Summers, et al. v. State Street Bank & Trust Company--brief in opposition.

No. 06-439

IN THE SUPREME COURT OF THE UNITED STATES

JERRY R. SUMMERS, GEORGE T. LENORMAND, JEFFREY D. CRITES, LOUISE VAN RENSBURG and JAMES E. SHAMBO, individually and on behalf of all others similarly situated,

Petitioners,

v.

STATE STREET BANK & TRUST COMPANY,

Respondent.

On Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit

RESPONDENT'S BRIEF IN OPPOSITION

LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP Randall J. Sunshine Counsel of Record Ronald S. Kravitz Kim Zeldin 1100 Glendon Avenue, 14th Floor Los Angeles, CA 90024-3503 Telephone: (310) 500-3500 Counsel for Respondent

STATUTES AND OTHER PROVISIONS INVOLVED

Statutes at issue in this case include the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. [subsection] 1002(21)(A), 1102(a)(2)(Resp. App. a and B), 1103(a)(1), 1104(a)(1), 1109(a), and 1132(a)(Pet. App. C, D, F and G). Also at issue is U.S. Department of Labor Employee Benefits Security Administration, Fiduciary Responsibilities of Directed Trustees, Field Assistance Bulletin 2004-03 (Dec. 17, 2004) (Pet. App. H), Federal Rule of Civil Procedure 56(c) (Resp. App. C), and Seventh Circuit Rule 40(e) (Resp. App. D).

STATEMENT OF THE CASE

After UAL Corporation ("UAL") (1) declared bankruptcy at the end of 2002, the participants of the UAL employee stock ownership plan (the "Plan") sued the fiduciaries of the Plan, claiming the fiduciaries breached their duties under ERISA by failing to divest the Plan of UAL stock and to override the terms of the Plan, which required that the assets be invested exclusively in UAL stock, fourteen months prior to the bankruptcy filing. Summers v. State Street Bank & Trust Co., 453 F.3d 404, 405 (7th Cir. 2006).

The ESOP Committee (the "Committee") and its members, the only named fiduciaries in the Plan, 29 U.S.C [section] 1102(a)(2), settled with Petitioners. The remaining defendant and Respondent in these proceedings, State Street Bank & Trust Company ("State Street"), was the directed trustee and a co-fiduciary of the Plan.

The Plan's Trust Agreement (the "Trust Agreement") obligated State Street, as directed trustee, to follow the Committee's directions and gave State Street no discretion regarding the disposition of the Plan's assets. (2) The Trust Agreement required State Street to invest the assets of the trust fund "exclusively" in UAL stock at the "direction of the ESOP Committee." (3) Under the Trust Agreement, State Street had to follow the directions of the Committee as long as such direction was in accordance with the terms of the Plan, proper within the meaning of 29 U.S.C. [section] 1103(a), and not contrary to ERISA. (4)

State Street monitored the financial condition of its clients, including UAL, whose ESOPs held the respective client's stock ("Employer Securities"), irrespective of whether State Street was the named fiduciary or the directed trustee. (5) CitiStreet LLC ("CitiStreet") performed this monitoring function on State Street's behalf. CitiStreet had two committees that met regularly to review Employer Securities: the Fiduciary Committee and the Watchlist Committee. (The latter reported to the former.) If an Employer Security were deemed to be "at-risk," the Watchlist Committee placed it on a watchlist, to be reviewed more closely by the Watchlist Committee. (6)

On December 20, 2001, the Watchlist Committee placed UAL on the watchlist after evaluating information concerning UAL's financial condition, including: an October 17, 2001 letter from then-Chief Executive Officer James Goodwin to UAL's employees asking for wage concessions following the tragic events of September 11, 2001 (the "Goodwin Letter"); analyst reports; and a benchmark deviation report showing that UAL stock deviated from its established benchmark three times within a four-week period. (7)

Petitioners argue placement on the watchlist was insufficient and that, following issuance of the Goodwin Letter, State Street should have overridden the Plan, Trust Agreement, and the directions of the named fiduciary, and should have sold the UAL stock held by the ESOP. Petitioners contend the Goodwin Letter was a clear "sign" or "warning" that UAL would shortly file bankruptcy. State Street did not agree.

The Goodwin Letter was issued in the context of labor negotiations and was understood by many, including analysts and the machinists' union, to be a negotiating ploy. (8) The Goodwin Letter was a rallying call to the employees and the unions to come to the bargaining table and threatened that if various events and agreements were not reached, UAL would "perish some time next year." (9) The phrase "some time next year" "clearly indicates that any such problems could very easily have been far off in 2002." Summers v. UAL Corp. ESOP Comm., No. 03 C 1537, 2005 U.S. Dist. LEXIS 23918, at *17 (N.D. Ill. Oct. 12, 2005). Moreover, the Goodwin Letter concluded in an upbeat and hopeful manner: "The sooner we get to break even, the sooner we'll remove the doubts about our future." The machinists' union sharply criticized the letter. (10) Goodwin subsequently resigned, and his successor Jack Creighton immediately and unequivocally stated that UAL was not considering bankruptcy. (11)

During the next nine months, the Watchlist Committee actively monitored UAL's performance and regularly provided the Fiduciary Committee with benchmark deviation reports on UAL's stock. (12) While State Street monitored the UAL stock, it knew that the named fiduciaries on the Committee also reviewed financial information about UAL. State Street was aware that Houlihan Lokey Howard & Zukin ("Houlihan Lokey") (outside consultants) presented investment advice to the Committee, including copies of annual valuation reports, analyses of UAL's financial condition, and presentations regarding the value of UAL stock. (13) The oral and written presentations included summaries of analyst recommendations, a general industry and economic overview, and information about UAL's financial status. (14)

Of the approximately 110 analyst reports dated from October 17, 2001 through August 13, 2002 (including all those Petitioners cite), (15) none recommended selling during the relevant time period and at least one recommended "accumulate." (16) None said UAL's bankruptcy was highly probable and none said bankruptcy was going to occur in the near or short term. (17) One commentary specifically noted that the Goodwin Letter did not mean UAL was facing bankruptcy. (18)

As part of its monitoring duties, State Street, CitiStreet, and Houlihan Lokey met with a representative of UAL's investor relations department in April 2002, to evaluate UAL's progress in implementing its recovery plan. (19) In May 2002, the Fiduciary Committee…