ERISA does not Preempt State Law Claims against Executives having “Dual Hat”

ERISA does not Preempt State Law Claims against Executives having “Dual Hat”

On July 28, 2021, the Seventh Circuit Court held that the Employee Retirement Income Security Act (“ERISA”) does not preempt state law claims brought against directors and officers. The Court reasoned that the intention behind ERISA and the bare-reading of its text contemplate a parallel corporate state liability against the executives who act as “dual hat” fiduciaries. Halperin v. Richards __ F.4th __, 2021 U.S. App. LEXIS 22348, 2021 WL 3184305 (7th Cir., No. 20-2793, July 28, 2021).. ERISA lays down minimum standards for retirement and health plans established voluntarily, in private industry with an aim to provide protection to beneficiaries of the plan. The purpose of ERISA preemption is to ensure uniformity of benefits law and protect the interests of plan beneficiaries. 

As per the facts alleged in the complaint, the plaintiffs were the co-trustees of a liquidating trust for Appvion, created under Chapter 11 bankruptcy. Plaintiffs were vested with the authority to pursue corporate law claims on the debtor’s behalf. Upon examination, plaintiffs found out that during its financial breakdown, the debtor’s executives fraudulently misrepresented the debtor’s financial projections to inflate its stock value, which was owned by the debtor’s ERISA-covered Employee Stock Ownership Plan. The inflated stock value benefitted the debtor’s directors and officers whose monthly income was linked to the stock’s valuation. Further, plaintiffs alleged that the execution of this fraud was aided and abetted by the Plan’s Trust Company and its retained independent appraiser who held expertise in stock valuation.

Through this complaint, the plaintiffs brought state law claims against the debtor’s executives for breaching their corporate fiduciary duties, and also against the trust company and its retained independent appraiser for aiding and abetting the state law claims breaches. However, the district court ruled in favor of the defendants. As per the defendants, their role in the plan’s valuations was governed under ERISA and the legislation preempted all state corporate-law liability arising from the valuation process.

Consequently, plaintiffs filed an appeal before the Seventh Circuit Court. The issue which arose before the Court was, whether plaintiffs’ claims were preempted under ERISA. The legislation preempts, “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by ERISA. The Court reversed the district court’s dismissal against the debtor’s executives but upheld the dismissal against the trust company and its independent appraiser.

The Court found that ERISA did not preempt state law corporate claims brought against executives who serve dual roles, i.e. as corporate fiduciaries and ERISA fiduciaries, because such state claims did not negate the intention of Congress behind the working of ERISA fiduciary duties. The Court noted that despite ERISA’s “exclusive benefit rule” which implies an exclusive duty of loyalty causing fiduciaries to act solely in the interest of ERISA beneficiaries, the legislation allows individuals to serve as corporate insiders and ERISA fiduciaries at the same time. Thus, ERISA contemplates parallel state-law liability against executives wearing “dual hats”.

The Court further noted that the plaintiffs were not questioning ERISA’s remedial scheme. The preemptive rule under ERISA protected the trust company and its retained independent appraiser, against state-law liability. The Court held that ERISA does not contemplate single-hat fiduciaries, viz. the trustee, owing to other duties of loyalty to a corporation. It noted that the appraiser still owned federal obligations under ERISA while working as the trust company’s contractor.