Opinion ID: 203648
Heading Depth: 2
Heading Rank: 2

Heading: The Case on Appeal

Text: On appeal appellants present us with two general complaints regarding the decision of the district court: first, they allege misapplication of the law concerning the presumption that the retention of company stock in a retirement plan is consistent with ERISA, and second, they claim error in the district court's mistaken equation of State Street's process for deciding to sell the Grace stock, which the court said took into consideration the totality of circumstances surrounding [said] stock, with a substantively sound and reasoned analysis of all relevant circumstances. Id. We shall discuss these contentions in inverse order of presentation because resolution of the second claimed error easily disposes of the first alleged fault. Considering the thorough investigative and decisional process that preceded the divestment of the Grace stock by the fiduciaries in this case, it is difficult, indeed impossible, given the standard of review which we are bound to follow, to legally challenge their actions in this appeal. Notwithstanding the re-framing of the issues before us, as stated above, it is clear from a reading of appellants' briefs that they continue to base their contentions of breach of fiduciary duty by State Street on the mistaken application of the efficient market theory to the facts of this case, a contention that was rejected by the district court. Specifically, this contention is the erroneously framed argument that State Street breached its duty by not giving sufficient weight to the market price in determining the value of the Grace stock. Reiterating what was decided by the district court, this position is plainly wrong. As cogently stated by that court, the efficient market is not the standard by which State Street's actions are to be judged. Rather, under ERISA, a fiduciary is required to act with `the care, skill, prudence and diligence ... that a prudent man acting in a like capacity and familiar with such matters would use.' Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 18 (1st Cir.1998) (quoting 29 U.S.C. § 1104(a)(1)(B)). [T]he test of prudence  the Prudent Man Rule  is one of conduct, and not a test of the result of performance of the investment. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir.1983) (emphasis added) (quotation marks omitted). [W]hether a fiduciary's actions are prudent cannot be measured in hindsight. ... DiFelice, 497 F.3d at 424. The test [is] how the fiduciary acted viewed from the perspective of the time of the challenged decision rather than from the vantage point of hindsight. Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917-18 (8th Cir.1994) (quotation marks omitted). Furthermore, prudence involves a balancing of competing interests under conditions of uncertainty. Armstrong v. LaSalle Bank Nat'l Ass'n, 446 F.3d 728, 733 (7th Cir.2006). Rather than emphasizing one factor, the market price, as proposed by appellants, State Street correctly considered the totality of the circumstances, including, of course, the market price of the Grace stock. See DiFelice, 497 F.3d at 418; Keach v. U.S. Trust Co., 419 F.3d 626, 636-37 (7th Cir. 2005). Under the circumstances of this case, the actions of both Grace and State Street, with relation to the divestment of the Grace stock held by the Plan, unquestionably meet the prudent man standard embodied in ERISA. First of all, upon concluding that the decisions required of Grace management in connection with the reorganization proceedings augured a potential conflict of interest with Grace's fiduciary duties, Grace took the eminently correct decision of insulating itself from that possibility. It amended the Plan, after duly notifying the participants of its intended action and notifying them of the reasons for its action. It then delegated the relevant decisional power to an independent third party, State Street, to render its expert, unbiased assessment of the Grace stock, and to execute its autonomous determination based on its conclusion regarding whether the Fund's retention or sale of Grace stock was appropriate. See 29 U.S.C. § 1104(a)(1) (requiring a fiduciary to act solely in the interest of the participants and beneficiaries). State Street itself sought further assessment from two non-partisan professional entities, D & P and Goodwin Procter LLP, whose expertise in their respective fields of knowledge is not questioned by appellants. State Street, as well as these two firms, in addition to closely monitoring the price fluctuations of the Grace stock on the market, compiled and studied Grace's financial performance and outlook, in particular analyzing how developments in the Grace bankruptcy and the process of reorganization could impact the value of Grace's common stock. Of prime importance was whether Grace's contingent asbestos liabilities in the bankruptcy could approach or exceed the value of equity in the company, thus diluting or altogether wiping out the value of the Grace stock in the Plan's portfolio. Among the factors considered by the State Street team at the various meetings and conferences regarding the asbestos contingent liability were: (1) the asbestos-related bodily injury claims being filed and pending against Grace; (2) the outcome of class action litigation pending against Grace regarding a product called Zonolite attic insulation material; (3) the availability of insurance coverage to pay asbestos claims; and (4) the probability of passage of legislation pending in Congress, the Fairness in Asbestos Injury Resolution Act of 2003, which, if enacted, could reduce or cap Grace's liability for asbestos bodily injury claims. Thereafter, based on its investigations and analysis of the facts that it found, D & P prepared and presented to State Street a detailed 88-page financial and valuation analysis of Grace, which included a determination of what it considered a reasonable pricing range for the [Grace] stock given the factors we believe should impact the value to equity investors. Based on these factors, the recommendation was made to State Street to commence selling the Grace stock holdings. Nevertheless, the Fiduciary Committee requested further analysis from its advisors, which led to additional meetings and a further formal presentation, attended by representatives of both D & P and Goodwin Procter LLP. At this presentation, a summary was made of the due diligence and analysis to date, which included the following summary of its recommendation: Unresolved asbestos litigation and potential asbestos legislation will affect the determination of whether Grace stock remains a prudent investment. The uncertainty and consequence of unfavorable events occurring as a result of litigation probabilities or of legislation not being enacted timely or at all, has resulted in the IFG [8] recommendation that the Committee override Plan documentation and begin to reduce the holdings of Grace stock. The recommendation to commence a selling program is based upon the IFG's determination that the continued holding by the Trust of all of its shares of Grace stock would be imprudent and therefore inconsistent with the requirements of Section 404(a)(1)(B) of ERISA. Such determination reflects the input of [D & P] and Goodwin [Procter LLP] and has been made after careful consideration of all of the facts and circumstances determined to be relevant by IFG. (emphasis added). Thereafter, the Fiduciary Committee met again and unanimously approved this recommendation, establishing as a minimum sales price the midpoint valuation range found by D & P of $1.88 per share. The divestment decision was communicated to the Plan's participants, who were also informed that the situation would continue to be monitored in case a change in strategy became necessary by reason of changed circumstances. Between February 25 and April 6, 2004, State Street sold approximately 900,000 shares of Grace stock in the open market transactions at then-prevailing New York Stock Exchange trading prices, ranging from $2.86 to $3.00 per share. During this period, State Street continued to monitor the Grace stock and received regular updates from D & P regarding its equity valuation conclusion for Grace. On April 2, 2004, Shaw, an independent investor, made State Street an unsolicited offer to purchase the remaining 6.2 million shares of Grace stock still in the Plan's portfolio. The offer was for the entire lot at $3.50 per share, which was 8% higher than the closing price of $3.24 per share on April 1, and almost twice the mid-point equity valuation of $1.36 per share assessed by D & P as of March 31, 2004. In the meantime, developments in the proposed legislative settlements required further investigation by D & P and additional meetings with State Street, but ultimately it was concluded that there was no further need for D & P to re-evaluate the equity valuation for Grace. This hiatus led to Shaw lowering its offer to $3.25 per share, after which Goodwin Procter LLP advised the Fiduciary Committee on recent events regarding Grace's exposure to asbestos liabilities. The Fiduciary Committee reaffirmed the basis for its conclusion that Grace stock was an inappropriate investment for the Plan because of the factors already considered, including the bankruptcy status of the company, the uncertainty that equity holders would receive value for the stock, and the outstanding asbestos litigation. The fundamentals regarding the Grace stock remaining unaltered from when the question was previously considered, the Fiduciary Committee voted unanimously to sell the remaining shares to Shaw provided that the original offer price of $3.50 was reinstated and that the sale did not burden the Plan with any commission expenses. The sale to Shaw was effectuated in two transactions, on April 12 and 19, 2004, at $3.50 per share, approximately 18% higher than the market closing price on those dates. There can be little doubt on this record that the state of Grace's corporate health was thoroughly studied by experts who debated and considered ad nauseam the pros and cons of retaining or selling the stock held in the Plan's portfolio. The unanimous conclusion of those charged with making the decision was that divestment of this stock was the only action consistent with the prudence required of a responsible fiduciary under ERISA. Without question, State Street engaged in a substantively sound, reasonable analysis of all relevant circumstances appropriate to the decision to sell the Grace stock. We cannot say that the district court's approval of these actions was in error. Appellants seek to induce us to reject State Street's actions by having us apply a presumption of prudence which is afforded fiduciaries when they decide to retain an employer's stock in falling markets, first articulated in Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.1995) and Moench, 62 F.3d at 571-72. The presumption favoring retention in a stock drop case serves as a shield for a prudent fiduciary. If applied verbatim in a case such as our own, the purpose of the presumption is controverted and the standard transforms into a sword to be used against the prudent fiduciary. This presumption has not been so applied, and we decline to do so here, as it would effectively lead us to judge a fiduciary's actions in hindsight. Although hindsight is 20/20, as we have already stated, that is not the lens by which we view a fiduciary's actions under ERISA. DiFelice, 497 F.3d at 424; Roth, 16 F.3d at 917-18. Rather, given the situation which faced it, based on the facts then known, State Street made an assessment after appropriate and thorough investigation of Grace's condition. Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984). [9] This assessment led it to find that there was a real possibility that this stock could very well become of little value or even worthless to the Plan. It is this prudent assessment, and not a presumption of retention, applicable in another context entirely, which controls the disposition of this case. See also LaLonde v. Textron, Inc., 369 F.3d 1, 6-7 (1st Cir.2004) (expressing hesitance to apply a hard-and-fast rule in an ERISA fiduciary duty cases, and instead noting the importance of record development of the facts).