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Acosta v. Reliance Trust Co.

United States District Court, D. Minnesota

August 9, 2019

R. Alexander Acosta, Secretary of Labor, U.S. Department of Labor, Plaintiff,
v.
Reliance Trust Company; Steven R. Carlsen; Paul A. Lillyblad; Kelli Watson; and Kurt Manufacturing Company, Inc., Employee Stock Ownership Plan, Defendants and Third-Party Plaintiffs,
v.
Gretchen Kuban Rode, in her capacity as Personal Representative of the Estate of William G. Kuban, Third-Party Defendant.

          Ruben R. Chapa, Elizabeth Arumilli, and Kevin M. Wilemon, for Plaintiff.

          William B. Brockman and Pierce G. Hand IV, Bryan Cave Leighton Paisner LLP, and Bradley R. Armstrong and Terese A. West, Moss & Barnett PA, for Defendant and Third-Party Plaintiff Reliance Trust Company.

          Jonathan P. Norrie, Alan I. Silver, Brittany B. Skemp, and Casey D. Marshall, Bassford Remele PA, for Defendants and Third-Party Plaintiffs Steven R. Carlsen, Paul A. Lillblad, and Kelli Watson, and Defendant Kurt Manufacturing Company, Inc., Employee Stock Ownership Plan.

          David R. Marshall, Kyle W. Ubl, Leah C. Janus, and Marie Williams, Fredrikson & Byron PA, for Third-Party Defendant Gretchen Kuban Rode.

          MEMORANDUM OPINION AND ORDER

          SUSAN RICHARD NELSON, UNITED STATES DISTRICT JUDGE

         This case centers around a closely held Minnesota company called “Kurt Manufacturing Inc.” (“Kurt”), and around a sale of Kurt stock that occurred on October 5, 2011. In that sale of stock, Kurt's then-majority shareholder and board chairman, William Kuban, sold his 75% stake in Kurt to Kurt's “employee stock ownership plan, ” or “ESOP, ”[1]so as to allow the ESOP to own 100% of Kurt. The ESOP entered into this transaction after the non-Kuban-related members of Kurt's board of directors, i.e., Defendants Carlsen, Lillyblad, and Watson (“the Directors”), vetted the transaction, and then appointed an independent trustee, i.e., Defendant Reliance Trust Company (“Reliance”), to negotiate the final price on the ESOP's behalf.

         In the view of the United States Department of Labor (“DOL”), however, in orchestrating this transaction, Defendants (both the Directors and Reliance) failed to abide by the fiduciary duties they owed the ESOP, as set forth in the Employee Retirement Income Security Act of 1974 (“ERISA”).[2] More specifically, DOL alleges, Defendants breached their duties of loyalty and prudence to the ESOP because they approved the at-issue transaction despite being aware of data suggesting that Kuban's selling price was unreasonably high. As a result, DOL claims, the ESOP paid far more for Kuban's share of the company than it should have, and thus enriched Kuban (and Defendants) at the expense of Kurt employees.

         Defendants dispute DOL's theory of the case on two fronts. First, on the merits, Defendants argue that the ESOP did not overpay for Kuban's share of the company, and that they acted with prudence and loyalty toward the ESOP at all relevant times. Second, from a procedural perspective, Defendants argue that, even assuming an ERISA violation occurred, they should not have to pay DOL damages. Rather, Defendants contend, because of an indemnification obligation allegedly to them by Kuban, Kuban's Estate should pay those damages. (Kuban is deceased and is now represented by his surviving daughter, Gretchen Kuban Rode.) Accordingly, both sets of Defendants have brought third-party complaints against Rode, on grounds that, if DOL succeeds on the merits of its ERISA suit, Rode must indemnify them for their losses.

         The Court now considers one motion related to each of these two defenses. First, the Directors (but not Reliance) have moved for judgment on the pleadings, contending that DOL has failed to set forth a plausible set of fiduciary breach allegations against them. Second, Rode has moved to dismiss both third-party complaints filed against her, arguing that there are no contractual, equitable, or statutory grounds under which she must indemnify Defendants.

         After carefully considering the parties' arguments and the applicable case law, the Court denies the Directors' motion for judgment on the pleadings, and grants Rode's motion to dismiss the third-party complaints.

         I. BACKGROUND

         A. Factual Background

         1. The Parties

         The United States Department of Labor (“DOL”) is the plaintiff in this case. DOL is a federal agency tasked with enforcing ERISA, among other statutes. Congress has authorized DOL to bring civil suits against persons who fail to comply with ERISA. See 29 U.S.C. §§ 1132(a)(2), (a)(5).

         Defendants are all connected to Kurt, a privately-owned Minnesota corporation that provides a variety of industrial services, such as “fabricating” and “die casting.” (Am. Compl. [Doc. No. 46] ¶ 12.) For ease of reference, however, the Court will treat the “Kurt Defendants” as four distinct entities.

         The first defendant is Third-Party Defendant Gretchen Kuban Rode, who currently serves as the personal representative for the Estate of William G. Kuban (“Rode”). (See Directors' Third-Party Compl. [Doc. No. 100] ¶ 2.) Before the at-issue ESOP transaction, Kuban owned 75.6% of Kurt, and served as the chairman of Kurt's board of directors. (Id.) In 2012, sometime after selling his stake in Kurt, Kuban died, and thereafter left his daughter, Rode, to administer his estate. (Id.) At the time of the at-issue transaction, Rode also served on Kurt's board of directors.

         The second defendant (or, more accurately put, group of defendants) consists of Steven R. Carlsen, Paul A. Lillyblad, and Kelli Watson (collectively, “the Directors”). At all relevant times, Carlsen was Kurt's President, Lillyblad was Kurt's Vice President of Finance, and Watson was Kurt's Vice President of Human Resources. (Am. Compl. ¶¶ 16-18; see also Directors' Am. Answer [Doc. No. 100] ¶ 10 (noting that all three individuals are still executives at Kurt, albeit with slightly different titles).) In October 2011, these three individuals, together with Kuban and Rode, comprised the entirety of Kurt's five-member board of directors. (Am. Compl. ¶¶ 16-18.)

         The third defendant is Reliance Trust Company, Inc. (“Reliance”), an independent trust company based in Atlanta, Georgia. (Reliance Third-Party Compl. [Doc. No. 90] ¶ 1.)

         The fourth and final defendant is Nominal Defendant[3] Kurt Manufacturing Company, Inc. Employee Stock Ownership Plan (“ESOP”), which is a “pension plan” subject to ERISA's regulatory scheme. (Am. Compl. ¶ 5 (citing 29 U.S.C. § 1002(2)); see also Martin v. Feilen, 965 F.2d 660, 664 (8th Cir. 1992) (explaining that ESOPs are pension plans that invest in “stock of the employer creating the plan, ” and are therefore intended to be “both an employee retirement benefit plan and a technique of corporate finance that encourage[s] employee ownership”).) Until October 5, 2011, the ESOP controlled the portion of Kurt that Kuban did not control, i.e., 24.4% of the company. (Id. ¶ 15.) Since that date, however, the ESOP has owned 100% of Kurt's stock. (Id. ¶ 65.)

         2. The October 5, 2011 Transaction

         a. The Undisputed Facts[4]

         The basic facts and timeline surrounding the October 5, 2011 Kuban-ESOP stock transaction are undisputed. At some point in late 2010 or early 2011, Kurt's board of directors (who, at the time, were also serving as the ESOP's trustees) began “exploring” the idea of “selling the company to a third party.” (Am. Compl. ¶ 32.) However, upon learning that selling Kurt to a willing third-party buyer, such as a private equity firm, would likely entail “breaking Kurt apart, ” Kurt's board decided to consider an “inside” transaction instead. (Id. ¶ 31.) That is, instead of selling Kurt to an outside private equity firm, Kurt's board determined that perhaps Kuban could sell his 75% stake in the company to the ESOP, i.e., Kurt's only other shareholder, and thus allow Kurt's ownership to stay “in house.” As such, in March 2011, Kurt's board began working with a financial advisory company, Chartwell Business Valuation, LLC (“Chartwell”), on a proposed “ESOP transaction.” (Id. ¶¶ 31, 33.)

         On April 28, 2011, after receiving Kurt's “financial information” and “future projections, ” Chartwell made a “detailed presentation” to Kurt's board. (Id. ¶ 34.) In this presentation, Chartwell “estimated [that] the equity purchase value for the Kuban shares was $28.7 million.” (Id.) As a result of this presentation, on June 3, 2011, Kurt's board retained Chartwell to “direct and/or assist in the coordination, design, economic analysis, and execution of the ESOP transaction.” (Id. ¶ 35.)

         On July 11, 2011, following more meetings between Chartwell and Kurt's board, Chartwell sent Kurt's board a “final lender material packet” valuing Kuban's share of Kurt at $39.1 million, which, for unclear reasons, was over $10 million higher than Chartwell's initial projection in April. (Id. ¶ 37.) Moreover, on a per-share basis, Chartwell's $39.1 million number valued Kurt shares at approximately $85 per share. (Id. ¶ 58.) This valuation was notable because it stood in marked contrast to prior valuations of Kurt stock. (See id. ¶¶ 19-30 (noting that, between July 1999 and October 2010, Kurt's stock had been consistently valued between $13.86 per share and $33.44 per share); Directors' Am. Answer ¶¶ 11-12 (admitting that, with one exception, the Directors had been aware of these valuations prior to the ESOP transaction).)

         A week after receiving Chartwell's “final” $39.1 million valuation, on July 18, 2011, Kurt's President, Director Defendant Carlsen, “signed an engagement letter with Reliance, ” which required Reliance to act as the ESOP's “trustee” for purposes of the forthcoming ESOP transaction. (Id. ¶ 42.) Specifically, Reliance agreed to “assume fiduciary responsibility as a discretionary trustee for determining, in consultation with its advisors, the prudence of the [ESOP's] purchase, that the purchase price in the Proposed Transaction [did] not exceed ‘adequate consideration' as that term is defined [in ERISA] and that the Proposed Transaction [was] fair to the ESOP from a financial viewpoint.” (Id.) The engagement letter also stated that Reliance would have “complete and absolute discretionary authority in investigating and evaluating the Proposed Transaction.” (Id.) Shortly after signing this engagement letter with Reliance, Kurt's board of directors resigned as “Trustees of the ESOP, ” and “executed a Written Resolution appointing Reliance as the Trustee of the ESOP.” (Id. ¶ 52.)[5]

         After taking over as the ESOP's trustee, Reliance hired the financial advisory firm Stout Risius Ross (“SRR”) to produce a “written fairness report” detailing what a fair and reasonable buyer would pay for Kuban's share of Kurt under normal market conditions. (Id. ¶¶ 48-51.) SRR produced that report shortly thereafter, on August 19, 2011. (Id. ¶ 54.) In its report, SRR “concluded that the fair market value of Kurt's equity not already owned by the ESOP was between $34.2 million and $43.1 million, with a midpoint of $39 million.” (Id. ¶ 56.) Consequently, “SRR identified the price to be paid by the ESOP for the stock [as] $39 million, or $85.22 per share.” (Id. ¶ 58.) Notably, this recommended price tag was the same “final” number Kurt's board had received from Chartwell about a month earlier, before Kurt had hired Reliance to serve as the ESOP's new trustee.

         Reliance adopted SRR's recommendation in full and, on October 5, 2011, Kuban sold his 75% stake in Kurt to the ESOP for $39 million. (Id. ¶ 64.) The agreement “was signed by Kuban as selling shareholder, by Reliance as ESOP trustee, and by Carlsen as Kurt President.” (Id. ¶ 64.) The ESOP financed the transaction by taking out loans from Kurt (for $20 million) and from Kuban himself (for $19 million). (Id. ¶¶ 66-67.) Moreover, as part of this transaction, Kurt's board “established a Stock Appreciation Rights (SAR) plan for key officers, ” including the Director Defendants, which allowed those officers to be awarded Kurt stock as bonus payments. (Id. ¶ 70.) In addition, to ensure that soon-to-retire Kurt employees did not lose their ESOP investment if Kurt's share price suddenly dropped after the ESOP transaction, Carlsen (Kurt's President) and Reliance executed a “Price Support Agreement” on October 5, 2011, too. (Id. ¶¶ 71-72.) However, in contrast to the $85 per-share sales price, the Price Support Agreement set Kurt's “fair market value” at only $55.29 per share. (Id.)

         With its work complete, Reliance resigned as the ESOP's trustee on October 28, 2011. (Id. ¶ 74.) A few weeks later, Kurt's board of directors appointed Bremer Trust, N.A. (“Bremer”) as “the new ongoing trustee for the ESOP.” (Reliance Third-Party Compl. ¶ 22.) Bremer remains in that position today. (Id. ¶ 24.)

         b. The Disputed Facets of the Transaction

         As is evident from even a cursory comparison of DOL's Complaint and the Directors' Amended Answer, however, several important facets of this transaction are hotly disputed.[6]

         First, although DOL alleges that the Directors essentially organized and approved the ESOP transaction (including the final $39 million price tag) “prior to engaging Reliance, ” and therefore only hired Reliance for appearance's sake, the Directors point to the Reliance engagement letter and contend that the letter single-handedly shows that the Directors “had no ability to control the terms of” the ultimate ESOP transaction. (Compare, e.g., Am. Comp. ¶¶ 40, 46 with Directors' Am. Answer ¶¶ 19-20.)

         Second, although DOL alleges that Chartwell's jump from valuating the Kuban stock at $28.7 million on April 28, 2011 to valuating that same stock at $39.1 million on July 11, 2011 did not make financial sense, and that Director Lillyblad (Kurt's Vice President of Finance) had been told as much by a lender in a late July 2011 e-mail exchange, the Directors counter that the $28.7 million valuation was merely an “initial estimate based on incomplete information, ” and that the e-mail exchanged cited by DOL in its complaint does not mean what DOL infers it to mean. (Compare, e.g., Am. Comp. ¶¶ 34-41 with Directors' Am. Answer ¶¶ 14-18.)

         Third, although DOL alleges that the prior valuations of Kurt's stock should have put the Directors on notice that a $85 per share sales price was unreasonably high, the Directors counter that sound economic and practical reasons justified the price differential. (Compare, e.g., Am. Comp. ¶ 82 with Directors' Am. Answer ¶¶ 82-83 (listing at least six such reasons).)

         Fourth, although DOL alleges that the Directors “failed to monitor” Reliance as it negotiated on behalf of the ESOP, and did not stop Reliance (and/or SSR) from simply rubber-stamping the (purportedly excessive) July 11 $39 million Chartwell valuation, the Directors counter that they “were actively engaged in ensuring the growth projections that were utilized by Reliance and SRR were reasonable.” (Compare, e.g., Am. Comp. ¶ 82 with Directors' Am. Answer ¶¶ 24-25.)

         Fifth, and finally, although DOL alleges that the $55 per share price used in the Price Support Agreement provides further evidence that the Directors knew the $85 per share was unreasonably high at the time of the ESOP transaction, the Directors counter by, again, pointing out various economic rationales justifying the price differential. (Compare, e.g., Am. Comp. ¶¶ 71-72, 82 with Directors' Am. Answer ¶¶ 36, 44.)

         3. The Indemnification Agreements

         Setting aside for the moment the substance of the October 5, 2011 transaction, the Court also notes that, as part of this transaction, the at-issue parties ...


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