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DONOVAN v. BRYANS

June 30, 1983

RAYMOND J. DONOVAN, Secretary of the United States Department of Labor
v.
GERALD W. BRYANS, DANIEL R. KELLY, JR., LEWIS WILSON and THE FINEST, INC.



The opinion of the court was delivered by: LUONGO

 LUONGO, Ch.J.

 This civil action was brought by Raymond J. Donovan, Secretary of the United States Department of Labor, pursuant to Title I of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., alleging numerous breaches of fiduciary duty by defendants Gerald W. Bryans and Daniel R. Kelly, Jr., in their capacity as trustees of an employee benefit plan covered by ERISA. Defendant, Lewis Wilson, has been joined under Fed. R. Civ. P. 19 as a party needed for a just adjudication of the lawsuit. Following a non-jury trial on April 18, 1983, the parties submitted proposed findings and memoranda of law. Based on the pleadings, proof and submissions of the parties, I make the following

 FINDINGS OF FACT

 1. The Finest Incorporated Profit Sharing Trust (the Plan) was established sometime prior to January 1, 1973, by The Finest Incorporated (Finest), a Pennsylvania corporation engaged in the business of commercial masonry.

 2. The Plan is an employee benefit plan or an employee pension benefit plan within the meaning of § 3 of ERISA, 29 U.S.C. § 1002.

 3. Finest was the "plan sponsor" of the Plan within the meaning of § 3(16)(B)(i) of ERISA, 29 U.S.C. § 1002(16)(B)(i), until it was declared bankrupt in 1978.

 4. Daniel R. Kelly, Jr., and Gerald W. Bryans, defendants in this action, were officers of Finest and owners of more than 80 percent of its outstanding stock from or before January 1, 1973 until Finest was declared bankrupt in 1978.

 5. Kelly and Bryans have served as co-trustees of the Plan since its inception.

 6. As trustees and fiduciaries of the Plan, Kelly and Bryans are "parties in interest" within the meaning of § 3(14)(A) of ERISA, 29 U.S.C. § 1002(14)(A).

 7. The duties of the trustees as specified in the Plan included, inter alia, the safeguarding and administration of the trust principal and the maintenance of full and complete records necessary for the administration of the Plan.

 8. Kelly and Bryans retained the law firm of Bluestein & Prusky to act as administrator of the Plan.

 9. On or about April 1, 1973, Kelly and Bryans, in their capacity as Plan trustees, approved a loan of $60,000 to Finest.

 (a) This loan was payable, together with interest at 9% per annum, over a period of five years. Under the terms of the loan, the Plan was to be given a security interest in all of the scaffolding equipment then owned by Finest to secure the loan. Although a security agreement was executed, Kelly and Bryans never perfected the Plan's security by the filing of appropriate financing statements.

 (b) On April 1, 1976, after three years of regular payments of principal and interest, Finest defaulted on its obligation to the Plan, leaving an unpaid principal balance of $26,222.

 (d) Finest's obligation to the Plan was discharged in bankruptcy in 1978. *fn1"

 10. On or about January 14, 1974, Bryans received a loan of $15,000 from the Plan. This loan was approved by Bryans himself and later ratified by Kelly.

 (a) The loan to Bryans was payable, together with interest at 8 3/4% per annum, over a five-year period.

 (b) A promissory note and mortgage were drafted by Bluestein & Prusky to document the loan, but Bryans never executed either instrument.

 (c) Bryans and Kelly did not act on the advice of counsel in approving the loan to Bryans.

 (d) Bryans has made no payments of principal or interest owing on the loan, and neither he nor Kelly made reasonable efforts to obtain repayment of the loan. The entire principal amount of $15,000, together with interest from January 14, 1974, remains outstanding.

 11. On or about July 1, 1976, Kelly and Bryans, in their capacity as trustees of the Plan, approved a loan of $25,000 to Lewis H. Wilson, an associate of Kelly and Bryans in another corporation. Kelly and Bryans knew and intended that the proceeds of the Wilson loan would be transferred to Finest.

 (a) This loan was payable, together with interest at 8 1/4% per annum, over a five-year period.

 (b) The loan was secured by a mortgage on real property owned by Wilson and his wife in Delaware County, Pennsylvania.

 (c) The mortgage and promissory note executed by Wilson and his wife in conjunction with the loan were prepared by Bluestein and Prusky. Kelly and Bryans did not, however, act on the advice of counsel in determining the propriety of the loan.

 (d) No portion of the principal or interest due on the $25,000 loan to Wilson has ever been paid.

 (e) Bryans and Kelly have not made reasonable efforts to secure repayment of the loan.

 12. The promissory note executed by Finest in connection with the April 1, 1973 loan contained an acceleration provision authorizing the Plan to declare the entire principal sum and interest immediately due and collectible in the event of Finest's failure to pay regular monthly installments. Despite the default of Finest on April 1, 1976, see Finding 9(b), Kelly and Bryans never exercised the Plan's option under the acceleration provision.

 13. A promissory note and mortgage were prepared by Bluestein and Prusky to evidence and secure the January 14, 1974 loan to Bryans. Bryans never executed either document, see Finding 10(b), and Kelly and Bryans as trustees failed to make reasonable efforts to secure Bryans' execution of the promissory note and mortgage. The promissory note contained an acceleration provision similar to that outlined in Finding 12. Had the promissory note been executed, the trustees would have had the undisputed right, at any time after January 14, 1974, to demand immediate repayment of the loan to Bryans.

 14. In the normal course of the Plan's affairs, the trustees would not approve a loan of the Plan's assets without receiving both a written promise to ...


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