Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 80 C 4492 -- William T. Hart, Judge. 12.
Pell, Coffey, and Flaum, Circuit Judges.
Defendant Briody appeals the district court's judgment holding him jointly and severally liable with co-defendant Hodgman for losses incurred by the Gilbert-Hodgman, Inc., Salaried Employees' Profit Sharing Plan (Plan) and denying Briody's cross-claim for indemnification against Hodgman. The underyling action was brought by Richard Free pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. Hodgman does not appeal the judgment against him, nor does he defend against Briody's appeal from the dismissal of the cross-claim. Plaintiff Free, however, does contest Briody's right to indemnification, and so we will first consider Briody's claim that he cannot be held liable for the Plan's losses and then his claim that he should be allowed to recoup from Hodgman any money paid to plaintiff.
The district court found the following facts to be true: Gilbert-Hodgman, Inc., was a corporation involved in the electrical contracting business. Plaintiff Free was employed by Gilbert-Hodgman from May, 1951, to November, 1979, serving as president from May, 1977, until May, 1979. Defendant Hodgman had been an officer and a shareholder of Gilbert-Hodgman since 1968, and became the sole shareholder in May, 1978. Hodgman served as president and was a controlling influence in the corporation.
In 1967 Gilbert-Hodgman established the Salaried Employees' Profit Sharing Plan and Trust. When ERISA was enacted the Plan qualified as an "employee benefit plan" within the meaning of the Act. Hodgman served as the sole trustee of the Plan until March 15, 1979. In his capacity as trustee Hodgman invested $10,000 of Plan assets in a corporation called MRC in 1975. Hodgman later recharacterized this investment as a loan to himself, but made no payments on the interest or principal. During 1977 Hodgman transferred $8,000 of Plan assets to Dennis Mirus, a purported financial advisor and investment counselor. An accountant employed by Hodgman warned him in February, 1978, to exercise greater care regarding Plan assets entrusted to Mirus and to obtain more information from Mirus.
In March of 1979 the Board of Directors of Gilbert-Hodgman amended the Plan to conform to ERISA requirements. The restated Plan required a second trustee. The Board designated Briody as the second trustee. Briody was a lifetime friend of Hodgman and did business with Hodgman in the role of an insurance agent. Briody also served as a director of several Hodgman companies, including Gilbert-Hodgman. Briody, as a director, signed a resolution naming him as second trustee on March 12, 1979. On March 15, 1979, Briody and Hodgman signed the restated Plan as trustees.
On March 19, 1979, Hodgman withdrew $44,284 the Plan had invested in The Chemical Fund, Inc., and gave $40,000 to Mirus eleven days later. During the fall of 1979 three Plan participants received checks from Mirus in purported satisfaction of their accounts. The bank refused to process these checks due to insufficient funds in the Plan's account. On April 11, 1980, Hodgman withdrew the last substantial Plan asset, a $22,185 cash balance from a life insurance policy, and placed the proceeds in the Plan's checking account. Two weeks later Hodgman withdrew $21,327 from the Plan's account to satisfy obligations of Gilbert-Hodgman. Briody's only action as a trustee in any way related to the Trust was to contact the bonding company on March 23, 1979, to ensure that he was bonded as a trustee. Briody did nothing to determine what assets the Plan possessed or to protect the Plan from loss.
Mirus never returned the money invested with him and, in January, 1982, he pled guilty to charges stemming from a number of fraudulent transactions, including his dealing with Hodgman. Mirus also filed for bankruptcy. Gilbert-Hodgman and Hodgman filed for bankruptcy in March, 1983.
Based on these facts the court found that Hodgman's misuse of Plan assets and his investment of Plan assets with Mirus after the accountant warned against this were violations of his fiduciary duties under ERISA. The court also found that Briody was a trustee of the Plan as of March 15, 1979, and that his complete inaction violated his fiduciary duty to supervise and control the Plan assets. The court removed Hodgman and Briody as trustees, held both of them jointly and severally liable for three-quarters of the loss incurred by the Plan, and held Hodgman individually liable for the remaining loss, which occurred before Briody became a trustee. Finally, the court rejected Briody's claim for indemnification from Hodgman because of his "nonfeasance and misfeasance in failing to perform his duties as a cofiduciary and trustee." The court later denied Briody's motion to reconsider denial of the cross-claim, noting that "the concept of passive liability is not applicable to a trust relationship."
Briody's first claim is that he cannot be held liable for breach of any fiduciary duty because he was not a trustee of the Plan when the losses occurred.Briody argues that the Plan was ineffective until the Internal Revenue Service held that it qualified under section 401(a) of the Internal Revenue Code, which did not happen until March 30, 1981. The basis of Briody's argument is Article XVI:3 of the Plan, which provides:
Notwithstanding any provision of this Agreement to the contrary, no Participant or beneficiary shall have any right or claim to any asset of the Trust, nor to have such rights assigned or alienated, or to any benefit under the Plan before the Internal Revenue Service determines that the Plan and Trust qualify under the provisions of Section 401(a) of the Internal Revenue Code of 1954 as amended by the Employee Retirement Income Security Act of 1974, or any statute of similar import and the Trust shall have no liability with respect to any Participant or beneficiary before such determination of qualification by the Internal Revenue Service. The sole exception to this general provision is that the beneficiary of a Participant who dies prior to such determination of qualification by the Internal Revenue ...