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Spires v. Schools

United States District Court, D. South Carolina, Charleston Division

September 19, 2017

Dana Spires, et al., Plaintiffs,
v.
David R. Schools, et al., Defendants.

          ORDER AND OPINION

          RICHARD MARK GERGEL, UNITED STATES DISTRICT COURT JUDGE

         This matter is before the Court on Defendants William A. Edenfield, Robert G. Masche, Joseph T. Newton, III, Burton R. Schools, David R. Schools, the Piggly Wiggly Carolina Company, Inc., and the Greenbax Enterprises, Inc., Employee Stock Ownership Plan and Trust Committee (collectively the "Piggly Wiggly Defendants") motion to dismiss (Dkt. No. 59) and Defendants Joanne Newton Ayers and Marion Newton Schools (collectively the "Noteholder Defendants") motion to dismiss (Dkt. No. 66). For the reasons set forth below, the Court grants in part and denies in part the Piggly Wiggly Defendants' motion to dismiss, and denies the Noteholder Defendants' motion to dismiss.

         I. Background

         Plaintiffs are former employees of Piggly Wiggly Carolina Company, Inc. ("PWCC") or Greenbax Enterprises, Inc. (collectively, the "Company"). They are participants in the PWCC and Greenbax Employee Stock Ownership Plan and Trust (the "Plan") and assert various claims under the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub. L. 93-406, 88 Stat. 829, for themselves and for others similarly situated. (Dkt. No. 50 ¶¶ 19-22.) Since September 2005, the Plan has owned approximately 99.5% of the outstanding stock of Greenbax, and Greenbax owns 100% of the outstanding stock of PWCC. (Id. ¶¶ 41, 55.) The Plan was established in 1985 "to reward, motivate, and provide retirement benefits" for the Plan's participants, who are current or former employees of the Company. (Dkt. No. 59-1 at 4.) The value of the stock and cash held by the Plan determined what funds were available in the Plan for participants' retirement. The value of the Plan's assets was determined primarily by the value of the Company stock held by the Plan. (Dkt. No. 50 ¶ 41.) The value of the Company stock held by the plan was established annually by appraisal, based on the Company's results of operations and financial condition. (Id. ¶¶ 46, 84-93.)

         Defendants Robert G. Masche, William Edenfield, Joseph T. Newton, III, Burton R. Schools, and David R. Schools (the "Fiduciary Defendants") allegedly controlled the Company's board of directors, were the Company's top executives, and controlled the "Plan Committee, " which directed the voting of Company stock held by the Plan. (Id. ¶¶ 23-28, 45.) Plaintiffs allege that the Fiduciary Defendants used their positions to enrich themselves by draining assets from the Company through excessive compensation and various insider dealings and that the Fiduciary Defendants engaged in "gross mismanagement." (Id. § III.) According to Plaintiffs, the losses created by the Fiduciary Defendants caused lenders to require repayment of outstanding loans and to decline to extend additional credit, ultimately forcing the Company to sell substantially all its assets, which in turn destroyed the value of Company stock held by the Plan. (Id. ¶¶ 171-75, 202-07.) Plaintiffs further allege the Fiduciary Defendants deliberately concealed the true causes of the Company's financial losses from Plan participants. (Id. ¶¶ 74-79, 99, 101, 103.)

         Plaintiffs also allege that the Fiduciary Defendants improperly moved assets from the Company to the Noteholder Defendants, who allegedly are Company insiders or family members of Company insiders. (Id. § IV.C.) The Noteholder Defendants had made loans to the Plan for the purchase of company stock, which were guaranteed by the Company. (Id.) In March 2014, the Company purchased the notes from the Noteholder Defendants for approximately $8.3 million in cash (which was less than the outstanding principal amount remaining on the notes). (Id.). Under ERISA, loans guaranteed by a party-in-interest must be without recourse to Plan assets other than unallocated Company shares pledged as security (i.e., the shares purchased with the loans). 29 C.F.R. § 2550.408b-3(e). According to Plaintiffs, in March 2014 those shares were worth approximately $4.2 million. (Dkt. No. 50 § IV.C.) Plaintiffs allege the difference between the amount paid to the Noteholder Defendants and the value of the security available to them- approximately $4 million-was an improper transfer of Company assets to insiders and a transaction prohibited under ERISA.

         Plaintiffs allege Company management and directors eventually agreed to wind down the company and to sell substantially all the Company's remaining assets to C&S Wholesale Grocers, Inc. on September 4, 2014. (Id. ¶ 225.) The sale and winding down was approved on December 12, 2014. (Id. ¶ 233.)

         On February 26, 2016, Plaintiffs filed the present putative class action, asserting six causes of action against Defendants. In count one, Plaintiffs allege the Fiduciary Defendants breached their fiduciary duties under ERISA. The Fiduciary Defendants necessarily were aware of their own conduct in their capacities as Company executives. Had they acted properly in their fiduciary capacities, according to Plaintiffs, the Fiduciary Defendants would have exercised the Plan's voting rights to install independent management not engaged in the malfeasance Plaintiffs ascribe to the Fiduciary Defendants. In count two, Plaintiffs allege the Fiduciary Defendants breached their fiduciary duties under ERISA by failing to bring a derivative action against the Company's management and board of directors. In count three, Plaintiffs allege co-fiduciary liability under 29 U.S.C. § 1105 against the Fiduciary Defendants. In count four, Plaintiffs allege the Fiduciary Defendants engaged in transactions prohibited by 29 U.S.C. § 1106. In count five, Plaintiffs seek equitable relief against all Defendants.

         On June 20, 2016, the Piggly Wiggly Defendants (all Defendants other than the Noteholder Defendants) moved to dismiss the amended complaint. The Piggly Wiggly Defendants argue that Plaintiffs' claims are time barred under 29 U.S.C. § 1113, that the actions Plaintiffs complain of were corporate acts unrelated to the Plan, that Plaintiffs fail to meet the pleading standard for a stock-drop claim set forth in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014), that Plaintiffs lack standing because they suffered no injury-in-fact, and that Plaintiffs fail to allege prohibited transactions. The Noteholder Defendants moved to dismiss on June 23, 2016, arguing that the transaction Plaintiffs complain of did not involve the Plan or Plan assets, and that Defendant Joanne Newton Ayers is not a party-in-interest under ERISA.

         II. Legal Standard

         Rule 12(b)(6) of the Federal Rules of Civil Procedure permits the dismissal of an action if the complaint fails "to state a claim upon which relief can be granted." Such a motion tests the legal sufficiency of the complaint and "does not resolve contests surrounding the facts, the merits of the claim, or the applicability of defenses. . . . Our inquiry then is limited to whether the allegations constitute 'a short and plain statement of the claim showing that the pleader is entitled to relief.'" Republican Party of N. C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992) (quotation marks and citation omitted). In a Rule 12(b)(6) motion, the Court is obligated to "assume the truth of all facts alleged in the complaint and the existence of any fact that can be proved, consistent with the complaint's allegations." E. Shore Mkts., Inc. v. J.D, Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir. 2000). However, while the Court must accept the facts in a light most favorable to the non-moving party, it "need not accept as true unwarranted inferences, unreasonable conclusions, or arguments." Id.

         To survive a motion to dismiss, the complaint must state "enough facts to state a claim to relief that is plausible on its face." Bell Ail. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Although the requirement of plausibility does not impose a probability requirement at this stage, the complaint must show more than a "sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint has "facial plausibility" where the pleading "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

         III. Discussion

         A. Statute of Limitations

         The argument that a statute of limitations bars a claim is an affirmative defense. Fed.R.Civ.P. 8(c)(1). Affirmative defenses may be raised on a motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure when "the face of the complaint clearly reveals the existence of a meritorious affirmative defense." Brooks v. City of Winston-Salem, N.C, 85 F.3d 178, 181 (4th Cir. 1996). When ruling on an affirmative defense raised in a Rule 12(b)(6) motion, courts "accept[] as true the well-pleaded facts in the complaint and view[] them in the light most favorable to the plaintiff." Id. ERISA's statute of limitations provides,

No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of-
(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or
(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.

29 U.S.C. § 1113.

         The Piggy Wiggly Defendants argue any action for breach of fiduciary duties accrued in 2007 because that is when, according to the complaint, Greenbax stock began its decline in price, which was reported on publicly available Form 5500s. (Dkt. No. 59-1 at 9-11.) Thus, according to the Piggy Wiggly Defendants, Plaintiffs access to the "exact same information" that, according to Plaintiffs, should have forced the Piggly Wiggly Defendants to take action to replace Company management. (Id.) Because Plaintiffs knew the Piggly Wiggly Defendants did not replace Company management, Plaintiffs had actual knowledge of their purported breach of fiduciary duty more than three years before the present action was commenced.

         The Piggly Wiggly Defendants' argument is unpersuasive. "Actual knowledge" means "knowledge of all material facts necessary to understand that an ERISA fiduciary has breached his or her duty." In re Citigroup ERISA Litig., 104 F.Supp.3d 599, 610 (S.D.N.Y. 2015).[1] Plaintiffs have not alleged that in 2007 they had actual knowledge of facts necessary to understand that the Plan Committee members had breached their fiduciary duties. Plaintiffs doubtless were aware of the beginning of the drop in Greenbax stock price and the failure to replace management as soon as it began, but these are not the fiduciary breaches Plaintiffs allege. Plaintiffs allege the Plan Committee members failed to take action in response to improper insider transactions and other specific acts of management malfeasance, of which the Plan Committee had actual knowledge. (E.g., Dkt. No. 50 ¶¶ 129-68.) Plaintiffs also allege those transactions were undisclosed or concealed from Plan participants. (E.g., id. ¶¶ 74-79.)[2] Plaintiffs do not allege that they had actual knowledge of those transactions more than six years before the commencement of this action. The truth of Plaintiffs' allegations, and, if they are true, the dates on which they occurred and the dates on which Plaintiffs learned of them, are factual questions the Court cannot decide on a motion to dismiss.

         The Piggly Wiggly Defendants also raise a cursory argument that the alleged fiduciary breaches were complete more than six years before this action was filed. (See Dkt. No. 59-1 at 11-12). That argument likewise is unpersuasive. The alleged breach of fiduciary duties in count one is an omission-the failure to take action to remedy managerial malfeasance. (Dkt. No. 50 ¶ 254.). The statutory six-year period for a breach by omission accrues from "the latest date on which the fiduciary could have cured the breach or violation." 29 U.S.C. § 1113. Plaintiffs have not alleged that the latest date on which the Plan Committee could have saved Plan asset value by replacing Company management was before February 2010. Further, they allege deliberate concealment, which extends the limitations period to six years "after the date of discovery of such breach or violation." Id.

         In sum, when the "last action which constituted a part of the breach" occurred, when "the fiduciary could have cured the breach, " whether Defendants engaged in "fraud or concealment, " and when "the plaintiff had actual knowledge of the breach" are disputed questions of fact. The Court therefore denies the Piggly Wiggly Defendant's motion to dismiss as to the statute of limitations argument, without prejudice to their ability to argue a statute of limitations defense after discovery.

         B. Fiduciary Duties Versus Corporate Acts

         ERISA imposes a stringent fiduciary standard on plan fiduciaries:

[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an ...

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