Appendix — Estate of Johnson v. Engle

Su 7

88 -] 066 FILED

DEC 20 1988

No.

In The

Supreme Court of Che United States

@ctober Cerm 1988

ESTATE OF GEORGE JOHNSON, ELEANOR MADSEN,

CARMEN COLON, CASIMIRA MACIAS, SOLEDAD

FREGOSO, MANUEL COLON, HILDA VALDES, CAR-

MEN REGALADO, AMERICA SUAREZ, FERDINAND

KANGISER, MARIA ROMERO RAFAEL MENDOZA,

JOSE LUIZ CORONA, HERIBERTO PIZZARO, RAMON

GONZALAS, AND GUILLERMINA OLIVARES,

For Themselves and all Participants in the Reliable Profit

Sharing Plan Trust except CHARLES W. LEIGH AND

ERVIN F. DUSEK, the Plaintiffs.

Petitioners

v.

CLYDE WILLIAM ENGLE, NATHAN DARDICK,

RONALD ZUCKERMAN, LIBCO CORPORATION,

TELCO MARKETING SERVICES, INC., TELVEST, INC.,

THE RELIABLE EMPLOYEES’ PROFIT SHARING

PLAN TRUST, AND NATIONAL BOULEVARD BANK

OF CHICAGO, A National Banking Association.

Respondents

SEPARATE APPENDIX TO PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SEVENTH CIRCUIT

RICHARD C. MoENNING

135 S. LaSalle Street

Chicago, Illinois 60603

312-263-0062

Counsel of Record

December 20, 1988

American Reprographics Management, Inc.™ (312) 332-ARMI (800-999-6239)

la

3n the

United States Court of Appeals

For the Seventh Circuit

Nos. 87-2548, 87-2609 and 87-2622

CHARLES W. LEIGH & ERVIN F. DUSEK,

Plaintiffs-Appellants,

and

ESTATE OF GEORGE JOHNSON, et al.,

Intervening Plaintiffs-Appellants,

Cross-Appellees,

Vv.

CLYDE WILLIAM ENGLE, et al.,

Defendants-Appellees,

Cross-Appellants.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 78 C 3799—Brian Barnett Duff, Judge.

ARGUED APRIL 8, 1988—DeEciIDED SEPTEMBER 21, 1988

Before BAUER, Chief Judge, CUMMINGS and CUDAHY,

Circuit Judges

CuDAHY, Circuit Judge. We revisit a plethora of issues

left open in our decision in Leigh v. Engle, 727 F.2d 113

(7th Gir 1984) (“Leigh I’). The district court’s thorough

opinion makes our task less arduous. See Leigh v. Engle,

2a

2 Nos. 87-2548, 87-2609 & 87-2622

669 F. Supp. 1390 (N.D. Ill. 1987) (‘Leigh IT’). We con-

clude that the trial judge ably applied Leigh J on remand;

therefore we affirm.

I

The facts are fully discussed in Leigh I, 727 F.2d at 115-

21. We will sketch out only those necessary to this ap-

peal.

Plaintiffs are beneficiaries of the Reliable Manufacturing

Corporation Employees Profit Sharing Trust (‘‘Reliable

Trust’”’).! They contend that defendants violated fiduciary

duties under ERISA, by investing trust assets in cor-

— control contests with which defendants were asso-

ciated.

The defendants are a network of individuals and com-

panies associated with defendant Clyde Engle, a financier

and investor. In particular, Libco is a company controlled

by Engle. The administrators of the Reliable Trust, Nathan

Dardick and Ronald Zuckerman, were officers or directors

of several Engle-controiled entities. We will refer to the

complete Engle network, fully described in Leigh I, 727

F.2d at 116-18, as the “Engle group.’

The suit concerns the trust’s investments in three com-

mon stocks of interest to the Engle group. For the details

of these transactions, see id. at 118-21. The Engle Group

and the Reliable Trust bought into Berkeley Bio Medical,

Inc. (“Berkeley”), at the request of that company’s man-

agement to help defend against a takeover attempt by

Cooper Laboratories, Inc. (““Cooper’’). Cooper eventually

1 The original plaintiffs, Charles W. Leigh and Ervin F. Dusek,

are not parties to this appeal. We will refer to intervening plain-

tiffs as “plaintiffs” for purposes of this opinion.

2 The present trustee, National Boulevard Bank, became trustee

after most of the events at issue here, and is not part of the Engle

group. The only allegation against the bank is undue delay in dis-

tributing assets. See infra pp. 8-10.

3a

Nos. 87-2548, 87-2609 & 87-2622 3

bought the Engle group’s shares, giving the group a large

profit. In the case of Outdoor Sports Industries, Inc.

(“OSI”), the Engle group was the raider. Eventually, a

“white knight” came to OSI’s rescue, and the Engle group

and the trust sold their shares, garnering a profit in ex-

cess of one hundred percent in approximately a one-year

period. The group and Reliable Trust also bought stock

in Hickory Furniture Company (“Hickory’’). Engle gained

control of the company, and the trust sold its shares after

a year at a four percent profit.

The Reliable Trust’s return on these three investments

was a whopping 72 percent over a relatively brief time

span. Nonetheless, plaintiffs brought this action, claiming

the administrators breached their duty of loyalty to the

trust under the Em C81 Retirement Income Security

Act of 1974, 29 U.S.C. §§ 1001-1461 (“ERISA”), and seek-

ing the Engle group’s entire profits from its investments

in the three stocks, estimated at up to ten million dollars.

The trial court initially found for the defendants. We

reversed in Leigh I, holding that the administrators had

breached their fiduciary duties under ERISA sections 404

and 406, 29 U.S.C. §§ 1104, 1106, and that plaintiffs might

be entitled to some damages, albeit not the amount they

requested. We remanded the case for a determination

whether Engle and Libco were liable as fiduciaries with

respect to the investments; whether the administrators

and the bank unduly delayed distribution of trust assets;

whether plaintiffs suffered any damages; and for a deter-

mination of fees. Jd. at 140-41.

The district court held that Engle and Libco breached

their fiduciary duties by failing to adequately supervise

the administrators selected by them. The court found no

undue delay in asset distribution. It awarded piaintiffs

$6,704 in damages, the difference between the return on

Hickory stock and that from a prudent alternative invest-

ment. Finally, the court allowed plaintiffs fees incurred

4a

4 Nos. 87-2548, 87-2609 & 87-2622

through the time of Leigh I, and allowed some defendants

partial fee reimbursement from the trust.? Both sides appeal.

In a probably futile attempt to clarify the analvsis, we

will divide our discussion into three categories. Initially,

we will review the district court’s findings on liability to

determine whether they are factually or legally erroneous.

Then we will examine the court’s calculation of damages.

Finally, we will look at the fees questions.

II.

The district court made two findings on liability; the

losing parties appeal. We will reverse factual findings only

if they are clearly erroneous.:'See Fed. R. Civ. P. 52(a);

Anderson v. City of Bessemer City, 470 U.S. 564, 573

(1985). “Where there are two permissible views of the

evidence, the factfinder’s choice between them cannot be

clearly erroneous.” Anderson, 470 U.S. at 574. We review

legal determinations de novo.

A.

In Leigh I, we ordered the district court to determine

whether Engle and Libco acted reasonably and prudently

in light of their knowledge of the administrators’ conflict-

ing interests and the trust’s investments. 727 F.2d at 136.

We held that Engle and Libco were fiduciaries of the

trust with respect to selection and retention of the Plan’s

administrators, id. at 134, and stated that they had a duty

“to take prudent and reasonable action to determine whether

the administrators were fulfilling their fiduciary obliga-

tions.” Id. at 135.

Judge Duff held on remand that “Engle and Libco did

not take reasonable action to ensure that Dardick and

3 The dollar amounts have yet to be determined. That fact does

not affect the finality of the judgment. See, e.g., Barrington Press,

Inc. v. Morey, 816 F.2d 341, 342 (7th Cir.), cert. denied, 108 S.

Ct. 249 (1987).

5a

Nos. 87-2548, 87-2609 & 87-2622 5

Zuckerman were fulfilling their fiduciary duties.’”’ Leigh

II, 669 F. Supp. at 1395. His key factual finding was that

Engle and Libco ‘“‘knew of, but chose to ignore’’ the ad-

ministrators’ improper investment decisions. /d. That find-

ing, in conjunction with our opinion in Leigh I, made the

ultimate finding of liability ‘‘almost inevitable.’’ Jd. at

1417.

Engle and Libco appeal. They do not attack the finding

that they knew of the investments. Instead, they contend

that even assuming total knowledge of the administrators’

actions, they were under no duty to respond. This attack

takes two approaches. The first is a thinly-veiled assault

on Leigh I’s central holding. Engle and Libco argue that

the investments were not spéculative and that “(tJhere

was no actual conflict of interest.”” Reply Brief of Engle

and Libco at 5. The latter assertion directly contradicts

our holding in Leigh I that the administrators breached

their duty of loyalty to the trust. 727 F.2d at 132. We

will not reopen that can of worms. Also, whether the in-

vestments were speculative is irrelevant. The administra-

tors’ breach did not consist of investment in speculative

assets. Rather, the administrators breached their duties

when they made investment decisions out of personal

motivations, without making adequate provision that the

trust’s best interests would be served.* That breach, known

to Engle and Libco, created a duty on their part to take

action to rectify the situation. They did not do so, thereby

breaching their supervisory duties.

4 See Leigh I, 727 F.2d at 132, where we concluded that the ad-

ministrators had breached their fiduciary duties

because the fiduciaries had divided loyalties with clear poten-

tial for conflicts of interests, because the fiduciaries with di-

vided loyalties failed even to seek independent, disinterested

advice regarding these investments and their duties to the plan

beneficiaries and because, throughout prolonged contests for

corporate control, the fiduciaries’ use of the trust assets dove-

tailed at all times with the interests of the Engle group.

6a

6 Nos. 87-2548, 87-2609 & 87-2622

Engle and Libco’s more substantial argument is that

Leigh I should not apply retroactively. They say that

Leigh I created a new basis for liability from whcele cloth,

and that it would be “punitive” to hold them liable when

they could not have recognized that the administrators

were violating the statute. They point us to City of Los

Angeles Dept. of Water and Power v. Manhart, 435 U.S.

702 (1978), where the Court refused to award retroactive

relief in a Title VII action brought against plan admins-

trators.

Manhart is inapposite. First of all, it is a Title VII case,

construing that statute’s unique retroactive relief provi-

sions. /d. at 718. Second, the Manhart Court’s reasoning

cuts against Engle and Libco. The Manhart Court was

concerned that “major unforeseen contingencies” could

wreak havoc on the nation’s pension plans, destroying the

entire system. /d. at 721. No such concerns are present

here. Leigh I did not announce any fundamental change

in the rules governing ERISA plan administration. At bot-

tom, the case simply held that administrators violate their

duty of loyalty when they use plan assets to dabble in

their business associates’ takeover attempts, unless there

have been special efforts to identify and preserve the

trust’s best interests. Leigh I, 727 F.2d at 132. We fail

to see anything novel or unpredictable in this holding.

While ERISA is a fairly modern creature, the law of fidu-

ciaries, codified in the Act, is of venerable vintage. Leigh

I was an application of principles at the heart of corporate

and trust law, principles that should be common knowl-

edge to every fiduciary. Cf. Fulton Nat’l Bank v. Tate,

363 F.2d 562, 570-71 (5th Cir. 1966); Restatement (Second)

of Trusts § 170 (1959) (“the trustee is under a duty...

to administer the trust solely in the interest of the bene-

ficiary’”’).

Engie and Libco briefly raise other points, all assaulting

the notion that they could ever he held liable for this sort

of conduct. Those arguments must fail in light of Leigh I.

ee

7a

Nos. 87-2548, 87-2609 & 87-2622 7

B

The district court’s second finding on liability was that

“the defendants did not breach their fiduciary duties by

delaying the distribution of trust assets.” Leigh II, 669

F. Supp. at 1412. Plaintiffs appeal this determination.

Judge Duff's holding on this point consists of two parts.

He first found that “there was neither a complete discon-

tinuance of contributions nor a complete termination of

the plan prior to February 28, 1979.” Id. Appellants con-

cede this point. ning Brief of Intervening Plaintiffs-

Appellants at 42. They thus must dispute the court’s sec-

ond finding that, given the 1979 termination date, initial

distributions were not due until March 1, 1980. Jd.

Plaintiffs’ first argument is that Judge Duff ignored this

court’s mandate in Leigh I. In that opinion, we remanded

so that the district court could reconsider the delay issue.

727 F.2d at 136-37. The district court’s exhaustive factual

findings and its common-sense construction of the relevant

documents and regulations compel affirmance. The reasons

for any delay become relevant only when distribution is

delayed beyond the time mandated by the trust instru-

ments.

Appellants act as though this approach is somehow dis-

honest. We are hardly inclined to discipline a trial judge

for finding the crux of an issue and Sashaiten at that

point. Contrary to appellants’ overzealous assertions, we

did not require the district court to find liability or to

follow any one theory in determining liability. In fact, the

mode of analysis adopted by the district court was sug-

gested in our opinion, when we urged the court to con-

sider the trust documents and relevant regulations to de-

a at what point distribution was required. See id.

at 136.

As to the factual finding that distributions were not due

prior to March 1, 1980, we are persuaded by Judge Duff's

reasoning. Section 7.2 of the Restated Plan says that

“{uJpon termination of the Trust, the Committee shall

direct the Trustee to distribute all assets remaining in

ai

8a

8 Nos. 87-2548, 87-2609 & 87-2622

the Trust. . . .” Intervening Plaintiffs say that use of the

word “upon” requires immediate distribution.

The district court properly rejected that rigid interpreta-

tion, for several reasons. Nothing in section 7.2 purports

to establish the time or manner of distribution. Use of

the word “upon” provides little or no guidance. Therefore,

Judge Duff poeuney looked elsewhere for interpretive

assistance. As directed by Leigh I, 727 F.2d at 136, he

looked to the governing law, 26 U.S.C. § 401(aX14), which,

although not applying directly to this type of termination,

gives some guidance. That section requires that payments

begin no later than sixty days after the close of the ter-

mination year. Likewise, in construing the word “upon”

in other sections of the Restated Plan, section 5.6 adopts

the same rule. We believe Judge Duff correctly looked

to closely analogous termination provisions to determine

when payments must begin under section 7.2.

Appellants contend that “upon” means something dif-

ferent in section 7.2 than elsewhere in the Restated Plan.

But there is not a scintilla of evidence, either in the trust

documents or elsewhere in the record, to support that as-

sertion. We will not reject the district court’s analysis in

favor of mere speculation.

Likewise, the court’s alternative holding independently

supports its result. Judge Duff held that “{ejven if defen-

dants had delayed distribution of trust assets, the damages

assessed in . . . this court’s decision would compensate

plaintiffs for any loss they suffered by reason of the de-

lay.” District Court Opinion at 46. That finding is clearly

correct. The only possible loss from delay is the opportu-

nity cost of not able to invest the money elsewhere.

The trust assets greatly appreciated in value during the

period of the alleged delay. Appellants do not challenge

this fact, which is dispositive on the “~~ question.

We affirm the district court’s finding on this point.

9a

Nos. 87-2548, 87-2609 & 87-2622 )

III.

The parties raise two questions as to the district court’s

calculation of damages. The court rejected plaintiffs’ con-

tention that they were entitled to al/ profits on all Engle

group investments in OSI, Berkeley and Hickory, holding

that defendants showed that their profits were not ob-

tained through use of the trust assets. Judge Duff did,

however, award plaintiffs $6,704 in — from the

trust’s investment in Hickory, since that s did not per-

form as well as more appropriate investment vehicles. We

are not surprised that both sides appeal. In Leigh I, we

called this damage calculation a “formidable task.” The

district court did an admirable job with it.

A.

Plaintiffs ask for millions of dollars in damages, claim-

ing that all or most of the Engle group’s profits from its

investments in the three companies were attributable to

use of trust assets. We thought we had laid this argu-

ment to rest in Leigh I, where we examined the facts

and the relevant statutes and said that “(the plaintiffs’

argument reaches too far.” 727 F.2d at 137.

Our holding in Leigh I was that 29 U.S.C. section 1109

only allows recovery “‘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.”

727 F.2d at 137. We also held that “the trustee has the

burden of showing which property and profits are his.”

Id. at 138. We tried to make clear to the plaintiffs how

unlikely they were to obtain substantial damages, given

the investments’ excellent returns and the miniscule per-

centage of the Engle group’s total investment made up

of trust assets. See id. at 137 n.35 (trust never heid even

one percent of target companies’ stock). Appellants char-

acterize the Engle group’s profits as a ‘windfall,’ Open-

ing Brief of Appellants at 5, but, if that windfall resulted

from defendants’ own efforts, it in no way belongs to the

trust. See Leigh I, 727 F.2d at 138. Plaintiffs once again ac-

| —_~_

10a

10 Nos. 87-2548, 87-2609 & 87-2622

cuse Judge Duff of ignoring this court’s mandate (an accusa-

tion they make far too often and with no apparent thought

as to whether it is appropriate, see Opening Brief of Ap-

pellants at 22 n.5), but that ‘“‘mandate’”’ included a caveat

that the judge on remand might very well find no damages

appropriate. Leigh I, 727 F.2d at 138. In order to avoid dis-

gorgement of part of its profits, the Engle group had to show

that they did not result from misuse of trust assets. Judge

Duff correctly held that defendants met this burden.

There are at least five theories that might explain how

use of trust assets increased the Engle group’s profits on

its own investments. First, perhaps the Engle group ef-

fectively “parked” stock by buying it with trust assets.

That is, the group might have delayed disclosure of its

investment in a target, allowing it to purchase more shares

at a lower, Died sag price, by not including the trust’s

shares in determining when the group’s investments met

the threshold for disclosure mandated by federal securities

laws. See Securities Exchange Act § 13(d), 15 U.S.C.

§ 78m(d). That contention will not fly here, since the

Engle group included the trust’s holdings in its Schedule

13D filings. Likewise, any assertion that the Engle group

would not have been able to purchase the stock with its

own money lacks support in the record. Engle’s reputa-

tion as an effective financier was based in part on his abil-

ity to quickly raise capital.

Third, the increase in the Engle group’s holdings due

to the trust’s investments might have convinced the man-

agement of OSI to seek a “white knight,” motivated

Berkeley’s buyer to pay a premium for the Engle group’s

shares or allowed the group to gain control of Hickory.

Judge Duff found these contentions implausible. Those

findings are not clearly erroneous. The trust’s holdings

were a tiny fraction of the Engle group’s holdings. The

Engle ’s efforts succeeded use of its large stake,

its abil ity to raise capital for a larger investment and

Engie’s reputation as an effective takeover artist. If any-

thing, the trust benefited from its association with Engle,

not vice versa.

lla

Nos. 87-2548, 87-2609 & 87-2622 ll

Fourth, the administrators did not, in the case of

Berkeley, have the potential to undermine a settlement

between the Engle group and Cooper by refusing to ten-

der the trust’s shares. Cooper Laboratories would not

have refused to purchase the Engle group’s large stake

but for the inclusion of the few shares held by the Reli-

able Trust. There is substantial evidence in the record

to support Judge Duff’s finding on this point, most notably

the testimony of expert witness Daniel Fischel. Plaintiffs

offered no persuasive evidence to the contrary, referring

primarily to an affidavit of Joseph Dornig, a Cooper of-

ficer, never accepted into evidence. Plaintiffs rely on a

single inconclusive statement taken out of context. They

make no detailed argument as to why the affidavit should

have been admitted. Even if it had been, the result warns

not have changed.

Finally, Judge Duff’s finding that trust purchases did

not substantially affect the market price of stock is not

clearly erroneous. Plaintiffs’ arguments on this point con-

sist mostly of attempts to denigrate the testimony of

Daniel Fischel, an expert called by the defendants. We

have reviewed Professor Fischel’s testimony and agree

with Judge Duff’s characterization of it as “highly credi-

ble and persuasive.” Leigh II, 669 F. Supp. at 1401. Pro-

fessor Fischel exhaustively analyzed the economic facts

of the case. Essentially the district court believed Fischel

and disbelieved plaintiff's experts. We cannot call findings

based on such thorough analysis clearly erroneous.

B.

Once the district court determined that the Engle

group’s profits were not tainted by the trust’s invest-

ments, it had to determine whether the Trust suffered

any losses attributable to the distorted investment deci-

sions that may have resulted from the trustees’ conflicts

of interest. Judge Duff undertook the straightforward ap-

proach of comparing the return on the improper invest-

ments with that of a reasonably prudent alternative in-

vestment—in this instance the Harris Bank’s common

12a

12 Nos. 87-2548, 87-2609 & 87-2622

stock funds. In Leigh I we placed the burden of disprov-

ing damages on the defendants. 727 F.2d at 138. There-

fore, the court adopted the ‘“‘most generous” of the rea-

sonable damage calculations submitted to it. Leigh II, 669 -

F. Supp. at 1405. Looking at each of the three trust in-

vestments in isolation, it found that the trust suffered no

losses from the OSI and Berkeley investments. It did,

however, find a loss of $6,704 on the Hickory investment.

While that investment made a small profit, the gain was

less than that from the alternative investment used as

a standard by the court.

Defendants appeal this award. They contend, not with-

out foundation, that the court erred in not looking at the

value of the entire portfolio in determining whether the

trust suffered any loss from the investments. Once again

a party alleges that Judge Duff misconstrued or ignored

this court’s mandate; once again we do not agree. We did

say in Leigh I that ‘{i}t is clear that the trust lost no

money in the challenged transactions.” 727 F.2d at 121-22.

Judge Duff did not find differently. He merely found that

the gain from the Hickory investment was less than that

which would have been obtained through prudent alter-

native investments.

Turning to the theoretical challenge, we find that de-

fendants’ arguments contain a kernel of truth. When in-

vestment advisors make decisions, they do not view in-

dividual investments in isolation. Rather, the goal is to

create a diversified portfolio that balances appropriate

levels of risk and return for the investor. The risk of a

given investment is neutralized somewhat when the in-

vestment is combined with others in a diversified port-

folio. The risk inherent in the entire portfolio is less than

that of certain assets within that portfolio. Ideally, after

diversification only market risk remains. Likewise, the

return from a portfolio over time should be more stable

than that of isolated investments within that portfolio.

(This discussion is greatly simplified; for a somewhat more

technical explanation, see R. Brealey & S. Myers, Prin-

ciples of Corporate Finance 119-32 (2d ed. 1984).)

13a

Nos. 87-2548, 87-2609 & 87-2622 13

Given the facts that investment advisors generally follow

a portfolio strategy of investment and that beneficiaries

whose assets are being managed are concerned with the

end result of that strategy, not with the return on a single

element in the portfolio, it makes sense for courts to look

at the whole portfolio to determine the investment strat-

egy’s success. Cf. Donovan v. Bierwirth, 754 F.2d 1049,

1057 (2d Cir. 1985); Landes & Posner, The Revolution in

Trust Investment Law, 63 A.B.A.J. 887, 889-90 (1976);

Note, Fiduciary Standards and the Prudent Man Rule

Under the Employment Retirement Income Security Act

of 1974, 88 Harv. L. Rev. 960, 967 (1975).

Judge Duff acknowledged this theory’s force as a gen-

eral principle, but determined that it should not apply in

this case. Although the question is a close one, we do not

believe he abused his discretion. Portfolio theory gains

its force from the fact that it reflects investment deci-

sions in the real world. But that assumption does not hold

in this case. As we held in Leigh I, defendants did not

make their investment decisions with the sole goal of cre-

ating a diversified, safe portfolio for the trust benefici-

aries. They argue that their decisions had that effect and

that the trust made a great deal of money; but the result

does not change the fact that the trustees’ purposes were

not those of portfolio investors. The administrators looked

at the stocks in isolation; so a court is justified in taking

the same view when calculating the loss from those invest-

ments. Our holding may be reduced to this: where fiduci-

aries breach their duty of loyalty by making individual

investments with an eye toward some goal other than the

creation of a proper portfolio for their clients, a court may

return the favor, viewing the investments in isolation to

determine damages.

One might argue that this rule results in overdeter-

rence, that trustees will be deterred from making poten-

tially —s and prudent investment decisions by the

risk of future damages. That might be the case if the rule

were applied to marginal conduct, e.g., to an investment

strategy that borders on an unacceptable risk level but

l4a

14 Nos. 87-2548, 87-2609 & 87-2622

is close to the range of reasonableness. That is not this

case. Here the trustees did not err slightly in their at-

tempt to create a proper portfolio; they simply made no

such attempt, at least with respect to the decisions to pur-

chase stock in OSI, Berkeley and Hickory. There is no

way to overdeter such conduct. It should never occur, no

matter how profitable the end result.

In short, the appeal and cross-appeal on damages lack

merit. Plaintiffs ask for the moon, a possibility we firm-

ly rejected in Leigh I. Defendants, on the other hand, seek

to avoid even a modest penalty for their misconduct. The

district court struck a defensible middle approach, one

much more in tune with the case’s realities than the ar-

guments of any party. Cf. Patton v. Mid-Continent Sys.,

Inc., 841 F.2d 742, 748 (7th Cir. 1988).

IV.

Finally, we must visit the issue of fees. Judge Duff held

first that the trust instruments allowed for reimburse-

ment of fees incurred by Dardick, Zuckerman and Na-

tional Boulevard Bank, for defense of claims on which

plaintiffs did not prevail. For their efforts in prosecuting

the sole issue on which they did prevail he awarded plain-

tiffs fees. Because determination of exact fees incurred

in litigating specific issues is well-nigh impossible in this

case, and because the parties have evidenced an uncanny

proclivity for making every molehill into a mountain, he

made the solomonic decision to award plaintiffs all fees

incurred through Leigh I, but none thereafter. Extended

fee litigation would serve no purpose except to further

deplete the trust, and the issues on which plaintiffs pre-

vailed were substantially resolved by our first decision.

Moreover, “{a}warding attorneys’ fee to plaintiffs for this

most recent portion of the case would reward litigation

that was ill-conceived, often poorly executed, and frac-

tious.” Leigh II, 669 F. Supp. at 1417. Both sides appeal.

15a

Nos. 87-2548, 87-2609 & 87-2622 15

A.

Plaintiffs ask us to reverse the decision allowing reim-

bursement of fees to Dardick, Zuckerman and National

Boulevard Bank, incurred in fighting claims that ultimate-

ly failed. We cannot say that the trial court abused its

discretion.

The trust instruments allow for reimbursement of fees,

and allow a reserve to be set up to ensure payment. The

only real question is whether the trust provisions conflict

with ERISA. They do not. While an award of fees to a

losing defendant certainly would contravene Congress’ in-

tent, see 29 U.S.C. § 111Qa), plaintiffs point us to no

statutory or common-law basis for denying fees to a pre-

vailing trustee where the trust documents specifically con-

template such reimbursement.

Plaintiffs argue that this result unjustly deprives the

beneficiaries of their funds. We sympathize, to the extent

that plaintiffs think it is disgraceful for pensioners to be

deprived of their benefits because of this seemingly end-

less litigation. To the extent they try to place the blame

for this result entirely on the defendants, however, plain-

tiffs are mistaken. Defendants prevailed as to most of the

claims. The record makes painfully clear that plaintiffs (or

their attorneys) needlessly prolonged this litigation through

quixotic, short-sighted and hardball tactics that were ap-

parently undertaken with little thought as to the effect

- on the ultimate victims—the beneficiaries. Defendants ex-

pended great sums of money defending meritless claims.

Very few people would become plan administrators if sub-

jected to such unjust, extensive potential costs. Reim-

bursement here conformed with the trust documents and

ERISA. We therefore affirm that aspect of the district

court’s holding.

B

Judge Duff awarded plaintiffs fees incurred through

Leigh I. We give great deference to this determination,

committed by statute to the trial court’s discretion. 29

0

16a

16 Nos. 87-2548, 87-2609 & 87-2622

U.S.C. § 1132(gX1). Both sides appeal. Plaintiffs want more

money; defendants say plaintiffs should get nothing. In

Leigh I we set out the legal standard to be applied on

remand. See Leigh I, 727 F.2d at 139 n.39. The court

below followed that analysis, considering five factors:

(1) The degree of the opposing parties’ culpability or

bad faith; (2) the ability of the opposing parties to

satisfy an award of fees; (3) whether an award of fees

against the opposing parties would deter others from

acting under similar circumstances; (4) whether the

parties requesting fees sought to benefit all partici-

pants and beneficiaries of an ERISA plan or to re-

solve a significant legal question regarding ERISA;

and (5) the relative merits of the parties’ positions.

Id. (quoting Marquardt v. North Am. Car Corp., 652 F.2d

715, 717 (7th Cir. 1981)). The district court found:

(1) Dardick, Zuckerman, Libco, and Engle were gross-

ly negligent in investing a substantial portion of the

trust’s assets in three speculative stocks. (2) The four

breaching fiduciaries have the resources to pay a fee

award and are better able than plaintiffs to bear this

cost. (3) An award of attorneys’ fees to prevailing

plaintiffs will tend to deter similar fiduciary miscon-

duct in the future. (4) Plaintiffs (or at least interven-

ing plaintiffs) brought this lawsuit on behalf of all

plan participants, not merely for individual gain. (5)

The liability of the four breaching fiduciaries is not

a close question; even minimal reflection should have

led them to realize it was unlawful to invest 30 per-

cent of the trust’s assets in three speculative stocks.

Leigh II, 669 F. Supp. at 1416.

Defendants challenge this characterization of the case,

but we cannot say it is so wild as to be an abuse of dis-

cretion. In particular, the deterrent effect of a fee award

looms large on these facts. As matters turned out, the

trust suffered little damage. But that does not make de-

fendants’ misconduct less censurable. Defendants’ briefs

in this court exhibit a disturbing inclination to downplay

17a

Nos. 87-2548, 87-2609 & 87-2622 17

the gravity of their offense because it made money. We

agree with the court below: ‘Perhaps the defendants are

too young, too wealthy, and too comfortable to have con-

templated the enormity of the risk they took, and the

human suffering so narrowly averted.” /d. at 1417. A fee

award is one small way to impress upon them the gravity

of their conduct, and to deter such action in the future.

Plaintiffs challenge the amount of the award. Again, the

abuse of discretion standard applies. Bright v. Land

O'Lakes, Inc., 844 F.2d 436, 442 (7th Cir. 1988). In this

context, “‘an abuse of discretion occurs only when no rea-

sonable person could take the view adopted by the trial

court. If reasonable persons could differ, no abuse of dis-

cretion can be found.” Harrington v. De Vito, 656 F.2d

264, 269 (7th Cir. 1981), cert. denied, 455 U.S. 993 (1982).

The court below allowed plaintiffs’ fees incurred prior

to Leigh I. Although the judge found that they prevailed

only as to one issue, he felt that attempting to coerce

these parties into dividing fee requests by issue would

be costly, time-consuming and probably not fruitful.

The district court’s approach is far from unreasonable.

Judge Duff correctly asserts that Leigh I “established the

only significant legal principles to arise from this lawsuit,

and. also resolved the principal factual issues on which

plaintiffs prevailed.” Leigh II, 669 F. Supp. at 1416. Our

first opinion made clear that while plaintiffs proved a

breach of duty, they were probably not greatly injured

by that breach. To continue in hope of a jackpot was mere

folly, and it should not be rewarded. The district court’s

approach ensures that the trust will not be further de-

pleted by years of fee litigation. We affirm.

5 Plaintiffs aiso request sanctions in their reply brief under Fed.

R. Civ. P. 11, Circuit Rule 38 and 28 U.S.C. section 1927. Rule

11 sanctions are of course not available from this court on appeal.

Hays v. Sony Corp., 847 F.2d 412, 420 (7th Cir. 1988). Moreover,

to the extent anyone should be sanctioned for abusing the litiga-

tion process, it is not the defendants. Plaintiffs sometimes tread

(Footnote continued on following page)

- ; = ———

18a

18 Nos. 87-2548, 87-2609 & 87-2622

V.

Judge Duff best characterized this case.

Perhaps only Charles Dickens could savor this

litigation. For nearly a decade now, the parties have

fought bitterly over the Reliable trust, the only no-

ticeable effect being the steady diminution of its as-

sets. The advocacy has been harsh and often vitu-

sate lawyers have accused each other of personal

mes discovery disputes continued through the

leak trial, and shouting matches have broken

out. If xt were possible to bottle the contempt, even

hatred, which the lawyers and parties feel for one

another, there would be ,enough to sustain a small

civil war for months. The great length and extraor-

difficulty of this litigation owes much to the

depth of the combatants’ animosity.

Leigh II, 669 F. Supp. at 1417. This is a case that ex-

isted, through much of its ten-year life, almost solely for

the benefit of the lawyers. That is indeed unfortunate,

for the costs are borne most heavily by those whom

ERISA was intended to protect—beneficiaries and their

families. We wish the trustees had considered the conse-

quences of their actions before breaching their duty of

loyalty to the beneficiaries. We also wish, however, that

plaintiffs’ counsel had paused for a moment to realistically

assess, at each stage of the game, the impact of exten-

sive litigation on their clients. Had they done so, everyone

involved would have been better off.

AFFIRMED.

5 continued

perilously close to personal insults t opposing ies and

ee ee whom we fee dd so eintiolts jab. Cf.

nited States v. Byrski, No. 88-1725, slip op. at 10-11 al 5,

be We have noted before the unfortunate tendency of parties

request sanctions far too often and with little or no reasoned

om org See Meeks v. Jewel Cos., 845 F.2d 1421, 1422 (7th Cir.

ag This case is a prime example of the species.

19a

Nos. 87-2548, 87-2609 & 87-2622 19

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA 79004—Midwest Law Printing Co., Inc., Chicago—9-21-88—475

20a

United States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

September 30, 1988.

Before

Hon. WILLIAM J. BAUER, Chief Judge

Hon. WALTER J. CUMMINGS, Circuit Judge

Hon. RICHARD D. CUDAHY, Circuit Judge

Nos. 872548, 87-2609 and 87-2622

CHARLES W. LEIGH &

ERVIN F. DUSEK, Appeals from the Uni-

Plaintiffs-Appellants, ted States District

—s Court for the Northern

ESTATE OF Se

GEORGE JOHNSON, et al.,

Intervening Plaintiffs- No. 78 C 3799

Appellants, Cross- ee

Appellees,

v. Brian Barnett Duff,

CLYDE WILLIAM ENGLE, Judge.

et al.,

Defendants-Appellees,

Cross-Appellants.

ORDER

The slip opinion published on September 21, 1988 in

the above-entitled matter is hereby amended as follows:

Page 13, line 8, should read “Langbein & Posner” in-

stead of “ Landes & Posner. ”

2la

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

CHARLES W. LEIGH and

ERVIN F. DUSEK,

Plaintiffs,

ESTATE OF

GEORGE JOHNSON, et al., No. 78 C 3799

Intervening Plaintiffs,

Vv

CLYDE W. ENGLE, et al.,

Defendants.

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

This action under the Employee Retirement Income

Security Act (“ERISA”), 29 U.S.C §§ 1001-1461 accuses

defendants of misusing the assets of an employees’ profit-

sharing trust. Defendants allegedly invested a substantial

portion of the trust’s assets in three speculative stocks for

the purpose of enhancing their own investments in those

stocks, and delayed distribution of trust assets to benefi-

ciaries in order to profit by prolonging their control of the

trust’s stock holdings.

Plaintiffs and intervening plaintiffs (collectively,

“plaintiffs”) are vested beneficiaries of the trust, which is

subject to ERISA. There are five defendants: Nathaniel

Dardick and Ronald Zuckerman, the trust’s two admin-

istrators; Libco Corp. (“Libco”), which owned 100 percent

of Reliable Manufacturing Co. (“Reliable”), the company

that sponsored the trust and had direct authority to appoint

and retain its administrators; Clyde Engle, who controlled

at least 49 percent of Libco’s stock and was chairman of

its board of directors; and National Boulevard Bank

(“National Boulevard”), the trustee of the Reliable trust.

nities

22a

Defendants prevailed in a 1982 trial before Judge

George Leighton. The Seventh Circuit vacated and

remanded, Leigh v. Engle, 727 F.2d 113 (7th Cir. 1984),

and in so doing resolved numerous factual and legal issues.

Of particular importance to this proceeding are the Seventh

Circuit’s conclusions that Dardick and Zuckerman

breached their fiduciary duties to the trust by investing

its assets as they did, 727 F.2d at 132, and that Libco and

Engle were fiduciaries of the trust to the extent they were

responsible for selecting, retaining, and supervising the

trust’s administrators, 727 F.2d at 133, 135-36.

The Seventh Circuit’s opinion left four issues for

resolution in a second trial:

1. Did Libco and Engle breach their fiduciary

reponsibilities by inadequately supervising

Dardick’s and Zuckerman’s investment activ-

ities, in light of Libco’s and Engle’s knowledge

that Dardick and Zuckerman faced conflicting

lo:alties in investing trust assests?

2. What, if any, restitution is due the trust from

those defendants found to have breached their

fiduciary duties with respect to investment of

trust’s assets?

3. Did Dardick, Zuckerman, and the National

Boulevard Bank breach their fiduciary duties

to the trust by delaying distribution of its assets,

and did Libco and Engle breach their fiduciary

duties by failing to supervise Dardick, Zuck-

erman, and the National Boulevard Bank in

this regard? If so, what restitution is due?

4. Must defendants restore to the trust money

used to pay their attorneys’ fees during this

litigation, and should the court award attor-

neys’ fees to either party under 29 U.S.C.

§§1132(g) (1)?

TT

23a

In addition, plaintiffs have raised a fifth issue which

was not before either Judge Leighton or the Seventh Circuit:

5. Should the court assess punitive damages

against those defendants found to have

breached their fiduciary duties?

The parties tried these issues to the court on 14 full

trial days from July 21 to August 6, 1986, and the court

now makes its findings of fact and conclusions of law.

Before proceeding, however, two preliminary comments are

in order. First, the Seventh Circuit made detailed findings

of fact from the record on appeal. Those findings, which

the court repeats only where necessary, form the starting

point for this court’s decision. Second, the final line of the

Seventh Circuit’s opinion reads “Vacated And Remanded.”

The parties disagree about whether this vacates Judge

Leighton’s findings of fact in their entirety, or vacates only

those findings of which the Court of Appeals specifically

disapproved. Resort to a dictionary settles the matter. To

“vacate” comes from the Latin verb vacare for “be empty,”

and means to annul or leave empty. Webster’s Third New

International Dictionary, 2527 (1981). Accord, Black’s Law

Dictionary, 1388 (5th ed. 1979). Because Judge Leighton’s

findings of fact have been “left empty,” they have no

continued vitality except insofar as the Seventh Circuit

may have adopted certain findings and made them their

own.

I. BREACH OF FIDUCIARY DUTY BY

LIBCO AND ENGLE

A. Findings of Fact

1. Reliable’s board of directors, which included Engle

and George Contarsy, Libco’s president, appointed Dardick

and Zuckerman administrators of the Reliable Employees

Profit-Sharing Trust. Before the Reliable board did so,

neither Engle nor Contarsy nor any other member of either

Reliable's or Libco's board made any inquiry into Dardick's

|

24a

or Zuckerman's experience with the administration of profit-

sharing trusts, or into their knowledge of ERISA. Engle

L-316-17; Contarsy L-427.1 So far as Engle and Libco knew,

Dardick and Zuckerman had no such experience or knowl-

edge. Id.

2. Neither Dardick nor Zuckerman received pay for

their services as trust administrators, but both received

substantial income from other activities related to Engle’s

business endeavors. 727 F.2d at 117; Zuckerman at L-442-

44,

3. At the direction of Dardick, who made all invest-

ment decisions for the Reliable trust, 727 F.2d at 117, PX

149 at 27, the trust purchased 15,800 shares of Berkeley

Bio Medical, Inc. (“Berkeley”) for a total of $71,480 between

March 17 and March 21, 1978. PX 427. The trust also

purchased 12,500 shares of Outdoor Sports Industries, Inc.

(“OSI”) at a cost of $77,734 between March 22 and April

11, 1978. Id. In addition, the trust purchased 8,000 shares

of Hickory Furniture Co. (“Hickory”) for $43,000 on March

22, 1978, and 4,000 more shares for $29,433 on June 9, 1978.

Id. The total cost of the Berkeley, OSI, and Hickory

purchases was $221,647, and represented approximately 30

percent of the trust’s assets. Id.; 727 F.2d at 118. The trust

never bought more stock in these companies.

4. Engle and persons and entities with whom he

maintained business affiliations (collectively, “the Engle

group”) made substantial investments in Berkeley, OSI,

1 The court uses the following abbreviations in citing to the record:

(1) a name followed by page numbers refers to the transcript

of testimony at this trial: (2) a name followed by “L”, followed

by page numbers refers to the transcript of the trial before Judge

Leighton; (3) DX and PX refer to defendants’ and joint plaintiffs’-

intervenors’ exhibits; L-DX and L-PX refer to defense and

plaintiff-intervenor exhibits originally admitted in the trial before

Judge Leighton; P1X and IntX refer to exhibits in this trial offered

solely by plaintiffs or intervening plaintiffs.

25a

and Hickory beginning before and continuing after the

trust's purchases of stock in those three companies. PX

427, DX 600 at Ex. D-F. The Engle group eventually

acquired 10.7 percent of Berkeley, 22 percent of OSI, and

a majority of Hickory. 727 F.2d at 119 n. 10. Prior to the

start of the trust's purchases, the Engle group owned 95,220

shares of Berkeley, bought for approximately $476,500;

9,000 shares of OSI, bought for $41,359; and 50,400 shares

of Hickory, bought for $258,001. PX 427. Because of his

roles as Engle's personal counsel and general counsel of

Libco, Dardick was aware of most if not all of these holdings

by members of the Engle group, 727 F.2d at 117, 130-31,

and Engle correspondingly was aware of Dardick's

knowledge.

5. Dardick did not invest trust assets in Berkeley, OSI,

and Hickory solely for the purpose of creating an invest-

ment portfolio to benefit the trust; rather, he did so at least

partly to aid the Engle group’s stock acquisition program.

727 F.2d at 129-31. While Dardick’s motives for investing

trust assets as he did are impossible to divine completely,

the evidence suggests that a variety of factors besides his

desire to aid the Engle group’s program may have entered

into his decisions: a genuine belief that Berkeley, OSI, and

Hickory were good investments, see PX 410; Newbill L-

671-75; Zuckerman 477-78, 513; his desire as a young and

ambitious lieutenant to emulate Engle’s investment

strategy; and the ready availability of Newbill’s investment

advice, which eliminated the need to search out an inde-

pendent investment counselor, see Dardick L-816-17.

6. Engle and Libco knew of the trust's investments

no later than April 21, 1978, when Engle disclosed them

at a board meeting of Telco Corp. (“Telco”). Engle 842;

727 F.2d at 118. Libco owned 64 per cent of Telco at the

time, and Engle was Chairman of the Board of each

company. 727 F.2d at 116. Once they learned that the trust

had purchased stocks in which the Engle group was

26a

acquiring substantial interests, Engle and Libco knew of

a conflict between Dardick's responsibility to invest trust

assets solely for the gain of the beneficiaries, and his duty

to act in the best interest of his superior.

7. Despite this evident conflict of interest, which

persisted until the trust sold its shares of OSI on June

26, 1979 (the trust disposed of its Berkeley and Hickory

shares earlier), neither Engle nor any other Libco official

ever questioned Dardick’s decision to invest a total of 30

percent of the trust’s assets in Berkeley, OSI, and Hickory.

Engle L-266; Contarsy L432-35. There is no evidence that

Engle or any other Libco official ever requested reports

from Dardick and Zuckerman on the nature of the trust’

investment policy, ever reminded them of their responsi-

bilities as fiduciaries under ERISA, ever asked whether

they considered investing in stocks other than the targets

of Engle’ investment program, ever sought an independent

review of their investment decisions, or ever suggested or

even contemplated replacing them with independent

administrators.

B. Conclusions of Law

1. Engle and Libco were fiduciaries of the trust “with

respect to the selection and retention of the plan admin-

istrators,” 727 F.2d at 134, and “[a]s the fiduciaries

responsible for selecting and retaining their close business

associates as plan administrators, Engle and Libco had

a duty to monitor appropriately the administrators’

actions,” id. at 135. This obliged Engle and Libco “to take

prudent and reasonable action to determine whether the

administrators were fulfilling their fiduciary obligations.”

Id.

2. Engle and Libco did not take reasonable action

to ensure that Dardick and Zuckerman were fulfilling their

fiduciary obligations. Engle and Libco knew of, but chose

to ignore, Dardick's and Zuckerman's pursuit of a specul-

ative investment policy which risked the trust's assets while

27a

at a minimum creating the appearance of serving Engle’s

and Libco's own business interests. Accordingly, the court

concludes that both Engle and Libco breached their

fiduciary duties to the trust.

II. RESTITUTION FOR INVESTMENT OF

TRUST ASSETS

A. Findings of Fact

1. When it sold its shares in Berkeley after holding

them approximately five months, the trust made a profit

of 66 percent on its investment of $71,581. 727 F.2d at 119;

DX 600 at Ex. D. The trust sold its shares in OSI after

approximately 15 months for a profit of 141 percent on

its investment of $77,737. 727 F.2d at 119; DX 600 at Ex.

E. The trust sold its Hickory shares after holding them

an average of approximately seven months, and made a

profit of four percent on its investment of $72,433. 727 F.2d

at 119; DX 600 at Ex. F. The trust’s aggregate return on

these three investments was 72 percent. 727 F.2d at 119.

2. The amount of restitution, if any, due the trust as

a result of its investments in Berkeley, OSI, and Hickory

has two components: (a) the trust's actual losses from these

investments; and (b) the breaching fiduciaries’ profits

attributable to those investments.? DX 600 at 3.

Losses to the Trust

3. The parties dispute whether the court should view

the trust's investments in Berkeley, OSI, and Hickory

2 Since the breaching fiduciaries’ profits are interwoven with

those of the Engle group as a whole, the portion of the court’s

decision addressing the issue of restitution considers the broader

and simpler question of whether any Engle group member

profited from the trust’s investments. The court’s conclusion that

no Engle group member profited from the trust’s investments

makes it unnecesary to separate the profits of Dardick, Zuck-

ao and Engle from those of the other Engle group

members.

]

28a

individually or as a portfolio for the purpose of determining

whether the trust lost money by investing in those stocks.

All parties agree that if the court views the trust's stock

investments in the aggregate, the trust suffered no loss

because its return of 72 percent substantially exceeded what

it could have earned through prudent alternative invest-

ments. All parties also agree that if the court views each

stock separately, the trust suffered no losses on its invest-

ments in Berkeley and OSI, but did suffer a loss on its

investment in Hickory because other prudent investments

would have produced a return in excess of four percent.

4. Defendants’ expert witness, Daniel Fischel,? testi-

fied that the court should consider the three stocks together

because they constitute a portfolio. Fischel 652-53; DX 600

at 6. According to Fischel, the trust's beneficiaries care only

about the total return on their investment, not about the

return on each component stock, or about whether the

portfolio is diversified. Id. Fischel’s testimony on this issue

is consistent with ‘that of another expert witness for

defendants, Gil Matthews, an investment banker who is

a managing director of Bear, Stearns & Co. Like Fischel,

Matthews testified that it is appropriate to consider the

three stocks together for the purposes of calculating the

amount of restitution due the trust. Matthews 2005-06.

Investors will always prefer a portfolio which returns an

aggregate of 72 percent but includes one stock returning

only four percent, to a fully diversified portfolio in which

every stock returns 14 percent, Fischel and Matthews

suggest.

3 Fischel is a professor of law and director of the Law and

Economics Program at the University of Chicago Law School.

He has published extensively on corporate finance and the

securities markets.

29a

5. Plaintiffs’ expert witnesses, Joel Stern and Laur-

ence Siegel,‘ testified that the court should consider the

returns on the trust’s investments in Berkeley, OSI, and

Hickory individually because a portfolio consisting only

of stocks in three small companies is so undiversified that

the stocks simply represent individual purchases. Siegel

1470-72; PX 412 at 11.

6. Lee Meyer, a former trust administrator at Harris

Trust and Savings Bank (“Harris”) in Chicago, testified

that although Harris manages, among others, a fund

comprised primarily of highly-speculative stocks issued by

small companies, the bank refuses to allow profit-sharing

trusts or pension plans to invest more than five percent

of their assets in this fund. Meyer L561. Charles Brickman,

an investment banker with Kidder Peabody & Co. for 23

years, testified that OSI stock was not an appropriate

investment for a profit-sharing trust because OSI's small

size and erratic earnings history rendered the stock

speculative. Brickman L-517-20. No witness testified that ,

a portfolio consisting solely of stock in Berkeley, OSI, and

Hickory would have been diversified. The court finds that

the trust’s investments in Berkeley, OSI, and Hickory were

undiversified and highly speculative.

8. Fischel testified that if the court decides to view

the Hickory investment individually, it should assess

damages to the trust from that investment by calculating

the additional profit the trust would have earned had it

made any of three prudent alternative investments.

4 Stern is managing partner of Stern Stewart & Co., a New

York firm that provides financial advice to industrial companies,

banks, and large accounting firms. He is an adjunct professor

at Columbia University’s Graduate School of Business, has

previously served as president of Chase Financial Policy, a

division of the Chase Manhattan Bank, and is a rotating panelist

on the Wall Street Week television program. Siegel is a selfem-

ployed financial consultant.

4 ,

30a

According to Fischel, instead of investing a total of $72,433

in Hickory stock in March and June, 1978, and selling it

for a four percent profit in March, 1979, the trust could

have invested the same amount: (a) in Harris Bank's

Investment Reserve Fund (in which the trust's nonstock

assets were invested), for an additional profit of $2,109;

(b) in Harris Bank's Common Stock Fund, for an additional

profit of $3,747; or (c) divided equally among all of Harris

Bank's common stock funds, for an additional profit of

$6,704. DX 600 at Ex. B.

9. Gil Matthews testified that he measured the

performance of the trust’s Hickory investments against

three alternative financial standards for the purpose of

assessing the trust's losses from those investments: (a) long-

term debt securities, which indicate no loss by the trust

since Hickory stock outperformed the market for long-term

debt securities while the trust owned the stock; (b) 12-month

Treasury bills, which indicate a loss by the trust of $800;

and (c) a general stock market index, which indicates a

loss of approximately $2000. Matthews at 2010-12.

10. Stern stated that a fair return on stocks as risky

as Berkeley, OSI, and Hickory would have been between

20 and 30 percent annually. Stern 1001; PX 412 at 11. If

the trust had earned a 30 percent annual return on its

Hickory investment its profits would have been $15,983

greater than they actually were. DX 600 at Ex. B. Neither

Stern's testimony nor any other evidence suggests how the

trust could have achieved such a high rate of return through

any prudent investment.

Gains to the Engle Group

Berkeley

11. Plaintiffs suggest a series of ways in which the

Engle group might have profited from the trust's invest-

ments in Berkeley, OSI, and Hickory. With respect to

Berkeley, they contend that the trust's purchases benefited

the Engle group because (a) the trust bought its Berkeley

3la

stock when the Engle group needed to acquire control of

additional shares but lacked the cash to do so; (b) the trust’s

purchases affected Berkeley’s stock price; (c) Cooper

Laboratories, Inc. (“Cooper”) would not have purchasee

the Engle group's Berkeley stock at a premium unless the

trust had agreed to sell its stock to Cooper. Plaintiffs alse

assert that the Engle group recycled profits from the trust’s

Berkeley purchases into new and remunerative investments

in OSI and Hickory. PX 412 at 7-8. None of these theories

has merit.

12. Plaintiffs’ first argument is that the Engle group

turned to the trust as a means of gaining control over

additional shares of Berkeley because in the spring of 1978

no other Engle group member could spare the $71,480 which

the trust invested. This argument is plausible only if the

Engle group could not wait to gain control of the 15,800

Berkeley shares that the trust purchased; if there was no

urgency in the Engle group’s acquisition of voting control

over those shares, the Engle group would have been better

off purchasing the shares in its own name once it accum-

ulated enough money to do so, since profits on those shares

then would accrue to the Engle group rather than to the

trust.

13. Even assuming it was important for some Engle

affiliate to gain control of 15,800 shares of Berkeley stock

between March 17 and March 21, 1978 an assumption for

which there is not a shred of evidence it is nonsense for

plaintiffs to claim that the Engle group was short of cash

during this period and therefore turned to the trust as a

source of purchasing power. The evidence establishes that

the Engle group had ample funds available to buy Berkeley

stock in the spring of 1978, had it desired to do so.

14. On of December 31, 1977, Libco had total assets

of approximately $48 million. DX 601 at 48. The company

had excess funds during 1977 and 1978. Engle 1838. The

book value of Telco in 1978 was approximately $11 million,

aie

32a

id. at 1840, and it was able to retain “a substantial part”

of monthly income in excess of one million dollars from

a leasing portfolio, id. at 1838. Another member of the Engle

group, GSC Enterprises, Inc., had assets in excess of $109

million as of September, 1978. DX 612. The record lacks

detailed financial information about other members of the

Engle group, but every indication is that at least two of

them - Sierra Capital Group, and Engle himself- had assets

that were substantial and separate from Libco's and Telco’s

assets. See IntX 430.

15. On April 17, 1978, Telco announced it had com-

pleted a refinancing of certain debts. PX 72 at CR 28-30.

Engle informed Telco’s board of directors at a meeting on

April 21, 1978 that as a result of this refinancing Telco

had approximately $2 million in cash available for imme-

diate use. PX 59 at CR 3. On Engle’s recommendation the

board then authorized Telco’s management to purchase up

to 200,000 shares of Berkeley at a price not to exceed $6.50

per share; up to 140,000 shares of OSI at a price not to

exceed $10.00 per share; and up to 120,000 shares of Hickory

at a price not to exceed $5.00 per share. Id. at CR 5-6.

16. Fischel testified that many sources of capital were

available to the Engle group at the time of the trust's stock

purchases, including retained earnings, the capital

markets, the partnership market, and personal wealth.

Fischel 1754; accord Matthews 2032. Even plaintiffs’ own

expert conceded that $75,000 was a “mere pittance” to a

company with assets of $50 million, Stern 638-39, and that

members of the Engle group might have been able to come

up with capital to acquire an additional $75,000 worth of

Berkeley stock in the spring of 1978 if doing so had been

important to their investment program, id. at 628-29. In

the face of this evidence the court finds it inconceivable

that the Engle group was so strapped for cash in February,

Masch, and April, 1978 that the only way it could gain

control of $71,480 worth of Berkeley stock was through

aera enn een es

33a

use of the trust’s assets.

17. Plaintiffs’ second argument for attributing the

Engle group’s profits to the trust’s investments in Berkeley

is that the trust’s purchases pushed up the price of Berkeley

stock, thereby inflating the value of the Engle group’s

shares. Oblivious to logic, plaintiffs also make the opposite

argument: that the trust’s purchases benefitted the Engle

group by preventing Berkeley’s stock price from rising. Both

arguments are wrong. The evidence demonstrates that the

trust’s purchases had at most a negligible effect on

Berkeley’s stock price.

18. Berkeley’s stock price was essentially flat from

February 28 to April 17, 1978, a period extending more

than two weeks before and three weeks after the trust’s

purchases. DX 600 at Ex. D.

19. Fischel studied the effect of the trust’s purchases

on Berkeley’s stock price by examining daily changes in

the value of Berkeley stock from January 3 to August 31,

1978. He compared the “actual return” from holding a

Berkeley share for each market day (taking into consid-

eration changes in the stock price as well as any dividends

distributed that day) to the “expected return” from holding

a share of stock in a typical company of Berkeley's size

and industry for the same day. Fischel 1642-43; DX 600

at 15-16, Ex. D.

20. This analysis, which plaintiffs do not challenge,

demonstrates that on the dates of the trust’s Berkeley

purchases, and on the several days immediately following,

there was never any statistically significant difference

between the actual return from holding a Berkeley share

and the return which would have been expected by someone

holding a share of stock in a comparable company. DX

600 at Ex. D, G. Fischel stated that statisticians view a

result as statistically significant if the probability of

obtaining it by chance is less than five percent, and that

he relied on this standard in preparing his analysis. Id.

34a

at Ex. G. In simpler terms, Fischel’s study establishes the

absence of any scientifically reliable link between the trust's

purchases and changes in Berkeley’s stock price.

21. Fischel’s analysis also establishes the absence of

any statistically significant price movement on or about

the date that Telco’s Schedule 13D filing provided the first

public disclosure of the trust’s purchases. Id. at Ex. D.

22. According to Fischel, numerous academic studies

have found that stock prices react almost instantaneously

to newly available information about a stock. PX 600 at

16. The absence of any statistically significant changes

in Berkeley’s stock price within several days of the filing

of Telco’s Schedule 13D therefore suggests that public

disclosure of the trust’s purchases did not affect the stock

price.

23. A look at a graph of Berkeley’s day-to-day stock

price changes, DX 635, offers a means of gauging the

market impact of the trust’s purchases and their subsequent

public disclosure that is less reliable but more sensitive

than Fischel’s approach. Fischel’s analysis detects only

stock price variations so large they almost certainly are

not random, while a graph can reveal relationships which,

though not statistically significant, are nonetheless real.

The graph shows that Berkeley’s stock price was almost

flat from early February through early June, 1978. In fact,

the stock price was most stable during the two-week period

when the trust purchased its shares. Id. The stock price

did increase slightly (from $4.625 to $5.000) in the five

trading days after Telco filed its Schedule 13D, but it is

impossible to attribute this increase to disclosure of the

trust’s purchases, since Telco bought a total of 35,200 shares

during the same five-day period, id., and those purchases

would have tended to drive the stock price up if they had

any effect at all, id. at 9.

24. Even if plaintiffs were correct that the trust’s

purchases of Berkeley shares drove the company’s stock

35a

price up, such an increase would not have benefitted the

Engle group. Of the total number of shares it accumulated

before selling them, the Engle group acquired substantially

more than half after the trust completed its purchases and

Telco filed its Schedule 13D. PX 427, DX 600 at Ex. D.

Any increase in the price of Berkeley stock attributable

_ to the trust’s purchases thus would have harmed the Engle

group by forcing it to pay more for the shares it subse-

quently acquired. Fischel 1701.

25. Thecourt rejects plaintiffs’ alternative theory that

the trust’s purchases aided the Engle group by prolonging

the secrecy of its acquisition program, thereby enabling

members of the group to accumulate additional shares

before disclosure of the program triggered a price increase.

Even assuming that disclosure of the Engle group’s

activities did cause Berkeley’s stock price to rise - a dubious

assumption since the evidence shows there was no mean-

ingful market reaction to Telco’s Schedule 13D filing - Telco

included the trust’s Berkeley shares in calculating the

trigger point for its duty to file a Schedule 13D, PX 76,

so the trust’s purchases could not have allowed Telco to

delay disclosure of the Engle group’s acquisition program.

Fischel 1662-64; DX 600 at Ex. C.L.

26. As their third reason for attributing the Engle’s

group’s profits to the trust’s investments in Berkeley,

plaintiffs argue that Cooper would not have agreed to

purchase the Engle group’s stock at a premium unless the

trust agreed to sell its stock as part of the deal. An

examination of the evidence concerning the Cooper tran-

saction demonstrates that plaintiffs are wrong.

27. On August 18, 1978, the trust and the Engle group

members that had purchased shares in Berkeley entered

into a written agreement with Berkeley, Cooper, and certain

officers and directors of those two companies. This agree-

ment settled litigation by Engle group members against

Berkeley, Cooper, and their officers, and provided that

36a

Cooper would purchase for $7.50 per share all Berkeley

stock held then held by Engle group members and the trust.

PX 78; PX 59 at CR 20. The market price of Berkeley stock

at the time was between $5.00 and $6.00 per share. DX

635. The agreement obligated Cooper to pay a total of

$1,944,150 to the trust and members of the Engle group.

Less than one-sixteenth of this amount - $118,500 - was

for shares held by the trust. PX 258.

28. The agreement required every Engle affiliate that

had owned Berkeley stock after August 1, 1975, including

the Reliable trust, to: (a) sell all of its Berkeley stock to

Cooper for $7.50 per share; (b) agree not to object to, or

encourage others to object to, Berkeley’s sale of its assets

or repurchase of its shares prior to July 1, 1979; (c) release

all causes of action against Berkeley, Cooper, and their

officers and directors; and (d) refrain from acquiring any

Berkeley or Cooper stock prior to July 1, 1979. PX 78. The

agreement did allow Engle to acquire “a limited number”

of Berkeley shares in his own name after January 1, 1979.

Id. at 16.

29. Although the trust was a party to the settlement

agreement, it was not a party to any of the underlying

litigation, and never paid or was assessed any portion of

the legal fees for conducting that litigation. Engle L-320,

330; Engle 1831; PX 410 at 4.

30. No witness from Cooper or Berkeley testified

about whether those companies would have settled with

the Engle group had the Reliable trust been unwilling to

tender its shares. Both plaintiffs and defendants did offer

expert opinion testimony on this issue, however. Stern

testified that it is virtually unheard of for targets of hostile

takeover attempts to buy out the stock of hostile share-

holders at a premium unless the company regains control

of all hostile shares and receives a long-term “hands-off”

promise from the aggressor. PX 412 at 8. According to Stern,

because Berkeley management considered the Engle

37a

group’s shares hostile, and because the trust’s shares were

subject to Engle’s control, Berkeley would not have settled

with the Engle group and paid a premium for its shares

unless the trust relinquished its holdings. Id.; Stern 472.

31. Like Stern, Siegel testified that Cooper would not

have agreed to purchase the Engle group’s Berkeley stock

at a premium unless it could acquire all shares under the

Engle group’s control, including those held by the trust.

Siegel 145354. Siegel based his opinion on a belief that

companies will only consummate “selective repurchase

agreements” with shareholders hostile to management if

the purchasers are certain of acquiring all shares under

the control of the hostile group. Jd. Siegel admitted under

cross-examination, however, that a shareholder such as the

trust which controlled less than one percent of a company’s

stock, displayed no intention of buying additional shares,

and had not participated in any litigation against the

company, would not constitute such a threat to manage-

ment that the shareholder could command a premium for

the sale of its stock. Id. at 1535-36.

32. Fischel testified that Cooper had no reason to

insist on buying the trust’s shares along with the shares

of other Engle group members. According to Fischel, if

every Engle group member except the trust tendered its

shares and signed a hands-off agreement, the trust’s

resources would be too small to threaten Berkeley man-

agement and endanger the purposes of the settlement

agreement. DX 600 at 12-14, 27-29; Fischel 1689-92. Mat-

thews likewise testified that the trust’s holdings of Berkeley

stock were so small they posed no threat to Cooper.

Matthews 2019. Moreover, he added, the trust was not a

party to the litigation involving Berkeley and Cooper, and

lacked the assets to buy a material amount of Berkeley

stock. Id. Matthews testified that Cooper would have paid

the Engle group the same price for its Berkeley stock

regardless of whether the trust sold its shares as part of

38a

the agreement, and that had he been advising Cooper

management he would have counseled it not to insist on

acquiring the trust’s shares. Jd. at 2017-20.

33. Fischel identified four factors as responsible for

Berkeley’s and Cooper’s fear of the Engle group, and

ultimately for Cooper’s willingness to pay a premium to

buy out the Engle group’s holdings: (1) Engle’s reputation

for engaging in hostile takeovers, coupled with Telco’s

statement in its Schedule 13D that it might seek control

of Berkeley in the future; (2) the Engle group’s ownership

of more than 10 percent of Berkeley’s stock; (3) the Engle

group’s access to capital for further acquisitions; and (4)

the lawsuits filed by members of the Engle group. Fischel

1679-80. The court finds Fischel’s analysis credible, as it

does his observation that the trust’s investments were

irrelevant to each factor. Id.

34. There is no evidence any member of the Engle

group ordered or urged Dardick to sell the trust’s Berkeley

stock in conjunction with the Engle group’s settlement

agreement with Cooper. Minutes of directors’ meetings of

Telco, Telvest, and Libco suggest those companies’ directors

never discussed whether the trust should sell its shares

_ pursuant to the settlement agreement. PX 59 at CR 13-

24; PX 60 at 2679-86; PX 305-06. Engle L-320-21. Moreover,

Engle testified that when he negotiated the price Cooper

would pay for the Engle group’s Berkeley stock, the parties

to the negotiations did not contemplate including the trust’s

shares in the purchase agreement. Engle 1830-31, 1878. See

also id. at 853. The question of the trust’s participation

arose only after the price had been set, when Dardick asked

Cooper to buy the trust’s shares. Jd. at 1830-31; PX 410

at 4. The court considers Engle’s testimony on this issue

credible, and finds that Cooper did not insist on purchasing

the trust’s stock, but acquired it only at Dardick’s request.

35. This finding is consistent with Fischel’s and

Matthews’ analysis of the Cooper-Engle group transaction,

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39a

which is more persuasive than the analysis by plaintiffs’

experts. So long as Cooper and Berkeley could extract a

promise from Engle not to interfere with their planned

transactions and not to give the trust access to funds for

its own takeover attempt promises Engle had no reason

to withhold and a strong financial incentive to make -

Cooper and Berkeley could not fear the trust.

36. Regardless of whether the trust could have

scuttled the agreement among Berkeley, Cooper, and the

Engle group by refusing to participate, it had no reason

to do so. The agreement left the trust with a profit of 66

percent on its Berkeley holdings. PX 78; PX 258. It was

not in the trust’s interest to reject a premium of approx-

imately $1.50 per share above the market price and retain

its substantial investment in Berkeley. Fischel 1689. Indeed,

particularly because that investment was speculative and

inadequately diversified, Dardick’s decision to rid the trust

of the investment was justifiable.

37. Ifitis not already apparent, this is an appropriate

place to note that the court found Fischel, defendants’

principal expert witness on the issue of whether the Engle

group profited by the trust’s stock investments, an extraor-

dinarily able witness in terms of the depth and breadth

of his understanding of this case. The court finds his

testimony highly credible and persuasive. By contrast,

plaintiffs’ principal expert witness, Stern, was less know!l-

edgeable about the events underlying this litigation, and

his testimony attributing the Engle group’s profits to the

trust’s stock investments rested primarily on unsubstan-

tiated speculation.

38. The evidence demonstrates that the trust’s invest-

ments in Berkeley enabled Engle group members neither

to acquire shares at a lower price nor to sell shares at a

higher price than would otherwise have been possible. See

Fischel 1661. Because the Engle group did not profit from

the trust’s investments in Berkeley, it could not have gained

40a

by recycling its profits into OSI and Hickory. Accordingly,

the court finds that Engle, Libco, Dardick and Zuckerman

did not profit from their breaches of fiduciary duty with

respect to the trust’s investments in Berkeley.

Os!

39. With respect to OSI, plaintiffs argue that the

Engle group profited from the trust’s purchases because

(a) they affected the stock price; (b) they led OSI’s man-

agement to seek out a “white knight” willing to acquire

the company’s shares at a premium; and (c) the Brown

Group, Inc. (“the Brown Group”) would not have made

its tender offer for OSI shares unless it had expected the

trust to sell its shares. Plaintiffs also claim that the Engle

group used profits attributable to the trust’s OSI invest-

ments to acquire stock in Hickory. PX 412 at 9-10.

40. The first of plaintiffs’ arguments - that the trust’s

investments in OSI benefited the Engle group by increasing

(or decreasing) the price of OSI’s stock fails for the same

reasons as their similar argument with respect to Berkeley.

The evidence shows that the trust’s purchases did not

increase the price of OSI stock, and that even if it did,

such an increase would have hurt rather than helped the

Engle group. The evidence also shows that the trust’s

purchases did not enable the Engle group to delay the filing

of a Schedule 13D and acquire OSI stock at depressed prices.

41. Ashe did with Berkeley, Fischel prepared a chart

comparing the daily return on OSI stock with the expected

daily return on stock in comparable companies. His study

establishes the absence of any statistically significant

changes in the price of OSI stock on or immediately after

any of the five dates when the trust purchased 12,400 of

its 12,500 shares March 22, 1978, when the trust purchased

1400 shares; March 23, when it purchased 2500 shares;

March 29, when it purchased 2100 shares; March 30, when

it purchased 1500 shares; and March 31, when it purchased

4900 shares. DX 600 at Ex. E; PX 259. Fischel’s study also

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finds no statistically significant change in OSI’s stock price

on any of the five trading days after Telco publicly disclosed

the trust’s OSI holdings by filing a Schedule 13D. DX 600

at Ex. E. Fischel’s study is careful and detailed in this

respect, and the court accepts its conclusions as accurate.

42. Fischel did find a statistically significant change

in OSI’s daily return on April 11, 1978, when the trust

purchased its final 100 shares of OSI, and on the following

day, April 11. Id. OSI’s stock traded at $6.750 on April

10, $7.375 on April 11, $7.875 on April 12, and $7.750 on

April 13. Id. Although Fischel’s study offers no explanation

for this jump in the stock price, the court finds it impossible

to suppose the trust’s purchase of a paltry 100 shares had

anything to do with it - particularly when earlier and much

larger purchases by the trust had no discernable impact

on OSI’s stock price.

43. Examination of a graph of OSI’s stock price

between March 1, 1978 and July 2, 1979 adds nothing to

Fischel’s statistical analysis. OSI’s stock price rose only

slightly (from $5.875 to $6.250, DX 600 at Ex. E) over the

course of the trust’s first five purchases, and the trust’s

final, negligible purchase came roughly in the middle of

a weeklong run-up of the stock price. DX 636. The chart

also fails to show any unusual stock price movement around

the time Telco filed its Schedule 13D. Jd.

44. By the last of the trust’s purchases of OSI stock

on April 11, 1978, the Engle group had acquired less than

ten percent of the OSI stock it would eventually buy. Fischel

1696; PX 259. Even if the trust’s investments in OSI had

increased the market price of OSI stock - a proposition

the court rejects - such an increase therefore would have

harmed rather than helped the Engle group.

45. Thetrust’s OSI purchases did not enable the Engle

group to prolong the secrecy of its acquisition program by

delaying the filing of a Schedule 13D, since members of

the Engle group counted the trust’s shares with their own

42a

in determining when their holdings were sufficiently large

to trigger the filing requirement. DX 600 at Ex. C; Siegel

1555-56.

46. Plaintiffs’ remaining arguments linking the

Engle group’s OSI profits to the trust’s investments are

that the trust’s purchases prompted OSI management to

seek a “White Knight,” and that the Brown Group would

not have made its tender offer for OSI stock unless it

expected the trust to tender its shares. Both arguments

are groundless.

47. OSI management did not regard the Engle group

as hostile until well after the trust completed its purchases.

Engle and investment consultant Charles Newbill visited

OSI’s Denver headquarters in early May, 1978 and met

with the company’s management to discuss Engle’s interest

in investing in OSI. 727 F.2d at 120; Engle L-201; Newbill

L-687. This encounter was friendly, Newbill L-687, and in

a cab ride to the airport at the end of the visit Engle

informally asked OSI’s president whether OSI would

consider giving the Engle group representation on its board

of directors. Id. at L-690. OSI’s president responded

noncommittally. Id. Engle reported to Telco’s board of

directors on June 20, 1978 that he had not yet received

a response to his informal request for representation. PX

59 at CR 14.

48. Charles Brickman, an investment banker who

acted as an adviser to OSI management during 1978 and

1979, testified that sometime after Engle’s visit OSI

management came to believe Engle planned a hostile

takeover of their company. Brinkman L-509. OSI manage-

ment thereafter considered all shares in Engle’s control

to be hostile, and viewed the trust and its holdings as part

of the Engle group. Id. at L512. Because OSI management

did not consider the Engle group hostile until well after

the trust acquired its shares, those purchases in and of

themselves could not have prompted OSI to seek acquisition

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43a

by a “friendly” third party.

49. OSI filed suit against various members of the

Engle group on September 1, 1978, seeking an order

enjoining them from acquiring additional shares and from

attempting to exercise control over the company’s man-

agement. PX 59 at 2628. OSI filed another suit seeking

similar relief against essentially the same parties on

January 29, 1979, and on February 6, 1979, Telco’s invest-

ment subsidiary, Telvest, sued OSI to enjoin implemen-

tation of an anti-takeover measure. Id. at 2641-43. The trust

was not a party to any of this litigation, and never paid

or was assessed any expenses connected with it. Engle L-

330; PX 410 at 4.

50. In early April, 1979, OSI proposed an agreement

under which the parties would settle their litigation, OSI

would buy out the Engle group’s stock holdings and pay

a portion of the Engle group’s legal fees, and the Engle

group would pledge not to acquire any more shares of OSI.

PX 60 at 2723-24. The Engle group considered this offer

inadequate. Id. at 2726.

51. Theminutes of a May 22, 1979 meeting of Telvest’s

board of directors indicate that the Engle group was then

considering a tender offer by the Brown Group to acquire

all outstanding shares of OSI for $15.00 per share. Id. at

2729-30. At the time, OSI’s stock was selling at $14.50 per

share. DX 600 at Ex. E. The Brown Group publicly

announced its tender offer on June 1, 1979. PX 138. Kidder

Peabody & Co., an investment bank retained by OSI to

help fend off a hostile takeover, played a major role in

encouraging the Brown Group’s bid. Brickman L-525.

52. There is no evidence that the trust’s purchases

of OSI shares in March, 1978 had any impact on the Brown

Group’s decision to make its tender offer more than a year

after those purchases occurred, nor is there any evidence

that the trust’s purchases played a role in the decision by

OSI management to seek a tender offer from a “white

44a

knight”. The trust’s 12,500 shares of OSI represented less

than one percent of OSI’s outstanding stock at the time

the Brown Group made its tender offer, PX 138, and

therefore posed no threat to the Brown Group’s acquisition

of control over OSI. Fischel 1696-97. Moreover, in the

unlikely event that the trust had rejected the tender offer,

turning down a handsome profit and maintaining its

imprudently large investment in OSI, the Brown Group

could have forced the trust out as a shareholder by merging

OSI with the Brown Group. Jd. at 1697. Fischel testified

that the same four factors responsible for Berkeley’s and

Cooper’s decision to resist the Engle group led OSI man-

agement to seek a “white knight.” Fischel 1695-96. The

court accepts Fischel’s explanation of the Engle group’s

profits on its OSI stock, as well as his conclusion that

“(njone of those factors were in any way related to the

small investments by the pension trust.” Id.

53. The Brown Group did not condition its tender offer

on the trust’s willingness to sell its shares of OSI; indeed,

the terms of the offer required the Brown Group to purchase

all tendered shares regardless of the trust’s actions, so long

as shareholders tendered at least 51 percent of the out-

standing stock. PX 138; Matthews 2023. There is no

evidence the Brown Group either expected the trust to tender —

its shares or cared whether it did so. Accordingly, the court

finds that the Brown Group would have made its tender

offer and purchased the Engle group’s shares even if it

had expected the trust not to sell.

54. The trust accepted the tender offer on June 26,

1979 and sold its OSI stock to the Brown Group for $15.00

per share. 727 F.2d at 121. The sale brought the trust a

profit of 141 percent on its original investment. Jd. Even

if the trust’s participation had been essential to consum-

mation of the Brown Group’s tender offer, it would not

have been in the trust’s interest to reject that offer and

retain its large, undiversified investment in OSI.

45a

55. The evidence demonstrates that the Engle group

did not profit in any way from the trust’s investments in

OSI.

Hickory

With respect to Hickory, plaintiffs claim that the Engle

group profited by (a) reinvesting proceeds derived from the

trust’s investments in Berkeley and OSI, PX 412 at 12;

and (b) using the trust’s assets in its successful effort to

gain control of Hickory.

56. Because the Engle group did not profit from the

trust’s investments in Berkeley and OSI, it could not have

gained by reinvesting such profits in Hickory. The court

accordingly turns to plaintiffs’ ‘second argument, that the

Engle group used the trust’s assets to help it gain control

of Hickory.

57. The Engle group’s holdings of Hickory stock rose

above 50 percent of the company’s outstanding shares in

late October, 1980. PX 406 (Form 8K filed Dec. 10, 1980).

The Reliable trust owned no stock in Hickory then, having

sold all its shares on March 19, 1979. The trust’s purchases

of Hickory stock thus played no direct role in the Engle

group’s acquisition of control over Hickory.

58. Plaintiffs suggest that the trust’s purchases may

have indirectly helped the Engle group gain control of

Hickory by enabling it to apply equity accounting with

respect to its Hickory investments beginning in August,

1978. According to plaintiffs, this in turn increased the

Engle group’s financial resources and allowed additional

investments in Hickory. Judge Leighton found at the first

trial, however, that the trust’s holdings of Hickory stock

played no role in the Engle group’s decision to use equity

accounting, and the Seventh Circuit expressly declined to

reject this finding, 727 F.2d at 132, n. 27. The evidence

presented to this court is entirely consistent with Judge

Leighton’s determination. Although Telco did use equity

46a

accounting with respect to its investment in Hickory

(something it did not do with respect to its investments

in Berkeley and OSJ), it did not take the trust’s stock

ownership into account in doing so. Torgerson 1899-1902.

59. The Seventh Circuit advances the possibility that

the trust’s actions could have aided the Engle group’s

acquisition program by depressing the stock price - perhaps

by retaining its shares while the Engle group was accum-

ulating stock, or by selling them at a low point in the market

after the success of the Engle group’s acquisition program

was assured. 727 F.2d at 131. Plaintiffs have not pursued

this hypothesis and no evidence promotes it in this

exhaustive record. The trust’s retention of its Hickory stock

could not have depressed the market price for the benefit

of the Engle group, since purchases by an investor ordi-

narily tend to increase the stock price, and any increase

is not offset until she sells her shares. Fischel-1662; DX

600 at 9. By retaining its stock while the Engle group was

buying, the trust thus increased rather than decreased the

Engle group’s acquisition costs.

60. The Engle group could not have gained from the

trust’s sale of its shares at a low price after the success

of the Engle group’s acquisition program was assured; if

the sale had any impact at all on Hickory’s stock price

it would have been negative, DX 600 at 9, and the Engle

group would have gained more by lowering the stock price

earlier. Moreover, the trust’s sale of its shares after the

success of Engle group’s program was assured could not

have contributed to the success of that program. Any

theorizing about the market reaction to the trust’s sale of

its shares is pointless, though, in light of the fact that

Hickory’s stock price was unchanged during the nine

market days immediately following the trust’s sale of its

shares. DX 600 at Ex. F.

61. Because the evidence demonstrates that the trust’s

investments in Hickory played no direct or indirect role

47a

in the Engle group’s acquisition of control over Hickory,

and neither lowered the price at which the Engle group

purchased its shares nor assisted its investment program

in any other way, the court finds that the Engle group

did not profit from the trust’s investments in Hickory.

B. Conclusions of Law

1. Under ERISA,

[any 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, 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, and shall be subject to such other

equitable or remedial relief as the court may deem

appropriate, including removal of such fiduciary.

29 U.S.C. § 1109%a).

2. The breaching fiduciaries - Dardick, Zuckerman,

Libco, and Engle - therefore are liable to restore to the

trust any losses the trust incurred as a result of their

breaches of fiduciary duty, as well as any profits they made

through use of the plan’s assets. Id.; 727 F.2d at 137; Brandt

v. Grounds, 687 F.2d 895, 898 (7th Cir. 1982). The court

may require the breaching fiduciaries to disgorge their own

profits only to the extent that “there is a causal connection

between the use of the plan assets and the profits made

by the breaching fiduciaries.” 727 F.2d at 137.

3. “{TJhe burden is on the defendants who are found

to have breached their fiduciary duties to show which

profits are attributable to their own investments apart from

their control of the Reliable Trust assets.” 727 F.2d at 138.

48a

4. In determining the amount that the breaching

fiduciaries must restore to the trust as a result of the trust’s

investments in Berkeley, OSI, and Hickory, the court

“should resolve doubts in favor of the plaintiffs.” Id. at

138-39. This ensures that the trust does not suffer simply

because the breaching fiduciaries’ actions have made it

difficult to calculate damages. Id.

5. Defendants have shown that no member of the

Engle group- including the four breaching fiduciaries -

profited from the trust’s investments in Berkeley, Hickory,

and OSI. Because defendants’ profits on those stocks are

attributable entirely to their own resources and invest-

ments, Dardick, Zuckerman, Libco, and Engle are not liable

to pay any funds to the trust as restoration of profits gained

through use of the trust’s assets.

6. Whether the trust lost money as a result of its

investments in Hickory depends on whether the court views

those investments individually or as a part of a portfolio

consisting of Berkeley, OSI, and Hickory; as the court

observed in its findings of fact, the former approach requires

a finding of damages, while the latter requires a finding

of no damages.

Black’s Law Dictionary (5th ed., 1979) defines “port-

folio” as follows: “{in investments, the collective term for

all the securities held by one person or institution.” Accord,

Webster’s Third New International Dictionary (1981); The

American Heritage Dictionary of the English Language

(1869). The trust’s Hickory stock satisfies this definition

to the extent that Hickory was simply one of three com-

panies whose stock the trust held in the spring of 1978.

But insofar as the definition of portfolio requires that the

portfolio’s components be acquired for investment purposes,

the trust’s purchases fall outside the definition, since the

Seventh Circuit found that Dardick did not purchase

Hickory stock solely for the benefit of the trust. 727 F.2d

at 129-31. Because Dardick purchased Hickory’s stock at

49a

least in part for purposes other than investment, and

because ERISA’s goal of protecting the integrity of

employee trust funds requires exacting scrutiny of the

actions of breaching fiduciaries, the court de:lines to

consider the trust’s Hickory shares as part of an investment

portfolio. This conclusion compels a finding that the trust’s

Hickory purchases damaged the trust in the amount of

the difference between the trust’s actual earnings from

those purchases, and what the trust would have earned

by making a reasonably prudent alternative investment.

7. Fischel and Matthews calculated damages to the

trust from its Hickory investments in six different ways,

taking as their starting points six alternative investment

strategies yielding different returns. While each of these

strategies would have been reasonable, neither Fischel nor

Matthews nor counsel for any party suggested how the

court should select the single most appropriate alternative

to the trust’s Hickory investments.

8. Because defendants bear the burden of proof on

damages and the court must resolve all doubts in plaintiffs’

favor, the court selects the most generous of the three

measures of damages — all of which are reasonable -

because defendants have not shown that a different

measure is more appropriate. Accordingly, the court

concludes that by investing trust assets in Hickory in

breach of their fiduciary duties, Dardick, Zuckerman, Libco,

and Engle caused damage to the trust in the amount of

$6,704. This equals the difference between what the trust

actually earned from its Hickory investments and what

it would have earned by making a reasonably prudent

alternative investment - namely, by dividing the same

amount of money equally among all of Harris Bank’s

common stock funds.

9. Although the court has discretion to allow prejudg-

ment interest on damage awards under ERISA, see Kat-

saros v. Cody, 744 F.2d 270, 281 (2nd Cir. 1984), it declines

50a

to do so in this case for two reasons. First, had plaintiffs’

counsel adopted a more realistic attitude toward the size

of the potential recovery from defendants, this litigation

would have ended years ago and the prejudgment interest

would have been insignificant. Gil Matthews bluntly but

aptly appraised plaintiffs’ theories of investment-related

damages: “I think this whole case is foolhardy because

I can’t see that the numbers here are big enough to make

it worth anyone’s while to pursue this. I think the legal

fees and the expert fees are absurd in relation to what

I view the potential award as being.” Matthews 2064. An

award of prejudgment interest on modest damages on

issues that more reasonable counsel could have resolved

years ago would unduly reward wasteful, even profligate,

litigation. Second, by selecting the highest possible measure

of damages, the court has conceivably compensated

plaintiffs well beyond their actual loss. Adding prejudg-

ment interest would multiply this potential munificence.

Il, DELAY IN DISTRIBUTION OF TRUST ASSETS

A. Findings of Fact

1. The Restated Reliable Manufacturing Corporation

Employees’ Profit-Sharing Plan (“Restated Plan”), L-DX

VV, incorporates the Trust Agreement for the Reliable

Manufacturing Company Employees’ Profit Sharing Trust

(“Trust Agreement”), PX 8. L-DDX VV at A. Section 9.1 of

the Trust Agreement provides:

This Trust shall terminate upon the first to occur

of the following:

(a) Thirty (30) days after the receipt by the

Trustee of written notice of such termination

from the Company;

(b) The date the Company shall be judicially

declared bankrupt or insolvent;

(c) The dissolution, consolidation or reorganiza-

5la

tion of the Company, or the sale by the

Company of all or substantially all of its

assets without provision for continuing this

Trust, except that in any such event provision

may be made for the continuance of this Trust

by any successor to the Company or any

purchaser of all or substantially all of its

assets, and in that event such successor or

purchaser shall be substituted for the Com-

pany hereunder.

PX 8.

2. Section 5.6 of the Restated Plan provides in relevant

part: ,

The distributions of the Account provided

hereunder shall be made in such one or more of

the methods following as the Committee in its

sole discretion, may determine:

(a) one lump sum payment; or

(b) payments in equal monthly, quarterly, semi-

annual or annual installments, over a period

not exceeding ten (10) years; or

(c) payments over the life of the Participant

and/or his spouse.

***

Notwithstanding anything to the contrary

stated in Section 5.1 through 5.6, a Participant

or beneficiary, unless he shall agree to the

contrary, shall be entitled to a distribution

within sixty days after the close of the Year

coinciding with or following the date of

5 The “Committee” consisted of Dardick and Zuckerman. PX

351 at 47.

52a

entitlement.

L-DX VV. The committee determined to pay beneficiaries’

interests in annual installments over a 10-year period. PX

351 at 69.

3. Section 7.2 of the Restated Plan provides:

The Employer shall have the right at any

time to discontinue its contributions hereunder

and to terminate this Agreement and the Trust

hereby created, by delivering to the Trustee and

the Committee written notice of such discontin-

uance or termination.

Upon complete discontinuance of the

Employer’s contributions, partial or complete

termination of the Trust [sic] all Participants’

accounts shall become fully vested, and shall not

thereafter be subject to forfeiture. Upon termina-

tion of the Trust, the Committee shall direct the

Trustee to distribute all assets remaining in the

Trust, after payment of any expenses properly

chargeable against the Trust, to the Participants

in accordance with the value of such Participants

[sic] accounts as of the date of such termination

in cash or in property valued at fair market value

as of the date of distribution and in such manner

as the Committee shall determine. The Commit-

tee’s determination shall be conclusive upon all

parties.

Upon termination, if there shall be any assets

in the Trust Fund which have not been allocated

to any Participant but are part of the Trust Fund,

such assets shall be distributed to each Partic-

ipant in the same proportion as the amount

credited te the account of each Participant bears

to the total of the amounts credited to the accounts |

of all Participants in such Trust.

53a

L-DX VV.

4. Libco purchased 100 percent of Reliable’s stock in

April, 1977. 727 F.2d at 116. During 1977, customers

returned large numbers of one of Reliable’s products

because of a design defect, and the company’s sales fell.

Zuckerman 469-70; Zuckerman L-456-57; P1X 58. Reliable

ended the 1977 fiscal year with a loss, P1X 58, making

no contributions to the profitsharing trust after March 31

of that year, L-DX II.

5. Reliable’s sales again were weak in the fall of 1978,

due to a sluggish market and damage to the company’s

reputation from the previous year’s design problems.

Zuckerman 480-41.

6. Zuckerman, who was Reliable’s chief operating

officer, Zuckerman 233, told a meeting of Libco’s board

of directors on August 1, 1978 that demand for Reliable’s

products was falling and the company had lost roughly

$400,000 during the first seven months of 1978. PX 58 at

CR 22-23. Reliable’s poor sales and the large volume of

customer returns left it with unbalanced inventories and

excessive amounts of raw materials. Zuckerman at L-456-

57. Zuckerman told Libco’s board at the August 1 meeting

that he was developing a plan for “liquefying” the com-

pany’s assets by reducing inventories and converting them

into finished goods that could be sold for cash, which in

turn would allow Reliable to retool and reenter the market

with a more suitable product mix. Id.; PX 58 at CR 22-

23. When Zuckerman used the term “liquefying”, he meant

that the objective of his plan was to increase the company’s

liquidity - that is, to increase the amount of cash available

to Reliable. Id; Engle 800-01. Zuckerman did not mean that

he planned to liquidate the company or cease operations.

Id. In November or December, 1978, Zuckerman decided

that Reliable would produce at a high volume until it ran

down its inventories, since the economies of higher volume

production would enable it to produce at lower cost.

54a

Zuckerman 484.

7. Between March, 1978 and February, 1979, Reliable

borrowed $907,000 from Harris Bank and approximately

$600,000 from Libco. As of February, 1979, Reliable owed

a total of $655,000 to Harris Bank and $443,000 to Libco.

PX 311.

8. Reliable did not earn a profit in 1978, and accord-

ingly did not contribute money to the profit-sharing trust.

L-DX XX.

9. Libco president George Contarsy, a director of

Reliable, Contarsy L-388-89, told a Libco board meeting

on December 28, 1978 that Reliable probably would lose

between $800,000 and $1,000,000 in 1978. Zuckerman told

the board Reliable was trying to work out a plan to minimize

the risk of further losses and allow a reasonable return

on Libco’s investment. Among other options, Reliable was

considering contracting out its manufacturing function. PX

58 at 2596-97. At the time, top officers of both Libco and

Reliable considered Reliable a troubled but viable company.

10. Harris Bank resigned as the trust’s trustee in

December, 1978 because of its concern over repeated delays

in obtaining proper documentation for certain of the trust’s

securities transactions (transactions which did not involve

Berkeley, OSI, and Hickory). Meyer L-557-60. National

Boulevard Bank agreed on January 2, 1979 to become the

new trustee for the trust, and received its assets on February

5, 1979. PX 183.

11. On or about February 28, 1979, Reliable laid off

75 of its 81 workers, Zuckerman L-461, telling them it

planned to let them know by mid-April whether or not it

would recall them, PX 351 at 19. See also Zuckerman 336-

38. The remaining workers performed office tasks, main-

tenance, clean-up, and shipping. Zuckerman 338; PX 29

at 308-09. Reliable’s lease on its manufacturing and office

facility expired in February, 1979, but the company

Os PE a, er orb ed tee

55a

remained on the premises after that date, paying rent of

$3000 per month. Zuckerman 357; PX 311 at Ex. 17.

Although Reliable terminated its last employee sometime

in the summer of 1979, it subsequently hired some former

employees as independent contractors to work on an hourly

basis. Id. No one remained on the premises after October

or November, 1979. Id. at 31. The company retained its

brokered sales force during this period. Zuckerman 354.

12. Despite the seriousness of Reliable’s financial

problems in the late winter and spring of 1979, neither

Zuckerman nor Libco believed the company was beyond

recovery. Zuckerman had recently revived another failing

company with only a few of its employees left, Zuckerman

488, and Libco was reluctant to walk away from its more

than one million dollar investment in Reliable, Id. See also,

id. at 454-55. Zuckerman believed Reliable had two good

products and at least one large customer, and that the

company might survive by changing its product line,

moving its plant, or eliminating its stamping operation

and continuing in business as an assembly or distribution

operation. Id. at 486-87.

13. Reliable’s creditors filed an involuntary bank-

ruptcy petition against Reliable on March 8, 1979, and on

March 16, 1979 Reliable converted the proceedings into

voluntary proceedings under Chapter 11. 727 F.2d at 136;

PX 30; PX 25A. The bankruptcy court adjudicated Reliable

a bankrupt on December 5, 1979. DX 628. Reliable’s

management knew that its creditors planned to file an

involuntary bankruptcy petition several weeks before they

actually did so. Zuckerman L-471.

14. Lawrence Hoffman, National Boulevard Bank’s

vice president in charge of employee benefits and the official

responsible for the bank’s duties as trustee of the Reliable

trust, learned in February, 1979 of the lay-offs of a majority

of Reliable employees. Hoffman 1265; Hirsch 1985. After

consulting with the bank’s counsel about the significance

56a

of these lay-offs for distribution of the trust’s assets, he

told Dardick and Zuckerman that under the circumstances

he would be uncomfortable making distributions to bene-

ficiaries without a determination letter from the Internal

Revenue Service (“IRS”) stating that recent events had

caused a termination of the trust. Zuckerman 489-90;

Hoffman 1263-64. Zuckerman then called Austin Hirsch,

an attorney who had previously performed work for the

trust, and asked him to request such a letter from the IRS.

Hirsch 1985-86. The trust retained Hirsch for this purpose

on February 25, 1979. Zuckerman L-457-58; IntX 401.

15. Hirsch wrote a letter dated March 1, 1979 to the

Employees’ Plans Division of the IRS in Chicago. This

letter informed the IRS that “[djue to adverse business

conditions and a seasonal layoff, approximately 75 of the

81 employees participating in the Plan have been tempor-

arily laid off as of approximately March 1, 1979. At this

juncture, it is unknown whether or not Reliable Manufac-

turing Corporation will be in a position to re-hire these

individuals wthin the next several months.” PX 1. The letter

went on to inquire (1) whether, assuming Reliable did not

rehire a substantial percentage of its employees, there would

be a partial termination of the plan, and if so, (2) whether

all of the terminated employees would be fully vested and

(3) whether the plan’s committee “would commence

distribution of accrued benefits within 60 days of the Plan

Year after a service break in accordance with the Plan

provisions.” Hirsch concluded with a request for a confer-

ence with the IRS before any final determination. Id. The

letter did not refer to the impending bankruptcy filings.

16. Hirsch persistently attempted to follow up on his

request for a determination. On April 27, 1979 he learned

that the Chicago office of the IRS had forwarded the request

to Washington, and he asked for a copy of the transmittal

letter. DX 625. On June 1 he asked the IRS for an expedited

response to the request, and he did so again on June 13.

57a

L-DX DD. The IRS finally acknowledged receipt of the

trust’s request on July 10, L-DX EE, but when Hirsch had

received no further response by August 7 he wrote yet

another letter seeing expedited review. L-DX FF. During

the time the trust’s request for a letter of determination

was pending with the IRS, Zuckerman repeatedly asked

Hirsch about the status of the request, in an effort to speed

up distribution of trust assets to the beneficiaries. Zuck-

erman 486.

17. When Reliable discharged its employees in Feb-

ruary, 1979, it did not tell them it had applied to the IRS

for a determination of whether a termination had occurred,

nor did it suggest that disbursement of their benefits

depended in any way on action by the IRS. Zuckerman

at L-468-69.

18. In early September, 1979, Hirsch finally received

an oral opinion from the IRS, which he summarized in

a confirming letter to the IRS dated September 6, 1979.

Hirsch’s letter said in part:

Based upon the facts and circumstances set

forth in the March 1, 1979 letter, you have con-

cluded that in accordance with Regulation

1.401.6(b)(2) promulgated by the Treasury Depart-

ment that a partial termination of the Reliable

Manufacturing Corporation Employees Profit

Sharing Plan has occurred as a result of the

significant reduction in the percentage of partic-

ipants in the Plan. Consequently, the amounts

credited to the account of the affected employees

are non-forfeitable. You provided as reference

Section 401(a)(7) of the Internal Revenue Code and

Section 411(d)(3) of the Employee Retirement

Income Security Act of 1974.

L-DX GG. The trust subsequently withdrew its request for

a determination. PX 3.

58a

19. On September 14, 1979, Zuckerman wrote Larry

Hoffman, who managed the trust’s affairs for National

Boulevard Bank, informing him that the IRS had found

a partial termination of the trust, and that the trust’s

committee “desires to have a distribution made to the

employees of the Trust.” L-DX HH.

20. Two weeks later, on September 28, 1979, Dardick

and Zuckerman asked the district court in this case to

approve a release form which they proposed to send to

all trust beneficiaries. (Although the Court of Appeals’

opinion states that Dardick and Zuckerman sought appro-

val of the release form on September 14, 1979, their motion

for approval is dated September 28, 1978, and stamped as

received on that date.) The terms of the proposed form gave

beneficiaries two choices: they could receive immediate

lump sum payment of vested funds if they were willing

to release defendants from all liability, including liability

in this action; or they could receive their vested benefits

over a ten-year period, subject to an unspecified reserve

for litigation expenses. 727 F.2d at 136. The district court

rejected the proposed release on October 16, and instructed

Dardick and Zuckerman to prepare a revised form that

did not require beneficiaries to release their claims in this

action. Id.

21. Dardick and Zuckerman then prepared a revised

form which released Reliable, (along with its directors,

officers, and employees), the Committee (including Dardick,

Zuckerman, and their attorneys), and National Boulevard

Bank from all causes of action except those raised in this

case. PX 11; DX 622; L-DX YYY. The district court approved

the revised form over plaintiffs’ objections on November

16, 1979, and shortly thereafter Dardick and Zuckerman

mailed the form and an explanatory cover letter to each

plan participant. PX 11; Zuckerman 444-46.

22. Engle testified credibly that he never asked

Dardick or Zuckerman to delay distribution of the trust’s

59a

assets, Engle 1841, and Zuckerman testified equally

credibly that no one ever asked him to delay distribution

of the trust’s assets for any reason, Zuckerman 486.

Defendants’ actions with respect to termination of the trust

and distribution of its assets were taken in good faith and

not for the purpose of delaying distribution of trust assets

to beneficiaries. There is no evidence defendants sought

to delay distribution of trust assets in order to prolong the

Engle group’s control over the trust’s holdings of Berkeley,

OSI, and Hickory stock.

23. Even if defendants had delayed distribution of

trust assets, the damages assessed in part II of this court’s

decision would compensate plaintiffs for any loss they

suffered by reason of the delay. At all times before their

distribution, trust assets were invested in money market

funds, corporate bonds, and stocks (primarily Berkeley,

OSI, and Hickory). See Meyer L-547-48, 598-600. Plaintiffs

have never complained about the rates of return on the

trust’s money market and bond investments, and thus only

could have lost money from a delay in distribution if the

trust’s stock investments yielded less during the delay than

plaintiffs could have earned by reasonable alternative

investments. During any delay in distribution the trust’s

Berkeley and OSI stock would have earned well above the

rate of return on any other reasonable investment, however,

and its Hickory stock would have earned the subpar return

for which the court assessed damages in part [I of this

decision.

B. Conclusions of Law

1. For a profit-sharing trust to be “qualified” under

§ 401 of the Internal Revenue Code, 26 U.S.C. § 401, the

plan of which it is a part must expressly provide that

employees’ benefits become nonforfeitable “upon the

termination of the plan or upon the complete discontin-

uance of contributions under the plan.” 26 C.F.R. § 1.407-

6(a)(1). The plan also must provide that unless a trust

60a

beneficiary agrees otherwise, payments to the beneficiary

shall begin no later than 60 days after the close of the

plan year in which the latest of three events occurs: (1)

the beneficiary reaches the age of 65 or some other

retirement age specified in the plan; (2) the Oth anniversary

of the beneficiary’s participation in the plan; or (3) termi-

nation of the beneficiary’s employment. 26 U.S.C.

§ 401(a)(14). :

2. Consistent with these requirements, the Restated

Plan provides that “[u]pon complete discontinuance of the

Employer’s contributions, partial or complete termination

of the Trust [sic] all Participants’ accounts shall become

fully vested, and shall not thereafter be subject to forfei-

ture.” § 7.2. The Restated Plan also provides that “[n}ot-

withstanding anything to the contrary stated in Sections

5.1 through 5.6 [dealing with distributions upon retirement,

death, disability, and termination of employment, as well

as loans to participants and the method for paying

distributions], a Participant or beneficiary, unless he shall

agree to the contrary, shall be entitled to a distribution

within sixty days after the close of the year coinciding

with or following the date of entitlement.” § 5.6.

3. Before it can decide whether defendants breached

their fiduciary duties to the trust by delaying distribution

of benefits, the court must determine when defendants were

obliged to begin making distributions. Plaintiffs argue that

the following paragraph from § 7.2 of the Restated Plan

requires defendants to make lump sum distributions of

benefits immediately after complete discontinuance of

employer contributions or complete termination of the trust:

Upon complete discontinuance of the

Employer’s contributions, partial or complete

termination of the Trust [sic] all Participants’

accounts shall become fully vested, and shall not

thereafter be subject to forfeiture. Upon termina-

tion of the Trust, the Committee shall direct the

6la

Trustee to distribute all assets remaining in the

Trust, after payment of any expenses properly

chargeable against the Trust, to the Participants

in accordance with the value of such Participants

[sic] accounts as of the date of such termination

in cash or in property valued at fair market value

as of the date of distribution and in such manner

as the Committee shall determine. The Commit-

tee’s determination shall be conclusive upon all

parties.

4. The court rejects plaintiffs’ interpretation of § 7.2

for two reasons. First, nothing in the language of § 7.2

specifies a time or manner of distribution. Section 5.6, by

contrast, provides generally for the time and manner of

distributions, requiring the Committee to begin distribu-

tions no later than 60 days after the close of the year in

which a beneficiary becomes entitled to distribution, and

offering a choice of three approved methods of distribution.

By its terms § 5.6 applies to all distributions made under

the Restated Plan, and there is no reason to believe its

drafters meant to give special treatment to distributions

following termination of the plan.

Second, the only reason to suspect that § 7.2 might

require distribution immediately after termination is its use

of the word “upon” - as in “/ujpon termination of the Trust,

the Committee shall direct the Trustee to distribute. .. .”

But the Restated Plan also uses “upon” in the same way

where immediate distributions clearly are not required.

Even though the Restated Plan provides for distribution

“Tulpon Retirement,” 5.1, distribution “{u]pon the death of

a Participant,” § 5.2, and distribution “[u]pon termination

of a Participant’s employment for any reason other than

retirement, death, or total disability,” § 5.4(a), it is clear

from § 5.6 that distributions arising from any of these events

need not begin until 60 days after the end of the year in

which the event occurred.

62a

Accordingly, the court concludes that the trust was

not required to begin making distributions to beneficiaries

earlier than 60 days after the end of the year in which

Reliable completely discontinued its contributions to the

plan, or in which the plan completely terminated. The court

thus must now determine the year or years in which these

events occurred. It turns fst to the question of when

Reliable completely discontinued its contributions to the

plan.

5. Although Reliable made its last contribution to the

trust in March, 1977, that does not necessarily coincide

with a “complete discontinuance” of contributions under

ERISA and its related regulations. Whether a suspension

of contributions constitutes a complete discontinuance

sufficient to trigger a distribution of benefits turns on the

employer’s intent and on “all the facts and circumstances

in the particular case.” 26 C.F.R. § 1.401-6(c)(1). Because

the evidence demonstrates that Reliable suspended its

contributions to the profit-sharing trust after March, 1977

simply because it had no profits to share, and that it

intended to remain in business and resume contributions

if and when it returned to profitability, the court concludes

that no complete discontinuance of contributions occurred

at that time. Rather, the court concludes that a complete

discontinuance of contributions occurred on or about

February 28, 1979, because that is the date when a series

of factors - the layoff of Reliable’s production workers, the

absence of specific plan by management for resuming

production, and the impending bankruptcy proceedings

combined to make it plain that Reliable’s management had

no present intent to resume contributions. See 26 C.F.R.

§ 1.401-6(c)(1).

6. Whether a termination of a plan has occurred “is

generally a question to be determined with regard to all

the facts and circumstances in a particular case. For

example, a plan is terminated when, in connection of the

63a

winding up of the employer’s trade or business, the

employer begins to discharge his employees.” 26 C.F.R.

1.401-6(b)(2). Based upon the record of communications

between the IRS and representatives of the trust, it is

apparent that the IRS found the trust to have terminated

- either partially or completely - no earlier than February

29, 1979. This court agrees with the IRS. February 28, 1979

marked the convergence of several factors relevant to

whether a termination had occurred: layoffs of virtually

all production workers; impending bankruptcy, manage-

ment’s lack of a specific plan for resuming production, and

no reasonably apparent capacity for corporate survival.

Accordingly, the court concludes that complete termination

of the plan occurred no earlier than February 28, 1979.

Accord, Leigh v. Engle, 619 F. Supp. 154, 157 (N.D. Il.

1985) (Moran, J.) (“Termination of the Plan occurred

sometime in 1979.’’)

7. Because there was neither a complete discontin-

uance of contributions nor a complete termination of the

plan prior to February 28, 1979, the earliest date that the

trust could have had to begin making distributions to

beneficiaries was 60 days after the end of 1979 - that is,

on March 1, 1980. There is no evidence or allegation that

defendants delayed the start of distributions beyond March

1, 1980, so the court concludes that defendants did not

breach their fiduciary duties by delaying distribution of

trust assets.

8. Plaintiffs contend that defendants also breached

their fiduciary duties to the trust by proposing, in Sep-

tember, 1978, a release form that would have allowed

beneficiaries to receive lump sum distributions only if they

relinquished their claims in this action. This effort, while

reflecting defendants’ cavalier attitude toward the trust and

its beneficiaries, cannot give rise to liability for damages

because it caused no harm; no beneficiary ever received

the form, and defendants’ proposal did not delay the start

64a

of distributions beyond the required date of March 1, 1980.

IV. PUNITIVE DAMAGES

Conclusions of Law

1. Plaintiffs urge the court to award punitive damages

against all defendants found in breach of their fiduciary

duties. Although neither plaintiffs’ second amended

complaint nor intervenors’ complaint specifically requests

punitive damages, defendants have not objected to the

court’s consideration of this belated demand and have

joined issue with plaintiffs on whether ERISA permits

punitive damages, and if so whether a punitive damage

award is appropriate in this case. Because the court answers

the first question in the negative, it is unnecessary to

consider the second.

2. The parties’ proposed conclusions of law on the

issue of punitive damages are sorely lacking: in support

of their assertion that ERISA allows punitive damage

awards, plaintiffs cite only Russell v. Massachusetts Life

Insurance Co., 722 F.2d 482 (9th Cir. 1983), which held

that an individual beneficiary may maintain a claim for

punitive damages against a breaching fiduciary - but

which was reversed on precisely that point by the Supreme

Court, Massachusetts Mutual Life Insurance Co. v. Russell,

473 U.S. 134 (1985) (individual suing on his own behalf

may not recover punitive damages under ERISA). For their

part, defendants simply cite Sommers Drug Stores Co. v.

Corrigan Enterprises, Inc., 793 F.2d 1456 (5th Cir. 1986),

and Pokratz v. Jones Dairy Farm, 771 F.2d 206 (7th Cir.

1985), and assert without elaboration that these cases

establish the unavailability of punitive damages under

ERISA.

3. They do no such thing. Massachusetts Mutual

deals only with the availability of punitive damages to

individual beneficiaries; the Court explicitly refused to

decide whether a plan, or an individual suing on behalf

65a

of a plan or all its beneficiaries, can recover punitive

damages. 473 U.S. at 144. Although Sommers does hold

that punitive damages are never recoverable under ERISA,

it is not from this circuit and other courts deciding the

issue since Massachusetts Mutual have reached contrary

conclusions, see Schoenholtz v. Doniger, 657 F. Supp. 899,

913-16 (S.D.N.Y. 1987); James A. Dooley Associates

Employees Retirement Plan v. Reynolds, 654 F. Supp. 457,

460-61 (E.D. Mo. 1987). But see, Powell v. Chesapeake &

Potomac Telephone Co. of Virginia, 780 F.2d 419, 424 (4th

Cir. 1985) ERISA does not allow punitive damages).

Pokratz, defendants’ Seventh Circuit citation, is irrelevant

because it merely applies Massachusetts Mutual, rejecting

an individual beneficiary’s claim for punitive damages. 771

F.2d at 210.

4. The dispute over the availability of punitive

damages under ERISA turns on the interpretation of §

409%(a) of ERISA, 29 U.S.C. § 1132(a)(2), which provides

that anyone who breaches his fiduciary duty to a plan

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,

and shall be subject to such other equitable or

remedial relief as the court may deem appropriate,

including removal of such fiduciary.

(Emphasis added.)

5. Those who find authority in ERISA for punitive

damage awards rely on the underlined portion of § 40%a).

They reason that punitive damages traditionally have been

available in actions for equitable relief, that ERISA’s

legislative history evidences Congressional intent to give

courts wide flexibility in fashioning remedies for fiduciary

misconduct, and that the authority in 40%a) for “such other

equitable or remedial relief as the court may deem approp-

66a

riate” resembles the remedial section of the Griffin-

Landrum Act, 29 U.S.C. § 412, which allows “a person

whose rights . . . have been infringed . . . to bring a civil

action. . . for such relief as may be appropriate” - language

courts have interpreted to authorize punitive damages. See

Schoenholtz, 657 F. Supp. at 913-16; Dooley, 654 F. Supp.

460-61.

6. In Sommers and Powell, the Fourth and Fifth

Circuits emphasize two reasons for rejecting punitive

damage awards under ERISA. First, contrary to the claims

in Schoenholtz and Dooley, punitive damages are not a

traditional equitable remedy. Second, ERISA’s legislative

history indicates that Congress intended common law trust

principles to govern fiduciary relationships under ERISA,

and the common law of trusts does not treat punitive

damages as “equitable relief.” Sommers, 793 F.2d at 1463-

64; Powell, 780 F.2d at 424.

7. Sommers and Powell are persuasive. The common

law of trusts generally does not allow punitive damages,

and makes exceptions only in cases of extraordinary

fiduciary disloyalty or malicious conduct, neither of which

is present here. G. Bogert & G. Bogert, The Law of Trusts

and Trustees § 862, at 39-41 (2d ed. 1982); Restatement

(Second) of Trusts 205 (1959). Moreover, while it is true

courts have construed the Landrum-Griffin Act to allow

punitive damages for breach of a union’s duty of fair

representation “where the union or its officials have acted

with malicious intent or at least reckless and wanton

indifference to the plaintiffs rights,” Quinn v. DiGiulian,

739 F.2d 637, 648-49 (D.C. Cir. 1984) (collecting cases), courts

have construed another employee-protection statute lacking

specific remedial provisions, the Railway Labor Act, 45 U.S.

§ 151 et seq., to preclude punitive damage awards, Inter-

national Brotherhood of Electrical Workers v. Proust, 442

U.S. 42 (1979).

8. Congress meant courts to have considerable dis-

67a

cretion in fashioning remedies for breaches of fiduciary

duty under ERISA, but the legislative history suggests

discretion limited by the bounds of common law, not judicial

imagination. The common law of trusts does not make

punitive damages generally available as a remedy for

breach of fiduciary duty absent extraordinary misconduct,

and there is no basis for reading such a remedy into ERISA.

The court rejects plaintiffs’ request for punitive damages.

V. ATTORNEYS’ FEES

A. Findings of Fact

1. Section 11.1 of the Trust Agreement

provides:

The Trustee shall not incur any personal

liability in connection with any act done or

omitted to be done in good faith and with reas-

onable care and prudence in the administration

of the Trust, and shall be indemnified and saved

harmless by the Company, or from the Trust

Fund, or both, from and against all liability to

which the Trustee shall be subjected by reason

of any such act or conduct, including all expenses

reasonably incurred in its defense if the Company

fails to provide such defense.

PX 8. Section 6.4 of the Restated Plan contains a similar

provision.

2. Section 1.6 of the Restated Plan provides:

Unless otherwise determined by the

Employer, the members of the Committee shall

serve without compensation for services as such,

but all expenses of the Committee may be paid

by the Employer. Such expenses shall include any

expenses incident to the functioning of the Com-

mittee, including, but not limited to, fees of

accountants, counsel, and other specialists, and

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other costs of administering the Plan. In the event

that the expenses are not paid by the Employer,

then such expenses shall be reimbursed by the

Trustee.

L-DX VV. Reliable - “the Employer” - did not pay the

legal fees and other expenses of Dardick and Zuckerman

in this litigation, see IntX 418-20; 619 F. Supp. at 159, so

the trust did so pursuant to § 1.6 of the Restated Plan and

§ 11.1 of the Trust Agreement, id.; PX 8; L-DX VV.

3. Nothing in either the Trust Agreement or the

Restated Plan authorizes the trust to reimburse Reliable,

Libco, or the directors of those companies for legal fees

incurred in connection with administration of the plan. PX

8; L-DX VV.

4. Section 9.2 of the Trust Agreement provides in part:

Upon termination of this Trust the Trustee shall

first reserve such reasonable amounts as it may

deem necessary to provide for the payment of any

expenses then or thereafter chargeable to the

Trust Fund. Subject to such reserve, the balance

of the Trust Fund shall be liquidated and distrib-

uted by the Trustee to or for the benefit of the

employees or former employees of the Company,

or their beneficiaries, as directed by the

Company.”

PX 8. The trust retained a reserve of approximately $100,000

and distributed the remainder to plan participants during

the several months following approval of the revised release

form. IntX 418.

5. Approximately $80,000 remained in the trust on

June 27, 1985, when Judge Moran, before whom this case

was then pending, determined that continued retention of

this amount was unnecessary and ordered the trust to

distribute $60,000 to beneficiaries within 21 days. Leigh

v. Engle, 619 F. Supp. 154, 159 (N.D. Ill. 1985).

—— eS ae

|

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B. Conclusions of Law

1. “(Indemnification for legal fees when a breach of

trust has been established, though perhaps provided for

by the trust agreement, is not allowed under ERISA.” 619

F. Supp. at 159. Nothing in ERISA prohibits a trust from

indemnifying its fiduciaries for legal expenses unrelated

to breaches of their duties, however, and § 1.6 of the Restated

Plan requires the trust to reimburse Committee members

for their legal expenses when Reliable fails to do so, as

it has in this case.

2. It follows that Dardick and Zuckerman are entitled

to reimbursement from the trust (or more accurately, to

retain funds advanced by the trust) for legal expenses not

attributable to their fiduciary violations. Unfortunately, it

is difficult to identify these expenses with precision. In one

sense their legal expenses are entirely their own fault, since

plaintiffs never would have filed this suit had Dardick and

Zuckerman not made the mistake of investing trust assets

in Berkeley, OSI, and Hickory. On the other hand, despite

the fact that Dardick and Zuckerman neither profited

personaily from the trust’s investments nor delayed the

distribution of trust assets, they have had to spend

considerable time and money refuting ill-considered

allegations of such wrongdoing.

3. Plaintiffs have prevailed against Dardick and

Zuckerman to the extent of establishing that they breached

their fiduciary duties by investing trust assets in Berkeley,

OSI, and Hickory, and that this breach caused the trust

a loss of $6,704 of its Hickory investment. Because ERISA

bars a trust from indemnifying breaching fiduciaries for

legal expenses attributable to their breaches, Dardick and

Zuckerman may not receive trust assets to defray legal

expenses incurred in responding to plaintiffs’ successful

“wrongful investment” claim.

4. Plaintiffs’ remaining claims against Dardick and

Zuckerman - that they profited from the trust’s stock

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investments and delayed distribution of its assets - are

a different matter. These unsuccessful claims turn on facts

that have little in common with those at issue in plaintiffs’

successful wrongful investment claim.

5. Proving that Dardick and Zuckerman wrongly

invested trust assets required plaintiffs to retrace the Engle

group’s investment program and point out the conflict of

interest that arises when a fiduciary makes speculative

investments in companies in which his employer is

simultaneously acquiring significant financial interests. To

establish that this misconduct caused the trust’s loss on

its Hickory investments, plaintiffs had only to show that

prudent alternative investments would have yielded higher

returns.

By contrast, plaintiffs’ claim that Dardick and Zuck-

erman personally profited from the trust’s investments

turns on price movements in Berkeley, OSI, and Hickory

stocks, on the circumstances surrounding the trust’s (and

the Engle group’s) sale of those stocks, and on expert

testimony about possible economic or market relationships

between the trust’s investments and the Engle group’s

profits. Plaintiffs’ unsuccessful claim that Dardick and

Zuckerman delayed distribution of trust assets is factually

even more remote from plaintiffs’ wrongful investment

claim, turning on the circumstances surrounding Reliable’s

business decline and the trust’s efforts to secure a letter

of determination from the IRS.

6. Because plaintiffs’ two unsuccessful claims against

Dardick and Zuckerman are factually and legally distinct

from their lone successful claim against those defendants,

ERISA does not bar the trust from paying the legal

expenses that Dardick and Zuckerman incurred in refuting

those claims, pursuant to § 1.6 of the Restated Plan. See

Hensley v. Eckerhart. 461 U.S. 424 (1983)(in awarding

statutory attorneys’ fees to plaintiffs prevailing on some

but not all claims, courts may award fees attributable to

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pursuit of an unsuccessful claim only if that claim shares

a common core of facts and a related legal theory with

a successful claim); Spanish Action Committee of Chicago

v. City of Chicago, 811 F.2d 1129, 1133 (7th Cir. 1987).

7. In holding that Dardick and Zuckerman are

entitled to reimbursement from the trust for their legal fees

in defending against plaintiffs’ “illicit profit” and “delay

damages” claims, but not against their “wrongful invest-

ment” claim, the court is aware of the difficulty of at-

tributing each dollar of legal costs to one claim or another.

Because ERISA prohibits trusts from reimbursing the legal

expenses of breaching fiduciaries, and Dardick and

Zuckerman did breach their fiduciary duties in one respect,

they must bear the burden of demonstrating that any iegal

expenses for which they seek reimbursement are attribut-

able solely to plaintiffs’ unsuccessful claims.

8. Nothing in the Trust Agreement or Restated Plan

authorizes the trust to pay the expenses of Libco, Engle,

Telco, or Telvest in this litigation, and they must reimburse

the trust for any expenditures made on their behalf. All

issues relating to these reimbursements should, of course,

be resolved before any attorneys’ fees are paid out.

9. Because plaintiffs did not prevail on any of their

claims against National Boulevard Bank, the bank is

entitled to complete reimbursement of its legal expenses

from the trust under § 11.1 of the Trust Agreement and

# 6.4 of the Restated Plan.

10. In addition to determining the trust’s responsi-

bility for defendants’ attorneys’ fees, the court has discre-

tion to award attorneys’ fees to any party, 29 U.S.C.

§1132(g)(1). The exercise of this discretion should depend

on:

(1) the degree of the opposing parties’ culpability

or bad faith; (2) the ability of the opposing parties

to satisfy an award of fees; (3) whether an award

72a

of fees against the opposing parties would deter

others from acting under similar circumstances;

(4) whether the parties requesting fees sought to

benefit all participants and beneficiaries of an

ERISA plan or to resolve a significant question

regarding ERISA; and (5) the relative merits of

the parties’ positions.

727 F.2d at 139 n. 39. Accord, Bittner v. Sadoff & Rudoy

Industries, 728 F.2d 820, 828-31 (7th Cir. 1984). The court

also must bear in mind that “[WJhere an ERISA beneficiary

substantially prevails on the merits of his or her claim,

an award of fees with respect to such a claim against the

party in question would almost always be an abuse of

discretion.” Id. at 140.

11. The court already has noted that plaintiffs’ claim

against Dardick, Zuckerman, Libco, and Engle for improp-

erly investing trust assets is factually and legally distinct

from their claims that those defendants profited by the

trust’s stock investments and that all defendants improp-

erly delayed distribution of trust assets. Because the three

claims are distinct, and because plaintiffs prevailed on the

first but not the latter two claims, it is appropriate to

consider them separately for the purpose of determining

whether to award attorneys’ fees under § 1132(g). See

Hensley, supra.

12. Applying the five-part test set out by the Court

of Appeals in this case, there is good reason to award

attorneys’ fees to plaintiffs for their successful claim that

Dardick, Zuckerman, Libco, and Engle breached their

fiduciary duties by investing trust assets as they did. (1)

Dardick, Zuckerman, Libco, and Engle were grossly

negligent in investing a substantial portion of the trust’s

assets in three speculative stocks. (2) The four breaching

fiduciaries have the resources to pay a fee award and are

better able than plaintiffs to bear this cost. (3) An award

of attorneys’ fees to prevailing plaintiffs will tend to deter

73a

similar fiduciary misconduct in the future. (4) Plaintiffs

(or at least intervening plaintiffs) brought this lawsuit on

behalf of all plan participants, not merely for individual

gain. (5) The liability of the four breaching fiduciaries is

not a close question; even minimal reflection should have

led them to realize it was unlawful to invest 30 percent

of the trust’s assets in three speculative stocks.

13. There is less reason to award attorneys fees to

defendants for the two claims on which they prevailed.

(1) Although plaintiffs were wrong in claiming that

defendants profited by the trust’s stock investments and

unlawfully delayed distribution of its assets, plaintiffs did

not litigate in bad faith. The circumstances of defendants’

misconduct could have fostered a reasonable suspicion that

the breaching fiduciaries had acted to further their own

interests at the expense of the trust. (2) Until their termi-

nation by Reliable, most of the plaintiffs were factory

workers with modest wages. Ordering them to pay attor-

neys’ fees for the claims on which defendants prevailed

could cause substantial hardship, while there is no evidence

defendants are unable to pay their own fees. (3) An award

of attorneys’ fees to defendants might deter future suits

in circumstances where defendants’ liability is not a

foregone conclusion, since plaintiffs naturally would be

reluctant to risk assessments of attorneys’ fees. This would

be inconsistent with the remedial purposes of ERISA. (4)

Defendants’ successful defense of the claims against them

did not benefit the plan, and an award of attorneys fees

would further deplete the trust’s assets. (5) Although

defendants’ position on the merits of plaintiffs’ delay

damages and illicit profits claims was distinctly stronger

than plaintiffs’ position on those claims, plaintiffs did not

litigate in bad faith.

14. Determining with precision the portion of plain-

tiffs’ attorneys’ fees attributable to their wrongful invest-

ment claim would be a difficult and time-consuming task

74a

- particularly, as Judge Moran so aptly noted, “[g}iven the

proclivity in this case .. . for everything to escalate into

a pierhead brawl,” 619 F. Supp. at 159. Because extended

litigation over attorneys’ fees will only drain the trust, the

court chooses to approximate the correct fee award by

ordering defendants to pay plaintiffs’ legal fees through

the date of the Seventh Circuit’s decision but no further.

The litigation leading up to that decision established the

only significant legal principles to arise from this lawsuit,

and also resolved the principal factual issues on which

plaintiffs prevailed. Plaintiffs have accomplished little

since then other than further depleting the trust’s assets

by forcing its fiduciaries to incur reimbursable attorneys’

fees. Awarding attorneys’ fees to plaintiffs for this most

recent portion of the case would reward litigation that was

ill-conceived, often poorly executed, and fractious.

15. An award of legal fees for the prior stages of the

case is entirely appropriate, however. Plaintiffs established

then that Dardick and Zuckerman breached their fiduciary

duties with respect to the trust’s investments, and plaintiffs’

success before the Seventh Circuit made almost inevitable

this court’s subsequent finding that Libco and Engle

likewise breached their fiduciary duties. Plaintiffs also

made it plain in the prior stages of this litigation that what

Dardick, Zuckerman, Libco, and Engle did is intolerable;

they played roulette with the retirement funds of employees

who worked for years at modest wages, relying on defend-

ants’ pledge to safeguard their pensions. The fact that

defendants’ gamble paid off in this instance renders their

conduct no more savory. If other fiduciaries roll the same

dice with other trust funds it is inevitable that someday,

somewhere, employees will lose benefits they had counted

on for their retirement. Perhaps the defendants in this case

are too young, too wealthy, and too comfortable to have

contemplated the enormity of the risk they took, and the

human suffering so narrowly averted. Because ERISA does

not allow punitive damages, an award of attorneys’ fees

ee

75a

under 29 U.S.C. § 1132(g) is the court’s only means to deter

similar misconduct in the future.

16. Accordingly, pursuant to 29 U.S.C. § 1132(g) the

court orders Dardick, Zuckerman, Libco, and Engle to pay

the reasonable attorneys’ fees incurred by counsel for

plaintiffs prior to issuance of the Seventh Circuit’s amended

decision on March 20, 1984. Because the parties have not

raised the issue, the court does not consider the allocation

between plaintiffs and intervening plaintiffs of its award

of attorneys’ fees to “plaintiffs”.

V. CONCLUSION

Perhaps only Charles Dickens could savor this litiga-

tion. For nearly a decade now, the parties have fought

bitterly over the Reliable trust, the only noticeable effect

being the steady diminution of its assets. The advocacy

has been harsh and often vituperative: lawyers have

accused each other of personal wrongdoing, discovery

disputes continued through the last day of trial, and

shouting matches have broken out. If it were possible to

bottle the contempt, even hatred, which the lawyers and

parties feel for one another, there would be enough to

sustain a small civil war for months. The great length and

extraordinary difficulty of this litigation owes much to the

depth of the combatants’ animosity.

Plaintiffs struggle mightily to portray defendants as

evil capitalists who sought to deprive dedicated workers

of their pension benefits. The record simply does not support

such a conclusion. While the four breaching fiduciaries were

deplorably cavalier and vincibly oblivious to the chasm

between investments appropriate for a pension fund and

those appropriate for a venture capital fund, the evidence

clearly establishes that they neither profited nor intended

to profit by the trust’s investments, and did not seek to

delay distribution of its assets. It should have been apparent

to plaintiffs’ counsel early in the present phase of this

litigation that while Dardick, Zuckerman, Libco, and Engle

76a

did breach their fiduciary duties by improperly investing

the trust’s assets, this misconduct did not significantly

damage the trust or benefit the Engle group. Counsel’s deep

emotions may have obscured their view of the merits.

In summary, the court concludes as follows: (1) Libco

and Engle breached their fiduciary duties by failing to

adequately supervise Dardick’s and Zuckerman’s invest-

ments of trust assets; (2) Dardick’s, Zuckerman’s, Libco’s,

and Engle’s breaches of fiduciary duty with respect to the

trust’s investment in Hickory damaged the trust in the

amount of $6,704, and they must restore that amount to

the trust; (3) none of the defendants profited by the improper

investment of trust assets; (4) none of the defendants

breached their fiduciary duties by delaying the distribution

of trust assets to beneficiaries; (4) Dardick and Zuckerman

are entitled to reimbursement from the trust for expenses

that they can show are attributable solely to their defense

against plaintiffs’ claims that they (a) personally profited

from the trust’s stock investments, and (b) delayed the

distribution of trust assets; (5) National Boulevard Bank

is entitled to reimbursement from the trust for all of its

expenses in this litigation; and (6) Dardick, Zuckerman,

Libco, and Engle must pay the reasonable attorneys’ fees

incurred by counsel for plaintiffs and intervening plaintiffs

until issuance of the Seventh Circuit’s amended decision

on March 20, 1984.

ENTER:

/3s/ BRIAN BARNETT DUFF

BRIAN BARNETT DUFF, JUDGE

UNITED STATES DISTRICT COURT

DATE: August 27, 1987

At PARROTT Malin: 8% thats °

77a

United States District Court

NORTHERN DISTRICT OF ILLINOIS

Eastern Division

Charles W. Leigh, et al JUDGMENT IN A CIVIL CASE

v.

Clyde W. Engle, et al. .

CASE NUMBER: 78 C 3799

O Jury Verdict. This action came before the Court

for a trial by jury. The issues have been tried

and the jury has rendered its verdict.

(x Decision by Court. This action came to trial or

hearing before the Court The issues have been

tried or heard and a decision has been rendered.

IT IS ORDERED AND ADJUDGED that (1) Libco

and Engle breached their fiduciary duties by failing to

adequately supervise Dardick’s and Zuckerman’s invest-

ments of trust assets; (2) Dardick’s, Zuckerman’s, Libco’s,

and Engle’s breaches of fiduciary duty with respect to the

trust’s investment in Hickory damaged the trust in the

amount of $6,704, and they must restore that amount to

the trust; (3) none of the defendants profited by the improper

investment of trust assets; (4) none of the defendants

breached their fiduciary duties by delaying the distribution

of trust assets to beneficiaries; (5) Dardick and Zuckerman

are entitled to reimbursement from the trust for expenses

that they can show are attributable solely to their defense

against plaintiffs’ claims that they (a) personally profited

from the trust’s stock investments, and (b) delayed the

distribution of trust assets; (6) National Boulevard Bank

is entitled to reimbursement from the trust for all of its

expenses in this litigation; and (7) Dardick, Zuckerman,

Libco, and Engle must pay the reasonable attorneys’ fees

incurred by counsel for plaintiffs and intervening plaintiffs

| cceeeeeeenneeiemeeeill

EE

78a

until issuance of the Seventh Circuit’s amended decision

on March 20, 1984.

August 27, 1987 _H. STUART CUNNINGHAM _

Date Clerk

/s/ CLaupiaA M. FLacc

(By) Deputy Clerk

Claudia M. Flagg

79a

In The

United States District Court

Hor the Northern District of

Ilinois Eastern Bivision

CHARLES W. LEIGH and

ERVIN F. DUSEK,

Plaintiffs,

GEORGE JOHNSON,

ELEANOR MADSEN, et al.,

Intervening Plaintiffs,

us.

CLYDE WM. ENGLE, NATHAN

DARDICK RONALD ZUCKER- No. 78 C 3799

MAN, LIBCO CORPORATION,

TELCO MARKETING SERVICES,

TELVEST, NATIONAL BOULE-

VARD BANK, and the RELIABLE

EMPLOYEES’ PROFIT SHARING

PLAN TRUST

Defendants.

MEMORANDUM AND ORDER

After an extended bench trial Judge Leighton entered

23 pages of findings of fact and conclusions of law on

November 18, 1982. Upon appeal, the Court of Appeals

issued a 28-page modified opinion in March 1984. See Leigh

v. Engle, 727 F.2d 113 (7th Cir. 1984). That opinion affirmed

in some respects, reversed in others, and vacated and

remanded for further proceedings, with costs to be borne

equally by the parties. Upon the commencement of those

further proceedings before this court we requested the

80a

assistance of the parties in fashioning a damages measure.

That assistance was not forthcoming in any meaningful

way, and this court detailed its concerns in October 1984

and again asked for assistance. Again the parties have

been of little help, apparently not one of them seem to be

able to accept what this court has accepted as the mandate

from the Court of Appeals. Indeed, the most recent effort

has been that of the intervenors seeking clarification from

the Court of Appeals. The intervenor asked the Court of

Appeals to “clarify” its opinion by adopting the intervenors’

position on damages, a position this court believed the

appellate decision had clearly rejected. The Court of

Appeals declined. This action’s troubled history continues,

and it obviously is not going to end unless this court

delineates the issues as we see them and, to the extent

it can do so without further “assistance,” acts upon them.

The principal battle is over what recovery there may

be from liable fiduciaries because of their involvement in

three investments. Two defendants have been found liable

for damages, if any. Whether two other defendants are

liable remains a factual dispute to be resolved after an

evidentiary hearing.

A second area of contention relates to a reserve fund.

The Court of Appeals directed this court to consider “at

the first opportunity the desirability of an immediate

distribution of all remaining assets....” The remaining

assets in hand, however, are approximately $80,000, less

than 10 per cent of the distribution long since made, and

the plaintiffs and intervenors have made it abundantly

clear that the remaining assets from their perspective are

closer to $250,000 to $300,000, after the return of attorneys’

fees and expenses to the fund. But that perception raises

legal and factual questions which need to be addressed,

which will be addressed herein, and which. have been

virtually ignored or, in this court’s view, erroneously

perceived by the parties.

8la

The third major area of dispute is whether distribution

was improperly delayed; whether, if so, any damage

resulted; and, if so, which of the defendants are liable for

those damages and to what extent. There are, as well, other

issues which have been less central to the disputes.

I. Reserve Fund

We turn, first, to the reserve fund issues. No one

disputes that some of the $80,000 can be distributed.

Plaintiffs and intervenors contend that the assets vested

in the beneficiaries upon termination were thereupon non-

forfeitable. Accordingly, even in the absence of a breach

of fiduciary obligations or bad faith the Plan thereafter

could pay nothing for expenses of whatever nature.

Defendants contend that the trust permits a reserve, that

such a reserve is necessary to pay ongoing litigation and

administration expenses, that it has already been finally

determined that any breaches of fiduciary duties were

despite their good faith, and that such litigation expenses

are therefore reimbursable from the trust pursuant to Sec.

11.1 of the Plan, which indemnifies the fiduciaries from

liability for “any act done or admitted to be done in good

faith and with reasonable care and prudence,” including

“all expenses reasonably incurred in its defense.” This court

believes both positions to be in error.

Termination of the Plan occurred sometime in 1979.

Upon termination, pension rights vest, and, as vested

rights, are non-forfeitable, as defendants admitted in their

September 6, 1979 letter to the Internal Revenue Service.

A non-forfeitable pension right is defined as one which

is “unconditional, and which is legally enforceable against

the Plan.” 29 U.S.C. § 1002(19). A non-forfeitable pension

right, however, is not necessarily a right to a recipient’s

percentage of the total fund. Jn Alessi v. Raybestos-

Manhattan, Inc., 451 U.S. 504 (1981), the Supreme Court

stated clearly that the amount considered non-forfeitable

must be defined by all the provisions of the Plan. “{TJhe

82a

statutory definition of ‘non-forfeitable’ assures that an

employee’s claim to the protected benefit is. legally enforce-

able, but it does not guarantee a particular amount or

method for calculating the benefit.” Id. at 512. The court,

in Alessi asked and answered a key question. “[Wjhat

defines the content of the benefit that, once vested, cannot

be forfeited? ERISA leaves this question largely to the

private parties creating the Plan.” Id. at 511. Thus, this

court must look to the trust plan to determine what

distributions the beneficiaries should receive. The Pension

Plan provisions are determinative respecting reserves,

except when they conflict with specific ERISA provisions.

Blackmar v. Lichtenstein, 603 F.2d 1306, 1309 (8th Cir.

1979).

Section 9.2 of the Trust Agreement provides that, before

distribution after termination, the trustee “shall first reserve

such reasonable amounts as it may deem necessary to

provide for the payment of any expenses then or thereafter

chargeable to the trust fund.” Attorneys’ fees have been

withheld as chargeable to the trust fund pursuant to Sec.

11.1 Even though the trustees were found to have breached

their fiduciary duties, the Seventh Circuit did not overturn

Judge Leighton’s finding of good faith. See 727 F.2d at

124; Finding of Fact 23. We can, therefore, assume good

faith has been found and defendants, according to the Plan,

may possibly be entitled to be indemnified and reimbursed

for any liability assessed or attorneys’ fees owed (although

it is difficult to square a breach of trust with “reasonable

care and prudence’).

The central question, largely ignored by the parties,

is whether such indemnification is allowed under ERISA.

Indemnification from liability for breach of fiduciary duty

by a trust is not allowed under ERISA. 29 U.S.C. § 111Ma).

See Chicago Board of Options Exchange, Inc. v. Connec-

ticut General Life Insurance Co., 713 F.2d 254, 259 (7th

Cir. 1983). It has also been found that indemnification for

AN OKRA De PIES

83a

attorney’s fees, even where liability has not attached, is

also not allowed. See Donovan v. Cunningham, 541 F.Supp.

276, 289 (S.D. Tex. 1982), modified on other grounds 716

F.2d 1455 (5th Cir. 1983).

Defendants, quite naturally, rest entirely on the Plan

language. Their position might have considerable merit if

this were a question of indemnification of a corporate

director of a commercial enterprise, where such indemni-

fication is often authorized by state statute. Arguably,

indemnification might be permissible under the general law

of trusts on the ground that the fiduciaries acted in good

faith and the investments in fact benefited the trust. See

generally G. Bogert, The Law of Trust and Trustees, § 871,

n.83 (2d Ed. 1981); Craven v. Craven, 407 Ill. 252, 95 N.E.2d

489 (1950). We are dealing here, however, with indemni-

fication of legal expenses of a fiduciary of a trust fund

subject to ERISA, when there has been a determination

of a breach of fiduciary duty.

In an advisory opinion dated September 9, 1977, the

Department of Labor commented on a provision which

indemnified trustees for their legal expenses and allowed

for payment in advance of the final disposition. The

Department found that Sec. 1110(a) did not forbid such

advances as long as the fund obtains a written legal opinion

from independent legal counsel that, based on review of

the relevant facts, the acts in question did not constitute

breach of a fiduciary duty. See Department of Labor

Advisory Opinion, Ref. No. CA-3588(a) (Sept. 9, 1977). This

finding indicates that indemnification for legal expenses,

after a finding of breach of fiduciary duty, is not allowed

and any advances made would have to be returned.

Such a result has been reached with regard to the Labor

Management Reporting and Disclosure Act, 29 U.S.C.

§ 401 et seg. In Morrissey v. Segal, 526 F.2d 121 (2d Cir.

1975), the court ordered defendants to reimburse the fund

for legal fees advanced during an unsuccessful defense to

84a

a breach of fiduciary duty claim. The court found that

allowing indemnification for fees “would undermine both

protection to union members and deterrence of union

officials intended by [the Act]. Id. at 126. See McNamara

v. Johnston, 522 F.2d 1157, 1167 (7th Cir. 1975), cert. denied,

425 US. 911 (1976) (allowing repayment for legal fees only

if defendants prevail). The policies underlying the treatment

of pension funds under the LMRDA and ERISA are similar

and the provisions in 29 U.S.C. §§ 1109 and 1110 seem

to confirm Congress’ intent to keep legal fee policies the

same for both acts as, unlike the general law of trusts,

there are no exceptions for liability of a trustee who, in

breaching his trust, acts in good faith and benefits the

fund. Accordingly, the court finds that indemnification for

legal fees when a breach of trust has been established,

though perhaps provided for by the trust agreement, is not

allowed under ERISA.

That does not, however, end the matter. Whether or

not the fiduciaries will be successful in defending against

the unresolved claims has yet to be determined. The

advancement of legal expenses to them for defense against

those claims, as the Department of Labor advisory opinion

indicates, is an entirely different matter from the question

of ultimate liability for legal expenses. And see Central

States, Southeast and Southwest Areas Pension Plan Fund

v. American National Bank and Trust Co., No. 77 C 4335,

slip op. at 6 (N.D. Ill. 1979). That issue has not been

addressed by the parties. Whether or not an advancement

is proper, however, an initial and continuing reserve for

reimbursement in the event of exoneration was and remains

proper. To the extent that funds have been or will be

necessary to defend against unresolved claims, they cannot

be available for distribution to the beneficiaries until and

unless there is a liability determination adverse to those

defendants.

That raises one of several related factual issues.

85a

Plaintiffs and intervenors appear to treat legal expenses

as some sort of fungible mass. They are not. The lawsuit

was against several defendants and raised several issues.

Two defendants, Telco Marketing Services, Inc. and

Televest, Inc., were apparently represented by a law firm

which was not paid by the Plan, nor is there any apparent

basis why they could have been. Libco and Engle were

also apparently represented by this firm, and the expenses

of their defense have not, apparently and for similar

reasons, been paid by the Plan. The Plan and three

fiduciaries have had their legal expenses advanced by the

Plan. They represent that half of those expenses have been

borne by an insurance carrier, something specifically

sanctioned by ERISA so long as there is recourse. 28 U.S.C.

§ 1110. Moreover, one of the fiduciaries has not been found

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