Appellate Court Reopens Case Against State Street by GM Participants

The 6th U.S. Circuit Court of Appeals revived a stock drop lawsuit brought by General Motors retirement plan participants against State Street.

In reversing a lower court ruling, the appellate court recognized that Moench v. Robertson (see “IMHO: Prudent Mien?“) established that a fiduciary’s decision to remain invested in employer securities is presumed to be reasonable, but a plaintiff may rebut the presumption “by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision.”  

The 6th Circuit found no error in the U.S. District Court for the Eastern District of Michigan’s holding that, accepting the allegations of the complaint as true, the plaintiffs have pleaded facts to overcome the presumption. The plaintiffs alleged that State Street failed to follow the terms of the plans, which required State Street to divest the plans’ holdings in company stock if “there is a serious question concerning [General Motors’] short-term viability as a going concern without resort to bankruptcy proceedings.”   

According to the complaint, on July 15, 2008, General Motors (GM) announced a restructuring plan designed to improve cash flow and save the company. By November 10, 2008, GM disclosed that its auditors had “substantial doubt” regarding the company’s “ability to continue as a going concern.” Nevertheless, State Street did not begin to divest the plan of its GM common stock holdings until March 31, 2009. Based on these allegations, the plaintiffs have sufficiently pleaded that “a prudent fiduciary acting under similar circumstances would have made a different investment decision” and thereby overcome the presumption of reasonableness, the appellate court found.  

The 6th Circuit noted that in contrast to other circuits, it has not adopted a specific rebuttal standard that requires proof that the company faced a “dire situation,” something short of “the brink of bankruptcy” or an “impending collapse.” It concluded that the better course is to permit the lower courts to consider the presumption in the context of a fuller evidentiary record rather than just the pleadings and their exhibits.   

The appellate court disagreed with the district court’s conclusion that the plaintiffs had failed to plausibly plead a causal connection between State Street’s alleged breach of duty and losses to the plan. The district court concluded that because plan participants could direct their investments by choosing from a menu of investment options and had the discretion to avoid GM stock altogether, State Street should not be held liable for the plaintiffs’ decisions to stay invested in the General Motors Common Stock Fund.   

According to the 6th Circuit, while it is true that the plaintiffs must eventually prove causation to prevail on their claims, the plaintiffs have plausibly pleaded causation to survive State Street’s motion to dismiss. The plaintiffs allege that State Street allowed the plans to continue to hold GM stock well after it became imprudent to do so and thereby breached its duty to the plan. According to the pleadings, GM stock ceased to be a prudent investment on July 15, 2008, the date on which GM announced its restructuring plan in response to its “significant” second quarter losses. State Street did not make the decision to divest the plans of their GM stock holdings until March 31, 2009. The plaintiffs allege that the plan suffered hundreds of millions of dollars in losses as a result of State Street’s delay.  

The appellate court also held that as a fiduciary, State Street was obligated to exercise prudence when designating and monitoring the menu of different investment options that would be offered to plan participants. State Street had a fiduciary duty to select and maintain only prudent investment options in the plans. The opinion noted that State Street’s engagement letter with GM vested State Street with the “exclusive authority under each Plan and Trust to determine whether the Company Stock Fund continue[d] to be a prudent investment option under [ERISA].”

Despite State Street’s fiduciary duty to protect plan assets, the district court focused on the fact that plan participants had the power to reallocate their funds among a variety of options, only one of which was the General Motors Common Stock Fund. A fiduciary cannot avoid liability for offering imprudent investments merely by including them alongside a larger menu of prudent investment options, the 6th Circuit said. It found State Street also cannot escape its duty simply by asserting at the pleadings stage that the plaintiffs themselves caused the losses to the plans by choosing to invest in the General Motors Common Stock Fund. Such a rule would improperly shift the duty of prudence to monitor the menu of plan investments to plan participants.  

In ruling that the plaintiffs failed to adequately plead causation, the district court relied in part on the safe harbor provision found in ERISA § 404(c). Specifically, it stated that “Section 404(c) provides that a trustee of a plan is not liable for any loss caused by any breach which results from the participant’s exercise of control over those assets.” The appellate court held that section 404(c) is not applicable at this stage of the case. Section 404(c) is an affirmative defense that is not appropriate for consideration on a motion to dismiss when, as here, the plaintiffs did not raise it in the complaint.  

According to the opinion, the Department of Labor (DoL) has promulgated detailed regulations about the section 404(c) defense, defining the circumstances under which a plan qualifies as a section 404(c) plan. The regulations include over 25 requirements that must be met before a fiduciary may invoke the section 404(c) defense. For its part, State Street did not assert or prove that it had complied with the requirements of the regulation to qualify for the safe harbor. The district court had no basis for assuming that the plans at issue in the case met the regulatory requirements for the section 404(c) defense.   

The DoL filed an amicus brief in the case furthering the argument against the 404(c) defense (see "DoL Urges 6th Circuit to Reverse Ruling in Stock Drop Case").  

Therefore, the appellate court found that the district court erred in relying on the section 404(c) safe harbor defense at this stage of the proceedings.  

The opinion in Pfeil v. State Street Bank and Trust Company is available at