COUNSEL: [**1] APPEARANCES:
HON. MARY JO WHITE, United States Attorney for the Southern District of New
York, Attorney for United States of America, New York, NY, By: ALLAN N.
TAFFET, ESQ., MANVIN S. MAYELL, ESQ., Assistant US Attorneys, Of Counsel.
ANDREW M. LAWLER, P.C., Attorney for Defendant Joseph Fater, New York, NY,
By: ANDREW M. LAWLER, ESQ., MAURICE M. McDERMOTT, ESQ., Of Counsel.
JUDGES: ROBERT W. SWEET, U.S.D.J.
OPINIONBY: ROBERT W. SWEET
OPINION: [*892]
OPINION
Sweet, J.
This Court, in its opinion and order of May 15, 1995, (the "May 15 Opinion")
granted partial summary judgment in favor of Plaintiffs, the United States
of America and Robert B. Reich, Secretary of the United States Department of
Labor (collectively, the "Government"), against Defendants Joseph Fater
("Fater") and James Lupo ("Lupo") (collectively, "Defendants"), for ERISA
violations in connection with the Mason Tenders Pension and Welfare Funds'
(the "Funds") purchase of certain real property in New York (the "West 18th
Street Property") and Florida (the "Florida Property") (collectively, the
"Properties").
United States v. Mason Tenders Dist. Council, 94 Civ. 6487 (RWS), 1995 U.S.
Dist. LEXIS 6470 [*893] (S.D.N.Y. May 15,
[**2] 1995).
Defendants' motion for reconsideration of the Court's decision and order was
denied for reasons set forth in the Opinion of August 18, 1995 (the "August
18 Opinion").
United States v. Mason Tenders Dist. Council, 94 Civ. 6487 (RWS), 1995 U.S.
Dist. LEXIS 11971 (S.D.N.Y. August 18, 1995). Familiarity with both
opinions is assumed.
The August 18 Opinion deferred entry of final judgment against Fater and
Lupo until the parties had submitted evidence on the issue of damages. On
September 11, 1995, the Government submitted a letter presenting such
evidence, and Fater responded on September 18, 1995. The matter was deemed
fully submitted and oral argument was heard on September 26, 1995. Lupo
neither submitted papers nor appeared for oral argument.
Discussion
HN1
ERISA
establishes that a trustee who breaches a fiduciary duty to an employee
benefit plan "shall be personally liable to make good to such plan any
losses to the plan resulting from such breach."
29 U.S.C. § 1109(a). This has been held to be a restitutionary measure
of damages: under this standard, plan participants must be placed in the
position they would have occupied absent the breach. See
Donovan v. Bierwirth, [**3] 754 F.2d
1049, 1056 (2d Cir. 1985);
Reich v. Valley Nat'l Bank of Ariz., 837 F. Supp. 1259, 1285 (S.D.N.Y. 1993)
(Motley, J.). As this Court noted in Reich, where the breach has resulted in
an excessive price being paid for an investment, the fiduciary is "liable
for the difference between the price paid and the price that should have
been paid."
Reich, 837 F. Supp. at 1289. The May 15 Opinion held Defendants liable
for the excessive price paid by the Funds for the Properties.
I. The Source of Defendants' Liability
According to Fater, the May 15 Opinion and the August 18 Opinion held that
his breach of fiduciary duty had arisen only from his failure to mitigate
losses to the Funds after the Properties had been purchased, that because he
was not present at the meetings at which the decisions to purchase were
made, his breach of fiduciary duty had not arisen from his failure to
prevent the purchase, and therefore that he was liable only for losses
suffered after the purchase.
However, the August 18 Opinion rejected Fater's contention that the May 15
Opinion had left open the source of his and Lupo's liability. The May 15
Opinion noted that "the lack of any independent
[**4] investigation of the purchases of these
properties failed the careful inquiry required of a trustee [under ERISA]."
1995 U.S. Dist. LEXIS 6470 at *7. In moving for reconsideration, Fater
contended that the May 15 Opinion had premised the breach of duty on a
presumption that Fater had actual, advance knowledge of the contemplated
purchases. The August 18 Opinion rejected that reading, reiterating that:
Defendants' liability does not depend on a definitive finding that they
affirmatively acted to approve the real estate purchases but, rather, is
based on the conclusion that, through various of their actions and
omissions, they failed to discharge their fiduciary obligations under
ERISA "with the care, skill, prudence, and diligence . . . 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."
1995
U.S. Dist. LEXIS 11971, at *3 (citing
29 U.S.C. § 1104(a)(1)(b) (other citations omitted). Fater's liability
is based on his failure to prevent the purchase of the Properties,
regardless of the extent of his knowledge, and the judgment will be
calculated on that basis.
II. The Florida
[**5] Property
Only Fater, not Lupo, was held in the May 15 Opinion to be liable for breach
of fiduciary duty with regard to the Florida Property. The Welfare Fund paid
$ 1,450,000 for that Property on November 7, 1987. On June 2 of that same
year, Eugene Klein, a certified appraiser with Professional Appraisals,
Inc., assessed the Property as worth between $ 750,000 and $ 850,000 (the
"Klein Appraisal"). Taking the higher of the two values to be the proper
measure, in Fater's favor and as stipulated by the Government,
[*894] the
damages to the Fund amount to the difference between $ 1,450,000 and $
850,000: that is, $ 600,000.
According to Fater, the Florida Property had a higher intrinsic value
according to a "value-in-use" theory of property valuation, based upon
Klein's statement that had the property been purchased and put to an
ancillary use by St. Francis Hospital, it would have "attained a higher
price than that based strictly on market value." However, even supposing
that any value-in-use could have risen to $ 1,450,000, that value could not
have been reaped by the Welfare Fund in its purchase and use of the
property. Indeed, there is no reason to suppose that St. Francis Hospital,
[**6] had it
purchased the property, would have paid anything more than the market price.
The difference between the June 2 market value as assessed and the November
7 purchase price is an appropriate measure of the damages suffered by the
Fund in its purchase of the Florida property as a result of Fater's breach
of fiduciary duty. No evidence offered shows a significant change in value
in the five months between valuation and purchase. Damages before interest
thus amount to $ 600,000.
III. The West 18th Street Property
On November 27, 1990, the Pension Fund paid $ 24 million for the West 18th
Street Property. Three appraisals were conducted before the Fund purchased
the Property, all within several days of one another. The first of these
(the "DiFranco Appraisal") was performed by DiFranco Realty on December 29,
1989, approximately eleven months before the Fund purchased the West 18th
Street Property. DiFranco appraised the Property at $ 15,950,000. The second
of the pre-purchase appraisals (the "Mistretta Appraisal") was performed by
Diane Mistretta, who issued a report on January 2, 1990, assessing the
property's worth at $ 15,850,000. The third (the "Wasserman Appraisal"),
for
[**7] $
8,300,000, was conducted by Wasserman Realty Service, which delivered its
report on January 4, 1990.
On February 1, 1990, ten months before the Fund purchased the West 18th
Street Property, the Fund lent $ 15,850,000 to Ronald Miceli ("Miceli") for
him to purchase the Property (the "Miceli Purchase"), an amount apparently
based on the Mistretta appraisal. Miceli purchased the property on that same
day for less than half that amount: $ 7,465,000 (the "Miceli Purchase
Price").
Finally, in September 1991, ten months after the Pension Fund purchased the
Property, Cushman & Wakefield conducted a comprehensive analysis at the
behest of the Pension Fund (the "Cushman & Wakefield Appraisal"). Despite
the fact that the Fund had spent an additional $ 5.62 million for
renovations in the intervening months, the appraisal was for $ 5 million.
The Miceli Purchase Price is the most reliable measure of the reasonable
value of the West 18th Street Property on the date it was purchased by the
Pension Fund. The Government concedes that Miceli's February 1, 1990,
purchase was "an apparently arms-length transaction". The Miceli Purchase
Price thus presents the most direct and practical evidence of
[**8] the
Property's market value at the time of its purchase by the Pension Fund.
The Wasserman appraisal, coming one month prior to Miceli's purchase, is
consonant with Miceli's Purchase Price and tends to buttress the latter's
validity. Between the Miceli Purchase Price and the Wasserman Appraisal, the
actual purchase is more likely to reflect that actual market value.
Appraisals represent a best estimate or approximation of value, whereas an
actual purchase, assuming the purchase is made after arms-length
negotiations and in a reasonably competitive market, shows fair market
price.
For the same reason, the Cushman & Wakefield appraisal, though credible and
closer in time to the Pension Fund purchase, has less probative value than
the Miceli purchase price.
The DiFranco and Mistretta Appraisals are disregarded, as they were
conducted only a month before the Miceli Purchase yet amount to double the
Miceli Purchase Price.
The loss sustained by the Pension Fund in purchasing the West 18th Street
Property is thus the difference between the Miceli Purchase
[*895] Price,
$ 7,465,000, and the Fund's November 27, 1990, purchase price, $ 24,000,000:
that is, $ 16,535,000.
IV. Prejudgment Interest
[**9]
HN2The award
of prejudgment interest in cases against fiduciaries is a matter of judicial
discretion, the purpose being not to penalize the trustee but to make plan
participants whole.
Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 286 (2d Cir.
1992). An award of prejudgment interest is appropriate here. As noted
above, ERISA provides that a fiduciary shall be personally liable for "any
losses to the plan resulting from [his] breach,"
29 U.S.C. § 1109(a). Moreover, our Court of Appeals has held that to
satisfy this standard, plan participants must be restored to the position
they would have occupied absent the breach.
Donovan, 754 F.2d at 1056. The rate of interest, then, should make up
the difference between "what the plan earned during the time in question and
what it would have earned had the money lost due to the breach been
available."
Diduck, 974 F.2d at 286.
To this end, the courts have often employed the rate used by the Internal
Revenue Service ("IRS"), set forth at
26 U.S.C. § 6621. That is the rate the Government advocates here. As
this Court has noted in the past, the IRS rate provides an "objective
measure of the value of money."
Russo v. Unger, [**10] 845 F.
Supp. 124, 127 (S.D.N.Y. 1994) (Haight, J.) (citation and internal
quotation marks omitted).
It is true that the IRS rate was at one time held to be excessive in certain
cases. The Court of Appeals in Diduck reversed the district court's award of
prejudgment interest computed at the IRS rate in a case against a fiduciary.
However, as noted in
Russo, 845 F. Supp. at 127, the Diduck court evaluated an application of
§ 6621 when that statute tied the IRS rate to the prime rate, noting that
"prime is not an appropriate measure where a plan typically does not earn
that sort of a return on its investments."
Diduck, 974 F.2d at 286. The IRS rate is now tied to the short-term
Government lending rate, not the prime rate, and this rate, as it would
apply to the period of the Mason Tenders Funds' damage, is squarely within
the range of what may fairly be considered a normal return on investment.
It is true that the Government has offered no evidence of the actual return
earned on the Funds' investments during the period of their injury nor any
suggestion of what might have been a plausible investment strategy for the
Funds. However, Fater does not contest the reasonableness
[**11] of the
IRS rate, nor does he suggest that the rate fails to correspond to any
actual rate of return earned by the funds.
Diduck, 974 F.2d at 286 (citing
Donovan, 754 F.2d at 1056). Inasmuch as the IRS § 6621 rate cannot be
said to be excessive on its face, but is rather firmly within the range of
reasonable return on investment, and given that the Court of Appeals has
held that where plaintiffs offer several plausible investment strategies and
corresponding rates of return, defendants bear the burden of showing that a
plan would not have earned the highest of these rates, the IRS rate is an
appropriate means of approximating the return that the Funds would have
earned. It is, therefore, an appropriate rate for the calculation of
prejudgment interest.
Finally, it must be determined whether compound or simple interest should be
used to calculate the prejudgment interest. Here again, guidance is provided
by ERISA's mandate that the damaged party be placed in the situation in
which it would have been absent the fiduciary breach. Compound interest is,
therefore, appropriate, for, as the Government notes and Fater does not
contest, it is most likely that the Funds would have invested
[**12] -- at
compound interest -- the amounts that were overpaid for the properties. In
Russo, the Honorable Charles S. Haight, noting that the courts have not
consistently chosen between simple and compound interest, determined that
the latter was merited by two factors: evidence of self-dealing and a
showing that there was a duty to reinvest at compound interest.
Russo, 845 F. Supp. at 128. Here Defendants' conduct involved gross
delinquencies, rather than honest mistake or bad judgment, and Fater and
Lupo, as trustees, did have a duty to invest in a manner that would earn
compound interest. In light of these facts and of Defendants'
[*896]
failure to oppose the Government's request for compound interest, interest
will be compounded.
Conclusion
For the reasons set forth above. Damages are set at $ 600,000 for the
Florida Property and $ 16,535,000 for the West 18th Street Property, with
prejudgment interest awarded at the IRS § 6621 rate and compounded as set
forth in the Declaration of Patricia Ponders annexed to the Government's
letter of September 11, 1995.
Final judgment on these amounts will be entered against Defendants, with
Fater being liable for the full amount of damages
[**13] plus
interest on the Florida Property and Fater and Lupo being jointly and
severally liable for the full amount of damages plus interest on the New
York Property.
Plaintiffs are directed to settle judgment upon seven days' notice within
thirty days from the date of this Order.
It is so ordered.
New York, N. Y.
December 12, 1995
ROBERT W. SWEET
U.S.D.J.
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