A somewhat overlooked U.S. Supreme Court decision from last month has breathed new life into claims that BP plc mismanaged employee stock ownership programs (ESOPs) that plummeted in value after the 2010 Deepwater Horizon oil spill.
In a decision issued on Tuesday, the U.S. Court of Appeals for the Fifth Circuit revived a class action alleging that BP breached fiduciary duties to ESOP participants by overinvesting in company stock. The Fifth Circuit based its decision on Fifth Third Bancorp v. Dudenhoeffer, a 9-0 Supreme Court decision from June 25 that gutted an important defense to investor class actions brought under the Employee Retirement Income Security Act (ERISA).
In the wake of the Deepwater Horizon catastrophe, plaintiffs firms including Milberg and Harwood Feffer brought suit on behalf of BP workers who participated in four employee stock plans offered by the British oil giant’s North American subsidiary. All four of the plans were tied in part to BP’s stock, so they took a beating in the wake of the Deepwater Horizon disaster. The plaintiffs firms alleged that BP knew its shares were overvalued and breached its ERISA duties by not better diversifying the ESOP’s investment portfolios.
Siding with BP’s lawyers at Steptoe & Johnson and Sullivan & Cromwell, U.S. District Judge Keith Ellison in Houston dismissed the ERISA case in March 2012. Ellison held that BP was shielded by the so-called Moench presumption—named after the Third Circuit’s 1995 decision in Moench v. Robertson—which stood for the idea that ESOP administrators are presumed to act prudently when they hold or sell a sponsor’s securities. Ellison wrote that to overcome the presumption of prudence, investors needed to show that the administrators of BP’s employee stock plans “had access to nonpublic information that should have put them on notice that BP was about to suffer such calamities that they should have considered themselves bound to divest”—an extremely high burden.
While Ellison’s ruling was on appeal, the U.S. Supreme Court granted cert in Dudenhoeffer, which dealt directly with the scope of the presumption of prudence for employee stock plan fiduciaries. In its June 25 ruling, which was largely overshadowed by higher-profile decisions like Halliburton Co. v. Erica P. John Fund, the high court held unanimously that the Moench presumption is bad law. Congress never intended for a special standard to apply to an ESOP fiduciary’s decision to hold on to company stock, Justice Stephen Breyer wrote for the court.
That’s given the BP ERISA litigation new legs—at least for now. “Because the district court applied the Moench presumption in granting defendants’ motion to dismiss and denying plaintiffs’ motion to amend, we vacate the judgment of the district court and remand for reconsideration of those motions in light of Dudenhoeffer,” the Fifth Circuit panel wrote.
Paul Ondrasik Jr. of Steptoe & Johnson represented BP at the Fifth Circuit. Ondrasik had urged the panel not to rule on the appeal until it heard another similar ERISA case that the Supreme Court remanded to the Fifth Circuit for reconsideration earlier this month. The plaintiffs’ appellate team included Ronald Kravitz of Shepherd, Finkelman, Miller & Shah and John Clay of Ajamie LLP.