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Schweitzer v. The Investment Committee of Phillips 66 Savings Plan

United States District Court, S.D. Texas, Houston Division

May 9, 2018

JEFFERY SCHWEITZER, JONATHAN SAPP, RAUL RAMOS, and DONALD FOWLER, on behalf of the Phillips 66 Savings Plan and a class of all others similarly situated, Plaintiffs,



         Plaintiffs, Jeffery Schweitzer, Jonathan Sapp, Raul Ramos, and Donald Fowler, bring this action pursuant to Sections 404, 405, 409, and 502 of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1104, 1105, 1109, and 1132, on behalf of the Phillips 66 Savings Plan (the "Plan" or the "Phillips 66 Plan") and a class of similarly situated participants in the Plan whose retirement assets were invested in the "ConocoPhillips Stock Fund" and the "ConocoPhillips Leveraged Stock Fund" (together, the "ConocoPhillips Funds") through the Plan during the period from May 2, 2012, to the date of judgment in this action (the "Class Period")[1] against defendants, the Investment Committee of the Phillips 66 Savings Plan (the "Committee"), individual members of the Investment Committee, John Does 1 through 10, and Sam Farace, the Plan's Financial Administrator (collectively "Defendants"). Pending before the court is Defendants the Investment Committee of the Phillips 66 Savings Plan and Sam Farace's Motion to Dismiss Plaintiffs' Class Action Complaint with Brief in Support ("Defendants' Motion to Dismiss") (Docket Entry No. 15). For the reasons explained below, Defendants' Motion to Dismiss will be granted.

         I. Factual and Procedural Background[2]

         Phillips 66 Company, Inc. ("Phillips 66") was incorporated in Delaware in 2011 as a wholly owned subsidiary of ConocoPhillips Corporation ("ConocoPhillips"). On April 30, 2012, Phillips 66 was spun-off from ConocoPhillips and became a separate, independent company. As a result of the spinoff approximately 12, 000 former ConocoPhillips employees became Phillips 66 employees. Phillips 66 established the Plan on May 1, 2012, for Phillips 66 employees in connection with the spinoff. The Plan is an employee benefit plan within the meaning of ERISA Sections 3(3) and 3 (2) (A), 2 9 U.S.C. §§ 1002(3) and 1002(2) (A) . The Plan is a "defined contribution" or "individual account" plan that maintains individual accounts for each participant within the meaning of ERISA Section 3(34), 29 U.S.C. § 1002 (34).[3] Participants designate the manner in which amounts allocated to their accounts will be invested in an array of investment funds. ConocoPhillips employees are not eligible to participate in the Plan.

         Assets of Phillips 66 employees who were former ConocoPhillips employees that were held in participant accounts under the ConocoPhillips Savings Plan ("ConocoPhillips Plan") were transferred to the Phillips 66 Plan. Included among the assets transferred from the ConocoPhillips Plan to the Phillips 66 Plan were shares of ConocoPhillips stock. The shares were originally contributed by ConocoPhillips to an employee stock ownership plan ("ESOP") and held in the ConocoPhillips Funds of the ConocoPhillips Plan. After the spinoff the shares became part of the ConocoPhillips Funds in the Phillips 66 Plan. The ConocoPhillips Funds invested exclusively in ConocoPhillips stock. The ConocoPhillips Funds were closed to new investments after the spinoff, but participants of the Phillips 66 Plan could "exchange out of the funds at any time."[4]

         The Board of Directors of Phillips 66 appointed the Phillips 66 Savings Plan Committee. The Committee is a named fiduciary with respect to the general administration of the Plan having "all powers necessary or desirable to discharge the duties relating to the administration of the Plan as are delegated to it by the Plan and Trust Agreements. . . . "[5] Defendant Sam Farace is the Plan Financial Administrator who "shall be a fiduciary and shall have responsibility to manage and control the assets of the Plan in accordance with the terms of the Plan. . . . "[6]

         Plaintiffs allege that Defendants breached their fiduciary duties of diversification and prudence by retaining the ConocoPhillips Funds in the Plan after the spinoff because the ConocoPhillips stock no longer qualified as an "employer security" under ERISA. Defendants move to dismiss Plaintiffs' claims for failure to state a claim under Rule 12(b)(6).[7]

         II. Standard of Review

         Under Rule 8 of the Federal Rules of Civil Procedure a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). A Rule 12(b)(6) motion tests the formal sufficiency of the pleadings and is "appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim." Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001), cert, denied sub nom. Cloud v. United States, 122 S.Ct. 2665 (2002) . The court must accept the factual allegations of the complaint as true, view them in a light most favorable to the plaintiff, and draw all reasonable inferences in the plaintiff's favor. Id.

         To defeat a motion to dismiss pursuant to Rule 12(b) (6) a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007) . "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal. 129 S.Ct. 1937, 1949 (2009) (citing Twombly, 127 S.Ct. at 1965) . "The plausibility standard is not akin to a 'probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Twombly, 127 S.Ct. at 1965). "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief.'" Id. (quoting Twombly, 127 S.Ct. at 1966) .

         When considering a motion to dismiss, district courts are "limited to the complaint, any documents attached to the complaint, and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint." Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC. 594 F.3d 383, 387 (5th Cir. 2010) . "Federal courts are required to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), claims based on invalid legal theories, even though they may be otherwise well-pleaded." Flynn v. State Farm Fire and Casualty Insurance Co. (Texas), 605 F.Supp.2d 811, 820 (W.D. Tex. 2009) (citing Neitzke v. Williams, 109 S.Ct. 1827, 1832 (1989)) . "[W]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should ... be exposed at the point of minimum expenditure of time and money by the parties and the court." Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007) (quoting Twombly, 127 S.Ct. at 1964-65) (quotations omitted); see also Exxon Mobil Corp. v. FX Networks, LLC, 39 F.Supp.3d 868, 870-71 (S.D. Tex. 2014) .

         Claims asserted under ERISA are subject to the notice pleading standard of Federal Rule of Civil Procedure 8, which "substitute[d] the requirement ofv a short and plain statement of the claim showing that the pleader is entitled to relief for the technical formula, such as 'facts constituting a cause of action, ' which typified the preexisting codes." Heimann v. National Elevator Industry Pension Fund, 187 F.3d 493, 509 (5th Cir. 1999), overruled on other grounds, Arana v. Ochsner Health Plan, 338 F.3d 433 (5th Cir. 2003) (quoting Charles A. Wright and Arthur R. Miller, Federal Practice and Procedure, § 1202 at 68 (2d ed. 1990)). See also Swierkiewicz, 122 S.Ct. at 998 (Rule 8 is a simplified notice pleading standard that applies to all civil actions, with limited exceptions, i.e., those enumerated in Rule 9(b), and requires merely a statement that gives the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.).

         Ill. Applicable Law

         A. ERISA

         ERISA is a statutory scheme enacted by Congress to protect employees' rights to benefits while also encouraging employers to develop employee benefits programs. Martinez v. Schlumberger, Ltd., 338 F.3d 407, 411 (5th Cir. 2003) (citing Edward E. Bintz, Fiduciary Responsibility Under ERISA: Is There Ever a Fiduciary Duty to Disclose?, 54 U. Pitt. L. Rev. 979, 979 (1993)). "ERISA assigns to plan fiduciaries 'a number of detailed duties and responsibilities, which include the proper management, administration, and investment of [plan] assets, the maintenance of proper records, the disclosure of specific information, and the avoidance of conflicts of interest.'" Laborers National Pension Fund v. Northern Trust Quantitative Advisors, Inc., 173 F.3d 313, 317 (5th Cir.), cert, denied, 120 S.Ct. 406 (1999) (quoting Mertens v. Hewitt Associates, 113 S.Ct. 2063, 2066 (1993)).

         ERISA requires employee benefit plans to be established and maintained pursuant to a written instrument that provides for one or more "named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan." 29 U.S.C. § 1102(a)(1).

[T] he term "named fiduciary" means a fiduciary who is named in the plan instrument, or who, pursuant to a procedure specified in the plan, is identified as a fiduciary (A) by a person who is an employer or employee organization with respect to the plan or (B) by such an employer and such an employee organization acting jointly.

29 U.S.C. § 1102(a)(2). Persons or entities who are not named as fiduciaries in plan documents but who exercise discretionary authority and control that amounts to actual decision-making power are also plan fiduciaries. 29 U.S.C. § 1002(21)(A). "A fiduciary within the meaning of ERISA must be someone acting in the capacity of manager, administrator, or financial adviser to a 'plan.'" Pegram v. Herdrick, 120 S.Ct. 2143, 2151 (2000) (citing 29 U.S.C. § 1002 (21) (A) (i) - (iii)) . "'[A] person is a fiduciary only with respect to those aspects of the plan over which he exercises authority or control.'" Bannistor v. Ullman, 287 F.3d 394, 401 (5th Cir. 2002) (quoting Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 1459-60 (5th Cir. 1986), cert. denied, 107 S.Ct. 884 (1987)). "[F]iduciary status is to be determined by looking at the actual authority or power demonstrated, as well as the formal title and duties of the party at issue." Landry v. Air Line Pilots Ass'n Intern. AFL-CIO, 901 F.2d 404, 418 (5th Cir.), cert, denied. 111 S.Ct. 244 (1990) . The issue of fiduciary status is a mixed question of law and fact. Reich v. Lancaster, 55 F.3d 1034, 1044 (5th Cir. 1995) .

         B. Fiduciary Duties Under ERISA

(1) [A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.

29 U.S.C. § 1104(a) (1) .

         C. Remedies for Breach

         ERISA makes fiduciaries liable for breach of their duties and specifies the remedies available against them. Mertens, 113 S.Ct. at 2066 (citing 29 U.S.C. § 1109(a)). ERISA allows any plan participant, beneficiary, or fiduciary to bring a civil action "for appropriate relief under section 1109." Id. at 2066-67 (quoting 29 U.S.C. § 1132(a) (2)) .

         IV. Defendants' Motion to Dismiss

         Defendants do not dispute the Committee's status as a fiduciary of the Plan or Sam Farace's status as the Plan Administrator and named fiduciary within the meaning of ERISA, 29 U.S.C. §§ 1002(16) (A), (21) (A) and § 1102(a) (2) . Defendants argue that they are exempt from ERISA's diversification requirement because the ConocoPhillips shares retain their character as employer securities after the spinoff under ERISA Section 407(d) (1)[8] and that Plaintiffs have failed to plead facts to state a claim for breach of the duty of prudence and the duty to diversify.[9]

         A. Employer Security

         Under ERISA an eligible individual account plan ("EIAP") as defined in 29 U.S.C. § 1107(d)(3) that invests in "qualifying employer securities" exempts fiduciaries from the duty to diversify. ERISA § 404(a)(2), 29 U.S.C. S 1104(a)(2); Fifth Third Bancorp v. Dudenhoeffer. 134 S.Ct. 2459, 2467 (2014). Plaintiffs do not dispute that the Plan is an EIAP. An "employer security" is "a security issued by an employer of employees covered by the plan, or by an affiliate of such employer." ERISA § 407(d)(1), 29 U.S.C. § 1107(d)(1). Plaintiffs allege that the shares of ConocoPhillips stock no longer qualify as "employer security" after Phillips 66 separated from ConocoPhillips because ConocoPhillips no longer was the employer of employees covered by the plan or an affiliate of such employer.[10] See id. No. court has addressed whether, after a spinoff resulting in two independent companies, shares of stock that were "employer securities" before the spinoff retain that character after the spinoff.

         Defendants argue that because ConocoPhillips was the "employer" that "issued" the ConocoPhillips shares before the spinoff, the shares retain their status of "employer securities" after the spinoff.[11] Defendants cite Manor Care of America, Inc. v. Property & Casualty Insurance Guaranty Corp., 185 Fed.Appx. 308, 309, 311 (4th Cir. 2006) (per curium) in support of their argument that under the plain language of the statute, "whether a stock qualifies as an employer security is evaluated at the time of issuance."[12] In Manor Care the Fourth Circuit held that to be eligible for insurance coverage, "a policyholder must have been a Maryland resident when the policy was issued, not when the claim is submitted." 185 Fed.Appx. at 311. It reasoned that the phrase "issued to a resident . . . unmistakably tethers the residency requirement to a particular event, the issuance of the policy." Id. Defendants argue that "[w]hether a security qualifies as an employer security under ERISA is likewise 'tethered' to the time of issuance of the security."[13] Plaintiffs respond that Defendants "ignor[e] that neither ERISA's language nor its history supports [Defendants'] desired outcome."[14]

         The statute at issue in Manor Care did not involve ERISA. The meaning of the word "issue" "cannot be determined in isolation, but must be drawn from the context in which it is used." Henrikson v. Guzik, 249 F.3d 395, 398 (5th Cir. 2001) (citations omitted). "It is important to look to the structure and language of the statute as a whole." Id. The decision in Manor Care as to the meaning of "issued" in the context of Maryland insurance law has little relevance in deciding the issue before the court.

         Defendants also cite Tatum v. RJR Pension Investment Committee, 761 F.3d 346 (4th Cir. 2014), in support of their interpretation of 29 U.S.C. § 1107(d)(1) because it "illustrates what undoubtedly would have happened had Defendants forced divestment of participant holdings of the ConocoPhillips stock around the time of the spinoff."[15] In Tatum, RJR Nabisco spun off its tobacco business, RJR, from its food business, Nabisco. Tatum, 761 F.3d at 351. After the spinoff RJR forced the divestment of the Nabisco shares held by employees in their 401(k) accounts. Id. at 354. The plaintiff alleged that the plan fiduciaries breached their duties by eliminating Nabisco stock from the plan without conducting a thorough investigation. Id. at 355. The district court determined that "nothing in the law or regulations required that the Nabisco Funds be removed from the Plan." Tatum v. R.J. Reynolds Tobacco Co., 926 F.Supp.2d 648, 680 (M.D. North Carolina 2013) . The district court held that RJR breached its fiduciary duty of procedural prudence when it "decided to remove and sell Nabisco stock from the Plan without undertaking a proper investigation into the prudence of doing so" but that RJR met its burden of proving that its decision was objectively prudent. Id. at 651. The Fourth Circuit upheld the district court's ruling that RJR breached its duty of procedural prudence but remanded the action to determine whether RJR met its burden of proving that a prudent fiduciary would have made the same decision under the circuit's articulated standard. Tatum, 761 F.3d at 361, 368.

         Defendants argue that "[l]ikewise, at the time ConocoPhillips shares were issued to the participants, they were indisputably employer securities under ERISA, and nothing in the law or regulations should be read to require divestment of those shares simply due to a change in the nominal employer of the participants."[16] Defendants argue that under Plaintiffs' interpretation of "employer security, " "ERISA plans would, at a minimum, feel increased pressure to force participants to divest stock like the Nabisco stock, due to the fact that fiduciaries would no longer be exempt from ERISA's diversification requirements with respect to such holdings."[17] Plaintiffs respond that on remand the district court in Tatum reviewed extensive evidence and held that RJR fiduciaries acted prudently when they divested the plan's holdings in Nabisco stock.[18] Tatum v. R.J. Reynolds Tobacco Company, Civil Action No. 1:02-00373, 2016 WL 660902 at *23 (M.D. North Carolina, Feb. 18, 2016). Plaintiffs argue that "[t]his analysis would have been completely irrelevant if, following the spin-off, Nabisco stock was still an 'employer security' for the plan at issue."[19]

         The issue in Tatum was RJR's lack of investigation before forcing divestiture of the plan's shares in Nabisco. The Fourth Circuit did not determine whether the Nabisco shares retained their status as employer securities after the spinoff. Although Defendants argue that fiduciaries would "feel increased pressure to force participants to divest stock like the Nabisco stock, " the teaching of Tatum is that the fiduciaries would merely feel pressure to evaluate the prudence of keeping the legacy stock as an investment option -- just as they would evaluate the prudence of including other investments in a plan.

         Plaintiffs argue that Defendants' interpretation of "employer security" to include a prior employer's shares is incorrect because under ERISA an "employer" means "acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan."[20] 29 U.S.C. § 1002(5) (emphasis added). Plaintiffs argue that ConocoPhillips stock is not an "employer security" because "the only 'employer of employees covered by the Plan' is Phillips 66. ConocoPhillips stock was not issued by Phillips 66 or an affiliate of Phillips 66. "[21] The Plan names Phillips 66 as the "employer."[22] The Plan is an ESOP that "shall consist primarily of Company Stock purchased by the Trustees holding the assets."[23] The Plan defines "Company Stock" as shares "issued by Phillips 66, which shall constitute 'employer securities.'"[24] Although Article XXIII of the Plan is titled "Special Provisions for Former Participants in the Retirement Savings Plan of ConocoPhillips Company, "[25] it does not state that ConocoPhillips remained an employer, or that its shares were employer securities under the Phillips 66 Plan. The court concludes that the language of the Phillips 66 Plan supports Plaintiffs' argument that shares of ConocoPhillips stock were not employer securities of the Plan after the spinoff. See In re Ford, 590 F.Supp. at 903-04 (determining whether a Plan is an ESOP by reviewing the terms of the Plan).

         Plaintiffs also cite the Internal Revenue Code Private Letter Ruling 201427024 ("PLR") .[26] Because ConocoPhillips ceased to be the employer of the participants of the Plan after the spinoff, Plaintiffs argue that under the PLR " [ConocoPhillips] shares are not employer securities with respect to [the] Plan." I.R.S. PLR 201427024 (July 3, 2014). Defendants respond that the IRS "does not have regulatory or enforcement authority with respect to the relevant provisions of ERISA" and that the PLR evaluated securities under the Internal Revenue Code, not ERISA.[27] Although the IRS's Private Letter Ruling is not binding precedent, it is persuasive because it addresses the precise issue in question -- whether an employer security retains that character after a spinoff.

         Finally, Plaintiffs argue that ownership of ConocoPhillips stock does not promote the purpose of ERISA's "employer securities" exemption to "bring about stock ownership by all corporate employees."[28] Defendants respond that their interpretation is supported by ERISA's policies because it encourages employee ownership "without the possibility that employees could be forced to divest of securities merely because of a corporate transaction that later changed the identity of their employer."[29] ESOPs are designed to promote employee ownership of employer stock, and Congress supports ESOPs' use for that purpose. Fifth Third Bancorp, 134 S.Ct. at 2468-70. Companies use ESOPs to encourage employee participants to focus on company performance and share price appreciation since the participants ...

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