Fifth Third Bancorp v. Dudenhoeffer

• Decision Date: 25 June 2014
• Docket Number: No. 12–751.,12–751.
• Citation: 134 S.Ct. 2459,573 U.S. 409,189 L.Ed.2d 457
• Parties: FIFTH THIRD BANCORP et al., Petitioners v. John DUDENHOEFFER et al.
• Court: U.S. Supreme Court

573 U.S. 409

134 S.Ct. 2459

189 L.Ed.2d 457

FIFTH THIRD BANCORP et al., Petitioners

v.John DUDENHOEFFER et al.

No. 12–751.

Supreme Court of the United States

Argued April 2, 2014.

Decided June 25, 2014.

Robert A. Long, Jr., Washington, DC, for Petitioners.

Ronald Mann, New York, NY, for Respondents.

Edwin S. Kneedler for the United States as amicus curiae, by special leave of the Court, supporting the Respondents.

James E. Burke, Counsel of Record, Danielle M. D'Addesa, David T. Bules, Joseph M. Callow, Jr., Keating Muething & Klekamp PLL, Cincinnati, OH, Robert A. Long, Jr., John M. Vine, David M. Zionts, Covington & Burling LLP, Washington, DC, for Petitioners.

Joseph H. Meltzer, Edward W. Ciolko, Shannon O. Braden, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, Thomas J. McKenna, Gregory M. Egleston, Gainey McKenna & Egleston, New York, NY, Ronald J. Mann, Counsel of Record, New York, NY, Maurice R. Mitts, Mitts Law, LLC, Philadelphia, PA, for Respondents.

Justice BREYER delivered the opinion of the Court.

The Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq ., requires the fiduciary of a pension plan to act prudently in managing the plan's assets. § 1104(a)(1)(B). This case focuses upon that duty of prudence as applied to the fiduciary of an "employee stock ownership plan" (ESOP), a type of pension plan that invests primarily in the stock of the company that employs the plan participants.

We consider whether, when an ESOP fiduciary's decision to buy or hold the employer's stock is challenged in court, the fiduciary is entitled to a defense-friendly standard that the lower courts have called a "presumption of prudence." The Courts of Appeals that have considered the question have held that such a presumption does apply, with the presumption generally defined as a requirement that the plaintiff make a showing that would not be required in an ordinary duty-of-prudence case, such as that the employer was on the brink of collapse.

We hold that no such presumption applies. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund's assets. § 1104(a)(2).

I

Petitioner Fifth Third Bancorp, a large financial services firm, maintains for its employees a defined-contribution retirement savings plan. Employees may choose to contribute a portion of their compensation to the Plan as retirement savings, and Fifth Third provides matching contributions of up to 4% of an employee's compensation. The Plan's assets are invested in 20 separate funds, including mutual funds and an ESOP. Plan participants can allocate their contributions among the funds however they like; Fifth Third's matching contributions, on the other hand, are always invested initially in the ESOP, though the participant can then choose to move them to another fund. The Plan requires the ESOP's funds to be "invested primarily in shares of common stock of Fifth Third." App. 350.

Respondents, who are former Fifth Third employees and ESOP participants, filed this putative class action in Federal District Court in Ohio. They claim that petitioners, Fifth Third and various Fifth Third officers, were fiduciaries of the Plan and violated the duties of loyalty and prudence imposed by ERISA. See §§ 1109(a), 1132(a)(2). We limit our review to the duty-of-prudence claims.

The complaint alleges that by July 2007, the fiduciaries knew or should have known that Fifth Third's stock was overvalued and excessively risky for two separate reasons. First, publicly available information such as newspaper articles provided early warning signs that subprime lending, which formed a large part of Fifth Third's business, would soon leave creditors high and dry as the housing market collapsed and subprime borrowers became unable to pay off their mortgages. Second, nonpublic information (which petitioners knew because they were Fifth Third insiders) indicated that Fifth Third officers had deceived the market by making material misstatements about the company's financial prospects. Those misstatements led the market to overvalue Fifth Third stock—the ESOP's primary investment—and so petitioners, using the participants' money, were consequently paying more for that stock than it was worth.

The complaint further alleges that a prudent fiduciary in petitioners' position would have responded to this information in one or more of the following ways: (1) by selling the ESOP's holdings of Fifth Third stock before the value of those holdings declined, (2) by refraining from purchasing any more Fifth Third stock, (3) by canceling the Plan's ESOP option, and (4) by disclosing the inside information so that the market would adjust its valuation of Fifth Third stock downward and the ESOP would no longer be overpaying for it.

Rather than follow any of these courses of action, petitioners continued to hold and buy Fifth Third stock. Then the market crashed, and Fifth Third's stock price fell by 74% between July 2007 and September 2009, when the complaint was filed. Since the ESOP's funds were invested primarily in Fifth Third stock, this fall in price eliminated a large part of the retirement savings that the participants had invested in the ESOP. (The stock has since made a partial recovery to around half of its July 2007 price.)

The District Court dismissed the complaint for failure to state a claim. 757 F.Supp.2d 753 (S.D.Ohio 2010). The court began from the premise that where a lawsuit challenges ESOP fiduciaries' investment decisions, "the plan fiduciaries start with a presumption that their ‘decision to remain invested in employer securities was reasonable.’ " Id., at 758 (quoting Kuper v. Iovenko, 66 F.3d 1447, 1459 (C.A.6 1995) ). The court next held that this rule is applicable at the pleading stage and then concluded that the complaint's allegations were insufficient to overcome it. 757 F.Supp.2d, at 758–759, 760–762.

The Court of Appeals for the Sixth Circuit reversed. 692 F.3d 410 (2012). Although it agreed that ESOP fiduciaries are entitled to a presumption of prudence, it took the view that the presumption is evidentiary only and therefore does not apply at the pleading stage. Id., at 418–419.

Thus, the Sixth Circuit simply asked whether the allegations in the complaint were sufficient to state a claim for breach of fiduciary duty. Id., at 419. It held that they were. Id., at 419–420.

In light of differences among the Courts of Appeals as to the nature of the presumption of prudence applicable to ESOP fiduciaries, we granted the fiduciaries' petition for certiorari. Compare In re Citigroup ERISA Litigation, 662 F.3d 128, 139–140 (C.A.2 2011) (presumption of prudence applies at the pleading stage and requires the plaintiff to establish that the employer was "in a ‘dire situation’ that was objectively unforeseeable by the settlor" (quoting Edgar v. Avaya, Inc., 503 F.3d 340, 348 (C.A.3 2007) )), with Pfeil v. State Street Bank & Trust Co.,

671 F.3d 585, 592–596 (C.A.6 2012) (presumption of prudence applies only at summary judgment and beyond and only requires the plaintiff to establish that " ‘a prudent fiduciary acting under similar circumstances would have made a different investment decision’ " (quoting Kuper, supra, at 1459) ).

II

A

In applying a "presumption of prudence" that favors ESOP fiduciaries' purchasing or holding of employer stock, the lower courts have sought to reconcile congressional directives that are in some tension with each other. On the one hand, ERISA itself subjects pension plan fiduciaries to a duty of prudence. In a section titled "Fiduciary duties," it says:

"(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 subchapter and subchapter III of this chapter." § 1104.

See also Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570, 105 S.Ct. 2833, 86 L.Ed.2d 447 (1985) ( Section 1104(a)(1) imposes "strict standards of trustee conduct ... derived from the common law of trusts—most prominently, a standard of loyalty and a standard of care").

On the other hand, Congress recognizes that ESOPs are "designed to invest primarily in" the stock of the participants' employer, § 1107(d)(6)(A), meaning that they are not prudently diversified. And it has written into law its "interest in encouraging" their use. One statutory provision says:

" INTENT OF CONGRESS CONCERNING EMPLOYEE STOCK OWNERSHIP PLANS .—The Congress, in a series of laws [including ERISA] has made clear its interest in encouraging [ESOPs] as a bold and innovative method of strengthening the free private enterprise system which will solve the dual problems of securing capital funds for necessary capital growth and of bringing about stock ownership by all corporate employees. The Congress is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat [ESOPs] as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take

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