ESOP Legal News, June 2012 - Volume 1, Number 3

INSIDE THIS ISSUE:

District court upholds prudence claim, dismisses communications and monitoring claims brought by participants in Community National Bank Corporation Employee Stock Ownership Plan; Eleventh Circuit adopts presumption of prudence, upholds district court judgment dismissing claims brought by participants in Home Depot, Inc. Employee Stock Ownership Plan; Second Circuit upholds district court judgment dismissing claims brought by participants in JP Morgan 401(k) Savings Plan; District court applies presumption of prudence at pleadings stage to dismiss claims alleging breach of fiduciary duty brought by participants in Sovereign Bankcorp, Inc. Employee Stock Ownership Plan; Department of Labor files complaint alleging breaches of fiduciary duties and prohibited transactions; Assistant Secretary of Department of Labor lists ESOPs as audit priority, discusses re-proposal of regulation redefining term "Fiduciary"; Pro-ESOP Legislation Garners Support.

IN THE COURTS

District Court Upholds Prudence Claim, Dismisses Communications and Monitoring Claims Brought by Participants in Community National Bank Corporation Employee Stock Ownership Plan

On May 10, 2012, the United States District Court for the Middle District of Florida issued an Opinion granting in part and denying in part a motion to dismiss claims brought by participants in the Community National Bank Corporation Employee Stock Ownership Plan against members of the board of directors and officers of the sponsor corporation.

The court upheld the participants' claim that the defendants failed to prudently and loyally manage the plan. The participants alleged that the defendants knew that employer securities were no longer a suitable and appropriate investment for the plan, and was an unsafe and unsound investment in light of the corporation's improper business and banking practices. The participants further alleged that the defendants continued to offer corporation stock as an investment option despite their knowledge. The defendants contended that ERISA does not require a fiduciary to diversify investments in employer securities in order to satisfy its duty of prudence. The court disagreed and cited the Eleventh Circuit's recent ruling in Lanfear v. Home Depot, Inc., ___ F.3d ___, 2012 WL 1580614 (11th Cir. May 8, 2012) for the proposition that a fiduciary abuses its discretion by acting in compliance with the directions of the plan when the fiduciary could not have reasonably believed that the settlor would have intended for him to do so under the circumstances.

The court dismissed without prejudice the participants' claim that the defendants breached their duty to inform the participants by failing to provide complete and accurate information regarding the corporation and its stock, and by conveying inaccurate information regarding the soundness of corporation stock and the prudence of investing in it. The court found the participants asserted no specific facts to support their claim, and found only general allegations concerning the defendants' communications.

The court dismissed without prejudice the participants' claim that the defendants breached their duty to monitor by failing to (i) prevent the plan's sizeable losses arising as a result of its investment in corporation stock, (ii) to ensure that other fiduciaries appreciated the true extent of the corporation's highly...