Neil et al v. Foster-Bey
Filing
34
MEMORANDUM OPINION. Signed by District Judge James C. Cacheris on 10/27/2016. (mpha)
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
ROBERT NEIL, in his capacity
as Trustee of the CSR,
Incorporated Employee Stock
Ownership Plan, et al.,
Plaintiffs,
v.
JOHN FOSTER-BEY,
Defendant.
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1:16cv1227 (JCC/IDD)
M E M O R A N D U M
O P I N I O N
This case arises out of a struggle between the Board
and management of CSR, Incorporated (“CSR”).
It is before the
Court now on the Motion for Preliminary Injunction [Dkt. 4]
filed by Plaintiffs CSR and Robert Neil, in his capacity as
Trustee of CSR’s Employee Stock Ownership Plan.
Also before the
Court is Plaintiffs’ Motion to Strike Defendant’s Opposition
[Dkt. Nos. 23, 29] as untimely.
For the reasons that follow,
the Court will deny both Motions.
I. Background
CSR is a “government contractor providing professional
and technical consulting services and research.” Compl. [Dkt. 1]
¶ 7.
Defendant joined CSR in 2008 as Project Director, and
within three years was promoted to Vice President of Operations.
On December 2, 2011, Defendant was elected as both CEO and sole
member of CSR’s Board of Directors.
CSR maintains an Employee Stock Ownership Plan — “a
qualified, defined contribution, stock bonus (or combination
stock bonus plan and money purchase pension) plan governed by
ERISA” that owns “100% of the outstanding common stock of CSR.”
Id. ¶¶ 8-9.
The Plan is administered “for the exclusive benefit
of eligible employees and their beneficiaries.”
Id. ¶ 9.
On
June 20, 2012, Defendant was appointed Trustee of the Employee
Stock Ownership Plan, assuming the fiduciary duties appurtenant
to that position.
In August of 2013, Defendant appointed Thomas Edgar
and Neil to CSR’s Board.
in January of 2016.
Cynthia Mardsen was added to the Board
Of the four Board members, only Defendant
served as both Board member and management.
Plaintiffs allege that, beginning in early 2015,
Defendant’s performance as President, CEO, and Trustee began to
deteriorate.
Among other things, Defendant ceased keeping
regular business hours and “failed to engage in the business
development activities required of him as CEO.”
Prelim. Inj. [Dkt. 4] at 2.
Mot. for
After repeated warnings, the other
Board members informed Defendant on September 12, 2016, that
they intended to terminate him as President, CEO, and Board
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member of CSR, and as Trustee of CSR’s Employee Stock Ownership
Plan.
Defendant asked that the other Board members
reconsider.
They responded with a “memorandum of understanding”
setting forth “specific mandates for [Defendant] going forward”
and providing for a six month probationary period.
4] at 3.
Mot. [Dkt.
Plaintiffs delivered this memorandum to Defendant on
September 14, 2016.
The Board also scheduled a meeting with
Defendant to take place on September 19, 2016, to discuss the
issue of Defendant’s employment.
Before the second meeting, on September 16, 2016,
Defendant wrote letters to two individuals – Garland Yates and
James Hymen – offering them the positions on the Board then
occupied by Edgar and Neil.
Mistakenly believing that the Board
membership terms of Edgar and Neil had expired, Defendant stated
that the positions offered Yates and Hymen would commence the
day of the scheduled Board meeting.
Yates and Hymen accepted
the appointments.
Defendant appeared late to the meeting on September
19, 2016, and rejected the Board’s mandates.
In particular,
Defendant took issue with the requirement that he be present in
the office for six hours a day, four days a week.
As a result,
the other Board members informed Defendant that they would
terminate him from his various positions at CSR.
3
Defendant responded that he would not recognize the
Board’s authority to remove him because the membership terms of
Edgar and Neil had expired the prior month.
The Board, however,
had earlier voted unanimously to extend those members’ terms to
the end of September.
Reminded of this resolution, Defendant
stated that he would not renew those Board members’ terms when
they expired at the end of September, and would use his position
as Trustee to elect new Board members who would retain him.
On September 21, 2016, the other Board members sent
Defendant a formal notice terminating him from his roles as
President, CEO, and Board member of CSR. The notice included the
caveat that it would not become effective while the parties
attempted to reach an amicable resolution.
Shortly thereafter,
it became apparent that no such resolution would be possible.
On September 26, 2016, the other Board members notified
Defendant that the earlier notice had become effective, and
provided him with a separate notice purporting to terminate him
as Trustee of the Employee Stock Ownership Plan.
The same day,
the remaining Board members appointed Neil as interim successor
Trustee of the Plan.
Defendant nonetheless continued to hold himself out as
President and CEO of CSR, as well as Trustee of the Employee
Stock Ownership Plan.
Plaintiffs allege that this has caused
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confusion, damaging the company’s business and with it the value
of the Employee Stock Ownership Plan.
On September 28, 2016, Plaintiffs brought suit
alleging that Defendant’s actions violated his fiduciary duty
under ERISA as Trustee of the Employee Stock Ownership Plan.
Plaintiffs filed the instant Motion for a Preliminary Injunction
contemporaneously with their Complaint, seeking an injunction
holding that, pending the resolution of this case, (1) Defendant
is no longer the CEO of CSR or the trustee of CSR’s Employee
Stock Ownership Plan, (2) Plaintiff Neil is the trustee of CSR’s
Employee Stock Ownership Plan, and (3) the sole members of CSR’s
Board of Directors are Neil, Edgar, and Marsden.
Two weeks after Plaintiffs filed suit, Defendant
called a meeting of what he viewed as CSR’s legitimate Board
members – Yates and Hymen (his recent appointees), Mardsen, and
himself.
Mardsen did not attend.
At the meeting, Defendant,
Yates, and Hymen voted to rescind the Board’s prior decisions
terminating Defendant from his various positions at CSR.
II. Legal Standard
A party seeking a preliminary injunction must
demonstrate that (1) it is likely to succeed on the merits of
its claim; (2) it is likely to suffer irreparable harm in the
absence of preliminary relief; (3) the balance of hardships
favors granting the injunction; and (4) the injunction is in the
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public interest.
2013).
are met.
Pashby v. Delia, 709 F.3d 307, 320 (4th Cir.
Injunctive relief is warranted only if all four factors
Id. at 320-21.
There are two kinds of preliminary injunctions:
prohibitory and mandatory.
“Prohibitory preliminary injunctions
aim to maintain the status quo and prevent irreparable harm
while a lawsuit remains pending.”
Id. at 319.
A mandatory
injunction, on the other hand, seeks relief beyond maintaining
the status quo, and is generally “disfavored, and warranted only
in the most extraordinary circumstances.”
Taylor v. Freeman, 34
F.3d 266, 274 n.2 (4th Cir. 1994).
While Plaintiffs couch their requested injunction in
prohibitory terms, they seek mandatory relief.
Plaintiffs ask
that the Court “enter a preliminary injunction freezing the
management of CSR and the CSR [Employee Stock Ownership Plan] as
it was on September 26, 2016,” at which point Defendant had
ostensibly “been removed” from his various positions.
[Dkt. 4] at 10-11.
Mot.
But the “status quo,” where preliminary
injunctions are concerned, is the “last uncontested status
between the parties which preceded the controversy.” Aggarao v.
MOL Ship Mgmt. Co., 675 F.3d 355, 378 (4th Cir. 2012).
Here,
that was a point before the Board purported to remove Defendant
from his various roles at CSR.
Plaintiffs’ Motion is therefore
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subject to the heightened standard applicable to motions seeking
mandatory relief.
The Court notes as well that, as formulated by
Plaintiffs, the requested remedy is not an injunction but a
declaratory judgment clarifying the parties’ legal relationship:
Injunctions and declaratory judgments are
different remedies. An injunction is a coercive
order by a court directing a party to do or
refrain from doing something, and applies to
future actions. A declaratory judgment states the
existing legal rights in a controversy, but does
not, in itself, coerce any party or enjoin any
future action.
Ulstein Mar., Ltd. v. United States, 833 F.2d 1052, 1055 (1st
Cir. 1987).
Phrased in injunctive terms, Plaintiffs appear to
request an order removing Defendant from any position he might
hold at CSR and installing Plaintiffs’ desired management.
III. Analysis
Plaintiffs’ Motion presents two issues. The first is
whether, based on the record now before the Court, the Board
effectively removed Defendant from his various positions at CSR.
The second is whether Defendant’s actions responding to their
efforts violated ERISA.
The Court finds that the resolution of
the first issue moots the second.
Defendant raises a number of procedural objections to
the manner in which he was removed from his various positions at
CSR.
In particular, he claims that the Board did not terminate
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him through “proper official ‘board action’” at a “properly
called and noticed meeting.”
Opp. [Dkt. 21] at 20.
Pursuant to Section 4.3 of CSR’s bylaws, “[t]he act of
the majority of the directors present at a meeting at which a
quorum is present shall be the act of the board of directors.”
Mot. Exh. A [Dkt. 4-2] at 4.
regular or special meeting.
A Board meeting may be either a
See id. at 3-4.
A special meeting
requires “written notice delivered to each director not less
than three (3) days before such meeting.”
Id. at 4.
A director
waives the notice requirement by attending a meeting unless he
or she does so “for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully
called or convened.”
Id.
Section 4.11 of CSR’s Bylaws states that “[a] director
may be removed by a majority vote of the remaining directors at
a regular meeting of the board or a specially called meeting
where the purpose is clearly published to all directors.”
at 5.
Id.
Similarly, section 5.2 provides that “[a]ny officer or
agent elected or appointed by the board of directors may be
removed by the board of directors whenever in its judgment the
best interests of the Corporation will be served thereby.”
at 5-6.
Id.
Finally, Section 5.2 of CSR’s Employee Stock Ownership
Trust Agreement states that “[t]he Company may remove the
Trustee by giving (30) days’ advance written notice to the
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Trustee, subject to providing the removed Trustee with
satisfactory written evidence of the appointment of a successor
Trustee and of the successor Trustee’s acceptance of the
trusteeship.”
Mot. Exh. B. [Dkt. 4-3] at 8.
Here, it is uncontested the other members of the Board
apprised Defendant of their intent to terminate him from his
various positions at CSR on September 12, 2016.
¶ 23.
Compl. [Dkt. 1]
The Board arranged to meet with Defendant five days later
on September 17, 2016 to discuss the matter.
Id. ¶ 25.
Three
days before that meeting, the other Board members sent Defendant
a memorandum detailing the issues they intended to address at
the meeting.
Defendant appeared at the meeting without raising
any objection to the notice afforded him.
Id. ¶ 26.
When
Defendant refused to accede to the Board’s terms, a majority of
the Board members informed Defendant that they would terminate
him from his various positions at CSR.
Id. ¶ 27.
Shortly
thereafter, the Board members sent Defendant a formal notice
memorializing that decision.
Id. ¶¶ 31, 32.
It is not clear what else Defendant believes the Board
was required to do.
Defendant had notice of the date and topic
of the special meeting held on September 17, 2016.
Defendant
received what amounted to a written agenda for the meeting three
days in advance, and evidently exchanged emails about the
meeting with the other directors.
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Even if this did not
constitute sufficient notice, per Section 4.3 of CSR’s bylaws,
Defendant waived any notice objection by attending the meeting
without raising the issue.
At the meeting, a majority of the
Board determined that, barring some agreement reached by their
respective counsel, Defendant would be terminated from his
various positions at CSR.
The Board later sent Defendant two
written notices formalizing its decision.
CSR’s governing documents do not include any of the
additional formal requirements Defendant would have the Court
imply.
They prescribe no magic words or rigid procedures the
Board neglected.
Accordingly, the Court finds that the Board’s
actions described above were sufficient to terminate Defendant
from his roles as President, CEO, and Board member.
Whether the Board effectively removed Defendant as
Trustee of CSR’s Employee Stock Benefits Plan, however, is
another matter.
Defendant raises several additional arguments
on this point.
Most of these may be dealt with in short order.
Defendant, for example, claims that the Board did not take
“proper official ‘board action’ to remove [him] as Trustee.”
Opp. [Dkt. 21] at 20.
But as discussed above, the decision to
remove Defendant as Trustee was reached by a majority of the
Board at a duly constituted meeting.
10
That is all Section 4.3 of
CSR’s bylaws and Section 5.2 of CSR’s Employee Stock Ownership
Trust Agreement requires.1
Defendant argues further that the Board did not
provide him “with ‘satisfactory written evidence’ required under
the Trust Agreement” when removing him as Trustee.
21] at 20.
Opp. [Dkt.
But the only “written evidence” to which Defendant
was entitled was “satisfactory written evidence of the
appointment of a successor Trustee and of the successor
Trustee’s acceptance of the trusteeship.”
3] at 8.
Mot. Exh. B. [Dkt. 4-
The notice provided to Defendant on September 26
stated that it was “intended . . . to provide satisfactory
written evidence of the appointment of a successor Trustee . . .
Robert Neil, and, as indicated by his signature below, his
acceptance of the position of Trustee.”
at 4.
Mot. Exh. E [Dkt. 4-2]
It is unclear what further evidence the Board should have
provided.
Finally, Defendant takes issue with the Board’s
purported appointment of an “interim” Trustee, claiming that
Plaintiffs have not shown this to be consistent with CSR’s
governing documents and ERISA.
Defendant, however, points to no
1
Defendant appears to take the position that a formal
Board resolution was required to remove him from office. But
while CSR’s bylaws do require a formal resolution to take some
actions – for example, to set the compensation of directors
(Section 4.8) or designate a committee (Section 4.9) – neither
CSR’s bylaws, nor the Trust Agreement, require a formal
resolution for the Board to remove the Trustee.
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provision of CSR’s governing documents or ERISA suggesting that
the Board was not allowed to appoint a Trustee with the intent
to later replace him.
The Court’s independent review has found
no such provision.
Defendant does, however, raise a colorable objection
with respect to the Board’s decision to disregard the 30-day
notice period contemplated in the Trust Agreement.
The members
of the Board presented Defendant with a notice purporting to
terminate him as Trustee on September 26, 2016.
[Dkt. 4-2] at 4.
See Mot. Exh. E
The letter acknowledged that the Board was
required to give Defendant 30 days advance notice before
removing him from that position. See id.; see also Mot. Exh. B.
[Dkt. 4-3] at 8.
It concluded, however, that “the Board [would]
not accept any directions or instructions from [Defendant]
purporting to be from a Trustee . . . during this thirty (30)
day period.”
Mot. Exh. E [Dkt. 4-2] at 4.
The Court can
discern no legal basis for the Board’s refusal to recognize
Defendant as Trustee during the 30-day notice period.
It is clear why the Board included this statement.
Defendant had informed the Board that when the membership terms
of Edgar and Neil expired on September 30, 2016 – four days
after Defendant received the notice – he would use his power as
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Trustee to replace them with new Board members who would reverse
the Board’s decision and retain him.2
Defendant undoubtedly had the power to do so under
normal circumstances.
Section 2.4(d) of the Employee Stock
Ownership Trust Agreement empowers the Trustee to “vote or
exercise other rights with respect to any ‘Company Stock’ . . .
in the Trust Fund at his discretion.” Mot. Exh. B. [Dkt. 4-3]
at 4.
Indeed, CSR’s articles of incorporation specifically
contemplate that members of the Board “shall be selected . . .
by the Trustee voting the shares of the Corporation’s capital
stock held in the [Employee Stock Ownership Plan].” Mot. Exh. A
[Dkt. 4-2] at 3; see also Mot. Exh. C (Employee Stock Ownership
Plan § 4.6(a)) [Dkt. 4-4] at 10.
The record indicates that Defendant followed through
on his plan, appointing Yates and Hymen to the Board.
Defendant
then called a meeting of what he viewed as CSR’s legitimate
Board members – Yates, Hymen, Mardsen, and himself.
At the
meeting, Defendant, Yates, and Hymen voted to rescind the
Board’s prior decision terminating Defendant from his various
positions at CSR.
2
The Court notes that Plaintiffs consistently refer to
Defendant’s decision to “terminate” Edgar and Neil as Board
members. That is not accurate. The Board membership terms of
Edgar and Neil expired upon a date previously set by a unanimous
Board. Defendant, as Trustee, had no power to terminate members
of the Board.
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At first blush, it might appear that Defendant’s plan
succeeded.
As discussed above, however, Defendant was not then
a member of the Board.
Defendant’s counsel confirmed at the
hearing on this matter that Defendant took no steps before the
October 14th Board meeting to reinstate himself.
Mardsen did not attend the meeting.
Moreover,
Assuming the appointments
of Yates and Hymen were legitimate, there were still only two
current Board members present.
CSR’s bylaws specify that the Board consists of four
members (Section 4.1), that a majority of the members
constitutes a quorum (Section 4.3), and that Board actions
require “a meeting at which a quorum is present” (Section 4.3).
With only two Board members present, the meeting lacked the
quorum necessary to transact CSR business.
This is so
notwithstanding the empty seat on the Board, for “quorum
provisions . . . ordinarily make irrelevant any vacancies in the
remainder of the larger body.” New Process Steel, L.P. v.
N.L.R.B., 560 U.S. 674, 685 (2010); Cf. Robert’s Rules of Order
§ 3, p. 20 (10th ed. 2001) (“The requirement of a quorum is a
protection against totally unrepresentative action in the name
of the body by an unduly small number of persons”).
Defendant’s
plan to reinstate himself therefore appears to have failed.
In light of the above, and based on the limited record
now before the Court, the Court must conclude that Defendant’s
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term as Trustee of the Employee Stock Ownership Plan expired on
October 26, 2016 – 30 days after receiving the notice of his
termination from that position.
As such, it does not appear
that he is presently employed in any capacity by CSR.
The Court
must conclude further that the Board’s appointment of Neil as
Trustee is, at this point, effective.
This brings the Court to an issue which it reaches sua
sponte.
See Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583
(1999) (“subject-matter delineations must be policed by the
courts on their own initiative”).
While Neil is likely now
Trustee of CSR’s Employee Stock Ownership Plan, the Court is
unable to discern any legal basis for his claim to that status
when the case was filed.
“[S]tanding must exist at the time suit is filed.”
Equal Access Educ. v. Merten, 325 F. Supp. 2d 655, 667 (E.D. Va.
2004).
Generally, only plan participants, beneficiaries, and
fiduciaries, as well as the Secretary of Labor, have standing to
bring a claim under ERISA for an alleged breach of fiduciary
duty.
See 29 U.S.C. § 1132(a); Yarde v. Pan Am. Life Ins., 67
F.3d 298, 1995 WL 539736, at *4-6 (4th Cir. 1995) (table).
As
Neil was not Trustee at the time he filed suit, he did not fall
15
into any of these categories.
Accordingly, the Court will
dismiss him from the case.3
While the Court finds – again, only provisionally, and
based on the present record – that Defendant is no longer
employed by CSR, and that Neil is now Trustee of CSR’s Employee
Stock Ownership Plan, that does not mean than an injunction
should issue.
Rather, it tends to demonstrate that Plaintiff’s
request for an injunction is largely moot.
The “coercive”
relief of a preliminary injunction, Ulstein Mar., Ltd., 833 F.2d
at 1055, can do little good when the world appears largely as
the Plaintiff would like it to be and unlikely to change.
Similarly, “plaintiffs seeking preliminary relief
[must] demonstrate that irreparable injury is likely in the
absence of an injunction.” Winter v. Nat. Res. Def. Council,
Inc., 555 U.S. 7, 22 (2008) (emphasis omitted).
It appears from
the record that Defendant has not only been removed from his
positions at CSR, but has largely been frozen out of CSR’s dayto-day business.
It is therefore not clear what injury
Plaintiffs’ requested injunction might prevent.
While it may
injure CSR’s business if Defendant continues to hold himself out
as representative of CSR, Plaintiffs’ Motion does not request an
injunction restraining him from doing so. The Court finds that
3
CSR is named as a plan fiduciary in Section 9.1 of the
Employee Stock Ownership Plan, and so has standing to bring suit
under ERISA. See Mot. Exh. C [Dkt. 4-4] at 17.
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it would be inappropriate to grant an injunction not fairly
embraced by the relief Plaintiffs requested.
The Court’s analysis is not altered by the
appointments of Yates and Hymen to the Board.
While it is
possible the Court may ultimately rule that their appointments
violated ERISA, there is no indication in the record that their
continued presence on the Board poses an imminent threat to the
Plaintiffs’ business.
Their apparent loyalty to Defendant does
not, in itself, render them unable to fulfil their duties as
Board members.
In light of the above, the Court finds that the
requested injunction would not serve to prevent any likely
injury.
Accordingly, Plaintiffs have not made the requisite
showing that would justify a preliminary injunction.
Pashby, 709 F.3d at 320-21.
See
Moreover, ”[a]n injunction is not
granted as a matter of course, and whether to grant the
injunction still remains in the equitable discretion of the
district court even when a plaintiff has made the requisite
showing.”
Bethesda Softworks, L.L.C. v. Interplay Entm’t Corp.,
452 F. App’x 351, 353 (4th Cir. 2011) (citations and alterations
omitted).
The Court finds that the requested injunction is not
equitably justified given that the current state of affairs
could not – from Plaintiffs’ perspective – be much improved by
its issuance.
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Finally, the Court will deny Plaintiffs’ Motion to
Strike Defendant’s Opposition.
The Court is not unsympathetic –
there appears to have been little reason for Defendant to delay
a month, filing his Opposition long after the deadline.
Certainly it did not aid the Court in its consideration of
Defendant’s arguments, and deprived Plaintiffs of a meaningful
opportunity to rebut them.
Nonetheless, in light of the above,
the Court finds that Plaintiffs were not so prejudiced by the
Opposition’s late submission that the Opposition should be
struck from the docket.
IV. Conclusion
For the foregoing reasons, the Court will deny both
Plaintiffs’ Motion for Preliminary Injunction and Plaintiffs’
Motion to Strike.
The Court will further dismiss Plaintiff
Robert Neil from this action.
An appropriate order will issue.
October 27, 2016
Alexandria, Virginia
/s/
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE
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