The opinion of the court was delivered by: Judge James B. Zagel
MEMORANDUM OPINION AND ORDER
This is a suit by a profit sharing plan and trust ("Plan") and seven persons, all plan contributors and employees of Complete Temperature Systems, Inc. ("Company"), against the Company for its negligence as administrator of the Plan. Merrill Lynch was managing the Plan's funds when the Plan incurred a loss of $80,000. About $760,000 was then transferred from Merrill Lynch to one Michael J. Murphy (not the Justice Michael J. Murphy of the Appellate Court, First District) who absconded with those monies along with other funds totaling about $16,000,000. He is now serving thirty years in prison. Unlike Merrill Lynch, he had no bond, and all that was recovered was $100,000 from the Plan's own insurance policy.
The Company has moved for summary judgment on the negligence claim, and there is no material dispute over the facts.*fn1
The Company is primarily in the business of commercial heating/cooling service and installation and has been since Duane and Joyce Forst ("Forsts") founded the company in 1971. The Plan was created effective February 1, 1984. The Forsts were the entire board of directors of the Company. Duane Forst was the president and had all the duties of a principal executive officer. Joyce Forst was the secretary and treasurer of the Company. Both served from 1971 until 2003, and both were the trustees of the Plan from its inception. The Company was the Plan administrator and had the authority to appoint an investment manager and allow the manager discretion to manage the fund assets in all respects.
Duane Forst thought that he and Joyce were the plan administrators, acting for the Company of which they were the sole directors. Duane Forst understood that he had obligations to the participants in the Plan and to the Company. The employee handbook listed the Company as the "legal" administrator of the Plan and Duane Forst as the person who would handle the dayto-day operations of the fund.
When an investment manager is appointed, the manager must, in writing, acknowledge receipt of the Plan document and its agreement to act as investment manager undertaking a fiduciary obligation to the Company. The trustees of the Plan were entitled to rely upon an investment manager's written directions if the manager was appointed by the Plan administrator and had made the written acknowledgments.
Merrill Lynch was the first and only manager until 2002, when the Plan incurred an $80,000 loss. Both Forsts sought out Michael J. Murphy to see if he could do better. Impressed by him, they entrusted nearly $1,000,000 of their own money to him in February 2002. In May of that year, they transferred more than $760,000 of the Plan's money to him.
No legal formalities were observed. The Forsts signed the agreement with Murphy, appointing him as investment manager, and did so as trustees. They had no written direction from the Company (90% of whose shares they owned), nor did they, as directors of the Company, adopt a corporate resolution authorizing transfer of the money. This, despite the fact that they had previously used a corporate resolution to restrict, to themselves, the power to sign drafts or order on behalf of the Company. They never gave written notice to themselves as directors of their conduct.
The Company, like many corporations, did provide for corporate action without a formal meeting and vote, but actions like this (usually taken by unanimous consent of a board of directors) must be reduced to writing. There is no such writing. Even informal decisions by directors required that written notice be given within five days so that the Company could ratify the action taken.
The Plan itself requires that investment managers have a bond to cover defalcations. But the Forsts delivered the money without ever seeing proof of such a bond. In fact, neither of them consulted the Plan to see what might be required. Murphy stole the money, dissipated it, and now is clothed and fed by the Bureau of Prisons. The Forsts sued Murphy but received nothing for their pains.
It is not difficult to understand why the Forsts might have thought that certain rules of corporate law need not be followed. From the perspective of most people, the failure to formally notify yourself as a director of what you have done as a trustee might seem absurd. Yet businesses that operate as corporations rather than traditional partnerships or sole proprietorships have the advantage of limited liability and other advantages as well, say for example, if one wants to transfer property to another. Many owners of closely held corporations do spend some time writing letters to themselves.
At issue here is the consequence of the failure of the Forsts to adhere to the formal requisites of the corporate form of an enterprise, a form which they chose to adopt for their business as opposed to other available forms. The Company argues that it cannot be found negligent in its conduct as plan administrator because it has never performed an "action" as plan administrator as the law defines corporate action.
The plaintiffs argue, in turn, that a corporation can act only through its officers and employees of which the Forsts were both. The Company is therefore bound by what the Forsts did.
In Sullivan v. Cox, 78 F.3d 322 (7th Cir. 1996) the Court of Appeals noted, in dicta, that an individual could, at least in theory, bind his corporation to an ERISA plan agreement, particularly where the corporation was owned and operated, as here, by a husband and wife. Either actual or apparent authority would support the validity of such an act. It is dicta because the issue in dispute was not whether the corporate office could bind his ...