Donna Marie Coburn v. Evercore Trust Company, N.A.

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 13, 2016 Decided December 30, 2016
No. 16-7029
DONNA MARIE COBURN, ON BEHALF OF HERSELF AND ALL
OTHERS SIMILARLY SITUATED,
APPELLANT
v.
EVERCORE TRUST COMPANY, N.A.,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:15-cv-00049)
Peter W. Overs, Jr. argued the cause for the appellant.
Robert I. Harwood was with him on brief. Daniel M. Cohen
entered an appearance.
Jonathan D. Hacker argued the cause for the appellee.
Meaghan VerGow was with him on brief. Jeffrey W. Kilduff
entered an appearance.
Before: HENDERSON and ROGERS, Circuit Judges, and
EDWARDS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge HENDERSON.
2
Opinion concurring in the judgment filed by Circuit Judge
ROGERS.
Concurring opinion filed by Senior Circuit Judge
EDWARDS.
KAREN LECRAFT HENDERSON, Circuit Judge: Donna M.
Coburn, on behalf of herself and all others similarly situated,
appeals the district court’s dismissal of her complaint against
Evercore Trust Company, N.A. (Evercore) pursuant to the
Employee Retirement Income Security Act of 1974 (ERISA)
§§ 409, 502(a)(2)-(3), 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3).
Coburn, a former J.C. Penney employee and investor in a J.C.
Penney employee stock ownership plan (ESOP) managed by
Evercore, claims that Evercore breached its fiduciary duties of
prudence and loyalty when it failed to take preventative action
as the value of J.C. Penney common stock tumbled between
2012 and 2013, thereby causing significant losses. Despite
clear factual similarities, Coburn argues that the pleading
requirements outlined in Fifth Third Bancorp v. Dudenhoeffer,
__ U.S. __, 134 S. Ct. 2459 (2014), are inapplicable to her
allegations because she challenges Evercore’s failure to
appreciate the riskiness of J.C. Penney stock rather than
Evercore’s valuation of its price. We disagree and therefore
affirm the district court’s judgment.
I. Background
While Coburn was employed by J.C. Penney, the large
retailer offered its employees the opportunity to “save for their
retirement” by investing in the J.C. Penney Savings
Profit-Sharing and Stock Ownership Plan (the Plan). Its
defined contribution plan was an “employee pension benefit
plan” within the meaning of ERISA § 3(2)(A), 29 U.S.C.
§ 1002(2)(A), and an eligible individual account plan within
3
the meaning of ERISA § 407(d)(3), 29 U.S.C. § 1107(d)(3).
Once an employee opted into the Plan, she could allocate her
contribution among a variety of investment options. One of the
options was the Penney Stock Fund, an ESOP that consisted
largely of J.C. Penney common stock. This was the option
Coburn selected.
On December 17, 2009, Evercore became the designated
fiduciary and investment manager of the Penney Stock Fund.
In this role, Evercore had the authority to restrict or limit the
ability of Plan participants to purchase or hold J.C. Penney
stock, including the power to “eliminate the [Penney Stock
Fund] as an investment option under the Plan and to sell or
otherwise dispose of all of the Company Stock held in the
[Penney Stock Fund].” Evercore did not manage any other
investment option available through the Plan.
In 2011, J.C. Penney attempted to reconceptualize its
brand and hired former Apple, Inc. executive Ron Johnson as
its chief executive officer. Distancing himself from J.C.
Penney’s historic reliance on sales, coupons and rebates to
boost sales, Johnson implemented a more straightforward
pricing scheme, reasoning that a “fair and square” pricing
policy would attract shoppers. Johnson also reworked both the
Company logo and the traditional layout of its stores in an
effort to modernize. Taken as a whole, Johnson sought to bring
J.C. Penney up to speed with the fads and fashions of 2012,
simplifying the business model in order to lower expenses and
increase gross profit margins. This strategy proved to be less
than successful.
J.C. Penney’s 2012 first quarter earnings report showed a
$163 million loss, or a $0.75 loss per share. Johnson’s poor
start was only the beginning, as the next twenty-one
months—from the end of 2012’s first quarter to the end of
4
2013’s fourth quarter—saw J.C. Penney’s stock price fall from
$36.72 to $5.92 per share. As market analysts became
increasingly bearish regarding its stock, J.C. Penney cancelled
dividends for only the second time since 2006. The disastrous
performance led Johnson to a telling realization: the abandoned
coupons “were a drug” that “really drove traffic.” Johnson’s
tenure ended in April 2013.
Throughout the entire period that the value of J.C. Penney
common stock dipped ever lower, Evercore stood resolute.
Despite its authority to eliminate the Penney Stock Fund as an
investment option in the Plan and its ability to sell shares
currently in the Fund, Evercore exercised neither option. The
shares in the Penney Stock Fund that Coburn and other
investors owned took the full force of the hit. In 2015, Coburn
sued on behalf of herself and all others similarly situated,
alleging that Evercore was liable for $300 million in losses to
the Plan for having breached its fiduciary duty under ERISA §§
409, 502(a)(2)-(3), 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3).
On February 17, 2016, the district court granted
Evercore’s motion to dismiss the complaint for failure to state a
claim. Primarily relying on the United States Supreme Court’s
opinion in Dudenhoeffer, the district court held that Coburn’s
allegations that Evercore should have recognized from
publicly available information alone that continued investment
in J.C. Penney common stock was “imprudent” were generally
implausible absent “special circumstances” affecting the
market. Because Coburn failed to plead special
circumstances—indeed, Coburn expressly disclaimed any
need to plead them—the district court held that Coburn’s
complaint could not survive Evercore’s Rule 12(b)(6)
challenge. The district court also rejected Coburn’s alternative
argument that, pursuant to Tibble v. Edison International, __
U.S. __, 135 S. Ct. 1823 (2015), Evercore violated its fiduciary
5
“duty to monitor” investments and remove imprudent ones.
The court reasoned that Tibble did not affect the Dudenhoeffer
holding and thus could not save Coburn’s complaint. Coburn
timely filed her notice of appeal.
II. Analysis
We review de novo the dismissal of a complaint for failure
to state a claim. Taylor v. Reilly, 685 F.3d 1110, 1113 (D.C.
Cir. 2012). The familiar pair of Iqbal and Twombly guide the
analysis of a Rule 12(b)(6) motion to dismiss. Ashcroft v.
Iqbal, 556 U.S. 662 (2009); Bell Atl. Corp. v. Twombly, 550
U.S. 544 (2007). Under that precedent, a complaint must “state
a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at
678 (internal quotation marks omitted) (quoting Twombly, 550
U.S. at 570). That is, the complaint must include factual
allegations that, when taken as true, rise above a “speculative
level.” Twombly, 550 U.S. at 555. It is “a plaintiff’s obligation
to provide the grounds of his entitle[ment] to relief [with] more
than labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do.” Id. (first alteration in
original) (internal quotation marks omitted).
In Dudenhoeffer, the Supreme Court further refined
pleading requirements regarding “allegations that a fiduciary
should have recognized from publicly available information
alone that the market was over- or undervaluing the stock.”
See Dudenhoeffer, 134 S. Ct. at 2471; accord In re Lehman
Bros. Sec. & ERISA Litig., 113 F. Supp. 3d 745, 755 (S.D.N.Y.
2015) (noting that Dudenhoeffer “appears to have raised the
bar for plaintiffs seeking to bring a claim based on a breach of
the duty of prudence” (internal quotation marks omitted)
(emphasis removed)), aff’d sub nom. Rinehart v. Lehman Bros.
Holdings Inc., 817 F.3d 56, 66 (2d Cir. 2016). In
Dudenhoeffer, a putative class of employees brought a claim
6
against fiduciaries who oversaw an ESOP, alleging that they
had violated the duties of loyalty and prudence imposed by
ERISA §§ 409, 502(a)(2), 29 U.S.C. §§ 1109, 1132(a)(2).
Dudenhoeffer, 134 S. Ct. at 2464. Specifically, the
Dudenhoeffer plaintiffs alleged that the fiduciaries “knew or
should have known that [the employer company’s] stock was
overvalued and excessively risky,” in part because “publicly
available information such as newspaper articles provided
early warning signs” of the company’s financial troubles. See
id. The Dudenhoeffer fiduciaries, however, “continued to hold
and buy” the company’s stocks, a move that ultimately
“eliminated a large part of the retirement savings that the
participants had invested in the ESOP.” Id.
The Supreme Court affirmed the district court’s dismissal
of the complaint, holding that “where a stock is publicly traded,
allegations that a fiduciary should have recognized from
publicly available information alone that the market was over-
or undervaluing the stock are implausible as a general rule, at
least in the absence of special circumstances.” Id. at 2471.
Driving the Dudenhoeffer opinion was the recognition that
“investors . . . have little hope of outperforming the market in
the long run based solely on their analysis of publicly available
information, and accordingly they rely on the security’s market
price as an unbiased assessment of the security’s value in light
of all public information.” Id. at 2471 (internal quotation marks
omitted) (quoting Halliburton Co. v. Erica P. John Fund, Inc.,
__ U.S. __, 134 S. Ct. 2398, 2411 (2014)). Dudenhoeffer was
thus grounded in the efficient capital market theory—the
“theory that security prices reflect all available information.”
Yesha Yadav, How Algorithmic Trading Undermines
Efficiency in Capital Markets, 68 VAND. L. REV. 1607, 1632
(2015) (citing Eugene F. Fama, Efficient Capital Markets: A
Review of Theory and Empirical Work, 25 J. FIN. 383, 384
(1970)); Appellee’s Br. 11-12. Indeed, according to the
7
efficient capital market theory, a security price in an efficient
market “represents the market’s most accurate estimate of the
value of a particular security based on its riskiness and the
future net income flows that investors holding that security are
likely to receive.” Yadav, supra at 1633; accord Basic Inc. v.
Levinson, 485 U.S. 224, 246 (1988) (“[T]he market price of
shares traded on well-developed markets reflects all publicly
available information . . . .”). “Where efficient markets exist,
traders cannot profit by using existing information available in
the market, since this news should already be reflected in
securities prices.” Yadav, supra at 1633. Instead, a security’s
price fluctuates only on the “arrival of new information into the
exchange.” Id. (emphasis added). Echoing this theory,
Dudenhoeffer agreed that “[a] fiduciary’s ‘fail[ure] to outsmart
a presumptively efficient market . . . is . . . not a sound basis for
imposing liability.’” Id. at 2472 (quoting White v. Marshall &
Ilsley Corp., 714 F.3d 980, 992 (7th Cir. 2013)).
Thus, because a stock price on an efficient market reflects
all publicly available information, Dudenhoeffer requires
additional allegations of “special circumstances” when a
plaintiff brings a breach of the duty of prudence claim against a
fiduciary based on that information. Special circumstances, the
Court instructed, includes evidence questioning “the reliability
of the market price as an unbiased assessment of the security’s
value in light of all public information . . . that would make
reliance on the market’s valuation imprudent.” Id. (quoting
Halliburton Co., 134 S. Ct. at 2411) (internal quotation marks
omitted). This evidence may demonstrate that illicit forces
(such as fraud, improper accounting, illegal conduct, etc.) were
influencing the market, Smith v. Delta Air Lines Inc., 619 F.
App’x 874, 876 (11th Cir. 2015) (per curiam), or may
otherwise suggest that the market was not efficient and
therefore the market price of a security in that market was not
8
necessarily indicative of its underlying, fundamental value. 1
See id. Ultimately, “[Dudenhoeffer] suggested that the special
circumstances might include something like available public
information tending to suggest that the public market price did
not reflect the true value of the shares.” Allen v. GreatBanc Tr.
Co., 835 F.3d 670, 679 (7th Cir. 2016).
Applying Dudenhoeffer here, we believe Coburn’s claim
falls far short. Despite the Supreme Court’s instruction that
claims of imprudence based on publicly available information
must be accompanied by allegations of “special
circumstances,” Coburn acknowledges that she “did not allege
the market on which J.C. Penney stock traded was inefficient
. . . .” Appellant’s Br. 21. Quite clearly, then, if
Dudenhoeffer controls, Coburn’s complaint was properly
dismissed.2 Dudenhoeffer, 134 S. Ct. at 2471.
1
“An inefficient market, by definition, does not incorporate
into its price all the available information about the value of a
security.” Freeman v. Laventhol & Horwath, 915 F.2d 193, 198 (6th
Cir. 1990). In an inefficient market, it is plausible that a fiduciary
could act imprudently by not acting on publicly available
information because there is less assurance that that information has
already been incorporated into the security price. Cf. Dudenhoeffer,
134 S. Ct. at 2471. “[M]arket efficiency is a matter of degree and
accordingly . . . a matter of proof.” Halliburton Co., 134 S. Ct. at
2410. The degree to which a market must be inefficient to meet the
“special circumstances” bar need not be decided here—we leave that
question for another day.
2
In district court, Coburn also argued that Evercore violated a
continuing duty to monitor investments as set forth in Tibble, 135 S.
Ct. at 1828. Whereas Dudenhoeffer primarily focuses on allegations
of misvaluation in the marketplace, see 134 S. Ct. at 2471, Tibble
focuses on the prudence of holding particular investments over time,
requiring a fiduciary “to conduct a regular review of its investment
9
Perhaps recognizing the inadequacy of her claim under
Dudenhoeffer, Coburn instead attempts to distinguish
Dudenhoeffer, arguing that the additional pleading
requirements set forth therein are inapplicable to her
allegations. Appellant’s Br. 11-12, 19-20. Coburn insists that
her claim is not that Evercore over- or undervalued J.C. Penney
stock but instead that Evercore exposed her to “outsized and
unnecessary retirement savings risk” by failing to act as J.C.
Penney stock value dipped ever lower. Id. at 11. This risk
exposure, according to Coburn, was especially egregious given
that the purpose of the Penney Stock Fund was to help
employees like Coburn prepare for retirement—Evercore
should have recognized its investors’ low risk tolerance. Id. at
19-20. In a nutshell, then, Coburn argues that Evercore was
imprudent for continuing to hold J.C. Penney common stock
when it became increasingly and excessively risky—a claim
that should fall under Iqbal/Twombly instead of Dudenhoeffer.
with the nature and timing of the review contingent on the
circumstances.” 135 S. Ct. at 1827-28. It is conceivable, then, that
publicly available information that is insufficient to allege a
plausible claim against a fiduciary under Dudenhoeffer would
nonetheless be sufficient to survive a motion to dismiss under Tibble
if the fiduciary failed to “conduct a regular review” of its investment
in light of that publicly available information. See id. And indeed,
Coburn’s allegations—that Evercore “failed to engage in proper
monitoring of the [Penney] Stock Fund,” Joint Appendix 20—would
perhaps be sufficient to survive a motion to dismiss under Tibble.
Coburn failed, however, to make this argument on appeal—indeed,
Coburn does not cite Tibble once in her brief—and the argument is
therefore forfeited. Am. Wildlands v. Kempthorne, 530 F.3d 991,
1001 (D.C. Cir. 2008) (issues not raised in opening brief are forfeited
on appeal).
10
We disagree. 3 For one, the plaintiffs in Dudenhoeffer
itself made the same argument, specifically claiming that the
fiduciaries there should have known that the company stock
was both “overvalued and excessively risky.” Dudenhoeffer,
134 S. Ct. at 2464 (emphasis added). Without preamble, the
Supreme Court disposed of the risk-based claims through its
broad rule that “allegations that a fiduciary should have
recognized from publicly available information alone that the
market was over- or undervaluing the stock are implausible as
a general rule.” Id. at 2471. If the Supreme Court had no
difficulty in using its value-centric rule to dismiss a risk-based
claim by plaintiffs with similar risk tolerance, we have no
license to deviate therefrom here. See id.; Rinehart, 817 F.3d at
66 (“Although the language of [Dudenhoeffer] refers primarily
3
The factual premise on which Coburn’s argument rests is
itself faulty. Although we have previously recognized as a central
pillar of financial analysis that “past trend[s] can often be accepted as
a dependable index of the future,” Am. Airlines, Inc. v. Civil
Aeronautics Bd., 192 F.2d 417, 421 (D.C. Cir. 1951), this
acknowledgement is a far cry from the proposition that past market
trends will always continue into the future. If the latter proposition
were true, any investor with an elementary understanding of a put
option would be exceedingly wealthy after having shorted J.C.
Penney stock in 2012, the beginning of the class period. Instead, at
any given point, a security’s risk of loss is counterbalanced by the
possibility of gain and a stock price reflects, inter alia, the market’s
equilibrium point between those competing forces. See Cent. Nat’l
Bank of Mattoon v. U.S. Dep’t of Treasury, 912 F.2d 897, 901 (7th
Cir. 1990) (“The prices of the stocks of weak companies are bid
down in the market until those stocks yield the same risk-adjusted
expected return as the stocks of the strongest companies; otherwise
no one would hold stock in a weak company—the prices of such
stock would fall to zero.”). To the extent Coburn argues that
Evercore knew that J.C. Penney stock was certain to suffer future
losses because of past poor performance, see Appellant’s Br. 8
(“Evercore Saw It Coming”), we reject that claim as implausible.
11
to ‘over- or undervaluing’ stock, the . . . Court applied [the
heightened pleading] rule to the plaintiffs’ risk-based claims in
that case.”).
Additionally, well-reasoned decisions by our sister
circuits have also determined that risk-based claims must
nonetheless meet Dudenhoeffer’s pleading requirement to
survive a motion to dismiss. For example, in no uncertain
terms, the Second Circuit held that “the purported distinction
between claims involving ‘excessive risk’ and claims
involving ‘market value’ is illusory.” Rinehart, 817 F.3d at 66.
The Rinehart court agreed that Dudenhoeffer “foreclose[d]
breach of prudence claims based on public information
irrespective of whether such claims are characterized as based
on alleged overvaluation or alleged riskiness of a stock.” Id.
(emphases and internal quotation marks omitted) (quoting In re
Lehman Bros. Sec. & ERISA Litig., 113 F. Supp. 3d at 756).
The Sixth Circuit also followed this approach in Pfeil v. State
Street Bank and Trust Co., where it reiterated that the
“excessively risky character of investing ESOP funds in stock
of a company experiencing serious threats to its business . . . is
accounted for in the market price, and the Supreme Court held
that fiduciaries may rely on the market price, absent any
special circumstances affecting the reliability of the market
price.” 806 F.3d 377, 386 (6th Cir. 2015) (internal quotation
marks omitted) (quoting In re Citigroup ERISA Litig., 104 F.
Supp. 3d 599, 615 (S.D.N.Y. 2015)); accord Smith, 619 F.
App’x at 876 (complaint must plead “special circumstances”
whenever alleged breach stems from fiduciary’s failure to act
on public information).
Rinehart and Pfeil—like Dudenhoeffer—are grounded in
the efficient capital market theory. See Rinehart, 817 F.3d at
65-66; Pfeil, 806 F.3d at 386. In fact, Rinehart declares that
“viewing [Dudenhoeffer’s] rule as applicable to all allegations
12
of imprudence based upon public information—regardless of
whether the allegations are framed in terms of market value or
excessive risk—is consistent with the efficient market
hypothesis that risk is accounted for in the market price of a
security.” Rinehart, 817 F.3d at 66; accord Pfeil, 806 F.3d at
386 (noting that related Modern Portfolio Theory “rests on the
understanding that organized securities markets are so efficient
at discounting securities prices that the current market price of
a security is highly likely already to impound the information
that is known or knowable about the future prospects of that
security” (quoting JOHN H. LANGBEIN ET AL., PENSION AND
EMPLOYEE BENEFIT LAW 634 (5th ed. 2010))); Yadav, supra at
1633 (in efficient market, market’s most accurate estimate of
particular security’s value is based on its riskiness and future
net income flows investors holding that security are likely to
receive). We likewise reject Coburn’s claim that risk is
attenuated from price such that risk-based
allegations are totally free from Dudenhoeffer’s constraints. 4
See Dudenhoeffer, 134 S. Ct. at 2471. Because a stock price
fluctuates, in part, to achieve “the same risk-adjusted expected
return as the stocks of the strongest companies,” Cent. Nat’l
Bank of Mattoon v. U.S. Dep’t of Treasury, 912 F.2d 897, 901
4
Coburn herself provides ample evidence of the connection
between risk and value as, throughout her brief, she argues the risky
nature of J.C. Penney stock by highlighting past declines in the price
of the security. Appellant’s Br. 18 (“Even with ever decreasing stock
price value caused by the Company’s continually bad financial
performance, Evercore stood on the deck of the sinking ship of J.C.
Penney and did precisely nothing to protect the assets of the Plan and
its participants . . . .” (emphasis added)); Appellant’s Br. 21-22
(“Evercore should have discontinued investment in J.C. Penney
stock precisely because the steady decline of the Company’s stock
price ‘accurately tracked the company’s steadily worsening
fortunes.’” (emphasis added)).
13
(7th Cir. 1990), arguing that a stock is too risky to hold at
current market prices is part and parcel of the claim that that
stock is overvalued,5 see Dudenhoeffer, 134 S. Ct. at 2471.
5
Coburn’s attempt to bypass this reality is unpersuasive. As
noted above, stock prices fluctuate to achieve the same expected
return as the stocks of the strongest companies in the market. Cent.
Nat’l Bank of Mattoon, 912 F.2d at 901. This means that, inter alia, a
“risk discount” is applied to stocks of weaker companies—when a
stock becomes increasingly risky (and hence, its potential for loss
increases), its price falls so as to maintain the expected market rate of
return. See id. Here, however, Coburn argues that Evercore could not
rely on the market to apply an appropriate “risk discount” because
Penney Stock Fund investors had a lower risk tolerance than average
market investors. See Appellant’s Br. 19-21. The investors therefore
demanded a greater risk discount than the one applied by the market
at large and Evercore should have recognized that the market price of
J.C. Penney stock constituted an imprudent investment if this more
conservative risk discount were applied. See id.
Coburn’s argument fails, however, because she
mischaracterizes the risk tolerance of ESOP investors. “Congress, in
seeking to permit and promote ESOPs, was pursuing purposes other
than the financial security of plan participants.” Dudenhoeffer, 134
S. Ct. at 2467-68. Although the alternative purposes are insufficient
to create a presumption of prudence on the part of an ESOP
fiduciary, id. at 2470-71, they nonetheless reflect a clear reality:
Whatever evils [that exist in ESOPs] are endemic to
the ESOP form established by Congress. A benefit
of employees investing in their employer is that
when the employer does well, the employees do
well. A risk is that when the employer goes
bankrupt, the employees do poorly.
Pfeil, 806 F.3d at 387. Undiversified ESOPs are thus not fairly
characterized as “low-risk” investments because of their direct
14
For the foregoing reasons, the judgment of the district
court is affirmed.6
So ordered.
relationship to the fortunes of a single company. Cf. Terrence R.
Chorvat, Ambiguity and Income Taxation, 23 CARDOZO L. REV. 617,
630 (2002) (citing RICHARD A. BREALEY & STEWART C. MYERS,
PRINCIPLES OF CORPORATE FINANCE 153-56 (1996)) (elementary
principle of finance instructs “ceteris paribus, a diversified portfolio
of investments has less risk than an undiversified portfolio of
stocks”). We therefore reject the premise of Coburn’s claim that
Evercore should have considered its investors as low risk (i.e., that
Evercore should have applied an above-market risk discount) when
assessing the prudence of continued investment in J.C. Penney
common stock. This conclusion is in accord with Dudenhoeffer
itself, which—as noted above—rejected the risk-based claims of
ESOP investors with a similar risk tolerance. See supra at 10-11.
6
Because we conclude that Dudenhoeffer applies to Coburn’s
claim, we need not reach the question whether, absent Dudenhoeffer,
Coburn was nonetheless required to allege that J.C. Penney was “no
longer viable” in order to survive dismissal. See Appellant’s Br.
22-23.
ROGERS, Circuit Judge, concurring in the judgment. The
Employee Retirement Income Security Act (“ERISA”), 29
U.S.C. § 1001 et seq., was designed “to protect . . . the interests
of participants in employee benefit plans and their
beneficiaries.” Id. § 1001(b). Congress’ “massive undertaking,”
Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 44 (1987), followed
“almost a decade of studying the Nation’s private pension
plans,” and resulted in a complex and comprehensive statute,
Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359,
361 (1980), under which every employee benefit plan is to be
managed by fiduciaries subject to common law duties of care
and specific duties set forth in ERISA, 29 U.S.C. §§ 1102(a),
1104(a)(1). ERISA fiduciaries ordinarily have a duty to
diversify investments in retirement plans “so as to minimize the
risk of large losses.” Id. § 1104(a)(1)(C). But employee stock
ownership plans (“ESOP”) are different. Such plans, which
invest “primarily” in the stock of the employer’s company, id.
§ 1107(d)(6)(A), are exempt from the diversification
requirement, id. § 1104(a)(2), and serve multiple purposes,
generally to protect employees’ retirement savings and also to
provide capital growth funds, see Tax Reform Act of 1976,
§ 803(h), 90 Stat. 1590. Despite the risk of undiversified
retirement investments acknowledged in ERISA, see 29 U.S.C.
§ 1104(a)(1)(C), Congress has continued to use tax incentives to
encourage the creation of ESOPs, Fifth Third Bancorp v.
Dudenhoeffer, __ U.S. __, 134 S. Ct. 2459, 2469 (2014).
Coburn’s purported class action complaint, on behalf of
herself as a J.C. Penney ESOP participant and other current and
former employees who participated in the J.C. Penney ESOP,
alleged that Evercore Trust Company, N.A. (“Evercore”), the
J.C. Penney ESOP fiduciary, violated its duty of prudence by
failing “to evaluate the merits of the [ESOP’s] investments on
an ongoing basis and take all necessary steps to ensure that the
[ESOP’s] assets were invested prudently.” Compl. ¶ 67 (Jan.
2
13, 2015). According to the complaint, given the results of new
management initiatives beginning in 2012, Evercore “knew or
should have known that [J.C. Penney] stock was not a suitable
and appropriate investment for the [ESOP], but was, instead, a
highly speculative and risky investment in light of [J.C.
Penney’s] serious mismanagement and precarious financial
condition.” Id. ¶ 69. Further, it alleged that a loyal and prudent
fiduciary would “have in place a regular, systemic procedure for
evaluating the prudence of investment in [J.C. Penney] stock.”
Id. ¶ 70. More particularly, the complaint alleged that Evercore
should have ceased “to offer [J.C. Penney] stock as an
investment option for participant contributions in the [ESOP]
when [Evercore] knew that [J.C. Penney] stock no longer was a
prudent investment for participants’ retirement savings,” id.
¶ 77, and it “could not possibly have acted prudently when it
continued to invest the [ESOP’s] assets” in J.C. Penney stock,
id. ¶ 76.
Opposing Evercore’s motion to dismiss the complaint
pursuant to Federal Rule of Civil Procedure 12(b)(6), on the
ground the complaint “is identical to the claim alleged” and
rejected in Dudenhoeffer, Mem. in Supp. of Def. Evercore Trust
Co. N.A.’s Mot. to Dismiss 6, Apr. 13, 2015 (“Def.’s Motion”),
Coburn pointed to the Supreme Court’s May 18, 2015 decision
in Tibble v. Edison International, __ U.S. __, 135 S. Ct. 1823
(2015). She argued not only that Tibble “reconfirmed
[Evercore’s] fiduciary obligations under trust law and ERISA,”
but that Dudenhoeffer “is only relevant in cases where the stock
price is alleged to have been artificially inflated,” which “is not
alleged here.” Pl.’s Opp. to Def.’s Mot. to Dismiss 1, 10, June
12, 2015 (“Pl.’s Opposition”). Absent a claim that J.C. Penney
stock was either overvalued or undervalued, Coburn asserted she
did not need to plead special circumstances in order to survive
the motion to dismiss. Id. at 10–11. In Coburn’s view, Tibble
“clarified that the duty of prudence under ERISA includes a duty
3
to continually monitor the prudence of investments of plan
assets.” Id. at 9. Evercore responded that Tibble “says nothing
about whether Evercore breached the duty [to monitor] by
failing to foresee the future decline in the price of J.C. Penney
stock. . . . Dudenhoeffer already resolves this issue.” Reply
Mem. in Support of Def. Evercore Mot. to Dismiss 2–3, July 13,
2015.
Surprisingly, Coburn does not raise a Tibble contention on
appeal. See Op. 8 n.2; Concurring Op. 1 (Edwards, J.).
Consequently, the question before this court is whether
Dudenhoeffer is dispositive. The Supreme Court has confirmed
that the role of ESOP fiduciaries gives rise to the “tension”
between the “general duty of prudence” required of ERISA
fiduciaries and the authorization of non-diversified, high-risk
ESOPs. Amgen Inc. v. Harris, __ U.S. __, 136 S. Ct. 758, 759
(2016); see also Pfeil v. State St. Bank & Trust Co., 806 F.3d
377, 382–83 (6th Cir. 2015); Rinehart v. Lehman Bros. Holdings
Inc., 817 F.3d 56, 63–65 (2d Cir. 2016); Gedek v. Perez, 66 F.
Supp. 3d 368, 372–74 (W.D.N.Y. 2014); Concurring Op. 3–4
(Edwards, J.). But neither the economic theory underlying the
appropriate balancing of the duties owed by ESOP fiduciaries,
nor the theory of ESOPs, nor the interaction between Tibble and
Dudenhoeffer were briefed on appeal; Tibble itself is not
mentioned in the briefs. Instead, Coburn places no reliance on
economic theory. Her position on appeal is that “[c]ommon law
concepts of fiduciary duty . . . cannot be reconciled with
[Evercore’s] tortured reading which ignores Dudenhoeffer’s
distinguishable facts that made market efficiency a relevant
topic there, but not here.” Reply Br. 1. She accepts that
Evercore was an independent plan fiduciary with no inside
information about J.C. Penney’s prospects, see Appellant’s Br.
11, and focuses on common law obligations where there is a
“properly functioning efficient market,” Reply Br. 2.
4
Consequently it behooves the court not to endorse a
particular economic theory that could have unforeseen and even
unintended consequences in future ERISA litigation, much less
in a class action, where the issues are squarely presented and a
court must decide them. See Op. 6–8, 11–13. The economic
theories underlying ERISA, and ESOPs specifically, have been
the subject of much scholarship.1 Although some theories of
stock valuation and ESOP fiduciary responsibilities were
addressed in the district court, see, e.g., Def.’s Motion 11–13;
Pl.’s Opposition 11–13, on appeal the parties’ economic analysis
is limited to general principles of market efficiency. See
Appellant’s Br. 18–21; Resp’t’s Br. 11–12, 16–18. Coburn rests
her appeal on Dudenhoeffer’s “extensive teaching” with respect
to the common law of trusts to which she asserts ESOP
fiduciaries, no less than other ERISA fiduciaries, are held, Reply
Br. 2 (citing Dudenhoeffer, 134 S. Ct. at 2465, 2467, 2470), and
on the district court opinion in Gedek (which was not followed
by the Second Circuit Court of Appeals in Rinehart, 817 F.3d at
66 n.3). Hence, it is unnecessary for this court to weigh in on
the economic theory of ESOPs, much less elaborate upon the
economic theory implied by Dudenhoeffer. In this complex,
technical ERISA context, I would not venture further than is
necessary to decide Coburn’s appeal, and, as she has presented
it, Dudenhoeffer is controlling.
The legal theory in Coburn’s complaint is based nearly
verbatim on the complaint filed in Dudenhoeffer. Compare
1
For three different analytical approaches to ERISA, see, e.g.,
Catherine L. Fisk, Lochner Redux: The Renaissance of Laissez-Faire
Contract in the Federal Common Law of Employee Benefits, 56 OHIO
ST. L.J. 153 (1995); Sean M. Anderson, Risky Retirement Business:
How ESOPs Harm the Workers They are Supposed to Help, 41 LOY.
U. CHI. L.J. 1 (2009); Brendan S. Maher & Peter K. Stris, ERISA &
Uncertainty, 88 WASH. U. L. REV. 433 (2010).
5
Compl. ¶¶ 67–80 with Consol. Class Action Compl. for
Violations of the Emp. Ret. Income Sec. Act ¶¶ 228–240,
246–48, Dudenhoeffer v. Fifth Third Bancorp, 757 F. Supp. 2d
753 (S.D. Ohio 2010) (No. 08-cv-538) (“Dudenhoeffer
Compl.”). Those theories from the Dudenhoeffer complaint
were argued in the employees’ brief to the Supreme Court. See
Br. For Resp’ts, Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct.
2459 (2014) (No. 12-751). The employees urged the Court to
conclude, where ESOP fiduciaries “‘continued to allow the
Plan’s investment in Fifth Third Stock even during the time that
the stock price was declining in value as a result of [the]
collapse of the housing market’ . . . that ‘[a] prudent fiduciary
facing similar circumstances would not have stood idly by as the
Plan’s assets were decimated.’” Dudenhoeffer, 134 S. Ct. at
2471 (quoting Dudenhoeffer Compl. at 53).
The Supreme Court in Dudenhoeffer was thus faced with
virtually identical arguments to those Coburn brings to this
court. That Court rejected as “implausible” the employees’ view
that, based solely on publicly available information, a
fiduciary’s failure to divest from an ESOP whose stock price is
declining has violated the duty of prudence, “at least in the
absence of special circumstances.” Id. Coburn urges this court
to conclude that Dudenhoeffer is inapplicable because her claim
is not based on the over- or undervaluation of J.C. Penney stock,
but rather that class members’ “risk aversion as retirement
investors must also be taken into account by a fiduciary when
assessing the prudence of continued investment of retirement
funds over the long term.” Appellant’s Br. 14. In her view,
“Evercore should have discontinued investment in J.C. Penney
stock precisely because the steady decline of the Company’s
stock price ‘accurately tracked the company’s steadily
worsening fortunes.’” Id. at 21–22 (quoting Gedek, 66 F. Supp.
3d at 375). In this context, she concludes, no “special
circumstances” needed to be pleaded. Id. at 14.
 6
Whatever merit there might be to Coburn’s risk-aversion
contention in the absence of Dudenhoeffer — a contention that
presumably would require examination of economic theory on
types of information incorporated into a stock price, market
efficiencies, and the extent of the duty of prudence in the context
of ESOPs — Dudenhoeffer forecloses the need for such
consideration here. Although the employees in Dudenhoeffer
also argued the employer’s stock was overvalued, and that
fiduciaries had failed to act on the basis of non-public
information, that does not undermine Dudenhoeffer’s rejection
of arguments as “implausible” that are indistinguishable from
those Coburn presents on appeal. 134 S. Ct. at 2471–72. And
because Dudenhoeffer is dispositive, it is unnecessary to address
Coburn’s challenge to the district court’s alternative holding on
Gedek, much less to attempt to resolve the tension between
Tibble and Dudenhoeffer or to expound on a possible economic
theory of ESOPs.
EDWARDS, Senior Circuit Judge, concurring: I do not take
issue with anything in the opinion for the court. I write only to
emphasize what we do not decide today.
I agree that Coburn’s claim of “outsized and unnecessary
retirement savings risk” is foreclosed by the Supreme Court’s
decision in Fifth Third Bancorp v. Dudenhoeffer, __ U.S. __,
134 S. Ct. 2459 (2014). I write separately to emphasize that,
in affirming the judgment of the District Court, we do not
mean to denigrate the viability of a separate “duty to monitor”
claim under Tibble v. Edison International, __ U.S. __, 135 S.
Ct. 1823 (2015). Although Coburn raised a duty to monitor
cause of action with the District Court, she failed to preserve
the claim and raise it on appeal. It is therefore forfeited.
Coburn raised two separate theories in support of her
complaint alleging that Evercore breached its fiduciary duty.
First, Coburn claimed that Evercore “knew or should have
known that Company stock was not a suitable and appropriate
investment for the Plan, but was, instead, a highly speculative
and risky investment.” Complaint ¶ 69, reprinted in Joint
Appendix (“J.A.”) 24. Second, Coburn claimed that
“Evercore Trust failed to engage in proper monitoring of the
Company Stock Fund.” Complaint ¶ 53, J.A. 20. Specifically,
Coburn argued that Evercore “fail[ed] to have in place
rudimentary trip wires that would have spurred a prudent
fiduciary into action.” Complaint ¶ 54, J.A. 20.
Coburn cited facts indicating that J.C. Penney’s stock
plummeted between 2012 and 2013 because of CEO Ron
Johnson’s poor management. Johnson’s misguided approach,
including changes to J.C. Penney’s pricing, the “store
experience,” and the merchandise offered, cost the company
stock plan approximately $300 million. See Complaint ¶¶ 19–
20, 36–37, J.A. 11, 14–15. In the wake of Johnson’s firing,
analysts described Johnson’s reign as “a tumultuous 17
2
months,” Stephanie Clifford, Chief’s Silicon Valley Stardom
Quickly Clashed at J.C. Penney, N.Y. TIMES, Apr. 10, 2013,
at A1; “a troubled stint,” Daisuke Wakabayashi, Corporate
News: Apple Ex-Retail Chief Leads Startup, WALL ST. J., Oct.
24, 2014, at B2; and an “abysmal tenure,” Sean Williams, The
Motley Fool’s Worst CEO of the Year Is . . ., MOTLEY FOOL
(Dec. 12, 2013, 10:05 AM),
http://www.fool.com/investing/general/2013/12/12/the-
motley-fools-worst-ceo-of-the-year-is-2.aspx. Asked to
describe Johnson’s performance, a prominent former CEO
responded: “There is nothing good to say about what he’s
done.” James Surowiecki, The Turnaround Trap, NEW
YORKER, Mar. 25, 2013, at 44.
In light of these uncontested facts, Coburn asserted that
Evercore did “absolutely nothing,” even though its “sole
responsibility was to evaluate and monitor the performance of
a single equity.” Complaint ¶¶ 52, 53, J.A. 19–20. Given the
facts and allegations pled, it is hard to comprehend how
Coburn’s complaint could not survive a motion to dismiss
under Tibble.
The opinion for the court properly distinguishes, as
Coburn did, distinct theories of a breach of fiduciary duty:
Whereas Dudenhoeffer primarily focuses on
allegations of misvaluation in the marketplace,
see 134 S. Ct. at 2471, Tibble focuses on the
prudence of holding particular investments
over time, requiring a fiduciary to “conduct a
regular review of its investment with the nature
and timing of the review contingent on the
circumstances.” 135 S. Ct. at 1827–28.
3
Maj. Op. Part II n.2. These theories are fundamentally
different: Dudenhoeffer addresses the “over- or undervaluing”
of a stock, 134 S. Ct. at 2471; Tibble, in turn, addresses the
“fail[ure] to properly monitor investments,” 135 S. Ct. at
1829. Broadly speaking, Dudenhoeffer involves the substance
of investment decisions, while Tibble has to do with a
fiduciary’s obligation to monitor those decisions. These
theories embrace distinct, albeit not mutually exclusive,
causes of action for violations of a fiduciary’s duty.
I recognize that the holding in Tibble may be in tension
with some of what the Court said in Dudenhoeffer.
Nevertheless, Tibble post-dates Dudenhoeffer, and it is quite
clear in what it says:
Under trust law, a trustee has a continuing
duty to monitor trust investments and remove
imprudent ones. This continuing duty exists
separate and apart from the trustee’s duty to
exercise prudence in selecting investments at
the outset. The Bogert treatise states that “[t]he
trustee cannot assume that if investments are
legal and proper for retention at the beginning
of the trust, or when purchased, they will
remain so indefinitely.” A. Hess, G. Bogert, &
G. Bogert, Law of Trusts and Trustees § 684,
pp. 145–146 (3d ed. 2009) (Bogert 3d). Rather,
the trustee must “systematic[ally] conside[r] all
the investments of the trust at regular
intervals” to ensure that they are appropriate.
Bogert 3d § 684, at 147–148.
....
4
In short, under trust law, a fiduciary
normally has a continuing duty of some kind to
monitor investments and remove imprudent
ones. A plaintiff may allege that a fiduciary
breached the duty of prudence by failing to
properly monitor investments and remove
imprudent ones.
135 S. Ct. at 1828–29 (alterations in original).
It seems plain to me that Appellant’s complaint and her
argument to the District Court stated a cause of action under
Tibble that easily should have survived a motion to dismiss.
See Moreno v. Deutsche Bank Americas Holding Corp., 15
Civ. 9936, 2016 WL 5957307, at *5–7 (S.D.N.Y. Oct. 13,
2016) (citing Tibble, 135 S. Ct. at 1828–29) (denying motion
to dismiss a failure to monitor claim); Northstar Fin. Advisors
v. Schwab Invs., 135 F. Supp. 3d 1059, 1075–76 (N.D. Cal.
2015) (quoting Tibble, 135 S. Ct. at 1828) (same). However,
because it is not before us, we have no occasion to address the
issue on appeal.