“The exclusive benefit rule is a cornerstone of ERISA that state law cannot dilute. While ERISA narrowly contemplates parallel liability against the dual-hat director and officer defendants, it preempts further aiding and abetting liability that would impose additional duties on Argent and Stout beyond their exclusive ERISA obligations.”
Halperin v. Richards No. 20-2793 (July 28, 2021) 7th Cir. 2021)
This is an important ERISA preemption case involving an ESOP of a failed paper company.
“According to the plaintiffs, Appvion, Inc. was in financial freefall from 2012 to 2016 as revenues from its paper business declined sharply. During those years, Appvion repeatedly missed its financial projections, yet the defendants continued to project unrealistic success when valuing the company’s stock-which was wholly-owned by employees under an ERISA-covered Employee Stock Ownership Plan (ESOP). . . .
The plaintiffs assert that, while the corporate ship was sinking, the defendants fraudulently inflated these stock valuations to line the pockets of directors and officers, whose pay was tied to the ESOP valuations. Plaintiffs allege that the directors and officers carried out this scheme with knowing aid from the ESOP trustee, Argent Trust Company (Argent), and its independent appraiser, Stout Risius Ross, LLC (Stout), who led the ESOP valuation process in coordination with the directors and officers.“
The Seventh Circuit faced the issue of (1) whether ERISA preempts state-law claims brought by bankruptcy creditors against directors and officers and others alleged to have inflated the company’s stock value and (2) whether ERISA preempts state law claims against the former ERISA trustee and the contractor appraising the stock.
State Law Claims Against Directors and Officers
The Court held that the plaintiffs’ claims are not preempted because ERISA contemplates parallel state-law liability against directors and officers serving dual roles as both corporate and ERISA fiduciaries.
“Section 408(c)(3) of ERISA explicitly allows corporate insiders to serve as ERISA fiduciaries. 29 U.S.C. § 1108(c)(3). . . . Allowing directors and officers to participate in plan decision-making as ERISA fiduciaries therefore supports employers’ incentives to form ERISA plans-something Congress clearly desired. . . . ERISA expressly allows corporate insiders to have dual corporate and ERISA obligations. Whatever complications those dual roles may entail, we are persuaded that ERISA should not be interpreted to preempt parallel state-law liability against the directors and officers in this case.“
State Law Claims Against Trustee and Appraisal Company
On the other hand, the Court stated that this reasoning does not extend to preemption of the aiding and abeting claims against the trustee and appraising company “because those claims seek, in essence, to impose the complicating dual roles on a single-role ERISA fiduciary and its contractor, whose actions should be governed by an undiluted exclusive-benefit rule under ERISA.”
“The plaintiffs’ Count V aiding and abetting claims against Argent Trust Company (Argent) are a different matter. These claims are preempted because ERISA does not permit states to dilute the exclusive benefit rule further, beyond its narrow exception for dual-hat directors and officers. Unlike the directors and officers, Argent is a “single-hat” ERISA fiduciary. It has no state-law duty of loyalty to the corporation.
“Like Argent, Stout is not a dual-hat director or officer for whom ERISA contemplates parallel corporate liability. Argent hired Stout for its expertise in aiding the ESOP valuation process. In this role, Stout owed no fiduciary duties to the corporation or to ERISA beneficiaries.”
Note – The Court noted the “limited precedent on the first issue:
“There is litle circuit-level precedent assessing whether and to what extent ERISA preempts corporation-law claims against dual-hat directors and officers. Beyond the Fifth Circuit’s decision in Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456 (5th Cir. 1986), there seems to be only a handful of district court cases that squarely address the problem. Most of these cases hold that ERISA does not preempt corporation-law claims against dual-hat directors and officers.”
Collected cases include the following:
Sommers Drug Stores’s “parallel but independent” duties theory has been followed in other cases. See In re Ullico Inc. Litig., 605 F. Supp. 2d 210, 222 (D.D.C. 2009) (“[T]he allegations of breach of fiduciary duty … were not preempted because they ‘derive from the counterclaim defendants’ obligations and responsibilities as officers of the corporation under state corporate law, rather than their relationship to the … plans as beneficiaries.'”), quoting Carabillo v. ULLICO, Inc., 357 F. Supp. 2d 249, 259 n.7 (D.D.C. 2004), in turn citing Sommers Drug Stores, 793 F.2d at 1470; Crabtree v. Central Florida Investments, Inc. Deferred Comp. Plan, 2012 WL 6523584, at *2 (M.D. Fla. Oct. 3, 2012), report and recommendation approved, 2012 WL 6523078 (M.D. Fla. Dec. 14, 2012) (“The preemption principles do not apply when, as is the case here, the cause of action for breach of fiduciary duty is against a corporate officer for duties owed to the corporation.”); Richmond v. American Sys. Corp., 792 F. Supp. 449, 458–59 (E.D. Va. 1992) (same: “The state corporate laws … regulate relations between plaintiffs, as minority shareholders … and Ramsey and Curran, as … officers and directors. The relations … function irrespective of [ERISA plan] administration.”); In re Antioch Co., 456 B.R. 791, 839 (Bankr. S.D. Ohio 2011), report and recommendation adopted, 2011 WL 3664564 (S.D. Ohio Aug. 12, 2011), modified on reconsideration sub nom. Antioch Co. Litig. Trust v. Morgan, 2012 WL 6738676 (S.D. Ohio Dec. 31, 2012), (“[A]ll three defendants were ESOP fiduciaries. However, … all the claims against these defendants are based on independent legal duties owed in their roles as corporate fiduciaries….”); In re Dehon, Inc., 334 B.R. 55, 68 (Bankr. D. Mass. 2005) (relying on Sommers Drug Stores and finding no preemption: “the claims are brought by a third party to enforce rights held by the corporation against directors of that corporation for their acts as corporate directors”); see also Housman v. Albright, 368 Ill. App. 3d 214, 223, 857 N.E.2d 724, 733 (2006) (same), citing Sommers Drug Stores, 793 F.2d at 1465.
Run of the Mill Tort Claims – It is important not to read too much into the Court’s holding on the second issue. The Court noted that many state law tort claims can be brought against third party contractors or other non-fiduciaries. It is “the preeminence of ERISA’s exclusive benefit rule is what distinguishes the aiding and abetting claims against Argent from other non-preempted, “run-of-the-mill” tort claims brought against single-hat ERISA fiduciaries.”
Collected cases permitting state law tort claims include:
See Mackey, 486 U.S. at 833. In Mackey, the Supreme Court recognized that claims for ordinary torts allegedly commited by ERISA fiduciaries are often not preempted. Id. (“lawsuits against ERISA plans for run-of-the-mill state-law claims such as unpaid rent, failure to pay creditors, or even torts commited by an ERISA plan-are relatively commonplace…. [T]hese suits, although obviously affecting and involving ERISA plans and their trustees, are not pre-empted by ERISA § 514(a).”).
“Accordingly, courts have permitted many tort claims against ERISA fiduciaries even when the tortious conduct occurred in the context of plan activity. See Mackey, 486 U.S. at 833 n.8 (collecting cases); see also, e.g., Franciscan Skemp, 538 F.3d at 601 (third-party hospital’s negligent misrepresentation claim against ERISA plan insurer was not completely preempted); Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974, 979–84 (9th Cir. 2001) (beneficiary could pursue invasion of privacy tort against ERISA plan insurer for actions taken to investigate benefits claim); Lane v. Goren, 743 F.2d 1337, 1340 (9th Cir. 1984) (beneficiary could pursue state-law race and age discrimination claims against ERISA fiduciaries).
Halperin v. Richards (7th Cir. 2021)“
N.B. In a footnote “[W]e need not decide whether ERISA would preempt similar corporation-law claims brought by ERISA beneficiaries, participants, or fiduciaries who can sue Appvion’s directors and officers under ERISA for the same conduct.”