Pension Benefit Guaranty Corporation v. Karp et al

Filing 30

ORDER Denying 20 21 Defendants' Motions for Leave to Amend Answer and Counterclaim. Based on the foregoing, the Court concludes that amendment of Defendants' answers would be futile. Therefore, the Court denies Defendants' motions for leave to amend. Signed by Judge Michael M. Anello on 5/14/2019. (rmc)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

SOUTHERN DISTRICT OF CALIFORNIA

10
11
12
13

PENSION BENEFIT GUARANTY
CORPORATION, as Statutory Trustee of
the Kachay Homes, Inc. Defined Benefit
Pension Plan

Case No.: 18cv652-MMA (AGS)
ORDER DENYING DEFENDANTS'
MOTIONS FOR LEAVE TO AMEND
ANSWER AND COUNTERCLAIM

Plaintiff,

14
15

v.

16

ILANA KARP and SAMUEL KARP,

17

[Doc. Nos. 20, 21]

Defendants.

18
19

Presently before the Court are Defendants Ilana Karp’s (“Ilana”) and Samuel

20

Karp’s (“Samuel”) motions to amend their answers to add counterclaims. Doc. Nos. 20,

21

21. Plaintiff Pension Benefit Guaranty Corporation (“Plaintiff” or “PBGC”) opposes the

22

motions. Doc. No. 22. Defendants did not reply. See Docket. The Court finds the

23

motions suitable for disposition without oral argument pursuant to Civil Local Rule

24

7.1.d.1. For the reasons stated herein, the Court DENIES both of Defendants’ motions.

25

BACKGROUND

26

On March 30, 2018, Plaintiff, as statutory trustee of the Kachay Homes, Inc.

27

Defined Benefit Pension Plan (the “Plan”), initiated this action on behalf of the Plan

28

under Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29
1
18cv652-MMA (AGS)

1

U.S.C. §§ 1301-1461, by filing a Complaint. Doc. No. 1 (“Compl.”). Plaintiff alleges

2

that Defendants Ilana and Samuel breached their ERISA fiduciary duties, causing the

3

Plan to suffer losses. Compl. ¶ 1. Specifically, Plaintiff alleges that Defendants

4

“breached their ERISA fiduciary duties by causing the Plan to engage in transfers and

5

loans that were not in the sole interest of participants and beneficiaries . . . and were

6

prohibited transactions.” Id. Additionally, Plaintiff alleges Defendants breached their

7

fiduciary duties “by failing to seek payment for the Plan of the transfer and loans.” Id.

8

On April 20, 2018, Defendants filed separate answers to the Complaint. Doc. Nos.

9

5, 6. On September 13, 2018, Magistrate Judge Major issued a Scheduling Order which,

10

among other things, provided that any motion to join other parties, to amend the

11

pleadings, or to file additional pleadings must be filed on or before October 23, 2018.

12

Doc. No. 19. On October 23, 2018, Defendants each filed a motion for leave to file an

13

amended answer to add counterclaims against Plaintiff for intentional infliction of

14

emotional distress and negligent infliction of emotional distress. Doc. Nos. 20, 21.

15

They allege that the Plan covered Kachay Homes, Inc. and Kachay Co., Inc.1

16

(“Kachay”) and that Defendants were co-trustees of the Plan. Doc. Nos. 20-2 at 9, 21-2

17

at 9. Kachay paid an annual premium to Plaintiff, which provides insurance to pension

18

plans in case of the pension’s failing and being unable to pay the full amount of benefits

19

due to the pension plan participants. Doc. Nos. 20-2 at 9, 21-2 at 9. Additionally,

20

Kachay made annual contributions to the Plan. Doc. Nos. 20-2 at 9, 21-2 at 9.
During the 2007 recession the Kachay companies were holding “four large spec

21
22

houses for sale to the public and had loans with several banks for financing of the

23

projects.” Doc. Nos. 20-1 at 9, 21-2 at 9. Due to the recession, banks “cut off funding

24

for Kachay’s projects,” and its projects “went into foreclosure and were taken away.”

25

Doc. Nos. 20-1 at 9-10, 21-1 at 9-10. Kachay was “in financial trouble and . . . at risk of

26
27
Kachay Co., Inc. has now been renamed Kachay Global Development, Inc. (“KGD”). Doc. Nos. 20-2
at 8-9, 21-2 at 8-9.
1

28

2
18cv652-MMA (AGS)

1

failure,” which meant the Plan “would also fail to be funded sufficiently to provide for

2

payment of benefits to the participants.” Doc. Nos. 20-1 at 10, 21-1 at 10. “To protect

3

the business and the pension, the Kachay Companies borrowed funds from the pension to

4

fund their ongoing operations, with the intention to return the funds. However, due to

5

their financial difficulties, the Kachay Companies were unable to repay some of these

6

loans prior to the date of the Plan termination.” Doc. Nos. 20-1 at 10, 21-1 at 10.

7

Additionally, Ilana and Samuel contributed personal assets to Kachay “to keep the

8

companies and pension solvent for as long as possible,” and “mostly paid the loans that

9

were taken by the company with their personal money.” Doc. Nos. 20-1 at 10, 21-1 at

10

10. Despite their efforts, “Kachay was no longer able to make premium payments to

11

[Plaintiff] or to fund the Plan contributions.” Doc. Nos. 20-1 at 10, 21-1 at 10.

12

On August 15, 2013, Plaintiff and Kachay agreed to terminate the Plan under a

13

“distress termination” as of February 4, 2013. Doc. Nos. 20-1 at 10, 21-1 at 10. Plaintiff

14

“spent three years requesting information from Kachay. During this time, Kachay

15

complied with numerous repetitive requests for information. [Ilana and Samuel]

16

responded in detail to each such request, with a great deal of effort and time consumed.

17

Kachay provided a voluminous amount of information to [Plaintiff].” Doc. Nos. 20-1 at

18

10, 21-1 at 10.

19

Ilana and Samuel, who are elderly, depend on their pension and social security

20

proceeds. Doc. Nos. 20-1 at 11, 21-1 at 11. They allegedly “have had concern and

21

distress over their treatment by [Plaintiff and] have worried that their benefits would be

22

taken away, leaving them with insufficient funds to pay their living expenses.” Doc. Nos.

23

20-1 at 11, 21-1 at 11. Ilana and Samuel allege that “[t]he delay in resolution of the

24

issues regarding the [Plan] was extremely distressing,” and that “[t]hey were concerned

25

over the implications of not being able to meet the demands [and] worried about their

26

potential liability based on groundless allegations.” Doc. Nos. 20-1 at 11, 21-1 at 11.

27

According to Defendants, they “suffered extreme concern over their fear that their

28

pension benefits could be taken away.” Doc. Nos. 20-1 at 11, 21-1 at 11.
3
18cv652-MMA (AGS)

LEGAL STANDARD

1
2

Federal Rule of Civil Procedure 15(a) provides that a party may amend its pleading

3

once as a matter of course within 21 days of serving the pleading, or 21 days after the

4

earlier of service of a responsive pleading or service of a Rule 12(b) motion. Fed. R. Civ.

5

P. 15(a). Otherwise, “a party may amend its pleading only with the opposing party’s

6

written consent or the court’s leave,” though the court “should freely give leave when

7

justice so requires.” Id. Courts consider five factors in assessing the propriety of an

8

amendment: (1) undue delay; (2) bad faith or dilatory motive; (3) repeated failure to cure

9

deficiencies by amendments previously permitted; (4) prejudice to the opposing party;

10

and (5) futility of amendment. Foman v. Davis, 371 U.S. 178, 182 (1962). These factors

11

do not “merit equal weight,” and “it is the consideration of prejudice to the opposing

12

party that carries the greatest weight.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d

13

1048, 1052 (9th Cir. 2003). “Absent prejudice, or a strong showing of any of the

14

remaining Foman factors, there exists a presumption under Rule 15(a) in favor of

15

granting leave to amend.” Id. However, “[f]utility of amendment can, by itself, justify

16

the denial of a motion or leave to amend.” Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir.

17

1995).

18
19

DISCUSSION
Plaintiff argues amendment would be futile but does not challenge any of the other

20

Foman factors. Doc. No. 22 at 5-13. As an initial matter, the Court finds that the other

21

factors are satisfied. First, Defendants filed their motion on the deadline to file motions

22

to amend pleadings and when discovery had just begun. As a result, there is an

23

insufficient showing of undue delay. Second, there is no indication of wrongful motive

24

in Defendants bringing the counterclaims. Third, Defendants have not previously

25
26
27
28
4
18cv652-MMA (AGS)

1

amended their answers. As to the fourth factor, Plaintiff does not allege amendment

2

would prejudice it.2 The Court, therefore, turns to futility of amendment.

3

As indicated previously, futility alone can justify the denial of a motion to amend.

4

Johnson v. Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004). Amendment is futile “only if

5

no set of facts can be proved under the amendment to the pleadings that would constitute

6

a valid and sufficient claim or defense.” Barahona v. Union Pac. R.R., 881 F.3d 1122,

7

1134 (9th Cir. 2018) (quotation marks and citation omitted). “‘If the underlying facts or

8

circumstances relied upon by a [party] may be a proper subject of relief, he ought to be

9

afforded an opportunity to test his claim on the merits.[’]” Breier v. N. Cal. Bowling

10

Proprietors’ Ass’n, 316 F.2d 787, 789-90 (9th Cir. 1963) (quoting Foman, 371 U.S. at

11

182).

12

Plaintiff first argues that amendment would be futile because the United States, not

13

Plaintiff, is the proper counter defendant for Defendants’ counterclaim. Doc. No. 22 at 6.

14

Federal courts lack jurisdiction over suits brought against the United States unless the

15

United States consented to be sued. See United States v. Mitchell, 445 U.S. 535, 538

16

(1980). The Federal Torts Claims Act (“FTCA”), however, grants federal district courts

17

exclusive jurisdiction over civil actions against the United States for damages “caused by

18

the negligent or wrongful act or omission of any employee of the Government while

19

acting within the scope of his office or employment . . . .” 28 U.S.C. § 1346(b)(1). The

20

FTCA “is the exclusive remedy for tortious conduct by the United States, and it only

21

allows claims against the United States. Although such claims can arise from the acts or

22

omissions of United States agencies . . . , an agency itself cannot be sued under the

23

FTCA.” FDIC v. Craft, 157 F.3d 697, 706 (9th Cir. 1998) (citing Shelton v. United

24
25
26
27
28

2

Originally these motions were set for hearing on December 3, 2018, but due to settlement discussions
which may fall through, the parties jointly requested the hearings be reset to May 20, 2019. See Doc.
Nos. 23, 25, 27. In the parties’ most recent request for a continuance, the parties sought only a different
date for the hearing and not other dates in the scheduling order. See Doc. No. 27. As such, it appears
that if the motions were granted the parties would either have sufficient time to complete discovery and
prepare for pretrial motions or would separately request a continuance. See Doc. No. 26.
5
18cv652-MMA (AGS)

1

States Customs Serv., 565 F.2d 1140, 1141 (9th Cir. 1977)). Here, the PBGC is a federal

2

agency that administers the pension plan termination insurance program under Title IV of

3

ERISA. See 29 U.S.C. §§ 1301-1461. Additionally, Defendants’ proposed

4

counterclaims assert the tort claims of negligent infliction of emotional distress and

5

intentional infliction of emotional distress. See Doc. Nos. 20-2, 21-2. As a result,

6

Defendants’ proposed tort claims may not be asserted against Plaintiff. See Craft, 157

7

F.3d at 706-07 (indicating that the FTCA waives sovereign immunity against only the

8

United States, and not United States agencies).

9

Even if the United States were the named counter defendant, Plaintiff argues

10

amendment would be futile because Defendants have not exhausted their administrative

11

remedies. Doc. No. 22 at 7. The FTCA “provides that an ‘action shall not be instituted

12

upon a claim against the United States for money damages’ unless the claimant has first

13

exhausted his administrative remedies.” McNeil v. United States, 508 U.S. 106, 107

14

(1993) (quoting 28 U.S.C. § 2675(a)). While the FTCA does not require exhaustion for

15

“such claims as may be asserted under the Federal Rules of Civil Procedure by third party

16

complaint, cross-claim, or counterclaim[,]” 28 U.S.C. § 2675(a), the Ninth Circuit has

17

construed this exception to apply only where “the principal action by the United States

18

was in tort and the counterclaim was compulsory in nature.” Spawr v. United States, 796

19

F.2d 279, 281 (9th Cir. 1986). The Ninth Circuit applies the “logical relationship” test to

20

determine whether a counterclaim is compulsory. Pochiro v. Prudential Ins. Co. of Am.,

21

827 F.2d 1246, 1249 (9th Cir. 1987) (applying Arizona law, but noting that the Ninth

22

Circuit uses the same standard). This test considers “whether the essential facts of the

23

various claims are so logically connected that considerations of judicial economy and

24

fairness dictate that all the issues be resolved in one lawsuit.” Id. (citation and internal

25

quotation marks omitted).

26

Plaintiff’s Complaint alleges that Defendants breached their ERISA fiduciary

27

duties “by causing the Plan to engage in transfers and loans that were not in the sole

28

interest of participants and beneficiaries” and “by failing to seek repayment for the Plan
6
18cv652-MMA (AGS)

1

of the transfers and loans[.]” Compl. ¶ 1. By contrast, Defendants’ intentional infliction

2

of emotional distress and negligent infliction of emotional distress counterclaims allege

3

that Plaintiff acted outrageously by processing Defendants’ pension and handling the

4

distress termination for three years. Doc. No. 20-2 at 11; 21-2 at 11. Thus, Plaintiff’s

5

claims arise out of Defendants’ conduct as trustees of the Plan and Defendants’

6

counterclaims arise out of Plaintiff’s conduct in terminating the Plan under a distress

7

termination. While all the claims generally relate to the Plan, they relate to different time

8

frames and a different set of facts. Further, it appears that none of the material facts of

9

Plaintiff’s claims would overlap with the material facts of Defendants’ counterclaims. As

10

such, the operative facts for these claims are not so logically connected that Defendants’

11

counterclaims would be considered compulsory.

12

Thus, Defendants are not excused from the FTCA’s administrative exhaustion

13

requirement. Defendants do not allege that they presented their tort claims to the

14

appropriate Federal agency. See Doc. Nos. 20-2 at 8-12, 21-2 at 8-12. “[T]he Supreme

15

Court [has] clarified that a prematurely filed FTCA claim must be dismissed even if the

16

[party] ultimately exhausts his administrative remedies before ‘substantial progress’ has

17

occurred in the case.” D.L. v. Vassilev, 858 F.3d 1242, 1245-46 (9th Cir. 2017) (citing

18

McNeil, 508 U.S. at 110, 113). Accordingly, amendment would be futile because

19

Defendants’ have not alleged exhaustion of administrative remedies.

20

Even if the United States were the named counter defendant and Defendants had

21

exhausted their administrative remedies, Plaintiff contends amendment would still be

22

futile because Defendants’ proposed counterclaims are barred by the discretionary

23

function exception to the FTCA. Doc. No. 22 at 9-12. “The discretionary function

24

exception precludes claims against the United States which are ‘based upon the exercise

25

or performance or the failure to exercise or perform a discretionary function or duty on

26

the part of a federal agency or an employee of the Government, whether or not the

27

discretion was abused.’” Nurse v. United States, 226 F.3d 996, 1001 (9th Cir. 2000)

28

(citing 28 U.S.C. § 2680(a)). The United States bears the burden of demonstrating the
7
18cv652-MMA (AGS)

1

challenged discretionary act involved “judgment . . . of the kind that the discretionary

2

function exception was designed to shield, namely only governmental actions and

3

decisions based on considerations of public policy.” Terbush v. United States, 516 F.3d

4

1125, 1129 (9th Cir. 2008) (internal quotation marks and citation omitted). “Where the

5

exception applies, the United States has not waived its sovereign immunity and [the

6

court] lack[s] subject matter jurisdiction over the claims.” Gonzalez v. United States, 814

7

F.3d 1022, 1027 (9th Cir. 2016). “The Supreme Court has prescribed a two-part test for

8

determining whether the discretionary function exception applies[:]” (1) the

9

“discretionary act” prong; and (2) the “policy judgment” prong. Id. (citing Berkovits v.

10

United States, 486 U.S. 531, 536-37 (1988)); Sabow v. United States, 93 F.3d 1445, 1451

11

(9th Cir. 1996).

12

Under the “discretionary act” prong, the Court asks whether the challenged

13

conduct “involve[d] an element of judgment or choice.” GATX/Airlog Co. v. United

14

States, 286 F.3d 1168, 1173 (9th Cir. 2002). “In addition to duties prescribed by the

15

common law torts ‘of the place where the act or omission occurred,’ federal employees

16

must follow ‘federal statute[s], regulation[s], or polic[ies that] specifically prescribe[] a

17

course of action for an employee to follow.’” Gonzalez, 814 F.3d at 1027 (citations

18

omitted). “In such cases, ‘the employee has no rightful option but to adhere to the

19

directive,’ and the discretionary function does not apply.” Id. (citation omitted). As a

20

result, conduct is not discretionary where it violates a mandatory directive and is not a

21

product of judgment or choice. Berkovits, 486 U.S. at 536. If the conduct involves an

22

element of judgment, the first prong is met.

23

Defendants’ allege that Plaintiff caused them acute emotional distress by making

24

numerous and repetitive requests for information, delaying for three years to process

25

Defendants’ plan benefits and in handling the Plan’s termination, and delaying in

26

resolving the issues regarding the Plan. Doc. Nos. 20-2 at 10-11; 21-2 at 10-11. Title IV

27

of ERISA provides Plaintiff with statutory authority to seek termination of a pension

28

plan, become its trustee, and to determine and pay benefits to plan participants and
8
18cv652-MMA (AGS)

1

beneficiaries. 29 U.S.C. §§ 1342(d)(1)(A)(vi), 1342(d)(1)(B)(i). Generally, the trustee of

2

a terminated plan is required to, among other things, require the plan sponsor, plan

3

administrator, contributing or withdrawn employer, or employee organization

4

representing plan participants to furnish any information reasonably needed to administer

5

the plan, and gives the trustee the discretion to do any other acts necessary “to continue

6

operations of the plan without increasing the potential liability of the PBGC, if such acts

7

may be done under the provisions of the plan.” 29 U.S.C. § 1342(d)(1)(A). “Aside from

8

these mandatory provisions, the trustee is given a number of discretionary powers that

9

allow it to administer the plan and manage its assets. Since the trustee’s discretion with

10

respect to these powers, which provide the bulk of its oversight authority, is not limited,

11

and plan trustees are bound by fiduciary duty to the extent that they exercise discretionary

12

authority with respect to the plan, the trustee’s fiduciary duties inhere in its general

13

oversight of the plan.” Pineiro v. Pension Benefit Guaranty Corp., 318 F. Supp. 2d 67,

14

81 (S.D.N.Y. 2003) (internal citation omitted). Moreover, “there is evidence that

15

terminating a plan is an extended process. The trustee is given the power to pay benefits,

16

and to receive payments for guaranteed benefits from PBGC, 29 U.S.C.

17

§ 1342(d)(1)(B)(i), (iii), without any indication that these duties might end, suggesting

18

that the trustee’s responsibilities continue as long as there are living participants and

19

survivors entitled to monthly benefit payments.” Id. at 82. Accordingly, the amount of

20

information and length of time in administering the Plan and its termination were a matter

21

of Plaintiff’s judgment or choice. Thus, the “discretionary act” prong is met.

22

Pursuant to the “policy judgment” prong, the Court determines “whether that

23

judgment is of the kind that the discretionary function exception was designed to shield.”

24

Berkovits, 486 U.S. at 536. The Court does not focus “on the agent’s subjective intent in

25

exercising the discretion conferred by statute or regulation,” but instead “on the nature of

26

the actions being taken and on whether they are susceptible to policy analysis.” United

27

States v. Gaubert, 499 U.S. 315, 325 (1991). “The decision need not actually be

28

grounded in policy considerations so long as it is, by its nature, susceptible to a policy
9
18cv652-MMA (AGS)

1

analysis.” GATX/Airlog Co., 286 F.3d at 1174 (internal quotation marks omitted). “[I]f a

2

regulation allows the employee discretion, the very existence of the regulation creates a

3

strong presumption that a discretionary act authorized by the regulation involves

4

consideration of the same policies which led to the promulgation of the regulations.”

5

Gaubert, 499 U.S. at 324. “When established governmental policy, as expressed or

6

implied by statute, regulation, or agency guidelines, allows a Government agent to

7

exercise discretion, it must be presumed that the agent’s acts are grounded in policy when

8

exercising that discretion.” Id. As a result, because the statutes governing Plaintiff allow

9

it to exercise discretion, it is presumed that Plaintiff’s acts are grounded in policy when

10

exercising that discretion. See id. Defendants have not argued otherwise. Accordingly,

11

the Court finds that the discretionary function exception applies and that the Court lacks

12

subject matter jurisdiction over Defendants’ counterclaims. See Gonzalez, 814 F.3d at

13

1027.

14

CONCLUSION

15

Based on the foregoing, the Court concludes that amendment of Defendants’

16

answers would be futile. Therefore, the Court DENIES Defendants’ motions for leave to

17

amend. Doc. Nos. 20, 21.

18
19

IT IS SO ORDERED.
Dated: May 14, 2019

20
21
22
23
24
25
26
27
28
10
18cv652-MMA (AGS)