953 F.3d 1022
8th Cir.2020Background
- Lifetouch was a privately held, employee-owned company: all outstanding shares were held in an ESOP that owned 100% of the company stock; Plan trustees were Lifetouch executives until May 2017, when Evercore became trustee.
- The Plan required an independent appraiser to set an annual "Anniversary Date" (June 30) fair market value used for mandatory repurchases; employer contributions were valued at the "then fair market value."
- Lifetouch experienced material business decline in 2015–2016 (store and facility closures, layoffs, senior-executive departures); trustee-set valuations were $93 (2015), $88 (2016), then fell to $56 (2017) after Evercore became trustee.
- Plaintiffs alleged the executive trustees breached ERISA’s duty of prudence by overvaluing stock in 2015–2016 (failing to investigate/adjust valuations) and that Board/Lifetouch breached duties to monitor; Plaintiffs also alleged a separate "sits" manipulation scheme by senior executives to inflate metrics used in valuation.
- The district court dismissed under Rule 12(b)(6), treating the manipulation allegations as fraud subject to Rule 9(b) and concluding Plaintiffs failed to plausibly plead trustee imprudence or resulting Plan loss given the Plan’s valuation provisions and ESOP limitations; Plaintiffs appealed and the Eighth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rule 9(b)’s heightened pleading standard applied to the "sits" manipulation allegations | The fraud rule should apply only if alleging fiduciaries themselves committed fraud; alleging fiduciaries failed to act on others' fraud should be governed by Rule 8 | The district court correctly applied Rule 9(b) to the manipulation allegations because they were grounded in alleged fraud | The court treated the manipulation allegations as fraud-based but found the point moot on appeal because Plaintiffs disclaimed that trustees committed the manipulation; district court did not err in excluding those allegations from prudence analysis |
| Whether trustees breached ERISA duty of prudence by overvaluing Lifetouch stock for the June 30, 2015 and June 30, 2016 valuations (failure to investigate) | Trustees should have investigated obvious signs of company decline in 2015–2016 and corrected overvaluations, harming participants | Trustees properly relied on the appraiser and plan structure; plaintiffs failed to plead facts showing trustees knew of overvaluation or caused Plan loss | Dismissed: Plaintiffs failed to plausibly allege trustees overvalued stock or caused loss given Plan terms and absent allegations tying trustees to the manipulation or to valuations used for contributions |
| Whether trustees breached duty by failing to remove/stop holding Lifetouch stock (imprudent retention/diversification) | Tibble allows claims for failure to monitor/remove imprudent investments; trustees should have removed risky stock | ESOP fiduciaries are exempt from the duty to diversify; a trustee cannot be required to force the employer to redeem shares, and removing holdings may be impractical or harmful to participants | Dismissed: retention claim fails for ESOPs under Dudenhoeffer and related authorities because ESOP design forecloses traditional diversification remedy and Plaintiffs did not allege a feasible, less harmful alternative |
| Whether the Board and Lifetouch breached a duty to monitor trustees they appointed | Monitoring liability depends on an underlying breach by trustees; Plaintiffs claim Board/Lifetouch ignored trustee imprudence | No underlying trustee breach was plausibly pleaded, so monitoring claim fails | Dismissed: monitoring claims depend on a sufficiently pleaded underlying fiduciary breach, which Plaintiffs did not allege |
Key Cases Cited
- Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014) (ESOP fiduciary prudence must account for the plan’s character and aims; rejected a presumption of prudence)
- Tibble v. Edison Intern., 135 S. Ct. 1823 (2015) (ERISA claim may allege breach by failing to monitor and remove imprudent investments)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard under Rule 8)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must provide factual content permitting a reasonable inference of liability)
- Usenko v. MEMC LLC, 926 F.3d 468 (8th Cir. 2019) (standards for reviewing Rule 12(b)(6) dismissals in the Eighth Circuit)
- Streambend Properties II, LLC v. Ivy Tower Minneapolis, LLC, 781 F.3d 1003 (8th Cir. 2015) (applying Rule 9(b) to claims grounded in fraud)
- Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56 (2d Cir. 2016) (dismissing imprudent-retention claims where ESOP structure made forced redemption unrealistic)
- Brown v. Medtronic, Inc., 628 F.3d 451 (8th Cir. 2010) (monitoring claims cannot survive without adequately pled underlying breach)