In Re: Wilmington Trust Corp. ERISA Litigation

Filing 51

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 5/3/2013. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

IN RE: WILMINGTON TRUST CORP.
ERISA LITIGATION

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Civ. No. 10-1114-SLR

Joseph J. Bodnar, Esquire of Law Offices of Joseph J. Bodnar, Wilmington, Delaware.
Counsel for Plaintiff. Of Counsel: Jacob A. Goldberg, Esquire and Gerald D. Wells, Ill,
Esquire of Faruqi & Faruqi, LLP; Edwin J. Mills, Esquire and Michael J. Klein, Esquire of
Stull, Stull & Brody; and, Gregory M. Egleston, Esquire of Egleston Law Firm.
Robert Scott Saunders, Esquire, Stephen Dale Dargitz, Esquire, and Daniel R.
Ciarrocki, Esquire of Skadden, Arps, Slate, Meagher & Flam, Wilmington, Delaware.
Counsel for Defendant. Of Counsel: Michael J. Prame, Esquire, Sarah A. Zumwalt,
Esquire, and Julia E. Zuckerman, Esquire of Groom Law Group, Chartered.

MEMORANDUM OPINION

Dated: May j , 2013
Wilmington, Delaware

R~~dge
I. INTRODUCTION
On December 20, 2010, plaintiffs Karen Outten ("plaintiff Outten") and James
Bradford (collectively "plaintiffs Outten and Bradford"), individually and on behalf of all
others similarly situated, instituted an Employee Retirement Income Security Act
("ERISA") class action against Wilmington Trust Corporation, et al. 1 (D.I. 1 at ,-r 1). On
January 31, 2011, plaintiff Julie Gray ("plaintiff Gray"), on behalf of herself and a class
of persons similarly situated, instituted an ERISA class action against Wilmington Trust
Corporation, et al. 2 (D.I. 1 at ,-r,-r 8-20 in 11-00101) On February 28, 2011, plaintiff Gray
filed a motion for consolidation and appointment of co-lead and liaison counsel. (D. I.
23) Plaintiffs Outten and Bradford filed a competing motion for consolidation and
appointment of lead counsel on March 14,2011. (D.I. 26) On March 15,2012, the
court ordered the cases consolidated and appointed Interim Lead and Co-Lead
counsel. (D.I. 35; D.l. 36)
On May 25, 2012, plaintiffs Julie Gray, Karen Outten, and James Bradford 3

1

Piaintiff Outten named the following defendants: Wilmington Trust Corporation,
Wilmington Trust Company, Wilmington Trust Corporation Employee Benefits
Committee, David R. Gibson, Gary E. Butler, Rebecca A. DePorte, Michael A.
DiGregorio, William J. Farrell II, I. Gail Howard, Kevin N. Rakowski, Diane M. Sparks,
and Doe Defendants 1-10. (D.I. 1 at ,-r,-r 18-33)
2

Piaintiff Gray named the following defendants: Wilmington Trust Corporation,
Wilmington Trust Company, The Wilmington Trust Corporation Employee Benefits
Committee, David R. Gibson, Rebecca A. DePorte, Michael A. DiGregorio, William J.
Farrell II, I. Gail Howard, Kevyn N. Rakowski, Diane M. Sparks, Gary E. Butler, and Ted
T. Cecala. (D.I. 1 at ,-r,-r 8-20 in 11-00101)
3

Piaintiffs filed on their own behalf, on behalf of the Wilmington Trust Company
Thrift Savings Plan, and on behalf of a class of similarly situated participants and
beneficiaries of the Wilmington Trust Company Thrift Savings Plan.

(collectively "plaintiffs") filed an amended consolidated complaint ("complaint") against
all defendants4 (collectively "defendants"). (D. I. 38) Pending before the court is
defendants' Rule 12(b) motion to dismiss plaintiffs' consolidated complaint for breach of
ERISA's fiduciary duties. (D.I. 42) The court has jurisdiction over this action pursuant
to ERISA§ 502(e)(1 ), 29 U.S.C. § 1132(e)(1 ).

II. BACKGROUND
A. Parties
Plaintiffs Gray and Outten are residents of the State of Delaware. Plaintiff
Bradford is a resident of the State of Pennsylvania. Each plaintiff maintained an
investment in Wilmington Trust stock in their individual account in the Wilmington Trust
Company Thrift Savings Plan ("Plan") during the class period. (D.l. 38 at 22-24)
Defendant Wilmington Trust Corporation ("WT Corp") was a financial holding
company that provided regional banking services throughout the mid-Atlantic region, as
well as wealth advisory services and corporate client services to clients in the United
States and overseas. 5 WT Corp was founded in 1901 and was headquartered in
Wilmington, Delaware. Plaintiffs allege that WT Corp was a de facto fiduciary under 29
U.S.C. § 1002(21 )(A) and through the doctrine of respondeat superior. (D.I. 38 at 25-

4

Wilmington Trust Employee Benefit Administrative Committee; Wilmington Trust
Corporation and Wilmington Trust Company (collectively "corporate defendants"); Ted
T. Cecala, David R. Gibson, Rebecca A. DePorte, Michael A. DiGregorio, William J.
Farrell II, I. Gail Howard, Kevin N. Rakowski, Diane M. Sparks and Gary E. Butler
(collectively "individual defendants"). As needed, each individual defendant will be
referred to as "defendant 'last name."'
5

Wilmington Trust is now "part of the M&T Bank Corporation." See
http://www.wilmingtontrust.com/wtcom/index.jsp?section=About.

2

34)
Defendant Wilmington Trust Company ("WT Bank") was the wholly-owned bank
subsidiary of WT Corp. WT Bank sponsored the Plan, was the Plan administrator, a
named fiduciary, and served as the Plan's trustee. WT Bank was a named fiduciary of
the Plan. (D.I. 38

at~

28)

Defendant Wilmington Trust Employee Benefit Administrative Committee (the
"Committee") managed and administered the Plan and its assets. The Committee
acted as a fiduciary of the Plan. (D.I. 38

at~

35)

Defendant Gibson served as the Chairman of the Committee from December 31,
2006 until May 13, 2011 (shortly before the closing of the M&T Bank Corporation
("M&T") acquisition of WT Corp). He also served at relevant times as WT Corp's Chief
Financial Officer (CFO), Chief Operating Officer (COO), and Executive Vice President.
(D.I. 38

at~

36)

Defendant De Porte served as a member of the Committee from December 31,
2006 until May 13, 2011. She also served as senior vice president of Personal
Financial Services at the WT Corp during the class period. (D.I. 38

at~

37)

Defendant DiGregorio served as a member of the Committee from December
31, 2006 until May 13, 2011. He also served as Executive Vice President of WT Corp
and of WTC, and as Secretary and General Counsel of WT Corp and WT Bank, during
the class period. (D.I. 38

at~

38)

Defendant Farrell served as a member of the Committee from December 31,
2006 until May 13, 2011. He also served as Executive Vice President of WT Corp and
WT Bank, and had oversight of WT Bank's Corporate Client Services Department

3

during the class period. (D. I. 38

at~

39)

Defendant Howard served as a member of the Committee from December 31,
2006 until May 13, 2011. She also served as Vice President, Human Resources for
WT Corp during the class period. (D.I. 38

at~

40)

Defendant Rakowski served as a member of the Committee from December 31,
2006 until May 13, 2011. He also served as WT Corp's Controller and Senior Vice
President since 2006. (D.I. 38

at~

41)

Defendant Sparks served as a member of the Committee from December 31,
2006 until May 13, 2011. He also served as Vice President, Corporate AML Officer &
Division Manager of Client Operations during the class period. (D. I. 38

at~

42)

Defendant Butler served as a member of the Committee from December 31,
2006 until May 13, 2011. He also served as Vice President in charge of tax services for
Wilmington Trust during the class period. (D. I. 38

at~

43)

Plaintiffs allege that defendants Gibson, DePorte, DiGregorio, Farrell, Howard,
Rakowski, Sparks and Butler are fiduciaries by virtue of their management positions
and their service on the Committee. (D. I. 38

at~

44)

Defendant Cecala was the Company's Chief Executive Officer and Chairman of
the Board of Directors, as well as the Chairman and Chief Executive Officer of its
subsidiaries, including WT Bank, during most of the class period, until he resigned
those positions on June 3, 2010 and July 19, 2010, respectively. He appointed the
members of the Committee, which managed and administered the Plan on a day-to-day
basis. Plaintiffs allege that defendant Cecala is a fiduciary by virtue of his management
position and his role in appointing members of the Committee. (D.I. 38

4

at~

45)

B. Factual Background
Plaintiffs bring this action under§§ 404 & 502(a) of ERISA, 29 U.S.C.§§ 1104 &
1132(a), on behalf of themselves and other participants in the Plan, where the holdings
included common stock of WT Corp or units of Wilmington Trust Common Stock Fund
from December 31, 2006 to May 13, 2011. (D.I. 38 at ,-r 1) Plaintiffs allege the
following causes of action: (1) imprudent investment against all defendants for allowing
investment of Plan assets in WT Corp stock (id. at ,-r,-r 242-47); (2) misrepresentations
and nondisclosure against all defendants for withholding material information from
plaintiffs, which would have allowed them to make informed decisions about investment
under the Plan (id. at ,-r,-r 248-55); (3) divided loyalty against the individual defendants
for breaching their fiduciary duties by not acting in the interests of the Plan (id. at ,-r,-r
256-61 ); (4) breach of the duty to properly appoint, monitor and oversee the Committee
and its members against WT Corp, WT Bank and defendant Cecala (id. at W 262-66);
and (5) defendants Gibson, Farrell and Cecala failed to avoid conflicts of interest,
thereby breaching their fiduciary duties (id. at ,-r,-r 267-273).
The Plan allowed participants to contribute a deferred percentage of their pay,
with WT Corp matching a percentage of the contributions. (D.I. 38 at ,-r 57) The Plan
consisted of two components described in the introduction:
One component of the Plan is intended to qualify as a profit
sharing plan . . . . The other component is intended to
qualify as a qualified stock bonus plan ... and as an
employee stock ownership plan (ESOP) .... This
component includes contributions invested in Qualifying
Employer Securities and shall be considered the ESOP
component of the plan. The ESOP component of the Plan is
intended to primarily invest in common stock of the

5

Employer.
(D.I. 44 at WTCo000006)
The complaint fully sets forth plaintiffs' factual allegations regarding the situation
leading up to M&T's "take-under" of WT Corp. (D. I. 38) Throughout 2007, WT Corp
increased its commercial real estate and construction loans. On April 20, 2007, WT
Corp assured its investors that there was "nothing on the horizon to suggest a change
in credit quality" and the "economy in our Regional Banking footprint is healthy and
stable." 6 WT Corp also alleged that it consistently applied rigorous underwriting
standards. (D. I. 38

at~~

92-94, 97-98)

As late as January 19, 2008, WT Corp did not acknowledge the concerns of its
banking peers regarding the viability of the housing market, responding to questions
regarding its construction loans by suggesting that perhaps WT Corp had a different set
of builders. (D. I. 38

at~~

103-05) As its banking peers acknowledged significant

problems in 2008, in April and May of 2008, WT Corp continued to assert that its
construction and home loan portfolios were locally focused and not suffering from the
deteriorating housing market conditions in the rest of the country. (/d.

at~~

109-13) On

July 18, 2008, WT Corp reported a loss for the 2008 second quarter, but continued to
defend and even increase its loan portfolio. (/d.

at~

115) By January 7, 2009, WT

Corp appeared to be acknowledging the decline in the housing market, but maintained
that WT Corp was not going "off an economic cliff," and retained a positive outlook. (/d.

6

The majority of the construction was single-family residential, in a tri-sate area
of "Delaware and north into Pennsylvania and a little bit into New Jersey and the
eastern shore of Maryland." Defendant Gibson stated that WT Corp did not "lend to the
large national builders." (D.I. 38 at~ 100)

6

at ,-r,-r 125-30) WT Corp did not adjust its underwriting standards for loans in light of its
losses. (/d. at ,-r,-r 132-35)
By December 2009, WT Corp's commercial real estate and construction loans
were about 22% of its loan portfolio, reportedly twice that of other banks. 7 On January
29, 2010, WT Corp acknowledged fourth quarter losses, with defendant Cecala quoted
as stating that "it is no surprise that most of the deterioration we have seen in credit
quality has been associated with construction borrowers in Delaware." (D.I. 38 at ,-r,-r
155-58) Throughout 2010, WT Corp attempted to right itself by raising capital. It then
looked to be sold or acquired and, ultimately, WT Corp was acquired by M&T, with the
merger closing on May 16, 2011. 8 (/d. at ,-r,-r 170, 187, 195-96, 206, 223) Over the
class period, WT Corp stock price fell 90%, from $43.19 per share on January 3, 2007
to a last closing price of $4.45 per share before delisting on May 13, 2011. (/d. at ,-r
224)
Ill. SUBJECT MATTER JURISDICTION
A. Standard

Once jurisdiction is challenged, the party asserting subject matter jurisdiction has
the burden of proving its existence. See Carpet Group lnt'l v. Oriental Rug Importers
Ass'n, Inc., 227 F.3d 62, 69 (3d Cir. 2000). Under Rule 12(b)(1 ), the court's jurisdiction
7

The Wall Street Journal reported that regulators reviewed WT Corp's loan book
in 2010 and discovered WT Corp was relying on outdated appraisals despite its
assurances that it reviewed its loans on a current basis. (D.I. 38 at ,-r 174)
8

1n the second quarter of 2010, WT Corp's loan loss reserves jumped to $205.2
million (D.I. 38 at ,-r 188), to $281.5 million in the third quarter (id. at ,-r 205), and $135.6
million in the fourth quarter after M&T acquired it (id. at ,-r 216). M&T then estimated a
further markdown of just over $500 million was required. (/d. at ,-r 203)

7

may be challenged either facially (based on the legal sufficiency of the claim) or
factually (based on the sufficiency of jurisdictional fact). See 2 James W. Moore,
Moore's Federal Practice§ 12.30[4] (3d ed. 1997). Under a facial challenge to

jurisdiction, the court must accept as true the allegations contained in the complaint.
See id. Dismissal for a facial challenge to jurisdiction is "proper only when the claim

'clearly appears to be immaterial and made solely for the purpose of obtaining
jurisdiction or ... is wholly insubstantial and frivolous."' Kehr Packages, Inc. v. Fide/cor,
Inc., 926 F.2d 1406, 1408-09 (3d Cir. 1991) (quoting Bell v. Hood, 327 U.S. 678, 682

(1946)).
Under a factual attack, however, the court is not "confine[d) to allegations in the .
. . complaint, but [can] consider affidavits, depositions, and testimony to resolve factual
issues bearing on jurisdiction." Gotha v. United States, 115 F.3d 176, 179 (3d Cir.
1997); see also Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891-92 (3d
Cir. 1977). In such a situation, "no presumptive truthfulness attaches to plaintiff's
allegations, and the existence of disputed material facts will not preclude the trial court
from evaluating for itself the merits of jurisdictional claims." Carpet Group, 227 F.3d at
69 (quoting Mortensen, 549 F.2d at 891 ). Although the court should determine subject
matter jurisdiction at the outset of a case, "the truth of jurisdictional allegations need not
always be determined with finality at the threshold of litigation." 2 Moore§ 12.30[1].
Rather, a party may first establish jurisdiction "by means of a nonfrivolous assertion of
jurisdictional elements and any litigation of a contested subject-matter jurisdictional fact
issue occurs in comparatively summary procedure before a judge alone (as distinct

8

from litigation of the same fact issue as an element of the cause of action, if the claim
survives the jurisdictional objection)." Jerome B. Grubart, Inc. v. Great Lakes Dredge &
Dock Co., 513 U.S. 527, 537-38 (1995) (citations omitted).
Article Ill standing requires: "(1) an injury-in-fact ... ; (2) a causal connection
between the injury and the conduct complained of; and (3) that it must be likely, as
opposed to merely speculative, that the injury will be redressed by a favorable
decision." Winer Family Trust v. Queen, 503 F.3d 319, 325 (3d Cir. 2007). To have
standing, "the 'injury in fact' test requires more than an injury to a cognizable interest. It
requires that the party seeking review be himself among the injured." Lujan v.
Defenders of Wildlife, 504 U.S. 555, 561 (1992) (quoting Sierra Club v. Morton, 405
U.S. 734, 734-735 (1972)).
B. Analysis
Defendants allege that plaintiff Outten does not have constitutional standing, as
she was not injured by the allegations of artificial inflation; instead, plaintiff Outten
benefitted from the alleged artificial inflation as a "net seller." (D.I. 43 at 9-10) As the
Third Circuit has not ruled directly on the issue of constitutional standing in this context, 9
the court looks to the Sixth and Eighth Circuit Courts which have directly addressed
how to calculate loss to determine if an injury-in-fact occurred. Taylor v. KeyCorp, 680
9

The court understands that the Third Circuit has expressed support for using an
"alternative investment" methodology to calculate damages in cases dealing with
breach of fiduciary breach under ERISA, when addressing a question of statutory
standing of a former employee. See Graden v. Conexant Sys. Inc., 496 F.3d 291, 301
(3d Cir. 2007) ("the measure of damages is the amount that affected accounts would
have earned if prudently invested") (emphasis added) .. Nevertheless, the discussion in
Graden embraced by plaintiffs was dicta and was not directed to the issue of
constitutional standing.

9

F.3d 609 (6th Cir. 2012); Brown v. Medtronic, Inc., 628 F.3d 451 (8th Cir. 2010). These
Courts concluded that plaintiffs who were "net sellers" of company stock during the
class period lacked Article Ill standing because they suffered no "actual injury." Taylor,
680 F.3d at 613; Brown, 628 F.3d at 458. Using an artificial inflation theory, individuals
who sell their holdings during a time when the stock is claimed to be artificially inflated,
would sell the holdings for more than they are worth, thereby benefitting the sellers.
Taylor, 680 F.3d at 613 (finding that since plaintiff sold all of her units right after the

beginning of the class period and did not repurchase any units - only acquiring some
through a matching program which were subsequently sold - plaintiff suffered no loss as
she earned a net profit). Where, as here, plaintiffs allege that defendants breached
their fiduciary duties by withholding information, "the appropriate measure of damages
[is] the difference between the investment as taken and the investment as it would have
been if not tainted by withheld information." Taylor, 680 F.3d at 614 (citing Brown, 628
F.3d at 458). The court concludes that, at the initial stages of litigation, the more
straightforward approach of artificial inflation should be used to establish injury-in-fact.
Plaintiff Outten sold 797 units and acquired only 89 units (through reinvestment
of dividends) during the class period, resulting in a net sale of 708 units during the class
period. (0.1. 43 at 9-10; 0.1. 45 at ,-r 10) Plaintiff Outten's first sale was on March 17,
2008, for 32% less than her purchase price on February 15, 2007, and her second sale
was June 5, 2008, for 25% less. (0.1. 47 at 6) On October 20, 2007, a news article
reported that WT Corp had increased the amount it set aside for potential losses
because of troubles with its construction loans. (0.1. 38 at ,-r 102) The January 18,
2008 earnings release reported that nonperforming loans had increased by about $7
10

million; however, WT Corp defended its construction portfolio during a conference call
with an analyst the next day. (/d.

at~

105) On May 12, 2008, WT Corp's SEC

Quarterly Report also defended the portfolio. (/d. at~ 112) On July 18, 2008, WT Corp
reported a loss of $19.5 million for the 2008 second quarter; this news resulted in a
6.5% decline in the stock price. (/d.

at~~

114, 118)

Plaintiff Outten must provide facts sufficient to show a causal connection
between the injury and the conduct complained of, namely the withholding of
information by the Committee. The net asset value ("NAV") of the Wilmington Stock
Fund 10 decreased overall from February 15, 2007 to June 5, 2008, from $17.41 to
$12.08; however, the values do not show a steady decrease, instead fluctuating during
this time period. 11 These fluctuations included increases in the NAV after each of the

10

Defendants' analysis presents these NAV values and plaintiffs rely on these in
their arguments regarding plaintiff Outten's losses when selling her stock; therefore, the
court's analysis will follow suit. (D.I. 45 at ex. 2; D. I. 47 at 6)
11

Date

NAV

2/15/07

$17.21

9/26/07

$15.39

11/15/07

$13.80

12/26/07

$14.22

2/15/08

$12.88

3/17/08

$11.71

6/5/08

$12.84

8/15/08

$9.64

(D. I. 45 at ex. 2)
11

negative events listed above, including the October 20, 2007 negative news article. As
other factors may be influencing stock prices, plaintiffs must allege more than a "price
drop throughout a proposed class period to articulate an injury to create standing." 12
Brown, 628 F.3d at 456 (citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342
(2005)).
For the foregoing reasons, the court concludes that plaintiff Outten was a netseller and has not shown the required causal connection to the alleged bad conduct.
Plaintiffs' allegations of concealment and withholding of information by defendants
throughout the class period, leading to artificial inflation of WT Corp's stock price, are
inextricably linked to their claims that WT Corp's stock was too risky for retirement
savings. Therefore, the court will not separate out the artificial inflation claims and
concludes that plaintiff Outten lacks constitutional standing.

IV. STANDARD OF REVIEW
In reviewing a motion filed under Federal Rule of Civil Procedure 12(b )(6), the
court must accept all factual allegations in a complaint as true and take them in the light
most favorable to plaintiff. See Erickson v. Pardus, 551 U.S. 89, 94 (2007); Christopher
v. Harbury, 536 U.S. 403, 406 (2002). A court may consider the pleadings, public
record, orders, exhibits attached to the complaint, and documents incorporated into the
complaint by reference. Te/labs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308, 322
(2007); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384-85 n.2 (3d
Cir. 1994 ). A complaint must contain "a short and plain statement of the claim showing
12

Piaintiffs recognize the ongoing issues with mortgage and construction loans
other lenders were seeing during this time. (See, e.g., 0.1. 38 at~ 112)
12

that the pleader is entitled to relief, in order to give the defendant fair notice of what the
... claim is and the grounds upon which it rests." Be// At/. Corp. v. Twombly, 550 U.S.
544, 545 (2007) (interpreting Fed. R. Civ. P. 8(a)) (internal quotations omitted). A
complaint does not need detailed factual allegations; however, "a plaintiff's obligation to
provide the 'grounds' of his entitle[ment] to relief requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do."

!d. at 545 (alteration in original) (citation omitted). The ''[f]actual allegations must be
enough to raise a right to relief above the speculative level on the assumption that all of
the complaint's allegations are true." /d. Furthermore, "[w]hen there are well-ple[d]
factual allegations, a court should assume their veracity and then determine whether
they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 556 U.S. 662, 129
S.Ct. 1937, 1950 (2009). Such a determination is a context-specific task requiring the
court "to draw on its judicial experience and common sense." /d.

V. DISCUSSION
A. Breach of Duty of Care
ERISA requires that fiduciaries perform their duties with care, skill, prudence and
diligence. 13 29 U.S.C. § 11 04(a)(1 ). Failure to do so may give rise to liability, if the
13

Specifically, §404 provides:
(a) Prudent man standard of care
(1) Subject to sections 11 03(c) and (d), 1342, and 1344 of
this title, a fiduciary shall discharge his duties with respect to
a plan solely in the interest of the participants and
beneficiaries and-(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries;
and
13

breach of fiduciary duty causes a loss to the beneficiaries. 29 U.S. C. § 1105. The
Third Circuit held that the decision of an ESOP fiduciary to invest in employer stock is
entitled to judicial deference, i.e., the decision is entitled to a "presumption of prudence"
and reviewed for abuse of discretion, if the investment in a particular stock was not
"absolutely required," but was "more than simply permitted. 14 Moench v. Robertson, 62
F.3d 553, 571 (3d Cir. 1995). A "plaintiff may overcome that presumption by
establishing that the fiduciary abused its discretion by investing in employer securities."

/d. The Third Circuit extended this presumption of prudence to several other types of
pension plans categorized under ERISA, reasoning that these plans also promoted
investment in employer securities. Edgar v. Avaya, Inc., 503 F3d 340, 347 (3d Cir.
2007) (finding that the presumption of prudence applies at the motion to dismiss stage).
The current litigation involves a savings plan, which "shall consist of two
components," one of which provides for investment as an ESOP, directing the

(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims;
(C) by diversifying the investments of the plan so as to
minimize the risk of large losses, unless under the
circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments
governing the plan insofar as such documents and
instruments are consistent with the provisions of this
subchapter and subchapter Ill of this chapter.
29 U.S.C. § 11 04(a)(1 ).
14

A fiduciary's decision is subject to de novo review if a trust merely permits the
fiduciary to invest in a particular stock. Moench, 62 F.3d at 571.
14

fiduciaries "to primarily invest in common stock of the Employer." 15 (D. I. 44 at
WTCo000006 (emphasis added)) The provision for the investment in employer stock
for the ESOP component does more than merely permit the Plan's fiduciaries to invest
in Wilmington Trust Company stock ("WTC stock"); it instructs them to do so. Edgar,
503 F3d at 347 (applying the presumption of prudence to a plan designed to promote
investment in employer securities). The court concludes that the presumption of
prudence applies to the Plan.
Having determined the appropriate standard of judicial review, the court now
turns its attention to plaintiffs' allegations. To establish that defendants abused their
discretion by continuing to invest in WTC stock, plaintiffs must allege sufficient facts to
"show that the ERISA fiduciary could not have believed reasonably that continued
adherence to the ESOP's direction was in keeping with the settlor's expectations of how
a prudent trustee would operate." 16 Moench, 62 F.3d at 571. Specifically, a complaint
must allege "the type of dire situation which would [have] require[ d) defendants to
disobey the terms of the Plans by not offering the [employer's stock] as an investment
option, or by divesting the Plans of [the employer's] securities." Edgar, 503 F3d at 348.
Courts must be cognizant that fiduciaries who are also directors of the corporation
"serve two masters [a]nd the more uncertain the loyalties of the fiduciary, the less

15

The "special rules for employer stock" state in part, "[t]he portion of your
account invested in employer stock is part of an employee stock ownership plan and
contains funds that are invested primarily in common stock of Wilmington Trust
Corporation." (D.I. 44 at WTCo000137)
16

Courts must consider that fiduciaries who diversify against the ESOP's direction
would face liability if the employer's securities subsequently thrived. Moench, 62 F.3d
at 572.
15

discretion it has to act." Moench, 62 F.3d at 572. A fiduciary in this position must show
"a careful and impartial investigation of all investment decisions." /d. (citing Martin v.
Feilen, 965 F.2d 660, 670 (8th Cir. 1992)).

The alleged facts demonstrate that WT Corp continued to make construction
loans after its peers acknowledged the housing market decline. Statements
disseminated by WT Corp through its directors show WT Corp seemingly turning a blind
eye to the market's decline, averring that it used different builders and financed loans
for real property in and around Delaware. Over the class period, WT Corp stock price
fell 90%. Defendants have proffered no showing of a conscientious and impartial
investigation or review of any of the Plan's investment decisions. 17 To the contrary,
during the market decline, WT Corp was relying on outdated appraisals for its loan
decisions. Drawing all inferences in favor of the plaintiffs, the court concludes that
plaintiffs have set forth allegations which more closely resemble those in Moench than
Edgar, and which plausibly suggest a dire enough situation to support an abuse of

discretion by the fiduciaries (at least, sufficient to permit discovery).

B. Breach of Duty to Disclose
Plaintiffs contend that defendants failed to provide information to Plan
participants, which prevented them from making informed decisions about Plan
investments. (D. I. 38 at mf 248-55) An ERISA fiduciary "may not materially mislead

17

Defendants advocate that WT Corp needed to reach the point of imminent
collapse before defendants could disobey the Plan's terms. (D. I. 43 at 3; D. I. 49 at 13)
In Edgar, the Third Circuit stated that a company need not be "on the brink of
bankruptcy before a fiduciary is required to divest a plan of employer securities," but the
situation must be dire enough to require it. Edgar, 503 F3d at 349 n.13.
16

those to whom section 11 04(a)'s duties of loyalty and prudence are owed." In re Unisys
Sav. Plan Litig., 74 F.3d 420, 440 (3d Cir. 1996). This duty includes "not only a

negative duty not to misinform, but also an affirmative duty to inform when the trustee
knows that silence might be harmful." /d. at 441. A fiduciary of a plan must inform
participants about the risks associated with investing in the plan, but does "not have a
duty to 'give investment advice' or 'to opine on' the stock's condition." Edgar, 503 F.3d
at 350 (citing Unisys, 74 F.3d at 443).
The Plan description and written communications provided plaintiffs with
information regarding the investment options and the associated risks. It also provided
summaries of past performance, warned against fluctuations due to market conditions,
and did not guarantee any particular future results. The Plan specifically described the
Wilmington Trust Stock Fund. (0.1. 43 at 23-25; see generally 0.1. 44); Edgar, 503 F.3d
at 350.
According to the analytical framework prescribed by the Third Circuit in Edgar,
although "an ERISA fiduciary 'may not materially mislead those to whom section
1104(a)'s duties of loyalty and prudence are owed,'" id., such a fiduciary may neither
act on (i.e., sell) nor share confidential corporate information before it has been publicly
released by the corporation. The reasoning underlying the above principle was
explained in Edgar as follows:
[H]ad the [defendant fiduciaries in that case] "publicly
released any adverse information they had prior to the
[corporate] announcement, under the 'efficient capital
markets hypotheses,' such a disclosure would have resulted
in a swift market adjustment." Therefore, ... "the Plans
would not have been able to sell their [corporate] stock
17

holdings at the higher, pre-announcement price, and the
Plans would have sustained the same losses they incurred
when the Company [Avaya] publicly announced the quarterly
results in April 2005." In addition, ... had defendants
decided to divest the Plans of Avaya stock prior to [the April
2005 public announcement], based on information that was
not publicly available, they would have faced potential
liability under the securities laws for insider trading.
In sum, we conclude that defendants fulfilled their duty of
disclosure under ERISA by informing Plan participants about
the potential risks associated with investment in the Avaya
Stock Fund. That defendants did not inform Plan
participants about several adverse corporate developments
prior to [the April 2005] earnings announcement, does not
constitute a breach of their disclosure obligations under
ERISA.

/d.
Consistent with the above analysis, plaintiffs have failed to adequately claim that
defendants breached their disclosure obligations under ERISA. 18
C. Breach of Duty of Loyalty
Plaintiffs allege divided loyalty against the individual defendants for breaching
their fiduciary duties by not acting in the interests of the Plan and that defendants
Gibson, Farrell and Cecala failed to avoid conflicts of interest. (0.1. 38 at 1f1f256-61,

18

To some extent, plaintiffs arguably allege that defendants actively concealed
WT Corp's financial distress and engaged in violations of law or regulations, which
could support a breach of disclosure claim. (0.1. 47 at 32; 0.1. 38 at 1f249); In re
Schering-Piough Corp. Erisa Utig., Civ. No. 08-1432, 2010 WL 2667414, at *6-7 (D.N.J.
Aug. 15, 2007); In re Merck & Co., Inc. Sec., Derivative & ERISA Utig., MDL No. 1658,
2009 WL 790452, at *5 (D. N.J. Mar. 23, 2009). Even if the court accepts that plaintiffs'
allegations pass muster under Twombly, plaintiffs are not able to show loss causation.
The efficient capital markets hypothesis, recognized by the Third Circuit, applies - had
defendants released the allegedly withheld information earlier, the Plan would not have
been able to sell the WT Corp units at a higher price as the market would have swiftly
adjusted itself, resulting in the same loss to plaintiffs. Edgar, 503 F.3d at 350.
18

267-73) Under ERISA, a fiduciary may wear two hats; specifically, the statute allows
officers and employees of a company to serve as fiduciaries of the company's ERISA
plans. ERISA,§ 408(c)(3), 29 U.S.C. § 1108(c) (3). Such fiduciaries are still required
to "discharge [their] duties with respect to a plan solely in the interest of the participants
and beneficiaries," which may require in some circumstances a neutral referee or to
explicitly inquire into conflict of interest. ERISA,§ 404, 29 U.S.C. § 1104; McMahon v.
McDowell, 794 F.2d 100, 110 (3rd Cir. 1986).

More specifically, plaintiffs assert that the compensation of defendants Gibson,
Farrell, and Cecala was tied to the performance of WT Corp's stock and that they had
information that was inconsistent with the rosy picture of WT Corp's financial condition
they continued to paint as corporate officers. According to plaintiffs, by these
assertions they have sufficiently pled that defendants failed to avoid conflicts of interest
and, therefore, breached their duty of loyalty to Plan participants.
The court recognizes that the mere fact that compensation is tied to stock prices,
without more, is not necessarily enough to show the existence of a breach of duty of
loyalty or a conflict of interest. See, e.g., Trenton v. Scott Paper Co., 832 F.2d 806, 809
(3d Cir. 1987); Johnson v. Radian Group, Inc., Civ. No. 08-2007, 2010 WL 2136562, at
*14 (E.D. Pa. May 26, 2010). However, the court concludes that the allegations at bar
are sufficient to withstand the motion to dismiss, and that a determination of whether a
conflict of interest arose under the circumstances at bar is better determined on a
developed record. See Advanta Corp. ERISA Litig., Civ. No. 09-4974, 2011 WL
45284341, at *4 (E. D. Pa. Sept. 30, 2011 ).

19

D. Breach of Duty to Monitor
Plaintiffs also allege that defendant Cecala 19 breached the duty to properly
appoint, monitor and oversee the Committee and its members by his failure to
adequately inform the Committee about the true financial and operating condition of WT
Corp. Alternatively, plaintiffs allege that, if defendant did so inform the Committee, he
then allowed the Committee to improperly invest in WT Corp's stock.
ERISA imposes a duty to monitor on those individuals empowered to appoint
and remove plan fiduciaries. Graden v. Conexant Systems, Inc., 574 F. Supp. 2d 456,
466 (O.N.J. 2008); In re RCN Litig., Civ. No. 04-5068, 2006 WL 753149, at *9 (O.N.J.
Mar. 21, 2006). Consistent with the court's conclusion above regarding the
Committee's duty to disclose, however, the court finds that these allegations do not
sufficiently allege a cause of action against defendant Cecala. In other words, even if
defendant Cecala had informed the Committee of the true financial and operating
condition of WT Corp, the Committee was precluded from doing anything with that
information until the information was publicly disclosed. Under these circumstances,
there can be no breach of the duty to monitor.

E. WT Corp as Fiduciary
As WT Corp is not a named fiduciary of the Plan, plaintiffs allege that it is a
functional or de facto fiduciary through the doctrine of respondeat superior. (0.1. 38 at
1f1f27, 29) Under ERISA,

19

Aithough the claim is asserted against WT Corp, WT Bank and Cecala, all of
the factual information relates to the alleged conduct of individual defendant Cecala.
(0.1. 38 at 1f1f262-66)
20

a person is a fiduciary with respect to a plan to the extent (I)
he exercises any discretionary authority or discretionary
control respecting management of such plan or exercises
any authority or control respecting management or
disposition of its assets, (ii) he renders investment advice for
a fee or other compensation, direct or indirect, with respect
to any moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) he has any
discretionary authority or discretionary responsibility in the
administration of such plan.
29 U.S.C. § 1002(21 )(A). The Third Circuit liberally construes "fiduciary," making it
clear "that one need not have discretion in exercising authority or control over the
management or disposition of plan assets in order to qualify as a fiduciary under §
1002(21)(A)(I)." In re Mushroom Transp. Co., Inc., 382 F.3d 325, 346 (3d Cir. 2004).
Plaintiffs allege that WT Corp effectively controlled WT Bank and that the two
entities shared many officers, including defendant Farrell (executive vice president) and
defendant Gibson (chief financial officer). (D.I. 38

at~

27) The court concludes that

plaintiffs have adequately pled a "de facto" fiduciary status, under the liberal definition,
by further alleging that the Committee members were employees of WT Corp and
delegated some responsibility for the administration and investment of the Plan to other
WT Corp employees. (/d.)
The Third Circuit, in McMahon v. McDowell, 794 F.2d 100, 109 (3d Cir. 1986),
recognized that, "if a beneficiary or participant can show that the plan fiduciaries
breached their duties, he may also be able to recover damages, for the benefit of the
plan, directly from the employer." This holding is consistent with the following cases
from other circuits: Howell v. Motorola, Inc., 633 F.3d 552 (7th Cir. 2011) (implicitly
recognizing respondeat superior liability in ERISA cases); Hamilton v. Carel/, 243 F.3d

21

992, 1001-02 (6th Cir. 2001) (respondeat superior may be a source of liability); Nat'/
Football Scouting Inc. v. Continental Assurance Co., 931 F.2d 646, 648-650 (10th Cir.
1991) (supporting the application of respondeat superior in ERISA cases); and Am.
Fed'n of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Soc. of
the U.S., 841 F.2d 658, 665 (5th Cir. 1988) (holding that "[t]he doctrine of respondeat
superior can be a source of liability in ERISA cases").
Here plaintiffs have alleged that WT Corp "knowingly and actively participated in
the breaches of fiduciary duty," as it knew that its stock was offered in the Plan and was
aware that it engaged in "unsafe or unsound practices," exposing the Plan to risks. (D.I.
38

at~~

29-31) WT Corp should have known that its stock was an imprudent

investment for the Plan, but did not adequately warn or instruct its employees or the
individual defendants. (!d.

at~

32) WT Corp ignored its duty to monitor its employees

and properly communicate information needed for the administration of the Plan. (!d. at
~ 33) WT Corp also appointed fiduciaries to the Committee for its own benefit. 20 (/d. at
~

34)
The court concludes that plaintiffs have proffered enough facts to plausibly show
20

Piaintiffs allege:
The Corporate Defendants also had incentive to, and did,
appoint fiduciaries who were likely to, and did, maintain the
status quo of Plan's investment in the Wilmington Trust
Common Stock Fund because the Corporate Defendants
reaped the benefits of the Company stock being offered and
held as a plan investment option, including tax benefits,
keeping significant amounts of stock in friendly hands, and
helping with the Corporate Defendants' cash flows.

(D. I. 38 at~ 34)
22

that the doctrine of respondeat superior applies, at least enough to warrant discovery
on the surrounding facts, for the court to review. 21

VI. CONCLUSION
For the above reasons, defendants' motion to dismiss is granted as to plaintiffs'
claims regarding breach of the duties to disclose and to monitor, as well as to the
standing issue. The motion is denied as to plaintiffs' claims regarding breach of the
duties of care and of loyalty, as well as to the respondeat superior issue.

21

Until the Third Circuit directly addresses this issue, the court will follow the
Third Circuit's current direction of liberally defining fiduciaries and allow discovery on
the circumstances illuminating the scope of employment.

23