Donovan v. Bierwirth

John Bierwirth, Robert Freese, and Carl Paladino (defendants) were trustees of the Grumman Corporation Pension Plan, an employee benefit plan governed by the Employee Retirement Income Security Act (ERISA). The trustees were also high-ranking officials in Grumman Corporation itself. In 1981, LTV Corporation, an outside business, made a tender offer for a controlling interest in Grumman at $45 per share. At the time, the pension plan held a significant number of Grumman’s shares of stock. The trustees chose not to tender any of the shares and instead directed the plan to purchase over one million additional shares of Grumman’s stock to defeat LTV’s tender offer. The day prior to LTV’s offer announcement, Grumman’s shares were priced at $26.75, but after the offer was announced, the price rose to $35.88. LTV’s offer distorted the market price of the shares, which normally had a lower value. When the trustees purchased their additional shares, the price was $36 to $39.34 per share. Several months later, the trustees sold their purchased stock, along with some previously held shares, for $47.55 each, earning a profit on their Grumman investment. Raymond Donovan (plaintiff), the secretary of the United States Department of Labor, filed suit in federal district court under ERISA, claiming that the trustees violated their fiduciary duties by imprudently buying Grumman stock through the pension plan at market prices distorted by LTV’s offer. The district court dismissed the complaint, finding that the plan did not suffer a loss within the meaning of ERISA § 409(a). Donovan appealed to the United States Court of Appeals for the Second Circuit.