Supreme Court Refuses United Airlines ESOP Appeals

February 21, 2007 ( - The U.S. Supreme Court has turned away two appeals involving State Street Bank & Trust Co.'s work as directed trustee for the United Air Lines' employee stock ownership plan (ESOP).

The case the high court refused to hear included two primary issues:

  • a ruling by the 7 th U.S. Circuit Court of Appeals that State Street did not breach its fiduciary duties by holding on to the company’s stock as United headed into bankruptcy (SeeNo Breach in Fiduciary Duties of Airlines’ Co. Stock Cases , Saxon Angle: Reasonable Doubts ). The plan participants sued State Street and others alleging the plan lost $2 billion as a result of the decrease in the value of United stock. In October 2005, U.S. District Judge Samuel Der-Yeghiayan ofthe U.S. District Court for the Northern District of Illinois ruled for State Street.
  • a ruling byDer-Yeghiayan approving a settlement   that deprived State Street from seeking any assets from the ESOP’s committee beyond their personal assets.

Writing for the 7 th Circuit, Circuit Judge Richard Posner found that the participants failed to set forth evidence of when it would have been feasible for State Street to sell the United stock to protect the participants against excessive risk.

The appeals court said that as a directed trustee, State Street had a statutory duty of prudence but that did not include the duty to diversify because an ESOP is not subject to the diversification requirements of the Employee Retirement Income Security Act (ERISA). Posner noted that ERISA actually forbids directed trustees from complying with the directions of a plan’s named fiduciary if those directions are not “proper.”

“So even if the methods of litigation could feasibly determine the point at which the ESOP trustee should sell in order to protect the employee-shareholders against excessive risk, the plaintiffs have made no effort to establish that point,” Posner wrote. “They think that what State Street did wrong was to fail to second-guess the market; in fact what State Street may well have done wrong was to delay selling its United stock until too late to spare the employee-shareholders from bearing inordinate risk.”

Lawyers for the ESOP participants had asked the high court to decide what the proper standard is for determining whether a fiduciary of an ESOP breached its duty of prudence by not diversifying that ESOP’s investment in employer stock before that stock lost all or most of its value. The participants also asked justices to decide the applicable fiduciary standard to be applied to directed trustees.

According to a case history in the appellate decision, United’s ESOP was established in 1994. Pummeled by severe financial pressures and the after-shocks of Sept. 11, 2001, terrorist attacks, United’s stock lost much of its value.

State Street began selling the plan’s stock in late September 2002 – three months before the airline sought U.S. Bankruptcy Court protection.

The 7th circuit ruling is here .