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declining to strike the expert affidavit where the expert sufficiently cited the facts upon which her opinion was based
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Civil Action No. AW-99-1283
June 15, 2001
MEMORANDUM OPINION
The Secretary of Labor of the United States Department of Labor (the "Secretary") brings this action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq. The complaint alleges that the trustees of a pension plan breached their fiduciary duties in causing the plan to enter a series of imprudent transactions. Currently pending before the Court is Defendants' Motion for Partial Summary Judgment. The motion has been fully briefed by all parties. No hearing is deemed necessary. See Local Rule 105.6. Upon consideration of the arguments made in support of, and opposition to, the Defendants' motion, the Court makes the following determinations.
I. FACTUAL BACKGROUND
Defendants, Jack Moore and John Grau, were trustees to the National Electrical Benefit Fund (the "Fund"). The Fund is a defined benefit pension plan under § 3(1) of ERISA and is subject to its provisions. In 1990, the trustees were approached by Terence McAuliffe and Richard Swann for the purpose of purchasing certain real estate in Florida. The group ultimately arranged for a newly formed limited partnership to own the property. In November 1990, American Capitol Group I Assets Limited Partnership (the "Limited Partnership" or "LP") was formed. American Capitol Management Company ("ACMC") was the general partner and the Fund was the limited partner. Each partner held a 50% interest in the LP. ACMC was owned by McAuliffe and his wife.
In 1992, McAuliffe proposed a second real estate purchase for the development of single-family homes. Under the proposed transaction, the Fund would loan $10 million to another McAuliffe entity, Columbia Land and Development Corporation ("Columbia"), to acquire and develop the property (the "Country Run Loan"). In addition to a mortgage on the property, as security for the loan, the Fund was to receive completion and payment guarantees from ACMC as well as a stock pledge supported by ACMC's shares in the LP. The trustees obtained a report from the Weitzman Group to evaluate the propriety of the transaction. The Weitzman Report concluded that the Country Run Loan was a suitable investment. This conclusion was based in part on representations as to the value of the ACMC's guarantee. The trustees decided to approve the loan.
While the Country Run Loan was transpiring, in June 1992, McAuliffe offered to sell additional shares of ACMC's interest in the LP to the Fund at a 15% discount. On June 22, 1992, the trustees signed an agreement purchasing the shares for $450,000. This purchase ultimately resulted in the Fund gaining an additional 6.8% interest in the LP. On June 26, 1992, the trustees executed the loan documents for the Country Run Loan. The parties dispute whether the Country Run Loan encountered difficulties.
In 1993, McAuliffe proposed an additional sale of ACMC's LP interests to the Fund at a 15% discount. The trustees accepted the proposal and the Fund paid $2 million to ACMC for additional shares of the LP. As a result of the purchase, the Fund's interest in the LP rose to 88.1%. Correspondingly, ACMC's interest declined to 11.9%. Eventually, in June 1997, ACMC purchased the Fund's interests in the LP and the Country Run Loan for $30,250,000.00.
II. DISCUSSION
A. Standard of Review
Rule 56 of the Federal Rules of Civil Procedure provides that summary judgment will be granted when no genuine dispute of material fact exists and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Haavistola v. Community Fire Co. of Rising Sun, Inc., 6 F.3d 211, 214 (4th Cir. 1993); Etefia v. East Baltimore Comm. Corp., 2 F. Supp.2d 751, 756 (D.Md. 1998). For the purposes of summary judgment, a genuine dispute exists if a reasonable jury could return a verdict for the non-moving party. Anderson, 477 U.S. at 248. The court must "draw all justifiable inferences in favor of the nonmoving party, including questions of credibility and of the weight to be accorded particular evidence." Masson v. New Yorker Magazine, 501 U.S. 496, 520, 111 S.Ct. 2419 (1991) (citations omitted). In the absence of contradictory evidence showing a genuine dispute as to a material fact, the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317 (1986). While the nonmoving party must do more than merely raise some doubt as to the existence of a fact, the moving party ultimately bears the burden of demonstrating the absence of all genuine issues of material fact. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). Thus, "[a]s the party moving for summary judgment, . . . the trustees can prevail only by demonstrating the absence of a genuine issue of material fact either on elements of the claim for which [the Secretary will] bear the burden of persuasion at trial or on elements for which the trustees themselves bear the burden of persuasion at trial." Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir. 1994) (hereinafter Roth I).
B. Evidentiary Issues
As a preliminary matter, the Court needs to address the parties' respective objections to particular evidence presented by each party. First, the trustees assert that the affidavit of the Secretary's expert, Margaret B. Sowell, does not comply with the requirements of Rule 56(e) of the Federal Rules of Civil Procedure. The trustees maintain that the affidavit fails to include facts pertaining to the merits of the LP purchases and, therefore, is conclusory. "[A]n affidavit that states facts on which the expert bases an opinion satisfies Fed.R.Civ.P. 56(e) even though the expert does not attach the data supporting the facts." MM Medical Supplies v. Pleasant Valley Hosp., 981 F.2d 160, 166 (4th Cir. 1992). As the expert affidavit in MM Medical Supplies, Sowell's affidavit is "far more than a conclusory statement" based upon general theories that is "devoid of reasoning." 981 F.2d at 164-65. Sowell sufficiently cited the facts on which her opinion was based, including the particulars of the Country Run Loan and the circumstances surrounding both LP purchases. The trustees' arguments concerning what additional considerations should have been included in her analysis goes to the weight to be accorded to her opinion, not its admissibility.
Next, the Secretary maintains that a memorandum sent from McAuliffe to the trustees delineating the positive progress of the LP properties is unauthenticated and inadmissable hearsay that cannot be considered on a motion for summary judgment. The Court disagrees. First, the memorandum may be sufficiently authenticated by Trustee Moore's deposition testimony that he read the memorandum and his familiarity with its author. See Fed.R.Evid. 901. Secondly, "[h]earsay is `a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.'" United States v. Lis, 120 F.3d 28, 30 (4th Cir. 1997) (quoting Fed.R.Evid. 801(c)) (emphasis in case). The trustees assert that this memorandum was relied upon in their decision to make the second LP purchase. "[W]here a statement is relevant under the facts and circumstances of a case to show its impact or effect on a particular [reader], the statement may be relevant without regard to its truth." Glen Weissenberger, Federal Rules of Evidence, § 801.7 (1998-99 ed.) (citing United States v. Freeman, 619 F.2d 1112, 1121 (5th Cir. 1980) (finding letter admissible because it was relevant to prove the effect on the reader)). Here, for purposes of determining whether the trustees acted in accordance with their fiduciary duties, the primary relevance of the memorandum is not the truth of the matter asserted therein, i.e., the status of the LP properties. Rather, the memorandum's significance lies in its effect on the trustees in their consideration of the second LP purchase. Therefore, the memorandum is not hearsay and properly available for the Court's review.
C. Breach of Fiduciary Duty under § 404(a)(1)(B)
There is no dispute that, at all relevant times, Moore and Grau were fiduciaries to the Fund as defined in Section 3(21) of ERISA. See 29 U.S.C. § 1002(21). Section 404(a)(1)(B) of ERISA requires a fiduciary to discharge its duties "[w]ith the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). "A fiduciary's subjective, good faith belief in his prudence will not insulate him from liability." Reich v. King, 867 F. Supp. 341, 343 (D.Md. 1994). "Rather, the prudent person standard has been determined by the courts to be an objective standard, requiring the fiduciary to (1) employ proper methods to investigate, evaluate and structure the investment; (2) act in a manner as would others who have a capacity and familiarity with such matters; and (3) exercise independent judgment when making investment decisions." Id. "Under this standard, a fiduciary is obligated to investigate all decisions that will affect the pension plan, and must act in the best interests of the beneficiaries." Schaefer v. Arkansas Medical Soc'y, 853 F.2d 1487, 1491 (8th Cir. 1988). Trustees "additionally are required to act `in accordance with the documents and instruments governing the plan.'" Bidwill v. Garvey, 943 F.2d 498, 507 (4th Cir. 1991) (quoting 29 U.S.C. § 1104(a)(1)(D)). "A trustee acts judiciously, then, in hesitantly exercising an ambiguous power." Id.
In interpreting the duty of prudence, the Secretary has prescribed regulations that incorporate the modern portfolio theory. See 29 C.F.R. § 2550.404a-l (2000); Laborers Nat'l Pension v. Northern Trust Advisors, 173 F.3d 313, 317 (5th Cir. 1999) (finding it erroneous to review investment decision in isolation, "instead of according to the modern portfolio theory required by ERISA policy as expressed by the Secretary's regulations"). The regulations provide that an investment manager satisfies the prudence requirement if the manager gives "appropriate consideration" to
those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan's investment portfolio with respect to which the fiduciary has investment duties.
29 C.F.R. § 2250.404a-1(b)(1)(i) (2000). "Appropriate consideration" includes, but is not limited to the following factors: (1) the investment objectives of the plan, taking into consideration the risk of loss and opportunity for gain and (2) the composition of the plan with regard to diversification; (3) the liquidity and current return of the portfolio relative to the cash flow requirements of the plan; (4) the projected return of the portfolio relative to the funding objectives of the plan. See 29 C.F.R. § 2250.404a-1(b)(2) (2000).
Much of the Defendants' brief is devoted to heralding the beneficial results of the LP purchases. However, "the prudent person standard is not concerned with results; rather, it is a test of how the fiduciary acted viewed from `the perspective of the `time of the [challenged] decision' rather than from the `vantage point of hindsight.''" Roth I, 16 F.3d at 918 (quoting Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 1984)). See also In re Unisys Savings Plan Litig., 74 F.3d 420 (3d Cir. 1996) (holding that the prudent investor standard requires "focusing on a fiduciary's conduct in arriving at an investment decision, not on its results"). Thus, the appropriate inquiry is whether, at the time of purchase, it was objectively reasonable for the trustees to consummate a transaction that deteriorated the secondary collateral of an impending or existing loan financed by the Fund.
The record reveals inconsistencies as to the extent of the trustees' deliberations or investigation prior to entering the LP purchases. The first purchase for $450,000 appears to be based upon several factors: (1) the 15% discount off the market value of the LP shares as determined by an independent appraisal; (2) Trustee Moore's belief that the Limited Partnership was doing well; and (3) the opinion of Roy Dickinson, the head of the Fund's investment staff, that the 15% percent discount made the LP purchase attractive. Furthermore, in their brief, the Defendants assert that, in deciding to go through with the purchase despite the impairment to the contemplated collateral, they "determined that the Fund would receive substantial value for its $450,000 investment." (Def. Mot. Summ. J. at 19.)
After reviewing the evidence in the light most favorable to the non-movant, the Court finds that genuine issues of material fact exist as to the prudence of the LP investments. "[A]n outside appraisal is not a `magic wand'; rather, it is `a tool' which must be `used properly.'" Scardelletti v. Bobo, 897 F. Supp. 913, 919 (D.Md. 1995) (quoting Donovan v. Cunningham, 716 F.2d 1455, 1474 (5th Cir. 1983)). Hiring an independent appraiser does not entitle a fiduciary to summary judgment when "there is insufficient evidence in the . . . record to determine whether the appraisal adequately informed the [challenged] decision . . . . [and] what the appraiser based his calculations on or what the results of his analysis even mean." Roth I, 16 F.3d at 918. From the partnership interest transfer agreement, it appears that the independent appraisal of the fair market value of the Limited Partnership had not been performed. At the time of the purchase and not until almost a year after the purchase, the trustees did not have an independent estimation of what they were getting a 15% discount for. Thus, a reasonable finder of fact could determine that the independent appraisal played a marginal role in the decision to purchase the additional LP interests. Likewise, the record does not disclose whether the trustees scrutinized the appraisal.
Moreover, it is unclear what was the basis for Moore's belief that the Limited Partnership was "doing well." Grau accepted Moore's opinion in approving the transaction apparently without undertaking an independent investigation. There is little explanation for Mr. Dickinson's belief that the 15% discount made the deal attractive. "A fiduciary's independent investigation of the merits of a particular investment is at the heart of the prudent person standard." Fink v. National Sav. Trust Co., 772 F.2d 951, 957 (D.D.C. 1985). Furthermore, in their depositions, the trustees could not recall much of the content of their deliberations in deciding to enter the transaction. Trustee Moore could not remember documents he reviewed in coming to his conclusion. Mr. Dickinson thought the reduction in the collateral wasn't considered significant, but couldn't recall. (Dickinson Dep. at 187.) While the inability to recall is not tantamount to an acknowledgment that no such consideration was made, it likewise does not mean there was appropriate consideration of the relevant factors. Such equivocal statements lend to issues of credibility that are best reserved for the trier of fact. See In re Unisys Savings Plan Litig., 74 F.3d 420, 433 n. 10 (3d Cir. 1996) ("Ambiguities and conflicts in a deponent's June 15, 2001testimony are generally matters for the fact-finder to sort out.").
Defendants highlight that, at the time of the first LP purchase, the Country Run Loan had not been signed and finalized. Therefore, according to Defendants, the effect of the first LP purchase on the value of the secondary collateral for the impending Country Run Loan was not a relevant consideration. The Defendants assert that ERISA imposes no duty to consider the effects of one investment decision on future transactions of the Fund that have not been completed. The trustees correctly state that a fiduciary's actions must be judged by the facts reasonably known at the time of the challenged investment action and not upon subsequent events. See In re Unisys Savings Plan Litig., 74 F.3d at 434. This general rule is based in the idea that trustees cannot reasonably be held responsible for random market fluctuations and other unforeseeable events. The trustees' extension of that rule to release trustees from considering the downstream impact of investments on the portfolio is inconsonant with the modern portfolio theory's emphasis on investing with a view to the fund's portfolio as a whole. The trustees cannot turn a blind eye to impending transactions to which they are fully aware and are playing an active role. At the time of the first LP purchase, the trustees knew that the Country Run Loan would be closed within days and that the purchase would reduce the value of the available collateral for that loan. Trustee Moore also knew that McAuliffe intended to apply almost half of the $450,000 purchase price toward Columbia's equity contribution for the Country Run Loan. These factors represent appropriate considerations that impact the integrity of the Fund's portfolio as a whole.
As to the second LP purchase, the record before the Court does not support summary judgment for the trustees. Trustee Grau could not recall any discussions on the effect of the second LP purchase on the Country Run Loan. Trustee Moore claims to have discussed the reduction in collateral with the investment staff, but determined that the accumulation of additional LP shares at a discount outweighed the costs. In deciding that the second LP purchase was a good investment, the trustees relied heavily on a status report compiled by Terry McAuliffe. Mr. McAuliffe is a major shareholder of ACMC, the seller. "[T]he most basic of ERISA's investment fiduciary duties [is] the duty to conduct an independent investigation into the merits of a particular investment." In re Unisys Savings Plan Litig., 74 F.3d at 435. "ERISA's duty to investigate requires fiduciaries to review the data a consultant gathers, to assess its significance, and to supplement it where necessary." Id. When asked why did the Fund make the $2 million purchase, Moore responded [McAuliffe and Swann] requested the money and we, at the time, thought we were getting — making a good investment." (Moore Dep. at 208.) A reasonable finder of fact could decide that the trustees passively relied on McAuliffe's representations without further inquiry in deciding that a 15% discount was a bargain. Cf. Dimond v. Retirement Plan for Employees of Michael Baker Corp., 582 F. Supp. 892, 898 (W.D.Pa. 1983) (finding trustees' belief that stock purchase was a wise investment insufficient under prudent man standard). Given McAuliffe's personal interest in the matter, the court cannot say that, as a matter of law, such reliance would be justified under the circumstances. Furthermore, the trustees failed to inform the Weitzman group of either LP purchase. With this knowledge, one cannot say that, as a matter of law, it was prudent of the trustees to continue to rely on the recommendations and analysis contained therein as to the suitability of the loan in light of the LP purchases. See Donovan v. Cunningham, 716 F.2d 1455, 1474 (5th Cir. 1983) (holding that fiduciaries, who had information available to them indicating that assumptions underlying an expert's appraisal were no longer valid, breached their duties under ERISA by not analyzing the effect of changes in those assumptions).
Defendants strenuously emphasize that the security interest at issue was merely secondary collateral for the Country Run Loan. According to the Defendants, the LP purchases had no impact on the primary collateral secured under the loan (the mortgage on the property) and, thus, any diminution in merely secondary collateral cannot give rise to a breach of a fiduciary duty. One court has stated that "under-collateralization of a loan does not, by itself, establish a breach of the fiduciary duty to invest prudently." Davidson v. Cook, 567 F. Supp. 225, 236 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir. 1984). Finding a breach on such grounds alone would improperly focus on the results rather than the process of arriving at the investment decision. See Roth I, 16 F.3d at 915 ("Whether a trustee is liable for breach of duty here does not depend on whether the security he provided ultimately proved to be inadequate.").
Here, viewing the evidence and drawing all justifiable inferences in the light most favorable to the nonmoving party, the record indicates that, with little to no independent investigation, the trustees took affirmative acts that they knew or should have known would imperil the security for a $10 million dollar loan issued by the Fund. According to the Secretary's expert, the Country Run Loan was not only high-risk, but also highly unusual due to the borrower's minimal cash investment. Trustee Moore knew the first LP purchase provided the funds necessary for that cash investment which in turn reduced the Fund's available recourse on the Country Run Loan. By the time of the last LP purchase, the borrower had breached the terms of the loan by allowing the balance to exceed the $6 million balance limit and unpaid interest had accrued to $720,000. While the trustees characterize the $396,000 overage as slight, the significance of the borrower's non-compliance with the terms of the loan gives rise to genuine issues of material fact that should not be resolved on a motion for summary judgment. Under these circumstances, the Court cannot find that, as a matter of law, the trustees' conduct satisfied the prudent investor standard.
D. Losses to Fund under 29 U.S.C. § 1109(a)
Defendants maintain that, even if the Secretary could establish that the trustees acted imprudently, she cannot prove that the Fund suffered any losses as a result of the asserted breaches. The Defendants argue that any asserted losses can only be measured from the effect of the reduction in the secondary collateral on the Fund. The trustees emphasize that the reduction in the secondary collateral had no economic effect on the Country Run Loan as the property was ultimately sold without the need for foreclosure proceedings. Therefore, according to the trustees, the Secretary has no grounds for monetary relief under 29 U.S.C. § 1109(a). By contrast, the Secretary asserts that the additional LP purchases were eventually sold at a loss and that the Fund sustained lost opportunity costs as a result of the alleged imprudent investments.
Section 409(a) of ERISA provides that "[a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary." 29 U.S.C. § 1109(a).
"To establish a claimed breach of fiduciary duty, an ERISA plaintiff must prove a breach of a fiduciary duty and a prima facie case of loss to the plan." McDonald v. Provident Indem. Life Ins. Co., 60 F.3d 234, 237 (5th Cir. 1995). "If trustees act imprudently, but not dishonestly, they should not have to pay a monetary penalty for their imprudent judgment so long as it does not result in a loss to the Fund." Brock v. Robbins, 830 F.2d 640, 647 (7th Cir. 1987). The trustees correctly state that the method for ascertaining a loss to the plan should be tailored to the type of breach claimed. See Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 602 (8th Cir. 1995) (hereinafter Roth II) (finding "snapshot" approach of comparing plan's assets immediately before and after alleged breach appropriate in cases of overpayment by the plan or price manipulation schemes, but inappropriate for failure to provide adequate security); Leigh v. Engle, 858 F.2d 361, 366-67 (7th Cir. 1988) (placing burden on trustee who breached duty of loyalty to disprove damages). However, the trustees propose a myopic view that focuses on only one adverse side effect of their alleged imprudence. Courts have frowned upon like narrow assessments to obscure losses to plans. See Dardaganis v. Grace Capital, 889 F.2d 1237, 1243 (2d Cir. 1989) (rejecting trustees' argument that court's inquiry is limited to specific investment decisions and losses should be ascertained only from those particular decisions). In enacting ERISA, "the crucible of congressional concern was misuse and mismanagement of plan assets by plan administrators and . . . ERISA was designed to prevent these abuses in the future." Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 n. 8, 105 S.Ct. 3085, 3089 n. 8 (1985). This concern incorporates the general rule under trust law that "a beneficiary is entitled to recover damages for the improper management of the trust's investment assets." Confederated Tribes of Warm Springs Reservation v. United States, 248 F.3d 1365, 1371 (2001).
The record reveals a genuine dispute as to whether the LP shares were sold at a loss to the plan. "To the extent that there are ambiguities in determining loss, [courts] resolve them against the trustee in breach." Roth II, 61 F.3d at 602. For purposes of summary judgment, there is a sufficient causal link that, but for the additional acquisitions, the Fund would not have suffered such a loss. Additionally, "comparing the return on the improper investment with that of a reasonably prudent alternative investment" represents an appropriate means of assessing damages under 29 U.S.C. § 1109. Leigh v. Engle, 858 F.2d 361, 367 (7th Cir. 1988). See Harley v. Minnesota Mining and Mfg. Co., 42 F. Supp.2d 898, 912 (D.Minn. 1999) (finding, for imprudent investment, the loss is the difference between the plan's actual profits and the profits it would have achieved had there been no breach). Viewing the record and drawing all justifiable inferences in the light most favorable to the nonmoving party, the Court finds that the Secretary has presented genuine issues of material fact as to whether the Fund suffered a loss as a result of the alleged fiduciary breaches. "Once the plaintiff has satisfied these burdens, `the burden of persuasion shifts to the fiduciary to prove that the loss was not caused by . . . the breach of duty.'" McDonald, 60 F.3d at 237 (quoting Roth I, 16 F.3d at 917). As discussed above, the Court is not convinced that the trustees have demonstrated the absence of a genuine issue of material fact on this issue.
III. CONCLUSION
For the reasons stated above, the Court will deny Defendants' motion for partial summary judgment. An Order consistent with this Opinion will follow.
ORDER
For the reasons stated in the accompanying Memorandum Opinion dated July ___, 2001, IT IS this day of July, 2001 by the United States District Court for the District of Maryland, hereby
ORDERED:
1. That Defendants' Motion for Partial Summary Judgment [45-1] BE, and the same hereby IS, DENIED; and
2. That the Clerk of the Court mail copies of this order to all counsel of record.