Mugnai v. Kirk Corp.

• Decision Date: 15 February 2012
• Docket Number: No. 11 C 01328.,11 C 01328.
• Citation: 53 Employee Benefits Cas. 2361,843 F.Supp.2d 858
• Parties: Elizabeth MUGNAI, Lisa Schmuldt, Jeff Arnold, Maryann Gorog, Chris Steponaitis, Cole Taylor Bank, Terry Caithamer, Timothy J. Brown, Todd Johnson, Shellie Hyslop, David Roller, Plaintiffs, v. KIRK CORPORATION, Paul Rose, Defendants, v. Stacy Barham, Luis Encarnacion, Michele Blasco, John Mutustik, Henry Thompson, Mark Rank, Robin Straus, Michael Albach, John Carroll, David Kirk, Donald Kirk, Lon Marchel, Cross Defendants.
• Court: U.S. District Court — Northern District of Illinois

843 F.Supp.2d 858

53 Employee Benefits Cas. 2361

Elizabeth MUGNAI, Lisa Schmuldt, Jeff Arnold, Maryann Gorog, Chris Steponaitis, Cole Taylor Bank, Terry Caithamer, Timothy J. Brown, Todd Johnson, Shellie Hyslop, David Roller, Plaintiffs,

v.KIRK CORPORATION, Paul Rose, Defendants,

v.Stacy Barham, Luis Encarnacion, Michele Blasco, John Mutustik, Henry Thompson, Mark Rank, Robin Straus, Michael Albach, John Carroll, David Kirk, Donald Kirk, Lon Marchel, Cross Defendants.

No. 11 C 01328.

United States District Court,

N.D. Illinois,

Eastern Division.

Feb. 15, 2012.

Jon D. Cohen, Shelly A. Derousse, Stahl Cowen Crowley LLC, Chicago, IL, for Plaintiffs.

Geoffrey Alexander Belzer, Josh M. Kantrow, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Chicago, IL, Alison Lima Andersen, Carol Connor Cohen, Caroline Turner English, Arent Fox LLP, Washington, DC, for Defendants.

William Francis Kelley, Scott Christopher Zambo, Kelley, Kelley & Kelley, Schaumburg, IL, for Cross Defendants.

MEMORANDUM OPINION AND ORDER

RUBEN CASTILLO, District Judge.

This dispute, involving alleged violations of the Employee Retirement Income SecurityAct of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., has its origins in an adversary proceeding before the United States Bankruptcy Court for the Northern District of Illinois (“Bankruptcy Court”). Cole Taylor Bank v. Kirk Corp. (In re Kirk Corp.), No. 09–A–788, 2010 WL 3523079, at *1 (Bankr.N.D.Ill. Sept. 3, 2010). Two groups of Cross Plaintiffs ¹ filed amended cross claims, alleging ERISA violations. (B.R. 184, First Am. Cross Claims; B.R. 193, First Am. Cross Claims; B.R. 223, Second Am. Cross Claims.) ² Both groups of Plaintiffs are former employees of Kirk Corporation (“Kirk” or the “Company”) and former participants of the Kirk Employee Stock Ownership Plan (the “Plan” or “Kirk ESOP”). (B.R. 184, First Am. Cross Claims ¶ 27; B.R. 193, First Am. Cross Claims ¶ 26; B.R. 223, Second Am. Cross Claims at 2, 6.) Group A Plaintiffs, Elizabeth Mugnai, Lisa Schmuldt, Jeff Arnold, MaryAnn Gorog, Chris Steponaitis (collectively, “Group A–1 Plaintiffs”), Terry Caithamer, Timothy J. Brown, Todd Johnson, Shellie Hyslop, and David Roller (collectively, “Group A–2 Plaintiffs”), asserted their cross claims against Kirk, Michael Albach, John Carroll, David Kirk, Donald Kirk, Lon Marchel, Paul Rose (collectively, “Trustees”), Stacy Barham, Luis Encarnacion, Michele Blasco, John Mutustik, Henry Thompson, Mark Rank, and Robin Straus (collectively, “Group B Plaintiffs”). (B.R. 184, First Am. Cross Claims ¶¶ 5, 12–24; B.R. 193, First Am. Cross Claims ¶¶ 5, 12–24.) ³ Group B Plaintiffs also filed amended cross claims against Kirk, the Kirk ESOP, and the Trustees. (B.R. 223, Second Am. Cross Claims at 3–5.) ⁴

On February 25, 2011, Group A–1 Plaintiffs filed a motion to withdraw the reference to the underlying adversarial proceeding, which was granted. (R. 1, Mot. Withdraw; R. 14, Min. Entry.) Presently before the Court is the Kirk ESOP's and the Trustees' motion to dismiss all claims alleged against them by Group A and Group B Plaintiffs pursuant to Federal Rule of Civil Procedure 12(b)(6). (R. 23, Defs.' Mot.) For the reasons stated below, the motion to dismiss is granted in part and denied in part.

RELEVANT FACTS

The Kirk ESOP is “a stock bonus plan under Section 401(a) of the Internal Revenue Code (the “Code”) and an employee stock ownership plan under Section 4975(e)(7) of the Code.” (R. 24–1, Kirk ESOP Docs. at 4.) ⁵ Under the terms of the Kirk ESOP, employees accumulated shares of Kirk stock that were to be distributed to them when their employment with Kirk terminated. ( Id. at 27, § 12.) The distribution of an employee's stock was to “be made in whole shares of Company Stock, cash or a combination of both, as determined by the Plan Administrator.” ( Id. at 69–70, § 14.1.) Under the December 2002 amendment to the Plan, Kirk was designated as the Plan Administrator, “for purposes of the reporting and disclosure requirements of ERISA and the Code.” ( Id. at 72, § 17.6.) The Kirk ESOP further provided that Company Stock could be “distributed subject to the requirement that it be immediately resold to the Company.” ( Id. at 70, § 14.2.) In addition, Section 15.2 of the Kirk ESOP provided participants with a “Put Option” that allowed participants “to sell such Company Stock to the Company at any time during two option periods, at the then Fair Market Value.” ( Id. at 34–35, § 15.2.) This provision of the Kirk ESOP further provided that Kirk “may allow the Trustee to purchase shares of Company Stock tendered to the Company under a put option.” ( Id.) The payment for any Company Stock sold under the Put Option could be “made in a lump sum or in substantially equal, annual installments over a period not exceeding five years, with adequate security provided and interest payable at a reasonable rate on any unpaid installment balance (as determined by the Company or the Trustee).” ( Id.)

Group A Plaintiffs terminated their employment at Kirk at various times between 2004 and 2007, (B.R. 193, First Am. Cross Claims ¶ 26), whereas Group B Plaintiffs terminated their employment at Kirk at various times between 2006 and 2008. (B.R. 223, Second Am. Cross Claims at 6.) Plaintiffs allege that after receiving their distribution of Company Stock, they sold their Company Stock back to Kirk through the exercise of the Put Option. (B.R. 193, First Am. Cross Claims ¶ 27; B.R. 223, Second Am. Cross Claims at 13, 16.) Rather than paying each Plaintiff in one lump sum, Kirk elected to pay each Plaintiff over installments. (B.R. 193, First Am. Cross Claims ¶ 28; B.R. 223, Second Am. Cross Claims at 13, 16.) In exchange, Plaintiffs allege that they each received an Installment Note (“Note”) from Kirk and a Certificate of Participation in Escrow and Security Agreement (“Certificate”). (B.R. 193, First Am. Cross Claims ¶ 28, 32; B.R. 223, Second Am. Cross Claims at 13, 16.) The Notes were signed by Albach. (B.R. 184–2, Notes; B.R. 193–2, Notes; R. 38–4, Notes.) ⁶

The Notes provided to Plaintiffs were secured by an Escrow and Security Agreement (the “Escrow Agreement”) entered into by Kirk, Cole Taylor Bank (“Cole Taylor”), as escrow agent, and participants receiving a Certificate. (B.R. 193, First Am. Cross Claims ¶ 31; B.R. 184–3, Escrow Agmt.; B.R. 193–4, Escrow Agmt.; B.R. 223, Second Am. Cross Claims at 13; B.R. 223–2, Escrow Agmt.) Pursuant to the Escrow Agreement, Kirk agreed to “deposit a Letter of Credit ... in the amount of the total balance due on all Notes in escrow for the benefit of each Participant.” (B.R. 184–3, Escrow Agmt.; B.R. 193–4, Escrow Agmt.; B.R. 223–2, Escrow Agmt.)

At the time Group A Plaintiffs received their Notes, Kirk increased the amount of the Letter of Credit to equal the unpaid principal amounts owed to each Group A Plaintiff. (B.R. 193, First Am. Cross Claims ¶¶ 33–34.) After Group A Plaintiffs received their adequately secured Notes, Kirk issued additional Notes and secured them with the same Letter of Credit, but failed to increase the amount of the Letter of Credit to securitize the Notes issued to Group B Plaintiffs. (Id. ¶ 35.) According to Group A Plaintiffs, at the time Group B Plaintiffs received their Notes, Kirk's financial status “was materially different from ... when the Notes were issued to Group A.” (Id. ¶ 36.) Specifically, Group A Plaintiffs allege that Kirk “was experiencing substantial financial difficulties early in 2008.” (Id. ¶ 56.) Group A Plaintiffs further assert that the Company Stock distributed to Group B Plaintiffs was purchased at more than its fair market value and that no valuations of Company Stock were performed close in time to when Kirk purchased Group B Plaintiffs' Company Stock. ( Id.) According to Group B Plaintiffs, they were repeatedly told by the Trustees that the Notes were secured, even though the Trustees knew that the Notes were not adequately secured. (B.R. 223, Second Am. Cross Claims at 6–7, 11).

Both Group A and B Plaintiffs also allege that the Trustees were fiduciaries of the Plan. (B.R. 193, First Am. Cross Claim ¶ 41; B.R. 223, Second Am. Cross Claims at 25–26, 30.) According to Plaintiffs, the Trustees breached their fiduciary duties to ensure that the Notes Plaintiffs received were adequately secured. (B.R. 193, First Am. Cross Claims ¶ 68; B.R. 223 Second Am. Cross Claims at 27, 31.) Group A Plaintiffs also allege that the Trustees breached their fiduciary duties to Group A because Kirk purchased Company Stock from Group B Plaintiffs for more than its fair market value. (B.R. 193, First Am. Cross Claims ¶ 67.) Group B Plaintiffs aver that the Trustees breached their fiduciary duties by failing to inform participants of the failure to adequately secure the Notes and instead telling participants otherwise, by allowing Group B Plaintiffs to sign the Escrow Agreement when the Trustees knew the Notes would not be adequately secured, and by allowing Kirk to purchase Company Stock that they “knew or reasonably should have known would be rendered worthless by the imminent bankruptcy” of Kirk. (B.R. 223, Second Am. Cross Claims at 27–28, 32.)

Finally, as relevant here, although Kirk was designated as the Plan Administrator, Section 17 of the Plan, as amended in December 2002, provides that, “[t]he Plan will be administered by one or more Trustees appointed by the Board of Directors to serve at its pleasure.” (R. 24–1, Kirk ESOP Docs. at 71, § 17.) Under the terms of the Plan, a Trustee was defined as “[t]he Trustee (and any successor Trustees) appointed by the Board of Directors to hold and invest the Trust Assets.” ( Id. at 66, § 2.38.) Additionally, Section 17.2 of the Plan, as amended in December 2002, made clear that Kirk was the named fiduciary “with authority to control and manage the operation and administration of the Plan.” ( Id. at 71, § 17.2.) As the named fiduciary, Kirk had “all powers necessary to enable it to administer the Plan in...