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Stanford v. Foamex L.P.

September 24, 2009


The opinion of the court was delivered by: Yohn, J.


Plaintiff William Stanford, Jr. filed this putative class action individually and on behalf of all other similarly situated persons and on behalf of the Foamex L.P. Savings Plan pursuant to Section 502(a)(2) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132(a)(2). His claims are lodged against Foamex L.P., Fidelity Management Trust Co., K. Douglas Ralph, Stephen Drap, Gregory J. Christian, and George L. Karpinski. Presently before the court is plaintiff's motion for class certification pursuant to Federal Rule of Civil Procedure 23. Plaintiff seeks certification of the following class: All individuals invested in the Foamex Stock Fund on September 22, 2005, except individuals who were members of the Foamex Benefits Committee at any time between September 22, 2005 and December 31, 2006, the members of their immediate families, and their heirs, successors or assigns. Defendants contest certification on several grounds. For the reasons that follow, the court will grant plaintiff's motion, and certify a mandatory class pursuant to Federal Rule of Civil Procedure 23(b)(1).

I. Facts and Procedural Background*fn1

Stanford is a former employee of Foamex, L.P. ("Foamex").*fn2 (Pl.'s Mot. Class Cert. ("Pl.'s Mot.") 1; Defs.' Br. in Opp'n to Pl.'s Mot. Class Cert. ("Defs.' Resp.") 3-4.) He was a participant in the Foamex L.P. Savings Plan (the "Plan"). (Pl.'s Mot. 1; Defs.' Resp. 3-4.) Foamex was the sponsor of the Plan, which is a 401(k) defined contribution plan*fn3 governed by ERISA. (3d Amend. Compl. ¶¶ 6, 11; Defs.' Resp. 3-4.) The Foamex L.P. Benefits Committee ("Committee"), which consisted of Foamex employees, including defendants Christian, Ralph, Karpinski, and Drap, controlled and managed the Plan, (3d Am. Compl. ¶ 16; Defs.' Resp. 4), and Fidelity Management Trust Company ("Fidelity"), the trustee of the Plan, held the Plan's assets. (3d Am. Compl. ¶ 17; Defs.' Resp. 4).

The Plan offered participants several different investment funds to choose from. (Plan App'x C.) Stanford was invested in the Foamex Stock Fund ("Fund"), which the Plan defines as a "non-diversified stock fund that invests solely in Employer Stock [Foamex International common stock]." (Plan § 1.32.) The Trust Agreement between Foamex and Fidelity explains: "Investments in the Stock Fund shall consist primarily of shares of Sponsor Stock. In order to satisfy daily participant exchange or withdrawal requests for transfers and payments, the [Fund] shall also include cash or short-term liquid investments...." (Trust Agreement § 4(e).)*fn4 "The investment performance of the [F]und is directly tied to the financial performance of Foamex International Inc. and its subsidiaries, along with general market conditions." (Foamex L.P. Savings Plan For Salaried Employees Summary Plan Description 7 (emphasis in original).) "Because of the non-diversified nature of this [F]und, investing in this [F]und involves a greater element of risk than the other available funds." (Id.) Prior to the fall of 2005, the Fund maintained a target cash balance of approximately 5%, meaning the Fund invested approximately 95% of its assets in Foamex International stock. (Compl. ¶ 37.)

Foamex International and Foamex began to experience financial problems in the summer of 2005. (See Spoonemore Supplemental Decl. Ex. E, Foamex International's Annual Report (Form 10-K), at 9 (April 4, 2005); see id. Ex. F, Foamex International's Current Report (Form 8-K), at 4 (July 11, 2005); see id. Ex. G, Foamex's Current Report (Form 8-K), at 3, 5 (August 15, 2005).) On July 13, 2005, the Committee met to discuss the volatility of Foamex International's stock. (See McGinley Decl. Ex. D, Minutes from July 15, 2005 Committee meeting ¶ 2.) Because of the heightened volatility of the stock's market value, the Committee decided that the Fund was no longer a prudent investment for Plan participants. (Id.) Therefore, the Committee resolved to prevent any new participants from investing in the Fund effective July 15, 2005. (Id.) The Committee planned to allow participants already invested in the Fund to maintain their investments in the Fund or transfer their investments to another of the Plan's funds. (Id.) Foamex and Fidelity informed Plan participants of these changes in letters sent on July 15, 2005 and July 20, 2005, respectively.*fn5 (Id. Ex. E, Letter from Greg Christian to Plan participants (July 15, 2005); see id. Ex. F, Letter from Fidelity to Plan participants (July 20, 2005).) On July 20, 2005, the Trust was amended to reflect these changes: "Effective at the close of business (4:00 p.m. ET) on July 20, 2005, amending the 'investment options' section... to reflect that [the Fund] is frozen to new contributions and exchanges in." (Trust Agreement Am. 5.)

Contrary to the language of the Trust Amendment and to the content of the letters sent to Plan participants, the Committee formally adopted Amendment No. 4 to the Plan on September 8, 2005,*fn6 which by its terms arguably prevents any new investment in the Fund or any transfer of existing Fund investments to other funds available under the Plan:*fn7

Effective July 20, 2005, a Member [plan participant] may not longer direct new investments into, or transfer existing investments into or out of, the [Fund]. All investments in the [Fund] as of July 19, 2005 shall remain in the [Fund] until moved into an alternate investment fund or distributed according to the terms of the Plan.

(Plan Am. No. 4 ¶ 10.) Notwithstanding the differences between the Plan and Trust Amendments, Stanford, who believed that Foamex International's stock price would rebound, decided to maintain his investment in the Fund.*fn8 (Stanford's Dep. 54:18-55:2.)

On September 19, 2005, Foamex International and certain of its subsidiaries, including Foamex, filed for bankruptcy. (Spoonemore Supplemental Decl. Ex. H, Foamex International's Quarterly Report (Form 10-Q), at 6 (November 21, 2005) (informing investors of bankruptcy filing).) Under the terms of Foamex International's proposed bankruptcy plan, "there would be no recovery for holders of equity securities in the Company [Foamex International]." (Id. at 28.) On September 22, 2008, allegedly envisioning an increase in the number of transfer requests in light of the proposed bankruptcy plan, the Committee directed Fidelity to increase the cash balance in the Fund to a target of 20%, "to provide liquidity to satisfy daily participant requests." (Id. Ex. I., Letter from Thomas A. McGinley to Fidelity (September 22, 2005).)

On December 23, 2005, Foamex International and its bankrupt subsidiaries filed a joint reorganization plan, which provided for the cancellation of all then-existing shares of Foamex International stock without any compensation for shareholders. (McGinley Decl. Ex. O, Foamex's Current Report (Form 8-K), at 5-6 (December 27, 2005).) On January 6, 2006, Foamex directed Fidelity to increase the target cash balance in the Fund to 50%. (Spoonemore Supplemental Decl. Ex. L, Letter from Thomas A. McGinley to Fidelity (January 6, 2006).). Again, the reason for the increase in the target cash balance was "to provide liquidity to satisfy daily participant requests." (Id.) Finally, between January 23, 2006 and January 30, 2006, allegedly in response to continuing financial troubles, all Foamex International stock holdings in the Fund were liquidated. (See McGinley Decl. Ex. P, Fund's Asset Holdings Report FIDFMX0000760 ("Fund Report") 6.) Throughout all of these transactions, and despite Foamex International's financial troubles, Stanford maintained his investment in the Fund.

The automatic cancellation of Foamex International stock, which would have occurred after the bankruptcy court approved the terms of the bankruptcy plan, was placed on hold due to delays in the bankruptcy proceeding. (Spoonemore Supplemental Decl. Ex. R, Foamex International's Annual Report (Form 11-K), at 10 (June 29, 2006).) Indeed, on February 7, 2006, Foamex contacted Fidelity to discuss the possibility of reversing the January 2006 voluntary liquidation of the Fund. (Id. Ex. M, Letter from Andrew R. Prusky to Charles Sirianni, at 2 (June 18, 2007).) On February 8, 2006, Fidelity began to repurchase Foamex International stock to establish a target stock position of 50% for the Fund. (Id.; see also Fund Report 7.) Participants in the Fund were informed via letter of the delay in automatic liquidation and the repurchase of Foamex International stock on February 24, 2006, two weeks after the repurchase of the stock began. (McGinley Decl. Ex. K, Letter from Fidelity to Participants, at 1 (February 24, 2006).) As the target stock position of the Fund in Foamex International stock increased, so did the market value of the stock. (See Fund Report 7-14.) The Fund, however, did not fully realize the gains attendant to the stock price increases because the Fund invested only 50% of its assets in Foamex International stock, retaining a 50% target cash balance. (See id.) The Fund was finally closed on December 22, 2006. (See Trust Agreement Am. No. 7.)

Stanford originally filed this action on July 3, 2007 in the Western District of Washington. The case was transferred to this district on September 28, 2007. The original complaint asserted eight counts against defendants. Stanford amended his complaint on November 21, 2007, and then amended his complaint again on September 15, 2008, after the court granted defendants' motion to dismiss the misrepresentation claim contained in Stanford's first amended complaint. Stanford filed a third amended complaint on June 29, 2009, in which Stanford added Christian and Karpinskias defendants. In his third amended complaint, Stanford's asserts six counts: (I) breach by all defendants, under ERISA § 404(a)(1)(D), of their fiduciary duties to follow Plan documents when they made unauthorized sales of Foamex International stock and transferred existing Fund investments in violation of Plan Amendment No. 4; (II) breach by Foamex of its duty under ERISA § 404(a)(1)(B) to monitor the Committee; (III) breach by Foamex under the theory of respondeat superior for the breaches by the members of the Committee; (IV) breach by Fidelity of its duty under ERISA § 403(a)(1) to follow proper directions when it followed the unauthorized direction of Foamex and violated the Plan's rules by liquidating the Fund by selling all of its Foamex International stock; (V) breach by Foamex of its duty under ERISA § 404(a)(1)(B) to monitor Fidelity; and (VI) breach by all defendants of their cofiduciary duties under ERISA § 405. Plaintiff filed a motion for class certification on January 13, 2009.*fn9 The Committee (which is no longer a defendant in the third amended complaint), Ralph and Drap responded on June 26, 2009. Fidelity also responded on June 26, 2009, joining the legal arguments set forth in Foamex's response. Stanford replied on July 24, 2009, and Fidelity filed a sur-reply on August 14, 2009.

II. Class Certification Standards

Federal Rule of Civil Procedure 23 governs the propriety of class certification.

To obtain class certification under Rule 23, plaintiffs bear the burden of establishing "that all four requisites of Rule 23(a) and at least one part of Rule 23(b) are met." Baby Neal v. Casey, 43 F.3d 48, 55 (3d Cir. 1994). "'Class certification is proper only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23 are met.'" Hohider v. United Parcel Serv., Inc., ---F.3d----, 2009 WL 2183267, *3 (3d Cir. Jul. 23, 2009) (quoting In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 309 (3d Cir. 2009) (internal quotations omitted)). Significantly, the "'requirements of Rule 23 must be met, not just supported by some evidence.'" In re Hydrogen Peroxide Antitrust Litig., 552 F.3d at 321 (quoting In re Initial Public Offering Sec. Litig., 471 F.3d 24, 33 (2d Cir. 2006)). When deciding whether to certify a class of plaintiffs, the court "must make whatever factual and legal inquiries are necessary and must consider all relevant evidence and arguments presented by the parties." Id. at 307; see Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 166 (3d Cir. 2001) ("A class certification decision requires a thorough examination of the factual and legal allegations."). "Factual determinations necessary to make Rule 23 findings must be made by a preponderance of the evidence." In re Hydrogen Peroxide Antitrust Litig., 552 F.3d at 320.

Importantly, the "requirements set out in Rule 23 are not mere pleading rules," and the court must "delve beyond the pleadings to determine whether the requirements for class certification are satisfied." Id. at 316 (internal quotations omitted); see also id. at 326 (stating that "actual, not presumed conformance with the Rule 23 requirements is essential" (alterations and quotation omitted)). "[T]he decision to certify a class calls for findings by the court, not merely a 'threshold showing' by a party, that each requirement of Rule 23 is met." Id. at 307. Moreover, "the court must resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits-including disputes touching on elements of the cause of action." Id.; see also id. at 316 ("An overlap between a class certification requirement and the merits of a claim is no reason to decline to resolve relevant disputes when necessary to determine whether a class certification requirement is met."). During the court's "preliminary inquiry into the merits," the "court may consider the substantive elements of the plaintiffs' case in order to envision the form that a trial on those issues would take." Id. at 317 (internal quotations omitted); see Hohider, 2009 WL 2183267, at *3, *19 (noting "critical" importance of determining how case will be tried when considering class certification). While the court may consider the substantive elements of plaintiff's claims, plaintiff's "burden at the class certification stage is not to prove the element[s]" of each claim. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d at 317 (emphasis added). "Instead, the task for plaintiffs at class certification is to demonstrate" that the elements of their claims are "capable of proof at trial through evidence that is common to the class rather than individual to its members."*fn10 Id. at 311-12.

III. Discussion

A. Plaintiff's Claims

Because a determination of how the case will proceed is "critical" to the issue of whether to certify a class, I begin with a discussion of plaintiff's claims. Stanford brings this action pursuant to § 502(a)(2) of ERISA (codified as 29 U.S.C. § 1132(a)(2)), which permits a plan participant to file a civil action against a fiduciary for relief under § 409 of ERISA (codified as 29 U.S.C. § 1109). Under § 409(a), fiduciaries found to have breached their fiduciary duties "shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary." In cases like this, where plan participants assert § 502(a)(2) claims against fiduciaries of a defined contribution plan, participants can assert claims on behalf of the entire Plan or on behalf of their individual plan accounts. LaRue v. DeWolff, Boberg & Assocs., Inc., 128 S.Ct. 1020, 1026 (2008) (holding that "although § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account"). In the present action, Stanford alleges breaches that affected the entire Plan, not just his individual account. (3d Am. Compl. ¶ 5.) Thus, any recoupment of lost profits would inure to the benefit of the Plan. See Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 (1985).

Each count of the third amended complaint asserts a breach of fiduciary duty claim, with each count centering in large part on specific transactions made by defendants: (1) the September 22, 2008 increase in the target cash balance to 20%; (2) the January 6, 2006 increase in the target cash balance to 50%; (3) the total liquidation of all Foamex International stock in the Fund that took place between January 23, 2006 and January 30, 2006; (4) the maintenance of a 50% target cash balance from February 2006 until the Fund's closure in December 2006; and (5) the willingness of defendants to allow participants invested in the Fund to transfer their investments out of the Fund after the adoption of Amendment No. 4 to the Plan (collectively, "Challenged Transactions"). (3d Am. Compl. ¶ 49; Pl.'s Reply Br. 16.)

In count I, plaintiff asserts that all defendants breached their fiduciary duties by failing to act in accordance with the Plan in violation of ยง ...

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