Court Clears ESOP Fiduciaries of Wrongdoing
>In dismissing the ESOP participants’ claims against the employer, the ESOP, and the ESOP trustee. US District Judge William Smith of the US District Court for the District of Rhode Island ruled that an ESOP fiduciary is entitled to a presumption that its decision to remain invested in employer securities was reasonable, Washington-based legal publisher BNA reported.
>Applying this presumption, Smith ruled that the participants’ allegations that the ESOP breached its fiduciary duty by still investing in company stock while there was a drop in the price of company stock, a decline in corporate profits, and an ongoing restructuring of the company, was not enough to overcome this presumption.
“ESOP fiduciaries are in the unique situation of having to facilitate the ESOP goal of employee ownership, while at the same time being bound by ERISA’s rigorous fiduciary obligations,” Smith wrote.
>The case involves Textron Inc., which established the Textron Savings Plan to invest in Textron common stock and to be an ERISA ESOP. Three Textron executives were designated as the plan administrator and appointed Putnam Fiduciary Trust Co. as the plan’s trustee.
>According to the ruling, Textron matched employee contributions to the ESOP with Textron stock. During the years 2000 and 2001, Textron common stock ranged from approximately $74 per share to approximately $31 per share, losing about 43% of its value. ESOP participants during the years 2000 and 2001 filed the suit, alleging that during this time Textron was laying off thousands of employees while simultaneously encouraging its employees to contribute to their ESOP accounts with “over-inflated” Texton stock.
>As a result, the participants claimed, Textron, the ESOP, and the trustee violated ERISA by engaging in self-dealing, prohibited transactions, allowing plan assets to inure to the benefit of Textron, and breaching their fiduciary duties.
‘Special Nature’ of ESOPs
>Regarding Textron and the ESOP, any allegation of a breach of fiduciary duty must be considered in light of the “special nature” of ESOPs, the court said. In creating ESOPs, “Congress sought to develop plans that would function both as ‘an employee retirement benefits plan’ and a ‘technique of corporate finance’ that would encourage employee ownership of a company,” the court said.
>As a result, the court said ESOPs are not intended to guarantee funds in that they place employee retirement assets at a greater risk than the typical diversified ERISA plan, but ESOP fiduciaries have a duty to use the prudent man standard of care in managing the plan and can be held liable to losses resulting from breach of that duty.
>Taking this into consideration, the court said an ESOP fiduciary is entitled to a reasonableness presumption. Therefore, the participants must argue facts that would establish that Textron and the ESOP abused their discretion in failing to diversify Textron stock during 2000 and 2001.
>In the current case, Smith ruled that the allegations didn’t do that. The court noted that at no time was Textron stock unsuitable for investment, that the stock market as a whole suffered dramatic losses during 2000 and 2001, and that if the ESOP had dumped Textron stock, that may have triggered a broader decline in the stock price.
>The court also dismissed the participants’ claims under ERISA of self-dealing and inurement of benefits to the ESOP. Addressing the self-dealing claim, the court said ESOPs are “traditionally exempted” from ERISA’s strict prohibitions against dealing with the assets of a plan in its own interest, because ESOPs are intended to encourage employee ownership in a company.
The case is Lalonde v. Textron Inc., D. R.I., No. 02-334s, 6/24/03.