest accrued on these notes and had made no principal payments. The defendant and Mr. Weaver then reached an understanding, confirmed by letter of March 28, 1977 that the $25,000 loan would be repaid in full on June 1, 1977 and the $10,000 loan on August 1. The loans were, however, renewed again. Periodic reductions in principal were made, and the loans were repaid in full after this action was filed.
14. In January 1972, the Plan purchased a parcel of land near 23d and Rockwell Streets in Bethany, Oklahoma for $28,957. The Plan entered into a lease with a subsidiary of Pizza Hut, Inc., the national parent company, which provided for a 15 year lease (with two 5 year renewals) of a restaurant to be constructed on the land with a minimum annual rental of $10,800 plus the excess of 7½% of the restaurant's gross receipts over $10,800. The restaurant, constructed for the Plan by the Company, opened for business on April 4, 1972. On April 7, 1972 and May 12, 1972, the Plan made payments of $35,000 and $6,400 to the Company for the costs of construction of the restaurant building.
a. There was never any note, agreement, or other document which provided for additional payments by the Plan to the Company in excess of the $41,000 already paid. Financial records of both the Plan and the Company did not reflect any debt owing for additional payments. The defendant *348 conceded that there is no document which reflects the existence of such a debt.
c. Not only is there a complete absence of records which would justify and support the additional $45,000 payment but also the few cost summaries maintained on this job positively demonstrate an intent that the Plan pay only approximately $41,400, i. e. the amount actually paid in 1972. The Cost Analysis sheet on this job totals to $39,168; the unfilled blanks in this sheet, except for profit, are relatively minor items which would not bring the costs out of that range. Likewise, the Application for a Building Permit estimated the costs of this job at $42,000. Finally, the building was carried on the Plan's tax returns at a cost of $40,015.
f. Finally, the intent of the parties is also conclusively shown by the absence of any credible explanation as to why, if additional costs were owing, they were not collected either in 1972 or in the intervening years before 1976 when the Plan had sufficient liquid assets to make $183,000 in loans to the Company. The defendant testified at trial (and conceded that he had so testified several times at his deposition) that the additional costs had not been paid in 1972 solely because the Plan had no more money after it paid the $41,400 to the Company. However, financial records of the Plan show that on May 12, 1972 when the Plan made its second and last payment to the *349 Company of $6400, it still had over $16,000 in its bank account. These records also show that three or four days later on May 15 or 16, 1972, the Plan received a contribution of over $17,000, apparently from the Mi-Kel Corp., bringing its total bank balance to around $34,000. Most of this money was then loaned to the Company on May 16, 1972 as the original $33,000 loan. Thus, the Plan had sufficient liquid assets in May of 1972 to satisfy most of the alleged debt. Its lending of money to the Company is completely inconsistent with the claim that the Plan owed money to the Company and by itself warrants the Court's finding that the $41,400 was intended to be final payment of all debts owed by the Plan to the Company in connection with the construction of the Plan's Pizza Hut.
1. The Court has jurisdiction over this action under Section 502(e) (1) of ERISA, 29 U.S.C. § 1132(e) (1). Venue of the action is proper in this district under Section 502(e) (2) of ERISA, 29 U.S.C. § 1132(e) (2). The Secretary of Labor has authority to bring this action under Sections 502(a) (2) and (5) of ERISA, 29 U.S.C. § 1132(a) (2) and (5).
2. The Mike Kelly Construction Company Profit Sharing Plan (the Plan) is an employee pension benefit plan within the meaning of Section 3(2) of ERISA, 29 U.S.C. § 1002(2), which is maintained by an employer engaged in an industry affecting commerce within the meaning of Section 4(a) (1) of ERISA, 29 U.S.C. § 1003(a) (1).
3. At all times since the effective date of ERISA, the defendant, Arthur M. Kelly, has been a fiduciary with respect to the Plan within the meaning of Section 3(21) (A) of ERISA, 29 U.S.C. § 1002(21) (A).
"to make applicable the law of trusts; . . . to establish uniform fiduciary standards to prevent transactions which dissipate or endanger plan assets; and to provide effective remedies for breaches of trust." U.S.Code Cong. and Admin. News, pp. 4639, 5186, 93d Cong., 2d Sess., 1974.
Like other legislation with remedial objectives, ERISA should be given a broad construction in order to carry out its purposes of protecting the interests of Plan participants and beneficiaries and preserving the integrity of Plan assets. See Marshall v. Snyder, 430 F. Supp. 1224, 1231 (E.D.N.Y. 1977), aff'd 572 F.2d 894, 901 (2d Cir. 1977); Tennessee Coal Co. v. Muscoda Local No. 123, 321 U.S. 590, 597, 64 S. Ct. 698, 88 L. Ed. 949 (1944) (Fair Labor Standards Act).
"a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and
*350 (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; and
6. The defendant failed to discharge his duties with respect to the Plan solely in the interest of the Plan's participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of Plan administration as required by Section 404(a) (1) (A) of ERISA, and 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, as required by Section 404(a) (1) (B) of ERISA, 29 U.S.C. § 1104(a) (1) (B) in that:
a. He caused the Plan to renew the $183,000 in loans to the Company which he owned, despite the declining financial condition of the Company, the declining value of the security on the loans, the Company's breaches of the security agreement, and the fact that the loans constituted an increasingly large share of the Plan's assets so that the risk of large losses was not minimized as required by 29 U.S.C. § 1104(a) (1) (C). He failed to take any steps to secure repayment of the loans or to protect the Plan's rights under the loan and security agreements.
b. He caused the Plan to make the $60,000 loan to himself at a lower interest rate and with less security than the Plan obtained on contemporaneous loans to other participants and despite the fact that loan was not in accordance with the lawful provisions of the document governing the Plan as required by 29 U.S.C. § 1104(a) (1) (D).
7. The obligations imposed by Section 404(a) of ERISA are supplemented by the provisions of section 406, 29 U.S.C. 1106, which prohibit a fiduciary from taking certain actions. Section 406(a) (1) provides in pertinent part, subject to certain exemptions, that:
"(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should have known that such transaction constitutes a direct or indirect. . .
*351 8. The Company is a party in interest to the Plan within the meaning of Section 3(14) (C) of ERISA, 29 U.S.C. § 1002(14) (C), because it is an employer whose employees are covered by the Plan. The defendant himself is also a party in interest to the Plan because he is a fiduciary with respect to the Plan, the owner of more than 50% of the stock of the employer sponsor, and an employee, officer, director and 10% or more shareholder of the employer sponsor; Sections 3(14) (A), (E), and (H) of ERISA, 29 U.S.C. § 1002(A), (E), and (H).
"The type of investigation that will be needed to satisfy the test of prudence will depend upon the particular facts and circumstances of the case. In the case of a significant transaction, generally for a fiduciary to be prudent he must make a thorough investigation of the other party's relationship to the plan to determine if he is a party-in-interest. In the case of a normal and insubstantial day-to-day transaction, it may be sufficient to check the identity of the other party against a roster of parties-in-interest that is periodically updated." H.R.Rep. 93-1280, Cong., 2d Sess. at p. 307; 1974 U.S.Code Cong. and Admin.News at p. 5087.
10. The defendant caused the Plan to engage in transactions which he knew or should have known constituted a direct or indirect lending of money or other extension of credit between the Plan and a party in interest in violation of Section 406(a) (1) (B) of ERISA, 29 U.S.C. § 1106(a) (1) (B), in that:
11. The defendant caused the Plan to engage in transactions which he knew or should have known constituted a direct or indirect transfer, or use by or for the benefit of, a party in interest, of any assets of the Plan in violation of 29 U.S.C. § 1106(a) (1) (D) in that:
12. Section 406(a) of ERISA expressly provides that its prohibitions are subject to the exemptions provided in Section 408 of ERISA, 29 U.S.C. § 1108. Section 408(b) (1), 29 U.S.C. § 1108(b) (1), exempts from the provisions of Section 406(a) (1):
At the time of the $60,000 loan to the defendant, the defendant was a participant *352 in the Plan and the Plan document did permit loans to participants under the conditions set forth in Finding of Fact No. 10, supra. The $60,000 loan was in an amount which exceeded the limits set forth in the Plan document and thus did not satisfy Section 408(b) (1) (C). In addition, even assuming that the defendant's vested benefits secured this loan, those benefits were not in an amount which constituted adequate security under Section 408(b) (1) (E). Since the loans to the defendant exceeded the total of loans to all other participants, this loan did not meet the criteria of Section 408(b) (1) (B). Finally, since other participants were required to provide greater security for their loans, the loans to the defendant were not made on a reasonably equivalent basis to loans to other participants as required by Section 408(b) (1) (A). Thus, Section 408(b) (1) provides no exemption for this loan.
13. Section 408(c) (2) of ERISA, 29 U.S.C. § 1108(c) (2), provides that Section 406 shall not be construed to prohibit a fiduciary from
The defendant has contended that his services in negotiating the Pizza Hut sale were not part of a normal trustee's duties but were "extraordinary services)" which should be separately compensated; if this were true, the section 408(c) (2) exemption would not apply since it exempts only compensation for services provided by a fiduciary in the performance of his fiduciary duties with the Plan. If, however, the negotiation of the Pizza Hut sale was merely part of the defendant's fiduciary duties for the Plan, the Section 408(c) (2) exemption is inapplicable by its terms since the defendant was, at the time of the sale, receiving full-time pay from the Company which was an employer of employees covered by the Plan. See also, 29 C.F.R. § 2550.408c-2(b) (2). In either case, Section 408(c) (2) provides no exemption from Section 406(a) for payment of the $9,000 "sales commission."
14. Section 408(b) (2) of ERISA, 29 U.S.C. § 1108(b) (2), exempts from the prohibitions of Section 406(a)
The Plan entered into no contract or arrangement for services which contemplated payment of the $9,000 "sales commission" or the $45,000 in "additional construction costs" and thus, Section 408(b) (2) provides no exemption for those payments. Also, since the Plan was represented in the Pizza Hut sale by a fiduciary who was already receiving full-time pay from an employer, the "commission" was not reasonable compensation. 29 C.F.R. § 2550.408c-2(b) (2). Likewise, the $45,000 payment was not reasonable compensation since the $45,000 in additional costs were not, in fact, owing.
15. Section 414(c) (1) of ERISA, 29 U.S.C. § 1114(c) (1), provides:
Sections 406 and 407(a) relating to prohibited transactions shall not apply
"(1) until June 30, 1984, to a loan of money or other extension of credit between a plan and a party in interest under a binding contract in effect on July 1, 1974 (or pursuant to renewals of such a contract), if such loan or other extension of credit remains at least as favorable to the plan as an arm's-length transaction with an unrelated party would be, and if the execution of the contract, the making of the loan, or the extension of credit was not at the time of such execution, making, *353 or extension, a prohibited transaction (within the meaning of section (b) of the Internal Revenue Code of 1954 or the corresponding provisions of prior law);"
The $183,000 in loans from the Plan to the Company were made under binding contracts in effect on July 1, 1974 which were renewed after ERISA became effective. However, these loans have not remained at least as favorable to the Plan as arm's-length transactions would be. Prior to ERISA in 1974, the borrower on these loans, the Company, had a good current financial position, and the Plan was apparently well secured by the assignment of the Company's accounts receivable. By the time of the renewals, however, the Company's finances had taken a severe downturn, the value of the security had diminished to well below the amount of the loans, and the provisions of the security agreement were completely ignored. Despite this significantly increased risk of loss of a major part of its assets, the Plan received neither additional security nor any increased return; to the contrary, the interest rates on the loans dropped until this suit was filed, and the defendant himself testified that the Plan may have received as much as a point below the bank rate in 1977. In short, the Plan originally negotiated these loans to be as favorable as arm's-length transactions. After the effective date of ERISA, the protections afforded to the Plan diminished significantly and the Plan received no offsetting advantages. Thus, the loans did not remain at least as favorable as arm's-length transactions, and they do not qualify for the transitional exemption provided by Section 414(c) (1).
16. Sections 406(b) (1) and (2) of ERISA, 29 U.S.C. § 1106(b) (1) and (2), provide that:
"(b) A fiduciary with respect to a plan shall not
(1) deal with the assets of the plan in his own interest or for his own account
The defendant dealt with Plan assets in his own interest in violation of 29 U.S.C. § 1106(b) (1) in that:
a. He caused the Plan to renew the loans to the Company which he owns.
17. A party who is a borrower from a plan or who is claiming payment from a plan will, by definition, have interests "adverse" to the interests of the Plan. The defendant acted in transactions involving the Plan on behalf of parties with interests adverse to the Plan's in violation of 29 U.S.C. § 1106(b) (2); in that:
18. For the reasons discussed in Conclusion 13, supra, Section 408(c) (2) of ERISA provides no exemption, on the facts of this case, from the prohibitions of Section 406(b). For the reasons discussed in Conclusion 15, supra, the limited transitional exemptions set forth in Sections 414(c) (1) and (4) of ERISA do not, on the facts of this case, provide an exemption from the prohibitions of Section 406(b).
19. Section 408(b) (2) of ERISA, 29 U.S.C. § 1108(b) (2), provides no exemption from the provisions of Section 406(b). Although the language of Section 408(b) (2) appears to provide an exemption from all of the prohibitions of Section 406, a closer look at the statutory language and purpose has led the Department of Labor to the position *354 expressed in an interpretative regulation, 29 C.F.R. § 2550.408b-2(a) and (e), that Section 408(b) (2) provides no exemption from the provisions of Section 406(b). Since this construction by the agency charged with the enforcement of ERISA resolves inconsistencies in the statutory language and preserves a fundamental purpose of ERISA, i. e. to prevent a fiduciary from acting in matters in which he has an interest which might affect his judgment, this Court should give it great weight, Udall v. Tallman, 380 U.S. 1, 85 S. Ct. 792, 13 L. Ed. 2d 616 (1965). In addition, the Court has itself reviewed the statutory language and legislative history and has independently concluded that Section 408(b) (2) should not be construed to provide an exemption from the prohibitions of Section 406(b).
No renewal of any note or other outstanding obligation to the Plan may be made unless same is clearly in keeping with ERISA law and rules and regulations thereunder *355 promulgated. The Court will appoint three trustees to supervise and manage the Plan during the interim period until defendant becomes eligible to resume his position. The Court requests that counsel attempt to agree on the names of disinterested trustees to be appointed and directs that their names be provided in the judgment of the Court. In the event counsel cannot agree upon interim trustees, the Court will appoint same on a date to be fixed for final settlement of judgment herein and may or may not adopt suggestions made by the parties.