Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 78 C 3799 -- George N. Leighton, Judge.
Wood and Cudahy, Circuit Judges, and Grant, Senior District Judge.*fn*
Plaintiffs in this case are beneficiaries of an employee benefit plan who alleged that the plan administrators and others had violated fiduciary duty provisions of the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 -- 1461 ("ERISA"). The heart of the case is a dispute over how ERISA governs the actions of plan administrators and other fiduciaries with respect to investment activities in contests for corporate control. The beneficiaries allege that the plan administrators and other defendants violated ERISA when they used plan assets to purchase stocks of companies that were targets of the defendants' investment program. After a bench trial, the district court entered judgment for the defendants. We vacate and remand.
Plaintiffs-appellants are beneficiaries of the Reliable Manufacturing Corporation Employees Profit Sharing Trust ("Reliable Trust"). This action was originally filed by Charles W. Leigh and Ervin F. Dusek; they are beneficiaries of the Reliable Trust and former owners of the Reliable Manufacturing Corporation ("Reliable Manufacturing"). Intervening plaintiffs are a class of all other Reliable Trust beneficiaries who have fully vested rights in the trust.
The Reliable Trust was created by Reliable Manufacturing in 1968 as an employees' profit sharing trust; the trust administrators were appointed by the Reliable Manufacturing board of directors. The Reliable Trust is subject to ERISA, and plaintiffs allege that the defendants-appellees violated their fiduciary duties under ERISA in a series of investments the Reliable Trust made in the spring of 1978. Until March 1978, the trust held all of its assets in the form of fixed income money market investments. In late March 1978, the trust invested approximately 30% of its assets in the stock of three companies: Berkeley Bio Medical, Inc. ("Berkeley"), Outdoor Sports Industries, Inc. ("OSI"), and the Hickory Furniture Company ("Hickory"). Both before and after the trust's purchases, other defendants made sizable investments in the same companies. Plaintiffs allege that the investment of approximately 30% of the Reliable Trust's assets in these three companies was done to aid the defendants who hoped either to win control of the companies or to earn substantial "control premiums."
Defendants-appellees are a group of individuals and business entities with close connections to defendant Clyde W. Engle. The complex network of legal and financial relationships among the defendants is central to our disposition of this case, so we must trace them in some detail. Although defendants dispute the characterization, we will on occasion refer to them as the "Engle group."
Clyde Engle stands at the center of the network. He is an Illinois financier and investor with numerous business interests.*fn1 Since 1976 Engle has been chairman of defendant Libco Corporation. In the spring of 1978, Engle owned 31.5% of Libco shares and through trusts for his children controlled an additional 6.4% of Libco. Supplemental Appendix at 496. He also had some degree of control over an additional 12% of Libco shares owned by the Sierra Capital Group, described below. Clyde Engle's offices are at Suite 1600, 625 North Michigan Avenue, Chicago, Illinois.
Defendant Libco Corporation is a holding company which purchased 100% of the common stock of Reliable Manufacturing from plaintiffs Leigh and Dusek in April 1977.*fn2 Libco also has offices at Suite 1600, 625 North Michigan Avenue in Chicago. In the spring of 1978, Libco owned 64% of the stock of defendant Telco Marketing Services, Inc. ("Telco"). At that time, Clyde Engle was chairman of the board, chief executive officer and treasurer of Telco. Telco's offices are also at Suite 1600, 625 North Michigan Avenue in Chicago.
Defendant Telvest, Inc. ("Telvest") is a wholly owned subsidiary of Telco formed on June 1, 1978, for investment purposes. Engle was president, treasurer and a director of Telvest in 1978. Telvest's offices are also located at Suite 1600, 625 North Michigan Avenue in Chicago.
Two other Engle businesses are not parties to this lawsuit, but their investments in Berkeley, OSI and Hickory in 1978 are relevant to the dispute here. First, GSC Enterprises, Inc. ("GSC") is a holding company which owns the Bank of Lincolnwood. In 1978 Engle was chairman of the board and president of GSC, as well as chairman of the board of the bank. GSC's offices are also located at Suite 1600, 625 North Michigan Avenue, Chicago. Second, the Sierra Capital Group ("Sierra") is an Illinois limited partnership engaged in investment activities. The general partner in Sierra is Sierra Associates, another Illinois limited partnership. Clyde Engle is one of two general partners of Sierra Associates. In the spring of 1978, among its other investments, Sierra owned 12% of Libco stock and 19% of GSC stock. Sierra's offices are also at Suite 1600, 625 North Michigan Avenue in Chicago.
Defendant Nathaniel Dardick is an attorney who played key roles in all of the organizations described above. Dardick graduated from the University of Chicago Law School in 1974. He was associated for several years with the Chicago firm of Sachnoff Schrager Jones Weaver & Rubenstein, which did work for Clyde Engle.*fn3 He then established his own firm with offices at Suite 1600, 625 North North Michigan Avenue in Chicago. During 1978 and 1979, Dardick was retained as personal counsel to Clyde Engle. He was also general counsel to Libco, Telco, Telvest, GSC, the Bank of Lincolnwood and Sierra. The record does not show clearly whether Dardick had other clients in 1978 and 1979, but it is clear that Engle and these organizations accounted for most of Dardick's income from his law practice.*fn4 Dardick is also one of two administrators of the Reliable Trust, and he had direct control over the trust's investments in 1978 and 1979.
Defendant Ronald Zuckerman was president of Reliable Manufacturing and a member of the Reliable Manufacturing board of directors in 1977 and 1978. However, he received no salary from Reliable Manufacturing. He was paid only as a member of the Libco board and as an investment consultant to Libco. Zuckerman was also the other administrator of the Reliable Trust. He and Dardick were appointed administrators in September 1977 by the Reliable Manufacturing board of directors, composed of Engle, George Contarsy and Zuckerman himself. (Engle, Contarsy and Zuckerman were also directors of Libco.) Neither Dardick nor Zuckerman received compensation as trust administrators. Zuckerman's offices are also at Suite 1600, 625 North Michigan Avenue in Chicago.
Charles Newbill was originally named as a defendant in the case, but he was never served with the complaint. His role in the case is central, for he was the investment analyst who identified the investment opportunities for Dardick and the Reliable Trust, as well as for Engle, Libco, Telco, Telvest, Sierra and GSC. Newbill first met Engle when both worked at the Harris Bank in Chicago. Newbill was also a general partner in Sierra Associates between 1970 and 1972, and he worked abroad briefly. Newbill went to work for Libco and Engle as an investment consultant in 1976. During 1977 and part of 1978, Libco was Newbill's only paying client.*fn5 According to Newbill's testimony, he sought financial information from several thousand companies, analyzed their replies to look for undervalued companies, and identified thirty companies which he thought had good investment potential for Libco. During the early months of 1978, Newbill talked with both Engle and Dardick about his research, and he narrowed the list of investment targets. To both Engle and Dardick, he recommended investments in Berkeley Bio Medical, Inc. ("Berkeley"), Hickory Furniture Company ("Hickory"), and Outdoor Sports Industries, Inc. ("OSI"). Newbill's office was also at Suite 1600, 625 North Michigan Avenue in Chicago.
Defendant National Boulevard Bank is now trustee of the Reliable Trust. The bank became trustee on February 5, 1979, after the challenged investments were made but while the trust still held its shares of OSI and Hickory. The bank is a defendant because all plaintiffs seek an immediate distribution of the assets remaining in the trust.
Plaintiffs' claim here depends upon the relationships between the Reliable Trust's investments in Berkeley, OSI and Hickory, and the activities of other members of the Engle group. Therefore we must examine the activities in considerable detail.
The Engle group's investment and acquisition plans for Berkeley, Hickory and OSI appear in the records of a meeting of the Telco board of directors on April 21, 1978. Supplemental Appendix at 424-29. The meeting was held at Suite 1600, 625 North Michigan Avenue in Chicago. Engle chaired the meeting and Dardick acted as secretary.*fn6 Engle informed the board that Telco had approximately $2,000,000 available for investment, and he recommended that Telco invest the money in up to 10% of the outstanding shares of Berkeley, Hickory and OSI. Newbill presented to the board his analysis of the three companies. The minutes of the meeting show that the Telco board learned that members of the group had already begun to establish positions in each of the three companies:
As part of these discussions, the Board was also advised of the ownership positions in such companies of certain affiliates of the Company and associates of certain directors of the Company, namely Libco Corporation, GSC Enterprises, Inc., Clyde Wm. Engle, Sierra Capital Group, Ronald K. Zuckerman and the Reliable Manufacturing Corporation Employees' Profit Sharing Trust. In particular, it was disclosed that the following persons own shares of Berkeley, Hickory and OSI in the amounts set opposite their respective names as follows:
Clyde Wm. Engle 41,670 3,500
GSC Enterprises, Inc. 32,100 4,000 8,000
Ronald K. Zuckerman 1,200
Sierra Capital Group 21,600
Trust 15,000 8,000 12,500
Supplemental Appendix at 426 (emphasis supplied). At the time of the April 21st meeting, the various members of the Engle group, including Telco,*fn7 owned approximately 5.58% of outstanding Berkeley shares, 2.98% of outstanding OSI shares and 4.88% of outstanding Hickory shares. Short Appendix at 29-33. The Telco board adopted a resolution authorizing management to purchase approximately 10% of the outstanding shares of the three companies, but the resolution also put ceiling prices on the purchases. The resolution authorized Telco to consolidate the group's holdings by purchasing shares owned by Sierra, Engle, Libco and GSC. Supplemental Appendix at 427. After the April 21st meeting, virtually all of the group's further purchases of the three stocks were made by Telco or by its subsidiary, Telvest, formed in June 1978.
Thus, during 1978 when the Reliable Trust invested 30% of its assets in Berkeley, OSI and Hickory, other members of the Engle group were purchasing substantial amounts of stock in the three companies both before and after the trust purchases.*fn8 Plaintiffs contend that the Engle group purchases and the trust's purchases were part of a concerted investment and acquisition program by Engle and his associates. They allege that the trust's assets were invested to enhance the Engle group's position with respect to control of the three target companies.
There is no claim here that the Reliable Trust lost any money through the disputed investments. Indeed, the trust profited handsomely from its investments in Berkeley and OSI.*fn9 Instead, plaintiffs here claim that the trust's assets were put at risk to benefit the Engle group in its program of acquisitions.*fn10
1. Berkeley investments : The Engle group's interest in Berkeley began in early 1978, when Berkeley was the target of an unfriendly takeover attempt by Cooper Laboratories, Inc. ("Cooper"). Berkeley president Irving Abramowitz asked Engle to help him defend against the takeover, and Engle purchased more than 60,000 shares of Berkeley stock for himself and GSC in January 1978. By the beginning of March, Sierra and Zuckerman had also purchased Berkeley shares, and the holdings of Engle, GSC, Sierra and Zuckerman amounted to approximately 3.6% of Berkeley shares.
In late February, Engle learned that Abramowitz and Cooper were planning a deal to settle their control contest. Berkeley management planned to give Cooper control of Berkeley's medical equipment subsidiary in return for Cooper's shares of Berkeley. The deal would have kept Abramowitz in control of Berkeley. Engle thought the proposed deal would be disadvantageous to minority shareholders such as himself. Supplemental Appendix at 554-61. Plaintiffs contend that Engle was "locked in" as a minority shareholder under hostile management, and that he sought to escape his position by increasing his control of the company. Engle bought an additional 11,200 shares of Berkeley for himself and GSC between February 27th and March 10th.
Between March 17, 1978, and March 31, 1978, the Reliable Trust bought at Dardick's direction 15,800 shares of Berkeley stock at a total cost of $71,580.53. Those 15,800 shares represented approximately 10% of the trust's assets at the time and constituted 0.65% of the outstanding Berkeley shares. Adding the trust's shares to those owned by Engle, Zuckerman, GSC and Sierra, the group owned a total of 4.65% of Berkeley at the end of March 1978.
While the Reliable Trust was buying Berkeley shares on his orders, Dardick was helping Engle respond to the proposed deal between Berkeley and Cooper. On March 22, 1978, Engle sent letters on GSC letterhead to the Berkeley outside directors protesting the proposed deal and arguing that it was contrary to the interests of minority shareholders. He described the transaction as an "improper sweetheart deal." The letters suggested that Engle would take further steps if necessary to protect the interests of minority shareholders. Dardick helped Engle prepare these letters and actually signed Engle's name to them. About two weeks later, Engle, Sierra and GSC filed suit to enjoin consummation of the deal between Berkeley and Cooper.*fn11 Dardick acted as their attorney in the suit. Thus, at the same time Dardick was investing 10% of the Reliable Trust's assets in Berkeley stock, he and Engle were arguing that Berkeley management was acting contrary to the interests of minority shareholders such as the Reliable Trust.
In April Telco began to purchase Berkeley shares, and by August the Engle group owned 10.72% of Berkeley stock. The litigation initiated by Engle and his associates to enjoin the Berkeley-Cooper deal was settled in August 1978 by having Cooper buy the Berkeley shares controlled by the Engle group for a very profitable price. The Reliable Trust was not a party to the lawsuit, nor were trust funds used in the litigation. However, the trust's shares were included in the settlement.*fn12
2. OSI investments : In March 1978, the Reliable Trust and GSC began purchasing OSI stock. By the end of March, the trust owned 12,400 shares and GSC owned 5,100 shares, totalling 1.22% of the outstanding OSI shares. The trust had spent $77,736.83 for its shares of OSI. At the time of the April 21st Telco board meeting, GSC, Engle, Telco and the Reliable Trust owned 42,800 shares of OSI, or approximately 2.98% of the outstanding shares. Telco and later Telvest continued to purchase OSI stock steadily until March 1979, when the group's holdings were 312,400 shares, or 21.73% of outstanding shares. On May 3, 1978, Engle and Newbill visited OSI management and asked that Engle be put on the OSI board, but the proposal was rejected. A few days later, Telco and Libco filed with the Securities and Exchange Commission a Schedule 13D revealing the Engle group's purchases of OSI stock and their intentions to acquire more shares. The Schedule 13D said "Libco may be deemed to own beneficially an additional 12,500 shares of OSI owned of record by the Reliable Manufacturing Corporation Employees Profit Sharing Trust ('Reliable Trust')," and it stated that Libco could elect the directors of Reliable who in turn appointed the Reliable Trust administrators. The statement also noted that Zuckerman was a director of both Libco and Reliable, president of Reliable and one of the Reliable Trust administrators. In the Schedule 13D, Libco expressly disclaimed "any beneficial interest in the assets of the Reliable Trust."*fn13
In early 1979 the Engle group battled OSI management for control of the company through two tender offers and a proxy fight. Documents filed in the tender offers continued to show the relationship between the Reliable Trust and other group members. Dardick acted as attorney for Telco in the tender offers and for Telvest in the proxy fight. During the proxy fight, Dardick ordered the Harris Bank as trustee to vote the trust's shares in favor of the Telvest slate of directors on April 24, 1979. During these struggles, Dardick was sharply critical of OSI management and the company's profitability. At the same time, Dardick controlled the Reliable Trust's investments in OSI, and his statements indicate that he believed the investments could have turned out well only if OSI management could have been replaced, or if the trust could have sold its shares to a "white knight" for a premium.
By May 1979, the Engle group controlled 21.73% of OSI shares. The control contest ended when the Brown Group, Inc., entered as a "white knight" on behalf of OSI management and tendered $15.00 per share of OSI stock. On June 26, 1979, the Reliable Trust sold its OSI shares to the Brown Group for a profit of 141%.
3. Hickory Furniture investments : Hickory was the third investment target, and the Engle group succeeded in purchasing a majority of Hickory stock by October 1979. The Reliable Trust bought 8000 shares of Hickory on March 22, 1978. At that time, Libco and GSC already owned 50,400 shares, and the trust purchases gave the group 4.88% of outstanding Hickory stock. After the April 21st Telco meeting, Telco and later Telvest steadily acquired Hickory stock.*fn14 The Reliable Trust purchased an additional 4000 shares of Hickory on June 9, 1978. Hickory management did not resist the Engle group investments, and on June 28th, Engle became a member of the Hickory board of directors. By the end of 1978, the Engle group owned 32.8% of Hickory, and their holdings grew to 52.8% in October 1979. The Reliable Trust sold its 12,000 shares of Hickory on March 19, 1979, one year after its initial purchase, for a net profit of 4%.
The case before us was tried in the district court before Judge Leighton in September 1982. The district court granted judgment for defendants in an unpublished memorandum issued November 18, 1982. The district court held first that ERISA does not create a cause of action where the plan does not suffer financial loss. Conclusion of Law No. 10. The district court also found that the defendants did not use the Reliable Trust assets for their own purposes and that the assets were used exclusively in the interest of the trust beneficiaries. Findings of Fact Nos. 11, 12, 13 and 18; Conclusions of Law Nos. 4 and 15. The district court held that Dardick, Zuckerman and the National Boulevard Bank were fiduciaries of the trust, but that they had not violated their duties under ERISA sections 404 and 406, 29 U.S.C. §§ 1104 and 1106, by investing the trust assets in Berkeley, OSI and Hickory. Conclusions of Law Nos. 2, 4, 5, 6 and 15. The court concluded that the plan assets had been used for the exclusive benefit of the plan beneficiaries, Conclusion of Law No. 15, and that the plan administrators acted in good faith, Finding of Fact No. 23. The court also concluded that Dardick, Zuckerman and the National Boulevard Bank did not breach their co-fiduciary obligations under 29 U.S.C. § 1105(a). The court held further that Engle, Libco, Telco and Telvest had not exercised discretionary authority over the Reliable Trust and were not fiduciaries with respect to the investment or administration of its assets. Findings of Fact Nos. 21 and 22; Conclusion of Law No. 7. The court awarded expenses and attorneys' fees to all defendants and held that Dardick, Zuckerman and the National Boulevard Bank were entitled to reimbursement of expenses and fees from the trust's remaining assets. Conclusion of Law No. 16.
The Reliable Trust's investments in Berkeley, OSI and Hickory produced in the aggregate the extraordinary return on investment of 72%, exclusive of dividends.*fn15 It is clear that the trust lost no money in the challenged transactions. The district court held that ERISA creates no cause of action where a breach of fiduciary duty does not cause financial harm to the benefit plan, Conclusion of Law No. 10, but the district court erred in this statement of the law. ERISA clearly contemplates actions against fiduciaries who profit by using trust assets, even where the plan beneficiaries do not suffer direct financial loss.*fn16 A fiduciary who breaches his duties "shall be ...