GREGORY JOHNSON; WILLIAM RODWELL; EDWARD RANGEL; KELLY MORRELL, Plaintiffs-Appellees, and DARLEEN STANTON, Plaintiff, ROORDA PIQUET & BESSEE, INC., Non-party appearing witness, Witness, v. CLAIR R. COUTURIER, JR., Defendant-Appellant, and ROBERT E. EDDY; DAVID R. JOHANSON; NOLL MANUFACTURING COMPANY EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST; PENSCO, INC.; JOHANSON BERENSON LLP; THE EMPLOYEE OWNERSHIP HOLDING CORPORATION, Employee Stock Ownership Plan; N & NW MANUFACTURING HOLDING COMPANY, INC.; NOLL MANUFACTURING COMPANY, Defendants.
Nos. 08-17369, 08-17373, 08-17375, 08-17631
United States Court of Appeals for the Ninth Circuit
July 27, 2009
D.C. No. 2:05-cv-02046-RRB-GGH
Argued and Submitted May 7, 2009—San Francisco, California
Before: Procter Hug, Jr., Michael Daly Hawkins, and Richard C. Tallman, Circuit Judges.
Opinion by Judge Tallman
Theodore M. Becker (argued), Thomas M. Peterson, Joseph E. Floren, and Elizabeth A. Frohlich, Morgan, Lewis & Bockius LLP, for appellant Clair R. Couturier, Jr.
Christopher J. Rillo, Lars C. Golumbic, and Dipal A. Shah, Groom Law Group Chartered, for appellant David R. Johanson.
Gary D. Greenwald (argued), Ron Kilgard, and Gary A. Gotto, Keller Rohrback, PLC, and Terence J. Devine, Devine, Markovits & Snyder, LLP, for the appellees.
Carol A. De Deo, Deputy Solicitor of Labor, Timothy D. Hauser, Associate Solicitor, Plan Benefits Security Division, Elizabeth Hopkins (argued), Counsel for Appellate and Special Litigation, and Robyn M. Swanson, Trial Attorney, U.S. Department of Labor, for the Secretary of Labor as amicus curiae supporting appellees.
OPINION
TALLMAN, Circuit Judge:
In his capacity as president of Noll Manufacturing Company (“Noll“) and its successors, Clair R. Couturier, Jr., together with his fellow directors, diverted almost $35 million
I
A
Noll, a closely held corporation founded in 1942, manufactured and sold galvanized sheet metal products. Through restructuring, Noll was succeeded first by N&NW Holding Company (“N&NW“) in 2001, and then by The Employee Ownership Holding Company (“TEOHC“) in 2004.
Noll‘s founder, who died in 1980, established the ESOP in 1977 to give the company‘s employees an opportunity to share in its success. His will reflects an intent that the ESOP own the entire company. However, for reasons we cannot discern from the record, the ESOP did not acquire full ownership of Noll until 2001.
Clair R. Couturier, Jr., became President of Noll in 1999. Noll‘s Board of Directors designated Couturier the sole trustee for the ESOP as of April 24, 2001. Attorney David R. Johanson, who had previously represented the ESOP in con-
This litigation traces its genesis to the sizeable deferred compensation awarded to Couturier during his tenure as president of Noll and its successors. Prior to 2001, retired Noll executives were entitled to continue receiving 75 percent of their base salary, with an adjustment made every three years, under a Compensation Continuation Agreement (“CCA“). In 2001, however, Johanson drafted three documents that tied deferred executive compensation to company value: (1) an Equity Incentive Plan (“EIP“) establishing an incentive stock option plan for key management personnel; (2) an Incentive Stock Option Agreement (“ISO“) granting Couturier 80,000 shares at a strike price of $34;1 and (3) a Value Enhancement Incentive Plan (“VEIP“) creating additional synthetic equity. At the time these plans were enacted, one director reportedly opined that this “is not too good” for the ESOP; they were nonetheless approved by the Board on June 13, 2001.2
After the reorganization of Noll under N&NW, Johanson and Couturier, remaining as the sole directors, orchestrated additional incentive agreements in February 2002. The 2002 EIP allowed for issuance of up to 110,000 shares, with no more than 93,500 shares being awarded to a single grantee. The 2002 ISO again granted to Couturier 80,000 shares at a strike price of $34 per share. The 2002 VEIP created additional synthetic equity for Couturier. Couturier and Johanson
The advent of 2003 heralded further expansion of Couturier‘s compensation. That year, Couturier and Johanson approved a retroactive annual cash bonus to Couturier equaling ten percent of the dollar amount of external debt repaid on certain loans. Some of these loans were refinanced later that same year. N&NW then purchased a $5.5 million home (“the Palm Desert home“) and a $325,000 private golf club membership in Palm Desert, California, for Couturier‘s personal use.
After unsuccessful negotiations with Alliance Holdings, Inc. for the acquisition of N&NW—during which the value of Couturier‘s interest in the company became a point of contention—Couturier and Johanson appointed Couturier‘s financial advisor, Robert E. Eddy, as Special Trustee to the ESOP. Eddy‘s role was to evaluate proposed transactions involving N&NW and the ESOP, including monetization of Couturier‘s financial interest in N&NW. Couturier and Johanson ultimately opted to merge N&NW into TEOHC, which Johanson had incorporated in Delaware on December 15, 2003. As the incorporator, Johanson appointed himself, Couturier, Eddy, and accountant James Roorda as directors. Pursuant to a new plan, the ESOP was now to be administered by Trustees appointed by the TEOHC Board of Directors; the Board members appointed themselves as Trustees.
B
On October 11, 2005, several former and current Noll employees (collectively, “Plaintiffs“), all of whom are ESOP participants, filed suit against Couturier, Johanson, and Eddy (collectively, “Defendants“) in the United States District Court for the Eastern District of California. Claiming that Couturier was vastly overcompensated, Plaintiffs’ amended complaint seeks relief from Defendants’ alleged breach of fiduciary duties in their capacities as
C
The Defendant directors, officers, and trustees entered into multiple and largely identical indemnification agreements with Noll and its successors between 2001 and 2005. These agreements generally indemnify Defendants for any liabilities incurred in their service as directors—and, in the case of Couturier and Eddy, in their service as ESOP trustees—so long as any such liability did not involve “deliberate wrongful acts” or “gross negligence.”5 The agreements are governed by California law “to the extent not preempted by federal law“; Couturier‘s trustee indemnification further specifies that it is “[s]ubject to the relevant provisions of [ERISA].”
At issue here are provisions within the indemnification agreements requiring TEOHC to advance defense costs. Seeking advancement as promised in the indemnification agreements, each Defendant has executed an undertaking to repay TEOHC for “any expenses paid by it on my behalf in advance of the final disposition of the [instant] suit[ ], if it shall ultimately be determined that I am not entitled to be indemnified by the Company” under Delaware law.
On October 24, 2008, the district court also granted a second preliminary injunction: (1) preventing Couturier from “transferring, secreting, assigning, pledging, mortgaging, or hypothecating” the assets he received as part of the 2004 buyout package without prior court approval; and (2) ordering an accounting of these assets within 20 days. However, the court limited this injunction to allow Couturier “to cover normal living expenses and legal fees.” Couturier timely appealed this second preliminary injunction.
D
A subsidiary of Gibraltar Industries, Inc. purchased TEOHC‘s assets on April 10, 2007, for almost $61 million. Approximately $15.8 million of the sale proceeds remained for distribution to the ESOP after payment of bank debt, executive compensation, closing costs, and escrow. Consulting Fiduciaries, Inc., the current ESOP trustee, distributed $5 mil-
II
Defendants collectively make three separate arguments to avoid invalidation of these agreements under
A
[1] Congress enacted
[2] An ESOP is a type of
[3] We construe
Johanson argues, without any citation to the record, that he served on the TEOHC ESOP Board of Trustees for only one day, and thus never had the opportunity to take any actions that would subject him to
B
[5] Decisions relating to corporate salaries generally do not fall within ERISA‘s purview. But where plan assets include the employer‘s stock, the value of those assets depends on the employer‘s equity. Employee compensation levels are, of course, one of the many business expenditures reducing the value of the overall equity of any company. On the other hand, “[v]irtually all of an employer‘s significant business decisions affect the value of its stock, and therefore the benefits that ESOP plan participants will ultimately receive.” Martin v. Feilen, 965 F.2d 660, 666 (8th Cir. 1992). Taken to its logical conclusion, therefore, this line of thinking would, in the case of an ESOP, extend the application of
[6] Nonetheless, we conclude that applying
C
Defendants argue that whether TEOHC is obligated to advance their defense costs is purely a matter of state contract law, and that
[7]
[8] Defendants’ indemnification agreements specify that they are governed by California law. California allows advancement of defense costs “upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this section.”9
[9] However, Defendants’ indemnification agreements provide complete indemnity so long as the challenged acts or omissions do not involve deliberate wrongful acts or gross negligence.
III
With these principles in mind, we turn to an evaluation of the district court‘s decision to enjoin advancement of defense costs. “A plaintiff seeking a preliminary injunction must establish [1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Winter v. Natural Res. Defense Council, Inc., 129 S. Ct. 365, 374 (2008). “We review the grant or denial of a preliminary injunction for abuse of discretion.” Am. Trucking Ass‘ns v. City of Los Angeles, 559 F.3d 1046, 1052 (9th Cir. 2009). This review is “limited and deferential,” and it does not extend to the underlying merits of the case. Id. (quoting Lands Council v. Martin, 479 F.3d 636, 639 (9th Cir. 2007)). A dis-
IV
We conclude that the district court did not abuse its discretion in preliminarily enjoining TEOHC from advancing Defendants’ defense costs. Plaintiffs established all four elements of the governing standard, and Defendants have failed to demonstrate that the district court based its decision either on an erroneous legal standard or on clearly erroneous findings of fact.
A
1
[10] Plaintiffs have established that they are likely to succeed in proving that Defendants breached their fiduciary duties under
[11] In 2003, Moss Adams Advisory Services (“Moss Adams“) recommended that Couturier be given no more than between $6 million and $9 million, the value of the deferred compensation agreements which N&NW carried on its books at that time. The record reveals that the Moss Adams fairness/valuation team was clearly uncomfortable with the package proposed by Couturier and Johanson, and refused to opine on the fairness of what ultimately became a $34.8 million package. On January 21, 2004, Moss Adams qualified its opinion to specifically exclude the “issues of whether the executive compensation for various executives and related packages represent ‘reasonable’ compensation,” deferring to others the resolution of these matters. At least at this stage in the proceedings, it is difficult to understand how an
[12] Because Plaintiffs are likely to succeed in proving that Defendants breached their
Admittedly, ERISA does not bar the purchase of liability insurance by a plan, fiduciary, or employer.
The indemnification agreements and associated advancement provisions at issue here clearly “purport[ ] to relieve” Defendants from their fiduciary responsibilities under ERISA. ERISA requires that a fiduciary discharge its duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
Defendants nonetheless argue that section 410(a) does not apply because advancement would be made from corporate, not plan, assets. See
Finally, because the agreement indemnifying Couturier as a trustee specifies that it is “[s]ubject to the relevant provisions of [ERISA],” Couturier argues that his right to advancement is not void under section 410(a). This assertion overlooks two key points. First, the remaining three agreements indemnifying Couturier as a director contain no such limitation, even though in his capacity as director Couturier was subject to ERISA fiduciary duties with respect to appointment and retention of ESOP trustees. Second, as we explain above, Plaintiffs are likely to succeed in proving that Couturier did in fact breach his ERISA obligations, thus also
2
[13] The Supreme Court recently clarified that preliminary injunctive relief is available only if plaintiffs “demonstrate that irreparable injury is likely in the absence of an injunction.” Winter, 129 S. Ct. at 375. In so doing, the Court rejected the Ninth Circuit‘s “possibility of irreparable harm” test, noting that “[i]ssuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with our characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Id. at 375- 76. Defendants allege that the district court failed to apply the requisite “likelihood of harm” standard and relied instead on a possibility of harm. We disagree.
[14] The district court correctly found that Plaintiffs will likely succeed in proving that Defendants breached their fiduciary duties under ERISA. The district court therefore also correctly found that Plaintiffs will likely succeed in proving that the indemnification agreements are void under section 410(a) of ERISA because they exculpate Defendants from their fiduciary obligations. Consequently, there is more than a possibility that Defendants will be required to reimburse TEOHC for any advanced defense costs—there is at least a likelihood.
[15] Similarly, there is a likelihood that Defendants will not have the resources to reimburse TEOHC if defense costs are advanced. Plaintiffs are not required to submit detailed financial statements in support of this assertion. Rather, it is enough that Couturier himself alleged that Defendants even now would not be able to pay their legal bills without advancement of funds. Moreover, Defendants have already expended the $5 million in D&O insurance coverage previ
3
[16] The balance of equities tips in Plaintiffs’ favor. Admittedly, if the preliminary injunction is upheld, Defendants will be forced either: (1) to find a way to pay for their own defense and seek recovery after trial; (2) to find attorneys willing to accept the risk of payment after trial; (3) to continue litigation without representation; or (4) to settle. We recognize that these options are accompanied by real and difficult consequences for each Defendant. Nonetheless, any such consequences are outweighed by the potential hardship to Plaintiffs if advanced defense costs are not reimbursed.
[17] If, as is likely, Defendants are found to have violated their fiduciary obligations under ERISA, section 410(a) renders their indemnification agreements void and they are not entitled to advancement of defense costs. Even if that were not the case, Plaintiffs are willing to place the potential defense costs in escrow; if they do so, Defendants will ultimately be able to recover their costs if so entitled. By contrast, as explained above, recovery by Plaintiffs of any advanced defense costs seems remote, a result that would leave ESOP participants without the benefits whose security ERISA strives above all else to protect.
4
[18] “In exercising their sound discretion, courts of equity should pay particular regard for the public consequences in
that the continued well-being and security of millions of employees and their dependents are directly affected by these plans; that they are affected with a national public interest; that they have become an important factor affecting the stability of employment and the successful development of industrial relations; . . . that despite the enormous growth in such plans many employees with long years of employment are losing anticipated retirement benefits owing to the lack of vesting provisions in such plans; that owing to the inadequacy of current minimum standards, the soundness and stability of plans with respect to adequate funds to pay promised benefits may be endangered; that owing to the termination of plans before requisite funds have been accumulated, employees and their beneficiaries have been deprived of anticipated benefits; and that it is therefore desirable in the interests of employees and their beneficiaries, for the protection of the revenue of the United States, and to provide for the free flow of commerce, that minimum standards be provided assuring the equitable character of such plans and their financial soundness.
B
We also reject the numerous additional arguments through which Defendants attempt to invalidate this preliminary injunction. Defendants attack the preliminary injunction as based on insufficient evidence, as failing to give due deference to the arbitration order, as improper under Supreme Court precedent, as impermissibly granting relief of a different character than any judgment that might finally issue, and as improperly imposing a constructive trust. None of these arguments has merit.
1
[19] Defendants first allege that the district court failed to rely on “credible and admissible” evidence in granting the preliminary injunction. See, e.g., Am. Passage Media Corp. v. Cass Commc‘ns, Inc., 750 F.2d 1470, 1473 (9th Cir. 1985) (finding an insufficient showing of irreparable harm in part because submitted “affidavits [from plaintiff ‘s own executives] are conclusory and without sufficient support in facts“). They object in particular to the district court‘s reliance on the interested declaration of Plaintiffs’ counsel and unverified client complaints.
A district court may, however, consider hearsay in deciding whether to issue a preliminary injunction. Republic of the Philippines v. Marcos, 862 F.2d 1355, 1363 (9th Cir. 1988) (en banc); see also Flynt Distrib. Co. v. Harvey, 734 F.2d 1389, 1394 (9th Cir. 1984) (“The trial court may give even inadmissible evidence some weight, when to do so serves the purpose of preventing irreparable harm before trial.“). More
2
[20] Defendants argue that the preliminary injunction cannot be reconciled with the arbitrator‘s finding that TEOHC is contractually obligated to advance defense costs. In particular, they cite the strong federal policy in favor of arbitration, as well as the statutory provision that limits the venue where a party may seek to enforce or vacate an arbitral award to the district court where the arbitration occurred (here, the Northern District of California). However, the district court correctly found that Plaintiffs are not bound by the indemnification agreements or the arbitral decision, being a party to neither. As we noted in IT Corp. v. General American Life Insurance Co., 107 F.3d at 1418, “a fiduciary‘s contract with an employer cannot get it off the hook with the employees who participate in the ERISA plan. They did not sign a contract exonerating the fiduciary.” Similarly, the Federal Arbitration Act “does not require parties to arbitrate when they have not agreed to do so.” EEOC v. Waffle House, Inc., 534 U.S. 279, 293 (2002) (quotation omitted). Moreover, Defendants have not asserted any alternative contract or agency principles which may bind a nonsignatory to an arbitration agreement. See Comer v. Micor, Inc., 436 F.3d 1098, 1101 (9th Cir. 2006).
3
4
[22] Relying on De Beers Consolidated Mines, Ltd. v. United States, 325 U.S. 212 (1945), Defendants also assert that a preliminary injunction may only grant relief of the same character as the judgment that may finally issue. Because the injunction here prevents advancement of TEOHC assets but Plaintiffs ultimately seek to recover funds held by Couturier, Defendants argue that the preliminary injunction is impermissible due to its difference in character from the final relief sought. But in De Beers, the district court‘s only power under antitrust law was to restrain future anticompetitive action—it was without jurisdiction to enter a monetary judgment at any
Here, by contrast, the district court has jurisdiction under ERISA to impose a constructive trust over any assets in Defendants’ possession it concludes rightfully belong to the ESOP.
5
[23] Finally, Johanson argues that Plaintiffs cannot establish his liability under ERISA because they cannot identify specific funds or property in his possession over which they seek to impose a constructive trust. Be that as it may, in addition to imposing a constructive trust, Plaintiffs seek also to hold Johanson jointly and severally liable for all ESOP losses related to Defendants’ misconduct. Accordingly, this argument, too, lacks merit.
V
In granting the second preliminary injunction freezing Couturier‘s assets and requiring an accounting, the district court applied an alternative analytical framework and found “that there are serious questions on the merits and the balance of
[24] A party seeking an asset freeze must show a likelihood of dissipation of the claimed assets, or other inability to recover monetary damages, if relief is not granted.11 See, e.g., Conn. Gen. Life Ins. Co. v. New Images of Beverly Hills, 321 F.3d 878, 881 (9th Cir. 2003). As already explained, Plaintiffs have established that they are likely to succeed in proving that Couturier impermissibly awarded himself tens of millions of dollars in compensation—in Couturier‘s own words, “33% to 40% of the value” of the company‘s stock—in contravention of the highest fiduciary duties known to the law.12 Thus, in the mere five years that he served as CEO, Couturier somehow convinced his fellow directors and trustees to consent to
[25] Couturier argues also that the district court erroneously found that he would not be harmed by an asset freeze. The district court in fact concluded that a narrowly tailored asset freeze would prejudice Couturier less than a denial of relief would prejudice Plaintiffs. In that context, the court found that any prejudice to Couturier would be substantially mitigated by limiting the injunction to permit Couturier “to cover normal living expenses and legal fees” and by allowing Couturier to petition the court at any time for consent to an asset transfer or disposal. Given that the freeze on Couturier‘s assets is limited to those in which Plaintiffs have an equitable interest and does not extend to normal living expenses and legal fees, the district court correctly balanced the relative hardships. See Marcos, 862 F.2d at 1362 (finding no hardship where an asset freeze does not extend to normal living expenses and legal fees).
VI
[26] The district court ordered Plaintiffs to post $5000 as security for each temporary restraining order preceding the corresponding preliminary injunction. Although Plaintiffs have since stated that these cash bonds remain with the Clerk of Court as security for the preliminary injunctions, the dis
VII
We conclude that ERISA establishes federal subject matter jurisdiction over this case and that state law governing advancement of defense costs is here preempted as its application would conflict with ERISA. We further conclude that the district court did not abuse its discretion in preliminarily enjoining TEOHC from advancing defense costs, nor in freezing Couturier‘s assets and requiring an accounting. Finally, because it did not consider the question in the first instance, we remand the question of bond sufficiency to the district court.
Costs on appeal are awarded to Plaintiffs-Appellees.
AFFIRMED but REMANDED with instructions.
Notes
Q: In the case of a plan established and maintained by an employer, are members of the board of directors of the employer fiduciaries with respect to the plan?
A: Members of the board of directors of an employer which maintains an employee benefit plan will be fiduciaries only to the extent that they have responsibility for the functions described in [