Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-00795/USCOURTS-caed-2_06-cv-00795-4/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 29:1132 E.R.I.S.A.-Employee Benefits

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This case was determined to be suitable for decision *

without oral argument. L.R. 78-230(h). 

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

JEFF EVANSON; LES OESTERREICH; and ) 2:06-cv-0795-GEB-KJM

KAREN O’BRINE, trustees of the )

Transhumance Employee Stock Plan, ) 

)

Plaintiffs, )

)

v. ) ORDER*

)

WILLIAM J. PRICE; MARY ELLEN )

BREEN, in her capacity as )

personal representative of the )

estate and as beneficiary of )

DENNIS J. BREEN, deceased; and )

THOMAS WATSON, )

)

Defendants. )

 )

Defendants move to dismiss Plaintiffs’ Complaint under

Federal Rule of Civil Procedure 12(b)(6), arguing that Plaintiffs'

claims are barred by the statute of limitations. Plaintiffs oppose

the motion arguing, inter alia, that they meet the requirements of the

fraud or concealment exception to the statute of limitations. For the

following reasons, Defendants’ motions will be denied. 

///

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Mary Ellen Breen is being sued in her capacity as the 1

personal representative/administrator/executor of former Trustee

and CEO, Dennis J. Breen’s estate and as his heir/successor-ininterest/beneficiary. (Pls.’ Second Am. Compl. ¶ 15.) 

Under the Employee Retirement Income Security Act 2

(“ERISA”), 404(a), 29 U.S.C. § 1104(a), fiduciaries are subject to

the “prudent man standard of care” and may be liable for breach of

this duty under ERISA 409(a), 29 U.S.C. § 1109(a). Fiduciaries are

also subject to co-fiduciary liability under ERISA 405(a), 29

U.S.C. § 1105(a).

ERISA § 407(d)(6), 29 U.S.C. § 1107(d)(6) prescribes: 3

“[t]he term ‘employee stock ownership plan’ means an individual

account plan–(A) which is a stock bonus plan which is qualified, or

a stock bonus plan and money purchase plan both of which are

qualified, under section 401 of Title 26, and which is designed to

invest primarily in qualifying employer securities, and (B) which

meets such other requirements as the Secretary of Treasury may

prescribe by regulation.” 

2

BACKGROUND

The original Complaint was filed on April 12, 2005. On

June 13, 2006, Plaintiffs filed a Second Amended Complaint in which

they assert that Defendants William J. Price (“Price”), Mary Ellen

Breen (“Breen”) and Thomas Watson (“Watson”), “in their capacities as 1

fiduciaries to the [Transhumance Employee Stock Ownership Plan

(“ESOP”)] breached their ERISA fiduciary duties of loyalty and

prudence to the ESOP to enrich themselves at the expense of the plan

and its participants.” (Pls.’ Second Am. Compl. ¶¶ 85-86.) 2

The pertinent allegations in the Complaint are as follows.

The ESOP is a tax-qualified retirement plan under Internal Revenue

Code § 401(a) and an employee stock ownership plan under ERISA

§ 407(d)(6), 29 U.S.C. § 1107(d)(6). ESOP is the sole shareholder of 3

the Transhumance Holding Company, Inc. (the “Company”) which owns

several subsidiaries in the meat production business. (Id. ¶¶ 3-4.) 

Defendants were the ESOP’s trustees at the time of the events alleged

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ERISA § 402(a), 29 U.S.C. § 1102(a) prescribes: “(a) 4

Named fiduciaries (1) Every employee benefit plan shall be

established and maintained pursuant to a written instrument. Such

instrument shall provide for one or more named fiduciaries who

jointly or severally shall have authority to control and manage the

operation and administration of the plan. (2) For purposes of this

subchapter, the term ‘named fiduciary’ means a fiduciary who is

named in the plan instrument, or who, pursuant to a procedure

specified in the plan, is identified as a fiduciary (A) by a person

who is an employer or employee organization with respect to the

plan or (B) by such an employer and such an employee organization

acting jointly.” ERISA § 3(21), 29 U.S.C. § 1002(21) provides, in

relevant part: “[A] person is a fiduciary with respect to a plan to

the extent (i) he exercises any discretionary authority or

discretionary control respecting management of disposition of its

assets, (ii) he renders investment advice for a fee or other

compensation . . . or (iii) he has any discretionary authority or

discretionary responsibility in the administration of such plan.”

The Board of Directors was composed of the three 5

Defendants and two non-employees, James Fletcher and Jon Legallet.

(Pls.’ Second Am. Compl. ¶ 40.) 

3

as well as members of ESOP’s Administrative Committee and as such were

“named fiduciaries” of ESOP under ERISA § 402(a), 29 U.S.C. § 1102(a)

and were fiduciaries to ESOP under ERISA § 3(21), 29 U.S.C. 

§ 1002(21). (Id. ¶ 6.) Defendants were also members of Company’s 4

Board of Directors and its top officers (Breen was CEO; Price was CFO;

and Watson was Procurement Manager/General Manager). (Id. ¶¶ 14-16.) 5

In 1995, Breen and Price, acting on behalf of the Company,

had the ESOP’s third-party plan administrator, BSI ESOP/401(k)

Consultants & Administrators (“BSI”), design a new compensation plan

for the executives. (Id. ¶ 26.) BSI produced a compensation report

in October of 1995 that recommended, inter alia, the adoption of an

equity appreciation plan called a Value Enhancement Incentive Feature

(“VEI Plan”) in which Breen, Price and Watson would be the sole

participants. (Id. ¶ 29.)

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“Because of their conflict of interest, the Trustees were 6

required to retain an independent trustee who would evaluate the

VEI Plan (presumably with the assistance of an independent

financial advisor) and approve of it only upon determining that the

VEI Plan was fair to the ESOP.” (Pls.’ Second Am. Compl. ¶ 42.) 

4

The VEI Plan was composed of a VEI Pool Participation Right

and a Tax Gross-Up Benefit. The VEI Pool Participation Right

determined that 30% of the future appreciation in value of Company

stock over a four-year period would be contributed to a pool and

allocated among Breen, Price and Watson. Upon the expiration of the

four-year vesting period, Defendants’ VEI Pool Participation Rights

would be paid out in shares of Class C Company stock. (Id. ¶ 30.) 

Under the Tax Gross-Up Benefit plan, the Company would pay Defendants

an amount equal to the anticipated federal and state taxes that would

be owed on the VEI Pool Participation Right, so that the Defendants’

benefits would not be diminished. (Id. ¶ 31.) 

In November 1996, the Board of Directors adopted the VEI

Plan unanimously; Defendants formally abstained from voting. (Id.

¶¶ 33, 40.) Despite the fact that the Plan was formally adopted in

November 1996, the VEI Plan was effective as of May 1, 1995. (Id.

¶ 34.)

Defendants retained an independent trustee, the firm of

Watson Wyatt WorldWide (“Watson Wyatt”), to evaluate the fairness of

the VEI Plan to the ESOP as a result of their conflict of interest.6

(Id. ¶ 44.) Watson Wyatt concluded that Defendants’ total cash

compensation, including their annual salaries and bonuses, but

excluding the VEI Plan benefits, exceeded market compensation rates by

approximately thirty to fifty percent, varying with each Defendant. 

When the VEI Plan benefits were considered in addition to the annual

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The Compensation Committee included Breen, Fletcher and 7

Legallet. (Pls.’ Second Am. Compl. ¶ 40.) 

5

salaries and bonuses, Breen’s compensation became more than double

that of the market, Price’s was two-and-a-third times the market and

Watson’s was two-and-three quarters times the market. (Id. ¶ 46.) As

a result, Watson Wyatt strongly recommended that the Defendants and

the Compensation Committee reconsider adopting the VEI Plan and 7

consider modifications that would bring it in line with market rates. 

Furthermore, Watson Wyatt stated that the compensation package might

harm the ESOP and raise issues for ESOP’s fiduciaries. (Id. ¶ 47.) 

This information was conveyed to Defendants in identical

seven-page letters. (Id. ¶ 44.) Breen’s letter was dated August 23,

1996; Price and Watson’s letters were dated August 26, 1996. (Id.) 

Defendants concealed the Watson letters by placing them in a file in

Breen’s office that was inaccessible to others and by keeping secret

the existence and contents of the letters. No one other than

Defendants and Wyatt Watson had knowledge of these letters. (Id.

¶ 49.) Plaintiff Evanson learned of the letters in 2006 when he

discovered them among Breen’s files remaining at the Company, and

Oesterreich and O’Brine learned of the letters thereafter. (Id. 

¶ 50.)

The VEI Plan was amended in 1998, when the Company decided

to elect “S” corporation status, which required the Company and ESOP

to make changes to the capital structure of the Company and

corresponding modifications to the VEI Plan. (Id. ¶ 52.) Under the

original VEI Plan, the Pool Participation Rights were to be redeemed

by the Company no later than May 1, 1999, in shares of Class C stock

which Defendants then had a right to require the Company to

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This date reflects a subsequent amendment to the SAR 8

Plan. The original amended date was May 1, 1999. (Pls.’ Second Am.

Compl. ¶ 55.)

6

repurchase. (Id. ¶ 53.) The Plan was amended in 1998 to, inter alia,

re-characterize the VEI Pool Participation Rights as Stock

Appreciation Rights (“SARs”), to change the name of the VEI Plan to

the Deferred Stock Appreciation Rights Plan (the “SAR Plan”), and to

make the SARs redeemable in cash on two redemption dates, the first

being October 31, 1998, up to a specified amount in value, the second

being March 31, 1999, for the remaining value, as well as to grant 8

the Company the right to defer the second redemption date for up to 10

years. (Id. ¶ 54.)

The SAR Plan provided that the 1999 redemption value would

be calculated “as of” the 1999 redemption date and that this valuation

would be prepared by an independent appraiser. (Id. ¶ 56.) The

Company commissioned Houlihan, Lokey, Howard & Zukin (“Houlihan”),

ESOP’s appraiser, to value it as of March 31, 1999, and to prepare a

report that would be used to determine the 1999 redemption value. 

Houlihan’s report valued the Company’s stock at $31,700,000 as of

March 31, 1999. (Id. ¶¶ 57-58.) Defendants were actively involved in

inflating this original 1999 valuation of $31,700,000 to a revised

valuation of $33,000,000 that Houlihan made on or about October 11,

1999. (Id. ¶¶ 64, 70.) Defendants did this by knowingly furnishing

Houlihan with unreliable and/or erroneous financial information and

pressuring it into recognizing, in the March 31, 1999 valuation, three

years of “tax savings” to the Company, rather than only one year, in

connection with the Company’s S corporation election. (Id. ¶¶ 64,68.)

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All subsequent references to Rules are to the Federal 9

Rules of Civil Procedure. 

7

Finally, in 1999, pursuant to one of the features of the SAR

Plan, the Company elected to defer the March 31, 1999 redemption,

allowing interest to accrue on the unpaid SARs. Thereafter, Price, as

CFO, caused the Company to accrue interest not only on the deferred

SARs, but also on the Tax Gross-Up Benefit which amounted to $300,000

to $400,000 in annual interest. (Id. ¶ 76.) This was contrary to the

intent of the Tax Gross-Up Benefit which was only designed to ensure

that Defendants’ payments would not be diminished by taxes and was not

designed to provide Defendants with an additional principal benefit. 

(Id. ¶¶ 76-77.) Price made this decision without consulting anyone. 

(Id. ¶ 78.) When the Compensation Committee was finally apprised of

the situation, it “made a formal determination under the SAR Plan that

the interest component was intended to apply only to the SARs and not

to the Tax Gross-Up Benefit.” (Id. ¶¶ 81). Plaintiff Evanson first

learned of these interest accruals in 2004 and Plaintiffs Oesterreich

and O’Brine learned of them thereafter. (Id.) Evanson reviewed the

original and revised versions of the 1999 valuation and began to

discover amounts that appeared to have no financial justification or

support. (Id.) Oesterreich and O’Brine only learned of these facts

after Evanson did. (Id.) 

DISCUSSION

Dismissal is appropriate under Rule 12(b)(6) if Plaintiffs

failed (1) to present a cognizable legal theory, or (2) to plead

sufficient facts to support a cognizable legal theory. Robertson v. 9

Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). 

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8

When considering a motion to dismiss, all material allegations in the

Complaint must be accepted as true and construed in the light most

favorable to Plaintiffs. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974);

Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996).

In addition, Plaintiffs are given the benefit of every reasonable

inference that can be drawn from the allegations in their Complaint. 

Retail Clerks Int’l Ass’n v. Shermahorn, 373 U.S. 746, 753 n.6 (1963). 

Accordingly, a motion to dismiss must be denied “unless it appears

beyond doubt that [Plaintiffs] can prove no set of facts in support of

[their] claim which would entitle [them] to relief.” Conley v.

Gibson, 355 U.S. 41, 45-46 (1957). 

I. The Statute of Limitations 

Defendants argue that Plaintiffs' claims are barred by each

prong of ERISA’s statute of limitations that governs actions for

breach of fiduciary duty. (Def. Price’s Mot. at 5, Def. Watson’s Mot.

at 2, Def. Breen’s Mot. at 1.) 

ERISA’s statute of limitations prescribes: 

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

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the date of discovery of such breach or

violation. 

ERISA § 413(1), 29 U.S.C. §1113.

“To apply the limitations period ... the underlying

violation upon which [Plaintiffs’] claim is founded” must be isolated

and defined. Meahger v. Int’l Ass’n of Machinists and Aerospace

Workers Pension Plan, 856 F.2d 1418, 1422 (9th Cir. 1988). 

Plaintiffs allege a breach of ERISA fiduciary duties. The underlying

violation, or “[t]he core of the plaintiffs’ breach of fiduciary duty

claim” is that Defendants concealed material information;

specifically, the Watson Wyatt letters. Cetel v. Kirwan Financial

Group, Inc., 460 F.3d 494, 511 (3rd Cir. 2006). Plaintiffs allege

these letters constituted material information because had they been

revealed to the Company, the VEI Plan would have been abandoned;

Defendants would not have received millions of dollars in

compensation; and the ESOP would not have allegedly suffered millions

of dollars in losses. (Pls.’ Second Am. Compl. ¶ 89.)

A. The Fraud or Concealment Exception

In cases of fraud or concealment, ERISA § 413(1), 29 U.S.C.

§ 1113(1) provides for tolling of the statute of limitations until the

date of discovery, at which point it begins to run for up to six

years. Defendants argue that Plaintiffs are not entitled to this

exception. (Def. Price’s Mot. at 6, Def. Watson’s Mot. at 10, Def.

Breen’s Mot. at 8.) 

A claim falls within the fraud or concealment exception if

an ERISA fiduciary either “‘misrepresent[s] the significance of facts

the beneficiary is aware of (fraud) or ... hid[es] facts so that the 

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beneficiary never becomes aware of them (concealment).’” Barker v.

American Mobil Power Corp., 64 F.3d 1397, 1401 (9th Cir. 1995), see

also DeFazio v. Hollister Employee Share Ownership, 406 F.Supp. 2d

1085, 1094 (E.D.Cal. 2005) (citing Radiology Ctr., S.C. v. Stifel,

Nicolaus & Co., 919 F.2d 1216, 1220 (7th Cir. 1990)). This exception

incorporates the common law doctrine of fraudulent concealment, “which

tolls the running of a statute of limitations when the defendant has

prevented the plaintiff’s timely discovery of the wrong she has

suffered.” Radiology Ctr., S.C., 919 F.2d at 1221. “The relevant

question is therefore not whether the complaint ‘sounds in

concealment,’ but rather whether there is evidence that the defendant

took affirmative steps to hide its breach of fiduciary duty.” Kurz v.

Philadelphia Elec. Co., 96 F.3d 1544, 1552 (3rd Cir. 1996) (citing

Barker 64 F.3d at 1402).

Plaintiffs allege that Defendants concealed the Watson Wyatt

letters in Breen’s office and as a consequence, enriched themselves

personally with compensation to which they were not entitled, causing

the ESOP to suffer millions of dollars in losses. (Pls’ Second Am.

Compl. ¶¶ 88-89.) The alleged concealment of the Watson Wyatt letters

is evidence that Defendants “took affirmative steps to hide [their]

breach of fiduciary duty.” Kurz, 96 F.3d at 1552. Accordingly,

taking Plaintiffs’ allegations as true, as required under the Rule

12(b)(6) dismissal standard, Defendants’ alleged breaches fall within

the fraud or concealment exception of the statute of limitations since

Plaintiffs allege that Evanson only first learned of the Watson Wyatt

letters in 2006 when he discovered them among Defendant Breen’s files 

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remaining at the Company and that Oesterreich and O’Brine only learned 

of them thereafter. (Pls.’ Second Am. Compl. ¶ 50.) 

Defendants further argue that Plaintiffs have not

sufficiently pled the elements of fraud or concealment as Rule 9(b)

requires. (See Def. Breen’s Mot. at 12, Def. Watson’s Mot. at 12, Def.

Price’s Mot. at 7.) Fraudulent concealment is a component of

Plaintiffs’ ERISA breach of fiduciary duty claim and Rule 9(b)

prescribes that “all averments of fraud or mistake, [and] the

circumstances constituting fraud or mistake shall be stated with

particularity.” Pleading is sufficient under Rule 9(b) if it

identifies “‘the circumstances constituting fraud so that the

defendant can prepare an adequate answer from the allegations.’” 

Gottreich v. San Francisco Investment Corp., 552 F.2d 866, 866 (9th

Cir. 1977) (quoting Walling v. Beverly Enter., 476 F.2d 393, 397 (9th

Cir. 1973)). Statements of the time, place and nature of the alleged

fraudulent activities are sufficient. Wool v. Tandem Computers Inc.,

818 F.2d 1433, 1440 (9th Cir. 1987) (citing Semegen v. Weidner, 780

F.2d 727, 735 (9th Cir. 1985); Bosse v. Crowell Collier & Macmillian,

565 F.2d 602, 611 (9th Cir. 1977)). Plaintiffs’ claim is sufficiently

pled under this standard. 

B. The California Decedent Statute of Limitations

Defendant Breen argues that Plaintiffs’ claim against her is

barred by the California decedent statute of limitations, since Dennis

Breen, Defendant Breen’s late husband, passed away in July 2004.

(Pls.’ Second Am. Compl. ¶ 4.) The California decedent statute of

limitations requires any claim against a decedent’s estate to be

brought within one year after the date of death, regardless of any 

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other statute of limitations, thereby barring all claims against

Defendant Breen as of July 2005. See Cal. Civ. Proc. Code § 366.2,

Def. Breen’s Mot. at 2. 

Plaintiffs counter that their breach of fiduciary duty claim

survives Dennis Breen’s death notwithstanding the California decedent

statute of limitations because of ERISA’s express pre-emption clause. 

(Pls.’ Opp’n at 32.) ERISA’s express pre-emption clause states that

ERISA “shall supersede any and all State laws insofar as they may now

or hereafter relate to any employee benefit plan ....” ERISA § 514(a),

29 U.S.C. § 1144(a). 

The Supreme Court held in Boggs that when a “direct clash

[exists] between state law and the provisions and objectives of ERISA,

the state law cannot stand.” Boggs v. Boggs, 520 U.S. 833, 844

(1997). “We can begin, and in this case end, the analysis by simply

asking if state law conflicts with the provisions of ERISA or operates

to frustrate its objects.” Id. at 841. Where this conflict exists,

analysis ends, and inquiry is unnecessary as to “whether the [ERISA]

statutory phrase ‘relate to’ provides further and additional support

for the pre-emption claim. Nor need we consider the applicability of

field pre-emption.” Id. “In enacting ERISA, Congress set out to

protect participants in employee benefit plans by establishing

standards of conduct, responsibility, and obligations for fiduciaries

of employee benefit plans, and by providing for appropriate remedies.” 

Arizona State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715,

719 (9th Cir. 1997). The California decedent statute of limitations,

by shortening the time period within which a cause of action can be

brought against an ERISA fiduciary, conflicts with the ERISA statute 

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of limitations at issue and would operate to limit available remedies

under ERISA and thereby frustrate its purpose. To the extent that

California’s decedent statute of limitations conflicts with ERISA’s

statute of limitations, it is pre-empted. Therefore, Plaintiffs’

claim against Defendant Breen is timely. 

For the stated reasons, the dismissal motions are denied. 

IT IS SO ORDERED. 

Dated: September 29, 2006

/s/ Garland E. Burrell, Jr.

GARLAND E. BURRELL, JR.

United States District Judge

 

 

 

 

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