Gough et al v. Tennyson et al

Filing 36

ORDER by Judge Hamilton denying 18 Motion to Dismiss. (pjhlc1, COURT STAFF) (Filed on 9/28/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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MANLEY GOUGH, et al.,

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United States District Court
Northern District of California

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Case No. 17-cv-2215-PJH

Plaintiffs,

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v.

ORDER DENYING MOTION TO
DISMISS

MICHAEL A. TENNYSON, et al.,
Defendants.

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Defendants’ motion to dismiss the first amended complaint (“FAC”) came on for

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hearing before this court on August 9, 2017. Plaintiffs appeared by their counsel Dan

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Feinberg, and defendants appeared by their counsel Joseph Faucher. Having read the

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parties’ papers and carefully considered their arguments and the relevant legal authority,

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the court hereby DENIES the motion.

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BACKGROUND
This is an ERISA case, filed as a proposed class action. Plaintiffs Manley Gough,

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John Gouveia, and Curtis Bryant are former employees of defendant Tennyson Electric,

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Inc. ("Tennyson"), a California corporation headquartered in Livermore, California. FAC

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¶¶ 6, 10-11. Plaintiffs are/were participants in the Tennyson Electric, Inc. Employee

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Stock Ownership Plan ("Tennyson ESOP"), an employee benefit plan as defined by

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ERISA § 3(3), 29 U.S.C. § 1002(3), and an "employee stock ownership plan" within the

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meaning of ERISA § 407(d)(6), 29 U.S.C. § 1107(d)(6). FAC ¶¶ 2, 6.

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Defendants Michael A. Tennyson, President and Secretary of Tennyson, and
Cathleen W. Tennyson, Vice President of Tennyson, are members of defendant Plan

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Committee of the Tennyson ESOP ("Plan Committee"), and are Trustees and fiduciaries

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of the ESOP. FAC ¶¶ 7-10. Tennyson is the sponsor and Administrator of the ESOP,

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and allegedly delegated its duties as Plan Administrator to the Plan Committee. FAC

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¶ 10.

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From 2005 to 2015, Tennyson was owned 100% by the Tennyson ESOP, which

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had purchased it from Michael and Cathleen Tennyson for $7.425 million in a 100%

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leveraged transaction. FAC ¶¶ 12-13. Plaintiffs allege that although the ESOP owned

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Tennyson from 2005 to 2015, Michael and Cathleen Tennyson continued to exercise

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"complete control" over the company during that time. FAC ¶ 14.

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Tennyson experienced a downturn in work as a result of the 2008 recession. FAC

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Northern District of California

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¶ 15. According to Tennyson's Form 5500s filed with the IRS, the value of the ESOP's

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company stock declined from $2.1 million in 2008 to $1.355 million in 2009, to $300,000

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in 2010, but then rebounded to $2.637 million in 2012. FAC ¶¶ 15-16.

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In 2014, Michael Tennyson decided to buy out the ESOP, and plaintiffs allege that

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"[d]efendants manipulated the value of the Tennyson stock to lower the share price to

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their advantage." FAC ¶ 17. Plaintiffs assert that while Tennyson's business remains

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strong, the ESOP valuation reported on the Plan's 2014 Form 5500 stated that the

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company stock was worth only $100,000. FAC ¶ 17.

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In 2015, Michael and Cathleen Tennyson, or “an entity controlled by them,"

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purchased the ESOP's company stock for $100,000, and distributed the proceeds to the

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ESOP participants. FAC ¶ 18. Plaintiffs claim that the valuation used for this transaction

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included "improper discounts, including a minority interest discount even though the

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ESOP owned 100% of the company.” FAC ¶ 19. They allege that Michael and Cathleen

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Tennyson also caused Tennyson to engage in "numerous transactions with related

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parties, i.e., other companies owned by Michael and Cathleen Tennyson[,]” and that

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these "related party" transactions were not in the best interests of Tennyson or the

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ESOP. FAC ¶ 20.

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Plaintiffs claim that defendants did not provide pension benefit statements or
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summary annual reports to plaintiffs in the years 2011-2014 as required by ERISA.

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FAC ¶¶ 21-23. Thus, plaintiffs assert, they were unaware of any valuation of the ESOP's

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company stock after 2010. FAC ¶ 21. Plaintiffs allege that Michael Tennyson told them

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he would provide the statements, which had been delayed by accounting issues and

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needed to be revised, and asked plaintiffs to "trust him." FAC ¶ 22-23.
Plaintiffs allege that in fact, the Plan's third-party administrator had prepared

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pension benefit statements for ESOP participants, including plaintiffs, and provided them

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to defendants in a timely manner, but defendants withheld the pension statements from

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Plan participants in order to conceal their manipulation of the value of Tennyson stock

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owned by the ESOP, and other fiduciary violations. FAC ¶¶ 24-26. Plaintiffs claim that

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Northern District of California

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they were unaware of the true state of facts until after they finally received the pension

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benefit statements in November 2015. FAC ¶ 27. Plaintiffs also assert that Michael and

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Cathleen Tennyson "ignored provisions in Plan documents and the stock purchase

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agreement requiring the appointment of independent directors and/or ESOP trustees."

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FAC ¶ 29.

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Plaintiffs allege that they have been deprived of retirement benefits as a result of

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violations of ERISA's fiduciary duty rules by the fiduciaries entrusted with overseeing the

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Plan. FAC ¶ 1. Plaintiffs filed the complaint in the present action on April 20, 2017, and

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filed the FAC on May 12, 2017. Plaintiffs seek to represent a class of approximately 35

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participants in the ESOP during the proposed class period, and an equal number of

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beneficiaries. FAC ¶ 31.

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The FAC alleges three causes of action – (1) a claim of breach of fiduciary duty

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under ERISA §§ 502(a)(2) and 502(a)(3), 29 U.S.C. §§ 1132(a)(2) and 1132(a)(3), arising

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from defendants' valuation of Tennyson ESOP stock and the implementation of

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defendants' decision to terminate the Plan; (2) a claim of engaging in a prohibited

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transaction forbidden by ERISA § 406(a)-(b), 29 U.S.C. § 1106(a)-(b), arising from the

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2015 transactions whereby Michael and Cathleen Tennyson regained ownership of

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Tennyson through Tennyson's purchase of the ESOP participants' stock for $100,000,
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asserting that the transactions constituted "a direct or indirect exchange . . . between the

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plan and a party in interest" or a party "whose interests are adverse to the interests of the

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plan or the interests of its participants;" and (3) a claim for statutory penalties under

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ERISA § 502(c)(1)(A), 29 U.S.C. § 1132(c)(1)(A), based on defendants' alleged failure to

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provide pension benefit statements for 2011-2014 until November 2015.
Defendants now seek an order dismissing the FAC for failure to state a claim.

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DISCUSSION

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A.

Legal Standard
A motion to dismiss under Rule 12(b)(6) tests for the legal sufficiency of the claims

alleged in the complaint. Ileto v. Glock, 349 F.3d 1191, 1199-1200 (9th Cir. 2003). A

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Northern District of California

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complaint may be dismissed under Rule 12(b)(6) if the plaintiff fails to state a cognizable

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legal theory, or has not alleged sufficient facts to support a cognizable legal theory.

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Somers v. Apple, Inc., 729 F.3d 953, 959 (9th Cir. 2013).

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While the court is to accept as true all the factual allegations in the complaint,

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legally conclusory statements, not supported by actual factual allegations, need not be

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accepted. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009); see also In re Gilead Scis.

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Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). The complaint must proffer sufficient

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facts to state a claim for relief that is plausible on its face. Bell Atlantic Corp. v. Twombly,

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550 U.S. 544, 555, 558-59 (2007) (citations and quotations omitted).

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A claim has facial plausibility when the plaintiff pleads factual content that allows

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the court to draw the reasonable inference that the defendant is liable for the misconduct

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alleged. See Iqbal, 556 U.S. at 678-79. Where dismissal is warranted, it is generally

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without prejudice, unless it is clear the complaint cannot be saved by any amendment.

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Sparling v. Daou, 411 F.3d 1006, 1013 (9th Cir. 2005).

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Review is generally limited to the contents of the complaint, although the court can

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also consider a document on which the complaint relies if the document is central to the

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claims asserted in the complaint, and no party questions its authenticity. See Sanders v.

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Brown, 504 F.3d 903, 910 (9th Cir. 2007). That is, the court may consider matters that
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are properly the subject of judicial notice, Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir.

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2005); Lee v. City of L.A., 250 F.3d 668, 688-89 (9th Cir. 2001), and may also consider

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exhibits attached to the complaint, see Hal Roach Studios, Inc. v. Richard Feiner & Co.,

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Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1989), and documents referenced in the

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complaint that form the basis of a the plaintiff's claims. See No. 84 Emp'r-Teamster Jt.

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Counsel Pension Tr. Fund v. Am. W. Holding Corp., 320 F.3d 920, 925 n.2 (9th Cir.

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2003).

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B.

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Defendants' Motion
Defendants argue that the first two causes of action should be dismissed because

the facts as pled do not state a claim under ERISA. They assert that contrary to the

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Northern District of California

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description of the structure of the ESOP's termination in the FAC, the governing plan

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documents for the ESOP show that the ESOP was first terminated, and that the shares

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were then distributed from the ESOP to Plan Participants. Thus, they assert, at the time

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of the sale of the shares, the shares were no longer ERISA Plan assets, and that their

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fiduciary role ended with the termination of the ESOP.

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Defendants argue that because the shares were no longer Plan assets at the time

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of the sale, it was the Internal Revenue Code ("IRC") – not ERISA – which supplied the

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applicable law. They argue that pursuant to IRC § 409(h)(2), the participants' shares

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could immediately be repurchased under a "fair valuation" formula. They argue further

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that while the IRC is similar to ERISA in that it sets forth requirements for employee

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benefit plans, the IRC does not provide for a private right of action, and thus, plaintiffs

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cannot bring a claim to enforce the IRC's "fair valuation" requirement.

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Defendants contend that the second cause of action (claim of “prohibited

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transactions”) should be dismissed for the further reason that there are no facts pled that

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satisfy the requirements of § 406(a) and/or § 406(b). Specifically, defendants argue,

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there are no facts pled showing any sale or exchange of property between the ESOP and

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a "party in interest," nor showing that any fiduciary dealt with any assets of the Plan in his

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or her own interest or for his or her own account.
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The court finds that the first and second causes of action raise factual issues that

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cannot be resolved in the absence of a fully developed record. For example, plaintiffs are

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in essence challenging the methods used in valuing the company and its shares.

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Assuming ERISA does apply, rather than the IRC – which is not clear at this stage of the

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litigation – the court has no ability to resolve the dispute without an evidentiary record.

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As for the third cause of action, defendants contend that Tennyson is the only
proper defendant, and as Plan Administrator can be liable for the relief provided under

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ERISA § 502(c)(a)(A). In addition, they argue that this claim should be dismissed to the

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extent it is based on alleged failures to timely distribute pension benefit statements for the

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years 2010 through 2013, on statute of limitations grounds. They concede that the claim

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Northern District of California

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as to the 2014 statements is not time-barred.

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The court finds either that the claims are timely, or that plaintiffs have pled the

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conditions necessary for the application of equitable estoppel, at least for purposes of the

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present motion. As for defendants' argument that this cause of action can be asserted

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only against Tennyson, this issue cannot be decided on a motion to dismiss because

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factual issues remain with regard to the identity of the Plan Administrator during the

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relevant period, and with regard to the Plan Administrator's alleged delegation of duties to

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the Plan Committee and its members.

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The motion is DENIED. The court finds that plaintiffs’ claims raise factual issues
that cannot be resolved in the absence of a fully-developed record.
CONCLUSION

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In accordance with the foregoing, defendants’ motion to dismiss the FAC for failure
to state a claim is DENIED.

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IT IS SO ORDERED.

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Dated: September 28, 2017

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__________________________________
PHYLLIS J. HAMILTON
United States District Judge
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