WILLIAM M. CONLEY, District Judge.
Notice is hereby given that Defendant-Appellant, David B. Fenkell in the above-named case, hereby amends his Notice of Appeal to the United States Court of Appeals for the Seventh Circuit filed on October 3, 2014, Document 988, as follows and thereby appeals to the United States Court of Appeals for the Seventh Circuit from the following:
(1) an Opinion and Order signed by District Judge William M. Conley on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985, granting a motion for payment of incentive awards to the class representatives, a motion for attorneys' fees (class counsel's motion for an award of attorney's fees and reimbursement of expenses), a motion for attorneys' fees (Plaintiffs' motion for an award of attorneys' fees and costs pursuant to Employee Retirement Income Security Act of 1974, as amended ("ERISA"), §502(g)(1) against Defendant David B. Fenkell), and a motion for final approval of a settlement agreement by Plaintiffs Carol Chesemore, Daniel Donkel, Thomas Gieck, Martin Robbins, and Nannette Stoflet; provided, however, that nothing in this Amended Notice of Appeal relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte Building Systems, Inc. ("Trachte") and the Trachte Building Systems, Inc. Employee Stock Ownership Plan and Trust (the "Trachte ESOP"); (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(2) a Final Judgment in a Civil Case signed by District Judge William M. Conley and entered in this action on the 8th day of September 2014, Document 986, in favor of Carol Chesemore, Daniel Donkel, Martin Robbins, Nannette Stoflet, and Thomas Gieck against David B. Fenkell in the total amount of $1,854,008.50 and in favor of the Alliance Holdings, Inc. Employee Stock Ownership Plan and Trust in the amount of $2,044,014.42, respectively;
(3) an Opinion and Order signed by District Judge William M. Conley on the 17th day of February 2011, and entered in this action on the 17th day of February 2011, Document 172, among other things, granting in part and denying in part Defendant David B. Fenkell's Motion to Dismiss Plaintiffs' Amended Class Action Complaint;
(4) an Order signed by District Judge William M. Conley on the 28th day of March 2012, and entered in this action on the 28th day of March 2012, Document 677, among other things, granting in part and denying in part Defendant David B. Fenkell's Motion for Summary Judgment;
(5) an Opinion and Order signed by District Judge William M. Conley on the 4th day of June 2013, and entered in this action on the 4th day of June 2013, Document 790, among other things, ruling on remedies; provided, however, that nothing in this Amended Notice of Appeal relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(6) an Opinion and Order signed by District Judge William M. Conley on the 15th day of October 2013, and entered in this action on the 16th day of October 2013, Document 824, among other things, denying Defendant Karen G. Fenkell's Motion to Dismiss and amending Document 790 to provide a ruling on remedies; provided, however, that nothing in this Amended Notice of Appeal relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs and the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(7) an Opinion and Order signed by District Judge William M. Conley on the 18th day of February 2014, and entered in this action on the 19th day of February 2014, Document 889, among other things, granting Plaintiffs' Motion for Preliminary Approval of Settlement Agreement; provided, however, that nothing in this Amended Notice of Appeal relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(8) an Opinion and Order signed by District Judge William M. Conley on the 9th day of April 2014, and entered in this action on the 9th day of April 2014, Document 913, among other things, granting Plaintiffs' Motion for Preliminary Approval of Settlement Agreement; provided, however, that nothing in this Amended Notice of Appeal relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985.
The Docketing Statement required pursuant to Circuit Rule 3(c)(1) of the United States Court of Appeals for the Seventh Circuit was filed on October 3, 2014, as an attachment to the original Notice of Appeal and is attached once again to this Amended Notice of Appeal. Dated: October 31, 2014
Respectfully submitted.
Defendant-Appellant David B. Fenkell, by his undersigned counsel, respectfully submits this Amended Docketing Statement pursuant to Circuit Rule 3(c)(1) of the United States Court of Appeals for the Seventh Circuit.
(1) an Opinion and Order signed by District Judge William M. Conley on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985, granting a motion for payment of incentive awards to the class representatives, a motion for attorneys' fees (class counsel's motion for an award of attorney's fees and reimbursement of expenses), a motion for attorneys' fees (Plaintiffs' motion for an award of attorneys' fees and costs pursuant to Employee Retirement Income Security Act of 1974, as amended ("ERISA"), §502(g)(1) against Defendant David B. Fenkell), and a motion for final approval of a settlement agreement by Plaintiffs Carol Chesemore, Daniel Donkel, Thomas Gieck, Martin Robbins, and Nannette Stoflet; provided, however, that nothing in this Amended Docketing Statement relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte Building Systems, Inc. ("Trachte") and the Trachte Building Systems, Inc. Employee Stock Ownership Plan and Trust (the "Trachte ESOP"); (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(2) a Final Judgment in a Civil Case signed by District Judge William M. Conley and entered in this action on the 8th day of September 2014, Document 986, in favor of Carol Chesemore, Daniel Donkel, Martin Robbins, Nannette Stoflet, and Thomas Gieck against David B. Fenkell in the total amount of $1,854,008.50 and in favor of the Alliance Holdings, Inc. Employee Stock Ownership Plan and Trust in the amount of $2,044,014.42, respectively;
(3) an Opinion and Order signed by District Judge William M. Conley on the 17th day of February 2011, and entered in this action on the 17th day of February 2011, Document 172, among other things, granting in part and denying in part Defendant David B. Fenkell's Motion to Dismiss Plaintiffs' Amended Class Action Complaint;
(4) an Order signed by District Judge William M. Conley on the 28th day of March 2012, and entered in this action on the 28th day of March 2012, Document 677, among other things, granting in part and denying in part Defendant David B. Fenkell's Motion for Summary Judgment;
(5) an Opinion and Order signed by District Judge William M. Conley on the 4th day of June 2013, and entered in this action on the 4th day of June 2013, Document 790, among other things, ruling on remedies; provided, however, that nothing in this Amended Docketing Statement relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(6) an Opinion and Order signed by District Judge William M. Conley on the 15th day of October 2013, and entered in this action on the 16th day of October 2013, Document 824, among other things, denying Defendant Karen G. Fenkell's Motion to Dismiss and amending Document 790 to provide a ruling on remedies; provided, however, that nothing in this Amended Docketing Statement relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs and the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(7) an Opinion and Order signed by District Judge William M. Conley on the 18th day of February 2014, and entered in this action on the 19th day of February 2014, Document 889, among other things, granting Plaintiffs' Motion for Preliminary Approval of Settlement Agreement; provided, however, that nothing in this Amended Docketing Statement relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985;
(8) an Opinion and Order signed by District Judge William M. Conley on the 9th day of April 2014, and entered in this action on the 9th day of April 2014, Document 913, among other things, granting Plaintiffs' Motion for Preliminary Approval of Settlement Agreement; provided, however, that nothing in this Amended Docketing Statement relates to (i) claims against Defendant Karen G. Fenkell, (ii) claims regarding Defendant David B. Fenkell's receipt of Trachte phantom stock plan proceeds; (iii) the Settlements and related Settlement Agreement entered into by David B. Fenkell and Karen G. Fenkell (the "Fenkell's") with the Plaintiffs, Trachte and the Trachte ESOP; (iv) the Settlements and related Settlement Agreement entered into by the Plaintiffs with the Trachte ESOP Trustees (James Matrangelo, Jeffrey Seefeldt and Pam Klute) and Stephen Pagelow except with respect to those provisions related to the assignment of certain claims by the Trachte ESOP Trustees to the Plaintiffs that were extinguished by virtue of the Trachte Settlement; (v) the Settlements and related Settlement Agreements entered into by the Plaintiffs with the "Alpha defendants" (Alpha Investment Consulting Group, LLC and John Michael Maier); (vi) payment of incentive awards to the class representatives, (vii) the Plan of Allocation approved by this Court, or (viii) attorneys' fees and expenses to be paid out of any settlement funds referenced in the Opinion and Order on the 4th day of September, 2014, and entered in this action on the 5th day of September 2014, Document 985.
The United States Court of Appeals for the Seventh Circuit has jurisdiction to decide this case pursuant to 28 U.S.C. § 1291 and 28 U.S.C. § 1294.
David B. Fenkell timely filed the required Amended Notice of Appeal (including this Amended Docketing Statement required pursuant to Circuit Rule 3(c)(1) of the United States Court of Appeals for the Seventh Circuit filed as an attachment to the Amended Notice of Appeal along with a separate Certificate of Service for the Amended Docketing Statement) with the District Court on October 31, 2014.
On October 6, 2011, the court held oral arguments on the motions for summary judgment and issued a number of rulings for the reasons articulated from the bench. For purposes of the record, this order memorializes those rulings. Accordingly,
IT IS ORDERED that:
Entered this 28th day of March, 2012.
In this putative class action, plaintiffs Carol Chesemore, Daniel Donkle, Thomas Gieck, Martin Robbins and Nannette Stoflet were long-term employees of Trachte Building Systems, Inc. ("Trachte") and remain participants in the company's Employee Stock Ownership Plan and Trust ("TBS ESOP" or "the Plan"). Plaintiffs allege that defendants Alliance Holdings, Inc. ("Alliance"), A.H.I., Inc., David B. Fenkell, Stephen Pagelow, Pamela Klute, James Mastrangelo, Jeffrey Seefeldt, Alpha Investment Consulting Group, LLC and John Michael Maier each played a role in setting up and executing a complex transaction which rendered plaintiffs' interests in an employee stock ownership plan essentially worthless in violation of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001-1461.
Now before the court are motions to dismiss brought by all defendants, except Alpha Investment Consulting Group, LLC and John Michael Maier.
Alliance is a holding company that buys, holds and sells other companies. Alliance markets itself to majority shareholders of small and medium-sized, privately-held operating companies seeking to be bought out while deferring taxation on the proceeds of the sale. When selling a company, Alliance offers potential buyers a phantom stock plan for the acquired company providing "substantial reward for each of our management team."
Alliance sponsors the nominal defendant AH ESOP. When Alliance purchases an operating company, the employees participating in that operating company's ESOP become participants in the AH ESOP. If Alliance sells the operating company, those employees' accounts are "spun off" from the AH ESOP.
At all times relevant to the complaint, the AH ESOP owned almost all the common stock of Alliance directly or indirectly.
In September 2002, Alliance purchased Trachte for $24 million through a complex transaction. Essentially, Trachte's employee stock ownership plan (the "old TBS ESOP") purchased sufficient stock to obtain an 80 percent ownership interest in Trachte. Alliance then purchased the 80 percent owned by old TBS ESOP and merged old TBS ESOP into the AH ESOP. The remaining 20 percent of shares stayed with defendant Stephen W. Pagelow, who had purchased Trachte in 1984 and was its president and chief operating officer. Effective October 1, 2002, Trachte established two phantom stock plans to reward key employees of Trachte and Alliance, respectively. The phantom stock plans entitled these eligible employees to receive cash based in part on the value of the Trachte stock.
Sometime in 2006, Alliance began looking for a buyer for Trachte. In early 2007, Alliance started negotiating a sale of Trachte with HIG Capital, a private investment firm. HIG Capital made an offer to purchase Trachte from Alliance, however it refused to purchase Trachte at the price Alliance was asking because it believed that "market data indicated [that] the self storage [industry in which Trachte operated] ha[d] matured" and orders had "softened in 2007." (Am. Compl. (dkt. #79) at 25.) At about the same time, Alliance marketed Trachte to other potential buyers, including Tricor Pacific Capital, Inc. After failing to find an outside buyer, Alliance decided to sell Trachte to Trachte's own employees through a newly-created, Trachte-sponsored Employee Stock Ownership Plan, also a nominal defendant here.
In early 2007, defendants James Mastrangelo and Jeffrey A. Seefeldt began discussions with Fenkell about the acquisition of Trachte by a new Trachte employee stock ownership plan. Mastrangelo and Seefeldt acted as "representatives" of this yet-to-be-formed TBS ESOP.
Fenkell drafted a "Letter of Intent" dated April 19, 2007, setting forth the proposed terms of an equally complex buyback of Trachte by the new TBS ESOP. Mastrangelo and Seefeldt signed the letter as "Representatives" of the yet-to-be formed TBS ESOP, Pagelow signed as one of the "Selling Shareholders" and Seefeldt signed again as the president of Trachte. The steps set out in the letter of intent included:
The closing was to be a "simultaneous sign and close," leaving the TBS ESOP as the sole shareholder of Trachte at the end of the "buyback."
As trustee of the AH ESOP, Fenkell obtained valuations of the fair market value of
Alliance, AH Transition and Trachte from Stout Risius Ross, Inc. Trachte was valued at about $44 million with a per share value of about $13,725.50, but Stout did not apply a discount for lack of marketability.
On July 2, 2007, Trachte trustees Mastrangelo, Seefeldt and Klute obtained a draft valuation and fairness opinion of the proposed transaction from Barnes Wendling Valuation Services, Inc. Barnes found that Trachte's common equity value ranged from $26.2 million to $40.1 million and compared this range to the Stout valuation. Barnes subtracted "phantom equity" payments of about $7.9 million from the Stout valuation and added a $1.9 million "tax shield" to its valuation. Comparing the "adjusted" Stout valuation of $37.6 to its upper range of $40.1 million, Barnes concluded that the proposed transaction was "within the range of reasonableness, albeit near the upper end of the range."
The Trachte trustees obtained a second opinion from RSM McGladrey, which reviewed both the Barnes and Stout valuations. RSM McGladrey sent a letter to the Trachte trustees noting that (1) Barnes's addition of $1.9 million in capital for the value of the Plan's tax shelter "did not have consensus in the valuation community" and (2) Barnes's valuation did not appear to account for the possibility that the face value of what Trachte would receive to fund the transaction might not be equivalent to cash. As the "bottom line," RSM McGladrey stated that, "[b]ased on the total invested capital value being paid, you are paying at the high end of the value ranges," although it also noted that the "valuation methodology" used by Stout and Barnes was "appropriate and common."
On August 29, 2007, Barnes issued a final valuation and fairness opinion to "the Trustees," relying on the same valuation and methodology as its draft fairness opinion. In particular, the Barnes valuation continued to subtract $7.9 million from the Stout valuation and add a $1.9 million "tax shield" without addressing the concerns raised by the RSM letter. The Barnes valuation compared its own $40.1 million valuation to an "adjusted" Stout valuation when considering whether the $40.5 million transaction was "within the range of reasonableness, albeit near the upper end of the range." Barnes concluded that the terms of the proposed transaction were "fair and reasonable for the purpose of the transaction."
In the final opinion, Barnes did not address: (1) any valuation concerns caused by the $26 million debt Trachte had to incur to loan money to the TBS ESOP for the transaction; (2) Trachte's ability to service that debt; (3) the risk of Trachte defaulting on the loan covenants, which required it to maintain $6.3 million in annual earnings before interest, taxes, depreciation and amortization; (4) Trachte's EBITDA in the prior year had been just that much and present sales were considered "softer" than in prior years; (5) the amount and basis for any control premium, although the stock was valued as a controlling interest; and (6) the discounted offer from HIG Capital and discussions with other potential buyers. In addition, Barnes' final valuation did not include a discount for lack of marketability and treated a $6.2 million cash balance as a non-operating asset, rather than working capital.
On August 13, 2007, Trachte engaged defendant Alpha Investment Consulting Group, LLC to act as an "independent fiduciary" for the TBS ESOP. At the time, Pagelow was the CEO, Chairman of the Board of Directors and one of two shareholders of Trachte. (Alliance was the other.) Through defendant Maier, Alpha agreed to be a fiduciary of the TBS ESOP. Trachte agreed to furnish all information reasonably requested by Alpha, with the understanding that Alpha had no obligation to verify the information independently, assumed no responsibility for the accuracy or completeness of the information, and was not required to make an appraisal of Trachte's assets or liabilities. At the time Alpha was retained, the target closing date for the transaction was August 20, 2007.
Three days after being retained, Alpha had preliminarily concluded that the transaction would be in the best interest of the new TBS ESOP and that Alpha would direct the trustees to proceed with the transaction. At that point, Alpha had not been asked to make and had not made any determination whether the purchase price was for fair market value (although it "eventually" provided such an opinion).
On August 22, the shareholders of Trachte (at the time Alliance and Pagelow) removed the existing directors of Trachte (one of whom was Pagelow) and appointed Seefeldt and Mastrangelo as directors. The shareholders also resolved to permit Fenkell and Wanko from Alliance to act as "board observers," with the right to notice and participation but not to vote.
On August 24, 2007, Mastrangelo and Seefeldt, acting as Trachte directors, adopted the TBS ESOP effective as of August 1, 2007, named themselves and defendant Pamela Mute as trustees and ratified and approved the previous engagement of Alpha.
Under the plan documents, the TBS ESOP's trustees enjoyed a limited ability to invest or incur debt:
(Dkt. #25-2 at 21 (TBS ESOP, § 6.2).) The plan documents also designated the "Administrator" to be "the named fiduciary and plan administrator, as those terms are defined by ERISA," TBS ESOP, § 7.1(b), and assigned the administrator "such duties and powers as may be necessary to discharge its duties hereunder, including . . . to appoint and employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal and actuarial counsel," TBS ESOP, § 7.6(d).
The "Administrator" is defined as "the person or entity designated by the Plan Sponsor [Trachte] to administer the Plan as set forth in 7.2." (TBS ESOP, §§ 2.2, 2.24.) Under § 7.2 of the TBS ESOP, "[t]he Administrator shall be the Employer [Trachte and its "Affiliated Employers"] or any other person or entity designated by the Employer from time to time."
The plan assigned the "Employer" the "sole fiduciary authority to appoint and remove the Trustee." (TBS ESOP, § 7.1(a).) The "Trustee" is assigned the "sole responsibility for administration of the Trust and administration of assets held under the Trust, all as specifically provided in the Trust," and is authorized "to do all acts, whether or not expressly authorized, which they may deem necessary and proper for the protection of the property held" under the Trust. (TBS ESOP, § 7.1(c).)
The AH ESOP designated Alliance to "serve as a Named Fiduciary" with a limited set of responsibilities, among which was the duty to "appoint the Trustee and Plan Administrator and to monitor each of their performances." (Dkt. #41-2 at 67 (AH ESOP, § 13.1).) The "Trustee" is designated as the "Named Fiduciary with respect to investment of the Fund assets" and is given the powers and dutes "set forth in the Trust Agreement," AH ESOP, § 14.3, which include "dispos[ing] of any authorized investment at any time held by him," Alliance Trust Agreement § 2.3(b), and "join[ing] in . . . or oppos[ing]" financial changes that affect investments of the Fund.
Before the spinoff, Trachte employee's accounts were governed by the AH ESOP document, which provides: "In the event of any . . . transfer of assets or liabilities to, any other plan, each Participant shall have a benefit in the surviving or transferee plan (determined as if such plan were then terminated immediately after such . . . transfer) that is equal in value to or greater in value than the benefit he would have been entitled to receive immediately before such . . . transfer in the plan in which he was then a Participant (had such plan been terminated at that time)." (AH ESOP, § 16.5.)
The AH ESOP document also provides that "Employer Securities" distributed from the Plan that are "not readily tradeable on an established market" were "subject to a put option in the hands of the Qualified Holder," allowing the holder to "sell any or all of the Employer Securities received in the distribution to the Employer that employs or employed the Participant" or to the Plan, at a "fair market value." (AH ESOP, § 11.4(b).) Under the AH ESOP, for all transactions except those "with a disqualified person," the "fair market value" is the value determined by an appraiser on the "Anniversary Date coinciding with or immediately preceding the date of the transaction." (AH ESOP, § 11.4(a)(6).)
After the spinoff, Trachte employees' accounts were governed by the TBS ESOP plan. Under that plan, a "distributee" of "Employer stock" would have a right to a "put option not readily tradeable on an established market." In that situation, a distributee could "require that the Employer repurchase the Employer Stock under a fair valuation formula as provided in [IRS] Code § 409(h)(1)(B) and as provided below." (TBS ESOP, § 5.9.) Except for transactions between the Plan and a "disqualified person," the "fair market value shall be determined as of the most recent valuation date." Under the TBS ESOP, "Employer Stock" is "stock that constitutes `employer securities' under Code § 409(1) with respect to the Employer." (TBS ESOP, § 2.12.)
The term "Employer" in the TBS ESOP includes the "Plan Sponsor" (Trachte) and "its Affiliated Employers." (TBS ESOP, § 2.11.) The plan provides the following definition for "Affiliated Employer":
(TBS ESOP, § 2.3.)
On August 29, 2007, after Barnes issued its final fairness opinion, defendants completed the transaction. Alliance, through its sole director Fenkell, executed a "spin-off" instrument providing that the assets allocated to AH ESOP accounts of Trachte employees would be spun off and transferred to the TBS ESOP. The instrument did not state a particular amount to be spun off, but did provide that "immediately after the Spinoff Date" the sum of the balance of each participant's account in the Alliance and TBS ESOPs after the transfer must equal the sum of each participant's account in the AH ESOP immediately before "the Spinoff Date" (of August 29, 2007) and the assets in the TBS ESOP should be equal to the sum of the balances of the Trachte employees. (Dkt. #41-3 at 2.)
On the same day, Alpha directed the Trachte trustees to complete the transaction. In the direction letter, signed by Maier, Alpha concluded that the transaction was in the best interest of the TBS ESOP participants and the price the Plan intended to pay for Trachte stock represented "no more than adequate consideration." The letter listed information that Alpha had reviewed, including the Stout and Barnes valuations and several other documents and sources, but did not list the RSM McGladrey letter.
At some point before the sale of Trachte stock to the Plan, Alliance transferred all of its Trachte stock to defendant A.H.I. Inc., a wholly-owned subsidiary of Alliance. At the time of the transaction, A.H.I. owned "50 percent or more" of the combined voting power of all classes of Trachte stock entitled to vote. Fenkell, acting as Trustee, transferred the accounts of Trachte employees and the assets tied to those accounts (Alliance and AH Transition common stock and cash) from the AH ESOP into the TBS ESOP. Alliance (and presumably AH Transition) redeemed the shares of Alliance (and AH Transition) stock held by Trachte and caused A.H.I. to transfer the common shares of Trachte stock to the TBS ESOP in exchange for promissory notes assigned to Alliance and AH Transition.
Trachte received a $26.6 million loan from J.P. Morgan Chase to repay Trachte's thenexisting indebtedness and fund the transaction. Trachte in turn loaned $26.6 million to the TBS ESOP to finance the stock purchase. Trachte borrowed an additional $5.6 million to redeem preferred and common stock held by Alliance and Pagelow. In addition, Trachte terminated the Trachte Building Systems, Inc. Phantom Stock Plan for Alliance employees and paid its participants $4.9 million. Fenkell was one of the participants of that phantom stock plan. As a result of these transactions, the TBS ESOP owned all outstanding shares of Trachte stock.
As of December 31, 2007, a "5500 report" listed the value of the Trachte stock as about $17 million, the cost of the stock as $34.5 million and the acquisition debt as $26.5 million, with negative $9.3 overall net assets available for the payment of benefits. The account balances of each plaintiff declined by approximately 50 percent within four months of the August 2007 transaction. To service the loans, Trachte reduced its contributions to its 401(k) plan, reduced the amount of paid sick leave, cut the amount of medical benefits provided employees, terminated and furloughed employees, cut the hours and workdays of remaining employees and forced employees to take two pay cuts. On March 18, 2008, Trachte management told Trachte employees that it had $45.7 million in loans outstanding. By December 31, 2008, the Trachte stock held by the TBS ESOP was worthless.
Spinoffs and other transfers of assets from one qualified plan to another are governed by § 208 of ERISA (29 U.S.C. § 1058). King v. Nat'l Human Res. Comm., Inc., 218 F.3d 719, 723 (7th Cir. 2000). Section 208 requires a sort of "benefit equivalence." John Blair Comm'ns, Inc. Profit Sharing Plan v. Telemundo Grp., Inc. Profit Sharing Plan, 26 F.3d 360, 364 (2d Cir. 1994). The "equivalence" contemplated by § 208 is that the benefits a participant "would receive" if a plan were terminated immediately after a transfer must be "equal to or greater than" the benefits a participant "would receive" if a plan had been terminated immediately before the transfer. 29 U.S.C. § 1058.
Plaintiffs allege that when Alliance spun off the Trachte employees' accounts into the TBS ESOP, it violated § 208 for three reasons: (1) Trachte employees lost their "put option"; (2) they lost a "control premium"; and (3) the spinoff was part of a larger transaction that was a bad deal for the Trachte employees.
Plaintiffs contend that their Alliance and AH stocks held in the Trachte employees' accounts were not "Employer Stocks" under the TBS ESOP. According to plaintiffs, only stock of the "Employer" could be "put," and the only entities considered "Employers" under the plan were Trachte and a specified list of "Affiliated Employers," not Alliance or AH.
In this, plaintiffs misread the law, if not the plan. While plaintiffs would read the phrase "Employer Stock" to mean "stock owned by the `Employer," the phrase has a defined meaning under the plan: "stock that constitutes `employer securities" as that term is used in 26 U.S.C. § 409(l). And § 409(l) defines "employer securities" to include stock issued by a corporation that is "a member of the same controlled group" and refers to 26 U.S.C. § 1563(a) to define which corporations fall into such a "controlled group." 26 U.S.C. § 409(l)(2), (4). Section 1563 defines "controlled group of corporations" to include groups of parent-subsidiary corporations in which the parent corporation owns 80% of "the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of at least one of the other corporations." 26 U.S.C. § 1563(a)(1)(B). Thus, the plan does not limit "Employer Stock" to the stock issued by Trachte and a frozen list of its current "Affliated Employers."
Even assuming plaintiffs were correct that term"Employer" is defined solely by use in the plan, rather than by statute, for purposes of deciding which stock counts as "Employer Stock," the result would be the same. "Employer" is defined to include "Affiliated Employers" and although plaintiffs focus on a list of three entities the plan describes as "currently Affiliated Employers of the Plan Sponsor," the plan defines that term more broadly to include "any" member of a "controlled group of corporations" under Internal Revenue Code § 414(b) (as well as other related groups under § 414(c), (m) or (o)). Unfortunately for plaintiffs, the definition of the "controlled group of corporations" referred to in § 414(b) leads right back to that set out in § 1563(a). In the context of such a broad definition, and in light of the fact that the two statute-based definitions coincide, the plan's list of "curren[t] Affiliated Employers" cannot be read as an exclusive list, but rather as a "guide" of entities likely to be "Affiliated Employers."
Plaintiffs make one final attempt to salvage its "put" claim by arguing that the allegations do not establish that Alliance or AH owned 80% or more of Trachte as required under § 1563(a) and, therefore, were not necessarily part of a "controlled group of corporations." Plaintiffs are correct that the allegations do not require a conclusion that Alliance continued to own 80% of the stocks at the time of the transfer. As plaintiffs point out, they allege only that Alliance owned, indirectly through A.H.I., "50 percent or more" of Trachte when the transaction occurred. Thus, plaintiffs argue they have not pled themselves out of court on this claim.
But plaintiffs' pleading proves too clever by half. Plaintiffs allege that Alliance originally purchased 80% of Trachte shares, but do not allege any facts to suggest that any of those shares were transferred out of its control. Plaintiffs' carefully-worded allegation that A.H.I. owned "50% or more" at the time of the transaction provides no basis for inferring that Alliance and its wholly-owned subsidiary owned "less than 80%" for purposes of § 1563(a). Since it is plaintiffs' burden to allege a basis for suit, its pleading falls short.
Even if Trachte employees enjoyed a "put option," plaintiffs contend their transferred accounts were less valuable because they lost a "control premium" in their Alliance and AH stocks. Plaintiffs point out that before transfer, the stock was held by the AH ESOP, which directly or indirectly owned all outstanding shares of Alliance and AH stock. This total ownership of stock, plaintiffs claim, created an added value. According to plaintiffs, the value of the Alliance and AH stock diminished after transfer because the TBS ESOP then owned only a minority interest in Alliance related to the small portion of Alliance and AH stock attributed to Trachte employees.
This claim is flawed on a number of levels. Most fundamentally, plaintiffs' claim is premised on the assumption that its minority interest in Alliance and AH stock somehow included rights to "control" those companies and their ultimate sale. The facts alleged in the amended complaint establish, if nothing else, this is simply not true. The shares of Alliance and AH stock attributed to Trachte employees were, by themselves, a small minority of all shares. Whether valued immediately before the transaction in the AH ESOP, or immediately after transfer to the TBS ESOP, the minority employees' shares have no "control premium" attached to them for valuation purposes.
Plaintiffs appear to be suggesting that the Trachte employees' shares would somehow be valued as part of the majority holders' shares so long as they are held in the same ESOP, at least for purposes of determining at what price that ESOP would sell the shares. This is perhaps akin to the notion that a majority shareholder could not sell all assets of the company in a way which unfairly benefitted the majority over the minority, but this is very different than the majority shareholders' ability to sell its controlling shares at a "premium" above minority shares. Alternatively, plaintiffs may be arguing that its minority shares are more valuable when "tied" to the majority shares in a common ESOP, but this "premium," if any, does not derive from "control," as plaintiffs learned all too well here.
Even if this theoretical, lost "premium" had some value, it relates to the value of the Alliance and AH stock. There is, however, no dispute that immediately after the stock was transferred to the TBS ESOP (and throughout the brief period in which the TBS ESOP owned the stock before it was replaced with Trachte stock), no new valuation of that stock occurred.
Assuming Trachte employees had exercised their put option immediately before or after the transfer, the TBS ESOP would require the "Employer" to pay at least "fair market value" for the Alliance and AH stocks. Because that value "shall be determined as of the most recent valuation date" (which would have been the most recent "Anniversary Date" for appraisal under the AH ESOP) and because both Plans would value the stocks in that setting according to the most recent valuation, the AH ESOP would have assigned the same value for put stocks terminated immediately before the spinoff as the TBS ESOP would have assigned for put stocks had it terminated immediately after the spinoff.
Although a later valuation could have led to a loss of value for plaintiffs, all that matters for § 208 is whether there is a difference between the benefits of the plan immediately before the transfer and the benefits of the plan immediately after, as measured by what would happen in each instance if the plan were terminated at that time. 29 U.S.C. § 1058. There is, therefore, not even a theoretical loss of a "premium" on stocks valued before the spinoff and, therefore, no violation of ERISA § 208.
Plaintiffs' final argument is that the transferred accounts were less valuable because the spinoff was part of a larger transaction orchestrated by defendants that could not be stopped and, as such, immediately diminished the value of plaintiffs' holdings. Defendants contend that plaintiff's "bad deal" theory does not fit with § 208 because that section focuses on any change in the value of benefits "immediately" before and after a transfer. Thus, say defendants, even if the "bad deal" was sealed beforehand it was not finalized until after the transfer, meaning no change in value and no § 208 violation at the time of the spinoff.
At least one court appears to side with defendants on this issue. In In re Fairchild Industries, Inc., 768 F.Supp. 1528, 1532 (N.D. Fla. 1990), the plaintiffs argued that a transfer of otherwise adequate funds to a new plan violated § 208 because it was "one part of a larger scheme which ultimately deprived the [Plan] participants of the value of their accrued benefits." The court disagreed, explaining that "the plain meaning of the statute requires only that the funds be equal `immediately before' and `immediately after' the .. . event triggering the necessity of transferring funds." Id.
Plaintiffs would distinguish their case from Fairchild in that the spinoff here was allegedly conditioned on a disastrous buyback of Trachte stock from Alliance. In other words, it would be reasonable for a jury to infer that Alliance never would have spun off the Trachte accounts if the exchange of its Trachte stocks for Alliance stocks was not locked in upfront. In Fairchild, there was no evidence that the parties to the transaction had entered into an agreement, binding or otherwise, to exchange stock after the spinoff. Rather, the recipient of the spinoff had merely stated an "intent" to use the funds transferred to purchase stock. Id. at 1531.
Section 208 does not require a transferor plan to insure that accounts are handled with care once they are out of its hands; it requires only that the accounts be placed in the transferee account with care to insure that the value of benefits in a transferee account "immediately" after a transfer is equivalent to or better than the value of those benefits "immediately" before the transfer. Thus, the entity responsible for a spinoff cannot be held liable if the recipient mishandles the accounts once spun off. Section 208 cannot be read to ban any transfer involving a potential for loss from subsequent events, lest the word "immediately" be read out of the statute.
The limitations on § 208 liability aim to reflect a shift in responsibility. Once the transferor plan has released the accounts, they become the responsibility of the transferee plan, which has the power to decide how to dispose of those accounts. Generally, the fiduciary of the new, spun-off plan will be able to assess whether subsequent events, such as stock sales, are in the interest of the plan and reject any that are not. To continue to hold the transferor plan liable for acts taken by a transferee plan after transfer would ignore the legal authority, indeed legal obligation, of the transferee plan to act independently in the best interest of its own participants.
At the same time, however, there may be instances when a new fiduciary's hands are already tied upon spinoff, such as alleged here, if the terms of a pre-spinoff agreement imposed a binding agreement to (or serious consequences for rejecting) a stock sale. If so, the new fiduciary may not truly have discretion to act, at least not without disadvantaging its own participants' interests, and the responsibility remains with the fiduciaries who struck the original deal. It may also mean the value of the accounts would crash immediately at the time of spinoff, when the deal is "initiated" and ownership of the accounts changes hands. Said another way, if the spun off accounts come encumbered by a binding, rotten deal, a § 208 violation at least arguably may occur at least assuming perfect information in the market for these shares.
The allegations in the amended complaint support an inference that such a spinoff occurred in this case. Plaintiffs allege that Alliance, Trachte and "representatives" of the future TBS ESOP agreed to and locked in the entire transaction, including both spinoff and buyback, before the spinoff. In addition, the TBS ESOP's fiduciaries were allegedly "directed" to engage in the transaction by Alpha, the fiduciary appointed by Trachte whose two shareholders at the time were still Alliance and Pagelow — both allegedly with much to gain if the deal went forward as planned. Finally, as explained below, there were deficiencies in the valuations that may have suggested to a reasonable fiduciary that the deal was not a good one.
The fact that the new TBS ESOP and its fiduciaries accepted the deal without question, and so quickly, despite these arguable red flags, at least suggests they may have had less discretion than they should have. At this point at least, these allegations suffice to support a theory that the spun off accounts came encumbered and the new fiduciaries could, or at least would, not reject the deal without unacceptable, adverse consequences to the new ESOP and/or themselves.
The allegations do not, however, get plaintiffs completely past a motion to dismiss their § 208 claim. The fact that the spun off accounts came encumbered may not be enough, by itself, to give rise to such a claim. Section 208 requires only that each participant "would (if the plan then terminated) receive a benefit immediately after the . . . transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the . . . transfer (if the plan had then terminated)." What matters under § 208 is what the plan participants would have received in the hypothetical event that an immediate termination of the plan occurred — not the "true" value of their accounts as the transaction actually played out later. As previously discussed, plaintiffs' put option immediately after sale would have been at a stock value determined before sale, meaning they would have had an immediate right to the pre-sale value, assuming Trachte had the funds to honor their put.
But there lies the rub. This court is not comfortable precluding plaintiffs from going forward to make the factual case that, as alleged, the spinoff was part of a larger transaction, which forced the TBS ESOP to accept immediately an unfair, stock exchange. In this case, an inference can be drawn that a termination immediately after spinoff would have allowed participants fewer benefits. Under the TBS ESOP, an Administrator "may direct the Trustee to liquidate and distribute the affected assets in the Trust Fund." (TBS ESOP, § 10.2.) If the spun off accounts were encumbered, they were less valuable and even an immediate liquidation might yield less to spread around to participants, meaning that the TBS ESOP accounts may in fact have been worth less immediately upon spinoff. If such is the case here, and so it is alleged, a hypothetical termination "immediately after" transfer arguably would have yielded less than termination "immediately before."
Section 406 of ERISA (29 U.S.C. § 1106) "categorically bar[s] certain transactions deemed likely to injure" a plan. Keach v. U.S. Trust Co., 419 F.3d 626, 636 (7th Cir. 2005); see also Reich v. Compton, 57 F.3d 270, 275 (3d Cir. 1995) (transactions prohibited under ERISA § 406 are those "that had been used in the past to benefit other parties at the expense of the plans' participants and beneficiaries") (citing S.Rep. No. 93-383, 93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 4890, 4981). Under § 406(a)(1)(D), a "fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect . . . transfer to, or use by or for the benefit of a party in interest, of any assets of the plan."
Plaintiffs contend that defendant Fenkell violated § 406 when, in his role as a trustee for the AH ESOP, he allegedly pre-arranged an unfair transfer of the Trachte employees' Alliance accounts in exchange for far less valuable Trachte stock so he would receive a personal payment from the Trachte Phantom Stock Plan. According to plaintiffs, Fenkell violated three different parts of § 406 by (a) causing a transaction that led to a payout for him in violation of § 406(a)(1)(D); (b) dealing with TBS ESOP assets "in his own interest" in violation of § 406(b)(1); and (c) receiving consideration from Trachte in connection with the spinoff he performed in violation of § 406(b)(3).
In Count III of their complaint, plaintiffs allege that Fenkell violated § 406(a)(1)(D) because, as fiduciary of the AH ESOP, he "caused" the AH ESOP to engage in the transaction that led to his receiving payment from the Phantom Stock Plan. As fiduciary of the AH ESOP, however, Fenkell had no fiduciary duty to members of the TBS ESOP and had no authority to direct that plan to purchase the Trachte stock. Fenkell's actions were limited to spinning off the Trachte employees' accounts into the TBS ESOP.
Plaintiffs contend that Fenkell can still be held liable because he allegedly arranged the terms of the transaction so that the spinoff was the first step in a larger, inevitable and almost instantaneous transaction, in which the TBS ESOP was "stuck" selling its valuable Alliance and AH stock holdings and acquiring lar less valuable Trachte stock as soon as Fenkell spun off the Trachte employee's accounts. Defendants contend that, to the extent Fenkell negotiated the terms of the transaction as a whole (by drafting the letter of intent, for example), he was not acting in his capacity as fiduciary of the AH ESOP.
As defendants point out, a company representative such as Fenkell may wear more than one hat: he is acting as plan fiduciary when he exercises discretionary authority or control over the management of the plan or the disposition of its assets, 29 U.S.C. § 1002(21)(A), but not when he makes "design changes" in the plan or negotiates the terms of a transaction involving the company that may require action by the plan as well. See Ames v. Am. Nat'l Can Co., 170 F.3d 751, 757 (7th Cir. 1999) ("when company representatives are negotiating the sale of a division, they are not acting in their capacity as a plan fiduciary"); Sys. Council EM-3 v. AT&T Corp., 159 F.3d 1376, 1379-80 (D.C. Cir. 1998) (administrators of plan not acting as fiduciaries while helping reorganize corporate structure by spinning off operations into separate businesses).
Whether Fenkell was truly wearing only the hat of an "administrator," as opposed to that of a fiduciary, when he structured the terms of the transaction is, at this point, a matter of dispute. If, as plaintiffs contend, he crafted a transaction designed to encumber the accounts spun off, he was doing more than merely negotiating the sale of a division as in Ames, or reorganizing a corporate structure as in Systems Council; he was considering whether to sacrifice the interests of plan participants tied to Trachte for his own benefit, or at least a jury might infer on the facts as alleged.
Moreover, plaintiffs point out that several recent district court cases support a wait-andsee approach to deciding whether an individual wearing multiple hats is acting as a fiduciary. George v. Kraft Foods Global, Inc., 674 F.Supp.2d 1031, 1049-50 (N.D. Ill. 2009); Will v. Gen. Dynamics Corp., No. 06-698-GPM, 2009 WL 3835883, *2 (S.D. Ill. Nov. 14, 2009). There may be instances in which it is clear even at this early, pleading stage that an actor was not assuming a fiduciary role. George, 674 F. Supp. 2d at 1050 n.18 (noting that dismissal of ERISA claim would be proper where defendant owed no fiduciary duty under facts alleged). In this case, however, the alleged non-fiduciary role — negotiation of a transaction between Alliance and Trachte — was focused entirely on the accounts of AH ESOP plan participants related to Trachte, meaning Fenkell may also have had an inherently "fiduciary" role in the negotiations.
Because the allegations support an inference that Fenkell acted as a fiduciary when he arranged the transaction leading to his Phantom Stock Plan payout, he may have "caused" the transfer of Alliance assets to a party in interest in violation of § 406(a)(1)(D). Therefore, defendants' motion to dismiss plaintiffs' § 406(a)(1)(D) claim against Fenkell will be denied.
In Count IV of the complaint, plaintiffs allege that Fenkell violated § 406(b)(1) in his role as an AH ESOP trustee, which prohibits "deal[ing] with" plan assets "in his own interest or for his own account." In particular, plaintiffs contend that Fenkell violated § 406(b)(1) by conditioning the spinoff he performed for the AH ESOP on the price the TBS ESOP would pay Alliance for the Trachte stock, which at least arguably could constitute "dealing with the assets of the AH ESOP in his own interest" because Fenkell received a payout from Trachte as part of the transaction.
As explained above, the allegations support an inference that Fenkell may have been acting as a fiduciary of the AH ESOP when he "conditioned" the spinoff on the price of Trachte stock. Even so, defendants contend, Fenkell cannot be held liable for violating § 406(1)(b) because that provision prohibits only improper dealings with the assets of a plan for which the person is a fiduciary. The statute says that "[a] fiduciary with respect to a plan shall not . . . deal with the assets of the plan in his own interest or for his own account."
At one point, plaintiffs stated that Fenkell dealt improperly with the TBS ESOP's assets. (Pls.' Br. (dkt. #57) at 27.) In a sense, the facts support plaintiffs' assertions: Fenkell received the payout only once the TBS ESOP was spun off, and he received it from the TBS ESOP, not the AH ESOP. To the extent plaintiffs are attempting to pursue a claim against Fenkell for his dealings directly with the TBS ESOP, however, such a claim fails since he owes no fiduciary duty to this new entity.
Here, Fenkell's dealings with the TBS ESOP may still not have been a true arm's length deal in light of the allegations that Fenkell played a part in setting up the whole transaction beforehand. More important, because Fenkell allegedly set up the TBS ESOP deal while those participants were still part of the AH ESOP, he is also alleged to have "dealt" improperly with assets from the AH ESOP, by setting up a transaction that included both spinning off the accounts and receiving payment from them. Plaintiff may, therefore, pursue a claim that Fenkell "dealt" improperly with AH ESOP assets that later became TBS ESOP assets by negotiating the terms of the transaction in violation of § 406(b)(1).
Plaintiffs contend that Fenkell violated § 406(b)(3) by receiving a payment from Trachte under the Phantom Stock Plan as part of the same transaction in which he spun off the Trachte accounts from the AH ESOP. Plaintiffs claim this payment conflicted with Fenkell's alleged fiduciary role in spinning off the account. Although defendants point out that Fenkell's fiduciary role was a modest one (carrying out the written terms of the Plan's spinoff amendment), this is still a fiduciary role. The language of § 406(b)(3) leaves little question that plaintiffs state a claim against Fenkell: it is worded broadly to prohibit any "fiduciary with respect to a plan" from "receiv[ing] any consideration" from "any party" dealing with the fiduciary's plan "in connection with a transaction involving the assets of the plan."
Defendants contend that the provision is an "anti-kickback provision" that is not intended to prohibit transactions such as the one at issue in this case, which they describe as one in which the "fiduciary ends up receiving a contractual benefit." (Defs.' Reply Br. (dkt. #63) at 19.) As alleged at least, defendants' characterization of what occurred is inaccurate: Fenkell did not simply "end up" receiving a contractual benefit in the form of a Phantom Stock payment; his payment under the Phantom Stock Plan was triggered by Alliance's sale of Trachte.
Moreover, defendants cite no case supporting the distinction they draw between "kickbacks" and other "contractual benefits." If defendants' point is that there needs to be a "deal" between the "party dealing with" the plan and the fiduciary, or that the party dealing with the plan (in this case Trachte) must somehow benefit, it is not clear why that is so. What matters under § 406 is whether a particular transaction will likely injure a plan. Keach, 419 F.3d at 636. Whether the "dealing" party ends up better off than the fiduciary is, at least to some extent, beside the point.
Defendants add that the Phantom Stock payment was "ERISA-protected." What they mean by that is unclear. To the extent they are suggesting that the payment was a generally permissible way to structure benefits under ERISA, that is also off point; § 406(b)(3) states that an otherwise legitimate method of payment is not "ERISA-protected" if it involves a payment to a fiduciary of a plan from a party dealing with the plan in connection with the plan's assets.
Defendants suggest that to read § 406(b)(3) in this way "would effectively outlaw most if not all `top hat' plans sponsored by ESOP-owned companies and virtually eliminate an entire class of employee benefit plans described in ERISA § 201(2)." Defendants again do not elaborate, appearing to expect the court to simply take its word that no work-around could be found to avoid § 406(b)(3) problems with these plans. For example, one obvious work around might be to insure that those senior executives' entitled to payments under a "top hat" plan — unfunded, deferred compensation in excess of a company's basic pension plan — not act as a fiduciary with regard to decisions impacting excess payments. Even if defendants were correct, that an assignment of liability here would have larger, unacceptable implications, the record is not sufficiently developed for the court to make that assessment at this early, pleading stage. Because § 406(b)(3) appears to prohibit the Phantom Stock payment Fenkell received, at least as currently pled, defendants' motion to dismiss plaintiffs' § 406(b)(3) claim against Fenkell will also be denied.
Plaintiffs allege that the trustees violated § 406(a)(1)(A) and (D) by "causing or permitting" the TBS ESOP to buy stock in a way that amounted to a direct or indirect exchange of property between the Plan and parties in interest and a transfer of assets of the plan to a party in interest. Defendants' response is that the trustees were "directed trustees" and, therefore, did not "cause" the plan to engage in the allegedly prohibited transactions.
Under § 403(a)(1) (29 U.S.C. § 1103(a)(1)), directed trustees are "subject to proper directions of [a named fiduciary who is not a trustee] which are made in accordance with the terms of the plan and which are not contrary to [ERISA]." In other words, the fiduciary duties of directed trustees are tempered by § 403(a)(1): a directed trustee can be held liable for actions taken at the direction of a named fiduciary if the direction (1) is not "proper," (2) violates the terms of the plan or (3) violates ERISA.
The TBS ESOP documents establish that the trustees are not allowed to invest funds or incur debt on their own, but only at the direction of the "Administrator," which is the "named fiduciary and plan administrator, as those terms are defined by ERISA." Plaintiffs contend that they have alleged sufficient facts that the trustees exercised functional authority to purchase the Trachte stock, as shown by their ongoing participation in the process. In particular, plaintiffs point to the April 2007 letter of intent, signed by Seefeldt and Mastrangelo, the July 2007 RSM valuation letter obtained by the trustees and the August 27, 2008 Barnes final valuation and opinion letter sent to the trustees. Leaving aside the fact that both the letter of intent and the RSM valuation letter were prepared before the August 1, 2007 formation of the Plan (and subsequent appointment of trustees), these allegations fall short of suggesting that the trustees exercised any discretion over the final decision to purchase Trachte stock.
To the extent the letter of intent suggested that the TBS ESOP trustees might have discretion to buy Trachte stock, because it described such a plan and Seefeldt and Mastrangelo signed it as "representatives" of the Plan, it is undermined by the fact that Seefeldt also signed it as the president of Trachte, which would be the Administrator of the plan. More important, any possibility of the trustees having such authority was eliminated on August 1, 2007, when the Plan became effective and gave the trustees a more limited role. As for the valuations, what they suggest is that the trustees were informed about the details of the transaction, not that they had the power to make a decision on their own.
Next, plaintiffs argue that § 403(a)(1) does not cover the trustees because they received their direction from Alpha, who was not a "named fiduciary." However, this point is irrelevant to whether the trustee's discretion was limited. Section 403(a)(1) simply recognizes that the "exclusive authority and discretion to manage and control assets of the plan" does not lie with the trustees when "the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee." The TBS ESOP provides as much with respect to investing stock by leaving that power in the hands of the "Administrator." Regardless whether Trachte or Alpha is the Administrator, the trustees must be deemed "subject to direction" within the meaning of § 403(a)(1), because the plan "expressly provides" that they are subject to the direction of the Administrator.
Defendants also contend that a directed trustee does not "cause" a plan to engage in a transaction, but rather is directed to "execute" a plan, citing in support Harris Trust and Savings Bank v. Salomon Smith Barney, 530 U.S. 238, 245 (2000), Tullis v. UMB Bank, N.A., 640 F.Supp.2d 974, 980 (N.D. Ohio 2009), and Beauchem v. Rockford Products Corp., No. 01 C 50134, 2003 WL 1562561, at *2 (N.D. Ill. Mar. 24, 2003). None of these cases sweep quite so broadly, however, and there are important differences between those cases and this one. In Harris, the court held only that a fiduciary must "cause" a plan to engage in the transaction, 530 U.S. at 245, hardly a useful reference because the statute itself says as much. See 29 U.S.C. § 1106(a)(1). In Tullis, the court concluded that a directed trustee was not liable under § 406, but not merely because it was "directed," rather because the participants exercised individualized control over their own assets, relieving the trustee of fiduciary obligations under § 404(c). 640 F.Supp.2d at 980-81.
The Beauchem decision comes the closest to being on point. 2003 WL 1562561, at *2. In that case, the court dismissed the plaintiff's claims against a directed trustee of a bank trust. The court concluded that a directed trustee did not have a fiduciary obligation to recoup losses suffered by the plan, obtain an independent appraisal or negotiate the terms of a stock because "the plan documents do not vest [the directed trustee] with the authority or responsibility to engage in these activities." Id. The Beauchem court does not explain, however, whether the plaintiff was asserting any § 406 claim against the directed trustee or whether the absence of these duties could affect a § 406 analysis. Id.
Under the statute, the question remains whether the directed trustee is a "fiduciary" that "cause[d] the plan to engage in a transaction." 29 U.S.C. § 1106. Defendants fail to identify any authority that establishes that a directed trustee can never be said to "cause" a transaction. As a result, the question is whether the directed trustee played a discretionary role in bringing about the transaction here.
At least as alleged, the directed trustees here may have played a discretionary role, if only a limited one. As explained above, the directed trustee is not "subject to" a direction unless the direction is proper, made in accordance with the terms of the plan and not contrary to ERISA. Because the transaction at issue was allegedly a prohibited transaction, it would be "contrary to ERISA" and, therefore, the directed trustees may have retained discretion to reject the direction. Because defendants do not explain why a directed trustee's limited, discretionary role could not still "cause" a transaction, their motion to dismiss Count VIII will be denied.
Section 404 of ERISA (29 U.S.C. § 1104) requires that a fiduciary "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries," among other things, (1) "for the exclusive purpose o[f] providing benefits to participants and their beneficiaries" and "defraying reasonable expenses of administering the plan"; (2) "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims"; and (3) "in accordance with the documents and instruments governing the plan." 29 U.S.C. § 1104(a)(1)(A),(B) and (D). Plaintiffs contend that each defendant violated one or more of these provisions of ERISA § 404 by failing to perform fiduciary duties they owed to the Trachte employees during the August 2007 transaction.
Plaintiffs contend that defendant Fenkell violated ERISA § 404 by executing Alliance's spin off of the Trachte accounts. In particular, plaintiffs contend that Fenkell had a fiduciary duty related to the transfer of AH ESOP assets and failed to "insure that the assets transferred to the Trachte [Plan] met the requirements of the Spinoff Amendment and Section 208 of ERISA." (Pls.' Opp'n Br. (dkt. #57) at 25.) As explained above in the context of plaintiffs' § 208 claim, plaintiffs have alleged sufficient facts to allow an inference that the value of the participants' accounts was reduced immediately after the spinoff. Since defendants acknowledge that Fenkell had an obligation "to ensure that the Spin-Off complied with ERISA Section 208" and the terms of the Amendment simply track the requirements of § 208 — requiring benefit equivalence "immediately after the Spin-off Date" — the court's earlier discussion is also sufficient to support an inference that Fenkell failed to ensure that the spinoff complied with § 208 and the terms of the Spin-Off Amendment.
Plaintiffs also contend that defendant Alliance breached its fiduciary duties by failing to monitor Fenkell in his execution of the spinoff. In particular, plaintiffs contend that Alliance should have ensured that Fenkell complied with the terms of the Spin-Off Amendment. Defendants' arguments for dismissal again hinge on plaintiffs' § 208 claim (whether plaintiffs have alleged sufficient facts to support an inference of a reduced value in the participants' accounts immediately after the spinoff). As explained above, plaintiffs have stated a § 208 claim, so defendants' motion to dismiss Count V will also be denied.
Plaintiffs' § 404 claim against defendants Mastrangelo, Seefeldt and Klute relates to their role as trustees of the TBS ESOP during the 2007 transaction. As explained above, the trustees were "directed trustees" under § 403(a)(1), which means they were "subject to the direction of a fiduciary who is not a trustee," provided the fiduciary's directions were proper, made in accordance with the terms of the plan and not contrary to ERISA. What remains to be decided is whether the directed trustees breached their limited fiduciary duty by following the direction they received.
Plaintiffs' first theory of liability involves Trachte's use of Alpha as an "independent fiduciary." Under § 403, a directed trustee is only subject to "the direction of a named fiduciary." According to plaintiffs, Alpha was not a "named fiduciary" under the terms of the TBS ESOP because the plan assigns the "Administrator" as the "named fiduciary" and as the sole entity with the authority to invest in stock. As plaintiffs point out, Trachte was the plan's Administrator and Alpha was appointed only as an "independent fiduciary."
Defendants acknowledge that only the "Administrator" is a "named fiduciary," but contend that Trachte could and did assign that role to Alpha with respect to the investment of stock. As defendants put it, "[t]he Plan allows Trachte to designate any `person or entity' to perform any of the duties of the Administrator from `time to time.'" (Defs.' Br. (dkt. #135) at 9 (citing TBS ESOP, § 7.2).) But § 7.2 does not allow Trachte to delegate parts of its work, as defendants suggest. Instead, "the Administrator shall be the Employer [Trachte] or any other person or entity designated by the Employer from time to time." In other words, § 7.2 provides a mechanism by which Trachte may assign the entire set of duties as Administrator to another; it does not provide for delegation of individual duties. Defendants also argue that the title given to Alpha, "independent fiduciary," should not be dispositive, but there is no suggestion that Alpha truly became the new "Administrator," with all its duties.
Because the Plan does not provide for an "independent fiduciary" to make determinations about the investment of stock, the trustees were not subject to Alpha's direction and may have breached their duties under § 404(a)(1)(D) by investing without receiving directions from the Administrator. Likewise, unless the transaction was "for the exclusive purpose of providing benefits to participants and their beneficiaries" and "prudent" under § 404(a)(1)(A) and (B), the trustees may be liable under those provisions.
Plaintiffs' alternative theory is that, even if Alpha were a "named fiduciary," the trustees' decision to follow the direction of Alpha would be a breach of their fiduciary duties because the directions were not proper or in accordance with the terms of the plan or ERISA as required under § 403(a)(1). The first question that arises relates to how much a directed trustee is required to do to ensure a direction is "proper" and to meet his or her duties in accordance with the terms of the plan and ERISA.
According to defendant Pagelow (who raised questions about the standard in the context of a claim that plaintiffs have now abandoned), ERISA does not require a trustee to disobey an "imprudent" direction, only an "improper" one, which Pagelow contends is limited to a direction that fails to "conform to certain formalities." (Defs.' Opp'n Br. (dkt. #53) at 7 (citing DiFelice v. U.S. Airways, 397 F.Supp.2d 735, 747 (E.D. Vir. 2005)); In re Cardinal Health, Inc. ERISA Litig., 424 F.Supp.2d 1002, 1037-40 (S.D. Ohio 2006); Herman v. NationsBank Trust Co., 126 F.3d 1354, 1361 (11th Cir. 1997); In re Delphi Corp. Sec., Derivative & Erisa Litig., 602 F.Supp.2d 810, 821 (E.D. Mich. 2009).
In DiFelice, the court reasons that directed trustees should not be held to any duty of "prudence" because to do so would "negate the purpose and function of § 403(a)," which makes a directed trustees "subject to" the directions of the named fiduciary, and would "invite wasteful disputes and litigation between named fiduciaries and directed trustees over the wisdom of each direction." Id. at 751.
Plaintiffs disagree with defendants' reading, pointing to the Seventh Circuit's decision in Summers v. State Street Bank & Trust Co., 453 F.3d 404 (7th Cir. 2006). In Summers, the court of appeals stated that a directed trustee "can disobey the named fiduciary's directions when it is plain that they are imprudent," indeed must do so, because ERISA "forbids them to comply with directions of the fiduciary named in the plan that are not `proper'" and "an imprudent direction cannot be a proper direction." 453 F.3d at 406-07. Although the statement in Summers flies in the face of defendants' position, defendants point out that this reasoning was not necessary to resolve the case because, ultimately, the court concluded that there was no breach of duty at all.
Even if the statement is dicta, the reasoning in Summers is persuasive. In Summers, the Seventh Circuit noted there is currently a split among the circuits, citing Herman, 126 F.3d at 13561-62, and FirsTier Bank, N.A. v. Zeller, 16 F.3d 907, 911 (8th Cir. 1994), explaining that the split "reflects a confusing statutory picture" under which a directed trustee is not held liable for obeying the directions of a named fiduciary, but other fiduciaries are held liable for knowing about a breach and taking no reasonable efforts. 453 F.3d at 406 (citing 29 U.S.C. §§ 1105(b)(3)(B) and (a)(2)(3)).
As the Summers court points out, however, the Department of Labor has taken the position that a directed trustee has a duty of prudence, even if the trustee has no "direct obligation to determine the prudence." Id. at 406 (citing "Fiduciary Responsibilities of Directed Trustees," Field Assistance Bulletin 2004-03, Dec. 17, 2004). Moreover, "[t]he trustee physically controls the trust assets; knowingly to invest them imprudently or let them remain invested imprudently is irresponsible behavior for a trustee, whose fundamental duty is to take as much care with the trust assets as he would take with his own property." Id. at 407.
In contrast, the DiFelice court expressed concern that a duty of prudence could lead to "second-guessing" and unnecessary litigation. 397 F.Supp. at 747. That concern would seem, however, to apply to a trustee's duty to insure that a direction is not contrary to the plan or ERISA. Indeed, imprudent actions of a fiduciary are "contrary to ERISA," which would mean a directed trustee concerned about a named fiduciary's breach of the duty of prudence could, and perhaps should, "second-guess" the fiduciary. For this reason, what is needed is not a hedging away from the duty of prudence, but a limitation on the duty to investigate.
Such a limitation also explains why the Labor Department recognizes in its pamphlet that a directed trustee has a duty of prudence but no "direct obligation to determine the prudence," and why the Summers court recognized (in resolving the apparent tension between the arguably conflicting requirements in the Labor Department pamphlet) that a directed trustee can disobey directions "when it is plain that they are imprudent." 453 F.2d at 407.
This limitation also answers the next dispute between the parties — whether directed trustees ever have to perform any investigation to decide whether a given direction would be "proper." Although plaintiffs suggest that a directed trustee may be required to investigate when there is "evidence that [t]he direction is imprudent" (Pls.' Opp'n Br. (dkt. #35) at 19-20), this notion has the risk of quickly devolving into a requirement that a directed trustee second-guess every direction of the named fiduciary. As the court explained in Summers, the duty of prudence of the directed trustee should be limited to what is "plain": where the directed trustee knows or should know (in his or her role as trustee) that a fiduciary's direction is imprudent, there is a duty to disobey the direction. In re Worldcom ERISA Litig., 354 F.Supp.2d 423, 445 (S.D.N.Y. 2005) (directed trustee can be held liable for what he or she knows or "ought to know"); see also Field Assistance Bulletin 2004-03, Dec. 17, 2004 ("when a directed trustee knows or should know that a direction from a named fiduciary is not [proper], the directed trustee may not, consistent with its fiduciary responsibilities, follow the direction").
Plaintiffs identify "at least five reasons" why the trustees should have known that the direction to purchase Trachte stock was imprudent and, therefore, should have declined to follow the direction: (1) a "prudent investigation" would have made it apparent that the price the TBS ESOP would pay for Trachte stock was too high; (2) the amount of debt incurred by Trachte and the TBS ESOP was more than Trachte could service; (3) the debt Trachte took on to redeem common and preferred shares and make the Phantom Stock payments reduced the value of the Trachte shares; (4) the valuation opinions provided by Stout and Barnes were not "reasonably justified" under the circumstances; (5) it was not reasonable to rely on these valuations in light of the critique in the RSM McGladrey letter; and (6) no importance was given to the failure to make an arms-length sale of the stock.
Some of plaintiffs reasons are expressly or implicitly tied to a requirement to investigate. Thus, although the valuations stated only that the Plan would be paying on the "high end" of reasonable for Trachte stock, plaintiffs contend that a "prudent investigation" would have shown that the price was too high. Similarly, the allegations do not suggest that the trustees had any reason to think Trachte would not be able to service the debt because its sales had been "soft," and would therefore have to second-guess Trachte's decision to take on the loan (if not the bank's decision to provide the loan) to develop cause for concern.
Nonetheless, the allegations suggest that the trustees should have known the direction to purchase Trachte stock would be imprudent. Although they might not have known the stock was overpriced, they knew it was on the "high end" of reasonable. They also allegedly knew that there were concerns even with those valuations, including (1) attaching value to a tax shield, (2) failing to take into account the likely effect of Trachte's taking on a $26 million loan as part of the transaction, and (3) the lack of a standard discount for the company's lack of marketability. While not overwhelming, the court cannot find on this limited record that it would be unreasonable to infer the trustees should have known the asset they were purchasing — Trachte's stock — would be adversely affected by Tracthe taking on a relatively large loan. Perhaps, as defendants suggest, all these concerns will be shown to be minor, only important by hindsight. At this early stage, however, they suffice to state a claim. Therefore, defendants' motion to dismiss count VI will be denied.
Plaintiffs contend that defendant Pagelow breached his fiduciary duties in violation of § 404(a)(1)(A) and (B) (29 U.S.C. § 1104(a)) when he authorized defendant Alpha to direct the Trachte trustees to complete the transaction at issue in this case. Defendant Pagelow moves for dismissal of this claim on several grounds: (1) Trachte, not Pagelow, was the "Administrator" authorized to "appoint" Alpha; (2) no facts support the conclusion that Pagelow knew or should have known that Alpha could not be appointed to act as an "independent fiduciary"; (3) there are no facts suggesting that individually Pagelow had the legal authority to "authorize" Alpha to direct the Trachte trustees; (4) the Plan authorized appointing Alpha as an "independent fiduciary" so Pagelow did not breach any duty in his alleged role; (5) if Alpha's appointment was improper, the right to direct the transaction would have reverted to the trustees or the "Administrator," not Pagelow, who never had that power; and (6) any fiduciary responsibilities Pagelow may have had disappeared when Pagelow resigned from the board on August 24, 2007, five days before the transaction was completed.
Two of these arguments may be addressed quickly. With respect to (4), defendants are mistaken in maintaining the Plan authorized the appointment of an independent fiduciary to direct a spinoff, at least as pled in the Amended Complaint. With respect to (2), the alleged facts simply do not support this argument. Pagelow was the CEO and chairman of the board of directors of Trachte, the "Administrator" of the TBS ESOP. When Pagelow went out to "engage" Alpha to act as an independent fiduciary, he should have known whether the Plan he was "administering" on behalf of Trachte allowed Alpha to take on this role. The remaining arguments fall into two different groups: (a) arguments about the personal liability of Pagelow while acting as a corporate officer or director, and (b) arguments about the timing and result of the allegedly illegal "engagement" of Alpha.
Points (1), (3) and (5) relate to Pagelow's alleged liability personally for actions taken on behalf of Trachte. There is no question that Trachte exercised discretionary authority over appointment of Alpha as a fiduciary because Trachte was the Administrator under the TBS ESOP. But plaintiffs allege that Pagelow "engaged" Alpha on behalf of Trachte as chairman of its board of directors, CEO and one of its two shareholders. Specifically, plaintiffs contend that officers or directors may be held liable as fiduciaries for actions they take on behalf of a corporation. Defendants take the opposite position: corporate officers should be shielded from liability for duties performed on behalf of their corporation.
The allegations do not suggest Pagelow took up any formal "trustee" role, but "ERISA. . . defines `fiduciary' not in terms of formal trusteeship, but in functional terms of control and authority over the plan." Mertens v. Hewitt Associates, 508 U.S. 248, 262 (1993) (citing 29 U.S.C. § 1002(21)(A)). The question whether an individual is a fiduciary boils down to the question whether that individual exercises discretionary control or authority over plan assets or plan management. 29 U.S.C. § 1002(21)(A).
The Department of Labor suggests that any director or officer assigned to perform a discretionary role should be considered a fiduciary so long as the corporate role assigned over the plan is fiduciary in nature. In ERISA Interpretative Bulletin 75-8, 29 C.F.R. § 2509.75-8, D-4 (1983), the Secretary of Labor explained that members of a board of directors of a corporation "will be fiduciaries only to the extent that they have responsibility" over plan assets or management. The Secretary went on to say that if a board is "responsible for the selection and retention of plan fiduciaries," its members are fiduciaries with respect to their selection and retention of fiduciaries.
Relying on Confer v. Custom Engineering Co., 952 F.2d 34 (3d Cir. 1991), defendants contend that a corporate officer remains "shielded" from liability so long as he is acting within the corporate form. In Confer, the court reasoned that a corporation may act as the "person" performing fiduciary functions, but when doing so through its officers and directors, the decisions of those officers and directors must be imputed to the corporation, not to the individuals. Id. at 37. As the court explained, to do otherwise would be to "abrogate[] the use of corporate structure clearly permitted by ERISA." Id.
Although the Court of Appeals for the Seventh Circuit has not addressed Confer, other courts have rejected applying so rigid a rule for determining the fiduciary status of corporate officers. Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1459-61 (9th Cir. 1995); Musmeci v. Schwegmann Giant Super Mkts., Inc., 332 F.3d 339, 350 (5th Cir. 2003). At the same time that Confer protects the corporate structure, it undermines ERISA's ability to hold responsible those who exercise discretion over plan accounts and plan management. As the Court of Appeals for the Ninth Circuit pointed out in Kayes, ERISA regularly seeks to hold responsible those individuals exercising discretion over a plan, (1) by providing for liability against "[a]ny person" who exercises such discretion, (2) by defining "fiduciary" in terms of function rather than formal assignment, and (3) by undermining attempts to void agreements that would free a fiduciary from responsibility. 51 F.3d at 1460. See also 29 U.S.C. § 1110 ("any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability . . . shall be void as against public policy"). These ERISA provisions all run counter to erecting an inviolate corporate shield, which would make fiduciary responsibility purely an "internal matter" for corporations. See also Briscoe v. Fine, 444 F.3d 478, 487 (6th Cir. 2006) (unlike Kayes, Confer applies a "rebuttable presumption" of no fiduciary duty for corporate officers and directors).
Moreover, while the Seventh Circuit has not yet addressed this issue directly, it has found that the chairman of a board of directors may be a "fiduciary" without making a separate finding that the individual exercised discretionary control. Leigh v. Engle, 727 F.2d 113, 133 (7th Cir. 1984). See also Ed Miniat, Inc. v. Globe Life Ins. Grp, Inc., 805 F.2d 732, 736 (7th Cir. 1986) (concluding from Leigh that corporate officers were fiduciaries despite the plan providing only the "employer" corporation could amend plan). In Leigh, the Seventh Circuit concluded that the chairman of the board of directors of a holding company was a fiduciary of one of its controlled companies "to the extent [he] performed fiduciary functions in selecting and retaining plan administrators." 727 F.3d at 133. The court did not pause to express concern that the chairman may have been acting on behalf of the corporation and, therefore, should be "shielded." Indeed, the court quoted approvingly the language in ERISA Interpretative Bulletin 75-8, D-4 mentioned above, albeit for a different point. Id.
Defendants read Leigh differently. For defendants, the decision supports a "rebuttable presumption" against assigning a fiduciary status to corporate officers because the court of appeals notes that the chairman exercised what the court called "real authority" over the plan by appointing "close business associates" as plan administrators. Leigh, 727 F.2d at 135 n.33. However, the court of appeals relied on that activity to establish a separate fiduciary duty, extending beyond the fiduciary duty already established by his duties to select and retain administrators of the plan. Even if it didn't, plaintiffs have alleged enough to call into question Pagelow's conduct here.
The question is whether Pagelow exercised discretion over plan assets or management, not whether he acted on behalf of a corporation when exercising that discretion. This does not mean, as defendants argue, that "any corporate officer or director" becomes liable for "any corporate action"; rather liability extends "to the extent" the corporate officer or director exercises control or authority over the plan on behalf of the corporation. Leigh, 727 F.2d at 133.
Defendants' point (6) relates to whether Pagelow can be held liable for his role in engaging Alpha despite the fact he was not a fiduciary when the transaction occurred, having stepped down some 5 days earlier. See ERISA § 409(b) (29 U.S.C. § 1109(b)) (fiduciary cannot be held liable for breach "committed before he became a fiduciary or after he ceased to be a fiduciary"). Defendants either misread § 409(b) or the nature of plaintiffs' claim against Pagelow. Plaintiffs contend that the breach occurred while Pagelow was a fiduciary, when he "engaged" Alpha to be a fiduciary. Even if the TBS ESOP had not come into existence on August 13, 2007, when Pagelow engaged Alpha, the Plan was made effective "retroactively" to August 1, 2007, so Pagelow could still have been a fiduciary of the Plan when he acted.
Defendants' real contention is that Pagelow's decision to "engage" Alpha could not have resulted in the alleged loss in this case because Pagelow was not "in a position" to direct the transaction. Under ERISA § 409(a), fiduciaries are liable only for actions that "result in" a particular loss. Defendants do not explain, however, why Pagelow's inability to direct the transaction interferes with what appears to be a "causal connection" between Pagelow's engaging Alpha and Alpha's directing the transaction that "resulted in" the loss. Brandt v. Grounds, 687 F.2d 895, 898 (7th Cir. 1982) (noting that § 409(a) requires a "causal connection" between breach of fiduciary duty and loss).
Perhaps defendants are suggesting that Pagelow cannot be blamed because the directors who replaced him could have declined to accept the allegedly improper engagement but instead approved it. The new directors' approval does not erase the alleged causal connection between Pagelow and the loss; it suggests only that the new directors may have also been causal factors of the loss. Therefore, Pagelow's motion to dismiss will also be denied with respect to Count XI.
In Count XII, plaintiffs seek to hold defendants Alliance and Pagelow liable as the sellers who allegedly benefitted by selling Trachte shares at an inflated price during the transaction.
As defendants point out, § 502(a)(3) is not a substantive provision but rather a provision for civil enforcement of ERISA. In other words, there is no "violation" of § 502(a)(3); instead, § 502(a)(3) provides a mechanism for pursuing equitable relief for other ERISA violations. However, this does not mean there is no such thing as a § 502(a)(3) "claim": when bringing a suit against a non-fiduciary for alleged ERISA violations of another, what else could a plaintiff call it? Thus, the fact that § 502(a)(3) is not technically a substantive provision is not grounds to dismiss Count XII.
At any rate, this question is not defendants' main concern. The real question is whether plaintiffs can pursue such equitable relief against Alliance and Pagelow. Defendants contend that what plaintiffs are really seeking is compensation, which is not available under § 502(a)(3). Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993) (section 502(a)(3) authorizes only "those categories of relief that were typically available in equity (such as injunction, mandamus, and restitution, but not compensatory damages)") (emphasis in original). Plaintiffs contend that they seek "restitution" or "disgorgement," which the Supreme Court has held to be "appropriate equitable relief" within the meaning of § 502(a)(3). Harris Trust, 530 U.S. at 253.
However, the parties' labels do not determine whether the "restitution" or "disgorgement" plaintiffs seek is equitable; instead, this question is decided by considering the "basis for [plaintiffs'] claim and the nature of the underlying remedies sought." Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213 (2002) (citing Reich v. Cont'l Cas. Co., 33 F.3d 754, 756 (7th Cir. 1994)). As a general rule, "for restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant's possession." Knudson, 534 U.S. at 213-14.
Ordinarily, a party seeking restitution in equity seeks "a constructive trust or an equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant's possession." Id. at 213 (citations omitted); see also id. at 215 (trustee may maintain action for restitution of the property if not already disposed of or disgorgement of proceeds if already disposed of) (citing Harris, 530 U.S. at 250). An equitable lien may also be created "by agreement or assignment," that is, when the parties agree "`[t]o dedicate property to a particular purpose, to provide that a specified creditor and that creditor alone shall be authorized to seek payment of his debt from the property or its value.'" Sereboff v. Mid Atl. Med. Services, Inc., 547 U.S. 356, 367-68 (2006).
Plaintiffs allege that Alliance and Pagelow received proceeds from the Trachte stock sale that belong in good conscience to plaintiffs. Thus, plaintiffs identify "particular funds or property" that defendants allegedly have that should be returned to plaintiffs. Defendants contend that because plaintiffs seek defendants' "profit," they are really seeking compensation, but they are mistaken. Regardless whether plaintiffs seek to obtain what defendants characterize as "their" profit, if plaintiffs are correct that the Trachte sale was improper under ERISA and the proceeds belong in good conscience to the TBS ESOP participants, defendants can be required to hold the money in trust for plaintiffs. What distinguishes this case from a case for compensation is that defendants will not be held liable to pay the value of the proceeds, only return the proceeds (or what is traceable to the proceeds).
Next, defendants argue that plaintiffs fail to plead sufficient facts to support the conclusion that defendants have clearly traceable funds or property belonging to plaintiffs in their possession. Defendants' argument proves too much. At this early stage, plaintiffs cannot be expected to identify a specific account in which the funds are held or string of transactions that show that the proceeds can be traced. To require as much would shut the door on most, if not all, claims for such equitable relief.
Rule 8 requires that plaintiffs allege sufficient facts to make it more than speculation as to whether discovery will reveal evidence to support the claim; not that plaintiffs map out a clear path to victory. See Twombly, 550 U.S. at 556 (2007); Iqbal, 129 S. Ct. at 1950. After discovery, plaintiffs may well be able to identify traceable funds, because proceeds obtained in a transaction such as this one have a good chance of being invested. This is so regardless whether there would be specific tax benefits to such an investment.
Because plaintiffs allege that defendants received the proceeds of the stock sale and do not allege that the funds were simply dissipated, defendants' motions to dismiss Count XII will be denied.
ORDER
IT IS ORDERED that:
Before the court is plaintiffs' motion for preliminary approval of settlement agreement. (Dkt. #876.) The court held a hearing on that motion at which all parties appeared via counsel. Appearing in person for plaintiffs were Robert Barton and Andrew Erlandson. Also appearing in person for defendants David and Karen Fenkell were Douglas Rubel and David Johanson. All other parties appeared by phone as follows: Alliance Defendants by Charles Jackson; Trachte Defendants by Charles Wolf; defendant Alliance ESOP by Lars Golumbic; defendant Stephen Pagelow by Alan Silver and Alliance ESOP Trustee Barbie Spears appeared personally.
At the hearing, the court orally granted plaintiffs' motion for preliminary approval, approved a draft class notice of partial settlement, ruled on other motions raised by the parties, and ruled on objections asserted by parties in writing, as well as certain oral objections that essentially repeated those previously asserted by counsel for David and Karen Fenkell in writing. The court sets forth the substance of its rulings in this order.
1. Based upon the court's review of plaintiffs' motion and all papers submitted in connection with the motion, the court will grant preliminary approval of the partial settlement.
2. The court concludes that at this preliminary stage, the proposed settlement "is within the range of possible approval." Armstrong v. Bd. of Sch. Dirs. of City of Milwaukee, 616 F.2d 305, 314 (7th Cir. 1980), overruled on other grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998). Specifically, the court finds that the proposed settlement appears "fair, reasonable, and adequate." Uhl v. Thoroughbred Tech. & Telecomms., Inc., 309 F.3d 978, 986 (7th Cir. 2002).
3. More specifically, the court finds that (a) the settlement figures and other provisions falls well within a reasonable range; (b) the settlement factors in defendants' ability to pay; (c) the settlement take into account the complexity, expense and duration of further litigation, including an appeal; (d) the settlement resulted out of arms-length negotiations; and (e) at this advanced stage of litigation, plaintiffs were well equipped to evaluate the merits of their case.
4. The assistance of Judge Anderson with respect to the settlement with the Alliance defendants reinforces the court's finding that the proposed settlement is non-collusive.
5. While the court is satisfied that the settlement is facially reasonable, it intends to scrutinize class counsel's application for attorneys' fees when the time comes for its final approval. Class counsel are put on notice that the court may use their hourly billing records and billing rates as a factor in determining an appropriate fee award.
1. The court approves plaintiffs' revised class notice and class questionnaire (dkt. #886-1) with modifications to sections 14 and 20 described during the hearing regarding the filing and service of class members objections.
2. The content of the notice fully complies with due process and Fed. R. Civ. P. 23.
3. Pursuant to Fed. R. Civ. P. 23(c)(2)(B), a notice must provide:
the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice must concisely and clearly state in plain, easily understood language: the nature of the action; the definition of the class certified; the class claims, issues, or defenses; that a class member may enter an appearance through counsel if the member so desires; that the court will exclude from the class any member who requests exclusion, stating when and how members may elect to be excluded; and the binding effect of a class judgment on class members under Rule 23(c)(3).
Fed. R. Civ. P. 23(c)(2)(B).
4. Subject to the changes to sections 14 and 20, the court finds the revised notice satisfies each of these requirements and adequately put class members on notice of the proposed settlements. Specifically, the notice describes the terms of the partial settlement, instructs class members about their rights and options under that settlement, adequately informs the class about the allocation of attorneys' fees, and provides specific information regarding the date, time, and place of the final approval hearing.
5. The court will, therefore, approve the following settlement procedure and timeline:
IT IS ORDER that:
1) plaintiffs' motion for approval of proposed notice and questionnaire to class members (dkt. #830) is DENIED AS MOOT;
2) plaintiffs' motion for preliminary approval of settlement agreement (dkt. #876) is GRANTED;
3) plaintiffs' motion to clarify and modify the definition of the class and subclass (dkt. #879) is RESERVED, pending Stephen Pagelow's response, now
4) defendants AHI, Inc., AH Transition Corporation, and Alliance Holdings, Inc.'s motion to adopt changes to the proposed class notice (dkt. #881) is DENIED AS MOOT; and
5) defendants David and Karen Fenkells' motion for court-ordered, mandatory settlement conference (dkt. #883) is DENIED.
IT IS ORDERED.
In this ERISA action, the court has resolved all pending claims save one, a relatively-recent claim that defendant Karen Fenkell is a gratuitous transferee under ERISA § 502(a)(3). Before the court are currently two, unrelated motions. In the first motion, Karen Fenkell moves to dismiss this remaining claim against her (dkt. #803), which the court will deny and set the claim on an expedited track to final judgment. In the second motion, nominal defendant Alliance Holdings, Inc. Employee Stock Ownership Plan ("Alliance ESOP") moves for clarification of the court's June 4, 2013, opinion and order on the appropriate remedies in this case. (Dkt. #799.) Having reviewed Alliance ESOP's motion and respective responses by plaintiffs and defendant David Fenkell (dkt. ##812, 815),
The court previously granted plaintiffs leave to amend their complaint to add principal defendant David Fenkell's wife, Karen Fenkell, as a defendant and to propose a new cause of action, Count XVI, alleging that Karen Fenkell is liable as a gratuitous transferee of phantom stock plan proceeds. (7/25/12 Opinion & Order (dkt. #736).)
Karen Fenkell moves to dismiss the complaint against her, based on several arguments, some of which were already raised in opposition to plaintiffs' motion for leave to amend. (Dkt. #803.) First, Ms. Fenkell argues that "[p]laintiffs made a significant and fatal error . . . by attaching as Exhibit A to their Motion for Leave to Amend the Complaint the "Second Amended Class Action Complaint" (Rec. Doc. 690-1) and not the Third Amended Class Action Complaint (Rec. Doc. 747)." (Def.'s Br. (dkt. #804) 8.) This argument is meritless. Plaintiffs filed the correct complaint once they discovered the error. (Dkt. #747.) Moreover, the parties briefed the motion for leave to amend the correct complaint, and the court issued an order on that motion relying on plaintiffs' redlined document illustrating the proposed changes to the Second Amended Complaint. (Dkt. #690-2.) Moreover, defendant was also able to file her present motion to dismiss without any prejudice caused by plaintiffs' clerical error.
Second, Ms. Fenkell argues that plaintiffs' pleading against her falls short because they fail to allege that the funds in question are "currently traceable to the August 2007 Transaction." (Def.'s Br. (dkt. #804) 9.) Defendant fails to point to any case law, or develop any argument, in support of her position that plaintiffs must allege or prove that the funds in her control are currently traceable to the August 2007 Transaction. Plaintiffs have alleged — indeed, there appears to be no dispute — that the funds from the August 2007 transaction were transferred to Karen Fenkell in October 2007. (See 3d Am. Compl. (dkt. #747) ¶ 300; Alliance Defs.' Phase 2 Trial Br. (dkt. #660) 34-35 ("[T]he funds are no longer in [David Fenkell's] possession, but instead are in the possession of his wife, in a bank account held solely in her name.").) These allegations are sufficient to support plaintiffs' claim that Karen Fenkell is liable as a gratuitous transferee pursuant to ERISA § 502(a)(3). 29 U.S.C. § 1132.
Third, defendant argues that the claim is barred by the applicable statute of limitations. In its prior order granting leave to amend, the court reserved a definitive ruling as to the applicable statute of limitations and whether plaintiffs' claim against Karen Fenkell was untimely. (7/25/12 Order (dkt. #736) 9.) Fenkell contends that plaintiffs' claim is barred by Pennsylvania's two-year statute of limitations for "an action taking, detaining or injuring personal property, including actions for specific recovery thereof." (Def.'s Br. (dkt. #804) 14 (quoting 48 Pa.C.S. § 5524(3)).) For this statute of limitations to apply, however, the following four propositions must be correct: (1) ERISA does not provide a statute of limitations for a claim against a gratuitous transferee; (2) this court should look to Pennsylvania law for an applicable statute of limitations; (3) Pennsylvania's two-year statute of limitations for the recovery of property is most applicable; and (4) the discovery rule does not save plaintiffs' claim because they could have discovered the transfer before May 2010 with the exercise of proper diligence.
Whether plaintiff's claim falls within ERISA's general six-year statute of limitations is a close question. Section 413 of the Act provides in relevant part:
29 U.S.C. § 1113.
Section 413 expressly covers obligations or violations of Part IV of the Act, while the claim asserted against Fenkell under ERISA § 502(a)(3) is found in Part V. As the court previously explained and plaintiffs now emphasize, however, ERISA § 502(a)(3) provides a mechanism for pursuing equitable relief for other ERISA violations. Chesemore v. Alliance Holdings, Inc., 770 F.Supp.2d 950, 978 (W.D. Wis. 2011). Plaintiffs argue, therefore, that the equitable claim against Karen Fenkell still arises under the breach of fiduciary duty defined in Part IV of ERISA and, in turn, the six-year statute of limitations set forth in ERISA § 413 applies. (Pls.' Opp'n (dkt. #818 15-16.) In further support, plaintiffs cite to cases where courts applied the statute of limitations in ERISA § 413 to claims for equitable relief against non-fiduciaries. See, e.g., Landwehr v. DuPree, 72 F.3d 726, 732 (9th Cir. 1995) (applying ERISA § 413's statute of limitations to § 502(a)(3) claim against non-fiduciary); Solis v. Couturier, No. 2:08-cv-02732-RRB-GGH, 2009 WL 1748724, at *2 (E.D. Cal. June 19, 2009) ("Suits brought under § 502(a)(2) for violations of a fiduciary duty under ERISA § 406 (29 U.S.C. § 1106) are therefore subject to the statute of limitations in § 413."). In response, defendant cite to a Northern District of Illinois case rejecting this argument, finding that a claim against a "party to a prohibited transaction" pursuant to ERISA § 502(a)(3) did not fall within Part IV of ERISA, and concluding, therefore, that the limitations period in ERISA § 413 did not apply. Beachum v. Rockford Prods. Corp., No. 01 C 50134, 2004 WL 432328, at *1 (N.D. Ill. Feb. 6, 2004).
The court need not resolve this split in authority because defendant fails to demonstrate that this court should look beyond Wisconsin law for an appropriate limitations period, even assuming ERISA does not provide the applicable statute of limitations.
Fenkell posits two arguments in favor of a Pennsylvania statute of limitations applying to the claim asserted against her: (1) the Alliance ESOP plan document selects Pennsylvania law as the controlling law; and (2) Karen Fenkell is a resident of Pennsylvania. The first argument was rejected by the Seventh Circuit in Berger: if the claim does not arise out of the plan document itself, then a choice of law provision does not control. 459 F.3d at 814 n.15. That leaves Ms. Fenkell's and her fund's connections to Pennsylvania. Defendant has failed to explain how applying the statute of limitations from the state where she resides supports "the intent of Congress when it created the underlying rights." Id. at 813.
To the contrary, this claim seeks equitable relief based on David Fenkell's receipt of approximately $2.9 million after cashing in phantom stock options in violation of his fiduciary duties to the named plaintiffs and other class members, all of whom are either located in Wisconsin or have a connection to this state. Moreover, the transactions surrounding David Fenkell's breach of certain fiduciary duties were governed by Wisconsin law and arose out of the sale of Trachte Building Systems, Inc., a Wisconsin company. As such, Wisconsin has a significant relationship to the parties and to the transaction underlying the entire lawsuit.
The statute of limitations for actions seeking to recover personal property under Wisconsin law, which appears analogous to the Pennsylvania statute of limitations proposed by defendant, is six years. Wis. Stat. § 893.35. Other Wisconsin statute of limitations, which may be appropriate to the claim asserted here, provide at least six years within which to bring a claim. See Wis. Stat. § 893.50 (10 years for all personal actions on any contract not limited by the chapter or any other law of this state); Wis. Stat. 893.93 (6 years for miscellaneous actions, e.g., an action upon a liability created by statute when a different limitation is not prescribed by law); Wis. Stat. § 893.51 (6 years for wrongful taking of personal property).
Plaintiffs' motion for leave to amend their complaint to assert this claim against Karen Fenkell was filed on May 3, 2012. Even assuming that the date of transfer, October 2007, started the clock running for statute of limitations purposes — as opposed to the much later date of discovery — plaintiffs' claim against Karen Fenkell is timely. Moreover, plaintiffs' delay in discovering the transferred funds appears reasonable to the court for reasons previously explained. (7/25/12 Op. & Order (dkt. #736); also available at Chesemore, 242 F.R.D. at 418.) At the very least, whether plaintiffs should have discovered the transfer sooner is a question of fact, not appropriate for determination on a motion to dismiss. See Cathedral of Joy Baptist Church v. Vill. of Hazel Crest, 22 F.3d 713, 719 (7th Cir. 1994).
Fourth, defendant argues that plaintiffs' claim should be barred by the doctrine of laches. Laches applies when the "plaintiff has waited for an unreasonable length of time to assert his claim and the defendant has been prejudiced by the delay." Horbach v. Kaczmarkek, 288 F.3d 969, 973 (7th Cir. 2002). As explained in the court's prior order granting plaintiffs leave to amend their complaint, plaintiffs did not wait an unreasonable length of time in filing the present action, especially given plaintiffs' reasonable attempts to discover the location of David Fenkell's phantom stock proceeds. Even if the delay were somehow unreasonable, defendant has failed to explain how she was prejudiced by the delay.
Finally, buried in a footnote, defendant Fenkell asks this court to reconsider its interpretation of Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 590 U.S. 238 (2000), that "knowledge — whether actual or constructive — of the existence of some fiduciary duty and breach of same is only required if the transferee of the trusts proceeds purchased them for some value. . . . In other words, to pursue a claim against a gratuitous transferee, such as Karen Fenkell, an allegation or proof of knowing participation does not appear to be required." (Def.'s Br. (dkt. #804 13 n.2 (quoting 7/25/12 Order (dkt. #736) 10 & 10 n.5).) In support, defendant also argues once again that by permitting plaintiffs to add a claim for gratuitous transfer by late amendment unfairly prejudiced her.
As for this court's interpretation of the standard of proof required in Harris, defendant has failed to articulate any reason why this court's original interpretation was incorrect. As to whether Karen Fenkell was prejudiced by the late amendment, this is a separate issue and one already addressed by the court in its order granting plaintiffs' leave to amend their complaint. (7/25/12 Order (dkt. #736) 10-11.)
Also pending before the court is nominal defendant Alliance ESOP's motion for clarification, which asks whether "allocation to the applicable participants' accounts of a contribution in the form of Alliance Holdings Inc. common stock independently valued in the amount of $7,803,543 plus prejudgment interest would satisfy the ESOP's obligations under the Order." (Alliance ESOP's Mot. (dkt. #799) 1.) This question is understandable given language in the Trust Agreement permitting the ESOP to receive contributions in the form of Alliance stock or cash. Alliance ESOP also explains that if stock is permitted, its current trustee and fiduciary, Barbie Spear, would retain a third party to value the stock.
In response, plaintiffs contend that Spear is biased and the court should appoint an independent fiduciary to manage the reinstatement process. Moreover, plaintiffs contend that class members should be given the option of receiving their respective distributions in either cash or stock, because (1) cash is simpler, and (2) it better reflects class members' likely position in July 2013, but for defendants' violations of ERISA. As plaintiffs explain, had the stock been contributed to the class members' accounts timely, class members would have had an opportunity to divest themselves from their Alliance holdings some years ago. If the court were not to allow this cash option, then plaintiffs also identify certain conditions for valuing stock and restoring it to the class members' accounts.
In reply, the Alliance ESOP does not object to the request that this court appoint an independent fiduciary, but argues that cash payments in lieu of stock are not an appropriate remedy because it would "entangle the distinct concepts of contributions to participants' ESOP accounts and distributions from participants' ESOP accounts." (Alliance ESOP's Reply (dkt. #817) 3 (emphasis in original).) The Alliance ESOP appears to mischaracterize plaintiffs' argument. Plaintiffs are not arguing that cash is appropriate here because the Trust Agreement allowed for cash contributions, rather they are arguing that if the class members had maintained the Alliance stock owing to them at the time of Trachte's sale to the newly-formed Trachte ESOP, then by this point in time, most (if not all) would have divested that stock and received cash distributions.
Accordingly, the court agrees that each class member should be given the option of receiving his or her respective allotment in cash or Alliance stock. On or before October 30, 2013, plaintiffs should serve and file a proposed notice to class members, explaining these options and providing them 30 days to submit their choice. Defendants shall file any responses to plaintiffs' proposed notice on or before November 15, 2013. If all of the class members select cash, the parties' request to appoint an independent fiduciary to value the stock appears moot. If not, the court will ask both plaintiffs' counsel and counsel for the Alliance ESPO trustees to name a valuation expert and direct them to choose jointly an independent fiduciary to manage the reinstatement process for those class members electing stock.
Federal Rule of Civil Procedure 54(b) provides in pertinent part:
Here, the court has already decided all issues of liability and the appropriate remedy as to all claims and all of the principal parties. Plaintiff's remaining claim against Karen Fenkell is wholly tangential to those claims and will not affect them regardless of the outcome. Finding no just reason for further delay of judgment as to all the other claims, the court is inclined to direct the clerk of court to enter judgment as follows:
Before doing so, the court will seek the parties' input on: (1) whether the court should enter final judgment pursuant to Rule 54(b) on all claims save the one still pending against Karen Fenkell; and (2) whether the proposed judgment described above is correct and complete.
IT IS ORDERED that:
Before the court is a second motion by plaintiffs seeking preliminary approval of two additional class settlements: (1) a partial settlement with David Fenkell consisting of a $375,000 cash payment (and possibly more) in exchange for plaintiffs' release of their interest in Fenkell's Alliance ESOP account and (2) a settlement with the Alpha Investment Consulting Group, LLC and John Michael Maier (the "Alpha defendants"), whereby the Alpha defendants agree not to seek attorney's fees or costs and not to serve as fiduciaries in exchange for plaintiffs' economic interests in the ESOPs. (Dkt. #910.) The court previously granted preliminary approval for another set of class settlements, concerning different claims and other defendants. (Dkt. #889.) The court will also grant preliminary approval for these more recent settlements, as well as reset certain deadlines across all settlements and reschedule the fairness hearing for July 24, 2014, to take up all of the settlements for which the court has granted preliminary approval at one hearing.
1. Based upon the court's review of plaintiffs' motion and all papers submitted in connection with this motion, the court preliminarily concludes that the proposed settlements are "within the range of possible approval." Armstrong v. Bd. of Sch. Dirs. of City of Milwaukee, 616 F.2d 305, 314 (7th Cir. 1980), overruled on other grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998).
2. Specifically, the court finds that the proposed settlements appear "fair, reasonable, and adequate." Uhl v. Thoroughbred Tech. & Telecomms., Inc., 309 F.3d 978, 986 (7th Cir. 2002). More specifically, the court finds that (a) the settlement figures and other provisions falls within a reasonable range; (b) the settlement factors in defendants' ability to recover and to pay; (c) the settlement take into account the complexity, expense and duration of further litigation, including an appeal; (d) the settlement resulted out of arms-length negotiations; and (e) at this advanced stage of litigation, plaintiffs were well equipped to evaluate the merits of their case.
3. While the court is satisfied that the settlement is facially reasonable, it intends to scrutinize class counsel's application for attorneys' fees when the time comes for its final approval. Class counsel are put on notice that the court may use their hourly billing records and billing rates as a factor in determining an appropriate fee award, as well as that defendants and their counsel will not be precluded from taking any reasonable position with regard to such an award notwithstanding any provision in a settlement agreement to the contrary.
1. The court approves plaintiffs' revised class notice and class questionnaire (dkt. #910-2), which includes the addition of the partial settlement with David Fenkell and the settlement with the Alpha defendants.
2. The content of the notice fully complies with due process and Fed. R. Civ. P. 23.
3. Pursuant to Fed. R. Civ. P. 23(c)(2)(B), a notice must provide:
Fed. R. Civ. P. 23(c)(2)(B).
4. The court finds the revised notice satisfies each of these requirements and adequately put class members on notice of the proposed settlements. Specifically, the notice describes the terms of the settlements, instructs class members about their rights and options under those settlements, adequately informs the class about the allocation of attorneys' fees, and provides specific information regarding the date, time, and place of the final approval hearing.
5. The court will, therefore, approve the following settlement procedure and timeline:
IT IS ORDER that plaintiffs' motion for preliminary approval of class action settlements (dkt. #910) is GRANTED.
IT IS ORDERED this 9th day of April, 2014.
The court previously granted preliminary approval of six settlements based on term sheets describing the essential elements of the settlements and approved a class notice based on those terms. (2/18/14 Order (dkt. #889); 4/9/14 Order (dkt. #913); Notice (dkt. #910-2).) There are now several motions before the court, which primarily seek final approval of these class action settlements. On July 24, 2014, the court held a fairness hearing on these settlements at which all parties appeared by counsel. While all class members had been properly notified in advance of the basic terms of the various settlements and petitions for attorneys' fees — as well as the date and time of the hearing (at which some members of the class were present) — none voiced an objection in writing or orally.
The parties have now filed fully executed settlement agreements, which the court will approve in this opinion and order. (Dkt. ##899, 960, 966, 984.) The court will also address plaintiffs' motions for (1) payment of incentive awards (dkt. #921); (2) attorneys' fees as part of the settlement (dkt. #928); and (3) attorneys' fees and costs pursuant to ERISA § 502(g)(1) against David Fenkell (dkt. #934). In opposing plaintiffs' motion for attorneys' and costs pursuant to ERISA § 502(g)(1), Fenkell raises objections that extend beyond the attorneys' fees issue. The Alliance defendants were granted an opportunity to respond to his broader objections, which they now have, with Fenkell filing a reply brief as well. The court will, therefore, address the various issues raised by Fenkell and enter final judgment against him on all unsettled claims, essentially bringing a close to all aspects of the case before this court save one.
The court previously granted plaintiffs' motion for preliminary approval of plaintiffs' settlement with (1) the Alliance defendants (Alliance Holdings, Inc., A.H.I., Inc. and AH Transition Corporation); (2) the Trachte Trustee defendants (James Mastrangelo, Jeffrey Seefeldt, Pamela Klute and Stephen Pagelow);
The Plan of Allocation sets forth the cash and other remedies available to class and subclass members. First, the "Gross Class Cash Settlement Fund" consists of (1) $3.25 million paid pursuant to the Trachte Trustees Settlement, plus any earnings and interest accrued thereon, and (b) the $150,000 paid to the escrow account pursuant to the Alliance Settlement. Taxes, attorneys' fees and costs, and any incentive awards will be paid from this gross settlement fund. That fund will be distributed to authorized members of the class who received any allocation to their Trachte ESOP account after the August 29, 2007 (excluding certain individuals, e.g., individual defendants and other fiduciaries). The "Net Class Cash Settlement Fund" will be allocated pro rata based on those members' units or shares of Trachte stock in the account, less any shares of such stock that were received for Alliance or AH Transition stock in the 2007 Transaction.
The Plan of Allocation sets forth the settlement award to subclass members. That settlement consists of both stock and cash. The Subclass Stock Settlement consists of $5.5 million in shares of Alliance and AH Transition stock as valued by the independent fiduciary appointed by the court. The "Gross Subclass Cash Settlement" consists of: (a) $1.5 million, plus any earnings and interest, in the Alliance Escrow Account; (b) $900,000, plus any earnings and interest, minus any payments by Trachte (including payments by Trachte for attorneys' fees and expenses) in the Fenkell Escrow Account;
Finally, the Plan of Allocation provides for assigning a seller's note with a market value as of December 2013 of approximately $369,000 to the Trachte ESOP to be held in trust as an asset of the Trachte ESOP for the exclusive benefit of the participants.
Pursuant to the court's second order granting preliminary approval, on April 21, 2014, the settlement administrator retained by class counsel, Gilardi & Co., L.L.P., sent a notice and questionnaire to 390 class and subclass members. Gilardi established a tollfree number for potential questions and a website containing documents and updates related to the settlement. In addition, class counsel held two town hall meetings, lasting approximately two hours each, at Trachte headquarters in Sun Prairie, Wisconsin. Those unable to attend in person were provided an opportunity to participate electronically or by telephone. Class counsel received and responded to a number of inquiries either in person or by telephone or electronically. Through the date of the final approval hearing on July 24, 2014, no objections have been received from class or subclass members.
The court may approve a proposed class action settlement only if it determines that it is "fair, reasonable, and adequate." Fed. R. Civ. P. 23(e)(2). In making this determination, the court considers various factors, including "the strength of plaintiffs' case compared to the amount of defendants' settlement offer, an assessment of the likely complexity, length and expense of the litigation, an evaluation of the amount of opposition to settlement among affected parties, the opinion of competent counsel, and the stage of the proceedings and the amount of discovery completed at the time of settlement." Isby v. Bayh, 75 F.3d 1191, 1199 (7th Cir. 1996); see also Mirfasihi v. Fleet Mortg. Corp., 450 F.3d 745, 748 (7th Cir. 2006) (listing "the probability of plaintiff prevailing on its various claims, the expected costs of future litigation, and hints of collusion" as factors for consideration).
This case presents a somewhat unique situation given that the settlements occurred after a full trial and final decision on the merits of plaintiffs' claims (except as to a lone, remaining claim for phantom stock proceeds brought against defendant Karen Fenkell) as well as a subsequent trial and final decision as to remedies (again except for the claim against Karen Fenkell). At least with respect to a judgment from this court, there is certainty, although questions and risks remain with respect to appeal and ability to collect. In light of this, the court's primary focus is on whether the settlement is fair and reasonable as compared to the "net expected gain." In re Fort Wayne Telsat, Inc., 665 F.3d 816, 820 (7th Cir. 2011). "The `expected gain' is the gain if the judgment is favorable, discounted (that is, multiplied) by the probability of a favorable judgment." Id.
Here, the court awarded a total of $17.2 million plus prejudgment interest, which as explained below is valued at approximately $2 million (see infra p.19), to the class and subclass as part of its remedies award plus an anticipated award of reasonable attorneys' fees and costs pursuant to ERISA § 502(g)(1). The combined settlement contemplates total payments of approximately $17.3 million, although approximately $5.5 million of that consists of negotiated attorneys' fees and costs, and class counsel seeks additional fees from the common fund portion of the total settlement as described below. After fees and costs, the class will, therefore, receive approximately $12 million in cash and stock, or roughly 62% of the total remedies award, inclusive of prejudgment interest.
Given the limited, remaining risks before this court, this combined settlement amount is arguably low, but discounting for the uncertainties of further complications, delays and possible reversals on appeal and in ultimate collection, as well as considering members' understandable desire for closure and prompt payment, this settlement is more than understandable. Indeed, it strikes the court as fair, reasonable and adequate.
Looking at the discrete settlements, each also appear fair, reasonable and adequate. For example, the court ordered the Trachte Trustee defendants to restore $6.47 million (plus prejudgment interest) to the Trachte ESOP, but the settlement provides for a $3.25 million in cash to the class to satisfy any claims against the Trustee defendants. As plaintiffs explain, the total insurance available to the Trustee defendants to satisfy claims against them was $7 million, of which only $3.5 million remains after allowable discounts for defense costs. Given the limited personal resources of those individuals, the proportion of that settlement is certainly fair and reasonable. Similarly, the settlement with David and Karen Fenkell to restore $1.8 million of the $2.896 million phantom stock options also appears fair and reasonable.
Further evidence of the essential fairness of the overall settlement here is that there were no objections filed to the proposed settlements, nor is there any sign of collusion. If anything, the varied positions of not only plaintiffs against the defendants, but amongst defendants, and the lengthy negotiations only after plaintiffs' trial victories, confirm these separate settlements were the product of hard fought, arms-length negotiations.
While the issued class notice was based on provisions in the term sheets, rather than the final, executed settlement agreements, the court finds that any differences between the terms sheets and final agreements are not material, and the class notice adequately described the settlement. See generally 2 McLAUGHLIN ON CLASS ACTIONS § 6:17 (10th ed. 2013) ("The settlement notice does not need to describe every facet of the settlement, or describe in exhaustive detail those features it does describe. It must contain enough information about the settlement and its implications for participants to enable class members to make an informed decision about whether to be heard concerning the settlement or, if allowed, to opt-out.") (citing cases).
Finally, in his opposition to plaintiffs' motion for attorneys' fees pursuant to ERISA § 502(g)(1), Fenkell attempts to raise what amounts to a back-door (and certainly self-serving) objection to the settlement between plaintiffs and the Alliance defendants. Fenkell argues that any assignment of plaintiffs' unsettled claims against Fenkell to the Alliance defendants as part of the settlement will violate ERISA because it would be "the equivalent of a contribution to Alliance." (Fenkell's Opp'n to Pls.' Mot. for Atty's Fees (dkt. #938) 27.) Putting aside the issue of whether Fenkell is correct that ERISA prohibits contribution between co-defendants,
Also before the court is plaintiffs' motion for payment of incentive awards to the five class representatives. (Dkt. #921.) Specifically, plaintiffs seek an award of $25,000 to Nanette Stoflet, and $10,000 each to Carol Chesemore, Martin Robbins, Thomas Gierck and Daniel Dockel. (Id. at 13.)
Incentive awards for class representatives are fairly common. See In re Synthroid Mktg. Litig., 264 F.3d 712, 722-23 (7th Cir. 2001) (describing purpose of incentive awards as "induc[ing] individuals to become named representatives"). In deciding whether an incentive award is appropriate and what the amount should be, courts may consider "the actions the plaintiff has taken to protect the interest of the class, the degree to which the class has benefited from those actions, and the amount of time and effort the plaintiff expended in pursuing the litigation." Cook v. Niedert, 142 F.3d 1004, 1016 (7th Cir. 1998).
As detailed in plaintiffs' brief, here, the class representatives (1) initiated the lawsuit by contacting plaintiffs' counsel after the 2007 town hall meeting describing the transaction at issue; (2) took on the risk of ERISA's fee-shifting statute in filing the lawsuit; (3) risked retaliation as current employees at least at the time the lawsuit was filed (with the exception of plaintiff Donkel); (4) participated in discovery efforts, including, their own depositions and attending depositions of other witnesses; (5) served as witnesses or attended the two trials; and (6) participated in numerous settlement discussions. Accordingly, the court finds a sufficient basis for approving incentive awards.
As for the appropriate amount, district courts in this circuit have awarded incentive fee awards ranging from $5,000 to $25,000. See Cook, 142 F.3d at 1016 (affirming incentive award of $25,000 where class representative spent hundreds of hours with attorney, providing them with an abundance of information, and reasonably feared workplace retaliation); Redman v. RadioShack Corp., No. 11 C 6741, 2014 WL 497438, at *12 (N.D. Ill. Feb. 7, 2014) (awarding $5,000 to each class representative); In re Sw. Airlines Voucher Litig., No. 11 C 8176, 2013 WL 4510197, at *11 (N.D. Ill. Aug. 26, 2013) (approving $15,000 award for two class representatives because of active participation in litigation); Heekin v. Anthem, Inc., No. 1:05-cv-01908-TWP-TAB, 2012 WL 5878032, at *1 (S.D. Ind. Nov. 20, 2012) (awarding $25,000 each to two class representatives based on extensive involvement over seven years of litigation); Great Neck Capital Appreciation Inv. P'ship, L.P. v. PricewaterhouseCoopers, L.L.P., 212 F.R.D. 400, 412 (E.D. Wis. 2002) (approving $5,000 awards where plaintiffs were "required to respond to discovery requests, produce documents, meet with counsel in preparation for their depositions and undergo depositions").
Here, discovery was extensive and settlement occurred after both liability and damages trials, on the eve of entry of judgment. Coupled with the class representatives' apparent personal involvement — especially that of plaintiff Nanette Stoflet — the court finds the requested awards appropriate, and will grant plaintiffs' motion.
Plaintiffs are seeking fee awards based on (1) negotiated amounts for two of the settlements and (2) 33% of the settlement funds for which plaintiffs did not negotiate a specific amount. In the first category of attorneys' fees and costs award, the Alliance defendants, as part of their settlement, agreed to pay $5,345,000 to class counsel in attorneys' fees and costs. Similarly, the Trachte defendants agreed to pay 30% of the $900,000 Trachte received as part of the Fenkells' settlement of the phantom stock options claim as attorneys' fees and also agreed to contribute $25,000 towards costs. In the second category, plaintiffs seek an award of 33% from each of the three "common funds": (1) $3.25 million settlement fund from the Trachte Trustees; (2) $900,000 from the settlement with the Fenkells on the phantom stock options claim; and (3) $375,000 from the Fenkells. In addition to the fees sought as part of the class action settlement, plaintiffs also seek attorneys' fees and costs pursuant to ERISA § 502(a)(1) from David Fenkell based on the unsettled claims. The class notice described each of these category of fees sought. (Notice (dkt. #910-2) p.15.)
Plaintiffs contend that the court should review their first category of requests for attorneys' fees — those premised on fee amounts negotiated with defendants — using the lodestar method. (Pls.' Mot. (dkt. #928) 20 (citing Redman v. RadioShack Corp., No. 11 C 6741, 2014 WL 497438, at *9 (N.D. Ill. Feb. 7, 2014); Kearney v. Hyundai Motor Am., No. SACV 09-1298-JST, 2013 WL 3287996, at *7-8 (C.D. Cal. June 28, 2013)).) The lodestar is "the product of the hours reasonably expended on the case multiplied by a reasonable hourly rate." Montanez v. Simon, 755 F.3d 547, 553 (7th Cir. 2014).
Counsel for plaintiffs have spent over 16,000 hours of professional time on this action from its inception until April 30, 2014, at current hourly rates ranging from $395 (for lower-level associates) to $895 (for highest-level partners), for a total lodestar amount of $7,948,619.50. (Declaration of R. Joseph Barton ("Barton Decl.") (dkt. #936) ¶¶ 68-69, 73; id. Ex. F (dkt. #936-6).)
While this total amount does not distinguish — and it would be difficult, if not impossible to distinguish — between time spent with respect to pursuing overlapping claims and remedies against the various defendants, the bulk of the fee request under the first category concerns the approximate $4.7 million award as part of the settlement with the Alliance defendants.
In their settlement with Trachte defendants, Trachte agreed to pay $270,000 in attorney's fees and $25,000 in expenses, separate from the $900,000 the subclass will receive from the Fenkells' phantom stock option claim. Similarly, this request for fees is separate from the cash contribution to the class members. Regardless, the court finds a $270,000 fee award based on the proportion of the $900,000 contribution compared to the total class settlement contribution is reasonable.
As for the second category of attorneys' fees requests, class counsel seeks a fee award representing one-third of the "common fund" settlements. In other words, class counsel seeks (1) approximately $1.1 million from the Trachte Trustees $3.25 cash contribution to the class settlement; (2) $300,000 from the $900,000 contribution from the Fenkells' phantom stock option settlement; and (3) $125,000 also from the Fenkells based on claims concerning David Fenkell's Alliance ESOP account. "When attorney's fees are deducted from class damages, the district court must try to assign fees that mimic a hypothetical ex ante bargain between the class and its attorneys." Williams v. Rohn & Haas Pension Plan, 658 F.3d 629, 635 (7th Cir. 2011) (citing In re Synthroid Mktg. Litig., 264 F.3d 712, 718-19 (7th Cir. 2001)).
In making this determination, the court considers "actual fee contracts that were privately negotiated for similar litigation, information from other cases, and data from class-counsel auctions," in addition to "the amount of work involved, the risks of nonpayment, and the quality of representation." Williams, 658 F.3d at 635-36 (quoting Taubenfeld v. AON Corp., 415 F.3d 597, 599 (7th Cir. 2005)) (citing Synthroid, 264 F.3d at 721).
While class counsel attempts to cabin the first category of fees from their fee request from the common fund settlement, the court opts to consider the reasonableness of the total fee award. If one were to add the attorneys' fees and costs in the first category described above to the class settlement contribution, the total negotiated settlement would be approximately $17.3 million ($11.675 million to the class and subclass plus $5.64 million in negotiated attorneys' fees and costs). As such, the $4,963,361 already awarded by the court under the first category of fees represents approximately 29% of the total negotiated settlement. Plaintiffs request an additional $1.525 million from the common settlement funds, bringing the award up to 37% of the total settlement fund. This strikes the court as too high on an ex ante contingency fee basis, but perhaps not on a lodestar basis. An award of 25% of the common fund settlements, would result in an additional $1.13 million in fees, for a total of $6.095 million, which represents approximately 35% of the total settlement. The court finds this amount from an ex ante approach to be reasonable and consistent with other awards in common fund class actions. (Pls.' Br. (dkt. #928) 30 (describing awards ranging from 20% to 40% in common fund class action settlements).) Moreover, assigning a lower percentage to this additional recovery is consistent with negotiated fee agreements that guarantee plaintiffs' counsel a higher percentage of the first dollars in and a lower percentage of longer recoveries; in this case, the reduction hits at just over the first $11 million recovered. Accordingly, the court will award $812,500.00 in attorney's fees from the Trachte Trustees common fund settlement, $225,000.00 from the Trachte ESOP common fund settlement, and $93,750.00 from the settlement with David Fenkell concerning the Alliance ESOP claim.
Class counsel also seeks reimbursement of costs advanced by class counsel in the total amount of $1,068,005.29, and provides documentation in support of that request. (Barton Decl., Ex. G (dkt. #936-7).)
Finally, plaintiffs seek an award of attorneys' fees and costs against defendant David Fenkell pursuant to ERISA § 502(g)(1), which allows an award to a party who has achieved "some success on the merits." While the class has settled two claims with Fenkell and his wife, the settlements do not resolve the court's finding (1) that Fenkell, along with the Alliance defendants, are jointly and severally liable to restore to the Alliance ESOP $7,803,543 plus prejudgment interest; and (2) that Fenkell and Alliance Holdings shall indemnify the Trachte Trustees. (Remedies Order (dkt. #790) 37-38.)
In the face of plaintiffs' motion for attorneys' fees, Fenkell responds with a panoply of objections, a number of which are unrelated — or at most, tangentially related — to plaintiffs' motion. Recognizing this, the Alliance defendants sought leave to reply, which they have now done, to which Fenkell has also filed a sur-reply. The court addressed above Fenkell's purported objection to the settlement between the Alliance defendant and plaintiffs. Fenkell's other objections primarily concern whether the Alliance defendants' settlement "extinguished" his liability, thereby rendering any judgment against him moot and, in turn, undermining any basis for awarding attorneys' fees to plaintiffs pursuant to ERISA § 502(g)(1).
First, Fenkell argues that the settlements described above result in a payment of $7,894,000, which exceeds the $7,803,543 awarded by the court in its remedies decision. (Fenkell's Opp'n (dkt. #983) 21.) Not only is Fenkell's math wrong, but it skirts the court's award of prejudgment interest in order to make the math work. In arriving at the $7,894,000 number, Fenkell adds the following amounts:
As emphasized by the italics above, the $150,000 in cash to the class should not be included in this creative accounting at all, since the $7.8 million award only concerns subclass claims, not class claims. More importantly, the court also awarded prejudgment interest to be calculated from the date of the breach (August 29, 2007) at the current prime rate, compounded quarterly. (6/4/13 Opinion & Order (dkt. #790) 37.) Based on that order, plaintiffs calculated total prejudgment interest through August 29, 2014, as $1,984,471.42, for a total award of $9,788,014.42:
(Declaration of Alina Lindblom, Ex. A (dkt. #943-1).)
Fenkell responds by arguing that the court should effectively reconsider its prejudgment interest award. In Fenkell's view, the settlement negotiated between plaintiffs and the Alliance defendants effectively assigns the prejudgment interest to the Alliance defendants, and as such, it would not serve the purpose of prejudgment interest to award it in a judgment against Fenkell. (Fenkell's Opp'n (dkt. #938) 26.)
In its remedies order, the court described its reasons for awarding prejudgment interest in this case. (See 6/4/13 Opinion & Order (dkt. #790) 33-34.) Fenkell's argument here fails to raise any credible basis for upending that award. The prejudgment interest award was intended to compensate plaintiffs fully. The fact that this award likely provided plaintiffs with another bargaining chip in their settlement with the Alliance defendants has nothing to do with plaintiffs' right to receive full compensation from a nonsettling defendant. Similarly, it has nothing to do with the fact that the Alliance defendants have separately negotiated the right to pursue Fenkell for the judgment entered against him. The court sees no basis for reconsidering this award, and further finds that plaintiffs' calculation of the amount as $1,984,471.42 is sound.
The Alliance defendants and Fenkell have already been adjudged jointly and severally liable to the subclass for a total of $9,788,014.42. Because plaintiffs are not allowed to recover more than their total damages, the court must determine the judgment against Fenkell on his unsettled claims in light of the plaintiffs' settlements with other defendants. See Donovan v. Robbins, 752 F.2d 1170, 1178 (7th Cir. 1985) ("Since a plaintiff's total recovery, from all the tortfeasors together, is not allowed to exceed his total damages, the amount that the nonsettling defendants will have to pay will be smaller, the larger the settlement is.") (citing Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 348 (1971)).
As part of the settlements, plaintiffs have received $7,744,000 to cover plaintiffs' award for subclass claims of $7.8 million plus prejudgment interest, leaving $2,044,014.42 including prejudgment interest unsatisfied by the settlements. In Donovan, the Seventh Circuit embraced the proportionate or comparative fault approach to determine the amount of a judgment against a non-settling defendant. Donovan, 752 F.2d at 1181 (describing the approach as a "neat solution"); see also Lumpkin v. Envirodyne Indus., Inc., 933 F.2d 449, 464 (7th Cir. 1991) (explaining that Donovan "advocated the adoption of a rule based on comparative fault" where "no party pays more than its adjudicated fair share"). Under this approach — which contemplates a settlement before a finding of damages — the court "fixes the percentage of the plaintiff's damages that is attributable to the fault of the settling defendants, multiplies that percentage by the judgment against the nonsettling defendants, and deducts the resulting amount from the judgment." Id. at 1180.
In light of the procedural posture of this case, where the court awarded and allocated damages before any defendant settled, the court need not hold a hearing as Fenkell suggests. In the remedies order, the court previously concluded "of the defendants found liable, Fenkell is far and away the most culpable party." (6/3/14 Opinion & Order (dkt. #790) 30.) Given this earlier finding, as well as the court's previous factual findings in this case as a whole, the court finds compelling evidence to conclude that Fenkell's crucial role in developing overseeing and implementing the 2007 transaction makes him responsible for at least 51% of plaintiffs' damages, including in particular at least 51% of the damages attributable for the wrongful conduct of the Alliance defendants.
In addition to entering judgment against Fenkell in that amount, the court will also enter judgment requiring him to indemnify defendants Mastrangelo, Seefeldt and Klute for any compensatory relief they are required to pay. (6/4/13 Opinion & Order (dkt. #790) 38.) Whether the fact that those defendants settled plaintiffs' claims against them with insurance proceeds alone moots this part of the judgment, as Fenkell now argues, is not an issue before in this case.
Plaintiffs also seek an award of attorneys' fees and costs against Fenkell pursuant to ERISA § 502(g)(1) in the amount left unpaid by the settling Alliance defendants, based on their total lodestar fees of $7,948,619.50. (Pls.' Opening Br. (dkt. #934).)
Recently, in Hardt v. Reliance Standard Life Insurance Co., 560 U.S. 242 (2010), the Supreme Court provided guidance to district courts in exercising discretion under this fee-shifting provision. The Court found that a party need not be a prevailing party, like for example, in civil rights cases under 42 U.S.C. § 1988. Rather, the party must simply show "some degree of success on the merits before a court may award attorney's fees under § 1132(g)(1)." Id. at 245.
Once a party has shown "some success on the merits," the court decides whether awarding fees is appropriate, employing one of two tests: the substantial justification test and the five-factor test. Raybourne v. Cigna Life Ins. Co. of New York, 700 F.3d 1076, 1089 (7th Cir. 2012). More recently, the Seventh Circuit took the approach that the district court need only consider whether a party achieved some degree of success on the merits. Temme v. Bemis Co., Inc., ___ F.3d ___, No. 14-1085, 2014 WL 3843789, at *4 (7th Cir. Aug. 6, 2014).
This court need not delve into the arguable differences in the Raybourne and Temme tests, however, because Fenkell does not challenge plaintiffs' right to an award under ERISA § 502(g)(1). Rather, he argues only that there should be no judgment entered against him, and in turn, no attorneys' fees. The court having already rejected this argument earlier in its opinion, nothing more need be said with respect to plaintiffs' right to an award of fees.
Plaintiffs' actual requested award is based on plaintiffs' counsel's calculated fees of $7,948,619.50, which the court has already found to be reasonable. (See supra pp.12-13.) While Fenkell asserts that the fees are "patently unreasonable" (Fenkell's Opp'n (dkt. #938) 19) — and reiterated this objection at the fairness hearing — he failed to provide any specific examples of excessive charges, choosing instead to lob this general, vague objection, contrary to clearly established case law in this Circuit. See, e.g., RK Co. v. See, 622 F.3d 846, 854 (7th Cir. 2010) (affirming fee award where defendant failed to "detail his objections to the fee petition such that the court can determine what portion of the fees, if any, were not reasonably expended"); Hutchison v. Amateur Elec. Supply, Inc., 42 F.3d 1037, 1048 (7th Cir. 1994) (holding that where defendant fails to "state objections [to fee requests] with particularly and clarity "the district court should not reward the defendants by denying the plaintiff's counsel an opportunity to defend his claim against specific challenges, whatever their source"); Ohio-Sealy Mattress Mfg. Co. v. Sealy Inc., 776 F.2d 646, 664 (7th Cir. 1985) ("Counsel who oppose the fees have a similar responsibility to state objections with particularity and clarity.").
This, then, leaves only the question of the appropriate portion to be awarded against Fenkell specifically. While the court generally agrees with plaintiffs that an award of attorneys' fees against multiple defendants where there is a common, intertwined core of facts need not necessarily be apportioned based on individual damages awards (Pls.' Opening Br. (dkt. #934) 43 (citing cases)), plaintiffs have secured $4,693,361 in negotiated fees from the Alliance defendants and $270,000 in negotiated fees from the Trachte defendants. Class counsel has also secured $1,131,250 in attorneys' fees from the common fund. The court appreciates plaintiffs' counsel's argument that an award under § 502(g)(1) is to plaintiffs, whereas an award from the common fund goes to class counsel. Regardless, both awards are for reasonably attorneys' fees. Therefore, the court opts to consider the total amount regardless of its specific source. In light of the prohibition against a plaintiff recovering more than that awarded, see Zenith Radio, 401 U.S. at 348, and the difficulty of differentiating between fees incurred for claims against individual defendants, the court finds that it is appropriate to reduce any attorneys' fee awarded against Fenkell on plaintiffs' unsettled claims by the amount already received in approved, negotiated fees and awarded out of the common fund.
Accordingly, the court will award plaintiffs $1,854,008.50 in attorney's fees pursuant to ERISA § 502(g)(1) against David Fenkell for the remaining, unsettled claims.
Finally, the court must consider plaintiffs' request for reimbursement of costs also pursuant to ERISA § 502(g)(1). Plaintiffs request costs in the amount not covered by the negotiated contribution of costs described above and totaling $391,366.29. That amount, however, was sought from the common settlement fund, and the court granted that request. (See supra p.17.) Accordingly, there are no unsatisfied costs to be awarded against Fenkell.
IT IS ORDERED that:
In an order entered July 24, 2012, the court found that defendants Alliance Holdings, Inc., A.H.I., Inc., AH Transition Corp., David B. Fenkell, Pamela Klute, James Mastrangelo, and Jeffrey A. Seefeldt had violated various fiduciary duties owed to the Trachte Building Systems, Inc. Employee Stock Ownership Plan ("Trachte ESOP") and to the Alliance Holdings, Inc. Employee Stock Ownership Plan ("Alliance ESOP") in conjunction with a complex leveraged buyout. (Dkt. #733.) More specifically, the court found that defendants leveraged plaintiff's accounts in the Alliance ESOP to purchase Trachte Building Systems, Inc. on behalf of the Trachte ESOP at a substantially-inflated price. Following the court's ruling on liability, a bench trial was held from July 25 to July 30, 2012, to determine the extent of the plaintiffs' losses and the appropriate remedies.
While plaintiffs continue to carry the burden of proof on damages, the requirement of precision — particularly with respect to uncertainties in valuation — is not as great. Once plaintiffs prove that defendants caused harm to the plan, uncertainty about the extent of that harm should be resolved in plaintiffs' favor. Here, the court concludes plaintiffs have proven that defendants' breach of their duties to the Alliance and Trachte ESOPs caused the Trachte ESOP to overpay for the purchase of Trachte and that overpayment can be reasonably estimated at $8,329,477.53.
Because defendants Alliance and Fenkell used their control over the Trachte employees' accounts in the Alliance ESOP and the Trachte ESOP trustees to obtain an inflated price and ensure payment of phantom stock, the court will order Alliance and Fenkell to reinstate plaintiffs in the Alliance ESOP and restore $7,803,543 to their accounts; order Fenkell to disgorge the $2,896,000 he received in phantom stock payments; and order the removal of Fenkell as trustee of the Alliance ESOP. Because defendants Mastrangelo's, Seefeldt's and Klute's breach of their fiduciary duties caused the Trachte ESOP to overpay for Trachte, they must restore $6,772,554.63 to the Trachte ESOP, which represents the amount it overpaid reduced by the share of the consideration paid through the share exchange with the employee accounts. However, because Alliance and Fenkell were the more culpable fiduciaries, the court will order Alliance and Fenkell to indemnify Mastrangelo, Seefeldt and Klute for any compensatory relief paid.
The court assumes familiarity with the findings of fact and conclusions of law set forth in its liability ruling. Based on the evidence presented during the remedies phase of trial, the court makes the following additional findings of fact and conclusions of law.
In the 2007 Transaction, Trachte and the Trachte ESOP paid $38,329,447.53 for 100% of Trachte's common equity. That amount represents the total consideration paid by Trachte and the Trachte ESOP, minus the $2 million worth of preferred equity and the $4,905,300 paid to Alliance employees for the phantom stock plan.
While valuation of a business is decidedly an art and not a science, especially when one is required to look back without the benefit of an arms-length sale, the parties and their experts offered wildly, at times absurdly, different approaches to Trachte's fair market value. Ultimately, the court finds two methods helpful in determining a reasonable estimate of Trachte's fair market value at the time of the 2007 Transaction.
The first method corrects four errors in Barnes Wendling's calculation of the range of fair market values for Trachte's common equity. One way to correct Barnes Wendling's opinion is to subtract those errors from its conclusion of Trachte's common equity value. First, the court will subtract $1,908,610 for the tax shield. The tax shield was a benefit to the Trachte ESOP by virtue of its special tax status, but the calculation of fair market value does not typically include features unique to an individual buyer. The court will also subtract $1.7 million as a reasonable estimate of Trachte's operating capital needs. During its calculation of common equity, Barnes Wendling added $6.2 million in value from Trachte's holding in cash and cash equivalents while subtracting $4.5 million for its customer deposits, mistakenly assuming that Trachte had no need for operating cash beyond customer deposits and unrealistically treating all of its cash in excess of customer deposits as an asset.
While even defendants' expert Robert Gross characterized these errors as "aggressive judgments," defendants argue they should be offset by what Gross identified as Barnes Wendling's other, more conservative judgments. The court disagrees. For example, while Gross testified that some appraisers would have applied a premium because the Trachte ESOP obtained a controlling share, Barnes Wendling performed its discounted cash flow analysis on a controlling interest basis, so no additional premium would have been appropriate. Gross also testified that Barnes Wendling assumed conservatively that Trachte would experience long term growth of 3%, which was lower than management's projections and Trachte's actual growth between 2002 and 2006. Management's judgments on future growth were highly suspect, however, both because of their own conflicts and those of Alliance and Fenkell, whose control over the actions of new management was virtually total until all steps of the sales transaction were completed. More importantly, the court already found that during the short time it owned Trachte between 2002 and 2007, Alliance had aggressively expanded Trachte's sales (with no material increase in total net profits to show for it) in anticipation of its sale and did so in what was already a mature market with little or no prospect for further growth. For these reasons, the court finds that a reasonable arms-length buyer would have found a projected 3% growth rate appropriate at best and unreasonably rosy at worst. Finally, Gross testified that Barnes Wendling used conservative EBITDA multiples, but (1) offered no opinion or analysis to support this opinion and (2) provided no guidance to the court as to more appropriate multiples.
As illustrated in the following chart, when the Barnes Wendling valuation is adjusted consistent with the above discussion, it supports a range of $20,315,067 to $32,817,601 for Trachte's common equity, with a median of $26,566,334.
Defendants urge the court to use the high end of this valuation range, but it would be unfair to give defendants the benefit of the range of permissible values after they breached their fiduciary obligation to determine fair market value. The court finds use of the median value fair for purposes of determining damages.
As in Barnes Wendling's original report, this analysis still produces an unrealistically large range of values — in part because Barnes Wendling compiled its range by taking the highest value under the discounted cash flow model and the lowest value under the market approach. This odd choice allowed Barnes Wendling to find a particularly high end value, which it then relied upon to justify the ultimate high-end value assigned to the transaction for the fairness opinion. In comparison, SRR calculated its range of value by averaging the high and low ends of the discounted cash flow analysis and the market approach.
One way to fix Barnes Wendling's mistakes and avoid its wide range of values is to recalculate Trachte's common equity using SRR's method for estimating Trachte's total invested capital.
Adoption of this method would also correct for another mistake made by Barnes Wendling in assuming the Phantom Stock Plans were 6% and 10% of the total equity minus the preferred equity for Trachte and Alliance employees respectively. In fact, the plan uses its own elaborate formula bearing no resemblance to the Barnes Wendling formula.
A second method to determine Trachte's fair market value on December 31, 2006, is to look to HIG's letter of intent. Although never consummated, this resulted from true arms-length negotiations only months before the orchestrated sale. HIG's final, revised letter of intent proposed a purchase of Trachte for $32 million in cash, $3.3 million in unfunded customer deposits and a $5.5 million earn-out dependent on Trachte's performance in 2007. (Joint Ex. 36 (dkt. #590).) Under the terms of the earn-out, Alliance would receive (1) a maximum of $5.5 million if Trachte achieved its projected 2007 EBITD. $8.16 million, (2) nothing if it fell below its 2006 EBITDA,
Several adjustments to the base price are necessary to compare HIG's offer to the 2007 Transaction price. First, the base offer must be reduced by an additional $1.2 million to include the higher customer deposits that Alliance would have been required to assume given Trachte's actual, unfunded deposits at the time of sale. Second, HIG's offer must be reduced to reflect the exclusion of phantom stock payments, which the letter of intent required be subtracted from the purchase price. (HIG Proposed Stock Purchase (dkt. #595-6) 13.) Third, unlike the Trachte ESOP offer, the HIG offer excluded Trachte's 60% interest in Store-N-Save, which Stout Risius and Ross valued at $4.2 million. As shown in the following chart, the actual value of the HIG offer was, therefore, somewhere between $30,955,558 and $35,742,190, depending on how confident Alliance was about Trachte's projections.
Unlike Barnes Wendling's fairness opinion, the court finds an appropriate value to assign HIG's offer falls at the bottom of the range. As an initial matter, Alliance regarded the rosy projections for Trachte's future profitability as shaky. In particular, Fenkell expressed doubts about Trachte's ability to meet those projections in the fall of 2006 and for good reason. In the spring of 2007, Trachte's EBITDA was on pace to exceed the 2006 EBITDA but management predicted Trachte would not meet its projected revenue figures. Moreover, once sold, HIG would have control over the timing for booking costs and revenues in Trachte's 2007 or 2008 fiscal years, something Fenkell certainly knew. Most telling for this court was Fenkell's testimony at trial — in response to the court's question — that he could not remember what value he personally assigned to the HIG earn-out opportunity. Given Fenkell's otherwise remarkable memory for details (particularly the financial, regulatory and fiduciary aspects of his companies' acquisitions) the court finds that response incredible. For example, when asked about various other, smaller and unrelated transactions that fell apart in the late stages of negotiations over the years, Fenkell volunteered very specific reasons for Alliance walking away. As a matter of fact, the court concludes, therefore, that Fenkell and Alliance assigned little or no value to the earn-out provision and for very good reasons.
Indeed, Alliance walked away from HIG's offer in part because Alliance and Fenkell saw little or no value in the earn-out. Even assuming that Alliance believed Trachte might meet or slightly exceed its 2006 EBITDA, the value of the earn-out was approximately $750,000 for purposes of determining damages. Consequently, the court concludes HIG assigned a fair market value to Trachte's common equity, including its interest in SNS, of approximately $31,705,558.20, which would mean that the Trachte ESOP overpaid by around $6,623,889.33.
Taking the average of the median of the BWVS adjusted valuation and HIG's actual offer suggests that fair market value for Trachte's common equity was approximately $30 million. Since the price paid for Trachte's common equity was $38,329,477.53, the court finds as a matter of fact that the resulting total overpayment by Trachte and the Trachte ESOP is $8,329,477.53.
After the 2007 Transaction, Trachte had around $40 million in debt and only $16 million in assets. Trachte met its loan covenants and preferred interest rate payments at the close of 2007 and even made a $1.4 million prepayment of its senior debt in the middle of 2008. While there were signs of trouble for Trachte in late 2006 and in 2007, no one foresaw the extent of the 2008 financial crash or the devastating effect it would have on the self-storage market and Trachte's business. Along with the construction and real estate markets generally, the market for self-storage units collapsed in dramatic fashion as Trachte's customer base, consisting primarily of small real estate investors and entrepreneurs, lost the ability to get credit. In fact, the number of units built fell from 3,000 in 2006 to 200 in 2010. Trachte's revenue in 2009 fell more than 50% compared to 2007 and sales hovered around $33.4 million in 2009, 2010 and 2011, with EBITDA between $0 and $150,000.
At the end of 2011, Trachte had $29 million in bank debt, primarily from the acquisition, and only $8.9 million in assets. Trachte remains operational and has entered into forbearance agreements with J.P. Morgan Chase, but Trachte common stock was valued at $0 at the end of 2009 and remains worthless. Nevertheless, the Trachte ESOP continues to repay the loan to Trachte by designating employee contributions to the release of Trachte stock at the price set in the 2007 Transaction. By December 2011, the Trachte ESOP had repaid approximately $5 million.
If defendants had not orchestrated the 2007 Transaction in violation of their fiduciary duties, Alliance had three realistic alternatives: (1) sell Trachte to a third party at a lower price; (2) appoint independent trustees and negotiate with a Trachte ESOP at a lower price; or (3) refinance Trachte.
An arms-length sale at a lower price was the most likely and preferred alternative. By 2007, Alliance and Fenkell were very eager to sell Trachte for a variety of reasons. First, the book valuation of Trachte had begun to exceed 50% of Alliance's overall holdings. Second, Alliance's business model called for a sale by this time. Third, Alliance and Fenkell were wary of holding Trachte further given their lowering expectations about its future performance. Fourth, Alliance and Fenkell were originally unwilling to even consider a purchase by a new Trachte ESOP, no doubt wanting a clean break and realization of profit from this investment and aware of the inherit cumbersomeness, fiduciary responsibilities and risks of litigation from orchestrating an ESOP sale.
If Trachte had sold to a third party, plaintiffs likely would have remained participants in the Alliance ESOP as contemplated in HIG's proposed purchase, but their accounts would have accrued no more shares and likely would have been redeemed in 20% increments over five years at the share price set by the annual valuation process. As a result, Trachte employee participants in the Alliance ESOP would probably have received roughly the value of the $7.8 million in their participant accounts as determined by annual valuations. In addition, a third-party buyer was unlikely to exercise its discretion to pay the phantom stock plan. HIG's letter of intent, for example, expressly subtracted the phantom stock liability from the purchase price.
Alliance's second option would have been to pursue an ESOP purchase, but under the court's hypothetical transaction Alliance would have had to appoint a truly independent trustee to represent the interests of the Trachte employees holding a stake in the Alliance ESOP. An independent trustee would have been substantially less likely to have allowed those interests to be put at risk to facilitate an already highly-leveraged transaction. Without Alliance offering the Trachte employee accounts as leverage, it is unclear whether the Trachte Trustee Defendants could have obtained bank financing for an ESOP purchase. In any case, the ESOP purchase would have proceeded at a substantially lower price.
Alliance's third option would have been to refinance Trachte to obtain the liquidity necessary to satisfy Pagelow's put option and pursue other investments. While Chase had shown its willingness to extend such a loan under this scenario, there would have been no triggering event under the phantom stock plan and no payout to Fenkell or the other Alliance employees, a truly unappetizing alternative since this, too, is part of Alliance's and Fenkell's business model. In addition, the Trachte employees would have remained in the Alliance ESOP and continued to accrue shares in Alliance and AH Transition. This would likely have been the most profitable outcome for plaintiffs, but also the least likely given the strong motivations by Alliance management to offload Trachte from its books. Nor have plaintiffs offered a viable method to value their accounts had Alliance refinanced Trachte.
Section 502(a)(2) of ERISA, 29 U.S.C. §1132(a)(2), authorizes participants to bring civil actions against fiduciaries "for appropriate relief under [ERISA § 409]." Section 409 states that a breaching fiduciary "shall be personally liable" to (1) "make good to such plan any losses to the plan resulting from each such breach," (2) "restore to such plan any profits . . . made through use of assets of the plan," and (3) "be subject to such other equitable or remedial relief as the court may deem appropriate, including removal." 29 U.S.C.A. § 1109(a). See also Donovan v. Estate of Fitzsimmons, 778 F.2d 298, 303 (7th Cir. 1985). The Seventh Circuit has explained that "other equitable or remedial relief" language in § 409(a) "grants courts the power to shape an award so as to make the injured plan whole while at the same time apportioning the damages equitably between the wrongdoers." Free v. Briody, 732 F.2d 1331, 1337 (7th Cir. 1984) (finding right to indemnification among fiduciaries based on relative culpability).
Civil actions brought against non-fiduciaries must be brought under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), which authorizes participants to sue only for "other appropriate equitable relief." The Supreme Court has confined civil actions under § 502(a)(3) to "those categories of relief that, traditionally speaking (i.e. prior to the merger of law and equity) were typically available in equity." CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1878 (2011). This relief includes injunction, rescission, reformation, equitable estoppel and "surcharge," which is "monetary `compensation' for a loss resulting from a trustee's breach of duty, or to prevent the trustee's unjust enrichment." Id. at 1879.
An ERISA plan may also recover benefits to which its participants are entitled but not "extracontractual damages," such as punitive damages or damages for emotional distress. Harzewski v. Guidant Corp., 489 F.3d 799, 804 (7th Cir. 2007) (quotation omitted). In defined-contribution plans, such as the Trachte ESOP, breaching fiduciaries are liable for "the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty." Harzewski, 489 F.3d at 807. See also Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985) ("One appropriate remedy in cases of breach of fiduciary duty is the restoration of the trust beneficiaries to the position they would have occupied but for the breach of trust.").
Although a plaintiff must prove by a preponderance of the evidence that defendants' fiduciary breaches caused harm to the plan, see CIGNA Co ., 131 S. Ct. at 1881, any doubt or ambiguity in estimating the extent of that loss should be resolved against the breaching fiduciary that caused the uncertainty. Bierwirth, 754 F.2d at 1056; Sect' of U.S. Dept. of Labor v. Gilley, 290 F.3d 827, 830 (6th Cir. 2002); Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 602 (8th Cir. 1995); Kim v. Fujikawa, 871 F.2d 1427, 1430-31 (9th Cir. 1989); See also Leigh v. Engle, 727 F.2d 113, 138 (7th Cir. 1984) ("Leigh I") (plaintiff seeking disgorgement must prove "causal connection" between use of plan assets and fiduciary's "profit," but breaching fiduciary has burden to show which profits were attributable to its investments and court "should resolve doubts in favor of the plaintiffs").
There are several possible ways to measure plaintiffs' damages. One measure would be to compare the plan's actual performance following the breach with a hypothetical alternative investment. Bierwirth, 754 F.2d at 1056. In Bierwirth, the plan trustees purchased company stock at an elevated market price to defeat a takeover, but later sold the stock at a profit for the plan. The court found that an award of damages based on the difference between the market price and some court-calculated fair value was inappropriate, finding instead that the proper measure of damages "requires a comparison of what the Plan actually earned . . . with what the Plan would have earned had the funds been" used for proper, alternative investments after fixing a "reasonable time at which the performance of the improper investment will be measured." Id. at 1056-58.
A similar, related measure is the difference between the purchase price and the stock's current value. Neil v. Zell, 767 F.Supp.2d 933, 948 (N.D. Ill. 2011). In Reich v. Valley National Bank of Arizona, for example, the defendants caused the plan sponsor to take on more debt for a leveraged ESOP buyout than its cash flow could support, causing the sponsor to go bankrupt three years later. 837 F.Supp. 1259, 1270-71, 1289 (S.D.N.Y. 1993). The court in Valley National Bank calculated the plan's loss based on the purchase price minus the minimal amount the plan received in the bankruptcy sale. Id. at 1288-89. In Roth, the Eight Circuit was presented with a defendant who repurchased stock from ESOP participants with promissory notes secured by company stock, which ultimately contributed to company's bankruptcy, leaving the participants with worthless notes and collateral. 61 F.3d at 600-01. The Roth Court held that the plaintiffs' loss was best measured by the difference between the purchase price and the worthless stock in bankruptcy, rather than the difference between the price and value at the time of the purchase, because "the decline in the value of the Company stock held by the Plan qualifies as a loss to the Plan under ERISA § 409(a)." Id. at 605.
Finally, when a fiduciary breach involves paying too high a price for company stock, some courts have measured the plan's loss by "the difference between the amount originally paid for the stock and the fair market value of the stock." Chao v. Hall Holding Co., Inc., 285 F.3d 415, 420 (6th Cir. 2002); Horn v. McQueen, 215 F.Supp.2d 867, 873-74 (W.D. Ky. 2002). In Chao v. Hall Holding Co., for example, the fiduciary caused the plan to enter a prohibited transaction under § 406(a) without adequate investigation into fair market value. 285 F.3d at 420, 444. The Sixth Circuit affirmed the district court order awarding the participants the difference between the purchase price and fair market value, which it distributed in cash to the participants based on the amount of stock that they had or would have received. Id. The Second and Eighth Circuits have explained that the amount of overpayment may be an appropriate measure of a plan's loss when the purchase price exceeded fair market value due to self-dealing, price manipulation or concealed information. See Roth, 61 F.3d at 603 (declining to measure loss by overpayment); Bierwirth, 754 F.2d at 1055 (same).
Plaintiffs ask the court to adopt the Roth and Valley National Bank method, arguing that defendants' breaches resulted in an overpayment, caused Trachte to take on excessive debt and, in turn, caused Trachte's value to collapse. Under plaintiffs' theory they are entitled to recover the full purchase price through rescission of the 2007 Transaction to the full extent possible because defendants caused the Trachte ESOP to lose the full value of its investment, including the full value of Trachte employees' former Alliance ESOP accounts used as leverage for the transaction.
Unfortunately for plaintiffs, they have not proven by a preponderance of the evidence that the acquisition debt or overpayment caused Trachte's collapse. In fact, the weight of the evidence strongly suggests otherwise. The excess debt no doubt placed additional pressure on Trachte, but plaintiffs' theory ignores the tsunami that was the 2008 financial crisis. Even with signs in late 2006 and 2007 that Trachte's value was inflated, Trachte managed to maintain its performance through most of 2007, ultimately collapsing only after the financial crisis, when its orders fell over 50% and its EBITDA fell to nearly $0 for reasons largely unrelated to servicing its sizable debt load. Having failed to prove by a preponderance of the evidence that defendants' fiduciary breaches caused Trachte's collapse, plaintiffs are not entitled to recover the full value of the Trachte common stock purchased by the Trachte ESOP. See Mohler v. Unger, 1994 WL 1860578, * 18 (S.D. Ohio 1994) (refusing to award plaintiffs the difference in stock value because they had not established that the leveraged buyout caused the decline in the sponsor's stock). Complete rescission of the entire transaction is similarly inappropriate here, because it would award plaintiffs the entire purchase price of Trachte despite the 2008 recession being the principal cause of its precipitous loss in value.
Plaintiffs also argue that any recovery short of $22 million would provide no benefit to them, because of the size of Trachte's outstanding debt. Plaintiffs' argument is difficult to understand. Under the Department of Labor regulations, ESOP acquisition loans are without recourse against the plan, with the exception of employee stock pledged as collateral that has not yet been released to employee accounts, 29 C.F.R. § 2550.408b-3(e), and the terms of the Trachte ESOP plan and the ESOP loan reflect this requirement. (Trachte ESOP Plan, Joint Ex. 2 (dkt. #583), § 6.4; ESOP Loan and Pledge Agreement, Joint Ex. 33, (dkt. #587-4) § 2.3). Even if the plan ultimately uses its recovery to release additional Trachte stock, plaintiffs' argument rests on a premise that mirrors defendants' mistaken argument that the debt was illusory. Just as assuming additional debt was a loss to the Trachte ESOP, the retirement of that debt is a benefit to the plan. Regardless, the court's only authorized role is to award damages available under ERISA and the plan documents, not to fashion sweeping, equitable relief out of whole cloth.
Although plaintiffs have not proven that the 2007 Transaction caused Trachte's collapse, they have proven by a preponderance of the evidence that defendants caused the Trachte ESOP to overpay by $8,367,507.43. The amount of overpayment may be an appropriate remedy when the purchase price exceeded fair market value because of a defendants' breach. Chao, 285 F.3d at 420; Bierwirth, 754 F.2d at 1055. Defendants argue that in this case, regardless of the overpayment, any award to plaintiffs would be inappropriate for two reasons: (1) the 2008 financial crisis would have wiped out all the value of the plaintiffs' accounts in the Trachte ESOP even if it had paid fair market value, and (2) the Trachte ESOP is unlikely to ever repay the acquisition loans.
Defendants' first argument is that the 2008 financial crisis would have wiped out the value of any Trachte common stock held by the Trachte ESOP and, therefore, the value of the Trachte employees' accounts transferred from the Alliance ESOP. Because the so-called "Great Rescission" wiped much of Trachte's equity, defendants argue, the fiduciary breaches did not ultimately cause plaintiffs to lose anything they would not have lost anyway, meaning any award of monetary damages would place plaintiffs in a better position than they would have been but for defendants' conduct.
Defendants' argument that the Trachte ESOP suffered no compensable loss rests at the other, equally-mistaken extreme as plaintiffs' claim to the full purchase price. Most important, it ignores plaintiffs' proof that Alliance, Fenkell and the Trachte Trustee Defendants caused the Trachte ESOP to pay more than fair market value for Trachte. The amount of this overpayment was both a real loss to plaintiffs (and a concomitant windfall to the Alliance Defendants) that can be estimated reasonably, resolving uncertainties about the extent of the overpayment against defendants, even if plaintiffs have not proven that the additional debt caused Trachte's business to collapse. See Roth, 61 F.3d at 605 ("If a breach of fiduciary duty caused the Plan to purchase Company stock which declined in value, the causal link between the breach and the loss is established, even if the Company stock would have inevitably declined in value."). Whether plaintiffs would later have lost the overpayment — for whatever reason (e.g., because it was tied up as equity, reduced debt in Trachte or gambled away at the race track) — is beside the point.
In a similar vein, defendants argue that any recovery would be a windfall to plaintiffs, because it is unlikely that Trachte or the Trachte ESOP will repay the bank loans or seller's notes used to purchase Trachte.
Second, defendants' argument ignores
Henry v. U.S. Trust Co. of Cal., N.A., 569 F.3d 96, 100 n.4 (2nd Cir. 2009) (rejecting argument that ESOP acquisition loan should be deducted from plan losses because company later forgave loan and repurchased stock as part of ESOP termination).
Third, the acquisition debt assumed by Trachte and the Trachte ESOP was not illusory. Indeed, the seller's notes are still accruing interest at 13%; the bank has not forgiven the loan to Trachte; and Trachte has not forgiven the loan to the Trachte ESOP. While the bank loans are in default, Trachte entered forbearance agreements and remains an ongoing enterprise. Finally, the Trachte ESOP has continued paying down its loan to Trachte with the employees' retirement contributions at the inflated price set in the 2007 Transaction.
Therefore, the court concludes that defendants' fiduciary breaches caused the Trachte ESOP to lose $8,367,507.43 by paying more than fair market value. Because the former Trachte employee participants in the Alliance ESOP will be reinstated to the full value of their former Alliance ESOP accounts as described below, the Trachte ESOP's recovery must be adjusted by the percentage of ownership accorded to those accounts in the Trachte ESOP. The Trachte ESOP received 100% of Trachte's equity, of which the share exchange represented 22.631 %. Accordingly, plaintiffs recovery for the participants of the Trachte ESOP will be reduced to $6,473,856.82 as an approximation of the difference between the purchase price for the equity interest that the plan purchased with debt and Trachte's fair market value as of August 29, 2007.
For their breach of fiduciary duty to the Trachte ESOP, the court will order Mastrangelo, Seefeldt and Klute to restore to the Trachte ESOP $6,473,856.82. However, as discussed below the Trachte ESOP trustees are entitled to indemnification from Alliance and Fenkell.
On behalf of the subclass, who were participants or beneficiaries in the Alliance ESOP at the time of the 2007 Transaction, plaintiffs seek restoration of their accounts in the Alliance ESOP. The Alliance Defendants contend that (1) reinstatement is not an available remedy and (2) restoration of the account balance is inappropriate because plaintiffs would have lost the entire value of their Alliance ESOP accounts regardless of the 2007 Transaction.
The Alliance Defendants first argue that reinstatement of the Trachte employees in the Alliance ESOP is not available as equitable relief because the court ruled on summary judgment that the spin-off complied with ERISA § 208. However, the court ruled after trial that Fenkell and Alliance breached their fiduciary obligations of prudence and loyalty to the Alliance ESOP under § 404(a), that Fenkell caused the Alliance ESOP to enter a prohibited transaction under § 406 and that Alliance is liable for Fenkell's violation of § 404 and § 406.
Reinstatement is an available remedy for fiduciary breaches under ERISA § 502(a)(2)(3). Varity Corp. v. Howe, 516 U.S. 489, 515 (1996). In Varity, the Supreme Court held that former participants deceived into withdrawing from a plan by its administrator could pursue individual relief for reinstatement and breach of fiduciary duties. Id. Defendants' cite Paulsen v. CNF Inc., 559 F.3d 1061 (9th Cir. 2009), in support of their position that plaintiffs cannot seek reinstatement, but Paulsen recognized reinstatement as an available form of equitable relief when a fiduciary breach causes a plaintiff to withdraw from the plan; it held only that the plaintiffs in that case could not seek reinstatement because the defendant was not acting as a plan fiduciary. Id. at 1076. Here, plaintiffs seek reinstatement in the Alliance ESOP in order to compensate the Alliance ESOP for the loss that Fenkell and Alliance's fiduciary breaches caused to plaintiffs' defined contribution accounts.
The Alliance Defendants next argue that plaintiffs should not be restored to the value of their account because the 2008 financial crisis would have wiped out the value of plaintiff's accounts in the Alliance ESOP regardless of the 2007 Transaction. Defendant's argument is unpersuasive for the reasons stated above. It also suffers from an additional false factual premise: it assumes that the participants' holdings would have been converted to Trachte stock even if the 2007 Transaction had not occurred as planned. As the court found above, the more likely alternative to an ESOP buyout at fair market value was a third party sale, in which case the Trachte employees would have remained in the Alliance ESOP and been paid by its terms.
While plaintiffs have not proven that the overpayment caused Trachte's collapse, they have proven that Alliance and Fenkell offered up the Trachte employees' accounts in the Alliance ESOP as collateral to obtain an overpayment for their Trachte shares and that breach was a necessary condition for the subsequent events. If Alliance and Fenkell had not entered this prohibited transaction and breached their fiduciary duties of loyalty and prudence, the Trachte employees would most likely have remained participants in the Alliance ESOP and received the full value of their Alliance accounts. By offering the accounts as collateral in a highly-leveraged purchase, Alliance and Fenkell subjected the accounts to a substantial risk that was ultimately realized when Trachte's value collapsed. But for defendants fiduciary breach, this subclass of plaintiffs would not have lost the entire value of their accounts in the Alliance ESOP.
For all these reasons, the court finds that members of the subclass are entitled to have the value of their accounts restored and will order Alliance and Fenkell to reinstate the members of the subclass to the Alliance ESOP and to restore the $7,803,543 value of the holdings in their accounts as of August 29 2007, adjusted for prejudgment interest as described below. This amount shall be allocated to their accounts in the Alliance ESOP in proportion to their stock ownership as of August 29, 2007.
ERISA § 409 states that a trustee shall disgorge any profits "made through the use of plan assets," which the Seventh Circuit has held "permits recovery of a fiduciary's profits only where there is a causal connection between the use of the plan assets and the profits made by fiduciaries on the investment of their own assets." Leigh I, 727 F.2d at 138. "If no misuse of the funds occurs, if no losses are incurred or profits obtained that differ from what they would have been had there been no breach of fiduciary duty, there is no remedy." Wsol v. Fiduciary Mgmt. Assoc., Inc., 266 F.3d 654, 658 (7th Cir. 2001). Once a causal connection is shown, however, "the burden is on the defendants who are found to have breached their fiduciary duties to show which profits are attributable to their own investments apart from their control of the [plan] assets." Leigh I, 727 F.2d at 138.
In its liability ruling, the court concluded that Fenkell breached his fiduciary duty of loyalty and prudence by using the Alliance ESOP accounts of the Trachte employees to obtain a higher price and to ensure that he received a payment on the phantom stock plan. Accordingly, the court has found already the requisite causal connection between Fenkell's violation and the phantom stock payment.
Moreover, of the defendants found liable, Fenkell is far and away the most culpable party. Each time he testified, the court was increasingly impressed by Fenkell's complete recall of minor details and sophisticated understanding of ERISA transactions, as well as the law governing those transactions. After Pagelow was sidelined by the 2002 sale, Fenkell was easily the smartest person in the room. He held between a $2.5 and $3 million interest in the phantom stock plan for Alliance employees. He knew that under any alternatives to a leveraged ESOP purchase, he was unlikely to receive any immediate phantom stock payments and his interest in the phantom stock plan would follow Trachte to what he expected to be an unhappy ending. Fenkell testified largely unconvincingly that HIG's refusal to pay the phantom stock plan did not affect his decision to walk away from its offer — even though he unquestionably recognized this was his obligation in his fiduciary roles. While his testimony was not credible, it does reveal that Fenkell knew his interest in the phantom stock plan potentially conflicted with his obligation to act in the interests of Alliance and the Alliance ESOP.
Despite fully understanding this substantial conflict of interest, Fenkell nevertheless orchestrated the 2007 Transaction to ensure that (1) he would receive his full phantom stock payment; (2) no truly independent person would look out for the other participants' interests; and (3) the transaction's structure would provide him with a plausible legal shield. Moreover, Fenkell used Alliance's position as employer of the Trachte ESOP Trustees to ensure the transaction would be arranged to pay out Alliance's phantom stock plans and used his control over the Alliance ESOP plan assets to ensure Alliance would receive a higher price by offering up the holdings of Trachte employees in the Alliance ESOP as collateral.
Nevertheless, Fenkell argues he should be required to restore only that portion of his phantom stock payment that corresponds to the Trachte ESOP's overpayment.
Plaintiffs also argue that Alliance should be required to disgorge any profit it made in connection with the use of plan assets in the 2007 Transaction, which they argue is the $12.35 million difference between the price that Alliance paid in 2002 and the consideration it received in 2007. This argument overreaches on a number of levels. As an initial matter, it fails to account for the additional shares that Alliance purchased from Pagelow in 2005, so that Alliance sold a 4.25% larger interest in 2007 than it purchased in 2002. In addition, plaintiffs include the $4.3 million seller's note as part of Alliance's so-called profits, although that note is worthless. Plaintiffs also made no effort to differentiate between the increase in share value attributable to Trachte's performance between 2002 and 2007 and Alliance's "profit" from its fiduciary breach. Finally, apart from the inflated calculation of profit, the court finds that plaintiffs have not proven by a preponderance of the evidence that Alliance received any "profit" through the use of plan assets in the 2007 Transaction beyond benefiting from an underpayment in the purchase price already awarded as damages.
District courts have discretion to award prejudgment interest in ERISA cases to fully compensate victims and prevent unjust enrichment. Trustmark Life Ins. Co. v. University of Chicago Hospitals, 207 F.3d 876, 885 (7th Cir. 2000) (citation omitted). "Whether to award prejudgment interest to an ERISA plaintiff is a question of fairness, lying within the court's sound discretion, to be answered by balancing the equities," including consideration of the parties' bad faith. Id. (quotation omitted). Because Fenkell and Alliance have unjustly benefited for six years from the use of the overpayment and the share-exchange which they procured by ignoring their fiduciary responsibilities, the court finds that Fenkell and Alliance should be liable for prejudgment interest. The Trachte Trustee Defendants, in contrast, were acting in good faith (albeit naively), received no profits from the sale or the breaches of their fiduciary duties and, therefore, were not unjustly enriched.
The Seventh Circuit's default rule is to award prejudgment at the prime rate on the date of judgment, unless the court "engages in `refined rate-setting' to determine a more accurate market rate for interest." First Nat. Bank of Chicago v. Standard Bank & Trust, 172 F.3d 472, 480 (7th Cir. 1999). See also Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 437 (7th Cir. 1989) (district courts have discretion to award compounding interest). Plaintiffs ask the court to assume a 4.633% interest rate, which would represent the return on a risk-free U.S. Treasury securities purchased on August 29, 2007. The court declines to use plaintiffs' proposed method because they have cited no authority for it, and it ignores the risk of investment and the post-transaction events. The court finds that plaintiffs are entitled to quarterly compounding interest at the current prime rate.
Removal of trustees is appropriate if they engaged in "repeated or substantial" violations of their fiduciary duties. Katsaros v. Cody, 744 F.2d 270, 281 (2d Cir. 1984). Although Fenkell's violations were not repeated, they were substantial. Fenkell manipulated plan assets to benefit Alliance and himself with conscious disregard for the interests of the Trachte employee participants in the Alliance ESOP. In opposition to the request for Fenkell's removal, the Alliance Defendants repeat their argument that the phantom stock payments were merely deferred executive compensation, an argument the court has already addressed and rejected.
The Alliance Defendants also allege that plaintiffs lack standing to seek Fenkell's removal as trustee of the Alliance ESOP. (Alliance Def.'s Answer (dkt. #261) ¶ 304.) Specifically, in their trial brief on remedies, they argue that plaintiffs lack standing to seek Fenkell's removal as a form of prospective relief, because plaintiffs are former participants without prospect of reinstatement to the plan. The court's finding above that plaintiffs are entitled to reinstatement and compensation for their lost account balances moots this argument. The court will, therefore, order Fenkell's removal as trustee of the Alliance ESOP. Seefeldt, Mastrangelo and Mute are no longer trustees of the Trachte ESOP (Anderson Aff., dkt. #758), so plaintiff's request for their removal is also moot.
Plaintiffs also seek a permanent injunction barring defendants from serving as fiduciaries for any ERISA plan that covers the class members or any employee of Trachte. (Cpt. (dkt. #254), 86.) Appropriate equitable relief under ERISA may include "a permanent injunction barring a former ERISA fiduciary from providing services or acting as a fiduciary to any employee benefit plan in the future." Chao v. Merino, 452 F.3d 174, 185 (2d Cir. 2006). Such an injunction is not warranted against the Trachte Trustee Defendants. Although they were in over their heads and acting with a conflict of interest, they acted in apparent good faith and their failures were not the kind of flagrant and egregious conduct that warrants a permanent injunction. See id. (defendant repeatedly failed to failed to prevent embezzlement of plan assets by service provider she knew could not be trusted). With respect to Fenkell, plaintiff's specific, requested injunction is moot given that Fenkell has no ongoing relationship with Trachte and will now be barred from acting as a trustee to the Alliance ESOP.
The Trachte Trustee defendants filed a cross claim for equitable relief against the Alliance Defendants.
The Trachte Trustee Defendants violated their duty of prudence by failing to follow the plan terms and allowing the Trachte ESOP to enter a prohibited transaction without adequate investigation of fair market value. On the other hand, the Alliance Defendants, and particularly Fenkell, used their positions of authority over the Trachte Trustees and their control of the Alliance ESOP plan assets to orchestrate a transaction at an inflated price. In fact, when it came to orchestration of the 2007 Transaction, Fenkell was the unquestioned conductor and the Trachte Trustees mere musicians.
Furthermore, the only benefit the Trachte Trustee Defendants derived from the 2007 Transaction was to keep their jobs, having lost the value of their retirement accounts along with the other Trachte employees. In contrast, Alliance received the full benefit of an overpayment it orchestrated through the fiduciary breaches of Alliance and Fenkell. If the 2007 Transaction had not occurred, either Trachte would have sold at a lower price or Alliance would have been stuck with Trachte when its revenue fell over 50% and its value plummeted. In these circumstances, the court finds that defendants Mastrangelo, Seefeldt and Mute are entitled to indemnification from defendants Alliance and Fenkell.
IT IS ORDERED that:
This action came for consideration before the court with District Judge William M. Conley presiding. The issues have been considered and a decision has been rendered.
IT IS ORDERED AND ADJUDGED
that judgment is entered in favor of plaintiffs against defendant David Fenkell on the unsettled claims as follows:
All other claims in this action are dismissed pursuant to the parties' settlement agreements, and this case is closed with the court retaining jurisdiction over enforcement of those agreements.
