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Brundle v. Wilmington Trust, N.A.

United States District Court, E.D. Virginia, Alexandria Division

June 23, 2017

TIM P. BRUNDLE, on behalf of the Constellis Employee Stock Ownership Plan, and on behalf of a class of all other persons similarly situated Plaintiff
WILMINGTON TRUST, N.A., as successor to Wilmington Trust Retirement and Institutional Services Company Defendant.


          Leonie M. Brinkema United States District Judge.

         The factual background of this civil action is fully set out in the Memorandum Opinion issued on March 13, 2017. See Mem. Op., [Dkt. 294]. Put briefly, plaintiff Tim P. Brundle ("plaintiff" or "Brundle"), acting on behalf of the Constellis Employee Stock Ownership Plan ("ESOP"), alleged that defendant, as the ESOP's trustee, caused the ESOP to engage in a transaction prohibited by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.. when it failed to ensure that the ESOP paid no more than adequate consideration for Constellis' stock. Id. at 1. Following a six-day bench trial, the Court held that the defendant was liable for causing the ESOP to engage in a prohibited transaction under 29 U.S.C. § 1106(a)(1)(A), but not liable for transactions prohibited under 29 U.S.C. §§ 1106(a)(1)(B) or 1106(b), and awarded the ESOP $29, 773, 250 in damages. Id. at 2.

         In the instant Motion to Amend the Judgment Pursuant to Rule 59(e), or, in the Alternative, For a New Trial Pursuant to Rule 59(a) ("Motion to Reconsider") [Dkt. 309], defendant argues that the Court made several discrete errors that require reconsideration of the finding of liability and the amount of damages awarded.[1]

         Separately, plaintiff has filed a Motion for Attorneys' Fees and Costs, and Plaintiffs Counsel's Motion for Attorneys' Fees and Reimbursement of Expenses ("Fee Petition") [Dkt. 312], seeking both reasonable attorneys' fees pursuant to ERISA's fee-shifting provision and an award of a one-third contingent fee, based on counsel's retainer agreement with Brundle, to be offset by any fee amount recovered under ERISA. Defendant objects that the fees claimed under ERISA are unreasonable and that the contingent fee is a "common fund" award that is unavailable in ERISA cases.

         For the reasons that follow, defendant's Motion to Reconsider will be denied, and plaintiff's Fee Petition will be granted in part, denied in part, and held in abeyance in part.

         I. DISCUSSION

         A. Motion to Reconsider Standard of Review

         Rule 59 "is an extraordinary remedy which should be used sparingly." Pac. Ins. Co. v. Am. Nat'l Fire Ins. Co., 148 F.3d 396, 403 (4th Cir. 1998) (internal quotation marks and citation omitted). The Fourth Circuit has recognized three grounds for granting relief under Rule 59: "(1) an intervening change in the controlling law, (2) new evidence that was not available at trial, or (3) that there has been a clear error of law or a manifest injustice, " Robinson v. Wix Filtration Corp., LLC. 599 F.3d 403, 407 (4th Cir. 2010); however, Rule 59 "motions may not be used ... to raise arguments which could have been raised prior to the issuance of the judgment, nor may they be used to argue a case under a novel legal theory that the party had the ability to address in the first instance." Pac. Ins. Co., 148 F.3d at 403.

         B. Liability

         1. Control

         Wilmington first argues that the Court erred when it concluded that the ESOP lacked a substantial degree of control over Constellis after rinding that "[a]t most, the ESOP had the power to veto certain transactions by the Sellers[2] and their chosen directors, but that power had to be exercised by filing a lawsuit." Def. Mem., [Dkt. 310] at 17 (quoting Mem. Op., [Dkt. 294] at 46). In support of its argument, Wilmington maintains that controlling Delaware case law, Rohe v. Reliance Training Network. Inc.. No. 17992, 2000 WL 1038190 (Del. Ch. July 21, 2000) (unpublished), "makes it clear that [the ESOP's] rights as 100% Stockholder are paramount, and that Constellis and/or the Selling Stockholders would face a steep burden in challenging the Trustee's action." Def. Mem., [Dkt. 310] at 18-19.

         As an initial matter, this is a new legal theory that could have been presented at trial, and therefore should not have been raised for the first time in a Rule 59 motion. Indeed, this argument was not only not raised at trial, it actually contradicts the understanding of defendant's own trial witness, Juliet Protas, Constellis' former general counsel, who testified that if Wilmington wanted to stop "an action by the board of directors... [it] felt... was inconsistent with ERISA, ... the only recourse would be to 'file a lawsuit and fight about it.'" Mem. Op., [Dkt. 294] at 26. Protas' opinion was supported by the marketing materials prepared by CSG, the investment banking firm that designed the ESOP structure used by Constellis, which stated that the advantage of the warrants issued in connection with the sale was that the Sellers would retain control of the company until the ESOP paid off its debt. Id. at 6. Although Rohe. the case that Wilmington cites as having established the contrary proposition, was decided in 2000, Wilmington did not probe its witnesses about this issue and did not cite Rohe during its closing argument, see Tr. at 1635-61, or in its proposed findings of fact and conclusions of law, see [Dkt. 270].

         Moreover, Rohe merely established a presumptive rule of construction for contractual agreements; it did not create a "guarantee, " as defendant has asserted, entitling Wilmington to intervene and block an offending sale. See Rohe. 2000 WL 1038190, at *16. In fact. Rohe opened the door to precisely the scenario envisioned by Protas and the Court: a situation where Wilmington and the board would have to go to court and "fight about it." Mem. Op., [Dkt. 294] at 29. The only relevance Rohe has for the Court's analysis is the burden and standard of proof that such litigation would involve. See Rohe. 2000 WL 1038190, at *16 ("[O]ur courts rightly hesitate to construe a contract as disabling a majority of a corporate electorate from changing the board of directors unless that reading of the contract is certain and unambiguous."). If anything, this burden and standard of proof provide additional support for the Court's conclusion that the lack of control discount should be 5% rather than the 20% proposed by plaintiffs expert Dana Messina ("Messina"), because the Rohe presumptions suggest that the ESOP would have more power than an ordinary shareholder to prevent the sale, but would still lack the first mover advantage possessed by the Sellers via their control of the board of directors.[3] Accordingly, Rohe provides no cause for the Court to reconsider its finding of liability.[4]

         2. Warranty

         Defendant's second challenge to the liability finding is that the Court misstated the warranty arrangement between the Sellers and the ESOP. This arrangement was relevant to the Court's consideration of the reliability of Constellis management's revenue projections, which were relied upon by Wilmington and SRR. Mem. Op., [Dkt. 294] at 42. The Court found that Wilmington's due diligence regarding those projections was lackluster compared to a traditional arms-length purchaser, a finding not contested in Wilmington's Rule 59 motion. Wilmington defended this lackluster due diligence in part by citing to the Sellers' representations and warranties about the veracity of those projections, arguing that the Sellers would have to repay the ESOP if the projections turned out to be deficient; however, the Court concluded that the "key warranty about the financial health of the company was made by Constellis, not the Sellers, " and that without a representation and warranty by the Sellers themselves there was "no external source of money to protect the ESOP's investment in the company if the financial disclosures proved inadequate." Id. at 44.

         Defendant argues that this conclusion was wrong, based on a provision in the Stock Purchase Agreement ("SPA") that the Sellers were liable onapro rata basis for "[a]ny inaccuracy in or breach of any representation or warranty made by the Sellers or the Company in Sections 3.2 and 3.3 [of the SPA], " which included the relevant warranties about the financial health of the company. DTX 112 at 30. Although no party highlighted this provision of the SPA at trial, plaintiff has not challenged this argument, and the Court agrees that it erred in not finding that this provision made the Sellers financially responsible for violations of Constellis' representations and warranties regarding the company's finances.

         This corrected understanding of the SPA does not alter the Court's conclusion about liability. The remaining evidence independently showed that Wilmington failed to adequately probe the soundness of the warranties and representations in the SPA and the associated indemnification regime. Mem. Op., pkt. 294] at 44-45. That conclusion is supported by Golden's inability to point to this provision when he was asked point blank if the Sellers had represented or warranted as to the truth of the financial information upon which Wilmington relied. Golden evaded this issue by testifying, "The company-you know, it was independent management that was running the company. They had audited financial statements and had an extremely robust forecast process, and to the best of my knowledge, the sellers, you know, weren't involved in the day-to-day operations of the company. So they didn't come up with those forecasts." Tr. at 209:2-10. This answer reveals that Golden did not even know that the Sellers would be financially responsible for any breach of the warranty regarding the financial projections.

         Additionally, this corrected understanding does not alter the conclusions about the inadequacy of the indemnification regime and Wilmington's inadequate investigation into the soundness of Constellis' financial projections. Even omitting its erroneous view of the Sellers' representations and warranties, the Court relied on management's financial incentive to inflate the purchase price; the inadequate indemnification for an ongoing government investigation with a potential for over $60 million in liability; the indication from that government investigation of inadequate record keeping and billing practices; the riskiness of Constellis' contract concentration; the multiple sets of projections that Constellis generated in a short period of time; and SRR's inadequate explanation for internal inconsistencies regarding the impact of two proposed acquisitions on its calculation of Constellis' value. Mem. Op., [Dkt. 294] at 41-45. The corrected understanding of the SPA does nothing to undermine any of those other red flags. Accordingly, in evaluating the totality of the circumstances regarding liability, the erroneous understanding of the SPA was marginal and inconsequential.[5]

         3. Projections

         Wilmington next attacks the conclusion that Wilmington inadequately probed SRR's reliance on revenue projections prepared by Constellis' management by ignoring or downplaying "several red flags indicating that these projections were inflated." Mem. Op., [Dkt. 294] at 41. Because Wilmington does not challenge any of the factual bases for the Court's conclusion, beyond the warranty issue already addressed, this is nothing more than an attempt to relitigate an issue exhaustively addressed at trial, and nothing more needs to be said about it to conclude that Rule 59 relief is unwarranted; however, in the interest of completeness, the Court will nevertheless address these arguments in greater detail.

         Wilmington relies heavily on Delaware case law that "prefers valuations based on contemporaneously prepared management projections." Def. Mem., [Dkt. 310] at 23 (quoting Doft & Co. v. Inc.. No. Civ. A. 19734, 2004 WL 1152338, at *5 (Del. Ch. May 20, 2004) (unpublished)). That case law actually expresses a preference for reliable management projections. Id. ("Often, [management] projections of this sort are shown to be reasonably reliable and are useful in later performing a DCF analysis. In this case, however, the court is persuaded from a review of all the evidence that the [management projections do] not provide a reliable basis for forecasting future cash flows."). This Court fully agrees with that preference, and concluded that that the Constellis projections were not reliable for all the reasons stated in the previous section. See also Mem. Op., [Dkt 294] at 41-45.

         Wilmington also highlights trial testimony from two Constellis officers-former Chief Financial Officer Thomas Magnani ("Magnani") and Senior Vice President for Strategic Initiatives Raymond Randall ("Randair)-vouching for the reliability of the projections. Def. Mem., [Dkt. 310] at 22. This testimony did not persuade the Court the first time around and it does not do so now, primarily because the key question on liability was whether Wilmington adequately probed SRR's reliance on management projections at the time. There was no evidence at trial that Wilmington made any inquiries of Magnani and Randall at the time, and there was an abundance of evidence, see Mem. Op., [Dkt. 294] at 41-45, that ought to have given Wilmington cause for concern. It was Wilmington's failure to ask those questions during the valuation process that led to the Court's conclusion on liability. Id. at 41. To the extent that the evidence now cited by Wilmington mitigates the damage caused by that failure, the Court considered that evidence when it halved Messina's conclusion about how much Wilmington's failure to probe the projections affected the purchase price. See Id. at 59-60.

         4. Beta

         Wilmington's final argument on liability is that the Court misunderstood the definition of a valuation factor known as beta. In its opinion, the Court defined beta as a method "to assess the risk of Constellis relative to that of the industry overall." Mem. Op., [Dkt. 294] at 14. Citing the testimony of all three valuation experts who testified at trial, Wilmington argues (and plaintiff does not dispute) that beta in fact measures the risk of a particular industry relative to the risk of the market overall. Def. Mem., [Dkt. 310] at 24. The Court concedes that this definition of beta is correct.

         What Wilmington fails to mention in this argument is that the Court based its definition of beta on the definition given by the defendant's Rule 30(b)(6) witness. See Mem. Op., [Dkt. 294] at 14. At trial, Wilmington's counsel asked Golden, "What is beta?" Tr. At 388:8. Golden responded:

Beta is a measure of a company's volatility compared to the market, so if you have a beta-if a company has a beta of 1, they would have-you know, as the market is volatile, the company would be equally volatile.
If it's under 1, the subject company is considered to be less volatile than the market, and vice versa. If it's over 1, the company is-would be more volatile in price fluctuations and performance versus the market.

Id. at 388:9-16 (emphases added). Accordingly, to the extent that the Court erred in stating that beta was a measure of risk that applies to an individual company rather than to an industry, that erroneous view was shared by Wilmington's party representative. See Id. That the Wilmington witness most intimately involved in the Constellis ESOP did not fully understand the significance of beta reinforces the Court's conclusion on liability, rather than undermining it. Moreover, the Court did not rely heavily on the discussion of beta in its conclusion on liability.[6] See Mem. Op., [Dkt. 294] at 43.

         In short, Wilmington's arguments on liability are primarily inappropriate efforts to introduce new legal theories or relitigate issues already addressed at trial and in the Court's previous Memorandum Opinion, and the few errors that have been acknowledged addressed marginal issues and are insufficient to support any change to the Court's conclusion, based on the totality of the circumstances, that Wilmington failed to adequately probe the reliability of SRR's valuation report and the fairness of the 2013 purchase price. Accordingly, Wilmington's motion to reconsider the Court's finding of liability will be denied.

         C. Damages

         As described in the Order entered on May 16, 2017, the Court used a *two-step method" to determine damages. [Dkt. 326] at 4 (citing Mem. Op., [Dkt. 294] at 59-65). "First, [the Court] identified the value of each error that Wilmington and SRR committed." Id. Second, it determined "how each error affected the overall purchase price." Id. On this second step, "the Court accepted [plaintiffs expert] Messina's method of aggregating each error, because defendant had presented no alternative approach beyond [defense expert] Tarbell's conclusory assertion that Messina's method was illogical." Id.

         1. Methodology

         Wilmington's first argument is that Messina's method of aggregating each error is flawed, and that a different procedure must be used to determine the impact of the errors on the final purchase price. The Court has already addressed defendant's proposed procedure in the May 16, 2017, Order striking the new declaration from defendant's expert Jeffrey Tarbell, which was found to have violated Fed.R.Civ.P. 26's disclosure requirements. See [Dkt. 326]. Wilmington now presses the same arguments without relying on Tarbell's declaration, arguing that they are "based on nothing more than the record before the Court, common sense, and simple math." Def. Rep., [Dkt. 330] at 11 n.6.

         Just as the Court concluded that these arguments were "substantively different and considerably more detailed than those previously revealed" when packaged in Tarbell's declaration, they also constitute a new theory that could have been, but was not, presented at trial, and therefore cannot be raised in a Rule 59 motion. See [Dkt. 326] at 8; Pac. Ins. Co., 148 F.3d at 403. As the Court has already found, by March 14, 2016, when he produced his expert report, defendant was on notice about the methodology Messina used to calculate damages. [Dkt. 326] at 2. Defendant was also provided on April 13, 2016, with a copy of Messina's "Difference in Value" table, which it now directly attacks. See PTX 74 at 3. Despite this notice, defendants failed to present these arguments, or any other evidence on damages, at trial. See [Dkt. 326] at 10.

         At this late stage in the litigation, after the trial has ended and judgment has been entered, defendant argues for the first time that Messina's method was flawed because it did not deduct the impact of his errors "through calculation of an adjusted Enterprise and Equity Value" and that "[o]nce the Enterprise Value has been recalculated based on the Court's findings, the total Fair Market Value of Equity can be derived and then divided by 66, 270 shares to arrive at a new fair market value on a per share basis." Def. Rep., [Dkt. 330] at 12-14. Plaintiffs response, that Messina's model "already account[s] for the calculations (Wilmingon] claims the Court should now undertake, " PL Opp., [Dkt. 324] at 6, is an apt demonstration of why it is so important for parties to raise arguments like these at trial, rather than afterwards. Without reopening the factfinding process, the Court cannot receive the testimony of expert witnesses to determine which of these fundamentally different views is correct. Because Wilmington chose not to raise its methodological disputes at trial, it cannot do so now, and the Court will not reconsider its damages calculation based on Wilmington's new theory of damages.

         Wilmington argues in the alternative that a new trial is warranted to determine the issue of damages. A new trial is only available under Rule 59 if "[1] the verdict is against the clear weight of the evidence, or [2] is based on evidence which is false, or [3] will result in a miscarriage of justice[.]" Atlas Food Svs. & Servs.. Inc. v. Crane Nat'l Vendors, Inc.,99 F.3d 587, 594 (4th Cir. 1996). None of those circumstances is present here. As the Court found, Messina presented the "only evidence as to damages" at trial, Mem. Op., [Dkt. 294] at 59, and the defendant's newly offered competing theory of the appropriate methodology does not make the evidence upon which the Court relied "false." Additionally, given ...

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