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September 21, 1989

DONALD R. ANDERSON, et al., Plaintiffs,
RAMON MORTELL, et al., Defendants

The opinion of the court was delivered by: BUA


 Plaintiffs in this consolidated action seek recovery under certain provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. Plaintiffs' four-count consolidated complaint alleges that defendants committed certain improprieties in connection with the management of an employee profit sharing plan in which plaintiffs participated. The parties agreed to a bench trial, which was held from July 24 to July 26 of 1989. Having heard all of the evidence presented at trial, and having considered the arguments made by the parties, the court hereby makes the following findings of fact and conclusions of law pursuant to Fed.R.Civ.P 52(a).


 1. Plaintiffs are present and former employees of the Mortell Company, a corporation in the business of manufacturing various adhesives, coatings, and sealants. During the course of their employment with the Mortell Company, plaintiffs participated in and obtained vested rights in the Mortell Employee Profit Sharing Plan ("the Plan"). (Uncontested Facts, *fn1" paras. 1-3; Plaintiffs' Exhibit 2.)

 2. The Plan is an "employee benefit plan" within the meaning of ERISA, and at all times material to this suit the Plan was subject to the provisions of ERISA. The Plan is a single-employer defined contribution plan covering all of Mortell Company's full-time employees age twenty-five or older with at least one year (1,000 hours) of service. Contributions to the Plan may be made by the Mortell Company based on the sole judgment and discretion of its board of directors. Employee-participants also may voluntarily contribute to the credit of their individual accounts; an employee's contribution cannot be less than 1 percent or more than 10 percent of his or her annual compensation. (Uncontested Facts, para. 8.)

 3. Defendant James W. Mortell was a shareholder of the Mortell Company from 1976 to 1986. In addition, he was a trustee of the Plan from 1976 until April 15, 1983, and a participant in the Plan until 1986. (Uncontested Facts, para. 4.)

 4. Defendant Ramon Mortell, James' brother, was likewise a shareholder of Mortell Company from 1976 to 1986. He also served as a trustee of the Plan from at least 1980 until April 15, 1983, and he was a participant in the Plan until 1986. (Uncontested Facts, para. 5.)

 5. Defendant George Blais was a vice president of the Mortell Company. Until his death in September 1982, he served as administrator of the Plan. (Uncontested Facts, para. 6.) On March 7, 1987, the court entered a technical default judgment against Blais' estate for failure to answer or appear.

 6. In the fall of 1982, James and Ramon Mortell received advice from their attorney, John Marshall of Mayer, Brown & Platt, that the Mortell Company should become a Subchapter S *fn2" corporation in order to avoid double taxation. (Uncontested Facts, para. 10; Tr. 101.)

 7. Marshall informed the Mortells that in order for the Mortell Company to qualify as a Subchapter S corporation, the company's profit sharing plan could not hold any stock in the company. (Tr. 101-03.) At the time, the Plan owned 1016 nonvoting, common shares of the company's stock. (Uncontested Facts, para. 9.)

 8. Marshall suggested that to achieve Subchapter S status, the company should purchase the Plan's 1016 shares. (Tr. 103.) Marshall further advised the Mortells that in order to properly effectuate the company's purchase of the Plan's shares, the Mortells should: (1) hire an independent appraiser to determine the fair market value of the shares and (2) resign as trustees of the Plan so that the sale of the Plan's shares could be approved by a new, independent trustee, such as a bank. (Tr. 103.)

 9. Based on Marshall's advice, in the fall of 1982 James Mortell contacted defendant First Bank of Kankakee, a/k/a First Trust and Savings Bank of Kankakee ("First Trust"), and inquired about the possibility of First Trust succeeding the Mortells as trustees of the Plan. First Trust did not become trustee of the Plan when first contacted by James Mortell in the fall of 1982. However, at that time, First Trust did begin an investigation to determine whether the sale of the Plan's 1016 shares was in the best interest of the Plan and, if so, at what price the Plan should sell the shares. (Uncontested Facts, para. 11.) The investigation was led by Peter J. Porter, the vice president in charge of First Trust's trust department. (Tr. 250-53.) His experience included numerous valuations of closely held corporations. (Tr. 249.)

 10. Also in the fall of 1982, James Mortell hired the Special Assets Division of the American National Bank of Chicago ("ANB") to prepare an independent valuation of the Plan's 1016 shares of the Mortell Company's stock. (Uncontested Facts, para. 12.)

 11. Richard Place, an employee at ANB, was initially assigned to work on ANB's valuation of the Plan's shares. (Tr. 158; Plaintiffs' Exhibit 8 at 12-14.) Place, a CPA who holds a degree in finance and an MBA, had conducted various asset and business valuations while employed at ANB. (Plaintiffs' Exhibit 8, at 8-10.) In connection with his valuation of the Mortell Company stock, Place interviewed the company's management, toured the company's facilities, and analyzed the company's financial data. (Tr. 158-59; Plaintiffs' Exhibit 8, at 12-14.) Place then wrote a letter, dated January 13, 1983, to James Mortell. (Uncontested Facts, para. 14.) Therein, Place stated:

To effect the purchase of the 1016 shares of Mortell Company, non-voting common stock owned by the firm's profit sharing fund, we were contracted to perform a valuation of the company. Per our analysis of the firm, the basis of which is set forth in the attached preface that will accompany the full valuation report, the value of the Mortell Company -- more specifically its stockholders' equity -- is estimated to be $ 30 million as of December 17, 1982 [and] . . . the per share value of the non-voting [common] stock is estimated to be $ 2,970.00.
* * * *
As has been discussed previously, a full report delineating the exact steps to be taken to arrive at the values noted above will follow this letter.

 (Plaintiffs' Exhibit 1.)

 12. Place's letter came into the hands of Marshall. (Tr. 105.) In Marshall's opinion, the valuation figures in Place's letter were much higher than any reasonable valuation should contain. (Tr. 105.) Marshall contacted Place and informed him of his opinion that the valuation figures were too high. (Tr. 105-06.)

 13. The next day, Marshall discussed Place's letter with William McFadden, Place's supervisor at ANB. (Tr. 107, 160.) Marshall informed McFadden of his objections to the valuation figures in Place's letter and requested that McFadden re-examine the valuation work which Place had performed. McFadden, who had not approved Place's letter before it was sent out, told Marshall that he would be happy to review Place's valuation work. (Tr. 163.)

 14. McFadden did not consider Place's letter to be an official ANB valuation report, and he would not have approved the letter if he had seen it before it was mailed. (Tr. 160-61.) He felt the letter was deficient in that it failed to sufficiently emphasize that a substantial amount of additional work needed to be completed before the ultimate valuation conclusions could be made. (Tr. 160-61.) Further, he was of the opinion that the valuation figures in the letter failed to take into account important valuation considerations such as the Mortell Company's balance sheet and comparable stock transactions. (Tr. 161.)

 15. During the conversation between Marshall and McFadden, at no time did Marshall suggest a figure for ANB's final valuation of the Plan's 1016 shares. (Tr. 108, 164, 166-67.) Marshall simply made certain observations regarding various valuation methods and certain aspects of the Mortell Company stock. (Tr. 108, 163-64.)

 16. After his discussion with Marshall, McFadden became more directly involved in the valuation of the Mortell Company stock. (Tr. 164-65.) Upon completing his investigation and analysis, McFadden informed Marshall that ANB's final valuation of the equity in the Mortell Company would be no higher than $ 17 million. (Tr. 166.) Consistent with that figure, ANB produced a final and official valuation report of the Plan's 1016 shares on February 1, 1983. (Uncontested Facts, para. 13.) That valuation report set the value of the Plan's shares at $ 1235 per share. (Plaintiffs' Exhibit 2, at 1.) The final valuation was determined by employing three separate, generally accepted valuation methods: the discounted cash flow approach, the multiple of earnings ratio approach, and the liquidation approach. The values produced by these three methods were assigned certain weights, and the weighted average of the three values produced ANB's final valuation figure. (Plaintiffs' Exhibit 2; Tr. 171-75, 184, 211-12, 261.)

 17. In a letter dated April 14, 1983, the Mortell Company offered to purchase the 1016 Plan shares for the amount at which they had been appraised by ANB -- $ 1,254,760 ($ 1235 per share). (Plaintiffs' Exhibit 24.)

 18. On April 15, 1983, Ramon and James Mortell resigned as trustees of the Plan, and First Trust became the trustee. First Trust remained trustee of the Plan until November 18, 1985. (Uncontested Facts, para. 7; Plaintiffs' Exhibits 23, 25, 26.)

 19. On April 20, 1983, First Trust accepted the Mortell Company's offer to purchase the Plan's 1016 shares. (Uncontested Facts, para. 15; Plaintiffs' Exhibit 17.)

 20. On April 25, 1983, the Mortell Company paid, and First Trust, on behalf of the Plan, received, $ 1,254,760 ($ 1235 per share) for the Plan's 1016 shares. (Uncontested Facts, para. 15.)

 21. Prior to First Trust's acceptance of the Mortell Company's offer to purchase the Plan's 1016 shares, First Trust, through Porter and others, conducted an investigation and analysis of the proposed transaction. That investigation included a review of the February 1, 1983 valuation report prepared by ANB, an examination of the documents establishing the Plan, and a study of the Plan's asset portfolio. (Tr. 252-55.)

 22. In determining to accept the Mortell Company's offer to purchase the Plan's shares at $ 1235 per share, First Trust considered various factors, including:

 a.) that the Mortell Company stock constituted a large portion of the Plan's portfolio, hindering the Plan's diversification;

 b.) that the Mortell Company stock had not paid dividends in the past two years, reducing the Plan's investment income;

 c.) that the Plan's shares were nonvoting, and thus the Plan had no control over the company in which it was heavily invested;

 d.) that there was no ready public market for the stock, since it was not listed on any stock exchange and had been privately held for many years; and

 e.) that the offer was consistent with the valuation performed by ANB, a bank which Porter knew as having a fine reputation in the area of ...

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