Alert June 26, 2014

Seventh Circuit Reverses Summary Judgment in Case Applying ERISA’s Statute of Limitations


A Seventh Circuit panel declined to apply ERISA’s three-year statute of limitations to bar fiduciary claims in a case arising out of a buy-out transaction involving an employee stock ownership plan. The court held that the claims could have been time-barred if the plaintiffs had actual knowledge of the fiduciary process that their claims challenged more than three years prior to suit.

In Fish v. GreatBanc Trust Co., No. 12-3330 (7th Cir. May 14, 2014), the U.S. Court of Appeals for the Seventh Circuit reversed summary judgment for the defendants on the issue of whether the plaintiffs’ claims were time-barred under ERISA’s statute of limitations.

The litigation was brought by employees of a company (the “Company”) who participated in an employee stock ownership plan (“ESOP”).  Their claims arose from a buy-out transaction in which the Company borrowed money to buy Company stock from its shareholders, who consisted primarily of members of the family that founded and controlled the Company. The stock owned by the ESOP would be exempt from the transaction, and after the transaction the ESOP would be left as the sole Company shareholder. After the transaction, the Company went bankrupt, leaving the stock held by the ESOP worthless. The plaintiffs asserted claims for breach of fiduciary duties against the individual plan fiduciaries and the independent trustee who was retained to negotiate the transaction for the plan, contending that the defendants failed to use a sound process to evaluate the fairness of the proposed buy-out. They also asserted that the defendants caused the ESOP to engage in prohibited transactions without adequate consideration.

The U.S. District Court for the Northern District of Illinois granted summary judgment to the defendants on the grounds that ERISA’s three-year statute of limitations barred the claims. The court held that proxy documents given to the plaintiffs at the time of the buy-out transaction and their knowledge of the Company’s financial affairs after the transaction gave them actual knowledge of the alleged ERISA violations more than three years before suit was filed.

On appeal, the Seventh Circuit reversed. The court stated that, in the circumstances of this case, whether the defendants met fiduciary standards and whether the transaction was exempted from ERISA’s prohibited transaction rules depended in part on whether the defendants performed sufficient due diligence before entering the buy-out transaction. The court held that “a plaintiff asserting a process-based claim under [ERISA] does not have actual knowledge of the procedural breach of fiduciary duties unless and until she has actual knowledge of the procedures used or not used by the fiduciary.” In this regard, the court stated that the district court had “overlooked the procedural dimension of a fiduciary’s duties under ERISA and the ability of a plaintiff to show she was harmed by a fiduciary’s substantive decision precisely because the fiduciary violated ERISA by failing to comply with its procedural obligations.”

The court found that no part of the proxy materials provided to the ESOP participants disclosed the processes that the fiduciaries had used to exercise due diligence and to conduct a fairness analysis of the transaction. Further, the court stated that the plaintiffs’ knowledge that a large number of other participants left the Company and cashed out of the ESOP shortly after the buy-out transaction did not give them actual knowledge of the defendants’ processes. Without undisputed proof of such knowledge of alleged inadequate processes, the defendants had failed to show that the plaintiffs had actual knowledge of their claims more than three years prior to suit. 

The court also rejected the defendants’ other arguments, including an argument that, under the particular facts of the case, the plaintiffs received sufficient information to have actual knowledge of the alleged violation more than three years before filing suit but were “willfully blind” to it, and their argument that defendants’ processes are not an element of the plaintiffs’ causes of action and could not form the basis for a statute of limitations defense. The case was remanded to the district court for further proceedings.