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Malcolm v. Trilithic, Inc.

United States District Court, Southern District of Indiana, Indianapolis Division

March 31, 2014

BRUCE MALCOLM Individually and as trustee for the Revocable Inter Vivos Trust for the benefit of Bruce G. Malcolm, dated March 11, 1996, Plaintiff,
v.
TRILITHIC, INC., TRILITHIC, INC. EMPLOYEE STOCK OWNERSHIP PLAN, HORIZON BANK, N.A. doing business as HORIZON TRUST & INVESTMENT MANAGEMENT; As Trustee for the Trilithic, Inc. Employee Stock Ownership Plan, BENEFITS COMMITTEE For the Trilithic, Inc. Employee Stock Ownership Plan, TERRY BUSH, GREGG RODGERS, JEFFREY HALE, JERI WOODCOCK, Defendants.

ORDER ON DEFENDANTS’ MOTIONS TO DISMISS

SARAH EVANS BARKER, JUDGE United States District Court Southern District of Indiana

This cause is now before the Court on Defendants’ (two) Motions to Dismiss [Docket Nos. 31 and 32], filed on April 15, 2013, pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff Bruce Malcolm brings this claim against Defendant Trilithic, Inc., and the Benefits Committee for Trilithic Inc. Employee Stock Ownership Plan, Terry Bush, Greg Rodgers, Jeffrey Hale, and Jeri Woodcock (collectively, “the Trilithic Defendants”), as well as the Trilithic, Inc. Employee Stock Ownership Plan (“the Plan”) and Horizon Bank, N.A. d/b/a Horizon Trust & Investment Management (“Horizon”), alleging various claims under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001, et seq. Mr. Malcolm also alleges state law claims for criminal mischief and fraudulent inducement. For the reasons detailed in this entry, both motions to dismiss are GRANTED IN PART and DENIED IN PART.

Factual Background

Trilithic is an Indiana corporation headquartered in Indianapolis, Indiana, that manufactures and designs customer-directed products for telecommunications, military, and industrial customers. It is a closely held corporation with approximately 132 employees. Plaintiff Bruce Malcolm and Defendant Terry Bush are the co-founders and major shareholders of Trilithic. Malcolm and Bush each owns approximately 35% of Trilithic’s outstanding voting stock. Since January 2005, Trilithic has sponsored an employee stock ownership plan (“ESOP”) subject to ERISA (“the Plan”). The Plan holds approximately 28% of the Company’s voting shares. Defendant Horizon acts as trustee of the Plan. The Company’s remaining voting shares are held by various Trilithic employees.

At all times relevant to this litigation, Trilithic’s activities were governed and overseen by a three-person board of directors (“the Board of Directors”), which included Malcolm, Bush, and Defendant Gregg Rodgers. Until his removal, Mr. Malcolm was Trilithic’s Chief Executive Officer and the Chairman of the Board of Directors. Mr. Bush acted as Trilithic’s President and Mr. Rodgers was Vice President of Engineering. In addition to being Trilithic’s highest ranking officer and director, Mr. Malcolm also served on the Plan’s Benefits Committee (“the Committee”), which administers the Plan. The members of the Committee are appointed by the Board and traditionally consist of the officers of the Company. In July 2012, the Board of Directors voted to remove Mr. Malcolm as an officer and director of Trilithic. Mr. Malcolm alleges various reasons for his removal, including his alleged discovery of accounting fraud in May 2012.

According to Mr. Malcolm, in late May 2012, as the Company’s annual audit was being completed, he learned that a fictitious sale had been included on Trilithic’s books and records. Mr. Malcolm contends that he discovered that finished goods (“the Instruments”) with a sale price of $175, 000 were hidden in Trilithic’s machine shop, but that a purchase order created on April 5, 2012, showed a sale of the Instruments to a distributor owned by a friend of Mr. Bush. In the First Amended Complaint, Mr. Malcolm alleges that, rather than being a true sale, the Instruments transaction was placed on Trilithic’s books merely to bolster Trilithic’s receivables account and profitability in order to present a better record to its lender, who provided a line of credit based on certain factors, including the Company’s monthly sales receivables.

Mr. Malcolm proceeded to conduct an investigation into the alleged fictitious sale, and, during the course of his investigation, he approached each of the members of the Committee to inquire about his suspicions. According to Mr. Malcolm, the Committee members (individual defendants Bush, Rodgers, Hale, and Woodcock) either participated in the false sale or subsequently learned about the false sale and failed to take appropriate responsive action. Following his investigation, Trilithic’s senior management began shutting Mr. Malcolm out of decision making and ceased including him in discussions regarding the Trilithic’s day-to-day operations.

On July 12, 2012, Mr. Malcolm was informed of an emergency meeting of the Board. Mr. Malcolm was out of state at the time the meeting was held and telephoned into the meeting. During the meeting, Mr. Bush informed Mr. Malcolm that he (Malcolm) was being asked to resign as an officer, director, and employee and that, if he refused, he would be terminated. Mr. Malcolm’s removal as officer and director was finalized at the Board’s July 24, 2012 meeting.

In late December 2012, Mr. Malcolm provided each of the defendants with a draft complaint for this lawsuit, detailing, among other things, the false sale and allegations that Defendants withheld information obtained from brokers and potential buyers regarding Trilithic’s estimated fair market value in order to affect the Company’s valuation. Approximately one week later, on January 4, 2013, Trilithic initiated a state court lawsuit against Mr. Malcolm to recover approximately $1 million in loans extended to him by the Company between June 2009 and April 2012. On January 11, 2013, Mr. Malcolm filed the instant lawsuit, alleging, inter alia, that, in breach of their fiduciary duties, the Trilithic Defendants falsified Trilithic’s books and records and presented false information to their lender, jeopardizing Plan assets and causing the material understatement of Trilithic’s value to the detriment of Mr. Malcolm and other Plan participants. According to Mr. Malcolm, the remaining Defendants either participated in the breaches or failed to remedy the breaches after receiving notice. Mr. Malcolm further alleges that when he reported the alleged breaches of Defendants’ alleged ERISA fiduciary duties, he was subject to retaliation in violation of ERISA section 510. Finally, he alleges state law claims of criminal mischief and fraudulent inducement against Defendant Bush.

On April 15, 2013, the Trilithic Defendants filed a motion to dismiss all claims set forth in Mr. Malcolm’s First Amended Complaint. That same day, the Plan and Horizon filed their own motion to dismiss. These motions are now fully briefed and ready for ruling.

Legal Analysis

I. Standard of Review

Defendants have filed their motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Under Rule 12(b)(6), the Court must accept as true all well-pled factual allegations in the complaint and draw all ensuing inferences in favor of the non-movant. Lake v. Neal, 585 F.3d 1059, 1060 (7th Cir. 2009). Nevertheless, the complaint must “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests, ” and its “[f]actual allegations must . . . raise a right to relief above the speculative level.” Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629, 633 (7th Cir. 2007) (citations omitted). The complaint must therefore include “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see Fed. R. Civ. P. 8(a)(2). Stated otherwise, a facially plausible complaint is one which permits “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

II. Discussion[1]

In his First Amended Complaint, Mr. Malcolm alleges the following ERISA claims: (1) denial of benefits claim brought pursuant to 29 U.S.C. § 1132(a)(1)(B) and § 1132(a)(2) (Count II); (2) breach of fiduciary duty claim under 29 U.S.C. §§ 1132(a)(2) and (3), based on allegations regarding a false sale (Count III); and (3) breach of fiduciary duty claim brought pursuant to 29 U.S.C. §§ 1132(a)(2) and (3), based on allegations of withholding of material information; and (4) retaliation claim brought pursuant to 29 U.S.C. § 1140. We address each of these claims in turn.

A. Denial of Benefits Claim (Count II)

In Count II of the First Amended Complaint, Mr. Malcolm alleges that Defendants breached their fiduciary and non-fiduciary duties by “failing to authorize and provide payments to [him] as required under the Plan and ERISA” in violation of ERISA § 502(a)(1)(B). He seeks both monetary damages as well as any equitable relief the Court ...


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