Chesemore et al v. Alliance Holdings, Inc. et al

Filing 736

ORDER that Plaintiffs' motion for leave to amend their complaint to add Karen Fenkell as a defendant and to assert a claim against her as a gratuitous transferee in violation of ERISA § 502(a)(3) dkt. # 689 is GRANTED. Plaintiffs' proposed third amended complaint dkt. # 690 -1 is now the operative pleading in this case. Signed by District Judge William M. Conley on 7/25/2012. (voc)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN

CAROL CHESEMORE, DANIEL
DONKLE, THOMAS GIECK, MARTIN
ROBBINS, and NANETTE STOFLET, on
behalf of themselves, individually, and on
behalf of all others similarly situated,

v.

Plaintiffs,

ALLIANCE HOLDINGS, INC., A.H.I., INC.,
AH TRANSITION CORPORATION,
DAVID B. FENKELL, PAMELA KLUTE,
JAMES MASTERANGELO, STEPHEN W.
PAGELOW, JEFFREY A. SEEFELDT, ALPHA
INVESTMENT CONSULTING GROUP, LLC,
and JOHN MICHAEL MAIER,

OPINION AND ORDER
09-cv-413-wmc

Defendants.
Before the court is plaintiffs’ motion for leave to amend their complaint to name
Karen Fenkell as a defendant. (Dkt. #689.) 1 Defendants oppose plaintiffs’ motion on
several bases. (Defs.’ Opp’n (dkt. #693).) For the reasons that follow, the court will
grant plaintiffs’ motion to add Karen Fenkell and to assert a new claim against her as a
gratuitous transferee in violation of ERISA § 502(a)(3).

1

The motion as filed contained two requests. The court has already ruled on plaintiffs’
request to clarify that Count XIV -- asserting a claim for knowing participation in a
breach of fiduciary duty under ERISA § 502(a)(3) -- is asserted against the Alliance
Defendants, not simply A.H.I. (See Post Trial Order (dkt. #733) 91 n.26.)

OPINION
Plaintiffs seek to add defendant David Fenkell’s wife, Karen Fenkell, as a
defendant and propose a new cause of action, Count XVI, alleging that Karen Fenkell is
liable as a gratuitous transferee of phantom stock plan proceeds pursuant to ERISA §
502(a)(3). (Declaration of Monya M. Bunch (“Bunch Decl.”), Ex. A. (Pl.’s Proposed 3d
Am. Compl.) (dkt. #690-1) Count XVI, ¶¶ 299-306).) Plaintiffs allege that on August
30, 2007, defendant David Fenkell’s $2,896,100 payment from the Phantom Stock Plan
for Alliance Employees was deposited into an account jointly held in the name of David
Fenkell and his wife Karen Fenkell. (Id. at ¶ 300.) Plaintiffs further allege that between
August 31, 2007 and October 31, 2007, all of the monies in that jointly-held account
were transferred to accounts held solely in the name of Karen Fenkell. (Id. at ¶ 301.)
Finally, plaintiffs allege that Karen Fenkell did not pay or provide anything of tangible
value to David Fenkell in exchange for the transfer of funds to accounts held solely in her
name. (Id. at ¶ 304.)

A. Federal Rule of Civil Procedure 16 Requirement
Plaintiffs concede, as they must, that this motion comes more than two years after
the amendment deadline established by this court. (Pretrial Conf. Order (dkt. #62) ¶ 1.)
Where a scheduling order is in place, such as here, modification of the order requires a
showing of “good cause.” Fed. R. Civ. P. 16(b)(4). This standard primarily concerns the
“diligence of the party seeking amendment.” Trustmark Ins. Co. v. Gen. & Cologne Life Re
of Am., 424 F.3d 542, 553 (7th Cir. 2005) (internal citation omitted).

Plaintiffs

originally sought production of discovery necessary to trace David Fenkell’s phantom
2

stock payment in June 2011. After Fenkell refused to produce the documents (no doubt
on grounds that this discovery should await entry of an adverse judgment) and after the
completion of the Phase I trial on liability (and a preliminary ruling by the court that
defendant David Fenkell would likely be found liable), plaintiffs filed a motion to compel
production, which the court granted on December 7, 2011. In late December, Fenkell
produced account statements demonstrating the transfer of his phantom stock payment
from a joint account to an account held solely by his wife.

Additional account

statements were produced on December 30, 2011. On January 6, 2012, plaintiffs sought
discovery as to whether David Fenkell had received anything of value from Karen Fenkell
in exchange for the transfer of funds.

In a March 21, 2012 email, David Fenkell’s

attorney advised plaintiffs’ counsel that David Fenkell had not received anything in
return for the transfer. Forty-three days later, plaintiffs filed their motion to amend to
add a claim against Karen Fenkell as a gratuitous transferee.
In response, defendants argue plaintiffs were not diligent in seeking leave for two
main reasons. First, plaintiffs should have sought discovery on the tracing issue much
sooner and should have been more diligent in filing a motion to compel production after
David Fenkell refused to produce the requested documents. On this, the court simply
disagrees. Indeed, the court likely would not have granted a motion to compel discovery
before completion of Phase I trial.

In light of this, plaintiffs cannot be faulted for

postponing discovery -- or rather a motion to compel discovery -- until after the
completion of Phase I of this complicated case. On the contrary, given the bifurcation of
the issues in this case, plaintiffs’ approach was reasonable.

3

Second, defendants challenge plaintiffs’ assertion that they only recently became
aware that David Fenkell received nothing of value in exchange for the transfer of
phantom stock proceeds to his wife. Defendants point to plaintiffs’ brief in support of a
motion to compel Karen Fenkell’s personal financial records filed on January 6, 2012, in
which plaintiffs argue that the funds in Karen Fenkell’s sole accounts “are likely traceable
and subject to disgorgement.” (Defs.’ Opp’n (dkt. #693) 9 (citing Pls.’ Br. in Supp. of
Mot. to Comply (dkt. #623) 5).) Defendants also point to a telephone conference in
which defendants’ counsel states that he told plaintiffs’ counsel that “the transfers were
made for estate-planning purposes, and that Mr. Fenkell did not receive any property or
thing in exchange for the transfers.” (Defs.’ Opp’n (dkt. #693) 9.) At most, the first
example discloses plaintiffs’ speculation that “funds” belonging to David Fenkell were
inappropriately transferred to Karen Fenkell’s accounts, not that phantom stock proceeds
were transferred without her paying anything of value. 2 As for the February 7, 2012
telephonic conference, plaintiffs contend that defendants’ counsel represented that “he
believed that Mr. Fenkell had not received anything of value, but needed to confirm with
his client.” (Pls.’ Reply (dkt. #696) 5.) Regardless of David Fenkell’s counsel’s exact
phrasing, it was reasonable for plaintiffs to wait for written assurance before filing a
proposed claim based on a gratuitous transfer.
On April 13, 2012, plaintiffs informed the court that they intended to seek leave
to amend their complaint to add Karen Fenkell as a defendant.

2

The court ordered

As described below, the fact that Karen Fenkell received these proceeds as a gratuitous
transferee is relevant in determining whether plaintiffs must demonstrate “knowing
participation.”
4

plaintiffs to file the present motion by May 7, 2012. (Dkt. #688.) Plaintiffs did so on
May 3, 2012. From March 21, 2012 -- when plaintiffs definitively learned that Karen
Fenkell received the funds traceable to the phantom stock option without payment -plaintiffs waited approximately six weeks to file the present motion. The court finds that
such a delay does not undermine the “good cause” requirement of Rule 16.

B. Federal Rule of Civil Procedure 15 Requirements
Having found that plaintiffs were sufficiently diligent in seeking leave to meet the
requirements of Fed. R. Civ. P. 16, the court must also consider whether leave is
appropriate pursuant to Fed. R. Civ. P. 15. On this issue, the parties dispute at the
outset whether the court should consider plaintiffs’ request under subsection (a) or (b) of
Rule 15.

Subsection (a) governs motions filed before trial, whereas subsection (b)

governs motions to amend filed during or after trial.
Defendants contend that plaintiffs’ request must satisfy the stricter requirements
of subsection (b) because the Phase I trial on liability has already been completed. In
what amounts to a tautology, defendants argue that a trial -- regardless of whether that
trial is germane to the amendment sought -- requires courts to consider a request to
amend under subsection (b).
At least one district court has recently described this issue in the context of a
bifurcated action as an issue of first impression. See SRI Int’l Inc. v. Internet Sec. Sys., Inc.,
817 F. Supp. 2d 418, 421 (D. Del. 2011) (noting that issue presented in motion
“whether leave to amend between the liability and damages phases of a bifurcated patent
trial is subject to the liberal standard set forth in Federal Rule of Civil Procedure 15(a)
5

or, as SRI suggests, the more conservative standard set forth in Federal Rule of Civil
Procedure 15(b)” is an issue of first impression).

Unfortunately, the court in SRI

International did not attempt to answer the question, finding the motion failed to meet
even the more liberal 15(a) standard and leaving this court with no more guidance than
do the parties.
The plain language of Rule 15(b) only applies where the issue presented in the
proposed amended pleading was tried (or was in the process of being tried) when the
motion for leave to amend the complaint was filed. 3 In Phase II of this case, plaintiffs
seek disgorgement of David Fenkell’s phantom stock payments (or its proceeds) and any
profits earned on the proceeds. Since plaintiffs have now traced these proceeds to an
account held solely in the name of Karen Fenkell, adding Karen Fenkell as a defendant

3

Federal Rule of Civil Procedure 15(b) provides:
(b) AMENDMENTS DURING AND AFTER TRIAL.
(1) Based on an Objection at Trial. If, at trial, a party objects
that evidence is not within the issues raised in the pleadings,
the court may permit the pleadings to be amended. The court
should freely permit an amendment when doing so will aid in
presenting the merits and the objecting party fails to satisfy
the court that the evidence would prejudice that party’s
action or defense on the merits. The court may grant a
continuance to enable the objecting party to meet the
evidence.
(2) For Issues Tried by Consent. When an issue not raised by
the pleadings is tried by the parties’ express or implied
consent, it must be treated in all respects as if raised in the
pleadings. A party may move—at any time, even after
judgment—to amend the pleadings to conform them to the
evidence and to raise an unpleaded issue. But failure to
amend does not affect the result of the trial of that issue.
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and asserting a claim of liability as a gratuitous transferee of phantom stock plan
proceeds solely concerns issues yet to be addressed in Phase II of this case. Indeed,
unless the court finds in Phase II that disgorgement is an appropriate remedy against
David Fenkell, any claim against Karen Fenkell for gratuitous transfer pursuant to ERISA
§ 502(a)(3) is moot. Because plaintiffs’ motion for leave to amend occurred before the
start of the trial on Phase II, the court finds it more appropriate to analyze plaintiffs’
request under subsection (a).
Under Rule 15(a)(2), courts should “freely give leave” to amend pleadings “when
justice so requires.” Still, “leave is inappropriate where there is undue delay, bad faith,
dilatory motive on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, or futility of the amendment.” Villa v. City of Chi., 924
F.2d 629, 632 (7th Cir. 1991) (citing Foman v. Davis, 371 U.S. 178, 183 (1962)). In
addition to asserting undue delay, which the court already addressed above in the context
of the Rule 16 analysis, defendants claim that plaintiffs fail to meet the requirements of
Rule 15(a)(2) because the proposed amendment (i) would unduly prejudice Karen
Fenkell and (ii) would be futile.
As for prejudice to Karen Fenkell, the court might be persuaded that amendment
at this late stage in a typical case would unduly prejudice a new defendant. Moreover,
typically -- at least in a non-bifurcated case -- the issue plaintiffs seek to raise by way of
amendment would be pursued after judgment, because collection efforts, including
discovery concerning tracing of money, would not be appropriate until entry of a money
judgment.

But, this case is not typical.

Phase II concerns the appropriate remedies
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under ERISA, and the § 502(a)(3) claim against Karen Fenkell falls squarely within the
scope of that phase.

Indeed, assuming disgorgement is ordered by this court, the

proposed claim appears to be straight-forward because there appears to be no factual
basis to dispute that the phantom stock proceeds were transferred gratuitously to Karen
Fenkell.
Given the complexity of the transaction involved in this case and the fact that
class certification has already been considered and approved, it would be far more
efficient for this court to decide the proposed claim against Karen Fenkell, rather than
punting it to another court. Moreover, there is at least a risk that, if this court were to
deny leave and plaintiffs were to pursue a separate action against Karen Fenkell, another
court might view the new action as being precluded by plaintiffs’ failure to bring a claim
against Karen Fenkell here.
On the other hand, the court is concerned about any prejudice to Karen Fenkell -including protecting her due process rights -- in allowing an amendment at this stage in
the proceedings. Specifically, defendants contend that Karen Fenkell has “substantive
defenses to liability,” including “statute of limitations, personal jurisdiction, detrimental
change in position and laches.” (Defs.’ Opp’n (dkt. #693) 15.) Any prejudice to Karen
Fenkell, however, can be addressed by providing an opportunity for her to raise these
defenses in a motion to dismiss. Moreover, unless addressed in this way, there is a real
possibility that another court might rule on these defenses in a way that is inconsistent
with the holdings of this court, even after expending time and judicial resources in
certifying a new class and understanding this court’s rulings.

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Defendants also contend that the court should deny amendment because the
claim against Karen Fenkell would be futile. Defendants specifically argue that plaintiffs’
claim (1) would be barred by the statute of limitations and (2) would fail because
plaintiffs did not allege the requisite element of “knowing participation” to hold Karen
Fenkell liable under ERISA § 502(a)(3). As for the statute of limitations argument, the
court will reserve deciding definitively this issue until it has a complete record, if and
when raised by Karen Fenkell in response to plaintiffs’ claim. At this stage, defendants
have not demonstrated that plaintiffs’ claim would be time barred. As plaintiffs indicate,
there is at least an argument that ERISA’s six-year limitation set forth in § 413 applies to
the non-fiduciary § 502(a)(3) claim asserted against Karen Fenkell.

See Landwehr v.

Dupree, 72 F.3d 726, 731-32 (9th Cir. 1995) (applying the statute of limitations in
ERISA § 413 to a § 502 claim for “other appropriate equitable relief” arising out a
fiduciary breach); Solis v. Couturier, No. 2:08-cv-02732-RRB-GGH, 2009 WL 1748724,
at *2 (E.D. Cal. June 19, 2009) (same, citing Landwehr).

Even if this statute of

limitations does not apply, there is an argument that Wisconsin’s analogous statute of
limitations applies as the forum state 4 and not the two-year statute of limitations under
Pennsylvania state law as proposed by defendants.
As for defendants’ contention that plaintiffs’ proposed claim against Karen Fenkell
is futile because they have failed to plead “knowing participation,” the court will also

4

There are a number of analogous statute of limitations from Wisconsin, all of which
provide six years to bring suit. See Wis. Stat. § 893.35 (action to recover personal
property); Wis. Stat. § 893.51 (action for wrongful taking of personal property); Wis.
Stat. § 893.93 (an action upon a liability created by statute when a different limitation is
not prescribed by law).
9

reserve a final determination on this issue until it has heard more fully from both sides,
As the court reads the Supreme Court’s decision in Harris Trust & Savings Bank v. Salomon
Smith Barney, Inc., 530 U.S. 238 (2000), knowledge -- whether actual or constructive -- of
the existence of some fiduciary duty and breach of that duty is only required if the
transferee of the trust proceeds purchased them for value. 5 In other words, to pursue a
claim against a gratuitous transferee, such as Karen Fenkell, an allegation or proof of
knowing participation does not appear to be required. For this reason, defendants have
failed to demonstrate that plaintiffs’ proposed pleading would be futile simply because it
fails to plead Karen Fenkell’s knowing participation.
Accordingly, the court will allow plaintiffs to amend their complaint to add Karen
Fenkell as a defendant and to add a new cause of action, Count XVI, alleging that Karen
Fenkell is liable as a gratuitous transferee of phantom stock plan proceeds pursuant to
ERISA § 502(a)(3). To address any possible prejudice, Karen Fenkell will also have an
5

In reaching this preliminary conclusion, the court primarily relies on the following
passages:
[I]t has long been settled that when a trustee in breach of his
fiduciary duty to the beneficiaries transfers trust property to a
third person, the third person takes the property subject to
the trust, unless he has purchased the property for value and
without notice of the fiduciary’s breach of duty.

Harris Trust, 530 U.S. at 250.
Only a transferee of ill-gotten trust assets may be held liable,
and then only when the transferee (assuming he has purchased
for value) knew or should have known of the existence of the
trust and the circumstances that rendered the transfer in
breach of the trust.
Id. at 251 (emphasis added).
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opportunity to bring a motion to dismiss and/or for summary judgment on this claim or
on any defenses she may have to this claim.

ORDER
IT IS ORDERED that:
1) Plaintiffs’ motion for leave to amend their complaint to add Karen Fenkell as a
defendant and to assert a claim against her as a gratuitous transferee in
violation of ERISA § 502(a)(3) (dkt. #689) is GRANTED. Plaintiffs’
proposed third amended complaint (dkt. #690-1) is now the operative
pleading in this case.
2) Plaintiffs shall immediately serve Karen Fenkell with the third amended
complaint and summons. Consistent with Federal Rule of Civil Procedure
12(a)(1), Karen Fenkell may answer, move, or otherwise respond to the
complaint within 21 days of service and this court will hold a scheduling
conference thereafter to establish a fair and orderly process to resolve this
claim.
3) All other defendants are relieved of any obligation to respond to the third
amended complaint, their current pleadings remaining operative, and the court
will proceed to a damages trial as previously scheduled.
Entered this 25th day of July, 2012.
BY THE COURT:
/s/
________________________________________
WILLIAM M. CONLEY
District Judge

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