Florida Bank Wins Dismissal of Stock Drop Suit

A federal court has dismissed claims that trustees and directors of Orion Bancorp’s Employee Stock Ownership Plan (ESOP) breached their fiduciary duties under the ERISA by continuing to offer company stock as a plan investment.

U.S. District Judge John E. Steele of the U.S. District Court for the Middle District of Florida first found that the plaintiffs had sufficiently exhausted their administrative remedies under the plan by sending a letter to Orion, the trustee defendants, and the director defendants demanding recovery of all plan losses incurred as a result of the breaches of fiduciary duties alleged in the Amended Complaint, to which they received no response. The Complaint was filed 99 days later.  

In dismissing the fiduciary breach claims against the trustee defendants, the court noted that in the 1995 case of Moench v. Robertson, the 3rd U.S. Circuit Court of Appeals affirmed the duty of prudence in ERISA, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an ESOP and Eligible Individual Account Plan (EIAP), and saw there a refutable presumption that a fiduciary that invested plan assets in employer stock acted consistently with ERISA (see “IMHO: Prudent Mien?“). The presumption can be rebutted by showing that the employer’s stock is declining precipitously, the trustees knew that the collapse of the company was imminent, and the trustees were conflicted on account of their dual status as trustees of the plan and directors of the company.  

Steele said the plaintiffs clearly failed to allege sufficient facts to support an obligation to diversify beginning January 1, 2006. Essentially all that is alleged for that time period is that the real estate market experienced a downturn beginning in 2005 and that this downturn affected the value of Orion’s stock. Stock fluctuations do not establish that Orion was on “the brink of collapse” and that no reasonable fiduciary would continue investing in Orion Stock, he stated.  

The opinion says unlike the situation in Moench, where insiders plainly acknowledged the company’s precarious condition and questioned the wisdom of continuing to invest in company stock, here, plaintiffs have alleged no facts which show that the trustee defendants actually believed or knew Orion would collapse.   

Steele also noted that plaintiffs were given an opportunity to diversify their personal contributions to the plan, unlike Moench which involved a “pure” ESOP where 100% of the employees’ investment was in employer stock. “Such an option makes the case for compelled diversification by the Trustee Defendants not nearly as persuasive as in Moench,” Steele wrote.  

The court also dismissed claims that Orion directors failed to monitor actions of the plan trustees, saying the plaintiffs have alleged no facts to support which director defendants, if any, were responsible for appointing or removing the trustee defendants. Plaintiffs also alleged no facts to support that each individually named director exercised authority or control with respect to the management or disposition of the Plan’s assets.  

However, the court found that the statements alleged by Orion CEO Jerry Williams about the condition of the company would be “material,” and that there are sufficient allegations that the statements are at least misleading to a reasonable participant. Steele allowed that claim against Williams to proceed.  

The case is Smith v. Williams, M.D. Fla., No. 2:10-cv-00339-JES-DNF.