Compliance

Court Finds No Fiduciary Breaches in Antioch ESOP Transaction

A U.S. District Court found the true fiduciary to the transaction did not breach its fiduciary duties and ruled for defendants on all claims.

By Rebecca Moore editors@plansponsor.com | September 19, 2016
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In a very detailed decision, a district court found that members of Antioch Company’s Board and ESOP Advisory Committee (EAC) did not violate their fiduciary duties during a transaction to make the employee stock ownership plan (ESOP) 100% employee-owned years before the company declared bankruptcy.

Defendant GreatBanc & Trust Company was the ESOP’s transactional trustee in 2003. The Antioch Board gave GreatBanc the independent discretion to determine whether to tender the ESOP’s shares in the transaction. Because the transaction would not close if GreatBanc tendered the ESOP shares, GreatBanc was given effective veto power over the transaction. GreatBanc exercised its discretion to decline the tender offer and it thereby allowed the transaction to close. GreatBanc and plaintiffs settled shortly before trial, so GreatBanc is no longer a defendant in the suit.

Plaintiffs claim that, based on the actions defendants took in connection with the 2003 tender offer transaction, defendants are liable for breaching their fiduciary duties to the ESOP, enabling other fiduciaries’ breaches, and causing a prohibited transaction, in violation of sections 404, 405 and 406 of the Employee Retirement Income Security Act (ERISA). However, U.S. District Judge Jorge Alonso in the U.S. District Court for the Northern District of Illinois, first determined that members of the EAC were not fiduciaries, so they did not violate any fiduciary duties. Since GreatBanc had discretion over the transaction, it was a fiduciary.

As far as the duty to monitor fiduciaries claim, the court noted that the Antioch Board of Directors, not the EAC, possessed the power to appoint and remove GreatBanc. Plaintiffs contend that whether the duty to monitor is breached depends on the facts and circumstances of each case, and their duty to monitor claim is not derivative of an underlying breach of fiduciary duty by the appointed fiduciary, nor does it depend directly on whether the appointed fiduciary committed an underlying breach. Defendants say the duty to monitor does depend on whether the appointed fiduciary committed a breach.

Regardless of who has the better of this argument, Alonso said the court must analyze whether GreatBanc breached its fiduciary duty anyway, in order to resolve plaintiffs’ co-fiduciary claim under section 405 of ERISA. He assumed for the sake of argument that defendants are correct that plaintiffs must prove an underlying breach of fiduciary duty by GreatBanc to prevail in their duty to monitor claim against defendants under section 404.

NEXT: No Breach of Fiduciary Duty by GreatBanc

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