OPINION
SCHWARTZ, Senior District Judge.
I. INTRODUCTION
Plaintiff End of the Road Trust, on behalf of Plaintiffs Fruehauf Trailer Corporation and Jacksonville Shipyards, Inc., and Pension Transfer Corp. (collectively "Plaintiffs") filed an Amended Complaint against Defendants Terex Corporation, Randolph W. Lenz, and Marvin B. Rosenberg (collectively "Defendants") alleging breach of fiduciary duty, negligent misrepresentation, gross negligence and mismanagement, unjust enrichment, aiding and abetting breach of fiduciary duty, breach of contract, and breaches of ERISA fiduciary duty mandated by ERISA §§ 502(a)(2) and 502(a)(3). Defendants filed this Motion to Dismiss for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6) and for lack of personal jurisdiction, pursuant to Fed.R.Civ.P. 12(b)(2). For the reasons set forth below, Defendants' Motion to Dismiss will be DENIED except as to Count 6 (breach of contract) which will be dismissed to the extent it is premised upon breaches of the duties of due care, good faith, and loyalty.
II. FACTS
Plaintiff Fruehauf Trailer Corp. ("Fruehauf") was, prior to bankruptcy, a Delaware corporation, engaged in the business of designing, manufacturing and selling truck trailers and related parts, accessories and services. Fruehauf was also the former sponsor and administrator for the Fruehauf Trailer Corporation Retirement Plan ("Fruehauf Plan"). Amended Complaint ("AC") ¶ 1.
Plaintiff Jacksonville Shipyards, Inc. ("JSI") was a wholly-owned and essentially nonoperating subsidiary of Fruehauf which had previously manufactured ships and sandblasting equipment. JSI was the former sponsor and administrator of the Pension Plan for Hourly Rated (Union) Employees of Jacksonville Shipyards, Inc. ("JSI Plan"). AC ¶ 1.
On October 7, 1996, Fruehauf, JSI and other affiliated entities of Fruehauf filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. Their consolidated Plan of Reorganization (the "Plan") became effective October 27, 1998. AC ¶ 1.
Plaintiff End of the Road Trust ("ERT") is a liquidating creditor trust formed pursuant to the Plan for Reorganization and operating under the laws of the State of Delaware with its principal place of business in California. Pursuant to the Plan, this action, as well as Fruehauf's and JSI's other assets and claims, were transferred to ERT. This action is being prosecuted under the authority of the Plan by ERT for the purpose of maximizing Fruehauf's and JSI's assets and claims. AC ¶ 1.
2.
Defendant Terex Corporation ("Terex") is a Delaware corporation with its principal place of business in Connecticut. Terex designs and manufactures heavy duty, off-highway, earth moving, lifting, and material handling equipment, attachments and parts for the construction and mining industries. From 1989 through August 1993, Terex was the parent company of Fruehauf and its dominant shareholder. AC ¶ 3.
Defendant Randolph W. Lenz ("Lenz") is a citizen and resident of Florida. From 1989 through August 1993, Lenz was Chairman of the Board of Fruehauf, Chairman of the Board of Terex, and Chairman of the Board, President and majority stockholder of KCS Industries, Inc. ("KCS"), a company which purported to provide legal, financial, and management services to Fruehauf and for which KCS received a monthly fee. AC ¶ 4.
Defendant Marvin B. Rosenberg ("Rosenberg") is a citizen and resident of Connecticut. From June 1989 through August 1993, Rosenberg was the Secretary and a Director of Fruehauf, and was the Secretary, General Counsel, and a Director of Terex; and was the General Counsel of KCS. Rosenberg continued to serve as Director of Fruehauf until September 1996 and remains a Director of Terex to this day. AC ¶ 5.
Between 1914 and 1989, Fruehauf (referred to herein as "Old Fruehauf") operated trailer manufacturing, distributing, sales and servicing facilities throughout the United States and was a leader in domestic used trailer sales. The company manufactured and marketed a wide variety of trailers and related products, including dry freight vans, refrigerated vans, platform trailers, liquid and bolt type trailers and dump trucks. Old Fruehauf also operated sales and services organizations that purchased and sold used trailers, sold replacement parts and offered maintenance services.
On July 14, 1989, Terex purchased Old Fruehauf's trailer division and maritime subsidiaries and the "Fruehauf" trade name through a complex and highly leveraged transaction (the "1989 Acquisition"). The trailer division and maritime subsidiaries became known as Fruehauf and was a wholly owned subsidiary of Terex. Terex paid an aggregate purchase price of approximately $231 million, obtaining much of the funds from $160 million in notes placed with certain institutional lenders. AC ¶¶ 15-16. Plaintiffs allege Defendants spent little or no time conducting due diligence in connection with the 1989 Acquisition. AC ¶ 19.
The Amended Complaint contains the following allegations of mismanagement of
1.
As part of the 1989 Acquisition, Old Fruehauf and Fruehauf entered into an Assumption Agreement, whereby Fruehauf assumed substantially all liabilities related to Old Fruehauf's trailer businesses, as well as the liabilities of its maritime subsidiaries, whether they were in the form of current or future claims (collectively referred to as "trailing liabilities"). The trailing liabilities included all current and future claims that might be brought under workers' compensation insurance coverage, assumed benefit plans, such as medical and retiree benefits, environmental liabilities, certain guarantee obligations, and products liabilities obligations. Plaintiffs allege Defendants reasonably should have known of the seriousness and extent of the trailing liabilities, but disregarded the consequences of the trailing liabilities vis a vis the business. AC ¶ 17.
2.
As part of the 1989 Acquisition, Old Fruehauf and Fruehauf also entered into a management agreement with KCS whereby KCS purported to provide legal, financial and management services to Fruehauf in exchange for approximately $300,000 per month. Plaintiffs contend KCS, which was owned and operated by Lenz, did not provide services to Fruehauf of a value commensurate with the fee charged or that Fruehauf was not already obtaining from other professionals. AC ¶ 18.
3.
Following the 1989 Acquisition, Fruehauf began publicizing efforts to restructure its operations and pare down its debt. Defendants claimed to have caused a strong turn around with positive results, purportedly for Fruehauf. In reality, Fruehauf was suffering significant losses. The economic recession of the early 1990's deeply affected trailer sales, and the entire trailer industry, including Fruehauf, suffered as a result. AC ¶ 20.
4.
First, Defendants caused Fruehauf to cancel its products liability insurance and attempt self insurance, a decision which conserved immediate short term cash, but severely and negatively impacted the company's operations in the long term. AC ¶ 21.
Second, Defendants caused Fruehauf to sell off its distributors' network to garner immediate cash, leaving the company with only its manufacturing division. Fruehauf's distributors' network had been a unique and profitable part of its operations. The sole remaining business of trailer manufacturing was subject to increasingly difficult competition and was itself increasingly less profitable. AC ¶ 21.
Third, Defendants caused Fruehauf to lower its inventory to levels so low that customers could no longer rely on Fruehauf's ability to provide and service trailers. With its funds diverted, Fruehauf was unable to pay its vendors consistently. Vendors stopped supplying parts, resulting in half-built trailers stagnating at the factories. AC ¶ 22.
Fourth, despite reduced cash flow, Defendants caused Fruehauf to use available cash to continue paying the monthly KCS "management" fee and the salaries of other Terex "advisors." AC ¶ 22. Fifth, Defendants caused Fruehauf to sell real estate for an amount considered to be substantially less than fair market value. AC ¶ 23. Sixth, Defendants directed that all mechanics at Fruehauf branches be fired, notwithstanding that this service work was providing one of the better sources of revenue for Fruehauf and could absorb most of the overhead of the company's branch offices. AC ¶ 23.
Finally, Defendants failed to seek Chapter 11 relief for the company, even though
5.
Defendants' management decisions affecting Fruehauf had caused Fruehauf to violate material covenants in its loan agreements with institutional lenders, including minimum income and net worth requirements. Such continuing violations would have constituted default enabling Fruehauf's lenders to demand immediate payment of all outstanding debt. AC ¶ 24. In order to avoid default, Defendants succeeded in covertly agreeing to alter the covenants by reducing the required minimum levels of profitability. Pursuant to this agreement, the minimum operating income required was reduced from $8 million to $2 million for the first six months of 1991, an amount that Defendants falsely depicted was a profit level that Fruehauf had achieved. However, Defendants had improperly overstated Fruehauf's net income to make it appear the company had achieved even this diminished level of profit. Rather than having been profitable in 1990, Fruehauf actually suffered significant losses for the year, thereby greatly exacerbating and magnifying the magnitude and materiality of Fruehauf's loan covenant violations. The company's true operating income was insufficient to meet the financial covenants in the loan agreements and, without further infusions of cash, the company would be unable to satisfy its loan covenants in the future. AC ¶ 25.
6.
In July 1991, Defendants announced an initial public offering ("IPO") of Fruehauf stock. AC ¶ 30. Defendants had continued to mislead the public that Fruehauf's debt was under control; that Fruehauf's restructuring was proceeding according to plan; that a "turn around" had occurred; and that the company's future prospects under Defendants' leadership and control were positive. AC ¶ 31. The IPO prospectus falsely portrayed an optimistic future for Fruehauf even though Defendants knew Fruehauf had liquidity problems and that Fruehauf's purported "turn around" was the false product of accounting improprieties. AC ¶ 32. Defendants kept secret their motivations for the IPO, which were: (i) to cure temporarily the problem of Fruehauf's noncompliance with its debt covenants; (ii) to obtain waivers and/or decreased levels of certain negative financial covenants to avoid imminent default; and, (iii) to recoup their initial investment in Fruehauf. AC ¶ 33. Although Fruehauf sold four million shares, $2.7 million of the proceeds was paid to Terex and $5.5 million was paid to KCS. AC ¶ 34. Defendants used the remaining proceeds of the IPO to, in part, to pay down Defendants' 1989 Acquisition debt. AC ¶ 35.
7.
In March 1992, without the knowledge of Fruehauf's financial staff, Board of Directors, or Audit Committee, Lenz liquidated $1 million worth of Fruehauf's marketable securities. In November 1992, again acting in secret and without the knowledge of Fruehauf's financial staff, Board of Directors, or Audit Committee, Lenz liquidated and utilized an additional $622,000 worth of Fruehauf's marketable securities. These funds were combined with the $1 million he had earlier appropriated and were used to post an appeal bond for the personal benefit of Lenz in litigation a brokerage firm had brought against him involving his own brokerage account. AC ¶ 36.
Although the Fruehauf Board of Directors later purported to "ratify" Lenz's actions, the Board insisted that Lenz return
8.
First, Lenz refused for a substantial period to permit the members of the Audit Committee of Fruehauf's Board to meet and direct the audit responsibilities for Fruehauf. Following protests by the company's outside auditors, Lenz dismissed those auditors in October 1992. AC ¶ 23.
Also, Defendants directed a series of false accounting methods to produce inaccurate financial statements and material violations of generally accepted accounting principles ("GAAP"). As a consequence, substantial profits were claimed after the 1989 Acquisition, when in fact, Fruehauf had suffered substantial losses. For the fiscal years ended December 31, 1989 through 1992, Defendants caused Fruehauf to engage in accounting improprieties described in the Amended Complaint as follows:
In addition, AC ¶ 48 alleges Defendants caused Fruehauf to establish improper purchase accounting reserves:
Finally, AC ¶ 51 alleges Defendants manipulated Fruehauf's accounting in connection with the violation of debt covenants:
9.
Defendants profited from manipulation of stock gains as a result of insider information and further manipulation of pension plan assets. AC ¶ 52. Between 1991 and 1993, and with knowledge of the improper accounting and false disclosures, Lenz exercised warrants and sold substantial blocks of stock of Fruehauf and Terex. During 1993 and with knowledge of the improper accounting and disclosure, Lenz, Terex and Rosenberg sold substantial amounts of shares of common stock of Fruehauf. AC ¶ 53. As a result of the deceptions the market prices of Fruehauf and Terex stock were artificially inflated in substantial amounts during these periods. AC ¶ 55. When the marketplace finally learned of these accounting deceptions, the value of the stocks decreased dramatically. AC ¶ 54.
10.
Before 1989, Fruehauf sponsored the previously described Fruehauf Plan. AC ¶ 56. After Terex acquired Fruehauf, Defendants established one trust to hold the assets of the Fruehauf Plan, and appointed Continental Bank, N.A. ("Continental") as trustee. AC ¶ 57. At the same time, Terex sponsored its own retirement plan (the "Terex Plan"), the assets of which were held in a second, separate trust. AC ¶ 57.
On January 1, 1992, the two trusts merged to hold the assets of the Fruehauf Plan and the Terex Plan in a single, commingled master trust (the "Master Trust"), with Continental as trustee. On September 8, 1992, Terex appointed Lenz as the sole member of the investment committee for the Master Trust, which gave Lenz discretionary responsibility to manage, acquire, dispose of, and invest the assets of the Master Trust. In September 1994, Fruehauf caused the Master Trust to be separated into separate trusts, one for the Fruehauf Plan (the "Fruehauf Trust") and one for the Terex Plan (the "Terex Trust"). Lenz, as sole member of the Investment Committee, allocated the Master Trust assets between the Fruehauf Trust and the Terex Trust. AC ¶ 58.
On March 31, 1993, Lenz directed Continental to invest $1 million of Master Trust assets in an investment trust called the Asset Acquisition Trust Limited Partnership ("AAT"). One of the assets held by the AAT was Connecticut Bank of Commerce, a bank in which Lenz held an ownership interest, and in which both Lenz and Rosenberg served as members of the Board of Directors. Continental completed the investment of the $1 million in the Asset Acquisition Trust in reliance upon representations given by Lenz, and in reliance upon a purported March 31, 1993 "opinion of counsel" given by Rosenberg, that the transaction would not violate ERISA. AC ¶ 59. On or around June 2, 1993, Continental discovered that Lenz and Rosenberg failed to disclose material information regarding their personal interests in the Connecticut Bank of Commerce and notified Lenz that the $1 million investment was fiduciary self-dealing, a conflict of interest, and a prohibited transaction, resulting a violation of ERISA. AC ¶ 60. When Continental attempted to remedy the violations by undoing the transaction, Lenz fired Continental as trustee. AC ¶ 61.
Between 1990 and 1993, Lenz directed the Fruehauf Plan to loan money to or for the benefit of Fruehauf and Terex, in the initial amount of approximately $3.3 million. In 1993, a letter of credit was substituted for the loan notes. The amounts outstanding under the letter of credit were exchanged in May 1995 for Fruehauf senior secured notes. The loans from the Fruehauf Plan benefitted Lenz and Rosenberg, who both had ownership interests and senior management positions in both Fruehauf and Terex. AC ¶ 64.
In 1991, Lenz caused the Fruehauf Plan to enter into an agreement with Richard Adams whereby Adams was empowered to "manage" $750,000 of the Fruehauf Plan's assets. When Continental learned of the arrangement, it notified Defendants that the agreement violated trust documents. Disregarding Continental's warnings, Lenz entrusted Adams with $750,000 from the Fruehauf Plan for investment in high-risk derivatives. The entire $750,000 thereafter was lost, and the Fruehauf Plan was able to recover only a small portion in Adams' subsequent Chapter 7 bankruptcy case. AC ¶ 65.
The Amended Complaint alleges Defendants concealed all of the above mentioned mismanagement activities until at least March 1994. AC ¶¶ 38-45, 66-69. Defendants contend that all of these transactions were fully disclosed in publicly filed documents prior to August 1993. The issue of concealment and disclosure is discussed more fully in section V.B.1.b, infra.
In 1992, Fruehauf hired a new president, Thomas Roller. AC ¶ 38. In August 1993, Roller caused Fruehauf to restructure its financing, resulting in several changes to the management and ownership of Fruehauf. First, Lenz resigned from his position on the Fruehauf Board of Directors. AC ¶ 39. In addition, Rosenberg resigned his position as Secretary of Fruehauf, although he stayed on the Board as an outside director. Also, Terex decreased its ownership of Fruehauf common stock from 42% to 26%. Terex also relinquished its voting rights in this stock. Lenz's and Rosenberg's ownership interests in Fruehauf were reduced to 5.4% and 1%, respectively. Finally, the management agreement with KCS was terminated.
In March 1994, Fruehauf learned that its outside auditor, Deloitte & Touche, was "refusing to reissue audit reports" for 1989-1992 and that the prior reports could no longer be relied upon. AC ¶ 40. Fruehauf confirmed that the financial statements for 1989-1992 could no longer be relied upon as accurate. AC ¶ 41. Fruehauf publicly announced this news about the financial statements, causing its business to deteriorate rapidly due to a perception it had "cooked books." AC ¶¶ 42, 44. After much investigation and work, Fruehauf re-issued its 1989-1992 financial statements in March 1995, which showed significant losses in each of these years. AC ¶ 43.
In January 1995, a class of Fruehauf stockholders filed a Second Amended Complaint against, inter alia, Fruehauf, Terex, Lenz, and Rosenberg, in a case captioned Rebenstock v. Fruehauf Trailer Corp., Case No. 92-CV-72050-DR (E.D.Mich.). This action alleged securities law violations and made some of the same allegations as the Amended Complaint in this case. On June 15, 1995, the case was settled. The Stipulation of Settlement included a Release entered into by Fruehauf, Terex, Lenz, and Rosenberg, in which each of them "releases and forever discharges each other . . . from any and all claims, rights of action and causes of action arising out of the Litigation only."
In March 1996, Fruehauf filed an action in Delaware Superior Court against its outside auditor Deloitte & Touche ("D & T"), alleging the same accounting improprieties as alleged in the Amended Complaint in this case. See Fruehauf Trailer Corp. v. Deloitte & Touche, L.L.P., C.A. No. 966-03-32(JEB) (Del.Super.Ct.). That case was settled on April 25, 1996.
III. SUBJECT MATTER JURISDICTION
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1331 over the causes of action arising under the laws of the United States. In addition, the Court has jurisdiction pursuant to 28 U.S.C. § 1334(b) over the causes of action arising under and related to cases under the Bankruptcy Code. Also, the Court has jurisdiction pursuant to 29 U.S.C. § 1132(e)(1) over the causes of action under the provisions of ERISA. Finally, the Court has jurisdiction pursuant to 28 U.S.C. § 1367 over the state law claims arising from the same set of operative facts that give rise to the claims based on the Bankruptcy Code and ERISA.
IV. STANDARD OF APPLIED TO A MOTION TO DISMISS
A motion to dismiss for failure to state a claim, pursuant to Rule 12(b)(6), should be granted only if, accepting all allegations in the Amended Complaint as true and viewing them in the light most favorable to the Plaintiffs, the Plaintiffs are not entitled to relief as a matter of law. See In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1420 (3d Cir.1997).
V. DISCUSSION
Both parties submitted voluminous appendices of documents for the Court to consider in deciding this Motion to Dismiss for failure to state a claim, pursuant to Rule 12(b)(6), and for lack of personal jurisdiction, pursuant to Rule 12(b)(2). In a motion to dismiss for failure to state a claim, submitted pursuant to Rule 12(b)(6), the Court may consider (1) documents attached to or incorporated by reference into the complaint, (2) matters of public record; (3) undisputably authentic documents upon which the claims are based. PBGC v. White, 998 F.2d 1192 1196 (3d Cir.1993). Matters of public record include documents that are required by law to be filed with the SEC. See Kramer v. Time Warner, 937 F.2d 767, 774 (2d Cir.1991). In a motion to dismiss for lack of personal jurisdiction, submitted pursuant to Rule 12(b)(2), the Court may also consider "sworn affidavits or other competent evidence" related to personal jurisdiction. See Patterson v. Federal Bureau of Investigation, 893 F.2d 595 (3d Cir.1990).
The parties have stipulated as to the exhibits which the Court may consider. Accordingly, the Court will consider Defendant's Exhibits ("D#") D1-D8, D15-D29, D31-D53, Plaintiff's Exhibits ("P#") P1-P2, P28-P40, and Defendant's Supplemental Exhibits ("DS#") DS1-3. The
Defendants argue that all of Plaintiffs state law claims in Counts 1 through 6 are barred by the Delaware statute of limitations which provides:
10 Del.Code § 8106. This three year statute of limitations applies to the claims for breach of fiduciary duties (Count 1);
It is undisputed that ERT filed the present action on October 6, 1998. The parties also agree that, accepting all allegations in the Amended Complaint as true, the latest date that an alleged wrongful act may have occurred was August 1993.
However, Plaintiffs argue that the claims are not time barred because: (1) the claims have an effective filing date of October 7, 1996 because of the petition for
The parties agree, absent any other statutory provision in addition to the statute of limitations, Plaintiffs claims would be barred by the statute of limitations, as they were filed on October 6, 1998, more than three years after Plaintiffs concede they acquired knowledge of the allegations. However, if the statute of limitations has not run on a claim as of the bankruptcy petition date, 11 U.S.C. § 108(a) extends the time period for filing the claim by two years:
11 U.S.C. § 108(a) (emphasis added). In a voluntary petition, as in this case, the filing of the petition operates as an order for relief. See id. at § 301. Under 11 U.S.C. § 108(a), the effective filing date, for statute of limitations purposes, is October 7, 1996, the date of Plaintiffs' petition for Chapter 11 bankruptcy protection.
If the statute of limitations had not expired before filing the petition on October 7, 1996, Plaintiffs commencement of the action less than two years later on October 6, 1998 is deemed timely. See, e.g., In re Walnut Leasing Co., Inc., 1999 WL 729267, *6 (E.D.Pa.1999) (claims timely under § 108(a) when filed within two years of voluntary petition). In sum, if the statute of limitations is tolled until at least October 7, 1993, the Amended Complaint was timely filed on October 6, 1998.
b.
The statute of limitations will be tolled under the doctrine of fraudulent concealment if the plaintiff can prove: "an affirmative act of concealment by the defendant — an `actual artifice' that prevents a plaintiff from gaining knowledge of the facts or some misrepresentation that is intended to put the plaintiff off the trail of inquiry." Dean Witter, 1998 WL 442456 at *5. If there has been fraudulent concealment, then the statute of limitations is tolled until the plaintiff knew or should have known of the alleged wrong. See id. However, the statute will not be tolled beyond the time when plaintiffs acquired inquiry notice of the alleged wrong. See id. at *6. The plaintiff bears the burden of pleading facts to prove that the statute should be tolled. See In re ML/EQ Real Estate Partnership Litig., 1999 WL 1271885, *1 (Del.Ch.1999). Thus, the statute will be tolled if: (a) the Amended Complaint alleges that Defendants fraudulently concealed the alleged wrongs from Plaintiffs; and (b) Plaintiffs lacked inquiry notice of the alleged wrongs.
(1)
Fraudulent concealment can encompass either "[1] the commission of affirmative acts of misrepresentation or [2] failure to disclose facts when there is duty to disclose." Litman v. Prudential-Bache Properties, Inc., 1994 WL 30529, *4 (Del. Ch.1994). To establish fraudulent concealment under the first prong, the Amended Complaint, and supporting documents, must allege Defendants had actual knowledge of the wrong and acted affirmatively to conceal the wrong from Plaintiffs. See Dunleavy v. Dugan, 1990 WL 49421, *4 (D.Del.1990) (citing Bradford, Inc. v. Travelers Indemnity Co., 301 A.2d 519, 525 (Del.Super.1972)). Under the second prong, fraudulent concealment may be established absent any affirmative act, by alleging a business fiduciary relationship between Defendants and Plaintiffs and a duty to disclose. See id. (citing Bradford, 301 A.2d at 525; 51 Am.Jur.2d Limitation of Actions § 149 (1970)). The Amended Complaint contains sufficient allegations, for the pertinent time period, that Terex, Lenz, and Rosenberg had fiduciary duties to Fruehauf by virtue of their positions as dominant shareholders,
The Amended Complaint also alleges affirmative acts of misrepresentation and/or failures to disclose material facts by Terex, Rosenberg, and Lenz from the time Terex acquired Fruehauf in July 1989 until at least March 1994.
Original Reported 1995 Restated
Net income Net income
Year (loss) (loss) Difference
1990 ( 2,176,000) (51,066,000) (48,890,000)
1991 (28,876,000) (73,125,000) (44,249,000)
1992 (65,160,000) (47,448,000) 17,712,000
Moreover, the Amended Complaint alleges that the fraudulent concealment continued through March 1994 (with emphasis added):
From what has been quoted above, it is clear the Amended Complaint adequately alleges affirmative acts of fraudulent concealment, sufficient to toll the statute until at least March 1994, which would make the claims timely filed within three years, on the effective filing date of October 7, 1996.
(2)
The statute of limitations ceases to be tolled when the plaintiff is put on inquiry notice of the alleged wrongs. Dean Witter, 1998 WL 442456 at *6. A plaintiff has inquiry notice when, given all of the facts, a person "exercising reasonable diligence should have discovered his injury." See id. Disclosure of wrongful acts in publicly filed documents such as annual reports is deemed to put a plaintiff on inquiry notice of the wrongful acts. See id. at *9; Seidel v. Lee, 954 F.Supp. 810, 817 (D.Del.1996); In re USACafes, L.P. Litigation, 1993 WL 18769, *3-6 (Del.Ch. 1993).
Defendants argue the Plaintiffs were on inquiry notice more than three years before the effective filing date of the Amended Complaint, as a result of information available in public filings. Specifically, Defendants contend that each and every allegation of wrongdoing in the Amended Complaint was disclosed in a publicly filed document on or before August 31, 1993. Plaintiffs counter that they could not discover any of these violations until March 1994 because of concealment by the Defendants. AC ¶¶ 43, 46. The Court has conducted a careful review of each allegation of the Amended Complaint and the publicly filed documents submitted by the parties in connection with this motion. For a significant number of these allegations, the Defendants have not pointed to and the Court has not discovered any disclosure sufficient to put the Plaintiffs on inquiry notice of the alleged wrongful acts. Since these allegations are sufficient to support all of the claims in the Amended Complaint, the Court holds that the statute of limitations must be tolled until March 1994, the time the Plaintiffs first allege they discovered the wrongful acts.
First, the Plaintiffs were not on inquiry notice of the acts alleged in AC ¶ 48, regarding certain accounting violations involving improper purchase accounting reserves.
Second, the Plaintiffs were not on inquiry notice of the allegations of insider trading in AC ¶¶ 53-55.
Next, AC ¶ 20 contains allegations that Defendants publicized a strong turnaround for Fruehauf while knowing that it was having serious financial problems.
Similarly, Plaintiffs were not on inquiry notice of the alleged misrepresentations made by the Defendants in connection with the 1991 initial public offering ("IPO") of Fruehauf stock.
In addition, AC ¶ 23 contains allegations that the Defendants damaged Fruehauf's long term business interests by selling real estate at substantially less than market value and firing all Fruehauf mechanics.
For all of the other allegations in the Amended Complaint, the Defendants point to purported public disclosures in a variety of publicly filed documents.
Count 1 of the Amended Complaint alleges breach of fiduciary duty by, inter alia, "improper accounting methods."; "realizing improper gains from insider gaining"; "selling or transferring corporate assets for less than adequate consideration"; and "engaging in self-interested transactions." AC ¶ 74. Count 2 alleges negligent misrepresentation by "ma[king] untrue representations of fact and omitt[ing] certain material facts regarding, among other things, the financial status of Fruehauf and its profitability, net worth, holdings,
On this Motion to Dismiss the Court must read the Amended Complaint and the documents discussed above in the light most favorable to the Plaintiffs. At this stage of the litigation, a favorable reading of the Amended Complaint and the limited record leads to the conclusion that the allegations are sufficient to allege the Defendants fraudulently concealed and the Plaintiffs were not on inquiry notice of the above mentioned wrongful acts until March 1994. Therefore, at this stage, it is appropriate to toll the statute of limitations until that date. Accordingly, the Court holds the Amended Complaint to be timely filed on its effective filing date of October 7, 1996, less than three years after Plaintiffs acquired notice of the wrongful acts.
c.
Plaintiffs argue and the Court agrees that the statute of limitations also should be tolled under the doctrine of equitable tolling. Under this doctrine, the statute of limitations is tolled until Plaintiffs are on inquiry notice if the complaint alleges "an abuse of the fiduciary relationship through actionable self dealing." In re MAXXAM, Inc., 1995 WL 376942, *6 (Del.Ch.1995) (citing Kahn v. Seaboard Corp., 625 A.2d 269, 275-76 (Del.Ch.1993)); see also Bovay v. H.M. Byllesby & Co., 38 A.2d 808 (Del.1944).
First, the Amended Complaint alleges fiduciary relationships between the Defendants and Fruehauf. As previously rehearsed, the Amended Complaint alleges that Lenz and Rosenberg were directors and officers of Fruehauf who owed fiduciary duties to Fruehauf. AC ¶¶ 4, 5, 71, 72; Arnold, 678 A.2d at 538. The Amended Complaint also alleges that Terex, as the dominant shareholder of Fruehauf, owed fiduciary duties to Fruehauf. AC ¶¶ 3, 16, 71, 72; Kahn, 638 A.2d at 1113. Thus, all Defendants were fiduciaries to Fruehauf.
Second, the Amended Complaint alleges Defendants engaged in actionable or fraudulent self dealing. One type of actionable self dealing, for equitable tolling purposes, is when a fiduciary of two corporations causes one corporation to pay money to the other for largely nonexistent services. See Carlton Investments v. TLC Beatrice Int'l Holdings, Inc., 1995 WL 694397, *14 (Del.Ch.1995). The Amended Complaint alleges Defendants, who were also fiduciaries of KCS, caused Fruehauf to pay KCS large sums of money for largely unperformed management and legal services. AC ¶¶ 18, 45. Another type of actionable self dealing, for purposes of equitable tolling, is insider trading. See Strougo v. Carroll, 1991 WL 9978, *3 (Del. Ch.1991). The Amended Complaint alleges that the Defendants also engaged in insider trading. AC ¶¶ 53-55. Therefore, Plaintiffs have alleged fraudulent self dealing by Defendants.
2.
In 1995, Fruehauf, Terex, Lenz, and Rosenberg were co-defendants in a class action Rebenstock v. Fruehauf Trailer Corp. et al., and executed a Release as part of a Stipulation of Settlement:
Rebenstock v. Fruehauf Trailer Corp. et al., C.A. No. 92-CV-77050-DT (E.D.Mich. June 15, 1995), D6 at 20. Defendants contend the Release bars state law claims that arise from the same set of operative facts or the same factual predicate as the Rebenstock Litigation. Plaintiffs counter that the Release is limited to cross-claims for contribution or indemnity which could have been raised in the Rebenstock Litigation. The dispute is therefore narrowed to determining the meaning of the phrase "arising out of the Litigation only." For the following reasons, the Court concludes that the meaning of the Release is ambiguous and cannot be resolved on a motion to dismiss.
The Release is interpreted according to state law. See Williams v. Stone, 109 F.3d 890, 893 (3d Cir.1997). Although the parties did not raise it, there is an issue of which state law governs interpretation of the Release. Gauging from the cases cited in the briefs, the parties have assumed the law of Delaware, the state in which this action was brought, is the governing law. However, the Stipulation of Settlement recites that the Release is to be governed by the law of Michigan.
Under Delaware law, the intent of the parties, as ascertained from the language of the document, controls interpretation of a release. See Adams v. Jankouskas, 452 A.2d 148, 155-56 (Del.1982). If the language of a release is clear and unambiguous then the Court must follow that interpretation. See id. If a release is ambiguous its interpretation becomes a question of fact and the fact finder may consider extrinsic evidence. See Tucker v. Albun, Inc., 1999 WL 1241073, *3 (Del.Super.1999); Rochen v. Huang, 1989 WL 5374, *1 (Del.Super.1989). A release is ambiguous if it is reasonably susceptible to more than one construction. See Tucker, 1999 WL 1241073 at *5.
Similarly, under Michigan law, the scope of a release is governed by the intention of the parties as discerned from the plain language of a release. See Rinke v. Automotive Moulding Co., 226 Mich.App. 432, 573 N.W.2d 344, 345-46 (1997).
The language, "arising out of the Litigation only," is ambiguous because it is reasonably susceptible to more than one meaning: (1) claims arising out of the same set of operative facts as the facts alleged in the Rebenstock class action, or (2) cross-claims for indemnification or contribution based on the federal securities law claims alleged in the Rebenstock class action. First, the Stipulation of Settlement does not explicitly define "Litigation," but instead uses it broadly to refer to "the above captioned class action." D6 at 1. It is not clear whether "the above captioned class action" refers to the set of operative facts alleged in the Rebenstock Second Amended Complaint ("RSAC") or to merely the federal securities law claims alleged in the RSAC. If it means the former, then the claims "arising out of" the same set of operative facts may be barred. However, if it means the latter, then only cross-claims for indemnification or contribution may be barred. Moreover, it is not at all clear how the use of the term "only" after "Litigation" affects the meaning of the term "Litigation" and the scope of the release.
In addition, the next sentence of the release, which carves out certain non-released claims, casts further doubt on the scope of the release.
Finally, the Delaware cases cited by Defendants fail to unambiguously support the construction proffered by Defendants. In In re Fuqua Industries, Inc. Shareholder Litigation, the court interpreted the release language "arise out of, under, or in connection with the acquisition of Georgia Federal" to include claims arising from the set of operative facts surrounding the acquisition of Georgia Federal. See 1997 WL 257460, *5-*6 (Del.Ch.1997). Similarly, in In re Union Square Associates Securities Litigation, the court construed the release language "arising in any way in connection with purchases of Units of partnership" to mean any claims related to the same factual predicate as the partnership unit sale. See 1993 WL 220528, *3 (Del. Ch.1993). In each of these cases, the release related to claims arising out of a particular transaction: the acquisition of Georgia Federal or the purchases of Units of partnership. In contrast, the Release uses the term "Litigation only" rather than defining a set of transactions or occurrences. Since the language "Litigation only" could refer to the transactions or only to the federal securities law claims, the scope of the Release is ambiguous. It follows, the Release must be interpreted by the trier of fact and the Amended Complaint will not be dismissed based upon Fruehauf having signed the Release.
Defendants assert Plaintiffs' state law claims fail as a matter of law because they fail to rebut the presumption of the business judgment rule. The Delaware business judgment rule is a presumption "that in making a business decision, the directors of a corporation acted on an informed basis [i.e., with due care], in good faith and in the honest belief that the action taken was in the best interest of the company." Cede & Co., Inc. v. Technicolor, Inc., 634 A.2d 345, 360 (Del.1993) (internal quotations eliminated). "The business judgment rule shields corporate decision-makers and their decisions from judicial second-guessing where the five elements of the rule — a business decision, disinterestedness, due care, good faith, and no abuse of discretion — are present." Dennis J. Block, et al., The Business Judgment Rule: Fiduciary Duties of Corporate Directors and Officers, 9 (1987). The Amended Complaint contains sufficient allegations of these five elements to preclude dismissal for failure to rebut the business judgment rule.
Defendant asserts that the breach of fiduciary duty claims against Terex and Lenz must be dismissed because they were both minority shareholders, and not directors or officers, after August 1993 and,
Defendants urge dismissal of the breach of contract claim in Count 6 because the contracts are unenforceable as they simply require Lenz and Rosenberg to perform pre-existing legal duties. Count 6 alleges that Lenz and Rosenberg breached "contracts with Fruehauf under which they were required to provide Fruehauf with their expertise and undivided and loyal service." AC ¶ 93. Defendants contend that Lenz and Rosenberg already had a legal duty to provide their expertise and undivided and loyal service under Delaware law. Plaintiffs do not contest this position.
Under the Delaware pre-existing duty rule, a contract is unenforceable insofar as it calls upon one of the parties to perform a duty which it is already legally obligated to perform. See Seidel v. Lee, 954 F.Supp. 810, 817 (D.Del.1996); The Continental Ins. Co. v. Rutledge & Co., Inc., 750 A.2d 1219, 1232-33 (Del.Ch. 2000). In Seidel, the complaint alleged breach of a contract requiring the defendant to comply with federal securities laws. See Seidel, 954 F.Supp. at 817. Since the defendant was already legally obligated to comply with the federal securities laws, the court dismissed the breach of contract claim "to the extent that Plaintiff's contract claim is premised upon the alleged securities violations." Id. at 817-18. However, the court also allowed the plaintiff to "pursue this claim to the extent that it is based upon a breach of other obligations." Id.
Likewise, as fiduciaries, Defendants owed Plaintiffs pre-existing legal duties of due care, good faith, and loyalty. See Cede, 634 A.2d at 361. It follows, Count 6 will be dismissed to the extent that it is premised upon breaches of the duties of due care, good faith, and loyalty. However, Plaintiffs may pursue Count 6 to the extent that it is based upon breach of other contractual obligations.
Defendants assert Plaintiffs' Amended Complaint must be dismissed for failure to comply with Fed.R.Civ.P. 9(b) which requires that "[i]n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity." Defendants contend that, although the state law claims are not formally fraud claims, the underlying allegations sound in fraud and are not pled with sufficient particularity. See Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.1984). The Court finds that, to the extent Rule 9(b) applies to Plaintiffs' claims, the circumstances surrounding the fraud are pled with the requisite particularity.
Although there is a dearth of case law, the Rule 9(b) heightened pleading requirement generally does not apply to the state law claims of breach of fiduciary duty,
The allegations of fraudulent concealment and other circumstances of fraud — to the extent they underlie the state law claims — are pled with sufficient particularity to satisfy Rule 9(b). The purpose of Rule 9(b) is to place Defendants on notice of the precise misconduct with which they are charged, and to safeguard Defendants against spurious charges of fraudulent behavior. See id. The Third Circuit courts take a "lenient approach" to the application of Rule 9(b). Kronfeld v. First Jersey Bank, 638 F.Supp. 1454, 1462 (D.N.J.1986). The Court should apply Rule 9(b) with some flexibility and should not require plaintiffs to plead issues that may have been concealed by defendants. See Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 657 (3d Cir.1998); Christidis v. First Pennsylvania Mortg. Trust, 717 F.2d 96, 99 (3d Cir.1983). Although pleading the date of, place of, substance of, and person making each fraudulent act is sufficient to satisfy Rule 9(b), see Christidis v. First Pennsylvania Mortgage, 717 F.2d 96, 99 (3d Cir.1983); Klapper v. Commonwealth Realty Trust, 657 F.Supp. 948, 958 (D.Del.1987), a complaint need not plead the "date, place or time" of the fraud, so long as it uses an "alternative means of injecting precision and some measure of substantiation into their allegations of fraud." See Seville at 791. In addition, "courts should be sensitive to the fact that application of [Rule 9(b)] prior to discovery may permit sophisticated defrauders to successfully conceal the details of their fraud." Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284-85 (3d Cir.1992) (internal quotations omitted).
As discussed in Section V.B.1.b, supra, AC ¶¶ 20, 25, 28, 30, 32, 36, 38, 43, 67, and 68 contain allegations of fraudulent concealment. The Court is satisfied that these allegations are injected with sufficient precision and substantiation to meet the heightened pleading requirements of Rule 9(b). Moreover, these allegations plead with particularity any fraud underlying the state law claims. Therefore, the state law claims will not be dismissed for failure to comply with the pleading requirements of Rule 9(b).
Defendants Lenz and Rosenberg assert this Court lacks personal jurisdiction over them for purposes of the ERISA claims in Counts 7 and 8 of the Amended Complaint.
As to the statutory dimension, Fed.R.Civ.P. 4(e) ("Rule 4(e)") provides that a Court has personal jurisdiction over a defendant if he is served with process "pursuant to the law of the state in which the district court is located . . . [u]nless otherwise provided by federal law." In this case, ERISA § 502(e)(2) supplies the governing federal law for the ERISA claims:
29 U.S.C. § 1132(e)(2) (emphasis added). In other words, ERISA § 502(e)(2) provides for nationwide service of process. See Green v. William Mason & Co., 996 F.Supp. 394, 396 (D.N.J.1998). Because Lenz and Rosenberg were served with process within the United States, the statutory component of personal jurisdiction is satisfied.
Next, for these federal claims, the constitutional aspect of personal jurisdiction is governed by the due process clause of the Fifth Amendment. See Max Daetwyler, 762 F.2d at 293. The Fifth Amendment due process clause has been interpreted to incorporate the Fourteenth Amendment due process two prong test for personal jurisdiction. Id. First, the Court must ascertain whether "`certain minimum contacts' exist between the nonresident defendant and the forum." Id. (quoting International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945)). Second, the Court must ensure "`that maintenance of the suit does not offend traditional notions of fair play and substantial justice.'" Id. (quoting International Shoe, 326 U.S. at 316, 66 S.Ct. 154).
As to the first prong, the parties dispute what is the relevant forum for evaluating Lenz's and Rosenberg's minimum contacts. Plaintiffs argue that, because ERISA § 502(e) provides for nationwide service of process, the Court should apply a "national contacts" test, i.e., analyze the contacts with the United States. Defendants assert the relevant forum is the state of Delaware, the state in which this Court sits.
The Circuit Courts of Appeals are divided on whether to use a national contacts analysis for personal jurisdiction when a federal statute provides for nationwide
Although the Third Circuit Court of Appeals has never squarely addressed this issue, it has implied that it would apply the national contacts theory when a federal statute provides for nationwide service of process. See Max Daetwyler, 762 F.2d at 293-94; see also Green, 996 F.Supp. at 396. In Max Daetwyler, the Court considered whether to apply a national contacts test on a federal claim where there was no applicable federal statute providing for nationwide service of process. See Max Daetwyler, 762 F.2d at 293. Although it declined to apply a national contacts test in that case, the Court held, in dicta, that "[t]he constitutional validity of national contacts as a jurisdictional base is confirmed by those statutes which provide for nationwide service of process." Id. at 294 n. 3. Moreover, the Court reasoned that jurisdiction is determined, not by "the territory in which a court sits," but rather by "the geographical limits of the unit of government of which the court is a part." Id. at 293-94. Finally, the Court approvingly acknowledged the decisions of other Courts of Appeals which have held that a national contacts test is appropriate when there is a statute providing for nationwide service of process. See id. at 296-97. While not free from doubt, the Third Circuit Court of Appeals is likely to apply a national contacts test where the statute provides for nationwide service of process. In this case, all of the acts underlying the alleged violations of ERISA occurred within the United States. Therefore, Lenz and Rosenberg had sufficient minimum contacts with the United States to support personal jurisdiction in this Court.
As to the second prong of the constitutional analysis, the Court must ensure that maintenance of the suit in this district "`does not offend traditional notions of fair play and substantial justice.'" Id. at 293 (quoting International Shoe, 326 U.S. at 316, 66 S.Ct. 154). Lenz and Rosenberg subjected themselves to suit in Delaware by committing the alleged ERISA violations in connection with their fiduciary responsibilities to Delaware corporations. Moreover, because this litigation stems from a bankruptcy case, Lenz and Rosenberg will have to litigate the state law claims in this District, regardless of whether the Court dismisses the ERISA claims. Therefore, it will not cause a substantial injustice to Lenz and Rosenberg to litigate the ERISA claims in this district. Accordingly, this Court will not dismiss the ERISA claims for want of personal jurisdiction over Lenz and Rosenberg.
Lenz and Rosenberg contend the ERISA claims are time barred by the
"Section 1113 sets a high standard for barring claims against fiduciaries prior to the expiration of the section's six-year limitations period." Id. at 1176. In order for the three year period to apply, the plaintiff must have actual, not constructive, knowledge. See id. Actual knowledge "requires that a plaintiff have actual knowledge of all material facts necessary to understand that some claim exists, which facts could include necessary opinions of experts." Id. The defendant must make a showing of when the plaintiff acquired actual knowledge. See International Union of Electronic, Elec., Salaried, Mach. and Furniture Workers, AFL-CIO v. Murata Erie North America, Inc., 980 F.2d 889, 900 (3rd Cir.1992). If the defendant cannot make such a showing, the Court will not dismiss the ERISA claims as barred by § 1113. See id.
Plaintiffs allege four sets of ERISA violations or prohibited transactions involving: (1) the Asset Acquisition Trust, AC ¶¶ 59-61; (2) the agreement with Richard Adams, AC ¶ 65; (3) Terex stock appreciation rights, AC ¶¶ 62-63; and, (4) loans from the Fruehauf Plan, AC ¶ 64. For each allegation, the parties agree that the action was filed within six years of the alleged violation. However, they dispute whether and when Plaintiffs acquired actual knowledge of each alleged violation. Reading the Amended Complaint in the light most favorable to Plaintiffs, the defendant has not made an adequate showing that Plaintiffs had actual knowledge of any of these violations more than three years prior to the effective filing date of this action, October 7, 1996.
a.
Plaintiffs allege that, on March 31, 1993, Lenz directed Continental, trustee of the Master Trust, to invest $1 million of Master Trust assets in the Asset Acquisition Trust ("AAT"). AC ¶ 59. One asset of AAT was Connecticut Bank of Commerce, a bank partially owned by Lenz, and for which Lenz and Rosenberg served as directors. Id. On June 2, 1993, Continental discovered that this transaction was fiduciary self dealing, a conflict of interest, and a prohibited transaction under ERISA. AC ¶ 60. When Continental attempted to undo the transaction, Lenz fired Continental as trustee. AC ¶¶ 60-61. Defendants assert Plaintiffs' knowledge of
As previously rehearsed, under prevailing Third Circuit law, the ERISA statute of limitations "sets a high standard" for finding the three year period to be the applicable period. See Gluck, 960 F.2d at 1178. Applying a similarly high standard, other district courts have refused to impute knowledge from a trustee of a benefit plan to a successor trustee of the same plan, absent a showing of some relationship between the two trustees that makes imputation of knowledge reasonable. See District 65 Retirement Trust v. Prudential Securities, Inc., 925 F.Supp. 1551, 1559, n. 8 (N.D.Ga.1996); Useden v. Acker, 734 F.Supp. 978, 980 (S.D.Fla.1989).
In this case, Lenz and Rosenberg urge imputation of knowledge from the trustee of the Master Plan, Continental, to the corporation which sponsored the Master Plan, Fruehauf, and then to the successor trustee to Fruehauf, End of the Road Trust. However, there has been no showing of a relationship between Fruehauf and Continental that would make imputation of knowledge reasonable. Indeed, the Amended Complaint alleges that the Defendants, without knowledge of Fruehauf, appointed Continental as trustee, directed Continental to make the alleged prohibited transaction, and fired Continental after it discovered the alleged prohibited transaction. AC ¶¶ 57-61. There is no evidence that Continental had any direct relationship with Fruehauf sufficient to impute knowledge. Absent such a showing, the Court will not apply the three year statutory period to the ERISA claims based on this transaction.
Lenz and Rosenberg seek refuge in several cases which impute knowledge from the directors and officers of a corporation to the corporation itself. See Breed v. Dawson, 1994 WL 1297871 (D.Me.1994); Brandt v. Steel Hector & Davis, 213 B.R. 406, 409-10 (S.D.Fla.1997) (non-ERISA case); Bourns v. Wells Fargo Bank, N.A., 1994 WL 36998, *4 (N.D.Cal.1994). However, Lenz and Rosenberg have made no argument that the other directors and officers of Fruehauf had knowledge of the transaction which is imputable to Fruehauf. Moreover, the Amended Complaint alleges that Lenz and Rosenberg, directors of Fruehauf, actually took affirmative steps to conceal their alleged wrongdoing from the corporation. See, e.g., AC ¶ 66. At this procedural stage, there is no reason to impute Lenz's and Rosenberg's knowledge of the transaction to Fruehauf and/or End of the Road Trust.
Finally, Lenz and Rosenberg argue that failure to impute knowledge from one trustee to a successor trustee will result in the absurd result of allowing a plaintiff to continuously revive a claim by continuing to appoint new trustees. This argument lacks merit because ERISA sets a maximum six year statute of limitations from the date of the last act, regardless of when and if a plaintiff acquires actual knowledge. See 29 U.S.C. § 1113. Therefore, appointing successive trustees will not infinitely toll the statute of limitations.
b.
Plaintiffs allege that, in 1991, Lenz entered into an agreement with Richard Adams, allowing Adams to manage $750,000 of the Fruehauf Plan's assets, which Adams subsequently lost. AC ¶ 65. Continental discovered this allegedly prohibited transaction in 1991 and warned Defendants to discontinue the agreement. Id. As with the AAT transaction, Lenz and Rosenberg assert that Continental's actual knowledge should be imputed to Fruehauf and on to End of the Road Trust. For the same reasons discussed in the prior section, Lenz and Rosenberg have not made a sufficient showing to warrant imputation of this actual knowledge. Absent any additional showing of actual knowledge of this transaction by Plaintiffs, the Court will not
c.
Plaintiffs allege that, in 1993, Lenz caused the Master Trust to invest in Terex stock appreciation rights ("SARs"), knowing the SARs were undervalued. AC ¶ 62. During division of the Master Trust into the Terex Trust and Fruehauf Trust in 1994, Lenz allocated the SARs entirely to the Terex Trust, a self dealing and prohibited transaction. AC ¶¶ 62-63. Defendants have not made any showing that any Plaintiff, or that even Continental,
d.
Plaintiffs allege that in 1990 and thereafter, Lenz directed the Fruehauf Plan to loan money to or for the benefit of Fruehauf and Terex. AC ¶ 64. The loans were evidenced by notes consolidated into a letter of credit in 1993. Id. In 1995, the letter of credit was exchanged for Fruehauf senior secured notes. Id. Plaintiffs assert that all of these acts were prohibited transactions. Id.
Lenz and Rosenberg first argue that Fruehauf had actual knowledge of these transactions, by virtue of the publicly filed Fruehauf 1991 10-K (D34 at 32), Fruehauf 1992 10-K (D39 at 22), and Fruehauf Rule 424(b) Registration Statement (D51). A careful review of these documents, as well as the allegations in the Amended Complaint, does not conclusively reveal that Fruehauf had actual knowledge of the alleged transactions from these documents.
Next, Lenz and Rosenberg appear to argue that, even if the six year period applies, the last act occurred in 1990, more than six years prior to the October 7, 1996 effective filing date of this action. Plaintiffs counter that the 1993 consolidation into the letter of credit and the 1995 exchange for senior secured notes represent continuing violations of ERISA so that the last act occurred in 1995. The test for whether subsequent acts constitute continuing violations is whether each overt act results in a new injury to the plaintiff. See Kuhns v. Meridian Bancorp., 1993 WL 34786 (E.D.Pa.1993); Haberern v. Kaupp Vascular Surgeons Ltd. Defined Ben. Plan and Trust Agreement, 822 F.Supp. 247, 259 (E.D.Pa.1993); Richard J. Link, Limitation of Actions, under § 413 of Employee Retirement Income Security Act (ERISA) (29 U.S.C. § 1113), with Respect to Action for Breach of Fiduciary Duty, 118 A.L.R.Fed. 377 (1994 & Supp. 2000). In this case, the facts are understandably insufficiently developed for the Court to determine whether the acts subsequent to 1990 represent a continuing violation. Reading the Amended Complaint in the light most favorable to Plaintiffs, they may represent a continuing violation, making the ERISA claims based on this transaction timely filed. Accordingly, the Court will not dismiss the ERISA claims based on this transaction.
3.
Rosenberg seeks dismissal of the ERISA claims, Counts 7 and 8, against him, asserting he was not a fiduciary of the Fruehauf Plan, Terex Plan, Master Trust, Fruehauf Trust, or Terex Trust (collectively "benefit plans"). Plaintiffs counter that there is insufficient evidence to conclusively determine that Rosenberg was not a fiduciary of the benefit plans and that
Under ERISA § 3(21)(A) there are three types of fiduciaries:
29 U.S.C. § 1002(21)(A) (emphasis added). As both parties concede, Rosenberg is not a type (ii) fiduciary, as there is no allegation he rendered investment advice. To determine whether he is a type (i) or (iii) fiduciary, the Court must determine whether Rosenberg had discretionary authority or control over "management" of the benefit plans, "plan assets," or "administration" of the benefit plans. See Tybout v. Karr Barth Pension Admin., Inc., 819 F.Supp. 371, 378 (D.Del.1993) (citing Confer v. Custom Engineering Co., 952 F.2d 34, 36 (3d Cir.1991)).
The Amended Complaint contains three sets of allegations to support Rosenberg's fiduciary status. First, it alleges that Rosenberg is a "fiduciar[y] . . . as defined in ERISA." AC ¶ 96. Second, it alleges fiduciary status by way of his positions with Fruehauf and Terex. The Amended Complaint alleges: Fruehauf "sponsored" the Fruehauf Plan; Terex, Lenz, and Rosenberg established a trust to hold the assets of the Fruehauf Plan; the Fruehauf Plan and Terex Plan merged into a Master Trust; "Terex appointed Lenz as the sole member of the investment committee for the Master Trust"; and, "Fruehauf, in its fiduciary capacity," separated the Master Trust into the Fruehauf Trust and Terex Trust. AC ¶¶ 56-58. At the times of each of these transactions, it alleges "Rosenberg was the Secretary, and a Director of Fruehauf, and was the Secretary, General Counsel, and a Director of Terex." AC ¶ 5. Finally, the Amended Complaint alleges fiduciary status by way of his rendering legal advice. It alleges Rosenberg gave Continental a legal opinion on the legality of the transaction involving AAT and the Connecticut Bank of Commerce, while Rosenberg and Lenz were members of the Board of Directors of Connecticut Bank of Commerce. AC ¶ 59.
As to the first allegation, simply alleging fiduciary status is insufficient to conclude that Rosenberg is a fiduciary. Instead, the "linchpin of fiduciary status" is whether the person exercises discretion over plan management, assets, or administration. Curcio v. John Hancock Mut. Life Ins. Co., 33 F.3d 226, 233 (3d Cir. 1994). ERISA broadly defines who is a fiduciary. See id. Determining whether someone is a fiduciary is a very fact specific inquiry which is difficult to resolve on a motion to dismiss. District 46; Kramer v. Smith Barney, 80 F.3d 1080, 1084 n. 2 (5th Cir.1996) (ERISA fiduciary status is mixed
As to the second set of allegations, the corporate sponsor of a benefit plan, such as Fruehauf or Terex, is generally not a fiduciary. See Malia v. General Electric Co., 23 F.3d 828, 833 (3d Cir.1994). However, a corporation may be a fiduciary if it exercises some discretion or control over the management, assets, or administration of the plan. See Payonk v. HMW Industries, Inc., 883 F.2d 221, 231 (3rd Cir.1989) (Stapleton, J., concurring) (cited favorably in Malia, 23 F.3d at 833); Curcio, 33 F.3d at 233. In this case, the factual record is not developed well enough to determine whether Fruehauf and/or Terex exercised sufficient discretion over the benefit plans to allow the Court to determine whether they had fiduciary status. Similarly, even if Fruehauf and/or Terex have fiduciary status, an officer or director of a corporate fiduciary generally is not a fiduciary simply by virtue of his corporate position. Confer v. Custom Engineering Co., 952 F.2d 34, 37 (3d Cir.1991). However, an officer or director may be a fiduciary if he exercises discretion over the management, assets, or administration of the plan. See id. The factual record is insufficient to determine whether Rosenberg exercised discretion over the benefit plans in his capacity as director and officer of Fruehauf/Terex sufficient to make him a fiduciary.
As to the third set of allegations, professionals, such as attorneys, rendering advice in their professional capacity are not ERISA fiduciaries. Painters of Philadelphia District Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146, 1149 (3d Cir.1989) (outside accountant not fiduciary); Nieto v. Ecker, 845 F.2d 868, 871 (9th Cir.1988) (attorney not fiduciary). However, a professional rendering professional advice may be a fiduciary if he uses that advice to exercise control over the management, assets, or administration of the plan. See F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1259-60 (2d Cir.1987) (cited favorably in Painters of Philadelphia, 879 F.2d at 1151). In this case, there are allegations that Rosenberg, while acting as an attorney, also was sitting on the Board of the benefit plan sponsor corporations and had a financial interest in the outcome of the transaction. Accordingly, whether his legal opinion made him a fiduciary will turn on whether he had sufficient discretion over management, assets, or administration of the benefit plans. This is a fact specific inquiry for which the record is not sufficiently developed at this time. Since the factual record is incomplete, the Court will not now dismiss the ERISA claims against Rosenberg because of a lack of fiduciary status.
4.
Lenz and Rosenberg argue for dismissal of Count 7 because it fails to allege a causal connection between the breach of fiduciary duty and the loss to the plan, as required by ERISA § 409(a), 29 U.S.C. § 1109(a). Plaintiffs counter that § 1109(a) does not require a showing of loss causation and that, even if it does, they have adequately pled loss causation.
First, § 1109(a) requires a causal connection between the breach and the resultant damage:
29 U.S.C. § 1109(a). Under § 1109(a), the fiduciary is liable for at least two types of
Second, the Amended Complaint adequately pleads a causal connection between the breach of fiduciary duty and the losses to the benefit plans and/or profits gained by Lenz and Rosenberg. For example, it alleges that Lenz breached his fiduciary duty by entering into an agreement with Adams, causing a loss of almost $750,000 to the benefit plans. AC ¶ 65. In addition, the Amended Complaint alleges gains to Lenz and Rosenberg and losses to the benefit plans caused by their self dealing transactions involving AAT, Terex SAR's, and improper loans. AC ¶¶ 59-64. The Court finds these allegations sufficient to allege causation between breaches of fiduciary duty and the losses to the benefit plans and the profits made by Lenz and Rosenberg. Accordingly, Count 7 will not be dismissed for this reason.
5.
Lenz and Rosenberg assert that the ERISA counts related to the SAR's must be dismissed for failure to comply with Fed.R.Civ.P. 9(b) which requires that "[i]n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity." Rule 9(b) generally does not apply to ERISA claims, unless the underlying allegations are grounded in fraud. Concha v. London, 62 F.3d 1493, 1502 (9th Cir.1995); Thornton v. Evans, 692 F.2d 1064, 1082-83 (7th Cir.1982); In re Ikon Office Solutions, Inc. Securities Litigation, 86 F.Supp.2d 481, 487-88 (E.D.Pa.2000). The Court finds that, to the extent Rule 9(b) applies to the ERISA claims related to the SAR's, the circumstances surrounding the fraud are pled with particularity.
Section V.B.6, supra, recites the general principles of Rule 9(b). The Amended Complaint adequately alleges fraud regarding the transaction involving the SAR's by alleging Lenz ensured the undervaluation of the SAR's by concealing inside knowledge about their value. AC ¶¶ 62-63.
VI. CONCLUSION
Defendants' Motion to Dismiss will be DENIED as to all counts except for Count 6 (breach of contract) which will be dismissed to the extent it is premised upon breaches of the duties of due care, good faith, and loyalty.
FootNotes
10 Del.Code § 8111. However, § 8111 only applies to "a breach of a duty to pay wages, salary, or overtime for work performed." Rich v. Zeneca Inc., 845 F.Supp. 162, 166 (D.Del.1994). Employer-employee claims arising out of breach of any other duty is governed by the 3 year limitations period in § 8106. In this case, Count 6 alleges that Lenz and Rosenberg breached their duty to Fruehauf to provide "their expertise and undivided and loyal service." Complaint ¶ 93. Because this is not a breach of the duty to pay compensation, the claim is governed by the 3 year statute of limitations in § 8106.
However, Rule 7004(e) further provides that "[i]f the summons is not timely delivered or mailed, another summons shall be issued and served." Id. (emphasis added). If a complaint is not served within 10 days, but the court grants additional time for service, then the complaint is deemed to have been timely served and receives the benefit of its original filing date. See In re Krikava, 236 B.R. 701, 705-06 (D.Neb.1999); Sparagna v. Metzger, 1998 WL 127595, *2 (Bankr.E.D.Va. 1998); In re Barr, 217 B.R. 626, 631 (Bankr. W.D.Wash.1998). The summons was reissued by the Bankruptcy Court on January 22, 1999 and served within several days. See B.D.I. 4-6. Since the Bankruptcy Court effectively granted permission to extend the time for service, the Amended Complaint was timely served.
AC ¶¶ 53-55.
AC ¶¶ 30-35.
-----------------------------------------------------------Allegation in AC Purported Public Disclosure ------------------------------------------------------------Failure to Exercise Fruehauf 1991 10-KDue Diligence in Acquiring (D34 at 4, 8);Fruehauf (July 1989)
Assumption Agreement: Fruehauf Sept. 1991 Fruehauf assumes 10-Q (D46 at 42) "trailing liabilities" of Old Fruehauf (AC ¶ 17) D's failed to exercise P31 at B00280-81: due diligence in acquiring Fruehauf (AC ¶ 19); -------------------------------------------------------------------KCS Agreement (July Fruehauf 1991 10-K 1989) (D34 at 31-32); Fruehauf enters management Fruehauf 1992 Notice agreement of Annual Meeting with KCS Industries (D37 at 8-9) to pay KCS $300,000/ Fruehauf 1992 10-Q month for legal, financial, (D42 at 5-6) and management D49 at 12 services (AC ¶ 18) P31 at B00310-11. --------------------------------------------------------------------Decision to Self Insure Fruehauf 1992 10-K (1989-1992): D's (D39 at 24, n. L) decide to self insure (AC ¶ 21) ---------------------------------------------------------------------Sale of Distributor's Fruehauf 1991 10-KNetwork (1989-1992): (D34 at 4, 6, 79) (AC ¶ 21) ---------------------------------------------------------------------Reduction in Inventory Fruehauf March 1993Levels (1989-1992): 10-Q (D45 at 3-4) D42 leaving half built trailers at 5 in factories (AC ¶ 22) ----------------------------------------------------------------------Paying KCS Management Fruehauf 1991 10-KFees (1989-1992): (D34 at 31-32) 1992 D's paid KCS Annual Meeting Notice instead of vendors (AC (D37 at 8-9) Sept. ¶ 22) 1992 10-Q (D42 at 5-6) -----------------------------------------------------------------------Refusing to Let Audit audit committee metCommittee Meet once in 1991 and 3 × (1989-1992): in 1992 (D37 at 3; D41 at 2) D's refuse to let Audit no documentation of Committee meet (AC meeting in 1989 or ¶ 23) 1990 ------------------------------------------------------------------------Firing Outside Auditors 1992 8-K (D52 at 2) (1992): Deloitte & Touche (AC ¶ 23) ------------------------------------------------------------------------Purchase Accounting Terex 1989 10K D 17Violations at 2-3, 7, 9 (1989-1992): Terex June 1989 10Q D's manipulate accounting, D16 at 2 in violation Terex 1989 Form 8 of GAAP (including D18 at 6, 10 purchase accounting Terex Sept. 1989 10Q violations), to conceal D19 at 2 deteriorating financial Terex 1990 10K D23 condition (AC ¶ 28, 46) at 4, 6] D's improperly account 1992 10-K Deloitte & for assets held Touche state that financial for sale (AC ¶ 47); statements comply with GAAP (1992 10-K D39 at 15)] D22 at 7, 9. --------------------------------------------------------------------------Release of Pension June 1991 10Q (D32Reserve into Income at 2) (1991): amortization of pension D's improperly uncap benefits disclosed and recap pension in Nov. 1991 Form 8 benefits and release (D28 at 2) the money into income D30 at 1 (AC ¶ 49-50) D52 at 2 ----------------------------------------------------------------------------Violating Loan Covenants: March 1992 Form 8 (1990-1991): in (D31 at 3) 1991 10-K Fruehauf loan agreements (D34 at 12, 26) (AC ¶ 24) ----------------------------------------------------------------------------Altering Loan Covenants D31 at 3 (1990-1991): D34 at 4 D's violate altered D35 at 4 loan covenants by P30 at ¶¶ 58, 86, 148 overstating income (AC ¶ 25); -----------------------------------------------------------------------------Failure to Seek Chapter D42 at 9-1011 Protection D45 at 5 (1991): (AC ¶ 26) ------------------------------------------------------------------------------Reclassifying Out D31 at 3standing Debt Covenants D34 at 12, 26as Long Term D35 at 4Debt (1991): (AC ¶ 51); --------------------------------------------------------------------------------Secretly Liquidating 1992 10-K (D40 atSecurities (March & 3-4) Nov. 1992): 1993 Notice of Annual Lenz secretly liquidates Meeting (D41 at 4)] $1 million of marketable securities (AC ¶ 36) Lenz secretly liquidates $622,000 of marketable securities (AC ¶ 36) ---------------------------------------------------------------------------------
D6 at 36-37. Federal law does not govern even if the release is asserted as a bar to federal law claims. See Three Rivers Motors Co. v. Ford Motor Co., 522 F.2d 885, 892 n. 15 (3d Cir.1975).
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