A federal appellate court has affirmed the decision of a district court in dismissing a fiduciary suit tied to its retirement plan holding of Boeing stock.
The original suit (Burke v. Boeing Co., N.D. Ill., No. 1:19-cv-02203, 11/12/20) had been filed by plaintiffs Diane Burke, Alex Proestakis, Miguel A. Ibarra, and Mohammad Farooq Mustafa—all participants in the Boeing Voluntary Investment Plan. One of the investment options offered by the Plan is the VIP Stock Fund, an employee stock ownership plan (ESOP), which invests in shares of Boeing stock, and which, as of Dec. 31, 2018, held $10.8 billion in Boeing stock, accounting for 18.6% of net plan assets. The controversy arose in the wake of a series of plane crashes that were later attributed to the Boeing 737 MAX safety features and subsequent grounding of the Boeing 737 fleet—which led to a sharp decline in the value of Boeing stock, and the retirement accounts of those who held it.
In November 2020, Judge Virginia M. Kendall of the U.S. District Court for the Northern District of Illinois determined that “as the Plan Administrator under ERISA § 3(16), the EBPC had no fiduciary responsibility over the Stock Fund,” since its (the Employee Benefit Plans Committee) responsibilities were limited to “all matters related to administration of the Plan.” Instead, the court cited an Independent Fiduciary Agreement that not only outlined Boeing’s role as a corporate entity, but specifically reserved to Evercore Trust Company, N.A. (which subsequently sold its institutional trust business to Newport Trust Company, and was throughout the opinion therefore referred to as “Newport”) “exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the [Stock Fund] is prudent under ERISA.
“Newport, then—not Boeing, not the EBPC, and not Dohnaek, Verbeck, or Does 1–25—had fiduciary responsibility over the Stock Fund,” she wrote, going on to note that, “this alone is sufficient to dispose of Plaintiffs’ claims against Defendants” before engaging in, and dismissing several alternative arguments.
The Appeal
The appellate court (Judge David F. Hamilton wrote the opinion, joined by Chief Judge Diane S. Sykes and Judge Kenneth F. Ripple) spent some time rehashing the history of these so-called “stock drop” suits, explain that, “for decades, employees unhappy about dropping stock values in employee stock ownership plans have tried to use ERISA to obtain relief from the ERISA fiduciaries and their employers. At the foundation of the early efforts was a theory that when an employer’s business ran into serious trouble that would cause the stock value to drop, company insiders with fiduciary duties under ERISA were obliged to use inside information about those troubles for the benefit of employee-shareholders at the (implicit) expense of other shareholders. That theory would conflict directly with federal securities laws.” But then noting that the “Supreme Court made clear in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), that ERISA does not require fiduciaries to violate securities laws on insider trading.”
That said, the court here (Burke v. Boeing Co., 7th Cir., No. 20-3389, 8/1/22) noted that, “in trying to reconcile ERISA and federal securities laws, however, Dudenhoeffer left open at least a theoretical possibility for employees to seek relief under ERISA on a theory that plan fiduciaries had a duty to disclose bad news to everyone.” But then “as part of the balance between ERISA and securities law, Dudenhoeffer imposed demanding pleading standards for such claims, requiring plaintiffs to plausibly allege an alternative action the defendant could have taken that would have been consistent with securities law and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the employee stock ownership fund than to help it.”
This court quickly agreed with the determination of the district court that the Boeing plan committee had no fiduciary relationship with regard to the Boeing stock fund. “Plaintiffs’ reliance on the Plans Committee’s ‘presumptive general authority with respect to the Plan,’ does not establish a basis for these plaintiffs’ claims arising from the 737 MAX stock drop because fiduciary status under ERISA is defined in functional terms of control and authority over the plan.
“Contrary to plaintiffs’ theories here,” the court wrote, “the mere exercise of some authority over Boeing employee benefit plans—here Boeing’s retention of administrative corporate compliance duties with respect to Boeing stock—did not mean that Boeing was exercising fiduciary authority over the investment choices and holdings of the Boeing Stock Fund. Those powers and duties were clearly delegated to the Investment Committee.” The court also dismissed arguments that there was some form of “duty to disclose” as part of their broader duty of loyalty.
“The Independent Fiduciary Agreement clearly delegated to Newport the decisions that are usually the focus of ESOP stock-drop cases: the decisions to allow the Plan and employees to continue to hold employer stock, and the decision to allow employees to continue making new investments in employer stock. In making those decisions, Newport was not a Boeing insider. It was making decisions like any outside investor, albeit one holding a massive, $11 billion stake in the company, on the basis of public information about the company and its prospects.”
What This Means
In 2014 the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs—and in fact, until that point the vast majority of these cases (including BP and Delta Air Lines, Lehman and GM) failed to get past the summary judgment phase. 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. They had also noted that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”
However, when the “more harm than good” standard emerged with Fifth Third Bancorp v. Dudenhoeffer, it didn’t just establish a new standard, it also led to a refiling of claims of many of the so-called “stock drop” suits. However, while those had gotten further than previous litigation, they fell short of the new standard—though they did at least get past the summary judgment stage. Indeed, since Fifth Third replaced the previous “presumption of prudence” standard, a number of these so-called “stock drop” cases have been relitigated, but most have resulted in judgments for the defendants, including BP and Delta Air Lines, Lehman and GM. In Dennis Smith v. Delta Airlines Inc., et al., the 11th Circuit noted that, “while Fifth Third may have changed the legal analysis of our prior decision, it does not alter the outcome.” There had been some hope that a recent Supreme Court case involving IBM might offer some clarity—but apparently not.
You can now add Boeing to that list.
