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Peabody v. Davis

September 2, 2009

JONATHAN F. PEABODY, PLAINTIFF,
v.
ANDREW A. DAVIS, ROBYN E. KOLE, ROCK ISLAND SECURITIES, INC., THE ROCK ISLAND COMPANY OF CHICAGO, AND THE ROCK ISLAND SECURITIES, INC. SALARY SAVINGS PLAN, LIBERTY MUTUAL SURETY, AND THE HANOVER INSURANCE CO., DEFENDANT.



The opinion of the court was delivered by: Honorable David H. Coar

MEMORANDUM OPINION AND ORDER

Plaintiff Jonathan F. Peabody ("Peabody" or "Plaintiff") brought this action against Defendants Andrew A. Davis ("Davis"), Robyn E. Kole ("Kole"), Rock Island Scurities, Inc. ("RIS"), The Rock Island Company of Chicago ("RIC"), and the Rock Island Securities, Inc. Salary Savings Plan ("the Plan") (collectively "Rock Island Defendants"), according to rights and duties created by Employee Retirement Income Security Act ("ERISA") and common law. The instant matter proceeded to bench trial on October 30, 2006. At the close of trial, both parties submitted post-trial memoranda on the subject of liability. Based on the trial, and parties' pre-trial and post-trial submissions, the Court makes the following findings of fact and conclusions of law. To the extent that any findings may be deemed conclusions of law, they shall also be considered conclusions; to the extent that any conclusions may be deemed findings of fact, they shall also be considered findings. See Miller v. Fenton, 474 U.S. 104, 113-14 (1985).

I. FINDINGS OF FACT

A. Parties

1. Peabody is a citizen of Illinois, residing at the time of trial at 1875 North Fremont Street, Chicago, Illinois 60614.

2. RIC is a Delaware corporation, maintaining an office in Chicago, Illinois at all relevant times.

3. RIS was owned by RIC and also maintained an office in Chicago, Illinois at all relevant times.

4. Defendants Andrew A. Davis ("Davis") and Robyn E. Kole ("Kole") were co-founders of RIS.

5. Defendant Andrew A. Davis ("Davis") was an employee, Chief Executive Officer, Chairman of the Board, and majority shareholder of RIC.

6. Defendant Robyn E. Kole was an employee of RIC, who worked for the company as a member of the board of directors, Chief Financial Officer, and, beginning in 2002, President. Prior to 2002, she acted in the capacity of Chief Operating Officer.

7. At all relevant times, RIC and RIS were closely held corporations, effectively controlled by Davis and Kole.

B. Stock in RIC

8. RIC had several dozen shareholders.

9. RIC maintained a list of stock transactions, reflecting the prices that it paid for the stock.

10. Davis, with some assistance from Kole, determined the price of RIC stock, typically expressed in round numbers.

11. In Spring of 2000 Davis sold or alienated 50 shares of RIC stock he held outside the Plan for $5,000 per share.

12. In April 2001, Davis obtained a valuation of RIC stock of $757 per share for RIC stock that he had given to a tax exempt college in 2000, for the purpose of Davis's personal tax reporting.

13. There is little to no evidence of the process by which Davis and Kole valued the RIC stock.

14. There is little evidence of the fair market value of RIC stock at any relevant time.

15. During discovery, Peabody identified experts on the subject of valuation, all of whom were barred as a result of his failure to comply with Federal Rule of Civil Procedure 26.

C. The ERISA Plan

16. From 1993 through at least the date of trial, RIS sponsored the Rock Island Securities, Inc. Salary Savings Plan ("the Plan"), and was responsible for appointing and monitoring the work of Plan trustees.

17. As discussed in greater detail below, the Plan is an employee benefit plan within the meaning of ERISA, 29 U.S.C. § 1002(3), and is a defined contribution plan within the meaning of 29 U.S.C. § 1002(34).

18. At all relevant times, Davis and Kole were trustees and fiduciaries of the Plan.

19. In their administration of the Plan and trust, Davis and Kole did not rely on, and had no contact with, legal counsel familiar with employee benefits law.

20. Davis and Kole, as administrators of the Plan, relied on the assistance of an outside record-keeping firm, Shievetz Enterprises, and particularly Arthur Shievitz and Geri Leland of that company.

21. As of December 1992, until December 31, 2001, the Plan consisted of a Basic Plan Document, an Adoption Agreement for employers to select specific plan features when they adopt the Basic Plan Document, a trust document, and a Summary Plan Description. These documents controlled when Peabody became a Plan participant.

22. Beginning January 1, 2002, and in effect through the present, the Plan consists of documents including a Basic Plan Document, an amended Adoption Agreement, an amended trust document, and Summary Plan Description.

23. Under the Adoption Agreement in place when Peabody became a Plan participant, rollover contributions were permitted. Beginning January 1, 2002, rollover contributions were no longer permitted.

24. Davis, Kole, RIS and RIC failed to provide the original Plan documents in discovery.

25. Under the document entitled Restricted Stock Agreement, upon an employee's termination, RIC was granted the option to repurchase an employee's stock at book value, but employees had no corresponding right to sell the stock back to the RIC.

D. Peabody's Employment and Involvement with the Plan

26. Peabody was employed by RIC from April 1, 1998 to January 30, 2004.

27. Peabody was never a trustee or fiduciary of the Plan.

28. Upon being hired by RIC in 1998, Peabody was given the option of purchasing RIC stock and/or participating in the Plan. He neither participated in the Plan nor purchased stock in RIC during his first 18 months of employment.

29. Peabody received a bonus of $30,000 from RIC in 1998.

30. In 1999, Peabody was not contractually entitled to a bonus. Nonetheless, that year Davis told Peabody that RIC was going to give him a bonus, payable in cash and RIC stock. Peabody responded that he wanted his entire bonus paid in cash, and did not want any portion paid in RIC stock. Peabody suggested that he rollover his IRA from his previous place of employment into the Plan, in exchange for receiving his full bonus payment in cash. Davis agreed. Peabody instructed National Financial Services Corporation ("National Financial") to roll his IRA from previous employment into the Plan. This rollover took the form of two checks from National Financial to the Plan, one issued on December 17, 1999 for $109,033.84, and another issued on February 14, 2000 for $58.785.58. The total rollover sum was $167,819.42.

31. The rollover funds were used to purchase RIC stock, held in the Plan for Peabody's benefit; $108,000 for 54 shares at $2,000 per share on December 20, 1999, and $58,000 for 29 shares at $2,000 per share on February 23, 2000. Peabody understood that the funds were to be used to purchase RIC stock.

32. In 1999, Peabody received a cash bonus in excess of $212,000.

33. In April 2000, there was a 10 for 1 stock split, which resulted in 830 shares being credited to Peabody's Plan account.

34. In April 2001, Kole told Peabody that Davis wanted all employees to purchase more RIC stock. Peabody agreed, telling Kole that he wanted a small sum of cash remaining in his Plan account to be used to purchase stock. The Plan then purchased 5 shares of RIC stock for $500 per share on Peabody's behalf.

35. Peabody received a benefit statement dated December 31, 2001 valuing his shares at $625 per share. Peabody received a benefit statement dated December 31, 2002, valuing his shares at $625 per share again.

36. On November 8, 2004, Peabody received a benefit statement dated December 31, 2003, valuing his shares at $460,489.03, indicating an effective per share value of $550.

37. To this day, there is also a Vanguard account held in the Plan under Peabody's name, valued at $10,703.80 as of December 31, 2004.

E. Later Changes to Plaintiff's Plan Holdings

38. Peabody's employment was terminated on January 30, 2004.

39. In 2004, RIC offered to purchase the Peabody Shares on one of three terms: First, if Peabody wanted to sell the Peabody Shares on April 1, 2004, RIC offered to purchase the Peabody Shares for $215 per share, Second, if Peabody was willing to defer selling the Peabody Shares until January 15, 2005, RIC offered to purchase the Peabody Shares for $300 per share. Third, if Peabody was willing to defer selling the Peabody Shares until January 15, 2007, RIC offered to purchase the Peabody Shares for $400 per share. ("Purchase Proposal"). Peabody rejected all of these proposals

40. As a result of additional discussions, and as memorialized in a letter dated April 12, 2004, RIC offered to purchase all stock held in the Plan on Peabody's behalf with a loan to RIC ("the Loan"). The Loan was calculated at a per-share value of $350. It was intended to commence on or about February 1, 2004, and to be repaid in a single payment of $292,250.00, plus quarterly interest calculated at prime rate, on February 1, 2005.

41. In a letter dated January 31, 2005, Peabody notified Davis that he wished the payment to be sent via wire transfer, and included the relevant account information.

42. In a letter dated March 1, 2005, RIC advised Peabody that it was unable to meet its obligations under the Loan.

43. On or about March 15, 2005, Davis and Kole conducted a meeting of RIC's creditors, including Peabody. Davis and Kole prepared and distributed a sheet showing the various debts of RIC, showing RIC was not creditworthy.

44. In a letter to Davis and Kole dated March 18, 2005, Peabody demanded that his benefit be distributed

45. In a letter dated March 21, 2005, Kole again stated that the Loan could not be repaid at that time, but included forms by which he could seek a distribution of his benefit or a rollover of his Plan account.

46. By letter dated February 22, 2006, Kole requested the Trustees' insurance broker to lower the level of coverage of the Plan's ERISA-mandated dishonesty bond from $400,000 to $200,000.

47. Sometime after January 29, 2005, Davis and Kole lost control of many Plan documents.

F. Insurance

48. As required under ERISA, Plan officials were bonded for protection against trustee or fiduciary fraud and/or mismanagement. See 29 U.S.C. § 1112.

49. On February 22, 1997, Peerless Insurance Company, a predecessor to Liberty Mutual Surety, issued a commercial crime policy to Rock Island Securities, Inc. Salary Savings Plan ("Plan"). A true and correct copy of the policy issued on February 22, 1997 is Joint Exhibit l. This policy was renewed on February 22, 2000, and ultimately expired on February 22, 2003. A true and correct copy of this policy in effect from February 22, 2000 through February 22, 2003 is Joint Exhibit 3. Joint Exhibit I and Joint Exhibit 3 are collectively referred to as the "Liberty Bonds."

50. The Liberty Bond in effect from February 22, 1997 to February 22, 2000 had a $60,000 limit of liability. On November 5, 1998, Liberty issued an endorsement increasing the limit of liability to $120,000, a true and correct copy of which is Joint Exhibit 2. On September 18, 2000, Liberty issued an endorsement increasing the limit of liability on that Liberty Bond to $500,000, a true and correct copy of which is Joint Exhibit 4. Upon renewal of that Liberty Bond on February 22, 2000, the limit of liability was reduced to $250,000. From February 22, 2000 to February 22, 2003, the Liberty Bond had a $250,000 limit of liability, 51 On February 22, 2003, Hanover Insurance Company issued a commercial crime policy to the Plan. A true and correct copy of this policy, which is hereinafter referred to as "Hanover Bond," is Joint Exhibit 5.

52. The Hanover Bond originally had a $400,000 limit of liability. On February 22, 2006, Hanover, at the request of Robyn Kole, reduced the limit of liability to $200,000. A true and correct copy of the letter requesting this reduction is Joint Exhibit 6, and a true and correct copy of the endorsement memorializing this reduction is Joint Exhibit 7.

53. Metro/Plaza Agency, Inc., an insurance broker in Illinois, obtained the Hanover Bond and ...


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