Supreme Court Declines to Hear "Reverse Stock-Drop" Case

On June 29, 2015, the United States Supreme Court declined the petition for a writ of certiorari filed with respect to a relatively unusual reverse stock-drop case in RJR Pension Investment Committee v. Tatum.  In a reversal of the typical facts in a stock drop action, this case involved a claim based on the notion that plan fiduciaries sold the stock too quickly or without adequate consideration of the impact of a sale decision on plan participants.  The case involved a decision by RJR Nabisco, Inc. to spin off its tobacco business from its Nabisco food business.  Before the spin-off, RJR Nabisco sponsored a 401(k) plan, and the new RJR 401(k) plan at issue in the case was created by a spin-off from the RJR Nabisco plan.  Immediately after the spin-off, the RJR 401(k) Plan continued to offer most of the investment funds that were offered under the RJR Nabisco plan (including stock in Nabisco), although that fund was frozen (i.e., plan participants could retain existing investments in the Nabisco but could not make additional investments). 

Following the spin-off, a group of RJR employees decided to eliminate the Nabisco stock from the RJR 401(k) Plan.  While one of the RJR 401(k) Plan committees adopted that working group’s recommendation to remove the Nabisco stock, there was no evidence that the committee met, discussed or voted on the issue or otherwise signed a required consent in lieu of a meeting authorizing a plan amendment to eliminate the Nabisco stock (the plan amendment that would have eliminated the Nabisco stock was later found to be invalid since it was not properly adopted).  As an aside, it appears that the courts would have viewed that amendment to have been an act not subject to ERISA fiduciary duties if a properly-adopted amendment had occurred, and thus the later elimination of the Nabisco stock would have been a fiduciary act only to the extent that discretion was involved as to when and how the stock would be divested.  This posture presents much surer ground for a fiduciary, and perhaps is a lesson learned.  As luck would have it, Nabisco shares were trading at all-time lows when the stock was divested but a few month after the liquidation a takeover offer for Nabisco sparked a bidding war and soon Nabisco stock was trading at record highs.  Richard Tatum, a participant in the RJR 401(k) Plan filed a class action alleging the fiduciaries for the RJR 401(k) Plan breached their fiduciary duties under ERISA by eliminating the Nabisco stock without conducting a thorough investigation.

Finding that there was in fact a breach of fiduciary duty, the district court explained that the fiduciary duty of procedural prudence requires fiduciaries to employ appropriate methods to investigate the merits of a particular investment, engage in reasoned decision-making processes consistent with that of a prudent man acting in a like capacity and monitor the prudence of an investment decision to ensure that it remains in the best interest of plan participants.  The court concluded that none of that happened in this case.  However, despite that conclusion, the district court also held that this breach of fiduciary duty did not cause the alleged losses since those losses stemmed not from the inadequate investigation but rather from the fiduciaries’ divestiture of the Nabisco stock funds, which the court felt was an objectively prudent decision.  This led to a conclusion that the plaintiffs failed to meet their burden of proof to sustain a claim for damages.  Upon appeal, the Court of Appeals for the Fourth Circuit reversed and held that the burden of proof on causation for losses shifts to the defendant after the plaintiff, as in this case, establishes that there was a breach of fiduciary duty and that the plan sustained a loss.  The appeals court also held that the defendant cannot satisfy that burden simply by showing that the substantive investment decision was objectively prudent but instead had to demonstrate that it is more likely than not that a hypothetical prudent fiduciary would have made the same decision as the defendant.  This concept of a shifting burden, which potentially puts more pressure on fiduciaries who are defending stock drop cases, is not embraced by all of the federal circuit courts—which presumably is why the defendants tried to get the case before the Supreme Court. 

Accordingly, the issue before the Supreme Court was whether the plaintiff in one of these cases bears the burden of proof of loss causation under ERISA or whether that burden of proof can shift to the defendant in a way in which an ERISA fiduciary could be held liable for a loss even if the ultimate investment decision by that fiduciary was objectively prudent.  Since the Supreme Court denied to hear this case (the Court does not need to explain why it declines to hear a case on certiorari), the Fourth Circuit ruling survives and the case will go back to the district court for consideration of loss causation under the shift of burden doctrine.