Solis v. Webb

• Citation: 931 F.Supp.2d 936
• Decision Date: 26 September 2012
• Docket Number: No. C–12–2055 EMC.,C–12–2055 EMC.
• Parties: Hilda SOLIS, Secretary of the United States Department of Labor, Plaintiff, v. Dennis WEBB, et al., Defendants.
• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California

931 F.Supp.2d 936

Hilda SOLIS, Secretary of the United States Department of Labor, Plaintiff,

v.Dennis WEBB, et al., Defendants.

No. C–12–2055 EMC.

United States District Court,

N.D. California.

Sept. 26, 2012.

Eric C. Lund, Glenn Michael Loos, Office of the Solicitor, U.S. Department of Labor, Washington, DC, Isabella Finneman, Danielle Lee Jaberg, Office of the Solicitor, United States Department of Labor, San Francisco, CA, for Plaintiff.

R. Bradford Huss, Virginia H. Perkins, Trucker Huss, APC, James P. Baker, Emily L. Garcia, Baker & McKenzie LLP, Ralph W. Robinson, Donald P. Sullivan, Wilson Elser Moskowitz Edelman & Dicker LLP, San Francisco, CA, for Defendants.

ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS

EDWARD M. CHEN, District Judge.

I. INTRODUCTION

Plaintiff Hilda L. Solis, the Secretary of the United States Department of Labor (“Secretary”), filed an action under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001 et seq., on April 25, 2012, against the fiduciaries of an Employee Stock Ownership Plan (“an ESOP”) for allegedly causing or permitting an ESOP to purchase stock for more than the stock's fair market value. See Compl. (Docket No. 1). Defendants Matthew Fidiam (“Fidiam”) and J. Robert Gallucci (“Gallucci”) filed a motion to dismiss the Secretary's complaint in its entirety on May 29, 2012. See Mathieu Fidiam and J. Robert Gallucci's Motion to Dismiss (Docket No. 18) (“Fidiam & Gallucci's Motion”). Defendant The Parrot Cellular Employee Stock Ownership Plan (“Parrot Cellular ESOP” or “the ESOP”) filed its own motion to dismiss on June 26, 2012. See The Parrot Cellular Employee Stock Ownership Plan's Motion to Dismiss (Docket No. 32) (“ESOP Motion”). Defendant Dennis Webb (“Webb”) joined in part Fidiam and Gallucci's motion on June 26, 2012, see Defendant Dennis Webb's Joinder (Docket No. 33), and filed his own motion to dismiss on the same day, see Motion to Dismiss Complaint on Behalf of Dennis Webb (Docket No. 35) (“Webb's Motion”).

Defendant Consulting Fiduciaries, Inc. (“CFI”), the last of the named Defendants, has not filed its own motion to dismiss, nor joined to any of the three motions now pending, but instead filed an Answer to the Complaint on July 10, 2012. See Answer (Docket No. 43). Having considered these three motions, all papers that are related thereto, and the argument of counsel, the Court hereby DENIES all three motions.

II. FACTUAL & PROCEDURAL BACKGROUND

The Secretary alleges the following facts in her complaint. Throughout the time relevant to this action, Webb served as an officer and director of Entrepreneurial Ventures, Inc. (“EVI”), a company which conducted and/or conducts business as “Parrot Cellular” and sponsored the subject ESOP.¹ Compl. ¶ 6. Fidiam and Gallucci also served as officers and directors of EVI, as well as members of the ESOP's “Plan Committee.” Id. ¶¶ 7–8. Among these individuals, Webb owned 250,000 shares of EVI (a 60.42% stake) and Fidiam owned 41,250 shares (a 9.97% stake) prior to the funding of the ESOP. Id. ¶¶ 6–7, 34. A third individual not party to this suit named Chad Webb (Dennis Webb's son) owned the final 122,500 shares of EVI (a 29.61% stake). Id. ¶ 34. CFI served as the “independent fiduciary and investment manager” for the ESOP. Id. ¶ 9.

At some point “around 1999 or 2000,” EVI began taking steps to create an ESOP to purchase EVI. Id. ¶ 11. The ESOP that is the subject of this suit “was established by EVI effective July 1, 2001,” and was at that time known as the “Parrot Cellular Employee Stock Ownership Plan and Money Purchase Plan.” Id. ¶ 10; See also Declaration of J. Robert Gallucci (Docket No. 18–1) (“Gallucci Decl.”), Ex. A at 1. The original plan consisted of two component parts, a Stock Bonus Plan and a Money Purchase Pension Plan, but these components were merged and renamed into their present form when EVI amended and restated the Plan on July 1, 2004. Compl. ¶ 10.

In June of 2002, a third-party administration firm contracted with EVI to design and implement provisions of the ESOP to facilitate the purchase of EVI's stock. Id. ¶¶ 11–12. On June 30, 2002, EVI's Board of Directors adopted the “2002 Plan Document” prepared by the third-party administration firm, and appointed Fidiam and Gallucci as the ESOP's trustees and sole members of the “Plan Committee.” Id. ¶ 13. The 2002 Plan Document “outlines the duties and responsibilities of EVI's Board of Directors regarding the ESOP,” as well as the “duties and responsibilities of the Plan Committee,” the latter of which is designated as a “named fiduciary” of the ESOP under ERISA. Id. ¶¶ 14–15. The 2002 Plan Document also permits the Plan Committee to “designate other persons who are not named fiduciaries to carry out its fiduciary duties” by themselves becoming “a fiduciary under the Plan.” Id. ¶ 15. The Secretary alleges that Webb, Fidiam, and Gallucci were all fiduciaries of the ESOP “by virtue of their authority under the [2002] Plan Document,” which granted them power to exercise discretionary authority, control, or responsibility over the management and administration of the Plan and the Plan's assets. See Compl. ¶¶ 14–18. Further, the Secretary alleges that Fidiam and Gallucci were “named fiduciaries” under ERISA by virtue of their membership on the Plan Committee. Id. ¶ 19.

On September 27, 2002, EVI and the ESOP's designated trustees (Fidiam and Gallucci) signed an engagement letter with CFI, appointing CFI as the Independent Fiduciary and Investment Manager for the Plan “with respect to the stock purchase transactions at issue in this case.” Id. ¶ 22. Using a third-party appraisal service retained by Webb,² EVI received appraisal reports on April 30 and July 31, 2002, valuing 100% of EVI's shares at $31,162,000. Id. ¶ 30. A subsequent appraisal report on November 21, 2002, placed the value of 100% of EVI's shares at $31,449,000. Id. The third-party appraisal service issued a letter on the same day as the November 21st appraisal stating that the Plan's contemplated purchase of EVI's stock at the appraised value was “fair and reasonable to the ESOP and its participants,” and the “ESOP will not be paying more than adequate consideration to acquire the shares of Company stock.” Id. ¶ 32. “After reviewing the appraisal and other transactional documents, CFI directed Defendants Fidiam and Gallucci, as the ESOP trustees, to purchase ... EVI stock on behalf of the ESOP,” which they did “without question.” Id. ¶ 33.

The ESOP acquired 90.03% of EVI's shares on November 21, 2002, at $76.01 per share for a total cost of $28,313,718. Id. ¶ 36. To finance the transaction, the ESOP borrowed $15,892,620 from EVI—a sum which EVI had itself borrowed from Heritage Bank of Commerce on November 19, 2002. Id. ¶ 35. The ESOP paid the balance of the purchase price by issuing promissory notes to Dennis and Chad Webb for $11,596,962 on the day of the transaction, and by using a $824,136 cash payment from EVI “constituting the initial EVI contribution to pay down the ESOP's debt.” Id. ¶ 37.

The Secretary alleges that the ESOP's purchase of EVI's stock was completed at an amount “far higher than actual fair market value” and as a result “the ESOP paid more than adequate consideration for its EVI stock.” Id. ¶ 42. This allegation is premised on the fact that CFI's appraisals of EVI's market value contained a number of “flaws and inaccuracies.” Id.; see also Compl. ¶¶ 40–41 (listing appraisal deficiencies). Chief among these deficiencies are the fact that the “appraisal report did not consider a prior valuation of EVI” from 2001 that set its market value at $7,300,000. Id. ¶ 41. Nor did the appraisal report account for a $12 million deferred compensation agreement and a $4 million deferred compensation payment, both payable to Webb and executed by EVI between June and November 2002, prior to the ESOP's purchase of EVI stock, that had the effect of reducing “the value of EVI and hence ... the value of the ESOP's EVI stock.” Id. ¶¶ 39–41, 45–46, 55–56.

The Secretary thereafter filed her action against the Defendants on April 25, 2012, alleging that their acts in connection with the ESOP's purchase of EVI's stock violated multiple provisions of ERISA. See Compl. ¶¶ 63–67. As against Defendants Fidiam and Gallucci, she charges that “as fiduciaries, they had a duty to act prudently and solely in the interests of the ESOP and its participants and beneficiaries.” Id. ¶ 58. In breach of this duty, these two Defendants “failed to oppose the $4 million payment to Defendant Webb and the $12 million agreement with Defendant Webb,” and failed “to take any action, including ... a corporate shareholder action, to stop the $4 million payment ... or to recoup that payment, and they failed to take any steps to invalidate the $12 million” deferred compensation agreement with Webb. Id. ¶ 58. As against Defendant Webb, she charges that “he had a duty to act prudently and solely in the interests of the ESOP and its participants and beneficiaries, but he chose instead to act in his own self interest by agreeing to a $4 million payment and a $12 million deferred compensation agreement from EVI that harmed the ESOP by reducing the value of the ESOP's EVI stock.” Id. ¶ 59. As against Defendant CFI, she charges that it relied on an unsound appraisal and “failed to adequately understand the methodologies used, the factual bases relied upon, and the conclusions reached in the appraisal, and therefore improperly directed the ESOP trustees to purchase EVI stock from Defendant Webb at a price in excess of fair market value.” Id. ¶ 60. Finally, regarding Webb, Fidiam, and Gallucci, she charges that they collectively “failed to prudently monitor, oversee or remove the independent fiduciary, CFI, which they had appointed or had responsibility to oversee pursuant to the [2002] Plan Document;” regarding Fidiam and Gallucci in particular, they improperly acquiesced “in accepting ......