text:
    H. Kenneth LEFOLDT, Jr., in his capacity as Trustee FOR the NATCHEZ REGIONAL MEDICAL CENTER LIQUIDATION TRUST, Plaintiff-Appellee, v. HORNE, L.L.P., Defendant-Appellant.
    No. 16-60245
    United States Court of Appeals, Fifth Circuit.
    FILED April 11, 2017
    REVISED April 12, 2017
    See also 2017 WL 1279258.

      Brent Bennett Barriere, Alysson Leigh Mills, Esq., Degan Skylar Rosenbloom, Esq., Rebecca Sha, Fishman Haygood, L.L.P., Douglas Scott Draper, Esq., Heller, Draper, Patrick, Horn & Dabney, L.L.C., New Orleans, LA, for Plaintiff-Appellee.
    Alan Walter Perry, Counsel, Simon Turner Bailey, Esq., Michael James Bentley, Esq., Bradley Arant Boult Cummings, L.L.P., Jackson, MS, for Defendant-Appellant.
    Before KING, OWEN, and HAYNES, Circuit Judges.
   PRISCILLA R. OWEN, Circuit Judge:

Horne, L.L.P. (Horne) moved to compel arbitration and to stay proceedings in federal district court pending arbitration. Horne and the chief financial officer of Natchez Regional Medical Center (NRMC), a community hospital that is a Mississippi public entity, signed three documents (in 2009, 2010, and 2012) detailing terms upon which Horne would provide audit services for NRMC. A threshold issue in this interlocutory appeal is whether the “minutes rule,” also known as the “minutes requirement,” under Mississippi law pertains to “the issue of the contract’s validity,” or instead more closely resembles “whether the alleged obligor [NRMC] ever signed the contract.”

We conclude that, with respect to the 2010 and 2012 engagement letters, the minutes rule pertains to whether written agreements between NRMC and Horne were formed in each of those years, and therefore, whether written contracts were consummated is a question for the courts rather than an arbitrator. We conclude that because of the minutes requirement, the 2010 and 2012 engagement letters are not contracts to which NRMC is a party, and therefore, NRMC is not a party to the arbitration provisions contained in the 2010 and 2012 engagement letters.

The minutes of NRMC’s board reflect that an agreement with Horne was reached in 2009, and we therefore conclude that the minutes rule does not pertain to that contract’s formation. NRMC’s arguments based on the minutes rule instead relate to the validity or enforceability of the terms of that agreement generally and do not go “to the making of the agreement to arbitrate.” Parties may agree that the validity or enforceability of a contract’s terms are to be resolved in arbitration. However, the scope of the arbitration agreement in the 2009 engagement letter was not raised as an issue in this appeal and has not been resolved in the district court. On remand, the district court should determine the scope of the arbitration agreement — specifically, whether the arbitration agreement in the 2009 engagement letter requires arbitration of the effect of the minutes rule on the validity of the 2009 engagement letter. If the parties did not agree to arbitrate that issue, then the district court should resolve the effect of the minutes rule on the validity of the 2009 letter agreement.

We further conclude that the Mississippi minutes rule is one of general applicability to Mississippi contracts with public entities and the requirement of § 2 of the Federal Arbitration Act (FAA) that “courts must place arbitration agreements on an equal footing with other contracts” does not foreclose its application in this case.

The district court’s denial of the motion to compel arbitration with regard to the 2010 and 2012 engagement letters was not error. However, we vacate the district court’s denial of Horne’s motion to compel arbitration with regard to the 2009 letter agreement and remand to the district court for further proceedings.

I

We briefly review the underlying facts and the procedural posture of the proceedings in the district court. NRMC’s Chief Financial Officer, Charles Mock (Mock), purportedly on behalf of NRMC, signed three engagement letters that are pertinent to this appeal detailing the terms upon which Horne would provide auditing services to NRMC. Each engagement letter contained arbitration provisions.

The first agreement relevant to this appeal was presented by Horne to Mock in August 2009. On August 12, 2009, the minutes of NRMC’s board reflect:

Management Report: Charles Mock reported that he had received a proposal for the annual audit for a one year contract from the Horne CPA Group of Jackson, Mississippi. Mr. Bland asked if other bids were taken and Mock reported that only one bid had been received and that from Horne. No action was taken at this time. Mr. Bland asked Mr. Mock to approach Horne again to request they consider not increasing their bid from the prior year.

Subsequent board minutes, dated September 2, 2009, reflect:

OTHER BUSINESS: C. Mock presented the bids for auditor with Horne CPA group costing 48,000.00 and BED CPA costing 58,000.00 plus expense charges including travel, report processing, etc. R. Grennell made the motion to accept the Horne CPA Group audit bid with B. Pyron seconding the motion. The motion passed unanimously by the Board to accept the Horne CPA Group audit bid at $48,000.00.

Mock, as Chief Financial Officer of NRMC, executed the 2009 engagement letter with Horne following the September 2, 2009, session. Subsequently, in April 2010, minutes of the board of trustees reflect that the board reviewed NRMC’s financial statements for 2009 with Horne.

Mock signed two other engagement letters, in 2010 and 2012, purporting to act on behalf of NRMC in retaining Horne to perform auditing services, but there is no mention of either of the agreements in the minutes of NRMC’s board of trustees. Nevertheless, NRMC admits that Horne performed annual audit services and that NRMC paid the amount specified in the engagement letters, $48,000 each year.

NRMC filed a voluntary petition for relief pursuant to Chapter 9 of the bankruptcy code in 2014. The court-appointed trustee for NRMC’s Chapter 9 bankruptcy estate is H. Kenneth Lefoldt, Jr. The Chapter 9 plan confirmed by the bankruptcy court gave Lefoldt the right to pursue all claims, demands, and causes of action belonging to NRMC. Lefoldt, as Trustee, has sued Horne, contending that Horne committed professional malpractice in auditing NRMC. Because the Trustee stands in the stead of NRMC, and to minimize confusion, we will refer only to “NRMC.”

Horne filed a motion in federal district court seeking to compel arbitration and requesting a stay pending arbitration. The district court denied that motion, concluding that because none of the arbitration agreements were set forth or described in the board’s minutes, “no such agreement [to arbitrate] exists.” The district court additionally rejected Horne’s contention that NRMC should be equitably estopped from denying the existence and enforceability of the engagement letters and the arbitration provisions contained in them. Horne has appealed.

II

The 2009 engagement letter contained an arbitration provision, .set forth in the margin, that is more limited than those in the 2010 and 2012 agreements. The 2010 and 2012 engagement letters each have a lengthy “Claims Resolution” section that includes an arbitration clause that provides:

Any dispute arising out of or relating to this engagement will be resolved by binding arbitration conducted before a panel of three arbitrators in accordance with the United States Arbitration Act and, to the extent not inconsistent with such law, the Professional Accounting and Related Services Dispute Resolution Rules of the American Arbitration Association. ... The arbitrator ... shall determine any controversy concerning whether a claim is arbitrable.

The Supreme Court has “recognized that parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” The Court has explained that “[a]n agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on. any other.” Such an agreement “is valid under § 2 ‘save upon such grounds as exist at law or in equity for the revocation of any contract,’ and federal courts can enforce the agreement by staying federal litigation under § 3 and compelling arbitration under § 4.”

This appeal presents several questions. Among them are whether the Mississippi minutes rule (1) invalidates the engagement letters, and consequently the arbitration provisions, or (2) invalidates the arbi-trations provisions, regardless of whether other provisions in the engagement letters are enforceable, or (3) requires the conclusion that no contract at all was formed between Horne and NRMC. We first consider whether the minutes requirement raises a question as to “whether any agreement between the parties ‘was ever concluded.’ ”

The Supreme Court has drawn a distinction between “validity” of an agreement and “whether any agreement between the parties ‘was ever concluded.’ ” The Court made clear in Buckeye Check Cashing and Rent-A-Center that when it explained that “[t]here are two types of validity challenges under § 2,” it was not addressing a contention that no agreement was ever concluded by the parties. The Court said in Buckeye Check Cashing that:

The issue of the contract’s validity is different from the issue whether any agreement between the alleged obligor and obligee was ever concluded. Our opinion today addresses only the former, and does not speak to the issue decided in the cases cited by respondents (and by the Florida Supreme Court), which hold that it is for courts to decide whether the alleged obligor ever signed the contract, Chastain v. Robinson-Humphrey Co., 957 F.2d 851 (C.A.11 1992), whether the signor lacked authority to commit the alleged principal, Sandvik AB v. Advent Int’l Corp., 220 F.3d 99 (C.A.3 2000); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F.3d 587 (C.A.7 2001), and whether the signor lacked the mental capacity to assent, Spahr v. Secco, 330 F.3d 1266 (C.A.10 2003).

The Supreme Court has instructed that “[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally ... should apply ordinary state-law principles that govern the formation of contracts.” In the present case, a Mississippi statute requires the board of trustees of a community hospital to “keep minutes of its official business,” and the Mississippi courts have construed this and similar statutes to give rise to the minutes rule at issue in this case. We therefore consider how the state-law minutes rule has been interpreted and applied by the Mississippi courts in deciding whether it pertains to the validity or enforceability of an agreement or instead stands as a bar to the formation of a contract with a state entity such as NRMC.

In a 2015 decision, Wellness, Inc. v. Pearl River County Hospital, the Mississippi Supreme Court reviewed the purposes of the minutes requirement. The court concluded that the requirement “has two major functions” that had been synthesized in a 1937 decision:

(1) That when authority is conferred upon a board, the public is entitled to the judgment of the board after an examination of a proposal and a discussion of it among the members to the end that the result reached will represent the wisdom of the majority rather than the opinion or preference of some individual member; and (2) that the decision or order when made shall not be subject to the uncertainties of the recollection of individual witnesses of what transpired, but that the action taken will be evidenced by a written memorial entered upon the minutes at the time, and to which the public may have access to see what was actually done.

This reflects that the minutes rule is partially in the nature of a statute of frauds or a prohibition of reliance on parol evidence to establish the terms of a contract with a public entity. Generally, requirements that contracts be in writing or comply with certain formalities relate to enforceability, not to whether the parties had a meeting of the minds. But a requirement that a majority of a quorum of the board assent to a contract, in an open meeting, seems more in the nature of a contract formation requirement. In Wellness, Inc., the Mississippi Supreme Court explained in this regard that “the reasoning behind requiring contracts to be spread upon the minutes is that the minutes rule ‘protect[s] the board from being bound by the unauthorized acts of individual members of the board or an agent thereof ” and that “by enforcing the minutes rule, the Court has recognized the importance of recorded, express consent by all board members to board actions, as board members are elected officials charged with the protection of the public’s funds.”

Nevertheless, whether the minutes requirement precludes enforcement of an agreement or instead forecloses formation of an agreement, given the facts in the present case, is a close question. Horne contends, with some purchase, that “the rule accepts that a contract exists between the parties, but simply refuses to enforce the contract on public policy grounds.”

This is trae with regard to some fact patterns, as the Mississippi Supreme Court’s decision in Wellness, Inc. recognized. The court recited the rule that “[n]o contract can be implied or presumed, it must be stated in express terms and recorded on the official minutes and the action of the board.” “However,” the court explained, “the entire contract need not be placed on the minutes. Instead, it may be enforced where ‘enough of the terms and conditions of the contract are contained in the minutes for determination of the liabilities and obligations of the contracting parties without the necessity of resorting to other evidence.” This unmistakably means that in some instances, the minutes rale is not a matter of contract formation but instead is a rule preventing consideration of evidence of the terms of the contract other than what is set forth in the minutes. When applied in this manner, the minutes rule seems to be one regarding validity or, more precisely, enforceability of contract terms not described in the minutes. The existence of a contract is not at issue in such a case; a meeting of the minds between the board and another party has occurred; but only the terms of the “contract” that are “contained in the minutes” are enforceable.

Another Mississippi decision, Thompson v. Jones County Community Hospital, reflects that a board consummated a contract to employ Thompson as the executive director of a county hospital. The court affirmed the dismissal of Thompson’s claim for salary owed because the amount of his compensation was not set forth in the minutes, even though the minutes reflected the award of a four-year contract, gave a member of the board the authority to draft the contract’s terms, and stated that the contract was reviewed and approved. The court refused to resort to outside evidence to determine the salary, hewing to the rule that “it [is] the responsibility of the [private ' contracting party] to see that the contract was properly recorded on the minutes.” Obviously, the board had agreed to compensate Thompson, but the minutes requirement limited a court’s ability to ascertain and enforce the amount he was to have been paid.

Based on these decisions, we cannot say that, categorically, the Mississippi minutes requirement pertains to contract formation rather than the validity or enforceability of a contract or certain of its provisions. In some circumstances, the minutes requirement bars proof of some of the terms of a contract that was in fact concluded with a board and the existence of which is reflected Board minutes. In such situations, the minutes rule is more properly characterized as relating to the validity of contract terms. In other circumstances, the minutes requirement is more properly characterized as pertaining to contract formation because it results in no formation of a contract at all, or the rule operates to prevent a board from being bound by the actions of single board member or an agent who acted without authority.

With regard to the 2010 and 2012 engagement letters, the question of “whether any agreement between the parties ‘was ever concluded’ ” is presented because neither of these agreements is referenced, at all, in the minutes of NRMC’s board. The minutes rule under Mississippi law requires that the board of a public entity cannot act to enter into a contract unless that action is taken by a majority of a quorum of the board at a meeting and is reflected in the board’s minutes. Therefore, whether that rule of contract formation applies and whether contracts were formed between NRMC and Horne in 2010 and 2012 is a matter to be resolved by the courts, not an arbitrator or arbitration panel. In ruling upon Horne’s motion to compel arbitration, the district court expressly declined to resolve at that point in the litigation whether the 2010 or 2012 engagement letters constituted contracts between NRMC and Horne. The district- court instead concluded that no arbitration agreements existed. For reasons we will explain in considering whether NRMC challenged the validity of the arbitration provision in the 2009 engagement letter (as distinguished from challenging the validity of the entire agreement), the district court should not have reached the question of whether an arbitration agreement existed without first determining whether any contract existed. However, there are no factual disputes, and whether the 2010 and 2012 engagement letters constitute contracts with NRMC is a question of law. We conclude that because of the minutes requirement, NRMC is not a party to the 2010 and 2012 engagement letters. No agreement to arbitrate, other than the arbitration provisions of those letter agreements, has been alleged. Accordingly, no error occurred when the district court denied Horne’s motion to compel arbitration as to the 2010 and 2012 engagement letters.

Unlike the 2010 and 2012 engagement letters, the minutes of NRMC’s board unequivocally reflect that a contract between Horne and NRMC was concluded in 2009, and NRMC does not contend otherwise. NRMC argues instead that the minutes rule either forecloses the possibility that there was an agreement to arbitrate or precludes enforcement of the arbitration provision. Based on how the Mississippi courts have applied the minutes rule when the existence of a contract is reflected in the minutes, we conclude that, in such circumstances, the state-law requirement relates not to the formation of a contract, as that concept has been expressed in Supreme Court decisions including Rent-A-Center and Buckeye Check Cashing, but to what specific terms of the contract can be proven and enforced. NRMC’s challenge involves “validity,” not contract formation, with regard to the 2009 engagement letter. We must therefore ascertain whether NRMC’s contentions regarding the applicability of the minutes rules is, in actuality, a challenge to the validity of the arbitration provision, as distinguished from a challenge to the engagement agreement as a whole or other parts of the engagement letter.

The Supreme Court has explained that “[t]here are two types of validity challenges under § 2.” “One type challenges specifically the validity of the agreement to arbitrate.” “The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” The Supreme Court has held that even if “another provision of the contract, or ... the contract as a whole,” is invalid, unenforceable, voidable, or void, that “does not prevent a court from enforcing a specific agreement to arbitrate” because, “[a]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.”

The Court has given examples. “[I]n an employment contract many elements of alleged unconscionability applicable to the entire contract (outrageously low wages, for example) would not affect the agreement to arbitrate alone.” “But even where that is not the case — as in Prima Paint itself, where the alleged fraud that induced the whole contract equally induced the agreement to arbitrate which was part of that contract — we nonetheless require the basis of challenge to be directed specifically to the agreement to arbitrate before the court will intervene.” The Court similarly explained in Buckeye Check Cashing that “if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the making of the agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally.” That is a matter for the arbitrator.

In Buckeye Check Cashing, the Supreme Court rejected the argument that “since an agreement void ab initio under state law is not a ‘contract,’ there is no ‘written provision’ in or ‘controversy arising out of a ‘contract,’ to which § 2 can apply.” The Court explained that “contract,” as used in § 2, “which allows a challenge to an arbitration provision ‘upon such grounds as exist at law or in equity for revocation of any contract’” “must include contracts that later prove to be void.” The Court recognized “that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But it is equally true that respondents’ approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable.” The Court explained that “Prima Paint resolved this conundrum — and resolved it in favor of the separate enforceability of arbitration provisions.” The Court reiterated, “a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.”

The Court made clear that even if the contract in which an arbitration clause is included is void rather than voidable, that “distinction” is “irrelevant.” The arbitration agreement is severable, as a matter of federal law. It is only when the challenge is to the arbitration clause itself that the court, rather than an arbitrator, decides whether the arbitration agreement, as distinct from the contract in which it appears, is valid, irrevocable, or enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” The Court observed that in prior decisions, it had “rejected the proposition that the enforceability of the arbitration agreement turned on the state legislature’s judgment concerning the forum for enforcement of the state-law cause of action.” In Buckeye Check Cashing, the Court said “we cannot accept the Florida Supreme Court’s conclusion that enforceability of the arbitration agreement should turn on ‘Florida public policy and contract law.’ ”

The Fifth Circuit has applied the Supreme Court’s teaching. In Primerica Life Insurance Co. v. Broum, a party contended that, because he lacked mental capacity to execute a contract that contained an arbitration clause, the contract he signed was void and the court could not order arbitration. This court disagreed, holding that the “capacity defense is a defense to his entire agreement with CitiFinaneial and not a specific challenge to the arbitration clause.” The question of capacity and its effects on the contract was a matter for the arbitrator to decide. The Primerica opinion cited other decisions in which this court has held that a contention that a contract is void or unenforceable does not challenge directly the arbitration provision, and therefore, such challenges must be decided by the arbitrator rather than the court.

The Buckeye Check Cashing principles were further elucidated in Rentr-A-Center, West, Inc. v. Jackson. The agreement under scrutiny consisted only of an agreement to arbitrate employment disputes, and the specific provision within that agreement that Rent-A-Center sought to enforce was a “delegation provision ... that gave the arbitrator ‘exclusive authority to resolve any dispute relating to the ... enforceability’ ” of the agreement. Jackson, the employee, argued that the agreement as whole (as noted, an arbitration agreement) was unconscionable. But none of the arguments as to why the agreement was unconscionable pertained specifically to the delegation clause. The Court held that “unless Jackson challenged the delegation provision specifically, we must treat it as valid under § 2, and must enforce it under §§ 3 and 4, leaving any challenge to the validity .of the Agreement as a whole for the arbitrator.”

NRMC asserts that the arbitration provision in the 2009 engagement letter is invalid, unenforceable, revocable, voidable, or void because of the minutes requirement. But NRMC does not explain how the minutes rule operates on the arbitration provision any differently than it operates on other provisions of the 2009 engagement letter that are not reflected in the board’s minutes. As discussed above, the Supreme Court has rejected arguments that grounds for refusing to enforce a contract in its entirety, such as fraud in the inducement, ineluctably means that the arbitration agreement was also induced by fraud. An argument that fraud induced a contract is not the equivalent of a contention that there was “fraud in the inducement of the arbitration clause itself.” The Supreme Court explained in Buckeye Check Cashing that “if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the making of the agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally” The minutes requirement is generally applicable to the 2009 engagement letter. Accordingly, a claim that the minutes rule necessarily applies to the arbitration provision is not a claim that the minutes rule applies specifically to the agreement to arbitrate in a way that differs from its general effect. As explained in Rent-A-Center: “where the alleged fraud that induced the whole contract equally induced the agreement to arbitrate which was part of that contract — we nonetheless require the basis of challenge to be directed specifically to the agreement to arbitrate before the court will intervene.”

Accordingly, to the extent that NRMC relies on the minutes rule to challenge the “validity” of the 2009 agreement to arbitrate, that challenge fails because it is not, in actuality, a challenge directed specifically to the agreement to arbitrate. Whether and how the minutes rule applies to the 2009 engagement letter and the scope of the arbitration clause would be a matter for an arbitrator or arbitration panel unless there is “evidence that the contracting parties intended to withhold that issue [or issues] from arbitration.” What the parties intended to arbitrate, as expressed in the arbitration provisions, is not part of this appeal and is a matter to be resolved in further proceedings. On remand, the district court should resolve the scope of the arbitration agreement, including whether the arbitration agreement delegates to an arbitrator the question of the effect of the minutes requirement on the validity of the arbitration agreement in the 2009 engagement letter.

Ill

Horne contends that the FAA’s requirement that courts place arbitration contracts on “equal footing” with all other contracts forecloses the application of Mississippi’s minutes requirement to the engagement letters. Horne argues that (1) Mississippi’s state policy interests advanced by the minutes rule, which Horne contends are “assuring that contracts with public bodies are approved by a majority of the governing board and making those contracts available for public scrutiny,” elevates these policies above the parties’ contractual rights, “mak[ing] the policy of protecting public funds ‘paramount’ to an individual’s contract rights”; (2) the district court applied the minutes rule to deem the arbitration clause in the engagement letters unenforceable but permits NRMC to enforce other provisions of those letters; and (3) the portions of the contract that the board selects for inclusion in its minutes are-enforceable by a court, but selective use by the board to avoid certain clauses in contracts is not in accord with a federal principle that favors arbitration.

The Supreme Court has held that arbitration agreements cannot be “invalidated ... by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” This conclusion flows from § 2, which “permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract.’” The Supreme Court has reasoned that “[t]his saving clause permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or uneonscionability.’ ” State laws, including state-court decisions, that do not “placet] arbitration contracts ‘on equal footing with all other contracts’ ” cannot be used to invalidate or prevent the enforcement of an arbitration provision.

In DIRECTV, Inc., the Supreme Court determined whether state courts had failed to give equal footing to arbitration contracts by examining whether those courts would “interpret contracts other than arbitration contracts the same way.” The Court also examined whether the state court “would [have] reaeh[ed] the same interpretation of [the commonly-used phrase] ‘law of your state’ in any context other than arbitration.”

The minutes requirement is generally applicable in Mississippi to contracts with a public entity. An examination of Mississippi law reveals that Mississippi has applied the minutes requirement to a wide variety of contract provisions; its applicability is not limited to arbitration provisions.

A 1921 decision of the Supreme Court of Mississippi in Smith County v. Mangum reviewed a number of prior decisions dealing with the minutes requirement. Man-gum was the successful bidder for a county project to construct a bridge; he completed the bridge; members of the county board of supervisors accepted the bridge, certifying that it was in conformance with the county’s plans and specifications; and the county used the bridge. The Mississippi court nevertheless held that, because the acceptance of the bid was not “spread upon the minutes of the board of supervisors,” Mangum could not recover any payment for his work either under an express contract theory or on a quantum meruit basis under a theory of implied contract. The court quoted from numerous prior decisions applying the minutes requirement, explaining:

The board of supervisors may “by a new contract, or an amendment of its original contract, or by a ratification (all of which must be by acts of the board in open session, spread upon its minutes), bind the county to pay in each of the cases named. And parties contracting with the counties are charged with knowledge of this statute.”

The court held in Mangum that:

Under these authorities it is manifest that the board of supervisors of a county can only enter into an express contract by an order spread upon its minutes, and that there can be no such thing as a verbal or oral order of this board. It, therefore, follows that the appellee had no express contract with the county for the building of the bridge.

The Mississippi court was confronted with comparable facts in 1952, when a piling of a county bridge sank, and the president of the board of supervisors of the county, purporting to act for the board, rented two barges to support the bridge pending repairs. The court held that the owner of the barges could not recover the rental, reasoning that:

It has been repeatedly held in this State that a board of supervisors can contract and render the county liable only by a valid order duly entered upon its minutes, that all persons dealing with a board of supervisors are chargeable with knowledge of this law, that a county is not liable on a quantum meruit basis even though it may have made partial payments on a void oral contract, and, moreover, that in such case there is no estoppel against the county.

In a 1970, Burt v. Calhoun, Burt was the county engineer “on a number of state aid road projects” and was paid for work under contracts described, in the minutes. He sought payment for projects commenced after the last contract reflected in the board’s minutes had expired, contending that actions of the board set forth in its minutes regarding submissions to the division of state aid road construction, the engineer’s estimate for each project, and records of notices to bidders “ratified and confirmed the employment of Burt as [the] county engineer.” The Mississippi Supreme Court rejected this contention, holding that “[n]o contract can be implied or presumed, [it] must be stated in express terms and recorded on the official minutes as the action of the board of supervisors.”

Mississippi has enforced the minutes requirement strictly, even when “apparent injustice” results. In Colle Towing Co. v. Harrison County, the parties conceded that an attempt by the board to ratify a prior oral contract was “void and that no valid contract was ever made.” The court rejected the private party’s argument for equitable relief, noting that “a board of supervisors can contract and render the county liable only by a valid order duly entered upon its minutes.”

In Rawls Springs Utility District v. No-vak, the court refused to bind a board to an agreement made between the president of the district and a private individual that was not recorded on the minutes. Because the president had no authority to enter into the agreement, the court determined that the agreement was void, and the county could pursue its claims against the private individual.

Mississippi courts have enforced contract terms not fully described nor included in board minutes when the essential terms of the agreement could be ascertained from the minutes. For example, in Cheatham v. Smith, the minutes of the county board of education authorized the superintendent to contract with “named person[s] ... at the place and salaries as indicated below.” An extensive list included in the minutes named the plaintiff and set a precise salary. The court determined that a valid contract existed for the salary recorded in the minutes, even though the individual’s contract was not attached. The court refused, however, to enforce an educational prerequisite not reflected in the minutes.

In Community Extended Care Centers, Inc. v. Board of Supervisors for Humphreys County, a Mississippi appellate court considered a nursing home lease not attached to the original board minutes, but recorded in the chancery clerk’s office in the deed records. The minutes authorized the president to enter into a lease and reflected two lease amendments, and the board accepted monthly rent payments and collected taxes under the terms of the lease for thirteen years. Considering the acts described in the minutes, as well as the fact that the lease was recorded in the public land records, a divided panel determined that the lease was enforceable against the county.

These decisions do not support a contention that application of the minutes rule is applied selectively to arbitration provisions or an argument that the minutes requirement is not generally applicable to contracts with public entities. As to Horne’s contention that boards may choose to omit mention of arbitration provisions in minutes to avoid enforcement of arbitration clauses, Mississippi courts have held for decades that “it is the responsibility of the entity contracting with the Board, not the responsibility of the Board itself, to ensure that ‘the contract is legal and properly recorded on the minutes of the board.’ ” Horne’s contention that the minutes requirement fails to place arbitration contracts on equal footing with other contracts is not borne out by Mississippi court decisions.

IV

Horne argues in the alternative that the court should equitably estop NRMC from denying the existence of the three engagement letters and the enforceability of the arbitration agreements reflected in them. A court considering an argument that a party should be equitably estopped looks to state law theories of estoppel for guidance.

Mississippi courts have consistently denied attempts to overcome the minutes rule based on equitable arguments. In Colle Towing Co., the president of a county board of supervisors, purporting to act for the board, entered into an oral agreement to rent barges. Though it was conceded that a ratification order from the board was void, the private party attempted to recover in equity based on the oral agreement, periodic payments made by the county, and the attempted ratification. The court held that the county was “not liable on a quantum meruit basis even though it may have made partial payments on a void oral contract, and, moreover, that in such case there is no estoppel against the county,” reiterating that the board can act only through its minutes, and that “all persons dealing with a board of supervisors are chargeable with knowledge of [the minutes rule].”

Though the minutes rule may work “apparent injustice,” Mississippi’s law is unsympathetic to arguments based in equity and instead requires private parties to ensure that their contracts are properly recorded in board minutes. The district court did not abuse its discretion in rejecting Horne’s arguments sounding in equity.

For the foregoing reasons, the district court’s denial of Horne’s motion to compel arbitration is AFFIRMED as to the 2010 and 2012 engagement letters, and VACATED as to the 2009 engagement letter. We remand for further proceedings consistent with this opinion.

      . Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 n.1, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006).

      . Id. at 445, 126 S.Ct. 1204.

        . AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) (citing 9 U.S.C. § 2).

      . The 2009 engagement letter provided:
      The Hospital and HORNE both agree that any dispute over fees charged by the accountant to the client will be submitted for resolution by arbitration in accordance with the Rules for Professional Accounting and Related Services Disputes of the American Arbitration Association. Such arbitration shall be binding and final. In agreeing to arbitration, we both acknowledge that, in the event of a dispute over fees charged by HORNE, each of us is giving up the right to have the dispute decided in a court of law before a judge or jury and instead we are accepting the use of arbitration for resolution.

      . Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 68-69, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010).

      . Id. at 70, 130 S.Ct. 2112.

        . Id. (quoting 9 U.S.C. § 2).

      . Id. at 70 n.2, 130 S.Ct. 2772 (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 n.1, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006)).

      . Id. (“The issue of the agreement’s ‘validity’ is different from the issue whether any agreement between the parties 'was ever concluded.’ ”) (quoting Buckeye Check Cashing, 546 U.S. at 444 n.1, 126 S.Ct 1204).

      . Id.

      . See id.; Buckeye Check Cashing, 546 U.S. at 444 n.1, 126 S.Ct. 1204.

      . Buckeye Check Cashing, 546 U.S. at 444 n.1, 126 S.Ct. 1204.

      . First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).

      . Miss. Code. Ann. § 41-13-35(3) (West).

      . 178 So.3d 1287, 1292-93 (Miss. 2015).

      . Id. at 1293 (quoting Lee County v. James, 178 Miss. 554, 174 So. 76, 77 (Miss. 1937)).

      . See Myers v. Blair, 611 So.2d 969 (Miss. 1992) (stating that the "minutes are the exclusive evidence of what the board did; and that parol evidence is not admissible to show what action the board took”) (quoting Noxubee County v. Long, 141 Miss. 72, 106 So. 83, 86 (1925)).

      . See generally 10 Williston on Contracts § 27:1 (4th ed.) ("The great weight of authority in this country holds that an oral contract that does not comply with the requirements of the Statute of Frauds is ‘unenforceable’ rather than void.”); id. § 27:3 ("Under most states' Statutes of Frauds, it is generally held that the enforceability of a bargain, rather than its validity, depends on satisfaction of the Statute.”); Restatement (Second) of Contracts § 138 cmt. b (Am. Law. Inst. 1981) ("Despite variations in wording, the American statutes based on the English Statute of Frauds are read to make contracts unenforceable by action or defense unless the Statute is satisfied by a signed memorandum.”).

      . See Smith County v. Mangum, 127 Miss. 192, 89 So. 913, 914 (1921) ("The board of supervisors may 'by a new contract, or an amendment of its original contract, or by a ratification (all of which must be by acts of the board in open session, spread upon its minutes), bind the county to pay.’ ”) (quoting Groton Bridge & Mfg. Co. v. Bd. of Sup'rs of Warren Cty., 80 Miss. 214, 31 So. 711, 712 (1902)); see also Lee County, 174 So. at 77 ("When official authority is conferred upon a board or commission consisting of three or more members, the authority so conferred must be exercised by a legal quorum, and, as a general rule, the decisions to be executed or the contracts to be awarded by the board must be determined or decided upon only in or at a lawfully convened session, and the proceedings must be entered upon the minutes, of the board or commission.”).

      . Wellness, Inc., 178 So.3d at 1292 (quoting Cmty. Extended Care Ctrs., Inc. v. Bd. of Supervisors for Humphreys Cty., 756 So.2d 798, 800 (Miss. Ct. App. 1999)). The court explained, "However, Butler goes further, revealing the broader purpose of the minutes requirement. The Butler Court went on to state that if the board were not required to make the entries onto its minutes,
      an individual member of the board or agent thereof would be capable of binding the board and expending the public taxpayer’s money without the benefit of the consent of the board as a whole which was elected and responsible for such purposes. In sum, the policy of protecting the public's funds for use and for the public is paramount to other individual rights which may also be involved.”

        Id. (quoting Butler v. Bd. of Supervisors for Hinds Cty., 659 So.2d 578, 579 (Miss. 1995)).

      . Id. at 1291 (quoting Burt v. Calhoun, 231 So.2d 496, 499 (Miss. 1970)).

      . Id. (emphasis added).

      . 352 So.2d 795, 797-98 (Miss. 1977).

      . Id.

      . Id. at 798.

      . See generally Urban Developers LLC v. City of Jackson, 468 F.3d 281, 299 (5th Cir. 2006) (observing Mississippi's “past strict adherence to the requirement that a board of supervisors only be bound by a contract entered upon its minutes” and acknowledging that "[t]his requirement applies not only to contract formation, but to contract modification as well”) (quoting Butler v. Bd. of Supervisors for Hinds Cty., 659 So.2d 578, 581 (Miss. 1995)).

      . See, e.g., Rawls Springs Util. Dist. v. Novak, 765 So.2d 1288, 1292 (Miss. 2000) (holding that the utility district board’s president could not bind the board absent authorization or other action by the board on the minutes); Colle Towing Co. v. Harrison County, 213 Miss. 442, 57 So.2d 171, 172 (1952) (holding that the oral contract between the board president and a private party was "void and that no valid contract was ever made” with the county).

        . Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 n.2, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) ("The issue of the agreement’s 'validity' is different from the issue whether any agreement between the parties 'was ever concluded.' ") (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 n.1, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006)).

      . See supra n.28.

      . Rent-A-Center, 561 U.S. at 70, 130 S.Ct. 2772.

      . Buckeye Check Cashing, 546 U.S. at 444, 126 S.Ct. 1204; see also Rent-A-Center, 561 U.S. at 70, 130 S.Ct. 2772.

      . Buckeye Check Cashing, 546 U.S. at 444, 126 S.Ct. 1204; see also Rent-A-Center, 561 U.S. at 70, 130 S.Ct. 2772.

      . Rent-A-Center, 561 U.S. at 70-71, 130 S.Ct. 2772 (quoting Buckeye Check Cashing, 546 U.S. at 445, 126 S.Ct. 1204).

      . Id. at 71, 130 S.Ct. 2772.

      . Id. (referring to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)).

      . Buckeye Check Cashing, 546 U.S. at 445, 126 S.Ct 1204 (quoting Prima Paint, 388 U.S. at 403-04, 87 S.Ct. 1801).

      . Id. at 445-46, 126 S.Ct. 1204 ("[U]nless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”).

      . Id. at 447, 126 S.Ct. 1204.

      . Id. at 448, 126 S.Ct. 1204 (emphasis in original) (quoting 9 U.S.C. § 2).

      . Id. at 448-49, 126 S.Ct. 1204.

      . Id. at 449, 126 S.Ct. 1204.

      . Id.

      . Id. at 446, 126 S.Ct. 1204.

      . Id. at 445, 126 S.Ct. 1204 ("First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.”); Rent-A-Center,
        561 U.S. at 70-71, 130 S.Ct. 2772 ("[A] party’s challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate.”).

      . Buckeye Check Cashing, 546 U.S. at 445-46, 126 S.Ct. 1204 ("Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”).

      . 9 U.S.C. § 2.

      . Buckeye Check Cashing, 546 U.S. at 446, 126 S.Ct. 1204.

      . Id. (quoting Cardegna v. Buckeye Check Cashing, Inc., 894 So.2d 860, 864 (Fla. 2005)).

      . 304 F.3d 469, 471-72 (5th Cir. 2002).

      . Id. at 472.

      . Id.

      . See id.:

      This court has applied the Prima Paint rule on numerous occasions. See Snap-On Tools Corp. [v. Mason, 18 F.3d 1261, 1267-68 (5th Cir. 1994) ] (submitting fraudulent inducement defense to arbitration because allegations of fraud did not specifically relate to the arbitration clause); R.M. Perez & Assoc., Inc. [v. Welch, 960 F.2d 534, 538-39 (5th Cir. 1992) ] (submitting allegations of fraud in obtaining signatures to contract to arbitration because defense was not specific to the arbitration agreement); Lawrence v. Comprehensive Business Serv. Co., 833 F.2d 1159, 1162 (5th Cir. 1987) (submitting illegality defense to arbitration because it did not specifically relate to arbitration clause); Mesa Operating Ltd. Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 244 (5th Cir. 1986) (submitting claim that contract was void ab initio to arbitration because parties failed to demonstrate that the arbitration agreement was "invalid separately from the entire contract”).

      . 561 U.S. 63, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010).

      . Id. at 72, 130 S.Ct. 2772 (“In this case, the underlying contract is itself an arbitration agreement. But that makes no difference.”).

      . Id. at 71, 130 S.Ct. 2772.

      . Id. at 73, 130 S.Ct. 2772.

      . Id. at 72-75, 130 S.Ct. 2772.

      . Id. at 72, 130 S.Ct. 2772.

      . See, e.g., id. at 71, 130 S.Ct. 2772.

      . Id. (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)).

      . Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) (emphasis added) (quoting Prima Paint Corp., 388 U.S. at 403-04, 87 S.Ct. 1801).

      . Rent-A-Center, 561 U.S. at 71, 130 S.Ct. 2772.

      . Prima Paint, 388 U.S. at 396, 87 S.Ct. 1801; see also First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985, (1995) (“[A] court must defer to an arbitrator's arbitrability decision when the parties submitted that matter to arbitration.”).

      . See DIRECTV, Inc. v. Imburgia, - U.S. -, 136 S.Ct. 463, 468, 193 L.Ed.2d 365 (2015) (quoting Buckeye Check Cashing, 546 U.S. at 443, 126 S.Ct. 1204).

      . AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011).

      . Id. (quoting 9 U.S.C. § 2).

      . Id. (quoting Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)).

      . DIRECTV, Inc., 136 S.Ct. at 468 (quoting Buckeye Check Cashing, 546 U.S. at 443, 126 S.Ct. 1204).

      . Id. at 469.

      . Id.

        . 127 Miss. 192, 89 So. 913 (1921).

      . Id. at 913-14.

      . Id. at 913-15.

      . Id. at 914 (quoting Groton Bridge & Mfg. Co. v. Bd. of Sup’rs of Warren Cty., 80 Miss. 214, 31 So. 711, 712 (1902)).

      . Id.

      . Colle Towing Co. v. Harrison County, 213 Miss. 442, 57 So.2d 171, 171-72 (Miss. 1952).

      . Id. at 172.

      . Burt v. Calhoun, 231 So.2d 496, 497 (Miss. 1970).

      . Id. at 499.

      . Id.

      . Colle Towing Co., 57 So.2d at 172-73; see also Butler v. Bd. Of Supervisors for Hinds Cty., 659 So.2d 578, 580, 582 (Miss. 1995) (affirming dismissal based on the minutes rule, even though the contract changes had been approved by the board architect, because the changes were not entered upon the board minutes).

      . 57 So.2d at 172.

      . Id.

      . 765 So.2d 1288, 1290, 1292 (Miss. 2000).

      . Id. at 1292.

      . Id. at 1292-93.

      . 229 Miss. 803, 92 So.2d 203, 204 (1957).

      . Id.

      . Id. at 208.

      . Id. at 207.

      . 756 So.2d 798, 799-800, 801 (Miss. Ct. App. 1999).

      . Id. at 799-800.

      . Id. at 802-04. The dissent would have held the lease invalid because the minutes did not include the "principal rights and obligations of the parties,” including the lease payment. Id. at 805 (King, P. J., dissenting).

      . Wellness, Inc. v. Pearl River Cty. Hosp., 178 So.3d 1287, 1291 (Miss. 2015) (quoting Thompson v. Jones Cty. Cmty. Hosp., 352 So.2d 7-95, 797 (Miss. 1977)).

      . See Al Rushaid v. Nat’l Oilwell Varco, Inc., 814 F.3d 300, 305 (5th Cir. 2016).

      . 213 Miss. 442, 57 So.2d 171, 171-72 (1952).

      . Id.

      . Id. at 172. .

      . See Urban Developers LLC v. City of Jackson, 468 F.3d 281, 300, 302 (5th Cir. 2006); Rawls Springs Util. Dist. v. Novak, 765 So.2d 1288, 1292-93; Colle Towing Co., 57 So.2d at 172.


source: Caselaw Access Project

author: COOK, Circuit Judge.

license: Public Domain

text:
    Paul SAUMER; Walter A. Skalsky, individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. CLIFFS NATURAL RESOURCES INC., et al., Defendants-Appellees.
    No. 16-3449
    United States Court of Appeals, Sixth Circuit.
    Decided and Filed: April 7, 2017

      ON BRIEF: Edward W. Ciolko, Mark K. Gyandoh, Julie Siebert-Johnson, KES-SLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, for Appellants. John M. Newman, Geoffrey J. Ritts, Adrienne Ferraro Mueller, Emmett E. Robinson, JONES DAY, Cleveland, Ohio, for Appellees.
    Before: MERRITT, COOK, and McKEAGUE, Circuit Judges.
   OPINION

COOK, Circuit Judge.

The Employee Retirement Income Security Act (“ERISA”) regulates employer-administered retirement plans. To safeguard employees’ retirement assets, ERISA requires plan fiduciaries to, among other things, manage plan assets prudently and diversify investments “so as to minimize the risk of large losses.” 29 U.S.C. § 1104(a)(1). For the past forty years, however, ERISA has also encouraged employee ownership of employer stock. To promote this goal, ERISA permits companies to offer an Employee Stock Ownership Plan (“ESOP”) — a retirement option designed to invest primarily in employer stock. Id. § 1107(d)(6)(A). Because ESOPs are, by definition, not prudently diversified, Congress fashioned an exemption to these core fiduciary duties: “the diversification requirement ... and the prudence requirement (only to the extent that it requires diversification) of [§ 1104(a)(1) are] not violated by acquisition or holding of [employer stock].” Id. § 1104(a)(2).

This case requires us to reconcile ERISA’s requirement that a fiduciary act prudently with its blessing of undiversified ESOPs.

I.

Cliffs Natural Resources (“Cliffs”) is a publicly traded iron-ore and coal-mining company. Cliffs’s business depends on the price of iron ore, which in turn depends on Chinese economic growth. In 2011, Chinese construction projects drove iron-ore prices to all-time highs. Betting on continued high prices, Cliffs financed the purchase of a mine located in Northern Quebec (“Bloom Lake Mine”). Projecting that the mine would increase cash-flow, Cliffs upped its stock dividend to double the S&P 500 average.

In 2012, a global demand slump halved the price of iron ore, cutting deeply into Cliffs’s revenue. The Bloom Lake Mine quickly turned from the company’s lifeblood to, in the words of Cliffs’s CEO, “the cancer that we have to take out.” The mine’s costs exceeded predictions, often by significant margins. And the company’s decreased revenue and high costs exacerbated its financial weakness. The market responded: in 2013, Cliffs stock performed worse than any other company in the S&P 500. All told, Cliffs lost 95% of its value between 2011 and 2015 (compared to a roughly 50% gain for the broader market during the same period).

Plaintiffs are Cliffs employees who participated in the company’s defined-contribution plan, commonly known as a 401(k). The plan allowed participants to invest in twenty-eight mutual funds, including an array of target-date, stock, and bond funds. The plan also offered an ESOP that invested solely in Cliffs stock. Employees enjoyed discretion about whether to invest their income and matching contributions in the ESOP. If the employee failed to choose an investment option, the fiduciary directed contributions into a money-market fund.

After Cliffs stock cratered, plaintiffs filed a class action claiming that the plan’s fiduciaries — investment-committee members and corporate officers — imprudently retained Cliffs stock as an investment option. In particular, plaintiffs allege that it was imprudent to continue investing in Cliffs stock because 1) the company’s “risk profile and business prospects dramatically changed from when the investment was introduced ... due to ... the collapse of iron ore and coal prices” and Cliffs’s deteriorating financial condition, and 2) the fiduciaries possessed inside information showing that the stock was overvalued.

The defendants filed a motion to dismiss, which the district court granted. For the following reasons, we AFFIRM.

II.

We review de novo the district court’s dismissal of a complaint for failure to state a claim. Bennett v. MIS Corp., 607 F.3d 1076, 1091 (6th Cir. 2010) (citations omitted). We “accept all well-pleaded factual allegations as true and construe the complaint in the light most favorable to plaintiffs.” Id. (citation omitted). To survive a motion to dismiss, the complaint must include sufficient factual allegations to state a plausible claim to relief. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

III.

Courts have struggled to define a fiduciary’s duties when administering an ESOP. To understand why, one must grasp the “efficient market hypothesis” and the importance of diversification to prudent portfolio construction.

The efficient market hypothesis posits that “a stock price on an efficient market reflects all publicly available information.” Coburn v. Evercore Trust Co., 844 F.3d 965, 969 (D.C. Cir. 2016). According to the theory, “a security price in an efficient market ‘represents the market’s most accurate estimate of the value of a particular security based on its’ ” risk profile and expected future earnings. Id. (quoting Yesha Yadav, How Algorithmic Trading Undermines Efficiency in Capital Markers, 68 Vand. L. Rev. 1607, 1633 (2015)). Fiduciaries may therefore rely on a “security's market price as an unbiased assessment of the security’s value in light of all public information.” Fifth Third Bancorp v. Dudenhoeffer, — U.S. -, 134 S.Ct. 2459, 2471, 189 L.Ed.2d 457 (2014) (quoting Halliburton Co. v. Erica P. John Fund, Inc., — U.S. -, 134 S.Ct. 2398, 2411, 189 L.Ed.2d 339 (2014)).

Because new information and changing circumstances can alter the market’s assessment of a company’s value — and cause extreme fluctuations in a security’s price— ERISA requires fiduciaries to diversify their investments. See 29 U.S.C. § 1104(a)(1). By purchasing multiple securities, fiduciaries can mitigate company- and industry-specific risks. See Summers v. State St. Bank & Trust Co., 453 F.3d 404, 409 (7th Cir. 2006). Furthermore, by investing in multiple asset classes (real estate, domestic stocks, foreign stocks, bonds) that respond differently to market-wide economic events — such as recessions, wars, or elections — -a fiduciary can craft a portfolio with an acceptable expected rate of return and limited volatility. See Restatement (Third) of Trusts § 90 cmt. g (Am. Law Inst. 2007).

An investor’s decision to eschew diversification and instead invest in only a single stock can be calamitous. Many blue-chip companies — Eastman Kodak, Lehman Brothers, General Motors, Enron, Delta Airlines, to name a few — have declared bankruptcy, resulting in staggering losses to shareholders. Many other well-known companies have suffered losses in excess of 80%, far worse than the losses that the overall market suffered during the Great Recession. (American Express, Amazon, Starbucks, Texas Instruments, Intel, Time Warner, Celgene, Cooper Tire, International Paper, JC Penney, General Electric, among many others, have suffered such losses since the turn of the century.) Among smaller companies, huge losses are even more common. For retirees regularly withdrawing money from their investments, such downturns — even if the stock’s price eventually recovers — are financially devastating.

Because ESOPs invest primarily in a single stock, they expose participants to the risks inherent in an undiversified portfolio. And by investing primarily in their employer, participants take on even greater risk because their other sources of security — their income, health insurance, and if the company is a large regional employer, their home value — are intertwined with the employer’s health.

Congress’s imposition of strict prudential standards is therefore in tension with its blessing of undiversified ESOPs. On the one hand, the “central feature” of prudence is the reduction of risk through diversification, Restatement (Third) of Trusts § 90 cmt. g; on the other hand, investing primarily in one’s employer exposes retirees to excessive company-specific risk.

IV.

Plaintiffs first contend that publicly available information revealed Cliffs’s de-dining revenues, high operating costs, and unmanageable debt. Thus, plaintiffs argue that the fiduciary’s decision to invest in “Cliffs stock was imprudent ... because its risk profile and business prospects dramatically” deteriorated during the class period. According to plaintiffs, even if the market accurately priced Cliffs stock, the company’s “risk profile exceeded the reasonable bounds for a retirement option within a plan meant for retirement savings.”

The Moench Presumption. In evaluating these types of claims, several courts, including the Sixth Circuit, reconciled ERISA’s prudence requirement with its approval of ESOPs by applying a now-defunct presumption: “an ESOP fiduciary who invests the [retirement] assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision,” Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995), abrogated by Dudenhoeffer, 134 S.Ct. at 2467, unless the “company faced ‘impending collapse’ or ‘dire circumstances’ that could not have been foreseen by the founder of the plan,” White v. Marshall & Ilsley Corp., 714 F.3d 980, 989 (7th Cir. 2013) (collecting cases), abrogated by Dudenhoeffer, 134 S.Ct. at 2467. When circumstances present “unusually severe financial risks to participants,” the fiduciary must ignore the ESOP-plan instructions and diversify the plan’s holdings. Id. at 990 (citing Steinman v. Hicks, 352 F.3d 1101, 1106 (7th Cir. 2003)); see also Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir. 1995) (adopting the Moench presumption), abrogated by Dudenhoeffer, 134 S.Ct. at 2467.

The Moench Presumption’s Shortcomings. The Moench presumption failed to solve ERISA’s inherent contradiction — after all, a portfolio consisting of a single stock is always excessively risky, even if the company isn’t facing impending collapse. The presumption also proved unworkable because neither courts nor fiduciaries knew how far a company’s financial position needed .to deteriorate before the fiduciary must diversify ESOP assets. As Judge Posner put it, “determining the ‘right’ point, or even range of ‘right’ points, for an ESOP fiduciary to break the plan and start diversifying may be beyond the practical capacity of the courts to determine.” Summers, 453 F.3d at 411.

Even if a fiduciary divests a distressed company’s stock, such action may not help plan participants. By the time the fiduciary perceivés the danger, it’s likely too late: the market has already digested any new negative information and tanked the stock’s price, and the fiduciary would simply be selling low. Furthermore, a fiduciary’s decision to eliminate company stock “is a clarion call to the investment world that the [fiduciary] lacked confidence in the value of its stock, and could have a catastrophic effect on [the] stock price,” severely harming plan members. In re Comput. Scis. Corp. ERISA Litig., 635 F.Supp.2d 1128, 1136 (C.D. Cal. 2009).

Finally, fiduciaries deciding whether to maintain company stock as an investment option face a dilemma: if they continue investing in the employer and the stock goes down, plan participants might sue them for acting imprudently, in violation of § 1104(a)(1)(B); if they sell the company stock and the company recovers, plan participants might sue them for disobeying plan documents, in violation of § 1104(a)(1)(D). See Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 256 (5th Cir. 2008).

Dudenhoeffer. Against this backdrop, the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer, a stock-drop case similar to the case here. The plaintiffs, Fifth-Third Bank employees, invested heavily in the company’s stock through an ESOP. Dudenhoeffer, 134 S.Ct. at 2464. During the 2008-09 financial collapse, Fifth Third Bank’s stock plummeted, losing most of its value. Id. Plaintiffs sued, claiming that the Bank’s risk profile — its balance sheet included substantial subprime mortgages — made the company an imprudent investment. Id.

Relying on ERISA’s plain language, the Court scrapped the presumption of prudence, explaining that “ESOP fiduciaries are subject to the duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.” Id. at 2463. The Court also held, however, that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” Id. at 2471. Thus, ERISA fiduciaries may “prudently rely on the market price” when determining whether to offer company stock. Id.

Post-Dudenhoeffer Cases. Although the Court discarded the presumption of prudence, “Dudenhoeffer appears to have raised the bar for plaintiffs seeking to bring a claim based on a breach of the duty of prudence.” In re Lehman Bros. Sec. & ERISA Litig., 113 F.Supp.3d 745, 755 (S.D.N.Y. 2015). Because a fiduciary may prudently rely on a stock’s market price, Dudenhoeffer “effectively immunizes fiduciaries from imprudence claims relating to publicly traded securities in the absence of special circumstances.” Pfeil v. State St. Bank & Trust Co., 806 F.3d 377, 388 (6th Cir. 2015) (White, J., dissenting).

To illustrate, in Pfeil, the plaintiffs argued that ESOP fiduciaries imprudently offered General Motors stock as a retirement option even though “overwhelming evidence in the public domain rais[ed] serious question[s] concerning GM’s short-term viability.” Id. at 383. We held that the plaintiffs’ risk-based claim failed, reasoning “that the ‘excessively risky’ character of investing ESOP funds in stock of a company experiencing serious threats to its business in 2008 ‘is accounted for in the market price, and the Supreme Court held that fiduciaries may rely on the market price, absent any special circumstances affecting the reliability of the market price.’ ” Id. at 386 (quoting In re Citigroup, 104 F.Supp.3d 599, 615 (S.D.N.Y. 2015)). Although we acknowledged that ESOPs expose retirees to great risk, such “evils ... are endemic to the ESOP form established by Congress. A benefit of employees investing in their employer is that when the employer does well, the employees do well. A risk is that when the employer goes bankrupt, the employees do poorly.” Id. at 387.

Similarly, in Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56 (2d Cir. 2016), plaintiffs alleged that the fiduciary imprudently invested ESOP assets solely in Lehman Brothers. The plaintiffs argued that even if the market accurately priced the stock, the company was nonetheless excessively risky. Id. at 64-65. The court held that the fiduciary’s reliance on Lehman’s market price shielded it from “all allegations of imprudence based upon public information.” Id. at 66. “[Rjegardless of whether the allegations are framed in terms of market value or excessive risk,” the fiduciary could assume that the market price accurately reflected the security’s value. Id.) see also Coburn, 844 F.3d at 971 (dismissing employees’ claim that JC Penney’s stock was excessively risky to be a sole holding, and explaining that any “risk is accounted for in the market price of a security” (quoting Rinehart, 817 F.3d at 66)).

Application. Applying Dudenhoef-fer, we reject plaintiffs’ argument that Cliffs’s risk profile “exceeded the reasonable bounds for a retirement option.” Du-denhoejfer plainly holds that a fiduciary may rely on market price as an unbiased assessment of a security’s value. Plaintiffs attempt to sidestep Dudenhoejfer, arguing that although the Court foreclosed claims alleging that a fiduciary failed to perceive a company’s overvaluation, the Court didn’t foreclose “classic ERISA ... imprudence action[s].”

Plaintiffs’ argument misses the mark. The plaintiffs in Dudenhoejfer similarly argued that the fiduciary should have known that the company’s stock was “overvalued and excessively risky.” 134 S.Ct. at 2464 (emphasis added). The Court’s market-price-reliance rule dispatched both the value- and risk-based claims. Id. at 2471-72. Furthermore, Pfeil, Rinehart, and Coburn all hold that Dudenhoejfer “foreclose^] breach of prudence claims based on public information irrespective of whether such claims are characterized as based on alleged overvaluation or alleged riskiness of a stock.” Coburn, 844 F.3d at 971 (alteration in original) (quoting Rinehart, 817 F.3d at 66); Pfeil, 806 F.3d at 386.

In addition, every company carries significant risk that unpredictable developments — such as the collapse of iron-ore prices — will devastate its prospects (and stock price). Although fiduciaries normally mitigate company- and industry-specific risks by diversifying plan assets, see Restatement (Third) of Trusts § 90(b), Congress explicitly approved concentrating assets in employer stock, see 29 U.S.C. § 1107(d)(6)(A). That changing conditions might undercut a company’s stock price and eviscerate employees’ retirement funds is simply “endemic to the ESOP form established by Congress.” Pfeil, 806 F.3d at 387.

V.

As explained, Dudenhoejfer held that, absent “special circumstances,” a fiduciary “is not imprudent to assume that a major stock market provides the best estimate of the value of the stocks traded on it.” 134 S.Ct. at 2471 (internal alteration omitted) (quoting Summers, 453 F.3d at 408). Plaintiffs allege that the fiduciaries’ failure “to engage in a reasoned decision-making process regarding the prudence of Cliffs Stock” constituted a “special circumstance” rendering reliance on the market price imprudent. The district court rejected plaintiffs’ argument, reasoning that the only way to plead “special circumstances” was to show Cliffs traded on an inefficient market.

In Pfeil, we left open whether a fiduciary’s failure to investigate the merits of investing in a publicly traded company counts as a “special circumstance.” 806 F.3d at 386. We now conclude that even if the special-circumstances exception encompasses more than market inefficiency, it doesn’t include a fiduciary’s failure to independently verify the accuracy of the market’s pricing.

Dudenhoeffer dictates our conclusion. The Court stated that fiduciaries may prudently “assume” that stock markets provide the best estimate of a security’s value. Dudenhoeffer, 134 S.Ct. at 2471 (quoting Summers, 453 F.3d at 408). Accepting that the Court meant what it said, an ESOP fiduciary may take for granted that the security’s market price reflects the company’s value.

Furthermore, Dudenhoeffer reasoned that an investor’s inquiry into a publicly traded company is unlikely to reveal the company’s “true” value, much less the future course of its stock price. As the Court explained, “[m]any investors take the view that ‘they have little hope of outperforming the market in the long run based solely on their analysis of publicly available information,’ and accordingly they ‘rely on the security’s market price as an unbiased assessment of the security’s value in light of all public information.’ ” Dudenhoeffer, 134 S.Ct. at 2471 (quoting Halliburton Co., 134 S.Ct. at 2411). And because ERISA fiduciaries “likewise could reasonably see ‘little hope of outperforming the market ... based solely on their analysis of publicly available information,’ [they] may, as a general matter, likewise prudently rely on the market price.” Id. (alteration in original) (quoting Halliburton, 134 S.Ct. at 2411). Dudenhoeffer's reasoning thus supports the conclusion that a fiduciary’s failure to investigate the accuracy of a publicly traded employer’s stock price is not a “special circumstance.”

In any event, although a fiduciary generally must investigate an investment’s merits, “a fiduciary’s failure to investigate an investment decision alone is not sufficient to show that the decision was not reasonable.” Kuper, 66 F.3d at 1459. Rather, “to show that an investment decision breached a fiduciary’s duty to act reasonably in an effort to hold the fiduciary liable for a loss attributable to this investment decision, a plaintiff must show a causal link between the failure to investigate and the harm suffered by the plan.” Id. (alterations omitted). Here, plaintiffs have not pled what, if anything, the fiduciaries might’ve gleaned from publicly available information that would undermine reliance on the market price.

VI.

Plaintiffs alternatively allege that the fiduciaries knew the Bloom Lake Mine would not deliver the promised profits. By withholding that information from the market, plaintiffs argue, the fiduciaries artificially inflated Cliffs’s stock price. The complaint alleges that the fiduciaries should have used their inside information to prevent ESOP losses by 1) divulging inside information about the mine so that the market would correct downward and the fiduciary would cease buying Cliffs stock at an inflated price, 2) directing that new “contributions to the Company Stock fund be held in cash,” or 3) “clos[ing] the Company Stock itself to further contributions and directing] that contributions be diverted from Company Stock into other (prudent) investment options.”

Supreme Court Precedent. In Du-denhoeffer, the Court explained that “[t]o state a claim for breach of the duty of prudence on the basis of inside information,” a plaintiff must put forth “an alternative action ... that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” 134 S.Ct. at 2472. And when the plaintiff alleges that the fiduciary should have closed the fund or divulged insider information, the court must

consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases — which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment— or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.

Id. at 2473.

In Amgen, Inc. v. Harris, — U.S. -, 136 S.Ct. 758, 193 L.Ed.2d 696 (2016) (per curiam), plaintiffs “allege[d] that Amgen, a large pharmaceutical company, concealed the negative results of a clinical trial for an anemia drug and also marketed a risky off-label use for that drug.” Harris v. Amgen, Inc., 788 F.3d 916, 924 (9th Cir. 2014) (Kozinski, J., dissenting from denial of reh’g en banc), rev’d by Amgen, 136 S.Ct. at 760. After the company disclosed the trial results, Amgen’s stock plummeted. Employees who invested in Amgen’s ESOP sued the fiduciaries, claiming that they “should have either removed the Am-gen stock as an investment option or revealed to the general public the test results and the alleged riskiness of the off-label use.” Id. The Ninth Circuit agreed, reasoning that the complaint plausibly alleged that the fiduciaries should have disclosed nonpublic information or removed the fund as an investment option. Id. at 935-39 (majority opinion). The Supreme Court issued a per curiam reversal, reasoning that the complaint failed to allege facts showing that the proposed “alternative action[s] ... could plausibly have satisfied [Dudenhoeffer1 s] standards.” Amgen, 136 S.Ct. at 760. Neither Amgen nor Du-denhoeffer articulate what factors lower courts should evaluate when determining if a complaint satisfies this standard.

Appellate Court Precedent. Few appellate courts have applied DudenhoeffePs alternative-action pleading requirement. In Rinehart, the Second Circuit held that a “prudent fiduciary could have concluded that divesting Lehman stock, or simply holding it without purchasing more, “would do more harm than good.’ ” 817 F.3d at 68 (quoting Amgen, 136 S.Ct. at 760). The court reasoned, without further analysis, that “[s]uch an alternative action in the summer of 2008 could have had dire consequences.” Id.

Similarly, in Whitley v. BP, P.L.C., 838 F.3d 523 (5th Cir. 2016), the plaintiffs alleged that the fiduciaries, BP corporate officers, knew BP stock was “overpriced because BP had a greater risk exposure to potential accidents than was known to the market.” Id. at 529. When the Deepwater Horizon explosion revealed BP’s safety defects and cratered the company’s stock, ESOP participants sued. In dismissing the complaint, the court explained that “the plaintiff bears the significant burden of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.” Id. Because the proposed alternative actions — disclosure of the safety defects and freezing BP stock purchases — “would likely lower the stock price ... it seems that a prudent fiduciary could very easily conclude that such actions would do more harm than good.” Id.

Our Application. We reject plaintiffs’ nonpublic-information claim. Plaintiffs offer the same alternative actions — disclosing inside information and stopping additional ESOP contributions — that Amgen, Whitley, and Rinehart reject. Here, too, the complaint fails to plausibly allege that a “prudent fiduciary ... could not have concluded that stopping purchases ... or publicly disclosing negative information would do more harm than good.” Dudenhoeffer, 134 S.Ct. at 2473. Cliffs’s fiduciaries could have concluded that divulging inside information about the Bloom Lake Mine would have collapsed Cliffs’s stock price, hurting participants already invested in the ESOP. And closing the fund without explanation might be even worse: “It signals that something may be deeply wrong inside a company but doesn’t provide the market with information to gauge the stock’s true value.” Amgen, 788 F.3d at 925-26 (Kozinski, J., dissenting from denial of reh’g en banc).

Plaintiffs say not so fast: Amgen noted that removing a fund as an investment option might satisfy the Dudenhoeffer standard, so long as the complaint includes sufficient supporting facts. Amgen’s analysis, however, neglects to offer any guidance about what facts a plaintiff must plead to state a plausible claim for relief. And our sister circuits have tersely rejected similar claims. See Whitley, 838 F.3d at 529; Rinehart, 817 F.3d at 68. Accepting that there might be “exceptional circumstances where such extreme action is compelled by ERISA,” Amgen, 788 F.3d at 926 (Kozinski, J., dissenting from denial of reh’g en banc), we nonetheless find plaintiffs’ complaint inadequate here.

Plaintiffs point to two allegations in the complaint supporting their argument that “no fiduciary in the same position as the Defendants could conclude that freezing or liquidating Company Stock would do more harm than good.”

• “Rather than do nothing (as they did), Defendants could have taken numerous steps to fulfill their fiduciary duties to the Plan under ERISA. As set forth more fully below, none of these steps (a) would have violated securities laws or any other laws, or (b) would [ ] have been more likely to harm the Company Stock Fund than to help it.”
• “Given the relatively small number of Cliffs shares that might not have been purchased by the Cliffs stock fund in comparison to the enormous volume of actively traded shares, it is extremely unlikely that this decrease in the number of shares that would have been purchased, considered alone, would have had an appreciable impact on the Cliffs share price.”

Neither allegation suffices. The first is a conclusion that we need not assume to be true. See Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. The second is non-responsive to the Court’s twin concerns: that ceasing purchases might indicate to the market “that insider fiduciaries viewed the employer’s stock as a bad investment,” and that divulging negative information might cause the stock to drop, hurting plan participants. Dudenhoeffer, 134 S.Ct. at 2473.

Accordingly, we reject plaintiffs’ nonpublic-information claims.

VII.

Plaintiffs also argue that 1) the fiduciaries breached their duty of loyalty to plan members and that 2) corporate officers (who are also ERISA fiduciaries) failed to monitor the investment committee or provide them with information. For the reasons stated by the district court, we reject plaintiffs’ arguments. Plaintiffs also contend that the district court abused its discretion when it denied their motion for relief from judgment and motion for discovery. Because the district court correctly dismissed the complaint, and because plaintiffs failed to explain why they waited until after the district court entered judgment to request discovery, we discern no error.

VIII.

In the Tax Reform Act of 1976, Congress “made clear its interest in encouraging [ESOPs] as a bold and innovative method of strengthening the free private enterprise system which will solve the dual problems of securing capital growth and of bringing about stock ownership by all corporate employees.” ' Dudenhoeffer, 134 S.Ct. at 2465-66 (quoting Tax Reform Act of 1976, § 803(h), 90 Stat. 1590). To promote these benefits, Congress has repeatedly enacted laws encouraging employers to offer ESOPs as a retirement option. See, e.g., 29 U.S.C. § 1107(b) (ex-⅛ empting ESOPs from the generally applicable 10% limit on the portion of plan assets that may be invested in employer stock); 26 U.S.C. § 404(k) (allowing companies to deduct dividends on employer stock held in an ESOP); id. § 1042 (deferring taxation of taxable gains from stock sold to an ESOP).

Regardless of the merits of employee stock ownership, the lack of safeguards ensuring employees diversify their assets frequently begets financial ruin. Because competition and changing circumstances will inevitably devastate some companies’ prospects, hapless employees will continue to lose their jobs, their benefits, and their retirement savings, often in one fell swoop. Any policy change to protect, employees, however, must come from Congress, not the courts.

For the foregoing reasons, we AFFIRM the district court’s judgment.

      . We cite to the lower court opinion because the Supreme Court’s per curiam order omits background facts.

      . Plaintiffs’ two other counterarguments warrant only brief mention. They first argue that the Department of Labor and the Securities and Exchange Commission filed amicus briefs in Whitley that support plaintiffs’ position. But neither agency filed an amicus brief articulating their positions in this case. And, in any event, the Fifth Circuit rejected the agencies’ position and dismissed the employees’ complaint. Whitley, 838 F.3d at 529.
      Plaintiffs also note that the district court denied a motion to dismiss in a related securities fraud claim. But “alleged securities law violations do not necessarily trigger a valid ERISA claim.” Jander v. Int’l Bus. Mach. Corp., 205 F.Supp.3d 538, 546 (S.D.N.Y. 2016) (citing In re Lehman Bros. Sec. & ERISA Litig., 113 F.Supp.3d at 768-69). Finally, we never evaluated the merits of the securities fraud claim against Cliffs's executives because the parties settled — the parallel securities litigation is thus unhelpful.


author: KETHLEDGE, Circuit Judge. ALICE M. BATCHELDER, Circuit Judge,

text:
    Ronald MOORE; Gina Waldrop; Donald Moore, Jr., Plaintiffs-Appellants, v. CITY OF MEMPHIS; Phillip Penny, Defendants-Appellees.
    No. 16-5552
    United States Court of Appeals, Sixth Circuit.
    Argued: February 1, 2017
    Decided and Filed: April 10, 2017

      ARGUED: Jeffrey S. Rosenblum, ROSENBLUM & REISMAN, P.C., Memphis, Tennessee, for Appellants. Richard J. Myers, GLANKLER BROWN, PLLC, Memphis, Tennessee, for Appellee City of Memphis. Betsy McKinney, GODWIN, MORRIS, LAURENZI & BLOOMFIELD, P.C., Memphis, Tennessee, for Appellee Penny. ON BRIEF: Jeffrey S. Rosenblum, Marc E. Reisman, ROSEN-BLUM & REISMAN, P.C., Memphis, Tennessee, Howard B. Manís, MANIS LAW FIRM, Memphis, Tennessee, for Appellants. Richard J. Myers, GLANKLER BROWN, PLLC, Memphis, Tennessee, Henry L. Klein, APPERSON CRUMP PLC, Memphis, Tennessee, for Appellee City of Memphis. Betsy McKinney, Deborah Godwin, GODWIN, MORRIS, LAU-RENZI & BLOOMFIELD, P.C., Memphis, Tennessee, for Appellee Penny.
    Before: BATCHELDER, SUTTON, and KETHLEDGE, Circuit Judges.
   KETHLEDGE, J., delivered the opinion of the court in which BATCHELDER and SUTTON, JJ, joined. BATCHELDER, J. (pg. 872), delivered a separate concurring opinion.

OPINION

KETHLEDGE, Circuit Judge.

Phillip Penny, a Memphis police officer, fatally shot Donald Moore, Sr., after Moore pointed a gun at him during the execution of a search warrant at Moore’s home. Moore’s children sued Penny and the City of Memphis under 42 U.S.C. § 1983, alleging constitutional violations that they say resulted in Moore’s death. The district court granted summary judgment for the defendants, holding that they did not violate Moore’s constitutional rights. We affirm.

I.

On September 5, 2012, Memphis Animal Services received its third complaint regarding potential animal cruelty at Moore’s home. The following month, an animal-control officer, Carol Lynch, went to Moore’s residence to investigate. Moore did not come to the door initially, but Lynch spoke to Moore’s neighbor, Tammy Hillis, who said that Moore had threatened her and that she was “terrified” of him. Lynch then called the Memphis Police Department for support, and two officers joined her at the scene. This time, Moore came to the front door and gestured with his hand behind his back as if he had a weapon. The police officers asked to see Moore’s hands, at which point Moore cursed, backed into the house, and shut the door. One of the officers tried to tell Moore through the door that they just wanted to talk to him about his animals, but Moore responded with more curses.

Soon thereafter, Lynch and John Mor-gret, a criminal investigator with the Memphis Humane Society, met with Lieutenant Martin Kula and Officer Scott Edwards of the Memphis Police Department. Based on Lynch’s statement, Lieutenant Kula thought that Moore might be unstable. But Officer Edwards — who was trained in dealing with people with mental illness — saw nothing in Moore’s records to indicate that he had a history of violence or was mentally ill.

On January 8, 2018, Officer Edwards and Lynch went to Moore’s home. Moore refused to open the door, but through it Officer Edwards told Moore that Animal Services merely wanted to ensure that his animals were healthy. Moore kept his door closed, ordered them off his property, and called 911. His call was directed to Lieutenant Kula, who tried unsuccessfully to get Moore to cooperate. After their interactions with Moore that day, both Officer Edwards and Lieutenant Kula thought that Moore was angry but not mentally ill. The next day, Hillis told Lynch that, after the officers had left the day before, Moore came out of his house with a gun and said he would kill Lynch if she returned. According to Hillis, Moore added that he would “shoot first and then ask questions later” if the officers came back.

On January 10, 2013, Morgret got a warrant to search Moore’s home. Lynch and Morgret presented the warrant to Lieutenant Colonel Marcus Worthy, who was in charge of the precinct. Lynch and Morgret told Lieutenant Colonel Worthy that Moore had threatened Lynch and Memphis police officers and that Moore was likely armed. Based on that information, Lieutenant Colonel Worthy decided that TACT (the Memphis Police Department’s version of SWAT) should assist in serving the warrant.

TACT uses what it calls a “dynamic entry” when it has probable cause to think that the officers who execute a search warrant will encounter a person armed and dangerous to them. During dynamic entries, TACT often deploys “flash-bangs,” which are small, grenade-like devices that disorient persons around them with a sudden loud noise and a very bright light.

After dark on January 11, 2013, Penny led the TACT team to Moore’s home. When they arrived, the officers split into two groups — one posted at Moore’s front door, and one at the back. At the front door, an officer announced “police department, search warrant,” and then broke the living-room window and threw a flash-bang inside. At the rear, Penny then announced “police department, search warrant,” entered through the back door, and tossed in another flash-bang. One of the .TACT officers saw Moore go down a hallway and enter his bedroom, where Moore called 911. Penny and his team approached the bedroom and called out “Memphis Police” and “we have a search warrant, Don.” The officers can be heard doing so on the 911 call. Moore yelled back, “I ain’t committed a crime,” and “a search warrant, big shit, ... nothing criminal happened here.”

Penny decided to secure the bedroom so that Moore could not barricade himself there. One of the officers threw a flash-bang into the bedroom; Penny followed close behind. Once in the room, according to Penny, he saw Moore several feet in front of him. Moore was facing Penny and holding a semi-automatic pistol in his hand — pointed at Penny. On the 911 tape, after the flash-bang goes off, Penny can be heard yelling, “Hands, Don! Hands, hands, hands!” A couple of seconds later, Penny fired three shots at Moore, killing him. Another officer entered the bedroom and secured Moore’s gun, which was fully loaded with a round in the chamber and still in Moore’s hand. Moore had another pistol in a holster on his belt. Officers also found a rifle next to the front door and axes next to each door into the house.

A year later, Moore’s children sued the city of Memphis and Officer Penny under 42 U.S.C. § 1983, claiming the officers used excessive force in violation of Moore’s Fourth Amendment rights. The defendants moved for summary judgment, which the district court granted. This appeal followed.

II.

We review the district court’s decision de novo. Gradisher v. City of Akron, 794 F.3d 574, 582 (6th Cir. 2015).

To prevail on their § 1983 claims, the plaintiffs must establish that the defendants violated a clearly established constitutional right. See Kindl v. City of Berkley, 798 F.3d 391, 398 (6th Cir. 2015). Officers violate the Fourth Amendment when they use “excessive force in the execution of a search warrant^]” Burley v. Gagacki, 729 F.3d 610, 619 (6th Cir. 2013) (citation omitted). An officer’s use of force is excessive if, under the totality of the circumstances, the force was objectively unreasonable. Livermore ex rel. Rohm v. Lubelan, 476 F.3d 397, 404 (6th Cir. 2007).

Here, the district court separated the Memphis Police Department’s encounter with Moore into three segments: the Department’s decision to use TACT to serve the warrant; TACT’s use of a dynamic entry; and Penny’s use of deadly force. Ultimately, however, the district court did not specifically analyze the reasonableness of the decision to deploy TACT; instead, the court found that the reasonableness of that decision merged with the reasonableness of the dynamic entry itself.

A.

As an initial matter, the plaintiffs argue that the district court should have analyzed the police department’s decision to use TACT separately from the dynamic entry that resulted from that decision. We disagree: the decision to use TACT was not itself an application of force under the Fourth Amendment. What the TACT team did when they got to Moore’s house, however, was an application of force.

So we turn to the question whether the so-called dynamic entry was unreasonable. The plaintiffs say it was, asserting that the TACT team should have knocked (rather than break the living-room window) before entering, and that the team should not have used flash-bangs. Generally, the police must knock and announce their presence before they enter a residence to execute a search warrant. See Wilson v. Arkansas, 514 U.S. 927, 934, 115 S.Ct. 1914, 131 L.Ed.2d 976 (1995). But that rule does not apply if the officers “have a reasonable suspicion that knocking and announcing their presence, under the particular circumstances, would be dangerous or futile[.]” Richards v. Wisconsin, 520 U.S. 385, 394, 117 S.Ct. 1416, 137 L.Ed.2d 615 (1997).

Here, the officers had several reasons to think that knocking and announcing would be dangerous, to wit: when Moore answered the door for officers during their initial visit to his home, he gestured with his hand behind his back as if he had a weapon; Moore’s neighbor, Hillis, told Lynch that Moore had a gun; and (according to Hillis) Moore said he would “shoot first and ask questions later” if the officers came back, and would kill Lynch in particular. Those reasons were enough to allow the officers to execute a no-knock entry. See United States v. Bates, 84 F.3d 790, 795 (6th Cir. 1996). The plaintiffs respond that Hillis’s statements were hearsay. But the defendants did not offer those statements for the truth of the matter asserted — that is, to show that Moore actually threatened Lynch and the officers. See Fed. R. Evid. 801(c). Instead, the statements were relevant for their effect on the listener — namely, that they made the officers believe that Moore had threatened their safety. See United States v. Churn, 800 F.3d 768, 776 (6th Cir. 2015). The statements were therefore admissible.

The plaintiffs also challenge the officers’ use of flash-bangs, both when they entered the house and just before Penny entered Moore’s room. To determine whether an officer’s use of flash-bangs was reasonable, we balance the officer’s interest in using them against the suspect’s interest in forbearance. Bing ex rel. Bing v. City of Whitehall, Ohio, 456 F.3d 555, 569 (6th Cir. 2006). Here, as the officers entered Moore’s home, they had reason to believe that Moore would pose an immediate threat to their safety. Meanwhile, nothing in the record suggests that flash-bangs themselves posed a danger to Moore: he had no health conditions that made him vulnerable to loud noises or blinding light, and the house contained no accelerants or other substances that could easily ignite. See Krause v. Jones, 765 F.3d 675, 679 (6th Cir. 2014). The officers’ initial use of flash-bangs was therefore reasonable.

As for the second use, by then Moore had refused to comply with the officers’ orders after they entered his home; instead he retreated into his bedroom. Officer Penny feared that Moore would barricade himself there, which could endanger the officers. Suffice it to say that, on this record, we see no basis to second-guess that judgment.

B.

That leaves Officer Penny’s decision to shoot Moore. Law enforcement officers may employ deadly force where “the officer has probable cause to believe that the suspect poses a threat of serious physical harm, either to the officer or to others[.]” Tennessee v. Garner, 471 U.S. 1, 11, 105 S.Ct. 1694, 85 L.Ed.2d 1 (1985). To determine if an officer had such probable cause, “we must consider the totality of the circumstances from the perspective of a reasonable officer on the scene, rather than with the 20/20 vision of hindsight.” Pollard v. City of Columbus, Ohio, 780 F.3d 395, 403 (6th Cir. 2015) (internal citations and quotation marks omitted).

The plaintiffs argue that a genuine dispute exists as to whether Moore pointed a gun at Officer Penny; in their view, Penny might have seen the phone in Moore’s hand and mistakenly thought it was a gun. Be that as it may, however, the relevant question is not whether Moore in fact had a gun in his hand, but whether Penny reasonably thought that Moore did. And on this record a jury could not find otherwise. Before Penny entered Moore’s bedroom, as noted above, Penny had good reason to think that Moore was armed. True, when Penny entered the room, smoke from the flash-bang might have obscured the object in Moore’s hand. But the 911 recording makes clear that Penny thought it was a gun: he yelled “Hands, Don! Hands, hands, hands!” immediately before he shot Moore. Penny’s decision to shoot under these circumstances was the archetype of a split-second decision to which we must defer. See id.

As a matter of law, therefore, the defendants’ use of force was not excessive under the Fourth Amendment. But that does not mean the dynamic entry, in particular, was wise. The warrant here concerned evidence only of a misdemeanor; and yet the defendants chose a course of action that, though constitutional, unavoidably jeopardized the officers’ lives along with Moore’s. In the end Moore was shot, though it just as easily could have been Penny — as the defendants themselves emphasize here. Meanwhile, the officers plainly had available to them other options that did not involve an immediate physical confrontation. The officers would have done well to consider them more seriously than they apparently did.

C.

Finally, the plaintiffs challenge the district court’s denial of municipal liability. If a plaintiff fails to establish a constitutional violation by the individual defendants, then “the municipal defendants cannot be held liable under § 1983.” Watkins v. City of Battle Creek, 273 F.3d 682, 687 (6th Cir. 2001). That is true (despite the plaintiffs’ arguments to the contrary) even if the court applied the so-called segmenting rule in determining that the individual defendants were not liable. See Gaddis ex rel. Gaddis v. Redford Twp., 364 F.3d 763, 772, 777 (6th Cir. 2004). Hence the district court correctly denied municipal liability here.

The district court’s judgment is affirmed.

CONCURRENCE

ALICE M. BATCHELDER, Circuit Judge,

concurring.

Although I concur fully in my colleagues’ reasoned opinion, I write separately to emphasize that, while the Memphis Police Department did not violate any clearly established rule of constitutional law, its decision to use a tactical unit and the way it used that unit are, in these circumstances which stem from a suspected animal cruelty misdemeanor offense, appalling. The fact is that the police department’s conduct, while not constitutionally impermissible, was certainly disproportionate. Had cooler and more rational heads prevailed, Moore’s life likely would have been spared and Memphis Animal Services would still have been able to investigate the animal cruelty complaints it had received. “The care of human life and happiness, and not their destruction, is the first and only legitimate object of good government.” Thomas Jefferson to the Republican Citizens of Washington County, Maryland (March 31, 1809), reprinted in 1 The Papers of Thomas Jefferson 98-99 (J. Jefferson Looney ed., 2004). The Memphis Police Department would do well to think about this admonition.