MEMORANDUM OPINION AND ORDER
In July, 1994 United Airlines (UAL Corporation, "United" or "UAL") became a majority employee owned company. Plaintiffs, two pilots and a mechanic, have brought this class action on behalf of all participants in the UAL Stock Ownership Plan ("UAL ESOP"), the UAL Corporation Supplemental Employee Stock Ownership Plan ("UAL Supplemental ESOP") (together the "ESOP"), and the trusts created in connection with the formation of the Plans, alleging that the ERISA fiduciary, State Street Bank and Trust Company, violated its fiduciary duties under ERISA in connection with the purchase of the UAL stock by the ESOP. Defendants
have moved to dismiss the complaint. For the reasons stated in this opinion, the motions to dismiss are granted.
According to the complaint, the background to the 1994 recapitalization included labor turmoil at United and diminished profits due to various factors, including higher operating costs, consumer demand for lower fares, and a poor economy. In 1993, United announced numerous proposals to reduce costs and requested concessions from its unions. In July, 1993, a coalition composed of the Airline Pilots Association ("ALPA"), the International Association of Machinists and Aerospace Workers ("IAM"), and the Association of Flight Attendants ("AFA") (the "Coalition") informed United that it was interested in participating in a cooperative restructuring that would include employee investment and a majority employee ownership of the company. After extensive negotiations and proposals, an agreement was signed on March 25, 1994, entitled the Amended and Restated Agreement and Plan of Recapitalization ("Recapitalization Agreement"). Under the Recapitalization Agreement, United would transfer between 53 and 63 percent of the equity in the company to a trust (the ESOP) in exchange for cash and a note payable by the trust. The shares were to be allocated to employees (the trust beneficiaries) as the note was repaid. The beneficiaries would receive their stock when their employment terminated. The consideration for this transfer included substantial wage and benefit reductions and work rule changes.
State Street was not a party to the Recapitalization Agreement. However, also on March 25, 1994, State Street, retained by United as the ESOP trustee, and United executed a Preferred Stock Purchase Agreement (the "Purchase Agreement"). This agreement provided that State Street, as trustee, would purchase 12,400,000 Class 1 Preferred Shares. State Street's obligation to buy the stock was subject to several conditions which form the basis for this suit.
In June, 1994, the agreement between the Coalition and United was altered as a result of the fact that United's stock was selling below the floor price set for the sale. The new floor price was set at a lower figure. Furthermore, the purchase was now to take place in seven installments. The first installment was to include 1,899,059 shares of newly issued UAL stock at a price of 138 percent of the trading place of UAL's new stock on the closing date with the 38 percent increase over the trading price representing a "control" premium. The amended agreement left the purchase price for the remaining sales to be negotiated in good faith between UAL and the trustee. In addition, the percentage ownership purchased by the UAL ESOP and Supplemental ESOP
was increased from 53 to 55 percent of the company. Closing of the first installment together with the recapitalization took place in July, 1994.
In their complaint, plaintiffs allege that when employee labor concessions in terms of wages and benefits are considered, the real price of the stock purchased by the trustee was approximately $ 198 per share. They say at the time of closing the stock was selling on the New York Stock Exchange at $ 88 a share, and that even with a 38 percent increase for a sale of control premium, the trustee paid far in excess of the value of the stock. Plaintiffs say the trustee abdicated its fiduciary responsibility under ERISA and applicable ESOP documents to determine that the price paid was fair, in violation of various sections of ERISA, including 29 U.S.C. sec. 1104(a)(a), 1106(a)(1)(A) and 1108(e). On this motion, defendants principally argue that State Street as trustee had no obligation under the language of the documents or ERISA to consider employee concessions and that since plaintiffs do not argue that the price paid ($ 121.44 per share) without consideration of concessions was unfair,
State Street did not violate ERISA as a matter of law.
In considering defendants' motion to dismiss, I must, of course, evaluate plaintiffs' complaint under the well known principle that all facts alleged and inferences reasonably to be drawn from those facts must be accepted as true. E.g., Bane v. Ferguson, 890 F.2d 11 (7th Cir. 1989).
An ESOP is a "welfare benefit plan" under ERISA. State Street, as the trustee of the ESOP, is bound by the fiduciary duties imposed by ERISA in 29 U.S.C. § 1104(a)(1). Section 1104(a)(1)(D) requires State Street to discharge its duties regarding the ESOP "in accordance with the documents and instruments governing the plan."
The ESOP specifies that the Trust document comprises part of the "Plan." Pls.' Ex. G, ESOP Sec. 1(ll). The Trust Agreement states:
3.8 Notwithstanding any other provisions of this Agreement or the Plan, the purchase of Qualifying Employer Securities pursuant to the ESOP Preferred Stock Purchase Agreement dated March 25, 1994, as amended, . . . among the Trustee and the Company shall be effected by the Trustee . . . in the exercise of its reasonable judgment . . . that such transaction is in the best interests of the Participants and that the purchase transaction and the terms and conditions of any Acquisition Loan entered into in connection with the above-described Purchase Agreement are in compliance with all applicable provisions of the Code and ERISA.
Pls.' Ex. F. The parties agree (see, e.g., Defendants' Memorandum at 7-8) that the Purchase Agreement further defined the Trustee's responsibilities. See also, Board of Trustees of the Watsonville Frozen Food Welfare Trust Fund v. California Cooperative Creamery, 877 F.2d 1415, 1420 n.2 (9th Cir. 1989).
State Street says that the Purchase Agreement conditioned its purchase of the stock on its determination that the purchase was not a prohibited transaction under ERISA, that it receive an opinion from its independent financial advisor that the purchase price did not exceed the stock's fair market value, and that the purchase was prudent and in the best interests of participants.
Plaintiffs say State Street's duties went further, and required it specifically to determine the value of the employee concessions made by United employees and to include these concessions in valuing the stock to be purchased by the ESOP. Plaintiffs base this argument on language in the Purchase Agreement that states:
The Trustee shall have made a good faith determination that the purchase of the Shares contemplated hereunder and the consummation of all other transactions contemplated by the Agreement
are prudent and in the best interests of the Plan participants.