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Henry v. Champlain Enterprises

January 5, 2007

JOSEPH HENRY AND MICHAEL MALINKY, PLAINTIFFS,
v.
CHAMPLAIN ENTERPRISES, INC., D/B/A COMMUTAIR; ANTHONY VON ELBE; JOHN ARTHUR SULLIVAN, JR.; ERNEST JAMES DROLLETTE;ANDREW PRICE; WILLIAM L. OWENS; CHAMPLAIN AIR, INC.; AND U.S. TRUST COMPANY OF CALIFORNIA, N.A., DEFENDANTS.



MEMORANDUM-DECISION and ORDER

I. BACKGROUND

Plaintiffs Joseph Henry and Michael Malinky ("plaintiffs") brought this action alleging 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 state law claims of breach of fiduciary duty, unjust enrichment, and corporate waste and diversion of assets. The state law claims and breach of fiduciary duty claims against certain defendants were dismissed on October 27, 2003. Henry v. Champlain Enters., Inc., 288 F. Supp. 2d 202 (N.D.N.Y. 2003) ("Henry I").

A bench trial was held on several days in February and April 2004. Thereafter, Findings of Fact and Conclusions of Law were set forth in a Memorandum-Decision and Order entered on September 3, 2004, Henry v. Champlain Enters., Inc., 334 F. Supp. 2d 252 (N.D.N.Y. 2004) ("Henry II"), vacated, 445 F.3d 610 (2d Cir. 2006). On October 29, 2004, an order was issued, among other things awarding prejudgment interest, attorneys fees, and expenses, and directing the entry of judgment. Henry v. Champlain Enters., Inc., 342 F. Supp. 2d 122, 122 (N.D.N.Y. 2004) ("Henry III"). An appeal was taken by defendants Champlain Enterprises, Inc., d/b/a CommutAir ("CommutAir"); Anthony Von Elbe, John Arthur Sullivan, Jr.; Ernest James Drollette; and U.S. Trust Company of California, N.A. (collectively "U.S. Trust" or "defendant"). The United States Court of Appeals for the Second Circuit vacated the judgment and remanded the matter for further proceedings consistent with its opinion, which will be discussed in more detail below. Henry v. Champlain Enters., Inc., 445 F.3d 610 (2d Cir. 2006) ("Henry IV").

Familiarity with the previous decisions in this action is assumed. The factual background is set forth only so far as is necessary to resolution of the issues on remand.

This matter arose out of a disagreement regarding the valuation of CommutAir convertible preferred stock sold by the owners of CommutAir*fn1 to the Employee Stock Ownership Plan ("ESOP"), of which plaintiffs are participants. The stock purchase at issue took place pursuant to a Stock Purchase Agreement signed on March 15, 1994. Pursuant to that agreement, 540,000 shares of convertible preferred CommutAir stock was sold to the ESOP for $60,000,000.00. Henry II, 334 F. Supp. 2d at 267. The ESOP financed the $60 million purchase with a $9 million loan from CommutAir and three promissory notes payable by the ESOP to the owners/sellers, id., totaling $51 million.

It was determined after trial that the fair market value of the convertible preferred CommutAir stock was $52.25 million, rather than the $60 million paid by the ESOP. Id. at 268, 274. It was further determined that the stock sale transaction was a prohibited transaction under Section 406 of ERISA.*fn2 Id. at 269. Additionally, it was found that an exception,*fn3 which permitted the sale, in certain circumstances, of an employer's stock to an ESOP so long as the sale was for adequate consideration, did not apply. Id. at 272. Finally, it was concluded that the prohibited transaction caused $7.75 million in damages, and that amount was awarded to plaintiffs.

Upon motion by plaintiffs, prejudgment interest in the amount of $7,410,937.50 was awarded. Henry III, 342 F. Supp. 2d at 123. Plaintiffs were also awarded $552,807.61 in attorneys fees and expenses. Id. U.S. Trust's application for a set-off*fn4 was denied. Id. Accordingly, an amended judgment in favor of plaintiffs on behalf of the ESOP and against U.S. Trust in the sum of $15,713,745.11 was entered.

The only remaining claim was dismissed by stipulation on January 10, 2005. An amended judgment was entered reflecting this dismissal. Finality was achieved. U.S. Trust's motion to waive the posting of a supersedeas bond was denied. U.S. Trust appealed and plaintiffs cross-appealed.

The United States Court of Appeals for the Second Circuit rendered its opinion on April 26, 2006. Henry IV, 445 F.3d 610. The Second Circuit remanded the case so that specific errors in the valuation of CommutAir could be identified and for a determination of "whether a prudent fiduciary would have detected these errors under the circumstances prevailing at the time of the ESOP transaction." Id. at 621. Further, the Second Circuit directed that if defects are found "in the valuation report that a prudent fiduciary would have detected," the damages must be assessed and specific findings set forth. Id. at 622. Similarly, the award of prejudgment interest was vacated "to provide the district court with an opportunity to articulate its reasons for awarding prejudgment interest in the amount and for the period it did in this case." Id. at 623. Next, the appellate court found that U.S. Trust could not revive disgorgement claims that were abandoned by plaintiffs. Id.

Finally, U.S. Trust argued that any damages recovered by the ESOP would result in a windfall. The basis for this argument was that, as a result of an IRS audit, Section 5.7 of the purchase agreement was invoked and the owners/sellers made a stock payment to the ESOP to make up the difference between the $60 million sale price and the $51 million value determined by the IRS. Id. at 624; see also supra note 4. In response to this argument, the Second Circuit directed that if it is determined that there is an entitlement to damages, it must be explained how such damages are not a windfall to the ESOP. 445 F.3d at 624.

Following remand, as ordered, plaintiffs and U.S. Trust submitted amended Proposed Findings of Fact and Conclusions of Law ("Prop'd F. Fact & Concl. Law"). They each replied. The matter was taken on submission without oral argument.

II. DISCUSSION

A. Proposed Findings of Fact and Conclusions of Law

Plaintiffs proposed that a factual finding be made that the fair market value of the convertible preferred stock was $52,250,000.00 as of March 15, 1994. ...


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