Under what is known as the Moench presumption, an ERISA plan fiduciary's decision to remain invested in employer stock in an Employee Stock Ownership Plan (ESOP) is insulated from legal challenge unless the participant proves that a prudent fiduciary would have made a different investment decision. The Sixth Circuit today reverses dismissal of such a case, where the ESOP - of General Motors stock - cratered as GM went into bankruptcy. Importantly for the future of such cases, the Sixth Circuit rejected the rulings of several other circuits and holds that the participant need not allege the Moench presumption in a complaint.
Pfeil v. State Street Bank and Trust Co., No. 10-2302 (6th Cir. Feb. 22, 2012): State Street operated as plan administrator of the General Motors Common Stock Fund, one of several 401(k) options open to GM employees; the "plans invested between $1.45 billion and $1.9 billion in plan assets in General Motors stock during the class period." Under the terms of the plan, the fund was to maintain investments in GM stock regardless of diversification or risk.
The complaint alleged that State Street continued to stay invested in GM stock, despite the storm warnings of an imminent financial collapse of the company. On August 1, 2008, GM announced a third quarter loss of $15.5 billion, and by 2009 the firm was seeking bankruptcy protection. State Street waited until November 21, 2008 to suspend purchases of GM stock, and until March 31, 2009 to sell off 50 million shares held by plan participants, in the process costing fund investors most of the value of their holdings. Plaintiffs filed a putative class action, alleging that the belated decision was a breach of fiduciary duty of prudence under ERISA § 409(a), 29 U.S.C. § 1109(a).
Although the district court dismissed the action, the Sixth Circuit reverses. The panel acknowledges that ESOPs are ordinarily excepted from the duty of diversification. However, "an ESOP fiduciary may be liable for failing to diversify plan assets even where the plan required that an ESOP invest primarily in company stock. "We have explained that ERISA's statutory exemptions for ESOPs 'do[ ] not relieve a fiduciary . . . from the general fiduciary responsibility provisions of [§ 1104] which, among other things, require a fiduciary to discharge his duties respecting the plan solely in the interests of plan participants and beneficiaries and in a prudent fashion . . . nor does it affect the requirement . . . that a plan must be operated for the exclusive benefit of employees and their beneficiaries'" (quoting Kuper v. Iovenko, 66 F.3d 1447, 1458 (6th Cir. 1995))
Defendants argued that the complaint should be dismissed because it failed to allege sufficient facts under the Kuper/Moench presumption to establish a plausible basis for challenging the good-faith basis for retaining the shares of GM stock, citing Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). But the Sixth Circuit, rejecting the stance of the Second, Third, Fifth and Ninth Circuits, holds that there is no heightened pleading requirement for ERISA ESOP cases and no need, therefore, to allege facts establishing a fiduciary's abuse of discretion in continuing to hold company stock.
The Sixth Circuit, in contrast to the other circuits, has never required that a participant prove that the company was at the stage of "impending collapse" or a "dire situation" before a plan participant must act to reverse investments in company stock. Thus, the court holds that there is no increased burden at the pleading stage to allege facts to overcome the burden of reasonableness in order to survive a motion to dismiss.
Holds the court:
"We recognize that ESOP plaintiffs, having had an opportunity to conduct formal discovery, may come forward with rebuttal proofs of many kinds, depending on the facts of each case. Because Kuper's standard for rebutting the presumption is not as narrowly defined to require proof of a 'dire situation' or an 'impending collapse,' we find it inappropriate to apply it to the pleadings on a motion to dismiss, making the contrary decisions of other circuits distinguishable."
Considering how very technical and difficult these violations may be to prove with out discovery, it is a significant breakthrough for plan participants and beneficiaries that at least one circuit has lowered the threshold for filing such cases.