Szalanski v. Arnold

609 F.Supp.3d 698

Brenda SZALANSKI, on behalf of herself, individually, and on behalf of all others similarly situated, Plaintiff,

v. Mike ARNOLD, Lea Gerend, Phil Troia, Mike Whaley, and GreatBanc Trust Company, Defendants,andPDQ Food Stores, Inc. Employee Stock Ownership Plan, Nominal Defendant.

19-cv-940-wmc

United States District Court, W.D. Wisconsin.

Signed June 28, 2022

Robert Joseph Barton, Colin M. Downes, Block & Leviton, LLP, Washington, DC, Andrew W. Erlandson, Hurley, Burish & Stanton, S.C., Madison, WI, for Plaintiff.

Jacob DeNiro Rhode, Michael Lewis Scheier, Keating Muething & Klekamp PLL, Cincinnati, OH, Todd G. Smith, Godfrey & Kahn S.C., Madison, WI, Kristen J. Kenley, Moore & Van Allen PLLC, Charlotte, NC, for Defendant Greatbanc Trust Company.

OPINION AND ORDER

WILLIAM M. CONLEY, District Judge

In this putative class action, plaintiff Brenda Szalanski, a former employee of PDQ Food Stores, Inc., and a participant in the PDQ Employee Stock Option Plan ("ESOP"), contends that four PDQ executives and GreatBanc Trust Company, the Trustee of the ESOP, breached their fiduciary duties in negotiating and approving PDQ's October 2017 sale to Kwik Trip in violation of the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. Before the court are two motions to dismiss, one by the individual defendants and one by defendant GreatBanc. (Dkt. ##16, 19.) For the reasons that follow, the court will grant both motions. Since GreatBanc's motion only applies to portions of the claims asserted against it, however, the case also will proceed against that defendant.

ALLEGATIONS OF FACT¹

A. The Parties

Plaintiff Brenda Szalanski was an employee of PDQ Food Stores from October 2000 until October 2017, and she participated in the PDQ Employee Stock Option Plan ("ESOP") for the final eight years of her employment. As a result, she remains a participant in the ESOP.

Plaintiff asserts claims against defendant GreatBanc Trust Company and four executives of PDQ, defendants Mike Arnold, Lea Gerend, Phil Troia and Mike Whaley, all arising out of the October 2017 sale of PDQ's assets to Kwik Trip, Inc. Before the sale, Arnold serving as PDQ's President, while Troia and Whaley were both PDQ's Vice Presidents. All three were also members of the PDQ Board of Directors. While Gerend did not sit on the board, she did sign the ESPO's Form 5500s filed with the United States Department of Labor from 2009 to 2017, as its "administrator."

B. The PDQ ESOP

The ESOP was established in 2009, when PDQ owner, Jeff Jacobson, arranged a sale of his shares in the company to the ESOP, ostensibly to "provide retirement benefits for eligible employees." (Compl. (dkt. #1) ¶¶ 29-30.) Following this sale, the ESOP owned all outstanding stock in PDQ, which was employee-owned until sold to Kwik Trip. During the eight years from 2009 to 2017, plaintiff and other ESPO participants went from owning PDQ stock worth $0 to owning stock sold at over $17,500 per share.

According to the Plan Document, which the individual defendants attach to their motion to dismiss (Ind. Defs.’ Opening Br., Ex. 2 (dkt. #2102)), PDQ was both Plan Administrator and named fiduciary of the Plan, with full authority to act with respect to its operation and administration. (Id. §§ 1.5, 8.2.) The Plan Document also granted PDQ the authority to designate another to perform the role of administrator. (Id. §§ 8.2(b), (c).) Similarly, PDQ was required to appoint a trustee to "receive and hold in trust all contributions, and Income, paid into the Trust Fund." (Id. § 9.1.) Pursuant to the Plan Document, PDQ and the named trustee were then to enter into an agreement to provide for the administration of the ESOP. (Id. § 9.2.)

C. The PDQ-Kwik Trip Transaction

For over sixty years, PDQ operated a series of convenience stores primarily in and around the Madison and Milwaukee areas. For various reasons, PDQ's Board of Directors decided to seek a buyer for the company sometime around 2017. To that end, the Board authorized company representatives to speak with and evaluate potential purchasers. Based on these evaluations, the Board agreed to enter into exclusive negotiations with Kwik Trip.

With respect to the ESOP, PDQ also hired GreatBanc in March 2017 to act as the "sole discretionary trustee" of the ESOP in anticipation of PDQ's potential sale. (Ind. Defs.’ Opening Br., Ex. 1 (dkt. #21-1) ("Information Sheet") 14; Compl. (dkt. #1) ¶ 11.)² Upon retaining GreatBanc as trustee for the PDQ ESOP, defendants Arnold, Whaley and Troia resigned as PDQ ESTOP trustees. Specifically, GreatBanc was engaged to determine whether the transaction was "in the best interest of the ESOP participants and beneficiaries." (Information Sheet (dkt. #21-1) 14.) In that capacity, GreatBanc -- and only GreatBanc -- was authorized to decide whether voting in favor of or against the transaction would violate ERISA. The Board also hired Enterprise Services, Inc. ("ESI"), a third-party financial consulting firm, to evaluate the fairness of the transaction to the company and its shareholder.

After extensive negotiations, Kwik Trip agreed to purchase substantially all of PDQ's assets for $67,400,000 ("the Transaction"). On July 14, 2017, the parties signed and executed the Asset Purchase Agreement by which Kwik Trip acquired 100% of the assets of PDQ. Some of these funds were held back to satisfy certain liabilities and expenses of PDQ, but the remaining proceeds were distributed to the participants in the PDQ ESOP.³ In the Information Statement sent to all ESOP participants, the estimated net purchase amount to be distributed to the PDQ ESOP participants would be $47,120,500, or approximately $17,500 per share of PDQ Stock. The individual defendants note that the share value was approximately $10,380 per share higher than the value of PDQ stock just nine months before the agreed upon sale.

Further, in its role as Trustee of the ESOP, GreatBanc hired an independent, outside legal advisor and financial advisor, Prairie Capital, to review the Transaction. Prairie Capital generated a written opinion in which it advised Great Banc that the transaction was fair to the ESOP.

On September 1, 2017, participants of the PDQ ESOP were all sent a copy of the "Information Statement" -- an 88-page document detailing the proposed Transaction with Kwik Trip, which included a summary of the proposed financial terms of the deal, the fairness opinion of Prairie Capital, the role of GreatBanc as the Trustee, and potential risk factors associated with the proposed transaction. The Information Statement also disclosed each of the five, challenged payments described below.

The PDQ Board unanimously voted to approve the Transaction; in so doing, the Board conducted its own separate discussions and voted on each aspect of the transaction, including the additional compensation to be received by the director defendants. None of the director defendants took part in these conversations. The Board voted to recommend that Plan participants direct GreatBanc as Trustee to vote for the proposal to approve the transaction in its entirety. The ESOP participants agreed, and GreatBanc followed the directive received from the voting participants by voting the ESOP's shares in favor of the Transaction, which closed on October 10, 2017. At that time, all plain participants became fully vested in their ESOP accounts. The proceeds of the sale, minus liabilities and expenses, were then distributed to the ESOP participants pro rata, and the ESOP was terminated effective January 31, 2018, by resolution of the PDQ Board.

D. Challenged Payments

Szalanski specifically challenges the following, five "side payments" to the individual defendants related to the larger Transaction:

• Kwik Trip's payment of $1,000,000 to each of the individual defendants in exchange for their promise, through separate agreements entered into with Kwik Trip, not to compete with Kwik Trip's new business for seven years after the Transaction;

• Kwik Trip's option at some point after the Transaction to purchase other property owned by Mike Arnold for $2 million;

• PDQ's payment of $4.96 million to the individual defendants owed under a Stock Appreciation Rights Plan also established eight years before the Transaction;

• Severance payments to approximately thirty office and division PDQ employees, including the individual defendants; and

• An incentive to the individual defendants to earn from Kwik Trip up to $1.85 million for PDQ (and the ESOP) and up to $1.85 million for themselves by successfully negotiating long-term leases or purchases of select properties on behalf of Kwik Trip after the transaction.

OPINION

Although overlapping, plaintiff asserts five counts against defendants under ERISA. In Count I, plaintiff claims that all defendants caused (and in the case of the four individual defendants, knowingly participated in) the October 2017 Transaction in violation of § 406(a). In Count II, plaintiff claims the individual defendants dealt with the assets of the Plan in their own interest in violation of § 406(b). In Count III, plaintiff claims under ERISA § 404(a)(1)(A) and (B), that: the individual defendants breached their fiduciary duty by structuring the Transaction to include side-payments; and GreatBanc breached its fiduciary duty by approving those side payments as part of the transaction. In Count IV, plaintiff claims that the individual defendants failed to monitor GreatBanc's performance as the Plan's Trustee, also in violation of ERISA § 404(a)(1)(A) and (B). Finally, in Count V, plaintiff claims that all defendants are liable as co-fiduciaries for knowing breach of their co-fiduciaries and failing to take any steps to remedy them, again in violation of ERISA § 404(a)(1)(A) and (B).

The individual defendants and GreatBanc filed separate motions to dismiss. Since the motions vary in substance, the court will take up the arguments presented in those two motions in turn.

I. The Individual Defen...