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Myers v. Administrative Committee

United States District Court, W.D. Oklahoma

March 22, 2019

KATHLEEN J. MYERS, on behalf of the Seventy Seven Energy Inc. Retirement & Savings Plan and a class of similarly situated participants of the Plan, Plaintiff,



         Currently before the Court are the Committee Defendants' Motion to Dismiss Plaintiff's Amended Class Action Complaint [Doc. No. 45] and Defendant Principal Trust Company's Motion to Dismiss [Doc. No. 46], [1] filed pursuant to Fed.R.Civ.P. 12(b)(6). Both Motions are fully briefed.[2] Because the Motions raise overlapping issues, they are taken up together.

         Factual and Procedural Background

         Plaintiff Kathleen Myers brings suit under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., as a participant in the Seventy Seven Energy Inc. Retirement & Savings Plan (the “Plan”), to obtain equitable relief and damages to which the Plan and its participants allegedly are entitled due to Defendants' breaches of fiduciary duties. The Committee Defendants are alleged to be administrators and fiduciaries of the Plan, and Principal Trust Company (“Principal”) serves as the trustee under a directed trust agreement of a trust that holds the Plan's assets. The Plan is a “defined contribution” or “individual account” plan as defined by ERISA, 29 U.S.C. § 1002(34), established by Seventy Seven Energy Inc. (“SSE”) to provide retirement income for its employees.

         SSE is a spinoff of Chesapeake Energy Corporation (“Chesapeake”) formed on June 30, 2014, from a wholly-owned subsidiary, Chesapeake Oilfield Operating, L.L.C. The Plan was established on July 1, 2014, as a spinoff from the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan, and initially was funded by a transfer of assets from the parent plan that included Chesapeake common stock. The Plan allows participants to defer a percentage of their employment income by making elective contributions (401(k) contributions), and allows SSE to match a percentage of participants' contributions and make discretionary contributions to an employee stock ownership plan (“ESOP”) in the form of SSE common stock.

         Plaintiff claims the Committee Defendants breached fiduciary duties to the Plan and its participants by: 1) “allowing the Plan to buy and hold Chesapeake stock in the ESOP because . . . Chesapeake stock was not a ‘qualifying employer security'” so “inclusion of Chesapeake stock in the ESOP was a per se violation of ERISA” (Am. Compl. [Doc. No. 39] ¶ 108); 2) imprudently investing and maintaining the investment in Chesapeake stock because they “knew or should have known that Chesapeake was not, and had never been, a suitable and appropriate investment for the Plan” (id. ¶ 111); 3) “failing to diversify Plan investments” (id. ¶ 114); and 4) failing to provide adequate disclosures “concerning the Plan's investments in Chesapeake” (id. ¶ 116). Plaintiff claims Principal breached its fiduciary duties by allowing the alleged ERISA violation to occur and by imprudently permitting the Plan to own Chesapeake stock (id. ¶¶ 121-123).[3] Plaintiff alleges “[t]he Plan should have divested itself of Chesapeake stock immediately following the spin-off” and Defendants' failure to divest caused “a substantial portion of the losses suffered” from a decline in value of the Chesapeake stock. Id. at ¶ 133.

         After the original Complaint was served, the parties agreed on a case management schedule for identification and joinder of the proper defendants, amendment of Plaintiff's pleading, and briefing of responsive motions. In keeping with that schedule, Plaintiff filed the Amended Complaint, and Defendants filed the instant Motions challenging the sufficiency of Plaintiff's pleading to state a claim on which relief can be granted. No discovery has been requested, and no motion to certify the proposed class of participants alleged in the Amended Complaint has been filed.

         The Committee Defendants assert: 1) the decision to retain Chesapeake stock in the Plan is exempt from challenge because the stock is a “qualifying employer security” as defined by ERISA; 2) if not exempt from the diversification requirement, the Committee Defendants cannot be held liable for a failure to diversify because participants had many investment options and they decided whether to retain Chesapeake stock in their accounts; 3) Plaintiff's factual allegations are based on public information and fail to show a breach of the duty of prudent investment under Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014); and 4) the alleged facts do not show a breach of any duty of disclosure because no general duty of disclosure exists, no material misrepresentation is alleged, and no specific disclosure obligation under 29 C.F.R. § 2520.102-2 is implicated.

         Principal contends its only duty as a directed trustee “was to follow the reasonable directions of the Committee Defendants so long as they were (1) in accordance with the Plan, and (2) not contrary to ERISA.” See Principal's Mot. at 1, 7 (citing 29 U.S.C. § 1103(a)(1)). Principal asserts that Plaintiff's action against it must be dismissed because: 1) the factual allegations on which liability depends “are contradicted by the very documents Plaintiff cites in the Amended Complaint” (id. at 6); 2) the Chesapeake stock was a permissible investment under the Plan and the directed trust agreement, regardless whether it was a “qualifying employer security” (id. at 8-9); and 3) Plaintiff's contention that holding the Chesapeake stock in the ESOP component of the Plan violated ERISA “is meritless for at least four reasons, ” primarily because the notion “that any stock is ‘held' in the ESOP component is misguided and wrong” and because “[i]t simply does not matter where any Plan investment is ‘held' for purposes of ERISA” (id. at 9-10, 13). Finally, like the Committee Defendants, Principal argues that Plaintiff's claim for breach of the duty of prudence fails under the standard announced in Dudenhoeffer for investments in publicly traded stock based on publicly available information.

         Standard of Decision

         “To survive a motion to dismiss [under Rule 12(b)(6)], a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “[W]here the well-pleaded facts do not permit the court to infer more than the possibility of misconduct, the complaint has alleged - but it has not ‘show[n]' - ‘that the pleader is entitled to relief.'” Id. at 679 (quoting Fed.R.Civ.P. 8(a)(2)). Thus, in assessing plausibility, a court must first disregard conclusory allegations and “next consider the factual allegations in [the] complaint to determine if they plausibly suggest an entitlement to relief.” Id. at 681. The question to be decided is “whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed.” Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007) (internal quotation omitted).

         Ordinarily, “the sufficiency of a complaint must rest on its contents alone.” Gee v. Pacheco, 627 F.3d 1178, 1186 (10th Cir. 2010). But there are several well-established exceptions: “(1) documents that the complaint incorporates by reference; (2) documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity, and (3) matters of which a court may take judicial notice.” Id. (internal quotations and citations omitted) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007), and Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002)); see Tal v. Hogan, 453 F.3d 1244, 1265 n.24 (10th Cir. 2006); see also Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009); Pace v. Swerdlow, 519 F.3d 1067, 1072 (10th Cir. 2008); Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007). Matters subject to judicial notice and appropriate for consideration under Rule 12(b)(6) include a court's “own files and records, as well as facts which are a matter of public record.” See Tal, 453 F.3d at 1265 n.24.

         In this case, Plaintiff does not attach any documents to her pleading, but she quotes from and cites extensively Plan-related documents, the directed trust agreement, and public records such as SEC filings. Consistent with the above-cited authorities, Defendants have submitted copies of the documents with their Motions. Because Plaintiff does not dispute the authenticity of these documents, the Court finds them to be appropriate for consideration. See GFF Corp. v. Assoc. Wholesale Grocers, Inc., 130 F.3d 1381, 1384-85 (10th Cir. 1997) (“[I]f a plaintiff does not incorporate by reference or attach a document to its complaint, but the document is referred to in the complaint and is central to the plaintiff's claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss.”); see also Brokers' Choice of Am., Inc. v. NBC Universal, Inc., 861 F.3d 1081, 1104 (10th Cir. 2017); Berneike v. CitiMortgage, Inc., 708 F.3d 1141, 1146 (10th Cir. 2013). Further, where Plaintiff misquotes or omits pertinent portions of the cited documents, the documents control. See GFF Corp., 130 F.3d at 1385 (“factual allegations that contradict . . . a properly considered document are not well-pleaded facts that the court must accept as true”); accord Farrell Cooper Mining Co. v. U.S. Dep't of Interior, 728 F.3d 1129, 1237 n.6 (10th Cir. 2013); Peterson v. Martinez, 707 F.3d 1197, 1206 (10th Cir. 2013).[4]

         Plaintiff's Allegations

         In addition to the facts summarized above, Plaintiff alleges that she “held shares of Chesapeake stock in her Plan account” from July 1, 2014, to the present, and that the value of those shares has “diminished considerably” during this time, resulting in a financial loss. See Am. Compl. ¶¶ 10-11. The Plan provided an individual account for each participant and benefits based on the amount contributed to the participant's account, together with any income, expenses, gains, losses, or forfeitures of other accounts that could be allocated to the participant's account. The Plan covered all SSE employees that met certain eligibility requirements. SSE employees were automatically enrolled in the Plan, initially deferred four percent of their pay, and automatically increased contributions in subsequent years of employment (unless they elected a different percentage). No. Chesapeake employees were covered by the Plan.

         SSE matched participants' contributions up to a maximum percentage, and could make discretionary contributions to participants' accounts on an annual basis. Both types of contributions by SSE were made in the form of “Qualifying Employer Securities” or “common stock issued by the Employer” - that is, SSE common stock - and constituted the ESOP component of the Plan. Id. ¶¶ 30-31 (quoting Plan Document at 14, 15; Plan Prospectus at 14). The Plan provided “22 core investment funds” in which participants could elect to invest their contributions, but SSE stock was not an investment option for participants because “this investment option is not diversified and exposes investors to a higher risk of loss than other investment options.” Id. ¶¶ 32-33 (quoting Plan Prospectus at 10, 14). Chesapeake common stock also was not an investment option. Id. ¶ 93; see Plan Prospectus at 10-14.

         SSE established a trust fund to hold and distribute the Plan's assets, and appointed Principal as the trustee. The trust agreement described Principal's duties and powers, and specified the types of financial products and investments that could be made, including annuity contracts, money market funds, exchange traded securities, mutual funds, and qualifying employer securities. See Am. Compl. ¶ 35 (citing Trust Agreement, § .05(a)). Principal became a “directed trustee, ” subject to the direction of the Committee Defendants, “unless such direction is contrary to the terms of the Plan or ERISA.” Id. ¶¶ 35, 45; see Trust Agreement § .04.

         When the Plan was established on July 1, 2014, as a spinoff from Chesapeake's employee savings plan, it received a transfer of assets from the Chesapeake plan valued at $196, 210, 229, which included Chesapeake stock valued at $87, 038, 874 (or 44.3 percent). See Am. Compl. ¶¶ 26, 36. According to Plaintiff, “[t]he Plan's 2014 Financial Statements incorrectly describe the Chesapeake stock as an ‘employer security.'” Id. ¶ 37.[5] After SSE's spinoff from Chesapeake, the two corporations were separate and independent, publicly-traded companies. Chesapeake had no ownership interest in SSE, and they were not affiliates of one another. Chesapeake was not an employer of any Plan participants.

         Plaintiff alleges that Chesapeake stock was historically risky and volatile and it “experienced precisely the volatility that might be expected during the [proposed] Class Period.” See Am. Compl. ¶ 48. Specifically, the nature of Chesapeake's business in oil and gas production, the fluctuation of oil and gas prices, the volatility of energy markets, and Chesapeake's financial condition combined to make Chesapeake stock a particularly risky investment that “was not a suitable option for the investment of retirement assets” when it received the Chesapeake stock on July 1, 2014. Id. ¶ 57. Further increasing the riskiness of Chesapeake stock during 2014 and 2015 was a sharp drop in share price, energy market predictions of further decline in oil and gas prices, and corporate debt levels that allegedly caused financial analysts to label Chesapeake as a stock for “energy risk-takers” in 2015 and as “an unprecedented mess” in 2016. Id. ¶¶ 58-63, 69-77. The market price of Chesapeake stock fell from $29 per share in July 2014 to $7 per share in October 2015, and has remained low, losing “approximately 80% of its value.” Id. ¶¶ 58, 71, 77.

         Plaintiff complains that “[t]he Committee Defendants ignored these risks and failed to take any action that a prudent fiduciary would have taken to stop the massive losses that Plan participants were suffering due to Chesapeake's free-falling share price” (id. ¶ 64), particularly “given the Plan's massive, overly-concentrated holding of Chesapeake stock” (id. ¶ 65) and the ESOP's investment in SSE stock (because SSE was in the same industry and its success was “directly dependent on Chesapeake”). Id. ¶ 66.[6] Instead, Plaintiff alleges the amount of Chesapeake stock held by the Plan increased “throughout 2014 and 2015” due to additional purchases. Id. ΒΆΒΆ 67, 83, 85. Plaintiff acknowledges that the Chesapeake stock held by the Plan at the end of 2014 was a lesser percentage of its assets (then ...

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