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Hugler v. Vinoskey

United States District Court, W.D. Virginia, Lynchburg Division

May 2, 2017

Edward C. Hugler, Plaintiff,
v.
Adam Vinoskey, ET AL., Defendants.

          MEMORANDUM OPINION

          NORMAN K. MOON UNITED STATES DISTRICT JUDGE.

         This matter is before the Court upon Defendant Michael New's Motion to Dismiss the First Amended Complaint. (Dkt. 40). The First Amended Complaint alleges that Defendants, in their various roles, facilitated the purchase of Sentry Equipment Erectors, Inc. (“Sentry”) stock by the Sentry Equipment Erectors, Inc. Employee Stock Ownership and Savings Plan (“the ESOP”) for an inflated price-in violation of the Employee Retirement Income Security Act (“ERISA”). (Dkt. 29).

         Michael New asks the Court to dismiss him from the case because he argues he was merely an employee-not a fiduciary-and thus not individually liable under ERISA. Because the First Amended Complaint's factual allegations are taken as true at this stage and the Secretary pled sufficient facts about New exercising discretionary authority or control over the management of the ESOP, the Court concludes-for purposes of this motion-that he was a fiduciary. Accordingly, New's motion to dismiss will be DENIED.

         I. Legal Standard

         A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) tests the legal sufficiency of a complaint to determine whether the plaintiff has properly stated a claim; “it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.” Republican Party of North Carolina v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). Although a complaint “does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted).

         A court need not “accept the legal conclusions drawn from the facts” or “accept as true unwarranted inferences, unreasonable conclusions, or arguments.” Eastern Shore Markets, Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir. 2000). “Factual allegations must be enough to raise a right to relief above the speculative level, ” Twombly, 550 U.S. at 555, with all allegations in the complaint taken as true and all reasonable inferences drawn in the plaintiff's favor. Chao v. Rivendell Woods, Inc., 415 F.3d 342, 346 (4th Cir. 2005). Rule 12(b)(6) does “not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. Consequently, “only a complaint that states a plausible claim for relief survives a motion to dismiss.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

         II. Facts as Alleged

         The facts alleged in this case concern a two-step transaction by which the ESOP purchased 100% of Sentry stock for an inflated price. (Dkt. 29 at 4).

         Sentry, founded in 1980, was initially owned entirely by Adam and Carole Vinoskey. (Id. ¶ 10). The Vinoskeys then created the ESOP, which included both a 401(k) defined-contribution plan and an employee stock-ownership feature. (Id. ¶ 11). The ESOP was designed to invest primarily in employer stock, which permitted the Vinoskey's to liquidate their ownership interest in Sentry without finding a third-party buyer. (Id.).

         Under the terms of the ESOP, terminating employees, which included retirees, were permitted to sell their shares back to the ESOP at a price approved by the ESOP fiduciaries. (Id. ¶ 13). In order to determine a fair price, Sentry hired Capital Analysts, Inc. (“CA”) to perform appraisals. (Id.). From 2007 to 2011, the resulting stock price ranged from $241 to $285 per share. (Id.).

         In 2004, the ESOP purchased 48% of the Vinoskeys' Sentry stock for $220 per share, for a total price of $9 million. (Id. ¶ 12). The ESOP paid $1.5 million to the Vinoskeys, and the remainder of the purchase price was borrowed from Sentry. (Id.). In the following years, Sentry made contributions to the ESOP that allowed the ESOP to repay the loan it had received from Sentry. (Id.). The ESOP's debt was fully repaid before 2010, and the shares of Sentry stock purchased by the ESOP were allocated to individual participant accounts as the debts were paid. (Id.).

         In December 2010, Defendant Adam Vinoskey and/or Defendant Adam Vinoskey Trust (“the Trust”), sold the remaining 52% of Sentry stock to the ESOP at a price of $406 per share and a total sale price of $20.7 million. (Id. ¶ 14). This price greatly exceeded the price offered to terminating participants who sold their shares back to the ESOP before December 2010- which ranged from $241 to $285 per share-and the price offered to participants dropped below $285 per share after the sale at $406 per share. (Id.).

         The $406-per-share price was based on a special appraisal conducted by CA in November 2010 in preparation for this transaction. (Id. ¶ 15). The CA valuation erroneously overvalued Sentry's fair market value for numerous reasons, such as: (1) CA used only a three-year loopback period, which failed to capture the peaks and valleys of Sentry's business cycle; and (2) CA used a projected-future-earnings discount rate of only 12.2% in its November 2010 appraisal, despite using a 16.2% rate in 2009 and an 18% discount rate in December 2010. (Id. ¶ 16).

         Evolve Bank and Trust (“Evolve”) was hired as an independent transaction trustee for the 2010 stock purchase and as such was a named trustee to the ESOP. (Id. ¶ 8). Evolve was a “party in interest” and a fiduciary with respect to the plan pursuant to ERISA §§ 3(21)(A), 3(14)(A)-(B). (Id.). Defendant Michael New was a lawyer employed by Evolve as its Senior Trust Officer and the head of Evolve's ESOP division. (Id. ¶ 9). New performed the duties of the independent transaction trustee and as such was a fiduciary with respect to the ESOP pursuant to ERISA § 3(21)(A) and a ...


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