Published September 2012 in The ESOP Association's ESOP Report Steve Greenapple addresses breach of fiduciary duty and federal common law fraud by participants who transferred their 401(k) account balances to an ESOP, against the sponsor of the Plans, fiduciaries of the Plans and the ESOP's financial advisor.

1. 4
Case Law Developments for
September 2012
By: Steven L. Greenapple, SFE&G, Cedar Knolls, NJ
Editor: Susan Schaefer, McDermott Will & Emery, LLP, Chicago, IL
JOSEPH ENNEKING, et al. v. SCHMIDT BUILDERS SUPPLY INC., et al., Decided June 19,
2012, U.S. District Court for the District of Kansas.
This case involves a claims of breach of fiduciary duty and federal common law fraud by participants
who transferred their 401(k) account balances to an ESOP, against the sponsor of the Plans, fiduciaries of
the Plans, and the ESOP’s financial advisor. The Court decided motions by the Defendants to dismiss the six
separate claims brought by the Plaintiffs, granting a motion to dismiss for five of the claims and denied the
motion to dismiss on one claim.
In June, 2003 Timothy Schmidt sold all of the stock of Schmidt Builders Supply, Inc (the “Company”),
60% to his sister, Mary Duncan and 40% to the newly created Schmidt Builders Supply, Inc Employee Stock
Ownership Plan (the “ESOP”). John Duncan, Mary’s husband, acted as Trustee of the ESOP, although he
had previously been convicted of 10 counts of securities fraud and theft. Schmidt was a fiduciary of the
Company’s 401(k) Plan and Mary and John Duncan were each fiduciaries of the ESOP. The creation of the
ESOP and the design of the purchase transaction had been structured by SS&C Solutions, Inc. (“SS&C”), at
Schmidt’s behest. SS&C also served as the ESOP’s “independent” financial advisor.
Plaintiffs were employees of Schmidt Builders Supply Inc. and participants in the Schmidt Builders
Supply Inc. 401(k) Profit Sharing Plan. They were offered the opportunity to transfer their 401(k) Plan
account balances to the ESOP, and were provided with an Information Statement describing the opportu-
nity.
Plaintiffs alleged that the information statement was lacking and that, at the time of the transaction,
they did not know and were not informed (a) of the impact that the transaction debt would have on the
Company’s financial condition; (b) of the conflicts of interest affecting Schmidt, Mary and John Duncan, and
SS&C; (c) of John Duncan’s criminal background; (d) of Schmidt’s 1997 purchase of the Company; or (e) that
the collapse of the Company would wipe out the assets that they transferred from the 401(k) Plan to the
ESOP.
In 2011 the Company collapsed and the Plaintiffs’ ESOP accounts became worthless. Plaintiffs filed suit
against Defendants alleging breaches of fiduciary duties and federal common law ERISA fraud against
defendants Schmidt, Mary and John Duncan, and SS&C; as well as non-fiduciary party in interest claims,
and State law negligence claims, against SS&C. Defendants moved to dismiss Plaintiffs’ claims.
ERISA breach of fiduciary duty claims time barred.
29 U.S.C. § 1113 states that “[n]o action may be commenced under this title with respect to a fiduciary’s
breach of any responsibility, duty, or obligation under this part, after the earlier of —
(1) six years after
(A) the date of the last action which constituted a part of the breach or violation, or
(B) in the case of an omission, the latest date on which the fiduciary could have cured the breach or viola-
tion, or
(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation;
except that in the case of fraud or concealment, such action may be commenced not later than six years
after the date of discovery of such breach or violation.
Plaintiffs argued that the statute of limitations commenced when they discovered the Defendants’ breach-
es, in July 2011, because the claims involve “fraud or concealment.” The Court sided with the Defendants,
who argued that the Plaintiffs failed to allege sufficient facts to demonstrate that the Defendants took any
affirmative steps to actively conceal the information from Plaintiffs or to engage in any trick or contrivance
to exclude suspicion and prevent inquiry. The Court cited a split among the federal Circuits, but that the
majority of circuits have held that the fraud or concealment provision in 29 U.S.C. §113 incorporates the fed-
eral concealment rule. The concealment rule established by the Supreme Court provides that when a defen-
dant’s wrongdoing has been concealed, or is of such character as to conceal itself, the statute of limitations
does not begin to run until the wrongdoing is discovered by the plaintiff. The relevant question is therefore
not whether there is evidence that the defendant took affirmative steps to hide its breach of fiduciary duty.
Concealment by mere silence is not enough, there must be actual concealment – i.e., some trick or contriv-
ance intended to exclude suspicion and prevent inquiry.

2. The author reviewed this article with Committee Chair, Susan D. Lenczewski, Susan Lenczewski, Fafinski, Mark &
Johnson, P.A., Minneapolis, MN.
5
September 2012
The Court stated that, in contrast to the majority of the Circuits, the Second Circuit’s approach,
requires a plaintiff to plead the time, place and contents of the false representation, the identity of the
party making the false statements and the consequences thereof.
The Court found that under either the majority approach or the Second Circuit approach, Plaintiff’s
claims failed. Even assuming that Plaintiff’s allegations are true that certain key facts were not disclosed
or were intentionally concealed, causing Plaintiffs to elect to roll their 401(k) accounts into the ESOP,
“does not establish that Defendants took any steps to actively conceal information from Plaintiffs or
that they otherwise engaged in any trick or contrivance intended to exclude suspicion and prevent
inquiry. Accordingly, the Court held that “[b]ecause the ERISA causes of action accrued more than three
years after Plaintiffs had actual knowledge of the breaches of fiduciary duty, their claims are time
barred,” and dismissed those causes of action.
Federal common law ERISA fraud claim does not exist.
The Court dismissed Plaintiffs’ claim for federal common law ERISA fraud, citing the Supreme Court’s
holding that “[w]hile providing numerous remedies for violations, ERISA simply does not permit a
claim for fraud as one of its enforcement mechanisms.”
Nonfiduciary party in interest claim without claim of prohibited transaction does not
state a claim upon which relief may be granted.
With regard to the claim against SS&C in its capacity as a “nonfiduciary party in interest,” the Court
held that, even assuming that SS&C was a party in interest, Plaintiffs’ allegations that SS&C failed to
properly value the Company and its stock did not amount to an allegation that SS&C participated in a
prohibited transaction or that SS&C knew or should have known that the fiduciaries participated in a
prohibited transaction. Accordingly, the Court held that Plaintiffs did not establish that SS&C had actu-
al or constructive knowledge of a prohibited transaction, and dismissed Plaintiffs’ claim against SS&C as
a nonfiduciary party in interest, for failure to state a claim upon which relief may be granted.
State claim for negligence not preempted.
Only one claim was not dismissed. The Court found that “State laws of negligence, indemnity, and
fraud are laws of general application – not specifically targeting ERISA plans – that involve traditional
areas of state regulation and do not affect relations among the principal ERISA entities. Therefore, the
negligence claim . . . against SS&C is not preempted.” The Court found that “the facts alleged are suffi-
cient to establish that Plaintiffs relied on SS&C’s valuation . . . in making their decision to roll over their
accounts to the ESOP” and, therefore, denied SS&C’s motion to dismiss the cause of action against SS&C
for negligence.
ISADORE FISHER, et al., Plaintiffs-Appellants, - v – JP MORGAN CHASE & CO., et al.,
Defendants-Appellees. Decided May 8, 2012, U.S. Second Circuit Court of Appeals.
Plaintiffs were participants of J.P. Morgan’s 401(k) Savings Plan, where they held J.P. Morgan’s com-
mon stock. Plaintiffs sued the Defendants, including J.P. Morgan and directors, in the U.S. District Court
of New York for (a) negligently permitting the Plaintiff participants to purchase and hold shares of com-
mon stock when it was imprudent to do so, and (b) for failing to disclose and negligently misrepresenting
material facts to plan participants.
The District Court granted Defendants motion for judgment on the pleadings, and the Plaintiffs
appealed.
On the “prudence” claim, citing Moench, the Court stated that fiduciaries are presumed to be prudent
in their decision to not divest investment plans of their stock or impose restrictions on participants’
investment in that stock. This presumption . . . is the best way to balance the competing policy inter-
ests of protecting retirement assets and encouraging investment in employer stock. Plan fiduciaries are
only required to divest a plan of employer stock where the fiduciaries know or should know that the
employer is in a ‘dire situation’.
On the “disclosure” claim, the Court held that the fiduciaries (who are also directors of the plan spon-
sor) have no duty to provide Plan participants with non-public information that could pertain to the
expected performance of Plan investment options. ERISA holds fiduciaries liable only to the extent that
they are acting as a fiduciary when taking the action subject to the complaint. They may not be held
liable under ERISA for misstatements contained in the SEC filings.
The appellate court affirmed the judgment of the district court, in favor of defendants.
This article originally ran in the September 2012 ESOP Report newsletter, the newsletter of The ESOP Association.
Reprinted with permision from The ESOP Association.
© The ESOP Association All Right Reserved 2012