The opinion of the court was delivered by: COOPER
Plaintiff brings this action alleging that defendants have breached and continue to breach fiduciary duties owed to two employee retirement plans at the Rye Psychiatric Hospital Center in Rye, New York in violation of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. Plaintiff seeks recovery for damages to the plans, attorneys' fees and punitive damages.
Defendants assert twelve affirmative defenses and five counterclaims generally alleging they owed no fiduciary duties with respect to the plans; that if any such duties were in fact to be undertaken by them, they did not breach any; and the impropriety on plaintiff's part in maintaining this law suit.
Our findings of fact and conclusions of law, which are set forth below, follow a fourteen day trial to the Court at which thirteen witnesses gave sworn testimony and over one hundred trial exhibits were received into evidence.
Before setting forth our findings, we are compelled to note our unalterable impression that, for the most part, the testimony of each defendant was evasive, grossly exaggerated -- totally unconvincing; we have no alternative to rejecting it in the main.
Further, we cannot refrain from revealing our astonishment upon learning, from their testimony adduced at trial, their ignorance as to the structure and operation of the retirement plans and their fiduciary obligations with respect to them -- the very subject matter of this litigation.
In contrast we remain favorably impressed by the testimony of plaintiff's witnesses; we find it persuasive.
1. The Rye Psychiatric Hospital Center, Inc. (the "Hospital") incorporated under the laws of this State on October 18, 1973 is a private psychiatric hospital located in Rye, New York and licensed by the New York Office of Mental Health. (Tr. 713-15, 722-23)
The Hospital cares for approximately 300 mentally ill persons each year. (Tr. 617, 944)
2. The voting shares of the Hospital are equally divided among Leonard J. Essman, M.D., Salvatore J. Pagliaro, M.D., Jack C. Schoenholtz, M.D., and the defendants herein: David E. Doniger, M.D., I. Jay Lauer, D.D.S., and Alexander Carlen, M.D. (F. 2) These six persons comprised the board of directors (or board of governors) of the Hospital from its inception until November 12, 1982, when Drs. Schoenholtz, Essman and Pagliaro were elected the sole directors at a special meeting of shareholders unattended by the defendants. (F. 3; In the Matter of Rye Psychiatric Hospital Center, Inc., No. 522, slip op. (N.Y., Nov. 19, 1985)) Presently Dr. Schoenholtz is the Hospital administrator and medical director pursuant to a management contract between the Hospital and his wholly owned professional corporation. (Tr. 710)
3. On December 27, 1979, the Hospital created two pension plans for the benefit of Hospital employees pursuant to § 401(a) of the Internal Revenue Code, 26 U.S.C. § 401(a), and §§ 3(2), (39) and 402 of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1002(2), (34) and 1102. These pension plans are known as the Rye Psychiatric Hospital Center, Inc., Supplemental Retirement Income Fund-Fixed (the "Fixed Plan") and the Rye Psychiatric Hospital Center, Inc., Supplemental Retirement Income Fund-Variable (the "Variable Plan") (collectively called the "Plans") (F. 5; Ex. 1, 2) The Variable Plan was implemented on December 27, 1979; the Fixed Plan was implemented in 1980 (exact date unspecified). (Ex. 6, 2, 12; Tr. 742-43, 751-53) The Fixed Plan provides for an annual mandatory contribution by the Hospital of ten percent of the total compensation of the participants; the Variable Plan provides for an annual voluntary contribution of up to 15 percent of the total participant compensation. Each year since the establishment of the Plans, beginning with 1979, the Hospital has made the maximum allowable contributions to the Plans. (Ex. 1, 2; Tr. 904-06)
4. At the inception of the Fixed Plan and the Variable Plan, the six shareholders and directors served as trustees of the Plans. (Ex. 1, 2; Tr. 34, 37-38, 40-41, 208, 751-52, 756-58, 1448-49, 1855, 1975, 2065, 2070) In addition, defendants Doniger and Lauer assumed the responsibility of investment manager of the Fixed Plan and the Variable Plan, respectively. Defendants Carlen and Lauer accepted the duties of custodians of the Fixed Plan and the Variable Plan, respectively. Plaintiff is the administrator of both Plans. The duties of investment manager are set forth in § 8.08 of each Plan and the duties of custodian are set forth in § 8.09. The duties and responsibilities of administrator are set forth in § 8.10 of the Plans. (Ex. 1, 2)
5. It was the expressed intent when the Plans were adopted that up to 100 percent of the assets of the Plans were to be invested in Hospital securities (so stated in § 8.09 of each Plan). (Ex. 1, 2; Tr. 738-39, 787) At a meeting on August 3, 1981, the shareholders unanimously approved amendment of the Hospital Certificate of Incorporation to authorize 1,000,000 shares of non-voting Class B Common stock and 240,000 shares of Preferred Stock-Series 1981, convertible into Class B Common. (Tr. 56-57, 808-18, 1641) The sole purpose for the creation of Preferred Series 1981 and Class B Common was to sell the Preferred stock to the Plans. It was intended that each year a new Preferred series would be authorized and sold to the Plans. (Ex. 1, 2, 118; Tr. 807, 1266-72)
6. At their August 3, 1981 meeting, the Hospital directors unanimously authorized the sale by the Hospital to the Plans of 119,593 shares of Preferred-Series 1981 for $1.00 per share. The same day, the trustees of the Plans unanimously authorized the purchase of these shares. (Tr. 56-57, 808-18, 1641)
7. At a special meeting of the board of directors on November 9, 1981, Dr. Lauer proposed that a dividend of $30,000 be issued to each of the six shareholders. The proposal did not meet with approval. Dr. Doniger then moved for a $25,000 dividend payment, which also did not meet with approval. Plaintiff and Drs. Essman and Pagliaro expressed their belief that such a substantial dividend would be detrimental to the Plans. (Ex. 37; F. 11; Tr. 72-74, 564, 820-27, 1118-19, 1128-30, 1186-87, 1200-02)
8. Following failure to obtain board approval for their proposed dividends, they jointly planned and embarked upon a scheme to gain control of the Hospital by boycotting or disrupting all subsequent meetings in an effort to paralyze the Hospital operations. The scheme had two complementary objectives. One was the ouster of Dr. Schoenholtz who defendants particularly perceived as blocking the financial expectations of their investment. With control of the board, defendants believed they could obtain the level of financial reward they thought appropriate. (Tr. 93-95, 294-95, 2017-18)
9. On various occasions beginning on November 9, 1981 defendants made positive assertions to the other directors to the effect that they would deadlock all decisionmaking affecting the Hospital and prevent it from functioning unless Dr. Schoenholtz was removed and defendants were able to sell their stock to an outside purchaser. An existing shareholders' agreement gave non-selling shareholders a right of first refusal at a stipulated price before any shareholder could dispose of his stock. (Tr. 822-28, 836, 1466-67, 1564-65)
10. In execution of their scheme, defendants intentionally disrupted the January 19, 1982 board of directors meeting by refusing to allow any business to be conducted unless they were permitted to tape record the proceedings. (Ex. 40; Tr. 79-83, 698, 832-35, 1463-64) On that occasion defendants knew full well that tape recording of meetings had previously been prohibited by vote of the board at the meeting on February 6, 1981. (Tr. 2027) By disrupting the January 19, 1982 meeting and refusing to participate therein, defendants foreclosed the possible consideration of matters concerning or of importance to the Plans, particularly the potential sale and purchase of the remaining 120,408 shares of Preferred Series 1981. Their conduct also precluded a meeting of the trustees.
11. At all relevant times, defendants knew that matters relating to the Plans frequently arose during regular board meetings and that meetings of the Plans' trustees routinely followed meetings of the board of directors, even in the absence of specific notice of a meeting of trustees. (Tr. 48, 88-89, 470, 1252-54, 1453, 2139-40)
12. At an executive committee meeting on February 22, 1982 attended by Drs. Schoenholtz, Essman and Doniger, Dr. Doniger demanded that a stenographer record the meeting. A vote was taken which resulted in a two to one decision to prohibit the stenographer's presence at the meeting. (Tr. 841-44, 1900-02)
13. At the February 22, 1982 executive committee meeting, Dr. Doniger raised the question of whether Dr. Essman had been elected Vice President and was properly a member of the executive committee. (Tr. 1290-91, 1578)
14. All the directors received due notice of a meeting of the Hospital board of directors scheduled to be held on April 26, 1982. (Ex. 44, 45; Tr. 85) Defendants agreed among themselves that they would boycott that particular meeting, thereby insuring that a quorum could not be obtained for the conduct of Hospital business, and so informed Dr. Schoenholtz. (Ex. 47; Tr. 85-87) Because of defendants' failure to attend, no business relating to the Plans could be conducted and no meeting of the trustees could be held.
15. Dr. Doniger sent a letter dated April 27, 1982, with a cover letter dated May 25, 1982, to Kenneth Simon, Esq., the Hospital's counsel. (Ex. DM) In that letter, Dr. Doniger asserted that Dr. Essman was not a merger of the board of directors and raised questions concerning Dr. Essman's true status. The letter further stated, "... you may feel free to let Dr. Schoenholtz know that it will not be possible to obtain a quorum or transact Governing Board business until this information has been supplied." (Id.)
16. Dr. Carlen testified that if it were proven that Dr. Essman was not a director, defendants would have had a majority of votes. (Tr. 91) He also admitted that defendants discussed Dr. Essman's removal as a means of obtaining the dividends they desired, and, equally important, to get rid of Dr. Schoenholtz. (Tr. 159, 93)
17. On July 2, 1982, defendants demanded a special meeting of the board of directors to consider Dr. Essman's status as a board member and a demand for Dr. Schoenholtz's immediate resignation. (Ex. 54) Shortly thereafter, defendants received due notice of a regular meeting of the board of directors to be held on July 12, 1982, when defendants' items of business were to be considered together with regular Hospital affairs. (Ex. 56; Tr. 856-57) Pursuant to their scheme, defendants agreed that they would not attend the July 12, 1982 meeting; they absented themselves. It was defendants' position that Dr. Schoenholtz had not appropriately responded to their demand for a special meeting. (Ex. 58) By reason of defendants' failure to attend, no action could be taken at the regular meeting of the board of directors held on July 12, 1982. Plaintiff had intended that Plan business be considered at that meeting. (Tr. 857)
18. Dr. Lauer testified that since defendants requested the special meeting before the board meeting was scheduled, the former, with its specific agenda, should have taken precedence to the exclusion of any other Hospital or Plan business. (Tr. 2146)
19. In accordance with defendants' demand, they received due notice of a special meeting of the board of directors to be held on July 26, 1982. (Ex. 60) At the July 26, 1982 meeting, defendants made a motion to tape record the proceedings. The motion failed to carry and, pursuant to the agreement among themselves, defendants intentionally disrupted the meeting and refused to participate further. (Ex. 113; Tr. 101-07, 860-65, 1917-19)
20. In August, 1982, as part of their plan to gain control of the board, defendants commenced a proceeding in the Supreme Court of the State of New York, County of Westchester, pursuant to Article 78 of the New York Civil Practice Law and Rules seeking a declaration that Dr. Essman was not a director of the Hospital corporation and that it had been improper to refuse to permit tape recording of the July 26, 1982 meeting. (Ex. 113) On March 26, 1983, defendants withdrew their claim as to Dr. Essman's status and acknowledged that he was a director. By decision dated May 12, 1983, the Honorable Abraham Isseks held that defendants had disrupted the July 26, 1982 meeting, that a tape recording was correctly not permitted and that Dr. Schoenholtz had properly conducted the meeting. (Ex. 77)
21. Defendants also commenced a shareholders' derivative action in New York State Supreme Court, County of Westchester, against plaintiff in August, 1982. That action is still pending. (Tr. 114, 866)
22. Defendants received notice dated September 14, 1982 of a regular meeting of the board of directors to be held on October 25, 1982 and to be followed by a meeting of trustees of the Plans. (Ex. 64, BD; Tr. 866-69) The directors were specifically informed that, among other items of business, the 1982 Hospital evaluation would be presented and that they would consider the proposed new issue of Preferred Stock-Series 1982. (F. 12) On October 22, 1982, defendants moved for an order enjoining the meeting until determination of their Article 78 proceeding; they obtained an order temporarily enjoining the directors' meeting and a special shareholders' meeting scheduled for November 12, 1982, which had been called for the election of directors. No injunction of the meeting of trustees was requested or issued. (F. 15; Tr. 117)
23. On or about October 22, 1982, defendants received notice that, pending a decision on their motion for an injunction, the board of directors meeting originally scheduled for October 25, 1982 was rescheduled for November 1, 1982, to be followed by a meeting of the trustees. (Ex. 65; Tr. 117-18) However, the administrative assistant to Dr. Schoenholtz, Amy Schoen, telephoned each director on October 25th to remind him that the trustees would meet as scheduled that evening. (Tr. 311-13, 869, 1330) Defendants failed to attend the meeting of the Plans' trustees on October 25, 1982 and, as a result of the absence of a quorum, the trustees were unable to conduct any Plan business. Dr. Doniger ...