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Your ERISA Watch – Dudenhoeffer Does Not Defeat Breach of Fiduciary Duty Claims Related to ESOP Purchase of Inflated Company Stock

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What do you do if you’re a milling and animal feed manufacturer saddled in scandal because you produced horse and cattle feed containing a fatal amount of monensin?  Apparently, you sell your stock to an ESOP at an overly inflated price.  That’s at least what the plaintiff alleges in this week’s notable decision, Zavala v. Kruse-Western, Inc., et al., No. 119CV00239DADSKO, 2019 WL 3387102 (E.D. Cal. July 26, 2019).

Following Kruse-Western’s expensive settlements related to monensin poisoning of horses and cattle, and allegedly with the knowledge of significant future liabilities, the Western Milling Employee Stock Ownership Plan (the “ESOP”) was created.  Zavala, a current ESOP participant, alleges various violations related to the sale of Kruse-Western stock to the ESOP.  The ESOP purchased the stock from Kruse-Western and the other defendant “selling shareholders,” which the ESOP financed by borrowing the entire purchase price of $244 million from Kruse-Western.  The value of Kruse-Western stock fell shortly thereafter, with only marginal recovery, such that within two years of the ESOP’s creation, the ESOP had purchased Kruse-Western’s outstanding stock for nearly ten times its actual value.  And like monensin, that’s a hard pill to swallow.

Defendants moved to dismiss Zavala’s four-count complaint but with only limited success.  The court dismissed the first cause of action alleging that the selling shareholders engaged in a prohibited transaction in violation of 29 U.S.C. § 1106(a) due to Plaintiffs’ failure to allege the location of the proceeds of the sale.  Plaintiffs must allege that the money or property is in the possession of defendants in order to state a claim for equitable relief under § 1132(a)(3).  The court denied dismissal of the same claim against GreatBanc because nothing on the face of the complaint establishes that it paid adequate consideration; rather, the complaint alleges that the ESOP paid more than fair market value based on unrealistic projections of future earnings considering recurring monensin contamination in Wester Milling’s animal feed.  The court dismissed the claim under 29 U.S.C. § 1106(b) against the Board defendants since the Complaint does not allege that they are fiduciaries with respect to actions related to the sale of Kruse-Western’s stock.  It is not enough to allege that they appointed GreatBanc as trustee of the ESOP.

The court denied dismissal of the claim that GreatBank breached its fiduciary duty to the ESOP under 29 U.S.C. § 1104(a)(1)(A) and (B) because the Dudenhoeffer rule requiring the allegation of  “special circumstances” does not apply to situations involving privately held stock and there are factual disputes that cannot be resolved at the motion to dismiss stage.  Lastly, the court denied dismissal of the cause of action alleging that the Board defendants violated 29 U.S.C. § 1104(a)(1)(A) and (B) by failing to monitor GreatBanc where the complaint alleges that the Board defendants failed to conduct any investigation following the sale of Kruse-Western’s stock.

Zavala is represented by Dan Feinberg, Nina Wasow, and Andrea Obando of Feinberg, Jackson, Worthman & Wasow and Michelle Yau and Mary Borthscheller of Cohen Milstein Sellers & Toll.

Following the court’s decision, “Plaintiff will file an amended complaint to resolve issues Judge Drozd found with other claims in the lawsuit.”  Class Action on Behalf of Western Milling ESOP Participants Allowed to Proceed.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Attorneys’ Fees

Second Circuit

Levy v. Young Adult Institute, Inc., et al., No. 13-CV-2861 (JPO), 2019 WL 3454613 (S.D.N.Y. July 30, 2019) (Judge J. Paul Oetken).  Plaintiffs moved for reconsideration of its prior conclusion that a reduction of 35% of Plaintiffs’ requested fee award was warranted due to Plaintiffs’ incomplete success on the merits.  The court denied the motion, finding that Plaintiffs presented no new law, arguments, or facts and that its prior assessment was correct. Fees were reduced because most of Plaintiffs’ recovery was obtained nearly before the case was closed and a substantial amount of the fees requested related to the latter half of the case’s proceedings.  The court applied a 33% reduction in Plaintiffs’ requested award for legal fees incurred in connection with the appeal because a substantial amount of time was spent on and billed for appellate matters on which Plaintiff did not prevail.

Sixth Circuit

Guest-Marcotte v. Life Insurance Company of North America, et al., No. 15-CV-10738, 2019 WL 3388478 (E.D. Mich. July 26, 2019) (Judge Thomas L. Ludington).  Following a remand from the Sixth Circuit reversing the denial of attorneys’ fees, the court awarded Plaintiff $126,547 in attorneys’ fees, and $2,706.67 in costs and denied Plaintiff’s request for interest and unjust enrichment.  In denying pre-judgment interest, the court explained that she is not entitled to pre-judgment interest on a short-term disability claim for which she received no judgment (it was approved on remand to the claims administrator) or on a long-term disability which was never litigated.  On the reasonableness of the hours expended by Plaintiff’s counsel, the court rejected Defendants’ counsel’s comparison to the number of hours they spent (368.9 versus 507 hours) to prove that Plaintiff’s counsel’s time was excessive.

Breach of Fiduciary Duty

Second Circuit

Harlan v. Harlan, et al., No. 6:18-CV-06883 MAT, 2019 WL 3387140 (W.D.N.Y. July 26, 2019) (Judge Michael A. Telesca).  The gravamen of Plaintiff’s ERISA claim against her ex-husband’s employer is that it did not assist her in having his TIAA-CREF divided or have her named as the beneficiary of his life insurance policy pursuant to their agreement.  The court granted the employer’s motion to dismiss her breach of fiduciary duty claim against it because Plaintiff fails to allege that she is a participant or a current beneficiary under the plans.  The employer was not obligated to respond to the letters she sent to Prudential, the insurer of the life policy.  There was also no QDRO in place.

Ninth Circuit

Zavala v. Kruse-Western, Inc., et al., No. 119CV00239DADSKO, 2019 WL 3387102 (E.D. Cal. July 26, 2019) (Judge Dale A. Drozd).  See Notable Decision summary.

Discovery

Third Circuit

Yost v. Anthem Life Insurance Company, No. 3:16-CV-00079, 2019 WL 3423429 (M.D. Pa. July 29, 2019) (Judge Robert D. Mariani).  In this class action challenging Defendant’s assertion of a right of subrogation against the proceeds of personal injury settlements on motor vehicle claims, the court granted Anthem’s motion for a protective order precluding Plaintiff from taking testimony pursuant to the “Plan Attorney” notice of deposition but denied the motion as to two other depositions.  The Plan Attorney deposition seeks to discover communications between Defendant’s employed attorneys and those involved in the administration of the Plan.  The court, applying the Wachtel factors, found that the fiduciary exception to the attorney-client privilege does not apply.  Anthem does not hold or manage plan assets, it assesses claims through an affiliate and pays claims through its own funds, it has interests larger and distinct from those of its beneficiaries, and it pays for legal services using its own assets.  “[T]he Court concludes that Wachtel makes clear that Defendant’s fiduciary responsibilities do not compel application of the fiduciary exception where information traditionally consistent with the attorney-client privilege is sought.”

ERISA Preemption

Ninth Circuit

Meyer v. Unitedhealthcare Insurance Company, No. CV 18-173-M-DLC, 2019 WL 3430475 (D. Mont. July 30, 2019) (Judge Dana L. Christensen).  The court found that Plaintiff’s claims under Montana’s Unfair Trade Practices Act are preempted by ERISA since they arise under the terms of a health plan provided by his employer.  Even though United’s Associate General Counsel told Plaintiff his policy is not governed by ERISA, that does not control the analysis of whether ERISA applies.  The court granted Defendant’s motion to dismiss.

Life Insurance & AD&D Benefit Claims

Eighth Circuit

The Prudential Insurance Company of America v. Williams, No. 19-CV-2015-CJW-KEM, 2019 WL 3482855 (N.D. Iowa July 31, 2019) (Judge C.J. Williams).  The court determined that Prudential adequately states a claim for relief in interpleader where the named beneficiary is charged with the insured’s murder (though not yet convicted), the insured’s next-of-kin are the insured’s parents, and Prudential risks multiple liability for the benefits distribution.  The court denied Prudential’s request for injunctive relief preventing Defendants from instituting or prosecuting any proceedings concerning the death benefits.  It also denied Prudential’s request to require Defendants to litigate or settle their claims.  The court ordered that Defendants may file their claims to the remaining death benefits at any time until 21 days after the judgment is entered in the pending criminal case for the insured’s murder.

Pleading Issues & Procedure

Third Circuit

Yost v. Anthem Life Insurance Company, No. 3:18-CV-1522, 2019 WL 3451507 (M.D. Pa. July 30, 2019) (Judge Robert D. Mariani).  The court dismissed the above-captioned matter (“Yost II”) for being duplicative of the action docketed at 3:16-CV-00079 (“Yost I”).  The court found that both cases are based on the same operative facts. Though Plaintiff argues that the underlying basis of Yost I is Anthem Life’s violation of 75 Pa. C.S. § 1720 and the underlying basis of Yost II is Anthem Life’s violation of the terms of its own insurance policy, “the distinction does not acknowledge the fundamental fact that Yost I also alleged Defendant’s policy violations.”  Yost II was filed after the court indicated that Plaintiff’s motion to file a second amended complaint in Yost I would likely not be granted.  When a second action is substantially identical to a pending case, a court can either stay the second case, consolidate it with the first case, or dismiss the second case without prejudice.  The court here chose the third option.

Statute of Limitations

Fourth Circuit

Brady v. The Dow Chemical Company Retirement Board, et al., No. 2:18-CV-01268, 2019 WL 3453917 (S.D.W. Va. July 31, 2019) (Judge Thomas E. Johnston).  Plaintiff requested plan documents on May 3, 2013, made a second request on August 24, 2017, and received them on September 2, 2017.  Plaintiff sought $170,500 in penalties, a claim which the Magistrate Judge recommended be dismissed for being time-barred.  The court found that the statute of limitations applicable to Plaintiff’s § 1132(c)(1) claim is the one-year period in West Virginia Code § 55-2-12(c), not the ten-year period in West Virginia Code § 55-2-6.  The federal discovery rule, not the West Virginia discovery rule, applies to Plaintiff’s ERISA claims.  This claim accrues at the end of the thirty days when a request is not complied with rather than from the date that the request is complied with.  Defendants did not have a duty to inform Plaintiff of the one-year deadline to file an enforcement action.  Objections overruled and PF&R adopted.

Statutory Penalties

Fifth Circuit

Hager v. DBG Partners, Inc., No. 4:16-CV-142-A, 2019 WL 3503068 (N.D. Tex. Aug. 1, 2019) (Judge John McBryde).  On remand from the Fifth Circuit, the court determined that Plaintiff should not receive statutory penalties from Defendant because it acted in good faith in giving Plaintiff notice of the termination of his health insurance.  The court found that there was no valid reason to punish Defendant by awarding penalties.  The court considered other factors including that Plaintiff did not properly inform the court before his COBRA claims were dismissed that he was making the penalty claim he now asserts, and Plaintiff did not provide the court with documents it requested concerning his medical expenses.  The court also denied attorneys’ fees and costs.

Ninth Circuit

Admor HVAC Products, Inc. v. Lessary, No. CV 19-00068 SOM-KJM, 2019 WL 3430766 (D. Haw. July 30, 2019) (Judge Susan Oki Mollway).  The court dismissed Defendant’s counterclaim for penalties under 29 U.S.C. § 1132(c)(1) because his allegations that he requested COBRA paperwork following his termination and the company failed to provide the paperwork does not allege entitlement to statutory penalties.  He fails to allege that he was prejudiced by the delay.

Withdrawal Liability & Unpaid Contributions

Second Circuit

Trustees of The New York City District Council Of Carpenters Pension Fund, Welfare Fund, Annuity Fund, And Apprenticeship, Journeyman Retraining, Educational And Industry Fund v. Benchmark Carpets, Inc., No. 19 CIV. 4786 (PAE), 2019 WL 3491487 (S.D.N.Y. Aug. 1, 2019) (Judge Paul A. Engelmayer).  The Court confirmed the arbitration award issued against respondent in favor of petitioners and issued judgment in the amount of $19,953.44 plus post-judgment interest pursuant to 28 U.S.C. § 1961(a).

Trustees of The Metal Polishers Local 8A-28A Funds v. Nu Look Inc., No. 18CV3816PKCRLM, 2019 WL 3500908 (E.D.N.Y. July 31, 2019) (Judge Pamela K. Chen).  The court granted Plaintiff’s motion for default judgment in part. The Court awards the Trustees $2,900 in reasonable attorneys’ fees and $465 in costs. Further, the Trustees shall have thirty (30) days from the date of this Order to submit adequate documentation supporting their request for damages in the amount of Nu Look’s delinquent contribution, interest thereon, and liquidated damages provided under ERISA, as well as attorneys’ fees incurred in preparing that submission.

Third Circuit

Caesars Entm’t Corp. v. Int’l Union of Operating Engineers Local 68 Pension Fund, No. 18-2465, __F.3d__, 2019 WL 3484247 (3d Cir. Aug. 1, 2019) (Before: Chagares, Hardiman, and Siler,* Circuit Judges).  Following the statutory text and PBGC guidance, the court determined that under § 1385(b)(2)(A)(i) “work … of the type for which contributions were previously required” does not include work of the type for which contributions are still required.  “And because CEC continues to contribute to its pension plan for engineering work at its remaining three casinos, it is not liable under § 1385(b)(2)(A)(i). We will affirm the judgment of the District Court.”

Trustees of the B.A.C. Local 4 Pension Fund v. Danaos Group LLC, No. CV 18-15551, 2019 WL 3453270 (D.N.J. July 31, 2019) (Judge Madeline Cox Arleo).  The court granted Plaintiffs’ Motion for Default Judgment and awarded damages in the amount of $14,188.62.

Eighth Circuit

National Roofing Industry Pension Plan, et al. v. Taylor Roofing Solutions, Inc., et al., No. 4:18CV1862 JCH, 2019 WL 3388041 (E.D. Mo. July 26, 2019) (Judge Jean. C. Hamilton).  The court held in abeyance Heyl, Royster’s motions for leave to withdraw as counsel, and ordered Defendants to obtain substitute counsel no later than September 9, 2019.

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