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Stanford v. Foamex L.P.

August 31, 2010

WILLIAM STANFORD, JR., INDIVIDUALLY AND ON BEHALF OF ALL OTHER SIMILARLY SITUATED PERSONS AND ON BEHALF OF THE FOAMEX L.P. SAVINGS PLAN, PLAINTIFF,
v.
FOAMEX L.P., ET AL., DEFENDANTS.



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

Memorandum

Plaintiff, William Stanford, Jr., filed this class action individually and on behalf of all other similarly situated persons and on behalf of the Foamex L.P. Savings Plan (the "Plan") pursuant to Section 502(a)(2) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132(a)(2).*fn1 Plaintiffs seek to recover alleged losses to their investments in the Foamex Stock Fund (the "Fund") that occurred when Fidelity Management Trust Company ("Fidelity") and the Foamex L.P. Benefits Committee (the "Committee") began selling the Fund's stock holdings in Foamex International, Inc., out of concern that Foamex International was financially distressed, and eventually closed down the Fund, even though the stock's value had increased.

Presently before the court are cross-motions for partial summary judgment on defendants' counterclaims.*fn2 In those counterclaims, defendants seek to reform a September 8, 2005, amendment to the Plan ("Amendment No. 4"), based on an alleged "scrivener's error." They seek this reformation in response to plaintiffs' allegation that defendants' sale of Foamex International stock from the Fund-ostensibly to increase the percentage of cash held in the Fund to satisfy increased daily exchanges or withdrawals by Plan participants-was unnecessary because Amendment No. 4 precluded transfers "out of" as well as into the Fund. Defendants argue that the language precluding transfers out of the Fund was a drafting error inconsistent with the intent of Amendment No. 4, which was only meant to preclude new investments in the Fund in order to protect Plan participants. They argue that the language is also inconsistent with other language in Amendment No. 4, other Plan documents, communications to the Plan participants, and the course of dealing under the Plan. Plaintiffs argue that defendants are not entitled to reformation of an unambiguous term that was defendants' unilateral drafting error.

Plaintiffs do not dispute that the language in question was an unintended drafting error. In addition, there is no evidence in the record that during the relevant time period any Plan participants received, viewed, or relied on the drafting error. In fact, Plan participants were informed that they would be allowed to transfer investments out of the Fund, and they did so. The evidence in the record is clear and convincing-and undisputed-that a drafting error occurred, that it did not reflect the intent of Amendment No. 4, and that no Plan participants were likely to have relied on it. The court concludes that no rational juror could find against defendants on this issue. Thus, the court will deny plaintiffs' motion, grant defendants' motions, reform Amendment No. 4 to eliminate the drafting error, and enter summary judgment in favor of defendants and against plaintiffs on defendants' counterclaims.

I. Factual and Procedural Background*fn3

A. The Plan

Foamex L.P. ("Foamex") is the Plan's Sponsor.*fn4 (Fidelity's Statement of Facts ¶ 1.) The Committee is the Plan's named fiduciary and also the Plan Administrator. (Id. ¶ 2.) The Committee Defendants-K. Douglas Ralph, Stephen Drap, Gregory J. Christian, and George L. Karpinski-were members of Foamex's senior management and served on the Committee during the relevant time period. (Id. ¶ 3.) The Committee has "complete authority to control and manage the operation and administration of the Plan." (Id. ¶ 4.) Fidelity served as the Plan's Trustee, pursuant to a Trust Agreement between Fidelity and Foamex. (Id. ¶ 5.)

The Plan permits either Foamex (as the Plan Sponsor) or the Committee (as the Plan Administrator) to amend its terms. (Plan §§ 1.47-1.48, 13.2 (McGinley Decl. Ex. A*fn5 ); see also Pls.' Statement of Facts ¶ 1.) The Plan also allows the Committee (as the Plan Administrator) to "change or add Investment Funds from time to time." (Plan § 4.4.) The Foamex L.P. Savings Plan for Salaried Employees Summary Plan Description (the "SPD") provides Plan participants with the right to allocate their investments among the various investment options in the Plan and to "reallocate savings already in your account daily[.]" (SPD 8.)*fn6 The SPD further states that "you can divide your contributions among the funds" (id. at 6) and that participants can "[e]xchange between investment options" (SPD 12 (Foamex Mot. Dismiss Ex. B (Docket No. 9)); Fidelity Statement of Facts ¶ 9.)*fn7 The Trust Agreement provides that "each Plan participant shall direct the Trustee in which investment option(s) to invest the assets in the participant's individual accounts." (Trust Agreement § 4(c) (Foamex Mot. Dismiss Ex. C (Docket No. 9)).)

B. The Fund

One of the investment options the Plan offered was the Fund. (Plan § 1.32.) The SPD describes the Fund as "a non-diversified stock investment that invests in the common stock of Foamex International Inc. and therefore is considered to have a high level of risk." (SPD 7.)*fn8

The SPD explains that "[t]he investment performance of the fund is directly tied to the financial performance of Foamex International Inc. and its subsidiaries, along with general market conditions." (SPD 7.) The SPD further explains that "[y]our ownership is measured in units of the fund instead of shares of stock." (Id. (emphasis deleted).) The SPD also explains that "[a] percentage of assets will be held as cash (short-term investments)." (Id. (emphasis deleted).)

The Trust Agreement's description of the Fund is consistent with that of the SPD: Investments in the Stock Fund shall consist primarily of shares of Sponsor Stock [i.e., Foamex International stock]. In order to satisfy daily participant exchange or withdrawal requests for transfers and payments, the Stock Fund shall also include cash or short-term liquid investments.... (Trust Agreement § 4(e) (Foamex Mot. Dismiss Ex. C).) The Trust Agreement requires that the Committee "shall continually monitor the suitability under the fiduciary rules of section 404(a)(1) of ERISA... of acquiring and holding Sponsor Stock." (Trust Agreement § 4(e)(ii) (McGinley Decl. Ex. B).) 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. Stanford, 263 F.R.D. at 161.

C. The Closing of the Fund to New Investments

From March through August 2005, Foamex International and Foamex disclosed their growing financial distress in public filings with the Securities & Exchange Commission, including the prospect of a bankruptcy filing. Id. (see also Fidelity Statement of Facts ¶ 10). At a July 13, 2005, meeting, the Committee decided to close the Fund to new investments but not to change the ability of Plan participants to move their investments out of the Fund:

Due to the recent volatility in the price of Foamex stock, the Committee determined that the Foamex Stock Fund may no longer be an appropriate investment for the 401(k) Plan and agreed to close the Fund to new investments as soon as administratively possible.... Money currently in the Foamex Stock Fund will not be affected, and participants will be permitted [to] move those assets at their discretion. (Mins. of Comm., July 13, 2005 (McGinley Decl. Ex. E) (emphasis added).)

Defendants began communicating to Plan participants concerning the decision to close the Fund to new investments. On July 15, 2005, defendant Christian issued a memorandum to Plan participants stating that the Fund would be closed to new investments but that Plan participants would be able to move their investments into other investment options in the Plan:

[D]ue to the recent volatility in the price of Foamex stock, the Benefits Committee has determined that the Foamex Stock Fund may not be an appropriate investment for a retirement plan such as the 401K Savings Plan at this time. Therefore, a decision has been made to close the Foamex Stock Fund to new investments effective July 15, 2005.

This action applies only to new contributions. Money that is currently in the Foamex Stock Fund may remain in the Fund or can be moved into other investments within the Savings Plan at the participant's discretion. (Mem. from Christian to 401(k) Participants Contributing to the Foamex Stock Fund, July 15, 2005 (McGinley Decl. Ex. F) (emphasis added).) On July 20, 2005, Fidelity mailed a letter to Plan participants, providing similar information:

Due to the recent volatility in the price of Foamex stock, the Benefits Committee has determined that the Foamex Stock Fund may no longer be an appropriate investment for the Savings Plan at this time.

Therefore, as of... July 20, 2005, no additional employee contributions or Company Matching contributions will be directed into the Foamex Stock Fund, and no exchanges into the Foamex Stock Fund will be permitted.

Money that is currently in the Foamex Stock Fund may remain in the fund or can be moved into other investment option[s] within the Savings Plan.

(Letter from Fidelity to Participants, July 20, 2005 (McGinley Decl. Ex. G) (emphasis added).) Stanford acknowledged in his deposition that he received and understood the communications to Plan participants. (Stanford Dep. 55:18-22, 56:18-57:21).)

On July 22, 2005, effective July 20, 2005, Fidelity executed Trust Agreement No. 5*fn9 to close the Fund to "new investments and exchanges in," but did not amend the Trust Agreement to preclude ...


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