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The opinion of the court was delivered by: DAVID HURD, District Judge



  Plaintiffs Joseph Henry and Michael Malinky (collectively "plaintiff"), who are participants in defendant CommutAir's Employee Stock Ownership Plan ("ESOP"), brought suit alleging various violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. §§ 1104, 1105, 1106; seeking removal of fiduciaries under the equitable relief provision of ERISA, 29 U.S.C. § 1109(a); and asserting various other state law claims.

  By Memorandum-Decision and Order dated October 27, 2003, plaintiff's state law claims were dismissed, as were all of its breach of fiduciary duty claims against defendants Antony von Elbe, John Arthur Sullivan, Jr., Ernest James Drollette, Andrew Price, William L. Owens, and Champlain Air, Inc.*fn1 Henry v. Champlain Enterprises, Inc. et al., 288 F. Supp. 2d 202 (N.D.N.Y. 2003). Most of plaintiff's breach of fiduciary duty claims against U.S. Trust Company of California, N.A. ("U.S. Trust") and CommutAir were also dismissed.*fn2 Id. Familiarity with that decision is assumed.

  A trial date was set for plaintiff's claims against U.S. Trust under ERISA Sections 404, 406, and 408, 29 U.S.C. §§ 1104, 1106, 1108. Prior to trial, the parties agreed that the dispositive issue was whether the March 15, 1994, sale of convertible preferred stock from the owners of CommutAir to the ESOP constituted a prohibited transaction under Section 406, not saved by the exception under Section 408(e). See Docket No. 142, Tr. Transcript, Vol. I at 53 ("MR. GREENWALD [counsel for plaintiff]: . . . The claim for breach of fiduciary duty under [§] 404 is a secondary claim that is subsumed within the prohibited transaction claim").

  The matter was tried to the bench for six days in February 2004, and five days in April 2004, in Utica, New York. (Docket Nos. 126-31, 133-37.) Called as witnesses by plaintiff were defendant Andrew Price, plaintiff Joseph Henry, defendant Antony von Elbe, Jeffrey Risius, and Bradford Eldridge. Called as witnesses by both sides were defendant John Sullivan, Norman Goldberg, Andrew Stull, and Michael Shea. Called as a witness by defendants only was Robert Dana. Plaintiff and defendants thereafter submitted proposed findings of fact and conclusions of law. (Docket Nos. 153, 154) ("Pl. Prop. ¶ ___" or "Def Prop. ¶ ___"). The following are the Findings of Fact and Conclusions of Law pursuant to Fed.R. Civ. P. 52.*fn3


  A. CommutAir

  CommutAir is a New York corporation based in Plattsburgh, New York engaged in the business of operating a regional commuter air service for public and private hire. (Stip. 1.) It was formed in 1989 by defendants Antony von Elbe ("von Elbe"), John Arthur Sullivan, Jr. ("Sullivan"), and Ernest James Drollette ("Drollette") (collectively, "the sellers") — who each owned a 1/3 share of the company — and enjoyed significant growth and profit in its first years in business. (Pl. Prop. ¶ 13; Stip. 4.) The company had in 1989 a ten-year code-sharing agreement with USAir, whereby CommutAir would provide commuter services to certain cities to USAir passengers, paying a fee to USAir based on passenger volume in exchange for use of USAir's name, code, and ground support. (Vol. I at 105-09; Pl. Ex. 111.) Because by this agreement the company was USAir's "primary vehicle for market entry in the Northeast, CommutAir grew quickly from two planes to twenty-four planes. (Vol. II at 101.)

  In early 1994, all of the planes in CommutAir's fleet were non-cabin class, and seated under twenty passengers. (Vol. I at 115-16.) It purchased its planes with financing from the manufacturer. Id. at 125. This provided the company with "a predictable cost structure" and allowed it "to have the lowest unit cost per departure if [it] were up against a carrier with larger equipment." (Vol. II at 100.) A competitor moving to larger planes, therefore, was a move CommutAir desired, because it could fill that competitor's place in the market. Id.; Vol. VII at 112-13.

  In 1993, CommutAir, then thriving financially, was approached by investment bankers Prudential Securities and Alex Brown & Sons regarding a possible strategic alliance with another airline or an initial public offering. (Vol. III at 53; Vol. II at 206, 208.) Presentations along with written materials were separately given to the company by both firms. (Vol. III at 54-55; Vol. I at 99-100; Pl. Exs. 47, 49.) Though the written materials collectively indicated CommutAir had a total equity value ranging from $140 million to $225 million, the sellers did not consider them to be a formal valuation of the company, but rather "a ranking of [CommutAir] in the industry, some comparisons and so forth." (Vol. III at 56, 54; Vol. II at 207, 226.) B. Late 1993 — CommutAir Develops Interest in ESOP Transaction

  Sometime in late 1993, the sellers began exploring the possibility of establishing an ESOP and selling to it stock in the company, followed by an initial public offering "before the second half of 1995," the latter of which would tentatively be accomplished using an investment banker. (Vol. III at 20-21; Vol VII at 119-120; Vol. II at 198; Pl. Ex. 187; Stip. 10.) "An ESOP is an employee benefit plan that is designed to encourage employee ownership through investment in securities issued by a sponsoring company." (Def. Prop. ¶ 10.)

  Some time after presenting CommutAir a proposal, Robert Irwin, from Alex Brown & Sons, suggested that Sullivan contact Jack Curtis ("Curtis"), then an attorney with the law firm of Keck, Mahin & Cate ("KMC"). (Vol. VII at 124; Vol. II at 240.) The two spoke in late 1993, and Curtis informed Sullivan about the general framework of an ESOP transaction, including the hiring of legal counsel, an appraisal firm, and a trustee to represent the ESOP. (Vol. VII at 125.) They also spoke about the possibility of making the transaction financed by the owners, thereby eliminating the need for an investment bank in the process, which Sullivan believed would have made it "very cumbersome and expensive." Id. at 125-26.

  1. December 1993 — CommutAir Speaks with U.S. Trust

  Curtis suggested that Sullivan contact U.S. Trust, a company that acted as a trustee for ESOP's both during and after transactions in which company stock is sold, and speak with Norman Goldberg ("Goldberg"). (Vol. III at 72, 103; Vol. VII at 126; Vol. II at 240.) Goldberg was a "senior fiduciary officer [in the special fiduciary services division at U.S. Trust] responsible for the relationships in connection with both transactions involving employer stock [and] transactions involving employee benefit plans." (Vol. III at 72.) He has significant experience in ERISA-related matters, having worked for the Department of Labor, an investment bank/financial advising firm, and a large, well-known appraisal company. (Vol. VII at 185-90; Def. Prop. ¶¶ 15-16.)

  Goldberg has never prepared a valuation of a closely held corporation, and does not consider himself to be an expert in the same. (Vol. III at 71, 75.) He has, however, authored articles and prepared speeches on the legal consequences of valuing businesses, and can generally understand valuation reports. (Vol. III at 75-77.) Per year, he reviews approximately ten valuation reports prepared by financial appraisal firms hired by U.S. Trust, usually focusing on the narrative portion and leaving technical aspects to in-house financial analysts. (Vol. III at 77, 79.)

  The in-house financial analyst in this case was Michael Shea ("Shea"). Shea's responsibilities included reviewing the financial appraiser's report and reporting to Goldberg on the reasonableness thereof. (Vol. V at 47.) He also was to actively participate in the financial appraiser's due diligence investigation of the company, and keep apprised of any developments.

  Sullivan had a phone conference with Goldberg in late December of 1993. (Vol. III at 3; Vol. VII at 127; Vol. II at 240-41.) By this time, it was the sellers' belief, based on the presentations by investment bankers, that the company had a total equity value of $200 million, and that they wanted to sell approximately 30% of the company for $60 million. (Vol. III at 6, 10, 60, 61; Vol. II at 251.) They admit that no independent, formal valuation was performed to support a value of $200 million. (Vol. III at 11, 61; Vol. II at 253.)

  As Goldberg echoed many sentiments expressed by Curtis, Sullivan's interest in a seller-financed ESOP transaction grew. (Vol. VII at 126-27.) At the end of the conference, Goldberg stressed the need for an appraisal of the company if U.S. Trust were to be hired to represent the ESOP in the proposed transaction, and advised Sullivan that there would be significant investigation of the company. (Vol. III at 104; Vol. VII at 128; Vol. II at 241-43.) Goldberg gave Sullivan a list of companies specializing in ESOP transactions, one of which was Houlihan, Lokey, Howard & Zukin ("HLHZ"), which provided financial appraisal services. (Vol. II at 245.) Goldberg did not keep notes of his conversation with Sullivan. (Vol. III at 103-04.)

  Following the conference, Sullivan conferred with the other owners of CommutAir, von Elbe and Drollette, and the three decided to meet face-to-face with U.S. Trust and the other potential members of the team that would represent the ESOP in the transaction. (Vol. VII at 128.) A "kick-off" meeting was slated for January 14, 1994, at the offices of KMC in Washington, D.C.

  2. Valuation Methodology

  At this point, before examining what, precisely, the relevant parties did or did not do in preparation for the transaction, it is helpful to give the proper context of what both plaintiff and defendants generally agree is the proper financial framework for assessing the fairness of the stock sale. Both sides agree that the primary component of any valuation is determining CommutAir's total equity value. To determine the total equity value, two valuation methodologies are employed — the discounted cash flow method ("DCF method") and the market capitalization method ("comparable companies method"). (Stip. 15; Vol. V at 206-07.) While the precise inner workings of the approach need not be detailed here, the major features about which the parties heatedly disagree are worthy of mention.

  The DCF method, generally speaking, estimates the present day value of a company's projected future cash flows which would be theoretically available to the capital providers of the company. Central to the DCF method are projections of the company's future performance submitted by management. Because these projections forecast results only for a discrete period of time, however, it is also necessary in the DCF to determine a terminal value, which is used to calculate the company's cash flows from the end of the projection period into perpetuity. Part of the terminal value calculation is the determination of the rate at which the company will be expected to grow into perpetuity. (Vol. V at 69.)

  The comparable companies method derives a total equity value of a company based on how it compares to other similar companies on selected financial measures. Central to this approach are the selection of comparable companies against which to compare the subject company, and a comparative analysis of the subject company relative to the selected comparable companies. Financial measures by which to compare the companies must be selected, and it is usually determined whether the subject company, individually on the measures selected, falls above, at, or below the median of the same for the comparable companies. (Vol. V at 69; Vol. IV at 70-71.)

  The total equity value of the company, derived from the DCF and comparable companies methods, is then used to determine if the proposed transaction — in this case, the sale of convertible preferred stock for $60 million — is appropriate. Certain features of the stock may be negotiated, which may drive the value of the stock up, down, or have no effect at all.

  3. January 5, 1994 — CommutAir Submits Management Projections

  At some time in late December/early January, HLHZ was contacted regarding the proposed transaction. Just over a week prior to the kick-off meeting, defendant Andrew Price ("Price"),*fn4 at the request of Sullivan, submitted management projections of CommutAir's future financial performance to Jack Berka, a managing director in HLHZ's Los Angeles office. (Pl. Ex. 108; Def. Ex. 2; Vol. I at 176.) The projections were forwarded to HLHZ employees Jerry Grossman and Andrew Stull ("Stull"). The forecast, which was prepared in November of 1993 for an investment banking group, used CommutAir's actual financial data from 1992 through October of 1993, and forecasted the company's performance through 1995. (Vol. 1 at 176-78.)

  HLHZ asked Price to submit a revised forecast that projected performance through 1998. For the revised projections, Price incorporated data from the last two months of 1993. (Vol. I at 179; Pl. Ex. 109; Def. Ex. 6.) The forecast primarily utilized the last six months of 1993 for the projections, because, in Price's words, the industry was "ever-changing." (Vol. II at 10.) No explanation was submitted with the forecast, and Price does not recall specifically a meeting with HLHZ where he explained the underlying assumptions. (Vol. II at 11-12.)

  Price admits that he did not review the FAA's annual aviation industry forecast from 1992 or 1993 before preparing the projections, he says because the forecast was company-specific, not of the industry. (Vol. I at 156-57, 167; Vol. II at 18, 104-05.) The 1993 FAA forecast projected a decline in growth for the segment of the regional commuter airline industry in which CommutAir was placed, i.e., those with planes with less than 20 seats. (Pl. Ex. 97; Pl. Ex. 92.) CommutAir had no plans to purchase or lease aircraft with more passenger seating, a segment of the industry the FAA indicated would see growth. (Vol. I at 169, 173.)

  Shea claims he had a copy of the projections, but does not recall doing anything to verify the reasonableness of the projections other than speaking with Price and HLHZ. (Vol. IX at 191, 209; Vol. V at 160.) Goldberg did not personally review Price's projections. (Vol. III at 133-34, 137.) HLHZ never made any adjustments to the projections. (Vol. IV at 132.)

  4. January 14, 1994 — Kick-off Meeting

  The January 14, 1994, kick-off meeting was attended by Sullivan and von Elbe from CommutAir; CommutAir legal counsel William Owens; Robert Irwin from Alex Brown; Luis Granados, Curtis and Marsha Matthews from KMC; Goldberg from U.S. Trust; and Andrew Stull and Jerry Grossman from HLHZ. (Vol. III at 12, 58, 108; Vol. IV at 12.) The meeting, which lasted one to two hours, was labeled as an introductory meeting of all the potential entities that would be involved with the proposed transaction. (Vol. IV at 12; Vol. VII at 209.) The potential transaction was discussed in more detail. (Vol. VII at 129.) Neither U.S. Trust, HLHZ, nor KMC had been formally retained.

  At the meeting, it was indicated that the transaction needed to be completed by March 15, 1994, which Goldberg stated was "[n]ot an unusually fast track for this type of transaction" but admitted is a "[m]oderately" fast track in general. (Vol. III at 120; Vol. VII at 211.) Robert Irwin, from Alex Brown & Sons, gave a presentation regarding the commuter airline industry, and gave certain documents to HLHZ regarding CommutAir. (Vol. IV at 13, 30; Pl. Ex. 208.) The general terms of the proposed transaction were outlined, including: (1) the intention that a seller-financed, leveraged ESOP be created; (2) the sellers' desire to sell roughly 30% of the company to the ESOP for $60 million, on the basis of an estimated total equity value of $200 million; (3) the advantages of using convertible preferred stock as the security purchased; (4) the possibility of a aggregate dividend rate for the stock of 8%-10%, with 6%-7% of such rate fixed and the rest discretionary; (5) that the dividend on the preferred stock be cumulative; and (6) that the preferred stock have participation rights, so as to allow for the pay-down of the ESOP's debt on an accelerated basis. (Vol. III at 111-121; Vol. IV at 16-17; Vol. VII at 210-11.)

  At the meeting, Goldberg did not inquire as to how the sellers came up with the $200 million total equity value for CommutAir, or have any preliminary opinion as to its validity. (Vol. III at 62, 122.) He did have a "fairly clear impression" that Alex Brown had performed some financial analysis of the company with respect to an initial public offering, though he neither saw, nor requested to see, the written materials that accompanied either investment banking firm's presentation to the sellers in 1993. (Vol. III at 109-110; id. at 54-57, 59.) He was also aware of CommutAir's "general business strategy" of following the creation of the ESOP with an initial public offering. (Vol. III at 118.) HLHZ was also aware that an ...

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