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Pohl v. McCaffrey

January 25, 2006


The opinion of the court was delivered by: Judge John A. Nordberg


The case was filed by the Trustees of a 401(k) plan to recover shares of stock that were mistakenly distributed to an employee after he left the company. The Plan seeks to recover these shares under ERISA based on a theory of restitution. Before the Court is the Plan's motion for summary judgment.


Defendant John McCaffrey was an employee of DS&P Insurance Services, Inc. ("DS&P"). At some point, DS&P created a 401(k) plan known as The DS&P Insurance Services, Inc. 401(k) Profit Sharing Plan. Plaintiffs are Trustees of the Plan. McCaffrey was a participant in this Plan while he worked at DS&P.

The Plan owned shares of several other corporations, one of which was American Chartered Bancorp ("ACB"). Although we have not been given copies of the Plan documents, the parties represent that the Plan provided that each participant owned a pro rata interest in the shares of ACB and the other corporations. This apparently meant that each participant owned a specific percentage of the ACB shares owned by the Plan. Although the parties have not told us what McCaffrey's percentage was, they appear to agree that his percentage interest was such that his interest at all times was 1773.56 shares.

But McCaffrey was never told what his percentage allocation was or that it consisted of 1773.56 shares. This is because the Plan only told participants, in an annual statement sent to them in August of each year, what the dollar value of their interest was. Each annual statement contained three figures regarding ACB shares: an opening balance; an amount labeled variously as "Earnings," "Earnings/Depreciation," or "Gains(Losses)"; and a total ending balance, which consisted of the opening balance plus earnings. All three figures were stated only in dollar amounts with no indication of how these figures were determined. For example, McCaffrey's August 31, 1995 statement, which is the earliest one we have, simply stated that he had an opening balance in ACB stock of $20,235.84; that he had "Earnings" of $2,447.46, and that he had a closing balance of $22,683.30.

The annual statements were prepared by the Plan's actuary, the Emering Companies, LLC. In preparing these annual statements, the actuary had to calculate these three dollar amounts for each participant. It did so by multiplying the total number of shares and then allocating that dollar value pro rata among the Plan participants. The actuary presumably had a list of the pro rata amounts. There was a further wrinkle in this process. Because ACB was not a publicly traded company with an easily ascertainable share price, the actuary had to get the most recent share price from ACB, which periodically calculated this price. In sum, the annual statement was prepared by the actuary who had to get information from both the Plan and ACB.

It was a breakdown in communication among these three parties that led to the two key mistakes in this case. The first mistake was an under distribution of shares to McCaffrey. This mistake arose when the actuary, in preparing the 1998 annual statements, failed to use the most recent share price. This is because, for some reason, the actuary was unaware that the ACB had began calculating its share price on a quarterly basis. Up until 1998, ACB had determined its share price annually, at calendar year end. So the actuary prepared the 1998 statement based on the December 31, 1997 share price, which was $34 per share, instead of using the most recently determined quarterly share price, which was $38 a share. At this point, no one was aware of the mistake, and in fact, as long as McCaffrey was still a participant in the Plan, this mistake would have had little consequence as it naturally would have been corrected in later statements when the then current price was used.

This initial mistake became more significant when McCaffrey stopped working for the company effective November 30, 1998, at which time he asked that the Plan distribute his ACB shares to his Individual Retirement Account. (At this point, McCaffrey still had no basis for knowing how many shares he should receive.) After receiving McCaffrey's request, the Plan administrator, who at the time was Rudy Drost, bypassed the actuary and sent a letter directly to ACB asking it to transfer to McCaffrey's IRA the "corresponding number of shares" that were "represented by" the dollar balance on his 1998 statement. Because ACB apparently did not have a list of the pro rata interests of each participant, it determined the number of McCaffrey's shares by, in effect, "re-translating" the dollar balance back into a share amount. In doing so, ACB wrongly assumed that the actuary had previously calculated this dollar balance by using the most recent quarterly price of $38. The actuary thus divided McCaffrey's ending balance of $60,301 balance by $38 rather than $34 as the actuary had done, and determined that McCaffrey should receive 1587 shares. As everyone now agrees, this was an under distribution and the correct amount of shares should have been 1773.56. Because McCaffrey did not know how many shares he should have received nor was he able to look up the share price of ACB, he had no way of knowing that he was owed an additional 186.69 shares.

This mistake went undetected for approximately a year. It was eventually discovered by the actuary the following August when it began preparing the 1999 statement and discovered that McCaffrey was owed an additional 186.69 shares.*fn1 For some reason, the actuary did not take any affirmative steps to see that these additional shares were then distributed to McCaffrey but instead sent him an annual statement that was intended to show that the Plan was still holding 186.69 shares that were allocated to him. Not only was this an awkward and indirect way to let him know that there had been a mistaken under distribution, but the statement itself was as everyone now agrees confusing.

The relevant portion of the statement was the following: American Chartered Bank 9/01/98: $60,301.19 (1,773.56 shares) Earnings: $8,681.09 Distributions: (60,301.19) American Chartered Bank 8/31/99 8,681.09 (186.69 shares)

McCaffrey argues that these four lines are ambiguous because they show "the value of" the 186.69 shares twice -- directly in line 4 and indirectly in line 2. McCaffrey apparently came to believe (the reasonableness of this belief will be examined further below) that the statement indicated that he was owed two sets of 186.69 shares, or 373.25 shares overall. One set of 186.69 shares was indirectly represented by the $8,681.09 earnings figure in line 2 and the other set of 186.69 shares was referred to directly in line 4.*fn2

On April 20, 2000, which was approximately 6 months after he received the 1999 statement, McCaffrey sent an email to Nancy Zorica at DS&P requesting 373.25 shares. We do not know what position Zorica held with the company nor why McCaffrey directed his request to her. Nevertheless, this email stated:

Per our conversation I should have 1,960.25 shares of American Chartered Bank stock per Ed Emering. Rudy only transferred 1587 shares. Please direct a letter to Bill Grant at the bank to transfer an additional 373.25 shares to . . . .*fn3 (Cmplt. Ex. D.)

A few months later, in July 2000, Stephen Pohl, who had replaced Drost as the plan administrator, responded to this request by instructing ACB to transfer 373.25 additional shares to McCaffrey's IRA. Pohl states that he was unaware that this was twice the amount McCaffrey should have received.*fn4

In the fall of 2000, the Plan's actuary discovered this mistake when it was preparing the August 2000 annual statements. Sometime later in the fall of 2000, the actuary ...

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