Supreme Court Refocuses the 11th Circuit in its Review of an ESOP Fiduciary's Duty of Prudence.
Two years ago, when called upon
to address an ESOP fiduciary’s duty of prudence in the context of a motion to
dismiss, the 11th Circuit Court of Appeals followed a long line of cases: “We
join our five sister circuits in …review[ing] only for an abuse of discretion
the defendant’s decision to continue investing in and holding [company] stock
in compliance with the direction of the Plan.”
Lanfear v. Home Depot, Inc., 679 F. 3d 1267 (11th Cir. 2012). (See our blog, Eleventh Circuit Determines Standard of Prudence for ESOP Fiduciaries in Stock-Drop Case.) In
defining that point at which a fiduciary abuses its discretion, 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, in following Moench v. Robertson, 62 F. 3d 553 (3d Cir. 1995), the Lanfear Court held that a fiduciary
would be seen to have abused its discretion only 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.” Id. at 1280,
quoting Moench.
Although the Moench Court called it a “presumption of prudence,” the Lanfear Court clarified that “the Third
Circuit did not intend to use, and we disavow any intension of using, the word
‘presumption’ in a sense that had any evidentiary weight.” Instead, in the context of a motion to dismiss,
the Lanfear described the standard in
dauntingly deferential terms:
“prescib[ing] who is to win in almost all of the circumstances that can
be envisioned.” Id. at 1281.
Whether called a “standard of
review” or a “presumption,” it is now gone.
In Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (June 25, 2014), the United States Supreme Court held that no
special presumption of prudence should apply to ESOP fiduciaries. Although the rule is stated simply, the issue
is complex, when measured against a backdrop of putative class actions where
the stakes are high at the pleadings stage. Defendants have been understandably concerned about meritless claims getting
past a Rule 12(b)(6) motion, due to the high cost of going forward in
litigation. The Supreme Court responded to these voiced concerns, but found
that this judicially-created presumption did “not readily divide the plausible
sheep from the meritless goats.” Id. at 2470. It
suggested instead a “careful, context-sensitive scrutiny of a complaint’s allegations.” Id. Keeping intact a requirement for a robust
review under Twombly and Iqbal, it provided guidelines on
“plausibility.” This included the strong
suggestion that a fiduciary’s prudence usually could not be questioned when it
used major stock markets as an estimate of the company’s stock value. Nor could ERISA’s duty of prudence “require
an ESOP fiduciary to perform an action…that would violate securities law,” such
as insider trading. Id. at 2473. For this latter suggestion,
it cited Lanfear, keeping at least
part of the 11th Circuit’s ruling intact.
