The opinion of the court was delivered by: John T. Elfvin, Senior District Judge
HSBC filed a motion for summary judgment March 6, 2003.*fn2 Oral argument was heard and this matter was submitted May 30. For the reasons set forth below, HSBC's motion will be denied. Defendants Allen, Livingston and Panto (collectively "Outside Directors") filed a motion for summary judgment on June 4. On July 3 plaintiffs filed a motion for partial summary judgment seeking a declaration that the Outside Directors are [ Page 2]
fiduciaries. Oral argument was heard and these motions were submitted August 1. For the reasons set forth below, the Outside Directors' motion for summary judgment will be denied and plaintiffs' motion for partial summary judgment will be granted. On July 3 plaintiffs filed a motion seeking to strike various portions of affidavits submitted by the Outside Directors in support of their motion for summary judgment. Although oral argument has not yet been heard on plaintiffs' motion, it will be denied as moot in light of the denial of the Outside Directors' motion for summary judgment.
Azon Corp. insiders sold $25 million of their Azon stock to the Azon Employee Stock Ownership Plan ("AESOP") in a transaction dated September 21, 1999 (the "Stock Sale"). To effectuate the Stock Sale, Azon borrowed $25 million from the Manufacturers and Traders Trust Company. Azon loaned this money to AESOP, which used it to purchase shares from the Azon insiders.*fn3 Pursuant to an agreement dated September 20, 1999, HSBC allegedly served as a directed trustee during the Stock Sale when it purchased and held the Azon shares for AESOP HSBC received direction from a named AESOP fiduciary, James L. Donovan, who directed HSBC to close the transaction on September 21, 1999.
Plaintiffs claim that the Azon insiders obtained an excessive price in the Stock Sale and that in so doing, they burdened Azon with more debt than it could carry. Plaintiffs further claim that this debt burden destroyed the value of the Azon stock AESOP acquired in the Stock Sale as well as its previously held Azon stock. With respect to HSBC, plaintiffs [ Page 3]
essentially allege that it violated its fiduciary duty by permitting the Stock Sale to close without having conducted an adequate investigation.
Plaintiffs filed suit September 20, 2002 against the Azon insiders and the AESOP Trustee, HSBC, for alleged breaches of defendants' fiduciary duties in violation of the Employee Retirement Income Security Act of 1974 ("ERISA"). On April 22, 2003 a class was certified consisting of current and former Azon employees who were damaged when the Azon stock held by AESOP became practically worthless when Azon filed for bankruptcy on July 24, 2002.
Rule 56(c) of the Federal Rules of Civil Procedure ("FRCvP") states that summary judgment may be granted only if the record shows "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." In other words, after discovery and upon a motion, summary judgment is mandated "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Summary judgment is thus appropriate where there is "no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).*fn4 [ Page 4]
With respect to the first prong of Anderson, a genuine issue of material fact exists if the evidence in the record "is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, at 248.*fn5 Stated another way, there is "no genuine issue as to any material fact" where there is a "complete failure of proof concerning an essential element of the nonmoving party's case ***." Celotex, at 323. Under the second prong of Anderson, the disputed fact must be material, which is to say that it "might affect the outcome of the suit under the governing law ***." Anderson, at 248.
Furthermore, "[i]n assessing the record to determine whether there is a genuine issue as to any material fact, the district court is required to resolve all ambiguities and draw all factual inferences in favor of the party against whom summary judgment is sought." St. Pierre v. Dyer, 208 F.3d 394, 404 (2d Cir. 2000) (citing Anderson, at 255). Nonetheless, mere conclusions, conjecture, unsubstantiated allegations or surmise on the part of the non-moving party are insufficient to defeat a well-grounded motion for summary judgment. Goenaga, at 18.*fn6 [ Page 5]
Even assuming arguendo that HSBC was a directed trustee, HSBC's summary judgment motion must be denied at this time. First, no discovery has taken place.*fn7 There exist genuine issues of material fact whether, inter alia, Donovan's direction to HSBC to complete the Stock Sale was contrary to ERISA. See Koch v. Dwyer, 1999 WL 528181, at *9-11 (S.D.N.Y. 1999) (denying directed trustee's motion to dismiss because it would have acted contrary to ERISA if it was "aware that the direction to invest in JWP common stock was imprudent or that the fiduciaries' direction to make that investment was based on an inadequate investigation"). Likewise, if HSBC had been aware that it was imprudent to purchase Azon stock — in light of, inter alia, the declining value and fortunes of the company — or that Donovan had undertaken an inadequate investigation, HSBC could then be liable for knowingly acting contrary to ERISA. See 29 U.S.C. § 1103(a)(1) (1999); In re Worldcom, Inc., 263 F. Supp.2d 745, 761 (S.D.N.Y. 2003) (holding that a directed trustee is obligated "to follow only `proper' directions of the [named fiduciary], directions which were made in accordance with the terms of the [Plan] and which were not `contrary to' the ERISA statute"); id. at 762 ("To the extent, therefore, that [the directed trustee] is alleged to have followed instructions to invest employee funds in WorldCom stock when a prudent trustee would know that WorldCom's decision to continue to offer its own stock to [ Page 6]
its employees as an investment option was imprudent, or otherwise in violation of WorldCom's obligations under ERISA, then [the directed trustee] may be liable as an ERISA fiduciary.").*fn8 Indeed, it would be inappropriate to grant HSBC's motion for summary judgment before plaintiffs have had an opportunity to discover, inter alia, what HSBC knew and when concerning the prudence of the Stock Sale and whether such was contrary to ERISA.*fn9 HSBC contends that, "after appropriate inquiry, [it] found no violation of ERISA." [ Page 7]
Def.'s Mem of Law, at 2. It is, however, premature to decide whether HSBC engaged in "appropriate" inquiry or whether HSBC considered the Stock Sale to be violative of ERISA.
Second, plaintiffs have adequately alleged that HSBC may be liable as a co-fiduciary if it either participated in or knew or should have known that Donovan was breaching his fiduciary duty but failed to remedy such violation. See 29 U.S.C. § 1105(a) (1999).*fn10 Moreover, as noted above, this Court will not ...