The parties in a company stock suit involving Eastman Kodak’s 401(k) and employee stock ownership plan (ESOP) have come to terms.
Eastman Kodak has agreed to pay $9.7 million to settle a 2012 lawsuit accusing them of breaching their ERISA fiduciary duties by permitting the plans to continue to offer Kodak stock as an investment option after objective information revealed that Kodak was in extreme financial distress (they declared bankruptcy) and that Kodak stock was an extremely risky investment that was imprudent for retirement asset investment.
The plaintiffs had alleged that:
- Kodak depended on a dying technology and the sale of antiquated products;
- the company was unable to generate sufficient cash flow from its short-term business strategy of initiating lawsuits that would garner settlements;
- it was suffering from a severe lack of liquidity; and
- Kodak’s bonds – which take priority of stock in bankruptcy – had been downgraded to “junk” status.
Alleging that Kodak’s stock price collapsed due to these circumstances, the plaintiffs sued the plan fiduciaries, claiming that they failed to act to protect the plans and the participants from inevitable losses.
Dudenhoeffer’s Influence
An early ruling denying the fiduciaries’ motion to dismiss was one of the first to come following the Supreme Court’s ruling in Fifth Third Bancorp v. Dudenhoeffer, which rejected the “presumption of prudence” that had been the legal standard for ESOP plans till that time. The court held that the participants alleged sufficiently dire circumstances to overcome the fiduciaries’ motion to dismiss, but then earlier this year, the parties engaged in mediation procedures and after “extensive arms' length negotiations,” they agreed to settle, according to the settlement filing.
The proposed settlement, filed April 22 in the U.S. District Court for the Western District of New York, would end a “highly adversarial litigation” and provide relief for 21,000 class members. It represents a recovery of between approximately 20% (assuming the imprudence was assumed from the beginning of the class action period) and 50% (assuming it was valued only a few months before Kodak declared bankruptcy) of the total damages allegedly suffered by the participants. In presenting the settlement and weighing its reasonableness, the document acknowledged that even following Dudenhoeffer, a plaintiff victory is anything but certain. Referring to Dudenhoeffer, the settlement states that, “certain language in that decision raises issues regarding the viability of an ERISA action regarding claims of imprudent investment in company stock based upon publicly available information, and thus have lent support to arguments by defendant-fiduciaries in similar circumstance in other cases.”
The settlement said that plaintiffs’ counsel will move for an amount not to exceed one third of the settlement fund as attorneys’ fees plus reimbursement of their out-of-pocket costs, when they file their motion for attorneys’ fees and costs (so, more than $3 million). Moreover, the plaintiffs and/or class representatives will apply for case contribution awards of $5,000 “in recognition of the services that they rendered on behalf of the settlement class as class representatives.”
