Ortiz et al v. American Airlines Inc et al

Filing 54

Memorandum Opinion and Order...consistent with the foregoing, the court is withholding a final ruling on the motion filed by plaintiffs on July 18 2016, the court orders that if plaintiffs wish to take steps to resolve the concerns of the court expr essed in section IV above, they advise the court of that fact by a document filed by Dec 8 2016, providing in that document a detailed description of what plaintiffs proposed to do to resolve those concerns and when the court can expect them to do whatever that is. (Ordered by Judge John McBryde on 11/18/2016) (wrb)

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§

Plaintiffs,

§
§

vs.

§
§

NO. 4:16-CV-151-A

AMERICAN AIRLINES, INC., ET AL.,§
§

Defendants.

§
MEMORANDUM OPINION
and
ORDER

Before the court for consideration is the relief sought by
plaintiffs in a document they filed in the above-captioned action
on July 18, 2016, titled "Unopposed Motion for Order
Preliminarily Approving (I) Conditional Certification of the
Settlement Classes;

(II) Appointment of Lead and Class Counsel;

(III) Preliminary Approval of Settlement; and (IV) Approval of
Form and Manner of Notice."

By this memorandum opinion and

order, the court is providing reasons why it is not in a position
at this time to grant any of the relief sought by that motion.
However, the court is not denying the requested relief, but is
informing plaintiffs of additional information the court wishes
to receive and consider before proceeding further.

I.

Plaintiffs' Complaint
This action was initiated on February 10, 2016, by Salvadora
Ortiz ("Ortiz") and Thomas Scott ("Scott")

("plaintiffs") , on

behalf of themselves and others similarly situated, by the filing
of a "Class Action Complaint (ERISA)" naming as defendants
American Airlines, Inc.

("American"), The American Airlines

Pension Asset Administration Committee ("Committee"), and
American Airlines Federal Credit Union ("Credit Union").
An abbreviated summary form of plaintiffs allegations is as

follows:
The action is brought on behalf of a 401(k) retirement plan
for employees of participating AMR Corporation subsidiaries (the
"Plan") under §§ 502 (a) (2) and 502 (a) (3) of the Employee
Retirement Income security Act of 1974, as amended,
(29 u.s.c. §§ 1132 (a) (2) and 1132 (a) (3)).

("ERISA")

Each defendant is a

fiduciary as to the Plan and its participants, and each violated
fiduciary duties owed to the Plan and its participants.

Each

named plaintiff has been a participant in the Plan, as defined in
ERISA§ 3(7)

(29 u.s.c. § 1002(7)), and has owned, directly or

indirectly, an interest in the Plan's investment option that is
referred to in the complaint as the American Airlines Credit
Union Demand Deposit Fund ("AA Credit Union Fund").
2

In addition to asserting actions on behalf of the Plan,
plaintiffs seek certification of the action as a class action on
behalf of all participants and beneficiaries of the Plan who
invested directly on indirectly in the AA Credit Union Fund at
any time from February 12, 2010, through the date of the judgment
in this action (excluding certain categories of persons) .

The

class of participants and beneficiaries plaintiffs requested the
court to certify was defined as follows:
All participants and beneficiaries of the $uper $aver, a 40 I (k) Capital
Accumulation Plan for Employees of Participating AMR Corporation Subsidiaries,
who invested directly in the AA Credit Union Fund or who indirectly invested in the
AA Credit Union Fund by virtue of their investment in the Moderate Pre-Mixed
Portfolio or the Conservative Pre-Mixed Portfolio at any time from February 12,
20 I 0 through the date of judgment, excluding the (i) Directors and elected officers of
Defendant American Airlines; (ii) the members ofthe PAAC; the members of any
other committee exercising fiduciary responsibility or authority with respect to the
Plan, including the Benefits Strategy Committee and the Pension Benefits
Administration Committee; and the Directors and elected officers of Defendant AA
Credit Union.

Doc. 1 at 9, ~ 33. 1
The Plan is an employee pension benefit plan within the
meaning of ERISA§ 3 (2) (A)

(29 U.S. C.

§ 1002 (2) (A)).

I t is an

eligible individual account plan, which provides an individual
retirement account for each participant, as contemplated by ERISA
§ 3 (34)

(29

u.s.c.

§ 1002 (34)), the benefits of which are based

solely on the amount contributed to the participant's account,

1

The "Doc. __" references are to the numbers assigned to the referenced items on the docket in
this Case No. 4:16-CV-151-A.
3

with adjustments for income, gains, losses, and expenses.

Such a

plan is commonly referred to as a "defined contribution plan."
The participants select the investments to be made to their
accounts from investment options provided for the participants by
one or more Plan fiduciaries.
with ERISA§ 404(c)

The Plan is intended to comply

(29 U.S.C. § 1104(c)) and related

regulations.
By ERISA regulation, one of the investment options that must
be provided to the participants of such a plan is an incomeproducing, low-risk, liquid fund.

The only option provided by

defendants to the Plan participants for an investment in that
category was the AA Credit Union Fund, which is a fund sponsored
and managed by Credit Union.
Defendants violated their fiduciary duties by having the AA
Credit Union Fund as the only Plan investment option that would
qualify as an income-producing, low-risk, liquid fund.

The AA

Credit Union Fund produced extremely poor investment returns.

As

of November 5, 2015, the twelve-month return on an investment in
that fund was 0.22%; and, as of January 3, 2016, the twelve-month
return was 0.24%.

The return on the AA Credit Union Fund was at

all material times less than a poorly managed checking account.
At the same time that the AA Credit Union Fund was providing the
Plan participants who invested in it the meager returns described
4

above, checking accounts offered by Credit Union to its
depositors paid better returns than those earned by the Plan
participants who elected to invest in the AA Credit Union Fund.
One such account paid interest at the rate of 2.27%.

Stable

value funds, commonly used by large plans similar to the Plan,
typically offered a greater return on a participant's investment
than does the AA Credit Union Fund.
If defendants had properly performed their fiduciary
obligations to the Plan and its participants, the incomeproducing, low-risk, liquid fund option would have been, or
included, a stable value fund.

According to a 2015 Stable Value

Study, 80% of sponsors of similar plans offered a stable value
fund option.

That same study disclosed that returns on stable

value funds were more than double the returns on money market
funds from 1988 to 2015, and that almost 90% of financial
advisors of defined contribution plans were in agreement that the
stable value funds outperformed the returns of money market funds
over the last twenty-five years.
If the Plan funds invested in the AA Credit Union Fund had
instead been invested in a stable value fund returning average
benchmark returns during the proposed class period, plaintiffs
and the other Plan participants would not have lost tens of
millions of dollars in their retirement savings, and would not
5

continue to suffer additional losses as a result of the existence
of the AA Credit Union Fund option in the Plan.
American Airlines and Committee are liable under 29 U.S.C.
§

1109(a) to make good to the Plan any losses to the Plan

resulting from their breach of fiduciary duties related to the
failure to provide a stable value fund as an investment option.
At all relevant times, Credit Union held $1 billion in Plan
assets in the AA Credit Union Fund, which is a demand deposit
account, for which it had a fiduciary obligation to pay a
reasonable rate of interest.

Rather than to pay a reasonable

rate of interest to the Plan participants who elected to invest
in the AA Credit Union Fund, Credit Union used the $1 billion in
Plan assets it held as investments by Plan participants to
provide loans to members of Credit Union and to make other
investments for which it earned substantial income, which, in
turn, permitted Credit Union to offer substantially higher
interest rates on similar demand deposit accounts to customers
other than the Plan participants who invested in the AA Credit
Union Fund.

Credit Union should have paid to plaintiffs in the

proposed class at least the same rate of interest it was offering
to its other customers.
Consequently, Credit Union is liable under 28 U.S.C.

§

1109(a} to make good to the Plan any losses to the Plan resulting
6

from Credit Union's breach of fiduciary duty in failing to pay to
the Plan participants a reasonable rate of return on investments
they made in the AA Credit Union Fund option.

American shares

with Credit Union, as American's co-fiduciary, liability under
29 U.S.C. § 1105(a) for those losses by reason of having
participated in Credit Union's breach of fiduciary duty knowing
that Credit Union's conduct was such a breach and by failing to
take reasonable efforts under the circumstances to remedy the
breach.
American and Committee share liability for the loss
resulting from Credit Union's breach of fiduciary duties to the
Plan and its participants by reason of ERISA§ 406(a)

(29 U.S.C.

§ 1106(a)), which prohibits transactions between the Plan and a
party-in-interest.
II.

Defensive Positions of
American, Committee, and Credit Union
While none of the defendants filed an answer to the
complaint, each made known its defensive positions by means of a
motion to dismiss.
"Am/Com")

American and Committee (collectively

jointly filed a motion to dismiss, with a supporting

memorandum and appendix, on May 10, 2016.

7

On the same date,

Credit Union filed its motion to dismiss and supporting
memorandum.
A.

The Substance of the Motion Filed by American and Committee
Am/Com sought dismissal of all claims asserted by plaintiffs

against them on the ground that plaintiffs failed to allege any
claims against either of them upon which relief might be granted.
They interpreted plaintiffs' contention to be that only a stable
value fund is an acceptable principal preservation option for
401(k) plans.

Am/Com urged that Count I be dismissed in its

entirety because plaintiffs have failed to "allege facts that, if
accepted as true, would show that a prudent fiduciary under like
circumstances would not and could not have made the same
investment decision."

Doc. 26 at 6.

Am/Com noted that nothing

in ERISA or its accompanying regulations precluded Plan
investment in Credit Union demand deposit vehicles or required
the inclusion of a stable value fund as an investment option.
They mention that ERISA

§

408 (b) (4)

(29 U.s. C.

§

1108 (b) (4))

expressly contemplates that all or a part of Plan assets may be
invested in deposits with a bank or similar financial
institution, such as credit unions.
As substantiation for the wisdom of the provision for the
Plan participants of the AA Credit Union Fund option rather than
a stable value fund option, Am/Com pointed to a study they
8

included in the appendix to their motion that indicates that 18%
of defined contribution plans do not include a stable value fund
option, and that 45% of the defined contribution plans that
provide a stable value fund option also provide an alternative
capital preservation option.

Another argument advanced is that

an investment in a stable value fund would have a greater risk of
investment loss than would an investment in the AA Credit Union
Fund.
According to Am/Com, plaintiffs' comparison between stable
value funds and credit union demand deposit vehicles "is all the
more flawed because it ignores the role of the Credit Union
Option in the Plan's broadly diversified lineup," and that "[t]he
Credit Union is just one option among many made available to Plan
participants, all across the risk/return spectrum, from which
participants can construct their individual investment portfolios
according to their individual investment needs and preferences."
Doc. 26 at 10.

The investment options the Plan participants had

during the years 2010-14 are disclosed in Form 5500 excerpts
found in the appendix to the motion.
121, 136, and 151.

Doc. 27 at AA-APP 090, 105,

Those items suggest that the only income-

producing, low-risk, liquid fund option provided to the Plan

9

participants in each of those years was the AA Credit Union Fund
option, and that
(1) of the $7,124,859,000 invested by the Plan participants
as of December 31, 2010, $1,255,308,000 was invested in the AA
Credit Union Fund demand deposit,
(2) of the $6,439,645,000 invested by the Plan participants
as of December 31, 2011, $1,695,160,000 was invested in the AA
Credit Union Fund demand deposit,
(3) of the $6,877,523,000 invested by the Plan participants
as of December 31, 2012, $1,259,896,000 was invested in the AA
Credit Union Fund demand deposit,
(4) of the $8,435,430,000 invested by the Plan participants
as of December 31, 2013, $1,145,443,000 was invested in the AA
Credit Union Fund demand deposit, and
(5) of the $9,093,254,000 invested by the Plan participants
as of December 31, 2014, $1,059,795,000 was invested in the AA
Credit Union Fund demand deposit.
Am/Com maintained that the comparison between the returns on
the AA Credit Union Fund investment and the 2.27% paid by Credit
Union to its checking account depositors is a false comparison
because the 2.27% checking account rate applied only to balances
up to $5,000, and was subject to reduction for fees, and that any
balances above $5,000 "receive a return of 0.05%,
10

. . . , again

subject to fees--a fraction of what the Complaint itself reports
that the Credit Union Option returns to investors."

Doc. 26 at

11.
American contended that the complaint does not allege facts
that would support a claim of co-fiduciary liability for alleged
fiduciary breaches by Credit Union.

It asserted that, to

establish co-fiduciary liability against it, plaintiffs must
first establish that Credit Union had fiduciary duties under
ERISA, and violated them, and that,

for the reasons set forth in

Credit Union's separately filed motion to dismiss, the complaint
fails to allege facts establishing violation of Credit Union of
any fiduciary duty owed to plaintiffs or the Plan.
Alternatively, American contended that the complaint does not
allege facts that would state a co-fiduciary liability against it
even if one were to assume a plausible claim of breach of
fiduciary duty against Credit Union because none of the three
circumstances prescribed by ERISA§ 405(a)

(29 U.S.C. § 1105(a))

that authorize co-fiduciary liability against a defendant
fiduciary have been alleged by plaintiffs.
Moreover, Am/Com asserted, plaintiffs' allegations that the
Plan's investment in the AA Credit Union Fund is a prohibited
transaction under ERISA§ 406(a) is in error because the

11

investment comes within an exemption provided by ERISA
§

B.

408 (b) (4)

(29

u.s.c.

§

1108 (b) (4)) . 2

The Substance of Credit Union's Motion
Credit Union urged by its motion that all claims asserted by

plaintiffs against it should be dismissed because plaintiffs have
failed to state a plausible right to relief.
Credit Union interpreted plaintiffs' claim against it to be
that it used Plan assets to benefit itself and its other
customers in violation of ERISA

§

406 (b) (1)

(29 U.S.C.

§

1106(b) (1)), resulting in significant losses for the Plan and its
participants.

First, Credit Union contended that plaintiff has

failed to allege factual bases for its conclusion that Credit
Union is a Plan fiduciary.

Second, Credit Union maintained that

plaintiffs do not allege facts sufficient to establish that

2

Am/Com recognizes that for the ERISA § 408(b )( 4) exemption to apply, the deposits in a bank
or similar institution must bear a reasonable interest rate. In explaining how the "reasonable interest
rate" hurdle is overcome by Am/Com, they state in their motion that:
By the statute's plain design, ERISA§ 408(b)(4)'s purpose is to permit 40l(k) plans to
invest in bank and similar deposits; the function of this exemption would be frustrated (if
not defeated altogether) if the reasonableness of such deposit returns were judged in
relation to the returns of a different investment vehicle altogether. See also H.R. Rep.
No. 93-1280 (1974), reprinted in 1974 U.S.C.C.A.N. 5038, 5093 ("[T]he prohibited
transaction rules of the substitute do not prevent a bank or similar institution ... which is
a plan fiduciary from investing all or part of the plan's a~sets in deposits with the bank
.... ").
Doc. 26 at 15. Am/Com omitted from the language it quoted from H.R. Rep. No. 93-1280 the ending
words "etc., if the deposits bear a reasonable interest rate." H.R. Rep. No. 93-1280 (1974), reprinted in
1974 U.S.C.C.A.N. 5038, 5093. Am/Com seemed to justify that omission by an argument that
comparing the rate of return on the AA Credit Union Fund demand deposit with the returns on stable
value funds is inappropriate because it is an investment vehicle that has features and terms different from
stable value funds.

12

Credit Union used any of the Plan's assets for its own interest
or for its own account, as they must under the plain terms of
29 U.S.C.

§

1106(b) (1).

In support of the latter contention,

Credit Union maintained that plaintiffs never allege a
transaction that benefitted Credit Union, much less a transaction
that would be prohibited.
Alternatively, Credit Union maintained that, even if
plaintiffs had sufficiently pleaded a claim against Credit Union
for a violation of 29 U.S.C.

§

1106(b) (1), the alleged prohibited

transactions are exempt under 29 U.S.C.

§

1108(b) (4).

In support

of that position, Credit Union maintained that "[p]laintiffs'
sole complaint,

. . , appears to be that the Credit Union

failed to pay the same rate of interest to Plan participants as
it did to its other customers."

Doc. 20 at 8.

From there,

Credit Union proceeded to argue that the comparison between the
interest rate earned by the Plan participants on the AA Credit
Union Fund demand deposits and the 2.27% Credit Union paid on the
depositors in one of its checking accounts is inappropriate
because of limitations placed on the checking account to which
plaintiffs refer.

Credit Union maintains that a more appropriate

comparison would be between the interest paid on the AA Credit
Union Fund investments and interest paid by Credit Union on its
other demand deposit accounts.
13

III.
Pertinent Allegations In, and Information Provided by,
Plaintiffs' Motion and Its Supporting Memorandum and Appendix
The court has not been made aware of the positions
plaintiffs would take in response to the grounds of defendants'
motions to dismiss.

Rather than to respond to those motions,

plaintiffs sought and obtained two extensions of time for the
filing of responses before their filing on July 18, 2016, of the
motion the court now has under consideration.
The instant motion and its supporting memorandum and
appendix contain allegations and information that raise concerns
as to whether an order of the kind sought by plaintiffs should be
issued.
A.

Information Plaintiffs Say Caused Them to Conclude That They
Had Valid Claims Against Defendants
On the fifth page of plaintiffs' supporting memorandum, the

following statements are made:
Before filing the Complaint, Class Counsel
undertook extensive investigation to support the
allegations and claims in the Complaint. Nestico Decl.
114 - 6 (APP61-63). Among other things, Class Counsel,
working with industry experts and ERISA consultants,
examined and evaluated Department of Labor filings from
the Plan and peers; Department of Labor filings from
parties in interest to the Plan; the investment
structure of the Plan in comparison with other types of
retirement plans; plan studies and surveys addressing
various types of fixed-income investment alternatives
available to plan sponsors, including historic risk and
return characteristics of those alternatives; industry
14

surveys and studies addressing the performance of
stable value funds over time, including periods of high
market volatility; professional publications discussing
various types of stable value products such as
insurance company guaranteed investment contracts,
insurance company pooled separate accounts, and
separately managed synthetic guaranteed investment
contracts; as well as the prevalence of stable value
funds in ERISA qualified retirement plans; rules of the
Financial Accounting Standards Board governing the
requirements of and accounting for stable value funds;
and other research regarding the use of demand deposits
for long-term investing in qualified retirement plans.
Id. at ,4 (APP61). Class Counsel, working with
consultants, constructed estimated damages models for
the Plan extrapolating from the publicly available, but
necessarily non-plenary information. Id. at
(APP63).
Later, Class Counsel, working with experts and
consultants, incorporated information shared by
Defendants in mediation into these models. Id. at ,6
(APP63) .

,5

Doc. 52 at 5. 3

And, plaintiffs add that:

The Complaint in the Action was the product of
hundreds of hours of extensive and careful research and
analysis. Plaintiffs' Counsel worked closely with
consultants to investigate the claims, with numerous
analyses of complex financial and investment data, in
addition to reviewing Plan documents, financial
statements, prospectuses, studies, surveys, and other
information and data to prepare the Complaint.
Id. at 22.

3

The "APP" references in the quoted language are to statements made in the declaration of
Nestico that is found in plaintiffs' supporting appendix. Doc. 53 at APP 60-66.

15

B.

The Process That Plaintiffs Say Led to the Proposed
Settlement
Plaintiffs described the process that led to their decision

to advocate the proposed settlement agreement now under
consideration by saying in their memorandum:
A private mediation was arranged with the Honorable
Faith Hochberg of Hochberg ADR. Id. at ~7 (APP63).
Judge Hochberg has extensive experience in mediating
complex class actions, including class actions
involving claims of ERISA violations. The parties
exchanged mediation briefs and other supporting
documents in advance of the June 6, 2016 mediation.
Nestico Decl. ~7 (APP63). At the day-long mediation,
the parties were able to reach tentative agreement on
some, but not all, key terms. Id. at ~7 (APP63).
Subsequent to the mediation, on or about June 7,
2016, Judge Hochberg made a mediator's proposal to the
parties, i.e., a proposal offered on a take-it-orleave-it basis. Id. at ~7 (APP63). The parties accepted
Judge Hochberg's proposed terms on June 14,2016. Id. at
~7 (APP63) .
Id. at 5-6. 4

Plaintiffs explained that:

Prior to mediating with Judge Hochberg, the parties
exchanged confidential information so that the parties
could more accurately value the claims. The parties
prepared detailed, substantive mediation briefs before
mediation. The parties' respective positions and
arguments were also subjected to vigorous questioning
and analysis by the mediator.
Id. at 22-23.

And, at page 22 of the memorandum:

The Settlement here was achieved through
extensive, arm's-length negotiations under the guidance
of Judge Faith Hochberg. Judge Hochberg has extensive

4

The "APP" references are again to the Nestico declaration contained in the Appendix.

16

experience mediating complex class actions.
In
addition to the in-person mediation session, Judge
Hochberg communicated with the parties by phone and
email to achieve Settlement. With her assistance, the
parties ultimately reached agreement and executed a
memorandum of understanding summarizing the key terms
on June 14, 2016.
Id. at 22

(footnote omitted).

Plaintiffs informed the court in their memorandum that they
have undertaken discovery to confirm the accuracy and
truthfulness of the facts they relied upon in connection with the
proposed settlement, which, when the discovery has been
completed, will have entailed a review of years of records of the
Plan's relevant fiduciary committees and interviews of key
individuals.

Id. at 23.

John J. Nestico, one of the attorneys

for plaintiffs, in his declaration, elaborated on plaintiffs'
ongoing efforts to acquire information relative to the merit of
the proposed settlement by saying:
Plaintiffs' counsel also reviewed additional
documents provided by Defendants to confirm assumptions
on which the settlement is premised, including two
years of records for the American Airlines Pension
Asset Administration Committee, and will review several
more years of records as provided by Defendants.
Plaintiffs' Counsel also plan to conduct interviews
with American Airlines executives aud employees
responsible for selecting and managing the Plan's
investment choices within the next few weeks.
Doc. 53 at APP65, , 9.

17

C.

The Proposed Settlement Agreement
The motion documents disclose that the proposed settlement

agreement contemplates certification for settlement purposes of
two non opt-out (Doc. 53 at APP15, ~ 2.13) classes, one
designated the "Monetary Relief Class," defined as follows:
The "Monetary Relief Class" will consist of all
current and former participants in the Plan who
maintained a balance of any amount in the Plan at any
point during the period from February 10, 2010 to the
date of the Preliminary Approval Order, and who
invested directly or indirectly in any of the following
capital preservation options at any time from
February 10, 2010 to the date of entry of the
Preliminary Approval Order:
( i)
(ii)
(iii)

The American Airlines Federal Credit Union
Option;
The Fidelity Institutional Money Market Money Market Portfolio; or
The Fidelity Managed Income Portfolio II
(collectively the "Fixed Income Options").

Doc. 52 at 11, and, the other designated the •structural Relief
Class,• defined as follows:
The •structural Relief Class• will consist of all
participants in the Plan on or after the date of entry
of the Preliminary Approval Order.

Plaintiffs disclosed in their memorandum that the only
monetary payment defendants' will make as part of the settlement

'The proposed settlement agreement itself discloses that the monetary payment will be made by
"[d]efendants or their insurers." Doc. 53 at APPJ6, 'jf 4.l(a).

18

is $8,800,000. 6

Out of that, there is to be deducted attorneys'

fees to be received by plaintiffs' counsel, not to exceed onethird of the remaining balance of the $8,800,000 payment 7 after
certain described deductions have been made.' Whatever is left is
to be allocated to Monetary Relief Class Members on a pro rata
basis according to a formula described in an exhibit to the
proposed settlement agreement.'
The benefits to be received by the members of the Structural
Relief Class, as well as members of the Monetary Relief Class,
are described in plaintiffs' memorandum as follows:
Defendants will implement the following changes to the
Plan (the "Structural Relief"), unless otherwise noted:

6

The proposed settlement agreement language discloses that the $8,800,000 monetary payment is
to be made in two segments; the first a $500,000 payment to be deposited to an Escrow Account within
thirty days after the entry of the preliminary approval, and the $8,300,000 balance to be deposited into
the Escrow Account within thirty days following what is referred to in the settlement agreement as the
"Effective Date." Doc. 53 at APP16-l7,, 4.l(a). The proposed settlement agreement has rather
complex provisions concerning the handling of the Escrow Account, including a provision that, if
approved by the court, would cause the court to have an ongoing obligation to monitor the handling of
the funds in the Escrow Account, saying that "[a)ll funds held in the Escrow Account shall be deemed to
be in the custody of the Court and shall remain subject to the jurisdiction of the Court until the funds are
distributed in accordance with [the settlement agreement]." !d. at APPI7,, 4.l(e); APP16-19, ~, 4.1(aj).
'The proposed settlement agreement itself provides that the award of attorneys' fees and
expenses to class counsel is "not to exceed in any event fifty percent of the value of the Monetary Relief
" Doc. 53 at APP26,, 8.2.
'According to plaintiffs' motion, the deductions before allocation to the Monetary Relief Class
members are to be incentive awards to plaintiffs, attorneys' fees and expenses, independent fiduciary
fees, settlement administration costs, and taxes and tax-related costs.
'The proposed settlement agreement's scheme for distribution of settlement funds to the
Monetary Relief Class members is set forth in its paragraph 4.2, which, in turn, refers to its Exhibit C for
the Plan of Allocation. Doc. 53 at APP19-22, ,, 4.2-4.6; APP57-58 (Ex. C).

19

the Plan shall retain the services of an unaffiliated
investment consultant to assist the American Airlines
Pension Asset Administration Committee (the
"Committee") or its successor in selection of an
appropriate "stable value fund" which, for this
purpose, shall be defined as a designated investment
alternative in the Plan that will provide capital
preservation, liquidity, and steady, positive returns
that are expected to exceed the returns of money market
investments over time. The ultimate selection of the
fund will be within the discretionary authority of the
Committee, but shall be derived from the competitive
selection process employed by, and based on the
recommendations of, the investment consultant. The fund
may be in the form of any of the stable value products
available in the marketplace, which may include the
stable value product added to the Plan at the end of
2015, provided the above conditions are met.
Doc. 52 at 6-7. 10
Plaintiffs, through their counsel, estimate that the future
monetary value to Plan participants of the "Structural Relief"
described above "is between $30,000,000 to $48,000,000 for the
three-year [period] following the implementation of the
Structural Relief, based on certain assumptions."

Id. at 7.

A

detailed explanation of how that estimated future monetary value

10

The description by plaintiffs in their memorandum of the Structural Relief is basically
consistent with the language of the proposed settlement agreement, except that plaintiffs' description
omits a section that is problematic. Paragraph 3.4 provides that:
Notwithstanding anything in this Section Ill to the contrary, Defendants shall not
be required to comply with any provision of this Section III should any change in
applicable law, based on advice of counsel, render such compliance unlawful or
unreasonably burdensome .or prohibitively expensive.
Doc. 53 at APP16, ~ 3.4. The court notes that there is no provision for resolution of the dispute that
would arise if Plan participants were to disagree with the advice of defendants' counsel that compliance
with the Structural Relief provision would be unlawful or unreasonably burdensome or prohibitively
expensive, other than, perhaps, the dispute resolution provision. !d. at APP30, ~ 11.2.

20

was determined is found in the declaration of Nestico, in which
he explains:
Plaintiffs' Counsel, with the assistance of qualified
financial experts, have estimated the value of the
Structural Relief to be between thirty million and
forty-eight million dollars ($30,000,000-$48,000,000)
for a three-year period following implementation of the
Structural Relief, depending on the value of
participant accounts transferred from the American
Airlines Credit Union Demand Deposit Option into the
new stable value option provided for in the Structural
Relief. Records for the Plan indicate that the average
investment return for the American Airlines Credit
Union Demand Deposit Option for the ten-year period
preceding the filing of the Complaint was 0.57% (57
basis points), with a one-year rate of return of 0.24%
(24 basis points). By contrast, a well-performing
stable value fund, such as the Bank of America Stable
Value Fund, has provided an investment return of 2.97%
over the preceding five-year period, and guaranteedinterest products offered by insurance companies, such
as the Mass Mutual Guaranteed Interest Account have
provided a stable return of 3.03% over that same fiveyear period. Hueler Analytics, one of the premier
stable value analysts, reports average investment
returns of 2.25% for the preceding five years.
Accordingly, for purposes of estimating the value of
the Structural Relief, Plaintiffs' Counsel have
calculated that a competitive selection process could
result in the selection of a stable value fund that
could produce returns that somewhat higher than the
Hueler average but not as high as the Bank of America
Stable Fund or the Mass Mutual Guaranteed Interest
Account, resulting in investment returns that are 2%
higher than the return on the Plan's current stable
value fund option. Based on that assumption, if
participants move half of the approximately one billion
dollars of their accounts currently invested in the
American Airlines Credit Union Demand Deposit Option
into the new stable value fund option, participants
would earn an additional $10,000,000 per year in
investment return, and if participants move eighty
percent of their accounts invested in the American
21

Airlines Credit Union Demand Deposit Option, the
increased investment return would equal $16,000,000 per
year, resulting in a range of value for the Structural
Relief Of $30,000,000-$48,000,000 for the three-year
period following implementation of the structural
Relief ..
Doc. 53 at APP64-65,

~

8.

Plaintiffs' memorandum explains that the proposed settlement
contemplates that all members of the settlement classes will
release defendants and other parties, as described in the
settlement agreement, of any claims arising out of or relating in
any way to the subject matter of the instant action, and covenant
not to sue any of the released parties on any such claims.
According to the memorandum,
[t]he release will include direct and derivative
claims, claims on behalf of any class, claims under
ERISA, common law and any other statute, in each with
respect to the claims covered by the Complaint, and
shall extend to all Defendants, including each of their
present, past, and future predecessors, successors,
parents, subsidiaries, affiliates, divisions, assigns,
officers, directors, committees, employees,
fiduciaries, administrators, actuaries, agents,
insurers, representatives, attorneys, retained experts
and trustees.
Doc. 52 at 9. 11
The proposed settlement agreement has language that has the
potential to cause the agreement to be terminated if the court

"The definition of the claims that are to be released and the subjects of the covenant not to sue
are extremely broad. Doc. 53 at APPS-6, ~ 1.12; APP9, ~ 1.34; APPl0-11, ~ 1.46; APP23, ~~ 6.1 & 6.2.

22

does not use the proposed preliminary approval order, the
proposed notice to members of the classes, or the proposed final
order and judgment, "including, but not limited to any judicial
findings included therein.•

Doc. 53 at APP27, ' ' 9.1 & 9.2.

The

provisions in the proposed settlement agreement the court has
located that,

in effect, provide that, if the court were to

approve the settlement, the court would be obligated to use the
proposed court documents attached thereto as exhibits are found
at Doc. 53 at APP7, '
'

2.2; APP12, '

APP28, '

1.20; APP7-8, '

1.25; APP9, '

1.33; APP11,

2.6; APP14, '2.9; APP27, ' ' 9.1 & 9.2; and

9.4.

IV.
Concerns of the Court
The court recognizes that at this preliminary approval
stage, the court is limited to determinations as to whether the
court is satisfied that the proposed settlement appears to be the
product of serious, informed, non-collusive negotiations, has no
obvious deficiencies, and does not improperly grant preferential
treatment to class representatives or segments of the class, and
that there is good cause to order issuance of notice to the
proposed settlement classes of the proposed settlement, and to
proceed with a hearing to determine whether the proposed
settlement should be approved as being fair, reasonable, and
23

adequate to the members of the proposed classes as Rule 23(e) (2)
of the Federal Rules of Civil Procedure contemplates.

See In re

Shell Oil Refinery, 155 F.R.D. 552, 555 (E.D. La. 1993).

The

court has not been persuaded by the information it has received
thus far that there is good cause for entry of such an order or
to proceed with such a hearing.
A.

Information Received by the Court Suggests That the Monetary
Payment Is Inadequate
Plaintiffs have provided the court information that causes

the court to be persuaded that if this case were to go to trial,
a fact finder probably would find that American and Committee, as
Plan fiduciaries, should have provided the Plan participants an
opportunity to invest in a stable value fund as an incomeproducing, low-risk,

liquid fund option instead of, or in

addition to, the AA Credit Union Fund option.
All parties to this action seem to take as a given that
money market funds, though perhaps riskier, generally generate
higher returns on a participant's investment than a demand
deposit fund such as the AA Credit Union Fund.

At least one

authority has recognized that "Stable Value Funds simply
outperform money market funds."

Paul J. Donahue, Plan Sponsor

Fiduciary Duty for the Selection of Options in ParticipantDirected Defined Contribution Plans and the Choice Between Stable

24

Value and Money Market, 39 Akron L. Rev. 9, 24 (2006).
to that author,

According

"Stable Value Funds are one of the more popular

investment options among [defined contribution] Plan
Participants." Id. at 20.

The author included the following in

the article's Conclusion:
Plan Sponsor choice of Plan options in Section
404(c) participant-directed plans is a fiduciary
responsibility of the Plan Sponsor. Section 404(c) does
not relieve Plan Sponsors of liability for failing to
uphold ERISA'S "prudent expert" fiduciary duty standard
in choosing plan options. Further, a Plan Sponsor must
provide adequate disclosure of the risks and returns of
each option offered, as well as having selected the
option prudently, in order to shift the liability for
their option selections to Plan Participants.
Stable Value Fund or Money Market Fund is a
universal example of Plan Sponsor exercise of option
selection, because of the requirement of a liquid, low
volatility fund. In the context of a [defined
contribution] Plan, Stable Value has an absolute
superiority to Money Market, as any reasonable due
diligence investigation would make clear. The choice of
a Money Market Fund instead of a Stable Value Fund
meaningfully decreases Participant wealth and is a
clear violation of a Plan Sponsor's duty to select
options as a prudent expert. Participants who were
offered only Money Market Funds have a right to recover
the difference in lost income from Plan Sponsors as
damages due to a breach of fiduciary duty.
Id. at 33.

Also pertinent is the study mentioned by plaintiffs

in their complaint, supra at 5, a copy of which is in the

25

appendix American and Committee filed with their motion to
dismiss, Doc. 27 at AA-APP 153-179. 12
According to plaintiffs and their experts, if defendants
were to provide a stable value fund option to the Plan
participants for the next three years, the participants would
earn an additional $10 million to $16 million per year,

for a

total increase in earnings of $30 million to $48 million for the
three-year period.

Using those same per-year numbers, if a

stable value fund option had been included as an incomeproducing, low-risk, liquid fund option, from February 2010
through this date, the income the Plan participants have lost by
reason of the absence of a stable value fund option would appear
to have been between $55 million and $88 million. Based on the
information provided to the court, if this action were to be
pursued through litigation rather than by settlement, such an
outcome would appear likely."

That being so, the court does not

12

The study says in its Introduction that:
Stable value is the most widely used safe option by asset volume. Stable value offers
significantly higher returns than alternatives in the capital preservation space, with less
risk. It is this combination that makes stable value options popular among plan
participants.
Doc. 27 at AA-APP 157.
13

Factors the Fifth Circuit has recognized as proper to be considered in evaluating adequacy of a
class-action settlement include the strength of the case for the plaintiffs, balanced against the amount
offered in settlement, and a comparison of the settlement terms with likely rewards the class would have
received following a successful trial. In re Corrugated Container Antitrust Litig., 643 F.2d 195,212 (5'"
Cir. 1981).
26

now have information that would allow it conclude that there is a
realistic chance that after a hearing the court would determine
that the proposed settlement, which contemplates a payment by
defendants of only $8.8 million to certain of the putative class
members, should be approved as being fair,

reasonable, and

adequate to the members of the proposed classes.
B.

The Court Is Concerned with the Broad Releases, and
Covenants Not to Sue, to Which the Class Members Would Be
Subjected If the Settlement Were to Be Approved
The court would not be inclined to approve a settlement

agreement that is binding on all the settlement class members
that contains broad release and covenant-not-to-sue language of
the kind contemplated by the proposed settlement agreement.

The

court would not expect release or covenant"not-to-sue language in
a settlement of claims of the kind that have been made by the
plaintiffs in this action to be broader than the scope of the
claims that are being settled.
Another concern is the effect on the Structural Relief Class
of the proposed releases and covenants not to sue. Even though
the members of the Structural Relief Class are not being
permitted to participate in the monetary relie.f aspect of the
proposed settlement, they would be denied by the broad release
and covenant-not-to-sue language from bringing a future action
against any of the defendants (or other released parties) for
27

whatever losses they might have suffered in the past from the
failure of the Plan fiduciaries to give them an opportunity to
invest in a stable value fund as an income-producing, low-risk,
liquid fund option, rather than in the AA Credit Union Fund
option.

The court is not satisfied that none of the members of

the Structural Relief Class who chose not to invest in the AA
Credit Union Fund (or one of the other funds listed in the
Monetary Relief Class definition) suffered damages by reason of
not having an option to invest in a stable value fund in years
past.
C.

Members of Both Settlement Classes Should Receive Notice by
First-Class Mail
A related concern is the language in the proposed settlement

agreement that contemplates that the Structural Relief Class
members would not receive by first-class mail the Class Notice,
thus causing them to be less likely than the Monetary Relief
Class members to have notice of a final approval hearing.

Doc.

53 at APP14, ~ 2.9.
D.

~he

Court Is Satisfied That it Would Not Approve Certain
Provisions in the Proposed Court Documents

The proposed documents contemplate that the court, after
approving the settlement agreement, and entering a final
judgment, would, nevertheless, have ongoing involvement in this
action, perhaps for years, in matters related to the settlement.
28

See Doc. 53 at APP6, , 1.15; APP17, , 4.1(c),
20, , 4.2(b); APP21, , 4.5; APP22,
, 11.12.

(d), & (e); APP19-

, 5.2; APP32,

, 11.8; APP33,

The proposed Judgment Approving Settlement of Class

Action contains injunctive-type language, such as the wording in
its paragraph 6 that "[t]he Parties are directed to implement,
perform, and consummate the Settlement in accordance with the
terms and provisions of the Agreement."

Doc. 53 at APP42, , 6.

The court would not be inclined to put that language in a
judgment. 14

The court would expect the parties to include in

their settlement agreement whatever language needs to be in it
for there to be a complete settlement between the parties,
without the court being involved in an ongoing basis through
wording of the settlement agreement or a judgment.
The court anticipates that if the court were to
preliminarily approve a settlement agreement, conditionally
certify the settlement classes, and appoint for settlement
purposes leading class counsel, the court would prepare its own
order granting that relief and providing the court's explanations
as to why it was doing so.

Therefore, the court does not

anticipate that it would use an order on those subjects provided
by the parties for the court's signature.

14

The same is true as to

Nor would the court put in a judgment much, if any, of the language proposed in paragraphs 2-4
and 8-15 of the proposed Judgment Approving Settlement of Class Action. Doc. 53 at APP41, 43-46.

29

notice to the class members and any final approval order and
final judgment, if the matter were to go that far.
The court adds that it would not,

if the matter were to go

that far, approve the wording of the proposed notice to the
settlement class members that is identified as Exhibit B to the
proposed settlement agreement.

Id. at APP48-55.

The court

anticipates that, if the matter were to reach that point, the
court would prepare a notice acceptable to the court, using as
much of the proposed notice as would be consistent with the
court's view of what a proper notice should say, and then present
the notice to the parties for comment before making a final
decision as to the wording to be used.
The court is calling the matters discussed under this
subheading to the attention of the parties because of the wording
in some of the documents presented by plaintiffs to the court for
review indicating that the proposed settlement will not go
forward, or will be subject to termination, if the court does not
choose to use as court documents ones worded consistent with the
oneJdrawn by the parties.

v.
Possible Future Courses of Action for Plaintiffs to Take
If, after considering the foregoing contents of this
memorandum opinion and order, and after consultation with counsel
30

for defendants, plaintiffs wish to proceed further with the
motion they filed on July 18, 2016, the court suggests that
plaintiffs give thought to the following courses of action:
(a)

Presumably the concerns the court expressed in the B,

C, and D parts of section IV could be resolved by a redrafting of
the proposed settlement agreement and a rethinking of their
wishes as to the contents of the proposed court documents.

If

the parties do not wish to tackle those projects, all plaintiffs
need to do is to inform the court of that fact.

Upon being so

informed, the court will deny plaintiffs' July 18, 2016 motion,
and go forward with steps to dispose of the litigation in the
usual manner, starting with fixing a deadline for plaintiffs'
responses to defendants' motions to dismiss.
If redrafting is to be accomplished and rethinking is to be
done, plaintiffs should promptly inform the court of that fact,
and give the court an indication as to when the court might be
expected to receive further filings by plaintiffs.

As the court

has indicated, the court plans for the most part to do its own
wording of any preliminary approval order, notice to the class
members, and final order and final judgment.

In preparing those

documents, the court would take into account the terms of any
revised proposed settlement agreement that the court has found
acceptable.
31

(b)

If plaintiffs wish to address the concerns the court

expressed in part A of section IV, the court will be receptive to
the receipt of further information from plaintiffs bearing on
that subject.

The documents filed by plaintiffs suggest that

they have an abundance of information that might give the court
further insight on the subject.
The court would benefit from the results of the "extensive
investigation to support the allegations and claims in the
Complaint" to which plaintiffs refer in their memorandum.
supra at 14.

See

According to plaintiffs, that investigation

involved plaintiffs' counsel working with industry experts and
ERISA consultants, examining and evaluating Department of Labor
filings from the Plan and peers, Department of Labor filings from
parties-in-interest to the Plan, the investment structure of the
Plan, etc.

Supra at 15.

working with consultants,

Plaintiffs assert that their counsel,
"constructed estimated damages models

for the Plan extrapolating from the publicly available, but
necessarily non-plenary information," id., and that later counsel
for plaintiffs,

"working with experts and consultants,

incorporated information shared by defendants in mediation into
these models," id.

The court would benefit from copies of the

results and products of all of the activities described in the
quoted language in section III. A. above.
32

Equally informative would be the writings that are mentioned
in section III. B. above, particularly (1) all documentation
provided to Judge Hochberg for her consideration,

(2) the

mediation briefs and other supporting documents that were
prepared or exchanged in advance of the June 6, 2016 mediation,
(3) Judge Hochberg's mediator's proposal, and (4) any other
documentation that had a role in the mediation conducted by Judge
Hochberg,

including all information exchanged by the parties in

preparation for or in the process of the mediation.
If a record was made of any of the "vigorous questioning and
analysis by the mediator"

(supra at 16), a transcript of the

record could prove helpful.

Plaintiffs indicate in their

memorandum that there were extensive exchanges between Judge
Hochberg and one or both of the parties.

Whatever record was

made of any of those exchanges would be helpful.

The court

probably would benefit from seeing the memorandum of
understanding summarizing the key terms that was executed on
June 14, 2016.
VI.
Order
Consistent with the foregoing,

the court is withholding a

final ruling on the motion filed by plaintiffs on July 18, 2016.

33

The court ORDERS that if plaintiffs wish to take steps to
resolve the concerns of the court expressed in section IV above,
they advise the court of that fact by a document filed by
December 8, 2016, providing in that document a detailed
description of what plaintiffs propose to do to resolve those
concerns and when the court can expect them to do whatever that
is.
SIGNED November 18, 2016.

District

34