Loral Librascope Pension Plan v. Bicoastal Corp. (In re Bicoastal Corp.)

Citations: 202 B.R. 998; 1996 U.S. Dist. LEXIS 20018Docket: No. 96-229-CIV-T-17B

Court: District Court, M.D. Florida; November 14, 1996; Federal District Court

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The Court is reviewing an appeal from the Bankruptcy Court’s Order that disapproved the Amended Application for Allowance and Payment of Fees and Expenses related to litigation over the Queen's Harbor Property, filed by the Loral Librascope Pension Plan. The appellant seeks to reverse the damages portion of the Liability Order and remand for an award of damages due to Bicoastal's breach of fiduciary duty. The Court has jurisdiction under 28 U.S.C. § 158.

Key issues under consideration include:

1. Whether the Bankruptcy Court erred in ruling that Loral could not recover damages under ERISA due to the timing of incurred fees post-assumption of the Plan by Loral.
2. Whether Loral met its burden of proof for litigation costs related to defending against Queen’s Harbor lawsuits.
3. Whether the Bankruptcy Court erred in denying Loral prejudgment interest.
4. Whether Loral's litigation costs qualify as recoverable administrative claims under § 503 of the Bankruptcy Code.

The appellate standard involves a de novo review for legal determinations and a clearly erroneous standard for factual findings, with discretion applied to prejudgment interest awards.

The factual background indicates that Bicoastal Corporation was the sponsor of the Singer Master Trust retirement plan, with its President, David Redmond, serving as the Named Fiduciary. In 1990, the Plan financed the purchase of two properties, including Queen's Harbor. Following a default on a related loan, the Plan had to foreclose on the Gateway property.

Victoria Clear replaced Redmond as the Named Fiduciary of Bicoastal’s pension plan prior to Bullard’s final loan default. In January 1991, Clear consulted Richard Watson, the Plan's actuary, regarding a potential substantial investment in real estate. Watson advised against this due to Bicoastal's impending bankruptcy, ongoing litigation with the Defense Logistics Agency, and a possible funding deficiency in the Plan. He recommended keeping Trust assets liquid with short-term investments. Despite this advice and Bullard's subsequent loan default, Clear executed a contract for the Plan to purchase “Queen’s Harbor” with Bullard, effective March 13, 1991, although the contract was not drafted at that time, and Clear only signed the last page.

The contract specified a purchase price of $38.5 million and included a $5 million loan to Bullard for developing the property. Notably, the contract lacked a legal property description, deposit requirements, interest rates, repayment schedules, or loan terms. It did, however, outline several conditions that the Seller and Purchaser had to fulfill prior to closing, including providing a property survey and title commitment, and ensuring feasibility through various tests and approvals. Specific conditions for the Purchaser included verifying utility availability, obtaining necessary building permits, ensuring no fees for public facilities, resolving any interfering easements, and securing zoning ordinances from the City of Jacksonville for intended property development.

The contract allowed the Purchaser to terminate the agreement if it determined it could not meet certain conditions within the specified time, provided that notice was given to the Seller within thirty days after the deadline. The closing date was March 20, 1991. Prior to this date, Clear instructed Northern Trust, the trustee, to wire $44 million for the transaction, but Northern Trust refused, citing its fiduciary duty to investigate the deal. Control of Bicoastal changed, and on April 25, 1991, Clear was removed as Named Fiduciary, rescinding her instructions to Northern Trust. On May 23, 1991, Bicoastal retained Northern Trust, granting it exclusive authority regarding the Queen’s Harbor transaction. Northern Trust, advised by counsel, informed Bullard that it would not proceed due to Clear's lack of authority under ERISA and the contract’s unenforceability under Florida law due to insufficient property description. Bullard then sued the Pension Plan and trustee for damages and specific performance. Northern Trust defended, incurring substantial litigation costs that became part of Loral's administrative expense claim against Bicoastal, which was in Chapter 11 bankruptcy. On August 12, 1992, Northern Trust filed an administrative expense claim against Bicoastal, asserting damages as administrative expenses under the Bankruptcy Code. In September 1992, Bicoastal sold the Pension Plan to Loral, which was allowed to pursue Northern’s claim. The Bankruptcy Court bifurcated related litigation and held hearings from January to June 1995. On December 19, 1995, the court ruled that while Clear breached her fiduciary duty by signing the agreement, Loral's administrative expense claim was disallowed in any amount.

Section 409(a) of ERISA mandates that fiduciaries who breach their duties are personally liable for losses incurred by the pension plan due to such breaches. The Bankruptcy Court found that Clear's breach of fiduciary duty regarding the Queen’s Harbor contract did not result in damages claimed by Loral, as the contract was an option contract. However, the appellate court disagreed, determining that specific expenses incurred—totaling approximately $500,000—were directly linked to Clear’s breach. These expenses included payments to legal and appraisal professionals and a $150,000 retainer to Northern Trust. The court emphasized that if Clear had not executed the contract, these expenses would not have been incurred. It concluded that the nature of the contract as an option did not exempt these expenses from being classified as damages under ERISA. The Bankruptcy Court's reasoning was criticized for failing to consider the economic implications of the contract's conditions that required good faith efforts to fulfill, which resulted in additional expenses. Thus, the appellate court reversed the Bankruptcy Court's decision regarding ERISA damages related to the contract execution.

Expenses incurred by Northern Trust following its engagement by Bicoastal regarding the Queen's Harbor transaction primarily consisted of legal fees to defend against lawsuits initiated by Bullard and others after the transaction's repudiation. Appellant contends these expenses stemmed from Clear’s breach of fiduciary duty, arguing that had Clear not executed the contract, the lawsuits would not have arisen. The Bankruptcy Court found that the contract was merely an option and that had Northern Trust exercised its rights under the contract, the lawsuits would have been avoided or less costly. Additionally, it noted that most fees incurred by Northern were after Loral took over the plan's sponsorship, removing Bicoastal from administration.

The Bankruptcy Court and Appellee argue that Northern Trust's legal expenses resulted from its failure to exercise the option to inform the Sellers of unmet conditions precedent for closing. They criticized Northern's decision, made on counsel advice, to disaffirm the contract due to its apparent invalidity and Clear's lack of authority. Appellant counters that such critiques are speculative and irrelevant since the Sellers contested the repudiation and the issue of conditions would have been litigated regardless of Northern’s strategy. The Bankruptcy Court acknowledged that the enforceability of the contract was not a significant concern and emphasized that the transaction constituted a breach of fiduciary duty, irrespective of its final status.

The Bankruptcy Court ruled that the Plan incurred $3,004,091.00 in fees for attorneys and professionals hired by Northern Trust, primarily after Loral took over the Plan's sponsorship, indicating that the Debtor had no responsibility or control over the litigation or its expenses. The Appellant contends that the Bankruptcy Court's conclusion regarding the Debtor's lack of supervision and control is unsupported, arguing that Bicoastal monitored and approved expenses before selling the Pension Plan to Loral and remained a fiduciary until then. 

The Appellee counters that after terminating Clear, Bicoastal delegated authority to Northern Trust, which was granted exclusive responsibility over the Queen’s Harbor contract and was to independently hire legal counsel, with fees paid by the Master Trust. Under ERISA, fiduciaries can delegate duties, but they retain liability for breaches of duty by others if they have knowledge of such breaches and fail to remedy them. The court noted that Bicoastal must be ready to reassume its fiduciary duties if it becomes aware of any breaches by Northern Trust. 

The Court found Bicoastal's arguments compelling but highlighted that a factual determination is needed regarding whether Bicoastal knew before the May 31, 1991, repudiation of the Queen’s Harbor contract that Northern Trust had breached its fiduciary duty. The clarity of the Bankruptcy Court's factual findings is insufficient, particularly concerning who at Bicoastal was informed of the litigation strategies and when. The case is remanded for further findings on these issues.

Conflicting testimony exists regarding the responsibility for monitoring the reasonableness of legal fees between Northern Trust and Bicoastal. Appellant claims John Cooleen, Bicoastal's assistant general counsel and Named Fiduciary for Administration, reviewed and approved the legal fees, while Appellee contends he only initialed bills that Northern Trust had already deemed reasonable. Evidence indicates Kendall Kay from Northern Trust sent Cooleen letters asserting the fees were fair and requesting approval for payment. Appellant argues that even if Cooleen did not conduct a thorough review, his inaction constitutes a breach of fiduciary duty under ERISA Sections 1109 and 1105(a). The only known amount related to the legal fees paid is $3,004,091.00, with Bicoastal labeling these expenses as excessive, while Loral defended them as reasonable. The court finds the Bankruptcy Court's findings on the reasonableness of the fees unclear, leading to a remand for further evaluation.

Regarding the burden of proof for litigation costs in defending against lawsuits related to Queen’s Harbor, the Bankruptcy Court determined that the proof provided by Appellant was insufficient. Appellant's exhibit did not include all necessary tabs due to a failure to authenticate business records with appropriate witnesses. Only a portion of the tabs were admitted into evidence, but the Bankruptcy Court allowed Appellant to conduct additional depositions to support the authentication of these records. Appellee initially objected to one witness's deposition based on prior testimony but did not contest the authentication of business records. Consequently, the court concluded that Appellee waived any objection to the admissibility of these records. With the depositions and accompanying business records admitted, the Court found that Appellant indeed met its burden of proof regarding the Queen's Harbor litigation expenses, deeming the Bankruptcy Court's contrary conclusion as erroneous.

The Court addresses two primary issues regarding the Bankruptcy Court's handling of Appellant's claims. First, it finds that the Bankruptcy Court erred by not awarding Appellant prejudgment interest, as it did not recognize Appellant’s administrative expense claim. Under ERISA, awarding prejudgment interest is at the trial court's discretion, intended to compensate a prevailing party for the time value of money. Since the Court has determined the Bankruptcy Court incorrectly assessed Appellant’s expenses as non-ERISA damages, it remands the case for a decision on the prejudgment interest entitlement.

Second, the Court examines whether Appellant’s ERISA damages qualify as an administrative expense claim under Section 503 of the Bankruptcy Code. The Bankruptcy Court's conclusion that these expenses were not ERISA damages prevented it from evaluating their status as administrative expenses, with the only comment being that they were unreasonable, lacking further explanation. The Court remands this issue as well for the Bankruptcy Court to assess if Appellant’s ERISA damages constitute administrative expenses under Section 503.

The Court's order reverses part of the Bankruptcy Court's decision regarding the Amended Application for Allowance and Payment of Fees and Expenses related to the Queen’s Harbor litigation and remands for further proceedings consistent with its findings.