fiduciary litigation: church plans and employer stock

Theresa Gee, Miller & Chevalier Chartered
Karen Handorf, Cohen Milstein Sellers & Toll PLLC
William Kinney, Dowd, Bloch, Bennett, Cervone,
Auerbach & Yokich
Church Plan Litigation
Church Plan Exemption
 In 1974, ERISA defined a “church plan” as
those plans “established and maintained by
a church.” § 1002(33)(A).
1980 Amendment to Church Plan Exemption
 The church is deemed to be the employer of
employees of church-affiliated organizations.
ERISA § 1002(33)(C)(ii)
 Congress added new § 1002(33)(C)(i) to the
Church Plan definition:
 A plan established and maintained for its
employees (or their beneficiaries) by a church …
includes a plan maintained by an organization … if
such organization is controlled by or associated
with a church
Church Plan Litigation
 The primary issue is whether (1) the plan must
be established by a church or (2) the plan
may be maintained by an organization
controlled by or associated with a church but
was not established by a church.
 Government agencies have adopted the
second interpretation.
Church Plan Litigation
 In 1983, the IRS released a General Counsel Memorandum
concluding that, in light of the 1980 amendment, a plan
maintained by a church affiliated retirement committee is
a church plan regardless of whether it was established by a
church. IRS Gen. Couns. Mem. 39,007, 1983 WL 197946, at
*1-2 (July 1, 1983).
 Since then, and as recently as 2015, IRS has issued more
than 500 private letter rulings based on the interpretation
contained in the GC Memo.
 DOL and PBGC interpret the statute consistent with the IRS.
Church Plan Litigation
 A central issue has been what constitutes a
 A church carries out religious functions, such as the
“ministration of sacerdotal functions and the
conduct of religious worship.” IRS Gen. Couns.
Mem. 37,266, 1977 WL 46200, at *4-5 (Sept. 22,
 Religious orders operating hospitals or similar
institutions are not “churches.” IRS Gen. Couns.
Mem. 39,007, 1983 WL 197946, at *4 (July 1, 1983).
Church Plan Litigation
 Three circuit courts have disagreed with the IRS and
interpreted the church plan exemption to mean that
the plan must be established by a church:
 The1980 amendment “merely adds an alternative
meaning to one of subsection (33)(A)’s two elements—
[the] ‘maintain’ element—but does not change the fact
that a plan must be established by a church.” See
Stapleton v. Advocate Health Care Network, 817 F.3d
517, 523 (7th Cir. 2016); Kaplan v. St. Peter’s Healthcare
Sys., 810 F.3d175, 180 (3d Cir.2015); Rollins v. Dignity
Health, 830 F.3d 900 (9th Cir. 2016).
Church Plan Litigation
 The Supreme Court granted cert and will
decide the issue:
Whether ERISA’s church-plan exemption applies so
long as a pension plan is maintained by an otherwisequalifying church-affiliated organization, or whether
the exemption applies only if, in addition, a church
initially established the plan.
Church Plan Litigation
 The parties disagree on the fundamentals:
 Statutory construction
 Legislative history
 Deference to government’s interpretation
 First Amendment concerns
Church Plan Litigation
 Plaintiffs’ Position:
 Congress amended the church plan definition to allow church
plans to continue to provide benefits to agency employees and to
clarify that plans maintained by pension boards would qualify
 The legislative history makes clear that Congress wanted to avoid
the disruption and expense of requiring church agencies whose
employees were covered by the sunset provision to establish their
own plans or to cease providing benefits.
 There should be no deference to government’s interpretation
because the PLRs and AOs expressly state that they are not
 To give large healthcare systems a preference based on religion
when there is no need to avoid entanglement and third parties are
harmed violates the First Amendment
Church Plan Litigation
 Defendants’ Position:
 Congress intended that the 1980 amendment eliminate
the requirement that a plan be established by a church
if the plan is maintained by a principal purpose
 Deference should be given to long-standing
governmental interpretation on which the plans have
reasonably relied.
 Adopting the plaintiffs’ interpretation would allow the
government to determine what a church is and how it
should structure its mission, raising First Amendment
Church Plan Litigation
 Government’s Position:
 Amicus brief filed on behalf of IRS, DOL, PBGC
 Congress intended that the church plan exemption
cover plans established and maintained by a
principal purpose organization
 “Particular deference” should be accorded to
agency interpretations of “longstanding duration”
involving a highly detailed regulatory scheme
 Exempting religious principal purpose organizations
from ERISA is consistent with the First Amendment
Church Plan Litigation
 Implications if church plan exemption does
not apply
 Collective bargaining obligations
 Tax qualification and consequences for
participants and sponsors
Church Plan Litigation
 Open issues
 Article III Standing
 Whether the plan sponsor is an organization, “the
principal purpose or function of which is the
administration or funding of a plan or program for
the provision of retirement benefits.” 29 U.S.C. §
 The IRS,DOL, and PBGC have taken the position that a
religious organization may satisfy the “principal purpose”
requirement by creating a pension committee.
Employer Stock Cases
Employer Stock Litigation: Mostly
Dead, All Dead, Slightly Alive?
 Inigo Montoya: He's dead. He can't talk.
 Miracle Max: Whoo-hoo-hoo, look who knows
so much. It just so happens that your friend
here is only MOSTLY dead. There's a big
difference between mostly dead and all
dead. Mostly dead is slightly alive.
Fifth Third Bancorp v. Dudenhoeffer,
134 S.Ct. 2459 (2014)
 Dudenhoeffer imposed new pleading standards on lawsuits
that challenge the prudence of an ESOP fiduciary’s decision
to hold or buy company stock
 Suits based on public information: allegations must point to
“special circumstances” that the market price is unreliable
and the fiduciary’s reliance on the market price is imprudent
 Suits based on insider knowledge: allegations must identify
an alternative course of action, consistent with securities
laws, that fiduciaries could have taken that was not likely to
do more harm than good to the value of company stock
What are “Special Circumstances”?
 Dudenhoeffer: public information concerning the
riskiness of the company stock is not a “special
 Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56
(2d Cir. 2016): SEC orders prohibiting the shortselling of Lehman securities was not a special
 Coburn v. Evercore Trust Co., 2016 WL 7480257
(D.C. Cir. Dec. 30, 2016): special circumstances
must be pled where the allegations rest on
“outsized and unnecessary retirement savings risk”
Alternative Conduct Not Likely to Do More
Harm than Good: A Difficult Standard
 Amgen, Inc. v. Harris, 577 U.S. ___, 136 S.Ct. 759 (2016):
“The Ninth Circuit’s proposition that removing the Amgen
Common Stock Fund from the list of investment options
was an alternative action that could plausibly have
satisfied Fifth Third’s standards may be true. If so, the facts
and allegations supporting that proposition should
appear in the stockholders’ complaint.”
 Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56 (2d
Cir. 2016): “A prudent fiduciary could have concluded
that divesting Lehman stock, or simply holding it without
purchasing more, ‘would do more harm than good.’”
What Conduct is Consistent with Securities
Laws and Not Likely to Do More Harm than
 Whitley v. BP, PLC, 838 F.3d 523 (5th Cir. 2016)
 DOL and SEC file coordinated amicus briefs
 DOL position:
 Halt buying company stock
 Make corrective public disclosure
 SEC: securities laws require halting both buying
and selling stock and public filing with SEC to
disclose suspension of trading and explain
Alternative Conduct Not Likely to Do More
Harm than Good
 Whitley v. BP, PLC, 838 F.3d 523 (5th Cir. 2016)
 Fifth Circuit’s interpretation of Dudenhoeffer standard:
 “[T]he plaintiff bears the significant burden of proposing an
alternative course of action so clearly beneficial that a
prudent fiduciary could not conclude that it would be more
likely to harm the fund than to help it.”
 Plaintiffs failed to specifically and plausibly allege this with
regard to each proposed alternative.
 “[A] prudent fiduciary could very easily conclude that
[disclosure or trade freezes] would do more harm than good.”
 No mention of agency briefs.
Dudenhoeffer Standards Present a Difficult
 Plan participants have had difficulty satisfying the Supreme
Court’s pleading requirements for employer stock cases. For
 In re 2014 RadioShack ERISA Litig., No. 4:14-cv-00959-O (N.D. Tex. Sept. 29, 2016)
(dismissing plaintiffs’ insider information and public knowledge claims).
 Martone v. Whole Foods Mkt., Inc., No. 1:15-CV-877 RP, 2016 U.S. Dist. LEXIS 133703
(W.D. Tex. Sept. 28, 2016) (applying Whitley, dismissing plaintiff’s insider information
claims for failing to meet the more harm than good standard).
 Loeza v. Does, No. 16-222-cv, 2016 U.S. App. LEXIS 16628 (2d Cir. Sept. 8, 2016)
(affirming district court’s dismissal in case involving JPMorgan Chase Common
Stock Fund).
 Jander v. IBM, No. 15cv3781, 2016 U.S. Dist. LEXIS 120638 (S.D.N.Y. Sept. 7, 2016)
(dismissal with leave to amend within 30 days; amended comp. filed 10/21/16)
Sidestepping Dudenhoeffer?
 Gedek v. Perez, 66 F. Supp. 3d 368, 375 (W.D.N.Y.
 The district court refused to dismiss the complaint
 Dudenhoeffer did not “address the situation
presented by the plaintiffs’ factual allegations here,
i.e., allegations that a company’s downward path
was so obvious and unstoppable that, regardless of
whether the market was ‘correctly’ valuing the
stock, the fiduciaries should have halted or
disallowed further investment in it.”
Monitoring Employer Stock
 The D.C. Circuit drew a distinction between fiduciary
responsibilities in connection with employer stock
based on Dudenhoeffer and Tibble:
 “Dudenhoeffer primarily focuses on allegations of
misvaluation in the marketplace” whereas “Tibble
focuses on the prudence of holding particular
investments over time, requiring a fiduciary ‘to conduct
a regular review of its investment with the nature and
timing of the review contingent on the circumstances.’”
 Coburn v. Evercore Trust Co., 2016 WL 7480257 (D.C. Cir.
Dec. 30, 2016)
Monitoring Employer Stock
 The D.C. Circuit majority decision concluded it was
“conceivable . . . that publicly available information
that is insufficient to allege a plausible claim against a
fiduciary under Dudenhoeffer would nonetheless be
sufficient to survive a motion to dismiss under Tibble if the
fiduciary failed to ‘conduct a regular review’ of its
investment in light of that publicly available information
. . . . Coburn’s allegations – that Evercore ‘failed to
engage in proper monitoring of the . . . Stock Fund’ –
would perhaps be sufficient to survive a motion to
dismiss under Tibble.”
 Coburn v. Evercore Trust Co., 2016 WL 7480257 (D.C. Cir. Dec. 30,
Monitoring Employer Stock
 The concurrence in Coburn v. Evercore Trust Co. was
more bullish on the monitoring claim: “It seems plain
to me that [Coburn’s] complaint and her argument . .
. stated a cause of action under Tibble that easily
should have survived a motion to dismiss.” 2016 WL
7480257 (D.C. Cir. Dec. 30, 2016).
 See Moreno v. Deutsche Bank Americas Holding
Corp., 2016 WL 5957307 (S.D.N.Y.Oct. 13, 2016)
(denying motion to dismiss a failure to monitor claim);
Northstar Fin. Advisors v. Schwab Invs., 135 F. Supp. 3d
1059 (N.D. Cal. 2015) (same).
Does Dudenhoeffer Apply to Private ESOPs?
 Hill v. Hill Bros. Constr. Co., 2016 WL 1252983 (N.D. Miss. Mar.
28, 2016)
 District court applied Dudenhoeffer’s standards for inside
information claims in connection with privately held ESOP
stock and that “[t]he Plaintiffs must [still] plausibly allege
an alternative action that the Defendants could have
taken consistent with securities laws and that a prudent
fiduciary in the same circumstances would not have
viewed as more likely to harm the fund than help it.”
 Department of Labor position that Dudenhoeffer's specialcircumstances requirement is confined to publicly-traded
stock suggests that the “alternative conduct” requirement
also would not apply to private ESOPs.
2016 Settlements
 Dudenhoeffer
 Avon
 Amgen
 J.C. Penney
 Gedek
$6 Million
$6.25 Million
$2.75 Million
$4.5 Million
$9.7 Million