The U.S. District Court for the District of Kansas issued another ruling last Friday in In re YRC Worldwide Inc. ERISA Litigation, D. Kan., No. 2:09-cv-02593-JWL-JPO (April 15, 2011 ) that we recently reported on. Specifically, the District Court ruled that ERISA’s fiduciary safe harbor provision, Section 404(c), does not relieve fiduciaries of liability if they assemble an imprudent menu of plan investments. Section 404(c) provides a defense to a breach of fiduciary duty claim if the loss caused by the breach resulted from a plan participant's exercise of control over his or her investments. The plaintiffs in the case filed a motion to strike several of the defendants' asserted affirmative defenses. In their motion to strike the Section 404(c) defense, the plaintiffs cited to the U.S. Court of Appeals for the Seventh Circuit's recent decision in Howell v. Motorola Inc., 663 F.3d 552 (7th Cir. 2011), where the Seventh Circuit adopted the DOL’s view that Section 404(c) does not immunize plan fiduciaries that make imprudent investment selections. The YRC defendants attempted to downplay the significance of Howell by saying the Seventh Circuit's discussion of Section 404(c) was mere dicta. The defendants also argued that even if the Section 404(c) discussion in Howell was not dicta, it extended only to the “selection” of investment options, not the decision to continue offering an investment once it is selected. The District Court rejected the defendants’ arguments stating that (1) the Seventh Circuit's decision regarding Section 404(c) was not dicta and, (2) the Howell opinion “is in no way limited” to the selection of investment options. According to the District Court, “[t]he opinion expressly references the decision ‘to continue offering a particular investment vehicle'—allegations which are clearly encompassed in the Amended Complaint—and the rationale offered by the Seventh Circuit clearly applies to decisions from the initial selection decision to other decisions relating to the investment menu offered under the Plan.” The District Court also rejected the defendants' argument that the court should follow the lead of a minority of federal courts, including the U.S. Court of Appeals for the Fifth Circuit, that have declined to give effect to the DOL’s interpretation of Section 404(c). The District Court noted its belief that, if confronted with this issue, the U.S. Court of Appeals for the Tenth Circuit would conclude, like the Seventh Circuit, that Section 404(c) does not insulate a fiduciary from liability for assembling an imprudent investment menu.
Monday, April 18, 2011
Thursday, April 7, 2011
The United States District Court for the District of Kansas has certified a class of approximately 17,000 YRC Worldwide Inc. (“YRCW”) employees who invested their retirement plan accounts in YRCW stock, and allegedly saw a decline in their accounts balances as the value of the shares plunged. See In re YRC Worldwide Inc. ERISA Litigation, D. Kan., No. 2:09-cv-02593-JWL-JPO (4/6/11). The class certification ruling comes approximately five months after the District court denied YRCW’s motion to dismiss the stock-drop lawsuit filed by employees who claimed the stock should have been taken out of YRCW’s 401(k) plan.
The decision is significant because it provides support for the minority view that the "Moench “presumption of prudence" discussed in our prior blog entries can be overcome at the pleading stage. As we have noted, the Moench presumption more frequently than not prevents plaintiffs from getting to the discovery phase of litigation – as plaintiffs typically cannot, or do not, allege enough facts in their complaint to show that they can rebut the presumption.
The YRCW case involved some interesting class-action stock-drop defense arguments. By way of background, the plaintiffs alleged that the fiduciaries YRCW’s 401(k) plan breached fiduciary duties under ERISA when they continued to invest in YRCW's stock even as the stock price plummeted. The plaintiffs alleged that YRCW’s stock dropped from a high of $25.96 per share in October 2007 to a low of 45 cents per share in March 2010. The fiduciary defendants offered several arguments as to why the court should not certify the lawsuit as a class action. One argument was that the typicality requirement for class certification could not be met in this stock-drop case, where there was no allegation that the fiduciaries failed to make “full disclosure” about YRCW’s financial struggles. [In most of the stock-drop cases, there are two allegations of wrongdoing on the part of ERISA fiduciaries. First, plaintiffs typically allege that plan fiduciaries breached their duty of prudence under Section 404(a) of ERISA by continuing to invest in company stock, even after the stock price spiraled downward. Second, plaintiffs frequently assert that the fiduciaries made misrepresentations or failed to disclose material information about the company's finances, and that had they known this information, the plaintiffs/participants which would have taken other action.] In the YRCW case, there was no allegation that YRCW had not made full disclosure to the participants about the performance YRWC, and the defendants argued that in the absence of a disclosure claim, class certification was inappropriate because the District would need to examine the prudence claim by looking at participants' individual investment choices. The District Court rejected this argument, stating that it could find no legal authority to support the YRCW fiduciaries' position. According to the District Court, “courts presented with both prudence claims and communications claims consistently treat those claims as entirely distinct such that the alleged misrepresentations or nondisclosures appear to have no bearing whatsoever on the prudence claim.”
The District Court also rejected the defendants’ argument that Section 404(c) of ERISA (which provides a defense to a breach of fiduciary duty claim if the loss caused by the breach resulted from a participant's exercise of control over his or her investments). The District Court also rejected the defendants’ argument that the Supreme Court’s 2008 LaRue decision brought an end to class certifications under Federal Rule of Civil Procedure 23(b)(1)(B) for ERISA fiduciary breach claims brought by defined contribution pension plan participants. [Many defendants in stock drop cases have argued that LaRue casts doubt on whether fiduciary breach claims brought under Section 502(a)(2) of ERISA are suitable for class action treatment given that the Supreme Court found in LaRue that individuals can bring their own claims.] According to the District Court, nothing in LaRue prevents class certification under Rule 23(b)(1)(B) of ERISA breach actions brought under ERISA Section 502(a)(2).