After conducting a fifteen-day bench trial and providing the parties with extended time to submit post-trial briefing, the court finds in favor of all defendants on all of plaintiffs' claims under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1461. This memorandum constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).
I. Factual and Procedural Background
Defendant Hollister, Inc. ("Hollister") is a privately- held Illinois corporation that develops, manufactures, and markets medical devices in the fields of ostomy, continence care, and wound care. Hollister is the wholly-owned and operating subsidiary of defendant The Firm of John Dickinson Schneider ("JDS"). JDS is an Illinois close corporation that holds all of Hollister's capital stock.
John D. Schneider, who only had a high school education and initially began a printing business, founded JDS and developed Hollister into a prosperous company. Schneider desired for JDS and Hollister to remain independent and employee-owned companies and wanted his employees to share in their success. Schneider accomplished these goals through a direct shareholder program and the Hollister Employee Share Ownership Trust ("HolliShare" or "Plan").
HolliShare is a non-contributory, tax qualified defined contribution profit sharing plan designed to provide retirement benefits to Hollister's non-union employees in the United States. It is governed by a written instrument, the HolliShare Employee Share Ownership Trust ("Plan Instrument"). HolliShare's predominant asset, which totals approximately 95% of its total value, is its JDS common shares. The Plan Instrument mandates that HolliShare's assets be invested in JDS shares to the maximum extent practicable. When initially funded in 1974, HolliShare received 11,950 common shares of JDS that were purchased from shareholders. In exchange, HolliShare assumed the obligation to pay the long-term promissory notes issued to the shareholders to purchase the shares. In late 1974, the Plan transferred 4,007 shares back to JDS along with the related promissory note obligations, leaving the Plan with 7,943 shares. HolliShare has not purchased JDS shares since 1975, but the number of its total shares has increased due to two 100-for-1 stock splits and a 9-for-1 stock dividend.
HolliShare's ownership of JDS shares has proved to be an extraordinary investment, and the annual increases in value of JDS shares according to JDS's valuations exceeded most publicly-traded investments. For example, from 1977 through 2010, the mean average increase in JDS's share price was 26.79% each year, whereas the mean average increase for the Standard & Poors 500 index was 8.8% per year, the mean average increase for the MidCap Index was 14.09% per year, and the mean average increase for the Small-Cap Index was 15.24% per year.
HolliShare participants are neither required nor permitted to contribute to HolliShare. HolliShare primarily raised the liquidity to pay benefits to participants through annual cash contributions from Hollister and cash paid by JDS for the repurchase of the Plan's stock. Hollister is required to contribute 5% of the aggregate compensation of participants to HolliShare each year, but, in recent years, Hollister has contributed between 7.5% to 8.5% of the aggregate compensation, totaling approximately $33 million in contributions since 1990. Because HolliShare invests primarily in JDS common shares, the principal factor that determines the change in value of each HolliShare participant's account is the annual decline or appreciation in the value of the Plan's JDS common shares, and the balance in each participant's account is generally based on the participant's pro-rata percentage of the value of HolliShare. Participants in HolliShare learned about the Plan and its financial condition in annual reports, which were referred to by the parties as and often bore the title of "HolliShare Highlights."
JDS has two classes of shares, preferred*fn1 and common, neither of which has a generally recognized public market. The JDS Articles of Incorporation*fn2 ("JDS Articles") provide several restrictions on JDS shares relevant to this case. First, under Article Five, only certain persons and entities are entitled to own JDS shares, including holders of shares as of May 5, 1978, select directors and officers of JDS or Hollister, select JDS or Hollister employees, and any deferred benefit plan maintained by JDS and/or Hollister.*fn3 (Ex. 533, Art. V, ¶ II.C.)
Second, Article Five restricts the manner in which holders of JDS
stock may transfer ownership. Specifically, subparagraph II.D.2.a
gives JDS a right of first refusal by requiring that any holder of JDS
stock who intends to transfer one or more shares must first offer to
sell those shares to JDS. Subparagraph II.D.3.b further provides that
the price paid for any common share purchased by JDS under its right
of first refusal "shall be its book value as of the end of the
calendar month in which the Repurchase Date occurs . . . computed in
accordance with generally accepted accounting principles."*fn4
(Ex. 531, Art. V, ¶ II.D.3.b.)
The JDS Articles also provide that when JDS repurchases shares pursuant to its right of first refusal, it is obligated to pay only a minimal amount in cash (set originally at $5,000 and then increased to $250,000 in 1999) and can pay the remainder with a promissory note. Not only did HolliShare's cash needs always exceeded the $5,000 and $250,000 minimums, it could not receive a promissory note for its sale of JDS stock because ERISA prohibited it from accepting a promissory note as payment from an employer. See 29 U.S.C. § 1106(a)(1)(B).
In addition to the right of first refusal, subparagraph II.D.7.a provides for the sale of JDS shares under "exceptional circumstances":
Under exceptional circumstances and in the discretion of the Corporation's Board of Directors, shares may be repurchased by the Corporation at such other times, upon such other terms, in such other manners, over such other periods of time, or on such other conditions as the Corporation and the owner or holder of such shares may from time to time agree. (Ex. 531, Art. V, ¶ II.D.7.a.)
The Plan Instrument permits the sale of the Plan's JDS stock and does not set the price for such sales but requires that the sales be conducted in accordance with the JDS Articles. (Ex. 9-9.14, § 11.01(2).) Defendants testified at trial that, since the mid-1980s, HolliShare has sold its holdings of JDS common shares to JDS pursuant to the "exceptional circumstances" provision of subparagraph II.D.7.a, not the right of first refusal embodied in subparagraph II.D.2.a. Defendants testified that HolliShare and JDS entered into an agreement in the mid-1980s ("mid-80s agreement")*fn5 that has since governed JDS's repurchases of common shares from HolliShare. Neither the mid-80s agreement nor its terms were memorialized in writing. Defendants testified that the terms of the agreement were that HolliShare would provide advance projections of the Plan's cash needs, HolliShare would sell shares back to JDS once a year, the purchase price would be the audited book value from December 31 of the prior year, JDS would purchase all of the shares HolliShare sought to sell, and JDS would pay all cash for the shares.
Although the theories underlying plaintiffs' claims have evolved as this case has progressed, the heart of plaintiffs' case at trial was that the price JDS paid for HolliShare's sales of its JDS stock should have been 1) the current month-end book value from the month in which the sale took place ("month-end book value"); or 2) a price determined to be the fair market value of the shares. Plaintiffs contend that, by selling at the December 31 book value from the year prior to the sale ("December 31 book value") instead of the month-end book value or the fair market value, the HolliShare fiduciaries breached their duties under ERISA and caused the Plan to suffer extraordinary losses.
The parties have stipulated as to a variety of details concerning the challenged transactions, including the sale date, the December 31 book value that was used for the sale price, the number of shares sold, and, for almost all of the sales, the month-end book value for the month in which the challenged transactions occurred. (See Docket No. 630 ("Stipulation of Facts").) Between 1981 and 2007, HolliShare sold its shares to JDS on nineteen occasions. The years in which sales took place, the number of shares sold, and the cash proceeds generated were as follows: 1981 (69,300 shares for $997,227.00); 1982 (38,000 shares for $723,140.00); 1985 (20,000 shares for $1,368,400.00); 1986 (180,000 shares for $12,619,800.00); 1987 (100,000 shares for $9,756,000.00); 1993 (75,000 shares for $25,830,000.00); 1995 (30,000 shares for $14,697,300.00); 1996 (166,973 shares for $10,000,012.97); 1997 (135,000 shares for $9,863,100.00); 1998 (250,000 shares for $21,262,500.00); 1999 (200,000 shares for $21,332,000.00); 2000 (150,000 shares for $18,679,500.00); 2001 (220,000 shares for $29,590,000.00); 2002 (46,250 shares for $7,174,300.00); 2003 (44,750 shares for $8,490,417.50); 2004 (50,000 shares for $11,908,000.00); 2005 (22,000 shares for $6,335,120.00); 2006 (26,500 shares for $8,717,400.00); and 2007 (85,500 shares for $34,006,770.00). (Id. ¶¶ 28-46.)
With the exception of plaintiff James P. DeFazio, all of the plaintiffs in this case are former employees of Hollister and former participants in HolliShare. The former HolliShare participant plaintiffs and the years in which they ended their Hollister employment and received the distribution of their HolliShare accounts include: DeLane Humphries (1998); Brenda Dimaro (1999); Judy Seay (1999); Hallie Lavick (2000); Michael McNair (2002); Nancy Russell Stanton (2002); Sonya Pace (2003); Kathleen Ellis (2004); Theresa Beetham (2006); and Cindy Worth (2006). All of these plaintiffs had terminated their employment and received lump sum distributions of their HolliShare accounts before commencing or joining this action. James P. DeFazio is Ellis's former husband and is an alternate payee on an account created with funds from Ellis's HolliShare distribution.
In a fourteen-month period between 2004 and 2005, three subsets of the current plaintiffs independently filed complaints against Hollister, JDS, the HolliShare Trustees, and various members of the boards of directors of both companies.*fn6 The cases were consolidated by court order on May 25, 2006. (Docket No. 87.) All of the plaintiffs except Ellis ("DeFazio/Dimaro plaintiffs") are represented by the same counsel and filed their Fifth Amended Complaint on July 22, 2008. (Docket No. 368.) Ellis, the only plaintiff represented by separate counsel, filed her Fourth Amended Complaint on January 23, 2008.*fn7 (Docket No. 314.) The allegations asserted against defendants are substantially similar in both operative complaints, and counsel for the DeFazio/Dimaro plaintiffs and Ellis tried the case together, with Ellis's counsel taking the lead at trial and in the post-trial briefing.
2. Defendants a. HolliShare Trustee Defendants Defendant Richard T. Zwirner has performed legal work for Hollister and JDS since 1969, and he has been a HolliShare Trustee since 1976. He has also provided consulting services to Hollister since the late 1970s and served as the Corporate Secretary of JDS from 1974 to 1981, a Director of JDS and Hollister since 1978, Hollister's Vice President of Marketing and Sales from 1991 to 1994, and General Counsel to Hollister since 1977.
Hollister's chief financial officers also served as HolliShare Trustees, which, in succession, were defendants Charles H. Gunderson,*fn8 James J. McCormack, and Samuel P. Brilliant. McCormack served as a HolliShare Trustee from 1989 to June 2000 and was also Hollister's Treasurer and Chief Financial Officer from 1981 to 2000, Vice President of Finance from 1981 to 1993, and a Senior Vice President from 1993 to 2000. Brilliant became a HolliShare Trustee in July of 2000 and was still a Trustee at the time of trial. Brilliant also served as Hollister's Vice President of Finance and Treasurer from October 1998 to July 2000 and became its Chief Financial Officer and a Vice President of Hollister in 2000.
Hollister's heads of the human resources department also served as HolliShare Trustees, which, in succession, were defendants Charles C. Schellentrager, James A. Karlovsky, and Lori Kelleher. Although it is unclear from the testimony at trial when Schellentrager became a Trustee, his term ended in 1990 at the latest when Karlovsky succeeded him. Karlovsky served as a Trustee from 1990 to July 2004 and also served as Hollister's Vice President of Human Resources from 1989 to 2003 and Executive Assistant to the President from 2003 to 2004. Kelleher succeeded Karlovsky as a Trustee in 2004 and continued to serve as a Trustee until 2011.
Defendant Loretta A. Stempinski also served as a HolliShare Trustee from 1980 to 2001, held various positions in Hollister from 1961 to 1980, and served as a Director of JDS and Hollister from 1980 to 2001.*fn9 Ellis has not asserted claims against Stempinski.
b. Non-Trustee Defendants
Defendant Michael C. Winn served as a Director of JDS and Hollister from 1979 to May 2001 and as Hollister's Vice President of Legal Affairs from 1974 to 1977, President from 1977 to 2001, and Chairman and CEO from 1981 until 2001. Ellis has not asserted claims against Winn. Defendant Alan F. Herbert served on the Boards of Directors of Hollister and JDS from 1998 to May 2011 and also served as Hollister's President and Chief Operating Officer from 1997 to 2001, President from 2001 to 2007, and Chairman and CEO from 2007 until 2011.
Plaintiffs also named Donald J. Groneberg, Richard I. Fremgen, and Donna J. Matson as defendants. The only testimony about Groneberg at trial was that he was a member of the finance department at Hollister. (Tr. 2153:21-2154:2, 2374:24-2375:1.) Plaintiffs did not offer evidence at trial establishing that Groneberg owed fiduciary duties to the HolliShare beneficiaries and have not proposed findings of fact or conclusions of law addressing his liability. Similarly, while there was limited testimony about Fremgen being on the Hollister Board of Directors (Tr. 315:14-316:5, 1546:25-1547:4) and defendants have indicated that he was on the board from 1999 until 2010, there was no testimony about his conduct at trial and plaintiffs did not propose any findings of fact or conclusions of law with respect to claims against him. Lastly, based on two passing references to her at trial, it appears Matson may have been a HolliShare Trustee. (See Tr. 306, 1913.) While the clerk's office has not terminated her as a defendant in this action, it appears she was dismissed in an early order in this case and neither party appears to believe claims are still pending against her. The court will therefore enter judgment in favor of Groneberg, Fremgen, and Matson.
Because plaintiffs failed to sufficiently identify their claims remaining for trial in their pretrial statement, the Final Pretrial Order required plaintiffs to file "an amended statement of the remaining claims that identifies, for each claim, 1) the statutory or common law basis for the claim; 2) the elements plaintiff must prove in order to prevail on the claim; 3) the plaintiff or plaintiffs asserting the claim; and 4) the defendant or defendants that the claim is asserted against." (Docket No. 583 at 3:23-28.) In their amended statement, plaintiffs identified twelve ERISA claims under various subsections of 29 U.S.C. §§ 1103-1106, 1110, 1140, and 1056. (Docket No. 588.)
ERISA provides for a civil action to be brought only by
the Secretary of Labor, a participant, a beneficiary,*fn10
or a fiduciary. 29 U.S.C. § 1132. In the context of ERISA, a
"participant" means "any employee or former employee of an employer .
. . who is or may become eligible to receive a benefit of any type
from an employee benefit plan which covers employees of such
employer." Id. § 1002(7). "The Supreme Court has interpreted this
section as conferring standing on former employees who 'have a
reasonable expectation of returning to covered employment or . . . a
colorable claim to vested benefits.'" Vaughn v. Bay Envtl. Mgmt.,
Inc., 567 F.3d 1021, 1025 (9th Cir. 2009) (quoting Firestone Tire &
Rubber Co. v. Bruch, 489 U.S. 101, 117 (1989)).
Relying on Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir. 1986), defendants have repeatedly argued during the course of this litigation that plaintiffs lack statutory standing under ERISA because, as retirees who have withdrawn their full account balances, they no longer have a colorable claim to vested benefits and thus are not "participants." In 2006, however, Judge Karlton rejected defendants' argument, concluding that the Ninth Circuit has "allowed suit even when plaintiffs have received their vested benefits if they allege that fiduciaries 'personally profited' from a breach of their duty of loyalty to the plan." Ellis v. Hollister, Inc., Civ. 05-559 LKK GGH, 2006 WL 988529, at *4 (E.D. Cal. Apr. 14, 2006) (citing Amalgamated Clothing & Textile Workers Union, AFL-CIO v. Murdock, 861 F.2d 1406, 1418 (9th Cir. 1988)). Defendants requested this court to reconsider Judge Karlton's ruling in 2007, and the court declined to do so because the ruling was not clearly erroneous. See DeFazio v. Hollister, Inc., Civ. No. 04-1358 WBS GGH, 2007 WL 3231670, at *3-4 (E.D. Cal. Nov. 1, 2007). The court again declines defendants' suggestion that the court should depart from Judge Karlton's 2006 decision.
Moreover, the Ninth Circuit has more recently distinguished Kuntz and held that a "former employee who has received a full distribution of his or her account balance under a defined contribution pension plan has standing as a plan participant to file suit under [ERISA] to recover losses occasioned by a breach of fiduciary duty that allegedly reduced the amount of his or her benefits." Vaughn, 567 F.3d at 1023, 1025-26; accord Harris v. Amgen, Inc., 573 F.3d 728, 733 (9th Cir. 2009). In Vaughn, the Ninth Circuit did not require that the trustees had personally profited from their breaches in order for the participants to have standing, which Judge Karlton had previously found would be required under the pre-Vaughn precedent.*fn11
B. Statute of Limitations
1. "Fraud or Concealment" Exception ERISA's statute of limitations provides: No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of--(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.
29 U.S.C. § 1113 (emphasis added). While § 1113 requires a plaintiff to file a claim within six years of the date of the last act constituting a part of the alleged violation, regardless of when the plaintiff actually learned of the violation, the "'fraud or concealment' exception tolls the running of the limitations period for six years from the date of discovery." Barker v. Am. Mobil Power Corp., 64 F.3d 1397, 1401 (9th Cir. 1995). "Plaintiffs bear the burden of proving 'fraud or concealment' under 29 U.S.C. § 1113." Harris v. Koenig, --- F. Supp. 2d ----, ----, No. 02--618, 2011 WL 4542973, at *5 (D.D.C. 2011); accord Barker, 64 F.3d at 1401 (finding the "fraud or concealment" exception inapplicable "because the plaintiffs have not produced specific evidence of fraudulent activity or concealment" by defendants).
Here, plaintiffs rely on the "fraud or concealment" exception to assert claims based on defendants' alleged breaches of fiduciary duties beginning in 1982. The "fraud or concealment" exception applies only when an ERISA fiduciary either "made knowingly false misrepresentations with the intent to defraud the plaintiffs" or took "affirmative steps . . . to conceal any alleged fiduciary breaches." Barker, 64 F.3d at 1401; accord Radiology Ctr., S.C. v. Stifel, Nicolaus & Co., 919 F.2d 1216, 1220 (7th Cir. 1990) ("An ERISA fiduciary can delay a wronged beneficiary's discovery of his claim [meriting application of the 'fraud or concealment' exception] either by misrepresenting the significance of facts the beneficiary is aware of (fraud) or by hiding facts so that the beneficiary never becomes aware of them (concealment).").
Courts have recognized that the "fraud or concealment" exception to § 1113 incorporates the common law doctrine of fraudulent concealment. Barker, 64 F.3d at 1402. Under that common law doctrine, passive concealment alone may toll the statute of limitations if the defendant has a duty to disclose material information. Thorman v. Am. Seafoods Co., 421 F.3d 1090, 1092 (9th Cir. 2005). Courts that have considered the issue, however, have held that the doctrine of passive concealment does not apply to § 1113. See, e.g., Ranke v. Sanofi-Synthelabo Inc., 436 F .3d 197, 204 (3d Cir. 2006) (stating that an ERISA fiduciary must "have taken affirmative steps to hide an alleged breach of fiduciary duty from a beneficiary in order for the 'fraud or concealment' exception to apply"); Larson v. Northrop Corp., 21 F.3d 1164, 1174 (D.C. Cir. 1994) ("While a fiduciary's mere silence could, in some circumstances, amount to fraud, it would still fall short of the fraudulent concealment that courts have required for purposes of § 1113."); Schafer v. Ark. Med. Soc'y, 853 F.2d 1487, 1491 (8th Cir. 1988) (holding that active concealment under § 1113 requires "more than merely a failure to disclose").
The Ninth Circuit in Barker implicitly found passive concealment insufficient to toll the statute of limitations. There, the Ninth Circuit recognized that an ERISA fiduciary generally has a duty to disclose "complete and accurate information material to the beneficiary's circumstances," but focused only on whether the defendants had affirmatively concealed their breach when holding that the defendants did not engage in "fraud or concealment" under § 1113. See Barker, 64 F.3d at 1401, 1403. An ERISA fiduciary's mere failure to disclose material information thus does not merit tolling under § 1113.
The "fraud or concealment" exception tolls the statute of limitations only "until the plaintiff in the exercise of reasonable diligence discovered or should have discovered the alleged fraud or concealment." J. Geils Band Emp. Ben. Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245, 1252 (1st Cir. 1996) (citing Larson, 21 F.3d at 1172-74).*fn12 Defendants first argue that plaintiffs cannot rely on the "fraud or concealment" exception because none of the plaintiffs testified at trial or submitted evidence establishing that they exercised reasonable diligence.
When addressing a similar tolling provision in the statute of limitations for federal securities fraud claims (28 U.S.C. § 1658(b)), however, the Supreme Court held that "the limitations period does not begin to run until the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered 'the facts constituting the violation,' . . . irrespective of whether the actual plaintiff undertook a reasonably diligent investigation." Merck & Co., Inc. v. Reynolds, --- U.S. ----, ----, 130 S. Ct. 1784, 1798 (2010) (emphasis added). The Court's holding applies equally to § 1113, especially because the Court's analysis in Merek is centered around concepts embodied in the general "discovery rule." See id. at 1793-98. Holding otherwise could fault plaintiffs for failing to exercise reasonable diligence even when the exercise of reasonable diligence would not have alerted them to their claims because the defendants had concealed their misconduct. Therefore, assuming plaintiffs in this case were not reasonably diligent, they would be precluded from relying on the "fraud or concealment" exception only if a reasonably diligent plaintiff would have discovered the misconduct.*fn13
Plaintiffs contend that defendants concealed the sales price of HolliShare's JDS shares in the HolliShare Highlights, which were the annual reports distributed to participants to inform them about HolliShare's funding and financial condition.*fn14
In the June 2009 Order, this court held that, based on language in the HolliShare Highlights, a participant could have reasonably believed that HolliShare's shares of JDS stock were sold to JDS at the month-end book value from the month in which a sale occurred. DeFazio, 636 F. Supp. 2d at 1061. Specifically, from 1993 to 2000, the HolliShare Highlights informed participants of the following:
JDS common shares, which are valued at their book value, are not publicly traded. They are for all practical purposes not transferable to any person or entity other than JDS itself. They are subject to severe transfer restrictions which require that the Trust first offer them to JDS, the parent company of Hollister Incorporated, at their book value.
To date, JDS has repurchased common shares from the Trust at their book value to provide the plan with the needed cash.
(Exs. 4-4.18 at 7, 4-4.19 at 7, 4-4.20 at 7, 4-4.21 at 7, 4-4.22 at 7, 4-4.23 at 7, 4-4.24 at 7, 4-4.25 at 7.)*fn15 Based on this information, a reasonable participant could have believed that HolliShare sold its holdings of JDS common shares pursuant to the sale price specified for sales made pursuant to the "right of first refusal" in subparagraph II.D.2.a of Article 5 of the JDS Articles.
Specifically, subparagraph II.D.2.a provides: If any . . . trust . . . desires or intends to transfer any one or more shares of the Corporation, . . . such holder shall first offer in writing, . . . to sell to the Corporation all shares of the Corporation which such holder desires or intends to transfer . . . at the price and in the manner set forth in subparagraphs 3 and 4 of this paragraph D. (Ex. 531, Art. V, ¶ II.D.2.a.) Subparagraph II.D.3.b of Article Five then mandates that, for sales pursuant to the right of first refusal, "[t]he price of each common share shall be its book value as of the end of the calendar month in which the Repurchase Date occurs . . . ." (Id. Art. V, ¶ II.D.3.b.) When the explanation in the HolliShare Highlights that the transfer restrictions on its JDS shares "require that the Trust first offer them to JDS . . . at their book value" is read in conjunction with the right of first refusal in the JDS Articles, a participant could reasonably conclude that the shares were sold at the month-end book value dictated in subparagraph II.D.3.b.
Defendants argue, however, that a reasonable beneficiary would not draw this conclusion because the JDS Articles also provide for JDS to pay the purchase price for sales pursuant to the right of first refusal with a limited amount of cash and the remainder in a subordinated promissory note. (See id. Art. 5, ¶ II.D.4.a.) In contrast to this provision, they point out that HolliShare always received payment for its shares from JDS in cash, suggesting that the sales were not conducted under the terms of the right of first refusal. In the HolliShare Highlights, however, beneficiaries were told that "JDS has repurchased common shares from the Trust at their book value to provide the plan with the needed cash." Although this suggests that payments may have been in cash, it does not preclude the possibility that HolliShare received a promissory note, especially because a promissory note could have been sold to a bank to obtain cash. (See Tr. 663:10-664:2.) That HolliShare's receipt of cash only payments for its JDS stock is inconsistent with the terms of payment for a sale conducted pursuant to the right of first refusal would therefore not prevent a reasonable participant from concluding that HolliShare's sales were conducted under the terms and at the price provided for in the right of first refusal provision.
Before 1993, however, the HolliShare Highlights did not contain similar language suggesting that HolliShare's sales of its JDS stock were pursuant to and according to the terms of the right of first refusal. Specifically, from 1983 to 1992, the HolliShare Highlights stated:
JDS common shares, which are valued at their book value, are not publicly traded. They are subject to severe transfer restrictions and can only be sold to JDS, the parent company of Hollister Incorporated.
To date, JDS has repurchased common shares from the Trust at their
book value to provide the plan with needed cash. (Exs. 4-4.8 at 9,
4-4.9 at 10, 4-4.10 at 10, 4-4.11 at 6, 4-4.12 at 6, 4-4.13 at 7,
4-4.14 at 7, 4-4.15 at 7, 4-4.16 at 7, 4-4.17 at 7.).*fn16
Similarly, the 1982 HolliShare Highlights explained:
In evaluating these comparisons, it must be recognized that JDS common shares, which are valued at their book value, are not publicly traded and are subject to very severe transfer restrictions. As a practical matter, they can only be sold to JDS, the parent company of Hollister Incorporated.
To date, JDS has repurchased common shares from the Trust at their book value in order to provide the Trust with needed cash. (Ex. 4-4.7 at 7.)
The explanations from 1982 to 1992 are silent with respect to whether "book value" refers to the December 31 book value or month-end book value and lack any language suggesting one or the other. Based on the explanations, it is equally plausible that HolliShare sold its shares under the exceptional circumstances provision. At most, the HolliShare Highlights from 1982 to 1992 omit arguably material information, which is insufficient to trigger the "fraud or concealment" exception. Plaintiffs have not satisfied the court that defendants committed any other affirmative acts of concealment during that ten-year period that would have led a reasonable participant to believe that HolliShare's sales of its JDS stock were at the month-end book value.
Accordingly, because plaintiffs are unable to rely on the "fraud or concealment" exception for any alleged misconduct between 1982 to 1992, their claims based on HolliShare's sale of JDS stock from 1982 to 1992 are time barred and the court will enter judgment in favor of defendants on those claims.*fn17
Further, because Schellentrager's tenure as trustee ended when Karlovsky replaced him in 1990, (Tr. 345:1-5), the entirety of plaintiffs' claims against him are untimely and the court will enter judgment in his favor.
Returning to plaintiffs' claims based on HolliShare's sale of JDS stock beginning in 1993, defendants further contend that the following language in the Plan Instrument disclosed the use of the December 31 book value:
The assets in the Trust Fund shall be valued by the Trustees at their respective fair market values as of each December 31st. The fair market value of Common Shares of JDS Inc. held in the Trust Fund shall, subject to the provisions of the remainder of this Section 7.03, be their book value as of the valuation date as reflected on the books of JDS Inc. The Trustees shall accept such book value as the fair market value if such book value is computed in accordance with generally accepted accounting principles.
(Ex. 501 § 7.03.)*fn18 Article VII of the Plan Instrument, which this explanation is a part of, however, is titled "Accounts and Allocations of Funds" and addresses valuing each participant's account in detail, not valuing JDS stock for the purpose of a sale.
Because the first sentence addresses the "assets in the Trust Fund" more broadly, the reference to the December 31 value in that sentence could be interpreted as referring to the valuation of all assets in the trust for purposes of determining the value of each participant's account. This is consistent with the use of December 31 as the date of evaluation for participant's accounts regardless of when they retire in the following year. On the other hand, the second sentence, which specifically refers to the "fair market value of Common Shares of JDS Inc.," omits any reference to December 31 and states that the value shall be "their book value as of the valuation date." Based on the use of "valuation date" in that sentence, a participant could reasonably conclude that the book value of JDS stock would vary depending on when the valuation and sale occurred and thus would not remain stagnant for the entire year at the December 31 book value. Although the correct interpretation of this explanation is not clear, a reasonable participant could still believe that HolliShare's sales of JDS stock were set at the right of first refusal price of month-end book value and that only the accounts were valued annually as of December 31.
Plaintiffs have thus persuaded the court that the potential inconsistency between HolliShare's receipt of cash payments and the provision for a promissory note in the right of first refusal and the disclosure setting the valuation date for HolliShare accounts at December 31 did not amount to "storm warnings" putting the plaintiffs on notice about defendants' alleged breaches. Even assuming these inconsistencies would have alerted a reasonably diligent participant to defendants' alleged breaches, the most a reasonable participant could be expected to do in receipt of potentially conflicting information would be to inquire further about the terms of the sales. While the court doubts that a reasonably diligent participant would have done more than review the annual HolliShare Highlights, the court finds that even additional efforts would not have led a participant to discover the alleged misconduct.
For example, a reasonably diligent participant might have inquired about the details pertaining to the Plan's sale of JDS stock. In this case, however, DeFazio made such an inquiry. In a letter dated November 3, 1997, he was told that, since 1973, "every transfer by JDS Inc[.] has been at book value; and JDS Inc[.] has always exercised its right of first refusal and repurchased such shares at book value." (Ex. 176 at 3.) As previously discussed, the express reference to the "right of first refusal" in this letter when read in conjunction with the JDS Articles indicates that the price for the JDS stock would have been the "book value as of the end of the calendar month in which the Repurchase Date occurs." (Ex. 531.)
Additionally, if plaintiffs had pursued an investigation beyond inquiring from Hollister or HolliShare, the evidence suggests they would not have discovered the precise terms of HolliShare's sales of JDS stock. In response to a Department of Labor investigator's request for documents evidencing HolliShare's sales of its shares to JDS, (Ex. 54 at 8), HolliShare indicated sales prices for sales from 1994 to 1998 that were the December 31 book value, but also indicated that each of the sales took place on January 1, (id. at 10). From the information provided to the Department of Labor and available to the participants, it would be unlikely that a reasonably diligent participant would have known that the sales in 1994 to 1998 actually took place in March of each year, with a sales price that is allegedly three months, not one day, "old."
The court also doubts that additional efforts or inquiries by plaintiffs could have unveiled the dynamics and purported terms of the Plan's sales of JDS stock because even defendants' counsel seemed unaware of the terms of such sales for at least the first three years of this litigation. In a memorandum in support of their motion to dismiss plaintiffs' First Amended Complaint filed in October 2006, counsel for seven of the defendants stated, "It cannot seriously be argued that a routine and commonplace sale by HolliShare of JDS common shares involves any 'extraordinary circumstances.'" (Docket No. 148 at 11:15-17.) A year later, the same counsel again explained that sales could not have been pursuant to the "exceptional circumstances" provision. (See Docket No. 282 at 12:3-6 ("Plaintiffs do not suggest what 'exceptional circumstances' exist that would -- or even may -- justify a decision by the JDS Board to treat HolliShare's periodic offers to sell some of its JDS common shares differently from offers to sell made by all other JDS shareholders.").) If it was unclear to at least some of defendants' counsel that the sales were pursuant to the exceptional circumstances provision, it would be unreasonable to conclude that a reasonably diligent participant would have discovered that fact about HolliShare's sales of JDS stock.
Accordingly, the court finds that a reasonably diligent participant would not have discovered the alleged misconduct at issue in this case before the plaintiffs in this case did and therefore any lack of diligence or inquiry by plaintiffs does not preclude them from relying on the "fraud or concealment" exception. Because § 1113 tolls the statute of limitations to six years after the discovery date and the true sales prices and terms were not revealed until after this case was filed, plaintiffs' ERISA claims beginning in 1993 and continuing through 2011 are timely.
C. Sales of JDS Shares at December 31 Book Value
1. Breach of Fiduciary Duties
a. Prohibited Transactions under ERISA ERISA establishes a blanket prohibition on certain transactions that "entail a high potential for abuse," including the sale or exchange of property between an ERISA plan and a "party in interest." Donovan v. Cunningham, 716 F.2d 1455, 1465 (5th Cir. 1983) (discussing 29 U.S.C. § 1106(a)(1)). As used in § 1106(a)(1), a "party in interest" includes the employer of the employees covered by the ERISA plan in question. 29 U.S.C. § 1002(14).
Nevertheless, ERISA provides an exemption for prohibited transactions that meet certain requirements, and § 1108(e) allows the sale or acquisition by a plan of employer stock if three criteria are met:
(1) if such acquisition, sale, or lease is for adequate consideration (or in the case of a marketable obligation, at a price not less favorable to the plan than the price determined under section 1107(e)(1) of this title), (2) if no commission is charged with respect thereto, and (3) if-- (A) the plan is an eligible individual account plan (as defined in section 1107(d)(3) of this title) . . .
Id. § 1108(e). The parties stipulated that HolliShare is an eligible individual account plan under ERISA, (Stipulation of Facts ¶ 26), and plaintiffs have not alleged that a commission was charged. Therefore, the only dispute at trial to determine whether HolliShare's sales of JDS stock to JDS came within the ...