Appeals Court Rules That Dudenhoeffer Ruling Does Not Apply to Private Company

In Allen v. GreatBanc Trust Co., the Seventh Circuit overturned a lower court ruling that dismissed a case over an ESOP valuation at the ESOP for Personal Touch Company. The company's stock price dropped just over 50% after the valuation. The plan's trustee, GreatBanc, argued that post-transaction stock prices are common because of the debt, but plaintiffs argued that GreatBanc failed to conduct an adequate investigation of the stock price and approved an interest rate on the ESOP loan two points above what banks were normally charging.

The district court ruled against the plaintiffs, concluding they had to argue special circumstances under Dudenhoeffer but failed to do so. The special circumstances doctrine was developed by the Supreme Court to replace the presumption of prudence (the so-called "Moench presumption"), but was crafted in a way that seemed only to apply to public companies. It relies on showing that the market prices were misleading in some way, a difficult standard to meet, or that fiduciaries should have acted in inside information the market did not have, which could violate securities laws.

The Department of Labor filed a brief in the case and argued along with the plaintiffs that that the Dudenhoeffer rule should apply only to public companies. The Seventh Circuit agreed and ruled that plaintiffs could continue their case on the basis on issues other than plausible alternatives, specifically that the valuation was improper.

The position and decision are notable for their implications for private companies. The presumption of prudence arguably never was an issue for private company litigation, and the doctrine only came up twice in the 26 years that the NCEO has been tracking litigation. If the Dudenhoeffer rule does not apply to private companies, the legal landscape for private companies with ESOP likely looks much like it did before the Supreme Court's decision.