Opinion ID: 615595
Heading Depth: 5
Heading Rank: 2

Heading: The Moench Court's Policy Considerations Are Insufficient to Justify Adopting Deferential Review

Text: The question remains whether the policy concerns articulated in Moench and reiterated by the majority herewarrant our adoption of a standard of review that is more lenient than ERISA's prudent man standard of conduct. I answer that question in the negative.
In my view, the Moench presumption strikes no acceptable accommodation, (Maj. Op. at 138), between the competing ERISA values of protecting employees' retirement assets and encouraging investment in employer stock. The majority favorably cites to decisions that note that the Moench presumption would be difficult to rebut, [4] and that refer to the presumption as a substantial shield [5] to fiduciary liability. As these authorities implicitly acknowledge, the Moench presumption precludes, in the ordinary course, judicial enforcement of the prudent man standard of conduct. In a case that was argued in tandem with the instant matter, [6] the Secretary of Labor noted that the Moench presumption relegates the duty of prudence to protecting employees only from the complete loss of their assets in the wake of a company's collapse, thereby leaving them otherwise unprotected from the careless management of plan assets. Brief for the Secretary of Labor as Amicus Curiae Supporting Plaintiffs-Appellants, Gearren v. McGraw-Hill Cos., (2d Cir. June 4, 2010) (No. 10-792-cv), 2010 WL 2601687, at . This cannot be what Congress envisioned when it enacted ERISA. Cf. ILGWU Nat'l Ret. Fund v. Levy Bros. Frocks, Inc., 846 F.2d 879, 885 (2d Cir.1988) (citing IUE AFL-CIO Pension Fund v. Barker & Williamson, Inc., 788 F.2d 118, 127 (3d Cir.1986) for the proposition that ERISA, as a remedial statute, should be liberally construed in favor of protecting the participants in employee benefits plans (internal quotations omitted)). ERISA is paternalistic, Van Boxel v. Journal Co. Emps.' Pension Trust, 836 F.2d 1048, 1052 (7th Cir. 1987), and it is thus incongruous to deny participants meaningful judicial review on the theory that investment in employer stock should be encouraged. The statutory structure further demonstrates the impropriety of Moench 's accommodation. ESOPs are merely one type of benefit plan under the broader ERISA framework. That they are exempt from certain of ERISA's standards of conduct does not mean that the policies favoring ESOPs should override the policies of ERISA. Indeed, when a general statutory policy is qualified by an exception, courts generally read `the exception narrowly in order to preserve the primary operation of the [policy].' John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 97, 114 S.Ct. 517, 126 L.Ed.2d 524 (1993) (parenthetically quoting Comm'r of Internal Revenue v. Clark, 489 U.S. 726, 739-40, 109 S.Ct. 1455, 103 L.Ed.2d 753 (1989)). Accordingly, the investment decisions of ESOP fiduciaries must be 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. Fink v. Nat'l Sav. & Trust Co., 772 F.2d 951, 955-56 (D.C.Cir. 1985) (internal quotations omitted); see also Eaves v. Penn, 587 F.2d 453, 460 (10th Cir.1978) (ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary except to the extent that the standards require diversification of investments.). Had Congress intended to accommodate ERISA's competing values by requiring deferential review of ESOP fiduciaries' decisions, it could have provided for that result. See, e.g., 5 U.S.C. § 706(2)(A) (Administrative Procedure Act) (establishing a deferential standard of review over agency determinations).
I further reject the Moench court's assertion, echoed by the majority here, that plenary review of a fiduciary's investment decisions would spell doomsday for the ESOP institution. See Moench, 62 F.3d at 570; Maj. Op. at 139. ESOPs (under ERISA) had been in existence for more than twenty years before the Court of Appeals for the Third Circuit issued its decision in Moench. I have seen no evidence that plenary review during that time or thereafter [7] resulted in ESOP termination, or deterred ESOP formation. ESOP growth apparently slowed in the early 1990s. But commentators (including the ESOP Association, an amicus here) attribute the subsidence to legislative and market factorsnot to fiduciaries' fears of being subjected to a particular brand of judicial review. [8] The Moench court questioned why an employer would establish an ESOP if its compliance with the purpose and terms of the plan could subject it to strict judicial second-guessing[.] Moench, 62 F.3d at 570. But the incentives for ESOP creation are well documented. First, corporations often establish ESOPs to help raise funds, which can then be used, for example, to provide working capital or to buy out large shareholders. See Michael E. Murphy, The ESOP at Thirty: A Democratic Perspective, 41 WILLAMETTE L.REV. 655, 664 (2005). Second, ESOPs confer significant tax advantages on employers. [9] Third, employers use ESOPs to accomplish various business objectives, including management entrenchment (by placing large amounts of stock in friendly hands), and avoiding hostile takeovers (by purchasing publicly held shares of employer stock as a defensive measure). See Aditi Bagchi, Varieties of Employee Ownership: Some Unintended Consequences of Corporate Law and Labor Law, 10 U. PA. J. BUS. & EMP. L. 305, 317 (2008). In light of these, and other incentives, some commentators note that ESOPs have been used more to the advantage of the firm than its employees. Id. at 316 (internal quotations omitted). I thus find implausible the suggestion that plenary review of fiduciaries' investment decisions would suddenly deter ESOP formation or lead to widespread plan termination.
I also disagree with the contention that plenary review of the prudence of fiduciaries' investment decisions would transform fiduciaries into virtual guarantors of the financial success of the [ESOP], Moench, 62 F.3d at 570 (alteration in original) (internal quotations omitted); see also Maj. Op. at 138 (stating that absent deferential review, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan's terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value). The foregoing arguments misperceive the nature of the prudence inquiry, and the effect of plenary review. The test of prudence is one of conduct, not results. See Bunch v. W.R. Grace & Co., 555 F.3d 1, 7-8 (1st Cir.2009). Accordingly, whether a fiduciary acted prudently at the time he engaged in a challenged transaction turns on whether he employed the appropriate methods to investigate the merits of the investment. Flanigan v. Gen. Elec. Co., 242 F.3d 78, 86 (2d Cir.2001) (internal quotations omitted). A fiduciary who discharges his duty of prudence will not be liable merely because the investment ultimately fails, see DiFelice v. U.S. Airways Inc., 497 F.3d 410, 424 (4th Cir.2007), just as a surgeon who abides by the applicable standard of care will not be liable in negligence merely because his patient expires on the operating table. In short, the duty of prudencewhich is concerned with conductdoes not require a fiduciary to become a guarantorwho is concerned with results. See DeBruyne v. Equitable Life Assurance Soc'y of the U.S., 920 F.2d 457, 465 (7th Cir.1990). Plenary review could not possibly alter that dichotomy, because the basis for liability is a breach of the duty of prudence, which is not a guarantee but a standard of conduct that Congress imposed and that the fiduciary can satisfy by acting reasonably. Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 920 (8th Cir.1994).
I further disagree with the contention that plenary review of fiduciaries' investment decisions would read the diversification exemption out of ERISA. See Moench v. Robertson, 62 F.3d 553, 570 (3d Cir.1995). As previously noted, ERISA provides that 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). The exemption thus allows ESOP fiduciaries to be released from certain per se violations on investments in employer securities. Eaves, 587 F.2d at 459. Of course, the absence of a general diversification duty from the ESOP setting does not eliminate fiduciaries' duty of prudence. See 29 U.S.C. § 1104(a)(2); Armstrong v. LaSalle Bank Nat'l Ass'n, 446 F.3d 728, 732 (7th Cir.2006). An ESOP fiduciary may invest plan assets in employer securities so long as it remains prudent to do so. See id. And plenary review of that question i.e., of the prudence of a fiduciary's investment decisionssimply has no impact on the continued viability of ESOPs' statutory exemption from per se liability for the failure to diversify. The Secretary of Labor, in her amicus brief, explains the distinction well: The plaintiffs here ... do not base their claims on the failure to diversify holdings of an otherwise prudent investment. Instead, they assert that the market was being misled to overvalue the stock, and that the plan's fiduciaries continued to purchase and hold the stock anyway. Diversification is not the issue; it was imprudent for the fiduciaries to knowingly buy even a single share at an inflated price. Brief for the Secretary of Labor as Amicus Curiae Supporting Plaintiffs-Appellants, In re Citigroup ERISA Litig., (2d Cir. Dec. 28, 2009) (No. 09-3804-cv), 2009 WL 7768350, at  n. 2. In other words, although in the ESOP context there is no duty to diversify as such, there is still a duty of prudence. And in particular cases, the duty of prudence might ... become a duty to diversify, even though failure to diversify an ESOP's assets is not imprudence per se. Steinman v. Hicks, 352 F.3d 1101, 1106 (7th Cir.2003) (emphasis added). Accordingly, whether courts evaluate the prudence of fiduciaries' conduct under plenary review does not endanger ESOPs' statutory exemption from per se liability for the failure to diversify.