No ERISA Standing Found In ESOP Suit Alleging Executive Mismanagement

July 28, 2003 (PLANSPONSOR.com) - A class action suit filed by former employees that allege executive mismanagement of the company devalued the employee stock ownership plan (ESOP) does not have standing under ERISA.

>The US 6th Circuit Court of Appeals  found ERISA did not apply because the complaint did not challenge the plan fiduciary’s actions, but questioned the propriety of certain business decisions made by the company’s board of directors.   “A claim that company directors did not operate the business itself in conformity with sound business practices does not, however, implicate the protections afforded by ERISA,” said Judge Martha Craig Daughtery, writing for the court, according to Washington-based legal publisher BNA.

>Further, the court noted that nowhere in the complaint did the employees allege that the executives mismanaged any fund designated as a pension benefit plan for company workers. Since the employees did not intend to challenge the decision or actions of plan fiduciaries, there was no claim under ERISA, the court said.

>With the ruling, the appellate court vacated the decision of the US District Court for the Southern District of Ohio – since a federal court did not have standing to render a judgment – with instructions it be remanded to the state courts.

ESOP Action

>Former participants in the Mosler Inc. ERISA-governed ESOP brought a class action in state court against the company and four company executives.   The suit alleged the company and executives breached their fiduciary responsibilities to the employees, causing a “drastic reduction” in the value of company stock and a resultant decrease in value of the ESOP.

>In spite of the fact that the employees asked for payment only for “the value of the stock lost,” and not “the value of all benefits lost,” the district court granted the motion to remove the case to federal court. The district court found that “plaintiffs seek to recover the loss of value of the retirement savings that was occasioned by the individual Defendants’ mismanagement of the corporation and the ESOP.” Therefore, the district court determined this complaint can only be asserted by participants of an employee benefit plan and is governed preemptively by ERISA.

The district court then dismissed the action based on lack of standing, since Mosler Inc. declared bankruptcy, and thereafter the employees lacked standing to bring a derivative action because Mosler was involved in bankruptcy proceedings.

The case is Husvar v. Rapoport, 6th Cir., No. 01-4254, unpublished 7/23/03.

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