Seventh Circuit Revives State Law Claims Against Executives Acting As “Dual-Hat” Fiduciaries
The Seventh Circuit ruled recently that ERISA does not preempt certain state law claims against directors and officers because ERISA’s text and purpose contemplate parallel corporate state-law liability against executives who act as “dual hat” fiduciaries.
In Halperin v. Richards, Plaintiffs were co-trustees of a Chapter 11 liquidating trust for Appvion, a paper company that filed for bankruptcy protection in 2017. Plaintiffs were given authority to pursue corporate law claims on Appvion’s behalf. Plaintiffs alleged that, while Appvion was in a financial freefall from 2012 to 2016, Appvion’s executives fraudulently misrepresented the company’s financial projections to inflate the company’s stock value, which was entirely owned by Appvion’s ERISA-covered Employee Stock Ownership Plan (the “Plan”). Allegedly, the inflated stock value lined the pockets of Appvion’s directors and officers whose salaries were tied to the stock’s valuation. Plaintiffs also alleged that this fraudulent scheme was aided and abetted by the Plan’s Trust Company (the Plan Trustee) and the Trustee’s retained independent appraiser, hired because of its expertise in stock valuation.
Plaintiffs brought state law claims against Appvion’s executives for breaching their corporate fiduciary duties and against the Trust Company and its retained independent appraiser for aiding and abetting those state law breaches. In the district court, all Defendants successfully moved to dismiss these state-law claims. They argued that their roles in the Plan’s valuations were governed by ERISA and that ERISA preempted all state corporate-law liability arising from the valuation process.
Plaintiffs appealed the district court’s motion to dismiss preemption ruling to the Seventh Circuit. The issue before the Court was whether Plaintiffs’ state law claims were preempted under ERISA, which preempts “any and all state laws insofar as they may now or hereafter relate to any employee benefit plan” covered by ERISA.
The Seventh Circuit reversed the dismissal against the executives but affirmed the dismissal against the Trust Company and its independent appraiser. The Court reasoned that ERISA did not preempt state law corporate claims against executives who serve dual roles as both corporate fiduciaries and ERISA fiduciaries because such state claims did not interfere with how Congress intended ERISA fiduciary duties to operate: Despite ERISA’s cornerstone “exclusive benefit rule” (an exclusive duty of loyalty causing fiduciaries to act solely in the interest of ERISA beneficiaries), ERISA explicitly allows for individuals to serve as corporate insiders and ERISA fiduciaries and, therefore, contemplates parallel state-law liability against executives wearing these “dual hats.” Also important to the Panel was the concept that as to these state-law claims, Plaintiffs were not circumventing ERISA’s remedial scheme. As to these claims, these Plaintiffs have no rights to bring ERISA claims as participants, fiduciaries, and/or beneficiaries, making ERISA preemption inappropriate because it would leave Plaintiffs without a remedy. However, unlike the Defendant dual-hat executives, ERISA does not contemplate single-hat fiduciaries (e.g., the Trustee ) owing other duties of loyalty to a corporation. Accordingly, the Court affirmed the dismissal of the state law claims against the Trust Company.
The exclusive benefit rule’s preemptive force also protected the Trust Company’s retained independent appraiser against state-law liability. Since the appraiser was not a fiduciary under ERISA, it was not subject to the exclusive benefit rule. Still, the Court found that imposing additional state law liability on the appraiser would hinder the Trust Company’s single-hat duties – the ability to hire experts whose opinions were not swayed by the acts of corporate executives. The Court also found that the appraiser still owed federal-law obligations under ERISA when serving as the Trust Company’s contractor and that such obligations should not be muddled with potentially conflicting state-law obligations to the corporation. Finally, state law liability against the contractor could conflict with ERISA’s remedial limits against non-fiduciaries – a cause of action for equitable relief available when brought only by the Secretary of Labor.
The case is Halperin v. Richards, __ F.4th __, 2021 U.S. App. LEXIS 22348, 2021 WL 3184305 (7th Cir., No. 20-2793, July 28, 2021).