Court Rejects 404(c) Defense in Certifying Stock Drop Suit Class

A U.S. District Court has certified as a class action a suit against YRC Worldwide that claims it offered company stock as a 401(k) investment option when it was no longer prudent.

In granting the motion to certify the class, U.S. District Judge John W. Lungstrum of the U.S. District Court for the District of Kansas rejected the defendants argument that the class did not satisfy the typicality requirement for certification because in the current case there was no claim of misleading statements or failure to disclose information, so prudence depends on the individual investment choices, strategies, and decisions of each participant in the plan. Defendants also contended that their assertion of a defense under the Employee Retirement Income Security Act (ERISA) § 404(c) requires an individualized analysis of causation with respect to each plan participant such that the claims of the named plaintiffs are not typical of the claims of the class members. 

Lungstrum said he joins “what appears to be every other court” in holding that the assertion of a § 404(c) defense does not defeat typicality (or otherwise bar certification), in large part because the defense is not unique to the claims of certain plaintiffs or class members but presumably would apply to all plan participants. 

As to the defendants first argument, Lungstrum said it doesn’t address the “common background” against which plan participants operate from the outset – the investment options available to plan participants. In light of this common background, “there might be plan losses in a defined-contribution setting, and at least some of those losses might be of the type that do not vary from participant to participant,” the opinion said. 

In addition, according to Lungstrum, losses that allegedly stem from a defendant’s failure to satisfy its fiduciary obligations in its offering of investment options are losses that would “operate across the plan.” Those losses, then, do not necessarily turn on whether the defendant, in connection with its offering of investment options, has made material misrepresentations or failed to disclose material facts about those options. 

The class is defined as all persons, excluding defendants and their immediate family members, who were participants in or beneficiaries of the plan, at any time between October 25, 2007, and the present and whose plan accounts included investments in YRCW common stock directly and/or through shares in the YRCW Company Stock Fund. 

Lungstrum previously denied the plaintiffs request for a jury trial in the case (see “Former YRC Employees Denied Jury in Stock Drop Case“).  The class certification opinion is here.