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2nd Circuit Says No Special Circumstances in SunEdison Stock Drop Suit


The same appellate court responsible for an outlier result in an ERISA suit accepted by the nation’s highest court has just ruled on a similar case.

The Second Circuit Court of Appeals, in an unpublished decision (O’Day v. Chatila, 2d Cir., No. 18-2621, unpublished 6/7/19) joined by Judges Gerard E. Lynch and Raymond J. Lohier Jr. and District Judge Brian M. Cogan (sitting by designation from the U.S. District Court for the Eastern District of New York). 

The plaintiffs here claim that the SunEdison defendants breached various duties under the Employee Retirement Income Security Act of 1974 by allowing participants to continue investing in company stock in the plan when they knew or should have known that SunEdison was on the verge of bankruptcy – at which point the value of the firm’s stock (and the participants’ savings) plummeted. The district court, as many have in the wake of the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, ruled in favor of the fiduciary defendants.

Appellate Review

In reviewing the district court’s decision, the court here stated that there the plaintiffs failed to allege any “special circumstances” that would affect the reliability of the market price as a reflection of the value of SunEdison shares, and that (citing Fifth Third Bancorp v. Dudenhoeffer), in the absence of special circumstances, allegations that a fiduciary should have recognized that a publicly traded stock was overvalued or risky from publicly available information alone are generally implausible. 

The plaintiffs here, however, relying on the Jander v. Retirement Plans Committee of IBM case recently decided in favor of plaintiffs by this same Second Circuit in another stock drop case (and now slated to considered by the U.S. Supreme Court) now argue that the defendants should have responded to non‐public information of SunEdison’s financial troubles by making proper disclosures and halting purchases or divesting the plan of SunEdison stock. 


The court here explained that, “in Jander we held that a prudent fiduciary could have concluded that disclosing the overvaluation of IBM’s microelectronics business would not have done more harm than good because it was inevitable that the overvaluation would be disclosed (the business was about to be sold) and studies showed early disclosure of fraud would soften the reputational damage.” The court went on to distinguish this case from Jander – pointing out that the plaintiffs had not alleged that an earlier disclosure of SunEdison’s financial problems might have caused less damage than a later disclosure nor alleged that “disclosure of SunEdison’s problems alone, without also halting purchases of SunEdison stock or divesting SunEdison stock altogether, would have sufficed.” 

And thus, they concluded that this case was “quite different from Jander and much closer to Rinehart, in which we addressed allegations that a prudent fiduciary should have divested or stopped purchasing stock and held that a prudent fiduciary could have concluded that such an action would have done more harm than good.” The Rinehart case involved a former Lehman Brothers’ plan participant, a suit also dismissed as not overcoming the “more harm than good” standard espoused by the Supreme Court in Fifth Third

Other Allegations

The appellate court also said that the plaintiffs:

  • Alleged a breach of duty of prudence in defendants’ failing to monitor the plan’s assets (“but such a claim requires Defendants both to have improperly monitored investments and to have failed to remove imprudent ones.” The judges said that the plaintiffs “failed to plausibly allege that it was imprudent for Defendants not to remove any investments”).
  • Claim that Defendants breached their duty of loyalty because their compensation was linked to SunEdison’s financial performance, “specifically, Plaintiffs argue that Defendants’ compensation structure caused them to pursue a growth strategy that led to SunEdison’s demise” (the court went on to note, however, that the plaintiffs “do not even allege that the compensation structure caused Defendants to act adversely to the Plan while acting as fiduciaries, and for that reason we agree with the District Court’s decision to dismiss that claim”).

The court concluded its analysis by stating that the district court correctly dismissed, on the ground that Plaintiffs failed to identify any underlying breach of a fiduciary duty under ERISA, Plaintiffs’ claim that certain fiduciaries failed to adequately monitor other fiduciaries.

“We have considered Plaintiffs’ remaining arguments and conclude that they are without merit,” the judges concluded.

Why This Matters

There’s some apparent irony in the same court that broke with a number of circuits to favor plaintiffs in a stock drop case in the Jander/IBM case cited above, finding – as many courts have since the Fifth Third Bancorp v. Dudenhoeffer. Indeed, the plaintiff in the IBM case had argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen. This result stands out only in that it’s the same appellate court that was inclined to rule in favor of the plaintiff in the Jander case.