‘Moench’ Ado About Nothing: Circuit Courts Divided on Employer Stock Presumption

by King & Spalding
Contact

[author, Laura R. Westfall, New York, +1 212 556 2263, lwestfall@kslaw.com.]

Introduction

Defined contribution retirement plans (such as 401(k), profit sharing and employee stock ownership plans) that invest in qualifying employer securities have a special exemption from a requirement to diversify plan investments. Until recently, Federal courts have applied this exception generously for employers and fiduciaries, setting up a presumption in their favor, often referred to as the “Moench presumption.” However, several recent pro-participant decisions by the U.S. Court of Appeals for the Sixth Circuit (which covers Kentucky, Michigan, Ohio and Tennessee) result in a split in how the presumption is applied by the Federal Circuit Courts and sets up the possibility of U.S. Supreme Court review.

Background

Section 404(a)(1)(C) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) generally imposes a duty to diversify pension plan investments so as to minimize the risk of large losses (unless under the circumstances it is clearly prudent not to do so). However, Section 404(a)(2) of ERISA provides an exception from the diversification requirement for “eligible individual account plans” (“EIAPs”), such as 401(k), profit sharing and employee stock ownership plans (“ESOPs”).

In 1995, the U.S. Court of Appeals for the Third Circuit addressed whether fiduciaries of an ESOP violated ERISA’s prudence requirement by continuing to invest solely in employer stock during a period when the employer deteriorated financially and its stock declined in value. Moench v. Robertson.  The terms of the ESOP made clear that the ESOP was designed to invest “primarily” in such securities.  The Third Circuit held that an ESOP's fiduciary is presumed to have acted consistently with ERISA where the fiduciary invests in employer stock in accordance with the ESOP's terms.  This presumption is known as the Moench presumption.  The court held that a plaintiff in a suit for breach of fiduciary duty may overcome this presumption by showing unforeseen circumstances that would defeat the purpose of offering employer stock in the ESOP. The Moench case dealt specifically with ESOPs; however, Federal courts have since extended the Moench presumption to cases involving other EIAPs, including 401(k) plans that offer employer stock as an investment option.

Employers who offer EIAPs that permit investment in employer stock often are subjected to lawsuits when there is a substantial decline in the employer's stock price (often referred to as “stock drop” cases). One of the key bases for dismissal of these “stock drop” cases at the pre-trial stage is the Moench presumption of prudence, which was at issue in several cases out of the U.S Court of Appeals for the Sixth Circuit. The basic Moench presumption first detailed in the Third Circuit decision has since been adopted by the Second Circuit, the Third Circuit, the Fifth Circuit, the Sixth Circuit, the Ninth Circuit, and most recently, by the Eleventh Circuit (in Lanfear v. Home Depot).

Sixth Circuit

The Sixth Circuit originally embraced the Moench presumption as established by the Third Circuit in 1995, Kuper v. Iovenko, but two 2012 cases appear to pit the Sixth Circuit against other Circuits as to how the presumption is applied.

In Pfeil v. State Street Bank & Trust Co., the Sixth Circuit held that in order to rebut the Moench presumption, plaintiffs must prove that a prudent fiduciary acting under similar circumstances would have made a different investment decision, rather than demonstrate other “unique circumstances” or prove the employer’s impending collapse or similar dire straits. Also in contrast to the holding in other Circuit Courts that have adopted the Moench presumption, the Sixth Circuit held that the Moench presumption did not apply at the pleadings (motion to dismiss) stage of a lawsuit.

In Griffin v. Flagstar Bancorp, the District Court had dismissed participants' lawsuit alleging that Flagstar Bancorp, Inc. (“Flagstar”) and certain other fiduciaries had breached their fiduciary duties by offering Flagstar stock as an investment option during a period when Flagstar's financial condition deteriorated and the price of its stock declined significantly. The District Court applied the Moench presumption and dismissed the lawsuit.  On appeal, the Sixth Circuit found that participants had a plausible claim that prudent fiduciaries would have stopped offering employer stock and sent the case back to the district court for further proceedings.

State of the Moench Presumption After Flagstar in Various Circuits

The U.S. Circuit Courts that have embraced the Moench presumption apply it differently.  The Second, Fifth, Ninth, and Eleventh Circuits require the plaintiffs to show some proof of “dire circumstances” or the “impending collapse” of the employer to rebut the presumption. In the Sixth Circuit, however, plaintiffs simply must prove that a prudent fiduciary acting under similar circumstances would have made a different investment decision. Further, in the Sixth Circuit only, the Moench presumption does not apply at the pleadings (motion to dismiss) stage of a lawsuit. 

Employers headquartered or doing business in the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee) should be aware that Federal courts in that circuit will apply the Moench presumption differently.  As a result, employers and fiduciaries defending a “stock drop” case brought in the Sixth Circuit will likely be forced to litigate the matter through discovery and plaintiffs will have a lower standard to overcome the Moench presumption later in the lawsuit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding
Contact
more
less

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!