Foltz v. US News & World Report, Inc.
| Decision Date | 15 January 1986 |
| Docket Number | Civ. A. No. 84-0447. |
| Citation | 627 F. Supp. 1143 |
| Parties | Charles S. FOLTZ, et al., Plaintiffs, v. U.S. NEWS & WORLD REPORT, INC., et al., Defendants. |
| Court | U.S. District Court — District of Columbia |
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Alan Raywid, John D. Seiver, Susan P. Baxter, Cole, Raywid & Braverman, Washington, D.C., for plaintiffs: (Foltz, Handleman, Price, Williamson).
Richard J. Leighton, Avis Black, Washington, D.C., for Save the Fund.
Leslie A. Nicholson, Jr., Hannah E.M. Lieberman, Thomas J. Catliota, Washington, D.C., for defendants: (U.S. News, Madana Realty).
Lawrence Latto, William Galeota, Julie Melamud, Shea & Gardner, Washington, D.C., for Profit-Sharing Plan & Current Plan Committee.
Richard J. Wertheimer, Hadrian Katz, Edward Wolf, Washington, D.C., for defendants: (Directors).
Willis B. Snell, Willard K. Tom, Steuart H. Tomsen, Washington, D.C., for defendant: (The American Appraisal Co.).
This class action suit is brought against U.S. News & World Report magazine ("U.S. News" or "Company") by a group of its former employees who terminated their employment during the period from 1974 through 1981.1 The litigation was triggered by the sale, in October 1984, of U.S. News to real estate magnate and developer Mortimer Zuckerman for approximately $176 million. Plaintiffs complain that the stock of the Company, which constituted the corpus of the employee profit-sharing plan, was wrongfully and grossly undervalued for a number of years prior to the sale and that employees who retired during the designated class period are owed unpaid benefits and entitled to damages under various legal theories.
The parties have completed substantial pretrial discovery and have filed cross motions for summary judgment. The issues presented are set forth, infra at 1148-1149. This Memorandum Opinion provides the Court's ruling on those motions.
In 1962, U.S. News was reorganized to provide, consonant with the wishes of David Lawrence, the magazine's founder and owner, that employees of the Company would share in its ownership and profits. Accordingly, Articles of Incorporation authorized the issuance of Class A and common stock, each having full and equal voting rights. The employees could not sell or transfer their interests during their employment and upon termination were required to offer them to the Company at values established through mutual agreement or by outside appraisers.
The Profit-Sharing Plan of U.S. News ("Plan"), a non-contributory plan, was in existence when the Articles were adopted. By 1967, the Plan had acquired 50,000 shares of Class A stock, which it held throughout the class period. In addition, U.S. News was obligated to make contributions to the Plan. Over the years, the Plan acquired a modest portfolio of investment securities, which was of limited value as compared with the Class A stock. The Plan was managed by a Profit-Sharing Committee ("Plan Committee"), appointed by the Company's Board of Directors, while its accounts were maintained by a trustee.2 Each plan participant was allotted an account balance, based upon his salary and term of service. Upon retirement, the participant received payment, either lump sum or periodic, as determined by the appraised value of the Class A stock held by the Plan.
Beginning in 1963, a stock bonus plan was adopted which allotted to certain employees common stock known as bonus or anniversary stock. The employee could not sell or encumber the stock, absent Company approval. Upon retirement or termination, each employee was, at the option of U.S. News, required to sell back his shares of stock to the Company. Payments of bonus stock were made every five years, beginning with the fifth year after an employee joined the magazine. The number of shares allotted an employee was based upon his salary and length of service.
Together with most of the common stock, the 50,000 shares of Class A stock held by the Plan were placed in a voting trust. This arrangement gave the voting trustees effective control over the management of U.S. News, and placed them in a position where they could elect themselves to the Board and then appoint themselves to the Plan Committee. While Board members were not entitled to participate in the stock bonus plan, beginning in 1968, the Board did award stock to its directors. This stock, carried on the corporate books as debt, represented a right to deferred compensation only, with no voting privileges. The plaintiffs have labeled the shares "phantom stock."
As noted, the amount of benefits that each employee received upon separation hinged upon the value of the Company's stock. Since there was no market for the stock, U.S. News hired an independent appraiser, defendant American Appraisal Associates ("American Appraisal"), to arrive at a fair value for the shares. Plaintiffs challenge the validity of those appraisals, because, as they allege, U.S. News and American Appraisal worked together to eliminate from the calculation of the Company's net worth, the value of several parcels of undeveloped real estate held by U.S. News, land which, upon sale of the magazine, added considerably to the price paid per share. The real estate was held by Madana Realty Company, a subsidiary of U.S. News. Plaintiffs also allege that American Appraisal improperly valued the stock in other ways, which are discussed in greater detail, infra at 1170-1173.
The original complaint was filed in early 1984. Since then it has undergone several amendments. At this time the defendants are U.S. News and eight former members of its Board of Directors, the Profit-Sharing Plan, American Appraisal, and the Madana Realty Company. To redress what wrongs they feel they suffered at the hands of those defendants, plaintiffs press a variety of statutory and common-law claims. In Count I of the recently filed Fifth Amended Class Action Complaint,3 U.S. News, the former directors, and American Appraisal are charged with violations of the Securities Exchange Act of 1934. Count II asserts claims for benefits and damages against U.S. News, the director-defendants, American Appraisal, and the Profit-Sharing Plan under various provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). In Counts III, IV, V and VI, U.S. News, the director-defendants, and American Appraisal are sued variously for common law and constructive fraud, breach of fiduciary duty, unjust enrichment, negligence and negligent misrepresentation.4
Plaintiffs have moved for partial summary judgment against all the defendants on the ERISA claims. The defendants, in turn, have moved for summary judgment on all counts, pleading that the relevant statutes of limitation bar most, if not all, the claims. In addition, U.S. News, the director-defendants, and American Appraisal press a variety of theories according to which they argue that each of the statutory and common-law claims are fatally flawed as a matter of law.
Subsequent to the filing of their Fifth Amended Complaint, plaintiffs renewed in substance their earlier filed motion for partial summary judgment. U.S. News, the director-defendants and American Appraisal also filed additional motions for summary judgment directed to the new claims raised by the Fifth Amended Complaint.
This Memorandum Opinion will discuss the issues presented by the parties' several motions in the following order:
Part I, pp. 7 to 26, discusses the motions of the defendants challenging the complaint on grounds that it was untimely filed and barred by the relevant statutes of limitations.
In part II, pp. 26 to 42, the Court deals with defendants' motion to dismiss plaintiffs' securities law claims.
Parts III and IV, pp. 43 to 71, are concerned with the parties' pleadings and representations on the ERISA claims. Part III, pp. 43 to 57 considers defendants' challenge to the plaintiffs' claims under ERISA. Part IV, pp. 57 to 70, addresses plaintiffs' motion for partial summary judgment on those claims.
Part V, pp. 70 to 75, discusses ERISA's preemptive effect on plaintiffs' common-law claims and Section VI, pp. 75-84, is concerned with whether the defendants are entitled to summary judgment on those claims.
At this stage in the pretrial proceedings, it is not the Court's task to attempt to resolve the factual issues raised, Rodway v. United States Dep't of Agriculture, 482 F.2d 722, 727 (D.C.Cir.1973), but merely to determine whether there are indeed material factual issues that need be presented more fully to the ultimate trier of fact. While discovery in this case fills volumes, the Court may not, tempting as it may be to do so, remove the resolution of disputed issues of fact from the fact-finder, in an effort to whittle down the litigation as originally framed.
A threshold issue presented at this juncture is whether the applicable statutes of limitation bar any or all of plaintiffs' claims5 relating to the undervaluation. All of the defendants seize upon this defense. As plaintiffs must concede, the applicable limitations periods would work to bar most or all of their claims unless they have been the victims of fraudulent concealment and were not otherwise on notice of their claims prior to filing suit. Yet because the questions of concealment and notice raise factual issues that vary as to each group of defendants, analysis of the limitations bar must consider the participation of each of the various defendants. Accordingly, the role of U.S. News, its directors and the Profit-Sharing Plan will first be addressed, followed by a consideration of the conduct of American Appraisal.
The Court has already visited the question concerning the extent to which the principals of the Company, its...
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