ERISA-Sixth Circuit Rules That Plaintiffs Have Stated A Valid Claim Under ERISA In A Stock Drop Case

August 28, 2012

In Griffin v. Flagstar Bancorp, Inc., No. 11-1497 (6th Cir. 2012) (Unpublished Opinion), the plaintiffs were a class of participants and beneficiaries of the Flagstar Bank 401(k) Plan (the "Plan"). They alleged that Flagstar Bancorp, Inc. ("Flagstar") and certain officials had breached their fiduciary duties under ERISA with respect to the Plan. The core of their complaint was that it was imprudent for the Plan to have offered, during a defined period (the "class period"), Flagstar stock as an investment option to Plan participants. During that period, Flagstar stock dropped from a price of $14.95 per share to $0.681 per share, due to low earnings, losses and certain related events. The district court dismissed the plaintiffs' claim, and the plaintiffs appealed.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") ruled that the presumption of prudence for fiduciary duty pertaining to investment in employer stock-the so called Moench presumption as applied by the Sixth Circuit- is evidentiary in nature, and does not apply at the pleading stage. That is where the case stood at the time of dismissal. Also, the Court said that the fiduciaries in this case are not protected by the section 404c safe harbor under ERISA (found at 29 U.S.C. § 1104(c); 29 C.F.R. § 2550.404c-1). That safe harbor insulates fiduciaries from liability for damages occasioned by plan participants' exercise of control over their individual accounts. However, that safe harbor does not exempt fiduciaries from their duty to use prudence when designating and monitoring the menu of different investment options that are offered under the plan, the duty at issue here.

Further, the Court concluded that the plaintiffs have pleaded sufficient facts to raise a plausible claim-under Supreme Court decisions in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal- that the defendants breached their fiduciary duties under ERISA. In this case, the plaintiffs must aver a plausible claim that the defendants breached their fiduciary duty of prudence. More specifically, they must present a plausible claim that a prudent person would have discontinued offering Flagstar stock as an investment option at some point during the class period. After reviewing the factual allegations in the complaint--which go far beyond documenting a simple drop in stock price to recite announcements from Flagstar itself, statements by analysts and financial media publications, and actions taken by Flagstar suggesting a precarious financial situation--the Court concluded that the complaint raises a plausible claim for breach of fiduciary duty under ERISA.
Accordingly, the Court reversed the dismissal of the case by the district court, and remanded the case back to the district court for further proceedings.