Smith v. Bd. of Dirs. of Triad Mfg., Inc.

Decision Date10 September 2021
Docket NumberNo. 20-2708,20-2708
Citation13 F.4th 613
Parties James SMITH, on behalf of himself and all others similarly situated, and on behalf of the Triad Manufacturing, Inc., Employee Stock Ownership Plan, Plaintiff-Appellee, v. BOARD OF DIRECTORS OF TRIAD MANUFACTURING, INC., et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

Douglas D. Geyser, Esq., Rachana Pathak, John Stokes, Peter K. Stris, Attorneys, Stris & Maher LLP, Los Angeles, CA, Daniel Sutter, Michelle C. Yau, Jamie L. Bowers, Karen L. Handorf, Attorneys, Cohen Milstein Sellers & Toll PLLC, Washington, DC, for Plaintiff-Appellee.

Benjamin P. Fryer, Attorney, FordHarrison LLP, Charlotte, NC, Matthew D. Grabell, Attorney, FordHarrison, LLP, Atlanta, GA, John C. O'Connor, Attorney, FordHarrison LLP, Chicago, IL, for Defendants-Appellants.

Lars Golumbic, Sarah Adams, William J. Delany, Elizabeth L. Woods, Attorneys, Groom Law Group, Washington, DC, for Amicus Curiae American Benefits Council.

Laurie A. McCann, Attorney, AARP Foundation Litigation, Washington, DC, for Amici Curiae AARP Foundation and American Association of Retired Persons.

Gregory Y. Porter, Attorney, Bailey & Glasser LLP, Washington, DC, Dan Feinberg, Feinberg, Jackson, Worthman & Wasow LLP, Berkeley, CA, Leah M. Nichols, Public Justice, P.C., for Amicus Curiae Public Justice.

Before Kanne, Brennan, and Scudder, Circuit Judges.

Brennan, Circuit Judge.

In this complex ERISA case, James Smith sued fiduciaries of the retirement plan offered by his former employer, Triad Manufacturing, Inc., for alleged financial misconduct. Add in a class action, an arbitration provision, and issues of notice and consent to plan amendments, and this lawsuit gets even more complicated.

The correct resolution here is straightforward, though. The ERISA provisions Smith invokes have individual and plan-wide effect. But the arbitration provision in Triad's defined contribution retirement plan precludes relief that "has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than the Claimant." Because that provision prohibits relief that ERISA expressly permits, we affirm the district court's denial of Triad's motion to compel arbitration or, in the alternative, to dismiss.

I
A

James Smith worked for Triad Manufacturing, Inc., a shelving and fixture company, from 2015 to 2016.1 As part of his employment, Smith participated in Triad's Employee Stock Ownership Plan, a defined contribution employee retirement plan under the Employee Retirement Income Security Act. A defined contribution plan allows the employee or the employer (or both) to contribute to the employee's individual account (e.g., a 401(k) plan). By contrast, a defined benefit plan provides a fixed monthly benefit based on a general pool of assets (e.g., a pension plan). See Hughes Aircraft Co. v. Jacobson , 525 U.S. 432, 439–40, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999). ERISA governs both plans. 29 U.S.C. § 1002 (34), (35).

Triad's board of directors, including shareholders David Caito, Robert Hardie, and Michael McCormick, created the plan for its employees in early December 2015. The plan provides that "[t]he Primary Sponsor reserves the right at any time to modify or amend or terminate the [plan] in whole or in part." The primary sponsor, per the plan, is Triad through its board.

On December 17, 2015, Caito, Hardie, and McCormick sold all of Triad's stock to the plan, which at $58.05 per share totaled more than $106 million. Triad's board appointed GreatBanc Trust Company as plan trustee on December 21, 2015, and GreatBanc approved the transaction in short order, seemingly after it had already occurred.2 Notably, the plan's holdings consisted entirely of Triad stock.

Triad's share price then dropped to $1.85 on December 31, 2015, according to the plan's financial statements. What had been valued at over $106 million plummeted in two weeks to just under $4 million. But under the plan's provisions, no participant could sell their shares until they vested—at the earliest, on December 31, 2016, for some employees. As of December 31, 2018, Triad's share price dipped to less than one dollar per share.

Caito, Hardie, and McCormick, though, seem to have benefited from the transaction. The plan financed its purchase of their shares through loans provided by the three men. Triad guaranteed these loans, charged against the company's equity that had just been purchased by the plan. The plan also required Triad to make retirement contributions in amounts no less than necessary to service the loan payments. So Caito, Hardie, and McCormick received repayment on the loans—at least in theory—no matter Triad's financial situation.

On July 17, 2018, Triad's board, as the plan's primary sponsor, amended the plan to include an arbitration provision with a class action waiver. That amendment includes a subsection, "(a) Covered Claims," requiring binding arbitration for any claim "which arises out of, relates to, or concerns this [plan], including without limitation, any claim for benefits under the [plan]; any claim asserting a breach of, or failure to follow, the [plan]; and any claim asserting a breach of, or failure to follow, any provision of ERISA or the [Internal Revenue] Code." Another subsection—entitled "(b) No Group, Class, or Representative Arbitrations"—warrants emphasis here. That subsection requires, in relevant part, that:

"All Covered Claims must be brought solely in the Claimant's individual capacity and not in a representative capacity or on a class, collective, or group basis."; and
"Each arbitration shall be limited solely to one Claimant's Covered Claims, and that Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than the Claimant."

That subsection also, with respect to any claim brought under ERISA § 502(a)(2) to seek appropriate relief under § 409, expressly limits the Claimant's remedy. What is more, "[i]n the event a court of competent jurisdiction were to find these requirements to be unenforceable or invalid, then the entire Arbitration Procedure ... shall be rendered null and void in all respects as to the particular claim that is the subject of that court's ruling." In other words, the arbitration provision is nonseverable, at least for the claim at issue in its invalidation. Smith, though, contends that he received no notice of this arbitration provision before its addition to the plan.3

B

In April 2020, Smith filed a class action complaint against Triad's board, Caito, Hardie, and McCormick (collectively, the "board defendants"), as well as GreatBanc, under 29 U.S.C. § 1132(a)(2) and (a)(3). The December 2015 transaction between Triad and the plan, according to Smith, violated numerous ERISA provisions. Three of the alleged violations are relevant here. In Count II, Smith alleged that the board defendants breached their fiduciary duties by failing to monitor fellow fiduciary GreatBanc as plan trustee, in violation of 29 U.S.C. § 1104(a)(1)(A) and (B).4 Smith alleged in Count IV that the board defendants engaged in prohibited transactions in violation of 29 U.S.C. § 1106(a). And according to Smith in Count V, the board defendants knowingly participated in GreatBanc's fiduciary violations, in violation of 29 U.S.C. § 1105(a)(1) and (a)(3).

Smith's prayer for relief was wide-ranging. As relevant here, Smith requested that the district court "[r]emove GreatBanc as the Trustee of the Triad [plan] or bar it from serving as a fiduciary of the [plan] in the future" and that it "[a]ppoint a new independent fiduciary to manage the Triad [plan] and order the costs of such independent fiduciary be paid for by Defendants." He also asked that the district court "[a]ward such other and further relief" under § 1132(a)(2) and/or (a)(3), Federal Rule of Civil Procedure 54(c), "or that is equitable and just."

Based on the class action waiver, the board defendants then moved to compel arbitration or, in the alternative, to dismiss Smith's claims under Federal Rules of Civil Procedure 12(b)(3) or (b)(6). The district court denied that motion on two grounds. First, assuming that ERISA claims are generally arbitrable—a question this court has not yet addressed—and applying Missouri state law (per the parties’ mutual contention), the district court held that because Smith had not consented to the arbitration provision, it could not bind him. Smith's work with Triad ended in 2016, the arbitration provision came in 2018, and no evidence had been offered that Smith received notice of the amendment. For the district court, it was Smith's consent, and not the plan's consent (through the primary sponsor, Triad), that mattered. That court thus rejected the Ninth Circuit's analysis in Dorman v. Charles Schwab Corp. (Dorman II ), 780 F. App'x 510, 513 (9th Cir. 2019) (unpublished memorandum opinion), which enforced a similar ERISA arbitration provision unilaterally added by the plan sponsor.5

Second, the district court relied on American Express Co. v. Italian Colors Restaurant to hold the arbitration provision unenforceable because it prospectively waived Smith's right to statutory remedies provided by ERISA. 570 U.S. 228, 235–36, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013). The plan's arbitration provision, the district court reasoned, prohibited plan-wide statutory remedies that ERISA permits under §§ 1132(a)(2) and 1109(a), so it could not be enforced. The district court again disagreed with Dorman II , 780 F. App'x at 515, rejecting the Ninth Circuit's determination that individualized arbitration for claims concerning a defined contribution plan, as here, accorded with ERISA. After the district court denied the motion, this appeal followed.

II

The board defendants moved to compel arbitration or to dismiss under ...

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