Foster v. Adams and Associates, Inc.

Background

Carol Foster and Theo Foreman brought a class action under the Employee Retirement Income Security Act (ERISA) on behalf of participants and beneficiaries of the Adams and Associates Employee Stock Ownership Plan (ESOP). The ESOP purchased all of Adams and Associates, Inc.’s stock for $33.5 million on October 25, 2012, from Roy Adams, Leslie Adams, and the Daniel Norem Revocable Trust. Plaintiffs alleged that Adams and Associates, Roy Adams, Leslie Adams, Daniel Norem, Joy Curry Norem, and the Trust breached fiduciary duties, engaged in prohibited transactions, failed to provide required disclosures, and improperly agreed to indemnification.

Plaintiffs moved for partial summary judgment on their breach-of-fiduciary-duty claim and their ERISA Section 406(a) prohibited-transaction claim. Defendants moved for summary judgment on all claims. The court also struck the parties’ separately filed evidentiary objections because they violated the district’s local rule. The court did not decide whether declarations by Daniel Norem and Roy Adams were “sham affidavits” because it did not rely on those declarations in deciding the motions.

Failure-to-monitor and breach-of-fiduciary-duty claims

Plaintiffs alleged that Roy Adams and Daniel Norem, who were directors and members of the ESOP Committee, failed to monitor ESOP Trustee Alan Weissman by withholding or providing inaccurate material information about small-business set-asides, possible contract losses, declining student enrollment, and other developments before the stock transaction.

The court held that a failure-to-monitor claim is derivative: it requires an underlying breach by the fiduciary who was allegedly not properly monitored. The court found factual disputes about whether Weissman breached his fiduciary duty by failing to investigate or discover material information that the Director Defendants allegedly did not provide to him or the valuation firm. Because those disputes could not be resolved on summary judgment, the court denied both sides’ motions on the failure-to-monitor breach-of-fiduciary-duty claims.

The court also explained that the monitoring duty recognized under ERISA Section 404 generally concerns selecting and retaining a trustee. Plaintiffs sought to extend that duty to require the appointing fiduciaries to disclose material, nonpublic information to the trustee. The court was not persuaded at this stage that the Director Defendants could never have such a duty, and it concluded that factual disputes prevented judgment for defendants.

Section 406(a) prohibited-transaction claim

ERISA Section 406(a) generally prohibits certain transactions between an employee benefit plan and a party in interest, unless an exemption applies. The relevant ESOP exemption permits a stock sale for adequate consideration, meaning fair market value determined in good faith by a fiduciary. Plaintiffs alleged that the Selling Shareholders knew the ESOP paid excessive consideration because Weissman lacked material information that could have reduced the stock’s value.

The court held as a matter of law that the Director Defendants were nonfiduciaries for purposes of the ESOP transaction. Their duty to monitor Weissman’s selection and retention did not mean they exercised the authority or control necessary to be fiduciaries for the transaction itself. The court found no evidence that they caused Weissman to engage in the transaction or controlled his independent decision.

For a nonfiduciary to be liable under Section 406(a), the person must have actual or constructive knowledge of the circumstances that made the transaction unlawful. The court granted defendants’ motion as to Leslie Adams and Joy Curry Norem. Plaintiffs had conceded that Norem lacked the required knowledge, and plaintiffs provided no specific evidence supporting their theory that Leslie Adams knew of the alleged wrongdoing. The court denied defendants’ motion as to Roy Adams and Daniel Norem because defendants did not provide evidentiary support for their assertion that they lacked knowledge, while plaintiffs also had not shown that they were entitled to judgment in their favor. Factual disputes remained concerning the materiality and public nature of the information.

The court rejected defendants’ argument that summary judgment was warranted because plaintiffs could not obtain equitable relief. It agreed that disgorgement and surcharge were unavailable against these nonfiduciaries on the record presented, but plaintiffs also sought rescission of the ESOP transaction. Because defendants had not moved for summary judgment on rescission in their opening papers, the court did not consider their argument against that remedy when first raised in their reply.

Section 406(b) prohibited-transaction claim

ERISA Section 406(b) prohibits a fiduciary from acting for a party whose interests are adverse to the plan or its participants. Because the court determined that the Director Defendants were not fiduciaries for purposes of the ESOP transaction, it granted defendants’ motion for summary judgment on plaintiffs’ Section 406(b) claim.

Summary plan description claim

Plaintiffs alleged that Adams and Associates violated ERISA disclosure requirements by failing to update the summary plan description (SPD). The SPD continued to identify Weissman as trustee after his removal and did not disclose that he had been indicted or convicted of a crime. Defendants argued that any failure was inadvertent, had been corrected, and made the claim moot.

The court denied defendants’ motion on this claim because a factual dispute remained about whether the corrected SPD accurately identified the plan administrator. The plan identified Adams and Associates, while the SPD identified Blue Ridge ESOP Associates, and defendants suggested that the plan itself might be inaccurate.

Section 410 anti-indemnification claim

ERISA Section 410(a) voids provisions that purport to relieve a fiduciary from responsibility or liability for duties under ERISA. Plaintiffs challenged indemnification language in the plan and Adams and Associates’ articles of incorporation.

The court denied defendants’ motion on this claim. It held that Section 410 does not require actual payment of indemnification; a clause that purports to provide prohibited indemnification is sufficient. The court also concluded that the challenged language could limit liability for ERISA violations, including prohibited-transaction claims, and that defendants had not shown the provisions could be reconciled with ERISA’s fiduciary standards. Defendants’ assurances that plan assets would not be used for indemnification did not change the result.

Disposition

The court denied plaintiffs’ motion for partial summary judgment. It granted defendants’ motion for summary judgment on the Section 406(a) claim as to Leslie Adams and Joy Curry Norem and on the Section 406(b) claim as to all defendants. It denied defendants’ motion in all other respects. The court set a July 23, 2020 status conference to discuss a trial date and directed the parties to address their availability for a bench trial beginning no earlier than December 2020, unless they agreed to proceed by video.