For the second time in a week, the Eighth Circuit Court of Appeals has weighed in on another stock-drop suit.
Stock drop cases inevitably arise from a surprise impact to corporate earnings and stock price, and sure enough, this one followed the announcement of losses suffered by an ESOP administered by Target following Target’s ill-fated expansion into Canada. Judge Jonathan A. Kobes noted that “from March 2013 to January 2015, Target opened and then closed more than 100 Canadian stores, due mostly to poor supply chain and inventory management.”
The Allegations
The impact on stock price—and on the value of the retirement accounts was dramatic—and the plaintiffs here alleged that “Target, Target’s Plan Investment Committee, several Target executives who were, at the time, members of the Plan Investment Committee or Plan Administrators, and Target’s CEO (who appointed the members of the Plan Investment Committee) failed to protect the Plan from that fall in Target stock’s price and breached fiduciary duties imposed by ERISA.” Specifically, the plan participants allege the fiduciaries had inside information about Target’s problems in Canada and so they should have known continuing to invest in Target stock was imprudent.
The plaintiffs here filed their first complaint in July 2016, saw that suit consolidated with a securities lawsuit focusing on the same underlying events—a case that was dismissed in July 2017. Thereafter they this lawsuit 30 days later, arguing the same claims of breach of the duties of loyalty, prudence, and monitoring, but with “additional allegations that they argued cured the deficiencies in their initial complaint.” Except that the district court disagreed and dismissed the case again—leading to this appeal.
The Appeal
Writing for the Eighth Circuit, Judge Kobes (joined in the decision by Judges Bobby E. Shepherd and L. Steven Grasz), explained (Dormani v. Target Corp., 8th Cir., No. 18-2543, 7/28/20) that their review of that dismissal for failure to state a claim would—as these reviews are required to be—with an assumption that “all factual allegations in the complaint are true” but with “all reasonable inferences” made in favor of the nonmoving party (here the fiduciary defendants).
Recounting the standards from the Supreme Court’s Dudenhoeffer decision, Judge Kobes explained that: (1) ERISA’s duty of prudence cannot require a fiduciary to violate the securities laws; (2) ERISA obligations should not conflict with complex insider trading and corporate disclosure laws or with the objectives of those laws; and (3) the Plan participants must plausibly allege “that a prudent fiduciary in the defendant’s position could not have concluded that [the alternative action] ... would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.” And with regard to whether the allegations presented meet that standard is “a fact-based inquiry that ‘focuses on the information available to the fiduciary at the time of the relevant investment decision.’”
Freeze, Framed
The arguments put forth by the plaintiffs here were basically public disclosure of Target Canada’s supply-chain management problems or a freeze in Plan purchases of Target stock. And, citing the conclusions recently made in a different stock drop case in the same district within the past week, Judge Kobes noted that “Target could not have implemented a purchase freeze[i] without inevitable disclosure,” and so turned to the public disclosure argument.
Judge Kobes explains that the plan participant-plaintiffs here raised four other alternative acts to the district court—but those weren’t considered here because (he notes), “to be reviewable, an issue must be presented in the brief with some specificity”—and since those alternatives (shifting Plan assets to cash, sending letters to Plan participants encouraging them to diversify, seeking guidance from the Department of Labor, the Securities and Exchange Commission, or other outside experts, or resigning as fiduciaries) occupy only one page of the participants’ brief—and “with the exception of resigning as fiduciaries,” were referred to only as “the Plan participants’ other alternative actions”—well, Judge Kobes paid them no mind.
‘Conflicted’ Position
The Plan participants also claim the fiduciaries violated the duty of loyalty in administering the Plan—arguing that that duty required the fiduciaries to engage independent fiduciaries rather than “put themselves in a conflicted position by having the [Plan] hold as much Target Stock as possible to entrench management and provide other benefits to [Target]” and “plac[e] their own and/or [Target’s] interests above the interests of the participants.”
However, Judge Kobes took issue with that position, noting that ERISA authorizes fiduciaries to “wear different hats.” He continued, “Where, as here, Plan participants point to nothing more than the tension inherent in the fiduciaries’ dual roles as ERISA fiduciaries and Target officers, they fail to state a claim for breach of the duty of loyalty.”
As for an argument that the fiduciaries breached the duty of loyalty by making misleading statements to Plan participants, Judge Kobes noted that “the district court correctly concluded the Plan participants failed to allege that the ERISA fiduciaries knew they were making untruthful statements in their disclosures and to specify which statements were untrue.” Moreover, he explained that “notwithstanding this deficiency in the complaint, we would still reject the Plan participants’ claim because they assert essentially the same actions we held were not required by the duty of prudence were implicated by the duty of loyalty. Litigants cannot use the duty of loyalty “to circumvent the demanding Dudenhoeffer standard for duty of prudence claims” (again, citing the Wells Fargo decision).
As for the claims that Target’s CEOs breached their duty to monitor the other ERISA fiduciaries,” he concluded: “this claim cannot survive without an underlying breach and so it fails as well.”
And affirmed the decision of the district court.
What This Means
It would have been highly unusual (to say the least) if two cases with similar fact patterns and arguments had been decided differently in the same appellate court (and with the same panel of judges) within a week of each other. And, sure enough, this decision not only mirrored the conclusions and rationale of the Allen v. Wells Fargo & Co. decision of the same week—it cited it.
Indeed, and as I pointed out in that post, despite their number, the diversity of venues in which the suits have been filed, and a standard of proof arguably modified to make such claims easier to prove—plaintiffs have repeatedly come up short. And they have again.
While the “more harm than good” standard was supposed to make it easier for plaintiffs to make their case (and, ostensibly it has, with those cases at least now getting to trial, whereas when there was a “presumption of prudence,” they rarely cleared a motion for summary judgment.
Ultimately, it seems that plan fiduciaries privy to sensitive corporate insider information will always have an “out” in these suits—if only because whatever the potential impact to the plan’s participants, any actions taken or disclosures made to them seem destined to be deemed as resulting in “more harm than good.”
[i]In a footnote, Judge Kobes explains that the plaintiffs had argued that the plan could have used the plan’s “cash buffer” and “could have silently redirected new contributions to cash.” He commented that the Supreme Court discussed this option in Dudenhoeffer, noting it leaves a fiduciary “between a rock and a hard place” and likely to be sued for imprudence either way if he guesses wrong about where the stock is headed. And thus, he concluded that “a reasonable fiduciary could have concluded that diverting contributions to cash would do more harm than good.”
