United States District Court, E.D. Virginia, Richmond Division
STEVEN B BRINCEFIELD, on behalf of the Morton G. Thalhimer, Inc. Employee Stock Ownership Plan, and derivatively on behalf Of Morton G. Thalhimer, Inc., as Trustee of the Steven B. Brincefield Revocable Trust, Plaintiff,
LANCE T. STUDDARD, et al., Defendants,
MORTON G. THALHIMER, INC., Nominal Defendant.
A. GIBNEY, JR., DISTRICT JUDGE.
B. Brincefield worked for Morton G. Thalhimer, Inc.
("Thalhimer"), a large commercial real estate firm.
Brincefield owns Thalhimer stock and participates in the
company's Employee Stock Ownership Plan
("ESOP"). After Thalhimer's stock prices
declined significantly, Brincefield brought claims under the
Employment Retirement Income Security Act
("ERISA"), as well as direct and derivative state
law claims, against several defendants. In broad terms,
Brincefield alleges that the defendants created the ESOP for
their own benefit and concealed fraudulent accounting that
caused the stock prices to plummet.
defendants moved to dismiss, and Thalhimer moved to terminate
the derivative proceedings. The Court held a hearing and
issued preliminary rulings on October 15, 2018. (Dk. No.
150.) This Opinion details those rulings and announces
FACTS ALLEGED IN THE AMENDED COMPLAINT
worked for Thalhimer for 38 years before retiring in 2012. He
owns stock through the ESOP and Thalhimer stock directly.
Although companies typically use ESOPs to encourage employee
stock ownership and provide retirement benefits, Brincefield
alleges that Thalhimer's directors designed the ESOP to
enrich themselves. Paul F. Silver, C. Lee Warfield, III, Evan
M. Magrill, David R. Dustin, Jr., and Jeffrey S. Bisger
(collectively, the "Director Defendants") have
served on Thalhimer's Board of Directors and the
ESOP's Board of Trustees. All have held various officer
positions for Thalhimer or its subsidiaries for many years.
The Director Defendants appointed Lance T. Studdard as
Special Trustee of the ESOP.
alleges the defendants created the ESOP as a "Tax-Free
Cash Warehouse" through a three-step process. (Am.
Compl., at 14.) First, Silver and Bisger owned a controlling
77% interest in Thalhimer. In 2004, they sold 50.2% to the
ESOP, but retained control as ESOP Trustees. In 2011, Silver
and Bisger sold their remaining shares to the ESOP, loaning
money at a high interest rate to Thalhimer to finance the
transaction ("2011 Loans"). They appointed
Warfield, Magrill, and Dustin as ESOP trustees. In 2016,
Magrill informed Thalhimer shareholders that the ESOP would
buy all remaining stock. Brincefield told Magrill that he
would not sell his stock, and Magrill threatened that
Thalhimer would no longer pay minimum tax distributions to
shareholders after the sale. On June 20, 2016, Brincefield
notified Thalhimer that the 1998 Shareholder Agreement
required it to continue to pay minimum tax distributions.
30, 2016, Studdard finalized the offering price and all
shareholders except for Brincefield sold their stock to the
ESOP for above fair market value ("2016 ESOP
Transaction"). The ESOP bought the stock with a large
SunTrust loan. As ESOP trustees, the Director Defendants
controlled the vast majority of Thalhimer stock. After the
sale, Thalhimer did not pay minimum tax distributions to the
ESOP or Brincefield.
September, 2016, Brincefield demanded documents as a
shareholder. Specifically, he wanted to know the value of the
company and why the Director Defendants stopped making
minimum distributions. Thalhimer largely refused to turn over
documents because Brincefield did not request them for
"proper purposes." (Am. Compl., at 25.)
early 2017, Brincefield learned through a former Thalhimer
colleague that (1) Thalhimer's stock value had plummeted;
(2) the ESOP had overpaid for the stock in 2016; and (3) the
Director Defendants engaged in conflicted transactions with
the ESOP. In January, 2017, Dustin told Brincefield that
Thalhimer expected a loss for the previous year. Brincefield
made another demand for corporate records to research the
loss. The documents he received revealed that the Director
Defendants knew about Thalhimer's misleading financial
statements in 2016. They also revealed that Silver, Bisger,
Magrill, and Warfield made large, high-interest loans to
Thalhimer so the company could pay the SunTrust loan from the
2016 ESOP Transaction.
February 16, 2017, the Director Defendants explained to the
shareholders who sold their stock in the 2016 ESOP
Transaction that MGT Construction ("MGT"), a
subsidiary of Thalhimer, had not paid millions of dollars in
expenses since 2014 and had engaged in fraudulent accounting
practices. They also told the former shareholders to prepare
to buy their stock back from the ESOP to help make up for the
losses. With Studdard's help, the Director Defendants
unwound the 2016 ESOP Transaction ("2017
Unwinding"). Even with the unwinding, Thalhimer's
stock price dropped millions of dollars and the ESOP
beneficiaries, including Brincefield, lost retirement
addition to all of these shenanigans with the ESOP, the
Director Defendants also directed many lucrative real estate
investments away from Thalhimer and the ESOP to their own
privately held companies. They often financed these
investments with loans from Thalhimer, further decreasing
Thalhimer's and the ESOP's value. Additionally, the
Director Defendants forced MGT to provide services to other
private companies without timely payment, exacerbating
April 19, 2017, Brincefield sent a demand letter to
Thalhimer, directing the company to take action against the
Director Defendants. The company appointed a new board of
directors consisting of Warfield, Magrill, Christopher E.
Rouzie, John L. Vincie, III, and Michael N. Mulkey. The board
appointed Vincie and Mulkey to a Special Litigation Committee
("SLC") to investigate Brincefield's claims. On
January 8, 2018, it came as no surprise that the SLC
concluded Thalhimer should take no action in response to
Brincefield's demand. The SLC directed the company to
move to dismiss any derivative claims in his complaint.
Brincefield alleges the SLC's review did not comply with
Virginia law. On April 20, 2018, Brincefield sent a second
demand letter for Thalhimer to sue accounting firm Cherry
Bekaert LLP. Thalhimer responded that it intended to pursue
claims against Cherry Bekaert.
October 26, 2017, Brincefield filed a complaint against the
Director Defendants and Studdard. Brincefield amended the
complaint on July 30, 2018, adding five new defendants who
participated in the alleged breaches. The first new
defendant, Cherry Bekaert, failed to identify MGT's
fraud. The next, Corporate Capital Resources, LLC
("Corporate Capital"), provided consulting services
to Thalhimer and the ESOP. William Gust, a lawyer for Gentry
Locke and consultant for Corporate Capital, advised Thalhimer
and the ESOP. Michael A. Coffey, the president of Corporate
Capital, provided Thalhimer and the ESOP with consulting
services.The final new defendant, Sheldrick, McGehee
& Kohler, LLC, provided stock valuation services to the
ESOP, and settled with Brincefield before the Court heard the
motions to dismiss.
brings ten counts in the amended complaint: (I) violation of
ERISA § 406(a) against the Director Defendants,
Studdard, Gust, Coffey, and Corporate Capital for causing the
ESOP to engage in non-exempt prohibited transactions; (II)
violation of ERISA § 404(a) against the Director
Defendants, Studdard, Gust, Coffey, and Corporate Capital for
breaching their fiduciary duties; (III) equitable relief
under ERISA § 502(a)(3) for unjust enrichment against
all defendants; (IV) a derivative action on behalf of
Thalhimer against the Director Defendants for
conversion; (V) a derivative action on behalf of
Thalhimer and on behalf of the ESOP against the Director
Defendants for statutory conspiracy; (VI) a
derivative action on behalf of Thalhimer and on behalf of the
ESOP against the Director Defendants for common law
conspiracy; (VII) a derivative action on behalf of Thalhimer
against the Director Defendants for breach of fiduciary duty;
(VIII) an action by Brincefield directly and on behalf of the
ESOP against Warfield, Magrill, and Dustin for breach of
contract; (IX) a derivative action on behalf of Thalhimer
against Cherry Bekaert for professional malpractice; and (X)
an action by Brincefield directly and on behalf of the ESOP
against Cherry Bekaert for professional malpractice.
Thalhimer's Motion to Terminate Derivative
Rule of Civil Procedure 23.1(c) does not set forth a standard
of review for motions to terminate derivative proceedings.
Because the motion to terminate requires the Court to
consider information outside of the complaint, the Court will
apply the Rule 56 summary judgment standard. See Luzak v.
Light, No. 1:15-cv-501, 2016 WL 3854118, at *2 (E.D. Va.
July 8, 2016), aff'd, 678 Fed.Appx. 180 (4th
Cir. 2017) (applying the summary judgment standard to a
motion to dismiss derivative proceedings).
also set forth requirements for terminating derivative
proceedings filed after an SLC rejects a shareholder demand.
Courts must decide whether the SLC "acted properly in
concluding that litigating  derivative claims was not in
the best interests of the Company," pursuant to the
Virginia Stock Corporation Act. Luzak, 2016 WL
3854118, at *3 (citing Va. Code Ann. § 13.1-672.4). To
avoid dismissal, a plaintiff must show one of the following:
(1) that a majority of "disinterested" directors
did not appoint the SLC members; (2) that the SLC members
themselves were not "disinterested"; (3) that the
SLC did not conduct a review and evaluation, "adequately
informed in the circumstances, of the allegations made in the
complaint"; (4) that the SLC did not determine that
maintenance of the derivative claims was not in the best
interests of the Company; (5) that the SLC's
determination was not made in good faith; [or] (6) that the
SLC did not submit a "short and concise" statement
in support of its decision.
Id. The Court, however, cannot make the
determinations that Virginia law requires on the existing
record. Thus, as in Luzak, Brincefield may pursue
discovery before the Court rules on the motion. 2016 WL
3854118, at *2. The Court will decide the extent of discovery
after reviewing the parties' briefing. Accordingly, the
Court defers deciding the motion to terminate.