*Of the Federal Circuit, sitting by designation.

United States Court of Appeals

For the First Circuit

No. 03-2033

LINDA L. LALONDE, ET AL.,

Plaintiff, Appellant,

v.

TEXTRON, INC.; TEXTRON SAVINGS PLAN; TEXTRON SAVINGS 

PLAN COMMITTEE; PUTNAM FIDUCIARY TRUST COMPANY and 

JOHN DOES 1-10,

Defendants, Appellees.

 

No. 03-2039

MACHELLE A. SIMON-GRECH, ET AL.,

Plaintiff, Appellant,

v.

TEXTRON, INC.; TEXTRON SAVINGS PLAN; TEXTRON SAVINGS 

PLAN COMMITTEE; PUTNAM FIDUCIARY TRUST COMPANY and 

JOHN DOES 1-10,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. William E. Smith, U.S. District Judge]

Before

 Torruella, Lourie* and Howard,

Circuit Judges.
Lee Squitieri, with whom Squitieri & Fearon, LLP, David J.

Strachman, McIntyre, Tate, Lynch & Holt, LLP, Charles J. Piven, Law

Offices of Charles Piven P.A., Joe R. Whatley, Jr., Whatley Drake

LLC, Kenneth A. Wexler, and The Wexler Firm, were on brief, for

appellants.

Karl G. Nelson, with whom William J. Kilberg, Mitchell A.

Karlan, Gibson, Dunn & Crutcher LLP, John A. Tarantino, Paul V.

Curcio, and Adler, Pollock & Sheehan P.C., were on brief, for

Textron Inc., Textron Savings Plan, and Textron Savings Plan

Committee.

James S. Dittmar, P.C., with whom James O. Fleckner, John J.

Cleary, P.C. (Of Counsel), Daniel P. Condon (Of Counsel), and

Goodwin Procter, LLP, were on brief, for Putnam Fiduciary Trust

Company.

May 7, 2004
1We confine ourselves to essentials in setting the stage for

our discussion of the issues in this appeal. Readers interested in

greater detail may consult the district court's published opinion.

See Lalonde v. Textron, Inc., 270 F. Supp. 2d 272 (D.R.I. 2003).

2Relevant statutory provisions are reproduced in a statutory

appendix to this opinion in the order in which we cite them.

3Textron contributed $0.50 or an equivalent amount of Textron

stock for each $1.00 an employee contributed.

-3-

HOWARD, Circuit Judge. Linda L. Lalonde and Machelle A.

Simon-Grech, acting on behalf of a putative class of participants

in and beneficiaries of an employee stock ownership plan ("ESOP")

known as the Textron Savings Plan, brought lawsuits (that were

eventually consolidated) against the plan; Textron, Inc. (the

plan's sponsor); the Textron executives who allegedly administered

the plan (the "Textron Savings Plan Committee"); and the plan's

trustee, the Putnam Fiduciary Trust Company. Insofar as is

relevant,1 the operative complaint asserts that, between January 1,

2000, and December 31, 2001, defendants violated the Employee

Retirement Income Security Act (ERISA) by breaching fiduciary

duties owed to the class, see 29 U.S.C. § 1104(a), and by violating

ERISA's anti-inurement provision, see 29 U.S.C. § 1103(c)(1).2

Plaintiffs seek to remedy these statutory lapses through ERISA's

enforcement provisions, 29 U.S.C. § 1132(a)(1) and (3), which

authorize certain actions by plan participants and beneficiaries.

Throughout the class period, defendants directed 50% of

employee contributions and 100% of employer matching contributions3
-4-

into a stock fund that held only Textron common stock. Plaintiffs

claim that, in investing so much of the class's funds in Textron

stock during the class period, defendants violated duties of

loyalty owed to the class and acted in an unlawfully selfaggrandizing manner because defendants knew or had reason to know

that Textron faced troubles that were certain to cause (and did in

fact cause) a significant decline in the value of its stock. In

support of these claims, plaintiffs allege (with varying degrees of

specificity) that, during the class period, defendants were

fiduciaries within the meaning of 29 U.S.C. § 1002(21)(A);

Textron's earnings per share declined by over 70%; Textron

initiated a restructuring that was expected to culminate in the

termination of over 10% of its workforce; Textron artificially

inflated the price of its stock by concealing internal problems

that led to its lost earnings and restructuring (malfeasance that

was alleged to have been the subject of a federal securities

lawsuit brought by Textron's shareholders); and Textron common

stock significantly underperformed in comparison to the market as

a whole (measured in terms of the Standard & Poor's 500) and

Textron's peer group. Despite this bleak scenario and in

dereliction of their duties, plaintiffs say, defendants continued
4Defendants lifted the prohibition on diversification on

January 1, 2002 (the date that corresponds with the closing of the

class period), at which point approximately 20% of the plan's

35,000 or so participants "almost immediately" (in the words of the

complaint) divested themselves of some or all of their Textron

stock.

5Defendants attached to their motions and relied upon in their

arguments the summary plan description, the plan documents, and the

trust and service agreements between Textron and Putnam. The

district court treated these documents as merged into the complaint

because the complaint's allegations depended on them and plaintiffs

made a number of references to them at oral argument on defendants'

motions. See Beddall v. State Street Bank & Trust Co., 137 F.3d

12, 17 (1st Cir. 1998) (documents on which a complaint depends and

to which it refers "merge[] into the pleadings and the trial court

can review [them] in deciding [a Rule 12(b)(6)] motion").

Plaintiffs do not argue that the court erred in considering these

documents or dispute that these documents are properly before us

for purposes of our review. 

-5-

to fund the Textron stock fund and prohibited the class from

diversifying its retirement accounts.4

Defendants elected to challenge these claims under Fed.

R. Civ. P. 12(b)(6). In support of their arguments that the claims

were not viable, defendants asserted that plaintiffs had pleaded

insufficient facts to establish that any one of them was an ERISA

fiduciary and/or that any one of them breached any fiduciary duties

owed to the class.5 Putnam additionally argued that, as a socalled "directed fiduciary," see 29 U.S.C. § 1103(a)(1), it lacked

the investment discretion that must be found to have been abused if

a viable breach of fiduciary duty claim is to lie. Central to

defendants' arguments was the fact that the plan was an ESOP and,

as such, designed to invest primarily in qualifying employer
6The district court decided that factual issues precluded

dismissal under Rule 12(b)(6) on the ground that the Textron

defendants were not fiduciaries of the class with respect to the

conduct in question. See 270 F. Supp. 2d at 277 n.4. The Textron

defendants do not argue that the court's ruling was erroneous in

this respect except to suggest that there is no such thing as the

Textron Savings Plan Committee and to contend that the plan is not

a proper defendant because (1) there are no allegations that the

plan acted as a fiduciary with respect to its own assets, and (2)

plaintiffs are seeking relief on the plan's behalf (and not from

the plan). The point about the Textron Savings Plan Committee is

not susceptible to resolution on the pleadings and may be taken up

following the limited remand that we order at the conclusion of

this opinion. The point about the plan not being a proper

defendant is effectively conceded by the plaintiffs, who make no

response to it in their reply brief. We therefore affirm the

dismissal of plaintiffs' breach of fiduciary duty and antiinurement claims against the plan. Henceforth, the phrase "the

Textron defendants" should be understood to encompass only Textron

and the Textron Savings Plan Committee. 

-6-

securities. See 26 U.S.C. § 4975(e)(7)(A); 29 U.S.C. §

1107(d)(6)(A). In essence, defendants' pleading rhetorically

asked, how can defendants be found to have violated ERISA in

connection with the Textron ESOP when they did nothing more than

what Congress contemplated would happen when an employer

establishes an ESOP?

In a thorough opinion and order, the district court

granted defendants' motions to dismiss. With respect to the breach

of fiduciary duty claims against the Textron defendants, the court

adopted the reasoning of Moench v. Robertson, 62 F.3d 553, 571 (3d

Cir. 1995), and Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.

1995), and held that an ESOP fiduciary6 "is entitled to a

presumption that its decision to remain invested in employer
7The court explained the difficulty an ESOP fiduciary faces in

performing this reconciliation:

An ESOP is an ERISA plan that invests primarily in

"qualifying employer securities," which typically are

shares of stock in the employer that creates the plan.

29 U.S.C. § 1107(d)(6)(A). In creating ESOPs, Congress

sought to develop plans that would function as both an

employee retirement benefit plan and a technique of

corporate finance that would encourage employee ownership

of a company. As a result of these dual purposes, ESOPs

are not intended to guarantee retirement funds, and they

place employee retirement assets at a greater risk than

the typical diversified, ERISA-regulated plan . . . .

Nonetheless, ESOPs are governed by ERISA's

requirements for fiduciaries. An ERISA fiduciary must

employ within the defined domain "the care, skill,

prudence, and diligence under the circumstances then

prevailing that a prudent man acting in a like capacity

and familiar with such matters would use." [29 U.S.C. §

1104(a)(1)(B)]. If a fiduciary fails to meet these

stringent requirements, it may be held liable for losses

-7-

securities was reasonable." 270 F. Supp. 2d at 279.

"Accordingly," the court continued, "in order to state a viable

claim, Plaintiffs must plead facts that, if proven at trial, would

establish that [the Textron defendants] abused their discretion in

failing to diversify Textron stock during the years 2000 and 2001."

Id.

In defining the boundaries of the Textron defendants'

discretion, the district court attempted to reconcile Congress's

concern that ERISA-plan fiduciaries must always act in the

interests of plan beneficiaries with Congress's endorsement of

employee stock ownership through the ESOP mechanism. See id. at

278-79.7 In doing so, the district court looked to Moench, Kuper,
to the plan that result from breaches of that duty. 29

U.S.C. § 1109(a). Consequently, ESOP fiduciaries are in

the unique situation of having to facilitate the ESOP

goal of employee ownership, while at the same time being

bound by ERISA's rigorous fiduciary obligations.

Id. at 278 (citations and internal quotation marks omitted). 

-8-

and Wright v. Oregon Metallurgical Corp., 222 F. Supp. 2d 1224,

1233-34 (D. Or. 2002), aff'd 360 F.3d 1090 (9th Cir. 2004), all of

which grappled with this same problem. See 270 F. Supp. 2d at 280.

Building from the facts and holdings of these cases, the court

concluded that, in exercising its discretion to continue purchasing

company stock, an ESOP fiduciary enjoys a presumption of

reasonableness that "may be overcome when a precipitous decline in

the employer's stock is combined with evidence that the company is

on the brink of collapse or is undergoing serious mismanagement."

Id. The court then granted the Textron defendants' motion to

dismiss because "[t]his is not one of those cases." Id. In

support of its ruling, the court stated that the complaint had

alleged only a drop in stock price, a decline in corporate profits,

and a restructuring of the company during the class period. See

id. The court also speculated that, had the Textron defendants

decided not to remain fully invested in Textron stock per the terms

of the plan, they might have triggered an even steeper sell-off

and/or invited a lawsuit when the stock later appreciated. See id.

Although this line of reasoning applies with equal force

to the breach of fiduciary duty claims against Putnam, the district
-9-

court also went on to analyze whether Putnam was a "directed

fiduciary" within the meaning of 29 U.S.C. § 1103(a)(1). See id.

at 280-82. Following the course charted in Beddall, 137 F.3d at

19-21, the court parsed the plan documents and concluded that

Putnam was a directed fiduciary as a matter of law. See 270 F.

Supp. 2d at 281-82. As such, the court reasoned, Putnam lacked the

discretionary authority to do what plaintiffs say it should have

done: ignore the directions of the plan administrator to keep

investing (and to remain invested in) Textron stock. See id. at

282. The court did not, however, go on to discuss plaintiffs'

alternative argument that, even if Putnam were a directed trustee,

it still could be held to have violated 29 U.S.C. 1103(a)(1) if it

followed directions from the Textron defendants that were "contrary

to [ERISA]." Id.

With respect to plaintiffs' anti-inurement claims, the

district court granted Textron's motion to dismiss on the basis of

a line of cases holding that 29 U.S.C. § 1103(c)(1) "does not

prevent an employer from enjoying indirect benefits associated with

plan investment decisions." Id. at 284 (collecting cases). The

court granted Putnam's motion on the basis of its prior ruling that

Putnam lacked discretion with respect to investment decisions and

therefore was not a fiduciary subject to liability under ERISA's

anti-inurement provision. Id. at 284 n.9. 
8Plaintiffs also take issue with the court's conclusions that

Putnam lacked discretion with respect to the funds and that the

absence of such discretion automatically rendered non-viable their

breach of fiduciary duty and anti-inurement claims. We do not

reach these arguments (or the responses to them) because, as we

shall explain, plaintiffs failed to allege facts sufficient to

ground a judgment in their favor even if disputes about the plan

documents and the law were resolved in their favor.

9The Ninth Circuit recently expressed sympathy for Textron's

position in its opinion affirming the Wright decision that was

relied upon by the district court. See 360 F.3d at 1097-98

(questioning in dicta whether Moench and Kuper undermine

congressional purpose in holding that ESOP fiduciaries sometimes

must diversify plan investments); id. at 1098 n.4 (suggesting in

dicta that Moench and Kuper are "problematic [under the federal

securities laws] to the extent that [they] inadvertently

encourage[] corporate officers to utilize inside information for

the exclusive benefit of the corporation and its employees"). 

-10-

On appeal, plaintiffs contend that the district court

erroneously scrutinized their allegations as if defendants had

moved not to dismiss the complaint under Fed. R. Civ. P. 12(b)(6),

but rather for summary judgment under Fed. R. Civ. P. 56. In

pressing this claim, plaintiffs make a subsidiary argument that the

court defined an ESOP fiduciary's duty too narrowly when it stated

that a discontinuation of plan funding is required only where there

is a precipitous decline in the value of the company's stock

combined with evidence of an impending collapse or serious internal

mismanagement.8 Textron responds by suggesting in a footnote that

the court's formulation of an ESOP fiduciary's duty "is not . . .

adequately deferential to Congress's intent to foster ESOP

investment in employer stock,"9 but otherwise is content to defend
-11-

the court's dismissal under the rule the court derived from Moench,

Kuper, and Wright.

We turn first to plaintiffs' breach of fiduciary duty

claims against Textron. As set forth above, the district court

concluded that the allegations in the complaint (and the reasonable

inferences they give rise to) were insufficient because the facts

alleged -- declines in stock price and corporate profits and a

significant corporate restructuring -- never could support a

finding that the Moench/Kuper/Wright rule had been satisfied. See

Lalonde, 270 F. Supp. 2d at 280. As an initial matter, we share

the parties' concerns about the court's distillation of the breach

of fiduciary standard into the more specific decisional principle

extracted from Moench, Kuper, and Wright and applied to plaintiffs'

pleading. Because the important and complex area of law implicated

by plaintiffs' claims is neither mature nor uniform, see supra n.9,

we believe that we would run a very high risk of error were we to

lay down a hard-and-fast rule (or to endorse the district court's

rule) based only on the statute's text and history, the sparse

pleadings, and the few and discordant judicial decisions discussing

the issue we face. Under the circumstances, further record

development -- and particularly input from those with expertise in

the arcane area of the law where ERISA's ESOP provisions intersect

with its fiduciary duty requirements -- seems to us essential to a

reasoned elaboration of that which constitutes a breach of
-12-

fiduciary duty in this context. Cf. Doe v. Walker, 193 F.3d 42, 46

(1st Cir. 1999) (vacating a Fed. R. Civ. P. 12(b)(6) dismissal on

an issue with "important social and moral implications" and with an

undeveloped factual background "in part because further facts may

make it unnecessary to decide the hard case but also because the

facts are likely to contribute to a more sensitive assessment of

what the law 'is' (which, absent decisive precedent, means what it

'should be')").

In any event, we believe that the breach of fiduciary

duty judgment in favor of the Textron defendants cannot withstand

conventional Fed. R. Civ. P. 12(b)(6) scrutiny. A complaint should

be dismissed under Rule 12(b)(6) "only if it is clear that no

relief could be granted under any set of facts that could be proved

consistent with the allegations." Swierkiewicz v. Sorema N.A., 534

U.S. 506, 514 (2002); see also id. at 511 ("When a federal court

reviews the sufficiency of a complaint, before the reception of any

evidence either by affidavit or admissions, its task is necessarily

a limited one. The issue is not whether a plaintiff will

ultimately prevail but whether the claimant is entitled to offer

evidence to support the claims.") (quoting Scheuer v. Rhodes, 416

U.S. 232, 236 (1974) (internal quotation marks omitted)). Here,

the district court's analysis, while perhaps convincing on its own

terms, failed to take account of plaintiffs' allegation that,

during the period identified in the complaint, Textron artificially
10If it were not, the proper response should have been a motion

for a more definite statement under Fed. R. Civ. P. 12(e) and not

a motion for dismissal on the merits. See Swierkiewicz, 534 U.S.

at 514. 

-13-

inflated its stock price by concealing "the disparate problems

throughout Textron's segments and their adverse effect on Textron

which are the subject of a federal securities lawsuit by

shareholders against Textron and certain of its officers and

directors." While this allegation is not terribly specific,

Textron surely is aware of the nature of the charges it faces in

the separate lawsuit.10 The allegation is thus sufficient to play

its part in effectuating the purposes of Fed. R. Civ. P. 8(a): to

give Textron "fair notice of what [plaintiffs'] claim is and the

grounds upon which it rests." Id. at 512 (quoting Conley v. Gibson,

355 U.S. 41, 47 (1957) (internal quotation marks omitted)). And,

when combined with the other allegations, it is sufficient to clear

the Rule 12(b)(6) hurdle. 

Consider, for example, a (purely hypothetical) scenario

under which plaintiffs unearth during discovery documents showing

that, during the class period, the Textron officials responsible

for administration of the ESOP were concerned that Textron was not

going to survive its downsizing and wanted the plan documents to be

amended so as to keep their employees from investing in a dying

venture. Consider further a scenario under which the plaintiffs

uncover evidence that these officials were dissuaded from so acting
-14-

by higher-ups concerned about sustaining the company's stock price

until stock options that they held could vest. Such evidence

certainly would be entirely consistent with plaintiffs'

allegations. Moreover, it might well be sufficient (much would

depend on the nature of the additional factual development to which

we previously alluded) to support a finding that the Textron

defendants had breached their fiduciary duty to the class. 

The odds of plaintiffs succeeding on their breach of

fiduciary duty claims against the Textron defendants might be very

long, but "that is not the test." Swierkiewicz, 534 U.S. at 515

(quoting Scheuer, 416 U.S. at 236) (internal quotation marks

omitted). Accordingly, we shall vacate the judgment in favor of

the Textron defendants and remand for further proceedings

consistent with this opinion.

Plaintiffs' breach of fiduciary duty claims against

Putnam, and their anti-inurement claims against all defendants,

stand on different footing. Even if we were to assume arguendo

that the district court erred in concluding that Putnam was a

directed fiduciary and that directed fiduciaries are shielded from

liability for following the directives in the plan documents, there

is absolutely nothing in the complaint which permits an inference

that Putnam abused any discretion it might have had. Putnam is not

alleged to have knowledge of any malfeasance within Textron; it is
-15-

alleged only to have learned (as the events were unfolding) that

Textron's stock price and profits were declining and that the

company was undergoing a restructuring. As the district court

aptly observed, this simply is not enough to ground a finding that

Putnam violated any duties it might have owed to the class. It

would subvert the purposes of ERISA to permit lawsuits against plan

fiduciaries (again, assuming that Putnam is a plan fiduciary) every

time a company's fortunes took a relatively unexceptional turn for

the worse. We therefore decline to upset the judgment in favor of

Putnam on plaintiff's breach of fiduciary duty claims. So too do

we decline to upset the judgments in favor of all defendants on

plaintiffs' anti-inurement claims, the appellate attacks on which

are set forth in a few sentences which seek only to differentiate

the facts of this case from those of the cases relied upon by the

district court and which make no effort at all to explain how the

scheme alleged caused plan assets to inure to the benefit of

Textron itself. See United States v. Zannino, 895 F.2d 1, 17 (1st

Cir. 1990).

Affirmed in part; vacated in part. No costs. 
-16-

STATUTORY APPENDIX

1. 29 U.S.C. § 1104(a) states:

 (a) Prudent man standard of care

 

(1) Subject to sections 1103(c) and (d), 1342,

and 1344 of this title, a fiduciary shall

discharge his duties with respect to a plan

solely in the interest of the participants and

beneficiaries and–

(A) for the exclusive purpose

of:

(i)providing benefits

to participants and

their beneficiaries;

and

( ii ) defraying

reasonable expenses

of administering the

plan;

(B) with the care, skill, prudence, and

diligence under the circumstances then

prevailing that a prudent man acting in a

like capacity and familiar with such

matters would use in the conduct of an

enterprise of a like character and with

like aims;

(C) by diversifying the investments of the

plan so as to minimize the risk of large

losses, unless under the circumstances it

is clearly prudent not to do so; and 

(D) in accordance with the documents and

instruments governing the plan insofar as

such documents and instruments are

consistent with the provisions of this

subchapter and subchapter III of this

chapter.

(2) In the case of an eligible individual

account plan (as defined in section 1107(d)(3)

of this title), the diversification
-17-

requirement of paragraph (1)(C) and the

prudence requirement (only to the extent that

it requires diversification) of paragraph

(1)(B) is not violated by acquisition or

holding of qualifying employer real property

or qualifying employer securities (as defined

in section 1107(d)(4) and (5) of this title).

2. In relevant part, 29 U.S.C. § 1103(c)(1) states:

[T]he assets of a plan shall never inure to

the benefit of any employer and shall be held

for the exclusive purposes of providing

benefits to participants in the plan and their

beneficiaries and defraying reasonable

expenses of administering the plan.

3. In relevant part, 29 U.S.C. § 1002(21)(A) states:

[A] person is a fiduciary with respect to a

plan to the extent (i) he exercises any

discretionary authority or discretionary

control respecting management of such plan or

exercises any authority or control respecting

management or disposition of its assets, (ii)

he renders investment advice for a fee or

other compensation, direct or indirect, with

respect to any moneys or other property of

such plan, or has any authority or

responsibility to do so, or (iii) he has any

discretionary authority or discretionary

responsibility in the administration of such

plan.

4. In relevant part, 29 U.S.C. § 1103(a) states:

 (a) Benefit plan assets to be held in trust; authority of

trustees

[A]ll assets of an employee benefit plan shall

be held in trust by one or more trustees.

Such trustee or trustees shall be either named

in the trust instrument or in the plan

instrument . . . or appointed by a person who

is a named fiduciary, and upon acceptance

being named or appointed, the trustee or

trustees shall have exclusive authority and
-18-

discretion to manage and control the assets of

the plan, except to the extent that--

(1) the plan expressly provides

that the trustee or trustees are

subject to the direction of a

named fiduciary who is not a

trustee, in which case the

trustees shall be subject to

proper directions of such

fiduciary which are made in

accordance with the terms of the

plan and which are not contrary

to this chapter . . . . 

5. In relevant part, 26 U.S.C. § 4975(e)(7)(A) states:

The term "employee stock ownership plan" means

a defined contribution plan --

(A) which is a stock bonus plan

which is qualified, or a stock

bonus plan and a money purchase

plan both of which are qualified

under section 401(a) [of title

26] and which are designed to

invest primarily in qualifying

employer securities . . . .

6. In relevant part, 29 U.S.C. § 1107(d)(6)(A) states:

The term "employee stock ownership plan" means

an individual account plan--

(A) which is a stock bonus plan

which is qualified, or a stock

bonus plan and money purchase

plan both of which are

qualified, under section 401 of

title 26, and which is designed

to invest primarily in

qualifying employer securities .

. . .