Plan contributions on a violation of ERISA, since ERISA § 410(a), 29 U.S.C. § 1110(a), forbids any agreement "which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part [as] void as against public policy."
Thus, Valley's motion for partial summary judgment on the "no loss" ground will be denied, since as the Kroy contributions became Plan assets once made, Valley's decision to invest those assets was subject to ERISA's fiduciary standards. Clearly, a loss has been suffered. The next question that must be addressed is the extent of the loss for which Valley is responsible.
The Measure of the Loss
Donovan v. Bierwirth, 754 F.2d at 1055, held that while ERISA preempts state law, it is clear that Congress' intent to provide the courts with broad remedial powers contemplated that courts look to principles developed under the common law of trusts which, in large measure, remain applicable under ERISA. One such remedy is that the fiduciary repay the purchase price, plus interest, here $ 17.5 million plus interest. Another case, Beck v. Levering, 947 F.2d 639 (2d Cir. 1991) reaffirmed the principle of broad judicial remedial power.
The sections of ERISA pertaining to fiduciary responsibility were intended "to make applicable the law of trusts; to prohibit exculpatory clauses . . . ; to establish uniform fiduciary standards to prevent transactions which dissipate or endanger plan assets; and to provide effective remedies for breaches of trust." Statement of Senator Williams, Aug. 22, 1974, 120 Cong. Rec. 515737, reprinted in 1974 U.S. Code Cong & Admin. News 5177, 5186. As the Secretary notes at page 3 of his Surreply in Opposition to the Motions for Partial Summary Judgment Submitted By Valley National Bank, ERISA was enacted to "provide the full range of legal and equitable remedies available in both state and federal courts." H.R. Rep. No 533, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Admin. News 4639, 4655.
Legal remedies are vital to ERISA's enforcement scheme, and this court cannot eviscerate that scheme merely because Valley was swift enough to consummate the LBO transaction before the Government brought a pre-closing enforcement action. As the Secretary points out, the available equitable remedies are insufficient to prevent the sort of wrongdoing with which Valley is charged here. According to Valley's argument, any employer can terminate its ESOP at will, which it has the legal right to do, and then reconstitute it with a forbidden transaction that primarily benefits the company. As long as the Secretary is not quick enough to enjoin the transaction pre-closing, the Secretary is then precluded from obtaining money damages no matter how high the losses suffered by the employees.
The equitable remedies outlined by Valley would never be sufficient or even available in a case like this one in which all the LBO participants are no longer involved. See 29 USC §§ 1109, 1132. Ironworkers Local v. Bowen, 695 F.2d 531, 535-36 (11th Cir. 1983). Also, while there are tax penalties available against a company under IRC § 4975, none of these remedies avail the employees. There is no sufficient equitable remedy for the employees when ERISA-violating actions such as are the subject of this action are consummated quickly. Equitable remedies alone provide the Government with a very limited window of enforcement, limiting it largely to pre-transaction relief.
The Bierwirth issue was whether an ESOP suffered a loss under ERISA § 409(a), 29 U.S.C. § 1109(a), when securities purchased in a breach of trust were later sold at a higher price than that obtained during the original purchase. The court found that even though the Plan made a "profit" there still could be a "loss" if the Plan would have made a greater profit had the funds invested been available for other Plan investments. Bierwirth at 1506. See also Dardaganis v. Grace Capital, Inc., 889 F.2d 1237, 1243-44 (2d Cir. 1989).
Following this analysis, the ESOP lost roughly $ 17.5 million plus interest, minus the $ 250,000 already recovered. The Kroy ESOP's original investment of $ 17.5 million was worth nothing at the time of the collapse of Kroy.
This measure of loss is consistent with the common law of trusts from which ERISA's fiduciary standards are derived. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110-13, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989); Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570, 86 L. Ed. 2d 447, 105 S. Ct. 2833 (1985).
Under the common law of trusts, a trustee who purchases property in a breach of trust is liable for the purchase price plus interest if the breach constitutes some misfeasance other than simply paying too high a price for the property. Estate of Rothko, 43 N.Y.2d 305, 372 N.E.2d 291, 297-98, 401 N.Y.S.2d 449 (1977).
Thus, even if Valley's breach involved nothing more than paying too high a price for the stock, Valley would still be liable for the difference between the price paid and the price that should have been paid. See Estate of Rothko, 372 N.E.2d at 297.
In any event, the Secretary argues that ERISA contemplates per se violations. Thus there can be monetary penalties absent proof of actual loss. He relies on the decision in Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 643 (W.D. Wisc. 1979) where the court found that ERISA § 409 provides for both profit and loss restoration. The court there held that it had broad discretion to fashion relief, and where the Plan invested in companies that subsequently went bankrupt, the Plan lost the amount in money reflecting the diminution of the value of its assets. Whether the violations are per se need not be passed on. The determination that there was a loss is a sufficient basis for denying Valley's motion for partial summary judgment.
III. VALLEY'S COUNTERCLAIMS AND THE MOTIONS FOR SUMMARY JUDGMENT THEREON BY BOTH PARTIES
Valley has interposed several counterclaims and affirmative defenses. Valley has moved, and the Department has countermoved, for summary judgment on the counterclaims. The counterclaims and the affirmative defenses arise for the most part out of the same nucleus of operative fact and appear to be facets of the same general argument. A discussion of one claim necessarily involves a discussion of a good deal of the same legal and factual issues. At the heart of Valley's various counterclaims and affirmative defenses is the contention that although the DOL did not formally review the LBO transaction prior to closing, there was an informal review during which the Department implicitly approved the transaction. Additionally, Valley contends that the Department violated some legal duty owed it by not promulgating certain regulations further defining "adequate consideration."
In 1974 Congress instructed the Secretary of Labor (the "Secretary") to promulgate regulations defining "adequate consideration" to guide trustees like Valley and other parties in structuring ESOP-financed leveraged buyouts ("LBOs"). Instead of promulgating the necessary regulations, the Department implemented an informal pre-closing review procedure. Under that procedure, the Department reviewed the terms of ESOP-financed LBOs prior to consummation, and alerted the ESOP trustees and other parties to the Department's legal concerns or problems. In 1986, the Department thoroughly reviewed the buyout at issue here and advised the parties that it had no objection to the closing of the transaction."