Seventh Circuit Revives State Law Claims Against Executives Acting As “Dual-Hat” Fiduciaries

In Halperin v. Richards, 2021 U.S. App. LEXIS 22348, 2021 WL 3184305 (7th Cir., No. 20-2793, July 28, 2021), the Seventh Circuit held that the Employee Retirement Income Security Act of 1974, (ERISA), does not preempt certain state law claims against directors and officers. The court reasoned that ERISA’s text and purpose contemplate parallel corporate state-law liability by executives who act as “dual hat” fiduciaries.

Plaintiffs in Halperin were co-trustees of a Chapter 11 liquidating trust for Appvion, a paper company that filed bankruptcy in 2017. These co-trustees were thereby authorized to pursue corporate law claims on behalf of Appvion.

Plaintiffs then alleged that, while Appvion was quickly declining financially over five years 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”).

It was further alleged that this inflated stock value went to Appvion’s directors and officers whose salaries were based on the stock’s valuation. Plaintiffs also alleged that the Plan’s Trust Company (the Plan Trustee) and the Trustee’s retained independent appraiser aided and abetted the Appvion executives in this fraudulent scheme.

Plaintiffs brought state law claims against Appvion’s executives for breaching their corporate fiduciary duties and against the Trust Company and the appraiser for aiding and abetting those state law violations. All Defendants successfully moved to dismiss the state-law claims at the district court level. This was based on their argument that their roles in the Plan’s valuations were regulated by ERISA, which preempted all state corporate-law liability arising from the valuation procedure.

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. According to the Court, 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.

The Seventh Circuit panel found that because ERISA expressly allows for individuals to serve as corporate insiders and ERISA fiduciaries, it contemplates parallel state-law liability against executives wearing these “dual hats.” However, unlike the Defendant dual-hat executives, ERISA does not contemplate single-hat fiduciaries like the Trustee and appraiser owing other duties of loyalty to a corporation. Accordingly, the Court affirmed the dismissal of the state law claims against the Trust Company and appraiser. The Court did find that the appraiser owed federally imposed obligations under ERISA when serving as the Trust Company’s contractor and that this obligation should not be confused with potentially conflicting state-law obligations to the corporation. 

HBL has experience in all areas of Employment and employment law, offering a comprehensive solution to all your business Employment and HR/employment needs. We help ensure that you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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