Fish et al v. Greatbanc Trust Company et al

Filing 267

MEMORANDUM Opinion and Order Signed by the Honorable Milton I. Shadur on 9/12/2012: This is a corrected version - Document #266 is stricken from the docket.Mailed notice(srn, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BONNIE FISH, et al.,
Plaintiffs,
v.
GREATBANC TRUST COMPANY, et al.,
Defendants.

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Case No. 09 C 1668

MEMORANDUM OPINION AND ORDER
This opinion addresses for a second time whether
plaintiffs -- Bonnie Fish (“Fish”), Christopher Mino (“Mino”),
Monica Lee Woosley (“Woosley”), Lynda Hardman (“Hardman”) and
Evolve Bank & Trust -- filed this action under the Employee
Retirement Income Securities Act (“ERISA”)1 after the applicable
limitations period had elapsed.

Their Complaint invokes Sections

1104, 1006 and 1108 to charge GreatBanc Trust Company
(“GreatBanc”), Lee Morgan (“Morgan”), Asha Morgan Moran (“Moran”)
and Chandra Attiken (“Attiken”) with breaches of fiduciary
duties.
Initially defendants said the suit was untimely because
actual knowledge of the alleged breaches existed more than three

1

All references to the ERISA statute will take the form
“Section --,” using the statutory numbering in Title 29 rather
than ERISA’s internal section numbering.

years before plaintiffs sued.

In that respect they argued that

the true plaintiff was the retirement plan itself.

As they put

it, because one of the plan’s trustees -- Barry Hoskins
(“Hoskins”) -- had knowledge of the alleged breaches more than
three years before the Complaint was filed, the plan too had
knowledge and the suit was time-barred.

This Court rejected that

argument in its August 31, 2010 memorandum opinion and order
(“Opinion,” 830 F. Supp. 2d 426 (N.D. Ill. 2010)), holding that
even if Hoskins had knowledge of the alleged breaches, whether he
was empowered to act on that knowledge was a disputed question of
fact.
Now however defendants, having acquired new facts through
discovery, have raised the argument again.2

They contend that

each of Fish, Mino, Woosley and Hardman acquired knowledge of all
of the relevant facts of the alleged breaches when they received
two documents -- a Proxy Statement and a document answering
frequently asked questions about the transaction -- as well as
explanatory letters from Morgan.

Because those documents did

indeed give plaintiffs actual knowledge of the alleged breaches

2

Both GreatBanc (in Dkt. 220) and the individual
defendants (in Dkt. 227) have moved for summary judgment.
opinion deals with the two motions collectively.
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This

in 2003, the perspective expressed in the Opinion must be
revisited, and this action must be and is dismissed as untimely.
Brief Account of the 2003 Transaction
It is unnecessary to repeat the Opinion’s detailed
recitation of many of the facts.

What follows instead is a brief

sketch of the relevant facts.3
Plaintiffs were employees of Antioch Company (“Antioch”), a
corporation founded and controlled by the Morgan family.

Antioch

had an Employee Stock Option Plan (“Plan” or occasionally
“ESOP”).

In 2003 the Plan owned almost 43% of Antioch’s stock,

the Morgan family owned 46.5% and 38 other shareholders held the
remaining 11%.
Morgan, Moran and Attiken managed the Plan as the members of
the Plan Advisory Committee.

In early 2003 the Committee -- with

the aid of outside consultants -- designed a transaction that
would give the Plan 100% ownership of Antioch but would preserve
the Morgan family’s control over the company.

GreatBanc was

hired to serve as the Plan’s trustee during that transaction.

3

At this summary judgment stage plaintiffs must merely
demonstrate the existence of a genuine issue of material fact.
Facts listed in this section are undisputed and are read in a
light most favorable to plaintiffs. This opinion cites to
GreatBanc’s LR 56.1 statement of facts as “G. St. ¶--” and to the
individual defendants’ statement as “M. St. ¶--.”
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To implement the transaction Antioch made a tender offer to
all Antioch shareholders to buy back their shares for $850 per
share (in either cash or some combination of cash, notes and
warrants).

Because the goal of the transaction was for the Plan

to own 100% of Antioch’s stock, the Plan had to decline to accept
the offer as to its own shares.

If the Plan did not decline, the

transaction would be cancelled.

GreatBanc negotiated a side

deal:

It would decline to turn in the Plan’s shares for

redemption if Plan members received additional cash distributions
and if Antioch agreed to something the parties call the Put Price
Protection Agreement.

Under the Put Price Protection Agreement

Antioch agreed that:
- Plan
January
greater
$840.26

participants who left the company between
1, 2003 and October 1, 2004 would receive the
of the fair market value of their shares or
per share.

- Plan participants who left between October 1, 2004
and October 1, 2005 would receive fair market value
plus $21.00 per share
- Plan participants who left between October 1, 2005
and October 1, 2006 would received fair market value
plus $12.80 per share.
To fund the transaction Antioch used $46 million of its cash
and borrowed $109 million.

That substantially increased

Antioch’s debt load.

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After the transaction closed, GreatBanc hired Prairie
Capital Advisors (“Prairie”) to value Antioch’s stock as of
December 31, 2003.

Prairie calculated Antioch’s stock to be

worth $894 per share.

Before that the highest appraisal of

Antioch stock had been $680 per share.
According to plaintiffs, Antioch employees wanted to lock in
that high valuation of their stock and rushed to quit and cash in
their shares.

Redemptions exceeded what GreatBanc and Antioch

had forecast, and so Antioch was unable to both service its
existing debt and meet its redemption obligations.
a bank run situation:

That created

As more employees quit, others saw the

mounting financial crisis and hurried to cash in their shares
before the coffers were empty.

In 2008 Antioch was unable to

make good on its various debt payments and share redemption
obligations, and the company filed for bankruptcy.

Company

stock, the sole asset of the Plan, is now worthless.
Statute of Limitations
Plaintiffs filed their complaint on March 17, 20094 -- too
late according to Defendants.

Here is the relevant statute of

4

Although that date controls for filing purposes, later
references to plaintiffs’ allegations will be to the Amended
Complaint (cited here as “AC ¶ --”).
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limitations from Section 1113:
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.
Defendants say that plaintiffs’ had actual knowledge of the
alleged breach or violation more than three years before filing
their complaint.

Plaintiffs say that they did not, so that the

six-year limitations period applies (in which event their
complaint was timely).
As the first step in the analysis, the breaches or
violations that plaintiffs ascribe to defendants -- that is, the
facts as to which plaintiffs had to have actual knowledge before
the watershed date if a limitations defense were to defeat their
claims -- should be identified.

Although plaintiffs are not

required to identify legal theories in complaints, here the
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plaintiffs did that, and the theories that they expounded provide
a helpful organizational structure for their claims.

In that

respect plaintiffs laid out two alleged breaches in their
complaint, one based on Section 1106 and the other based on
Section 1104.
Section 1106 is the source of what will be referred to here
as “Alleged Breach No. 1.”

Section 1106 prohibits fiduciaries

from causing an ERISA plan to engage in transactions with a
“party in interest.”

Plaintiffs are vague about the exact nature

of the prohibited transaction, but they seem to argue that
Morgan, Moran and Attiken were “parties in interest” (AC ¶73) and
that the Plan engaged in an indirect exchange of property with
them (D. Mem. 8-9).

Antioch agreed to redeem Morgan’s, Moran’s

and Attiken’s stock, and plaintiffs say that the redemption price
was too high.

According to plaintiffs, Morgan, Moran and Attiken

are liable for a self-dealing transaction and GreatBanc is liable
for blessing the transaction.
Section 1106 is an inapt referent for the transaction,
because by plaintiffs’ own admission the Plan never bought or
sold anything (D. Mem. 8).

Usually “indirect” exchange refers to

a situation in which an ERISA plan and a party in interest engage
in a transaction through some kind of intermediary.
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When a plan

neither buys nor sells anything, it’s strange to characterize it
as having participated in a transaction (either directly or
indirectly).
Perhaps plaintiffs mean that the Plan effectively (if not
literally) paid for the share redemption, because after the
redemption the Plan was the sole shareholder in Antioch and
because the funds for the redemption came from Antioch’s cash
reserves and debt.

Regardless, whether plaintiffs have a

meritorious claim is not the question here.

What matters is the

set of facts and circumstances that they say gives them a claim
for relief:

that is, the redemption of Morgan’s, Moran’s and

Attiken’s shares of stock.
As “Alleged Breach No. 2,” plaintiffs also say that all of
the defendants violated Section 1104, which imposes the prudent
man standard of care (from the common law of trusts) on ERISA
fiduciaries.

AC ¶78 lists 14 ways in which defendants assertedly

violated that duty.

But those are all variations on the same

theme -- that defendants approved a transaction that put Antioch
in financial distress by increasing its debt, decreasing the cash
it had available to pay that debt and saddling it with a
redemption obligation that was impossible to meet and caused
employees to flee the company.
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Martin v. Consultants & Adm’rs, Inc., 966 F.2d 1078, 1086
(7th Cir. 1992)(emphasis in original) explains that for
plaintiffs to have actual knowledge of those two claims for
limitations purposes, they must have:
knowledge of the facts or transaction that constituted
the alleged violation. Consequently, it is not
necessary for a potential plaintiff to have knowledge
of every last detail of a transaction, or knowledge of
its illegality.
So the three-year clock would not start if plaintiffs merely had
knowledge that something was awry or that further investigation
might reveal a breach -- what is known in legal jargon as
“inquiry notice.”
But the standard is not so strict that it requires
plaintiffs to know every detail of the breach.

As Martin, id.

put it (emphasis added):
Suffice it to say that to have actual knowledge of a
violation to trigger ERISA’s three-year statute of
limitations, a plaintiff must know of the essential
facts of the transaction or conduct constituting the
violation.
That means plaintiffs needed to know enough of the facts of the
transaction to establish a claim, though they need not have
realized that they have a legal claim.

That distinction has a

parallel in criminal law, where the term “willfully” can refer to
acting either with knowledge of what the law punishes or merely
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with the intent to act (but without knowing of the action’s
illegality) -- see, e.g., Kimani v. Holder, Nos. 11-1497 and 112955, 2012 WL 3590816, at *2 (7th Cir. Aug. 22).

Martin’s

holding makes Section 1113 the equivalent of the latter
definition of “willfully” -- knowledge of the action is enough,
without knowledge of its illegality.
Willful Blindness
GreatBanc and Antioch sent out information that sufficiently
disclosed every purported breach about which plaintiffs now
complain.

Plaintiffs admit that they received those papers

(G. St. ¶34).

Some of the plaintiffs say that they skimmed the

materials (id.).

Each of them denies reading the materials

carefully in 2003 or understanding the transaction in 2003.
Defendants say that plaintiffs’ failure to read those materials
made them willfully blind to the breaches in 2003, and willful
blindness is the same thing as actual knowledge.

If so, that

started the statute of limitations’ clock in 2003, making the
2009 filing too late by three years.
Numerous other areas of the law equate willful blindness
with actual knowledge, including for example trademark law (see
Lorillard Tobacco Co. v. A&E Oil, Inc., 503 F.3d 588, 592 (7th
Cir. 2007) and criminal law (see United States v. Nobles, 69 F.3d
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172, 185 (7th Cir. 1995)).

Martin, 996 F.2d at 1086 teaches that

the words “actual knowledge” in Section 1113 include willful
blindness.

And both the First Circuit (Edes v. Verizon Commc’ns,

Inc., 417 F.3d 133, 142 (1st Cir. 2005)(citing Martin as support
for the statement that “we do not think Congress intended the
actual knowledge requirement to excuse willful blindness by a
plaintiff”) and the Sixth Circuit (Brown v. Owens Corning Inv.
Review Comm., 622 F.3d 564, 571 (6th Cir. 2010))(repeating that
language from Edes) have read Section 1113 the same way.

Indeed,

Brown, id. at 571 (internal quotation marks omitted) holds that
“[a]ctual knowledge does not require proof that the individual
Plaintiffs actually saw or read the documents that disclosed the
allegedly harmful investments.”
Because Martin, 966 F.3d at 1086 held firmly that
constructive knowledge does not start the limitations period, it
is important to distinguish willful blindness from constructive
knowledge.

Eckstein v. Balcor Film Investors, 58 F.3d 1162, 1168

(7th Cir. 1995) provides a helpful definition of constructive
knowledge: “no actual knowledge, but the ability to acquire
knowledge by reasonably diligent inquiry.”

By contrast, willful

blindness is “a failure to investigate because one ‘was afraid of
what the inquiry would yield’” (Lorillard Tobacco, 503 F.3d at
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592).
There is some overlap in the concepts:

Both require some

limited knowledge on the part of a party that could allow her to
uncover the full facts.

But while willful blindness requires a

deliberate looking away -- which is why courts typically employ
the ostrich metaphor (burying one’s head in the sand) to
illustrate the concept -- constructive knowledge requires only
carelessness.

Separating the ERISA plaintiff who buries her head

in the sand from the ERISA plaintiff who is merely careless can
be difficult, but it is certainly feasible.
In this case the undisputed facts show that plaintiffs were
willfully blind, not merely careless.

Each of the plaintiffs

received from Antioch a package containing the following
documents: a cover letter from Lee Morgan summarizing the
contents of the other documents (G. St. ¶37), a letter from
GreatBanc (id.), an information sheet explaining participants’
rights to give voting directions to GreatBanc (id.) and the Offer
to Purchase Statement--a large document that provided the details
of the transaction (id.).

Morgan’s cover letter pointed to

several specific sections of the Offer to Purchase Statement:
“Questions and Answers about the Transaction” (id. ¶38), “The
Transaction (Background & Reasons)” (id.), “The ESOP” (id.), “The
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Merger Agreement” (id.), and “Risks Related to the Transaction”
(id.).

Each of the named plaintiffs admitted to receiving those

materials (id. ¶37), and each admitted to at least skimming them
(M St. ¶34).

Those materials and an additional letter from Lee

Morgan (G. St. Ex. 32, MOR001193-96) contained all of the
information that plaintiffs needed to learn of the breach.
Alleged Breach No.1
Lee Morgan’s two letters and accompanying materials
expressly disclosed Alleged Breach No.1 -- the redemption of the
individual defendants’ shares.

First, as to their right to do so

and the corollary non-tender of the ESOP shares, here are
relevant excerpts from page 2 of the second (November 14, 2002)
letter:
The Transaction provides shareholders with an
opportunity to sell their shares of Common Stock of the
Company (the Tender Offer) for either (i) $850 per
share in cash (less a $5.00 tax distribution
reimbursement), or (ii) a package of consideration per
share [describes package].
*

*

*

It is a condition to the closing of the transaction
that the ESOP Trustee decides not to tender the shares
owned by the ESOP.
And the same information as to the tender rights of shareholders
had been disclosed in the “Questions and Answers About the

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Transaction” section of the materials enclosed with Morgan’s
first letter.

Pages 1 and 2 of that document (Ex. 32 to G. St.

at MOR001215-16) answer the questions “[w]hat are the classes and
amounts of securities sought in the offer” and “[h]ow much are
you offering to pay, what is the form of payment....”

But most

critically, page 4 of that document specifically told plaintiffs
(and all other shareholders) that “Lee Morgan, Asha Morgan Moran,
and the directors of the Company who own shares” planned to
tender their shares in the redemption.

So it is clear beyond

cavil that plaintiffs had full disclosure of the parts of the
transaction that they now claim were prohibited by Section 1106.
And there is added evidence that plaintiffs had actual and
direct knowledge of this alleged breach -- that they were not
just willfully blind to it.

Hardman testified that Morgan “made

it very clear that the Morgan family was going to cash in their
shares right away, so we knew that going into it, yes” (M. St.
¶47).

Plaintiffs say that such knowledge is insufficient to have

given them actual knowledge of the breach because of the
complexity of the transaction.

They refer to it as an

“‘indirect’ sale or exchange of any property between a plan and a
party in interest” (again they view the individual defendants as
the purported parties in interest)(P. Mem. 8-9).
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But the two most basic -- and abundantly clear -- features
of the transaction were (1) that Antioch would redeem shares not
held by the Plan and (2) that the Plan would end up as the sole
shareholder in Antioch.

Plaintiffs say the transaction was

“highly complicated, ever evolving” (id. at 9), but those two
features of the transaction were simple and constant.
Alleged Breach No. 2
Another section identified in Morgan’s letter, “The ESOP,”
disclosed a critical part of Alleged Breach No. 2 -- the socalled Put Price Protection Agreement that set a floor on the
redemption price for Plan participants (Ex. 32 to G. St. at
MOR001256-58).

Another section of the Questions and Answers

document described the debt that Antioch took on with the
transaction (id. at MOR001220).

And still another (MOR001283)

spelled out the risk that those two actions, taken together,
created:
If the Company were unable to meet its repurchase
obligations, the Company could be left insolvent and
unable to pay other obligations, including the
subordinated notes.
M. St. ¶¶41-46 collects additional disclosures of similar
information that the Plaintiffs received.
Plaintiffs say that those documents were too technical for

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them to read, and so they ignored them.

If the documents were

indeed incomprehensible for a law person, that would be the stuff
of which constructive rather than actual knowledge could be
fashioned (Eckstein, 58 F.3d at 1169).

Plaintiffs could not be

willfully blind to information that they could not comprehend.
But that position does not withstand analysis here, for it
is grounded solely on arguments from plaintiffs’ lawyers and
conclusory statements from the lawyers’ clients -- the
plaintiffs.

What must control instead is evidence, and here

there is objective evidence that puts the lie to plaintiffs’
contention:

Morgan’s letter pointed to specific sections of the

documents that plaintiffs cannot legitimately justify having
ignored (if they did indeed ignore them).

Those sections have

plain common-sense descriptions of the facts underlying the
alleged breach.

And reading those sections was critical to a

Plan participant’s understanding how to direct GreatBanc to vote
his or her shares in the merger transaction (M. St. ¶38).
There is even more to the evidence that torpedoes
plaintiffs’ position--evidence that evokes the familiar saying
that actions speak louder than words.

Plaintiffs’ counsel are

seemingly blind to the clear import of the allegation in AC ¶59
(emphasis added):
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Prior to October 1, 2004, a veritable “stampede of
employees” gave notice of their resignation of
employment so as to lock in the value of their ESOP
accounts at $894.00 per share before the October 1,
2004 deadline in the Put Price Protection Agreement.
This predictable stampede exacerbated the Company’s
repurchase obligations, drove the Company deeper into
debt, and caused an immediate breach of Antioch’s
financial loan covenants with the lenders from the 2003
Transaction.
Plainly a great many Plan participants knew from the selfsame
documents that they had a limited opportunity to redeem their
shares in the Plan for more than they were worth.
What plaintiffs and their counsel offer up is a dual
universe, one in which many other Plan participants participated
in a “predictable stampede” that acted on the plain explanation
conveyed by the documents delivered to them, while plaintiffs
found the same documents so abstruse as to defy reading.

But

this is not the place to import the “least sophisticated
consumer” standard from other congressional enactments -- yet
that standard, which plaintiffs essentially argue for themselves
in their desperate effort to save their lawsuit from dismissal on
limitations grounds, is in this instance the quintessence of
willful blindness.
And once again some of the plaintiffs themselves have
acknowledged the requisite actual knowledge.

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Mino testified that

he was aware of the calculation of the redemption price under the
Put Price Protection Agreement, but decided not to cash in
because he wanted to see if the stock price would go up more
(M. St. Ex. F. at 123-25).

And Hardman testified about the large

increase in redemption obligations in 2003-04 (G. St. Ex. E at
175):
I do recall in--whether it was this meeting or not, but
the discussion, you know, Lee [Morgan] bringing it to
our attention. There again, you know, I thought that
it had all been taken into consideration, no reason to
get concerned. It was so soon after the transaction
that, you know, I felt that GreatBanc Trust had done
their homework and that this was all taken into
consideration.
Plaintiffs say that even if they knew the facts of the
transaction, they needed more information to have actual
knowledge of a breach -- they assert that they needed to know
what GreatBanc did to analyze the deal and determine its fairness
(P. Mem. 7-8).

But the asserted breach about which they really

complain is GreatBanc’s setting the redemption price too high in
the face of Antioch’s substantial debt (AC ¶¶75-76).

Their true

complaint is about the substance of the decision, not about the
process undertaken in reaching the decision, for no matter how
much process GreatBanc undertook, plaintiffs would still be
complaining that the ultimate decision that set the redemption

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price too high was imprudent (AC ¶78(b)).5
In sum, plaintiffs had actual knowledge of -- or its
equivalent, willful blindness to -- all of the critical facts
underlying what they allege was an imprudent decision by
GreatBanc.

Their claims are time-barred.
Conclusion

At this Court’s direction, plaintiffs initially filed only a
limited memorandum response to the summary judgment motions.
After reviewing defendants’ joint reply, however, plaintiffs
asked for leave to file a supplemental response.

This Court

granted that motion, and plaintiffs later filed an additional
response.
So while plaintiffs did not respond to defendants’ Rule 56.1
statement as such, they have had ample opportunity to brief their
case before this Court -- as this Court has frequently said in
describing the burden of parties opposing other summary judgment

5

To put the point a bit differently, plaintiffs would have
to establish the excessiveness of the redemption price as an
element of their claim. If they cleared that hurdle, defendants
could proffer the asserted reasonableness of GreatBanc’s conduct
in setting that price as a potential defense to the claim that
would then have to be resolved -- but plaintiffs’ clearing of the
hurdle had to come first.
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motions, they have wheeled out all of their artillery.6

And

because plaintiffs have not contested -- and cannot contest -the basic facts identified in this opinion, defendants’ motions
are granted.

Plaintiffs’ claims are barred by Section 1113, and

this action is dismissed with prejudice.

_____________________________________
Milton I. Shadur
Senior United States District Judge
Date: September 12, 2012

6

See, e.g., Employers Ins. of Wausau v. Bodi-Wachs
Aviation Ins. Agency, Inc., 846 F. Supp. 677, 685 (N.D. Ill.
1994), which this Court believes is the first published opinion
in which it used that locution.
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