Bonds v. Heeter

1

RICHARD N. BONDS, on behalf of the Flat Rock Metal and Bar Processing Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiffs, v. RICHARD A. HEETER, CAPITAL TRUSTEES, LLC, PETER F. SHIELDS, PAUL J. LANZON II, and JOHN DOES 1-10, Defendants.

No. 23-12045

United States District Court, E.D. Michigan, Southern Division

May 8, 2024

OPINION AND ORDER DENYING IN PART AND AND GRANTING IN PART DEFENDANTS' MOTIONS TO DISMISS (ECF NOS. 18 19)

HON GEORGE CARAM STEEH UNITED STATES DISTRICT JUDGE

Defendants seek dismissal of Plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) and (6). For the reasons explained below, Defendants' motions are denied in part and granted in part.

BACKGROUND FACTS

This case arises under the Employee Retirement Income Security Act of 1974 (“ERISA”) and involves the creation of an Employee Stock Ownership Plan. Plaintiff Richard N. Bonds is a participant in the ERISA plan at issue, the Flat Rock Metal and Bar Processing Stock Ownership Plan (the “Plan” or “ESOP”). Defendants Richard A. Heeter and his company, Capital Trustees, LLC, were appointed as the Plan's Trustee.

In November 2020, the Plan purchased one hundred percent of the outstanding shares of SAC Ventures, Inc., which is a holding company for subsidiaries in the steel processing industry. SAC's subsidiaries include Flat Rock Metal, Inc., Steel Dimension, Inc., and Custom Coating Technologies, Inc. The Plan purchased SAC stock from shareholders Peter F. Shields and Paul J. Lanzon II, who are named as Defendants. At the time of the ESOP transaction, Shields was President and a Director of SAC, and Lanzon was Treasurer, Chief Executive Officer, and Director of SAC. Lanzon is also Shields' son-in-law.

Prior to the ESOP transaction, SAC was owned by members of the Shields family and its stock was not publicly traded. SAC is the sponsor and administrator of the Plan, which covers all employees of SAC and its subsidiaries who have completed more than 1,000 hours of service.

As a method for transitioning ownership of SAC away from the Shields family, Shields and Lanzon decided to develop an ESOP. The board of directors of SAC appointed Richard Heeter and Capital Trustees as Trustee for the Plan. The Trustee had sole and exclusive authority to negotiate and approve the ESOP transaction on behalf of the Plan.

The Plan purchased approximately one million shares of SAC stock from Shields and Lanzon (or their trusts) for approximately $60 million. SAC financed the sale by loaning the Plan the $60 million needed for the purchase, at an interest rate of 1.17 percent. The complaint alleges that the sale was financed by the sellers because they were unable to arrange for bank financing, which would have required due diligence to ensure that the stock was worth the price paid.

Plaintiff alleges that the Plan overpaid for the stock for several reasons. Plaintiff contends that the purchase price should have been discounted to reflect that the selling shareholders retained control of the company. The complaint also asserts that the Trustee's appraisal relied on unrealistic growth projections and dissimilar comparable companies, while failing to take into account the lack of marketability and the issuance of “synthetic equity” that dilutes stock value. Plaintiff alleges that the Trustee's failure to diligently investigate these issues and to negotiate a fair price resulted in the Plan paying an inflated price for the SAC stock. Although the Plan paid approximately $60 million for the stock in November 2020, it was valued at approximately $3.6 million on December 31, 2020, and $17.1 million on December 31, 2021.

Plaintiffs have asserted the following claims under ERISA: Count I, against the Trustee, for causing prohibited transactions in violation of § 406(a) (28 U.S.C. § 1106(a)); Count II, against the Trustee, for violation of fiduciary duties under § 404(a) (28 U.S.C. § 1104(a)); Count III, against Shields and Lanzon, for equitable relief under § 502(a)(3) for knowingly participating in violations of § 404(a) and § 406(a); and Count IV, against Shields and Lanzon, for co-fiduciary liability under § 405(a)(3). Defendants seek dismissal for lack of standing and failure to state a claim.

LAW AND ANALYSIS

I. Standard of Review

Under Federal Rule of Civil Procedure 8, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8. To survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege facts that, if accepted as true, are sufficient “to raise a right to relief above the speculative level” and to “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The complaint “must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.” Advocacy Org. for Patients & Providers v. Auto Club Ins. Assn, 176 F.3d 315, 319 (6th Cir. 1999) (internal quotation marks omitted).

II. Standing

Standing is a jurisdictional requirement: “an essential and unchanging part of the case-or-controversy requirement of Article III.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). The party invoking federal jurisdiction has the burden of demonstrating the three elements of standing:

First, the plaintiff must have suffered an “injury in fact” - an invasion of a legally protected interest which is (a) concrete and particularized, and (b) “actual or imminent, not ‘conjectural' or ‘hypothetical.'” Second, there must be a causal connection between the injury and the conduct complained of - the injury has to be “fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court.” Third, it must be “likely,” as opposed to merely “speculative,” that the injury will be “redressed by a favorable decision.”

Lujan, 504 U.S. at 560-61 (citations omitted).

A facial challenge to the court's subject matter jurisdiction, as Defendants make here, “questions merely the sufficiency of the pleadings.” Wayside Church v. Van Buren Cty., 847 F.3d 812, 816-17 (6th Cir. 2017).

Accordingly, the court accepts the factual allegations in the complaint as true, “just as in a Rule 12(b)(6) motion.” Id.

Plaintiff alleges that because the Plan overpaid for SAC stock, the Plan and its participants were injured through diminished stock allocations, excessive debt, and losses to individual plan accounts. ECF No. 1 at ¶ 73. Valuations of the stock soon after the sale were significantly less than the price paid by the Plan. These losses were caused by the Trustee's failure to diligently investigate and negotiate the ESOP transaction. Shields and Lanzon authorized the loan from SAC and were centrally involved in the transaction. ECF No. 1 at ¶¶ 44, 49. Plaintiffs assert that the Trustee, with the knowing participation of the selling shareholders, breached his fiduciary duty and caused the Plan to engage in a prohibited transaction. Plaintiffs contend that Defendants are liable to the Plan for the difference between the price paid by the Plan and the fair market value of the SAC shares.

These allegations satisfy the standing elements of injury in fact, causation, and redressability. See, e.g., Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 592 (8th Cir. 2009) (“Braden has satisfied the requirements of Article III because he has alleged actual injury to his own Plan account,” caused by defendants, that is likely to be redressed by a favorable judgment); In re Mut. Funds Inv. Litig., 529 F.3d 207, 216 (4th Cir. 2008) (plaintiffs “suffered injury in that their retirement accounts were worth less than they would have been absent the breach of duty, and this injury was caused, as the plaintiffs have alleged, by the fiduciaries' misconduct”).

The primary ESOP case relied upon by Defendants, Plutzer v. Bankers Trust Co. of South Dakota, is distinguishable. 2022 WL 596356 (S.D.N.Y.), aff'd 2022 WL 17086483 (2d Cir. Nov. 21, 2022). In that case, the plaintiff initially argued that post-transaction equity valuations of the company supported his theory that the plan overpaid for the stock. Subsequently, however, the plaintiff “disavowed” this argument, leaving no concrete allegations of overpayment. Here, Plaintiff alleges that the “stock was revalued at $3,649,046 as of December 31, 2020,” a short time after the transaction was completed in November 2020. ECF No. 1 at ¶ 70. Taking the facts in the complaint as true, as the court must at this stage, Plaintiff's allegations raise an inference of overpayment, which is an injury to the Plan and its participants.

Defendants argue that Plaintiff cannot show injury because he cannot substantiate his allegations that the stock was overpriced. This argument goes to the merits of Plaintiff's claim however, not standing. See Arizona State Legislature v. Arizona Indep. Redistricting Comm'n, 576 U.S. 787, 800 (2015) (“[O]ne must not ‘confus[e] weakness on the merits with absence of Article III standing.'”) (citation omitted); Huff v. TeleCheck Servs., Inc., 923 F.3d 458, 462 (6th Cir. 2019), cert. denied, 140 S.Ct. 1117 (2020) (“There is a difference between failing to establish the elements of a cause of action and failing to show an Article III injury. One is a failure of proof. The other is a failure of jurisdiction. Yes, there can be overlap between the two inquiries. But they are not one and the same.”). Plaintiff's general allegations of concrete and particularized injury are sufficient at this stage of the...