Hensiek v. Bd. of Dirs. of Casino Queen Holding Co.

• Docket Number: 3:20-cv-377-DWD
• Decision Date: 28 January 2022
• Parties: TOM HENSIEK and JASON GILL, Plaintiffs, v. BOARD OF DIRECTORS OF CASINO QUEEN HOLDING COMPANY, INC., ADMINISTRATIVE COMMITTEE OF THE CASINO QUEEN EMPLOYEE STOCK OWNERSHIP PLAN, CHARLES BIDWELL, III, TIMOTHY J. RAND, JAMES G. KOMAN, JEFFREY WATSON, ROBERT BARROWS, and JOHN & JANE DOES 1-20 Defendants.
• Court: U.S. District Court — Southern District of Illinois

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TOM HENSIEK and JASON GILL, Plaintiffs, v. BOARD OF DIRECTORS OF CASINO QUEEN HOLDING COMPANY, INC., ADMINISTRATIVE COMMITTEE OF THE CASINO QUEEN EMPLOYEE STOCK OWNERSHIP PLAN, CHARLES BIDWELL, III, TIMOTHY J. RAND, JAMES G. KOMAN, JEFFREY WATSON, ROBERT BARROWS, and JOHN & JANE DOES 1-20 Defendants.

No. 3:20-cv-377-DWD

United States District Court, S.D. Illinois

January 28, 2022

MEMORANDUM & ORDER

DAVID W. DUGAN United States District Judge.

Plaintiffs Tom Hensiek and Jason Gill have brought claims for breach of fiduciary duty against Defendants under the Employee Retirement Income Security Act of 1974 ("ERISA") 29 U.S.C. §§ 1104, 1105 & 1106. Defendants Timothy Rand, James Koman, and Jeffrey Watson now bring a motion to dismiss the claims against them under Federal Rule of Civil Procedure 12(b)(6). (Doc. 48). The motion has been fully briefed and is ripe for decision. (Docs. 49, 58 & 61). For the following reasons, the Court finds that Plaintiffs have adequately plead their claims and that Defendants' motion to dismiss is due to be denied.

I. FACTUAL BACKGROUND

According to the complaint, Plaintiffs are former employees of Casino Queen Hotel & Casino, a riverboat gambling house that opened in 1997 and moved on land in 2007 in East St. Louis Illinois. While initially successful, Casino Queen's revenue suffered when other casinos opened nearby, prompting the owners to sell the casino. From 2006 to 2011, the owners pitched the casino to numerous potential buyers-all without success. Then, in 2012 and 2013, the owners sold the casino and its assets through a process evidenced by essentially four particular events.

First, the owners created a holding company for Casino Queen: CQ Holding Company, Inc. (the "Holding Company"). Second, the board of directors of the Holding Company created the Casino Queen Employee Stock Ownership Plan (the "ESOP") for the sole purpose of purchasing 100% of the Holding Company's outstanding stock. The directors of the Holding Company selected two of their own (Defendants Jeffrey Watson and Robert Barrows) to be co-trustees of the ESOP. The co-trustees were instructed to take directions from a newly created Administrative Committee which consisted of directors and officers of the Holding Company. The directors retained the power to dismiss the co-trustees and members of the Administrative Committee, a power that Plaintiffs contend is the functional equivalent of control over their decision making as cotrustees. (Doc. 1 at 3). Plaintiffs believe that because of this retention of control, the directors attained a fiduciary status toward them. (Doc. 1 at 4).

Third, the ESOP purchased the Holding Company's stock (the "stock-purchase transaction"). This transaction effectively transferred ownership of Casino Queen to the ESOP. Under the direction of the co-trustees, the ESOP purchased all of the outstanding stock for the sum of $170 million. The original shareholders of the Holding Company loaned $170 million to the ESOP to finance the sale, and the Holding Company guaranteed the loans. At the time of the stock-purchase transaction, the co-trustees were the only members of the Holding Company's board of directors who were not also shareholders in the Holding Company. According to Plaintiffs, the price paid for the stock was dramatically inflated based on financial projections of Casino Queen's future profitability, which projections the board of directors knew or should have known were unreliable, unrealistic, and inaccurate. Thus, the ESOP paid significantly more than fair market value for the stock, which was the ESOP's only asset. Casino Queen employees did not learn of the stock-purchase transaction until after it had been completed.

Fourth, the ESOP sold Casino Queen's real property (the "real property transaction"). The co-trustees had the power to vote unallocated stock, which since 2012 has been the majority of the Holding Company stock, thus enabling them to make decisions on behalf of the Holding Company without regard to how any employees would vote. The co-trustees voted their stock in favor of the sale of "virtually all of" Casino Queen's real property to make an accelerated payment on debt owed to the sellers of the Holding Company's stock. (Doc. 1 at 5). The real property sold at a price of $140 million to Gaming and Leisure Properties ("GLPI"). (Doc. 1 at 23-24). The Holding Company then agreed to enter into a "triple net lease agreement" to lease the same property back from GLPI for $210 million over 15 years. (Doc. 1 at 24). The real property had a tax-assessed value of about $12.1 million at the time it was sold to GLPI. (Doc. 1 at 24).

Plaintiffs contend that Defendants conducted the stock-purchase and real property transactions in violation of their fiduciary duties under ERISA. Plaintiffs also allege that Defendants actively concealed their ERISA violations by misrepresenting the terms of the stock-purchase transaction or the effects of the transactions on the value of the stock. For example, Defendants misreported the price of the stock and the amount of debt required to complete the stock-purchase transaction in the ESOP's required annual filings with the Department of Labor (Form 5500s). The Form 5500s also misreported the Casino Queen's assets and their growth. The Form 5500s filed for plan years 2012, 2013, and 2014 were signed by Defendant Barrows, and the Form 5500s filed after that were signed by William Vandersand.

And at various company meetings, the co-trustees told employees, including Plaintiffs, that the ESOP would provide significant retirement savings and wealth for participants. Employees were even told that they would be able to purchase vacation homes with the money from the ESOP. When Plaintiff Gill left Casino Queen in 2018, company management told him he was making a big mistake because the ESOP was a unique opportunity that would provide the best retirement he would ever have.

Defendants are alleged to have also misrepresented the growth of Casino Queen's value to the ESOP participants in annual reports produced by Defendants and distributed to the ESOP participants. The only exception was the annual report in October 2019, which indicated that the value of the shares had decreased by 95%. Company management explained that the drop in value was due to decreased revenue since 2017.

However, employees did not observe the business levels at Casino Queen dropping at a rate consistent with management's explanation.

Plaintiffs assert that they exercised due diligence by reviewing their annual account balances and attending employee meetings concerning the ESOP. These sources of information indicated that the value of the ESOP was growing rapidly. It was only because of Defendants' efforts to conceal material facts that Plaintiffs did not learn of Defendants' breaches of fiduciary duty until 2019.

II. MOTION TO DISMISS STANDARD

To survive a motion to dismiss brought pursuant to Rule 12(b)(6), a complaint must include enough factual content to give the opposing party notice of what the claim is and the grounds upon which it rests. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 698 (2009). To satisfy the notice-pleading standard of Rule 8, a complaint must provide a "short and plain statement of the claim showing that the pleader is entitled to relief" in a manner that provides the defendant with "fair notice" of the claim and its basis. Erickson v. Pardus, 551 U.S. 89, 93 (2007) (citing Twombly, 550 U.S. at 555 and quoting Fed.R.Civ.P. 8(a)(2)). The court will accept all well-pleaded allegations as true. Iqbal, 556 U.S. at 678. However, the court will not accept legal conclusions as true. Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009). In ruling on a motion to dismiss for failure to state a claim, a court must "examine whether the allegations in the complaint state a 'plausible' claim for relief." Arnett v. Webster, 658 F.3d 742, 751 (7th Cir. 2011) (citing Iqbal, 556 U.S. at 677-78). A complaint "must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face/' rather than providing allegations that do not rise above the speculative level. Arnett, 658 F.3d at 751-52 (internal quotations and citation omitted).

III. ANALYSIS

Defendants make three arguments in support of their motion to dismiss. First, Defendants contend that Plaintiffs' claims are barred by ERISA's statute of limitations. Second, they argue that Plaintiffs have not plausibly alleged that the ESOP paid more than adequate consideration for the Holding Company's stock. And third, they argue that they cannot be liable under ERISA for the real property transaction. The Court will address each argument in turn.

A. Statute of Limitations

Claims for breach of fiduciary duty under ERISA cannot be brought

after the earlier of-

(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or

(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation;

except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.

29 U.S.C. § 1113. The alleged breaches of fiduciary obligations all occurred in 2012 and 2013. Thus, any legal claims regarding those breaches would normally have to be brought in 2018 or 2019 at the latest. The present action was filed in 2020. Plaintiffs are therefore forced to rely on the "fraud or concealment" exception. They argue that the "fraud or concealment" exception...