Opinion ID: 176297
Heading Depth: 3
Heading Rank: 2

Heading: The Moench Presumption

Text: The Fiduciaries urge us to adopt the so-called  Moench presumption, first formulated by the Third Circuit in Moench, 62 F.3d at 571, for assessing whether fiduciaries imprudently invested in employer stock. The Participants point out that we have twice declined to adopt it and have even criticized it. In Moench, the Third Circuit was confronted with the question, To what extent may fiduciaries of [ESOPs] be held liable under [ERISA] for investing solely in employer common stock, when both Congress and the terms of the ESOP provide that the primary purpose of the plan is to invest in the employer's securities[?] Moench, 62 F.3d at 556. The court concluded 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. The plan at issue in Moench required the fiduciaries to invest primarily in the employer's stock. [6] Based on this language, the Third Circuit concluded that the plan did not absolutely require the [fiduciaries] to invest exclusively in [the employer's] stock, so that the district court erred in holding that the fiduciaries had no latitude but to continue investing in [the employer's] stock. Id. at 568. The fiduciaries in Moench argued that they nevertheless could not be liable under ERISA, because of the nature of the ESOP. [7] Therefore, the court turned to the standard of review for an ESOP fiduciary's decisions, and ultimately concluded that the most logical result is that the fiduciary's decision to continue investing in employer securities should be reviewed for an abuse of discretion. . . . [A]n ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. Id. at 571. The court went on to explain, in somewhat more detail, what a claimant would be required to show to rebut the presumption of prudent investment. Moench, 62 F.3d at 571-72. The Third Circuit has since elaborated on the scope and effect of the Moench presumption. See In re Schering-Plough Corp. ERISA Litig., 420 F.3d 231 (3d Cir. 2005); Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir.2007). The Fifth and Sixth Circuits have expressly adopted the Moench presumption. See Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.1995); Kirschbaum, 526 F.3d at 254-56. No federal appellate court has rejected the Moench presumption on its merits. But see Bunch v. W.R. Grace & Co., 555 F.3d 1, 10 (1st Cir.2009) (declining to adopt a Moench presumption that retention of employer stock was reasonable in a case challenging the fiduciary's decision to divest the plan of the employer's stock, as doing so would controvert the purpose of the presumption and transform the intended shield into a sword to be used against a prudent fiduciary). Until now, we have declined to adopt the Moench presumption. See Syncor, 516 F.3d at 1102; Wright, 360 F.3d at 1098 n. 3. On the other hand, we have also declined to reject Moench. Wright did express reservations about the presumption: The Third Circuit's intermediate prudence standard is difficult to reconcile with ERISA's statutory text, which exempts EIAPs from the prudence requirement to the extent that it requires diversification. Interpreting ERISA's prudence requirement to subject EIAPs to an albeit tempered duty to diversify arguably threatens to eviscerate congressional intent and the guiding rationale behind EIAPs themselves. Wright, 360 F.3d at 1097 (internal citations omitted). Wright also observed that [t]he Moench standard seems problematic to the extent that it inadvertently encourages corporate officers to utilize inside information for the exclusive benefit of the corporation and its employees. Id. at 1098 n. 4. We are not persuaded by either of the objections to the Moench presumption raised in Wright, that 1) the presumption conflicts with ERISA's diversification exemption, 29 U.S.C. § 1104(a)(2); and 2) the presumption encourages fiduciaries to engage in insider trading. We conclude that the Moench presumption is fully reconcilable with ERISA's statutory text and does not encourage insider trading, when properly formulated. First, the Wright court was concerned that the Moench presumption was at odds with ERISA's exemption of ESOPs and other EIAPs from its diversification requirements. `If there is no duty to diversify ESOP plan assets under the statute, it logically follows that there can be no claim for breach of fiduciary duty arising out of a failure to diversify, or in other words, arising out of allowing the plan to become heavily weighted in company stock' Wright, 360 F.3d at 1097 (citing In re McKesson HBOC, Inc. ERISA Litig., No. C00-20030RMW, 2002 WL 31431588, at  (N.D.Cal. Sept. 30, 2002) (unpublished disposition)). We were likely concerned about this conflict between Moench and ERISA's text because Moench itself cites § 1104(a)(2) for the proposition that under normal circumstances, ESOP fiduciaries cannot be taken to task for failing to diversify investments, regardless of how prudent diversification would be under the terms of an ordinary non-ESOP pension plan. Moench, 62 F.3d at 568. That is not the scenario in which the Moench presumption would do its work, however:  Moench ... would not apply to allegations... which fairly state only a violation of the fiduciaries' duty to diversify.... Kirschbaum, 526 F.3d at 254 n. 8. We do not read the Moench presumption to apply to a diversification claim, because a presumption of prudence is unnecessary where fiduciaries are not subject to a prudence requirement to begin with. On the other hand, where employer stock is only one of the possible plan investments, and plaintiffs assert a claim that the fiduciary should have divested the plan of employer stock, the fiduciaries would be entitled to the presumption that investment in employer stock was prudent. Thus, the Moench presumption does not run afoul of the exemption from diversification in § 1104(a)(2). The Wright court's second concern was that [t]he Moench standard seems problematic to the extent that it inadvertently encourages corporate officers to utilize inside information for the exclusive benefit of the corporation and its employees, which would potentially run afoul of the federal securities laws. 360 F.3d at 1098 n. 4. Quite the opposite is true: In contrast to ERISA's prudence requirement, Moench gives fiduciaries a safe harbor from failing to use insider information to divest from employer stock. In Kirschbaum, the Fifth Circuit noted that an objection to tempering the Moench presumption was that doing so would effectively require the fiduciary to trade on insider information. Kirschbaum, 526 F.3d at 256. We believe that if the burden to rebut the presumption of prudent investment is sufficiently heavy, plan fiduciaries will not be tempted to act on insider information to protect themselves from liability for decisions about continued investment in employer stock. We therefore adopt the Moench presumption. The presumption is consistent with the statutory language of ERISA and the trust principles by which ERISA is interpreted, whether the plan is an ESOP or other EIAP. See Wright, 360 F.3d at 1098 n. 3. At its core, our objection to adopting the Moench presumption in Wright was that it was not sufficiently deferential to or protective of fiduciaries, not that it placed too great a burden on those asserting breach-of-fiduciary-duty claims. We believe that if properly formulated, the Moench presumption can strike the appropriate balance between the employee ownership purpose of ESOPs and other EIAPs, and ERISA's goal of ensuring proper management of such plans. Plans that tie employee compensation to the company's success are widely believed to be good for employee productivity and loyalty: They expand[ ] the national capital base among employeesan effective merger of the roles of capitalist and worker. Moench, 62 F.3d at 568 (citing Donovan, 716 F.2d at 1458). Congress has granted favored status to ESOPs and other EIAPs by exempting them from certain ERISA requirements. Congress has also expressed concern that regulations and rulings which treat employee stock ownership plans as conventional retirement plans ... block the establishment and success of these plans. Id. at 569 (citing Tax Reform Act of 1976, Pub.L. No. 94-455, § 803(h), 90 Stat. 1583, 1590). We adopt the Moench presumption because it provides a substantial shield to fiduciaries when plan terms require or encourage the fiduciary to invest primarily in employer stock. Fiduciaries are not expected to predict the future of the company stock's performance; without the Moench presumption, a fiduciary could be sued for not selling if he adhered to the plan [and the company stock dropped], but also sued for deviating from the plan [and selling] if the stock rebounded. Kirschbaum, 526 F.3d at 256. Moreover, the long-term horizon of retirement investing requires protecting fiduciaries from pressure to divest when the company's stock drops. Id. at 254. The Moench presumption should also make it less likely that a plan fiduciary would be tempted to use insider information to divest the plan from company stock, since continued investment in the plan will be presumed prudent. The presumption does not entirely insulate a fiduciary from a breach-of-fiduciary-duty claim because it may be rebutted by a showing that the fiduciary abused its discretion by investing in employer stock. Moench itself does not fully spell out what plan participants must show to rebut the presumption of prudent investment. The Moench court explained that the presumption would be rebutted if `owing to circumstances not known to the settlor and not anticipated by him[the making of such investment] would defeat or substantially impair the accomplishment of the purposes of the trust.' Moench, 62 F.3d at 571 (quoting Restatement (Second) of Trusts § 227 cmt. g). We agree and add that if there is room for reasonable fiduciaries to disagree as to whether they are bound to divest from company stock, the abuse of discretion standard protects a fiduciary's choice not to divest. This will allow fiduciaries to fulfill their duties in the safe harbor that Congress seems to have intended to provide them for managing EIAPs and ESOPs. In re Ford Motor Co. ERISA Litigation, 590 F.Supp.2d 883, 910 n. 14 (E.D.Mich.2008). How bad do things have to be before no reasonable fiduciary in similar circumstances would have continued investing in company stock? A plaintiff in Moench pled the impending collapse of the company in order to overcome the presumption of prudent investment on a motion to dismiss. Moench determined the precipitous decline in company stock combined with an insider fiduciary's knowledge of the stock's impending collapse and the fiduciary's own conflicted status would constitute the type of change in circumstances that was not anticipated by the settlor of the trust. 62 F.3d at 571-72. Similarly, in Wright, we contemplated the need for dire circumstances before the presumption would be rebutted, observing that [u]nlike Moench, this case does not present a situation where a company's financial situation is seriously deteriorating and there is a genuine risk of insider selfdealing. 360 F.3d at 1098. To overcome the presumption of prudent investment, plaintiffs must therefore make allegations that clearly implicate[ ] the company's viability as an ongoing concern or show a precipitous decline in the employer's stock ... combined with evidence that the company is on the brink of collapse or is undergoing serious mismanagement. Id. at 1099 n. 5; Lalonde v. Textron, Inc., 270 F.Supp.2d 272, 280 (D.R.I.2003), rev'd on different grounds in Lalonde v. Textron, Inc., 369 F.3d 1 (1st Cir.2004). It will not be enough for plaintiffs to prove that the company's stock was not a prudent investment or that defendants ignored a decline in stock price. Plan participants can only rebut the Moench presumption by showing publicly known facts that would trigger the kind of careful and impartial investigation by a reasonable fiduciary that the plan's fiduciary failed to perform. Moench, 62 F.3d at 572 (internal quotation marks omitted). [8] In Wright, we said that, under ERISA's prudence requirement, the court's task is to inquire `whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment.' 360 F.3d at 1097 (quoting Donovan, 716 F.2d at 1232). In contrast, under the Moench presumption, a fiduciary's decision not to divest, when faced with [m]ere stock fluctuations, even those that trend downward significantly, does not give rise to the inference that the fiduciary did not properly investigate the merits of continued investment in employer stock. Wright, 360 F.3d at 1099. There is no bright-line rule as to how much evidence is needed to rebut the Moench presumption because Congress has not chosen to create one: [T]he statutory standard itself'prudence'has no tidy limiting principle.... In this matter as in many others, fiduciaries and courts alike must rely on common sense and experience to supplement airtight logic. In re Ford Motor Co., 590 F.Supp.2d at 892. A guiding principle, however, is that the burden to rebut the presumption varies directly with the strength of a plan's requirement that fiduciaries invest in employer stock. For a directed trustee, there is a lesser degree of judicial scrutiny, while the more discretion a fiduciary has to invest in less-risky holdings as necessary, the more his decisions will be subject to judicial scrutiny. Kirschbaum, 526 F.3d at 255 & n. 9. In any event, however, the Moench presumption would be difficult to rebut. See id. at 256 n. 12 (citing cases with facts insufficient to rebut the Moench presumption, including an ill-fated merger, reverse stock split, and seventy-five percent drop in stock price, company-wide financial woes and eighty percent drop in stock price and widespread accounting violations, restated revenues for three years, and seventy-five percent drop in stock price).