526 F.3d 243 (5th Cir. 2008), 06-20157, Kirschbaum v. Reliant Energy, Inc.

Docket Nº:06-20157
Citation:526 F.3d 243
Party Name:Brad KIRSCHBAUM, on behalf of himself and all others similarly situated, Plaintiff-Appellant, Raymond Royer, Appellant, v. RELIANT ENERGY, INC., et al., Defendants, Reliant Energy, Inc.; T. Milton Honea; Milton Carroll; John T. Cater; Richard E. Balzhiser; James A. Baker, III; Benefits Committee of Reliant Energy; David M. McClanahan; Mary P. Ricci
Case Date:April 25, 2008
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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526 F.3d 243 (5th Cir. 2008)

Brad KIRSCHBAUM, on behalf of himself and all others similarly situated, Plaintiff-Appellant,

Raymond Royer, Appellant,


RELIANT ENERGY, INC., et al., Defendants,

Reliant Energy, Inc.; T. Milton Honea; Milton Carroll; John T. Cater; Richard E. Balzhiser; James A. Baker, III; Benefits Committee of Reliant Energy; David M. McClanahan; Mary P. Ricciardello; Gary Whitlock; Lee Hogan; Waters S. Davis, IV; Steve Schaeffer; Tom Standish, Defendants-Appellees.

No. 06-20157

United States Court of Appeals, Fifth Circuit

April 25, 2008

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Paul O. Paradis, Gina M. Tufaro, Horwitz, Horwitz & Paradis, New York City, Robert A. Izard, Jr. (argued), Eric Lee Palmquist, Schatz Nobel Izard P.C., Hartford, CT, John G. Emerson, Jr., Emerson Poynter, Houston, TX, for Brad Kirschbaum and Raymond Royer.

Mary Ellen Signorille, Melvin Radowitz, American Ass'n of Retired Persons, Washington, DC, for American Ass'n of Retired Persons, Amicus Curiae.

Jeffrey G. Lewis, Lewis, Feinberg, Renaker & Jackson, Oakland, CA, for Nat. Employment Lawyers Ass'n, Amicus Curiae.

Elizabeth Hopkins (argued), U.S. Dept. of Labor, Washington, DC, for Elaine Chao, Amicus Curiae.

James Edward Maloney (argued), Maria Wyckoff Boyce, Aaron Michael Streett, Baker Botts, David Keith Isaak, David Gerger & Associates, Houston, TX, for Defendants-Appellees.

Lawrence H. Hunt, Jr., Sidley Austin, Chicago, IL, for Reliant Energy, Inc., T. Milton Honea, Milton Carroll, John T. Cater, Richard E. Balzhiser and James A. Baker, III.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, and STEWART and CLEMENT, Circuit Judges.

EDITH H. JONES, Chief Judge:

Brad Kirschbaum ("Kirschbaum"), an employee of Reliant Energy, Inc. ("REI") and a participant in the Reliant Energy Savings Plan ("Plan"), brought this ERISA class action against REI and the REI Benefits Committee (collectively, "REI defendants") representing current and former plan participants on whose behalf the Plan purchased or held shares of the Reliant Energy Common Stock Fund from August 2, 1999 to May 16, 2002. The district court certified the class but granted the REI defendants' motion for summary judgment on all claims. We AFFIRM. Even if the REI defendants had a fiduciary duty to liquidate the Common Stock Fund and cease purchasing REI shares, notwithstanding the Plan's express contrary requirements, Kirschbaum falls short of bearing his heavy burden to rebut the presumption that the defendants satisfied their legal duties.


The relevant version of the Plan was adopted on April 1, 1999. Pursuant to a Trust Agreement adopted simultaneously and incorporated into the Plan, all Plan assets were held in trust by the Northern

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Trust Company ("Trustee"). 1The Trustee, REI, and the Benefits Committee were all named in the Plan as fiduciaries for specific purposes. The Plan is an Eligible Individual Account Plan ("EIAP") under ERISA. 29 U.S.C. § 1107(d)(3). Consequently, participants could invest in a number of funds, ranging from riskier, growth-oriented funds to more stable mutual funds. One investment option under the plan was the REI Common Stock Fund ("Common Stock Fund"). With the exception of a small cash component for liquidity purposes, the Common Stock Fund was invested entirely in REI common stock.

Participants were permitted to invest up to sixteen percent of their compensation in the Plan. REI agreed to match up to the first six percent of an employee's contribution with shares of REI common stock allocated to the employee's Common Stock Fund account. Matching contributions were to remain in the Common Stock Fund for all employees who had not yet attained the age of fifty-five years with ten years of service with the company. After reaching that benchmark, employees could divest a portion of their holdings in the Common Stock Fund.2 The participants' holdings of REI stock and the Common Stock Fund assets thus arose from two sources: employees' voluntary purchases of the Common Stock Fund as a Plan option, and REI's matching contributions in the form of REI common stock.

The value of the Common Stock Fund fell when the price per share of REI common stock dropped about forty percent, from $24.60 on May 9, 2002, to $14.50 a week later. The drop was occasioned by the disclosure that some REI employees had engaged in "round-trip" energy trades between 1999 and 2001. In these sham transactions, REI and another energy trader would "sell" identical quantities of power or natural gas to each other simultaneously, for the same price. Although no gas, power or money ever changed hands, the "round-trip" trades were booked as transactions to inflate REI's trading volume. The disclosure occurred in stages. On May 10, 2002, REI withdrew a planned $500 million debt offering in light of the possibility that "round-trip" trading had occurred. On May 13, REI publicly confirmed that such trades had inflated revenues by about ten percent over a three year period. On May 16, senior executives implicated in the "round-trip" trading resigned.

In his three-count Fourth Amended Complaint, Kirschbaum alleges that the REI defendants are responsible under ERISA to make good the losses the Plan sustained on REI common stock. Counts I and II both allege the REI defendants should have known, based on information available to them, that REI stock was not a prudent investment. Count I focuses on information available to the public, while Count II focuses on non-public information (the "round-trip" trades). Both counts assert that because REI common stock became an imprudent investment, the REI defendants had a fiduciary duty to (a) halt all Plan purchases of REI common stock, (b) sell the Plan's holdings in REI common stock, and (c) terminate the Common Stock Fund. Count III alleges that the REI defendants breached their fiduciary duties by negligently misrepresenting REI's financial condition to Plan participants

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in documents that incorporated the company's SEC filings.

After certifying the class, the district court granted summary judgment to the REI defendants on all three Counts. On Counts I and II, the court reasoned that the REI defendants could be fiduciaries only to the extent they exercised discretionary control over the Plan. Since the Plan afforded them no discretion to terminate the fund or halt investments in it, the district court concluded the REI defendants had no fiduciary duty to do so. As to Count III, the district court held that the alleged misrepresentations were made by REI in its corporate capacity, not its fiduciary capacity, and were not actionable under ERISA. Kirschbaum has appealed.


We review a grant of summary judgment de novo, using the same standards applied by the district court. Condrey v. SunTrust Bank of Georgia, 429 F.3d 556, 562 (5th Cir. 2005). Summary judgment is proper when the movant can demonstrate that there is no genuine issue of material fact and that he is entitled to judgment as a matter of law. Willis v. Coca Cola Enterprises, Inc., 445 F.3d 413, 416 (5th Cir. 2006). On review of a grant of summary judgment, all facts and inferences must be construed in the light most favorable to the non-movant. Murray v. Earle, 405 F.3d 278, 284 (5th Cir. 2005).

A brief sketch of the ERISA principles underlying the operation of the REI Savings Plan is in order. ERISA provides that an employer who sponsors an employee plan may also serve as a fiduciary of that plan. The statute imposes on the employer-fiduciary and on those who manage the plan strict statutory duties, including loyalty, prudence, and diversification. See 29 U.S.C. § 1104(a)(1). Under the common law of trusts, an employer could not invest plan assets in its own stock without creating an impermissible conflict of interest. See Pegram v. Herdrich, 530 U.S. 211, 225, 120 S.Ct. 2143, 2152, 147 L.Ed.2d 164 (2000). But Congress, for well-documented policy reasons, has encouraged plan ownership of employer stock and has exempted such investments from certain of ERISA's fiduciary requirements. See, e.g., Donovan v. Cunningham, 716 F.2d 1455, 1466-67 (5th Cir. 1983). In particular, for an EIAP like that before us, there is no "cap" on the percentage of permissible investments in the employer's own securities. Compare 29 U.S.C. § 1107(b)(1) with § 1107(a)(3)(A). Further, an EIAP fiduciary's decision to purchase or hold the employer's securities is exempt from the duty to diversify and the related duty of prudence insofar as it concerns asset diversification. 29 U.S.C. § 1104(a)(2). The fiduciary remains bound, however, by its other statutory fiduciary duties. See, e.g., Martin v. Feilen, 965 F.2d 660, 665, 670 (8th Cir. 1992). With these general principles in mind, we turn to the discussion of each count.

Count I - Publicly Available Information

As it happens, the general statutory principles are sufficient to affirm the district court's grant of summary judgment on Count I. Kirschbaum here avers that the REI defendants should have concluded, based on publicly available information, that REI common stock was an imprudent investment. Count I alleges that the transformation of REI from a "traditional power utility company" into a "speculative energy trading operation" changed REI common stock from a "classic long term conservative investment" to a "risky and volatile one." The company's change in business strategy, Kirschbaum contends, made it imprudent for the REI defendants to continue investing "such massive amounts or such a large percentage

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of [the Plan's] assets" in REI...

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