Fish v. Greatbanc Trust Co.

109 F.Supp.3d 1037

Bonnie Fish, Christopher Mino, Monica Lee Woosley, Lynda D. Hardman, Evolve Bank and Trust, Plaintiff,

v.GreatBanc Trust Company, Lee Morgan, Asha Morgan Moran, Chandra Attiken, Morgan Family Foundation, Defendants.

No. 09 C 1668

United States District Court, N.D. Illinois, Eastern Division.

Signed June 12, 2015

Kathryn Marie Mack, David C. Ahlstrom, James A. Dyer, Jon Michael Sebaly, Sebaly Shillito Dyer, Dayton, OH, Charles Robert Watkins, Guin, Stokes & Evans, LLC, Chicago, IL, Michael D. Woerner, Keller Rohrback, LLP, David Ko, Seattle, WA, Gary A. Gotto, Gary D. Greenwald, Keller Rohrback, L.L.P., Phoenix, AZ, for Plaintiff.

Theodore Michaelson Becker, Julie Ann Govreau, Drinker Biddle & Reath LLP, Mark Elliott Furlane, Drinker Biddle Gardner Carton, Chicago, IL, Anthony M. Verticchio, Jacob Deniro Rhode, Lori Goetz Heilman, Michael L. Scheier, Amber Michele Justice–Manning, Benjamin Guthrie Stewart, Brian P. Muething, Danielle M. D'Addesa, David Thomas Bules, Thomas Frost Hankinson, Keating Muething & Klekamp PLL, Cincinnati, OH, for Defendants.

MEMORANDUM OPINION AND ORDER

HON. JORGE L. ALONSO, United States District Judge

Plaintiffs, Bonnie Fish, Christopher Mino, Monica Lee Woosley, Lynda Hardman and Evolve Bank & Trust, have brought this action against defendants, GreatBanc Trust Company ("Greatbanc"), Lee Morgan, Asha Morgan Moran, Chandra Attiken and the Morgan Family Foundation ("MFF"), for allegedly violating their fiduciary duties under several provisions of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1104, 1106, 1108, 1109, and 1132. The Morgan Family Foundation has moved to dismiss on the ground that it cannot be liable because it is not a fiduciary and it did not participate in the transaction. For the reasons set forth below, the motion is denied.

I. BACKGROUND

The facts and procedural history of this case have been set out more fully elsewhere, see Fish v. GreatBanc Trust Co., 749 F.3d 671 (7th Cir.2014), and the Court will provide only a brief summary of the facts that form the background for the instant motion to dismiss. Plaintiffs Bonnie Fish, Christopher Mino, Monica Lee Woosley and Lynda Hardman are former employees of the Antioch Company ("Antioch") and participants in its Employee Stock Ownership Plan ("ESOP"), a retirement plan subject to ERISA. (Second Am. Compl. ¶¶ 1–4.) Plaintiff Evolve Bank & Trust ("Evolve") is the current trustee for the ESOP. (Id. ¶ 5.) Defendants Lee Morgan, Asha Morgan Moran and Chandra Attiken were officers, directors and shareholders of Antioch, members of the ESOP committee, and fiduciaries of the ESOP under ERISA. (Id. ¶¶ 7–9.) In 2003, seeking a way to avoid making huge annual distributions to shareholders to cover their tax liability, Antioch began to explore a proposed transaction that would make the company 100–percent ESOP-owned, although it would still be controlled and managed by the Morgan family. (Id. ¶¶ 44–46.)

The proposed transaction required Antioch to merge with a new company, formed for the purpose of the transaction, and make a tender offer in which the ESOP would agree not to participate. (Id. ¶ 46.) All non-ESOP shares would be redeemed for cash or a combination of cash, notes and warrants, but the Morgan family would maintain control of Antioch, its board of directors, and the ESOP committee. (Id. ¶¶ 46–47.) In or about August 2003, the Antioch Board of Directors formally resolved to pursue the transaction. (Id. ¶ 49.)

Antioch engaged defendant Greatbanc to serve as trustee for the ESOP with respect to the proposed transaction. (Id. ¶ 50.) Greatbanc's duty was to examine the transaction from the standpoint of the ESOP and determine whether it was financially fair to the ESOP. (Id. ¶ 51.) With the assistance of Duff & Phelps, a financial advisory firm, Greatbanc determined that the transaction was unfair and sought modifications. (Id. ¶ 58.) Greatbanc negotiated "Put Price Protection" for the ESOP, which set a floor on the per-share amount Antioch could pay an ESOP member who wanted to terminate her employment and sell back her shares (id. ¶¶ 59, 62), as every ESOP member had the right to do under ERISA (id. ¶ 31). Antioch and the individual defendants allegedly worried that these terms were too generous to the ESOP and that, in the wake of the transaction, employees would rush to quit their jobs and sell back their stock in exchange for huge payouts (id. ¶ 65), but they did not disclose their concerns to Greatbanc or Duff & Phelps (id. ¶ 77), nor, it is alleged, did Greatbanc or Duff & Phelps sufficiently consider this possibility (id. ¶ 78).

Antioch used $46 million of its own cash and $109 million in loans to complete the transaction, which closed in December 2003. (Id. ¶¶ 86, 89). Just as Antioch and the individual defendants allegedly feared, the transaction resulted in a stampede of ESOP member resignations, triggering Antioch's repurchase obligations. (Id. ¶¶ 101, 107.) Sales declined at the same time (id. ¶ 104), and Antioch could no longer service its debt and meet its repurchase obligations to ESOP participants (id. ¶ 108). In 2008, Antioch declared bankruptcy. (Id. ) The ESOP is now worthless, and plaintiffs seek to recover the losses they have sustained due to the defendants' alleged breaches of fiduciary duty and participation in a prohibited transaction under ERISA. (Id. ¶ 109.)

Reviewing an earlier order in this case, the Seventh Circuit summarized the transaction by explaining that "[t]he economic substance of the transaction was that the [ESOP] would buy Antioch stock (indirectly) from the Morgan family and other shareholders." Fish, 749 F.3d at 675. The Court summarized plaintiffs' causes of action against Greatbanc and the individual defendants as follows:

ERISA imposes general standards of loyalty and prudence that require fiduciaries to act solely in the interest of plan participants and to exercise their duties with the "care, skill, prudence, and diligence" of an objectively prudent person. 29 U.S.C. § 1104(a)(1) ; Eyler v. Comm'r of Internal Revenue, 88 F.3d 445, 454 (7th Cir.1996). In addition, § 1106 supplements the general fiduciary duty provisions by prohibiting ERISA fiduciaries from causing a plan to enter into a variety of transactions with a "party in interest." See Keach v. U.S. Trust Co., 419 F.3d 626, 635 (7th Cir.2005). As a general rule, a fiduciary may not engage in a direct or indirect transaction constituting a "sale or exchange, or leasing, of any property between the plan and a party in interest." 29 U.S.C. § 1106(a)(1)(A). A plan fiduciary is a party in interest, as are officers, directors, and major shareholders of a plan sponsor like Antioch. 29 U.S.C. § 1002(14)(A) & (H). Section 1106 begins, though, by saying "Except as provided in section 1108," which provides numerous exceptions to the prohibited transaction rule. The most relevant exception for this case is for plan purchases of employer securities. Section 1106(a) does not apply to such purchases if, among other conditions, the transaction "is for adequate consideration." § 1108(e). ERISA defines adequate consideration as "the fair market value of the asset as determined in good faith by the trustee ...." § 1002(18)(B).... Plaintiffs contend that by carrying out the Antioch buy-out transaction in 2003, all the defendants violated the general duty of prudence under § 1104 and engaged in a transaction prohibited by § 1106(a).

Fish, 749 F.3d at 679–80 (reversing and remanding this Court's earlier ruling that plaintiffs' claims were barred by the statute of limitations). After the Seventh Circuit remanded the case, the plaintiffs filed a Second Amended Complaint, which makes similar claims under § 1104 and § 1106(a) as well as a claim for co-fiduciary liability pursuant to § 29 U.S.C. § 1105. Plaintiffs also add a claim for equitable remedies pursuant to 29 U.S.C. § 1109(a) and 29 U.S.C. § 1132(a)(3) ; this is the only claim seeking relief against MFF.

Among the equitable remedies plaintiffs request are a constructive trust on the assets Lee Morgan, Asha Morgan Moran and Chandra Attiken received in payment for the sale of their stock in the 2003 buyout transaction. (Id. ¶ 151; Prayer for Relief ¶ 3.) Further, Lee Morgan and Asha Morgan Moran ("the Morgan defendants") allegedly donated to MFF more than $40 million of the proceeds of the 2003 buyout, and plaintiffs seek to impose a constructive trust on the funds transferred to MFF from the Morgan defendants. (Id. ¶¶ 144–45; Prayer for Relief ¶ 3.) MFF now moves to dismiss.

II. LEGAL STANDARDS

"A motion under Rule 12(b)(6) tests whether the complaint states a claim on which relief may be granted." Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir.2012). Under Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The short and plain statement under Rule 8(a)(2) must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (ellipsis omitted).

Under federal notice-pleading standards, a plaintiff's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. Stated differently, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955 ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ). "In reviewing the sufficiency of a complaint under the plausibility standard, [courts must] accept the well-pleaded facts in the complaint as...