Husvar v. Rapoport ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0404a.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
-
JAMES R. HUSVAR, SIDNEY B. GUTZWILLER, ROBERT
-
V. CARUSO, and RONALD W. BARNETT, individually
-
and as the representatives of the plaintiff class,
-
No. 01-4254
,
Plaintiffs-Appellants, >
-
-
-
v.
-
-
MICHEL RAPOPORT, WILLIAM A. MARQUARD,
Defendants-Appellees. -
THOMAS R. WALL, and ROBERT A. YOUNG III,
-
N
Appeal from the United States District Court
for the Southern District of Ohio at Cincinnati.
No. 01-00430—Sandra S. Beckwith, Chief District Judge.
Argued: May 7, 2003
Decided and Filed: October 3, 2005
Before: BOGGS, Chief Judge; GUY and DAUGHTREY, Circuit Judges.
_________________
COUNSEL
ARGUED: Robert A. Steinberg, WAITE, SCHNEIDER, BAYLESS & CHESLEY, Cincinnati,
Ohio, for Appellants. Robert E. Zimet, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP,
New York, New York, for Appellees. ON BRIEF: Robert A. Steinberg, WAITE, SCHNEIDER,
BAYLESS & CHESLEY, Cincinnati, Ohio, Richard S. Wayne, STRAUSS & TROY, Cincinnati,
Ohio, for Appellants. Robert E. Zimet, Susan L. Saltzstein, SKADDEN, ARPS, SLATE,
MEAGHER & FLOM, LLP, New York, New York, for Appellees.
_____________________
AMENDED OPINION
_____________________
MARTHA CRAIG DAUGHTREY, Circuit Judge. The plaintiffs, all of whom are
shareholders and former employees of Mosler, Inc., brought this class action in Ohio state court
against the company itself and against four members of the Mosler board of directors, seeking
recompense for the diminution in value of company stock that, in part, was used to fund employee
retirement plans. Although the plaintiffs couch their causes of action in terms of direct and
derivative claims for breach of fiduciary duty under state law, the district court concluded that the
1
No. 01-4254 Husvar, et al. v. Rapoport, et al. Page 2
complaint and amended complaint filed by the plaintiffs actually implicated the Employee
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461, and thus was properly
removable to federal court. Ultimately, however, the district court dismissed the action in its
entirety on motion of the defendants, based not on ERISA but on a finding that the plaintiffs lacked
standing to bring a derivative action because the nominal defendant, Mosler, was involved in
bankruptcy proceedings.
On appeal, the plaintiffs contend that the district court erred in denying their motion to
remand the action to state court and thus had no jurisdiction to enter an order of dismissal on the
merits. For the reasons set out below, we agree that the district court lacked jurisdiction over what
appear to be solely state-law claims. We therefore find it necessary to reverse the district court’s
judgment, vacate the order of the district court denying the plaintiffs’ motion to remand, and
remand the case to the district court with directions to remand this matter to the Ohio state court for
resolution of the plaintiffs’ claims.
FACTUAL AND PROCEDURAL BACKGROUND
As non-union employees of Mosler, Inc., the plaintiffs received shares of company stock in
conjunction with their participation in an employee stock option plan (ESOP). As alleged in the
amended complaint filed in this matter, “Mosler’s ESOP is a defined contribution stock bonus plan
for which all salaried non-union employees are eligible. Mosler has funded the ESOP primarily with
its own common and preferred stock.”
According to the plaintiffs, the company’s fortunes, under the direction of defendants Michel
Rapoport, William A. Marquard, Thomas R. Wall, and Robert A. Young, III, spiraled downward
dramatically. Regardless of that negative trend, however, Rapoport continued to receive substantial
performance bonuses and additional stock issuances authorized by the board of directors. The
remaining defendants also benefitted from various bonuses and fees, while the value of the common
and preferred stock distributed to the named plaintiffs and other putative class members tumbled at
least 80 percent.
Faced with the prospect of complete dissolution of their retirement funds due to the
perceived mismanagement of the company by the defendants, the plaintiffs originally filed a class
action suit in Ohio state court claiming that those defendants breached their fiduciary responsibilities
to the employees and caused a “drastic reduction in the value of Mosler’s stock and the resultant
destruction of most of Mosler’s employees’ retirement funds.” The complaint contained both a
direct common law claim for relief that alleged financial injury to the class members “[a]s a
proximate result of these breaches of fiduciary duty,” and a derivative common law claim, alleging
damage and injury to the company and to the shareholders as a result of those same breaches.
The defendants subsequently sought removal of the litigation to federal district court. In so
doing, they recognized that the complaint did not “on its face contain a federal question.”
Nevertheless, they argued that the ESOP was an ERISA-covered plan and that the complaint’s
perceived allegations of improper management of that plan resulted in the complete federal
preemption of all matters relating to that entity. Claiming that the plaintiffs failed to exhaust
administrative remedies and failed to comply with requirements for filing derivative actions, the
defendants also moved to dismiss the complaint “for failure to state a claim upon which relief may
be granted.”
In response to the attempt to terminate the litigation, the plaintiffs then filed both an amended
complaint in district court and a motion to remand the matter to state court. In the amended
complaint, they attempted to remove any indications that the action was brought pursuant to ERISA.
Instead, the plaintiffs sought payment only for “the value of the stock lost” as a result of defendants’
actions, not “the value of all benefits lost,” as prayed for in the original complaint. The district court
No. 01-4254 Husvar, et al. v. Rapoport, et al. Page 3
nevertheless denied the motion to remand, ruling that, despite the artful crafting of the language of
the complaint, “Plaintiffs seek to recover the loss of value of the retirement savings that was
occasioned by the individual Defendants’ mismanagement of the corporation and the ESOP.”
According to the district judge, such a prayer can be asserted only by participants of the employee
benefit plan and is governed preemptively by ERISA, thus vesting the federal courts with
jurisdiction over the dispute.
During the pendency of that motion, Mosler, Inc., filed a bankruptcy petition, effectively
staying all claims for monetary damage against the company itself. The remaining, individual
defendants, however, continued their efforts to be dismissed from the suit as well and filed a second
motion to dismiss. In that filing, the defendants contended that the plaintiffs lacked standing to
prosecute the derivative action described in the complaint because, in the absence of abandonment,
only the debtor-in-possession of Mosler’s bankruptcy estate (the bankruptcy trustee) can prosecute
such a claim. The defendants further argued that the direct claims of breach of fiduciary duty should
also be dismissed.
In response, the plaintiffs asserted that they “no longer intend to pursue the direct claims
currently alleged in the Amended Complaint. As such, the issues contained in Defendants’ Motion
to Dismiss Plaintiffs’ Amended Complaint with respect to Plaintiffs’ direct claims and class action
allegations are moot.” Furthermore, the plaintiffs did not “dispute that Mosler’s filing of a Chapter
11 Petition extinguished their rights to pursue a shareholder derivative action at this time.” They
requested, however, that the district court stay its ruling on the defendants’ motion to dismiss that
claim pending a ruling by the bankruptcy court on another motion by the plaintiffs in that forum
seeking abandonment by the trustee of the derivative cause of action.
In light of the plaintiffs’ assertions in their court filings, the district court dismissed the
federal court action in its entirety. Specifically, the court “construe[d] Plaintiffs’ statement
regarding the direct claim in the amended complaint as an accession to the dismissal of that claim.”
Moreover, the district judge ruled:
Plaintiffs’ concession that they do not have standing to assert the derivative claim in
the amended complaint is essentially an accession to the dismissal of that claim.
This Court may not entertain jurisdiction over a claim asserted by a party without
standing on the basis of an hypothesis that it may gain subject matter jurisdiction in
the course of future events.
From that order of dismissal, as well as from the district court’s denial of the motion to remand, the
plaintiffs now appeal.
DISCUSSION
We review a denial of a motion for remand de novo. See Peters v. Lincoln Elec. Co., 285
F.3d 456, 465 (6th Cir. 2002). Thus, in this case, we must examine the complaint to determine
whether the claims raised therein are not only preempted by ERISA, but also are so tied to the
statutory scheme that federal courts, and only federal courts, must exercise jurisdiction over their
resolution.
Generally, a defendant is entitled to remove a cause of action from state court to federal court
when the federal district court would “have original jurisdiction founded on a claim or right arising
under the Constitution, treaties or laws of the United States.” 28 U.S.C. § 1441(b). In determining
whether an action meets this removal requirement, courts analyze the litigation under the “well-
pleaded complaint rule.” See Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987). Pursuant to that
“rule,” the federal judiciary recognizes that “the plaintiff is the master of the complaint, that a
No. 01-4254 Husvar, et al. v. Rapoport, et al. Page 4
federal question must appear on the face of the complaint, and that the plaintiff may, by eschewing
claims based on federal law, choose to have the cause heard in state court.” Id. at 398-99.
Consequently, because a defendant’s argument that a cause of action is preempted by federal
law does not appear on the face of a well-pleaded complaint, the doctrine of preemption does not
alone necessarily authorize removal to federal court. See Metro. Life Ins. Co. v. Taylor, 481 U.S.
58, 63-64 (1987). “One corollary of the well-pleaded complaint rule developed in the case law,
however, is that Congress may so completely pre-empt a particular area that any civil complaint
raising this select group of claims is necessarily federal in character.” Id.
The defendants in this case assert that ERISA’s overarching preemption provision constitutes
an example of just such an intent on the part of Congress to vest federal courts with exclusive
jurisdiction over all disputes involving employee benefit and pension plans. In Warner v. Ford
Motor Co., 46 F.3d 531, 535 (6th Cir. 1995), however, this court unanimously held, in an en banc
decision, that “[r]emoval and preemption are two distinct concepts.” As the court explained:
Removal is allowed in § 1132(a)(1)(B) type cases under Metropolitan Life because
of the Court’s conclusion that Congress intended federal law to occupy the regulated
field of pension contract enforcement. State claims for damages or injunctive relief
to enforce a pension plan against an employer or trustee are subject to removal. State
causes of action not covered by § 1132(a)(1)(B) may still be subject to a preemption
claim under § 1144(a) . . . because the state law at issue may “relate to” a pension or
employee benefit plan. But such actions are not subject to removal.
.....
“The fact that a defendant might ultimately prove that a plaintiff’s claims are pre-
empted” – for example under § 1144(a) – “does not establish that they are removable
to federal court.” Caterpillar, 482 U.S. at 398 . . . . The federal preemption defense
in such nonremovable cases would be decided in state court and would be subject to
review on certiorari in the U.S. Supreme Court.
Id. See also Smith v. Provident Bank, 170 F.3d 609, 613 (6th Cir. 1999) (“the mere availability of
a federal preemption defense to a state-law claim does not, in general, confer federal subject-matter
jurisdiction”).
The plaintiffs purport to invoke federal jurisdiction under ERISA’s statutory scheme.
Nevertheless, an action can still be removed to federal court, and a subsequent motion for remand
be denied, “where the real nature of the claim asserted in the complaint is federal, irrespective of
whether it is so characterized.” Sable v. Gen. Motors Corp., 90 F.3d 171, 174 (6th Cir. 1996)
(quoting 1A J. MOORE & B. RINGLE, MOORE’S FEDERAL PRACTICE ¶ 0.160[3.-3] (2d ed. 1987)). In
Smith, for example, we noted that certain claims to recover ERISA benefits are clearly federal in
nature, and stated:
ERISA is at least as concerned with defining and standardizing the duties of a
fiduciary as it is with providing for recovery of benefits. A claim for breach of
fiduciary duty against a fiduciary of an ERISA plan necessarily presents a federal
question. Thus, [a] state-law fiduciary duty claim is not only preempted but also
provides federal subject-matter jurisdiction.
Smith, 170 F.3d at 613 (citations omitted).
In this case, however, the complaint being examined does not challenge the actions of a plan
fiduciary. Instead, the complaint merely questions the propriety of certain business decisions made
No. 01-4254 Husvar, et al. v. Rapoport, et al. Page 5
by the company’s board of directors. Although those decisions, without question, affected the value
of the company stock that comprised the employees’ benefit plan assets, that fact alone does not
transform a state-law breach of fiduciary duty claim into a federal ERISA action. As this court
concluded in Grindstaff v. Green, 133 F.3d 416, 423-24 (6th Cir. 1998), quoting from the Eighth
Circuit decision in Hickman v. Tosco, 840 F.2d 564, 566 (8th Cir. 1988):
“ERISA does not prohibit an employer from acting in accordance with his interests
as an employer when not administering the plan or investing the assets.” In fact, in
Hickman, the Eighth Circuit specifically observed that “day-to-day corporate
business transactions, which may have a collateral effect on prospective, contingent
employee benefits [do not have to] be performed solely in the interest of plan
participants.” In Martin v. Feilen, [965 F.2d 660 (8th Cir. 1992)], the court
concluded that Hickman applied to ESOPs, noting that “[v]irtually all of an
employer’s significant business decisions affect the value of its stock, and therefore
the benefits that ESOP plan participants will ultimately receive.” 965 F.2d at 666
(observing that section 1104 only applies to “transactions that involve investing the
ESOP’s assets or administering the plan.”)
A close examination of the plaintiffs’ complaint reveals that nowhere in that document do
the former employees allege that the defendants themselves mismanaged any fund designated as a
pension benefit plan for company workers. Instead, the complaint is replete only with allegations
that the individual defendants mismanaged the company so as to result in a dramatic decrease in the
value of Mosler stock – a result that, in turn, happened to devalue the ESOP funded with such stock.
A claim that company directors did not operate the business itself in conformity with sound business
practices does not, however, implicate the protections afforded by ERISA. Absent any indication
in the complaint that the plaintiffs intend to challenge the decisions or actions of plan fiduciaries,
the filing contains no claims arising under federal law. We conclude, therefore, that the district
judge erred in denying the plaintiffs’ motion to remand this matter to the state court system for
resolution.
In view of this conclusion, the plaintiffs’ contention that the district court erred in dismissing
this action for failure to state a claim upon which relief could be granted is moot.
CONCLUSION
The mere fact that the plaintiffs’ complaint referenced alleged actions undertaken by the
defendants that ultimately resulted in a diminution in value of the assets of the plaintiffs’ retirement
plan does not necessarily vest the federal judiciary with jurisdiction over this matter. Because we
hold that the complaint actually raised only state-law issues involving the legitimacy of business
decisions made by the defendants, and the record does not establish diversity jurisdiction, we find
it necessary to VACATE the order denying the plaintiffs’ motion for remand to state court. Because
such a remand was proper, the district court then had no jurisdiction to enter an order of dismissal.
The judgment is therefore REVERSED and the case is REMANDED to the district court with
directions to remand the matter to the state court.