101 Wash. App. 575 | Wash. Ct. App. | 2000
In 1989, David Sabey was interested in purchasing Frederick & Nelson Acquisition Company (FNAC). At the time, Howard Johnson & Company, an actuarial firm, was assisting FNAC in phasing out its pension plan and replacing it with a 401(k) and profit-sharing plan. Howard Johnson communicated orally and in writing with Sabers personal counsel about the adequacy of FNAC’s pension plan funding and its compliance with the Employee Retirement Income Security Act (ERISA). Sabey allegedly relied on those representations, and formed a company, F&N Holding, Inc., which purchased FNAC. Eventually, the Pension Benefits Guaranty Corporation (PBGC) determined the plan was underfunded in violation of ERISA, and notified Sabey that he and Sabey Corporation were liable for a shortfall of $3.75 million. Sabey settled with the PBGC and brought this action against Howard Johnson, seeking reimbursement on theories of negligence, negligent misrepresentation, and indemnification. The trial court dismissed all claims on summary judgment.
Considering the evidence in the light most favorable to Sabey, we hold that he has standing to seek reimbursement from Howard Johnson because he incurred personal liability under ERISA, his claims are not remote because they are based on representations made to him personally, and his common law indemnification claim is not barred by the
FACTS
In 1986, FNAC hired Howard Johnson, an actuarial firm, to assist in terminating its pension plan and substituting 401(k) and profit-sharing plans.
In the fall of 1988, FNAC began formal termination of the pension plan as required under ERISA.
Based on Howard Johnson’s advice, FNAC reported in its financial statements that the pension plan was underfunded by approximately $150,000.
In February 1989, David Sabey’s personal counsel began conducting due diligence for Sabey’s decision about the potential purchase of FNAC. At that time, Sabey’s representatives reviewed FNAC’s financial statements, met with FNAC management, and secured oral and written advice from Howard Johnson regarding the FNAC pension plan.
Sabey was aware that the plan was being terminated and that Howard Johnson was acting as the actuarial consultant for the purpose of determining whether ERISA’s termination requirements were met. As a result of Howard Johnson’s assurances to FNAC and Sabey’s personal counsel, Sabey believed plan assets were sufficient to complete the termination with no significant deficiency. Sabey’s com
Meanwhile, in spring of 1989, Howard Johnson urged FNAC to make lump sum payments to plan members. FNAC expressed concern about doing so. Howard Johnson repeatedly assured FNAC that there were sufficient funds available to pay lump sum distributions, purchase members’ annuities, and pay other expenses. FNAC made the lump sum distributions before receiving formal annuity bids. Howard Johnson began soliciting annuity bids in late spring of 1989. All the bids were $1.4 million or more above plan assets. On September 7, 1989, Howard Johnson informed the PBGC that the plan lacked sufficient assets.
In September 1991, FNAC filed for bankruptcy protection. FNAC and F&N Holding ceased operations and were liquidated. The PBGC paid the affected pension plan members but made no ERISA claims against FNAC.
Im 1993, the PBGC began investigating which parties were liable for improper termination and underfunding of the plan. At that time, the PBGC told Sabey that he and Sabey Corporation
That same year, FNAC, Sabey Corporation, and the pension plan itself brought suit against Howard Johnson and others in federal court. David Sabey was not a party. Howard Johnson moved for summary judgment, arguing that the plaintiffs had no claims until the PBGC assigned liability. The motion was never decided. In April 1995, the federal district court dismissed the suit for failure to prosecute. Under the federal local rules, the dismissal was with prejudice, but as to Sabey Corporation, the order was modified to read, “The claims asserted by plaintiff Sabey
In June 1995, the PBGC advised Sabey’s counsel by telephone that in their view, the appropriate termination date for the pension plan would be a date between September 7, 1989 and July 1, 1993. The PBGC’s position was confirmed by a letter received July 10, 1995. The PBGC asserted that Sabey and his affiliated companies were liable for the underfunding of the pension plan in the amount of $1.75 million to $3.72 million, depending on the termination date.
In February 1997, the PBGC formally notified Sabey that it would seek, under ERISA, to establish his and Sabey Corporation’s liability in the amount of $3.75 million. In March 1998, Sabey agreed to pay $1.95 million to settle the claim, securing his and Sabey Corporation’s release from liability.
Sabey paid the PBGC in August 1998, and brought negligence, negligent misrepresentation, and indemnification claims against Howard Johnson, seeking reimbursement of his settlement with the PBGC. Howard Johnson moved for summary judgment, arguing that Sabey lacked standing, his claims were too remote, his indemnity claim was abolished by the tort reform act, and his claims were time barred. The trial court granted Howard Johnson’s motion and dismissed all of Sabey’s claims.
DISCUSSION
When reviewing an order on summary judgment,
Preliminary Discussion: ERISA Termination Liability
Because Sabey’s personal liability to the PBGC derives from his inclusion in the “controlled group” held responsible under ERISA for improper termination and underfunding of the FNAC’s pension plan, a brief discussion of ERISA is necessary.
Congress enacted ERISA “to ensure that employees and their beneficiaries would not be deprived of anticipated retirement benefits by the termination of pension plans before sufficient funds had been accumulated in the plans.”
The PBGC administers this insurance program.
ERISA provides that “all... trades or businesses ... under common control shall be treated as ... a single employer.”
(1) corporations are affiliated through overlapping 80 percent ownership (parent-subsidiary); (2) two entities belong to a brother-sister group, that is, five or fewer persons own a controlling interest (80 percent) in each organization and exercise effective control (50 percent identical ownership) over both; or (3) a combined group of three or more corporations that are members of either a parent-sub or brother-sister group and one of which is a common parent and a brother corporation.[20 ]
This is the so-called “controlled group.” Members of the “controlled group” are jointly and severally liable to the PBGC.
Standing
The standing doctrine requires that a plaintiff must have a personal stake in the outcome of the case in order to bring suit.
There are two often overlapping exceptions to the general rule: (1) where there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder; and (2) where the shareholder suffered an injury
As to the existence of a special duty, Howard Johnson points out that it was not in contractual privity with Sabey. While this is true, it is not dispositive. The special duty need not arise from a contract. The question is whether a duty was owed to the individual independent of his status as a shareholder:
As an exception to the general rule, a stockholder may maintain an action in his own right against a third party (although the corporation may likewise have a cause of action for the same wrong) when the injury to the individual resulted from the violation of some special duty owed to the stockholder but only when that special duty had its origin in circumstances independent of the stockholder’s status as a stockholder.[27 ]
Sabey’s claim is for negligent misrepresentation. The Restatement (Second) of Torts § 552 (1977) provides in relevant part:
(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
For 1988, the plan was fully funded as defined by the Internal Revenue Service for purposes of minimum funding.
However, based on the current PBGC interest assumptions, the assets are insufficient to cover the lump-sum cash value of each participant’s benefit. The amount of deficiency will vary as the Pension Benefit Guaranty Corporation assumptions change. As an educated guess, the deficiency, based on current PBGC assumptions is in the range of $200,000-$350,000....
We are currently in the process of obtaining bids for those benefits which have been promised in the form of an annuity. It is anticipated that the plan can be successfully terminated in 1989.
The purpose of the letter was to confirm previous discussions between Howard Johnson and Sabey’s personal counsel. Under the Restatement, this representation, and those that preceded it, could be found to create (and breach) a duty to Sabey personally.
As to the second exception to the shareholder standing rule, Sabey alleges individual injury. When Sabey was identified as member of the controlled group and paid $1.95 million to the PBGC in exchange for release of his and Sabey Corporation’s liability, he suffered an injury separate and distinct from that of other shareholders. Thus, both exceptions to the shareholder standing rule are applicable, and the rule does not preclude Sabey’s standing.
In a related argument, Howard Johnson also asserts that Sabey lacks standing because he was merely a statutory guarantor of FNAC’s pension obligations. Howard Johnson relies on several cases involving shareholders’ personal guaranties of corporate debt. But the cases are unhelpful because each involves shareholders’ guaranties grounded in contract, not an obligation grounded in statute.
We hold that despite Sabey’s status as sole shareholder in F&N Holding, he has standing to seek reimbursement from Howard Johnson because he alleges a personal relationship that may create a duty in Howard Johnson under the Restatement, misrepresentations made to him personally that may constitute a breach of that duty, and a separate and distinct injury, i.e., personal liability under ERISA.
Remoteness
Howard Johnson argues the remoteness doctrine bars Sabey’s action because his claims are four times removed: Howard Johnson allegedly negligently advised FNAC regarding the pension plan, FNAC was damaged by the negligence, F&N Holding was damaged when it purchased FNAC because FNAC could not satisfy its pension obligations, and Sabey was damaged because, as a controlling shareholder in F&N Holding, he was required to cover FNAC’s liability.
Only a limited class of plaintiffs may bring negligent misrepresentation claims based on section 552 of the Re
Common Law Indemnity after the Tort Reform Act
Indemnity sounds either in contract or in tort, and it is a distinct and separate equitable cause of action.
Howard Johnson argues that the 1981 Product Liability and Tort Reform Act
The Tort Reform Act provides, “The common law right of indemnity between active and passive tort feasors is abolished: Provided, That the common law right of
In abolishing indemnity rights between joint tortfeasors, the Legislature intended such rights would be replaced with contribution rights. As the court observed in Johnson v. Continental West, Inc.,
[A] review of the act itself as well as the act’s historical background and subsequent legislative action discloses that the intended purpose was to simply substitute the right of contribution for the right of common law indemnity. Consequently, it is not logical to assume it was the Legislature’s*590 intent that one would be denied both the right of contribution and a common law right of indemnity.[41 ]
In Glover v. Tacoma General Hospital, the Washington Supreme Court also noted that when RCW 4.22.040 and RCW 4.22.060 (regarding the effect of settlement agreements) are read together, they “form a comprehensive statutory scheme designed to allocate financial responsibility between defendants.”
The Glover court’s observations relate equally to the broader statutory scheme, which also indicates that substitution of indemnity rights with contribution rights is limited to joint tortfeasors. Until 1981, Washington followed the common law rule against contribution between joint tortfeasors, which was premised on notions of “indivisibility of harm” and the conceptual difficulties of allocating fault between joint tortfeasors.
The Tort Reform Act thus abolishes common law indem
Rules of statutory construction also confirm the continuing existence of tort-based indemnity claims between non-joint tortfeasors. “[T']he Legislature is presumed to know the existing state of the case law in those areas in which it is legislating and a statute will not be construed in derogation of the common law unless the Legislature has clearly expressed its intention to vary it.”
At least one post-Tort Reform Act case demonstrates that tort-based indemnity actions between non-joint tortfeasors survived passage of the Tort Reform Act. In Radach v. Gunderson,
Were this purely an action at law, there is no doubt at all that the Gundersons would be entitled to indemnity from the City*592 for any relief granted against them. Only a duty running from the City to the Gundersons would be necessary to support this result. We see no reason why the same principles should not apply in equity.[51 ]
In a footnote, the court added, “In view of the Gundersons’ ‘innocence’ as found by the trial court, this result would not be changed by RCW 4.22.040 (right of contribution among tortfeasors; common law indemnity abolished).”
The authorities upon which Howard Johnson relies are not to the contrary, but rather either confirm the Legislature’s abolition of common law indemnity rights between joint tortfeasors, or involve contribution rights.
Where a legal duty exists between non-joint tortfeasors, an indemnity right exists at common law. This right is not affected by the Tort Reform Act. Sabers indemnity claim is not barred by the statute.
Statute of Limitations
Sabey’s claims for negligence and negligent misrepresentation are subject to three-year statutes of limitations.
An indemnity action accrues, on the other hand, when the party seeking indemnity pays or “is legally adjudged obligated to pay” damages to a third party.
The question here is when Sabey was damaged. Howard Johnson argues that if Sabey was personally harmed, the harm occurred when his company, F&N Holding, acquired FNAC in July 1989.
The underfunding of the plan was known in September 1989. But not until June 1995 did the PBGC notify Sabey that, based on a likely plan termination date between September 7, 1989 and July 1, 1993, Sabey and his affiliated companies were part of the controlled group, and potentially liable for $1.75 to $3.72 million (plus interest). Not until February 1997 did the PBGC officially notify Sabey that it would seek to recover $3.75 million from him personally and from Sabey Corporation. In March 1998,
Howard Johnson has not established that Sabey’s negligence claims accrued earlier than March 1998 when he agreed to pay the PBGC. As to the indemnification action, neither party specifies which statute of limitation applies, but Sabey’s indemnification action accrued when he paid the PBGC in August 1998, and so would be timely under any statute.
Howard Johnson relies on Green v. A.P.C.
Finally, Howard Johnson argues Sabey conceded his injury occurred in 1989 when he stated in his complaint in this action: “Had Mr. Sabey known of the underfunding and of the potential termination problems resulting therefrom, he would have notified the Sellers and obtained indemnity from, or compensation for, this potential liability prior to
CONCLUSION
Summary judgment is reversed. We remand for further proceedings consistent with this opinion.
Baker and Kennedy, JJ., concur.
This matter was decided on summary judgment. We recite the facts in the light most favorable to Sabey.
29 U.S.C. §§ 1001-1461.
Sabey was president and sole shareholder of Sabey Corporation.
The significance of the PBGC designation of a “controlled group” is discussed infra.
The court explained, “It is apparent that, up to now, Sabey [Corp.] could not have known and, indeed, still does not know whether it might be held responsible for problems with the Frederick & Nelson pension plan. Until the Pension Benefit Guaranty Corporation makes a final determination on this matter, Sabey will not be able to decide whether it should pursue a lawsuit for indemnity against defendant Howard Johnson. An order dismissing this action with prejudice would deprive Sabey of its day in court even though Sabey has never had an opportunity to present its case on the merits.”
The order granting summary judgment in favor of Howard Johnson does not provide the basis for the court’s decision. Sabey’s motion for reconsideration suggests, however, that the court granted the motion on both standing and statute of limitation grounds.
Schaaf v. Highfield, 127 Wn.2d 17, 21, 896 P.2d 665 (1995).
Id., 127 Wn.2d at 21.
See CR 56(c).
Teamsters Pension Trust Fund v. Cristinzio, 994 F. Supp. 617, 621 (E.D. Pa. 1998).
Id. at 621.
Id.
Pension Benefit Guar. Corp. v. Ouimet Corp., 630 F.2d 4, 9 (1st Cir. 1980).
Pension Benefit Guar. Corp. v. East Dayton Tool & Die Co., 14 F.3d 1122, 1126 (6th Cir. 1994) (citing 29 U.S.C. § 1362(a) (Supp. 1993)).
29 U.S.C. § 1348.
Id. § 1301(b)(1).
See 29 C.F.R. § 4001.3.
East Dayton Tool, 14 F.3d at 1127 (citing 26 C.F.R. § 11.414(c)-2(b)(1)).
Id. (citing 26 C.F.R. § 11.414(c)-2(b)(2)(a)).
John J. Kalas, Termination Liability for Single Employer Pension Plans: What Lenders Need to Know, 112 Banking L.J. 24, 29 (1995) (citing 26 C.F.R. §§ 11.414(c)-2(c)(1), 11.414(d)).
29 U.S.C. § 1362(a).
The record contains no documents from the PBGC other than the settlement agreement between it, Sabey, and Sabey Corporation. The record does not establish what, if any, interest Sabey Corporation may have held in F&N Holding, and the record does not reveal the precise basis for the PBGC’s determination of liability.
Personal liability under ERISA is a complex subject. See, e.g., Diana M. Muir & Cindy A. Schipani, The Intersection of State Corporation Law and Employee Compensation Programs: Is It Curtains for Veil Piercing?, 1996 U. Ill. L. Rev. 1059, 1101 (“To an even greater degree than other federal statutes such as CERCLA, ERISA’s myriad regulatory requirements provide a number of potential settings where a variety of parties may attempt to reach through the curtain of protection typically accorded to corporations.”); Wilson McLeod, Shareholders’ Liability and Workers’ Rights: Piercing the Corporate Veil Under Federal Labor Law, 9 Hofstra Lab. L.J. 115, 167 (1991).
Gustafson v. Gustafson, 47 Wn. App. 272, 276, 734 P.2d 949 (1987).
Id. at 276.
12B William Meade Fletcher, et al., Fletcher Cyclopedia of the Law of Private Corporations § 5910 (perm. ed. rev. vol. 1993).
Id. § 5911.
Hunter v. Knight, Vale & Gregory, 18 Wn. App. 640, 646, 571 P.2d 212 (1977) (emphasis omitted).
Although Washington courts have not directly adopted section 552, it has been cited with approval numerous times. See Schaaf, 127 Wn.2d at 22 (discussing Washington case law that relies on section 552).
See Sparling v. Hoffman Constr. Co., 864 F.2d 635 (9th Cir. 1988); Adair v.
See Associated Gen. Contractors of Cal., Inc v. California State Council of Carpenters, 459 U.S. 519, 103 S. Ct. 897, 74 L. Ed. 2d 723 (1983); see also Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 112 S. Ct. 1311, 117 L. Ed. 2d 532 (1992); Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., 185 F.3d 957 (9th Cir. 1999), cert. denied, 120 S. Ct. 789 (2000); Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3d Cir. 1999), cert. denied, 120 S. Ct. 844 (2000); Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., 17 F. Supp. 2d 1170 (D. Or. 1998), cert. denied, 120 S. Ct. 789 (2000); Forcum-James Co. v. Duke Transp. Co., 231 La. 953, 93 So. 2d 228 (1957); Rockaway Boulevard Wrecking & Lumber Co. v. Raylite Elec. Corp., 26 A.D.2d 9, 269 N.Y.S.2d 926 (1966).
Schaaf, 127 Wn.2d at 26.
Id. at 25 (quoting Restatement (Second) of Torts § 552(2)(a)).
Central Wash. Refrigeration v. Barbee, 133 Wn.2d 509, 513, 946 P.2d 760 (1997).
Id., 133 Wn.2d at 513 (quoting Stevens v. Security Pac. Mortgage Corp., 53 Wn. App. 507, 517, 768 P.2d 1007 (1989)).
Laws of 1981, eh. 27 (codified in chapters 7.72 and 4.22 RCW).
RCW 4.22.040(3). RCW 4.22.920 provides:
(1) Chapter 27, Laws of 1981 apply to all claims arising on or after July 26, 1981.
(2) Notwithstanding subsection (1) of this section, RCW 4.22.040, 4.22.050, and 4.22.060 shall also apply to all actions in which trial on the underlying action has not taken place prior to July 26, 1981, except that there is no right of contribution in favor of or against any party who has, prior to July 26, 1981, entered into a release, covenant not to sue, covenant not to enforce judgment, or similar agreement with the claimant.
RCW 4.22.040(1).
Johnson v. Continental W., Inc., 99 Wn.2d 555, 560, 663 P.2d 482 (1983).
Johnson, 99 Wn.2d at 561-62 (citing Final Legislative Report, at 185 (1982)).
Id. at 560.
Id.
Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 724, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988).
See Kottler v. State, 136 Wn.2d 437, 441, 963 P.2d 834 (1998). Where the parties are not joint tortfeasors, difficulties of allocating fault are, of course, not present.
Id. at 441 (citing Laws of 1981, ch. 27, §§ 12-14 (codified at RCW 4.22.040-.060)).
Id. at 442.
Id. at 443 (citing Laws of 1986, ch. 305).
Price v. Kitsap Transit, 125 Wn.2d 456, 463, 886 P.2d 556 (1994).
Radach v. Gunderson, 39 Wn. App. 392, 695 P.2d 128 (1985).
Radach, 39 Wn. App. at 397.
Id. at 401.
Id. at 398 (citations omitted).
Id. at 398 n.5.
See Kottler v. State, 136 Wn.2d 437, 449, 963 P.2d 834 (1998) (settling party has no contribution right against another alleged tortfeasor because there is no joint and several liability); All-Pure Chem. Co. v. White, 127 Wn.2d 1, 16, 896 P.2d 697 (1995) (federal Insecticide, Fungicide, and Rodenticide Act preempted state tort claim, resulting in no joint liability); 16 David K Dewolf & Keller W. Allen, Washington Practice: Tort Law and Practice § 6.70, at 173 (1993) (“Prior to the Tort Reform Act, before contribution was available as a general remedy, indemnity was permitted between active and passive tortfeasors. This right was abolished as part of the Tort Reform Act of 1981.”); DeWolf, supra, § 6.62, at 168-69 (“In order to have a right to obtain contribution from an entity, the party seeking contribution must be held jointly and severally liable with the party against whom contribution is sought.”).
RCW 4.16.080(2); RCW 4.16.080(4); Davidheiser v. Pierce County, 92 Wn. App. 146, 156 n.5, 960 P.2d 998 (1998), review denied, 137 Wn.2d 1016 (1999).
Colwell v. Eising, 118 Wn.2d 861, 868, 827 P.2d 1005 (1992).
See, e.g., Gevaart v. Metco Constr., Inc., 111 Wn.2d 499, 501, 760 P.2d 348 (1988).
First Md. Leasecorp v. Rothstein, 72 Wn. App. 278, 282, 864 P.2d 17 (1993).
Central Wash. Refrigeration v. Barbee, 133 Wn.2d 509, 517, 946 P.2d 760 (1997).
Sabey argues that the federal court’s 1995 ruling, in which the claims were dismissed without prejudice, estops Howard Johnson from claiming Sabey’s claims are time-barred. Sabey was not party to that litigation, however, and his injury is different from injuries alleged by PNAC, P&N Holding, and Sabey Corporation.
Green v. A.P.C., 136 Wn.2d 87, 960 P.2d 912 (1998).
Hamilton v. Arriola Bros. Custom Farming, 85 Wn. App. 207, 931 P.2d 925 (1997).
Green, 136 Wn.2d at 97.
Id. at 98.
Hamilton, 85 Wn. App. at 212.
Howard Johnson alleges Sabey made the same allegation in 1990 when FNAC, F&N Holding, and Sabey sued the sellers of FNAC in superior court, alleging various causes of action, including breach of contract, misrepresentation of assets, and securities fraud. One allegation was that “[t]he cost of terminating the Frederick & Nelson Pension Plan was not properly accrued on the financial statements upon which the plaintiffs relied.” According to briefs in this appeal, the suit was settled in 1992. The record contains nothing further regarding this litigation.