June 15, 2020

Court Holds Contribution and Indemnity Claims May Be Brought Against ERISA Co-Fiduciaries

Holland & Knight Alert
Todd D. Wozniak | Lindsey R. Camp | Jamie L. Hill

Highlights

  • The U.S. District Court for the Eastern District of Pennsylvania recently joined several other courts in finding that the Employee Retirement Income Security Act (ERISA) permits co-fiduciaries to assert counterclaims for contribution and indemnification.
  • After filing a complaint asserting various ERISA breaches of fiduciary duty, the defendant-plan administrator responded with counterclaims for contribution and indemnification in connection with the plaintiffs' own alleged wrongdoing.
  • The U.S. District Court held that ERISA does not foreclose such claims, but that affirmative defenses for proportional liability and equitable contribution for the portion of loss allegedly caused by the plaintiffs are not permissible.

The U.S. District Court for the Eastern District of Pennsylvania recently joined several other courts in finding that the Employee Retirement Income Security Act (ERISA) permits co-fiduciaries to assert counterclaims for contribution and indemnification. See Leventhal, et al. v. The MandMarblestone Group LLC, et al., Case No. 18-cv-2727, 2020 WL 2745740 (E.D. Pa. May 27, 2020).

In Leventhal, the plaintiffs, which included the 401(k) profit-sharing plan sponsor and trustee, sued the plan administrator and plan custodian for breach of fiduciary duty under ERISA and various violations of state law relating to losses incurred by the plan in connection with cyberfraud. The plan administrator responded to the complaint by asserting contribution and indemnification claims against the plaintiffs and arguing that the plaintiffs' "own carelessness with respect to their employees and their computer/IT systems and policies … permitted the cyberfraud or other criminal fraud to occur." In addition, the plan administrator asserted various affirmative defenses alleging that the plaintiffs are proportionally liable for the losses incurred by the plan and that the plaintiffs' ERISA breach of fiduciary duty claim is "precluded, reduced or setoff by [the plaintiffs'] respective breaches of fiduciary duty."

The plaintiffs argued that the counterclaims for contribution and indemnity should be dismissed based upon nonbinding case law holding that ERISA precludes such claims against co-fiduciaries. The plan administrator argued that dismissal of the counterclaims would be inappropriate given the lack of precedential authority and a circuit split on the issue.

Circuit Courts Are Split

The U.S. Court of Appeals for the Second and Seventh Circuits permit co-fiduciaries to assert claims for contribution and indemnity in ERISA actions based on principles of traditional trust law. In Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12, 15-17 (2d Cir. 1991), the Second Circuit held that "traditional trust law provides for a right of contribution among defaulting fiduciaries" under ERISA, reasoning that "ERISA's legislative history confirms that the Act's fiduciary responsibility provisions ... codify and make applicable to ERISA fiduciaries certain principles developed in the evolution of the law of trusts." Moreover, the Second Circuit held that federal courts are to establish federal common law for ERISA claims and a right of contribution is an available remedy for ERISA claims under traditional trust law and that it is appropriate to "incorporat[e] traditional trust law's doctrine of contribution and indemnity into the law of ERISA." Id. at 18.

Similarly, in Chesemore v. Fenkell, 829 F.3d 803, 813 (7th Cir. 2016), the Seventh Circuit held that "[i]f we are to interpret ERISA according to the background principles of trust laws – as the Supreme Court has repeatedly instructed us to do – then indemnification and contribution are available equitable remedies under the statute."

The plaintiffs, however, relied on decisions from the U.S. Court of Appeals for the Eighth and Ninth Circuits, which have held that ERISA does not allow claims for contribution and indemnification between co-fiduciaries. In Travelers v. Iada Servs., 497 F. 3d 862, 867 (8th Cir. 2007), the Eighth Circuit held that not only does ERISA not allow for such claims, but it also preempts state law claims for contribution and indemnity because "[t]o recognize a state-law cause of action that supplements the federal scheme in these circumstances would pose an obstacle to the purposes and objectives of Congress." (citations omitted). The Eighth Circuit found that allowing claims for contribution would "undermine the comprehensive federal scheme to permit an action under state law for that same remedy." Id.

The Ninth Circuit, in Kim v. Fujikawa, 871 F.2d 1427, 1433 (9th Cir. 1989), similarly held that there is no right of contribution under ERISA because "implying a right of contribution is particularly inappropriate where, as in this case, the party seeking contribution is a member of the class e.g., fiduciaries whose activities Congress intended to regulate for the protection and benefit of an entirely distinct class e.g., ERISA plans, and where there is no indication in the legislative history that Congress was concerned with softening the blow on joint wrongdoers." (citations omitted). The Ninth Circuit held that Congress' legislative history for ERISA does not afford federal courts the power to create additional remedies under ERISA. Id.

Court: ERISA Does Not Foreclose Contribution and Indemnification Counterclaims

In its ruling, the Leventhal district court recognized that, while the Third Circuit has not ruled on the issue, "[d]istrict courts within the Third Circuit 'have largely concluded that a right of contribution between fiduciaries does exist in the ERISA context.'" 2020 WL 2745740 at *4 (quoting Lash v. Reliance Standard Life Ins. Co., No. 16-235, 2017 WL 2180301, at *4 (E.D. Pa. May 18, 2017)). These courts "have grounded their decision, in part, on the principle in trust law that defaulting fiduciaries may seek contribution from one another." Id.

Acknowledging the lack of precedent from the Third Circuit, the district court agreed with the Second and Seventh Circuits and allowed the contribution and indemnification counterclaims to proceed, noting that "nothing within the ERISA statute forecloses these types of claims." Leventhal, 2020 WL 2745740 at *4. In doing so, the court distinguished its prior ruling dismissing contribution claims in Spear v. Fenkell, No. 13-02391, 2015 WL 518235, at *3 (E.D.Pa. Feb. 6, 2015). According to the district court, Spear did not apply in the instant case because the contribution claims in Spear were between non-fiduciaries; whereas, in this case, the parties were sufficiently pled as co-fiduciaries.

Despite allowing the contribution and indemnification counterclaims to proceed, the district court granted the plaintiffs' motion to strike the affirmative defenses for proportional liability and equitable contribution for the portion of loss alleged caused by the plaintiffs. The court held that a plaintiff co-fiduciary's breach of its fiduciary duties does not give rise to an affirmative defense or relieve the defendant of its own fiduciary breach.

How Holland & Knight Can Help

If you have any questions regarding the court's decision or ERISA, please contact the authors or another member of Holland & Knight's ERISA, ESOP and Employee Benefits Litigation Team.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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