Supreme Court Rejects “Presumption of Prudence” in ESOP CasesJune 2014
On June 25, 2014, the Supreme Court issued a decision in Fifth Third Bancorp v. Dudenhoeffer regarding the availability of relief against fiduciaries of an employee stock ownership plan (“ESOP”) for alleged breaches of the fiduciary duty of prudence in investing in employer stock.
The Court held that ESOP fiduciaries are not entitled to a special “presumption of prudence” when their decision to buy or hold employer stock is challenged in court. This is a departure from the previous trend among federal appellate courts – including in the Second Circuit – which had applied a fiduciary-friendly presumption of prudence in employee stock-drop cases brought under the Employee Retirement Income Security Act of 1974 (“ERISA”). To overcome the presumption, plaintiffs were required to show that fiduciaries knew or should have known that the employer faced dire circumstances and was on the brink of collapse. Under the Supreme Court’s Fifth Third Bancorp ruling, ESOP fiduciaries are now held to the same duty of prudence as are general ERISA fiduciaries, except that, in accordance with statute, no diversification requirement exists with respect to an ESOP's accumulation of employer stock.
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