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Peabody v. Davis, No. 09-3428 (7th Cir. Apr. 12, 2011); George v. Kraft Foods Global, Inc., No. 10-1469 (7th Cir. Apr. 11, 2011)

Feel that your retirement plan is ripping you off, either wholesale or nickels at a time? Two back-to-back decisions from the Seventh Circuit involving breach of fiduciary duty claims under the Employee Retirement Income Security Act (ERISA) hold that there might be a remedy under Section 502(a)(2) of that statute.

Peabody v. Davis, No. 09-3428 (7th Cir. Apr. 12, 2011): Plaintiff Peabody alleged that he was induced to rollover his personal IRA into the company's Savings Plan, an Eligible Individual Account Plan (EIAP) within the meaning of ERISA § 407(d)(3), that was allowed to hold qualifying employer securities. The resulting transaction left the employee's retirement account 98% invested in Rock Island Corporation (RIC) stock, a concentration that proved far out-of-proportion to other employees' accounts (which were 5% RIC stock or less) and ultimately disastrous when the company's fortunes declined.

When Peabody left RIC employment, he entered into a transaction where RIC acquired his stock, with a promise that it would pay him $350/share (a total of $292,250) in one year's time. But RIC ultimately defaulted on the loan. Peabody sued the plan trustees, RIC and RIC's insurance companies (the latter two were ultimately dismissed). At a bench trial, the district court found liability against the trustees for breach of the fiduciary duty of prudence under ERISA § 404(a)(1)(B), and awarded plaintiff the loss to the account of $506,601.82 (based on the estimated value of the shares and prejudgment interest).

The Seventh Circuit affirms the liability finding. In an opinion signed by Judge Cudahy, the court upholds the breach of fiduciary duty judgment based on the trustees' failure to divest from company stock in the face of a foreseeable collapse in the company's fortunes, i.e., "a widely-known and permanent change in the regulatory environment had undermined RIC's core business model, and consequently the company stock became an imprudent investment."

The panel nevertheless vacates and remands the remedy, holding that the district court's reliance on the $500/share valuation was not "solidly tied to the breach of fiduciary duty" and gave the employee a windfall. It holds that regardless of the breach, it would have been prudent for some portion of the RIC stock to remain in the account: "because of the uncertainties involved, prudence did not require that the account be totally drained of the arguably imprudent RIC stock investment immediately, even though that investment eventually became worthless." It also holds that the district court consider on remand addition al relief requested by Peabody, i.e., to retain jurisdiction during the remedial stage of the case.

George v. Kraft Foods Global, Inc., No. 10-1469 (7th Cir. Apr. 11, 2011): Defendant Kraft maintained a very large 401(k) plan (during the relevant period, 37,000 to 55,000 participants) that included seven to nine funds, with two company stock options. It was administered by a recordkeeper, Hewitt Associates ("Hewitt"), and an administrator, State Street Bank & Trust Company.

In relevant part, the plaintiff class alleged that the fiduciaries breached their duty of prudence under ERISA in two respects:

(1) That by choosing to operate the company stock funds (CSFs) on a unitized basis ("meaning that participants own units of the fund rather than shares of the relevant company stock"), the CSFs lagged the actual performance of the company stock to the tune of $83.7 million over the class period. The plaintiffs alleged that the fiduciaries were minimally obliged to engage in a reasoned weighing of the cost options on behalf of the participants, but defaulted on this obligation. 

(2) That they likewise failed to assess whether Hewitt's fees were reasonable, either by bargaining over contract renewals, or by soliciting competitive bids.

The district court granted summary judgment on these claims, but a 2-1 Seventh Circuit panel reverses in an opinion signed by visiting U.S. District Court Judge Adelman, joined by Judge Rovner. (There was a third claim against State Street Bank for excessive compensation. Summary judgment was granted on that claim as well, and the panel unanimously affirms). In particular, the panel holds that there may be a remedy under section 502(a)(2) for the alleged losses to the CSFs:

"If plaintiffs prove that defendants should have made a decision with respect to [unitized funds] but did not, then plaintiffs would likely be entitled to an injunction requiring the fiduciaries to consider the proposed solutions to these issues and come to a decision. . . . Plaintiffs might also seek an order compelling the fiduciaries to 'make good to [the] plan' any losses caused by their breach of fiduciary duty."

Dissenting in part, meanwhile, Judge Cudahy would have affirmed the district court entirely, holding that the fiduciaries' discretionary, administrative decisions were reasonable as a matter of law.

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