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United States Court of Appeals for the Seventh Circuit
April 12, 2016, Argued; August 25, 2016, Decided
[*673] WOOD, Chief Judge. GreatBanc is the fiduciary for an employee stock ownership plan ("the Plan") for employees of Personal-Touch, a home-health-care company. In that role, it facilitated a transaction in which the Plan purchased a number of shares in the company with a loan from the company itself. Unfortunately, the shares turned out to be worth much less than the Plan paid, leaving the Plan with no valuable assets and heavily indebted to the company's principal shareholders. The Plan's participants, all employees of Personal [**2] Touch, wound up being on the hook for interest payments on the loan. Employees Lisa Allen and Misty Dalton brought this action under section 502 of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132, raising two theories of recovery: first, that GreatBanc engaged in transactions that section 406 of ERISA prohibits, see 29 U.S.C. § 1106; and second, that GreatBanc breached its fiduciary duty under ERISA section 404, 29 U.S.C. § 1104, by failing to secure an appropriate valuation of the Personal-Touch stock. The district court initially dismissed the complaint without prejudice, but it later converted the judgment to one with prejudice after plaintiffs opted not to amend their complaint. Because the plaintiffs plausibly alleged both a prohibited transaction and a breach of fiduciary duty, we reverse the judgment of the district court and remand for further proceedings.
At this stage, we present the facts as alleged in the complaint in the light most favorable to plaintiffs. Employee stock ownership plans (ESOPs) are meant to be a way for companies to provide employees with a stake in the enterprise. See 29 U.S.C. § 1002. Personal-Touch, a privately held entity, is the sponsor of the Plan at issue here. See 29 U.S.C. § 1002(16)(B). Sponsors are responsible for administering ESOPs and often appoint [**3] independent trustees to carry out that job. Personal-Touch appointed GreatBanc as Trustee of the Plan in 2010 for the purpose of representing the Plan in the proposed stock-purchase transaction.
On December 9, 2010, GreatBanc instructed the Plan to acquire an unknown amount of stock from Personal-Touch's shareholders for $60 million. Before this acquisition, Personal-Touch's principal shareholders owned 100 percent of its shares. The plaintiffs do not know whether GreatBanc hired any financial advisors to review the transaction. The principal shareholders arranged for the Plan to finance this transaction through a loan they gave to the Plan at a 6.25% interest rate; the record does not reveal why the Plan did not use outside funding.
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835 F.3d 670 *; 2016 U.S. App. LEXIS 15704 **; 62 Employee Benefits Cas. (BNA) 1900
LISA ALLEN and MISTY DALTON, Plaintiffs-Appellants, v. GREATBANC TRUST CO., Defendant-Appellee.
Prior History: [**1] Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 C 3053 — James B. Zagel, Judge.
Dalton v. Greatbanc Trust Co., 2015 U.S. Dist. LEXIS 133711 (N.D. Ill., Oct. 1, 2015)
stock, exemptions, fiduciary, affirmative defense, district court, interest rate, prohibited transaction, fiduciary duty, breach of fiduciary duty, special circumstance, prohibited-transaction, shareholders, valuation, shares, value of a stock, plaintiffs', settlement, employees, traded, transactions, purposes
Business & Corporate Compliance, Fiduciaries, Fiduciary Responsibilities, Prohibited Transactions, Civil Procedure, Appeals, Standards of Review, De Novo Review, Pensions & Benefits Law, Prohibited Transactions, Exemptions, ERISA, Fiduciary Liability, Pleadings, Complaints, Requirements for Complaint, Duty of Loyalty, Duty of Prudence