Pfeil v. State St. Bank & Trust Co.

• Decision Date: 28 March 2012
• Docket Number: No. 10–2302.,10–2302.
• Citation: 52 Employee Benefits Cas. 1641,671 F.3d 585
• Parties: Raymond M. PFEIL and Michael Kammer, Individually and on behalf of all others similarly situated, Plaintiffs–Appellants, v. STATE STREET BANK AND TRUST COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

52 Employee Benefits Cas. 1641

671 F.3d 585

Raymond M. PFEIL and Michael Kammer, Individually and on behalf of all others similarly situated, Plaintiffs–Appellants,

v.STATE STREET BANK AND TRUST COMPANY, Defendant–Appellee.

No. 10–2302.

United States Court of Appeals, Sixth Circuit.

Argued: Oct. 7, 2011.Decided and Filed: Feb. 22, 2012.Rehearing and Rehearing En Banc Denied March 28, 2012.

ARGUED: Geoffrey M. Johnson, Scott & Scott, LLP, Cleveland Heights, Ohio, for Appellants. Wilber H. Boies, McDermott Will & Emery LLP, Chicago, Illinois, for Appellee. ON BRIEF: Geoffrey M. Johnson, Scott & Scott, LLP, Cleveland Heights, Ohio, for Appellants. Wilber H. Boies, Nancy G. Ross, McDermott Will & Emery LLP, Chicago, Illinois, Chris C. Scheithauer, McDermott Will & Emery LLP, Irvine, California, James D. VandeWyngearde, Pepper Hamilton LLP, Southfield, Michigan, for Appellee. Elizabeth S. Goldberg, United States Department of Labor, Washington, D.C., Kent A. Mason, Davis & Harman LLP, Washington, D.C., for Amici Curiae.Before: MARTIN and GRIFFIN, Circuit Judges; ANDERSON, District Judge.^*

OPINION

S. THOMAS ANDERSON, District Judge.

Raymond M. Pfeil and Michael Kammer, individually and on behalf of others similarly situated, allege that State Street Bank and Trust breached its fiduciary duty under the Employee Retirement Income Security Act (“ERISA”). State Street was the fiduciary for the two primary retirement plans offered by General Motors, and the plaintiffs were plan participants. The plaintiffs allege that State Street breached its fiduciary duty by continuing to allow participants to invest in GM common stock, even though reliable public information indicated that GM was headed for bankruptcy. The district court dismissed the complaint, holding that State Street's alleged breach of duty could not have plausibly caused losses to the plan. For the reasons set forth below, we REVERSE the judgment of the district court and REMAND the case for further proceedings.

I. BACKGROUND

A. Factual Background

General Motors offered separate defined contribution 401(k) profit-sharing plans to its salaried and hourly employees. The plans maintained individual accounts for each participant. A participant's benefits were based on the amount of contributions and the investment performance of the contributions. According to the complaint, the plans offered participants several investment options, including mutual funds, non-mutual fund investments, and the subject of this litigation: the General Motors Common Stock Fund. Participants had control over how their funds were invested. The plans imposed no restrictions on the participant's allocation of assets among the investment options and gave participants the discretion to change their allocation in any investment on any business day. The plans invested each participant's funds by default in the Pyramis Strategic Balanced Fund, and not the General Motors Common Stock Fund.

The plan documents explain that the purpose of the General Motors Common Stock Fund was “to enable Participants to acquire an ownership interest in General Motors and is intended to be a basic design feature” of the plans. The complaint alleges that the plans invested between $1.45 billion and $1.9 billion in plan assets in General Motors stock during the class period. The plan documents provide that this fund “shall be invested exclusively in [General Motors] $1–2/3 par value common stock without regard to” diversification of assets, the risk profile of the investment, the amount of income provided by the stock, or fluctuations in the market value of the stock. However, the plans state that these restrictions do not apply if State Street, acting as the independent fiduciary:

in its discretion, using an abuse of discretion standard, determines from reliable public information that (A) there is a serious question concerning [General Motors'] short-term viability as a going concern without resort to bankruptcy proceedings; or (B) there is no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings.

In the event either of these conditions were met, the plan documents directed State Street to divest the plans' holdings in the General Motors Common Stock Fund.

State Street became fiduciary for the plans on June 30, 2006, at a time, as the plaintiffs allege, when General Motors was already in serious financial trouble. The complaint alleges that General Motors' troubles were well-documented and that commentators increasingly opined that bankruptcy protection was “virtually a certainty” for the company. On July 15, 2008, GM Chief Executive Officer Rick Wagner announced that the company needed to implement a restructuring plan to combat second quarter 2008 losses, which he described as “significant.” As part of the plan, General Motors eliminated its dividend, reduced its salaried workforce by twenty percent, and curtailed truck and large vehicle production, all signs of what plaintiff contend was a “potential disaster for shareholders.” The complaint alleges that on August 1, 2008, General Motors announced a third quarter net loss of $15.5 billion. These bleak reports forced the company to acknowledge in its November 7, 2008 third-quarter financials that it would exhaust cash reserves by mid–2009. Three days later, General Motors filed its Form 10–Q for third quarter 2008, disclosing that its auditors had “substantial doubt” regarding the company's “ability to continue as a going concern.” The plaintiffs allege that under these circumstances, State Street should have recognized as early as July 15, 2008, that General Motors was bound for bankruptcy and that GM stock was no longer a prudent investment for the plans.

On November 21, 2008, State Street informed participants that it was suspending further purchases of General Motors Common Stock Fund citing “GM's recent earnings announcement and related information about GM's business.” The plaintiffs allege, however, that State Street took no further action to divest the over fifty million shares of General Motors stock held by plan participants at that time. On March 31, 2009, State Street finally decided to sell off the plans' holdings in company stock and completed the sell-off on April 24, 2009. General Motors filed its bankruptcy petition on June 1, 2009.

B. Procedural History

The plaintiffs filed their putative class action on June 9, 2009, alleging State Street's breach of fiduciary duty in violation of ERISA § 409(a), 29 U.S.C. § 1109(a). Specifically, the complaint alleged that State Street had failed to prudently manage the plan's assets thereby breaching its fiduciary duty defined in ERISA § 404. The named plaintiffs brought this action on behalf of themselves and a class of individuals defined as: “All persons who were participants in or beneficiaries of the [General Motors 401(k) Plans] at any time between July 15, 2008 and April 24, 2009 (the ‘Class Period’) and whose accounts included investments in General Motors Stock.”

State Street filed a motion to dismiss the complaint for failure to state a claim, which the district court granted on September 30, 2010. The district court held that the plaintiffs had sufficiently pleaded a breach of State Street's fiduciary duty by alleging that State Street continued to operate the General Motors Common Stock Fund after public information raised serious questions about General Motors' short-term viability as a going concern without resort to bankruptcy. However, the district court concluded that the plaintiffs had not plausibly alleged that State Street's breach proximately caused losses to the plans. The district court emphasized that plan participants had a menu of investment options from which to choose and that participants retained control over the allocation of assets in their accounts at all times. Because the participants could have elected to move their funds from the General Motors Common Stock Fund to one of the other investments offered in the plan, the court reasoned, State Street could not be liable for losses to the plan. Therefore, the district court granted State Street's motion to dismiss. The plaintiffs' timely appeal followed.

II. ANALYSIS

A. Standard of Review

We review de novo a dismissal for failure to state a claim under Rule 12(b)(6). Ohio ex rel. Boggs v. City of Cleveland, 655 F.3d 516, 519 (6th Cir.2011). A complaint must “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face” in order to survive a motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (internal quotations and citations omitted); Ctr. for Bio–Ethical Reform, Inc. v. Napolitano, 648 F.3d 365, 369 (6th Cir.2011). A claim is facially plausible if the “plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 129 S.Ct. at 1949 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

B. Duty of a Fiduciary under ERISA

“ERISA is a comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). ERISA § 404(a), 29 U.S.C. § 1104(a)(1), establishes the fiduciary duties of trustees administering plans governed by ERISA:

[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in...