The Fifth Circuit on Tuesday affirmed the dismissal of an Employee Retirement Income Security Act class action brought by participants in now-defunct Idearc Inc.’s management plan, who accused the company’s board members and officers of breaching fiduciary duty by failing to divest company stock and to stop offering it as an investment option.
A Texas federal judge first dismissed the lawsuit in 2011, finding that the plan's trust agreement mandated that company stock be an option, but allowed the plaintiffs leave to file an amended complaint. In 2012, U.S. District Judge David C. Godbey permanently tossed the plaintiffs’ amended complaint for failure to state a claim, after which the plaintiffs appealed.
But a three-judge panel for the Fifth Circuit on Tuesday sided with the district court, finding that lead plaintiff Randy Kopp had failed to state a claim for the various breaches of fiduciary duty.
“Kopp’s allegation that the Idearc defendants had a duty, based on their knowledge of inside information, not only to cease permitting investments in Idearc stock, but also to divest Idearc stock is untenable under securities laws,” U.S. Circuit Judge Emilio M. Garza wrote in the published opinion. “A duty to divest employer stock, arising from knowledge of inside information, might amount to a duty to violate securities laws.”
Retirement plan participants filed suit in 2009, accusing the officers of the Yellow Pages publisher of offering company stock as a viable investment option while using misleading statements about the company's fiscal health in plan descriptions.
The plan participants sought to pursue ERISA claims against Idearc officers including CEO Scott W. Klein, board chairman John J. Mueller and Chief Financial Officer Samuel D. Jones.
The two retirement plan members who filed the suit said millions of dollars had been lost from investments in Idearc stock as the company faced dwindling revenues and debt that eventually led to bankruptcy in March 2009.
In March 2011, Judge Godbey dismissed the claims without prejudice, saying the company didn't have to stop offering Idearc stock as an investment option while it approached bankruptcy. One year later, Judge Godbey dismissed the complaint permanently, holding that three causes of action failed to state a claim and that the remainder were considered derivative and should be dismissed because of a failure to allege any underlying breach of fiduciary duty.
The Fifth Circuit affirmed that decision Tuesday.
The plan participants filed the suit against Idearc officers, several directors and an employee benefits committee in December 2009, nine months after Idearc filed for Chapter 11 bankruptcy amid a loss of advertising revenue from its base of small and local businesses that floundered in the recession. Idearc also listed more than $9 billion in debt, incurred during its spinoff from Verizon Communications Inc. in 2006.
James P. Gillespie of Kirkland & Ellis LLP, counsel to the defendants, told Law360 on Tuesday that the court had struck the right balance.
"The court's opinion correctly recognized the difficult circumstances where a company encounters difficulties of the recent severe economic downturn and struck an appropriate balance," Gillespie said.
A representative for Kopp didn't immediately respond to a request for comments.
U.S. Circuit Judges E. Grady Jolly, Emilio M. Garza and Priscilla Owen joined in the decision.
Kopp is represented by Thomas J. McKenna of Gainey McKenna & Egleston and by Roger F. Claxton.
Defendants are represented by Chris Landau, Jay P. Lefkowitz, David Scott Flugman, James Philip Gillespie and Andrew George Horne of Kirkland & Ellis LLP.
The case is Randy Kopp et al. v. Scott W. Klein et al., case number 12-10416, in the United States Court of Appeals for the Fifth Circuit.
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