Thomas v. Bostwick

Filing 24

ORDER by Judge Joseph C. Spero denying 8 Motion to Dismiss (jcslc2, COURT STAFF) (Filed on 9/19/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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RICHARD TODD THOMAS,
Plaintiff,

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v.

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JAMES S. BOSTWICK,
Defendant.

United States District Court
Northern District of California

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Case No. 13-cv-02544-JCS
ORDER DENYING DEFENDANT'S
MOTION TO DISMISS
Dkt. No. 19

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I.

INTRODUCTION
Plaintiff Richard T. Thomas filed this action against Defendant James S. Bostwick under

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the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132. Plaintiff alleges

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that Defendant was Trustee of the Datair Mass-Submitter Prototype Defined Contribution Plan

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(“the Plan), and breached his fiduciary duties by terminating the Plan, liquidating the assets, and

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taking the proceeds allocable to Plaintiff’s interest in the Plan. Plaintiff alleges that Defendant

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applied these proceeds against Plaintiff’s judgment debts in violation of the Plan’s anti-alienation

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provision.
Defendant filed a Motion to Dismiss (“Motion”). Defendant contends that Plaintiff’s claim

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is moot and further contends that Plaintiff fails to state a claim. The Court held a hearing on the

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Motion on September 13, 2013, at 9:30 a.m. For the reasons stated below, Defendant’s Motion to

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Dismiss is DENIED.1

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//

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//

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The parties have consented to the jurisdiction of the undersigned magistrate judge
pursuant to 28 U.S.C. § 636(c).

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II.

BACKGROUND

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A.

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In the Complaint, Plaintiff alleges that all relevant times, he was a participant of the Plan,

Factual Allegations

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of which Defendant Bostwick, an individual, was Trustee. Complaint (“Compl.”) ¶¶ 3-4.

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Between 1996 and 2005, Plaintiff was employed at James S. Bostwick, a Professional

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Corporation, doing business as Bostwick & Associates (hereafter “the Employer”). Id. ¶¶ 3, 5.

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During this time, the Plan was in effect, and the Employer made contributions to the Plan for

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Plaintiff’s benefit. Id. ¶ 6.

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After Plaintiff was terminated by the Employer, the Plan was terminated. Id. Plaintiff
alleges that in the course of liquidating the Plan, Defendant, acting as Trustee, caused the proceeds

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United States District Court
Northern District of California

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allocable to Plaintiff’s interest in the Plan to be received by the Employer. Id. The Employer

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received three cashier’s checks from the liquidated Plan funds which constituted Plaintiff’s

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interest: one for $6,040.94 dated October 28, 2009; one for $15,386.17 dated January 2, 2009; and

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one for $204.68 dated January 2, 2009. Id. ¶ 7. Plaintiff did not become aware of the liquidation

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of his interest in the Plan or the Employer’s receipt of the proceeds until June 5, 2012, one year

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before the Complaint was filed. Id. ¶ 9.

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Plaintiff alleges that the Employer applied these proceeds against Plaintiff’s “judgment

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debts” to the Employer.2 Compl. ¶ 7. On December 15, 2005, the Employer filed a civil action

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against Plaintiff in state court alleging that Plaintiff had embezzled funds while working at

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Bostwick & Associates. Request for Judicial Notice in Support of Motion to Dismiss (“RJN”)

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Exhibit (“Ex.”) C (Civil Complaint in Bostwick v. Thomas, CV-055657, Superior Court of

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California, County of Marin). On October 6, 2006, the state court entered judgment in favor of the

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Employer in the amount of $19,837,866.14. RJN Ex. D (Civil Order). Moreover, on February 20,

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2007, a criminal complaint was filed against Plaintiff asserting multiple felony counts for

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embezzlement. RJN Ex. E (Felony Complaint in People v. Thomas, SCR-471365, Superior Court

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These “judgment debts” are subject to judicial notice. Fed.R.Evid. 201; Lee v. City of
Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (“under Fed.R.Evid. 201, a court may take judicial
notice of matters of public record.”) (quotations omitted).
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California, County of San Francisco). On December 21, 2009, the court filed an Order for

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Restitution against Plaintiff and in favor of the Employer in the amount of $8,777,725.18. RJN

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Ex. F (Restitution Order).
The Employer filed an adversary bankruptcy proceeding in an effort to obtain a judgment

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as to whether he was allowed to accept, without Plaintiff’s permission, Plaintiff’s share in the

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Plan’s liquidated assets as partial satisfaction of Plaintiff’s judgment debts. RJN Ex. A (Joint

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Stipulation of Undisputed Facts, and Statement of Disputed Matters filed on April 11, 2013 in the

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matter of Bostwick v. Thomas, United States Bankruptcy Court, Northern District of California,

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A.P. 12-03123). The parties filed motions for summary judgment, but the bankruptcy court

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declined to decide whether the Employer properly received the funds, leaving that issue for

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United States District Court
Northern District of California

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“another court to determine.” RJN Ex. B (Order re: Cross-Motions for Summary Judgment) at

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2:2.
The Plan3

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B.

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Plaintiff alleges that he did not, at any time, authorize the Employer to receive his share of

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the proceeds. Id. Plaintiff notes that the Plan document contains an anti-alienation provision

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barring any creditor from enforcing any claim against a Plan participant’s interest in the Plan.

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Section 3.11.7 of the Plan provides, in relevant part:

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3.11.7 Inalienability. The right of any Participant or his
Beneficiary in any distribution hereunder or to any separate Account
shall not be subject to alienation, assignment or transfer, voluntarily
or involuntarily, by operation of law or otherwise, except as may be
expressly permitted herein. No participant shall assign, transfer, or
dispose of such right nor shall any such right be subjected to
attachment, execution, garnishment, sequestration, or other legal,
equitable, or other process.

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RJN Ex. A-5 at 91. Such an anti-retaliation provision is required by ERISA. See 29 U.S.C. §

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1056(d)(1) (“Each pension plan shall provide that benefits provided under the plan may not be

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The Plan was submitted as part of Defendant’s Request for Judicial Notice. See RJN Ex.
A 1-5. While the Plan is not subject to judicial notice, the Court may consider the Plan because its
authenticity is not contested and the plaintiff “necessarily relies” on the Plan in the Complaint.
Lee, 250 F.3d at 688 (citing Parrino v. FHP, Inc., 146 F.3d 699, 705–06 (9th Cir. 1998)).
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assigned or alienated”).
The Plan also provides that the proceeds of the Trust shall not revert to the Employer.

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3.11.1 No Reversion to Employer. Except as specifically provided
in the Plan, no part of the corpus or income of the Trust shall revert
to the Employer or be used for, or diverted to purposes other than for
the exclusive benefit of Participants and their Beneficiaries.

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RJN Ex. A-5 at 91 (emphasis added).
The Plan also provides the rule for voluntary termination of the Plan:

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3.8.4 Voluntary Termination. The employer may terminate the
Plan at any time by delivering to the Trustee an instrument in
writing which designates such termination. Following termination
of the Plan, the Trust will continue until the Distributable Benefit of
each Participant has been distributed.

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United States District Court
Northern District of California

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RJN Ex. A-4 at 85 (emphasis added).

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C.

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Defendant moves to dismiss, contending the case is moot and Plaintiff fails to state a

Motion to Dismiss

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claim. Defendant argues the case is moot for two reasons. First, Defendant contends the Plan is

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no longer in existence, and therefore, there can be no funds due under the Plan. Defendant also

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contends that at the time in which Defendant Bostwick, acting as Trustee, allocated the funds to

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the Employer, he was no longer a fiduciary of the Plan, and therefore, he could not have breached

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a fiduciary duty.
Defendant also argues that Plaintiff fails to state a claim. Defendant contends that because

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Plaintiff embezzled funds, he lost all his rights to claim any entitlement under the terms of the

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Plan. Defendant also notes that he, as the Plan Administrator, had discretion to determine

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eligibility under the Plan, and was therefore within his rights to deny Plaintiff benefits under the

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terms of the Plan.

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III.

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LEGAL STANDARD
A complaint may be dismissed for failure to state a claim for which relief can be granted

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under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Fed.R.Civ.P. 12(b)(6). “The

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purpose of a motion to dismiss under Rule 12(b)(6) is to test the legal sufficiency of the

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complaint.” N. Star. Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 1983). In ruling on
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a motion to dismiss under Rule 12(b)(6), the Court takes “all allegations of material fact as true

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and construe(s) them in the lights most favorable to the non-moving party.” Parks Sch. of Bus. v.

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Symington, 51 F.3d 1480, 1484 (9th Cir. 1990). The complaint need not contain “detailed factual

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allegations,” but must allege facts sufficient to “state a claim to relief that is plausible on its face.”

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Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547

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(2007)).

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IV.

As a threshold matter, the Court notes that Defendant is incorrect to argue that Plaintiff’s

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DISCUSSION

case is moot. “A case is moot if the issues presented are no longer live and there fails to be a ‘case
or controversy’ under Article III of the Constitution.” In re Burrell, 415 F.3d 994, 998 (9th Cir.

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United States District Court
Northern District of California

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2005). “The court must be able to grant effective relief, or it lacks jurisdiction and must dismiss

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the appeal.” Pub. Utilities Comm’n of State of Cal. v. F.E.R.C., 100 F.3d 1451, 1458 (9th Cir.

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1996).

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Under ERISA § 409(a), 29 U.S.C. § 1109(a), a fiduciary of an ERISA plan may be

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personally liable for a breach of fiduciary duties, which includes wrongful taking or transfer of

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plan assets. Kim v. Fujikawa, 871 F.2d 1427, 1431 (9th Cir. 1989) (holding an ERISA fiduciary

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liable for “the entire cost of the prohibited transaction”). The Court is capable of finding

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Defendant in breach of his duties, entering judgment in favor of Plaintiff, and awarding Plaintiff

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damages. Therefore, the case is not moot.

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Defendant also argues the case is moot because the Plan is no longer in existence as it was

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terminated in 2008 and 2009. Defendant is incorrect. The Ninth Circuit has held that

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“participants and beneficiaries of a terminated plan have no standing to seek legal damages for

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breach of fiduciary duty once the Plan was terminated and Plan liabilities were satisfied.” Waller

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v. Blue Cross of California, 32 F.3d 1337, 1339 (9th Cir. 1994) (emphasis added). Assuming

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Plaintiff’s allegations are true, he has standing to bring his claim because he alleges the Plan

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liabilities have not been satisfied. See id.

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Moreover, the fact the Plan has been terminated does not make Defendant immune from
liability. “ERISA sets forth the exclusive procedures for the standard termination of single5

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employer pension plans.” Beck v. PACE Int’l Union, 551 U.S. 96, 102 (2007). Termination of an

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ERISA pension plan requires, inter alia, final distribution of plan funds. Id. at 102-03 (citing 29

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U.S.C. § 1341(b)(2)(D)). The Plan at issue in this case also requires that all benefits be distributed

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to participants before the Plan Trust is terminated. See RJN Ex. A-4 at 84. Plaintiff alleges that

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he has not received what is owed to him under the Plan, and that there has not been a final

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distribution of plan funds.
Defendant also argues that he was not Trustee of the Plan (and therefore had no fiduciary

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duties) at the time he transferred the funds to the Employer because the funds were liquidated prior

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to the transfer. This argument is meritless. The Complaint alleges that Defendant was trustee at
the time that he caused Plaintiff’s portion of the Plan proceeds to be paid to the Employer. Compl.

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United States District Court
Northern District of California

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¶¶ 3, 6.

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Defendant also asserts that Plaintiff did not ask for a distribution of his profit-sharing

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account at the time he was terminated. The Motion cannot succeed on this ground. First, this

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“fact” is not alleged in Plaintiff’s Complaint, nor is this a fact subject to judicial notice. Second,

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Defendant fails to support his assumption that Plaintiff’s omitted request for benefits at the time of

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his termination renders him ineligible for benefits under the terms of the Plan. Defendant does not

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cite any Plan provision in support of this position, and ignores the provision in the Plan that

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expressly states that the Trust corpus “shall” not revert to the employer. RJN Ex. A-5 at 91.

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Next, Defendant contends that Plaintiff fails to state a claim because the Plan

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Administrator had discretion to interpret the terms of the Plan. While the Plan Administrator does

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“have full and complete discretion to determine eligibility for participation and benefits under this

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Plan,” he may still be liable if, in interpreting the terms of the Plan, the Plan Administrator abuses

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his or her discretion. See Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955 (9th Cir. 2006).

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Plaintiff states a claim under ERISA based on the allegation that Defendant abused his discretion

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by ignoring the anti-alienation provision in the Plan. See id.; RJN Ex. 5 at 91.

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Defendant argues that under United States v. Novak, 476 F.3d 1041 (9th Cir. 2007), there

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is an exception to the anti-alienation provision in an ERISA pension plan when there is a criminal

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restitution order. In Novak, the United States sought to garnish the funds from an ERISA pension
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pla under the Mandatory Victims Res
an
V
stitution Act of 1996 (“M
MVRA”), Pu
ub.L. No. 104
4–132, 110

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Sta 1227. Th Ninth Circ reconcile a conflict between tw federal sta
at.
he
cuit
ed
t
wo
atutes−ERIS
SA’s anti-

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alie
enation prov
vision on the one hand, th MVRA’s garnishmen provision on the other Because
he
s
nt
r.

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the MVRA pro
e
ovides that “[n]otwithstanding any ot
ther Federal Law…a jud
l
dgment impo
osing a fine

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ma be enforce against al property or rights to pr
ay
ed
ll
r
roperty of th person fin
he
ned,” 18 U.S.C. §

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361
13(a), the Ni
inth Circuit interpreted the MVRA t supersede ERISA in th limited
i
t
to
his

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circ
cumstance. Novak, 476 F.3d 1046-5
51.
ase
a
t
it−under the MVRA, onl “[t]he
ly
This ca does not arise under the MVRA. Nor could i

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Un
nited States may enforce a judgment… 18 U.S § 3613(a Moreove the questi in this
m
….”
S.C.
a).
er,
ion

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cas unlike No
se,
ovak, is not whether a cri
w
iminal restit
tution order a
allows the g
government t seize the
to

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United States District Court
Northern District of California

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fun but whether the Trustee may tra
nds,
ansfer the fun to the Em
nds
mployer. In the absence of any legal
e

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sup
pport for suc a proposit
ch
tion, the Cou finds that the Trustee cannot.
urt
t
e

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V.

CONCLUSION

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For the foregoing re
easons, Defe
endant’s Mo
otion to Dism is DENI
miss
IED.

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IT IS SO ORDER
S
RED.

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Da
ated: Septem
mber 19, 2013
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__
___________
__________
___________
________
JO
OSEPH C. SP
PERO
Un
nited States M
Magistrate Ju
udge

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