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Linda White v. Marshall & Ilsley Corporation
Citations: 714 F.3d 980; 55 Employee Benefits Cas. (BNA) 1918; 2013 U.S. App. LEXIS 7831; 2013 WL 1688918Docket: 11-2660
Court: Court of Appeals for the Seventh Circuit; April 19, 2013; Federal Appellate Court
Original Court Document: View Document
In the case before the Seventh Circuit, Linda White and Charlene Roundtree appeal on behalf of themselves and a class of similarly situated individuals against Marshall & Ilsley Corporation and others. The appeal arises from a prior decision by the Eastern District of Wisconsin regarding the fiduciaries of an employee retirement savings plan under the Employee Retirement Income Security Act (ERISA). The plaintiffs allege that the fiduciaries acted imprudently by allowing employees to invest in the M&I Stock Fund even as the stock's value plummeted during the financial crisis of 2008-2009, resulting in a 54% decline in the stock price. The court highlights that similar cases have challenged the prudence of offering employer stock as an investment option, emphasizing the difficulty plaintiffs face in proving ERISA violations absent allegations of misrepresentation or wrongful conduct. The theory of liability hinges on the premise that fiduciaries have a duty to outperform the market or use insider information, both of which are deemed untenable. M&I's Plan allowed employees to select from over twenty investment options, including the M&I Stock Fund, and the fiduciaries were obligated under ERISA to select prudent investment choices. The plaintiffs contend that by continuing to offer the underperforming stock option, the fiduciaries breached their duty of prudence as mandated by ERISA. Federal courts have established a presumption of prudence in evaluating claims of imprudence against fiduciaries of Employee Stock Ownership Plans (ESOPs). In this case, the district court applied this presumption, concluding that the plaintiffs' allegations did not sufficiently overcome it, which led to the dismissal of the case under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. The court did not address class certification, and the plaintiffs have since appealed. The Secretary of Labor submitted an amicus brief concerning the legal standard applicable in these cases, particularly the presumption of prudence. The M&I Retirement Program, sponsored by M&I Bank, is governed by ERISA and qualifies as an Employee Individual Account Plan (EIAP), allowing employees to choose their investment allocations from among twenty-two funds. Employees could adjust their investments flexibly, as specified in the Plan's governing document, overseen by an Investment Committee comprised of M&I directors. A critical requirement of the Plan was the inclusion of the M&I Stock Fund, which exclusively held M&I's common stock, thus classifying it as an ESOP. The governing document mandated that the M&I Stock Fund must always invest in M&I stock, acknowledging potential stock price declines while emphasizing a long-term investment strategy to align employee and corporate interests. The document recognized the possibility of significant downturns in both M&I’s business performance and stock valuation but asserted that the alignment of interests would ultimately benefit both the participants and the corporation. Marshall & Ilsley Corporation, as the settlor of the Plan and Trust, mandates that the Committee and any other Plan fiduciary are restricted from investing the M&I Fund in anything other than M&I stock, with the only exception being for liquidity needs. The Corporation believes that maintaining this investment strategy aligns the interests of Plan Participants with its own, potentially aiding in its recovery during financial downturns. The governing document emphasizes that fiduciaries must uphold the M&I Stock Fund regardless of circumstances. Plaintiffs allege that M&I and its Plan fiduciaries breached their duty of prudence under ERISA by continuing to offer the M&I Stock Fund during a significant decline in its market value, particularly following the financial crisis of 2008. They argue that the fiduciaries should have sold the M&I stock and removed it as an investment option due to its overvaluation and associated risks. The plaintiffs contend that M&I's rapid expansion into risky loans led to substantial losses and a deterioration in credit quality, prompting the bank to heavily rely on capital reserves. Evidence cited includes multiple downgrades of M&I's stock and bonds by analysts, the bank receiving federal TARP funds, and assessments indicating high risk in M&I's loan portfolio, culminating in significant stock price declines and losses for plan participants. They seek compensation for the decrease in value of their retirement savings from November 10, 2006, to April 21, 2010, asserting that fiduciaries failed to provide accurate financial information and did not adequately monitor other fiduciaries. Plaintiffs have narrowed their appeal to a claim of breach of the duty of prudence, having abandoned other theories. During the class period, M&I stock experienced a significant decline of 54%, falling from $46.92 to an adjusted value of $21.43 per share. This adjusted price accounts for the shares of two spinoff entities, Metavante and FIS, which M&I shareholders retained. Although M&I's stock nominally closed at $9.94 at the end of the class period, the total investment value for shareholders, considering the spinoffs, was $21.43. At its lowest point, M&I stock was valued at $3.11 per share in March 2009. Additionally, Bank of Montreal announced plans to acquire M&I Bank for $7.75 per share in December 2010, representing a 33% premium over M&I's closing price the day before. Shareholders received .333 shares of Metavante for each share of M&I upon its split on November 2, 2007, and received 1.35 shares of FIS for each share of Metavante following its acquisition on October 1, 2009. In reviewing a district court's motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court accepts all factual allegations as true and draws reasonable inferences in favor of the plaintiffs. Judicial notice of public stock prices can be taken without converting the dismissal motion to summary judgment. ERISA aims to protect employee interests in benefit plans and imposes fiduciary duties on plan managers, including the duties to invest prudently, comply with plan documents, and diversify investments. However, the duty to diversify conflicts with the purpose of Employee Stock Ownership Plans (ESOPs), which concentrate investment in one employer's stock. Congress encourages ESOPs by exempting their fiduciaries from the duty to diversify and limiting the duty of prudence to avoid requiring diversification. ERISA duties, including prudent management of retirement plans and adherence to plan documents, apply to Employee Stock Ownership Plan (ESOP) fiduciaries. Under Section 1104, fiduciaries must act with the care and skill of a prudent person, selecting only prudent investments. This section also mandates compliance with governing plan documents unless inconsistent with ERISA. In ESOPs, fiduciaries face a conflict where plan documents often require investment in employer stock, which may become imprudent if the company's financial health declines. For instance, fiduciaries of the M&I Plan maintained the M&I Stock Fund during a period of declining stock prices, leading plaintiffs to allege a breach of the duty of prudence. Conversely, had the fiduciaries removed the fund during the decline, they could have faced claims for violating the plan by preventing employees from benefiting from subsequent stock price recovery. This dual obligation creates a precarious situation for ESOP fiduciaries, potentially rendering them liable for both poor investment performance when retaining employer stock and for missing out on gains when divesting. The precarious position of fiduciaries managing Employee Stock Ownership Plans (ESOPs) is likened to sitting on a "razor’s edge," highlighting the litigation risks that may deter employers from offering ESOPs or retirement savings plans. Courts interpreting ERISA must consider Congressional goals, including the encouragement of welfare benefit plans. The Moench presumption, established in Moench v. Robertson, provides fiduciaries with a presumption of prudence when investing in employer stock, even during significant stock price declines. In Moench, the Third Circuit ruled on fiduciary prudence concerning a stand-alone ESOP that mandated investment in employer stock, contrasting it with cases like M&I Bank, where employees had multiple investment options. In such cases, courts apply the Moench presumption more robustly, acknowledging the tension between ERISA’s duty of prudence and the requirement to invest in employer stock. The Moench court allowed for a presumption of prudence for fiduciaries, which can be challenged by demonstrating that the fiduciary abused its discretion by not acting in line with prudent investment standards. A fiduciary would be deemed to have abused its discretion if it could not reasonably believe that adhering to the ESOP’s investment direction was in line with prudent trustee expectations. Overall, the presumption is that fiduciaries remain prudent unless compelling circumstances indicate otherwise. The plaintiff is required to demonstrate that unforeseen circumstances, unknown to the settlor, would hinder or significantly impair the trust's objectives. This requirement aligns with the 'Moench presumption,' which has been recognized by various circuits in cases involving imprudent investments in Employee Stock Ownership Plans (ESOPs) or allowing employee participation in such plans. The Moench presumption balances the need to protect retirement assets with the encouragement of investment in employer stock. For plaintiffs to counter this presumption, they must show that the company was facing imminent collapse or severe conditions that the plan's founder could not have anticipated. Allegations must clearly indicate risks to the company’s ongoing viability. A mere decline in stock price is insufficient to challenge the presumption, unless accompanied by evidence of impending collapse or mismanagement. Courts have upheld this presumption in various cases, noting that fluctuations in stock value do not alone demonstrate imprudence. The Moench presumption has been applied in the circuit to evaluate imprudence claims against ESOP and EIAP fiduciaries. In relevant cases, such as Howell v. Motorola, fiduciaries’ decisions to maintain employer stock options were assessed under this presumption. Furthermore, the standard of review for discretionary fiduciary actions involves an abuse of discretion analysis, particularly when balancing competing interests amidst uncertainty, as seen in Armstrong v. LaSalle Bank, where the court found genuine factual disputes regarding fiduciary discretion. Plaintiffs in ESOP cases under ERISA can counter the Moench presumption of prudence by demonstrating that fiduciaries’ actions imposed excessive and unreasonable risk on employees, beyond the recognized 'dire circumstances' or 'impending collapse' criteria. In prior rulings, such as Steinman v. Hicks and Summers v. State Street Bank, courts upheld summary judgment for fiduciaries, suggesting that prudence may require diversification of employer stock in situations of heightened financial risk, particularly for participants nearing retirement who have concentrated their savings in employer stock. The evaluation of excessive risk considers the employees’ other assets. The ruling in Howell extended this risk assessment to ESOP offerings within EIAPs, emphasizing the importance of available alternative investment options. The court acknowledges that fiduciaries must navigate the complexities of ERISA, balancing adherence to plan documents with prudential investment decisions. Fiduciaries need protection from liability for investment choices influenced by market fluctuations, as unreasonable liability could arise from hindsight judgments of their actions. The court maintains a high standard for proving fiduciary imprudence, rejecting calls to relax the Moench presumption or alter its application as a pleading requirement, affirming its role as a substantive legal standard in assessing fiduciary conduct. A claim against Employee Stock Ownership Plan (ESOP) fiduciaries alleging a violation of the duty of prudence may be dismissed at the pleading stage if plaintiffs fail to provide sufficient allegations to overcome the presumption of prudence. The Moench standard functions as a standard of review, not an evidentiary presumption, applicable at both the motion to dismiss stage and beyond. Courts, including the Second, Third, and Eleventh Circuits, uphold that a presumption exists to protect fiduciaries from claims based solely on hindsight or differing investment decisions. The standard proposed by the Secretary and plaintiffs, which allows for overcoming this presumption by demonstrating that a prudent fiduciary would have acted differently, is rejected as it could undermine fiduciary protections. The text emphasizes that merely showing another investor’s alternative choices does not effectively evaluate the fiduciaries’ conduct. However, it acknowledges a distinction with the Sixth Circuit’s decision in Pfeil, where the presumption was overcome due to allegations of actual plan violations regarding the necessity of divesting employer stock under certain conditions. Ultimately, the Moench presumption is affirmed as essential for safeguarding fiduciaries against imprudence claims linked to normal market fluctuations. Claims regarding excessive risk associated with stock ownership in Employee Stock Ownership Plans (ESOPs) are often raised by participants after significant declines in the employer's stock value. Participants assert that the plan fiduciaries should have recognized the stock's overvaluation and inherent risks due to the company's dire circumstances. However, the viability of such prudence claims is questionable, especially when the employer's stock is publicly traded in an efficient market, allowing participants to observe market conditions and invest accordingly. Arguments alleging fiduciary imprudence typically center on three points: 1. Fiduciaries' failure to predict the future performance of the company's stock. 2. Fiduciaries' failure to utilize non-public information to benefit employees. 3. Fiduciaries' inability to outperform the market. None of these arguments are sufficient grounds for liability. The first point reflects a lack of foresight, which does not constitute a breach of fiduciary duty, as established in relevant case law. The second point raises issues of compliance with federal securities laws, as it would require insiders to misuse non-public information, which is prohibited. Lastly, the third point suggests an unrealistic expectation for fiduciaries to outsmart an efficient market, where stock prices reflect all publicly available information. Overall, there is no substantial basis for imposing liability on fiduciaries within an efficient market context, and the expectations set by plaintiffs are deemed unreasonable, as current market prices are assumed to incorporate all relevant public information regarding stock value. Efficient securities markets are characterized by price changes that can be anticipated by a few investors, while many others fail to predict such changes. In the context of ERISA fiduciary duties, it is challenging to claim imprudence for valuing stock at its current market price. Plaintiffs argue that M&I fiduciaries acted imprudently by not anticipating a decline in the stock price. However, fiduciaries cannot reliably forecast stock price movements, although they can expect rare, high-impact events. The M&I Bank Plan acknowledged a broad range of potential market circumstances and required fiduciaries to maintain the M&I Stock Fund regardless of market conditions, believing that alignment of interests could foster recovery from setbacks. The Plan viewed the employer stock fund as just one option among various investment choices, emphasizing the prioritization of investing in one's employer over diversification. The plaintiffs’ second theory—that fiduciaries exposed participants to excessive risk—faces challenges as investing heavily in employer stock is acknowledged as risky. The risk associated with single-firm investment is significantly higher than with diversified portfolios, and employees face the potential for declines in both retirement savings and wages. Despite these risks, the M&I Plan allowed employees to select from multiple investment options, empowering them to tailor their portfolios according to their risk tolerance. However, there are concerns about employees' understanding of the risks associated with undiversified employer stock, as studies reveal a lack of awareness among many participants regarding such risks. Only 30% of respondents understand that company stock carries more risk than a diversified stock fund. Research indicates that employees often underestimate the risk associated with company stock, basing their perceptions more on past returns than stock volatility. Under ERISA, fiduciaries of an employee investment and savings plan (EIAP) are not required to act as personal investment advisers, as they lack sufficient information about employees' personal financial situations to provide tailored advice. The plan structure is designed to grant participants control and responsibility over their investment choices. Regarding the Moench presumption of prudence, the text suggests that challenges to ESOP fiduciaries’ decisions to offer publicly traded employer stock as an investment option are generally unlikely to succeed. Plaintiffs must demonstrate that fiduciaries acted imprudently by offering such stock, which requires showing extreme risks that outweigh the plan's flexibility. The plaintiffs in this case failed to present compelling allegations indicating that the employer's circumstances were dire or that the fiduciaries imposed excessive risk on participants. The decline in investment value mirrored the broader stock market, and the plan allowed employees to choose from 22 investment options and change their investments at any time. Thus, the fiduciaries’ decision to continue offering the M&I Stock Fund was deemed reasonable and aligned with the terms of the plan. The decline in M&I's stock price from $46.92 to $21.43 (a 54% drop) between November 2006 and April 2010 was not unusual compared to similar banks and the broader market, with other institutions experiencing comparable declines during the same period. An analysis indicated that M&I's stock performance was aligned with that of national and regional banks, and the overall market, including the S&P 500, which fell nearly 50% before recovering in 2009. The efficient market hypothesis suggests that if fiduciaries had removed the M&I Stock Fund from the investment options, finding a better-performing alternative would have been challenging. Previous court cases (Summers, Howell, Citigroup) have established that significant stock price drops (84%, 50%, and 52%, respectively) did not constitute imprudent behavior by fiduciaries, as market prices were the best estimate of stock value. Consequently, M&I's 54% drop does not represent the extraordinary circumstances required for fiduciaries to disregard the Plan's terms. Additionally, the M&I Plan's flexibility allowed participants to choose from multiple funds, enabling them to mitigate risks associated with M&I stock by reallocating their investments at any time. The default investment choice for employees was a diversified "balanced growth" fund. The tension between employee interests and the goals of an Employee Stock Ownership Plan (ESOP) is less pronounced when participants have other income sources that are not tied to employer stock, which prevents the ESOP from being their sole financial asset. While the presence of other investment options does not exempt fiduciaries from the duty of prudence under ERISA, it is a relevant factor when evaluating the risks associated with offering employer stock. The prudence of fiduciaries is assessed based on the totality of circumstances, including the diversity of retirement assets. Even with the availability of other options, the risk imposed by fiduciaries is not excessive if participants can invest in various funds. Participants were restricted to investing only 30% of their contributions in the employer's stock fund, with the option to transfer more later, mitigating potential risk. The court acknowledges that while imprudence claims against ESOP fiduciaries are possible, the plaintiffs' allegations do not demonstrate that it was imprudent to maintain the employer stock option. The plan's requirement to offer employer stock, even amid a significant stock price decline, does not negate the presumption of prudence, especially since ERISA mandates fiduciaries adhere to plan documents only when they align with ERISA standards. ERISA permits plan participants significant autonomy regarding their investment choices, especially in Employee Stock Ownership Plans (ESOPs). While the law assumes rational behavior in investment decisions, empirical data reveals that many participants lack understanding of risk, with over half of 401(k) participants mistakenly believing employer stock is less risky than diversified options. This naivety presents substantial risks, as employees may inadvertently overexpose themselves to riskier investments. However, the plaintiffs in this case did not present a valid claim under ERISA's fiduciary duty of prudence. The court found that the fiduciaries acted within their rights by continuing to offer the M&I Stock Fund during a stock price decline that mirrored market trends, thereby not imposing excessive risk on participants. The court affirmed the district court's judgment, indicating that fiduciaries should not be held liable merely for offering employer stock as an investment option, as this could improperly shift their role to that of guaranteeing retirement savings.