Opinion
Civil No. 03-1176-AS.
March 30, 2004
FINDINGS AND RECOMMENDATION
Defendants Joseph I. Eoff, Schwabe Williamson and Wyatt PC, and Richard Phenneger, individually and in his professional capacity with Phenneger Morgan, Inc. (collectively "Defendants"), move to dismiss the claims asserted against them by Jim Holmes, as Trustee for and on behalf of the Eoff Electric Company 401(k) Stock Ownership Plan ("Plaintiff"). Defendants argue that the beneficiaries of the Eoff Electric Company 401(k) Stock Ownership Plan (the "Plan") made individual and independent decisions to purchase Eoff Electric Company Stock ("Stock") and that Plaintiff lacks standing to assert claims arising from the purchase of the Stock. In the alternative, Defendants ask the court to join the Plan beneficiaries as parties under Fed.R.Civ.P. 19(a). Also before the court is a motion by Plaintiff for leave to file a sur reply.
Background
In 1999, defendant Eoff, the sole shareholder of Eoff Electric Company (the "Company"), decided to sell the Company to his employees through employee stockownership plans. The Company hired a number of experts to aid in the fully-leveraged buyout of defendant Eoff and the sale was completed in August 1999. Plaintiff alleges that the employees were induced by Defendants to pay more than $13 million for the Company, which had a value of no more than $9.2 million. Less than three years after the sale, it became evident that the Company could not sustain operations at a profitable level givenits debt service requirements. In September 2002, the employees equity interest in the Company was sold for $2.85 million, resulting in a loss of more than $5 million.
One ofthe vehicles used to purchase Stockwas the Company's existing 401(k) retirement plan, which was converted to a stock ownership plan as a part of the leveraged buyout. Participants of the Planwere giventhe right to choose whether to purchase Stock and how much of their existing account would be used to make such purchase. The Company distributed an offering circular to all eligible Oregon employees. The employees who were interested in purchasing Stock were required to sign and submit a participation form directing the Plan trustee to purchase a specified amount of Stock using the funds in their existing account. By signing the participation form, the employees represented and warranted that they had sufficient financial sophistication to evaluate the investment and that the investment was speculative and subjectto substantial risks. The Plan trustee then purchased the Stock as directed and held the stock in a separate stock account for the plan beneficiaries.
The offering was limited to Oregon employees to qualify the offer as an "intra-state offering" which was exempt from registration.
Preliminary Procedural Matter
Plaintiff seeks leave to file a sur replyto respond to the authorities cited by Defendants for the first time in their reply. The court has not considered Plaintiff's sur reply in the discussion of the motion to dismiss and rules in Plaintiff's favor on the motion. Accordingly, the sur reply is not outcome determinative and the courtrecommends the denial of Plaintiff's motion for leave to file a sur reply.
Legal Standard
Motion to Dismiss
Courts grant motions to dismiss under Rule 12(b)(6) only if "it appears beyond a reasonable doubt that the plaintiff canprove no set offacts insupportofhis claim that would entitle himto relief." Gibson v. United States, 781 F.2d 1334, 1347 (9th Cir. 1986), cert. denied, 479 U.S. 1054 (1987). The review is limited to the complaint, and all allegations of material fact are taken as true and viewed in the light most favorable to the non-moving party. Cassettari v. County of Nevada, 824 F.2d 735, 737 (9th Cir. 1987).
Motion for Joinder
If a person is subject to service and joinder of that person will not defeat subject matter jurisdiction, Fed.R.Civ.P. 19(a) mandates joinder where either (1) the person's absence will make complete relief among the parties impossible; or (2) the person claims an interest relating to the subject of the action and that person's absence mayimpair or impede the ability to protect that interest or may leave any of those already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. If the person should join as a plaintiff but refuses, the person may be joined as a defendant.
Discussion
Motion to Dismiss
In Counts 1 through 6, Plaintiff asserts claims against the fiduciaries of the Plan, including defendant Eoff, under the provisions of the Employee Retirement Income Security Act of 1974 ( 29 U.S.C. § 1001, et seq.) ("ERISA"). ERISA specifically provides that a civil action may be brought by a plan fiduciary to enforce the provisions of ERISA or the provision of the Plan. 29 U.S.C. § 1132(a). Plaintiff, as the Plan trustee, is clearly a fiduciary under the terms of ERISA and, therefore, has standing to bring the first six counts.
The remaining counts assert claims for violation of Oregon securities laws, professional negligence, negligent misrepresentation, breach ofcontract, breachofcommonlaw fiduciaryduty and breachofthe duty ofgood faith and fair dealing. Defendants contend that because the Planparticipants made the decision to purchase the Stock with no assistance fromPlaintiff, the participants are the true purchasers of the Stock. Defendants then argue that because only purchasers have standing to bring a claim under Oregon securities, Plaintiff is barred from bringing any non-ERISA claim.
Defendants rely on a number of cases in which the courts held that individuals who purchased securities through a trustee have standing as "purchasers" to assert claims under securities laws.Vannest v. Sage, Rutty Co., Inc., 960 F. Supp. 651 (W.D.N.Y. 1997); Atchley v. Qonaar Corp., 1982 U.S. Dist. LEXIS 12178, *5 (N.D. Ill. 1982) reversed on other grounds, 704 F.2d 355 (7th Cir. 1983); Wendt v. Keenan Clarey, Inc., 1986 U.S. Dist. LEXIS 17378, *6 (D. Minn. 1986). However, these cases do not hold that trustees who purchase securities at the direction of their beneficiaries do not have standing to bring the same claims. To the contrary, the court in Atchley stated that a beneficiary may assert a claim, either "alone or with the trustee" against the seller of the securities, thereby acknowledging that a trustee had standing to bring a claim against the seller.Atchley, supra, at *5. There is no rule that only one person has standing to bring a claim. In many instances, there may be more thanone proper plaintiff. In this case, it appears that both the employees and the trustee have standing to assert a claim based on the purchase of the Stock.
Most of the cases relied on by Defendants refer to the "Birnbaum" rule which limits those authorized to asserta private right of action for money damages under Rule 10b-5 to actual purchasers or sellers of securities. There is no dispute that Plaintiff purchased the Stock, and actually held the Stock, for the benefit of the Plan participants. Plaintiff was clearly a purchaser under the Birnbaum rule and has standing to bring this action.
The Birnbaum Rule was created by the Second Circuit inBirnbaum v. Newport Steel Corp., 193 F.2d 461, 461064 (2d Cir. 1952) and was adopted by the United States Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-33 (1975).
Defendants also offer a number of SEC no-action letters in which the agency has held that the domicile of a trustee who purchases stock at the direction of plan participants is not considered for the purposes of the intra-state offering exemption. First, the court notes that these no-action letters are not binding on the court. Second, while the no-action letters do hold that a trustee who purchases securities at the direction of beneficiaries and acts as a custodian of the purchased securities are not "purchasers" for the purpose of qualifying for the exemption provided by Section 3(a)(11) of the Securities Act of 1993 and Rule 147 promulgated thereunder, there is no indication that this characterization is applicable or relevant to the issue before the court.
Plaintiff purchased the Stock and retained ownership of the Stock for the benefit of the Plan participants. Plaintiff is a purchaser of securities and has standing to assert claims for improper activity relating to the sale of the securities. Defendants' motion to dismiss should be denied.
Even assuming the Plaintiff is not a "purchaser" and, therefore, unable to assert claims for securities violations, the court questions whether such a characterization is relevant to the nonsecurities claims. In all of the non-securities claims, Plaintiff alleges a special or contractual relationship between the professionals hired to assist in the leveraged buyout and the Plan. These allegations support a claim for breach of the contract or a breach of a duty owed to the Plan. It is evident that the Plan has standing and is, in fact, the proper party to bring an action for these breaches.
Motion for Joinder
Defendants ask the court to require the joinder of the Plan participants based on the fact that they are interested parties and that complete relief cannot be awarded without their presence in the action. Additionally, Defendants assert that discovery will be problematic unless all participants are named as parties. The court disagrees.
The Plan, and the statutes under which it was created, contemplate that the trustee of the Plan will live up to his fiduciary duties and protect the interests of the Plan beneficiaries. Plaintiff is pursuing this action on behalf of the Plan beneficiaries and all damages awarded in this action will inure to their benefit. "It has long been the rule that beneficiaries of a trust ordinarily need not be joined as necessaryparties under Rule 19." Arizona Laborers, Teamsters and Cement Masons Local v. Conquer Cartage Company, 753 F.2d 1512, 1521 (9th Cir. 1985). This rule applies in this instance.
With regard to Defendants' argument that discovery will be difficult in the absence ofthe Plan beneficiaries as parties, the court recognizes that the Plan beneficiaries' financial interest in this case will, for the most part, make them willing participants in the discovery process. It is extremely unlikely that they won't fully participate and the slight chance of a meaningful discoverydispute is not sufficient reason to require the joinder of all of the Plan participants.
Conclusion
Defendants' motions (#35, #76 and #83) to dismiss or, in the alternative, for joinder, should be DENIED. Plaintiff's motion (#103) for leave to file sur reply should be DENIED.
Scheduling Order
The above Findings and Recommendation will referred to a United States District Judge for review. Objections, if any, are due April 14, 2004. If no objections are filed, review of the Findings and Recommendation will go under advisement on that date. If objections are filed, a response to the objections is due 10 days fromthe date of service of the objections, and the review ofthe Findings and Recommendation will go under advisement on that date.