MICHAEL A. SHIPP, District Judge.
This matter comes before the Court on: (1) Defendant SJP Group, Inc. Employee Stock Ownership Trust's ("Defendant" or "the Plan")
Plaintiff initiated the instant lawsuit against Defendant on May 26, 2017. (Compl., ECF. No. 1.) The Complaint is factually related to a case filed by the Department of Labor on July 7, 2012, captioned Solis v. First Bankers Trust Services, Inc., et al., No. 3:12-cv-4450 ("The DOL Case").
The relevant facts are almost entirely undisputed. By way of background, SJP Group, Inc. ("SJP") sponsored an employee stock ownership plan ("ESOP") and an affiliated trust ("ESOT") (collectively, the "Plan").
The Plan used the $16,000,000 to purchase 380,000 shares of Series B Convertible Common Stock in SJP from Vincent DiPano, the majority shareholder of the company. (Pl.'s CSMF ¶ 29; Pl.'s Resp. to DOL's SUMF ¶ 11, ECF No. 32-2)
On July 17, 2012, the DOL filed a claim against First Bankers and Vincent DiPano for violating provisions of the Employee Retirement Security Act of 1974 ("ERISA"). (DOL's SUMF ¶ 12; Pl.'s Resp. to DOL's SUMF ¶ 18; see also DOL Case, No. 12-4450, Compl., ECF No. 1.) The DOL alleged that FBT and DiPano breached their fiduciary duties with respect to the Plan by causing it to enter into a prohibited transaction by purchasing the shares of SJP at a price that exceeded its fair market value after an investigation that it determined was not prudent or in good faith. (DOL's SUMF ¶ 13; DOL Case Compl., No. 12-4450, ¶ 32.)
On April 20, 2016, the DOL settled with DiPano, whereby DiPano agreed to pay $2,045,454.54 to the ESOP. (DOL's SUMF ¶ 15.) On March 31, 2017, following a seventeen-day bench trial, the Undersigned issued a judgment against First Bankers in the amount of $9,485,000, plus interest, and subject to a reduction in the amount of Mr. DiPano's settlement. (DOL's SUMF ¶ 16; DOL Case Order, ECF No. 231.) First Bankers appealed and, while the appeal was pending, on September 21, 2017, First Bankers settled with the DOL for $8,000,000 (together with the DiPano Settlement, the "Recovery"). (DOL's SUMF ¶ 17.)
Prior to the settlements, but after the DOL case was underway, SJP defaulted on the loan. On April 28, 2015, First American Bank and SJP entered into a "Voluntary Collateral Surrender and Foreclosure Agreement." (Def.'s SUMF ¶ 6.) Pursuant to the terms of the Foreclosure Agreement, in exchange for SJP's assistance in connection with foreclosing on certain SJP equipment, First American Bank released its interest in SJP's contract rights, discharged any cause of action against SJP and its agents, officers, directors, and shareholders, and accepted certain collateral in full satisfaction of SJP's obligations. (LeVan Decl. Ex. F ("Voluntary Collateral Surrender and Foreclosure Agreement") ¶¶ 1(b), 1(g), 2(a), ECF No. 28-3.)
In this lawsuit, First American Bank contends that it is legally entitled to all or part of the DOL Recovery pursuant to the Collateral Assignment. Plaintiff alleges three counts against the Plan: (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; and (3) unjust enrichment. (Compl.) On February 9, 2018, the Court granted DOL's Motion to Intervene in the instant case. (Mot. to Intervene, ECF No. 23.) The DOL filed counterclaims seeking to dismiss the action and to enjoin First American Bank from violating ERISA by attempting to collect from the DOL Recovery. (ECF No. 24.) The DOL and the Plan each now move to dismiss or for summary judgment. (ECF Nos. 28, 29.) Plaintiff opposed and cross-moved to dismiss the DOL's counterclaim. (ECF No. 32.)
Summary judgment
To determine whether a genuine dispute of material fact exists, the Court must consider all facts and reasonable inferences in the light most favorable to the non-movant. Curley v. Klem, 298 F.3d 271, 276-77 (3d Cir. 2002). The Court will not "weigh the evidence and determine the truth of the matter" but will determine whether a genuine dispute necessitates a trial. Anderson, 477 U.S. at 249. The party moving for summary judgment has the initial burden of proving an absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 330 (1986). Thereafter, the nonmoving party creates a "genuine [dispute] of material fact if . . . sufficient evidence [is provided] to allow a jury to find [for him] at trial." Gleason v. Norwest Mortg., Inc., 243 F.3d 130, 138 (3d Cir. 2001).
"[T]he nonmoving party `may not rest upon mere allegation or denials of his pleading.'" Ciafrei v. Bentsen, 877 F.Supp. 788, 792 (D.R.I. 1995) (citing Anderson, 477 U.S. at 256); see also Olympic Junior, Inc. v. David Crystal, Inc., 463 F.2d 1141, 1146 (3d Cir. 1972). "Indeed, `[e]ven in cases where elusive concepts such as motive or intent are at issue, summary judgment may be appropriate if the nonmoving party rests merely upon conclusory allegations, improbable inferences, and unsupported speculation.'" Ciafrei, 877 F. Supp. at 792 (citing Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)). To defeat summary judgment, therefore, "the nonmoving party must establish a trial-worthy issue by presenting `enough competent evidence to enable a finding favorable to the nonmoving party.'" Id. (citing Goldman v. First Nat'l Bank of Bos., 985 F.2d 1113, 1116 (1st Cir. 1993)).
The Plan argues that Count One of the Complaint fails as a matter of law because Plaintiff can only recover against the "proceeds" of its secured collateral and the DOL Recovery is not "proceeds." (Def.'s Moving Br. 11-22, ECF No. 28-1.) Specifically, the Plan argues that because the Recovery was for an overpayment, not for a diminution in value of the collateral, the litigation proceeds are beyond the scope of FAB's reach. (Id. (emphasis added).) Further, the Plan argues that the Collateral Assignment, under which FAB asserts its rights here, is actually an unenforceable prohibited transaction under ERISA because the parties used the Plan assets to secure the full $22,500,000 loan, which improperly included general employer business expenses instead of strictly the loan to purchase the employer securities. (Id. at 22.) The Plan argues, therefore, that "the Collateral Assignment—which is the only document that purports to give FAB standing to seek the relief it demands in the Complaint—is an unlawful and unenforceable agreement." (Id. at 24.)
In addition, the Plan argues that all claims arising from the loan, including the claims asserted against the Plan in this action, were released through the Voluntary Surrender and Foreclosure Agreement on April 28, 2015. (Id. at 24-27.) Finally, the Plan argues that the good faith and fair dealing claim fails because it is based on the same failure to pay as the breach of contract claim. (Id. at 27-29.) As to the unjust enrichment claim, the Plan argues that unjust enrichment is not available when a valid, un-rescinded contract governs the rights of the parties. (Id. at 29.) According to the Plan, unjust enrichment, like the implied covenant of good faith and fair dealing, is unavailable as a remedy because an express contract exists that defines the parties' respective rights. (Id.) Despite the Plan's claim that the Collateral Assignment is an unenforceable transaction, the Plan argues that it does not change the fact that Plaintiffs legal claims arise from express contracts that establish rights and obligations between the parties. (Id. at 27-31.)
The DOL argues that "[t]he ESOP Loan—made to the ESOP by SJP (a party in interest)— constitutes a prohibited transaction pursuant to ERISA" because ERISA prohibits lending money between a plan and a party in interest. (DOL's Moving Br. 10, ECF No. 29-1.) The DOL also makes the same arguments about the definition of "proceeds" and its application to the Recovery. Specifically, the DOL asserts that Plaintiff is barred from touching the Recovery in the DOL Case, as the settlements do not fall under one of the three enumerated categories of permissible collateral nor does the Recovery constitute "proceeds" of the collateral, because it was a recovery for overpayment, not for a diminution in the value of the collateral. (Id. at 11 (citing McDannold v. Star Bank, NA., 261 F.3d 478 (6th Cir. 2001).) Further, Intervenor argues that, to the extent that state law would permit the security interest to attach to the Recovery, it is preempted by ERISA. (Id. at 12 n.7.)
On reply, Intervenor focuses heavily on the Voluntary Surrender and Foreclosure Agreement with SJP originally raised by the Plan in its moving papers. (DOL's Reply Br. 1, 4-5, ECF No. 34.) Intervenor argues that regardless of the definition of "proceeds," FAB's complaint fails in its entirety. (Id. at 4-5.) Intervenor also argues that the Complaint fails to plead that its assignor satisfied the condition precedent for the Plan's repayment obligations. (Id. at 8.) Specifically, Intervenor argues that "as a condition precedent for the Plan's ESOP Loan repayment obligations, SJP was first required to make a contribution in an amount that was at a minimum sufficient to allow the Plan to make the scheduled repayment on the Plan Loan." (Id.) As the pleadings do not indicate that this occurred, Intervenor asserts that FAB fails to plead that the Plan was under an obligation to repay.
In opposition, Plaintiff argues that the Uniform Commercial Code ("UCC") defines the word "proceeds" broadly to protect secured creditors and that First American Bank's interest, as a result, extends to the Recovery. (Pl.'s Opp'n Br. 15-17, ECF No. 32-1.) FAB argues that because the Recovery amount was grounded in the stock price of SJP, it should be considered "proceeds" as defined by Delaware's applicable UCC statute. (Id. at 17-20.) Plaintiff disputes that ERISA preempts its claims, arguing that ERISA does not preempt the Delaware UCC, a statute of general applicability. (Id.) FAB also disputes that the Collateral Assignment was a prohibited transaction or that the release extends to the claims against the Plan in this action because the Plan was not a party to the release. (Id. at 28-41.) Finally, First American Bank asserts that it has sufficiently pled its implied covenant claim and that its unjust enrichment claim, pled alternatively to the contract claim, is viable. (Id. at 41-47.)
The disputed issues before the Court require purely legal determinations. For the reasons set forth below, the DOL's and SJP's motions for summary judgment are granted.
The Court first considers the implications of the Voluntary Surrender and Foreclosure Agreement. Both the Plan and DOL argue that the Release resolves all issues in this action. (Def.'s Moving Br. 24-27; DOL's Reply Br. 1-5.) First American Bank responds that: (i) the Plan is not a party to the release and, therefore, does not benefit from the Release; and (ii) in any event, discovery is needed to determine the parties' intent on the scope of the release. (Pl.'s Opp'n Br. 39-41.) Intervenor, however, argues that because the contract is clear and unambiguous, there is no need—and in fact, no ability—to look to extrinsic evidence of the parties' intent. (DOL's Reply Br. 5.) The Court agrees with Intervenor. Here, the scope of the release is clear and, therefore, extrinsic evidence of the parties' intent is inadmissible—rendering discovery on this issue futile. In re Diet Drugs Prod. Liab. Litig., 706 F.3d 217, 223 (3d Cir. 2013). Even if a party intended something contrary to the plain meaning of the agreement's terms, the use of clear and unambiguous terms renders the party's intent inapplicable. Schor v. FMS Fin. Corp., 357 N.J.Super. 185, 191-92 (N.J. Super. Ct. App. Div. 2002). Further, as Intervenor points out, the unambiguous contract terms were drafted by the party now claiming the ambiguity. (DOL's Moving Br. 6.) The Court finds the language of the release clear. FAB explicitly agreed:
(LeVan Decl. Ex. F In 1(b), 1(g), 2(a), ECF No. 28-3 (emphasis added).)
Each one of these paragraphs undermines the Bank's position that it has viable claims against the Plan. First, the Bank released its interest in any of SJP's contract rights. The only manner in which the Bank can proceed against the Plan is through the contracts between SJP and the Plan that SJP assigned to the Bank. Because the Bank, however, released its interest in all of SJP's contract rights, without limitation, the Bank cannot now bring this action.
Second, the collateral obtained pursuant to the Agreement constituted "satisfaction in full of Borrower's obligations under the Loan Documents," which specifically included the original $22,500,000 loan. The collateral was simply incidental to the loan that was satisfied. As the DOL argued, "FAB cannot credibly argue that it could simultaneously terminate a security interest in collateral as to certain persons, but not others. Rather, the creation and termination of a security interest is attendant to the property itself, and thus operates as to the entire world." (DOL's Reply Br. 7 n.2.) The Court agrees. Once FAB released the underlying debt, the security interest in the collateral—which was incidental to the debt—was extinguished. See Nordeen v. Taylor, Bean & Whitaker Mortg. Co. (In re Nordeen), 489 B.R. 203, 206 (D. Nev. 2013) ("[Lender] forgave the remaining principal balance . . . before the loan was purportedly transferred . . . which if true would have extinguished both the note and the security interest such that no party could ever again attempt to collect on the note."); see also Island Pond Nat'l Bank v. Lacroix, 158 A. 684 (Vt. 1932) (explaining that the security interest is incident to the principal debt); Interbusiness Bank, N.A. v. First Nat'l Bank, 318 F.Supp.2d 230, 245 (3d Cir. 2004) ("Assignment or satisfaction of the underlying debt obligation extinguishes the party's security interest"); Md. Nat'l Bank v. Porter-Way Harvester Mfg. Co., 300 A.2d 8, 11 (Del. 1972) ("We find unpersuasive the contention that an execution sale does not extinguish a previous security interest in collateral."). The issue, therefore, is not a question of whether the release extends to Plan as an entity, as Plaintiff attempts to argue (Pl.'s Opp'n Br. 37-38), but whether First American Bank can collect against the collateral securing a debt after the Bank entered into an agreement specifically agreeing that the debt was satisfied.
Finally, the Bank specifically released all claims against SJP's
Summary judgment is also appropriate on Count I for a second reason. Giving every possible inference to First American Bank—even if Plaintiff had not released its claims against the Plan, and assuming the Collateral Assignment is valid,
It is undisputed that ERISA, the IRC, and the loan documents at issue limit First American Bank's recovery on the loans to: (1) unallocated SJP shares still held in the Plan's suspense account; (2) earnings, including dividends on and
The parties agree the contract is governed by Delaware law. Under Delaware law, the term "proceeds" is defined as:
6 Del. C. § 9-102. Plaintiff argues that the Recovery falls within subsections (A), (C), and (D) and therefore, its security interest in the shares attaches to the Recovery. The Plan and DOL point the Court to the Sixth Circuit's decision in McDannold v. Star Bank, N.A., 261 F.3d 478 (6th Cir. 2001). In McDannold, the Sixth Circuit considered a similar fact pattern and, in distinguishing litigation proceeds that compensate a debtor for damage to collateral from litigation proceeds that compensate a debtor for professional malpractice associated with overvaluing the collateral, found that only the first category is considered "proceeds." Id. at 483 ("Even if the settling defendants negligently inflated the price of the stock, as plaintiffs allege, they did not diminish its worth, which was already imperiled due to business setbacks. Accordingly, the settlement fund compensates plaintiffs for unsound legal and financial advice, not for loss of collateral. . . . The bank does not address the essential distinction between an improper valuation of a stock price, as here, and the impairment of its actual market value.") (emphasis added).
Plaintiff argues that this case is inapposite because it was decided on a version of the UCC that did not include subsections (C) and (D) above. Id. at 482 n.2. Plaintiff also argues that, in addition, the McDannold court noted that "the revised Article 9 expands the concept of disposition to include property that originates from, but need not replace, the underlying collateral." Id. Plaintiff argues that the more applicable authority is the Ninth Circuit's decision in McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992).
The Sixth Circuit noted that a different analysis would be required under an expanded definition. McDannold, 261 F.3d at 482. After careful review of the McDannold and McGoniglel
The DOL Recovery does not fall into any of the applicable categories of "proceeds." As to subsection (A), the Recovery was not "acquired upon the sale, lease, license, exchange, or other disposition of collateral." The parties have not cited, and the Court is not aware of, any case where obtaining money back from an overpayment on collateral was found to be a "disposition" of the collateral. Even under the expanded concept of "disposition," therefore, the DOL's Recovery does not constitute "proceeds" under subsection (A).
Similarly, as to subsection (C), the Recovery does not constitute "proceeds" because the Recovery is not "rights that arise out of the collateral." As the Plan argued,
(Def.'s Moving Br. 16.) The Court agrees. The breach of fiduciary duty owed to the Plan participants is separate and apart from the Bank's rights with respect to the collateral. The Recovery, therefore, cannot be legitimately characterized as "rights arising out of the collateral" so that FAB's security interest would attach.
Finally, as to subsection (D), the Recovery did not involve claims arising out of the "loss, nonconformity, or interference with the use of, defects, infringement of rights in, or damage to, the collateral." Although Plaintiff argues that the difference is a "distinction without a difference" (Pl.'s Opp'n Br. 19), the Court disagrees. Overpaying for the collateral did not change in any way the actual value of the collateral. In other words, if someone acts in a way that diminishes or interferes with the value of secured collateral, the lender's security interest automatically attaches to amounts meant to compensate for that interference. On the other hand, however, where a lender enters into a transaction secured by collateral that it believes is worth more than it is worth, the lender is not entitled to security in the amount of its belief—it is only secured in the amount that the collateral is worth. The overpayment, therefore, did not affect the actual value of the collateral.
The Court, therefore, finds that the Recovery does not constitute "proceeds" and First American Bank's security interest does not attach to the Recovery. As such, summary judgment in favor of the Plan and the DOL on this issue is appropriate.
The DOL also filed counterclaims against First American Bank seeking the following relief: (1) dismissing FAB's Complaint, which "knowingly seeks to divert plan assets to pay a debt that has been discharged or is otherwise unenforceable pursuant to the plain language of the Loan Documents"; (2) enjoining FAB from asserting any claim against the DiPano proceeds or the FBT recovery; (3) enjoining FAB from requesting the fiduciary to tender the proceeds to FAB; and (4) an injunction requiring FAB to restore Plan Assets expended in responding to FAB's claims. (DOL's Countercl. 9-11.)
Plaintiff moves to dismiss the counterclaims, arguing that neither "dismissal" nor "injunctive relief' are causes of action. (Pl.'s Opp'n Br. 47-50.) Plaintiff also argues that ERISA provides limited causes of action against non-fiduciaries and allowing FAB to foreclose on its collateral would not violate ERISA. (Id. at 50-54.) In opposition, the DOL argues that the issue of whether "dismissal" is a cause of action is mooted by the DOL's motion to dismiss. (DOL's Opp'n Br. 3, ECF No. 35.) As to the claims for injunctive relief, ERISA expressly authorizes the causes of action and the Secretary can enjoin non-fiduciaries such as FAB. (Id.)
When analyzing a Rule 12(b)(6) motion, district courts conduct a three-part analysis. First, the court must "k[e] note of the elements a plaintiff must plead to state a claim." Ashcroft v. Iqbal, 556 U.S. 662, 675 (2009). Second, the court must accept as true all well-pleaded factual allegations and construe the complaint in the light most favorable to the plaintiff. Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). A court, however, must disregard any conclusory allegations proffered in the complaint. Id. at 210-11. Finally, a court must determine whether the "facts alleged in the complaint are sufficient to show that the plaintiff has a `plausible claim for relief" Id. at 211 (quoting Iqbal, 556 U.S. at 679).
Here, it appears that Counts I, II, and III are mooted by the Court's grant of summary judgment.
For the reasons set forth above, Defendant's motion for summary judgment is granted; the DOL's motion for summary judgment is granted; and First American Bank's cross-motion to dismiss is granted. An order consistent with this Memorandum Opinion will be entered.
