The opinion of the court was delivered by: DUFFY
KEVIN THOMAS DUFFY, D.J.:
These two actions arise primarily from a transaction finalized on December 9, 1981 in which Harper & Row, Publishers, Inc. ("Harper & Row") terminated its Retirement Plan, liquidated the fund and recaptured the excess contributions in order to purchase approximately one-third of the outstanding shares of Harper & Row stock from defendant Minneapolis Star & Tribune Company ("MST") after being notified by MST that it intended to sell the stock. The plaintiffs in the first action ("District 65 action") include District 65 of the United Auto Workers Union ("District 65") which represents approximately 15 percent of Harper & Row's employees and Renee Cafiero and William Monroe who are Harper & Row employees and participants of the employee benefit plans. The second action ("Harwood action") was commenced by Raymond Harwood, a stockholder, former president of Harper & Row and participant in the Retirement Plan. The two other plaintiffs in the Harwood action, Carolyn Reed and Glen Howard, were formerly associated with Harper & Row and are participants in the Retirement Plans. The defendants in both actions are the same with three exceptions. The defendants in common include Harper & Row, MST, and directors on the Board of Directors of Harper & Row.
Two of the MST defendants in both actions are John Cowles, Jr. and Otto A. Silha who were directors of Harper & Row between February 1, 1981 and July 28, 1981.During this time, they were also directors of MST. Fred A. Taylor, a defendant in the Harwood action, was a director of Harper & Row until August 31, 1981.
Defendants Harper & Row and MST move to dismiss and move for summary judgment in both actions. Defendants Prudential Insurance Company of America ("Prudential") moves alternatively to dismiss and for summary judgment in the District 65 action. The Pension Benefit Guaranty Corporation ("PBGC") moves to dismiss the District 65 Complaint. Defendant Fred Taylor moves alternatively to dismiss and for summary judgment in the Harwood action. Plaintiff UAW moves for summary judgment on its complaint. Additionaly, there are several miscellaneous motions pending that concern discovery, amendments to complaints, and class claims.
In February 1981, MST notified Harper & Row that it intended to dispose of its entire position in Harper & Row which consisted of 1,017,630 shares of stock. The MST holdings represented one-third of the outstanding shares of Harper & Row stock. After learning of MST's decision to sell its shares of Harper & Row stock, a committee of outside directors was formed by Harper & Row to review the possibility of purchasing the stock from MST.
The Board of Directors of Harper & Row engaged Kidder, Peabody & Co. ("Kidder, Peabody"), an investment banking firm, to render a financial opinion regarding the feasability of purchasing the MST shares.
Harper & Row planned to finance the stock purchase in part by terminating the Harper & Row Publishers, Inc. Retirement Plan.
After purchasing annuities to provide for the present value of accrued benefits for all employoees covered by the Retirement Plan, Harper & Row anticipated an excess fund of $10.2 million. The balance of the purchase price was to be financed from the sale of real property ($5 million), the purchase of Harper & Row stock by the Harper & Row employee profit-sharing plan ($2 million) and loans $3.1 million). See Letter from Norman L. Cannon, Vice President and Treasurer, Harper & Row, to MST (September 15, 1981) (Plaintiff District 65 Exh. 9).
Harper & Row thereafter commenced negotiations with MST in July 1981 for the purchase of the shares held by MST and in August 1981 a tentative agreement was reached. In August, the Harper & Row stockholders, current employees and retireees were notified about the tentative agreement and a notice of intent to terminate the Retirement Plan was filed with the PBGC. Harper & Row also applied to the Internal Revenue Service ("IRS") for a determination that the termination of the Retirement Plan would not adversely affect its qualified status under the Internal Revenue Code.
On November 6, 1981, the PBGC issued a Notice of Sufficiency pursuant to Employee Retirement Income Security Act ("ERISA") § 4041(b), 29 U.S.C. § 1341(b), which stated that the assets of the Plan would be sufficient to satisfy all obligations concerning guaranteed benefits. Affidavit of Edward A. Miller ("Miller Affidavit"), Exh. J. On November 20, 1981, the IRS issued a determination letter finding that the termination of the Retirement Plan "does not adversely affect its qualification for Federal tax purposes." Miller Affidavit, Exh. K. The Retirement Plan was terminated effective August 31, 1981. In an agreement dated September 15, 1981, Harper & Row agreed to purchase the 1,017,630 shares of stock at the price of $20 per share.On the same day the Board of Directors held a regular quarterly meeting. At the meeting, the resignations of Directors John Cowles, Jr., Otto A. Silha, and Fred A. Taylor were recorded. The Board also ratified the Plan to purchase the MST shares and the proposed financing of that purchase.
On September 15, 1981, Kidder, Peabody submitted its opinion to Harper & Row in which it stated that "(i) the purchase is an action that the Company can reasonably take without materially and adversely affecting its financial ability to carry out its present plans, and (ii) the Purchase Price represents a fair value for the Shares." Miller AFfidavit, Exh. F. On October 7, 1981 the Board of Directors held a special meeting to review the purchase plan and the dissemination of information to shareholders concerning the proposed changes in the employee benefit plans. See Miller Affidavit, Exh. G. On December 9, 1981, the Harper & Row shareholders approved the proposed transactions at its annual meeting. To fund the benefits accrued in the Plan, Harper & Row entered into a contract with Prudential to purchase annuities for the present value of the accrued benefits for those members in the Plan whose accrued benefits had a present value of at least $1,000 and to pay lump-sum amounts to the other participants. The arrangement with Prudential was later amended and those participants with an accrued present value of between $250 and $1,000 could opt to either receive a lump-sum payment or an annuity. As a result of this transaction, approximately $9 million was recaptured by Harper & Row after the retirement fund was liquidated.
Two other transactions are challenged by plaintiffs. Harper & Row's Profit-Sharing Plan purchased 152,588 of the 1,017,633 shares from Harper & Row for approximately $11-5/8 per share for a total of $1.8 million. This purchase occurred after the Profit-Sharing Plan was amended to allow an investment of up to $2 million, but not more than one-half of the Plan assets, in Harper & Row shares.
The amended Profit-Sharing Plan provided that the price was to be determined by the average of the bid and asked quotation for Harper & Row shares reported in the over-the-counter market at the close of business on the day preceding the purchase. The amendment was approved by the Board of Directors on October 7, 1981 and reviewed again on December 9, 1981. Harper & Row's last transaction relevant to this dispute was the establishment of an Employee Stock Plan by a contribution of 865,045 Harper & Row stocks. The creation of the Employee Stock Plan was approved by the Board on October 7,1981 and approved by the shareholders on December 9, 1981.
The District 65 plaintiffs and the Harwood plaintiffs assert a variety of claims in their complaints arising out of the purchase by Harper & Row of over one million shares of Harper & Row stock held by MST, and the related transactions involving the Retirement Plan, Profit Sharing Plan and Employee Stock Plan. Plaintiffs in both actions allege that defendants' conduct violated ERISA. The District 65 plaintiffs allege in their proposed amended complaint violations of the federal and state securities laws and common law. As preliminary matters, District 65's motion for leave to amend its complaint, the consolidation of the two actions and the class action motions will be discussed.
A. District 65's Motion to Amend Its Complaint
The District 65 complaint was filed on June 3, 1982.A motion was thereafter filed on February 3, 1983 for leave to file an amended complaint. On April 26, 1983 plaintiffs filed a motion to amend the proposed amended complaint to add another subparagraph. Basically, the District 65 plaintiffs seek to add (1) an allegation that there was a breach of ERISA § 404(a)(1)(D), 29 U.S.C. § 1004(a)(1)(D), by the failure of the Trustee of the Profit-Sharing Plan Trust Agreement, Manufacturers Hanover Trust, to exercise independent authority and discretion concerning the purchase of the MST shares;
(2) an allegation that there exists an implied covenant not to terminate the Plan for other than legitimate business reasons and that this covenant was breached; (3) a claim based on common-law fraud; (4) claims under ERISA § 510, 29 U.S.C. § 1140; (5) and allegation of tortious interference with a contract and with existing rights under the retirement and profit-sharing plans; (6) a claim alleging a breach of District 65 collective bargaining agreement with Harper & Row; and (7) an allegation that the Internal Revenue Code § 401 was violated by Harper & Row.
Fed. R. Civ. P. 15(a) provides that leave to file an amended complaint should "be freely given when justice so requires. . . ." Leave to file an amended complaint is therefore granted freely absent bad faith, undue delay or prejudice to the opposing party. See Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962).
Defendant has not argued that it would suffer any prejudice or that the motion to amend is motivated by bad faith. Defendant argues that District 65's motion to amend should be denied because the addition of the "claims for relief would serve no useful purpose whatsoever" and because the proposed claims fail to state a claim upon which relief can be granted. Although the legal sufficiency of the proposed amended complaint may be tested on a motion to amend, I will grant the motion to amend and consider the amended complaint on defendants' motion to dismiss. See Campbell v. A.C. Petersen Farms, Inc., 69 F.R.D. 457, 460 (D. Conn. 1975).
B. Consolidation and Class Action
Defendants Harper & Row and Prudential move for an order dismissing plaintiffs' class claims.
Because both the District 65 and the Harwood actions were instituted as class actions, the possibility of consolidation whould be explored first. Fed. R. Civ. P. 42(a) provides that "[w]hen actions involving a common question of law or fact are pending before the court, it may order a joint hearing or trial of any and all matters in issue in the actions [or] it may order all the actions consolidated. . . ." Consolidation is a device that promotes judicial economy but does not change the rights of the parties in the separate suits.See Cole v. Schenley Industries, Inc., 563 F.2d 35, 38 (2d Cir. 1977).
The Harwood and District 65 actions are consolidated in order to avoid duplication of discovery. There are questions of law and fact common to both actions and no prejudice to the plaintiffs or defendants would result from the consolidation.See Lloyd v. Industrial Bio-Test Laboratories, Inc., 454 F. Supp. 807, 812 (S.D.N.Y. 1978); Torres v. Sachs, 381 F. Supp. 309, 311 (S.D.N.Y. 1974) (even where defendants are different, consolidation is proper where there are common questions of law and fact). Accordingly, the Harwood and District 65 actions are consolidated.
I turn to the issue of whether the action as consolidated will proceed as a class action.The Harper & Row defendants move to dismiss plaintiffs' class claims in both actions. Prudential moves to dismiss plaintiffs' class claims in the District 65 action. Fed. R. Civ. P. 23(c)(1) which provides that "[a]s soon as practicable after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained." In order to maintain an action on behalf of a class, the proposed representative must allege that "(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a). The District 65 plaintiffs allege the above elements but defendants argue only that leave to amend should be denied because plaintiffs failed to make the appropriate motion under the local court rules.
The Court Rules for the District Court in the Southern District of New York provides that the party asserting a class claim "shall move" within 60 days after filing the pleading in which the class claims are asserted. Rule 4(c). Rule 4(d), however, provides that the opposing party shall move within 30 days thereafter to dismiss the action as a class action. In the interests of judicial economy, I find that the absence of a formal motion by plaintiffs is not fatal. Because insufficient information was submitted by the parties, a determination as to class action status is postponed pending the submission by plaintiffs of information concerning the size and composition of the class and the possible methods of notification of such members.
C. Motions to Dismiss/Motions for Summary Judgment
Motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and motions for summary judgment pursuant to Fed. R. Civ. P. 56(b) have been made by several parties including plaintiff District 65 and defendants PBGC, Harper & Row, MST, Prudential, and Taylor.
In considering a motion to dismiss, the complaint should not be dismissed unless it appears that the plaintiffs could "prove no set of facts in support of [their] claim[s] which would entitle [them] to relief." Conley v. Gibson, 355 U.S. 41, 57, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
The standard governing a summary judgment motion is that the motion must be denied when there exists a genuine issue of disputed material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 1970, 26 L. Ed. 2d 142, 90 S. Ct. 1598). The movant has the burden of establishing that there is no disputed material fact and that he is entitled to judgment as a matter of law. Id.
1. District 65's Standing Under ERISA
Defendants move to dismiss the ERISA claims asserted by Districts 65 on the ground that District 65 has no standing.ERISA § 502(a), 29 U.S.C. § 1132(a) provides that an action may be brought by a "participant, beneficiary or fiduciary."
District 65 has no standing under the clear language or ERISA § 502(a) to assert claims under ERISA. District 65 is not a participant, beneficiary or fiduciary. See ERISA § 3(7), (8), (21), 29 U.S.C. § 1002(7), (8), (21). It therefore has failed to state a claim upon which relief can be granted on such claims.
The individual plaintiffs in the District 65 action, however, are proper plaintiffs. Throughout this opinion, any reference to the "District 65 plaintiffs" on the ERISA claims should be read to mean only the individual plaintiffs.
Additionally, District 65 argues that District 65 has standing and the court has jurisdiction with regard to the ERISA claims because it is merely representing its members who do qualify under ERISA § 502(e), 29 U.S.C. § 1132(e). The adoption of this argument would render the explicit language used in ERISA meaningless. Additionally, District 65 represents only a small portion of Harper & Row's employees who are participants or beneficiaries.
In the Harwood actions, two of the plaintiffs, Harwood and Howard, are not "participants, beneficiaries, or fiduciaries" with respect to the Profit-Sharing or Employee Stock Plans. They are therefore dismissed as party plaintiffs on the claims relating to ERISA violations of those two plans.
2. Termination of the Retirement Plan
The Retirement Plan provides for its termination and outlines the procedure by which the benefits are allocated upon termination. Section 9.01 provides that "[w]hile the plan is intended to be permanent, an Employer may terminate or partially terminate the Plan at any time." Miller Affidavit, Exh. I. The Trust Fund may then be liquidated subject to the approval of the PBGC and IRS. Id. § 9.04.
ERISA, § 4041, 29 U.S.C. § 1341 provides that the Plan administrator shall file a notice of termination with the PBGC prior to the effective date of termination. Plaintiffs filed its notice of intent to terminate its Plan effective August 31, 1981.See Plaintiffs' Exh. 10.In accordance with section 4041(b), the PBGC notified Harper & Row that "the assets of th[e] Plan will be sufficient as of your proposed date of distribution to discharge when due all obligations of the Plan with respect to guaranteed benefits." Miller Affidavit, Exh. J.
Acknowledging the right to terminate generally, District 65 Memorandum, at 63, it is asserted that under the circumstances in this case by terminating its Plan, Harper & Row violated ERISA's fiduciary standard ...