Compliance March 6, 2009

Court Finds Real Estate Deal Constituted ERISA Breach

March 6, 2009 (PLANSPONSOR.com) - A federal appellate court has upheld a lower court ruling that a former pension trustee committed a fiduciary breach by undervaluing real estate owned by the plan so that he would receive a windfall at the expense of other participants.
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The 7 th U.S. Circuit Court of Appeals issued the ruling in a case involving George P. Klein Jr., president and owner of Current Development Corp. (CDC), a real estate development firm where Klein served as trustee of CDC’s pension plan.

Circuit Judge Terence T. Evans, writing for the court, agreed with a lower court that Klein had manipulated the sale of a vacant Westmont, Illinois, land parcel owned by the plan when terminating the plan as part of an agreement with the U.S. Labor Department (DoL).

The DoL had filed an enforcement action against Klein for failure to file required annual reports and using $25,000 in plan assets to pay his attorney’s fees. The two sides agreed Klein would repay the fees and shut down the plan, according to Evans  (See  EBSA: Executive Dipped Into Plan Money for Legal Fees ).

According to the court opinion, as part of the plan termination, Klein gave the approximately 40 participants the option of taking their distributions in cash or in cash combined with a share in the Westmont property. Only one other participant elected to take a real estate stake, leaving Klein a 97% owner.

Even though he had already received a $2.3-million offer on the land, Klein told participants of the lower valuation and kept the higher offer secret.

At that point, according to Evans, the DoL asked a federal judge to remove Klein as fiduciary, charging that the scheme effectively gave Klein a windfall by allowing him to receive virtually all of the proceeds of the higher offer. The court found that Klein breached his duty of loyalty to the participants and appointed Consulting Fiduciaries Inc. to be the plan's independent fiduciary. Consulting Fiduciaries eventually sold the Westmont property for $2.6 million.

"As a fiduciary of the plan, Klein was required to discharge his duties 'solely in the interest of the participants,' ... and seeking benefit for himself at the expense of the participants falls short of this duty," Evans wrote.

Disclosure of the $2.3-million purchase offer "was vital, particularly when the plan was being terminated and participants needed to choose how they would receive their take. But instead of sharing this information, Klein kept it under wraps. There is no excuse for this concealment," the court said.

The 7th Circuit ruling is available  here .

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