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Compliance April 27, 2016
ESOP Participants Failed to State Claim Under Fifth Third Standard
A district court found the requirement to allege an alternative action in a stock drop case applied to participants in a closely held company’s ESOP.
Reported by Rebecca Moore
Participants in the Hill Brother Construction Company, Inc. Employee Stock Ownership and 401(k) Plan and Trust (ESOP) failed to state a claim under the requirements of Fifth Third v. Dudenhoeffer that plan fiduciaries breached their duties by continuing to offer company stock in the plan, a court found.
U.S. District Judge Sharion Aycock of the U.S. District Court for the Northern District of Mississippi, noted that in the U.S. Supreme Court decision in Fifth Third, the high court said to “state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”
The plaintiffs in Hill v. Hill Brothers Construction Company, Inc. argued that because the business in Fifth Third was a publicly traded corporation, the same considerations and standards do not apply in their case, as Hills Brothers Construction (HBC) was a closely held corporation. In particular, the plaintiffs contend that the claim in Fifth Third was based on inside information that is not at issue here, and publicly traded corporations are subject to securities laws whereas non-public entities are not. Therefore, they assert there is no specific requirement to plead an ‘alternative action.’
However, in her opinion, Aycock said her reading of Fifth Third does not preclude application of the “alternative action” standard to closely held companies. In the Hill case, inside information is alleged to form the basis of the plaintiffs’ breach of the fiduciary duty of prudence, and Aycock found no securities law infringements are at issue or need to be balanced.
NEXT: Even if Fifth Third wasn’t applicableAycock concluded that the plaintiffs failed to allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it.
She noted that even if the court did not find the Fifth Third standard to be applicable, the plaintiffs failed to state a claim pursuant to Iqbal and Twombly. The Supreme court in Twombly said, “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal used this standard.
Aycock noted that this means, although a complaint need not include detailed factual allegations, it must provide “more than an unadorned, the-defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’ And, that is what Aycock found the plaintiffs in Hill offered.
The case arose because in October of 2012, the plan participants received official written notice that the value of their retirement investment was approximately $19.8 million. HBC was valued by an outside evaluator at $16 million in early 2013. Within six months, however, HBC had ceased operations. On June 18, 2013, HBC employees were notified that their retirement savings amounted to zero.
The District Court’s opinion in the case is here.