Dairy Fresh Corporation in Greensboro, Ala., and
Victor Poole, the trustee of its Employee Stock Ownership Plan (ESOP) were
removed as fiduciaries of the ESOP and immediately and permanently barred from
serving as its fiduciaries in a summary judgment issued by the U.S. District
Court in Mobile, Ala. on Aug. 9.
The action resulted from the Labor
Departments intervention in an independent lawsuit filed by Daily Fresh
against Poole as the ESOPs trustee. In that action, Dairy Fresh had
alleged Poole breached his fiduciary duty to the ESOP by his refusal to
redistribute the ESOPs assets according to a revised schedule that Dairy
Fresh had created for the ESOP. Dairy Fresh also had alleged, based upon a 1995
report, due to an alleged mistake that, it claimed, had occurred in a 1988
transaction, the ESOP should have received less stock in that transaction and
that participant pensions should be reduced, eight years later, by almost half.
In its Aug. 9 ruling, the court agreed with the
department that Dairy Freshs action had no legal basis and that, by
filing the lawsuit, Dairy Fresh had violated the Employee Retirement Income
Security Act (ERISA). The court found that Dairy Fresh had no authority to
redistribute the ESOPs assets; that Dairy Freshs directions to
Poole as the ESOPs trustee were contrary to ERISA; that no mistake had
actually taken place in 1988; that even had there been a mistake as Dairy Fresh
claimed, no legal theory supported the redistribution sought by Dairy Fresh;
and that the proposed redistribution would harm the ESOPs participants by
decreasing their pensions by almost half.
The court also agreed with the department that
Dairy Fresh had violated provisions of ERISA by failing to act prudently and in
the best interests of plan participants, and that Dairy Fresh violated
provisions that pertained to self- dealing, when it sought to redistribute the
ESOPs plan assets. The court maintained if the redistribution had
occurred, Dairy Fresh and three of its directors stood to gain financially. In
that instance, the ESOP would have lost majority ownership of Dairy Fresh and
the three directors personally would have had effective control and ownership
of the company.
Finally, the court found that Poole also violated
provisions of ERISA pertaining to prudent plan management and loyalty to plan
participants when he failed to vigorously defend the ESOP against Dairy
Freshs lawsuit, opposed the departments motion to intervene, and
made, little, if any, inquiry into the basis for the proposed
redistribution.
Herman v. Dairy Fresh Civil Action No.
96-0187-CB-C |