Godfrey v. Greatbanc Tr. Co.
| Decision Date | 19 August 2020 |
| Docket Number | Case No. 18 C 7918 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | GREGORY GODFREY, JEFFREY SHELDON, and DEBRA ANN KOPINSKI, on behalf of themselves and all others similarly situated, Plaintiffs, v. GREATBANC TRUST COMPANY, MCBRIDE & SON MANAGEMENT COMPANY, LLC, JOHN F. EILERMANN, JR., MICHAEL D. ARRI, and MCBRIDE & SON CAPITAL, INC., Defendants. |
Three participants in the McBride & Son Employee Stock Ownership Plan have sued the Plan's sponsor, corporate officers of the sponsor, and the Plan's trustee, alleging that they have violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA). The claims that the plaintiffs assert in their second amended complaint arise mainly out of two transactions. The first is a 2013 reorganization of McBride & Son that, according to the plaintiffs, the defendants structured and conducted in order to strip valuable assets from the Plan and ultimately convert them to their own benefit. The second transaction is the 2017 sale of all the Plan's assets to the Plan sponsor for a value that the plaintiffs contend was below fair market value. The plaintiff also assert claims arising from actions between these two transactions that they claim diluted the value of the Plan's holdings.
The Court dismissed an earlier version the plaintiffs' claims regarding the 2013 reorganization on various grounds but allowed their claims regarding the 2017 sale to proceed against certain defendants. The plaintiffs began discovery and then filed the second amended complaint, which is now before the Court. The Plan's sponsor and its corporate officers have moved to dismiss several of the claims against them, and the Plan's trustee has moved separately to dismiss the claims based on the 2013 reorganization. The Court apologizes to the parties for its lengthy delay in ruling on the motions.
McBride & Son Companies, Inc., is a home construction business based in Missouri. Plaintiffs Gregory Godfrey, Jeffrey Sheldon, and Debra Ann Kopinski are former McBride & Son employees and participants in its Employee Stock Ownership Plan (ESOP or Plan). They have alleged several violations of ERISA by the Plan's current sponsor, McBride & Son Capital, Inc. (MS Capital); its predecessor entity, McBride & Son Management (MS Management); and the Plan's trustee, GreatBanc Trust Company. They have also sued two of MS Capital's corporate officers, who are also the only members of its board of directors: John Eilermann, Jr., Chief Executive Officer, and Michael Arri, Chief Financial Officer. For convenience, the Court will refer to Eilermann, Arri, MS Management, and MS Capital as "the McBride defendants."
Many of the plaintiffs' claims arise out of a 2013 business reorganization that they allege Eilermann and Arri facilitated, with the involvement of GreatBanc, to appropriate valuable Plan assets to themselves and other corporate officers. Prior to thisreorganization, the Plan, which as indicated was an ESOP, was the sole shareholder of McBride & Son Companies. On December 31, 2013, GreatBanc entered into two agreements with MS Management, which at the time was the Plan's sponsor. Eilermann and Arri executed these agreements on behalf of MS Management, which they allegedly controlled. The effect of these agreements was to exchange the entirety of the Plan's equity stake in McBride & Son Companies for shares of a new entity, MS Capital. MS Capital was established as a holding company for all of the equity in McBride & Son Companies, Inc., and it was also designated as the Plan's new sponsor.
The plaintiffs allege that this reorganization and the resulting exchange of the Plan's McBride & Son Companies stock for MS Capital stock diminished the value of the Plan's assets. First, although the Plan received one share of MS Capital in exchange for each of its 88,201 shares of McBride & Son Companies, the Plan's ownership interest in the business was diluted, because Eilermann and Arri also each received approximately 1,500 shares of MS Capital. Thus, the Plan no longer owned all of the equity in the McBride & Sons construction business and was no longer the exclusive recipient of McBride & Sons distributions to stockholders. Furthermore, the MS Capital shares that were granted to Eilermann and Arri had distribution rights superior to the Plan's shares. These new shares also gave Eilermann and Arri voting rights, which diminished the Plan's control over the business.
After the 2013 reorganization, Eilermann and Arri, the sole board members of MS Capital, had the authority to issue additional shares of MS Capital. Over the next few years, through 2017, they made several distributions of MS Capital shares to themselves and a few other corporate officers. These distributions, the plaintiffs allege,further diluted the Plan's ownership interest in MS Capital. By the end of 2017, Eilermann held approximately 37,000 shares of MS Capital, Arri held roughly 16,500, and other corporate officers collectively held another 12,000 shares. The Plan still held the 88,201 shares it had received during the 2013 business reorganization. Thus, due to the distributions of MS Capital equity to officers, the Plan's ownership interest in MS Capital dropped from ninety-nine percent in 2013 to approximately sixty percent by 2017.
The remainder of the plaintiffs' claims are based on a 2017 sale of all of the Plan's equity in MS Capital back to MS Capital. Eilermann and Arri, acting on behalf of MS Capital, proposed this sale to Plan trustee GreatBanc, which agreed to it. MS Capital then bought all of the Plan's MS Capital shares. The plaintiffs have alleged that the sale price for the Plan's assets was below market value, thereby harming the Plan.
In November 2018, the plaintiffs filed suit on behalf of themselves and others similarly situated against GreatBanc, the McBride defendants, and several other corporate entities and officers associated with MS Capital. The plaintiffs alleged that their conduct relating to the 2013 business reorganization and the 2017 stock sale violated their fiduciary duties under ERISA. In March 2019, the plaintiffs filed an amended complaint, which GreatBanc answered and the remaining defendants moved to dismiss. The Court dismissed the claims relating to the 2013 reorganization, and it dismissed claims against several of the McBride defendants because the plaintiffs failed to plausibly allege their fiduciary status, but it otherwise denied the motion. Godfrey v. GreatBanc Tr. Co., No. 18 C 7918, 2019 WL 4735422, at *8 (N.D. Ill. Sept. 26, 2019). After conducting some discovery, the plaintiffs filed a second amended complaint inJanuary 2020, which GreatBanc and the McBride defendants have now moved to dismiss.
The McBride defendants and GreatBanc have moved to dismiss the plaintiffs' second amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). In ruling on this motion, the Court must accept as true well-pleaded factual allegations in the complaint and draw all reasonable inferences in the plaintiffs' favor. NewSpin Sports, LLC v. Arrow Elecs., Inc., 910 F.3d 293, 299 (7th Cir. 2019). To survive the motion to dismiss, a plaintiff must allege facts that allow a court to reasonably infer that the defendants are liable for the misconduct alleged, rendering the claim "plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
The plaintiffs have alleged that by conducting the 2013 reorganization, making the subsequent distributions of MS Capital shares to corporate officers and paying excessive executive salaries, and executing the 2017 stock sale, the defendants violated fiduciary duties imposed by ERISA. Section 404 of ERISA "imposes general standards of loyalty and prudence that require fiduciaries to act solely in the interest of plan participants and to exercise their duties with the care, skill, prudence, and diligence of an objectively prudent person." Fish v. GreatBanc Tr. Co., 749 F.3d 671, 679 (7th Cir. 2014); 29 U.S.C. § 1104(a)(1). ERISA section 406 "supplements [this] general fiduciary duty" and prohibits fiduciaries from "caus[ing]" the "direct or indirect[] sale or exchange . . . of any property" between the plan and a party-in-interest, such as a plan fiduciary, the employer, or an officer or director of the employer. Fish, 749 F.3d at 679;
29 U.S.C. §§ 1106(a)(1)(A), 1102(14)(A), (C), (H).
To state a claim for fiduciary breach under ERISA section 404(a), a plaintiff must plausibly allege "(1) that the defendant is a plan fiduciary; (2) that the defendant breached its fiduciary duty; and (3) that the breach resulted in harm to the plaintiff." Allen v. GreatBanc Tr. Co., 835 F.3d 670, 678 (7th Cir. 2016) (quoting Kenseth v. Dean Health Plan, Inc., 610 F.3d 452, 464 (7th Cir. 2010)). As to the first element, ERISA defines fiduciary status in "functional terms":
[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. 1002(21)(A); Brooks v. Pactiv Corp., 729 F.3d 758, 765 (7th Cir. 2013). The fiduciary status inquiry—element (1) above— simply involves whether a defendant meets this statutory definition. See Howell v. Motorola, Inc., 633 F.3d 552, 564-65 (7th Cir. 2011). In short, a person or entity that acts in the capacity of manager, administrator, or financial...
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