ERISA-Sixth Circuit Rules That Plaintiffs State A Claim For Breach Of Fiduciary Duty Based On SEC Filings Incorporated By Reference In An SPD

In Dudenhoefer v. Fifth Third Bancorp, No. 11-3012 (6th Cir. 2012), the plaintiffs were appealing the dismissal of their case by the district court. The plaintiffs are former employees of defendant Fifth Third Bank (the “Bank”), and were participants in the Fifth Third Bancorp Master Profit Sharing Plan (“the Plan”). The Plan is a defined contribution retirement plan, for which the Bank serves as trustee. Participants could direct their account balances in the Plan among various options, including a fund holding Bank common stock (“Bank Stock Fund”). The Bank chose to incorporate by reference the Bank’s SEC filings into the Plan’s Summary Plan Description (the “SPD”).

The plaintiffs allege that the Bank switched from being a conservative lender to a subprime lender, that its loan portfolio became increasingly at risk due to defaults, and that it either failed to disclose the resulting damage to the company and its stock or provided misleading disclosures. The price of the Bank’s common stock declined 74% during the period covered by the suit, July 19, 2007 through September 18, 2009, causing the Bank Stock Fund and thus the Plan to lose tens of millions of dollars. The plaintiffs said that the Bank breached its ERISA fiduciary duties by continuing to offer and failing to divest the Plan of Bank stock (the “prudence claim”), and by failing to provide complete and accurate information about Bank stock (the “disclosure claim”).

The Sixth Circuit Court of Appeals (the “Court”) concluded that the plaintiffs had stated a claim of breach of fiduciary duty with respect to the prudence claim. It said that the complaint alleges facts indicating that an adequate (or even cursory) investigation would have revealed to a reasonable fiduciary that investment by the Plan in Bank stock was clearly imprudent. A prudent fiduciary acting under similar circumstances would have acted to protect participants against unnecessary losses, and would have made different investment decisions. The Court noted that the Sixth Circuit has adopted the Kuper/Moench presumption that the Bank acted prudently when keeping the Plan invested in Bank stock, but said that this presumption does not apply at the notice to dismiss stage-where the case stood at this point.

As to the disclosure claim, the Court said that a failure to disclose is a breach of the ERISA duty of loyalty. A fiduciary breaches this duty by making material misrepresentations or by failing to inform when the fiduciary knows that silence might be harmful. The threshold question is whether the Bank was acting as a fiduciary when it was making misrepresentations or was silent. Here, the Bank was acting as a fiduciary when incorporating the SEC filings into the SPD by reference. An SPD, a document ERISA requires to be sent to plan participants to provide specified information about the plan, is unquestionably a fiduciary communication. The Bank chose to provide Plan participants with selected information–alleged to include misrepresentations about the Bank and its stock–by incorporating only specifically enumerated SEC filings and specific future filings into the SPD. Thus, the incorporation is a fiduciary action and communication. The Court concluded that the complaint states a claim of breach of fiduciary duty with respect to the disclosure clam, as it alleges that the Bank intentionally incorporated the Bank’s SEC filings into the Plan’s SPD-a fiduciary action- and thereby conveyed misleading information to Plan participants-a possible breach of the duty of loyalty.

Since the Court concluded that the plaintiffs’ complaint states claims for breaches of fiduciary duty, the Court overturned the district court’s dismissal of the case, and remanded the case back to the district court for further proceedings.

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