Court Says Cashed-Out Participant Can Pursue Fiduciary Breach Claim

August 16, 2007 ( - The 6th U.S. Circuit Court of Appeals has reversed a district court ruling denying class certification and dismissing a suit brought by a former plan participant who claimed plan administrators breached their fiduciary duties by continuing to offer company stock as a plan investment when it was imprudent to do so.

In rejecting the district court’s decision that Kermit Bridges lacked standing because he ceased to be a participant in the American Electric Power System Retirement Savings Plan after divesting himself of his holdings in 2004, the appellate court relied on the logic in a Supreme Court ruling in favor of a former Firestone Tire & Rubber Co. employee. In that decision, the Supreme Court construed the statutory term “participant” to include “former employees who ‘have . . . a reasonable expectation of returning to covered employment’ or who have ‘a colorable claim’ to vested benefits.”

The court also pointed out that a recent 7 th Circuit decision in a similar suit held that a former employee has “participant” standing despite having cashed out his defined-contribution plan, as the receipt of a money judgment by the court will constitute the receipt of a plan benefit (See Cashed-Out Participants Still Have ERISA Legal Standing ).

The American Electric Power Company, Inc. (AEP) plan offered as an investment the AEP Stock Fund, which consisted almost entirely of AEP stock. According to Bridges’ complaint between 1998 and 2002, AEP secretly engaged in various reporting and energy-trading abuses which caused AEP’s stock price to be artificially inflated. When the market learned of these abuses in 2002, AEP’s stock price dropped dramatically which devalued the AEP Stock Fund.

In 2003 Bridges sued the company under the Employee Retirement Income Security Act (ERISA), and the court consolidated several related cases and appointed Bridges lead plaintiff. Bridges alleged that the company breached its fiduciary duty to plan participants by continuing to offer the AEP Stock Fund despite knowing that AEP stock was artificially overvalued and by failing to disclose the alleged abuses to participants so they could make informed investment decisions.

The district court dismissed Bridges’ claims, saying the law establishes that only the Secretary of Labor, a participant, a beneficiary, or a fiduciary may bring a civil action to enforce a fiduciary’s duties. The appellate court reversed the decision and remanded the case back to district court for further proceedings.

The opinion in Bridges v. American Electric Power Company Inc. is here .