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November 27, 2002


The opinion of the court was delivered by: Michael M. Mihm, United States District Judge


Now before the Court are Plaintiffs' Motion for Partial Summary Judgment as to Liability Against US Trust: Absence of Authority, Second Motion for Partial Summary Judgment as to Liability Against US Trust: Breach of Loyalty and Prudence: Failure to Investigate, and Third Motion for Partial Summary Judgment as to Liability Against US Trust: ERISA § 406 Prohibited Transactions on December 20, 1995, as well as US Trust's Alternative Motion for Leave to File an Amended Answer. For the reasons set forth below, the three Motions for Partial Summary Judgment [#278, #287, and #311] are DENIED, and US Trust's Alternative Motion [#347] is GRANTED.


The following facts are not in dispute unless otherwise indicated. Foster & Gallagher, Inc. ("F&G") was a direct marketing firm engaging in the marketing of gifts, housewares, and novelty items through the mail. Over time, F&G began to market horticultural products through its direct mail operations. F&G was an employer engaged in commerce or in an industry or activity affecting commerce within the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA").

On January 1, 1988, F&G established an employee stock ownership plan ("ESOP"). On January 1, 1999, the ESOP was amended and restated and continues to operate as a defined contribution, leveraged employee stock ownership plan, covering substantially all employees of F&G and its subsidiaries.

The ESOP is an employee pension benefit plan within the meaning of ERISA. F&G is the sponsor of the ESOP, and Plaintiffs Debra Keach and Patricia Sage (collectively referred to as "Plaintiffs") are participants in the ESOP. Defendant US Trust is the present trustee of the ESOP and a fiduciary with respect to the ESOP. In this capacity, US Trust holds the plan assets, manages the assets of the ESOP, makes distributions to participants, and administers the payments of interest and principal on certain loans.

In 1995, Thomas Foster ("Foster") was CEO/Chairman of the Board of Directors of F&G, and was also a director of Michigan Bulb Corporation ("MBC"), a subsidiary purchased by F&G in October 1992. Foster died on July 11, 1996, and Ellen D. Foster is the executrix of his estate. Defendant Melvyn Regal ("Regal") was at all relevant times a shareholder and executive of F&G. In 1995, he was Vice Chairman of the Board of Directors of F&G and a director of MBC.

The F&G ESOP began in 1988 with the purchase of 3,587,573 shares of F&G stock from certain shareholders, including Foster and Regal, using a $3 million cash contribution from F&G and $47 million from the proceeds of a loan through F&G. All contributions were to be controlled by a trustee "acting under a Trust which forms a part of the Plan." Under the F&G Employee Stock Ownership Trust dated 1988 (the "ESOP Trust"), the trustee of the ESOP was authorized to purchase shares in F&G.

LaSalle National Bank was the original trustee of the ESOP. The ESOP Trust provided that "[t]he Company may, at its discretion, remove a Trustee by giving thirty (30) days advance written notice to the Trustee, subject to providing the removed Trustee with satisfactory written evidence of the appointment of a successor Trustee and of the successor Trustee's acceptance of the trusteeship." Article VI, Section VI-2. Article VIII, Section VIII-1 further provided that the Company reserved the right to amend the ESOP Trust at any time, "except that no amendment shall substantially change the rights, duties and liabilities of the Trustee under this Trust Agreement without its consent."

Defendant Valuemetrics performed an annual valuation of F&G shares for the ESOP every year from 1988 through 1994. On March 16, 1995, Valuemetrics proposed to assist the ESOP Administrative Committee and F&G's Board of Directors in outlining and reviewing the significant elements of a subsequent sale or sales of stock to the ESOP. By March 23, 1995, Foster had told Lyle Dickes ("Dickes"), F&G's Executive Vice President, to go ahead with the Valuemetrics proposal.

Valuemetrics met with F&G representatives on May 8, 1995. Based on the assumption that the shareholders wanted liquidity in the near term and for F&G to remain healthy and viable, Valuemetrics concluded: (1) a large leveraged ESOP ($50-70 million) or a recapitalization would meet those goals; (2) an ESOP of this size would be able to acquire a significant number of shares but would not be able to buy all of the remaining shares; (3) the selling shareholders could take advantage of favorable tax treatment; (4) a recapitalization would allow the shareholders to sell their entire interest but would result in capital gains tax; and (5) an initial public offering ("IPO) of the stock would be less desirable because the market may restrict the amount of shares the controlling shareholders could sell as part of the IPO. On May 10, 1995, Valuemetrics issued a valuation of F&G as of December 31, 1994 in which it concluded that on a marketable minority basis, the value of the capital stock was $162 million, which represented a 38% increase over the previous year's valuation of $117 million. At this time, Valuemetrics was also consulting with F&G about ownership transition strategies and the expanded use of the ESOP as a means of achieving the desired purchase or liquification of the stock holdings of the selling shareholders, including Foster and Regal. Given the primary goals of these shareholders to provide immediate liquidity and to maximize the present value of their after-tax proceeds received from a sale of their stock and the value of their residual shares in F&G, Valuemetrics found a leveraged ESOP transaction and a recapitalization or sale of F&G to a strategic buyer to be "far superior" options.

Norman Goldberg ("Goldberg") was at relevant times the manager of US Trust's Washington, DC, office and acted on behalf of its Special Fiduciary Committee where US Trust acted as an institutional trustee specialized investment manager for transactions involving ERISA issues. In late June 1995, Goldberg met with Regal, Dickes, and others. By July 5, 1995, F&G had reached an agreement with US trust for a fee schedule regarding the contemplated ESOP transaction which included fees for the transactional decision and follow-up services as the independent fiduciary.

On July 17, 1995, Valuemetrics advised F&G that it would be pleased to be retained by F&G's board of directors to provide financial advisory services, including: (1) updating its December 31, 1994, ESOP valuation analysis to estimate a revised range for the fair market value of F&G shares on a control basis; (2) determining an optimal structure of the security to be purchased by the ESOP in order to maximize the value received by the selling shareholders; (3) preparing a transaction memorandum for the board discussing the important aspects of the transaction structure; (4) meeting with the board to discuss the transaction memorandum; and (5) presenting and issuing an opinion on the fairness of the transaction.

Valuemetrics then issued a valuation on July 24, 1995, reporting that as of July 20, 1995, the value of F&G stock on a control basis was $229.2 million.*fn1

On August 30, 1995, Goldberg wrote to Regal to confirm the understanding and agreement between F&G and US Trust "with respect to certain professional services to be provided by US Trust to the Foster & Gallagher, Inc. Employee Stock Ownership Plan and related Trust established by the Company (collectively, the `Plan')." Among other things, the letter stated:

1. Foster and Gallagher, Inc. (the "Company") desires to retain U.S. Trust Company of California, N.A. ("U.S. Trust") as the independent trustee of the Foster & Gallagher, Inc. Employee Stock Ownership Plan (the "ESOP") in conjunction with a possible purchase of Company stock by the ESOP and related actions (hereinafter collectively referred to as the "Proposed Transaction").
2. It is understood that in exercising its responsibilities pursuant to this Agreement, U.S. Trust will rely on the written opinion of the Plan's independent financial advisor that (i) the consideration to be paid by the Plan is not in excess of "adequate consideration" within the meaning of Section 3(18) of ERISA; (ii) the Proposed Transaction is fair and reasonable to the Plan from a financial point of view; and (iii) the terms and conditions of the acquisition loan are fair and reasonable to the ESOP from a financial point of view (the "Financial Opinion"). If for any reason the Financial Advisor does not provide the Financial Opinion in form satisfactory to U.S. Trust at or prior to the Closing, U.S. Trust will not be required to make a final determination whether to participate in the Proposed Transaction. Although the fees and expenses incurred by U.S. Trust pursuant to this Agreement will be paid by the Company, it is understood that U.S. Trust's sole professional responsibilities are to the Plan and the Plan participants.
3. The Company will furnish or cause to be furnished to U.S. Trust or its Financial Advisor all current and historical financial and other information regarding the Company requested by U.S. Trust or its Financial Advisor in order for U.S. Trust to perform its obligations hereunder. The Company represents that the information which it provides will be accurate and complete in all material respects to the best of its officers' knowledge and it is understood that U.S. Trust will rely on the accuracy of that representation to carry out its responsibilities pursuant to this Agreement.
5. Except as otherwise required by paragraph 7, as compensation for the services to be rendered by U.S. Trust in connection with the Proposed Transaction, the Company will pay to U.S. Trust the sum of $75,000 to be paid in three installments of $32,500, $32,500, and $10,000. . . . No portion of the fee to U.S. Trust under this paragraph or reimbursement of its expenses under paragraph 5 hereof is contingent in any way upon the consummation of the Proposed Transaction or the decision by U.S. Trust, as Trustee, whether to purchase the Company Stock pursuant to the Proposed Transaction.

On August 31, 1995, Dickes signed the engagement letter with US Trust on behalf of F&G.

On September 26, 1995, Defendant Houlihan Lokey ("Houlihan") was engaged to render a written opinion to US Trust as the ESOP trustee as to whether the proposed stock transaction was fair to the ESOP from a financial point of view. The engagement letter indicated that although Houlihan would report solely to US Trust, F&G would pay Houlihan's fees and expenses, and Houlihan would use, rely on, and assume the accuracy of "without independent verification, data, material, financial forecasts and projections and other information with respect to the Company [F&G], furnished to Houlihan Lokey by or on behalf of the Company [F&G] and its agents, counsel, employees and representative."

On September 30, 1995, Valuemetrics issued its first transaction memorandum to the F&G board of directors describing a proposed offer to sell 2,916,667 shares to the ESOP at $24.00 per share. In its memorandum, Valuemetrics noted that the memorandum included certain statements, including projections, with respect to the anticipated future performance of F&G and cautioned that: (1) such statements were based on various estimates and assumptions by F&G, which estimates and assumptions may or may not prove to be correct; (2) although the projections contained therein had been prepared with significant good faith input from F&G's management, such projections involve significant elements of subjective judgment and analysis and would be materially different if different estimates and assumptions were employed; and (3) no representation was made as to the accuracy of any such statements, and there could be no assurance that the projected results would be obtained.

Valuemetrics then summarized the ESOP transaction as follows: (1) F&G's board of directors would authorize the conversion of the current Executive Incentive Plan ("EIP") from a book value basis to a market value basis, which would create a significant income tax benefit to F & G; (2) F&G's management employees would have the opportunity to exercise 527,141 EIP options at an average exercise price of $4.60 per share; (3) of the 2,916,667 total shares offered to the ESOP, 1,790, 243 shares would be offered on a pro-rata basis from Foster and Regal, and 1,126,424 shares would be offered by management, either through the sale of existing shares or through the exercise of options granted as part of the EIP; (4) those employees who sold shares to the ESOP would have an opportunity to purchase, on a pro-rata basis, 626,858 newly issued, restricted shares at market value; and (5) $10.25 million of the proceeds generated from the recapitalization of the EIP shares would be used to repay existing, non-tax preferred debt from Comerica Bank and NBD Bank. Following this transaction, the ESOP would own 51.7% of the equity value of F&G.

On October 26, 1995, Valuemetrics issued an Analysis of Value for the ESOP purchase in which it concluded that the value of F&G as of October 24, 1995, ranged from $298.5 to $311.4 million on a marketable control basis.

At a Board of Directors meeting on October 26-27, 1995, the F&G board adopted a resolution approving the proposed ESOP transaction and authorizing the officers of the corporation to take all steps necessary and proper to bring about the completion of the transaction. The members of the Executive Committee, which consisted of Foster, Regal, and Pellegrino, were authorized to approve changes to the proposal.

Price negotiations involving F&G and US Trust continued during the month of November 1995.

On November 29, 1995, US Trust (through Goldberg) announced that it was willing to recommend that the ESOP purchase a controlling block of F&G shares at $19.50 per share. US Trust did not consult with Magna Bank regarding the sale price at or before this time.

At 10:00 a.m. that same day, F&G's board held a telephonic meeting to discuss the proposed sale price per share. The board authorized the Executive Committee to proceed with the ESOP transaction at a price of $19.50 per share.

In a December 4, 1995, letter, Regal (acting on behalf of F&G) notified Magna Bank that it was being removed as trustee of the ESOP "subject to our providing you with satisfactory written evidence of the appointment of a successor and of the successor trustee's acceptance of the trusteeship." Magna Bank acknowledged its receipt of this letter on December 6, 1995.

On December 12, 1995, the firm of Sonnenschein, Nath & Rosenthal, which was retained as counsel for US Trust in connection with the due diligence for the ESOP transaction, faxed a Legal Document Review Memorandum to the Kavanagh firm, as counsel for F&G, Foster, and Regal, requesting certain documents to be provided for review. Among the documents requested were copies of any significant correspondence with any regulatory agencies.

On December 19, 1995, the ESOP transaction was approved by US Trust's Special Fiduciary Committee, and US Trust accepted the custodial account. The next day, on December 20, 1995, F&G's Executive Committee unanimously entered a resolution authorizing the Vice Chairman or any Vice President of the company to execute and deliver certain documents, including the Note Agreement between the company and the lenders, $19,999, 998.50 Series A Senior ESOP Notes, $50,000,000 Series B Senior ESOP Notes, the F&G Employee Stock Ownership Trust as amended and restated effective December 20, 1995, and the F&G Employee Stock Ownership Plan as amended and restated effective January 1, 1995. The resolution also authorized the officers of the company to take "all other such actions that are necessary and proper to effectuate the above resolution. . . ." Pursuant to this authority, Regal, acting on behalf of F&G, authored a letter appointing US Trust as trustee of the ESOP and signed the amended and restated Employee Stock Ownership Trust that same day.

Also on December 20, 1995, US Trust accepted the appointment as successor trustee of the ESOP and made written findings in connection with the ESOP transaction. In the written findings, US Trust expressly noted its reliance on the opinions it received from Houlihan, Sonnenschein Nath & Rosenthal as counsel to the trustee, Mayer Brown & Platt as the company's special ESOP counsel, the Kavanagh firm as general corporate counsel to F&G, and Price Waterhouse, as well as Valuemetrics' transaction memorandum, the representations and warranties of F&G and its controlling shareholders, and the pertinent finance documents. US Trust stated that the terms and conditions of the transaction were prudent and reasonably designed to further the purposes of the ESOP, satisfied the requirements of Section 408(e) of ERISA and Section 4875(d)(13) of the Internal Revenue Code, and also that the purchase price of the shares did not exceed the fair market value of the shares.

US Trust then entered into a Stock Purchase Agreement with Foster, Regal, Pellegrino, and other F&G officers and directors. In doing so, US Trust caused the ESOP to use the proceeds of a $70 million loan to purchase ...

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