United States District Court, W.D. Oklahoma
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,
ADMINISTRATIVE COMMITTEE, SEVENTY SEVEN ENERGY, INC. RETIREMENT & SAVINGS PLAN; et al., Defendants.
TIMOTHY D. DEGIUSTI, UNITED STATES DISTRICT JUDGE.
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],  filed pursuant to Fed.R.Civ.P.
12(b)(6). Both Motions are fully briefed. Because the
Motions raise overlapping issues, they are taken up together.
and Procedural Background
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
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.
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). 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.
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.
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.
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
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).
“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.
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).
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.
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
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.
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. 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
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.
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. Instead, Plaintiff alleges the amount
of Chesapeake stock held by the Plan increased
“throughout 2014 and 2015” due to additional
purchases. Id. ¶¶ 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