Seventh Circuit Revives ERISA Claims Related to ESOP Purchase of Company at Allegedly Inflated Valuation Price

In Appvion, Inc. Ret. Sav. & Emp. Stock Ownership Plan by & through Lyon v. Buth, No. 23-1073, __F.4th__, 2024 WL 1739032 (7th Cir. Apr. 23, 2024), Plaintiff-Appellant is the Appvion, Inc. Savings and Employee Stock Ownership Plan, for which Grant Lyon was authorized to act on its behalf by a bankruptcy court. Following Appvion, Inc.’s declaration of bankruptcy in 2017, Lyon brought many claims—ERISA, federal securities law, and various state laws—against many defendants related to his theory that the defendants fraudulently inflated the company’s price in 2001, when it was sold to its employees, and the price remained inflated until the bankruptcy. The district court dismissed most of the claims, except for two counts against Argent, the Plan’s most recent trustee. The district court “held that the pre-2012 ERISA claims were barred by ERISA’s statute of repose and that the post-2012 ERISA claims were improperly group-pleaded and lacked particularity.” Lyon appealed the dismissal of some of the claims, including all of his ERISA claims against the directors and officers and most of his ERISA claims against the Plan’s former trustees, State Street and Reliance Trust Company. (This summary will only discuss the ERISA claims).

With respect to the pre-2012 claims, the court explained that 29 U.S.C. § 1113 provides that any action for breach of fiduciary duty must be brought within six years after the date of the last action which constituted a part of the breach or, in the case of an omission, the latest date on which the fiduciary could have cured the breach. Lyon filed his first complaint on November 26, 2018, so normally liability would be barred for any actions or omissions prior to November 26, 2012. However, there is a fraud exception to the statute of repose which states that in the case of fraud or concealment, an action may be commenced no later than six years after the date of discovery of the breach or violation. For this exception to apply, a plaintiff must allege actual concealment. Lyon’s allegations of fraud, including that defendants misrepresented the company’s fair market value and failed to disclose the investment banking firm Houlihan Lokey’s conflict of interest (it was to receive a fee of the final sale price if the company was sold), are the same allegations that support his theory of fraudulent concealment. In other words, the court found that there was no separate allegation of concealment of the fraud. Because of this, the district court correctly dismissed the breach of fiduciary duty claims against the directors and officers who left Appvion before 2012, and other claims related to pre-2012 conduct.

The court did reverse the dismissal of the post-2012 ERISA claims. With respect to the allegations of breach of fiduciary duty, the court found that the complaint did contain sufficient allegations to support a breach of the duties set forth in 29 U.S.C. § 1104(a)(1). The magistrate judge determined that the claims were subject to the heightened pleading standard found in Rule 9(b) and recommended dismissal of the claims for failing to meet the standard. Though it was not clear to the Seventh Circuit on what grounds the district court dismissed the breach-of-duty arguments, it considered three possible explanations and dismissed each one.

First, Lyon was not obligated to plead intent with particularity under Rule 9(b). He was only required to plead with particularity the “who, what, when, where, and how” of the fraud, which the court found that he did in the Second Amended Complaint.

Second, to the extent that the district court concluded that Lyon did not plead an element of his fraud claim with particularity, the Seventh Circuit found that Lyon’s allegations with respect to post-2012 conduct do not rest entirely on a theory of fraud such that the imprudence claims should remain.

Third, the court explained that Rule 9(b) does not impose a heightened plausibility standard. It just calls for a short and plain statement of the claim. Factual pleadings do not require factual pleadings that demonstrate the probability of wrongdoing. Applying Twombly, the court found that Lyon adequately pleaded a breach of the fiduciary duty of loyalty by State Street, Reliance, and the ten post-2012 directors and officers. The court also found that Lyon adequately pled the prohibited transaction and co-fiduciary liability claims against the post-2012 officers.