As the employee benefits world awaits the U.S. Supreme Court’s decision in Dudenhoeffer v. Fifth Third Bancorp, two federal courts recently dismissed employer stock-drop cases brought under ERISA on the ground that plaintiffs failed to overcome the presumption that a fiduciary’s decision to remain invested in employer stock was prudent. See Smith v. Delta Air Lines, 2014 U.S. App. LEXIS 7209 (11th Cir. Apr. 17, 2014); Pfeil v. State St. Bank & Trust Co., 2014 U.S. Dist. LEXIS 50227 (E.D. Mich. Apr. 11, 2014) (on remand).
In Pfeil, plaintiffs claimed that by the time State Street was retained as an independent fiduciary for the GM stock fund in 2006, GM was already in serious financial trouble, and thus State Street should have discontinued further investment in the fund. In support of their claim, plaintiffs alleged that numerous securities analysis and experts were already discussing a possible GM bankruptcy filing and how, in their view, GM’s financial condition continued to deteriorate. A federal district court in Michigan originally dismissed plaintiffs’ claims based on application of the presumption of prudence. The Sixth Circuit reversed, becoming the only circuit court to reject application of the presumption of prudence at the pleadings stage. The Court also adopted a different standard for rebutting the presumption, stating that, instead of showing dire circumstances, “a plaintiff must show that the ERISA fiduciary could not have reasonably believed that the plan’s drafters would have intended under the circumstances that the fiduciary continue to comply with the ESOP’s direction that the fiduciary invest exclusively in employer securities.” On remand, the district court reviewed the evidence, which included mixed analyst reports and continued investment in the stock by some large investors and participants, and on that basis concluded that plaintiffs had not carried their burden to overcome the presumption of prudence.
In the case against Delta Airlines, the Eleventh Circuit applied circuit precedent and affirmed the district court’s ruling granting defendant’s motion to dismiss. In so ruling, the court found that the plan’s requirement to maintain the employer stock fund as an investment option entitled the plan fiduciaries to a presumption of prudence. The court explained, albeit briefly, that plaintiffs were unable to rebut the presumption because, it “was not at all obvious at the time, as underscored by market movements during the class period”, that the investment in the stock fund was imprudent.