Editor's Overview
This month, our lead article discusses the Sixth Circuit's recent decision in Pfeil v. State Street Bank & Trust, a potentially significant opinion in the field of employer-stock litigation. The article examines the Pfeil court's suggestion in dicta that the presumption of prudence — i.e., a presumption insulating plan fiduciaries' decisions to permit participant employer-stock investments where plan terms permit or require them — does not apply at the motion to dismiss stage. The article also describes several ways in which the Sixth Circuit's decision departs from the jurisprudence in other circuits, and considers the implications of the decision on future employer-stock claims.
Our second article discusses whether release agreements negotiated between employers and employees are enforceable to bar ERISA claims. The article discusses the general standards applied by the courts to determine whether a release was knowing and voluntary, the ERISA anti-alientation provisions that courts traditionally have relied upon to hold releases unenforceable, and whether different standards may be applicable to different types of ERISA claims. It also takes note of a recent Supreme Court decision that may provide support to the lower courts in finding ERISA's anti-alienation provisions inapplicable to release agreements. The article concludes with some practical advice for drafting release agreements that are more likely to be held enforceable.
As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.
Has the Sixth Circuit Breathed New Life into Employer Stock-Drop ERISA Litigation?
Contributed by Russell L. Hirshhorn and Anthony S. Cacace
In Pfeil v. State Street Bank and Trust Co., No. 10-CV-2302, 2012 WL 555481 (6th Cir. Feb. 22, 2012),[1] the Sixth Circuit decided three issues that it had not previously confronted in employer stock-drop ERISA litigation. Unfortunately for ERISA plan sponsors and fiduciaries, the court's ruling on each issue may increase plaintiffs' ability to survive a motion to dismiss within the Sixth Circuit. First, the court stated that the presumption of prudence applicable to a plan fiduciary's decision to invest in an employer stock fund should not be applied on a motion to dismiss. Second, based on what would appear to reflect a lack of understanding of the modern portfolio theory, the court ruled that plaintiffs adequately pled loss causation by alleging that the offering of a company stock fund was imprudent, without regard to the plan's other investment alternatives. Lastly, the court ruled that safe harbor available to plan fiduciaries pursuant to ERISA § 404(c) should not be evaluated on a motion to dismiss and, in any event, would not, in its view, eliminate a plan fiduciary's responsibility for making imprudent investment options available in 401(k) plans.
Background & Procedural History
General Motors (GM) sponsored two defined contribution 401(k) plans, one for hourly employees and one for salaried employees (GM Plans). The GM Plans offered participants several investment options, including mutual funds, non-mutual fund investments, and the GM Stock Fund (GM Fund). The Plan documents explained that the purpose of this stock fund was "to enable Participants to acquire an ownership interest in General Motors and is intended to be a basic design feature" of the Plans. The Plans further provided that this fund "shall be invested exclusively in [General Motors stock]" without regard to diversification of assets, the risk profile of the investment, the amount of income provided by the stock, or fluctuations in the market value of the stock. The Plans documents stated, however, that these restrictions would not apply if the Plan fiduciary:
in its discretion, using an abuse of discretion standard, determines from reliable public information that (A) there is a serious question concerning [General Motors'] short-term viability as a going concern without resort to bankruptcy proceedings; or (B) there is no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings.
In the event either of these conditions were met, the Plan documents directed the Plan fiduciary to divest the Plans' holdings in the GM Fund.
On June 30, 2006, GM appointed State Street Bank and Trust Company (State Street) as the independent fiduciary of the Plans. Plaintiffs alleged that, at that time, GM already was in "serious financial trouble" and that the prevailing view was that bankruptcy protection was "virtually a certainty" for the company. In fact, according to plaintiffs, on July 15, 2008, GM's Chief Executive Officer announced that the company needed to implement a restructuring plan to combat second quarter 2008 losses, which he described as "significant." Plaintiffs alleged that under these circumstances, State Street should have recognized as early as July 15, 2008 that GM was bound for bankruptcy and that GM stock was no longer a prudent investment for the Plans.
It was not, however, until November 21, 2008 that State Street informed participants that it was suspending further purchases of GM stock, citing "GM's recent earnings announcement and related information about GM's business." State Street did not take any action to divest the over fifty million shares of GM stock held by Plan participants until March 31, 2009. GM filed a bankruptcy petition on June 1, 2009.
Plaintiffs filed a complaint alleging that State Street breached its fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (ERISA) by failing to prudently manage Plan assets. In particular, plaintiffs asserted that State Street should have recognized that GM was destined for bankruptcy, GM stock was no longer a prudent investment option to be offered under the Plans, and State Street should have divested the GM Plans' investments in the GM Fund much sooner.
On September 30, 2010, the district court granted State Street's motion to dismiss, finding that while plaintiffs sufficiently pled that State Street breached its fiduciary duty by continuing to offer the GM Fund as an investment option under the Plans, plaintiffs failed to plausibly allege that State Street's alleged breach proximately caused losses to the GM Plans. In so ruling, the district court reasoned that Plan participants could have, without penalty, divested their own accounts of the GM Fund and reinvested their assets in other investment options offered under the GM Plans. Thus, according to the district court, State Street could not be held liable, as a matter of law, for the losses to the Plans.
The Sixth Circuit's Decision
Application of Presumption of Prudence
First espoused by the Third Circuit and since followed by the Second, Fifth, Sixth, Seventh and Ninth Circuits, courts routinely have reviewed a plan fiduciary's decision to invest in an employer stock fund for an abuse of discretion.[2] Three of these Circuits and most (but not all) district courts have applied this presumption of prudence at the motion to dismiss stage. In so ruling, these courts generally have reasoned that the presumption of prudence is not an evidentiary standard, but rather a standard of review by which a plan fiduciary's conduct must be evaluated. According to these courts, if plaintiffs are unable to plead a plausible set of facts to overcome that presumption of prudence by, for example, pleading that the company was in a dire situation or facing impending collapse, these courts have concluded that a plan fiduciary should not be required to further defend the merits of his decision to invest in an employer stock fund.
The Sixth Circuit concluded that it need not decide whether the presumption of prudence should be applied at the motion to dismiss stage because the district court concluded that plaintiffs pled sufficient facts to rebut the presumption of prudence, particularly insofar as the complaint contained detailed allegations of GM's "precarious financial situation" during a time when State Street decided to continue holding GM stock as a Plan asset. Nevertheless, the Court decided to "take this opportunity" to decide whether the presumption should apply at this stage, and concluded that it should not. The Court reasoned that the presumption of prudence is an evidentiary standard that concerns questions of fact and thus not appropriately evaluated on a motion to dismiss. Although several Circuits have reached the opposite conclusion, the Sixth Circuit distinguished those authorities on the grounds that those Circuits adopted "more narrowly-defined tests for rebutting the presumption than the test this Court announced in [Kuper v. Iovenko, 66 F.3d 1447, 1459-60 (6th Cir. 1995)]." In particular, the Sixth Circuit observed that the rebuttal standard adopted in Kuper requires plaintiffs merely to prove that "a prudent fiduciary acting under similar circumstances would have made a different investment decision" whereas other Circuits have required that the participants demonstrate that the company was in a "dire situation" or faced "impending collapse."
Loss Causation
To establish a causal connection between State Street's alleged fiduciary breach and losses to the Plans, the Sixth Circuit ruled that plaintiffs must only show "a causal link between the [breach of duty] and the harm suffered by the plan," i.e., "that an adequate investigation would have...
