Breach of Fiduciary Duty

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This week’s notable decision is one from a wave of ERISA lawsuits against universities over allegations of imprudent investments and excessive fees.  In Divane v. Northwestern Univ., No. 18-2569, __F.3d__, 2020 WL 1444966 (7th Cir. Mar. 25, 2020), the Seventh Circuit Court of Appeals upheld the dismissal of claims alleging that Northwestern breached its fiduciary duty as a prudent investor.   

Plaintiffs, who are beneficiaries of the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan (“the Plans”), alleged that Northwestern, the Plans’ administrator and designated fiduciary, breached its duty to act as a prudent fiduciary and that they are entitled to relief under ERISA, 29 U.S.C. §§ 1132(a)(2) and 1109(a).  “In their amended complaint, plaintiffs specifically alleged that Northwestern failed to act as a prudent fiduciary when it included the Stock Account as a plan investment offering and allowed TIAA-CREF to serve as a recordkeeper for its funds (Count I); created a multi-entity recordkeeping arrangement (Count III); and provided investment options that were too numerous, too expensive, and underperforming (Count V). In Counts II, IV, and VI, plaintiffs claimed the above conduct also constituted prohibited transactions under ERISA. Id. § 1106.”  Divane, 2020 WL 1444966, at *5.

In upholding the district court’s dismissal, the Seventh Circuit made several key findings.  
Continue Reading Seventh Circuit Rules for Northwestern University in Retirement Plan Investment Dispute

Yesterday, in Retirement Plans Committee of IBM v. Jander, No. 18-1165, 2020 WL 201024 (U.S. Jan. 14, 2020), the U.S. Supreme Court vacated and remanded a closely watched ESOP breach of fiduciary duty case to the Second Circuit Court of Appeals.  The High Court’s per curiam decision is a short one so allow me to give you some background to understand the full picture.

In December 2018, the Second Circuit issued a decision in Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620 (2d Cir. 2018), cert. granted, 139 S. Ct. 2667, 204 L. Ed. 2d 1068 (2019), and vacated and remanded sub nom. Retirement Plans Committee of IBM v. Jander, No. 18-1165, 2020 WL 201024 (U.S. Jan. 14, 2020), where it addressed the question of what standard one must meet to plausibly allege that fiduciaries of an employee stock option plan (“ESOP”) have violated ERISA’s duty of prudence.
Continue Reading Supreme Court Sends Closely Watched Fiduciary Duty Case Back to the Second Circuit Court of Appeals

What do you do if you’re a milling and animal feed manufacturer saddled in scandal because you produced horse and cattle feed containing a fatal amount of monensin?  Apparently, you sell your stock to an ESOP at an overly inflated price.  That’s at least what the plaintiff alleges in this week’s notable decision, Zavala v. Kruse-Western, Inc., et al., No. 119CV00239DADSKO, 2019 WL 3387102 (E.D. Cal. July 26, 2019).  

Following Kruse-Western’s expensive settlements related to monensin poisoning of horses and cattle, and allegedly with the knowledge of significant future liabilities, the Western Milling Employee Stock Ownership Plan (the “ESOP”) was created.  Zavala, a current ESOP participant, alleges various violations related to the sale of Kruse-Western stock to the ESOP.  The ESOP purchased the stock from Kruse-Western and the other defendant “selling shareholders,” which the ESOP financed by borrowing the entire purchase price of $244 million from Kruse-Western.  The value of Kruse-Western stock fell shortly thereafter, with only marginal recovery, such that within two years of the ESOP’s creation, the ESOP had purchased Kruse-Western’s outstanding stock for nearly ten times its actual value.  And like monensin, that’s a hard pill to swallow.
Continue Reading Dudenhoeffer Does Not Defeat Breach of Fiduciary Duty Claims Related to ESOP Purchase of Inflated Company Stock