ORDER DENYING DEPENDANTS’ MOTIONS TO DISMISS
I. INTRODUCTION
Plaintiff Hilda L. Solis, the Secretary of the United States Department of Labor (“Secretary”), filed an action under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001 et seq., on April 25, 2012, against the fiduciaries of an Employee Stock Ownership Plan (“an ESOP”) for allegedly causing or permitting an ESOP to purchase stock for more than the stock’s fair market value. See Compl. (Docket No. 1). Defendants Matthew Fidiam (“Fidiam”) and J. Robert Gallueci (“Gallucci”) filed a motion to dismiss the Secretary’s complaint in its entirety on May 29, 2012. See Mathieu Fidiam and J. Robert Gallucci’s Motion to Dismiss (Docket No. 18) (“Fidiam & Gallucci’s Motion”). Defendant The Parrot Cellular Employee Stock Ownership Plan (“Parrot Cellular ESOP” or “the ESOP”) filed its own motion to dismiss on June 26, 2012. See The Parrot Cellular Employee Stock Ownership Plan’s Motion to Dismiss (Docket No. 32) (“ESOP Motion”). Defendant Dennis Webb (‘Webb”) joined in part Fidiam and Gallueci’s motion on June 26, 2012, see Defendant Dennis Webb’s Joinder (Docket No. 33), and filed his own motion to dismiss on the same day, see Motion to Dismiss Complaint on Behalf of Dennis Webb (Docket No. 35) (“Webb’s Motion”).
Defendant Consulting Fiduciaries, Inc. (“CFI”), the last of the named Defendants, has not filed its own motion to dismiss, nor joined to any of the three motions now pending, but instead filed an Answer to the Complaint on July 10, 2012. See Answer (Docket No. 43). Having considered these three motions, all papers that are related thereto, and the argument of counsel, the Court hereby DENIES all three motions.
II. FACTUAL & PROCEDURAL BACKGROUND
The Secretary alleges the following facts in her complaint. Throughout the time relevant to this action, Webb served as an officer and director of Entrepreneurial Ventures, Inc. (“EVI”), a company which conducted and/or conducts business as “Parrot Cellular” and sponsored the subject ESOP.
At some point “around 1999 or 2000,” EVI began taking steps to create an ESOP to purchase EVI. Id. ¶ 11. The
In June of 2002, a third-party administrаtion firm contracted with EVI to design and implement provisions of the ESOP to facilitate the purchase of EVI’s stock. Id. ¶¶ 11-12. On June 30, 2002, EVI’s Board of Directors adopted the “2002 Plan Document” prepared by the third-party administration firm, and appointed Fidiam and Gallucci as the ESOP’s trustees and sole members of the “Plan Committee.” Id. ¶ 13. The 2002 Plan Document “outlines the duties and responsibilities of EVI’s Board of Directors regarding the ESOP,” as well as the “duties and responsibilities of the Plan Committee,” the latter of which is designated as a “named fiduciary” of the ESOP under ERISA. Id. ¶¶ 14-15. The 2002 Plan Document also permits the Plan Committee to “designate other persons who are not named fiduciaries to carry out its fiduciary duties” by themselves becoming “a fiduciary under the Plan.” Id. ¶ 15. The Secretary alleges that Webb, Fidiam, and Gallucci were all fiduciaries of the ESOP “by virtue of their authority under the [2002] Plan Document,” which granted them power to exercise discretionary authority, control, or responsibility over the management and administration of the Plan and the Plan’s assets. See Compl. ¶¶ 14-18. Further, the Secretary alleges that Fidiam and Gallucci were “named fiduciaries” under ERISA by virtue of their membership on the Plan Committee. Id. ¶ 19.
On September 27, 2002, EVI and the ESOP’s designated trustees (Fidiam and Gallucci) signed an engagement letter with CFI, appointing CFI as the Independent Fiduciary and Investment Manager for thе Plan “with respect to the stock purchase transactions at issue in this case.” Id. ¶ 22. Using a third-party appraisal service retained by Webb,
The ESOP acquired 90.03% of EVI’s shares on November 21, 2002, at $76.01 per share for a total cost of $28,313,718. Id. ¶ 36. To finance the transaction, the
The Secretary alleges that the ESOP’s purchase of EVI’s stock was completed at an amount “far higher than actual fair market value” and as a result “the ESOP paid more than adequate consideration for its EVI stock.” Id. ¶42. This allegation is premised on the fact that CFI’s appraisals of EVI’s market value contained a number of “flaws and inaccuracies.” Id.; see also Compl. ¶¶ 4(MH (listing appraisal deficiencies). Chief among these deficiencies are the fact that the “appraisal report did not consider a prior valuation of EVI” from 2001 that set its market value at $7,300,000. Id. ¶ 41. Nor did the appraisal report account for a $12 million deferred compensation agreement and a $4 million deferred compensation payment, both payable to Webb and executed by EVI between June and November 2002, prior to the ESOP’s purchase of EVI stock, that had the effect of reducing “the value of EVI and hence ... the value of the ESOP’s EVI stock.” Id. ¶¶ 39-41, 45-46, 55-56.
The Secretary thereafter filed her action against the Defendants on April 25, 2012, alleging that their acts in connection with the ESOP’s purchase of EVI’s stock violated multiple provisions of ERISA. See Compl. ¶¶ 63-67. As against Defendants Fidiam and Gallucci, she charges that “as fiduciaries, they had a duty to act prudently and solely in the interests of the ESOP and its participants and beneficiaries.” Id. ¶ 58. In breach оf this duty, these two Defendants “failed to oppose the $4 million payment to Defendant Webb and the $12 million agreement with Defendant Webb,” and failed “to take any action, including ... a corporate shareholder action, to stop the $4 million payment ... or to recoup that payment, and they failed to take any steps to invalidate the $12 million” deferred compensation agreement with Webb. Id. ¶ 58. As against Defendant Webb, she charges that “he had a duty to act prudently and solely in the interests of the ESOP and its participants and beneficiaries, but he chose instead to act in his own self interest by agreeing to a $4 million payment and a $12 million deferred compensation agreement from EVI that harmed the ESOP by reducing the value of the ESOP’s EVI stock.” Id. ¶ 59. As against Defendant CFI, she charges that it relied on an unsound appraisal and “failed to adequately understand the methodologies used, the factual bases relied upon, and the conclusions reached in the appraisal, and therefore improperly directed the ESOP trustees to purchase EVI stock from Defendant Webb at a price in excess of fair market value.” Id. ¶ 60. Finally, regarding Webb, Fidiam, and Gallucci, she charges that they collectively “failed to prudently monitor, oversee or remove the independent fiduciary, CFI, which they had appointed or had responsibility to oversee pursuant to the [2002] Plan Document;” regarding Fidiam and Gallucci in particular, they improperly acquiesced “in accepting ... improper direction from [CFI] to purchase EVI stock on behalf of the ESOP for more than fair market value.” Id. ¶ 61. The Defendants thereafter filed the three Motions to Dismiss that are the subject of this Order.
III. DISCUSSION
A. Statutory Background
“ERISA is a comprehensive statute designed to promote the interests of employ
Section 1107(d)(6) of ERISA
An employer desiring to set up an ESOP will execute a written document to define the terms of the plan and the rights of beneficiaries under it. 29 U.S.C. § 1102(a) (1976). The plan document must provide for one or more named fiduciaries “to control and manage the operation and administration of the plan.” Id., § 1102(a)(1). A trust will be established to hold the assets of the ESOP. Id., § 1103(a). The employer may then make tax-deductible contributions to the plan in the form of its own stock or cash. If cash is contributed, the ESOP then purchases stock in the sponsoring company, either from the company itself or from existing shareholders. Unlike other ERISA-covered plans, an ESOP may also borrow in order to invest in the employer’s stock. In that event, the employer’s cash contributions to the ESOP would be used to retire the debt.
Donovan,
B. Motion to Dismiss — Legal Standard
Under Federal Rule of Civil Procedure 12(b)(6), a party may move to dismiss based on the failure to state a claim upon which relief may be granted. See Fed. R.Civ.P. 12(b)(6). A motion to dismiss based on Rule 12(b)(6) challenges the legal sufficiency of the claims alleged. See Parks Sch. of Bus. v. Symington,
At issue in a 12(b)(6) analysis is “not whether a plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims” advanced in his or her complaint. Scheuer v. Rhodes,
In ruling on a motion to dismiss, a court may look to documents whose contents are speсifically alleged as part of a complaint, even though the plaintiff did not append them to the complaint. “Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion.” Hal Roach Studios, Inc. v. Richard Feiner & Co.,
C. Fidiam & Gallucci’s Motion to Dismiss-Principal Arguments
Defendants Fidiam and Gallucci’s motion to dismiss asks this Court to dismiss the Secretary’s complaint as to these two Defendants in its entirety under Rule 12(b)(6). See Fidiam & Gallucci’s Motion at 1. Defendant Webb has joined all arguments made in Fidiam and Gallueci’s motion “except for the argument that Defendants Fidiam and Gallucei are not liable for following the investment directions of CFI because they were directed trustees, which does not apply to Webb.” See Webb’s Joinder at 1. The motion advances two principal arguments: (1) that they are not subject to liability under ERISA because they were not fiduciaries under ERISA until after the Plan was funded, and the activities complained of by the Secretary took place prior to the Plan’s funding, and (2) that they were “directed trustees” under ERISA who had no inde
1. Fiduciary Duties Before Funding of ESOP
Fidiam and Gallucci’s motion argues in the main that they are cannot be held liable as fiduciaries under ERISA for transactions that took place before Nov 21, 2002. The two “business transactions” referred to by Fidiam and Gallucci are the $ 4 million deferred compensation payment to Webb that transpired on June 25, 2002, and the $ 12 million deferred compensation agreement executed by EVT and Webb on October 15, 2002, and restated on November 21, 2002. Fidiam and Gallucci argue they cannot be held liable because “the ESOP had not yet been funded, and as such, the ESOP did not exist at the time of these two business transactions,” and therefore “neither Mr. Fidiam nor Mr. Gallucci could act as an ERISA fiduciary to the ESOP nоr could they take any action to harm the ESOP’s nonexistent assets.” Fidiam & Gallucci’s Motion at 16-17. They cite language in ERISA’s definition of an ESOP, 29 U.S.C. § 1107(d)(6), which states that an ESOP is in pertinent part “a stock bonus plan which is qualified, or a stock bonus plan and money purchase plan both of which are qualified, under section 401 of Title 26” of the U.S.Code. Fidiam & Gallucci’s Motion at 12 (emphasis added). That citation refers to a provision in the Internal Revenue Code which sets out requirements for qualified pension, profit-sharing, and stock bonus plans, and states that “[a] trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section ...” 26 U.S.C. §, 401(a). Using the Internal Revenue Code’s reference to the “trust,” these Defendants refer to the common law of trusts for the proposition that “a trust cannot be created unless there is trust property.” See Fidiam & Gallucci’s Motion at 14 (citing the Restatement (Second) of Trusts). Since “no Parrot Cellular ESOP existed until the Stock Bonus Plan part of the Retirement Plan was funded by the Employer’s contribution of EVI stock on November 21, 2002,” Fidiam & Gallucci’s Motion at 13, Defendants argue “the ESOP was not in existence at the time of either payment to Mr. Webb,” and therefore “there can be no fiduciary breach.” Id. аt 16. Defendant’s syllogism misconstrues the nature of fiduciary responsibility under ERISA.
It cannot seriously be questioned that the Parrot Cellular Employee Stock Ownership Plan is an “employee pension benefit plan” covered by the terms of ERISA, of which ESOPs are a subset. ERISA defines an “employee pension benefit plan” as:
any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.
29 U.S.C. § 1002(2)(A). The terms of the Parrot Cellular Employee Stock Ownership Plan clearly fall within this definition. See Howard v. Shay,
Defendants’ arguments that the Internal Revenue Code or the common law of trusts determine the existence of an ERISA plan, and along with it, the emergence of fiduciary duties, is unavailing. Faced with a similar argument, a district court in Wisconsin rejected the notion that qualified tax status under the Internal Revenue Code marked the existence or non-existence of an ERISA covered ESOP. See Freund v. Marshall and Ilsley Bank,
[T]hat the law of trusts often will inform, but will not necessarily determine the outcome of, an effort to interpret ERISA’s fiduciary duties. In some instances, trust law will offer only a starting point, after which courts must go on to ask whether, or to what extent, the language of the statute, its structure, or its purposes require departing from common-law trust requirements.
Varity Corp. v. Howe,
Indeed, as the Secretary’s citation to Donovan v. Dillingham,
Defendants’ position that no fiduciary duty to the ESOP obtains even when an ESOP has been legally and formally established and fiduciaries named is similarly meritless. For instance, if an ESOP were formally established and a named fiduciary obligated the ESOP by contract to a self-dealing transaction in violation of § 1106(b)(3), a breach of fiduciary duty would obtain even if the ESOP had not yet been funded. When pressed with this hypothetical at oral argument, Defendants had no response.
In any event, because the Court holds that the breach of fiduciary duty, if any, did not occur here until the ESOP’s purchase of the EVI stock on November 21, 2002, the dispute over whether Defendants had fiduciary duty to the ESOP prior that date is moot. EVI’s deferred compensation commitment made to Webb caused no harm to the ESOP and breached no statutory duty until the ESOP acquired EVI for more than fair market value. As described below, it is only at that moment that a violation of § 1108(e) could have occurred. Had EVI stock been properly appraised and adequate consideration paid by the ESOP on November 21, 2002 (reflecting its true market value), there would be no harm or breach.
The Court thus focuses on the scope of fiduciary duties relative to thе ESOP’s acquisition of EVI stock in November, 2002.
2. “Duty to Acquire Stock for Adequate Consideration”
Ninth Circuit precedent construes ERISA fiduciary status “liberally, consistent with ERISA’s policies and objectives.” Johnson,
“[T]he statute includes a comprehensive scheme of both general and specific provisions regulating the conduct of fiduciaries,” with provisions relating to the general responsibilities of all fiduciaries of “employee pension benefit plans” appearing in § 1104, and additional specific responsibilities concerning the fiduciaries of certain plans including ESOPs appearing in § 1106-1108. Donovan,
“As a supplement to the general duties imposed on fiduciaries by [§ 1104], ERISA also incorporates a detailed list of specifically prohibited transactions,” and these “prohibited transaction rules are an important part of Congress’s effort to tailor traditional judge-made trust law to fit the activities of fiduciaries functioning in the special context of employee benefit plans.” Donovan,
As noted above, the crux of the Secretary’s complaint is that the fiduciaries to the ESOP, including Fidiam and Gallucci, purchased EVI stock from Webb at a price in excess of fair market value in violation of ERISA’s statutory mandate that the acquisition of such stock be for the “adequate consideration.” Compl. ¶ 60. See Reich v. Hall Holding Co.,
In the case at bar, the complaint alleges with sufficient specificity why the price paid by the ESOP for EVI stock exceeded fair market value in violation of § 1108(e). The appraisal used to value EVI’s stock at $76.01 per share on November 21, 2002, allegedly contained “significant flaws and inaccuracies that would have been uncovered during a thorough and objective review and analysis.” Compl. ¶ 40. Among the “flaws and inaccuracies” alleged were the failure to consider either a prior valuation of EVI from 2001 that set its market value at $7,300,000, or Webb’s existing $12 million deferred compensation agreement and pri- or $4 million deferred compensation payment, both of which had the effect of reducing “the value of EVI and hence ... the value of the ESOP’s EVI stock.” See Id. ¶¶ 39-41, 45-46, 55-56. Thus, when the ESOP acquired 90.03% of EVI’s shares on November 21 for a total cost of $28,313,718, it allegedly paid an amount “far higher than actual fair market value,” and therefore “paid more than adequate consideration for its EVI stock” in violation of § 1108(e). Id. ¶¶ 36, 42. Taking these allegations as true, which a court must on a motion to dismiss, the Secretary has adequately stated a claim that Fidiam and Gallucci breached their fiduciary duties under ERISA.
3. Limitations on Fiduciary Liability
Fidiam and Gallucci argue that they cannot be held liable for any breach of fiduciary duties connected with the purchasing of EVI stock for the ESOP because, consistent with the ESOP’s Plan Document and ERISA, they had allocated or delegated their fiduciary responsibilities to another party. See Fidiam and Gallucci Motion at 20-21. They assert that, pursuant to § 1103(a) and Section 18 of the 2002 Plan Document, they had appointed an investment manager and/or were subject to the direction of another fiduciary with regard to the stock purchase, and by doing so are shielded from any liability flowing from the acts or omissions of these third party fiduciaries, as provided in § 1105 and Section 18 of the Plan Document. See id. at 20-22. While, as they assert, “the responsibilities of the trustee are correspondingly lessened” with the delegation of fiduciary duties to a third party, they are not extinguished. Indeed, ERISA cases on this subject make clear that delegations of this sort not only preserve certain fiduciary responsibilities with the original party, but they also give rise to a new duty — a duty to monitor the performance of third party delegatees. As developed infra, Defendants’ delegation arguments misstate their potential for liability under ERISA,
a. Identifying ERISA Fiduciaries
An ERISA fiduciary is “anyone who exercises discretionary authority or control respecting the management or administration of an employee benefit plan.” Arizona State Carpenters Pension Trust Fund v. Citibank (Arizona),
Generally, ERISA holds fiduciaries to the “prudent man” standard of care. Section 1104(a)(1) defines this standard in relevant part as follows:
[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan;
(B) 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;
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter.
In this matter, the Secretary has alleged that Dennis Webb, Matthew Fidiam, and J. Robert Gallueci were all plan fiduciaries by virtue of their service on EVI’s Board of Directors because, under the 2002 Plan Document, each of them exercised some modicum of “discretionary authority or discretionary control respecting management of such plan or exercise[d] any authority or control respecting management or disposition of its assets,” and had “discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A)(i) and (in); see Compl. ¶¶ 14-18. Specifically, as members of the Board of Directors, these three Defendants were:
responsible for, among other things, making decisions with respect to the selection, retention, or removal of the Trustee and the Plan Committee and periodically reviewing the performance of the Trustee, the performance of the members of the Plan Committee, and the performance of persons to whom duties have been allocated or delegated and of any advisers appointed by the Board of Directors, the Plan Committee, or their delegees.
Compl. ¶ 14.
Further, the Secretary alleges that as the sole members of the ESOP’s Plan Committee, Fidiam and Gallueci were also “named fiduciaries” under ERISA and the 2002 Plan Document, as well as designated trustees of the ESOP. Compl. ¶ 19. In this capacity, they were responsible for:
reviewing periodically any allocation or delegation of duties and responsibilities and any appointment of advisers, investing and controlling the Plan assets, directing the Trustee with respect to voting shares of Company Stock, interpreting and construing the terms of the Plan and Trust Agreement, and selecting, retaining and monitoring the Independent Appraiser. The Plan Committee must also periodically review the investment of Plan assets and the performance of the Trustees and any investment managers and must advise the Board of Directors of any matters which might be relevant to the decision as to whether the services of the Trustee should be retained.
Compl. ¶ 15.
b. Directed Trustee
Fidiam and Gallueci assert that they cannot be liable for any breach of fiduciary duty connected to the ESOP’s purchase of
Section 1103(a)(1) permits an ERISA plan to subject its trustees to the “proper directions” of a named fiduciary so long as those directions “are made in accordance with the terms of the plan” and “are not contrary” to ERISA.
Normally, “ERISA relieves a trustee from fiduciary obligations regarding the management and control of a plan’s assets when the trustee is ‘directed’ by the plan’s designated fiduciaries.” Wright v. Oregon Metallurgical Corp.,
ERISA’s co-fiduciary liability section makes clear that, although trustees may be subject to the direction of a namеd fiduciary pursuant to § 1103(a)(1), they are nonetheless liable for their directed acts when such acts are not in accordance with a plan’s governing documents or are contrary to the terms of ERISA. Section 1105(a) and (a)(1) provide that:
In addition to any liability which he may have under any other provisions of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:
(1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;
29 U.S.C. § 1105(a).
Accordingly, in Koch v. Dwyer,
The Secretary has clearly alleged that Fidiam and Gallucci followed the direction of CFI to purchase EVI’s stock even though the “appraisal of the stock was flawed and inaccurate,” and the direction would cause “the ESOP to pay more that fair market value for the stock,” in violation of the Plan Document and § 1108(e) of the statute. Compl. ¶ 43. She alleges that these two Defendants “knew about the $12 million agreement with Defendant Webb that reduced the value of EVI’s stock,” “knew ... of the problems with the November 21, 2002 appraisal,” and yet “they allowed the stock purchase to occur.” Id. ¶ 44. The Secretary’s complaint, therefore, presents a valid cause of action against Plan Trustees Fidiam and Gallucci even though they followed CFI’s direction to purchase EVI’s stock on November 21, 2002, because they knew that carrying out the direction would cause the ESOP to pay more than “adequate consideration” for the stock in violаtion of ERISA and the 2002 Plan Document.
c. Investment Manager
Fidiam and Gallucci also argue that their appointment of CFI as an investment manager for the Plan also absolves them of fiduciary liability connected to the funding of the ESOP. They contend that § 1102(c)(3)
If an investment manager or managers have been appointed under section 1102(c)(3) of this title, then, notwithstanding subsections (a)(2) and (3) and subsection (b) of this section, no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager.
29 U.S.C. § 1105(d)(1).
While the appointment of an investment manager under § 1102(c)(3) does shield plan trustees from fiduciary liability for certain acts, it does not totally extinguish their fiduciary duties. As noted above, § 1105(a)(1) imposes co-fiduciary liability for breaches committed by other plan fiduciaries when one “participates knowingly in, or knowingly undertakes to conceal, an
(2) if, by his failure to comply with section 1104(a)(1) of this title in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
29 U.S.C. § 1105(a)(2) and (a)(3).
By its terms, § 1105(d)(1) excludes trustee liability “for the acts and omissions” of an investment manager for conduct covered by “subsections (a)(2) and (3) and subsection (b) of this section.” However, Congress omitted subsection (a)(1) from § 1105(d)(l)’s exclusion. “[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States,
Thus, under § 1105(d)(1), even though a trustee appoints an investment manager, that trustee may still be liable for the liability of another plan fiduciary “if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach,” 29 U.S.C. § 1105(a)(1), “[i]n addition to any liability which he may have under any other provisions of this part [§§ 1101-1114],” 29 U.S.C. § 1105(a).
The Secretary’s complaint alleges that Fidiam and Gallucci followed the direction of CFI to purchase EVI’s stock even though they knew that to do so would violate the 2002 Plan Document and § 1108(e) of the statute. See Compl. ¶ 43-44. As such, they participated knowingly in an act that breached the fiduciary duty to acquire company stock for “adequate consideration.” The complaint thus presents a valid cause of action against Plan Trustees Fidiam and Gallucci insofar as she alleges that they knowingly allowed the ESOP to pay more than fair market value for EVI’s stock on November 21, 2002.
d. Monitoring Duties
Finally, Fidiam and Gallucci, joined on this argument by Webb, assert that having appointed CFI as an investment manager under § 1102(c)(3), and having appointed Fidiam and Gallucci as the sole trustees of the Plan Committee, are all three relieved of any duty to monitor CFI’s performance as members of EVI’s Board of Directors, and, for Webb, of any duty to monitor the Plan Committee’s performance. However, as with appointing an investment manager or serving as a directed trustee, the appointment of third party fiduciaries tasked with carrying out elements of an ERISA plan does not wholly extinguish a fiduciary’s duty to the plan or its beneficiaries.
The Ninth Circuit has “recognized that where members of an employer’s board of directors have responsibility for the appointment and removal of ERISA trustees, those directors are themselves subject to
Implicit within the duty to select and retain fiduciaries is a duty to monitor their performance. See In re Calpine Corp., No. 03-1685,
Defendants, in their motions, try to escape potential liability for failing to monitor CFI’s performance by arguing that Department of Labor Field Assistance Bulletin 2004-03 absolves them of the responsibility to independently evaluate the findings of other plan fiduciaries. See e.g. Fidiam and Gallucci’s Reply at 12 (“The directed trustee does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets ... ”) (quoting Field Assistance Bulletin 2004-03). In doing so, they overlook the fact that the Field Assistance Bulletin at issue addresses transactions involving publically traded stock that is valued on the open market, not stock of a closely held private corporation. See Fidiam and Gallucci’s Motion at 24; Pl.’s Opp. at 13. The price of a publically traded stock is assumed to be fair and accurate because it is vetted in the open market and not subject to over-valuation by an appraiser. Thus, this particular Field Assistance Bulletin is inapplicable to the ease at bar.
Defendants also misconstrue the Ninth Circuit’s holding in Arizona State Carpenters Pension Trust Fund v. Citibank,
The arrangement in Arizona State Carpenters is readily distinguishable from the
The Court rejects Defendants’ argument that appointment of CFI wholly insulates them from fiduciary liability under ERISA. Having appointed CFI as a fiduciary, EVI’s Board of Directors and the E SOP’s Trustees undertook a duty to review the performance of their appointed fiduciary. See Gallucci Deck Ex. A at 55. Thus, the Secretary’s complaint presents a valid cause of action against Webb, Fidiam, and Gallucci for their alleged failure to prudently monitor CFI’s performance insofar as they knowingly permitted CFI to overstate the value of EVI’s stock and improperly directed the ESOP to purchase EVI shares at more than fair market value.
e. Standard of Knowledge
During oral argument, the parties had difficulty articulating the appropriate standard of knowledge required to establish a breach of fiduciary duty under these three avenues of ERISA liability. The Court finds that the “knowing” standard discussed herein is the appropriate standard. As discussed in detail above, employing a “knowing” standard for all three theories of liability examined here is both consistent with the relevant case law, and also follows the standard imposed under ERISA for co-fiduciary liability. See § 1105(a)(1) (liability for fiduciary who “participates knowingly in, or knowingly undertakes to conceal ... knowing such act or omission is a breach.”). Indeed, counsel for the Defendants acknowledged as much in argument when he stated that a fiduciary who followed an improper direction from another fiduciary with knowledge that it violated ERISA or the Plan would raise a “Red Flag.” The Court rejects the Secretary’s argument that a “known or should have known” standard ought to be adopted. See, e.g. Compl. ¶ 44. Such a standard is largely duplicative of ERISA’s “prudent man” standard for fiduciary conduct. Its adoption here, where fiduciaries have delegated some of their fiduciary duties to others, would render both that delegation and ERISA’s liability limiting provisions ineffective.
The Secretary’s complaint clearly satisfies this knowledge standard by alleging, among other things, that “Defendants Webb, Fidiam and Gallucci knew about the $12 million agreement with Defendant Webb that reduced the value of EVI’s stock ... knew ... of the problems with the November 21, 2002 appraisal ... [and] [y]et they allowed the stock purchase to occur ...” Compl. If44; see also Compl. ¶¶ 40^13, 60-61, 63. Therefore, Defendants’ motions to dismiss based on their
D. Parrot Cellular ESOP’s Motion to Dismiss
The ESOP’s motion to dismiss argues that the Secretary’s suit cannot properly name the ESOP as defendants. In her Complaint, the Secretary added the ESOP as a “party Defendant pursuant to Rule 19(a), Fed.R.Civ.P., solely to assure that complete relief can be granted.” Compl. ¶ 10. The ESOP moved to dismiss itself from this action on two grounds: (1) that as a non-fiduciary party this Court lacks subject matter jurisdiction under ERISA to hear a suit against it, and therefore it should be dismissed pursuant to Rule 12(b)(1), and (2) that it need not be joined under Rule 19(a)(1) in order for the parties to be accorded complete relief. See ESOP Motion (Docket No. 32). The Court finds that both arguments are without merit.
Rule 12(b)(1) permits a party to assert by motion the defense that a court lacks subject matter jurisdiction over a claim for relief. “Rule 12(b)(1) jurisdictional attacks can be either facial or factual.” White v. Lee,
The ESOP Defendant argues that the Secretary’s complaint advances a breach of fiduciary duty action against the ESOP itself, which, under 29 U.S.C. § 1002(9), is not a “person” subject to personal liability for such an action, and is “therefore[ ] not a proper defendant in an ERISA fiduciary breach claim.” ESOP Motion at 4. This argument overlooks both the fact that the Secretary did not assert “that the ESOP is a fiduciary or that the ESOP committed any fiduciary breaches.” PL’s Opp. (Docket No. 45) at 3. See Compl. ¶¶ 58-67 (complaint does not allege the ESOP breached a duty). Although an ESOP is not itself a fiduciary, “[a]n employee benefit plan may sue or be sued under [ERISA] as an entity” under the statute, 29 U.S.C. § 1132(d)(1).
The Secretary has named the ESOP because she claims it is necessary to obtain complete relief. Paragraph 10 of the Complaint explicitly states that the ESOP was joined as a Defendant “solely to assure that complete relief can be granted.” Her Prayers for Relief are likely to impаct administration of the ESOP, particularly paragraph 3 which asks this Court to enjoin “Defendants and all related parties from benefitting from any agreement that grants or purports to grant them indemnification from EVI or the Plan or to absolve them of liability for their fiduciary breaches.” Compl. at 21. Fed.R.Civ.P. 19(a)(1) provides:
Persons Required to Be Joined if Feasible. (1) Required Party. A person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined as a party if: (A) in that person’s absence, the court cannot accord complete relief among existing parties; ...
A party “can be joined under Rule 19 in order to subject it, under principles of res judicata, to the ‘minor and ancillary’ ef
In approving joinder, the Second Circuit in Marshall v. Snyder,
The [ERISA] plans, however, are clearly proper if not indispensable parties to the proceeding, and it would appear that if, as may be unavoidable, the Secretary will press for very broad relief affecting many aspects of the three plans and their administration, they should be joined as proper parties defendant which may later become necessary parties. Joinder of the plans as parties will provide assurаnce that complete relief can be accorded among those already parties ... and it is clear, of course, that the plans may properly be joined under Rule 20(a) in any case, even though they may not be interested in obtaining or in defending against all of the relief demanded.
Marshall v. Snyder,
Therefore, the Court rejects Defendant’s argument that the Parrot Cellular ESOP cannot be joined to this action under Rule 19.
E. Dennis Webb’s Motion to Dismiss
Defendant Dennis Webb’s motion to dismiss asks this Court to dismiss the Secretary’s complaint in its entirety as it relates to him for failure to state a claim under Rule 12(b)(6). Webb’s Motion at 25. Webb served as an “officer and director” of EVI, and was “Chairman of the EVI Board of Directors” during the time period relevant to this action. Compl. ¶ 7. As discussed above, given his position and the terms of the Plan, Webb is charged with violating сertain fiduciary duties with respect to the ESOP. His motion repeats many of the prior arguments presented by Fidiam and Gallucei in Fidiam & Gallueci’s Motion to Dismiss. Thus, the Court need not re-examine whether Webb’s fiduciary obligations attach to the purchase of EVI stock on November 21, 2002, nor whether, as a member of the Board of Directors, Webb had a duty to monitor the Plan Trustees and CFI’s performance during the acquisition of EVI stock for the ESOP. The complaint also contains sufficient allegations to state a breach by Webb of § 1105(a)(1) for participating knowingly in the act or omission of another fiduciary with the knowledge that such an act violates ERISA. See e.g. Compl. ¶ 44 (alleging that Webb “knew about the $12 million agreement with Defendant Webb that reduced the value of EVTs stock ... knew ... of the problems with the November 21, 2002 appraisal ... [and] [y]et they allowed the stock purchase to occur ...”). As discussed above, the appointment of CFI as an investment manager by the EVI Board does not preclude liability under § 1105(a)(1) since § 1105(d)(1) which limits liability of a fiduciary upon appointment of an investment manager affords immunity
Webb advances two arguments in support of his contention that the Secretary’s complaint is deficient under Rule 12(b)(6). First, he argues that he “was not a fiduciary with respect to the challenged сonduct because [he] lacked any discretion or control over the valuation and purchase of EVI stock by the ESOP.” Webb’s Motion at 24. As discussed supra, by virtue of his position on the Board of Directors and pursuant to the 2002 Plan Document, Webb had a degree of authority, control and hence responsibility over the decisions at issue here.
Further, the Secretary alleges that Webb had an additional duty to take steps to counteract any breach CFI and his co-fiduciaries may have committed after the conclusion of the stock purchase, including potential shareholder actions to recover all or a portion of the $16 million in deferred compensation EVI agreed to pay to him. See Compl. ¶ 58. Although § 1109(b) limits fiduciary duties as to breach committed before the fiduciary is appointed, once an individual becomes a fiduciary, he or she has an affirmative duty to investigate risks to ERISA plan assets that may have occurred prior to them becoming a fiduciary, even if they resulted from another party’s fiduciary breach. See Chao v. Merino,
Webb’s second argument charges the Secretary with failing to make an “allegation that Webb had knowledge of any fiduciary breach by any other party, as is required for co-fiduciary liability under ERISA.” Webb’s Motion at 24. The text of the Secretary’s complaint flatly contradicts Webb’s position. See e.g. Compl. ¶ 44.
Finally, at oral argument, counsel for the Secretary advanced for the first time a new theory of fiduciary liability for Defendant Webb based on ERISA’s § 1106. Counsel argued that § 1106(b)(3)
IV. CONCLUSION
For the foregoing reasons, the Court DENIES all three motions to dismiss in their entirety. Neither Fidiam & Gallucci’s Motion nor Webb’s Motion adequately demonstrate that the Secretary’s complaint fails to state a cause of action under Rule 12(b)(6). Nor does the ESOP Motion show that the Parrot Cellular ESOP cannot properly be joined to this action to afford complete relief among the parties.
This order disposes of Docket Nos. 18, 32, and 35.
IT IS SO ORDERED.
Notes
. An ESOP (Employee Stock Ownership Plan) is an individual account plan held by an employee which is "designed to invest primarily in qualifying employer securities.” 29 U.S.C. § 1107(d)(6)(A).
. According to the Secretary's complaint, Webb, on behalf of EVI, "retained a firm that serves as a 'registry' of independent contractor appraisers” in order to obtain an appraisal of EVI's stock. Compl. ¶ 25. The Secretary alleges that Webb "was solely responsible” for selecting this firm, who "subcontracted this appraisal work” to yet another party "for EVI's appraisals.” Id. ¶ 26. She further alleges that “Webb and Fidiam were not involved in the selection of the [subcontractor] Appraiser,” and that "CFI did not know who seleсted the Registry or how it assigned work to the Appraiser.” Id.
. Citations to sections of ERISA in this Order refer to their place of codification in the U.S.Code.
. Defendants' citation to the Ninth Circuit’s decision in Cline v. Indus. Maint. Eng'g & Contracting Co. is inapplicable to the case at bar. While the Ninth Circuit panel in Cline held that ”[u]ntil the employer pays the employer contributions over to the plan, the contributions do not become plan assets over which fiduciaries of the plan have a fiduciary obligation,”
. Defendants erroneously assert that CFI, and not either of them, is the "named fiduciary” of the ESOP. See Fidiam & Gallucci’s Motion at 22. Section 18(a)(2)(A) of the 2002 Plan Document, addressing the responsibilities of the "Plan Committee” clearly indicates that "[t]he Committee and the Company shall each be a "named fiduciary” within the meaning of Section 402 [§ 1002] of ERISA.” Gallucci Decl., Ex. A at 55. That Fidiam and Gallucci were members of the "Plan Committee” on November 21, 2002, when the ESOP purchased EVI’s stock is uncontested. As the Secretary points out in her opposition brief, CFI as the "investment manager” for the ESOP could not have been a "named fiduciary,” since under ERISA the "term ‘investment manager' means any fiduciary (other than a trustee or named fiduciary, as defined in section 1102(a)(2) of this title ...” 29 U.S.C. § 1002(38) (emphasis added). Thus, Fidiam and Gallucci were each a “named fiduciary” at the time of the stock purchase at issue.
. In full, this provision places "exclusive authority and discretion to manage and control the assets of the plan,” except where:
the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to this chapter.
29 U.S.C. § 1103(a)(1).
. This provision states that “[a]ny employee benefit plan may provide — that a person who is a named fiduciary with respect to control or management of the assets of the plan may appoint an investment manager or managers to manage (including the power to acquire and dispose of) any assets of a plan.” Id.
. 29 C.F.R. § 2509.75-8, subsection D-4 provides as follows:
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 section 3(21)(A) of the Act. For exаmple, the board of directors may be responsible for the selection and retention of plan fiduciaries. In such a case, members of the board of directors exercise "discretionary authority or discretionary control respecting management of such plan” and are, therefore, fiduciaries with respect to the plan. However, their responsibility, and, consequently, their liability, is limited to the selection and retention of fiduciaries (apart from co-fiduciary liability arising under circumstances described in section 405(a) of the Act). In addition, if the directors are made named fiduciaries of the plan, their liability may be limited pursuant to a procedure provided for in the plan instrument for the allocation of fiduciary responsibilities among named fiduciaries or for the designation of persons other than named fiduciaries to carry out fiduciary responsibilities, as provided in section 405(c)(2).
. 29 C.F.R. § 2509.75-8, subsection FR-17 provides as follows:
Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments?
A: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.
(Emphasis added.)
. This paragraph of the Complaint states as follows:
Defendants Webb, Fidiam and Gallucci knew about the $12 million agreement with Defendant Webb that reduced the value of EVI's stock, had a duty to monitor the independent fiduciary, and knew or should have known of problems with the November 21, 2002 appraisal, including the use of inappropriate companies as comparables, the use of overly optimistic projections of future earnings and profitability, the failure to account for the $12 million agreement, and the lack of explanation in the [valuation] Report. Yet, they allowed the stock purchase to occur, for the benefit of Defendant Webb and his son, who immediately received a total of more than $28.3 million in cash and notes for their stock, in addition to Defendant Webb's earlier $4 million payment, his more than $1.55 million annual salary for 2002, and his deferred compensation of $12 million.
Compl. ¶ 44.
. Section 1106(b)(3) prohibits transactions between a plan and a fiduciary who "receive[s] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”