United States Court of Appeals
For the First Circuit
No. 03-2033
LINDA L. LALONDE, ET AL.,
Plaintiff, Appellant,
v.
TEXTRON, INC.; TEXTRON SAVINGS PLAN; TEXTRON SAVINGS
PLAN COMMITTEE; PUTNAM FIDUCIARY TRUST COMPANY and
JOHN DOES 1-10,
Defendants, Appellees.
No. 03-2039
MACHELLE A. SIMON-GRECH, ET AL.,
Plaintiff, Appellant,
v.
TEXTRON, INC.; TEXTRON SAVINGS PLAN; TEXTRON SAVINGS
PLAN COMMITTEE; PUTNAM FIDUCIARY TRUST COMPANY and
JOHN DOES 1-10,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. William E. Smith, U.S. District Judge]
Before
Torruella, Lourie* and Howard,
Circuit Judges.
*
Of the Federal Circuit, sitting by designation.
Lee Squitieri, with whom Squitieri & Fearon, LLP, David J.
Strachman, McIntyre, Tate, Lynch & Holt, LLP, Charles J. Piven, Law
Offices of Charles Piven P.A., Joe R. Whatley, Jr., Whatley Drake
LLC, Kenneth A. Wexler, and The Wexler Firm, were on brief, for
appellants.
Karl G. Nelson, with whom William J. Kilberg, Mitchell A.
Karlan, Gibson, Dunn & Crutcher LLP, John A. Tarantino, Paul V.
Curcio, and Adler, Pollock & Sheehan P.C., were on brief, for
Textron Inc., Textron Savings Plan, and Textron Savings Plan
Committee.
James S. Dittmar, P.C., with whom James O. Fleckner, John J.
Cleary, P.C. (Of Counsel), Daniel P. Condon (Of Counsel), and
Goodwin Procter, LLP, were on brief, for Putnam Fiduciary Trust
Company.
May 7, 2004
HOWARD, Circuit Judge. Linda L. Lalonde and Machelle A.
Simon-Grech, acting on behalf of a putative class of participants
in and beneficiaries of an employee stock ownership plan ("ESOP")
known as the Textron Savings Plan, brought lawsuits (that were
eventually consolidated) against the plan; Textron, Inc. (the
plan's sponsor); the Textron executives who allegedly administered
the plan (the "Textron Savings Plan Committee"); and the plan's
trustee, the Putnam Fiduciary Trust Company. Insofar as is
relevant,1 the operative complaint asserts that, between January 1,
2000, and December 31, 2001, defendants violated the Employee
Retirement Income Security Act (ERISA) by breaching fiduciary
duties owed to the class, see 29 U.S.C. § 1104(a), and by violating
ERISA's anti-inurement provision, see 29 U.S.C. § 1103(c)(1).2
Plaintiffs seek to remedy these statutory lapses through ERISA's
enforcement provisions, 29 U.S.C. § 1132(a)(1) and (3), which
authorize certain actions by plan participants and beneficiaries.
Throughout the class period, defendants directed 50% of
employee contributions and 100% of employer matching contributions3
1
We confine ourselves to essentials in setting the stage for
our discussion of the issues in this appeal. Readers interested in
greater detail may consult the district court's published opinion.
See Lalonde v. Textron, Inc., 270 F. Supp. 2d 272 (D.R.I. 2003).
2
Relevant statutory provisions are reproduced in a statutory
appendix to this opinion in the order in which we cite them.
3
Textron contributed $0.50 or an equivalent amount of Textron
stock for each $1.00 an employee contributed.
-3-
into a stock fund that held only Textron common stock. Plaintiffs
claim that, in investing so much of the class's funds in Textron
stock during the class period, defendants violated duties of
loyalty owed to the class and acted in an unlawfully self-
aggrandizing manner because defendants knew or had reason to know
that Textron faced troubles that were certain to cause (and did in
fact cause) a significant decline in the value of its stock. In
support of these claims, plaintiffs allege (with varying degrees of
specificity) that, during the class period, defendants were
fiduciaries within the meaning of 29 U.S.C. § 1002(21)(A);
Textron's earnings per share declined by over 70%; Textron
initiated a restructuring that was expected to culminate in the
termination of over 10% of its workforce; Textron artificially
inflated the price of its stock by concealing internal problems
that led to its lost earnings and restructuring (malfeasance that
was alleged to have been the subject of a federal securities
lawsuit brought by Textron's shareholders); and Textron common
stock significantly underperformed in comparison to the market as
a whole (measured in terms of the Standard & Poor's 500) and
Textron's peer group. Despite this bleak scenario and in
dereliction of their duties, plaintiffs say, defendants continued
-4-
to fund the Textron stock fund and prohibited the class from
diversifying its retirement accounts.4
Defendants elected to challenge these claims under Fed.
R. Civ. P. 12(b)(6). In support of their arguments that the claims
were not viable, defendants asserted that plaintiffs had pleaded
insufficient facts to establish that any one of them was an ERISA
fiduciary and/or that any one of them breached any fiduciary duties
owed to the class.5 Putnam additionally argued that, as a so-
called "directed fiduciary," see 29 U.S.C. § 1103(a)(1), it lacked
the investment discretion that must be found to have been abused if
a viable breach of fiduciary duty claim is to lie. Central to
defendants' arguments was the fact that the plan was an ESOP and,
as such, designed to invest primarily in qualifying employer
4
Defendants lifted the prohibition on diversification on
January 1, 2002 (the date that corresponds with the closing of the
class period), at which point approximately 20% of the plan's
35,000 or so participants "almost immediately" (in the words of the
complaint) divested themselves of some or all of their Textron
stock.
5
Defendants attached to their motions and relied upon in their
arguments the summary plan description, the plan documents, and the
trust and service agreements between Textron and Putnam. The
district court treated these documents as merged into the complaint
because the complaint's allegations depended on them and plaintiffs
made a number of references to them at oral argument on defendants'
motions. See Beddall v. State Street Bank & Trust Co., 137 F.3d
12, 17 (1st Cir. 1998) (documents on which a complaint depends and
to which it refers "merge[] into the pleadings and the trial court
can review [them] in deciding [a Rule 12(b)(6)] motion").
Plaintiffs do not argue that the court erred in considering these
documents or dispute that these documents are properly before us
for purposes of our review.
-5-
securities. See 26 U.S.C. § 4975(e)(7)(A); 29 U.S.C. §
1107(d)(6)(A). In essence, defendants' pleading rhetorically
asked, how can defendants be found to have violated ERISA in
connection with the Textron ESOP when they did nothing more than
what Congress contemplated would happen when an employer
establishes an ESOP?
In a thorough opinion and order, the district court
granted defendants' motions to dismiss. With respect to the breach
of fiduciary duty claims against the Textron defendants, the court
adopted the reasoning of Moench v. Robertson, 62 F.3d 553, 571 (3d
Cir. 1995), and Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.
1995), and held that an ESOP fiduciary6 "is entitled to a
presumption that its decision to remain invested in employer
6
The district court decided that factual issues precluded
dismissal under Rule 12(b)(6) on the ground that the Textron
defendants were not fiduciaries of the class with respect to the
conduct in question. See 270 F. Supp. 2d at 277 n.4. The Textron
defendants do not argue that the court's ruling was erroneous in
this respect except to suggest that there is no such thing as the
Textron Savings Plan Committee and to contend that the plan is not
a proper defendant because (1) there are no allegations that the
plan acted as a fiduciary with respect to its own assets, and (2)
plaintiffs are seeking relief on the plan's behalf (and not from
the plan). The point about the Textron Savings Plan Committee is
not susceptible to resolution on the pleadings and may be taken up
following the limited remand that we order at the conclusion of
this opinion. The point about the plan not being a proper
defendant is effectively conceded by the plaintiffs, who make no
response to it in their reply brief. We therefore affirm the
dismissal of plaintiffs' breach of fiduciary duty and anti-
inurement claims against the plan. Henceforth, the phrase "the
Textron defendants" should be understood to encompass only Textron
and the Textron Savings Plan Committee.
-6-
securities was reasonable." 270 F. Supp. 2d at 279.
"Accordingly," the court continued, "in order to state a viable
claim, Plaintiffs must plead facts that, if proven at trial, would
establish that [the Textron defendants] abused their discretion in
failing to diversify Textron stock during the years 2000 and 2001."
Id.
In defining the boundaries of the Textron defendants'
discretion, the district court attempted to reconcile Congress's
concern that ERISA-plan fiduciaries must always act in the
interests of plan beneficiaries with Congress's endorsement of
employee stock ownership through the ESOP mechanism. See id. at
278-79.7 In doing so, the district court looked to Moench, Kuper,
7
The court explained the difficulty an ESOP fiduciary faces in
performing this reconciliation:
An ESOP is an ERISA plan that invests primarily in
"qualifying employer securities," which typically are
shares of stock in the employer that creates the plan.
29 U.S.C. § 1107(d)(6)(A). In creating ESOPs, Congress
sought to develop plans that would function as both an
employee retirement benefit plan and a technique of
corporate finance that would encourage employee ownership
of a company. As a result of these dual purposes, ESOPs
are not intended to guarantee retirement funds, and they
place employee retirement assets at a greater risk than
the typical diversified, ERISA-regulated plan . . . .
Nonetheless, ESOPs are governed by ERISA's
requirements for fiduciaries. An ERISA fiduciary must
employ within the defined domain "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." [29 U.S.C. §
1104(a)(1)(B)]. If a fiduciary fails to meet these
stringent requirements, it may be held liable for losses
-7-
and Wright v. Oregon Metallurgical Corp., 222 F. Supp. 2d 1224,
1233-34 (D. Or. 2002), aff'd 360 F.3d 1090 (9th Cir. 2004), all of
which grappled with this same problem. See 270 F. Supp. 2d at 280.
Building from the facts and holdings of these cases, the court
concluded that, in exercising its discretion to continue purchasing
company stock, an ESOP fiduciary enjoys a presumption of
reasonableness that "may be overcome when a precipitous decline in
the employer's stock is combined with evidence that the company is
on the brink of collapse or is undergoing serious mismanagement."
Id. The court then granted the Textron defendants' motion to
dismiss because "[t]his is not one of those cases." Id. In
support of its ruling, the court stated that the complaint had
alleged only a drop in stock price, a decline in corporate profits,
and a restructuring of the company during the class period. See
id. The court also speculated that, had the Textron defendants
decided not to remain fully invested in Textron stock per the terms
of the plan, they might have triggered an even steeper sell-off
and/or invited a lawsuit when the stock later appreciated. See id.
Although this line of reasoning applies with equal force
to the breach of fiduciary duty claims against Putnam, the district
to the plan that result from breaches of that duty. 29
U.S.C. § 1109(a). Consequently, ESOP fiduciaries are in
the unique situation of having to facilitate the ESOP
goal of employee ownership, while at the same time being
bound by ERISA's rigorous fiduciary obligations.
Id. at 278 (citations and internal quotation marks omitted).
-8-
court also went on to analyze whether Putnam was a "directed
fiduciary" within the meaning of 29 U.S.C. § 1103(a)(1). See id.
at 280-82. Following the course charted in Beddall, 137 F.3d at
19-21, the court parsed the plan documents and concluded that
Putnam was a directed fiduciary as a matter of law. See 270 F.
Supp. 2d at 281-82. As such, the court reasoned, Putnam lacked the
discretionary authority to do what plaintiffs say it should have
done: ignore the directions of the plan administrator to keep
investing (and to remain invested in) Textron stock. See id. at
282. The court did not, however, go on to discuss plaintiffs'
alternative argument that, even if Putnam were a directed trustee,
it still could be held to have violated 29 U.S.C. 1103(a)(1) if it
followed directions from the Textron defendants that were "contrary
to [ERISA]." Id.
With respect to plaintiffs' anti-inurement claims, the
district court granted Textron's motion to dismiss on the basis of
a line of cases holding that 29 U.S.C. § 1103(c)(1) "does not
prevent an employer from enjoying indirect benefits associated with
plan investment decisions." Id. at 284 (collecting cases). The
court granted Putnam's motion on the basis of its prior ruling that
Putnam lacked discretion with respect to investment decisions and
therefore was not a fiduciary subject to liability under ERISA's
anti-inurement provision. Id. at 284 n.9.
-9-
On appeal, plaintiffs contend that the district court
erroneously scrutinized their allegations as if defendants had
moved not to dismiss the complaint under Fed. R. Civ. P. 12(b)(6),
but rather for summary judgment under Fed. R. Civ. P. 56. In
pressing this claim, plaintiffs make a subsidiary argument that the
court defined an ESOP fiduciary's duty too narrowly when it stated
that a discontinuation of plan funding is required only where there
is a precipitous decline in the value of the company's stock
combined with evidence of an impending collapse or serious internal
mismanagement.8 Textron responds by suggesting in a footnote that
the court's formulation of an ESOP fiduciary's duty "is not . . .
adequately deferential to Congress's intent to foster ESOP
investment in employer stock,"9 but otherwise is content to defend
8
Plaintiffs also take issue with the court's conclusions that
Putnam lacked discretion with respect to the funds and that the
absence of such discretion automatically rendered non-viable their
breach of fiduciary duty and anti-inurement claims. We do not
reach these arguments (or the responses to them) because, as we
shall explain, plaintiffs failed to allege facts sufficient to
ground a judgment in their favor even if disputes about the plan
documents and the law were resolved in their favor.
9
The Ninth Circuit recently expressed sympathy for Textron's
position in its opinion affirming the Wright decision that was
relied upon by the district court. See 360 F.3d at 1097-98
(questioning in dicta whether Moench and Kuper undermine
congressional purpose in holding that ESOP fiduciaries sometimes
must diversify plan investments); id. at 1098 n.4 (suggesting in
dicta that Moench and Kuper are "problematic [under the federal
securities laws] to the extent that [they] inadvertently
encourage[] corporate officers to utilize inside information for
the exclusive benefit of the corporation and its employees").
-10-
the court's dismissal under the rule the court derived from Moench,
Kuper, and Wright.
We turn first to plaintiffs' breach of fiduciary duty
claims against Textron. As set forth above, the district court
concluded that the allegations in the complaint (and the reasonable
inferences they give rise to) were insufficient because the facts
alleged -- declines in stock price and corporate profits and a
significant corporate restructuring -- never could support a
finding that the Moench/Kuper/Wright rule had been satisfied. See
Lalonde, 270 F. Supp. 2d at 280. As an initial matter, we share
the parties' concerns about the court's distillation of the breach
of fiduciary standard into the more specific decisional principle
extracted from Moench, Kuper, and Wright and applied to plaintiffs'
pleading. Because the important and complex area of law implicated
by plaintiffs' claims is neither mature nor uniform, see supra n.9,
we believe that we would run a very high risk of error were we to
lay down a hard-and-fast rule (or to endorse the district court's
rule) based only on the statute's text and history, the sparse
pleadings, and the few and discordant judicial decisions discussing
the issue we face. Under the circumstances, further record
development -- and particularly input from those with expertise in
the arcane area of the law where ERISA's ESOP provisions intersect
with its fiduciary duty requirements -- seems to us essential to a
reasoned elaboration of that which constitutes a breach of
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fiduciary duty in this context. Cf. Doe v. Walker, 193 F.3d 42, 46
(1st Cir. 1999) (vacating a Fed. R. Civ. P. 12(b)(6) dismissal on
an issue with "important social and moral implications" and with an
undeveloped factual background "in part because further facts may
make it unnecessary to decide the hard case but also because the
facts are likely to contribute to a more sensitive assessment of
what the law 'is' (which, absent decisive precedent, means what it
'should be')").
In any event, we believe that the breach of fiduciary
duty judgment in favor of the Textron defendants cannot withstand
conventional Fed. R. Civ. P. 12(b)(6) scrutiny. A complaint should
be dismissed under Rule 12(b)(6) "only if it is clear that no
relief could be granted under any set of facts that could be proved
consistent with the allegations." Swierkiewicz v. Sorema N.A., 534
U.S. 506, 514 (2002); see also id. at 511 ("When a federal court
reviews the sufficiency of a complaint, before the reception of any
evidence either by affidavit or admissions, its task is necessarily
a limited one. The issue is not whether a plaintiff will
ultimately prevail but whether the claimant is entitled to offer
evidence to support the claims.") (quoting Scheuer v. Rhodes, 416
U.S. 232, 236 (1974) (internal quotation marks omitted)). Here,
the district court's analysis, while perhaps convincing on its own
terms, failed to take account of plaintiffs' allegation that,
during the period identified in the complaint, Textron artificially
-12-
inflated its stock price by concealing "the disparate problems
throughout Textron's segments and their adverse effect on Textron
which are the subject of a federal securities lawsuit by
shareholders against Textron and certain of its officers and
directors." While this allegation is not terribly specific,
Textron surely is aware of the nature of the charges it faces in
the separate lawsuit.10 The allegation is thus sufficient to play
its part in effectuating the purposes of Fed. R. Civ. P. 8(a): to
give Textron "fair notice of what [plaintiffs'] claim is and the
grounds upon which it rests." Id. at 512 (quoting Conley v. Gibson,
355 U.S. 41, 47 (1957) (internal quotation marks omitted)). And,
when combined with the other allegations, it is sufficient to clear
the Rule 12(b)(6) hurdle.
Consider, for example, a (purely hypothetical) scenario
under which plaintiffs unearth during discovery documents showing
that, during the class period, the Textron officials responsible
for administration of the ESOP were concerned that Textron was not
going to survive its downsizing and wanted the plan documents to be
amended so as to keep their employees from investing in a dying
venture. Consider further a scenario under which the plaintiffs
uncover evidence that these officials were dissuaded from so acting
10
If it were not, the proper response should have been a motion
for a more definite statement under Fed. R. Civ. P. 12(e) and not
a motion for dismissal on the merits. See Swierkiewicz, 534 U.S.
at 514.
-13-
by higher-ups concerned about sustaining the company's stock price
until stock options that they held could vest. Such evidence
certainly would be entirely consistent with plaintiffs'
allegations. Moreover, it might well be sufficient (much would
depend on the nature of the additional factual development to which
we previously alluded) to support a finding that the Textron
defendants had breached their fiduciary duty to the class.
The odds of plaintiffs succeeding on their breach of
fiduciary duty claims against the Textron defendants might be very
long, but "that is not the test." Swierkiewicz, 534 U.S. at 515
(quoting Scheuer, 416 U.S. at 236) (internal quotation marks
omitted). Accordingly, we shall vacate the judgment in favor of
the Textron defendants and remand for further proceedings
consistent with this opinion.
Plaintiffs' breach of fiduciary duty claims against
Putnam, and their anti-inurement claims against all defendants,
stand on different footing. Even if we were to assume arguendo
that the district court erred in concluding that Putnam was a
directed fiduciary and that directed fiduciaries are shielded from
liability for following the directives in the plan documents, there
is absolutely nothing in the complaint which permits an inference
that Putnam abused any discretion it might have had. Putnam is not
alleged to have knowledge of any malfeasance within Textron; it is
-14-
alleged only to have learned (as the events were unfolding) that
Textron's stock price and profits were declining and that the
company was undergoing a restructuring. As the district court
aptly observed, this simply is not enough to ground a finding that
Putnam violated any duties it might have owed to the class. It
would subvert the purposes of ERISA to permit lawsuits against plan
fiduciaries (again, assuming that Putnam is a plan fiduciary) every
time a company's fortunes took a relatively unexceptional turn for
the worse. We therefore decline to upset the judgment in favor of
Putnam on plaintiff's breach of fiduciary duty claims. So too do
we decline to upset the judgments in favor of all defendants on
plaintiffs' anti-inurement claims, the appellate attacks on which
are set forth in a few sentences which seek only to differentiate
the facts of this case from those of the cases relied upon by the
district court and which make no effort at all to explain how the
scheme alleged caused plan assets to inure to the benefit of
Textron itself. See United States v. Zannino, 895 F.2d 1, 17 (1st
Cir. 1990).
Affirmed in part; vacated in part. No costs.
-15-
STATUTORY APPENDIX
1. 29 U.S.C. § 1104(a) states:
(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d), 1342,
and 1344 of this title, 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 of this
chapter.
(2) In the case of an eligible individual
account plan (as defined in section 1107(d)(3)
of this title), the diversification
-16-
requirement of paragraph (1)(C) and the
prudence requirement (only to the extent that
it requires diversification) of paragraph
(1)(B) is not violated by acquisition or
holding of qualifying employer real property
or qualifying employer securities (as defined
in section 1107(d)(4) and (5) of this title).
2. In relevant part, 29 U.S.C. § 1103(c)(1) states:
[T]he assets of a plan shall never inure to
the benefit of any employer and shall be held
for the exclusive purposes of providing
benefits to participants in the plan and their
beneficiaries and defraying reasonable
expenses of administering the plan.
3. In relevant part, 29 U.S.C. § 1002(21)(A) states:
[A] person is a fiduciary with respect to a
plan to the extent (i) he exercises any
discretionary authority or discretionary
control respecting management of such plan or
exercises any authority or control respecting
management or disposition of its assets, (ii)
he renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of
such plan, or has any authority or
responsibility to do so, or (iii) he has any
discretionary authority or discretionary
responsibility in the administration of such
plan.
4. In relevant part, 29 U.S.C. § 1103(a) states:
(a) Benefit plan assets to be held in trust; authority of
trustees
[A]ll assets of an employee benefit plan shall
be held in trust by one or more trustees.
Such trustee or trustees shall be either named
in the trust instrument or in the plan
instrument . . . or appointed by a person who
is a named fiduciary, and upon acceptance
being named or appointed, the trustee or
trustees shall have exclusive authority and
-17-
discretion to manage and control the assets of
the plan, except to the extent that--
(1) the plan expressly provides
that the trustee or trustees are
subject to the direction of a
named fiduciary who is not a
trustee, in which case the
trustees shall be subject to
proper directions of such
fiduciary which are made in
accordance with the terms of the
plan and which are not contrary
to this chapter . . . .
5. In relevant part, 26 U.S.C. § 4975(e)(7)(A) states:
The term "employee stock ownership plan" means
a defined contribution plan --
(A) which is a stock bonus plan
which is qualified, or a stock
bonus plan and a money purchase
plan both of which are qualified
under section 401(a) [of title
26] and which are designed to
invest primarily in qualifying
employer securities . . . .
6. In relevant part, 29 U.S.C. § 1107(d)(6)(A) states:
The term "employee stock ownership plan" means
an individual account plan--
(A) which is a stock bonus plan
which is qualified, or a stock
bonus plan and money purchase
plan both of which are
qualified, under section 401 of
title 26, and which is designed
to invest primarily in
qualifying employer securities .
. . .
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