Moore v. Va. Cmty. Bankshares, Inc.
| Decision Date | 26 June 2020 |
| Docket Number | Civil Action No. 3:19CV00045 |
| Court | U.S. District Court — Western District of Virginia |
| Parties | JANICE A. MOORE, et al., Plaintiffs, v. VIRGINIA COMMUNITY BANKSHARES, INC., et al., Defendants. |
Plaintiff Janice A. Moore filed a two-count putative class action complaint on August 12, 2019, alleging violations of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001 et. seq, ("ERISA") by Defendants Virginia Community Bankshares, Inc. (the "Holding Company"); Virginia Community Bank ("VCB"), a wholly-owned subsidiary of the Holding Company; A. Pierce Stone; Ronald S. Spicer; John A. Hodge; and H.B. Sedwick, III. This matter is before the court on Defendants' motion to dismiss Moore's complaint under Federal Rule of Civil Procedure 12(b)(6) and Defendants' motion to supplement the record. The complex matters addressed therein have been expertly briefed and argued by all parties and are ripe for review. For the reasons stated, the court will deny the motion to dismiss and deny the motion to supplement the record.
Moore is a former VCB employee and former participant in an Employee Stock Ownership Plan—a retirement plan—sponsored by the Holding Company for the benefit of employees of the Holding Company and of VCB (the "ESOP" or the "Plan"). The bulk of the Plan's assets were in Holding Company stock with the remainder invested in cash. Compl. ¶¶ 1, 43, & 44. Moore alleges that the Boards of Directors of the Holding Company and of VCB (which included Spicer) administered the Plan, that the same people who controlled the ESOP also controlled VCB, and that VCB had discretion to make stock bonus contributions to the ESOP. Id. ¶¶ 41-45. At "all relevant times," Stone, Hodge, and Sedwick were trustees of the ESOP. Id. ¶¶ 24-27. The Plan has since terminated, effective December 31, 2016. Id. ¶ 123.
This story begins in late-2006 and early 2007. Moore alleges that the ESOP trustees retained an investment bank, Howe Barnes Hoefer & Arnett, Inc. ("Howe Barnes"), to perform a valuation of Holding Company stock as of December 31, 2006. Compl. ¶ 60, Ex. 1. To do so, Howe Barnes considered information provided by the trustees, and "relied on" the "accuracy and completeness" of that data. Ex. 1 at 2-3. Howe Barnes submitted a March 19, 2007 letter that valued Holding Company stock at $55 per share. Id.
Moore asserts that Howe Barnes reached its $55 per share valuation due to fraudulent omissions by the ESOP trustees, Stone, Spicer, and others. Id. ¶¶ 57-68. She contends that the Holding Company and VCB were facing serious problems at the time of the valuation—including defaults or anticipated defaults on one or more large loans that were highly unlikely to be repaid—that would negatively impact the value of Holding Company stock. Id.¶ 64.
Moore fortifies this assertion with specific allegations. In 2010, the Virginia State Corporation Commission (the "Corporation Commission") and the Federal Reserve Bank of Richmond (the "Federal Reserve") began investigating VCB's and the Holding Company's operations. This resulted in a Compliance Agreement dated June 29, 2011, which according to Moore "revealed long-standing patterns of operational and compliance problems and regulatory violations" including, among other things, insufficient oversight in credit risk management and lending, as well as "problems related to loan grading." Id. ¶ 65; see also ECF No. 30-8. For example, the agreement required that VCB and the Holding Company comply with certain agencyguidance and policy statements—dated 1985, 2001, 2006, 2009, and 2010—which related to credit risk management among other things. ECF No. 30-8 ¶¶ 4(d), 5(f), 9(b), & 13(c). Moore posits that the issues addressed by the investigation and subsequent agreement did not arise overnight and that they existed in 2006. Compl. ¶ 65.
Based on information and belief, Moore alleges that the trustees, Stone, and Spicer failed to disclose these issues to Howe Barnes. Id. ¶ 67. Moore points to the disparity between the Howe Barnes valuation as of December 31, 2006: $55 per share, and the price of Holding Company stock sold on December 29, 2006: $44.00 per share. Id. ¶ 61. She also notes subsequent drop-offs in share value. See, e.g., id. ¶¶ 59, 92, 109, 131. According to Moore, this indicates that Howe Barnes did not have all the facts necessary to value the Holding Company shares.
Next, Moore alleges that Defendants caused the ESOP to repurchase Holding Company stock at that allegedly inflated value, established by the 2007 valuation, for the purpose of making cash distributions to Stone and Spicer. Id. ¶¶ 90-93 & 136. Indeed, Moore alleges, based on information and belief, that Defendants obtained the 2007 valuation for the purpose of entering these transactions. Id. ¶ 68. Defendants leveraged the ESOP's assets to finance Stone and Spicer's cash-outs through allegedly non-exempt loans issued in 2007 and 2008 between VCB as the lender and the ESOP as the borrower, loans which Stone and Spicer helped to "set up." Id. ¶¶ 8, 85-113. Thereby, Defendants foisted the burden of these loans upon Plan participants because, according to Moore, the sums paid on the loans should have been used for the benefit of all plan participants.
Moore alleges that she became suspicious about the ESOP transactions in late 2014 or early 2015. VCB co-founder and former Board member Goodman Duke, who was "visibly upset,""briefly showed" Moore a copy of the Howe Barnes valuation at that time. Id. ¶ 97. On February 26, 2017, Moore wrote a letter to VCB's president and CEO complaining about the Plan's management. He responded, attaching a copy of the valuation, in April 2017. ECF No. 30-10.
According to Moore, Defendants had engaged in a coverup to prevent her and other Plan participants from learning about the valuation and the 2007 and 2008 loans. For example, she states that the 2007 valuation letter and loans were not disclosed for many years. Compl. ¶¶ 67-68, 94. Further, she alleges that transactions in 2008 were part of an effort to conceal the details of the 2007 loan, and that Defendants disclosed "inaccurate information" on certain disclosures—Form 5500 filings—to the Department of Labor and the Internal Revenue Service. Id. ¶¶ 11, 114-125. As to the Form 5500 filings, Moore alleges that Defendants failed to disclose a "Schedule E (ESOP information)" from 2006-2009 and information related to the Plan's liabilities, i.e. the loans, in line 1.b of Schedule I for each Form 5500 from 2007-2016. Id.; ECF No. 30-2 at 10, 17, 22, 27, 34, 41, 48, 55, 63, 71, 80, 88, & 96.
Moore also alleges that VCB intimidated employees who raised concerns about the ESOP. Compl. ¶¶ 94-95. For example, in 2010, a VCB loan officer was fired roughly two weeks after asking to review the ESOP's governing documents. Upon leaving, he allegedly stated that "this is what happens when you ask about the ESOP." In addition, Moore states that defendants "initiated questionable performance charges against her" soon after she asked about the ESOP. Id. Defendants also allegedly resisted Moore's efforts to obtain information in concert with an investigation by the Department of Labor. Id.
Defendants' initial motion to dismiss raised three principle arguments: (1) that Moore's complaint is untimely under ERISA's statutory time limits; (2) that Moore fails to plausibly allegethat Defendants possessed but failed to disclose materially adverse information in 2006; and (3) that defendants VCB and Ronald Spicer are not proper defendants, or that the complaint does not sufficiently allege that they are fiduciaries under ERISA. On January 29, 2020, the parties appeared before the court on the motion to dismiss.
Thereafter, the court entered an order which, in part, took the motion under advisement and permitted the parties to jointly submit documents that they agreed were integrated into Moore's complaint or subject to judicial notice, were relevant to the motion, and were authentic. ECF No. 27. The order also invited supplemental briefing. The parties submitted a joint declaration and accompanying documents contemplated by the court's order. At the same time, Defendants filed a motion arguing that the court should consider additional documents. Moore responded that these documents were not explicitly relied on in her complaint. Defendants' supplemental briefing offered additional arguments for dismissal, to which Moore has responded.
To be sure, Federal Rule of Civil Procedure 12(b)(6) is an "important mechanism for weeding out meritless claims." Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 425 (2014) (). To survive a motion to dismiss, a plaintiff must "state a claim to relief that is plausible on its face," meaning that a plaintiff must "plead[] factual content that allows the court to draw the reasonable inference" that a defendant is liable. Iqbal, 556 U.S. at 678 (internal quotation marks omitted). Yet "[w]hen considering the sufficiency of a complaint's allegations under a Rule 12(b)(6) motion, courts must construe the complaint liberally so as to do substantial justice." Bd. of Trustees, Sheet Metal Workers' Nat'l Pension Fund v. Four-C-Aire, Inc., 929 F.3d 135, 152 (4th Cir. 2019) (quotation marks omitted).In so doing, courts must "assume as true all its well-pleaded facts and draw all reasonable inferences in favor of the plaintiff." Id. at 145 (quoting Nanni v. Aberdeen Marketplace, Inc., 878 F.3d 447, 452 (4th Cir. 2017)).
Federal Rule of Civil Procedure 9(b) requires that, "[i]n alleging fraud . . . , a party must state with particularity the circumstances constituting fraud . . ....
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