In a case echoing from the high-profile automobile bankruptcies of recent years, a panel of the Sixth Circuit recently considered Rule 12(b)(6) dismissal of a class action alleging breach of fiduciary duty under ERISA as to two retirement plans for certain General Motors employees. In Pfeil v. State Street Bank & Tr. Co. (6th Cir., No. 10-2302, Feb. 22, 2012) (PDF), plan participants sued the retirement plans’ fiduciary, State Street Bank and Trust, alleging that State Street wrongly failed to recognize in July 2008 that GM was bound for bankruptcy and therefore failed to timely divest the plans’ holdings in GM stock. In reversing the district court’s dismissal of the lawsuit, the Court also expressly ruled on whether a “presumption of reasonableness” should be applied in the context of dismissal, ultimately arriving at a different conclusion than several of its sister circuits.
At issue in Pfeil were two specific forms of ERISA plans known as Employee Stock Ownership Plans (ESOPs). These ESOPs were defined contribution 401(k) profit-sharing plans that allegedly invested between $1.45 billion and $1.9 billion in plan assets in GM stock during the class period. The ESOPs required their fiduciary, State Street, to determine, pursuant to reliable public information, whether a serious question existed as to GM’s short-term viability as a going concern without resort to bankruptcy; where State Street made such a determination, the plans required State Street to divest holdings in GM stock. The plaintiffs alleged that various public reports about GM’s infirmities were available sufficient by July 2008 to have caused State Street to conclude that GM was headed toward bankruptcy and to divest the stock. In fact, State Street did reach such a conclusion and sold GM stock in the spring of 2009, and GM filed its bankruptcy petition on June 1, 2009. The district court dismissed under Rule 12, concluding that the plaintiffs had failed to plausibly allege that State Street’s putative breach had proximately caused losses to the ESOPs.
Writing for a unanimous panel that included Circuit Judges Martin and Griffin, District Judge S. Thomas Anderson of the Western District of Tennessee reversed the district court. The Court relied significantly upon a prior decision of the Sixth Circuit, Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995), which held that an ESOP fiduciary’s decision to remain invested in employer securities is presumed to be reasonable. But whereas Kuper had been decided in the context of trial briefs and a stipulated record, in Pfeil the district court had applied the presumption in the context of dismissal. The Court “recognize[d] that many district courts in this Circuit have confronted the issue and reached conflicting decisions,” and so it “t[ook] this opportunity to address whether a plaintiff must plead enough facts to overcome the Kuper presumption in order to survive a motion to dismiss” — ultimately concluding that the presumption of reasonableness in Kuper did not apply at dismissal.
In doing so, the Court recognized that several of its sister circuits had concluded otherwise. In Edgar v. Evaya, 503 F.3d 430 (3d Cir. 2007), the Third Circuit affirmed a dismissal premised upon a presumption of reasonableness, and the Second Circuit followed suit in In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir. 2011). The Court further noted that the Fifth and Ninth Circuits have adopted a rebuttal standard in cases involving presumption of reasonableness, though they had not reached the specific question of applicability to dismissal. The Court parted ways with its sister circuits, noting that “we have not adopted a specific rebuttal standard that requires proof that the company faced a ‘dire situation,’ something short of ‘the brink of bankruptcy’ or an ‘impending collapse.’” Instead, the Sixth Circuit applies the standard in Kuper, in which a plaintiff must prove that “‘a prudent fiduciary acting under similar circumstances would have made a different investment decision’” (quoting Kuper). Because the Kuper standard was “not as narrowly defined” as those of its sister circuits, the Court found those circuits’ contrary decisions to be “distinguishable.”
It remains to be seen whether this circuit split will attract the attention of the Supreme Court, which has addressed a number of pleading cases in recent years. If not, the ultimate impact of Pfeil may not be felt for several years, until the ruling works its way through the Circuit’s previously fractured district courts.