Dudenhoefer v. Bancorp

• Decision Date: 05 September 2012
• Docket Number: No. 11–3012.,11–3012.
• Citation: 53 Employee Benefits Cas. 2842,692 F.3d 410
• Parties: John DUDENHOEFER, on behalf of himself and all others similarly situated; Alireza Partovipanah, Plaintiffs–Appellants, v. FIFTH THIRD BANCORP; Kevin T. Kabat; Paul L. Reynolds; The Pension and Profit Sharing Committee; Nancy Phillips; Greg Carmichael; Robert Sullivan; Mary Tuuk; John Does 1–20, Defendants–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

692 F.3d 410

53 Employee Benefits Cas. 2842

John DUDENHOEFER, on behalf of himself and all others similarly situated; Alireza Partovipanah, Plaintiffs–Appellants,

v.FIFTH THIRD BANCORP; Kevin T. Kabat; Paul L. Reynolds; The Pension and Profit Sharing Committee; Nancy Phillips; Greg Carmichael; Robert Sullivan; Mary Tuuk; John Does 1–20, Defendants–Appellees.

No. 11–3012.

United States Court of Appeals, Sixth Circuit.

Argued: June 7, 2012.

Decided and Filed: Sept. 5, 2012.

ARGUED:Peter H. LeVan, Jr., Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, for Appellants. Joseph M. Callow, Jr., Keating, Muething & Klekamp PLL, Cincinnati, Ohio, for Appellees. Melissa Moore, United States Department of Labor, Washington, D.C., for Amicus Curiae. ON BRIEF:Edward W. Ciolko, Mark K. Gyandoh, Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, Thomas J. McKenna, Gainey & McKenna, New York, New York, for Appellants. Joseph M. Callow, Jr., James E. Burke, Danielle M. D'Addesa, David T. Bules, Keating, Muething & Klekamp PLL, Cincinnati, Ohio, for Appellees. Melissa Moore, United States Department of Labor, Washington, D.C., Jay E. Sushelsky, AARP Foundation, Washington, D.C., for Amici Curiae.

Before: COOK and STRANCH, Circuit Judges; LAWSON, District Judge. ^*

OPINION

JANE B. STRANCH, Circuit Judge.

Plaintiffs John Dudenhoefer and Alireza Partovipanah, participants in and contributors to their employer's retirement plan, filed suit against Fifth Third and several individual Defendants on behalf of themselves and a class of similarly situated individuals alleging violations of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. Plaintiffs alleged that plan fiduciaries continued to invest in and hold Fifth Third Stock despite its precipitous decline in value in breach of their fiduciary duties including their duty to prudently and loyally manage the plan's investment in company securities. The district court found Plaintiffs failed to state claims upon which relief could be granted and granted Defendants' Motion to Dismiss the Amended Complaint. This appeal followed. For the following reasons, we REVERSE the judgment of the district court and REMAND for further proceedings.

I. BACKGROUND

A. Factual History

Because this appeal arises from a decision at the motion to dismiss stage, we draw the facts from the allegations of the Amended Complaint. Plaintiffs John Dudenhoefer and Alireza Partovipanah, former employees of Fifth Third Bank, are plan participants in the Fifth Third Bancorp Master Profit Sharing Plan (“the Plan”) and invested in Fifth Third common stock through the Plan during the class period. The Plan is a defined contribution retirement plan for employees sponsored by Fifth Third, which serves as trustee. Participants make voluntary contributions to the Plan from their salaries and direct the Plan to purchase investments for their individual account from options preselected by the Defendants. During the class period, these options included Fifth Third Stock, two collective funds, or seventeen mutual funds.

Once employees are eligible to participate in the Plan, Fifth Third matches 100% of the first 4% of a participant's compensation contributed as part of the employee's compensation package. Those matching contributions are initially invested in the Fifth Third Stock Fund but may be moved subsequently to the other investment options. The Plan is not invested solely in Fifth Third Stock, nor is it required to be: the Plan Document does not mandate that the Fifth Third Stock Fund invest solely in Fifth Third Stock and does not limit the ability of the Plan fiduciaries to remove the Fifth Third Stock Fund or divest assets invested in the Fifth Third Stock Fund, as prudence dictates. The Plan fiduciaries chose to incorporate by reference Fifth Third's SEC filings into the Summary Plan Description (SPD), an ERISA required communication to Plan participants.

During the class period, a significant amount of the Plan's assets were invested in Fifth Third Stock. Plaintiffs allege that, during this period, Fifth Third switched from being a conservative lender to a subprime lender, its loan portfolio became increasingly at risk due to defaults, and it either failed to disclose the resulting damage to the company and its Stock or provided misleading disclosures. The price of Fifth Third Stock declined 74% from the beginning of the class period, July 19, 2007 through September 18, 2009, causing the Plan to lose tens of millions of dollars. The Amended Complaint further alleges that: Defendants were aware of the risks presented by its investment in the subprime lending market, citing specific public sources; and business and accounting mismanagement related to these risks, coupled with incomplete and inaccurate statements by Fifth Third executives, caused the price of Fifth Third Stock to be artificially inflated before plummeting. It is alleged that “[a] prudent fiduciary facing similar circumstances would not have stood idly by as the Plan's assets were decimated.”

B. Procedural History

On September 21, 2008, Plaintiffs filed an Amended Complaint alleging ERISA violations against Fifth Third; Kevin T. Kabat, Fifth Third's President and Chief Executive Officer during the class period; and members of Fifth Third's Pension, Profit Sharing, and Medical Plan Committee (the “Committee”). Plaintiffs allege each Defendant acted as a fiduciary with respect to the Plan during the class period. The Amended Complaint contains four counts. Count I alleges that: (1) all Defendants breached their fiduciary duties under ERISA by maintaining significant investment in Fifth Third Stock and continuing to offer it as an authorized investment option at a time that they knew or should have known it was imprudent to do so; and (2) the Defendants breached their fiduciary duties by failing to provide Plan participants with accurate and complete information about Fifth Third and the risks of investment in Fifth Third Stock. Count II alleges that Fifth Third and President/CEO Kabat breached their fiduciary duties under ERISA by failing to properly monitor the performance of their fiduciary appointees. Count III alleges that all Defendants failed to avoid or ameliorate inherent conflicts of interest relating to their management of the Plan. Finally, Count IV alleges that all Defendants are liable for breaches of their co-fiduciaries.

On October 5, 2008, Defendants filed a Motion to Dismiss the Amended Complaint. On November 24, the district court granted the motion, finding that the Amended Complaint failed to state a plausible claim for relief. Specifically, the district court found that the Plan was an employee stock ownership fund (“ESOP”) under ERISA and, thus, Defendants benefitted from a presumption that their decision to remain invested in employer securities was reasonable. Applying this presumption at the motion to dismiss stage, the district court found that Count I of the Amended Complaint failed to allege facts to overcome this presumption of reasonableness. The district court also found that Count I of the Amended Complaint failed to the extent it relied on SEC filings incorporated into Plan documents because the court concluded the Defendants did not speak in a fiduciary capacity when those alleged misstatements and omissions were made. Finally, the district court dismissed the remaining Counts based entirely on their dependency on Count I. The district court dismissed the Amended Complaint in its entirety and denied the Plaintiffs' request for leave to amend. Plaintiffs timely appealed.

II. ANALYSIS

A. Standard of Review

This court reviews the district court's order granting a Rule 12(b)(6) motion to dismiss de novo. Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 572 (6th Cir.2008). In assessing a complaint for failure to state a claim, we must construe the complaint in the light most favorable to the plaintiff, accept all well pled factual allegations as true, and determine whether the complaint “contain[s] sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation and citation omitted).

B. Count I: Violations of ERISA Fiduciary Duties1. Fiduciary Duties under ERISA for ESOPs

“ERISA is a comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). ERISA safeguards the “financial soundness” of employee benefit plans “by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.” 29 U.S.C. § 1001(a), (b). Section 404(a)(1) establishes the fiduciary duties of trustees administering plans governed by ERISA:

(a) Prudent man standard of care

(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this...