Perez v. Mueller et al

Filing 48

ORDER signed by Judge Rudolph T. Randa on 10/15/2014. 34 Secretary's MOTION to Strike Affirmative Defenses GRANTED; 40 Defendants' MOTION for Leave to File Second Amended Third-Party Complaint DENIED; 36 Secretary' ;s MOTION to Dismiss First Amended Third Party Complaint GRANTED, third-party defendants Does 1-25 and Omni Resources, Inc. DISMISSED from this action; 46 Defendants' MOTION for Extension of Time DENIED as moot. Telephonic Scheduling Conference set for 12/2/2014 at 11:00 AM (Central Time) before Judge Rudolph T. Randa, the Court will initiate the call. (cc: all counsel)(cb)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
THOMAS E. PEREZ, Secretary of the
United States Department of Labor,
Plaintiff,
-vsVERONICA MUELLER, ROGER
MUELLER, ALPHA CONSULTING
GROUP, LLC, THE CAREY V. MUELLER
(n/k/a VOLLMERS) 1996 TRUST DATED
11/14/96, THE CRAIG M. MUELLER 1996
TRUST DATED 11/14/96, THE
CHRISTOPHER L. MUELLER 1996
TRUST DATED 11/14/96, THE ROGER L.
AND VERONICA S. MUELLER 1996
EXEMPTION TRUST DATED 11/14/96
Case No. 13-C-1302
f/b/o/ CAREY V. MUELLER (n/k/a
VOLLMERS), THE ROGER L. AND
VERONICA S. MUELLER 1996
EXEMPTION TRUST DATED 11/14/96
f/b/o CRAIG M. MUELLER, THE ROGER
L. AND VERONICA S. MUELLER 1996
EXEMPTION TRUST DATED 11/14/96
f/b/o/ CHRISTOPHER L. MUELLER, and
THE OMNI RESOURCES Inc. EMPLOYEE
STOCK OWNERSHIP PLAN,
Defendants/Third-Party Plaintiffs,
-vsOMNI RESOURCES, Inc. and DOE
DEFENDANT 1-25,
Third-Party Defendants.

DECISION AND ORDER

In this action, the Secretary of Labor alleges that Veronica Mueller,
Christopher Mueller, and Alpha Investment Consulting Group, LLC — the
so-called “Fiduciary Defendants” — violated their duties of prudence and
loyalty by causing or permitting the Omni Resources, Inc. Employee Stock
Ownership Plan to buy Omni stock for more than fair market value and
without a proper valuation.
All of the defendants (save for Alpha Investment and the Omni
Resources Inc. Employee Stock Ownership Plan)1 moved to dismiss. On
May 19, the Court denied that motion and set the matter for a scheduling
conference. The Court soon learned that docketing a scheduling conference
was a futile attempt to move this case forward. What followed was a flurry
of additional pleadings and motions. As a result, this matter is stuck in
procedural purgatory. A quick summary will help set the stage.
First, on June 2, the defendants answered the Secretary’s complaint.
The defendants also filed a third-party complaint against Omni Resources,
alleging claims for breach of contract and tortious interference with
contractual rights. Two weeks later, the defendants amended their thirdparty complaint. Count One of the first amended third-party complaint is

Unless otherwise noted, the general term “defendants” refers to all of the abovecaptioned defendants, minus Alpha Investment and the Omni ESOP.
1

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against Omni for “Breaches of Contract and Specific Performance;” Count
Two is against Omni and the so-called Doe Third-Party Defendants (Does
1-25) for tortious interference with contractual rights.
On June 26, the Secretary moved to strike certain affirmative
defenses in the defendants’ answer. On June 30, the Secretary moved to
strike or, in the alternative, to dismiss the first amended third-party
complaint. The defendants opposed this motion, but they also moved for
leave to file a second amended third-party complaint. The Secretary
opposes the defendants’ motion for leave to file a second amended thirdparty complaint for many of the reasons stated in its motion to dismiss the
first amended third-party complaint.
I.

Motion to strike
Federal Rule of Civil Procedure 12(f) provides that the Court “may

strike from a pleading any insufficient defense or any redundant,
immaterial, impertinent, or scandalous matter.” Motions to strike are
generally disfavored, but they can be used to “remove unnecessary clutter
from the case.” Heller Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286,
1294 (7th Cir. 1989). “Affirmative defenses will be stricken only when they
are insufficient on the face of the pleadings. Ordinarily, defenses will not
be struck if they are sufficient as a matter of law or if they present
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questions of law or fact.” Id. The Seventh Circuit has yet to decide whether
the Twombly/Iqbal standard applies to affirmative defenses, but lower
courts in this circuit have assumed that it does. See, e.g., Sarkis’ Café, Inc.
v. Sarks in the Park, LLC, --- F. Supp. 2d ----, 2014 WL 3018002, at *4
(N.D. Ill. July 3, 2014). Thus, the defendants must make factual allegations
sufficient to raise the right to relief pursuant to the asserted defenses
above the “speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007).
The Secretary moves to strike the defendants’ Seventh Defense,
which asserts that the Secretary’s claims are “barred by the doctrines of
estoppel, waiver, laches, acquiescence and/or ratification,” and also the
Eighth Defense, which states that the Secretary’s claims are “barred, in
whole or part, by the doctrine of unclean hands.” The defendants’ answer
does not include any factual allegations which would support the
application of these defenses. Therefore, the Court agrees that they should
be stricken. See, e.g., Solis v. Zenith Capital, LLC, No. C 08-4854 PJH,
2009 WL 1324051, at *6 (N.D. Cal. May 8, 2009) (“The court finds that
defendants have not alleged any facts that would support a defense of
equitable estoppel against the Secretary, . . . Instead, defendants have
merely pleaded a legal conclusion which is insufficient to withstand the
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Secretary’s motion to strike”).
The Secretary also moves to strike the defendants’ Thirteenth
Defense, which states: “Defendants reserve the right to raise additional
defenses and to amend their Answers and Statements of additional
Defenses provided herein, in accordance with the Federal Rules of Civil
procedure, as discovery proceeds.” This statement is superfluous; of course
the defendants can only amend their pleadings in accordance with the
rules of procedure. This defense will also be stricken.
II.

Third-party complaints
In their proposed second amended third-party complaint, the

defendants “assume the role” of third-party plaintiffs against Omni
Resources and Does 1-25. Count One is a request for indemnification and
contribution from Omni Resources. Count Two is against Omni for breach
of contract and specific performance. Count Three is against Does 1-25 for
tortious interference with contractual rights.
Third-party practice is governed by Federal Rule of Civil Procedure
14. This rule provides, in relevant part, that a “defending party may, as
third-party plaintiff, serve a summons and complaint on a nonparty who is
or may be liable to it for all or part of the claim against it. But the thirdparty plaintiff must, by motion, obtain the court’s leave if it files the third-5-

party complaint more than 14 days after serving its original answer.” Fed.
R. Civ. P. 14(a)(1).
A third-party claim may only be brought if the third-party’s liability
somehow depends upon the outcome of the underlying litigation or if the
third party is secondarily liable to the third-party plaintiff. United States
Gen., Inc. v. City of Joliet, 598 F.2d 1050, 1053 (7th Cir. 1979). If the thirdparty claim is separate or independent from the main action, impleader is
prohibited, even if the third-party claim grows out of the same transaction
upon which the plaintiff’s underlying claim is based. 6 Wright & Miller,
Fed. Practice & Procedure § 1446 (3d ed.). “The claim against the thirdparty defendant must be based upon plaintiff’s claim against defendant.
The crucial characteristic of a Rule 14 claim is that defendant is
attempting to transfer to the third-party defendant the liability asserted
against defendant by the original plaintiff.” Id.; Forum Ins. Co. v. Ranger
Ins. Co., 711 F. Supp. 909, 915 (N.D. Ill. 1989).
Counts Two and Three do not meet this standard. For example, in
Count Two, the defendants/third-party plaintiffs allege that Omni “has
refused and failed, and continues to refuse and fail, to pay Veronica
Mueller and the Third-Party Plaintiff Trusts the funds to which each are
entitled to receive under the terms of the ESOP Loan and Pledge
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Agreement and the Company Note, as amended, thereby defaulting upon
and breaching those agreements.” Proposed Second Amended Third-Party
Complaint, ¶ 34. Thus, the defendants “seek to enforce their rights . . . with
respect to applying a security interest to Omni’s assets as permitted under
Wisconsin law to protect the creditor interests of the Third-Party Plaintiffs
in order to satisfy the obligations of Omni to them, including, without
limitation, obtaining all rights as a secured creditor under the [UCC] . . . to
the assets of Omni to address the payment obligations owed to them, . . .”
Id., ¶ 37. This claim does not pursue a transference of liability for the
Secretary’s claims from the defendants/third-party plaintiffs to Omni.
Same for Count Three, which alleges that the Doe Third-Party Defendants
“intentionally interfered with the contractual rights of the Third-Party
Plaintiffs,” causing damage “in an amount to be proved at trial.” Id., ¶¶ 4546.
Count One, however, stands on different footing. In this claim, the
defendants allege that the terms of the Omni ESOP plan document provide
that the Trustees — i.e., defendants Veronica and Roger Mueller – “shall
not be liable for any act or failure to act of the Employer or Administrator
in the performance of their responsibilities under the Plan or ERISA.” Id.,
¶ 28. Similarly, the ESOP Loan and Pledge Agreement — upon which
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certain of the Secretary’s claims against the defendants are predicated —
contains a provision titled “Actions Taken as Trustee,” which states that
the Trustee “does not undertake, nor shall he have, any personal liability
or obligation of any nature whatsoever by virtue of the execution and
delivery of this Agreement or the ESOP Note or the representations,
covenants, or warranties contained herein.” Id., ¶ 29. The same agreement
also provides that Omni “will pay all reasonable costs, expenses and fees
incurred by the Seller, the Trustee, and the ESOP in connection with this
Agreement and the purchase of the Shares.” Id.
These provisions, at least arguably, could form the basis for a valid
contribution claim, such that impleader is appropriate under Rule 14.
However, Section 410(a) of ERISA provides that “any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or duty under
this part shall be void as against public policy.” 29 U.S.C. § 1110(a). Under
this provision, the defendants’ attempt to impose the burden of their
fiduciary breaches on Omni, the company that sponsors the ESOP, is
invalid. Delta Star, Inc. v. Patton, 76 F. Supp. 2d 617, 640-41 (W.D. Pa.
1999) (noting that it would be “inconsistent with the intentions of ERISA to
allow a trustee who has breached his fiduciary duties to the ESOP to be
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indemnified by the sponsoring company where the ESOP would indirectly
bear the financial burden”); see also, Johnson v. Couturier, 572 F.3d 1067,
1080 (9th Cir. 2009) (“The Department of Labor interprets section 410(a) as
rendering void any arrangement for indemnification of a fiduciary of an
employee benefit plan by the plan”).
The defendants’ citation to cases such as Free v. Briody, 732 F.2d
1331 (7th Cir. 1984) and Alton Mem’l Hosp. v. Metro. Life Ins. Co., 656 F.2d
245 (7th Cir. 1981) cannot salvage their claim. In Free, the Seventh Circuit
recognized a right to indemnification, but that case involved “a fiduciary
who had committed an act of nonfeasance who sought indemnification from
a co-fiduciary more culpable than he.” BP Corp. N. Am. Inc. Savings Plan
Inv. Oversight Comm. v. N. Trust Investments, N.A., 692 F. Supp. 2d 980,
983 (N.D. Ill. 2010). The “co-fiduciary” in Free was not, as here, the
company that sponsored the employee benefit plan. Indeed, Free
emphasized that any indemnification remedy should ensure that “the plan
beneficiaries would not be adversely affected.” Id. (citing Free at 1338: “To
the extent Briody’s claim might adversely affect Free, the court on remand
may shape its award to protect Free from any loss resulting from Briody’s
claim against Hodgman”). In Alton, the Seventh Circuit recognized a right
to “seek indemnification or contribution from co-fiduciaries in accordance
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with 29 U.S.C. s. 1105(a),” but went on to hold that “no breach of fiduciary
duties with respect to plan participants and beneficiaries can be
established.” 656 F.2d at 250. Unlike in Free, the co-fiduciary in Alton was
the company that sponsored the plan, but the observation that such a claim
could be brought was merely dicta; Alton thus had no occasion to discuss or
confront Section 410(a).
The Court’s denial of the defendants’ motion for leave to file a
second amended third-party complaint means that it must address the
Secretary’s motion to dismiss the defendants’ first amended third-party
complaint. The claims in the first amended third-party complaint are
identical in all material respects to Counts Two and Three in the proposed
second amended third-party complaint. Therefore, the first amended thirdparty complaint will be dismissed for the reasons already stated.
NOW, THEREFORE, BASED ON THE FOREGOING, IT IS
HEREBY ORDERED THAT:
1.

The Secretary’s motion to strike [ECF No. 34] is GRANTED;

2.

The defendants’ motion for leave to file a second amended
third-party complaint [ECF No. 40] is DENIED;

3.

The Secretary’s motion to dismiss the first amended thirdparty complaint [ECF No. 36] is GRANTED. Therefore, the
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third-party defendants, Omni Resources, Inc. and Does 1-25
are DISMISSED from this action;
4.

The defendants’ motion for an extension of time to serve its
first amended third-party complaint [ECF No. 46] is DENIED
as moot; and

5.

Pursuant to Federal Rule of Civil Procedure 16(b), a
telephonic scheduling conference is scheduled for December
2, 2014 at 11:00 a.m. (Central Time). Please be available at
that time. The Court will initiate the call. The parties should
refer to the Court’s May 19, 2014 Order, ECF No. 28 at 9-21,
for details on how to prepare for this conference.

Dated at Milwaukee, Wisconsin, this 15thy day of October, 2014.
BY THE COURT:
__________________________
HON. RUDOLPH T. RANDA
U.S. District Judge

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