Difelice v. U.S. Airways, Inc.

• Decision Date: 27 September 2005
• Docket Number: No. 1:04CV889.,1:04CV889.
• Citation: 397 F.Supp.2d 735
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Vincent D. DIFELICE, on behalf of himself and all others similarly situated, Plaintiff, v. US AIRWAYS, INC., et al., Defendants.

397 F.Supp.2d 735

Vincent D. DIFELICE, on behalf of himself and all others similarly situated, Plaintiff, v. US AIRWAYS, INC., et al., Defendants.

No. 1:04CV889.

United States District Court, E.D. Virginia, Alexandria Division.

September 27, 2005.

COPYRIGHT MATERIAL OMITTED

Stephen Ray Pickard, Alexandria, VA, for Plaintiff.

Christine Bannon Cox, Karen Ellen Gray, Morgan Lewis & Bockius LLP, Washington, DC, Craig Crandall Reilly, Richard McGettigan Reilly & West, Alexandria, VA, Howard Shapiro, Robert W. Rachal, Charles F. Seemann III, Proskauer Rose LLP, New Orleans, LA, for Defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

At issue at the threshold dismissal stage in this breach-of-fiduciary-duty action brought pursuant to § 502(a)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a)(2), is the nature of a directed trustee's duties to the participants in a 401(k) retirement plan. More specifically, the question presented is whether a directed trustee under ERISA § 403(a) has a duty to challenge the continued inclusion of company stock as one of several investment choices in the company's 401(k) plan where, as here, publicly available information indicated that the company was considering filing for bankruptcy protection, but had not yet done so.

I.¹

Defendant U.S. Airways, Inc. ("US Airways") is a Delaware corporation and a major American passenger airline. In 1988, U.S. Airways² created the U.S. Airways, Inc. 401(k) Savings Plan ("the Plan"), an ERISA retirement plan, for the express purpose of providing retirement income for certain of its employees. The Plan³ permits participating employees to make tax-deferred payroll contributions to individual retirement savings accounts, and to direct the investment of their contributions among several different investment options. In addition, the Plan requires U.S. Airways to make matching cash contributions to eligible participants' accounts. Plan §§ 4.8-4.10. The Plan makes participants "solely responsible" for investment decisions, and states that no "other person or entity shall be liable for any loss or liability that results from [a] Participant's or Beneficiary's exercise of control" over his Plan account. Plan § 6.4; see also Plan § 16.5 (disclaiming guarantee from Plan losses). Under the Plan's terms, U.S. Airways is designated as the Plan administrator and fiduciary, and is expressly given responsibility for selecting and, if necessary, terminating the investment options available to Plan participants. Plan §§ 13.1, 7.1, 7.2; Pl.'s Am. Compl. ¶¶ 7, 25, 29. The Plan also directs U.S. Airways to enter into a trust agreement for the holding, management and administration of all Plan assets, and provides that the terms of the trust agreement are to be incorporated by reference into the Plan itself. Plan § 14.1.

Pursuant to this direction, U.S. Airways, in 1993, entered into a trust agreement for the Plan ("the Trust Agreement") with defendant Fidelity Management Trust Company ("Fidelity"), by which agreement Fidelity became the Plan trustee. The Trust Agreement⁴ confers broad, discretionary powers and duties on Fidelity for the management of Plan assets, but makes those powers subject to the directions of U.S. Airways and the Plan participants. Trust Agreement §§ 1.1-1.5. Specifically, the Trust Agreement states that U.S. Airways "shall direct the Trustee ... [to] invest the assets of the Trust in separate Investment Funds," and that apart from providing U.S. Airways with a list of investment options, "[t]he Trustee shall have no responsibility for the determination of Investment Funds ... and shall not render investment advice to any person in connection thereto." Trust Agreement § 1.5(a). The same section of the Trust Agreement further states that "[t]he Trustee shall be required to follow the directions... given to it [by U.S. Airways], except that the Trustee shall not be required to follow any directions that would result in a breach of the Trustee's fiduciary duties." Id. The Trust Agreement also provides that:

[T]he Trustee shall not be liable for any loss, or by reason of any breach, arising from the direction [of U.S. Airways] unless it is clear on the direction's face that the actions to be taken under the direction would be prohibited by [ERISA's] fiduciary duty rules ... or would be contrary to the terms of the Plan or [the Trust] Agreement.

Trust Agreement § 1.13.

The Trust Agreement also requires the trustee to act at the direction of individual Plan participants:

[E]ach Participant shall direct the Trustee with respect to investment of the funds reflected in his Separate Account among the Investment Funds.... The Trustee shall not render investment advice to any Participant and shall be under no duty to question any such direction of a Participant with respect to investments.

Trust Agreement § 1.5(b). As a corresponding limitation on Fidelity's liability, the Trust Agreement provides that when directed in such a manner, the Trustee shall not be liable "for any losses which may result from either the Participant's direction of any investment made pursuant to this paragraph or for any loss which may result by reason of failure of a Participant to make such direction." Id.

Among the range of investments that U.S. Airways selected as Plan investment options was the U.S. Air Group Common Stock Fund ("the Company Stock Fund"), which was to consist exclusively of shares of U.S. Air Group, Inc. ("US Air Group"),⁵ the parent company of U.S. Airways, and cash. This choice was expressly contemplated by Article VIII of the Trust Agreement, entitled "Investments in Company Stock," which sets forth specific provisions governing the Company Stock Fund's composition and management. Article VIII provided that the Company Stock Fund would include, in addition to U.S. Air Group common stock, enough cash "to satisfy the Fund's cash needs for transfers and payments," and tasked U.S. Airways and Fidelity jointly with determining a "cash target range" that would be sufficient in this respect. Trust Agreement § 8.1. Article VIII further provided that Plan assets "may be invested in Company Stock to the extent necessary to comply with investment directions provided by the Plan Participants or the Company [i.e., U.S. Airways]." Trust Agreement § 8.2. Consistent with this provision, Article VIII also stated that U.S. Airways would be responsible for "continually monitor[ing] the suitability under the fiduciary duty rules of Section 404(a)(1) of ERISA... of acquiring and holding Company Stock," and that Fidelity would not be liable for any loss resulting from Plan participants' or U.S. Airways' directions with respect to the Company Stock Fund, unless it was "clear on [the] face" of such directions "that the actions to be taken ... would be prohibited by [ERISA's] fiduciary duty rules or would be contrary to the terms of the Plan or [the Trust] Agreement." Trust Agreement § 8.3. Although Article VIII was later amended in January 2002, the alterations were few and immaterial.⁶ Neither party contends that the amendments constitute any substantive change to Article VIII or the Trust Agreement.

The Company Stock Fund remained an available investment option for Plan participants from 1993 until 2002, when U.S. Airways filed for bankruptcy. By then, plaintiff contends, the harbingers of U.S. Airways' financial decline had been apparent for some time. At the end of 1998, Fidelity held in excess of 417,000 shares of U.S. Air Group stock — worth nearly $21.7 million — in various mutual funds it actively managed apart from the Company Stock Fund. Pl.'s Am. Compl. ¶ 135. In the first quarter of 1999, Fidelity liquidated about one-half of these shares. Pl.'s Am. Compl. ¶ 136. Fidelity sold approximately two-thirds of the remaining shares the following quarter, and by the end of 1999 had reduced its holdings in U.S. Air Group to 57,000 shares, worth approximately $1.8 million. Pl.'s Am. Compl. ¶¶ 135-36. At that time or shortly thereafter, U.S. Air Group and U.S. Airways began recording significant operating losses, losses that a U.S. Airways employee bulletin would later describe as the product of "the combined impact of a weak economic environment and expanding competition from low-cost competitors and network carriers." Pl.'s Am. Compl. ¶ 46.

In May 2000, in an attempt to reverse U.S. Airways' flagging fortunes, U.S. Air Group executed a tentative merger agreement with UAL Corp. ("UAL"), the parent company of United Air Lines, Inc. ("United"), which would have consolidated United and U.S. Airways into a single entity. Following the announcement of the proposed merger, the share price of U.S. Airways stock nearly doubled, going from approximately $26 to $49 in a single day. In October 2000, U.S. Airways' shareholders voted on and approved the proposed merger.

At the close of 2000, the U.S. Airways-United merger had not yet been consummated, and U.S. Airways and U.S. Air Group reported pre-tax operating losses for the year of $350 million and $270 million, respectively. In February 2001, in a U.S. Senate hearing on airline consolidation, Stephen Wolf, the Chairman of U.S. Airways' Board of Directors, explained that bankruptcy and dissolution were "real threats" for U.S. Airways if the merger with United did not come to fruition. Two months later, U.S. Air Group reported an operating loss of $228 million for the first quarter of 2001. During a public conference call held in connection with the announcement of this loss, U.S. Airways President and CEO Rakesh Gangwal informed investors that there was no "Plan B" for U.S. Airways if the proposed merger did not receive regulatory approval, meaning presumably that absent a merger with United, U.S. Airways would likely seek bankruptcy protection. Also, investment analysts at this time were skeptical of U.S. Airways' long-term prospects, noting that the proposed merger faced...