Raymond Pfeil v. State Street Bank and Trust Co

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 12a0048p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

RAYMOND M. PFEIL and MICHAEL KAMMER, X

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Individually and on behalf of all others

similarly situated, -

Plaintiffs-Appellants, -

No. 10-2302

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v.

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STATE STREET BANK AND TRUST COMPANY,

Defendant-Appellee. -

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Appeal from the United States District Court

for the Eastern District of Michigan at Detroit.

No. 09-12229—Denise Page Hood, District Judge.

Argued: October 7, 2011

Decided and Filed: February 22, 2012

Before: MARTIN and GRIFFIN, Circuit Judges; ANDERSON, District Judge.*

_________________

COUNSEL

ARGUED: Geoffrey M. Johnson, SCOTT & SCOTT, LLP, Cleveland Heights, Ohio,

for Appellants. Wilber H. Boies, McDERMOTT WILL & EMERY LLP, Chicago,

Illinois, for Appellee. ON BRIEF: Geoffrey M. Johnson, SCOTT & SCOTT, LLP,

Cleveland Heights, Ohio, for Appellants. Wilber H. Boies, Nancy G. Ross,

McDERMOTT WILL & EMERY LLP, Chicago, Illinois, Chris C. Scheithauer,

McDERMOTT WILL & EMERY LLP, Irvine, California, James D. VandeWyngearde,

PEPPER HAMILTON LLP, Southfield, Michigan, for Appellee. Elizabeth S. Goldberg,

UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., Kent A. Mason,

DAVIS & HARMAN LLP, Washington, D.C., for Amici Curiae.

*

The Honorable S. Thomas Anderson, United States District Judge for the Western District of

Tennessee, sitting by designation.

1

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 2

_________________

OPINION

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S. THOMAS ANDERSON, District Judge. Raymond M. Pfeil and Michael

Kammer, individually and on behalf of others similarly situated, allege that State Street

Bank and Trust breached its fiduciary duty under the Employee Retirement Income

Security Act (“ERISA”). State Street was the fiduciary for the two primary retirement

plans offered by General Motors, and the plaintiffs were plan participants. The plaintiffs

allege that State Street breached its fiduciary duty by continuing to allow participants to

invest in GM common stock, even though reliable public information indicated that GM

was headed for bankruptcy. The district court dismissed the complaint, holding that State

Street’s alleged breach of duty could not have plausibly caused losses to the plan. For

the reasons set forth below, we REVERSE the judgment of the district court and

REMAND the case for further proceedings.

I. BACKGROUND

A. Factual Background

General Motors offered separate defined contribution 401(k) profit-sharing plans

to its salaried and hourly employees. The plans maintained individual accounts for each

participant. A participant’s benefits were based on the amount of contributions and the

investment performance of the contributions. According to the complaint, the plans

offered participants several investment options, including mutual funds, non-mutual fund

investments, and the subject of this litigation: the General Motors Common Stock Fund.

Participants had control over how their funds were invested. The plans imposed no

restrictions on the participant’s allocation of assets among the investment options and

gave participants the discretion to change their allocation in any investment on any

business day. The plans invested each participant’s funds by default in the Pyramis

Strategic Balanced Fund, and not the General Motors Common Stock Fund.

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 3

The plan documents explain that the purpose of the General Motors Common

Stock Fund was “to enable Participants to acquire an ownership interest in General

Motors and is intended to be a basic design feature” of the plans. The complaint alleges

that the plans invested between $1.45 billion and $1.9 billion in plan assets in General

Motors stock during the class period. The plan documents provide that this fund “shall

be invested exclusively in [General Motors] $1-2/3 par value common stock without

regard to” diversification of assets, the risk profile of the investment, the amount of

income provided by the stock, or fluctuations in the market value of the stock. However,

the plans state that these restrictions do not apply if State Street, acting as the

independent fiduciary:

in its discretion, using an abuse of discretion standard, determines from

reliable public information that (A) there is a serious question concerning

[General Motors’] short-term viability as a going concern without resort

to bankruptcy proceedings; or (B) there is no possibility in the short-term

of recouping any substantial proceeds from the sale of stock in

bankruptcy proceedings.

In the event either of these conditions were met, the plan documents directed State Street

to divest the plans’ holdings in the General Motors Common Stock Fund.

State Street became fiduciary for the plans on June 30, 2006, at a time, as the

plaintiffs allege, when General Motors was already in serious financial trouble. The

complaint alleges that General Motors’ troubles were well-documented and that

commentators increasingly opined that bankruptcy protection was “virtually a certainty”

for the company. On July 15, 2008, GM Chief Executive Officer Rick Wagner

announced that the company needed to implement a restructuring plan to combat second

quarter 2008 losses, which he described as “significant.” As part of the plan, General

Motors eliminated its dividend, reduced its salaried workforce by twenty percent, and

curtailed truck and large vehicle production, all signs of what plaintiff contend was a

“potential disaster for shareholders.” The complaint alleges that on August 1, 2008,

General Motors announced a third quarter net loss of $15.5 billion. These bleak reports

forced the company to acknowledge in its November 7, 2008 third-quarter financials that

it would exhaust cash reserves by mid-2009. Three days later, General Motors filed its

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 4

Form 10-Q for third quarter 2008, disclosing that its auditors had “substantial doubt”

regarding the company’s “ability to continue as a going concern.” The plaintiffs allege

that under these circumstances, State Street should have recognized as early as July 15,

2008, that General Motors was bound for bankruptcy and that GM stock was no longer

a prudent investment for the plans.

On November 21, 2008, State Street informed participants that it was suspending

further purchases of General Motors Common Stock Fund citing “GM’s recent earnings

announcement and related information about GM’s business.” The plaintiffs allege,

however, that State Street took no further action to divest the over fifty million shares

of General Motors stock held by plan participants at that time. On March 31, 2009, State

Street finally decided to sell off the plans’ holdings in company stock and completed the

sell-off on April 24, 2009. General Motors filed its bankruptcy petition on June 1, 2009.

B. Procedural History

The plaintiffs filed their putative class action on June 9, 2009, alleging State

Street’s breach of fiduciary duty in violation of ERISA § 409(a), 29 U.S.C. § 1109(a).

Specifically, the complaint alleged that State Street had failed to prudently manage the

plan’s assets thereby breaching its fiduciary duty defined in ERISA § 404. The named

plaintiffs brought this action on behalf of themselves and a class of individuals defined

as: “All persons who were participants in or beneficiaries of the [General Motors 401(k)

Plans] at any time between July 15, 2008 and April 24, 2009 (the ‘Class Period’) and

whose accounts included investments in General Motors Stock.”

State Street filed a motion to dismiss the complaint for failure to state a claim,

which the district court granted on September 30, 2010. The district court held that the

plaintiffs had sufficiently pleaded a breach of State Street’s fiduciary duty by alleging

that State Street continued to operate the General Motors Common Stock Fund after

public information raised serious questions about General Motors’ short-term viability

as a going concern without resort to bankruptcy. However, the district court concluded

that the plaintiffs had not plausibly alleged that State Street’s breach proximately caused

losses to the plans. The district court emphasized that plan participants had a menu of

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 5

investment options from which to choose and that participants retained control over the

allocation of assets in their accounts at all times. Because the participants could have

elected to move their funds from the General Motors Common Stock Fund to one of the

other investments offered in the plan, the court reasoned, State Street could not be liable

for losses to the plan. Therefore, the district court granted State Street’s motion to

dismiss. The plaintiffs’ timely appeal followed.

II. ANALYSIS

A. Standard of Review

We review de novo a dismissal for failure to state a claim under Rule 12(b)(6).

Ohio ex. rel. Boggs v. City of Cleveland, 655 F.3d 516, 519 (6th Cir. 2011). A complaint

must “contain sufficient factual matter, accepted as true, to state a claim to relief that is

plausible on its face” in order to survive a motion to dismiss. Ashcroft v. Iqbal, 129

S. Ct. 1937, 1949 (2009) (internal quotations and citations omitted); Ctr. for Bio-Ethical

Reform, Inc. v. Napolitano, 648 F.3d 365, 369 (6th Cir. 2011). A claim is facially

plausible if the “plaintiff pleads factual content that allows the court to draw the

reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal,

129 S. Ct. at 1949 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)).

B. Duty of a Fiduciary under ERISA

“ERISA is a comprehensive statute designed to promote the interests of

employees and their beneficiaries in employee benefit plans.” Shaw v. Delta Air Lines,

Inc., 463 U.S. 85, 90 (1983). ERISA § 404(a), 29 U.S.C. § 1104(a)(1), establishes the

fiduciary duties of trustees administering plans governed by ERISA:

[A] fiduciary shall discharge his duties with respect to a plan solely in the

interest of the participants and beneficiaries and –

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 6

(B) 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;

(C) by diversifying the investments of the plan so as to minimize the risk

of large losses, unless under the circumstances it is clearly prudent not

to do so; and

(D) in accordance with the documents and instruments governing the

plan.

“We have explained that the fiduciary duties enumerated in [the statute] have three

components.” Gregg v. Transp. Workers of Am. Int’l, 343 F.3d 833, 840 (6th Cir. 2003).

First, a fiduciary owes a duty of loyalty “pursuant to which all decisions regarding an

ERISA plan must be made with an eye single to the interests of the participants and

beneficiaries.” Id. (quoting Kuper v. Iovenko, 66 F.3d 1447, 1458 (6th Cir. 1995)

(internal quotations marks omitted)). Second, ERISA imposes “an unwavering duty to

act both as a prudent person would act in a similar situation and with single-minded

devotion to [the] plan participants and beneficiaries.” Id. (internal quotation marks and

citation omitted). Third, ERISA fiduciaries must act for the exclusive purpose of

providing benefits to plan participants and beneficiaries. Id. “[T]he duties charged to

an ERISA fiduciary are the highest known to the law.” Chao v. Hall Holding Co., Inc.,

285 F.3d 415, 426 (6th Cir. 2002) (citation and internal quotation marks omitted).

ERISA holds a fiduciary who breaches any of these duties personally liable for any

losses to the plan that result from its breach of duty. Kuper, 66 F.3d at 1458 (citing 29

U.S.C. § 1109(a)).

It is undisputed in this case that the plans at issue are a specific kind of ERISA

plan known as Employee Stock Ownership Plans (“ESOPs”). ERISA authorizes certain

kinds of eligible individual account plans (“EIAP”) including ESOPs. 29 U.S.C.

§ 1107(d). An ESOP is an ERISA plan investing primarily in “qualifying employer

securities,” which is most commonly the stock of the employer creating the plan.

29 U.S.C. § 1107(d)(6)(A). An ESOP promotes a policy of employee ownership of a

company by modifying the fiduciary duty to diversify plan investments, 29 U.S.C.

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 7

§ 1104 (a)(1)(C), and the prudence requirement to the extent that it requires

diversification, 29 U.S.C. §§ 1104 (a)(1)(B); 1104 (a)(2). “[A]s a general rule, ESOP

fiduciaries cannot be held liable for failing to diversify investments, regardless of

whether diversification would be prudent under the terms of an ordinary non-ESOP

pension plan.” Kuper, 66 F.3d at 1458.

However, an ESOP fiduciary may be liable for failing to diversify plan assets

even where the plan required that an ESOP invest primarily in company stock. Id. at

1459. We have explained that ERISA’s statutory exemptions for ESOPs

do[ ] not relieve a fiduciary . . . from the general fiduciary responsibility

provisions of [§ 1104] which, among other things, require a fiduciary to

discharge his duties respecting the plan solely in the interests of plan

participants and beneficiaries and in a prudent fashion . . . nor does it

affect the requirement . . . that a plan must be operated for the exclusive

benefit of employees and their beneficiaries.

Id. at 1458 (citations omitted).

ESOP fiduciaries “wear two hats” as they “are expected to administer ESOP

investments consistent with the provisions of both a specific employee benefits plan and

ERISA.” Id. (quoting Moench v. Robertson, 62 F.3d 553, 569 (3d Cir. 1995) (internal

quotation marks omitted)). Put another way, an ESOP fiduciary must follow the plan

documents but only insofar as such documents and instruments are consistent with the

provisions of ERISA. Id. at 1457. In recognition of an ESOP fiduciary’s “two hats,” we

have adopted an abuse-of-discretion standard of review for an ESOP fiduciary’s decision

to invest in employer securities. Id. at 1459. A fiduciary’s decision to remain invested

in employer securities is presumed to be reasonable, the so-called Kuper or Moench

presumption. Id. A plaintiff may rebut the presumption “by showing that a prudent

fiduciary acting under similar circumstances would have made a different investment

decision.” Id.; accord Quan v. Computer Sciences Corp., 623 F.3d 870, 881–82 (9th

Cir. 2010); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254-56 (5th Cir. 2008).

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 8

C. Whether the Kuper/Moench Presumption Applies at the Pleadings Stage

While State Street is entitled to the Kuper/Moench presumption, we have not

addressed whether the presumption applies at the motion to dismiss stage. The Third

Circuit in Moench announced the presumption of reasonableness when considering an

evidentiary record on a motion for summary judgment. In Kuper, this Court adopted the

Moench presumption in reviewing the judgment of the district court, which was based

on the parties’ trial briefs, proposed findings of fact and conclusions of law, and the

stipulated record of the case. In this case the district court assumed the presumption

would apply at the pleadings stage and held that the plaintiffs pleaded sufficient facts to

rebut the presumption, particularly the allegations detailing General Motors’ precarious

financial situation during the class period and State Street’s decision to continue holding

GM stock as a plan asset.

We find no error in the district court’s holding that, accepting the allegations of

the complaint as true, the plaintiffs have pleaded facts to overcome the presumption.

The plaintiffs have alleged that State Street failed to follow the terms of the plans

themselves, which required State Street to divest the plans’ holdings in company stock

if “there is a serious question concerning [General Motors’] short-term viability as a

going concern without resort to bankruptcy proceedings.” According to the complaint,

on July 15, 2008, General Motors announced a restructuring plan designed to improve

cash flow and save the company. By November 10, 2008, GM disclosed that its auditors

had “substantial doubt” regarding the company’s “ability to continue as a going

concern.” Nevertheless, State Street did not begin to divest the plan of its GM common

stock holdings until March 31, 2009. Based on these allegations, the plaintiffs have

sufficiently pleaded that “a prudent fiduciary acting under similar circumstances would

have made a different investment decision” and thereby overcome the presumption of

reasonableness.

Because the plaintiffs have pleaded facts to overcome the presumption, we need

not decide whether the Kuper presumption creates a heightened pleading standard in

order to resolve this appeal. However, both parties have addressed this issue in their

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 9

briefs and at oral argument. We also recognize that many district courts in this Circuit

have confronted the issue and reached conflicting decisions. E.g. In re Regions Morgan

Keegan ERISA Litig., 741 F. Supp. 2d 844, 849 (W.D. Tenn. 2010) (noting that “[a]t

least fourteen district courts in this Circuit have addressed this issue . . .” and have

“overwhelmingly declined to apply the presumption of prudence” when considering a

motion to dismiss); Dudenhoeffer v. Fifth Third Bancorp, 757 F. Supp 2d 753, 758-59

(S.D. Ohio 2010) (holding that the presumption applied at the pleadings stage in light

of Twombly and Iqbal). Therefore, we take this opportunity to address whether a

plaintiff must plead enough facts to overcome the Kuper presumption in order to survive

a motion to dismiss.

Today, we hold that the presumption of reasonableness adopted in Kuper is not

an additional pleading requirement and thus does not apply at the motion to dismiss

stage. Our holding derives from the plain language of Kuper itself where we explained

that an ESOP plaintiff could “rebut this presumption of reasonableness by showing that

a prudent fiduciary acting under similar circumstances would have made a different

investment decision.” Kuper, 66 F.3d at 1459 (emphasis added). The presumption of

reasonableness in Kuper was cast as an evidentiary presumption, and not a pleading

requirement. Cf. In re Citigroup ERISA Litig., 662 F.3d 128, 129 (2d Cir. 2011) (“The

‘presumption’ is not an evidentiary presumption; it is a standard of review applied to a

decision made by an ERISA fiduciary.”). We also highlight that in Kuper we applied

the presumption to a fully developed evidentiary record, and not merely the pleadings.

As such, a plaintiff need not plead enough facts to overcome the presumption in order

to survive a motion to dismiss.1 Cf. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 510

(2002) (holding that a plaintiff was not required to plead all of the prima facie elements

1

We also note that many district courts in this Circuit have reached a similar conclusion. See e.g.

Sims v. First Horizon Nat’l Corp., No. 08-2293, 2009 WL 3241689, at *24 (W.D. Tenn. Sept. 30, 2009);

In re Diebold ERISA Litig., No. 06-cv-170, 2008 WL 2225712, at * 9 (N.D. Ohio May 28, 2008); In re

Goodyear Tire & Rubber Co. ERISA Litig., 438 F. Supp. 2d 783, 793 (N.D. Ohio 2006); In re Ferro Corp.

ERISA Litig., 422 F. Supp. 2d 850, 860 (N.D. Ohio 2006); In re CMS Energy ERISA Litig., 312 F. Supp.

2d 898, 914 (E.D. Mich. 2004); Rankin v. Rots, 278 F. Supp. 2d 853, 866 (E.D. Mich. 2003); see also

Tullis v. UMB Bank, N.A., 515 F.3d 673, 681 (6th Cir. 2008) (rejecting heightened pleading requirements

in ERISA cases that “would elevate form over substance”).

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 10

of the McDonnell Douglas evidentiary framework in order to survive a motion to

dismiss).

Our holding is consistent with the standard of review for motions to dismiss

generally. Courts are required to accept the well-pleaded factual allegations of a

complaint as true and determine whether those allegations state a plausible claim for

relief. Napolitano, 648 F.3d at 369. It follows that courts should not make factual

determinations of their own or weigh evidence when considering a motion to dismiss.

Precisely because the presumption of reasonableness is an evidentiary standard and

concerns questions of fact, applying the presumption at the pleadings stage, and

determining whether it was sufficiently rebutted, would be inconsistent with the Rule

12(b)(6) standard. Otherwise, courts would be forced to weigh the facts pleaded against

their notion of the presumption and then determine whether the pleadings plausibly

overcame the presumption of fiduciary reasonableness.

For example, State Street contends that the district court erred in concluding that

the facts alleged in the complaint were sufficient to rebut the presumption. Specifically,

State Street argues that there was a widely publicized expectation of government

intervention on GM’s behalf, and therefore, it was not unreasonable for the plans to

continue to hold GM stock during the class period. State Street also asserts that holding

GM stock continued to be reasonable until the White House “with all of its resources and

expertise” determined on March 31, 2009, that GM’s “viability as a going concern was

in serious doubt.” Appellee’s Br. 42. State Street maintains that no amount of discovery

will change these asserted facts. The possibility of federal intervention and its effect on

the reasonableness of holding company stock, however, present questions of fact

inappropriate for resolution on a motion to dismiss. State Street’s argument about a

possible bailout does nothing to establish that the numerous, detailed factual averments

in the complaint fail to plausibly allege that General Motors was on the road to

bankruptcy and thus had ceased to be a prudent investment for the plans. Short of

converting the motion to dismiss into a motion for summary judgment, such an approach

also invites courts to consider facts and evidence that have not been tested in formal

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 11

discovery.2 Therefore, it would be improper for a court to weigh these factual assertions

against the facts pleaded in the plaintiffs’ complaint in order to determine whether the

plaintiffs had overcome the presumption of reasonableness.

Finally, we recognize that sister circuits have reached the opposite conclusion

and held that the Kuper presumption should be considered at the pleadings stage. State

Street cites this authority in support of its assertion that the plaintiffs must plead facts

to overcome the presumption in order to state a plausible claim. We find these decisions

distinguishable because these circuits have adopted more narrowly-defined tests for

rebutting the presumption than the test this Court announced in Kuper. For instance, the

Third Circuit in Edgar v. Avaya affirmed the dismissal of a complaint, holding that the

pleadings failed to allege facts demonstrating that the fiduciary abused its discretion by

not divesting the plans of their holdings in company stock. 503 F.3d 340, 348-49 (3d

Cir. 2007). Concerning the kinds of facts required to overcome the presumption of

reasonableness, the Third Circuit explained that a plaintiff need not necessarily prove

that a company is “on the brink of bankruptcy” but must demonstrate more than possible

fraud or corporate wrongdoing in order to rebut the presumption. Id. at 349 n.13. The

Third Circuit declined to find that corporate developments likely to have a negative

effect on earnings, “or the corresponding drop in stock price [from $10.69 to $8.01],

created the type of dire situation which would require defendants to disobey the terms

of the Plans by not offering the Avaya Stock Fund as an investment option, or by

divesting the Plans of Avaya securities.” Id. at 348. The Third Circuit expressly

rejected the plaintiff’s contention that application of the presumption at the motion to

dismiss stage was inconsistent with liberal notice-pleading standards. Id. at 349. The

Third Circuit held that the allegations themselves affirmatively showed that the company

was far from the sort of deteriorating financial circumstances that would permit the

2

Of course, even on a motion to dismiss, courts retain the discretion to take judicial notice of

certain adjudicative facts under Federal Rule of Evidence 201. See Fed. R. Evid. 201(c) & (f) (“Judicial

notice may be taken at any stage of the proceeding.”). Likewise, courts may consider written instruments

incorporated into the pleadings by reference pursuant to Rule 10(c). Nothing in our holding limits the

courts’ discretion to employ these Rules to consider uncontested facts or exhibits at the pleadings stage.

We simply conclude that applying the presumption of reasonableness to the pleadings is likely to force

courts to weigh factual assertions and run afoul of the standard of review for motions to dismiss.

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 12

presumption to be rebutted, commenting that “‘[m]ere stock fluctuations, even those that

trend downward significantly, [were] insufficient to establish the requisite imprudence

to rebut the Moench presumption.’” Id. (quoting Wright v. Oregon Metallurgical Corp.,

360 F.3d 1090, 1099 (9th Cir. 2004)) (alterations in original).

The Second Circuit recently reached a similar conclusion that courts should

apply the presumption of reasonableness when analyzing the plausibility of the pleadings

on a motion to dismiss. In re Citigroup ERISA Litig., 662 F.3d at 140–41. The plaintiffs

in Citigroup alleged that the bank had made “ill-advised investments in the subprime-

mortgage market while hiding the extent of those investments from Plan participants and

the public.” Id. at 140. As a result of the investments, the company suffered $30 billion

in losses, and Citigroup stock lost significant value. Id. The Second Circuit explained

that in order to rebut the presumption of reasonableness, plaintiffs might not necessarily

have to plead the company’s “impending collapse” but must allege a “dire situation.”

Id. at 140–41. The Second Circuit affirmed the district court’s dismissal of the prudence

claim under Rule 12(b)(6), holding that “plaintiffs fail to allege facts sufficient to show

that defendants either knew or should have known that Citigroup was in the sort of dire

situation that required them to override Plan terms in order to limit participants’

investments in Citigroup stock.” Id. at 141. The Second Circuit stressed that even had

the fiduciary investigated Citigroup’s exposure to the sub-prime mortgage market, the

company’s losses and “the dire situation” in which it found itself during the class period

were not foreseeable. Id.

We note that in addition to the Second and Third Circuits, the Fifth and Ninth

Circuits have also adopted a rebuttal standard in cases involving the presumption of

reasonableness, in which plaintiffs are required to come forward with some proof of

“dire circumstances” or the “impending collapse” of the company. Quan, 623 F.3d at

882 (holding that a plaintiff must prove facts that “clearly implicate the company’s

viability as an ongoing concern or show a precipitous decline in the employer’s stock

combined with evidence that the company is on the brink of collapse or is undergoing

serious mismanagement”) (internal quotations marks, citations, and ellipsis omitted);

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 13

Kirschbaum, 526 F.3d at 255 (affirming summary judgment in fiduciary’s favor in

absence of evidence that company’s “viability as a going concern was ever threatened”

or that the company’s stock “was in danger of becoming essentially worthless”). The

Fifth and Ninth Circuits have also commented that the strength of the presumption

depends on other factors such as the amount of discretion given to the fiduciary under

the terms of the plan and any conflicts of interest the fiduciary may have. Quan, 623

F.3d at 883 (“A guiding principle, however, is that the burden to rebut the presumption

varies directly with the strength of a plan’s requirement that fiduciaries invest in

employer stock.”) (citing Kirschbaum, 526 F.3d at 255 & n. 9). Unlike the Second and

Third Circuits, however, the Fifth and Ninth Circuits have not addressed whether a

plaintiff must plead enough facts to rebut the presumption of reasonableness to survive

a motion to dismiss.

In contrast to our sister circuits, 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.” The rebuttal standard adopted in this

Circuit, and the one which we are bound to follow, requires a plaintiff to prove that “a

prudent fiduciary acting under similar circumstances would have made a different

investment decision.” Kuper, 66 F.3d at 1459. This formulation establishes an abuse

of discretion standard, much like the one set out in the plan documents at issue here, and

forces plaintiffs in cases of this type to carry a demanding burden. At the same time, this

standard retains enough flexibility to address the unique circumstances that might give

rise to a breach-of-duty claim against an ESOP fiduciary, whether the company is one

with small capitalization or a corporation “too big to fail.” We recognize that ESOP

plaintiffs, having had an opportunity to conduct formal discovery, may come forward

with rebuttal proofs of many kinds, depending on the facts of each case. Because

Kuper’s standard for rebutting the presumption is not as narrowly defined to require

proof of a “dire situation” or an “impending collapse,” we find it inappropriate to apply

it to the pleadings on a motion to dismiss, making the contrary decisions of other circuits

distinguishable.

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 14

Even if we applied the Kuper standard to the pleadings in this case, we conclude

that the plaintiffs have plausibly alleged that a prudent fiduciary acting under similar

circumstances would have made a different investment decision with respect to GM

stock. In fact, we agree with the district court that the plaintiffs in this case have

plausibly alleged that General Motors was on the brink of bankruptcy, under

circumstances that would more than satisfy the “dire situation” standard of the Second,

Third, Fifth and Ninth Circuits and arguably rise to the level of the “impending collapse”

of the company.

In sum, we conclude that the better course is to permit the lower courts to

consider the presumption in the context of a fuller evidentiary record rather than just the

pleadings and their exhibits. Therefore, we hold that while a complaint must plead facts

to plausibly allege that a fiduciary has breached its duty to the plan, the pleadings need

not overcome the presumption of reasonableness in order to survive a motion to dismiss.

D. Whether the Plaintiffs Adequately Pleaded that State Street Proximately

Caused Their Losses

The district court granted State Street’s motion to dismiss based on its conclusion

that the plaintiffs had failed to plausibly plead a causal connection between State Street’s

alleged breach of duty and losses to the plan. The district court concluded that because

plan participants could direct their investments by choosing from a menu of investment

options and had the discretion to avoid GM stock altogether, State Street should not be

held liable for the plaintiffs’ decisions to stay invested in the General Motors Common

Stock Fund. In other words, “State Street cannot be held liable for actions which

Plaintiffs controlled.” We disagree.

While it is true that the plaintiffs must eventually prove causation to prevail on

their claims, see Kuper, 66 F.3d at 1459, the plaintiffs have plausibly pleaded causation

to survive State Street’s motion to dismiss. In order to establish a causal connection

between State Street’s alleged breach of duty and losses to the plan, the plaintiffs need

only show “a causal link between the [breach of duty] and the harm suffered by the

plan,” meaning “that an adequate investigation would have revealed to a reasonable

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 15

fiduciary that the investment [in GM stock] was improvident.” Id. at 1459-60 (internal

quotations and citations omitted). The plaintiffs allege that State Street allowed the

plans to continue to hold GM stock well after it became imprudent to do so and thereby

breached its duty to the plan. See Compl. ¶¶ 7-10, 71-72. According to the pleadings,

GM stock ceased to be a prudent investment on July 15, 2008, the date on which GM

announced its restructuring plan in response to its “significant” second quarter losses.

State Street did not make the decision to divest the plans of their GM stock holdings

until March 31, 2009. The plaintiffs allege that the plan suffered hundreds of millions

of dollars in losses as a result of State Street’s delay.3 Based on these allegations, the

complaint has sufficiently pleaded a causal link between State Street’s breach and losses

to the plans.

The district court erroneously relied on the fact that the plaintiffs had the ability

to divest their 401(k) accounts of the GM stock on any given business day and held that

State Street’s alleged breach did not cause the losses to the plan. We hold that as a

fiduciary, State Street was obligated to exercise prudence when designating and

monitoring the menu of different investment options that would be offered to plan

participants. See Howell v. Motorola, Inc., 633 F.3d 552, 567 (7th Cir.), cert. denied sub

nom. Lingis v. Dorazil, 132 S. Ct. 96 (2011); DiFelice v. U.S. Airways, Inc., 497 F.3d

410, 418 n.3 (4th Cir. 2007); Langbecker v. Elec. Data. Sys. Corp., 476 F.3d 299, 312

(5th Cir. 2007). As the Seventh Circuit explained, “[t]he choice of which investments

will be presented in the menu that the plan sponsor adopts is not within the participant’s

power. It is instead a core decision relating to the administration of the plan and the

benefits that will be offered to participants.” Howell, 633 F.3d at 567. Therefore, “[i]t

is . . . the fiduciary’s responsibility . . . to screen investment alternatives and to ensure

that imprudent options are not offered to plan participants.” Id.; see also Hecker v.

Deere & Co., 569 F.3d 708, 711 (7th Cir. 2009) (rejecting the notion that a fiduciary

3

The plaintiffs need not ultimately prove that July 15, 2008 was the actual date on which it was

no longer reasonable to continue holding GM stock, only that the “imprudent date” for GM stock occurred

prior to March 31, 2009. The plaintiffs have alleged, for example, that in November 2008 GM’s own

auditors reported “substantial doubt” about the company’s “ability to continue as a going concern.”

Regardless of whether the actual “imprudent date” was in July 2008 or November 2008, the date is more

relevant to the amount of losses to the plan, and not the issue of causation.

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 16

“can insulate itself from liability by the simple expedient of including a very large

number of investment alternatives in its portfolio and then shifting to the participants the

responsibility for choosing among them”); accord Braden v. Wal-Mart Stores, Inc.,

588 F.3d 585, 596 (8th Cir. 2009) (holding that allegations that better investment options

existed were sufficient to state a claim for breach of fiduciary duty).

Here State Street had a fiduciary duty to select and maintain only prudent

investment options in the plans. Indeed, State Street’s engagement letter with GM

vested State Street with the “exclusive authority under each Plan and Trust to determine

whether the Company Stock Fund continue[d] to be a prudent investment option under

[ERISA].” Despite State Street’s fiduciary duty to protect plan assets, the district court

focused on the fact that plan participants had the power to reallocate their funds among

a variety of options, only one of which was the General Motors Common Stock Fund.

A fiduciary cannot avoid liability for offering imprudent investments merely by

including them alongside a larger menu of prudent investment options. Much as one bad

apple spoils the bunch, the fiduciary’s designation of a single imprudent investment

offered as part of an otherwise prudent menu of investment choices amounts to a breach

of fiduciary duty, both the duty to act as a prudent person would in a similar situation

with single-minded devotion to the plan participants and beneficiaries, as well as the

duty to act for the exclusive purpose of providing benefits to plan participants and

beneficiaries. Gregg, 343 F.3d at 840. Therefore, we reject the district court’s approach

because it would insulate the fiduciary from liability for selecting and monitoring the

menu of plan offerings so long as some of the investment options were prudent.

State Street also cannot escape its duty simply by asserting at the pleadings stage

that the plaintiffs themselves caused the losses to the plans by choosing to invest in the

General Motors Common Stock Fund. Such a rule would improperly shift the duty of

prudence to monitor the menu of plan investments to plan participants. The Seventh

Circuit opined that such a standard “would place an unreasonable burden on

unsophisticated plan participants who do not have the resources to pre-screen investment

alternatives.” Hecker, 569 F.3d at 711. While some plan participants undoubtedly

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 17

possess greater sophistication than others in these matters, the fact remains ERISA

charges fiduciaries like State Street with “the highest duty known to the law,” Kuper,

66 F.3d at 1458, which includes the duty to prudently select investment options and the

duty to act in the best interests of the plans. For this reason, we reject State Street’s

argument that plan participants, who enjoyed access to all of the same publicly-available

information about GM’s woes during the class period as State Street, caused the plan

losses. Aside from being an untested assertion of fact, we disagree that plaintiff-

participants should be held to the same standard of care as an ERISA fiduciary,

particularly in a matter that pertains to plan administration. If the rule were otherwise,

a fiduciary administering any 401(k) where participants direct their own investments

could always argue that the participant’s decision to hold the imprudent investment was

an intervening cause and avoid any liability. Therefore, we conclude that the plaintiffs

have pleaded enough facts to make plausible their claim of a causal link between State

Street’s conduct and the losses to the plan.

E. Whether Section 404(c) of ERISA Shields State Street from Liability

In ruling that the plaintiffs failed to adequately plead causation, the district court

relied in part on the safe harbor provision found in ERISA § 404(c). Specifically, it

stated that “Section 404(c) provides that a trustee of a plan is not liable for any loss

caused by any breach which results from the participant’s exercise of control over those

assets.” We hold that section 404(c) is not applicable at this stage of the case. Section

404(c) is an affirmative defense that is not appropriate for consideration on a motion to

dismiss when, as here, the plaintiffs did not raise it in the complaint.

Section 404(c) contains an exception to the fiduciary duties otherwise imposed

on plan administrators when the plans delegate control over assets directly to plan

participants or beneficiaries. The relevant portion of the statute, 29 U.S.C. § 1104(c),

states

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 18

(c) Control over assets by participant or beneficiary

(1)(A) In the case of a pension plan which provides for individual

accounts and permits a participant or beneficiary to exercise control over

the assets in his account, if a participant or beneficiary exercises control

over the assets in his account (as determined under regulations of the

Secretary) –

(i) such participant or beneficiary shall not be deemed to be a fiduciary

by reason of such exercise, and

(ii) no person who is otherwise a fiduciary shall be liable under this part

for any loss, or by reason of any breach, which results from such

participant’s or beneficiary’s exercise of control, except that this clause

shall not apply in connection with such participant or beneficiary for any

blackout period during which the ability of such participant or

beneficiary to direct the investment of the assets in his or her account is

suspended by a plan sponsor or fiduciary.

9 U.S.C. § 1104(c) (emphasis added).

The following example illustrates the policy rationale for the section 404(c) safe

harbor defense. “If an individual account is self-directed, then it would make no sense

to blame the fiduciary for the participant’s decision to invest 40% of her assets in Fund

A and 60% in Fund B, rather than splitting assets somehow among four different funds,

emphasizing A rather than B, or taking any other decision.” Howell, 633 F.3d at 567.

The safe harbor then “ensures that the fiduciary will not be held responsible for decisions

over which it had no control.” Id. (citing Mertens v. Hewitt Assocs., 508 U.S. 248, 262

(1993)).

Nevertheless, the fact that a plan participant or beneficiary exercises control over

plan assets does not automatically trigger the section 404(c) safe harbor. The statute

specifies that participant control is determined under the Department of Labor (“DOL”)

regulations. 29 U.S.C. § 1104(c)(1)(A). The DOL has promulgated detailed regulations

about the section 404(c) defense, defining the circumstances under which a plan qualifies

as a section 404(c) plan. The regulations include over twenty-five requirements that

must be met before a fiduciary may invoke the section 404(c) defense. See 29 C.F.R.

§ 2550.404c-1. One such requirement is that participants be provided with “an

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 19

explanation that the plan is intended to constitute a plan described in section 404(c) and

[the regulations].” Id. The regulation is consistent with the legislative history of

ERISA, which suggests that Congress was reluctant to extend the section 404(c) safe

harbor to include stock funds. H.R. Conf. Rep. No. 93-1280, at 305, reprinted in 1974

U.S.C.C.A.N. 5038, 5086. The regulations, accordingly, include particularly stringent

protections with respect to stock funds.

While we have not previously addressed the issue, we join other circuits in

recognizing that section 404(c) is an affirmative defense to a claim for breach of

fiduciary duty under ERISA, on which the party asserting the defense bears the burden

of proof. Hecker, 556 F.3d at 588; Allison v. Bank One Denver, 289 F.3d 1223, 1238

(10th Cir. 2002); In re Unisys Sav. Plan Litig., 74 F.3d 420, 446 (3d Cir. 1996); see

Langbecker, 476 F.3d at 309 (referring to § 404(c) as a “defense”). Courts generally

cannot grant motions to dismiss on the basis of an affirmative defense unless the plaintiff

has anticipated the defense and explicitly addressed it in the pleadings.4 Hecker, 556

F.3d at 588. Here, the complaint says nothing of the detailed requirements that a party

must establish in order to rely on the defense. For its part, State Street did not assert or

prove that it had complied with the requirements of the regulation to qualify for the safe

harbor. The district court had no basis for assuming that the plans at issue here met the

regulatory requirements for the section 404(c) defense. Therefore, we hold that the

district court erred in relying on the section 404(c) safe harbor defense at this stage of

the proceedings.

Moreover, even if the plans satisfied the regulations to qualify as section 404(c)

plans, we hold that the safe harbor defense does not apply under the circumstances

because it does not relieve fiduciaries of the responsibility to screen investments. The

Seventh Circuit recently held that “the selection of plan investment options and the

decision to continue offering a particular investment vehicle are acts to which fiduciary

duties attach, and that the [section 404(c)] safe harbor is not available for such acts.”

4

This fact is no less true even if the result is only “to delay the inevitable.” Appellee’s Br. 36

n.6.

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 20

Howell, 633 F.3d at 567; DiFelice, 497 F.3d at 418 n.3 (holding that “although section

404(c) does limit a fiduciary’s liability for losses that occur when participants make poor

choices from a satisfactory menu of options, it does not insulate a fiduciary from liability

for assembling an imprudent menu in the first instance”).

We find the Seventh Circuit’s reasoning persuasive. If the purpose of the safe

harbor is to relieve a fiduciary of responsibility “for decisions over which it had no

control,” Howell, 633 F.3d at 567, then it follows that the safe harbor should not shield

the fiduciary for a decision which it did control, such as the selection of plan investment

options. See also 29 C.F.R. § 2550.404c-1(d)(2)(i) (“[I]f a plan participant or

beneficiary of an ERISA section 404(c) plan exercises independent control over assets

in his individual account in the manner described in [the regulation],” then the

fiduciaries may not be held liable for any loss or fiduciary breach “that is the direct and

necessary result of that participant’s or beneficiary’s exercise of control.” (emphasis

added)).

This holding is also consistent both with the position taken by the Secretary of

Labor in her amicus curiae brief in this appeal and with the preamble to the regulations

implementing the safe harbor. See Final Regulation Regarding Participant Directed

Individual Account Plans (ERISA Section 404() Plans), 57 Fed. Reg. 46,906, 46,924

n.27 (Oct. 13, 1992) (explaining that “the act of designating investment alternatives . . .

in an ERISA section 404(c) plan is a fiduciary function to which the limitation on

liability provided by section 404(c) is not applicable”). We add that the Department of

Labor began a notice and comment rule-making proceeding in 2010 to revise its

regulations and “reiterate [the Department’s] long held position that relief afforded by

section 404(c) and the regulation thereunder does not extend to a fiduciary’s duty to

prudently select and monitor . . . designated investment alternatives under the plan.”

Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans,

73 Fed. Reg. 43,014, 43,018 (proposed July 23, 2008). The amended text of the 404(c)

regulation also provides that the safe harbor provision “does not serve to relieve a

fiduciary from its duty to prudently select and monitor any service provider or

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 21

designated investment alternative offered under the plan.” Fiduciary Requirements for

Disclosure in Participant-Directed Individual Account Plans, 75 Fed. Reg. 64,910,

64,946 (Oct. 20, 2010) (to be codified at 29 C.F.R. § 2550.404c-1(d)(2)(iv)). Although

the proposed amendment to the regulation is not binding or even owed any deference in

this case, it does provide additional, relevant support for the result we reach.

We recognize that the Fifth Circuit took a contrary view in a split opinion

considering a class certification motion and held that a fiduciary may be able to rely on

the safe harbor defense when presented with claims that it improperly selected and

monitored plan investment choices. Langbecker, 476 F.3d at 309. The court explained

that

a plan fiduciary may have violated the duties of selection and monitoring

of a plan investment, but § 404(c) recognizes that participants are not

helpless victims of every error. Participants have access to information

about the Plan’s investments, pursuant to DOL regulations, and they are

furnished with risk-diversified investment options. In some situations,

as happened here, many of the Participants will react to the company’s

bad news by buying more of its stock. Other Participants will . . . trade

their way to profit no matter the calamity that befell the stock. Section

404(c) contemplates an individual, transactional defense in these

situations, which is another way of saying that in participant-directed

plans, the plan sponsor cannot be a guarantor of outcomes for

participants.

Id. For the reasons state above, we disagree with this approach. But even were we were

to adopt it, State Street would only be able to raise the section 404(c) defense on an

individual basis at some later stage of the case, such as at the class certification stage,

but not on a motion to dismiss. However, we hold that section 404(c) does not provide

a defense to the selection of the menu of investment options that the plan will offer.

F. Whether the Plaintiffs are Collaterally Estopped

State Street argues that the plaintiffs are collaterally estopped from bringing this

action because the issues raised are “virtually identical” to issues decided by the Second

Circuit in Young v. General Motors Investment Management Corp., 325 F. App’x 31 (2d

Cir. 2009). In order to establish preclusion, State Street must show

No. 10-2302 Pfeil, et al. v. State Street Bank and Trust Co. Page 22

(1) the precise issue raised in the present case must have been raised and

actually litigated in the prior proceeding; (2) determination of the issue

must have been necessary to the outcome of the prior proceeding; (3) the

prior proceeding must have resulted in a final judgment on the merits;

and (4) the party against whom estoppel is sought must have had a full

and fair opportunity to litigate the issue in the prior proceeding.

Kosinski v. Comm’r, 541 F.3d 671, 675 (6th Cir. 2008) (citation omitted)

State Street has failed to establish the first element, that the precise issue raised

in this case was raised and actually litigated in a prior proceeding. The district court in

Young issued its decision on March 24, 2008. The plaintiffs in the case at bar allege that

State Street breached its duty at the earliest on July 15, 2008, several months after the

district court in Young granted summary judgment in favor of State Street and another

fiduciary on claims arising well before the ones at issue here. Therefore, putting aside

all the other requirements that must be established to invoke collateral estoppel, Young

could not have resolved the fiduciary breaches alleged to have occurred during the class

period in this case. Therefore, we hold that the plaintiffs are not collaterally estopped

from bringing this action.

For the reasons set forth above, we REVERSE the judgment of the district court

and REMAND the case for further proceedings.