General of the State of Indiana
wrote MBC's sweepstakes counsel regarding a multi-state inquiry into
MBC's use of sweepstakes promotions on behalf of Alabama, Arizona,
Arkansas, Indiana, Kansas, Massachusetts, Minnesota, Mississippi,
Missouri, Nebraska, New Jersey, New Mexico, Ohio, Oregon, Rhode Island,
South Dakota, Tennessee, Texas, West Virginia, and Wisconsin. Also in
August 1998, MBC entered into a Stipulated Settlement on the Connecticut
suit which enjoined MBC from engaging in certain sweepstakes marketing
practices in the state for a period of seven years and required MBC to pay
Beginning in 1998, MBC's revenue bases suffered extensive damage as a
result of the negative publicity targeting sweepstakes marketing. Over
the next three years, MBC's gross revenues declined from $197 million in
1998, to $116 million in 1999, to $65 million in 2000. During the same
time period, F&G also experienced a decline in gross revenues from $471
million, to $368 million, to $337 million.
In September 1999, Defendants Ostertag, Cole, Dix, and Elletson,
members of the ESOP administrative committee, reported that on December
31, 1998, the value of the ESOP's F&G shares was $8.52 per share, as
compared to the reported value of $20.33 per share on December 31, 1997.
The total value of F&G shares owned by the ESOP decreased by more than
$83 million in 1998, and the reported net value of ESOP assets, after
deducting liabilities, decreased more than 90% from a net value of more
than $82 million on December 31, 1997, to a net value of just over $7
million on December 31, 1998.
On April 6, 2001, Plaintiffs filed this suit. They bring their claims
against numerous defendants pursuant to ERISA. Plaintiffs have now moved
for partial summary judgment against US Trust. The motion is fully
briefed, and this Order follows.
Summary judgment should be granted where "the pleadings, depositions,
answers to interrogatories and admissions on file, together with the
affidavits, if any, show there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a matter of
law." Fed.R.Civ.P. 56(c). The moving party has the responsibility of
informing the Court of portions of the record or affidavits that
demonstrate the absence of a triable issue. Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986). The moving party may meet its burden of showing
an absence of disputed material facts by demonstrating "that there is an
absence of evidence to support the non-moving party's case." Id. at 325.
Any doubt as to the existence of a genuine issue for trial is resolved
against the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
255 (1986); Cain v. Lane, 857 F.2d 1139, 1142 (7th Cir. 1988).
If the moving party meets its burden, the non-moving party then has the
burden of presenting specific facts to show that there is a genuine issue
of material fact. Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586-87 (1986). Federal Rule of Civil Procedure 56(e)
requires the non-moving party to go beyond the pleadings and produce
evidence of a genuine issue for trial. Celotex, 477 U.S. at 324.
Nevertheless, this Court must "view the record and all inferences drawn
from it in the light most favorable to the [non-moving party]." Holland
v. Jefferson Nat. Life Ins. Co., 883 F.2d 1307, 1312 (7th Cir. 1989).
Summary judgment will be denied where a reasonable jury could return
a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986); Hedberg v. Indiana Bell Tel. Co., 47 F.3d 928,
931 (7th Cir. 1995).
I. ABSENCE OF AUTHORITY
Plaintiffs assert that US Trust was only a co-trustee of the ESOP at
the time of the stock purchase transaction, and therefore could not have
acted without the consent of Magna Bank. Specifically, Plaintiffs contend
that because Magna Bank did not receive written notice of US Trust's
acceptance of the trusteeship until December 21, 1995, Magna Bank
remained a co-trustee of the ESOP at the time that the stock purchase
transaction closed on December 20, 1995. Thus, they argue that US Trust
and Magna Bank had joint authority and power over the plan assets and
that US Trust lacked authority to commit the ESOP to the transaction
The terms of the 1988 ESOP trust agreement provided that F&G could
remove Magna Bank as 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." It is
undisputed that although Magna Bank was given written notice of its
replacement as trustee for the ESOP on December 6, 1995, it did not
receive written notification of US Trust's acceptance of the trusteeship
until December 21, 1995, the day after the stock purchase transaction
closed. It is also undisputed that 30 days had not passed between the
time F&G gave Magna Bank notice of its removal and December 20, 2002,
when US Trust purported to act as sole trustee of the ESOP in closing the
stock purchase transaction.
Initially, US Trust argues that the removal provision of the ESOP trust
specifies no timing requirement on when the written evidence must be
provided and does not state that the trustee must receive this written
evidence before the trustee can be considered removed. The Court agrees,
particularly in light of the reference in the same provision to the
written evidence being supplied to the "removed Trustee."
This suggests that, although the outgoing trustee might still have some
fiduciary obligations under ERISA, the outgoing trustee could be removed
prior to actually receiving the written confirmation that a successor
trustee had been appointed and accepted the appointment.
The record indicates that Magna Bank had actual, although not written,
notice of F&G's decision to remove it as trustee, US Trust's appointment
as successor trustee, and US Trust's acceptance of the trusteeship prior
to December 20, 1995, with the written confirmation following on December
While this sequence of events may have some bearing on when Magna
Bank's fiduciary duties to the ESOP ended, that question is not before
the Court because Magna Bank is not a party to this litigation. The cases
relied on by Plaintiffs go to the issues of when a trustee's fiduciary
liability ends and whether that trustee can be liable to the plan if it
does not properly terminate its fiduciary relationship; they do not stand
for the proposition that a relationship that does not terminate in a
textbook manner automatically results in a co-trustee relationship.
Accordingly, the Court rejects Plaintiffs argument that because F&G had
not yet delivered written proof of US Trust's acceptance of the
trusteeship, US Trust and Magna Bank were co-trustees from December 20,
1995, to December 21, 1995.
Plaintiffs also argue that US Trust and Magna Bank were effectively
co-trustees on December 20, 1995, because 30 days had not passed since
F&G delivered its written notice of removal to Magna Bank. Citing Nichol
v. Pullman Standard, Inc., 889 F.2d 115, 119 (7th Cir. 1989), and H.J.,
Inc. v. ITT, 867 F.2d 1531, 1545-46 (8th Cir. 1989), US Trust responds
that ERISA rights may be waived, and that a valid waiver need not be
express, but rather can be inferred from the conduct of the party.
Accordingly, US Trust argues that Magna Bank could and did waive any
applicable requirements for its removal.
In this respect, certain relevant facts are undisputed. Regal wrote to
Magna Bank on December 4, 1995, stating:
We do hereby remove you as Trustee under the Foster
& Gallagher, Inc. Employee Stock Ownership Trust,
subject to our providing you with satisfactory written
evidence of the appointment of a successor trustee and
of the successor trustee's acceptance of the
trusteeship. Upon our providing you with such
evidence, we would appreciate your delivering the
assets of the Trust to the successor trustee:
U.S. Trust Company of California, N.A.
1300 I Street, N.W., Suite 1080 East
Washington, D.C. 20005-3314
Attention: Normal P. Goldberg, Esq.
Senior Vice President
That same day, Regal also sent a letter to Goldberg stating, "We do
hereby appoint you, U.S. Trust Company of California, N.A., . . .
Successor Trustee ("Trustee") under the Foster & Gallagher, Inc.
Employee Stock Ownership Trust." Barbara Friend ("Friend") acknowledged
receipt by Magna Bank of the notice of removal on December 6, 1995.
On December 18, 1995, Stuber faxed Friend a draft Collateral Custody
Agreement with a cover memorandum requesting that Magna Bank provide its
Custodial Fee Schedule to be used as Exhibit A to the agreement. The
draft agreement referred to US Trust as acting "solely as Trustee of the
Foster & Gallagher, Inc. Employee Stock Ownership Trust (in such
capacity, the `Trustee')" and referred to Magna Bank as a collateral
agent and custodian. The draft also contained an indemnification clause
protecting Magna Bank from costs, expenses, etc., incurred "by reason of
any action taken upon instructions or directions by the Company or the
Trustee (with respect to the tender or exchange of Company Shares or
designation of an account for transfers of Proceeds) or any inaction by
the Bank in the absence of such instructions or directions." Later that
day, Friend then faxed Magna Bank's fee schedule to Stuber, stating "Here
is Exhibit `A' to the Collateral Custody Agreement with regard to the
Even though Friend has testified that she still considered Magna Bank
to be the trustee of the ESOP at the time of the stock purchase, her
testimony concerning the basis for this belief is somewhat conflicting.
Moreover, her (and therefore Magna Bank's) actions, or lack thereof,
speak louder than her subsequent words. On this record, a reasonable
factfinder could conclude that had Magna Bank considered itself trustee
at the time of the stock transaction, it would have been cognizant of its
fiduciary duty to act in the interests of the ESOP beneficiaries and
would have become affirmatively involved by requesting information about
the transaction and asserting its right to approve the sale rather than
sitting back and doing nothing.
To suggest that Magna Bank could have knowledge of the fact that a
multi-million dollar stock purchase by a trust to which it believed it
had a fiduciary duty was imminent but that it could
sit back and hide its head in the sand because it had no information is
Magna Bank did not inquire into the details of the ESOP transaction,
did not assert any right to additional information about the
transaction, did not assert that its consent as trustee was required for
the transaction to proceed, did not attend the closing, and did not
attempt to prevent the closing. In fact, the record suggests that Magna
Bank immediately assumed its new role as collateral agent and custodian,
that Magna Bank had notice of the proposed transaction, that US Trust was
accepting the trusteeship, that F&G considered US Trust to be acting as
sole trustee, and that F&G did not believe that Magna Bank was still
trustee of the ESOP or that its approval was required in order to
consummate the transaction.
The Seventh Circuit has acknowledged that "just as could any party to
any contract," a party to an ERISA-related contract could choose to waive
a contractual requirement. Harris Trust and Savings Bank v. John Hancock
Mutual Life Insurance Co., 302 F.3d 18, 27 (7th Cir. 2002). In fact, in
the prior history of the F&G ESOP, LaSalle Bank waived the 30-day notice
requirement when it was removed as trustee to the ESOP in favor of
Community Bank, and Plaintiffs do not argue that that waiver was somehow
Here, there is evidence from which the trier of fact could reasonably
conclude that Magna Bank implicitly accepted its removal and waived its
right to the 30-day notice and follow-up evidence, or that Magna Bank
acquiesced in and ratified the actions taken by US Trust. However, as the
record is not such that the trier of fact could only find in favor of US
Trust on this issue, the Court finds genuine issues of material fact
requiring resolution at trial with respect to this aspect of Plaintiffs'
In summary, the Court has rejected Plaintiffs' argument that US Trust
and Magna Bank were co-trustees of the ESOP from December 20, 1995, to
December 21, 1995, because F&G had not yet delivered written proof of US
Trusts' acceptance of the trusteeship; this issue is no longer part of
However, the same result does not follow with respect to Plaintiffs'
argument that US Trust and Magna Bank were co-trustees of the ESOP
because the 30-day notice period established in the ESOP trust had not
passed. Although the evidence of record could support the reasonable
conclusion that Magna Bank either waived the 30-day notice period or
alternatively ratified US Trusts' actions, the evidence is not of
sufficient magnitude that such a conclusion would be compelled.
Accordingly, the questions of waiver and ratification present genuine
issues of material fact requiring resolution at trial, and Plaintiffs'
Motion for Partial Summary Judgement as to Liability Against US Trust:
Absence of Authority is denied.
II. BREACH OF LOYALTY AND PRUDENCE: FAILURE TO INVESTIGATE
Plaintiffs second motion seeks a finding that US Trust breached its
duty of loyalty and prudence by failing to conduct an adequate
investigation in connection with the December 20, 1995, stock purchase
transaction by the ESOP. Plaintiffs base their argument in part on their
contention that Foster and Regal admittedly did not make adequate
disclosure to US Trust, which was previously rejected and found to
present a genuine issue of material fact for trial in the Court's November
18, 2002, Order denying Plaintiffs'
First Motion for Summary Judgment against Foster and Regal.
Like the motion at issue in the November 18, 2002, Order, this motion
again takes particular pieces of evidence out of context and attaches to
them Plaintiffs' characterization of what the evidence shows.
In doing so, Plaintiffs ignore disputes of fact as to who knew what and
when, what was provided to whom at what time, the scope of US Trust's
inquiry, etc., that involve assessments of credibility that must be
resolved at trial. Situations involving clear disputes of material fact
are plainly inappropriate for resolution on summary judgment.
Accordingly, the Court denies Plaintiffs' Second Motion for Partial
Summary Judgment without further discussion.
III. ERISA § 406 PROHIBITED TRANSACTIONS ON DECEMBER 20, 1995
Finally, Plaintiffs argue that US Trust violated § 406(a) of ERISA
by causing the ESOP to engage in a potentially abusive transaction.
Section 406(a) is a per se prohibition on such transactions unless the
transaction meets certain statutory exemptions under § 408(e). As US
Trust has not pled an affirmative defense under § 408(e), Plaintiffs
contend that it is liable as a matter of law.
US Trust responds that no court has ever specifically held § 408(e)
to be an affirmative defense that must be pled for purposes of Federal
Rule of Civil Procedure 8(c). Be that as it may, the Court notes that
there is no binding case law holding that § 408(e) is not an
affirmative defense either.
Section 408(e) provides in relevant part that § 406 does not apply
to the acquisition or sale by a plan of qualifying employer securities if
certain conditions are met:
(1) if such acquisition . . . is for adequate
consideration (or in the case of a marketable
obligation, at a price not less favorable to the plan
than the price determined under section 1107(e)(1) of
(2) if no commission is charged with respect thereto, and
(3) if —
(A) the plan is an eligible individual account plan (as
defined in section 1107(d)(3) of this title). . . .
29 U.S.C. § 1108(e). As § 408(e) clearly places the burden of
proof on the defendant, this Court now finds that a fiduciary's invocation
of an exception under § 408(e) is an affirmative defense that must be
See Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996); Lowden v.
Tower Asset Management, Inc., 829 F.2d 1209, 1215 (2nd Cir. 1987);
Donovan v. Cunningham, 716 F.2d 1455, 1467-68 (5th Cir. 1983); Montgomery
v. Aetna Plywood, Inc., 39 F. Supp.2d 915, 919, 935 (N.D.Ill. 1998);
Reich v. Valley National Bank of Arizona, 837 F. Supp. 1259, 1272
(S.D.N.Y. 1993). Any suggestion to the contrary lacks merit.
Although Plaintiffs correctly assert that a failure to plead an
affirmative defense can result in waiver, they ignore the corresponding
maxim that where the opposing party is provided with notice of and a full
opportunity to respond to an affirmative defense, a technical failure to
plead the defense does not result in waiver. Vaughn v. King, 167 F.3d 347,
352 (7th Cir. 1999). Here, US Trust has consistently denied that it
caused the ESOP to pay more than adequate consideration and maintained
from the time it filed its answer that it acted in good faith and that
the stock purchase transaction met the requirements of § 408(e) for
exemption from the prohibited transaction requirements of ERISA.
Whether US Trust's failure to affirmatively plead this defense or
otherwise acknowledge its burden of proof was strategic or mere
oversight, Plaintiffs cannot credibly claim unfair surprise and have
demonstrated no substantial prejudice. Accordingly, for purposes of
presenting a complete record, US Trust's Alternative Motion for Leave to
File an Amended Answer for purposes of adding the affirmative defense is
granted, and Plaintiffs' Third Motion for Partial Summary Judgment is
That being said, the Court is disturbed by the inconsistency in the
burden of proof position taken by US Trust in this case, as opposed to
the position that it took in the case of Henry v. Champlain Enterprises,
Inc., et al., Case No. 01-cv-1681, in the United States District Court
for the Northern District of New York, as well as the fact that counsel
for US Trust has authored a portion of a book on ERISA fiduciary
litigation in which he wrote:
Borrowing from the law of trusts, decisions in ERISA
cases have generally recognized that once a
beneficiary has established that a prohibited
transaction has taken place, the burden of explaining
or justifying the transaction shifts to the
fiduciary, who must prove that the transaction was
undertaken for adequate consideration. One who acts in
violation of his or her fiduciary duty bears the
burden of showing that he or she acted fairly and
Robert N. Eccles, ERISA Fiduciary Law, Chapter 14, at 403-04.
This Court is not an arena for playing games. Had US Trust followed its
prior position and the apparent opinion of its counsel by pleading an
affirmative defense under § 408(e) in its Answer or at least
otherwise affirmatively acknowledging its burden of proof of this issue,
Plaintiffs would not have incurred the costs of filing their Third Motion
for Partial Summary Judgment. As a result of US Trust's inconsistent
positions, the Court finds that US Trust should pay the reasonable
attorneys fees incurred by Plaintiffs in filing their Third Motion for
Partial Summary Judgment. Plaintiffs shall compile an invoice for their
attorneys fees reasonably incurred in preparing the Third Motion for
Partial Summary Judgment and Combined Reply in support thereof and submit
it to counsel for US Trust within 14 days. US Trust will then either
remit this amount to Plaintiffs counsel or file written objections to the
reasonableness of the fees incurred with the Court within 14 days of its
receipt of Plaintiffs' invoice.
For the reasons set forth above, Plaintiffs' Motion for Partial Summary
Judgment as to Liability Against US Trust: Absence of Authority [#278] is
DENIED. Plaintiff's Second Motion for Partial Summary Judgment as to
Liability Against US Trust: Breach of Loyalty and Prudence: Failure to
Investigate [#287] is DENIED. US Trust's Alternative Motion for Leave to
File an Amended Answer [#347] is GRANTED, and the Amended Answer shall be
filed on or before December 9, 2002. Plaintiffs' Third Motion for Partial
Summary Judgment as to Liability Against US Trust: ERISA § 406
Prohibited Transactions on December 20, 1995 [#311] is also DENIED. As
set forth in more detail above, Plaintiffs are awarded their reasonable
attorneys fees in connection with their Third Motion for Partial Summary
Judgment as to Liability Against US Trust.