US Labor Department files suit to recover employee contributions to 401(k) plan of lumber company in Kennett Square, Pa.

Date of Action: May 22, 2014

Type of Action: Complaint

Name(s) of Defendant(s): Stephen Scott Danby, Jr., Danby Lumber and Millwork Co. Inc. and Danby Lumber and Millwork Co. Inc. 401(k) profit sharing plan

Allegations: Based on an investigation conducted by the U.S. Department of Labor’s Employee Benefits Security Administration, the Secretary of Labor filed a complaint alleging the following:

Danby Lumber and Millwork Co. Inc. was the sponsor and administrator of the Danby Lumber and Millwork Co. Inc. 401(k) profit sharing plan. Stephen Scott Danby, Jr. was the president and majority shareholder owner of the company, and also served as the trustee of the plan. In addition to serving as trustee, Danby also performed the duties of plan administration for the company. The plan was established by the company on June 1, 1980, for the benefit of their employees. The company operated a lumber business located in Kennett Square, Pa., from 1978 through 2011.

Although the company was named as the plan administrator, Danby made the decisions regarding plan administration and the disposition of the plan’s assets. As part of his plan administrative duties, he was responsible for making decisions concerning the remittance of employee elective contributions to the plan and was also responsible for making investment decisions for the plan. Based on his authority to exercise discretionary control over the administration and operation of the plan, Danby was considered a fiduciary to the plan. Although the plan failed to file required reports with the Secretary of Labor and failed to provide required information to plan participants, as of Dec. 31, 2007, it was known that approximately 30 participants were fully vested in the plan with account balances totaling approximately $840,000. In 2011, the company terminated all of its employees. As a result, all participants became eligible for their plan distributions. However, the majority of the plan’s participants were denied their benefit distributions because the plan had insufficient liquid assets to satisfy their requests.

An investigation by the Department of Labor found on or about Dec. 30, 2008, Danby and the company invested approximately $175,000 of the plan’s assets in an undeveloped lot at 33 Orchard View Drive in Chadds Ford, Pa. The plan purchased this lot from the company. In this transaction, Danby, as president of the company, acted as the seller. In the same transaction, Danby, as trustee of the plan, acted as the buyer. In addition to the purchase price, the plan paid $4,900 in settlement costs. On March 8, 2011, the Orchard View lot was independently appraised at $145,000. The Labor Department found since Dec. 30, 2008, Danby and the company have used assets of the plan to satisfy property taxes and other taxes for the Orchard View lot.

Additionally, on Feb. 6, 2009 Danby and the company executed a promissory note for a loan of $100,000 to George Harlan, a construction contractor and customer of the company. The note was to be secured by a mortgage on an apartment building owned by Harlan. However, a mortgage was never obtained to secure the promissory note for the plan. Further, while Danby and the company received $16,628.28 in payments from Harlan, Danby deposited this amount into the company’s account rather than the plan. No payments were received by Harlan with regard to the promissory note after June 24, 2010, and neither Danby nor the company took any actions to collect the remainder of this note from Harlan.

The investigation also found, on or about Dec. 10, 2010, Danby sold the plan’s undeveloped lot at 34 Gibble Road, in Cochranville, Pa., in a transaction that was contingent upon Danby retaining property rights on the lot for Danby and his family for the seller’s lifetime and that Danby had the right of first refusal to purchase the property from the seller upon any future offer to sell the property. The plan purchased the Gibble property on Aug. 22, 1996, for $180,000. In February 2008, the property was independently appraised at $420,000. Danby and the company sold the Gibble property in December 2010 for $270,000 and the retention of the Danby family’s property rights.

Investigators additionally found that between December 2010 and April 2011, Danby and the company used more than $111,000 of the plan’s assets to satisfy Danby’s personal expenses and the company’s expenses. These expenses included using the plan’s assets to pay Danby’s parents for a loan they made to the company, Danby’s personal legal expenses, the company’s legal expenses, utility bills, health insurance premiums, payroll, vendor bills and banking fees. All of these transactions were made after the plan received approximately $266,000 from the sale of the Gibble property in December 2010.

Finally, EBSA’s investigation revealed on or about Dec. 22, 2010, shortly after the plan sold the Gibble property, Danby and the company transferred approximately $35,000 from the plan for the purchase of a membership in the Fieldstone Golf Course from Danby. Danby had originally purchased the golf course share in his own name with his own assets. However, to date, the Fieldstone Golf Course remains titled to Danby instead of the plan.

Further, while at least one plan participant requested their plan benefit prior to Sept. 14, 2010, and was unable to obtain such a distribution until September 2011, Danby made $10,000 distributions to his mother on Dec. 10, 2010, and Jan. 25, 2011. Also, Danby made a $10,000 distribution to himself on May 18, 2011. It is alleged, by Sept. 6, 2011, approximately $12,000 of the $266,000 deposit from the plan’s sale of the Gibble property remained in the plan’s account. By Dec. 31, 2011, the plan had a cash balance of $7,120.90 with participants still waiting for their vested benefit payments.

The complaint alleges, by engaging in the actions described above, Danby and the company participated knowingly and knowingly undertook action to conceal acts or omissions by each other that they knew to be violations of the Employee Retirement Income Security Act of 1974. It also alleges that Danby and the company breached their fiduciary duties to the plan and its participants and failed to take reasonable efforts to remedy those breaches and caused the plan to engage in transactions that violated ERISA.

Resolution: The lawsuit is seeking the removal of Danby and the company as fiduciaries to the plan and to permanently enjoin them from making any decisions or having custody or control over any employee benefit plans covered by ERISA; appointment of an independent fiduciary, paid for by Danby and the company, to marshal remaining assets of the plan pursue claims on behalf of the plan, and make distributions to plan participants; and disgorgement of all monies received from the plan caused by their fiduciary misconduct. Additionally, the lawsuit seeks the use of Danby’s individual plan account balance to off-set losses, including lost opportunity costs resulting from his fiduciary breaches if the losses are not otherwise restored to the plan by the defendants; and the defendants’ cooperation with the Department’s investigation.

Court: United States District Court for the Eastern District of Pennsylvania

Docket Number: 2:14-cv-02920-JHS

U.S. Department of Labor materials are accessible at www.dol.gov. The information above is available in large print, Braille, audio tape or disc from the COAST office upon request by calling (202) 693-7828 or TTY (202) 693-7755.