Scalia v. Reliance Tr. Co.
| Decision Date | 04 May 2020 |
| Docket Number | Case No. 17-cv-4540 (SRN/ECW) |
| Parties | Eugene Scalia, Secretary of Labor, U.S. Department of Labor, Plaintiff, v. Reliance Trust Company, Steven R. Carlsen, Paul A. Lillyblad, Kelli Watson, and Kurt Manufacturing Company, Inc., Employee Stock Ownership Plan, Defendants. |
| Court | U.S. District Court — District of Minnesota |
This matter is before the Court on Plaintiff Eugene Scalia, Secretary of Labor's (the "Secretary"), Motion to Compel Defendant Directors to Produce Documents and a Privilege Index and to Compel Compliance with Subpoena for Production of Documents Directed to Third-Party Thomas M. Hughes, Ltd. (Dkt. 143.) For the reasons set forth below, the Motion to Compel is denied.
The factual background in this case is largely undisputed; the Court sets forth the following allegations from the pleadings and the exhibits filed in connection with the Motion. This case involves the October 5, 2011 sale of Kurt Manufacturing Company,Inc. ("Kurt") stock (the "ESOP Transaction"). (Dkt. 46 ¶ 2 (the "Amended Complaint"); Dkt. 100 ¶ 2 ("Def. Directors' Am. Answer").) Kurt, a Minnesota corporation headquartered in Minneapolis, is a manufacturer of various industrial products and services. (Dkt. 46 ¶ 12; Dkt. 100 ¶ 7.) Before the ESOP Transaction, Defendant Kurt Manufacturing Company, Inc. Employee Stock Ownership Plan ("the ESOP") owned 24% of Kurt's stock, and William G. Kuban2 owned the remaining 76%. (Dkt. 46 ¶¶ 63-64; Dkt. 100 ¶ 30.)
In January 2011, Kurt explored selling the company to a third party but was advised by Chartwell Business Valuation, LLC ("Chartwell") that likely buyers would be private equity firms, which would find greater value in "breaking Kurt apart to sell in pieces." (Dkt. 46 ¶ 32; Dkt. 100 ¶ 13.) Around March 2011, Kurt engaged with Chartwell to discuss "the potential sale, or redemption, of all non-ESOP shareholders' stock in the company, i.e., the ESOP transaction, and about Chartwell serving as Kurt's financial advisor in connection with the ESOP transaction." (Dkt. 46 ¶ 31; Dkt. 100 ¶ 13.)
On April 28, 2011, Chartwell presented to Kurt's Board of Directors (the "Board") "detailed information about valuation methodologies, share value, and share pricing, and funding for the transaction." Chartwell recommended a 100% sale of the outstanding shares of Kurt to the ESOP, and estimated that the equity purchase value for the Kubanshares was $28.7 million. (Dkt. 46 ¶ 34; Dkt. 100 ¶ 14.)3 After Chartwell's presentation, the Defendant Directors retained Steven Potach, who was Kurt's regular outside corporate counsel, and third-party Thomas M. Hughes of Thomas M. Hughes, Ltd. ("Hughes"), who was Kurt's "corporate ERISA counsel." (Dkt. 100 ¶ 14.)
On June 3, 2011, Kurt entered into an agreement with Chartwell, which provided, among other things, that Chartwell would direct the coordination and execution of the ESOP Transaction. (Dkt. 46 ¶ 35; Dkt. 100 ¶ 15.)
On July 11, 2011, Chartwell sent the Board an email with a "final lender material packet" valuing the equity redemption price for the Kurt stock from Kuban at $39.1 million. (Dkt. 46 ¶ 37; Dkt. 100 ¶ 15.) Chartwell's $39.1 million evaluation was equivalent to $85.22 per share. (Dkt. 46 ¶ 58; Dkt. 100 ¶ 26.) Prior evaluations by Willamette Management Associates ("Willamette") valued Kurt stock between $13.71 and $33.44 per share between 1999 and 2010. (Dkt. 46 ¶¶ 25-30; Dkt. 100 ¶¶ 11-12.)
At all relevant times, Defendant Steven Carlsen was the President and a director of Kurt, Defendant Paul Lillyblad was the Vice President of Finance and a director of Kurt, and Defendant Kelli Watson was the Vice President of Human Resources and a director of Kurt. (Dkt. 46 ¶¶ 16-18; Dkt. 100 ¶ 10.)4 Carlsen, Lillyblad, and Watson(collectively, "the Director Defendants") were trustees of the ESOP before the ESOP Transaction. (See Dkt. 167-2 ().) Upon the recommendation of Chartwell, Defendant Reliance Trust Company ("Reliance") was appointed to replace the Defendant Directors as a trustee for the ESOP. (Dkt. 100 ¶¶ 5-6.) On July 18, 2011, in his capacity as Kurt's President, Carlsen signed an engagement letter with Reliance, which required Reliance to serve as the ESOP's trustee in connection with the ESOP Transaction. (Dkt. 46 ¶ 42; Dkt. 100 ¶ 19.) As part of the agreement, Reliance agreed to "assume fiduciary responsibility as a discretionary trustee for determining, in consultation with its advisors, the prudence of the [ESOP's] purchase, that the purchase price in the Proposed Transaction [did] not exceed 'adequate consideration' as that term is defined [in ERISA] and that the Proposed Transaction [was] fair to the ESOP from a financial viewpoint." (Id.) Reliance was also given "complete and absolute discretionary authority in investigating and evaluating the Proposed [ESOP] Transaction." (Id.)
On July 22, 2011, the Defendant Directors resigned as "Trustees of the ESOP" and "executed a Written Resolution, appointing Reliance as the Trustee of the ESOP." (Dkt. 46 ¶ 52; Dkt. 100 ¶ 23; Dkt. 167-2.)
On the same day, Reliance hired Stout Risius Ross ("SRR") "to provide certain financial advisory services related to the ESOP transaction, with Gray Plant Mooty as legal counsel to Reliance." (Dkt 46 ¶ 48; Dkt. 100 ¶ 22.) Specifically, SRR agreed toproduce "a written opinion, as of the transaction date, that the consideration to be paid by the ESOP for its shares of Company stock pursuant to the terms of the Transaction is not greater than the fair market value of such shares," and "the terms of the loan from the Company to the ESOP are at least as favorable to the ESOP as would be the terms of a comparable loan resulting from negotiations between independent parties." (Dkt. 46 ¶ 48; Dkt. 100 ¶ 22.)
On August 19, 2011, SRR issued a report called "Analysis of Transaction Fairness for the October 5, 2011 Transaction." (Dkt. 46 ¶ 54; Dkt. 100 ¶ 25.) The report showed that the fair market value of Kurt's equity, excluding what the ESOP already owned, was "between $34.2 million and $43.1 million, with a midpoint of $39 million." (Dkt. 46 ¶ 56; Dkt. 100 ¶ 26.) In its report, "SRR identified the price to be paid by the ESOP for the stock, $39 million, or $85.22 per share." (Dkt. 46 ¶ 58; Dkt. 100 ¶ 26.)
On August 26, 2011, Reliance and SRR entered into a second agreement, in which SRR would provide a "written fairness opinion" on the ESOP purchase of Kuban's shares for an aggregate purchase price of $39 million. (Dkt. 46 ¶ 50; Dkt. 100 ¶ 22.) This opinion included whether "the fair value and present fair saleable value of the Company's assets would exceed the Company's stated liabilities; the Company should be able to pay its debts as they become absolute and mature; and the Company should not have unreasonably small capital for the business in which the Company is engaged." (Id.)
On October 5, 2011, the ESOP purchased all of Kuban's shares of Kurt for $85.22 per share or an aggregate purchase price of $39 million. (Dkt. 46 ¶ 2; Dkt. 100 ¶ 2.) The ESOP Transaction purchase agreement "was signed by Kuban as the selling shareholder,Reliance as ESOP Trustee, and by Carlsen as Kurt President." (Dkt. 46 ¶ 64; Dkt. 100 ¶ 30.) The ESOP borrowed $20 million from Kurt and $19 million from Kuban to finance the transaction. (Dkt. 45 ¶¶ 66-67; Dkt. 100 ¶¶ 31-32.) As part of the ESOP Transaction, the Board "established a Stock Appreciation Rights ('SARs') plan for key officers," including the Defendant Directors. (Dkt. 46 ¶ 70; Dkt. 100 ¶ 35.) In addition, the Defendant Directors executed a Price Support Agreement ("PSA"). (Dkt. 46 ¶ 71; Dkt. 100 ¶ 36.) The Secretary alleges that the purpose of the PSA was "to ensure that eligible ESOP participants and beneficiaries will receive the greater of the 'Support Price' or the fair market value of a share," after the ESOP Transaction. (Dkt. 46 ¶ 71.) The Defendant Directors allege that the purpose of the PSA was "to protect near-term retirees who would be impacted due to the projected share price drop as a result of increased debt resulting from the ESOP Transaction." (Dkt. 100 ¶ 36.) For purposes of the PSA, "Fair Market Value" was defined as "the most recent valuation of the Shares determine[d] in accordance with the terms of the ESOP with the advice of an independent appraiser." (Dkt. 46 ¶ 72; Dkt. 100 ¶ 37.) Kurt's board and Reliance executed the PSA at $55.29 per share. (Id.) After the ESOP Transaction, the ESOP owned 100% of all outstanding shares of Kurt stock. (Dkt. 46 ¶ 2; Dkt. 100 ¶ 2.)
On October 28, 2011, the Board executed a Written Action terminating Reliance as the ESOP's trustee. (Dkt. 46 ¶ 74; Dkt. 100 ¶ 38.) The Board appointed Bremer Trust, N.A. ("Bremer") as the ongoing trustee for the ESOP. (Dkt. 90 ¶ 22 ("Reliance Third-Party Compl.").)
On October 4, 2017, the Secretary filed his initial Complaint asserting claims against Defendants under the Employee Retirement Income Security Act of 1974 "ERISA") for breach of fiduciary duty and prohibited transactions. (Dkt. 1.)5
On August 20, 2018, the Secretary filed an Amended Complaint, which is now the operative complaint in this matter. (Dkt. 46.) Count I alleges a breach of fiduciary duty ERISA claim against Reliance and the Defendant Directors in violation of ERISA § 404 (a)(1)(A) and (B), 29 U.S.C. §§ 1104(a)(1)(A)-(B). (Dkt. 46 ¶¶ 80-83.) Count II alleges a "prohibited transaction" ERISA claim against Reliance and the Defendant Directors in violation of ERISA §§ 406(a)(1)(A) and (D), 29 U.S.C §§ 1106(a)(1)(A)&(D). (Id. ¶¶ 84-90.) Count III alleges an "exculpatory provision" ERISA claim in violation of ERISA § 410, 29 U.S.C. § 1100(a). (Id. ¶¶ 91-94.)
The Secretary seeks the following forms of relief in the Amended Complaint: (1) that Reliance and the Defendant Directors "restore all losses caused to the ESOP as a result of their fiduciary...
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