Enneking v. Schmidt Builders Supply Inc.

• Decision Date: 19 June 2012
• Docket Number: Case No. 11–cv–4111–JAR–KGG.
• Citation: 875 F.Supp.2d 1274
• Court: U.S. District Court — District of Kansas
• Parties: Joseph ENNEKING, on behalf of himself and all others similarly situated, Plaintiffs, v. SCHMIDT BUILDERS SUPPLY INC., Mary S. Duncan, John W. Duncan, Timothy Schmidt, and SS & C Solutions Inc. f/k/a SS & C Business & Tax Services, Inc., Defendants.

875 F.Supp.2d 1274

Joseph ENNEKING, on behalf of himself and all others similarly situated, Plaintiffs,

v.SCHMIDT BUILDERS SUPPLY INC., Mary S. Duncan, John W. Duncan, Timothy Schmidt, and SS & C Solutions Inc. f/k/a SS & C Business & Tax Services, Inc., Defendants.

Case No. 11–cv–4111–JAR–KGG.

United States District Court, D. Kansas.

June 19, 2012.

Jay F. Fowler, Foulston Siefkin LLP, Wichita, KS, James P. Rankin, Sr., Jeremy L. Graber, Foulston Siefkin LLP, Ronald P. Pope, Ralston, Pope & Diehl LLC, Topeka, KS, for Plaintiffs.

Shelley A. Runion, Lyndsey J. Conrad, Husch Blackwell LLP, Brian S. Franciskato, Dean E. Nash, Nash & Franciskato Law Firm, George D. Halper, Gregory S. Davey, Lawrence D. Greenbaum, McAnany, Van Cleave & Phillips, P.A., Kansas City, MO, for Defendants.

MEMORANDUM AND ORDER

JULIE A. ROBINSON, District Judge.

Plaintiffs filed suit against defendants under the Employee Retirement Income Security Act of 1974 (“ERISA”) for breaches of fiduciary duties (including failure to disclose, concealment, failure to conduct prudent and independent investigation to determine the fair market value of stock, failure to act for exclusive benefit, and prudence), federal common law ERISA fraud, nonfiduciary party in interest, and to recover damages for negligent valuation of company stock under Kansas state law. This case comes before the Court on Defendants Mary Duncan, John Duncan, and Schmidt Builders Supply's Motion to Dismiss Plaintiff's Claims (Doc. 19), Defendant Timothy Schmidt's Motion to Dismiss Plaintiff's Claims (Doc. 21), and Defendant SS & C Solutions Inc.'s Motion to Dismiss for Failure to State a Claim (Doc. 23). The motions are fully briefed, and the Court is prepared to rule. As explained more fully below, the Court grants dismissal of Counts I, II, III, IV, VI and VII, but denies dismissal of Count VIII.

I. Motion to Dismiss—Rule 12(b)(6) Standard

To survive a motion to dismiss, a complaint must present factual allegations, assumed to be true, that “raise a right to relief above the speculative level” and must contain “enough facts to state a claim to relief that is plausible on its face.” ¹ Under this standard, “the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims.” ² The plausibility standard does not require a showing of probability that “a defendant has acted unlawfully,” ³ but requires more than “a sheer possibility.” ⁴

The plausibility standard enunciated in Bell Atlantic Corp. v. Twombly⁵ seeks a middle ground between heightened fact pleading and “allowing complaints that are no more than ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action,’ which the Court stated ‘will not do.’ ” ⁶Twombly does not change other principles, such as that a court must accept all factual allegations as true and may not dismiss on the ground that it appears unlikely the allegations can be proven.⁷

The Supreme Court has explained the analysis as a two-step process. For the purposes of a motion to dismiss, the court “must take all the factual allegations in the complaint as true, [but] we ‘are not bound to accept as true a legal conclusion couched as a factual allegation.’ ” ⁸ Thus, the court must first determine if the allegations are factual and entitled to an assumption of truth, or merely legal conclusions that are not entitled to an assumption of truth.⁹ Second, the court must determine whether the factual allegations, when assumed true, “plausibly give rise to an entitlement to relief.” ¹⁰ “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” ¹¹

II. Summary of Complaint

The following allegations are taken from Plaintiffs' Complaint. As noted above, well-pleaded factual allegations in the complaint are assumed to be true for purposes of determining whether the complaint states a claim for relief.

A. Parties

Plaintiff Joseph Enneking (“Enneking”) was a participant in the Schmidt Builders Supply Inc. (“Schmidt Builders”) 401(k) Profit Sharing Plan and Employee Stock Ownership Plan (“ESOP”), both employee benefit plans within the meaning of section 3(3) of ERISA, 29 U.S.C. § 1002(3). Enneking is a co-trustee of the ESOP. Enneking did not assist with the creation of the ESOP or participate in the ongoing maintenance of the ESOP. Enneking brings this action on his own behalf and as a class representative on behalf of the class of all persons who were participants in the ESOP or beneficiaries of such participants who suffered as a result of the 2003 transfer from the 401(k) Plan to the ESOP or suffered harm as a result of the July 2011 collapse of Schmidt Builders.

Defendant Schmidt Builders (“Schmidt Builders”) is a Kansas corporation. Schmidt Builders was the Administrator of the 401(k) Plan and the ESOP. Schmidt Builders is the “employer” who employed eligible employees under the 401(k) Plan and the ESOP. Schmidt Builders is a fiduciary of the Plan and a “party in interest.”

Defendant Timothy Schmidt (“Schmidt”) was the sole owner of Schmidt Builders from 1997 until its sale in 2003. He was the Administrator, a fiduciary of the 401(k) Plan, and a “party in interest.”

Defendant Mary Duncan was 60% owner, President, and Chairman of the Board after the 2003 sale of Schmidt Builders. She is Timothy Schmidt's sister. She was the Administrator, is a fiduciary of the ESOP, and a “party in interest.”

Defendant John Duncan is Mary Duncan's husband and the Chief Financial Officer of Schmidt Builders. He is also the Secretary and Treasurer of Schmidt Builders from 1996 to present. He was the Administrator of the 401(k) Plan and ESOP, is trustee of the ESOP, and a “party in interest.” Upon information and belief, John Duncan is a convicted felon, convicted of five counts of Kansas securities fraud and five counts of theft of $150 or more, for offenses occurring on or about July 20, 1987.

SS & C Solutions Inc., f/k/a Business and Tax Services, Inc. (“SS & C”) is a Kansas corporation and a CPA firm that conducted a valuation analysis of Schmidt Builders stock in conjunction with the 2003 ESOP formation, conducted ongoing annual ESOP valuations up to and including the 2009 ESOP valuation, provided material assistance and advice to Schmidt Builders, the Duncans, and Timothy Schmidt regarding formation and tax qualification approval of the ESOP by the Internal Revenue Service, and conducted other financial services for Schmidt Builders. SS & C is a “party in interest.”

B. Factual Allegations

Plaintiffs were employed as full-time employees by Schmidt Builders and ESOP Participants sometime during the period of January 1, 2002 and July 31, 2011. Until December 31, 2002, eligible Schmidt Builders employees participated in Schmidt Builders' 401(k) Plan.

Defendant Timothy Schmidt had taken control of Schmidt Builders in January 1997 by Schmidt Builders redeeming the co-owner's stock for book value of approximately $2,000,000, leaving Timothy Schmidt as the sole shareholder. On November 26, 2002, Defendants Timothy Schmidt, John Duncan, and Mary Duncan entered into a stock purchase agreement (“Agreement”) to sell all of Schmidt Builders' stock to Mary Duncan and the newly created ESOP. The Agreement closed on June 6, 2003.

Pursuant to the terms of the Agreement, the ESOP would purchase 40% of Schmidt Builders for $1,455,000 and Mary Duncan would purchase the remaining 60% for $3,395,000. Timothy Schmidt received three bonus payments in 2002–2003 totaling $314,385.71 and additionally received $400,000 for a non-competition agreement—making the total paid for his 100% ownership interest in Schmidt Builders $5,564,385.71.

For the ESOP to raise its share of the purchase price, at least $1,100,000 was required to be transferred from the existing 401(k) Plan to the ESOP. The transfer required employees to affirmatively elect such a transfer from their 401(k) Plan accounts. The employees were told that if enough assets were not transferred from the 401(k) Plan to the ESOP, the sale of Schmidt Builders would not close. Regardless of the employees' decisions, the 401(k) Plan would be discontinued December 31, 2002. The difference between the 401(k) Plan rollover amount and the ESOP purchase price would be funded with a loan from Schmidt Builders to the ESOP. The 401(k) Plan was not encumbered by any debts.

Plaintiffs were told that a valuation expert, SS & C, was hired solely to represent the ESOP and ESOP trustee to ensure the price paid by the ESOP for Schmidt Builders' shares was fair to the ESOP participants and beneficiaries. SS & C was originally retained by Schmidt Builders to establish the ESOP so that the sale of Schmidt Builders could be consummated. This circumstance placed SS & C in the conflicted position of promoting and implementing the ESOP as well as providing an objective valuation of the ESOP. Plaintiffs were not adequately informed of SS & C's conflict of interest or the risks of moving their 401(k) Plan to the ESOP.

SS & C's valuation failed to provide Plaintiffs with an accurate valuation of Schmidt Builders, including failing to account for the Schmidt Builders' increased debt obligations following the close of the Agreement. SS & C continued ESOP valuations up to and including the 2009 ESOP valuation for the benefit of the ESOP Trustee and the ESOP participants.

Plaintiffs believed Timothy Schmidt was not operating Schmidt Builders in a financially sound manner and believed that they had no other viable choice but to roll their 401(k) Plan account to the ESOP to keep Schmidt Builders in business and keep their jobs.

Mary Duncan raised her share of the purchase price by issuing a promissory note to Schmidt Builders in exchange for the funds. Schmidt Builders did not take a security interest in any of her assets or require a personal...