Hunter v. Caliber System

• Decision Date: 02 May 2000
• Docket Number: 99-3623,Nos. 99-3620,s. 99-3620
• Citation: 220 F.3d 702
• Parties: (6th Cir. 2000) David T. Hunter (99-3620); Robert Allison, et al. (99-3623), Plaintiffs-Appellants, v. Caliber System, Inc., f/k/a Roadway Services, Inc., et al., Defendants-Appellees. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 702

220 F.3d 702 (6th Cir. 2000)

David T. Hunter (99-3620); Robert Allison, et al. (99-3623), Plaintiffs-Appellants, v. Caliber System, Inc., f/k/a Roadway Services, Inc., et al., Defendants-Appellees.

Nos. 99-3620, 99-3623

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: May 2, 2000

Decided and Filed: August 2, 2000

Appeal from the United States District Court for the Southern District of Ohio at Columbus; Nos. 96-01186; 97-00321--James L. Graham, District Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Tony C. Merry, McCARTHY PALMER VOLKEMA & THOMAS, Columbus, Ohio, for Appellants.

David J. Young, Michael R. Reed, SQUIRE, SANDERS & DEMPSEY, Columbus, Ohio, Daniel W. Srsic, David A. Kadela, LITTLER MENDELSON, Columbus, Ohio, Albert J. Lucas, CALFEE, HALTER & GRISWOLD, Columbus, Ohio, for Appellees.

Before: MERRITT and COLE, Circuit Judges; QUIST, District Judge.^*

OPINION

GORDON J. QUIST, District Judge.

These consolidated cases arise out of the January 1, 1996, spin-off of Defendant Roadway Express, Inc. ("REX") by its former parent company, Defendant Caliber System, Inc¹. ("Caliber"), and the precipitous decline in the price of Caliber stock between July 1996 and August 1996 following the spinoff. Plaintiffs, employees of REX, alleged in their complaints that in connection with the spinoff, Defendants committed various breaches of fiduciary duty and other violations under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 to 1461 ("ERISA"). Plaintiffs claim they lost substantial amounts in their retirement accounts when the price of Caliber stock declined because Caliber denied Plaintiffs a lump sum distribution of their account balances and REX delayed allowing Plaintiffs the opportunity to either sell or withdraw their Caliber stock. After certifying a class with regard to issues of liability, the district court granted summary judgment to Defendants on all claims. For the reasons that follow, we affirm the judgment of the district court.

I.

Plaintiffs are non-union employees of REX. Prior to January 1, 1996, REX was a wholly-owned subsidiary of Caliber. As a subsidiary of Caliber, REX was a participating employer in three tax-qualified employee benefit plans sponsored by Caliber (collectively the "Caliber Plans") known as the Roadway Services, Inc. Stock Bonus Plan and Trust ("SBP"), the Roadway Services, Inc. Stock Savings and Retirement Income Plan ("SSRIP"), and the Roadway Services, Inc. Employee Stock Ownership Plan ("ESOP"). Each of the Caliber Plans was an "individual account plan" or a "defined contribution plan," meaning that a participant in each plan had an individual account and benefits were based solely upon contributions made to the participant's account. See 29 U.S.C. § 1002(34). Plaintiffs were participants in one or more of the Caliber Plans.

During the summer of 1995, Caliber adopted a plan to divest itself of REX by distributing REX stock to Caliber's shareholders. Caliber's board of directors adopted the spinoff as a solution to an intra-corporate problem created by deregulation in the trucking industry, which pitted REX and other Caliber subsidiaries against each other as business competitors. Consequently, REX's status as a Caliber-owned company presented an obstacle to REX management's implementation of an effective incentive compensation program that was tied to the performance of other members of Caliber's corporate family. As a solution to the problem, REX management formulated a plan for separating ownership of REX from Caliber. Caliber's board of directors ultimately adopted the plan, which called for a tax-free distribution of REX stock by Caliber to Caliber's shareholders, including the Caliber plans.

The spin-off occurred on January 2, 1996. Following the spin-off, all REX employees continued in their employment with REX in the same positions they had held prior to the spin-off. Thus, REX employees did not experience any change in their employment. In preparation for the spin-off, Caliber and REX executed an agreement on December 29, 1995, titled "Agreement on Employee Matters" ("Agreement"), which, among other things, provided that REX would establish a new 401(k) individual account retirement plan (the "401(k) Plan" or "Plan") to accept from the SSRIP and SBP transfers of assets attributable to the accounts of REX employees. Paragraphs 2.2(b) and (c) of the Agreement permitted the transfer of assets from the SSRIP and the SBP "in cash, securities or other property or a combination thereof, as reasonably determined by [Caliber] and acceptable by the" trustee of the 401(k) Plan. (Agreement §§ 2.2(b), (c), J.A. 868-69.) In addition, the parties agreed that neither party would be obligated to proceed with the transfer of assets until the parties received either a favorable determination letter from the Internal Revenue Service ("IRS") or an opinion of counsel that the 401(k) Plan met the Internal Revenue Code requirements for status as a qualified plan. See id. (§ 2.2(e), J.A. 869.) The parties also agreed that Caliber would amend the SSRIP and the SBP to provide that any participant employed by REX on January 1, 1996, would not be eligible to receive benefits from the SSRIP or the SBP until the individual terminated his or her employment with REX after December 31, 1995. (See id. § 2.2(f), J.A. 869.) At or about the time Caliber and REX signed the Agreement, Caliber adopted written amendments to the SSRIP and the SBP (the "December Amendments") which, as specified in the Agreement, amended the SSRIP and the SBP to provide that participants employed by REX on January 1, 1996, were not eligible to receive distributions of their account balances until their employment with REX terminated after December 31, 1995. The purpose of the amendments was to clarify that REX employees did not incur a termination of their employment as a result of the spin-off and therefore were not entitled to a distribution of their SSRIP and SBP accounts.

REX adopted the 401(k) Plan and received a favorable determination letter from the IRS as well as an opinion of counsel indicating that the 401(k) Plan met the requirements for qualified plans. Pursuant to the Agreement, Caliber transferred the assets of the SSRIP to the 401(k) Plan on April 2, 1996. Caliber transferred the SBP assets to the 401(k) Plan in late April and early May of 1996. The transferred assets consisted of approximately 6 million unregistered shares of Caliber stock, 3 million shares of shares of REX stock, and cash. The 6 million shares of Caliber stock represented approximately 15% of Caliber's outstanding shares of stock. Key Trust, the 401(k) Plan trustee, reconciled the participants' accounts, which numbered approximately 5,000, by June 12, 1996.

During the reconciliation process, REX learned from its counsel that because of the size of the 401(k) Plan's Caliber holdings, the 401(k) Plan was deemed an "affiliate" of Caliber under the federal securities laws. As a consequence of its affiliate status, the 401(k) Plan could not sell the unregistered Caliber stock, except in small amounts each quarter, and, thus, the Plan participants could not diversify the Caliber stock in their accounts as allowed under the terms of the Plan. Between May and June of 1996, REX officials explored various options for solving that problem. On June 28, 1996, the REX board of directors decided to amend the 401(k) Plan to allow certain eligible participants to withdraw their Caliber stock and to give participants who desired to sell their Caliber stock within the 401(k) Plan more options for reinvestment of the sale proceeds. The board of directors anticipated that the amendment allowing withdrawals would solve the affiliate problem by reducing the 401(k) Plan's Caliber holdings below the 10% level giving rise to affiliate status, thus permitting the 401(k) Plan to freely sell the Caliber stock. REX notified the participants of the changes to the 401(k) Plan on July 5, 1996. Plan participants were thus permitted to begin making withdrawal elections in early August, 1996, and the Plan began acting on those elections on August 28, 1996.

Unlike the SSRIP and the SBP, Caliber decided to distribute the assets of the ESOP to participants rather than transfer them to the 401(k) Plan. The decision to distribute assets was based on the small size of the account balances and the fact that the ESOP had been frozen for approximately nine years due to a change in the tax laws. On December 20, 1995, Caliber adopted an amendment which, effective January 1, 1996, amended the ESOP to provide that the spin-off would result in a termination of employment for REX employees, giving participants a right to a distribution, and also that a participant's account would be distributed "as soon as practicable after the Participant has filed his application with the Plan Administrator . . . ." (ESOP Amendment No. 1 § 7, J.A. 567.) The first ESOP distribution was made to REX employees on August 30, 1996.

The primary impetus behind Plaintiffs' claims occurred on July 1, 1996, when Caliber announced that its second quarter earnings would be $.01 per share less than had been anticipated. Within a few weeks after the announcement, Caliber stock had fallen from around $34 per share to approximately $17 per share.² Plaintiff Hunter and other participants elected to withdraw their Caliber stock from the 401(k) Plan and sold it at or around $17.50 per share. However, by October of 1997, Caliber stock had rebounded to $60 per share. Thus, participants who held their Caliber stock until that time realized a significant gain.

II.

On November 18, 1996, Plaintiff Hunter filed a seventeen count complaint against Caliber, REX, Key Trust, National City Bank (the trustee of the Caliber Plans), and the Caliber Plans alleging that Defendants breached their fiduciary duties and engaged in prohibited transactions in...