Appeal from a judgment of the United States District Court for the Eastern District of New York (Mishler, Judge) dismissing plaintiffs' complaints, which had alleged breach of fiduciary duty by the defendant trustees, and sought recovery of any resulting losses and injunctive relief. Finding no likelihood of violations in the future and that no losses resulted from the trustees' conduct, the district court dismissed the complaint. Reversed on the question of loss and remanded.
Before: FRIENDLY, MESKILL, and PIERCE, Circuit Judges.
Before us on these consolidated appeals are: the Secretary of the United States Department of Labor ("Secretary") and Robert J. Lawrence, plaintiffs-appellants, and John C. Bierwirth, Robert G. Freese, and Carl A. Paladino, defendants-appellees, who are the trustees ("Trustees") of the Grumman Corporation Pension Plan ("Plan"). The Secretary and Lawrence appeal from judgments entered February 28, 1984, in the United States District Court for the Eastern District of New York, Jacob Mishler, Judge, after a joint trial of both plaintiffs' actions. The complaints alleged that the defendant Trustees violated their fiduciary responsibilities by improperly buying Grumman securities on behalf of the Plan. The plaintiffs sought, inter alia, recovery of any losses suffered by the Plan as a result of the Trustees' alleged breach. On February 21, 1984, the district court concluded that no losses were sustained by the Plan. We reverse and remand the question of loss to the district court for findings of fact as to what the Plan would have earned but for the Trustees' purchase of the Grumman stock.
This case arises under the Employee Retirement Income Security Act of 1974 ("ERISA") or "Act"), 29 U.S.C. §§ 1001-1381 (1982). The facts are set forth in earlier proceedings in this matter, see Donovan v. Bierwirth, 538 F. Supp. 463 (E.D.N.Y. 1981), aff'd as modified, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S. 1069, 74 L. Ed. 2d 631, 103 S. Ct. 488 (1982). A brief recapitulation suffices for our purposes.
On September 24, 1981, the LTV Corporation ("LTV") made a tender offer for a controlling interest in Grumman Corporation at a price of $45 per share. At that time, the Plan held approximately 525,000 shares of Grumman stock. The Trustees, who were also highranking officials of Grumman,*fn1 determined not to tender any of these shares and on October 12 and 13 used Plan funds to purchase 1,158,000 additional shares of Grumman stock at the prevailing market price in an effort to defeat the tender offer. The day before the tender offer was announced, Grumman stock sold for $26.75 per share. The next day, after announcement of the tender offer, the price rose to $35.88 per share. On October 12 and 13, when the Trustees made the purchases, Grumman stock was selling at $36 to $39.75 per share; the average price paid by the Plan was $38.34. On October 14, LTV's tender offer was preliminarily enjoined by Judge Mishler on antitrust grounds, Grumman Corp. v. LTV Corp., 527 F. Supp. 86 (E.D.N.Y.), aff'd, 665 F.2d 10 (2d Cir. 1981). The Secretary brought this action on October 19, 1981, seeking injunctive relief, appointment of a receiver, and recoupment of the Plan's losses. The tender offer ultimately failed, and the price of Grumman stock dropped in the next month to approximately the pre-tender offer level of $23 per share. On December 3, 1981, the district court concluded that the Secretary had "shown a likelihood of success on his claim that each of the trustees has acted imprudently with respect to their recent investment decisions concerning Grumman stock." 538 F. Supp. at 476. Subsequently the court entered an order that preliminarily enjoined the Trustees from buying, selling or exercising any rights with respect to Grumman securities except upon further order of the court and directed the appointment of a receiver to serve as an "Investment Manager" for Grumman securities owned by the Plan with "power to tender for sale, or otherwise dispose of all or part of such stock or securities." 680 F.2d at 265. We modified the order of the district court by striking the appointment of the Investment Manager and, as modified, affirmed. Id. at 277. Approximately seventeen months after the stock was purchased, the Trustees, with the district court's permission, sold the stock, together with some of the previously-held Grumman shares, for $47.55 per share. Including dividends, the amount earned by the Plan on the shares purchased during the tender offer was, net of commissions, $11.41 per share (selling price of $47.55 per share, plus dividends of $2.20 per share, less average purchase price of $38.34 per share), or $13,212,780 total.
On remand, Judge Mishler stated that he would "try the case in steps," taking evidence on the issue of loss to the Plan before taking additional evidence on the question of breach of duty, as to which we had affirmed the preliminary injunction. Joint Appendix at 147-48. A bench trial on loss was held on December 19 and 20, 1983. The district court found, based in part upon expert testimony, that the market price of Grumman stock on October 12 and 13, 1981 was distorted by the pending tender offer and that the fair market value of the stock at that time was only $23 per share. Donovan v. Bierwirth, 538 F. Supp. 463, (E.D.N.Y. 1984).
On February 21, 1984, Judge Mishler dismissed the complaint because he found no likelihood of breaches of fiduciary duty in the future, and that the Plan had not suffered a "loss" within the meaning of ERISA section 409(a), 29 U.S.C. § 1109(a) (1982).*fn2 Thus, an injunction was held to be unnecessary and the Trustees were held to have incurred no personal liability under section 409(a).
The chief issue presented for our review concerns the applicable measure of damages. Specifically, if securities are purchased in breach of trust but are later sold at a price exceeding the purchase price, is there a "loss" within the meaning of ERISA section 409?
In resolving the question whether the Plan sustained a "loss," we bear in mind that the Trustees, if ultimately found to have breached their fiduciary duties, will be liable personally for any such "loss" pursuant to section 409.*fn3 ERISA does not define "loss" as that term is used in section 409. The Act's legislative history, however, indicates that Congress' intent was "to provide the full range of legal and equitable remedies available in both state and federal courts." H. Rep. No. 533, 93d Cong., 2d Sess., reprinted in 1974-3 U.S. Code Cong. & Ad. News 4639, 4655. Measuring damages involves the application of law to fact; the proper formula for calculating damages is essentially a question of law. Clark v. John Lamula Investors, Inc., 583 F.2d 594, 603 (2d Cir. 1978); see C. McCormick, Handbook on the Law of Damages ch. 2 (1935). Consequently the "clearly erroneous" standard does not apply; rather, "it is enough that the appellate court should be convinced . . . that the result [does or] does not jibe with the applicable rule of law." In re Joseph Kanner Hat Co., Inc., 482 F.2d 937, 939 (2d Cir. 1973) (quoting In re Hygrade Envelope Corp. 366 F.2d 584 (2d Cir. 1966)); accord Bose Corp. v. Consumers Union, 466 U.S. 485, 104 S. Ct. 1949, 1960, 80 L. Ed. 2d 502 (1984); 5A J. Moore, Moore's Federal Practice P52.03, at 2663 (2d ed. 1977).
The district court set out its proposed measure of loss in its June 3, 1983 denial of the parties' motions for summary judgment: "The question then is whether the gain of $13,212,780 is of such magnitude that it offsets (1) the loss to the Plan, as alleged by the Secretary, at whatever fair value is ultimately found respecting Grumman securities on October 12 and 13, plus (2) the income that the Plan would have earned if the funds used to purchase such securities were invested with other Plan assets." Evidence was taken in a bench trial on December 19 and 20, 1983. Judge Mishler rendered a decision on February 21, 1984, but it contained no finding of fact as to the second part of the court's proposed test, namely the income that the Plan would have earned had the funds been invested with other plan assets. Rather, the judge found that "loss" to the Plan would be established only if the stock had been sold for less than its purchase price, that is, less than $38.34 per share. Since it was sold for more than this price, the district court dismissed the complaint. It appears to us that the measure the court applied in doing so is inconsistent with the measure set forth in its June 3, 1983 denial of summary judgment. The June 3 decision incorporates in part the Secretary's measure, with which we disagree for reasons stated below. The February 24, 1984 dismissal of the complaint appears in large part to adopt the Trustees' proposed measure, and we reject that measure also. Consequently, we reverse the judgment of the trial court.
The Secretary argues that the proper measure of loss looks to the amount of overpayment at the time of the stock purchase. Applied to the facts before us, his analysis compares the price actually paid by the Trustees, $38.34 per share, with the "fair value" of the stock on the dates of purchase, defined as the price of the stock absent the influence of the tender offer. Expert testimony at trial suggested that this value was between $22 and $23 per share; the trial court found that it was $23. Because the "fair value," $23, was less than the amount actually ...