RESPONDENT: John Dudenhoeffer, et al.
LOCATION: Fifth Third Bank Headquarters
DOCKET NO.: 12-751
DECIDED BY: Roberts Court (2010-2016)
CITATION: 573 US (2014)
GRANTED: Dec 13, 2013
ARGUED: Apr 02, 2014
DECIDED: Jun 25, 2014
Facts of the case
John Dudenhoeffer and Alireza Partivopanah are former employees of Fifth Third Bank and are participants in the Fifth Third Bancorp Master Profit Sharing Plan, an employee stock ownership plan (ESOP), which is a defined contribution retirement fund for employees with Fifth Third as a trustee. Participants make voluntary contributions to the ESOP from their salaries and Fifth Third matches the contributions by purchasing Fifth Third stock for their individual accounts. During the time period in question, a large amount of the ESOP's assets were invested in Fifth Third stock. Also during this period, Fifth Third switched from being a conservative lender to a subprime lender and the portfolio became increasingly vulnerable to risk, which it failed to disclose. The price of the stock declined drastically and caused the ESOP to lose tens of millions of dollars. The respondents sued Fifth Third and argued that Fifth Third breached its fiduciary duty as imposed by the Employee Retirement Income Security Act (ERISA) by continuing to invest in Fifth Third stock despite having knowledge of its increasingly precarious value. The federal district court granted Fifth Third's motion to dismiss and held that the plaintiffs failed to state a claim for which relief could be granted because under ERISA, the investment decisions made by ESOP fiduciaries are presumed to be prudent. The U.S. Court of Appeals for the Sixth Circuit reversed and held that, while ESOP fiduciaries have a presumption of prudence, this presumption was an evidentiary matter and thus not grounds for a motion to dismiss.
Did the U.S. Court of Appeals for the Sixth Circuit err by holding that the respondents were not required to plausibly allege that Fifth Third abused its discretion by remaining invested in the employer stock in order to overcome the presumption that the decision to invest in the stock was reasonable?
Media for Fifth Third Bancorp v. DudenhoefferAudio Transcription for Oral Argument - April 02, 2014 in Fifth Third Bancorp v. Dudenhoeffer
Audio Transcription for Opinion Announcement - June 25, 2014 in Fifth Third Bancorp v. Dudenhoeffer
Justice Breyer has the opinion of the Court in two cases this morning.
The -- the first case is called the Fifth Third Bancorp v. Dudenhoeffer is pretty technical case.
It has to do with the ERISA, the Federal Pension Law in which is technical.
And one thing it does require, ERISA, is that all the fiduciaries act prudently and it's about prudent action.
Was it prudent what they did?
And this particular fiduciary had a fund which is a special kind of fund, it's called an employee stock option -- stock ownership plan and it's known as an ESOP.
So the case is about ESOPs and ERISA.
And an ESOP is special in that all the investment goes to the stock of the company, that's the employers.
So if you have an ESOP, then all of that money will be invested in your company's stock.
That's the idea of it.
And now the question here is well there were plaintiffs who said that because these fiduciaries got information about what was going on in 2007 and the company involved, the Fifth Third Bancorp had a lot of investments, I guess, in subprime mortgages.
They say that that fiduciary should have stopped buying the stock in the company and should have probably instead sold the stock, or at least not bought more.
All right, now that's the basic idea.
But we took the case because in many different Circuit Courts, they have come up with what's called a presumption that favors the defendant such as -- and they've said it differently.
They've said it differently.
For example, the Third Circuit says an ESOP fiduciary who invest the ESOP's assets and employer stock is entitled to a presumption that it acted consistently with the statute.
Then another circuit says well you have to have an impending collapse or serious mismanagement or the like before the plaintiff can win.
And so, we were taking this case to decide what is the right presumption or is there some kind of presumption when you sue a fiduciary for acting imprudently in respect to an ESOP.
Well our conclusion is there is no such presumption, it doesn't exist.
Now ESOP says that fiduciaries are exempt from the usual requirement which is there in the statute that a fiduciary has to diversify the investment and that's logical because the whole point of the ESOP is to invest all the money in just one stock namely that of the employer company and we don't see why an -- the statute says that.
It says they're exempt from the requirement to diversify.
So you don't need a presumption if you're a defendant in that kind of case.
And of course, there are other kinds of cases in which you could say as a plaintiff that the ESOP fiduciary acted imprudently.
It could arise in a situation that doesn't involve diversification.
And there, we don't see any reason why the defendant ought to have a presumption in its favor in that kind of case because in respect to that kind of case, that defendant is no different from any other fiduciary.
The ESOP probably has nothing to do with it, so that's the basic holding.
But the basic argument against that is well this presumption has served a useful purpose as the defendant, because it has prevented a lot of meritless cases from going forward.
We said, well that may be true but there are many, many rules in the law that try to prevent baseless cases from going forward.
And we give some examples here involving this case.
For example, they are arguing in this case that a reason that the fiduciary acted imprudently is that based upon information that was public in 2007, the fiduciary should've known that the stock of this publicly traded company, based on publicly available information, was too high.