Ralph Whitley v. BP, P.L.C.

Case: 15-20282 Document: 00513693089 Page: 1 Date Filed: 09/26/2016

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

September 26, 2016

No. 15-20282

Lyle W. Cayce

Clerk

RALPH WHITLEY, Individually and on behalf of others similarly situated;

FRANKIE RAMIREZ; DAVID M. HUMPHRIES; CHARIS MOULE;

EDWARD F. MINEMAN; SYED ARSHADULLAH; JERRY T. MCGUIRE;

MAUREEN S. RIELY; THOMAS P. SOESMAN,

Plaintiffs - Appellees

v.

BP, P.L.C.; ANTHONY HAYWARD; THE SAVINGS PLAN INVESTMENT

OVERSIGHT COMMITTEE; RICHARD J. DORAZIL; COREY CORRENTI;

MARVIN DAMSMA; JAMES DUPREE; PATRICK GOWER; JEANNE M.

JOHNS; PATRICIA H. MILLER; STEPHEN J. RINEY; BRIAN D. SMITH;

LORD JOHN BROWNE; STEPHANIE C. MOORE; BP CORPORATION

NORTH AMERICA, INCORPORATED; BP AMERICA, INCORPORATED;

LAMAR MCKAY; GREGORY T. WILLIAMSON; NEIL SHAW; THOMAS L.

TAYLOR; BP CORPORATION NORTH AMERICA, INCORPORATED’S

BOARD OF DIRECTORS; ROBERT A. MALONE,

Defendants - Appellants

Appeal from the United States District Court

for the Southern District of Texas

Before WIENER, CLEMENT, and COSTA, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

In this stock-drop suit, the question on appeal is whether the district

court erred in holding that the plaintiff stockholders’ amended complaint

stated a plausible claim under the pleading standards of Fifth Third Bancorp

Case: 15-20282 Document: 00513693089 Page: 2 Date Filed: 09/26/2016

No. 15-20282

v. Dudenhoeffer, 134 S. Ct. 2459 (2014). Because we conclude that it did, we

reverse and remand.

I.

BP, p.l.c. (“BP”) is a multinational oil and gas company headquartered

in London, England. BP offered its employees a choice of investment and

savings plans (the “Plans”) regulated by ERISA, 29 U.S.C. §§ 1001-1461. The

Plans included the BP Stock Fund—an employee stock ownership plan

(“ESOP”) comprised primarily of BP stock—as an investment option.

On April 20, 2010, the BP-leased Deepwater Horizon offshore drilling rig

exploded, causing a massive oil spill in the Gulf of Mexico and a subsequent

decline in BP’s stock price. The BP Stock Fund lost significant value, and the

affected investors filed suit on June 24, 2010, alleging that the plan fiduciaries:

(1) breached their duties of prudence and loyalty by allowing the Plans to

acquire and hold overvalued BP stock; (2) breached their duty to provide

adequate investment information to plan participants; and (3) breached their

duty to monitor those responsible for managing the BP Stock Fund.

The district court determined that the fiduciaries’ investments in

company stock were entitled to a “presumption of prudence” under Kirschbaum

v. Reliant Energy, Inc., 526 F.3d 243, 255 (5th Cir. 2008) (applying Moench v.

Robertson, 62 F.3d 553 (3d Cir. 1995), abrogated by Fifth Third, 134 S. Ct.

2459). The district court held that the plaintiffs (hereafter “stockholders”) had

failed to overcome the Moench presumption and dismissed their claims under

Federal Rule of Civil Procedure 12(b)(6). The stockholders appealed, and while

their appeal was pending in this court, the Supreme Court issued Fifth Third,

holding that there was no such “presumption of prudence” under ERISA. 134

S. Ct. at 2467. Instead, the Court held that “[t]o state a claim for breach of the

duty of prudence on the basis of inside information, a plaintiff must plausibly

allege an alternative action that the defendant could have taken that would

2

Case: 15-20282 Document: 00513693089 Page: 3 Date Filed: 09/26/2016

No. 15-20282

have been consistent with the securities laws and that a prudent fiduciary in

the same circumstances would not have viewed as more likely to harm the fund

than to help it.” Id. at 2472. This court then vacated the district court’s

judgment and remanded for reconsideration in light of Fifth Third. Whitley v.

BP, P.L.C., 575 F. App’x 341, 343 (5th Cir. 2014).

On remand, the stockholders moved to file an amended complaint

alleging, as per Fifth Third, that the defendant fiduciaries possessed

unfavorable inside information about BP and that they could have taken

various alternative actions that would not have done more harm than good to

the BP Stock Fund. The district court held that: (1) the stockholders had

plausibly alleged that the defendants had inside information; and (2) the

stockholders had plausibly alleged two alternative actions that the defendants

could have taken that met the Fifth Third standard: freezing, limiting, or

restricting company stock purchases; and disclosing unfavorable information

to the public. The district court granted the motion to amend with respect to

pleading these alternative actions. It then certified the defendants’ motion for

interlocutory appeal.

II.

Under 28 U.S.C. § 1292(b), this court has “appellate jurisdiction over the

order certified to the court of appeals,” and “review is not limited to the

controlling question of law formulated by the district court in its certification

order.” Hines v. Alldredge, 783 F.3d 197, 200 (5th Cir. 2015). This court reviews

“de novo a district court’s grant or denial of a Rule 12(b)(6) motion to dismiss.”

Id. at 200–01 (quoting True v. Robles, 571 F.3d 412, 417 (5th Cir. 2009)). Here,

because the district court’s grant of leave to amend was the functional

equivalent of a denial of a Rule 12(b)(6) motion to dismiss, and was based on a

question of law, this court reviews the district court’s order de novo.

3

Case: 15-20282 Document: 00513693089 Page: 4 Date Filed: 09/26/2016

No. 15-20282

III.

ERISA, 29 U.S.C. §§ 1001-1461, protects participants in voluntarily

established, private sector retirement plans. It does this “by establishing

standards of conduct, responsibility, and obligation for fiduciaries of employee

benefit plans.” 29 U.S.C. § 1001(b). It “provides that an employer who sponsors

an employee plan may also serve as a fiduciary of that plan,” and it “imposes

on the employer-fiduciary and on those who manage the plan strict statutory

duties, including loyalty, prudence, and diversification.” Kirschbaum, 526 F.3d

at 248.

Here, the BP Stock Fund was an ESOP. “The term ‘employee stock

ownership plan’ means an individual account plan . . . which is designed to

invest primarily in qualifying employer securities . . . .” 29 U.S.C. §

1107(d)(6)(A). When the share price of an employer’s stock decreases, the value

of an employee-held ESOP account decreases as well. When the share price of

an employer’s stock decreases significantly, the affected employees often sue

to recover their losses on their investments in employer stock. Such actions are

commonly known as “stock-drop” suits.

Courts have recognized a tension between a fiduciary’s duty to prudently

manage investments under ERISA and Congress’s allowance of funds

composed primarily of employer stock. In Moench, the Third Circuit framed

the question as follows: “To what extent may fiduciaries of [ESOPs] be held

liable under [ERISA] for investing solely in employer common stock, when both

Congress and the terms of the ESOP provide that the primary purpose of the

plan is to invest in the employer’s securities[?]” 62 F.3d at 556. There, the

plaintiffs sued after their employer, a bank, collapsed, wiping out their ESOP

investments. After a lengthy discussion of the history and purpose of ERISA

and ESOP funds, the Third Circuit ultimately held that “an ESOP fiduciary

who invests the assets in employer stock is entitled to a presumption that it

4

Case: 15-20282 Document: 00513693089 Page: 5 Date Filed: 09/26/2016

No. 15-20282

acted consistently with ERISA by virtue of that decision.” Id. at 571. This

presumption was later adopted by several other circuits, including this one in

Kirschbaum, 526 F.3d at 255.

The Moench presumption was rejected by the Supreme Court in Fifth

Third. 134 S. Ct. 2459. There, the defendants included a large financial

services firm and the plaintiffs were ESOP participants. The firm’s stock price

plummeted seventy-four percent during the great recession. The plaintiffs

sued, alleging that “the fiduciaries knew or should have known that Fifth

Third’s stock was overvalued and excessively risky” based on both public

information and nonpublic, i.e., inside, information. Id. at 2464. The district

court held that the defendants were entitled to a “presumption that their

decision to remain invested in Fifth Third stock was reasonable,” Dudenhoeffer

v. Fifth Third Bancorp, 757 F. Supp. 2d 753, 758 (S.D. Ohio 2010), and cited

Moench. The district court held that the plaintiffs had failed to allege sufficient

facts to overcome the presumption and dismissed the complaint under Rule

12(b)(6). The Sixth Circuit reversed. Dudenhoefer v. Fifth Third Bancorp, 692

F.3d 410, 424 (6th Cir. 2012). The Sixth Circuit did not reject the application

of the presumption; rather, it held that the presumption concerns questions of

fact that do not apply at the pleading stage. Id. at 418-19.

The Supreme Court noted that “[i]n applying a ‘presumption of prudence’

that favors ESOP fiduciaries’ purchasing or holding of employer stock, the

lower courts have sought to reconcile congressional directives that are in some

tension with each other.” 134 S. Ct. at 2465. “On the one hand, ERISA itself

subjects pension plan fiduciaries to a duty of prudence,” while “[o]n the other

hand, Congress recognizes that ESOPs are ‘designed to invest primarily in’ the

stock of the participants’ employer, § 1107(d)(6)(A), meaning that they

are not prudently diversified.” Id. After reviewing the “pertinent provisions of

ERISA,” the Court held that “the law does not create a special presumption

5

Case: 15-20282 Document: 00513693089 Page: 6 Date Filed: 09/26/2016

No. 15-20282

favoring ESOP fiduciaries” and that “the same standard of prudence applies to

all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP

fiduciary is under no duty to diversify the ESOP’s holdings.” Id. at 2467.

The Court nonetheless recognized the plaintiffs’ “legitimate” concern

“that subjecting ESOP fiduciaries to a duty of prudence without the protection

of a special presumption will lead to conflicts with the legal prohibition on

insider trading” because “ESOP fiduciaries often are company insiders and

because suits against insider fiduciaries frequently allege . . . that the

fiduciaries were imprudent in failing to act on inside information they had

about the value of the employer’s stock.” Id. at 2469. The Court disagreed that

the presumption of prudence applied by the lower courts was “an appropriate

way to weed out meritless lawsuits” and stated that such a task could “be better

accomplished through careful, context-sensitive scrutiny of a complaint’s

allegations.” Id. at 2470.

Turning to pleading standards, the Court stated 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. The Court then stated:

To state a claim for breach of the duty of prudence on the

basis of inside information, a plaintiff must plausibly allege

an alternative action that the defendant could have taken

that would have been consistent with the securities laws and

that a prudent fiduciary in the same circumstances would not

have viewed as more likely to harm the fund than to help it.

Id. at 2472. The Court vacated and remanded, “leav[ing] it to the courts below

to apply the foregoing to the complaint in this case in the first instance.” Id. at

2473.

6

Case: 15-20282 Document: 00513693089 Page: 7 Date Filed: 09/26/2016

No. 15-20282

The Ninth Circuit soon took on the challenge of interpreting the Supreme

Court’s Fifth Third pleading standards in Harris v. Amgen, Inc., 788 F.3d 916

(9th Cir. 2015). Harris—like this case—was an employee stock-drop action that

was filed before Fifth Third. In Harris, the plaintiffs alleged that Amgen, a

pharmaceutical company, concealed unfavorable information about a drug,

and that when the unfavorable information came to light, Amgen’s share price

declined significantly. The plaintiffs claimed “that fiduciaries of Amgen’s stock-

ownership plans knew or should have known that the stock was overvalued

based on inside information, and should have either removed the Amgen stock

as an investment option or revealed to the general public” the unfavorable

inside information. Id. at 924 (Kozinski, J., dissenting from denial of rehearing

en banc). The Ninth Circuit decided that the allegations in the plaintiffs’

complaint—despite being written before Fifth Third—were sufficient because

it was “plausible” that the “defendants could remove the Fund from the list of

investment options without causing undue harm to plan participants.” Id. at

938. The court further held that the Supreme Court had “articulated certain

standards for ERISA liability in Fifth Third” but that the Ninth Circuit had

“already assumed those standards” in an earlier opinion. Id. at 940.

The Supreme Court reversed. Amgen Inc. v. Harris, 136 S. Ct. 758 (2016).

The Court clarified that the complaint itself must plausibly allege “that a

prudent fiduciary in the same position ‘could not have concluded’ that the

alternative action ‘would do more harm than good.’” Id. at 760 (quoting First

Third, 134 S. Ct. at 2463). The Court clarified that a court cannot simply

presume that the plaintiff’s proposed alternatives would satisfy the Fifth Third

standards; rather, “the facts and allegations supporting that proposition

should appear in the stockholders’ complaint.” Id. Noting that the plaintiffs

were the “masters of their complaint,” the Court left it to the district court to

7

Case: 15-20282 Document: 00513693089 Page: 8 Date Filed: 09/26/2016

No. 15-20282

determine whether the Amgen plaintiffs could amend their complaint to satisfy

the standards of Fifth Third. Id.

In light of these decisions, the district court here erred when it altered

the language of Fifth Third to reach its holding. In Fifth Third, the Supreme

Court stated that the plaintiff’s proposed alternative must be one that “a

prudent fiduciary in the same circumstances would not have viewed as more

likely to harm the fund than to help it.” 134 S. Ct. at 2472 (emphasis added).

But here the district court stated that it could not determine, “on the basis of

the pleadings alone, that no prudent fiduciary would have concluded that [the

alternatives] would do more good than harm” (second emphasis added). These

statements are not equivalent. Under the Supreme Court’s formulation, the

plaintiff bears the significant burden of proposing an alternative course of

action so clearly beneficial that a prudent fiduciary could not conclude that it

would be more likely to harm the fund than to help it.

Here, the stockholders have failed to do so. Indeed, in certifying this case

for interlocutory appeal the district court recognized that if defendants have

correctly read Dudenhoeffer to require “plaintiffs to plausibly allege that no

prudent fiduciary could have concluded that the proposed alternative action

would do more harm than good”—and Amgen has since confirmed that is the

standard—then the plaintiff’s claim should be dismissed. In their amended

complaint, the stockholders state that their proposed alternatives “(a) could

have been done without violating the securities laws or any other laws; (b)

should have been done to fulfill Defendants’ fiduciary obligations under

ERISA; and (c) would not have been more likely to harm the BP Stock Fund

than to help it.” Aside from these conclusory statements, the stockholders do

not specifically allege, for each proposed alternative, that a prudent fiduciary

could not have concluded that the alternative would do more harm than good,

nor do they offer facts that would support such an allegation. This runs counter

8

Case: 15-20282 Document: 00513693089 Page: 9 Date Filed: 09/26/2016

No. 15-20282

to the Supreme Court’s directive that “the facts and allegations supporting” an

alternative action that could satisfy Fifth Third’s standards “should appear in

the stockholders’ complaint.” 136 S. Ct. at 760. See also Rinehart v. Lehman

Bros. Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016) (affirming a dismissal under

12(b)(6) because the plaintiffs’ complaint did not “plausibly plead facts and

allegations showing that a prudent fiduciary during the class period ‘would not

have viewed [disclosure of material nonpublic information regarding Lehman

or ceasing to buy Lehman stock] as more likely to harm the fund than to help

it’” (quoting Amgen, 136 S. Ct. at 759) (alteration in original)).

The amended complaint states that BP’s stock was overvalued prior to

the Deepwater Horizon explosion due to “numerous undisclosed safety

breaches” known only to insiders. In other words, the stockholders theorize

that BP stock was overpriced because BP had a greater risk exposure to

potential accidents than was known to the market. Based on this fact alone, it

does not seem reasonable to say that a prudent fiduciary at that time could not

have concluded that (1) disclosure of such information to the public or (2)

freezing trades of BP stock—both of which would likely lower the stock price—

would do more harm than good. In fact, it seems that a prudent fiduciary could

very easily conclude that such actions would do more harm than good.

Accordingly, we find that the stockholders’ amended complaint is

insufficient, and the district court erred in granting the stockholders’ motion

to amend.

IV.

For the foregoing reasons, the judgment of the district court is

REVERSED, and the case is REMANDED for further proceedings.

9