July 26, 2016

Fiduciary Liability Update: Seventh Circuit Holds That ERISA Permits Indemnification or Contribution Among Fiduciaries

By Theodore M. Becker and Richard J. Pearl

ERISA imposes liability on fiduciaries that breach their fiduciary duties. The statute does not, however, expressly provide a way to apportion liability among multiple fiduciaries or allow a less-culpable fiduciary to seek contribution from a more-culpable fiduciary.

In Chesemore v. Fenkell, Case Nos. 14-3181, 14-3215, and 15-3740, 2016 WL 3924308 (7th Cir., July 21, 2016), the Seventh Circuit held that a court in an action brought under ERISA may order indemnification/contribution from a more-culpable fiduciary to a less-culpable fiduciary. The court previously reached the same conclusion in Free v. Briody, 732 F.2d 1331, 1337 (7th Cir. 1984), and took the opportunity to re-affirm that nothing has changed. The Second Circuit has reached a similar conclusion, while the Eighth and Ninth Circuits have held that ERISA does not permit contribution among fiduciaries.

ERISA’s “Equitable Relief” Provisions Authorize Contribution Claims

ERISA Section 502(a) authorizes a variety of claims to be brought by the U.S. Department of Labor, ERISA plan participants, beneficiaries, or fiduciaries. ERISA provides that a fiduciary shall be personally liable to make good to a plan for a breach of fiduciary duty, but does not provide that a breaching fiduciary may be liable to another fiduciary.

ERISA Section 502(a)(3) permits a court to fashion “appropriate equitable relief,” but ERISA does not say what constitutes “appropriate equitable relief.” The U.S. Supreme Court has long held that ERISA’s scope should be determined according to the common law of trusts. Trust law considers indemnification and contribution to be traditional equitable remedies, suggesting that these equitable remedies also should be available under ERISA.

In its opinion, the Seventh Circuit observed that ERISA Section 405(b)(1)(B) allows fiduciaries to allocate responsibilities among them, and provides that one fiduciary will not be responsible for breaches of duties that were allocated to another fiduciary. The court reasoned that, consistent with fiduciaries being allowed to allocate and limit their liability under ERISA, courts fashioning equitable relief should be permitted to consider allocation and limitation among fiduciaries with varying degrees of culpability. The Seventh Circuit previously had concluded in Free that “Congress clearly did not intend trustees to act as insurers of co-trustees actions.” Free, 732 F.2d at 1337.

When is a Contribution Claim Appropriate?

The Seventh Circuit highlighted a few reasons why three individual fiduciaries in the Chesemore case were allowed to seek indemnification from another fiduciary. One fiduciary, David Fenkell, was the controlling owner, sole director, president, and CEO of Alliance Holdings, Inc., and its business model was “flipping ESOP-owned, closely held companies with limited marketability.” In 2002, Alliance acquired 80 percent of the stock in Trachte Building Systems, and by 2006, a Trachte executive’s costly put option was to come due. Rather than satisfy the option, Fenkell decided to try and sell Trachte before the option’s maturity date.

The court observed that after failing to find a buyer, Fenkell orchestrated a leveraged buyout in order to “off-load the company onto Trachte’s employees.” Chesemore, 2016 WL 3924308 at *3. Using three “handpicked trustees” who lacked experience, expertise, or information, and who did Fenkell’s bidding, the deal was one-sided, lacked independent representation on behalf of the employees, was designed to benefit all but the employees, and led to the company’s ultimate collapse in 2008.

The Seventh Circuit summarized the reasons why the district court ordered Fenkell to indemnify the three other individual fiduciaries:

The judge ordered Fenkell to indemnify Seefeldt, Mastrangelo, and Klute because his culpability vastly exceeded theirs. The judge found that Fenkell orchestrated their installation as trustees and directed their actions. And they in turn did his bidding, both because they were inexperienced as fiduciaries and because he called the shots as controlling owner, sole director, president, and CEO of Alliance. In short, Fenkell had authority over the Trachte trustees and used that authority and his control of the Alliance ESOP assets to orchestrate the inflated leveraged buy-out. As the judge analogized, ‘Fenkell was the unquestioned conductor and the Trachte [t]rustees mere musicians.’

Chesemore, 2016 WL 3924308 at *5. The difference in experience, authority, control, and knowledge supported the indemnification award.

The Seventh Circuit’s opinion indicates that when multiple fiduciaries are accused of breaching their fiduciary duties, contribution and indemnification claims among them are permitted, and as a matter of equity, the allocation of recovery on such claims as among the respective fiduciaries depends on the degree each had responsibility and their relative knowledge, experience, control, and authority.

If you have any questions or would like assistance with any of the matters discussed in this alert, please do not hesitate to contact the authors or any member of our Employee Benefits and Executive Compensation Practice Group.

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