ERISA-Seventh Circuit Finds That Plaintiffs Plausibly Allege That Defendant Engaged In Prohibited Transactions And Breached Fiduciary Duty When It Allowed An ESOP To Purchase Company Stock.

In Allen v. GreatBanc Trust Co., No. 15-3569 (7th Cir. 2016),  GreatBanc Trust Co. (“GreatBanc”) is the fiduciary for an employee stock ownership plan (“the Plan”) for employees of Personal-Touch, a home-health-care company. In that role, GreatBanc facilitated a transaction in which the Plan purchased a number of shares in the company with a loan from the company itself. Unfortunately, the shares turned out to be worth much less than the Plan paid, leaving the Plan with no valuable assets and heavily indebted to the company’s principal shareholders. The Plan’s participants, all employees of Personal Touch, wound up being on the hook for interest payments on the loan. Employees Lisa Allen and Misty Dalton brought this action under section 502 of ERISA, raising two theories of recovery: first, that GreatBanc engaged in transactions that section 406 of ERISA prohibits; and second, that GreatBanc breached its fiduciary duty under ERISA section 404 by failing to secure an appropriate valuation of the Personal-Touch stock. The district court dismissed the complaint, and the plaintiffs appealed.

Upon analyzing the case, the Seventh Circuit Court of Appeals (the “Court”) held that the plaintiffs plausibly alleged both a prohibited transaction and a breach of fiduciary duty. Therefore, the Court reversed the judgment of the district court and remanded the case for further proceedings.

As to the allegation of a prohibited transaction, the Court said that the complaint alleges a purchase of employer stock by the Plan and a loan by the employer to the Plan, both of which are indisputably prohibited transactions within the meaning of section 406 of ERISA. GreatBanc can prevail only if it can take advantage of one of the exemptions for prohibited transactions in section 408 of ERISA. It never raised any affirmative defense based on those exemptions. GreatBanc had the burden of both pleading and proving the applicability of a section 408 exemption, which it did not meet.  Thus, the allegation of a prohibited transaction is plausible.

As to the allegation of a breach of fiduciary duty, the Court said that in order to state a claim for breach of fiduciary duty under ERISA, the plaintiff must plead: (1) that the defendant is a plan fiduciary; (2) that the defendant breached its fiduciary duty; and (3) that the breach resulted in harm to the plaintiff.  The plaintiffs readily met elements (1) and (3). The only issue in this case is whether the plaintiffs sufficiently pleaded breach. The plaintiffs’ central allegation is that GreatBanc failed to conduct an adequate inquiry into the value of Personal-Touch’s stock prior to the Plan’s purchase. To plausibly plead breach, the plaintiffs need to allege facts from which a factfinder could infer that the fiduciary’s process was inadequate. Details are not required, so long as the plaintiffs present a story that holds together. The plaintiffs met this burden for pleading breach: they alleged that the stock value dropped dramatically after the sale (implying that the sale price was inflated), that the loan came from the employer-seller rather than from an outside entity (indicating that outside funding was not available), and that the interest rate was uncommonly high (implying that the sale was risky, or that the shareholders executed the deal in order to siphon money from the Plan to themselves). These facts support an inference that GreatBanc breached its fiduciary duty, either by failing to conduct an adequate inquiry into the proper valuation of the shares or by intentionally facilitating an improper transaction. Thus, the allegation of breach of fiduciary duty is plausible.



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