New Life For Stock-Drop Lawsuits: Sixth Circuit Rejects Moench Presumption At Pleading Stage

In Moench v. Robertson, 1the United States Court of Appeals for the Third Circuit adopted a presumption of compliance with ERISA when an employee stock ownership plan (ESOP) fiduciary invests in the employer's stock. Last week, the Court of Appeals for the Sixth Circuit breathed new life into ERISA "stock-drop" claims against State Street Bank, holding that the Moench presumption of prudence does not apply to motions to dismiss.

In Pfeil v. State Street Bank and Trust Company, 2the Sixth Circuit refused to follow the Second Circuit's decisions last October in Citigroup 3and McGraw-Hill 4that applied the "presumption of reasonableness" in affirming motions to dismiss stock-drop class actions, claiming that fiduciaries breached ERISA duties in continuing to offer employer stock as an investment option in 401(k) plans. State Street highlights a split among the circuits that may not be resolved until the Supreme Court weighs in on the issue.

The Moench Presumption of Reasonableness in Stock-Drop Cases

The Third, 5Fifth, 6Sixth, 7Seventh 8and Ninth 9Circuits have applied some version of the Moench presumption of reasonableness in stock-drop cases ESOPs and eligible individual account plans (EIAPs) that permit investment of plan assets in employer stock. In ERISA § 404(a)(2), Congress expressly exempted such employer stock holdings from the diversification standard set forth in ERISA's fiduciary responsibility provisions, the prudence standard (only to the extent it requires diversification) and the limitations that otherwise apply to employer stock holdings.

Courts applying the Moench presumption recognize that employer stock is a presumptively-prudent investment for ESOPs and EIAPs. To defeat the presumption, plaintiffs must show the fiduciaries were aware of dire financial circumstances threatening the company's viability as a going concern and creating the danger that company stock would become worthless. Some of these cases have applied this presumption of reasonableness at the summary-judgment stage, after the parties have been through discovery on the merits. Some courts, most recently the Second Circuit, have applied this presumption at the motion-to-dismiss stage, cutting off plaintiffs' claims before discovery on the grounds that plaintiffs cannot plausibly state a claim of breach of ERISA fiduciary duty.

Second Circuit Applies Moench to Grant Motion to Dismiss

In Citigroup and McGraw-Hill, the Second Circuit applied the presumption of prudence in considering defendants'...