Ervast v. Flexible Products Co.

• Decision Date: 24 September 2003
• Docket Number: No. 02-15769.,No. 02-15941.,02-15769.,02-15941.
• Citation: 346 F.3d 1007
• Parties: Roger ERVAST, Plaintiff-Appellant, v. FLEXIBLE PRODUCTS COMPANY, Randy Peterson, Doug Cruickshank, Defendants-Appellees. Roger Ervast, Plaintiff-Appellee, v. Flexible Products Company, Randy Peterson, Doug Cruickshank, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

346 F.3d 1007

Roger ERVAST, Plaintiff-Appellant, v. FLEXIBLE PRODUCTS COMPANY, Randy Peterson, Doug Cruickshank, Defendants-Appellees.

Roger Ervast, Plaintiff-Appellee, v. Flexible Products Company, Randy Peterson, Doug Cruickshank, Defendants-Appellants.

No. 02-15769.

No. 02-15941.

United States Court of Appeals, Eleventh Circuit.

September 24, 2003.

COPYRIGHT MATERIAL OMITTED

Douglas R. Kertscher, Peter F. Schoenthaler, Atlanta, GA, for Ervast.

Howard Douglas Hinson, Patrick Connors DiCarlo, Alston & Bird, Atlanta, GA, for Flexible Products Co., Peterson and Cruickshank.

Appeals from the United States District Court for the Northern District of Georgia.

Before BIRCH and HULL, Circuit Judges, and EDENFIELD^*, District Judge.

BIRCH, Circuit Judge:

This case arose when an employee collected benefits from an Employee Stock Ownership Plan ("ESOP") at the time of his resignation from the company. The company did not disclose information to him about a potential merger during the time he made his decision to resign. The employee claims he was entitled to the information and seeks damages for the difference in stock price. The issue before us is whether he will litigate that claim in state court, where he filed the case, or in federal court, where the defendants removed it by arguing complete preemption under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. We conclude that the district court improperly assumed removal jurisdiction over this case because plaintiff-appellant Ervast's state law claims for breach of corporate fiduciary duty are not super preempted by ERISA. Accordingly, the district court's denial of Ervast's motion to remand the action to state court is REVERSED, and the district court is instructed to remand the case to state court. Thus, we will not reach the merits of appeal No. 02-15941 because the district court's order denying sanctions was entered without jurisdiction over the underlying case.

I. BACKGROUND

A. The ERISA Plan

Flexible Products Company ("Flexible") stock was not publicly traded, but employees could obtain interest in the stock through the two employee incentive plans, the Employee Stock Ownership Plan ("ESOP") and the Long Term Incentive Plan ("Option Plan").¹ Pursuant to the ESOP, Flexible made contributions to a trust, which invested primarily in Flexible stock and held the assets for the benefit of participants. The ESOP trustee maintained a separate account for each participant, however, the participants did not directly own the Flexible stock as shareholders. The ESOP provided that the "separate accounts shall not require a segregation of the Trust assets and no Participant shall acquire any right to or interest in any specific asset of the Trust as a result of the allocations provided for in the Plan." R5-57, Exh. 13 at 13.

Once a participant's employment terminated, he was entitled to a distribution commencing "not later than 120 days after the date the Participant incurs a One Year Break in Service." Id. at 25. The ESOP provided for a "put" option, which obligated either the trust or Flexible to purchase any or all of participants' shares. Id. at 27. When the participant exercised the put, the stock's price was determined by the most recent annual independent valuation of the company's stock.

B. Ervast's Resignation and the Dow Merger

Roger Ervast was employed with Flexible and participated in Flexible's ESOP and Option Plan, wherein he accumulated significant holdings during the course of his employment. On 4 October 1999, Ervast tendered his resignation to Flexible, effective 15 October. On 5 October, Flexible discovered that Ervast would be employed with a competitor, Hydroseal, promptly escorted him from company property because he had access to confidential information, and paid him two weeks' compensation in lieu of notice. Immediately following his 5 October termination, Ervast exercised his rights under the ESOP and "put" his shares under the ESOP. On 12 October, Ervast received his payout from the ESOP and sold his stock under the Option Plan. Pursuant to Ervast's instructions, Flexible remitted a total of $448,648.10 from the Flexible Products ESOP, which was transferred directly to a rollover individual retirement account ("IRA").

During the fall of 1999, Flexible entertained the idea of selling the company to an interested buyer, Dow Chemical Company ("Dow"). In September 1999, the managers of both companies met to discuss the potential acquisition and negotiated a confidentiality agreement in exchange for Dow's agreement to make a takeout bid. On 1 October 1999, the parties entered into a confidentiality agreement and two managers entered into financial payout agreements in the event the merger was consummated. On 7 October, the senior management of both companies held a meeting, after which Dow's Senior Vice President indicated an offer to purchase Flexible was pending. On 26 October, Dow offered a price Flexible was willing to consider. On 10 November 1999, Flexible executed a letter of intent with Dow, authorizing the parties to engage in discussions about a potential merger. In January 2000, the merger was consummated and the Flexible ESOP merged into the Dow benefit plan and then ceased to exist. During the pendency of the sale, no one disclosed to Ervast the existence of the merger negotiations at the time he sold his Flexible stock. After the merger between Flexible and Dow was consummated, the 26 October 1999 date was selected as the point after which the shareholders who sold their Flexible shares were to receive the higher merger price because it was the date Flexible deemed the merger negotiations became "material."

C. Procedural History

On 23 January 2001, Ervast filed suit against Flexible Products Company, Randy Peterson, and Doug Cruickshank² in the State Court of Fulton County, Georgia, alleging breach of fiduciary duty and negligence resulting from Flexible's failure to disclose material information that would have affected Ervast's decision to liquidate his account in Flexible stock in the ESOP. On 28 February 2001, Flexible removed the case to the federal district court in the Northern District of Georgia. On 18 July 2001, Ervast filed a motion to remand the case to state court for lack of subject matter jurisdiction. The district court denied Ervast's motion to remand, finding that his claims were "related to Defendants' administration of an ERISA plan," because the ESOP would have to be referenced to determine the value the Flexible stock. R4-43 at 5. As a result, the district court determined that Ervast's claims were super preempted by ERISA, and that federal question jurisdiction existed over Ervast's claims.³

During discovery, Flexible filed a motion for summary judgment and Ervast filed a motion for partial summary judgment. The district court awarded summary judgment to Flexible and denied Ervast's motion. Although Ervast's complaint contained allegations in the rubric of state law, the district court determined that Ervast need not amend his complaint and the court construed the complaint to state a claim for recovery of benefits under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B). The district court then found that, in accordance with the undisputed facts, there was no evidence that Ervast was denied any benefits under the ESOP. Because the district court found previously that Ervast's claim was super preempted by ERISA as a claim for benefits, he could not maintain his claim for breach of fiduciary duty, despite the fact that he continually couched his argument in such terms. Nevertheless, "out of an abundance of caution," the district court addressed the breach of fiduciary duty claim under 29 U.S.C. § 1132(a)(3), and found that no fiduciary duty existed under ERISA for a plan administrator to disclose material business decisions of the company. R6-76 at 10. From this order, Ervast properly filed his notice of appeal, No. 02-15769.

D. Ervast's Deposition Dishonesty and Flexible's Motion for Sanctions

During discovery, Flexible determined that Ervast gave false testimony in his deposition regarding the date he communicated his acceptance of the Hydroseal offer. In addition, Ervast allegedly failed to produce a letter dated 27 September that Flexible argues proved the falsity of his statements, in response to the Rule 34 document requests. On these two bases, Flexible filed a motion for sanctions, which the district court denied because it found that there was no evidence that Ervast possessed the letter and that Flexible had not demonstrated a Rule 37(c) violation. Thereafter, Flexible properly filed its notice of appeal, No. 02-15941.

II. DISCUSSION

Ervast's appeal presents two issues: the first focuses upon the denial of his motion to remand the case to state court; and, second, the grant of Flexible's motion for summary judgment and the denial of his motion for partial summary judgment. Flexible appeals the denial of its motion for sanctions against Ervast for allegedly making dishonest statements during his deposition. Because the preemption issue is a jurisdictional predicate, we first discuss whether Ervast's state law claims were super preempted by ERISA and the district court properly denied his motion to remand.⁴ Because we disagree with the district court's decision that Ervast's claims were super preempted by ERISA, the district court never had subject matter jurisdiction over the case, and Ervast's appeal of the district court's summary judgment is moot. We will not address Flexible's appeal of the district court's order denying sanctions against Ervast because it also was rendered without jurisdiction over the underlying case.

Ervast's appeal is before us because his state law claims were removed by Flexible invoking federal question jurisdiction in the form of ERISA complete (or, alternatively, super) preemption, and Ervast's motion to remand was denied. A...