Bunch v. W.R. Grace & Co.
| Decision Date | 29 January 2009 |
| Docket Number | No. 08-1406.,08-1406. |
| Citation | 555 F.3d 1 |
| Court | U.S. Court of Appeals — First Circuit |
| Parties | Lawrence BUNCH, individually and on behalf of all others similarly situated and on behalf of the W.R. Grace & Co. Savings and Investment Plan; Jerry L. Howard, Sr., individually and on behalf of all others similarly situated and on behalf of the W.R. Grace & Co. Savings and Investment Plan; David Mueller, individually and on behalf of all others similarly situated and on behalf of the W.R. Grace & Co. Savings and Investment Plan, Plaintiffs, Appellants, Keri Evans, on behalf of herself and a class of all others similarly situated, Plaintiff, v. W.R. GRACE & CO.; W.R. Grace Investment And Benefits Committee; Robert M. Tarola; Fred E. Festa; State Street Bank and Trust Company; John F. Akers; Ronald C. Cambre; Marye Anne Fox; Officer John J. Murphy; Paul J. Norris; Thomas A. Vanderslice; H. Furlong Baldwin, Defendants, Appellees, Brenda Gottlieb; W. Brian McGowan; Michael Piergrossi; Unknown Fiduciary Defendants 1-100; Martin Hunter; Ren Lapadario; David Nakashige; Elyse Napoli; Eileen Walsh; Fidelity Management Trust Company; State Street Global Advisors; Investments and Benefits Committee; Administrative Committee, Defendants. |
Paul M. DeMarco, with whom James R. Cummins, Terrence L. Goodman, Jane H. Walker, and Waite, Schneider, Bayless & Chesley Co., L.P.A., were on brief for plaintiffs-appellants.
Scott M. Flicker, with whom Thomas A. Rust, Paul, Hastings, Janofsky & Walker LLP, Sean T. Carnathan, and O'Connor, Carnathan, Mack LLC, were on brief for defendant-appellee State Street Bank and Trust Company.
Nancy S. Heermans, with whom Carol Connor Cohen, Caroline Turner English, Valerie N. Webb, and Arent Fox LLP, were on brief for defendants-appellees.
Before TORRUELLA, STAHL, Circuit Judges, and GARCÍA-GREGORY,* District Judge.
This appeal is from a summary judgment granted by the district court dismissing consolidated suits1 filed by various participants in the W.R. Grace Retirement and Savings Plan ("Plan").2 These actions allege breach of the fiduciary duty owed appellants pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"). 29 U.S.C. §§ 1109, 1132. Appellants sued their employer and retirement fund manager, W.R. Grace & Co. ("Grace"), as well as their delegated fiduciary, State Street Bank ("State Street").3 The latter was engaged by Grace to advise it regarding the soundness of retaining certain stock assets of the Plan and to act independently on said advice. In synthesis, appellants claim that Grace and State Street breached their fiduciary duty to appellants when State Street sold the Plan's holdings in Grace stock at an imprudently low price while Grace was in bankruptcy reorganization. They claim that Grace failed to properly monitor State Street in the performance of its delegated fiduciary duties. Because we conclude that the granting of summary judgment in favor of appellees was appropriate as a matter of law, we affirm the decision of the district court.
Since at least 1976, Grace has sponsored the Plan, a defined contribution 401(k) plan which offers participants an opportunity to invest wages in anticipation of retirement benefits. The Plan was administered by the Investments and Benefits Committee ("IBC") composed of Grace officers. The IBC was responsible for selecting and changing investment options offered under the Plan. Each Plan member, however, had the power to determine in which fund to invest at any given time. The Plan offered participants twenty eight different options, including the Grace Stock Fund, which invested in Grace stock. The Grace Stock Fund owned approximately 12% of Grace's outstanding shares.
Commencing in the 1970s, Grace, which was a global manufacturer and supplier of catalysts and silica products, became a defendant in industry-wide asbestos-related personal injury suits. Because of potential massive liability, on April 2, 2001, Grace filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware.5
In the meantime, from September 1999 until the bankruptcy proceedings were initiated in April 2001, the market price of Grace stock fell from approximately $19 per share to $1.50 per share. During this period, Grace continued to maintain the Grace Stock Fund and to offer Grace stock as an investment option in the Plan.6 Thereafter, while the bankruptcy proceedings continued their course, and during the certified class period, the stock price more or less stabilized at between $2.00 to $5.00 per share.
On March 17, 2003, Brian McGowen, a member of the IBC, wrote the Plan's participants informing them that the Grace fiduciaries were "seriously consider[ing]" naming an independent fiduciary to operate the Grace Stock Fund in order to avoid any potential conflict of interest arising out of the reorganization plan in Grace's bankruptcy. Thereafter, Grace proceeded to amend the Plan to allow the IBC to appoint an independent investment manager for the Grace Fund. The amendment provided that:
[T]he Independent Investment Manager shall have the following authority and duties:
. . .
(i) the continuous authority and duty to determine the extent that the continued retention of shares of Grace Stock within the Grace Stock Fund is not inconsistent with the applicable provisions of [ERISA], and to take actions in this regard that it deems appropriate; including the authority to dispose of Grace Stock held within the Grace Stock Fund and to close the Grace Stock Fund to participant trading.
Pursuant to this provision, in December 2003, after due deliberation, the IBC decided to resolve the potential conflict of interest conundrum by appointing State Street as an independent investment manager, granting it the powers and discretion authorized by the amended Plan. In this respect the independent investment manager was charged with determining the risks inherent in continued ownership of the Grace stock, including the extent of the contingent asbestos litigation liability, an analysis that was itself partially dependent on assessing the likelihood of enactment by Congress of the Fairness in Asbestos Injury Resolution Act of 2003. S. 1125, 108th Cong. (2003) ().
Upon its appointment, State Street itself proceeded to seek expert advice by retaining Duff and Phelps LLC ("D & P") for the purpose of obtaining an opinion regarding Grace's financial prospects, and the firm of Goodwin Procter LLP to provide appropriate legal counsel. After due consideration, D & P prepared a report that concluded that the value of Grace stock was between $0.73 and $3.02 per share, with a midpoint value of $1.88 per share. Considering that the approximate market price of Grace stock was $3.51 per share at that time, the State Street Fiduciary Committee ("Fiduciary Committee"), charged with exercising the discretion assigned to State Street by Grace, entertained D & P's findings and recommendations that the Grace stock be sold at its January 2004 meeting. The Fiduciary Committee, however, requested further findings.
Upon reconvening in February, the Fiduciary Committee concluded that the Grace stock was an inappropriate investment because of the risks inherent to the price of the stock by reason of the potential liability extant in the continuing asbestos litigation. Concomitantly, it also found that "the market price of W.R. Grace stock [was] not a good indication of its long term value." Thus, it decided that the best course to follow was to sell the Grace holdings on the open market.
Before doing so, however, State Street gave advance notice to Grace of its decision to begin selling the Plan's Grace stock. It then notified the Plan's participants of its decision, but advised them that, notwithstanding this decision, it would "continue to monitor the situation" and might decide to end the sales effort if the circumstances required it. The Grace fiduciaries did not question State Street about why it decided to sell the Plan's Grace stock, in part because Robert Tarola ("Tarola") considered such inquiry "off limits" in view of the conflict of interest potential that led to delegation of the independent power to act to State Street.
Relying in part on D & P's valuation of the stock, State Street proceeded to sell 13% of its Grace stock holdings at between $2.86 and $3.09 per share.
Approximately a month or two later, an independent third party investor, D.E. Shaw & Co.("Shaw"), sought to buy the Plan's remaining Grace stock. Shaw offered to buy this block at $3.50 per share, although the stock was then selling at $2.96 per share. State Street informed Grace of the offer and asked Tarola if there was anything that State Street should know about Grace before making a decision on this offer. Tarola responded that everything that State Street should know about Grace was available in the public domain.
On April 12, 2004, State Street sold substantially all of the Plan's holdings in Grace stock to Shaw at $3.50 per share, and notified the Plan participants of its action. The balance of the Grace stock was passed to Shaw one week later, on April 17, 2004.
Although packaged in a more legalistic wrapping, the essence of appellants' allegations of fiduciary misconduct by Grace can be reduced to faulting Grace for its failure or refusal to insert itself into State Street's decision-making process. This may be an accurate statement of Grace's actions, or rather inactions; however, under the circumstances of this case, this did not constitute a breach of Grace or State Street's fiduciary duties to appellants under ERISA.
Before the district court, appellants argued that because Grace's stock traded in an efficient market,7 absent...
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