Class Action Against ESOP Sponsor, Trustees Advances

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

April 20 — Participants in an employee stock ownership plan can continue with their ERISA claims against the plan sponsor and trustees for allegedly breaching their fiduciary duties and engaging in self-dealing transactions.

In his April 18 order, Judge James V. Selna of the U.S. District Court for the Central District of California denied in part the sponsor's and trustees' motion to dismiss. Selna held that the participants sufficiently alleged that the sponsor and trustees were acting as Employee Retirement Income Security Act fiduciaries when they directly profited from business decisions that affected the value of the plan assets.

Earlier this year, Selna held that a financial services firm retained by the ESOP to provide a fairness opinion and stock valuation wasn't liable as an ERISA fiduciary.

In this previous ruling, Selna cited the Department of Labor's then-proposed fiduciary rule in support of his conclusion that the firm didn't act as an ERISA fiduciary because it didn't provide “investment advice” under the statute (40 PBD, 3/1/16). The rule was finalized earlier this month.

Fiduciary Breaches

Pamela Carter and other former workers of Fleet Card Fuels filed a class action against the company, its directors William Davies and Richard Davies, and other entities for allegedly selling company stock to the Fleet Card Fuels ESOP at “fraudulently inflated prices” and engaging in self-interested transactions to the detriment of the plan.

The class alleged that Fleet Card and the Davies breached their ERISA fiduciary duties when they entered into a $2 million settlement agreement that shifted the monetary obligations from one of the Davies's companies to Fleet Card, allegedly causing a 90 percent fall in the price of Fleet Card's stock.

The class further alleged that Fleet Card and the Davies entered into non-compete, consulting and lease agreements that adversely affected the value of the plan assets.

Fleet Card and the Davies moved to dismiss the proposed class's second amended complaint, arguing that when they committed these alleged breaches, they weren't acting as ERISA fiduciaries because these acts were business decisions taken in their capacities as an employer and officers and directors of Fleet Card.

“An individual that has both fiduciary and business functions is liable for breach of fiduciary duty under ERISA for business decisions affecting the value of plan assets when the individual could directly profit from business decisions,” the court said.

Here, the class sufficiently alleged that Fleet Card and the Davies entered into agreements and engaged in transactions for their own profit and to avoid liability, the court concluded.

The court declined to dismiss the class's fiduciary breach claim against Fleet Card and the Davies for allegedly failing to disclose to participants information regarding Fleet Card's financial condition. It also declined to dismiss the class's claims for co-fiduciary liability and violation of prohibited transactions, holding that the facts alleged in the complaint were sufficient to sustain these causes of action.

However, the court dismissed the class's California law claims for breach of fiduciary duty since they were preempted by ERISA.

Trujillo and Winnick LLP represented the participants. Sheppard Mullin Richter Hampton LLP represented the sponsor and trustees.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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