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.