District Court Erred in Granting Summary Judgment in ERISA Class Action Because it should have Considering Proposed Class Action Settlement Prior to Ruling on Summary Judgment and Because Third Circuit’s Moench Presumption not Applicable in Ninth Circuit Triable Issues of Fact Existed Precluding Summary Judgment Ninth Circuit Holds
Plaintiffs, participants in employee stock ownership plan (ESOP), filed a class action against their employer, Syncor International, and two board of directors alleging breach of fiduciary duties under ERISA (Employee Retirement Income Security Act); the class action alleged that Syncor administered an Employee’s Saving and Stock Ownership retirement plan governed by ERISA (“the Plan”), and permitted employees to invest in Syncor stock even though they knew that Syncor’s Taiwanese subsidiary and other foreign offices systematically used bribes to increase sales and to grow Syncor’s business in violation of the Foreign Corrupt Practices Act (FCPA). In re Syncor ERISA Litig., 516 F.3d 1095, 2008 WL 427763, *1-*2 (9th Cir. 2008). Once news of the illegal payments became public Syncor’s stock price lost half of its value, decreasing the value of the Plan by at least $24 million and precipitating the filing of the class action lawsuit on behalf of Plan participants. Id., at *2. Plaintiffs’ lawyers sought and obtained certification of the litigation as a class action, id. Syncor Taiwan pleaded guilty to violating the FCPA, and a member of the board of directors surrendered $2.5 million worth of personal Syncor stock to reimburse the company for fines levied by governmental agencies. Id. Following the filing of a consolidated class action complaint, defense attorneys filed a motion for summary judgment; simultaneously, the parties participated in settlement discussions. Id. In December 2005, the district court took the summary judgment motions under submission, and in January 2006, without knowing that the district court had decided the summary judgment motion, the parties signed a proposed settlement of the class action. Id. The parties notified the court of the tentative settlement on January 10, 2006, but failed to provide the court with the term sheet evidencing the settlement; that same day, the district court entered an order granting summary judgment in favor of the defense. Id. The following day, the parties requested that the court not rule on the summary judgment motions because of the proposed settlement, but again failed to provide a term sheet, id., at *3. Nonetheless, on January 12, 2006, the district court entered judgment in favor of defendants on the class action complaint, and denied as moot the proposed class action settlement, id. The Ninth Circuit reversed.
The Ninth Circuit summarized its holding as follows: “We hold that, when parties (1) enter into a binding class action settlement agreement, which requires court approval pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, and (2) provide the required notice of the settlement to the district court prior to the district court’s entry of the final judgments, the district court should hold a hearing and review the settlement agreement to determine if it is fair, reasonable, and adequate…. Failure to do so-even when the district court has already drafted a summary judgment order-is an abuse of discretion.” In re Syncor, at *1. The Circuit Court further held that the district court erred in granting summary judgment “genuine issues of material fact exist regarding whether the Defendants breached their fiduciary duty under ERISA,” id.
With respect to the proposed class action settlement, the Ninth Circuit explained that the district court denied a motion under FRCP Rules 60(b) and 59(e), which asked the district court to set aside the judgments, and also denied a motion for preliminary approval of the class action settlement because it believed “that merely because ‘the parties reached a tentative settlement on the same day the Court issued its summary judgment rulings does not, without more, mean that a manifest injustice will result if the Court allows its summary judgment rulings to stand.’” In re Syncor, at *3. The Circuit Court disagreed, reasoning that Rule 23(e) required the district court to determine whether the proposed class action settlement was fair, reasonable and adequate, and that its failure to do so jeopardized the rights of absent class members. Id., at *4. “The court’s role in the class action settlement process is to protect the right of those not involved in negotiating the settlement, generally the unnamed class members.” Id., at *5 (citation omitted). On the other hand, had the lower court considered whether to approve the class action settlement, no prejudice to the defense would have resulted because “Defendants knew they had dispositive motions pending and chose the certainty of settlement rather than the gamble of a ruling on their motions.” Id., at *4. Each side agreed to be bound by the settlement agreement and to avoid the risk of an adverse ruling on the summary judgment motion, id. Under these circumstances, the court should not have ruled on the summary judgment motion and should not have refused to consider the proposed class action settlement, id. (citing Sheng v. Starkey Labs., Inc., 117 F.3d 1081 (8th Cir. 1997)). The Ninth Circuit also relied upon the “strong judicial policy” favor settlements, “particularly where complex class action litigation is concerned.” Id., at *5.
The Circuit Court rejected defense arguments that the district court had “discretion to enter final judgment rather than review the proposed settlement in order to manage its calendar.” In re Syncor, at *5. In the Ninth Circuit’s view, “Because the parties provided appropriate notice to the district court of the settlement agreement, the court should never have filed its order or entered the final judgments.” Id. Because the parties had notified the court of the binding settlement agreement before the court entered its order on summary judgment and before it entered final judgments, the district court should have reviewed the proposed class action settlement under FRCP Rule 23(e). Id. The Ninth Circuit therefore held that the lower court “abused its discretion by entering the final judgments and by refusing to vacate the final judgments” and that it “erred when it did not apply Rule 23(e) and review the settlement agreement prior to the entry of the judgments.” Id., at *6.
Finally, the Ninth Circuit held that the trial court erred in granting summary judgment. Defendants had argued that they were exempt from “the duty to diversify holdings in company stock” and that Syncor’s stock “was not an imprudent investment,” thus defeating the class action’s breach of fiduciary duty claims. In re Syncor, at *6. The district court held that plaintiffs failed to rebut the presumption afforded by Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995), “under which fiduciaries of ESOPs are presumed to have acted consistently with ERISA in their decisions to invest assets in employer stock.” In re Syncor, at *6. In reversing, the Circuit Court held that triable issues of material fact existed as to whether defendants knew of Syncor’s deteriorating financial condition and whether defendants acted within the “prudent man” standard, id., at *6-*7, particularly in light of the fact that the Moench presumption had not been adopted by the Ninth Circuit, id., at *6. Accordingly, the Ninth Circuit reversed the summary judgment order, and remanded the class action to the district court with instructions to review the proposed class action settlement pursuant to Rule 23(e). Id., at *7.
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