Moore v. Va. Cmty. Bankshares

1

JANICE A. MOORE, on behalf of herself and a class of all similarly situated participants in the Virginia Community Bankshares, Inc. Employee Stock Ownership Plan, Plaintiff, v. VIRGINIA COMMUNITY BANKSHARES, INC., et al., Defendants.

Civil Action No. 3:19-cv-00045

United States District Court, W.D. Virginia, Charlottesville Division

March 30, 2022

MEMORANDUM OPINION & ORDER

Joel C. Hoppe, United States Magistrate Judge

This matter is before the Court on Plaintiff Janice Moore's Motion to Amend her Complaint. ECF No. 61. The motion has been fully briefed, see ECF Nos. 62, 65, 69, 72, and is ripe for disposition. For the following reasons, the Court hereby grants Plaintiff's Motion to Amend.

I. Background

This putative class action suit arises from Defendants' alleged improprieties administering an Employee Stock Ownership Plan (“ESOP”). Defendant Virginia Community Bankshares, Inc. (“the Holding Company”) sponsored the ESOP, which was offered to employees of Defendant Virginia Community Bank, Inc. (“VCB”), including Plaintiff Moore and other members of the proposed Plaintiff class.^[1] The ESOP was governed by the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1001 et seq. Plaintiff Moore filed her original complaint (the “Original Complaint”) ECF No. 1, on August 12, 2019, naming the following Defendants: A. Pierce Stone, John A. Hodge, and H.B. Sedwick III (together, “the Trustee Defendants”) and Ronald Spicer, the Holding Company, and VCB. Compl. 1-2. Stone, Hodge, Sedwick, Spicer, the Holding Company, and VCB are the six “Original Defendants” to this putative class action.

Plaintiff Moore's Original Complaint asserted one count for breach of fiduciary duty under ERISA and one count for engaging in prohibited transactions under ERISA. Id. ¶¶ 144-64. She alleged that the Original Defendants engaged in a series of “prohibited transactions” under ERISA from 2006 until 2008. First, the Original Defendants intentionally withheld information from Howe Barnes Hoefer & Arnett, Inc., an investment bank that the Original Defendants retained to perform a valuation of the Holding Company in 2006, to obtain a fraudulently inflated valuation. Id. ¶¶ 57-68. The Original Defendants allegedly then caused the ESOP to repurchase Holding Company stock at the inflated valuation using ESOP contribution funds to finance cash distributions to Defendants Stone and Spicer through non-exempt loans issued in 2007 and 2008. Id. ¶¶ 8-10, 85-113 136. The Original Defendants personally benefited from the loans at the expense of ESOP participants, including Plaintiff Moore and the other putative Plaintiff class members, by creating annual debt payments for ESOP participants that continued until the ESOP's termination in 2016. Id. ¶ 3. The Original Defendants allegedly later covered up the inflated valuation and the 2007 and 2008 loans, disclosing “inaccurate information” on filings with the Department of Labor and Internal Revenue Service. Id. ¶¶ 11, 67-68, 94, 114- 25. Lastly, the Original Defendants allegedly intimidated or disciplined employees for raising concerns about the ESOP. Id. ¶¶ 94-95.

In September 2019, the Original Defendants moved to dismiss the Original Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, primarily arguing that Plaintiff Moore's claims were time-barred. ECF Nos. 15, 18. In June 2020, the Honorable Glen E. Conrad, presiding, denied the motion to dismiss and allowed Plaintiff Moore's claims to proceed. Moore v. Va. Comm. Bankshares, Inc., No. 3:19cv45, 2020 WL 3490224 (W.D. Va. June 26, 2020), ECF Nos. 44, 45. The case is currently in “Phase I” of the parties' agreed-upon bifurcated discovery schedule, ECF Nos. 51, 52, 53, and has not been set for trial before the Honorable Norman K. Moon, presiding, see ECF No. 54, 55.

Plaintiff Moore moved for leave to amend her complaint in August 2021. ECF No. 61. Her proposed two-count amended complaint (“Amended Complaint”), ECF Nos. 65 (sealed), 68-1 (redacted), largely reiterates the allegations from her Original Complaint. She no longer asserts, however, that Defendant Stone personally benefited from the inflated 2007 valuation. The Amended Complaint seeks to substitute Blue Ridge Bankshares, Inc., and Blue Ridge Bank, N.A., as successor entities through merger to Defendants the Holding Company and VCB, respectively. Alleged events and transactions related to the Blue Ridge-VCB merger, which was finalized in December 2019, feature prominently in the Amended Complaint's proposed changes. The Amended Complaint also seeks to add Thomas Crowder, Andrew Holzwarth, A. Preston Moore, Mark Sisk (the “Director Defendants”), and Amy Schick as defendants.^[2] The Trustee Defendants (Stone, Hodge, Sedwick) and Defendant Spicer are still named as defendants to Counts I and II.

Defendant Crowder served as Executive Vice President, Chief Financial Officer, and Chief Operating Officer of VCB from July 2014 until the merger in December 2019, and as a director of both VCB and the Holding Company from 2018 until the Blue Ridge merger. Am. Compl. ¶ 34. Defendant Holzwarth served as a director of both the Holding Company and VCB from 2016 until the merger. Id. ¶ 35. Defendant Moore served as Director, President, Chief Executive Officer, and Treasurer of the Holding Company from 2010 or 2011 until the merger, and as Director, President, and Chief Executive Officer of VCB during the same period. Id. ¶ 36. Defendant Sisk began serving as a director for the Holding Company in 2015 and severed as Chair of the Holding Company's Board from 2015 until the merger. Id. ¶ 38. Defendant Schick began her employment with VCB in 1988, and “was at all relevant times VCB's Senior Vice President of Human Resources and intimately involved with the ESOP.” Id. ¶ 37 (cleaned up). Defendant Schick “also served as Corporate Secretary of both VCB and the Holding Company from 2008 until the [m]erger” was finalized in December 2019. Id.

Plaintiff Moore also adds to her Amended Complaint new allegations against all original and proposed Defendants relating to the 2016 termination of the ESOP and subsequent merger with Blue Ridge. Specifically, she alleges that “the Holding Company Board met and approved a termination of the ESOP effective December 31, 2016.” Id.. ¶ 143. Sometime before that meeting, Defendant Moore had hired consulting firm ESOP Services, Inc. to advise the Holding Company and VCB on its ESOP termination procedures. Id. ¶ 145. Upon ESOP Services, Inc.'s recommendation, Michael N. Mulkey was engaged as an independent trustee for purposes of the ESOP termination. Id. ¶ 146.

In July 2017, the Holding Company and Atlantic Bay Mortgage Group announced they would merge pending regulatory approval. Id. ¶ 147. The Holding Company applied to the IRS for a final determination letter on the tax-qualified status of the ESOP, and delayed distributions to ESOP participants until it received a favorable letter from the IRS on December 4, 2017. Id. ¶ 148. Upon receiving that letter, “and in light of the pending merger” with Atlantic Bay Mortgage Group, “Mr. Mulkey determined that distributions should be based on a valuation of the ESOP Stock as of December 31, 2017, and possibly updated with a ‘bring down' letter and fairness opinion depending on the proximity of the [anticipated Atlantic Bay Mortgage Group] merger closing date to the distribution date.” Id. ¶ 149. Mr. Mulkey engaged Mercer Capital to conduct the 2017 valuation. Id. In July 2018, Mercer Capital issued a valuation report concluding that “the ESOP Stock value as of December 31, 2017, was $34.65 per share.” Id. ¶ 150.

On July 20, 2018, Defendant Moore provided Mr. Mulkey with the ESOP bank statements and checkbook register. Id. ¶ 151. Only then did Mr. Mulkey “learn[] that over $100, 000 had been deducted from the ESOP to pay plan termination expenses. As of December 16, 2017, the ESOP trust account had $155, 562.05 in cash. But by July 20, 2018, the account balance was down to less than $5, 000.” Id. Mr. Mulkey allegedly “voiced objection to the allocation of Plan expenses to the ESOP participants, but to no avail.” Id. Defendant Moore and Mr. Mulkey, along with their respective legal counsel, subsequently discussed whether an updated valuation of the ESOP Stock price was required as of the distribution date. Id. ¶ 152. On July 25, 2018, Mr. Mulkey's attorney wrote in an e-mail to Defendant Moore,

Our understanding is that the ESOP distribution process will involve distributing all of the shares in the Trust to the participants at a certain date, e.g., September 30, and then having the participants make an election at that time as to whether they want their shares cashed out immediately or, on the other hand, if they want to keep the shares subject to the 60-day put right on the one year anniversary of the distribution. If our understanding above is correct, the distribution to participants followed by an immediate redemption (for those who elect cash) are not party in interest transactions as the Bank will be redeeming directly from the participants, not the Trust, and as such, will not require an updated valuation to the date of distribution. If our understanding on the structure of the ESOP termination is not correct, Mike will not require an updated valuation. Please confirm our understanding of how the ESOP termination is to be handled.

Id. (cleaned up). The anticipated merger between VCB and Atlantic Bay Mortgage Group was still awaiting regulatory approval at that time.

On August 13, however, the Holding Company withdrew from its proposed merger agreement with Atlantic Bay Mortgage Group because of difficulties obtaining regulatory approval. Id. ¶ 153. On August 21, Defendant Moore provided ESOP...