Rule 11 Safe Harbor Ends $20 Million ESOP Class Action Before It Starts
By: Joelle C. Sharman, Partner, and Michael S. Metta, Partner
On the last day of the six-year statutory repose period, a plaintiff claiming to be a participant in an Employee Stock Ownership Plan (ESOP) filed a $20 million class action lawsuit against our clients—the ESOP Trustee and the ESOP Plan Sponsor—alleging ERISA violations related to a stock purchase transaction.
However, the plaintiff was never eligible to participate in the ESOP because he had not worked the required number of hours in any plan year.
Before filing a responsive pleading, our team served the plaintiff and his counsel with a Rule 11 letter and accompanying motion. The letter stated that the motion would be filed if the complaint was not voluntarily dismissed within 21 days. The motion asserted that the plaintiff and his counsel had failed to conduct even the most basic pre-filing investigation to determine whether a sufficient factual and legal basis existed for their claims, warranting sanctions against both.
In response, plaintiff’s counsel announced an intent to seek leave to amend the complaint to substitute the named plaintiff with an actual participant. We immediately advised that this would not cure the jurisdictional defect depriving the court of subject matter jurisdiction and would not remedy the Rule 11 violation.
One business day before the 21-day safe harbor expired, plaintiff’s counsel dismissed the complaint with prejudice.
