Klein and Sharman on Fifth Third Bancorp. v. Dudenhoeffer and the Demise of the Moench/Kuper Presumption

Klein and Sharman on Fifth Third Bancorp. v. Dudenhoeffer and the Demise of the Moench/Kuper Presumption

 In Fifth Third Bancorp. v. Dudenhoeffer, No. 12-751, 2014 U.S. LEXIS 4495 (June 25, 2014) [an enhanced version of this opinion is available to lexis.com subscribers], the Supreme Court unanimously held that plan fiduciaries are not entitled to a "presumption of prudence" under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") when they decide to invest in or retain company stock in an employee stock ownership plan ("ESOP"). The Supreme Court concluded that ESOP fiduciaries are subject to the same general duty of prudence that applies to all ERISA fiduciaries under ERISA, except for the duty to diversify. At the same time, however, the Court raised the bar in terms of what an ERISA plaintiff seeking damages for breach of fiduciary duty must allege to survive a motion to dismiss. Indeed, the Court remanded the case to the Sixth Circuit with guidance on how to evaluate the ESOP fiduciaries' motion to dismiss the former employees' claims for breach of the duty of prudence.

Issues Presented on Certiorari

The Supreme Court addressed two questions in Dudenhoeffer: (1) whether fiduciaries of an employer stock ownership plan ("ESOP") are entitled to a presumption of prudence in terms of their decision to invest (and remain invested) in employer stock; and (2) whether a complaint alleging breach of that fiduciary duty must contain sufficient facts demonstrating that the employer's financial status was dire.

The Facts of Dudenhoeffer

During the financial crisis of 2008, two former employees of the Bank filed separate class actions (which were later consolidated) against fiduciaries of the Bank's defined contribution retirement plan ("the Plan"). Per the Plan's structure, employer contributions initially were paid into a stock fund ("the Fund") consisting primarily of the Bank's common stock. Participants then had the option to move those contributions into other investment choices available under the Plan.

Plaintiffs alleged that amid the shift in the financial industry, the downturn in the economy, and the resulting instability in 2007, none of the Plan fiduciaries investigated the propriety of the Plan's continued investments in the Bank's common stock. Instead, Plaintiffs alleged that Plan fiduciaries proffered incomplete and inaccurate financial statements to the market and, thus, artificially inflated the price of the Bank's stock. In actuality, the Bank's stock had significantly declined in value in 2007 and 2008. However, the price of the stock rebounded in 2009.

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