Myers v. The 401(K) Fiduciary Committee for Seventy Seven Energy INC et al
Filing
78
ORDER granting in part and denying in part 45 Defendants' Motion to Dismiss; granting 46 Principal Trust Company's Motion to Dismiss. Signed by Honorable Timothy D. DeGiusti on 3/22/2019. (mb)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
KATHLEEN J. MYERS, on behalf of the
Seventy Seven Energy Inc. Retirement
& Savings Plan and a class of similarly
situated participants of the Plan,
Plaintiff,
v.
ADMINISTRATIVE COMMITTEE,
SEVENTY SEVEN ENERGY, INC.
RETIREMENT & SAVINGS PLAN; et al.,
Defendants.
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Case No. CIV-17-200-D
ORDER
Currently before the Court are the Committee Defendants’ Motion to Dismiss
Plaintiff’s Amended Class Action Complaint [Doc. No. 45] and Defendant Principal Trust
Company’s Motion to Dismiss [Doc. No. 46], 1 filed pursuant to Fed. R. Civ. P. 12(b)(6).
Both Motions are fully briefed. 2
Because the Motions raise overlapping issues, they are
taken up together.
1
The “Committee Defendants” are Defendant Administrative Committee of the Seventy
Seven Energy, Inc. Retirement & Savings Plan, and individual committee members, Defendants
Cary Baetz, Karl Blanchard, Christin Borden, Linda Clark, Clint Cover, Gino DeMarco, Lance
Haffner, and Jerome Loughbridge. Defendant Delaware Charter Guarantee & Trust Company
uses its trade name.
2
The parties’ respective briefs are: Plaintiff’s Brief in Opposition to the Committee
Defendants’ Motion to Dismiss [Doc. No. 49]; Plaintiff’s Brief in Opposition to Principal Trust
Company’s Motion to Dismiss [Doc. No. 50]; the Committee Defendants’ Reply in Support of
Their Motion to Dismiss [Doc. No. 52]; and Principal Trust Company’s Reply in Support of
Motion to Dismiss [Doc. No. 51]. The parties have also filed supplemental briefs [Doc. Nos. 59
& 60] and multiple notices of supplemental authority [Doc. Nos. 55, 61-62, 66-69, 77].
Factual and Procedural Background
Plaintiff Kathleen Myers brings suit under the Employee Retirement Income
Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., as a participant in the Seventy
Seven Energy Inc. Retirement & Savings Plan (the “Plan”), to obtain equitable relief and
damages to which the Plan and its participants allegedly are entitled due to Defendants’
breaches of fiduciary duties. The Committee Defendants are alleged to be administrators
and fiduciaries of the Plan, and Principal Trust Company (“Principal”) serves as the trustee
under a directed trust agreement of a trust that holds the Plan’s assets. The Plan is a
“defined contribution” or “individual account” plan as defined by ERISA, 29 U.S.C.
§ 1002(34), established by Seventy Seven Energy Inc. (“SSE”) to provide retirement
income for its employees.
SSE is a spinoff of Chesapeake Energy Corporation (“Chesapeake”) formed on
June 30, 2014, from a wholly-owned subsidiary, Chesapeake Oilfield Operating, L.L.C.
The Plan was established on July 1, 2014, as a spinoff from the Chesapeake Energy
Corporation Savings and Incentive Stock Bonus Plan, and initially was funded by a transfer
of assets from the parent plan that included Chesapeake common stock. The Plan allows
participants to defer a percentage of their employment income by making elective
contributions (401(k) contributions), and allows SSE to match a percentage of participants’
contributions and make discretionary contributions to an employee stock ownership plan
(“ESOP”) in the form of SSE common stock.
Plaintiff claims the Committee Defendants breached fiduciary duties to the Plan and
its participants by: 1) “allowing the Plan to buy and hold Chesapeake stock in the ESOP
2
because . . . Chesapeake stock was not a ‘qualifying employer security’” so “inclusion of
Chesapeake stock in the ESOP was a per se violation of ERISA” (Am. Compl. [Doc.
No. 39] ¶ 108); 2) imprudently investing and maintaining the investment in Chesapeake
stock because they “knew or should have known that Chesapeake was not, and had never
been, a suitable and appropriate investment for the Plan” (id. ¶ 111); 3) “failing to diversify
Plan investments” (id. ¶ 114); and 4) failing to provide adequate disclosures “concerning
the Plan’s investments in Chesapeake” (id. ¶ 116). Plaintiff claims Principal breached its
fiduciary duties by allowing the alleged ERISA violation to occur and by imprudently
permitting the Plan to own Chesapeake stock (id. ¶¶ 121-123). 3 Plaintiff alleges “[t]he
Plan should have divested itself of Chesapeake stock immediately following the spin-off”
and Defendants’ failure to divest caused “a substantial portion of the losses suffered” from
a decline in value of the Chesapeake stock. Id. at ¶ 133.
After the original Complaint was served, the parties agreed on a case management
schedule for identification and joinder of the proper defendants, amendment of Plaintiff’s
pleading, and briefing of responsive motions. In keeping with that schedule, Plaintiff filed
the Amended Complaint, and Defendants filed the instant Motions challenging the
sufficiency of Plaintiff’s pleading to state a claim on which relief can be granted. No
3
Plaintiff also seeks to impose co-fiduciary liability on all defendants for allegedly
participating in, enabling, or failing to remedy any breach of duty committed by another fiduciary.
See 29 U.S.C. § 1105(a). This claim is derivative of a viable claim for some other breach. See,
e.g., Gabriel v. Alaska Elec. Pension Fund, 773 F.3d 945, 952 n.2 (9th Cir. 2014); Coulter v.
Morgan Stanley & Co., 753 F.3d 361, 368 (2d Cir. 2014).
3
discovery has been requested, and no motion to certify the proposed class of participants
alleged in the Amended Complaint has been filed.
The Committee Defendants assert: 1) the decision to retain Chesapeake stock in
the Plan is exempt from challenge because the stock is a “qualifying employer security” as
defined by ERISA; 2) if not exempt from the diversification requirement, the Committee
Defendants cannot be held liable for a failure to diversify because participants had many
investment options and they decided whether to retain Chesapeake stock in their accounts;
3) Plaintiff’s factual allegations are based on public information and fail to show a breach
of the duty of prudent investment under Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct.
2459 (2014); and 4) the alleged facts do not show a breach of any duty of disclosure
because no general duty of disclosure exists, no material misrepresentation is alleged, and
no specific disclosure obligation under 29 C.F.R. § 2520.102-2 is implicated.
Principal contends its only duty as a directed trustee “was to follow the reasonable
directions of the Committee Defendants so long as they were (1) in accordance with the
Plan, and (2) not contrary to ERISA.” See Principal’s Mot. at 1, 7 (citing 29 U.S.C.
§ 1103(a)(1)).
Principal asserts that Plaintiff’s action against it must be dismissed
because: 1) the factual allegations on which liability depends “are contradicted by the
very documents Plaintiff cites in the Amended Complaint” (id. at 6); 2) the Chesapeake
stock was a permissible investment under the Plan and the directed trust agreement,
regardless whether it was a “qualifying employer security” (id. at 8-9); and 3) Plaintiff’s
contention that holding the Chesapeake stock in the ESOP component of the Plan violated
ERISA “is meritless for at least four reasons,” primarily because the notion “that any stock
4
is ‘held’ in the ESOP component is misguided and wrong” and because “[i]t simply does
not matter where any Plan investment is ‘held’ for purposes of ERISA” (id. at 9-10, 13).
Finally, like the Committee Defendants, Principal argues that Plaintiff’s claim for breach
of the duty of prudence fails under the standard announced in Dudenhoeffer for investments
in publicly traded stock based on publicly available information.
Standard of Decision
“To survive a motion to dismiss [under Rule 12(b)(6)], a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007)).
“A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.”
Id.
“[W]here the well-pleaded facts do
not permit the court to infer more than the possibility of misconduct, the complaint has
alleged – but it has not ‘show[n]’ – ‘that the pleader is entitled to relief.’”
(quoting Fed. R. Civ. P. 8(a)(2)).
Id. at 679
Thus, in assessing plausibility, a court must first
disregard conclusory allegations and “next consider the factual allegations in [the]
complaint to determine if they plausibly suggest an entitlement to relief.”
Id. at 681.
The question to be decided is “whether the complaint sufficiently alleges facts supporting
all the elements necessary to establish an entitlement to relief under the legal theory
proposed.”
Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007) (internal quotation
omitted).
5
Ordinarily, “the sufficiency of a complaint must rest on its contents alone.”
v. Pacheco, 627 F.3d 1178, 1186 (10th Cir. 2010).
Gee
But there are several well-established
exceptions: “(1) documents that the complaint incorporates by reference; (2) documents
referred to in the complaint if the documents are central to the plaintiff’s claim and the
parties do not dispute the documents’ authenticity, and (3) matters of which a court may
take judicial notice.”
Id. (internal quotations and citations omitted) (quoting Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007), and Jacobsen v. Deseret Book
Co., 287 F.3d 936, 941 (10th Cir. 2002)); see Tal v. Hogan, 453 F.3d 1244, 1265 n.24 (10th
Cir. 2006); see also Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009); Pace v.
Swerdlow, 519 F.3d 1067, 1072 (10th Cir. 2008); Alvarado v. KOB-TV, L.L.C., 493 F.3d
1210, 1215 (10th Cir. 2007).
Matters subject to judicial notice and appropriate for
consideration under Rule 12(b)(6) include a court’s “own files and records, as well as facts
which are a matter of public record.”
See Tal, 453 F.3d at 1265 n.24.
In this case, Plaintiff does not attach any documents to her pleading, but she quotes
from and cites extensively Plan-related documents, the directed trust agreement, and public
records such as SEC filings. Consistent with the above-cited authorities, Defendants have
submitted copies of the documents with their Motions. Because Plaintiff does not dispute
the authenticity of these documents, the Court finds them to be appropriate for
consideration. See GFF Corp. v. Assoc. Wholesale Grocers, Inc., 130 F.3d 1381, 138485 (10th Cir. 1997) (“[I]f a plaintiff does not incorporate by reference or attach a document
to its complaint, but the document is referred to in the complaint and is central to the
plaintiff’s claim, a defendant may submit an indisputably authentic copy to the court to be
6
considered on a motion to dismiss.”); see also Brokers’ Choice of Am., Inc. v. NBC
Universal, Inc., 861 F.3d 1081, 1104 (10th Cir. 2017); Berneike v. CitiMortgage, Inc., 708
F.3d 1141, 1146 (10th Cir. 2013). Further, where Plaintiff misquotes or omits pertinent
portions of the cited documents, the documents control. See GFF Corp., 130 F.3d at 1385
(“factual allegations that contradict . . . a properly considered document are not wellpleaded facts that the court must accept as true”); accord Farrell Cooper Mining Co. v.
U.S. Dep’t of Interior, 728 F.3d 1129, 1237 n.6 (10th Cir. 2013); Peterson v. Martinez, 707
F.3d 1197, 1206 (10th Cir. 2013). 4
Plaintiff’s Allegations
In addition to the facts summarized above, Plaintiff alleges that she “held shares of
Chesapeake stock in her Plan account” from July 1, 2014, to the present, and that the value
of those shares has “diminished considerably” during this time, resulting in a financial loss.
See Am. Compl. ¶¶ 10-11. The Plan provided an individual account for each participant
and benefits based on the amount contributed to the participant’s account, together with
any income, expenses, gains, losses, or forfeitures of other accounts that could be allocated
to the participant’s account.
The Plan covered all SSE employees that met certain
eligibility requirements. SSE employees were automatically enrolled in the Plan, initially
deferred four percent of their pay, and automatically increased contributions in subsequent
4
Defendants have also submitted documents that are not referred to in the Amended
Complaint, such as a “Direction to Trustee” form [Doc. No. 46-4] and a document providing
investment information for Plan participants dated January 1, 2016 [Doc. No. 45-9]. These
documents cannot properly be considered under Rule 12(b)(6).
7
years of employment (unless they elected a different percentage).
No Chesapeake
employees were covered by the Plan.
SSE matched participants’ contributions up to a maximum percentage, and could
make discretionary contributions to participants’ accounts on an annual basis. Both types
of contributions by SSE were made in the form of “Qualifying Employer Securities” or
“common stock issued by the Employer” – that is, SSE common stock – and constituted
the ESOP component of the Plan. Id. ¶¶ 30-31 (quoting Plan Document at 14, 15; Plan
Prospectus at 14). The Plan provided “22 core investment funds” in which participants
could elect to invest their contributions, but SSE stock was not an investment option for
participants because “this investment option is not diversified and exposes investors to a
higher risk of loss than other investment options.” Id. ¶¶ 32-33 (quoting Plan Prospectus
at 10, 14). Chesapeake common stock also was not an investment option. Id. ¶ 93; see
Plan Prospectus at 10-14.
SSE established a trust fund to hold and distribute the Plan’s assets, and appointed
Principal as the trustee. The trust agreement described Principal’s duties and powers, and
specified the types of financial products and investments that could be made, including
annuity contracts, money market funds, exchange traded securities, mutual funds, and
qualifying employer securities. See Am. Compl. ¶ 35 (citing Trust Agreement, § .05(a)).
Principal became a “directed trustee,” subject to the direction of the Committee
Defendants, “unless such direction is contrary to the terms of the Plan or ERISA.” Id.
¶¶ 35, 45; see Trust Agreement § .04.
8
When the Plan was established on July 1, 2014, as a spinoff from Chesapeake’s
employee savings plan, it received a transfer of assets from the Chesapeake plan valued at
$196,210,229, which included Chesapeake stock valued at $87,038,874 (or 44.3 percent).
See Am. Compl. ¶¶ 26, 36.
According to Plaintiff, “[t]he Plan’s 2014 Financial
Statements incorrectly describe the Chesapeake stock as an ‘employer security.’” Id.
¶ 37. 5 After SSE’s spinoff from Chesapeake, the two corporations were separate and
independent, publicly-traded companies. Chesapeake had no ownership interest in SSE,
and they were not affiliates of one another. Chesapeake was not an employer of any Plan
participants.
Plaintiff alleges that Chesapeake stock was historically risky and volatile and it
“experienced precisely the volatility that might be expected during the [proposed] Class
Period.” See Am. Compl. ¶ 48. Specifically, the nature of Chesapeake’s business in oil
and gas production, the fluctuation of oil and gas prices, the volatility of energy markets,
and Chesapeake’s financial condition combined to make Chesapeake stock a particularly
risky investment that “was not a suitable option for the investment of retirement assets”
when it received the Chesapeake stock on July 1, 2014. Id. ¶ 57. Further increasing the
5
Although Plaintiff cites “Financial Statements” throughout the Amended Complaint,
she does not identify the documents to which she refers. Defendants submit for consideration
annual financial reports filed with the Securities and Exchange Commission (Form 11-K) and the
Internal Revenue Service (Form 5500). See Comm. Defs.’ Mot., Exs. 1, 5 & 7 [Doc. Nos. 45-2,
45-6 and 45-8]; Principal’s Mot., Ex. 4 [Doc. No. 46-5]. In her response briefs, Plaintiff refers to
these exhibits without clarifying which ones provide the basis of her claims; the spot cites in the
Amended Complaint do not appear to fit Defendants’ exhibits. It appears, however, that both
types of reports contain some of the material on which Plaintiff relies for her “employer security”
allegation. As discussed infra, Defendants contend the allegation is a legal conclusion based on
Plaintiff’s misreading of the documents.
9
riskiness of Chesapeake stock during 2014 and 2015 was a sharp drop in share price, energy
market predictions of further decline in oil and gas prices, and corporate debt levels that
allegedly caused financial analysts to label Chesapeake as a stock for “energy risk-takers”
in 2015 and as “an unprecedented mess” in 2016. Id. ¶¶ 58-63, 69-77. The market price
of Chesapeake stock fell from $29 per share in July 2014 to $7 per share in October 2015,
and has remained low, losing “approximately 80% of its value.” Id. ¶¶ 58, 71, 77.
Plaintiff complains that “[t]he Committee Defendants ignored these risks and failed
to take any action that a prudent fiduciary would have taken to stop the massive losses that
Plan participants were suffering due to Chesapeake’s free-falling share price” (id. ¶ 64),
particularly “given the Plan’s massive, overly-concentrated holding of Chesapeake stock”
(id. ¶ 65) and the ESOP’s investment in SSE stock (because SSE was in the same industry
and its success was “directly dependent on Chesapeake”). Id. ¶ 66. 6 Instead, Plaintiff
alleges the amount of Chesapeake stock held by the Plan increased “throughout 2014 and
2015” due to additional purchases. Id. ¶¶ 67, 83, 85. Plaintiff acknowledges that the
Chesapeake stock held by the Plan at the end of 2014 was a lesser percentage of its assets
(then “comprising more than 30% percent of the Plan’s assets”), but she attributes this
6
Not stated by Plaintiff, SSE sought bankruptcy protection in June 2016 and, through a
Chapter 11 reorganization, canceled its outstanding stock. See In re Seventy Seven Energy Inc.,
Case No. 16-11410, Pet. (D. Del. June 7, 2016); Tom Hals, Oilfield Service Firm Seventy Seven
Energy Files for Bankruptcy, Reuters (June 7, 2016), https://www.reuters.com/article/
seventyseven-bankruptcy-idUSL1N18Z1KL; see also Katy Stech, Judge Clears Seventy Seven
Energy to Leave Bankruptcy, Wall St. J. (July 13, 2016), https://www.wsj.com/articles/judgeclears-seventy-seven-energy-to-leave-bankruptcy-1468435109.
10
change to participants’ added contributions to other investment options and the lower
market value of Chesapeake stock. Id. ¶ 84.
Discussion
A.
Was Chesapeake Stock a “Qualifying Employer Security” Under ERISA?
Plaintiff and the Committee Defendants strongly disagree on the answer to this
question, but neither side presents any caselaw directly on point. 7 While the Motions were
pending, the Committee Defendants provided notice of one district court decision that has
addressed the issue and rejected their position. See Schweitzer ex rel. Phillips 66 Sav.
Plan v. Inv. Comm., 312 F. Supp. 3d 608 (S.D. Tex. 2018), appeal filed, No. 18-20379 (5th
Cir. June 12, 2018) (oral argument held March 11, 2019). In Schweitzer, the court held
that after a corporate spinoff – where a subsidiary of ConocoPhillips Corporation became
a separate and independent company, Phillips 66 Company, Inc. – stock of ConocoPhillips
that was transferred to an employee savings plan established by Phillips 66 no longer
qualified as an “employer security,” even though the stock was attributable to employeeparticipants’ accounts in their former (ConocoPhillips) ESOP. See Schweitzer, 312 F.
Supp. 3d at 611-12, 617-18. The court relied primarily on the language of the plan. 8
7
Principal takes no position on this issue – although it contends Plaintiff’s argument is
wrong – because the directed trust agreement permitted the Plan to hold the Chesapeake stock (an
exchange traded security) so the stock could properly be received into the Plan’s trust fund from
the Chesapeake plan. Principal asserts that the controlling documents refute Plaintiff’s contention
that the Chesapeake stock was held in the ESOP component of the Plan, as discussed infra.
8
The court also found support in an IRS private letter ruling that Plaintiff cites in this
case. See Pl.’s Resp. Comm. Defs.’ Mot. at 8-9. Private letter rulings “may be cited as evidence
of administrative interpretation.” True Oil Co. v. Comm’r, 170 F.3d 1294, 1302 (10th Cir. 1999)
(internal quotation omitted). But the Tenth Circuit has determined they are “inappropriate for
judicial notice.” See Am. Stores Co. v. Comm’r, 170 F.3d 1267, 1270 (10th Cir. 1999); accord
11
Under ERISA, “[t]he term ‘employer security’ means a security issued by an
employer of employees covered by the plan, or by an affiliate of such employer.” See 29
U.S.C. § 1107(d)(1). 9 Stock issued by a former employer – with no relationship to
employees covered by the plan of a separate, spun-off corporation – does not appear to fit
that definition. The Committee Defendants contend the focus of the phrase “issued by an
employer” should be the date on which the stock was issued and that the Chesapeake stock
was issued at a time when Plan participants were employed by Chesapeake. See Comm.
Defs.’ Mot. at 10. Plaintiff contends this argument is contrary to “ERISA’s plain words”
because the statutory definition of “employer” speaks in present terms of a “person acting
directly as an employer, or indirectly in the interest of an employer, in relation to an
employee benefit plan.” See Pl.’s Resp. Comm. Defs.’ Mot. at 8 (citing 29 U.S.C.
§ 1002(5)).
Upon consideration, the Court is not persuaded by the Committee Defendants’
argument that the status of the Chesapeake stock hinges on the date of issue.
The
argument assumes that the stock held by the Chesapeake plan was newly issued when it
was contributed to employee-participants’ accounts, rather than received as a transfer of
corporate stock or an acquisition of previously issued stock. Otherwise, there would be
no way of knowing whether employee-participants in the Chesapeake plan were in fact
Tomlinson v. El Paso Corp., 653 F.3d 1281, 1296 (10th Cir. 2011). Further, the rulings are issued
by the IRS under its authority to enforce the Internal Revenue Code. See 26 C.F.R. § 7805(a).
9
A “qualifying employer security” is “an employer security which is – (A) stock, (B) a
marketable obligation . . . , or (C) an interest in a publicly traded partnership (as defined in
section 7704(b) of the Internal Revenue Code of 1986) . . . .” 29 U.S.C. § 1107(d)(5).
12
employed by Chesapeake at the time the stock was issued.
More importantly, the
argument is made without any reference to principles of statutory construction, which begin
and end with “the plain language of the statute” if “the statute’s language is clear” and the
result is not “an absurd application of the law.” See Levorsen v. Octapharma Plasma,
Inc., 828 F.3d 1227, 1236 (10th Cir. 2016).
The Court finds that the Committee
Defendants’ argument requires a strained, unworkable reading of the statutory definition
of “employer security.”
Further, the Plan-related documents identify only SSE stock as “employer
securities.” The Plan document itself expressly defines the term “qualifying employer
securities” to mean “common stock issued by the Employer,” with “Employer” defined as
“the Primary Employer” or SSE. See Comm. Defs.’ Mot., Ex. 2 [Doc. No. 45-3] and
Principal’s Mot., Ex. 1 [Doc. No. 46-2] (hereafter, “Plan”), § 1.02 at 9, 14. 10 The Plan
document designates qualifying employer securities as the ESOP portion of the Plan. Id.
§ 4.02(a). Similarly, the Plan’s summary plan description and prospectus make clear that
all matching and discretionary contributions to the ESOP (that is, employer securities)
would be made in the form of SSE stock. See Comm. Defs.’ Mot., Ex. 4 [Doc. No. 45-5]
and Principal’s Mot., Ex. 5 [Doc. No. 46-6] (hereafter, “SPD”) at 27; Comm. Defs.’ Mot.,
Ex. 3 [Doc. No. 45-4] (hereafter, “Prospectus”) at 14, 30. These provisions reinforce the
10
“Employer” also includes any successor corporation that assumes the obligations of the
Plan or “any Predecessor Employer that maintained this Plan.” Id. at 9. Chesapeake may have
been a “Predecessor Employer” (id. at 13), but there is no indication Chesapeake maintained “this
Plan,” which was effective July 1, 2014. See Plan, Intro. at 1.
13
view that the shares of Chesapeake stock transferred to the Plan were not “employer
securities” after the spinoff.
As argued by Defendants, the consequence of a finding that Chesapeake stock is not
a “qualifying employer security” under ERISA is that fiduciaries of the Plan lose an
exemption from the duty to diversify provided by 29 U.S.C. § 1104(a)(2).
See
Dudenhoeffer, 134 S. Ct. at 2463 (“ESOP fiduciaries are subject to the same duty of
prudence that applies to ERISA fiduciaries in general, except that they need not diversify
the fund’s assets”). Without the exemption, Plaintiff must still sufficiently allege that the
Committee Defendants breached the duty to diversify, and that Principal failed a duty to
correct the breach, in order to state a plausible claim against them. The question of
whether Plaintiff has sufficiently pleaded a failure-to-diversify claim with regard to the
Chesapeake stock is addressed infra.
Under Plaintiff’s view, whether Chesapeake stock is an “employer security” also
affects her claim that Defendants violated ERISA by holding Chesapeake stock in the
ESOP component of the Plan. Defendants contend this claim is based on a misreading of
the Plan documents, and is meaningless, because all assets of the Plan were held in a single
fund and there was no separate account designated as an “ESOP fund.” Plaintiff argues,
as alleged in her Amended Complaint, that “Chesapeake stock was held in the Plan’s ESOP
component” based on the “Plan’s 2014 Financial Statements at p.11 and at Schedule H,
Line 4i.” See Am. Compl. ¶ 37; Pl.’s Resp. Comm. Defs.’ Mot. at 5 (citing Am. Compl.
¶ 89, which cites “Plan’s 2014 Financial Statements at p.11”).
14
Of the two financial reports filed by the Plan for the year ending December 31, 2014,
only the IRS Form 5500 [Doc. No. 46-5] contains any information on a page 11 regarding
the Chesapeake stock other than the value of the investment. The auditor’s report attached
to the Form 5500 states on page 11 under “Note 5” that, like SSE common stock, “the
Chesapeake common stock transferred to the Plan during the spin-off is considered nonparticipant-directed for this disclosure.” See Form 5500 at 36 (ECF page numbering).
This same statement appears in note 5 on page 14 of the SEC filing. See Form 11-K [Doc.
No. 45-2] at 17 (ECF page numbering). Each of the reports contains a Schedule H, Line 4i
list of assets that indicates the Chesapeake common stock was not participant-directed.
See Form 5500 at 40 (ECF page numbering); Form 11-K at 21-22 (ECF page numbering).
From these materials, the Court finds Plaintiff’s allegation that the Chesapeake stock was
in the “ESOP component” of the Plan is unsupported by the materials on which she relies. 11
Further, the Court finds that Plaintiff’s allegation conflicts with the controlling Planrelated materials. The Plan document expressly states that the ESOP component of the
Plan “means that part of the assets of the Trust Fund that are designated to be held primarily
or exclusively in Qualifying Employer Securities,” which was a defined term, discussed
supra. See Plan § 1.02 at 15. The Plan document dictated that the Plan would consist of
two components: 1) a non-ESOP component made up of “contributions that are invested
in funds other than company stock;” and 2) an ESOP component made up of “contributions
11
A statement that the Chesapeake stock was not participant-directed accurately reflects
the fact that it was not an investment option for participants to select. Even a list noting the
Chesapeake stock as an employer security (Form 5500 at 43 (ECF numbering)) does not support
a conclusion that the stock was part of the Plan’s ESOP.
15
invested in company stock” and “intended to primarily invest in common stock of the
Employer.” Id., Intro. at 1. The Plan provided an express “ESOP Designation” for “[t]he
portion of the Plan that consists of Participants’ Accounts holding Qualified Employer
Securities . . . and is designed to invest primarily in Qualified Employer Securities.” Id.
§ 4.02(a). The ESOP was not to be held in a separate fund: “All shares of Qualified
Employer Securities held under the Plan will be held in the Trust Fund in the name of the
Trustee or the nominee of the Trustee.” Id. As discussed supra, both the summary plan
description and prospectus made clear that the ESOP would consist of matching and
discretionary contributions made in the form of SSE stock.
Based on the express language of the Plan-related documents, Plaintiff’s allegation
that Defendants violated ERISA by holding Chesapeake Stock, or allowing it to be held,
in the ESOP component of the Plan is unfounded. Therefore, although the Court sides
with Plaintiff on the question of whether the Chesapeake stock was an employer security,
the Court finds that the Amended Complaint fails to state a plausible claim that the
Committee Defendants breached a fiduciary duty by engaging in a “per se violation of
ERISA.” See Am. Compl. ¶ 108.
B.
Has Plaintiff Alleged a Breach of the Duty to Diversify?
Plaintiff’s duty-to-diversify claim rests on the fact that the transfer of Chesapeake
stock from the employees’ former ESOP to the SSE Plan resulted in an asset fund in which
over 40 percent of its value consisted of a single-stock investment. See Am. Compl.
¶¶ 80, 114. Plaintiff claims the resulting Plan investment “was over-concentrated in one
company whose share price was extremely volatile” and given this “excessive holding in
16
Chesapeake stock and [SSE]’s dependence on Chesapeake and the acknowledged risks
associated with a lack of diversification, a prudent fiduciary would have sold the
Chesapeake stock at the time of the spin-off to properly diversify the Plan’s assets.” Id.
¶¶ 80-81 (emphasis omitted). Plaintiff further claims “the Committee Defendants instead
allowed the Plan to acquire even more Chesapeake stock in 2014” and 2015. Id. ¶¶ 83,
85, 114. Plaintiff acknowledges the percentage of the Plan’s asset value attributable to
Chesapeake stock decreased over time (reaching 30% by “the end of 2014”), but the change
allegedly was due to participants’ contributions in other investments and the declining
value of Chesapeake stock rather than any action taken by the Committee Defendants. Id.
¶¶ 84-85. Plaintiff notes the Plan’s holding in Chesapeake stock “was greater than the
total of [the] Plan’s next five largest holdings.” Id. ¶ 84 (emphasis omitted).
Plaintiff’s arguments regarding the diversification issue are based, in part, on an
unfounded view of the acquisition of Chesapeake stock as an investment decision made by
the Committee Defendants. All Plan-related documents and financial statements make
clear that the Plan’s holding of Chesapeake common stock came through a transfer of assets
in the spinoff from the Chesapeake plan. Plaintiff’s real complaint is that the Committee
Defendants “should have divested [the Plan] of Chesapeake stock immediately following
the spin-off and avoided any [later] purchase of Chesapeake stock.” Id. ¶ 133.
The Committee Defendants’ position (apart from the alleged exemption) is that a
duty to diversify looks at a plan’s investments as a whole, rather than a single investment,
and that the Plan’s holdings of Chesapeake stock “were attributable to the participants’
individual decisions to retain the Chesapeake stock.” See Comm. Defs.’ Mot. at 15 (citing
17
Young v. Gen. Motors Inv. Mgmt. Corp., 325 F. App’x 31, 33 (2d Cir. 2009)). 12 They
argue that “[m]uch of this stock was held by participants as a result of Chesapeake’s
voluntary employer contributions to the [Chesapeake plan] in Chesapeake stock.” Id.
The corollary of this argument, however, is that some of the Chesapeake stock held by the
Plan did not come from past Chesapeake contributions.
Plaintiff alleges, and the Plan’s financial reports support the allegation, that the Plan
continued to acquire more Chesapeake stock after the spinoff. The Plan’s Form 11-K
filings for both 2014 [Doc. No. 45-2] and 2015 [Doc. No. 45-6] reflect in Schedule H,
Line 4j that additional purchases of Chesapeake stock occurred. Thus, it appears the Plan
continued to invest in Chesapeake stock even though participants were not allowed to
choose this investment. The legal authorities on which Defendants rely to argue that the
lack of diversification was the participants’ choice do not address the situation presented.13
12
In support of the Motion, the Committee Defendants also contend their conduct is
protected by § 404(c) of ERISA because any losses were due to participants’ direction of their
individual accounts. See Comm. Defs.’ Mot. at 16. However, in reply to Plaintiffs’ argument
that § 404(c) provides an affirmative defense and should not be considered under Rule 12(b)(6),
the Committee Defendants say that consideration of their § 404(c) defense is unnecessary. See
Comm. Defs.’ Reply Br. at 5 n.1. Therefore, the Court does not consider it.
13
It may be the Plan’s additional purchases were the result of dividend reinvestments.
The Court notes that the Plan allowed participants to elect what would be done with cash dividends
of qualified employer securities and, in the absence of an election, the participant was deemed to
have elected reinvestment. See Plan, § 4.02(f)(3). The Court has determined Chesapeake stock
was not a qualified employer security. Further, even if the Committee Defendants’ view were
accepted, the Plan required that participants be given an opportunity to revise their elections. Id.
The Amended Complaint and the record are silent regarding any elections that were made.
18
Principal argues that it had no duty as a directed trustee to ensure that the Plan’s
holdings were diversified. 14 In making this argument, Principal does not deny it was a
fiduciary but, instead, focuses on the limited role of a directed trustee under ERISA, which
requires only that the trustee comply with proper directions of a plan’s named fiduciary.
See 29 U.S.C. § 1103(a)(1). Further, the directed trust agreement in this case expressly
provided that Principal “is not responsible for any aspect of the Plan’s administration” and
“is not responsible for choosing, recommending, or investigating investments.”
See
Principal’s Mot., Ex. 2 [Doc. No. 46-3], § .04. Plaintiff’s claim that Principal should have
taken action to divest the Plan of Chesapeake stock and prevent additional investment seeks
to hold Principal liable for breach of a putative duty that Principal did not owe. Where a
directed trustee’s limited role “does not encompass the activities alleged as a breach of
fiduciary duty,” the complaint fails to state a viable claim. See Renfro v. Unisys Corp.,
671 F.3d 314, 323 (3d Cir. 2011). Under Plaintiff’s allegations and the circumstances of
this case, the Amended Complaint fails to state a breach of fiduciary duty against Principal
based on a failure to diversify assets of the Plan.
C.
Has Plaintiff Alleged a Breach of the Duty of Prudence?
Both the Committee Defendants and Principal persuasively argue that Plaintiff has
failed to allege a duty-of-prudence claim under the Dudenhoeffer standard applicable to
14
Principal advances this argument even though it takes the position that the Second
Amended Complaint does not assert a failure-to-diversify claim against it. See Principal’s Reply
Br. at 4, 9. Giving Plaintiff the benefit of any doubt, the Court elects to consider the argument.
19
claims involving publicly traded securities and publicly available information. 15 Under
this standard, “allegations that a fiduciary should have recognized from publicly available
information alone that the market was over- or undervaluing the stock are implausible as a
general rule, at least in the absence of special circumstances.” Dudenhoeffer, 134 S. Ct.
at 2471. Because “a fiduciary usually is not imprudent to assume that a major stock
market provides the best estimate of the value of the stocks traded on it,” a plaintiff must
“point[ ] to a special circumstance affecting the reliability of the market price as an
unbiased assessment of the security’s value in light of all public information that would
make reliance on the market’s valuation imprudent.” Id. at 2471-72 (internal quotations
and citations omitted).
Plaintiff neither alleges any special circumstance in her Amended Complaint, nor
argues that the Dudenhoeffer standard is satisfied. She instead seems to argue that the
15
The Committee Defendants also argue that the decision not to require Plan participants
to divest of Chesapeake stock should be assessed under the Dudenhoeffer standard for claims based
on a fiduciary’s access to inside information. See Comm. Defs.’ Mot. at 19 (“‘a plaintiff must
plausibly allege an alternative action . . . that a prudent fiduciary in the same circumstances would
not have viewed as more likely to harm the fund than to help it’”) (quoting Dudenhoeffer, 134 S.
Ct. at 2472) (alteration by Defendants). In reply to Plaintiff’s argument that her duty-of-prudence
claim is not based on inside information, the Committee Defendants contend Dudenhoeffer’s
“more harm than good” standard is not reserved for such circumstances. See Comm. Defs.’ Reply
Br. at 6-7. This argument is not supported by any citation of legal authority, and ignores the
express limitation of Dudenhoeffer and cases following it. See Amgen Inc. v. Harris, 136 S. Ct.
758, 759 (2016); see also Singh v. RadioShack Corp., 882 F.3d 137, 145 (5th Cir. 2018)
(Dudenhoeffer “establishes different standards for duty-of-prudence claims based on public
information and insider information, respectively.”) (footnote omitted). The standard protects
against the “potential for conflict” encountered by ESOP fiduciaries who must also comply with
securities laws. See Dudenhoeffer, 134 S. Ct. at 2469, 2472-73; Amgen, 136 S. Ct. at 759-60.
The Court therefore rejects the Committee Defendants’ argument as ill-founded and unpersuasive.
20
standard does not apply because her imprudent investment claim is not based on an alleged
over-valuation of the Chesapeake stock but, instead, an unacceptable degree of risk. 16
The Court addressed this same issue in Gernandt v. SandRidge Energy, Inc., Case
No. CIV-15-834-D, 2017 WL 3219490 (W.D. Okla. July 28, 2017), and rejected Plaintiff’s
position. Relying on Rinehart v. Lehman Brothers Holdings, Inc., 817 F.3d 56, 66 (2d
Cir. 2016), and the weight of federal authority, the Court concluded that the standard
announced in Dudenhoeffer applies equally to risk-based and value-based claims.
Gernandt, 2017 WL 3219490 at *9-10. The Court adheres to that conclusion in this case.
Therefore, the Court finds that Plaintiff has failed to state a plausible claim that Defendants
breach their duty of prudence.
D.
Has Plaintiff Alleged a Breach of the Duty of Disclosure?
Plaintiff claims the Committee Defendants breached general duties of disclosure
because the Plan documents – specifically, the summary plan description and the
prospectus – did not inform participants of the alleged fact that the ESOP would hold
Chesapeake stock. See Am. Compl. ¶¶ 88- 90. To support this claim, Plaintiff points to
the fact that the prospectus did not list Chesapeake stock as an investment option or provide
historical information for it. Id. ¶¶ 92-93. Plaintiff focuses on these same allegations in
her briefs, relying on an alleged general duty of plan fiduciaries to disclose material
16
In support of her prudent investment claim, Plaintiff also argues that Defendants
breached a different duty, the continuing duty to monitor investments and remove imprudent ones.
See Pl.’s Resp. Comm. Defs.’ Mot. at 20-21 (citing Tibble v. Edison Int’l, 135 S. Ct. 1823, 1828
(2015), and other cases); Pl.’s Resp. Principal’s Mot. at 15-16 (same). The Amended Complaint
does not assert a claim that Defendants breached this distinct duty.
21
information. See Pl.’s Resp. Comm. Defs.’ Mot. at 22-24. Under the Court’s ruling that
the Chesapeake stock was not part of the ESOP component of the Plan nor held in an ESOP
fund, Plaintiff’s allegations fail to state a breach of any general duty of disclosure. 17
E.
Has Plaintiff Alleged a Breach of Co-Fiduciary Duty?
Plaintiff includes in the Amended Complaint conclusory allegations that all
Defendants are liable as co-fiduciaries under § 1105(a) because each of them knowingly
participated in, enabled, or failed to remedy another fiduciary’s breach of duty based on
the Plan’s improper investment in Chesapeake stock. This claim is derivative of a viable
claim for some other breach. See, e.g., Gabriel v. Alaska Elec. Pension Fund, 773 F.3d
945, 952 n.2 (9th Cir. 2014); Coulter v. Morgan Stanley & Co., 753 F.3d 361, 368 (2d Cir.
2014). The Court has found that the Amended Complaint only states a plausible claim
that the Committee Defendants breached a duty to diversify the Plan’s assets by failing to
take any action regarding the holding of Chesapeake stock. The question presented is
whether Plaintiff has stated any claim against Principal that would support co-fiduciary
liability for this alleged breach by the Committee Defendants.
The only theory of co-fiduciary liability of Principal argued in Plaintiff’s brief in
opposition to dismissal is that Principal “enabled the Committee Defendants’ fiduciary
breaches” by “not ensuring the instructions it received were proper.” See Pl.’s Resp.
Principal’s Mot. at 24. However, Plaintiff does not identify any improper instructions that
the Committee Defendants gave Principal. Just the opposite, Plaintiff alleges that the
17
The Committee Defendants point out that the Tenth Circuit has yet to recognize such a
duty. See Jensen v. Solvay Chems., Inc., 625 F.3d 641, 658-59 (10th Cir. 2010).
22
Committee Defendants failed to take any action – that is, to give Principal any instructions
– that would have reduced the unreasonable risk to plan participants from the Plan’s large
holding of Chesapeake stock. The Court therefore finds that Plaintiff has failed to state a
plausible claim of co-fiduciary liability against Principal.
Conclusion
For these reasons, the Court finds that the Amended Complaint fails to state any
plausible ERISA claim against the directed trustee, Principal, and fails to state any
plausible ERISA claim against the Committee Defendants except a claim that they
breached a fiduciary duty to diversify the Plan’s investments.
IT IS THEREFORE ORDERED that the Committee Defendants’ Motion to Dismiss
[Doc. No. 45] is GRANTED in part and DENIED in part, and Principal Trust Company’s
Motion to Dismiss [Doc. No. 46] is GRANTED. 18
IT IS SO ORDERED this 22nd day of March, 2019.
18
Because Plaintiff has not moved to further amend her pleading pursuant to Fed. R. Civ.
P. 15(a)(2) and LCvR15.1, and because the scheduling order to be entered will set a deadline for
motions to amend, the Court declines to consider at this point whether further amendment of
Plaintiff’s deficient pleading should be allowed.
23
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