Brundle v. Wilmington Trust, N.A.

258 F.Supp.3d 647

Tim P. BRUNDLE, ON BEHALF OF the CONSTELLIS EMPLOYEE STOCK OWNERSHIP PLAN, and on behalf of a class of all other persons similarly situated, Plaintiff

v.WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant.

1:15-cv-1494 (LMB/IDD).

United States District Court, E.D. Virginia, Alexandria Division.

Signed June 23, 2017

Gregory Yann Porter, Bailey & Glasser LLP, Washington, DC, for Plaintiff.

James Patrick McElligott, Jr., Summer Laine Speight, McGuireWoods LLP, Richmond, VA, John Edward Thomas, Jr., Nicholas DelVecchio SanFilippo, Stephen W. Robinson, McGuireWoods LLP, McLean, VA, Sarah Aiman Belger, Odin Feldman & Pittleman PC, Reston, VA, for Defendant.

MEMORANDUM OPINION

Leonie M. Brinkema, United States District Judge

The factual background of this civil action is fully set out in the Memorandum Opinion issued on March 13, 2017. See Mem. Op., [Dkt. 294]. Put briefly, plaintiff Tim P. Brundle ("plaintiff" or "Brundle"), acting on behalf of the Constellis Employee Stock Ownership Plan ("ESOP"), alleged that defendant, as the ESOP's trustee, caused the ESOP to engage in a transaction prohibited by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 etseq., when it failed to ensure that the ESOP paid no more than adequate consideration for Constellis' stock. Id. at 1. Following a six-day bench trial, the Court held that the defendant was liable for causing the ESOP to engage in a prohibited transaction under 29 U.S.C. § 1106(a)(1)(A), but not liable for transactions prohibited under 29 U.S.C. §§ 1106(a)(1)(B) or 1106(b), and awarded the ESOP $29,773,250 in damages. Id. at 2.

In the instant Motion to Amend the Judgment Pursuant to Rule 59(e), or, in the Alternative, For a New Trial Pursuant to Rule 59(a) ("Motion to Reconsider") [Dkt. 309], defendant argues that the Court made several discrete errors that require reconsideration of the finding of liability and the amount of damages awarded.¹

Separately, plaintiff has filed a Motion for Attorneys' Fees and Costs, and Plaintiff's Counsel's Motion for Attorneys' Fees and Reimbursement of Expenses ("Fee Petition") [Dkt. 312], seeking both reasonable attorneys' fees pursuant to ERISA's fee-shifting provision and an award of a one-third contingent fee, based on counsel's retainer agreement with Brundle, to be offset by any fee amount recovered under ERISA. Defendant objects that the fees claimed under ERISA are unreasonable and that the contingent fee is a "common fund" award that is unavailable in ERISA cases.

For the reasons that follow, defendant's Motion to Reconsider will be denied, and plaintiff's Fee Petition will be granted in part, denied in part, and held in abeyance in part.

I. DISCUSSION

A. Motion to Reconsider Standard of Review

Rule 59 "is an extraordinary remedy which should be used sparingly." Pac. Ins. Co. v. Am. Nat'l Fire Ins. Co., 148 F.3d 396, 403 (4th Cir. 1998) (internal quotation marks and citation omitted). The Fourth Circuit has recognized three grounds for granting relief under Rule 59: "(1) an intervening change in the controlling law, (2) new evidence that was not available at trial, or (3) that there has been a clear error of law or a manifest injustice," Robinson v. Wix Filtration Corp., LLC, 599 F.3d 403, 407 (4th Cir. 2010) ; however, Rule 59 "motions may not be used ... to raise arguments which could have been raised prior to the issuance of the judgment, nor may they be used to argue a case under a novel legal theory that the party had the ability to address in the first instance." Pac. Ins. Co., 148 F.3d at 403.

B. Liability

1. Control

Wilmington first argues that the Court erred when it concluded that the ESOP lacked a substantial degree of control over Constellis after finding that "[a]t most, the ESOP had the power to veto certain transactions by the Sellers² and their chosen directors, but that power had to be exercised by filing a lawsuit." Def. Mem., [Dkt. 310] at 17 (quoting Mem. Op., [Dkt. 294] at 46). In support of its argument, Wilmington maintains that controlling Delaware case law, Rohe v. Reliance Training Network, Inc., No. 17992, 2000 WL 1038190 (Del. Ch. July 21, 2000) (unpublished), "makes it clear that [the ESOP's] rights as 100% Stockholder are paramount, and that Constellis and/or the Selling Stockholders would face a steep burden in challenging the Trustee's action." Def. Mem., [Dkt. 310] at 18–19.

As an initial matter, this is a new legal theory that could have been presented at trial, and therefore should not have been raised for the first time in a Rule 59 motion. Indeed, this argument was not only not raised at trial, it actually contradicts the understanding of defendant's own trial witness, Juliet Protas, Constellis' former general counsel, who testified that if Wilmington wanted to stop "an action by the board of directors ... [it] felt ... was inconsistent with ERISA, ... the only recourse would be to 'file a lawsuit and fight about it.' " Mem. Op., [Dkt. 294] at 26. Protas' opinion was supported by the marketing materials prepared by CSG, the investment banking firm that designed the ESOP structure used by Constellis, which stated that the advantage of the warrants issued in connection with the sale was that the Sellers would retain control of the company until the ESOP paid off its debt. Id. at 6. Although Rohe, the case that Wilmington cites as having established the contrary proposition, was decided in 2000, Wilmington did not probe its witnesses about this issue and did not cite Rohe during its closing argument, see Tr. at 1635–61, or in its proposed findings of fact and conclusions of law, see [Dkt. 270].

Moreover, Rohe merely established a presumptive rule of construction for contractual agreements; it did not create a "guarantee," as defendant has asserted, entitling Wilmington to intervene and block an offending sale. See Rohe, 2000 WL 1038190, at * 16. In fact, Rohe opened the door to precisely the scenario envisioned by Protas and the Court: a situation where Wilmington and the board would have to go to court and "fight about it." Mem. Op., [Dkt. 294] at 29. The only relevance Rohe has for the Court's analysis is the burden and standard of proof that such litigation would involve. See Rohe, 2000 WL 1038190, at *16 ("[O]ur courts rightly hesitate to construe a contract as disabling a majority of a corporate electorate from changing the board of directors unless that reading of the contract is certain and unambiguous."). If anything, this burden and standard of proof provide additional support for the Court's conclusion that the lack of control discount should be 5% rather than the 20% proposed by plaintiff's expert Dana Messina ("Messina"), because the Rohe presumptions suggest that the ESOP would have more power than an ordinary shareholder to prevent the sale, but would still lack the first mover advantage possessed by the Sellers via their control of the board of directors.³ Accordingly, Rohe provides no cause for the Court to reconsider its finding of liability.⁴

2. Warranty

Defendant's second challenge to the liability finding is that the Court misstated the warranty arrangement between the Sellers and the ESOP. This arrangement was relevant to the Court's consideration of the reliability of Constellis management's revenue projections, which were relied upon by Wilmington and SRR. Mem. Op., [Dkt. 294] at 42. The Court found that Wilmington's due diligence regarding those projections was lackluster compared to a traditional arms-length purchaser, a finding not contested in Wilmington's Rule 59 motion. Wilmington defended this lackluster due diligence in part by citing to the Sellers' representations and warranties about the veracity of those projections, arguing that the Sellers would have to repay the ESOP if the projections turned out to be deficient; however, the Court concluded that the "key warranty about the financial health of the company was made by Constellis, not the Sellers," and that without a representation and warranty by the Sellers themselves there was "no external source of money to protect the ESOP's investment in the company if the financial disclosures proved inadequate." Id. at 44.

Defendant argues that this conclusion was wrong, based on a provision in the Stock Purchase Agreement ("SPA") that the Sellers were liable on a pro rata basis for "[a]ny inaccuracy in or breach of any representation or warranty made by the Sellers or the Company in Sections 3.2 and 3.3 [of the SPA]," which included the relevant warranties about the financial health of the company. DTX 112 at 30. Although no party highlighted this provision of the SPA at trial, plaintiff has not challenged this argument, and the Court agrees that it erred in not finding that this provision made the Sellers financially responsible for violations of Constellis' representations and warranties regarding the company's finances.

This corrected understanding of the SPA does not alter the Court's conclusion about liability. The remaining evidence independently showed that Wilmington failed to adequately probe the soundness of the warranties and representations in the SPA and the associated indemnification regime. Mem. Op., [Dkt. 294] at 44–45. That conclusion is supported by Golden's inability to point to this provision when he was asked point blank if the Sellers had represented or warranted as to the truth of the financial information upon which Wilmington relied. Golden evaded this issue by testifying, "The company—you know, it was independent management that was running the company. They had audited financial statements and had an extremely robust forecast process, and to the best of my knowledge, the sellers, you know, weren't involved in the day-to-day operations of the company. So they didn't come up with those forecasts." Tr. at 209:2–10. This answer reveals that Golden did not even know that the Sellers...