401(k) Suit Survives Anti-Alienation Challenge

By Nevin Adams • October 10, 2016 • 0 Comments
Stock drop lawsuits are generally about employer stock that has suffered a precipitous drop in value, and in rare cases, where participants have been deprived from keeping that investment — and then there’s this one.

As noted above, these type of employer stock-based lawsuits are often over stock that is later deemed to be overvalued due to some kind of fraud or unrevealed insider information, and retained as a plan holding. More rarely they are a result of individuals who have taken issue with the decision of plan fiduciaries to sell stock that the participants wanted to retain (Tatum v. RJR Pension Investment Committee, et al.).

Although the court found that the plan provision’s forced sale of Wawa stock may have violated ERISA, in Pfeifer v. Wawa Inc., E.D. Pa., No. 2:16-cv-00497, 10/6/16, the judge refused to hold the company liable for eliminating company stock as a plan investment option.


The suit, brought in the U.S. District Court for the Eastern District of Pennsylvania on behalf of a potential class of terminated Wawa employees, alleged that Wawa Inc., its ESOP plan trustees and its plan administrators violated ERISA by amending the ESOP to “eliminate Plaintiffs’ right to own Wawa stock (which is privately held), forcing liquidation of Plaintiffs’ Wawa stock at an unfair price, and misrepresenting Plaintiffs’ rights under the Plan.”

Case History

Before the amendment in question, the Wawa ESOP provided terminated employee participants (including the plaintiffs) the same benefits as participants who retired from Wawa at their designated retirement date. Participants holding more than $5,000 in their plan accounts could receive their benefits in either a single lump sum payment or in installment payments over 10 years, and terminated and retired employees had a put option (which they could execute before age 68) to sell their shares back to Wawa at an appraised price.

In August 2015, the plan was amended to divest terminated employees — but not retired employees — of their shares in Wawa stock and terminated employees were also not allowed to remain plan participants. On Sept. 11, 2015, plan fiduciaries effectuated the forced sale at $6,940 per share (below fair market value) and charged a distribution fee. According to the court, the price of Wawa shares has increased since the September 2015 forced sale, and reached $7,652 per share in December.

Arguments Made

Among the arguments put forth by plaintiffs was that the amendment violated ERISA’s anti-cutback provision, specifically that “the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan.” However, Judge Paul S. Diamond cited both previous decisions and the Treasury Department’s own determination that the right to a particular form of investment is not a protected benefit under this provision.

That said, the allegation that the defendants unlawfully liquidated the plaintiffs’ accounts and forced their transfer “is quite another matter,” according to the court, which noted that to the extent that plaintiffs base their anti-cutback claim on the liquidation of their accounts (and not the forced sale of Wawa stock), they would be allowed to proceed — and dismissed defendants’ move to dismiss those claims.

The court held that Wawa’s reservation of a right to amend the plan “at any time” did not necessarily give it the authority to reduce the plaintiffs’ benefits once they had upheld their part of the bargain. “At a minimum, the Plan is ambiguous as to whether Wawa could amend the Plan after the participants’ performance,” according to the court, which also dismissed defendants’ attempt to dismiss those claims.

SPD Misrepresentations

The plaintiffs also alleged that the fiduciary-defendants made two misrepresentations in the SPDs:

1. “[N]o amendment to the Plan will reduce the benefit you have already earned, or divest you of any entitlement to a benefit”; and
2. terminated employees would be paid their vested benefits “in the same form and manner as retirement benefits.”

The court found that the plaintiffs made a plausible argument that that statement was misleading, “because Plaintiffs’ option right fits within the ordinary meaning of the word ‘benefit,’ and because Plaintiffs purportedly understood that they retained the right to hold Wawa stock” — and dismissed the defendants’ motion to dismiss these claims.

As for the notion that the amendment was really intended to restore the Wood family’s majority ownership of the firm, the court found no connection between how a failure to disclose the motivation “affected their retirement planning in any way,” and dismissed this claim by the defendants as well.

Stock Valuation

As to the valuation of the stock, the court noted that defendants’ financial advisor, Duff & Phelps, valued Wawa stock at $7,000 to $7,900 per share, above the forced sale price of $6,940, even though it did not include the anticipated tax benefits from Wawa’s 2014 reorganization. Moreover that defendants offered outside shareholders and dissenters $7,000 per share as part of the reorganization, also above the forced sale price, in addition to what the court characterized as an unjustified $50 distribution fee. The forced sale price, derived from a June 2015 appraisal, was stale by the time the forced sale occurred, according to the court, which noted that the share price has continued to rise since the sale.

“These allegations are sufficient to make out plausible claims that Plaintiffs did not receive adequate consideration for their stock,” the court ruled, dismissing the defendants’ claims on that front as well.






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