ERISA-Eleventh Circuit Adopts The Moench Presumption, And Uses It To Reject The Plaintiffs’ Claim That The Fiduciaries’ Failure To Divest Employer Stock Was Imprudent

In Lanfear v. Home Depot, Inc., No. 10-13002 (11th Cir. 2012), the plaintiffs had been participating in a retirement plan (the “Plan”) which contained an “eligible individual account plan” (an “EIAP”).The Plan was maintained by their employer, the Home Depot, Inc. (“Home Depot”). Participants were allowed to direct the investment of their accounts under the EIAP into a “Company Stock Fund”, which held shares of Home Depot stock. One of the plaintiffs’ claims was that the fiduciaries of the Plan, who are the defendants in this case, breached their fiduciary responsibilities under ERISA because they continued to purchase and failed to sell Home Depot stock held in the Company Stock Fund, even though they knew based on nonpublic information that the stock price probably was inflated (the “Prudence Claim”). The nonpublic information pertained to illegal chargebacks of merchandise to vendors and backdating of stock options by Home Depot.

As to the plaintiff’s Prudence Claim, the Court noted that the issue is whether the plaintiff’s allegations were sufficient to rebut the Moench Presumption, under which an ERISA fiduciary’s decision to increase and retain a plan’s investment in employer stock-when the fiduciary is not absolutely required to keep the plan invested in employer stock- is entitled to a presumption of prudence. In applying the Moench Presumtion, the Court: (1) adopted the Moench Presumption for the Eleventh Circuit; (2) held that the Moench Presumption is overcome when a fiduciary acts in compliance with the terms of the plan and the fiduciary could not have reasonably believed that the persons creating the plan (the “settlors”) would have intended for him to so act under the circumstances; and (3) held that the Moench Presumption may be applied at the motion to dismiss stage of litigation.

The Court then reviewed the plaintiffs’ complaint in view of the Moench Presumption. It said that the plaintiffs base their allegation that Home Depot stock was an imprudent investment on the change in its market price after the company released the earnings report reflecting the effect of the chargebacks. On February 18, 2005, the day before it released the report, Home Depot stock traded at $42.02 per share. By April 28, 2005, it had fallen by about 16.5% to $35.09. By July 22, 2005, however, the price had risen to $43.47, an increase of nearly 3.5% over the price of the stock before the report had been released. The Court termed these price changes as “mere stock fluctuations”, which are not sufficient to overcome the Moench Presumption. As such, the Court ruled that the plaintiffs’ Prudence Claim fails.

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