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Perez v. WPN Corp.

United States District Court, W.D. Pennsylvania

June 7, 2017

THOMAS E. PEREZ, SECRETARY OF LABOR, UNITED STATES DEPARTMENT OF LABOR, Plaintiff,
v.
WPN CORPORATION, RONALD LABOW; SEVERSTAL WHEELING, INC. RETIREMENT COMMITTEE; MICHAEL DICLEMENTE; DENNIS HALPIN; WHEELING CORRUGATING COMPANY RETIREMENT SECURITY PLAN; AND SALARIED EMPLOYEES' PENSION PLAN OF SEVERSTAL WHEELING, INC., Defendants.

          MEMORANDUM OPINION

          Nora Barry Fischer United States District Judge

         I. Introduction

         The Secretary of Labor of the United States Department of Labor ("DOL") brings this action under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001, et seq. ("ERISA") alleging that the fiduciaries and investment managers of two related pension plans violated ERISA causing a loss of the pension plans' value of approximately $7, 000, 000.00. Defendant fiduciary body, the Severstal Wheeling, Inc. Retirement Committee (the "Retirement Committee") and its two individual members, Michael DiClemente ("DiClemente") and Dennis Halpin ("Halpin") appointed Ronald Labow ("Labow") and WPN Corporation ("WPN") to manage the assets of the two pension plans, the Wheeling Corrugating Company Retirement Security Plan and the Salaried Employees' Pension Plan of Severstal Wheeling, Inc. ("the Plans").[1] In its Amended Complaint the DOL alleges that Labow, the sole officer and principal owner of WPN, and WPN are directly responsible under ERISA for the loss in value of the Plans' assets from approximately December 5, 2008 through May 19, 2009. The DOL alleges that Retirement Committee, DiClemente, and Halpin (collectively, "Defendants") are liable under ERISA for failing to invest the Plans' assets from November 3, 2008 to December, 5, 2008; for failing to monitor Labow and WPN's conduct from December 5, 2008 to May 19, 2009; and for co-fiduciary liability for Labow and WPN's violations.

         Presently before the Court is Defendants' Motion to Dismiss and, in the alternative, Motion for Summary Judgment. (Docket No. 124). The DOL has filed a Response to the Motion (Docket No. 130) and Defendants have filed a Reply (Docket No. 134). The Court heard oral argument on the Motion on February 7, 2017 (Docket No. 135), after which both parties filed Supplement Briefs (Docket Nos. 139 and 140). After careful consideration of the parties' positions, and for the following reasons, Defendants' Motion to Dismiss is granted, in part and denied in part. Defendants' alternative Motion for Summary Judgment is denied.

         II. Procedural History and Factual Background

         A. Procedural History

         The DOL filed a Complaint in this Court on October 14, 2014. (Docket No. 1). An Amended Complaint was filed on March 27, 2015. (Docket No. 28). On April 10, 2015, the Court issued a Consent Order on Stay granting the Retirement Committee, DiClemente, and Halpin's unopposed Motion for Stay of Proceedings. (Docket No. 37). The Stay was requested to await the issuance of a decision on the merits in a lawsuit filed by the Retirement Committee and its members (and the Plans) against Labow and WPN in the United States District Court for the Southern District of New York. (Docket No. 37, at ¶ 1; Severstal Wheeling, Inc. v. WPN Corp., No. 1:10-cv-954). Following a bench trial, District Judge Laura Taylor Swain issued a decision dated August 10, 2015, finding that WPN and Labow breached their fiduciary duties under ERISA and entered judgment for approximately $15, 000, 000.00. Severstal Wheeling, Inc. Ret. Comm. v. WPN Corp., 119 F.Supp.3d 240, 242 (S.D.N.Y. 2015). The decision was affirmed by the United States Court of Appeals for the Second Circuit on August 30, 2016. Severstal Wheeling, Inc. v. WPN Corp., 659 F.App'x 24 (2d Cir. 2016). The Stay in this Court was lifted on the same day. (Docket No. 97). Defendants' Motion to Dismiss and, in the alternative, Motion for Summary Judgment was filed on October 31, 2016. (Docket No. 124).

         B. Factual Background

         From approximately June 2008 to approximately May 2009, the Plans' sponsor was Severstal Wheeling, Inc., which is no longer in business. (Am. Compl. ¶ 12, Docket No. 28). The Plans were established to provide retirement benefits to employees. Pursuant to the Plans' documents, Severstal Wheeling, Inc. Retirement Committee is the Plan Administrator and a Named Fiduciary for each of the Plans. (Am. Compl. ¶ 8). DiClemente was a member of the Retirement Committee from June, 2008, through February 2009, and is a Named Fiduciary pursuant to the Plans' documents. (Am. Compl. ¶ 9). Halpin was a member of the Retirement Committee from June, 2008, through April, 2009, and is a Named Fiduciary pursuant to the Plans' documents. (Am. Compl. ¶ 10).

         The Plans' assets were part of a large trust, the WHX Trust, holding the assets of several pension plans managed by Labow and WPN. (Am. Compl. ¶ 14). The Trustee of the WHX Trust was Citibank, N.A. (Am. Compl. ¶ 15). In June, 2008, Citibank announced that it was discontinuing its trust services by the end of 2008. (Am. Compl. ¶ 15.) As a result, the Plans' assets were to be separated from the unrelated pension plan assets held in the WHX Trust and deposited into a new standalone trust holding only the Plans' assets. (Am. Compl. ¶ 16.) The new standalone trust was "subsequently renamed" the Severstal Wheeling, Inc. Pension Plan Master Trust ("Severstal Trust"). (Am. Compl. ¶ 16.) National City Bank became the Trustee of the Severstal Trust on December 31, 2008.[2] (Am. Compl. ¶ 15).

         The allegations supporting the DOL's claims that Defendants violated ERISA fall into two definable time periods. The first period begins on November 3, 2008, with the transfer of the Plans' Assets from the WHX Trust to a standalone trust, and ends on December 5, 2008, when a written investment management agreement was entered into between the Retirement Committee and Labow and WPN.

         The majority of the Plans' assets (valued at approximately $31, 446, 845) were held in an undiversified account with Neuberger Berman, LLC. (Am. Compl. ¶¶ 19, 21). The Neuberger Berman account had approximately 97% of its value invested in eleven large cap energy stocks, and remained in this undiversified state during the period from November 3, 2008 through December 5, 2008. (Am. Compl. ¶¶ 21, 22).

         The Neuberger Berman account holding the Plans' assets was transferred from the WHX Trust to the Severstal Trust on November 3, 2008. (Am. Compl. 19). On November 4, 2008, DiClemente confirmed the transfer of the Neuberger Berman account to the Severstal Trust by letter dated November 3, 2008. (Am. Compl. ¶ 20).

         There was no written investment management agreement from November 3, 2008, until December 5, 2008. (Am. Compl. ¶ 22). On December 5, 2008, DiClemente, on behalf of the Retirement Committee, signed an investment management agreement with Labow and WPN, titled the Third Amendment to the Severstal Wheeling, Inc. Investment Management Agreement. (Am. Compl. ¶ 23). Although the investment management agreement signed on December 5, 2008, was backdated to be effective November 1, 2008 (Am. Compl. ¶ 23), the DOL alleges that Labow and WPN's investment manager fiduciary duties became effective on December 5, 2008. In the DOL's first claim it is alleged that from November 3, 2008 through December 5, 2008, Defendants failed to discharge their fiduciary duties solely in the interest of the participants and beneficiaries by failing to prudently invest the Plans' assets when no investment management agreement was in place in violation of ERISA sections 404(a)(1)(A) and 404(a)(1)(B); 29 U.S.C. §§ 1104(a)(1)(A) & 1104(a)(1)(B). (Am. Compl. ¶ 35).

         The second time period begins when the Retirement Committee entered into the investment management agreement with Labow and WPN on December 5, 2008, and ends when Labow and WPN are terminated on May 19, 2009. (Am. Compl. ¶¶ 23, 28). The Plans' assets remained in the undiversified Neuberger Berman account from December 5, 2008 through December 30, 2008. (Am. Compl. ¶ 24). On December 30, 2008, the Retirement Committee, DiClemente, and Halpin first learned that the Plans' assets were in the undiversified Neuberger Berman account and DiClemente informed Labow and WPN of the discovery. (Am. Compl. ¶ 25).

         The Plans' assets remained in the undiversified Neuberger Berman account while Defendants communicated with Labow and WPN, from December 30, 2008 through March 24, 2009. (Am. Compl. ¶ 26). On March 24, 2009, the Plans assets in the Neuberger Berman account were sold for cash. (Am. Compl. ¶ 27).

         The Plans' assets remained in cash from March 24, 2009 through May 19, 2009, during which time the Retirement Committee and Halpin communicated with Labow and WPN. (Am. Compl. ¶ 29). On May 19, 2009, the investment management agreement was terminated and Labow and WPN were fired. (Am. Compl. ¶¶ 6, 28).

         From November 3, 2008 through May 19, 2009, the Plans suffered losses and lost earnings of approximately $7, 000, 000.00. (Am. Compl. ¶ 32). The DOL's second claim alleges that Defendants failed to discharge their fiduciary duties solely in the interest of the participants and beneficiaries by failing to monitor Labow and WPN from December 5, 2008 through May 19, 2009, while they acted as investment manager for the Plans in violation of ERISA sections 404(a)(1)(A) and 404(a)(1)(B); 29 U.S.C. §§ 1104(a)(1)(A) & 1104(a)(1)(B). (Am. Compl. ¶ 35).

         Finally, the DOL alleges in its third claim that Defendants are subject to co-fiduciary liability because they enabled Labow and WPN to commit a breach of ERISA section 404(a)(1), and knew of Labow and WPN's breach and failed to make reasonable efforts to remedy the breach, all in violation of ERISA sections 405(a)(2) and 405(a)(3); 29 U.S.C. §§ 1105(a)(2) & 1105(a)(3). (Am. Compl. ¶ 36).

         Defendants seek dismissal of the DOL's claims for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). In the alternative, Defendants request the Court convert the motion to dismiss into a motion for summary judgment relying primarily on the fact finding developed in the related proceeding in the United States District Court for the Southern District of New York, as well as an Affidavit prepared by DiClemente. The DOL was not a party in Severstal Wheeling, Inc. v. WPN Corp., No. 1:10-cv-954, nor were Defendants. Although the District Court for the Southern District of New York found Labow liable for fiduciary breaches, the decision in that case cannot be read to absolve Defendants from liability. Finally, the Court agrees with the DOL that the opportunity to obtain discovery is required before the motion is converted to a motion for summary judgment. Accordingly, the Court declines to convert the motion to dismiss to a motion for summary judgment.

         III. Standard of Review

         When reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Eid v. Thompson, 740 F.3d 118, 122 (3d Cir.2014) (quoting Phillips v. Cnty of Allegheny, 515 F.3d 224, 233 (3d Cir.2008)). A pleading party need not establish the elements of a prima facie case at this stage; the party must only "put forth allegations that 'raise a reasonable expectation that discovery will reveal evidence of the necessary element[s]."' Fowler v. UPMC Shadyside, 578 F.3d 203, 213 (3d Cir.2009) (quoting Graff v. Subbiah Cardiology Associates, Ltd., 2008 WL 2312671 (W.D.Pa. June 4, 2008)); see also Connelly v. Lane Const. Corp., 809 F.3d 780, 790 (3d Cir.2016) ("Although a reviewing court now affirmatively disregards a pleading's legal conclusions, it must still . . . assume all remaining factual allegations to be true, construe those truths in the light most favorable to the plaintiff, and then draw all reasonable inferences from them.") (citing Foglia v. Renal Ventures Mgmt, LLC, 754 F.3d 153, 154 n. 1 (3d Cir.2014)).

         Nonetheless, a court need not credit bald assertions, unwarranted inferences, or legal conclusions cast in the form of factual averments. Morse v. Lower Merion School District, 132 F.3d 902, 906, n. 8 (3d Cir.1997). The primary question in deciding a motion to dismiss is not whether the Plaintiff will ultimately prevail, but rather whether he or she is entitled to offer evidence to establish the facts alleged in the complaint. Maio v. Aetna, 221 F.3d 472, 482 (3d Cir.2000). The purpose of a motion to dismiss is to "streamline [ ] litigation by dispensing with needless discovery and factfinding." Neitzke v. Williams, 490 U.S. 319, 326-327, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989).

         IV. Discussion

         Defendants first argue that the DOL fails to state claims upon which relief can be granted for failure to invest or co-fiduciary liability because once Defendants appointed investment managers they are entitled to the protection of the safe harbor provision of ERISA section 405(d)(1), 29 U.S.C. § 1105(d)(1). Defendants also argue that the DOL has failed to state a claim upon which relief can be granted that Defendants breached their duty to monitor the investment managers. Defendants argue that they complied with their duty to monitor and that the DOL's claim is an improper attempt to impute the investment managers' conduct to Defendants.

         As discussed below, the Court agrees that once Defendants appointed investment managers they are entitled to the safe harbor protection. The Court also finds that the DOL has properly stated a claim for failure to monitor. In addition, because the Court finds that the investment management agreement is effective as of November 1, 2008, the Court will permit the DOL to amend its Amended Complaint to conform to the ruling.

         A. Failure to Invest and Co-fiduciary Claims

         Defendants argue that the DOL's failure to invest and co-fiduciary liability claims should be dismissed because Defendants are protected by the safe harbor provision of ERISA section 405(d)(1), 29 U.S.C. § 1105(d)(1). This sections states:

(d) Investment managers
(1) If an investment manager or managers have been appointed under section 1102(c)(3) of this title, then, notwithstanding subsections (a)(2) and (3) and subsection (b) of this section, no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager.

29 U.S.C.A. § 1105(d)(1). Defendants argue that because they appointed an investment manager effective November 1, 2008, the safe harbor provision explicitly relieves them from liability for the acts or omissions of Labow and WPN, and from any obligation to invest assets. Accordingly, Defendants assert that both the failure to invest claim and co-fiduciary liability claim must be dismissed.

         Implicit in the DOL's argument is (i) that Labow and WPN were acting as the appointed investment managers as of the November 1, 2008 backdated investment agreement, and (ii) that Defendants fall within the meaning of the term "trustee" in section 1105(d)(1). The Court addresses these arguments in turn.

         1. Effective Date of Appointment of Investment Manager

         If Defendants are correct that the appointment of the investment managers was effective as of November 1, 2008, then Defendants would not have had a duty to invest the Plans' assets from November 3, 2008 to December 5, 2008. Conceivably Defendants would be exposed to co-fiduciary liability for this time period, however Defendants' argument is that the safe harbor provision would relieve them from co-fiduciary liability for this time period as well. If, however, the effective date is December 5, 2008, then the failure to invest claim would survive the motion to dismiss. This is true because if the investment managers were not properly appointed during the relevant time period Defendants would retain control of the assets of the plan with corresponding fiduciary duties.

         Defendants argue that basic contract law allows parties the freedom to impose whatever obligations they wish and that includes the ability to backdate the effective date of an agreement. Defendants rely on an opinion from the United States Court of Appeals for the Third Circuit approving insurance agreements that are not legally operative until the first premium is paid, and affirming that the effective date of the agreement is essentially backdated once the first premium is paid. Wise v. Am. Gen. Life Ins. Co., 459 F.3d 443 (3d Cir. 2006). In Wise, the Court of Appeals reviewed several Pennsylvania cases before concluding that in Pennsylvania "backdated contracts are not inherently unfair and should be enforced according to their explicit terms." Wise, 459 F.3d at 449 (citing Ford v. Fidelity Mutual Life Insurance Company, 314 Pa. 54, 170 A. 270 (1934)).

         Defendants also point to the course of conduct between the parties in this case; highlighting that Labow and WPN had been investment managers of the Plans' assets prior to the transfer to the Severstal Trust and remained as investment managers after the transfer. Thus, Defendants argue that the agreement entered into on December 5, 2008, was in effect an amendment to the ongoing investment management agreement ...


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