United States District Court, Western District of New York
August 19, 2003
CARL BEAM, VINCENT LOMONACO, RICHARD DIMMICK, GEORGE PITMAN, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS, VS. HSBC BANK USA, AZON CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN, WILLIAM L. BORDAGES, JANET S. BORDAGES, JOHN BORDAGES, NICOLE BORDAGES, JAMES G. BANNON, WILLIAM BANNON, JUDITH BALLEW, ROBERT W. ALLEN, ROBERT LIVINGSTON, TONY PANTO AND JAMES L. DONOVAN, DEFENDANTS
The opinion of the court was delivered by: John T. Elfvin, Senior District Judge
MEMORANDUM and ORDER*fn1
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 grant HSBC's summary judgment before plaintiffs have had the benefit of discovery.
With respect to the Outside Directors' motion for summary judgment, denial is appropriate at this time for several reasons. First, there has been no discovery. Summary [ Page 8]
judgment is thus inappropriate at this time for the reasons discussed above.*fn11 Second, genuine issues of material fact remain. For example, the extent, if any, of the Outside Directors' fiduciary status remains to be determined. Indeed, a person is an ERISA fiduciary to the extent that, inter alia, he "exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. § 1002(21)(A) (1999) (emphasis added). Moreover, Allen and Panto contend that "it is clear that *** [they based their] decision to appoint Mr. Donovan and HSBC on the advice of independent and outside professionals and on the information they were provided by others." Defs.' Mem. of Law, at 12. What Allen and Panto knew or thought when they appointed Donovan and HSBC is best determined after discovery.*fn12 Indeed, it would be odd to dismiss a defendant from a case at this early stage based solely on a self-serving affidavit that says "I am innocent." Accordingly, the Outside Directors' motion for summary judgment will be denied.
Inasmuch as the Outside Directors' motion for summary judgment will be denied, plaintiff's motion to strike the Outside Directors' affidavits in support of such will be denied as moot. [ Page 9]
With respect to plaintiffs' motion for partial summary judgment, such will be granted. Section 6.01 of the Trust Agreement requires Azon to consent in writing in order for the Trustee to borrow money. Consequently, the Board members, including the Outside Directors, were fiduciaries because they authorized the disposition of AESOP assets where the Board authorized the Trustee to borrow the funds required for AESOP to enter into the Stock Sale. See 29 U.S.C. § 1002(21)(A) (providing that a person is an ERISA fiduciary to the extent that, inter alia, he "exercises any authority or control respecting management or disposition of its assets.") (emphasis added).*fn13 Moreover — and as they concede to some extent — the Outside Directors had fiduciary duties with respect to the appointment, monitoring and removal of the trustee and the named fiduciary.*fn14 Nonetheless, the Court finds it premature — to wit, before any discovery has been taken — to make a determination as to the scope of the Outside Directors' fiduciary status. Indeed, as plaintiffs [ Page 10]
have noted, the scope of such status is a fact-intensive inquiry.*fn15 Accordingly, plaintiffs' summary judgment motion will be granted.*fn16
Accordingly, it is hereby ORDERED that HSBC's motion for summary judgment is denied, that the Outside Directors' motion for summary judgment is denied, that plaintiffs' motion for partial summary judgment is granted and that plaintiffs' motion to strike is denied as moot.*fn17
*fn2 HSBC seeks summary judgment on the ground that, inter alia, it was a directed trustee that was required to follow the instructions given by the named fiduciary with respect to the transaction in issue unless such violated pertinent law. HSBC contends that, after appropriate inquiry, it determined that the transaction did not violate any such law and it therefore acted as directed by the named fiduciary.
*fn3 See generally Benefits Comm. of Saint-Gobain Corp., 313 F.3d 919, 925 (6th Cir. 2003) (discussing leveraged employee stock ownership plan transactions).
*fn4 Of course, the moving party bears the burden of showing that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995) (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970)). If the moving party makes such a showing, the non-moving party must then come forward with evidence of specific facts sufficient to support a jury verdict in order to survive the summary judgment motion. Ibid.; FRCvP 56(e).
*fn5 See also Anderson, at 252 ("The mere existence of a scintilla of evidence in support of the [movant's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [movant].")
*fn6 See footnote 4.
*fn7 Miller v. Wolpoff & Abramson, L.L.P., 321 F.3d 292, 303 (2d Cir. 2003) (setting forth the showing that must be made in a FRCvP 56(f) affidavit when a party resists a summary judgment motion on the ground that discovery is needed in order to respond). Upon reviewing the affidavit of R. Joseph Barton, Esq., this Court finds that plaintiffs have substantially complied with the requirements set forth by FRCvP 56(f). See ibid. Indeed, HSBC's knowledge is an issue inherently within HSBC's control and one that plaintiffs cannot adequately address without discovery.
*fn8 See also Kling v. Fidelity Mgt. Trust Co., 2003 WL 21554070, at *10 (D. Mass. 2003) (exempting directed trustee from fiduciary status but denying motion to dismiss because it held that the directed trustee "may still be found liable if a jury determines that [the directed trustee] followed directions that were contrary to the Plan or ERISA"); ibid. (holding that, to find a directed trustee liable, a direction does not have to be facially contrary to the Plan or ERISA); Koch, at *9-10 (holding that the proper inquiry for a directed trustee is "whether a given direction is contrary to ERISA *** [and that] [a]n imprudent investment undertaken without adequate investigation constitutes a breach of fiduciary duty and is contrary to ERISA."); cf. Maniace v. Commerce Bank of Kansas City, N.A., 40 F.3d 264, 267-268 (8th Cir. 1994) (finding that plaintiffs "failed to establish that Commerce's handling of the ESOP was contrary to Plan directives or contrary to ERISA"), cert, denied, 514 U.S. 1111 (1995); Ershick v. United Missouri Bank, 948 F.2d 660, 668-669 (10th Cir. 1991) (finding that district court's ruling that directed trustee had not violated ERISA was not clearly erroneous). But see Grindstaff v. Green, 133 F.3d 416, 425-426 (6th Cir. 1998) (holding that directed trustee had no duty to investigate the merits of directives given by a named fiduciary); LaLonde v. Textron, Inc., 2003 WL 21517334, at *6 (D.R.I. 2003) (granting directed trustee's motion to dismiss because "[directed trustees *** cannot be held liable for following the investment instructions provided by a plan's named fiduciaries"); Beauchem v. Rockford Prods., 2003 WL 1562561, at *2 (N.D. Ill. 2003) (granting directed trustee's motion to dismiss because the directed trustee was a non-fiduciary that lacked "any discretionary authority concerning matters related to RP stock held by the ESOP"). Maniace is distinguishable because plaintiffs herein have had no discovery; they have thus lacked the opportunity to establish that HSBC acted contrary to ERISA. Ershick is likewise distinguishable because judgment was rendered in favor of the directed trustee after trial. Moreover, "Maniace does not *** require a finding that a directed trustee can never be a fiduciary." Worldcom, at 762 (noting that Maniace held that directed trustees are subject to the prudent person standard of care). Inasmuch as plaintiffs allege "facts including the rapid decline in stock value over several years coupled with continued investment in the declining stock," this case is akin to Koch and is distinguishable from In re McKesson HBOC, Inc. ERISA Litig., 2002 WL 31431588, at *11-12 (N.D. Cal. 2002).
*fn9 Miller, supra note 7, at 303 (holding that "summary judgment should only be granted if 'after discovery, the nonmoving party has failed to make a sufficient showing on an essential element of [its] case with respect to which it has the burden of proof *** [and that] [o]nly in the rarest of cases may summary judgment be granted against a plaintiff who has not been afforded the opportunity to conduct discovery.'") (citation omitted).
*fn10 Maniace, supra note 8, at 268 (holding that a claim for co-fiduciary liability would require plaintiffs to establish (1) a co-fiduciary's underlying violation and (2) that the directed trustee either participated in such or knew but failed to remedy such violation). As noted in Firstier Bank, N.A. v. Zeller, 16 F.3d 907, 911 (8th Cir. 1994), section 1103(a) modifies but does not eliminate "the trustee's fiduciary duty when handling plan assets." Indeed, when a directed trustee receives direction from a named fiduciary, "the law of trusts does not excuse a compliant trustee from all fiduciary responsibility:
"[W]here the holder of the power [to direct the
trustee] holds it as a fiduciary, the trustee is
not justified in complying with his directions if
the trustee knows or ought to know that the holder
of the power is violating his duty to the
beneficiaries as fiduciary in giving the
Accordingly, Firstier holds that
"an ERISA trustee who deals with plan assets in
accordance with proper directions of another
fiduciary is not relieved of its fiduciary duties
to conform to the prudent man standard of care,
see 29 U.S.C. § 1104(a); to attempt to
remedy known breaches of duty by other fiduciaries,
see 29 U.S.C. § 1105(a); and to avoid
prohibited transactions, see
29 U.S.C. § 1106." Ibid.
See Miller, supra note 7, at 303. Indeed, the cases cited by the Outside Directors stand for the proposition that a district court has discretion to deny additional discovery — as opposed to the proposition that no discovery be allowed. See e.g., Paddington Partners v. Bouchard, 34 F.3d 1132
, 1138 (2d Cir. 1994); Gray v. Town of Darien, 927 F.2d 69
, 74 (2d Cir. 1991); Capital Imaging Assocs. v. Mohawk Valley Med. Assocs., 725 F. Supp. 669, 680 (N.D.N.Y. 1989).
*fn12 Likewise, a determination as to the Outside Directors' knowledge concerning events that could give rise to liability under section 1105(a) is best made after discovery.
*fn13 See also Reach v. U.S. Trust Co., N.A., 234 F. Supp.2d 872, 882-883 (C.D. Cal. 2002) (holding that outside directors were fiduciaries because they, inter alia, "adopted a resolution approving the concept of the proposed ESOP transaction and authorizing [the company's officers] to take all steps necessary to complete the transaction ***"); cf. Mohler v. Unger, 1994 WL 1860578, at *16 (S.D. Ohio 1994) (holding that an inside director was a fiduciary based on her "discretionary control of the plan through her actions in approving the ESOP Loan and leveraged buyout ***"); Montgomery v. Aetna Plywood, Inc., 231 F.3d 399, 404 (7th Cir. 2000) (permitting case to go to trial against several outside directors who were accused of permitting ESOP to sell its shares to the company at an insufficient price), cert. denied, 532 U.S. 1038 (2001).
*fn14 See e.g., Defs.' Reply Mem. of Law, at 7; Liss v. Smith, 991 F. Supp. 278, 310 (S.D.N.Y. 1998) ("It is well-established that the power to appoint plan trustees confers fiduciary status."); id. at 311 ("The power to appoint and remove trustees carries with it the concomitant duty to monitor those trustees' performance."); Keach, supra note 13 at 882-883 (holding that outside directors who had selected trustee were unquestionably fiduciaries).
*fn15 See Pls.' Mem. of Law, at 20 ("The Extent of Defendants' Fiduciary Status Is A Factual Issue Requiring Discovery"); Keach, supra note 13, at 882 ("ERISA ties fiduciary responsibilities to a person's actual authority, and therefore, that person is a fiduciary only `to the extent' that he or she exercises control or authority over the plan.").
*fn16 The Court, however, will not determine the scope of the Outside Directors' fiduciary status at this time.
*fn17 The parties are strongly encouraged to explore settlement at this time. [ Page 1]