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Swain v. Wilmington Trust, N.A.

United States District Court, D. Delaware

February 16, 2018

SCOTT J. SWAIN and KENNY L. FIORITO, on behalf of the ISCO Industries Inc. Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated, Plaintiffs,
v.
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant.

          David A. Felice, Esquire of Bailey & Glasser LLP, Wilmington, Delaware. Counsel for Plaintiffs. Of Counsel: Gregory Y. Porter, Esquire, Ryan T. Jenny, Esquire, and Patrick O. Muench, Esquire of Bailey & Glasser LLP, Washington D.C.

          Clark Collins, Esquire, and Albert Manwaring, Esquire of Morris James LLP, Wilmington, Delaware. Counsel for Defendant. Of Counsel: Michael J. Prame, Esquire, Lars C. Golumbic, Esquire, Natasha S. Fedder, Esquire, and Andrew D. Salek-Raham, Esquire of Groom Law Group, Chartered, Washington D.C.

          MEMORANDUM OPINION

          ANDREWS, U.S. DISTRICT JUDGE:

         Plaintiffs Scott J. Swain and Kenny L. Fiorito (collectively, "Plaintiffs") are participants in the ISCO Industries Inc. Employee Stock Ownership Plan (the "ESOP"), and assert claims on behalf of themselves and a class of similarly situated persons against defendant Wilmington Trust, N.A. ("Wilmington Trust"). Wilmington Trust is the successor trustee to the ESOP. Plaintiffs bring this action under sections 406, 409, and 502(a) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1106, 1109, and 1132(a), alleging that Wilmington Trust caused the ESOP to purchase the stock of ISCO Industries Inc. ("ISCO") for more than fair market value. (D.I. 1 ¶¶ 48-58). Wilmington Trust moved to dismiss the complaint pursuant to Fed R. Civ. P. 12(b)(1) and 12(b)(6) for lack of subject-matter jurisdiction and failure to state a claim respectively. (D.I. 10). A magistrate judge issued a report recommending that the court grant Wilmington Trust's motion to dismiss for lack of subject matter jurisdiction or, in the alternative, grant in part and deny in part Wilmington Trust's motion to dismiss for failure to state a claim. (D.I. 20 at 2). Presently before the court are Plaintiffs' objections to the magistrate judge's report and recommendation, and Wilmington Trust's responses thereto. (D.I. 22, D.I. 24). For the reasons stated below, the court adopts in part and rejects in part the magistrate judge's report and recommendation.

         I. BACKGROUND

         The ESOP was established on January 1, 2012, and "provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains, and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account." (D.I. 1 ¶¶ 19, 21). Since its inception, the ESOP's principal asset has been ISCO stock. (Id. at ¶ 23). ISCO is a privately-held S-corporation, so its stock is not readily tradable on an established securities market. (Id. at ¶ 18). Plaintiffs claim that Wilmington Trust violated 29 U.S.C. §§ 1106, 1109, and 1132(a), when it caused the ESOP to purchase shares of ISCO in 2012 for more than fair market value. (Id. at ¶ 3).

         Specifically, on December 20, 2012, Wilmington Trust caused the ESOP to purchase all 4, 000, 000 issued and outstanding shares of ISCO common stock. (Id. at ¶ 30). As a result, ISCO is now wholly-owned by the ESOP. (Id.). But ISCO remains under the control of its previous owners (the "Sellers"). (Id. at ¶¶ 33-43). The ESOP paid $98, 000, 000 for the stock, and financed the purchase price with a loan from the Sellers. (Id. at ¶ 31). The loan, represented by a note, must be fully repaid in 25 years and accrues interest at a rate of 2.40% per annum. (Id.). On December 31, 2012, an independent appraiser, for the purposes of a 2012 year-end report, "revalued" ISCO's common stock at $39, 000, 000, which is $59, 000, 000 less (or 60% lower) than the purchase price paid two weeks earlier. (Id. at ¶¶ 44-45).

         Wilmington Trust was the trustee of the ESOP at the time of the disputed transaction, and was therefore a fiduciary as defined under ERISA. (Id. at ¶ 15). As trustee, Wilmington Trust had had sole and exclusive discretion to authorize the disputed transaction. (Id.). Moreover, Wilmington Trust had an "exclusive duty" to ensure that any transaction between a potential seller and the ESOP was fair and reasonable, and that the ESOP paid no more than fair market value. (Id. at ¶ 29). Plaintiffs allege that the ESOP transaction allowed the Sellers to unload its interests in ISCO at an inflated price, saddle ESOP participants with millions of dollars of debt, and still maintain control of the company. (Id. at ¶¶ 7, 33, 37-41). Thus, Wilmington Trust failed to fulfill its duties to the ESOP and its participants, including Plaintiffs.

         II. STANDARD OF REVIEW

         The court conducts a de novo review when determining whether to adopt a magistrate judge's report and recommendation on a dispositive matter. Fed.R.Civ.P. 72(b)(3). Upon review, the court may accept, reject, or modify the magistrate judge's recommendations. Id. The court may also receive further evidence or return the matter to the magistrate judge with instructions. Id.

         III. DISCUSSION

         Plaintiffs claim that Wilmington Trust violated five subparts of 29 U.S.C. § 1106, specifically, subparts (a)(1)(A), (a)(1)(B), (a)(1)(E), (b)(2), and (b)(3). (D.I. 1 ¶¶ 49-55). In addition, Plaintiffs seek declaratory and injunctive relief pursuant to 29 U.S.C. §§ 1109 and 1132(a). (Id. ¶¶ 56-57). The magistrate judge's report recommends that the court dismiss all of Plaintiffs' claims for lack of subject matter jurisdiction. (D.I. 20 at 11-12). In the alternative, the report recommends that the court dismiss some, but not all, of Plaintiffs' claims for failure to state a claim. (Id. at 13-18). Specifically, the report recommends that the court dismiss the claims based on subparts (a)(1)(E), (b)(2), and (b)(3). (Id.). Plaintiffs have raised objections to each unfavorable recommendation in the report, which the court addresses in turn below.

         A. Standing

         The report found that the court lacked subject matter jurisdiction over Plaintiffs' claims, because Plaintiffs did not have Article III standing, often called "constitutional standing." (D.I. 20 at 11-12). The report's discussion of standing was divided between claims seeking damages and claims seeking declaratory and injunctive relief. "A plaintiff bears the burden of establishing that he has Article III standing for each type of relief sought." ZF Meritor, LLC v. Eaton Corp.,696 F.3d 254, 301 (3d Cir. 2012). Accordingly, "a plaintiff may have standing to pursue damages, but lack standing to seek injunctive relief." Id. Constitutional standing has three elements: (1) an injury-in-fact; (2) a causal connection between the injury and the conduct complained of; and (3) a likelihood that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife,504 U.S. 555, 560-61 (1992). The report found that Plaintiffs failed to demonstrate a cognizable injury-in-fact with respect to either their claims for damages or their claims for declaratory and injunctive relief. (D.I. 20 at 11 -12). An "injury-in-fact" is an invasion of a legally protected ...


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