Cynthia Marie Vespa v. Singler-Ernster Inc. et al

Filing 44

ORDER by Judge Richard Seeborg granting 28 Motion to Dismiss, with leave to amend.(cl, COURT STAFF) (Filed on 11/8/2016)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CYNTHIA MARIE VESPA,

Case No. 16-cv-03723-RS

Plaintiff,
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United States District Court
Northern District of California

v.

ORDER GRANTING MOTION TO
DISMISS, WITH LEAVE TO AMEND

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SINGLER-ERNSTER, INC., et al.,
Defendants.

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In this putative class action, plaintiff Cynthia Maria Vespa brings claims under ERISA and

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state law on behalf of participants in an Employee Stock Ownership Plan (“ESOP”), formerly

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administered by defendant Singler-Ernster, Inc. (“The Company”). The Company was founded by

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Peter Singler, Sr. and a partner. The Company originally owned and operated a number of Round

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Table Pizza franchises in the San Francisco Bay area, on the Peninsula and in the North Bay.

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Vespa alleges, in essence, that upon the retirement and subsequent death of Peter Singler, Sr., his

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son, defendant Peter Singler, Jr., assumed control of the business and, through a series of

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imprudent management decisions, involving attempts to operate restaurants other than Round

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Table Pizza franchises, destroyed the value of the Company—thereby rendering the putative

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class’s interest in the ESOP worthless. Vespa particularly challenges defendants’ decision to have

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the ESOP expend $250,000—cash acquired in a bequest from Peter Singler, Sr.—to purchase

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additional Company stock at a time when they allegedly knew the value of the Company and its

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stock was collapsing.

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Peter Singler, Jr., (hereafter “Singler”) moves to dismiss, arguing the complaint fails to

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state a claim. Pursuant to Civil Local Rule 7-1(b) the matter is suitable for disposition without

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oral argument, and the hearing set for November 10, 2016 is hereby vacated. The motion is

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granted, with leave to amend.

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1. “Information and belief” pleading

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Singler’s motion to dismiss places significant emphasis on the fact that the majority of the
substantive allegations in the complaint are qualified as being made “on information and belief.”

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Despite the common appearance of that phrase in practice, it is not a recognized pleading device

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under the Federal Rules. Rather, Rule 11(b) of the Federal Rules of Civil Procedure provides that

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United States District Court
Northern District of California

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by submitting a pleading to the court, the signatory is always certifying that, “to the best of the

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person’s knowledge, information, and belief, formed after an inquiry reasonable under the

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circumstances . . . the factual contentions have evidentiary support or, if specifically so identified,

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will likely have evidentiary support after a reasonable opportunity for further investigation or

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discovery.”
Thus, the phrase “on information and belief” at best constitutes surplusage. Where, as

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here, some of the allegations are qualified with the phrase and others are not, it is reasonable to

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infer it is intended as caveat, to provide additional protection should Vespa be unable to prove the

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factual allegations the phrase precedes.1 It thus creates a further inference that Vespa may lack

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knowledge of underlying facts to support the assertions, and is instead engaging in speculation to

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an undue degree. As such, while the phrase perhaps could simply be disregarded as neither adding

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to nor subtracting from the adequacy of the factual averments, it at least creates uncertainty that

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supports requiring re-pleading here.
In any amended complaint, Vespa must be willing to make her averments without caveat

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Using the phrase provides no such protection as it cannot lessen the requirements of reasonable
pre-suit investigation under the rules

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CASE NO.

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16-cv-03723-RS

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and/or with additional detail explaining the basis of her beliefs. She, of course, remains free to

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invoke the provision of Rule 11 that permits a party specifically to identify averments as ones

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which it in good faith believes, “will likely have evidentiary support after a reasonable opportunity

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for further investigation or discovery.” The present complaint, however, does not do so.

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2. First Claim for relief—Breach of Fiduciary Duty under ERISA

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The parties’ primary dispute regarding the adequacy of the present allegations of the

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complaint’s claim for breach of a fiduciary duty under ERISA turn on whether the pleading

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requirements identified by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct.
2459 (2014) (“Fifth Third”) and Amgen, Inc. v. Harris, 136 S.Ct. 758 (2016) (“Amgen”) apply

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United States District Court
Northern District of California

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where the ESOP in dispute does not relate to a publicly-traded corporation. Singler insists that

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under Fifth Third and Amgen, Vespa must plead facts showing an “alternative action,” she

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contends Singer could and should have undertaken in lieu of the challenged conduct. Vespa, in

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turn, argues the concerns identified in Fifth Third and Amgen relate exclusively to the conflicts an

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ESOP administrator may face between the duties imposed by securities laws with respect to

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publicly-traded shares and duties towards the ESOP and its participants.

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A fellow district court case, while not binding, provides a persuasive explanation of how

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Fifth Third applies in the context of a privately-held corporation. See, Hill v. Hill Brothers

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Construction Co., Inc., 2016 WL 1252983 at *5 (N.D. Miss. March 28, 2016) (“Looking to the

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other considerations the Supreme Court set forth which ‘inform [ed] the requisite analysis’ of the

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‘alternative action’ pleading standard, none of the situations outlined by the Court are relevant for

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closely held corporations; however, that does not necessarily preclude the application of the

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alternative action pleading standard to closely-held entities . . . . Therefore, in order to state a

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claim for breach of the fiduciary duty of prudence, the Plaintiffs must [still] plausibly allege an

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alternative action that the Defendants could have taken consistent with securities laws and that a

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prudent fiduciary in the same circumstances would not have viewed as more likely to harm the

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fund than help it.”)

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CASE NO.

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16-cv-03723-RS

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Here, the gist of Vespa’s claim appears to be that it would have been more prudent for

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Singler and the other defendants not to have invested $250,000 in funds the ESOP obtained as a

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beneficiary of the estate of Peter Singler, Sr. in purchasing additional Company stock. While it

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may be the case that any purchase of stock in a related entity is subject to question, Vespa has not

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alleged sufficient facts to support a claim that it was a breach of fiduciary duty for the Company’s

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ESOP to make an investment in the stock of the Company. Nor, at this juncture, has Vespa

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alleged sufficient non-conclusory facts to show that the loss in value of the ESOP resulted from

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any fiduciary breach. These issues are only heightened by the “information and belief” issue

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identified above.

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That said, Singler’s suggestion that dismissal should be granted without leave to amend is

United States District Court
Northern District of California

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not tenable. Singler’s attack sounds in the adequacy the current allegations, and does not establish

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that no viable claim is possible. Accordingly, leave to amend will be granted.

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2. Second claim for relief—ERISA Self-dealing

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As currently pleaded, Vespa’s second claim for relief focuses on alleged conduct that, if

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proven, arguably may have constituted corporate mismanagement and possibly a breach of duty to

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the Company. This is not, however, a shareholder’s derivative suit. Vespa argues she and the

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class may nonetheless pursue such claims because the allegations of the complaint are insufficient

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to establish that the company is an “operating company,” as opposed to a mere “holding

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company.” While Vespa may be correct that the distinction is inherently factual, the current

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allegations support only a conclusion that the company is an operating company, and that as a

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result she and the putative class did not have an ownership interest in the Company assets

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sufficient to support this claim. Again, however, leave to amend is warranted.

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CASE NO.

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16-cv-03723-RS

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3. State law claims

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As Singler correctly points out, in the absence of viable federal claims, discretion weighs

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against adjudicating state law claims. In view of the fact that leave to amend is being granted,

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however, some observations regarding those claims may be in order. Even assuming ERISA

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preemption is not an issue if the state law claims are advanced in the alternative, or for any other

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reason, the third claim for relief for breach of fiduciary duties suffers from the same deficiencies

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as the federal claims. The fifth claim for relief, for breach of contract (and duplicatively, for

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breach of the covenant of good faith and fair dealing), fails to identify a relevant contract, its

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terms, or the nature of the breach. Accordingly, the state law claims are dismissed with leave to

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amend.

United States District Court
Northern District of California

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4. Declaratory relief.

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Vespa fails to allege facts demonstrating a present controversy exists as to the meaning and

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effect of the ESOP plan and any conflict between its provisions and the requirements of ERISA.

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Accordingly, her claim for declaratory relief must also be dismissed, with leave to amend.

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The motion to dismiss is granted. Any amended complaint shall be filed within 20 days of

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the date of this order. The Case Management Conference is hereby continued to December 22,

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2016 at 10:00 a.m.

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IT IS SO ORDERED.

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Dated: November 8, 2016
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______________________
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RICHARD SEEBORG
United States District Judge

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CASE NO.

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16-cv-03723-RS