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Lawrence v. Potter

United States District Court, D. Utah

July 30, 2018

CASEY LAWRENCE, A PARTICIPANT IN, and PERRY LARSON, as TRUSTEE OF, THE PREMIER COMPUTING EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST, Plaintiffs and Counter-Defendants,
v.
JULIE A. POTTER, Defendant and Counterclaimant. JULIE A. POTTER, Third-Party Plaintiff,
v.
PREMIER COMPUTING, INC., PREMIER COMPUTING EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST, BRAD ORTON, TERRY HOECHERL, TERRY ARMSTRONG, ROB GILLESPIE, DAN ERICKSON, and DOES 1-10, Third-Party Defendants.

          MEMORANDUM DECISION AND ORDER ON PENDING MOTIONS

          Ted Stewart United States District Judge.

         This matter is before the Court on Defendant Julie A. Potter's Motion for Partial Judgment on the Pleadings and Counterclaim/Third-Party Defendants' Motion to Dismiss. For the reasons discussed below, the Court will grant in part and deny in part both Motions.

         I. BACKGROUND

         Prior to 2006, Defendant Julie A. Potter (“Defendant” or “Potter”) and her late husband, Dale Potter, or grantor trusts created for their benefit, owned 100% of Premier Computing Inc.'s (“Premier”) issued and outstanding shares of common stock (“Premier Stock”). In 2006, the Potters established the Premier Computing Stock Ownership Plan (the “Plan”) and the related Premier Computing Employee Stock Ownership Plan Trust (the “Trust”). The Plan is an Employee Stock Ownership Plan (“ESOP”) under the Employee Retirement Income Security Act (“ERISA”). At the time of its establishment, the Potters were the sole fiduciaries of the Plan and the sole shareholders of Premier.

         In 2007, the Potters began selling their shares of Premier Stock to the Trust. The sales were financed by the Potters causing Premier to make cash contributions to the Trust and then having the Trust pay themselves for their shares of Premier Stock sold. These transactions continued through 2011, at which time the Trust had become the owner of 48% of Premier Stock. Plaintiffs allege that for each of these sales, either: (1) no independent fiduciary was appointed to represent the Trust and no fair market value determination of Premier Stock was made by a qualified appraiser; or (2) if an appraisal was obtained, the Potters supplied the appraiser with false and misleading information regarding Premier's financial condition in order to inflate the appraised share value and, in turn, the purchase price of Premier Stock sold to the Trust.

         On October 1, 2012, the Potters, as shareholders of Premier, entered into an agreement with the Trust, with Dale Potter acting on behalf of the Trust as a Trustee (the “Shareholder Agreement”). The Shareholder Agreement required the Trust pay a control premium for all remaining shares and that the Potters retain a majority-voting control until the Trust obtained all of the Premier Stock.

         On October 12, 2012, the Potters entered into an Amendment to the Shareholder Agreement (the “Amendment”). Like the Shareholder Agreement, the Amendment required the Trust to pay a control premium and provided the Potters with majority-voting control until the Trust owned 75% of the Premier Stock. Additionally, the Amendment purported to require Premier to pay the Potters an annual salary of $96, 000, along with health and life insurance benefits, and to reimburse the Potters for certain taxes. The Amendment, like the Shareholder Agreement, was signed by the Potters as shareholders for Premier and Dale Potter as Trustee for the Trust.

         On October 31, 2012, the Potters and the Trust entered into a Revised Amendment to the Shareholder Agreement (the “Revised Amendment”). The Revised Amendment removed the provision providing the Potters with majority-voting control, but included the provisions requiring a control premium, annual salary, health and life insurance, and tax reimbursement. Unlike the prior agreements, the Revised Amendment was signed not only by the Potters, but also Ken Auton and Perry Larson as Trustees for the Trust.

         Dale Potter passed away on November 8, 2012. After his death, Defendant became the sole non-Trust shareholder of Premier and replaced Dale as chairman of the ESOP Administration Committee, acting as Plan administrator.

         On or about December 31, 2013, Defendant sold additional shares of Premier Stock to the Trust (the “2013 Stock Sale”). Plaintiffs allege that Defendant used her position to manipulate and misrepresent Premier's financial data, to overstate and misrepresent the per-share price of Premier Stock, to omit, fail to disclose, and conceal the truth about Premier's financial data and per-share price of Premier Stock, which caused the Trust to overpay for shares of Premier Stock. After the 2013 Stock Sale, the Trust became the majority shareholder of Premier, with the Trust owning 64% of Premier Stock and Defendant owning the remaining 36%.

         On April 14, 2014, Defendant caused Premier to declare and pay a dividend to shareholders (the “2014 Dividend”). Defendant caused Premier to pay 52% of the dividend to herself, despite owning just 36% of Premier Stock.

         On December 31, 2014, Defendant sold additional shares of Premier Stock to the Trust (the “2014 Stock Sale”). As with the 2013 Stock Sale, Plaintiffs allege that Defendant caused the Trust to overpay for the shares of Premier Stock that were sold by Defendant to the Trust. Following the 2014 Stock Sale, the Trust owned 82% of Premier Stock and Defendant owned 18%.

         On May 20, 2015, Defendant caused Premier to declare and pay a dividend to shareholders (the “2015 Dividend”). Defendant caused Premier to pay 36% of the dividend to herself, despite owning just 18% of Premier Stock.

         Plaintiffs bring claims alleging that Defendant breached her fiduciary duty under ERISA and engaged in actions prohibited by ERISA. Plaintiffs also assert state-law claims for breach of fiduciary duty, breach of legal duty, securities fraud, fraud, and negligent misrepresentation.

         Defendant denies she engaged in any wrongdoing. However, Defendant brings a Counterclaim and Third-Party Complaint asserting that, if she is found liable, she is entitled to indemnification and/or contribution. In addition, Defendant asserts claims against the Plan and certain individuals for wrongfully denying her benefits, breaching their fiduciary duties, and violating ERISA's anti-cutback provision.

         Defendant seeks dismissal of various claims in Plaintiffs' Complaint and the Counterclaim/Third-Party Defendants seek dismissal of certain claims in the Counterclaim and Third-Party Complaint.

         II. STANDARD OF REVIEW

         These Motions are before the Court under Federal Rules of Civil Procedure 12(b)(6) and Rule 12(c). The Court applies the same standards in evaluating motions under Rule 12(b)(6) and Rule 12(c).[1]

         In considering a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6), all well-pleaded factual allegations, as distinguished from conclusory allegations, are accepted as true and viewed in the light most favorable to the nonmoving party.[2] The pleading must provide “enough facts to state a claim to relief that is plausible on its face, ”[3] which requires “more than an unadorned, the-defendant-unlawfully harmed-me accusation.”[4] “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'”[5]

         “The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted.”[6] As the Court in Iqbal stated,

only a complaint that states a plausible claim for relief survives a motion to dismiss. Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not shown-that the pleader is entitled to relief.[7]

         In considering a motion to dismiss, a district court not only considers the complaint, “but also the attached exhibits, ”[8] and “documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.”[9] The Court “may consider documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity.”[10]

         III. DISCUSSION

         A. MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS

         Plaintiffs' Complaint asserts seventeen claims for relief. Defendant seeks dismissal of the majority of Plaintiffs' claims. Defendant argues that Plaintiffs' state-law claims are preempted by ERISA, are inadequately pleaded, and/or are barred by the applicable statute of limitations. Defendant further argues that Plaintiffs' ERISA claims are not adequately pleaded and are barred or partially barred by the statute of limitations.

         1.State-Law Claims

         a. Preemption

         Defendant argues that Plaintiffs' state-law claims are preempted by ERISA. “The Supreme Court has recognized only a few federal statutes that so pervasively regulate their respective areas that they have complete preemptive force; ERISA is one.”[11] There are two forms of ERISA preemption: complete preemption and conflict preemption. Under the doctrine of complete preemption, “any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy conflicts with the clear congressional intent to make the ERISA remedy exclusive and is therefore pre-empted.”[12]

         Under conflict preemption, ERISA provides that “the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.”[13] This “pre-emption provision . . . has a broad scope, and an expansive sweep, and it is broadly worded, deliberately expansive, and conspicuous for its breadth.”[14] “‘[R]elate to' is to be given its broad common-sense meaning. That does not mean, however, that ERISA preemption is unlimited.”[15] “A law ‘relates to' a covered employee benefit plan for purposes of [§ 1114(a)] if it (1) has a ‘connection with' or (2) ‘reference to' such a plan.”[16]

         The Tenth Circuit has identified four categories of state laws that are conflict preempted by ERISA:

(1) laws regulating the type of benefits or terms of ERISA plans; (2) laws creating reporting, disclosure, funding or vesting requirements for such plans; (3) laws providing rules for calculating the amount of benefits to be paid under such plans; and (4) laws and common-law rules providing remedies for misconduct growing out of the administration of such plans.[17]

         However, “ERISA does not preempt all state law claims” and “has no bearing on those which do not affect the relations among the principal ERISA entities, the employer, the plan, the plan fiduciaries and the beneficiaries . . . .”[18]

         i. Breach of Fiduciary Duty, Breach of Legal Duty, Fraud, and Negligent Misrepresentation

         Plaintiffs' Eighth, Ninth, and Tenth causes of action assert claims for breach of fiduciary duty based on the Shareholder Agreement, the Amendment, and the Revised Amendment. In each of these claims, Plaintiffs allege that “[a]s majority shareholders of Premier, officers and directors of Premier, and fiduciaries of the Plan, the Potters owed a fiduciary duty of utmost good faith and loyalty to the Trust, beneficiaries of the Trust, the Plan, participants of the Plan, and all shareholders of Premier.”[19] Plaintiffs further allege that by entering into and signing these three agreements, “the Potters breached their fiduciary duty to the Trust, beneficiaries of the Trust, the Plan, participants of the Plan, and all shareholders of Premier.”[20] Plaintiffs allege that “[t]he Trust, beneficiaries of the Trust, the Plan, participants of the Plan, and all shareholders of Premier have been damaged as a proximate result of the Potter's and Defendant's breach of fiduciary duty.”[21]

         Plaintiffs' Eleventh and Twelfth causes of action involve the 2014 and 2015 dividend distributions. Plaintiffs allege that Defendant “owed the Trust a duty to carry out her corporate duties in good faith, with prudent care, and in the best interests of the corporation.”[22] Plaintiffs allege that by declaring the dividends, “Defendant breached her legal duty to carry out her corporate duties in good faith, with prudent care, and in the best interests of the corporation.”[23]Plaintiffs allege that “Defendant's actions constituted gross negligence, willful misconduct, and intentional infliction of harm to the Trust.”[24] This resulted in damage to the Trust.[25]

         Plaintiffs' Fifteenth and Sixteenth causes of action allege fraud and negligent misrepresentation in relation to the stock sales. Plaintiffs allege that the Trust was damaged as a result of Defendant's alleged fraud and negligent misrepresentations.

         These claims seek remedies for misconduct growing out of the administration of plan assets and affect the relations among the principal ERISA entities. Therefore, they are preempted. Ignoring the allegations contained in their Complaint, Plaintiffs attempt to recast their claims, arguing that they are not brought against Potter “in her role as an ERISA fiduciary, but instead, in her role as a corporate officer and director of the company.”[26] Plaintiffs assert that they are bringing these “claims against Potter for violating her duties as a company officer and director.”[27]

         Plaintiffs' claims are not as limited as they suggest. Claims Eight through Ten, in particular, alleged that the Potters breached their fiduciary duty to the Trust, beneficiaries of the Trust, the Plan, participants of the Plan, and all shareholders of Premier. Thus, it is not true that Plaintiffs are only asserting claims against Defendant for violating her duties to Premier and the Trust. These claims seek to remedy alleged breaches by a Plan fiduciary to the Plan and Plan participants. Such claims are preempted.

         Plaintiffs' Eleventh, Twelfth, Fifteenth, and Sixteenth causes of action are more limited in that they only allege claims that resulted in harm to the Trust. However, they are still preempted. Defendant's duties with respect to the Trust grow directly out of ERISA. ERISA requires that “all assets of an employee benefit plan shall be held in trust by one or more trustees.”[28] The Trust here holds the Plan assets. Without the Plan, there would be no Trust and, consequently, Plaintiffs would have no cause of action for breaches related to the Trust.[29]Further, any harm to the Trust is really just harm to the Plan and Plan assets, and any recovery by the Trust would inure to the benefit of the Plan and Plan participants. Thus, this claim directly affects the relations among the principal ERISA entities. Additionally, the same allegations that make up these claims also form the factual basis of Plaintiffs' ERISA claims. Such claims are preempted.[30] Therefore, the Court will dismiss Plaintiffs' Eighth, Ninth, Tenth, Eleventh, Twelfth, Fifteenth, and Sixteenth causes of action.

         ii. Utah Securities Fraud

         Defendant argues that Plaintiffs' claims under the Utah Uniform Securities Act are barred by complete preemption.[31] Under complete preemption, a claim “will be pre-empted if it provides a separate vehicle to assert a claim for benefits outside of, or in addition to, ERISA's remedial scheme.”[32]

         In Aetna Health Inc. v. Davila,

the Supreme Court laid out a two-part test for determining whether a claim falls within the scope of the civil enforcement provision: “[I]f an individual, at some point in time, could have brought his claim under ERISA § 502(a)(1)(B), and where there is no other independent legal duty that is implicated by a defendant's actions, then the individual's cause of action is completely pre-empted by ERISA § 502(a)(1)(B).”[33]

         On the first prong, Plaintiffs argue that their securities fraud claims do not fall within ERISA § 502(a)(1)(B). That provision provides that a participant or a beneficiary may bring suit “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.”[34] Plaintiffs argue that complete preemption does not apply because they are not seeking to recover benefits due to them under the terms of the plan, to enforce his rights under the terms of the plan, or to clarify their rights to future benefits under the terms of the plan. Defendant argues that complete preemption is not limited to claims for benefits under ERISA § 502(a)(1)(B), but also applies to claims brought under ERISA § 502(a)(2).

         The Supreme Court in Davila expressly limited its discussion to claims brought under ERISA § 502(a)(1)(B) and did “not address ERISA § 502(a)(2).”[35] While some courts have expressly extended complete preemption to claims brought under ERISA § 502(a)(2), [36] Tenth Circuit case law on the issue is somewhat unclear. In David P. Coldesina, D.D.S., P.C., Employee Profit Sharing Plan and Trust v. Estate of Simper, [37] the Tenth Circuit noted both conflict preemption and complete preemption were implicated in plaintiff's vicarious liability claim for breach of fiduciary duty.[38] Since the claim regulated the relationship between plan entities, ERISA conflict preemption was triggered. Additionally, because “[r]egulation of fiduciary duties is also one of the primary subjects of ERISA's civil enforcement scheme, ” complete preemption was triggered.[39] As a result, the claim was preempted under both conflict and complete preemption.

         In a more recent case, however, the Tenth Circuit stated that complete preemption was limited “to claims ‘by a participant or beneficiary' of an ERISA-regulated plan ‘to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan or to clarify his rights to future benefits under the terms of the plan.'”[40] Because neither the Supreme Court nor the Tenth Circuit has expressly applied complete preemption outside of claims falling within § 502(a)(1)(B), the Court declines to do so here.

         Assuming complete preemption would apply, the Court must consider the second prong. Under that prong, “a claim only falls within ERISA's civil enforcement scheme when it is based solely on legal duties created by ERISA or the plan terms, rather than some other independent source.”[41] Plaintiffs' claims under the Utah Uniform Securities Act allege that Defendant violated legal duties that arise independently of ERISA or the Plan. Those duties arise under the Utah Uniform Securities Act, which makes it unlawful for any person to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading” “in connection with the offer, sale, or purchase of any security.”[42] Those duties are independent of any duties Defendant may have under ERISA or the Plan. There can be no question that if Defendant sold shares to the Trust in a private capacity, the Trust would be able to maintain a cause of action despite its status as an ESOP trust. The connection to ERISA or the Plan based on Defendant's status as a fiduciary is merely fortuitous.[43]

         Relying on a case from the Southern District of Florida, Defendant argues that these claims are nonetheless preempted. In Bacon v. Stiefel Laboratories, Inc., the court found that claims under the Florida Securities Act were completely preempted. The facts in Bacon make clear that the plaintiffs' securities claims were based on the plan, not an independent legal duty. There, the plan allowed employees to own stock in the company, but could not sell, trade, or redeem their shares unless they separated from the company, at which time they had the right to put their shares to the company.[44] The plaintiffs alleged that the defendants engaged in “a scheme to force employees to sell their shares back to the Company at a below-market price, while simultaneously planning to sell the Company at a much higher price than was offered to Plaintiffs.”[45] The plaintiffs brought a number of claims, including claims under ERISA and the Florida Securities Act. The court found that the Florida Securities Act was preempted because it provided a remedy of monetary damages that supplemented the remedies provided by ERISA.[46]Of particular importance, the court noted that the remedy plaintiffs were seeking was recovery of plan benefits and, as such, they must proceed under ERISA. Further, the option for the plaintiffs to put their shares to the company arose solely because of the plan.

         Here, there are no similar allegations concerning the parties' obligations under the Plan that would implicate Plaintiffs' securities claims.[47] Rather, this cause of action seeks to hold Defendant accountable for her alleged violations of state securities laws based on stock sales to the Trust. There is no claim for Plan benefits, as there was in Bacon, and no direct link to the Plan. Instead, any recovery would come from Defendant. Therefore, the Court declines to follow Bacon and concludes that Plaintiffs' securities claims are not preempted.

         iii. Punitive Damages

         Plaintiffs' Seventeenth cause of action asserts a stand-alone claim for punitive damages. Plaintiffs' state common law claims are preempted and ERISA does not allow for punitive damages. Therefore, there is no basis for punitive damages and this claim will be dismissed. Even if Plaintiffs' state-law claims survived, this claim is still subject to dismissal. A claim for punitive damages is not an independent cause of action, it is a remedy. Plaintiffs have requested punitive damages in their prayer for relief. Therefore, there is no need for an independent claim. Plaintiffs' Seventeenth cause of action is dismissed.

         b. Failure to Plead with Particularity

         Defendant also argues that Plaintiffs' Thirteenth, Fourteenth, Fifteenth, and Sixteenth causes of action must be dismissed because Plaintiffs have failed to plead fraud with particularity. The Court's discussion here is limited to Plaintiffs' claims under the Utah Uniform Securities Act, as the remaining state-law claims are preempted. For the reasons set forth below, the Court finds that these claims are adequately pleaded.

         Rule 9(b) requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” This means that a claim alleging fraud must “set forth the time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof.”[48]

         Defendant is correct that the claims themselves are rather perfunctory. However, the claims explicitly incorporate the other paragraphs of the Complaint. Those paragraphs provide sufficient allegations of Defendant's alleged false statements and material omissions. For example, in relation to the 2013 stock sale, Plaintiffs allege that Defendant used her position “to manipulate and misrepresent Premier's financial data, to overstate and misrepresent the per share price of Premier Stock, to omit, fail to disclose, and conceal the truth about Premier's financial data and per share price of Premier Stock, and thereby caused Premier to overfund, and the Trust to overpay, for the shares of Premier Stock that were sold by Defendant to the Trust.”[49] Similar allegations are made in reference to the 2014 stock sale.[50] Plaintiffs further allege that Defendant created misleading and overstated corporate budgets and projections, altered financial statements used by the stock appraiser to hide the true financial position of Premier, prevented other Plan fiduciaries from being able to determine the fair market value of Premier stock, failed or refused to provide financial information to the other Plan fiduciaries, and provided incomplete, partial, incorrect or falsified information about Premier. All of this allegedly resulted in the Trust paying more than fair market value for Premier's stock. Based upon these allegations, the Court finds that these claims are adequately pleaded.

         c. Statute of Limitations

         Defendant next argues that Claims 8 through 10 are barred by the applicable statute of limitations. These claims are preempted. Therefore, the Court declines to address this argument.

         2. ERISA Claims

         Defendant next argues that Plaintiffs' ERISA claims are barred or partially barred.

         a. Failure to State a Claim

         Defendant argues that certain of Plaintiffs' ERISA claims are inadequately pleaded. Defendant argues that Plaintiffs have failed to sufficiently allege that she was a fiduciary before her husband's death. Defendant also complains that Plaintiffs have conflated her actions, alleged breaches, and damages caused with those of her late husband.

         Under ERISA,

a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.[51]

         While there can be no doubt that Defendant was an ERISA fiduciary after her husband's death, there are limited allegations concerning her status as a fiduciary beforehand. Plaintiffs allege that, at all relevant times, Defendant was a fiduciary of the Plan[52] and that, after her husband's death, Defendant replaced him as the chairperson of the ERISA administrative committee that acted as administrator of the Plan. Plaintiffs further allege that Defendant controlled the financial affairs and financial information of Premier and had sole control of the Plan and Premier's financial information and accounts.[53] These allegations are ...


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