Spear v. Fenkell

SPEAR, et al. v. FENKELL, et al.

CIVIL ACTION NO. 13-2391

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

September 30, 2016

MEMORANDUM

Contents

I. STATEMENT OF FACTS .......................................................................................... 7

a. The parties. ..................................................................................................................................... 7

b. The Spread Transactions. ........................................................................................................... 8

c. The Stonehenge/DBF Consulting Agreement. ................................................................... 12

d. Alliance's advisory services agreement with SLMRS. ...................................................... 15

e. Fenkell's termination, the internal investigation, and litigation. ................................. 16

f. AH III payments to Stonehenge, and the plan assets issue. .......................................... 18

II. ALLIANCE AND FENKELL .................................................................................... 19

a. The standard of review. ............................................................................................................ 19

b. Fenkell's receipt of fees from Stonehenge, through DBF, violated ERISA § 406(b)(3) as a matter of law. ....................................................................................................... 20

i. Fenkell was an ESOP fiduciary. ............................................................................ 22

ii. Fenkell received consideration for his own account. ........................................... 22

iii. Stonehenge was "dealing with the plan in connection with a transaction involving the assets of the plan." ................................................................................ 23

1. Stonehenge was "dealing with the plan." ......................................................... 23

2. The 1999 ESOP funding transaction was "a transaction involving the assets of the plan." ............................................................................................ 24

3. The Stonehenge/DBF fees were "in connection with" the funding transaction ............................................................................................................... 27

c. Negotiating and accepting the $4,000,000 in fees from Stonehenge violated Mr. Fenkell's fiduciary duty of loyalty under ERISA § 404(a)(1)(A) as a matter of law. ............................................................................................................................... 32

d. Fenkell's use of plan assets to generate the DBF fees violated 29 U.S.C. § 1106(a)(1)(D) as a matter of law. .................................................................................................... 34

e. Fenkell's dealing with plan assets in his own interest and for his own account violated 29 U.S.C. § 1106(b)(1) as a matter of law. ................................................... 35

f. Mr. Fenkell's defenses preclude entry of partial summary judgment for either party with respect to the DBF fees. ................................................................................... 36

i. Questions of fact exist whether the statute of limitations, 29 U.S.C. § 1113, bars plaintiffs from recovering against Fenkell. ......................................................... 36

1. Questions of fact exist whether Alliance had "actual knowledge" of the nature of Fenkell's kickbacks. ........................................................................ 38

2. Questions of fact exist whether the six year "fraud or concealment" statute applies, and when the limitation period under the statute begins to run. ....................................................................................................................... 39

g. ERISA provides an equitable remedy against DBF Consulting, as well as Fenkell. .................................................................................................................................................. 41

h. Stonehenge arguments. ............................................................................................................ 42

i. Alliance's motion concerning counterclaims and third-party claims. ........................ 42

i. Questions of fact exist whether Fenkell is entitled to indemnification. .............. 42

ii. Summary judgment is granted, dismissing Fenkell's contribution claims against the Alliance parties. ............................................................................. 43

iii. Summary judgment is granted, dismissing Fenkell's third-party claim asserting prohibited transactions by Spear ............................................................... 45

iv. Fenkell's proposed amended pleading alleging breach of duty by Alliance to the shareholders is denied, and Fenkell's tenth third-party claim is dismissed. .................................................................................................................... 46

v. Summary judgment is granted, dismissing Fenkell's eleventh third-party claim for breach of duty to monitor ........................................................................... 48

j. Theories of liability that depend upon a determination that Alliance's assets were "plan assets" are not ripe for summary judgment. ............................................ 50

k. Fenkell's motions against the Alliance Parties. ................................................................. 51

i. Fenkell's motion for summary judgment as to Alliance's first through third claims for relief is denied. .................................................................................. 52

ii. Fenkell's motion for summary judgment dismissing Alliance's sixth claim for relief seeking declaratory judgment that Fenkell is not entitled to indemnification is denied. ........................................................................................... 52iii. Fenkell's motion for summary judgment dismissing Alliance's seventh claim for relief for contribution is denied. .................................................................. 53

iv. Fenkell's motion for summary judgment dismissing Alliance's eighth claim for relief for indemnification is denied. ............................................................ 53

v. Fenkell's motion for summary judgment dismissing Alliance's ninth claim for relief for fraud is denied. .............................................................................. 54

vi. Fenkell's motion for summary judgment dismissing Alliance's tenth claim for relief for breach of fiduciary duties is denied. ............................................. 55

vii. Summary judgment is granted, dismising Alliance's thirteenth and fourteenth claims for civil conspiracy. ................................................................. 56

viii. Fenkell's motion for summary judgment dismissing Alliance's fifteenth claim for relief for unjust enrichment is denied. ........................................................ 56

ix. Fenkell's motion for summary judgment based on various statute of limitations theories is denied. ..................................................................................... 57

III. ALLIANCE AND STONEHENGE ........................................................................... 57

a. Fourth and Fifth Claims for Relief. ....................................................................................... 57

i. Questions of fact exist whether Stonehenge knowingly participated in a breach of fiduciary duty .............................................................................................. 61

ii. If Stonehenge knowingly participated in Fenkell's fiduciary violations, accounting and disgorgement are appropriate equitable remedies. .......................... 65

iii. Stonehenge's Defenses Sounding in Prohibited Transactions ........................... 70

1. Questions of fact exist whether Fenkell, as a fiduciary, caused the plan to engage in unlawful transactions in violation of Section 406(a)(1)(C) and (D). .................................................................................................................... 72

2. Questions of fact exist whether the payments to Stonehenge are entitled to exemption under ERISA Section 408(b)(2). ....................................................... 73

3. Questions of fact exist whether Stonehenge was a party in interest under ERISA Section 406(a)(1). ......................................................................................... 76

4. Questions of fact exist whether Stonehenge's payments came out of plan assets. ....................................................................................................................... 77

5. Questions of fact exist whether Fenkell was acting as an ERISA fiduciary, under ERISA Section 406(b)(3), when he approved fees to be paid from AH III to Stonehenge. .............................................................................................. 786. There was a connection between Fenkell's receipt of consideration from Stonehenge and the ESOP's participation in the 1999 ESOP Loan Transaction. .................................................................................................... 78

b. Questions of fact exist whether Stonehenge is liable as a gratuitous transferee of plan assets under Alliance's fifth claim for relief. ............................................................... 80

i. The origin of the gratuitous transferee theory .................................................... 80

ii. What does "no value" mean? ............................................................................... 82

iii. The burden of proof ............................................................................................. 86

c. Whether Alliance and AH III...