Employees Sue United Airlines over ESOP

March 5, 2003 (PLANSPONSOR.com) - United Airlines's employee stock ownership plan (ESOP) has been slapped with a class action lawsuit brought by employees accusing its trustees of a breach of their ERISA fiduciary duties.

Filed in the US District Court for the Northern District of Illinois, the suit alleges the fiduciary breach resulted in their loss of billions of dollars.   The suit seeks to include in a class action thousands of employees who were or are participants or beneficiaries of the United ESOP as of July 19, 2001, according to Washington-based legal publisher BNA.

Overall, the claim said the ESOP trustees breached their fiduciary duties by:

  • failing to appoint an independent trustee to avoid a potential conflict of interest by having United employees oversee the ESOP
  • failing to sell off the ESOP’s United stock when they knew it was no longer a sound investment
  • failing to disclose that the airline stock was no long a prudent investment when the trustees knew of United’s bleak outlook

The lawsuit also alleges that the ESOP fiduciaries had a duty under ERISA to sell off United stock despite the fact that the ESOP documents directed that the ESOP could only invest in United stock.

The Claims

The complaint tracked the decline of United’s financials beginning in 2000, and concluded that the ESOP committee should have sold itself out of the United stock long before it finally began selling stock in September 2002.

The plaintiffs claims that United officials knew about the company’s financial difficulties prior to September 11, 2001 and even after September 11, when United’s chief executive officer reported that the problems at United were deep and systemic.  

In a letter sent to company employees in October 2001, the company revealed its financial troubles.   However, the ESOP committee fiduciaries, who were United employees, did not sell the stock because of a conflict between their loyalty to United and their duties as ESOP fiduciaries to take action in the best interest of the ESOP, the lawsuit contends.

Then in September 2002 United appointed an independent investment manager to avoid any further conflict. After an investigation, the investment manager announced that having the ESOP invested solely in United stock was not a prudent investment and started selling United stock. By the time this occurred, United stock had plunged from the high $30s per share to approximately $2 per share. The complaint alleged that a prudent fiduciary would have diversified at a much earlier date.

Suit: United Stock Too Speculative

The lawsuit noted plan documents provided that the ESOP should invest exclusively in United stock. However, between July 19, 2000 and the present, United stock was too speculative to be considered an appropriate investment, the lawsuit contends.

Therefore, in the best interest of the plan’s participants and under ERISA investment requirements, the ESOP had the duty to sell the United stock even though it was not in accordance with the plan document, the complaint says.

The case is Summers v UAL Corp Employee Stock Ownership Plan.