April 12, 2016
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 15 C 3053 - James
B. Zagel, Judge.
Wood, Chief Judge, and Flaum and Williams, Circuit Judges.
is the fiduciary for an employee stock ownership plan
("the Plan") for employees of Personal-Touch, a
home-health-care company. In that role, it facilitated a
transaction in which the Plan purchased a number of shares in
the company with a loan from the company itself.
Unfortunately, the shares turned out to be worth much less
than the Plan paid, leaving the Plan with no valuable assets
and heavily indebted to the company's principal
shareholders. The Plan's participants, all employees of
Personal Touch, wound up being on the hook for interest
payments on the loan. Employees Lisa Allen and Misty Dalton
brought this action under section 502 of the Employee
Retirement Income Security Act (ERISA), 29 U.S.C. §
1132, raising two theories of recovery: first, that GreatBanc
engaged in transactions that section 406 of ERISA prohibits,
see 29 U.S.C. § 1106; and second, that GreatBanc
breached its fiduciary duty under ERISA section 404, 29
U.S.C. § 1104, by failing to secure an appropriate
valuation of the Personal-Touch stock. The district court
initially dismissed the complaint without prejudice, but it
later converted the judgment to one with prejudice after
plaintiffs opted not to amend their complaint. Because the
plaintiffs plausibly alleged both a prohibited transaction
and a breach of fiduciary duty, we reverse the judgment of
the district court and remand for further proceedings.
stage, we present the facts as alleged in the complaint in
the light most favorable to plaintiffs. Employee stock
ownership plans (ESOPs) are meant to be a way for companies
to provide employees with a stake in the enterprise. See 29
U.S.C. § 1002. Personal-Touch, a privately held entity,
is the sponsor of the Plan at issue here. See 29 U.S.C.
§ 1002(16)(B). Sponsors are responsible for
administering ESOPs and often appoint independent trustees to
carry out that job. Personal-Touch appointed GreatBanc as
Trustee of the Plan in 2010 for the purpose of representing
the Plan in the proposed stock-purchase transaction.
December 9, 2010, GreatBanc instructed the Plan to acquire an
unknown amount of stock from Personal-Touch's
shareholders for $60 million. Before this acquisition,
Personal-Touch's principal shareholders owned 100 percent
of its shares. The plaintiffs do not know whether GreatBanc
hired any financial advisors to review the transaction. The
principal shareholders arranged for the Plan to finance this
transaction through a loan they gave to the Plan at a 6.25%
interest rate; the record does not reveal why the Plan did
not use outside funding.
was hardly dry on the acquisition papers when the value of
Personal-Touch's stock began to tank. Twenty-two days
later, the complaint asserts and GreatBanc accepts for
present purposes, the Plan's stock was estimated to be
worth some $13 million (almost 22%) less than what the Plan
paid for it. By late 2011, the estimated value of the stock
had declined by almost 50%, and by December 31, 2013, the
Plan's shares were worth only around $26.6 million. The
selling shareholders, however, were relatively untouched by
these developments. Rather than holding a rapidly
depreciating asset in the form of the stock, they had become
creditors of the Plan (and thus indirectly the employees) and
the recipients of a secure flow of principal and interest
payments on the original $60 million loan. The plaintiffs
felt that they had drawn the short straw: they sued
GreatBanc, alleging that it violated its fiduciary
responsibilities under ERISA by approving a purchase of stock
at too high a price and by facilitating two prohibited
transactions: (1) the Plan's purchase of stock from the
company, and (2) the loan to the Plan that funded the
purchase. See 29 U.S.C. § 1106(a) and (b).
complaint alleges that GreatBanc did not conduct any inquiry
into whether whoever was responsible for Personal-Touch's
financial projections had a conflict of interest, did not
undertake an independent investigation of
Personal-Touch's revenues, and failed to seek any remedy
for the overpayment for the stock. The complaint originally
alleged that 4.25% was the customary interest rate for an
ESOP transaction such as the one that took place, but it
retracted that detail in surreply. Last, the complaint notes
that GreatBanc entered into a settlement with the Department
of Labor in 2014 (after the transaction), binding it to
specific policies and procedures for analyzing stock
valuation in ESOP transactions; the settlement, plaintiffs
imply, was designed to address its record of shortcomings as
district court dismissed the complaint, finding that the
plaintiffs had not sufficiently pleaded breach of fiduciary
duty according to the standard outlined in Fifth Third
Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014).
Dudenhoeffer held that "where a stock is
publicly traded, allegations that a fiduciary should
have recognized from publicly available information alone
that the market was over- or undervaluing the stock are
implausible as a general rule, at least in the absence of
special circumstances." Id. at 2471 (emphasis
added). A plaintiff in this type of case must therefore point
to those "special circumstances" in her complaint,
in order to survive a motion to dismiss. Believing that this
rule applied and that no special circumstances existed, the
district court dismissed the breach-of-fiduciary-duty claim.
It rejected the prohibited-transaction claim for much the
same reason, finding that the question whether the Plan paid
a fair price for the stock was not properly alleged.
apply the usual de novo standard of review to the
district court's rulings and accept the facts as alleged
for present purposes. Wilczynski v. Lumbermens Mut.
Casualty Co., 93 F.3d 397, 401 (7th Cir. 1996);
Alexander v. United States, 721 F.3d 418, 423 (7th
Cir. 2013). No heightened pleading standard applies here; it
is enough to provide the context necessary to show a
plausible claim for relief. See Dudenhoeffer, 134
S.Ct. at 2471 (citing Ashcroft v. Iqbal, 556 U.S.
662, 677-80 (2009), and Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 554-63 (2007)). We consider first
the plaintiffs' prohibited-transaction argument, and then
their broader claim for breach of fiduciary duty.
identifies a number of transactions that are flatly
prohibited between a plan and a party in interest, or a plan
and a fiduciary. See ERISA § 406, 29 U.S.C. § 1106.
The provision at issue here ...