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Moench Presumption Does Not Apply at Motion to Dismiss Stage: Sixth Circuit
Practical Law Legal Update 4-518-1550 (Approx. 4 pages)
Moench Presumption Does Not Apply at Motion to Dismiss Stage: Sixth Circuit
by PLC Employee Benefits & Executive Compensation
| Published on 24 Feb 2012 • USA (National/Federal) |
The US Court of Appeals for the Sixth Circuit held in Pfeil v. State Street Bank & Trust Co. that plaintiffs need not plead facts at the motion to dismiss stage sufficient to overcome the Kuper/Moench presumption of prudence that a plan fiduciary's decision to remain invested in employer securities is reasonable.
Key Litigated Issues
On February 22, 2012, the US Court of Appeals for the Sixth Circuit issued an opinion in Pfeil v. State Street Bank & Trust Co. Key issues in the case were whether:
- A plaintiff needs to plead facts sufficient to overcome the Kuper/Moench presumption of prudence to survive a motion to dismiss.
- The plaintiffs had plausibly pled a causal connection between the fiduciary's alleged breach of duty and plan losses where the plaintiffs could direct their own investments in the plan.
- The safe harbor defense found in Section 404(c) of ERISA is appropriate for consideration on a motion to dismiss when it had not been raised in a complaint.
Background
General Motors (GM) offered its employees 401(k) profit-sharing plans that offered several investment options, including an option to invest in a GM common stock fund. The plans' documents required investment in the GM common stock fund unless the plans' fiduciary determined from reliable public information that there was either:
- A serious question about GM's short-term viability as a going concern without resorting to bankruptcy proceedings.
- No possibility of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings in the short term.
Plan participants brought suit against State Street Bank and Trust Company, the plans' fiduciary, claiming it breached its fiduciary duty under ERISA by continuing to allow participants to invest in GM common stock when reliable public information indicated GM was headed for bankruptcy. The district court held that the plaintiffs sufficiently pled a breach of State Street's fiduciary duty by alleging that State Street continued to operate the GM stock fund after public information indicated that GM's short term viability was a concern. However, the district court granted State Street's motion to dismiss, finding the plaintiffs had not plausibly alleged that State Street's breach proximately caused plan losses. The plaintiffs appealed.
Outcome
The Sixth Circuit reversed the district court's decision and remanded the case, holding that plaintiffs do not need to plead facts sufficient to overcome the Kuper/Moench presumption of prudence in order to survive a motion to dismiss. Under the Kuper/Moench presumption, a fiduciary's decision to invest in employer securities is presumed to be reasonable. The presumption can only be rebutted by establishing that the fiduciaries abused their discretion. The Kuper/Moench presumption has been adopted by the Second, Third, Fifth, Sixth and Ninth circuits.
In reaching its decision, the Sixth Circuit:
- Held that the Kuper/Moench presumption is an evidentiary issue, not an additional pleading requirement, and therefore a plaintiff need not plead facts sufficient to overcome the presumption to survive a motion to dismiss.
- Distinguished contrary decisions from the Second and Third Circuits, which hold that the Kuper/Moench presumption does apply at the motion to dismiss stage. The Sixth Circuit found those decisions distinguishable because those circuits have adopted more narrowly-defined tests for rebutting the Kuper/Moench presumption. In those circuits, plaintiffs are required to come forward with some proof of dire circumstances or the impending collapse of the company to rebut the presumption. However, the Sixth Circuit follows the abuse of discretion standard in Kuper v. Iovenko for a rebuttal, which requires a plaintiff to show that a prudent fiduciary acting under similar circumstances would have made a different investment decision.
The court also found that the plaintiffs had sufficiently alleged that State Street's actions caused plan losses. The district court held that because the plaintiffs could divest their accounts of GM stock at any time, State Street could not be held liable for losses that occurred when the plaintiffs remained invested in GM stock. However, the Sixth Circuit held that State Street had a fiduciary duty to exclude imprudent investment options and could not escape this duty by claiming, at the pleadings stage, that the plaintiffs' investment choices caused their losses.
Finally, the court held that the safe harbor provision in Section 404(c) that protects plan trustees from liability for losses caused by a participant exercising control over his own assets is not applicable at the motion to dismiss stage when it is not raised in the complaint. However, the court noted that the fact that a plan participant or beneficiary exercises control over plan assets does not automatically trigger the Section 404(c) safe harbor defense and does not relieve fiduciaries of their duty to screen investments.
Practical Implications
Employers in the Sixth Circuit should be aware that the applicability of the Kuper/Moench presumption of prudence in the Sixth Circuit is different than in the Second and Third Circuits at the motion to dismiss stage, which lowers the bar for plaintiffs to survive a motion to dismiss in this circuit.
For more information on fiduciary duties under ERISA, see Practice Note, ERISA Fiduciary Duties: Overview.