Hill v. Opus Corp.

• Decision Date: 14 November 2011
• Docket Number: No. CV 10–04806 MMM (VBKx).,CV 10–04806 MMM (VBKx).
• Citation: 464 B.R. 361
• Parties: Jefferson HILL, Tom Roberts, Paul Marshall. Thomas Schaal, Jr., Charles Vogel, John Greer, Claire Janssen, Daniel Haug, Matthew Montgomery, James Fritcher, Sara Gordon, Don Little, Jr., Greg Wattson, Jeffery Dickerson, Randy Ackerman, and Jeff Roberts, Plaintiffs, v. OPUS CORPORATION, a Minnesota corporation, Gerald Rauenhorst T982 Irrevocable Trust f/b/o Grandchildren, Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Children, Keith Bednarowski, an individual, Luz Campa, an individual, Mark Rauenhorst, an individual, and Does 1 through 100, inclusive, Defendants.
• Court: U.S. District Court — Central District of California

464 B.R. 361

Jefferson HILL, Tom Roberts, Paul Marshall. Thomas Schaal, Jr., Charles Vogel, John Greer, Claire Janssen, Daniel Haug, Matthew Montgomery, James Fritcher, Sara Gordon, Don Little, Jr., Greg Wattson, Jeffery Dickerson, Randy Ackerman, and Jeff Roberts, Plaintiffs,

v.OPUS CORPORATION, a Minnesota corporation, Gerald Rauenhorst T982 Irrevocable Trust f/b/o Grandchildren, Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Children, Keith Bednarowski, an individual, Luz Campa, an individual, Mark Rauenhorst, an individual, and Does 1 through 100, inclusive, Defendants.

No. CV 10–04806 MMM (VBKx).

United States District Court, C.D. California.

Nov. 14, 2011.

Charles E. Hill, Greg K. Hafif, Michael G. Dawson, Law Offices of Herbert Hafif APC, Claremont, CA, for Plaintiffs.

Dennis M. Ryan, John B. Gordon, Peter J. Goss, Woodrow T. Roberts, III, Faegre & Benson LLP, Minneapolis, MN, James Oliva, David F. McDowell, Morrison & Foerster LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

MARGARET M. MORROW, District Judge.

On June 29, 2010, Randy Ackerman, Jeffrey Dickerson, James Fritcher, Sara Gordon, John Greer, Daniel Haug, Jefferson Hill, Claire Janssen, Don Little, Jr., Paul Marshall, Matthew Montgomery, Jeff Roberts, Tom Roberts, Thomas Schaal, Jr., Charles Vogel, and Greg Wattson filed this action against Keith Bednarowski, Luz Campa, Mark Rauenhorst, Gerald Rauenhorst 1982 Irrevocable Trust F/B/O Children (“the Children Trust”), Gerald Rauenhorst 1982 Irrevocable Trust F/B/O Grandchildren (“the Grandchildren Trust”), and Opus Corporation.¹ Plaintiffs allege that they are owed compensation and deferred compensation by their former employer, Opus West Corporation (“Opus West”). They assert that defendants caused Opus West to transfer monies to its parent company, Opus Corporation,² which led Opus West to fail and seek Chapter 11 bankruptcy protection.

On July 11, 2011, plaintiffs filed a first amended complaint.³ On August 29, 2011, defendants filed a motion for summary judgment on plaintiffs' remaining state law and ERISA claims.⁴ Plaintiffs opposed the motion, ⁵ and defendants then filed a reply.⁶

I. FACTUAL BACKGROUND

A. History of Opus West, Opus Corp., and Opus LLC

Opus West Corporation (“Opus West”) is a Minnesota corporation wholly owned by Opus Corporation (“Opus Corp.”).⁷ Plaintiffs are former top executives of Opus West and its subsidiary, Opus West Construction Corporation.⁸ Opus West, as well as four other regional subsidiaries of Opus Corp., were “merchant builders.” ⁹ Opus West's objective was to locate land for the construction of investment properties, to design, develop, and build projects while locating tenants to lease them, and to generate profits by selling the developed properties to real estate investors. ¹⁰ Chuck Vogel, one of the plaintiffs, characterized Opus West's business as follows: “Opus West was not in the business [of] long-term ownership of the real estate. It was there to design the real estate, build it and sell it upon completion or when it's leased and completed, and realize the development profits from that asset, not ... investment [income] from the long-term ... leas[ing] [of] the property.” ¹¹

Opus West's business model was high-risk, high-reward.¹² The company's projects were funded through recourse debt in order to minimize lenders' equity requirements, which allowed the company to leverage its equity and do more projects, [but caused it to] tak[e] on more debt.¹³ This business model “magnified the high returns on equity [but led to] additional risk and exposure.” ¹⁴ For this reason, Opus West reinvested most of its retained net income in new projects.¹⁵ Opus West's highly-leveraged business model was exceptionally profitable—at its peak in 2007, the company grossed approximately $780,641,000 in revenue before imputed taxes of approximately $87,641,000.¹⁶ According to an October 2008 letter written by plaintiff and then-Chief Financial Officer (“CFO”) Claire Janssen, Opus West's 2007 net worth exceeded $50,000,000.¹⁷ As Vogel testified, “Opus West always struggled with limited cash. [The company] had sources of cash when we sold property and large uses of cash when we brought property. So the challenge always was to sell property before you bought property.” ¹⁸ Despite its limited liquidity, Opus West never missed a payment to a lender at any time before 2009, and its employees were paid in full at least through December 31, 2008.¹⁹

Under Opus West's bylaws, the company's board of directors had the authority “to declare any dividends and other distributions upon the shares of the Corporation to the extent permitted by law.” ²⁰ Plaintiff Thomas Roberts (“T. Roberts”) asserts that, despite this provision, the Board, in reality, “did not have the ability to say ‘no’ to [a] request” for dividends from the parent company, and that Board approval was a mere “rubber stamp.” ²¹ The Board did not vote dividends of a certain amount; rather, dividends were determined according to a formula.²² The parties appear to dispute the precise nature of the formula used. Defendants contend that in 2007, as in prior years, the formula called generally for a dividend of 35% of Opus West's consolidated pre-tax earnings, plus pro-forma taxes on those earnings.²³ Plaintiffs assert that Opus West was required to pay “approximately 75% of [its] pre-tax income to Opus [Corp.] as a dividend distribution,” and “another 10% of pre-tax income for charitable contributions.” ²⁴

Opus West had its own accounting staff, led by CFO Janssen, who oversaw the preparation of quarterly financial reports and forecasts that were delivered to Opus West's Board of Directors.²⁵ Every quarter, Opus West's directors, including plaintiff and former President and CEO Tom Roberts, met to discuss detailed financial and business information that had been approved by Janssen and Roberts.²⁶

William McFarland served as an outside director of Opus West.²⁷ He voted in favor of every dividend resolution during his tenure on the board. ²⁸ He testified that while he believed he possessed the authority to vote against a dividend resolution, he did not know what would have happened had he or another Board member done so.²⁹ None of the other directors ever voted against a dividend resolution either.³⁰ Opus West paid its last dividend on March 15, 2008, based on 2007 results.³¹

Opus West consistently ranked first or second among the five regional operating companies.³² As Vogel stated: “I can tell you that the dividends created over the last several years of the company were gigantic, and the money that was sent [to Opus Corp.] was based on the success of the company. My deferred compensation was earned based on the success of the company....” ³³ The plaintiffs were paid varying amounts.³⁴

B. The Benefits and Deferred Compensation Plans In Question

Plaintiffs' complaint is based on certain benefits and deferred compensation plans specifically tailored for a select group of highly compensated employees.³⁵ It is undisputed that these plans were unfunded by design.³⁶ Compensation under the plans was to be paid from Opus West's general corporate assets.³⁷ One of the ERISA plans discussed in the complaint, for example, is the Opus West Stock Appreciation Right (“SAR”) plan.³⁸ This plan was “designed to provide the participant with approximately the same economic benefit[ ] he would realize if he were holding a ... number of shares in the company [equal to] the number of SARs awarded to him.... The value of the SARs depend on how profitable the company has been since the SARs were awarded.” ³⁹ The SAR plan thus permitted its participants to enjoy equity-like gains without the risk and tax obligations of actual shareholders.⁴⁰ The purpose of the SAR plan was to provide an incentive for Opus West's senior management to perform “exceptional services” and devote their full abilities to the success of Opus West.⁴¹ It defines Opus West, and any entity that succeeds to its business through merger, consolidation, acquisition of all or substantially all its assets, or any other means, as the “Company,” so long as the successor entity elects in writing, within a reasonable time after succession, to continue the Plan.⁴² The SAR Plan provides that an employee of Opus West or one of its affiliates will become a participant when a committee, in its sole discretion, designates the employee to receive an award under the Plan.⁴³

Plaintiffs' ERISA allegations are not based on the SAR Plan, however, but on two other plans. The first of these is the “Opus 80/20 Plan for Officers.” ⁴⁴ This plan was established to provide future compensation to certain highly-paid employees through the deferral of incentive compensation.⁴⁵ The 80/20 Plan refers to Opus Corp. and Opus LLC as the “Companies”; it denominates each of entities individually as the “Company.” ⁴⁶ The 80/20 Plan establishes an “Account” for each eligible participant, which reflects the amount of deferred incentive compensation owed.⁴⁷ An employee is eligible to become a participant on the earliest date on which he or she is deemed a “qualified employee.” ⁴⁸ The Plan provides that the Companies will maintain sub-accounts for each participant that reflect the employee's annual award for each year of the plan as well as interest.⁴⁹ The deferred compensation credited to a participant's account is allocated as of the annual award date for that plan year.⁵⁰ The 80/20 Plan provides that it can be amended in whole or in part at any time, for any reason, by “the Company's” Board of Directors. ⁵¹ No amendment can eliminate the right of a participant to receive the balance of his or her “vested” account, which is determined as of the date the amendment is adopted.⁵² An amendment can, however, modify or eliminate the deferrals under Section 4.1 and/or the interest under Section 4.3 that would otherwise be allocated...