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Shirk v. Fifth Third Bancorp

April 10, 2007

BENJAMIN SHIRK, ET AL., PLAINTIFFS,
v.
FIFTH THIRD BANCORP, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Black, M.J.

MEMORANDUM OPINION AND ORDER

This case is before the Court on Defendants' amended motions to dismiss Plaintiffs' first amended class action complaint for failure to state a claim upon which relief can be granted, pursuant to Fed. R. Civ. P. 12(b)(6), and for failure to adequately plead violations of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., pursuant to Fed. R. Civ. P. 9(b). (Docs. 62, 65.) Defendants also request, in the alternative, a more definite statement pursuant to Fed. R. Civ. P. 12(e). (See Doc. 65.) For the following reasons, the motions to dismiss are DENIED, except, as explained infra, as to any claim by Plaintiffs for monetary damages against a nonfiduciary.

I. BACKGROUND AND PROCEDURAL HISTORY

Plaintiff Benjamin Shirk, a former employee of defendant Fifth Third Bancorp and alleged participant in the Fifth Third Bancorp Master Profit Sharing Plan ("the Plan"), initiated this action by filing a class action complaint on January 26, 2005, alleging, inter alia, improprieties in the management and administration of the Plan. (See Doc. 1.) On October 14, 2005, Shirk was granted leave to file an amended complaint. (Doc. 52.) Joined by Ronald Jauss, another alleged Plan participant, Shirk filed an amended class action complaint on October 17, 2005. (Doc. 53.)

On January 24, 2006, Defendants Fifth Third Bancorp, Fifth Third Bank, George A. Schaefer, Jr., Paul L. Reynolds, James F. Girton, Joyce Tillman, and the members of the Fifth Third Pension and Profit Sharing Committee*fn1 (collectively "the Fifth Third Defendants") filed a motion to dismiss Plaintiffs' first amended class action complaint for failure to state a claim upon which relief can be granted and for failure to adequately plead violations of ERISA. (Doc. 62.) On the same day, a second group of Defendants comprised of the Fifth Third Board of Directors (hereinafter "the Outside Directors"),*fn2 separately filed a motion to dismiss or, in the alternative, motion for a definite statement. (Doc. 65.) Plaintiffs filed a memorandum in opposition to the motions on February 28, 2006. (Doc. 73.) The two defendant groups separately filed memoranda in reply. (Docs. 74, 75.) Both sides have filed supplemental authority. (Docs. 79, 80, 84.)

A. The Parties

Plaintiffs state that they are former Fifth Third employees and current participants in the Plan. (Doc. 53 at ¶¶ 12-13.) During the alleged Class Period, September 21, 2001 to the present (see id. at ¶ 3), as a result of their own and/or the Company's contributions, Plaintiffs acquired and held shares of Fifth Third stock in their respective Plan accounts. (Id.)

Defendant Fifth Third Bancorp (collectively, with its subsidiaries and affiliates, "Fifth Third") is an Ohio corporation with its principal executive office in Cincinnati, Ohio. (Id. at ¶ 14.) Fifth Third is a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System. (Id.) Fifth Third has a second-tier holding company, Fifth Third Financial Corporation, which has six wholly-owned direct subsidiaries: Fifth Third Bank; Fifth Third Bank (Michigan); Fifth Third Community Development Corporation; Fifth Third Investment Company; Old Kent Capital Trust I; and Fifth Third Reinsurance Company, Ltd. (Id.)

Throughout the alleged Class Period, Fifth Third's responsibilities included, through its Board of Directors and its Chief Executive Officer, broad oversight of and ultimate decision-making authority respecting the management and administration of the Plan and the Plan's assets, as well as the appointment, removal, and monitoring of other fiduciaries of the Plan that Fifth Third appointed, or to whom it assigned fiduciary responsibility, including the Fifth Third Pension and Profit Sharing Committee and the Fifth Third Investment Advisors. (Id. at ¶ 15.) Fifth Third exercises discretionary authority with respect to management and administration of the Plan and/or management and disposition of the Plan's assets. (Id.)

Defendant Fifth Third Bank serves as the trustee of the Plan and also exercises discretionary authority with respect to management and administration of the Plan and/or management and disposition of the Plan's assets. (Id. at ¶ 16.)

Defendant George A. Schaefer, Jr. ("Schaefer") is the Company's Chief Executive Officer, a member of the Board of Directors, and an alleged fiduciary of the Plan. (See id. at ¶ 17.)

The Board of Directors (or "Outside Directors") are identified as fiduciaries because they allegedly exercise decision-making authority regarding the appointment of Plan fiduciaries and the management of the Plan's assets. (Id. at ¶ 18; see also id. at ¶¶ 19(a)-(q).)

Defendant Paul L. Reynolds is a member of the Pension and Profit Sharing Committee and signed the financial reports for the Plan. (See id. at ¶ 21.)

Defendant James F. Girton signed the Form 5500s for Fiscal Year 2002 for the Plan as the "individual signing as Plan administrator" and also exercised discretionary authority with respect to management and administration of the Plan and/or management and disposition of the Plan's assets. (Id. at ¶ 31.)

Defendant Joyce Tillman signed the Form 5500s for Fiscal Year 2001 for the Plan as the "individual signing as Plan administrator" and also exercised discretionary authority with respect to management and administration of the Plan and/or management and disposition of the Plan's assets. (Id. at ¶ 32.)

Defendant Fifth Third Investment Advisors*fn3 manage the assets of the Plan. (Id. at ¶ 33.)

B. The Plan

According to Plaintiffs, the Plan is a defined contribution profit sharing plan, subject to the provisions of ERISA, with a 401(k) feature and with separate accounts maintained for each participant. (Id. at ¶ 35.) The Plan has two components: (1) a component in which Plan participants make voluntary, pre-tax contributions to the Plan out of their base pay, and (2) a component in which the Company matches a portion of the participant's contributions to the Plan. (Id. at ¶ 2; see also ¶¶ 40, 41.) Participants are fully vested in both voluntary and matching contributions. (Id. at ¶¶ 40, 42.)

The Plan's 401(k) feature offers a variety of investment alternatives of which one, the Fifth Third Stock Fund, contains shares of Fifth Third Bancorp common stock and short-term liquid investments. (Id. at ¶ 44.) Effective December 31, 2001, a participant with an account invested in the Fifth Third Stock Fund has a right to elect to have dividends from the fund reinvested in Fifth Third Bancorp common stock or to take the dividends in cash. (Id. at ¶ 48.)

C. Factual Allegations

Plaintiffs' claims are based, in part, on the following allegations of fact: On April 2, 2001, the Company acquired Old Kent Financial Corp. ("Old Kent") in a stock-for-stock transaction valued at $5.5 billion. (Id. at ¶ 66.) The integration of Old Kent's operations with Fifth Third's was allegedly "a Herculean undertaking" for which Fifth Third was unprepared, and for which Fifth Third lacked the experience or managerial competence to accomplish successfully. (Id.) Fifth Third issued press releases and filed financial reports with the SEC, which represented that it had successfully and seamlessly integrated Old Kent into its operations, and was already experiencing meaningful growth from the acquisition. (Id. at ¶ 68.) Plaintiffs allege that defendants concealed the difficulties encountered in integrating Old Kent into Fifth Third, and the lack of adequate financial controls at Fifth Third necessary to properly manage the Company and account for Fifth Third's assets and liabilities, and thereby artificially inflated the Company's publicly traded stock. (Id. at ¶ 69.) Defendants allegedly concealed from investors the fact that it had outgrown its infrastructure and internal financial and operating controls and that the breakdown of financial controls was producing false, misleading, and unreliable financial statements. (Id. at ¶ 70.)

On September 10, 2002, the Company announced -- in a Form 8-K filed with the SEC -- that it would be taking a $54 million after-tax ($81.8 million pre-tax) charge for impaired funds, allegedly a one-time, immaterial event resulting from an accounting reconciliation. (Id. at ¶ 71.) On November 14, 2002, the Company revealed that federal banking regulators and the SEC were investigating whether the Company's rapid growth had outpaced its internal controls and processes. (See id. at ¶ 72.) Plaintiffs allege that the news of the investigation caused the price of Fifth Third common stock to drop, falling from a November 14, 2002 close of $62.53 to close at $57.42 the next day, a one-day decline of 8.1%, on extremely heavy trading volume. (Id.)

Plaintiffs allege that the Company issued further misrepresentations about the financial impact of the regulatory investigation. (See id. at ¶ 73.) "In a Form 8-K filed on December 10, 2002, the Company represented that . . . its internal controls were adequate, and that there would be no additional negative financial impact from the $81 million incident." (Id.)

On January 31, 2003, however, the Company issued a Form 8-K stating that banking regulators would likely take formal action against it. (Id. at ¶ 74.) Plaintiffs allege that as a result of this later report, the price of Fifth Third common stock closed at $52.21 per share on February 3, 2003 (the next trading day), a further decline of 15% from the closing price on November 14, 2002. (Id.)

In further support of their claims that Defendants mishandled the internal operations of the Company, Plaintiffs allege that on March 26, 2003, Fifth Third entered into an agreement with regulatory agencies to dramatically reconstruct its entire system of internal controls. (See id. at ¶ 75, 76.) Plaintiffs state that at no time prior to the disclosure of the agreement were investors informed of the depth or severity of Fifth Third's lack of internal financial controls or the risk to investors flowing from those absent controls entering the agreement. (Id. at ¶ 77.)

According to plaintiffs, Fifth Third suffered a chronic, systemic, and internally obvious breakdown of internal accounting controls due to a failure to implement and maintain adequate control systems, or a knowing and reckless toleration of the failure to use existing controls. (See id. at ¶ 81.)

In support of its claims that Fifth Third knew or should have known that Fifth Third stock was not a prudent investment for the Plan, Plaintiffs allege, in part, that Defendants knew of the false and misleading statements (id. at ¶ 83), failed to provide Plan participants with information regarding Fifth Third's improper activities (id. at ¶ 88), and failed to protect participants against unnecessary losses (id. at ¶¶ 89, 90). Plaintiffs allege, moreover, that Defendants' regular communications with Plan participants fostered a positive attitude toward Fifth Third stock and did not disclose negative material information concerning investment in Fifth Third stock. (See id. at ¶¶ 91, 92.)

D. The Claims

Plaintiffs present six bases for recovery for breach of fiduciary duties in violation of ERISA §§ 404, 405, and 502(a)(3): (1) a failure by all Defendants to prudently and loyally manage the Plan's assets (Count I); a failure by all Defendants to provide complete and accurate information to participants and beneficiaries (Count II); (3) a failure by Fifth Third, Schaefer, and the Outside Directors to monitor the Pension and Profit Sharing Committee, the Investment Advisors and other fiduciaries of the Plan and to provide them with accurate information (Count III); (4) a breach by all Defendants of the duty to avoid conflicts of interest (Count IV); (5) co-fiduciary liability for breaches of fiduciary duties by Fifth Third, the Outside Directors and Schaefer (Count V); and (6) knowing participation by Fifth Third in a breach of fiduciary duty (Count VI).

Specifically, Plaintiffs allege that Defendants breached their fiduciary duties by failing to prudently and loyally manage the Plan's investment in Fifth Third Stock by continuing to offer Fifth Third stock as an investment option, to match in Fifth Third Stock, and to hold virtually all assets of the Fifth Third Bank Common Stock Fund in Fifth Third Stock (instead of suitable short-term options within the Fund), when the stock allegedly was no longer a prudent investment for participants' retirement savings. (Doc. 53 at ¶ 50.) Plaintiffs allege that Defendants failed to provide participants with complete and accurate information regarding Fifth Third Stock sufficient to advise participants of the true risks of investing their retirement savings in Fifth Third Stock. (Id.) Plaintiffs allege that Defendants failed to properly monitor the performance of their fiduciary appointees and remove and replace those whose performance was inadequate, and that Defendants breached their duties and responsibilities to avoid conflicts of interest and to serve the interests of the participants in and beneficiaries of the Plan with undivided loyalty. (Id.)

II. LEGAL STANDARDS

A. Motions to Dismiss

On consideration of a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the court must construe the complaint in a light most favorable to the plaintiff, accept all of the factual allegations as true, and determine whether the plaintiff undoubtedly can prove no set of facts in support of his claims that would entitle him to relief. Columbia Natural Resources, Inc. v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995), cert. denied, 516 U.S. 1158 (1996); see also In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993); Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993). A complaint need only give "fair notice of what the plaintiff's claim is and the grounds upon which it rests." Lawler v. Marshall, 898 F.2d 1196, 1199 (6th Cir. 1990) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint, however, must contain either direct or inferential allegations with respect to all material elements necessary to sustain a recovery under some viable legal theory. In re DeLorean Motor Co., 991 F.2d at 1240; see also Weiner v. Klais & Co., 108 F.3d 86, 88 (6th Cir. 1997).

In considering a defendant's motion to dismiss, it is proper for the Court to take into account any relevant plan documents. In re Cardinal Health, Inc. ERISA Litig., 424 F. Supp. 2d 1002, 1015 (S.D. Ohio 2006). Courts may consider ERISA plan documents not attached to a complaint where a plaintiff's claims are "based on rights under the plans which are controlled by the plans' provisions as described in the plan documents" and where the documents are "incorporated through reference to the plaintiff's rights under the plans, and they are central to plaintiff's claims." Id. (citing Weiner, 108 F.3d at 89). Thus, "materials central to the claims asserted, including exhibits to the defendant's moving papers, may be considered when ruling on a motion to dismiss without converting it to a summary judgment motion. See Weiner, 108 F.3d at 89; Butler v. Aetna U.S. Healthcare, Inc., 109 F. Supp. 2d 856, 859-860 (S.D. Ohio 1999); see also Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993) ("[d]ocuments that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the Plaintiffs' complaint and are central to her claim").

B. ERISA

A fiduciary's duties under ERISA are set forth in § 404(a)(1)(A) and (B). See 29 U.S.C. § 1104(a)(1)(A), (B). The statute provides, in relevant part, as follows:

[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and--

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Id.

As explained by the Sixth Circuit, a fiduciary's duty under ERISA has three components: (1) a duty of loyalty; (2) a duty to act as a prudent person would act in a similar situation; and (3) a duty to act for the exclusive purpose of providing benefits to plan beneficiaries. See Krohn v. Huron Memorial Hosp., 173 F.3d 542, 547 (6th Cir. 1999) (citing Berlin v. Michigan Bell Telephone Co., 858 F.2d 1154, 1162 (6th Cir. 1988)) (internal quotations and citations omitted).

Generally, an individual's liability as a fiduciary is limited to the extent he has authority to act:

[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 1105(c)(1)(B) of this title.

29 U.S.C. § 1002(21)(A). See Kuper v. Quantum Chem. Corp., 838 F. Supp. 342, 348 (S.D. Ohio 1993) (citing Leigh v. Engle, 727 F.2d 113, 133 (7th Cir. 1984)).

Section 405 of ERISA, however, provides a basis for claims of co-fiduciary liability for ...


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