US: Appeals Court Vacates Ruling for Reynolds

Source from:  Winston-Salem (NC) Journal  08/08/2014

A U.S. Appeals Court has vacated a ruling in favor of R.J. Reynolds Tobacco Co. in a 12-year-old lawsuit involving its former affiliation with Nabisco, and 3,500 current and former employees.

The lawsuit was filed in May 2002 by Richard Tatum of Winston-Salem in U.S. District Court in Greensboro. The lawsuit alleged Reynolds failed to live up to its duty as trustee of its 401 (k) retirement plan by selling Nabisco stocks at a loss in January 2000.

District Court Judge Carlton Tilley Jr. dismissed the lawsuit with prejudice in March 2013, meaning the case could not be refiled later.

The Fourth Circuit Court of Appeals heard Tatum's appeal March 18 and rendered a 2-1 decision Monday. The case was remanded to the District Court "for further proceedings consistent with this opinion."

At its essence, the lawsuit was about whether the fiduciaries of the Reynolds plan "undertook the appropriate investigation into the prudence of removing the Nabisco funds from the tobacco plan" and whether "prudence would have compelled a fiduciary to maintain the Nabisco funds as frozen funds in the plan."

Robert Elliot of Elliot Pishko Morgan in Winston-Salem, an attorney for Tatum, said in 2008 that potential damages could have reached into "the multimillions of dollars."

"It has been our contention all along that no prudent person would've sold the Nabisco stocks at that point in time." Elliot could not be reached for immediate comment on the Appeals Court ruling.

The appellate judges agreed with Tilley's ruling that Reynolds "breached its duty of procedural prudence and so carries the burden of proof on causation."

They reversed Tilley's ruling dismissing the Reynolds benefits and investment committees as defendants. They affirmed the order denying Tatum's motion for leave to amend his complaint to add additional defendants.

Reynolds spokesman Bryan Hatchell said the company is reviewing the Appeals Court ruling.

"In his strongly worded dissent, Judge Harvie Wilkinson called the majority's opinion contrary to prior precedent and "border(ing) on the absurd,' Hatchell said. "Additionally, even if the District Court were to determine that RJR is liable, the financial implications will not be material."

In Tilley's 2013 ruling, he ruled that R.J. Reynolds Tobacco Holdings Inc. reached an appropriate decision to eliminate the Nabisco Funds from its 401 (k) plan in January 2000.

Tilley determined Reynolds breached its duty to properly investigate the investment decision to eliminate the Nabisco funds from the tobacco plan, including not discussing the option of allowing the Nabisco stock to remain frozen indefinitely. That decision, according to the appellate judges, "caused a substantial loss to the plan," in part because the plan documents did not mandate divestment of the Nabisco funds.

However, Tilley said plaintiffs also had to prove Reynolds' trustee for the 401 (k) "knew more than they did" in making the decision that caused financial loss to the plaintiffs. Tilley ruled that Reynolds had met its burden of proof because its decision to eliminate the Nabisco funds was "one which a reasonable and prudent fiduciary could have made after performing such an investigation."

The appellate judge said Tilley "failed to apply the correct legal standard in assessing Reynolds' liability; we must reverse its judgment."

"The District Court's task on remand will be to review the evidence to determine whether Reynolds has met its burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same decision," the appellate judges wrote.

"In doing so, the court must consider all relevant evidence, including the timing of the divestment, as part of a totality-of-the-circumstances inquiry.

"Perhaps, after weighing all of the evidence, the District Court will conclude that a prudent fiduciary would have sold employees' existing investments at the time and in the manner Reynolds did because of the funds' high-risk nature, recent decline in value and Reynolds' interest in diversification," according to the appellate judges.

"Or perhaps the court will instead conclude that a prudent fiduciary would not have done so, because freezing the funds had already mitigated the risk and because divesting shares after they declined in value would amount to 'selling low' despite Nabisco's strong fundamentals and positive market outlook."

The appellate judges said that if the District Court determines that a fiduciary who conducted a proper investigation would have reached the same decision, "Reynolds will escape all monetary liability, notwithstanding its procedural imprudence."

"But if the court concludes to the contrary, then the law requires that Reynolds be held monetarily liable for the plan's loss." Enditem