Burnett v. Prudent Fiduciary Servs.

• Decision Date: 25 January 2023
• Docket Number: C. A. 22-270-RGA-JLH
• Parties: DAVID BURNETT and DAVID NELSON, as representatives of a class of similarly situated persons, and on behalf of the WESTERN GLOBAL AIRLINES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, Plaintiffs, v. PRUDENT FIDUCIARY SERVICES LLC, MIGUEL PAREDES, JAMES K. NEFF, CARMIT P. NEFF, JAMES K. NEFF REVOCABLE TRUST DATED 11/15/12, CARMIT P. NEFF REVOCABLE TRUST DATED 11/15/12, WGA TRUST DATED 8/16/13, and JOHN DOES 1-10, Defendants.
• Court: U.S. District Court — District of Delaware

DAVID BURNETT and DAVID NELSON, as representatives of a class of similarly situated persons, and on behalf of the WESTERN GLOBAL AIRLINES, INC. EMPLOYEE STOCK OWNERSHIP PLAN, Plaintiffs, v. PRUDENT FIDUCIARY SERVICES LLC, MIGUEL PAREDES, JAMES K. NEFF, CARMIT P. NEFF, JAMES K. NEFF REVOCABLE TRUST DATED 11/15/12, CARMIT P. NEFF REVOCABLE TRUST DATED 11/15/12, WGA TRUST DATED 8/16/13, and JOHN DOES 1-10, Defendants.

C. A. No. 22-270-RGA-JLH

United States District Court, D. Delaware

January 25, 2023

REPORT AND RECOMMENDATION

THE HONORABLE JENNIFER L. HALL, UNITED STATES MAGISTRATE JUDGE

Plaintiffs David Burnett and David Nelson (collectively “Plaintiffs”) brought this action alleging violations of the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq. (“ERISA”) by Defendants Prudent Fiduciary Services LLC, Miguel Paredes James K. Neff, Carmit P. Neff, James K. Neff Revocable Trust Dated 11/15/12, Carmit P. Neff Revocable Trust dated 11/15/12, WGA Trust Dated 8/16/13, and John Does 1-10 (collectively, “Defendants”). Plaintiffs allege among other things, that Defendants breached their fiduciary duties under ERISA, causing damage to their retirement plan, and Plaintiffs seek relief for and on behalf of the plan under 29 U.S.C. §§ 1109(a) and 1132(a)(2).

Pending before the Court is Defendants' Motion to Compel Arbitration and to Stay Pursuant to Sections 3 and 4 of the Federal Arbitration Act, or, in the Alternative, to Dismiss. (D.I. 24.) Although § 1132(a)(2) permits plan beneficiaries such as Plaintiffs to seek relief on behalf of the plan as a whole, the arbitration provision at issue in this case purports to bar Plaintiffs from seeking relief for the plan as a whole. Because that portion of the arbitration provision is invalid and is not severable from the remainder of the arbitration provision, Defendants' motion to compel arbitration should be DENIED.

I. BACKGROUND

This case involves an employee stock ownership plan (“ESOP”). An ESOP is a type of ERISA-regulated defined contribution plan “designed to invest primarily in qualifying employer securities.” 29 U.S.C. §§ 1107(d)(6), 1002(34).

Plaintiffs are all current employees of Western Global Airlines, Inc. and have participated in the company's ESOP (the “Plan”) since its inception in 2020. (D.I. 1 ¶¶ 25, 33-35.) The exact details of Plaintiffs' allegations aren't germane to resolving the present motion, but their general claim is that Defendants breached their fiduciary duties to the Plan by causing it to pay more for shares of Western Global Airlines than the shares were actually worth. Plaintiffs' Complaint seeks “recovery on behalf of the Plan” under §§ 1132(a)(2) and 1109(a). (Id. ¶¶ 115-17.) As explained further below, § 1109(a) says that a plan fiduciary who breaches a fiduciary duty listed in §§ 1101-1114 shall be liable to the plan “for any losses to the plan resulting from each such breach” and subject to equitable relief. Section 1132(a)(2) says that a beneficiary of a plan can bring a civil action in district court for appropriate relief under § 1109.^[1] The Complaint has a lengthy prayer for relief. Among other things, it seeks to order Defendants to make good to the Plan the losses resulting from the breaches of fiduciary duties under ERISA and to disgorge any profits they made through the use of Plan assets. (Id. ¶ 177(F), (H), (I).) It also seeks to remove the Plan trustees and to enjoin the Neffs from serving the Plan in any fiduciary capacity, as well as certain other equitable and declaratory relief. (Id. ¶ 177(J), (L); see also id. ¶ 177.)

The Plan is governed by an instrument that the parties refer to as the “Plan Document.”^[2] (D.I. 26, Ex. A.) It has a lengthy arbitration provision, which provides, in pertinent part, as follows:

18.7 Mandatory and Binding Arbitration Procedure (“Arbitration Procedure”). As a condition to (i) any Employee becoming eligible to participate in the Plan, (ii) any Employee, Participant, or Beneficiary continuing to participate in the Plan, (iii) any Claimant asserting a claim related to the Plan or any benefits under the Plan, (iv) any Employee, Participant, or Beneficiary receiving any contributions to his or her Plan account, and/or (v) any Employee, Participant, or Beneficiary receiving any benefit under this Plan, such Employee, Participant, or Beneficiary shall be bound, and hereby is bound, to follow and comply with the provisions of this Arbitration Procedure to resolve all Covered Claims.

(a) Covered Claims. Any claim by a Claimant which arises out of, relates to, or concerns this Plan . . ., including without limitation . . . any claim asserting a breach of . . . any provision of ERISA . . ., including without limitation claims for breach of fiduciary duty, . . . (collectively, “Covered Claims”), shall be settled by binding arbitration administered in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”) then in effect. Under no circumstances are the AAA Supplementary Rules for Class Arbitrations to be used .... The judgment on the final award . . . shall not have any binding effect on the Administrator or Trustee except as to the individual Claimant only.

(b) No Group, Class, or Representative Arbitrations. All Covered Claims must be brought solely in the Claimant's individual capacity and not in a representative capacity or on a class, collective, or group basis. Each arbitration shall be limited solely to one Claimant's Covered Claims and that Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Employee, Participant or Beneficiary other than the Claimant. For instance, with respect to any claim brought under ERISA § 502(a)(2) [29 U.S.C. § 1132(a)(2)] to seek appropriate relief under ERISA § 409 [29 U.S.C. § 1109], the Claimant's remedy, if any, shall be limited to (i) the alleged losses to the Claimant's individual Plan account resulting from the alleged breach of fiduciary duty, (ii) a pro-rated portion of any profits allegedly made by a fiduciary through the use of Plan assets where such pro-rated amount is intended to provide a remedy solely to Claimant's individual Plan account, and/or (iii) such other remedial or equitable relief as the arbitrator deems proper so long as such remedial or equitable relief does not include or result in the provision of additional benefits or monetary relief to any Employee, Participant or Beneficiary other than the Claimant, and is not binding on the Administrator or Trustee with respect to any Employee, Participant or Beneficiary other than the Claimant. The requirement that (x) all Covered Claims be brought solely in a Claimant's individual capacity and not in a purported group, class, collective, or representative capacity, and (y) that no Claimant shall be entitled to receive, and shall not be awarded, any relief other than individual relief, shall govern irrespective of any AAA rule or decision to the contrary and is a material and nonseverable term of this Section 18.7, Mandatory and Binding Arbitration Procedure (“Arbitration Procedure”). In the event that the requirements of this subsection (the “Class Action Waiver”) were to be found unenforceable or invalid by the court specified in Section 18.8, then the entire Arbitration Procedure (i.e., all of Section 18.7) shall be rendered null and void in all respects. Except as to the applicability and enforceability of the foregoing Class Action Waiver, the arbitrator(s) shall have exclusive authority to resolve any dispute or issue of arbitrability with respect to this Arbitration Procedure, including as to the jurisdiction of the arbitrator(s) or relating to the existence, scope, validity, enforceability, or performance of this Arbitration Procedure or any of its provisions. Any dispute or issue as to the applicability or validity of the Class Action Waiver shall be determined solely by the court specified in Section 18.8....

18.8 Restriction on Venue. If a Claimant wishes to pursue any Covered Claim, that Claimant shall comply with the Arbitration Procedure, set forth in Section 18.7 of the Plan, and shall not file any such claim in a state or federal court. To the extent, however, any Claimant . . . wishes to challenge the legal enforceability of the Arbitration Procedure, or to the extent the Arbitration Procedure is invalidated, such action or challenge shall be filed exclusively in the United States District Court for the District of Delaware or any Delaware State Court ....

(D.I. 26, Ex. A §§ 18.7-8.)

Defendants filed a motion seeking to compel arbitration of Plaintiffs' claims in accordance with the arbitration provision in the Plan Document. (D.I. 24.) Plaintiffs oppose. Judge Andrews referred the motion to me on July 15, 2022, after briefing was complete. (D.I. 25-29, 32.) The parties filed numerous supplemental briefs and notices of additional authority, all of which have been considered. (D.I. 33, 34, 38, 41, 44, 45.) The Court heard oral argument on October 27, 2022. (“Tr.__.”)

II. LEGAL STANDARD

“The Federal Arbitration Act reflects the ‘national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts.'” In re Remicade (Direct Purchaser) Antitrust Litig., 938 F.3d 515, 519 (3d Cir. 2019) (quoting Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440, 443 (2006)). Its primary substantive provision says that “[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy . . . arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for...