Bonds v. Heeter et al
Filing
28
OPINION AND ORDER Denying in Part and Granting in Part Defendants' Motion to Dismiss 18 and 19 . Signed by District Judge George Caram Steeh. (LSau)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
RICHARD N. BONDS, on
behalf of the Flat Rock Metal
and Bar Processing Employee
Stock Ownership Plan, and on behalf
of a class of all other persons
similarly situated,
Plaintiffs,
Case No. 23-12045
Hon. George Caram Steeh
v.
RICHARD A. HEETER, CAPITAL
TRUSTEES, LLC, PETER F.
SHIELDS, PAUL J. LANZON II,
and JOHN DOES 1-10,
Defendants.
_______________________________/
OPINION AND ORDER DENYING IN PART AND
AND GRANTING IN PART DEFENDANTS’
MOTIONS TO DISMISS (ECF NOS. 18, 19)
Defendants seek dismissal of Plaintiff’s complaint pursuant to Federal
Rule of Civil Procedure 12(b)(1) and (6). For the reasons explained below,
Defendants’ motions are denied in part and granted in part.
BACKGROUND FACTS
This case arises under the Employee Retirement Income Security Act
of 1974 (“ERISA”) and involves the creation of an Employee Stock
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Ownership Plan. Plaintiff Richard N. Bonds is a participant in the ERISA
plan at issue, the Flat Rock Metal and Bar Processing Stock Ownership
Plan (the “Plan” or “ESOP”). Defendants Richard A. Heeter and his
company, Capital Trustees, LLC, were appointed as the Plan’s Trustee.
In November 2020, the Plan purchased one hundred percent of the
outstanding shares of SAC Ventures, Inc., which is a holding company for
subsidiaries in the steel processing industry. SAC’s subsidiaries include
Flat Rock Metal, Inc., Steel Dimension, Inc., and Custom Coating
Technologies, Inc. The Plan purchased SAC stock from shareholders Peter
F. Shields and Paul J. Lanzon II, who are named as Defendants. At the
time of the ESOP transaction, Shields was President and a Director of
SAC, and Lanzon was Treasurer, Chief Executive Officer, and Director of
SAC. Lanzon is also Shields’ son-in-law.
Prior to the ESOP transaction, SAC was owned by members of the
Shields family and its stock was not publicly traded. SAC is the sponsor
and administrator of the Plan, which covers all employees of SAC and its
subsidiaries who have completed more than 1,000 hours of service.
As a method for transitioning ownership of SAC away from the
Shields family, Shields and Lanzon decided to develop an ESOP. The
board of directors of SAC appointed Richard Heeter and Capital Trustees
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as Trustee for the Plan. The Trustee had sole and exclusive authority to
negotiate and approve the ESOP transaction on behalf of the Plan.
The Plan purchased approximately one million shares of SAC stock
from Shields and Lanzon (or their trusts) for approximately $60 million.
SAC financed the sale by loaning the Plan the $60 million needed for the
purchase, at an interest rate of 1.17 percent. The complaint alleges that the
sale was financed by the sellers because they were unable to arrange for
bank financing, which would have required due diligence to ensure that the
stock was worth the price paid.
Plaintiff alleges that the Plan overpaid for the stock for several
reasons. Plaintiff contends that the purchase price should have been
discounted to reflect that the selling shareholders retained control of the
company. The complaint also asserts that the Trustee’s appraisal relied on
unrealistic growth projections and dissimilar comparable companies, while
failing to take into account the lack of marketability and the issuance of
“synthetic equity” that dilutes stock value. Plaintiff alleges that the Trustee’s
failure to diligently investigate these issues and to negotiate a fair price
resulted in the Plan paying an inflated price for the SAC stock. Although the
Plan paid approximately $60 million for the stock in November 2020, it was
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valued at approximately $3.6 million on December 31, 2020, and $17.1
million on December 31, 2021.
Plaintiffs have asserted the following claims under ERISA: Count I,
against the Trustee, for causing prohibited transactions in violation of
§ 406(a) (28 U.S.C. § 1106(a)); Count II, against the Trustee, for violation
of fiduciary duties under § 404(a) (28 U.S.C. § 1104(a)); Count III, against
Shields and Lanzon, for equitable relief under § 502(a)(3) for knowingly
participating in violations of § 404(a) and § 406(a); and Count IV, against
Shields and Lanzon, for co-fiduciary liability under § 405(a)(3). Defendants
seek dismissal for lack of standing and failure to state a claim.
LAW AND ANALYSIS
I.
Standard of Review
Under Federal Rule of Civil Procedure 8, a complaint must contain “a
short and plain statement of the claim showing that the pleader is entitled to
relief.” Fed. R. Civ. P. 8. To survive a motion to dismiss under Rule
12(b)(6), the plaintiff must allege facts that, if accepted as true, are
sufficient “to raise a right to relief above the speculative level” and to “state
a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). The complaint “must contain either direct or inferential allegations
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respecting all the material elements to sustain a recovery under some
viable legal theory.” Advocacy Org. for Patients & Providers v. Auto Club
Ins. Ass’n, 176 F.3d 315, 319 (6th Cir. 1999) (internal quotation marks
omitted).
II.
Standing
Standing is a jurisdictional requirement: “an essential and unchanging
part of the case-or-controversy requirement of Article III.” Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560 (1992). The party invoking federal
jurisdiction has the burden of demonstrating the three elements of standing:
First, the plaintiff must have suffered an “injury in fact” – an
invasion of a legally protected interest which is (a) concrete
and particularized, and (b) “actual or imminent, not
‘conjectural’ or ‘hypothetical.’” Second, there must be a
causal connection between the injury and the conduct
complained of – the injury has to be “fairly . . . trace[able]
to the challenged action of the defendant, and not . . . th[e]
result [of] the independent action of some third party not
before the court.” Third, it must be “likely,” as opposed to
merely “speculative,” that the injury will be “redressed by a
favorable decision.”
Lujan, 504 U.S. at 560-61 (citations omitted).
A facial challenge to the court’s subject matter jurisdiction, as
Defendants make here, “questions merely the sufficiency of the pleadings.”
Wayside Church v. Van Buren Cty., 847 F.3d 812, 816-17 (6th Cir. 2017).
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Accordingly, the court accepts the factual allegations in the complaint as
true, “just as in a Rule 12(b)(6) motion.” Id.
Plaintiff alleges that because the Plan overpaid for SAC stock, the
Plan and its participants were injured through diminished stock allocations,
excessive debt, and losses to individual plan accounts. ECF No. 1 at ¶ 73.
Valuations of the stock soon after the sale were significantly less than the
price paid by the Plan. These losses were caused by the Trustee’s failure
to diligently investigate and negotiate the ESOP transaction. Shields and
Lanzon authorized the loan from SAC and were centrally involved in the
transaction. ECF No. 1 at ¶¶ 44, 49. Plaintiffs assert that the Trustee, with
the knowing participation of the selling shareholders, breached his fiduciary
duty and caused the Plan to engage in a prohibited transaction. Plaintiffs
contend that Defendants are liable to the Plan for the difference between
the price paid by the Plan and the fair market value of the SAC shares.
These allegations satisfy the standing elements of injury in fact,
causation, and redressability. See, e.g., Braden v. Wal-Mart Stores, Inc.,
588 F.3d 585, 592 (8th Cir. 2009) (“Braden has satisfied the requirements
of Article III because he has alleged actual injury to his own Plan account,”
caused by defendants, that is likely to be redressed by a favorable
judgment); In re Mut. Funds Inv. Litig., 529 F.3d 207, 216 (4th Cir. 2008)
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(plaintiffs “suffered injury in that their retirement accounts were worth less
than they would have been absent the breach of duty, and this injury was
caused, as the plaintiffs have alleged, by the fiduciaries’ misconduct”).
The primary ESOP case relied upon by Defendants, Plutzer v.
Bankers Trust Co. of South Dakota, is distinguishable. 2022 WL 596356
(S.D.N.Y.), aff’d 2022 WL 17086483 (2d Cir. Nov. 21, 2022). In that case,
the plaintiff initially argued that post-transaction equity valuations of the
company supported his theory that the plan overpaid for the stock.
Subsequently, however, the plaintiff “disavowed” this argument, leaving no
concrete allegations of overpayment. Here, Plaintiff alleges that the “stock
was revalued at $3,649,046 as of December 31, 2020,” a short time after
the transaction was completed in November 2020. ECF No. 1 at ¶ 70.
Taking the facts in the complaint as true, as the court must at this stage,
Plaintiff’s allegations raise an inference of overpayment, which is an injury
to the Plan and its participants.
Defendants argue that Plaintiff cannot show injury because he cannot
substantiate his allegations that the stock was overpriced. This argument
goes to the merits of Plaintiff’s claim, however, not standing. See Arizona
State Legislature v. Arizona Indep. Redistricting Comm’n, 576 U.S. 787,
800 (2015) (“[O]ne must not ‘confus[e] weakness on the merits with
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absence of Article III standing.’”) (citation omitted); Huff v. TeleCheck
Servs., Inc., 923 F.3d 458, 462 (6th Cir. 2019), cert. denied, 140 S. Ct.
1117 (2020) (“There is a difference between failing to establish the
elements of a cause of action and failing to show an Article III injury. One is
a failure of proof. The other is a failure of jurisdiction. Yes, there can be
overlap between the two inquiries. But they are not one and the same.”).
Plaintiff’s general allegations of concrete and particularized injury are
sufficient at this stage of the proceedings. Lujan, 504 U.S. at 561 (“At the
pleading stage, general factual allegations of injury resulting from the
defendant’s conduct may suffice, for on a motion to dismiss we ‘presum[e]
that general allegations embrace those specific facts that are necessary to
support the claim.’”).
Defendants cite Lee v. Argent Trust Co., 2019 WL 3729721, at *3-4
(E.D. N.C. Aug. 7, 2019) for the proposition that because the plan borrowed
100% of the funds necessary to purchase the stock, it would be expected
that the equity value of the stock would be $0 immediately after the
transaction. In other words, the nature of the leveraged transaction
precludes a finding of injury. But Plaintiff makes no allegation about the
equity value of the stock immediately after the transaction; rather, he
contends that post-transaction valuations, along with flaws in the initial
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valuation methodology, raise an inference that the ESOP overpaid.
Moreover, for the purposes of standing, the court in Lee improperly focused
on the merits of the plaintiff’s claim, rather than on whether she alleged an
injury. For these reasons, the court declines to follow the reasoning in Lee.
See Placht v. Argent Trust Co., 2022 WL 3226809, at *3 (N.D. Ill. Aug. 10,
2022) (declining to follow Lee); Laidig v. GreatBanc Tr. Co., 2023 WL
1319624, at *5 (N.D. Ill. Jan. 31, 2023) (same).
III.
Count I
In Count I of the complaint, Plaintiff alleges violations of § 406 of
ERISA against the Trustee. Section 406 prohibits plan fiduciaries from
causing the benefit plan to engage in certain “prohibited transactions”
because these transactions create conflicts of interest. 29 U.S.C.
§ 1106(a). The purpose of this provision is “to prohibit transactions that
would clearly injure the plan.” Jordan v. Michigan Conf. of Teamsters
Welfare Fund, 207 F.3d 854, 858 (6th Cir. 2000) (citing Lockheed Corp. v.
Spink, 517 U.S. 882, 888 (1996)). “Congress adopted § 406 to prevent
employee benefit plans from engaging in transactions that would benefit
parties in interest at the expense of plan participants and their
beneficiaries.” Id.
Section 406(a) provides in part:
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(a) Except as provided in 29 U.S.C. § 1108 [ERISA § 408]:
(1) A fiduciary with respect to a plan shall not cause the
plan to engage in a transaction, if he knows or should
know that such transaction constitutes a direct or indirect-(A) sale or exchange, or leasing, of any property
between the plan and a party in interest;
(B) lending of money or other extension of credit
between the plan and a party in interest;
(C) furnishing of goods, services, or facilities
between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of, a party
in interest, of any assets of the plan; or
(E) acquisition, on behalf of the plan, or any
employer security or employer real property in violation
of section 1107(a) of this title.
29 U.S.C. § 1106(a). See 29 U.S.C. § 1002(14) (definition of “party in
interest” includes employer, owner, officer, or director).
ERISA provides exceptions to the prohibited transactions rule; for
example, under § 408(e)(1), § 406 does not apply to the acquisition or sale
by a plan of the employer’s securities as long as the acquisition or sale is
for “adequate consideration.” 29 U.S.C. § 1108(e)(1); see also Chao v. Hall
Holding Co., 285 F.3d 415, 425 (6th Cir. 2002). The statute defines
“adequate consideration” as follows:
[I]n the case of an asset other than a security for which
there is a generally recognized market, the fair market
value of the asset as determined in good faith by the
trustee or named fiduciary pursuant to the terms of the
plan and in accordance with regulations promulgated by
the Secretary.
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29 U.S.C. § 1002(18)(B). Additionally, under § 408(b)(3), § 406 does not
prohibit a loan to an ESOP, if “(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and (B) such loan is at an interest
rate which is not in excess of a reasonable rate.” 29 U.S.C.A. § 1108(b)(3).
These exceptions were enacted in order to encourage employee ownership
of their companies through ESOPs. Chao, 285 F.3d at 425.
Plaintiff alleges three violations of § 406(a)(1), based upon the stock
sale between the plan and a party in interest (§ 406(a)(1)(A)); the loan
between the plan and a party in interest (§ 406(a)(1)(B)); and the transfer of
assets from the plan to a party in interest (§ 406(a)(1)(D)). The Trustee
seeks dismissal of the claims based upon § 406(a)(1)(B) and (D), but does
not challenge Plaintiff’s § 406(a)(1)(A) claim.
With respect to the § 406(a)(1)(B) claim, challenging the loan
between the Plan and the employer, the Trustee asserts that the exemption
set forth in § 408(b)(3) applies and precludes liability. The § 408(b)(3)
exemption is an affirmative defense, for which the Trustee carries the
burden of proof. See Allen v. GreatBanc Tr. Co., 835 F.3d 670, 676 (7th
Cir. 2016). A motion to dismiss may be granted based upon an affirmative
defense only if “the plaintiffs’ complaint contains facts which satisfy the
elements of the defendant’s affirmative defense.” Estate of Barney v. PNC
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Bank, Nat. Ass’n, 714 F.3d 920, 926 (6th Cir. 2013). It is not an ERISA
plaintiff’s burden to “plead the absence of exemptions to prohibited
transactions. It is the defendant who bears the burden of proving a section
408 exemption.” Allen, 835 F.3d at 676 (citing cases).
The Trustee contends that the complaint establishes that the loan
was “primarily for the benefit of participants and beneficiaries of the plan”
and carried a reasonable interest rate. See 29 U.S.C.A. § 1108(b)(3). To
the contrary, the face of the complaint does not conclusively demonstrate
that the exemption applies. Plaintiff alleges that the loan financed a
transaction in which the ESOP paid an inflated price for company stock,
allowing the selling shareholders to divest their holdings. As such, the loan
benefited the selling shareholders rather than the Plan. ECF No. 1 at ¶¶ 5354. Although allegations establishing the absence of an exemption are not
required, the complaint nonetheless plausibly alleges that the loan was not
primarily for the benefit of the Plan. The Trustee is not entitled to dismissal
of Plaintiff’s § 406(a)(1)(B) claim based upon the § 408(b)(3) exemption.
The Trustee also seeks dismissal of Plaintiff’s claim under
§ 406(a)(1)(D), which provides that a fiduciary “shall not cause the plan to
engage in a transaction, if he knows or should know that such transaction
constitutes a direct or indirect . . . transfer to, or use by or for the benefit of
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a party in interest, of any assets of the plan. . . .” 29 U.S.C.A.
§ 1106(a)(1)(D). Plaintiff alleges that this provision was violated by the
transfer of Plan assets to the selling shareholders, in exchange for their
company stock. The Trustee argues that dismissal is warranted because
Plaintiff cannot show the Trustee had “a subjective intent to benefit a party
in interest” with respect to the transfer or use of assets. See Jordan, 207
F.3d at 861.
In Jordan, the participants of an ERISA plan brought suit against the
plan under ERISA and the Labor Management Relations Act. The
participants’ attorneys’ fees were advanced by their union. After the parties
settled their dispute, the district court approved the settlement agreement
and awarded the plaintiffs attorneys’ fees. However, the district court
determined that the plaintiffs could not reimburse the union for the
attorneys’ fees that it advanced, because such reimbursement would
constitute a prohibited transaction under § 406(a)(1)(D), as the transfer of
plan assets to a party in interest.
The Sixth Circuit reversed for several reasons, including that “[t]he
remittance of attorney’s fees to the [union] would not benefit the [union] in
the manner intended to be proscribed by the statute.” Jordan, 207 F.3d at
859. The court explained that a “benefit is defined as an advantage,
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privilege, profit or gain,” and the union “would not receive a benefit in the
context of the statutory framework involved in the instant case inasmuch as
the transaction would merely constitute repayment for money already
expended by [the union] in support of Plaintiffs’ suit against Defendants.”
Id. The court further explained the repayment of attorneys’ fees was not the
type of “abuse” Congress sought to protect against in enacting § 406(a),
“as the transaction will not injure the plan.” Id.
The Jordan court then addressed several other reasons why the
transaction was not prohibited by § 406(a), including that the defendants
could not show that the fund had a “subjective intent” to benefit the union.
Id. at 860-61 (citing Reich v. Compton, 57 F.3d 270 (3d Cir. 1995)). Plaintiff
argues that the Jordan court wrongly adopted the subjective intent
requirement and that it is, at most, limited to its facts. The Jordan opinion is
not so limited, however.
Plaintiff points to a subsequent Sixth Circuit case, Chao v. Hall
Holding Co., 285 F.3d 415, 442 (6th Cir. 2002), for the proposition that a
showing of subjective intent is not required under § 406(a)(1)(D). The Chao
court noted its concerns with the Jordan opinion in a footnote, including that
“requiring subjective intent for a violation of § 406(a)(1)(D) is against the
great weight of authority. Most courts and commentators have found that
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§ 406(a) contemplates per se violations.” Id. at 442 n.12. This observation,
although persuasive, is nonetheless dictum, as it was not necessary to the
Chao decision. Moreover, a panel of the Sixth Circuit may not overrule a
decision of a prior panel. “The prior decision remains controlling authority
unless an inconsistent decision of the United States Supreme Court
requires modification of the decision or this Court sitting en banc overrules
the prior decision.” Salmi v. Sec'y of Health & Hum. Servs., 774 F.2d 685,
689 (6th Cir. 1985).
Accordingly, Jordan is binding and controlling precedent, requiring
Plaintiff to show that the Trustee had a subjective intent to benefit a party in
interest by transferring plan assets. Plaintiff has not alleged that the
Trustee had a subjective intent or that the complaint creates a reasonable
inference of subjective intent. Therefore, Plaintiff’s claim under
§ 406(a)(1)(D) is subject to dismissal. The court will deny the Trustee’s
motion with respect to the claims under § 406(a)(1)(A) and (B).
IV.
Count II
Count II of the complaint alleges that the Trustee breached his
fiduciary duties under ERISA § 404(a), 29 U.S.C. § 1104(a). This section
provides that a “fiduciary shall discharge his duties with respect to a plan
solely in the interest of the participants and beneficiaries and—"
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(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
(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).
“Consequently, ERISA fiduciaries ‘must act for the exclusive benefit
of plan beneficiaries.’” Chao, 285 F.3d at 425. The duty of loyalty requires
that “all decisions regarding an ERISA plan ‘must be made with an eye
single to the interests of the participants and beneficiaries.’” Id. (citations
omitted). The duty of prudence “imposes ‘an unwavering duty’ to act both
‘as a prudent person would act in a similar situation’ and ‘with singleminded devotion’ to those same plan participants and beneficiaries.” Id.
(citations omitted); see also Pipefitters Loc. 636 Ins. Fund v. Blue Cross &
Blue Shield of Michigan, 722 F.3d 861, 867 (6th Cir. 2013). In addition, the
Plan itself requires that “[a]ll purchases and sales of Company Stock shall
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be made at a price not less favorable to the Trust than fair market value as
determined in good faith by the Trustee.” ECF No. 1 at ¶ 51.
Plaintiff alleges that the Trustee breached the duties of loyalty and
prudence and failed to act in accordance with plan documents, in violation
of § 1104(a)(1)(A), (B), and (D). The complaint alleges that the Trustee
breached these duties by failing to thoroughly investigate the merits of the
company stock purchase. It also alleges that the Trustee would receive
ongoing fees if the ESOP transaction was approved, and that the Trustee
depended on referrals by other providers in the ESOP business, such as
Greenwich Capital Group LLC, the sellers’ advisor, which appointed him.
ECF No. 1 at ¶¶ 46-47, 49-50, 71. These allegations are sufficient to state
a claim for breach of the duties of loyalty and prudence. See Chao, 285
F.3d at 434 (duties of loyalty, prudence, and exclusive purpose breached
by defendants who did not properly investigate or negotiate stock sale).
Although the Trustee suggests that Plaintiff must allege “self-dealing”
in order to state a claim for breach of loyalty, such a claim is not so
narrowly defined. See id; Pipefitters, 722 F.3d at 869 (“ERISA’s duties of
loyalty and care are undeniably broader than the prohibition against selfdealing, [and require] acting with the ‘care, skill, prudence, and diligence’
‘with an eye single to the interests of the participants and beneficiaries.’”);
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see also Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 298 (5th Cir. 2000)
(the duty of loyalty inquiry concerns “the extent to which the fiduciary’s
conduct reflects a subordination of beneficiaries’ and participants’ interests
to those of a third party”).
With respect to the duties of loyalty and prudence, and the failure to
act in accordance with plan documents, the Trustee argues that Plaintiff
has not alleged facts impugning the valuation process, but only
“hypothetical critiques.” The complaint alleges several reasons why Plaintiff
believes the Trustee’s valuation of the stock was flawed and that the ESOP
paid an inflated price due to the Trustee’s improper investigation. ECF No.
1 at ¶¶ 59-70. These allegations are sufficiently specific to comply with
Rule 8 notice pleading standards. See Allen, 835 F.3d at 678 (holding in
ESOP case that “[i]t was enough to allege facts from which a factfinder
could infer that the process was inadequate” and “an ERISA plaintiff
alleging breach of fiduciary duty does not need to plead details to which
she has no access, as long as the facts alleged tell a plausible story”);
Braden, 588 F.3d at 598 (“No matter how clever or diligent, ERISA plaintiffs
generally lack the inside information necessary to make out their claims in
detail unless and until discovery commences.”). The court will deny the
Trustee’s motion to dismiss as to Count II.
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V.
Count III
Count III seeks equitable relief against Shields and Lanzon pursuant
to ERISA § 502(a)(3), to redress their knowing participation in the violations
of § 404(a) (breach of fiduciary duty) and § 406(a) (prohibited transaction).
Section 502(a)(3) authorizes a “participant, beneficiary, or fiduciary” of a
plan to bring a civil action to obtain “appropriate equitable relief” to redress
violations of ERISA Title I. 29 U.S.C. § 1132(a)(3); Harris Trust & Sav.
Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241 (2000). With
respect to his claim that Defendants knowingly participated in a transaction
prohibited by § 406, Plaintiff must allege that these defendants “had actual
or constructive knowledge of the circumstances that rendered the
transaction unlawful.” Harris, 530 U.S. at 251.
Shields and Lanzon argue that Plaintiff has not sufficiently alleged
that they knew or should have known that the stock was overpriced and
that the transaction was prohibited under § 406(a). Plaintiff alleges that
Shields and Lanzon were officers, directors, and more than ten percent
shareholders in SAC, who were centrally involved in the transaction,
including directing the preparation of financial information used to value the
stock. They were selling a family business: Shields was the founder of the
company, and Lanzon is his son-in-law. These allegations regarding
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Defendants’ roles and participation in the transaction are sufficient at this
stage to infer that Shields and Lanzon knew or should have known the
stock’s true value. See, e.g., Placht, 2022 WL 3226809, at *13; Lysengen
v. Argent Trust Co., 2022 WL 854818, at *5 (C.D. Ill. Mar. 22, 2022)
(“These shares were not just an anonymous piece of an investment
portfolio, but a family business where the selling shareholders must
necessarily have been involved in the details of the sale.”).
With respect to Plaintiff’s claim that they knowingly participated in a
breach of fiduciary duty in violation of § 404(a), Defendants argue that such
a claim is not cognizable under ERISA § 502(a)(3). Defendants assert that
although Harris recognized a claim for knowing participation in a
transaction prohibited by § 406(a), Harris should not be extended to
authorize claims against non-fiduciaries for knowing participation in a
breach of fiduciary duty under § 404(a). The reasoning in Harris, however,
is not limited to § 406(a) claims. The Court relied upon the language of
§ 502(a)(3), which provides that a plan participant, beneficiary, or fiduciary
may bring suit: “(A) to enjoin any act or practice which violates any
provision of this subchapter or the terms of the plan, or (B) to obtain other
appropriate equitable relief (i) to redress such violations or (ii) to enforce
any provisions of this subchapter or the terms of the plan.” 29 U.S.C.
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§ 1132(a)(3) (emphasis added). The court held that “§ 502(a)(3) itself
imposes certain duties, and therefore that liability under that provision does
not depend on whether ERISA’s substantive provisions impose a specific
duty on the party being sued.” Harris, 530 U.S. at 245. The Sixth Circuit
has recognized that although in Harris “liability was premised on the
nonfiduciary’s role as a party-in-interest to the prohibited transaction,
though the Court’s rationale would seem to apply to other nonfiduciaries as
well.” McDannold v. Star Bank, N.A., 261 F.3d 478, 486 (6th Cir. 2001); see
also Rudowski v. Sheet Metal Workers Int’l Ass’n, Loc. Union No. 24, 113
F. Supp. 2d 1176, 1180 (S.D. Ohio 2000) (“Given that section 406(a)(1)
was enacted to supplement and to clarify section 404(a)(1), this Court finds
that a violation of section 404(a)(1) would support a claim under section
502(a)(3) as readily as would a violation of section 406(a)(1).”). Although
the Sixth Circuit has not directly addressed the issue, the court agrees that
under the reasoning of Harris, a plaintiff may seek equitable relief against a
nonfiduciary for knowing participation in a breach of fiduciary duty under
§ 404(a)(1).1 Defendants have not persuasively articulated why, under
Defendants’ out-of-circuit authority is distinguishable in that it addresses the availability
of money damages rather than equitable relief, or does not fully consider the
implications of Harris. See Gerosa v. Savasta & Co., Inc., 329 F.3d 317, 321-23 (2d Cir.
2003) (issue was whether remedy sought was properly characterized as restitution, and
whether § 502(a)(3) permitted money damages); Renfro v. Unisys Corp., 671 F.3d 314,
325 (3d Cir. 2011) (holding no claim against “nonfiduciaries charged solely with
1
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§ 502(a)(3) and Harris, knowing participation in a § 404(a) violation should
be treated differently than knowing participation in a § 406(a) violation. The
court declines to dismiss Count III on this basis.
Defendants next argue that Plaintiff has not requested true equitable
relief, but money damages, which are not authorized by § 502(a)(3).
Plaintiff alleges that Defendants “profited from the prohibited stock
transaction in an amount to be proven at trial, and upon information and
belief, they remain in possession of assets that belong to the Plan.” ECF
No. 1 at ¶ 105. Plaintiff seeks relief including “disgorgement or restitution of
ill-gotten gains,” and reformation or rescission of the transaction. Id. at
¶ 106.
“[B]oth disgorgement and equitable restitution may be pursued
through § 1132(a)(3). Disgorgement is an equitable remedy that ‘deprive[s]
wrongdoers of their net profits from unlawful activity.’ Like disgorgement,
equitable restitution ‘seeks to punish the wrongdoer’ by stripping him ‘of illgotten gains.’ Relief in the universe of transferred assets is generally
participating in a fiduciary breach,” but does not examine Harris); cf. Nat'l Sec. Sys., Inc.
v. Iola, 700 F.3d 65, 90 (3d Cir. 2012) (calling reasoning of Renfro into doubt and noting
that several courts of appeal have determined that “the Harris Trust reasoning is not
tethered to the limitations of § 406(a)”); Halperin v. Richards, 7 F.4th 534, 553 (7th Cir.
2021) (observing, without deciding, that “Harris’s reasoning would seem to extend
equally to a § 404 fiduciary duty claim”).
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limited, however, by an important caveat – the tracing requirement. That is
certainly true for equitable restitution, where an award must trace back to
‘particular funds or property in the defendant’s possession.’” Patterson v.
United HealthCare Ins. Co., 76 F.4th 487, 497 (6th Cir. 2023).2
Defendants rely upon Helfrich v. PNC Bank, Kentucky, Inc., 267 F.3d
477, 481 (6th Cir. 2001), in which the court determined that the plaintiff
could not proceed under § 502(a)(3) because he was not seeking equitable
relief. The plaintiff in Helfrich wanted the defendant to “compensate him for
losses he suffered because PNC Bank failed to transfer his assets to
higher performing mutual funds.” Id. The court determined that the
requested remedy “constitutes money damages, not restitution.” Id.
Here, Plaintiff is alleging that the plan overpaid for stock. The
overpayment may constitute a “specifically identified fund” in Defendants’
possession that “is potentially susceptible to recovery under § 1132(a)(3),
even if commingled with other funds.” Patterson, 76 F.4th at 498. At this
stage of the proceedings, Plaintiff has alleged “a colorable equitable claim.”
Id. The court will deny Defendants’ motion to dismiss Count III.
Plaintiff seeks leave to file a sur-reply, because Defendants raised the traceability
requirement for the first time in their reply brief. The court agrees that the sur-reply will
assist in its review of the motion and will grant leave to file it.
2
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VI.
Count IV
Count IV alleges that Shields and Lanzon are liable as co-fiduciaries
under ERISA § 405(a). See 29 U.S.C. § 1102(a). Circumstances giving rise
to co-fiduciary liability include knowingly participating in a breach of
fiduciary duty. 29 U.S.C. § 1105(a). The statute defines a fiduciary as one
who “exercises any discretionary authority or . . . control respecting
management of [a] plan, or . . . disposition of its assets”; and who “has any
discretionary authority or . . . responsibility in the administration of [a] plan.”
29 U.S.C. § 1002(21)(A)(i), (ii). The threshold question in ERISA fiduciary
breach case is whether the defendant “was acting as a fiduciary (that is,
was performing a fiduciary function) when taking the action subject to
complaint.” Pegram v. Herdrich, 530 U.S. 211, 226 (2000).
Defendants argue that Plaintiff has not sufficiently alleged facts
establishing their fiduciary status with respect to the plan or the transaction.
Plaintiff alleges that Shields and Lanzon were fiduciaries based upon their
roles as directors of SAC, were named fiduciaries under the plan, had
discretionary authority over plan assets and management, and were
fiduciaries with respect to their appointment of the Trustee. ECF No. 1 at
¶¶ 23, 44, 47-48. Plaintiff further alleges that Defendants were “centrally
involved in conceiving of, facilitating, and executing the Transaction,” that
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they had a duty to monitor the Trustee’s performance, and that Lanzon
signed the ESOP Trust Agreement. It is “well-established that the power to
appoint plan trustees confers fiduciary status.” Stockwell v. Hamilton, 163
F. Supp. 3d 484, 490-91 (E.D. Mich. 2016) (quoting Liss v. Smith, 991
F.Supp. 278, 310 (S.D.N.Y.1998) (citing cases)); see also 29 C.F.R.
§ 2509.75-8 (when the board of directors are “responsible for selection and
retention of plan fiduciaries,” they “exercise discretionary authority or
discretionary control respecting management of such plan and are,
therefore, fiduciaries with respect to the plan”). Plaintiff has sufficiently
alleged that Defendants were fiduciaries; the extent of their fiduciary duties
with respect to the transaction is a matter requiring factual development
that is not amenable to a motion to dismiss. See generally Hamilton v.
Carell, 243 F.3d 992, 997 (6th Cir. 2001) (unless the facts are undisputed,
“fiduciary status under ERISA is a mixed question of law and fact”).
Defendants also argue that Plaintiffs have failed to allege that they
had actual knowledge of, enabled, or participated in a fiduciary breach. As
discussed above, Plaintiffs have plausibly alleged that Defendants had
knowledge of the relevant facts surrounding the allegedly prohibited
transaction, including that stock was overvalued. See ECF No. 1 at ¶ 102.
Plaintiffs further allege that Defendants enabled the Trustee’s breach of
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fiduciary duty by providing him with unreasonably optimistic financial
projections, by failing to inform him of material information about the true
value of SAC, and by failing to monitor his performance. These allegations
are sufficient to state a claim of co-fiduciary liability. See Stockwell, 163
F.Supp.3d at 491(“[t]he power to appoint and remove trustees carries with
it the concomitant duty to monitor those trustees’ performance”).
CONCLUSION
Defendants generally take issue with whether Plaintiff’s claims are
factually supported, rather than whether his allegations are sufficient to
survive a Rule 12(b)(6) motion. Except for Plaintiff’s § 406(a)(1)(D) claim in
Count I, the court finds that Plaintiff’s complaint satisfies basic pleading
standards. Therefore, IT IS HEREBY ORDERED that the Trustee’s motion
to dismiss (ECF No. 19) is GRANTED IN PART AND DENIED IN PART,
consistent with this opinion and order. IT IS FURTHER ORDERED that
Shields and Lanzon’s motion to dismiss (ECF No. 18) is DENIED, and
Plaintiff’s motion for leave to file a sur-reply (ECF No. 25) is GRANTED.
Dated: May 8, 2024
s/George Caram Steeh
HON. GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE
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CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record
on May 8, 2024, by electronic and/or ordinary mail.
s/Lashawn Saulsberry
Deputy Clerk
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