In February of 2012, the Sixth Circuit issued an opinion in Pfeil, et al. v. State Street Bank & Trust Co. reversing a district court’s dismissal of the case. The plaintiff in Pfeil, an employee at General Motors, brought suit against the fiduciary of a certain pension plan at GM known as an Employee Stock Ownership Plan (ESOP). The plaintiff claimed that the fiduciary violated their duty to act prudently in the management of the ESOP because the bank continued to purchase GM stock for the plan in 2008 and 2009 despite the financial struggles of GM. The district court dismissed the case stating that there is a presumption of prudence attached to the actions of the fiduciary. The Sixth Circuit reversed, finding that the presumption did not apply before the summary judgment stage of the case. Shortly after the Sixth Circuits decision in 2012, the Supreme Court granted certiorari in Dudenhoefer v. Fifth Third Bancorp, another Sixth Circuit case with similar facts, and eliminated the “presumption of prudence” altogether.

On Tuesday, the Sixth Circuit issued a divided opinion in Pfeil, et al. v. State Street Bank & Trust Co. upholding the district court’s grant of summary judgment in favor of State Street Bank. The case came back to the Sixth Circuit after the plaintiffs had been certified as a class consisting of all members in the GM ESOP between July of 2008 and March of 2009. As a result of the Supreme Courts holding in Dudenhoefer, the Sixth Circuit was unable to rely on the presumption of prudence to analyze the reasonableness of the bank’s decision to continue to purchase GM stock for the employee ESOP. However, the Sixth Circuit noted that an appeal of summary judgment could be review de novo, allowing the Court to affirm the judgment of the district court on any grounds supported by the record.

The majority applied the “prudent-process” standard to determine if the fiduciary, “at the time they engaged in the challenged transactions, employed [] appropriate methods to investigate the merits of the investment and to structure the investment.” Essential to this analysis was the concept of the Modern Portfolio Theory (MPT), which assumes that an organized securities market, like the market on which GM share are traded, is efficient enough that it is reasonable to assume that the security price on the market includes all information that is known or is knowable about the future prospects of the security. Following the example of the Supreme Court, the Sixth Circuit found that, while a presumption of prudence is no longer permissible, it is prudent to rely on market prices of securities barring some special circumstance. Because State Street Bank had performed internal investigations into the prudence of purchasing additional GM shares, and the plaintiffs had not presented sufficient evidence to challenge the defendant’s approach, the actions of the fiduciary were sufficiently prudent. The Sixth Circuit noted that the prudence of State Street Bank’s decision must be judged at the time the decisions were made, not in hindsight based on the performance of the investments.

Judge White dissented, stating that what is prudent for one type of investor may be imprudent for another. The dissent argued that the nature of the investment, namely a pension plan for employees, required additional attention by the fiduciary than a standard investment portfolio.

It appears clear from the opinion in Pfeil that the Sixth Circuit remains wary of interfering with the actions of investment groups simply because a different investment would have yielded stronger returns. In something resembling the business judgment rule, the Sixth Circuit stuck to the position that, as long as the methods used to analyze an investment are prudent, so too is the investment itself.