Compliance March 7, 2006

Textron ESOP Claims Thrown Out

March 7, 2006 (PLANSPONSOR.com) - Former Textron Inc. employees have hit a major legal roadblock in their long-standing battle to prove the value of their employee stock ownership plan (ESOP) holdings fell because they were improperly allowed to invest in company stock shares.
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That’s because a judge ruled that because the former employees were no longer legally considered ESOP participants they didn’t have the required legal standing to sue the company for a fiduciary breach under the Employee Retirement Income Security Act (ERISA), BNA reported.

The latest ruling by US District Judge William Smith of the US District Court for the District of Rhode Island is the second major decision he has handed down in the fight over whether the ex-employees lost money by investing in company stock at an artificially inflated price. In July 2003, Smith threw out the original case, asserting that the plaintiffs had failed to overcome the “presumption of reasonableness” given to fiduciaries of plans that invest in employer stock (See  Court Clears ESOP Fiduciaries of Wrongdoing ). The 1 st US Circuit Court of Appeals reversed Smith and reinstated the employees’ claims. 

The former employees had worked for Textron’s automotive division until December 2001 when the division was sold to Collins & Aikman. Following the sale, the employees received distributions of their plan accounts from Textron’s ESOP.

Two years later, two of the former employees filed a lawsuit against Textron and the ESOP’s fiduciaries (See Textron Targeted by Company Stock Suit ) alleging they breached their ERISA fiduciary duties by:

  • continuing to purchase Textron stock while it was decreasing in value,
  • failing to sell the stock when it was in the best interests of the participants and beneficiaries,
  • encouraging employees to purchase stock while Textron was restructuring its workforce, and
  • restricting the ability to sell Textron stock despite its decreasing value.

The lawsuit requested that Textron and the fiduciaries “make good to the plan all losses to the plan, including lost return on investments.”

The former employees did not meet the definition of a participant under ERISA because they had no reasonable expectation of returning to Textron as employees, nor did they have colorable claims for vested benefits, Smith claimed.

“The difference between what their accounts actually earned and what they might have earned is not a benefit provided for, or promised under, the terms of the Plan. The remedy Plaintiffs are seeking is not the payment of a vested benefit, but a monetary damage amount for alleged breach of a fiduciary duty,” the court said.

The case is Lalonde v. Textron Inc., D.R.I., No. 02-334S, 3/1/06.

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