United States District Court, N.D. Illinois
February 6, 2004.
The opinion of the court was delivered by: PHILIP REINHARD, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff, Harry J. Beauchem, brings this action, in a third amended
complaint, against defendants, Rockford Products Corp. ("RP"), Richard L.
Goff, Richard L. Mowris, David P. Peterson, Gerald S. Thain, and R. Ray
Wood alleging violations of the Employee Retirement Income Security Act
("ERISA") 29 U.S.C. § 1001 et seq., in matters
relating to the Rockford Products Corporation Employee Stock Ownership
Plan ("ESOP") and the Rockford Products Savings and Retirement Plan
("SRP") in both of which plaintiff is a participant. The court has
jurisdiction pursuant to 29 U.S.C. § 1132 (e)(1). The claim against
RP is based on its alleged status as a party to a prohibited transaction.
The individual defendants are alleged to have breached their fiduciary
duties as members of the plan committee that managed the ESOP and SRP.
Defendants have moved to dismiss certain of plaintiffs claims pursuant to
Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief
can be granted claiming the statute of limitations bars plaintiffs claims
for breach of fiduciary duty and prohibited party in interest
transactions arising from stock transactions in 1985 and 1994, a
settlement with Rexnord, Inc. in 1994, and refinancings in 1989 and 1994.
In an order entered March 24, 2003, the court noted that these matters on
their face appeared to fall outside the limitations period but granted
plaintiff leave to file an amended complaint to allege with particularity
(see Fed.R.Civ.P. 9(b)) the fraud or concealment that would
render the filing of this action timely.
Defendants contend ERISA sets no specific limitations period for
prohibited transaction claims so the period for such claims is borrowed
from state law, in this case, the Illinois five-year statute of
limitations for conversion actions. 735 ILCS 5/13-205. Where there is
fraudulent concealment, Illinois extends the period to five years after
discovery. 735 ILCS 5/13-215. Plaintiff maintains prohibited transaction
claims are subject to the limitations period set by 29 U.S.C. § 1113.
Section 1113 provides a limitations period for breaches and violations
under "this part," which is part 4 of ERISA. 29 U.S.C. § 1113. A
claim against a transferee of a prohibited transaction, however, arises
under section 1132(a)(3), see Harris Trust & Savings Bank v.
Salomon Smith Barney Inc., 530 U.S. 238, 248-49(2000), which is in
part 5. This claim is outside the scope of section 1113 so the
limitations period must be borrowed from state law. Claims to avoid a
prohibited transaction are analogous to conversion actions so it is the
Illinois five-year limitations period for conversion that applies.
See Calobrace v. American Nat'l Can Co., No. 93 C 999, 1995 WL
557410, *8 (N.D. Ill. Sept. 19, 1995) (Manning, J.).
Plaintiff alleges the ESOP's 1985 acquisition of RP stock at the
inception of the plan and its sale of RP stock to RP in 1994 were
prohibited transactions because they were not for adequate consideration.
Generally, a prohibited transaction occurs when there is a sale or
exchange of property between the plan and a party in interest.
29 U.S.C. § 1106 (a)(1)(A). However, an exemption exists for ESOPs when the
transaction is the acquisition or sale of qualifying employer securities
for adequate consideration. Id. § 1108(e). The limitations
period for conversion begins to run on the date of the conversion.
See Nelson v. Sotheby's, Inc., 115 F. Supp.2d 925, 929 (N.D. Ill.
2000) (Bucklo, J.). By analogy, the limitations period here would have
begun to run on the date of the respective prohibited transactions. Absent
an exception, these claims are untimely because this action was commenced
April 27, 2001, more than five years after each transaction, which
occurred in 1985 and 1994. Illinois provides that "[i]f a person liable to
an action fraudulently conceals the cause of such action from the
knowledge of the person entitled thereto, the action may be commenced at
any time within 5 years after the person entitled to bring the same
discovers that he or she has such a cause of action. 735 ILCS 5/13-215.
Plaintiff contends RP through its agents fraudulently concealed the
causes of action so that they were not discovered by plaintiff until at
the earliest March 25, 1998, which would be within the limitations period
where fraudulent concealment has occurred. Fraudulent concealment must be
pled with particularity. Fed.R.Civ.P. 9(b). Plaintiffs allegations
indicate 1991 as the time from which the concealment dates. He alleges no
specific acts occurring before 1991. Thus, the limitations period for the
1985 transaction expired before the first alleged act of concealment. The
prohibited transaction claim against RP for the 1985 stock transaction is
barred by the statute of limitations.
As to the 1994 transactions, plaintiff alleges RP, through its agents
the individual defendants, fraudulently concealed the settlement with
Rexnord, thereby causing the sale of stock by the ESOP to be for
inadequate consideration. Plaintiff alleges that the defendants
intentionally refused to file Form 5500 with the Department of Labor for
the plan years ending October 31, 1994 and 1995 in a timely manner in
order to conceal the inadequate consideration for the stock transaction.
The Form 5500 for each of these years was not filed until August 15,
1996. He further alleges RP's officer, Peterson, in response to a direct
request from plaintiff in 1997, told plaintiff the Rexnord settlement had
no impact on the plans and that the terms of the settlement were none of
Fraudulent concealment requires some trick or contrivance to exclude
suspicion or inquiry. See Martin v. Consultants & Administrators
Inc., 966 F.2d 1078, 1095 (7th Cir. 1992). Plaintiff has alleged
sufficient facts to survive a motion to dismiss. The essence of his
prohibited transaction claim is the inadequacy of the consideration. He
has alleged facts which show actions taken to conceal the inadequacy of
the consideration from plan participants such as plaintiff by not filing
required reports and telling plaintiff the settlement had no impact on
the plans. Defendants contend that concealing the inadequacy of
consideration cannot be concealment of the action because adequacy of
consideration is an affirmative defense that must be pled by defendants
and is not an element of the plaintiffs claim. See Keach v. U.S.
Trust Co., N.A., 235 F. Supp.2d 886, 899 (C. D. Ill. 2002) (Mihm,
J.), vacated in part on other grounds, No. 01-1168, 2002 WL
31958720, (C.D. Ill, Dec. 12, 2002). However, defendants' concealment of
the actual value of the stock held by the plans at the time of the 1994
sale to RP in effect concealed the cause of action because without that
information plaintiff could not have known a violation occurred.
Accordingly, plaintiff has alleged facts to support fraudulent
concealment of the cause of action at least until after the spring of
1997. The cause of action filed in April 2001 is within the five-year
limitations period of 735 ILCS 5/13-215 and, therefore, timely.
The statute of limitations for a fiduciary breach under ERISA is the
earlier of (1) six years from the last action constituting part of the
breach or, in the case of an omission, the latest date on which the
fiduciary could have cured the breach or (2) three years after the
earliest date on which the plaintiff had actual knowledge of the breach.
29 U.S.C. § 1113. However, in the event of "fraud or concealment" the
period is six years after the date of discovery of the breach. Id. This
provision governs die claims against the individual defendants. Because
this provision provides a six-year limit after discovery for claims of
fiduciary breach, plaintiffs action is timely for the same reasons the
prohibited transaction claim was timely. For the reasons discussed above,
breach of fiduciary duty claims related to the 1985 transactions are
untimely but plaintiff has alleged sufficient facts to show fraud or
concealment and discovery no earlier than spring of 1997 for fiduciary
breaches arising from the 1994 transactions. The action begun in 2001 is
within six years of the alleged discovery of the breach.
Plaintiff also claims the individual defendants are liable for failure
to correct the breaches caused by predecessor fiduciaries in the 1985
transactions. However, ERISA expressly states no fiduciary shall be
liable for a breach committed before he became a fiduciary or after he
ceased to be one. 29 U.S.C. § 1109 (b). Allowing a fiduciary to be
liable for failing to correct a breach committed by prior fiduciaries
would destroy the protection of section 1109(b). For the foregoing
reasons, the claims against RP as a party in interest are dismissed as to
the 1985 transactions. The claims against the individual defendants
seeking to hold them liable as co-fiduciaries for failure to correct
fiduciary breaches of prior fiduciaries are dismissed. Otherwise,
defendants' motions to dismiss are denied.
© 1992-2004 VersusLaw Inc.