Compliance September 28, 2011

Lack of Document Distribution Lands Employer in Hot Water

A federal appellate court has determined that employer Houston Poly Bag I, Ltd., failed to act in a participant’s best interest by withholding profit sharing plan documents and rollover information.
Reported by

The 5th U.S. Circuit Court of Appeals said it was troubled by the lack of evidence on the record that Houston Poly ever provided Kenneth Kujanek with the controlling documents for its profit-sharing plan, as required under ERISA. Kujanek maintained throughout litigation that during his employment with Houston Poly, he never received the Summary Plan Description, Adoption Agreement, or Defined Contribution Prototype Plan and Trust.   

Houston Poly argued that it provided the requisite plan information to Kujanek in the summary allocation report it issues to plan participants every year. The summary allocation report lists the participant’s beginning balance, contribution, and ending balance for the year on a spreadsheet, and notifies participants that they have a right to examine documents such as the full annual report, accountant’s report, and a list of the plan’s assets and liabilities. According to the opinion, the report contains no information about how a participant may elect to receive a rollover distribution, nor does it inform the participant of his rights under the profit-sharing plan.   

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A district court had awarded Kujanek statutory penalties starting from a 2008 request for documents during the discovery phase of prior litigation, but the 5th Circuit remanded the case back to the district court for additional findings on whether Houston Poly failed to furnish Kujanek with the requisite documents under ERISA § 104(b)(1), and if so, whether that omission serves as a basis for statutory penalties.  

The district court awarded Kujanek $183,881.88 in damages “to restore plan losses”; $25,025 in statutory penalties; and attorney’s fees in the amount of $60,030. The appellate court affirmed the award of damages and attorney’s fees. 

In September 2007, Kujanek resigned from Houston Poly after 17 years with the company as a sales representative. At the end of 2007, Kujanek’s profit-sharing account with Houston Poly had vested benefits totaling $490,198.78. Employees were required under company policy to wait at least one year from the date of termination before they could obtain a distribution of their account benefits.   

Two months after Kujanek resigned, Houston Poly sued Kujanek in state court for breach of employment contract, breach of fiduciary duty to the company, and tortious interference with business relations. In April 2008, during the discovery phase of the state court litigation, Kujanek made a production request on Houston Poly for all documents describing the terms and conditions of Houston Poly’s contribution to its profit-sharing plan, and documents describing the eligibility requirements for employees to receive benefits from the plan. Houston Poly objected to the request on relevancy grounds and refused to provide the documents.   

After several requests for his profit sharing distribution and a complete set of the plan documents, in April 2009, Houston Poly responded by sending Kujanek a complete copy of the plan documents and a rollover distribution of $306,000.  

The opinion is at http://www.ca5.uscourts.gov/opinions/pub/10/10-20664-CV0.wpd.pdf.
Compliance September 28, 2011

Florida Bank Wins Dismissal of Stock Drop Suit

A federal court has dismissed claims that trustees and directors of Orion Bancorp’s Employee Stock Ownership Plan (ESOP) breached their fiduciary duties under the ERISA by continuing to offer company stock as a plan investment.
Reported by

U.S. District Judge John E. Steele of the U.S. District Court for the Middle District of Florida first found that the plaintiffs had sufficiently exhausted their administrative remedies under the plan by sending a letter to Orion, the trustee defendants, and the director defendants demanding recovery of all plan losses incurred as a result of the breaches of fiduciary duties alleged in the Amended Complaint, to which they received no response. The Complaint was filed 99 days later.  

In dismissing the fiduciary breach claims against the trustee defendants, the court noted that in the 1995 case of Moench v. Robertson, the 3rd U.S. Circuit Court of Appeals affirmed the duty of prudence in ERISA, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an ESOP and Eligible Individual Account Plan (EIAP), and saw there a refutable presumption that a fiduciary that invested plan assets in employer stock acted consistently with ERISA (see “IMHO: Prudent Mien?“). The presumption can be rebutted by showing that the employer’s stock is declining precipitously, the trustees knew that the collapse of the company was imminent, and the trustees were conflicted on account of their dual status as trustees of the plan and directors of the company.  

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Steele said the plaintiffs clearly failed to allege sufficient facts to support an obligation to diversify beginning January 1, 2006. Essentially all that is alleged for that time period is that the real estate market experienced a downturn beginning in 2005 and that this downturn affected the value of Orion’s stock. Stock fluctuations do not establish that Orion was on “the brink of collapse” and that no reasonable fiduciary would continue investing in Orion Stock, he stated.  

The opinion says unlike the situation in Moench, where insiders plainly acknowledged the company’s precarious condition and questioned the wisdom of continuing to invest in company stock, here, plaintiffs have alleged no facts which show that the trustee defendants actually believed or knew Orion would collapse.   

Steele also noted that plaintiffs were given an opportunity to diversify their personal contributions to the plan, unlike Moench which involved a “pure” ESOP where 100% of the employees’ investment was in employer stock. “Such an option makes the case for compelled diversification by the Trustee Defendants not nearly as persuasive as in Moench,” Steele wrote.  

The court also dismissed claims that Orion directors failed to monitor actions of the plan trustees, saying the plaintiffs have alleged no facts to support which director defendants, if any, were responsible for appointing or removing the trustee defendants. Plaintiffs also alleged no facts to support that each individually named director exercised authority or control with respect to the management or disposition of the Plan’s assets.  

However, the court found that the statements alleged by Orion CEO Jerry Williams about the condition of the company would be “material,” and that there are sufficient allegations that the statements are at least misleading to a reasonable participant. Steele allowed that claim against Williams to proceed.  

The case is Smith v. Williams, M.D. Fla., No. 2:10-cv-00339-JES-DNF.

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