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Supreme Court May Take Up ERISA Indemnification Case

Posted by Gregory Paul | Jan 18, 2017 | 0 Comments

An Employee Stock Ownership Plan (ESOP) is a type of retirement plan that allows employees to take an ownership interest in their company by investing in employer securities. Most ESOPs fall under ERISA protections, which include fiduciary duty provisions. When the manager of an ESOP is not acting in the best interests of the represented employees, they may be liable for damages. The Supreme Court has asked the Solicitor General to look at whether an ESOP fiduciary will have to indemnify co-fiduciaries in a case before the Court.

Under ERISA, retirement plan fiduciaries, including ESOP fiduciaries, have certain roles and responsibilities to represent the best interests of the plan participants. When the fiduciary fails to fulfill their obligations, they may be liable to plan participants for losses and damages. Plan participants of a Wisconsin ESOP have accused a former manager of a leveraged buyout scheme that left the plan participants holding worthless stock.

In 2002, David Fenkell and his company Alliance Holdings, Inc., acquired Trachte Building Systems for $24 million. Fenkell projected the new company would be worth almost $50 million in five years. However, in 2007, growth and profits were flat. Without a buyer for the company, Fenkell sold the company to its own employees in a complex leveraged buyout.

Fenkell first created a new Trachte ESOP, with his own trustees as fiduciaries. Then, the Alliance ESOP accounts were added to the Trachte ESOP. The Trachte ESOP then used the employees' accounts as collateral to take on debt to purchase equity back from Alliance. This complicated deal left the Trachte ESOP paying $45 million for Trachte stock, along with $36 million in debt. By the next year, Trachte's stock was worthless.

After litigation, Fenkell conceded liability, but disputed responsibility for indemnifying his cofiduciaries. On appeal, 7th Circuit judges upheld Fenkell's obligation to indemnify the cofiduciaries. The judges found Fenkell's culpability to vastly exceed that of his cofiduciaries.

Specifically, Fenkell had orchestrated the installation of these specific trustees, had authority over them and used his control to orchestrate the inflated leveraged buyout. A judge used the analogy, “Fenkell was the unquestioned conductor and the Trachte trustees mere musicians.”

The court upheld their decision based on a 1984 7th Circuit case, Free v. Briody. The judges found that the “principles of trust law permit the courts to order contribution or indemnification among cofiduciaries based on degrees of culpability,” and ERISA includes the authority to order contribution or indemnification as allowed in the law of trusts.

However, there is a split among other circuits on this issue, and the case is now on petition before the Supreme Court. The Court has asked the Acting Solicitor General to file a brief on behalf of the government for the case, to decide the issue: “Whether the Employee Retirement Income Security Act of 1974 permits a cause of action for indemnity or contribution by an individual found liable for breach of fiduciary duty.”

Greg Paul has 16 years of experience fighting for his clients against ERISA violations. Greg Paul represents individuals and families who have been denied benefits by their insurance company or plan administrator. You have a limited time to appeal your disability denial, so do not delay. If you have been denied short-term or long-term disability benefits, contact our office for a free consultation.

About the Author

Gregory Paul

Gregory G. Paul is a trial lawyer who practices in the areas of disability, employment and toxic tort injury law. He is admitted to practice law in California, Maryland, Missouri, Ohio, Pennsylvania, Texas and West Virginia with additional admissions in federal courts nationwide. Greg is a graduate of the University of Pittsburgh and the University of the Pacific, McGeorge School of Law in Sacramento where he was on the Dean's List and Law Review.  He is a graduate of Gerry Spence's Trial Lawyers College.                        In addition to litigating cases on behalf of people denied benefits and rights, Greg has been a speaker at PBI: Employment Law West: Americans With Disabilities Act , Pittsburgh, PA (2012-2015); National Employment Lawyers Association: Breaking Down the Barriers in the Workplace, Oakland, CA (2010); NBI: Litigating ERISA Cases, Pittsburgh, PA (2008); ADA: Fighting for Fairness, Atlanta, GA (2006) and Chicago, IL (2008). He is a member of American Association for Justice, National Employment Law Association and the Million Dollar Advocates Forum. Greg is the Vice-Chair of the National Legal Advocacy Committee for the American Diabetes Association and recipient of the ADA 2008 National Service Award for Outstanding Advocacy.  LIST OF ADMISSIONS AND BAR ASSOCIATIONS Pennsylvania, 1999 West Virginia, 1999 Maryland, 2000 California, 2004 Ohio, 2005 Texas, 2006  Missouri, 2012 U.S. District Court, Western District of Pennsylvania U.S. District Court, Eastern District of Pennsylvania U.S. District Court, Middle District of Pennsylvania U.S. District Court, Southern District of West Virginia U.S. District Court, Northern District of West Virginia U.S. District Court, District of Maryland U.S. District Court, District of Colorado U.S. District Court, Northern District of Ohio U.S. District Court, Southern District of Ohio U.S. District Court, Eastern District of Texas U.S. District Court, Northern District of Texas U.S. District Court, Southern District of Texas U.S. District Court, Northern District of California U.S. District Court, Eastern District of California U.S. District Court, Central District of California U.S. District Court, Eastern District of Michigan U.S. District Court, Eastern District of Arkansas U.S. District Court, Northern District of Illinois U.S. Court of Appeals, 3rd Circuit U.S. Court of Appeals, 4th Circuit U.S. Court of Appeals, 5th Circuit U.S. Court of Appeals, 6th Circuit U.S. Court of Appeals, 9th Circuit U.S. Court of Appeals, 11th Circuit Supreme Court of the United States Allegheny Bar Association Federal Bar Association American Bar Association The American Association for Justice Million Dollar Advocates Forum National Employment Lawyers Association Sonoma County Bar Association

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Please contact us for a free consultation with Greg concerning the denial of short-term or long-term disability benefits. Most clients prefer to have a contingency fee agreement, which means attorney fees are are payable if we are successful.

ERISA Experience

Greg Paul has 18 years experience fighting for long-term disability benefits against insurance companies such as Aetna, CIGNA, Guardian, Hartford, Liberty Mutual, Mutual of Omaha, Principal, Prudential, Reliance Standard, Standard, Sun Life, and Unum.