Yates v. Nichols

286 F.Supp.3d 854

Jefferey YATES, Plaintiff

v.Rodney NICHOLS, et al., Defendants

Case No. 3:17CV1389

United States District Court, N.D. Ohio, Western Division.

Signed December 18, 2017

Gregory Y. Porter, Mark George Boyko, Ryan T. Jenny, Bailey & Glasser, Washington, D.C., Douglas P. Needham, Mark P. Kindall, Robert A. Izzard, Izzard Kindall & Raabe, West Hartford, CT, for Plaintiff.

Thomas P. Dillon, Shumaker, Loop & Kendrick, Toledo, OH, Eric S. Mattson, Anne E. Rea, Lisa E. Schwartz, Sidley Austin, Chicago, IL, for Defendants.

ORDER

James G. Carr, Sr. U.S. District Judge

This is a breach-of-fiduciary-duty and putative class-action case arising under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq.

In 2011, Marathon Petroleum spun off from its parent company, Marathon Oil. When Marathon Petroleum established its employee-retirement plan, the defendants—plan administrator Rodney Nichols, the plan's investment committee, and members of that committee—allegedly placed $88 million in plan assets into a fund holding only Marathon Oil common stock. Participants could then hold the stock or sell it and invest the proceeds in a different fund, but they could not purchase additional Marathon Oil stock.

At the time of the plan's creation, Marathon Oil stock traded at $33.28 per share. (Doc. 1 at ¶ 54). Within months of the spin-off, shares had dropped below $20; by mid-June, 2017, Marathon Oil's stock was worth less than $13 per share. (Id. ).

Plaintiff Jefferey Yates, a former Marathon Petroleum employee and plan participant, brought this suit in June, 2017, on behalf of himself, the Marathon Petroleum Thrift Plan, and all similarly situated plan participants. He raises essentially three claims for breaches of the defendants' fiduciary duties and a claim of co-fiduciary liability.

First, plaintiff alleges that defendants breached their duty to offer only prudent investments by allowing participants to hold Marathon Oil stock, which Yates characterizes as excessively risky.

Second, plaintiff claims that defendants failed to conduct an adequate investigation before permitting participants to hold Marathon Oil stock. According to plaintiff, defendants authorized this investment option because they: 1) wanted to "mirror" the investment options in Marathon Oil's employee-retirement plan; and 2) wrongly assumed that the stock was an "employer security," 29 U.S.C. § 1107(d)(1), that was exempt from the duty to diversify plan assets.

Third, plaintiff alleges that defendants breached their duty to diversify the plan's assets by placing $88 million, or 6.5% of the plan's total assets, into a fund holding only Marathon Oil stock.

Jurisdiction is proper under 28 U.S.C. § 1331.

Pending is the defendants' motion to dismiss under Fed. R. Civ. P. 12(b)(6). (Doc. 18). For the following reasons, I grant the motion to dismiss with prejudice.

Background

Before the spin-off, Marathon Oil engaged in "upstream" and "downstream" energy operations: the former entailed oil-and-gas exploration and production, and the latter refining, marketing, and transportation. (Doc. 18–1 at 4). On June 30, 2011, Marathon Petroleum separated from Marathon Oil. It assumed responsibility for the downstream operations, and Marathon Oil managed the upstream operations. (Doc. 1 at ¶ 8; Doc. 18–1 at 4).

A. The Plan

Marathon Petroleum established its employee-benefit plan on July 1, 2011.

The plan is a defined-contribution, 401(k) plan that is open to "all employees of Marathon Petroleum that meet certain eligibility requirements." (Doc. 1 at ¶ 20; Doc. 18–2 at 56–57).

Participants had the option of investing in four "tiers" of funds. Tier 1 included twenty-one index or mutual funds; Tier 2 included 12 "lifecycle" funds aimed at participants' varying retirement dates; Tier 3 offered thousands of mutual-fund options through Fidelity Brokerage; and Tier 4 included the common stock of both Marathon Petroleum and Marathon Oil. (Doc. 18–2 at 56–57).

The plan authorized defendants to "add, modify, or delete any investment option as they may deem appropriate" and to do so at any time. (Id. at 20; Doc. 1 at ¶ 3).

Nevertheless, plaintiff alleges, defendants exercised essentially no independent judgment when they selected the plan's investment options. (Doc. 1 at ¶¶ 3, 34). Rather, defendants decided simply to "mirror" the investment options that Marathon Oil had offered to its employees. (Id. at ¶ 3). The two plans' investment options thus overlapped entirely, with the exception that only participants in Marathon Petroleum's plan could purchase Marathon Petroleum stock. (Id. at ¶¶ 36–38).

B. Marathon Oil Stock

After the spin-off, many Marathon Oil employees became employees of Marathon Petroleum. And many of those employees, by virtue of their participation in Marathon Oil's employee-retirement plan, owned Marathon Oil stock.

Accordingly, when defendants established the plan, they permitted participants who held Marathon Oil stock to retain that stock or sell it and move the proceeds to a different investment option.¹ But the defendants also designated the Marathon Oil stock fund as a "frozen" investment option, meaning that participants could not purchase additional Marathon Oil stock. (Doc. 18–2 at 19–20, 57).

At the beginning of the class period (July 1, 2011, see Doc. 1 at ¶ 74), the plan held $88 million of Marathon Oil stock. As already noted, this amounted to roughly 6.5% of the plan's $1.5 billion in assets. According to plaintiff, the Marathon Oil stock "represented the third largest investment in the plan." (Id. at ¶ 26).

Marathon Oil "is in the oil and gas industry, a very volatile, high-risk sector of the economy subject to frequent boom-and-bust cycles." (Id. at ¶ 4).

According to plaintiff, Marathon Oil has admitted that "its stock price and earnings are highly dependent on the prices of liquid hydrocarbons (oil) and natural gas, which ‘fluctuate widely,’ ‘have been volatile,’ and ‘may continue to be volatile.’ " (Id. at ¶ 47). Plaintiff alleges that, during the class period, "Marathon Oil stock experienced precisely the volatility and poor performance that might be expected" of a single-stock investment within a volatile sector of the economy. (Id. at ¶ 48).

As examples, plaintiff notes that, in mid-2014, "Marathon Oil's price per share declined by over 30%." (Id. at ¶ 56). Contemporaneous market information also indicated that "energy prices would remain low in the future—warning signs that the Defendants should have recognized would cause the price of Marathon Oil stock to drop further." (Id. ). Finally, a series of market forecasts from December, 2014, through December, 2015, predicted "high uncertainty in the price of oil" and a likelihood of lower oil prices. (Id. at ¶ 58).

For these reasons, plaintiff maintains, "there should have been heightened cause for concern" when it came to holding the Marathon Oil stock. (Id. at ¶ 46). Nevertheless, defendants permitted participants to retain or invest in Marathon Oil stock and took no steps to divest, even after the negative market conditions emerged in late 2014 and the stock's price plummeted in 2015.

According to plaintiff, the defendants' alleged breaches of their fiduciary caused the plan and its participants to lose roughly $58 million. (Id. at ¶ 54).

Standard of Review

A complaint must contain a "short and plain statement of the claim showing the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2).

To survive a motion to dismiss under Rule 12(b)(6), the complaint "must contain sufficient factual matter, accepted as true, to state a claim that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

Discussion

A. Prudence

Plaintiff first alleges that defendants breached their duty of prudence by permitting participants to invest in Marathon Oil common stock. According to plaintiff, the Marathon Oil stock was excessively risky and thus an imprudent option for an employee-retirement plan.

Plaintiff emphasizes that, in general, "a single-stock fund, particularly in a volatile industry like energy, is always risky[.]" (Id. at ¶ 45). Regarding the Marathon Oil stock specifically, plaintiff points to Marathon Oil's admission that its earnings and stock price depend heavily on oil and gas prices, which "fluctuate widely." (Id. at ¶ 47). He also relies on stock market bulletins and analyses forecasting uncertainty in the energy market and probable declines in oil prices. (Id. at ¶¶ 56–58).

1. Duty of Prudence

"ERISA requires the fiduciary of a pension plan to act prudently in managing the plan's assets." Pfeil v. State Street Bank & Trust Co. , 806 F.3d 377, 383 (6th Cir. 2015). The statute imposes "a prudent person standard by which to measure fiduciaries' investment decisions and disposition of assets and also imposes other obligations." Id. (internal quotation marks and citation omitted).

Under ERISA, as under the common law of trusts, "a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones." Tibble v. Edison Int'l , ––– U.S. ––––, 135 S.Ct. 1823, 1828–29, 191 L.Ed.2d 795 (2015). Accordingly, "a plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones." Id. at 1829.

2. Dudenhoeffer Forecloses the Prudence Claim

In Fifth Third Bancorp v. Dudenhoeffer , ––– U.S. ––––, 134 S.Ct. 2459, 2471, 189 L.Ed.2d 457 (2014), the Supreme Court 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."

The Court explained that "[m]any investors take...