Acosta v. Saakvitne et al

Filing 47

ORDER Denying (1) Defendant Bowers + Kubota Consulting, Inc.'s Motion To Dismiss and (2) Defendants Brian J. Bowers and Dexter C. Kubota's Motion To Dismiss re 7 26 . "The court denies the Company's motion to dismiss, con cluding that the Company was properly joined as a defendant under Rule 19. The court further denies Bowers and Kubota's motion to dismiss because the Complaint sufficiently pleads ERISA claims against Bowers and Kubota." Signed by JUDGE SUSAN OKI MOLLWAY on 1/18/2019.(cib) Modified to correct motion link on 1/18/2019 (cib, ).

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
R. ALEXANDER ACOSTA,
Secretary of Labor, United
States Department of Labor

)
)
)
)
Plaintiff,
)
)
vs.
)
)
NICHOLAS L. SAAKVITNE, an
)
individual; NICHOLAS L.
SAAKVITNE, A LAW CORPORATION, )
)
a California corporation;
)
BRIAN J. BOWERS, an
individual; DEXTER C. KUBOTA, )
)
an individual; BOWERS +
)
KUBOTA CONSULTING, INC., a
)
corporation; BOWERS + KUBOTA
)
CONSULTING, INC. EMPLOYEE
)
STOCK OWNERSHIP PLAN,
)
)
Defendants.
_____________________________ )

Civ. No. 18-00155 SOM-RLP
ORDER DENYING (1) DEFENDANT
BOWERS + KUBOTA CONSULTING,
INC.’S MOTION TO DISMISS AND
(2) DEFENDANTS BRIAN J.
BOWERS AND DEXTER C. KUBOTA’S
MOTION TO DISMISS

ORDER DENYING (1) DEFENDANT BOWERS + KUBOTA CONSULTING, INC.’S
MOTION TO DISMISS AND (2) DEFENDANTS BRIAN J. BOWERS
AND DEXTER C. KUBOTA’S MOTION TO DISMISS
I.

INTRODUCTION.
Before this court are two motions seeking dismissal of

the Complaint filed by Plaintiff R. Alexander Acosta, the
Secretary of the United States Department of Labor (the
“Secretary”), asserting claims against Defendants under the
Employee Retirement Income Security Act of 1974 (“ERISA”).
motions are denied.
Defendant Bowers + Kubota Consulting, Inc. (the
“Company”) moves for dismissal under Rule 12(b)(6) of the

Both

Federal Rules of Civil Procedure, arguing that the Company was
improperly joined under Rule 19.

ECF No. 26.

This court denies

the Company’s Motion, concluding that the Company’s joinder
under Rule 19 is necessary and feasible.
Defendants Brian J. Bowers and Dexter C. Kubota move
for dismissal under Rule 12(b)(6), arguing that the Complaint
fails to sufficiently allege facts demonstrating that they had
ERISA fiduciary liability or acted in violation of ERISA.

Their

motion is denied because the Complaint alleges sufficient facts
to support the ERISA claims against Bowers and Kubota.
II.

BACKGROUND.
On April 27, 2018, the Secretary filed a Complaint

alleging that, on December 14, 2012, Nicholas L. Saakvitne,
Bowers, and Kubota caused the Bowers + Kubota Consulting, Inc.
Employee Stock Ownership Plan (the “ESOP”) to purchase the
Company’s shares for more than they were worth.

See ECF No. 1.

The Complaint names six Defendants: (1) Saakvitne; (2)
Saakvitne’s law firm (“Saakvitne Law Corporation”); (3) Bowers;
(4) Kubota; (5) the Company; and (6) the ESOP.

See id.

The

Complaint states that the Company and the ESOP are named as
defendants “pursuant to Rule 19(a) of the Federal Rules of Civil
Procedure solely to assure that complete relief can be granted.”
Id., PageID #s 6-7.

2

The Secretary alleges the following facts in his
Complaint.

Bowers, the Company’s President, and Kubota, its

Vice President, owned the Company through their respective
trusts.

See id. at 4, 7.

They met with an attorney in the

summer of 2012 to discuss the creation of an ESOP to divest
themselves of their ownership interests in the Company.
at 9.

See id.

In the fall of 2012, Bowers and Kubota provided

information about the Company to the valuation firm Libra
Valuation Associates (“LVA”). 1

See id.

LVA produced a

preliminary appraisal report that put the Company’s value
between $37,090,000 and $41,620,000.

See id. at 10.

LVA later

produced an updated valuation report and a fairness opinion,
both valuing the Company at $40,150,000.

See id.

The Complaint

alleges that these LVA valuation reports were flawed in several
respects.

For example, the reports applied a 30% control

premium even though there would be no change in control of the
Company, and they used unreasonable revenue projections that
went far beyond the Company’s historical average.

See id. at

10-11.
In the meantime, Bowers, Kubota, and their attorney
communicated with Saakvitne about appointing Saakvitne the
trustee of the ESOP and about the pending sale of the Company.

1

Bowers and Kubota’s motion to dismiss states that the correct
name for the firm is Libra Valuation Advisors, Inc. ECF No. 71, PageID # 43.
3

See id. at 12.

The Complaint alleges that, “at the outset of

Saakvitne’s involvement with the transaction, [the attorney]
emailed Saakvitne listing the price for a 100% sale of the
Company as ‘40 million.’”

Id. at 12.

It also alleges that

“Saakvitne met with Bowers and Kubota in Hawaii” with a document
that “listed ‘Valuation: Approx. 40 million’ under the heading
‘Basis of Deal – General.’”

Id.

According to the Complaint, on December 10, 2012,
Bowers made an initial offer to Saakvitne to sell the Company’s
shares to the ESOP for $41 million, payable over 20 years at 10%
interest.

See id.

After negotiating for a day, Saakvitne,

Bowers, and Kubota allegedly agreed that the ESOP would purchase
the Company’s shares for $40 million payable, over 25 years at
7% interest.

See id. at 13.

On December 11, 2012, the ESOP was

formed with a retroactive date of January 1, 2012, and Saakvitne
was named as its trustee.

See id. at 9.

On December 14, 2012,

Saakvitne, Bowers, and Kubota allegedly caused the ESOP to
purchase the Company’s shares for $40 million dollars.

See id.

at 13.
The Complaint alleges that Saakvitne, Bowers, and
Kubota “did not carry out a meaningful review” of the LVA
valuation reports, which “were obviously defective and
significantly overvalued the shares of the Company,” and that
they knew or should have known that the reports “should not have
4

been relied upon to justify the ESOP transaction.”
14.

Id. at 10,

Bowers and Kubota allegedly provided unreasonable and

inflated revenue projections to LVA, knowing that such
projections were inaccurate, and allegedly failed to monitor
Saakvitne to assure that he acted in the best interests of the
ESOP’s participants and beneficiaries.

See id. at 15-18.

Relying on these allegations, the Complaint asserts
the following ERISA claims:
(1)

Saakvitne, Saakvitne Law Corporation, Bowers, and Kubota
failed to discharge fiduciary duties with care, skill,
prudence, and diligence in violation of 29 U.S.C.
§ 1104(a)(1)(A), (B), and (D);

(2)

Bowers and Kubota are liable for breaches of fiduciary
responsibilities by another fiduciary (“co-fiduciary
liability”) under 29 U.S.C. § 1105(a)(1)-(3);

(3)

Saakvitne, Saakvitne Law Corporation, Bowers, and Kubota
engaged in prohibited transactions between a plan and a
party in interest in violation of 29 U.S.C.
§ 1106(a)(1)(A);

(4)

Bowers and Kubota engaged in prohibited transactions
between a plan and a fiduciary in violation of 29 U.S.C.
§ 1106(a)(1)(A);

(5)

Bowers and Kubota knowingly participated in a transaction
prohibited by ERISA under 29 U.S.C. § 1132(a)(5);
5

(6)

Provisions of the ESOP documents are void for improperly
indemnifying fiduciaries under 29 U.S.C. § 1110.

Id. at 15-22.

The Secretary seeks restitution for the ESOP, as

well as injunctive and declaratory relief.

See id. at 22-23.

Bowers and Kubota filed a motion to dismiss on June
12, 2018.

ECF No. 7.

On September 5, 2018, the Company filed a

separate motion to dismiss and joined the motion to dismiss
filed by Bowers and Kubota. 2

ECF No. 26.

Following the recusal

of the district judge originally assigned to this case, the case
was reassigned, and a hearing was held on both motions on
January 7, 2019.
III.

STANDARD OF REVIEW.
Both motions are brought under Rule 12(b)(6) of the

Federal Rules of Civil Procedure.

Under Rule 12(b)(6), a

complaint may be dismissed for failure to state a claim upon
which relief can be granted.

The court’s review is generally

limited to the contents of a complaint.

Sprewell v. Golden

State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Campanelli v.
Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996).

If matters

outside the pleadings are considered, the Rule 12(b)(6) motion
is treated as one for summary judgment.

Keams v. Tempe Tech.

Inst., Inc., 110 F.3d 44, 46 (9th Cir. 1997); Anderson v.
Angelone, 86 F.3d 932, 934 (9th Cir. 1996).

2

However, the court

The Company filed its answer on July 10, 2018.
6

ECF No. 19.

may take judicial notice of and consider matters of public
record without converting a Rule 12(b)(6) motion to dismiss into
a motion for summary judgment.

Lee v. City of Los Angeles, 250

F.3d 668, 688 (9th Cir. 2001); Emrich v. Touche Ross & Co., 846
F.2d 1190, 1198 (9th Cir. 1988).
On a Rule 12(b)(6) motion to dismiss, all allegations
of material fact are taken as true and construed in the light
most favorable to the nonmoving party.

Fed’n of African Am.

Contractors v. City of Oakland, 96 F.3d 1204, 1207 (9th Cir.
1996).

However, conclusory allegations of law, unwarranted

deductions of fact, and unreasonable inferences are insufficient
to defeat a motion to dismiss.

Sprewell, 266 F.3d at 988; In re

Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th Cir. 1996).
Dismissal under Rule 12(b)(6) may be based on either “lack of a
cognizable legal theory or the absence of sufficient facts
alleged under a cognizable legal theory.”

Balistreri v.

Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988) (citing
Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34
(9th Cir. 1984)).
To survive a Rule 12(b)(6) motion to dismiss,
“[f]actual allegations must be enough to raise a right to relief
above the speculative level, on the assumption that all the
allegations in the complaint are true (even if doubtful in
fact).”

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
7

(citations omitted); accord Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (“[T]he pleading standard . . . does not require detailed
factual allegations, but it demands more than an unadorned, thedefendant-unlawfully-harmed-me accusation.” (internal quotation
marks omitted)).

“[A] plaintiff’s obligation to provide the

grounds of his entitlement to relief requires more than labels
and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.”

Twombly, 550 U.S. at 555

(internal quotation marks omitted).

A complaint must “state a

claim to relief that is plausible on its face.”

Id. at 570.

“A

claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.”
Iqbal, 556 U.S. at 678.
IV.

ANALYSIS.
A.

The Company’s Motion To Dismiss Is Denied Because
The Company Was Properly Joined Under Rule 19.

The Company seeks dismissal of the Complaint, arguing
that it “states no allegations as against [the Company] and
seeks no relief as against [the Company.]”
# 312.

ECF No. 26-1, PageID

The Company further argues that it cannot be joined as a

nominal defendant or as an indispensable defendant under Rule 19
of the Federal Rules of Civil Procedure because it holds no
interest in the subject matter of the litigation.
309-12.
8

See id. at

The court determines that the Company was properly
joined under Rule 19, which governs compulsory joinder in
federal district courts.

EEOC v. Peabody W. Coal Co., 400 F.3d

774, 778 (9th Cir. 2005) (“Peabody I”).

While the Complaint

does not assert any claims against the Company, “joinder of [a
defendant] under Rule 19 is not prevented by the fact that the
[plaintiff] cannot state a cause of action against [the
defendant].”

See id.

Rule 19(a) provides:
(1) Required Party. A person who is subject
to service of process and whose joinder will
not deprive the court of subject-matter
jurisdiction must be joined as a party if:
(A) in that person’s absence, the court
cannot accord complete relief among existing
parties; or
(B) that person claims an interest relating
to the subject of the action and is so
situated that disposing of the action in the
person’s absence may:
(i) as a practical matter impair or
impede the person’s ability to protect
the interest; or
(ii) leave an existing party subject to
a substantial risk of incurring double,
multiple, or otherwise inconsistent
obligations because of the interest.
Rule 19(b) provides that if it is not feasible for the
court to join a person meeting the requirements of Rule 19(a),
the court “must determine whether, in equity and good
conscience, the action should proceed among the existing parties
9

or should be dismissed.”

The Ninth Circuit, deeming a dismissal

to be a determination that the absent person is indispensable,
see Peabody I, 400 F.3d at 779, provides the following guidance:
The factors to be considered by the court
[in determining whether a party is
indispensable] include: first, to what
extent a judgment rendered in the person’s
absence might be prejudicial to the person
or those already parties; second, the extent
to which, by protective provisions in the
judgment, by shaping of relief, or other
measures, the prejudice can be lessened or
avoided; third, whether a judgment rendered
in the person’s absence will be adequate;
fourth, whether the plaintiff will have an
adequate remedy if the action is dismissed
for nonjoinder.
Id.
The Ninth Circuit interprets Rule 19 as requiring
“three successive inquiries.”

Id.

“First, the court must

determine whether a nonparty should be joined under Rule 19(a).”
Id.

“If the absentee is a necessary party under Rule 19(a), the

second stage is for the court to determine whether it is
feasible to order that the absentee be joined.”

Id.

“Finally,

if joinder is not feasible, the court must determine at the
third stage whether the case can proceed without the absentee,
or whether the absentee is an ‘indispensable party’ such that
the action must be dismissed.”

Id.

As explained below, the Company is a necessary party
that may be feasibly joined.

Having made this determination,
10

the court need not address whether the Company is an
indispensable party.

See Peabody I, 400 F.3d at 779; Walter v.

Drayson, 496 F. Supp. 2d 1162, 1178 (D. Haw. 2007).
1.

The Company Is A Necessary Party.

The Secretary argues that the Company is a necessary
party under Rule 19(a)(1)(A) because, in the Company’s absence,
the court would not be able to accord complete relief if the
Secretary prevailed on his ERISA claims.
#s 324-25.

See ECF No. 30, PageID

The court agrees.
The Ninth Circuit has explained that the term

“necessary” describes “persons to be joined if feasible.”
Peabody I, 400 F.3d at 779 (quoting Fed. R. Civ. P. 19(a))
(brackets omitted).

“Necessary” in the ordinary sense is “too

strong a word” because “it is still possible under Rule 19(b)
for the case to proceed without the joinder of the so-called
‘necessary’ absentee.”

Id.

Rather, “Rule 19(a) ‘defines the

persons whose joinder in the actions is desirable’ in the
interests of just adjudication.”

Id. (quoting Fed. R. Civ. P.

19 Advisory Committee Note (1966)).

Such desirable persons are

“persons having an interest in the controversy, and who ought to
be made parties, in order that the court may act.”

Id. (quoting

Shields v. Barrow, 58 U.S. 130, 139 (1854)).
Complete relief under Rule 19(a)(1)(A) means
“consummate rather than partial or hollow relief” and
11

“preclud[es] multiple lawsuits on the same cause of action.”
Id. at 780.

A plaintiff need not state a direct cause of action

against a party joined under Rule 19.

“[B]y definition, parties

to be joined under Rule 19 are those against whom no relief has
formally been sought but who are so situated as a practical
matter as to impair either the effectiveness of relief or their
own or present parties’ ability to protect their interests.”
Id. at 783 (quoting Eldredge v. Carpenters 46 N. Cal. Ctys.
Joint Apprenticeship & Training Comm., 440 F. Supp. 506, 518
(N.D. Cal. 1977)).

A party “can be joined under Rule 19 in

order to subject it, under principles of res judicata, to the
‘minor and ancillary’ effects of a judgment.”

EEOC v. Peabody

W. Coal Co., 610 F.3d 1070, 1079 (9th Cir. 2010) (“Peabody II”)
(quoting Gen. Bldg. Contractors Ass’n, Inc. v. Pennsylvania, 458
U.S. 375, 399 (1982)).
The Complaint prays for several forms of relief,
including injunctive relief to (1) “[p]ermanently enjoin
Defendants Saakvitne, Saakvitne Law Corporation, Bowers, and
Kubota from acting as a fiduciary to the ESOP”; (2) “[s]trike,
void, and declare invalid the portions of the Plan Documents,
Trust Agreement, ESOP Stock Purchase Agreement, and any other
agreement which purport to indemnify Defendants as the expense
of the Plan or the Company”; and (3) “[p]ermanently enjoin
Defendants Saakvitne, Saakvitne Law Corporation, Bowers, and
12

Kubota from causing or allowing the Plan or the Company to
indemnify them at the expense of the Plan or the Company.”

ECF

No. 1, PageID # 23.
The requested relief appears to require the Company’s
involvement, given the Company’s role in administering the ESOP.
See Solis v. Webb, 931 F. Supp. 2d 936, 956 (N.D. Cal. 2012)
(holding that an ESOP was a necessary party for complete relief
because the Secretary’s prayers for relief were “likely to
impact administration of the ESOP”).

The Complaint alleges that

the Company is “intimately involved in issues pertaining to the
ESOP” because it “created the ESOP, and is the ESOP Employer,
Plan Sponsor, Plan Administrator, and signatory to contracts
governing the ESOP.”

ECF No. 30, PageID # 325.

The Company

would therefore need to be involved in modifying the ESOP’s
governing documents and restructuring the ESOP’s fiduciaries if
the Secretary obtained the relief sought.
In its reply, the Company argues that the Secretary
may not have the authority under ERISA to seek modification of
the ESOP contracts.

ECF No. 33, PageID #s 363-64.

The Company

cites CIGNA Corp v. Amara, which states that 29 U.S.C.
§ 1132(a)(1)(B) “speaks of ‘enforc[ing]’ the ‘terms of the
plan,’ not of changing them.”
29 U.S.C. § 1132(a)(1)(B)).

563 U.S. 421, 436 (2011) (quoting
Amara does not restrict the

Secretary in the manner the Company asserts.
13

First, the Complaint does not mention § 1132(a)(1)(B)
because that subsection applies to civil actions brought “by a
participant or beneficiary,” not by the Secretary.
29 U.S.C. § 1132(a)(1)(B).

See ECF 1;

Second, Amara held that, while an

ERISA plan cannot be reformed under § 1132(a)(1)(B), it can be
reformed under § 1132(a)(3).

See Amara, 563 U.S. at 438-42.

The Supreme Court reasoned that § 1132(a)(3) permits a court to
award “appropriate equitable relief,” and “[t]he power to reform
contracts . . . is a traditional power of an equity court.”
id.

See

The Secretary is seeking relief under § 1132(a)(2), which

allows a court to award “appropriate relief under section 1109
of this title.”

ECF No. 1, PageID # 3; 29 U.S.C. § 1132(a)(2).

Section 1109 permits “other equitable or remedial relief as the
court may deem appropriate.”

29 U.S.C. § 1109(a).

Thus, Amara

supports the Secretary’s ability to seek modification of the
ESOP contracts as a form of equitable relief.
The Company also argues that it need not be joined
because the ESOP is already party to the action.
33, PageID # 362.

See ECF No.

The Company says, “The Secretary has not

cited a single case in which a company whose stock was the
subject of an [ESOP] was held to be a necessary party to an
action against the parties who valued or sold the stock to the
[ESOP].”

Id.

The Company attempts to distinguish the present

case from Acosta v. Pacific Enterprises, 950 F.2d 611 (1991),
14

and Solis v. Webb, 931 F. Supp. 2d 936 (N.D. Cal 2012), in which
Rule 19 joinder of ERISA plans was permitted.

Although neither

Acosta nor Solis addressed joinder of an entity like the
Company, neither case suggests that companies cannot be joined
under Rule 19 when their participation is needed to ensure that
complete relief is obtained.

Further, the Company’s attempts to

distance itself from the ESOP in this instance are inconsistent
with its position equating itself with the ESOP in arguing that
the Company should not be forced to incur further litigation
expenses.

The Company states, “If the Secretary believes that

the goal should be to protect the [ESOP] from suffering the
expense of a suit, it can start by agreeing to the dismissal of
[the Company], so that no further expenses of litigation are
incurred by [the Company].”

ECF No. 33, PageID # 365.

The

ESOP’s ownership of the Company’s shares does not, without more,
necessitate the Company’s dismissal as a party.
The court here briefly addresses the argument the
Secretary made at the hearing that the Company is also a
necessary party under Rule 19(a)(1)(B) because the Company may
benefit from any relief awarded.

Rule 19(a)(1)(B) is not

applicable here because joinder under that subsection is
“contingent . . . upon an initial requirement that the absent
party claim a legally protected interest relating to the subject
matter of the action.”

Altmann v. Republic of Austria, 317 F.3d
15

954, 971 (9th Cir. 2002), amended by 327 F.3d 1246 (9th Cir.
2003) (quoting Northrop Corp. v. McDonnell Douglas Corp., 705
F.2d 1030, 1043 (9th Cir. 1983)).

The Company has explicitly

stated that it claims no such interest in the action.

See ECF

No. 33, PageID # 362 (“[The Company] does not claim any interest
relating to the subject matter of this action[.]”).
joinder under Rule 19(a)(1)(B) is not necessary.

Thus,

See United

States v. Bowen, 172 F.3d 682, 689 (9th Cir. 1999) (holding that
joinder was not necessary when a party “was aware of this action
and chose not to claim an interest”).
The court concludes that the Company is a necessary
party under Rule 19(a)(1)(A) for the purposes of according
complete relief.
2.

The Company Can Be Feasibly Joined.

Because the Company is a necessary party, the next
inquiry is whether joinder is “feasible” under Rule 19.

See

Peabody I, 400 F.3d at 779; United States v. Bowen, 172 F.3d
682, 688 (9th Cir. 1999); Fed. R. Civ. P. 19(a)-(b).

“Rule

19(a) sets forth three circumstances in which joinder is not
feasible: when venue is improper, when the absentee is not
subject to personal jurisdiction, and when joinder would destroy
subject matter jurisdiction.”

Peabody I, 400 F.3d at 779

(citing Fed. R. Civ. P. 19(a); Tick v. Cohen, 787 F.2d 1490,
1493 (11th Cir. 1986)).
16

The Secretary argues that venue is proper because the
Company resides in Hawaii, and that this court has jurisdiction
under 29 U.S.C. § 1132(e)(2).

ECF No. 30, PageID # 327 (citing

Trustees For Alaska Laborers-Constr. Indus. Health & Sec. Fund
v. Ferrell, 812 F.2d 512, 517 (9th Cir. 1987)).
the Company conceded that joinder is feasible.

At the hearing,
The court

therefore concludes that the Company may be feasibly joined
under Rule 19.
3.

The Company’s Consent Decree Argument Is
Unpersuasive.

Finally, the Company’s reply states in a footnote, “To
the extent necessary, if it will facilitate its dismissal from
this action, [the Company] will agree to be bound by any ruling
that this Court may make that so requires it.”
PageID # 365.

ECF No. 33,

At the hearing, the Company stated that it was

willing to enter into a consent decree binding the Company to
any ruling in the case.

It did not provide the court with a

proposed consent decree.
When the court asked the Company to articulate the
scope and effect of this hypothetical consent decree, the
Company suggested that it would be confined to the scope of the
Complaint.

This description invites litigation over whether

particular consent decree terms fall within the scope of the
Complaint.

Complaints do not expressly address all issues that

may arise and be ruled on in a case.
17

The Company provided no

citation to a case discussing a consent decree like that
described by the Company.
At this stage in the proceeding and without a proposed
consent decree to consider, the court has no basis for agreeing
with the Company that a consent decree is a feasible alternative
to joinder of the Company under Rule 19(a).
B.

Bowers And Kubota’s Motion To Dismiss Is Denied.

In their motion to dismiss, Bowers and Kubota make
five arguments as to why the claims against them should be
dismissed.

Each argument fails.
1.

The Complaint Sufficiently Alleges that
Bowers and Kubota were ERISA Fiduciaries for
the ESOP’s 2012 Purchase of Company Stock.

Bowers and Kubota argue that they were not ERISA
fiduciaries with respect to the ESOP’s 2012 purchase of the
Company’s shares because the allegations in the Complaint go to
their alleged conduct before the purchase.
#s 58-59.

ECF No. 7-1, PageID

They also argue that the Company delegated

responsibility for approving the 2012 purchase to Saakvitne as
the ESOP’s trustee, which divested the Company, Bowers, and
Kubota of “any ERISA fiduciary duty with respect to the sale of
the [Company] stock to the ESOP.”

Id. at 60.

Bowers and Kubota

highlight the Complaint’s failure to allege that their
appointment of Saakvitne breached any ERISA fiduciary duty.
at 61.
18

Id.

Bowers and Kubota’s concept of ERISA fiduciary status
appears too limited.

The Ninth Circuit “construe[s] ERISA

fiduciary status ‘liberally, consistent with ERISA’s policies
and objectives.’”

Johnson v. Couturier, 572 F.3d 1067, 1076

(9th Cir. 1997) (quoting Ariz. State Carpenters Pension Tr. Fund
v. Citibank, 125 F.3d 715, 720 (9th Cir. 1997)); see also
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.”).

Congress enacted ERISA to establish “minimum

standards . . . assuring the equitable character of [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.
§§ 1001(b), 1102(a).

Id.

These standards include the duties of

loyalty and care and a prohibition against self-dealing.

Id.

§§ 1104(a)(1), 1106(b)(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)).
19

ESOP fiduciaries

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 disposition of its assets.’”
Id. (quoting 29 U.S.C. § 1002(21)(A)(i)).

Members of an

employer’s board of directors are subject to ERISA fiduciary
duties to the extent they have responsibility over the ESOP and
over the management or disposition of its assets.

See id.; see

also 29 C.F.R. § 2509.75-8(D-4) (“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 [29 U.S.C.
§ 1002(21)(A)].”); 29 U.S.C. § 1002(21)(A) (“a person is a
fiduciary with respect to a plan to the extent (i) he exercises
any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control
respecting management or disposition of its assets”).
The Complaint alleges that Bowers and Kubota were the
Company’s owners and the only members of its Board of Directors,
and that, in those roles, they established the ESOP and
appointed Saakvitne as trustee.
13.

ECF No. 1, PageID #s 7-8, 12-

The Complaint also alleges that Bowers and Kubota met with

Saakvitne prior to his appointment as trustee and indicated to
20

him that the value of the Company was $40 million.

Id. at 12.

Taken together, the allegations in the Complaint sufficiently
plead that Bowers and Kubota exercised discretionary authority
and control over the management of the ESOP and the selection
and retention of Saakvitne.
The ESOP’s governing documents, attached to Bowers and
Kubota’s motion, support these allegations. 3

According to these

documents, Bowers and Kubota, as Directors of the Board, had
discretionary control over the management of the ESOP and the
sale of Company stock.

See ECF Nos. 7-4; 7-5.

For example,

according to the “Bowers + Kubota Consulting, Inc. Employee
Stock Ownership Plan (Effective As Of January 1, 2012),” the
Board of Directors appoints the ESOP’s Trustee to “serve at its
pleasure” and may appoint a committee “to assist in the

3

Bowers and Kubota’s motion attached several documents related
to the creation and administration of the ESOP. See ECF Nos. 73, 7-4, 7-5, 7-6, 7-7. Courts may “consider certain materials-documents attached to the complaint, documents incorporated by
reference in the complaint, or matters of judicial notice-without converting the motion to dismiss into a motion for
summary judgment.” United States v. Ritchie, 342 F.3d 903, 908
(9th Cir. 2003). Documents whose contents are alleged in a
complaint and whose authenticity is not questioned by any party
may also be considered in ruling on a Rule 12(b)(6) motion to
dismiss. See Branch v. Tunnell, 14 F.3d 449, 453–54 (9th Cir.
1994), overruled on other grounds by Galbraith v. Cty. of Santa
Clara, 307 F.3d 1119 (9th Cir. 2002). The Secretary confirmed
at the hearing that he consents to the court’s consideration of
all attachments to Bowers and Kubota’s motion to dismiss. The
court therefore considers the attachments without converting the
motion to one for summary judgment.
21

administration of the Plan.”

ECF No. 7-4, PageID # 158.

The

Board of Directors also may act to “amend or terminate the Plan
(in whole or in part) and the Trust Agreement at any time.”
at 166.

Id.

That document also states that the Trustee can only

sell Company stock with the approval of the Board of Directors:
5.04 – Sales of Company Stock:
With the approval of the Board of Directors,
the Trustee may sell shares of Company Stock
to any person (including the Company),
provided that any such sale must be made at
a price not less than Fair Market Value as
of the date of the sale. Any decision by
the Trustee to sell Company Stock under this
Section 5.04 must comply with the fiduciary
duties applicable under Section 404(a)(1) of
ERISA and with the primary benefit rule of
Section 408(b)(3)(A) of ERISA and Section
4975(d)(3)(A) of the Code, if applicable.
Id. at 108-09 (emphasis added).

Thus, Bowers and Kubota’s ERISA

fiduciary duties appear to have extended to the 2012 purchase of
Company stock.
Further, the Complaint’s inclusion of allegations
discussing conduct prior to the ESOP’s 2012 purchase does not
rid Bowers and Kubota of fiduciary responsibility.

Congress

sought to ensure that fiduciaries who fund an ESOP acquire
employer securities for “adequate consideration.”
§ 1108(e)(1).

29 U.S.C.

When an ESOP is created and managed, “the core

fiduciary duties of loyalty and care as well as the prohibition
against self-dealing remain in effect.”
1075–76.

Couturier, 572 F.3d at

Persons acting on behalf of an ESOP are not absolved
22

of ERISA fiduciary responsibility relating to the purchase of
employer securities simply because the ESOP has yet to be
funded.

See Webb, 931 F. Supp. 2d at 945 (“[T]he existence of

an ESOP and the vesting of fiduciary duties in respect thereto
does not necessarily depend on the date of the ESOP’s
funding.”).
The Complaint alleges facts sufficient to support a
claim that Bowers and Kubota exercised discretionary authority
and control over the management of the ESOP, including the 2012
purchase of Company stock.
2.

The Complaint Sufficiently Alleges that
Bowers and Kubota Breached their Duty to
Monitor Saakvitne.

Bowers and Kubota concede that “[a] plan ERISA
fiduciary who has the power to and does appoint a trustee (or
other fiduciary) is required by ERISA to monitor the performance
of the appointee in order to ensure that such appointed person
is in compliance with the terms of the plan and statutory
standards.”
§ 2509.75-8).

ECF No. 7-1, PageID #s 62-63 (citing 29 C.F.R.
However, Bowers and Kubota argue that they had no

individual duty to monitor Saakvitne because, pursuant to
Saakvitne’s engagement agreement, the Company appointed
Saakvitne as trustee to the ESOP.
3).

23

Id. at 63 (citing ECF No. 7-

This argument fails under the functional test used to
determine fiduciary status.

See Couturier, 572 F.3d at 1076.

Even if it was the Company that formally appointed Saakvitne,
the Complaint alleges that Bowers and Kubota were the primary
decision-makers as owners of the Company and the sole members of
its Board of Directors.

According to the Complaint, they

communicated with Saakvitne directly or through their attorney
to discuss his trustee appointment, and then indicated to him
that the valuation of the Company was $40 million.
PageID #s 12-14.

ECF No. 1,

Those who act as “the de facto decision makers

of closely held and related entities” also serve as “ERISA
fiduciaries with respect to appointment and removal of ESOP
trustees.”

See Couturier, 572 F.3d at 1077.

And “[i]mplicit

within the duty to select and retain fiduciaries is a duty to
monitor their performance.”

Webb, 931 F. Supp. 2d at 953; Carr

v. Int’l Game Tech., 770 F. Supp. 2d 1080, 1090 (D. Nev. 2011)
(“Case law under ERISA indicates that the power to appoint and
remove an ERISA fiduciary gives rise to a duty to monitor and
results in the appointing and removing party being a de facto
fiduciary with respect to such appointment, monitoring and
removal.”).
Bowers and Kubota next argue that “the Complaint fails
to allege conduct inconsistent with ERISA fiduciary
responsibilities to the ESOP.”

ECF No. 7-1, PageID # 65.
24

They

assert that the “duty to monitor is understood to involve
reviewing the actions of appointees after they have been taken”
and does not necessitate review of the decision-making process.
See id. at 65-66.

Further, they argue that the duty to monitor

does not include a duty to disclose “material information” or
information already known to the trustee.

Id. at 66-67 (“[T]he

Secretary fails to allege that Mr. Bowers and Mr. Kubota
possessed information regarding [the Company’s] financial
condition that also was not known to Mr. Saakvitne and/or
LVA.”).
Bowers and Kubota’s view of the duty to monitor is
unpersuasive.

The Complaint alleges that Bowers and Kubota

failed to monitor Saakvitne by knowingly providing him with
flawed information about the Company, permitting him to
overstate the value of the Company’s shares, and permitting him
to direct the ESOP to purchase the shares for more than they
were worth.

ECF No. 1, PageID #s 9-14.

Under their definition,

a fiduciary need not monitor a trustee’s flawed decision-making
process, despite the fiduciary’s own involvement in the process,
simply because the trustee has not yet implemented a decision
that will be harmful to the ERISA plan.

Nor, according to

Bowers and Kubota, would a fiduciary need to provide accurate
information to the trustee so long as the fiduciary and trustee
had the same, erroneous information.
25

A proper understanding of the duty to monitor
recognizes that a fiduciary may not enable and participate in a
trustee’s breach of ERISA duties.

“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)).
The allegations in the Complaint are sufficient to
state a claim against Bowers and Kubota for a breach of their
duty to monitor Saakvitne.
3.

The Complaint Sufficiently Alleges that
Bowers and Kubota had Co-Fiduciary Liability
for Saakvitne’s Breach.

Bowers and Kubota argue that the Complaint’s claims of
co-fiduciary liability must be dismissed because the Complaint
fails to allege that they had “actual knowledge” of Saakvitne’s
alleged breaches of fiduciary duty.
72.

ECF No. 7-1, PageID #s 70-

They note that the Complaint alleges a lesser standard,

that Bowers and Kubota “knew or should have known” that the LVA
valuation reports were erroneous and that Saakvitne should not
rely on them.

See id. at 72.

Further, Bowers and Kubota argue

that they could not have had known that the LVA valuation
26

reports contained errors because the Complaint does not allege
that they are “trained economists” or have “some specialized
expertise in economic forecasting.”

See id. at 73.

ERISA defines “co-fiduciary liability” in 29 U.S.C.
§ 1105(a), which provides:
(a) Circumstances giving rise to liability
In addition to any liability which he may
have under any other provisions of this
part, a fiduciary with respect to a plan
shall be liable for a breach of fiduciary
responsibility of another fiduciary with
respect to the same plan in the following
circumstances:
(1) if he participates knowingly in, or
knowingly undertakes to conceal, an act or
omission of such other fiduciary, knowing
such act or omission is a breach;
(2) if, by his failure to comply with
section 1104(a)(1) of this title in the
administration of his specific
responsibilities which give rise to his
status as a fiduciary, he has enabled such
other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such
other fiduciary, unless he makes reasonable
efforts under the circumstances to remedy
the breach.
The Complaint states that Bowers and Kubota violated all three
subsections, § 1105(a)(1)-(3).

ECF No. 1, PageID # 17.

Bowers

and Kubota are correct that § 1105(a)(1) requires a showing of
actual knowledge, but this explanation of § 1105(a) is
incomplete.

A different standard applies to each subsection.

27

To bring a claim under § 1105(a)(1), a plaintiff “must
show: (1) that a co-fiduciary breached a duty to the plan, (2)
that the fiduciary knowingly participated in the breach or
undertook to conceal it, and (3) damages resulting from the
breach.”

Carr, 770 F. Supp. 2d at 1096-97 (quoting In re Touch

Am. Holdings, Inc. ERISA Litig., No. CV-02-106-BU-SEH, 2006 WL
7137416, at *11 (D. Mont. June 15, 2006)).
A claim under § 1105(a)(2) requires a plaintiff to
prove that the fiduciary “failed to comply with its duties under
ERISA, and thereby enabled a co-fiduciary to commit a breach.”
Id. at 1097 (quoting In re Enron Corp. Sec., Derivative & ERISA
Litig., 284 F. Supp. 2d 511, 581 (S.D. Tex. 2003)).

Unlike co-

fiduciary liability under § 1105(a)(1) and (3), co-fiduciary
liability under § 1105(a)(2) does not require a plaintiff to
prove knowledge.

Id.

Under § 1105(a)(3), a plaintiff must show: “(1) that
the fiduciary had knowledge of the co-fiduciary’s breach, and
(2) that the fiduciary failed to make reasonable efforts under
the circumstances to remedy the breach.”

Id. (quoting Silverman

v. Mut. Ben. Life. Ins. Co., 941 F. Supp. 1327, 1337 (E.D.N.Y.
1996)).
Bowers and Kubota focus on the element of “actual
knowledge” and therefore do not appear to dispute the
Complaint’s claim under § 1105(a)(2).
28

With respect to the

claims under § 1105(a)(1) and § 1105(a)(3), the court concludes
that the Complaint sufficiently alleges facts indicating that
Bowers and Kubota had actual knowledge of Saakvitne’s breach.
The Complaint alleges that Saakvitne breached his fiduciary duty
to the ESOP by authorizing the purchase of the Company’s shares
for more than they were worth based on the LVA’s flawed
valuations.

See ECF No. 1, PageID #s 9-14, 18.

The Complaint

further alleges that Bowers and Kubota knew that the valuations
were flawed yet proceeded to negotiate with Saakvitne and
participate in the sale of the Company’s shares to the ESOP.
See id.

The Complaint alleges that neither Bowers nor Kubota

made any effort to correct the valuation information or to
remedy the breach, which resulted in losses to the ESOP.

See

id.
These allegations support a claim of co-fiduciary
liability against Bowers and Kubota.

Whether Bowers and Kubota

in fact knew that the LVA valuation reports were overstated
valuations based on their expertise and understanding of the
Company’s financial projections is a question beyond the scope
of the present motion.
4.

The Complaint Sufficiently Alleges Non-ERISA
Fiduciary Claims Against Bowers and Kubota.

Bowers and Kubota argue that, if the court determines
that they are not fiduciaries, the non-ERISA fiduciary claims
against them should also be dismissed.
29

ECF No. 7-1, PageID

#s 73-74.

They argue that the Complaint fails to allege the

requisite knowledge of Saakvitne’s alleged breach and fails to
“show[] any inaccuracy in the projections or any knowledge of
any inaccuracy by Defendants.”

See id.; ECF No. 34, PageID

# 388.
A nonfiduciary may be liable under 29 U.S.C.
§ 1132(a)(3) for knowingly participating in a prohibited ERISA
transaction.

See Harris Tr. & Sav. Bank v. Salomon Smith

Barney, Inc., 530 U.S. 238, 246 (2000); 29 U.S.C. § 1106(a)(1).
“Knowing participation” means “actual or constructive knowledge
of the circumstances that rendered the transaction unlawful.”
Id. at 251.

The nonfiduciary need not have engaged in any

wrongdoing.

It is enough if he had knowledge, based on the

surrounding circumstances, that the fiduciary was engaging in a
prohibited transaction.

See id.; see also Brock v. Hendershott,

840 F.2d 339, 342 (6th Cir. 1988) (“[A] nonfiduciary’s knowledge
of the breach can be inferred from surrounding circumstances
raising a reasonable inference of knowledge.”); Trs. of Update
N.Y. Eng’rs Pension Fund v. Ivy Asset Mgmt., 131 F. Supp. 3d
103, 131 (S.D.N.Y. 2015) (“The knowledge element of [a
nonfiduciary] cause of action can be broken down into two
elements, namely (1) knowledge of the primary violator’s status
as a fiduciary; and (2) knowledge that the primary’s conduct
contravenes a fiduciary duty.”); AirTran Airways, Inc. v. Elem,
30

771 F. Supp. 2d 1344, 1350 (N.D. Ga. 2011) (“[T]here is no
requirement that the attorney himself engage in any wrongdoing.
Indeed, all that is required is that the attorney had knowledge
of the wrongful transfer.”).
The Complaint has sufficient factual allegations going
to both actual and constructive knowledge by Bowers and Kubota
of actions constituting or resulting in the breach in issue.
That is, they had knowledge of Saakvitne’s decision to allow the
ESOP to purchase the Company’s shares, allegedly without a
proper valuation and at a price higher than the shares were
worth.

ECF No. 1, PageID # 21.

According to the Complaint,

Bowers and Kubota knew that $40 million was too high a price for
the Company’s shares for several reasons.

For example, Bowers

and Kubota allegedly knew that control of the Company would not
change, yet they did not correct LVA’s wrongful application of a
30% control premium to the valuation.

See id. at 10-13.

The

Complaint alleges that, in spite of this knowledge, Bowers and
Kubota proceeded to communicate the $40 million valuation to
Saakvitne before hiring him as a trustee, and then participated
in negotiations with Saakvitne before agreeing to sell their
shares for $40 million.

See id.

Bowers and Kubota characterize the Secretary as
“argu[ing], without any supporting authority, that it is somehow
illegal under ERISA for a seller to state his desired price.”
31

ECF No. 34, PageID # 386.

This misstates the Secretary’s claim.

As the court understands it, the Secretary is not asserting that
Bowers and Kubota knowingly participated in Saakvitne’s breach
merely by participating in the negotiations and hoping for a
high sales price.

Rather, the Secretary’s claims are based on

the allegation that Bowers and Kubota, knowing that Saakvitne
had erroneous valuations for the Company, agreed to an
overstated sales price.

These allegations are sufficient to

state a claim for nonfiduciary liability against Bowers and
Kubota.
Despite having allegedly had intimate involvement in
the ESOP and the 2012 purchase, Bowers and Kubota argue that
they should be presumed to be good faith sellers of the
Company’s shares because the shares had more than nominal value.
See ECF No. 7-1, PageID #s 74-76.

They quote the burden-

shifting analysis set forth in Hans v. Tharaldson, Civ. No.
3:05-cv-115, 2011 WL 7179644 (D.N.D. Oct. 31, 2011), and Keach
v. U.S. Tr. Co., N.A., 256 F. Supp. 2d 818 (C.D. Ill. 2003).
See id.

Those cases state, “If a plaintiff meets its burden of

establishing that the purchase of stock by an ESOP constituted a
‘prohibited transactions’ under § 406, the nonfiduciary
defendants can invoke ‘the substantive equivalent of a modified
bona fide purchaser defense by establishing that they gave value
for the trust property.’”

Hans, 2011 WL 7179644, at *16
32

(quoting Keach, 256 F. Supp. 2d at 822).

Once defendants

establish this, the burden shifts to the plaintiff “to establish
the nonfiduciary defendants acted in ‘bad faith or had actual or
constructive notice of the circumstances that rendered the
transaction unlawful.’”

Id. (quoting Keach, 256 F. Supp. 2d at

822).
In addition to being nonbinding on this court, these
cases do not suggest that Bowers and Kubota are entitled to a
presumption of good faith.

The standard in Hans and Keach is

essentially a restatement of the standard in Harris requiring a
nonfiduciary to have had “actual or constructive knowledge of
the circumstances that rendered the transaction unlawful.”
Harris, 530 U.S. at 251.

As explained above, the Complaint

sufficiently alleges that Bowers and Kubota had the requisite
knowledge given their knowledge of the errors in the LVA
valuation reports and their subsequent communications with
Saakvitne.

The burden-shifting procedure is not a pleading

standard; it instead shifts the burdens that must be met at a
later stage of litigation.

Even if this court were required to

apply the Hans and Keach burden-shifting analysis, that would
not mean the Secretary failed to state a claim.

Bowers and

Kubota are not entitled to dismissal based merely on their
selling of the Company’s shares for more than nominal
consideration.
33

5.

Because the Complaint Sufficiently Alleges
ERISA Fiduciary Liability, the Improper
Indemnification Claims May Proceed.

Finally, Bowers and Kubota take issue with the
Complaint’s claim under 29 U.S.C. § 1110, which asserts that
“[t]he ESOP Transaction involved a number of documents which
violate ERISA’s prohibition on fiduciary indemnification.”
No. 1, PageID # 21.

ECF

Bowers and Kubota argue that the Secretary

cannot “impose indemnification restrictions on them” because
they are not ERISA fiduciaries.

ECF No. 7-1, PageID # 77.

Section 1110(a) provides 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.”

As stated above, the Complaint sufficiently

alleges that Bowers and Kubota were ERISA fiduciaries with
respect to the ESOP.

Therefore, this court does not dismiss the

Complaint’s claim that the ESOP’s Trust Agreement, Plan
Documents, and Stock Purchase Agreement include indemnification
clauses that violate § 1110(a).
V.

CONCLUSION.
The court denies the Company’s motion to dismiss,

concluding that the Company was properly joined as a defendant
under Rule 19.

The court further denies Bowers and Kubota’s

34

motion to dismiss because the Complaint sufficiently pleads
ERISA claims against Bowers and Kubota.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, January 18, 2019.

/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge
R. Alexander Acosta v. Nicholas L. Saakvitne, et al., Civ. No.
18-00155 SOM-RLP; ORDER DENYING (1) DEFENDANT BOWERS + KUBOTA
CONSULTING, INC.’S MOTION TO DISMISS AND (2) DEFENDANTS BRIAN J.
BOWERS AND DEXTER C. KUBOTA’S MOTION TO DISMISS.

35