Pioneer Centres Holding Co. Emp. Stock Ownership Plan & Trust v. Alerus Fin., N.A.

• Decision Date: 05 June 2017
• Docket Number: No. 15-1227,15-1227
• Citation: 858 F.3d 1324
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: The PIONEER CENTRES HOLDING COMPANY EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST and its trustees, Matthew Brewer, Robert Jensen, and Susan Dukes, Plaintiffs-Appellants, v. ALERUS FINANCIAL, N.A., Defendant-Appellee.

858 F.3d 1324

The PIONEER CENTRES HOLDING COMPANY EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST and its trustees, Matthew Brewer, Robert Jensen, and Susan Dukes, Plaintiffs-Appellants,

v.ALERUS FINANCIAL, N.A., Defendant-Appellee.

No. 15-1227

United States Court of Appeals, Tenth Circuit.

Filed June 5, 2017

Bruce E. Rohde, Campbell Killin Brittan & Ray, LLC, Denver, Colorado, for Plaintiffs-Appellants.

Shannon Wells Stevenson (Michael T. Kotlarczyk with her on the briefs), Davis Graham & Stubbs LLP, Denver, Colorado, for Defendant-Appellee.

Before BACHARACH, PHILLIPS, and McHUGH, Circuit Judges.

McHUGH, Circuit Judge.

I. INTRODUCTION

The Pioneer Centres Holding Company Employee Stock Ownership Plan and Trust (the "Plan" or "ESOP") and its trustees sued Alerus Financial, N.A. (Alerus) for breach of fiduciary duty in connection with the failure of a proposed employee stock purchase. The district court granted summary judgment to Alerus after determining the evidence of causation did not rise above speculation. The Plan appeals, claiming the district court erred in placing the burden to prove causation on the Plan rather than shifting the burden to Alerus to disprove causation once the Plan made out its prima facie case. In the alternative, the Plan contends that even if the district court correctly assigned the burden of proof, the Plan established, or at the very least raised a genuine issue of material fact regarding, causation. We affirm.

II. BACKGROUND

A. Factual History

1. The Proposed Transaction

Pioneer Centres Holding Company (Pioneer) owned and operated (through its subsidiaries) several automobile dealerships in Colorado and California, including Land Rover, Audi, and Porsche. In 2001, Pioneer sponsored the Plan under the Employee Retirement Income Security Act of 1974 (ERISA). Matthew "Jack" Brewer (Pioneer's founder), Robert Jensen (Pioneer's President), and Susan Dukes (Pioneer's Chief Financial Officer), served as the Plan's trustees. Mr. Brewer initially owned 100% of Pioneer's stock. Over the course of several years, Mr. Brewer sold 37.5% of his Pioneer stock to the Plan and retained 62.5% ownership.

In 2009, the Plan's trustees "proposed a stock transaction whereby the ESOP would become the 100% owner of Pioneer" (the "Transaction"). The Transaction included a stock redemption agreement, whereby Pioneer would redeem most of Mr. Brewer's shares, and a stock purchase agreement, whereby the Plan would purchase the remaining shares. Mr. Jensen and Ms. Dukes also held stock options that they would exercise and that Pioneer would then redeem as part of the Transaction. Because the trustees' interests in the transaction were adverse to those of the Plan, and to avoid any conflict of interest issues, the Plan hired Alerus as an independent "transactional trustee." Alerus's job was to determine whether, and on what terms, the Plan should purchase Mr. Brewer's shares.

2. Correspondence Between Pioneer and Land Rover

Pioneer's dealership agreement with Land Rover required approval before any changes in ownership or management occurred, stating: "[T]here will be no change in the foregoing [dealership ownership and management] in any respect without [Land Rover's] prior written approval." The agreement also granted Land Rover a right of first refusal to purchase any of Pioneer's stock offered for sale.

Pioneer sent a letter to Land Rover on August 17, 2009, in which it asked Land Rover to consent to Mr. Brewer's transfer of his remaining Pioneer stock to the Plan to make the Plan the 100% owner of Pioneer. The letter included the proposed terms of the Transaction and informed Land Rover that Pioneer's management would not change.

On August 31, 2009, Land Rover¹ responded that it had not received any previous notice, or request for approval, of the prior transfers of 37.5% of Mr. Brewer's stock to the Plan. Instead, Land Rover indicated that its records still showed Mr. Brewer as owning 100% of Pioneer's stock. Land Rover accordingly requested documentation of Mr. Brewer's previous transfers to the Plan, and "reminded" Pioneer that "changes in ownership may not be made without our prior, written approval." In addition, Land Rover "reserve[d] all of [its] rights with respect to any prior, unauthorized changes in ownership and any misrepresentations made in connection with the Dealer Agreement." Finally, Land Rover explained that because Pioneer had failed to send a complete buy/sell agreement (a formal proposal), Land Rover's right of first refusal with respect to the Transaction had not been triggered. To illustrate, Land Rover included a checklist of documents and information it requires before it will consider whether to approve a proposed ownership transfer.

On September 15, 2009, Pioneer sent a second letter to Land Rover, explaining that Pioneer's August 17 letter was not intended as a formal proposal, but rather as "an informal request for an opinion from [Land Rover] regarding any significant issues [it] may have regarding the proposed change of ownership to being 100% ESOP owned." Pioneer did not dispute that it never applied for or received Land Rover's authorization for the prior transfers, it explained, however, that it thought permission was unnecessary because it was the ownership of the holding company (Pioneer) that had changed, not the ownership of Pioneer's dealerships.

On October 30, 2009, Land Rover responded that it had "a substantial objection regarding the previous changes of ownership that have resulted in [Pioneer] being 37.5% [Plan] owned." Because Pioneer had not previously disclosed or sought approval for these transfers, Land Rover maintained that each "was a material violation of the terms of the Land Rover Dealer Agreements," which require prior written approval before any change in ownership.

Land Rover further complained that in addition to not informing it of these transfers, Pioneer affirmatively misrepresented its ownership interest when Mr. Brewer signed a new dealership agreement in February 2005. In that agreement, Mr. Brewer listed himself as the only beneficial owner of Pioneer and as the 100% owner of Pioneer's stock. Land Rover considered this a "material misrepresentation" because "Mr. Brewer had already transferred 14.5%" of Pioneer's stock to the Plan at that time. Consequently, Land Rover "demand[ed] that all prior, unauthorized transfers of beneficial ownership be reversed and that ownership be restored to comply with the representations made in the [dealership agreements]."

Significant for our purposes, Land Rover also advised Pioneer that it would not approve a change in ownership to 100% Plan owned, because its "requirements for ownership/operation of its dealerships would foreclose such an arrangement." Land Rover explained that the "identity, reputation, financial resources, personal and business qualifications and experience, and the marketing philosophy of the designated owners and management of [Pioneer] are of vital significance" to Land Rover. Land Rover further stated that

if majority ownership of a Land Rover Dealer were held by an ESOP, then the Dealer would ultimately be controlled by an ever-changing group of employees who have not been vetted for ownership and management by [Land Rover], and who may not have the requisite financial and personal capabilities, qualifications, experience and commitment. Further, control and management of the dealership would be subject to internal politics and factions. This is an unacceptable ownership structure for a Land Rover Dealer.

Moreover, in this particular case, we are being asked to approve a transfer of full ownership following a series of undisclosed and unauthorized transfers in which both current ownership and the [Plan] participated.

On December 3, 2009, Pioneer (assisted by Alerus) responded, interpreting Land Rover's October 30 letter as announcing a prohibition against ESOP-owned dealerships, and asserting that this position violated California and Colorado law, as well as federal public policy favoring ESOP ownership. Pioneer also challenged some of Land Rover's reasoning for finding Plan ownership unacceptable. First, Pioneer explained that the same management team would stay in place after the transfer, because 100% of the stock in the dealerships would continue to be owned by the holding company (Pioneer), which in turn would be owned by the Plan. And the Plan would remain under the management of its trustees, Mr. Brewer, Mr. Jensen, and Ms. Dukes. Second, Pioneer claimed that "numerous studies" have shown ESOP-owned companies outperform competitors because the employees have a beneficial interest in the company and are motivated to help the company succeed. It is undisputed that Pioneer did not specifically identify or cite to a single study to support this claim.

On December 14, 2009, Land Rover wrote to Pioneer and clarified that it did not have a policy against all ESOP ownership. But Land Rover explained that its hesitation with respect to this Transaction was because "Pioneer never applied for nor received Land Rover's authorization for any of these prior transfers, in direct contravention of the Dealer Agreements," and because Pioneer misrepresented its ownership in 2005. Land Rover also took issue with Pioneer's arguments in favor of ESOP ownership. To begin, Land Rover indicated that even if management continued after the Transaction, it could change at any time and there was no guarantee of "who will ultimately control the dealership and be able to make changes in management and business direction." And Land Rover noted Pioneer's assertion that ESOPs outperform competitors was "not supported by the performance of your own dealerships." Whereas Land Rover sales were down 16% nationally that year, Pioneer's three Land Rover dealerships' sales were well below average, being down 45%, 35%, and 34%. Land Rover also observed that all three dealerships were below average on the Customer Satisfaction Index (CSI), and...