Marlow Henry v. Wilmington Trust NA ( 2023 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 21-2801
_____________
MARLOW HENRY, on behalf of the BSC Ventures
Holdings, Inc. Employee Stock Ownership Plan, and on
behalf of a class of all other persons similarly situated
v.
WILMINGTON TRUST NA; BRIAN SASS; E.
STOCKTON CROFT, IV,
Appellants
_____________
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil No. 1-19-cv-1925)
District Judge: Honorable Maryellen Noreika
_____________
Argued: November 9, 2022
______________
Before: CHAGARES, Chief Judge, JORDAN and SCIRICA,
Circuit Judges
(Filed: June 30, 2023)
_____________
Sarah M. Adams [ARGUED]
Michael J. Prame
Groom Law Group Chartered
1701 Pennsylvania Avenue NW
Suite 1200
Washington, DC 20006
Counsel for Appellant Wilmington Trust NA
Mark A. Nebrig
Moore & Van Allen
100 N Tryon Street
NationsBank Corporate Center, 47th Floor
Charlotte, NC 28202
Kevin J. Connors
Marshall Dennehey Warner Coleman & Goggin, P.C.
1007 N Orange Street
Nemours Building, Suite 600
Wilmington, DE 19801
Counsel for Appellants Brian Sass and E. Stockton
Croft, IV
Daniel Feinberg
Feinberg Jackson Worthman & Wasow
2030 Addison Street
Suite 500
Berkeley, CA 94704
2
David A. Felice
Bailey & Glasser LLP
2961 Centerville Road
Suite 302
Wilmington, DE 19808
Ryan T. Jenny
Gregory Y. Porter
Bailey & Glasser LLP
1055 Thomas Jefferson Street, N.W.
Suite 540
Washington, D.C. 20007
Peter K. Stris [ARGUED]
Rachana A. Pathak
John R. Stokes
Stris & Maher LLP
777 S. Figueroa Street, Suite 3850
Los Angeles, CA 90017
Tillman J. Breckenridge
Stris & Maher LLP
1717 K Street, N.W., Suite 900
Washington, DC 20006
Counsel for Appellee
_____________
OPINION
_____________
3
CHAGARES, Chief Judge.
Marlow Henry participated in an employee stock
ownership plan (“ESOP”) sponsored by his employer. After
the ESOP purchased stock at what Henry believed was an
inflated price, Henry filed a lawsuit against Wilmington Trust,
N.A. (“Wilmington Trust”), the plan’s trustee, and Brian Sass
and E. Stockton Croft, executives of his employer
(collectively, the “defendants”). He alleged that the defendants
breached their fiduciary duties to the ESOP imposed by the
Employment Retirement Income Security Act (“ERISA”), 29
U.S.C. § 1001 et seq., and engaged in transactions prohibited
by ERISA. The defendants moved to dismiss. They contended
that an arbitration provision, added to the ESOP’s plan
documents after Henry joined the ESOP, barred Henry from
pursuing his claims in federal court. The District Court denied
the motion to dismiss. For the following reasons, we will
affirm the judgment of the District Court.
I.
Henry worked at BSC Ventures Holdings, Inc.
(“BSC”), a company that makes custom return envelopes for
mass mailings, between 2012 and 2019. In 2015, BSC created
an ESOP for its employees. The ESOP is a pension plan
subject to the requirements of ERISA. All BSC employees,
including Henry, were automatically enrolled in the ESOP and
were not permitted to opt out. Wilmington Trust served as the
ESOP’s trustee. Sass and Croft were executives at BSC who
owned BSC stock and provided financial information and
projections about BSC to Wilmington Trust.
4
All ERISA plans must “be established and maintained
pursuant to a written instrument.” 29 U.S.C. § 1102(a)(1). In
accordance with that statutory requirement, a plan document
sets forth the structure of the BSC ESOP. ERISA plans must
also “provide a procedure for amending such plan, and for
identifying the persons who have authority to amend the plan.”
29 U.S.C. § 1102(b)(3). The plan document gave BSC “the
right to amend the [ESOP] from time to time in its sole
discretion,” subject to restrictions not relevant here. Appendix
(“App.”) 144. BSC also reserved the right to terminate the
ESOP at any time.
The ESOP purchased $50 million in BSC stock from
Sass, Croft, and others in 2016. That purchase was mainly
funded by a note payable to BSC. BSC stock was not (and is
not) publicly traded, so Wilmington Trust had to value the
stock before the ESOP could purchase it. Henry contends that
Wilmington Trust breached its fiduciary duty to the ESOP by
incurring debt to purchase BSC stock at an inflated price.
Henry alleges that the price was excessive given the relative
weakness of BSC’s business model and the fair market value
of the stock. He also contends that Wilmington Trust
improperly relied on flawed financial projections provided by
self-interested executives Sass and Croft to justify the
transaction.
BSC amended the plan document in 2017 to include an
arbitration provision. In relevant part, this arbitration
provision required that any “claims for breach of fiduciary
duty” be “resolved exclusively by binding arbitration.”1 App.
1BSC again amended the arbitration provision in 2019. The
2019 changes are immaterial to this appeal.
5
159. The arbitration provision also included a class action
waiver. That class action waiver stipulated that claims against
the ESOP “must be brought solely [in an] individual capacity
and not in a representative capacity or on a class, collective, or
group basis.” App. 160. It further prohibited a claimant from
“seek[ing] or receiv[ing] any remedy which has the purpose or
effect of providing additional benefits or monetary or other
relief” to anyone other than the claimant. Id. The class action
waiver was expressly nonseverable from the rest of the
arbitration provision: “[i]n the event a court of competent
jurisdiction were to find [the class action waiver’s]
requirements to be unenforceable or invalid, then the entire
[a]rbitration [p]rocedure . . . shall be rendered null and void in
all respects.” App. 160–61.
Henry filed suit in the United States District Court for
the District of Delaware on October 10, 2019. Suing on behalf
of a putative class of ESOP participants, he sought several
forms of relief, including a declaratory judgment that the
defendants breached their fiduciary duties, a declaratory
judgment that an indemnification agreement between
Wilmington Trust and BSC violates ERISA, disgorgement,
attorneys’ fees, and “other appropriate equitable relief to the
[ESOP] and its participants and beneficiaries.” App. 60.
The defendants moved to dismiss in December 2019,
arguing that Henry lacked Article III standing to bring his
ERISA claims2 and that, even if he had standing, Henry failed
to state a claim for relief because the plan document required
him to pursue his claims in arbitration. Henry opposed the
2
The District Court rejected this standing argument. The
defendants do not press it on appeal.
6
motion to dismiss, arguing that the arbitration clause was
invalid because it was added unilaterally and he had not
consented to it. Henry also argued that the class action waiver
— and, because of the nonseverabilty provision, the arbitration
clause as a whole — was invalid because it required him to
waive his rights to pursue plan-wide relief authorized by
ERISA.3 After oral argument on the motion, the parties filed
supplemental briefing on whether the class action waiver was
invalid because it required him to waive his right to pursue
plan-wide relief.
The District Court denied the motion to dismiss. It
concluded that it could not dismiss Henry’s complaint in favor
of arbitration because all parties to an arbitration agreement
must manifest assent to the agreement, and Henry had not
manifested his assent to BSC’s addition of an arbitration
provision to the ESOP plan document. Because it disposed of
the motion by concluding that Henry had not consented to
adding the arbitration clause, the District Court only briefly
addressed the class action waiver issue in a footnote. It
expressed skepticism that Henry could succeed on that issue.
The District Court suggested that only a “clear and express
command by Congress that an arbitration provision requiring a
class action waiver is void” could establish the invalidity of the
class action waiver and indicated that, in its view, the relevant
remedial provisions of ERISA did not amount to the requisite
clear statement by Congress. App. 15 n.9 (citing Epic Sys.
3
Henry does not appear to contest that the ESOP included the
amendment procedure required by 29 U.S.C. § 1102(b)(3), nor
does he appear to contest that BSC complied with the ESOP’s
amendment procedure when it added the arbitration provision.
7
Corp. v. Lewis, 138 S.Ct. 1612, 1628 (2018)). The defendants
timely appealed.
II.
As a threshold matter, Henry argues that we lack
appellate jurisdiction to review the District Court’s order
denying the defendants’ motion to dismiss.4 “[W]e have an
obligation to assure ourselves that jurisdiction exists,” Ellison
v. Am. Bd. of Orthopaedic Surgery, 11 F.4th 200, 205 (3d Cir.
2021), so we must address Henry’s jurisdictional challenge
before we may turn to the merits of this appeal. We have
jurisdiction to review our own jurisdiction when it is in doubt.
Duncan v. Governor of Virgin Islands, 48 F.4th 195, 203 n.6
(3d Cir. 2022).
The Federal Arbitration Act (“FAA”) authorizes us to
exercise jurisdiction in appeals “from . . . order[s] . . . denying
a petition [under 9 U.S.C. § 4] to order arbitration to proceed.”
9 U.S.C. § 16(a)(1)(B). But, as Henry notes, the defendants
did not bring a petition to order arbitration to proceed under 9
U.S.C. § 4: they brought a motion to dismiss for failure to state
a claim under Federal Rule of Civil Procedure 12(b)(6).5 The
4
Because this ERISA case is a “civil action[] arising under the
. . . laws . . . of the United States,” the District Court had subject
matter jurisdiction pursuant to 28 U.S.C. § 1331.
5
In this case, the defendants could not have enforced the
arbitration provision through the procedure set forth in 9
U.S.C. § 4. We have held that 9 U.S.C. § 4 does not permit a
district court to enter an order compelling arbitration outside
the district where it sits. Econo-Car Int’l., Inc. v. Antilles Car
8
ultimate relief sought — a court order declining to adjudicate
Henry’s claims because an agreement requires that those
claims be heard in an arbitral forum — is substantively similar
across these two categories of motion. The text of the FAA,
however, refers only to motions to compel arbitration. As we
have acknowledged, “linguistically, a motion to dismiss . . . is
a far cry from a motion to compel arbitration.” Harrison v.
Nissan Motor Corp. in U.S.A., 111 F.3d 343, 349 (3d Cir.
1997) (quotation marks omitted). And if we cannot rely on 9
U.S.C. § 16(a)(1)(B) as a basis for appellate jurisdiction, we
must face the question of whether we have jurisdiction to
review the District Court’s order denying the defendants’
motion to dismiss. Indeed, in most cases, we do not have
appellate jurisdiction to review district court orders denying
motions to dismiss. This is because our statutory jurisdiction
is limited to “appeals from . . . final decisions of the district
courts of the United States.” 28 U.S.C. § 1291. An order
denying a motion to dismiss is not a final decision because it
does not “end[] the litigation on the merits and leave[] nothing
for the court to do but execute the judgment.” Weber v.
Rentals, Inc., 499 F.2d 1391, 1394 (3d Cir. 1974). Henry
brought his lawsuit in Delaware and the arbitration provision
requires arbitration to occur in Roanoke, Virginia. The District
Court therefore could not have granted a 9 U.S.C. § 4 petition
to compel arbitration in this case. Accordingly, a Rule 12(b)(6)
motion to dismiss was the appropriate procedural mechanism
for enforcing the arbitration provision at issue in this litigation.
See Singh v. Uber Techs. Inc., 939 F.3d 210, 214 (3d Cir.
2019) (“[The defendant] moved for the District Court to
dismiss the case and compel [the plaintiff] to have it decided
by an arbitrator, on the basis of an agreement to arbitrate.”).
9
McGrogan, 939 F.3d 232, 236 (3d Cir. 2019) (quoting Catlin
v. United States, 324 U.S. 229, 233 (1945)).
Although there is some textual appeal to Henry’s
argument that we have appellate jurisdiction to review only
denials of motions styled as petitions to compel arbitration
under 9 U.S.C. § 4 — and not denials of other motions that
have the effect of declining to enforce an arbitration agreement
— that argument departs from our precedent. We have
consistently held that under 9 U.S.C. § 16(a), “all orders that
have the effect of declining to compel arbitration [are]
reviewable.” Palcko v. Airborne Express, Inc., 372 F.3d 588,
592 (3d Cir. 2004) (quoting Sandvik AB v. Advent Intern.
Corp., 220 F.3d 99, 103 (3d Cir. 2000)). The substance of the
motion and order, and not its form, determines its
appealability. To determine whether an order is one that, in
substance, declines to compel arbitration, “we examine the
label and the operative terms of the district court’s order, as
well as the caption and relief requested in the underlying
motion.” Devon Robotics, LLC v. DeViedma, 798 F.3d 136,
146–47 (3d Cir. 2015). If we determine “that the order denied
a motion to compel arbitration, then we will exercise
jurisdiction even if that order is not final.” Bacon v. Avis
Budget Grp., Inc., 959 F.3d 590, 597 (3d Cir. 2020)
(concluding that the denial of a motion for summary judgment
was immediately appealable when the motion was, in
substance, a motion to compel arbitration).
In this case, the defendants’ motion to dismiss was
substantively a motion to compel arbitration, and the District
Court’s order denying the motion to dismiss was substantively
an order denying a motion to compel arbitration. While the
defendants’ motion to dismiss was not captioned as a motion
10
to compel arbitration, much of their brief in support of their
motion to dismiss focused on why Henry’s claims were subject
to arbitration. The brief explained that the defendants were
pursuing a motion to dismiss rather than a motion to compel
arbitration because the Delaware-based District Court could
not compel arbitration in Virginia as the arbitration provision
required. The District Court’s order denying the motion to
dismiss acknowledged that the defendants’ motion to dismiss
was “pursuant to a mandatory arbitration clause.” App. 20.
These documents make clear that the motion to dismiss before
the District Court was effectively a motion to compel
arbitration. And since the motion to dismiss was in substance
a motion to compel arbitration, 9 U.S.C. § 16(a) gives us
appellate jurisdiction to review the denial of that motion to
dismiss.
III.
Having confirmed our jurisdiction, we turn to the
6
merits. The defendants argue that the District Court erred in
concluding that the arbitration provision was unenforceable
because Henry did not consent to it. Henry disagrees, but also
argues on appeal that the class action waiver (and, by
extension, the arbitration provision as a whole) is not
enforceable because it requires him to waive statutory rights
and remedies guaranteed by ERISA. We need address only the
latter issue — whether the class action waiver amounts to an
6
Since the questions presented in this appeal involve “the
validity and enforceability of an agreement to arbitrate,” our
review is plenary. Puleo v. Chase Bank USA, N.A., 605 F.3d
172, 177 (3d Cir. 2010).
11
illegal waiver of statutory remedies — to resolve this appeal.7
We agree with Henry that the class action waiver is
unenforceable because it requires him to waive statutory
remedies.8 And because the class action waiver is expressly
nonseverable from the rest of the arbitration provision, we will
affirm the District Court’s order declining to enforce the
arbitration provision.
A.
The FAA creates a “liberal federal policy favoring
arbitration agreements.” Epic Sys. Corp., 138 S. Ct. at 1621(quoting Moses H. Cone Memorial Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24 (1983)). But despite this federal policy,
arbitration agreements are not enforceable in some cases. One
7
Although the District Court focused on the issue of Henry’s
consent, “we may affirm on any basis supported by the record,
even if it departs from the District Court's rationale.”
Bedrosian v. United States Dep’t of Treasury, Internal
Revenue Serv., 42 F.4th 174, 185 (3d Cir. 2022) (quotation
marks omitted). We express no position on whether, and under
what circumstances, an ERISA plan participant must consent
to the addition of an arbitration provision to an ERISA plan
document before the plan participant may be bound by it.
8
We have held that ERISA claims are arbitrable, Pritzker v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1116
(3d Cir. 1993), and this opinion does not undermine that
holding. We solely address the question of whether an
arbitration clause in an ERISA plan document may prevent a
plan participant from pursuing the full range of statutory
remedies created by ERISA.
12
such circumstance is when an arbitration provision functions
as a “prospective waiver of a party’s right to pursue statutory
remedies.” Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228,
236 (2013) (emphasis and quotation marks omitted). “Put
differently, while arbitration may be a forum to resolve
disputes, an agreement to resolve disputes in that forum will be
enforced only when a litigant can pursue his statutory rights
there.” Williams v. Medley Opportunity Fund II, LP, 965 F.3d
229, 238 (3d Cir. 2020) (citations omitted). If an arbitration
provision prohibits a litigant from pursuing his statutory rights
in the arbitral forum, the arbitration provision operates as a
forbidden prospective waiver and is not enforceable. Id.Henry alleged that the defendants engaged in prohibited
transactions and breached their fiduciary duties, in violation of
ERISA. ERISA authorizes plan participants to bring suit to
remedy breaches of fiduciary duties. 29 U.S.C. § 1132(a)(2).
“[A]ctions for breach of fiduciary duty” under § 1132(a) are
“brought in a representative capacity on behalf of the plan as a
whole.” Massachusetts Mut. Life. Ins. Co. v. Russell, 473 U.S.
134, 142 n.9 (1985). The statute also expressly authorizes
certain remedies for violations. For instance, ERISA provides
that a fiduciary who “breaches any” of his “responsibilities,
obligations, or duties” to a plan “shall be personally liable to
make good to such plan any losses to the plan resulting from
each such breach, and to restore to such plan any profits of such
fiduciary which have been made through use of assets of the
plan by the fiduciary.” 29 U.S.C. § 1109(a). A court may also
order “such other equitable or remedial relief as the court may
deem appropriate.” Id. That relief may include “removal of
[the] fiduciary.” Id.13
The class action waiver here purports to waive plan
participants’ rights to seek remedies expressly authorized by
statute. Recall that the class action waiver claims to prohibit
ESOP participants from bringing a lawsuit that “seek[s] or
receive[s] any remedy which has the purpose or effect of
providing additional benefits or monetary or other relief” to
any third party. App. 160. But § 1109(a) expressly allows
ERISA plan participants to seek such relief. For example, §
1109(a) allows a plan participant to bring a lawsuit seeking
removal of a plan fiduciary. Such relief necessarily has plan-
wide effect: it is impossible for a court or arbitrator to order a
plan’s fiduciary removed only for the litigant, while leaving the
plan’s fiduciary in place for all other participants. See Smith
v. Bd. of Directors of Triad Mfg., Inc., 13 F.4th 613, 621–22
(7th Cir. 2021). Or take the clause of § 1109(a) that authorizes
a plan member to seek restitution of plan losses from a
fiduciary. That provision does not limit restitution to the
plaintiff’s losses: it “permit[s] recovery of all plan losses
caused by a fiduciary breach.” LaRue v. DeWolff, Boberg &
Assocs., Inc., 552 U.S. 248, 261 (2008) (Thomas, J.,
concurring) (emphasis in original). Restitution of “all plan
losses” would necessarily result in monetary relief to non-party
plan participants. Yet the class action waiver purports to
prohibit plan participants from bringing claims that have the
“purpose or effect” of providing “monetary . . . relief” to third
parties. App. 160.
Because the class action waiver purports to prohibit
statutorily authorized remedies, the class action waiver and the
statute cannot be reconciled. “[W]hat the statute permits, the
plan precludes.” Smith, 13 F.4th at 621. And when a provision
of an arbitration clause purports to waive rights that a statute
creates, it is a prohibited prospective waiver, and the provision
14
must give way to the statute. In short, the class action waiver
in this case cannot be enforced.9 Williams, 965 F.3d at 238.
The defendants argue that the prospective waiver
doctrine does not bar enforcement of the class action waiver
because Henry’s complaint seeks only monetary remedies that
can be logically constrained to Henry alone, rather than
equitable remedies that are necessarily plan-wide. Not so. It
is true that, as the defendants note, Henry’s complaint does not
explicitly request removal of Wilmington Trust as the plan
fiduciary. But Henry’s complaint asks the District Court to
“[o]rder . . . appropriate equitable relief to the Plan and its
participants and beneficiaries,” App. 60, and ERISA explicitly
identifies “removal of [the] fiduciary” as a form of inherently
plan-wide relief that a “court may deem appropriate” in a
breach of fiduciary duty case, 29 U.S.C. § 1109(a). And even
if Henry’s complaint is not properly construed as seeking
removal of the fiduciary, it unmistakably seeks other forms of
relief (such as restitution) that are both expressly authorized by
statute and necessarily plan-wide.
The defendants finally argue that the class action waiver
does not entirely eviscerate the possibility of plan-wide
equitable remedies under ERISA, because even if a plan
participant may not seek those remedies, the Department of
9
We note that two other Courts of Appeals have addressed the
validity of similar or identical waiver provisions in ERISA plan
documents, and both have concluded that the provisions are
invalid because they purport to waive the right to pursue forms
of relief expressly authorized by ERISA. See Harrison v.
Envision Mgmt. Holding, Inc., 59 F.4th 1090, 1108–09 (10th
Cir. 2023); Smith, 13 F.4th at 621–22.
15
Labor is not similarly constrained by the class action waiver
and is statutorily authorized to bring suit against the ESOP for
plan-wide relief. While ERISA does authorize the Department
of Labor to seek relief for breaches of fiduciary duty by ERISA
plan fiduciaries, it also expressly authorizes plan
“participant[s] [and] beneficiar[ies]” to seek the remedies
enumerated in § 1109(a). 29 U.S.C. § 1132(a)(2). The class
action waiver requires ESOP participants to waive their
statutory right to pursue statutorily authorized remedies. It is
therefore unenforceable even if it permits the Department of
Labor to pursue those remedies on behalf of the ESOP’s
participants.
B.
Having concluded that the class action waiver clause of
the arbitration provision is an unenforceable prospective
waiver of Henry’s ERISA rights, we also must determine
whether the remaining portion of the arbitration provision is
enforceable in the absence of the class action waiver. It is not.
The class action waiver is explicitly nonseverable from the rest
of the arbitration provision, and the defendants have conceded
that the entire arbitration provision must fall with the class
action waiver. Oral Argument at 16:10. Because the
arbitration provision is void in its entirety, we will affirm the
District Court’s order declining to enforce it.
IV.
For the foregoing reasons, we will affirm the order of
the District Court.
16