Vigeant v. Meek, Case No. 18-cv-577 (JNE/TNL)

• Decision Date: 07 November 2018
• Docket Number: Case No. 18-cv-577 (JNE/TNL)
• Citation: 352 F.Supp.3d 890
• Parties: Deborah VIGEANT, Rhonda Wood, Elizabeth Millane, Douglas Eckelbecker, Amanda Eckelbecker, Rodney Uting, and Lawrence Anderson, and All Other Individuals Similarly Situated, Plaintiffs, v. Michael MEEK, Paul Harmel, P. Robert Larson, Donald Goldfus, John Anderson, Bruce Nicholson, Bernie Alrich, Ted Koenecke, Glenn Elo, Newport Trust Company, and Lifetouch Inc., Defendants.
• Court: U.S. District Court — District of Minnesota

352 F.Supp.3d 890

Deborah VIGEANT, Rhonda Wood, Elizabeth Millane, Douglas Eckelbecker, Amanda Eckelbecker, Rodney Uting, and Lawrence Anderson, and All Other Individuals Similarly Situated, Plaintiffs,

v.Michael MEEK, Paul Harmel, P. Robert Larson, Donald Goldfus, John Anderson, Bruce Nicholson, Bernie Alrich, Ted Koenecke, Glenn Elo, Newport Trust Company, and Lifetouch Inc., Defendants.

Case No. 18-cv-577 (JNE/TNL)

United States District Court, D. Minnesota.

Signed November 7, 2018

Douglas J. Nill, Douglas J. Nill, P.L.L.C., Minneapolis, MN, Edward H. Glenn, Jr., Pro Hac Vice, Jacob H. Zamansky, Pro Hac Vice, Justin Sauerwald, Pro Hac Vice, Samuel E. Bonderoff, Pro Hac Vice, Zamansky LLC, New York, NY, for Plaintiffs.

Andrew J. Holly, Nicholas J. Bullard, Stephen P. Lucke, Dorsey & Whitney LLP, Minneapolis, MN, Lars Golumbic, Pro Hac Vice, Groom Law Group, Chtd. District of Columbia, Washington, DC, Theodore M. Becker, Pro Hac Vice, McDermott Will & Emery, Cardelle B. Spangler, Pro Hac Vice, Heather Lehman Kriz, Pro Hac Vice, Winston & Strawn LLP, Chicago, IL, for Defendants.

ORDER

JOAN N. ERICKSEN, United States District Judge

Plaintiffs brought a class action to recover the hundreds of millions of dollars lost when Lifetouch's stock value declined. Under Section 502 of the Employee Retirement Income Security Act ("ERISA"), Plaintiffs claim that this loss resulted from breaches of fiduciary duties by Lifetouch, Lifetouch's Board of Directors, and Lifetouch Trustees directly responsible for managing the Employee Stock Ownership Plan ("ESOP"). All Defendants moved to dismiss the claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. Subsequently, Plaintiffs voluntarily dismissed the action against Defendant Newport Trust, a Lifetouch Trustee, pursuant to Rule 41(a)(1)(A)(i). Therefore, only the claims against Lifetouch, the Board of Directors ("Directors"), and Trustees Ted Koenecke and Glenn Elo remain. As set forth below, the Court grants Defendants' motion to dismiss.

BACKGROUND

Lifetouch is a professional photography company focused primarily on school pictures.

Until its recent sale to Shutterfly, Lifetouch was 100% owned by its employees through an ESOP sponsored by Lifetouch ("the Plan"). Lifetouch made all contributions to the Plan and the Plan invested primarily in shares of Lifetouch stock. According to the Summary Plan Description, Defendant Lifetouch—the Plan Administrator—was responsible for managing the Plan and communicating with Plan participants. Under the terms of the Trust Agreement, Lifetouch's Directors appointed a Trustee, who had exclusive authority to manage the Plan assets in the trust. Defendants Ted Koenecke and Glenn Elo, Lifetouch senior executives, served as Trustees through May 2017.

Lifetouch made cash distributions to ESOP participants upon their retirement. In the event of a distribution, Lifetouch stock was repurchased at the fair market value determined by the Trustees on the June 30th immediately preceding the repurchase date. Because Lifetouch was a private company, its share price could not be determined on publicly traded markets. For that reason, the Plan required the Trustees to value Lifetouch stock annually. The Trustees appointed and relied on the opinion of an independent appraiser to determine the fair market value.

Starting in 2015, Lifetouch struggled financially as new technologies transformed the professional photography industry and consumer tastes. In 2015 and 2016, Lifetouch suffered repeated financial setbacks. Lifetouch closed J.C. Penney and Target brick-and-mortar portrait studio locations. In November 2015, Lifetouch closed an entire production facility in North Carolina and laid off 206 employees. Additionally, several Lifetouch senior executives retired, culminating in the retirement of then-CEO Paul Harmel in July 2016. In August of 2016, the StarTribune , a major Minnesota newspaper, published an article about Lifetouch's struggles to stay relevant, adapt to modern technology, and satisfy consumer needs.

During this time, Lifetouch's stock value decreased. On June 30, 2015, the Trustees valued Lifetouch stock at $93 per share, a 10% decrease from the 2014 valuation. On June 30, 2016 the Trustees valued Lifetouch stock at $88 per share, a 5% decrease from the previous year's valuation. On June 30, 2017, the Trustees valued Lifetouch stock at $56 per share, a 36% decrease from the previous year.

Lifetouch's financial troubles continued. On January 30, 2018, CEO Michael Meek explained in a StarTribune article that Lifetouch had put itself up for sale because growth had slowed, and Lifetouch was not generating enough cash flow to invest in new technologies and other areas of business. That same month, Shutterfly announced it was acquiring Lifetouch for $825 million plus unspecified cash and investments. After receiving a fairness opinion from a third-party financial advisor, Trustee Newport Trust reviewed and approved the sale price.¹ Lifetouch's sale terminated the Plan and commenced the distribution of proceeds to participants.

LEGAL STANDARD

To survive a Rule 12(b)(6) motion, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A complaint "does not need detailed factual allegations," but it must contain "more than labels and conclusions." Twombly , 550 U.S. at 555, 127 S.Ct. 1955. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. But if the pled facts are merely consistent with liable acts, the complaint "stops short of the line between possibility and plausibility." Meiners v. Wells Fargo & Co. , 898 F.3d 820, 822 (8th Cir. 2018) (quoting Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ).

The principal duties owed by Plan fiduciaries are prudence and loyalty. Braden v. Wal-Mart Stores, Inc. , 588 F.3d 585, 595 (8th Cir. 2009). The duty of prudence requires that the fiduciary act "with the care, skill, prudence, and diligence." 29 U.S.C. § 1104(a)(1)(B). The duty of loyalty requires that the fiduciary discharge his duties "solely in the interests of the participants and beneficiaries." Id. § 1104(a)(1). While plaintiffs "must offer sufficient factual allegations to show that he or she is not merely engaged in a fishing expedition," the court "must also take account of [plaintiffs'] limited access to crucial information" when pleading ERISA claims. Braden , 588 F.3d at 598.

In Fifth Third Bancorp v. Dudenhoeffer , 573 U.S. 409, 134 S.Ct. 2459, 2470, 189 L.Ed.2d 457 (2014), the Supreme Court outlined a court's task in separating the "plausible sheep from the meritless goats" in a breach of fiduciary duty action under ERISA. That task requires "careful, context-sensitive scrutiny" of a plaintiff's allegations. Id. Moreover, a plaintiff fails to state a claim by alleging "from the vantage point of hindsight" that fiduciaries could have better managed an ESOP's investments. In re Target Corp. Sec. Litig. , 275 F.Supp.3d 1063, 1087 (D. Minn. 2017). Finally, given the difficulty in valuing ESOP privately-held stock, courts review such valuations deferentially. See Armstrong v. LaSalle Bank Nat'l Ass'n , 446 F.3d 728, 733 (7th Cir. 2006) ("We must not seat ESOP trustees on a razor's edge."); see also Kool v. Coffey , 300 F.3d 340, 362-63 (3d Cir. 2002) (acknowledging "the extremely difficult task of valuing the stock of a company which is privately owned").

DISCUSSION

I. Duty of Prudence

Plaintiffs allege two breach of prudence claims. First, Plaintiffs claim that that the Trustees and other "senior executives" manipulated data provided to the independent appraiser to inflate Lifetouch's stock value in 2015 and 2016.² Second, Plaintiffs assert that Defendants should have investigated the evident discrepancy between the 2015 and 2016 valuations and Lifetouch's financial reality and removed imprudent investments.

A. Defendants Artificially Inflated Lifetouch's Stock Value in 2015 and 2016

Defendants argue that Plaintiffs fail to plead that Lifetouch's stock was overvalued in 2015 and 2016. First, Defendants assert that Plaintiffs do not plead with particularly, under Rule 9(b), that the Trustees fraudulently inflated Lifetouch's stock value. Second, Defendants argue that Lifetouch's stock drop in 2017 does not plausibly suggest that Defendants overvalued Lifetouch stock in 2015 and 2016. For the following reasons, the Court agrees.

1. Pleading Standard

The parties disagree as to what pleading standard applies. Defendants argue that Plaintiffs must plead the fraud-based allegation of data manipulation with particularity, as required by Rule 9(b). Although Rule 9(b) is not generally applied to ERISA claims, several district courts in this circuit have applied the heightened pleading requirement where fraudulent conduct is the basis of the alleged breach. Crocker v. KV Pharm. Co. , 782 F.Supp.2d 760, 784 (E.D. Mo. 2010) (collecting cases); In re ADC Telecommunications, Inc., ERISA Litig. , No. 03-2989, 2004 WL 1683144, at *3 (D. Minn. July 26, 2004) ("Plaintiffs' non-specific claims that certain Defendants engaged in ‘a scheme to deceive’ by improperly booking revenues to inflate stock value do not supply adequate detail to meet the particularity requirements of who, what, when, where, and how."). These decisions comport with Eighth Circuit precedent that Rule 9(b) applies to claims "grounded in fraud." Streambend Props. II, LLC v. Ivy Tower Mpls., LLC , 781 F.3d 1003, 1010 (8th Cir. 2015).

Plaintiffs nevertheless contend that ERISA claims need only be pleaded consistent with Rule 8. However, the cases cited by Plaintiffs...