Oral Argument in the US Supreme Court’s Fifth Third Bank Case – “Coach Class Trustees” and Insider Trading Dominate the Debate Oral Argument in the US Supreme Court’s Fifth Third Bank Case – “Coach Class Trustees” and Insider Trading Dominate the Debate
On April 2, the U.S. Supreme Court heard oral argument in the Fifth Third Bank v. Dudenhoeffer case, which started with a bang – the very first question (from Justice Kennedy) described the presumption of prudence as like having a “coach class trustee” for ESOPs. Which was a theme throughout the argument by Fifth Third Bank in favor of a strong presumption in favor of holding employer stock – that the Justices were struggling with how to differentiate between the duty of prudence for all ERISA fiduciaries and a workable presumption of prudence for ESOP trustees. Justice Scalia, for example, wondered why we need a “special rule” for ESOP trustees when ESOPs have the same “buy/sell” dilemmas that ordinary 401(k) plans face (page 17).
The argument advanced by the plaintiffs, and the U.S. as amicus in support – that no presumption should apply – was met with a different practical question: how can an allegedly conflicted ESOP trustee act upon inside information? What exactly is an ESOP trustee to do? The response of counsel for the plaintiffs focused on the fact that the dilemma is entirely caused by the trustees’ insider status; the fact that they may not be able to take action “is not something that ERISA can tolerate” (p.43). The response of the US was that these insiders are required to investigate the circumstances and the proper course of action. But the Justices appeared to struggle applying both answers.
This was an argument that was dominated by practical questions – and not just why have a duty of prudence, or what to do about inside information, but also how many ESOPs have inside trustees (Justice Kennedy, p.13), what the SEC thinks about the inside information argument (Justice Breyer, p.46), and the scope of ESOPs (Justice Breyer, p.49), to name just a few examples. Which makes it very difficult to assess what sort of decision may emerge when many of the Justices appeared to be struggling with the practical implications of the arguments and issues presented.
Here’s the link to the transcript of the argument –