Seventh Circuit Interprets ERISA’s Statute of Limitations for Fiduciary Breach: Fish v. GreatBanc Trust Company

by Williams Mullen
Contact

The Seventh Circuit Court of Appeals in Fish v. GreatBanc Trust Company, No. 12-3330 (7th Cir. May 14, 2014), has issued a decision that clarifies the rules for suits for fiduciary breach under ERISA. The decision primarily concerned whether the plaintiffs’ case was time-barred by ERISA’s statute of limitations for breaches of fiduciary duty. The Seventh Circuit allowed the case to proceed on the basis that the clock did not begin to run until the plaintiffs had actual knowledge of facts showing the alleged breach. The way in which the court reached that conclusion is worth careful consideration.
 
The Background. The plaintiffs were employees of The Antioch Company (“Antioch”), a relatively small, closely held company which sold scrapbooks and related accessories. Antioch sponsored an Employee Stock Ownership Plan (“Plan”). Under a 2003 proposal from the family members who held most of the stock, the Plan would decline a tender offer of $850 per share, leaving the Plan as sole shareholder. To buy the proffered stock, Antioch would be required to borrow most of the money needed to pay more than $150 million for the stock. As fiduciaries of the Plan as well as the primary beneficiaries of the buy-out, the family members were expected to remain in control of the company.
 
The proposed buy-out was a “prohibited transaction” under ERISA § 406, which prohibits transactions between plans and fiduciaries unless, pursuant to ERISA § 408, the purchase is for fair market value as determined in good faith by the fiduciary. In this case, the individual owners of Antioch were also fiduciaries of the Plan, thus triggering the prohibited transaction rules.
 
Accordingly, Antioch designated GreatBanc Trust Company (“GreatBanc”) as the Plan trustee on a temporary basis to evaluate the fairness of the proposed buy-out to the Plan. GreatBanc hired a financial advisor to assist with valuation and assessment of the transaction. That firm initially described the proposed transaction as “the most aggressive deal structure in the history of ESOPs,” which resulted in a threat by the Antioch owners to terminate both GreatBanc and the advisor firm. The transaction was then modified, but in ways that contractually increased the risk to Antioch and the Plan. GreatBanc and the advisor firm ultimately approved the transaction under the market value standard in late 2003.
 
Within a year of the closing of the buy-out transaction, seventy Antioch employees under the age of fifty resigned and sold their shares. Plaintiffs alleged that these sales of stock depleted Antioch’s cash reserves and “set off a downward cycle as liabilities increased and revenues decreased, forcing Antioch into bankruptcy by 2008.” Antioch’s shares and the Plan became worthless, representing a total loss of $60 million. Plaintiffs alleged that the cause of such large numbers of employees resigning and cashing out was an overly generous share price which benefited the prior owners as well as the employees that exercised the option to buy, to the detriment of the Plan and Antioch. Plaintiffs filed suit in 2009 for fiduciary breach.

Defendants GreatBanc, Antioch and the prior individual fiduciaries of the Plan defended on the basis of ERISA’s statute of limitations and statute of repose for claims of fiduciary breach (ERISA § 413). Defendants contended that the ERISA suit was filed more than six years from the date of the alleged actions giving rise to the claims in 2003, and more than three years from the date of Plaintiffs’ actual knowledge of the relevant facts.
 
The Court’s Ruling. The Seventh Circuit held that an ERISA plaintiff does not have actual knowledge of the basis for a claim of fiduciary breach until the plaintiff has knowledge of “all material facts”. This does not necessarily require “knowledge of every detail or knowledge of illegality.” Under that standard, the three-year statute of limitations did not begin to run until Plaintiffs had knowledge of facts suggesting that the fiduciaries failed to uphold their duty under ERISA § 408 to evaluate the transaction in good faith according to the market value standard. In analyzing the nature of Plaintiffs’ claims, the court observed that “[a]n independent appraisal [by the financial advisor] is not a magic wand that fiduciaries may simply wave over a transaction to ensure that their responsibilities are fulfilled.” Thus, whether GreatBanc had properly approved the transaction depended on knowledge of whether its process for evaluating the fairness of the transaction was adequate. The court held that Plaintiffs did not acquire knowledge of facts allegedly showing an improper approval until less than three years before filing suit. ERISA’s statute of limitations therefore did not bar their claims, and the case was remanded to the district court for further proceedings.
 
The Significant Lessons: ERISA’s statute of limitations for claims of fiduciary breach does not begin to run until all material facts are known to the plaintiff. In a situation such as Fish, the statute of limitations begins to run only when the material facts of both the self-dealing violation and the failure to abide by the market value standard under ERISA § 408 become actually known to the plan participants.
 
Fish also provides a useful analysis of a fiduciary’s obligations in the buy-out context. The facts starting the statute of limitations period pertained to the exception under ERISA § 408, which provides that an otherwise prohibited transaction between a plan and the fiduciaries is acceptable if it is based on “the fair market value of the asset as determined in good faith by the fiduciary or fiduciaries,” not simply knowledge of the prohibited transaction itself. The court declined to hold as a matter of law that the statute of limitations began to run once large numbers of employees began electing to sell shares for the high stock price during the summer of 2004. Such a number of sales, by themselves, did not necessarily put Plaintiffs on notice of a potential fiduciary breach claim. The Seventh Circuit also emphasized that mere reliance on an independent fairness opinion does not, by itself, necessarily satisfy the fiduciary’s obligations.

 

Written by:

Williams Mullen
Contact
more
less

Williams Mullen on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.