Acosta et al v. Zander Group Holdings, Inc. et al
Filing
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MEMORANDUM OPINION OF THE COURT. Signed by District Judge William L. Campbell, Jr on 9/10/2018. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(mg)
IN THE UNITED STATES DISTRICT COURT FOR THE
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
R. ALEXANDER ACOSTA,
Secretary of Labor,
United States Department of Labor,
Plaintiff,
v.
ZANDER GROUP HOLDINGS, INC., et
al.,
Defendants.
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NO. 3:17-cv-01187
JUDGE CAMPBELL
MAGISTRATE JUDGE BROWN
MEMORANDUM
I. Introduction
Pending before the Court are Defendants Zander Group Holdings, Inc. and Jeffrey L.
Zander’s Motion to Dismiss (Doc. No. 28), Plaintiff’s Response (Doc. No. 37), and Defendants’
Reply (Doc. No. 41). For the reasons set forth herein, Defendants’ Motion to Dismiss (Doc. No.
28) is DENIED.
II. Factual and Procedural Background
Through the Complaint, Plaintiff R. Alexander Acosta, the Secretary of Labor, alleges
Defendants Zander Group Holdings, Inc. (“the Company”), Jeffrey J. Zander (“Zander”), and
Stephen M. Thompson (“Thompson”) violated the Employee Retirement Income Security Act of
1974 (“ERISA”) by breaching their fiduciary duties, engaging in prohibited transactions, and
acting on behalf of a party whose interests were adverse to the interests of the Zander Group
Holdings, Inc. Employee Stock Ownership Plan (“the Plan”). (Doc. No. 1). Specifically, the
Complaint alleges that, prior to establishment of the Plan, Zander Insurance (“the Business”) was
a partnership owned by the JJZ Insurance Agency, Inc., as well as two trusts, the Cardinal Trust
and the Toxaway Trust. (Id. ¶¶ 8, 13). Zander was allegedly the trustee and the beneficiary of
both trusts, and the president of JJZ Insurance Agency, Inc. (Id.)
In December, 2010, Zander allegedly retained Second Generation Capital, LLC (“2nd
Gen.”) to conduct an independent valuation of the Business. (Id. ¶ 21). On May 5, 2011, 2nd
Gen. prepared a preliminary valuation report, dated May 1, 2011, that concluded the fair market
value of the Business was $74,000,000. (Id. ¶ 22). The final valuation report, also dated May 1,
2011, concluded the fair market value of the Business was $75,000,000. (Id.) The Complaint
further alleges that, on May 28, 2011, 2nd Gen. sought to obtain documents from Zander to
support the conclusions reached in its valuation report. (Id. ¶ 24). Instead, Zander allegedly
provided 2nd Gen. with a letter stipulating to the numbers previously provided. (Id.)
On May 22, 2011, Zander engaged Thompson to act as Trustee to the Plan. (Id. ¶¶ 17-18,
23). On July 7, 2011, the Company was established, and the Toxaway Trust owned 100% of the
shares of the Company. (Id. ¶ 8, 14, 25). On August 31, 2011, the Complaint alleges Zander
again retained Thompson to act as Trustee to the Plan. (Id. ¶ 26). In doing so, Zander acted in
his capacity as president of the Company, but he was not named as president until the following
day. (Id.) The engagement letter provided that the Plan intended to acquire 500,000 “common
shares of the Company from the Toxaway Trust . . . at an offer price of $35,350,000,” and
directed the Trustee to engage 2nd Gen. to serve as an independent appraiser. (Id.)
On September 1, 2011, the Company established the Plan, and on the same date, named
Zander as president of the Company. (Id. ¶ 15). In that capacity, and as trustee of the Toxaway
Trust, Zander allegedly caused the Toxaway Trust to sell its shares of the Company to employees
who were leased to the Company from the Business, thereby establishing the Plan. (Id. ¶¶ 8, 15,
17). To finance the purchase, the Plan obtained a loan from the Company. (Id). The Plan
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documents name the Company as the Employer and the Plan Sponsor. (Id. ¶ 16). The Company,
through Zander as president, acted to administer the Plan, and is allegedly a “functional
fiduciary” to the Plan and a “party in interest.” (Id. ¶ 16).
Also on September 1, 2011, the Company allegedly empowered Zander to sign the
Trustee Engagement Agreement engaging Thompson. (Id. ¶¶ 8, 27). On that same day, the
Complaint alleges, 2nd Gen. supplemented its May 1, 2011 valuation report by issuing a “bring
forward” letter, which incorporated a “no material change” letter provided by management of the
Company, stating the Company’s financial performance had improved since May 1, 2011. (Id. ¶
28). 2nd Gen. allegedly concluded the proposed transaction was not in excess of fair market
value. (Id.) Also, on that same day, according to the Complaint, the Company established the
Plan and paid $35,350,000 to Zander, as trustee of Toxaway Trust, in order to acquire 500,000
shares of the Company. (Id. ¶ 29). After the stock purchase, the Plan owned 100% of the
outstanding shares of the Company; the Company owned 49% ownership in the Business; and
the trusts retained 51% ownership of the Business. (Id. ¶¶ 8, 30). Zander remained trustee and
beneficiary of both trusts. (Id.)
The Complaint alleges 2nd Gen.’s valuation report contained numerous flaws, which
grossly inflated the value of the Company’s shares. (Id. ¶ 31). According to the Complaint,
Zander actively lobbied for a higher value during preparation of the report, and Thompson failed
to understand and critically analyze the report. (Id. ¶ 31). As a result, the Complaint alleges, the
Plan significantly overpaid for shares of the Company’s stock. (Id. ¶¶ 32-43).
Count I of the Complaint alleges Zander and Thompson breached their fiduciary duties to
the Plan by relying on the conclusions in the valuation report, and by causing the Plan to
purchase the Company’s stock from Toxaway Trust in excess of fair market value, in violation of
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ERISA § 404(a)(1)(A), (B), and (D), 29 U.S.C. § 1104(a)(1)(A), (B), and (D). (Id. ¶¶ 44, 45).
Count II alleges Zander and Thompson engaged in a non-exempt prohibited transaction by
influencing the conclusion as to the value of the stock, and by authorizing the Plan to purchase
the stock at a price above fair market value, in violation of ERISA § 406(a)(1)(A), (B), and (E),
29 U.S.C.§ 1106(a)(1)(A), (B), and (E). (Id. ¶ 49). Count III alleges Zander and Thompson
violated ERISA § 406(b)(2), 29 U.S.C. §1106(b)(2), by acting in a transaction on behalf of a
party whose interests were adverse to the interests of the Plan. (Id. ¶ 54).
The Complaint also alleges Zander is liable for failure to monitor Thompson, and that
Zander and Thompson are liable for each other’s breaches. (Id. ¶¶ 46, 52, 56).
III. Analysis
A. The Standards Governing Motions To Dismiss
In considering a motion to dismiss, a court must determine whether the plaintiff has
sufficiently alleged “a claim to relief that is plausible on its face.” Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662,
129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009). Well-pleaded factual allegations are accepted
as true and are construed in the light most favorable to the nonmoving party. 129 U.S. at 1950:
Mills v. Barnard, 869 F.3d 473, 479 (6th Cir. 2017).
Defendants have attached as exhibits to their Motion to Dismiss a Trustee Engagement
Agreement (Doc. No. 29-1), and a Unanimous Written Consent of the Board of Directors of
Zander Group Holdings, Inc. To Action Taken Without a Meeting (Doc. No. 29-2). Plaintiff
argues the exhibits should be excluded as they are unauthenticated and should not be considered
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with a motion to dismiss. Defendants argue the documents should be considered because they
were referred to in the Complaint. The Court need not resolve this issue, however, because, even
if the Court considers the documents filed by Defendants, the motion to dismiss is without merit
for the reasons described below.
B. Allegations Involving Zander Group Holdings, Inc.
Defendants seek dismissal of Zander Group Holdings, Inc. (“the Company”) because
they contend the Complaint fails to allege any actionable conduct by the Company. Plaintiff
argues dismissal is unwarranted because the Complaint adequately states claims against the
Company as a fiduciary and as a knowing participant in Zander’s fiduciary breaches.
“Fiduciary status is the key to unlocking ERISA’s civil-enforcement scheme because the
statute permits a suit ‘by the Secretary [of Labor], or by a participant beneficiary or fiduciary for
appropriate relief” under [29 U.S.C. § 1109].’” Briscoe v. Fine, 444 F.3d 478, 486 (6th Cir.
2006); see also 29 U.S.C. § 1132. ERISA defines a “fiduciary” to include anyone who “exercises
any discretionary authority or discretionary control respecting management of [a] plan” or “has
any discretionary authority or discretionary responsibility in the administration of [a] plan.” 29
U.S.C. § 1002(21)(A);1 see also Deschamps v. Bridgestone Americas, Inc. Salaried Employees
Retirement Plan, 2016 WL 4728029 (6th Cir. Sept. 12, 2016).
In determining whether a
Section 1002(21)(A) provides as follows:
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(21)(A) Except as otherwise provided in subparagraph (B), 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, (ii) he
renders investment advice for a fee or other compensation, direct or indirect, with
respect to any moneys or other property of such plan, or has any authority or
responsibility to do so, or (iii) he has any discretionary authority or discretionary
responsibility in the administration of such plan. Such term includes any person
designated under section 1105(c)(1)(B) of this title.
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corporation is a fiduciary, the Sixth Circuit uses a “functional approach” by which it looks to
whether the corporation acts as a fiduciary with respect to the conduct at issue. Briscoe, 444 F.3d
at 486. ERISA makes any person found to be a fiduciary personally liable for any damages
caused by that person’s breach of fiduciary duties. Id.; 29 U.S.C. § 1109.
Among other allegations, the Complaint contends the Company is a functional fiduciary
to the Plan because it acted through Zander, its president, to engage Thompson as Trustee, and
had a duty to monitor Thompson’s actions. (Id. ¶ 20). In addition, the Complaint alleges the
Company allowed Zander, as its president, to administer the Plan rather than the Committee it
created to do so. (Id. ¶¶ 16, 20). Thus, Plaintiff seeks to hold the Company liable for the alleged
fiduciary breaches by Zander. The Complaint also alleges the Company is a party in interest,
under 29 U.S.C. § 1002(14) (B),2 because it is an employer whose employees are covered by the
Plan. (Id.)
The Court is persuaded the allegations of the Complaint sufficiently state a claim against
the Company. To the extent Defendants argue the allegations against the Company must be
specifically referenced in the three “counts” of the Complaint to avoid dismissal, they failed to
cite any authority to that affect. See Fabian v. Fulmer Helmets, Inc., 628 F.3d 278, 281 (6th Cir.
2010) (“So long as we can ‘draw the reasonable inference that the defendant is liable for the
misconduct alleged’ . . , a plaintiff's claims must survive a motion to dismiss.”)
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Section 1002(14)(C) [Plaintiff mistakenly cited Subpart B] provides:
(14) The term “party in interest” means, as to an employee benefit plan—
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(C) an employer any of whose employees are covered by such plan;
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B. Allegations Involving Zander
Defendants argue the allegations involving Zander fail to state a claim because they are
“unsupported and/or contradictory.” (Doc. No. 29, at 3). More specifically, Defendants argue,
the Complaint alleges Zander was acting on behalf of the seller when he “caused” the Plan to
buy the Company’s stock from the Toxaway Trust, but offers no facts to explain how Zander had
any authority to “cause” or “authorize” the Plan to take actions.
Defendants also argue, relying on various documents attached to the Motion to Dismiss,
that Zander did not retain Thompson to act as Trustee for the Plan on August 31, 2011 because
the engagement agreement states it is between the Company and Thompson. According to
Defendants, that document “further reflects that Zander was also not a party to the prior
agreement with the Trustee, as that agreement, dated May 22, 2011, was ‘between the Trustee
and JJZ, Inc.’” (Doc. No. 29, at 4). Defendants also contend the Complaint does not allege facts
to support the assertion that Zander had actual or constructive knowledge of the alleged breaches
by the Trustee.
Plaintiff argues the Complaint states a claim against Zander, and points to the allegations
that Zander acted as a functional fiduciary, a co-fiduciary with Thompson, and a knowing
participant in Thompson’s breaches. Plaintiff also points to the allegations that Zander actively
influenced 2nd Gen.’s valuation of the stock to be sold to the Plan, acted to engage Thompson as
Trustee on more than one occasion before he became president of the Company, and failed to
monitor Thompson’s actions.
As discussed above, the Complaint alleges Zander actively lobbied and used his influence
with 2nd Gen. and with the Trustee to obtain a higher price for the stock that he sought to sell to
the Plan, and that he also acted to administer the Plan in lieu of the Committee that was created
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to do so. (Doc. No. 1 ¶¶ 9, 17, 20, 21, 31, 40, 41, 43). These allegations are sufficient to state a
claim that Zander breached his duties as a functional fiduciary. 29 U.S.C. § 1002(21)(A);
Deschamps, supra.
As for Thompson, the Complaint alleges Zander: (1) engaged Thompson as Trustee on
two occasions prior to Zander’s appointment as president of the company on September 1, 2011;
(2) failed to monitor Thompson as he approved 2nd Gen’s flawed valuation report; and (3)
participated in Thompson’s breach of fiduciary duties. (Id. ¶¶ 17, 18, 21, 23, 26, 43, 46). These
allegations are sufficient to state a claim against Zander in connection with the actions or
inactions of Thompson.
Accordingly, the Court is persuaded the allegations of the Complaint sufficiently states
claims against the Company and Zander, and Defendants’ Motion to Dismiss is without merit.
IV. Conclusion
For the reasons set forth above, Defendants’ Motion to Dismiss (Doc. No. 28) is denied.
It is so ORDERED.
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WILLIAM L. CAMPBELL, JR.
UNITED STATES DISTRICT JUDGE
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