EDWARD M. CHEN, District Judge.
Plaintiff Hilda L. Solis, the Secretary of the United States Department of Labor ("Secretary"), filed an action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001, et. seq., on April 25, 2012, against the fiduciaries of an Employee Stock Ownership Plan ("an ESOP") for allegedly causing or permitting an ESOP to purchase stock for more than the stock's fair market value. See Compl. (Docket No. 1). Defendants Matthew Fidiam ("Fidiam") and J. Robert Gallucci ("Gallucci") filed a motion to dismiss the Secretary's complaint in its entirety on May 29, 2012. See Mathieu Fidiam and J. Robert Gallucci's Motion to Dismiss (Docket No. 18) ("Fidiam & Gallucci's Motion"). Defendant The Parrot Cellular Employee Stock Ownership Plan ("Parrot Cellular ESOP" or "the ESOP") filed its own motion to dismiss on June 26, 2012. See The Parrot Cellular Employee Stock Ownership Plan's Motion to Dismiss (Docket No. 32) ("ESOP Motion"). Defendant Dennis Webb ("Webb") joined in part Fidiam and Gallucci's motion on June 26, 2012, see Defendant Dennis Webb's Joinder (Docket No. 33), and filed his own motion to dismiss on the same day, see Motion to Dismiss Complaint on Behalf of Dennis Webb (Docket No. 35) ("Webb's Motion").
Defendant Consulting Fiduciaries, Inc. ("CFI"), the last of the named Defendants, has not filed its own motion to dismiss, nor joined to any of the three motions now pending, but instead filed an Answer to the Complaint on July 10, 2012. See Answer (Docket No. 43). Having considered these three motions, all papers that are related thereto, and the argument of counsel, the Court hereby
The Secretary alleges the following facts in her complaint. Throughout the time relevant to this action, Webb served as an officer and director of Entrepreneurial Ventures, Inc. ("EVI"), a company which conducted and/or conducts business as "Parrot Cellular" and sponsored the subject ESOP.
At some point "around 1999 or 2000," EVI began taking steps to create an ESOP to purchase EVI. Id. ¶ 11. The
In June of 2002, a third-party administration firm contracted with EVI to design and implement provisions of the ESOP to facilitate the purchase of EVI's stock. Id. ¶¶ 11-12. On June 30, 2002, EVI's Board of Directors adopted the "2002 Plan Document" prepared by the third-party administration firm, and appointed Fidiam and Gallucci as the ESOP's trustees and sole members of the "Plan Committee." Id. ¶ 13. The 2002 Plan Document "outlines the duties and responsibilities of EVI's Board of Directors regarding the ESOP," as well as the "duties and responsibilities of the Plan Committee," the latter of which is designated as a "named fiduciary" of the ESOP under ERISA. Id. ¶¶ 14-15. The 2002 Plan Document also permits the Plan Committee to "designate other persons who are not named fiduciaries to carry out its fiduciary duties" by themselves becoming "a fiduciary under the Plan." Id. ¶ 15. The Secretary alleges that Webb, Fidiam, and Gallucci were all fiduciaries of the ESOP "by virtue of their authority under the [2002] Plan Document," which granted them power to exercise discretionary authority, control, or responsibility over the management and administration of the Plan and the Plan's assets. See Compl. ¶¶ 14-18. Further, the Secretary alleges that Fidiam and Gallucci were "named fiduciaries" under ERISA by virtue of their membership on the Plan Committee. Id. ¶ 19.
On September 27, 2002, EVI and the ESOP's designated trustees (Fidiam and Gallucci) signed an engagement letter with CFI, appointing CFI as the Independent Fiduciary and Investment Manager for the Plan "with respect to the stock purchase transactions at issue in this case." Id. ¶ 22. Using a third-party appraisal service retained by Webb,
The ESOP acquired 90.03% of EVI's shares on November 21, 2002, at $76.01 per share for a total cost of $28,313,718. Id. ¶ 36. To finance the transaction, the
The Secretary alleges that the ESOP's purchase of EVI's stock was completed at an amount "far higher than actual fair market value" and as a result "the ESOP paid more than adequate consideration for its EVI stock." Id. ¶ 42. This allegation is premised on the fact that CFI's appraisals of EVI's market value contained a number of "flaws and inaccuracies." Id.; see also Compl. ¶¶ 40-41 (listing appraisal deficiencies). Chief among these deficiencies are the fact that the "appraisal report did not consider a prior valuation of EVI" from 2001 that set its market value at $7,300,000. Id. ¶ 41. Nor did the appraisal report account for a $12 million deferred compensation agreement and a $4 million deferred compensation payment, both payable to Webb and executed by EVI between June and November 2002, prior to the ESOP's purchase of EVI stock, that had the effect of reducing "the value of EVI and hence ... the value of the ESOP's EVI stock." Id. ¶¶ 39-41, 45-46, 55-56.
The Secretary thereafter filed her action against the Defendants on April 25, 2012, alleging that their acts in connection with the ESOP's purchase of EVI's stock violated multiple provisions of ERISA. See Compl. ¶¶ 63-67. As against Defendants Fidiam and Gallucci, she charges that "as fiduciaries, they had a duty to act prudently and solely in the interests of the ESOP and its participants and beneficiaries." Id. ¶ 58. In breach of this duty, these two Defendants "failed to oppose the $4 million payment to Defendant Webb and the $12 million agreement with Defendant Webb," and failed "to take any action, including... a corporate shareholder action, to stop the $4 million payment ... or to recoup that payment, and they failed to take any steps to invalidate the $12 million" deferred compensation agreement with Webb. Id. ¶ 58. As against Defendant Webb, she charges that "he had a duty to act prudently and solely in the interests of the ESOP and its participants and beneficiaries, but he chose instead to act in his own self interest by agreeing to a $4 million payment and a $12 million deferred compensation agreement from EVI that harmed the ESOP by reducing the value of the ESOP's EVI stock." Id. ¶ 59. As against Defendant CFI, she charges that it relied on an unsound appraisal and "failed to adequately understand the methodologies used, the factual bases relied upon, and the conclusions reached in the appraisal, and therefore improperly directed the ESOP trustees to purchase EVI stock from Defendant Webb at a price in excess of fair market value." Id. ¶ 60. Finally, regarding Webb, Fidiam, and Gallucci, she charges that they collectively "failed to prudently monitor, oversee or remove the independent fiduciary, CFI, which they had appointed or had responsibility to oversee pursuant to the [2002] Plan Document;" regarding Fidiam and Gallucci in particular, they improperly acquiesced "in accepting ... improper direction from [CFI] to purchase EVI stock on behalf of the ESOP for more than fair market value." Id. ¶ 61. The Defendants thereafter filed the three Motions to Dismiss that are the subject of this Order.
"ERISA is a comprehensive statute designed to promote the interests of employees
Section 1107(d)(6) of ERISA
Donovan, 716 F.2d at 1459. With this understanding of ESOPs in mind, we now turn to the Defendants' motions.
Under Federal Rule of Civil Procedure 12(b)(6), a party may move to dismiss based on the failure to state a claim upon which relief may be granted. See Fed. R.Civ.P. 12(b)(6). A motion to dismiss based on Rule 12(b)(6) challenges the legal sufficiency of the claims alleged. See Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). In considering such a motion, a court must take all allegations of material fact as true and construe them in the light most favorable to the nonmoving party, although "conclusory allegations of law and unwarranted inferences are insufficient to avoid a Rule
At issue in a 12(b)(6) analysis is "not whether a plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims" advanced in his or her complaint. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). While "a complaint need not contain detailed factual allegations... it must plead `enough facts to state a claim to relief that is plausible on its face.'" Cousins, 568 F.3d at 1067 (9th Cir.2009). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. at 556, 127 S.Ct. 1955. "The plausibility standard is not akin to a `probability requirement,' but it asks for more than sheer possibility that a defendant acted unlawfully." Id.
In ruling on a motion to dismiss, a court may look to documents whose contents are specifically alleged as part of a complaint, even though the plaintiff did not append them to the complaint. "Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion." Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir.1990). "However, material which is properly submitted as part of the complaint may be considered" on such a motion. Hal Roach Studios, 896 F.2d at 1555 Fn. 19. The Ninth Circuit has stated that "a document is not "outside" the complaint if the complaint specifically refers to the document and if its authenticity is not questioned." Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir.1994) overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir.2002) (citing Townsend v. Columbia Operations, 667 F.2d 844, 848-49 (9th Cir.1982)). "[D]ocuments whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss." Branch v. Tunnell, 14 F.3d at 454. This case presents just such a situation. Both parties have made numerous references to the ESOP's Plan documents in the Complaint, in the three pending motions, and at oral argument. Accordingly, it is appropriate for this Court to consider the Plan documents in ruling on Defendants' three motions to dismiss.
Defendants Fidiam and Gallucci's motion to dismiss asks this Court to dismiss the Secretary's complaint as to these two Defendants in its entirety under Rule 12(b)(6). See Fidiam & Gallucci's Motion at 1. Defendant Webb has joined all arguments made in Fidiam and Gallucci's motion "except for the argument that Defendants Fidiam and Gallucci are not liable for following the investment directions of CFI because they were directed trustees, which does not apply to Webb." See Webb's Joinder at 1. The motion advances two principal arguments: (1) that they are not subject to liability under ERISA because they were not fiduciaries under ERISA until after the Plan was funded, and the activities complained of by the Secretary took place prior to the Plan's funding, and (2) that they were "directed trustees" under ERISA who had no independent
Fidiam and Gallucci's motion argues in the main that they are cannot be held liable as fiduciaries under ERISA for transactions that took place before Nov 21, 2002. The two "business transactions" referred to by Fidiam and Gallucci are the $ 4 million deferred compensation payment to Webb that transpired on June 25, 2002, and the $ 12 million deferred compensation agreement executed by EVI and Webb on October 15, 2002, and restated on November 21, 2002. Fidiam and Gallucci argue they cannot be held liable because "the ESOP had not yet been funded, and as such, the ESOP did not exist at the time of these two business transactions," and therefore "neither Mr. Fidiam nor Mr. Gallucci could act as an ERISA fiduciary to the ESOP nor could they take any action to harm the ESOP's nonexistent assets." Fidiam & Gallucci's Motion at 16-17. They cite language in ERISA's definition of an ESOP, 29 U.S.C. § 1107 (d)(6), which states that an ESOP is in pertinent part "a stock bonus plan which is qualified, or a stock bonus plan and money purchase plan both of which are qualified, under section 401 of Title 26" of the U.S.Code. Fidiam & Gallucci's Motion at 12 (emphasis added). That citation refers to a provision in the Internal Revenue Code which sets out requirements for qualified pension, profit-sharing, and stock bonus plans, and states that "[a] trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section ..." 26 U.S.C. § 401(a). Using the Internal Revenue Code's reference to the "trust," these Defendants refer to the common law of trusts for the proposition that "a trust cannot be created unless there is trust property." See Fidiam & Gallucci's Motion at 14 (citing the Restatement (Second) of Trusts). Since "no Parrot Cellular ESOP existed until the Stock Bonus Plan part of the Retirement Plan was funded by the Employer's contribution of EVI stock on November 21, 2002," Fidiam & Gallucci's Motion at 13, Defendants argue "the ESOP was not in existence at the time of either payment to Mr. Webb," and therefore "there can be no fiduciary breach." Id. at 16. Defendant's syllogism misconstrues the nature of fiduciary responsibility under ERISA.
It cannot seriously be questioned that the Parrot Cellular Employee Stock Ownership Plan is an "employee pension benefit plan" covered by the terms of ERISA, of which ESOPs are a subset. ERISA defines an "employee pension benefit plan" as:
29 U.S.C. § 1002(2)(A). The terms of the Parrot Cellular Employee Stock Ownership Plan clearly fall within this definition. See Howard v. Shay, 100 F.3d 1484, 1488
Defendants' arguments that the Internal Revenue Code or the common law of trusts determine the existence of an ERISA plan, and along with it, the emergence of fiduciary duties, is unavailing. Faced with a similar argument, a district court in Wisconsin rejected the notion that qualified tax status under the Internal Revenue Code marked the existence or non-existence of an ERISA covered ESOP. See Freund v. Marshall and Ilsley Bank, 485 F.Supp. 629, 633 (W.D.Wis.1979) (Title I of ERISA applies by its terms to all employee benefit plans within the meaning of § 1002(2) and (3), without regard to tax qualification); see also Donovan v. Shaw, 668 F.2d 985, 990 (8th Cir.1982) (citing Freund and noting same). Further, the Supreme Court's decision in Hughes Aircraft Co. v. Jacobson rejected the general applicability of the sort of common law trust theory Defendants advance here. The Court held that "because ERISA is a comprehensive and reticulated statute, and is enormously complex and detailed, it should not be supplemented by extratextual remedies, such as the common-law [trust] doctrines ..." Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 447, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) (internal citations and quotations omitted). The Court, in Varity Corp. v. Howe, three years earlier had noted how "ERISA's standards and procedural protections partly reflect a congressional determination that the common law of trusts did not offer completely satisfactory protection," and presented its opinion:
Varity Corp. v. Howe, 516 U.S. 489, 497, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). Here, it is clear that the language of the statute requires a departure from the common law of trusts insofar as it would frustrate Congress' explicit desire to cast as fiduciaries those who act to initially fund an ESOP and thereby absolve them of their duty to ensure that the ESOP acquires employer securities for "adequate consideration." Hence, the existence of an ESOP and the vesting of fiduciary duties in respect thereto does not necessarily depend on the date of the ESOP's funding.
Indeed, as the Secretary's citation to Donovan v. Dillingham, 688 F.2d 1367 (11th Cir.1982) (en banc), points out, an ERISA plan and ERISA fiduciary responsibilities thereunder, can exist even where a formal employee benefit plan had not been adopted. Donovan v. Dillingham, 688 F.2d at 1373 ("a `plan, fund, or program' under ERISA is established if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source
Defendants' position that no fiduciary duty to the ESOP obtains even when an ESOP has been legally and formally established and fiduciaries named is similarly meritless. For instance, if an ESOP were formally established and a named fiduciary obligated the ESOP by contract to a self-dealing transaction in violation of § 1106(b)(3), a breach of fiduciary duty would obtain even if the ESOP had not yet been funded. When pressed with this hypothetical at oral argument, Defendants had no response.
In any event, because the Court holds that the breach of fiduciary duty, if any, did not occur here until the ESOP's purchase of the EVI stock on November 21, 2002, the dispute over whether Defendants had fiduciary duty to the ESOP prior that date is moot. EVI's deferred compensation commitment made to Webb caused no harm to the ESOP and breached no statutory duty until the ESOP acquired EVI for more than fair market value. As described below, it is only at that moment that a violation of § 1108(e) could have occurred. Had EVI stock been properly appraised and adequate consideration paid by the ESOP on November 21, 2002 (reflecting its true market value), there would be no harm or breach.
The Court thus focuses on the scope of fiduciary duties relative to the ESOP's acquisition of EVI stock in November, 2002.
Ninth Circuit precedent construes ERISA fiduciary status "liberally, consistent with ERISA's policies and objectives." Johnson, 572 F.3d at 1076 (citing Ariz. State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 720 (9th Cir.1997)). ERISA itself "defines `fiduciary' not in terms of formal trusteeship, but in functional terms of control and authority over [a] plan." Mertens v. Hewitt Assocs., 508 U.S. 248, 262, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993). Under ERISA's statutory provisions, ESOP fiduciaries include not only those individuals specifically named in an employee benefit plan, 29 U.S.C. § 1102(a), but also any individual who "exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets," 29 U.S.C. § 1002(21)(A)(i).
"[T]he statute includes a comprehensive scheme of both general and specific provisions regulating the conduct of fiduciaries," with provisions relating to the general responsibilities of all fiduciaries of "employee pension benefit plans" appearing in § 1104, and additional specific responsibilities concerning the fiduciaries of certain plans including ESOPs appearing in § 1106-1108. Donovan, 716 F.2d at 1463-65. Among the general provisions are duties that a fiduciary must act for the exclusive benefit of plan beneficiaries, 29 U.S.C. § 1104(a)(1), and must act "with
"As a supplement to the general duties imposed on fiduciaries by [§ 1104], ERISA also incorporates a detailed list of specifically prohibited transactions," and these "prohibited transaction rules are an important part of Congress's effort to tailor traditional judge-made trust law to fit the activities of fiduciaries functioning in the special context of employee benefit plans." Donovan, 716 F.2d at 1464. One of these specifically prohibited transactions makes it unlawful for a fiduciary to engage in `self-dealing:' "A fiduciary with respect to a plan shall not ... (2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries." 29 U.S.C. § 1106(b). ERISA contains a statutory exemption to this restriction with respect to ESOPs, permitting "the acquisition or sale by a plan of qualifying employer securities ... (1) if such acquisition [or] sale ... is for adequate consideration." 29 U.S.C. § 1108(e).
As noted above, the crux of the Secretary's complaint is that the fiduciaries to the ESOP, including Fidiam and Gallucci, purchased EVI stock from Webb at a price in excess of fair market value in violation of ERISA's statutory mandate that the acquisition of such stock be for the "adequate consideration." Compl. ¶ 60. See Reich v. Hall Holding Co., 990 F.Supp. 955, 960 (N.D.Ohio 1998) aff'd sub nom. Chao v. Hall Holding Co., Inc., 285 F.3d 415 (6th Cir.2002) (holding that during an initial acquisition of employer stock, "ERISA explicitly requires the plan's fiduciaries to ensure that the stock is purchased for "adequate consideration" by conducting an independent investigation to determine the fair market value of the to-be-acquired securities."). She bases this assertion on the belief that CFI's direction to purchase the stock at $76.01 per share on November 21, 2002, was based on an incorrect appraisal that did not take into account $16 million in deferred compensation awarded to Webb, which "reduced the value of the stock." Compl. ¶ 61. It is from this transaction that the Secretary's theories of liability extend to these two Defendants. Both Defendants were "named fiduciaries" under ERISA by virtue of their membership on the Plan Committee.
In the case at bar, the complaint alleges with sufficient specificity why the price paid by the ESOP for EVI stock exceeded fair market value in violation of § 1108(e). The appraisal used to value EVI's stock at $76.01 per share on November 21, 2002, allegedly contained "significant flaws and inaccuracies that would have been uncovered during a thorough and objective review and analysis." Compl. ¶ 40. Among the "flaws and inaccuracies" alleged were the failure to consider either a prior valuation of EVI from 2001 that set its market value at $7,300,000, or Webb's existing $12 million deferred compensation agreement and prior $4 million deferred compensation payment, both of which had the effect of reducing "the value of EVI and hence ... the value of the ESOP's EVI stock." See Id. ¶¶ 39-41, 45-46, 55-56. Thus, when the ESOP acquired 90.03% of EVI's shares on November 21 for a total cost of $28,313,718, it allegedly paid an amount "far higher than actual fair market value," and therefore "paid more than adequate consideration for its EVI stock" in violation of § 1108(e). Id. ¶¶ 36, 42. Taking these allegations as true, which a court must on a motion to dismiss, the Secretary has adequately stated a claim that Fidiam and Gallucci breached their fiduciary duties under ERISA.
Fidiam and Gallucci argue that they cannot be held liable for any breach of fiduciary duties connected with the purchasing of EVI stock for the ESOP because, consistent with the ESOP's Plan Document and ERISA, they had allocated or delegated their fiduciary responsibilities to another party. See Fidiam and Gallucci Motion at 20-21. They assert that, pursuant to § 1103(a) and Section 18 of the 2002 Plan Document, they had appointed an investment manager and/or were subject to the direction of another fiduciary with regard to the stock purchase, and by doing so are shielded from any liability flowing from the acts or omissions of these third party fiduciaries, as provided in § 1105 and Section 18 of the Plan Document. See id. at 20-22. While, as they assert, "the responsibilities of the trustee are correspondingly lessened" with the delegation of fiduciary duties to a third party, they are not extinguished. Indeed, ERISA cases on this subject make clear that delegations of this sort not only preserve certain fiduciary responsibilities with the original party, but they also give rise to a new duty — a duty to monitor the performance of third party delegatees. As developed infra, Defendants' delegation arguments misstate their potential for liability under ERISA.
An ERISA fiduciary is "anyone who exercises discretionary authority or control respecting the management or administration of an employee benefit plan." Arizona State Carpenters Pension Trust Fund v. Citibank (Arizona), 125 F.3d 715, 720 (9th Cir.1997) (quoting Kyle Rys., Inc. v. Pacific Admin. Serv., Inc., 990 F.2d 513, 516 (9th Cir.1993)). The statute "defines `fiduciary' not in terms of formal trusteeship, but in functional terms of control and authority over the plan, see 29 U.S.C. § 1002(21)(A), thus expanding the universe
Generally, ERISA holds fiduciaries to the "prudent man" standard of care. Section 1104(a)(1) defines this standard in relevant part as follows:
In this matter, the Secretary has alleged that Dennis Webb, Matthew Fidiam, and J. Robert Gallucci were all plan fiduciaries by virtue of their service on EVI's Board of Directors because, under the 2002 Plan Document, each of them exercised some modicum of "discretionary authority or discretionary control respecting management of such plan or exercise[d] any authority or control respecting management or disposition of its assets," and had "discretionary authority or discretionary responsibility in the administration of such plan." 29 U.S.C. § 1002(21)(A)(i) and (iii); see Compl. ¶¶ 14-18. Specifically, as members of the Board of Directors, these three Defendants were:
Compl. ¶ 14.
Further, the Secretary alleges that as the sole members of the ESOP's Plan Committee, Fidiam and Gallucci were also "named fiduciaries" under ERISA and the 2002 Plan Document, as well as designated trustees of the ESOP. Compl. ¶ 19. In this capacity, they were responsible for:
Compl. ¶ 15.
Fidiam and Gallucci assert that they cannot be liable for any breach of fiduciary duty connected to the ESOP's purchase of
Section 1103(a)(1) permits an ERISA plan to subject its trustees to the "proper directions" of a named fiduciary so long as those directions "are made in accordance with the terms of the plan" and "are not contrary" to ERISA.
Normally, "ERISA relieves a trustee from fiduciary obligations regarding the management and control of a plan's assets when the trustee is `directed' by the plan's designated fiduciaries." Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1102 (9th Cir.2004). "Directed trustees, as a result, cannot be held liable for following the investment instructions provided by a plan's named fiduciaries." Id. However, where a directed trustee knows that instructions of a named fiduciary are contrary to ERISA and, despite that knowledge follows the instructions nonetheless, he does so at his own peril, and the statute will not absolve him of fiduciary liability.
ERISA's co-fiduciary liability section makes clear that, although trustees may be subject to the direction of a named fiduciary pursuant to § 1103(a)(1), they are nonetheless liable for their directed acts when such acts are not in accordance with a plan's governing documents or are contrary to the terms of ERISA. Section 1105(a) and (a)(1) provide that:
29 U.S.C. § 1105(a).
Accordingly, in Koch v. Dwyer, 1999 WL 528181 (S.D.N.Y. July 22, 1999) (cited with approval in Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1102 (9th Cir. 2004)), a district court in the Southern District of New York denied a directed trustee's motion to dismiss a fiduciary breach claim where plaintiffs alleged that the directed trustee followed the instructions of a named fiduciary despite knowledge that doing so would violate the terms
The Secretary has clearly alleged that Fidiam and Gallucci followed the direction of CFI to purchase EVI's stock even though the "appraisal of the stock was flawed and inaccurate," and the direction would cause "the ESOP to pay more that fair market value for the stock," in violation of the Plan Document and § 1108(e) of the statute. Compl. ¶ 43. She alleges that these two Defendants "knew about the $12 million agreement with Defendant Webb that reduced the value of EVI's stock," "knew ... of the problems with the November 21, 2002 appraisal," and yet "they allowed the stock purchase to occur." Id. ¶ 44. The Secretary's complaint, therefore, presents a valid cause of action against Plan Trustees Fidiam and Gallucci even though they followed CFI's direction to purchase EVI's stock on November 21, 2002, because they knew that carrying out the direction would cause the ESOP to pay more than "adequate consideration" for the stock in violation of ERISA and the 2002 Plan Document.
Fidiam and Gallucci also argue that their appointment of CFI as an investment manager for the Plan also absolves them of fiduciary liability connected to the funding of the ESOP. They contend that § 1102(c)(3)
29 U.S.C. § 1105(d)(1).
While the appointment of an investment manager under § 1102(c)(3) does shield plan trustees from fiduciary liability for certain acts, it does not totally extinguish their fiduciary duties. As noted above, § 1105(a)(1) imposes co-fiduciary liability for breaches committed by other plan fiduciaries when one "participates knowingly in, or knowingly undertakes to conceal, an
29 U.S.C. § 1105(a)(2) and (a)(3).
By its terms, § 1105(d)(1) excludes trustee liability "for the acts and omissions" of an investment manager for conduct covered by "subsections (a)(2) and (3) and subsection (b) of this section." However, Congress omitted subsection (a)(1) from § 1105(d)(1)'s exclusion. "[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir.1972)); see also Silvers v. Sony Pictures Entm't, 402 F.3d 881, 885 (9th Cir.2005) (en banc) ("The doctrine of expressio unius est exclusio alterius as applied to statutory interpretation creates a presumption that when a statute designates certain persons, things, or manners of operation, all omissions should be understood as exclusions." (internal quotation marks and citations omitted)).
Thus, under § 1105(d)(1), even though a trustee appoints an investment manager, that trustee may still be liable for the liability of another plan fiduciary "if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach," 29 U.S.C. § 1105(a)(1), "[i]n addition to any liability which he may have under any other provisions of this part [§§ 1101-1114]," 29 U.S.C. § 1105(a).
The Secretary's complaint alleges that Fidiam and Gallucci followed the direction of CFI to purchase EVI's stock even though they knew that to do so would violate the 2002 Plan Document and § 1108(e) of the statute. See Compl. ¶ 43-44. As such, they participated knowingly in an act that breached the fiduciary duty to acquire company stock for "adequate consideration." The complaint thus presents a valid cause of action against Plan Trustees Fidiam and Gallucci insofar as she alleges that they knowingly allowed the ESOP to pay more than fair market value for EVI's stock on November 21, 2002.
Finally, Fidiam and Gallucci, joined on this argument by Webb, assert that having appointed CFI as an investment manager under § 1102(c)(3), and having appointed Fidiam and Gallucci as the sole trustees of the Plan Committee, are all three relieved of any duty to monitor CFI's performance as members of EVI's Board of Directors, and, for Webb, of any duty to monitor the Plan Committee's performance. However, as with appointing an investment manager or serving as a directed trustee, the appointment of third party fiduciaries tasked with carrying out elements of an ERISA plan does not wholly extinguish a fiduciary's duty to the plan or its beneficiaries.
The Ninth Circuit has "recognized that where members of an employer's board of directors have responsibility for the appointment and removal of ERISA trustees, those directors are themselves subject to
Implicit within the duty to select and retain fiduciaries is a duty to monitor their performance. See In re Calpine Corp., No. 03-1685, 2005 WL 1431506, at *3 (N.D.Cal. Mar. 31, 2005) (noting that the "power of appointment gives rise to a limited duty to monitor"). Thus, the U.S. Department of Labor's implementing regulations for ERISA acknowledge that a fiduciary may be held liable for breach flowing from their decision to select and retain ERISA plan fiduciaries. See 29 C.F.R. § 2509.75-8 Questions and answers relating to fiduciary responsibility under the Employee Retirement Income Security Act of 1974.
Defendants, in their motions, try to escape potential liability for failing to monitor CFI's performance by arguing that Department of Labor Field Assistance Bulletin 2004-03 absolves them of the responsibility to independently evaluate the findings of other plan fiduciaries. See e.g. Fidiam and Gallucci's Reply at 12 ("The directed trustee does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets ...") (quoting Field Assistance Bulletin 2004-03). In doing so, they overlook the fact that the Field Assistance Bulletin at issue addresses transactions involving publically traded stock that is valued on the open market, not stock of a closely held private corporation. See Fidiam and Gallucci's Motion at 24; Pl.'s Opp. at 13. The price of a publically traded stock is assumed to be fair and accurate because it is vetted in the open market and not subject to over-valuation by an appraiser. Thus, this particular Field Assistance Bulletin is inapplicable to the case at bar.
Defendants also misconstrue the Ninth Circuit's holding in Arizona State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 722 (9th Cir.1997), and attempt to transform its limited holding into a more broad pronouncement that "a directed trustee only has ministerial responsibilities." See e.g. Fidiam and Gallucci's Reply at 14. In Arizona State Carpenters, the Ninth Circuit ruled that Citibank was not an ERISA fiduciary with respect to the plan at issue because it lacked "independent authority or managerial responsibility over the operation or administration" of certain ERISA controlled funds. Id., 125 F.3d at 721. In that case, the documents governing that ERISA plan "expressly limit[ed] Citibank's responsibilities and authority, such that Citibank had no duty to furnish advice with respect to investments, no responsibility for monies or property paid upon written authorization of the Trustees, and no power or duty to determine the rights or benefits of anyone claiming an interest in the Trust Fund." Id. at 721. The court observed how "[t]he Agreements [did] not purport to delegate any fiduciary duty to Citibank, nor [did] they provide Citibank with independent authority or managerial responsibility over the operation or administration of the Trust Funds." Id.
The arrangement in Arizona State Carpenters is readily distinguishable from the
The Court rejects Defendants' argument that appointment of CFI wholly insulates them from fiduciary liability under ERISA. Having appointed CFI as a fiduciary, EVI's Board of Directors and the ESOP's Trustees undertook a duty to review the performance of their appointed fiduciary. See Gallucci Decl. Ex. A at 55. Thus, the Secretary's complaint presents a valid cause of action against Webb, Fidiam, and Gallucci for their alleged failure to prudently monitor CFI's performance insofar as they knowingly permitted CFI to overstate the value of EVI's stock and improperly directed the ESOP to purchase EVI shares at more than fair market value.
During oral argument, the parties had difficulty articulating the appropriate standard of knowledge required to establish a breach of fiduciary duty under these three avenues of ERISA liability. The Court finds that the "knowing" standard discussed herein is the appropriate standard. As discussed in detail above, employing a "knowing" standard for all three theories of liability examined here is both consistent with the relevant case law, and also follows the standard imposed under ERISA for co-fiduciary liability. See § 1105(a)(1) (liability for fiduciary who "participates knowingly in, or knowingly undertakes to conceal ... knowing such act or omission is a breach."). Indeed, counsel for the Defendants acknowledged as much in argument when he stated that a fiduciary who followed an improper direction from another fiduciary with knowledge that it violated ERISA or the Plan would raise a "Red Flag." The Court rejects the Secretary's argument that a "known or should have known" standard ought to be adopted. See, e.g. Compl. ¶ 44. Such a standard is largely duplicative of ERISA's "prudent man" standard for fiduciary conduct. Its adoption here, where fiduciaries have delegated some of their fiduciary duties to others, would render both that delegation and ERISA's liability limiting provisions ineffective.
The Secretary's complaint clearly satisfies this knowledge standard by alleging, among other things, that "Defendants Webb, Fidiam and Gallucci knew about the $12 million agreement with Defendant Webb that reduced the value of EVI's stock ... knew ... of the problems with the November 21, 2002 appraisal ... [and][y]et they allowed the stock purchase to occur ..." Compl. ¶ 44; see also Compl. ¶¶ 40-43, 60-61, 63. Therefore, Defendants' motions to dismiss based on their
The ESOP's motion to dismiss argues that the Secretary's suit cannot properly name the ESOP as defendants. In her Complaint, the Secretary added the ESOP as a "party Defendant pursuant to Rule 19(a), Fed.R.Civ.P., solely to assure that complete relief can be granted." Compl. ¶ 10. The ESOP moved to dismiss itself from this action on two grounds: (1) that as a non-fiduciary party this Court lacks subject matter jurisdiction under ERISA to hear a suit against it, and therefore it should be dismissed pursuant to Rule 12(b)(1), and (2) that it need not be joined under Rule 19(a)(1) in order for the parties to be accorded complete relief. See ESOP Motion (Docket No. 32). The Court finds that both arguments are without merit.
Rule 12(b)(1) permits a party to assert by motion the defense that a court lacks subject matter jurisdiction over a claim for relief. "Rule 12(b)(1) jurisdictional attacks can be either facial or factual." White v. Lee, 227 F.3d 1214, 1242 (9th Cir.2000). "In a facial attack, the challenger asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction. By contrast, in a factual attack, the challenger disputes the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction." Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir.2004). The jurisdictional attack here is facial; thus the task for the Court is to is to assess whether a lack of federal jurisdiction appears from the face of the pleading itself. Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir.2004).
The ESOP Defendant argues that the Secretary's complaint advances a breach of fiduciary duty action against the ESOP itself, which, under 29 U.S.C. § 1002(9), is not a "person" subject to personal liability for such an action, and is "therefore[] not a proper defendant in an ERISA fiduciary breach claim." ESOP Motion at 4. This argument overlooks both the fact that the Secretary did not assert "that the ESOP is a fiduciary or that the ESOP committed any fiduciary breaches." Pl.'s Opp. (Docket No. 45) at 3. See Compl. ¶¶ 58-67 (complaint does not allege the ESOP breached a duty). Although an ESOP is not itself a fiduciary, "[a]n employee benefit plan may sue or be sued under [ERISA] as an entity" under the statute, 29 U.S.C. § 1132(d)(1).
The Secretary has named the ESOP because she claims it is necessary to obtain complete relief. Paragraph 10 of the Complaint explicitly states that the ESOP was joined as a Defendant "solely to assure that complete relief can be granted." Her Prayers for Relief are likely to impact administration of the ESOP, particularly paragraph 3 which asks this Court to enjoin "Defendants and all related parties from benefitting from any agreement that grants or purports to grant them indemnification from EVI or the Plan or to absolve them of liability for their fiduciary breaches." Compl. at 21. Fed.R.Civ.P. 19(a)(1) provides:
A party "can be joined under Rule 19 in order to subject it, under principles of res judicata, to the `minor and ancillary' effects
In approving joinder, the Second Circuit in Marshall v. Snyder, 572 F.2d 894, 897 (2nd Cir.1978), reasoned,
Marshall v. Snyder, 572 F.2d 894, 897 (2nd Cir.1978). Ninth Circuit precedent is not to the contrary. In Acosta v. Pac. Enterprises, 950 F.2d 611, 618 (9th Cir.1991), the Ninth Circuit stated that while an ERISA "plan itself cannot be sued for breach of fiduciary duty", this "does not inexorably lead to the conclusion that a plan cannot be properly named in a suit alleging breach of fiduciary duty." Indeed, the court concluded "even though Acosta cannot sue the SoCal Gas Plan for breach of fiduciary duty per se, he may, as he has done here, join the Plan in his action for breach of fiduciary duty in order that he may obtain the relief sought." Id. at 618.
Therefore, the Court rejects Defendant's argument that the Parrot Cellular ESOP cannot be joined to this action under Rule 19.
Defendant Dennis Webb's motion to dismiss asks this Court to dismiss the Secretary's complaint in its entirety as it relates to him for failure to state a claim under Rule 12(b)(6). Webb's Motion at 25. Webb served as an "officer and director" of EVI, and was "Chairman of the EVI Board of Directors" during the time period relevant to this action. Compl. ¶ 7. As discussed above, given his position and the terms of the Plan, Webb is charged with violating certain fiduciary duties with respect to the ESOP. His motion repeats many of the prior arguments presented by Fidiam and Gallucci in Fidiam & Gallucci's Motion to Dismiss. Thus, the Court need not re-examine whether Webb's fiduciary obligations attach to the purchase of EVI stock on November 21, 2002, nor whether, as a member of the Board of Directors, Webb had a duty to monitor the Plan Trustees and CFI's performance during the acquisition of EVI stock for the ESOP. The complaint also contains sufficient allegations to state a breach by Webb of § 1105(a)(1) for participating knowingly in the act or omission of another fiduciary with the knowledge that such an act violates ERISA. See e.g. Compl. ¶ 44 (alleging that Webb "knew about the $12 million agreement with Defendant Webb that reduced the value of EVI's stock ... knew... of the problems with the November 21, 2002 appraisal ... [and][y]et they allowed the stock purchase to occur..."). As discussed above, the appointment of CFI as an investment manager by the EVI Board does not preclude liability under § 1105(a)(1) since § 1105(d)(1) which limits liability of a fiduciary upon appointment of an investment manager affords immunity
Webb advances two arguments in support of his contention that the Secretary's complaint is deficient under Rule 12(b)(6). First, he argues that he "was not a fiduciary with respect to the challenged conduct because [he] lacked any discretion or control over the valuation and purchase of EVI stock by the ESOP." Webb's Motion at 24. As discussed supra, by virtue of his position on the Board of Directors and pursuant to the 2002 Plan Document, Webb had a degree of authority, control and hence responsibility over the decisions at issue here.
Further, the Secretary alleges that Webb had an additional duty to take steps to counteract any breach CFI and his co-fiduciaries may have committed after the conclusion of the stock purchase, including potential shareholder actions to recover all or a portion of the $16 million in deferred compensation EVI agreed to pay to him. See Compl. ¶ 58. Although § 1109(b) limits fiduciary duties as to breach committed before the fiduciary is appointed, once an individual becomes a fiduciary, he or she has an affirmative duty to investigate risks to ERISA plan assets that may have occurred prior to their becoming a fiduciary, even if they resulted from another party's fiduciary breach. See Chao v. Merino, 452 F.3d 174, 182 (2nd Cir.2006) ("If a fiduciary was aware of a risk to [an ERISA] fund, he may be held liable for failing to investigate fully the means of protecting the fund from that risk."). In any event, the complaint alleges that the ESOP transaction occurred while (not before) Webb was a fiduciary.
Webb's second argument charges the Secretary with failing to make an "allegation that Webb had knowledge of any fiduciary breach by any other party, as is required for co-fiduciary liability under ERISA." Webb's Motion at 24. The text of the Secretary's complaint flatly contradicts Webb's position. See e.g. Compl. ¶ 44.
Finally, at oral argument, counsel for the Secretary advanced for the first time a new theory of fiduciary liability for Defendant Webb based on ERISA's § 1106. Counsel argued that § 1106(b)(3)
For the foregoing reasons, the Court
This order disposes of Docket Nos. 18, 32, and 35.
IT IS SO ORDERED.
29 U.S.C. § 1103(a)(1).
(Emphasis added.)
Compl. ¶ 44.
