Opinion
Cause No. SA-98-CA-0230-OG.
August 28, 2000.
In this order, the Court will consider the following motions: defendants' motion to dismiss second amended complaint (docket no. 134); plaintiffs' motion for partial summary judgment (docket no. 143), [first] supplement (docket no. 99), [second] supplement (docket no. 119), and third supplement (docket no. 151); plaintiffs' motion for preliminary injunction, which is contained in their second amended complaint (docket no. 115), and plaintiffs' motion for leave to file third amended complaint (docket no. 136) and the supplement to that motion (docket no. 163).
The Court will not bother to list the myriad responses, replies, oppositions, sur-replies, and so on, that apply to these motions. As can readily be seen, this has been a motion-intensive case.
This is a putative class action suit involving the withdrawal of Crum Forster, Inc. from the Xerox Corporation's Employee Stock Ownership Plan ("ESOP") in 1993. In 1989 Xerox adopted a leveraged ESOP for its employees. The plan is a "defined contribution plan" as defined in 29 U.S.C. § 1102(34). Xerox funded the ESOP by selling ten million shares of its convertible stock to the ESOP for $785 million. The ESOP borrowed the purchase price of the stock from a group of lenders. At the time of the Plan's creation, Crum Forster was a Xerox subsidiary and its employees were participants in the Plan. Crum Forster employees were promised that 1.3 million of the 10 million shares would be distributed to them over a 15-year period.
Crum Forster's participation in the ESOP terminated on January 1, 1993 when Xerox sold Crum Forster to another corporation. On February 2, 1993, Crum Forster employees, including plaintiffs, received a memorandum informing them that Crum Forster employees would be withdrawn from the ESOP. The employees would retain their previously issued Xerox shares and the right to receive future dividends on those shares. The employees were also promised a profit-sharing replacement plan for the ESOP.
The Bakner plaintiffs ("Bakner") commenced this suit in this Court on March 20, 1998 seeking damages and attorney's fees for alleged breaches of fiduciary duties by defendants. Bakner is an employee of Crum Forster and was a vested participant in the Xerox employee stock ownership plan ("ESOP"). He contended that defendants committed acts constituting actual and constructive fraud and breaches of fiduciary duties by terminating the Xerox ESOP and instituting an allegedly less valuable profit-sharing replacement plan. Bakner moved for class certification, but the Court denied that motion (docket no. 68).
Darwin Bakner and John Harrison.
Meanwhile, a similar suit was filed in the United States District Court in New Jersey by the Lawrence plaintiffs ("Lawrence") against virtually the same defendants. Lawrence, a Crum Forster employee, brought breach of fiduciary duty claims similar to Bakner's, along with a claim for benefits due. Lawrence also sought certification of a nationwide class composed of all Crum Forster employees who were participants in the Xerox ESOP, estimated to number 10,000 persons. That motion was not addressed by the New Jersey court. The New Jersey district court instead transferred the Lawrence case to this Court based on 28 U.S.C. § 1404(a). Prior to transfer, Lawrence had decided to abandon his breach of fiduciary duty claims, and to rely instead solely on his benefits claim. See Docket no. 95, Exs. A B. Following transfer, the Court granted defendants' motion to consolidate the Bakner and Lawrence cases. (Docket no. 83).
Gregory J. Lawrence and Hal D. Pugach. Neither Mr. Harrison nor Mr. Pugach remain parties in the case.
In their second amended complaint (docket no. 115), plaintiffs raise two alternative theories. In Count One plaintiffs set out Lawrence's benefits claim based on his theory that Crum Forster participants are entitled to their proportional share of unallocated Xerox shares (13 percent of the original 10 million Xerox shares). In Count Two, they raise two claims for breach of fiduciary duty — Bakner's original theory that defendants misrepresented the value of the replacement plan (theVarity claim), and new claims regarding defendants' hiring of Joseph Brown Jr. to sell Crum Forster. Plaintiffs also assert Count Three, a claim for injunctive relief related to the benefits claim, and Counts Four through Seven, which are related to the breach of fiduciary duties claims. Because Counts Three through Seven are derivative of Counts One and Two, the Court will address only the latter two counts.
See Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065 (1996). In their proposed third amended complaint, plaintiffs drop their Varity claim. Consequently, that claim will not be discussed regarding defendants' motion to dismiss the second amended complaint.
I. Defendants' Motion to Dismiss Plaintiffs' Second Amended Complaint.
In reviewing a motion to dismiss, the Court will accept the well-pleaded allegations in the compliant as true, construe those allegations in the light most favorable to the plaintiff, and draw all inferences in his favor. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Truman v. United States, 26 F.3d 592, 594 (5th Cir. 1994). A claim will not be dismissed upon a 12(b)(6) motion unless it appears to a certainty (1) that no relief can be granted under any set of facts provable in support of its allegations, or (2) that the allegations, accepted as true, do not present a claim upon which relief legally can be obtained. Adolph v. Federal Emergency Management Agency, 854 F.2d 732, 735 (5th Cir. 1988).
A. Benefits claim.
Defendants move to dismiss the Count One benefits claim on the grounds that it is time barred and that plaintiffs failed to timely exhaust their administrative remedies.
1. The benefits claim is not barred by limitations.
The first issue is whether Texas' four-year statute of limitations (TEX. CIV. PRAC. REM. CODE § 16.004) or New Jersey's (or New York's) six-year statute of limitations applies. Plaintiffs argue that in this ERISA case, following a § 1404 transfer, the Court should apply the law of the transferor forum, or alternatively, apply New York law pursuant to the ESOP's choice-of-law provision.
In Van Dusen v. Barrack, 376 U.s. 612, 639 (1964), a diversity case, the Supreme Court held that the law of the transferor forum continues to govern in the transferee forum after a defendant's request for transfer under 28 U.S.C. § 1404(a) is granted. The Court extended this rule in another diversity case to § 1404(a) transfers requested by plaintiffs. Ferens v. John Deere Co., 494 U.S. 516, 519 (1990). In In re Korean Air Lines Disaster, 829 F.2d 1171 (D.C. Cir. 1987), aff'd on other grounds sub nom. Chan v. Korean Air Lines, Ltd., 490 U.S. 122 (1989), then-Judge Ginsburg rejected extension of Van Dusen in the federal question context, applying the law of the transferee instead. Defendants argue that because this is a federal question case, Korean Air Lines controls, and the Court must apply the Texas statute of limitations.
This issue has apparently been resolved in this Circuit by Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir. 1974). Sargent involved a claim brought under the federal securities law. The court applied the Van Dusen principle to a statute of limitations question, finding that when a § 10(b) suit was transferred from New York to Florida pursuant to § 1404(a), the transfer effected "merely a `change of courtrooms'" and brought New York's statute of limitations to the Florida federal district court. Sargent, 492 F.2d at 758 (quoting Van Dusen, 376 U.S. at 637). As the case involved simply the application of state law, it was proper for the court to apply Van Dusen. In light of Sargent, Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993), cited by defendants, is not persuasive authority.
Although Sargent predates Korean Air Lines, other courts have reached the identical conclusion subsequent to Korean Air Lines. These courts accept Korean Air Lines' "principle that a transferee court should normally use its own best judgment about the meaning of federal law when evaluating a federal claim." Korean Air Lines, 829 F.2d at 1174. When faced, however, with federal statutory claims lacking express limitation periods, these courts hold that Van Dusen and Ferens must apply because the issue before the federal court does not involve interpretation of federal law but simply the borrowing of state law. See, e.g., Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1126-27 (7th Cir. 1993), cert. denied, 114 S.Ct. 883 (1994); In re United Mine Workers of Am. Employee Benefit Plans Litig., 854 F. Supp. 914, 919 (D. D.C. 1994); Pellegrino v. United States, No. CIV.89-8406, 1992 WL 84475, at *7-8 (S.D. N.Y. Apr. 15, 1992); Pelullo v. Patterson, 788 F. Supp. 234, 237 (D. N.J. 1992); In re Rospatch Sec. Litig., 760 F. Supp. 1239, 1256-57 (W.D. Mich. 1991).
Defendants also argue that plaintiffs' filing of a consolidated complaint following transfer of the New Jersey portion of the case constitutes an election to be bound by Texas law. Defendants cite no authority in support of this argument other than general principles applicable to amended complaints. Nor does Judge Murphy in her comment, also cited by defendants. See Diana E. Murphy, Unified and Consolidated Complaints in Multidistrict Litigation, 132 F.R.D. 597, 608 (1991). Nor do defendants cite authority for their argument that Bakner cannot assert the benefits claim (defendants' reply, docket no. 157 at n. 1) in a case the Court consolidated for all purposes (see docket no. 114). While defendants find it unfair that Bakner can avoid his Texas limitations problem through the consolidation of Lawrence's case, it is more unfair if Lawrence is to be deprived of a timely benefits claim by a consolidation for the convenience of the parties and in the interest of justice.
New Jersey's six-year statute of limitations is applicable. Thus, it is irrelevant when plaintiffs' benefits claim accrued. Even assuming, as defendants argue, that plaintiffs' claim accrued in February 1993, the claim is timely. 2. Plaintiffs have not failed to timely exhaust their benefits claim.
The Court also need not discuss the applicability of the ESOP's New York choice-of-law provision to the limitations question.
Admittedly, plaintiffs failed to exhaust their administrative remedies before filing suit. They have cured that omission now. Defendants argue that exhaustion was untimely, but they fail to cite an ESOP provision setting an exhaustion deadline, and there does not appear to be one. Finally defendants argue that even in the absence of a specific plan deadline, exhaustion must occur within a reasonable time. Clearly, this is true. Protracted delays in pursuing administrative remedies "clearly hinder the efforts of plan administrators and Courts in evaluating claims, given the inevitable problems involving staleness of proof."Brown v. Star Enterprise, No. 1:95-CV-378, 1996 WL 450694, at *4 (E.D. Tex. 1996) (quoting Tiger v. AT T Technologies Plan for Employees' Pensions, Disability Benefits, 633 F. Supp. 532, 534 (E.D. N.Y. 1986)). Defendants, however, have failed to show any harm from the late exhaustion.
B. Breach of fiduciary duties claims.
Plaintiffs' breach of fiduciary duties claims in their second amended complaint all relate to Xerox's hiring of Joseph W. Brown, Jr. in 1992 as Chairman, President, and CEO of Crum Forster. Second Amended Complaint ¶¶ 59. Brown's "explicit mission was to take charge of Crum Forster and sell it in pieces or as a single unit as soon as possible, with his compensation dependent on the amount received." Id. at ¶ 32. The Brown-led liquidation group concluded that the retirement program, including the ESOP, had to be changed to make Crum Forster more attractive to a prospective purchaser. Id. at ¶¶ 36, 59. The Brown-led group, which ran Crum Forster and determined the future of employee benefits, was simultaneously maximizing its own personal financial interest by restructuring the retirement program at Crum Forster. Id. at ¶¶ 34, 60, 65. In 1992, Crum Forster recommended to Xerox that Crum Forster be taken out of the ESOP, which in fact occurred as of December 31, 1992. Id. at ¶¶ 39, 61. Plaintiffs contend that defendants' dealings with Brown under these circumstances constituted breaches of fiduciary duties in violation of ERISA §§ 406(b)(2), 406(a)(1), and 404(a).
1. Plaintiffs' breach of fiduciary claims are not barred by limitations.
Defendants argue that plaintiffs' claims under these sections are barred by ERISA's three-year statute of limitations. 29 U.S.C. § 1113. Defendants argue that plaintiffs had actual knowledge of the withdrawal of Crum Forster participants from the ESOP in 1993 and knew that Brown had been hired to restructure and position Crum Forster for sale, and therefore, plaintiffs' complaint, filed in 1998, was beyond the limitations period. The prohibited transaction plaintiffs complain about, however, is not the mere removal of Crum Forster from the plan, but the exercise of discretion by defendants in hiring Brown on a contingency-fee basis and giving him a direct personal financial interest in the removal. Plaintiffs argue that they did not have actual knowledge of Brown's direct personal financial involvement in the transaction until they recently took the deposition of Kathleen Wilson. Further, knowledge that Brown had been hired is not knowledge that he had been hired on a contingency basis, which is the gravamen of their complaints under §§ 404 and 406. Dismissal of the fiduciary duty claims on limitations grounds will be denied.
2. Plaintiffs have failed to state a claim.
Defendants also argue that plaintiffs' "Brown" allegations fail to state a claim upon which relief can be granted. Again defendants ignore plaintiffs' explicit allegations, arguing that plaintiffs are complaining of the withdrawal of Crum Forster employees from the ESOP, which, defendants correctly point out, is not the act of a fiduciary, and not a transaction involving a plan. Plaintiffs' claims concerning Brown, however, are that defendants, who are plan fiduciaries and parties-in-interest, hired Brown, also a party-in-interest, pursuant to a compensation scheme that made it financially advantageous to Brown to diminish the value of the ESOP, which he did. Thus, the issues are whether the defendants, by hiring Brown on a contingency fee basis, breached their duty of loyalty pursuant to § 404 and engaged in transactions prohibited by § 406.
ERISA § 404(a)(1) ( 29 U.S.C. § 1104(a)(1)) imposes on a fiduciary the duty of undivided loyalty to plan participants and beneficiaries. McDonald v. Provident Indem. Life Ins. Co., 60 F.3d 234, 237 (5th Cir. 1995), cert. denied, 516 U.S. 1174 (1996). Plaintiffs allege that defendants breached their duty of loyalty by giving Brown a financial incentive to change the ESOP and by accepting Brown's recommendation to terminate the ESOP. Second Amended Complaint at ¶¶ 65-67. Section 406 of ERISA ( 29 U.S.C. § 1106) prohibits fiduciaries from involving the plan and its assets in certain specific kinds of business deals. Lockheed Corp. v. Spink, 517 U.S. 882, 887-88, 116 S.Ct. 1783, 1788 (1996). Plaintiffs allege that defendants' participation in the removal of Crum Forster from the ESOP at Brown's request, when it was in Brown's financial interest to restructure Crum Forster's retirement benefits, violated § 406(a)(1). Second Amended Complaint at ¶¶ 63-64. Finally, § 406(b)(2) forbids a fiduciary to "act in any transaction involving the plan on behalf of a party . . . whose interests are adverse to the interest of the plan." Plaintiffs allege that Brown recommended that the ESOP be changed based on his direct personal financial interest, and that defendants, in acquiescing to that recommendation, acted "on behalf of a party whose interests were adverse to the ESOP and the participants." Second Amended Complaint at ¶¶ 59-62.
Section 406(a)(1) reads as follows:
(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect —
(A) sale or exchange, or leasing, of any property between the plan and a party in interest;
(B) lending of money or other extension of credit between the plan and a party in interest;
(C) furnishing of goods, services, or facilities between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan; or
(E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 1107(a) of this title.
Plaintiffs do not specify which subsection of 406(a)(1) is applicable.
Unfortunately for plaintiffs, their theories of recovery under sections 404 and 406 have no legal basis. There is a clear distinction between employers acting as fiduciaries on behalf of the plan, and employers pursuing reasonable business decisions on behalf of the corporation. ERISA does not require that "day-to-day corporate business transactions, which may have a collateral effect on prospective, contingent employee benefits, be performed solely in the interest of plan participants."Phillips v. Amoco Oil Co., 614 F. Supp. 694, 718 (N.D. Ala. 1985) aff'd 799 F.2d 1464 (11th Cir. 1986), cert. denied, 481 U.S. 1016 (1987). The court in Sutton v. Weirton Steel Div. of Nat'l Steel Corp., 567 F. Supp. 1184 (N.D. W. Va. 1983), aff'd 724 F.2d 406 (4th Cir. 1983), cert. denied, 467 U.S.1205 (1984), further explained this distinction:
When acting on behalf of the pension fund, there is no doubt that [an employer] must act solely to benefit participants and beneficiaries. However . . . when a corporate employer negotiates the terms of sale of a division, whose employees are participants in a pension plan, the negotiations that affect the terms and conditions of future pension benefits (at least those that are not protected by ERISA's vesting and nonforfeitability provisions), do not implicate fiduciary duties as to the pension fund. . . . [T]he mere fact that a company has named itself as pension plan administrator or trustee does not restrict it from pursuing reasonable business behavior in negotiations concerning pension benefits not otherwise affected by the requirements of ERISA.567 F. Supp. at 1201 (emphasis added).
It is important to reiterate at this point that plaintiffs here do not contend that the divestiture of Crum Forster has deprived them of any vested or accrued retirement benefits. In their benefits claim they seek "their proportional share of the ESOP shares that were yet to be allocated." Second Amended Complaint at ¶ 57; see also id. at ¶¶ 4-5, 16, 30, 57.
Phillips, like Sutton and the present case, also involved ERISA claims arising out of the sale of a corporate division. Amoco, the defendant-employer in Phillips, was administrator of its employees' retirement plan. The dispute centered around Amoco's right to sell its liquid propane gas ("LPG") division, for which the plaintiff-employees worked, to Norgas. The plaintiffs' arguments in Phillips are similar to those brought by plaintiffs here. The Phillips plaintiffs argued that the defendants violated the duty imposed by § 404 because in negotiating the terms of the sale of its LPG operation, Amoco was under a fiduciary duty to ensure that the plaintiffs' years of service with Amoco would be credited for all purposes under the Norgas retirement plan, and that Amoco breached that duty by its failure to arrange a sale transaction meeting those standards. 614 F. Supp. at 717. Concerning Amoco's alleged § 406 duties, the Phillips plaintiffs argued that Amoco received a better price in its sale of the LPG facilities by not transferring the years of service or accumulated benefits of the plan participants to Norgas. Id. at 720.
The Phillips court rejected both of these arguments. It first found that the § 404 claim was without merit because ERISA's fiduciary duty provisions are not implicated in the sale of a business or a portion of a business merely because the sale will affect the terms and conditions of contingent future retirement benefits. Id. at 717. The court held that because the LPG sale concerned only nonvested contingent benefits that were not part of plan assets, a corporation selling off a division has no
fiduciary duty under ERISA to act solely in the plaintiffs' interests in negotiating the terms upon which the LPG operations were to be sold. A contrary holding would mean that every corporate business decision which had any possible collateral effect on pension benefits would have to be made solely in the interest of pension plan beneficiaries and participants.Id. at 719.
The court next dismissed the plaintiffs' § 406 claims, finding that that section on its face applies only to transactions to which the plan itself is a party or in which monies, property, or fiscal assets of the plan are involved. Id. at 720.
[T]he mere fact that an employer also acts as a plan fiduciary does not restrict it from pursuing reasonable business behavior in negotiating the sale of a division, even though the terms ultimately agreed upon modify or eliminate the contingent rights of transferred employees to benefits under the seller's ERISA plan which are neither vested nor accrued."Id. at 720-21 (footnote omitted) (emphasis added).
The requirement that the plan be a party to the transaction at issue is clearly based upon the language contained in § 406(a)(1), which provides that "[a] fiduciary . . . shall not cause the plan to engage in a transaction. . . ." (emphasis added). To sustain a violation of § 406(a), a plaintiff must show that a fiduciary caused the plan to engage in the allegedly unlawful conduct. Lockheed, 517 U.S. at 888, 116 S.Ct. at 1788. Because the plan here was not a party to the challenged transaction, and because the challenged transaction did not involve assets of the plan, § 406 is inapplicable on its face.Phillips, 614 F. Supp. at 720.
Thus, in general, an employer's fiduciary duties do not extend to the negotiations of the sale of a going concern and are not violative of fiduciary duties described in sections 404 and 406 of ERISA. See also Dougherty v. Chrysler Motors Corp., 840 F.2d 2 (6th Cir. 1988) (in selling part of business, employer has no ERISA duty to guarantee future, nonvested, benefits); Bigger v. American Commercial Lines, Inc., 677 F. Supp. 626 (W.D. Mo.) (a plan-sponsoring employer does not violate its fiduciary duty by refusing to transfer a portion of the surplus assets to participants of a spun-off plan as long as the participants in the spun-off plan receive the full measure of their accrued benefits),aff'd, 862 F.2d 1341 (8th Cir. 1988); Coleman v. General Elec. Co., 643 F. Supp. 1229, 1238-39 (E.D. Tenn. 1986) (employer's fiduciary duties do not extend to the negotiations of the sale of a corporate division, and the court found no violation of ERISA §§ 404 and 406); Dhayer v. Weirton Steel Div. of Nat'l Steel Corp., 571 F. Supp. 316, 328 (N.D. W. Va.) (negotiations of a sale of a division that affect the terms and conditions of future pension benefits do not implicate fiduciary duties as to the pension fund; such negotiations are distinct from actually administering a plan), aff'd sub nom. Sutton v. Weirton Steel Div. of Nat'l Steel Corp., 724 F.2d 406 (4th Cir. 1983), cert. denied, 467 U.S. 1205 (1984).
In a similar vein, it is held that plan sponsors who alter the terms of a plan do not come within the category of fiduciaries; they are generally free for any reason at any time to modify or terminate plans. Lockheed, at 890, 116 S.Ct. at 1789. See also Izzarelli v. Rexene Prods. Co., 24 F.3d 1506, 1524 (5th Cir. 1994) (employer that terminates or amends a plan "does not act as a fiduciary, and thus cannot violate its fiduciary duty, provided that the benefits reduced or eliminated are not accrued or vested at the time, and that the amendment does not otherwise violate ERISA or the express terms of the Plan."). of particular note is Young v. Standard Oil (Indiana), 849 F.2d 1039, 1045 (7th Cir. 1988), in which the court upheld a district court determination that an employer does not breach a fiduciary duty when it unilaterally amends a severance benefit plan in a sale-of-business context to avoid coverage of employees who continue to work for the purchaser. See also Averhart v. US West Management Pension Plan, 46 F.3d 1480, 1488 (10th Cir. 1994) (amendment of plan to provide special enhanced benefits to director-level employees but not other employees not a fiduciary act); McGath v. Auto-Body North Shore, Inc., 7 F.3d 665, 670-671 (7th Cir. 1993) (employer does not act as fiduciary when it alters a plan's eligibility requirements); Sejman v. Warner-Lambert Co., Inc., 889 F.2d 1346, 1349 (4th Cir. 1989) (employer does not act as fiduciary when it amends plan to affect nonvested interests); West v. Greyhound Corp., 813 F.2d 951, 956 (9th Cir. 1987) (amendment of plan to reduce unacerued benefits not a fiduciary decision).
Likewise, termination of a plan is regarded as a settlor, not a fiduciary, decision. See Morse v. Adams, 857 F.2d 339 (6th Cir. 1988) (decision to terminate welfare and pension plan pursuant to an order of a bankruptcy court is a settlor function); Cunha v. Ward Foods, Inc., 804 F.2d 1418, 1432-33 (9th Cir. 1986) (decision to terminate a pension plan was a business decision, not made by company in connection with its fiduciary responsibility as plan administrator); Riley v. Murdock, 890 F. Supp. 444, 459 (E.D. N.C. 1995) (termination of plans are not evaluated under fiduciary standards); Rinard v. Eastern Co., 769 F. Supp. 1416, 1427 (S.D. Ohio 1991) (in making a decision to terminate a benefit plan, an employer acts as an employer, not as a fiduciary).
As already indicated, for the provisions of § 406 to apply, there must be a transaction involving the monies, property, or other assets of the fund. Sutton, 567 F. Supp. at 1199 (citing Donovan v. Bierwirth, 680 F.2d 263, 270 (2nd Cir. 1982), cert. denied, 459 U.S. 1069 (1983)). Plaintiffs have not alleged that Brown, or any defendant, profited at the expense of the Plan assets. If Brown's compensation in fact increased by the sale of Crum Forster, he was not paid from the "monies, property, or other assets" of the ESOP. There has been not the slightest hint, throughout all the myriad pleadings, motions, responses, replies, and oral arguments, that there has ever been a transfer of Plan assets or properties to any fiduciary or party-in-interest. Nor have plaintiffs alleged that defendants engaged in any of the specific activities forbidden by § 406(a)(1), that is, they allege no transfer of plan assets. "What the "transactions' identified in § 406(a) thus have in common is that they generally involve uses of plan assets that are potentially harmful to the plan." Lockheed, at 893, 116 S.Ct. at 1791.
Thus, the present case is distinguishable from Reich v. Lancaster, 843 F. Supp. 194 (N.D. Tex. 1993). Reich involved the transfer of fund assets to fiduciaries and parties-in-interest, and losses to the plan of over $750,000. None of the alleged actions in the present suit effected any transfer of plan assets. Likewise, In re Gulf Pension Litigation, 764 F. Supp. 1149 (S.D. Tex. 1991), aff'd sub nom, Borst v. Chevron Corp., 36 F.3d 1308 (5th Cir. 1994) is distinguishable. In that case former participants of a plan sued their employer to recover the plan's residual assets, which reverted to the company upon the complete termination of the plan and after all benefits and expenses were paid. In the present case there is at most a partial termination of the plan as to Crum Forster and no reversion of assets to Xerox.
Finally, defendants were not acting as fiduciaries when they hired Brown. Moehle v. NL Industries, Inc., 646 F. Supp. 769, 779 (E.D. Mo. 1986) (defendant did not have fiduciary duties when it was acting in its capacity as employer making employment decisions; fiduciary duties apply only to activities, decisions, and transactions directly affecting or dealing with the pension plan). This is especially so since, again, there is no indication that Brown's contingency fee was paid from Plan assets.
ERISA's fiduciary duty statutes have no application to plaintiffs' "Brown" allegations, and therefore plaintiffs' breach of fiduciary duty claims will be dismissed.
II. Plaintiffs' Motion for Partial Summary Judgment.
Plaintiffs seek summary judgment on their benefits claim and their prohibited transactions claims. Because the Court has already held that plaintiffs' breach of fiduciary duty claims will be dismissed, it will discuss only plaintiffs' benefits claim.
"A party seeking to recover upon a claim . . . or to obtain a declaratory judgment may... move with or without supporting affidavits for a summary judgment in the party's favor upon all or any part thereof." FED. R. Civ. P. 56(a). Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. Civ. P. 56(c). As a prerequisite to summary judgment, a moving party must demonstrate "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has properly supported its motion for summary judgment, the nonmoving party must "do more than simply show there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 586 (1986). The nonmoving party may not rest on mere allegations or denials of his pleading, but must "come forward with `specific facts showing that there is a genuine issue for trial.'" Id. at 587 (quoting FED. R. CIV. P. 56(e) and adding emphasis). See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). The inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co., 475 U.S. at 587 (citations omitted). However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'" Id. (citation omitted).
Plaintiffs seek in essence a declaratory judgment interpreting the Plan provisions. When, as in this case, the terms of a benefit plan governed by ERISA give the plan administrator discretionary authority to determine eligibility for benefits, the district court reviews the plan administrator's denial of benefits for abuse of discretion. FDIC v. Myers, 955 F.2d 348, 349 (5th Cir. 1992). Eligibility for benefits under any ERISA plan is governed in the first instance by the plain meaning of the plan language. Nickel v. Estate of Estes, 122 F.3d 294, 298 (5th Cir. 1997). Generally, the court employs a two-step methodology for testing the plan administrator's interpretation of the plan. Wildbur v. ARCO Chemical Co., 974 F.2d 631, 637-38 (5th Cir. 1992). First, a court must determine the legally correct interpretation of the plan. Id. at 637. If the administrator did not give the plan the legally correct interpretation, the court must then determine whether the administrator's decision was an abuse of discretion. Id. In answering the first question, a court must consider: (1) whether the administrator has given the plan a uniform construction, (2) whether the interpretation is consistent with a fair reading of the plan, and (3) any unanticipated costs resulting from different interpretations of the plan. Id. at 637-38. When the record lacks evidence as to each of the factors, a court considers only those factors for which there is evidence. Pickrom v. Belger Cartage Serv., Inc., 57 F.3d 468, 471 (5th Cir. 1995). Only if the court determines that the administrator did not give the legally correct interpretation, must the court then determine whether the administrator's decision was an abuse of discretion. Tolson v. Avondale Industries, Inc., 141 F.3d 604, 608 (5th Cir. 1998).
See Plan, §§ 12.07-.09.
Plaintiffs' benefits claim was first referred to and rejected by Arlyn B. Kaster, Manager, Employee Pension and Life Insurance Programs, in a letter dated September 22, 1999. (Docket no. 119, Ex. 2.) Plaintiffs' request for reconsideration of that decision was denied by Plan Administrator Sally L. Conkright in a letter dated November 23, 1999, in which she incorporated Ms. Kaster's reasoning and directly addressed plaintiffs' theories. (Docket no. 119, Ex. 7.) Plaintiffs made the claim to the administrator "that the Trustee be directed to transfer all of their proportionate shares of stock or other assets, including Xerox stock, that were held in the Suspense Account or Employee Stock Ownership Account as of December 31, 1992." Letter from James L. Reed, Jr. to Patricia Nazemetz (the then-Administrator) dated July 19, 1999, docket 119, ex. 1. Plaintiffs' theory is grounded on § 11.02 of the Plan. That section reads:
Upon termination of the Plan with respect to an Employer, the Trustee shall allocate and segregate for the benefit of the Participants then or theretofore employed by such Employer their proportionate interest in the Trust Fund.
Undoubtedly, Crum Forster was, prior to its termination, an "Employer" under the Plan. Plan §§ 1.17, 1.43. The Trust Fund is defined to include "all of the assets of the Plan that are held by the Trustee pursuant to the Trust Agreement." Plan § 1.48. Ergo, according to plaintiffs, when our employer left the Plan, not only do we get our vested benefits, we get our proportionate interest in the shares of all the stock that might have been allocated to us over the ensuing eleven years (assuming we had stayed employed with Crum Forster for all those years) even though our employer is no longer contributing to the Plan.
Plaintiffs' narrow focus on essentially one paragraph of the Plan is understandable, but it is not a luxury the Plan Administrator — or this Court — enjoys. Ms. Kaster and Ms. Conkright correctly read not one section in isolation, but the Plan in its entirety, taking care to construe all its provisions consistently with the others in order to render none of them nugatory. Harper v. R.H. Macy Co., 920 F.2d 544, 545 (8th Cir. 1990). The Court turns now to a review of the administrative decisions.
For convenience, Ms. Kaster's and Ms. Conkright's decisions will sometimes be referred to as "the administrative decisions."
The administrative decisions are based on two primary theories. First, Crum Forster's termination was a partial termination, in which case the Plan and Trust continue, and the employees of the terminated employer are entitled only to their vested account balances. Second, Plan and Trust Provisions specifically prohibit any segregation and transfer of shares held in the Suspense Account after an employer ceases to make contributions toward repayment of the loan. The Plan provisions support both theories.
The Suspense Account is "the account established under Section 5.02 of the Plan to hold shares of Stock acquired by the Trustee with the proceeds of a Loan pending allocation to Participants' Stock Accounts Pursuant to Articles IV and V." Plan § 1.45.
The first holding of the administrative decisions goes to the heart of plaintiffs' theory. Clearly, as Ms. Conkright explained, the Plan contemplates both complete and partial terminations of the Plan. The first sentence of § 11.01 permits the Board of Directors to terminate the Plan in its entirety. The second sentence of § 11.01 permits the Board to require any employer to withdraw from the Plan and permits any employer to voluntarily withdraw from the Plan. The second event — withdrawal of an employer from the Plan — constitutes a termination "in respect of such Employer. . . ." The sections of Article XI that relate to complete termination, §§ 11.04 and 11.06, refer to all participants without distinction. In contrast, § 11.05, which refers to a partial termination, refers only to the rights of "affected participants." Similarly, § 11.02, describing termination "with respect to an Employer," does not refer to all participants, but only those employed by that employer. Therefore, in the event of termination as to an employer, there are only "affected Participants" (i.e., those employed by the terminated employer), and § 11.05 controls. Section 11.05 provides that in the event of partial termination, affected participants are entitled to their account balances as of the date of the partial termination. This is precisely what plaintiffs have already received.
Section 11.01 provides:
11.01. The Board of Directors may, by appropriate notice to the Trustee, terminate the Plan in its entirety. The Board of Directors may at any time require any Employer to withdraw from the Plan, and any Employer may voluntarily withdraw with the consent of the Board of Directors, and upon such withdrawal, the Plan, in respect of such Employer, shall be terminated.
Section 11.04 reads:
11.04. Upon a termination of the Plan in its entirety, each Participant shall be fully (100%) vested in the balance in his Accounts, determined as of the date of such termination, and such benefit shall be nonforfeitable.
Section 11.06 reads:
11.06. Upon termination of the Plan in its entirety, the Trustee shall —
(a) pay any and all expenses chargeable against the Trust;
(b) determine, in accordance with the provisions of Article V, the balance in each Participant's Accounts;
(c) repay the Loan, as the Investment Committee of the Board and the creditor shall agree and in the case of sale of shares of Stock held in the Suspense Account, allocate to each Participant that portion of the remaining balance of the proceeds which is determined by multiplying such remaining balance by a fraction, the numerator of which is the balance of the Participant's Accounts as of the date of termination of the Plan, and the denominator of which is the aggregate balance of the Accounts of all Participants in the Plan as of such date;
(d) pay over to each Participant, in accordance with the provisions of Section 403(d)(1) of ERISA, the balance in his Stock Account in shares of Common Stock (and cash in lieu of any fractional shares), and the balance in his Nonstock Account in cash (provided that the Participant shall have the right to require that the balance in his Nonstock Account be paid in the same manner as the balance in his Stock Account); and
(e) continue to maintain the Trust and Plan to pay benefits in accordance with the provisions of Article VIII, except that no Employee shall become a Participant on or after the effective date of such termination.
Section 11.05 reads:
11.05. In the event of a partial termination of the Plan, the rights of all affected Participants to their Account balances, determined as of the date of such partial termination, shall be fully (100%) vested.
Section 11.02, when read in conjunction with § 11.01, obviously refers to a partial termination. Ms. Conkright determined that when § 11.02 refers to allocation and segregation of participants' "proportionate interest in the Trust Fund" it does not add a third level of entitlement in addition to that provided by § 11.04 with respect to a complete termination, or § 11.05 with respect to partial termination. Participants' "proportionate interest in the Trust Fund" pursuant to § 11.02 can therefore only refer to the interest they are entitled to pursuant to partial termination under § 11.05, that is, their vested account balances. Account balances reflect each participants' interest in the Trust Fund, § 5.03, but their proportionate interests in shares in the Trust Fund can be only what has accrued, that is, only those shares that have been released from the Suspense Account and credited to their individual stock accounts. Participants' interests in the shares remaining in the Suspense Account are purely contingent on their remaining employed and on their employer continuing to make contributions to the repayment of the loan. Only then are shares periodically released and credited to participants' accounts. §§ 4.02(d), 5.02(b).
Thus, § 11.02 is harmonized with § 11.05, which provides for immediate vesting of affected participants' account balances in the event of a partial termination. Section 11.06, which addresses termination of the Plan in its entirety and provides for allocation to current participants of remaining Suspense Account shares after the loan has been repaid, has no application to the termination of a single employer. See § 11.06(c) (upon termination of the Plan in its entirety the Trustee must repay the loan, which may be done by release of shares from the Suspense Account, and, following repayment, participants are allocated their proportionate shares of the remaining balance).
This interpretation is further in harmony with the Plan provisions that support the administrative decisions' second theory — no participant has any interest in shares held in the Suspense Account unless a contribution towards repayment of the loan debt has been made by their employer. See § 5.02(a) (shares held in the Suspense Account shall not be allocated to participants until their release from the Suspense Account), § 5.02(b) (shares are released from the Suspense Account only following payment of installments of loan principal and interest), § 4.02(d) (shares of stock are released from the Suspense Account "with respect to Unallocated Dividends and Employer contributions . . . on account of the loan amortization payment"), and § 11.07 ("termination" includes a complete discontinuance of contributions under the Plan). When Crum Forster was terminated, its contributions ceased, and plaintiffs do not argue otherwise.
The administrative decisions' interpretation of the Plan is the only interpretation that harmonizes the Plan as a whole. Plaintiffs' theory of § 11.02's meaning is inconsistent with other Plan provisions in that it would require invasion of the Suspense Account in the absence of continued employer contributions and before the loan is repaid. Further, to segregate plaintiffs' shares from the ongoing Plan while remaining participants (Xerox employees) are required to wait 15 years to receive their stock allocations, may constitute an illegal preference prohibited by ERISA. See Spencer v. Central States Pension Fund, 778 F. Supp. 985, 996 (N.D. Ill. 1991) (creation of preferences among participants of an employee benefits plan can give rise to a breach of fiduciary duty). The only other interpretation consistent with plaintiffs' reading would require the loan to be repaid and the remainder of the Suspense Account shares to be distributed upon the termination of a single employer. But this would render nugatory the majority of Article XI, which clearly contemplates continuation of the Plan in the event of withdrawal of an employer.
In addition to being supported by a commonsense reading of the Plan, the administrative decisions are supported by case law. See Bennett v. Conrail Matched Sav. Plan Admin. Comm., 168 F.3d 671, 676 (3d Cir. 1998) (ERISA protects only accrued benefits, not unallocated assets), cert. denied, ___ U.S. ___, 120 S.Ct. 173 (1999); Walsh v. Great Atl. Pac. Tea Co., 96 F.R.D. 632, 652 (D. N.J. 1983) (upon partial termination of the plan, affected participants are not entitled to a pro rata share of any excess assets because there are no excess assets as long as the remainder of the plan remains in effect; the amount of the surplus can only be calculated after a complete termination of the plan), aff'd 726 F.2d 956 (3d Cir. 1993); Rummel v. Consolidated Freightways, Inc., C-91-4168 DLJ, 1992 WL 486913 at *6 (N.D. Cal. Sept. 17, 1992) ("Plaintiffs have not identified a single court decision or agency ruling holding that the unacerued assets held in a suspense account of a contribution plan must be immediately allocated upon a partial termination.").
There is nothing in the record to indicate whether the plan administrators have given the Plan a uniform construction or whether different interpretations of the Plan will result in unanticipated costs. The Court finds, however, based on the language of the Plan and the facts in the record, that the administrative decisions are consistent with a fair reading of the Plan. Thus, the administrative decisions are legally correct, and it is unnecessary to review the decisions under the abuse of discretion standard. Pickrom, 57 F.3d at 471-72. Plaintiffs' motion for summary judgment on their benefits claim will therefore be denied.
One remaining issue needs to be discussed. The parties have spilled much ink and killed several trees in arguing whether it was futile for plaintiffs to exhaust their administrative remedies. Whether it was or was not (it was not), the Court is at a loss to understand what the futility doctrine has to do with the review of a Plan Administrator's decision. Plaintiffs assert that abuse-of-discretion review is not proper when the record demonstrates futility of the administrative process. (Second Supplement at 2, docket no. 119.) They offer no authority to support this assertion. In any event, any inferences of lack of good faith on the part of the Plan Administrator are examined only if the court finds the decision was not legally correct and must then determine whether the decision was an abuse of discretion. Wildbur, 974 F.2d at 638. The decision in this case is legally correct.
Exhaustion may be considered futile if the plan administrator has failed to provide information to the claimant regarding benefits, or if the plan's review process has been abolished. Hall v. National Gypsum Co., 105 F.3d 225, 232-33 (5th Cir. 1997). Exhaustion may also be excused in cases involving a finding of bias or hostility on the part of the administrator. See Denton v. First Nat'l Bank, 765 F.2d 1295, 1302-03 (5th Cir. 1985) (finding that the evidence did not show that the committee was hostile or bitter toward plaintiff and therefore exhaustion would not have been futile); Brown v. Star Enter., 881 F. Supp. 257, 259 (E.D. Tex. 1995) ("Futility of appeal will serve as an exception to the administrative exhaustion requirement only if a plaintiff can make a clear showing that the plan administrators harbored bitterness or hostility for the claimant."). Finally, exhaustion is not required if the plan administrator has indicated in the course of the litigation that it intends to refuse any further claim by the plaintiff, or that it has a longstanding policy concerning denial of certain types of claims. DePina v. General Dynamics Corp., 674 F. Supp. 46, 50-51 (D. Mass. 1987).
Plaintiffs' futility argument is specious. As plaintiffs admit, they first leamed of defendants' argument that § 11.02 is inapplicable in August, 1999. (Plaintiffs' reply, document no. 103 at 12.) A statement contained in a brief filed in 1999 cannot establish futility in 1993, the date plaintiffs received notice that they were no longer participants in the ESOP. Plaintiffs have failed to suggest that the plan administrator was hostile or bitter towards them, that the administrator indicated that she intended to refuse plaintiffs' claims, or that she had a longstanding policy to deny such claims. While plaintiffs complain that the administrator failed to provide them necessary information, that complaint is untenable in light of the administrators' decisions, which clearly address plaintiffs' claims and set out the reasons for their denial.
III. Plaintiffs' motion for injunctive relief.
In their second amended complaint, plaintiffs request "a preliminary injunction mandating that defendants segregate the ESOP stock necessary to comply with Plaintiffs' claim that the unallocated stock as of January 1, 1993 attributable to the Crum Forster participants should have been segregated and allocated to those participants." Second Amended Complaint ¶¶ 74-75. For the reasons set forth in the discussion of plaintiffs' partial summary judgment motion on their benefits claim, it is clear that there is no likelihood that plaintiffs will prevail on the merits. See Griffin v. Box, 910 F.2d 255, 259 (5th Cir. 1990). Therefore, their motion for preliminary injunction will be denied.
IV. Plaintiffs' Motion for Leave to File Third Amended Complaint
Plaintiffs' proposed third amended complaint would add a new prohibited transaction claim under ERISA § 406(a)(1)(B) ( 29 U.S.C. § 1106 (a)(1)(B)), would delete their Varity claim, would expand their ERISA § 404(a) allegations, and would "emphasize a breach of fiduciary duty claim against Defendants [pursuant to ERISA § 409] that has always been in the case." The proposed complaint (docket no. 163, attachment) also contains the claims previously asserted in plaintiffs' Second Amended Complaint: their benefits claim, breach of fiduciary duty claims involving the hiring of Joseph W. Brown, Jr. to restructure and sell Crum Forster, and request for preliminary injunction.
A. Plaintiffs have failed to satisfy the Rule 16(b) standard.
The Court's scheduling order gave the parties until November 3, 1998 to amend their pleadings, and despite the fact that the parties have jointly moved three times to extend deadlines, plaintiffs have never requested that the date for amending the pleadings be extended. Nor have they done so now.
While plaintiffs' motion for leave to file their Second Amended Complaint was also untimely, because the Bakner case had been recently consolidated with the Lawrence case, defendants did not object on that basis. The Court granted leave to file.
Motions to amend pleadings are generally determined pursuant to the standards of FED. R. Civ. P. 15(a). Motions to extend scheduling order deadlines, however, are determined according to FED. R. Civ. P. 16(b). In situations where the motion to amend is filed beyond the scheduling order deadline, many courts have required the movant to first show good cause for extending scheduling order deadlines, and then, if good cause is shown, the movant must satisfy the more liberal requirements of Rule 15(a). See Parker v. Columbia Pictures Industries, 204 F.3d 326, 340 (2d Cir. 2000) (collecting cases); Callais v. Susan Vizier, Inc., No. Civ. A. 99-2008, 2000 WL 278097 *3-4 (E.D. La. Mar 13, 2000); McCombs v. Allwaste Recovery Systems, Inc., No. Civ. A. 3:98-CV-0489D, 1999 WL 102816 *1-2 (N.D. Tex. Feb. 24, 1999).
The Court finds the reasoning of these cases persuasive. By limiting the time for amendments, Rule 16(b) is designed to offer a measure of certainty in pretrial proceedings, ensuring that "at some point both the parties and the pleadings will be fixed." Parker, 204 F.3d at 339-40 (quoting FED. R. CIV. P. 16 advisory committee's note (1983 amendment, discussion of subsection (b))). See also Sosa v. Airprint Sys., Inc., 133 F.3d 1417, 1419 (11th Cir. 1998) (per curiam) ("If we considered only Rule 15(a) without regard to Rule 16(b), we would render scheduling orders meaningless and effectively would read Rule 16(b) and its good cause requirement out of the Federal Rules of Civil Procedure."); Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 610 (9th Cir. 1992) ("Disregard of the [scheduling] order would undermine the court's ability to control its docket, disrupt the agreed-upon course of the litigation, and reward the indolent and the cavalier. . . . Rule 16['s] . . . standards may not be short-circuited by an appeal to those of Rule 15."). The Fifth Circuit has always allowed the trial courts "broad discretion to preserve the integrity and purpose of the pretrial order."Geiserman v. McDonald, 893 F.2d 787, 790 (5th Cir. 1990).
Modification of a scheduling order requires a showing of good cause. FED. R. CIV. P. 16(b); Reliance Ins. Co. v. Louisiana Land Exploration Co., 110 F.3d 253, 257 (5th Cir. 1997); Geiserman, 893 F.2d at 790. The "good cause" standard primarily focuses on the diligence of the party seeking the modification. Johnson, 975 F.2d at 609; 6A WRIGHT, MILLER KANE, FEDERAL PRACTICE AND PROCEDURE § 1522.1 at 231 (2d ed. 1990) ("good cause" means scheduling deadlines cannot be met despite party's diligence). The absence of prejudice to the nonmovant and mere inadvertence on the part of the movant are insufficient to demonstrate good cause. See Geiserman, 893 F.2d at 791.
Plaintiffs state that they did not earlier file their § 406(a)(1)(B) claim because they "did not obtain documents related to this financing transaction, or obtain the testimony of the Washington, D.C. law firm that represented Xerox in the transaction until February 1, 2000." The transaction they refer to is the refinancing of the ESOP loan that occurred in 1993 upon Crum Forster's removal from the Plan. The Washington, D.C. law firm represented Xerox in obtaining an IRS letter ruling concerning Xerox's refinancing of the ESOP loans. Plaintiffs do not explain why it took them over six years to look into the refinancing of the ESOP. Moreover, as defendants point out (docket no. 161 at 2), the IRS letter ruling was mentioned in the Plan Administrator's November 23, 1999 letter, and in defendants' brief filed August 16, 1999 (docket no. 95). Thus, plaintiffs knew of letter ruling long before they deposed the attorney from the D.C. firm. Otherwise, it is doubtful they would have deposed him in the first place. Plaintiffs have failed to show that they could not have met the deadline for amending their complaint despite their diligence. They have therefore failed to show good cause for extension of the deadline.
The Fifth Circuit has not yet spoken definitively on the juxtaposition of Rules 16(b) and 15(a). Therefore, the Court will also consider whether to permit amendment pursuant to Rule 15(a).
B. Plaintiffs have failed to satisfy the Rule 15(a) standard.
Rule 15(a) instructs that "leave [to amend] shall be freely given when justice so requires." The rule evinces a strong bias in favor of granting leave to amend, FDIC v. Conner, 20 F.3d 1376, 1385 (5th Cit. 1994), but leave should not be granted automatically, In re Southmark Corp., 88 F.3d 311, 314 (5th Cir. 1996), cert. denied. 519 U.S. 1057 (1997). Instead, the decision whether to grant leave lies within the sound discretion of the trial court. Louisiana v. Litton Mortgage Co., 50 F.3d 1298, 1302-03 (5th Cir. 1995). In exercising its discretion, the Court may consider such factors as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of the amendment. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962);Southmark Corp., 88 F.3d at 314-15. In addition, although a party must have a fair chance to present claims and defenses, "we also must protect `a busy district court [from being] imposed upon by the presentation of theories seriatim.'" Daves v. Payless Cashways, Inc., 661 F.2d 1022, 1025 (5th Cir. 1981). Even if there is substantial reason to deny leave to amend, the court should consider prejudice to the movant, as well as judicial economy, in determining whether justice requires granting leave.Jamieson v. Shaw, 772 F.2d 1205, 1208 (5th Cir. 1985).
1. New prohibited transaction claim under § 406(a)(1)(B).
In their new breach of fiduciary duty claim, plaintiffs plead that Xerox guaranteed the refinancing of certain debt in the connection with Crum Forster's withdrawal from the Plan. Proposed complaint ¶ 51. Because, plaintiffs contend, Xerox is a party-in-interest and its guaranty is an extension of credit to the ESOP, the transaction violates ERISA § 406(a)(1)(B). Section 406(a)(1)(B) prohibits a fiduciary from causing a plan to engage in a transaction that constitutes a "lending of money or other extension of credit between the plan and a party in interest."
As already stated, plaintiffs are complaining of the refinancing that occurred in 1993 after the withdrawal of Crum Forster. Proposed complaint ¶¶ 5, 39, 51. Breach of fiduciary duty actions are subject to the ERISA statute of limitations. 29 U.S.C. § 1113. An action must be filed after the earlier of (1) six years after the last action that constituted the alleged breach, or (2) three years after the earliest date on which the plaintiff acquired actual knowledge of the breach, in the absence of fraud or concealment. Id. Six years after the alleged breach is 1999. Plaintiffs filed the motion for leave in February 2000. Plaintiffs do not claim fraud or concealment of the alleged breach.
The doctrine of relation back does not apply. See FED. R. CIV. P. 15(c). The proposed third amended complaint is the first time plaintiffs have complained about the refinancing. There is no relation back if the amended complaint asserts new or distinct conduct, transactions, or occurrences as the basis for relief. McGregor v. Louisiana State Univ. Bd. of Supervisors, 3 F.3d 850, 863 (5th Cir. 1993).
The proposed claim is time-barred, and amendment of the complaint is therefore futile. FDIC v. Conner, 20 F.3d 1376, 1385 (5th Cir. 1994) (leave to amend should be denied on the basis of futility when the movant seeks to add a claim upon which the statute of limitations has run).
Even if the claim was not time-barred, plaintiffs have not stated a cause of action because they have failed to allege that a fiduciary caused the plan to engage in the alleged prohibited transaction. To sustain a violation of § 406(a), a plaintiff must show that a fiduciary caused the plan to engage in the allegedly unlawful conduct.Lockheed Corp. v. Spink, 517 U.S. 882, 888, 116 S.Ct. 1783, 1788 (1996). "[T]he only transactions rendered impermissible by § 406(a) are transactions caused by fiduciaries." Id. at 889 n. 3, 116 S.Ct. 1789 n. 3.
Plaintiffs also allege that Xerox is a fiduciary. Proposed complaint ¶ 12. Even if the proposed complaint can be construed to allege that Xerox "caused" the Plan to enter into the refinancing transaction with itself by providing its guaranty, plaintiffs have still failed to state an actionable claim under § 406(a)(1)(B).
Beyond the mere fact of the refinancing, plaintiffs' theory in their proposed complaint centers around Xerox's obtaining a letter ruling from the IRS seeking to establish that the refinancing would pass muster under the IRS's primary benefit rule. Proposed complaint ¶¶ 52, 53, 56, 57.See also Exhibits 3-6 of Plaintiff's Motion to Compel Testimony and Production of Documents Related to Xerox's IRS Ruling Request (docket no, 127), which plaintiffs incorporated by reference into their motion for leave to file. Xerox sought the letter ruling to determine whether its proposed refinancing would be subject to the excise tax on prohibited transactions. See 26 U.S.C. § 4975. To come within the exemption to the tax, the loan must be primarily for the benefit of ESOP participants and their beneficiaries. See § 4975(c)(2); Treasury Regulation § 54.4975-7(b)(3). ERISA also contains a primary benefit rule, which provides that "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan." 29 U.S.C. § 1103(c). The letter ruling request and letter ruling concern the avoidance of the excise tax on a prohibited transaction for purposes of the Internal Revenue Code, and thus have nothing to do with the ERISA rule, which in turn has nothing to do with a violation of § 406(a)(1)(B). Whether or not the refinancing was a "prohibited transaction" for excise tax purposes, or even for purposes of § 1103(c)(1), has nothing to do with whether it is a prohibited transaction under § 406(a)(1)(B). The latter statute, which merely prohibits a fiduciary from causing a plan to engage in a transaction that constitutes a "lending of money or other extension of credit between the plan and a party in interest," says nothing about "prohibited transactions." See Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160, 113 S.Ct. 2006, 2012 (1993) (Congress enacted § 406 "to bar categorically a transaction that [is] likely to injure the pension plan."); Etter v. J. Pease Constr. Co., 963 F.2d 1005, 1008-09 (7th Cir. 1992) (no violation of § 406(a)(1)(B) calling for a remedy if the Plan has suffered no loss or other injury and the fiduciary has not profited from the loan; even if the loan were an ERISA prohibited transaction, the Plan is not entitled to damages). Because § 406(a) characterizes per se violations, it should be interpreted narrowly. See United Steelworkers of Am., Local 2116 v. Cyclops Corp., 860 F.2d 189, 203 (6th Cir. 1988); Amato v. Western Union Int'l. Inc., 773 F.2d 1402, 1417 (2d Cir. 1985) (stating that a broad interpretation of the transactions prohibited by § 406 bars plaintiff's claim); Phillips v. Amaco Oil Co., 614 F. Supp. 694, 720 (N.D. Ala. 1985), aff'd, 799 F.2d 1464 (11th Cir. 1986). In addition, ERISA's exclusive benefit rule can only be violated if there has been a removal of plan assets for the benefit of someone other than the participants. Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Comm., 953 F.2d 587, 592 n. 6 (11th Cir. 1992); Holliday v. Xerox Corp., 732 F.2d 548, 551-52 (6th Cir. 1984). Plaintiffs have not alleged that Plan assets were removed or were used to benefit the fiduciaries. See Maez v. Mountain States Tel. Tel., Inc., 54 F.3d 1488, 1506 (10th Cir. 1995) (exclusive benefit rule is designed to protect participants' expected payments by preventing employers from diverting funds to themselves).
Because plaintiffs fail to state a claim under § 406(a)(1)(B), amendment of the complaint with the addition of this claim would be futile.
Finally, as already mentioned, undue delay on the part of the plaintiff in seeking the amendment is a factor the Court must consider in deciding whether to permit amendment. Although Rule 15(a) contains no time limit for permissive amendment, at some point delay can be procedurally fatal.Whitaker v. City of Houston, 963 F.2d 831, 836 (5th Cir. 1992). In such a situation, the plaintiff bears the burden of showing that the delay was due to oversight, inadvertence, or excusable neglect. Id. Plaintiffs have not done so. For the reasons already discussed above, the Court finds that plaintiffs' more than six-year delay in complaining of the 1993 refinancing is undue. See Southmark Corp., 88 F.3d at 316.
2. Expanded breach of duty of loyalty allegations under § 404(a).
In their Second Amended Complaint, plaintiffs alleged that defendants violated ERISA § 404(a)(1) by giving Brown a financial incentive to change the ESOP and by accepting Brown's recommendation to terminate the ESOP. Second Amended Complaint at ¶¶ 65-67. In their proposed third amended complaint, plaintiffs add the allegations that defendants breached their duty of loyalty following the removal of Crum Forster from the Plan by designating Crum Forster unallocated shares for allocation to Xerox participants contrary to the terms of the ESOP. Proposed third amended complaint at ¶¶ 4, 64-66.
The motion for leave to file the proposed amendment will be denied as futile. First, plaintiffs essentially restate their benefits claim as a claim for breach of fiduciary duty. The Court has already denied plaintiffs' motion for partial summary judgment on their benefits claim by upholding the Plan Administrator's rejection of that claim. What had no merit as a claim for benefits will not succeed in the guise of a breach of loyalty claim. See Varity Corp. v. Howe, 516 U.S. 489, 515, 116 S.Ct. 1065, 1079 (1996) ("where Congress elsewhere provided adequate relief for a beneficiary's injury, there will likely be no need for further equitable relief, in which case such relief normally would not be `appropriate.'"); Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610 (5th Cir. 1998) (plan participant cannot assert simultaneously a denial of benefits claim and a § 1132(a)(3) breach of fiduciary duty cause of action).
Third, in amending the ESOP, defendants acted as settlors, not fiduciaries. Lockheed Corp., 517 U.S. at 890, 116 S.Ct. at 1789. See also cases cited above at pages 13 and 14.
3. New breach of fiduciary duty claim under § 502(a)(2).
ERISA § 502(a)(2) provides a beneficiary a cause of action for relief pursuant to § 409. Plaintiffs state that their claim pursuant to ERISA § 409 "has always been in the case." They cite paragraph 51 of their Second Amended Complaint, which reads:
ERISA § 409 ( 29 U.S.C. § 1109(a)) provides:
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.
Among other safeguards, ERISA section 409(a), 29 U.S.C. § 1109(a), imposes fiduciary duties on all ERISA plan fiduciaries and provides a cause of action for breach of these duties.
In their previous pleadings, plaintiffs have always alleged that they have suffered individual losses and have never alleged any loss to the Plan itself as a result of defendants' actions. Never, that is, until their proposed third amended complaint where they have added "and the Plan" to their previous claims for relief on their own behalf. See e.g., proposed complaint ¶¶ 4, 68.
In Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140-42, 105 S.Ct. 3085, 3089-90 (1985), the Supreme Court interpreted the "loss to the plan" language in § 409 to limit claims under that section to those that inure to the benefit of the plan as a whole rather than to individual beneficiaries, noting that this interpretation reflects ERISA's primary concern with the possible misuse or mismanagement of plan assets. Relying on Russell, the Fifth Circuit has held that § 409 focuses on fiduciary breaches that cause harm to a plan as a whole.Matassarin v. Lynch, 174 F.3d 549, 565-66 (5th Cir. 1999), cert. denied, 120 U.S. 934 (2000). As has been clear throughout this case, plaintiffs have never pleaded nor argued that there has ever been a transfer of Plan assets or properties out of the Plan to any fiduciary or party-in-interest. They have failed to allege any way in which the defendants' actions caused a loss to the Plan as a whole as envisioned in § 502(a)(2).
In any event, plaintiffs cannot proceed simultaneously with a claim under § 502(a)(2) and their § 502(a)(1) benefits claim. Rhorer v. Raytheon Engineers Constructors, Inc., 181 F.3d 634, 639 (5th Cir. 1999). This is true even if plaintiffs ultimately fail to prevail on their benefits claim. Tolson, 141 F.3d at 610.
Thus, expansion of plaintiffs' breach of fiduciary duty claims to include a claim under § 502(a)(2) is futile.
V. Orders.
Defendants' motion to dismiss second amended complaint (docket no. 134) is DENIED as it pertains to plaintiffs' benefits claim and GRANTED as it pertains to plaintiffs' breach of fiduciary duties claims. Plaintiffs' motion for partial summary judgment (docket no. 143), [first] supplement (docket no. 99), [second] supplement (docket no. 119), and third supplement and motion to have responses deemed admitted (docket no. 151) are DENIED. Plaintiffs' motion for preliminary injunction in their second amended complaint (docket no. 115) is DENIED. Plaintiffs' motion for leave to file third amended complaint (docket no. 136) and the supplement to that motion (docket no. 163) are DENIED.
Thus, the only currently pending claim is plaintiffs' benefits claim found in Count One of their second amended complaint.
SIGNED and ENTERED this 28th day of August 2000.