Openshaw v. Cohen, Klingenstein & Marks, Inc., No. CIV.A. WDQ03-1838.

Decision Date03 June 2004
Docket NumberNo. CIV.A. WDQ03-1838.
Citation320 F.Supp.2d 357
PartiesJames A. OPENSHAW, Jr., et al. Plaintiffs, v. COHEN, KLINGENSTEIN & MARKS, INC., Defendant.
CourtU.S. District Court — District of Maryland

Betty Sue Diener, Goldberg Pike and Besche PC, Baltimore, MD, for Plaintiffs and Counter Defendants.

Howard G. Goldberg, Goldberg Pike and Besche PC, Baltimore, MD, for Plaintiffs.

Charles I. Poret, Robert Allen Cohen, Ross L. Hirsch, Dechert LLP, New York, NY, Frank J. Eisenhart, Dechert LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION

QUARLES, District Judge.

Pending are Plaintiffs' Motion to Dismiss Defendant's Counterclaim, Plaintiffs' Motion to Strike Answer to Complaint, Counterclaim, With Respect to Affirmative Defenses, and Plaintiffs' Motion for Leave to File Amended Complaint. For the following reasons, the Motion to Dismiss the Counterclaim and the Motion to Strike Affirmative Defenses will be granted and the Motion for Leave to File an Amended Complaint will be granted in part and denied in part.

I. Background

Plaintiffs are trustees of the Severance & Annuity Plan and Pension Plan of The International Union of Operating Engineers Local 37 ("Plans"). Defendant Cohen, Klingenstein & Marks, Inc. ("CKM") is an investment firm. Plaintiffs retained CKM to:

"[I]nvest and reinvest the cash and securities in the ACCOUNT with ADVISOR's complete discretion, without being required to consult with CLIENT in advance, and at CLIENT'S sole risk. However ADVISOR will exercise discretion prudently and in CLIENT'S best interest and subject to such investment objectives and guidelines as ADVISOR and CLIENT adopt from time to time."

Compl. Ex. 1 at ¶ 2.

Pursuant to this agreement, Plaintiffs gave CKM between ten and fifteen million dollars to manage. Complaint at ¶ 20. CKM invested significant portions of the Plans' assets in WorldCom, Inc. ("WorldCom") stock. Complaint at ¶¶ 25-65. CKM alleges that despite warnings from numerous financial institutions, CKM continued to purchase WorldCom stock as its price plummeted which caused the Plans to lose hundreds of thousands of dollars. Id.

Plaintiffs brought this action on behalf of the Plans on June 20, 2003 alleging that CKM's actions violated Title 29 U.S.C. § 1104. CKM answered the complaint, asserting seven affirmative defenses and a counterclaim against the trustees for contribution. Answer at 9-11. Plaintiffs have moved to dismiss the counterclaim and strike the affirmative defenses.

While those motions were pending, Plaintiffs requested leave to file an amended complaint to state claims under 29 U.S.C. § 1106(b)(1) and add a prayer for punitive damages. CKM opposes the amendments as futile.

II. Analysis
A. Motion for Leave to File an Amended Complaint

The grant of leave to amend is favored absent prejudice to the opposing party. See Intown Properties Management, Inc. v. Wheaton Van Lines, Inc., 271 F.3d 164, 170 (4th Cir.2001), citing Gillespie v. U.S. Steel Corp., 379 U.S. 148, 158, 85 S.Ct. 308, 13 L.Ed.2d 199 (1964). Moreover, "[u]nless a proposed amendment may clearly be seen to be futile because of substantive or procedural considerations ... conjecture about the merits of the litigation should not enter into the decision whether to allow amendment." Davis v. Piper Aircraft Corp., 615 F.2d 606, 613 (4th Cir.1980), cert. dismissed, 448 U.S. 911, 101 S.Ct. 25, 65 L.Ed.2d 1141 (1980). Futility is governed by the same standard as a Fed.R.Civ.P. 12(b)(6) motion to dismiss. Perkins v. United States, 55 F.3d 910, 917 (4th Cir.1995); see also Burger King v. Weaver, 169 F.3d 1310, 1320 (11th Cir.1999).

A Fed.R.Civ.P. 12(b)(6) motion to dismiss should be granted "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002), citing Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir.1982). All allegations are accepted as true and the complaint is viewed in the light most favorable to the plaintiff. Mylan Laboratories, Inc. v. Raj Matkari, et al., 7 F.3d 1130, 1134 (4th Cir.1993). If any possible basis for relief has been pled, the Court must deny the motion to dismiss. Garland v. St. Louis, 596 F.2d 784 (8th Cir.1979), cert. denied, 444 U.S. 899, 100 S.Ct. 208, 62 L.Ed.2d 135 (1979); Swierkiewicz, 534 U.S. at 514, 122 S.Ct. 992.

Plaintiffs seek to amend their complaint to state a claim under Title 29 U.S.C. § 1106(b)(1), which prohibits a plan fiduciary from dealing with plan assets "in his own interest or for his own account." Mot. for Leave to Amend at ¶ 5; 29 U.S.C. § 1106(b). Plaintiffs also seek to amend their prayer for relief to include punitive damages for all counts. Mem. in Support of Mot. for Leave to Amend at 2.

1. Section 1106(b)(1) Claims

Plaintiffs seek leave to assert § 1106(b) claims1 because discovery revealed that CKM was one of the ten largest shareholders of WorldCom stock. Mem. in Support of Mot. for Leave to Amend at 2; Amended Complaint at ¶ 35. Plaintiffs contend that CKM's WorldCom interest motivated it to continue to buy WorldCom stock although its value was collapsing. Amended Complaint at ¶¶ 34-51; ¶¶ 92-99. CKM argues that the Amended Complaint merely claims that it gambled on WorldCom stock to increase its business and reputation and that this self-interest cannot satisfy the requirements of § 1106(b)(1). CKM Sur-Reply at 2-3.2

If an ERISA fiduciary takes unreasonable risks with plan assets to increase its professional reputation, the fiduciary has not administered the plan "for the exclusive purpose of providing benefits to plan beneficiaries." Leigh v. Engle, 727 F.2d 113, 129 (7th Cir.1984); see also id. at 127 ("The use of plan assets for any interest, financial or nonfinancial, other than an interest of the plan and its beneficiaries" violates § 1106(b)(1)). Under such circumstances, there may be § 1106(b)(1) liability even if the gamble is successful; the unnecessary risk of plan assets generates § 1106(b)(1) liability. Id. at 119(finding § 1106(b)(1) liability although the ERISA plan reaped substantial returns from self-interested investments); id. at 122 (the unnecessary risk of plan investments violates ERISA fiduciary duties).3 Accordingly, because Plaintiffs have stated a claim under § 1106(b)(1) the amendment is not futile and leave to amend will be granted with respect to those claims. Perkins, 55 F.3d at 917; Swierkiewicz, 534 U.S. at 514, 122 S.Ct. 992.4

2. Punitive Damages

Though Congress imported some principles of trust law into ERISA, the ultimate inquiry remains whether the statute authorizes the relief sought. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989); see Mertens v. Hewitt Associates, 508 U.S. 248, 253, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993); Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985). Title 29 U.S.C. § 1109 enumerates the relief available to an ERISA plan in an action based on the breach of a fiduciary duty. 29 U.S.C. § 1109(a); 29 U.S.C. § 1132(a)(2). Section 1109(a) authorizes the award of, inter alia,"such other equitable or remedial relief as the court may deem appropriate, including the removal of the fiduciary." 29 U.S.C. § 1109(a).5 The Court must determine whether Congress, in differentiating between "equitable" and "remedial" relief, intended to allow the award of punitive damages. See Mertens, 508 U.S. at 258 n. 8, 113 S.Ct. 2063 (noting that there is a distinction between the two words in the statute).

Historically, trust actions were brought in equity courts, where punitive damages were not available absent express statutory authorization. Mertens, 508 U.S. at 270, 113 S.Ct. 2063 (White dissenting) ("courts of equity would not — absent some express statutory authorization — enforce penalties or award punitive damages"). The Restatement (Second) of Trusts does not include punitive damages among the remedies available in actions for breach-of-trust or breach of loyalty. Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 1463-64 (5th Cir.1986), cert. denied, 479 U.S. 1089, 107 S.Ct. 1298, 94 L.Ed.2d 154 (1987), citing Restatement (Second) of Trusts §§ 205-06. Accordingly, because punitive damages were not typically available under trust law before the enactment of ERISA, such damages are only available if clearly permitted by the statutory language. Powell v. Chesapeake and Potomac Telephone Co. of Va., 780 F.2d 419, 424 (4th Cir.1985) ("The legislative history supports [plaintiff's] theory that Congress intended to import into ERISA principles of trust law ... [but punitive damages were] generally not available in an action by a beneficiary against a trustee for breach of trust");6 Sommers, 793 F.2d at 1464 ("The Restatement, therefore, suggests that the law of trusts does not permit punitive damages for breach of fiduciary duty"); see also Mertens, 508 U.S. at 254, 113 S.Ct. 2063 (There is strong evidence that "Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly") (emphasis in original).7

"Remedial relief" does not state clear authorization for punitive damages that the history of trust law and nature of the extraordinary remedy require. Id.; Mertens, 508 U.S. at 254, 113 S.Ct. 2063 (There is strong evidence that "Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly"); Sommers, 793 F.2d at 1464 (§ 1109(a) does not permit the recover of punitive damages); Dependahl v. Falstaff Brewing Corp., 653 F.2d 1208, 1216 (8th Cir.1981) ("We do not think punitive damages are provided for in ERISA. Ordinarily punitive damages are not presumed; they are not the norm; and nowhere in ERISA are they mentioned. If Congre...

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