Spires et al v. Schools et al

Filing 91

ORDER AND OPINION granting in part and denying in part (Dkt. No. #59 ) the Piggly Wiggly Defendants' Motion to Dismiss. The Court DISMISSES the claims asserted in paragraphs 254(c), 254(d), and 254(e) of count one and the claims regarding above-market leases and excessive executive compensation asserted in count four of the complaint. The Piggly Wiggly Defendants' motion to dismiss is otherwise DENIED. The Court DENIES the Noteholder Defendants' motion to dismiss (Dkt. No. #58 ). AND IT IS SO ORDERED. Signed by Honorable Richard M Gergel on 9/19/2017.(sshe, )

IN THE UNITED STATES DISTRICTr~QJJRTc,_ f:ffr{'S OFFICE
DISTRICT OF SOUTH CAROLINA
CHARLESTON DIVISION nil S::P l 9 P J I 3
Dana Spires, et al.,
Plaintiffs,
V.

David R. Schools, et al.,
Defendants.

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ORDER AND OPINION

This matter is before the Court on Defendants William A. Edenfield, Robert G. Masche,
Joseph T. Newton, III, Burton R. Schools, David R. Schools, the Piggly Wiggly Carolina
Company, Inc., and the Greenbax Enterprises, Inc., Employee Stock Ownership Plan and Trust
Committee (collectively the "Piggly Wiggly Defendants") motion to dismiss (Dkt. No. 59) and
Defendants Joanne Newton Ayers and Marion Newton Schools (collectively the "Noteholder
Defendants") motion to dismiss (Dkt. No. 66). For the reasons set forth below, the Court grants
in part and denies in part the Piggly Wiggly Defendants' motion to dismiss, and denies the
Noteholder Defendants' motion to dismiss.

I.

Background
Plaintiffs are former employees of Piggly Wiggly Carolina Company, Inc. ("PWCC") or

Greenbax Enterprises, Inc. (collectively, the "Company"). They are participants in the PWCC and
Greenbax Employee Stock Ownership Plan and Trust (the "Plan") and assert various claims under
the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub. L. 93-406, 88 Stat. 829,
for themselves and for others similarly situated. (Dkt. No. 50 ~~ 19-22.) Since September 2005,
the Plan has owned approximately 99.5% of the outstanding stock of Greenbax, and Greenbax
owns 100% of the outstanding stock of PWCC. (Id.~~ 41, 55.) The Plan was established in 1985

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"to reward, motivate, and provide retirement benefits" for the Plan's participants, who are current
or former employees of the Company. (Dkt. No. 59-1 at 4.) The value of the stock and cash held
by the Plan determined what funds were available in the Plan for participants' retirement. The
value of the Plan's assets was determined primarily by the value of the Company stock held by the
Plan. (Dkt. No. 50

1 41.)

The value of the Company stock held by the plan was established

annually by appraisal, based on the Company's results of operations and financial condition. (Id.

1146, 84-93.)
Defendants Robert G. Masche, William Edenfield, Joseph T. Newton, III, Burton R.
Schools, and David R. Schools (the "Fiduciary Defendants") allegedly controlled the Company's
board of directors, were the Company's top executives, and controlled the "Plan Committee,"
which directed the voting of Company stock held by the Plan. (Id. 1123-28, 45.) Plaintiffs allege
that the Fiduciary Defendants used their positions to enrich themselves by draining assets from the
Company through excessive compensation and various insider dealings and that the Fiduciary
Defendants engaged in "gross mismanagement." (Id. § III.) According to Plaintiffs, the losses
created by the Fiduciary Defendants caused lenders to require repayment of outstanding loans and
to decline to extend additional credit, ultimately forcing the Company to sell substantially all its
assets, which in turn destroyed the value of Company stock held by the Plan. (Id. 11171-75, 20207.) Plaintiffs further allege the Fiduciary Defendants deliberately concealed the true causes of
the Company's financial losses from Plan participants. (Id. 1174--79, 99, 101, 103.)
Plaintiffs also allege that the Fiduciary Defendants improperly moved assets from the
Company to the Noteholder Defendants, who allegedly are Company insiders or family members
of Company insiders. (Id. § IV.C.) The Noteholder Defendants had made loans to the Plan for
the purchase of company stock, which were guaranteed by the Company. (Id.) In March 2014,

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the Company purchased the notes from the Noteholder Defendants for approximately $8.3 million
in cash (which was less than the outstanding principal amount remaining on the notes). (Id.).
Under ERISA, loans guaranteed by a party-in-interest must be without recourse to Plan assets other
than unallocated Company shares pledged as security (i.e., the shares purchased with the loans).
29 C.F.R. § 2550.408b-3(e). According to Plaintiffs, in March 2014 those shares were worth
approximately $4.2 million. (Dkt. No. 50 § IV.C.) Plaintiffs allege the difference between the
amount paid to the Noteholder Defendants and the value of the security available to themapproximately $4 million-was an improper transfer of Company assets to insiders and a
transaction prohibited under ERISA.
Plaintiffs allege Company management and directors eventually agreed to wind down the
company and to sell substantially all the Company's remaining assets to C&S Wholesale Grocers,
Inc. on September 4, 2014. (Id. 1225.) The sale and winding down was approved on December
12, 2014. (Id. 1233.)
On February 26, 2016, Plaintiffs filed the present putative class action, asserting six causes
of action against Defendants. In count one, Plaintiffs allege the Fiduciary Defendants breached
their fiduciary duties under ERISA. The Fiduciary Defendants necessarily were aware of their
own conduct in their capacities as Company executives. Had they acted properly in their fiduciary
capacities, according to Plaintiffs, the Fiduciary Defendants would have exercised the Plan's
voting rights to install independent management not engaged in the malfeasance Plaintiffs ascribe
to the Fiduciary Defendants. In count two, Plaintiffs allege the Fiduciary Defendants breached
their fiduciary duties under ERIS A by failing to bring a derivative action against the Company's
management and board of directors. In count three, Plaintiffs allege co-fiduciary liability under
29 U.S.C. § 1105 against the Fiduciary Defendants. In count four, Plaintiffs allege the Fiduciary

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Defendants engaged in transactions prohibited by 29 U.S.C. § 1106. In count five, Plaintiffs seek
equitable relief against all Defendants.
On June 20, 2016, the Piggly Wiggly Defendants (all Defendants other than the Noteholder
Defendants) moved to dismiss the amended complaint. The Piggly Wiggly Defendants argue that
Plaintiffs' claims are time barred under 29 U.S.C. § 1113, that the actions Plaintiffs complain of
were corporate acts unrelated to the Plan, that Plaintiffs fail to meet the pleading standard for a
stock-drop claim set forth in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), that
Plaintiffs lack standing because they suffered no injury-in-fact, and that Plaintiffs fail to allege
prohibited transactions. The Noteholder Defendants moved to dismiss on June 23, 2016, arguing
that the transaction Plaintiffs complain of did not involve the Plan or Plan assets, and that
Defendant Joanne Newton Ayers is not a party-in-interest under ERISA.

II.

Legal Standard
Rule 12(b)(6) of the Federal Rules of Civil Procedure permits the dismissal of an action if

the complaint fails "to state a claim upon which relief can be granted." Such a motion tests the
legal sufficiency of the complaint and "does not resolve contests surrounding the facts, the merits
of the claim, or the applicability of defenses. . . . Our inquiry then is limited to whether the
allegations constitute 'a short and plain statement of the claim showing that the pleader is entitled
to relief."' Republican Party ofNC. v. Martin, 980 F.2d 943,952 (4th Cir. 1992) (quotation marks
and citation omitted). In a Rule l 2(b)(6) motion, the Court is obligated to "assume the truth of all
facts alleged in the complaint and the existence of any fact that can be proved, consistent with the
complaint's allegations." E. Shore Mkts., Inc. v. JD. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th
Cir. 2000). However, while the Court must accept the facts in a light most favorable to the nonmoving party, it "need not accept as true unwarranted inferences, unreasonable conclusions, or
arguments." Id.
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To survive a motion to dismiss, the complaint must state "enough facts to state a claim to
relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544,570 (2007). Although
the requirement of plausibility does not impose a probability requirement at this stage, the
complaint must show more than a "sheer possibility that a defendant has acted unlawfully."

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint has "facial plausibility" where the
pleading "allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged." Id.

III.

Discussion

A.

Statute of Limitations
The argument that a statute of limitations bars a claim is an affirmative defense. Fed. R.

Civ. P. 8(c)(l ). Affirmative defenses may be raised on a motion under Rule 12(b)(6) of the Federal
Rules of Civil Procedure when "the face of the complaint clearly reveals the existence of a
meritorious affirmative defense." Brooks v. City of Winston-Salem, NC., 85 F.3d 178, 181 (4th
Cir. 1996). When ruling on an affirmative defense raised in a Rule 12(b)(6) motion, courts
"accept[] as true the well-pleaded facts in the complaint and view[] them in the light most favorable
to the plaintiff." Id. ERISA's statute of limitations provides,
No action may be commenced under this subchapter with respect to a fiduciary's
breach of any responsibility, duty, or obligation under this part, or with respect to a
violation of this part, after the earlier of(1) six years after (A) the date of the last action which constituted a

part of the breach or violation, or (B) in the case of an omission the
latest date on which the fiduciary could have cured the breach or
violation, or
(2) three years after the earliest date on which the plaintiff had actual
knowledge of the breach or violation;
except that in the case of fraud or concealment, such action may be commenced not
later than six years after the date of discovery of such breach or violation.

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29 U.S.C. § 1113.
The Piggy Wiggly Defendants argue any action for breach of fiduciary duties accrued in
2007 because that is when, according to the complaint, Greenbax stock began its decline in price,
which was reported on publicly available Form 5500s. (Dkt. No. 59-1 at 9-11.) Thus, according
to the Piggy Wiggly Defendants, Plaintiffs access to the "exact same information" that, according
to Plaintiffs, should have forced the Piggly Wiggly Defendants to take action to replace Company
management.

(Id.)

Because Plaintiffs knew the Piggly Wiggly Defendants did not replace

Company management, Plaintiffs had actual knowledge of their purported breach of fiduciary duty
more than three years before the present action was commenced.
The Piggly Wiggly Defendants' argument is unpersuasive. "Actual knowledge" means
"knowledge of all material facts necessary to understand that an ERISA fiduciary has breached his
or her duty." In re Citigroup ER/SA Litig., 104 F. Supp. 3d 599,610 (S.D.N.Y. 2015). 1 Plaintiffs
have not alleged that in 2007 they had actual knowledge of facts necessary to understand that the
Plan Committee members had breached their fiduciary duties. Plaintiffs doubtless were aware of
the beginning of the drop in Greenbax stock price and the failure to replace management as soon
as it began, but these are not the fiduciary breaches Plaintiffs allege. Plaintiffs allege the Plan
Committee members failed to take action in response to improper insider transactions and other
specific acts of management malfeasance, of which the Plan Committee had actual knowledge.
(E.g., Dkt. No. 50 ,1,1 129-68.) Plaintiffs also allege those transactions were undisclosed or

1

There is a circuit split on whether "actual knowledge" requires the plaintiffs to know that the
events constituting the breach supported a claim under ERISA. See Browning v. Tiger's Eye
Benefits Consulting, 313 F. App'x 656,660 (4th Cir. 2009). That issue, however, is not relevant
to the Piggly Wiggly Defendants' statute of limitations argument because there is no allegation
that there was any period when Plaintiffs knew all facts necessary to understand that there had
been a fiduciary breach but did not realize that those facts supported an ERISA claim.

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concealed from Plan participants. (E.g., id.

,r,r 74-79.)2

Plaintiffs do not allege that they had actual

knowledge of those transactions more than six years before the commencement of this action. The
truth of Plaintiffs' allegations, and, if they are true, the dates on which they occurred and the dates
on which Plaintiffs learned of them, are factual questions the Court cannot decide on a motion to
dismiss.
The Piggly Wiggly Defendants also raise a cursory argument that the alleged fiduciary
breaches were complete more than six years before this action was filed. (See Dkt. No. 59-1 at
11-12). That argument likewise is unpersuasive. The alleged breach of fiduciary duties in count
one is an omission-the failure to take action to remedy managerial malfeasance. (Dkt. No. 50 ,r
254.). The statutory six-year period for a breach by omission accrues from "the latest date on
which the fiduciary could have cured the breach or violation." 29 U.S.C. § 1113. Plaintiffs have
not alleged that the latest date on which the Plan Committee could have saved Plan asset value by
replacing Company management was before February 2010.

Further, they allege deliberate

concealment, which extends the limitations period to six years "after the date of discovery of such
breach or violation." Id.
In sum, when the "last action which constituted a part of the breach" occurred, when "the
fiduciary could have cured the breach," whether Defendants engaged in "fraud or concealment,"
and when "the plaintiff had actual knowledge of the breach" are disputed questions of fact. The
Court therefore denies the Piggly Wiggly Defendant's motion to dismiss as to the statute of

2

The Piggly Wiggly Defendants argue Plaintiffs have not alleged "a course of conduct designed
to conceal evidence" of wrongdoing and so cannot avail themselves of the extended statute of
limitations applicable in a "case of fraud or concealment." (Dkt. No. 59-1.) To the contrary,
Plaintiffs indeed have alleged "a course of conduct designed to conceal evidence." (See, e.g., Dkt.
No. 50 ,r,r 76, 270.)

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limitations argument, without prejudice to their ability to argue a statute of limitations defense
after discovery.

B.

Fiduciary Duties Versus Corporate Acts
ERISA imposes a stringent fiduciary standard on plan fiduciaries:
[A] fiduciary shall discharge his duties with respect to a plan solely in the interest
of the participants and beneficiaries and(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;

29 U.S.C. § 1104(a)(l). ERISA fiduciary standards, however, apply only to actions taken in when
in a fiduciary status. Lockheed Corp. v. Spink, 517 U.S. 882,890 (1996) ("'[O]nly when fulfilling
certain defined functions, including the exercise of discretionary authority or control over plan
management or administration,' does a person become a fiduciary under [29 U.S.C. §
1102(21 )(A)]." (quoting Siskind v. Sperry Retirement Program, Unisys, 47 F.3d 498, 505 (1995))).
The Piggly Wiggly Defendants argue Plaintiffs fail to allege the Fiduciary Defendants
breached their fiduciary duties because Plaintiffs confuse Defendants acts as corporate executives
with their acts as ERISA fiduciaries. (Dkt. No. 59-1 at 16-20.) The Piggly Wiggly Defendants
argue that when the purported malfeasance occurred, the Fiduciary Defendants were acting in their
capacity as corporate executives and not in their capacity as Plan fiduciaries.

Under the

settler/fiduciary doctrine, only fiduciary acts are subject to ERISA's fiduciary requirements, while
settlor acts are unconstrained by ERISA fiduciary duties. See Spink, 517 U.S. at 890. The

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settlor/fiduciary doctrine typically addresses the distinction between the design, amendment, or
termination ofERISA plans, which are settlor acts, and the implementation ofERISA plans, which
is a fiduciary act. See., e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444 (1999). Here,
Plaintiffs do not assert ERISA fiduciary duties apply to decisions to design, amend, or terminate
the Plan. Rather, they allege Plan fiduciaries administered the Plan in a self-interested manner that
was adverse to the interests of Plan participants. But the "two hats" principle means ERISA's
fiduciary standards extend to employers "only when and to the extent that they function in their
capacity as plan administrators, not when they conduct business that is not regulated by ERISA."
Amato v. W Union Int 'l, Inc., 773 F .2d 1402, 1416-17 (2d Cir. 1985) (internal quotation marks

omitted) abrogated on other grounds by Mead Corp. v. Tilley, 490 U.S. 714 (1989). "[T]he ERISA
scheme envisions that employers will act in a dual capacity as both fiduciary to the plan and as
employer. ERISA does not prohibit an employer from acting in accordance with its interests as
employer when not administering the plan or investing its assets." Phillips v. Amoco Oil Co., 799
F.2d 1464, 1471 (11th Cir. 1986). Thus, according to the Piggly Wiggly Defendants, the corporate
acts of corporate management are not subject to ERISA's fiduciary standards even if an ESOP
owns the company.
The Court agrees. Mismanagement or malfeasance by the executives of an operating
company is not in itself a breach of fiduciary duty under ERISA. But in this case, the alleged
managerial malfeasance is not the alleged breach of fiduciary duty. The alleged breach of fiduciary
duty is the failure of the Plan fiduciaries to take action to protect Plan assets by responding to
managerial malfeasance that depleted the Plan assets of most of their value. Plaintiffs allege the
Fiduciary Defendants failed to take action because they placed their personal interest in selfdealing with Company assets above their fiduciary duty to protect the value of Plan assets. Those

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allegations are sufficient to state a claim under 29 U.S.C. § 1109 for violation of the fiduciary
duties imposed by 29 U.S.C. § 1104(a)(l).
The Piggly Wiggly Defendants further contend Plaintiffs claims fail because the actions
allegedly constituting managerial malfeasance were ordinary business decisions. (Dkt. No. 59-1
at 17.) That contention is unavailing. Plaintiffs do not merely allege the Fiduciary Defendants

qua corporate management made poor decisions regarding real property leases or other poor
business decisions. They also allege the Fiduciary Defendants deliberately colluded to transfer
Company assets to themselves, necessarily depleting the value of Plan assets, and as Plan
fiduciaries decided not to protect Plan participants because the Fiduciary Defendants' self-interest
was adverse to the interests of Plan participants. Under ERISA, employers "owe a duty ... [as] .
. . trustees to avoid placing themselves in a position where their acts as officers or directors of the
corporation will prevent their functioning with the complete loyalty to participants demanded of
them as trustees of a pension plan." Amato, 773 F .2d at 1417 (internal quotation marks omitted).
Further, the authorities the Piggly Wiggly Defendants cite in support of the proposition that
corporate executive's business decisions can never give rise to a breach of ERISA fiduciary
obligations do not support that proposition. DiFelice v. US. Airways did not hold that ''when not
wearing a fiduciary hat, a corporation or its employees are free to act in furtherance of corporate
interests." (Dkt. No. 59-1 at 16-17 (497 F.3d 410, 418-19 (4th Cir. 2007).) To the contrary,
[fJiduciaries must also scrupulously adhere to a duty of loyalty, and make any
decisions in a fiduciary capacity with "an eye single to the interests of the
participants and beneficiaries." Kuper v. Iovenko, 66 F.3d 1447, 1458 (6th Cir.
1995) (internal quotation marks omitted). Any fiduciary who wears two hats--e.g.,
by virtue of being a plan fiduciary as well as a corporate officer-must "wear only
one at a time, and wear the fiduciary hat when making fiduciary decisions."
Pegram, 530 U.S. [211,] 225 [2000], 120 S. Ct. 2143. Corporate officers must
"avoid placing themselves in a position where their acts [or interests] as officers or
directors of the corporation will prevent their functioning with the complete loyalty

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to participants demanded of them as trustees of a pension plan." Donovan v.
Bierwirth, 680 F.2d 263,271 (2d Cir. 1982).

DiFelice, 497 F.3d at 418-19. Here, Plaintiffs allege corporate officers did what DiFelice holds
corporate officers may not do-that they placed themselves in a position where their interests
prevented them from functioning with complete loyalty to the Plan participants. Similarly, 29
U.S.C. § 1002(21)(A) provides in relevant part, "a person is a fiduciary with respect to a plan to
the extent (i) he exercises any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control respecting management or
disposition of its assets." 29 U.S.C. § 1002(21)(A). Here, Plaintiffs allege that the Fiduciary
Defendants breached their fiduciary duties by failing to exercise their discretionary control over
Plan assets in various ways, e.g., by failing to vote company stock to replace management.
Nothing in the statute suggests that a person is relieved of his fiduciary duties under ERISA
whenever his fiduciary duties touch upon his duties as a corporate officer.
In their reply brief, the Piggly Wiggly Defendants' cite Grindstajf v. Green, 133 F.3d 416
(6th Cir. 1999), to assert that the exercise of ESOP voting rights is not the use or management of
ESOP plan asset, except "in certain extreme cases."3 (Dkt. No. 67 at 5.) In Grindstaff, the Sixth
Circuit held the right to vote or direct the voting of an ESOP's shares in an unopposed election is
"simply an aspect of corporate control" that "does not, by itself, constitute a plan asset." 133 F.3d
at 425. But this Court respectfully finds the reasoning of Grindstaff to be unpersuasive. The

3

The Piggly Wiggly Defendants raise this argument for the first time in their reply brief. It is
improper to raising a new argument in a reply brief. See, e.g., EEOC v. Freeman, 961 F. Supp. 2d
783, 801 (D. Md. 2013); Tyndall v. Maynor, 288 F.R.D. 103, 108 (M.D.N.C. 2013). The Court's
consideration of this new argument, however, does not prejudice Plaintiffs, because the Court
rejects the new argument.

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problem with the Sixth Circuit's reasoning has been ably set forth by Judge Rebecca R. Pallmeyer
of the Northern District of Illinois:
The Grindstaff court relied on the outcome of the vote at issue, reasoning that
because Congress anticipated that company managers would also run ESOPs, when
those managers, acting as members of the ESOP committee, voted for themselves
as managers in an uncontested election, they did not breach their fiduciary duty to
the ESOP. [133 F.3d] at 424-25. From this narrow holding, the court extrapolated
that "the right to vote, or direct the voting of an ESOP' s shares, even when used to
perpetrate one's own incumbency, does not, by itself, constitute a plan asset." Id.
at 425. As the dissenting judge pointed out, though, the majority ignored ERISA §
3(21)(A)(i), 29 U.S.C. § 1002(21)(A)(i), which defines fiduciary conduct under
ERISA to include "any authority or control respecting management or disposition
of'' a plan's assets. Grindstaff, 133 F.3d at 432. Even if the right to vote a share is
not a plan asset, the share itself is an asset, so voting that share must be
"management" of the asset. Newton[ v. Van Otterloo], 756 F.Supp. [1121,] 1128
[(N.D. Ind. 1991)]; O'Neill [v. Davis], 721 F. Supp. [1013,] 1015 [(N.D. Ill. 1989)].
Moreover, the common law of trusts applies a duty of proper care to voting
decisions by trustees, Grindstaff, 133 F.3d at 432 (citing Restatement (Second) of
Trusts § 193, cmt. a (1959)), and courts routinely look to the common law to
interpret ERISA. Id. (citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101,
109-11, 109 S. Ct. 948, 103 L.Ed.2d 80 (1989)). Finally, in regulations interpreting
ERISA, the Department of Labor has concluded that "[t]he fiduciary act of
managing plan assets that are shares of corporate stock includes the voting of
proxies appurtenant to those shares of stock." 29 C.F.R. § 2509.08-2 (2009); 29
C.F.R. § 2509.94-2 (1995). For all these reasons, the court respectfully declines to
adhere to the broad language of the majority opinion in Grindstaff. The reasoning
of the dissenting judge as well as that of the courts in Newton and O'Neill is more
convincing. Voting of shares held by the ESOP constitutes the "management" or
"use" of plan assets.
Neil v. Zell, 677 F. Supp. 2d 1010, 1028-29 (N.D. Ill. 2009), as amended (Mar. 11, 2010). This

Court agrees with Judge Pallmeyer' s analysis and holds that the voting of shares held by an ESOP
is the use or management of a Plan asset.

The Court therefore denies the Piggly Wiggly

Defendants' motion to dismiss as to the arguments raised in section IV.B of their memorandum in
support of the motion.
C.

Derivative Action Claims

The Piggly Wiggly Defendants devote much briefing to the argument that count two, which
alleges the Fiduciary Defendants' failure to bring a derivative suit was a breach ofERISA fiduciary
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duties, is an attempt to avoid South Carolina's pleading requirements for derivative suits,
specifically the statute of limitations and requirements of SCRCP Rule 23(b)(1 ). The purpose of
their argument is obscure. Whether the Plan participants can now bring a derivative suit under
South Carolina law has no bearing on whether the Fiduciary Defendants' past failure to bring a
derivative suit was a breach of fiduciary duty under BRISA.
There appears to be no dispute that the Fiduciary Defendants could have brought a
derivative suit under South Carolina law. Implicitly conceding that point, the Piggly Wiggly
Defendants correctly assert that "[t]o proceed under the theory that a fiduciary breached its duties
by failing to bring a corporate derviative action," the Plaintiffs must allege (1) that the Fiduciary
Defendants had a duty to bring a derivative suit, and (2) that a derivative suit would have been
successful. (Dkt. No. 59-1 at 29-30.) Beyond the fiduciary duty challenge addressed above, the
Piggly Wiggly Defendants argue Plaintiffs fail plausibly to allege that any derivative action the
Fiduciary Defendants might have taken would have been successful because they do not plead the
elements of a derivative claim or facts satisfying those elements. The Court disagrees. Looking
at the complaint as a whole, the Court finds that the extensive allegations contained in its 83 pages
and 288 numbered paragraphs are sufficient to state with requisite detail why a derivative action
would have been successful-i. e., that the persons in control of the corporation acted in a manner
unfairly prejudicial to the Company and the Plan as stockholder, and that corporate assets were
wasted. It is not necessary for the complaint to include a legal memorandum on South Carolina
derivative actions.
The Court therefore denies the Piggly Wiggly Defendants' motion to dismiss as to the
arguments raised in section IV.D.2 of their memorandum in support of the motion.

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D.

Stock-Drop Claims
An ESOP "stock-drop" claim is an allegation that ESOP plan fiduciaries breached their

fiduciary duties under ERISA by continuing to invest in company stock or failing to warn
employees of impending drops in stock price. In Fifth Third Bancorp v. Dudenhoeffer, the
Supreme Court held that "the same standard of prudence applies to all ERIS A fiduciaries" except
"that an ESOP fiduciary is under no duty to diversify the ESOP's holdings," and that a claim for
breach of the duty of prudence based on nonpublic information available to the fiduciaries must
"allege an alternative action that the [fiduciary] could have taken." 134 S. Ct. 2459, 2467, 2472
(2014). The Piggly Wiggly Defendants argue Plaintiffs have failed to plead a "stock-drop" claim
adequately, in light of that standard. Plaintiffs respond that this is not a stock-drop case and that
the purpose of complaint allegations regarding declining stock prices is "to demonstrate the actual
financial losses suffered by the Plan that resulted from Defendant Plan Fiduciaries' wrongful
actions." (Dkt. No. 62 at 21.)
Plaintiffs, however, do allege a "stock-drop" claim, among other claims. Plaintiffs allege
the Fiduciary Defendants breached their fiduciary duties by, inter alia,
c. Failing, as members of the Plan Committee and Plan Trustees, to appropriately
monitor and evaluate Plan investments and remove inappropriate ones, including
Company stock;
d. Failing, as members of the Plan Committee and Plan Trustees, to sell Company
stock either before or during its steady decline in value;
e. Continuing, as members of the Plan Committee and Plan Trustees, to allow the
Plan to hold Company stock year after year despite the decline in stock value
between 2007 and 2015;
(Dkt. No. 50 ~ 254.) Each of the above allegations asserts that the Plan should have diversified its
assets in response to the Company stock's decline in value. But the Supreme Court has held "an
ESOP fiduciary not obliged under§ 1104(a)(l)(C) to 'diversif[y] the investments of the plan so as

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to minimize the risk oflarge losses" or under§ 1104(a)(l )(B) to act 'with the care, skill, prudence,
and diligence' of a "prudent man' insofar as that duty 'requires diversification,'" and so "ESOP
fiduciaries, unlike ERISA fiduciaries generally, are not liable for losses that result from a failure
to diversify." Fifth Third Bancorp, 134 S. Ct. at 2466-67 (quoting 29 U.S.C. § 1104)). 4 Alleging
that the Fiduciary Defendants should have found new directors to lead the Company may state a
claim, but alleging that the Fiduciary Defendants should have found a new company (or other
asset) for the ESOP to own cannot. The Court therefore grants the Piggly Wiggly Defendants'
motion to dismiss as to paragraphs 254(c), 254(d), and 254(e) of the amended complaint.

E.

Standing
The Piggly Wiggly Defendants assert Plaintiffs lack standing to assert breach of fiduciary

duty claims against the Fiduciary Defendants because they fail to allege that they have suffered
injury-in-fact. (Dkt. No. 59-1 at 24-25.) That argument is without merit. Plaintiffs allege that
"[ c]orrupt practices among top management" caused a significant financial loss for Plan
participants, including Plaintiffs, and that the Fiduciary Defendants knew of those practices but
chose not to replace management because they placed their own interests above the Plan
participants' interests.

(See, e.g., Dkt. No. 50 § III.) The gravamen of the Piggly Wiggly

Defendants' argument seems to be an argument that Plaintiffs cannot prove causation-that the
alleged actions of the Fiduciary Defendants caused any specific drop in the value of Plan-owned
stock. The Court expresses no opinion on whether Plaintiffs can prove causation, but they have
certainly alleged it, even by the pleading standard the Piggly Wiggly Defendants propose. (See,

4

Plaintiffs suggest that Fifth Third Bancorp may not apply to privately held companies. (Dkt. No.
62 at 21 n.22.) Although Fifth Third Bancorp's discussion of compliance with securities laws may
be inapplicable to ESOPs that hold no publicly traded stocks, this Court discerns no reason why
the holding "that an ESOP fiduciary is under no duty to diversify the ESOP's holdings" should not
apply to private company ESOPs.

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e.g., id. ,i 255 (alleging replacement of board of directors would have "increase[d] the value of the

Company's shares held by the Plan"), ,i 263 (alleging derivative action would have been successful
and would have recovered "significant assets").) The Court therefore denies the Piggly Wiggly
Defendants' motion to dismiss as to the argument that Plaintiffs lack standing.

F.

Prohibited Transactions Claims

1.

Claims Under 29 U.S.C. § 1106(a)
Title 29 U.S.C. § 1106(a) generally prohibits the direct or indirect transfer of plan assets to

a party-in-interest. The definition of party-in-interest includes any plan fiduciary, relatives of plan
fiduciaries, the employer, any director, officer, or employee of the employer.

29 U.S.C. §

1002(14). Relatives of parties-in-interest are defined as spouses, ancestors, descendants, and
spouses of descendants. 29 U.S.C. § 1002(15). Siblings are not considered relatives ofparties-ininterest. The prohibitions of 29 U.S.C. § 1106(a) do not apply to transactions that qualify for one
of the many exemptions provided by 29 U.S.C. § 1108. 29 U.S.C. § 1106(a).

Possibly, the

exemption most relevant to this case is 29 U.S.C. § 1108(17), which provides that 29 U.S.C. §
1106(a) does not apply to transactions between the plan and a party-interest (other than a fiduciary)
that constitute the sale or leasing of property, the lending of money, or transfer or use of plan
assets, if the transaction is for adequate consideration. "The Department of Labor has identified
two requirements for a transaction to be considered supported by adequate consideration: a
substantive requirement that the value assigned reflect the fair market value of the asset, and a
procedural requirement that the fiduciary actually determine the value assigned in good faith."

Fish v. GreatBanc Tr. Co., 749 F.3d 671, 680 (7th Cir. 2014).
a.

The Plan Assets Regulation
Plaintiffs allege the Fiduciary Defendants caused the Plan to engage with parties-in-interest

in four transactions prohibited under 29 U.S.C. § 1106(a). Plaintiffs do not allege the Plan was a

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party to the transactions. Rather, their allegations often are premised on the idea that Company
assets like cash are, effectively, Plan assets because the Plan owned 99.5% of the Company. (See,

e.g., Dkt. No.501220.) Under the "look-through" rule of the Plan Assets Regulation, when an
ERISA plan invests in an entity, the plan generally is treated as owning not only an interest in the
entity but also an undivided interest the assets held by the entity, unless an exception applies. 29
C.F.R. § 2510.3-101. If the entity assets are plan assets, then the assets of the entity are subject to
ERIS A's fiduciary standards.
One of the exceptions to the look-through rule, however, is the "operating company"
exception. Id. An operating company is a company that manufactures or sells goods or provides
services other than capital investment. See 29 C.F.R. § 2510.3-lOl(c). There is no dispute that
the Company was an operating company (although the date the Company ceased to be an operating
company appears disputed). The assets of an operating company are not plan assets, so, according
to Defendants, cash held by the Company was not a Plan asset, and Defendants were not dealing
in Plan assets when they allegedly engaged in the transactions Plaintiffs complain of.
Plaintiffs offer four arguments to the contrary. First, they argue that the Plan Assets
Regulation merely provides for when a company asset is per se a plan asset, not for when a
company asset is not a plan asset. That is true but cuts against Plaintiffs. The Plan Assets
Regulation only provides a per se rule because that is the purpose of 29 U.S.C. § 1106(a). As the
Sixth Circuit has explained,
Congress (in ERISA § 406 [29 U.S.C. § 1106]) intended to create an easily applied
per se prohibition ... of certain transactions, no matter how fair, unless the
statutory exemption procedures (of ERISA § 408(a)) are followed." Cutaiar v.
Marshall, 590 F.2d 523, 529-30 (3d Cir. 1979); see also Eaves v. Penn, 587 F.2d
453, 457-59 (10th Cir. 1978). Lack of harm to the plan or the good faith or lack of
the same on the part of the borrower are not relevant, and certainly not controlling,
under ERISA § 406. Rather, "Congress was concerned in ERISA (§ 406) to prevent

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transactions which offered a high potential for loss of plan assets or for insider
abuse .... " (Marshall v. Kelly, 465 F. Supp. 341,354 (W.D. Okla.1978)).

Chao v. Hall Holding Co., 285 F.3d 415, 439 (6th Cir. 2002) (quoting Reich v. Valley Nat. Bank
ofArizona, 837 F. Supp. 1259, 1281 (S.D.N.Y. 1993)). Defendants' purported "lack of good faith"
is "not relevant" under 29 U.S.C. § l 106(a) because that section only creates aper se prohibition
on transactions involving certain parties or certain assets.
Second, Plaintiffs argue the operating company exception should not apply because the
Company had adopted a plan to wind down operations. An operating company is "is an entity that
is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the
production or sale of a product or service other than the investment of capital." 29 C.F.R. § 2510.3101. Some courts have held, however, that the operating company exception to the look-through
rule may not apply to the implementation of a plan to liquidate an operating company owned by
an ESOP. See, e.g., Johnson v. Couturier, 572 F.3d 1067, 1080 (9th Cir. 2009). In Johnson, the
ESOP was going to be liquidated and all remaining equity paid out to the ESOP participants. The
Ninth Circuit rejected the argument that an advancement of defense costs to executives of the
company did not implicate ERISA's ban on indemnification of a fiduciary of an ERISA plan by
the plan because corporate assets rather than plan assets were used, because the "plan ofliquidation
provides for payment of all remaining equity to ESOP participants as shareholders" and so "any
proceeds taken from [the company's] remaining funds ... will, dollar for dollar, reduce the funds
available for distribution to ESOP participants." Id. This Court finds that reasoning persuasive.
Without the operating company exception, ERISA fiduciary standards would attach to the
management of company assets like inventory or office supplies-"clearly an absurd result." Id.
at 1077. But when a company is being liquidated, it is reasonable to view company assets as assets
of the ESOP owning the company. The Court therefore concludes that transactions that were part

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of the sale of the substantially all Company assets to C&S, and later transactions, may be prohibited
transactions under 29 U.S.C. § 1106 because Company assets may then be considered Plan assets.
Third, Plaintiffs rely on Johnson v. Couturier for the broader proposition that "courts have
found an ERISA prohibition on an ESOP taking a specific action also prohibits a similar action by
the corporation whose stock is owned by the ESOP when the ESOP would effectively bear the
financial cost and burden of the corporation's action." (Dkt. No. 62 at 31-32.) Plaintiffs appear
to mean that the Plan Assets Regulation should not prevent look-through to an operating
company's assets with regard to ERISA prohibitions against self-dealing from which fiduciaries
could directly profit: "Where, as here, an ESOP fiduciary also serves as a corporate director or
officer, imposing ERISA duties on business decisions from which that individual could directly
profit does not to us seem an unworkable rule" because "[t]o hold otherwise would protect from
ERISA liability obvious self-dealing, as Plaintiffs allege occurred here, to the detriment of the plan
beneficiaries." Johnson, 572 F.3d at 1077. 5 This Court reads Johnson as holding that ERISA
fiduciary duties may apply to self-dealing business decisions taken by a plan fiduciary who is also
a corporate officer or director. This Court does not read Johnson as an abrogation of the Plan
Assets Regulation.

Courts in the Ninth Circuit likewise have declined to read Johnson as

abrogating the Plan Assets Regulation. See, e.g., Wool v. Sitrick, No. 210CV02741JHNPJWX,
2010 WL 11448099, at *7-8 (C.D. Cal. Aug. 10, 2010).
Fourth, Plaintiffs cite several cases in support of the proposition that a transaction is an
"indirect prohibited transaction" under 29 U.S.C. § l 106(a) if the economic substance of the
transaction is to dissipate plan assets to the benefit of parties-in-interest. (Dkt. No. 63 at 10-12.)

5

Plaintiffs argument also relies on Donovan v. Cunningham, 541 F. Supp. 276 (S.D. Tex. 1982),
but that case has limited relevance because it predates the Plan Assets Regulation.

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Some of those cases antedate the Plan Assets Regulation. E.g., M & R Inv. Co. v. Fitzsimmons,
685 F.2d 283,287 (9th Cir. 1982); Donovan v. Bryans, 566 F. Supp. 1258 (E.D. Pa. 1983). Those
that do not are inapposite. Fish v. Greatbanc Trust Co. does not concern, as Plaintiffs assert, an
argument that a transaction did not involve plan assets under the Plan Assets Regulation. See
generally 749 F.3d 671 (7th Cir. 2014). FirsTier Bank, NA. v. Zeller concerned improper plan

participant loans. 16 F.3d 907 (8th Cir. 1994). Chesemore v. Alliance Holdings, Inc. concerned a
transaction in which a fiduciary received $2.9 million from the ESOP. 886 F. Supp. 2d 1007, 1055
(W.D. Wis. 2012). The fiduciary argued that he was not engaging in a prohibited transaction
because he was not acting as a fiduciary with respect to the transaction, not that the transaction did
not involve plan assets. Id. As discussed above, Neil v. Zell concerned (in part) whether voting
the shares held by an ESOP constitutes the management or use of plan assets. 677 F. Supp. 2d at
1029. It did not address whether cash or other assets of an operating company are plan assets.
b.

Alleged Prohibited Transactions

As noted above, Plaintiffs allege the Fiduciary Defendants caused the Plan to engage with
parties-in-interest in four transactions (or groups of transactions) prohibited under 29 U.S.C. §
1106(a):
a. The settlement of the Notes Payable with the Defendant Note Holders;
b. The entry into and/or the continuance of leases with ACDC [the A-C
Development Club, LLC] and entities controlled by ACDC and the Dallas Cotton
Club;
c. Excessive compensation and benefits paid to the Defendant Plan Fiduciaries; and
d. Payment of certain of the Defendant Plan Fiduciaries for a covenant not to
compete in connection with the 2014 Asset Sales as hereinabove alleged.
(Dkt. No. 50 ,J 277.)

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The "settlement of the Notes Payable with the Defendant Note Holders" is the March 2014
purchase by the Company of notes from the Noteholder Defendants for approximately $8.3 million
in cash. (Dkt. No. 50 § IV.C.) Loans guaranteed by a party-in-interest (i.e., the Company) must
be without recourse to Plan assets other than unallocated Company shares pledged as security (i.e.,
the shares purchased with the loans). 29 C.F.R. § 2550.408b-3(e). Plaintiffs allege that in March
2014 those shares were worth approximately $4.2 million. (Dkt. No. 50 § IV.C.) They allege the
difference between the amount paid to the Noteholder Defendants and the value of the security
available to them-approximately $4 million-was a transaction prohibited under ERISA. They
allege that the Fiduciary Defendants are liable for their participation in that prohibited transaction
and that Noteholder Defendants are liable under ERISA for "knowingly participating in
transactions that violated ERISA and/or knowingly participated as parties in interest in prohibited
transactions." (Id

i! 285.)

The Dallas Cotton Club, Inc. allegedly was a member in the A-C Development Club, LLC
("ACDC"), which allegedly owned many properties that it leased to the Company at above market
rates. (Id ,i,i 150-67.) Plaintiffs allege the Fiduciary Defendants (or, in the case of Defendant
Joseph Newton, his son Tradd), along with Jerry Durham, a Company executive who is not a
named Defendant, created and controlled the Dallas Cotton Club and ACDC, that they in their
capacities as corporate officers and directors directed the Company to enter into above-market
leases with ACDC, and that those funds were ultimately distributed to the Fiduciary Defendants.
(Id)

Plaintiffs allege the Fiduciary Defendants and other Company executives received "grossly
exorbitant compensation" and "excessive benefits" including luxury automobiles. (Id. ,i,i 132135.) They also allege the Company accelerated deferred compensation retirement benefits for

-21-

Company executives, which provided 15 years of full salary following retirement and vested at
age 65, because Company executive realized the Company would not exist by the time they
reached age 65. (Id
payments. (Id.

,r,r

138-142.) Plaintiffs also complain of allegedly excessive severance

,r,r 143-45.)

Allegedly, one of the terms of the sale agreement with C&S was a four-year covenant not
to compete that would apply to senior Company management who did not become employees of
C&S. (Id.

,r

230.) Plaintiffs allege senior management, including Defendants David Schools,

Edenfield, and Masche received $700,000 in consideration of their agreement not to compete with
C&S. (Id.)
Under the analysis the Court provides above, the entry into leases with ACDC and entities
controlled by ACDC and the Dallas Cotton Club were not prohibited transactions under 29 U.S.C.
§ l 106(a) because the Plan was not a party to those transactions and because no Plan assets were
involved. Allegedly excessive compensation and benefits paid to the Fiduciary Defendants (before
the September 5, 2014 decision to sell substantially all Company assets to C&S) were not
prohibited transactions under 29 U.S.C. § l 106(a) for the same reason. These transactions might
support claims for breach of fiduciary duties, but they do not fall within the per se prohibitions of
29 U.S.C. § l 106(a). Plaintiffs, however, have stated a claim under 29 U.S.C. § l 106(a) regarding
the covenant not to compete that was allegedly included in the sale agreement with C&S, because
that transaction diverted funds from the Plan participants to the Fiduciary Defendants.
The analysis of the 2014 settlement of the notes payable is more complex. The use of
Company cash in the March 2014 purchase of notes payable with the Noteholder Defendants was
not a prohibited transaction under 29 U.S.C. § 1106(a) merely because Company cash was used,
because Company cash was not then a Plan asset. Plaintiffs, however, raise three additional

-22-

arguments specific to the notes payable settlement. First, Plaintiffs argue the Company was
liquidating in 2013, i.e., before the March 2014 settlement. The Court finds that argument
unpersuasive. Plaintiffs allege the decision to sell substantially all assets and to wind down the
Company occurred on September 5, 2014. (Dkt. No.~ 225.) Their allegations regarding 2013 are
that the "2013 Asset Sales were a clear first step toward a sale of substantially the assets of the
Company" and that "the Company had effectively decided in 2013 to embark on a sale of
substantially all assets and pursue a winding down." (E.g., id

~~

204, 219.) In the Court's view,

the Company ceased to be an operating company (for purposes of the Plan Assets Regulation)
when Company management and directors actually decided to sell substantially all the assets of
the Company to C&S and to seek approval for a winding down of the Company, not when they
"effectively decided" to sell the Company, not when they formed a subjective belief that the
Company should be sold, and not when they took an action that might be characterized as a "first
step" toward a sale.
Second, Plaintiffs argue the settlement had the effect of violating the prohibition against
recourse to plan assets for repayment of loans to ESOPs guaranteed by a party-in-interest beyond
the collateral provided for the loans. See 29 C.F.R § 2550.408b-3(e). The Court finds that
argument unpersuasive because the settlement of the notes payable was, allegedly, without
recourse against Plan assets (other than the pledged unallocated shares).

The Noteholder

Defendants received cash from the company, and the collateral shares were ultimately cancelled.
(Dkt. No. 50

~

211-12.). Plaintiffs' argument relies upon the premise that the Company cash

tendered to the Noteholder Defendants was a Plan asset, which is a premise the Court rejects, for
the reasons given above.

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Third, Plaintiffs argue the transaction involved the redemption and cancellation of the
unallocated shares held by the Plan and held as collateral to the notes. (Dkt. No. 63 at 13; Dkt.
No. 5011208-12.) The Court finds that argument persuasive but only as to the Piggly Wiggly
Defendants. Plaintiffs allege the Company purchased the notes from the Noteholder Defendants
in March 2014. (Dkt. No.501211.) They allege the Company and the Plan later entered into a
redemption agreement, in which the unallocated shares of Company stock held by the Plan and
pledged as collateral for the notes were redeemed and cancelled, and the notes owed by the Plan
were forgiven. (Id. 1 212.) What the Company and Plan did with the notes' collateral months
after the Company purchased the notes is not relevant to the Noteholder Defendants' liability. But
the cancellation of shares held by the Plan and forgiveness of notes collateralized by those shares
was a transaction involving Plan assets. Plaintiffs alleged the cancellation was delayed from
March to December to dilute Plan participants' voting percentage in the vote on the sale of the
Company's assets to C&S. (Id.) That allegation is sufficient to state a claim under 29 U.S.C. §
1106(a)(l)(D) (prohibiting transactions between a plan and a party-in-interest (e.g., the Company)
that constitutes a direct or indirect transfer to, or use by or for the benefit of a party-in-interest).
Further, the Court observes that when the Company purchased the notes payable from the
Noteholder Defendants, the Company was purchasing an interest in the collateral for those notes,
which was a Plan asset. For that reason, the March 2014 purchase of the notes constituted an
indirect transfer of Plan assets to a party-in-interest (the Company). The purchase may or may not
have been for adequate consideration or commercially reasonable. Plaintiffs allege it was not, so
that issue is a disputed question of fact, not a pleading deficiency to be adjudicated on a motion to
dismiss.

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2.

Claims Under 29 U.S.C. § 1106(b)
Title 29 U.S.C. § 1106(b) prohibits fiduciaries from dealing in plan assets on the

fiduciaries' own account or on behalf of a party with interests adverse to the plan beneficiaries.
[29 U.S.C. § 1106(b)] is broader in scope [than 29 U.S.C. § 1106(a)], proscribing
self-dealing and certain transactions by fiduciaries. Whereas [29 U.S.C. § 1106(a)]
is limited to transactions with parties in interest, [29 U.S.C. § 1106(b)] is more
expansive, proscribing self-dealing or transactions involving parties with interests
that are adverse to those of the Plan. See Reich v. Compton, 57 F.3d 270,289 (3rd
Cir. 1995). [29 U.S.C. § 1106(b)] imposes a duty of undivided loyalty upon
fiduciaries, making clear that in the exercise of their authority, fiduciaries may not
involve parties with adverse interests. See 29 C.F.R. § 2550.408b-2(e)(l);
Compton, 57 F.3d at 287. [29 U.S.C. § l 106(b)] is broadly construed, Lowen v.
Tower Asset [Mgmt.], 829 F.2d 1209, 1213 (2[]d Cir. 1987); Leigh, 727 F.2d at 126,
as is the term "adverse interest." See Sandoval v. Simmons, 622 F.Supp. 1174,
1213-14 (C.D. Ill. 1985). To be adverse within the meaning of the ERISA, the
interests need not directly conflict but must be sufficiently different. See id. at
1213. *12

Int 'l Bhd. of Painters and Allied Trades Union and Indus. Pension Fund v. Duval, 925 F. Supp.
815,825 (D.D.C. 1996). Further, where 29 U.S.C. § 1106(a) applies to transactions in which the
Plan is a party or Plan assets are used or transferred, 29 U.S.C. § 1106(b) more broadly "prohibits
fiduciaries of an ERISA plan from receiving 'any consideration' coming 'from any party dealing
with' the plan in connection with a transaction 'involving' plan assets." Chesemore, 886 F. Supp.
2d at 1056-57. Indeed, 29 U.S.C. § 1106(b)(2) does not even mention "plan assets." It only
requires that the transaction "involve the plan."
The broader scope of § 1106(b), however does not change the Court's prohibited
transaction analysis. The alleged excessive compensation for Company executives and alleged
above-market leases did not "involve" Plan assets. The settlement of the notes payable and noncompete agreement did "involve" Plan assets.
*

*

-25-

*

For the above reasons, the Court grants the Piggly Wiggly Defendants' motion to dismiss
as to claims under count four regarding entry into above-market leases and excessive
compensation, and denies the motion to dismiss as to claims under count four regarding the 2014
settlement of the notes payable and the 2014 non-compete agreement. The Court denies the
Noteholder Defendants motion to dismiss claims under count four.

Although Noteholder

Defendant Joanne Newton Ayers was not a party-in-interest, that is not relevant because the
settlement of the notes payable was, allegedly, a transfer to or use by the Company of Plan assets,
which is prohibited by 29 U.S.C. § 1106(a) unless an exemption under 29 U.S.C. § 1108 applies.

G.

Equitable Claims
Title 29 U.S.C. § 1132(a)(3) is a "catchall" provision that provides "a safety net, offering

appropriate equitable relief for injuries caused by violations that [29 U.S.C. § 1132] does not
elsewhere adequately remedy." Varity Corp. v. Howe, 516 U.S. 489,512 (1996). Under 29 U.S.C.
§ 1132(a)(3), "[a] civil action may be brought ... by a participant, beneficiary, or fiduciary (A) to
enjoin any act or practice which violates any provision of this title 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 title or the terms of the plan." In Harris Trust and Savings Bank v. Salomon

Smith Barney, the Supreme Court provided that non-fiduciaries can be liable as knowing
participants in fiduciary breaches under 29 U.S.C. § 1132(a)(3). 530 U.S. 238,246 (2000) (noting
that 29 U.S.C. § 1132(a)(3) "admits of no limit ... on the universe of possible defendants"); see

also Daniels v. Bursey, 313 F.Supp.2d 790, 808 (N.D. Ill. 2004) (concluding that to state a claim
under 29 U.S.C. § 1132(a)(3), "the plaintiff must allege only that a fiduciary violated a substantive
provision of ERISA and the nonfiduciary knowingly participated in the conduct that constituted
the violation").

-26-

Relief under 29 U.S.C. § 1132(a)(3), however, is limited to "other appropriate equitable
relief." "[O]ther appropriate equitable relief' incorporates limits from the common law of trusts.
Harris Tr., 530 U.S. at 250. Under the law of trusts, a non-fiduciary must "have had actual or

constructive knowledge of the circumstances that rendered the transaction unlawful." Id. at 251;
see also Rest. 2d Trusts§ 297, cmt. a ("A third person has notice of a breach of trust not only when

he knows of the breach, but also when he should know of it; that is when he knows facts which
under the circumstances would lead a reasonably intelligent and diligent person to inquire whether
the trustee ... is committing a breach of trust, and if such inquiry when pursued with reasonable
intelligence and diligence would give him knowledge or reason to know that the trustee is
committing a breach of trust."). Typical equitable relief against a party that knowingly participates
in a fiduciary breach would be an order requiring the party to return whatever plan assets it
obtained in the transaction. See, e.g., Landwehr v. DuPree, 72 F.3d 726, 735 (9th Cir. 1995).
To the extent the Fiduciary Defendants breached their fiduciary duties and other ERISA
provisions do not provide adequate remedies, they may be liable for equitable relief under 29
U.S.C. § 1132(a)(3). To the extent the Company or the Noteholder Defendants participated in
transactions prohibited under ERISA, they also may be liable for equitable relief if they had actual
or constructive knowledge that the transactions involved a breach of fiduciary duties. Plaintiffs
allege the Fiduciary Defendants engaged in or caused the Company to engage in violative
transactions and that the Noteholder Defendants participated in those transactions knowledge that
they violated ERISA. (Dkt. No. 50 ,i,i 284-85.) Plaintiffs therefore state a claim under 29 U.S.C.
§ l 132(a)(3) for equitable relief, and the Piggly Wiggly Defendants' and Noteholder Defendants'
motions to dismiss are denied as to count five of the complaint.

-27-

H.

Co-Fiduciary Liability
The Piggly Wiggly Defendants' motion to dismiss count three (co-fiduciary liability) is

premised on the purported failure to state a claim for an antecedent breach of fiduciary duty.
Because the Court holds Plaintiffs have stated a claim for an antecedent breach of fiduciary duty,
the Court denies the motion to dismiss as to count three.

IV.

Conclusion
For the foregoing reasons, the Court GRANTS IN PART AND DENIES IN PART the

Piggly Wiggly Defendants' motion to dismiss (Dkt. No. 59). The Court DISMISSES the claims
asserted in paragraphs 254(c), 254( d), and 254(e) of count one and the claims regarding abovemarket leases and excessive executive compensation asserted in count four of the complaint. The
Piggly Wiggly Defendants' motion to dismiss is otherwise DENIED. The Court DENIES the
Noteholder Defendants' motion to dismiss (Dkt. No. 58).
AND IT IS SO ORDERED.

uev ss-f_

Richard Mark Gergel
United States District Court Judge
September 1~ , 2017
Charleston, South Carolina

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