An Untrustworthy Presumption: Developing a Sound Standard for Stock-Drop Litigation

Abstract

On December 13, 2013, the Supreme Court granted certiorari in Fifth Third Bancorp v. Dudenhoeffer to determine the fate of the Moench presumption. The Moench presumption, which establishes a broad presumption of prudence for fiduciaries plans designed to invest in company stock, was adopted by the Third Circuit in 1995. The six circuits to subsequently consider the issue have also adopted the presumption.Under the Moench presumption, judicial review of fiduciaries’ decisions to purchase, hold, or sell company stock is subject to an abuse of discretion standard. To overcome the Moench presumption, plaintiffs must show the existence of a “dire situation” that threatens a company’s viability or renders the stock essentially worthless. Plaintiffs have experienced great difficulty in meeting this standard, which has effectively insulated fiduciaries from liability in all but the most extreme circumstances.This Note argues that the Moench presumption is unsound in both theory and practice because it is unsupported by the common law of trusts, ERISA, and public policy. This Note draws heavily from the common law of trusts and ERISA's prudent person standard to articulate and apply a doctrinally sound alternative standard that protects both plan participants and fiduciaries.