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Eleventh Circuit Applies "Moench Presumption" To Dismiss ERISA "Stock Drop" Class Action

Eleventh Circuit Applies "Moench Presumption" To Dismiss ERISA "Stock Drop" Class Action


ERISA and Life Insurance News
(August 21, 2012)

Home Depot sponsored a defined contribution retirement plan for certain of its employees. The plan required that one of the available investment funds be a “Company Stock Fund” invested primarily in shares of Home Depot Stock. Of the eight investment funds in the plan, the Home Depot, Inc. Common Stock Fund qualified as the “Company Stock Fund.”

The value of the Common Stock Fund declined after it was disclosed that certain Home Depot officials and employees had engaged in misconduct that inflated the company’s stock price.

Lanfear and others filed a putative class action, alleging that Home Depot stock became an imprudent investment, and that the plan fiduciaries breached their duty of prudence by, among other things, “continu[ing] to offer and approve the Home Depot Stock as an investment option for the Plan.”

Home Depot filed a motion to dismiss the complaint under Fed. R. Civ. P. 12(b)(6), arguing that the “prudence claim” actually was a “failure to diversify” claim that was barred by ERISA’s provisions regarding employee stock ownership plans (ESOPs). Alternatively, Home Depot argued that plaintiff’s allegations were insufficient to rebut what has become known as the Moench presumption of prudence.

ERISA fiduciaries operate under a “prudent man standard of care.” ERISA requires fiduciaries to discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries. They are to do so by, among other things, “diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.” 29 U.S.C. § 1104(a)(1)(C).

However, in the case of an eligible individual account plan (EIAP) – which includes ESOPs such as the Home Depot Common Stock Fund – section 1104(a)(2) provides an exemption from the diversification requirement. The Act states: “In the case of an [EIAP], the diversification requirement … and the prudence requirement (only to the extent that it requires diversification) … is not violated by acquisition or holding of employer securities ….”

The federal district court granted Home Depot’s motion to dismiss, concluding that plaintiffs’ prudence claim was “at its core a diversification claim” that was barred by § 1104(a)(2). Alternatively, the district court held that the plaintiffs’ allegations were insufficient to rebut the Moench presumption of prudence, because they did not allege that Home Depot was in such dire financial condition that the fiduciaries were required to deviate from the plan’s requirement that it include the Common Stock Fund.

What has become known as the Moench presumption – actually a standard of judicial review – originated in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), and it previously had been adopted by the Second, Fifth, Sixth, and Ninth Circuits. The Third Circuit held in Moench that “an ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision,” subject to being rebutted by the plaintiff.

In an opinion covering multiple related issues, the Eleventh Circuit affirmed the order of the district court in part and reversed in part, but ultimately held that the complaint failed to state a claim upon which relief could be granted.

First, the court disagreed that plaintiffs’ claim was actually a diversification claim barred by § 1104(a)(2), and found that it was a prudence claim, as alleged. The court then held, however, that the Moench standard applied, and that the presumption of prudence had not been rebutted by the allegations of plaintiffs’ complaint.

“We will review only for an abuse of discretion the defendants’ decision to continue investing in and holding Home Depot stock in compliance with the directions of the Plan,” the Eleventh Circuit said. In order for the abuse of discretion standard to apply, the court announced this test:

Although a fiduciary is generally required to invest according to the terms of the plan, when circumstances arise such that continuing to do so would defeat or substantially impair the purpose of the plan, a prudent fiduciary should deviate from those terms to the extent necessary. Because the purpose of a plan is set by its settlors (those who created it), that is the same thing as saying that a fiduciary abuses his discretion by acting in compliance with the directions of the plan only when the fiduciary could not have reasonably believed that the settlors would have intended for him to do so under the circumstances.

The Eleventh Circuit acknowledged a split among the circuits concerning whether the rule announced in Moench is a pleading presumption, applicable at the motion to dismiss stage, or whether it is an evidentiary presumption, applicable only later at the summary judgment or trial stage.

The court concluded that in Moench the Third Circuit “did not intend to use, and we disavow any intention of using, the word ‘presumption’ in a sense that has any evidentiary weight.” Instead, the court said, “[t]he Moench standard of review of fiduciary action is just that, a standard of review; it is not an evidentiary presumption. It applies at the motion to dismiss stage as well as thereafter.”

Applying that standard of review to the plaintiffs’ complaint, the court held that the plaintiffs did not plead facts establishing that the plan fiduciaries “abused their discretion by following the Plan’s directions,” and thus, that “they have not stated a valid claim for breach of the duty of prudence.”

Click here to view the full August 2012 Edition of the ERISA and Life Insurance News.

Authors
H. Sanders Carter
T (404) 962-1015
F (404) 962-1220
Kenton J. Coppage
T (404) 962-1065
F (404) 962-1256
Dorothy H. Cornwell
T (404) 962-1096
F (404) 962-1246
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