Allen v. Greatbanc Trust Co.
835 F.3d 670
7th Cir.2016Background
- GreatBanc was trustee of Personal-Touch’s ESOP and arranged a December 2010 transaction whereby the Plan purchased Personal-Touch stock for $60 million funded by a loan from the selling shareholders at 6.25% interest.
- Soon after the transaction the alleged value of the acquired stock fell sharply (initially ~22% below purchase; later nearly 50% decline), leaving the Plan heavily indebted and participants exposed to loan interest obligations.
- Plan participants (Allen and Dalton) sued GreatBanc under ERISA § 502, alleging (1) prohibited transactions under ERISA § 406 (purchase of employer stock and employer loan) and (2) breach of fiduciary duty under ERISA § 404 for failing to secure an appropriate valuation and adequate process.
- The district court dismissed the complaint for failure to plead breach under the Dudenhoeffer framework and for failing to allege absence of § 408 exemptions; judgment was converted to one with prejudice after plaintiffs declined to amend.
- The Seventh Circuit reversed, holding plaintiffs plausibly alleged both prohibited transactions and a fiduciary breach and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a plaintiff must plead facts negating § 408 exemptions to state a prohibited-transaction claim | Plaintiffs need only allege the prohibited § 406 transaction; defendant bears burden to plead/prove § 408 exemptions | GreatBanc: plaintiffs must plead absence of exemptions (e.g., inadequate consideration, unreasonable interest) | Held: § 408 exemptions are affirmative defenses; plaintiffs need not negate them in the complaint |
| Whether Dudenhoeffer’s "special circumstances" pleading rule applies to private (nonpublic) stock ESOP transactions | Allen: Dudenhoeffer applies only to publicly traded stock; private-stock transactions lack market price so no special-circumstances rule | GreatBanc: Dudenhoeffer’s protections should extend to private stock to avoid burdens on trustees | Held: Dudenhoeffer does not govern private stock ESOPs; special-circumstances pleading requirement not required for private holdings |
| Adequacy of pleading breach of fiduciary duty based on valuation/process failures | Plaintiffs: alleged inadequate inquiry, reliance on interested party valuations, absence of outside financing, steep post-sale decline and high interest rate support plausible inference of imprudence/disloyalty | GreatBanc: post-transaction decline and interest rate are equally consistent with permissible conduct; plaintiffs’ allegations are conclusory under Twombly/Iqbal | Held: Allegations—big decline, lack of independent valuation, insider loan at high rate—sufficiently plead plausible breach; claim survives dismissal |
| Whether the DOL–GreatBanc settlement (post-transaction) affects pleading sufficiency | Plaintiffs: settlement supports inference of prior valuation-process problems (but not required) | GreatBanc: settlement is not an admission and does not identify prior practices | Held: Settlement irrelevant to dismissal stage; district court may later decide admissibility if needed |
Key Cases Cited
- Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014) (publicly traded ESOPs: market price generally shields fiduciary absent special circumstances)
- Fish v. GreatBanc Trust Co., 749 F.3d 671 (7th Cir. 2014) (section 408 exemptions treated as defendant’s burden)
- Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009) (ERISA plaintiffs may plead facts indirectly to show fiduciary breach when lacking inside information)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard requiring plausible claim)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Tibble v. Edison Int'l, 135 S. Ct. 1823 (2015) (fiduciary duties of prudence and ongoing monitoring)
- Keach v. U.S. Trust Co., 419 F.3d 626 (7th Cir. 2005) (burden allocation on § 408 defenses)
- Armstrong v. LaSalle Bank Nat. Ass'n, 446 F.3d 728 (7th Cir. 2006) (prudence in ESOP trustee valuation can raise triable issues)
- Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010) (elements of ERISA fiduciary breach claim)
- DeBruyne v. Equitable Life Assurance Soc’y of the U.S., 920 F.2d 457 (7th Cir. 1990) (fiduciary not required to be clairvoyant regarding future stock movements)