Opinion
Civil Action No: 99-3439 Section: "D"(4)
November 30, 2001
Before the court are the following motions:
(1) "Motion to Dismiss" filed by Defendants, Avondale Industries, Inc., Albert L. Bossier, Jr., Thomas M. Kitchen and Kenneth B. Dupont, Blanche S. Barlotta, Eugene E. Blanchard, Jr., Rodney J. Duhon, Jr., Ernest F. Griffin, Jr., and R. Dean Church; and
(2) "Motion for Partial Summary Judgment" filed by Defendants.
Plaintiffs, Harry L. Thompson, Jr., Raymond R. Young, Sr., and Peter J. Hill (who were members of the Avondale Industries, Inc. Employee Stock Ownership Plan (ESOP)), filed memoranda in opposition to these motions. The motions were set for hearing on Wednesday, November 28, 2001, on which date the court heard oral argument from counsel. Now, having considered the memoranda and argument of counsel, the record and the applicable law, the court finds that both motions should be denied.
An employee stock ownership plan is an ERISA plan that invests primarily in the employer's stock. 29 U.S.C. § 1107(d)(6)(A).
(1) Defendants' Motion to Dismiss
(a) Inapplicability of Federal Rules of Procedure 23.1 and 23
In this matter, Plaintiffs allege that Defendants violated their fiduciary duties under ERISA in connection with the sale of ESOP's Avondale stock in 1996 and 1998. ( See Amended Complaint, Counts 2 3) "Plaintiffs have brought this action in their capacity as participants under ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2), on behalf of the ESOP as a whole to recover appropriate relief under ERISA § 409, 29 U.S.C. § 1109, and under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), in the form of equitable remedies that will redress violations and enforce the provisions of Title I of ERISA as well as the 1934 Act." ( See Amended Complaint, ¶ 11, emphasis added).
Plaintiffs also initially asserted a violation of Section 10(b) of the Securities Exchange Act of 1943 against Defendant Avondale. ( See Amended Complaint, Count 1). But the court subsequently granted Defendant Avondale's Motion to Dismiss that claim, and Plaintiffs elected not to further amend their Complaint to allege a securities fraud claim against the individual Defendants.
Liability for breach of fiduciary duty
29 U.S.C. § 1132
(A) for the relief provided for in subsection (c) of this section, or
(B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan;
(2) by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title;
(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan . . .
1109
(a) 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 . . .
In their Motion to Dismiss now before the court, Defendants argue that the "derivative plaintiffs cannot represent adequately the Avondale Employee Stock Ownership Plan (ESOP) and its participants" as required by Federal Rule of Civil Procedure 23.1. (Defendants' Memo., p. 1).
Federal Rule of Civil Procedure 23.1, entitled "Derivative Action by Shareholders" states:
In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted against it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiffs share or membership thereafter devolved on the plaintiff by operation of law, and (2) that the action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiffs failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members m such manner as the court directs.
FRCP 23.1 (emphasis added).
While Plaintiffs acknowledge that "their claims are derivative in the broad sense that they are seeking relief on behalf of the ESOP and not on their individual behalf", Plaintiffs contend that Rule 23.1 has no applicability here because "Plaintiffs are not shareholders attempting to enforce a right of a corporation or members attempting to enforce the right of an unincorporated association." (Plaintiffs' Opp. at 6-7). The court agrees.
Although this suit may be characterized as "derivative" in the broad sense, it clearly does not fall within the terms of Rule 23.1. That rule applies only to derivative actions "brought by one or more shareholders or members to enforce the right of a corporation or of an unincorporated association. (emphasis added). Plaintiffs here are not suing as "shareholders" or "members" to enforce the right of any "corporation" or "unincorporated association." Rather, they are suing as plan beneficiaries to enforce the right of the plan against its fiduciaries. When a trust beneficiary brings a derivative suit on behalf of a trust, "the specific provisions of Rule 23.1 are not controlling. Charles A. Wright, Law of Federal Courts § 73 at 525 (5th ed. 1994)
As the Supreme Court made clear in Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535 n. 11, 104 S.Ct. 831, 838 n. 11, 78 L.Ed.2d 645 (1984), not every "derivative" action falls under Rule 23.1. Rule 23.1 applies only to a narrow class of derivative suits: those brought by shareholders or members of a corporation or unincorporated association to vindicate a right which may properly be asserted by that corporation or association. See, e.g., Id., at 535, 104 S.Ct. at 838 (refusing to apply Rule 23.1 where the shareholder plaintiff suing on behalf of the corporation sought to assert a right which could not properly be asserted by the corporation).Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1462-63 (9th Cir. 1995).
Further, the court will not require Plaintiffs to show that they are adequate class representatives within the meaning of Rule 23 (or that they satisfy any of the other requirements of Rule 23(a)), because Plaintiffs do not assert their ERISA claims as a class action. Rather, Plaintiffs state claims for breach of fiduciary duty on behalf of the ESOP as a whole, rather than individual claims for benefits under 29 U.S.C. § 1132(a)(1)(B).
Plaintiffs are entitled to sue as plan participants on behalf ESOP under 29 U.S.C. § 1132(a)(2). In re: Occidental Petroleum Corp., 217 F.3d 293, 297 (5th Cir. 2000). See also Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610 (5th Cir. 1998) ("Section 1132(a)(2) allows a beneficiary to bring a standard breach of fiduciary duty suit for the benefit of the subject plan.").
However, recovery under 29 U.S.C. § 1109 (a) and 29 U.S.C. § 1132(a)(2) is limited to that which "inures to the benefit of the plan as a whole." In re: Occidental Petroleum Corp., 217 F.3d 293, 297 n. 14, quoting Massachusetts Mut Life Ins Co. v. Russell, 473 U.S. 134, 140, 105 S.Ct. 3085, 3089, 87 L.Ed.2d 96 (1985). Extracontractual compensatory or punitive damages are therefore not appropriate. Id.
Further, a successful outcome for Plaintiffs "would benefit the Plan as a whole and would foreclose any subsequent litigation because it would cure any harm that the Plan suffered". Kuper v Iovenko. 66 F.3d 1447, 1453 (6th Cir. 1995).
Finally, to hold that Plaintiffs' right to bring their ERISA claims on behalf of the ESOP as a whole is subject to the requirements of either Rule 23.1 (derivative action by shareholders) or Rule 23 (class action) would frustrate the broad remedial and protective objectives of ERISA. In the absence of an explicit legislative directive that this type of suit must The brought either as a derivative suit (under Rule 23.1) or as a class action (under Rule 23), this court will not presume that Congress intended to make such a requirement. (b) Plaintiffs are "participants" within the meaning of ERISA .
The court recognizes in the jurisprudence that breach of fiduciary duty suits under ERISA have been brought as both Rule 23.1 derivative suits and Rule 23 class actions. However, there is no legislative requirement that they must be brought as such when they are brought of behalf of the subject plan.
Plaintiffs bring this suit "in their capacity as participants under ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2) , on behalf of the ESOP as a whole . . ." (Amended Complaint, ¶ 11, emphasis added). While Defendants do not challenge the capacity of Plaintiffs Harry Thompson and Peter Hill as "participants", Defendants argue that because Plaintiff Raymond Young retired from Avondale in 1999, and took his ESOP contributions "in kind" at that time, he ceased to be a participant in the ESOP.
See fn. 2, supra, for text of ERISA, 29 U.S.C. § 1132(a)(2).
Defendants argue that Plaintiff Young has no standing under Rule 23.1. While the court has found that Rule 23.1 has no applicability here, the court nevertheless addresses Plaintiff Young's standing to bring this suit as a "participant" under ERISA.
ERISA defines "participant" as "any employee or former employee . . . who is or may be eligible to receive a benefit of any type from an employee benefit plan." ERISA, 29 U.S.C. § 1002(7). In Firestone Tire Rubber Co. v. Burch, 489 U.S. 101m 117, 109 S.Ct. 948, 957-58, 103 L.Ed.2d 80 (1989), the Supreme Court interpreted this provision to include former employees who have "a reasonable expectation of returning to covered employment" and/or a "colorable claim" to vested benefits.
Here, the court finds that Plaintiff Young fits the Firestone definition of "participant" because he has a colorable claim of prevailing, the result of which would be recovery of funds withheld from the ESOP, which would ultimately result in additional vested benefits to be paid to him (i.e., the difference between the amount he received for his ESOP shares and the amount he should have received). Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan, 883 F.2d 345, 349-50 (5th Cir. 1989) (plaintiffs' claims for vested benefits qualified them as "participants" authorized to bring suit under ERISA).
Accordingly;
IT IS ORDERED that Defendants' "Motion to Dismiss" be and is hereby DENIED.
(2) Defendants' Motion for Partial Summary Judgement
In this motion, Defendants seek dismissal of Count 2 of the Amended Complaint as it pertains to Plaintiffs, Peter J. Hill and Harry L. Thompson, Jr., because Defendants contend that the claim set forth in Count 2 is untimely. In Count 2, Plaintiffs claim that Defendants breached their fiduciary duty under ERISA regarding the sale of the Avondale stock in 1996. ERISA's statute of limitations, Section 413(a), 29 U.S.C. § 1113(a), provides that ERISA claims generally may be commenced the earlier of six years after the breach or three years after the actual knowledge of the breach.
Defendants do not seek dismissal of Count 2 as it pertains to Plaintiff Raymond Young, Sr.
Plaintiffs filed their original Complaint on November 11, 1999. However, Defendants argue that Plaintiffs Hill and Thompson had actual knowledge of the breach of the fiduciary duty claim as asserted in Count 2 in April 1996, and thus the three year statute of limitations applies to bar this claim.
In Maher v. Shipping Co., 68 F.3d 951 (5th Cir. 1995), the Fifth Circuit reiterated its adoption of the Third Circuit's test for applying the three-year time bar and explained that "actual knowledge" means:
actual knowledge of all material facts necessary to understand that some claim exists, which facts could include necessary opinions of experts, knowledge of a transactions's harmful consequences, or even actual harm.Maher, 68 F.3d at 954, quoting Gluck v. Unisys Corp., 960 F.2d 1168, 1177 (3rd Cir. 1992)
The Maher Court then recognized that the Third Circuit had elaborated its definition of "actual knowledge" to require:
a showing that plaintiffs actually knew not only of the events that occurred which constitute the breach or violation but also that those events supported a claim for breach of fiduciary duty or violation under ERISA.Maher, 68 F.3d 954, quoting Int'l Union v. Murata Erie North America, 980 F.2d 889, 900 (3rd Cir. 1992).
Based on the summary judgment evidence submitted by the parties, the court finds that there are genuine issues of material fact regarding whether or not Plaintiffs Hill and Thompson had the requisite actual knowledge of the alleged ERISA violation asserted in Count 2 so as to trigger the three-year statute of limitations.
Accordingly;
IT IS ORDERED that Defendants' "Motion for Partial Summary Judgment" be and is hereby DENIED.
* * * * * *