Court Moves Forward Claim ESOP Reps Omitted Financial Data

December 15, 2009 ( – A federal court has ruled that a former Employee Stock Ownership Plan (ESOP) participant can pursue his claim that plan fiduciaries breached their duties by failing to tell him financial data that potentially could have resulted in a higher distribution.

U.S. District Judge Thelton E. Henderson of the U.S. District Court for the Northern District of California ruled that a representative of Delta Star Inc.’s ESOP intentionally connected its statements about the company’s financial health to statements it made about the future of benefits, so its intended communication about the security of benefits could be considered materially misleading.

The defendants argued that John Balsley’s claims of two material omissions in the information presented to him are not actionable because the omitted information relates only to the operations of the company in which the plan invests and are therefore not “with respect to a plan,” as required by the Employee Retirement Income Security Act (ERISA). 

“When the allegations are viewed in a light most favorable to Balsley, as required at this stage of the proceedings, they suggest that Balsley was encouraged to accept the lump-sum distribution based on the December 31, 2006 stock valuation in part because Delta Star had a questionable financial future that might or would preclude a future lump-sum offer,” Henderson wrote. He noted that Balsley’s allegations sufficiently state a basis for the defendants’ knowledge of the information allegedly omitted.

In addition, the court determined that the alleged misrepresentation that the plan would not offer a lump-sum option in the future is also actionable since the terms of the plan allow the trustees to determine each year whether to allow lump sums. However, Henderson ruled that the statement that cash may not be available in the future for a lump sum is not actionable, saying increased sales and revenue do not necessarily translate into increased liquid assets, so it is not plausible that the defendants would have known with certainty that cash would be available to offer a lump-sum distribution in the future.

The court did agree with Delta Star that Balsley lacks standing to pursue a claim under ERISA 502(a)(2), which “does not provide a remedy for individual injuries distinct from plan injuries, so those claims were dismissed.

According to the court opinion, a plan representative contacted Balsley on two occasions in October 2007 to offer a lump-sum buyback of the stock in Balsley’s plan account based on the December 31, 2006 stock valuation of $22.38. The representative indicated that cash may not be available in the future to buy back Balsley’s shares, and that the lump-sum offer would not remain open, so on November 26, 2007, Balsley received a $1,318,422.15 distribution from the plan.

As of December 31, 2007, each share was valued over six times higher, at $142.45, which would have made Balsley’s distribution worth $8,391,729.50.

The case is Balsley v. Delta Star Employee Stock Ownership Plan, N.D. Cal., No. C09-2952 TEH, 12/10/09.