                United States Court of Appeals
                           For the Eighth Circuit
                       ___________________________

                               No. 18-3616
                       ___________________________

       Deborah Vigeant, and all other individuals similarly situated, et al.

                      lllllllllllllllllllllPlaintiffs - Appellants

                                          v.

                               Michael Meek, et al.

                     lllllllllllllllllllllDefendants - Appellees

                             ------------------------------

                                Secretary of Labor

                 lllllllllllllllllllllAmicus on Behalf of Appellants
                                       ____________

                   Appeal from United States District Court
                        for the District of Minnesota
                                ____________

                         Submitted: December 10, 2019
                            Filed: March 24, 2020
                                ____________

Before SMITH, Chief Judge, LOKEN and GRASZ, Circuit Judges.
                              ____________
LOKEN, Circuit Judge

        Prior to being acquired in January 2018, Lifetouch, Inc. was an eighty-year-old
professional photography company focused primarily on school pictures. All
outstanding Lifetouch shares were owned by employees through their participation
in an employee stock ownership plan (“ESOP”) sponsored by Lifetouch (the “Plan”),
making Lifetouch one of the nation’s largest wholly-employee-owned companies.
In this action under the Employee Retirement Income Security Act of 1974, 29 U.S.C.
§§ 1001 et seq. (“ERISA”), a putative class of present and former employees
(“Plaintiffs”) sue former trustees of the Plan, former members of the Board of
Directors (the “Board”), and Lifetouch. The Amended Complaint alleged, inter alia,
(i) that the trustees breached their fiduciary duty of prudence to the Plan and its
participants by overvaluing Lifetouch stock when the company’s fortunes were
declining in 2015 and 2016, and (ii) that the Board and Lifetouch breached their
fiduciary duties to monitor trustees they appointed and to remedy trustee imprudence.
The district court1 dismissed the Amended Complaint for failure to state a claim.
Plaintiffs appeal the dismissal of the above two claims.

      We review a Rule 12(b)(6) dismissal for failure to state a claim de novo,
accepting all well-pleaded factual allegations as true and construing all reasonable
inferences in the nonmoving party’s favor. Usenko v. MEMC LLC, 926 F.3d 468,
472 (8th Cir.), cert. denied, 140 S. Ct. 607 (2019). To avoid dismissal, a complaint
must plead “enough facts to state a claim to relief that is plausible on its face.” Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). Applying these standards, we affirm.


      1
      The Honorable Joan N. Ericksen, United States District Judge for the District
of Minnesota.

                                          -2-
                              I. The ERISA Landscape

        ERISA imposes fiduciary duties on persons such as the Plan trustees “to the
extent” they exercise discretionary authority or control over the management or
administration of the Plan or its assets. 29 U.S.C. § 1002(21)(A). ERISA fiduciary
duties include the “prudent man standard of care” set forth in § 1104(a)(1), the duty
that is the primary focus of this appeal. A fiduciary “shall discharge his duties with
respect to a plan solely in the interest of the participants and beneficiaries” and:

            (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 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 . . . .

29 U.S.C. § 1104(a)(1)(B), (C). Congress in ERISA also encouraged employers such
as Lifetouch to establish an ESOP “to invest primarily in qualifying employer
securities,” § 1107(d)(6)(A), as a means of both providing retirement savings and
fostering employee ownership of businesses. See Martin v. Feilen, 965 F.2d 660,
664-65 (8th Cir. 1992), cert. denied, 506 U.S. 1054 (1993). To this end, § 1104(a)(2)
provides that the duty to diversify in paragraph (a)(1)(C) and the duty of prudence in
paragraph (a)(1)(B), to the extent it requires diversification, are “not violated by [the]
acquisition or holding of qualified employer securities.”

      Lifetouch made annual contributions to the Plan for the benefit of employees’
individual accounts in the Plan. The Board determined the amount of the
contributions and whether they would be paid in Lifetouch stock, cash, or other
property. Section 5(c) of the Plan provided that contributions “of Company Stock


                                           -3-
and other property will be valued at their then fair market value.” By contrast, section
16(a) provided that, if a participant retired and requested a distribution from his or her
account, the Plan purchased Lifetouch stock in the account at its fair market value
“based upon the appraised fair market value determined as of the Anniversary Date
. . . immediately preceding the date of repurchase.” The Plan provided that the
Board-appointed Plan trustees would annually determine the Anniversary Date fair
market value as of June 30, using the valuation opinion of an independent appraiser.
The Plan paid a retiring participant for his or her Lifetouch stock with cash provided
by Lifetouch contributions or Plan earnings, so Lifetouch stock never left the Plan.

                               II. Factual Background

       The following facts are drawn from the allegations in Plaintiffs’ Amended
Complaint, which we accept as true for purposes of reviewing a Rule 12(b)(6)
dismissal. Usenko, 926 F.3d at 471. By 2015, Lifetouch’s business was declining
as technology changed the market for school pictures. Lifetouch closed its portrait
studios in J.C. Penney and Target department stores. In November 2015, it closed a
production facility acquired just four year earlier, laying off 206 employees. An
“unusually large number” of senior executives departed the company in 2015 and
2016, including its CEO, defendant Paul Harmel, in July 2016. The next month, new
CEO Michael Meek commented publicly that Lifetouch was struggling to adapt to
technological changes and evolving consumer demands.

      During this period, the Plan trustees were Lifetouch executives Ted Koenecke
and Glenn Elo (collectively, the “Trustee Defendants”). They served until May 2017,
when Evercore Trust Company, N.A. (“Evercore”), became Trustee. On the June 30,
2015 Anniversary Date, the Trustee Defendants determined the fair market value of
Lifetouch stock to be $93 per share -- a ten percent drop from the previous year. On
June 30, 2016, they valued the stock at $88 per share. On June 30, 2017, soon after
Evercore became Trustee, the Anniversary Date fair market value tumbled to $56 per

                                           -4-
share. Plaintiffs claim the outward manifestations of Lifetouch’s financial struggles
occurred during 2015 and 2016; the Trustee Defendants breached the duty of
prudence by failing to investigate “the obvious overvaluation of Lifetouch stock” in
those years, resulting in excessive fair market values that harmed Plan participants.
In January 2018, Shutterfly, Inc. bought Lifetouch for $825 million. Following the
sale, the Plan terminated and paid out the remaining participants in cash.

      The district court concluded that Plaintiffs failed to plausibly allege that
defendants inflated the fair market value of Lifetouch stock in 2015 and 2016, and,
because there is no duty to diversify an ESOP’s holdings, failed to plausibly allege
that Defendants were imprudent in not removing the Plan’s investment in that stock.
The court dismissed the claim that the Board and Lifetouch breached a duty to
monitor because the Trustee Defendants did not breach their duty of prudence.

                                  III. Discussion

       The primary issue on appeal is whether the district court erred in dismissing
Plaintiffs’ claim that the Trustee Defendants breached their ERISA duty of prudence
by overvaluing the fair market value of Lifetouch stock in 2015 and 2016. Before
reaching the merits of that issue, Plaintiffs and the Secretary of Labor raise a
recurring issue regarding the applicable standard for reviewing the sufficiency of
certain allegations in Plaintiffs’ Amended Complaint.

      A. In a seven-page section of the Amended Complaint that alleges fiduciary
breaches by the Trustee Defendants, Plaintiffs augmented allegations that the Trustee
Defendants failed to take into account Lifetouch’s evident signs of financial decline
in 2015 and 2016 with a more sinister allegation:

            61. Indeed, there seems to have been a concerted effort by
      Lifetouch senior executives to ensure the inflated value of Lifetouch

                                         -5-
      stock in 2015 and 2016. One of the metrics used to calculate the success
      of Lifetouch during this time was to look at the number of “sits” -- photo
      sittings -- that the Company had booked. The greater the number of sits,
      the higher the valuation of Lifetouch stock. Yet Lifetouch’s practice
      during this time was to manipulate this figure to make the value of the
      Company look greater than it actually was. For example, if Lifetouch
      booked a family of five for a photoshoot, instead of marking that shoot
      as one “sit,” Lifetouch would count it as six -- one for the family, and
      then one for each individual member of the family. Yet Lifetouch was
      only profiting from one sit; but the valuation would be inflated because
      the Company counted the one shoot as six sits. Similarly, Lifetouch
      would send large teams of employees to do photoshoots in faraway
      places even though only one or two appointments had been booked, and
      the profit from the shoot could not justify the expense of the travel.
      Such expensive shoots counted as sits, however, and thus further
      boosted Lifetouch’s ostensible value when it came time for the stock
      price assessment. (During 2015 and 2016, of course, the Trustee was
      composed of senior Lifetouch executives and not a third party).

       Defendants argued in their motion to dismiss that this was an allegation of
fraudulent overvaluation that was not pleaded with the specificity required by Rule
9(b) of the Federal Rules of Civil Procedure. The district court agreed this part of the
imprudence claim was “grounded in fraud” and failed to meet Rule 9(b)’s standard
that the circumstances constituting fraud must be pleaded “with particularity”:

      This alleged conduct -- providing inaccurate and misleading information
      to the independent appraiser -- sounds in fraud. Moreover, Plaintiffs do
      not allege that the Trustees simply had knowledge of and failed to
      disclose fraud; they allege that they breached their duty by committing
      fraud. . . . Consequently, the heightened Rule 9(b) pleading standard
      applies to Plaintiffs’ claim that the Trustees manipulated the stock value.
      The remaining allegation -- Defendants’ failures to investigate and
      remove imprudent investments -- is not based on fraudulent conduct,
      and thus, Rule 9(b) does not apply to [this] claim.



                                          -6-
      Based on this ruling, the district court ignored the “Sits Scheme” allegations
in Paragraph 61 in considering, under the less rigorous pleading standard in Rule
8(a), whether the remaining allegations plausibly stated a claim the Trustee
Defendants breached their duty of prudence by overvaluing Lifetouch stock in 2015
and 2016. On appeal, Plaintiffs argue that, when an ERISA breach of duty claim is
pleaded, Rule 9(b) should only apply to an allegation that the ERISA fiduciary
committed fraud, not to a claim that the fiduciary failed to act on the basis of
another’s fraud.2 The Secretary of Labor as amicus argues the district court erred in
concluding that Rule 9(b) governs allegations that an ERISA fiduciary “provid[ed]
inaccurate and misleading information to the independent appraiser.”

        We believe the Secretary misconstrued the district court’s opinion in equating
the court’s application of Rule 9(b) to the “Sits Scheme” allegations with a holding
that Rule 9(b) applies to all allegations that a fiduciary provided “inaccurate and
misleading information” to an independent appraiser. The district court carefully
confined its application of Rule 9(b) to “Plaintiffs’ claims of fraudulent data
manipulation.” At oral argument, counsel for the Secretary agreed that Rule 9(b)
applies to a breach of fiduciary duty claim when the alleged breach is the commission
of a fraud. We conclude that is what the district court intended when it ruled that the
sits allegations were grounded in fraud, consistent with our analysis of claims under
the Interstate Land Sales Full Disclosure Act in Streambend, 781 F.3d at 1010-13.




      2
        Though we have not addressed the issue in this context, the Seventh Circuit
rejected Plaintiffs’ contention in Pugh v. Tribune Co., 521 F.3d 686, 700 (7th Cir.
2008), concluding that an allegation that ESOP fiduciaries actually knew about fraud
that overstated a public company’s circulation figures would be “tantamount to a
claim of fraud against the defendants themselves, subjecting the complaint to the
stricter pleading standards of Rule 9(b).” We are inclined to agree. Cf. Streambend
Properties II, LLC v. Ivy Tower Minneapolis, LLC, 781 F.3d 1003, 1013 (8th Cir.
2015); Brown v. Medtronic, Inc., 628 F.3d 451, 459 (8th Cir. 2010).

                                         -7-
       We further conclude that we need not decide whether Rule 9(b) applied to the
allegations in Paragraph 61 because, in their briefs on appeal, Plaintiffs state they
only alleged that the Board and Lifetouch breached the ERISA duty of loyalty by
manipulating financial data, whereas “the Trustee Defendants are nowhere alleged to
have engaged in such manipulation.” That is a reinterpretation of Paragraph 61 and
their argument to the district court. But it is binding on Plaintiffs on appeal, and it
renders the Rule 9(b) issue irrelevant.

       Plaintiffs’ complaint on appeal is that the district court improperly stripped the
Sits Scheme allegations from its analysis of whether the Trustee Defendants breached
their duty of prudence because the allegation was grounded in fraud and had not been
pleaded with sufficient particularity. If the Trustee Defendants were not alleged to
have engaged in manipulation, then the Sits Scheme allegation does not support the
plausibility of Plaintiffs’ breach of duty claim evaluated under the notice pleading
standards of Federal Rule 8(a). Paragraph 61 fails to allege what “senior executives”
engaged in the Sits Scheme; whether the sits figures were provided to the independent
appraiser and, if so, how that affected his annual valuations; or that the Trustee
Defendants even knew of the scheme, much less used it in determining the fair market
value of Lifetouch stock in 2015 and 2016 based on the appraiser’s valuations. Thus,
the district court did not err in ignoring these allegations in determining whether
Plaintiffs plausibly alleged that the Trustee Defendants breached the duty of prudence
by overvaluing Lifetouch stock in 2015 and 2016, or by failing to investigate whether
the Anniversary Date valuations were overvalued.

       B. Turning to the merits of that claim, the district court succinctly summarized
Plaintiffs’ remaining factual allegations:

      Plaintiffs allege that Lifetouch experienced serious financial problems
      in 2015 and 2016. Further, Plaintiffs assert that no negative events
      occurred internally at Lifetouch in 2017 that would have materially


                                          -8-
      impacted Lifetouch’s value. Yet, Lifetouch’s stock value did not drop
      dramatically until 2017. Therefore, say Plaintiffs, Defendants must have
      overvalued the 2015 and 2016 stock price[s] and withheld Lifetouch’s
      economic struggles to maintain these artificially inflated values.

On appeal, Plaintiffs assert that their claim concerns whether the Amended Complaint
plausibly alleged that, had the Trustee Defendants fulfilled their duty of carefully
investigating and monitoring the valuation of Lifetouch stock, they would not have
missed that Lifetouch’s well-documented decline during 2015 and 2016 meant the
stock was overvalued in those years and would have reconsidered “the continued
prudence of Lifetouch as a retirement investment” for Plan participants. They rely
on Tibble v. Edison Intern., 135 S. Ct. 1823, 1829 (2015) (An ERISA plaintiff “may
allege that a fiduciary breached the duty of prudence by failing to properly monitor
investments and remove imprudent ones.”).

       The Trustee Defendants correctly respond that Plaintiffs did not appeal the
district court’s dismissal of their claim that the Trustee Defendants breached the duty
of prudence by failing to “remove” Lifetouch stock from the Plan when it became an
excessively risky investment. That was the issue in Tibble, which involved an ERISA
plan whose fiduciaries were subject to the duty to diversify, the duty that dictates how
a traditional fiduciary evaluates investment options under trust law. “Diversification
is at the heart of prudent investment under the prudent investor standards of the
Restatement (Third) of Trusts and the [Uniform Prudent Investor Act]. This is
because prudence under these standards is determined, not as to each asset in
isolation, but as to the trust’s entire portfolio.” Amy Morris Hess et al., Bogert’s The
Law of Trusts and Trustees § 612 (digital ed. 2019) (footnote omitted); see 29 C.F.R.
§ 2550.404a-1(b)(2)(i).

      Congress eliminated diversification as a prudential consideration for ESOP
fiduciaries. The Supreme Court addressed an ESOP fiduciary’s more limited duty of


                                          -9-
prudence in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014). In rejecting
a “presumption of prudence” in favor of ESOP fiduciaries who buy and hold
employer stock, the Court noted the ESOP fiduciary’s exemption from the duty to
diversify. Id. at 416-19. An ESOP invests in employer securities because that is what
it is designed to do. Therefore, any prudential duty to monitor that investment cannot
be defined by traditional trust law standards, whether the employer’s stock is publicly
or privately held. “[T]he prudence requirement is flexible, such that the adequacy of
a fiduciary’s independent investigation and ultimate investment selection is evaluated
in light of the ‘character and aims’ of the particular type of plan he serves.” In re
Unisys Sav. Plan Litig., 74 F.3d 420, 434 (3d Cir.), cert. denied, 519 U.S. 810 (1996).
The Supreme Court made this point more dramatically in Dudenhoeffer: when the
employer’s stock appears risky, the ESOP fiduciary “finds himself between a rock
and a hard place: If he keeps investing and the stock goes down he may be sued for
acting imprudently . . . but if he stops investing and the stock goes up he may be sued
for disobeying the plan documents.” 573 U.S. at 424.3

       In this case, the Trustee Defendants were monitoring an ESOP Plan in which
the employer’s charter required that all outstanding stock be owned by the ESOP in
trust for employee participants. Thus, if the Trustee Defendants had determined that
Lifetouch stock was excessively risky in 2015 and 2016, the only potential buyer for
the stock was Lifetouch, which in effect would be a stock redemption. The Amended
Complaint did not allege that Lifetouch would be required to redeem its stock at the

      3
       The Secretary of Labor argues that Dudenhoeffer does not apply to an ESOP
fiduciary if the employer’s stock, like Lifetouch, is not publicly traded. The Supreme
Court has not addressed this issue, and we have no need to decide it. See Amgen Inc.
v. Harris, 136 S. Ct. 758 (2016); Retirement Plans Comm. of IBM v. Jander, No. 18-
1165, 589 U.S. __ (January 14, 2020). We note that the analysis may be different if
an ESOP trustee charged with engaging in a prohibited transaction in violation of 29
U.S.C. § 1106(a)(1)(A) defends by claiming that the employer stock was bought or
sold “for adequate consideration,” § 1108(e)(1). See Perez v. Bruister, 823 F.3d 250,
262-65 (5th Cir. 2016).

                                         -10-
Trustees’ demand (corporate law would suggest not, and the Plan is silent), that
Lifetouch would have agreed to buy, or that forcing a troubled business to repurchase
its shares was financially feasible and would not inflict grievous harm on the
company that employed Plan participants whose interests the Trustee Defendants
were duty-bound to protect. Therefore, the imprudent retention allegations in the
Amended Complaint were properly dismissed for failure to state a claim, even if not
waived on appeal. See Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56, 68 (2d
Cir. 2016).

       That leaves the issue Plaintiffs did appeal, whether the Amended Complaint
plausibly alleged that the Trustee Defendants breached their duty of prudence by
failing to investigate and remedy the overvaluation of Lifetouch stock in the June 30,
2015 and June 30, 2016 Anniversary Date valuations. “To prevail on a claim of
breach of fiduciary duty under ERISA, the plaintiff must make a prima facie showing
that a defendant acted as a fiduciary, breached his fiduciary duties, and thereby
caused a loss to the Plan.” Usenko, 926 F.3d at 472 (cleaned up). For this claim, the
Amended Complaint alleged:

      Because the shares were overvalued by the Trustee, the contribution that
      Lifetouch made to the Plan in those years was not able to purchase as
      many shares of Lifetouch stock, which resulted in fewer shares of stock
      available to distribute to Plan participant accounts.

This allegation is directly contrary to the applicable terms of the Plan. Section 16(a)
dealt specifically with mandatory repurchases of Lifetouch stock from the account of
a retiring participant. “For purposes of this Section,” Section 16(a) provided that
“fair market value shall be based upon the appraised fair market value determined as
of the [previous June 30] Anniversary Date.” On the other hand, Section 5 of the
Plan, entitled “Employer Contributions,” had a significantly different valuation
provision:


                                         -11-
            (c) . . . Employer Contributions may be paid in cash, shares of
      Company Stock or other property as the Company’s Board of Directors
      may from time to time determine. Shares of Company Stock and other
      property will be valued at their then fair market value.

This reference to fair market value obviously does not refer to the previous June 30
Anniversary Date valuation -- the word “then” does not mean the prior June 30, and
the Anniversary Date valuations did not value “other property.” The Amended
Complaint did not allege what “fair market value” the Board or the Trustee
Defendants used in valuing Lifetouch contributions in 2015 or 2016, much less allege
facts plausibly showing breach of fiduciary duty or loss to the Plan by reason of those
valuations. Thus, the district court did not err in dismissing the overvaluation claim
for failure to state a plausible claim.

                                   IV. Conclusion

      Because Plaintiffs failed to plead a plausible breach of the duty of prudence by
the Trustee Defendants, the district court properly dismissed their duty to monitor
claims against the Board and Lifetouch because those claims cannot “survive without
a sufficiently pled theory of an underlying breach.” Brown, 628 F.3d at 461.
Accordingly, the judgment of the district court is affirmed.
                       ______________________________




                                         -12-
