Summers v. State Street Bank & Trust Co., 05-4005.

• Decision Date: 28 June 2006
• Docket Number: No. 05-4317.,No. 05-4005.,05-4005.,05-4317.
• Citation: 453 F.3d 404
• Parties: Jerry SUMMERS, et al., individually and on behalf of all others similarly situated, Plaintiffs-Appellants, Cross-Appellees, v. STATE STREET BANK & TRUST COMPANY, Defendant-Appellee, Cross-Appellant, and UAL Corporation ESOP Committee, et al., Defendants, Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

453 F.3d 404

Jerry SUMMERS, et al., individually and on behalf of all others similarly situated, Plaintiffs-Appellants, Cross-Appellees, v. STATE STREET BANK & TRUST COMPANY, Defendant-Appellee, Cross-Appellant, and UAL Corporation ESOP Committee, et al., Defendants, Cross-Appellees.

No. 05-4005.

No. 05-4317.

United States Court of Appeals, Seventh Circuit.

Argued April 4, 2006.

Decided June 28, 2006.

Steve W. Berman (argued), Hagens, Berman, Sobol, Shapiro, Seattle, WA, for Plaintiffs-Appellants in 05-4005.

Steve W. Berman (argued), Hagens, Berman, Sobol, Shapiro, Seattle, WA, Elizabeth A. Fegan, Hagens, Berman, Sobol, Shapiro, Chicago, IL, for Plaintiffs-Appellants in 05-4317.

Rene E. Thorne (argued), Schiff Hardin LLP, Chicago, IL, for Defendants-Appellees UAL Corp. ESOP Committee, Marty Torres, Barry Wilson and Craig Musa in 05-4005.

Randall J. Sunshine (argued), Liner, Yankelevitz, Sunshine & Regenstreif, Los Angeles, CA, Ronald S. Kravitz (argued), Liner, Yankelevitz, Sunshine & Regenstreif, San Francisco, CA, for Defendant-Appellee State Street Bank and Trust.

Before POSNER, WOOD, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

At the end of 2002, when United Air Lines declared bankruptcy, its employees (both active and retired) owned more than half the airline's common stock through an ESOP (employee stock ownership plan). In re UAL Corp., 412 F.3d 775, 777 (7th Cir.2005). ESOPs are subject to ERISA, the federal pension law, 29 U.S.C. §§ 1104(a)(2), 1107(b), (d)(6); Armstrong v. LaSalle Bank National Ass'n, 446 F.3d 728, 730 (7th Cir.2006), and this is a suit under ERISA. The plaintiffs represent a class consisting of United's employees. The principal defendant is State Street Bank & Trust, a cofiduciary of the UAL Corporation ESOP Committee. The Committee—which has six members, all appointed by the unions that represent United's employees—is the only fiduciary named in the plan. 29 U.S.C. § 1102(a)(1). The plan directs the Committee "to establish an investment policy and objective for the Plan, except that it is understood that the Plan is designed to invest exclusively in Company Stock." The Committee accordingly established a policy and goal of owning United stock, and appointed State Street to be the plan's trustee, that is, to manage the ESOP's assets, initially consisting of that stock. § 1103(a). The class charges State Street with imprudent management—specifically with failing to sell United stock as its market price plummeted en route to the airline's bankruptcy— and is appealing from the grant of summary judgment to State Street, which has in turn cross-appealed on an unrelated issue that we discuss at the end of this opinion.

State Street is what is called a "directed" trustee, because the Committee (the fiduciary named in the plan), in accordance with the plan language that we have quoted, directed State Street to invest the ESOP's assets exclusively in stock of United Air Lines. Directed trustees are permitted by ERISA: if an ERISA plan "provides that the trustee or trustees are subject to the direction of a named fiduciary [in this case it is the UAL Corporation ESOP Committee] who is not a trustee,...the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to [ERISA]." 29 U.S.C. § 1103(a)(1); see Maniace v. Commerce Bank, N.A., 40 F.3d 264, 267 (8th Cir.1994); May Dept. Stores Co. v. Federal Ins. Co., 305 F.3d 597, 599 (7th Cir.2002); LaLonde v. Textron, Inc., 369 F.3d 1, 5 (1st Cir.2004). Like other ERISA trustees, a directed trustee has a statutory duty of prudence. § 1104(a)(1)(B). But as an ESOP fiduciary, he does not have the further (really, the included) duty to diversify the trust assets, § 1104(a)(1)(C)—we call it "included" in the duty of prudence because diversification is normally an essential element of prudent investing by a fiduciary. Armstrong v. LaSalle Bank National Ass'n, supra, 446 F.3d at 732. A directed trustee appointed under an ERISA plan does not have that duty because the very purpose of an ESOP is to invest in a single stock, that of the employer of the ESOP's participants.

We must first decide whether a directed trustee of an ESOP has any fiduciary duty with respect to the choice of trust assets, specifically any duty ever to replace the employer's stock—the normal holding of an ESOP—with some other security. The Maniace case that we cited, along with Herman v. NationsBank Trust Co., 126 F.3d 1354, 1361-62 (11th Cir.1997), says no, but FirsTier Bank, N.A. v. Zeller, 16 F.3d 907, 911 (8th Cir.1994), says yes, as does In re WorldCom, Inc. ERISA Litigation, 354 F.Supp.2d 423, 444-45, 449 (S.D.N.Y.2005). The split reflects a confusing statutory picture. One provision of ERISA states that the directed trustee cannot be liable for obeying the directions of the fiduciary named in the plan, § 1105(b)(3)(B), but other provisions impose liability on a fiduciary for breaches of fiduciary duty by a cofiduciary if he knows of the breach and takes no reasonable efforts to prevent it, or if by his own failure to exercise prudence he enables the breach. §§ 1105(a)(2), (3). And recall that the directed trustee "shall be subject to proper directions of [the named] fiduciary which are made in accordance with the terms of the plan and which are not contrary to [ERISA]." § 1103(a)(1) (emphasis added). An imprudent direction cannot be a proper direction since the trustee has an express statutory duty of prudence.

The tension among these provisions is reflected in a pamphlet published by the Labor Department's Employee Benefits Security Administration, which affirms both that the directed trustee has a duty of prudence and that he has no "direct obligation to determine the prudence of a transaction" entrusted by the plan to another fiduciary. "Fiduciary Responsibilities of Directed Trustees" (Field Assistance Bulletin 2004-03, Dec. 17, 2004). "[D]irect" is the critical word, inviting us to resolve the tension by ruling that the trustee can disobey the named fiduciary's directions when it is plain that they are imprudent. (The Labor Department's pamphlet, as we'll see, is actually consistent with this approach.) The trustee physically controls the trust assets; knowingly to invest them imprudently or let them remain invested imprudently is irresponsible behavior for a trustee, whose fundamental duty is to take as much care with the trust assets as he would take with his own property. He is "an agent who is required to treat his principal with utmost loyalty and care—treat him, indeed, as if the principal were himself." Pohl v. National Benefits Consultants, Inc., 956 F.2d 126, 128-29 (7th Cir.1992). And although the creator of an ordinary trust may be able to include a provision in the trust instrument excusing the trustee from complying with the prudent-man rule, John H. Langbein, "The Contractarian Basis of the Law of Trusts," 105 Yale L.J. 625, 659-60 (1995), ERISA as we have seen expressly imposes the duty of prudence on directed trustees and forbids them to comply with directions of the fiduciary named in the plan that are not "proper." That is why Kuper v. Iovenko, 66 F.3d 1447, 1457 (6th Cir.1995), holds that an ERISA plan "may not be interpreted to include a per se prohibition against diversifying an ESOP."

Which brings us to the particulars of this case. The plaintiffs argue that State Street violated its fiduciary duty by failing to sell United stock held by the ESOP until the eve of United's bankruptcy. State Street knew long before then, if the plaintiffs are to be believed, that the UAL Corporation ESOP Committee, the named fiduciary, had unreasonably refused to deviate from the plan and diversify the ESOP's holdings or take other measures to reduce the looming risk to the employee-shareholders. The following chart traces the ups and downs (mostly downs) of United's stock price between January 1, 2001, and December 9, 2002, when United declared bankruptcy:

NOTE: OPINION CONTAINING TABLE OR OTHER DATA THAT IS NOT VIEWABLE

The price of United stock, which on September 10, 2001, was already 25 percent below the price at the beginning of the year, dropped almost 50 percent more in the immediate aftermath of the September 11, 2001, terrorist attacks. The following month, United's CEO sent a gloomy letter to all its employees which said that the company was "in a struggle just to survive" and was not yet in "a financial position that will allow us to continue operating," that it was "hemorrhaging money," and unless the "bleeding [was] stopped...United will perish sometime next year." The price of United stock fell another 20 percent in the two days after the publication of the letter.

The price continued falling, though with occasional upticks, and the financial press began speculating on the possibility of bankruptcy. State Street observed the decline with anxiety, but not until August 15, 2002—by which time the price had fallen to $2.70—did it notify the UAL Corporation ESOP Committee that it might be imprudent for the ESOP to continue holding United stock. In response to this warning the Committee authorized State Street to sell the stock, and it began doing so on September 27. By that time, however, the price had fallen to $2.36. The plaintiffs argue that State Street should have started selling within 30 days after the October 2001 letter of United's then-CEO and that had it done so the ESOP would have avoided $540 million in losses.

The plaintiffs say the letter should have alerted State Street that United was going into the tank. That is wrong. After the market "read" the letter, it valued United stock at $15.05 a share. Had the market thought that United would be bankrupt by the end of 2002, it would not have priced its stock that high in October 2001, implying a market capitalization for the company of more than $800 million. A trustee is not...