Opinion ID: 1219527
Heading Depth: 1
Heading Rank: 4

Heading: An abuse of discretion standard governs defendants' decision to offer Avaya stock

Text: In concluding that defendants' decision to offer Avaya common stock as an investment option is reviewed for an abuse of discretion, the District Court relied on Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). In Moench, we held that fiduciaries of an Employee Stock Ownership Plan (ESOP) are entitled to judicial deference when they decide to invest plan assets in the sponsoring company's stock. Id. at 571. Under ERISA, an ESOP is defined, in relevant part, as an individual account plan which is designed to invest primarily in qualifying employer securities. 29 U.S.C. § 1107(d)(6). Although the Plans are not ESOPs, we agree with the District Court that the same deferential standard applies here. Moench involved an employer-sponsored ESOP which required the Trustee to invest all contributions received under the terms of the plan . . . in ESOP stock. Moench, 62 F.3d at 558. After the price of the stock declined dramatically, a former employee and participant in the ESOP sued the fiduciaries of the plan for breach of their duty under ERISA, claiming that they should have diversified plan assets in light of the company's financial deterioration. Id. at 559-60. On appeal, we reversed the district court's summary judgment ruling in favor of defendants and held that in limited circumstances, ESOP fiduciaries can be liable under ERISA for continuing to invest in employer stock according to the plan's direction. Id. at 556. We explained that although the primary purpose of the ESOP was to invest in employer stock, defendants were not absolutely require[d] to do so; rather, they retained limited discretion over investment decisions. [8] Id. at 568. Turning to the standard governing defendants' discretionary decision to offer employer securities as an investment option, we first considered the unique status of ESOPs under ERISA. Specifically, we noted that ESOP fiduciaries are exempt from the duty to diversify imposed by § 1104(a)(1)(C), and from § 1106(b)(1)'s strict prohibition against dealing with a party in interest. [9] Id. at 568. We explained that these exceptions arise[] out of the nature and purpose of ESOPs themselves, id., which as set forth in § 1107, is to invest primarily in qualifying employer securities. 29 U.S.C. § 1107(d)(6)(A). In other words, the concept of employee ownership constituted a goal in and of itself. Moench, 62 F.3d at 568. Despite the special status of ESOPs, we emphasized that ESOP fiduciaries are still required to act in accordance with the duties of loyalty and care that apply to fiduciaries of typical ERISA plans. Id. at 569; see also Kuper v. Iovenko, 66 F.3d 1447, 1457 (6th Cir.1995) ([T]he purpose of ESOPs cannot override ERISA's goal of ensuring the proper management and soundness of employee benefit plans.); Fink v. Nat'l Sav. & Trust Co., 772 F.2d 951, 955-56 (D.C.Cir.1985) (The investment decisions of a profit sharing plan's fiduciary are subject to the closest scrutiny under the prudent person rule, in spite of the strong policy and preference in favor of investment in employer stock.) (internal quotation marks omitted). In other words, Congress expressly intended that the ESOP would be both an employee retirement benefit plan and a technique of corporate finance that would encourage employee ownership. Moench, 62 F.3d at 568 (internal quotation marks omitted). Accordingly, we declined to adopt a per se rule that the decision of an ESOP fiduciary to invest in employer securities is not subject to judicial review. [10] See id. at 571. In order to fashion an appropriate standard that would balance the two roles that ESOPs are required to serve  as a mechanism of corporate finance and a vehicle for retirement savings  we noted that trust law distinguishes between two types of directions. Id. at 571. On the one hand, if the trust requires the trustee to invest in a particular stock, then the trustee is immune from judicial inquiry. Id. On the other hand, if the trust merely permits the trustee to invest in a particular stock, then the trustee's investment decision is subject to de novo judicial review. Id. The situation presented in Moench did not fit either category. Defendants were not absolutely required to invest in employer securities, but they were more than simply permitted to make such investments. Id. We therefore determined that an intermediate abuse of discretion standard would strike the appropriate balance between immunity from judicial review, at one extreme, and de novo review, at the other. Accordingly, we set forth the following rebuttable presumption: [A]n ESOP fiduciary who invests [plan] assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities. Id. Edgar refers to this deferential abuse of discretion standard as Moench 's presumption of prudence. ( See, e.g., Appellant's Br. at 23.) Edgar argues that Moench 's presumption of prudence does not apply here, because the Plans at issue in this case are not ESOPs. We are not persuaded. An ESOP is one of several types of pension plans categorized under ERISA as Eligible Individual Account Plans or EIAPs. 29 U.S.C. § 1107(d)(3)(A). An EIAP is defined as an individual account plan which is (i) a profit-sharing, stock bonus, thrift, or savings plan; (ii) an employee stock ownership plan; or (iii) a money purchase plan which . . . [is] invested primarily in qualifying employer securities. Id. It is undisputed that the Plans at issue in this case are EIAPs. [11] Because one of the purposes of EIAPs is to promote investment in employer securities, they are subject to many of the same exceptions that apply to ESOPs. See Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1094 (9th Cir.2004). For example, § 1104(a)(2) provides that all EIAPs, not just ESOPs, are exempt from ERISA's duty to diversify: In the case of an eligible individual account plan . . . the diversification requirement . . . and the prudence requirement (only to the extent that it requires diversification) . . . is not violated by acquisition or holding of . . . qualifying employer securities. 29 U.S.C. § 1104(a)(2) (emphasis added). And § 1108(e)(3)(A) states that ERISA's prohibitions against dealing with a party in interest or self-dealing shall not apply to the acquisition or sale by a plan of qualifying employer securities . . . if the plan is an eligible individual account plan.  29 U.S.C. § 1108(e)(3)(A) (emphasis added). Consequently, EIAPs, like ESOPs, place employee retirement assets at much greater risk than traditional ERISA plans. Wright, 360 F.3d at 1097 n. 2. Given these similarities, we conclude that the underlying rationale of Moench applies equally here. [12] In sum, we conclude that the District Court correctly determined that Moench 's abuse of discretion standard governs judicial review of defendants' decision to offer the Avaya Stock Fund as an investment option.