Citing a recent U.S. Supreme Court ruling, the Fifth Circuit on Thursday revived proposed class action claims against Yellow Pages directories publisher Idearc Inc. brought by retirement plan participants who say the company had to stop offering Idearc stock as an investment option while it approached bankruptcy.
The appeals panel had previously affirmed a district court’s dismissal of the suit, but on Aug. 4 the U.S. Supreme Court vacated that ruling and remanded the case back to the Fifth Circuit for further considerations consistent with the high court’s June decision in Fifth Third Bancorp v. Dudenhoeffer.
The Fifth Third ruling said workers claiming that their employer's stock was too risky of an investment for their retirement plan don't have to overcome a special "presumption of prudence,” and the Fifth Circuit held that that required it to vacate the district court’s dismissal and remand the case for further proceedings.
The plan participants filed suit in 2009 under the Employee Retirement Income Security Act, accusing Idearc officers, including CEO Scott W. Klein, board Chairman John J. Mueller and Chief Financial Officer Samuel D. Jones, of breaching fiduciary duty by failing to divest company stock and stop offering it as an investment option.
The two retirement plan members that filed the suit said millions of dollars were lost from investments in Idearc stock as the company faced dwindling revenues and debt that eventually led to bankruptcy in March 2009.
U.S. District Judge David C. Godbey of the U.S. District Court for the Northern District of Texas was the first to dismiss the case.
Judge Godbey found that none of the company officers who are fiduciaries of the plan could amend it to remove Idearc stock as an investment option.
"The defendants had no discretion over whether to offer Idearc stock and consequently no fiduciary duty to divest or not offer the stock," Judge Godbey wrote.
Following the Supreme Court vacating the Fifth Circuit’s earlier dismissal of the case, attorneys for the plaintiffs argued the case should be remanded for further proceedings in light of Fifth Third Bancorp.
“The panel’s decision was based in large part on its agreement with the district court that the fiduciaries of the plan were entitled to a presumption of prudence with respect to the inclusion of the company stock in the plan, which could only be overcome by allegations that the fiduciaries knew or should have known the viability of the company was threatened or the employer’s stock was in danger of becoming worthless,” the plaintiffs’ motion to remand states.
The defendants had opposed the remand, arguing that a motion to dismiss is an appropriate mechanism for “weeding out meritless claims” alleging the breach of an ERISA fiduciary duty.
“That is precisely what happened here: After plenary consideration, the district court granted such a motion, and this court affirmed,” the defendants' motion says.
Instead of remanding the case, the defendants argued, the panel should order the parties to submit 20-page briefs on the impact of the Fifth Third Bancorp ruling on the current case.
“Because an argument that a complaint fails to satisfy the pleading standard is purely legal in nature, there is no need for the district court to address any factual allegations,” the defendants' motion states.
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.
Attorneys for the parties did not immediately respond to a request from Law360 for comment.
The plaintiff-appellant is represented by Thomas McKenna and Gregory Egleston of Gainey McKenna & Egleston and by attorney Roger Claxton.
The defendants-appellees are represented by Dee Kelly Jr. and Marcus Mungioli of Kelly Hart & Hallman LLP, and Jay Lefkowitz, Andrew Horne, David Flugman, Christopher Landau and James Gillespie of Kirkland & Ellis LLP
The case is Randy Kopp v. Scott W. Klein, et al., case number 12-10416, in the U.S. Court of Appeals for the Fifth Circuit.
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