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Kopp v. Klein

United States Court of Appeals, Fifth Circuit

June 27, 2018

RANDY KOPP, Individually and on Behalf of All Others Similarly Situated, Plaintiff - Appellant
v.
SCOTT W. KLEIN; DONALD B. REED; STEPHEN L. ROBERTSON; THOMAS S. ROGERS; PAUL E. WEAVER; JOHN J. MUELLER; JERRY V. ELLIOT; SAMUEL D. JONES; KATHERINE J. HARLESS; EMPLOYEE BENEFITS COMMITTEE; GEORGIA SCAIFE; WILLIAM GIST; STEVEN GABERICH; CLIFFORD WILSON; BILLY MUNDY; ANDREW COTICCHIO; HUMAN RESOURCES COMMITTEE; JOHN DOES 1-20, Defendants - Appellees RANDY KOPP, Plaintiff - Appellant
v.
SCOTT W. KLEIN; DONALD B. REED; STEPHEN L. ROBERTSON; THOMAS S. ROGERS; PAUL E. WEAVER; JOHN J. MUELLER; JERRY V. ELLIOT; SAMUEL D. JONES; KATHERINE J. HARLESS; EMPLOYEE BENEFITS COMMITTEE; GEORGIA SCAIFE; JOHN DOES 1-20, Defendants - Appellees

          Appeal from the United States District Court for the Northern District of Texas

          Before HIGGINBOTHAM, JONES, and GRAVES, Circuit Judges.

          PER CURIAM

         Randy Kopp, a former employee of Idearc, Inc., filed this action on behalf of himself and a putative class of participants in, and beneficiaries of, Idearc's retirement benefits plan, asserting that the Defendants breached their duties of loyalty and prudence as ERISA fiduciaries "resulting in the depletion of millions of dollars of the retirement savings and anticipated retirement income of the Plan Participants."[1] The District Court dismissed Kopp's Third Amended Complaint for failure to state a claim. We affirm.

         I.

         Idearc was the directory operations arm of Verizon Communications, Inc. until it was spun off into a publicly-traded standalone company in November 2006. After the spinoff, Idearc offered its employees a retirement savings plan ("the Plan") governed by ERISA.[2] The Plan is a "defined contribution" or "individual account" plan, meaning that each participant has an individual account and benefits are based on the amounts allocated to each participant's account.[3] Participants could contribute to the Plan and invest their contributions in a variety of pre-selected investment options, including Idearc stock.[4]

         According to Kopp's Third Amended Complaint, Idearc experienced serious financial issues during the "Relevant Period" of November 2006 through March 2009. To start, Idearc incurred $9.115 billion of debt as a result of its spinoff from Verizon. Like most of the yellow pages industry, Idearc's revenues began to decline, and its average quarterly cash flows plummeted from $248 million in 2006 to $92 million in 2007. At the same time, Idearc found itself writing off more uncollectable debt. Between November 2006 and March 2009, the price of Idearc stock dropped precipitously. On October 24, 2008, the New York Stock Exchange notified Idearc that it was not in compliance with the exchange's continued listing criteria because "the average closing price of Idearc's common stock was less than $1.00 over a consecutive 30 trading-day period." On October 30, 2008, Idearc held a telephone conference where it acknowledged that non-payments had increased; Kopp claims this information "caused . . . Idearc's stock to drop 36%."

         Kopp alleges that the company's "financial instability and onerous debt obligations were public information from the beginning of the Relevant Period." Kopp further claims that the Defendants possessed insider information-including knowledge about Idearc's relaxation of its credit policies and increase in uncollectable receivables-that showed Idearc was in financial trouble. Kopp alleges that, armed with this knowledge, certain Defendants "took affirmative measures to alter Idearc's books to reflect a lower level of bad debt receivables."

         On November 17, 2008, Idearc's Employee Benefits Committee prohibited Plan participants from making future investments in Idearc stock. That same day, the Benefits Committee implemented an automatic liquidation of Idearc stock; however, it later agreed to cancel the scheduled liquidation. Kopp alleges that Defendants never held any meetings or conducted any discussions regarding the prudence of maintaining the Plan's investment in Idearc stock. The Benefits Committee acted through written consents in lieu of meetings. On March 31, 2009, Idearc filed for Chapter 11 bankruptcy. Idearc emerged from bankruptcy in December 2009.

         In 2009 and 2010, Kopp and another Plan participant, Bruce Fulmer, filed separate actions alleging that the Defendants violated their duties of loyalty and prudence as Plan fiduciaries.[5] The district court consolidated the two cases and later dismissed the consolidated complaint for failure to state a claim.[6] The court granted the plaintiffs leave to amend and later dismissed the amended complaint with prejudice.[7] Kopp appealed, and we affirmed.[8] Kopp then filed a petition for a writ of certiorari. While that petition was pending, the Supreme Court issued its opinion Fifth Third Bancorp v. Dudenhoeffer.[9]The Supreme Court subsequently granted Kopp's petition, vacated this court's judgment, and remanded for further consideration in light of Dudenhoeffer.[10]We in turn vacated the district court's judgment and remanded for further proceedings.[11]

         On remand, Kopp filed a second amended complaint, and the Defendants moved to dismiss for failure to state a claim. The district court granted that motion and gave Kopp leave to amend.[12] Kopp then filed the Third Amended Consolidated Complaint ("TAC"), which is the operative complaint in this appeal. As relevant here, the TAC alleges that the Defendants breached their fiduciary duties under ERISA by allowing employees to make and maintain investments in Idearc stock between November 2006 and March 2009. Defendants moved to dismiss, and the district court again granted that motion.[13] Kopp now appeals.

         II.

         "We review a district court's dismissal of a plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) de novo."[14] To avoid dismissal, a complaint must contain "sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face, '" meaning that "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."[15] A complaint must include more than mere "labels and conclusions" or "formulaic recitation[s] of the elements of a cause of action."[16]

         III.

         ERISA's primary purpose is to protect employee retirement plan participants and beneficiaries.[17] To that end, ERISA § 404 sets out distinct but interrelated duties on fiduciaries, including the duty of prudence and the duty of loyalty.[18] A fiduciary "who breaches any of the[se] responsibilities, obligations, or duties" becomes "personally liable" for "any losses to the plan resulting from each such breach."[19]

         Kopp alleges that Defendants breached their duties of prudence and loyalty in handling the Plan's investments in company stock. First, Kopp argues that the Defendants breached their duty of prudence by allowing Plan participants to continue to invest in Idearc stock despite public information about the company's financial instability and the Defendants' allegedly fraudulent activities. Second, Kopp contends that the Defendants breached their "procedural" duty of prudence by failing "even to consider taking action in response to the long-maturing deterioration of the financial condition of Idearc." Finally, Kopp alleges that the Defendants breached their duty of loyalty by "pursu[ing] a pattern of behavior that benefitted [Idearc] and Defendants, to the detriment of employees."

         A.

         Under ERISA § 404, a fiduciary must act "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."[20] Kopp contends that the Defendants breached this duty by allowing Plan participants to invest in Idearc stock at a time when publicly available information revealed it was not a prudent investment.

         In Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court provided guidance for courts evaluating this type of duty-of-prudence claim based on public information.[21] It held that

where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.[22]

         This rule is rooted in the "efficient market hypothesis," which assumes that the market price of a security incorporates relevant public information such that investors "have little hope of outperforming the market in the long run based solely on their analysis of publicly available information."[23] Thus, as a general rule, "a fiduciary usually 'is not imprudent to assume that a major stock market . . . provides the best estimate of the value of the stocks traded on it that is available to him.'"[24]

         The Court acknowledged an exception to this general rule where a plaintiff points to "a special circumstance affecting the reliability of the market price as an unbiased assessment of the security's value in light of all public information . . . that would make reliance on the market's valuation imprudent."[25] Put another way, "unless some 'special circumstance[]' makes the market price unreliable, 'ERISA fiduciaries . . . may, as a ...


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