U.S. Supreme Court to Hear ESOP Presumption of Prudence Case

The U.S. Supreme Court has agreed to hear another ERISA case in Dudenhoeffer v. Fifth Third Bancorp, involving whether the presumption of prudence typically available in stock drop cases should apply at the pleading stage of the lawsuit.

Many courts apply a presumption that fiduciaries act prudently when the plan requires them to invest in company stock. Inconsistent with a number of other appellate courts, the Sixth Circuit Court of Appeals held that this presumption of prudence is not available at the pleading stage. Generally, the presumption is only overturned in unusual cases where the company is facing impending insolvency or something close to it. Thus, plan sponsors are generally insulated from liability in situations involving merely a temporary (or longer) stock drop (due to the vagaries of the market or company related business conditions).

The U.S. Supreme Court agreed to decide whether the Sixth Circuit erred by holding that the participants were not required to allege in their complaint that the fiduciaries abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable.

ERIC members and trial members can read more here.