WASHINGTON - A U.S. District Court judge upheld investments by the trustees to a Maryland plumbing contractor's pension plan that put more than 75% of the plan's assets into real estate.
Marc Machiz, associate solicitor for the Department of Labor, which brought the suit against the $5 million Walter W. King Plumbing & Heating Contractor plan trustees, said the department will not appeal the case.
The case is not expected to set a precedent because it involves a specific type of investment.
Observers said the case hinged on the experts used, and the Department's expert didn't convince the court. "Sometimes it becomes a battle of the experts, and if the expert lacks credibility, it's all over," said Michael Gordon, former minority counsel for pensions on Senate Labor and Public Welfare Committee in the early 1970s, and now a pension lawyer.
The trustees to the pension plan had invested about 77% of plan assets in Frederick County, Md., residential mortgages.
The Department of Labor argued in U.S. District Court for the District of Maryland that this violated pension law, which requires funds to diversify investments. The trustees, who had invested in residential real estate mortgages since the early 1980s, said the investments were prudent.
According to the testimony, Walter King, one of the fund's two trustees and president of the company, met with each borrower and visited each property. The loans were staggered, with different maturity dates; interest rates on the loans mirrored bank rates at the time; and the loans had a typical loan-to-value ratio of 80% or less. In addition, the loans were five-year balloon loans amortized over 30 years, and were usually for $100,000 or less. The average rate of return for the mortgage loans was 8.93%. Of the 83 loans the plan made from 1985 to 1993, only two borrowers defaulted, and the defaults did not hurt the plan.
"You should diversify until it is prudent not to do so," said Jim Rothschild, partner at Anderson, Coe & King, Baltimore, who represented the trustees. "We had a unique set of facts. This was a very well thought out investment."
One of the trustees' three experts, David Brock, president of the Bank of Brunswick, said his bank agreed to purchase several of the plan's loans.
Mr. Brock said the investments were prudent, based on the low loan to value ratios and other factors, and that at least 60% of his bank's assets were invested in similar mortgage loans in the same area.
The Department of Labor argued the plan could have received a comparable rate of return with a more diversified portfolio that had less risk. Richard Hinz, the Labor Department's director of research and economic analysis, testified that although he did not examine the real estate investments in the fund's portfolio, the fund could have faced default risk, interest rate risk, inflation risk and liquidity risk.
"The secretary's expert based his opinions on textbook-type theories that appeared far removed from the actual realities of mortgages in Frederick County," said U.S. District Judge William M. Nickerson. "In this regard, the secretary simply failed to put forth sufficiently credible proof to refute the King's substantial presentation that the plan's investments were clearly prudent."