When Representations Regarding the Financial Condition of the Plan Sponsor Become Actionable Under ERISA

The U.S. District Court for the Northern District of California ruled in December 2009 that statements made by an officer of Delta Star, Inc. (Company) regarding the financial condition and anticipated performance of the Company, which was also the plan sponsor of the Delta Star, Inc. Employee Stock Ownership Plan (ESOP), were sufficiently connected to benefits payable under the ESOP so as to be actionable as a fiduciary breach under ERISA.

The plaintiff, John Balsley, was a participant in the ESOP and held 58,910 shares of Company stock in his ESOP account. As of December 31, 2006, the per share value for the shares of Company stock held by the ESOP was determined to be $22.38. John Green, CFO of the Company, contacted the plaintiff on two separate occasions in October 2007 and offered a lump-sum buyback of the stock held in the plaintiff’s ESOP account. The offer was based on the December 31, 2006 valuation. In his communications with the plaintiff, the CFO indicated that (1) cash may not be available in future to buy back the ESOP shares and (2) the lump-sum offer would not remain open. However, according to the court, the CFO failed to advise the plaintiff that (1) “Delta Star was having a record sales year with record gross profits and net sales increasing over 50%” and that (2) “[E]ven though annual valuation [for 2007] had not been completed, based on the increased gross profits and revenue, Delta Star’s stock [value] had increased.”

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