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KEACH v. U.S. TRUST COMPANY

February 24, 2003

DEBRA KEACH AND PATRICIA SAGE, PLAINTIFFS,
V.
U.S. TRUST COMPANY, N.A., ET AL., DEFENDANTS.



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

  ORDER

FACTUAL BACKGROUND

The basic factual background has been sufficiently set forth in the prior orders of this Court, and familiarity therewith is presumed. The present motion is brought by the Gehring Defendants, who are in this suit only as parties-in-interest in Count IX of the First Amended Complaint. Gehring was the Senior Vice President of Information Systems and Chief Information Officer for F&G. Gregory was F&G's Senior Vice President of Advertising. Halpin, Kyle, and Lappegaard were respectively the Vice President of Marketing, Vice President of Facilities and Development, and the President of Spring Hill Nurseries, an F&G subsidiary. McKittrick was the Vice President of Customer Sales and Service for F&G. Patino was the President of MMI, another subsidiary of F&G. Rathmann was F&G's Senior Vice President of Operations. Swedlund was the President of The Children's Group, another F&G subsidiary. Vandervlugt was the General Manager of the Breck Bulb Division of F&G. Wilson was the Director of Production for F&G, and Wright was F&G's Senior Vice President of Advertising.

The matter is now fully briefed and ready for resolution. This Order follows.

DISCUSSION

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 fact-finder 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).

The Gehring Defendants are in this case only as non-fiduciary parties-in-interest pursuant to § 406(a) of ERISA, which prohibits a "sale or exchange . . . of any property between the plan and a party in interest," and also prohibits a "transfer to . . . a party in interest . . . of any assets of the plan." 29 U.S.C. § 1106 (a)(1)(A) and (D). ERISA further defines a "party in interest" to include any fiduciary, person providing services to the plan, an employer, an employee/officer/director or 10% shareholder of an employer, or any relative of these individuals. 29 U.S.C. § 1002 (14). There is no dispute that these Defendants qualify as parties in interest.

As the Court has previously held and hereby incorporates by reference, once Plaintiffs establish that the purchases of stock by the ESOP constituted a prohibited transaction under § 406, § 502(a)(3) then provides a right of action to seek appropriate equitable relief from parties-in-interest to redress the violation. Harris Trust, 120 S.Ct. at 2188, citing § 502(1)(1)(B). Borrowing from the law of trusts, the Defendants can then invoke the substantive equivalent of a modified bona fide purchaser defense by establishing that they gave value for the trust property. if the Defendants are able to make such a showing, a presumption of good faith attaches, and the burden shifts back to the Plaintiffs to establish that Defendants acted in bad faith or had actual or constructive notice of the circumstances that rendered the transaction unlawful.

Plaintiffs have conceded that at least for purposes of these motions, they do not contest that the stock purchase transactions were for "value" in the sense that they were not gratuitous but rather involved consideration that was more than nominal. Accordingly, the Gehring Defendants are entitled to a presumption of good faith and lack of knowledge unless Plaintiffs are able to rebut that presumption.

Initially, the Court notes that Plaintiffs make no effort to demonstrate actual knowledge on the part of any of these Defendants, relying instead on a constructive knowledge theory. In this respect, the Court's review is complicated by the fact that Plaintiffs have made virtually no effort to address the knowledge of each of the individual Defendants. Rather, Plaintiffs seem to assume that the Gehring Defendants all have equal knowledge and can be dealt with as a group. However, there is no support for this assumption in either the record for this case or the applicable law, which makes clear that guilt by association is insufficient; the knowledge necessary to establish the liability of a non-fiduciary party-in-interest must be determined on an individual basis and cannot be based on what some other party knew. See Harris Trust, 120 S.Ct. at 2189-90. It is not the responsibility of this Court to root through the record like a pig in search of truffles to determine whether there is a factual basis for the assertion that any given Defendant had the requisite knowledge to support a finding of liability; that burden rests with Plaintiffs, and their failure to attempt to meet this burden on an individual basis is fatal to their claim. Moreover, as set forth below, even if the Court were to wade through the record in an effort to determine whether there is sufficient evidence for the claim against any of the Gehring Defendants to proceed to trial, these Defendants would nevertheless be entitled to judgment in their favor.

Plaintiffs attempt to demonstrate knowledge by stating that some of the Gehring Defendants were involved in the due diligence process when F&G bought MBC in 1992 and "received materials indicating that increased state regulation of sweepstakes was a concern of MBC." However, the authority cited for this assertion is one line in a 70-page document listing "[i]ncreased state regulation of sweepstakes first round winner" as one of 12 concerns of the business. The suggestion that this was sufficient to place even those Defendants who actually participated in the process and received the materials on notice of circumstances rendering the transaction unlawful is without merit. Plaintiffs also reference reports authored by Gehring, Rathmann, and Wright in connection with the due diligence of ...


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