A new Employee Retirement Income Security Act (ERISA) lawsuit ruling has been issued in a case filed by the acting U.S. Secretary of Labor, alleging the Reliance Trust Co. violated the act’s fiduciary standards during its facilitation of an employee stock ownership plan (ESOP) transaction.
The order, issued in the U.S. District Court for the District of Arizona, sides against the defendants’ dismissal motion, which sought to bar the lawsuit based on a failure to state an actionable claim, per the Federal Rule of Civil Procedure 12(b)(6). In addition to the Reliance Trust Co., defendants in the case include a mix of individual, trust and corporate entities, including RVR Inc., a management consulting company that engaged its co-defendant, among other entities, to effectuate an ESOP transaction.
Collectively, RVR and the individual and trust defendants sought dismissal of five claims detailed in the underlying complaint, which alleges various failures and points of wrongdoing associated with sale of company stock to employees.
In sum, the Department of Labor (DOL) alleges that the individual defendants breached their fiduciary duty to monitor the plan trustee (i.e., Reliance Trust Co.), as imposed by ERISA; that the individual defendants are liable for Reliance’s breaches as co-fiduciaries pursuant to ERISA; and that the individual defendants are liable for their allegedly knowing participation in Reliance’s breaches of its fiduciary duty, regardless of their own respective fiduciary statuses. These specific alleged fiduciary breaches stem from the overarching allegation that Reliance, as trustee, caused the ESOP to pay “tens of millions of dollars too much” to the individual defendants for all of the then-outstanding stock of RVR. According to the DOL, the transaction which the individual defendants negotiated with the trustee resulted in them maintaining their positions as controlling officers and sole members of the board of RVR—despite the ESOP having allegedly paid a control premium for RVR.
For their part, the defendants argue that each of these three claims is infirm for the same reason—because the plaintiff has failed to allege sufficient facts that would show their knowledge that a certain ESOP transaction was illegal under ERISA.
As explained in the text of the ruling, in basic terms, a dismissal under Rule 12(b)(6) for failure to state a claim can be based on either the lack of a cognizable legal theory or insufficient facts to support a cognizable legal claim. At the same time, when analyzing a complaint for failure to state a claim for relief under Federal Rule of Civil Procedure 12(b)(6), well-pled factual allegations are taken as true and construed in the light most favorable to the nonmoving party—though legal conclusions couched as factual allegations are not entitled to the assumption of truth.
In reasoning through the factual allegations in this case, the District Court has determined that dismissal at this early stage would be inappropriate. Its rationale is explained as follows: “From these allegations, taken as true and viewed in the light most favorable to plaintiff, the court can draw an obvious inference that the individual defendants, controlling RVR and its actions and communicating directly with trustee Reliance and appraiser SRR, controlled and therefore knew of the information both Reliance and SRR received in valuing the company and evaluating the fairness of stock price for the plan. … The court can infer that defendants knew how the information was being used and the price their shares ultimately would fetch. And the court can infer from the allegations that the individual defendants, as the senior officers, sole directors and sole shareholders of RVR, knew its approximate value at least.”
The decision continues: “The court can infer from the allegations that the transaction was rushed and completed according to the individual defendants’ dictated timeline, that there was inadequate review and scrutiny of the transaction by the trustee and its agent appraiser. These inferences, drawn from the allegations in the complaint, would establish the actual knowledge of circumstances demonstrating breach by the trustee. The allegations are thus adequate to state a claim for breach of a fiduciary’s duty to monitor. Whether the evidence ultimately developed supports these allegations and inferences at the summary judgment stage or at trial is a wholly different question and one this court does not approach.”
The same explanation is given for why the other claims should proceed, and, in closing, the ruling states that RVR is a necessary party to these proceedings and therefore cannot be dismissed as a defendant.
The full text of the ruling is available here.