Acosta v. Reliance Trust Company et al
Filing
124
ORDER denying the Director Defendants' Motion for Judgment on the Pleadings 105 , and granting Third-Party Defendant Rode's Motion to Dismiss the Third-Party Complaints 109 (Written Opinion) Signed by Judge Susan Richard Nelson on 8/9/2019. (ACT)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
R. Alexander Acosta, Secretary of Labor,
U.S. Department of Labor,
Case No. 17-cv-4540 (SRN/ECW)
Plaintiff,
v.
Reliance Trust Company; Steven R.
Carlsen; Paul A. Lillyblad; Kelli Watson;
and Kurt Manufacturing Company, Inc.,
Employee Stock Ownership Plan,
Defendants and Third-Party
Plaintiffs,
MEMORANDUM OPINION
AND ORDER
v.
Gretchen Kuban Rode, in her capacity as
Personal Representative of the Estate of
William G. Kuban,
Third-Party Defendant.
Ruben R. Chapa, Elizabeth Arumilli, and Kevin M. Wilemon, United States Department
of Labor, Office of the Solicitor, 230 South Dearborn Street, Suite 844, Chicago, IL 60604,
for Plaintiff.
William B. Brockman and Pierce G. Hand IV, Bryan Cave Leighton Paisner LLP, 1201
West Peachtree Street, Fourteenth Floor, Atlanta, GA 30309, and Bradley R. Armstrong
and Terese A. West, Moss & Barnett PA, 150 South Fifth Street, Suite 1200, Minneapolis,
MN 55402, for Defendant and Third-Party Plaintiff Reliance Trust Company.
Jonathan P. Norrie, Alan I. Silver, Brittany B. Skemp, and Casey D. Marshall, Bassford
Remele PA, 100 South Fifth Street, Suite 1500, Minneapolis, MN 55402, for Defendants
and Third-Party Plaintiffs Steven R. Carlsen, Paul A. Lillblad, and Kelli Watson, and
Defendant Kurt Manufacturing Company, Inc., Employee Stock Ownership Plan.
David R. Marshall, Kyle W. Ubl, Leah C. Janus, and Marie Williams, Fredrikson & Byron
PA, 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402, for Third-Party
Defendant Gretchen Kuban Rode.
SUSAN RICHARD NELSON, United States District Judge
This case centers around a closely held Minnesota company called “Kurt
Manufacturing Inc.” (“Kurt”), and around a sale of Kurt stock that occurred on October 5,
2011. In that sale of stock, Kurt’s then-majority shareholder and board chairman, William
Kuban, sold his 75% stake in Kurt to Kurt’s “employee stock ownership plan,” or “ESOP,”1
so as to allow the ESOP to own 100% of Kurt. The ESOP entered into this transaction after
the non-Kuban-related members of Kurt’s board of directors, i.e., Defendants Carlsen,
Lillyblad, and Watson (“the Directors”), vetted the transaction, and then appointed an
independent trustee, i.e., Defendant Reliance Trust Company (“Reliance”), to negotiate the
final price on the ESOP’s behalf.
In the view of the United States Department of Labor (“DOL”), however, in
orchestrating this transaction, Defendants (both the Directors and Reliance) failed to abide
by the fiduciary duties they owed the ESOP, as set forth in the Employee Retirement
Income Security Act of 1974 (“ERISA”).2 More specifically, DOL alleges, Defendants
1
An ESOP is a kind of pension plan that invests primarily in the stock of the
company that employs the plan’s participants.
“ERISA is a comprehensive [federal] statute designed to promote the interests of
employees and their beneficiaries in employee benefit plans.” Shaw v. Delta Air Lines,
Inc., 463 U.S. 85, 90 (1983). To that end, the statute “sets various uniform standards,
including rules concerning reporting, disclosure, and fiduciary responsibility, for both
pension and welfare plans.” Id. at 91.
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breached their duties of loyalty and prudence to the ESOP because they approved the atissue transaction despite being aware of data suggesting that Kuban’s selling price was
unreasonably high. As a result, DOL claims, the ESOP paid far more for Kuban’s share of
the company than it should have, and thus enriched Kuban (and Defendants) at the expense
of Kurt employees.
Defendants dispute DOL’s theory of the case on two fronts. First, on the merits,
Defendants argue that the ESOP did not overpay for Kuban’s share of the company, and
that they acted with prudence and loyalty toward the ESOP at all relevant times. Second,
from a procedural perspective, Defendants argue that, even assuming an ERISA violation
occurred, they should not have to pay DOL damages. Rather, Defendants contend, because
of an indemnification obligation allegedly to them by Kuban, Kuban’s Estate should pay
those damages. (Kuban is deceased and is now represented by his surviving daughter,
Gretchen Kuban Rode.) Accordingly, both sets of Defendants have brought third-party
complaints against Rode, on grounds that, if DOL succeeds on the merits of its ERISA suit,
Rode must indemnify them for their losses.
The Court now considers one motion related to each of these two defenses. First,
the Directors (but not Reliance) have moved for judgment on the pleadings, contending
that DOL has failed to set forth a plausible set of fiduciary breach allegations against them.
Second, Rode has moved to dismiss both third-party complaints filed against her, arguing
that there are no contractual, equitable, or statutory grounds under which she must
indemnify Defendants.
3
After carefully considering the parties’ arguments and the applicable case law, the
Court denies the Directors’ motion for judgment on the pleadings, and grants Rode’s
motion to dismiss the third-party complaints.
I.
BACKGROUND
A. Factual Background
1. The Parties
The United States Department of Labor (“DOL”) is the plaintiff in this case. DOL
is a federal agency tasked with enforcing ERISA, among other statutes. Congress has
authorized DOL to bring civil suits against persons who fail to comply with ERISA. See
29 U.S.C. §§ 1132(a)(2), (a)(5).
Defendants are all connected to Kurt, a privately-owned Minnesota corporation that
provides a variety of industrial services, such as “fabricating” and “die casting.” (Am.
Compl. [Doc. No. 46] ¶ 12.) For ease of reference, however, the Court will treat the “Kurt
Defendants” as four distinct entities.
The first defendant is Third-Party Defendant Gretchen Kuban Rode, who currently
serves as the personal representative for the Estate of William G. Kuban (“Rode”). (See
Directors’ Third-Party Compl. [Doc. No. 100] ¶ 2.) Before the at-issue ESOP transaction,
Kuban owned 75.6% of Kurt, and served as the chairman of Kurt’s board of directors. (Id.)
In 2012, sometime after selling his stake in Kurt, Kuban died, and thereafter left his
daughter, Rode, to administer his estate. (Id.) At the time of the at-issue transaction, Rode
also served on Kurt’s board of directors.
4
The second defendant (or, more accurately put, group of defendants) consists of
Steven R. Carlsen, Paul A. Lillyblad, and Kelli Watson (collectively, “the Directors”). At
all relevant times, Carlsen was Kurt’s President, Lillyblad was Kurt’s Vice President of
Finance, and Watson was Kurt’s Vice President of Human Resources. (Am. Compl. ¶¶ 1618; see also Directors’ Am. Answer [Doc. No. 100] ¶ 10 (noting that all three individuals
are still executives at Kurt, albeit with slightly different titles).) In October 2011, these
three individuals, together with Kuban and Rode, comprised the entirety of Kurt’s fivemember board of directors. (Am. Compl. ¶¶ 16-18.)
The third defendant is Reliance Trust Company, Inc. (“Reliance”), an independent
trust company based in Atlanta, Georgia. (Reliance Third-Party Compl. [Doc. No. 90] ¶
1.)
The fourth and final defendant is Nominal Defendant3 Kurt Manufacturing
Company, Inc. Employee Stock Ownership Plan (“ESOP”), which is a “pension plan”
subject to ERISA’s regulatory scheme. (Am. Compl. ¶ 5 (citing 29 U.S.C. § 1002(2)); see
also Martin v. Feilen, 965 F.2d 660, 664 (8th Cir. 1992) (explaining that ESOPs are
pension plans that invest in “stock of the employer creating the plan,” and are therefore
intended to be “both an employee retirement benefit plan and a technique of corporate
The Court uses the phrase “nominal defendant” because, in its complaint, DOL
avers that “the ESOP is named as a Defendant . . . solely for the purpose of ensuring
complete relief among the parties under Fed. R. Civ. P. 19.” (Am. Compl. ¶ 5.) Although
the ESOP is technically represented by the same counsel as the Directors, to date, neither
the Plan nor its current trustee, Bremer Trust, N.A., has attempted to participate in this
litigation in any manner whatsoever. (See Reliance Third Party Compl. ¶¶ 22-24 (noting
that Bremer has served as the ESOP’s trustee since November 10, 2011).)
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finance that encourage[s] employee ownership”).) Until October 5, 2011, the ESOP
controlled the portion of Kurt that Kuban did not control, i.e., 24.4% of the company. (Id.
¶ 15.) Since that date, however, the ESOP has owned 100% of Kurt’s stock. (Id. ¶ 65.)
2. The October 5, 2011 Transaction
a. The Undisputed Facts4
The basic facts and timeline surrounding the October 5, 2011 Kuban-ESOP stock
transaction are undisputed. At some point in late 2010 or early 2011, Kurt’s board of
directors (who, at the time, were also serving as the ESOP’s trustees) began “exploring”
the idea of “selling the company to a third party.” (Am. Compl. ¶ 32.) However, upon
learning that selling Kurt to a willing third-party buyer, such as a private equity firm, would
likely entail “breaking Kurt apart,” Kurt’s board decided to consider an “inside” transaction
instead. (Id. ¶ 31.) That is, instead of selling Kurt to an outside private equity firm, Kurt’s
board determined that perhaps Kuban could sell his 75% stake in the company to the ESOP,
i.e., Kurt’s only other shareholder, and thus allow Kurt’s ownership to stay “in house.” As
such, in March 2011, Kurt’s board began working with a financial advisory company,
Chartwell Business Valuation, LLC (“Chartwell”), on a proposed “ESOP transaction.” (Id.
¶¶ 31, 33.)
On April 28, 2011, after receiving Kurt’s “financial information” and “future
projections,” Chartwell made a “detailed presentation” to Kurt’s board. (Id. ¶ 34.) In this
presentation, Chartwell “estimated [that] the equity purchase value for the Kuban shares
The Court describes these facts as “undisputed” because, in their Amended
Answer, the Directors conceded the truth of the cited allegations.
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was $28.7 million.” (Id.) As a result of this presentation, on June 3, 2011, Kurt’s board
retained Chartwell to “direct and/or assist in the coordination, design, economic analysis,
and execution of the ESOP transaction.” (Id. ¶ 35.)
On July 11, 2011, following more meetings between Chartwell and Kurt’s board,
Chartwell sent Kurt’s board a “final lender material packet” valuing Kuban’s share of Kurt
at $39.1 million, which, for unclear reasons, was over $10 million higher than Chartwell’s
initial projection in April. (Id. ¶ 37.) Moreover, on a per-share basis, Chartwell’s $39.1
million number valued Kurt shares at approximately $85 per share. (Id. ¶ 58.) This
valuation was notable because it stood in marked contrast to prior valuations of Kurt stock.
(See id. ¶¶ 19-30 (noting that, between July 1999 and October 2010, Kurt’s stock had been
consistently valued between $13.86 per share and $33.44 per share); Directors’ Am.
Answer ¶¶ 11-12 (admitting that, with one exception, the Directors had been aware of these
valuations prior to the ESOP transaction).)
A week after receiving Chartwell’s “final” $39.1 million valuation, on July 18,
2011, Kurt’s President, Director Defendant Carlsen, “signed an engagement letter with
Reliance,” which required Reliance to act as the ESOP’s “trustee” for purposes of the
forthcoming ESOP transaction. (Id. ¶ 42.) Specifically, Reliance agreed to “assume
fiduciary responsibility as a discretionary trustee for determining, in consultation with its
advisors, the prudence of the [ESOP’s] purchase, that the purchase price in the Proposed
Transaction [did] not exceed ‘adequate consideration’ as that term is defined [in ERISA]
and that the Proposed Transaction [was] fair to the ESOP from a financial viewpoint.” (Id.)
The engagement letter also stated that Reliance would have “complete and absolute
7
discretionary authority in investigating and evaluating the Proposed Transaction.” (Id.)
Shortly after signing this engagement letter with Reliance, Kurt’s board of directors
resigned as “Trustees of the ESOP,” and “executed a Written Resolution appointing
Reliance as the Trustee of the ESOP.” (Id. ¶ 52.)5
After taking over as the ESOP’s trustee, Reliance hired the financial advisory firm
Stout Risius Ross (“SRR”) to produce a “written fairness report” detailing what a fair and
reasonable buyer would pay for Kuban’s share of Kurt under normal market conditions.
(Id. ¶¶ 48-51.) SRR produced that report shortly thereafter, on August 19, 2011. (Id. ¶ 54.)
In its report, SRR “concluded that the fair market value of Kurt’s equity not already owned
by the ESOP was between $34.2 million and $43.1 million, with a midpoint of $39
million.” (Id. ¶ 56.) Consequently, “SRR identified the price to be paid by the ESOP for
the stock [as] $39 million, or $85.22 per share.” (Id. ¶ 58.) Notably, this recommended
price tag was the same “final” number Kurt’s board had received from Chartwell about a
month earlier, before Kurt had hired Reliance to serve as the ESOP’s new trustee.
Reliance adopted SRR’s recommendation in full and, on October 5, 2011, Kuban
sold his 75% stake in Kurt to the ESOP for $39 million. (Id. ¶ 64.) The agreement “was
As a point of context, the Court notes that this “changing of the guard” occurred
because ERISA outright prohibits pension plan fiduciaries from entering into an “inside”
ESOP transaction like the proposed Kuban transaction unless the ESOP’s
fiduciary/trustee shows that the ESOP purchased the insider’s stock for “adequate
consideration.” See 29 U.S.C. § 1108(e)(1); see also Martin, 965 F.2d at 670-71
(observing that this rule exists because the “potential for disloyal self-dealing” is
“inherently great when insiders act for a closely held corporation’s ESOP”). Hence, to
ensure that the ESOP paid a fair and “adequate” price for Kuban’s share of Kurt (or to at
least give that appearance), Kurt’s board of directors hired Reliance, an independent trust
company, to “negotiate” the final ESOP transaction price on behalf of the ESOP.
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signed by Kuban as selling shareholder, by Reliance as ESOP trustee, and by Carlsen as
Kurt President.” (Id. ¶ 64.) The ESOP financed the transaction by taking out loans from
Kurt (for $20 million) and from Kuban himself (for $19 million). (Id. ¶¶ 66-67.) Moreover,
as part of this transaction, Kurt’s board “established a Stock Appreciation Rights (SAR)
plan for key officers,” including the Director Defendants, which allowed those officers to
be awarded Kurt stock as bonus payments. (Id. ¶ 70.) In addition, to ensure that soon-toretire Kurt employees did not lose their ESOP investment if Kurt’s share price suddenly
dropped after the ESOP transaction, Carlsen (Kurt’s President) and Reliance executed a
“Price Support Agreement” on October 5, 2011, too. (Id. ¶¶ 71-72.) However, in contrast
to the $85 per-share sales price, the Price Support Agreement set Kurt’s “fair market value”
at only $55.29 per share. (Id.)
With its work complete, Reliance resigned as the ESOP’s trustee on October 28,
2011. (Id. ¶ 74.) A few weeks later, Kurt’s board of directors appointed Bremer Trust, N.A.
(“Bremer”) as “the new ongoing trustee for the ESOP.” (Reliance Third-Party Compl. ¶
22.) Bremer remains in that position today. (Id. ¶ 24.)
b. The Disputed Facets of the Transaction
As is evident from even a cursory comparison of DOL’s Complaint and the
Directors’ Amended Answer, however, several important facets of this transaction are
hotly disputed.6
6
Admittedly, because motions for judgment on the pleadings are decided before
discovery has been conducted in a case, these kinds of stark factual disputes are often not
evident at this early a stage of litigation. However, because the Directors elected to
include numerous new “affirmative allegations” in their Amended Answer, the disparity
9
First, although DOL alleges that the Directors essentially organized and approved
the ESOP transaction (including the final $39 million price tag) “prior to engaging
Reliance,” and therefore only hired Reliance for appearance’s sake, the Directors point to
the Reliance engagement letter and contend that the letter single-handedly shows that the
Directors “had no ability to control the terms of” the ultimate ESOP transaction. (Compare,
e.g., Am. Comp. ¶¶ 40, 46 with Directors’ Am. Answer ¶¶ 19-20.)
Second, although DOL alleges that Chartwell’s jump from valuating the Kuban
stock at $28.7 million on April 28, 2011 to valuating that same stock at $39.1 million on
July 11, 2011 did not make financial sense, and that Director Lillyblad (Kurt’s Vice
President of Finance) had been told as much by a lender in a late July 2011 e-mail
exchange, the Directors counter that the $28.7 million valuation was merely an “initial
estimate based on incomplete information,” and that the e-mail exchanged cited by DOL
in its complaint does not mean what DOL infers it to mean. (Compare, e.g., Am. Comp. ¶¶
34-41 with Directors’ Am. Answer ¶¶ 14-18.)
Third, although DOL alleges that the prior valuations of Kurt’s stock should have
put the Directors on notice that a $85 per share sales price was unreasonably high, the
Directors counter that sound economic and practical reasons justified the price differential.
(Compare, e.g., Am. Comp. ¶ 82 with Directors’ Am. Answer ¶¶ 82-83 (listing at least six
such reasons).)
in the parties’ interpretation of certain facts is evident from the face of the pleadings
alone.
10
Fourth, although DOL alleges that the Directors “failed to monitor” Reliance as it
negotiated on behalf of the ESOP, and did not stop Reliance (and/or SSR) from simply
rubber-stamping the (purportedly excessive) July 11 $39 million Chartwell valuation, the
Directors counter that they “were actively engaged in ensuring the growth projections that
were utilized by Reliance and SRR were reasonable.” (Compare, e.g., Am. Comp. ¶ 82
with Directors’ Am. Answer ¶¶ 24-25.)
Fifth, and finally, although DOL alleges that the $55 per share price used in the
Price Support Agreement provides further evidence that the Directors knew the $85 per
share was unreasonably high at the time of the ESOP transaction, the Directors counter by,
again, pointing out various economic rationales justifying the price differential. (Compare,
e.g., Am. Comp. ¶¶ 71-72, 82 with Directors’ Am. Answer ¶¶ 36, 44.)
3. The Indemnification Agreements
Setting aside for the moment the substance of the October 5, 2011 transaction, the
Court also notes that, as part of this transaction, the at-issue parties signed indemnification
agreements with each other.
First, and most importantly, on October 5, 2011, Kuban, Reliance (on behalf of the
ESOP), and Director Defendant Carlsen (on behalf of Kurt) signed and executed a
“Limitation Agreement.” (See Reliance Third-Party Compl., Ex. A [Doc. No. 90-1]
(“Limitation Agreement”).) Two provisions are of note here.
One, in the section of the Limitation Agreement detailing “Covenants of the
Company,” the parties agreed that, should a court of competent jurisdiction decide that the
ESOP overpaid for Kuban’s shares, i.e., more than “adequate consideration,” Kuban
11
“shall” either (1) offset the “Excess Purchase Price” from “amounts otherwise due under
the Seller Notes [due to the ESOP] in the manner that [Kuban] (or his successor) may
specify,”7 or (2) “if no amounts remain due and payable under the Seller Notes, [Kuban]
(or his successor) shall pay to the [ESOP] the amount of the Excess Purchase Price.” (Id.
§ 3.1(d) (hereinafter, the “Excess Purchase Price” provision).)
Two, in the section of the Limitation Agreement detailing “Special
Indemnifications” for “ERISA Proceedings,” the parties agreed that Kurt shall “indemnify
and defend [Reliance] and hold [Reliance] harmless from and against any and all Adverse
Consequences which may be incurred by [Reliance], arising by virtue of the applicability
of legal or regulatory requirements . . . including without limitation any applicable
provisions of ERISA.” (Id. § 4.4(c).) However, in accordance with ERISA, the Agreement
did not require Kurt to indemnify Reliance “for its own gross negligence, breach of
fiduciary duty, or willful misconduct as determined by a court of competent jurisdiction.”
(Id. § 4.4(c); see 29 U.S.C. § 1110(a) (“[A]ny provision in 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.”).)
Second, on October 5, 2011, Kurt also signed materially identical “indemnification
agreements” with each of the Director Defendants. (See Rode’s Br. in Support of Mot. to
Dismiss, Exs. A-C [Doc. No. 112-1] (“Director Indemnification Agreement”).) Under
Section 11 of the Agreement(s), detailing “Special Fiduciary Indemnification,” Kurt agreed
7
Again, as the Court noted above, Kuban lent the ESOP $19 million to help
facilitate the transaction. (See supra at 9.)
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to “indemnify and hold harmless [each Director] from and against any losses, claims,
expenses, damages or liabilities . . . related to serving as a fiduciary of the [ESOP].” (Id. §
11(a).) Again, though, in accordance with ERISA, the Agreement did not require Kurt to
indemnify any individual Director for their own “gross negligence, breach of fiduciary
duty, or willful misconduct.” (Id.)8
B. Procedural Background
On October 4, 2017, nearly six years after the ESOP transaction, DOL filed its initial
complaint in this Court. On August 20, 2018, DOL filed its operative complaint, i.e., the
Amended Complaint. The Complaint contains two primary claims: First, a breach of
fiduciary duty ERISA claim against both Reliance and the Directors, see 29 U.S.C. §
1104(a)(1)(A)-(B) (imposing a “duty of loyalty” and a “duty of prudence” on pension plan
fiduciaries), and, second, a “prohibited transaction” ERISA claim against both Reliance
and the Directors, see 29 U.S.C. § 1106(a) (barring pension plan fiduciaries from “causing”
their plan to enter into a “prohibited” transaction with a company insider, unless the
transaction was for “adequate consideration”).9
That said, the Directors’ indemnification agreement appears to be more favorable
than Reliance’s indemnification agreement, in that the Directors’ agreement provides
that, even if a Director cannot be completely indemnified for their ERISA violations,
Kurt will nonetheless “share in responsibility for the Losses” “to the extent permitted by
ERISA or other applicable law,” and will also pay for the Director’s attorneys’ fees
“unless and until a court of competent jurisdiction determines that [the Director] has
committed gross negligence, willful misconduct, or a breach of fiduciary duty.” (Id. §
11(b)-(c).)
8
9
The Amended Complaint also seeks to nullify a (separate) July 18, 2011
indemnification agreement between Reliance and Kurt, on grounds that that agreement
does not comply with ERISA’s prohibition against indemnifying “breaches of fiduciary
13
DOL’s complaint, in turn, requests the following equitable relief from Reliance and
the Directors: (a) that Reliance and the Directors “restore all losses caused to the ESOP as
a result of their fiduciary breaches,” (b) that Reliance and the Directors “disgorge all
profits, fees, and costs, including legal fees that they or their agents received from Kurt,
the ESOP, or any other source for all services related to the ESOP and any litigation related
to their fiduciary breaches alleged herein,” (c) that the Court “remove” Reliance and the
Directors “from all fiduciary or service provider positions they may now have in
connection with the ESOP,” (d) that the Court “enjoin” Reliance and the Directors “from
acting as a fiduciary or service provider to any ERISA-covered plan,” and (e) that the Court
“appoint” an “independent fiduciary to distribute all recoveries made to the ESOP” and
“require” Reliance and the Directors to “pay for all fees and expenses related to such
appointment.” (Am. Compl., Prayer for Relief; accord 29 U.S.C. § 1109 (permitting
ERISA plaintiffs to seek this relief for breaches of fiduciary duty).)
On September 4, 2018, Reliance moved to dismiss DOL’s complaint under Fed. R.
Civ. P. 12(b)(7), for failing to join Rode as an allegedly “necessary party” to this litigation.
(See Doc. No. 61.)10 On January 7, 2019, the Court determined that Rode was not a
“necessary party” to this litigation, as that term is defined in the Federal Rules of Civil
Procedure, and accordingly denied Reliance’s motion to dismiss. See Acosta v. Reliance
duty,” discussed supra. (See Am. Compl. ¶¶ 92-95.) However, because this claim is not
at issue now, the Court will not address it further in this opinion.
10
The Directors did not join Reliance in this motion, and, instead, immediately filed
an Answer to DOL’s Amended Complaint. (See Doc. No. 76.)
14
Trust Co., 2019 WL 121185 (D. Minn. Jan. 7, 2019); see also Doc. No. 87. The Court
reached this result in large part because Reliance’s interest in defending the propriety of
the October 5, 2011 ESOP transaction and Rode’s interest in defending the propriety of
that transaction are “virtually identical” (because Rode, like Reliance, is at risk of incurring
a substantial financial obligation if the Court finds that the ESOP paid more than “adequate
consideration” for Kuban’s share of the company). Id. at *3; see also supra at 12
(discussing the Excess Purchase Price provision of the October 5, 2011 Limitation
Agreement). Therefore, the Court concluded, Rode’s absence from the litigation was not
“impairing” or “impeding” her interests. Reliance Trust, 2019 WL 121185, at *3; see Fed.
R. Civ. P. 19(a)(1)(B)(i) (explaining that a “necessary party” is a “person [who] 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, as a practical matter, impair or impede the person’s ability to
protect the interest”).11
On February 5, 2019, about a month after the Court denied Reliance’s attempt to
bring Rode into this litigation by way of Fed. R. Civ. P. 19, Reliance filed a third-party
complaint against Rode. (See Doc. No. 90.) In Reliance’s third-party complaint, it asserted
claims of “contractual indemnification,” “common law indemnification,” “equitable
indemnification,” and “promissory estoppel” against Rode, arguing largely that it
(Reliance) was a “third-party beneficiary” to the Excess Purchase Price provision discussed
The Court also observed that Rode had at no point attempted to “affirmatively
claim” an interest in the “subject of [this] action,” despite having been aware of DOL’s
suit for “over a year.” Reliance Trust, 2019 WL 121185, at *3.
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supra, and that, if DOL succeeded on the merits of its suit, the provision entitled Reliance
to seek indemnification from Rode in the amount of any judgment entered against it. On
March 13, 2019, the Directors filed a materially identical third-party complaint against
Rode, arguing that they, too, were “third-party beneficiaries” to the Excess Purchase Price
provision. (See Doc. No. 100.)12
On May 7, 2019, the Directors (but not Reliance) moved for judgment on the
pleadings under Fed. R. Civ. P. 12(c), and Rode moved to dismiss both Reliance’s and the
Directors’ third-party complaints under Fed. R. Civ. P. 12(b)(6). The parties filed briefing
for and against each other’s respective motions, and the Court entertained oral argument
on June 18, 2019. (See Directors’ Br. in Support of Judgment on the Pleadings [Doc. No.
107] (“Directors’ 12(c) Br.”); DOL’s Br. in Opp. to Judgment on the Pleadings [Doc. No.
117] (“DOL 12(c) Opp. Br.”); Directors’ 12(c) Reply Br. [Doc. No. 120]; Rode’s Br. in
Support of Mot. to Dismiss [Doc. No. 111] (“Rode 12(b)(6) Br.”); Reliance’s Br. in Opp.
to Mot. to Dismiss [Doc. No. 116] (“Reliance 12(b)(6) Opp. Br.”); Directors’ Br. in Opp.
to Mot. to Dismiss [Doc. No. 118] (“Directors’ 12(b)(6) Opp. Br.”); Rode’s 12(b)(6) Reply
Br. [Doc. No. 119].)
II.
DISCUSSION
The Court will first address the Directors’ motion for judgment on the pleadings,
and will explain why, at this early stage of litigation, the Court cannot grant the Directors
12
In their third-party complaint, the Directors also asserted an ERISA claim against
Rode for “co-fiduciary breach.” Reliance did not include such a claim in its third-party
complaint.
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judgment as a matter of law. Next, the Court will address Rode’s motion to dismiss the
third-party complaints, and will detail why Defendants have failed to state a claim for
indemnification.
A. The Directors’ Motion for Judgment on the Pleadings
Motions for judgment on the pleadings under Fed. R. Civ. P. 12(c) are treated the
same as motions to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6). That
is, in evaluating a motion for judgment on the pleadings, a Court must accept as true the
factual allegations in the complaint, must construe all reasonable inferences from those
allegations in the light most favorable to the non-moving party, and must only grant the
motion if the complaint fails to state a “plausible” claim for relief. State Farm Auto. Ins.
Co. v. Merrill, 353 F. Supp. 3d 835, 837, 841 (D. Minn. 2018); see also Potthoff v. Morin,
245 F.3d 710, 715 (8th Cir. 2001) (“Judgment on the pleadings is appropriate only where
the moving party has clearly established that no material issue of fact remains and the
moving party is entitled to judgment as a matter of law.”). Moreover, because granting a
Rule 12(c) motion “summarily extinguish[es] litigation at the threshold and foreclose[s]
the opportunity for discovery and factual presentation,” courts must treat such motions with
the “greatest of care.” Comcast Cable Commc’ns, LLC v. Hourani, 190 F. Supp. 3d 29, 32
(D.D.C. 2016); accord 5C Wright & Miller, Federal Practice & Procedure § 1368 (3d ed.).
1. The Law
As the Court noted above, ERISA is a “comprehensive [federal] statute” that “sets
various uniform standards, including rules concerning . . . fiduciary responsibility, for both
17
pension and welfare plans.” Shaw, 463 U.S. at 90-91. Four of ERISA’s fiduciary
responsibility provisions are of note here.
First, ERISA imposes the “twin duties” of “loyalty” and “prudence” on any person
acting as a “fiduciary” for an employee retirement plan (including an ESOP). Braden v.
Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009) (citing 29 U.S.C. § 1104(a)(1)).
These duties require fiduciaries to act with “diligence” and with an “eye single” to the
interests of the plan’s participants when making decisions about the plan, even if the
fiduciary is employed by the plan’s sponsor in some other capacity. Pegram v. Herdich,
530 U.S. 211, 224-26, 235 (2000); see also Braden, 588 F.3d at 598 (describing ERISA’s
fiduciary duties as “the highest known to law”). A person is a “plan fiduciary,” and thus
subject to these exacting duties, not only if they are named as such in a plan document, or
if they are appointed as such by a prior plan fiduciary, but also “to the extent [they]
exercise[] any discretionary authority or discretionary control respecting management of
such plan or exercise[] any authority or control respecting management or disposition of
its assets.” 29 U.S.C. § 1002(21)(A)(i); accord Martin, 965 F.2d at 669. Thus, determining
whether a person is acting as a “fiduciary” to a plan at any given time presents a functional
inquiry; the question is not whether the person was called a “fiduciary” or “trustee” on
paper, but, rather, whether the person “exercised effective control over the [plan’s] assets”
with respect to the transaction at issue. See, e.g., Martin, 965 F.2d at 669 (finding that,
although a company’s accountants were not named fiduciaries of the company’s ESOP,
they were nonetheless fiduciaries under ERISA because “they recommended transactions,
structured deals, and provided investment advice to such an extent that they exercised
18
effective control over the ESOP’s assets”); accord Mertens v. Hewitt Assocs., 508 U.S.
248, 262 (1993) (“ERISA . . . defines ‘fiduciary’ not in terms of formal trusteeship, but
in functional terms of control and authority over the plan . . . thus expanding the universe
of persons subject to fiduciary duties [beyond traditional trust law]”). Moreover, to prevent
high-ranking company employees or directors from “passing the buck to another person
and then turning a blind eye,” ERISA also requires persons responsible for appointing and
removing plan fiduciaries (often the sponsoring company’s board of directors) to “monitor
the activities of their appointees” “at reasonable intervals.” Howell v. Motorola, Inc., 633
F.3d 572-73 (7th Cir. 2011) (citing 29 C.F.R. § 2509.75-8)); accord Krueger v. Ameriprise
Fin., Inc., No. 11-cv-2781 (SRN/JSM), at *17-18 (D. Minn. Nov. 20, 2012).
Second, ERISA supplements the duty of loyalty by outright prohibiting fiduciaries
from “causing” their plans to enter into certain “insider” transactions, such as the
transaction at issue here, see 29 U.S.C. § 1106(a), on grounds that these transactions are
“presumably not at arm’s length.” Lockheed Corp. v. Spink, 517 U.S. 882, 893 (1996).
However, as the Court noted above, see supra n.5, a fiduciary may always defend against
a “prohibited transaction” charge by producing evidence that the pension plan transacted
with the company insider in exchange for “adequate consideration.” 29 U.S.C. §
1108(e)(1); see also Perez v. Bruister, 823 F.3d 250, 262-63 (5th Cir. 2016) (discussing
the “affirmative defense” of “adequate consideration” in the context of an ESOP insider
transaction).
Third, ERISA also subjects plan fiduciaries to liability if they “knowingly
participate in,” “enable,” or “have knowledge of” a breach of fiduciary duty by a fellow
19
fiduciary to the plan. 29 U.S.C. § 1105(a); see also Acosta v. Saakvitne, 355 F. Supp. 3d
908, 923-24 (D. Hawaii 2019) (detailing the different variants of “co-fiduciary liability”).
Fourth, and finally, ERISA imposes liability on certain non-fiduciaries, too, i.e.,
any “person” who “knowingly” participates in a “breach or violation” of ERISA by “any
other person.” 29 U.S.C. § 1132(l)(1)(B); see also Harris Trust & Sav. Bank v. Salomon
Smith Barney, Inc., 530 U.S. 238 (2000) (explaining the breadth of this provision).
However, with respect to remedies, ERISA imposes far more limited sanctions on nonfiduciaries who knowingly participate in a breach of duty than on fiduciaries who
participate in a breach of duty, or who breach a fiduciary duty themselves. Compare GreatWest Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 210-215 (2002) (explaining that
plaintiffs can only seek certain kinds of “non-monetary,” “equitable” relief from nonfiduciaries, such as “injunctions,” “mandamus,” and (non-monetary) “restitution”) with
Mertens, 508 U.S. at 252 (noting that, by contrast, “fiduciaries” are “personally liable for
damages (‘to make good to [the] plan any losses to the plan resulting from each such
breach’), for restitution (‘to restore to [the] plan any profits of such fiduciary which have
been made through use of assets of the plan by the fiduciary’), and for ‘such other equitable
or remedial relief as the court may deem appropriate,’ including removal of the fiduciary”)
(quoting 29 U.S.C. § 1109(a)).
2. Analysis
Here, the Directors move for judgment on the pleadings with respect to (a) DOL’s
breach of fiduciary duty claim, (b) DOL’s prohibited transaction claim, and (c) the scope
of DOL’s proposed equitable relief. The Court will address each issue in turn.
20
a. The Breach of Fiduciary Duty Claim
Viewing the complaint in the light most favorable to DOL, as the Court must at this
stage, it appears that DOL is asserting two different breach of fiduciary duty theories here.
First, and most broadly, DOL alleges that, because the Directors “orchestrated” the final
ESOP transaction prior to their appointment of Reliance, and because the Directors knew
the ESOP was paying Kuban “vastly more than fair market value” as part of that
transaction, the Directors “effectively controlled” the ESOP’s purchase of Kuban’s stock,
and thus breached the duties of prudence and loyalty they owed the ESOP as fiduciaries.
(See DOL 12(c) Opp. Br. at 8-9, 13, 27-28; accord, e.g., Saakvitne, 355 F. Supp. 3d at 92023 (declining to dismiss individual company directors from ERISA suit for their role in
orchestrating improper ESOP transaction, simply because the directors had appointed a
different party to be the ESOP’s fiduciary for purposes of the final transaction); Keach v.
U.S. Bank Trust Co., N.A., 234 F. Supp. 2d 872, 881-83 (C.D. Ill. 2002) (same, and
observing that “[w]hile Defendants’ invitation to look simplistically at the power to appoint
as the [limit on their fiduciary obligations] is attractive, to do so would be [to] elevat[e]
form over substance and [to] ignore the Court’s obligation to ‘look beyond’ formal
authority to the realities of the fiduciary relationship at issue”).) Second, and more
narrowly, DOL alleges that, even if the Directors no longer served as fiduciaries for
purposes of approving the final ESOP transaction (because they had appointed Reliance to
act as the ESOP’s fiduciary in that capacity), as board members responsible for overseeing
Reliance, the Directors also breached their general fiduciary “duty to monitor” Reliance,
in the sense that they allowed Reliance to approve a transaction that the Directors knew
21
was harmful to the ESOP’s pecuniary interests. (See DOL 12(c) Opp. Br. at 9, 13-17;
accord, e.g., Saakvitne, 355 F. Supp. 3d at 922-23.)
It is clear to the Court that both of DOL’s theories present “plausible” ERISA
fiduciary breach claims on their face, and that, to the extent the Directors have viable
defenses to these claims, those defenses are based on disputed facts and inferences not
suitable for resolution at this preliminary stage of litigation. (See supra at 9-11 (detailing
disputed facts and inferences).) Indeed, DOL’s case here is comparable to a variety of
recent “overpriced ESOP insider transaction” cases, almost all of which have either been
resolved at summary judgment or through a bench trial – not through a motion to dismiss
or a motion for judgment on the pleadings. See, e.g., Brundle v. Wilmington Trust, N.A.,
919 F.3d 763 (4th Cir. 2019) (affirming finding for plaintiffs after bench trial); Perez v.
Bruister, 823 F.3d 250 (5th Cir. 2016) (affirming finding for DOL after bench trial); Chao
v. Hall Holding, Inc., 285 F.3d 415 (6th Cir. 2002) (affirming finding for DOL at summary
judgment); Blackwell v. Bankers Trust Co. of South Dakota, 18-cv-141 (CWR/FKB), 2019
WL 1433769 (S.D. Miss. Mar. 29, 2019) (denying motion to dismiss); Acosta v. Saakvitne,
355 F. Supp. 3d 903 (D. Hawaii 2019) (denying motion to dismiss); Acosta v. Vinoskey,
310 F. Supp. 3d 662 (W.D. Va. 2018) (granting in part and denying in part motions for
summary judgment); Perez v. First Bankers Trust Servs., Inc., No. 12-cv-4450
(MAS/DEA), 2017 WL 1232527 (D.N.J. Mar. 31, 2017) (finding for DOL after bench
trial); Fish v. GreatBanc Trust Co., No. 09-cv-1668, 2016 WL 5923448 (N.D. Ill. Sept. 1,
22
2016) (finding for defendants after bench trial). The Court sees no need to break from this
precedent here.13
The Directors advance a few other, more focused arguments in support of
dismissing DOL’s breach of fiduciary duty claim, too. However, the Court finds none of
the Directors’ arguments availing (at least at this stage of litigation).
First, the Directors point to an ERISA decision with relatively similar facts to those
alleged in their Amended Answer, see Fish v. GreatBanc Trust Co., No. 09-cv-1668, 2016
WL 5923448 (N.D. Ill. Sept. 1, 2016), and argue that, because the court in that case rejected
a “duty to monitor” claim against individual director defendants, the Court should rule
likewise here. (See Directors’ 12(c) Br. at 19-20.) However, the Directors’ attempts to
analogize this case to Fish elides a critical distinction between the cases: the District Court
in Fish only ruled in favor of the director defendants after holding a bench trial, where the
The Court acknowledges that in one “overpriced ESOP insider transaction” case
cited by neither party, Neil v. Zell, Judge Rebecca Pallmeyer of the Northern District of
Illinois dismissed a group of individual director-defendant at the motion to dismiss stage.
See 677 F. Supp. 2d 1010 (N.D. Ill. 2009). However, the plaintiffs’ allegations against the
individual directors in Zell are readily distinguishable from DOL’s allegations here.
In that case, plaintiffs argued that the board of directors should be held liable as
fiduciaries to the ESOP simply because they approved the (allegedly overpriced)
transaction that the independent trustee negotiated on the ESOP’s behalf. But there was
no allegation that those directors helped structure that transaction or “influenced [the
independent trustee’s] decision in any way.” Id. at 1023. Indeed, several of the defendant
directors did not even join the ESOP sponsor’s board of directors until after the at-issue
transaction was “made and finalized.” Id. Moreover, although plaintiffs in that case also
asserted a “duty to monitor” claim, they made that allegation “only in the most general
terms,” and without any factual enhancement. Id. at 1023-24.
Here, by contrast, DOL has set forth a (relatively) detailed complaint explaining
what role the Directors played in orchestrating the at-issue “overpriced ESOP
transaction,” and how the Directors (allegedly) breached their fiduciary duties to the
ESOP in so doing.
13
23
judge considered evidence that the director defendants acted diligently and in the best
interests of the ESOP at all relevant times, not just “affirmative allegations” contained in
an answer. Accordingly, at this early stage of the case, Fish is inapposite.
Second, the Directors cite a District Court’s decision to grant a board of directors’
motion to dismiss an ERISA “failure to monitor” claim, see In re Dynergy, Inc., ERISA
Litig., 309 F. Supp. 2d 861 (S.D. Tex. 2004), and argue that that case further shows why a
“duty to monitor” claim must fail here. (See Directors’ 12(c) Br. at 18-19.) However, the
“duty to monitor” allegations in that case, which centered around a large corporation’s
responsibility for overseeing (allegedly imprudent) investment decisions made by the
company’s ESOP investment committee, are nothing like the fact-bound questions of
“effective control” and “valuation” at issue here. Moreover, DOL’s complaint alleges that
the Directors knew that Reliance acted wrongfully when it entered into the Kuban
transaction on behalf of the ESOP (because the Directors knew the ESOP was purchasing
Kuban’s share of the company for far more than fair market value), and that the Directors
failed to “monitor” (and then stop) that wrongdoing. These allegations distinguish this case
from Dynergy as well. See Dynergy, 309 F. Supp. 2d at 904 (“The Court nevertheless
concludes that plaintiff has failed to state a claim against [the corporate defendants] for
breach of the fiduciary duty to monitor because she has failed to allege . . . that any of them
were on notice of possible misadventure by any of their appointees.”) (emphasis added).
Finally, the Directors briefly argue that DOL failed to distinguish between its “duty
of prudence” and “duty of loyalty” allegations in its Complaint, and that this failure
provides reason to dismiss the breach of fiduciary duty claim in its entirety. (See Directors’
24
12(c) Reply Br. at 10-11.) The Directors are correct, as a general matter, that a fiduciary’s
“duty of loyalty” differs somewhat from their “duty of prudence.” See, e.g., In re Wells
Fargo ERISA 401(k) Litig., 331 F. Supp. 3d 868, 874-75 (D. Minn. 2018) (explaining that,
while the duty of prudence is based on an “objective” reasonableness standard, the duty of
loyalty focuses on “why the defendant acted the way he did”). However, as Magistrate
Judge Brisbois of this Court recently observed, when considering an analogous argument
at the motion to dismiss stage, the Eighth Circuit has often treated the duties of prudence
and loyalty as “intertwined,” and has thus suggested that breaches of the two duties “need
not be pled separately in a Complaint in order to survive a Rule 12(b)(6) Motion to
Dismiss.” Morin v. Essentia Health, Inc., No. 16-cv-4397 (RHK/LIB), 2017 WL 4083133,
at *9 (D. Minn. Sept. 14, 2017) (denying defendants’ motion to dismiss), report and
recommendation adopted, 2017 WL 4876281 (D. Minn. Oct. 27, 2017); accord Martin,
965 F.2d at 670 (in an ESOP insider transaction case, similarly describing the duties of
loyalty and prudence as “overlapping”). Indeed, in many of the “overpriced ESOP insider
transaction cases” cited above, the court used similar (albeit not identical) analyses when
reviewing “breach of the duty of loyalty” and “breach of the duty of prudence” claims. See,
e.g., First Bankers Trust Servs., Inc., 2017 WL 1232527, at *79 (finding a breach of the
duty of loyalty in large part because of the “reasons set forth” in the portion of the Court’s
opinion explaining why the defendant had breached its duty of prudence). As such, at this
25
stage of litigation, the Court declines to dismiss DOL’s breach of fiduciary duty claim on
this ground.14
b. The Prohibited Transaction Claim
DOL’s complaint also seeks to hold the Directors liable, as co-fiduciaries, for
Reliance’s breach of its fiduciary duty against approving “prohibited transactions.” See
29 U.S.C. § 1106(a) (barring fiduciaries from “causing” their pension plan to enter into a
prohibited inside transaction, unless the transaction was for “adequate consideration”).
More specifically, DOL alleges that the Directors were fiduciaries to the ESOP at all
relevant times (even after appointing Reliance as the ESOP’s trustee), and that, by
breaching their fiduciary duties of prudence and loyalty, the Directors “enabled” Reliance
to “breach” ERISA’s “prohibited transaction” provision. Id. § 1105(a)(2); see also Am.
Compl. ¶ 89.15
The Directors argue that the Court must dismiss this claim against them, too, but
solely on grounds that, “because [DOL’s breach of fiduciary duty claim against them]
fails as a matter of law, [DOL’s prohibited transaction claim against them] must similarly
follow suit.” (Directors’ 12(c) Reply Br. at 13.) However, because the Court declined to
grant the Directors judgment on the pleadings with respect to DOL’s breach of fiduciary
14
However, as the case proceeds toward summary judgment and trial, the Court
expects DOL to more clearly delineate the scope and nature of its breach of fiduciary
duty claim, in accordance with the existing case law.
DOL does not allege that the Directors themselves “caused” the ESOP to enter
into the at-issue transaction (and thus directly breached 29 U.S.C. § 1106(a)), or that the
Directors are liable as co-fiduciaries for “knowingly” participating in Reliance’s breach
of the prohibited transaction provision, see 29 U.S.C. §§ 1105(a)(1),(a)(3).
15
26
duty claim, the Directors’ argument on the prohibited transaction claim fails, too. And, to
the extent the Directors are disputing whether their conduct “enabled” Reliance to enter
into a prohibited transaction, or whether the Kuban transaction was in exchange for
“adequate consideration,” those arguments are premature. See, e.g., Blackwell, 2019 WL
1433769, at *4 (denying defendant’s motion to dismiss prohibited transaction claim in
“ESOP overpriced transaction” case, and observing that, “[i]t might be that [defendant’s
‘adequate consideration’] defense proves successful in this case at a later stage. At this
point, however, the plaintiffs allege one thing and [the defendant] claims another. That is
a fact dispute not appropriate for resolution at this time.”).
c. DOL’s Proposed Equitable Relief
Finally, with respect to DOL’s requested remedies, the Directors contend that DOL
is legally barred from seeking certain kinds of monetary relief from them. (See Directors’
12(c) Reply Br. at 14 (describing the Complaint’s request that the Directors “restore all
losses [to the ESOP],” “repay all fees and costs, including legal fees, that they received
from the company,” and “pay for all fees and expenses related to the appointment of an
independent fiduciary to distribute all recoveries made to the ESOP,” as the kind of
improper “monetary” relief sought by DOL).) However, this argument appears to be based
on a misunderstanding of ERISA’s remedial structure. As the Court explained above, if the
Court finds that the Directors acted as a fiduciary to the ESOP with respect to the at-issue
transaction, and then breached their fiduciary duties (or helped Reliance breach its
fiduciary duties), DOL is entitled to seek the relief requested in its Complaint. (See supra
at 20; accord 29 U.S.C. §§ 1109(a), 1132(a)(2).) But, if this Court were to find that the
27
Directors did not act as a fiduciary to the ESOP at the relevant time, but that the Directors
nonetheless “knowingly” participated in a breach of fiduciary duty by Reliance, then the
Court would be dutybound to curtail DOL’s proposed remedies in the manner suggested
by the Directors. (Id.) In other words, this issue, like the other issues raised in the Directors’
motion, cannot be definitively resolved until further fact-finding is conducted. Accord Zell,
677 F. Supp. 2d at 1022 (similarly declining to resolve remedial issue in a decision on a
motion to dismiss).
****
For all of these reasons, the Court denies the Directors’ motion for judgment on
the pleadings.
B. Rode’s Motion to Dismiss the Third-Party Complaints
As the Court noted above, in evaluating a motion to dismiss under Fed. R. Civ. P.
12(b)(6), a Court must accept as true the factual allegations in the complaint, must construe
all reasonable inferences from those allegations in the light most favorable to the nonmoving party, and must only grant the motion if the complaint fails to state a “plausible”
claim for relief. (See supra at 17.) However, Rule 12(b)(6) also “authorizes a court to
dismiss a claim on the basis of a dispositive issue of law.” Neitzke v. Williams, 490 U.S.
319, 326 (1989); see, e.g., Staffing Specifix, Inc. v. TempWorks Mgmt. Servs., Inc., 913
N.W.2d 687, 692 (Minn. 2018) (noting that courts may interpret “unambiguous”
contractual language as a matter of law).
In their third-party complaints, Defendants essentially contend that, because Rode’s
late father (William Kuban) played such an instrumental role in the October 5, 2011 ESOP
28
transaction – indeed, he was the one who most directly benefited from the (allegedly
improper) transaction – if they (Defendants) are held liable under ERISA, Rode must be
required to cover their losses. More specially, Defendants allege that Rode has a duty to
“indemnify” them “in an amount equal to any judgment for loss entered against [them] on
[DOL’s] claims in this action,” (Reliance Third-Party Compl., Prayer for Relief; accord
Directors’ Third-Party Compl., Prayer for Relief), either because Defendants are “thirdparty beneficiaries” to the Excess Purchase Price provision described supra, or because
“equity” demands such an outcome.
Contrary to Defendants’ assertions, however, there is no legal or equitable basis for
indemnification here. The Court accordingly grants Rode’s motion to dismiss both
complaints.
1. The Law
Indemnification is an “exceptional and limited” remedy that “requires one party to
reimburse the other entirely” for their losses. Hendrickson v. Minn. Power & Light Co.,
104 N.W.2d 843, 847-48 (Minn. 1960). The purpose of indemnification is to protect parties
who have “been held liable even though not personally at fault,” or to protect parties who
have explicitly contracted to receive indemnification (so long as the contract does not
violate public policy). Tolbert v. Gerber Indus., Inc., 255 N.W.2d 362, 366 (Minn. 1977);
accord United States v. J&D Enter. of Duluth, 955 F. Supp. 1153, 1157 (Minn. 1997).16
“Contribution,” by contrast, is an equitable remedy that focuses on “relative fault”;
it is not “all-or-nothing,” like indemnification. Tolbert, 255 N.W.2d at 367; see also
Hendrickson, 104 N.W.2d at 847 (“Contribution requires parties to share the liability”
16
29
Thus, to receive indemnification under Minnesota law, “a party must show” an “express
contractual relationship” or “implied legal duty” “that requires one party to reimburse the
other entirely.” All Metro Glass, Inc. v. Tubelite, Inc., 227 F. Supp. 3d 1007, 1019 (Minn.
2016).
An “implied legal duty” to indemnify a liable party arises when “(1) the one seeking
indemnity has only a derivative or vicarious liability for damage caused by the one sought
to be charged; (2) the one seeking indemnity has incurred liability by action at the direction,
in the interest of, and in reliance upon the one sought to be charged; or (3) the one seeking
indemnity has incurred liability because of a breach of duty owed to him by the one sought
to be charged.” Id. at 1020 (emphasis added) (quoting Hendrickson, 104 N.W.2d at 848).
An “express contractual relationship” to indemnify a liable party arises “where there
is an express contract between the parties containing an explicit undertaking to reimburse
for liability of the character involved.” Id. (emphasis added). However, a party may also
be indemnified as a “third-party beneficiary” to an indemnification contract. See 13
Williston on Contracts § 37.1 (4th ed.) (explaining that the “third-party beneficiary
doctrine” allows “an individual who is not a party to a contract [to] nonetheless enforce”
the contract). Minnesota courts use two tests to determine whether a person is a “thirdparty beneficiary” to a contract: the “duty owed test” and the “intent to benefit test.”
Hickman v. SAFECO Ins. Co., 695 N.W.2d 365, 369 (Minn. 2005). To prove third-party
beneficiary status under the “intent to benefit test,” which is the only test at issue here, “the
“where there is a common liability among the parties.”) (emphasis added). Defendants
are not seeking contribution from Rode here.
30
contract must express some intent by the parties to benefit the third party through
contractual performance.” Dayton Dev. Co. v. Gilman Fin. Servs., Inc., 419 F.3d 852, 856
(8th Cir. 2005). “To ascertain the parties’ intent, courts look to the surrounding
circumstances at the time of the contracting, and generally require the contract to express
some objective manifestation of intent to benefit a third party.” Nassar v. Chamoun, No.
A11-793, 2012 WL 426595, at *2 (Minn. Ct. App. Feb. 13, 2012) (citing Hickman, 695
N.W.2d at 370). “Absent ambiguity, the surrounding circumstances do not include extrinsic
evidence.” Id.
Importantly, however, in the specific context of ERISA, the Eighth Circuit has held
that the statute’s preemption provision bars liable fiduciaries from bringing “state commonlaw claims” of “contribution” and “indemnification” against other arguably liable
fiduciaries, so as to share in (or shift entirely) liability. Travelers Cas. and Sur. Co. of Am.
v. IADA Servs., Inc., 497 F.3d 862, 867 (8th Cir. 2007). That is, the Eighth Circuit reasoned,
because “ERISA is a comprehensive and reticulated statute, the product of a decade of
congressional study of the Nation’s private employee benefit system,” and because ERISA
contains no express provision allowing for co-fiduciary contribution or indemnification,
“it would undermine the comprehensive federal scheme to permit an action under state law
for [those remedies].” Id. at 865-67. Although the Eighth Circuit acknowledged that “there
are certainly equitable arguments for allowing contribution among wrongdoers,” the panel
ultimately ruled that the question of whether to permit those kinds of common law remedies
31
in the ERISA context was “a matter of high policy” fit “for resolution within the legislative
process.” Id. at 867 (emphasis added).17
A 2010 decision by then-Magistrate Judge Keyes provides further guidance on this
point. See Christopher v. Hanson, No. 09-cv-3703 (JNE/JJK), 2010 WL 3002889 (D.
Minn. May 24, 2010), report and recommendation adopted, 2010 WL 3023417 (D. Minn.
July 29, 2010). Christopher, like this case, centered around an allegedly overpriced ESOP
transaction. More specifically, in Christopher, plaintiffs alleged that a company’s President
and CEO (Hanson) sold his controlling stake in his company to the company’s ESOP for
“millions” more dollars than necessary, and thus both “cheated” the ESOP and “saddled
[the company] with crippling financial obligations” going forward. Id. at *1. In a role
reversal from this litigation, though, the Christopher plaintiffs sued just Hanson and his
family members (i.e., the sellers), not the key directors/ESOP trustees who allegedly helped
Hanson facilitate this transaction. Id. at *2. As a result, after being sued by the ESOP,
Hanson brought a third-party complaint against those key directors, on grounds that, if he
was found liable as a breaching fiduciary under ERISA, they should have to indemnify him
(or, at the least, pay some form of contribution). Judge Keyes rejected this argument and
found that Hanson’s third-party complaint was “preempted” under Travelers. See id. at *6.
Two additional facts are worth noting about the Eighth Circuit’s decision in
Travelers. First, the Eighth Circuit reached this decision as a matter of federal common
law and as a matter of preemption. Therefore, in this Circuit, there is no indemnification
remedy under ERISA, whether construed as a “federal common law” remedy or as a
“state common law” remedy. Second, the Eighth Circuit’s decision is currently the
subject of a circuit split. See, e.g., Chesemore v. Fenkell, 829 F.3d 803, 813 (7th Cir.
2016) (describing the split, and then joining the side of the split in disagreement with the
Eighth Circuit).
17
32
Judge Keyes also examined Hanson’s indemnification claim under Minnesota state law,
and found that, because Hanson did not plausibly allege the existence of any of the three
“implied legal duties” indicating that indemnification is appropriate, his third-party
complaint could not go forward either. See id. at *8-9; see also supra at 30 (listing the three
“implied legal duties”).
2. Analysis
Here, Defendants argue that Kuban must indemnify them, either under a theory of
(1) “common-law indemnification,” (2) “equitable indemnification,” (3) “contractual
indemnification,” (4) “promissory estoppel,” or (5) in the case of the Director Defendants,
“ERISA co-fiduciary liability.” The Court will address these claims in turn.
a. Common-Law and Equitable Indemnification
As an initial matter, Defendants’ claims for “common-law indemnification” and
“equitable indemnification” are plainly barred under the Eighth Circuit’s decision in
Travelers, just like the indemnification claim Judge Keyes considered in Christopher.
Moreover, even if Travelers was not controlling, these two indemnification claims would
fail on the merits because Defendants have not articulated an “implied legal duty” that
Rode (or, better put, Kuban) owed them as part of the at-issue transaction. Without pointing
to one of those duties, all of which essentially require Defendants to show that they will be
“held liable [for violating ERISA] even though not personally at fault,” Defendants cannot
33
seek “equitable” or “common-law” indemnification from Rode here. Tolbert, 255 N.W.2d
at 366.18
b. Contractual Indemnification
Defendants’ contractual indemnification claim, by contrast, does not appear to be
foreclosed by Travelers (because “common-law indemnification” is different than
“contractual indemnification”). However, this claim fails, too, for at least three reasons.
First, although Defendants describe the Excess Purchase Price provision of the
Limitation Agreement as an “indemnification agreement” between Kuban and the ESOP,
see supra at 11-12 (detailing the provision), the Court is not certain that that is the case,
and, hence, is skeptical that Minnesota indemnification law even applies here. As explained
above, the at-issue provision is found in a section of the Agreement called “Covenants of
the Company,” and merely provides that, should this Court decide that the ESOP paid more
than “adequate consideration” for Kuban’s shares in Kurt, Kuban “shall” reimburse the
ESOP in the amount of the “excess purchase price,” either by forgiving in part the loan he
made to the ESOP to help facilitate the transaction, or by re-paying the ESOP in cash.
However, the provision does not use the terms “indemnify” or “hold harmless,” and is
limited solely to the issue of “excess purchase price.” Thus, unlike a typical
indemnification agreement, which focuses on shielding a party from incurring any liability
18
Moreover, because Defendants are seeking indemnification from any liability they
may incur as a result of DOL’s suit, and because DOL’s claims against Defendants are
based on Defendants’ own breaches of fiduciary duty, this does not appear to be a
situation where Defendants are at risk of being “held liable [for violating ERISA] even
though not personally at fault.” Tolbert, 255 N.W.2d at 366. Thus, the Court struggles to
see how “equitable” or “common law” indemnification could ever arise here.
34
as a result of its own illegal conduct, the allegedly “indemnifying” provision here appears
far narrower in scope. (Compare, e.g., with supra at 12 (the “Special Indemnification”
agreement between Kurt and Reliance) (“[Kurt] shall indemnify and defend [Reliance] and
hold [Reliance] harmless from and against any and all Adverse Consequences which may
be incurred by [Reliance], arising by virtue of the applicability or legal or regulatory
requirements . . . including without limitation any applicable provisions of ERISA.”).) As
such, although the Excess Purchase Price provision undoubtedly created a contractual
obligation between Kuban and the ESOP, it is not the kind of “explicit” promise of
indemnity that courts usually see in the indemnification context. See All Metro Glass, 227
F. Supp. 3d at 1020 (noting that an “express contractual relationship” to indemnify a liable
party arises “where there is an express contract between the parties containing an explicit
undertaking to reimburse for liability of the character involved”) (emphasis added).
Second, even assuming the Excess Purchase Price provision constitutes a legally
viable “indemnification agreement” between Kuban and the ESOP, there is no indication
that the parties to the Limitation Agreement, i.e., Kuban, Reliance, and Kurt, intended this
provision to protect Defendants as “third-party beneficiaries.”19 The plain language of the
provision states that Kuban shall reimburse “the ESOP” in the event that a court finds that
19
Rode fairly notes that it is doubtful that the third-party beneficiary doctrine even
applies here, because Reliance and the Directors were both parties to the underlying
October 5, 2011 contracts and negotiations. (See Rode 12(b)(6) Br. at 9; accord Williston
on Contracts § 37.1 (explaining that the “third-party beneficiary doctrine” allows “an
individual who is not a party to a contract [to] nonetheless enforce” the contract)
(emphasis added).) For purposes of this opinion, however, the Court will assume, without
deciding, that Defendants can invoke the doctrine.
35
the at-issue transaction was for less than “adequate consideration.” And, in other provisions
of the contract (or in accompanying contracts, in the case of the Directors), Defendants
received explicit indemnification guarantees (with respect to ERISA liability) from Kurt,
not Kuban. (See supra at 12-13.) In light of both the plain language of the provision and
the accompanying contractual context, then, the only sensible interpretation of the Excess
Purchase Price provision is that the provision exists to protect the ESOP, and the ESOP
alone. In other words, it would not make sense to interpret the Excess Purchase Price
provision as a sweeping promise of indemnification from Kuban to Defendants, on top of
the explicit indemnification guarantees Kurt already provided to Defendants. Cf. Art
Goebel v. N. Suburban Agencies, Inc., 567 N.W.2d 511, 516 (Minn. 1997) (“By entering
into an agency agreement containing a clear and unambiguous indemnity clause, [the
parties] expressed their intent to have the clause provide [the party’s] exclusive right to
indemnity.”) (emphasis added). Accordingly, because neither the Excess Purchase Price
provision nor the “surrounding circumstances” of the Limitation Agreement express an
“objective manifestation of intent to benefit” Defendants through the provision,
Defendants are not third-party beneficiaries to the provision. Hickman, 695 N.W.2d at 370
n.7.
Third, as a practical matter, even assuming Defendants were third-party
beneficiaries to the Excess Purchase Price provision, and were thus entitled to directly seek
indemnification from Rode in the amount of their losses to DOL, Defendants would almost
certainly be unable to enforce the provision. That is, if either (or both) Defendants are
found liable under DOL’s theory of the case, and are forced to reimburse the ESOP for its
36
losses, that would mean that the Court determined that Defendants breached their fiduciary
duties under ERISA. And, if Defendants breached their fiduciary duties under ERISA, by
law, Rode could not indemnify them for losses arising out of that misconduct. (See supra
at 12-13 (noting this law); see also J&D Enter. of Duluth, 955 F. Supp. at 1157 (“Indemnity
is not permitted . . . where its application would contravene public policy.”).) Indeed,
Defendants’ own indemnification agreements with Kurt contain this very limit, and thus
highlight the irrationality of allowing Defendants to receive through the Excess Purchase
Price provision what they could not receive through their own (specifically negotiated)
indemnification agreements. (See, e.g., supra at 12 (the “Special Indemnification”
agreement between Kurt and Reliance) (“[Reliance] shall have no right to be indemnified
to the extent prohibited by Section 410 of ERISA for its own gross negligence, breach of
fiduciary duty, or willful misconduct as determined by a court of competent jurisdiction.”)
(emphasis added).) Of course, this is not to say that the Excess Purchase Price provision
would be per se unenforceable were this Court to rule that the ESOP paid more than
“adequate consideration” for Kuban’s share of Kurt. Rather, the Court is simply observing
that, no matter how one cuts it, the ESOP is the only party legally entitled to enforce the
Excess Purchase Price provision against Kuban.
c. Promissory Estoppel and ERISA Co-Fiduciary Liability
Finally, Defendants also advance claims of “promissory estoppel” and, in the case
of the Director Defendants, “co-fiduciary liability” under ERISA. These claims miss the
mark, too.
37
Defendants’
promissory estoppel claim
fails because
the question of
indemnification is governed by the October 5, 2011 contracts, and because Defendants
have not pointed to any “clear or definite” promise of indemnification arising outside those
contracts. See HomeStar Prop. Sols., LLC v. Safeguard Props., Inc., 370 F. Supp. 3d 1020,
1028 (D. Minn. 2019) (“[B]ecause promissory estoppel is an equitable doctrine that implies
a contract in law where none in fact exists . . . an express contract covering the same subject
matter will preclude the doctrine’s application.”) (cleaned up).
The Directors’ ERISA claim20 fails because the claim appears to be a thinly
disguised claim for co-fiduciary indemnification/contribution, and is thus prohibited under
the Eighth Circuit’s decision in Travelers. (See, e.g., Directors’ Third-Party Compl. ¶ 42
(“If the Directors breached their fiduciary liability by failing to monitor Reliance to prevent
ERISA breaches, then Kuban is liable as a co-fiduciary because he knew of and enabled
this failure yet did nothing to correct it.”); see also supra n.17 (observing that Travelers
applies both as a matter of state law preemption and as a matter of federal common law).)
Moreover, even if the Directors could bring an ERISA breach of fiduciary duty claim
against Rode, the claim is now barred by ERISA’s six-year statute of repose. See 29 U.S.C.
§ 1113 (requiring plaintiffs to bring their ERISA breach of fiduciary duty claim either “six
years after the date of the last action which constituted a part of the breach or violation,”
Although the Directors’ third-party complaint technically assert two “claims”
under ERISA – one under the remedial section of the statute, 29 U.S.C. § 1132(a)(3), and
one under the substantive section of the statute, 29 U.S.C. §§ 1104-05 – the Directors are
essentially just asserting a single “co-fiduciary breach of fiduciary duty” claim against
Rode, and then using § 1132(a)(3) as the cause of action by which to enforce that alleged
violation. Accordingly, the Court uses the singular “claim” here.
20
38
or “three years after the earliest date on which the plaintiffs had actual acknowledge of the
breach or violation,” whichever comes “earlier”); accord Fulghum v. Embarq Corp., 785
F.3d 395, 413-16 (10th Cir. 2015) (describing this six-year limit as a “statute of repose,”
and noting that “statutes of repose operate to extinguish a plaintiff’s cause of action
whether or not the plaintiff should have discovered within that period that there was a
violation or an injury”).
****
For all of these reasons, the Court grants Rode’s motion to dismiss the third-party
complaints.
III.
ORDER
Based on the submissions and the entire file and proceedings herein, IT IS
HEREBY ORDERED that the Directors’ Motion for Judgment on the Pleadings [Doc.
No. 105] is DENIED, and that Rode’s Motion to Dismiss the Third-Party Complaints
[Doc. No. 109] is GRANTED.
Dated: August 9, 2019
_/s/ Susan Richard Nelson ___
SUSAN RICHARD NELSON
United States District Judge
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