The opinion of the court was delivered by: David N. Hurd United States District Judge
MEMORANDUM-DECISION and ORDER
On July 10, 2009, the United States Court of Appeals for the Second Circuit issued a mandate vacating a Memorandum-Decision and Order filed on January 5, 2007. Henry v. U.S. Trust Co. of Calif., N.A., 569 F.3d 96 (2009) ("Henry V"), vacating & remanding Henry v. Champlain Enters., Inc., 468 F. Supp. 2d 368 (N.D.N.Y. 2007) ("Henry IV"). The Second Circuit remanded the matter for further proceedings consistent with its decision of June 19, 2009, and the opinion in Henry v. Champlain Enters., Inc., 445 F.3d 610 (2d Cir. 2006) ("Henry III"). Id. at 100. Familiarity with the prior decisions is assumed. See id.; Henry IV; Henry III; Henry v. Champlain Enters., Inc., 342 F. Supp. 2d 122, 122 (N.D.N.Y. 2004); Henry v. Champlain Enters., Inc., 334 F. Supp. 2d 252 (N.D.N.Y. 2004) ("Henry II"); Henry v. Champlain Enters., Inc., 288 F. Supp. 2d 202 (N.D.N.Y. 2003).
According to the Second Circuit, it is necessary to determine if an award of damages in favor of plaintiffs Joseph Henry and Michael Malinky ("plaintiffs") as against defendant U.S. Trust Company of California, N.A. ("U.S. Trust" or "defendant") is appropriate. Henry V at 100. If so, then it will also be necessary to determine the value of the total number of shares of convertible preferred stock acquired in 1994 and 2004 by the Employee Stock Ownership Plan ("ESOP") of Champlain Enterprises, Inc., d/b/a CommutAir ("CommutAir"). Id. Further, "if damages are awarded against U.S. Trust, then the interest overpayment argument may perhaps be relevant" with regard to calculation of damages. Id.
The Findings of Fact set forth in the Memorandum-Decision and Order of September 3, 2004, remain valid and therefore are incorporated in this decision. Henry II, 334 F. Supp. 2d at 256-68.
A. Section 406 Prohibited Transactions
There is no basis upon which to change the prior conclusion that the stock sale to the ESOP was a prohibited transaction under 29 U.S.C. § 1106(a)(1)(A), (E). Accordingly, that conclusion stands. Id. at 268-69.
B. Section 408(e) Exception
The issue for determination is if U.S. Trust "acted with the prudence required of a fiduciary under the prevailing circumstances at the time of the transaction." Henry III, 445 F.3d at 620. In order to be found a prudent fiduciary, "U.S. Trust must show that the CommutAir ESOP paid no more than 'the fair market value of the asset as determined in good faith by the trustee or named fiduciary. . . .'" Id. at 621 (quoting 29 U.S.C. § 1002(18)(B)) (emphasis added). A fiduciary makes "a proper determination of the 'fair market value' of the asset" when it is "'well-informed about the asset and the market for that asset.'" Id. (quoting Proposed Regulation Relating to the Definition of Adequate Consideration, 53 Fed. Reg. 17632, at 17,634 (May 17, 1988) (to be codified at 29 C.F.R. § 2510-3(18)(b))).
U.S. Trust had significant experience in handling ESOP transactions. Norman Goldberg ("Goldberg"), senior fiduciary officer and a financial analyst for U.S. Trust, insisted to the sellers that an appraisal would be needed, which would require a significant investigation of CommutAir. U.S. Trust provided a list of companies specializing in financial appraisals for ESOP transactions. The list included Houlihan, Lokey, Howard & Zukin ("HLHZ"), which was eventually retained by U.S. Trust as an outside financial advisor.
CommutAir submitted management projections forecasting future financial performance of the company through 1995 to HLHZ. HLHZ required a revised forecast through 1998. The general terms of the proposed transaction were outlined at a meeting attended by Goldberg in January 1994. If HLHZ was to be retained with regard to the ESOP transaction, its goal would be to design the security so that the proposed purchase price of $60 million was fair. U.S. Trust's special fiduciary committee approved its engagement as trustee for the proposed transaction on January 20, 1994, after reviewing the initial offer from the sellers.
HLHZ and the counsel retained by U.S. Trust for purposes of the ESOP transaction sent requests for due diligence to CommutAir, to which the company responded. U.S. Trust's financial analyst also received some background information about the company in preparation for a due diligence meeting. The due diligence meeting was held February 2, 1994, over a period of several hours. Rigorous questioning about all aspects of CommutAir took place. After this meeting, HLHZ provided a preliminary valuation to U.S. Trust's Goldberg. HLHZ concluded that CommutAir had a total equity value of $180 million. HLHZ arrived at this total equity value ...