In Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (Jun 25, 2014), the Supreme Court held that it would not allow a presumption to continue — the so-called “presumption of prudence” — that many courts have allowed for employee stock ownership pan (“ESOP”) fiduciaries. (See my June 26 blog post.) And now the fall-out from that opinion begins, as the Fifth Circuit just remanded a class action based on Dudenhoeffer.
In Whitley v. BP, PLC, No. 12-20670 (July 15, 2014) (get BP Remand Opinion here), plaintiffs allege that their employee investment and savings plans declined as a result of the Deepwater Horizon disaster. Those plans were substantially invested in BP, and plaintiffs allege, among other things, that defendants, plan fiduciaries, knew or should have known that BP was not a prudent investment. In their 2011 motion to dismiss, defendants argued that they were entitled to a presumption of prudence (also called the “Moench presumption”). The district court dismissed the complaint based on the fact that plaintiffs could not overcome the presumption. The district court further denied plaintiffs’ motion to file an amended complaint as futile.
Plaintiffs appealed and while the appeal was pending, the Supreme Court held that the presumption of prudence was not a valid presumption because it did not appear in the ERISA statute. Based on this ruling, the Fifth Circuit in Whitley vacated the district court’s judgment and remanded the case consistent with Dudenhoeffer.
The Fifth Circuit’s remand of Whitley is not surprising, and I would anticipate more such remands. That said, it is important to remember that although the Supreme Court would not allow a presumption of prudence that it could not find in the text of the ERISA statute, it went to great lengths to explain how courts should evaluate allegations of imprudence against ESOP fiduciaries. Its analysis should help defendants as they tackle ESOP class actions anew.