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Dan Neil and Eric Bailey, Individuals, On Behalf of Themselves and v. Samuel Zell; Greatbanc Trust Company

February 28, 2011


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


Defendant, GreatBanc, trustee of the Tribune Employee Stock Ownership Plan ("ESOP"), oversaw the ESOP's purchase of $250 million worth of Tribune Company stock as part of a complex leveraged going-private transaction on April 1, 2007. Tribune Company has now entered bankruptcy and the stock is worthless. The court has ruled on summary judgment that GreatBanc breached its fiduciary duties to the ESOP by approving the stock purchase which, the court concluded, is a prohibited transaction under relevant regulations. Defendant now seeks partial summary judgment on the issue of damages, arguing that because the purchase was effectuated with a promissory note, the most Defendant GreatBanc can be liable for is the $2.8 million cash principal payment made on that note in 2008, or, alternatively, the principal and interest paid at that time, a total of $15.3 million in cash. For the reasons explained herein, Defendant's motion is denied.


The Tribune Company's transition from a publicly-held to an employee-owned corporation is the product of a complex set of transactions in which the Tribune Company borrowed approximately $12 billion in order to buy back and retire its publicly-held shares and merge with a subsidiary of its newly-created ESOP. (56.1(a)(3) [240], Ex. B ("Tribune Company 10-K") at 23.) The transaction at issue in this opinion, described in more detail below, involved the ESOP's purchase of $250 million in Tribune Company stock. (Id. at 2.) The ESOP executed that purchase by giving the Tribune Company a promissory note, which was to be paid off over a thirty-year period by the ESOP, using cash contributions from the Tribune Company itself. (56.1(a)(3), Ex. A ("8-K"), Ex. 10.8 ("ESOP Note") at 1.) Each year, as the Tribune Company made contributions to the ESOP, the ESOP in turn paid back the Tribune Company. (Id. at 2.) After each payment, pledged shares would be released from the ESOP's "suspense account" and distributed to individual employee accounts. (8-K, Ex. 10.9 ("ESOP Pledge Agreement") at 1-2.)

On April 1, 2007, pursuant to a series of agreements executed that day, the ESOP purchased 8,928,571 shares of unregistered Tribune common stock at a price of $28 per share, for a total of $250 million. (8-K at 2.) The ESOP paid for the purchase by giving a promissory note to the Tribune Company, to be paid by the ESOP over thirty years using expected contributions from the Tribune Company. (Id.) The ESOP Note provides for the repayment of the principal amount of $250 million, and interest at an annual rate of 5.01 percent, by April 1, 2037. (ESOP Note at 1.) The note specifies that repayment shall come only from "employer contributions" or "dividends, earnings, or distributions" earned from the Tribune stock. (Id. at 2.) The 8,928,571 shares purchased by the ESOP on April 1, 2007, were converted into 56,521,739 shares of common stock after the completion of the Tribune Company's merger with the ESOP subsidiary on December 20, 2007. (Tribune Company 10-K at 46-47.) Those shares represent the only outstanding shares of Tribune Company common stock. (Id.)

Also on April 1, 2007, Tribune Company entered into an agreement with Defendant GreatBanc in its role as the ESOP's trustee, providing for the merger of Tribune Company with Tesop Corp., a corporation owned by the ESOP. (Id. at 3.) Following the merger, the "[Tribune] Company [is] to continue as the surviving corporation wholly owned by the ESOP." (Id.) Preceding the merger, Tribune Company arranged debt financing in order to purchase all of the outstanding publicly-traded Tribune Company stock at $34 per share, for a total expenditure of $8.3 billion. (Id. at 46-47.)

The ESOP Pledge Agreement, also executed on April 1, 2007 between the Tribune Company and GreatBanc, explains the collateral arrangement and the workings of the suspense account--essentially an escrow account in which the ESOP's shares are held until paid for with the Tribune Company's annual contributions, at which point some shares are distributed to employee accounts. The ESOP "pledges, grants a security interest in and assigns to the Company all of the Trust's rights, title and interest in and to the Shares." (8-K, Ex. 10.9 ("ESOP Pledge Agreement") at 1.) Each year, at the end of the "Plan year," shares are released from the pledge equal to the number of outstanding shares still pledged multiplied by the fraction of the outstanding principal and interest that was paid in that year. (Id. at 2.) The Pledge Agreement remains in place "until all obligations due under the ESOP Loan Agreement have been paid in full and all the terms and conditions of the ESOP Note have been satisfied." (Id.)

The Tribune Company made a cash contribution of $15.3 million to the ESOP on April 1, 2008, which the ESOP immediately paid back to the Tribune. (56.1(a)(3), Ex. D, Declaration of John S. Marino ("Marino Declaration") ¶ 6.) The payment consisted of $2.8 million in principal and $12.5 million in interest. (Id.) On April 1, 2009, and April 1, 2010, the Tribune Company forgave an additional $30.6 million in debt, consisting of $24.6 million in interest and $6 million in principal. (Id. ¶¶ 7, 8.) Approximately five million shares have been released from the suspense account as a result of these payments, with 51.5 million shares remaining pledged. (Id. ¶ 9.)

The Tribune Company entered bankruptcy shortly after the completion of this two-step transaction, rendering the shares held by the ESOP essentially worthless. Each of the bankruptcy reorganization plans currently under consideration calls for the termination of the ESOP and the cancellation of the common stock held by the ESOP.*fn2 The Tribune Company-backed plan calls for the forgiveness of all unpaid principal and interest remaining on the ESOP Note. (56.1(a)(3), Ex. C, § 6.8 at 47.) The plan also calls for the cancellation of existing common stock of the type held by the ESOP. (Id. at § 5.8.) The process for termination is spelled out in Section 6.3 of the ESOP Loan Agreement. It provides that "[i]n the event that the value of the Shares [ ] held in the suspense account [at the time of termination] is less than the unpaid principal remaining on the ESOP Note, any unpaid principal and interest so remaining shall be forgiven." (8-K, Ex. 10.7 ("ESOP Loan Agreement") at 5.) Plaintiffs do not dispute that the reorganization plans call for cancellation of the remaining payments, but note that no reorganization plan has yet been approved. (Response Br. at 17-18.)


Plaintiffs allege that Defendant, GreatBanc, breached its duties of loyalty and prudence under ERISA § 404(a), 29 U.S.C. § 1004(a), as a result of the leveraged ESOP transaction. (Third Am. Compl. ¶ 173.) Plaintiffs also allege that Defendant engaged in a transaction prohibited by ERISA § 406(a)-(b), 29 U.S.C. § 1106(a)-(b), when it approved the purchase of unregistered stock from the Tribune Company at an amount less than "adequate consideration." (Id. ¶ 189, 190.) Plaintiffs ask that the court order Defendant to "make good to the plan any losses to the plan resulting from each such breach" and order "other equitable or remedial relief [that] the court may deem appropriate" as provided for by ERISA § 409, 29 U.S.C. § 1109; ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2); and ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3). (Id. ¶¶ 170, 171, 172, 186, 187, 188.)

In a December 17, 2009 ruling, this court concluded that Plaintiffs had adequately alleged that Defendant GreatBanc failed to act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims" as required by ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B). Neil v. Zell, 677 F.Supp.2d 1010, 1019-22 (N.D. Ill. 2009). The court further held that Plaintiffs adequately alleged that GreatBanc violated its fiduciary duties by agreeing to a stock purchase that was a prohibited transaction because the ESOP did not pay "adequate consideration" as defined by ERISA § 402(18), 29 U.S.C. § 1002(18), and because the stock it purchased was not a "qualifying employer security" as required by ERISA § 407(d)(4), 29 U.S.C. § 1107(d)(4). Neil, 677 F.Supp.2d at 1025-27. More recently, the court granted summary judgment in favor of Plaintiffs on their claim that GreatBanc breached its fiduciary duty when it approved the ESOP's April 1, 2007, $250 million purchase of Tribune Company stock. Neil v. Zell, No. 08 C 6833, 2010 WL 4670895, at *9 (N.D. Ill. Nov. 9, 2010). The court found that the stock purchase violated ERISA § 406(a)(1)(E), 29 U.S.C. § 1106(a)(1)(E), because the stock did not meet the Tax Code's definition of "qualifying employer securit[y]." Id. at *8.

Defendant GreatBanc moves for partial summary judgment on the issue of damages. (Pl.'s Mem. in Supp. of Mot. for P. Summ. J. [241] [hereinafter "Damages Br."] at 2.) GreatBanc argues that because the ESOP has paid only $15.3 million on the $250 million note, Defendant's maximum possible liability is that amount, or, alternatively, the $2.8 million of that amount that was paid as principal. (Damages Br. at 1-2.) In GreatBanc's view, Plaintiffs' "recovery cannot exceed the difference between what the ESOP actually paid for Tribune shares it acquired and the fair market value of Tribune stock on the date that it was acquired by GreatBanc." (Id. at 2.) Plaintiffs respond that "[t]he fact that the shares were bought with a promissory note is irrelevant. Contrary to GreatBanc's assertion, the ESOP did not promise to 'eventually' pay $250 million for the shares it bought -- it paid $250 million using a loan from Tribune, and promised to pay that amount back to Tribune." (Response Br. at 4.)


Summary judgment should be granted if "there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). In considering a motion for summary judgment, the court draws "all reasonable inferences from the evidence in the light most favorable to the nonmoving party." Williamson v. Indiana University, 345 F.3d 459, 462 (7th Cir. 2003). In addition, in determining the amount of loss (which Defendant asks us to do here), the court resolves ambiguities against the breaching fiduciary. See, e.g., Secretary of U.S. Dept. of Labor v. Gilley, 290 F.3d 827, 830 (6th Cir. 2002) ("[T]o the extent that there is any ambiguity in determining the amount of loss in an ERISA action, the uncertainty should be resolved against the breaching fiduciary."); Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 602 (8th Cir.1995) ("To the extent that there are ambiguities in determining loss, we resolve them against the trustee in breach."); Kim v. Fujikawa, 871 F.2d 1427, 1430-31 (9th Cir.1989) ("In determining the amount that a breaching fiduciary must restore to the [benefit fund] as a result of a prohibited transaction, the court should resolve doubts in favor of the plaintiffs.") (quotation marks omitted); Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir.1985) ("[O]nce a breach of trust is established, uncertainties in fixing damages will be resolved against the wrongdoer.").


Plaintiffs seek unspecified damages from GreatBanc for breaches of ERISA § 404(a), 29 U.S.C. § 1104(a), and ERISA § 406(a)-(b), 29 U.S.C. § 1106(a)-(b). For each of these two breaches, Plaintiffs seek relief under ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2); and ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3).*fn3

ERISA § 502(a)(2) permits a plan participant to bring a civil action for "appropriate relief" under ERISA § 409, 29 U.S.C. § 1109. That section requires in part that "[a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach." ERISA § 409.

Remedies for ERISA violations rest within the discretion of the district court. "The enforcement provisions of ERISA are intended to provide the Secretary [of Labor], as well as participants and beneficiaries, with broad, flexible remedies to redress or prevent statutory violations." Donovan v. Estate of Fitzsimmons, 778 F.2d 298, 302 (7th Cir. 1985). "ERISA grants the courts the power to shape an award so as to make the injured plan whole." Free v. Briody, 732 F.2d 1331, 1337 (7th Cir. 1984) (discussing ERISA § 409). "A district court is given wide latitude in compensating the participants in an ESOP when a breach of fiduciary duty has been shown. '[I]t is clear that Congress intended to provide the courts with broad remedies for redressing the interests of participants and beneficiaries when they have been adversely affected by breaches of a fiduciary duty.'" Chao v. Hall Holding Co., 285 F.3d 415, 443 (6th Cir. 2002) (quoting Bierwith, 754 F.2d at 1055 (quotation and citation omitted)).

The court has already ruled that Defendant permitted a transaction prohibited by ERISA § 406 when it approved the purchase by the ESOP of $250 million worth of unregistered Tribune Company common stock on April 1, 2007. The court has not yet resolved whether Defendant also breached its fiduciary duties under ERISA § 404. Since Defendant seeks partial summary judgment on damages, the court must construe the facts in the light most favorable to the non-moving party, meaning that the court must assume that Plaintiffs will also succeed in proving a breach of § 404. And, ...

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