May 25, 2012

ERISA Stock Drop Cases: Eleventh Circuit Adoption of “Moench Presumption”

As a result of the recession and resulting losses in the stock market, there have been a substantial number of claims against ERISA plan fiduciaries for losses resulting from drops in the value of company stock held in the company’s benefit plans (“stock drop” lawsuits). The participants’ claims may be based on (i) the idea that the decline in value was caused by malfeasance on the part of company employees or officers about which plan fiduciaries knew or should have known, or (ii) simply that the price of company stock declined so sharply that it was no longer a prudent investment.

Despite the number of stock drop lawsuits filed, courts have been reluctant to allow claims based on a fiduciary’s decision to maintain investments in company stock, particularly where the terms of the plan call for the investment in company stock. Under ERISA, fiduciaries are required to administer a plan in accordance with the terms of the plan. Relying on ERISA’s plan term requirement, in Moench v. Robertson, the U.S. Court of Appeals for the Third Circuit established a rebuttable presumption (referred to as the “Moench presumption”) of prudence when the fiduciaries of an employee stock ownership plan (“ESOP”) maintain a plan’s investments in company stock. The Moench presumption generally provides that the fiduciaries of an ESOP will be presumed to be prudent in investing in or continuing to hold company securities as an investment in accordance with the terms of the plan, even if the value of the securities declines. In other words, the Moench presumption serves to insulate ESOP plan fiduciaries from potential liability in a stock drop lawsuit. Some courts have subsequently applied the Moench presumption in the context of claims involving company stock funds in 401(k) plans as well.

It is possible for the Moench presumption to be overcome. However, a mere fluctuation in the price of employer stock alone is not sufficient. In order to be able to proceed with a claim, plaintiffs must show that a company was in the type of “dire situation” which would require the fiduciaries of the plan to disobey the terms of the plan that call for investment in employer securities. As explained in a decision by the Second Circuit, the Moench presumption “prescribes who is to win in almost all of the circumstances that can be envisioned- not all, but almost all.”

On May 8, 2012, the U.S. Court of Appeals for the Eleventh Circuit (which covers Florida, Georgia, and Alabama) adopted the Moench presumption in its decision in Raymond A. Lanfear, et al. v. Home Depot, Inc, et al. The Eleventh Circuit joins four other Circuit Courts of Appeals (the Second, Fifth, Sixth, and Ninth) that have already adopted the Third Circuit’s Moench presumption. Although they have not expressly adopted the Moench presumption, the Moench decision has been cited favorably by the First and Seventh Circuits as well. Therefore, ESOP fiduciaries in the Eleventh Circuit will now have the Moench presumption as a protection from potential liability in stock drop lawsuits.

For more information, please contact your SGR Executive Compensation and Employee Benefits Counsel.

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