Moench v. Robertson

• Decision Date: 12 September 1995
• Docket Number: No. 94-5637,94-5637
• Citation: 62 F.3d 553
• Parties: , 19 Employee Benefits Cas. 1713, Pens. Plan Guide P 23911Z Charles MOENCH in his own right and on behalf of those similarly situated, and on behalf of the Statewide Bancorp Employee Stock Option Plan v. Joseph W. ROBERTSON, Richard D. Sutton, Joseph P. Iaria, Frank J. Ewart, Jack Meyers, Leonard G. Lomell, John C. Fellows, Jr., Raymond A. Taylor, Estate of Frank Ewart, John Ewart, Administrator, Charles Moench, in his own right and on behalf of all those similarly situated, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 553

62 F.3d 553

64 USLW 2164, 19 Employee Benefits Cas. 1713,

Pens. Plan Guide P 23911Z

Charles MOENCH in his own right and on behalf of those similarly situated, and on behalf of the Statewide Bancorp Employee Stock Option Plan v. Joseph W. ROBERTSON, Richard D. Sutton, Joseph P. Iaria Frank J. Ewart, Jack Meyers, Leonard G. Lomell John C. Fellows, Jr., Raymond A. Taylor Estate of Frank Ewart, John Ewart, Administrator Charles Moench, in his own right and on behalf of all those similarly situated, Appellant.

No. 94-5637.

United States Court of Appeals, Third Circuit.

Argued June 26, 1995.

Decided Aug. 10, 1995.

Sur Petition for Rehearing Sept. 12, 1995.

Philip Stephen Fuoco (argued), Joseph A. Osefchen, Haddonfield, NJ, Fredric J. Gross, Mount Ephraim, NJ, for appellant.

Christopher J. Carey (argued), Lisa W. Santola, Tompkins, McGuire & Wachenfeld, Newark, NJ, for appellees.

Thomas S. Williamson, Jr., Sol. of Labor, Marc I. Machiz, Associate Sol., Karen L. Handorf, Counsel for Special Litigation, Eric G. Serron, Wayne R. Berry, Trial Attys., U.S. Dept. of Labor, Office of the Sol., Plan Benefits Sec. Div., Washington, DC, for Amicus Curiae The Secretary of Labor.

John F. Zabriskie, Raymond T. Goetz, Hopkins & Sutter, Chicago, IL, for Amicus Curiae F.D.I.C. as Receiver for First Nat. Bank of Toms River.

Before MANSMANN, GREENBERG, and SAROKIN, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

This case requires us to decide the following difficult question: To what extent may fiduciaries of Employee Stock Ownership Plans (ESOPs) be held liable under the Employee Retirement Income Security Act (ERISA) for investing solely in employer common stock, when both Congress and the terms of the ESOP provide that the primary purpose of the plan is to invest in the employer's securities. The district court held that fiduciaries cannot be liable in such cases, and therefore it granted the fiduciaries' motion for summary judgment. Because we conclude that in limited circumstances, ESOP fiduciaries can be liable under ERISA for continuing to invest in employer stock according to the plan's direction, we will vacate the district court's grant of summary judgment in favor of the plan fiduciaries and will remand the case to the district court for further proceedings. In this opinion we will refer to the plaintiff-appellant Charles Moench, a plan beneficiary, as "Moench," and

the defendants-appellees, the Plan Committee, the fiduciaries with investment responsibilities, singularly as the "Committee."

I. Introduction

A. Statewide's Demise

Statewide Bancorp was a bank holding company with its principal office in Toms River, New Jersey. During the time relevant to this appeal, it operated through two wholly owned subsidiaries, The First National Bank of Toms River, New Jersey ^BTR, and The First National Bank of New Jersey/Salem County.

Statewide began experiencing financial difficulties in 1989. "Between July 1989 and December 1989, the market value of Statewide Bancorp common stock fell from $18.25 per share to $9.50 per share." Dist.Ct. op. at 2. During the next year, the price fell even more precipitously--to $6.00 per share in July 1990, to $2.25 per share in December, and finally to less than 25 cents per share in May 1991. During this period--from 1989 through 1991--federal regulatory authorities repeatedly expressed concern to Statewide's Board of Directors over problems with Statewide's portfolio and financial condition. On July 31, 1989, the Office of the Comptroller of the Currency (OCC) informed the Statewide Board that "[c]ompliance management in the two subsidiary banks was found to be satisfactory in virtually all areas." Letter of July 31, 1989 at Expanded Appendix (EA) 606. ¹ Nevertheless, the OCC letter indicated that "[v]iolations of law and regulation were found across a number of areas in the subsidiary banks [and] [w]hile management has shown a commitment to promptly correct all violations, the need to develop in certain cases and otherwise improve policies and procedures is clearly evident." Id. A March 1990 report of an off-site review of FNBTR revealed "lack of depth and quality of management, unsafe and unsound credit practices, the resulting rapid deterioration in the quality of the loan portfolio, unreliable regulatory and management reports on loans, the inadequacy of the Allowance for Loan and Lease Losses, and the adverse impact of asset quality upon earnings and capital adequacy." EA 690. Ultimately, on May 22, 1991, the Federal Deposit Insurance Corporation took control of FNBTR and on May 23, 1991, Statewide filed a voluntary petition under Chapter 11 of the Bankruptcy Code.

B. Statewide's ESOP Plan

This case involves not so much Statewide's demise but the fate during the period of its decline of funds invested in its ESOP. Beginning on January 1, 1986, Statewide offered its employees the opportunity to participate in the ESOP, which was designed to invest primarily in Statewide common stock. See Summary Plan Description at app. 174. The ESOP named various entities and gave them specific administrative and fiduciary duties. First, an ESOP Committee was set up "to administer the Plan." The Statewide Bancorp Employee Stock Ownership Plan Art. 10.1 at EA 451; app. 150 (Trust Agreement); SA 306-07 (Summary Plan Description). The plan provided that the Committee "shall adopt rules for the conduct of its business shall have responsibility and authority to control the operation and administration of the Plan in accordance with the terms of the Plan and of this Agreement, including ... (i) establishment, in its discretion, of investment guidelines which shall be communicated to the Trustee in writing.

                and administration of the Plan as it considers desirable, provided they do not conflict with the Plan."   EA 451 (Plan, Art. 10.2);  SA 307 (Summary Plan Description).  The documents authorized the Committee to "construe the Plan, correct defects, supply omissions or reconcile inconsistencies to the extent necessary to effectuate the Plan, and such action shall be conclusive."   EA 451 (Plan, Art. 10.4);  SA 298a-299, 307 (Summary Plan Description).  To allow the Committee fully and adequately to perform its duties, the plan authorized it to "contract for legal, actuarial, investment management ... and other services to carry out the Plan."   EA 451 (Plan, Art. 10.3);  App. 150 (Trust Agreement);  SA 307 (Summary Plan Description).  According to the Trust Agreement implementing the plan, the Committee
                

Trust Agreement Art. 7.2 at app. 150-51. The Trustee of the plan had "exclusive responsibility for the control and management of the assets of the Trust Fund," Trust Agreement at app. 150.

The plan provided that:

Except as otherwise provided in this Section, the Trustee shall invest the Fund as directed by the Committee. Generally, within 30 days of receipt, the Trustee shall invest all contributions received under the terms of the plan not applied to the repayment of principal and interest on any Acquisition Loan in ESOP stock, except that the Trustee shall be authorized to invest a portion of the contributions received in other securities as a reserve for the payment of administrative expenses and cash distributions.

App. 148 (ESOP Plan, Amended and Restated Effective Jan. 1, 1989). The plan documents gave Statewide, as the plan sponsor, "the authority and responsibility for ... the design of the Plan, including the right to amend the Plan." Trust Agreement Art. 7.3 at app. 151. The plan documents also required Statewide to exercise "all fiduciary functions provided in the Plan or in this [Trust] Agreement or necessary to the operation of the Plan except such functions as are assigned to other fiduciaries pursuant to the Plan or this Agreement." Id.

The ESOP created and governed by these documents worked as follows: Employees became eligible to participate in the plan after one year of service. Employees who chose to participate had their contribution deducted from their salary; the employer then would match up to 50% of the employee's voluntary contribution. The plan also provided for an Employer Profit Sharing Contribution, to be made at the end of the Plan year, though only at the option of the Statewide Board of Directors.

Throughout the relevant time period, the Committee regularly invested the ESOP fund in Statewide common stock, despite the continual and precipitous drop in its price and despite the Committee's knowledge of Statewide's precarious condition by virtue of the members' status as directors. Yet the record reflects that several Statewide insiders began to have misgivings regarding the investment. Jack Breda, FNBTR's Director of Personnel, testified that when the price of Statewide stock started to drop, he began thinking it would be inappropriate to continue such investments. App. 119. He further testified that he relayed to Statewide's chief executive officer (CEO) the pension committee's recommendation that "we [should] look for other vehicles to invest money in," and that the CEO should relay that advice to the executive committee or the Board of Directors. App. 120. Apparently, the CEO reported back that the Board of Directors had rejected the proposal because "the original intent of the plan was to invest [in] Statewide Bancorp stock." App. 120. On May 13, 1991, C.T. Bjorklund, Statewide's Benefits and Compensation Manager, wrote a memorandum to Breda stating the following:

The Statewide [ESOP] permits employees to voluntarily suspend contributions at any time during the year. The Bank can also cease contributions at any time without notice. Such discontinuance would not Although the ESOP gives us a beginning bias to hold Statewide Stock and the plan says that amounts contributed are to be invested in company stock, the trustee has the power to invest in other vehicles. Potentially the trustee should consider investing in short term...