Neil et al v. Foster-Bey
MEMORANDUM OPINION. Signed by District Judge James C. Cacheris on 01/10/2017. (mpha)
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
ROBERT NEIL, in his capacity
as Trustee of the CSR,
Incorporated Employee Stock
M E M O R A N D U M
O P I N I O N
This matter is before the Court on Defendant John
Foster-Bey’s Motion to Dismiss [Dkt. 49].
rests largely upon a single argument: that the Trustee of an
Employee Stock Ownership Plan cannot, as a matter of law,
violate ERISA by voting stock held by the Plan in a selfinterested manner.
For the reasons that follow, the Court
rejects that argument and will deny Defendant’s Motion.
The following allegations of fact from Plaintiff’s
Complaint are taken as true for purposes of Defendant’s Motion.
See E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637
F.3d 435, 440 (4th Cir. 2011).
Plaintiff CSR, Incorporated is a “government
contractor providing professional and technical consulting
services and research.” Compl. [Dkt. 1] ¶ 7.
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
Id. ¶¶ 18, 19.
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.
June 20, 2012, Defendant was appointed Trustee of the Employee
Stock Ownership Plan, assuming the fiduciary duties appurtenant
to that position.
Id. ¶ 19.
In August of 2013, Defendant appointed Thomas Edgar
and Robert Neil to CSR’s Board.
the Board in January of 2016.
Cynthia Mardsen was added to
Of the four Board members, only
Defendant served as both Board member and management.
Plaintiff alleges that, beginning in early 2015,
Defendant’s performance as President, CEO, and Trustee began to
Id. ¶ 21.
Defendant ceased keeping regular
business hours and failed to “perform the business development
activities required of a CEO, and . . . bec[a]me, essentially,
an absentee CEO.”
After repeated warnings, the other Board
members informed Defendant on September 12, 2016, that they
intended to terminate him as President, CEO, and Board member of
CSR, and as Trustee of CSR’s Employee Stock Ownership Plan.
¶¶ 22, 23.
Defendant asked that the other Board members
Id. ¶ 24.
They responded with specific terms
Defendant would be required to meet to retain his positions at
Id. ¶ 25.
The Board also scheduled a meeting with
Defendant to take place on September 19, 2016, to discuss the
issue of Defendant’s employment.
Defendant appeared late to the meeting on September
19, 2016, and rejected the Board’s mandates.
Id. ¶ 26.
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.
Id. ¶ 27.
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.
Id. ¶ 28.
Board, however, had earlier voted unanimously to extend those
members’ terms to the end of September.
Id. ¶ 29.
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.
Id. ¶ 30.
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.
Id. ¶ 31.
included the caveat that it would not become effective while the
parties attempted to reach an amicable resolution.
thereafter, it became apparent that no such resolution would be
See id. ¶ 32.
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 purported to
appoint 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.
Id. ¶ 43.
Plaintiff alleges that this
has caused confusion, damaging the business.
also appointed new Board members at the expiration of Edgar’s
and Neil’s terms.
See id. ¶ 36.
He did so “purely in
retaliation and in his own self-interest, to prevent his own
termination from his positions as President, CEO, member of the
Board, and Trustee.”
Id. ¶ 34.
On September 28, 2016, Plaintiff brought suit alleging
that Defendant’s actions violated his fiduciary duty as Trustee
of the Employee Stock Ownership Plan.
Plaintiff sought a
preliminary injunction, which this Court denied upon
provisionally finding that Defendant had successfully been
removed from his various positions at CSR, rendering injunctive
Defendant later moved for a temporary
restraining order seeking to prevent the removal of the Board
members he had installed during his final days at CSR.
Court likewise denied Defendant’s Motion.
filed, and the Court denied, a premature Motion for Attorney’s
Fees. On November 29, 2016, Defendant filed the instant Motion
to Dismiss [Dkt. 49] pursuant to Federal Rule of Civil Procedure
II. Legal Standard
“The purpose of a Rule 12(b)(6) motion is to test the
sufficiency of a complaint; importantly, [a Rule 12(b)(6)
motion] does not resolve contests surrounding the facts, the
merits of a claim, or the applicability of defenses.”
v. City of Goldsboro, 178 F.3d 231, 243-44 (4th Cir. 1999)
In reviewing a motion to dismiss for
failure to state a claim under Rule 12(b)(6), the Court “must
accept as true all of the factual allegations contained in the
complaint,” drawing “all reasonable inferences” in the
E.I. du Pont de Nemours & Co., 637 F.3d at
440 (citations omitted).
Generally, the Court may not look
beyond the four corners of the complaint in evaluating a Rule
See Goldfarb v. Mayor & City Council of
Baltimore, 791 F.3d 500, 508 (4th Cir. 2015).
Defendant first contends that the Court’s ruling on
Plaintiff’s Motion for a Preliminary Injunction “fully resolves
and moots all of the Complaint’s claims for declaratory judgment
and injunctive relief.”
Mem. in Supp. of Mot. [Dkt. 50] at 4.
The Court’s various findings in this case have been
provisional and made on a limited record, and do not amount to
Moreover, a preliminary injunction “has
different prerequisites and serves different purposes than a
MercExchange, L.L.C. v. eBay, Inc., 500
F. Supp. 2d 556, 573 (E.D. Va. 2007).
The Court’s denial of
Plaintiff’s earlier Motion does not preclude his continued
pursuit of permanent injunctive relief.
Defendant next argues that Plaintiff’s Complaint fails
to state causes of action for breach of fiduciary duty and selfdealing under ERISA and the common law.
He contends that “it
cannot be held that a Trustee’s exercise of his authority under
the corporate Bylaws and the Trust Agreement to appoint board
members can constitute . . . a breach of fiduciary duty or selfdealing.”
Opp. [Dkt. 50] at 2.
Here, Plaintiff alleges that its Board confronted
Defendant after he became “an absentee CEO,” failing to appear
for work and to “perform the business development activities
required of a CEO.”
Compl. [Dkt. 1] ¶ 21.
Rather than address
the Board’s concerns, Defendant permitted the membership terms
of two Board Members to lapse.
He then used his position as
Trustee to vote the shares of stock held by the company’s
Employee Stock Ownership Plan, replacing the Board members who
held him accountable with members who would continue to retain
his services notwithstanding his shortcomings.
Defendant is alleged to have used his power as Trustee to vote
the stock held by the company’s Employee Stock Ownership Plan in
a wholly self-interested manner, to the detriment of the Plan
and its beneficiaries.
The Court has little difficulty
concluding that this alleges a violation of Defendant’s
fiduciary duty under ERISA and the common law.
For purposes of ERISA, “a person is a fiduciary with
respect to a plan to the extent . . . 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.”
“The statutory language plainly indicates
that the fiduciary function is not an indivisible one. In other
words, a court must ask whether a person is a fiduciary with
respect to the particular activity at issue.” Coleman v.
Nationwide Life Ins. Co., 969 F.2d 54, 61 (4th Cir. 1992), as
amended (July 17, 1992).
Under CSR’s Employee Stock Ownership Trust Agreement,
the Board acts as a Plan fiduciary, and serves as the only check
on Trustee’s administration of the Plan.
4-3] at 8.
See Mot. Exh. B [Dkt.
The Board plays an integral part in the management
of the Plan and safeguards the interests of Plan participants
Appointing Board members is therefore an act
involving the “exercise[ ] . . . [of] discretionary authority or
discretionary control respecting management of [the] plan or
. . . its assets[.]”
29 U.S.C. § 1002(21)(A)(i); see also Neil
v. Zell, 677 F. Supp. 2d 1010, 1029 (N.D. Ill. 2009), as amended
(Mar. 11, 2010) (“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.”); Mohler v. Unger, No. C-390-284, 1994 WL 1860578, at *13 (S.D. Ohio Aug. 26, 1994) (“The
power to appoint and remove plan fiduciaries identifies members
of a board of directors as fiduciaries, requiring them to adhere
to the ERISA standards.”); 29 C.F.R. § 2509.08-2 (“The fiduciary
act of managing plan assets that are shares of corporate stock
includes the management of voting rights appurtenant to those
shares of stock.).
Defendant therefore acted as a fiduciary
when voting to appoint members of the Board.
Having determined that Defendant’s alleged use of his
position as Trustee to replace Edgar and Neil with loyal Board
members implicated his fiduciary duty under ERISA, the Court
turns to whether Defendant’s conduct violated that duty.
forbids a fiduciary to “deal with the assets of the plan in his
own interest or for his own account.”
29 U.S.C. § 1106(b)(1).
Moreover, “[p]ursuant to the duty of loyalty, an ERISA fiduciary
must ‘discharge his duties . . . solely in the interest of the
participants and beneficiaries.’” Tatum v. RJR Pension Inv.
Comm., 761 F.3d 346, 356 (4th Cir. 2014) (quoting 29 U.S.C. §
“The fiduciary responsibility provisions [of ERISA]
invoke the common law of trusts.”
Faircloth v. Lundy Packing
Co., 91 F.3d 648, 656 (4th Cir. 1996).
Under the common law,
“[i]t is the duty of the trustee in voting shares of stock to
use proper care to promote the interest of the beneficiary.”
Restatement (Second) of Trusts § 193 (1959).
A trustee is
afforded latitude in pursuing this goal, and “if he does not
abuse his discretion the court will not control him in voting
. . . but he may be restrained by injunction or otherwise from
casting a vote which would violate his duty to the beneficiary.”
The law is, to some degree, unsettled as to when the
trustee of an employee stock ownership plan violates his or her
fiduciary duty by voting the plan’s shares in a self-interested
Several district courts have held that “the voting of
Plan-owned shares by the Plan’s trustees [is] a fiduciary act
under ERISA, and one which the trustees [are] bound to exercise
in the sole interests of the Plan participants.” O’Neill v.
Davis, 721 F. Supp. 1013, 1015–16 (N.D. Ill. 1989); see also
Neil v. Zell, 677 F. Supp. 2d 1010, 1028 (N.D. Ill. 2009), as
amended (Mar. 11, 2010); Newton v. Van Otterloo, 756 F. Supp.
1121, 1127–28 (N.D. Ind. 1991).
Accordingly, these Courts have
held that a trustee who acts out of self-interest when voting
shares held by a plan to maintain him or herself to corporate
office violates ERISA.
The Sixth Circuit, on the other hand, has adopted a
somewhat more lenient approach.
That Court has held that a
trustee who votes plan shares to entrench him or herself in
management, without more, does not violate ERISA.
Grindstaff v. Green, 133 F.3d 416, 425 (6th Cir. 1998).
the “the ‘dual role’ of directors and plan fiduciaries in the
[employee stock ownership plan] context,” the Sixth Circuit has
found that some degree of self-interest is inherent and “the
mere voting of an [employee stock ownership plan]’s stock by
incumbent directors to perpetuate their own incumbency [does
not] constitute[ ] a breach of an ERISA fiduciary’s duty in the
handling of a ‘plan asset.’”
Id. at 424-25.1
All Courts to have considered the matter appear to
agree, however, that a trustee’s self-interested use of his or
her voting power to determine the outcome of a corporate power
struggle can violate the trustee’s fiduciary duty under ERISA.
See id. at 422-23; O’Neill, 721 F. Supp. at 1015–16; Newton, 756
F. Supp. at 1128–29; Neil, 677 F. Supp. 2d at 1029.
alleges that the Board attempted to remove Defendant once he
became “an absentee CEO,” failing to appear for work and to
“perform the business development activities required of a CEO.”
Compl. [Dkt. 1] ¶ 21.
Plaintiff alleges further that, rather
than agree to fulfil his obligations to the company, Defendant
used his position as Trustee to replace two independent Board
members with members who would retain him notwithstanding his
Such an action goes well beyond run-of-the-mill
The Sixth Circuit also held that the power to vote
shares of an employee stock ownership plan is not a “plan asset”
for purposes of ERISA. See Grindstaff. 133 F.3d at 425. As
observed in Neil, 677 F. Supp. 2d at 1028, however, this should
not impact the fiduciary duty of the trustee, because “[e]ven 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.” Regardless, the Court finds the Sixth Circuit’s
analysis unpersuasive for the reasons set forth in Neil, 677 F.
Supp. at 1029.
entrenchment in management.
See Grindstaff, 133 F.3d at 424-25.
Rather, if proven, these allegations would clearly demonstrate
that Defendant failed to “‘discharge his duties . . . solely in
the interest of the participants and beneficiaries.’” Tatum, 761
F.3d at 356 (quoting 29 U.S.C. § 1104(a)(1)).
would show that Defendant “deal[t] with the assets of the plan
in his own interest or for his own account.”
29 U.S.C. §
The Court therefore rejects Defendant’s argument
that “that a Trustee’s exercise of his authority under the
corporate Bylaws and the Trust Agreement to appoint board
members can[not] constitute . . . a breach of fiduciary duty or
Opp. [Dkt. 50] at 2.
Finally, Defendant argues that “Plaintiff’s claims
that Foster-Bey breached his fiduciary duties at President, CEO,
board member, and Trustee are supported by mere conclusory
statements rather than actual alleged facts.”
Rep. [Dkt. 61] at
As discussed above, Plaintiff has alleged that Defendant (1)
ceased appearing in the office on a regular basis, (2) failed to
undertake the business development activities required of his
position, (3) refused to address these concerns when raised by
independent Board members, objecting even to the requirement he
be present at the office for six hours a day, four days a week,
and (4) replaced independent Board members with new Board
members loyal to him solely out of a self-interested desire to
retain his job without amending his behavior. To survive a
motion to dismiss, a plaintiff need only allege “sufficient
facts . . . to support an inference that plaintiff is entitled
to the relief he seeks.”
Searls v. Sandia Corp., No. 1:14CV578
JCC/TCB, 2014 WL 7157431, at *2 (E.D. Va. Dec. 15, 2014).
light of the above, Plaintiff has done so.
For the foregoing reasons, the Court will deny
Defendant’s Motion to Dismiss [Dkt. 49].
An appropriate order
January 10, 2017
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?