Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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PEABODY v. DAVIS (April 12, 2011)

Jonathan Peabody joined the Rock Island Corporation, a closely held operation, in 1998. He first invested in the company’s pension plan in 1999 when he rolled over a $167,000 IRA into the Plan. Almost all of the rolled over funds were used to purchase Rock Island stock. There was no market for, and therefore no easy way to value, the stock. The Plan's trustee issued valuation statements periodically. At different times between 2000 and 2004, it was assigned values of $757, $500, $625 and $550 per share. Peabody left Rock Island in 2004. At the time he had 835 Rock Island shares. Peabody and Rock Island entered into a loan agreement pursuant to which Rock Island agreed to purchase the stock and to pay $350 per share in one year. However, when the loan became due, Rock Island was unable to pay. It went out of business in 2005. Peabody brought suit against the company, the Plan trustees, and two insurance companies that had issued policies protecting Rock Island against employee dishonesty. Judge Coar (N.D. Ill.) held a bench trial and ruled that: a) Peabody had waived any fiduciary duty claim with respect to the initial rollover or the defendants' failure to diversify his account, b) the Plan and the trustee's violated their fiduciary duties by maintaining the Rock Island investment and by failing to distribute the benefit, c) one trustee breached his fiduciary duty by offering the loan, d) ERISA prohibited the loan transaction, e) Rock Island itself was not liable, and f) Peabody did not have standing to assert a claim against the insurance company defendants. The court awarded damages based on a $500 per-share valuation in reliance on the fact that the Plan purchased shares for Peabody's account at that price in 2001. Peabody and the defendants appealed.

In their opinion, Judges Cudahy, Flaum, and Kanne affirmed in part and reversed and remanded in part. The Court first noted it was dealing with three separate claims: a) a § 502(a)(2) claim against the fiduciaries on behalf of the Plan, b) a § 502(a)(1)(b) claim for benefits, and c) a § 502(a)(3) equitable claim against the insurance companies. The Court first concluded that the trustees breached their fiduciary duties under § 502(a)(2). A new SEC rule had substantial negative implications for the company's profit margins and its stock steeply declined over a five-year period. The trustee's knew of the changed rule, knew it was prominent, and knew of its significant impact on Rock Island’s business model. The company did not require employees to invest in Rock Island stock. In fact, Peabody apparently had a greater percentage of company stock than any other employee. A prudent investor would have divested earlier. The Court also concluded that Peabody's initial consent to the stock purchase did not affect the trustee's continuing fiduciary duty over the course of the investment. The Court rejected Peabody's alternative theory of liability arising from the loan for stock transfer. Although the Court agreed that the transaction violated ERISA, it concluded that Peabody suffered no damages from the transaction. As the Court pointed out, it was simply the trade "of worthless stock for a worthless loan." The district court erred, however, in computing damages when it applied the $500 per-share figure to all of the stock. The Court remanded for a damages recalculation, advising the district court to start with Peabody's original investment , consider using average values over the length of the investment, and assume that 25% to 33% of the stock could have been left in the account without violating a duty of prudence. The Court also affirmed the district court's rejection of Peabody's § 502(a)(1)(B) benefits claim on the grounds that it would result in no additional relief. Finally, the Court agreed with the district court’s rejection of the § 502(a)(3) claim against the insurance companies. That section allows for "other appropriate equitable relief." The Supreme Court has limited the section to "typical" equitable relief. Peabody's request for money damages from the insurance policies is not typical equitable relief.