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 “church:” 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, 1977). 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 binding 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 organization. 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 concerns. 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. § 1002(33)(C)(i). The IRS,DOL, and PBGC have taken the position that a religious organization may satisfy the “principal purpose” requirement by creating a pension committee. Post-Dudenhoeffer 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 circumstance” 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 circumstance 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 Good? 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 reason 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 Challenge Plan participants have had difficulty satisfying the Supreme Court’s pleading requirements for employer stock cases. For example: 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. 2014) 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, 2016) 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
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