Sixth Circuit Dismisses Stock Drop Claim For Failure To Allege 'Actual Injury'

Author:Goodwin Procter's ERISA Litigation Practice
Profession:Goodwin Procter LLP

The U.S. Court of Appeals for the Sixth Circuit recently rejected a breach of fiduciary duty claim in connection with a participant's investment in a company stock fund on the ground that the plaintiff failed to establish an actual injury. The case is Taylor v. KeyCorp, No. 10-4163, 2012 WL 1889283 (6th Cir. May 25, 2012). In her complaint, the plaintiff alleged that the price of the company stock had been artificially inflated as a result of the sponsor's inappropriate lending and tax practices, among other breaches. She alleged that plan fiduciaries violated ERISA by failing to prudently manage the plan's investment in company stock, failing to adequately inform plan participants about the risk of investing in the company stock, failing to adequately monitor the management and administration of plan assets, and failing to avoid impermissible conflicts of interest. The plaintiff brought her claim on behalf of herself and similarly situated participants and beneficiaries.

Having lost an early motion to dismiss on the pleadings for failure to state a claim, the defendants moved again to dismiss the complaint in the district court on the ground that the court lacked subject matter jurisdiction over the claims because the plaintiff had sustained no "actual injury." The defendants argued that the plaintiff did not experience a net loss in investing in company stock through the plan. They pointed out that she had sold 80% of her company stock at a time she alleged its price was inflated. The plaintiff countered that she sustained an injury, either based on an alternative investment theory of damages or based on the loss sustained on 20% of her holdings. The district court dismissed the claim, finding that the plaintiff had benefitted from any inflation of the stock's price and therefore had alleged no actual injury sufficient to establish the subject matter jurisdiction.

The Sixth Circuit reviewed the dismissal de novo and similarly concluded that the court lacked subject matter jurisdiction where the plaintiff could establish no actual injury. The appeals court relied on the Supreme Court's reasoning in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), that, in the context of securities fraud allegations, to establish economic loss based on an alleged inflation of stock price, the...

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