Alert June 26, 2014

Second Circuit Affirms Dismissal of Stock Drop Challenge on Grounds Unrelated to Moench


Prior to the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer,  the central issue in nearly every case alleging the imprudent investment of plan assets in employer stock has revolved around whether plan fiduciaries are entitled to a presumption of prudence for such investments if they are mandated by the governing plan documents. However, the Second Circuit last month affirmed dismissal of identical claims on alternative grounds, holding that a company’s decision to make contributions to a plan in its stock, as opposed to cash, is not subject to ERISA fiduciary requirements.

In Coulter v. Morgan Stanley & Co., Nos. 13-2504 and 13-2509 (2d Cir. May 29, 2014), the United States Court of Appeals for the Second Circuit affirmed dismissal of claims involving the investment of a financial services company’s 401(k) plan and employee stock ownership plan (collectively, the “Plans”) in the company’s stock during the market downturn of 2008. Typically, before the Supreme Court’s decision in Fifth Third Bancorp (discussed in this ELU), courts had addressed these types of claims by applying the Moench presumption. However, the Coulter court instead held that the employer’s decision to make employer contributions to the Plans in company stock rather than cash was not subject to ERISA’s fiduciary rules, and therefore could not support a claim of breach of duty.

Plaintiffs were participants of the Plans. They brought suit alleging breaches of ERISA fiduciary duty for the Plans’ continued investment in the stock of the employer sponsoring the Plans, during a time when the stock “plunged in conjunction with the broader economic downturn.” The Plans’ investments in the stock declined nearly 70% in 2008. Defendants included the company, the investment committee for the company’s Plans, and the company’s board of directors, and numerous individual executives and employees.

The district court initially denied dismissal motions by the defendants. However, after the Second Circuit later held that the Moench presumption of prudence applied at the motion to dismiss stage in the Citigroup decision, reported in our December 14, 2011 edition, the district court granted renewed motions to dismiss. It held that the defendants, though ERISA fiduciaries, could not be held to have breached any duties because the plaintiffs had not alleged the dire circumstances sufficient to establish a claim under the standard established in Citigroup.

On appeal, plaintiffs argued “primarily” that defendants should have been held liable for electing to satisfy the employer’s contribution obligations to the Plans by contributing company stock rather than cash. The Second Circuit held that the company’s decision as to whether to contribute stock or cash to the Plans was not an ERISA fiduciary decision “because, at the time of the decision, the Company Stock was not a Plan asset.” The court held that even if the conduct complained of was allegedly detrimental to the Plans, since it was not undertaken in an ERISA fiduciary capacity, it was not actionable as a breach of ERISA fiduciary duties or impermissible conflict of interest. Although the Court did not rule on whether the Moench presumption would preclude plaintiffs’ claims, as it had in its earlier Citigroup decision, it followed Citigroup in holding that the company’s Chairman of the Board and CEO did not have an impermissible conflict solely because his compensation was linked to the value of the company’s stock.