The opinion of the court was delivered by: Lechner, District Judge.
This is an action brought by the plaintiffs, Gregory J.
Lawrence ("Lawrence") and Hal D. Pugach ("Pugach")
(collectively, the "Plaintiffs"), against defendants, Xerox
Corporation ("Xerox"), Xerox Corporation Employee Stock
Ownership Plan (the "Xerox ESOP"), Crum & Foster, Inc. ("C &
F"), Crum & Foster Holdings, Inc. ("C & F Holdings"), Talegent
Holdings, Inc. ("Talegent"), Fairfax Financial Holdings Ltd.
("Fairfax") and Patricia M. Nazametz ("Nazametz")
(collectively, the "Defendants"). Plaintiffs seek to recover
stock, or its value, alleged to have been lost when Defendants
terminated the participation of C & F employees in the Xerox
Plaintiffs Lawrence and Pugach were employed by C & F at its
offices in Roseland, New Jersey from, respectively, about 1
December 1986 through about 7 January 1994, and from about 1
April 1983 through about 1 May 1998. Plaintiffs would have been
Participants in the Xerox ESOP commencing on 31 December 1993
and thereafter, if Xerox had not terminated the Xerox ESOP.
Xerox is a New York corporation with its principal place of
business in Stamford, Connecticut.
Talegent is a Delaware corporation with its principal place
of business in Seattle, Washington. Talegent was formed by
Xerox to act as a holding company for the insurance and
financial services operations of Xerox.
C & F is a Delaware corporation with its principal place of
business in Morristown, New Jersey. C & F Holdings is a
Delaware corporation with its principal place of business in
Morristown, New Jersey. C & F Holdings is an affiliate of C &
Fairfax is a Canadian corporation with its headquarters
located in Toronto, Canada. Fairfax purchased the C & F
entities from Xerox in mid-1998 and now does business in the
United States and the State of New Jersey by operating its C &
F entities from their principal places of business in
Morristown, New Jersey.
The Xerox ESOP is an entity established by Xerox effective as
of 1 July 1989 under the Employee Retirement Income Security
Act of 1974, 29 U.S.C. § 1001 et seq. ("ERISA"), and as defined
in Section 4975(e)(7) of the United States Internal Revenue
Code. The Xerox ESOP is, according to its terms, controlled by
Xerox and administered by a plan administrator (the "Plan
Administrator"). See Xerox ESOP at 30, Article 12.01, attached
to Amended Complaint as Exh. A. The Plan Administrator
designated in the Xerox ESOP also serves as the named fiduciary
of the Xerox ESOP. See id.
Nazametz serves as the Plan Administrator for the Xerox ESOP.
Plaintiffs allege Nazametz maintains an office at the principal
office of Xerox in Stamford, Connecticut. Although not
specifically set forth by either party, it appears the
operations of the Xerox ESOP are also centered in Stamford,
The instant matter was commenced by Plaintiffs on 18 December
1998. Plaintiffs filed the Amended Complaint on 16 March 1999.
Defendants filed an answer to the Amended Complaint on 6 April
On 8 April 1999, the Defendants submitted the Motion to
Transfer. By letter, dated and received on 28 April 1999, the
Plaintiffs submitted the Second Request to Amend.
During 1983 Xerox acquired C & F, a large insurance and
financial services company. On or about 1 July 1989, Xerox
established the fully leveraged, defined contribution Xerox
ESOP to purchase 10,000,000 of its convertible shares for
approximately $78 per share. The listed market value of one
share of Xerox common stock ("Xerox Stock") on the New York
Stock Exchange on 3 July 1989, the first trading day in July of
1989, was $20.81.
Plaintiffs allege that although the Xerox ESOP was facially
established as a single plan, the Xerox ESOP was actually two
separate, fully leveraged, defined contribution plans.
Plaintiffs further allege the two plans which constituted the
Xerox ESOP were operated by a single administrative structure
and were controlled by the Chief Executive Officer and Board of
Directors of Xerox.
The Xerox ESOP paid Xerox approximately $785,000,000 from
borrowed funds for 10 million shares of Xerox Stock. The Xerox
ESOP's loan to pay for the Xerox Stock purchase was secured by
the Xerox Stock and a guarantee from Xerox; funds for repayment
of the loan were to be derived from employee participant
("Employee Participant") concessions, Xerox Stock dividends and
Xerox contributions as needed. Plaintiffs allege the Xerox ESOP
did not provide for any rights of reversion.
The concessions of the Employee Participants were primarily
a 1% reduction in merit pay increases and a 50% reduction in
employer 401 K contributions for employees with more than 10
years of service. All Xerox Stock owned by the Xerox ESOP was
to be distributed to the Employee Participants over the course
of fifteen years, commencing in 1989. See 11 July 1999 Letter
to C & F Employees, attached to Amended Complaint as Exh. B.
Plaintiffs allege the establishment of the Xerox ESOP was
additionally motivated by the need of Xerox to combat hostile
merger or acquisition activity in 1989.
Early in 1993, Xerox announced its decision to exit the
insurance and financial services business, and created Talegent
and C & F Holdings to facilitate that exit and the sale of all
the C & F entities. On or about 2 February 1993, the Xerox ESOP
was terminated. The document distributed to all C & F employees
announcing the termination of the Xerox ESOP stated that the
termination "will not be a take away" and that "profit sharing
replacements for the ESOP" would "be announced in the second
quarter." Amended Complaint ¶ 22 and Exh. C. Plaintiffs allege
the subsequently announced merit based profit sharing plan was
not even remotely equivalent to the Xerox ESOP assets which had
been taken away. Plaintiffs further allege the C & F employees
received little or nothing in consideration for the Xerox Stock
they lost upon termination of the Xerox ESOP.
Plaintiffs seek to represent a class composed of all C & F
employees, as defined in Article 1.16 of the Xerox ESOP, who
were employed by C & F during the period beginning 1 July 1989
and ending on 31 December 1992, and who were employed by C & F
at least through calendar year 1993. Plaintiffs allege there
are approximately 10,000 C & F employees who fall within this
In Count One of the Amended Complaint, Plaintiffs seek to
recover stock owned by the C & F Employee Participants through
the Xerox ESOP. Plaintiffs allege Xerox and C & F received
$785, 000,000 in 1989 as partial consideration for 10,000,000
shares of Xerox Stock, which immediately became the property of
the Xerox ESOP. Plaintiffs further allege that in addition to
the $785,000,000, Xerox and C & F received several significant
benefits. These benefits included (a) highly significant tax
savings and advantages, (b) reduction of non-union salary
expenses, (c) the acquisition of additional leverage to retain
valuable employees, (d) the discouragement of any unionization
activity by nonunion employees, (e) increased compensation for
Xerox and C & F executives who were instrumental in
establishing the Xerox ESOP, and (f) the use of the Xerox ESOP
to combat a hostile attempt at a merger or acquisition.
Plaintiffs contend that, in violation of the rights of the C
& F Employee Participants under the Xerox ESOP and in violation
of 29 U.S.C. § 1132(a)(1)(B) ("Section 1132(a)(1)(B)"), Xerox,
C & F, Talegent and C & F Holdings denied, and purported to
cancel, the rights of the C & F Employee
Participants in the Xerox ESOP assets. See Amended Complaint
Count One & Exh. C. Plaintiffs allege Xerox, Talegent, and C &
F Holdings breached their obligations under Section
1132(a)(1)(B) causing the C & F Employee Participants to suffer
losses to the extent of the value of the Xerox Stock of the C &
F Employee Participants. Plaintiffs further allege the net
value for the Xerox Stock that was lost upon termination of the
Xerox ESOP was at least $252,000,000.
In Count Two of the Amended Complaint, Plaintiffs allege
Xerox, Talegent, C & F, C & F Holdings, and Nazametz are Xerox
ESOP fiduciaries, as defined by ERISA. Plaintiffs further
allege that when the Xerox ESOP was established in July of
1989, it constituted a classic trust fund formed for the sole
benefit of its beneficiaries, including the C & F Employee
Participants. Plaintiffs assert the trustees had no right to
return the trust assets to Xerox or to withhold the assets from
the C & F Employee Participants. Plaintiffs seek to recover
from Xerox, Talegent, C & F, C & F Holdings, and Nazametz the
$252,000,000 value of the Xerox Stock alleged to have been
taken from Plaintiffs upon the termination of the Xerox ESOP.
In Count Three of the Amended Complaint, Plaintiffs allege
the Xerox ESOP, in addition to being an agreement regulated by
ERISA and the Internal Revenue Code, is a trust agreement (the
"Xerox ESOP Trust Agreement"). Plaintiffs further contend the
Xerox ESOP Trust Agreement defines the procedure for the
disbursal of assets and the rights of parties interested in
those assets. Plaintiffs assert the Xerox ESOP Trust Agreement
is subject to all the applicable laws of the State of New
Plaintiffs allege Xerox, Talegent, C & F and C & F Holdings,
as parties to the Xerox ESOP Trust Agreement, breached their
obligations as trustees and parties to fulfill their
contractual duties. Plaintiffs further allege Xerox, Talegent,
C & F and C & F Holdings breached their obligation to deal
fairly and in good faith. Plaintiffs seek to recover ...