Wednesday, May 8, 2013

Participants' Stock-Drop Claims Overcome Moench Presumption in Wilmington Trust Litigation

The United States District Court for the District of Delaware ruled on May 3, 2013 that a group of participants challenging Wilmington Trust Corp.'s ("WT Corp.") decision to continue offering company stock in its defined contribution retirement plan alleged sufficiently dire circumstances to overcome the presumption of prudence that shields plan fiduciaries from liability. See In re Wilmington Trust Corp. ERISA Litigation, D. Del., No. 1:10-cv-01114-SLR, 5/3/13. The participants alleged that WT Corp. stock price declined by 90 percent during a period in which plan fiduciaries failed to acknowledge the “concerns of its banking peers” regarding problems in the housing and commercial real estate market. The Court denied the fiduciaries' motion to dismiss this claim, finding that the participants pleaded facts sufficient to overcome the presumption of prudence.
However, the Court did dismiss claims of failure to disclose material information and failure to properly monitor the plan's investment committee.
By way of background, according to the complaint, the plaintiffs each invested in WT Corp. stock through their individual accounts in the WT Corp. Thrift Savings Plan. In December 2010, they filed a proposed class action against WT Corp. and related individuals and entities challenging the plan's investment in company stock during a period in which the stock price declined by 90 percent.
According to the complaint, WT Corp. increased its exposure to commercial real estate and construction loans throughout 2007 and failed to acknowledge the “concerns of its banking peers” regarding the viability of the housing market as late as January 2008. In April and May 2008, WT Corp. “continued to assert that its construction and home loan portfolios were locally focused and not suffering from the deteriorating housing market conditions in the rest of the country,” the participants alleged. By December 2009, WT Corp.'s commercial real estate and construction loans made up about 22 percent of its loan portfolio, which the participants claimed was “twice that of other banks.” By the time WT Corp. was acquired by M&T Bank Corp. in 2011, its stock price fell 90 percent from $43.19 per share in January 2007 to $4.45 per share in May 2011. The complaint alleged that the defendants' continued investment of plan assets in WT Corp. stock breached their ERISA fiduciary duties of care, loyalty, and monitoring. The complaint also challenged the defendants' alleged withholding of material information about plan investments.
In evaluating the participants' claim of breach of the fiduciary duty of care, the Court applied the Moench presumption, which requires plaintiffs to point to a plan sponsor's impending collapse or other dire circumstances to show that a reasonable plan fiduciary would have divested the plan of employer stock. The Moench presumption, articulated by U.S. Court of Appeals for the Third Circuit in Moench v. Robertson, 62 F.3d 553,  (3d Cir. 1995), is frequently cited as a grounds for dismissal of employer stock-drop cases.The Court determined that the Moench presumption applied, because the plan language directed the fiduciaries to “primarily invest in common stock of the Employer.” Under this standard, the Court found that the participants' complaint demonstrated that WT Corp. “continued to make construction loans after its peers acknowledged the housing market decline” and “seemingly turn[ed] a blind eye to the market's decline.” Further, WT Corp. relied on “outdated appraisals for its loan decisions” throughout the class period. Given these allegations, the Court concluded that the participants set forth allegations that “plausibly suggest a dire enough situation to support an abuse of discretion by the fiduciaries (at least, sufficient to permit discovery).”The Court also allowed the participants to proceed with their claim of breach of the fiduciary duty of loyalty. The participants asserted that the compensation of certain individual defendants “was tied to the performance of WT Corp's stock and that they had information that was inconsistent with the rosy picture of WT Corp's financial condition they continued to paint as corporate officers.” Although the Court cautioned that “the mere fact that compensation is tied to stock prices…is not necessarily enough to show the existence of a breach,” it found that the participants' allegations were sufficient to withstand the motion to dismiss.
The Court agreed with the defendants that the participants failed to state a claim for violations of ERISA's disclosure requirements. According to the Court, the plan description and written communications provided the participants with information regarding plan investments and associated risks, including summaries of past performance and warnings against fluctuations resulting from market conditions. These activities satisfied ERISA's disclosure obligations, the court concluded.The Court also dismissed the participants' claim that WT Corp.'s chief executive officer breached the duty to properly appoint, monitor, and oversee the committee responsible for determining plan investments. According to the Court, “even if [the CEO] had informed the Committee of the true financial and operating condition of WT Corp, the Committee was precluded from doing anything with that information until the information was publicly disclosed.”