A federal judge has carved up a lawsuit against former prominent Lowcountry grocer Piggly Wiggly Carolina and its parent company, tossing out some claims made by stockholders and employees while leaving much of the case intact.
Judge Richard Gergel dismissed allegations of excessive compensation and above-market store leases that the plaintiffs claimed padded executives' pocketbooks at their expense, but he denied most arguments that the entire case should be thrown out.
The complaint was filed last year in federal court. It seeks millions of dollars in lost retirement benefits, alleging that poor decisions and inaction by top company executives and insiders led to the ruin of one of the Charleston region’s most well-known retail businesses.
The lawsuit also said senior officials with the grocer and its parent, Greenbax Enterprises Inc., enriched themselves while the value of the worker-owned Piggly Wiggly stock plan fell nearly 90 percent over eight years, “devastating the retirement accounts of thousands of company employees.”
The plaintiffs estimate that the value of the employee stock ownership plan, or ESOP, skidded from $88.7 million in 2008 to $9 million in 2015.
“This catastrophic decline decimated the retirement savings of thousands of Piggly Wiggly employees,” according to the complaint, which went on to say that most of the workers made less than $40,000 a year.
You were more than an employee. You were an owner.
The defendants include Piggly Wiggly, Greenbax, the companies' CEO David Schools, other executives and their relatives. They asked last year that the entire case be dismissed on various grounds.
One of the arguments Piggly Wiggly management made was that the statute of limitations had run out for the employees to bring a lawsuit. Gergel, who took over the case this year from late Judge Weston Houck, said he found that “unpersuasive,” though he said he’d be open to revisiting the issue again later, after the discovery process is completed.
Management also tried to shoot down allegations they put their personal financial interests ahead of their duties as “fiduciaries,” or trustees, of the stock ownership plan as spelled out in the Employee Retirement Income Security Act.
The federal law, passed in 1974, sets minimum standards and provides protection for individuals in private-industry pension plans.
The defendants said the case should be tossed because the former employees had confused the business decisions they made as executives with actions they took as trustees of the stock plan.
Gergel agreed to a point, saying that mismanagement “or malfeasance by the executives of an operating company is not in itself a breach of fiduciary duty” under the federal law, known commonly as ERISA.
“But in this case, the alleged managerial malfeasance is not the alleged breach of fiduciary duty,” he wrote. “The alleged breach of fiduciary duty is the failure of the plan fiduciaries to take action to protect plan assets by responding to managerial malfeasance that depleted the plan assets of most of their value.”
Gergel added: “Nothing in the statute suggests that a person is relieved of his fiduciary duties under ERISA whenever his fiduciary duties touch upon his duties as a corporate officer.”
Piggly Wiggly also sought to dismiss a claim that the stock plan overseers had a legal obligation under the retirement act to file what’s known as a “derivative lawsuit” on behalf of shareholders, based on the alleged mishandling of the plan.
Attorneys for the executives questioned whether the case would be successful, one of the requirements for bringing such a case under South Carolina law.
Gergel didn’t buy it.
“Looking at the complaint as a whole, the court finds that the extensive allegations contained in its 83 pages … are sufficient to state with requisite detail why a derivative action would have been successful – i.e., that the persons in control of the corporation acted in a manner unfairly prejudicial to the company and the plan as stockholder, and that corporate assets were wasted,” he said.
Gergel also knocked down an argument that the former employees lacked standing because they failed to allege they suffered injury.
"That argument is without merit," he said.
Gergel said the employees claim the "corrupt practices among top management" caused a significant financial loss for the stock plan.
The judge dismissed a claim targeting the lack of diversified investments in the stock plan.
"Alleging the defendants should have found a new company (or other asset) for the (stock plan) to own cannot" state a claim, the judge ruled.
He also ruled that allegations of above-market leases and excessive executive compensation did not involve stock plan assets and tossed out those complaints.
Gergel denied a request to dismiss a claim against two noteholders who the plaintiffs claim had ties to the company. According to the suit, noteholders Joanne Newton Ayers and Marion Newton Schools made loans to the stock plan to purchase shares guaranteed by the company.
In March 2014, about six months before Piggly Wiggly and Greenbax sold nearly all of their remaining assets to C&S Wholesale Grocers, the companies bought the notes for $8.3 million in cash, the lawsuit alleges. The employees allege the value of those shares at the time was $4.2 million and the difference was an improper transfer of company assets to insiders under federal law.
The law states, "A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect sale or exchange, or leasing, of any property between the plan and a party in interest."
The judge ruled the cash paid to the noteholders was not a stock plan asset, "but the cancellation of shares held by the plan and forgiveness of notes" backed by the shares did involve plan assets.
Attorneys for the noteholders and former employees declined to comment on the judge's ruling. An attorney for the companies and others named in the suit did not immediately respond for comment.
Gergel has not scheduled a trial date in the case.