RICHARD A. LLORET, Magistrate Judge.
The parties seek summary judgment on a number of grounds. This memorandum rules on them all. Part I of this Memorandum is a statement of facts that provides overall context. Because of the number of issues and transactions, I have reserved more detailed discussions of the facts for those portions of the Memorandum that require them. In part II of this Memorandum, I will discuss the claims the Alliance Parties have asserted against the Fenkell Parties, and those asserted by the Fenkell Parties against the Alliance Parties. In part III, I will discuss the claims asserted by both Alliance and the Stonehenge Parties against each other. In part IV, I will discuss the claims between Alliance and the Sefcovic Parties.
In their primary roles the parties in this case are:
These parties appear in various capacities throughout the many intertwined pleadings: cross-claimants, cross-defendants, counter-claimants, counter-defendants, and third-party plaintiffs and defendants. For convenience I sometimes will refer to the plaintiffs and third-party defendants, above, all of whom are associated in one way or another with Alliance Holdings, Inc., as the "Alliance Parties," or simply "Alliance." On occasion I will refer to the Fenkells and DBF together as the "Fenkell Parties." Stonehenge, Witten, Gowdy, and Brooks are often referred to as the "Stonehenge Parties," or "Stonehenge." Sometimes I will refer to the Sefcovics, SLMRS, and SLAMS as the "Sefcovic Parties."
Alliance's claims against Fenkell and Stonehenge arise out of a complex set of transactions that the parties have referred to as the "Spread Transactions." See Stonehenge Mem. at 15. It is useful to recount some of the history of these transactions in order to put the current disputes in context.
The Spread Transactions were designed to take advantage of a now-repealed section of the Internal Revenue Code ("IRC"). Section 133 of the IRC permitted a lender to exclude from taxable income 50% of the interest paid on a loan to an employee stock ownership plan (ESOP)
Until 2012, Fenkell was the CEO of Alliance. During all periods relevant to this suit, Alliance was the fiduciary for the ESOP. See Fenkell Dep. at 110:23-111:8. As the door was closing on favorable tax treatment under IRC § 133, Alliance executed two loan deals. On July 16, 1996, Bank One Capital Markets ("BOCM") facilitated a $100 million non-recourse loan from Bank One Capital Funding Corporation ("BOCFC") to the Alliance ESOP. See July 16, 1996 Loan Agreement at SP0001311-12. BOCFC served as a qualified ESOP lender pursuant to Section 133 of the IRC, which made the interest on that loan eligible for the 50% interest exclusion. See Grien Report, Appendix C, at 1. On July 29, 1996, BOCM facilitated another non-recourse loan from Bank One Capital Holdings Corporation ("BOCHC") to the Alliance ESOP of approximately $450 million. See Grien Report, Appendix C, at 1. These two amounts, $100 million and the $450 million, make up the 1996 Section 133 Loan. Id.
The tax benefits of these loans were substantial. Bank One was permitted under the law to deduct half of the interest income it received from the ESOP borrower, while AH III and Alliance Holdings could deduct from their income qualified plan contributions that they made to the ESOP itself. See Stonehenge Mem. at 15-16. Bank One acted as a critical party on two sides of this Transaction: first, by serving as a "qualified lender" pursuant to Section 133 and second, through various affiliates, as the seller of Participation Interests
The income from the proportional interest in the auto loan pools was more than the sum required to make payments on the ESOP/Bank One loan. Id. The "Spread" represented the difference between income from the receivable pools less the loan payments. See id. (citations omitted). The loan remained outstanding until July of 2011, which was the end of the maximum period allowed under Section 133. See id. at 17 (citing 26 U.S.C. § 133(b)(1)(B)).
With the $550 million in loan proceeds, the ESOP purchased stock
In November of 1998, Bank One announced that it was merging with First Chicago. See 12/18/2014 Witten Dep. at 18-19. This merger compromised the 1996 deal because the qualified Section 133 lender was leaving Bank One. See 3/31/2015 Deposition of Barry Gowdy ("Gowdy Dep.") at 67; see also 12/18/2014 Witten Dep. at 108-09 (identifying Bank One Capital Funding Corporation as a "qualified lender" under Section 133). Qualified lenders were needed, otherwise the transaction would not be grandfathered under the now-repealed Section 133 of the tax code. Id. at 127-28. Stonehenge Financial Holdings, Inc., formerly BOCM, stepped in to find a new qualified lender. Stonehenge secured Bank One, Texas, N.A. and Bank One, Arizona, N.A. to serve as the new qualified lenders. See Stonehenge's Supplemental Response to Interrogatory No. 7 at 7-8. Another affiliate of Bank One, Finance One Corporation, provided the pool of assets in which the loan proceeds would be invested. Id. at 8. Stonehenge incorporated in April of 1999 and began to ramp up operations sometime in early May. 12/18/2014 Witten Dep. at 131-32.
On September 1st, 1999, approximately $535 million of Section 133 loans owned by BOCFC transferred to Bank One Texas and Bank One, NA. Id. at 125; see also Sept. 1, 1999 Closing Binder at SQUIRE-SH_00001411 (defining "The Loan" and 15-year repayment period). These banks were the "qualified lenders" for Section 133 purposes. 12/18/2014Witten Dep. at 127. With the loan proceeds, the ESOP purchased qualifying employer securities in Alliance Holdings, pursuant to Section 133 guidelines. As collateral for the refinanced loan, the ESOP pledged its Alliance Holdings shares to the lender and Alliance Holdings pledged all its shares of AH III stock. AH III used the loan money to purchase participation interests in a $900 million pool of auto loan receivables designed by Bank One. Sept. 1, 1999 Closing Binder at SQUIRE-SH_00001521 (describing the "background" of the transaction); see also id. at 00001526-27 (defining "Participation Interest").
The Participation Interest in these loans ran until August 31, 2000, providing that "each September 1 [after 2000], the term of this Agreement and the Participation hereby shall be automatically extended for an additional one year term. . . ." See id. at 00001527. Stonehenge, now up and running, continued to perform duties for Alliance related to the different transactions and ensured that the spread deal kept renewing for the benefit of all parties. See Stonehenge's Supplemental Response to Alliance Holdings' Interrogatory No. 7 at 9. The deal with the various parties ended in July 2011, when the Section 133 loan period of 15 years ended. See 12/8/2014 Witten Dep. at 123-24. The deal made the parties a total of $115.4 million. See 4/17/2015 Deposition of Kenneth J. Wanko ("Wanko Dep.") at 297.
David Fenkell formed DBF Consulting in 1998. DBF and Bank One entered into a consulting agreement in April of 1998. See 1/26/2015 Witten Dep. at 253. This agreement, Fenkell and Stonehenge argue, was not related to the ESOP loan deal from 1996. See id. at 257; see also 7/18/2014 Fenkell Dep. at 345-346 ("If you read the consulting agreement . . . there is no mention of the consulting agreement being tied to any Alliance Holdings or Alliance Holdings ESOP transaction.").
Following the merger of Bank One and First Chicago, along with the formation of Stonehenge, Stonehenge and DBF Consulting entered into a consulting agreement on August 7, 1999, which Stonehenge writes "was nearly identical to the 1998 agreement." See Stonehenge Mem. at 65 (citing Stonehenge-DBF Consulting Agreement). In this agreement, Stonehenge paid DBF Consulting $240,000 per year until 2006. See 1/26/2015 Witten Dep. at 76; Stonehenge-DBF Consulting Agreement at ALESOP01284. That amount increased to $500,000 a year starting in 2006. 1/26/2015 Witten Dep. at 76-77.
The details of how this 2006 increase came about are significant. Alliance Holdings asked Stonehenge to share the increased costs of purchasing payroll option contracts. See id. at 143. In 2006, Stonehenge agreed that "we would increase what was being paid to DBF Consulting." Id. at 144; see also 7/18/2014 Fenkell Dep. at 352. This agreement increased the fees paid to DBF to $500,000, and ran from 2006 to July 2011. See 7/18/2014 Fenkell Dep. at 352. In his deposition, Fenkell provided a little more explanation for the increase:
Id. at 394. Fenkell testified that the 2006 increase served to share some of the increased costs associated with servicing the ESOP loan. See id. at 394-95. Other witnesses claim that Fenkell provided a number of consulting and advisory services not related to the ESOP loan transaction. See 12/18/2014 Witten Dep. at 242; 4/27/2015 Deposition of James Henson ("Henson Dep.") at 26-27. Fenkell admitted that he did not have any records to indicate that he did any other work for different companies. See 7/18/2014 Fenkell Dep. at 367-69. DBF did not have an office or other employees. Id. at 370-71. Fenkell was DBF Consulting's only shareholder, director, and employee. See id. at 371.
A condition of the DBF consulting agreement was that the arrangement could terminate during any fiscal year "in which the total revenues derived by Stonehenge from ESOP related transactions is less than $2 million. . . ." See Stonehenge-DBF Consulting Agreement at ALESOP01284. DBF Consulting fees were paid from Stonehenge's general revenue.
Numerous communications point to awareness among Alliance employees, of DBF Consulting's existence, Ken Wanko, Barbie Spear, and David Fenkell frequently worked together. See 9/14/2014 Deposition of Donald W. Hughes ("Hughes Deposition"), at 40-41. Barbie Spear knew about the payments to DBF at least by 2008. See 2/25/2015 Deposition of Barbie Spear ("Spear Dep."), at 151.
A number of outside companies and organizations knew about the relationship between Alliance and DBF. Stonehenge points to information in the record demonstrating that Squire Sanders, KPMG, and Deloitte all knew about payments from Stonehenge to DBF. See Stonehenge Mem. at 68 (citations omitted). Furthermore, there was testimony and other evidence that:
See id. at 69-70 (citations omitted).
The Alliance Parties assert causes of action against Fenkell, Paul Sefcovic, an attorney who advised Fenkell for years, and his wife Lianne Sefcovic, for their involvement in two companies: Student Loan Management and Research Services, LLC ("SLMRS") and Student Loan Advisory Management Services, LLC ("SLAMS"). See FAC ¶¶ 170-83.
In 2010, Alliance hired Paul Sheldon, an expert in the student loan business, to design and structure different student loan transactions through his company, Student Loan Capital Strategies ("SLCS")
Fenkell, along with Draucker and the Sefcovics, created an Advisory Services Agreement ("ASA") under which Alliance paid SLMRS $27,500 per month to consult on student loans. Id. at 36. Alliance argues that the two LLCs provided no services to Alliance. These payments raised suspicions among members of Alliance. See 1/15/2015 Deposition of Kenneth J. Wanko ("Wanko Dep.") at 323; see also id. at 255 ("I had no idea who [SLMRS] was."). Sheldon did not know of any work done by SLMRS or SLAMS. See Sheldon Dep. at 97-100. Alliance alleges that the ASA was simply a device to siphon money to the Sefcovics, as neither SLMRS nor SLAMS provided any services to Alliance or the ESOP. See Alliance Mem. at 36; see also 11/19/2014 Deposition of Stephen Jones ("Jones Deposition") at 37 (testifying that, to Jones' knowledge, SLMRS never performed any services).
This lawsuit, filed on May 1, 2013, is one of many involving Alliance Holdings and Fenkell. There is a case in the Western District of Wisconsin arising out of a sale of a former Alliance Holdings' subsidiary ("Trachte") in 2007. See Chesemore v. Alliance Holdings, Inc., 886 F.Supp.2d 1007 (W.D. Wis. 2012), affirmed sub nom Chesemore et. al. v. Fenkell et. al., Nos. 14-3181, 14-3215, 15-3740, 2016 WL 3924308 (7th Cir. July 21, 2016). David Fenkell filed a lawsuit on March 22, 2013 against Alliance Holdings in Philadelphia County on a number of grounds. Fenkell v. Alliance Holdings, Inc., No. 03417 (Phila. Ct. Com. Pl. Mar. 22, 2013). Fenkell filed another lawsuit against other Alliance Holdings employees in 2014. Fenkell v. Wanko, et al., No. 3515 (Phila. Ct. Com. Pl. Sept. 2, 2014). Alliance Holdings sued Squire Sanders over its conduct arising out of the same facts in this case. See Alliance Holdings, Inc., et al. v. Squire Patton Boggs (US) LLP, No. 14-05780 (E.D. Pa. Oct. 10, 2014).
In the Chesemore litigation in the Western District of Wisconsin, Fenkell was found to have committed fiduciary violations under ERISA. Chesemore, 886 F. Supp. 2d at 1059-60. Alliance placed Fenkell on administrative leave on September 25, 2012, shortly after the opinion in the Chesemore litigation. See 1/15/2015 Wanko Dep. at 336. After the Chesemore decision, Spear and Wanko retained the law firm of Ballard Spahr, along with Deloitte Touche, to conduct an internal investigation into the issues surrounding Fenkell's departure. See 2/3/2015 Spear Dep. at 345. According to Alliance, the investigation uncovered a pattern of misconduct on Fenkell's part. This included allegations of mishandling reimbursements and using company funds to pay for Barbie Spear's wedding in 2005. See Alliance Mem. at 55 n. 35 (citations omitted). The Chesemore case and internal strife culminated in the October 1, 2012 firing of David Fenkell, See Spear Dep. at 325.
Though the parties disagree at length
The parties are in almost perfect disharmony on the issue of whether Alliance's assets are assets of the ESOP, i.e., "plan assets." Stonehenge insists that they are not. See Stonehenge Mem. at 81. Alliance insists that they are. See Alliance Opp. at 44-45. The parties marshal volumes of financial facts in support of their arguments.
Having described the background of the case, I will discuss first the claims Alliance has asserted against Fenkell. Next, I will discuss the claims Alliance has asserted against Stonehenge. Finally, I will discuss the claims against SLMRS.
Summary judgment is warranted "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c)(2). A factual issue is material only if it might affect the outcome of the case under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The moving party must show the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). I "must view the facts in the light most favorable to the non-moving party," and make every reasonable inference in that party's favor. Hugh v. Butler Cnty. Family YMCA, 418 F.3d 265, 267 (3d Cir. 2005). Nevertheless, I may disregard allegations that are without evidentiary support. See Celotex, 477 U.S. at 322-23; Jones v. UPS, 214 F.3d 402, 407 (3d Cir. 2000) ("unsupported allegations" cannot defeat summary judgment). Absent a genuine issue of material fact, summary judgment is appropriate. Celotex, 477 U.S. at 322.
I must evaluate whether there is a material issue of disputed fact through the lens of the applicable burden of proof. Anderson, 477 U.S.at 247-48. The inquiry is akin to the determination, on a motion for judgment at trial, whether a reasonable finder of fact, correctly applying the burden of proof, could decide against the moving party based on the available evidence. Id. at 252. The fact that I would be the ultimate fact finder at a trial, not a jury, affects the assessment of certain issues of fact on summary judgment. Id. at 253-54. There may be different kinds of factual disputes in a case: disputes about what the ascertainable historical facts are, and disputes about the appropriate inferences to be drawn from those facts. See id. at 253 (citing Curley v. United States, 160 F.2d 229, 232-33 (D.C. Cir. 1947)). If the ultimate fact finder is a jury, the jury must resolve both at trial. Id. at 255. If the court, rather than a jury, is the ultimate trier of fact, the court is free to draw inferences from undisputed historical facts at the summary judgment phase. Id. at 255-56. If there is a factual dispute for which a trial would actually serve a benefit, such as weighing witness credibility, a judge should not dispose of the case on summary judgment. Id. at 255.
The Alliance Parties allege that Fenkell, a fiduciary, was prohibited from receiving approximately $4,000,000 in fees from Stonehenge through Fenkell's company, DBF Consulting. Alliance contends that these fees represented a kickback to Fenkell in violation of ERISA § 406(b)(3). I agree.
ERISA § 406(b)(3), 29 U.S.C. § 1106(b)(3), prohibits a fiduciary of the plan from receiving "any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan." There is no dispute that Fenkell was a fiduciary of the ESOP. Mr. Fenkell argues that the DBF fees did not amount to Fenkell 1) receiving consideration 2) for his own personal account 3) from a party (Stonehenge) "dealing with the plan in connection with a transaction involving the assets of the plan."
In addition, Mr. Fenkell argues that the ERISA statute of limitations bars the Alliance claims, and that the equitable doctrines of laches, estoppel, and unclean hands also bar the Alliance claims.
Alliance contends the statute of limitations does not bar their claims, both because the scheme adopted by Mr. Fenkell occurred, at least in part, within the relevant statutory periods, and because the statutes are tolled by the "discovery rule" as a result of Mr. Fenkell's fraud and concealment. Alliance also argues that Mr. Fenkell's misconduct disqualifies him from asserting his various equitable defenses, such as laches, estoppel, and unclean hands.
I will discuss Fenkell's liability under ERISA § 406(b)(3), as well as under other ERISA sections, and then the various defenses he asserts.
Under ERISA law, a fiduciary is anyone who exercises discretionary authority or control related to the management or disposition of assets of an employee benefit plan. See 29 U.S.C. § 1002(21)(a). David Fenkell was a fiduciary for the Alliance ESOP until at least December 31, 2011. See Fenkell Dep. at 110:23-111:8.
Fenkell "received consideration" from Stonehenge. His corporation, DBF, received about $4,000,000 from 1999 to 2011. There is no question Fenkell was the sole shareholder and director of DBF. See Alliance Mem. at 12 (citing 7/8/14 Fenkell Dep. at 320:2-7). Profits from DBF were distributed to Mr. Fenkell. The language under the statute does not require that Fenkell received consideration "directly." The language only asks if he received "consideration." See Nat'l Sec. Sys., Inc. v. Iola, CIV-00-6293AET, 2007 WL 2868634 (D.N.J. Sept. 26, 2007), aff'd in part, vacated in part sub nom. Natl. Sec. Sys., Inc. v. Iola, 700 F.3d 65, 86 (3d Cir. 2012); 29 U.S.C. § 406(b)(3).
To argue that Fenkell did not receive "consideration for his own account" from Stonehenge because of the intermediation of DBF is to argue that one has not drunk water from a well because of the intermediation of a cup. Fenkell was the sole shareholder, employee, officer, and director of DBF. The focus of the statute is not on whether Mr. Fenkell used DBF or not, but whether the fees were on "his own account" rather than on account of the ESOP. There is no dispute that the ESOP did not get the $4,000,000 in fees paid by Stonehenge to DBF. The money wound up in Fenkell's pocket. Hence, he "received consideration for his own account[,]" rather than on the ESOP's account.
Fenkell's more serious argument is that Stonehenge received its fees, from which Fenkell's fees were paid, from AH III, not the ESOP. Therefore, Fenkell argues, Stonehenge was not "dealing with the plan," but with AH III. In addition, Mr. Fenkell contends that the fees were not paid from "assets of the plan," but from Stonehenge income. I will discuss his argument in light of the statutory language.
The 1999 agreement under which the Alliance parties agreed to pay Stonehenge a fee for its services says that the parties are Alliance, the ESOP, and AH III, and that the counterparty is Stonehenge. In an August 27, 1999 letter outlining each parties' responsibility, the signatories agreed Stonehenge would be paid in exchange for advice rendered to the "Alliance Holdings, Inc., the Plan and Alliance SPE. . ." defined to include the ESOP. See Ltr. of Aug. 27, 1999, at 1. Under the plain language of the Stonehenge agreement, it was "dealing with the plan." Alliance Mem. at 6 (citing DX 43, at 1511, 1521-38).
Mr. Fenkell points to the fact that it was AH III that actually paid Stonehenge the fees. That is not the question under the statute. The question is whether Stonehenge was a party "dealing with the plan in connection with" the 1999 "transaction." It was.
The 1999 ESOP funding transaction contemplated multiple steps and parties. Nevertheless, it was "a transaction," that is, the entire set of steps and all the parties were united in a single purpose and plan. Mr. Fenkell spends a great deal of time trying to unspool the transaction, as if the half-billion in loan proceeds arrived in AH III's coffers by a series of independent market events that serendipitously coalesced into a profitable whole. The funding transaction's multiple documents contradict this claim. A few make the point:
See Sept. 1, 1999 Closing Binder et seq.
The point of the funding transaction was to take advantage of the lucrative tax benefit available to the Bank if it lent money to an ESOP: 50% of the interest income from the loan repayment was tax deductible. See 26 U.S.C. § 133(a). The more money the Bank lent to the ESOP, the bigger the tax benefit to the Bank. The ingenious aspects of the funding transaction were that the parties agreed to share the tax benefit, and that the parties found a way to make the loan to the ESOP almost risk free. The benefit sharing was accomplished through a calculation of the value of the tax benefit over the years the loan was repaid, and a splitting of the benefit in accordance with an agreed formula.
The parties reduced the risk of the loan to almost zero by a security arrang ement under which a) the ESOP used the loan proceeds to buy Alliance shares from Alliance, b) Alliance used the proceeds to buy shares in AH III from AH III, and c) AH III used the loan proceeds to buy "Participation Interests" in a pool of the Bank's auto loans. The Participation Interests were secured by a UCC filing by the Bank. Neither of the intermediary steps — the Alliance share purchase or the AH III share purchase — made any sense without the beginning and end points: the loan to the ESOP and the purchase of the Participation Interests. Carl Draucker, a partner at Squire who represented Bank One during the transactions,
The loan risk was further reduced by a requirement that the Bank maintain a healthy rate of return on the Participation Interests by regularly culling out under performing or paid off loans from the pool of loans in which AH III had purchased a Participation Interest, and replacing them with healthy loans, measured by standards agreed upon by the parties in the funding transaction documents. Sept. 1, 1999 Closing Binder at SQUIRE-SH_00001524-00001524. The Bank itself ensured that the assets securing the loan were maintained in prime condition.
In the end, the essence of this complex transaction was that the Bank funded a purchase of an interest in its own automobile receivables, and in the process earned itself a hefty premium over the income it otherwise could have earned on those receivables.
AH III was merely a lockbox in which title to the Participation Interests was stored for the duration of the loan. The company had no business purpose, other than holding the Participation Interests, getting paid by the bank, and distributing fees. Sept. 1, 1999 Closing Binder at SQUIRE-SH_00001540-00001549. It was left with no discretion: it could not sell its own shares, or take any other action affecting the Participation Interests, without Bank approval. Nor could it do anything with the proceeds of the Participation Interests except make payments dictated by the funding transaction documents. Sept. 1, 1999 Closing Binder at SQUIRE-SH_00001556-00001560. These payments included a payment to the ESOP to cover repayment of the principal and interest on the loan, a payment to Alliance representing its cut of the underlying tax benefit, and a payment to Stonehenge representing its consulting fees. The payments by AH III, in three separate tranches, one to the ESOP, one to Alliance, and one to Stonehenge, were mutually dependent. The ESOP had first call on the participating interest income from AH III; Alliance had the second priority; and Stonehenge's fee came last. All were paid on the annual payment date of August 31 of each year. All the payments were established by the original loan documents.
In summary, the funding documents created and joined together a number of components into a unitary whole for the purpose of lending money to the ESOP and securing the loan. The parties' incentive to do the deal was the fact that it turned an inchoate, illiquid asset — the tax benefit — into cash, which was split among the parties. Absent this final step, the splitting of cash among the parties, none of the four prior steps — the loan, the transfer of loan proceeds through two stock purchase transactions (Alliance and then AH III), and the purchase of the Participation Interests, using the loan proceeds, made any business sense.
The security arrangement with AH III was a crucial inducement motivating the Bank to make the loan. The Bank already had the pool of receivables safely in its own possession, and was getting paid interest from them. Absent the safekeeping afforded by the AH III arrangement, the Bank was not interested in parting with its lucrative pool of receivables. See Fenkell Dep. at 94:13-96:9; Grien Rep. at App. C. ¶ 22.
In this case the entire funding transaction "involved" assets of the plan. The multi-tiered transaction was unified in time, place, motivation, and effect. Fenkell's theory would have me ignore what actually happened and treat each step in this unitary transaction as a separate transaction. Fenkell's theory is not supported by the facts or the statutory language.
Mr. Fenkell argues that he did not receive fees from Stonehenge "in connection with" the funding transaction. I disagree. Fenkell's argument is contradicted by the record evidence.
Fundamental to Fenkell's argument is his notion, unsupported by the case law, that Alliance is under a burden to establish that his receipt of fees from Stonehenge was "in connection with" the funding transaction. That is incorrect. It is Mr. Fenkell's burden, as a fiduciary, to proffer evidence that would establish that the receipt of fees was not "in connection with" the funding transaction, by clear and convincing evidence. See Lowen v. Tower Asset Mgt., Inc., 829 F.2d 1209, 1215 (2d Cir. 1987). He has not satisfied his burden.
Neither is it Alliance's burden to demonstrate that the fees he received from Stonehenge were paid solely "in connection with" the funding transaction. Nothing in the statute suggests such a requirement. Mr. Fenkell has produced facts that suggest that some of his fees may have been paid in consideration of matters not "in connection with" the funding transaction. Fenkell Mem. at 21-22. But he has produced no facts that clearly and convincingly demonstrate that the DBF fees were not "in connection with" the funding transaction, at least in substantial part.
I must evaluate Alliance's summary judgment motion through the lens of the heightened "clear and convincing" burden of proof. Anderson, 477 U.S. at 247-48. And while I may not resolve disputes about the underlying facts, I am free to draw inferences from undisputed historical facts at the summary judgment phase, because I am the trier of fact at trial. Id. at 255-56.
Fenkell's heightened burden of proof, and the fact that I may draw inferences from undisputed historical facts, have an impact on my evaluation of the section 406(b)(3) claim involving DBF's fees. The facts paint a "clear and convincing" picture in favor of Alliance's theory, rather than Mr. Fenkell's. On Alliance's side of the ledger, a number of facts are undisputed:
In opposition, Fenkell points to several facts:
When a party's testimony or affidavits are contradicted by a transaction's contemporaneous records, a judge is not bound to credit the party's after-the-fact version of events. See Jiminez v. All American Rathskeller, Inc., 503 F.3d 247, 254 (3d Cir. 2007). Otherwise, any party could create a material issue of fact simply by denying a contract's clear terms. Baer v. Chase, 392 F.3d 609, 624 (3d Cir. 2004) (citing Hackman v. Valley Fair, 932 F.2d 239, 241 (3d Cir. 1991)). When the material historical record is actually ambiguous, or can be accessed only through disputed human memories, trial is necessary. See Anderson, 477 U.S. at 249.
I treat as undisputed that 1) the DBF arrangement with Stonehenge's principals preceded the 1999 ESOP funding agreement, but was modified in light of the 1999 transaction, 2) Fenkell consulted with Stonehenge on other deals besides the ESOP funding agreement, and 3) Fenkell told anyone who asked at Alliance that the DBF relationship had nothing to do with Alliance and the ESOP. See Alliance Mem. at 111 (citations omitted). The question is whether these facts, taken with their reasonable inferences, are enough to meet Fenkell's burden to establish clearly and convincingly that he did not receive the DBF fees "in connection with" the ESOP funding transaction. They are not.
Mr. Fenkell is a fiduciary. He is responsible to demonsrate by clear and convincing evidence that the DBF fees were not "in connection with" the ESOP funding. While Mr. Fenkell may be able to prove he did some consulting work for Stonehenge that was not "in connection with" the ESOP funding transaction, there is no disputing the fact that the DBF fees were negotiated in connection with, in light of, and in consideration of the Stonehenge fees from the ESOP funding transaction. If there is some commingling of the reasons for paying Mr. Fenkell, i.e., that he was paid for work done "in connection with" other deals, in addition to the ESOP funding transaction, it is immaterial as to his liability. It may be of equitable concern when fixing a remedy. Fenkell has not clearly and convincingly excluded his fees from being "in connection with" the ESOP funding transaction.
I conclude that Mr. Fenkell violated ERISA section 406(b)(3) as a matter of law, through the negotiation and receipt of approximately $4,000,000 in fees kicked back from Stonehenge in connection with the ESOP funding transaction. This does not end the discussion, as Fenkell has raised a number of affirmative defenses, which I discuss below. Before discussing Fenkell's affirmative defenses, I will turn briefly to Alliance's alternative theories of liability for the kickback scheme.
Alliance argues that Fenkell violated ERISA § 404(a)(1)(A) by accepting the DBF fees from Stonehenge. ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A) requires a fiduciary to "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan[.]" Alliance alleges that the DBF fee agreement violated Fenkell's fiduciary duty of loyalty under section 404(a)(1)(A).
The duty of loyalty under section 404(a)(1)(A) requires that a fiduciary act in the interests of the plan participants and beneficiaries. Not all breaches of the duty of loyalty involve self-dealing. See, e.g., Kujanek v. Houston Poly Bag I, Ltd., 658 F.3d 483, 489 (5th Cir. 2011) (withholding of material information from beneficiary was a breach of the duty of loyalty). But self-dealing by its nature is a breach of the duty of loyalty. See LaScala v. Scrufari, 479 F.3d 213, 221 (2d Cir. 2007) (noting that an ERISA fiduciary who gave himself raises without board approval was liable both for self-dealing and for breach of his duty of loyalty).
Mr. Fenkell argues that his receipt of DBF fees did not involve the "discharge [of] his duties with respect to a plan," since he received the DBF fees from Stonehenge, and Stonehenge was entitled to its fees from AH III under its own agreement with Alliance, the ESOP, and AH III. Mr. Fenkell argues that because he was not wearing his "fiduciary" hat when he negotiated and accepted fees from Stonehenge, he cannot have been in violation of his fiduciary duty of loyalty under section 404(a)(1)(A). Fenkell Memorandum ("Fenkell Mem.") at 47.
Mr. Fenkell's "two hats" argument is interesting, but avoids the most important point — that the hats were perched simultaneously on Fenkell's head as he dealt with a unitary transaction. See Pegram v. Herdrich, 530 U.S. 211, 225-26 (2000) (ERISA does require, however, that the fiduciary with two hats wear only one at a time, and wear the fiduciary hat when making fiduciary decisions."). Wearing two hats does not entitle the fiduciary to play a shell game, with his fiduciary hats serving as the shells and his fiduciary duty as the disappearing pea. Fenkell, in his capacity as fiduciary of the ESOP, violated his duty of loyalty when he negotiated and closed a deal between the ESOP, Alliance, and AH III, on one side, and Stonehenge on the other. The crucial fact is that closing this deal triggered an enormous fee payable to him from Stonehenge, a fee that was not disclosed to, or authorized by, the ESOP. Whatever Mr. Fenkell's exact status vis a vis Stonehenge, and whatever pot of money Stonehenge used to pay Fenkell, is beside the point. The relevant facts are that Stonehenge was not the ESOP, Stonehenge stood to gain from a transaction involving ESOP assets, and Fenkell owed a duty of undivided loyalty to the ESOP. That duty was hopelessly compromised by the promise and payment of millions in fees from Stonehenge to DBF, Fenkell's wholly controlled corporate entity, in connection with the ESOP funding transaction.
I find Fenkell violated his duty of undivided loyalty to the ESOP by entering into the Stonehenge/DBF fee agreement.
29 U.S.C. § 1106(a)(1)(D) prohibits a fiduciary the "use, by or for the benefit of a party in interest, of any assets of the plan." Fenkell, the ESOP trustee, was a "party in interest." 29 U.S.C. § 1002(14)(A). Fenkell, as the ESOP trustee, approved the ESOP Loan Transaction, which generated profits to Alliance but also generated fees for Fenkell, through the Stonehenge/DBF consulting agreement. Thus, the Alliance Parties argue, Fenkell used plan assets to benefit himself, in violation of section 1106(a)(1)(D). Alliance Mem. at 71.
Fenkell argues that this theory is "dependent on Plaintiff's allegations that . . . Alliance's assets were plan assets of the Alliance ESOP." Fenkell Mem. at 46. I have found that a genuine issue of material fact attends the plan asset question,
Reich v. Compton, 57 F.3d 270, 278 (3d Cir. 1995), amended (Sept. 8, 1995). Only the fourth element is at issue here. Fenkell is a fiduciary who caused the plan to engage in the ESOP Loan Transaction, which used plan assets. As a fiduciary he is a party in interest. The question is whether the "transaction's use of the assets is `for the benefit of' a party in interest[.]'"
The entire ESOP Loan Transaction was one "transaction." The fees to DBF were a direct consequence, and in consideration of, the ESOP Loan Transaction. Fenkell clearly intended to benefit from the transaction through the DBF fees. That this benefit was indirect is of no consequence, since the statute explicitly prohibits "direct or indirect" benefits that the fiduciary knows about. 29 U.S.C. § 1106(a)(1). Neither does the statute or the case law require that the use of assets in a transaction be for the "sole" benefit of the party in interest.
There is no dispute that the ESOP Loan Transaction occurred, that it was managed by Fenkell in his fiduciary capacity, and that loan assets were used in the transaction. Nor is there any genuine dispute that Fenkell benefitted personally from the use of the plan's assets in this transaction. Although Fenkell has maintained throughout that the DBF fees had nothing to do with the ESOP Loan Transaction, his "say so" does not create a genuine issue of material fact, because his narrative is completely undercut by contemporaneous documents, and the reasonable inferences drawn from those contemporaneous records.
I find that Fenkell violated 29 U.S.C. § 1106(a)(1)(D) by spinning off fees from the ESOP Loan Transaction to benefit DBF.
29 U.S.C. § 1106(b)(1) bars a fiduciary from "deal[ing] with the assets of the plan in his own interest or for his own account[.]" Alliance claims that the DBF fees represented a violation of section 1106(b)(1). Alliance Mem. at 71-72. Fenkell claims that this liability theory is dependent on Alliance assets being plan assets. Fenkell Mem. at 46-47. I disagree, at least with respect to the deal to make payment of fees to DBF by Stonehenge. As the ESOP's trustee, Fenkell "deal[t] with the assets of the plan" through the ESOP Loan Transaction. Because the deal was designed to generate fees to Fenkell through DBF, the deal was "in his own interest or for his own account[.]"
Mr. Fenkell contends that 29 U.S.C. § 1113(2) bars plaintiffs from recovering against him. Fenkell Mem. at 67. The statute bars claims for breach of fiduciary duty unless they are brought within "three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation." 29 U.S.C. § 1113(2). Mr. Fenkell claims that the plaintiffs "knew well before May 1, 2010 [three years before the filing of this lawsuit] that Alliance (through A.H. III) was paying fees to Stonehenge pursuant to the Alliance-Stonehenge Agreement." Fenkell Mem. at 67. Fenkell also claims that plaintiffs knew before May 1, 2010 that Stonehenge was paying fees to DBF pursuant to the Stonehenge/DBF agreement. Id.
The Alliance Parties argue that their claims are timely under 29 U.S.C. § 1113(1). Alliance Opp. at 60-65. The Alliance Parties also contend that they did not have "actual knowledge" of all the relevant facts concerning Fenkell's wrongdoing within three years of the filing of their complaint. See id. at 65-71; 29 U.S.C. § 1113(2). Plaintiffs contend that Fenkell fraudulently concealed his kickbacks and breaches of fiduciary duty, such that the statute of limitations ran for six years from the date plaintiffs discovered Fenkell's violations. See 29 U.S.C. § 1113. Alliance Opp. at 52-60. Finally, the plaintiffs argue that the limitations period was tolled because Fenkell "adversely dominated" Alliance up until 2012. Id. at 74-78.
The ERISA statute of limitations, 29 U.S.C. § 1113, provides as follows:
See 29 U.S.C. § 1113. Section 1113 "creates a general six year statute of limitations, shortened to three years in cases where the plaintiff has actual knowledge, and potentially extended to six years from the date of discovery in cases involving fraud or concealment." Kurz v. Philadelphia Elec. Co., 96 F.3d 1544, 1551 (3d Cir. 1996). The "fraud or concealment" exception in 29 U.S.C. §1113 requires "evidence that the defendant took affirmative steps to hide its breach of fiduciary duty." Id. at 1552. The final paragraph of section 1113 provides that in the instance of "fraud or concealment" an "action may be commenced not later than six years after the date of discovery of such breach or violation."
Fenkell argues that there is evidence that Alliance personnel, other than Fenkell, had actual knowledge of the DBF payments long before May of 2010, three years before this lawsuit. Fenkell Mem. at 66-69. This is not enough to trigger application of the 3-year statute of limitations under 29 U.S.C. § 1113(2).
Fenkell must show that "plaintiffs actually knew not only of the events that occurred which constitute the breach or violation but also that those events supported a claim of breach of fiduciary duty or violation under ERISA." Intl. Union of Elec., Elec., Salaried, Mach. and Furniture Workers, AFL-CIO v. Murata Erie N.A., Inc., 980 F.2d 889, 900 (3d Cir. 1992). This requirement puts Fenkell in the "unenviable position" of showing that his conduct was a kickback, and that plaintiffs actually knew this before May, 2010. See Mathews v. Kidder, Peabody & Co., Inc., 260 F.3d 239, 250 (3d Cir. 2001). Fenkell ignores this requirement. Fenkell's argument is that knowledge of Stonehenge payments to DBF suffices to trigger the 3-year statute. He cites to Koert v. GE Group Life Assur. Co., 416 F.Supp.2d 319 (E.D. Pa. 2005) aff'd, 231 Fed. Appx. 117 (3d Cir. 2007) (unpublished). Fenkell Mem. at 68. However, Koert simply held that plaintiff "had actual knowledge of the exact facts giving rise to her cause of action at the time her benefits were terminated[.]" Id. at 325. A full appreciation that these facts triggered ERISA liability was not required. Fenkell has not produced facts that establish that Alliance had knowledge of the crucial fact necessary to turn Fenkell's "consulting fees" into prohibited "kickbacks:" that the fees were paid in consideration of the ESOP Loan Transaction, and not for other deals.
There is substantial evidence in the record that Fenkell repeatedly insisted that the fees paid to DBF had nothing to do with the ESOP Loan Transaction, a position that he continues to take. See Fenkell Mem. at 21-22. There is little doubt that he regularly assured personnel at Alliance that this was so.
Fenkell's motion to bar plaintiff's claim under 29 U.S.C. § 1113(2) must be denied.
The "fraud or concealment" exception contained in the last paragraph of 29 U.S.C. §1113 requires that plaintiff produce "evidence that the defendant took affirmative steps to hide its breach of fiduciary duty." Kurz, 96 F.3d at 1552; Ranke v. Sanofi-Synthelabo Inc., 436 F.3d 197, 204 (3d Cir. 2006). "[T]here must be conduct beyond the breach itself that has the effect of concealing the breach from its victims." In re Unisys Corp. Retiree Med. Benefit "ERISA" Litig., 242 F.3d 497, 503 (3d Cir. 2001), as amended (Mar. 20, 2001) ("Unisys III"). Here, plaintiffs point to evidence that on several occasions Fenkell told personnel at Alliance that the DBF fees had nothing to do with the ESOP Loan. Alliance Mem. at 110-11. There is no dispute by Fenkell that he said this on more than one occasion. Id. Fenkell's statements were incorrect. The fees paid to DBF were "receive[d]" in consideration of the loan deal. 29 U.S.C. §§ 1106(b)(3). That Fenkell communicated incorrect information about the DBF fees to Alliance personnel may qualify as "concealment," under section 1113. Providing false information is the type of "affirmative step[]" that can trigger application of the "fraud or concealment" limitations period. See Ranke, 436 F.3d at 204 ("responding to questions in a manner that diverted the beneficiary from discovering" the fiduciary's wrongdoing was sufficient to trigger the fraud or concealment section) (citing to Unisys III, 242 F.3d at 505); Chaaban v. Criscito, 468 Fed. Appx. 156, 160 (3d Cir. 2012) (not precedential) (false information provided by retiring trustee triggered application of "fraud or concealment" section of the statute).
"The statute of limitations is tolled until the plaintiff in the exercise of reasonable diligence discovered or should have discovered the alleged fraud or concealment."
Fenkell argues that ERISA provides no remedy in this case against DBF, because Fenkell, the fiduciary, did not violate the statute. Fenkell Mem. at 50. Mr. Fenkell is correct that Iola provides for an equitable remedy against DBF, a non-fiduciary, if it knowingly participated with Fenkell in violating the statute. See Fenkell Mem. at 50-51; Iola, 700 F.3d at 101 ("The trustee or beneficiaries may . . . maintain an action for restitution of the property (if not already disposed of) or disgorgement of proceeds (if already disposed of), and disgorgement of the third person's profits derived therefrom.") (quoting Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 250 (2000)). If trial results in a remedy against Fenkell for having violated ERISA, appropriate equitable relief can be sought against DBF, a non-fiduciary to whom all knowledge possessed by Mr. Fenkell is attributable.
At oral argument Mr. Fenkell joined in a variety of arguments by his co-defendants, the Stonehenge Parties. I have addressed those arguments separately, in section III of this opinion, and I need not address them here.
The Alliance Parties have moved for summary judgment as to a variety of Fenkell's counterclaims and third-party claims. Alliance Mem. at 97.
Fenkell's first counterclaim and first third-party claim seek indemnification against Alliance for his expenses in this litigation and expenses in his state court suit in Philadelphia, which seeks recovery under his employment contract with Alliance. Alliance Mem. at 98. I previously dismissed Fenkell's claims for indemnification arising out of the Chesemore litigation, based on Pennsylvania's policy against indemnification for an intentional tortfeasor. Doc. No. 432 at 8; reconsideration denied Doc. No. 481 at 6-7.
Alliance asks me to enter summary judgment denying Fenkell's contribution claims. Alliance Mem. at 102. Alliance makes a number of arguments in support of its motion:
I will not apply judicial estoppel to preclude Fenkell's contribution claims. Fenkell's appeal was rejected by the Seventh Circuit. "[J]udicial estoppel[] `generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.'" New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (quoting from Pegram, 530 U.S. at 227, n. 8). "Absent success in a prior proceeding, a party's later inconsistent position introduces no `risk of inconsistent court determinations,' United States v. C.I.T. Constr. Inc., 944 F.2d 253, 259 (5
I agree with Alliance that contribution between fiduciaries — if it exists at all under ERISA
I will grant summary judgment denying Fenkell a contribution remedy against any of the Alliance Parties arising out of the Chesemore litigation.
Alliance requests summary judgment dismissing Fenkell's third third-party claim. Alliance Mem. at 113. Fenkell seeks recovery on behalf of the ESOP and other plan participants, alleging that Spear engaged in a a prohibited transaction by receiving payments related to the Trachte transaction. Id. Alliance contends that 1) Fenkell is disqualified from suing Spear or others because of his malefactions in Chesemore (id. at 114); and 2) that Fenkell cannot demonstrate that Spear was a fiduciary, or that she knowingly participated in prohibited transactions Id. at 117. I agree that Fenkell is disqualified from pursuing a remedy on behalf of the ESOP. He posted his ESOP plan account — and status as a plan participant — to secure his supersedeas bond in the Chesemore appeal, and forfeited that account — and his standing as a plan participant — once he lost his appeal. See Doc. No. 585-1 ¶ 6 (Agreed Consent Order); "Notice of Filing," Doc. 585 ¶ 5.
I will grant summary judgment dismissing Fenkell's third-party claim asserting prohibited transactions by Spear.
Alliance asks me to dismiss Fenkell's tenth third-party claim. Alliance Mem. at 124. The tenth third-party claim alleges that Alliance's Board of Directors breached their duties to the shareholders by asserting the plan assets position in this litigation. Id. I dismissed this claim previously for failure to meet the pleading standard of Fed. R. Civ. Pro. 23.1, but granted leave for Fenkell to move to amend. Doc. No. 432. Fenkell moved to amend his claim. Doc. No. 445. Alliance opposed his amendment. Doc. No. 452. I explained my reasons for reserving ruling on the motion until the summary judgment stage. See Doc. No. 432 at 52.
Fenkell is no longer an ESOP participant. His standing to sue was based on his status as an ESOP participant. This is grounds enough to deny his motion to amend. In the alternative, there is no dispute that Fenkell failed to provide pre-suit notice as required under Fed. R. Civ. Pro. 23.1. Fenkell argues that pre-suit demand was not required because Alliance is a closed corporation. He cites to section 7.01(d) of the American Law Institute's Principles of Corporate Governance, which provides that a "court in its discretion may treat an action raising derivative claims as a direct action[] [and] exempt it from restrictions and defenses applicable only to derivative actions" if the court finds that such an exemption will not 1) unfairly expose the defendants to multiple actions, 2) materially prejudice corporate creditors, or 3) interfere with fair distribution of recovery among all interested parties. See Warden v. McLelland, 288 F.3d 105, 112 (3d Cir. 2002).
While Alliance is a closely held corporation, since all of its stock is held by the ESOP, I am convinced I should not exercise my discretion to exempt Fenkell from the notice requirements of Fed. R. Civ. Pro. 23.1. The point of the exemption for closely held corporations is that they ordinarily do not face the possibility of multiple conflicting lawsuits from a large number of shareholders. Here, there are many participants in the ESOP, any of whom might bring a derivative action seeking remedies for alleged fiduciary violations. Nothing in these circumstances counsels me to waive the ordinary requirements of Rule 23.1. Fenkell has twice been found to have violated his fiduciary duties to ESOP participants, once by Judge Conley and now by me. Fenkell is not a suitable candidate to represent those same ESOP participants in a dispute with Alliance.
There is no dispute that Fenkell did not satisfy the pre-suit notice requirement. There are many reasons not to exercise my discretion to excuse the failure. I will deny Fenkell's proposed amended pleading concerning his tenth third-party claim. Doc. No. 445.
The Alliance Parties ask me to dismiss Fenkell's eleventh third-party claim, in which he seeks to hold Spear, Wanko, Lynn and other directors liable for instituting this lawsuit. Alliance Mem. at 127. Fenkell's theory is that Alliance's fundamental litigating premise, that Alliance and AH III assets are plan assets, is so fraught with adverse consequences and so devoid of merit that it represents a breach of the directors' duty to oversee and monitor its corporate officers and affairs. Fenkell Mem. at 80.
Alliance argues that the decision to institute and pursue this lawsuit was (and is) protected under the business judgment rule. See Alliance Mem. at 128. Pennsylvania's version of the business judgment rule insulates a director from liability for a business decision made (1) in good faith; (2) where the director or officer is not interested in the subject of the business judgment; (3) is informed with respect to the subject of the business judgment to the extent he reasonably believes to be appropriate under the circumstances; and (4) rationally believes that the business judgment in question is in the best interests of the corporation. In re Lampe, 665 F.3d 506, 516-17 (3d Cir. 2011).
The Pennsylvania Supreme Court has encouraged courts to apply the business judgment rule prior to full litigation on the merits, in order to avoid excessive judicial involvement in second guessing business decisions. See Cuker v. Mikalauskas, 692 A.2d 1042, 1048 (Pa. 1997). As the court stated,
Id. In this case, four of the five Alliance directors are disinterested outside directors appointed after Fenkell left. Alliance Mem. at 127 (citing to facts of record). Fenkell asserts that Wanko, Lynn, and Spear had an interest in preserving their jobs, which motivated them to file the lawsuit, an allegation for which there is precious little evidence. Fenkell Opp. at 109. More to the point, there is no evidence that the outside directors filed the lawsuit in their own interest. Id. Alliance was assisted by competent counsel — both Ballard Spahr, in the internal investigation, and Morgan, Lewis, in the litigation. Id. The internal investigation was more than adequate: it was exhaustive. Id. There is a ratonal basis for the lawsuit. Whether it proves entirely successful or not, a trial will tell, but success in the lawsuit is not the criteria for application of the business judgment rule. Cuker, 692 A.2d at 1047. Summary judgment is appropriate as to this component of Fenkell's eleventh third-party claim.
Fenkell also claims that the directors breached their duty to monitor by failing to insist on filing the shareholder derivative suit described in Fenkell's tenth third-party claim. See Alliance Mem. at 127. Alliance argues that if the tenth third-party claim is dismissed, to the extent the eleventh is predicated on the tenth, it should follow. Id. Given the derivative nature of Fenkell's liability theory, in this instance, for the same reasons I have granted liability under the tenth cause of action, summary judgment is appropriate as to this component of Fenkell's eleventh third-party claim for relief.
A final fact convinces me that summary judgment is appropriate as to both components of Fenkell's eleventh third-party claim. Events have overtaken this cause of action. Mr. Fenkell is no longer an ESOP participant, and so has no standing to pursue this claim, if ever he did. See Doc. 214 ¶¶ 161, 164 (Fenkell alleges he is a participant and therefore entitled to bring the cause of action). There appears to be no other ground upon which Fenkell would have standing to pursue his eleventh third-party claim. This undisputed fact strongly counsels in favor of summary judgment dismissing Fenkell's eleventh third-party claim in its entirety.
For all these reasons I will grant summary judgment dismissing Fenkell's eleventh third-party claim.
The Alliance Parties have moved for summary judgment against Fenkell based on several other theories founded on the premise that Alliance's assets are "plan assets." I explain in section III of this opinion why genuine issues of material fact preclude summary judgment on this basis. As a result, I will deny plaintiffs' motion for summary judgment insofar as it is predicated on a "plan assets" theory of liability. See Alliance Mem. at 73-83 (theories of liability against Fenkell under 29 U.S.C. §§ 1104(a)(1) (duty of single loyalty); 1106(b)(1) (duty not to deal with assets in his own interest); 1106(b)(3) (duty not to receive consideration from a party dealing with the plan); 1106(a)(1)(D) (duty not to transfer plan assets to a party in interest). The allegations concerning the Brookdale
The Fenkell Parties have moved for summary judgment as to all claims by Alliance against them. Doc. No. 505. A number of the Fenkell Parties' arguments are simply the flip side of arguments by Alliance; hence, my discussion of the Alliance motion is in many respects dispositive of Fenkell's motions. Most of the Fenkell Parties' arguments can be disposed of for reasons already elaborated upon during my discussion of the Alliance motion.
The Fenkell Parties have moved to dismiss the various ERISA claims contained in the first through fifth claims for relief. See Fenkell Mem. 25-50. Alliance has established that Fenkell violated various ERISA sections with regard to the fees paid by Stonehenge to DBF. I have held that Alliance may have a remedy against both Fenkell and his corporation, DBF, depending on the outcome of a trial on various affirmative defenses interposed by Fenkell. I have also held that any theory of liability predicated on Alliance's plan asset theory will be resolved at trial. I will therefore deny the Fenkell Parties' motion to dismiss Alliance's first through fifth claims for relief, under ERISA.
I will deny the Fenkell Parties' motion for judgment dismissing Alliance's sixth claim for relief. Fenkell Mem. at 52-54. Under their sixth claim for relief, the Alliance Parties seek a declaratory judgment that Fenkell is not entitled to indemnification, under Alliance by-laws and his employment agreement, for his defense costs and attorneys' fees in the Chesemore action. Doc. No. 68, at 44-45. I have explained that Fenkell is not entitled to indemnification, under Pennsylvania law, for intentional misconduct, and that "Judge Conley made findings that Mr. Fenkell's fiduciary violations were the product of design and deliberation. See Chesemore, 886 F. Supp. 2d at 113, 1052-53. The Chesemore opinion is rife with findings of Mr. Fenkell's intentional state of mind." Doc. 510 at 2.
The Fenkell Parties assert that Alliance cannot sue Fenkell for contribution. Common law contribution may or may not be available, but Alliance is entitled to assert co-fiduciary liability against Fenkell for the $13 million Alliance paid to settle the Chesemore case, under 29 U.S.C. § 1105.
ERISA limits indemnification among fiduciaries. See 29 U.S.C. §§ 1110, 1105. Whether a federal common law right of co-fiduciary indemnification exists under ERISA is unsettled. I have refused to extend such a federal common-law right of indemnification, if it exists, to a non-fiduciary sued for ERISA violations. See Spear v. Fenkell, CIV.A. 13-02391, 2015 WL 518235, at *4 (E.D. Pa. Feb. 6, 2015). I will reserve to trial, after sorting out the underlying liabilities upon which co-fiduciary liability might be based, whether I should use principles drawn from the common law of contribution and indemnification to define the nature and extent of the relief afforded under 29 U.S.C. § 1105(a). I will deny the Fenkell Parties' motion for summary judgment as to the plaintiffs' eighth claim for relief.
The Fenkell Parties ask me to grant summary judgment dismissing plaintiffs' ninth claim for relief, which sounds in fraud. Fenkell Mem. at 56. Fenkell argues that plaintiffs have not met their burden of establishing the elements of fraud by clear and convincing evidence. Fenkell Mem. at 56 (citing to Blumenstock v. Gibson, 811 A.2d 1029, 1034 (Pa. Super. Ct. 2002)). Alliance argues that, to the contrary, a wealth of facts developed during discovery demonstrate that Fenkell failed to tell the Alliance Compensation Committee about his true level of compensation, omitting, for instance, his DBF fees received from Stonehenge. Alliance Opp. at 121. Fenkell claims the pertinent information about his compensation was well known by everyone at Alliance who mattered. Fenkell Mem. at 57-58.
Under Pennsylvania law, "fraud consists of anything calculated to deceive, whether by single act or combination, or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture." Moser v. DeSetta, 589 A.2d 679, 682 (Pa. 1991). "The concealment of a material fact can amount to a culpable misrepresentation no less than does an intentional false statement." Id. There are genuine issues of material fact concerning Fenkell's disclosure, or lack of it, to the Compensation Committee, and as to his intent. See Alliance Opp. at 121-25. There are also genuine issues of material fact about whether the facts of Fenkell's compensation were so well known to others that either Mr. Fenkell's intent to defraud, his duty to disclose, or Alliance's reliance on Fenkell's alleged omissions, are vitiated. Who knew what, and when, and issues of intent, are all the type of factual disputes that should be sorted out at trial. I will deny Fenkell's motion for summary judgment as to the plaintiffs' ninth claim for relief.
The Fenkell Parties ask me to grant summary judgment dismissing the plaintiffs' tenth claim for relief sounding in breach of corporate fiduciary duties. Fenkell Mem. at 62. The Fenkell Parties' argument boils down to this: "[t]he record is replete with testimony of Mr. Fenkell regarding the good faith and diligence that he applied to the exercise of his corporate duties. . ." Id. at 63. The record is also replete with documentary and testimonial evidence about his fiduciary misdeeds. See Alliance Opp. at 126-27. As there are genuine issues of material fact surrounding the question whether Fenkell breached his fiduciary duties to Alliance, I will deny summary judgment.
The Fenkell Parties ask me to grant summary judgment dismissing Alliance's thirteenth and fourteenth claims for relief. Fenkell Mem. at 63-64. The thirteenth claim for relief alleges that Fenkell and the Sefcovic Parties engaged in a civil conspiracy to commit fiduciary and ERISA violations. Doc. No. 68, at 56-57. The fourteenth claim for relief alleges a civil conspiracy between Fenkell, DBF and the Stonehenge defendants to pay excessive fees to Stonehenge and kickbacks to Fenkell, in violation of state law fiduciary standards and ERISA. Doc. No. 68, at 58-59.
As I discuss in more detail elsewhere,
The Fenkell Parties ask me to grant summary judgment dismissing the fifteenth claim for relief. Fenkell Mem. at 64. Fenkell argues that there were employment contracts between the parties, so there can be no unjust enrichment remedy. Id. at 65 (citing to Benefit Life Ins. Co. v. Union Nat'l Bank, 776 F.2d 1174, 1177 (3d Cir. 1985) (quoting Schott v. Westinghouse Electric Corp., 259 A.2d 443, 448 (Pa. 1969)). The Alliance Parties point out that their claims extend outside the terms of the employment contracts, and that there is a dispute whether Fenkell had a valid contract. See Alliance Opp. at 127 (citing to Grudkowski v. Foremost Ins. Co., 556 F. App'x 165, 170 n.8 (3d Cir. 2014); Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912, 936 (3d Cir. 1999); Batoff v. Charbonneau, No. 12-05397, 2013 WL 1124497, at *9 (E.D. Pa. Mar. 19, 2013)). I agree with Alliance: its claims involve more than the employment contracts, and there is a legitimate dispute over whether the contract was valid. I will deny defendants' motion for summary judgment as to the fifteenth claim of relief.
The statute of limitations defenses in this case present fact issues that will be resolved at trial. I will therefore deny the Fenkell Parties' motion for summary judgment based on various statute of limitations theories. Fenkell Mem. 65-80.
Alliance's fourth claim for relief alleges that Stonehenge is liable for its knowing participation in Fenkell's fiduciary violations. This claim arises under Harris Trust, discussed infra. In its fifth claim for relief, Alliance alleges that the Stonehenge fees amounted to a gratuitous transfer of plan assets, because Stonehenge provided no value in exchange for the fees. This, Alliance alleges, violated 29 U.S.C. § 502(a)(3). See Alliance Mem. at 65. Stonehenge claims that Alliance cannot establish the necessary grounds for either claim. In support of this position, Stonehenge argues that 1) Alliance cannot show that the Stonehenge Defendants participated, knowingly or otherwise, in a prohibited transaction, 2) the fourth and fifth claims for relief do not seek appropriate equitable relief, and 3) Alliance cannot establish the elements of the underlying prohibited transaction. See Stonehenge Mem. at 105. Alliance disagrees, stating that Stonehenge is liable, under the fourth and fifth claims for relief, because they received plan assets
In Harris Trust the Supreme Court held that a fiduciary could pursue a claim against a non-fiduciary entity for knowingly participating in a transaction that was prohibited under ERISA. 530 U.S. at 241. The Court's opinion rested on its reading of 29 U.S.C. § 1132(a)(3), which provides that a civil action may be brought:
Id. at 246; 29 U.S.C. § 1132(a)(3) (ERISA § 502(a)(3)). The Court reasoned that this section permitted an action by a defined class of individuals, "participant[s], beneficiar[ies], or fiduciar[ies]," to pursue "appropriate equitable relief" against any person, not just against fiduciaries. Id. at 246-47. The Court construed section 1132(a)(3) (ERISA § 502(a)(3)) to permit an action against non-fiduciaries who "knowing[ly] particip[ate]" in a fiduciary breach. See Harris Trust, 530 U.S. at 248-49.
Stonehenge's primary argument is that it never received plan assets, because it was always paid by AH III, not Alliance Holdings or the Alliance ESOP. Stonehenge Mem. at 84. This, Stonehenge argues, means that it never "participated" in a fiduciary violation, in the sense required under Harris Trust. Id. at 105. The argument rests on the premise that Harris Trust liability only attaches if a non-fiduciary receives plan assets. I disagree. Receiving plan assets through a prohibited transfer is one way, but not the only way, a non-fiduciary can "knowingly participate" in a fiduciary violation. It happens to be the type of fiduciary violation at issue in Harris Trust. 530 U.S. at 241. By serving as the means through which Mr. Fenkell received the DBF fees in connection with the 1999 ESOP Loan Transaction, Stonehenge "participated" in Mr. Fenkell's violation of section ERISA § 406(b)(3), 29 U.S.C. § 1106(b)(3).
Section 1106(b)(3) prohibits a fiduciary of the plan from receiving "any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan." The language of section 406(b)(3) does not limit the prohibited consideration to receipt of plan assets. Nor does section 406(b)(3) require that the party that pays consideration to the fiduciary be a recipient of plan assets. Rather, to fall under the statute's ban, the consideration paid must be "in connection with a transaction involving assets of the plan," and the party paying the consideration must be "dealing with the plan" in connection with such a transaction. See Iola, 700 F.3d at 94 (noting 406(b)(3) "commands that fiduciaries `shall not' receive consideration in connection with a transaction involving plan assets").Section 502(a)(3) permits a fiduciary to obtain "appropriate equitable relief" against "any act or practice which violates any provision of [ERISA Title I] or the terms of the plan . . ." (emphasis supplied). The statute does not limit relief to only those violations involving receipt of plan assets by a non-fiduciary. As I held in section II of this Memorandum, Fenkell committed ERISA fiduciary violations in connection with his receipt of fees from Stonehenge.
The resolution of this preliminary point leaves several questions in its wake. First, did Stonehenge "knowingly" participate in a fiduciary breach, that is, was Stonehenge aware of facts that should have alerted it that Fenkell was committing fiduciary violations? Second, is there "appropriate equitable relief" available to Alliance against Stonehenge, if Stonehenge knowingly participated in Fenkell's violations? Third, are there any affirmative defenses, such as the statute of limitations, which would bar relief even if liability otherwise attaches?
I conclude there is a genuine issue of material fact that precludes summary judgment on the issue whether Stonehenge "knowingly" participated in Fenkell's breach of fiduciary duty, although there is evidence that Stonehenge knew or should have known that payments to DBF amounted to a kickback. I also conclude that there may be "appropriate equitable relief" available to Alliance, in the form of disgorgement and an accounting. I conclude as well that genuine issues of fact preclude summary judgment on the various affirmative defenses asserted by Stonehenge. These defenses turn on questions of knowledge and intent, and the factual disputes that attend them are genuine and material.
Finally, the parties have devoted a substantial amount of time to the question whether assets of Alliance Holdings or AH III were "plan assets." If Alliance's or AH III assets are "plan assets," both Fenkell and Stonehenge face more significant liability, and some of the defenses asserted by Stonehenge and Fenkell would tend to become less viable. I conclude that there are genuine issues of material fact that make summary judgment inappropriate.
Stonehenge argues that they only provided investment banking services for a set fee, which "is legally insufficient to subject [them] to liability for relief under ERISA Section 502(a)(3)." Stonehenge Mem. at 117.
Under Harris Trust, liability only attaches to a non-fiduciary if they knowingly participated in a prohibited transaction. See 530 U.S. at 246. The participation prong, Stonehenge assures me, does not cover an individual who enabled or caused a prohibited transaction to occur. See Stonehenge Mem. at 118 (citing Mellon Bank, N.A. ex rel. Weiss Packing Co., Inc. Profit Sharing Plan v. Levy, 71 Fed. Appx. 146, 149 (3d Cir. 2003) (non-precedential)). But I find that is far too narrow a reading of Mellon Bank.
In Mellon Bank, Levy acted as a lawyer in a transaction involving a profit sharing plan. See id. at 147. One of the trustees of the plan sold property to the plan for $450,000. Id. The Plan took out a loan and mortgage against that property for $450,000. Before the deal went through, the bank requested that the plan provide it an opinion letter saying that state or federal law which could affect the bank's mortgage did not prohibit the sale from the owner of the property to the plan, where he sat as a co-fiduciary. Id. Levy wrote the opinion letter, the bank accepted it, and the loan went through. Id. The loan was later found to have violated ERISA. Id.
The Third Circuit held that "[i]t is not alleged that Levy ever participated in the actual exchange of money for property, ever saw profit from the transaction, or ever possessed title or right to the property or money involved." See id. at 149. Stonehenge, by contrast, received "a number in the vicinity of $30 million" for its services. See Witten Dep. 187:4-5; see also Alliance Mem. at 13 (concluding that $34,475,553.72 was the total of the fees Stonehenge received vis-à-vis the Spread Deal). It is quite a stretch to argue that Stonehenge, which was paid $34 million for its part in facilitating the Spread Deal, is indistinguishable from an attorney who issued an ultimately incorrect opinion letter and got no share of the profits. Unlike the attorney in Mellon Bank, Stonehenge's fee was contingent on the profitability of the Spread Deal, and was paid through AH III via the same "waterfall" that generated fees for the ESOP and Alliance. See Stonehenge Mem. at 21 (citing Sept. 1, 1999 Fee Agreement).
Mellon Bank, which mentioned some factors that cut against a finding of "participation," did not hold that only those factors may define "participation," and no others. "Participation" means "[t]he act of taking part in something, such as a partnership, a crime, or a trial." Black's Law Dictionary (10th ed. 2014). "Participate" means to "take part in an activity or event." Compact Oxford English Dictionary (3d Ed., Rev'd, 2008). It is difficult to see how Stonehenge did not "participate" in the Spread Deal under the ordinary meaning of the word. A salesman who "actively assisted" a deal, and thereby earned commissions, was a "knowing participant." See Iola, 700 F.3d at 80. Barrett, the salesman in Iola, did not receive trust assets. Stonehenge's active involvement in arranging and managing the deal, and its $34 million in fees, is not materially different than Barrett's commissions in Iola.
Whether Stonehenge "knowingly" participated is a murkier question. Harris Trust requires actual or constructive knowledge of the facts that made the underlying transaction at issue unlawful. See 530 U.S. at 251.
The Third Circuit has held that actual knowledge
The parties have lined up a host of facts and arguments on either side of the question.
See Alliance Opp. Mem. at 28.
There are genuine issues of material fact about whether Stonehenge and its agents actually or constructively knew of Fenkell's fiduciary breaches. The resolution of the issue will hinge, to a significant extent, on the credibility of witnesses at trial.
Harris Trust held that ERISA relief against non-fiduciaries must be equitable and appropriate under the law. See 530 U.S. at 250. Equitable relief, under ERISA, means "something less than all relief." See Great-West Life & Annuity Ins. Co v. Knudson, 534 U.S. 204, 209 (2002). The Third Circuit has cautioned that calling damages an equitable remedy
Stonehenge cites to a line of cases that permit the restitution of trust assets in the hands of a transferee. Stonehenge Mem. at 107. But the fact that equitable relief is available in these cases does not prove that no equitable relief is available if the assets have been dissipated and are no longer in the hands of the transferee. The question is whether disgorgement and an accounting are appropriate equitable remedies, under the language of 29 U.S.C. § 1132(a)(3). The Supreme Court has interpreted the statute to permit only those remedies "typically" available from a court of equity before the equitable and legal jurisdictions of the federal courts were joined in 1938. See Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 362 (2006); Knudson, 534 U.S. at 212; Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993).
In Edmonson v. Lincoln Nat. Life Ins. Co., 725 F.3d 406 (3d Cir. 2013) the Court of Appeals held that "Edmonson's claim for disgorgement, which is akin to an accounting for profits, is an equitable remedy available under ERISA and Great-West Life." Id. at 420. That could end the discussion, but Stonehenge urges me to distinguish Edmonson.
The subject of what remedies qualify as "equitable" under Knudson
Montanile v. Bd. of Trustees of Nat. Elevator Indus. Health Benefit Plan, 136 S.Ct. 651, 657 (2016) (emphasis in the original).
The Supreme Court's concerns about permitting damage-like remedies in equitable guise are well documented. See Knudson, 534 U.S. at 210. These concerns may be in tension with its "typically available in equity" test, when it comes to accounting and disgorgement. Nevertheless, the Supreme Court has endorsed accounting and disgorgement as an equitable remedy at least three times, without actually ruling on the subject. Knudson, 534 U.S. at 215 (quoting Harris, 530 U.S. at 250-51); Mertens, 508 U.S. at 262 ("Professional service providers . . . must disgorge assets and profits obtained through participation as parties-in-interest in transactions"); see Edmonson, 725 F.3d at 419 ("`an accounting for profits, a form of equitable restitution,' is a `limited exception' to [the Supreme Court's] rule defining the nature of equitable remedies." (quoting Knudson, 534 U.S. at 214 n. 2).
Accounting, along with its cohort, disgorgement,
Loss to the victim is not the measure or limit of a disgorgement remedy, in contrast with a compensatory damage remedy. Cavanagh, 445 F.3d at 117. The accounting and disgorgement remedies are designed to account to the trust for profit made through a fiduciary's misuse of trust assets. It forces a wrongdoer to disgorge the profit, even if the trust has suffered no loss — or perhaps made a lot of money — as a result of the breach of fiduciary duty. And the remedy is available against non-fiduciaries who knowingly participate in a fiduciary breach. See Duncan, 82 U.S. at 169 (a non-fiduciary was forced to account for the value of pledged shares he sold).
Our Court of Appeals plainly held that accounting and disgorgement are available equitable remedies. See Edmonson, 725 F.3d at 419-20. In Iola, there were no traceable assets in the hands of a non-fiduciary, a salesman who had earned and distributed commissions generated by a transaction that violated ERISA; nevertheless the court approved a disgorgement remedy against him. See 700 F.3d at 102;
Stonehenge, in a supplemental memorandum, argues that the Supreme Court's recent opinion in Montanile undercuts the notion that disgorgement or accounting are available where there is no specific, traceable property in defendant's possession. See Stonehenge Defendants' Statement of Supplemental Authority, Doc. No. 563, at 2.
I find that Montanile overruled neither the holding nor the rationale of Edmonson. Absent clear language from the Supreme Court overruling the holding or rationale of Edmonson, I must follow the Court of Appeals. See United States v. Mitlo, 714 F.2d 294, 298 (3d Cir. 1983) (quoting Allegheny Gen. Hosp. v. NLRB, 608 F.2d 965, 970 (3d Cir. 1979)); Litman v. Massachusetts Mut. Life Ins. Co., 825 F.2d 1506, 1508 (11th Cir. 1987). If Stonehenge knowingly participated in Fenkell's fiduciary violations, accounting and disgorgement may be appropriate equitable remedies.
The Stonehenge Parties make a number of arguments that focus on ERISA's various definitional requirements concerning prohibited transactions. Stonehenge Mem. at 125.
I will address each of these arguments in turn.
To prove a section 406(a)(1)(C) or (D)
Fenkell negotiated the 1999 ESOP loan deal. He caused the ESOP, Alliance, and AH III to enter into the deal. He signed the loan documents for all three of them. In the broad sense of the word, there is a genuine issue of material fact whether Mr. Fenkell "caused" the payments to Stonehenge. The issue must be resolved at trial.
Stonehenge also claims that they are entitled to an exemption under ERISA Section 408(b)(2), because compensation was not paid by the plan, but by AH III. Id. at 126. Section 408(b)(2) provides that the prohibitions of Section 406 are inapplicable to "reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor." See 29 U.S.C. § 1108(b)(2). Stonehenge argues that even if it was deemed to have provided services to the ESOP, and as a consequence to have been a party in interest, it was paid by AH III, and thus not by "a plan." Id. at 126. Stonehenge argues that "reasonable compensation," under Section 408(b)(2), means compensation paid by a plan, not by a party to an agreement. See id. (citing Iola, 700 F.3d at 95; Lowen, 829 F.2d at 1216 n. 4 (2d Cir. 1987)). The result, Stonehenge argues, is that it is entitled to the exemption under Section 408(b)(2) as a matter of law, because Stonehenge did not receive "more than reasonable compensation" from the plan. Id. at 126-27.
Stonehenge's argument is not convincing. Section 406(a) provides that a plan fiduciary "shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect . . . (C) furnishing of goods, services, or facilities between the plan and a party in interest" (emphasis supplied). While Section 408(b)(1) provides an exemption for "loans made by the plan" under certain circumstances, Section 408(b)(2) exempts "reasonable arrangements with a party in interest[,]" to provide services for the "establishment or operation of the plan," without specifying that the plan be a party to the "reasonable arrangements[.]" 29 U.S.C. § 1108(b)(2); ERISA Section 408(b)(2). Iola did not hold that Section 408(b)(2) contains an independent requirement that reasonable compensation be paid by a plan, not some other entity. And if Section 408(b)(2) did have such a requirement, the effect would be to make the exemption provision inapplicable except when compensation was paid by a plan. See Lowen, 829 F.2d at 1216 (Section 408 "does not exempt the fees and other compensation that defendants received from companies in which the Plans' assets are invested."). This exactly contradicts Stonehenge's argument, and is consistent with the Third Circuit's holding, in Iola, that Section 408 is not a broad ranging, stand-alone exemption for "reasonable compensation." See Iola, 700 F.3d at 95.
Stonehenge's argument is not only gainsaid by the statute's language. Stonehenge claims that it did not provide any services to the plan other than the initial work on the funding transaction in 1999. See Stonehenge Mem. at 58-59, 126 n. 42. Yet an August 27, 1999 letter plainly contradicts this narrative. The letter identifies Stonehenge as "an advisor to Alliance Holdings, Inc., the Plan,
The letter alone would create a triable issue of fact. Alliance also claims that AH III assets were plan assets and that Stonehenge's fees were not "reasonable arrangements" involving "reasonable compensation." All these issues should be resolved at trial, not on summary judgment.
ERISA § 406(a)(1) imposes liability on a fiduciary for engaging in a set of prohibited transactions with a party in interest, unless the transaction comes under an exception in ERISA § 408. 29 U.S.C. § 1106(a)(1)(A)-(E). "Prohibited Section 406(a) transactions between a plan and a party in interest are those `commercial bargains that present a special risk of plan underfunding because they are struck with plan insiders, presumably not at arm's length.'" Danza v. Fid. Mgt. Trust Co., 533 Fed. Appx. 120, 125 (3d Cir. 2013) (non-precedential) (quoting Lockheed Corp., 517 U.S. at 893). Both a fiduciary and a party in interest may be liable for a prohibited transaction under ERISA Section 406(a)(1).
The question is whether Stonehenge provided services to the plan and received payment from plan assets,
Stonehenge argues that under 29 U.S.C. § 1106(b)(3), no violation occurred because the transactions at issue did not implicate plan assets. See Stonehenge Mem. at 128. This is another invocation of the "plan assets" argument, already dealt with. I reiterate that (a) the "plan assets" argument cannot be resolved on summary judgment and (b) the various facets of the 1999 ESOP Loan Transaction were all part of one "transaction," the entirety of which involved "assets of the plan." See discussion at p. 24 of this opinion and at page 91-100 of this opinion.
Stonehenge argues that Fenkell was not acting in his role as a fiduciary when he acted as an AH III board member to approve fees to Stonehenge. Stonehenge Mem. at 131 (citing to Payonk v. HMW Industries, Inc., 883 F.2d 221, 225 (3d Cir. 1989). But this is wrong. The premise of Stonehenge's argument is that there are reasons other than its "plan assets" argument that warrant summary judgment. Id. at 125 ("independent of the plan assets issue, Plaintiffs cannot establish that any prohibited transactions . . . occurred."). Under this premise I must assume that there is a fact issue about whether AH III assets were "plan assets." There is no question that Fenkell, as an AH III board member, was acting as a fiduciary with respect to AH III assets. If there is a fact issue about whether AH III assets were plan assets, then there is a fact issue about whether Fenkell was acting as a "functional" fiduciary concerning assets of the plan when he approved payment of Stonehenge fees out of AH III assets. See 29 U.S.C. § 1002(21)(A); Pegram, 530 U.S. at 225-26. Summary judgment is not appropriate.
Stonehenge insists that because there was no connection between David Fenkell's compensation from Stonehenge and the Spread Deal, no 406(b)(3) violation occurred. See Stonehenge Mem. at 133. This argument is grounded in Department of Labor regulations that require a cognizable connection between the fiduciary's receipt of money and the fiduciary's decision to allow the plan to participate in the transaction. See id. at 133-34 (citing 45 Fed. Reg. 51194-95) (additional citations omitted).
Stonehenge notes that the ESOP participated in the Spread Deal only by entering into the 1996 loan agreement and then refinancing those loans in 1999. Id. at 134. Alliance seeks to draw a connection between the DBF Consulting agreement and the fees paid to Stonehenge, but that is improper, according to Stonehenge, because the ESOP never paid Stonehenge's fees: AH III did. Id. (citations omitted). Stonehenge insists that Alliance has never alleged a connection between David Fenkell receiving money through DBF Consulting and the Alliance ESOP's participation in the 1996 deal or the 1999 refinancing. Id.
Alliance relies on Lowen in addressing this argument. They write that this situation, where a number of corporate forms are used to mask some wrongdoing, is precisely what Lowen contemplated: "[a]s Lowen makes clear, ERISA violators cannot hide behind convenient corporate formalities to defeat ERISA's protections of benefit plan participants." See Alliance Opp. at 26. Factually, Alliance alleges the Stonehenge defendants always knew that they were receiving so-called "ESOP fees" from the 1996 deal, and regularly discussed their splitting of those funds with Fenkell, DBF Consulting, and Alliance. Id. at 27; see also id. at 26 n. 17 (citing Purchase Agreement And Consulting Agreement (Dkt. 502-34, Ex. 204, SP0002626 et seq.)).
I have rejected Stonehenge's argument in Section II of this Memorandum, and found that Fenkell violated various ERISA provisions by negotiating and accepting the DBF fees in consideration of the 1999 ESOP Loan Transaction. See supra at 20-36. What remains for trial is whether Stonehenge "knowingly participated" in these fiduciary violations. That question will likely implicate a variety of evidence, such as the various corporate convolutions, the particulars of each deal, statements in emails and other documents, and any number of other facts that can be brought to bear on the question of whether Stonehenge "knowingly participated" in Fenkell's fiduciary violations. This is a question that must be left for trial.
Stonehenge has moved for summary judgment as to Alliance's fifth claim for relief, arguing that neither the company, nor the individual defendants, were gratuitous transferees of plan assets. See Stonehenge Mem. at 134. A bit of background is necessary to assess this claim.
In a footnote to their memorandum, the Alliance Parties explain the theory of liability in their fifth claim for relief. Alliance Mem. at 67, n.42. They read Harris Trust to provide for a cause of action against a non-fiduciary who takes trust property without providing value. Id. (citing to Harris Trust, 530 U.S. at 250). This theory of liability is premised on a transfer of trust assets. Id. Thus, unless Stonehenge received plan assets, the liability theory is not applicable. The argument is that a third-party recipient of trust property who supplies no value for the property is liable to the trust in equity, even if the recipient was entirely unaware of the breach of trust. See, e.g., Restatement (Second) of Trusts § 289 (1959).
Stonehenge argues that it 1) never received plan assets, 2) the Alliance Parties have not met their tracing burden, and 3) no underlying prohibited transaction ever occurred. Id. These arguments have been dealt with.
Stonehenge points to record evidence that shows it provided at least some value. For instance, Stonehenge identified lenders, secured a new asset pool of auto receivables, calculated the cash flow yield of various assets in that pool, persuaded bank personnel to participate in the transaction, and took a number of other actions to encourage the success of the Spread Deal. See Stonehenge Mem. at 135-36 (internal citations omitted). Alliance acknowledges that the Stonehenge services were worth approximately $100,000 to $250,000 per year. See Mittelman
Alliance argues that the Stonehenge defendants have failed to satisfy their burden that they provided "value" in exchange for receipt of plan assets, and have failed to prove they were without notice of a fiduciary breach. See Alliance Opp. at 93 (citing Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1383 (3d Cir. 1994)). Alliance also argues that because all inferences must be drawn in favor of the non-moving party, Stonehenge should lose. See id. at 94 (citing Kowalski v. L&F Prods., 82 F.3d 1283, 1288 (3d Cir. 1996)).
Stonehenge has come forward with facts that demonstrate it provided some value. See Stonehenge Mem. at 137 (citing Mittelman Rep. at 16). Alliance argues that the value provided by Stonehenge was a fraction of the fees Stonehenge took, and brought no value to Alliance. See Alliance Opp. at 95 n. 59. Alliance also argues that the kickback scheme by which David Fenkell received $4 million "infects the whole transaction and [Stonehenge's] purported rendering of services."
Alliance does not cite much in the way of convincing authority. See id. at 94 n. 57. Stonehenge argues that the opinions cited by Alliance are inapposite, because the cases refer to Pennsylvania's inheritance tax and the meaning of "reasonably equivalent value" under the Bankruptcy Code. See Stonehenge Rep. Mem. at 54 n. 42 (citing Estate of Beck, 414 A.2d 65, 69 (Pa. 1980); In re Riley, 305 B.R. 873, 882 (Bankr. W.D. Mo. Jan. 29, 2004)).
The Restatement (Second) of Trusts states that: "The interest of the beneficiary in the trust property is not cut off by a transfer by the trustee in breach of trust to a third person if no value is given for the transfer, although the transferee had no notice that the transfer was in breach of trust; and the beneficiary can in equity compel the third person to restore the property to the trust. See Restatement (Second) of Trusts § 289 cmt. a (emphasis added). Stonehenge is linguistically correct: "some value" is not the same as "no value." Alliance's expert admitted that the services Stonehenge performed would amount to approximately $100,000 to $250,000 per year. See Stonehenge Mem. at 137 (citing Mittleman Rep. at 16).
If Stonehenge's argument is correct, a dollar of value would kill a gratuitous transfer claim because it was more than "no value." Alliance points to several cases, among them Hans, in which the District of North Dakota held that the transferee had to prove the value amounted to "adequate consideration." Hans, 3:05-CV-115, 2011 WL 7179644, at *16. This is dicta; Hans turned on whether the transferee had notice, not on whether the transferee provided value. Keach, cited to in Hans and cited to by Alliance, phrased the test as whether "the transaction was not gratuitous but rather involved more than nominal consideration[.]" Keach v. U.S. Trust Co., N.A., 244 F.Supp.2d 968, 974 (C.D. Ill. 2003).
The Supreme Court has relied on the Restatements
(Emphasis supplied).
Section 289 cross-references to Section 298 for a definition of value. Section 298 says that "[i]f money is paid or other property is transferred or services are rendered as consideration for the transfer of trust property, the transfer is for value." Restatement (Second) of Trusts § 298 (1959). Comment (i) to Section 298 goes on to say this:
Id., comment (i). Comment (i) seems to draw a distinction between consideration that is of "less value than the trust property" and consideration that is "insignificant." Consideration of "less value" does not disqualify the transfer on grounds that it had "no value," under Section 289, but may be "evidence that the transferee had notice that the transferor was committing a breach of trust in making the transfer." Consideration that is "insignificant," by contrast, may be proof that "the transaction was not a bargain but a gift." It seems "insignificant" consideration is something different from consideration of "less value:" the first is evidence of a gratuitous transfer, while the second is not, but the second can be evidence that the transferee had notice of a breach of trust.
Keach and the Restatement
The next question is who has the burden of proving that the trust assets were conveyed for a nominal or insignificant price. The answer to the question "is about as clear as mud." Keach, 244 F. Supp. 2d at 972. Harris Trust, the foundation upon which this theory of liability must be based, explicitly reserved decision on who bore the burden of proof. 530 U.S. at 251 n.3. Carefully examining Harris Trust, as well as trust law sources, the court in Keach made a case for imposing the burden of proof on the defendant to show that trust property was exchanged for "value," once the plaintiff proved a transfer in breach of trust. Keach, 244 F. Supp. 2d at 972-76. The court in Keach went on to hold that if the defendant met this burden, then the burden of proof reverted to the plaintiff to prove that the defendant took the trust property knowing of the breach of trust. Id. at 974; see Carlson v. Principal Fin. Group, 320 F.3d 301, 308 (2d Cir. 2003) (in an ERISA case, imposing the burden of proving knowledge on the plaintiff); BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F.Supp.2d 123, 132 (S.D.N.Y. 1999), aff'd, 205 F.3d 1321 (2d Cir. 2000) (same).
The rule in Keach attempts to balance the historical allocation of the burden of proof (on the defendant) with language in Harris Trust that suggests that the plaintiff must prove "knowing participation" under § 1132(a)(3). As the court in Keach concluded, the line in Harris Trust — that "the transferee must be demonstrated to have had actual or constructive knowledge" —
244 F. Supp. 2d at 974 (quoting Harris Trust, 530 U.S. at 251).
At common law, the trust applied to assets transferred in breach of trust unless the transferee established the defense of bona fide transferor for value without notice. See Restatement (Second) of Trusts § 304 (1959). Whether the transferee gave value, or knew of the breach, was a matter of affirmative defense, and the burden rested with the defendant. See Volante, 16 F.3d at 1383-85. Volante, cited by Alliance, was not an ERISA case. It involved goods subject to a trust under The Perishable Agricultural Commodities Act of 1930 ("PACA"). See 16 F.3d at 1377-79. While the Third Circuit relied on the Restatement (Second) of Trusts throughout the opinion in resolving questions of liability, see, e.g., id. at 1380 (citing § 304); 1383 (citing § 297(a)), Volante did not actually address the argument Stonehenge is making. In Volante there was no dispute that the lender had given value for the trust property. Id. at 1380. The case turned on the lender's knowledge of the breach of trust. Id. at 1384. Volante does not actually explain why Stonehenge should bear the burden of proving it paid more than nominal or insignificant value. Id. at 1383.
The language in Harris Trust cited to by the Court in Keach does seem to place the burden on plaintiff to prove that the transferee had knowledge of the breach of trust. See Keach, 244 F. Supp. 2d at 973-74. There is no guidance on the burden of proving a gratuitous transfer, because there was no question of gratuitous transfer in Harris. The burden shifting scheme proposed in Keach works if liability for the asset transfer is treated as one cause of action, as it was in Keach. See id. at 976-77. The problem here is that Alliance has attacked the asset transfer via two causes of action, one seeking to prove that Stonehenge was a knowing participant in the breach of trust (fourth claim for relief), the other seeking to prove that the transfer was gratuitous (fifth claim for relief). This is not unreasonable. As an equitable defense, defendant had to prove both that the transfer was for value and that defendant had no knowledge of the breach. This meant plaintiff could defeat the defense by disproving either of the two elements. If Harris Trust meant to cast the issue as a cause of action, plaintiff need prove only one or the other fact to trigger liability: either there was no value, or defendant had knowledge of the breach.
Alliance's theory responds to Judge Conley's observations, in Chesemore, about Karen Fenkell's potential liability as a gratuitous transferee. See Chesemore v. Alliance Holdings, No. 09-cv-413-WMC, 2013 WL 6989526, at *1 (W.D. Wis. Oct. 16, 2013). In Chesmore, Karen Fenkell filed a motion to dismiss any gratuitous transferee liability as a result of money that was shifted from David Fenkell's accounts to her accounts following the Trachte deal in 2007. Id. In denying the motion to dismiss, Judge Conley refused to modify his previous interpretation of Harris Trust liability. Id. at *4; see Chesemore v. Alliance Holdings, Inc., 284 F.R.D. 416, 421 n.5 (W.D. Wis. 2012).
The Court of Appeals has identified five factors I must weigh when allocating the burden of proof under a statutory scheme:
Evankavitch v. Green Tree Servicing, LLC, 793 F.3d 355, 361 (3d Cir. 2015). The challenge in applying the Evankavitch factors to this case is that ERISA is not the explicit source of the gratuitous transfer and knowing participation issues. Those issues derive from trust law, the clay from which ERISA was molded. Harris Trust, 530 U.S. at 250.
I will address the Evankavitch factors in order. First, the issues are not framed at all by the statute, but by the common law, which treats a bona fide transfer without notice of the breach of trust as an exception to the general rule that the terms of a trust follow trust assets through a transfer to a third party. This factor weighs in favor of imposing the burden on the defendant, since that was the ordinary burden at common law. Second, ERISA's "general structure and scheme" do not clearly indicate where the burden should fall, but the common law does: on the defendant. See Volante, 16 F.3d at 1383. Third, a plaintiff would not be "unfairly surprised by the assertion of [these issues]" absent a rule requiring their assertion as an affirmative defense. See Evankavitch, 793 F.3d at 364-65. The case which raised these issues to prominence, Harris Trust, is well known to the ERISA bar, as the present dispute makes painfully clear. This is not an issue that would sneak up on a plaintiff at trial if not raised explicitly by the defendant.
Evankavitch's fourth factor weighs in favor of imposing the burden on the defendant: "whether a party is in particular control of information necessary to prove or disprove the defense[.]" Id. at 361. The value of the services that the Stonehenge Parties supplied is information within the "particular control" of the defendants. Finally, Evankavitch's fifth factor, "other policy or fairness considerations," suggests the burden should be placed on the defendant in this case. Stonehenge is not an ordinary business vendor who wandered into a transaction involving trust assets without the first hint of what it was getting into. Stonehenge participated in the creation and servicing of the ESOP funding transaction. It was well versed in the nuances and hazards of dealing with an ERISA fiduciary.
In addition, the variation in burden of proof between the fourth and fifth claims for relief makes sense on a wider view of equity. Where the evidence suggests that a transfer of assets was gratuitous, there seems nothing unfair about requiring the transferee to prove consideration. The fact that the transferee got something for nothing — or nominal or insignificant value — supplies an equitable basis for believing that he was on notice that something was amiss. But where the transferee has provided significant value for the trust assets — even if not full value — equity should be more solicitous of the transferee, and require proof by the party seeking return of the assets that the transferee knowingly participated in a breach of trust. Analysis of the Evankavitch factors suggests it is appropriate to impose the burden of demonstrating value on Stonehenge, as to the fifth claim for relief.
To summarize, to prove its fourth claim for relief, Alliance bears the burden of showing that assets of the plan were transferred in breach of trust, and that Stonehenge "knowingly participated" in a fiduciary breach. To prove the fifth claim for relief, Alliance bears the burden of showing that assets of the plan were transferred in breach of trust. If it does so, Stonehenge bears the burden of proving that it provided more than "nominal" or "insignificant" value for the transfer. Whether the services provided by Stonehenge were "nominal," "insignificant," or merely of "less value" than the fees paid are issues that should be resolved at trial.
If assets of Alliance Holdings and AH III are ESOP plan assets, a host of transactions become subject to ERISA. See Alliance Opp. at 41. If the assets of Alliance Holdings and AH III are not ESOP plan assets, the scope of ERISA liability in this case is reduced. See Stonehenge Mem. at 36-37. The parties have spent a great deal of effort battling over this question. I conclude that a trial will be necessary to resolve the issue.
The Alliance ESOP owns Alliance Holdings stock. This stock is clearly a plan asset. Stonehenge argues that while the Alliance stock is a plan asset, the assets which underlie that stock, i.e. the assets of Alliance Holdings, are not plan assets. See Stonehenge Mem. at 85.
A DOL regulation provides that a plan's investment in a non-public
Section 2510.3 defines an operating company as one "primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital." See 29 C.F.R. § 2510.3-101(c). The dispute between the parties boils down to the meaning of two words: "primarily engaged." The regulation supplies no definition of "primarily engaged." The parties supply very different definitions. Alliance focuses on what percentage of its assets were engaged in production or sales, as opposed to investment. See Alliance Mem. at 29. Stonehenge disputes Alliance's calculation, on its own terms, but also argues that the measure should not be an asset comparison, but a measure of what proportion of the company's activities are devoted to production, as opposed to investment. Id. I will refer to Alliance's theory as the "asset" theory and Stonehenge's theory as the "activity" theory.
Alliance argues that through the first half of 2011, it "primarily engaged" in passive investment, not the selling of goods or the performing of services that would qualify Alliance as an operating company. See Alliance Mem. at 28. Alliance provides an analysis of its assets to prove its point: "[i]n 2010, 25.82% of Alliance's assets, valued at cost, were invested in the production or sale of a product or service." See id. at 29 (citing 4/15/15 Spear Dep. Ex. 578). Thus, Alliance argues, its primary focus was on passive investments, and not operating companies.
Stonehenge argues that Alliance was in fact an operating company. See Stonehenge Mem. at 86 (citing 51 Fed. Reg. 41262 at Section VI(A)(1) (Nov. 13, 1986)). Stonehenge relies in the main on one case, Middleton v. Stephenson, No. 2:11-CV-313, 2011 WL 6131334, **2-3 (D. Utah Dec. 8, 2011)).
Stonehenge points out that Alliance carried on an active trade or business. See Stonehenge Mem. at 87 (citing 51 Fed. Reg. 41262 at Section VI(A)(1) (Nov. 13, 1986)). Stonehenge also cites to various deposition transcripts that show that Alliance was involved in helping to buy and sell operating entities, and highlights the fact that Alliance was an ESOP "collective" that gathered many ESOPs under its umbrella. See id. (citations omitted). Stonehenge puts great emphasis on Form 5500s filed with the Department of Labor and Internal Revenue Service, which state that Alliance Holdings was in the business of managing companies.
There is little case law to inform my analysis of what an operating company is. The only guidance Stonehenge can provide comes from Middleton. The opinion, though helpful, does not carry the weight of a case decided in this jurisdiction. See, e.g., Kendall v. Daily News Pub. Co., 716 F.3d 82, 92 (3d Cir. 2013) (discussing use of Ninth Circuit case law in defamation case); Karlo v. Pittsburgh Glass Works, LLC, No. 2:10-cv-128, 2014 WL 1317595, at *17 n. 16 (W.D. Pa. Mar. 31, 2014) (citing cases outside of the Third Circuit and noting they had "little persuasive value")). Alliance distinguishes Middleton from this case, arguing that the corporate make-up of the companies involved in Middleton was entirely different from the ones currently before me. See Alliance Mem. in Opp. at 38. (citing Middleton, 2011 WL 613334, at *2).
It cannot be that in all cases the operating company definition should hinge only on the number of employees who are committed to operating company activities versus those employees engaged in investment activities. See id. at 39. Otherwise the Department of Labor would not have used an "asset" test, in one particular circumstance, to determine whether a company is "primarily engaged" as an ordinary operating company. Plan Assets Reg. § 2510.3-101(d).
I agree with the Department of Labor that, "[i]n general, whether a particular company is, or is not, an operating company . . . is a factual question to be resolved taking into account the particular characteristics of the entity under consideration." Final Regulation Relating to the Definition of Plan Assets, 51 FR 41262-01, *41271, 1986 WL 116042 (emphasis supplied). In this particular instance, neither the "assets" theory nor the "activities" theory is clearly more reasonable than the other. Assets and activities together make up a business. A legislative or administrative body might reasonably choose to pick one theory over the other, for various reasons, including ease of administration, but that has not happened in this instance. In large measure a decision here will involve the weighing of incommensurables, a task generally better suited to trial. Cf. Conway v. O'Brien, 111 F.2d 611, 612 (2d Cir. 1940), rev'd, 312 U.S. 492 (1941) (After observing the difficulty of weighing incommensurables, and the ordinary practice of leaving such a task to a jury, Judge Learned Hand elected to decide a gross negligence issue as a matter of law. He was reversed by the Supreme Court, which sent the case back for trial.).
The law consists of deriving general principles from the experience of cases, and then applying those principles to a particular set of facts. It is a kind of dialectic. Typically the particular facts of a case are variable or novel, while the legal principles have been developed over time and are well known. In those instances summary judgment may be appropriate, because detailed, well-developed legal standards permit more confident judgments about which facts are material. In the absence of well developed legal principles, assurance about what facts are material is harder to come by. It is appropriate, in that instance, to test the facts through the rigors of trial, so that at least one side of the dialectic is carefully grounded in reality. I conclude that the plan assets issue needs to be decided at trial. I will deny summary judgment for any party to the extent the motion requires a resolution of the plan assets issue.
Stonehenge argues that assets of AH III, the entity that actually paid Stonehenge, could not be considered ESOP assets even if Alliance Holdings was an operating company. See Stonehenge Mem. at 89. Stonehenge argues that 29 C.F.R. § 2510.3-101(a)(2)
Alliance argues that assets of Alliance were plan assets, based on the DOL rule that if an ESOP owns 100% of the stock of an entity, and the entity is not an "operating company," then the entity's underlying assets are "plan assets." Alliance Mem. at 76 (citing to 29 C.F.R. § 2510.3-101(a)(2)(i) and (c)(1)). Alliance argues that the DOL rule should be applied to both Alliance and AH III. Alliance Op. at 40-41. Alliance points to the DOL application of its plan assets rule and exemptions to certain types of downstream entities, an application that would make no sense if the plan assets rule applied to only the first layer of corporate subsidary, as Stonehenge suggests. Id. at 41 (citing to Final Regulation Relating to the Definition of Plan Assets, 51 Fed. Reg. 41262-01, 41262 (Nov. 13, 1986).
Alliance argues that 1) Alliance Holdings, and all its assets, are plan assets belonging to the ESOP; 2) AH III's assets constitute plan assets unless AH III is an "operating company" or the Participation Interest in AH III "is not significant." See Alliance Opp. at 42. (citing Final Regulation Relating to the Definition of Plan Assets, 51 Fed. Reg. 47,226 (Dec. 31, 1986)). Stonehenge has not contended that AH III qualifies as an operating company, nor can Stonehenge demonstrate that Alliance Holdings' equity participation in AH III was insignificant. See id. at 42-43. Since these two qualifying requirements cannot be met, Alliance argues, AH III's assets are plan assets. Id. at 43.
Alliance's interpretation of the regulation is not unreasonable. Under the language of the 29 C.F.R. § 2510.3-101(a)(2), if the plan invests in the stock of company "A," and "A" is not an operating company, "A's" underlying assets are assets of the plan. If "A's" assets include stock in "B," then the stock of "B" is a plan asset. The plan has "invested in" the stock of "B," in the sense that the plan has paid for and owns stock of company "B." But if this is so, the stock of company "B" is subject to rule of Section 2510.3-101(a)(2): if it is not an operating company, then "B's" underlying assets are plan assets, as well. See 29 C.F.R. § 2510.3-101(c)(1) ("An `operating company' is an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital") (emphasis supplied); (j)(1)-(12) (examples). The emphasized language in Section 2510.3-101(c)(1), "subsidiary or subsidiaries," can just as sensibly be read to include subsidiaries of subsidiaries as to include multiple direct subsidiaries. It may well mean both.
Stonehenge concludes that 29 C.F.R. § 2510.3-101(c)(1) categorically cannot extend to AH III assets. I find Stonehenge's argument — that 29 C.F.R. § 2510.3-101(c)(1)'s definition of plan assets categorically cannot apply to a second level subsidiary such as AH III — unconvincing. Since I disagree with Stonehenge on this point, I need not address its consequential argument, based on Secretary of Labor v. Doyle, 675 F.3d 187, 203 (3d Cir. 2012). Doyle held that if there is no applicable regulation, then plan assets should be identified "on the basis of ordinary notions of property rights under non-ERISA law." See Doyle, 675 F.3d at 203 (citing In re Luna, 406 F.3d 1192, 1999 (10th Cir. 2005)). This extends to tangible and intangible property. See id. at 203-04 (citing Department of Labor, Advisory Op. No. 93-14A, 1993 WL 188473, at *4 (May 5, 1993); Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 647 (8th Cir. 2007)). Since I conclude that 29 C.F.R. § 2510.3-101(a)(2) may apply, I need not engage in Doyle's analysis.
If the facts at trial convince me that Alliance was not an operating company, under Section 2510.3, then AH III's assets may be in play, as well. If at trial I determine that AH III's assets are not affected by Section 2510.3, then it may or may not be necessary to apply the teaching of Doyle.
Stonehenge argues that none of the Alliance executives and independent advisors
While it is certainly the case that the opinions or representations of Alliance executives are probative, they cannot be dispositive, in the face of contradictory facts adduced by Alliance, i.e., the devotion of a huge proportion of Alliance assets to investment, rather than production. The possibility remains that Alliance Executives were incorrect.
Stonehenge urges that the plaintiffs are estopped from arguing that the assets of Alliance Holdings and AH III were plan assets. See Stonehenge Mem. at 94. Each of the three estoppel arguments hinge on questions of fact.
Regulatory estoppel prevents a party from reporting a transaction to a government body as one type of transaction, then later characterizing that transaction in a different way during litigation. See id. at 95. For instance, a debtor who classified monthly payments as alimony for the purposes of tax deduction cannot categorize those transactions as something else under the Bankruptcy Code. See id. at 95 n. 26 (citing Robb-Fulton v. Robb (In re Robb), 23 F.3d 895, 899 (4th Cir. 1994)). Stonehenge argues that years of tax and regulatory filings by Alliance were consistent with the position that its assets were not ESOP assets.
Alliance insists that "a party must have made a statement to a regulatory agency and then taken an opposite position to the one presented to the regulatory agency and possessed some level of culpability in doing so. See id. (citing Simon Wrecking Co. v. AIU Ins. Co., 541 F.Supp.2d 714, 717 (E.D. Pa. 2008)) (additional citations omitted) (emphasis in original). Alliance states that they should not be bound by statements made on, for instance, tax filings at Fenkell's direction. Id.
Regulatory estoppel requires, among other things, that I closely examine the deductions and claims made to the IRS regarding what are or are not plan assets. Forms signed by Alliance representatives, under pain of perjury, made representations to various governmental agencies that Alliance assets were not plan assets. See Stonehenge Mem. at 11. It was not just David Fenkell who made these "misclassifications." There is evidence that Ms. Spear signed Forms 5500 in 2004-05 and again in 2009-12. See id. at 41-42 (citations omitted). Ken Wanko also signed these Form 5500s in 2011-12. See id. at 42 (citations omitted). I cannot form a clear picture of Alliance's intent in filing these allegedly mistaken Form 5500s, or of the evidentiary significance of these filings on the issue of estoppel, on a summary judgment record. Whether Mr. Fenkell, Ms. Spear and Mr. Wanko were correct, mistaken but acting in good faith, or mendacious when they signed off on these documents are determinations best left for trial.
Stonehenge argues that quasi-estoppel bars Plaintiffs from making the plan assets argument. Id. at 99. In support, Stonehenge notes that this doctrine "applies where it would be unconscionable to allow a person to maintain a position inconsistent with one in which he acquiesced, or of which he accepted a benefit." Id. (citing Girard Estate Area Residents v. Def. Realty, LLC, No. 2:08-CV-2456, 2009 WL 1967220, at *17 (E.D. Pa. Mar 17, 2009)). Stonehenge describes this doctrine as disabling a party's ability to "blow both hot and cold." See id. (citing Erie Telecom., Inc. v. City of Erie, 659 F.Supp. 580 585 (W.D. Pa. 1987) (further citations omitted). Stonehenge explains that Alliance suddenly changing its position on the plan assets issue for the purposes of this litigation, after reaping a substantial tax benefit through the Section 133 loan program, "is textbook estoppel-barred conduct." See Stonehenge Mem. at 100. Courts in this jurisdiction note "[t]he doctrine applies where it would be unconscionable to allow a person to maintain a position inconsistent with one in which he acquiesced, or of which he accepted a benefit." Id.
Alliance disagrees, arguing that Fenkell was in control of Alliance at the time and that it is inappropriate for me to rule on summary judgment on these quasi-estoppel grounds. See Alliance Opp. Mem. at 47. Specifically, they take issue with the applicability of quasi-estoppel, pointing out that the doctrine requires a position to be "unconscionable." Id. (citations omitted).
Quasi-estoppel requires that I examine whether Alliance took a truly "inconsistent position" with regard to the plan assets question previously, such that it would be unconscionable to permit Alliance to maintain their current position. The theory requires a fact-specific inquiry into the intent of various agents of a corporate entity, Alliance, while that entity took tax and litigating positions involving complex financial and legal judgments, all while (somehow) excluding Fenkell's influence, knowledge, and intent. Summary judgment is inappropriate.
Stonehenge contends that Plaintiffs are judicially estopped from asserting their plan assets position. Stonehenge Mem. at 102. In the Chesemore litigation, the Plaintiffs claimed that the assets of the ESOP were shares of Alliance Holdings and AH Transition stock. See Stonehenge Mem. at 102 (citing Proposed Findings of Fact by Defendants Alliance Holdings, Inc., David B. Fenkell, AH Transition Corp. and Alliance Holdings, Inc. Employee Stock Ownership Plan and Trust, 3:09-cv-00413 (Doc. 527) at ¶ 187)). Alliance argues that "estoppel is inappropriate, See Alliance Opp. Mem. at 44.
I have already stated that judicial estoppel may be appropriate when a party has adopted inconsistent positions in bad faith and no lesser sanction is sufficient.
All this is not to say that Stonehenge's arguments are without weight. Alliance's position on the plan assets issue raises an eyebrow. If Fenkell and Alliance misclassified Alliance and AH III assets, and they are indeed plan assets, then the Spread Transaction may have been illegal. See Stonehenge Rep. at 29. That Alliance's litigating theory may fly in the face of fifteen years of various representations in tax forms or other documents, and may result in grave discomfiture to the ESOP and its participants, are facts that cannot be dispositive in themselves at the summary judgment phase. Nevertheless, they may have probative weight when assessing at trial whether the theory will prevail, or whether estoppel is appropriate.
For reasons I explained in Section II of this opinion, dealing with Fenkell's statute of limitations arguments, I conclude that there are genuine issues of material fact that preclude summary judgment against the Alliance Parties based on the statute of limitations.
The same fact questions that lead me to conclude that neither estoppel nor the statute of limitations bar plaintiffs' claims as a matter of law also lead me to conclude that equitable defenses, such as estoppel and laches, do not render plaintiffs' requested relief inappropriate as a matter of law, under 29 U.S.C. § 1132(a)(3). See Stonehenge Mem. at 111-116. Whether and what kind of equitable relief might be appropriate is dependent in large part on the exact nature of liability — and culpability — proven at trial. The decision on whether to order equitable relief, and the exact contour of that relief, will await trial.
In addition to the arguments already discussed, Stonehenge argues on behalf of the individual defendants that "Third Circuit ERISA law makes clear that individuals acting in their corporate capacity, like the Individual Stonehenge Defendants, cannot be liable under Counts [IV] and [V]." See id. at 150. Alliance argues that under ERISA section 502(a)(3) the individual defendants face liability for knowingly participating in ERISA violations, under Harris Trust. See Alliance Opp. at 87. Alliance also argues that common law alter ego theories, while "instructive, do not end the inquiry when a breach of fiduciary duty and knowing participation under ERISA are involved. Id. at 89-90 (citing Leddy v. Standard Drywall, Inc., 875 F.2d 383, 388 (2d Cir. 1989); Sasso v. Cervoni, 985 F.2d 49, 50 (2d Cir. 1993) (explaining the holding in Lowen, 829 F.2d at 1220-21 (additional citations omitted))).
Defendants Ronald Brooks, Barry Gowdy, and John Witten were employed in various roles for Stonehenge. Each of them was involved in some fashion in the transactions that form the basis of the complaint. Brooks is a Stonehenge principal responsible for signing the August 27, 1999 letter regarding which party would pay for Stonehenge fees. Gowdy had relationships with Alliance and other parties involved in the Spread Transaction. See Stonehenge Mem. at 6 (citations omitted). Gowdy worked in numerous roles for Stonehenge related to accounting, tax, and other financial reporting aspects of the company. See id. at 8. Witten served as a senior vice president and general counsel in various Stonehenge iterations.
ERISA Section 502(a)(3) provides for a type of accomplice liability when the accomplice knowingly participates in an ERISA violation. Alter ego or "veil piercing" theories are a different animal. Such theories impose liability on an individual shareholder, director, or officer for corporate wrongdoing based on a wide variety of factors, many of which have less to do with the culpability of the individual defendant for the wrongdoing, and more to do with defects in the maintenance of the corporate entity. These defects undercut the justifications for the limitation of liability that is at the heart of corporate law. See, e.g., United States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981) (adopting multi-factor test from DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 687 (4th Cir. 1976)); Franklin A. Gevurtz, Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding the Doctrine of Piercing the Corporate Veil, 76 OR. L. REV. 853, 854 (1997).
The Third Circuit is clear that piercing the corporate veil is not to be taken lightly and that the standards for doing so are demanding. See American Bell Inc. v. Federation of Telephone Workers of Pennsylvania, 736 F.2d 879, 886 (3d Cir. 1984); Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967) (a "court must start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception.") (citation omitted); DeWitt, 540 F.2d at 683 ("This power to pierce the corporate veil, though, is to be exercised "reluctantly" and "cautiously" and the burden of establishing a basis for the disregard of the corporate fiction rests on the party asserting such claim.") (citations omitted). The standards for veil piercing include gross undercapitalization, failure to observe corporate formalities, not paying dividends, corporate insolvency, siphoning of funds by a dominant stockholder, non-functioning officers and directors, absence of corporate records, and the probability that the corporation is a façade used by stockholders for his or her personal gain. Pisani, 646 F.2d 83, 88 (3d Cir. 1981) (citing to DeWitt, 540 F.2d at 687). Corporate protection is not absolute, and veil-piercing is available in order to "prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from liability for a crime." Zubik, 384 F.2d at 272. Alliance bears the burden of demonstrating that the corporate form should be disregarded. See Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979).
Stonehenge cites to a number of cases in this jurisdiction which hold that officers cannot be held personally liable for the actions of their corporations, in the context of ERISA claims. See Confer v. Custom Engineering Co., 952 F.2d 34 (3d Cir. 1991); Solomon v. Klein, 770 F.2d 352 (3d Cir. 1985); Local Union No. 98 IBEW v. RGB Servs., LLC, No. 10-3486, 2011 WL 292233 (E.D. Pa. Jan. 28, 2011).
In Solomon, the Court of Appeals held that a corporate executive, Klein, could not be held liable for the delinquent retirement contributions of his employer, A.J.I.D., Inc. 770 F.2d at 354. The Court rejected plaintiff's theory of liability, which was that Klein fit the definition of "employer" under ERISA Section 515 (29 U.S.C. § 1145). Id. What the Court of Appeals did not do was decide that Klein could not be held liable, under Harris Trust and ERISA Section 502(a)(3), for knowingly participating in an ERISA violation. The same is true of Loc. Union No. 98 Intern. Broth. of Elec. Workers v. RGB Services, LLC, CIV.A. 10-3486, 2011 WL 292233, at (E.D. Pa. Jan. 28, 2011). Plaintiffs sought to recover missing retirement contributions from a corporate entity and two of its corporate officers, claiming that the officers were "employers" under ERISA Section 515. Id. at *3. The district court relied on Solomon and refused to hold the corporate employees liable, noting that unless the corporate veil could be pierced, under common law, corporate employee liability was unavailable. Id. at *4.
The theory of liability in this case is not that Witten, Gowdy, and Brooks were ERISA fiduciaries because of their corporate position with Stonehenge. Thus, Confer v. Custom Engr. Co., 952 F.2d 34 (3d Cir. 1991) is of no help, since there the Court of Appeals held that corporate employees could not be deemed fiduciaries merely because they held high corporate offices in a corporate fiduciary. Id. at 35.
Alliance argues that Stonehenge's corporate form may be disregarded because 1) the fees Stonehenge received passed through different entities; 2) Stonehenge used non-employees to do some of the work for Alliance; 3) the fees that Stonehenge received were the result of unlawful conduct; and 4) Stonehenge allowed its insurance to lapse in 2009 as part of winding down its business. See Alliance Opp. at 91. None of these facts match the factors mentioned in Solomon:
770 F.2d 353-54 (citing to Pisani, 646 F.2d at 88, and DeWitt Truck Brokers, Inc., 540 F.2d 681).
The only Solomon factor that could apply in this case is the first: "the failure to observe corporate formalities." Yet the facts proffered by Alliance do not demonstrate a failure to observe corporate formalities. That fees passed through different entities has nothing necessarily to do with a failure to observe corporate formalities. Nor does the use of non-employees to do corporate work. Nor does the fact that a corporation received fees for "unlawful conduct." As for dropping insurance as part of a business wind-down, Alliance cites to a non-precedential 11th Circuit case to argue that "[a]llowing insurance to lapse is indicative of a failure to observe corporate formalities, justifying a piercing of the corporate veil." Alliance Opp. at 91 (citing Samuels & Associates, Inc. v. Boxcar Foods USA, Inc., 286 F.App'x 708, 715 (11th Cir. 2008)). That is not what Samuels & Associates held. Instead, the fact that the corporation had no assets, even insurance, from which to satisfy a judgment, was a factor weighed by the court in assessing whether to disregard the corporate form. Id. There is no indication Stonehenge would be unable to pay a judgment. Certainly, Alliance does not make that representation in its briefing.
Stonehenge acted as a private equity firm and served as an investment manager to different funds. See Stonehenge Mem. at 5. Seven individuals had some kind of ownership interest in Stonehenge during the life of the Spread Deal. See Ex. 8, Stonehenge Response to Second Set of Interrogatories at 16. According to documents provided by the Grien Report, Stonehenge's total revenues ranged from $7 million in 1999 to more than $60 million in 2001. See Grien Report Appendix F-1. These total revenues from 1999 to 2011 were more than $300 million which, after calculated expenses, left the company with $129 million for shareholder distribution purposes. Id.
To the extent that Alliance's theory of liability is that that Stonehenge's corporate form should be disregarded, and liability imposed under a common law veil piercing theory, I reject it. Alliance has made no serious demonstration of the various factors emphasized in alter ego cases. The notion that Stonehenge is undercapitalized, did not observe corporate formalities, or that any of the factors outlined in Solomon call for disregarding Stonehenge's corporate entity is not borne out by the record. See 770 F.2d at 353.
I will grant summary judgment dismissing the veil piercing theory. The only surviving theory against individual defendants, under the fourth and fifth claims for relief, is their own knowing participation in an ERISA violation. 29 U.S.C. §1132(a)(3).
Stonehenge argues that it is entitled to summary judgment as to Alliance's twelfth and fourteenth claims for relief. See Stonehenge Mem. at 153-168. The twelfth claim for relief alleges that the Stonehenge Parties aided and abetted Fenkell's state law fiduciary duties. Doc. No. 68, at 54. The fourteenth claim for relief alleges that the Stonehenge Parties conspired with Fenkell to violate Fenkell's state law fiduciary duties. Id. at 57. Stonehenge argues that not only can Alliance not prove the underlying elements of each claim, but that these state law actions are barred under the two-year statute of limitations under Pennsylvania law. See id. at 154. Alliance argues that, with regard to Stonehenge, there are issues of material fact that require denying the summary judgment motions.
As a preliminary matter, and for reasons I have already explained in the context of arguments about the ERISA statute of limitations defenses, I find that there are genuine issues of material fact that preclude entry of summary judgment based on applicable Pennsylvania statutes of limitation. I will turn to Alliance's twelfth claim for relief, alleging that Stonehenge aided and abetted Fenkell's state law fiduciary duties.
I previously concluded that Pennsylvania would recognize a cause of action for aiding and abetting a tort. See Spear v. Fenkell, CV 13-02391, 2015 WL 5005117, at *4 n.3 (E.D. Pa. Aug. 20, 2015) (citing to Matlack Leasing, LLC v. Morison Cogen, LLP, No. CIV.A. 09-1570, 2010 WL 114883, at *11 (E.D.Pa. Jan. 13, 2010)). Reis v. Barley, Snyder, Senft & Cohen LLC, 667 F.Supp.2d 471, 492 (E.D. Pa. 2009) (not precedential) (citations omitted). A plaintiff must show "that the party knew that the other's conduct constituted a breach of a fiduciary duty and gave substantial assistance or encouragement to the other in committing that breach." Board of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 174 (3d Cir. 2002) (citing to Resolution Trust Corp. v. Spagnoli, 811 F.Supp. 1005, 1014 (D.N.J. 1993)).
Stonehenge argues that Pennsylvania law requires actual knowledge — not constructive knowledge — of fiduciary violations. See Reis, 426 F. App'x. at 84; Stonehenge Mem. at 164. Stonehenge also cautions that Pennsylvania's Supreme Court has yet to recognize aiding and abetting a fiduciary duty as a cause of action. Official Comm. Of Unsecured Creditors of Allegheny Health Educ. & Research Fund v. Price Waterhouse Coopers LLP, 989 A.2d 313, 327 n. 14 (Pa. 2010); Stonehenge Mem. at 164 n. 64.
The Alliance Parties argue that the facts surrounding the doubling of the DBF fees in 2006 would permit me to infer that the Stonehenge Parties actually knew Fenkell was committing a fiduciary violation. See Alliance Mem. at 79, n. 44, and at 117. I agree.
In the context of the ERISA claim under Alliance's fourth claim for relief I have already held that there is a genuine issue of material fact whether Stonehenge knew that Fenkell was committing fiduciary violations by receiving fees, through DBF, from Stonehenge. See supra, at 61. The parties' discussions of the state law aiding and abetting claims are focused exclusively on the Stonehenge and DBF fees.
Alliance asserts, in its fourteenth claim for relief, that David Fenkell, DBF Consulting, and Stonehenge conspired together to pay kickbacks to Fenkell, through DBF, that were breaches of fiduciary duty that Fenkell owed to Alliance. See FAC ¶ 261. The action underlying the conspiracy included Fenkell's breaches of fiduciary duty and Stonehenge's payments to DBF Consulting through alleged illegal kickbacks. See id. ¶ 264.
In Pennsylvania, civil conspiracy requires 1) a combination of two or more people acting with a common purpose to perform an unlawful act or to do an act by unlawful means, 2) an overt act done in pursuit of that common purpose, and 3) actual legal damage. See Strickland v. University of Scranton, 700 A.2d 979, 987-88 (Pa. Super. 1997) (citing Smith v. Wagner, 588 A.2d 1308, 1311-12 (Pa. Super 1991)); see also Kline v. Sec. Guards, Inc., 386 F.3d 246, 262 (3d Cir. 2004). Strickland also requires that "[p]roof of malice or an intent to injure is essential to the proof of a conspiracy." See id. at 988 (citing Skipworth ex rel. Williams v. Lead Indus. Assoc., 690 A.2d 169, 174 (Pa. 1997)).
Federal courts have relied upon Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466 (Pa. 1979) for the proposition that "[m]alice `will only be found when the sole purpose of the conspiracy is to cause harm to the party who has been injured.'" See Sarpolis v. Tereshko, 26 F.Supp.3d 407, 423 (E.D. Pa. 2014) (collecting cases) (alteration in original). In addition, the object of a civil conspiracy must be an act for which there is a viable cause of action. See Caplan v. Fellheimer Eichen Braverman & Kaskey, 884 F.Supp. 181, 184 (E.D. Pa. 1995).
Stonehenge argues that under Pennsylvania law it is clear that the malice element of civil conspiracy has been defined narrowly: unless a party's sole purpose was to injure, a claim for civil conspiracy will not lie. See Sarpolis, 26 F. Supp. 3d at 423 (citations omitted); see also Zafarana v. Pfizer, Inc., 724 F.Supp.2d 545, 559 (E.D. Pa. 2010) (noting that a plaintiff must allege that the sole purpose of the conspiracy was to damage the defendants; maximizing profit for a company undermines such claims). As the purpose of the ESOP loan transaction was not to harm Alliance Holdings, but to make money — lots of it — for all involved, Stonehenge argues that the civil conspiracy claim must fail as a matter of law. Stonehenge Mem. at 162. Alliance argues that Thompson, the foundation upon which all the authority cited to by Stonehenge's argument rests, does not support the proposition that plaintiff must prove the defendant's sole motive was to injure. Alliance Opp. at 115. I disagree with Alliance.
Citing to Rosenblum v. Rosenblum, 181 A. 583, 585 (1935), for the "proper test," the Court in Thompson noted that "[t]here are no facts of record which indicate that [defendant] acted solely to injure appellants. To the contrary, there are many facts which indicate that [defendant] acted solely to advance the legitimate business interests of his client and to advance his own interests." Thompson, 412 A.2d at 472. The court in Thompson noted that plaintiffs had not provided facts that established a combination or agreement. Id. at 473. The court concluded that plaintiffs failed to show facts "which would substantiate the allegation that Johnston combined with Ralph and Pike Coal with the unlawful intent to injure appellants." Id.
Alliance points to cases that have permitted a state law conspiracy allegation to go to trial where the harm to plaintiff was not simply a "side-effect" of lawful activity, but the intended consequence of improper activity. See, e.g., See RDK Truck Sales and Serv. Inc. v. Mack Trucks, Inc., CIV.A. 04-4007, 2009 WL 1441578, at *32-33 (E.D. Pa. May 19, 2009) (Buckwalter, S.J.) ("Mack is not alleging that the legitimate business actions of RDK and Worldwide form the basis of its civil conspiracy claim. Instead, it is the improper actions of RDK and Worldwide that — while economically beneficial to them — form the basis of Mack's civil conspiracy claim."); Power Restoration Intern., Inc. v. PepsiCo, Inc., CIV.A. 12-1922, 2014 WL 1725041, at *6 (E.D. Pa. Apr. 30, 2014) (Pratter, J.) (quoting Daniel Boone Area Sch. Dist. v. Lehman Bros., Inc., 187 F.Supp.2d 400, 412 (W.D. Pa. 2002) (holding that because the "injuries [from the conspiracy] were not simply an accidental side-effect of [the conspirators'] otherwise legitimate business interests" the injured party had adequately alleged an intent to injure) (alterations in the original)); Doltz v. Harris & Associates, 280 F.Supp.2d 377, 389-90 (E.D. Pa. 2003) (Buckwalter, J.) (holding that plaintiff had made a sufficient showing of malice and denying summary judgment where defendants reaped substantial profits by diverting corporate opportunities and wasting corporate assets to the benefit of corporate officers).
Stonehenge points to federal cases that read Thompson to require unadulterated malice.
First, the court in Thompson elected to extend Rosenblum's malice standard to a conspiracy predicated on fraud, an underlying tort, even though the conspiracy alleged in Rosenblum was not based on an underlying tort, but on non-tortious conduct, a so-called "conspiracy to injure." See Rosenblum, 181 A. at 585 (plaintiff alleged a conspiracy among several creditors to harm him by enforcing judgments); see, e.g., Thomas J. Leach, Civil Conspiracy: What's the Use?, 54 U. MIAMI L. REV. 1, 9-10 (1999) (discussing the historical roots of the "conspiracy to injure"); see also Morris Run Coal Co. v. Barclay Coal Co., 68 Pa. 173, 187 (1871) (suggesting that the object of a conspiracy need not have been unlawful). The conspiracy alleged in Thompson was an amorphous hodgepodge that simply incorporated by reference all the disparate facts and theories recounted in the indictment and then alleged a conspiracy to defraud. 412 A.2d at 472. The Supreme Court of Pennsylvania's obvious concern, in Thompson, was not that civil conspiracies be nutured, but that they should be pruned back.
Second, one is hard-pressed to find cases in which conspiracy is not a make-weight. Under Pennsylvania law conspiracy must be predicated on an underlying tort. See McKeeman v. Corestates Bank, N.A., 751 A.2d at 660; Lackner v. Glosser, 892 A.2d 21, 35-36 (Pa. Super. 2006) (plaintiff failed to allege an underlying fraud, an essential element of his conspiracy claim). Why the tort of fraud, for instance, requires an overlay of expansive civil conspiracy liability is not immediately, or mediately, apparent. Aiding and abetting or concert of activities theories cover the field well enough.
I will grant summary judgment and dismiss the fourteenth claim for relief.
In addition to its various bases for summary judgment against Alliance, Stonehenge seeks dismissal of Fenkell's cross-claim for contribution under ERISA and state law. Stonehenge Mem. at 169-170. Fenkell's cross-claim seeks contribution under ERISA and under state law, based on allegations that Stonehenge knowingly participated in Fenkell's alleged fiduciary breaches. Doc. No. 154 at 11. Stonehenge argues that 1) Fenkell may not pursue a contribution remedy against a non-fiduciary, Stonehenge, and 2) Stonehenge is not liable as a knowing participant in Fenkell's fiduciary violations. Stonehenge Mem. at 169-170. Fenkell has not responded to Stonehenge's motion. See Fenkell Opp. at 2-4 (Doc. No. 520).
As to the first ground, Stonehenge cites to and quotes from a previous opinion in this case for the proposition that there is no contribution remedy against a non-fiduciary. Stonehenge Mem. at 169 (quoting from Spear v. Fenkell, CIV.A. 13-02391, 2015 WL 3643571, at *8 (E.D. Pa. June 12, 2015), motion for relief from judgment denied, CV 13-02391, 2015 WL 5582761 (E.D. Pa. Sept. 21, 2015) ("a party seeking contribution in the context of an ERISA claim must plead facts that demonstrate that the target of the contribution claim was acting as an ERISA fiduciary concerning the events that gives rise to the claim.")
The quoted language is inapt. It was a recitation of Alliance's argument that contribution should only be available against fiduciaries, not a holding by me. As I explained in footnote 9, appended to the sentence quoted, "I have previously ruled that contribution is not available to non-fiduciaries who are facing claims under ERISA. See Doc. No. 281, at 5-19." Id. That is not the same as holding that there is no right of contribution by a fiduciary against a non-fiduciary alleged to have knowingly participated in fiduciary violations, under ERISA section 502(a)(3). I went on to deny Alliance's motion to dismiss the contribution claims against individuals aligned with Alliance. I will deny Stonehenge's motion for summary judgment.
As to the second ground in Stonehenge's motion, I have found elsewhere that there are genuine issues of material fact on the question whether Stonehenge was a knowing participant in Fenkell's fiduciary violations. I will deny Stonehenge's motion on this ground, as well.
The Sefcovic Parties
Lianne Sefcovic and Louise Bistrick formed Student Loan Advisory Management Services (SLAMS) in August of 2010. Sefcovic Statement of Material Facts Not in Genuine Dispute (SMF) ¶ 17; Sefcovic Mem. at 13. Sefcovic owned 99% of the company, Bistrick 1%. SMF ¶ 17. Carl Draucker, an attorney for Squire, formed SLMRS in the same month, August of 2010. Id. at 18. SLAMS was a 90% member and Hiram Ventures was a 10% member. Id. Hiram Ventures was the managing member of SLMRS. Id. at 19. In September of 2010 SLMRS and Alliance entered into the ASA. Id. at ¶ 20. Fenkell negotiated on behalf of Alliance, Draucker on behalf of SLMRS. Id.
Under the ASA SLMRS was to provide various services in connection with Alliance's plan to acquire companies in the student loan business. Id. at ¶ 24. Alliance did not actually acquire any student loan companies. Id. at 26. The term of the agreement was one year. Id. at 21. The ASA was renewed for an additional year. Id. Alliance agreed to pay SLMRS $27,500 per month.
Alliance argues that the Sefcovic Parties are liable under ERISA Section 502(a)(3), both as knowing participants in fiduciary breaches and as gratuitous transferees of plan assets. Alliance Mem. at 88. The focal point of the Alliance theory is that the Advisory Services Agreement (ASA) of September 2010 was just a means of siphoning $600,000 from Alliance to SLMRS, and then ultimately to the Sefcovics, and that Alliance received nothing in return for the $600,000 it paid. Alliance Mem. at 33-43.
There is a genuine issue of material fact about whether Alliance assets were plan assets before August of 2011. See supra, at 91-96. Alliance paid $330,000 to SLMRS under the ASA before August of 2011. See Alliance Opp. at 105. There is no dispute that the Sefcovic Parties were paid by Alliance, not by the ESOP. See Stonehenge Rep. Mem. at 6; Alliance Opp. at 13-14. Whether assets of Alliance were plan assets will have to be answered at trial. If the Alliance assets used to pay the Sefcovic Parties were not plan assets, no ERISA liability, whether for knowing participation or gratuitous transfer, attaches. I need not reach the other arguments raised by the parties in connection with Alliance's motion for summary judgment against the Sefcovic Parties under ERISA Section 502(a)(3), and will deny Alliance's motion for summary judgment as to its fourth and fifth claims for relief.
Alliance contends that the Sefcovic Parties "caused losses to Alliance and the ESOP while violating Pennsylvania state law."
Alliance's payback theory is no more than that: a theory. It is not an undisputed fact, and it is certainly material. I will deny summary judgment based on Alliance's self-dealing theory.
Alliance contends that Fenkell violated his duty of prudence by causing Alliance to enter into the ASA, because it overpaid for any services actually provided to Alliance. Alliance Opp. at 84. I agree.
There is little to recommend the ASA, from Alliance's standpoint. Under this agreement, Alliance paid about $660,000 to SLMRS over two years for almost nothing. Alliance Mem. at 38.
The Sefcovic Parties argue that 1) only SLMRS — not SLAMS, Lianne Sefcovic, or Paul Sefcovic — was a party to the ASA; 2) the ASA was a "standby" agreement, not uncommon in the student loan industry, under which SLMRS "was compensated whether or not [it] ever provided services" to Alliance; 3) SLMRS did provide services to Alliance, in the form of "introductions and hosted events by SLAMS;" 4) Paul Sheldon's testimony is "inapposite" because he and SLCS were "not aware of and was not a party to SLAMS, SLMRS or the ASA." Sefcovic Opp. at 8 (RSF ¶ 27), 12 (the major portion of Sheldon's testimony lacked "foundation."); 5) Sheldon and SLCS were hired to do different work than SLMRS. Sefcovic Opp. at 7-8 (RSF ¶¶ 24, 26).
The Sefcovic Parties' argument on the services provided by SLMRS is revealing. The Sefcovic Parties do not spend time detailing the services they provided. They claim that Alliance admits that SLMRS provided services to Alliance. Sefcovic Opp. at 14 (citing to Doc. No. 500 (Plaintiff's Motion at pp. 33-48)).
I have summarized the services purportedly admitted by Alliance. Since the Sefcovic Parties have not suggested any actual services in addition to the Alliance summary, I will take it that there is nothing more to offer: the Alliance summary constitutes the universe of actual services provided by SLMRS, along with an unquantifiable readiness to perform additional services if called upon. I say unquantifiable because there is no evidence that, even if called upon, the Sefcovic Parties were bound to perform a certain amount of work, whether measured by hours or some other measure of labor.
Under Pennsylvania law, a fiduciary "must exercise common prudence, common skill, and common caution in the performance of his duties, or shortly stated, due care in the circumstances." In re Pearlman's Est., 35 A.2d 418, 419 (Pa. 1944) (internal quotations and citation omitted). A corporate officer is subject to this fiduciary duty vis a vis the conduct of the corporation's business. Ciampa v. Conversion Scis., Inc., 2752 EDA 2014, 2015 WL 8196712, at *10 n.13 (Pa. Super. Dec. 8, 2015) (citing to 15 Pa. C.S.A. § 1712.).
Alliance uses the Sheldon agreement as a bench-mark for reasonableness, pointing out that Alliance paid out three times more money to SLMRS than it did to Sheldon, a recognized student loan industry expert who actually performed services. See Alliance Reply at 49 (Sheldon's rate was $28,000 per quarter, SLMRS was $27,500 per month (citing to Sefcovic. Opp. at 14, Fenkell's Opp. at 67, Sheldon Dep. at 16:3-6 (Doc. No. 500-58)); Alliance Mem. at 34-35 (detailing Sheldon's company's services); 36 ("SLMRS admitted that it provided no services but "was ready, willing and able to provide services when requested to do so.")).
The material historical facts about this particular dispute are fixed. There is nothing to be gained by a trial. Since I am the trier of fact I may draw such reasonable inferences as are appropriate from the undisputed record. Anderson, 477 U.S. at 255; Tiggs Corp v. Dow Corning Cop., 822 F.2d 358, 361 (3d Cir. 1987). I find that paying SLMRS $330,000 for dinner parties and introductions was unreasonable, and a breach of Fenkell's fiduciary duty of prudence to Alliance.
Alliance requests that I enter summary judgment against Paul Sefcovic for aiding and abetting Fenkell's state law fiduciary violations.
Nevertheless, I do not think that Mr. Sefcovic's conduct indisputably amounted to "substantial" encouragement or assistance. He had some input into the drafting of the ASA agreement, but Draucker seems to have had the laboring oar. Alliance Mem. at 36 (citing to 4/14/14 Draucker Dep. 157:18 to 158:1; Jones Ex. 2; Draucker Ex. 529 and 531). Sefcovic had some input into the structure of SLMRS; again, Draucker seems to have done most of the work, and Sefcovic's role is not undisputed. Alliance Mem. at 35 (citing to 4/14/14 Draucker Dep. at 154:20 to 155:1; Valitsky Ex. 1 at Sefcovic 00082). Sefcovic asked Fenkell to structure the ASA so that it would automatically renew, but asking for money is not necessarily substantial assistance or encouragement. Sefcovic aided Lianne Sefcovic in providing allegedly inaccurate information about SLMRS' services in response to the Ballard Spahr investigation, but it was Lianne Sefcovic who was the corporate officer who signed and sent the letter, and the truth about who provided those services is not undisputed. See 7/3/2014 L. Sefcovic Dep. at 29:6-10.
Certainly Sefcovic's conduct might amount to substantial encouragement or assistance. See Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406, 413 (3d Cir. 2003) (attorneys who participated in the formation of a sham corporation to avoid a debt, and sent a letter to the marshals to aid the scheme, might be liable for aiding and abetting a fraud). Nevertheless, even if I find that Paul Sefcovic's liability is established, the trial will inquire into whether the Squire/Alliance settlement should extinguish his liability, if there is any. Answering that question will require close examination of the underlying conduct allegedly covered by the Squire/Alliance settlement. Thus, the relevant facts will be litigated at trial regardless of my decision here. Under the circumstances I will deny summary judgment against Paul Sefcovic for the state law aiding and abetting claims.
As I mention below during the discussion of the Sefcovic Parties' summary judgment motion, there are genuine issues of material fact as to Lianne Sefcovic's knowledge that Fenkell was committing a fiduciary violation, and the extent to which her knowledge, if culpable, was imputable to SLAMS or SLMRS. Those issues will be taken up at trial. Thus, summary judgment is inappropriate on the theory that Lianne Sefcovic aided and abetted Fenkell's violation of his fiduciary duty of prudence. I have already concluded that genuine issues of material fact preclude summary judgment against the Sefcovics on Alliance's duty of loyalty theory.
Paragraph 30 of the Fourth Counterclaim reads as follows:
Alliance asks me to grant summary judgment dismissing the Fourth Counterclaim. Alliance Mem. at 128. Alliance argues two points: 1) that the ASA was "at the center of torts and fraud committed by Fenkell, Draucker, and the Sefcovics against Alliance; 2) that "no renewal to the ASA was executed and, therefore, SLAMS cannot state a breach of contract claim." Alliance Mem. at 128-29.
Alliance does not provide any elaboration or authority for its first argument. I treat this as an argument that SLAMS has unclean hands and therefore cannot enforce whatever right it may have had as a third-party beneficiary under the ASA. Under Pennsylvania law, the doctrine of unclean hands requires that a litigant "act fairly and without fraud or deceit as to the controversy in issue." Terraciano v. Com., Dept. of Transp., Bureau of Driver Licensing, 753 A.2d 233, 237-38 (Pa. 2000). Equitable defenses may be interposed against asserted contract liability. See Blessing v. Miller, 102 Pa. 45, 48-49 (1883) (defendant to a contract action was entitled to raise, as an equitable defense, injuries arising from the same transaction, although distinct from the contract) (citation omitted).
Whether SLAMS is guilty of unclean hands would depend, if not exclusively, then for the most part, on the conduct of Lianne Sefcovic. I have held that there are issues of fact that preclude entry of summary judgment against Ms. Sefcovic based on Alliance's theory that she aided and abetted fiduciary violations by Fenkell. For the same reason, whether SLAMS was guilty of unclean hands will have to be resolved at trial.
I previously rejected Alliance's second argument, holding that in the absence of an executed contract, the Alliance Board of Directors' minutes approving the two-month extension of the ASA might serve as sufficient evidence of a contract. See Doc. No. 305, at 19-20. Alliance does not point to any facts that might change this analysis. See Alliance Mem. at 128-29. I will deny Alliance's motion for summary judgment as to SLAMS' fourth counterclaim.
Alliance asks me to enter summary judgment rejecting Paul Sefcovic's indemnification claims. Alliance Mem. at 100-101. Because I have denied Alliance's motion for summary judgment on its affirmative claims against Paul Sefcovic, I will deny Alliance's motion for summary judgment on Sefcovic's claims for indemnification against Alliance. Sefcovic's indemnification claims will be resolved at trial.
The Sefcovic Parties have moved for summary judgment against Alliance on several grounds. They contend that because Fenkell is not liable, they cannot be liable. Sefcovic Mem. at 17. For the same reasons I have denied Mr. Fenkell's motion for summary judgment in Section II of this memorandum, I reject the Sefcovic Parties' derivative position.
The Sefcovic Parties next argue that Paul Sefcovic is not liable for knowingly participating in a fiduciary breach because, as a lawyer at Squire Sanders,
Alliance entered into two different settlement agreements in July of 2015. See Alliance Opp. at 101. There was a malpractice action against Squire Sanders and a separate agreement with SLMRS, Hiram College, and Hiram Ventures. Id. According to deposition testimony, Paul Sefcovic was not charging SLAMS for his time, either individually or on behalf of Squire Sanders. See id. (citing 7/2/2014 P. Sefcovic Dep. at 157). This arrangement was confirmed by Lianne Sefcovic in her deposition. See id. (citing 7/3/2014 L. Sefcovic Dep. at 36-37). Lianne Sefcovic stated in her deposition that Squire Sanders did not provide any legal services in forming SLAMS, only legal advice as to forming SLMRS. See L. Sefcovic Dep. at 37. She further explained that SLAMS was a member of SLMRS and SLMRS had an ASA with Alliance to provide consulting advice as to the student loan business to Alliance. Id. at 39-40.
The Sefcovic Parties provide some background into the different entities' corporate structure:
See Sefcovic Mem. at 23.
Paul Sefcovic's argument is unconvincing. Even if Sefcovic was acting within the scope of his employment — a fact disputed by Alliance, which plausibly points to facts suggesting he was acting on his own account — an injured plaintiff can sue "the principal, the agent, or both" until it receives "full satisfaction." Natl. Union Fire Co. of Pittsburgh, PA v. Wuerth, 913 N.E.2d 939, 944 (Ohio 2009) (internal quotations and citations omitted).
Losito v. Kruse, 24 N.E.2d 705, 707 (Ohio 1940). I will deny summary judgment based on the settlement with Squire Sanders.
I have previously concluded that there is a genuine issue of material fact whether Alliance assets were plan assets. Lianne Sefcovic and SLAMS claim there is another ground under which they are entitled to dismissal of the ERISA claim in Alliance's fourth claim for relief: that they did not knowingly participate in ERISA fiduciary breaches by Fenkell. See Sefcovic Mem. at 20 (citing Harris Trust, 530 U.S. at 251). To recover under Harris Trust, Alliance must prove that Lianne Sefcovic knowingly participated with Fenkell in the commission of ERISA fiduciary violations. Harris Trust, 530 U.S. at 251. Lianne Sefcovic and SLAMS argue that SLMRS — not SLAMS or the Sefcovics — provided services to Alliance under the ASA. Sefcovic Mem. at 20-21. The advisory services agreement was structured so that the Sefcovics and SLAMS were not parties. Id. at 21. "The services that Ms. Sefcovic and SLAMS agreed to provide on behalf of SLMRS to Alliance were determined by the SLMRS Operating Agreement." Id.
Alliance points to numerous facts from which the Sefcovic Parties' (including Lianne Sefcovic, Paul Sefcovic, and SLAMS) knowledge of Fenkell's fiduciary breaches might be inferred. Alliance Reply at 47-53. The facts presented by Alliance clearly create a genuine dispute of material fact as to Paul Sefcovic.
What is not pinned down is the extent to which Lianne Sefcovic was aware that Fenkell was operating as an ERISA fiduciary when he caused Alliance to enter into the ASA. The facts produced by Alliance to prove that Lianne Sefcovic had knowledge that Fenkell was committing a fiduciary breach are exceedingly thin. Nevertheless, if Lianne Sefcovic knowingly provided false information to Ballard Spahr in an effort to deceive its investigators about the services provided by SLMRS to Alliance under the ASA, I might infer that she was aware that the ASA deal amounted to fiduciary wrongdoing. See Ashcraft v. Tennessee, 327 U.S. 274, 277 (1946) (A [w]ilful concealment of material facts has always been considered as evidence of guilt[]);United States v. Kemp, 500 F.3d 257, 296-97 (3d Cir. 2007) (untrue grand jury testimony was probative of the defendant's consciousness of wrongdoing). Such a finding would require evaluation of her testimony at trial. Even if I find that Lianne Sefcovic lied to Ballard Spahr, it is conceivable that such a lie was motivated by knowledge of Fenkell's fiduciary status gained after the fact, as a result of the Alliance investigation.
As for SLAMS, its knowledge must be imputed from Lianne Sefcovic. The parties have not pointed to a genuine conflict between Ohio's imputation law and Pennsylvania's. State law, not federal law, governs the issue of whether Lianne Sefcovic's knowledge may be imputed to SLAMS. See O'Melveny & Myers v. F.D.I.C., 512 U.S. 79, 83-84 (1994). Under either Ohio or Pennsylvania law, "knowledge of a corporate officer is knowledge of the corporation," except under unusual circumstances. Gordon v. Contl. Cas. Co., 181 A. 574, 576 (Pa. 1935); Arcanum Nat. Bank v. Hessler, 433 N.E.2d 204, 211 (Ohio 1982) ("the knowledge of the officers of a corporation is at once the knowledge of the corporation.") (citation omitted).
I will deny the Sefcovic Parties' motion for summary judgment as to the fourth claim for relief.
The Sefcovic Parties argue that in order to prove Paul Sefcovic was a gratuitous transferee of plan assets, under the fifth claim for relief, Alliance must show that he actually received plan assets. See Sefcovic Mem. at 22 (citations omitted). The Sefcovic Parties argue that this cannot be proven, because Squire Sanders paid Paul Sefcovic, not Alliance or the Alliance ESOP. Id. Nor is there any evidence in the record that Lianne Sefcovic transferred money received from SLAMS to her husband. Id.
The Sefcovic Parties point out that because Alliance stated in the FAC that the assets of Alliance were only plan assets until August of 2011, ERISA relief is impossible for any money received by SLAMS/SLMRS after that date. See Sefcovic Mem. at 23 (citing FAC ¶¶ 18-22). The relief due to Alliance under ERISA would be limited to money received before August, 2011. See id. at 24. Alliance does not dispute this state of affairs, and I will enter summary judgment limiting any ERISA recovery under both the fourth and fifth claims for relief to the period before August of 2011. See Footnote 74, supra.
As for the period before August, 2011, while discussing Alliance and Stonehenge's cross-motions, I explained my reasons for allowing Alliance's gratuitous transfer claims to go to trial. See supra, at 80. I find that there are genuine issues of material fact as to whether Alliance's assets were plan assets.
The Sefcovic Parties have also moved for summary judgment related to claims that they aided and abetted Fenkell's fraud and breach of corporate fiduciary duty under Pennsylvania state law, the eleventh cause of action in the Alliance complaint. See Sefcovic Mem. at 24-25. The Sefcovic Parties argue that Paul Sefcovic was at most a messenger,
As I explained in my discussion of Alliance's motion on the aiding and abetting claim, there are genuine issues of material fact that preclude summary judgment on the issue of whether the Sefcovics aided and abetted Fenkell's breach of fiduciary duty.
The Sefcovic Parties argue that they are not liable for civil conspiracy, as alleged in the thirteenth cause of action in Alliance's complaint. Sefcovic Mem. at 26-27. I agree. Alliance has submitted no evidence that would satisfy the heightened malice standard under Pennsylvania civil conspiracy law. See Thompson, 412 A.2d at 472. It is undisputed that the Sefcovic Parties, to the extent they participated in the ASA, were doing so to advance their own economic interests, and not solely to injure Alliance. I will enter summary judgment dismissing the thirteenth claim for relief. See supra, at 56 (summary judgment on Fenkell's motion as to the thirteenth claim for relief).
The Sefcovic parties argue that the statute of limitations should bar the the eleventh cause of action. See Sefcovic Mem. at 28-29. Under Pennsylvania law, the statute of limitations for claims in tort is two years. See 42 Pa. C.S.A. § 5524(7). The Sefcovic Parties argue that all of Alliance's claims are time-barred. The Sefcovic Parties note that Alliance signed the ASA in September of 2010. See Sefcovic Mem. at 29. There is evidence that Spear and Alliance were well aware of the payments made pursuant to the ASA as early as October 2010. Id. This suit was commenced in May of 2013, more than two years from each of these events.
Alliance argues that "Pennsylvania's discovery rule applies to toll the statute of limitations where, as here, `plaintiff cannot, despite the exercise of due diligence, know of his injury or its cause.'" See Alliance Opp. at 108 (citing Foulke v. Dugan, 187 F.Supp.2d 253, 258 (E.D. Pa. 2002)). The Third Circuit has noted that Pennsylvania law "favors strict application of statutes of limitations." See Knopick v. Connelly, 639 F.3d 600, 606 (3d Cir. 2011) (citing Glenbrook Leasing Co. v. Beausang, 839 A.2d 437, 441 (Pa. Super. 2003), appeal granted in part, 582 Pa. 101, 870 A.2d 318 (2005) and order aff'd without opinion, 584 Pa. 129, 881 A.2d 1266 (2005)); see also New York Cent. Mut. Ins. Co. v. Edelstein, 637 Fed. Appx. 70, 72 (3d Cir. 2016).
Alliance points to Barbie Spear's deposition testimony that she asked Fenkell the purpose of SLMRS. See Alliance Opp. at 108 (citing 2/3/15 Spear Dep. at 326-27). According to that testimony, Fenkell told her not to worry about it. See id. (citations omitted). Alliance claims that Spear did not give the matter any additional thought until she and Wanko discovered the payments to SLMRS in August of 2012. See id. at 108-09.
As with other statute of limitations arguments in this case, I find that questions of who knew what and when, the extent of Fenkell's influence on Alliance, and the credibility of the various witnesses on the subject are fact issues better left for resolution at trial. I will deny summary judgment to the Sefcovic Parties on the basis of the statute of limitations, as to Alliance's eleventh claim for relief. The statute of limitations argument is moot, as to the conspiracy count (the thirteenth claim for relief), because I have decided to grant summary judgment on separate grounds.
An order granting summary judgment in certain instances, and denying it in others, will enter.
700 F.3d at 89 (emphasis supplied) (citing to Harris Trust, 530 U.S. at 250). The language in my June 12, 2015 opinion did not take disgorgement or accounting off the table as available equitable remedies.
Harris Trust, 530 U.S. at 250, 120 S.Ct. 2180.
Id. at 251, 120 S.Ct. 2180 (emphasis added).
29 C.F.R. § 2510.3-101(c)(1) provides that:
