Difelice v. U.S. Airways, Inc.

Decision Date19 October 2005
Docket NumberNo. 1:04CV889.,1:04CV889.
Citation397 F.Supp.2d 758
CourtU.S. District Court — Eastern District of Virginia
PartiesVincent D. DIFELICE, on behalf of himself and all others similarly situated, Plaintiff, v. US AIRWAYS, INC., et al., Defendants.

ELLIS, District Judge.

This is a breach-of-fiduciary-duty class action brought by a participant in a company § 401(k) retirement plan against the plan fiduciaries for losses to the plan pursuant to § 502(a)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a)(2). At issue on summary judgment is the extent of a named fiduciary's duties (i) to disclose information concerning plan investment options, and (ii) to select and manage prudently plan investment options.


Defendant U.S. Airways, Inc. ("US Airways") is a Delaware corporation and a major American passenger airline. In 1988, U.S. Airways 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 flight attendants and mechanics. The Plan divided decision-making authority among three principal actors: (i) U.S. Airways, the Plan administrator and named fiduciary; (ii) Fidelity Management Trust Company ("Fidelity"), the directed trustee of the Plan; and (iii) the Plan participants, who were each responsible for making investment decisions for their individual accounts. Broadly viewed, this dispute concerns the allocation of responsibility among these actors for losses suffered by the Plan as a result of the financial decline and ultimate bankruptcy of U.S. Airways and its parent company, U.S. Airways Group, Inc. ("US Air Group").

1. The Plan

US Airways established the Plan on September 1, 1988 as a qualified profit sharing plan in order to provide retirement income to certain employees on a tax deferred basis pursuant to § 401(k) of the Internal Revenue Code, 26 U.S.C. § 401(k). Plan § 1.1. The Plan was funded (i) from payroll contributions to individual retirement savings accounts made by participants, (ii) from U.S. Airways' matching cash contributions to eligible participants' accounts, and (iii) from transfers and rollovers from certain prior retirement accounts. Plan §§ 4.1, 4.8, 5.1, 5.2. Under the terms of the Plan, U.S. Airways was the Plan administrator and a named fiduciary of the Plan with responsibility for selecting and, if necessary, terminating the investment options available to Plan participants. Plan §§ 7.1, 7.2. The Plan also directed U.S. Airways to enter into a trust agreement for the holding, management and administration of all Plan assets, and provided 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 entered into a trust agreement for the Plan ("Trust Agreement") with defendant Fidelity Management Trust Company ("Fidelity") in 1993. The Trust Agreement set forth the relative responsibilities of U.S. Airways and Fidelity, and confirmed that U.S. Airways alone was responsible for choosing the investment options for the Plan. Trust Agreement § 1.5(a). The various investment funds from which U.S. Airways could choose were set forth in Schedule C of the Trust Agreement and included actively managed mutual funds, a fixed income fund, and the publicly traded shares of U.S. Air Group. Trust Agreement § 1.5, Schedule C. Plan participants were not able to buy shares of U.S. Air Group directly, but instead were able to purchase units of the U.S. Air Group Common Stock Fund ("the Company Stock Fund") which consisted primarily of shares of U.S. Air Group stock, including any paid dividends, plus an amount of cash sufficient only to satisfy the Fund's needs for transfers and payments. Trust Agreement § 8.1. The value of each unit was determined daily by dividing the net assets of the Company Stock Fund by the total number of units outstanding in the Company Stock Fund. Because U.S. Airways had not paid any dividends since 1990, the value of each unit of the Company Stock Fund was primarily dependent upon the value of the underlying U.S. Air Group stock. When a participant transferred assets out of the Company Stock Fund, the participant received the equivalent value of his units in cash, paid out of the Company Stock Fund's cash component. Conversely, when a participant directed assets into the Company Stock Fund, she received the number of units equivalent to the value of those assets at the time, and the assets were added to the Company Stock Fund's cash component. The Company Stock Fund was set up in this manner to enable participants to trade in and out of the Company Stock Fund on a daily basis, rather than having to wait for the three day settlement period normally required for purchases and sales of stock.

Article 8.1 of the Trust Agreement tasked Fidelity and U.S. Airways jointly with determining the appropriate percentage of cash in the Company Stock Fund and tasked Fidelity with ensuring that the amount of cash in the Company Stock Fund did not stray more than 1% from this target. Fidelity and U.S. Airways agreed that a cash target range of 10% of total assets would be sufficient for the cash component's limited purpose and Fidelity did not allow this percentage to fluctuate by more than a few percentage points throughout the class period. If, owing to participants' decisions to buy or sell units of the Company Stock Fund, the value of cash in the Company Stock Fund failed to fall within the predetermined range, Fidelity was directed to purchase or sell shares of U.S. Air Group stock to return the cash to stock ratio to the appropriate range. In addition, as the value of U.S. Air Group shares declined the percentage of cash in the Company Stock Fund would necessarily increase thereby obligating Fidelity to purchase shares of U.S. Air Group to maintain the agreed-upon percentage of cash in the Company Stock Fund. Therefore, not all purchases of U.S. Air Group stock for the Company Stock Fund were caused by participants' directions; some purchases of U.S. Air Group stock for the Company Stock Fund by Fidelity occurred as a result of variations in the price of U.S. Air Group stock.

Decisions to retain the Company Stock Fund as a Plan investment option rested solely with U.S. Airways.2 The Trust Agreement expressly provided that U.S. Airways "shall continually monitor the suitability under the fiduciary duty rules of Section 404(a)(1) of ERISA ... of acquiring and holding Company Stock."3 Trust Agreement § 8.3. Importantly, however, Plan participants were themselves solely responsible for choosing among the various investment options, including the Company Stock Fund, and for making the investment decisions for their own § 401(k) accounts. Significantly, the Trust Agreement provided that "neither the Trustee [Fidelity] nor the Company shall have any liability for any losses which may result from either the Participant's direction of any investment ... or for any loss which may result by reason of failure of a Participant to make such direction." Trust Agreement § 8.3. And, in this respect, the Plan permitted participants to allocate their account assets into one or more of the available investment options, and to alter this allocation at any time. Plan §§ 6.1, 6.2

During the relevant time period, the Plan allowed participants to choose from among 13 different investment options, including a money market fund, a fixed income fund, various mutual funds, several diversified portfolio funds, and the Company Stock Fund.4 The Plan stated that giving participants control over their investment decisions was intended to trigger the operation of ERISA § 404(c), whereby participants become "solely responsible" for any losses resulting from the exercise of their control. Plan § 6.4.

Pursuant to ERISA's disclosure requirements, U.S. Airways provided participants with a Summary Plan Description ("SPD"), and investment brochures which described aspects of the Plan, including rules for investments in the Company Stock Fund. Participants were advised to diversify the assets in their accounts among investments with different risk/return characteristics, and characterized investments in the Company Stock Fund as "involving more risk" than investments in a diversified fund. Similarly, the SPD advised participants that an investment in the Company Stock Fund "involves all the risks of securities ownership." Significantly, the SPD illustrated the volatility of U.S. Air Group shares by providing the annual rates of return for shares of U.S. Air Group common stock for the prior seven years, which ranged from a gain of 212% to a loss of 67%. The SPD further stated that U.S. Airways, U.S. Air Group, and Fidelity could not "guarantee the performance of the Fund and have no obligation to compensate for any losses suffered by any participant should any such losses occur."

2. The Decline and Bankruptcy of U.S. Airways

US Airways' serious financial problems had become publicly apparent at least by the year 2000 when U.S. Airways and U.S. Air Group began accumulating losses that would ultimately total annual pre-tax operating losses of $350 million and $270 million respectively. In May 2000, in an attempt to reverse the deterioration of U.S. Airways' financial fortunes, U.S. Air Group entered into a tentative merger agreement with UAL Corp. ("UAL"), the parent company of United Air Lines, Inc. ("United"), to merge the two airlines into a single entity. The market responded favorably to this merger announcement, and U.S. Air Group's share price rose from $25.938 to $49.00. The merger was approved by U.S. Air Group's shareholders on October 12, 2000.

Yet, shareholder approval alone would not be enough to ensure the success of the proposed merger. On February 7, 2001 the Chairman of U.S. Airways, Stephen Wolf,...

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