Boggs et al v. Chesapeake Energy Corporation et al

Filing 89

ORDER granting 79 defendants' Motion to Dismiss and 80 defendants' Request for Judicial Notice and Consideration of Documents in Support of Defendants' Motion to Dismiss Consolidated Class Action Complaint (as more fully set out in order). Signed by Honorable Vicki Miles-LaGrange on 10/11/2013. (ks)

IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
IN RE CHESAPEAKE ENERGY
CORPORATION 2012 ERISA CLASS
LITIGATION

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)
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Lead Case No. CIV-12-688-M

ORDER
Before the Court are defendants’ Motion to Dismiss and Brief in Support of Motion to
Dismiss Consolidated Class Action Complaint and defendants’ Request for Judicial Notice and
Consideration of Documents in Support of Defendants’ Motion to Dismiss Consolidated Class
Action Complaint, both filed April 22, 2013. On June 18, 2013, plaintiffs filed their response to
defendants’ motion to dismiss, and on July 22, 2013, defendants filed their reply.
I.

BACKGROUND
A.

ERISA

Plaintiffs, on behalf of the Chesapeake Energy Corporation Savings and Incentive Stock
Bonus Plan (the “Plan”), themselves, and a class of all other similarly situated Plan participants,
have brought this action under the federal Employee Retirement Income Security Act of 1974, 29
U.S.C. § 1001 et seq. (“ERISA”). ERISA is a comprehensive remedial statute designed to “protect
. . . the interests of participants in employee benefit plans and their beneficiaries, . . . by establishing
standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and
by providing for appropriate remedies, sanctions, and ready access to the Federal courts.” 29 U.S.C.
§ 1001(b). Specifically, ERISA provides, in pertinent part:
(a)(1) Subject to sections 403(c) and (d), 4042, and 4044 [29 U.S.C.
§§ 1103(c), (d), 1342, 1344], a fiduciary shall discharge his duties
with respect to a plan solely in the interest of the participants and
beneficiaries and –
(A) for the exclusive purpose of:
(i) providing benefits to participants and their
beneficiaries; and

(ii) defraying reasonable expenses of
administering the plan;
(B) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims;
(C) by diversifying the investments of the plan so as to
minimize the risk of large losses, unless under the
circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments
governing the plan insofar as such documents and instruments
are consistent with the provisions of this title and title IV.
(2) In the case of an eligible individual account plan (as defined in
section 407(d)(3) [29 U.S.C. § 1107(d)(3)], the diversification
requirement of paragraph 1(C) and the prudence requirement (only
to the extent that it requires diversification) of paragraph 1(B) is not
violated by acquisition or holding of qualifying employer real
property or qualifying employer securities (as defined in section
407(d)(4) and (5) [29 U.S.C. § 1107(d)(4) and (5)]).
29 U.S.C. § 1104(a).1 These requirements generally are referred to as the duties of loyalty and care,
or as the “solely in the interest” and “prudence” requirements.
B.

The Plan

The Plan is an “employee pension benefit plan,” as defined by ERISA § 3(2)(A). See
Consolidated Class Action Complaint at ¶ 58. The Plan was established on October 1, 1988 by
Chesapeake Energy Corporation (“Chesapeake”). See id. at ¶ 59. The Plan is a defined contribution
plan that covers all employees of Chesapeake and its subsidiaries, except for hourly employees of

1

ERISA defines an eligible individual account plan as follows:
an individual account plan which is (i) a profit-sharing, stock bonus,
thrift, or savings plan; (ii) an employee stock ownership plan; or (iii)
a money purchase plan which was in existence on the date of
enactment of this Act and which on such date invested primarily in
qualifying employer securities.
29 U.S.C. § 1107(d)(3)(A).
2

Chesapeake Appalachia, L.L.C., a wholly owned subsidiary. See id. at ¶ 60. Effective July 1, 2009,
the Plan was amended to designate the employer stock option as an Employee’s Stock Ownership
Plan (“ESOP”). See id. at ¶ 61. “The ESOP component of the Plan is intended to primarily invest
in common stock of [Chesapeake].” 2009 Plan, attached as Exhibit 2 to the Consolidated Class
Action Complaint, at CHK_WC000162. In order to be an “active participant” in the Plan, an
employee must complete three months of eligible service and be eighteen years or older. See
Consolidated Class Action Complaint at ¶ 65.
The Plan identifies Chesapeake as the “Plan Administrator.” See id. at ¶ 67.2 The 2009 Plan
provides that “the Employer, Plan Administrator, and any other person or entity who has authority
with respect to the management, administration, or investment of the Plan may exercise that
authority in its/his full discretion, subject only to the duties imposed under ERISA.” 2009 Plan at
CHK_WC000244.
The Plan provides that all or some portion of a Plan participant’s account resulting from (1)
elective deferral contributions, (2) matching contributions, and (3) discretionary contributions may
be invested in Chesapeake common stock (“Chesapeake stock”). See id. at ¶ 72. A Plan participant
enters into an elective deferral agreement with Chesapeake to have a portion of his compensation
deferred to his Plan account by Chesapeake, and Chesapeake then makes Elective Deferral
Contributions on behalf of the employee which are equal to a portion of compensation as specified
in the elective deferral agreement. See id. at ¶ 73. A participant’s Elective Deferral Contributions
may be up to 75% of pre-tax annual compensation and up to 100% of performance related bonus

2

Chesapeake delegated some or all of its administrative duties and authority to the Benefits
Committee. See Consolidated Class Action Complaint at ¶ 71.
3

compensation, subject to certain limitations. See id. The Plan also provides for automatic Elective
Deferral Contributions from employees. See id. at ¶ 74.
Chesapeake also provides for Plan participants to receive matching contributions which are
invested in Chesapeake stock. See id. at ¶ 77. The matching contributions are calculated based on
Elective Deferral Contributions and Compensation for the payroll period and may amount up to 15%
of a participant’s compensation. See id. at ¶ 78. The matching contributions are invested
automatically in Chesapeake stock. See id. at ¶ 79. The Plan further provides that discretionary
contributions may be made for each plan year in an amount determined by Chesapeake, and any
discretionary contributions are automatically invested in Chesapeake stock.
Finally, the Plan places limits on a participant’s ability to transfer funds out of Chesapeake
stock. Specifically, the Plan provides:
Effective January 1, 2007, the Participant shall direct the transfer of
amounts resulting from those Contributions that are held in
Qualifying Employer Securities pursuant to the following schedule:
(1)
(2)

100% of the Contributions that are held in Qualifying
Employer Securities after the Participant attains age 55, or
100% of the Contributions that are held in Qualifying
Employer Securities for a Participant who has completed at
least three (3) years of Vesting Service.

2009 Plan at CHK_WC000212.
As of December 31, 2010, the Plan held $236,427,190 of Chesapeake stock, which was
approximately 49.8% of total investments in the Plan. See Consolidated Class Action Complaint
at ¶ 85. As of December 31, 2011, the Plan held $246,005,310 of Chesapeake stock, which was
approximately 45% of total investments. See id. at ¶ 86.

4

C.

Amended Class Action Complaint

On February 21, 2013, plaintiffs filed the Consolidated Class Action Complaint. In their
complaint, plaintiffs summarize their claims as follows:
4.
Specifically, Plaintiffs allege in Count I that Defendants, each
having certain responsibilities regarding the management and
investment of Plan assets, breached their fiduciary duties to the
Plan’s participants and beneficiaries by failing to prudently and
loyally manage the Plan’s investment in Company Stock by: (1)
continuing to offer Chesapeake Stock as an investment option for the
Plan when it was imprudent to do so; and (2) maintaining the Plan’s
preexisting significant investment in Chesapeake Stock when it was
no longer a prudent investment for the Plan. These actions/inaction
under the circumstances are counter to the express purpose of ERISA
pension plans, which are designed to help provide retirement funds
for participants.
See ERISA § 2, 29 U.S.C. § 1001
(“CONGRESSIONAL FINDINGS AND DECLARATION OF
POLICY”).
5.
Plaintiffs’ Count II alleges that certain Defendants failed to
avoid or ameliorate inherent conflicts of interest which crippled their
ability to function as independent, “single-minded” fiduciaries with
only the Plan’s and its participants’ best interests in mind.
6.
Plaintiffs’ Count III alleges that certain Defendants breached
their fiduciary duties by failing to adequately monitor other persons
to whom the management and administration of the Plan’s assets
were delegated, despite the fact that such Defendants knew or should
have known that such other fiduciaries were imprudently allowing
the Plan to continue offering Chesapeake Stock as an investment
option, and investing the Plan’s assets in Chesapeake Stock when it
was no longer prudent to do so.
7.
Defendants have allowed the imprudent investment of the
Plan’s assets in Chesapeake Stock throughout the Class Period
despite the fact they knew or should have known that such investment
was imprudent in light of circumstances demonstrating the
Company’s dire financial condition, which as explained in detail
below, included among other things: (a) an over-supply of natural gas
in a market saturated with natural gas producers; (b) the collapse of
natural gas prices; (c) the Company’s tremendous and unsustainable
debt load; (d) the Company’s severe liquidity crisis; (e) the
5

Company’s altered risk profile; (f) the Company’s deteriorating
Altman Z-score (“Z-score”) – a financial formula commonly used by
financial professionals to predict whether a company is likely to go
bankrupt – which indicated that Chesapeake was in danger of
bankruptcy; and (g) the Company’s serious mismanagement and
improper business practices highlighted by the rogue conduct of its
former Chairman, Chief Executive Officer and co-founder of
Chesapeake, Aubrey McClendon, during the Class Period.
8.
A prudent fiduciary would have recognized that as a
consequence of the above, the Plan’s significant and continuing
investment of employees’ retirement savings in Company Stock was
contrary to the primary purpose of the Plan, which is “[t]o provide
employees an effective, efficient, and convenient retirement savings
vehicle.” Chesapeake Energy Corporation Savings and Incentive
Stock Bonus Plan Investment Policy Statement, effective as of
February 29, 2012, CHK_WC000001-09 (the “2012 Investment
Policy Statement”), attached hereto as Exhibit 1 at CHK_WC000003.
9.
Plaintiffs seek to recover substantial losses to the Plan for
which Defendants are liable pursuant to ERISA §§ 409 and 502, 29
U.S.C. §§ 1109 and 1132. Because Plaintiffs’ claims apply to the
Plan, inclusive of all participants with accounts invested in Company
Stock during the Class Period, and because ERISA specifically
authorizes participants, such as Plaintiffs, to sue for relief to the Plan
for breaches of fiduciary duty such as those alleged herein, Plaintiffs
bring this action as a class action on behalf of the Plan and all
participants and beneficiaries of the Plan during the proposed Class
Period.
Consolidated Class Action Complaint at ¶¶ 4-9. The proposed Class Period is any time between
April 29, 2011 and the present. See id. at ¶ 87.
II.

STANDARD FOR DISMISSAL
Regarding the standard for determining whether to dismiss a claim pursuant to Federal Rule

of Civil Procedure 12(b)(6), the United States Supreme Court has held:
To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is
plausible on its face. A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the
6

reasonable inference that the defendant is liable for the misconduct
alleged. The plausibility standard is not akin to a “probability
requirement,” but it asks for more than a sheer possibility that a
defendant has acted unlawfully. Where a complaint pleads facts that
are merely consistent with a defendant’s liability, it stops short of the
line between possibility and plausibility of entitlement to relief.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations and citations omitted). Further,
“where the well-pleaded facts do not permit the court to infer more than the mere possibility of
misconduct, the complaint has alleged - but it has not shown - that the pleader is entitled to relief.”
Id. at 679 (internal quotations and citations omitted). Additionally, “[a] pleading that offers labels
and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does
a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Id. at
678 (internal quotations and citations omitted). A court “must determine whether the complaint
sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief
under the legal theory proposed.” Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007) (internal
quotations and citation omitted). Finally, “[a] court reviewing the sufficiency of a complaint
presumes all of plaintiff’s factual allegations are true and construes them in the light most favorable
to the plaintiff.” Hall v. Bellmon, 935 F.2d 1106, 1109 (10th Cir. 1991).
III.

DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE
In conjunction with their motion to dismiss, defendants filed a Request for Judicial Notice

and Consideration of Documents in Support of Defendants’ Motion to Dismiss Consolidated Class
Action Complaint [docket no. 80].3 Specifically, defendants request that this Court consider various

3

Plaintiffs filed no response to defendants’ request.
7

documents Chesapeake filed with the Securities and Exchange Commission (“SEC”) and five charts
from various sources on the internet.
On a motion to dismiss pursuant to Rule 12(b)(6), “courts must consider the complaint in its
entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions
to dismiss, in particular, documents incorporated in the complaint by reference, and matters of which
a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322
(2007). A court may take judicial notice of documents that are referred to in the complaint, even
if those documents were not attached to the complaint or explicitly incorporated by reference. See
Pace v. Swerdlow, 519 F.3d 1067, 1072 (10th Cir. 2008). Further, a court may take judicial notice
of documents that are “capable of accurate and ready determination by resort to sources whose
accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b).
Numerous courts have taken judicial notice of the contents of SEC filings. See, e.g., In re
Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148, 1156 (D. Colo. 2012); In re
Thornburg Mortg., Inc. Sec. Litig., No. CIV 07-0815 JB/WDS, 2009 WL 5851089, at *3 (D.N.M.
Dec. 21, 2009); Thomas v. Metro. Life Ins. Co., No. CIV-07-0121-F, 2008 WL 4619822, at *10
(W.D. Okla. Oct. 16, 2008); Sterlin v. Biomune Sys., Inc., 114 F. Supp. 2d 1163, 1172 (D. Utah
2000). Further, “[i]t is not uncommon for courts to take judicial notice of factual information found
on the world wide web.” O’Toole v. Northrop Grumman Corp., 499 F.3d 1218, 1225 (10th Cir.
2007). Finally, a “district court may take judicial notice of well-publicized stock prices without
converting the motion to dismiss into a motion for summary judgment.” Ganino v. Citizens Utils.
Co., 228 F.3d 154, 167 n.8 (2d Cir. 2000).

8

Having reviewed defendants’ request and the documents at issue, and in light of the case law
set forth above, the Court GRANTS defendants’ request. For purposes of ruling on defendants’
motion to dismiss, the Court will take judicial notice of and/or consider Exhibits 1 through 14
attached to defendants’ Request for Judicial Notice and Consideration of Documents in Support of
Defendants’ Motion to Dismiss Consolidated Class Action Complaint.
IV.

DISCUSSION
A.

Prudence Claim (Count I)

Defendants contend that plaintiffs fail to state a claim for breach of the duty of prudence.
Specifically, defendants assert that a presumption of prudence attaches to the offering of employer
stock where, as here, the plan is expressly designed to offer employer stock as an investment option.
Defendants further assert that under this presumption, plan fiduciaries are only required to divest
an ESOP of employer stock where the fiduciaries know or should know that the employer is in a
“dire situation,” such that the employer’s viability as a going concern was threatened or its stock was
in danger of becoming essentially worthless. Defendants contend that plaintiffs do not, and cannot,
plead facts demonstrating that Chesapeake is, or ever was, in such a “dire situation” sufficient to
overcome the presumption of prudence.
Plaintiffs, on the other hand, contend that Count I states a claim for breach of the duty to
prudently manage the Plan’s assets. Specifically, plaintiffs assert that the presumption of prudence
has not been adopted by the Tenth Circuit and that defendants’ actions, or lack thereof, during the
Class Period must be reviewed de novo without the benefit of any presumption of prudence.
Plaintiffs further assert that absent the benefit of the presumption of prudence, the conduct alleged
in the Consolidated Class Action Complaint clearly shows a breach of fiduciary duty. Additionally,

9

plaintiffs assert that even if the Tenth Circuit did adopt the presumption, because the Plan documents
do not require or encourage the offering of Chesapeake stock, the presumption does not apply to
defendants’ decision to maintain company stock. Plaintiffs further assert that the presumption of
prudence does not apply at the pleading stage. Finally, plaintiffs assert that even if the presumption
of prudence does apply, plaintiffs need not plead impending collapse to overcome the presumption,
and they have pled sufficient facts to overcome the presumption.
1.

“Presumption of prudence”

Recognizing the competing goals of ERISA and ESOPs4, and attempting to balance these
goals in relation to claims that an ESOP fiduciary violated its ERISA duties by continuing to invest
in employer securities, the Third Circuit, in Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995),
developed the “presumption of prudence.” Specifically, the Third Circuit found:
In a case such as this, in which the fiduciary is not absolutely
required to invest in employer securities but is more than simply
permitted to make such investments, while the fiduciary
presumptively is required to invest in employer securities, there may
come a time when such investments no longer serve the purpose of
the trust, or the settlor’s intent. Therefore, fiduciaries should not be
immune from judicial inquiry, as a directed trustee essentially is, but
also should not be subject to the strict scrutiny that would be
exercised over a trustee only authorized to make a particular
investment. Thus, a court should not undertake a de novo review of
the fiduciary’s actions . . . . Rather, the most logical result is that the
fiduciary’s decision to continue investing in employer securities
should be reviewed for an abuse of discretion.

4

“ESOPs, unlike pension plans, are not intended to guarantee retirement benefits, and indeed,
by its very nature an ESOP places employee retirement assets at much greater risk than does the
typical diversified ERISA plan.” Moench, 62 F.3d at 568 (internal quotations and citation omitted).
“Under their original rationale, ESOPs were described as . . . device[s] for expanding the national
capital base among employees – an effective merger of the roles of capitalist and worker.” Id.
(internal quotations and citation omitted).
10

. . . we hold that in the first instance, an ESOP fiduciary who invests
the assets in employer stock is entitled to a presumption that it acted
consistently with ERISA by virtue of that decision. However, the
plaintiff may overcome that presumption by establishing that the
fiduciary abused its discretion by investing in employer securities.
In attempting to rebut the presumption, the plaintiff may
introduce evidence that “owing to circumstances not known to the
settlor and not anticipated by him [the making of such investment]
would defeat or substantially impair the accomplishment of the
purposes of the trust.” Restatement (Second) § 227 comment g. As
in all trust cases, in reviewing the fiduciary’s actions, the court must
be governed by the intent behind the trust – in other words, the
plaintiff must show that the ERISA fiduciary could not have believed
reasonably that continued adherence to the ESOP’s direction was in
keeping with the settlor’s expectations of how a prudent trustee
would operate. In determining whether the plaintiff has overcome the
presumption, the courts must recognize that if the fiduciary, in what
it regards as an exercise of caution, does not maintain the investment
in the employer’s securities, it may face liability for that caution,
particularly if the employer’s securities thrive.
In considering whether the presumption that an ESOP
fiduciary who has invested in employer securities has acted
consistently with ERISA has been rebutted, courts should be
cognizant that as the financial state of the company deteriorates,
ESOP fiduciaries who double as directors of the corporation often
begin to serve two masters. And the more uncertain the loyalties of
the fiduciary, the less discretion it has to act.
Moench, 62 F.3d at 571-72 (internal citation omitted).
The Second, Fifth, Sixth, Seventh, Ninth and Eleventh Circuits have all expressly adopted
the Moench “presumption of prudence,” and no federal appellate court has rejected the presumption
on its merits. See White v. Marshall & Ilsley Corp., 714 F.3d 980 (7th Cir. 2013); Lanfear v. Home
Depot, Inc., 679 F.3d 1267 (11th Cir. 2012); In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir.
2011); Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010); Kirschbaum v. Reliant
Energy, Inc., 526 F.3d 243 (5th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995).

11

However, while the circuit courts have adopted the “presumption of prudence,” the framework of
the presumption does vary to some extent among the circuits.
When adopting the Moench presumption, the Ninth Circuit agreed with the Third Circuit and
added “that if there is room for reasonable fiduciaries to disagree as to whether they are bound to
divest from company stock, the abuse of discretion standard protects a fiduciary’s choice not to
divest. This will allow fiduciaries to fulfill their duties in the safe harbor that Congress seems to
have intended to provide them for managing EIAPs and ESOPs.” Quan, 623 F.3d at 882 (internal
quotations and citation omitted). The Ninth Circuit further held:
To overcome the presumption of prudent investment, plaintiffs must
therefore make allegations that clearly implicate the company’s
viability as an ongoing concern or show a precipitous decline in the
employer’s stock . . . combined with evidence that the company is on
the brink of collapse or is undergoing serious mismanagement.
Id. (internal quotations and citations omitted).
In In re Citigroup, the Second Circuit adopted the Moench “presumption of prudence” and
endorsed the “guiding principle” recognized by the Ninth Circuit that “judicial scrutiny should
increase with the degree of discretion a plan gives its fiduciaries to invest”, finding that “a
fiduciary’s failure to divest from company stock is less likely to constitute an abuse of discretion if
the plan’s terms require – rather than merely permit – investment in company stock.” In re
Citigroup, 662 F.3d at 138. The Second Circuit then set forth its formulation of the presumption as
follows:
We agree with [the Moench court’s] formulation and cannot imagine
that an ESOP or EIAP settlor, mindful of the long-term horizon of
retirement savings, would intend that fiduciaries divest from
employer stock at the sign of any impending price decline. Rather,
we believe that only circumstances placing the employer in a “dire
situation” that was objectively unforeseeable by the settlor could
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require fiduciaries to override plan terms. The presumption is to
serve as a “substantial shield,” that should protect fiduciaries from
liability where there is room for reasonable fiduciaries to disagree as
to whether they are bound to divest from company stock. The test of
prudence is . . . one of conduct rather than results, and the abuse of
discretion standard ensures that a fiduciary’s conduct cannot be
second-guessed so long as it is reasonable.
Although proof of the employer’s impending collapse may
not be required to establish liability, [m]ere stock fluctuations, even
those that trend downhill significantly, are insufficient to establish the
requisite imprudence to rebut the Moench presumption. We judge a
fiduciary’s actions based upon information available to the fiduciary
at the time of each investment decision and not from the vantage
point of hindsight. We cannot rely, after the fact, on the magnitude
of the decrease in the employer’s stock price; rather, we must
consider the extent to which plan fiduciaries at a given point in time
reasonably could have predicted the outcome that followed.
Id. at 140 (internal quotations and citations omitted).
On the other hand, in Kirschbaum, the Fifth Circuit did not hold that the “presumption of
prudence” could be overcome only in the case of investments in stock of a company that is about
to collapse. See Kirschbaum, 526 F.3d at 256. The Fifth Circuit held:
[t]he presumption, however, is a substantial shield. As Moench
states, it may only be rebutted if unforeseen circumstances would
defeat or substantially impair the accomplishment of the trust’s
purposes. One cannot say that whenever plan fiduciaries are aware
of circumstances that may impair the value of company stock, they
have a fiduciary duty to depart from ESOP or EIAP plan provisions.
Instead, there ought to be persuasive and analytically rigorous facts
demonstrating that reasonable fiduciaries would have considered
themselves bound to divest. Less than rigorous application of the
Moench presumption threatens its essential purpose. A fiduciary
cannot be placed in the untenable position of having to predict the
future of the company stock’s performance. In such a case, he could
be sued for not selling if he adhered to the plan, but also sued for
deviating from the plan if the stock rebounded.
Id. (internal citation omitted).

13

Additionally, in Lanfear, the Eleventh Circuit rejects any interpretation of the presumption
that provides that the only circumstance in which a fiduciary could abuse its discretion by following
an ESOP plan’s directions about company stock was when the fiduciary knew that the company was
peering over the precipice into a financial abyss. See Lanfear, 679 F.3d at 1280. Instead, the
Eleventh Circuit sets forth the test as follows:
Although a fiduciary is generally required to invest according to the
terms of the plan, when circumstances arise such that continuing to
do so would defeat or substantially impair the purpose of the plan, a
prudent fiduciary should deviate from those terms to the extent
necessary. Because the purpose of a plan is set by its settlors (those
who created it), that is the same thing as saying that a fiduciary
abuses his discretion by acting in compliance with the directions of
the plan only when the fiduciary could not have reasonably believed
that the settlors would have intended for him to do so under the
circumstances. That is the test.
Id. at 1281.
The Tenth Circuit has not addressed whether it would adopt the Moench “presumption of
prudence.” However, the Tenth Circuit has held:
While an ESOP fiduciary may be released from certain Per se
violations on investments in employer securities under the provisions
of ss 406 and 407 of ERISA, the structure of the Act itself requires
that in making an investment decision of whether or not a plan’s
assets should be invested in employers securities, an ESOP fiduciary,
just as fiduciaries of other plans, is governed by the “solely in the
interest” and “prudence” tests of ss 404(a)(1)(A) and (B).
Eaves v. Penn, 587 F.2d 453, 459 (10th Cir. 1978). Further, the Tenth Circuit has found that
“[j]udicial review of fiduciary actions is highly deferential.” Ershick v. United Mo. Bank of Kan.
City, 948 F.2d 660, 666 (10th Cir. 1991).
Based upon the Tenth Circuit’s prior decisions and the sound reasoning behind the Moench
“presumption of prudence,” the Court finds that the Tenth Circuit would adopt the Moench
14

“presumption of prudence” in cases in which, under the terms of an ERISA plan, the fiduciary is not
absolutely required to invest in employer securities but is more than simply permitted to make such
investments and would apply an abuse of discretion standard of review to the fiduciary’s decision
to continue investing in employer securities. Further, the Court finds that the Tenth Circuit would
require the plaintiff to show that the ERISA fiduciary could not have believed reasonably that
continued adherence to the ESOP’s direction was in keeping with the settlor’s expectations of how
a prudent trustee would operate in order to demonstrate an abuse of discretion. The Tenth Circuit
would also require the plaintiff to present persuasive and analytically rigorous facts demonstrating
that reasonable fiduciaries would have considered themselves bound to divest. However, the Court
finds that the Tenth Circuit would not require the plaintiff to show that the company was facing
impending collapse.
2.

Applicability of presumption at motion to dismiss stage

Plaintiffs assert that the “presumption of prudence” is not applicable at the pleading stage
of an action. The Second, Third, Fifth, Seventh, and Eleventh Circuits have applied the presumption
when considering motions to dismiss; the Sixth Circuit has not.
The “presumption” is not an evidentiary presumption; it is a standard
of review applied to a decision made by an ERISA fiduciary. Where
plaintiffs do not allege facts sufficient to establish that a plan
fiduciary has abused his discretion, there is no reason not to grant a
motion to dismiss.
In re Citigroup, 662 F.3d at 139. See also Lanfear, 679 F.3d at 1281 (“The Moench standard of
review of fiduciary action is just that, a standard of review; it is not an evidentiary presumption. It
applies at the motion to dismiss stage as well as thereafter.”); White, 714 F.3d at 990-91 (“As to its
application at the pleading stage, the presumption of prudence is not an evidentiary standard but a

15

substantive legal standard of liability and conduct. Thus, we agree with the Second, Third, and
Eleventh Circuits that a claim against ESOP fiduciaries alleging a violation of the duty of prudence
may be dismissed at the pleading stage if the plaintiffs do not make allegations sufficient to
overcome the presumption of prudence.”)
Having reviewed the decisions by the circuit courts that have addressed this issue, the Court
finds the reasoning of the Second, Third, Fifth, Seventh, and Eleventh Circuits more persuasive,
particularly in light of the requirement that the plaintiff plead “enough facts to state a claim to relief
that is plausible on its face,” Twombly, 550 U.S. at 570. The Court, therefore, finds that the
“presumption of prudence” is appropriately applied at the motion to dismiss stage.
3.

Applicability of presumption to Plan

As set forth in Moench, the “presumption of prudence” applies when “the fiduciary is not
absolutely required to invest in employer securities but is more than simply permitted to make such
investments”. Moench, 62 F.3d at 571. Therefore, the Court must determine if under the Plan, the
fiduciaries are not absolutely required to invest in employer securities but is more than simply
permitted to make such investments.
Having reviewed the Plan as a whole, the Court finds that it does more than simply permit
the fiduciaries to make investments in Chesapeake stock, and, in fact, encourages such investment.
For example, the Plan requires the employer discretionary contributions to be “in the form of
Qualifying Employer Securities or in cash designated by the Employer to be invested in Qualifying
Employer Securities” and requires the employer matching contributions “to be invested in
Qualifying Employer Securities”.

See Plan at CHK_WC000171 and CHK_WC 000187.

Additionally, the Plan requires that dividends be automatically reinvested in Chesapeake stock if no

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other election is made. See Plan at CHK_WC000215. Finally, the Investment Policy Statement
provides that the Plan will include Chesapeake common stock. See Investment Policy Statement,
attached as Exhibit 1 to the Consolidated Class Action Complaint, at CHK-WC000001.
Accordingly, the Court finds that the “presumption of prudence” is applicable to the Plan.
4.

Sufficiency of complaint5

In order for plaintiffs to sufficiently allege their prudence claim, they must set forth sufficient
facts, presumed to be true and construed in the light most favorable to plaintiffs, showing that they
plausibly can overcome the “presumption of prudence.” As set forth above, plaintiffs must plead
persuasive and analytically rigorous facts demonstrating that reasonable fiduciaries would have
considered themselves bound to divest and that the defendant fiduciaries could not have believed
reasonably that continued adherence to the Plan’s direction was in keeping with the settlor’s
expectations of how a prudent trustee would operate in these circumstances.
Having carefully reviewed the Consolidated Class Action Complaint, the Court finds that
although plaintiffs have set forth numerous specific and detailed facts regarding certain aspects of
Chesapeake’s financial well-being, and even presuming these facts to be true and construing them
in the light most favorable to plaintiffs, plaintiffs have not shown that they plausibly can overcome
the “presumption of prudence.” Most damaging to plaintiffs’ prudence claim is the fact that the
price of Chesapeake stock during the Class Period always retained significant value. The lowest
price pled in the complaint is $19.60 on May 1, 2012, and on the date the complaint was filed, the
price was $20.19. The Court finds that it is implausible that a reasonable fiduciary would have

5

In their motion to dismiss, defendants only dispute whether plaintiffs have rebutted the
“presumption of prudence.” Defendants do not dispute that they are fiduciaries of the Plan.
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considered himself bound to divest when the price of the stock was only slightly less than twenty
dollars. In fact, had the defendant fiduciaries stopped purchasing Chesapeake stock and divested
the Plan of Chesapeake stock, they would have risked liability for having failed to follow the terms
of the Plan, particularly if the price of Chesapeake stock increased, as it has, in fact, done.
Additionally, the Court finds that all of the facts plaintiffs set forth in the complaint
regarding the financial state of Chesapeake does not alter the plausibility of plaintiffs’ prudence
claim. While Chesapeake had significant working capital deficits, had significant long term debt,
and had operating losses during the Class Period, Chesapeake also, throughout 2011-2012, had
annual revenues in excess of $11.5 billion, combined net income of nearly $1 billion, and increased
its total assets from over $34 billion to over $41 billion. Further, Chesapeake’s cash deficits in 2010
of more than $6 billion were similar to the cash deficits Chesapeake had had since 2007.6
Chesapeake’s Altman Z-score similarly has been in the distress zone since 2003. Based upon the
above, the Court finds plaintiffs have not plausibly shown that the defendant fiduciaries could not
have believed reasonably that continued adherence to the Plan’s direction was in keeping with the
settlor’s expectations of how a prudent trustee would operate in these circumstances. Based upon
Chesapeake’s history, the Court finds it implausible that divesting the Plan of Chesapeake stock
would have been in keeping with the settlor’s expectations.
Accordingly, the Court finds that plaintiffs’ prudence claim should be dismissed.
B.

Loyalty Claim

Defendants contend that plaintiffs fail to state a claim for breach of the duty of loyalty.
Specifically, defendants assert that the loyalty claim is derivative of plaintiffs’ duty of prudence

6

In fact, in 2008, Chesapeake had cash deficits of $12 billion.
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claim and, therefore, fails because plaintiffs failed to state a prudence claim. Defendants further
assert that a conflict-of-interest claim cannot be based solely on the link between an ERISA
fiduciary’s compensation and company stock. Additionally, defendants assert that the receipt of
company stock does not create a conflict but aligns the interests of plan fiduciaries with those of plan
participants. Finally, defendants assert that plaintiffs have alleged no facts suggesting that any
defendant’s ownership of Chesapeake stock prompted him or her to act against the interests of plan
participants.
Plaintiffs contend that they sufficiently allege a claim for breach of the duty of loyalty.
Specifically, plaintiffs assert that their “conflicts” claim is not simply based on defendants’
compensation in Chesapeake stock, but, rather, the core allegation is that the defendants engaged
in their own self-interest without regard to safe-guarding the interests of the Plan and its participants.
To the extent that plaintiffs’ loyalty claim is derivative of their prudence claim, the Court
finds that the loyalty claim should be dismissed based upon the dismissal of the prudence claim. To
the extent that plaintiffs’ loyalty claim is based upon the fiduciary’s compensation being
significantly tied to the price of Chesapeake stock and the fiduciary’s incentive to keep Chesapeake
stock’s price inflated, the Court finds that plaintiffs have not set forth sufficient factual allegations
to state a claim for breach of the duty of loyalty. In their Consolidated Class Action Complaint,
plaintiffs simply make the following conclusory statement with no factual allegations to support the
statement: “Because the compensation of at least some of the Defendants was significantly tied to
the price of Chesapeake Stock, they had an incentive to keep its price artificially inflated.”
Consolidated Class Action Complaint at ¶ 208. Additionally, a conflict of interest claim can not be
based solely on the fact that an ERISA fiduciary’s compensation was linked to the company’s stock.

19

See In re Citigroup, 662 F.3d at 146 (“We agree with the many courts that have refused to hold that
a conflict of interest claim can be based solely on the fact that an ERISA fiduciary’s compensation
was linked to the company’s stock.”).
Accordingly, the Court finds that plaintiffs’ loyalty claim should be dismissed.
C.

Failure to Adequately Monitor Other Fiduciaries Claim

Because plaintiffs’ failure to adequately monitor other fiduciaries claim is derivative of their
prudence and loyalty claims, and because the prudence and loyalty claims have been dismissed, the
Court finds that plaintiffs’ failure to adequately monitor other fiduciaries claim should be dismissed.
V.

CONCLUSION
For the reasons set forth above, the Court GRANTS defendants’ Motion to Dismiss [docket

no. 79] and defendants’ Request for Judicial Notice and Consideration of Documents in Support of
Defendants’ Motion to Dismiss Consolidated Class Action Complaint [docket no. 80] and
DISMISSES the Consolidate Class Action Complaint.
IT IS SO ORDERED this 11th day of October, 2013.

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