Harris v. Koenig

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
______________________________
WILLIAM S. HARRIS, et al., )
)
Plaintiffs, )
)
v. ) Civil Action No. 02-618 (GK)
)
JAMES E. KOENIG, et. al., )
)
Defendants. )
______________________________)
MEMORANDUM OPINION
Plaintiffs William S. Harris, Reginald E. Howard, and Peter M.
Thornton, Sr. are former employees of Waste Management Holdings,
Inc. (“Old Waste” or “the Company”) and participants in the Waste
Management Profit Sharing and Savings Plan (“Old Waste Plan” or
“Plan”). They bring this action on behalf of the Plan’s
approximately 30,000 participants against Defendants,1 all of whom
were fiduciaries of the Old Waste Plan or are fiduciaries of its
1
Defendants include the “Old Waste Fiduciaries” (Old Waste
(the Plan’s sponsor), the Waste Management, Inc. Profit Sharing and
Savings Plan Investment Committee (“Old Waste Investment
Committee”), the Waste Management, Inc. Profit Sharing and Savings
Plan Administrative Committee (“Old Waste Administrative
Committee”), the individual Trustee Members of the Committees, the
Old Waste Board Directors and its individual members, and fifteen
unidentified fiduciaries) and the “New Waste Fiduciaries” (the
Waste Management Retirement Savings Plan (“New Waste Plan”), the
Investment Committee of the Waste Management Retirement Savings
Plan (“New Waste Investment Committee”) and its individual Trustee
Members; the State Street Bank and Trust Company (“State Street”),
and fifteen unidentified fiduciaries).
successor plan, the Waste Management Retirement Savings Plan (“New
Waste Plan”).2
In the Third Amended Complaint [Dkt. No. 181], Plaintiffs
alleged ten separate violations by Defendants of the Employee
Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§
1001, et seq. This matter is presently before the Court on
Plaintiffs’ Motion for Leave to File a Fourth Amended Complaint
[Dkt. No. 240], in which they seek to revive five claims dismissed
as time-barred in the March 12, 2009 Order on Defendants’ Motion to
Dismiss and to add two new ERISA claims against Defendants, and
Plaintiffs’ Motion for Leave to File a Substitute Fourth Amended
Complaint [Dkt. No. 257], in which Plaintiffs seek to add two
additional ERISA claims against Defendants. Parties presented oral
argument at a Motions Hearing held on December 2, 2009. Upon
consideration of the parties’ arguments, the Motions, Oppositions,
Replies, and the entire record herein, and for the reasons set
forth below, the Motions for Leave to File are granted in part, and
denied in part.
I. Background
This action arises from Old Waste’s announcement on February
24, 1998 that it was restating several of its financial statements
2
On January 16, 1998, Old Waste and Waste Services, Inc.,
merged to become New Waste. On January 1, 1999, the Old Waste Plan
was merged with the USA Waste Services, Inc. Employee’s Savings
Plan to become the Waste Management Retirement Savings Plan (“New
Waste Plan”).
2
for periods between 1991 and 1997 and that, prior to 1992 and
continuing through the first three quarters of 1997, it had
materially overstated its reported income by $1.43 billion. That
announcement led to a securities class action in the Northern
District of Illinois, which settled on September 17, 1999. In
1999, after Old Waste merged with Waste Services, Inc. to become
New Waste, New Waste announced further after-tax charges and
adjustments of $1.23 billion. The announcement led to the filing
of additional securities class action complaints against New Waste
and certain of its officers and directors in the Southern District
of Texas, which settled on April 29, 2002. Both settlements
included the Plans and its fiduciaries within the scope of the
class.
On February 2, 2005, Plaintiffs filed their Third Amended
Complaint in this action, alleging ten counts of ERISA violations.
The claims were divided into three periods. First, Plaintiffs
alleged five ERISA violations related to the Plan’s purchase of
inflated shares of company stock in the first claim period between
January 1, 1990 and February 24, 1998 (Counts I-V). Second,
Plaintiffs alleged four ERISA violations related to the release of
claims by the Old Waste Plan’s fiduciaries in the Illinois
securities litigation (Counts VI-IX) in the second claim period.
Third, Plaintiffs alleged one ERISA violation in the third claim
period related to the release of claims by the New Waste Plan’s
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trustee--Defendant State Street--in the Texas securities
litigation.
In this Court’s March 12, 2009 Order [Dkt. No. 218], Counts I-
V were dismissed as time-barred under ERISA § 413 because
Plaintiffs had “actual knowledge of the breach or violation” more
than three years before filing the original Complaint. March 12,
2009 Order at 26. The Order also rejected Plaintiffs’ argument
that the three-year limitation should be tolled, finding that
Defendants’ failure to disclose material information was
insufficient to establish fraud or concealment under ERISA. Id. at
27-29. In the Motion for Leave to File a Fourth Amended Complaint,
Plaintiffs request leave to amend their Complaint to include new
facts that establish acts of fraud or concealment by Defendants--
namely, that certain Old Waste Plan fiduciaries “fraudulently
misstated, or caused to be fraudulently misstated, material
financial information contained in disclosures required by ERISA
and the 1934 Act.” Substitute Fourth Amended Complaint at ¶ 79.
Plaintiffs also seek to add Counts XI and XII, both of which
relate to the third claim period covering the Texas securities
litigation. The Third Amended Complaint currently includes one
count (Count X) related to this period, which alleges that
Defendant State Street breached its fiduciary duties under ERISA §
404 by releasing the ERISA claims in the Texas litigation without
first conducting an adequate review, and without adequate
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consideration. Count XI would further allege that State Street
caused the New Waste Plan to engage in a prohibited exchange with
New Waste, a party in interest, by releasing the claims. Count XII
would allege that State Street, along with Defendants New Waste
Investment Committee and its individual Trustee Members, breached
their fiduciary duties by enabling each other (as co-fiduciaries)
to commit the violations described in Counts X-XI.
Finally, in the Motion for Leave to File a Substitute Fourth
Amended Complaint, Plaintiffs seek to add Counts XIII and XIV.
These counts stem from Defendants’ statement, made in the course of
opposing the Motion to add Counts XI and XII, that Defendant State
Street was released from all third period claims because it was
acting as an “agent” of New Waste. Each count alleges that such a
principal-agent relationship conflicts with State Street’s
fiduciary obligations, and so State Street’s participation in the
Illinois and Texas settlements constitutes prohibited self-dealing
in violation of ERISA § 406(b), 29 U.S.C. § 1106(b).
In opposing the Motions, Defendants argue that all nine counts
are barred by the statute of limitations contained in § 413 of
ERISA. Defendants further argue that the Motions for leave to
amend should be denied because of the undue delay in adding Counts
I-V, XI, and XII and the prejudice that would follow from
permitting amendment at this point in the proceedings.
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II. Standard of Review
Under Rule 15(a), after amending as a matter of course “a
party may amend its pleading only with the opposing party's written
consent or the court's leave.” Fed. R. Civ. P. 15(a). “In the
absence of any apparent or declared reason--such as undue delay,
bad faith or dilatory motive on the part of the movant, repeated
failure to cure deficiencies by amendments previously allowed,
undue prejudice to the opposing party by virtue of allowance of the
amendment, futility of amendment, etc.--the leave sought should, as
the rules require, be freely given.” Foman v. Davis, 371 U.S. 178,
182, 83 S.Ct. 227, 230 (U.S. 1962); Atchinson v. District of
Columbia, 73 F.3d 418, 425-26 (D.C. Cir. 1996); Caribbean Broad.
Sys., Ltd. v. Cable & Wireless P.L.C., 148 F.3d 1080, 1083-85 (D.C.
Cir. 1998).
When a party amends its complaint to add a claim or defendant,
the statute of limitations may bar the amendment unless it “relates
back” to the original complaint, in which case the date of the
original pleading is used. Under Federal Rule of Civil Procedure
15(c):
[A]n amendment to a pleading relates back to the date
of the original pleading when: (A) the law that
provides the applicable statute of limitations allows
relation back; (B) the amendment asserts a claim or
defense that arose out of the conduct, transaction, or
occurrence set out--or attempted to be set out--in the
original pleading; or (C) the amendment changes the
party or the naming of the party against whom a claim
is asserted . . . .
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Fed. R. Civ. P. 15(c).
Relation back is improper when the amended claim "asserts a
new ground for relief supported by facts that differ in both time
and type from those the original pleading set forth." Mayle v.
Felix, 545 U.S. 644, 650, 125 S.Ct. 2562, 162 L.Ed.2d 582 (2005);
see also Jones v. Bernanke, 557 F.3d 670, 674 (D.C. Cir. 2009)
(“[A]ttempts to introduce a new legal theory based on facts
different from those underlying the timely claims does not relate
back”) (internal quotation and citation omitted). Instead, “[t]he
underlying question is whether the original complaint adequately
notified the defendants of the basis for liability the plaintiffs
would later advance in the amended complaint.” Meijer, Inc. v.
Biovail Corp., 533 F.3d 857, 866 (D.C. Cir. 2008).
III. Analysis
First, Plaintiffs seek to revive Counts I-V, which were
dismissed as time-barred in the March 12, 2009 Order, in the Motion
for Leave to File a Fourth Amended Complaint. Second, Plaintiffs
seek leave to add Counts XI and XII against Defendants State
Street, the New Waste Investment Committee, and the Committee’s
individual trustee members. Third, Plaintiffs seek to add Counts
XIII and XIV against Defendant State Street in the Motion for Leave
to File a Substitute Fourth Amended Complaint.
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A. Plaintiffs Are Granted Leave to Revive Counts I-V
Counts I-V allege the Old Waste fiduciaries’ liability for
their conduct during the years in which the Old Waste Plan
purchased and maintained shares of Old Waste stock at artificially
inflated prices. These claims were dismissed as time-barred in the
March 12, 2009 Order under the three-year limitations period.
March 12, 2009 Order at 26. Section 413 of ERISA sets forth the
statute of limitations for ERISA violations:
No action may be commenced under this subchapter with
respect to a fiduciary's breach of any responsibility,
duty, or obligation under this part, or with respect
to a violation of this part, after the earlier of (1)
six years after (A) the date of the last action which
constituted a part of the breach or violation, or (B)
in the case of an omission the latest date on which
the fiduciary could have cured the breach or
violation, or (2) three years after the earliest date
on which the plaintiff had actual knowledge of the
breach or violation; except that in the case of fraud
or concealment, such action may be commenced not later
than six years after the date of discovery of such
breach or violation.
29 U.S.C. § 1113 (2008) (emphasis added).
Plaintiffs now seek leave to amend Counts I-V to add
allegations of fraud or concealment in order to use the six-year
tolling provision. The parties agreed at the motions hearing that,
if the tolling provision is found to apply, Plaintiffs’ discovery
of the violations alleged in Counts I-V is February 24, 1998, the
date on which Old Waste announced the accounting irregularities.
8
Leave to amend to cure deficiences in pleading fraud is
favored in this Circuit. See, e.g., Firestone v. Firestone, 76
F.3d 1205, 1209 (D.C. Cir. 1996). Under Rule 9(b), “[i]n alleging
fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake. Malice, intent,
knowledge, and other conditions of a person's mind may be alleged
generally.” Fed. R. Civ. P. 9(b) (2007). This Court is satisfied
that Plaintiffs have stated the circumstances constituting fraud--
namely, the fraudulent misstatements made by Plan fiduciaries in
public filings--in the Substitute Fourth Amended Complaint with
sufficient particularity to satisfy Rule 9(b).
There also is no sufficiently compelling reason to deny leave
to amend. As only four months have passed between this Court’s
order dismissing Counts I-V and the Motion for Leave to File a
Fourth Amended Complaint, there is no indication of Plaintiffs’
undue delay, bad faith, dilatory motive, or repeated failure to
cure this deficiency in previous amendments.
Finally, Defendants argue that, under the fraudulent
concealment doctrine, Plaintiffs’ actual knowledge of the
underlying claims prevents application of the six-year tolling
provision for fraud or concealment, and so Counts I-V are still
time-barred. Given the significance and dispositive nature of
Defendants’ argument, the briefings and argument on this subject
were not sufficiently clear or convincing to deny the Motions for
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Leave to File at this early point in the history of the proposed
amendments. Further development is needed on the issue of whether,
and how, § 413’s six-year tolling provision for fraud or
concealment applies when a plaintiff gained actual knowledge of the
violation after it had ceased, and only upon the defendant’s
voluntary disclosure of the information. In short, the Court
defers ruling on the merits of Defendants’ statute of limitations
argument, which is better addressed in a motion to dismiss.
Therefore, the Motion for Leave to amend Counts I-V in order
to add sufficient allegations of fraud or concealment is granted.
While relatively short delays will undoubtedly follow this
decision, given the likelihood of Defendants’ filing a motion to
dismiss, the Court is aware that counsel have been working
cooperatively and productively on discovery, and anticipates that
they will continue to do so.
B. Plaintiffs Are Denied Leave to Add Counts XI and XII
In the Motion for Leave to File A Fourth Amended Complaint,
Plaintiffs also seek to add two new claims relating to the third
claim period. Count XI alleges that Defendant State Street engaged
in a prohibited exchange of choses in action between the New Waste
Plan and New Waste in violation of ERISA § 406(a)(1)(A), and Count
XII alleges that Defendant State Street, as well as Defendants New
Waste Investment Committee and its individual trustee members--
named as Defendants for their conduct in the third claim period for
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the first time--enabled their co-fiduciaries to commit ERISA
violations in the third claim period in violation of ERISA §§
405(a)(2) and (3).
Defendants argue that the Court has discretion to deny
amendment on the grounds of undue delay and prejudice because
Plaintiffs could have alleged these claims in the Third Amended
complaint filed in 2005. At the motions hearing, Plaintiffs
conceded that, while Counts XI and XII may not have been fully ripe
when the Third Amended Complaint was filed in February 2005, over
four years ago, there was no legal bar that prevented them from
filing. Had the claims had been filed at that time, they would
have been addressed in Defendants’ Motion to Dismiss the Third
Amended Complaint, which was decided in the March 12, 2009 Order.
There is no justification for Plaintiffs having waited over
four years to bring these claims. While the case law indicates
that, “[a]bsent evidence of prejudice, delay . . . cannot justify
denying a motion to amend to clarify the legal basis for a
complaint,” this is an old, complex case and permitting two new
counts will drag it out even further. Harrison v. Rubin, 174 F.3d
249, 250, (D.C. Cir. 1999). Moreover, Count XII carries real
prejudice to the New Waste Investment Committee and its individual
members, who were not previously given notice that they would be
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held liable for their conduct in the third claim period. Thus, the
Motion for Leave to add Counts XI and XII is denied.3
C. Plaintiffs Are Granted Leave to Add Counts XIII and XIV
Finally, in the Motion for Leave to File a Substitute Fourth
Complaint, Plaintiffs seek leave to add two new counts. These
claims arise from the argument, made by Defendants in their
Opposition to the Motion for Leave to File a Fourth Amended
Complaint, that Defendant State Street was released from liability
for Counts XI and XII under the terms of the settlement agreement
entered in the Texas securities litigation. Opp’n to Motion for
Leave to File A Fourth Amended Complaint at 18-19. Specifically,
Defendants argue that State Street qualified as an “agent” of New
Waste under the terms of the settlement agreement, and thus was a
“Releasee,” as defined in that agreement.
Given the conflicts that could arise from a Plan trustee being
subject to such a principal-agent relationship during the course of
settlement negotiations, Plaintiffs seek leave to add two new
counts alleging that Defendant State Street’s participation in the
Illinois and Texas settlements constituted prohibited self-dealing
in violation of ERISA § 406(b).4 The Waste Management Defendants’
3
Because the Motion is denied on grounds of undue delay and
prejudice, Defendants’ argument that Counts XI and XII are time-
barred because they do not relate back to the Third Amended
Complaint need not be addressed.
4
Count XIII addresses Defendant State Street’s involvement in
the Illinois litigation, while Count XIV addresses Defendant State
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main argument in response addresses the definition of “agent” under
the Illinois and Texas settlement agreements, and whether Defendant
State Street was capable of exercising independent judgment despite
being an agent of Old Waste and New Waste. Waste Management Defs.’
Opp’n to Motion for Leave to File a Substitute Fourth Amended
Complaint at 3-4 [Dkt. No. 260]. At this point, discovery is
needed on this issue, and Defendants’ argument would be better
addressed in a more fully fleshed out motion to dismiss.
Defendants also argue, however, that these claims are time-
barred under ERISA § 413 because Plaintiffs were put on notice of
the alleged principal-agent relationship years ago by the New Waste
Plan’s Master Trust Agreement.5 Plaintiffs respond that they “knew
that State Street was a fiduciary, but [] did not know that State
Street purported to act as an agent of Waste.” Reply to Opp’n to
Motion for Leave to File A Substitute Fourth Amended Complaint at
Street’s involvement in the Texas litigation.
5
Defendants also rely on various allegations made by
Plaintiffs in 2002 that State Street’s participation in the Texas
settlement was a prohibited transaction under § 406(a) to argue
Plaintiffs’ actual knowledge. Opp’n to Motion for Leave to File a
Substitute Fourth Amended Complaint at 4-7 [Dkt. No. 259].
However, this argument is unpersuasive because Counts XIII and XIV
allege prohibited transactions under § 406(b), not § 406(a). The
§ 406(a) violations alleged in 2002 are based on a different set of
facts: the prohibited exchange of the ERISA claims with a party in
interest. A § 406(b) violation, in contrast, occurs when a
fiduciary acts on behalf of or represents a party whose interests
are adverse to beneficiaries. 29 U.S.C. § 1106(b) (2008). Thus,
the 2002 allegations do not demonstrate Plaintiffs’ actual
knowledge of the principal-agent relationship.
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4 [Dkt. No. 267]. Further, because Plaintiffs seek leave to add
these claims in 2009, over six years since the Texas litigation was
settled, they must allege fraud or concealment with particularity
in order to rely on the six-year tolling provision, which runs from
the date of Plaintiffs’ discovery of the allegedly prohibited
relationship between Defendant State Street and the company. 29
U.S.C. § 1113 (2008) (“[I]n the case of fraud or concealment, such
action may be commenced not later than six years after the date of
discovery of such breach or violation.”) (emphasis added).
The reasoning applied to the statute of limitations argument
above, supra Part III.A, applies equally here. At this point in
the early history of Counts XIII and XIV, and given the
significance and dispositive nature of Defendants’ statute of
limitations argument, the arguments presented at the hearing and in
the parties’ briefs are not sufficiently developed to warrant
denying Plaintiffs’ Motion. Clarification is needed on when
Plaintiffs first learned of the principal-agent relationship, what
the scope and nature of that relationship was, and whether
Plaintiffs must allege more than the fact of the relationship to
make out a claim under ERISA § 406(b). Thus, the Motion for Leave
to File a Substitute Fourth Amended Complaint is granted without
addressing Defendants’ statute of limitations argument, which they
are free to raise in a motion to dismiss.
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IV. CONCLUSION
For the reasons set forth above, Plaintiffs’ Motion for Leave
to File a Fourth Amended Complaint is granted with respect to
Counts I-V, and denied with respect to Counts XI and XII. The
Motion for Leave to File a Substitute Fourth Amended Complaint is
granted with respect to Counts XIII and XIV.
In the interest of ensuring that this case continues to move
forward at an appropriate pace, any motion to dismiss must be filed
no later than January 15, 2010. Oppositions to any motion to
dismiss will be due by February 15, 2010, and the reply by March 1,
2010. Because brevity often forces parties to better focus their
arguments, the motions and oppositions are limited to thirty pages
each, and the reply to fifteen pages.
An Order will accompany this Memorandum Opinion.
/s/
December 14, 2009 Gladys Kessler
United States District Judge
Copies to: attorneys on record via ECF
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