New Post-Dudenhoeffer Ruling on Private Company ESOPs

On March 28, the federal district court for the northern district of Mississippi applied the Supreme Court's ruling in Fifth Third Bancorp v. Dudenhoeffer to an ESOP in a closely held company. In the case, Hill v. Hill Brothers Construction Co., the court dismissed the plaintiff's claims of a breach of fiduciary duty by the plan's trustees, holding that the plaintiffs had not shown that there was an alternative action that "a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the [plan] than to help it."

This "alternative action" standard is based on the Supreme Court's 2014 ruling in the Dudenhoeffer case, which involved a public company. Sharion Aycock, the district court judge in the Hill Brothers case, however, noted that although all of the Supreme Court's examples in Dudenhoeffer concerned public company situations, "that does not necessarily preclude the application of the alternative action pleading standard to closely-held entities."

In their analysis of the case, Charles Dyke, Matthew Goedert, and William Lisa of Nixon Peabody observe that another district court, the northern district of Illinois, applied Dudenhoeffer to a closely held company in its 2015 ruling in Allen v. GreatBanc Trust. They conclude that although it is unknown whether other district courts follow the lead of these two cases, "they nonetheless may find good reason to conclude in principle that plaintiffs in private-company ESOP cases should be held to an 'alternative action' pleading standard."