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Rader v. Bruister

United States District Court, Fifth Circuit

December 20, 2013

JOEL D. RADER and VINCENT SEALY, Plaintiffs,
v.
HERBERT C. BRUISTER, AMY O. SMITH, JONDA HENRY, ROBERT EDDY, and BRUISTER FAMILY LLC, Defendants, and SOUTHEASTERN VENTURES, INC., fka BRUISTER & ASSOCIATES, INC.; BRUISTER & ASSOCIATES, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST; BRUISTER & ASSOCIATES, INC. ELIGIBLE INDIVIDUAL ACCOUNT PLAN MINAL DEFENDANTS.

ORDER

DANIEL P. JORDAN, III, District Judge.

This ERISA case is before the Court on a number of pending motions: (1) Plaintiffs' Motion to Exclude Expert Lorenzo Heart [427]; (2) Plaintiffs' Motion for Partial Summary Judgment [429]; (3) Plaintiffs' Daubert Motion to Exclude Expert Report and Testimony of Defense Expert Jared Kaplan [436]; (4) Defendants' Motion to Exclude Z. Christopher Mercer, Plaintiffs' Expert Witness, from Testifying with Respect to Opinions Regarding the Standard of Care for an ERISA Fiduciary and from Providing a Corresponding Expert Report in this Respect [445]; (5) Defendants' Motion for Summary Judgment on the Basis of Statutes of Limitations [448]; and (6) Defendants' Motion for Summary Judgment [450]. The Court finds that the motions should all be denied without prejudice to the parties raising some of the issues at trial as set forth herein.

I. Facts and Procedural History

In a three-year period, Defendant Herbert C. Bruister sold 100% of the shares of Bruister and Associates ("BA") stock to BA's employees through an Employee Stock Ownership Plan ("ESOP") governed by ERISA.[1] The transfer was completed through five separate transactions, the last three of which are now disputed.[2] Generally speaking, Plaintiffs Joel D. Radar and Vincent Sealy, both plan beneficiaries, assert that Defendants violated ERISA by approving the stock purchases.

Each purchase of BA Stock on behalf of the ESOP was made through an Employee Stock Ownership Trust ("ESOT"). Bruister and Amy Smith-as BA's directors-appointed themselves and initially Michael Bruce as trustees for the ESOT. Jonda Henry later replaced Bruce. Though Bruister was a trustee of the ESOT that purchased the stock from himself and his LLC, the parties dispute whether Bruister acted in a fiduciary capacity when the trustees authorized the purchases.

In all five transactions, the ERISA fiduciaries relied upon valuations prepared by Matthew Donnelly to assess the stock's sale price. Plaintiffs assert that Defendants did not adequately investigate Donnelly's qualifications before hiring him to value the company, supplied Donnelly with incomplete or inaccurate financial information, and were not reasonably justified in relying on Donnelly's valuations. They contend that the sales prices for the transactions were inflated.

Based on these generically described facts, Plaintiffs claim Defendants violated the following ERISA-created duties: the duty of loyalty (Herbert Bruister), the duty of prudence in the value paid for BA shares (Bruister, Amy Smith, and Jonda Henry), the duty owed by nature of being co-fiduciaries (Bruister, Smith, and Henry), and the duty of BA's Board of Directors to monitor the fiduciaries (Bruister and Smith). Plaintiffs also claim that Defendants (Bruister, Smith, and Henry) engaged in transactions with a party-in-interest without ensuring the ESOP paid no more than "adequate consideration". See Pls.' Second Am. Compl. [343] at 21-27. In addition to seeking relief for these breaches from the fiduciaries, Plaintiffs also seek "appropriate equitable relief" under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), on behalf of the ESOP as a whole from the non-fiduciary, BFLLC, and Bruister-to the extent Bruister was not acting as a fiduciary. The case is now before the Court on a variety of dispositive and non-dispostive motions. The Court has personal and subject-matter jurisdiction.

II. Analysis

A. Motions for Summary Judgment

Summary judgment is warranted under Rule 56(a) of the Federal Rules of Civil Procedure when evidence reveals no genuine dispute regarding any material fact and that the moving party is entitled to judgment as a matter of law. The rule "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The party moving for summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Id. at 323. The nonmoving party must then "go beyond the pleadings" and "designate specific facts showing that there is a genuine issue for trial.'" Id. at 324 (citation omitted). Conclusory allegations, speculation, unsubstantiated assertions, and legalistic arguments are not an adequate substitute for specific facts showing a genuine issue for trial. TIG Ins. Co. v. Sedgwick James of Wash., 276 F.3d 754, 759 (5th Cir. 2002); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc); SEC v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1993). In reviewing the evidence, factual controversies are to be resolved in favor of the nonmovant, "but only when... both parties have submitted evidence of contradictory facts." Little, 37 F.3d at 1075. When such contradictory facts exist, the court may "not make credibility determinations or weigh the evidence." Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000) (citations omitted).

"Even if the standards of Rule 56 are met, a court has discretion to deny a motion for summary judgment if it believes that the better course would be to proceed to a full trial.'" Firman v. Life Ins. Co. of N. Am., 684 F.3d 533, 538 (5th Cir. 2012) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)). In the present case, the Court has concluded genuine issues of material fact exist that will require a trial on the merits of at least some of the claims. Other factual and legal issues present close calls under Rule 56, but because a bench trial seems unavoidable, it is more prudent to carry those issues to trial. This is especially so given the more than 300 pages of briefing on the summary-judgment issues alone and nearly 5, 000 pages of supporting record evidence. While the Court has endeavored to digest the issues and the record, it will be in a better position to rule after trial.

1. Procedural Issues

a. Statute of Limitations

(1) Which Statute Applies

Defendants argue that all claims are barred by the applicable statute of limitations. Before addressing that issue, the Court must determine whether the Mississippi or federal statute applies. The answer is not disputed as to Counts I-III of the Amended Complaint, which are governed by ERISA's three-year statute of limitations found in § 413.[3] The only real dispute is whether Plaintiffs' claim against Bruister and BFLLC in Count IV should borrow Mississippi's general three-year statute of limitations found in Mississippi Code section 15-1-49.

To begin with, it is not entirely clear what Count IV intends. Defendants describe the count as asserting a claim for equitable relief pursuant to § 502(a)(3)[4] "against Defendant Bruister (in a non-ERISA fiduciary party in interest capacity) and BFLLC, a non-ERISA fiduciary party in interest." Defs.' Mem. [449] at 15. They then argue that § 502(a)(3) claims arise under ERISA part 5 and therefore fall outside the scope of § 413 which applies to part 4. Id. at 16.

Plaintiffs dispute Defendants' description of this claim, noting that they also invoke the "catch-all" provision of ERISA § 409(a), 29 U.S.C. § 1109(a), which is in part 4. Pls.' Resp. [460] at 11-12 (citing Pls.' Second Am. Compl. [343] at 110). But Plaintiffs never specifically address Defendants' assertion that Count IV is brought against Bruister and BFLCC as nonfiduciaries, an assertion that goes to the core of Defendants' argument.

To the extent Count IV is addressed to Bruister in his fiduciary capacity, the claims brought under § 502(a)(3) fall under § 413's limitations period. See Radford v. General Dynamics Corp., 151 F.3d 396, 399 (5th Cir. 1998) (concluding that claims for equitable relief against a fiduciary under § 502(a)(3) are governed by § 413). As for BFLLC-and any nonfiduciary claims against Bruister-they are not covered by § 409(a). That section is expressly limited to acts by a fiduciary. See Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 246-47 (2000) (explaining that § 409(a), 29 U.S.C. § 1109(a), is limited to claims against fiduciaries). But that does not foreclose the possibility that the limitations period provided in § 413 may still apply to equitable relief against a non-fiduciary under § 502(a)(3).

Whether § 413 applies to equitable relief against a non-fiduciary party in interest under § 502 is not firmly established. In Reich v. Lancaster, the Fifth Circuit applied § 413 to claims under § 502(a)(5) against a nonfiduciary found to have engaged in a prohibited transaction under § 406. 55 F.3d 1034, 1043, 1054-55 (5th Cir. 1995). But the state-verses-federal question was not examined. The same thing happened in Landwehr v. DuPree, where the Ninth Circuit, again without discussion, applied § 413 to a § 502 claim for "other appropriate equitable relief" arising out of a fiduciary breach. 413 72 F.3d 726, 731-32 (9th Cir. 1995) (applying the statute of limitations in ERISA § 413). But see Campanella v. Mason Tenders' Dist. Council Pension Plan, 132 F.App'x 855, 856 (2d Cir. 2005) ("ERISA § 413 applies only to breach of fiduciary duty claims."). Despite the somewhat thin authority, the Court concludes that § 413 does apply.

In Harris Trust, the Supreme Court concluded that "§ 502(a)(3) itself imposes certain duties, and therefore that liability under that provision does not depend on whether ERISA's substantive provisions impose a specific duty on the party being sued." 530 U.S. at 245. Defendants latch onto this language arguing that § 413 is limited to claims arising under ERISA part 4, and therefore excludes claims arising independently from § 502(a)(3), which is found in part 5. This argument is perhaps too easy and eventually loses steam when the Harris Trust analysis is examined in light of the full text of §§ 413 and 502(a)(3).

Section 502(a)(3) describes who may sue and the available remedies. It does not indicate the parties against whom suit may be brought. 29 U.S.C. § 1132(a)(3). Relevant here, it allows plan participants, like Plaintiffs, to seek equitable remedies. Id. With respect to a claim against a fiduciary, § 502(a)(3) would merely provide a remedy for violation of one of the substantive sections, like § 406, which precludes certain transactions with parties in interest. But no such sections exist as to non-fiduciary parties in interest, leaving the Court in Harris Trust to ask whether § 502(a)(3) itself created that cause of action.

The Supreme Court concluded that it did by construing § 502(a)(3) in light of § 502(l).[5] The Court paraphrased § 502(l) as follows: "the Secretary shall assess a civil penalty against an other person' who knowing[ly] participat[es] in' any violation of part 4 by a fiduciary.'" 530 U.S. at 248 (ellipses omitted) (emphasis added). The Court then concluded, "The plain implication is that the Secretary may bring a civil action under § 502(a)(5) against an other person' who knowing[ly] participat[es]' in a fiduciary's violation. " Id. (emphasis added). Having found this authority for the Secretary, the Supreme Court extended it to private litigants entitled to bring suit under § 502(a)(3). Id. In sum, the equitable remedy provided in § 502(a)(3) against a non-fiduciary arises when a fiduciary violates part 4. Id.

Looking then to § 413, it begins, "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..." two specified periods. 29 U.S.C. § 1113 (emphasis added). This language amply covers equitable relief against a nonfiduciary under § 502(a)(3). First, § 413 relates to claims "under this subchapter, " i.e., Title II of ERISA, which includes both parts 4 and 5. Second, nothing in § 413 limits it to claims against fiduciaries. Had Congress wished to accomplish that goal, it could have simply stated, "no action may be commenced under this subchapter against a fiduciary. " Instead, § 413 by its plain terms relates to claims " with respect to " a fiduciary's breach " or with respect to a violation of this part." Id. (emphasis added). Equitable relief imposed against a non-fiduciary under § 502(a)(3) springs from knowing participation in "any violation of part 4 by a fiduciary." Harris Trust, 530 U.S. at 248 (quoting 29 U.S.C. § 1132(l)) (emphasis added). So a claim for equitable relief against a non-fiduciary under § 502(a)(3) is "with respect to a violation of this part [4]." 29 U.S.C. § 1113. And in this case, Plaintiffs seek equitable relief based on § 409 and for breaches of §§ 404, 405, and 406. See Pls.' Second Am. Compl. [343] ¶¶ 112-13. Section 413 applies. See Solis v. Couturier, No. 2:08-cv-02732-RRB-GGH, 2009 WL 1748724, at *2 (E.D. Cal. June 19, 2009) (applying the statute of limitations in ERISA § 413 to a § 502 claim for "other appropriate equitable relief" arising out of a fiduciary breach).[6]

(2) Application of § 413's Three-Year Limitations Period

The next question is whether Plaintiffs' claims are untimely because Plaintiffs filed suit more than three years after acquiring actual knowledge of breaches of fiduciary duties. Under § 413(2), Plaintiffs were required to bring suit "three years after the earliest date on which [they] had actual knowledge of the breach or violation...." 29 U.S.C. § 1113(2). Unlike some other circuit courts, including the Seventh Circuit in the opinion Defendants cited, "actual knowledge" in the Fifth Circuit "requires that a plaintiff have actual knowledge of all material facts necessary to understand that some claim exists, which facts could include necessary opinions of experts, knowledge of a transaction's harmful consequences, or even actual harm.'" Reich, 55 F.3d 1057 (quoting Gluck v. Unisys Corp., 960 F.2d 1168, 1177 (3d Cir. 1992)); see also Kling v. Fid. Mgmt. Trust Co., 323 F.Supp.2d 132, 136-37 (D. Mass. 2004) (noting the Fifth and Seventh Circuits, among others, are split). This test further "requires a showing that plaintiffs actually knew not only of the events that occurred which constitute the breach or violation but also that those events supported a claim for breach of fiduciary duty or violation under ERISA.'" Maher v. Strachan Shipping Co., 68 F.3d 951, 954 (5th Cir. 1995) (quoting Int'l Union v. Murata Erie N. Am., 980 F.2d 889, 900 (3d Cir. 1992)); see also Babcock v. Hartmary Corp., 182 F.3d 336, 339 (5th Cir. 1999).

Defendants contend that Plaintiffs obtained this actual knowledge in March 2006, when the ESOP mailed a letter stating in part: "The ESOT has recently completed the purchase of 134, 710.53 shares of Bruister capital stock from individual Bruister shareholders and now owns a total of 1, 000, 000 shares, which represents one hundred percent (100%) of the issued and outstanding shares of Bruister capital stock." Pass-Through Materials [499-1] at 2. According to Defendants, because § 406 prohibits transactions with a party-in-interest and the fiduciary bears the burden of showing any exemptions to § 406, Plaintiffs had actual knowledge of a claim.

While the March 2006 letter did inform Plaintiffs that the ESOP had purchased all of BA's outstanding shares, the issue is raised under Rule 56, and the Court concludes that the letter is not sufficient-at least as a matter of law-to establish actual knowledge under § 413. First, ERISA prohibits a plan from engaging in transactions with a party-in-interest, but a party-ininterest is not defined so broadly to include every shareholder of a company. See 29 U.S.C. § 1002(14). Second, Defendants fail to explain how knowledge that the ESOP purchased BA's outstanding shares is sufficient for the other claims that Defendants breached their duties of loyalty and prudence as well as duties by nature of their roles as co-fiduciaries and members of BA's board of directors. See Maher, 68 F.3d at 956 ("Inasmuch as appellants are challenging the actual selection of [an annuity provider], they must have been aware of the process utilized by [defendant] in order to have had actual knowledge of the resulting breach of fiduciary duty."). The statement in the March 2006 letter is inadequate to show-again as a matter of law-that Plaintiffs "actually knew not only of the events that occurred which constitute the breach or violation but also that those events supported a claim for breach of fiduciary duty or violation under ERISA." Id. at 954 (citation and quotations omitted). The Court therefore finds that Defendants' motion for summary judgment based on the statute of limitations should be denied.[7]

b. Ability to Sue on Behalf of Plan

Defendants argue that neither Radar nor Sealy may bring this action as a "representative action." Defs.' Mem. [452] at 54. ERISA § 502(a)(2) states: "A civil action may be brought by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 409 [29 U.S.C. § 1109]." 29 U.S.C. § 1132(a)(2). Section 409 states, in relevant part:

(a) Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

29 U.S.C. § 1109 (emphasis added). It has been traditionally held that § 502(a)(2) claims were brought on behalf of the plan as a whole. Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 (1985). But in LaRue v. DeWolff, Boberg & Assoc., the Court explained that Russell was decided in light of a defined benefits plan. 552 U.S. 248, 255 (2008). In the defined-contribution-plan context, the Court held that a participant proceeding under § 502(a)(2) could "recover[] for fiduciary breaches that impair the value of plan assets in a participant's individual account." Id. at 256.

Defendants agree that LaRue would have allowed Radar and Sealy to seek individual relief in their Amended Complaint-had they so elected. But they protest Plaintiffs' attempt to obtain recovery "on behalf of the ESOP as a whole." Pls.' Am. Compl. [105] ¶10. According to Defendants, after LaRue, participants in a defined-contribution plan may seek relief only for losses to their individual accounts. See Defs.' Mem. [452] at 55 (citing Bendaoud v. Hodgson, 578 F.Supp.2d 257, 266 (D. Mass. 2008)). But this Court agrees with others that "[ LaRue ] broadens, rather than limits, the relief available under § 502(a)(2).... [The] contention that LaRue establishes that there are no plan claims' in the defined contribution context is incorrect." In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 595 n.9 (3d Cir. 2009); see also LaRue, 552 U.S. at 262-63 (Thomas, J., concurring) ("[W]hen a participant sustains losses to his individual account as a result of a fiduciary breach, ...


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