U.S.D.C., E.D. Pennsylvania

ESOP Fiduciary Liability – Duty to Diversify

Ragan v. Advanta Corporation, 2011 U.S. Dist. LEXIS 112495 (September 30, 2011)

In this Employee Stock Ownership Plan ("ESOP") fiduciary liability dispute, the court upheld claims that Advanta Corporation directors and committee members breached their duties of prudence, loyalty, and monitoring by investing in Advanta stock. However, the court dismissed the claim that the directors failed to disclose complete and accurate information regarding Advanta's financial condition.

A. Duty to Prudently and Loyally Manage

The Court concluded that the complaint alleged sufficient facts to rebut the Moench presumption and to withstand the defendants' motion to dismiss. The participants alleged Advanta consistently misrepresented the quality of its accounts, executives sold their own stock knowing that the business was deteriorating, the share price plummeted, and Advanta eventually filed for bankruptcy.

In addition, the Court found sufficient facts to support the conclusion that the defendants knew that Advanta's stock was an imprudent investment. The participants alleged that Advanta's share price fell precipitously, federal regulators commenced an investigation, and executives sold significant blocks of their own Advanta stock while publicly stating the company's future was secure. The defendants contended that they did not violate ERISA because the Plan Document required them to invest in employer securities. The Court disagreed, finding the Plan Document contained no such requirement, and noting that such a requirement could not completely shield a fiduciary from liability.

B. Duty to Disclose

The participants alleged the directors failed to disclose that Advanta was concealing a significant number of impaired credit card receivables. In addition, they claimed Advanta failed to verify customers' ability to pay and failed to properly account for delinquent customer and credit trends. The Court dismissed this claim on the grounds that participants could not establish loss. The Court relied on a Third Circuit decision upholding a district court's determinations that financial markets would react too swiftly to public disclosure of negative information to allow plans to sell stock to avoid losses, and that the directors risked liability for insider trading for any decision to divest the plan of company stock based on nonpublic information.

C. Duty to Avoid Conflicts of Interests

The Court rejected the defendants' contention that the claim should have been dismissed for failing to identify any specific breach arising from the conflict. The participants alleged executive compensation was often tied to Advanta's share price, and that some of the directors sold their own stock while failing to protect the participants. The Court acknowledged a split in authorities on this issue, with some courts holding that allegations that executives would benefit from an inflated stock price at the expense of participants holding stock for retirement are sufficient to state a claim, while others holding that the holding of stock by fiduciaries does not sufficiently allege that the personal investments caused the fiduciary to take or fail to take any actions detrimental to the plan while acting as a fiduciary. Ultimately, the Court upheld the claim, concluding that a more developed record was necessary to determine whether the defendants' actions constituted a conflict of interest.

D. Duty to Monitor

The Court also rejected the directors' contention that the participants failed to specify circumstances that should have triggered a duty to monitor other fiduciaries. The participants alleged the directors had a duty to ensure that the plan administrators had all relevant information about the problems affecting Advanta, including the allegations that the company concealed large amount of impaired credit card receivables, failed to verify its customers' ability to pay and, improperly accounted for delinquent customers and credit trends. The Court concluded the allegations were sufficient to state a claim.

Sixth Circuit

ERISA and Subject Matter Jurisdiction

Daft et. al. v. Advest Inc., 658 F.3d. 583 (6th Cir. 2011)

In Daft, a group of beneficiaries brought suit concerning a denial of pension benefits, alleging that the plan violated ERISA's vesting requirements. For the first time on appeal, the defendants argued that the court lacked subject matter jurisdiction over the case because the plan did not satisfy ERISA's definition of an employee pension benefits plan. Alternatively, the defendants argued that the plan did not violate ERISA's vesting requirements because it was a tophat plan, and therefore exempt from ERISA's substantive protections.

The court rejected the defendant's jurisdictional claim based on Arbaugh v. Y&H Corp., 546 U.S. 500 (2006), explaining that the existence of an ERISA plan is not a jurisdictional issue, but rather speaks to whether the plaintiffs can state a claim upon which relief may be granted. Accordingly, the court held that the defendants waived their jurisdictional argument. With respect to the issue of whether the plan was a top-hat plan, the court held that the issue should be remanded to the plan committee for further development of the administrative record.

Seventh Circuit

Discretion To Interpret Ambiguous Plan Provisions

Frye v. Thompson Steel Co. Inc., 657 F.3d 488 (7th Cir. 2011)

In Frye, a pension plan participant claimed the administrator's offset of his worker's compensation benefits violated the terms of the plan. The court disagreed and found the plan to contain a "real ambiguity that the Committee [plan administrator] had to face and resolve", in turn affording the plan administrator considerable discretion in deciding whether the plan's language allowed for offsetting worker's compensation benefits. Therefore, because the plan administrator's resolution of the ambiguity was reasonable under the terms of the plan, the participant failed to meet his burden of demonstrating that there was "no rational support in the record for the Committee's determination...."

Limitation On Benefits For Disability Based On Self-Reported Symptoms

Weitzenkamp v. Unum Life Ins. Co., 2011 U.S. App. LEXIS 19283 (7th Cir. Sept. 20, 2011)

In this long term disability benefit dispute, the participant who suffered from fibromyalgia, chronic pain and depression, challenged the claim administrator's decision to terminate benefits at the conclusion of the 24 month limitation period for payment of benefits related to disabilities based on self-reported symptoms. The participant also argued that the plan was not entitled to recoup overpayments resulting from a retroactive award of social security disability benefits.

The court concluded that Unum's interpretation of the plan was unreasonable and determined that the self reported symptoms limitation did not apply because the participant's fibromyalgia diagnosis was based on objective evidence and findings. The court also dismissed the participant's argument that Unum's claim for recoupment was barred by the Social Security Act.

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