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Lynn v. Peabody Energy Corp.

United States District Court, E.D. Missouri, Eastern Division

March 30, 2017

LORI J. LYNN and JAVIER GONZALEZ, individually and on behalf of all others similarly situated, Plaintiffs,



         This putative class action is brought under the Employee Retirement Income Security Act of 1974, (“ERISA”), claiming breach of fiduciary duties by Defendants, the fiduciaries of three ERISA-governed Employee Stock Option Plans (“ESOPs”) made available to employees of Peabody Energy Corporation (“Peabody”) as retirement investment options. The matter is before the Court on Defendants' motion (ECF No. 83) to dismiss Plaintiffs' Second Amended Class Action Complaint for failure to state a claim. Oral argument was held on the motion. For the reasons set forth below, the motion to dismiss will be granted.


         Plaintiffs initiated this action on June 11, 2015, on behalf of three Peabody ESOP Plans[1] and their participants and beneficiaries. Pursuant to Plan documents, participants when in fact, Peabody had made market projections in the ordinary course of business that found that certain potential regulatory scenarios could “materially and adversely” impact Peabody's future financial condition. In addition in numerous SEC filings, Peabody omitted less favorable projections of the International Energy Agency for future coal demand. The Assurance of Discontinuance further stated that Peabody neither admitted nor denied the NYAG's findings, but agreed that in future SEC filings and public communications it would not engage in the above-described behavior. ECF No. 72-1.

         In December 2015, Peabody appointed Gallagher Fiduciary Advisors, LLC, (“Gallagher”) to serve as an independent fiduciary and investment manager for the Plans with respect to the Peabody Stock Fund. By letter dated February 26, 2016, Gallagher informed the ESOP participants that it had decided (1) to “restrict the [Peabody] Stock Fund to all participant activity effective as of March 9, 2016, and (2) to eliminate the [Peabody] Stock Fund as an investment option in each Plan, on or around March 16, 2016.” ECF No. 88-1. Gallagher stated that it had concluded that “maintaining the [Peabody] Stock Fund as an investment option is no longer consistent with the fiduciary responsibility provisions of ERISA, and that Gallagher's decision “simply reflects [its] judgment, as a fiduciary, that it is in the interest of the Plans' participants to eliminate [their] exposure within the Plans through the [Peabody] Stock Fund to the risks facing the Company and Peabody Stock.” Id.

         The second amended - and operative - complaint was filed on March 11, 2016. ECF. No. 72. Defendants are the Retirement Committees of the three Plans that were charged with selecting and monitoring the Plans' investment options; individual members of the Retirement Committees; the Board of Directors of PIC that appointed the PIC Plan Retirement Committee members; and individual members of the PIC Board of Directors. The gravamen of Plaintiffs' claims continues to be that Defendants breached their duties as ERISA fiduciaries by retaining Peabody stock as a retirement investment option in the Plans from December 14, 2012, onward. To their original claim that purchasing/retaining Peabody stock was imprudent due to public information about the global decline in coal prices and clear indicia during the Class Period that Peabody was headed toward bankruptcy (“public information claim”), Plaintiffs add a claim that purchasing/retaining the stock was imprudent due to the stock price being “artificially inflated.” Plaintiffs allege that Defendants should have known this because of nonpublic information of which they were aware but withheld, namely that laws and regulations to cut carbon emissions from the combustion of coal would have a detrimental effect on Peabody stock (“inside information claim”). As a remedy, Plaintiffs seek monetary damages that would restore the values of the Plans' assets to what they would have been if the Plans had been properly administered.

         In their second amended complaint, Plaintiffs plead that facts such as the following rendered continued investment of Plans' assets in Peabody common stock imprudent: (a) the collapse of coal prices which drastically and for the foreseeable future compromised Peabody's financial health; (b) Peabody's deteriorating “Z-score” - a formula used by financial professionals to predict whether a company is likely to go into bankruptcy - which indicated that Peabody was is in danger of bankruptcy; (c) an excessive increase in the Company's debt to equity ratio; and (d) increased costs due to the acquisition of an Australian coal company. Plaintiffs fault Defendants for continuing to allow Plaintiffs “to gamble their retirement savings on a ‘pure coal play, '” despite the “predictions that the domestic coal market was facing a long-term, if not permanent, sea-change.” Id. at 9-10.

         Plaintiffs also claim that Peabody stock was “artificially inflated” during the Class Period because certain information about risks to Peabody's business was not disclosed to the market, as found by the NYAG - namely, the extent of the adverse effect that regulations on emissions from coal combustion would have on Peabody. To support this nonpublic information claim, Plaintiffs posit two alternative actions that Defendants should have taken: (1) “directed that all Company and Plan Participant contributions to the Company Stock fund be held in cash rather than be used to purchase Peabody stock”; and (2) “closed the Company Stock itself to further contributions and directed that contributions be diverted from Company Stock.” Id. at 99-100.

         The second amended complaint represents that as of the start of the Class Period on December 14, 2012, the Plans held an estimated total of approximately $48 million in Peabody stock, and that “using the current pricing scale, Peabody Stock was trading at $398 at the beginning of the Class Period compared to its price of $6.39 as of March 10, 2016, ” the most recent trading day preceding the filing of the second amended complaint. (Doc. No. 72 at 14.)

         In Counts III and IV, Plaintiffs assert claims against the Director Defendants for failing adequately to monitor the fiduciary Defendants and provide them with complete information, and rather, “standing idly by as the Plans suffered enormous losses as a result of the appointees' imprudent actions and inaction with respect to Company Stock; and failing to remove appointees whose performance was inadequate in that they continued to permit the Plans to make and maintain investments in the Company Stock despite the practices that rendered it an imprudent investment during the Class Period.” Id. at 112.

         Plaintiffs assert in the second amended complaint itself that their claims are not foreclosed by Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014). As will be discusssed below, Dudenhoeffer held with respect to public information claims against ESOP fiduciaries, that “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances . . . affecting the reliability of the market price as an unbiased assessment of the security's value in light of all public information.” Dudenhoeffer, 134 S.Ct. at 2471-72 (citations omitted). And with respect to nonpublic information claims against ESOP fiduciaries, Dudenhoeffer held that to survive a motion to dismiss, such claims must allege alternative action that the fiduciary could have taken consistent with securities laws, actions that a prudent fiduciary would not have viewed as more likely to harm the plan than to help it. Id. at 2472.

         Plaintiffs stated in the second amended complaint that (a) withholding of the market projections from the public, (b) objective criteria, such Peabody's Z-Score predicting Peabody's demise, (c) Peabody's “overwhelming unserviceable” debt, and (d) Defendants' failure to properly investigate the continued prudence of Peabody Stock, individually and collectively, represent the kind of “special circumstances” contemplated by the Supreme Court in Duddenhoeffer. ECF No. 72-7-8. And in support of their breach of fiduciary duty claims, Plaintiffs cited to Tribble v. v. Edison, Int'l, 135 S.Ct. 1823 (2015), a post-Duddenhoeffer case that held that reaffirmed that “an ERISA fiduciary's duty is derived from the common law of trusts, ” and held that “[u]nder trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.” Tribble, 135 S.Ct. at 1828.

         On April 13, 2016, Peabody filed a Notice of Bankruptcy informing the Court that, on that day, Peabody and certain related entities filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code.[2]

         Arguments of the Parties

         Defendants argue that an impending bankruptcy is not the type of “special circumstance” the Supreme Court had in mind in Dudenhoeffer. Public information that a company was headed to bankruptcy, Defendants argue, is the kind of information to which the market price would adjust. Similarly, Peabody's Z-Score and debt load are just other pieces of public information that were incorporated into the stock price. And, argue Defendants, a failure to investigate the continued prudence of investing in Peabody stock would not constitute a “special circumstance” under Dudenhoeffer because the extent to which Defendants monitored Peabody stock had no impact on its market price or the price's reliability. When asked at oral argument what he thought “special circumstances” in this context meant, counsel for Defendants responded that a special circumstance would be if, for example, the fiduciary was aware that the books of the company were not accurate.

         Defendants contend that Plaintiffs are improperly “short circuiting” Duddenhoeffer's careful delineation of distinct tests for public information and nonpublic information claims by arguing that the Peabody projections that were undisclosed until November 8, 2015, constitute a “special circumstance” for Plaintiffs' public information claim. Defendants further argue that Plaintiffs' nonpublic information claim fails because Plaintiffs have not plausibly alleged an alternative action that Defendants could have taken that a prudent fiduciary in the same circumstances could not have viewed as more likely to harm the Peabody stock fund than to help it, as Dudenhoeffer requires. Defendants argue that the failure to monitor claims in Counts III and IV are derivative of the breach of prudence claims, and so fail too, as a matter of law.

         In response, Plaintiff reassert that the following allegations, individually and collectively, represent “special circumstances” under Dudenhoeffer that rendered reliance on Peabody's stock price imprudent: (1) Defendants' withholding, until November 8, 2015, its market projections about the impact of potential climate change regulatory actions; (2) Peabody's Z-Score and unserviceable debt; and (3) Defendants' failure to investigate the continued prudence of investing in ...

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