Who’s to Blame?

Court Equitably Apportions Fiduciary Misdeeds

When a breach by a fiduciary occurs, some fiduciaries could be more blameworthy than others. In this case, the courts are able to direct those parties to indemnify other fiduciaries who were, notwithstanding their technical status as fiduciaries, devoid of blame. In a recent case, this was the opinion of the U.S. Court of Appeals for the Seventh Circuit.

The Facts of the Case

In Chesemore v. Fenkell, the CEO was the controlling owner of a company that sponsored an employee stock ownership plan (“ESOP”). Under the ESOP’s terms, participants were allowed to sell their employer stock shares back to the company following a given period of time. A senior executive at the company was nearing the sell back period, which would necessitate a considerable cash distribution from the company.

The CEO was opposed to such a distribution. After failing to locate independent buyers willing to pay his price, he arranged the sale of the company to the ESOP, at a price the court considered to be “inflated.” According to the court, the CEO instated ESOP trustees beholding to him.

Purchase of all of the shares required immense borrowing of funds by the ESOP. The burden of servicing that debt contributed to the company’s subsequent failure. The employees sued, and the trial court in turn ordered the employees to be compensated, and, in addition, receive reimbursement and payment for their attorneys’ fees.

The Court Decides

The CEO did renounce his liability, however, he did appeal and dispute that the liability should span amongst all of the ESOP’s fiduciaries. The court discovered that the trustees selected by Fenkell “lacked the experience and the incentive to assess” the sale and that the CEO “orchestrated the entire complex transaction.” Therefore, his accountability “vastly exceeded theirs.”

The appeals court stated that, although ERISA “contemplates the allocation of fiduciary obligations among cofiduciaries, thereby limiting subsequent losses,” it’s not an absolute standard. Noting that the Supreme Court has interpreted ERISA as “incorporating the law of trusts,” the appeals court deduced that trial courts are allowed to order “appropriate equitable relief.”

In a previous case this court had ruled similarly. The injured plans can be made whole by court orders, while also rightfully apportioning the damages among wrongdoers.

As this ruling was made in the Seventh Circuit, it is technically only applicable in that circuit, which includes Wisconsin, Illinois and Indiana. The Second Circuit, which spans New York, Connecticut and Vermont, has ruled equivalently as the Seventh Circuit. In addition, the ruling has the ability to sway courts in other circuits that haven’t already dealt with a case involving this question. In contrast, two other circuits, the Ninth and the Eighth, have taken the opposite view, leaving the remaining five circuits and 30 states in limbo.

The Moral of the Story

The ESOP trustees in the Chesemore case appear to have dodged the bullet. The true moral of the story is that plan fiduciaries should always maintain the best interests of their plan participants at all times.

© 2017

Join Our Newsletter

Sign up to receive exclusive newsletters with the latest information affecting you and your organization.

Posted in

SHARE THIS POST