United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 96-2256
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Melody Ann Felber; Estate of *
William Marion Donelson, *
*
Plaintiffs - Appellees, *
*
v. * Appeal from the United States
* District Court for the
Estate of Robert J. Regan; * District of Minnesota.
Profit Sharing Plan of Osseo- *
Brooklyn School Bus Company; *
Osseo-Brooklyn School Bus *
Company, *
*
Defendants - Appellants. *
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Submitted: February 14, 1997
Filed: July 1, 1997
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Before MAGILL, BEAM, and LOKEN, Circuit Judges.
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LOKEN, Circuit Judge.
A Department of Labor investigation concluded that Robert Regan,
trustee of the Osseo-Brooklyn School Bus Company Profit Sharing Plan (“the
Plan”), had engaged in prohibited and imprudent transactions that violated
his fiduciary duties under the Employee Retirement Income Security Act
(“ERISA”), 29 U.S.C. §§ 1001 et seq. After the Department acquiesced in
voluntary compliance efforts, including appointment of a new, independent
trustee, certain Plan beneficiaries commenced this private action against
Regan and the Bus Company seeking compensatory relief on behalf of the
Plan.
When Regan died before trial, his estate was substituted as a party
defendant. After the bench trial, the district court1 concluded that Regan
twice breached fiduciary duties as trustee and awarded $287,269.27 to the
Plan and $146,750 to plaintiffs for their attorneys’ fees. Defendants
appeal, challenging only the relief awarded. We affirm.
I. The Relief Afforded to the Plan.
ERISA imposes exacting duties on the fiduciaries who control employee
benefit plans to protect the interests of plan participants and
beneficiaries. In investing plan assets, for example, ERISA fiduciaries
must act solely in the interest of plan beneficiaries and “with the care,
skill, prudence, and diligence [of] a prudent man acting in a like capacity
and familiar with such matters.” 29 U.S.C. § 1104(a)(1)(B). In addition,
fiduciaries must avoid engaging in prohibited transactions, such as self-
dealing. See 29 U.S.C. § 1106. When these duties are breached, 29 U.S.C.
§ 1109(a) provides that the fiduciary “shall be personally liable to make
good to such plan any losses to the plan resulting from each such breach,
and to restore to such plan any profits of such fiduciary which have been
made through use of assets of the plan by the fiduciary.” The principal
issue on this appeal is whether the district court correctly applied
§ 1109(a) to two transactions in which Regan improperly invested Plan
assets.
1
The HONORABLE WARREN K. URBOM, United States District Judge
for the District of Nebraska, sitting by designation.
2
A. The School District Transaction.
In November 1988, Regan bought a school bus terminal for $820,000 at
a bankruptcy auction, planning to resell the property to Independent School
District #196 (the “School District”). After financing the initial
purchase with an $820,000 “bridge loan” from First Bank Robbinsdale (“First
Bank”), Regan began negotiating a lease/purchase agreement with the School
District and long term financing with First Bank. In January 1989, First
Bank offered Regan a long-term $820,000 loan, bearing interest at 11.0% the
first year and at a floating rate thereafter, and secured by a mortgage on
the terminal property, a corporate guaranty from the Bus Company, a pledge
of $200,000 of certificates of deposit owned by Regan, and assignment of
the School District’s lease payments.
In April 1989, Regan and the School District entered into a
lease/purchase agreement. The School District leased the terminal for
$17,969 per month for the fifty months commencing May 1,1989, and was
granted an option to buy the property for $594,292 at the end of the lease.
With this commitment in place, Regan turned down First Bank’s permanent
loan offer and obtained his financing from the Plan. On May 1, 1989, he
caused the Plan to repay the $820,000 bridge loan. No document evidenced
this $820,000 “loan.” During each month of the lease, Regan received the
$17,969 rent payment from the School District. For the first thirty eight
months, he remitted $9,969 to the Plan, keeping $8,000 per month as his
profit in the transaction. He remitted all of the last twelve rental
payments to the Plan. When the School District exercised its option to
purchase, the Plan received the full $594,292 purchase price. During the
fifty-month lease, Regan held unencumbered title to the terminal and made
a gross profit of $304,000 ($8,000 per
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month for thirty-eight months). The Plan earned 11.75% annual interest,
and its $820,000 loan was repaid in full.
The district court concluded that this self-dealing between Regan and
the Plan breached Regan’s fiduciary duties as defined in ERISA,
specifically, 29 U.S.C. §§ 1104(a)(1)(B) and 1106(b)(1). Defendants do not
challenge that conclusion on appeal, and rightly so. Even if Regan
intended to benefit the Plan, ERISA flatly “prohibits transactions in which
the potential for misuse of plan assets is particularly great.” Leigh v.
Engle, 727 F.2d 113, 123 (7th Cir. 1984). Though Regan invested Plan
assets in a “loan” that earned 11.75% interest -- much better than the 4%-
6% return then being earned on the Plan’s investments -- he did not protect
the Plan, as an independent trustee surely would have, by documenting that
the Plan was a lender, not an investor, and by obtaining adequate security
for the Plan’s loan, such as the collateral demanded in First Bank’s
proposal. Regan evidently knew his self-dealing was suspect because, by
reporting that the Plan had made a secured loan to the School District, he
concealed the true nature of the transaction from Plan beneficiaries, the
Plan’s auditors, and the Internal Revenue Service.
Thus, the issue here is remedy. Because the Plan suffered no loss,
the question is whether Regan (now his estate) must disgorge to the Plan
“profits . . . made through use of assets of the plan by the fiduciary.”
29 U.S.C. § 1109(a). When a fiduciary has invested his own assets and made
use of plan assets in a prohibited transaction, “section 1109 only allows
recovery [for the plan] where there is a causal connection between the use
of the plan’s assets and the profits made by fiduciaries on the investment
of their own assets.” Leigh v. Engle, 858 F.2d 361, 366 (7th Cir.
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1988), cert. denied, 489 U.S. 1078 (1989).2 Defendants argue that Regan
did not profit by “using” Plan assets because his profit was locked in when
he reached agreement with the School District in April 1989, and because
he could have financed the lease/purchase with his own liquid assets, or
with a long-term loan from First Bank. The district court rejected that
argument and awarded the Plan $275,652.27, Regan’s entire net profit from
the transaction including prejudgment interest.
On appeal, defendants renew their argument that Regan’s
entrepreneurial profit was fixed once he had negotiated terms with both the
School District and First Bank, before the Plan became involved. The most
obvious problem with this argument is that Regan obtained financing from
the Plan on different terms than First Bank had offered. Appellants focus
only on the fact that the initial interest rate offered by First Bank would
have been less than the 11.75% paid to the Plan. But First Bank financing
would have involved not only the risk of a floating interest rate, but also
extensive collateral requirements -- a first mortgage on the terminal
property, assignment of the School District’s lease payments, a guaranty
from the Bus Company, and a continuing pledge by Regan of $200,000 of
highly liquid assets. There is no evidence in the record that explains the
financial cost of these terms to Regan as borrower at that time. Had Regan
lived to testify at trial, he might have convinced the finder of fact that,
despite his efforts to cover up the Plan’s involvement, he really did
transfer all of the “lender’s profit” from First Bank to the Plan, deriving
no personal profit from his unlawful use of Plan assets. But on
2
See also Etter v. J. Pease Constr. Co., 963 F.2d 1005, 1009
(7th Cir. 1992) (“the fact that a transaction is prohibited under
ERISA does not necessarily mandate a remedy, although it is a
very dangerous area for trustees to explore, let alone attempt to
exploit”).
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this record, the district court was clearly justified in drawing a contrary
conclusion -- that Regan surreptitiously made use of the Plan’s $820,000
at least in part to improve his own financial circumstances and thereby
increase his profit from the purchase and resale of the terminal property.
That conclusion resolves this part of the case. Defendants argue
only that Regan made no profit through use of the Plan’s assets. They do
not raise the more complex question whether Regan’s entire profit should
be attributed to his unlawful use of the Plan’s assets. We do not address
that question, except to remind future litigants that “once the ERISA
plaintiff has proved a breach of fiduciary duty and a prima facie case of
. . . ill-gotten profit to the fiduciary, the burden of persuasion shifts
to the fiduciary to prove that . . . his profit was not attributable to the
breach of duty.” Martin v. Feilen, 965 F.2d 660, 671 (8th Cir. 1992), cert
denied, 506 U.S. 1054 (1993).
B. The Reco Loans.
In October 1985, Regan lent $200,000 of Plan assets to Reco, Inc.,
a competing school bus company owned beneficially by several of his nieces
and nephews. This term loan was repayable in semiannual $10,000
installments, with the balance due in July 1988. It was secured by a
junior mortgage on Reco’s new bus terminal. Regan caused the Plan to
extend this loan beyond July 1988 and to lend Reco an additional $450,000
in October 1990. Reco repeatedly missed installment payments of principal
and interest over the years, but there was evidence that the Plan’s loan
was always fully secured. In January 1992, at Reco’s request, Regan caused
the Plan to reduce the interest rate on the unpaid loan balance from 11.0%
to 9.5%. Reco repaid the Plan in full in January 1993.
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This was not a prohibited transaction, but the district court
nonetheless concluded that Regan breached his fiduciary duty of care to the
Plan by acting imprudently and by not acting solely in the best interests
of the Plan. See 29 U.S.C. § 1104 (a)(1)(A) and (B). Again, defendants
do not contest this conclusion on appeal. Turning to the question of
remedy, the district court awarded $11,617 to reimburse the Plan for the
loss attributable to the 1992 interest rate reduction. Defendants argue
that this was an improper remedy under § 1109(a), pointing to
“uncontradicted and apparently credible” testimony by Patrick Regan, a Reco
officer, and Scott Regan, Regan’s son, that interest rates declined in
1991, that Reco threatened to refinance elsewhere if the Plan did not
reduce its interest rate to 9.5%, and that Regan reasonably acquiesced in
this demand because alternative Plan investments did not offer a return
better than 9.5%. This is a plausible theory, but lacking proof that Reco
had a willing alternative lender waiting in the wings, the district court
found that Reco’s “threat to [refinance was] an empty one.” This finding
is not clearly erroneous, and therefore defendants failed to satisfy their
burden to rebut plaintiffs’ prima facie showing of loss to the Plan.
II. The Award of Attorney’s Fees.
ERISA provides that in any action by plan participants or
beneficiaries “the court in its discretion may allow a reasonable
attorney’s fee.” 29 U.S.C. § 1132(g). In this case, plaintiffs’ two law
firms requested a total fee award of $222,332. The district court
conducted a thorough review of the litigation, applying the factors set
forth in Lawrence v. Westerhaus, 749 F.2d 494, 495-96 (8th Cir. 1984), and
concluded that plaintiffs were entitled to a reasonable fee award. It then
carefully analyzed the fee requests, rejecting substantial portions because
they
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reflected work that was excessive, duplicative, or unnecessary. The court
awarded plaintiffs attorneys’ fees of $146,750, payable by Regan’s estate
and the Bus Company. Because defendants concede the court applied the
correct legal standard, we review this award for abuse of discretion. See
Jacobs v. Pickands Mather & Co., 933 F.2d 652, 659 (8th Cir. 1991).
Defendants argue that the fee award is excessive because plaintiffs
succeeded on only four of the thirteen claims in their complaint, because
plaintiffs recovered only a fraction of the total damages they were
seeking, and because it “cannot be disputed that Mr. Regan was acting in
good faith,” which is one of the Westerhaus factors. Although plaintiffs’
excessive fee requests and questionable billing practices concern us, as
they did the district court, the lawsuit has resulted in a substantial
recovery for the Plan that is significantly greater than the court’s fee
award. After carefully reviewing the record and the district court’s
meticulous analysis of the fee issue, we conclude that the fees awarded
were well within its considerable discretion.
The amended judgment of the district court is affirmed.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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