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Perez v. PBI Bank, Inc.

United States District Court, S.D. Indiana, Indianapolis Division

February 4, 2015

THOMAS E. PEREZ, Secretary of Labor, United States Department of Labor, Plaintiff,


MARK J. DINSMORE, District Judge.

This matter comes before the Court on Plaintiff's Motion to Strike Defendant PBI Bank's Affirmative Defenses, [Dkt. 22], Plaintiff's Motion to Strike Defendant Michael A. Evans's Affirmative Defenses, [Dkt. 24], and Defendant PBI Bank's Motion for Leave to File Amended Answer and Affirmative Defenses. [Dkt. 44] For the reasons that follow, the Court GRANTS Plaintiff's motions and DENIES Defendant's motion.

I. Background

On August 29, 2014, Secretary of Labor Thomas E. Perez ("Plaintiff" or "the Secretary") filed suit against PBI Bank ("PBI"), AIT Laboratories Employee Stock Ownership Plan ("the Plan" or "ESOP"), and Michael A. Evans ("Evans"). [ See Dkt. 1.] The complaint alleged that the Plan was established by AIT Holding Company ("AIT Holding") for the benefit of employees in its two subsidiaries: American Institute of Toxicology, Inc. d/b/a AIT Laboratories and AIT Bioscience, LLC. [ Id. ¶ 2.] It also identified PBI as the named trustee of the Plan, [ id. ], and Evans as the 88 percent owner, majority selling shareholder, CEO, and sole member of the Board of Directors of AIT Holding and AIT Laboratories. [ Id. ¶ 3.]

Plaintiff alleged that Defendant PBI breached its fiduciary duties and violated the Employee Retirement Income Security Act of 1974 ("ERISA") by causing the Plan to "vastly overpay for stock purchased from Defendant Evans and others for $90 million on June 30, 2009." [ Id. ¶ 4.] Plaintiff also alleged that Defendant Evans appointed and was responsible for monitoring PBI, such that he was "liable for Defendant PBI Bank's violations of ERISA as a cofiduciary." [ Id. ¶¶ 3, 5.]

The allegations arose from a June 29, 2009 resolution by which PBI Bank caused the Plan to purchase $90, 000, 000 of stock in AIT Holding. [ Id. ¶ 4, 6, 46.] Plaintiff claims that the $90, 000, 000 price was based on a valuation that Defendants knew or should have known was unreliable. [ Id. ¶ 7.] Among other deficiencies, the valuation allegedly failed to account for increased competition from AIT Holdings' major competitors and failed to account for negative price pressures from AIT Holdings' largest sources of revenue. [ Id. ]

The Secretary also alleges that the valuation was erroneous because it "specifically, and incorrectly, assumed that the stock being purchased... included a controlling interest in AIT Holding and its subsidiaries." [ Id. ¶ 8.] In reality, however, the stock purchase agreement included a provision that required the Plan to vote its shares to elect AIT Board members as designated by Evans. [ Id. ] Defendant Evans thus effectively retained control of AIT Holding. [ Id. ¶ 9.] Moreover, in October 2013, Plaintiff alleges that Evans used his control to execute a restructuring in which he "[took] back ownership of AIT Holding from the ESOP, " and thus left the ESOP with only a small fraction of the company. [ Id. ¶¶ 9, 57.]

Based on these events, Plaintiff alleges that Defendants PBI and Evans violated numerous provisions of ERISA, including 29 U.S.C. § 1104(a)(1)(A) (requiring discharge of duties solely in the interest of plan participants and beneficiaries), § 1104(a)(1)(B) (requiring prudence and diligence in management of plan), § 1106(a)(1) (prohibiting certain transactions between plan and parties in interest), and 29 U.S.C. §§ 1105(1)-(3) (imposing liability on cofiduciaries). [ Id. ¶¶ 11-12.]

PBI answered Plaintiff's complaint on November 3, 2014. [Dkt. 16.] It denied most of Plaintiff's allegations and asserted nine affirmative defenses. [ See id. ] Evans answered Plaintiff's complaint on the same day. [Dkt. 17.] He denied most of Plaintiff's allegations and asserted twelve affirmative defenses. [ See id. ]

The Secretary then filed the current motions to strike certain of PBI's affirmative defenses, [Dkt. 22], and certain of Evans' affirmative defenses. [Dkt. 24.] While these motions were pending, PBI filed its Motion for Leave to File Amended Answer and Affirmative Defenses. [Dkt. 44.] That motion seeks "to redress some of the purported deficiencies alleged" in the Secretary's motions to strike. [ Id. at ¶ 3.]

II. Discussion

A court "may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). Motions to strike are appropriate when they expedite matters by "remov[ing] unnecessary clutter from the case." Heller Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989). A court may thus strike defenses that are "insufficient on the face of the pleadings, " that fail "as a matter of law, " or that are "legally insufficient." Id. at 1294.

In addition, "[a]ffirmative defenses are pleadings and, therefore, are subject to all pleading requirements of the Federal Rules of Civil Procedure." Id. at 1294. They must thus set forth a "short and plain statement" of the defense, id. at 1295 (quoting Fed.R.Civ.P. Rule 8(a)), and they must give the opposing party "fair notice of the nature" of the defense. See, e.g., Fleet Bus. Credit Corp. v. Nat'l City Leasing Corp., 191 F.R.D. 568, 570 (N.D. Ill. 1999).

Defenses that consist of "nothing but bare bones conclusory allegations" will not suffice. Heller, 883 F.2d at 1295. The exact amount of factual material that a defense must include, however, is unclear. In Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court held that to satisfy Rule 8, a complaint "must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). In subsequent years, some courts in this circuit have concluded that affirmative defenses are subject to the "plausibility" pleading standard announced in Twombly and Iqbal. See, e.g., Fed. Deposit Ins. Corp. v. Giannoulias, No. 12 C 1665, 2014 WL 3376892, at *2 (N.D. Ill. July 10, 2014) (citing Iqbal, 556 U.S. at 678, when striking defenses); Shield Technologies Corp. v. Paradigm Positioning, LLC, No. 11 C 6183, 2012 WL 4120440, at *8 (N.D. Ill. Sept. 19, 2012) (concluding that majority view in Seventh Circuit is to apply Twombly and Iqbal to affirmative defenses). Other courts, however, have taken the opposite view. See, e.g., Cottle v. Falcon Holdings Mgmt., LLC, No. 2:11-CV-95-PRC, 2012 WL 266968, at *2 (N.D. Ind. Jan. 30, 2012) ("This Court agrees with those cases declining to apply the plausibility' standard of Iqbal and Twombly to affirmative defenses."). These courts thus consider motions to strike "under the standard set forth in Heller. " Id. at 3.

The Seventh Circuit has not yet resolved this division of authority. See, e.g., Makeda-Phillips v. White, No. 12-3312, 2014 WL 7450078, at *2 (C.D. Ill.Dec. 30, 2014) ("[T]he Seventh Circuit has not addressed whether the heightened pleading standard set forth in [ Twombly ] and [ Iqbal ] applies to affirmative defenses."). Other circuit courts have also declined to rule on the issue. See, e.g., Herrera v. Churchill McGee, LLC, 680 F.3d 539, 547 n.6 (6th Cir. 2012) ("We therefore have no occasion to address, and express no view regarding, the impact of [ Twombly ] and [ Iqbal ] on affirmative defenses."); Mifflinburg Tel., Inc. v. Criswell, No. 4:14-CV-00612, 2015 WL 268806, at *6 (M.D. Pa. Jan. 21, 2015) ("[T]he Third Circuit has not yet definitively addressed the issue[.]"); Miller v. Live Nation Worldwide, Inc., No. CIV.A. TDC-14-2697, 2015 WL 235553, at *2 (D. Md. Jan. 15, 2015) ("Neither the Supreme Court nor the Fourth Circuit has addressed the issue.").

This Court thus faces two formulations of the standard for striking an affirmative defense: Under the approach adopted in Heller, the Court may strike those defenses that fail as a matter of law or that are "nothing but bare bones conclusory allegations." 883 F.2d at 1294-95. Under the approach adopted in Shields Technologies, on the other hand, the Court may strike affirmative defenses that fail as a matter of law or that do not include enough "factual matter" to render their contentions "plausible" within the meaning of Twombly and Iqbal. See 2012 WL 4120440, at *8.

Choosing between the standards makes little difference in resolving the current motions. As explained below, Defendants' affirmative defenses are insufficient under either standard: each defense either fails as a matter of law or contains such little factual matter that it cannot meet even the less demanding standard of Heller, let alone the plausibility standard of Twombly and Iqbal. The Court accordingly GRANTS Plaintiff's motions to strike these defenses. For each defense, however, the Court must also determine whether to strike the defense with or without prejudice. "Courts strike defenses that are inadequately pleaded without prejudice so that defendants can fix any shortcomings of inadequately pleaded defenses. On the other hand, Courts strike with prejudice defenses that are not appropriately pleaded as affirmative defenses or for which it is impossible for the defendant to prove a set of facts in support." Hayes v. Agilysys, Inc., No. 09 C 727, 2009 WL 891832, at *1 (N.D. Ill. Mar. 30, 2009) (citations omitted). The Court will apply this standard to each defense in turn.

1. Plaintiff's Motion to Strike PBI's Defenses

The Secretary argues that the Court should strike affirmative defenses two, three, four, five, six, seven, and nine. [Dkt. 22 at 1.] The Court addresses each defense below.

A. Second Affirmative Defense

PBI's second defense contends that "[s]ome or all of the Plaintiff's claims fail because the Plaintiff did not join parties necessary for the court to accord complete relief as required by Federal Rule of Civil Procedure 19(a)(1)(A)." [Dkt. 16 at 24.] Rule 19, in turn, provides that a "person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined" if "in that person's absence, the court cannot accord complete relief among existing parties." Fed.R.Civ.P. 19(a)(1)(A).

PBI contends that the Secretary seeks to "unwind" the June 30, 2009 stock purchase, but notes that the purchase did not involve only Defendants PBI and Evans; instead, the purchase also involved several individual shareholders. [Dkt. 34 at 3.] PBI thus argues that the proposed relief would affect the rights of these shareholders, such that, without them, the Court cannot "accord complete relief." [ Id. at 4 (citing Fed.R.Civ.P. 19(a)(1)(A)).]

This argument mischaracterizes the Secretary's requested remedy. Plaintiff seeks an order "[r]equiring Defendant Evans to rescind and undo the prohibited transactions in which he participated and disgorge any and all profits and financial benefits he received as a result of his knowing participation in the violations described herein, plus interest[.]" [Dkt. 1 at 17 (emphasis added).] Thus, as the Secretary notes, the complaint is " not requesting the Court to order rescission with regard to transactions involving parties not named in the Complaint." [Dkt. 37 at 3 (emphasis added).] The Court therefore need not join these individuals to accord complete relief, such that Rule 19(a) does not require their joinder.

Additionally, to the extent that any other parties may share liability with Defendants Evans and PBI, their joinder is not required. First, the "complete relief" contemplated by Rule 19 applies to "relief between the persons already parties, and not as between a party and the absent person." Perrian v. O'Grady, 958 F.2d 192, 196 (7th Cir. 1992). Second, PBI bank is jointly and severally liable for all harm it may have caused. See, e.g., Jennings v. Pierce, No. 93 C 2539, 1995 WL 88795, at *2 (N.D. Ill. Mar. 1, 1995) ("[U]nder ERISA, plan trustees that have breached their fiduciary duty are jointly and severally liable."). This shared liability implies that, as long as the complaint names one of the fiduciaries as a defendant, the Court can accord complete relief among the named parties, such that joinder of any additional fiduciaries who may be liable is not required. See id. ("[T]he absent trustees, as jointly and severally liable parties, are permissive-not necessary or indispensable-parties.").

PBI's second defense thus fails as currently pled: whether the defense is read to refer to absent shareholders or absent trustees, the defense is insufficient and may be stricken. See Heller, 883 F.2d at 1294. The Court thus GRANTS Plaintiff's motion to strike PBI's second affirmative defense. The Court, however, will do so without prejudice: As noted above, courts strike defenses with prejudice when it "is impossible for the defendant to prove a set of facts in support" of the defense. Hayes, 2009 WL 891832, at *1. PBI's reliance on the absence of cofiduciaries or individual shareholders is misplaced, but that does not necessarily foreclose the availability of Rule 19(a) in all cases. If PBI can plead a Rule 19(a) defense that does not depend on the absence of shareholders or co-fiduciaries, then PBI may do so.

B. Third and Fourth Affirmative Defenses

PBI's third affirmative defense is that it "did not act arbitrarily or capriciously, but acted with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in the like capacity and familiar with such matters would use." [Dkt. 16 at 24.] Its fourth affirmative defense is that any harm that the Plan suffered "did not result from any purported breach of the alleged fiduciary duties by PBI, or any act or omission by PBI." [ Id. ] Plaintiff contends these statements are not affirmative defenses at all; instead, they are merely repetitions of PBI's "earlier denials of the Secretary's allegations" and should be stricken for that reason. [Dkt. 23 at 6.] PBI responds that its defenses go beyond its earlier denials because they relate to the affirmative defense afforded in 29 U.S.C. § 1108(e), which exempts certain transactions from ERISA's general prohibition on transactions between a plan and interested parties. [Dkt. 34 at 5-6.]

A defense is an affirmative defense if it is specifically enumerated in Fed.R.Civ.P. 8(c), [1] if the defendant bears the burden of proof, or if the defense does not require controverting the plaintiff's proof. See Winforge, Inc. v. Coachmen Indus., Inc., 691 F.3d 856, 872 (7th Cir. 2012). A court may properly strike a defense that does not meet this standard but that a party nonetheless pleads as an affirmative defense. See, e.g., Ford v. Psychopathic Records, Inc., No. 12-CV-0603-MJR-DGW, 2013 WL 3353923, at *7 (S.D. Ill. July 3, 2013).

Defendant's third defense is that it acted with care, skill, prudence, and diligence. [ See Dkt. 16 at 24.] As the Secretary concedes, however, it is his burden to prove that PBI acted improvidently. [Dkt. 23 at 7.] Hence, this defense does not require PBI to bear the burden of proof, and it does require PBI to controvert Plaintiff's proof. It thus fails Winforge 's test for identifying affirmative ...

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