Acosta v. Saakvitne et al
Filing
412
ORDER GRANTING IN PART AND DENYING IN PART GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT; ORDER DENYING BOWERS AND KUBOTA'S MOTION FOR SUMMARY JUDGMENT AND JOINDER THEREIN BUT DISMISSING THE PORTION OF COUNT IX CHALLENGING THE VALIDITY OF LANGUAGE IN THE ESOP STOCK PURCHASE AGREEMENT re 351 , 359 , 362 . Signed by JUDGE SUSAN OKI MOLLWAY on 3/12/2021. (cib)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
MILTON AL STEWART, Acting
Secretary of Labor, United
States Department of Labor,
)
)
)
)
Plaintiff,
)
)
vs.
)
)
NICHOLAS L. SAAKVITNE, an
)
individual; NICHOLAS L.
)
SAAVITNE, A LAW CORPORATION, )
a California Corporation;
)
BRIAN BOWERS, an individual; )
DEXTER C. KUBOTA, an
)
individual; BOWERS + KUBOTA
)
CONSULTING, INC., a
)
corporation; BOWERS + KUBOTA )
CONSULTING, INC. EMPLOYEE
)
STOCK OWNERSHIP PLAN,
)
)
Defendants.
)
_____________________________ )
CIVIL NO. 18-00155 SOM-WRP
ORDER GRANTING IN PART AND
DENYING IN PART GOVERNMENT’S
MOTION FOR SUMMARY JUDGMENT;
ORDER DENYING BOWERS AND
KUBOTA’S MOTION FOR SUMMARY
JUDGMENT AND JOINDER THEREIN
BUT DISMISSING THE PORTION OF
COUNT IX CHALLENGING THE
VALIDITY OF LANGUAGE IN THE
ESOP STOCK PURCHASE AGREEMENT
ORDER GRANTING IN PART AND DENYING IN PART GOVERNMENT'S
MOTION FOR SUMMARY JUDGMENT; ORDER DENYING BOWERS
AND KUBOTA'S MOTION FOR SUMMARY JUDGMENT AND JOINDER THEREIN
BUT DISMISSING THE PORTION OF COUNT IX CHALLENGING
THE VALIDITY OF LANGUAGE IN THE ESOP STOCK PURCHASE AGREEMENT
I.
INTRODUCTION.
Brian Bowers and Dexter C. Kubota operated Bowers +
Kubota Consulting, Inc. (the “Company”), through which they
provided consulting, architectural, and engineering services.
Bowers and Kubota had separate trusts that owned the Company.
The two men created an Employee Stock Ownership Plan called
Bowers + Kubota Consulting, Inc. Employee Stock Ownership Plan
(the “ESOP”), and had their trusts sell their 100 percent
ownership interest in the Company to the ESOP.
The consulting
company was allegedly overvalued based on faulty data, meaning
that the ESOP allegedly agreed to pay more money than the Company
was worth.
The Secretary of Labor (the “Government”), proceeding
under the Employee Retirement Income Security Act of 1974
(“ERISA”), is suing the two individuals, the Company, the ESOP,
Nicholas L. Saakvitne (the first trustee of the ESOP), and the
first trustee’s law firm, alleging that the sale to the ESOP
improperly benefitted Bowers and Kubota to the detriment of the
ESOP.
The Government also claims that Saakvitne breached his
duties as the ESOP’s trustee and that Bowers and Kubota breached
their fiduciary duties to monitor Saakvitne and to sell the
Company for no more than fair market value.
Before the court are two motions for summary judgment.
The court grants in part the Government’s motion for partial
summary judgment, which seeks to set the dates when Bowers and
Kubota were acting as fiduciaries.
This court rules that Bowers
and Kubota acted as fiduciaries to the ESOP no later than
December 3, 2012, when they adopted the ESOP and appointed
Saakvitne as an independent fiduciary and the sole ESOP trustee,
with a retroactive date of January 1, 2012.
Questions of fact
preclude this court from determining on the present record
whether Bowers and Kubota acted as fiduciaries before December 3,
2012.
The Government’s motion is therefore denied in all other
respects.
2
The court denies Bowers and Kubota’s motion for summary
judgment, as well as the Company’s joinder therein.
However, the
court dismisses the portion of Count IX challenging the validity
of the indemnification language in the ESOP Stock Purchase
Agreement, as there is no actual case or controversy with respect
to that language.
II.
BACKGROUND.
A.
The Sale of ESOP Stock.
Bowers and Kubota’s respective trusts owned the
Company, which performed consulting, architectural, and
engineering work.
See Answer, ECF No. 67, PageID # 588;
Responsive Concise Statement, ECF No. 383, PageID # 8156.
Bowers
and Kubota as individuals indisputably controlled the Company.
In December 2011, URS Corporation sent the Company a
nonbinding indication of interest in purchasing the Company for
$15,000,000, plus or minus “cash and debt on the Company’s
balance sheet.”
See ECF No. 386-6, PageID #s 8478-80 (“URS has
estimated a preliminary purchase price of $15,000,000 in cash,
not including any cash and debt on the Company’s balance sheet .
. . .).
Taking that “cash and debt on the Company’s balance
sheet” into account, Bowers and Kubota say the offer was closer
to between $20,000,000 and $30,000,000.
See Depo. of Greg
Kniesel, ECF No. 388-5, PageID # 8734 (indicating that the URS
letter of interest, with adjustments, meant a preliminary
3
purchase price “in the neighborhood of $20 to $30 million
total”).
In January 2012, Bowers, Kubota, and Tom Nishihara, the
Company’s outside certified public accountant, met with Gary Kuba
of GMK Consulting, Inc.
9, PageID # 6962.
See Depo. of Dexter Kubota, ECF No. 363-
The Company hired GMK to determine what the
Company was worth for the purpose of evaluating the URS offer.
See Depo. of Brian Bowers, ECF No. 355-7, PageID # 6595.
On May
9, 2012, GMK valued the Company at between $31.2 and $46.8
million, see ECF No. 355-5, PageID #s 6576-87, relying on
information provided by Bowers, Kubota, and Nishihara, see Bowers
Depo., ECF No. 355-7, PageID # 6598.
The Company sent a copy of
the GMK report to URS, which then abandoned discussions about
acquiring the Company.
See Bowers Depo., ECF No. 355-7, PageID
#s 6597, 6600; ECF No. 355-6, PageID # 6588 (May 9, 2012, e-mail
from Bowers to Paul Vallone, of URS, attaching GMK valuation
report).
In June 2012, Bowers and Kubota started “moving in the
ESOP direction.”
ECF No. 355-8, PageID # 6607 (June 19, 2012, e-
mail from Bowers to Kuba and Kubota).
On July 26, 2012, Kuba of GMK told Bowers that GMK was
interested in assisting the Company with its transition to an
ESOP, if that was the direction the Company chose.
Kuba also
recommended Greg Hansen, of the Honolulu law firm of Case
4
Lombardi & Pettit, as a possible attorney.
See ECF No. 355-9,
PageID # 6609.
On September 2, 2012, the Company hired Hansen to
provide legal advice with respect to the Company’s possible sale
to the ESOP.
See ECF No., 355-10, PageID #s 6510-13.
That same
day, the Company asked Kuba to “pick[] up where you left off” and
complete a formal valuation appraisal for the Company.
See ECF
No. 355-8, PageID # 6607.
The following month, October 2012, Kuba indicated to
the Company that he felt “uncomfortable with . . . the structure
of the transaction” and did not want to complete a valuation for
ESOP purposes.
See Depo. of Gary Kuba, ECF No. 388-9, PageID
#s 8768-69; ECF No. 356-1, PageID # 6618 (October 19, 2012, email from Bowers to Hansen, explaining that “Kub[a] felt
uncomfortable completing our valuation” and quit on October 17,
2012).
Hansen then recommended that Bowers and Kubota meet
Greg Kniesel of Libra Valuation Advisors (“LVA”) when Bowers and
Kubota were on a business trip to Chicago.
PageID #s 6621, 6623.
See ECF No. 356-2,
On October 18, 2012, Bowers sent Kniesel a
copy of Kuba’s May report valuing the Company at between $31.2
and $46.8 million.
See ECF No. 355-5, PageID # 6559 (Oct. 18,
2012, e-mail from Bowers to Kniesel attaching Kuba’s May report);
Bowers Depo., ECF No. 355-7, PageID #s 6597.
5
On October 20, 2012, LVA sent an engagement letter to
the Company and “Brian Bowers, Trustee . . . of the Proposed
Bowers + Kubota Employee Stock Ownership Plan and Trust,” in
which LVA agreed to determine the fair market value of the ESOP
stock.
See ECF No. 356-3, PageID # 6627.
Bowers, Kubota, and Kniesel met on October 22, 2012.
See ECF No. 356-2, PageID # 6620 (October 12, 2012, e-mail
indicating that the meeting occurred that day); Depo. of Greg
Kniesel, ECF No. 388-5, PageID #s 8729-30 (indicating that the
meeting between himself and Bowers and Kubota occurred at a
private meeting room in a hotel and likely lasted several hours).
At some point, LVA was hired and then produced a report
dated November 21, 2012.
See ECF No. 356-3, PageID # 6627; ECF
No. 356-6, PageID #s 6637-40.
The report stated that the fair
market value of the Company was “in the range of $37,090,000 to
$41,620,000.”
Id., PageID # 6638.
According to Kniesel, this
value range was based in part on income statements and cash flow
information provided to LVA by the Company.
See Kniesel Depo.,
ECF No. 388-5, PageID # 8745.
On November 21, 2012, Bowers and Kubota met with the
Company’s attorney, Hansen.
Hansen’s agenda for the meeting
included a line item for “Trustee appointment--independent highly
recommended.”
ECF No. 356-8, PageID # 6656.
Hansen strongly
recommended that Saakvitne be the ESOP trustee, as Hansen had
6
known Saakvitne for many years and Saakvitne had experience
practicing law, dealing with business matters, and working with
ESOPs.
See Bowers Depo., ECF No. 355-7, PageID # 6602.
That
same day, Hansen sent Saakvitne an e-mail stating, “They agreed
to hire you on my advice.”
ECF No. 356-9, PageID # 6657.
The e-
mail further stated, “This is looking like a $12 million
preferred stock transaction.
There is a slight possibility they
will change their mind and do a 100% transaction for 40 million .
. . .”
Id.
The e-mail also noted, “Greg Kniesel [j]ust finished
the draft evaluation today.”
Id.
Finally, Hansen told Saakvitne
that Hansen was leaving town on December 19, 2012, and that any
deal would need to be completed by then.
Id.
On November 22, 2012, Bowers forwarded the LVA report
to the Company’s CPA, Tom Nishihara, stating, “Range is tighter
and falls within Gary[ Kuba]’s previous range which is good.”
ECF No. 356-7, PageID # 6654.
On November 24, 2012, Hansen asked Saakvitne to send
LVA his exact title so that LVA’s engagement letter would “run
directly to the Trustee” of the ESOP, rather than to the Company
and “Brian Bowers, Trustee . . . of the Proposed Bowers + Kubota
Employee Stock Ownership Plan and Trust,” as set forth in the
previous engagement letter.
See ECF No. 356-3, PageID # 6627;
ECF No. 357-1, PagID # 6661.
7
On November 26, 2012, the Company formally agreed with
Saakvitne that he would be the Company’s ESOP trustee.
See ECF
No. 358, PageID #s 6696-99 (Employee Stock Ownership Plan
Fiduciary Agreement Between Bowers + Kubota Consulting, Inc. and
Nicholas L. Saakvitne).
On December 3, 2012, Bowers and Kubota, as the only
members of the Company’s board of directors, signed a resolution
adopting the ESOP and appointing Saakvitne as an independent
fiduciary and the sole ESOP trustee, retroactively effective as
of January 1, 2012.
See ECF No. 357-3, PageID #s 6667-68.
On December 7, 2012, Saakvitne, as “Trustee of the
Proposed Bowers + Kubota Employee Stock Ownership Plan and
Trust,” executed a second LVA engagement letter.
357-2, PageID #s 6662-67.
See ECF No.
Before hiring Saakvitne, Bowers and
Kubota had had only one telephone discussion with him that may
have lasted from four to six hours.
355-7, PageID # 6602-03.
See Bowers Depo., ECF No.
However, Saakvitne billed a total of
only 1.2 hours for “11/23/12 CORRESPONDENCE WITH GREG HANSEN;
TELEPHONE CONFERENCE WITH MESSRS BOWERS, KUBOTA AND HANSEN
REGARDING ESOP TRANSACTION.”
ECF No. 357-7, PageID # 6691.
Possibly, Saakvitne wrote off some of his time in billing for the
meeting.
Given challenges by Bowers and Kubota to the
authenticity of Saakvitne’s bill, see ECF No. 382, PageID # 8142,
8
the court assumes that the telephone discussion lasted four to
six hours.
On December 10, 2012, Bowers sent Saakvitne an e-mail
indicating that he and Kubota (“the sellers,” according to
Bowers) were offering to sell the ESOP 100 percent of the
Company’s common stock for $41 million.
Bowers did not refer to
his and Kubota’s trusts, which actually owned the stock.
December 11, 2012, Saakvitne countered at $39 million.
On
Later
that day, Bowers sent an e-mail countering at $40 million, which
Saakvitne agreed to.
See ECF No. 357-4, PageID #s 6669-72.
On December 11, 2012, Bowers and Kubota, in their
capacities as the Company’s officers, adopted the Bowers + Kubota
Consulting, Inc. Employee Stock Ownership Plan (Effective As Of
January 1, 2012).
See ECF No. 357-5, PageID #s 6674-85.
The
Plan states, “The Company shall be the named fiduciary with
authority to control and manage the administration of the Plan,
except where the Plan otherwise delegates such responsibility to
the Board of Trustees.”
Id., PageID # 6679.
The Plan further
states, “The Plan will be administered by the Company and a Board
of Trustees composed of one or more individuals appointed by the
Board of Directors to serve at its pleasure and without
compensation.”
Id.
The Plan provides:
The Company shall have all powers necessary
to enable it to administer the Plan and the
9
Trust Agreement in accordance with their
provisions, including without limitation the
following: . . . (9) reviewing the
performance of the Trustee with respect to
the Trustee’s administrative duties,
responsibilities and obligations under the
Plan and Trust Agreement.
Id., PageID # 6680.
The Plan also states:
The Trustee shall have all powers necessary
to administer the Plan and the Trust
Agreement in accordance with their
provisions, including without limitation the
following:
(1) establishing a funding policy and method
for acquiring Company Stock and for otherwise
investing the Trust Assets in a manner that
is consistent with the objectives of the Plan
and the requirements of ERISA; and
(2) selecting an independent appraiser and
determining the Fair Market Value of Company
Stock as of such dates as it determines to be
necessary or appropriate.
Id., PageID #s 6680-81.
On December 14, 2012, LVA sent Saakvitne and Bowers a
valuation of the Company’s stock as of that date.
LVA noted its
understanding that the ESOP was going to purchase all 1,000,000
shares of the Company’s stock for $40,000,000, with the Brian J.
Bowers Trust, dated December 22, 2010, selling 510,000 shares and
the Dexter C. Kubota Trust, dated March 17, 2006, selling 490,000
shares.
This meant the purchase price per share was $40.00.
LVA
determined that the fair market price of each share was $40.15.
Accordingly, LVA determined that the price the ESOP was paying to
acquire the stock did not exceed its fair market value.
10
See ECF
No. 357-6, PageID #s 6686-90.
Also on December 14, 2012, Bowers
and Kubota’s respective trusts sold all of their 1,000,000 shares
to the Company’s ESOP for $40,000,000.
See ESOP Stock Purchase
Agreement, ECF No. 368-1, PageID #s 7680-96.
The sale was
financed by a loan by Bowers and Kubota to the ESOP, with the
ESOP giving Bowers and Kubota promissory notes for the money
owed.
The shares were the collateral for the loan.
Id., PageID
# 7680.
On or about October 15, 2013, the ESOP filed Form 5500,
its Annual Return/Report of Employee Benefit Plan, with the
Internal Revenue Service.
See ECF No. 364-6, PageID # 7285.
Apparently, the form was also submitted to the Department of
Labor via EFAST2, an electronic filing system discussed in BK
Exhibit 280.
See ECF No. 365-4.
According to Jerome Raguero of
the Department of Labor, EFAST2 is an automated system in which,
when a form is submitted, “there isn’t someone who is receiving
it, a person receiving it when it’s filed, that a person doesn’t
necessarily look [at] it at the time that it’s filed.”
30(b)(6)
Depo. of Jerome Raguero, ECF No. 363-1, PageID # 6783.
Bowers
and Kubota have asserted that Form 5500 was indeed read by an
EFAST2 contractor when received.
#s 7709-10.
See ECF No. 373, PageID
However, at the hearing on the motions addressed in
the present order, they were unable to identify admissible
evidence supporting this contention.
11
Instead, they are drawing
an inference that they say flows from the absence of a rejection
of the form by the EFAST2 system.
The supplemental attachments to Form 5500 explain the
transaction:
Closing on December 14, 2012, the Plan
purchased all of the issued and outstanding
shares (Shares) of common stock of the
Company and financed the purchase with two
loans (ESOP Loans) from the Sellers that are
evidenced by two executed Promissory Notes,
and pledged the Shares to the Sellers to
secure payment of the Notes. The Company
common stock is held in a trust (Trust)
established under the Plan. The loans are to
be repaid over a period of twenty five years
by Company contributions and/or distributed
dividends and/or earnings to the Plan. As
the Plan makes each payment of principal, an
appropriate percentage of stock will be
allocated to eligible employees’ accounts in
accordance with applicable regulations under
the Code. Shares vest fully upon allocation.
The loans are collateralized by the
unallocated shares of common stock and are
guaranteed by the Company. The lenders have
no rights against shares of common stock once
they are allocated under the ESOP.
Accordingly, the financial statements of the
Plan as of December 31, 2012, and for the
year ended December 31, 2012, present
separately the assets and liabilities and
changes therein pertaining to:
B The accounts of employees with vested
rights in allocated common stock (Allocated)
and
B Common stock not yet allocated to employees
(Unallocated).
ECF No. 364-6, PageID # 7301.
12
Attached to Form 5500 is the Independent Auditors’
Report and Financial Statements as of December 31, 2012, prepared
by Robert H.Y. Leong & Company.
#s 7296-7300.
See ECF No. 364-6, PageID
This report concluded that each company share, as
of December 31, 2012, had a fair market value of about $6.53 per
share, giving the 1,000,000 shares a total value of $6,530,000.1
See id., PageID #s 7309, 7313.
At the hearing, Bowers and Kubota
explained that the apparent drop in price was not a drop at all.
Instead, they say the Independent Auditors’ Report’s $6.53 per
share valuation reflects the value of the company offset by the
ESOP’s debt relating to the purchase of the stock.
This
explanation is consistent with the Independent Auditors’ Report’s
statement that “[t]he carrying value of the notes payable as of
December 31, 2012, was approximately $39,092,055, which
approximated fair value.”
See id., PageID # 7310.
From his appointment as the ESOP trustee through the
sale of the stock on December 14, 2012, Saakvitne billed for 30.1
hours of work.
See ECF No. 357-7, PageID #s 6691-6693.
1
Although
As of December 31, 2012, 44,611 shares had been allocated
to the Company’s employees, leaving 955,389 of the 1,000,000
shares unallocated. See id., PageID # 7306. The report noted
that the employer had contributed $2,459,873 to the plan, giving
the plan assets of $8,989,873, calculated by adding the value of
the shares ($6,530,000) and the employer contributions
($2,459,873). The report then subtracted the value of the notes
payable for the purchase of the stocks and interest on the notes
($39,129,540), giving the ESOP a deficit of $30,139,667. See
id., PageID # 7299.
13
Bowers and Kubota challenge the authenticity of this bill, this
court need not rely on it in addressing the present motions.
Instead, the number of hours worked by Saakvitne goes to the
issue of whether he properly represented and evaluated the value
of the ESOP or whether he was improperly swayed by what he may
have been told by the Company, matters not before the court on
the present motions.
B.
The Government’s Enforcement Action.
In December 2014, Michael Wen of the Department of
Labor was told by his supervisor to “find some ESOP cases in
Hawaii.”
Depo. of Michael Wen, ECF No. 388-1, PageID # 8585.
Wen then used the Government’s ERISA data system, asking it to
locate leveraged ESOPs with an asset value over $1 or $5 million.
The ERISA data system identified the Company’s ESOP.
Id.
Wen
says he then printed out the ESOP’s Form 5500 and the auditors’
notes for 2012 and 2013 and sent a document request to the ESOP.
Id., PageID #s 8586, 8587, 8592-92.
The Department of Labor had previously investigated
other ESOPs involving Saakvitne.
For example, beginning on
November 5, 2013, it had investigated the Kennedy Fabricating,
Inc. Employee Stock Ownership Plan.
See Depo. of Harold W.
LeBrocq, III, ECF No. 363-6, PageID # 6937.
The October 2015
Investigative Plan for Major Case with respect to the Kennedy
Fabricating ESOP indicates that the Department of Labor sought to
14
“[d]etermine if the named Trustee, Nicholas L. Saakvitne[,]
performed his due diligence with regards to the valuation
performed by Vantage Point Advisors.
by 11/20/15.
Documents to be subpoenaed
To be interviewed by 11/30/15.”
ECF No. 364-3,
PageID # 7230.
According to Jerome Raguero of the Department of Labor,
although an investigator is not prohibited from inquiring about
other ESOPs a service provider may have been involved with,
Department of Labor investigators do not generally make such
inquiries.
See Depo. of Jerome Raguero, ECF No. 363-1, PageID
# 6800; see also Johnson Depo., ECF No. 363-3, PageID #s 6840-41
(stating that, although investigators have the power to ask about
other ESOPs, “I don’t know . . . why we would,” and noting that
an investigator focuses on trying to resolve the case before the
investigator); Depo. of Robert Prunty, ECF No. 363-5, PageID
#s 6895, 6908 (testifying that investigators do not typically ask
about other ESOPs when conducting an investigation into an ESOP
and that he has not done so).
Harold LeBrocq investigated the Kennedy Fabricating
ESOP without asking Saakvitne about other ESOPs Saakvitne was
involved with.
See LeBrocq Depo., ECF No. 363-6, PageID # 6933.
Similarly, while investigating the ESOP at issue in this case,
Wen did not ask Saakvitne about other ESOPs Saakvitne was
involved with.
Wen explained that he was focused only on the
15
ESOP transaction before him.
See Wen Depo., ECF No. 363-2,
PageID #s 6824-25.
The Department of Labor had also investigated the Hot
Dog on a Stick Employee Stock Ownership Plan.
Robert Prunty, the
senior investigator assigned to that investigation, said that the
Department of Labor began that investigation when a service
provider gave them a lead around July 14, 2014.
See Prunty
Depo., ECF No. 363-5, PageID #s 6898-6900, 6906.
The Government
interviewed Saakvitne in July 2014 about the matter.
of Crisanta Johnson, ECF No. 363-3, PageID # 6850.
See Depo.
A Report of
Investigation dated September 19, 2017, indicates that the
investigation was opened because the plan sponsor and trustee
agreed to sell the company for $12 million after having earlier
agreed to sell it for $16 million.
# 7239.
See ECF No. 364-4, PageID
According to the report, “Saakvitne was the designated
fiduciary to more than 100 plans.”
Id., PageID # 7248.
The
report notes that, on June 8, 2015, the “LARO [the Department of
Labor’s Los Angeles Regional Office] opened a spin-off service
provider investigation of Saakvitne.”
Id.; Investigative Plan-
Major Case (Subject: Nicholas L. Saakvitne) dated October 7,
2016, ECF No. 364-5, PageID # 7253.
Miguel Paredes, a former Department of Labor
supervisory investigator, said, “I would expect that if an
investigator has uncovered what they think is a fiduciary breach
16
by a fiduciary, they would want to know whether or not that
fiduciary is a fiduciary of other plans because they would be
concerned that this provider is breaching a fiduciary duty in
other--in other--in the provision of services to other plans.”
Depo. of Miguel Paredes, ECF No. 363-4, PageID # 6889.
On or about June 15, 2016, Wen prepared a Major Case
Submission for the ESOP at issue in this case.
ECF No. 388-1, PageID # 8595.
See Wen Depo.,
That document explains, “The case
was opened due to more than $30 million decrease in the Company
stock valuation after the ESOP purchased 100% of the Company
stock in 2012.”
ECF No. 364-10, PageID # 7329.
In October 2016, the Government, the Company, and
Bowers and Kubota in their individual capacities, agreed to toll
the statute of limitations under ERISA effective October 16,
2017, to April 30, 2018.
See ECF No. 367-2, PageID #s 7607-12.
On April 27, 2018, the Government filed the Complaint
in this matter.
III.
See ECF No. 1.
STANDARD OF REVIEW.
Under Rule 56 of the Federal Rules of Civil Procedure,
summary judgment shall be granted when “the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).
Fed. R. Civ.
See Addisu v. Fred Meyer, Inc., 198 F.3d 1130, 1134
(9th Cir. 2000).
Summary judgment movants must support their
17
position concerning whether a material fact is genuinely disputed
by either “citing to particular parts of materials in the record,
including depositions, documents, electronically stored
information, affidavits or declarations, stipulations (including
those made for the purposes of the motion only), admissions,
interrogatory answers, or other materials”; or “showing that the
materials cited do not establish the absence or presence of a
genuine dispute, or that an adverse party cannot produce
admissible evidence to support the fact.”
Fed. R. Civ. P. 56(c).
One of the principal purposes of summary judgment is to identify
and dispose of factually unsupported claims and defenses.
Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
Summary judgment must be granted against a party that
fails to demonstrate facts to establish what will be an essential
element at trial.
See id. at 323.
A moving party without the
ultimate burden of persuasion at trial--usually, but not always,
the defendant--has both the initial burden of production and the
ultimate burden of persuasion on a motion for summary judgment.
Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102
(9th Cir. 2000).
The burden initially falls on the moving party to
identify for the court those “portions of the materials on file
that it believes demonstrate the absence of any genuine issue of
material fact.”
T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors
18
Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp.,
477 U.S. at 323).
“When the moving party has carried its burden
under Rule 56(c), its opponent must do more than simply show that
there is some metaphysical doubt as to the material facts.”
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986) (footnote omitted).
The nonmoving party may not rely on the mere
allegations in the pleadings and instead must set forth specific
facts showing that there is a genuine issue for trial.
Elec. Serv., 809 F.2d at 630.
T.W.
At least some “‘significant
probative evidence tending to support the complaint’” must be
produced.
Id. (quoting First Nat’l Bank of Ariz. v. Cities Serv.
Co., 391 U.S. 253, 290 (1968)); see also Addisu, 198 F.3d at 1134
(“A scintilla of evidence or evidence that is merely colorable or
not significantly probative does not present a genuine issue of
material fact.”).
“[I]f the factual context makes the non-moving
party’s claim implausible, that party must come forward with more
persuasive evidence than would otherwise be necessary to show
that there is a genuine issue for trial.”
Cal. Arch’l Bldg.
Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468
(9th Cir. 1987) (citing Matsushita Elec. Indus. Co., 475 U.S. at
587).
Accord Addisu, 198 F.3d at 1134 (“There must be enough
doubt for a ‘reasonable trier of fact’ to find for plaintiffs in
order to defeat the summary judgment motion.”).
19
In adjudicating summary judgment motions, the court
must view all evidence and inferences in the light most favorable
to the nonmoving party.
T.W. Elec. Serv., 809 F.2d at 631.
Inferences may be drawn from underlying facts not in dispute, as
well as from disputed facts that the judge is required to resolve
in favor of the nonmoving party.
Id.
When “direct evidence”
produced by the moving party conflicts with “direct evidence”
produced by the party opposing summary judgment, “the judge must
assume the truth of the evidence set forth by the nonmoving party
with respect to that fact.”
IV.
Id.
ANALYSIS.
A.
The Government’s Motion for Summary Judgment Is
Granted in Part and Denied in Part.
The Government’s motion seeks partial summary judgment
in the form of an order declaring that Bowers and Kubota were
fiduciaries with respect to the Company’s ESOP from January 1,
2012, the date the ESOP was retroactive to, through December 14,
2012, when the ESOP purchased the Company’s stock.
This court
therefore examines whether and to what extent Bowers and Kubota
exercised “discretionary authority or discretionary control
respecting management of such plan or exercise[d] any authority
or control respecting management or disposition of its assets.’”
Johnson v. Couturier, 572 F.3d 1067, 1076 (9th Cir. 1997)
(quoting 29 U.S.C. § 1002(21)(A)(i)).
20
Congress enacted ERISA to establish “minimum standards
. . . assuring the equitable character of [employee benefit]
plans and their financial soundness.”
29 U.S.C. § 1001(a).
ERISA requires that “authority to control and manage the
operation and administration of the plan” be vested in one or
more named fiduciaries, and that these fiduciaries abide by
“standards of conduct, responsibility, and obligation” to protect
the plan’s participants and beneficiaries.
1102(a)(1).
Id. §§ 1001(b),
These standards include the duties of loyalty and
care and a prohibition against self-dealing.
In other words,
employee plan fiduciaries must discharge plan duties “solely in
the interest of the participants and beneficiaries.
§§ 1104(a)(1), 1106(b)(1).
Id.
Fiduciaries are required to discharge
their duties with respect to a plan:
(A) for the exclusive purpose of:
(i) providing benefits to participants
and their beneficiaries; and
(ii) defraying reasonable expenses of
administering the plan;
(B) with the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent man 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;
(C) by diversifying the investments of the
plan so as to minimize the risk of large
losses, unless under the circumstances it is
clearly prudent not to do so; and
21
(D) in accordance with the documents and
instruments governing the plan insofar as
such documents and instruments are consistent
with the provisions of this subchapter and
subchapter III.
29 U.S.C. § 1104(a)(1).
ERISA “defines ‘fiduciary’ not in terms of formal
trusteeship, but in functional terms of control and authority
over the plan.”
Couturier, 572 F.3d at 1076 (quoting Mertens v.
Hewitt Assocs., 508 U.S. 248, 262 (1993)).
The Ninth Circuit
“construe[s] ERISA fiduciary status ‘liberally, consistent with
ERISA’s policies and objectives.’”
Id. (quoting Ariz. State
Carpenters Pension Tr. Fund v. Citibank, 125 F.3d 715, 720 (9th
Cir. 1997)); see also LeGras v. AETNA Life Ins. Co., 786 F.3d
1233, 1236 (9th Cir. 2015) (“we have repeatedly stated that ERISA
is remedial legislation that should be construed liberally to
protect participants in employee benefits plans.” (alteration
signals, quotation marks, and citation omitted)); Batchelor v.
Oak Hill Med. Grp., 870 F.2d 1446, 1449 (9th Cir. 1989) (“ERISA
is remedial legislation which should be liberally construed in
favor of protecting participants in employee benefit plans.”).
ESOP fiduciaries therefore include “not only those specifically
named in the employee benefit plan, 29 U.S.C. § 1102(a), but also
any individual who ‘exercises any discretionary authority or
discretionary control respecting management of such plan or
exercises any authority or control respecting management or
22
disposition of its assets.’”
Couturier, 572 F.3d at 1076
(quoting 29 U.S.C. § 1002(21)(A)(i)).
Members of an employer’s board of directors have ERISA
fiduciary obligations to the extent they have responsibility over
the ESOP and over the management or disposition of its assets.
See Couturier, 572 F.3d at 1076 (“We have accordingly recognized
that where members of an employer’s board of directors have
responsibility for the appointment and removal of ERISA trustees,
those directors are themselves subject to ERISA fiduciary duties,
albeit only with respect to trustee selection and retention.”).
The Department of Labor has provided guidance for fiduciaries on
a board of directors:
Members of the board of directors of an
employer which maintains an employee benefit
plan will be fiduciaries only to the extent
that they have responsibility for the
functions described in section 3(21)(A) of
the [ERISA, 29 U.S.C. § 1002(21)(a)]. For
example, the board of directors may be
responsible for the selection and retention
of plan fiduciaries. In such a case, members
of the board of directors exercise
“discretionary authority or discretionary
control respecting management of such plan”
and are, therefore, fiduciaries with respect
to the plan. However, their responsibility,
and, consequently, their liability, is
limited to the selection and retention of
fiduciaries (apart from co-fiduciary
liability arising under circumstances
described in section 405(a) of the Act[, 29
U.S.C. § 1105(a)]).
29 C.F.R. § 2509.75-8(D-4).
23
As this court previously recognized, fiduciary duties
may extend to the creation of an employee benefit plan.
No. 47, PageID #s 470-71.
See ECF
To determine whether Bowers and Kubota
were fiduciaries for purposes of ERISA, this court looks at
whether they functionally exercised control and authority over
the ESOP’s management.
This court construes ERISA fiduciary
status liberally, consistent with ERISA’s policies and
objectives.
Couturier, 572 F.3d at 1076; see also LeGras, 786
F.3d at 1236; Batchelor, 870 F.2d at 1449.
ERISA seeks to ensure
that fiduciaries who fund an ESOP acquire employer securities for
“adequate consideration.”
29 U.S.C. § 1108(e)(1).
Courts
recognize that “an ERISA plan and ERISA fiduciary
responsibilities thereunder, can exist even where a formal
employee benefit plan had not been adopted.”
F. Supp. 2d 936, 945 (N.D. Cal. 2012).
Solis v. Webb, 931
As the Ninth Circuit has
recognized, “A person’s actions, not the official designation of
his role, determines whether he enjoys fiduciary status,
regardless of what his agreed-upon contractual responsibilities
may be.”
CSA 401(K) Plan v. Pension Pros., Inc., 195 F.3d 1135,
1138 (9th Cir. 1999) (quotation marks and citation omitted).
In December 2011, when URS submitted a nonbinding
indication of interest in purchasing the Company for $15,000,000,
see ECF No. 386-6, PageID #s 8478-80, Bowers and Kubota tried to
figure out what the Company was worth, asking GMK to value it.
24
See Depo. of Dexter Kubota, ECF No. 363-9, PageID # 6962; Depo.
of Brian Bowers, ECF No. 355-7, PageID # 6595; ECF No. 355-4,
PageID #s 6555-58.
In May 2012, GMK valued the Company at
between $31.2 and $46.8 million based on information provided by
Bowers and Kubota.
See ECF No. 355-5, PageID #s 6576-87.
URS
ultimately decided not to pursue the purchase of the Company.
See Bowers Depo., ECF No. 355-7, PageID #s 6597, 6600; ECF No.
355-6, PageID # 6588 (May 9, 2012, e-mail from Bowers to Paul
Vallone, of URS, attaching GMK valuation report).
In June 2012, Bowers and Kubota started “moving in the
ESOP direction.”
ECF No. 355-8, PageID # 6607 (June 19, 2012, e-
mail from Bowers to Kuba and Kubota).
There is no evidence in
the record demonstrating that Bowers and Kubota exercised
discretionary authority, management, or control with respect to
the ESOP at or before that time, as the record does not show that
Bowers and Kubota had by then decided to form an ESOP.
On September 2, 2012, the Company hired Hansen to
provide legal advice with respect to the Company’s possible sale
to the ESOP.
See ECF No., 355-10, PageID #s 6510-13.
The
Company also asked Kuba to “pick[] up where you left off” and
complete a formal valuation appraisal for the Company.
No. 355-8, PageID # 6607.
LVA stepped in.
See ECF
Kuba later bowed out, and Kniesel of
See ECF No. 356-2, PageID # 6620; Depo. of Greg
Kniesel, ECF No. 388-5, PageID #s 8729-30.
25
On October 18, 2012,
Bowers sent Kniesel a copy of Kuba’s May 2012 report valuing the
Company at between $31.2 and $46.8 million.
See ECF No. 355-5,
PageID # 6559; Bowers Depo., ECF No. 355-7, PageID # 6597.
Based
on information Bowers and Kubota had provided to LVA, LVA valued
the company in the range of $37,090,000 to $41,620,000.
See ECF
No. 356-6, PageID # 6638.
On November 21, 2012, Bowers and Kubota met with the
Company’s attorney, Hansen, who recommended that Saakvitne be
selected as the ESOP’s trustee.
PageID # 6602.
See Bowers Depo., ECF No. 355-7,
ECF No. 356-9, PageID # 6657.
A few days later,
on November 26, 2012, the Company agreed to retain Saakvitne as
the ESOP trustee.
See ECF No. 358, PageID #s 6696-99 (Employee
Stock Ownership Plan Fiduciary Agreement Between Bowers + Kubota
Consulting, Inc. and Nicholas L. Saakvitne).
On December 3,
2012, Bowers and Kubota, the only members of the Company’s board
of directors, signed a resolution adopting the ESOP and
appointing Saakvitne as an independent fiduciary and the sole
ESOP trustee, retroactively effective as of January 1, 2012.
ECF No. 357-3, PageID #s 6667-68.
See
On December 11, 2012, Bowers
and Kubota, in their capacities as the Company’s officers,
adopted the Bowers + Kubota Consulting, Inc. Employee Stock
Ownership Plan (Effective As Of January 1, 2012).
357-5, PageID #s 6674-85.
26
See ECF No.
The above background establishes that Bowers and Kubota
did exercise discretionary management authority at some point
with respect to the formation of the ESOP and the selection of
Saakvitne as its trustee.
The question for this court is when
that could be said to have begun.
This court rules that Bowers
and Kubota had fiduciary obligations no later than December 3,
2012, the date on which, as the only members of the Company’s
board of directors, they signed a resolution adopting the ESOP
and appointing Saakvitne as an independent fiduciary and the sole
ESOP trustee, retroactively effective as of January 1, 2012.
ECF No. 357-3, PageID #s 6667-68.
See
But this court cannot tell on
the present record whether Bowers and Kubota exercised
“discretionary authority or discretionary control respecting
management of such plan or exercise[d] any authority or control
respecting management or disposition of its assets’” before
December 3, 2012.
Couturier, 572 F.3d at 1076.
It may be that Bowers and Kubota were exercising such
discretionary authority on, for example, November 26, 2012, when
the Company agreed that Saakvitne would be the ESOP trustee.
See
ECF No. 358, PageID #s 6696-99 (Employee Stock Ownership Plan
Fiduciary Agreement Between Bowers + Kubota Consulting, Inc. and
Nicholas L. Saakvitne).
It may also be that Bowers and Kubota
were exercising discretionary authority, management, and control
with respect to the ESOP when they sent LVA a copy of Kuba’s May
27
2012 report valuing the Company at between $31.2 and $46.8
million, as well as other financial data, which LVA may have
relied on in valuing the company in the range of $37,090,000 to
$41,620,000.
See ECF No. 356-6, PageID # 6638.
Saakvitne had to
evaluate the value of the Company in a very short time and may
have relied on the LVA valuation in determining that the
Company’s stock was being sold for fair market value.
But this
court cannot say on the present record that Bowers and Kubota’s
actions in that regard were necessarily fiduciary in nature.
In seeking to impose fiduciary status dating back to
January 1, 2012, the Government points to the backdating of the
ESOP to be effective as of that date.
As the party seeking
summary judgment, the Government has the burden of establishing
that Bowers and Kubota functioned as fiduciaries going back to
that date.
It is not clear how Bowers and Kubota exercised
discretionary authority or discretionary control respecting
management of a plan that was not even being considered at the
time.
Under the Ninth Circuit’s “functional” test, Bowers and
Kubota cannot be said to have functioned as fiduciaries as of
January 1, 2012.
The mere backdating of an employee benefit plan
does not, without more, mean that Bowers and Kubota exercised
“functional” control starting on that backdated date.
In fact,
the record does not demonstrate that Bowers and Kubota did
anything at all with respect to the ESOP on January 1, 2012.
28
To
the contrary, the record reflects that, on January 1, 2012,
Bowers and Kubota were evaluating the letter of interest from
URS.
Nothing in the record demonstrates that they were even
considering forming an ESOP at the time.
The backdating of the
ESOP instead appears to have been intended to benefit Company
employees, by making them eligible to receive Company shares as
of the backdated date of January 1, 2012.
Whether Bowers and Kubota had a fiduciary duty as of
January 1, 2012, may not ultimately affect any issue in this
case, as the Government has not indicated how Bowers or Kubota
breached fiduciary obligations with respect to actions taken
before the ESOP was being formed.
The earliest Bowers and Kubota could have had fiduciary
responsibilities was when they began the process of forming the
ESOP, a date that has not been definitively established on the
present record but must have been on or before December 3, 2012,
the date Bowers and Kubota signed a Company resolution adopting
the ESOP and appointing Saakvitne as an independent fiduciary and
the sole ESOP trustee.2
See ECF No. 357-3, PageID #s 6667-68.
2
This court is not ruling that Bowers and/or Kubota
breached any such fiduciary duty, as no such ruling is being
sought by the Government on this motion. See Reply, ECF No. 390,
PageID # 8789 (“The Secretary’s motion for partial summary
judgment does not seek a ruling from the Court that Defendants
breached their fiduciary duties or engaged in a prohibited
transaction.”).
29
This court is not persuaded by the Government’s
argument that, because § 1102(a)(1) requires that one or more
named fiduciaries have the “authority to control and manage the
operation and administration of the plan,” Bowers and Kubota must
have had fiduciary status from the date the ESOP was backdated
to.
Even construing fiduciary status liberally to benefit the
ESOP and its participants, the Government has not shown how
beginning fiduciary status before Bowers and Kubota had taken any
action to form the ESOP makes any sense.
While rejecting the Government’s argument, this court
is not adopting Bowers and Kubota’s contention that there is
already a ruling that they were not acting as fiduciaries.
Bowers and Kubota cite a discovery order by the Magistrate Judge
assigned to this case for that proposition.
However, that order
is actually consistent with this court’s present ruling and only
determines that certain documents sought via discovery were not
subject to the fiduciary exception to the attorney-client
privilege, not that Bowers and Kubota lacked fiduciary
obligations.
See ECF No. 281, PageID # 6085.
While Bowers and Kubota clearly had discretionary
authority with respect to the formation of the ESOP and the
selection of its trustee, there is a question of fact with
respect to whether such discretionary authority extended to the
sale of the stock to the ESOP.
According to the ESOP’s formation
30
document, the ESOP’s board of directors was to appoint the ESOP’s
trustee to “serve at its pleasure.”
Id., PageID # 6679.
The Plan states, “The Company shall be the named
fiduciary with authority to control and manage the administration
of the Plan, except where the Plan otherwise delegates such
responsibility to the Board of Trustees.”
Id.
It further
states, “The Plan will be administered by the Company and a Board
of Trustees composed of one or more individuals appointed by the
Board of Directors to serve at its pleasure and without
compensation.”
Id.
According to the Resolution of Board of Directors by
Unanimous Written Consent Without a Meeting, dated December 3,
2012, Saakvitne was appointed “as Independent Fiduciary and sole
member of the Board of Trustees under the Plan.”
ECF No. 386-3,
PageID # 8370.
The Plan states:
The Trustee shall have all powers necessary
to administer the Plan and the Trust
Agreement in accordance with their
provisions, including without limitation the
following:
(1) establishing a funding policy and method
for acquiring Company Stock and for otherwise
investing the Trust Assets in a manner that
is consistent with the objectives of the Plan
and the requirements of ERISA; and
(2) selecting an independent appraiser and
determining the Fair Market Value of Company
Stock as of such dates as it determines to be
necessary or appropriate.
31
Id., PageID #s 6680-81.
In keeping with those powers, Saakvitne,
after receiving the LVA report, negotiated the price of the stock
down from $41 million to $40 million.
#s 6669-72.
See ECF No. 357-4, PageID
This was the price that Hansen had told Saakvitne
100 percent of the shares might be sold for.
See ECF No. 356-9,
PageID # 6657 (Nov. 21, 2012, e-mail from Hansen to Saakvitne).
Whether Bowers and Kubota influenced the purchase price
via documents they selectively provided to Saakvitne and whether
Saakvitne exercised his independent judgment in determining the
fair market value of the Company are matters this court need not
address here.
In any event, those issues present questions of
fact.
The Government also argues that Bowers and Kubota had a
fiduciary duty to monitor Saakvitne’s actions from his
appointment on November 26, 2012, through the sale of the stock
on December 14, 2012.
According to the Plan,
[t]he Company shall have all powers necessary
to enable it to administer the Plan and the
Trust Agreement in accordance with their
provisions, including without limitation the
following: . . . (9) reviewing the
performance of the Trustee with respect to
the Trustee’s administrative duties,
responsibilities and obligations under the
Plan and Trust Agreement.
ECF No. 357-5, PageID # 6680.
The Department of Labor’s published guidance discusses
the fiduciary duty to monitor a trustee:
32
At reasonable intervals the performance of
trustees and other fiduciaries should be
reviewed by the appointing fiduciary in such
manner as may be reasonably expected to
ensure that their performance has been in
compliance with the terms of the plan and
statutory standards, and satisfies the needs
of the plan. No single procedure will be
appropriate in all cases; the procedure
adopted may vary in accordance with the
nature of the plan and other facts and
circumstances relevant to the choice of the
procedure.
29 C.F.R. § 2509.75-8(FR-17).
This court has already ruled in
this case that the power to appoint and remove a trustee gives
rise to a duty to monitor the trustee’s performance.
See ECF No.
47, PageID # 472 (citing Webb, 931 F. Supp. 2d at 953; Carr v.
Int’l Game Tech., 770 F. Supp. 2d 1080, 1090 (D. Nev. 2011)).
As
the district court noted in In re Calpine Corporation ERISA
Litigation, 2005 WL 1431506, at *3 (N.D. Cal. Mar. 31, 2005), the
duty arising from § 2509.75-8(FR-17) is “limited.”
Remaining for
trial is the issue of whether Bowers and Kubota actually breached
this limited fiduciary duty to monitor Saakvitne with respect to
the purchase of the Company’s stock.
33
B.
Bowers and Kubota’s Motion for Summary Judgment is
Denied.
Bowers and Kubota seek summary judgment on several
grounds, each of which this court is unpersuaded by.
1.
Questions of Fact Preclude Summary Judgment
Based on the Applicable Statutes of
Limitations.
Bowers and Kubota argue that the Government’s claims
are untimely.
Under section 413 of ERISA:
No action may be commenced under this
subchapter with respect to a fiduciary's
breach of any responsibility, duty, or
obligation under this part, or with respect
to a violation of this part, after the
earlier of–
(1) six years after (A) the date of the last
action which constituted a part of the breach
or violation, or (B) in the case of an
omission the latest date on which the
fiduciary could have cured the breach or
violation, or
(2) three years after the earliest date on
which the plaintiff had actual knowledge of
the breach or violation;
except that in the case of fraud or
concealment, such action may be commenced not
later than six years after the date of
discovery of such breach or violation.
29 U.S.C. § 1113.
With respect to the three-year limitations period set
forth in § 1113(2), the Supreme Court last year, in Intel
Corporation Investment Policy Committee v. Sulyma, 140 S. Ct.
768, 776 (2020), discussed when a plaintiff can be said to have
34
had “actual knowledge” of a breach or violation such that the
limitation period began running.
“Actual knowledge” requires
more than “potential, possible, virtual, conceivable,
theoretical, hypothetical, or nominal” knowledge.
Id.
Section
1113(2) “requires more than evidence of disclosure alone.
That
all relevant information was disclosed to the plaintiff is no
doubt relevant in judging whether he gained knowledge of that
information. . . .
To meet § 1113(2)’s ‘actual knowledge’
requirement, however, the plaintiff must in fact have become
aware of that information.”
Id. at 777.
In Sulyma, the Court noted that actual knowledge could
be proven in the usual way, such as through testimony and
inferences from circumstantial evidence.
Id. at 779.
The Court
also noted that its decision did “not preclude defendants from
contending that evidence of ‘willful blindness’ supports a
finding of ‘actual knowledge.’”
Id. (citing Global-Tech
Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011)).
In Global-Tech, the Court saw “willful blindness” as
occurring when a person subjectively believed there was a high
probability that a fact existed but deliberately avoided learning
about that existence.
563 U.S. at 769.
Sulyma recognizes that
willful blindness can support a finding of actual knowledge.
S. Ct. at 779.
35
140
The Government, the Company, and Bowers and Kubota in
their individual capacities agreed to toll the statute of
limitations under ERISA effective October 16, 2017, to April 30,
2018.
See ECF No. 367-2, PageID #s 7607-12.
Complaint was filed on April 27, 2018.
The present
See ECF No. 1.
Bowers
and Kubota argue that the statute of limitation set forth in
§ 1113(2) bars claims of ERISA violations that the Government had
actual knowledge of three years before October 16, 2017 (i.e., on
or before October 16, 2014).
Bowers and Kubota argue that the Government gained
actual knowledge of the alleged violations from Form 5500 (the
Annual Return/Report of Employee Benefit Plan) filed with the
Internal Revenue Service and submitted to the Department of Labor
via EFAST2 on October 15, 2013.
However, Sulyma states that
“§ 1113(2) requires more than evidence of disclosure alone.”
S. Ct. at 777.
140
Jerome Raguero of the Department of Labor
explains that EFAST2 is an automated system in which officials do
not automatically read submissions upon receipt.
30(b)(6) Depo.
of Jerome Raguero, ECF No. 363-1, PageID # 6783.
This raises a
question of fact as to whether the Government had actual
knowledge of the contents of Form 5500 or whether the EFAST2
submission amounted to only a disclosure.
Additionally, the court notes that Form 5500 shows only
a possible decrease in the value of the Company stock, rather
36
than establishing on its own an actual ERISA violation in the
form of a sale of stock for more than fair market value.
At the
hearing, Bowers and Kubota explained that what appears to be a
decrease in the value of the Company stock was actually an
accounting of the debt related to the loan taken out to purchase
the stock.
Whatever the explanation, this court cannot conclude
that Form 5500, without more, provides actual notice of a
possible ERISA violation.
Bowers and Kubota fail to show on the
present record that the Government had actual knowledge of the
alleged ERISA violations in this case from the Form 5500
submitted via the EFAST2 system.
A question of fact similarly precludes summary judgment
with respect to Bowers and Kubota’s argument that the
Government’s alleged willful blindness counts as actual knowledge
of the alleged ERISA violations.
Bowers and Kubota argue that
the Government willfully ignored Saakvitne’s conduct, having
received a tip in July 2014 that Saakvitne may have done
something improper with respect to the Hot Dog on a Stick ESOP.
See Depo. of Robert Prunty, ECF No. 363-5, PageID #s 6898-6900,
6906; Depo. of Crisanta Johnson, ECF No. 363-3, PageID # 6850.
Bowers and Kubota also argue willful blindness based on the
Kennedy Fabricating investigation, which began in November 2013,
and led to a November 2015 investigation into Saakvitne.
See
Depo. of Harold W. LeBrocq, III, ECF No. 363-6, PageID # 6937;
37
ECF No. 364-3, PageID # 7230.
Citing Miguel Paredes, a former
Department of Labor supervisory investigator, Bowers and Kubota
argue that the Government should have investigated Saakvitne’s
conduct in other cases, including this one.
Paredes testified,
“I would expect that if an investigator has uncovered what they
think is a fiduciary breach by a fiduciary, they would want to
know whether or not that fiduciary is a fiduciary of other plans
because they would be concerned that this provider is breaching a
fiduciary duty in other--in other--in the provision of services
to other plans.”
# 6889.
Depo. of Miguel Paredes, ECF No. 363-4, PageID
What an investigator might want to know about other
ESOPs is not actual knowledge for purposes of § 1113(2).
There are questions of fact as to whether the Hot Dog
on a Stick and Kennedy Fabricating investigations show willful
blindness on the Government’s part.
Raguero of the Department of
Labor testified that, although an investigator may inquire about
other ESOPs that a particular service provider may be involved
with, Department of Labor investigators do not generally make
such inquiries.
See Depo. of Jerome Raguero, ECF No. 363-1,
PageID # 6800; see also Johnson Depo., ECF No. 363-3, PageID
#s 6840-41; Prunty Depo., ECF No. 363-5, PageID #s 6895, 6908.
For example, with respect to the Kennedy Fabricating
investigation, LeBrocq testified that, when he was investigating
the Kennedy Fabricating ESOP, he did not ask Saakvitne about
38
other ESOPs Saakvitne was involved with.
No. 363-6, PageID # 6933.
See LeBrocq Depo., ECF
Similarly, Wen testified that, when he
was investigating the ESOP at issue in this case, he did not ask
Saakvitne about other ESOPs Saakvitne was involved with.
Wen
explained that he focused only on the ESOP transaction he was
working on.
See Wen Depo., ECF No. 363-2, PageID #s 6824-25.
On this motion, Bowers and Kubota fail to establish
that other investigations were red flags to which the Government
was willfully blind.
It might be that it would have been a good
practice for individuals to have considered Saakvitne’s
involvement with other ESOPs, but willful blindness requires more
than a failure to do what is best.
At a minimum, there is a
question of fact as to whether the Government investigators were
deliberately ignoring those alleged red flags or were instead
reasonably focusing on the potential ERISA violations they were
investigating.
2.
There is a Question of Fact as to Whether
Bowers and Kubota Breached Their Duty to
Monitor Saakvitne.
Bowers and Kubota’s summary judgment motion argues
that, as the Company’s board members, they prudently appointed
Saakvitne as the ESOP’s trustee and that there is no evidence
supporting the Government’s contention that Bowers and Kubota
breached their fiduciary duty to monitor Saakvitne, who had the
39
sole discretion to purchase the Company’s stock.3
In other
words, they argue that they cannot be liable for having breached
a fiduciary duty to monitor Saakvitne because there is no
evidence that they “knew or should have known” about any trustee
misconduct, yet failed to take steps to remedy the situation.
That argument raises factual issues that need to be resolved at
trial.
In denying Bowers and Kubota’s earlier motion to
dismiss, this court ruled,
“A fiduciary with a duty to monitor a trustee
is liable for the trustee’s fiduciary breach
if he ‘knew or should have known’ about the
trustee’s misconduct and failed to take steps
to remedy the situation.” Solis v.
Couturier, No. 2:08-cv-02732-RRB-GGH, 2009 WL
1748724, at *7 (E.D. Cal. June 19, 2009)
(quoting Henry v. Frontier Indus., Inc., 863
F.2d 886, 1988 WL 132577, at *4 (9th Cir.
1988) (unpublished decision)).
ECF No. 47, PageID # 474.
In October 2012, LVA sent an engagement letter to the
Company and “Brian Bowers, Trustee . . . of the Proposed Bowers +
Kubota Employee Stock Ownership Plan and Trust,” stating that LVA
would determine the fair market value of the ESOP stock.
3
See ECF
Whether Saakvitne’s appointment was prudent is not a
matter that generally lends itself to a summary judgment ruling.
This court has ruled that Bowers and Kubota acted as fiduciaries
in appointing Saakvitne. Whether Bowers and Kubota breached that
duty is similar to whether they acted prudently in appointing
him. There is a question of fact as to whether, in hiring
Saakvitne just a few weeks before the sale of stock closed, they
breached their fiduciary duty.
40
No. 356-3, PageID # 6627.
On November 21, 2012, LVA completed
its report, valuing the Company “in the range of $37,090,000 to
$41,620,000.”
See ECF No. 356-6, PageID #s 6637-40.
LVA reached
this conclusion based in part on income statements and cash flow
information provided to LVA by the Company (which was controlled
by Bowers and Kubota).
See Kniesel Depo., ECF No. 388-5, PageID
# 8745.
On November 21, 2012, following a meeting in which
Hansen recommended that Bowers and Kubota hire Saakvitne, Hansen
sent Saakvitne an e-mail stating, “They agreed to hire you on my
advice.”
ECF No. 356-9, PageID # 6657.
The e-mail further
stated, “This is looking like a $12 million preferred stock
transaction.
There is a slight possibility they will change
their mind and do a 100% transaction for 40 million . . .”
Id.
The e-mail also noted that LVA had just finished a draft
valuation.
Id.
Three days later, on November 24, 2012, Hansen asked
Saakvitne to send LVA his exact title so that LVA’s engagement
letter would “run directly to the Trustee.”
PageID # 6661.
ECF No. 357-1,
Before hiring Saakvitne, Bowers and Kubota had a
single telephone discussion with him that may have been lengthy.
See Bowers Depo., ECF No. 355-7, PageID # 6602-03.
On November 26, 2012, the Company and Saakvitne agreed
that he would be the Company’s ESOP trustee.
41
See ECF No. 358,
PageID #s 6696-99 (Employee Stock Ownership Plan Fiduciary
Agreement Between Bowers + Kubota Consulting, Inc. and Nicholas
L. Saakvitne).
Then, on December 3, 2012, Bowers and Kubota, the
only members of the Company’s board of directors, signed a
resolution adopting the ESOP and appointing Saakvitne as an
independent fiduciary and as the sole ESOP trustee, retroactively
effective as of January 1, 2012.
See ECF No. 357-3, PageID
#s 6667-68.
On December 10, 2012, Bowers sent Saakvitne an e-mail
indicating that he and Kubota, as “the sellers,” were offering to
sell the ESOP all of the common stock of the Company for $41
million.
Saakvitne countered at $39 million.
Ultimately,
Bowers, Kubota, and Saakvitne agreed to a price of $40 million.
See ECF No. 357-4, PageID #s 6669-72.
The Government argues that Saakvitne failed to
adequately investigate the value of the Company and instead
accepted the value given to him by the Company, Bowers, and
Kubota, going so far as to change the LVA report recipient and
proceeding with a $40,000,000 sale in less than a month.
Bowers
and Kubota contend that Saakvitne had unfettered discretion to
hire LVA.
But Saakvitne may have had in mind Hansen’s statement
of November 21, 2012, indicating that any deal had to be
completed by December 19, 2012, leaving little time to get
another opinion other than LVA’s.
42
ECF No. 356-9, PageID # 6657.
This court is left with a question of fact as to whether Bowers
and Kubota knew or should have known whether Saakvitne was
relying heavily on the LVA report, which was based on figures
they themselves had given LVA.
In other words, it is not clear
from the record that Saakvitne properly and independently
determined that the Company stock was worth $40,000,000, or that
Bowers and Kubota knew of any alleged deficiency in that
determination.
To be more specific, this court notes that it is
unclear from the record whether the LVA report given to Saakvitne
was based on faulty data, whether the sale price was too high,
whether Bowers and Kubota knew or should have known that, and
whether they failed to take steps to remedy the situation.
While
the Government could certainly have provided more detail
regarding its claim in this regard, Bowers and Kubota have the
burden on their own motion of showing entitlement to summary
judgment.
Bowers and Kubota may indeed be correct that the
valuation report attached to Form 5500 showed a decrease in value
only because the ESOP had acquired substantial debt in purchasing
the stock.
However, questions of fact exist on the current
record that preclude summary judgment with respect to their duty
to monitor Saakvitne.
43
3.
ERISA § 502(a)(5) Claims (29 U.S.C.
§ 1132(a)(5)).
Bowers and Kubota argue that, to the extent the
Government seeks to hold them liable under ERISA § 502(a)(5), 29
U.S.C. § 1132(a)(5), the Government may only recover funds from
them that are attributable to the direct payments to their
revocable trusts by the ESOP.
See ECF No. 360, PageID # 6733.
That section provides that a civil action may be brought “except
as otherwise provided in subsection (b), by the Secretary (A) to
enjoin any act or practice which violates any provision of this
subchapter, or (B) to obtain other appropriate equitable relief
(i) to redress such violation or (ii) to enforce any provision of
this subchapter.”
29 U.S.C. § 1132(a)(5).4
Bowers and Kubota
4
ERISA § 409 provides for personal liability for breaches
of fiduciary duties:
(a) Any person who is a fiduciary with respect to a
plan who breaches any of the responsibilities,
obligations, or duties imposed upon fiduciaries by this
subchapter shall be personally liable to make good to
such plan any losses to the plan resulting from each
such breach, and to restore to such plan any profits of
such fiduciary which have been made through use of
assets of the plan by the fiduciary, and shall be
subject to such other equitable or remedial relief as
the court may deem appropriate, including removal of
such fiduciary. A fiduciary may also be removed for a
violation of section 1111 of this title.
(b) No fiduciary shall be liable with respect to a
breach of fiduciary duty under this subchapter if such
breach was committed before he became a fiduciary or
after he ceased to be a fiduciary.
29 U.S.C. § 1109.
44
argue that, under Montanile v. Board of Trustees of the National
Elevator Industry Health Benefit Plan, 577 U.S. 136 (2016), the
Government may only recover funds from them pursuant to
§ 1132(a)(5) that they directly received from the ESOP, or
$3,226,013.84.
See ECF No. 360, PageID # 6733.
They say that
any equitable remedy is limited to those funds because, on March
1, 2013, the Company agreed to assume the ESOP’s obligations to
pay the respective Bowers and Kubota trusts for the Company’s
stock in exchange for the ESOP’s agreement to pay the Company
$37,313,352.88 though a loan financed by the Company.
See ECF
No. 381-9, PageID #s 8080-89 (executed by Saakvitne as the ESOP
trustee and Bowers as the Company’s president).
In other words,
they say that no equitable remedy is available under ERISA for
funds paid after March 1, 2013, because any money paid after that
date was paid by the Company, not the ESOP.
Bowers and Kubota
are stretching the holding of Montanile.
Montanile was injured by a drunk driver and incurred
more than $120,000 in medical expenses, which his ERISA plan
paid.
Montanile sued the drunk driver and obtained a $500,000
settlement, which was used to pay his attorney $260,000 for fees
and expenses.
Because his ERISA plan contained a subrogation
clause, his plan administrator sought reimbursement of the
medical bills the plan had paid.
the dispute with the plan.
Montanile attempted to settle
When settlement negotiations broke
45
down, Montanile’s attorney notified the plan’s board of trustees
that the $240,000 remaining in the attorney’s client trust
account would be distributed to Montanile in 14 days unless the
attorney received an objection.
When no such objection was
received, the attorney turned over the $240,000 to Montanile.
The plan’s board sued Montanile six months later, asking for an
equitable lien on the settlement funds and an order enjoining
Montanile from dissipating such funds, some of which Montanile
conceded he still had.
577 U.S. at 140-41.
ERISA § 502(a)(3), at issue in Montanile, authorizes
plan fiduciaries like the a plan’s board of trustees to bring
civil suits “to obtain other appropriate equitable relief . . .
to enforce . . . the terms of the plan.”
29 U.S.C. § 1132(a)(3).
This language is the same as that used in ERISA § 502(a)(5), at
issue in this case, which authorizes the Government to do the
same.
29 U.S.C. § 1132(a)(5).
Montanile recognized that the
basis of the board’s claim was equitable and gave rise to an
equitable lien attaching to the settlement funds.
144.
577 U.S. at
The Supreme Court examined whether the board would still be
seeking an equitable remedy if Montanile had spent all of the
funds and the board then sought recovery from his general assets.
The Supreme Court noted that, ordinarily, equitable
liens may only be placed on “specifically identified funds that
remain in the defendant’s possession or against traceable items
46
that the defendant purchased with the funds (e.g., identifiable
property like a car).”
The Court said that, when a person spends
the entire identifiable fund on nontraceable items such as food
or travel, there can be no equitable lien, and a plaintiff like
the board has only a legal remedy to recover on a personal claim
against a defendant like Montanile.
Id. at 144-45.
However, if
the person comingles the identifiable funds with another pot of
funds, such as by putting it into a bank account, a plaintiff
like the board can recover the amount of the lien from the pot
via an equitable lien.
Id. at 144-45.
The Supreme Court
remanded the case for the district court to determine how much
money had been dissipated by Montanile.
Id. at 151.
Relying on Montanile, Bowers and Kubota argue that only
the funds directly paid by the ESOP to Bowers and Kubota’s trusts
are subject to an equitable lien.
They say that any money being
paid to the trusts by the Company (which assumed the ESOP’s
liability in exchange for a note from the ESOP to the Company) is
not subject to an equitable lien.
Montanile does not go that
far.
Montanile applies to identifiable money on which an
equitable lien can be placed.
source of that money.
The case does not focus on the
Here, the Government is arguing that the
ESOP agreed to pay Bowers and Kubota’s trusts too much money for
the stock purchased.
The Government therefore seeks either an
47
equitable lien on money in excess of what it says should have
been paid, or rescission of the stock sale.
Nothing before this
court indicates that Bowers and Kubota spent all of the money
received from the stock sale on consumable items such as food or
travel.
The Company agreed to assume the liabilities of the
ESOP, and Bowers and Kubota control the Company.
Under those
circumstances, money paid to Bowers and Kubota’s trusts arising
out of the stock sale might be part of identifiable funds from an
allegedly impermissible transaction for which an equitable lien
might still attach.
This court has wide latitude in crafting equitable
remedies.
Bowers and Kubota do not, on the present record,
demonstrate that the Government is barred from obtaining
disgorgement of allegedly improper profits.
See Harris Tr. &
Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 250 (2000)
(recognizing in the ERISA § 502(a)(3) context that disgorgement
of proceeds is available when restitution of property is not).
It may well be possible to determine whether and to what extent
Bowers and Kubota have allegedly been unjustly enriched.
They do
not show that their liability is necessarily limited to the
$3,226,013.84 they say they received directly from the ESOP.
4.
Indemnification.
Bowers and Kubota seek summary judgment with respect to
indemnification provisions in three of the ESOP’s documents,
48
arguing that Count IX of the Complaint seeks a determination that
they have been improperly indemnified.
See ECF No. 360, PageID
# 6735 (“Section IX of the Complaint alleges that Bowers and
Kubota have been improperly indemnified in violation of ERISA.”).
However, the relief sought in the Complaint is not a ruling that
Bowers and Kubota have been improperly indemnified.
Instead,
Count IX of the Complaint seeks a ruling that certain provisions
in the ESOP documents are void as against public policy under
ERISA § 410, 29 U.S.C. § 1110.
ERISA § 410 states that “any
provision in an agreement or instrument which purports to relieve
a fiduciary from responsibility or liability for any
responsibility, obligation, or duty under this part shall be void
as against public policy.”5
Nothing in the record indicates that
either Bowers or Kubota has been improperly indemnified under any
of the three ESOP documents, and Count IX does not appear to so
allege.
Because Count IX does not appear to assert a claim
against Bowers or Kubota, it makes no sense to award summary
judgment to Bowers and Kubota on that claim.
5
The court therefore
Bowers and Kubota have sought indemnification from the
Company pursuant to its Amended and Restated Articles of
Incorporation. See ECF No. 367-5, PageID # 7621. The Company
agreed to provide such indemnification with respect to the
advancement of defense fees and expenses pursuant to those
articles of incorporation. See ECF No. 367-7. PageID # 7632.
The indemnification provision in the Company’s Amended and
Restated Articles of Incorporation is not at issue in this case,
as the Complaint does not seek to have it declared void. See ECF
No. 1, PageID #s 21-22.
49
denies Bowers and Kubota’s motion to the extent they seek summary
judgment with respect to Count IX.
However, with respect to the portion of Count IX
challenging the indemnification language in one of the documents-the ESOP Stock Purchase Agreement, the court cannot identify any
actual case or controversy.
Bowers and Kubota say they have
never sought indemnification under that document, and the
language in that document has expired by its terms.
The portion
of Count IX challenging that language is dismissed.
Whether the other indemnity provisions in the Bowers +
Kubota Consulting, Inc., Employee Stock Ownership Trust Agreement
or the ESOP are or are not void remains for adjudication, and
that adjudication may affect other parties like Saakvitne.
The
court nevertheless discusses those provisions here in aid of
avoiding misunderstandings in future proceedings.
a.
Bowers + Kubota Consulting, Inc.,
Employee Stock Ownership Trust
Agreement.
The Bowers + Kubota Consulting, Inc., Employee Stock
Ownership Trust Agreement provides:
Subject to the applicable provisions of
ERISA, the Company shall indemnify the
Trustee and its officers, directors,
employees and agents (“Indemnitees”) for any
loss, cost, expense or other damage,
including attorney’s fees, suffered by any of
the Indemnit[e]es and resulting from or
incurred with respect to any legal
proceedings related in any way to the
performance of services by any one or more of
50
the Indemnit[e]es pursuant to this Trust
Agreement. The indemnification provided for
in this Paragraph shall include, but not be
limited to: (a) any action taken or not taken
by any of the Indemnitees at the direction or
request of the Company, any agent of the
Company, or any committee or fiduciary under
the Plan or Trust; and (b) all costs and
expenses incurred by the Indemnitees in
enforcing the indemnification provisions of
this Paragraph, including attorney’s fees and
court costs. However, this indemnification
provision shall not apply to the extent that
any loss, cost[,] expense, or damage with
respect to which any of the Indemnit[e]es
shall seek indemnification is held by a court
of competent jurisdiction, [i]n a final
judgment from which no appeal can be taken,
to have resulted either from the gross
negligence, or willful misconduct of one or
more of the Indemnitees, or from the
violation or breach of any fiduciary duty
imposed under ERISA on any one or more of the
Indemnitees. An Indemnitee who receives an
advancement of fees or expenses from the
Company pursuant to this paragraph shall make
arrangements reasonably satisfactory to the
Company to ensure that such Indemnitee will
reimburse the Company for such advancements
in the event it is determined the Indemnitee
is not entitled to retain such amounts
hereunder.
ECF No. 367-8, PageID #s 7639-40.
Bowers and Kubota point out, and the Government agrees,
that this indemnity provision does not actually benefit Bowers or
Kubota.
They have not been indemnified under it.
360, PageID # 6735; ECF No. 378 n.5, PageID # 7827.
See ECF No.
Instead,
this provision appears to apply to indemnification of Saakvitne.
This, of course, does not establish whether the provision is or
is not void under 29 U.S.C. § 1110.
51
To the extent Bowers and
Kubota seek summary judgment with respect to the indemnification
language of the ESOP stock trust agreement, they do not establish
entitlement to summary judgment because any claim relating to
that language is not asserted against them.
However, the court
will hold the Government to its position that it is not
challenging this provision in aid of seeking any recovery from
Bowers and Kubota.
b.
ESOP Stock Purchase Agreement.
In relevant part, the ESOP Stock Purchase Agreement
provides:
11.2 Except for claims relating to matters
known prior to the Closing by the potentially
indemnified party, the Company shall
indemnify, hold harmless, reimburse and, if
requested by the Sellers [the respective
trusts of Bowers and Kubota], defend the
Sellers (the “Indemnified Person”) for, and
will pay to the Indemnified Person the amount
of, any loss, liability, claim, damage
(including incidental and consequential
damages), expense (including reasonable costs
of investigation and defense and reasonable
attorneys’ fees), or diminution of value,
whether or not involving a third party claim,
arising, directly or indirectly, from or in
connection with any breach or any
representation, warranty, covenant or other
agreement of the ESOP or the Company herein
contained.
11.3 The indemnity obligations of the Sellers
and the Company under this Agreement shall
survive the Closing and for a period of two
(2) years thereafter, provided that indemnity
obligations as to specific claims for which
52
notice is given under Section 12.6 below
within such period shall survive until
resolved.
ECF No. 368-1, PageID # 7691.
Bowers and Kubota argue that they did not seek
indemnification within two years of the closing of the sale and
thus the indemnification provision in the ESOP stock purchase
agreement expired.
See ECF No. 360, PageID # 6736.
The
Government notes that this indemnification agreement does not run
in favor of Bowers or Kubota individually.
PageID # 7827.
See ECF No. 378 n.5,
Instead, this indemnification provision runs in
favor of Bowers and Kubota’s respective trusts, as the sellers of
the stock.
The trusts have not been named as Defendants, but
Bowers and Kubota control the trusts and have treated them as
themselves.
See ECF No. 357-4, PageID #s 6669-72 (negotiating
the sale of the Company in their names, rather than the trusts
that owned it).
This court assumes that, when Bowers and Kubota
say that they have not sought indemnification under the ESOP
Stock Purchase Agreement, that representation means that their
trusts have also not sought such indemnification.
If this
assumption is unwarranted, Bowers and Kubota are ordered to
explain why in a filing no later than March 31, 2021.
The Company’s indemnification obligation under the ESOP
Stock Purchase Agreement expired two years from the closing of
the sale, unless the “savings clause” (under which the
53
obligations survive even after two years) is in effect.
There is
no evidence in the record indicating that the “savings clause”
has been implicated.
While the Government argues that Bowers and
Kubota may be receiving an advancement for or reimbursement of
attorneys’ fees pursuant to the indemnification provision in the
ESOP stock purchase agreement, it submits no evidence
demonstrating that Bowers and Kubota could possibly be or are now
being indemnified pursuant to the indemnity provision in the ESOP
stock purchase agreement.
Because there is no evidence in the
record demonstrating that the indemnification provision in the
ESOP Stock Purchase Agreement is or could be in issue, this court
dismisses Count IX to the extent it seeks a determination that
the indemnification language in the ESOP Stock Purchase Agreement
is void.
Absent an actual case or controversy relating to the
document, this court lacks jurisdiction over the challenge.
c.
ESOP.
The ESOP provides:
The Company hereby agrees to indemnify each
member of the Board of Trustees (to the
extent permitted by law) against any personal
liability or expense, including reasonable
attorney’s fees, resulting from his service
on the Board of Trustees, except such
liability or expense as may result from his
own willful misconduct.
ECF No. 366-1, PageID # 7500.
Bowers and Kubota seek a determination that the
indemnification provision in the ESOP does not apply to them, as
54
they were not members of the ESOP’s board of trustees.
No. 360, PageID # 6735.
See ECF
Of course, such a determination would
not establish whether the ESOP’s indemnification provision is or
is not void under 29 U.S.C. § 1110, the relief sought in Count IX
of the Complaint.
See ECF No. 1, PageID #s 21-22.
Accordingly,
Bowers and Kubota’s motion is denied to the extent they seek
summary judgement with respect to the indemnification provision
in the ESOP.
However, again, this court will hold the Government
to its position that it is seeking a declaration about the
language in the provision, not a judgment in this regard against
Bowers and Kubota individually.
V.
CONCLUSION.
The court grants the Government’s motion to the extent
it seeks a determination that Bowers and Kubota were exercising
fiduciary obligations to the ESOP no later than December 3, 2012,
when they adopted the ESOP and appointed Saakvitne as an
independent fiduciary and the sole ESOP trustee, retroactively
effective as of January 1, 2012.
In all other respects, the
Government’s motion is denied.
The court also denies the motion for summary judgment
filed by Bowers and Kubota as well as the Company’s joinder in
it.
However, this court dismisses the portion of Count IX
challenging the indemnity provision in the ESOP Stock Purchase
55
Agreement, as there is no actual case or controversy with respect
to that language.
In preparing for trial, the parties should review and
follow this court’s Procedures for Trials Before Judge Susan Oki
Mollway (Revised 2/04/21),
https://www.hid.uscourts.gov/reqrmts/SOM/SOM_trial_procedures.pdf
?pid=19&mid=61, paying particular attention to the additional
instructions for civil nonjury trials.
Additionally, given the complexity of and expected
number of exhibits in this case, the parties are ordered to meet
and confer before submitting trial exhibits to see whether they
can stipulate to the authenticity and/or admissibility of certain
exhibits and to the filing of those documents with joint exhibit
numbers.
This will avoid submission of the same documents under
multiple exhibit numbers.
The parties may, of course, offer exhibits other than
those agreed upon, labeling the exhibits as such.
For example,
the parties may have Joint Exhibits 1 through 100, Government’s
Exhibits 101 through 300, and Defendants’ Exhibits 301 through
500.
Using different number series for each party’s separate
exhibits will make it easier to refer to and locate exhibits.
The parties should keep in mind that, in any submission of
proposed findings of fact and conclusions of law, they must refer
56
to specific pages of these trial exhibit numbers, not exhibit
numbers used in discovery.
The parties are further reminded that trial exhibits
must be appropriately tabbed and three copies (labeled “witness,”
“judge,” and “law clerk”) must be submitted to the court in
three-ring binders (not D-ring binders).
At the time the binders
are provided to the court, the parties must also submit a flash
drive containing .pdf copies of the exhibits, preferably in a
searchable format in which the file is named in a manner
describing the exhibit number and exhibit, such as “Exhibit __
(description of exhibit).”
No later than May 3, 2021, each party proceeding to
trial should submit a statement discussing what, if any,
testimony must be in person (as opposed to by live video) and how
many hours each side should be limited to if this court imposes
time limits (such as, for example, 12 hours for cross- and
redirect examinations, including rebuttal for the Government, and
12 hours for cross- and redirect examinations for all Defendants
combined, keeping in mind this court’s practice of receiving
direct examinations in writing).
57
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, March 12, 2021.
/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge
Stewart v. Heritage, et al., Civ. No. 18-00155 SOM-WRP; ORDER GRANTING IN PART
AND DENYING IN PART GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT; ORDER DENYING
BOWERS AND KUBOTA'S MOTION FOR SUMMARY JUDGMENT AND JOINDER THEREIN BUT
DISMISSING THE PORTION OF COUNT IX CHALLENGING THE VALIDITY OF LANGUAGE IN THE
ESOP STOCK PURCHASE AGREEMENT
58
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