Federal Judge Allows Ford ESOP Suit to Move Forward

December 24, 2008 (PLANSPONSOR.com) - The U.S. District Court for the Eastern District of Michigan has denied a motion to dismiss a case brought by participants of Ford Motor Co.'s employee stock ownership plans claiming the plans' investment in Ford company stock was imprudent.

According to the opinion, Ford moved to dismiss the case on the grounds that the participants did not state a viable claim for relief. Ford argued that it committed no breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA) because the plan documents required the plans be invested in Ford company stock.

However, U.S. District Judge Stephen J. Murphy, III noted in his opinion that while ERISA does provide an exemption from diversification rules for ESOPs, it does so while still requiring that the plan sponsor act with prudence when investing in company stock.

Using previous case history Ford argued that it did not commit a fiduciary breach by continuing to invest in Ford stock because, during the class period, it was not facing “imminent collapse.” Also looking to prior case history and the statutory language of ERISA, Murphy rejected this argument, saying that the “presumption of prudence means that [the law] requires fiduciaries to divest their plans of company stock when holding it becomes so risky – that is, so imprudent – that the problem could not be fixed by diversifying into other assets.”

Finally, Ford argued that a magistrate judge that refused to dismiss the case previously erred by not considering the ESOPs company stock investments together with other investments in other retirement plans offered to employees. Ford said that because its employees were free to diversity their retirement savings across all plans offered to them, they were greatly exaggerating the risk the stock plans presented to their retirement savings.

However, the court agreed with the participants who contended that Ford had a fiduciary duty to ensure that each of the investments it offered for retirement savings was a prudent one.

Notably, another U.S. District Court recently came to a very different conclusion in a company stock case.  The U.S. District Court for the Western District of Texas granted Dell Inc.’s motion to dismiss a case against it, saying the Dell plan is an eligible individual account plan (EIAP) and therefore exempt from ERISA’s diversification requirements, and that Dell properly diversified by offering various other funds in its plan (See Court Sides with Dell in Company Stock Suit ).

The district court’s opinion is here .