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Remy v. Lubbock National Bank

United States District Court, E.D. North Carolina, Western Division

August 8, 2019

BILL REMY, MICHELE BENNETT, DAN SULLIVAN, and KEN KOENEMANN, Plaintiffs,
v.
LUBBOCK NATIONAL BANK, Defendant. LUBBOCK NATIONAL BANK, Counter Claimant,
v.
BILL REMY, MICHELE BENNETT, and DAN SULLIVAN, Counter Defendants. LUBBOCK NATIONAL BANK, Third-Party Plaintiff,
v.
TBM CONSULTING GROUP, INC. EMPLOYEE STOCK OWNERSHIP PLAN COMMITTEE; ANAND SHARMA 2009 GRAT TRUST; ANAND SHARMA; ROBERT DEAN; STEPHEN SMITH; RON WINCE; MELVIN R. HAUGHT; JOHN DOES 1-15; WILLIAM SCHWARTZ; TBM CONSULTING GROUP, INC.; LOTUS ONE LLC; MARK GOTTFREDSON; and STOUT RISIUS ROSS, LLC f/k/a/ Stout Risius Ross, Inc., Third-Party Defendants.

          ORDER

          LOUISE W. FLANAGAN, UNITED STATES DISTRICT JUDGE

         This matter is before the court on motions to dismiss filed by third-party defendants Stout Risius Ross, LLC f/k/a Stout Risius Ross, Inc. (“Stout”) (DE 57), and Anand Sharma (“Sharma”), Anand Sharma 2009 GRAT Trust, and Lotus One LLC (collectively, “Sharma parties”) (DE 61). The issues raised have been fully briefed and in this posture are ripe for ruling. For the reasons that follow, the court grants both motions.

         STATEMENT OF THE CASE

         TBM Consulting Group, Inc. (“TBM”) and four of its officers filed this action against Lubbock National Bank (“Lubbock”), a former trustee of the TBM Consulting Group, Inc. Employee Stock Ownership Plan (the “ESOP”), on September 11, 2017, seeking relief for Lubbock's alleged breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., arising out of a 2011 transaction (the “2011 transaction”) in which, among other things, the ESOP purchased stock from the Sharma parties. In connection with the 2011 transaction, Lubbock engaged Stout, an independent advisory firm, to perform a valuation of TBM and provide a fairness opinion concerning the consideration to be paid by the ESOP for the Sharma parties' shares.

         On November 17, 2017, Lubbock filed a motion to dismiss, and on May 31, 2018, the court granted in part and denied in part Lubbock's motion, in part dismissing TBM as a plaintiff. On July 5, 2018, Lubbock filed answer, affirmative defenses, counterclaim, and third-party complaint. Lubbock subsequently amended its answer and third-party complaint on September 13, 2018, and in its first amended third-party complaint seeks indemnity, contribution and/or apportionment from counterclaim defendants and third-party defendants, including Stout and the Sharma parties, should Lubbock be deemed liable to the ESOP for the losses alleged in the complaint.

         Stout and the Sharma parties filed the instant motions to dismiss Lubbock's claims on September 18 and 27, 2018, respectively. Stout argues that ERISA does not provide fiduciary Lubbock a right to contribution against non-fiduciary Stout. The Sharma parties argue that 1) ERISA does not provide fiduciary Lubbock a right to contribution or indemnity against co-fiduciaries, the Sharma parties, 2) even if ERISA did provide such a cause of action, the Sharma parties were not ERISA fiduciaries, and 3) Lubbock's claims are barred by the statute of limitations. Lubbock opposes, arguing that ERISA provides for a right of indemnity and contribution against fiduciaries and non-fiduciaries, Lubbock sufficiently has alleged that the Sharma parties were fiduciaries, and its claims are not barred by the statute of limitations.

         On February 8, 2019, Stout and Sharma parties filed motion to stay all discovery pending resolution of the instant motions to dismiss, which the court granted on March 20, 2019, holding in part that the motions to dismiss raise “significant issues for the court's consideration, ” including whether ERISA provides for a right of contribution or indemnity by a fiduciary against a co-fiduciary or non-fiduciary, an issue of law not yet decided by the United States Court of Appeals for the Fourth Circuit. (DE 88 at 5).

         STATEMENT OF THE FACTS

         The facts alleged in Lubbock's third-party complaint as relevant to the resolution of the instant motions are summarized as follows.[1]

         TBM established the ESOP in or around 2003. (TP Compl. (DE 50) ¶ 3). TBM is a named fiduciary of the ESOP. (Id. ¶ 60). The board of directors of TBM (“TBM board of directors”) exercised authority and control over the ESOP, including without limitation with respect to its authority to amend the ESOP, to appoint, monitor and remove ESOP fiduciaries, and to monitor fiduciary performance compliance with ERISA and other applicable laws, including by monitoring transactions involving TBM stock and the valuation of TBM stock and avoiding nonexempt prohibited transactions under ERISA. (Id. ¶ 4). Lubbock alleges, therefore, the TBM board of directors owed fiduciary duties to the ESOP. (Id. ¶¶ 4 and 73-77).

         The TBM board of directors formed the TBM Consulting Group, Inc. Employee Stock Ownership Plan Committee (the “TBM ESOP committee”) to oversee the management of the ESOP, including the valuation of TBM stock, the avoidance of nonexempt prohibited transactions under ERISA, and compliance with reporting and disclosure requirements related to the ESOP. (Id. ¶ 5). The TBM ESOP committee is a named fiduciary of the ESOP and also acted as a fiduciary in the performance of its duties, including when it exercised discretionary authority as to the disposition of ESOP assets. (Id. ¶ 5).

         In 2011, Sharma was TBM's president and chief executive officer, the chair of the TBM board of directors, and a member of the TBM ESOP committee. (Id. ¶ 12). Lubbock alleges Sharma individually exercised discretion over the disposition of ESOP plan assets and thus acted as a fiduciary of the ESOP, individually and/or as an agent of other fiduciaries such as TBM, the TBM board of directors, and the TBM ESOP committee. (Id. ¶ 12). Lubbock alleges as an ERISA fiduciary during the relevant time period, Sharma owed the ESOP and its participants duties of care, prudence, and loyalty, including a fiduciary duty to ensure that TBM shares were valued consistent with the requirements of ERISA and the ESOP on at least an annual basis. (Id. ¶ 84).

         In August 2011, TBM retained Lubbock to serve as the trustee of the ESOP. (Id. ¶ 23). Around that time, Sharma offered to sell to the ESOP most of the 77, 799.07 shares of TBM Series B common stock that he owned personally and through two entities he managed and/or controlled, third-party defendants Anand Sharma 2009 GRAT Trust and Lotus One, LLC. (Id. ¶ 25). On September 12, 2011, the Sharma parties, TBM, and Lubbock, as trustee, entered into a Stock Purchase Agreement (the “SPA”) pursuant to which the Sharma parties sold 62, 239.26 of their shares in TBM to the ESOP for $10, 500, 000.00. (Id. ¶ 27; see also SPA (DE 50-2)).[2]

         As a condition precedent to the SPA, TBM and the ESOP entered into an ESOP credit agreement on September 12, 2011, pursuant to which TBM loaned $10, 500, 000.00 to the ESOP to finance the purchase of the Sharma parties' shares. (TP Compl. (DE 5) ¶ 30; see also ESOP credit agreement (DE 50-3)). Sharma, as TBM's president and CEO, signed the ESOP credit agreement on behalf of TBM. (Id. at 16).

         Lubbock alleges that Sharma was acting as the agent of Anand Sharma 2009 GRAT Trust and Lotus One, LLC for purposes of the 2011 transaction. (TP Compl. (DE 50) ¶¶ 13-14). Lubbock further alleges Sharma and TBM were each a party-in-interest under 29 U.S.C. § 1002(14), and therefore the 2011 transaction (including both the purchase of the Sharma parties' shares and the loan from TBM), was a “prohibited transaction” under 29 U.S.C. § 1106(a) that would require a statutory exemption to comply with ERISA. (Id. ¶ 34). One of the exemptions requires that the price paid for the Sharma parties' shares not exceed adequate consideration. (Id. ¶ 35).

         In connection with the 2011 transaction, Lubbock, in its capacity as trustee of the ESOP, retained Stout to prepare an independent valuation of TBM and a fairness opinion concerning the proper consideration to be paid by the ESOP for the Sharma parties' shares. (Id. ¶¶ 36, 39). Stout holds itself out to the public and its clients as a professional and experienced financial advisor, including as an expert in valuation advisory services. (Id. ¶ 37). Stout was knowledgeable about TBM, as it had previously provided professional valuation services to the ESOP. (Id. ¶ 38).

         In the SPA, the Sharma parties made certain representations as to the accuracy and validity of TBM financial information that had been delivered to Lubbock and used by its financial advisor Stout for purpose of its independent valuation of the TBM shares purchased in the 2011 transaction. (Id. ¶ 28). Lubbock alleges that, among other things, the Sharma parties represented that no document or information provided to Lubbock “contain[s] any untrue statement of material fact or omits or shall omit a material fact necessary to make the statements contained therein not misleading.” (Id. ¶ 29; see also SPA (DE 50-2)§ 6.28). Lubbock alleges the SPA also confirmed TBM's fiduciary responsibility for the ESOP and its obligation to “administer the Plan in compliance with … the Code and ERISA, as applicable to the Plan and this Agreement.” (TP Compl. (DE 50) ¶ 70-71; see also SPA (DE 50-2) § 17). Additionally, in the ESOP credit agreement by which TBM loaned funds to the ESOP to purchase the Sharma parties' shares, TBM also represented, warranted, and covenanted to the ESOP that the “ESOP Loan satisfies the Exempt Loan Rules and qualifies as an Exempt Loan and the transactions contemplated by the ESOP Loan Documents are not ‘prohibited transactions' within the meaning of Section 4975 of the Code or Section 406(a) of ERISA.” (TP Compl. (DE 50) ¶¶ 30-31).

         Lubbock alleges that the financial information that Lubbock and Stout relied on to evaluate the fair market value of the shares to be sold by the Sharma parties was provided by TBM, its directors and officers, the TBM ESOP committee, and other agents of TBM who may have been fiduciaries to the ESOP. (Id. ¶¶ 43-45). Nonetheless, plaintiffs allege that Stout, in preparing its valuation report, relied on financial projections for TBM for 2011-2015 that were “heavily influenced by Sharma” in order “to maximize the amount paid by the ESOP, ” and that were inconsistent with the trajectory of TBM's actual performance and with TBM's internally prepared financial statements for the first seven months of 2011. (Compl. (DE 1) ¶¶ 34-35, 38). Plaintiffs allege Lubbock knew or should have known that the financial projections used by Stout were unreliable as a means to calculate the reasonable value of the Sharma parties' shares and that the $10, 500, 000.00 price for those shares was unsupportable given the unreliability of the financial projections influenced by Sharma. (Id. ¶¶ 37, 45). Accordingly, plaintiffs have asserted ERISA claims against Lubbock for its alleged breaches of fiduciary duty, including by allegedly failing to adequately review and verify Stout's valuation and causing the ESOP to enter into a nonexempt prohibited transaction under ERISA by paying more than adequate consideration for the Sharma parties' shares. (Id. ¶¶ 53, 59- 61).

         Lubbock has denied all liability to plaintiffs and the ESOP, and has specifically denied it had any reason to believe that Sharma had heavily influenced the financial information it and Stout relied upon to determine the fair market value of the Sharma parties' shares, or that the price paid for the Sharma parties' shares was for more than adequate consideration. (TP Compl. (DE 50) ¶¶ 51, 58). Lubbock alleges that neither the Sharma parties nor the other ESOP fiduciaries disclosed to Lubbock prior to its removal as the ESOP trustee that the financial information provided to Lubbock and Stout for the 2011 transaction was manipulated by Sharma to the ESOP's detriment. (Id. ¶ 53). Lubbock alleges Stout's independent valuation concluded that the price for the Sharma parties' shares was in fact no more than adequate consideration for those shares, and this conclusion was consistent with the independent valuations that Stout provided to the ESOP each of the six years following the 2011 transaction. (Id. ¶¶ 56-57).

         DISCUSSION

         A. ...


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