United States District Court, D. Delaware
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,
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company, Defendant.
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.
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,
ANDREWS, U.S. DISTRICT JUDGE:
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.
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).
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
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,
STANDARD OF REVIEW
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.
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.
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 ...