Texas Judge Hears ESG Lost American Airlines 401(k) $15 Million

An American Airlines Inc. pilot and other 401(k) plan investors told a Texas federal judge the company placed its “incestuous” relationship with BlackRock Inc. ahead of its fiduciary duty, resulting in a $15 million worker benefits loss.

American Airlines’ employment benefits committee didn’t separate the company’s corporate business interests, including its ties to BlackRock, which has espoused socially-conscious investing, from its fiduciary duty to employees’ 401(k) plan, the pilot’s counsel argued Thursday at the close of a four-day bench trial in Fort Worth.

The case will set a standard for companies overseeing retirement benefits by holding American Airlines accountable for not monitoring BlackRock’s proxy-voting compliance, unlike its other investment managers, said Heather Hacker of Hacker Stephens LLP, who also represents the court-certified class.

The lawsuit filed in June 2023 alleged the airline pursued environmental, social, and governance priorities through BlackRock investments at the expense of workers’ financial interests.

BlackRock’s May 2021 proxy vote at ExxonMobil, which focused on ESG priorities, harmed the airline’s plan by devaluing its energy stocks, class members claimed. An expert testifying on behalf of the class said the vote led the airline’s plan to suffer losses of over $15 million, an estimate American has argued was “deeply flawed.”

The litigation in the US District Court for the Northern District of Texas is among the first private-sector suits alleging a breach of the Employee Retirement Income Security Act on ESG grounds. ESG considerations in both public and private pensions have been under fire as part of conservatives’ battle against socially conscious investing.

Fiduciary Questions

Judge Reed O’Connor questioned counsel over whether American Airlines created an adequate wall to help senior executives on the employment benefits committee to focus on workers’ interests and not corporate goals like ESG. The judge noted Meghan Montana, senior vice president and treasurer at American Airlines, testified to sending emails with staff about BlackRock’s relationship with the airline.

Montana told the court that the emails were sent before she sat on the employee benefits committee when she was assistant treasurer. The emails discussed how BlackRock was the company’s fourth largest equity holder and owned more than $400 million of the company’s fixed-income debt, according to testimony.

Russell D. Cawyer of Kelly Hart & Hallman LLP, counsel for American Airlines, argued during closing the class members didn’t provide enough evidence to prove a breach of fiduciary duty. The company complied with the law by establishing a system of delegating proxy-voting to investment managers and hiring an adviser to monitor them, he said.

American Airlines employees testified the airline buys sustainable aviation fuel to compete in certain markets in Europe that have climate change-related regulations. But these corporate actions have nothing to do with how the employee benefit committee handles the retirement plans, said Cawyer.

“I don’t know if the world is warming or not, but these European countries do,” said Cawyer.

Attorneys for the class argued the airline didn’t monitor its investment managers.

Ken Menezes, managing director of American Airlines’ asset management group, testified Tuesday that BlackRock provided quarterly compliance reports for its proxy voting to American through a portal—documents not given to the class members’ attorneys.

Menezes returned to court Thursday correcting his testimony after he discovered BlackRock did not in fact provide quarterly reports, which were allegedly required by an agreement between American Airlines and the investment manager.

American Airlines and counsel for the class members didn’t immediately respond to requests for comment on Thursday.

O’Melveny & Myers LLP and Kelly Hart & Hallman LLP represent American Airlines and its benefits committee. Hacker Stephens LLP and Sharp Law LLP represent the plaintiff and the class.

The case is Spence v. American Airlines Inc. et al, N.D. Tex., No. 4:23-cv-00552, closing arguments held 6/27/24.