>A federal appeals court reversed a lower court decision and reinstated Richard Tatum’s suit against the company, which charged that the plan trustees breached their fiduciary duties by liquidating the company stock at a loss – especially since the two company stock funds removed as plan options later rebounded. The US 4 th Circuit Court of Appeals sent the case back to Chief District Judge N. Carlton Tilley Jr. of the US District Court for the District of North Carolina.
>Writing for the court, Circuit Judge M. Blane Michael said Tatum had succeeded in stating a claim that the decision to liquidate the funds violated the Employee Retirement Income Security Act’s (ERISA) duty of prudence.
>According to Michael’s ruling, R.J. Reynolds Tobacco (RJRT), R.J. Reynolds Tobacco Holding (RJRTH), and RJR Nabisco (Nabisco) were subsidiaries of RJR Nabisco Holdings Inc. (RJRNH) until June 15, 1999. The companies’ 401(k) plan had a lineup of investment options that included Nabisco and RJRNH stock.
>However, with the onset of tobacco liability lawsuits, the board voted to spin off RJRT to separate the tobacco business from Nabisco’s food business and to split the K plan into two pieces. RJRT workers were later informed that as of the spin-off date, June 15, 1999, Nabisco and RJRNH stock was being eliminated as an investment option and all Nabisco and RJRNH stock held by RJRT’s 401(k) plan participants would be frozen, according to the court.
>The Nabisco and RJRNH stock remained frozen until January 31, 2000. During that period, Nabisco stock dropped from $42 per share to $30 per share, while RJRNH stock dropped from $21 to $8.50 per share, according to the court. On that date, RJRT directed the 401(k) plan to sell off all remaining Nabisco and RJRNH stock.
>By making those moves, the trustees forced participants to sell their Nabisco stock when Nabisco shares were at an all-time low, Tatum claimed in the suit. According to the appeals court, by June 2000, RJRNH stock was selling for $30 per share, over three times the price that the 401(k) plan sold it for six months earlier. In addition, Nabisco stock was selling for approximately $55 per share by June 2000, nearly twice the price the 401(k) plan sold it for on January 31, 2000.
>In the lower court, Tilley threw out Tatum’s lawsuit after finding that the decision to drop Nabisco and RJRNH stock as an investment option was a settlor function and was not subject to ERISA fiduciary requirements. Tatum, who was joined in his appeal by the US Department of Labor, argued that even if a plan amendment required the sale of RJRNH and Nabisco stocks, the plan fiduciaries had a duty to ignore the plan document if it was imprudent to sell.
>The appeals judges said amendments to the plan did not actually require the elimination or liquidation of the RJRNH and Nabisco funds. According to the appeals court, a “plain reading” of the amendments revealed that the amendments “did not strip the Plan fiduciaries of discretion to redesignate the Nabisco funds as investment options effective February 1, 2000.”
>The opinion in Tatum v. R.J. Reynolds Tobacco Co., 4th Cir., No. 04-1082, 12/14/04, is at http://pacer.ca4.uscourts.gov/opinion.pdf/041082.P.pdf .