Eleventh Circuit Determines Standard of Prudence for ESOP Fiduciaries in “Stock-Drop” Case.

The 11^th Circuit Court of Appeals has now defined the point at which an ESOP fiduciary could be deemed to have breached its fiduciary duties even when complying with the plan terms.   Lanfear v. Home Depot, Inc., 2012 U.S App. Lexis 9321 (11^th Cir. 2012).  The Lanfear case involved Home Depot’s “FutureBuilder Plan” (which was both an EIAP and an ESOP plan).  The Plan participants alleged that the fiduciaries knew that the Home Depot stock price was inflated due to an improper “chargeback” scheme by management at the Home Depot stores, and knew that the stock price would fall sharply when the wrongful chargeback scheme was discontinued.  Accordingly, the participants alleged, the fiduciaries knew when the Home Depot stock was an imprudent investment, and should have discontinued investing Home Depot stock into the Plan.

The Lanfear Court explored  Congress’ intent in its governance of ESOPs, providing retirement income to employees as well as encouraging employee ownership in the company in which they worked.  The Court recognized that this inherent tug-of-war between the prudence of diversification (reducing risk) and investment in the company (increasing risk), was a conflict that “Congress commanded …, or at least permitted ….”    As such, a plan fiduciary is exempt from its normal duty of diversification.  ERISA 404(a)(2). 

Here, the Plan’s fiduciaries’ duty of prudence was at issue.   As is the nature of ESOPs, Home Depot’s Plan requires investment primarily in the company’s own stock, and in practice, the Plan’s fiduciaries invested exclusively in Home Depot stock.  The fiduciaries argued that they were immune from liability, because they were in compliance with the terms of the Plan.    The Lanfear Court rejected this argument:  Because the Plan’s terms required investment primarily in the company’s stock, the fiduciaries had at least some discretion.    

The question then became:  At what point has a fiduciary abused its discretion in continued investment and holding of company stock?    The Lanfear Court explored and rejected the two ends of the spectrum:  A fiduciary’s actions should not be subject to scrutiny with every rise and fall of the stock market, nor should the standard be so deferential as to presume prudence unless the company was on the brink of financial collapse.   Rather, following the Third Circuit and borrowing from trust law, the Court held that a fiduciary would be seen to have abused its discretion when it continued to invest in company stock at a time when it could not have reasonably believed that “continued adherence to the ESOP’s directions was in keeping with the settlor’s expectations of how a prudent trustee would operate it.”  Quoting, Moench v. Robertson, 62 F 3d 553, 571 (3d Cir. 1995).    

Against this backdrop, the Court dismissed Plaintiffs’ claim, finding that they had failed to allege facts that suggested circumstances under which the fiduciaries were compelled to diverge from the Plan’s terms in favor of divestiture of Home Depot stock.     

Fourth Circuit Tweaks Statute of Limitations Rules for ERISA Benefit Claims.

ERISA itself does not contain a statute of limitations for filing a lawsuit for benefits, nor does it specify when such a claim begins to accrue. Nevertheless, in the Fourth Circuit, it is well-settled that a Court should borrow from the forum state’s statute of limitations applicable to an analogous claim (such as breach of contract) to arrive at the limitations period. The accrual date, on the other hand, is governed by federal common law: In general, a benefit claim accrues after administrative remedies have been exhausted and the claim has been formally denied. White v. SunLife Assurance Co., 488 F. 3d 240 (4^th Cir. 2007). In White, the plan language provided that any lawsuit must be filed within three years after proof of claim is required. Under this language, the Court held, the plan’s time limit conceivably could run before the claim was formally denied. Because a claimant is required to exhaust administrative remedies before he can file suit, (Makar v. Carefirst, 872 F 2d 80 (4^th Cir. 1989)), the Court found that the plan language impermissibly “starts the clock [running] before the participants can even file suit.” Id., at 247. The Court therefore held that plan language could not trump federal common law with respect to the accrual starting date.

The Fourth Circuit recently fine-tuned the rule in White. In Belrose v. Hartford, 2012 U.S. App. Lexis 7506 (4^th Cir. (April 13) 2012),the Fourth Circuit affirmed the District Court, (2010 U.S. Dist. Lexis 121254 (E.D. Va. 2010)) which allowed the plan’s language to trump the forum state’s limitations statute, even if the plan’s time limit was shorter, and even if the accrual date under the plan language was invalid. In Belrose, plan language similar to the plan language in White was at issue: The plan required a lawsuit to be filed within three years after proof of loss was required. The Fourth Circuit, in affirming the District Court, followed White ’s holding that the claimant’s cause of action would not begin to accrue until after his administrative remedies were exhausted and the claim had been finally denied, but the Court held that the three-year limitations period specified in the plan applied, rather than the forum state’s five-year statute of limitations.

Another recent tweaking of the statute of limitations was made by the District Court in Maryland, in Wallace v. Freight Drivers Pension Fund, 2012 U.S. Dist. Lexis 53724 (D. Md. (April 17), 2012). In Wallace, the plaintiff retired in 2003 and began receiving pension benefits. In September of 2006, he notified the plan that his benefits were miscalculated, and requested the additional amount. He proceeded through the administrative process, which culminated in the plan’s final denial on July 30, 2008. On July 27, 2011, just shy of the three year limitation period, the plaintiff filed a lawsuit. The plan argued that the statute of limitations accrued when the plaintiff first received benefits in 2003, and therefore his benefit claim was time-barred. The plaintiff argued that his claim did not begin to accrue until after the final formal denial. The Court rejected both arguments under the circumstances, finding that the accrual of plaintiff’s claim began under the “discovery rule”: When the claimant knew or reasonably should have known that the calculation was incorrect.