Walsh v. Reliance Trust Company

Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 1 of 51 1 WO — 2 — — 3 — — 4 — — 5 — 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA — 8 — 9 Martin J Walsh, No. CV-19-03178-PHX-ROS 10 Plaintiff, ORDER 11 v. 12 Reliance Trust Company, et al., 13 Defendants. — 14 — 15 In 2014, RVR, Inc., decided to establish an employee stock ownership plan, a type 16 of pension plan that would allow RVR’s employees to own RVR stock. RVR hired 17 Reliance Trust Company to serve as the trustee and independent fiduciary for that plan. 18 Under Reliance’s guidance, the newly formed plan agreed to purchase 100% of RVR’s 19 stock for $105 million. The Secretary of Labor believes that price was too high. According 20 to the Secretary, the restrictive terms of the stock purchase agreement meant RVR’s stock 21 was worth approximately $15 million at the time of the transaction. The Secretary filed 22 this suit alleging the individuals and entities involved in the purchase of RVR stock 23 committed violations of the Employee Retirement Income Security Act (“ERISA”). After 24 completing discovery, the parties filed cross-motions for summary judgment as well as 25 numerous motions in limine. There are plenty of disputes of material fact and most of the 26 evidentiary arguments are not well taken. Therefore, the bulk of the motions will be denied 27 and trial will be set. 28 BACKGROUND Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 2 of 51 1 There are many factual and legal disputes between the parties but this suit boils 2 down to a dispute over the value of RVR’s stock in 2014. If, as the Secretary believes, 3 RVR’s stock was not worth anything close to $105 million, the defendants will face 4 significant difficulty in avoiding liability. If, as the defendants believe, RVR’s stock was 5 worth $105 million, the Secretary’s claims likely will fail. This is a greatly simplified view 6 of things but the basic disagreement about the value of RVR’s stock is why there will be a 7 trial. 8 Despite the obvious factual dispute regarding the correct value of the stock, all 9 parties moved for at least partial summary judgment. Those cross-motions require the 10 Court view the facts differently depending on which motion is being addressed. 11 Considering that requirement, it is difficult to present a concise and accurate version of the 12 facts. The following is a basic outline of the facts. More specific factual details are set 13 forth in the context of resolving particular motions. 14 Together with their father, brothers Randall Smalley and Robert Smalley, Jr., 15 established a recreation vehicle rental company in 1972. That company, RVR, now does 16 business as Cruise America and Cruise Canada. (Doc. 222-1 at 51). In 2000, Randall and 17 Robert “became the sole shareholders and sole directors of RVR.” (Doc. 222-1 at 51). 18 Randall put his RVR stock “in family trusts for which [he is] the trustee.” (Doc. 222-1 at 19 2). Robert kept ownership of his stock. In 2011, one of RVR’s longtime employees, Eric 20 Bensen, “was allowed to acquire 3.3% of RVR’s stock.” (Doc. 222-1 at 2). Thus, as of 21 2011 and until the 2014 creation of the employee stock ownership plan, Robert owned 22 48.35% of RVR’s stock, the trusts connected to Randall owned 48.35%, and Bensen owned 23 3.3%.1 24 Sometime in 2013, Robert and Randall claim they “began considering succession 25 planning and the possible transfer of RVR’s ownership to RVR’s employees.” (Doc. 22226 1 at 3; 222-1 at 51). In January 2014, Robert, Randall, and Bensen (collectively, the — 27 — 28 1 Randall’s stock was held in family trusts but for simplicity, and solely for purposes of this Order, the Court will describe Randall’s stock as being in his possession. -2Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 3 of 51 1 “Director Defendants”) met with employees of Chartwell Financial Advisory, Inc.2 The 2 Chartwell employees discussed with the Director Defendants the benefits of employee 3 stock ownership plans (“ESOPs”), “a type of pension plan that invests primarily in the 4 stock of the company that employs the plan participants.” Fifth Third Bancorp v. 5 Dudenhoeffer, 573 U.S. 409 , 412 (2014). The Chartwell employees explained how an 6 ESOP might work should the Director Defendants establish one. Relying on “preliminary 7 information” regarding RVR’s value, the Director Defendants claim Chartwell employees 8 concluded “a preliminary fair market value range for 100% of RVR’s stock as of December 9 31, 2013 was between $100.7 million and $143.9 million.” (Doc. 222-1 at 52). The 10 presentation from the January 2014 meeting, however, indicates Chartwell’s value range 11 reflected a “controlling interest equity value.” (Doc. 222-1 at 305). As discussed later, the 12 Secretary believes a “controlling interest equity value” often will be much higher than a 13 “non-controlling interest equity value” because having control over the company is worth 14 significantly more. In any event, using $100.7 million as the expected value, the Chartwell 15 employees “illustrate[d] . . . how a potential ESOP transaction could be financed and 16 structured and how much cash [the Director Defendants] might receive” if the transaction 17 occurred. (Doc. 222-1 at 52, 307-09). 18 The Director Defendants viewed the preliminary numbers as sufficient such that 19 they decided to proceed with establishing an ESOP. The Director Defendants “decided 20 that RVR should retain Chartwell to serve as RVR’s financial advisor in connection” with 21 establishing the ESOP. (Doc. 222-1 at 53). Once retained, Chartwell instructed the 22 Director Defendants to compile “due diligence materials so that the information could be 23 promptly shared with the to-be-selected independent trustee and its advisors.” (Doc. 22224 1 at 53). 25 During meetings in early 2014, Chartwell recommended the Director Defendants — 26 — — 2 — Some documents identify this entity as “Chartwell Financial Services, Inc.” (Doc. 222-1 27 at 3, 20, 52). It appears the correct name is “Chartwell Financial Advisory, Inc.” (Doc. 222-1 at 36). Numerous entities containing the name “Chartwell” were involved in the 28 transaction but an employee of Chartwell Financial Advisory, Inc., refers to all of the affiliated entities simply as “Chartwell.” (Doc. 222-1 at 36). The Court will do the same. -3Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 4 of 51 1 select Reliance Trust Company as the independent trustee for the ESOP.3 In the Secretary’s 2 view, the Director Defendants selected Reliance no later than February 25, 2014. On that 3 date a Chartwell employee sent an email to a Reliance employee indicating Reliance would 4 be selected as the trustee. (Doc. 250-5 at 15). Despite that email, the Director Defendants 5 maintain no selection was made in February 2014. Instead, in March 2014 the Director 6 Defendants claim they began “reviewing the credentials” of Reliance and two other 7 candidates to serve as ESOP trustee. (Doc. 222-1 at 53). The Director Defendants 8 indicated to the three candidates that a closing date for the transaction should be no later 9 than May 2014. The Director Defendants now claim that “was not a hard deadline” but an 10 email between advisors Reliance later hired describes May 27 as a “hard close date.” (Doc. 11 222-1 at 55; Doc. 251-3 at 30). All three trustee candidates allegedly stated a closing date 12 in May 2014 “was realistic and achievable.” (Doc. 222-1 at 54). Assuming Reliance had 13 not already been selected in February 2014, Reliance was in fact selected to serve as trustee 14 after the Director Defendants reviewed the three candidates. 15 The exact details of who made the decision to retain Reliance and how Reliance was 16 retained are disputed. In brief, the Director Defendants or possibly only Robert and 17 Randall, selected Reliance “to act as the ESOP’s independent, discretionary trustee” and 18 to “negotiate the terms by which the ESOP would purchase 100% of RVR’s stock from 19 [the Director Defendants].” (Doc. 222-1 at 55). Bensen, allegedly on behalf of RVR, 20 executed a formal retention letter with Reliance.4 21 To perform its duties as the ESOP trustee, Reliance selected its own financial 22 advisor, a firm named Stout Risius Ross (“SRR”), and legal counsel, the law firm K&L 23 Gates. The Director Defendants claim they “did additional due diligence” regarding SRR 24 and K&L Gates and the research confirmed SRR and K&L Gates “were qualified to serve 25 as Reliance’s advisors.” (Doc. 222-1 at 55). Once Reliance had appropriate advisors, the 26 3 Reliance Trust Company is a financial services firm that, when hired, agrees to act as trustee and ensure any “transaction is fair from a financial viewpoint to the ESOP and its 27 participants.” (Doc. 222-1 at 343) (engagement letter setting forth duties). — 4 — The retention letter states Reliance is being retained to work on the “Cruise America Inc.” 28 ESOP. (Doc. 222-1 at 343). Bensen signed that letter as “Chief Financial Officer” of “Cruise America Inc.” -4Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 5 of 51 1 two sides began negotiations. The basic setup was the Director Defendants were seeking 2 the highest price for their stock while Reliance was seeking the lowest price.5 3 On April 16, 2014, the Director Defendants and Chartwell met with Reliance and 4 its advisors. (Doc. 222-1 at 56). The following day, Chartwell gave Reliance access to 5 RVR’s business information. To be clear, Reliance first gained access to the crucial 6 information necessary to assess RVR’s value on April 17, 2014. Four days later, on April 7 21, 2014, Chartwell sent Reliance “the initial transaction proposal and term sheet.” 8 Chartwell proposed a purchase price of $143.9 million for 100% of RVR’s stock. That 9 proposal included several additional terms, such as granting the Director Defendants the 10 right to purchase shares of RVR after the transaction that would be newly issued after the 11 transaction. On May 5, 2014, Reliance sent a counteroffer for $100 million. (Doc. 250-4 12 at 24). 13 Reliance first obtained access to the requisite business documents on April 17, 14 meaning its counteroffer to pay $100 million for the RVR stock was sent less than three 15 weeks later. And that counteroffer did not contain the complete terms. The counteroffer 16 said Reliance would “want to revisit the employment agreements” for the Director 17 Defendants that would be part of the transaction, but Reliance did not set forth what that 18 “revisit[ing]” would entail. As set forth in more detail later, the employment agreements 19 with the Director Defendants contained large payouts in the event the Director Defendants 20 were replaced such that, when viewed in the light most favorable to the Secretary, it is 21 suspicious that Reliance could make a plausible offer without having a better idea of the 22 terms of the employment agreements. Reliance’s May 5, 2014, counteroffer also noted 23 Reliance needed to continue its “due diligence on other important issues such as any 24 environmental issues with the paint shop.” (Doc. 250-4 at 24). Viewed in the light most 25 favorable to the Secretary, offering that much money before significant investigations had 26 been completed is evidence Reliance may not have been acting prudently and solely in the — 27 — — 5 — The complicated nature of the transaction meant the total price was only one aspect of 28 their negotiations but, as evidenced by the negotiations, the total final price was the primary focus. -5Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 6 of 51 1 interest of the ESOP’s beneficiaries (i.e., RVR’s employees). 2 After Reliance’s counteroffer, Chartwell and Reliance exchanged subsequent offers. 3 Eventually they agreed on a purchase price of $105 million for the 1,000,000 shares of 4 RVR. (Doc. 220 at 21) (chart of offers). There are a few terms of the transaction that need 5 highlighting. The following is not a complete recital of the final terms but merely some of 6 the terms most crucial for resolving the various motions. 7 The transaction required the RVR ESOP borrow approximately $105 million from 8 RVR with a 40-year term. The RVR ESOP then used those funds to purchase all of the 9 RVR stock from the Director Defendants. (Doc. 222-3 at 60). So, the Director Defendants, 10 for a moment, had $105 million. Randall and Robert then loaned RVR $95 million. In 11 connection with that loan, Randall and Robert received what they refer to as “Seller Notes 12 and warrants.” (Doc. 220 at 25). The Seller Notes paid a cash interest rate of 2.5% per 13 year as well as “payment in kind interest” of 1.05% (compounding) and 2.15% (non14 compounding). Randall and Robert stress these debts were unsecured and subordinate to 15 RVR’s other debts. (Doc. 222-1 at 11). The accompanying warrants gave Randall and 16 Robert the right to purchase 666,667 shares of RVR stock at $7.50 per share, $92.50 per 17 share less than what the ESOP paid. (Doc. 222-1 at 61). Those warrants were issued 18 shortly after the transaction and were immediately exercisable. 19 The transaction required RVR establish a “management incentive plan” that allowed 20 238,095 “stock appreciation rights” to be granted to eligible RVR employees. (Doc. 21321 2 at 19). Neither Robert nor Randall were eligible under that incentive plan but Bensen 22 was eligible. Given the existing 1,000,000 shares of RVR stock sold to the ESOP, the 23 238,095 “stock appreciation rights” that other RVR employees might earn, and the 666,667 24 shares Randall and Robert were eligible to purchase after the transaction, Randall and 25 Robert could regain ownership of 35% of RVR’s outstanding shares immediately after 26 ostensibly selling 100% of the shares.6 Because Randall and Robert could purchase those 27 shares almost immediately, within a few days of the transaction, the ESOP’s ownership 28 6 Calculated as 666,667/(1,000,000 shares sold to ESOP + 666,667 shares Randall and Robert might buy + 238,095 shares for management incentive plan). -6Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 7 of 51 1 percentage of RVR could have slid from 100% to 65%. And once the “stock appreciation 2 rights” were earned, particular RVR employees could own 12.5% of RVR’s outstanding 3 shares. Thus, despite buying 100% of RVR’s equity in 2014, the transaction contemplated 4 the ESOP might own only 52.5% of RVR’s equity in the near future. 5 The final terms of the transaction to outline before discussing particular motions 6 involve additional monetary benefits for the Director Defendants and the amount of control 7 over RVR they retained. The terms of the transaction meant the Director Defendants were 8 entitled to five years of compensation worth a combined total of approximately $8 million. 9 The terms also established the ESOP would agree to elect the Director Defendants to serve 10 on RVR’s board of directors. (Doc. 222-3 at 80). The ESOP trust agreement identified 11 RVR as the plan administrator, RVR would serve as the trust’s “investment committee,” 12 and that committee could appoint an “investment manager.” (Doc. 222-3 at 7). In brief, 13 RVR had control over the ESOP and the Director Defendants were the only members of 14 RVR’s board of directors. Thus, the Director Defendants retained control over RVR, albeit 15 somewhat indirectly. 16 Based on these events, the Secretary filed the present suit against Reliance and the 17 Director Defendants.7 As noted earlier, the Secretary’s basic contention is the ESOP paid 18 way too much for the RVR stock considering the other terms of the transaction. The 19 Secretary believes allowing the ESOP to overpay for the RVR stock enriched the Director 20 Defendants at the expense of the ESOP. The Secretary alleged a total of seven claims 21 against Reliance and the Director Defendants: 22 • Count I: Against Reliance for engaging in what ERISA deems a “prohibited 23 transaction”; 24 • Count II: Against Reliance for breaching its fiduciary duty in approving the 25 transaction’s final terms; 26 • Count III: Against the Director Defendants for breaching their fiduciary 27 7 The Secretary also named RVR as a defendant but the Secretary explains RVR is named “pursuant to Rule 19(a) of the Federal Rules of Civil Procedure solely to assure that 28 complete relief can be granted.” (Doc. 182 at 6). RVR’s presence can be ignored for purposes of resolving the pending motions. -7Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 8 of 51 1 duties by failing to monitor Reliance; 2 • Count IV: Against the Director Defendants for “co-fiduciary liability” based 3 on participating in Reliance’s breaches; 4 • Count V: Against the Director Defendants for participating in Reliance’s 5 breaches and for participating in a prohibited transaction; 6 • Count VI: Against Reliance to void indemnification provisions in the plan 7 and trust documents; 8 • Count VII: Against the Director Defendants to void indemnification 9 provisions in the plan and trust documents. 10 Reliance and the Director Defendants are represented by separate counsel. At times, 11 however, Reliance and the Director Defendants have filed documents jointly. Therefore, 12 the Court will refer to Reliance or the Director Defendants separately and “Defendants” 13 will be used when referring to all of them. The parties have filed four motions to seal, six 14 evidentiary motions, and three motions for summary judgment. 15 ANALYSIS 16 I. Motions to Seal and Stipulation (Doc. 227, 233, 266, 269, 274) 17 The parties and non-parties have numerous disputes regarding whether certain 18 documents should be filed under seal. The disputed documents are attached to either 19 motions in limine or summary judgment briefing. The parties have complied with Local 20 Rule 5.6(d) but there remains significant confusion about the parties’ disagreements. 21 Rule 5.6(d) states “if a party wishes to file a document that has been designated as 22 confidential by another party,” the parties must confer and attempt to reach agreement. If 23 they cannot reach agreement, the filing party must lodge the documents under seal. At the 24 time of that lodging, the party who wishes to file the documents on the public docket must 25 set forth its position. After the lodging, the party that believes the documents should remail 26 under seal must file a motion to seal. Rule 5.6(d) does not allow for a response to a motion 27 to seal. 28 The process required by Rule 5.6(d) required the Secretary lodge numerous -8Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 9 of 51 1 documents.8 That lodging led to numerous motions to seal from Defendants and non2 parties (Doc. 227, 233, 266, 269) as well as a stipulation regarding how certain documents 3 should be redacted. (Doc. 274). Based on those filings, it is not possible to identify 4 precisely where the parties agree or disagree. For example, the Secretary lodged under seal 5 a presentation prepared by Chartwell. (Doc. 258). That document, labeled Exhibit 14, 6 appears to be the same document as a separately lodged document labeled Exhibit 19. 7 (Doc. 253). The subsequent motions to seal and stipulation make no reference to Exhibits 8 14 or 19. (Doc. 266, 269, 274). Thus, the parties seem to agree Exhibits 14 and 19 should 9 be filed on the public docket. But if the parties agree, they should have filed a stipulation 10 as set forth in Rule 5.6(d). 11 Despite the general confusion based on the manner the parties presented their 12 positions regarding the filing of certain documents, the basic question is whether the Court 13 should seal the documents because they contain confidential business information. The 14 documents, in brief, are the following: 15 • Reliance and the Director Defendants seek to seal a single page from the reports by 16 expert Jeffrey S. Tarbell. That page contains “RVR’s projected financial results and 17 its actual and adjusted earnings.” (Doc. 227 at 3). Reliance also seeks to seal the 18 “transaction memorandum” prepared by a law firm advising Reliance on the ESOP 19 transaction. And Reliance seeks to seal some discovery responses that include 20 compensation information and annual revenues. 21 • Reliance and SRR seek to seal the valuation reports prepared by SRR. Those reports 22 contain SRR’s “confidential and proprietary processes towards valuation and 23 RVR’s confidential financial and business information.” (Doc. 233 at 5). Those 24 8 The Secretary lodged the following: • portions from an expert report and a rebuttal report connected to a motion in limine 25 (Doc. 185); • valuation reports prepared by SRR as well as additional excerpts from expert reports 26 connected to a motion in limine (Doc. 189); • other valuation reports prepared by SRR connected to a motion for summary 27 judgment (Doc. 217); • other transactions documents, including documents that post-date the transaction 28 involving Reliance’s agreements with a separate non-party connected to an opposition to a motion for summary judgment (Doc. 252). -9Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 10 of 51 1 reports set forth SRR’s practices when determining a company’s value and also set 2 forth extensive information about RVR’s customer base, suppliers, and financial 3 statements. 4 Reliance, the Director Defendants, and SRR argue their businesses will suffer harm 5 if the information in the various documents is placed on the public docket. The Secretary 6 argues that not all the information contained in the various documents qualifies as 7 confidential. The Secretary also claims some of this evidence “lie[s] at the heart of the 8 Secretary’s claims” and, therefore, “any motion to seal should be denied.” 9 (Doc. 252 at 9 4). 10 Depending on the type of underlying motion, the Ninth Circuit applies two different 11 standards for filing documents under seal. If “the motion at issue is more than tangentially 12 related to the underlying cause of action,” the Court must find “compelling reasons” for 13 placing the documents under seal. Ctr. for Auto Safety v. Chrysler Grp., LLC, 809 F.3d 14 1092, 1099 (9th Cir. 2016). For other motions not “tangentially related” to the merits, the 15 Court need only find “good cause” to justify the sealing. Id. at 1097. The documents at 16 issue were attached either to a motion in limine or to summary judgment briefing. Such 17 motions or briefing require application of the “compelling reasons” standard. Id. at 1099 18 (noting motions in limine “are strongly correlative to the merits of a case”). The present 19 record does not establish “compelling reasons” to seal the various documents in their 20 entirety. 21 It appears undisputed the documents contain extensive non-public information 22 about RVR’s operations and details of how SRR conducts its valuations. And it is well23 established “[t]he disclosure of business information that could create competitive harm is — 24 — — 9 — The Secretary argues the protective order granted permission for either party to file on 25 the public docket any document produced in discovery. (Doc. 252 at 2). The Secretary reads the protective order as prohibiting only the use of the disputed documents in unrelated 26 proceedings. In other words, the Secretary believes all documents produced during discovery may be filed on the public docket. That is not correct. The correct reading of 27 the protective order that during discovery any party or non-party is entitled to designate documents as confidential. The side receiving the allegedly confidential documents may 28 then use, but not necessarily file on the public docket, those documents in this litigation. The side producing the documents remains entitled to seek the sealing of the documents. - 10 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 11 of 51 1 a compelling reason to seal.” Doe v. Meta Platforms, Inc., No. 22-CV-03580-WHO, 2022 2 WL 17970394 , at *2 (N.D. Cal. Dec. 21, 2022) (citing cases). Therefore, some of the 3 information in the documents may properly be placed under seal.10 But the disputed 4 documents cannot be placed under seal in their entirety because significant portions of 5 those documents reflect information that must be placed on the public docket. 6 The documents contain information that is already part of the public record. For 7 example, one disputed document includes the following statement: “As part of the ESOP 8 Transaction, Cruise America entered into the Seller Notes in the aggregate amount of $95.9 9 million.” (Doc. 190 at 23). That information is already available on the public docket. 10 (Doc. 251-7 at 32). Page 26 of the same disputed document includes statements regarding 11 how RVR views ESOP expenses. (Doc. 190 at 26). And while it is not clear if those 12 statements are already on the public docket, there has not been a sufficient explanation how 13 RVR’s view of ESOP expenses can qualify as proprietary business information that would 14 cause harm if disclosed. These are only two of the many portions of the disputed 15 documents that, at present, have not met the “compelling reasons” standard. Because 16 statements that are not confidential or that do not disclose any confidential business 17 information cannot be sealed, the motions to seal will be denied without prejudice. 18 The Director Defendants, Reliance, and SRR will be required to identify those 19 portions of the disputed documents which they believe meet the “compelling reasons” 20 standard for sealing. The Director Defendants, Reliance, and SRR must then confer with 21 the Secretary to reach an agreement. If an agreement is reached, the parties must file a 22 stipulation together with the redacted versions of the documents on the public docket. The 23 complete copies of the documents should be lodged, under seal, as attachments to 24 thestipulation. If no agreement is reached, the Director Defendants, Reliance, and SRR 25 must file a single joint motion to seal, accompanied by clear indication of the portions of 26 the documents they continue to believe should be sealed and the compelling reasons that 27 support their positions. The Secretary will then respond and the Director Defendants, — 28 — — 10 — This does not resolve how those documents will be handled at trial. - 11 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 12 of 51 1 Reliance, and SRR will file a single joint reply. The Court will then resolve the disputed 2 portions and order the parties to file redacted versions. 3 II. Evidentiary Motions 4 The parties have briefed six evidentiary motions. The Court will analyze each 5 motion separately. 6 A. Secretary’s Motion to Exclude Portion of Expert Opinions (Doc. 184) 7 The Secretary seeks to exclude any “expert evidence containing legal conclusions.” 8 (Doc. 184 at 3). According to the Secretary, the reports and deposition testimony from 9 three of Defendants’ experts contain “impermissible opinion evidence” reflecting the 10 experts’ opinion on issues of law, such as the appropriate standard for evaluating the 11 legality of the transaction.11 (Doc. 184 at 5). In their opposition, Defendants agree “that 12 an expert cannot state an opinion as to ultimate legal conclusions.” (Doc. 231 at 2). But 13 Defendants argue their experts have not done so. 14 The statements to which the Secretary objects include statements that provide some 15 basic background regarding ERISA and ESOPs. For example, the Secretary believes it is 16 improper for one expert to state “Given the nature of ESOP financing and the relationship 17 between the seller(s) and buyer, it is my understanding that ESOP transactions are 18 generally subject to ERISA’s prohibited transaction rules.” (Doc. 184-1 at 4). The 19 Secretary also objects to statements addressing “industry best practices.” The Secretary 20 reasons the experts’ opinions that Defendants’ actions were consistent with “industry best 21 practices” contain an “implicit” assertion that Defendants’ actions were consistent with 22 ERISA. (Doc. 184 at 4). 23 The boundary between permissible and impermissible expert testimony regarding 24 issues of law is one where courts routinely struggle to draw meaningful lines. See 25 Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195 , 218 (3d Cir. 2006) (noting “line between — 26 — — 11 — It is unclear if the parties believe the experts’ reports will be admitted into evidence. 27 Absent an agreement between the parties, those reports may not be admissible. See, e.g., Hunt v. City of Portland, 599 F. App’x 620, 621 (9th Cir. 2013) (“With respect to the 28 expert’s written report, we conclude that the report is hearsay to which no hearsay exception applies.”). - 12 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 13 of 51 1 admissible and inadmissible expert testimony . . . often becomes blurred when the 2 testimony concerns a party’s compliance with customs and practices that implicate legal 3 duties”). In general, experts may offer testimony “concerning an ultimate issue” but cannot 4 offer testimony “on an ultimate issue of law.” Hangarter v. Provident Life & Acc. Ins. Co., — 5 — 373 F.3d 998, 1016 (9th Cir. 2004). For example, in an insurance bad faith case, the Ninth 6 Circuit concluded an expert appropriately testified the defendants “deviated from industry 7 standards” but it would have been inappropriate for the expert to testify the defendant 8 “acted in bad faith (i.e., an ultimate issue of law).” Id. 9 The rule prohibiting expert testimony on ultimate issues of law usually is justified 10 on the basis that “instructing the jury as to the applicable law is the distinct and exclusive 11 province of the court.” Id. See also Nationwide Transp. Fin. v. Cass Info. Sys., Inc., 523 12 F.3d 1051, 1058 (9th Cir. 2008). That issue is not present in bench trials. In fact, the Ninth 13 Circuit has noted expert testimony on “matters of law” might be permissible in some bench 14 trials because there is “no danger that a jury might give too much credence to a legal 15 expert.” Flores v. Arizona, 516 F.3d 1140, 1166 (9th Cir. 2008), reversed on other 16 grounds, Horne v. Flores, 557 U.S. 433 (2009). 17 Here, the Court is equipped at trial to assess the admissibility of discrete portions of 18 the experts’ testimony. The Court will not require any explanation of the legal background 19 of ERISA or ESOPs and experts will not be allowed to provide such explanations. But it 20 is often “difficult to draw the line between what are questions of law, what are questions 21 of fact, and what are mixed questions.” Nieves-Villanueva v. Soto-Rivera, 133 F.3d 92 , 22 100 (1st Cir. 1997). That difficulty is especially pronounced pretrial when the context for 23 the testimony is unknown. An expert referencing a particular provision of ERISA might, 24 in some circumstances, be viewed as an impermissible statement regarding the governing 25 law. But it would be unrealistic to forbid the experts here from referencing the underlying 26 law. Drawing the appropriate line between permissible and impermissible expert 27 testimony is better drawn during trial and not based on snippets from reports and 28 depositions. The Secretary’s request to exclude exact portions of the experts’ planned - 13 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 14 of 51 1 testimony will be denied without prejudic. 2 B. Secretary’s Motion to Exclude Evidence of Stock Performance (Doc. 188) 3 The Secretary seeks to exclude “evidence and testimony . . . related to the 4 performance of . . . RVR’s stock after the May 28, 2014 transaction.” (Doc. 188 at 1). 5 According to the Secretary, “evidence concerning the performance of RVR or its stock 6 after the Transaction is not relevant to whether the Plan paid ‘adequate consideration’ for 7 the stock.” (Doc. 188 at 2). The issue, in the Secretary’s opinion, is the reasonableness of 8 the transaction as of May 2014, not “whether the investment ultimately succeeded or 9 failed.” (Doc. 188 at 3). Defendants respond the post-transaction performance of RVR’s 10 stock “is relevant and admissible” to show, among other things, the financial projections 11 used in 2014 were appropriate and the Director Defendants were not “motivated by greed 12 or the desire to secure an unfair or improper benefit” from the sale of their stock to the 13 ESOP. (Doc. 230 at 2-3). 14 The reasonableness of the May 2014 transaction must be focused on the facts known 15 at that time. The statutory language itself requires an ERISA fiduciary “discharge his 16 duties . . . with the care, skill, prudence, and diligence under the circumstances then 17 prevailing.” 29 U.S.C. § 1104 (a)(1). See also Fifth Third Bankcorp v. Dudenhoeffer, 573 18 U.S. 409, 425 (2014) (noting “the content of the duty of prudence turns on the 19 circumstances prevailing at the time the fiduciary acts”). The “circumstances then 20 prevailing” indicate the assessment must be on what the fiduciaries knew at the time. 21 Courts have disagreed on this issue but the rule consistent with the statutory text is to focus 22 on the “circumstances” that existed at the exact time, not developments after the 23 fiduciaries’ actions.12 — 24 — — 12 — When assessing the admissibility of post-transaction performance, one court held 25 “[p]ost-transaction performance is irrelevant to a valuation analysis” and the sole issue is whether “the facts that [were] known or knowable at the time of the transaction.” Hans v. 26 Tharaldson, 2011 WL 6937598 , at *13 (D.N.D. Dec. 23, 2011). But a different court looked to a company’s post-transaction performance when assessing the reasonableness of 27 a transaction. Walsh v. Bowers, 561 F. Supp. 3d 973 , 990 (D. Haw. 2021). See also Allen v. GreatBanc Tr. Co., 835 F.3d 670, 680 (7th Cir. 2016) (noting a “post-ESOP transaction 28 decline in stock value” is relevant when evaluating plausibility of claims at motion to dismiss stage). - 14 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 15 of 51 1 While the focus must be on the circumstances at the time of the transaction, it is 2 possible subsequent events will be relevant, such as when assessing damages. The parties 3 do not argue this point but if the ESOP’s investment increased in value after the transaction, 4 it is not clear whether the Court can find liability even if Defendants were imprudent. On 5 this point, the Ninth Circuit has held “ERISA holds a trustee liable for a breach of fiduciary 6 duty only to the extent that losses to the plan result from the breach.” Friend v. Sanwa 7 Bank California, 35 F.3d 466, 469 (9th Cir. 1994). See also Tatum v. RJR Pension Inv. 8 Comm., 761 F.3d 346, 361 (4th Cir. 2014) (“[i]f trustees act imprudently, but not 9 dishonestly, they should not have to pay a monetary penalty for their imprudent judgment 10 so long as it does not result in a loss to the Fund.”). Thus, post-transaction events will not 11 be relevant to assessing Defendants’ actions leading up to the transaction, but it is possible 12 they will be relevant on other aspects. The motion to exclude post-transactions events 13 entirely will be denied without prejudice. 14 C. Reliance’s Motion to Exclude a Draft Policy Statement (Doc. 210) 15 Reliance seeks to exclude any reference to a “draft procedure statement” dated July 16 2012. The document outlines the policies and procedures Reliance would follow when 17 Reliance was hired to work on ESOP transactions. Reliance describes the document as a 18 “working copy of a policy that was never implemented.” (Doc. 210 at 2). The Secretary 19 admits the document was never formally adopted as a policy, but the Secretary seeks to use 20 the document in interpreting other policies that were formally adopted or in proving 21 Reliance’s common practices. In particular, the Secretary wishes to use the document to 22 show Reliance acted contrary to other policies or common practices by having only two 23 individuals approve the transaction. (Doc. 226 at 5-6). 24 At present, the fact that the document does not reflect Reliance’s formal policy 25 means it is unlikely to be of significant evidentiary value. However, if the document 26 accurately sets forth what Reliance’s employees viewed as existing policies or procedures, 27 it may be relevant to establish the Reliance employees knew the transaction should not 28 proceed. That is, even if the document itself was never formally adopted, it may reflect - 15 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 16 of 51 1 other preexisting policies or practices Reliance employees knew existed or followed in 2 other cases. The document may be used on cross examination to show Reliance employees 3 violated internal policies or deviated from usual practices such that the transaction was 4 flawed. If the Secretary plans on using the document as direct evidence, it must be 5 supported by proper foundation. The Court will not exclude all references to the document. 6 D. Defendants’ Motion to Exclude Expert Opinions (Doc. 213) 7 Defendants seek to exclude all testimony from two of the Secretary’s experts. The 8 first expert, Charles E. Wert, is expected to offer opinions “regarding whether Defendants’ 9 conduct in negotiating the transaction met the appropriate standard of care.” (Doc. 236 at 10 10). The second expert, Paul Wazzan, Ph.D., is expected to offer opinions “regarding the 11 fair market value of RVR’s equity on May 28, 2014, and, if the [ESOP] overpaid, the 12 amount of damages it suffered.” (Doc. 236 at 12). According to Defendants, these experts 13 are not qualified to offer their opinions nor are their opinions reliable. Defendants’ 14 arguments are relevant for cross-examination, not for exclusion of the experts’ testimony. 15 The admissibility inquiry under Rule 702 requires a judge “screen the jury from 16 unreliable nonsense opinions, but not exclude opinions merely because they are 17 impeachable.” Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960, 969 (9th 18 Cir. 2013). The task when determining admissibility is not “deciding whether the expert 19 is right or wrong,” but “whether his testimony has substance such that it would be helpful 20 to a jury.” Id. at 969-970 . In the context of a bench trial, the standard for hearing expert 21 testimony is more relaxed than in a jury trial. 22 “Daubert is meant to protect juries from being swayed by dubious scientific 23 testimony. When the district court sits as the finder of fact, there is less need for the 24 gatekeeper to keep the gate when the gatekeeper is keeping the gate only for himself.” 25 United States v. Flores, 901 F.3d 1150, 1165 (9th Cir. 2018). Thus, a district court may 26 “make its reliability determination during, rather than in advance of trial.” Id. If, after 27 hearing from the experts, the district court determines they do not meet the requirements 28 of Federal Rule of Evidence 702, the district court is free to exclude or disregard the expert - 16 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 17 of 51 1 testimony. Id. 2 A. Charles E. Wert 3 Wert has “over 50 years of direct hands-on experience in overseeing, managing, and 4 administering employee benefit plans designed specifically to invest in employer stock 5 such as ESOPs.” (Doc. 213-2 at 3). Wert worked as “an entry level Trust Administrator” 6 but he advanced and eventually was named President and CEO of Evercore Trust 7 Company. Evercore provides “consulting and Trust services” to numerous large 8 companies, such as General Motors, Chrysler, and Ford Motor Company. When Wert 9 retired from Evercore in 2017, it held more than $45 billion in company stock in various 10 employee benefit plans, including ESOPs. 11 During his career, Wert has been involved in 30 to 40 ESOP purchase transactions. 12 Wert was involved in the formation of an “ESOP advocacy organization that has been in 13 existence for more than 40 years.” Wert is a coauthor in a publication titled “The Role of 14 the Independent Fiduciary,” which he describes as a reference that is still used today. Wert 15 is now a principal at Fiduciary Resolutions, Inc., which provides “advice to the ERISA 16 marketplace on various aspects of fiduciary conduct in managing and overseeing retirement 17 plans covered by ERISA.” The Secretary retained Wert to provide opinions on the conduct 18 of Reliance as well as the conduct by the Director Defendants in overseeing Reliance’s 19 conduct. 20 Defendants do not challenge Wert’s qualifications to offer opinions regarding the 21 proper conduct by fiduciaries in ESOP transactions. Instead, Defendants argue Wert is 22 offering improper legal opinions, his opinions are unreliable because he did not personally 23 review every document, his opinions are based on his own improper valuation of RVR’s 24 stock, and his statements regarding Defendants’ “knowledge and state of mind” are 25 improper. (Doc. 213 at 14). 26 As noted earlier, the general rule is that experts may offer testimony “concerning an 27 ultimate issue” but cannot offer testimony “on an ultimate issue of law.” Hangarter v. 28 Provident Life & Acc. Ins. Co., 373 F.3d 998, 1016 (9th Cir. 2004). Defendants argue Wert - 17 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 18 of 51 1 violates this rule. Wert’s opinions evaluate Defendants’ behavior under the “standard of 2 care” which Wert defined as “the requirements of ERISA . . . as I understand them.” (Doc. 3 213-10 at 15). Thus, when Wert offers his opinion that Defendants’ conduct fell below the 4 “standard of care,” Defendants believe Wert is offering the impermissible legal opinion 5 that Defendants violated ERISA. It is not that simple. 6 Wert’s view of the standard of care is derived from his understanding of the 7 requirements of ERISA. In explaining his opinions, Wert has been clear he was opining 8 on his personal understanding of ERISA and not attempting to provide a definitive legal 9 interpretation of ERISA. In addition, Wert’s deposition illustrated his view of the 10 governing standard of care was based on his own experiences in the industry. When asked 11 why he did not adopt “industry best practices” as the relevant threshold for evaluating 12 Defendants’ behavior, Wert stated he “never believed that industry best practices” were the 13 proper threshold. According to Wert, there is no agreed upon set of “industry best 14 practices” and it is possible that practices followed throughout the industry might be 15 “incorrect.” (Doc. 213-10 at 15). Thus, Wert was adamant that “the standard of care is the 16 standard of care,” meaning Wert has his own opinion, built on decades of experience, of 17 what the standard of care requires. 18 Wert’s view of appropriate fiduciary conduct, built on decades of experience in the 19 relevant industry, has a sufficiently reliable basis such that it would be helpful to [the finder 20 of fact].” Elosu v. Middlefork Ranch Inc., 26 F.4th 1017, 1024 (9th Cir. 2022). The 21 Secretary should clarify the exact basis for Wert’s opinion regarding the applicable 22 standard of care, ensuring Wert is not merely offering a pure legal opinion that Defendants’ 23 violated ERISA. At this stage, however, Wert’s opinions appear to be based on his lengthy 24 career in the exact industry about which he will testify. Wert’s opinions will not be 25 excluded as prohibited legal opinions. 26 Defendants next argue Wert’s opinions are not reliable because he conducted only 27 a “limited review of the evidentiary record.” (Doc. 213 at 10). Rule 702(b) requires an 28 expert’s opinion be “based on sufficient facts or data.” This requirement is meant to - 18 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 19 of 51 1 exclude “wholly speculative or unfounded testimony.” Elosu v. Middlefork Ranch Inc., 26 2 F.4th 1017 , 1025 (9th Cir. 2022). The requirement contemplates there will be a sufficient 3 “foundation” for an opinion, not necessarily that there will be sufficient “corroboration” of 4 that opinion in all portions of the record. Id. 5 Defendants complain Wert’s opinions are not based on “sufficient facts or data” 6 because he did not review “thousands of pages” they believe are relevant. (Doc. 213 at 7 11). They also complain Wert had associates review and identify the relevant documents. 8 Wert would then review those identified documents. Defendants argue an expert’s opinion 9 can be excluded if the expert did not personally review every document produced in 10 discovery. Defendants do not cite any authority establishing such a rule and, under the 11 governing standard, Defendants’ argument is baseless. 12 Defendants fail to explain why it was improper for Wert to rely on the work of 13 associates in crafting his opinions. Given the requirements of Rule 703, Wert was free to 14 rely on reliable facts or data provided to him by others. Fed. R. Civ. P. 703 (allowing 15 expert to rely on facts or data he has “been made aware of”). Wert’s reliance on associates 16 does not require exclusion of his opinions. 17 In reaching his opinions Wert reviewed sufficient documents to allow him to craft 18 seventeen single-spaced pages outlining his view of the relevant facts. That section 19 included information about RVR, the negotiations, and the final terms of the transaction. 20 (Doc. 213-2 at 4-21). His opinions set forth on the subsequent seventeen pages of his report 21 cite to underlying documents when Wert believed it was necessary to do so. Defendants 22 argue Wert should have done more by reviewing every document produced in discovery 23 but Defendants do not identify the allegedly crucial documents Wert overlooked. And, 24 based on the present record, Wert reviewed sufficient documents to understand the relevant 25 events and offer his opinion. Thus, Wert’s opinions were based on sufficient facts and 26 data. 27 Defendants argue Wert offers improper opinions regarding the value of RVR’s 28 stock. (Doc. 213 at 13). In particular, Defendants complain Wert offers opinions on the - 19 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 20 of 51 1 correct valuation of stock that does not reflect a controlling interest in a corporation as well 2 as the allegedly inappropriate number of shares the Director Defendants were entitled to 3 purchase after the transaction. The Secretary admits Wert is not being offered as an expert 4 regarding the value of obtaining a controlling interest or the value of the stock the Director 5 Defendants could purchase. (Doc. 236 at 19). Rather, Wert’s opinions go to the 6 reasonableness of Defendants’ behavior in completing the transaction. Thus, Wert will not 7 directly critique the valuation provided to Reliance. Instead, Wert will explain what an 8 appropriately prudent trustee would have done to ensure that valuation was accurate. 9 Similarly, Wert will testify about how a prudent trustee would have negotiated with the 10 Director Defendants regarding their entitlement to additional shares of stock after the 11 transaction. Based on his extensive experience regarding trustees and ESOPs, Wert is 12 entitled to offer opinions regarding how prudent trustees would have acted in the particular 13 circumstances Defendants faced. 14 Finally, Defendants argue Wert offers improper opinions regarding Defendants’ 15 knowledge and state of mind. In his report, Wert often states the Director Defendants 16 “knew” certain things. For example, Wert states the Director Defendants “knew that the 17 $105 million purchase price” was calculated under the assumption the buyer would gain 18 control of RVR. (Doc. 213-2). Wert also states the Director Defendants “knew” of 19 particular aspects of the transaction’s final terms based on the fact the Director Defendants 20 signed the documents containing those terms. In context, the cited statements regarding 21 knowledge are not a basis for excluding Wert’s opinions. 22 The portions of Wert’s report cited by Defendants do not support their interpretation 23 that Wert was attempting to opine on Defendants’ subjective state of knowledge. Rather, 24 Wert described certain things that must have been “known” by Defendants based on certain 25 events. For example, Wert states the Director Defendants “knew” how the $105 valuation 26 had been calculated because they attended the meeting where the terms of that valuation 27 were discussed. And Director Defendants “knew” the contents of documents because 28 Director Defendants read and signed the documents. At present, Wert’s statements appear - 20 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 21 of 51 1 to be shorthand references to matters Wert believes the Director Defendants “knew or 2 should have known.” 3 If the Director Defendants wish to press this point at trial by arguing they did not 4 have the “knowledge” described by Wert, they will be free to do so. However, arguing 5 they were unaware of how a crucial valuation was being calculated or unaware of material 6 terms of the transaction might undermine their defense. That is, arguing they did not 7 inquire into matters such that they understood what was happening may be viewed as 8 evidence the Director Defendants were not prudent. But regardless of what will be argued 9 at trial, Wert’s opinions will not be excluded merely because of the way he describes the 10 Director Defendants’ knowledge. 11 B. Paul Wazzan, Ph.D. 12 Paul Wazzan has a Ph.D. in finance from UCLA. (Doc. 213-7 at 5). He is currently 13 a “Senior Managing Director” at FTI Consulting, Inc. Wazzan also runs Wazzan & Co. 14 Investment, LLC, “a venture capital firm providing seed-level funding to firms specializing 15 in semiconductor . . . and related technologies.” Wazzan has worked as an adjunct 16 professor of business and economics and taught MBA classes at universities in California. 17 Wazzan describes his specialty as “providing financial, economic, and statistical 18 expertise in the areas of complex damages [and] finance,” including valuation and 19 corporate finance. (Doc. 213-7 at 5). Wazzan has conducted 30 to 40 valuations of closely 20 held companies for business and tax purposes. He has also published research in peer21 reviewed economic journals and law reviews. And Wazzan has testified many times as an 22 expert in federal and state courts, including sometimes offering expert opinions regarding 23 valuation. 24 The Secretary asked Wazzan “to determine the fair market value of RVR’s equity 25 as of May 28, 2014.” Wazzan was also asked to calculate the damages suffered by the 26 ESOP, assuming it overpaid for the equity. Finally, he was asked to evaluate the work of 27 SRR in determining the value of RVR’s equity. (Doc. 213-7 at 8). Wazzan’s report 28 consists of an overview of RVR and its industry, followed by a lengthy discussion of - 21 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 22 of 51 1 various methods experts use to arrive at valuations. Wazzan rejects certain methods for 2 reasons outlined in his report. Wazzan then explains why he believes the “discounted cash 3 flow” method is appropriate and conducts an analysis of the value of RVR’s equity value 4 using that method. Finally, Wazzan calculates the “damages due to overpayment” and 5 critiques the valuation work performed by SRR. 6 Defendants argue Wazzan is not qualified to offer any opinion in this case because 7 he “has no experience in ERISA or ESOP cases.” (Doc. 213 at 17) (emphasis in original). 8 While not stated explicitly, Defendants appear to believe an expert who has not worked in 9 ERISA or ESOP cases before can never work on such cases. But even the world’s most 10 qualified expert in the areas of ERISA and ESOPs must have, at some point, testified for 11 the first time in an ERISA or ESOP case. Defendants’ argument based on Wazzan’s lack 12 of ERISA or ESOP experience is not a sufficient basis to deem him categorically 13 unqualified in this case. 14 Defendants also argue Wazzan’s lack of ERISA and ESOP experience is relevant 15 because Wazzan misunderstands the fundamental “standard for valuation in these types of 16 cases.” (Doc. 213 at 18). Defendants claim the relevant inquiry for ESOP valuations is 17 identifying the “fair market value.” Defendants seem to believe, although they do not 18 elaborate, that “fair market value” has a unique meaning in ERISA and ESOP cases such 19 that experience in non-ERISA cases is not helpful. The Secretary responds Defendants are 20 overstating the uniqueness of the “fair market value” inquiry in ESOP cases. The Secretary 21 points out Defendants agree some of the best guidance for the meaning of “fair market 22 value” in this context is found in a DOL proposed regulation. That proposed regulation 23 states the term “fair market value” “essentially reflects the well-established meaning of this 24 term in the area of asset valuation.” (Doc. 236 at 26). That meaning is: “the price at which 25 an asset would change hands between a willing buyer and a willing seller when the former 26 is not under any compulsion to buy and the latter is not under any compulsion to sell, and 27 both parties are able, as well as willing, to trade and are well-informed about the asset and 28 the market for that asset.” Proposed Regulation Relating to the Definition of Adequate - 22 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 23 of 51 1 Consideration, 53 FR 17632 -01. 2 Under the proposed regulation, as well as available caselaw, “fair market value” in 3 the ESOP context has a very similar definition as “fair market value” used elsewhere. See 4 Henry v. Champlain Enterprises, Inc., 445 F.3d 610, 619 (2d Cir. 2006) (noting “‘fair 5 market value’ is an imprecise term” but citing proposed regulation). Defendants have not 6 established Wazzan’s understanding of “fair market value” is incorrect. Therefore, this is 7 no basis to exclude Wazzan’s opinion. 8 Defendants’ final argument regarding Wazzan’s lack of experience in ERISA and 9 ESOP cases is he is not qualified because he had to correct certain errors in his expert report 10 once those errors were identified by a separate expert. Defendants attributed those errors 11 to Wazzan’s lack of experience in this field. Defendants also argue Wazzan has only a 12 basic understanding of the fiduciary duties present in an ESOP transaction of this sort. The 13 fact that Wazzan corrected errors in his report does not render him unqualified and 14 Defendants do not cite any authority holding the correction of initial errors renders an 15 expert unqualified. And Wazzan is not being offered as an expert regarding fiduciary 16 duties. Thus, his knowledge of ESOP-specific fiduciary duties does not render him 17 unqualified to offer the opinions he plans to offer. 18 Beyond challenging Wazzan’s qualifications, Defendants challenge the reliability 19 of Wazzan’s opinions. Defendants first argue Wazzan’s valuation opinion is “not 20 predicated on any recognized valuation or appraisal standards.” (Doc. 213 at 22). The 21 Secretary responds Wazzan used the widely-known “discounted cash flow” method when 22 reaching his valuation opinion. (Doc. 236 at 28). In their reply, Defendants argue the 23 Secretary is “purposefully conflat[ing] professional valuation standards . . . with valuation 24 methodologies.” (Doc. 239 at 11). According to Defendants, the discounted cash flow 25 method is only a “method” within the general “income approach” of determining valuation. 26 (Doc. 239 at 11 n.8). And if Wazzan were attempting to conduct his valuation using the 27 “income approach,” he was required to interview the Director Defendants. Because 28 Wazzan did not conduct such interview, he was not using the “income approach” (or either - 23 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 24 of 51 1 of the other two methods Defendants identify as legitimate). Therefore, according to 2 Defendants, Wazzan’s “value conclusion [is] unreliable.” (Doc. 239 at 12). 3 The Court will assume there is some crucial nuance to Defendants’ argument that is 4 not made sufficiently clear in their briefs. To the extent Defendants’ argument is the 5 “discounted cash flow” method is never an appropriate way to value stock, that would be 6 quite surprising. There are countless opinions accepting “discounted cash flow” as a 7 legitimate method to determine value.13 For example, in a tax case the Sixth Circuit 8 analyzed use of “discounted cash flow” to determine the appropriate value of shares of a 9 closely-held corporation. Gross v. Comm’r of Internal Revenue, 272 F.3d 333, 340 (6th 10 Cir. 2001). The parties in that case both used “discounted cash flow,” but they disagreed 11 how the method should account for tax liabilities. Neither the parties nor the Sixth Circuit 12 took issue with “discounted cash flow” as an appropriate way to value the shares. 13 The Third Circuit has been even clearer that “discounted cash flow” may be an 14 appropriate approach in cases such as this. The Third Circuit believes “discounted cash 15 flow” is appropriate for “the extremely difficult task of valuing the stock of a company 16 which is privately owned and not traded on a public exchange.” Kool, Mann, Coffee & Co. 17 v. Coffey, 300 F.3d 340, 362-63 (3d Cir. 2002). That is precisely the situation here. 18 Given existing caselaw, Defendants’ argument that Wazzan erred by using the 19 discounted cash flow method is not convincing. Defendants are free to cross-examine 20 Wazzan to attempt to undermine his valuation opinion, but Defendants have not shown 21 Wazzan’s opinion based on that approach is so unreliable it must be excluded. 22 Defendants next argue Wazzan’s opinions are unreliable because he used some 23 aspects of the analysis conducted by SRR in reaching his opinions. Defendants argue 24 Wazzan was required to complete “his own valuation from the ground-up” and not “piggy25 back on the May 2014 valuation conducted” by SRR. (Doc. 213 at 24). It is very difficult 26 to believe Defendants are serious. Defendants cite no authority that an expert cannot rely — 27 — — 13 — It gets even more confusing because a few pages after arguing “discounted cash flow” is 28 inappropriate, Defendants note that SRR used “discounted cash flow” in its own valuation. (Doc. 213 at 25). - 24 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 25 of 51 1 on the work of others when reaching his conclusion, and experts often do so. There is no 2 requirement that an expert conduct a valuation “from the ground-up” and Defendants do 3 not define what is “from the ground-up.” Presumably that would require an expert 4 personally visit and determine the value of each piece of real property owned by RVR, 5 review each recreational vehicle used by RVR to determine its value, assess the 6 performance of each employee to determine if the employee’s salary was appropriate, 7 assess the condition and value of office furniture, and the list could go on. No such 8 “ground-up” process is required by law. To the extent Defendants believe Wazzan did not 9 review crucial information or relied on incorrect aspects of SRR’s valuation, they can 10 inquire into those areas during trial. 11 Finally, Defendants argue Wazzan’s opinion regarding the damages suffered by the 12 ESOP is unreliable. Wazzan calculated the amount the ESOP could have recovered had it 13 paid the appropriate value for the RVR equity and then invested the remaining balance in 14 a diversified stock portfolio. Defendants argue this opinion is unreliable because the 15 Director Defendants never would have sold their equity for “only” the amount Wazzan 16 determined it was worth (approximately fourteen million). Defendants also point out that 17 it would have been illegal for RVR to loan the ESOP funds to invest in the stock market. 18 It is not clear why Defendants believe these objections require the exclusion of Wazzan’s 19 damages opinion at this stage. 20 Assuming the Secretary were to prevail on the merits, Ninth Circuit authority 21 requires damages be calculated as “at least the entire cost of the prohibited transaction.” 22 Acosta v. City Nat’l Corp., 922 F.3d 880, 887 (9th Cir. 2019). The “cost” usually will be 23 “the illegal compensation plus the lost opportunity cost.” Id. Given that authority, 24 Defendants have not established Wazzan’s opinion is so unreliable that it cannot be 25 considered. 26 Defendants argue the Director Defendants would not have sold their stock for only 27 fourteen million. But that appears to be irrelevant at this stage. Defendants cannot insist 28 they would not have sold their stock for any amount less than $105 million and, therefore, - 25 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 26 of 51 1 the ESOP suffered no damages. Adopting that position would mean no suit of this type 2 could ever succeed. In addition, while Defendants argue a loan from RVR to the ESOP to 3 invest in stock would have been illegal, Defendants do not explain why it is, per se, 4 inappropriate to calculate opportunity costs in this manner. 5 In brief, Defendants have not explained how opportunity cost damages should be 6 calculated in cases of this type and why Wazzan’s approach is forbidden. If Defendants 7 believe opportunity cost damages are, as a matter of law, unavailable, they are free to make 8 that argument. At present, Wazzan will be permitted to offer his damages opinion subject 9 to the Court determining its reliability. 10 E. Director Defendants’ Motion to Exclude Notes Taken by Financial Advisor 11 (Doc. 223) 12 RVR hired Chartwell “to provide financial advisory and investment banking 13 services to explore the possibility of forming an ESOP.” (Doc. 223 at 3). In working with 14 RVR and the Director Defendants, a Chartwell employee named Stephanie Geerdes “took 15 personal notes of some, but not all, of the communications allegedly made during . . . 16 meetings and phone calls” with RVR personnel and other advisors. (Doc. 223 at 3). The 17 notes present an unflattering depiction of the transaction. For example, one note indicated 18 RVR’s stated “growth rate” was “great but not realistic.” (Doc. 223-1 at 3). Another note 19 referenced the expected debt the ESOP would incur as “$100m is a big #--and a lot of 20 debt.” (Doc. 223 at 6). The Director Defendants seek to exclude Geerdes’ notes in their 21 entirety, arguing they are inadmissible hearsay. The Secretary responds the notes are not 22 hearsay and, even if they are, they may be admissible as business records or recorded 23 recollections. 24 The Secretary argues he may use Geerdes’ notes for a nonhearsay purpose, such as 25 proving the Director Defendants’ knowledge. See United States v. Castro, 887 F.2d 988 , 26 1000 (9th Cir. 1989) (stating credit reports offered at criminal trial were not hearsay 27 because they were “introduced to show what information was available to [the defendant] 28 at the time he approved loans”); Kunz v. Utah Power & Light Co., 913 F.2d 599, 605 (9th - 26 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 27 of 51 1 Cir. 1990) (stating press releases regarding flooding “were not offered to prove their truth, 2 but rather to show that the [plaintiffs] had notice of the potential flooding”). The Director 3 Defendants’ motion does not address this possibility. At present, the Court is skeptical the 4 notes will be relevant if they are not being offered for their truth.14 In any event, at present, 5 the Secretary likely will be required to prove an exception to the hearsay rule should he 6 wish to admit the notes.15 7 The present record shows the notes might qualify for admission under the recorded 8 recollection exception.16 During her deposition, Geerdes professed a lack of memory 9 regarding the meeting and the notes. And while somewhat ambiguous, she also seemed to 10 admit she did make the notes, the notes were made when the matter was fresh in her 11 memory, and the notes generally were accurate. Fed. R. Evid. 803(5). And forensic 12 evidence might establish they are Geerdes’ notes. Thus, the notes likely are admissible 13 under the recorded recollection exception. The Director Defendants’ request to exclude 14 the notes pretrial will be denied. 15 F. Director Defendants’ Motion to Exclude Two Emails from Financial 16 Advisors (Doc. 224) 17 The Director Defendants seek to exclude two emails sent from a Reliance employee 18 to employees of Chartwell. The first email includes statements regarding a “blocking 19 right” the Director Defendants were seeking to have included in the transaction. That — 20 — — 14 — The knowledge that someone made these statements would seem to have little 21 importance unless the statements were true. In other words, the Director Defendants’ actions taken after these statements are relevant only assuming the statements are true. 22 15 It may be possible, with foundation, that Geerdes could qualify as the Director Defendants’ agent such that her notes would be nonhearsay under Rule 801(c)(2)(D). 23 Neither the Secretary nor Director Defendants address this possibility. — 16 — The Secretary also argues the notes might qualify as business records. The Ninth Circuit 24 has noted business records under Rule 803(6) “includes personal records kept for business reasons.” United States v. Huber, 772 F.2d 585 , 591 n.4 (9th Cir. 1985). Thus, the Ninth 25 Circuit concluded a gun collector’s personal inventory of his rifles qualified as a business record. Similarly, the diary of a taxpayer’s coworker reflecting the amount received in tips 26 was deemed a business record that could be used to establish how much in tips a taxpayer received. Keogh v. Comm’r, 713 F.2d 496, 499 (9th Cir. 1983). Those two cases adopt an 27 exceptionally expansive view of what can qualify as a business record. But even under a much less expansive view, notes taken by a Chartwell employee, of business meetings, at 28 or near the time of the meetings, to help the employee perform her job, might be admissible as business records. - 27 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 28 of 51 1 “blocking right” refers to a right the Director Defendants wished to retain such that they 2 could prevent the sale of RVR after the ESOP owned all the stock. The email indicates the 3 Reliance employee believed the Director Defendants insisting on such a right might put 4 them “in hot water with the DOL.” (Doc. 224-1 at 4). The second email is from a Reliance 5 employee to a Chartwell employee that indicates Bensen kept going “to the plate to bat 6 again and again on the [compensation] issues,” referring to the compensation the Director 7 Defendants would be entitled to receive after the transaction. The Reliance employee 8 stated the Director Defendants “have gotten almost everything they asked for” and if the 9 “deal [was] audited by DOL,” the Director Defendants would have to modify some 10 provisions. The Reliance employee cautioned that “[p]igs get fat and hogs get 11 slaughtered.” (Doc. 224-1 at 6). 12 The Secretary believes these emails indicate Reliance had significant concerns with 13 the terms the Director Defendants were pursuing. Reliance has not moved to exclude the 14 emails. The Director Defendants, however, argue the emails should be excluded because 15 there is no evidence the Director Defendants were aware of the emails and Chartwell was 16 not acting as their agent at the time the emails were sent. These arguments do not provide 17 any basis for exclusion. 18 As best as the Court presently understands, the Director Defendants believe the only 19 basis on which the emails might be introduced is to establish the Director Defendants had 20 knowledge of the contents of the emails. That is not accurate. The Secretary points out 21 the emails “are relevant to [his] claims regardless of the [Director Defendants’] knowledge 22 of the emails.” (Doc. 228 at 6). That is, the emails will be used, among other things, to 23 establish “Reliance’s deficient negotiating.” (Doc. 228 at 6). While it is undisputed the 24 emails may be used at trial against Reliance, precisely how the emails may be used against 25 the Director Defendants is better evaluated during trial when all the facts are presented. At 26 that point, the exact context for offering the emails will be known. And in particular, the 27 Director Defendants will have an opportunity to explain, if possible, how Chartwell was 28 not acting as their agent when Chartwell was conducting negotiations on their behalf. The - 28 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 29 of 51 1 Director Defendants’ request to exclude the emails will be denied. 2 III. Secretary’s Motion for Summary Judgment (Doc. 225) 3 The Secretary seeks summary judgment regarding four discrete aspects of his 4 various claims. Some of those aspects involve only Reliance while others involve only the 5 Director Defendants. The Court will analyze the four requests separately. 6 A. Reliance Was a Fiduciary 7 The Secretary requests the Court 8 rule as a matter of law that . . . [Reliance] was a fiduciary of the RVR [ESOP] who caused the [ESOP] to engage in a 9 transaction Reliance knew or should have known was a transaction as defined in ERISA sections 406(a)(1)(A) and (D) 10 . . . when it caused the [ESOP] to enter into a May 28, 2014 transaction to purchase 100% of the shares of RVR, Inc. stock. — 11 — 12 (Doc. 225 at 7). Reliance responds it “has already admitted that it was a fiduciary in 13 connection with the ESOP Transaction at issue, and that the transaction constituted an 14 (exempt) prohibited transaction under ERISA.” (Doc. 244 at 4). While Reliance does not 15 use the exact same language as the Secretary, the Court interprets the Secretary and 16 Reliance as agreeing 1) Reliance was a fiduciary of the RVR ESOP, 2) who caused the 17 ESOP to engage in the May 28, 2014, transaction, and 3) Reliance knew or should have 18 known the transaction qualified as a “prohibited transaction” under ERISA. Because of 19 the special exemption from prohibited transactions for ESOP transactions, these facts do 20 not establish Reliance’s liability. Rather, these facts merely establish the foundation on 21 which liability might be predicated. Because Reliance does not oppose the Secretary’s 22 request, the Court will grant summary judgment that these facts are established. 23 B. Director Defendants acted as Fiduciaries 24 The Secretary seeks summary judgment the Director Defendants “acted as Plan 25 fiduciaries . . . when they retained Reliance as the Plan’s trustee for the Transaction, and 26 therefore had a duty under ERISA . . . to monitor Reliance’s conduct as Plan trustee.” (Doc. 27 225 at 7). The Director Defendants largely agree the Secretary is entitled to this ruling, but 28 they disagree on two minor points. - 29 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 30 of 51 1 According to the Director Defendants, Randall Smalley and Robert Smalley, Jr., 2 were acting as plan fiduciaries when, in their positions on the RVR Board of Directors, 3 they caused RVR to retain Reliance.17 (Doc. 245 at 19). The Director Defendants argue, 4 however, Bensen was not a member of the RVR Board of Directors at the relevant time 5 and, therefore, Bensen cannot be deemed a fiduciary at the relevant time. Untangling 6 Bensen’s status is surprisingly difficult because the underlying documents were often 7 executed by Bensen, seemingly establishing he was acting as a fiduciary. However, the 8 Director Defendants are adamant Bensen never had the authority to act as a fiduciary. 9 While the Director Defendants have made a valiant effort at obscuring matters, the 10 undisputed documents and governing law establish Bensen was acting in a fiduciary role 11 when he executed the agreement retaining Reliance. 12 The following facts are undisputed. On April 15, 2014, Reliance sent Bensen an 13 engagement letter explaining the terms under which Reliance would serve as a trustee and 14 fiduciary for the planned ESOP. (Doc. 215-5 at 33). That letter was signed by Bensen, 15 ostensibly in his role as Chief Financial Officer for Cruise America.18 (Doc. 215-5 at 36). 16 On May 22, 2014, Bensen, identified as RVR’s Chief Financial Officer, executed the 17 formal Trust Agreement with Reliance. (Doc. 215-5 at 30). That agreement purported to 18 supersede the engagement letter. (Doc. 215-5 at 26). Finally, on May 22, 2014, RVR’s 19 Board of Directors (the Smalleys), ratified the Trust Agreement Bensen had executed with 20 Reliance. (Doc. 215-9 at 2). 21 17 The opposition is not entirely clear on this point. The Smalleys argue RVR, not the Smalleys, “retained Reliance to serve as the ESOP Trustee.” (Doc. 245 at 18). In addition, 22 “only the RVR Board could cause RVR to engage Reliance as a matter of law.” (Doc. 245 at 19). But the Smalleys admit “the only members of the RVR Board were the two 23 Smalleys.” (Doc. 245 at 19). In other words, the Smalleys concede they made the decision to retain Reliance by taking actions as members of RVR’s board. The Smalleys do not 24 explain how these facts could be interpreted other than proving they were acting as fiduciaries. In any event, the Secretary interprets the Smalleys as having conceded they 25 were fiduciaries and the undisputed facts establish the Smalleys were fiduciaries. — 18 — The letter stated the ESOP would be established by Cruise America and be known as the 26 Cruise America ESOP. The Director Defendants argue that was an error and the letter “should have referenced RVR and the RVR ESOP (rather than Cruise America and the 27 Cruise America ESOP).” (Doc. 246 at 8). According to Reliance, however, there was no such error. According to Reliance, it was “engaged by Cruise America, Inc. (an operating 28 subsidiary of RVR) to serve as discretionary trustee in connection with a proposed ESOP transaction.” (Doc. 244 at 5). - 30 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 31 of 51 1 Despite these facts showing Bensen’s involvement in the retention of Reliance and 2 execution of the Trust Agreement, the Director Defendants argue Bensen was not acting as 3 a fiduciary when taking those actions. The Director Defendants explain things this way: 4 Neither the RVR Board of Directors nor the Cruise America, Inc. Board of Directors delegated to Eric Bensen the 5 discretionary authority to engage Reliance as the trustee of the to-be-formed RVR ESOP; rather, the RVR Board only 6 delegated to Eric Bensen the power to sign the Reliance Engagement Letter and Trust Agreement on behalf of RVR. — 7 — 8 (Doc. 246 at 7). To the extent the Court can understand this argument, the Director 9 Defendants appear to believe Bensen was not acting as a fiduciary because he was merely 10 taking actions that had been delegated to him by RVR. To the extent this is the Director 11 Defendants’ argument, it was rejected long ago. 12 In Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1459 (9th Cir. 1995), a pension plan 13 identified the corporation as the “named fiduciary.” Two executives of the corporation 14 involved in the termination of the pension plan, and other transactions, were sued for 15 allegedly breaching their fiduciary duties. Those executives argued they could not be 16 deemed “fiduciaries because they acted solely on behalf” of the corporation. Id. at 1458 . 17 In other words, the executives believed that those “who act on behalf of the corporation do 18 not become individual fiduciaries by virtue of those acts,” regardless of the nature of those 19 acts. Id. at 1459 . The Ninth Circuit rejected this argument in straightforward terms: if an 20 individual “exercises any authority or control respecting management or disposition of [a 21 plan’s] assets,” he will be a fiduciary, regardless whether he was “exercising discretion ‘on 22 behalf of a corporation’” or if he had an “individual discretionary role[].” Id. at 1459-60 23 (quoting 29 U.S.C. § 1002 (21)). 24 Applying Kayes to the present situation is simple. The Director Defendants concede 25 the execution of the engagement letter was a fiduciary act. It is undisputed Bensen 26 executed that letter. Thus, regardless of whether Bensen was acting pursuant to some sort 27 of delegation from RVR or if he was acting in an individual discretionary role of some sort, — 28 — - 31 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 32 of 51 1 he can be sued as a fiduciary.19 See CSA 401(K) Plan v. Pension Pros., Inc., 195 F.3d 2 1135, 1138 (9th Cir. 1999) (“A person’s actions, not the official designation of his role, 3 determines whether he enjoys fiduciary status, regardless of what his agreed-upon 4 contractual responsibilities may be.”). 5 The only other aspect of the Secretary’s request the Director Defendants dispute 6 involves an issue the Secretary did not brief because he does not seek summary judgment 7 on. According to the Director Defendants, the Secretary has misdescribed the scope of 8 their duty to monitor Reliance. In particular, the Director Defendants point to the 9 Secretary’s statement “the Director Defendants had a fiduciary duty . . . to ensure the 10 Transaction was in the Plan’s best interests.” (Doc. 225 at 12). The Director Defendants 11 claim that is incorrect and their duty to monitor did not require them to ensure the 12 transaction was in the ESOP’s best interest. (Doc. 245 at 22). Because the Secretary did 13 not seek summary judgment on the scope of the duty to monitor, the Director Defendants’ 14 insistence that the Secretary is incorrect is immaterial. 15 C. Director Defendants as Co-Fiduciaries with Reliance 16 The Secretary seeks summary judgment the Director Defendants “were co17 fiduciaries with Reliance.” (Doc. 225 at 7). In particular, the Secretary argues the Director 18 Defendants should be found to have been co-fiduciaries with Reliance based on the 19 Director Defendants’ status as ESOP committee members. This dispute involves a strange 20 issue regarding backdating documents. 21 According to the underlying documents, the ESOP committee (consisting of the 22 Director Defendants) was formed on May 28, 2013. Reliance was selected as the trustee 23 in early 2014 and was replaced by another company on June 30, 2014. (Doc. 245 at 24). 24 Thus, the Secretary requests a ruling that the Director Defendants were co-fiduciaries with 25 Reliance from May 28, 2013, to June 30, 2014. The Director Defendants make a limited 26 argument in response. 27 19 It is possible the Director Defendants are attempting to argue Bensen had no discretion when retaining Reliance such that Bensen cannot qualify as a fiduciary. But if that is 28 Bensen’s position, the opposition does not present clear arguments on this point. Bensen is free to reurge this at trial if appropriate. - 32 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 33 of 51 1 According to the Director Defendants, they could not have been co-fiduciaries with 2 Reliance as of May 28, 2013, because “the ESOP Committee was not created until May 3 28, 2014.” (Doc. 245 at 24). The Director Defendants argue the 2013 date was a 4 “typographical error” and the charter should have read “May 28, 2014.” (Doc. 246-3 at 3). 5 The Secretary responds, however, that using the 2013 was no mistake. Rather, the Director 6 Defendants used 2013 “to reap the resulting tax benefits for an additional year.” (Doc. 271 7 at 10). As evidence the 2013 date was intentional, the Secretary points out the plan 8 document as well as the trust agreement both stated they were established as of June 1, 9 2013. (Doc. 246-3 at 20; Doc. 215-5 at 6). Accordingly, the Secretary is correct the use 10 of 2013 on the ESOP Committee Charter was intentional. 11 The fact the Director Defendants backdated the charter creates a strange temporal 12 problem that may not matter. There is no evidence the Director Defendants took any 13 actions in May 2013 regarding the ESOP transaction. In fact, there is no evidence the 14 Director Defendants were even contemplating an ESOP in May 2013. Therefore, at 15 present, there is no reason to believe their liability will turn on whether the Director 16 Defendants were co-fiduciaries as of 2013. See Al Stewart v. Saakvitne, No. CV 18-00155 17 SOM-WRP, 2021 WL 951590 , at *10 (D. Haw. Mar. 12, 2021) (“It is not clear how [the 18 defendants] exercised discretionary authority or discretionary control respecting 19 management of a plan that was not even being considered at the time.”). To the extent the 20 Secretary seeks a legal ruling that the Director Defendants were co-fiduciaries as of 2013, 21 that request will be denied. If such a finding is, in fact, needed and supported by the facts, 22 the Secretary may renew this request at trial. See Al Stewart v. Saakvitne, No. CV 1823 00155 SOM-WRP, 2021 WL 951590 , at *11 (D. Haw. Mar. 12, 2021) (noting government 24 had not shown how it “makes any sense” to deem defendants fiduciaries based on date set 25 forth in document when no relevant actions were taken at that time). 26 The remaining question is whether the Director Defendants should be deemed co27 fiduciaries with Reliance as of the important dates in 2014, when the transaction was 28 discussed and executed. The Secretary’s motion, however, does not make any arguments - 33 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 34 of 51 1 other than the backdating of documents. (Doc. 225 at 18-19). Because it is unclear whether 2 the backdating of documents is sufficient on its own, the Court will leave for trial the exact 3 date the Director Defendants became co-fiduciaries through other actions beyond 4 backdating documents. 5 D. Indemnification Provisions 6 The Secretary seeks summary judgment the “indemnification provisions in the Plan 7 document, Reliance Engagement Letter, and Trust Agreement are void as against public 8 policy.” (Doc. 225 at 19). In support, the Secretary cites a provision of ERISA which has 9 been interpreted to prohibit any attempt at “indemnification of a fiduciary by the ERISA 10 plan itself.” Johnson v. Couturier, 572 F.3d 1067, 1080 (9th Cir. 2009). The theory behind 11 that provision is that allowing a plan to indemnify a fiduciary “would, in effect, relieve the 12 fiduciary of responsibility and liability to the plan by abrogating the plan’s right to recovery 13 from the fiduciary for breaches of fiduciary obligations.” Id. The Director Defendants 14 respond the indemnification provisions contemplate payments from RVR, not the ESOP. 15 Therefore, the Director Defendants argue indemnification is permissible. Reliance 16 responds the indemnification provisions are not prohibited by ERISA because they do not 17 apply should Reliance be found liable. Reliance also argues it would be permissible for 18 RVR to provide indemnification as its assets are distinct from the assets of the ESOP. 19 Based on the present record, the Secretary is not entitled to summary judgment that the 20 provisions are unlawful. 21 There are four indemnification provisions at issue. The first provision is found at 22 Section 12.6 of the plan document. (Doc. 215-8 at 3). That section states 23 Legal Action. Unless otherwise prohibited by law, either [RVR] or the Trust, in the sole discretion of [RVR], will 24 reimburse [Reliance] and/or the [ESOP Committee] for all costs, attorneys fees and other expenses associated with any 25 such claim, suit or proceeding. — 26 — The second provision is found at Section 12.14 of the plan document. That section states — 27 — Limitation of Liability and Indemnification. In addition to 28 and in furtherance of any other limitations provided in the Plan, and to the extent permitted by applicable law, [RVR] will - 34 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 35 of 51 1 indemnify and hold harmless its board of directors (collectively and individually), if any, the [ESOP Committee] 2 (collectively and individually), if any, and its officers, Employees, and agents against and with respect to any and all 3 expenses, losses, liabilities, costs, and claims, including legal fees to defend against such liabilities and claims, arising out of 4 their good-faith discharge of responsibilities under or incident to the Plan, excepting only expenses and liabilities resulting 5 from willful misconduct.20 — 6 — The third provision is found in the engagement letter signed by Bensen with Reliance. That — 7 — letter included language stating RVR21 would indemnify Reliance and its employees “from — 8 — any and all claims, damages, expenses, liabilities, and losses whatsoever” related to — 9 — Reliance’s work as trustee. But that provision also stated the indemnification would “not — 10 — apply to any claim, damage, expense, liability, or loss that is attributable to . . . bad faith, — 11 — breach of fiduciary duty under ERISA, gross negligence, [or] willful misconduct.” (Doc. — 12 — 215-5 at 34). The fourth and final indemnification provision is found in the trust document. — 13 — That provision provides Reliance with the same types of indemnification as found in the — 14 — engagement letter. (Doc. 215-5 at 27-28). — 15 — The Secretary, the Director Defendants, and Reliance have two basic disagreements — 16 — regarding these provisions. First, whether the limitations that indemnification will be — 17 — allowed “unless otherwise prohibited by law,” “to the extent permitted by applicable law,” — 18 — and not for “breach of fiduciary duty under ERISA,” mean the provisions are lawful. And — 19 — second, whether it would be permissible for RVR to provide indemnification given that the — 20 — ESOP owns 100% of RVR’s stock.22 The provisions are not, on their face, unlawful and — 21 — — 20 — The language of the two plan provisions was changed in 2018. Those changes do not 22 have any material impact. And some indemnification may have occurred prior to 2018. Thus, the legality of the stated plan provisions remains a live dispute. 23 21 The letter actually identifies Cruise America Inc. as the company that would provide indemnification. 24 22 The Secretary has not explained why it wishes to litigate the legality of the indemnification provisions at this time. It is possible the Secretary believes it is improper 25 for RVR to advance any litigation expense to the Director Defendants or Reliance to defend this suit. But the Secretary has not established RVR is doing so for the Director Defendants 26 and, while Reliance requested RVR advance funds, RVR has refused to do so. Assuming the Secretary is concerned with the advancement of litigation expenses for the Director 27 Defendants, the Secretary has not established such advancement would be improper. In 1977, the Department of Labor stated a contract provision allowing for the advancement 28 of defense costs did not violate ERISA’s prohibition on indemnification of fiduciaries. DOL Opinion Letter, 1977 WL 5446 . And the Secretary has not cited any more recent - 35 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 36 of 51 1 the legality of RVR providing indemnification should await resolution of the Secretary’s 2 claims on their merits. 3 The provisions prohibit indemnification in the event such indemnification is 4 prohibited by law. In effect, the provisions remove any possibility indemnification will 5 occur if doing so would violate ERISA. The Secretary argues the caveats do not render 6 the provisions lawful, but the Secretary does not meaningfully develop this argument. 7 Instead, the Secretary relies on a case that involved indemnification provisions that did not 8 contain the type of caveats found here. 9 In Johnson v. Couturier, 572 F.3d 1067, 1074 (9th Cir. 2009), the Ninth Circuit 10 addressed provisions that promised indemnification so long as the fiduciaries did not 11 engage in “‘deliberate wrongful acts’ or ‘gross negligence.’” The Ninth Circuit noted these 12 provisions “effectively limit[ed]” the fiduciaries’ “liability under ERISA, because, so long 13 as they do not engage in deliberate wrongful acts or gross negligence, [the fiduciaries 14 would] be indemnified—even if they violated the ERISA ‘prudent man’ standard of care.” — 15 — Id. at 1078 . Thus, the Ninth Circuit found the indemnification provisions were likely to be 16 found void. Id. at 1080 . 17 Unlike the agreements in Johnson, the indemnification provisions here may not 18 indemnify the fiduciaries in the event they are found to have violated ERISA. That is, the 19 provisions applicable to the Director Defendants are limited to providing indemnification 20 “[u]nless otherwise prohibited by law” and “to the extent permitted by law.” These 21 provisions will not apply if the Director Defendants are found liable under ERISA and the 22 assets of RVR are deemed assets of the ESOP for purposes of indemnification. As for 23 Reliance, indemnification will not occur if it is “prohibited by law” or it is found liable for 24 “breach of fiduciary duty under ERISA.” Thus, if the assets of RVR are deemed assets of 25 the ESOP, there is no chance Reliance will be indemnified contrary to ERISA. The 26 indemnification provisions are not void on their face. 27 The Secretary’s second argument regarding the indemnification provisions is that — 28 — authority establishing advancement of defense costs is improper in all circumstances. - 36 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 37 of 51 1 they are unlawful because payments by RVR would be, in effect, payments by the ESOP. 2 This involves a difficult issue regarding when a company completely owned by an ESOP 3 can indemnify fiduciaries out of ostensibly company assets. There is a strong argument in 4 support of the Secretary’s position that RVR cannot provide any indemnification. In 5 Johnson, the Ninth Circuit concluded indemnification by a company owned by an ESOP 6 would be improper. Johnson, 572 F.3d at 1080-81 . But Johnson addressed a potentially 7 distinguishable factual situation where the underlying company was being liquidated. Id. 8 at 1080. Here, RVR continues to operate and that might be a reason to determine 9 indemnification by RVR would be permissible. This is an issue the Court need only 10 address if the Secretary prevails on the merits.23 Because the Secretary has not sought to 11 prevent the advancement of defense costs, the legality of indemnification by RVR will 12 await a decision on liability. 13 IV. Reliance’s Motion for Summary Judgment (Doc. 211) 14 Reliance seeks summary judgment on what appears to be a relatively minor aspect 15 of the Secretary’s breach of fiduciary duty claim. One of the claims the Secretary is 16 pursuing against Reliance is described in the complaint as a claim that Reliance breached 17 “fiduciary duties of loyalty, prudence, and adherence to plan documents.” (Doc. 182 at 18 15). Reliance seeks summary judgment regarding the “claim for breach of the duty of 19 loyalty.” (Doc. 211 at 1). According to Reliance, the Secretary lacks “unique facts . . . 20 supporting any breach of the duty of loyalty.” Instead, all the evidence the Secretary has 21 accumulated can only be viewed as potentially supporting a claim for breach of the duty of 22 prudence. The Secretary disagrees, claiming the duties of loyalty and prudence 23 significantly overlap and he has sufficient evidence to establish both types of breaches. 24 Neither Reliance nor the Secretary has explained why this dispute is worth litigating 25 at summary judgment. At trial, the Secretary plans to present evidence of the many ways 26 23 If Defendants prevail, it likely will be lawful for RVR to provide indemnification, even assuming RVR’s funds should be viewed as plan assets. See Packer Eng’g, Inc. v. 27 Kratville, 965 F.2d 174, 176 (7th Cir. 1992) (“How could anyone take seriously the proposition that ERISA forbids the indemnification of fiduciaries wrongly accused of 28 misconduct . . . ?”); Leigh v. Engle, 858 F.2d 361, 368 (7th Cir. 1988) (allowing trust to reimburse fiduciaries for successfully defending claims). - 37 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 38 of 51 1 he believes Reliance acted contrary to how a faithful fiduciary would have acted. Reliance 2 concedes the Secretary has sufficient evidence to proceed to trial on one subspecies of 3 fiduciary breach (i.e., breach of the duty of prudence), but Reliance believes the Secretary 4 lacks sufficient evidence to proceed to trial on a different subspecies of fiduciary breach 5 (i.e., breach of the duty of loyalty). By statute, however, the same relief will be available 6 regardless of which subspecies of fiduciary breach the Secretary establishes. That is, the 7 statute outlining the available relief does not describe certain relief as available only when 8 a particular type of fiduciary breach is proven. 29 U.S.C. § 1109 (a). Therefore, Reliance’s 9 decision to seek summary judgment is puzzling and the Court need not wade too far into 10 this issue. 11 ERISA’s duty of prudence “demands that fiduciaries act with the type of ‘care, skill, 12 prudence, and diligence under the circumstances’ not of a lay person, but of one 13 experienced and knowledgeable with these matters.” Tibble v. Edison Int’l, 729 F.3d 1110 , 14 1133 (9th Cir. 2013) (quoting 29 U.S.C. § 1104 (a)(1)(B)), vacated on other grounds, 575 15 U.S. 523 (2015). ERISA’s duty of loyalty demands a fiduciary “‘discharge his duties with 16 respect to a plan solely in the interest of the participants and beneficiaries’ and for the 17 exclusive purpose of ‘providing benefits to participants and their beneficiaries’ and 18 ‘defraying reasonable expenses of administering the plan.’” California Ironworkers Field 19 Pension Tr. v. Loomis Sayles & Co., 259 F.3d 1036 , 1045 (9th Cir. 2001) (quoting 29 20 U.S.C. § 1104 (a)(1)(A)). The Secretary has ample evidence to proceed to trial that 21 Reliance breached the duty of prudence. The Secretary argues much of that same evidence 22 could be viewed as supporting a breach of the duty of loyalty. The Secretary is correct. 23 The following is a brief overview of the evidence supporting a breach of the duty of loyalty, 24 viewed in the light most favorable to the Secretary. 25 The Secretary argues it was in Reliance’s interest to ensure the transaction 26 proceeded for two basic reasons. First, Reliance relied on Chartwell for business referrals. 27 Chartwell referred Reliance to RVR and the record does indicate Reliance and Chartwell 28 often worked together. (Doc. 248-4 at 43-44). In addition, Chartwell was promised - 38 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 39 of 51 1 $600,000 if the transaction closed but only $75,000 if it did not. Thus, Reliance knew that 2 preventing the transaction by negotiating too hard would result in a significant loss to 3 Chartwell. Imposing such a loss on Chartwell reasonably could have led to Chartwell to 4 decline work with Reliance in the future. If, however, Reliance agreed to terms Chartwell 5 proposed, Reliance could expect future business referrals from Chartwell. The Secretary 6 argues Reliance had these considerations in mind when approving the transaction and 7 Reliance breached the duty of loyalty. 8 There is no clear evidence Reliance had the motivation ascribed to it by the 9 Secretary. But it is certainly unlikely a Reliance employee would admit to a forbidden 10 motivation. Thus, the Secretary may argue that the motivation can be divined from viewing 11 all of the surrounding circumstances. At summary judgment, Reliance’s questionable 12 behavior in approving the transaction creates a reasonable inference that Reliance was 13 motivated by its own interests. 14 The second piece of evidence regarding Reliance’s breach of the duty of loyalty is 15 that if the transaction closed, Reliance could expect ongoing payments as the ESOP’s 16 trustee. If the transaction failed, no such fees would be paid. Again, there is no obvious 17 evidence Reliance’s behavior was attributable to desire to reap ongoing payment as the 18 trustee for the newly formed ESOP. But, if the Secretary is correct and the transaction was 19 gravely flawed, there is a reasonable inference that Reliance was acting in its own self20 interest instead of solely in the ESOP’s interest. This evidence is sufficient to survive 21 summary judgment on the breach of loyalty claim. 22 V. Director Defendants’ Motion for Summary Judgment (Doc. 220) 23 The Director Defendants seek summary judgment on all the Secretary’s claims. 24 This motion should not have been filed as the papers establish there are obvious disputes 25 of material fact regarding the claims against the Director Defendants. 26 A. Breach of Fiduciary Duty 27 The Director Defendants seek summary judgment on the Secretary’s breach of 28 fiduciary duty claim. The Director Defendants argue that, as fiduciaries, they had only a - 39 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 40 of 51 1 “narrow” or “limited” duty to monitor Reliance and they claim the record establishes they 2 satisfied that duty. The Secretary responds the duty is not as limited as the Director 3 Defendants argue it to be. Moreover, the Secretary argues there were obvious signs a 4 reasonable fiduciary would not have tolerated Reliance completing the transaction under 5 the applicable terms. The Secretary is correct. 6 When, as here, “members of an employer’s board of directors have responsibility 7 for the appointment and removal of ERISA trustees, those directors are themselves subject 8 to ERISA fiduciary duties, albeit only with respect to trustee selection and retention.” 9 Johnson v. Couturier, 572 F.3d 1067, 1076 (9th Cir. 2009). This duty involving selection 10 and especially retention is often described as a “duty to monitor.” The Department of 11 Labor’s formal guidance explains one fiduciary’s “duty to monitor” the performance of 12 other fiduciaries requires review of the other fiduciaries’ performance “[a]t reasonable 13 intervals . . . to ensure that their performance has been in compliance with the terms of the 14 plan and statutory standards, and satisfies the needs of the plan.” The Department of Labor 15 noted “[n]o single procedure will be appropriate in all cases,” and fiduciaries with the duty 16 to monitor must consider the particular “facts and circumstances” in determining how best 17 to accomplish the required monitoring. 29 C.F.R. § 2509.75-8 (FR-17). 18 The recognition there is no universally appropriate method of monitoring other 19 fiduciaries has prevented the development of a simple standard by which to assess an 20 appointing fiduciary’s performance. In trying to describe the standard, one court used 21 general language that fiduciaries who appoint other fiduciaries must “act with an 22 appropriate prudence and reasonableness” when monitoring their appointees’ behavior. 23 Leigh v. Engle, 727 F.2d 113, 135 (7th Cir. 1984). Another court concluded the duty to 24 monitor might include the “duty to prevent wrongful conduct.” Martin v. Feilen, 965 F.2d 25 660, 670 (8th Cir. 1992). In general, however, courts have not attempted to provide a more 26 concrete formulation of the duty to monitor than what is found in the DOL guidance. 27 Instead, courts cite the DOL guidance and examine the precise details of what the 28 appointing fiduciaries did or did not do. See, e.g., Howell v. Motorola, Inc., 633 F.3d 552 , - 40 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 41 of 51 1 573 (7th Cir. 2011). 2 Despite caselaw not imposing any clear standard, the Director Defendants propose 3 the Court adopt a three-part test to evaluate their duty to monitor in connection with the 4 appointment of the ESOP trustee. Under the proposed test, appointing fiduciaries must 5 select and appoint an independent trustee, provide that trustee with “all material 6 information relating to the proposed transaction,” and investigate any “red flags that 7 indicate that the trustee was not fulfilling its own fiduciary duties.” (Doc. 220 at 28-29). 8 The Secretary correctly points out no such three-part test exists. The proper test is whether, 9 under the circumstances, the appointing fiduciaries acted in a reasonable and prudent 10 manner. That cannot be reduced to a simple three-step analysis. But for present purposes, 11 even accepting the Director Defendants’ test, there were more than enough red flags with 12 this particular transaction to alert any reasonable fiduciary. In fact, when viewed in the 13 light most favorable to the Secretary, the record contains a remarkable number of red flags. 14 Before discussing some of the red flags, the Director Defendants make a preliminary 15 argument that they “lacked knowledge as to how private-company stock is valued or what 16 valuation methodologies, premiums, and discounts should be considered.” (Doc. 220 at 17 38). The Director Defendants appear to believe they can claim ignorance of valuation 18 methodologies and, therefore, not be held responsible for the valuation used by Reliance. 19 But the Director Defendants are incorrect. Professed “lack of knowledge” cannot be the 20 absolute defense the Director Defendants wish it could be. 21 The Director Defendants were required to act with “the care, skill, prudence, and 22 diligence under the circumstances then prevailing.” 29 U.S.C. § 1104 (a)(1). This standard 23 requires individuals who do not understand what is going on take steps to ensure that deficit 24 is remedied before action is taken. Otherwise, ERISA fiduciaries could always avoid 25 liability by professing ignorance. In this case, the Director Defendants’ professed lack of 26 knowledge regarding proper valuation could be used to excuse their behavior no matter 27 how extreme the valuation from Reliance was. For example, if Reliance had made an offer 28 to purchase RVR for seven times what was paid, approximately $700 million, the Director - 41 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 42 of 51 1 Defendants presumably would have known Reliance was not acting reasonably. And they 2 would have known that despite lack of detailed knowledge regarding “how private3 company stock is valued.” 4 Here, if the Secretary’s expert is believed, the appropriate valuation of RVR stock 5 was approximately $14 million. Yet the Director Defendants allowed Reliance to enter 6 into a transaction with a purchase price of $105 million, more than seven times the actual 7 value. Thus, lack of precise knowledge of how private-company stock is valued would not 8 be needed to know something was off. This is not a situation where the competing 9 valuations were close such that the Director Defendants’ professed ignorance of proper 10 valuation techniques might be more persuasive at summary judgment. Rather, if the 11 Secretary is correct, the purchase price itself was a massive red flag that Reliance was 12 behaving unreasonably. 13 Despite professing ignorance of the intricacies of valuing privately held companies, 14 and assuming the Secretary’s evidence is believed, the Director Defendants knew 15 Reliance’s valuation was flawed. The Director Defendants argue they were not aware of 16 the exact valuation method Reliance was using but the record contains evidence the 17 Director Defendants’ agent had significant information about how Reliance was 18 calculating value. There are indications that information reached the Director Defendants, 19 in at least some manner. (Doc. 250-4 at 20) (conference call notes stating Bensen was 20 present when Chartwell learned the line of credit was being ignored). 21 At the very least, the Director Defendants were aware Reliance was calculating 22 RVR’s value without taking into account RVR’s line of credit. That line of credit had not 23 dipped below $43 million in recent years. The Director Defendants argue there was a 24 reasonable explanation for the valuation to ignore that line of credit, but the Secretary 25 counters there was not. For purposes of summary judgment, all that matters is that there is 26 a question of fact whether a reasonable and prudent valuation of RVR would ignore so 27 much debt. There is no evidence the Director Defendants inquired into why ignoring such 28 a seemingly large amount of debt was proper. A reasonable and prudent fiduciary likely - 42 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 43 of 51 1 would have done so. 2 The next possible red flag involving Reliance’s valuation was that prior valuations 3 roughly equivalent to Reliance’s offer had been for the value of having control over RVR. 4 At the very early stages of considering an ESOP, the Director Defendants were informed 5 by Chartwell that RVR had a “controlling interest equity value of $100.7 million.” 6 (emphasis added). Despite that, the Director Defendants allowed Reliance to agree to a 7 very similar transaction price for a non-controlling interest. Viewed in the light most 8 favorable to the Secretary, the same value being used for controlling and non-controlling 9 interests should have been a red flag. 10 There is little dispute the Director Defendants knew the ESOP was not gaining a 11 controlling interest. Under the terms of the transaction, the ESOP was required to confirm 12 the election of the Director Defendants as the sole members of the RVR board of directors. 13 The Director Defendants then appointed themselves the only members of the ESOP 14 Committee and that committee was responsible for directing the trustee. The Director 15 Defendants also had the power to remove the trustee. Perhaps most strikingly, the Director 16 Defendants, as the only members of the board, were responsible for all decisions regarding 17 mergers and acquisitions. (Doc. 248-6 at 17). Thus, the Director Defendants could ignore 18 any offer to purchase all of the ESOP’s stock if, in the Director Defendants’ view, it was 19 not in RVR’s best interest.24 Viewed in the light most favorable to the Secretary, it is 20 possible a reasonable and prudent fiduciary would have grown concerned that an appointed 21 fiduciary was pursuing a generous purchase price with so little control over RVR. 22 Yet another potential red flag ignored by the Director Defendants was that the 23 transaction was structured to make it extremely expensive for anyone else to take control 24 over RVR. The transaction contained generous severance provisions in the event the — 25 — — 24 — The Director Defendants argue there is “no evidence” they “knew or should have known 26 where, precisely, the sale of 100% of RVR stock to the Trust falls along the control spectrum.” (Doc. 220 at 39). While they may not have known “precisely” how to quantify 27 the measure of control, the Director Defendants likely knew RVR would remain under their control. Indeed, evidence in the record establishes the Director Defendants were especially 28 careful to ensure they retained control after the transaction. - 43 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 44 of 51 1 Director Defendants lost any meaningful amount of control or there were any changes to 2 RVR’s executive leadership. Based on the transaction’s final terms, the Director 3 Defendants would receive at least four years of severance if there was any “diminution in 4 the nature or status of the Executive’s position, authority, duties or responsibilities.” (Doc. 5 248-5 at 31). This mandatory severance was even triggered if the Director Defendants 6 were required to report to a board of directors different than what existed as of May 28, 7 2014. Given their annual compensation, if an entity wished to purchase RVR’s stock and 8 take control of RVR, that entity would be required to pay the Director Defendants a 9 combined total of approximately $40 million dollars. (Doc. 250-3 at 139). RVR’s entire 10 value was, according to the Director Defendants, $105 million. Thus, the possibility of 11 $40 million in severance payments was close to half of the value of the company. 12 There are at least two more potential red flags the Director Defendants ignored. The 13 Director Defendants knew that, under the terms of the transaction, they would be able to 14 significantly dilute the ESOP’s stock. While the ESOP purchased all the outstanding stock, 15 the Director Defendants ensured the transaction included terms allowing them to purchase 16 or earn more than 35% of the fully diluted post-transaction shares of RVR. The bulk of 17 those shares would be bought at $7.50 per share. And those purchases could happen almost 18 immediately. Thus, the Director Defendants apparently concluded it was not concerning 19 for Reliance to agree to pay $100 dollars per share even though the Director Defendants 20 were entitled, five days later, to buy 35% of RVR at $7.50 per share. 21 The final potential red flag significant for consideration on summary judgment is 22 the Director Defendants’ insistence on a very short period in which to complete the ESOP 23 transaction. The Director Defendants have not proffered an explanation for moving so 24 quickly. Given the self-imposed deadline, Reliance had an extremely short period of time 25 to conduct due diligence, formulate a valuation, negotiate, and settle on a final purchase 26 price and terms. That timeline led to Reliance taking steps that, from a distance, could be 27 described as obviously unreasonable. 28 The undisputed timeline establishes Reliance offered $100 million dollars for a - 44 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 45 of 51 1 company based on an investigation and valuation that had only started a few weeks earlier. 2 Reliance’s own offers admitted it still needed to research potentially significant issues, 3 such as environmental liability. The Director Defendants argue it is normal for business 4 transactions to proceed on multiple tracks and to have areas needing additional discussion 5 while negotiating a final price. But viewed in the light most favorable to the Secretary, 6 Reliance offering to pay $100 million dollars for a company based on a potentially cursory 7 investigation should have alerted the Director Defendants that Reliance was not behaving 8 prudently. 9 There are other aspects of the transaction that, when viewed in the light most 10 favorable to the Secretary, may establish the Director Defendants breached their duty to 11 monitor Reliance. But at least the foregoing red flags create a dispute of fact regarding the 12 Director Defendants’ liability for not monitoring Reliance. 13 B. Co-Fiduciary Liability with Reliance 14 The Director Defendants next seek summary judgment that they cannot be 15 considered co-fiduciaries with Reliance and, even if they were co-fiduciaries, they did not 16 have actual knowledge of the alleged fiduciary breaches by Reliance. Given the facts 17 outlined regarding the various red flags involving the transaction, the Director Defendants 18 are not entitled to summary judgment on these issues. 19 The Secretary alleged a claim under 29 U.S.C. § 1105 (a)(1)-(3) against the Director 20 Defendants for “co-fiduciary liability” based on participating in Reliance’s breaches of 21 fiduciary duty. The referenced statute provides, in relevant part, a fiduciary “shall be liable 22 for breach of fiduciary responsibility of another fiduciary with respect to the same plan” in 23 three circumstances: 24 1. If the fiduciary “participates knowingly in, or knowingly undertakes to conceal, 25 an act or omission of such other fiduciary, knowing such act or omission is a 26 breach”; 27 2. If the fiduciary has, through its own breach of duty, enabled another fiduciary to 28 commit a breach; - 45 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 46 of 51 1 3. If the fiduciary “has knowledge of a breach by such other fiduciary, unless he 2 makes reasonable efforts under the circumstances to remedy the breach.” 3 Based on these statutory provisions, it is far from obvious what the Director Defendants 4 had in mind when seeking summary judgment on the Secretary § 1105(a) claim. 5 The Director Defendants were acting as fiduciaries in 2014 when they selected, 6 retained, and monitored Reliance. Despite being fiduciaries in some respects, the Director 7 Defendants argue they “could not have participated as a fiduciary in Reliance’s alleged 8 breach of its duty of loyalty or prudence, as Reliance had the exclusive responsibility of 9 representing the ESOP and the sole authority to negotiate and execute a stock transaction 10 on behalf of the ESOP.” (Doc. 220 at 42) (emphasis in original). The Director Defendants 11 then conclude they “had no authority to, and did not, represent the ESOP in connection 12 with the Transaction at issue and, as such, were not acting as co-fiduciaries with Reliance.” 13 (Doc. 220 at 42) (emphasis added). This argument appears to address the prohibition in § 14 1105(a)(1) regarding knowing participation in another’s breach. That is, the Director 15 Defendants argue they had no fiduciary duties regarding the negotiation of the terms of the 16 ESOP transaction. Even if that were true, however, the Director Defendants do not explain 17 why the other sections of § 1105(a) regarding co-fiduciary liability cannot apply. 18 Section 1105(a)(2) contemplates liability when one fiduciary enables another 19 fiduciary’s breach and § 1105(a)(3) contemplates liability when one fiduciary knows of 20 another’s breach and fails to remedy it.25 Reliance did not seek summary judgment on the 21 25 The parties devote many pages to arguing what type of knowledge is required. The Director Defendants argue “actual knowledge” is required while the Secretary argues it is 22 enough if the Director Defendants “knew or should have known.” This is a complicated issue because “co-fiduciary liability under § 1105(a)(2) does not require a plaintiff to prove 23 knowledge.” Acosta v. Saakvitne, 355 F. Supp. 3d 908, 924 (D. Haw. 2019). It is only liability under § 1105(a)(1) and (3) that implicate the type of knowledge issue. In resolving 24 the motions to dismiss in this case, Judge Tuchi stated “actual knowledge” was required. (Doc. 30 at 5). That statement was not accompanied by any analysis and a Supreme Court 25 decision the following week may bear on this issue. Intel Corp. Inv. Pol’y Comm. v. Sulyma, 140 S. Ct. 768, 776 (2020) (addressing ERISA’s statute of limitations that uses 26 phrase “actual knowledge”). The Secretary has a plausible argument that the absence of the modifier “actual” in the statute’s text should have some importance. The Secretary also 27 argues requiring actual knowledge would be contrary to “ERISA’s structure and purpose.” (Doc. 249 at 42). The Court may not need to resolve this issue. The type of knowledge 28 will only matter if the Court were to conclude Reliance breached its fiduciary duty and the Director Defendants lacked actual knowledge of those breaches but had constructive - 46 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 47 of 51 1 Secretary’s entire fiduciary breach claim. Thus, the Court will assume the Secretary may 2 prevail in proving Reliance’s breach. Given that, the Director Defendants do not explain 3 how they could be entitled to summary judgment regarding their actions enabling Reliance 4 to breach its duties or failing to remedy Reliance’s breach. Assuming Reliance was 5 breaching its fiduciary duties, and the Director Defendants were not properly monitoring 6 Reliance, co-fiduciary liability in the present situation would seem to be what § 1105(a) 7 authorizes. When viewed in the light most favorable to the Secretary, there is ample 8 evidence the Director Defendants enabled Reliance’s breach or knew of that breach and 9 did nothing. Therefore, the Director Defendants are not entitled to summary judgment on 10 the co-fiduciary liability claim. 11 C. Non-Fiduciary Participation and Prohibited Transaction 12 The Director Defendants seek summary judgment on the Secretary’s Claim V. That 13 claim consists of two parts. First, the Director Defendants allegedly knowingly 14 participated in Reliance’s breach of fiduciary duty. This aspect is brought pursuant to 29 15 U.S.C. § 1104 (a)(1)(A),(B),(D). Second, the Director Defendants knowingly participated 16 in a prohibited transaction under 29 U.S.C. § 1106 (a)(1)(A) and (D). 17 1. Participation in Reliance’s Breach of Fiduciary Duty 18 The Director Defendants argue there is no liability under ERISA when a non19 fiduciary participates in a fiduciary’s breach. (Doc. 220 at 38). The Director Defendants 20 rely on a Ninth Circuit case that cannot be reconciled with a later Supreme Court opinion. 21 There are three sections of ERISA relevant to this issue. First, 29 U.S.C. § 1104 22 sets forth the applicable fiduciary duties, such as the duty of prudence. Second, 29 U.S.C. 23 § 1109 imposes personal liability on fiduciaries who breach their duties. See Lockheed 24 Corp. v. Spink, 517 U.S. 882, 887 , 116 S. Ct. 1783, 1788 , 135 L. Ed. 2d 153 (1996) 25 (“Sections [1104] and [1109] of ERISA impose respectively a duty of care with respect to 26 the management of existing trust funds, along with liability for breach of that duty, upon 27 plan fiduciaries.”). And third, 29 U.S.C. § 1106 prohibits transactions, such as the “lending — 28 — knowledge. If that occurs, the Court will definitively resolve the proper type of knowledge. - 47 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 48 of 51 1 of money” or the “furnishing of goods, services, and facilities” between a fiduciary and an 2 ERISA plan. Certain transactions, including transactions setting up an ESOP, are exempt 3 from these prohibitions. 4 In 1991, the Ninth Circuit addressed a claim brought by plan participants against an 5 ERISA plan’s actuary for “knowing participation in breach of fiduciary duty.” Mertens v. 6 Hewitt Assocs., 948 F.2d 607 , 608 (9th Cir. 1991). The plan participants argued that even 7 if the actuary did not qualify as a fiduciary, it could still be “personally liable to the plan” 8 based on 29 U.S.C. § 1109 (a). Id. at 611. In other words, a non-fiduciary could be liable 9 for participating in a fiduciary’s breach. The Ninth Circuit rejected this position. 10 According to the Ninth Circuit, a non-fiduciary could not “be liable under [§ 1109] for 11 knowing participation in a breach of fiduciary duty.” Id. The Supreme Court subsequently 12 affirmed the judgment and made comments that indicated the holding regarding 13 nonfiduciary liability was correct. But the Supreme Court’s actual holding in affirming the 14 Ninth Circuit only spoke to the distinct issue whether it was possible to seek “monetary 15 damages against nonfiduciaries who knowingly participate in a fiduciary’s breach of 16 fiduciary duty.” Mertens v. Hewitt Assocs., 508 U.S. 248, 251 (1993). In other words, the 17 Supreme Court only issued an opinion regarding the permissible types of relief, not the 18 possibility of liability itself. 19 In 2000, the Supreme Court addressed whether a nonfiduciary could be sued for 20 engaging in a transaction prohibited by § 1106. Harris Tr. & Sav. Bank v. Salomon Smith 21 Barney, Inc., 530 U.S. 238, 241 (2000). In that opinion, the Supreme Court went on a 22 complicated tour through various provisions of ERISA. In doing so, the Supreme Court 23 noted the statements in Mertens questioning the viability of imposing liability on 24 nonfiduciaries were “dictum.” Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 25 U.S. at 249. And on the merits of a nonfiduciary’s liability for participating in a transaction 26 prohibited by § 1106, the Supreme Court looked to a provision of ERISA authorizing the 27 Secretary of Labor to seek civil penalties against “two classes of defendants, fiduciaries 28 and ‘other person[s].’” Id. at 248. That provision of ERISA explicitly allows penalties - 48 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 49 of 51 1 based on “any knowing participation” in a fiduciary breach by the “other person.” The 2 Supreme Court noted the provision authorizing penalties applied for any knowing 3 participation in a “violation of . . . part 4” of ERISA. Id. “Part 4” of ERISA covers § 1101 4 to § 1114, the portion dealing with “fiduciary responsibilities.” 5 According to the Supreme Court in Harris, the statutory language authorizing 6 penalties as permitting suit against nonfiduciaries had “[t]he plain implication . . . that the 7 Secretary [of Labor] may bring a civil action . . . against an ‘other person’ who 8 ‘knowing[ly] participat[es]’ in a fiduciary’s violation.” Id. at 248. This statement was 9 made in the specific context of a claim against a nonfiduciary for participating in a 10 transaction prohibited by § 1106. But the underlying statutory analysis necessarily extends 11 to breaches of fiduciary duty under § 1104 and 1109. That is, §§ 1104, 1106, and 1109 are 12 all found in “part 4” of ERISA. The Supreme Court concluded there was liability for 13 “knowingly participating” in a violation of part 4. Accordingly, there is no longer any 14 basis to distinguish between the various forms of liability regarding nonfiduciaries found 15 in part 4. 16 The parties cite conflicting district court opinions on this issue, with one court 17 deeming itself bound by the 1991 Ninth Circuit opinion while the other, without discussion 18 of the 1991 Ninth Circuit opinion, concludes a nonfiduciary may be liable for knowing 19 participation in a breach. Compare Vyas v. Vyas, 2017 WL 6551110 , at *9 (C.D. Cal. May 20 8, 2017) (relying on 1991 Ninth Circuit opinion) with Perez v. Brain, 2015 WL 3505249 , 21 at *12 (C.D. Cal. Jan. 30, 2015) (“Neither the Ninth Circuit nor the Supreme Court has 22 addressed the scope of nonfiduciary liability under ERISA § 404.”). Based on the 23 reasoning in Harris, the 1991 Ninth Circuit opinion is longer good law. A nonfiduciary 24 may be liable for knowing participation in a breach of fiduciary duty.26 See 8 NO. 3 ERISA 25 Litig. Rep. 12, 16 (“Hard as it may seem to believe, the analysis followed in Harris Trust 26 seems to have resurrected the general claim against a nonfiduciary for having participated 27 26 The Director Defendants cite opinions from the Second and Third Circuits holding, even after Harris, there is no liability for a nonfiduciary who participates in a fiduciary breach. 28 Both opinions cite but do not discuss Harris. Gerosa v. Savasta & Co., 329 F.3d 317 , 323 n.6 (2d Cir. 2003); Renfro v. Unisys Corp., 671 F.3d 314, 325 (3d Cir. 2011). - 49 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 50 of 51 1 in a fiduciary’s breach of duty, despite the apparent elimination of that claim in Mertens.”). 2 2. Participation in Prohibited Transaction 3 The Director Defendants seek summary judgment there is insufficient evidence they 4 knowingly participated in a prohibited transaction.27 (Doc. 220 at 45). The Director 5 Defendants believe the Secretary “lacks the evidence necessary to create a genuine issue 6 as to a material fact as to whether the [Director Defendants] knew or should have known 7 that the ESOP was purchasing their RVR stock for more than fair market value.” (Doc. 8 273 at 24). Viewed in the light most favorable to the Secretary, the Director Defendants 9 were told the fair market value of a controlling interest in RVR was as low as approximately 10 $100 million. The Director Defendants subsequently negotiated the terms of the 11 transaction such that they retained control over RVR yet they still believed the fair market 12 value was $105 million. The Secretary is entitled to prove at trial that the Director 13 Defendants knew or should have known that stock is worth more when it connotes control 14 versus when it does not. The Director Defendants’ request for summary judgment 15 regarding the prohibited transaction claim will be denied. 16 Accordingly, 17 IT IS ORDERED the Stipulation re Notice of Confidential Designation (Doc. 274) 18 is GRANTED. 19 IT IS FURTHER ORDERED the Motions to Seal (Doc. 227, 233, 266, 269) are 20 DENIED WITHOUT PREJUDICE. The parties and non-parties must confer regarding 21 the appropriate redactions to the disputed documents. Within fourteen days of this Order 22 the parties and non-parties shall file either 1) a stipulation regarding the appropriate 23 redactions, accompanied by the redacted documents and the complete documents under 24 seal; or 2) a single motion to seal from the parties and non-parties setting forth the 25 27 The Director Defendants argue Randall Smalley cannot be liable on this claim because he was “not a selling shareholder.” (Doc. 220 at 45). This appears to be a reference to the 26 fact that Randall Smalley’s stock was in numerous trusts at the time of the transaction. It is undisputed, however, Randall Smalley was the trustee of the trusts and he caused the 27 trusts to enter into the transaction. The Director Defendants do not explain why a trustee in this position cannot be liable for causing the trusts to take the allegedly wrongful actions. 28 Thus, Randall Smalley is not entitled to summary judgment. If the trusts, not Randall Smalley, are the relevant defendant, Randall Smalley is free to argue that point at trial. - 50 - Case 2:19-cv-03178-ROS Document 277 Filed 02/13/23 Page 51 of 51 1 document or information that should be placed under seal and why, accompanied by the 2 redacted documents on the public docket and the complete documents lodged under seal. 3 If a motion to seal is filed, the Secretary shall respond within fourteen days and a single 4 reply shall be filed within seven days of the response. 5 IT IS FURTHER ORDERED the Motions in Limine (Doc. 184, 188, 210, 223, 6 224) are DENIED. 7 IT IS FURTHER ORDERED the Motion to Exclude Expert Opinion (Doc. 213) 8 is DENIED. 9 IT IS FURTHER ORDERED Motions for Partial Summary Judgment (Doc. 211) 10 and Motion for Summary Judgment (Doc. 220) are DENIED. 11 IT IS FURTHER ORDERED the Motion for Partial Summary Judgment (Doc. 12 214) is GRANTED IN PART and DENIED IN PART. 13 IT IS FURTHER ORDERED the parties shall confer and within seven days of 14 this Order shall file a joint statement setting forth their positions on the number of trial days 15 that will be necessary as well as the dates in April through October all parties and counsel 16 are available for trial. 17 Dated this 13th day of February, 2023. — 18 — — 19 — 20 Honorable Roslyn O. Silver 21 Senior United States District Judge — 22 — — 23 — — 24 — — 25 — — 26 — — 27 — — 28 — - 51 -