ESOP Benefit Payout Stripped Employee of Participant Status

U.S. District Judge David S. Doty of the U.S. District Court for the District of Minnesota issued that ruling in a consolidated class action case filed by plaintiff Tamara Dolliver against Patterson Companies Inc. Based inSt. Paul , Minnesota , Patterson is a major distributor of dental, veterinarian and rehabilitation supply products.  

Damages incurred as a result of the sponsor’s fiduciary breach were not “readily ascertainable” so Dolliver could not prove the damages would be the same as recovering “vested benefits” as allowed under the Employee Retirement Income Security Act (ERISA), Doty asserted.

Plaintiffs charged that Patterson knew prior to May 2005 that the price of its common stock was artificially inflated and the company could not attain its financial guidance, but continued to publicly tout growth and maintain previously issued earnings-per-share projections. According to the allegations, Patterson and its officers and directors breached their ERISA fiduciary duties because they knew of Patterson’s undisclosed financial situation and should have divested the company’s ESOP of its investments in Patterson stock.

Following an announcement that Patterson missed its fourth quarter and fiscal year 2005 guidance, its common stock traded on record volume of over 10 million shares and dropped approximately 17% in price, resulting in an estimated $1.1 billion loss in market capitalization, according to court documents.

“Dolliver does not seek a readily ascertainable amount, but a jury determination on the difference between the value of Patterson common stock following its drop in price and the money the Patterson Plan could have earned had it transferred its assets into other more profitable investment options,” Doty wrote. “Not only are the damages not readily ascertainable, a drastic transfer of a substantial portion of the Patterson Plan’s assets from Patterson common stock into alternative investments would have been in contravention of the very purpose of the ESOP, which was to primarily invest in Patterson securities.”

Doty, in granting Patterson’s request to have the case thrown out, rejected Dolliver’s argument that she still had legal standing to sue despite having cashed out her ESOP because she was a participant on the date she filed the original lawsuit.

According to the court, Dolliver does not qualify for an exception to the rule that a plaintiff has to be a participant to be allowed to pursue a fiduciary breach claim. Because Dolliver had voluntarily resigned from Patterson and voluntarily elected to take a full benefit payout, she would not qualify for an exception covering situations where the alleged fiduciary breach involuntarily deprived the worker of participant status, Doty ruled.

The case is In re Patterson Companies Inc. Securities, Derivative & ERISA Litigation, D. Minn., No. 05cv1757 (DSD/JJG), 3/20/07.