Canale v. Yegen, Civ. No. 90-2409 (HLS).

• Decision Date: 07 February 1992
• Docket Number: Civ. No. 90-2409 (HLS).
• Citation: 782 F. Supp. 963
• Parties: Frank Sturla CANALE, Plaintiff, v. Christian C. YEGEN, Jason Semel, Yegen Holdings Corporation and Yegen Holdings Corporation Employee Stock Ownership Plan, Defendants.
• Court: U.S. District Court — District of New Jersey

782 F. Supp. 963

Frank Sturla CANALE, Plaintiff, v. Christian C. YEGEN, Jason Semel, Yegen Holdings Corporation and Yegen Holdings Corporation Employee Stock Ownership Plan, Defendants.

Civ. No. 90-2409 (HLS).

United States District Court, D. New Jersey.

January 28, 1992.

As Amended February 7, 1992.

COPYRIGHT MATERIAL OMITTED

Mark E. Belland, Tomar, Simonoff, Adourian & O'Brien, Haddonfield, N.J., for plaintiff.

Robert A. Patria, Newark, N.J., Michael J. Dell, Kramer, Levin, Nessen, Kamin & Frankel, New York City, for defendants.

OPINION

SAROKIN, District Judge.

Before the court is defendants' motion for summary judgment dismissing all claims.

Background

This case arises out of the participation of plaintiff Frank S. Canale ("Canale") in an Employee Stock Ownership Plan ("the Plan") maintained by defendant Yegen Holdings Corporation ("Holdings"). Individual defendants Christian C. Yegen ("Yegen") and Jason Semel ("Semel") were officers and directors of Holdings and trustees and fiduciaries of the Plan.

The Plan was established in September, 1976 by Yegen Associates ("Associates"), a subsidiary of Holdings, and sponsorship was transferred to Holdings in or around 1981. It is undisputed that Canale, a Holdings employee, was vested in the Plan. Most of the Plan's assets were invested in Holdings common stock. Among Holdings' significant assets was the Integrity Financial Group, which was, as of the end of 1985, 80% owned by Holdings. Integrity Financial Group was the sole owner of the Integrity Insurance Company ("Integrity"). Plaintiff Exh. G.

In January 1986, the Plan trustees voted to terminate the Plan retroactively to October 1, 1985. Plaintiff Exh. L. Employees, including Canale, were notified of the termination by memorandum dated March 14, 1986. Plaintiff Exh. M. In March, 1986, Canale's employment at Holdings was terminated. By letter dated April 28, 1987, Canale was advised of an offer by defendants to pay him $17,182.01 in full discharge of his claims against the Plan. Plaintiff Exh. N. The letter stated that, since the last statement of the value of Canale's Plan account had been prepared for the plan year ended September 30, 1985, Holdings "has suffered serious financial reverses and the value of its stock is much reduced." The letter further stated:

While the most recent appraisal of the value of Holdings' stock showed a value of $34 per share at December 31, 1985 that value is no longer a true current value because the principal asset of Holdings, consisting of 80% of the shares of the Integrity Financial Group, Inc., is now worthless due to the failure of the Integrity Insurance Company.

Plaintiff Exh. N.

Canale did not accept this offer. By letter dated May 12, 1986, Holdings informed Canale that his Plan balance had been $68,728.05 as of September 30, 1985; although the cover letter stated that it would "be unreasonable to anticipate that, given today's circumstances, the values attributable to this stock as of 12/31/84 are attainable today." Plaintiff Exh. F.

In July, 1988, a class action suit was filed against defendants by certain former Plan beneficiaries who alleged that defendants had breached their fiduciary duties as Plan trustees. Canale "considered himself at all times to be a potential member of the class." Canale Aff. at ¶ 6 (Plaintiff Exh. B). After a motion for class certification was denied on December 28, 1989, the suit was voluntarily dismissed with prejudice on June 27, 1990.

On February 14, 1990, Canale filed this lawsuit. Canale's amended complaint contains two counts. The First Count alleges that defendants breached fiduciary duties they owed to Canale as trustees of the Plan under 29 U.S.C. §§ 1104, 1105 & 1106. Specifically, plaintiff alleges that the individual defendants (1) "participated in decisions which substantially weakened the financial stability of Integrity Insurance" — a principal asset of defendant Holdings — "and failed to take any action to divest the holdings of the Plan to protect the Plaintiff" while the value of the assets of the Plan was "dropping dramatically;" (2) that the Board of Directors of Integrity, chaired by defendant Yegen, ordered it to pay a $5 million dividend to its sole stockholder, Integrity Financial Group, at a time when Integrity was "essentially insolvent," and that this action "caused a huge devaluation of the stock" held by the Plan; (3) that cash generated from the sale of Holdings subsidiaries "was not used to provide any cash" to the Plan, but was instead used to capitalize the nearly insolvent Integrity; (4) that from 1981 to 1985, the individual defendants "participated in the filing of false or misleading financial statements regarding Integrity Insurance and fraudulent inter-company transfers;" (5) that the individual defendants acted under a conflict of interest, serving their own ends at the expense of the Plan; (6) that they failed to take steps to diversify the Plan's assets; and (7) that self-dealing by the defendants caused "the depletion and near total loss of the value" of plaintiff's interest in the Plan. Complaint at ¶¶ 31-40. Plaintiff's Second Count seeks payment in full of the value of plaintiff's Plan account as of September 30, 1985, the closing date of the Plan year prior to his termination, or as of the termination of his employment.

Discussion

In order to prevail on a motion for summary judgment, the moving party must show that there are no genuine issues of material fact and that, viewing the facts in the light most favorable to the non-movant, the movant will prevail as a matter of law. Fed.R.Civ.P. 56. See, Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Wisniewski v. Johns-Manville Corp., 812 F.2d 81, 84 (3d Cir. 1987).

Defendants have moved for summary judgment on the grounds that the First Count of plaintiff's complaint fails to state a claim under the Employee Retirement Income Security Act ("ERISA"). Further, defendants contend that Canale's claim for breach of fiduciary duty is time-barred. Finally, defendants maintain that the Second Count is essentially a request for further benefits under the Plan, and must be dismissed for failure to exhaust the remedies provided by the Plan. The court will discuss each of these claims in turn.

Breach of ERISA Fiduciary Duties

For the purposes of assessing whether plaintiff has stated a claim for violation of ERISA fiduciary duties, his allegations fall into essentially three categories: (1) allegations of defendants' misbehavior while serving as Plan administrators; (2) allegations of their mismanagement of entities in which the Plan owned stock, including an alleged failure to distribute proceeds from asset sales to the Plan; and (3) allegations of fraudulent misconduct and concealment in the Individual Defendants' role as officers and directors of entities in which the Plan held equity interests.

Under ERISA, plan administrators, like defendants, assume fiduciary duties toward the plans they administer.¹ An ERISA fiduciary is statutorily required to:

discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of: providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan; 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 enterprise of a like character and with like aims; by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and in accordance with the documents and instruments governing the plan....

29 U.S.C. § 1104.

These duties apply equally to plan administrators who are also the officers of sponsoring corporations. However, such officers "assume fiduciary status `only when and to the extent' that they function in their capacity as plan administrators, not when they conduct business that is not regulated by ERISA." Payonk v. HMW Industries, Inc., 883 F.2d 221, 227 (3d Cir. 1989) (quoting Amato v. Western Union Intern., Inc., 773 F.2d 1402, 1416-17 (2d Cir.1985), cert. dismissed, 474 U.S. 1113, 106 S.Ct. 1167, 89 L.Ed.2d 288 (1986)). A claim that alleges nothing more than mismanagement of entities in which the administrator serves as an officer or director is therefore not actionable under ERISA, even if the plan has an interest in the entity.

As defendants rightly contend, to the extent they may have participated in decisions regarding the distribution of proceeds from the asset sales, they were acting in their capacity as employees of Holdings, not as Plan fiduciaries. See Payonk, 883 F.2d at 229 (decision to terminate retirement plan was corporate management decision, not subject to ERISA fiduciary obligations); Local Union 2134, United Mine Workers of America v. Powhatan Fuel, Inc., 828 F.2d 710 (11th Cir.1987) (decision to pay business expenses rather than insurance premiums was corporate matter, not subject to ERISA fiduciary duties). Accordingly, defendants are not subject to ERISA liability for any decisions they may have made regarding the asset sale proceeds. Plaintiff's claim that defendants breached their fiduciary duties by failing to distribute the asset sale proceeds to the Plan will therefore be dismissed as failing to state a claim cognizable under ERISA.

In contrast, plaintiff's claim that defendants failed to diversify the Plan's holdings concerns actions undertaken by defendants in their capacity as plan administrators, not as managers conducting a business.² ERISA states that in the case of an employee stock ownership plan ("ESOP"), such as this, "the diversification requirement that plan fiduciaries diversify plan investments so as to minimize the risk of large losses and the prudence requirement ...