11th Circuit Reaffirms Delta Air Lines Stock Drop Victory

Circuit court sees no need to change a previous ruling in a stock drop case, reconsidered in light of the Supreme Court’s recent Fifth Third Bancorp v. Dudenhoeffer decision. 

Few legal challenges seem to survive quite as long as lawsuits under the Employee Retirement Income Security Act (ERISA), and some “stock drop” cases have had truly impressive lifespans.

Consider the recently reaffirmed decision from the U.S. Circuit Court of Appeals in Dennis Smith v. Delta Airlines Inc., et al. A district court initially dismissed the challenge all the way back in March 2006, but the subsequent appeals have only just concluded, with the 11th Circuit ruling that the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer “does not alter our prior disposition of this case.”

When it first considered the case, the 11th Circuit endorsed a district court decision that found lead plaintiff Dennis Smith’s claims unreasonable. In classic stock drop suit fashion, Smith contended that the plan administrators should have known Delta’s turnaround efforts would fail to restore losses suffered in an employee stock owners plan (ESOP) between 2000 and 2004—meaning they should have dropped Delta stock as an investment option to prevent further participant losses. But, the court said, it was in reality not at all obvious at the time how Delta would perform, as underscored by market movements during the class period. “Because a reasonable fiduciary could have concluded that investments in Delta stock during the class period remained appropriate, Smith’s prudence claim fails,” the court wrote.

The decision was rooted in the highly deferential abuse of discretion standard, as set forth by the 11th Circuit in Lanfear v. Home Depot. The appellate court said the standard as set forth in Lanfear applies to the allegations set forth in the complaint against Delta. The court conceded it cannot be denied that during the period in question, Delta faced business challenges, but the plan documents required defendants to offer participants investments in Delta stock, and defendants continued to abide appropriately by those provisions.

NEXT: No Moench, No Problem 

As the 11th Circuit explains, soon thereafter, the Supreme Court decided Fifth Third v. Dudenhoeffer, and Smith filed a petition for rehearing, arguing that the 11th Circuit’s decision was inconsistent with Dudenhoeffer. A rehearing was denied, leading Smith to file a successful petition with the Supreme Court, vacating the judgement and demanding a second round of consideration by the appellate court.

Now the 11th Circuit has confirmed its decision again, determining the same ruling applies even in light of Dudenhoeffer, in which the high court ruled that fiduciaries responsible for employer stock funds “are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.”

In doing so, the high court held that company stock fiduciaries are not entitled to a “presumption of prudence.” Lower federal courts around the country had ruled that fiduciaries are protected from liability by that presumption (known as the Moench presumption based on the name of the 1995 case that first articulated it), unless the fiduciaries let the plan continue to hold or purchase employer stock when they knew or should have known of “dire circumstances,” such as the company’s impending collapse.

In reaffirming its decision, the 11th Circuit says Smith’s prudence claim “falls squarely within the class of claims the Supreme Court deems ‘implausible as a general rule.’”

“The crux of his prudence claim is that the Delta fiduciaries should have foreseen that Delta stock would continue to decline,” the court explains. “There is no allegation in the amended complaint that the fiduciaries had material inside information about Delta’s financial condition that was not disclosed to the market, nor is there any allegation of a ‘special circumstance [that rendered] reliance on the market price imprudent,’ such as fraud, improper accounting, illegal conduct or other actions that would have caused Delta stock to trade at an artificially inflated price.”

The full text of the reaffirmed decision is here