Schweitzer et al v. The Investment Committee of the Phillips 66 Savings Plan et al

Filing 48

MEMORANDUM OPINION AND ORDER granting #15 MOTION to Dismiss #1 Complaint (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)

United States District Court
Southern District of Texas

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
JEFFERY SCHWEITZER, JONATHAN
SAPP, RAUL RAMOS, and DONALD
FOWLER, on behalf of the
Phillips 66 Savings Plan
and a class of all others
similarly situated,
Plaintiffs,
v.

THE INVESTMENT COMMITTEE OF THE
PHILLIPS 66 SAVINGS PLAN,
SAM FARACE, and JOHN DOES 1-10,
Defendants.

§
§
§
§
§
§
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§
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§
§
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§
§
§

ENTERED
May 09, 2018
David J. Bradley, Clerk

CIVIL ACTION NO. H-17-3013

MEMORANDUM OPINION AND ORDER

Plaintiffs, Jeffery Schweitzer, Jonathan Sapp, Raul Ramos, and
Donald Fowler,
and

409,

502

bring this action pursuant to Sections 404,
of

the

("ERISA"), 29 U.S.C.

Employee

§§

Retirement

Income

405,

Security Act

1104, 1105, 1109, and 1132, on behalf of

the Phillips 66 Savings Plan (the "Plan" or the "Phillips 66 Plan")
and a class of similarly situated participants in the Plan whose
retirement assets were invested in the "ConocoPhillips Stock Fund"
and

the

"ConocoPhillips

"ConocoPhillips Funds")
May 2,

2012,

Period")
1

1

Leveraged

Stock

Fund"

(together,

the

through the Plan during the period from

to the date of judgment in this action (the "Class

against

defendants,

the

Investment

Commit tee

of

the

Class-Action Complaint ("Complaint") , Docket Entry No. 1,
p. 1 ~ 1.
All page number citations are to the pagination
imprinted by the federal court's electronic filing system at the
top and right of the document.

Phillips 66 Savings Plan (the "Committee"), individual members of
the Investment Committee, John Does 1 through 10, and Sam Farace,
the Plan's Financial Administrator

(collectively "Defendants") .

Pending before the court is Defendants the Investment Committee of
the Phillips 66 Savings Plan and Sam Farace's Motion to Dismiss
Plaintiffs'

Class

Action

Complaint

("Defendants' Motion to Dismiss")
reasons explained below,

in

Support

(Docket Entry No. 15).

For the

Defendants'

with

Brief

Motion to Dismiss will be

granted.
I.

Factual and Procedural Background 2

Phillips 66 Company, Inc.

("Phillips 66") was incorporated in

Delaware in 2011 as a wholly owned subsidiary of ConocoPhillips
Corporation ( "ConocoPhillips")

On April 30, 2012, Phillips 66 was

spun-off from ConocoPhillips and became a separate,
company.

independent

As a result of the spinoff approximately 12,000 former

ConocoPhillips employees became Phillips 66 employees.

Phillips 66

established the Plan on May 1, 2012, for Phillips 66 employees in
connection with the spinoff.

The Plan is an employee benefit plan

within the meaning of ERISA Sections 3(3) and 3(2) (A), 29 U.S.C.
§§

1002 (3) and 1002 (2) (A).

The Plan is a "defined contribution" or

"individual account" plan that maintains individual accounts for
each participant within the meaning of ERISA Section

2

See id.

~~ 13-89.

-2-

3 (34),

29

u.s.c.

§

1002 (34) . 3

Participants designate the manner in which

amounts allocated to their accounts will be invested in an array of
investment funds.

ConocoPhillips employees are not eligible to

participate in the Plan.
Assets of Phillips 66 employees who were former ConocoPhillips
employees

that

ConocoPhillips

were

held

Savings

in

participant

Plan

accounts

( "ConocoPhillips

transferred to the Phillips 66 Plan.

under

Plan")

the
were

Included among the assets

transferred from the ConocoPhillips Plan to the Phillips 66 Plan
were shares of ConocoPhillips stock.

The shares were originally

contributed by ConocoPhillips to an employee stock ownership plan
("ESOP") and held in the ConocoPhillips Funds of the ConocoPhillips
After

Plan.

the

spinoff

the

shares

became

ConocoPhillips Funds in the Phillips 66 Plan.
Funds

invested

ConocoPhillips

exclusively
Funds

were

in

3

of

the

The ConocoPhillips

ConocoPhillips

closed to new

part

stock.

investments

after

The
the

A defined contribution plan does not pay any fixed or
determinable benefits.
Instead, benefits will vary depending on
the amount of plan contributions, the investment success of the
plan, and allocations made of benefits forfeited by non-vested
participants who terminate their employment. Thus, the amount of
benefits is based, in part, on the earnings generated by the plan.
Both defined benefit and defined contribution plans can provide for
employee contributions. The individual accounts for all participating employees reflect each participant's share in the underlying
trust assets and are adjusted annually to take into account plan
contributions, earnings, and forfeitures.
Defined benefit plans
ordinarily do not maintain individual accounts, except to the
extent necessary under the Internal Revenue Code to record benefits
attributable to voluntary contributions by employees. SEC Release
No. 33-6188, 1980 WL 29482, at *6-7 (Feb. 1, 1980).
-3-

spinoff, but participants of the Phillips 66 Plan could "exchange
out of the funds at any time." 4
The Board of Directors of Phillips 66 appointed the Phillips
66 Savings Plan Committee.

respect

to

The Committee is a named fiduciary with

the general administration of

the

Plan having

"all

powers necessary or desirable to discharge the duties relating to
the administration of the Plan as are delegated to it by the Plan
and Trust Agreements.

"

5

Defendant Sam Farace is the Plan

Financial Administrator who "shall be a fiduciary and shall have
responsibility to manage and control the assets of the Plan in
accordance with the terms of the Plan.

116

Plaintiffs allege that Defendants breached their fiduciary
duties

of

diversification

and

prudence

by

retaining

the

ConocoPhillips Funds in the Plan after the spinoff because the
ConocoPhillips stock no longer qualified as an "employer security"
under ERISA.

Defendants move to dismiss Plaintiffs'

claims for

failure to state a claim under Rule 12 (b) ( 6) . 7
II.

Standard of Review

Under Rule 8 of the Federal Rules of Civil Procedure a pleading
must contain "a short and plain statement of the claim showing that

4

ConocoPhillips U.S. Employee Transition Guide, Exhibit 8 to
Defendants' Motion to Dismiss, Docket Entry No. 15-8, p. 6.
5

Phillips 66 Savings Plan, Exhibit 9 to Defendants' Motion to
Dismiss, Docket Entry No. 15-9, p. 65.
6

Id.

7

Defendants' Motion to Dismiss, Docket Entry No. 15.
-4-

the pleader is entitled to relief."

Fed. R. Civ.

P. 8 (a) (2).

A

Rule 12(b) (6) motion tests the formal sufficiency of the pleadings
and is "appropriate when a defendant attacks the complaint because
it

fails

to

state

a

legally

cognizable

claim."

Ramming

v.

United States, 281 F.3d 158, 161 (5th Cir. 2001), cert. denied sub
nom. Cloud v. United States, 122 S. Ct. 2665 (2002).

The court must

accept the factual allegations of the complaint as true, view them
in a light most favorable to the plaintiff, and draw all reasonable
inferences in the plaintiff's favor.

Id.

To defeat a motion to dismiss pursuant to Rule 12 (b) ( 6)

a

plaintiff must plead "enough facts to state a claim to relief that
Bell Atlantic Corp.

is plausible on its face."
S. Ct. 1955, 1974 (2007).

v.

Twombly,

127

"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."
Twombly,
akin to a

Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)
127 S. Ct. at 1965).

"The plausibility standard is not

'probability requirement,'

sheer possibility that a

(citing

but it asks for more than a

defendant has acted unlawfully."

(quoting Twombly, 127 S. Ct. at 1965).

Id.

"Where a complaint pleads

facts that are 'merely consistent with' a defendant's liability, it
'stops short of the line between possibility and plausibility of
entitlement to relief.'"
When considering a

Id.

(quoting Twombly, 127 S. Ct. at 1966).

motion to dismiss,

district

courts

are

"limited to the complaint, any documents attached to the complaint,
-5-

and any documents attached to the motion to dismiss that are central
to the claim and referenced by the complaint."
(U.S.),
2010).

L.P.

v.

Barclays Bank PLC,

594

Lone Star Fund

F.3d 383,

387

v

(5th Cir.

"Federal courts are required to dismiss, pursuant to Federal

Rule of Civil Procedure 12 (b) (6),

claims based on invalid legal

theories, even though they may be otherwise well-pleaded."
State Farm Fire and Casualty Insurance Co.
811, 820 (W.D. Tex. 2009)
1827, 1832 (1989)) .

Flynn v.

(Texas), 605 F. Supp. 2d

(citing Neitzke v. Williams, 109 S. Ct.

"[W] hen the allegations in a complaint, however

true, could not raise a claim of entitlement to relief, this basic
deficiency

should

expenditure

of

Cuvillier v.

be

time

Taylor,

and

exposed

at

the

point

of

minimum

and

the

court."

money by

the

parties

503 F.3d 397,

401

(5th Cir.

2007)

(quoting

Twombly, 127 S. Ct. at 1964-65) (quotations omitted); see also Exxon
Mobil Corp. v. FX Networks, LLC, 39 F. Supp. 3d 868, 870-71 (S.D.
Tex. 2014) .
Claims asserted under ERISA are subject to the notice pleading
standard of Federal Rule of Civil Procedure 8, which "substitute[d]
the

requirement

of

'a

short

and plain statement

of

the

claim

showing that the pleader is entitled to relief' for the technical
formula,

such as

'facts constituting a

typified the preexisting codes."

cause of action,'

Heimann v.

which

National Elevator

Industry Pension Fund, 187 F.3d 493, 509 (5th Cir. 1999), overruled
on other grounds, Arana v. Ochsner Health Plan, 338 F.3d 433 (5th
Cir. 2003)

(quoting Charles A. Wright and Arthur R. Miller, Federal
-6-

Practice and Procedure,
Swierkiewicz,

122 S.

1202 at 68

§

Ct.

at 998

(2d ed.

1990)).

See also

(Rule 8 is a simplified notice

pleading standard that applies to all civil actions, with limited
exceptions,

i.e.,

those

enumerated in Rule

9 (b) ,

and requires

merely a statement that gives the defendant fair notice of what the
plaintiff's claim is and the grounds upon which it rests.).
III.
A.

Applicable Law

ERISA

ERISA is a statutory scheme enacted by Congress to protect
employees' rights to benefits while also encouraging employers to
Martinez v.

develop employee benefits programs.
Ltd., 338 F.3d 407, 411

(5th Cir. 2003)

Fiduciary Responsibility Under ERISA:

Schlumberger,

(citing Edward E. Bintz,

Is There Ever a Fiduciary

Duty to Disclose?, 54 U. Pitt. L. Rev. 979,

979

assigns

detailed duties

to plan

responsibilities,

fiduciaries
which

'a number
include

of

the

(1993)).

proper

"ERISA
and

management,

administration, and investment of [plan] assets, the maintenance of
proper records,

the disclosure of specific information,

avoidance of conflicts of interest.'"

and the

Laborers National Pension

Fund v. Northern Trust Quantitative Advisors, Inc., 173 F.3d 313,
317

(5th Cir.),

cert.

denied,

120

S.

Ct.

406

(1999)

(quoting

Mertens v. Hewitt Associates, 113 S. Ct. 2063, 2066 (1993)).
ERISA requires employee benefit plans to be established and
maintained pursuant to a written instrument that provides for
-7-

one

or more

"named fiduciaries who jointly or severally shall have

authority to control and manage the operation and administration of
the plan."

29

u.s.c.

§

1102 (a) (1).

[T] he term "named fiduciary" means a fiduciary who is
named in the plan instrument, or who, pursuant to a
procedure specified in the plan, is identified as a
fiduciary (A) by a person who is an employer or employee
organization with respect to the plan or (B) by such an
employer and such an employee organization acting
jointly.
29 U.S.C.

§

fiduciaries

1102(a) (2).
in

plan

Persons or entities who are not named as

documents

but

who

exercise

discretionary

authority and control that amounts to actual decision-making power
are also plan fiduciaries.

29 U.S.C.

§

1002(21) (A).

"A fiduciary

within the meaning of ERISA must be someone acting in the capacity
of manager,

administrator,

or financial

adviser

Pegram v. Herdrick, 120 S. Ct. 2143, 2151 (2000)
§

1002 (21) (A) {i)- (iii)).

respect

to

those

aspects

authority or control.'"
(5th Cir. 2002)

"'[A]
of

to a

'plan.'"

(citing 29 U.S.C.

person is a fiduciary only with

the

plan over which he

Bannistor v.

Ullman,

exercises

287 F.3d 394,

401

(quoting Sommers Drug Stores Co. Employee Profit

Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 1459-60
(5th

Cir.

1986)

1

cert.

denied,

107

s.

Ct.

884

(1987)).

"[F]iduciary status is to be determined by looking at the actual
authority or power demonstrated, as well as the formal title and
duties of the party at issue."
Intern. AFL-CIO,
S.

Ct.

244

Landry v. Air Line Pilots Ass'n

901 F.2d 404, 418

(1990).

The

(5th Cir.), cert. denied, 111

issue of fiduciary status
-8-

is a mixed

question of law and fact.

Reich v. Lancaster, 55 F.3d 1034, 1044

(5th Cir. 1995).
B.

Fiduciary Duties Under ERISA
(1)

[A]
fiduciary shall discharge his duties with
respect to a plan solely in the interest of the
participants and beneficiaries and(A)

for the exclusive purpose of:
(i)
providing benefits to participants
their beneficiaries; and

and

(ii) defraying reasonable expenses of administering the plan;
(B)

(C)

C.

u.s.c.

by diversifying the investments of the plan so
as to minimize the risk of large losses,
unless under the circumstances it is clearly
prudent not to do so; and

(D)

29

with the care, skill, prudence, and diligence
under the circumstances then prevailing that a
prudent man acting in a like capacity and
familiar with such matters would use in the
conduct of an enterprise of a like character
and with like aims;

in accordance with the documents and instruments governing the plan insofar as such
documents and instruments are consistent with
the
provisions
of
this
subchapter
and
subchapter III.

§

1104(a)(1).

Remedies for Breach

ERISA makes fiduciaries liable for breach of their duties and
specifies the remedies available against them.
at

2066

(citing 29 U.S.C.

§

1109(a)).

Mertens, 113 S. Ct.

ERISA allows any plan

participant, beneficiary, or fiduciary to bring a civil action "for
-9-

appropriate relief under section 1109."

Id. at 2066-67 (quoting 29

U.S. C. § 1132 (a) (2)).
IV.
Defendants
fiduciary

of

Defendants' Motion to Dismiss

do
the

not
Plan

dispute

the

or

Farace's

Sam

Committee's

status

status

as

as

the

a

Plan

Administrator and named fiduciary within the meaning of ERISA, 29
U.S.C. §§ 1002 (16) (A),
that

they

because

are

from

ERISA' s
shares

securities

407 (d) (1)

8

a

for

claim

exempt

and§ 1102 (a) (2).

ConocoPhillips

the

employer

(21) (A)

after

the

Defendants argue

diversification
retain

spinoff

their
under

requirement

character
ERISA

as

Section

and that Plaintiffs have failed to plead facts to state
duty

to

Under ERISA an eligible individual account plan ("EIAP")

as

diversify.
A.

breach

of

the

duty

of

prudence

and

the

9

Employer Security

defined in 29
employer
diversify.

U.S.C.

securities"

§ 1107(d) (3)
exempts

that

invests

fiduciaries

from

in

"qualifying

the

duty

to

ERISA§ 404 (a) (2), 29 U.S.C. § 1104 (a) (2); Fifth Third

Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2467 (2014).
do not dispute that the Plan is an EIAP.

Plaintiffs

An "employer security" is

"a security issued by an employer of employees covered by the plan,

8

Defendants' Motion to Dismiss, Docket Entry No. 15, pp. 13-18.

9

Id. at 19-24.
-10-

or by an affiliate of such employer."
§ 1107(d) (1).

ERISA§ 407 (d) (1), 29 U.S.C.

Plaintiffs allege that the shares of ConocoPhillips

stock no longer qualify as "employer security" after Phillips 66
separated from ConocoPhillips because ConocoPhillips no longer was
the employer of employees covered by the plan or an affiliate of
such employer. 10

See id.

No court has addressed whether, after a

spinoff resulting in two independent companies,
that were

"employer securities"

shares of stock

before the spinoff retain that

character after the spinoff.
Defendants
"employer"
spinoff,

that

argue

that

"issued"

the

because

ConocoPhillips

ConocoPhillips

shares

was
before

the
the

the shares retain their status of "employer securities"

after the spinoff. 11

Defendants cite Manor Care of America, Inc.

v. Property & Casualty Insurance Guaranty Corp., 185 F. App'x 308,
309, 311 (4th Cir. 2006)

(per curium) in support of their argument

that under the plain language of the statute,

"whether a stock

qualifies as an employer security is evaluated at
issuance. " 12

the

time of

In Manor Care the Fourth Circuit held that to be

eligible for insurance coverage, "a policyholder must have been a
Maryland resident when the policy was issued, not when the claim is
submitted."

1

185 F. App'x at 311.

It reasoned that the phrase

°Complaint, Docket Entry No. 1, pp. 12-13

~~

50-55.

11

Defendants' Motion to Dismiss, Docket Entry No. 15, p. 13.

12

Id. at 13-14.
-11-

"issued to a resident

unmistakably tethers the residency

requirement to a particular event,
Id.

the issuance of the policy."

Defendants argue that "[w]hether a security qualifies as an

employer security under ERISA is likewise 'tethered' to the time of
issuance of the security." 13
"ignor[e]

Plaintiffs respond that Defendants

that neither ERISA'S language nor its history supports

[Defendants'] desired outcome." 14
The statute at issue in Manor Care did not involve ERISA.

The

meaning of the word "issue" "cannot be determined in isolation, but
must be drawn from the context in which it is used."
Guzik, 249 F.3d 395, 398 (5th Cir. 2001)

Henrikson v.

(citations omitted).

"It

is important to look to the structure and language of the statute
as a whole."
"issued"

in

Id.
the

The decision in Manor Care as to the meaning of
context of

Maryland

insurance

law has

little

relevance in deciding the issue before the court.
De fen dan t s
Committee,

761

also

F.3d 346

(4th Cir.

interpretation of 29 U.S.C.
what

undoubtedly

..=T~a~t:::..!u~m:!!.----'v~._.=.R=.::J~R~--=P-"'e~n~s~i..::::o~n=-----=I..:.:n!:...:v-"'e:::.!s=..t.=.m=e:.:.n~t

cite

would

§

have

2014),

their

1107 (d) (1) because it "illustrates
happened

divestment of participant holdings of
around the time of the spinoff." 15

13

in support of

had

Defendants

forced

the ConocoPhillips stock

In Tatum, RJR Nabisco spun off

Id. at 14.

14

Plaintiffs' Response in Opposition to Defendants' Motion to
Dismiss ("Plaintiffs' Response"), Docket Entry No. 38, p. 14.
15

Defendants' Motion to Dismiss, Docket Entry No. 15, pp. 14-15.
-12-

its tobacco business, RJR, from its food business, Nabisco.
761 F.3d at 351.

Tatum,

After the spinoff RJR forced the divestment of

the Nabisco shares held by employees in their 401(k) accounts.
at 354.

Id.

The plaintiff alleged that the plan fiduciaries breached

their duties by eliminating Nabisco stock from the plan without
conducting a thorough investigation.

Id.

at 355.

The district

court determined that "nothing in the law or regulations required
that the Nabisco Funds be removed from the Plan."

Tatum v. R.J.

Reynolds Tobacco Co., 926 F. Supp. 2d 648, 680 (M.D. North Carolina
2013) .

The district court held that RJR breached its fiduciary

duty of procedural prudence when it "decided to remove and sell
Nabisco

stock

from

the

Plan

without

undertaking

a

proper

investigation into the prudence of doing so" but that RJR met its
burden of proving that its decision was objectively prudent.
at 651.

Id.

The Fourth Circuit upheld the district court's ruling that

RJR breached its duty of procedural prudence but

remanded the

action to determine whether RJR met its burden of proving that a
prudent

fiduciary would have made

circuit's articulated standard.

the

same decision under the

Tatum, 761 F.3d at 361, 368.

Defendants argue that "[l]ikewise, at the time ConocoPhillips
shares were issued to the participants,
employer

securities

under

ERISA,

and

they were indisputably
nothing

in

the

law

or

regulations should be read to require divestment of those shares
simply

due

to

a

change

in

the

-13-

nominal

employer

of

the

participants." 16

Defendants argue that under Plaintiffs' interpre-

tation of "employer security," "ERISA plans would, at a minimum,
feel increased pressure to force participants to divest stock like
the Nabisco stock, due to the fact that fiduciaries would no longer
be exempt from ERISA'S diversification requirements with respect to
such holdings." 17
court

in Tatum

Plaintiffs respond that on remand the district
reviewed extensive

evidence

and

held

that

RJR

fiduciaries acted prudently when they divested the plan's holdings
in Nabisco stock. 18

Tatum v. R.J. Reynolds Tobacco Company, Civil

Action No. 1:02-00373, 2016 WL 660902 at *23 (M.D. North Carolina,
Feb. 18, 2016).

Plaintiffs argue that "[t]his analysis would have

been completely irrelevant

if,

following

the

spin-off,

Nabisco

stock was still an 'employer security' for the plan at issue." 19
The issue in Tatum was RJR' s

lack of investigation before

forcing divestiture of the plan's shares in

Nabisco.

The Fourth

Circuit did not determine whether the Nabisco shares retained their
status

as

employer

securities

after

the

spinoff.

Although

Defendants argue that fiduciaries would "feel increased pressure to
force participants to divest stock like the Nabisco stock," the
teaching

of

Tatum

is

that

the

fiduciaries

would

merely

16

Id. at 15-16.

17

Id. at 16.

18

Plaintiffs' Response, Docket Entry No. 38, p. 15.

19

Id. at 15.
-14-

feel

pressure to evaluate the prudence of keeping the legacy stock as an
investment option -- just as they would evaluate the prudence of
including other investments in a plan.
Plaintiffs argue that Defendants' interpretation of "employer
security" to include a prior employer's shares is incorrect because
under ERISA an "employer" means "acting directly as an employer, or
indirectly

in

the

interest

employee benefit plan. " 20
Plaintiffs argue

of

an

employer,

29 U.S.C.

1002 (5)

§

that ConocoPhillips

in

relation

to

an

(emphasis added).

stock is not an

"employer

security" because "the only 'employer of employees covered by the
Plan'

is

Phillips

Phillips

66.

ConocoPhillips

66 or an affiliate of

Phillips 66 as the "employer." 22
consist

primarily

of

Company

holding the assets. " 23
"issued

by

"Special

Phillips

issued by

The Plan names

The Plan is an ESOP that "shall
Stock

66,

which

Although Article

Provisions

66. " 21

not

purchased

by

the

Trustees

The Plan defines "Company Stock" as shares

Phillips

securities. '" 24

stock was

for

Former

shall
XXIII

constitute
of

Participants

the
in

Plan
the

20

is

titled

Retirement

Id. at 10.

21

'employer

Plaintiffs' Response, Docket Entry No. 38, p. 10.

22

Phillips 66 Savings Plan, Exhibit 9 to Defendants' Motion to
Dismiss, Docket Entry No. 15-9, p. 10, Article I definition 30.
23

Id. at 32, Article VI section 7.

24

Id. at 9, Article I definition 18.
-15-

Savings Plan of ConocoPhillips Company/

1125

ConocoPhillips

or

employer
concludes

remained

securities
that

the

an

under

employer
the

language

1

Phillips

of

the

it does not state that
that
66

its

shares

Plan.

Phillips

66

The
Plan

were
court

supports

Plaintiffs' argument that shares of ConocoPhillips stock were not
employer securities of the Plan after the spinoff.
590 F. Supp. at 903-04

See In re Ford,

(determining whether a Plan is an ESOP by

reviewing the terms of the Plan) .
Plaintiffs also cite the Internal Revenue Code Private Letter
Ruling 201427024 ( "PLR 11 )
employer

of

the

•

26

Because ConocoPhillips ceased to be the

participants

of

the

Plan

after

the

Plaintiffs argue that under the PLR "[ConocoPhillips]
not employer securities with respect to

[the]

Plan.

11

25

shares are
I.R.S. PLR

Id. at 82, Article XXIII.

26

spinoff,

Plaintiffs' Response, Docket Entry No. 38, p. 12.

PLR 201427024 states:
[F] allowing the Spin-Off, Company B ceased to be the
employer of the participants covered under Plan X, and
Company A ceased to be the employer of the participants
covered under Plan Y. In addition, Company A and Company
B are no longer affiliated employers within the meaning
of section 407 (d) (7) of ERISA since Company A and Company
B will not be members of the same controlled group of
corporations as determined under section 1563(a) of the
Code (except substituting 50 percent for 80 percent) .
Since section 407(d) (1) of ERISA defines "employer
securityn as a security issued by an employer of
employees covered by the plan or by an affiliate of such
an employer, following the Spin-Off, Company B shares are
not employer securities with respect to Plan X, and
Company A shares are not employer securities with respect
to Plan Y.
-16-

201427024

(July 3, 2014).

Defendants respond that the IRS "does

not have regulatory or enforcement authority with respect to the
relevant provisions of ERISA" and that the PLR evaluated securities
under the Internal Revenue Code, not ERISA. 27

Although the IRS's

Private Letter Ruling is not binding precedent, it is persuasive
because it addresses the precise issue in question

whether an

employer security retains that character after a spinoff.
Finally,

Plaintiffs argue that ownership of ConocoPhillips

stock does not promote the purpose of ERISA's "employer securities"
exemption

to

employees . " 28
supported

by

"bring

about

Defendants
ERISA' s

stock

respond

policies

ownership
that

because

by

their
it

all

corporate

interpretation is

encourages

employee

ownership "without the possibility that employees could be forced
to divest of securities merely because of a corporate transaction
that later changed the identity of their employer." 29
designed

to promote

Congress

supports

employee

ESOPs'

ownership of

use

for

Bancorp, 134 S. Ct. at 2468-70.

that

ESOPs are

employer stock,
Fifth

purpose.

and

Third

Companies use ESOPs to encourage

employee participants to focus on company performance and share

27

Defendants' Motion to Dismiss, Docket Entry No. 15, pp. 17-18.

28

Plaintiffs' Response, Docket Entry No.
Fifth Third Bancorp, 134 S. Ct. at 2469).
29

38,

p.

13

(citing

Defendants the Investment Committee of the Phillips 66
Savings Plan and Sam Farace's Reply in Support of Their Motion to
Dismiss Plaintiffs' Class Action Complaint ("Defendants' Reply"),
Docket Entry No. 43, pp. 9-10.
-17-

price

appreciation

since

the

participants

themselves

are

shareholders.

Because Phillips 66 became an independent company

following

spinoff,

the

participant

ownership of

ConocoPhillips

stock would not promote the purposes of ESOPs.
Having

carefully

considered

the

parties'

arguments

and

authorities the court concludes that shares of ConocoPhillips stock
are not employer securities and that Defendants are therefore not
exempt from ERISA's diversification requirement with respect to the
ConocoPhillips Funds.
B.

Duty to Diversify

Fiduciaries must "diversify[] the investments of the plan so
as

to

minimize

the

risk

of

large

losses,

unless

under

circumstances it is clearly prudent not to do so."
§

1104 (a) (1) (C).

"As

a

general

proposition,

29

ERISA' s

the

u.s.c.

duty

to

diversify prohibits a fiduciary from investing disproportionately
in a particular investment or enterprise."
Plan Litigation,

74 F.3d 420,

438

In re Unisys Savings

(3d Cir. 1996).

As the Fifth

Circuit has explained:
The degree of investment concentration that would violate
this requirement to diversify cannot be stated as a fixed
percentage, because a fiduciary must consider the facts
and circumstances of each case.
The factors to be
considered include (1) the purposes of the plan; (2) the
amount of the plan assets; (3) financial and industrial
conditions; ( 4) the type of investment, whether mortgages,
bonds or shares of stock or otherwise; (5) distribution
as to geographical location;
( 6) distribution as to
industries; (7) the dates of maturity.
Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997)
Rep.

No.

1280,

93d Cong.,

2d Sess.
-18-

(1974),

(quoting H.R.

reprinted

in 1974

U.S.C.C.A.N. 5038, 5084-85

(Conf. Rpt. at 304)).

The court also

noted that "[w]e think it is entirely appropriate for a fiduciary
to consider the time horizon over which the plan will be required
to pay out benefits in evaluating the risk of large loss from an
investment strategy."

Id. at 210 n.6.

"To establish a violation,

a plaintiff must demonstrate that the portfolio is not diversified
'on its face.'"

Id. at 209.

Once Plaintiff establishes that a

plan is not diversified on its face,

"the burden shift[s]

to the

defendant to show why under the circumstances it was prudent not to
diversify the investments of the plan."
Litigation,

563

F.

Supp.

2d 681,

690

In re Dell,
(W.D.

Tex.

Inc.

2008)

ERISA
(citing

Metzler, 112 F.3d at 209).
Plaintiffs

allege

that

Defendants

breached

their

duty

to

diversify "by failing to diversify Plan investments" 30 because the
Plan had more than 25% of its assets invested in the ConocoPhillips
Funds at the beginning of the Class Period and "continued to hold
an

excessive

amount

of

assets

in

the

ConocoPhillips

Funds. " 31

Plaintiffs allege that "Defendants took no actions to diversify the
Plan's assets and end the Plan's investments in the ConocoPhillips
Funds" 32 and that "Defendants'

3

failure to properly diversify the

°Complaint, Docket Entry No. 1, p. 24

31

Id. at 19

~~

32

Id. at 25

~

80-81.
107.
-19-

~

105.

Plan's assets caused the Plan to suffer tens of millions of dollars
in losses during the Class Period." 33
In support of their Motion to Dismiss Defendants argue that
(1) the Plan offered a diverse menu of investment options in which
participants could invest
Plan's

holdings

participants'

in

their assets;

ConocoPhillips

( 2)

was

the extent of

attributable

to

elections to retain the ConocoPhillips stock;

the
the
and

(3) section 404(c) of ERISA relieves plan fiduciaries of liability
for losses that result from a participant's exercise of control. 34
Defendants rely heavily on Yates v. Nichols, 286 F. Supp. 3d
854 (N.D. Ohio 2017) . 35

The facts of Yates are similar to those of

this

spinoff

case:

retirement

After
plan

a

participant

of
sued

one
the

company
plan

from

another,

administrator,

a
the

investment committee, and members of that committee for breach of
the fiduciary duty to diversify because they placed 6.5% of the
plan's total assets into a fund holding only the legacy company's
stock.

Yates, 286 F. Supp. 3d at 857.

Like the Phillips 66 Plan,

the plan at issue in Yates was a defined contribution plan.

33

Id.

Id.

34

Defendants' Motion to Dismiss, Docket Entry No. 15, pp. 19-22.
Section 404 (c) is an affirmative defense that is generally not
suitable for resolution by a 12(b) (6) motion. The court therefore
has not addressed Defendants section 404(c) argument.
35

See Defendants the Investment Committee of the Phillips 66
Savings Plan and Sam Farace's Notice of Supplemental Authority,
Docket Entry No. 24; Defendants' Reply, Docket Entry No. 43,
pp. 12-18.
-20-

The district court explained that

"because ERISA requires

that

fiduciaries diversify 'the investments of the plan,'

the statute

'contemplates

a

a

failure

to

undiversified as a whole.'"

diversify

claim

when

plan

is

Id. at 863 (quoting Young v. General

Motors Investment Management Corp., 325 Fed. App'x 31, 33 (2d Cir.
2009)

(unpublished opinion)).

The court held:

[E]valuating the plan as a whole makes good sense when
the plan at issue is .
. a defined-contribution plan
where each participant has his or her own account.
In these cases, the plan participants themselves-rather
than the plan's trustees or its investment committeedecide how to allocate their contributions among the
plan's investment options.
The trustees and the
investment committee, in other words, have no ability to
enforce
the
diversification
requirement
on
the
participants. All they can do, it would seem, is offer
a diversified menu of investment options.
What seems
most critical, then, at least in terms of the trustees'
diversification duty, is the range of investment options
available to the participants.
Here, there is no question that
whole, offered diverse options.

[the plan],

taken as a

Id. at 864.
The

participants

in

the

Phillips

66

Plan

decide

how

to

allocate their contributions among the Plan's investment options, 36
and Plaintiffs do not challenge the diversity of the investment
options.

"Defendants had little, if any, authority under the Plan

36

See Phillips 66 Savings Plan [Summary Plan Description] ,
Exhibit 2 to Defendants' Motion to Dismiss, Docket Entry No. 15-2,
pp. 19, 21 ("Do I get to decide how my money is invested? Yes. In
fact, it's your responsibility.
. You can choose to invest in
one or more of the plan's investment funds.
. you can 'mix and
match' your funds from among all of the groups.
Whichever funds
you choose, you're always responsible for selecting and monitoring
your investment choices.").
-21-

to

'override'

the

employee

investors'

decisions

to

[retain]

[ConocoPhillips] stock in order to diversify the actual holdings of
the Plan."

In re Dell, 563 F. Supp. 2d at 690.

"All they can do

. is offer a diversified menu of investment options."
286

F.

Supp.

3d

at

864;

see

also

In

re

Dynegy,

Litigation, 309 F. Supp. 2d 861, 896 (S.D. Tex. 2004)

Yates,

Inc.

ERISA

(holding that

because the self-directed portion of the plan "always included an
array of investment options" the plaintiff "does not

. allege

that the Plan was not diversified on its face.").
Plaintiffs challenge the fiduciaries'

decision not to force

divestiture of the assets in the ConocoPhillips Funds.

But the

participants

time." 37

could

"exchange

out

of

the

funds

at

any

Because the participants could elect to exchange their assets out
of the ConocoPhillips Funds, any amount of the Plan's assets that
remained invested in the ConocoPhillips Funds was there by the
participants'

choice.

If plan participants choose to exchange

their holdings in ConocoPhillips Funds they may reinvest in the
remaining investment options of the Plan, which Plaintiffs do not
allege

are

not

diversified.

Dividends

on

the

shares

of

the

ConocoPhillips Funds "will automatically be reinvested according to
[participants']

current

investment

allocation election

[in the

Phillips 66 Plan] . " 38

37

ConocoPhillips U.S. Employee Transition Guide, Exhibit 8 to
Defendants' Motion to Dismiss, Docket Entry No. 15-8, p. 6.
38

Id. at 7.
-22-

Fiduciaries
plan,"

but

have

the

investments." 39

a

duty

to diversify

ConocoPhillips

funds

"investments

were

"closed

of
to

the
new

Because the shares of ConocoPhillips are no longer

employer securities, a fiduciary's decision to allocate 25% of the
plan's assets to the ConocoPhillips Funds might, hypothetically,
violate the duty to diversify the plan's investments.

But because

the ConocoPhillips Funds were no longer an investment option, and
because

participants

could

ConocoPhillips Funds,
assets

to

the

remove

their

assets

from

the

the fiduciaries had no power to allocate

ConocoPhillips

Funds.

The

real

issue

is

not

diversification but the prudence of the fiduciaries' decision not
to force divestiture.
participants'

Because Defendants did not mandate that

assets remain in ConocoPhillips Funds and because

Plaintiffs do not allege that the Plan's other investment options
are not diversified,

Plaintiffs fail to allege that the Plan was

not diversified on its face.

Plaintiffs have therefore failed to

state a claim for relief based on a duty to diversify.
C.

Prudence

Plaintiffs

allege

that

Defendants

breached

their

duty of

prudence by permitting participants to retain their interests in
the ConocoPhillips Funds in their accounts after the spinoff. 40

39

4

Id. at 6.

°Complaint, Docket Entry No. 1, pp. 8-14
-23-

~~

32-76.

Plaintiffs allege that the ConocoPhillips stock was an excessively
risky and volatile investment and thus an imprudent option. 41
ERISA requires fiduciaries to discharge their duties "with the
care, skill, prudence, and diligence under the circumstances then
prevailing
familiar

that

with

a

prudent

such

matters

man

acting

would

in

use

a

in

like
the

capacity

conduct

enterprise of a like character and with like aims."
§

1104 (a) (1) (B).

29

of

and
an

u.s.c.

The Fifth Circuit has stated:

In determining compliance with ERISA's prudent man
standard,
courts
objectively
assess
whether
the
fiduciary, at the time of the transaction, utilized
proper methods to investigate, evaluate and structure the
investment; acted in a manner as would others familiar
with such matters;
and exercised independent judgment
when making investment decisions.
"[ERISA' s] test of
prudence .
. is one of conduct, and not a test of the
result of performance of the investment.
The focus of
the inquiry is how the fiduciary acted in his selection
of the investment, and not whether his investments
succeeded or failed." Thus, the appropriate inquiry is
"whether the individual trustees, at the time they
engaged in the challenged transactions, employed the
appropriate methods to investigate the merits of the
investment and to structure the investment."
Laborers National, 173 F.3d at 317 (citations omitted).
"This duty of prudence

'trumps the instructions of a plan

document, such as an instruction to invest exclusively in employer
stock even if financial goals demand the contrary.'"
RadioShack Corp,

882 F.3d 137,

144

(5th Cir.

(citing Dudenhoeffer, 134 S. Ct. at 2468.)

41

Id.
-24-

2018)

Singh v.

(per curium)

The duty of prudence

applies fully to employee-owned stock ownership plans, except that
ESOPs need not be diversified.

Dudenhoeffer, 134 S. Ct. at 2468.

Dudenhoeffer establishes different standards for duty-of-prudence
claims based on public information versus insider information.
at 2471-72.

Id.

The Court held that "where a stock is publicly traded,

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."
circumstances

special

fiduciaries,

make

the

market

Id. at 2471.

Unless

unreliable,

"ERISA

who likewise could reasonably see

outperforming the market .

'little hope of

. based solely on their analysis of

publicly available information,' may, as a general matter, likewise
prudently

rely

on

the

market

Such

price."

"special

circumstances" must "affect[] the reliability of the market price
as 'an unbiased assessment of the security's value in light of all
public information.'"

Id. at 2472.

Defendants argue that "Plaintiffs'

Complaint cannot survive

scrutiny under Dudenhoeffer and thus does not state a claim for
breach

of

the

Dudenhoeffer

duty

does

ConocoPhillips,

of
not

prudence. " 42
apply

Dudenhoeffer

because

involved

Plaintiffs
unlike
employer

respond

the

shares

securities

that
of
that

"fall within ERISA's limited exemption from normal diversification

42

Defendants' Motion to Dismiss, Docket Entry No. 15, p. 24.
-25-

considerations." 43

Plaintiffs argue that "[w]here, as here,

exemption does not apply,

that

failure to properly diversify must be

considered as part of a prudence analysis. " 44

The court is not

persuaded by Plaintiffs' argument because in Dudenhoeffer the Court
stated that "the same standard of prudence applies to all ERISA
fiduciaries,

including

ESOP

fiduciaries,"

with

the

limited

exception that ESOP fiduciaries are "under no duty to diversify the
ESOP's holdings."

Dudenhoeffer, 134 S. Ct. at 2467.

Plaintiffs allege that "the Plan's highly concentrated holding
of ConocoPhillips stock at the time of the spin-off, together with
public information and ConocoPhillips' poor performance, were redflags to Defendants that the ConocoPhillips stock was not a prudent
investment

for

the

Plaintiffs'

Plan. " 45

claim that Defendants

breached the duty of prudence by holding the ConocoPhillips Funds
is based on publicly available information such as the Vanguard
Institutional

Index Fund,

46

ConocoPhillips'

10-K,

47

the price of

ConocoPhillips stock, 48 the price of oil, 49 website articles, 50 and

43

Plaintiffs' Response, Docket Entry No. 38, p. 27.

44Id.
45

Id. at 28.

46

Complaint, Docket Entry No. 1, p. 10

47

Id. at 10

48

Id. at 13-16

49

Id. at 14

50

Id. at 15-17

~ 43.

~~

~~

57,

65,

67-68.

69,

74.

59-62.
~~

63,

-26-

~ 40.

other "publicly available information [that] showed the riskiness
of ConocoPhillips stock. " 51

In the absence of special circumstances,

the claim is implausible.

Dudenhoeffer, 134 S. Ct. at 2471; see

also Singh,

882 F. 3d at 146

(holding that because "the overall

decline in the price of [defendant's] stock during the class period
shows

that

the

market

information

accounted

Plaintiffs'

for

negative

[]

public-information

implausible under Dudenhoeffer's general rule").

[public]

claims

are

Plaintiffs have

neither alleged in their Complaint nor argued in their Response
that any "special circumstances" are present.

Because Plaintiffs

have not identified any plausible special circumstances undermining
the market price as a measure of ConocoPhillips' value, Plaintiffs
fail to state a claim for breach of the duty of prudence based on
public information.

See Singh, 882 F.3d at 147 (holding that the

defendant's heavy debt load and bond-market indicators that the
defendant

would

likely

default

do

not

qualify

as

special

circumstances because "the stock market presumably incorporated
that information into the price of [defendant's] stock.").
D.

Failure to Engage in Adequate Process

Plaintiffs allege that
regular,

appropriate

"Defendants had a duty to follow a

systematic

procedure

to

ConocoPhillips Funds as investments in the Plan.

evaluate

the

They breached

that duty and failed to conduct an appropriate investigation of
51

Id. at 16

~

69.
-27-

continued investment in the ConocoPhillips Funds. " 52

Plaintiffs

also allege that "ConocoPhillips remained an investment option for
the

Plan's

participants

appropriate

process

because

in

Defendants

evaluating

the

did

not

follow

prudence

of

an
the

ConocoPhillips Funds." 53
" [T] o plead plausibly a breach of the duty of prudence for
failure

to

investigate,

proved,

would

show

plaintiffs must

that

an

adequate

allege

facts

investigation

that,

would

if

have

revealed to a reasonable fiduciary that the investment at issue was
improvident."

Rinehart v. Lehman Bros. Holdings Inc., 817 F. 3d 56,

67 (2d Cir. 2016)

(internal quotations and citations omitted)

But when the alleged facts do not "directly address[] the
process by which the Plan was managed," a claim alleging
a breach of fiduciary duty may still survive a motion to
dismiss if the court, based on circumstantial factual
allegations, may reasonably "infer from what is alleged
that the process was flawed."
To survive a motion to
dismiss, a plaintiff may "allege facts sufficient to
raise a plausible inference that
a superior
alternative investment was readily apparent such that an
adequate
investigation would
have
uncovered
that
alternative."
Main v. American Airlines Inc., 248 F. Supp. 3d 786, 793 (N.D. Tex.
2017)

(quoting Pension Benefits Guaranty Corp. ex rel. St. Vincent

Catholic

Medical

Centers

Investment Management

Inc.,

Retirement
712

F.3d

(quoting Braden v. Wal-Mart Stores,

Plan

v.

705,

716

Inc.,

52

Complaint, Docket Entry No. 1, p. 24

53

Id. at 11

~

45.
-28-

Morgan
(2d

Stanley

Cir.

588 F.3d 585, 596

~

102.

2013)
(8th

Cir.

2009))).

"For

instance,

the

complaint

may allege

facts

sufficient to raise a plausible inference that the investments at
issue were so plainly risky at the relevant times that an adequate
investigation would have revealed their imprudence [.] "

Pension

Benefits, 712 F.3d at 719.
Plaintiffs' Complaint contains only legal conclusions with no
specific factual allegations about the process Defendants engaged
in.

Moreover, Plaintiffs fail to allege that an adequate investi-

gation

would

available

have

revealed

information

ConocoPhillips

Funds

anything

other

a

risky

the

establishing

allegedly

were

than

investment

publicly

that

option.

the

Because

Plaintiffs' allegations restate their claim for breach of the duty
of prudence based on public information, Dudenhoeffer forecloses
their claim.
failure

to

Therefore,
engage

in

an

Plaintiffs

fail

to state a

adequate

process

for

claim for

evaluating

the

prudence of continuing to hold the ConocoPhillips Funds.
E.

Claims for Co-Fiduciary Liability

In addition to any liability that a fiduciary may have under
any other provision of ERISA, 29 U.S.C.

§

1105(a) provides that

a fiduciary with respect to a plan shall be liable for a
breach of fiduciary responsibility of another fiduciary
with respect to the same plan in the following
circumstances:
(1) if he participates knowingly in, or knowingly
undertakes to conceal, an act or omission of such other
fiduciary, knowing such act or omission is a breach;

-29-

(2) if, by his failure to comply with section 1104(a) (1)
of this title in the administration of his specific
responsibilities which give rise to his status as a
fiduciary, he has enabled such other fiduciary to commit
a breach; or
( 3) if he has knowledge of a breach by such other
fiduciary, unless he makes reasonable efforts under the
circumstances to remedy the breach.
Plaintiffs allege that the Committee and its individual members and
Sam Farace are liable as co-fiduciaries for each other's breaches
of their fiduciary duties. 54

Because the court has concluded that

the allegations against all Defendants fail to state a claim for
which relief may be granted,

the court concludes that Plaintiffs

have

claims

also

failed

to

state

against

Defendants

for

co-

fiduciary liability.

V.

Conclusions and Order

For the reasons set forth above,

Defendants The Investment

Committee of The Phillips 66 Savings Plan and Sam Farace's Motion
to Dismiss Plaintiffs' Class Action Complaint (Docket Entry No. 15)
is GRANTED.
SIGNED at Houston, Texas, on this the 9th day of May, 2018.

SIM LAKE
UNITED STATES DISTRICT JUDGE

54

Complaint, Docket Entry No. 1, pp. 25-26
-30-

~~

109-116.