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noting that the specificity under Rule 9(b) is required to " afford defendant fair notice of the plaintiff's claim and the factual ground upon which it is based; [t]o safeguard defendant's reputation and goodwill from improvident charges of wrongdoing; and to inhibit the institution of strike suits."
Summary of this case from Tese-Milner v. Bon Seung Kim (In re Level 8 Apparel, LLC)Opinion
98 Civ. 5519 (RPP)
September 27, 2000
Counsel for Plaintiff: Barrett, Gravante, Carpinello Stern LLP, 570 Lexington Avenue, New York, N.Y. 10022, By: David A. Barrett Evan Glassman, Tel: 212-446-2300, Fax: 212-446-2350
Counsel for Plaintiff: Malakoff, Doyle Finberg PC, Suite 200 — The Frick Building, 437 Grant Street, Pittsburgh, PA 15219; By: Ellen M. Doyle, Tel: 412-281-8400 x420, Fax:n 412-281-3262
Counsel for Defendants, EMCOR, Murphy, Bander, McGinn: O'Melveny Myers LLP, 555 13th Street, NW , Washington, DC 20004 By: Robert Eccles, Tel: 202-383-5363, Fax: 202-383-5414
Counsel for Defendant Andrew Dwyer: Coblence Warner, 415 Madison Avenue, New York, N.Y. 10017, By: Howard S. Schrader, Tel: 212-593-8000, Fax: 212-593-9056
Counsel for Defendant Ernest Grendi: Solomon, Zauderer, Ellenhorn, Friseher Sharp, 45 Rockefeller Plaza, New York, N.Y. 10111 By: Michael S. Lazaroff, Tel: 212-424-0776, Fax: 212-956- 4068
Counsel for Defendant American Express Trust Company: Faegre Benson LLP, 2200 Norwest Center, 90 South Seventh Street Minneapolis, MN 55402-3901, By: Steven L. Severson, Tel: 612-336- 3272, Fax: 612-336-3026
OINION AND ORDER
Defendants move pursuant to Rules 9(b) and 12(f) of the Federal Rules of Civil Procedure for an order (1) striking the allegations of fraud and concealment from plaintiff Thomas F. Koch's First Amended Class Action Complaint ("Amended Complaint") with prejudice and (2) ordering Koch to file a Second Amended Complaint that does not plead fraud or concealment.
On July 22, 1999, this Court denied defendants' motions to dismiss the original class action complaint against several benefit plans of JWP, Inc. (the "ERISA Plans") and their fiduciaries on statute of limitations grounds. However, the Court dismissed the complaint because Plaintiff's allegations sounding in fraud were not in compliance with Fed.R.Civ.P. 9(b). SeeKoch v. Dwyer, 1999 WL 528181 at *6, 12 (S.D.N.Y. July 22, 1999). Plaintiff filed an Amended Class Action Complaint on March 10, 2000. Defendants EMCOR Group, Inc., JWP 401(k) Retirement Savings Plan Committee, James S. Murphy, Wendy McKinley (formerly Bander), Retirement Plan Investment Committee and Phillip McGinn, joined by Defendants Andrew T. Dwyer and Ernest W. Grendi, now move pursuant to Rules 9(b) and 12(f) of the Federal Rules of Civil Procedure for an order (1) striking the allegations of fraud and concealment from the Amended Complaint with prejudice and (2) ordering Plaintiff to file a Second Amended Complaint that does not plead fraud or concealment. Defendant American Express Trust Company moves for an order (1) striking the allegations of fraud and concealment that relate to AMEX Trust from the Amended Complaint and (2) ordering Plaintiff to file a Second Amended Complaint that does not plead fraud or concealment with respect to AMEX Trust.
The Court also denied the motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) brought by American Express Trust and the motion to dismiss brought by defendants Grendi and Dwyer.
Defendants' motion to strike pursuant to Fed.R.Civ.P. 12(f) is denied. A motion to strike is not an appropriate vehicle to dismiss claims from a complaint. See Day v. Moscow, 955 F.2d 807, 811 (2d Cir. 1992) (holding that Fed.R.Civ.P. 12(f) is designed for excision of material from pleadings, not for dismissal of claims in their entirety (citing 5A C. Wright A. Miller, Federal Practice and Procedure § 1380, at 644)). By its terms, a motion to strike under Fed. Rule Civ. p. 12(f) only applies to "any insufficient defense" and "any redundant, immaterial, impertinent, or scandalous matter." It does not apply to a complaint, the pleading attacked here. Additionally, Defendants seek to strike Plaintiff's fraud and concealment claims in their entirety rather than to excise redundant, immaterial, impertinent, or scandalous material. Defendants' motion is therefore improper.
Furthermore, the movant must demonstrate all of the following to succeed on a motion to strike: (1) that no evidence in support of the allegation would be admissible; (2) that the allegations have no bearing on the issues in the case; and (3) that to permit the allegations to stand would result in prejudice to the movant.See Wine Markets Int'l. Inc. v. Bass, 177 F.R.D. 128, 133 (E.D.N.Y. 1998). Defendants' moving papers do not meet these requirements.
Defendants' motion for failure to comply with the provisions of Fed.R.Civ.P. 9(b) requires an examination of how ERISA's statute of limitations applies to the Amended Complaint. Accordingly, the remainder of this opinion addresses that issue. Fraud and concealment allegations bear on Plaintiff's claims because the equitable tolling exception to the three or six-year statute of limitations contained in 29 U.S.C. § 1113 is based on fraud or concealment.
No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of —
(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in then case of any omission, the latest date on which the fiduciary could have cured the breach or violation, or
(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation;
except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.29 U.S.C. § 1113. Plaintiff attempts to invoke this exception here, claiming to have pled the facts and elements necessary to obtain the benefit of ERISA's equitable tolling provision. (Plaintiff's Brief in Opposition to the EMCOR Defendant's Motion to Strike Allegations of Fraud and Concealment ("Pl.'s Br. in Opp. to EMCOR") at 8; Plaintiff's Memorandum in Opposition to the Motion to Strike Fraud Allegations of American Express Trust Company ("Pl's Mem. in Opp. to AMEX") at 5.)
The principal ERISA cases upon which the moving defendants rely are Schaefer v. Arkansas Med. Soc., 853 F.2d 1487, 1491-92 (8th Cir. 1988); Diduck v. Kaszycki Sons Contractors. Inc., 974 F.2d 270, 276 (2d Cir. 1992); Kirk v. Liberty Mutual Ins. Co., 28 F. Supp.2d 696, 700 n. 3 (D. Conn. 1998); Lospuadro v. FGH Realty Credit Corp., 959 F. Supp. 152, 157 (E.D.N.Y. 1997); Martin v. Consultants Administrators. Inc., 966 F.2d 1078, 1093-96 (7th Cir. 1992).
Courts have distinguished fraud and concealment under federal equitable tolling provisions. In Hobson v. Wilson, 737 F.2d 1 (D.C. Cir. 1984), the court noted that
[E]quitable tolling generally has two elements, (successful) concealment by defendant and diligence by plalntiff, and second, that a defendant who contrives to commit a wrong in such a manner as to conceal the very existence of a cause of action, and who misleads plaintiff in the course of committing the wrong, may be found to have concealed the wrong. This second principle distinguishes between acts that are self-concealing (such as frauds) and acts where, absent a subsequent act of concealment, only the perpetrator, but not the fact that a cause of action might exist, would be unknown (such as burglary). In the former case, concealment is established by the nature of the act; in the latter case, additional acts of concealment are required to trigger the tolling doctrine.Hobson, 737 F.2d at 33.
The Court went on to state:
Although the foregoing principles have generally been accepted by the courts, the case law reflects a variety of formulations to apply the concealment doctrine. In each instance, however, before a defendant's "exposure to liability is given a potentially indefinite duration, there [is) some minimum of culpability — if not affirmative concealment, then at least the construction of a scheme which is by its nature unknowable."Id. at 34 (quoting Long v. Abbott Mortgage Co., 459 F. Supp. 108, 118 n, 7 (D. Conn. 1978)).
To plead common law fraud plaintiff must allege facts showing "(1) a material false representation or omission of an existing fact, (2) made with knowledge of its falsity, (3) with an intent to defraud, and (4) reasonable reliance, (5) that damages plaintiff" Diduck, 974 F.2d at 276; Gruby v. Brady, 838 F. Supp. 820, 831 (S.D.N.Y. 1993); Losquadro, 959 F. Supp. at 157.
If a plaintiff does not plead fraud, he may plead concealment. The Schaefer court held that " 29 U.S.C. § 1113 incorporates the `fraudulent concealment doctrine,' which requires `that plaintiffs show (1) that defendants engaged in a course of conduct designed to conceal evidence of their alleged wrongdoing and that (2) [plaintiffs] were not on actual or constructive notice of that evidence, despite (3) their exercise of due diligence'" Schaefer, 853 F.2d at 1491-92 (citing Foltz v. U.S. News World Report, Inc., 663 F. Supp. 1494, 1537 n. 66 (D.D.C. 1987) aff'd 865 F.2d 364 (D.C. Cir. 1989), and Hobson, 737 F.2d at 33-34 nn. 102-103)). In Schaefer, the court held that the ERISA fiduciary's failure to investigate adequately and relay warnings about proposed retirement plan provisions did not "rise to the level of active concealment which is more than merely a failure to disclose." Id. at 1491 (citing Hobson, 737 F.2d at 33-34). Moreover, the court found that plaintiffs had failed to meet the second and third elements of fraudulent concealment because they did not show that, "despite their exercise of due diligence and care, they were not on notice of Schaefer's breach of duty." Id.
plaintiff relies on Miele v. Pension Plan of N.Y. State, 72 F. Supp.2d 88, 103-04 (E.D.N.Y. 1999) where the court articulated the elements of fraudulent concealment as follows: "(1) fraudulent or deceptive conduct by defendants designed to conceal facts underlying the plaintiffs cause of action, (2) unawareness of those facts on the part of the plaintiff, and (3) exercise of due diligence by the plaintiff in his efforts to uncover his claim." Id. The distinction between this test and the Schaefer test is that the first prong of the Schaefer test requires allegations of (1) defendant's wrongful act and (2) conduct designed to conceal defendant's wrongful act. See Schaefer, 853 F.2d at 1491-92. The first prong of the Miele test, by comparison, requires only fraudulent or deceptive conduct designed to conceal "facts" underlying the claim. See Miele, 72 F. Supp.2d at 103-04. Plaintiff asserts that the first prong of the Miele test is satisfied by a fiduciary's failure to inform the party to whom a fiduciary duty is owed of facts underlying that party's claim. (Plaintiff's Brief in Opposition to the EMCOR Defendant's Motion to Strike Allegations of Fraud and Concealment ("Pl.'s Br. in Opp. to EMCOR") at 8-9.) Even if Plaintiff's allegations satisfy, the first prong of the test of fraudulent concealment doctrine, however, Plaintiff has not alleged the second two elements of either the Meile test or the Schaefer test.
Thus plaintiff must plead either common law fraud or the three elements of fraudulent concealment doctrine to trigger ERISA's equitable tolling exception in 29 U.S.C. § 1113. See Diduck, 974 F.2d at 276; Schaefer, 853 F.2d at 1491-92; Losquadro, 959 F. Supp. at 157. Under Fed.R.Civ.P. 9(b), plaintiff must plead the circumstances constituting fraud or mistake with particularity. This specificity is required to (1) "afford defendant fair notice of the plaintiffs claim and the factual ground upon which it is based;" (2) "[t]o safeguard defendant's reputation and goodwill from improvident charges of wrongdoing;" and (3) "to inhibit the institution of strike suits." IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1057 (2d Cir. 1993) (quoting Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990) (additional citations omitted)).
In the Amended Complaint, defendants Andrew T. Dwyer, the Chairman of the Board and Chief Executive Officer of JWP, Inc., Ernest W. Grendi, Chief Financial Officer of JWP, Inc., and Philip M. McGinn, Controller of JWP, Inc. (now EMCOR Group, Inc. ("EMCOR")) and EMCOR, are alleged to have concealed JWP's losses, overstated its income and assets, and otherwise concealed its true and deteriorating financial condition. (Amended Complaint ¶ 51.) Dwyer, Grendi, McGinn and EMCOR are alleged to have thereby inflated the market value of JWP stock (id.) and violated the requirements of GAAP and federal securities laws in making public disclosures of JWP's financial condition which they knew were not true. (Id ¶¶ 62-65.) Plaintiff further alleges that these defendants successfully hid their practices (Id. ¶¶ 67-68) until Deloitte Touche was hired to review JWP's financial reporting in August 1992 (Id. ¶ 78) and required restatements of quarterly 1992 earnings leading to JWP, Inc.'s reporting a loss of $162 million on November 17, 1992 (id. ¶ 80). Moreover, Plaintiff alleges that Defendants Dwyer, Grendi, McGinn and EMCOR were fiduciaries of the ERISA Plans during the relevant period. (Id. ¶ 69, 10, 12, 16.) Finally, Plaintiff alleges economic harm resulting from these actions in the form of diminished assets in the ERISA Plans. (Id. ¶ 134, 136.)
The Amended Complaint therefore alleges fraud by EMCOR and by Dwyer, Grendi and McGinn who comprised a majority of the Retirement Plan Investment Committee managing the 401(k) Plan, the 401(k) Retirement Savings Plan Committee, and the Trustees of the Employee Stock Ownership Plan ("ESOP"). Plaintiff has alleged facts sufficient to satisfy Fed.R.Civ.P. 9(b) regarding the circumstances constituting fraud by these defendants. The facts noted above are specific as to the time, place, speaker and content of the alleged fraud. See IUE AFL-CIO Pension Fund. 9 F.3d at 1057. Plaintiff has therefore adequately pled common law fraud and thereby triggered ERISA's equitable tolling exception as to those defendants.
The Amended Complaint does not allege that defendants Wendy McKinley (formerly Wendy Bander), James S. Murphy or American Express Trust Company ("AMEX") knew of the other individual defendants' fraudulent acts prior to their public release. Accordingly, as to those defendants, the allegations in the Amended Complaint do not meet the test of fraudulent concealment as articulated in Schaefer. See Schaefer, 853 F.2d at 1491-92. Nor does Plaintiff allege the elements of common law fraud as to those defendants to trigger ERJSA's equitable tolling provision.
Plaintiff states that he need only plead facts showing "deceptive conduct by defendants designed to conceal facts underlying the plaintiffs cause of action." (Pl.'s Mem. in Opp. to AMEX at 9.) Plaintiff argues that AMEX and Defendant Murphy engaged in deceptive conduct by concealing the fact that AMEX was a directed trustee holding the ERISA Plans' assets but with no discretionary authority over the Plans' assets in two separate instances: (1) by distributing the October 29, 1993, memorandum from JWP, Inc.'s Retirement Plans Committee to plan participants (Pl.'s Mem. in Opp. to AMEX at 5-7; Amended Complaint ¶¶ 98- 99; Affidavit of Steven L. Severson sworn to April 10, 2000 (the "Severson Aff,"), Ex. B); and (2) in financial statements to the 401(k) Savings Plan's 1992 Form 5500, signed by Defendant Murphy on October 15, 1993 (Pl.'s Br. in Opp. to EMCOR at 16).
With respect to the October 29, 1993, memorandum, Plaintiff alleges that JWP, Inc. 401(k) Retirement Savings Plan Committee and AMEX misrepresented to plan participants that AMEX was an "Independent Trustee of Plans," i.e. had the power to invest trust assets independently, and concealed the fact that AMEX was a so-called directed trustee. (Amended Complaint ¶ 98.) This memorandum cannot reasonably be construed as false and misleading as Plaintiff suggests. (Pl.'s Br. in Opp. to EMCOR at 16; Pl.'s Mem. in Opp. to AMEX at 5-7.)
As stated in its opening line, the October 29, 1993, memorandum was issued in the wake of an announcement on October 11, 1993, that EMCOR had been negotiating with holders of its senior notes and bank debt, had reached an agreement on a plan for reorganization, and intended to file a "pre-packaged bankruptcy." (Amended Complaint ¶¶ 96, 98.) The October 29, 1993, memorandum relates not to how the company contributions would be invested, but rather it is an assurance to the beneficiaries that the Plans' assets were not subject to creditor claims, as were JWP, Inc.'s assets, and would not be affected by the settlement with JWP, Inc.'s creditors:
[A]ssets in your individual accounts will continue to be yours. . . . This will be true regardless of the ultimate outcome of JWP Inc.'s financial situation because these assets are not part of and are legally separate from JWP Inc. The assets in the plan are held by IDS Trust Company, the Trustee of the plans, and will not be part of any settlement with JWP Inc.'s creditors.
(Severson Aff, Ex. B at 8.)
The memorandum goes on to point out that the value of those assets and the plans which consisted of JWP, Inc., common stock were virtually worthless.
The value of any investments in the JWP Inc. Pooled Stock Fund in the 401(k) Retirement Savings Plan as well as your participation in the ESOP, if any, are subject to the market price of JWP's common stock. As a result of the announcement the value of JWP Inc. Common Stock has declined to and is likely to remain at or around zero.
(Id. at 9.)
Common law fraud requires a false representation. See Gruby v. Brady, 838 F. Supp. 820, 831-32 (S.D.N.Y. 1993). AMEX was independent of JWP, Inc, and thereby an independent trustee in the sense that the ERISA Plans' assets were held not by JWP, Inc. or by committees or persons under its control, but were held in trust by an independent entity. Therefore the statement that plan assets were held by an independent trustee (AMEX) is true. These statements in the memorandum are consistent with the facts as articulated by Plaintiff at oral argument. Since the statements in the memorandum are true and not misleading, AMIEX's action of distributing the memorandum cannot be reasonably construed as concealment or as fraud as Plaintiff contends. (Pl.'s Br. in Opp. to EMCOR at 16; Pl.'s Mem. in Opp. to AMEX at 5-7.)
Additionally, the memorandum is from "JWP INC Retirement Plans Committee," not from AMEX. (Severson Aff., Ex. B at 8.) AMEX merely distributed the memorandum. (Id. ¶ 6 3.) Thus it is not a statement or representation by AMEX.
Plaintiff also contends that Defendant Murphy concealed the fact that AMEX was a directed trustee in the 401(k) Savings Plan's 1992 Form 5500 that Defendant Murphy signed on October 15, 1993, which represented that "AMEX Trust was responsible for the investment and control of the 401(k) Plan Assets." (Pl.'s Br. in Opp. to EMCOR at 16.) According to Plaintiff, the Form 5500 failed to disclose that AMEX was in part a directed trustee and the form was therefore false and misleading. (Id.) The Amended Complaint does not make this claim. (See Amended Complaint ¶¶ 18, 31, 38.) Thus, Plaintiff has not pled fraud as to Defendants McKinley (formerly Bander), Murphy or AMEX. Nor has Plaintiff alleged the elements of fraudulent concealment doctrine as articulated in Schaefer as to those defendants See Schaefer, 853 F.2d at 1491-92. Accordingly, Plaintiff has not alleged fraud or concealment sufficient to trigger ERISA's equitable tolling provision as to Defendants McKinley (formerly Bander), Murphy or AMEX.
See "JWP Inc. 401(k) Retirement Savings Plan, Amended and Restated Effective as of January 1, 1989." §§ 8.1, 8.2 (Affidavit of Christy G. Leuk In Support of American Express Trust Company's Motion to Dismiss, dated November 5, 1998, Exhibit B). Section 8.1, "The Trust," states that "Matching Contributions shall be invested in the JWP INC. Common Stock Fund, or such other Investment Fund or Funds as the Committee shall from time to time direct." Section 8.2, "Participant Directed Investments," states that "[t]he Committee shall designate the Investment Fund in which all contributions credited to the Accounts of Participants who fail or refuse to execute an investment directions [sic] shall be invested."
As noted above, Plaintiff must show lack of actual or constructive notice despite due diligence to meet the Schaefer test of fraudulent concealment. If Plaintiff seeks to allege fraudulent concealment, Plaintiff must show why he, as a participant in 401(k) Retirement Savings Plan, would not have had notice of the provisions in the Plan and subsequent notices of any changes in the Plan's provisions.
Further, at oral argument, Plaintiff stated that in the Amended Complaint the term "defendants" meant all the defendants except when otherwise denoted by the phrase "`defendants except for'." (June 30, 2000, Transcript at 26.) This standard does not meet the pleading requirements in this circuit. See generally Fed.R.Civ.P. 9(b). The defendants have occupied fiduciary roles at different periods of time during the period covered by the complaint. Thus, each defendant is entitled to have fraud or concealment claims against him, her or it stated with the particularity required in DiVittorio v. Equidyne Extractive Industries. Inc.,822 F.2d 1242, 1247 (2d Cir. 1987), and Gruby v. Brady, 838 F. Supp. at 831.
Additionally, Plaintiff has not pleaded when he first discovered each of the alleged breaches of fiduciary duty; he only argues that he could not have become aware of those facts prior to six years before he filed this action. (Pl.'s Mem. in Opp. to AMEX at 10 (citing Amended Complaint ¶ 78).) The statute, however, provides that Plaintiff's knowledge of the breach or violation prior to three years before the filing of the action bars those claims. See 29 U.S.C. § 1113 (2). Accordingly, to avoid unnecessary future expenditures of time and effort, an amended complaint should contain an allegation of when Plaintiff discovered each defendant's alleged breach.
Also, Plaintiff cannot rely on ERISA's provision for co- fiduciary liability as to Defendants McKinley (formerly Bander), Murphy or AMEX. Co-fiduciary liability arises for a fiduciary only in limited circumstances:
(1) if [a fiduciary] participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary knowing such act or omission is a breach;
(2) if, by his failure to comply with section 1104(a)(1) of this title in the administration of his specific responsibilities which give rise to his status as fiduciary, he has enabled such other fiduciary to commit a breach; or
(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.29 U.S.C. § 1105 (a). The allegations of the Amended Complaint do not come within these parameters. If Plaintiff seeks to allege co-fiduciary liability, Plaintiff must make sufficient allegations to that effect in his Second Amended Complaint.
For the reasons stated, the Court finds that the Amended Complaint fails to allege adequately acts of fraud or concealment to trigger ERISA's equitable tolling provision as to Defendants McKinley (formerly Bander), Murphy and AMEX. Accordingly, the exception in 29 U.S.C. § 1113 for fraud or concealment shall not apply to those defendants. Plaintiff may cure this defect in the Amended Complaint by filing a Second Amended Complaint by October 20, 2000.
IT IS SO ORDERED.