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LEIGH v. ENGLE

June 27, 1985

CHARLES W. LEIGH AND ERVIN F. DUSEK, PLAINTIFFS, GEORGE JOHNSON, ELEANOR MADSEN, ET AL., INTERVENING PLAINTIFFS,
v.
CLYDE WM. ENGLE, NATHAN DARDICK, RONALD ZUCKERMAN, LIBCO CORPORATION, TELCO MARKETING SERVICES, TELVEST, NATIONAL BOULEVARD BANK, AND THE RELIABLE EMPLOYEES' PROFIT SHARING PLAN TRUST, DEFENDANTS.



The opinion of the court was delivered by: Moran, District Judge.

  MEMORANDUM AND ORDER

After an extended bench trial Judge Leighton entered 23 pages of findings of fact and conclusions of law on November 18, 1982. Upon appeal, the Court of Appeals issued a 28-page modified opinion in March 1984. See Leigh v. Engle, 727 F.2d 113 (7th Cir. 1984). That opinion affirmed in some respects, reversed in others, and vacated and remanded for further proceedings, with costs to be borne equally by the parties. Upon the commencement of those further proceedings before this court we requested the assistance of the parties in fashioning a damages measure. That assistance was not forthcoming in any meaningful way, and this court detailed its concerns in October 1984 and again asked for assistance. Again the parties have been of little help, apparently not one of them seem to be able to accept what this court has accepted as the mandate from the Court of Appeals. Indeed, the most recent effort has been that of the intervenors seeking clarification from the Court of Appeals. The intervenor asked the Court of Appeals to "clarify" its opinion by adopting the intervenors' position on damages, a position this court believed the appellate decision had clearly rejected. The Court of Appeals declined. This action's troubled history continues, and it obviously is not going-to end unless this court delineates the issues as we see them and, to the extent it can do so without further "assistance," acts upon them.

The principal battle is over what recovery there may be from liable fiduciaries because of their involvement in three investments. Two defendants have been found liable for damages, if any. Whether two other defendants are liable remains a factual dispute to be resolved after an evidentiary hearing.

A second area of contention relates to a reserve fund. The Court of Appeals directed this court to consider "at the first opportunity the desirability of an immediate distribution of all remaining assets. . . ." The remaining assets in hand, however, are approximately $80,000, less than 10 per cent of the distribution long since made, and the plaintiffs and intervenors have made it abundantly clear that the remaining assets from their perspective are closer to $250,000 to $300,000, after the return of attorneys' fees and expenses to the fund. But that perception raises legal and factual questions which need to be addressed, which will be addressed herein, and which have been virtually ignored or, in this court's view, erroneously perceived by the parties.

The third major area of dispute is whether distribution was improperly delayed; whether, if so, any damage resulted; and, if so, which of the defendants are liable for those damages and to what extent. There are, as well, other issues which have been less central to the disputes.

I. Reserve Fund

We turn, first, to the reserve fund issues. No one disputes that some of the $80,000 can be distributed. Plaintiffs and intervenors contend that the assets vested in the beneficiaries upon termination were thereupon non-forfeitable. Accordingly, even in the absence of a breach of fiduciary obligations or bad faith the Plan thereafter could pay nothing for expenses of whatever nature. Defendants contend that the trust permits a reserve, that such a reserve is necessary to pay ongoing litigation and administration expenses, that it has already been finally determined that any breaches of fiduciary duties were despite their good faith, and that such litigation expenses are therefore reimbursable from the trust pursuant to Sec. 11.1 of the Plan, which indemnifies the fiduciaries from liability for "any act done or admitted to be done in good faith and with reasonable care and prudence," including "all expenses reasonably incurred in its defense." This court believes both positions to be in error.

Termination of the Plan occurred sometime in 1979. Upon termination, pension rights vest, and, as vested rights, are non-forfeitable, as defendants admitted in their September 6, 1979 letter to the Internal Revenue Service. A non-forfeitable pension right is defined as one which is "unconditional, and which is legally enforceable against the Plan." 29 U.S.C. § 1002(19). A non-forfeitable pension right, however, is not necessarily a right to a recipient's percentage of the total fund. In Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 101 S.Ct. 1895, 68 L.Ed.2d 402 (1981), the Supreme Court stated clearly that the amount considered non-forfeitable must be defined by all the provisions of the Plan. "[T]he statutory definition of `non-forfeitable' assures that an employee's claim to the protected benefit is legally enforceable, but it does not guarantee a particular amount or method for calculating the benefit." Id. at 512, 101 S.Ct. at 1900. The court, in Alessi, asked and answered a key question. "[W]hat defines the content of the benefit that, once vested, cannot be forfeited? ERISA leaves this question largely to the private parties creating the Plan." Id. at 511, 101 S.Ct. at 1900. Thus, this court must look to the trust plan to determine what distributions the beneficiaries should receive. The Pension Plan provisions are determinative respecting reserves, except when they conflict with specific ERISA provisions. Blackmar v. Lichtenstein, 603 F.2d 1306, 1309 (8th Cir. 1979).

Section 9.2 of the Trust Agreement provides that, before distribution after termination, the trustee "shall first reserve such reasonable amounts as it may deem necessary to provide for the payment of any expenses then or thereafter chargeable to the trust fund." Attorneys' fees have been withheld as chargeable to the trust fund pursuant to Sec. 11.1. Even though the trustees were found to have breached their fiduciary duties, the Seventh Circuit did not overturn Judge Leighton's finding of good faith. See 727 F.2d at 124; Finding of Fact 23. We can, therefore, assume good faith has been found and defendants, according to the Plan, may possibly be entitled to be indemnified and reimbursed for any liability assessed or attorneys' fees owed (although it is difficult to square a breach of trust with "reasonable care and prudence").

The central question, largely ignored by the parties, is whether such indemnification is allowed under ERISA. Indemnification from liability for breach of fiduciary duty by a trust is not allowed under ERISA. 29 U.S.C. § 1110(a). See Chicago Board Options Exchange, Inc. v. Connecticut General Life Insurance Co., 713 F.2d 254, 259 (7th Cir. 1983). It has also been found that indemnification for attorney's fees, even where liability has not attached, is also not allowed. See Donovan v. Cunningham, 541 F. Supp. 276, 289 (S.D.Tex. 1982), modified on other grounds 716 F.2d 1455 (5th Cir. 1983).

Defendants, quite naturally, rest entirely on the Plan language. Their position might have considerable merit if this were a question of indemnification of a corporate director of a commercial enterprise, where such indemnification is often authorized by state statute. Arguably, indemnification might be permissible under the general law of trusts on the ground that the fiduciaries acted in good faith and the investments in fact benefited the trust. See generally G. Bogert, The Law of Trust and Trustees, § 871, n. 83 (2d Ed. 1981); Craven v. Craven, 407 Ill. 252, 95 N.E.2d 489 (1950). We are dealing here, however, with indemnification of legal expenses of a fiduciary of a trust fund subject to ERISA, when there has been a determination of a breach of fiduciary duty.

In an advisory opinion dated September 9, 1977, the Department of Labor commented on a provision which indemnified trustees for their legal expenses and allowed for payment in advance of the final disposition. The Department found that Sec. 1110(a) did not forbid such advances as long as the fund obtains a written legal opinion from independent legal counsel that, based on review of the relevant facts, the acts in question did not constitute breach of a fiduciary duty. See Department of Labor Advisory Opinion, Ref. No. CA-3588(a) (Sept. 9, 1977). This finding indicates that indemnification for legal expenses, after a finding of breach of fiduciary duty, is not allowed and any advances made would have to be returned.

Such a result has been reached with regard to the Labor Management Reporting and Disclosure Act, 29 U.S.C. § 401 et seq. In Morrissey v. Segal, 526 F.2d 121 (2d Cir. 1975), the court ordered defendants to reimburse the fund for legal fees advanced during an unsuccessful defense to a breach of fiduciary duty claim. The court found that allowing indemnification for fees "would undermine both protection to union members and deterrence of union officials intended by [the Act]." Id. at 126. See McNamara v. Johnston, 522 F.2d 1157, 1167 (7th Cir. 1975), cert. denied, 425 U.S. 911, 96 S.Ct. 1506, 47 L.Ed.2d 761 (1976) (allowing repayment for legal fees only if defendants prevail). The policies underlying the treatment of pension funds under the LMRDA and ERISA are similar and the provisions in 29 U.S.C. § 1109 and 1110 seem to confirm Congress' intent to keep legal fee policies the same for both acts as, unlike the general law of trusts, there are no exceptions for liability of a trustee who, in breaching his trust, acts in good faith and benefits the fund. Accordingly, the court finds that indemnification for legal fees when a breach of trust has been established, though perhaps provided for by the trust agreement, is not allowed under ERISA.

That does not, however, end the matter. Whether or not the fiduciaries will be successful in defending against the unresolved claims has yet to be determined. The advancement of legal expenses to them for defense against those claims, as the Department of Labor advisory opinion indicates, is an entirely different matter from the question of ultimate liability for legal expenses. And see Central States, Southeast and Southwest Areas Pension Plan Fund v. American National Bank and Trust Co., No. 77 C 4335, slip op. at 6 (N.D.Ill. 1979). That issue has not been addressed by the parties. Whether or not an advancement is proper, however, an initial and continuing reserve for reimbursement in the event of exoneration was and remains proper. To the extent that funds have been or ...


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