Court Opinion

ID: 3009834
Source: CourtListenerOpinion
Date Created: 2015-10-13 20:47:48.789527+00
Date Added: 2024-06-11T12:02:19.498845
License: Public Domain

Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

8-10-1995

Moench v Robertson
Precedential or Non-Precedential:

Docket 94-5637

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995

Recommended Citation
"Moench v Robertson" (1995). 1995 Decisions. Paper 215.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/215

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
              UNITED STATES COURT OF APPEALS
                  FOR THE THIRD CIRCUIT
                     _________________

                       No. 94-5637
                    _________________

                     CHARLES MOENCH
   in his own right and on behalf of those similarly
       situated, and on behalf of the Statewide
           Bancorp Employee Stock Option Plan

                                                v.

          JOSEPH W. ROBERTSON, RICHARD D. SUTTON,
      JOSEPH P. IARIA, FRANK J. EWART, JACK MEYERS,
         LEONARD G. LOMELL, JOHN C. FELLOWS, JR.,
     RAYMOND A. TAYLOR, ESTATE OF FRANK EWART, JOHN
                   EWART, ADMINISTRATOR

                             Charles Moench, in his own right
                             and on behalf of all those
                similarly situated,

                                               Appellant
                    _________________

    On Appeal from the United States District Court
            for the District of New Jersey
                  (D.C. No. 92-4829)
                    _______________

                   Argued June 26, 1995

BEFORE:   MANSMANN, GREENBERG, and SAROKIN, Circuit Judges

                 (Filed: August 10, 1995)
                      ______________

                             Philip Stephen Fuoco (argued)
                             Joseph A. Osefchen
                             24 Wilkins Place
                             Haddonfield, NJ 08033

                             Fredric J. Gross
                             7 East Kings Highway
                             Mount Ephraim, NJ 08059

                                    Attorneys for Appellant

                            1
        Christopher J. Carey (argued)
        Lisa W. Santola
        Tompkins, McGuire & Wachenfeld
        Four Gateway Center
        100 Mulberry Street
        Newark, NJ 07102

               Attorneys for Appellees

        Thomas S. Williamson, Jr.
        Solicitor of Labor

        Marc I. Machiz
        Associate Solicitor

        Karen L. Handorf
        Counsel for Special Litigation

        Eric G. Serron
        Wayne R. Berry
        Trial Attorneys
        U.S. Department of Labor
        Office of the Solicitor
        Plan Benefits Security Division
        P.O. Box 1914
        Washington, D.C., 20013

                Attorneys for Amicus
        Curiae The Secretary of
Labor

        John F. Zabriskie
        Raymond T. Goetz
        Hopkins & Sutter
        Three First National Plaza
        Chicago, Ill 60602

               Attorneys for Amicus

                         Curiae The
               Federal Deposit Insurance
               Corporation as Receiver
               for First National Bank
               of Toms River

        2
                     _______________________

                         OPINION OF THE COURT
                       _______________________

GREENBERG, Circuit Judge.

            This case requires us to decide the following difficult

question:   To what extent may fiduciaries of Employee Stock

Ownership Plans (ESOPs) be held liable under the Employee

Retirement Income Security Act (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.     The district court held that

fiduciaries cannot be liable in such cases, and therefore it

granted the fiduciaries' motion for summary judgment.    Because we

conclude that in limited circumstances, ESOP fiduciaries can be

liable under ERISA for continuing to invest in employer stock

according to the plan's direction, we will vacate the district

court's grant of summary judgment in favor of the plan

fiduciaries and will remand the case to the district court for

further proceedings.    In this opinion we will refer to the

plaintiff-appellant Charles Moench, a plan beneficiary, as

"Moench," and the defendants-appellees, the Plan Committee, the

fiduciaries with investment responsibilities, singularly as the

"Committee."

                          I.   Introduction

                                  3
                       A.   Statewide's Demise

           Statewide Bancorp was a bank holding company with its

principal office in Toms River, New Jersey.      During the time

relevant to this appeal, it operated through two wholly owned

subsidiaries, The First National Bank of Toms River, New Jersey

(FNBTR), and The First National Bank of New Jersey/Salem County.

           Statewide began experiencing financial difficulties in

1989.   "Between July 1989 and December 1989, the market value of

Statewide Bancorp common stock fell from $18.25 per share to

$9.50 per share."   Dist. Ct. op. at 2.   During the next year, the

price fell even more precipitously -- to $6.00 per share in July

1990, to $2.25 per share in December, and finally to less than 25

cents per share in May 1991.    During this period -- from 1989

through 1991 -- federal regulatory authorities repeatedly

expressed concern to Statewide's Board of Directors over problems

with Statewide's portfolio and financial condition.      On July 31,

1989, the Office of the Comptroller of the Currency (OCC)

informed the Statewide Board that "[c]ompliance management in the

two subsidiary banks was found to be satisfactory in virtually

all areas."   Letter of July 31, 1989 at Expanded Appendix (EA)

606.0   Nevertheless, the OCC letter indicated that "[v]iolations

0
We cite the appendix as "app.," the supplemental appendix as
"SA" and the expanded appendix as "EA." There is an expanded
appendix because the Committee made a motion which Moench opposed
to expand the appendix to include materials which were not before
the district court. Ordinarily we would have denied the motion.
Here, however, a significant portion of the expanded appendix
consists of actual copies of documents that were summarized to
the district court pursuant to Fed. R. Evid. 1006. Rule 1006
states that "[t]he contents of voluminous writings . . . which
cannot conveniently be examined in court may be presented in the

                                  4
of law and regulation were found across a number of areas in the

subsidiary banks [and] [w]hile management has shown a commitment

to promptly correct all violations, the need to develop in

certain cases and otherwise improve policies and procedures is

clearly evident."   Id.   A March 1990 report of an off-site review

of FNBTR revealed "lack of depth and quality of management,

unsafe and unsound credit practices, the resulting rapid

deterioration in the quality of the loan portfolio, unreliable

regulatory and management reports on loans, the inadequacy of the

Allowance for Loan and Lease Losses, and the adverse impact of

asset quality upon earnings and capital adequacy."    EA 690.

Ultimately, on May 22, 1991, the Federal Deposit Insurance

Corporation took control of FNBTR and on May 23, 1991, Statewide

filed a voluntary petition under Chapter 11 of the Bankruptcy

Code.

                    B.    Statewide's ESOP Plan

form of a chart, summary, or calculation," provided that "[t]he
originals, or duplicates, shall be made available for examination
[and t]he court may order that they be produced in court." For
all practical purposes, then, these actual documents were before
the district court, though the court did not feel a need to
examine them. It seems to us that when a party relies on a Rule
1006 summary to support its position on an appeal, at least when,
as here, the appellate court exercises de novo review over the
district court decision, the appellate court similarly may
examine the actual documents. Therefore, we will grant the
Committee's motion to expand the appendix. We note, though, that
we cite to the expanded appendix only to make clear the factual
underpinnings of this appeal, and whenever possible, we include
parallel citations to similar propositions in the appendix or the
supplemental appendix.

                                 5
            This case involves not so much Statewide's demise but

the fate during the period of its decline of funds invested in

its ESOP.    Beginning on January 1, 1986, Statewide offered its

employees the opportunity to participate in the ESOP, which was

designed to invest primarily in Statewide common stock.      See

Summary Plan Description at app. 174.      The ESOP named various

entities and gave them specific administrative and fiduciary

duties.     First, an ESOP Committee was set up "to administer the

Plan."    The Statewide Bancorp Employee Stock Ownership Plan Art.

10.1 at EA 451; app. 150 (Trust Agreement); SA 306-07 (Summary

Plan Description).    The plan provided that the Committee "shall

adopt rules for the conduct of its business and administration of

the Plan as it considers desirable, provided they do not conflict

with the Plan."     EA 451 (Plan, Art. 10.2); SA 307 (Summary Plan

Description).    The documents authorized the Committee to

"construe the Plan, correct defects, supply omissions or

reconcile inconsistencies to the extent necessary to effectuate

the Plan, and such action shall be conclusive."      EA 451 (Plan,

Art. 10.4); SA 298a-299, 307 (Summary Plan Description).       To

allow the Committee fully and adequately to perform its duties,

the plan authorized it to "contract for legal, actuarial,

investment management . . . and other services to carry out the

Plan."    EA 451 (Plan, Art. 10.3); App. 150 (Trust Agreement); SA

307 (Summary Plan Description).       According to the Trust Agreement

implementing the plan, the Committee:
          shall have responsibility and authority to
          control the operation and administration of
          the Plan in accordance with the terms of the

                                  6
          Plan and of this Agreement, including . . .
          (i) establishment, in its discretion, of
          investment guidelines which shall be
          communicated to the Trustee in writing.

Trust Agreement Art. 7.2 at app. 150-51.   The Trustee of the plan

had "exclusive responsibility for the control and management of

the assets of the Trust Fund," Trust Agreement at app. 150.

          The plan provided that:
          Except as otherwise provided in this Section,
          the Trustee shall invest the Fund as directed
          by the Committee. Generally, within 30 days
          of receipt, the Trustee shall invest all
          contributions received under the terms of the
          plan not applied to the repayment of
          principal and interest on any Acquisition
          Loan in ESOP stock, except that the Trustee
          shall be authorized to invest a portion of
          the contributions received in other
          securities as a reserve for the payment of
          administrative expenses and cash
          distributions.

App. 148 (ESOP Plan, Amended and Restated Effective Jan. 1,

1989).   The plan documents gave Statewide, as the plan sponsor,

"the authority and responsibility for . . .      the design of the

Plan, including the right to amend the Plan."     Trust Agreement
Art. 7.3 at app. 151.   The plan documents also required Statewide

to exercise "all fiduciary functions provided in the Plan or in

this [Trust] Agreement or necessary to the operation of the Plan

except such functions as are assigned to other fiduciaries

pursuant to the Plan or this Agreement."   Id.

           The ESOP created and governed by these documents worked

as follows:   Employees became eligible to participate in the plan

after one year of service.   Employees who chose to participate

                                7
had their contribution deducted from their salary; the employer

then would match up to 50% of the employee's voluntary

contribution.   The plan also provided for an Employer Profit

Sharing Contribution, to be made at the end of the Plan year,

though only at the option of the Statewide Board of Directors.

          Throughout the relevant time period, the Committee

regularly invested the ESOP fund in Statewide common stock,

despite the continual and precipitous drop in its price and

despite the Committee's knowledge of Statewide's precarious

condition by virtue of the members' status as directors.      Yet the

record reflects that several Statewide insiders began to have

misgivings regarding the investment.    Jack Breda, FNBTR's

Director of Personnel, testified that when the price of Statewide

stock started to drop, he began thinking it would be

inappropriate to continue such investments.    App. 119.   He

further testified that he relayed to Statewide's chief executive

officer (CEO) the pension committee's recommendation that "we

[should] look for other vehicles to invest money in," and that

the CEO should relay that advice to the executive committee or

the Board of Directors.   App. 120.   Apparently, the CEO reported

back that the Board of Directors had rejected the proposal

because "the original intent of the plan was to invest [in]

Statewide Bancorp stock."   App. 120.   On May 13, 1991, C.T.

Bjorklund, Statewide's Benefits and Compensation Manager, wrote a

memorandum to Breda stating the following:
          The Statewide [ESOP] permits employees to
          voluntarily suspend contributions at any time
          during the year. The Bank can also cease

                                8
           contributions at any time without notice.
           Such discontinuance would not trigger a full
           vesting situation. Only a complete plan
           termination would cause immediate full
           vesting of all participants.
           Although the ESOP gives us a beginning bias
           to hold Statewide Stock and the plan says
           that amounts contributed are to be invested
           in company stock, the trustee has the power
           to invest in other vehicles. Potentially the
           trustee should consider investing in short
           term money market instruments with current
           and future contributions.

App. 90.   A notation from Breda to Bjorklund at the bottom of the

memorandum states "I have been notified by [the CEO] on 5/21/91

that the Executive Committee of Statewide Bancorp voted not to

accept the revised or restated ESOP plan . . . ."   App. 90.

           Kevin William Bless, Assistant Vice President and

Senior Pension Trust Officer of FNBTR testified that as

Statewide's stock price fell, FNBTR's Trust Division held general

discussions "about the permissibility of investing moneys in ESOP

in a stock that had potential problems."   App. 136.   The Trust

Division decided that since the Committee's knowledge of

Statewide's precarious state was based on confidential reports

issued by the OCC, it would be inappropriate to use the

information in making investment decisions.   Thus, Bless

testified that "the nature of the ESOP dictated that we invest

solely in [Statewide] securities absent any public knowledge that

it would be an imprudent investment."   App. 139.   In these

discussions, then, the ESOP was not seen as absolutely requiring

investment in Statewide stock.   Indeed, in early 1991 the Trustee

                                 9
decided to cease investing in Statewide stock and to place all of

the ESOP assets in money market accounts.

          The Committee has not directed our attention to

anything in the record to suggest that while the stock price was

falling and the OCC was issuing its warning letters, the

Committee met to discuss any possible effects on the ESOP or any

actions that it should take and we have not found any indication

that there was such a meeting.    Moreover, although on June 12,

1990, investors filed a class action securities fraud suit

against Statewide and certain of its directors (the Lerner

action), which eventually settled for $3,200,000.00, the

Committee did not participate on behalf of the ESOP and therefore

the ESOP did not share in the settlement.      Ultimately,

Statewide's descent rendered the employees' ESOP accounts

virtually worthless.

                         C.   The Litigation

          On November 16, 1992, Moench, a former Statewide

employee who participated in the ESOP plan, brought this action

against the members of the Committee.    These defendants were also

members of Statewide's Board of Directors.     However, he did not

sue either the Trustee or the plan sponsor, Statewide.       In his

first complaint, he charged the Committee with breaching its

fiduciary duties under ERISA and pleaded a securities fraud suit

on behalf of the ESOP.   Moench moved to certify the class and the

Committee moved to dismiss the complaint.      In an August 17, 1993

opinion and order (entered four days later), the district court

                                  10
dismissed a count Moench advanced that the plan should have been

amended or terminated because "[r]egardless of whether

terminating or modifying the Plan would have proved to be prudent

conduct, such action is not that which is encompassed within a

director's fiduciary duties under ERISA."   Op. at SA 256 (citing

Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1161 (3d Cir.

1990)).   The court denied the motion to dismiss the remaining

ERISA counts but dismissed the securities fraud count without

prejudice for failure to plead with the particularity required by

Fed. R. Civ. P. 23.1.   The court requested further briefing on

Moench's class certification motion. Op. at 4-5.

          Moench responded by filing an amended complaint,

principally under 29 U.S.C. § 1132(a)(2), for breach of fiduciary

duty under 29 U.S.C. §§ 1104 and 1109.   Count 1 charged the

Committee with breaching its fiduciary obligations under ERISA;

Count 2 sought to hold the members of the Committee liable for

breaches of their co-fiduciaries; Count 3 charged it with failing

to disclose and misrepresenting pertinent information concerning

Statewide's condition, that affected employees' decision to

invest in the ESOP;   Count 4 charged breaches of fiduciary duties

on behalf of the ESOP, including failing to file a securities

fraud action on behalf of the plan; and Count 5 plead on behalf

of the ESOP a securities fraud claim under 15 U.S.C. § 78 et seq.

On December 20, 1993, the district court issued an order

certifying a class as to the first three counts and allowing

Moench to prosecute the derivative actions on behalf of the ESOP.

          On July 18, 1994, Moench filed a motion for a partial

                                11
summary judgment declaring that the individual Committee members

were fiduciaries governed by the standard of care provided in

ERISA.   The Committee did not oppose Moench's motion, and thus it

admitted that its members were ERISA fiduciaries.     The Committee

nevertheless filed a cross-motion for summary judgment dismissing

the complaint on the ground that it did not breach its ERISA

obligations.   The district court issued an opinion and order on

September 21, 1994, granting both motions.

           Noting that the Committee had conceded its fiduciary

status, the court granted Moench's motion without analysis.        The

court then held that the Committee had no discretion under the

terms of the plan to invest the ESOP funds in anything other than

Statewide common stock.   And since the plan complied with ERISA,

"[Moench] has failed to establish that [the Committee's] actions

in directing the purchases of stock for the Plan were other than

in accordance with the requirements of the Plan or otherwise in

violation of ERISA."   Op. at 12.    The court found no merit in

Moench's allegations that the Committee gave inaccurate,

incomplete and false information about the plan.     Rather, it

observed, "[t]he Plan specifically provides that it 'is a capital

accumulation Plan [and therefore] . . . does not provide for a

guaranteed benefit at retirement,'" op. at 12 (first alteration

added), and that "the very nature of ESOP plans contemplates that

the value and security of the employees' retirement fund will

necessarily fluctuate with the fortunes of the employer because

ESOPs invest primarily in employer stock."    Id.   Finally, the

                                12
court held that the statute of limitations barred Moench's

derivative securities fraud suit.       Id. at 16.

          Moench timely filed this appeal.      He argues that the

district court erred in deciding that the plan documents absolved

the Committee from any liability resulting from investing the

ESOP funds in Statewide stock.     He also contends that the

district court should not have dismissed his purported claim that

the Committee violated ERISA by failing to file a securities

fraud action on behalf of the plan.      He does not challenge the

dismissal of the securities fraud suit, and, though he is not

entirely clear on this point, does not appear to challenge the

district court's conclusions concerning the Committee's alleged

misrepresentations and omissions.       Thus, in his brief he recites

that he appeals from the summary judgment on counts 1, 2, and 4

but not from the summary judgment on counts 3 and 5 of the

amended complaint.   We have jurisdiction pursuant to 28 U.S.C.

§1291.   The district court exercised jurisdiction under 28 U.S.C.

§ 1331 and 29 U.S.C. § 1132(e).     We exercise plenary review over

the district court's grant of summary judgment.

                           II.    Discussion

             A.   Introduction:    ERISA's Broad Purpose

          Congress enacted ERISA in 1974, "after 'almost a decade

of studying the Nation's private pension plans' and other

employee benefit plans."   Central States, Southeast and Southwest
Area Pension Fund v. Central Transp., Inc., 472 U.S. 559, 569,

105 S.Ct. 2833, 2839 (1985) (quoting Nachman Corp. v. Pension

                                   13
Benefit Guar. Corp., 446 U.S. 359, 361, 100 S.Ct. 1723, 1726

(1980)).    Noting the rapid growth of such plans, Congress set out

to "'assur[e] the equitable character of [employee benefit plans]

and their financial soundness.'"       Central States, 472 U.S. at

570, 105 S.Ct. at 2840 (quoting statute) (alterations in

original).    ERISA seeks to accomplish this goal by requiring such

plans to name fiduciaries and by giving them strict and detailed

duties and obligations.    Specifically, ERISA requires benefit

plans to "provide for one or more named fiduciaries who jointly

or severally shall have authority to control and manage the

operation and administration of the plan."      29 U.S.C. § 1102(a)

(1).    An ERISA fiduciary "shall discharge his duties . . . solely

in the interest of the participants and beneficiaries" and must

act "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."      29

U.S.C. § 1104(a)(1)(B).    These requirements generally are

referred to as the duties of loyalty and care, or as the "solely

in the interest" and "prudence" requirements.       This case requires

us to decide how these requirements apply to fiduciaries of ESOP

plans.

   B.    Are Defendants Fiduciaries as to Investment Decisions?

             Before considering the substantive questions on this

appeal, we must address the Committee's argument that for the

purposes of this lawsuit, dealing principally with investment

                                  14
decisions, its members are not ERISA fiduciaries, but rather

either the Trustee or Statewide was the fiduciary with respect to

investments.   Under ERISA, "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 . . . or (iii) he has any

discretionary authority or discretionary responsibility in the

administration of such plan."   29 U.S.C. § 1002(21)(A).     As

these definitions imply, "'[f]iduciary status . . . is not an

"all or nothing concept . . . . [A] court must ask whether a

person is a fiduciary with respect to the particular activity in

question."'"   Maniace   v. Commerce Bank of Kansas City, N.A., 40

F.3d 264, 267 (8th Cir. 1994) (quoting Kerns v. Benefit Trust

Life Ins. Co., 992 F.2d 214 (8th Cir. 1993)) (first alteration

added), cert. denied, 115 S.Ct. 1964 (1995);   American Fed'n of

Unions Local 102 Health and Welfare Fund v. Equitable Life

Assurance Soc'y of the United States, 841 F.2d 658, 662 (5th Cir.

1988) ("A person is a fiduciary only with respect to those

portions of a plan over which he exercises discretionary

authority or control.").   The Statewide ESOP, like most benefit

plans, names several fiduciaries and allocates duties among them.

          The Committee's argument that it was not the fiduciary

vis a vis investment decisions faces a procedural hurdle because
it did not advance that position before the district court.       To

the contrary, in its "Brief in Support of Defendants' Cross-

Motion for Summary Judgment," the Committee stated the following:

                                 15
          Plaintiff has filed a motion for Summary
          Judgment on the issue of whether the
          defendants were fiduciaries. Defendants do
          not dispute that they were fiduciaries of the
          ESOP. However, defendants argue that they
          did not breach any of their fiduciary duties.

Dist. Ct. Br. at 1.   Based on this representation, the district

court quite naturally interpreted the Committee's admission

consistently with the relief Moench sought in his motion.       In

that motion, Moench sought a partial summary judgment declaring

that the Committee members were fiduciaries vis a vis, among

other things, investment decisions regarding the ESOP.    See
Memorandum in Support of Plaintiff's Motion for Partial Summary

Judgment at 1 ("the members of the committee were given the power

to, inter alia, . . . create investment guidelines for the ESOP,

appoint investment mangers for the ESOP . . . .").   After all,

that is what this case always has been about.   Thus, in the

absence of any distinctions or qualifications drawn by the

Committee with respect to the capacities in which its members

were fiduciaries, the court granted Moench's motion and treated

the Committee members as fiduciaries vis a vis investment

decisions.

          At the very least, then, the Committee failed to raise

before the district court the argument that its members were not

fiduciaries regarding investment decisions.   This omission is

decisive for "[i]t is well established that failure to raise an

issue in the district court constitutes a waiver of the

argument."   American Cyanamid Co. v. Fermenta Animal Health Co.,

54 F.3d 177, 187 (3d Cir. 1995) (quoting Brenner v. Local 514,

                                16
United Bhd. of Carpenters and Joiners of America, 927 F.2d 1283,

1298 (3d Cir. 1991)).

            In fact, the Committee's representation in the district

court, when read in conjunction with the arguments it advanced in

its district court brief, shows that it actually conceded that

its members were fiduciaries vis a vis investment decisions.      The

Committee did not qualify the concession it made at the outset of

its brief.    To the contrary, in the argument section, the

Committee contended that it "had absolutely no [discretion]

regarding where to invest the plan's assets," br. at 8, and that

"the [Committee] had no choice except to continue purchasing

Statewide stock."   Br. at 16.   In other words, the Committee

conceded that it was responsible for making investment decisions

but argued that by complying with the ESOP provisions it complied

with ERISA's fiduciary requirements.     Thus, the Committee is

changing course when it now argues that either the Trustee or the

Sponsor was the fiduciary regarding investing the ESOP assets and

that it was simply not an ERISA fiduciary in the relevant

capacity.    We will not permit this.   See Eichleay Corp. v.

International Ass'n of Iron Workers, 944 F.2d 1047, 1056 n. 9 (3d

Cir. 1991), cert. dismissed, 503 U.S. 915, 112 S.Ct. 1285 (1992);

Cowgill v. Raymark Indus., Inc., 832 F.2d 798, 803 (3d Cir.

1987).   Thus, we hold that the Committee acted in a fiduciary

capacity regarding decisions about how to invest the ESOP

                                 17
assets.0   We next turn to the district court's grant of the

Committee's motion for summary judgment.

               C.    The Committee's Duties Under ERISA

           The first issue we address is the one on which the

district court focused -- the requirements of the Statewide ESOP

and ESOPs generally.       This inquiry raises the following

questions:   (1)     Did the district court err in concluding that

the Committee was required by the plan to invest the plan assets

in Statewide stock;       (2) If so, was the Committee nevertheless

constrained by the nature of ESOPs themselves to invest solely in

Statewide stock?; (3)       If the plan required the Committee to

invest in Statewide stock, did its fiduciary responsibilities

under ERISA nevertheless require it to ignore the provisions of

the plan and to diversify the plan's investments?

                    1.   The district court's decision

           The district court concluded that the plan documents

mandated that the Committee invest the ESOP assets solely in

Statewide stock, and thus it granted the Committee's motion for

summary judgment.        It appears that in reaching this result the

court deferred to the Committee's interpretation of the plan.

0
For the reasons set forth later in this opinion, Judge Mansmann
agrees that the Committee acted in a fiduciary capacity regarding
investment decisions of the ESOP assets. She does not believe,
however, that the Committee conceded the point since it
maintained from the commencement of the suit that the ESOP
documents did not grant it discretion in the investment of the
plan's assets.

                                     18
Specifically, it held that "[j]udicial review of the decisions of

fiduciaries in the exercise of their powers is highly deferential

and will be upheld unless the decisions are shown to be arbitrary

and capricious, not supported by substantial evidence, or

erroneous on a question of law."      Op. at 11.   Against this

backdrop, it reasoned:
          the terms of the Plan required [the
          Committee] to invest the Plan funds in
          Statewide Bancorp Common Stock within 30 days
          after the end of the month in which the funds
          were received. It is clear by the terms of
          the Plan that it did not afford any
          discretion in directing the investment of the
          Plan funds in any other manner.

Op. at 11-12.

            Therefore, we initially must decide the scope of a

court's review over an ERISA fiduciary's decisions.       Moench and

his amici argue that the district court applied an incorrect

standard of review, as in their view, in cases not involving a

trustee's decision to deny benefits to a particular beneficiary,

courts do not apply the deferential arbitrary and capricious

standard.   Rather, they contend that the courts in such cases

apply the prudent person standard.

   2.   The Scope of Review Over an ERISA Fiduciary's Decisions

            Moench relies heavily on Struble v. New Jersey Brewery
Employees' Welfare Trust Fund, 732 F.2d 325 (3d Cir. 1984), to

support his argument that the arbitrary and capricious standard

does not apply.   In that case, the plaintiff beneficiaries

charged the defendant trustees with breaching their fiduciary

                                 19
obligations under ERISA by failing to collect employer

contributions to the plan and by applying surpluses to benefit

the employers rather than the retirees.   The defendants argued

that the court only should have asked whether their actions were

arbitrary or capricious.

           At that point in ERISA's history, courts routinely

borrowed the "arbitrary and capricious" standard of review

governing claims brought under section 302(c)(5) of the Labor

Management Relations Act, a statute that permits employer

contributions to a welfare trust fund "only if the contributions

are used 'for the sole and exclusive benefit of the employees . .

. .'"   Struble, 732 F.2d at 333 (citing LMRA).   After surveying

the ERISA caselaw, we observed that "[a]lthough the courts have

described the applicability of the arbitrary and capricious

standard in rather overbroad language, they nonetheless have

limited the use of the standard to cases involving personal

claims for benefits.   In other cases they have consistently

applied the standards set forth explicitly in ERISA."    Id.    And,

we reasoned, there exists a qualitative difference between a

personal claim for benefits and a contention that an ERISA

trustee failed to act in the interest of the beneficiaries at

all.    We explained:
            In actions by individual claimants
            challenging the trustees' denial of benefits,
            the issue is not whether the trustees have
            sacrificed the interests of the beneficiaries
            as a class in favor of some third party's
            interests, but whether the trustees have
            correctly balanced the interests of present
            claimants against the interests of future
            claimants. . . . In such circumstances it is

                                 20
          appropriate to apply the more deferential
          'arbitrary and capricious' standard to the
          trustees' decisions. In the latter type of
          action, the gravamen of the plaintiff's
          complaint is not that the trustees have
          incorrectly balanced valid interests, but
          rather that they have sacrificed valid
          interests to advance the interests of non-
          beneficiaries.

Id. at 333-34.   Because in Struble "[t]he plaintiffs allege[d]

that the Employer Trustees voted to give the . . . surplus to the

Employers and to reduce the Employers' contributions in order to

promote the Employers' interests rather than the retirees'

interests," id. at 334, we held that the trustees' actions were
subject to the prudent person standard.   We then applied a de

novo standard of review.

          Although the plaintiff and their amici urge the

mechanical application of Struble here, the facts of that case

are not directly apposite.   Struble involved a decision by an

ERISA fiduciary to give a benefit to the employer rather than to

the beneficiary -- the fiduciary was required to decide which of

two classes to favor.   And a decision in favor of one class

necessarily meant that the other class "lost," that is, could not

share in the benefit.   When the fiduciary's alignment with the

the employer class was added to the mix, its stark, conflicted

position became evident.   Here, by contrast, Moench does not

contend that the Committee's interpretation of the plan and its

investment decisions favored non-beneficiaries at the necessary

expense of beneficiaries. Rather, the Committee's interpretation

of the plan and its investment decisions occurred prior to, as

                                21
well as during, the period in which Statewide declined

financially.   Thus, the Committee did not engage in the kind of

zero-sum, conflicted analysis that we looked at so warily in

Struble.   Actually, Moench's conflict of interest allegations

really go to the second issue raised on appeal -- that the

Committee members' positions as Statewide directors as well as

ESOP fiduciaries made impartial decision-making regarding whether

to pursue an action on behalf of the ESOP impossible.    See

typescript, infra, at 46-47.   Moreover, unlike the situation in

Struble, the Committee's investment decision was squarely in

keeping with the purpose of all ESOP plans.

           While Struble does not directly control, we must

inquire whether its reasoning properly may be expanded to the

facts here after Firestone Tire and Rubber Co. v. Bruch, 489 U.S.

113, 109 S.Ct. 948 (1989), a case in which the Supreme Court

addressed the standard of review governing claims for benefits

under 29 U.S.C. § 1132(a)(1)(B).     We turn to that case now.

           The Firestone Court began its analysis by addressing

ERISA decisions borrowing the LMRA standard of review.     The Court

pointed out that the arbitrary and capricious standard of review

under the LMRA arose in large part because the LMRA did not

provide for judicial review of decisions of LMRA trustees.       Thus,

the courts adopted the deferential standard of review "as a means

of asserting jurisdiction over suits under § 186(c) by

beneficiaries of LMRA plans who were denied benefits by

trustees."   Id. at 109, 109 S.Ct. at 953.    ERISA, on the other

hand, explicitly authorizes private causes of action.     Therefore,

                                22
"the raison d'etre for the LMRA arbitrary and capricious standard

. . . is not present in ERISA."     Id. at 110, 109 S.Ct. at 954.

          However, after declining to apply the LMRA caselaw, the

Firestone Court did not assume that the strict standards of ERISA

necessarily should be applied in a de novo fashion.      To the

contrary, the Court proceeded to point out that "ERISA abounds

with the language and terminology of trust law" and that "ERISA's

legislative history confirms that the Act's fiduciary

responsibility provisions . . . 'codif[y] and mak[e] applicable

to [ERISA] fiduciaries certain principles developed in the

evolution of the law of trusts.'"      Id. (citation omitted)

(elipses added).   The Court previously had interpreted the

statute and its legislative history as authorizing courts to

develop a "'federal common law of rights and obligations under

ERISA-regulated plans,'" id. (quoting Pilot Life Ins. Co. v.

Dedeaux, 481 U.S. 41, 56, 107 S Ct. 1549, 1558 (1987)), and in

Firestone the Court further held that "[i]n determining the

appropriate standard of review for actions under § 1132(a)(1)(B),

we are guided by principles of trust law."      Id. at 111, 109 S.Ct.

at 954.

          After examining the common law of trusts, the Court

concluded that the language of the trust controls the ultimate

standard of judicial review.   Thus, "'[w]here discretion is

conferred upon the trustee with respect to the exercise of a

power, its exercise is not subject to control by the court except

to prevent an abuse by the trustee of his discretion.'"     Id.
(quoting Restatement (Second) of Trusts § 187 (1959)).      However,

                                  23
where the trust agreement does not give the trustee power to

construe uncertain provisions of the plan, or to make eligibility

determinations, the trustee is not entitled to deference and

courts exercise de novo review.     Id. at 111-12, 109 S.Ct. at 955.

          Firestone's analytical framework mandates a fresh look

at the appropriate standard of review in light of the particular

action being challenged.    After all, Firestone seemed to require

courts in all ERISA cases to examine the common law of trusts for

guidance in determining the scope of review over a particular

ERISA question.   The situation is complicated, however, by

Firestone's caveat at its outset that "[t]he discussion which

follows is limited to the appropriate standard of review in

§1132(a)(1)(B) actions challenging denials of benefits based on

plan interpretations."     Id. at 108, 109 S.Ct. at 953.   The Court

then continued, "[w]e express no view as to the appropriate

standard of review for actions under other remedial provisions of

ERISA."   Id.

          A number of courts, relying on Firestone's express

limitation, have refused to apply the arbitrary and capricious

standard of review to ERISA cases falling outside the category of

claims for benefits even though the fiduciary involved had

discretionary powers.    For instance, in Ches v. Archer, 827 F.
Supp. 159 (W.D.N.Y. 1993), the plaintiffs alleged that the plan

administrators violated ERISA by refusing to enforce a

contribution agreement against an employer.     The administrators

urged that Firestone compelled application of the arbitrary and
capricious standard of review, because the plan granted them

                                  24
broad discretion in their administration of the plan.      The court,

relying primarily on Struble, rejected the argument:
          [T]he discussion in Firestone was expressly
          limited to the appropriate standard of review
          in actions challenging denials of benefits
          based on plan interpretations, . . . and its
          holding therefore does not encompass the
          present case where the fiduciaries' failure
          to enforce the contribution payments
          agreement is challenged. . . . In evaluating
          fiduciaries' administration of ERISA plans,
          courts have typically applied the stricter,
          statutory standard of care, limiting the
          applicability of the more lenient, arbitrary
          and capricious standard only to cases where
          the legality of the trustees' benefit
          determination was at issue.

Id. at 165.    More recently the Court of Appeals for the Second

Circuit, relying in part on Ches v. Archer, interpreted Firestone

narrowly and explicitly held that the Struble holding survived

the Supreme Court's decision.    In that case, John Blair

Communications, Inc. Profit Sharing Plan v. Telemundo Group, Inc.

Profit Sharing Plan, 26 F.3d 360 (2d Cir. 1994), a profit sharing

plan brought an ERISA claim against the committee charged with

administering the plan, and alleged that by allocating certain

surpluses as an employer contribution rather than to the

individual beneficiaries' accounts, the committee violated its

fiduciary obligations under ERISA.    The court "decline[d] to

apply the arbitrary and capricious standard to the fiduciary

conduct at issue here because this case does not involve a simple

denial of benefits, over which the plan administrators have

discretion."   Id. at 369.   Rather, the court held that

"Firestone's proposition that the more lenient arbitrary and

                                 25
capricious standard applies where the plan grants discretion to

the administrators does not alter Struble's holding that

decisions that improperly disregard the valid interest of

beneficiaries in favor of third parties remain subject to the

strict prudent standard articulated in § 404 of ERISA."    Id.   In

reaching its decision, the court expressed concern about the

policy implications of expanding Firestone's reach: "Any other

rule would allow plan administrators to grant themselves broad

discretion over all matters concerning plan administration,

thereby eviscerating ERISA's statutory command that fiduciary

decisions be held to a strict standard."   Id.

          We agree with these courts that the arbitrary and

capricious standard of review allowed in Firestone should not be

applied mechanically to all ERISA claims, and that claims

analogous to those addressed by Struble merit de novo review. But

that does not mean that Firestone has nothing to say about ERISA

claims falling outside the purview of section 1132(a)(1)(B) and

not controlled by Struble.   While the Firestone Court

"express[ed] no view as to the appropriate standard of review for

actions under other remedial provisions of ERISA," id. at 108,
109 S.Ct. at 953, the Court's mode of analysis is certainly

relevant to determine the standard of review pertaining to all

claims filed under ERISA challenging a fiduciary's performance.

Specifically, the Court looked to trust law in large part because

the terms used throughout ERISA -- participant, beneficiary,

fiduciary, trustee, fiduciary duties -- are the "language and

terminology of trust law."   Firestone, 489 U.S. at 110, 109 S.Ct.

                                26
at 954.   That being the case, we believe that after Firestone,

trust law should guide the standard of review over claims, such

as those here, not only under section 1132(a)(1)(B) but also over

claims filed pursuant to 29 U.S.C. § 1132(a)(2) based on

violations of the fiduciary duties set forth in section 1104(a).

After all, section 1104(a) also abounds with the language of

trust law, and the Supreme Court previously has noted that

"Congress invoked the common law of trusts to define the general

scope of [fiduciaries'] authority and responsibility."   Central

States, 472 U.S. at 570, 105 S.Ct. at 2840.   Indeed, in Central

States, the Court went on to say that "[t]he manner in which

trustee powers may be exercised . . . is further defined in the

statute through the provision of strict standards of trustee

conduct, also derived from the common law of trusts -- most

prominently, a standard of loyalty and a standard of care."      Id.;

see also Acosta v. Pacific Enter., 950 F.2d 611, 618 (9th Cir.

1991) ("common law trust principles animate the fiduciary

responsibility provisions of ERISA.").

           Our conclusion is supported by a recent decision by the

Court of Appeals for the First Circuit discussing both Firestone
and Struble.   In that case, Mahoney v. Board of Trustees, 973

F.2d 968 (1st Cir. 1992), the plaintiffs claimed that the

trustees of a plan violated ERISA by increasing the size of

retirement pensions unevenly, in a manner that "treat[ed]

longshoremen who had already retired less favorably than those

who were still working."   Id. at 969.   The plaintiffs, relying in

part on Struble, contended that because several of the trustees

                                27
were working longshoremen, who benefitted from the trustees'

decision, the court should apply "an especially strict standard

of review." Id. at 970.    The court disagreed, noting that in

determining the appropriate standard of review after Firestone,

trust law "guides, but does not control, our decision."    Id. at

971.    The court then reviewed ordinary principles of trust law,

as well as cases applying common law trust principles in

analogous situations, and concluded that even though the trustees

arguably made a decision to benefit themselves rather than the

plaintiff class, trust law permitted them to be beneficiaries of

the plan.    Therefore, as long as they were making discretionary

decisions, the arbitrary and capricious standard of review

applied.
   3.    The Scope of Review Over the Committee's Interpretation

            In this case, Firestone itself gives us guidance as to

the standard of review over the Committee's interpretation of the

plan.    The Supreme Court's analysis of trust law led it to the

conclusion that "[a] trustee may be given power to construe

disputed or doubtful terms, and in such circumstances the

trustee's interpretation will not be disturbed if reasonable."

Firestone, 489 U.S. at 111, 109 S.Ct. at 954.    This conclusion is

in accord with general principles of trust law, which provides

that "[w]here discretion is conferred upon the trustee with

respect to the exercise of a power, its exercise is not subject

to control by the court, except to prevent an abuse by the

trustee of his discretion."    Restatement (Second) of Trusts §187.

Indeed, in Central States, the Court gave significant weight to

                                 28
the trustees' interpretation of the trust agreement, because "the

trust agreement explicitly provide[d] that 'any construction [of

the agreement's provisions] adopted by the Trustees in good faith

shall be binding upon the Union, Employees and Employers.'"

Central States, 472 U.S. at 568, 105 S.Ct. at 2839 (first

alteration added).

          Here, the plan gave the Committee unfettered discretion

to interpret its terms; it further provided that the Committee's

interpretations are conclusive.    Thus, assuming that the

Committee interpreted the plan, the arbitrary and capricious

standard applies and we will disturb its interpretation only if

its reading of the plan documents was unreasonable.0

          In this regard, the Court of Appeals for the Eighth

Circuit has enumerated a series of helpful factors to consider in

determining whether an interpretation of a plan is reasonable:
          (1) whether the interpretation is consistent
          with the goals of the Plan; (2) whether it
          renders any language in the Plan meaningless
          or internally inconsistent; (3) whether it
          conflicts with the substantive or procedural
          requirements of the ERISA statute; (4)
          whether the [relevant entities have]
          interpreted the provision at issue
          consistently; and (5) whether the
          interpretation is contrary to the clear
          language of the Plan.

Cooper Tire & Rubber Co. v. St. Paul Fire & Marine Ins. Co., 48

F.3d 365, 371 (8th Cir. 1995) (citing Finley v. Special Agents

0
Our result is in complete harmony with the prudent man standard
of care obligations imposed by 29 U.S.C. § 1104 on fiduciaries,
as our holding implicates only the standard of review of the
conduct of a fiduciary and not the standards governing that
conduct.

                                  29
Mut. Benefit Ass'n, 957 F.2d 617, 621 (8th Cir. 1992)).     The

first factor clearly weighs in favor of the interpretation

suggested by the Committee during the course of this litigation

in both the district court and on appeal, i.e., that it was

required without any discretion to invest in Statewide stock.      As

the district court recognized, ESOP plans are formulated with the

primary purpose of investing in employer securities.   That being

the case, the Committee's interpretation is consistent with the

purpose of the trust.   See Restatement (Second) of Trusts § 187

Comment d (court should consider "the purposes of the trust" in

determining whether trustee has abused the discretion conferred

on him or her by the terms of the plan.).

          However, the Committee's purported interpretation

renders other language in the plan documents meaningless.    For

instance, the plan documents state that assets are to be invested

primarily in Statewide stock.   Therefore, it seems

counterintuitive for the Committee to interpret the plan as

requiring it to invest exclusively in Statewide stock.    More

importantly, the history of the Trustee's investment decisions --

actually relied upon by the Committee -- belie the reasonableness

of the Committee's interpretation.   The Committee concedes in its

brief (apparently without realizing the consequences) that "in

March, 1991 . . . the Trust Division voted not to invest any more

money in Statewide's stock until the issue was clarified and

instead held the fund in money market instruments."    Br. at 11.

With this statement, the Committee admits that the plan has been

interpreted -- by the entity investing the assets -- as

                                30
permitting the Trustee to refrain from investing the plan assets

in Statewide stock.    Therefore, the language of the trust

documents has not been interpreted consistently in the manner the

Committee suggests.    Similarly, the Committee makes inconsistent

arguments on this appeal, which make us wary of adopting its

interpretation.    On the one hand, it argues that the plan

documents did not permit it to invest in securities other than

Statewide stock.    On the other, it argues that it could diversify

the investments only when information about Statewide's impending

collapse became public.

          Finally, the Committee's interpretation, particularly

in light of the ambiguous language of the plan, is inconsistent

with ERISA inasmuch as it constrains the Committee's ability to

act in the best interest of the beneficiaries.    Kuper v. Quantum

Chem. Corp., 852 F. Supp. 1389, 1395 (S.D. Ohio 1994) (ESOP plan

"must be interpreted, consistent with ERISA to provide that the .

. . ESOP fiduciaries did possess discretion to place ESOP funds

into investments other than [employer] stock, in the event that

the interests of the plan participants and beneficiaries so

required"); cf. Restatement (Third) of Trusts § 228(a) ("In
investing the funds of the trust, the trustee has a duty to the

beneficiaries to conform to any applicable statutory provisions

governing investment by trustees.").    Moreover, as we discuss

more fully below, it is at odds with a fiduciary's responsibility

under the common law of trusts, which mandates that the trustee

in certain narrow instances must take actions at odds with how it

                                 31
is directed generally to act.   Therefore, the Committee's

interpretation of the plan is unreasonable and we reject it.0

          We need not rely solely on the unreasonableness of the

Committee's interpretation during this litigation, however,

because the record is devoid of any evidence that the Committee

construed the plan at all.   Thus, this is not a case implicating

the arbitrary and capricious standard of review.   The Committee

points to nothing in the record indicating that it -- the

Committee -- actually deliberated, discussed or interpreted the

plan in any formal manner.   To the contrary, in support of its

supposed interpretation, the Committee cites actions taken by the

Pension and Benefits Committee of Statewide, which it concedes

"was an entity separate and distinct from the Plan Committee

comprised of the defendants," br. at 9, and actions taken by the

"Trust Division of FNBTR, the Trustee of the Plan," br. at 10,

which also was not the Committee in charge of construing the

terms of the plan.   The deferential standard of review of a plan

interpretation "is appropriate only when the trust instrument

allows the trustee to interpret the instrument and when the
trustee has in fact interpreted the instrument."   Trustees of

Central States, Southeast and Southwest Areas Health and Welfare

0
In view of our result, we are not concerned with a situation in
which an ESOP plan in absolutely unmistakeable terms requires
that the fiduciary invest the assets in the employer's securities
regardless of the surrounding circumstances. Consequently, we
should not be understood as suggesting that there never could be
a breach of fiduciary duty in such a case. We similarly do not
reach Moench's argument that if the plan directed the Committee
to invest the funds solely in Statewide stock, ERISA nevertheless
required the Committee to ignore the plan terms when those terms
conflicted with its fiduciary obligations under ERISA.

                                32
Fund v. State Farm Mut. Auto Ins. Co., 17 F.3d 1081, 1083 (7th

Cir. 1994) (emphasis added).   As the Restatement (Second) of

Trusts § 187, comment (h) puts it:
          The court will control the trustee in the
          exercise of a power where its exercise is
          left to the judgment of the trustee and he
          fails to use his judgment. Thus, if the
          trustee without knowledge of or inquiry into
          the relevant circumstances and merely as a
          result of his arbitrary decision or whim
          exercises or fails to exercise a power, the
          court will interpose.

Here, there is no indication that the Committee actually made an

effort to construe the plan. In the absence of such evidence:
          'The extent of the duties and powers of a
          trustee is determined by rules of law that
          are applicable to the situation, and not the
          rules that the trustee or his attorney
          believes to be applicable, and by the terms
          of the trust as the court may interpret them,
          and not as they may be interpreted by the
          trustee or by his attorney.'

Firestone, 489 U.S. at 112, 109 S.Ct. at 955 (citation omitted).

          As such, applying a de novo interpretation of the plan,

we have no hesitation concluding that the Statewide ESOP, while

designed with the primary purpose of investing in Statewide

securities, did not absolutely require the Committee to invest

exclusively in Statewide stock.0    We therefore believe that the

district court erred in determining that the Committee had no

latitude but to continue investing in Statewide stock.

          The Committee nevertheless argues that it cannot be

liable under ERISA because, consistent with the nature of ESOPs

0
As we have explained, we would have reached the same result
applying the arbitrary and capricious standard of review.

                                   33
themselves, it cannot be accountable for investing the assets

solely in Statewide stock.   We turn to that argument now, which

again requires a detailed inquiry into the standard of review

over an ESOP fiduciary's decisions.

                       4.    ESOPs and ERISA

         a.   General policies and the developed caselaw

          ERISA contains specific provisions governing ESOPs.

While fiduciaries of pension benefit plans generally must

diversify investments of the plan assets "so as to minimize the

risk of large losses," see section 1104(a)(1)(C), fiduciaries of

ESOPS are exempted from this duty.     Specifically, "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).     In other

words, 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.    ESOPs also are exempted from

ERISA's "strict prohibitions against dealing with a party in

interest, and against self-dealing, that is, 'deal[ing] with the

assets of the plan in his own interest or for his own account.'"

Martin v. Feilen, 965 F.2d 660, 665 (8th Cir. 1992) (citing 29
U.S.C. § 1106(b)(1)), cert. denied, 113 S.Ct. 979 (1993).

          The reason for these specific rules arises out of the

nature and purpose of ESOPs themselves.    "[E]mployee stock

                                  34
ownership plan[s are] designed to invest primarily in qualifying

employer securities."   29 U.S.C. § 1107(d)(6)(A).    Thus, unlike

the traditional pension plan governed by ERISA, ESOP assets

generally are invested "in securities issued by [the plan's]

sponsoring company," Donovan v. Cunningham, 716 F.2d 1455, 1458

(5th Cir. 1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533

(1984).   In keeping with this, ESOPs, unlike pension plans, are

not intended to guarantee retirement benefits, and indeed, by its

very nature "an ESOP places employee retirement assets at much

greater risk than does the typical diversified ERISA plan."

Martin v. Feilen, 965 F.2d at 664.    The summary plan description

in this case, for example, explicitly stated that the plan "does

not provide for a guaranteed benefit at retirement."     App. 174.

           Rather, ESOPs serve other purposes.   Under their

original rationale, ESOPS were described "as . . . device[s] for

expanding the national capital base among employees -- an

effective merger of the roles of capitalist and worker."       Donovan

v. Cunningham, 716 F.2d at 1458.     Thus, the concept of employee

ownership constituted a goal in and of itself.      To accomplish

this end, "Congress . . . enacted a number of laws designed to

encourage employers to set up such plans."    Id.    The Tax Reform

Act of 1976 was one of those statutes, and in passing it,

Congress explicitly stated its concern that courts should refrain

from erecting barriers that would interfere with that goal:
          'The Congress is deeply concerned that the
          objectives sought by [the series of laws
          encouraging ESOPs] will be made unattainable
          by regulations and rulings which treat
          employee stock ownership plans as

                                35
          conventional retirement plans, which reduce
          the freedom of the employee trusts and
          employers to take the necessary steps to
          implement the plans, and which otherwise
          block the establishment and success of these
          plans.'

Tax Reform Act of 1976, Pub. L. No. 94-455, § 803(h), 90 Stat.

1590 (1976) (quoted in Donovan v. Cunningham, 716 F.2d at 1466

n.24).

          Notwithstanding all of this, ESOPs are covered by

ERISA's stringent requirements, and except for a few select

provisions like the ones we quote above, ESOP fiduciaries must

act in accordance with the duties of loyalty and care.    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."    Martin v.
Feilen, 965 F.2d at 664 (quoting 129 Cong. Rec. S16629, S16636

(Daily ed. Nov. 7, 1983) (statement of Sen. Long)).    ESOP

fiduciaries must, then, wear two hats, and are "expected to

administer ESOP investments consistent with the provisions of

both a specific employee benefits plan and ERISA."    Kuper v.

Quantum Chem. Corp., 852 F. Supp. at 1395.

          All of this makes delineating the responsibilities of

ESOP trustees difficult, because they "must satisfy the demands

of Congressional policies that seem destined to collide." Donovan

v. Cunningham, 716 F.2d 1455, 1466 (5th Cir. 1983) (footnotes

omitted), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533 (1984).     As

the Cunningham court explained:
          On the one hand, Congress has repeatedly
          expressed its intent to encourage the

                               36
          formation of ESOPs by passing legislation
          granting such plans favorable treatment, and
          has warned against judicial and
          administrative action that would thwart that
          goal. Competing with Congress' expressed
          policy to foster the formation of ESOPs is
          the policy expressed in equally forceful
          terms in ERISA: that of safeguarding the
          interests of participants in employee benefit
          plans by vigorously enforcing standards of
          fiduciary responsibility.

Id.   See also Martin v. Feilen, 965 F.2d at 665 ("the special

statutory rules applicable to ESOPs inevitably affect the

fiduciary's duties under § 1104"); Kuper, 852 F. Supp. at 1394
(quoting Cunningham).   So with the goals of ESOPs on the one

hand, and ERISA's stringent fiduciary duties on the other, the

courts' "task in interpreting the statute is to balance these

concerns so that competent fiduciaries will not be afraid to

serve, but without giving unscrupulous ones a license to steal."

Donovan v. Cunningham, 716 F.2d at 1466.   The goals of the two

statutes often serve consistent ends -- ensuring that the

fiduciary acts in the interest of the plan -- and in those cases

the nature of a plaintiff's claim will not create tension.     But
when the plaintiff claims that an ESOP fiduciary violated its

ERISA duties by continuing to invest in employer securities, the

conflict becomes particularly stark.

          Nevertheless, cases addressing the duties of ESOP

fiduciaries in this area generally have allowed ERISA's strict

standards to override the specific policies behind ESOPs.    In

Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978), for example, an

ESOP fiduciary argued that he was bound by both the terms of the

                                37
ESOP plan and ERISA itself to invest the plan assets in employer

securities.   The court, relying extensively on the legislative

history underlying ERISA, interpreted the statutory exception as

only prohibiting per se liability based on failure to diversify.

It justified this conclusion by reasoning that "the structure of

the Act itself requires that in making an investment decision of

whether or not a plan's assets should be invested in employer

securities, an ESOP fiduciary, just as fiduciaries of other

plans, is governed by the 'solely in the interest' and 'prudence'

tests. . . ."   Id. at 459.

          Other decisions are more specific and have held that

notwithstanding ERISA's diversification provisions, an ESOP

fiduciary must diversify if diversification is in the best

interests of the beneficiaries.    The Court of Appeals for the

District of Columbia Circuit has stated:
          [T]he requirement of prudence in investment
          decisions and the requirement that all
          acquisitions be solely in the interest of
          plan participants continue to apply. 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.'

Fink v. National Sav. and Trust Co., 772 F.2d 951, 955-56 (D.C.
Cir. 1985) (citations omitted).    And in an opinion heavily relied

upon by Moench and his amici, a district court in this circuit

has held that the ERISA provisions exempting ESOP fiduciaries

from the duty to diversify "merely entail that 'acquisition of

employer securities . . . does not, in and of itself, violate any

                                  38
of the absolute prohibitions of ERISA.'"    Canale v. Yegen, 782 F.

Supp. 963, 967 (D.N.J. 1992) (quoting Fink, 772 F.2d at 955),

reargument denied in part, granted in part, 789 F. Supp. 147

(D.N.J. 1992).     Rather, the court continued, "the allegation that

[an ESOP] administrator has failed to prudently diversify plan

assets invested exclusively in the stock of the beneficiaries'

employer can state a claim for breach of fiduciary duties under

ERISA."     Id. at 967-68.

             Notwithstanding the fact that none of these decisions

specifically delineate a standard of review, Moench and his amici

read these cases as requiring that a court not be deferential

when reviewing an ESOP fiduciary's actions in investing in

employer securities.    There are numerous problems with their

argument.    First, by subjecting an ERISA fiduciary's decision to

invest in employer stock to strict judicial scrutiny, we

essentially would render meaningless the ERISA provision

excepting ESOPs from the duty to diversify.    Moreover, we would

risk transforming ESOPs into ordinary pension benefit plans,

which then would frustrate Congress' desire to encourage employee

ownership.    After all, why would an employer establish an ESOP if

its compliance with the purpose and terms of the plan could

subject it to strict judicial second-guessing?    Further still,

basic principles of trust law require that the interpretation of

the terms of the trust be controlled by the settlor's intent.

That principle is not well served in the long run by ignoring the

general intent behind such plans in favor of giving beneficiaries

the maximum opportunities to recover their losses.

                                  39
             In short, the sheer existence of ESOPs demonstrates

that there is some value in employee ownership per se, even

though participants inevitably run some risk in terms of their

financial gain.    Therefore, the policies behind ERISA's rules

governing pension benefit plans cannot simply override the goals

of ESOPs, and courts must find a way for the competing concerns

to coexist.    Indeed, the position taken by Moench and the

Secretary of Labor leaves numerous questions unanswered:        How is

an ESOP fiduciary to determine when diversification is in the

best interest of the beneficiaries?     Is the fiduciary always to

seek the return-maximizing investment, or is there some non-

tangible loyalty interest served by retaining ESOP investments in

employer stock?     Additionally, to what extent should ESOPs be

considered retirement plans, notwithstanding the qualification

contained in most of them, including Statewide's, that they are

not designed to guarantee retirement income?     We are uneasy with

the answers Moench and the Secretary would give to these

questions.    Both seem ready and willing to sacrifice the policies

behind ESOPs and employee ownership in order to make "ESOP

fiduciaries virtual guarantors of the financial success of the

[ESOP] plan."    Martin v. Feilen, 965 F.2d at 666.   That we

cannot, should not and will not do.

             In this regard, we point out that the participants in

the plan effectively became investors in Statewide and thus

should have expected to run risks inherent in that role.        The

Statewide plan was voluntary and the summary plan description

provides that "[e]ach individual Employee's account will

                                  40
experience gains or losses according to the performance of the

investments held by the Plan.    The primary investment of the Plan

shall be Statewide Bancorp Common Stock."   App. 174.   Therefore,

the participants should have recognized that the value of their

interests was dependent on Statewide's performance.

                    b.    Developing a standard

          We again look to trust law for guidance in determining

the standard of review.    We can formulate a proper standard of

review of an ESOP fiduciary's investment decisions by recognizing

that when an ESOP is created, it becomes simply a trust under

which the trustee is directed to invest the assets primarily in

the stock of a single company.   More than that, the trust serves

a purpose explicitly approved and encouraged by Congress.

Therefore, as a general matter, "ESOP fiduciaries should not be

subject to breach-of-duty liability for investing plan assets in

the manner and for the . . . purposes that Congress intended."

Martin v. Feilen, 965 F.2d at 670.    And while trustees -- of both

ordinary trusts and pension benefit plans -- are under a duty to

"diversify the investments of the trust," see Restatement (Third)
§ 227(b), that duty is waivable by the terms of the trust.

Section 227(d) ("The trustee's duties under this Section are

subject to the rule . . . dealing with contrary investment

provisions of a trust or statute.").    Seen in light of these

principles, the provision in ERISA exempting ESOPs from the duty

to diversify is simply a statutory acknowledgement of the terms

                                 41
of ESOP trusts.    And the common law of trusts in fact guides us

in this difficult area.

          The Restatement of Trusts provides that in investing

trust funds, "the trustee . . . has a duty to the beneficiaries

to conform to the terms of the trust directing . . . investments

by the trustee."   Restatement (Third) § 228.     Thus, "[a]s a

general rule a trustee can properly make investments in such

properties and in such manner as expressly or impliedly

authorized by the terms of the trust."       Id. comment (d). However,

trust law distinguishes between two types of directions: the

trustee either may be mandated or permitted to make a particular

investment.   If the trust requires the fiduciary to invest in a

particular stock, the trustee must comply unless "compliance

would be impossible . . . or illegal" or a deviation is otherwise

approved by the court.    Id. comment (e).    When the instrument

only allows or permits a particular investment, "[t]he fiduciary

must still exercise care, skill, and caution in making decisions

to acquire or retain the investment."    Id. comment (f).

          In a case such as this, in which the fiduciary is not

absolutely required to invest in employer securities but is more

than simply permitted to make such investments, while the

fiduciary presumptively is required to invest in employer

securities, there may come a time when such investments no longer

serve the purpose of the trust, or the settlor's intent.

Therefore fiduciaries should not be immune from judicial inquiry,

as a directed trustee essentially is, but also should not be

subject to the strict scrutiny that would be exercised over a

                                 42
trustee only authorized to make a particular investment.    Thus, a

court should not undertake a de novo review of the fiduciary's

actions similar to the review applied in Struble.   Rather, the

most logical result is that the fiduciary's decision to continue

investing in employer securities should be reviewed for an abuse

of discretion.

          In light of the analysis detailed above, keeping in

mind the purpose behind ERISA and the nature of ESOPs themselves,

we hold that in the first instance, an 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.

However, the plaintiff may overcome that presumption by

establishing that the fiduciary abused its discretion by

investing in employer securities.

          In attempting to rebut the presumption, the plaintiff

may introduce evidence that "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."   Restatement

(Second) § 227 comment g.0   As in all trust cases, in reviewing

the fiduciary's actions, the court must be governed by the intent

behind the trust -- in other words, the plaintiff must show that

the ERISA fiduciary could not have believed reasonably that

continued adherence to the ESOP's direction was in keeping with

0
This quote derives from the Second Restatement, though the
section we quote has been amended by the Restatement (Third) of
Trusts.

                                 43
the settlor's expectations of how a prudent trustee would

operate.   In determining whether the plaintiff has overcome the

presumption, the courts must recognize that if the fiduciary, in

what it regards as an exercise of caution, does not maintain the

investment in the employer's securities, it may face liability

for that caution, particularly if the employer's securities

thrive.    See Kuper, 852 F. Supp. at 1395, ("defendants who

attempted to diversify its ESOP assets conceivably could confront

liability for failure to comply with plan documents").

           In considering whether the presumption that an ESOP

fiduciary who has invested in employer securities has acted

consistently with ERISA has been rebutted, courts should be

cognizant that as the financial state of the company

deteriorates, ESOP fiduciaries who double as directors of the

corporation often begin to serve two masters.   And the more

uncertain the loyalties of the fiduciary, the less discretion it

has to act.   Indeed, "'[w]hen a fiduciary has dual loyalties, the

prudent person standard requires that he make a careful and

impartial investigation of all investment decisions.'" Martin v.

Feilen, 965 F.2d at 670 (citation omitted).   As the Feilen court

stated in the context of a closely held corporation:
          [T]his case graphically illustrates the risk
          of liability that ESOP fiduciaries bear when
          they act with dual loyalties without
          obtaining the impartial guidance of a
          disinterested outside advisor to the plan.
          Because the potential for disloyal self-
          dealing and the risk to the beneficiaries
          from undiversified investing are inherently
          great when insiders act for a closely held
          corporation's ESOP, courts should look
          closely at whether the fiduciaries

                                 44
          investigated alternative actions and relied
          on outside advisors before implementing a
          challenged transaction.

Id. at 670-71.    And, if the fiduciary cannot show that he or she

impartially investigated the options, courts should be willing to

find an abuse of discretion.

          When all is said and done, this is precisely the

argument Moench makes in this case:     that the precipitous decline

in the price of Statewide stock, as well as the Committee's

knowledge of its impending collapse and its members' own

conflicted status, changed circumstances to such an extent that

the Committee properly could effectuate the purposes of the trust

only by deviating from the trust's direction or by contracting

out investment decisions to an impartial outsider.

          Because the record is incomplete, we cannot determine

whether the Committee is entitled to summary judgment. Therefore,

we will remand the matter to the district court for further

proceedings in which the record may be developed and the case may

be judged on the basis of the principles we set forth.0

                 D.   Failure to bring derivative action

          Moench and the Secretary of Labor appear to argue that

the district court erred by failing to address Moench's claim
0
Moench contends that he raised a number of other fiduciary
breaches before the district court, independent of the
Committee's investment in Statewide stock. Furthermore, Moench
contended at oral argument that the Committee engaged in self-
dealing prohibited by ERISA. This opinion is limited to the
issues discussed; it is up to the district court to determine
whether these other claims are adequately plead, and if so, how
to proceed with them.

                                   45
that the Committee violated ERISA by failing to file a claim

against Statewide's directors on behalf of the ESOP.

            Actually, Moench's argument is somewhat unclear.   In

his statement of issues presented, Moench asks whether "ERISA

[is] violated when pension plan administrators exonerate

themselves of personal liability to the plan by excluding the

plan from participation in the settlement of a class action

securities fraud suit against some of the plan administrators,

and by letting limitations run out without investigating the

wisdom of the plan bringing its own securities fraud suit?"0      Br.

at 1.   However, the corresponding portion of the brief's argument

section is entitled "Failure to have the ESOP pursue any

securities fraud claim was a prejudicial and actionable breach of

fiduciary duty."    Br. at 24 (emphasis added).   In that section,

Moench argues that "the defendant[s] . . . clearly and

unequivocally had a duty to pursue a derivative action against

three of their own number as well as the plan sponsor, whom the

members served as corporate directors."    Br. at 27.   For his

part, the Secretary of Labor makes a different, more general

argument:    "The district court did not address the plaintiff's

claim that the defendants breached their fiduciary duties under

ERISA by failing to take steps on the ESOP's behalf as

0
The record shows that a shareholder's derivative action was
filed against Statewide, Lerner v. Statewide Bancorp., Civ. No.
90-1552, which named, among others, three of the defendants in
this suit. That action eventually settled, and the ESOP was
excluded from the settlement.

                                 46
shareholder to remedy corporate fiduciary breaches committed by

FNBTR's directors."    Amicus Br. at 23.

           The confused arguments urged on this appeal, and the

conflicting descriptions of what was raised in the district

court, is not surprising, considering that Moench made an

entirely different argument before the district court.     The issue

of the Committee's duty to take affirmative legal action was

raised below only as part of a still different argument that

"[t]here are numerous questions of fact surrounding defendants'

conflict of interest."    Plaintiff's Mem. of Law in Opp. to Def.

Mot. for Sum. Jud. at 25.     Moench argued in the district court

that "the defendants, having knowledge that the bank was

fraudulently understating the true extent of its financial

difficulties, had a duty to act on this knowledge, even if it was

not public knowledge.    Moreover, this duty may have included a

duty to bring a derivative action on behalf of the ESOP, even if

it meant suing themselves as directors."    Id. at 29 (emphasis

added).   It appears from a fair reading of his brief in the

district court -- though it is by no means crystal clear -- that

Moench was urging that the Committee breached its ERISA duties by

failing either to resign as ESOP trustees or to assign the

investment decisions to an independent outside source.    Thus,

Moench concluded the conflict of interest section in the brief

below by stating:     "It is submitted that after receipt of the

March 1990 OCC report, and the filing of the Lerner action, these
two duties [of director and ESOP fiduciary] became

irreconcilable."    Id. at 30.

                                  47
          At any rate, our resolution of the issues discussed

above, which requires that we vacate the grant of summary

judgment and hence resurrects Moench's complaint, makes it

unnecessary for us to reach this issue.     Upon remand, Moench may

seek to file a motion to amend his complaint to make clear

precisely what he is arguing on this score.0
                        III.   Conclusion

          For the foregoing reasons, we will vacate the district

court's order of September 21, 1994, granting summary judgment on

counts 1, 2, and 4 of the amended complaint, and will remand the

matter to the district court for further proceedings consistent

with this opinion.

0
We stress that the standard of review we apply over an ESOP
fiduciary's investment decisions does not necessarily apply over
a claim that an ESOP fiduciary failed to take action to protect
the ESOP assets. If the district court reaches this "failure to
sue" issue on remand, it should determine in the first instance
the appropriate standard of review. In making that
determination, the court should consider whether Struble
controls.

                                48