If the trustees of a pension fund do not exercise proper caution in investing the fund's assets and the market prices of the stocks they buy plunge, the trustees can be held personally liable for the losses. But what if the "unwise" investment rises in value? That doesn't mean the trustees are off the hook, a Feb. 6 decision by the U.S. Court of Appeals in New York suggests.
The ruling is the latest in a lengthy legal fight over the purchase by Grumman Corp. pension plan trustees -- who also are directors of the company -- of all the Grumman shares the pension plan could legally own, as part of the strategy to fend off a tender offer from LTV Corp.
In 1982, the New York appeals court held that the directors, by increasing the plan's ownership share of Grumman from 2 percent to 10 percent, had not lived up to their fiduciary duty to Grumman workers covered by the pension plan. The reason: They were motivated by a desire to keep the company out of LTV's hands rather than by an investment strategy to increase the worth of the pension plan's holdings. But the investment turned a profit: The shares bought at $38.34 each at a time when LTV was offering $45 were sold after the LTV takeover bid failed. The pension plan got $47.55 per share for the stock, which had been held for 17 months.
The Labor Department, acting to protect the rights of the pension beneficiaries, insisted the Grumman stock was worth only $23 when it was purchased. The Labor Department said that the $15.34 difference between the purchase price and the actual worth represented the market reaction to the LTV bid, and so should be considered an overpayment, for which the directors are liable.
The appeals court refused to buy this theory, however, calling the market price legitimate. But the appellate judges were not beguiled by the pension plan's $9.21 per share profit, either. The proper measure, they said in Donovan v. Bierwirth, is what the fund would have earned on an alternative investment. If the plan was doing better on its other purchases -- even if it was doing better on only some of them -- then the directors can be made to pay out of their own pockets the difference between the profits made on the Grumman stock trade and the hypothetical profit that would have been made on the better investment.
What if the stock had not been sold? In that case, the ruling says, it would have been up to the trial court judge to select some appropriate date during the course of litigation over the purchase, and use the value of the disputed investment on that date to determine fair compensation to the plan.
In other cases, courts ruled that:
* A shortcut for reviewing court rulings on bankruptcy matters no longer exists. In the past, when a bankruptcy judge issued a ruling that all parties to the case agreed should get immediate attention from an appellate court, the question could leapfrog the local U.S. District Court and go right to a panel of U.S. appeals judges. But the U.S. Court of Appeals in New Orleans has now decided that Congress closed down that shortcut route last year when it passed new legislation spelling out the powers of to bankruptcy judges. All issues now must have to go from such judges to the federal district court before they can be taken to the appeals next level, the decision says.(Thistlethwaite v. 1st National Bank, Feb. 1)
* It's a crime to make false statements to the government, even if you did not mean to deceive anyone. The U.S. Court of Appeals in Richmond recently came to that conclusion, and so reinstated a conviction of a moving company charged with rigging bids for storing the households goods of U.S. military families. The jury acquitted the company of the antitrust charges, though but did find it guilty of making false statements. But the trial judge threw out the conviction, because the jury had not been told to consider whether the company had a fraudulent intent when it filed the untrue information. The appellate judges said the question of intent is beside the point.(Nilson Van v. Marsh, Feb. 13)
* Congress must provide some way for former mental patients to win back the right to buy guns. Saying that he found it reminiscent of the Dark Ages, U.S. District Judge. H. Lee Sarokin in Trenton, N.J., threw out as unconstitutional a provision of the federal gun control law that decrees that no one who has been committed to a mental institution can lawfully buy firearms. The constitutional infirmity, the judge said, was that for no logical reason, the law treats former mental patients differently from persons convicted of a crime. Ex-cons, too, are barred from buying guns, but can apply to have that prohibition lifted. The law provided no such appeals process for those once judged mentally ill. (Galioto v. Treasury, Feb. 7)