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Another Fiduciary Suit Falls Short of ‘Special Circumstances’ Standard


A participant-plaintiff’s appeal of a judgement denying his claims of a fiduciary breach by his employer has come up short.

This suit was brought by plaintiff Alexander Usenko, a former employee of SunEdison Semiconductor, LLC, which was once a wholly owned subsidiary of SunEdison, Inc. On April 21, 2016, SunEdison filed for bankruptcy, and the following August Usenko brought suit derivatively on behalf of the plan and, in the alternative, as a putative class action on behalf of plan participants.

His suit alleged that between July 20, 2015, and April 21, 2016, the SunEdison defendants “knew or should have known that SunEdison was in poor financial condition and faced poor long-term prospects and therefore should have removed SunEdison stock from the plan’s assets” – specifically that the investment was “imprudent because SunEdison’s failing business prospects dramatically altered its suitability as a retirement investment.”

The plan was later amended to freeze contributions to the SunEdison stock fund, and pursuant to the amendment, effective February 1, 2015, participants could retain their existing investments but could no longer direct additional investments into the SunEdison stock fund.

District Decision

The district court dismissed Usenko’s complaint as to all defendants for failure to state a claim—and denied Usenko leave to amend his complaint. Usenko then appealed the dismissal for failure to state a claim and the denial of leave to amend. 

In reviewing the district court’s decision granting a motion to dismiss for failure to state a claim de novo, the court here (as is the standard in such matters) assumes “all factual allegations as true and construing all reasonable inferences in favor of the nonmoving party,” noting however, that, “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”

Here the court turned to a number of ERISA fiduciary precedents (including Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 597 (8th Cir. 2009), Rinehart v. Lehman Bros. Holdings Inc., U.S., No. 16-562, cert. denied 2/21/17, Coburn v. Evercore Tr. Co., N.A., 2016 BL 435165, D.C. Cir., No. 16-7029, 12/30/16, and, significantly, the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014). 

Prudent Person Precedents

Drawing on those precedents, Judge Kelly noted that the “prudent person standard is an objective standard that focuses on the fiduciary’s conduct preceding the challenged decision,” that “ERISA requires fiduciaries to act with prudence, not prescience, and therefore the relevant inquiry focuses on the information available to the fiduciary at the time of the relevant investment decision,” going on to explain (as the Second Circuit recently did in another suit involving SunEdison stock) that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”  

Referring to the Fifth Third analysis, this court noted that the Supreme Court “embraced the view that a security’s price in an efficient market reflects all publicly available information and represents the market’s best estimate of its value in light of its riskiness and the future net income flows that those holding it are likely to receive,” and noting that “the complaint at issue did not point to any special circumstance that rendered reliance on the market price imprudent,” the Court remanded the issue to a lower court for reconsideration. 

“Undeniable” Similarity

The Eighth Circuit determined that “the similarity between Usenko’s allegations and those that the Supreme Court deemed insufficient to plausibly state a breach of the duty of prudence in Dudenhoeffer is undeniable.” Judge Kelly commented that while “Usenko’s complaint presents a series of public announcements by SunEdison that spurred negative commentary by the financial press and concomitant drops in stock price,” and “faults the defendants for failing to act on this publicly available information” while alleging that “the declines in SunEdison’s stock price and reports of SunEdison’s extraordinary debts and liquidity problems should have prompted them to investigate and ultimately determine that divesting from SunEdison stock would be prudent as early as July 20, 2015,” the complaint “contains no allegations that the circumstances indicated to the defendants that they could not rely on the market’s valuation of SunEdison stock.” Judge Kelly concludes by explaining that “Accordingly, Usenko fails to plausibly allege that the defendants breached the duty of prudence and dismissal for failure to state a claim is proper.”

The plaintiff here had also tried to argue that another Supreme Court decision – Tibble v. Edison International  – was pertinent here.  However, Judge Kelly (adding a little flavor by describing this as “Usenko’s attempts to evade Dudenhoeffer”) noted that “the Supreme Court’s acknowledgment in Tibble that an ERISA fiduciary “has a continuing duty to monitor trust investments and remove imprudent ones,” does not exempt Usenko’s complaint from meeting Dudenhoeffer’s pleading requirements.”  The Eighth Circuit said that duty didn’t apply – by failing to “identify any special circumstances undermining the market price,” there was no duty of prudence violated. 

What This Means

Plaintiffs who have seen their retirement savings – more precisely the value of the employer stock held in those retirement savings accounts – eviscerated by the impact of the economic travails of their employer – haven’t had much success in persuading the courts of a fiduciary breach in the decision to hold that stock as a plan option. 

First there was the “presumption of prudence” (which effectively kept cases from getting past summary judgement), that gave way to the “more harm than good” disclosure standard from the Dudenhoeffer case (which got cases to trial, but no further), and now – though it’s not a new argument - there are three cases (two districts) in recent days (see Plan Committee’s Prudence Prevails in Fiduciary Suit and 2nd Circuit Says No Special Circumstances in SunEdison Stock Drop Suit) that, at least when publicly traded securities are involved, erect another bar to plaintiffs – that there must be “special circumstances” that suggest that a reliance on publicly traded information is insufficient (see Stock Suit Can’t Clear ‘Virtually Insurmountable’ Standard, Prudent Process Preempts Prudence Presumption in Stock Suit and Company Stock Claims Come Up Short – Again).  

Granted, the United States Supreme Court has just agreed to consider a case Jander v. Retirement Plans Committee of IBM. That could bring a new standard to the fore. Or perhaps a “new” standard that (still) doesn’t improve plaintiffs’ prospects.