Alert June 08, 2010

Federal District Court Grants in Part and Denies in Part Motion to Dismiss ERISA Class Action Claims Challenging Bank’s Inclusion of Company Stock in its Retirement Plans

In Wilson v. Venture Fin’l Group, Inc., et al., Case No. 09-5768, 2010 WL 2028088 (W.D. Wash. May 18, 2010), the U.S. District Court for the Western District of Washington granted in part and denied in part a motion to dismiss ERISA breach of fiduciary duty claims involving a bank’s inclusion of a company stock fund in its retirement plans.  

Plaintiffs, former employee participants in employee stock ownership plans sponsored by their employer bank, filed a class action suit seeking to hold plan fiduciaries liable for alleged losses incurred when the bank’s share value fell as a result of alleged unsound banking practices.  Plaintiffs in their complaint alleged, among other things, that plan fiduciaries breached their duties of loyalty and prudence under ERISA by (1) continuing to offer the bank’s stock given known financial challenges facing the bank, and (2) failing to divest the plans of their holdings in the stock.  The complaint named as defendants the bank, its board of directors, and the plans’ administrators and trustees.

Divestiture

Plaintiffs in their complaint alleged that defendants had a responsibility to divest the plans of company stock if it became or remained imprudent.  Defendants moved to dismiss this claim on the ground that the divestiture was impossible because the bank’s stock was not publicly traded, and there was no readily available market for the bank’s stock.  The court granted defendants’ motion to dismiss on the divestiture issue on the ground that plaintiffs failed to allege facts sufficient to establish that defendants could have divested the stock held by the plans even if they wanted to.  The court also rejected plaintiffs’ assertion that defendants had a “heightened” responsibility to divest where the plans were overwhelmingly invested in company stock, noting that such a claim was nothing more than a claim for diversification, and that ERISA § 404(a)(2) exempts investments in qualifying employer stock from ERISA’s duty to diversify.

Continuing To Hold And Offer Stock

The court denied defendants’ motion to dismiss plaintiffs’ claim that it was a breach of duty for plan fiduciaries to permit the plans to continue to hold bank stock where an FDIC investigation of the bank allegedly revealed unsound banking practices.  The court held that, while divestiture was not an option under the allegations as pleaded, continuing to hold and purchase stock may have been imprudent if, as plaintiffs alleged, plan fiduciaries were aware that the bank faced the alleged financial crisis.  In short, this decision held that under plaintiffs’ allegations, while defendants did not have the ability to divest, they did have the choice not to offer more of the stock to the plans.

Other Claims

The court also denied the motions to dismiss plaintiffs’ claims based on the alleged failure to monitor the performance of appointed fiduciaries and failure to disclose information regarding the soundness of investment in the bank stock, as well as claims for alleged co‑fiduciary liability.