April 11, 2013 Top Story

Contribution and Indemnification for ERISA Fiduciaries

Federal courts divided on implied right, and the Supreme Court remains silent

Douglas E. Motzenbecke

A federal district court has held that, pursuant to the federal common law of ERISA, a defendant in a breach of fiduciary duty action may seek contribution and indemnification from other liable fiduciaries. Guididas v. Community Nat’l Bank Corp. [PDF].The decision widens a split among the federal courts over this issue.

Background Issues

After 10 years of study, debate, and legislative compromise, Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA) to implement national pension reform and, in turn, to displace practically all state regulation of privately sponsored employee benefit plans. The statute preempts “any and all State laws insofar as they . . . relate to any employee benefit plan[.]” ERISA § 514(a), 29 U.S.C. §1144(a).

ERISA imposes strict standards with respect to the funding of such plans, disclosure to participants and regulatory authorities, prudent administration of plan assets, prohibited transactions, fiduciary conduct, the rights of participants and beneficiaries, and other conduct affecting such plans. The U.S. Department of Labor, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation have been granted specific authority over benefit plans and the persons who run them.

The Supreme Court observed that ERISA is “comprehensive and reticulated,” is “enormously complex and detailed[,]” and “should not be supplemented by extratextual remedies[.]” It also noted, “We are reluctant to tamper with an enforcement scheme crafted with such evident care as the one in ERISA.”

Even so, ERISA does not speak to every circumstance or issue, and, citing this void, the Supreme Court has authorized the courts to develop a federal common law of ERISA. Still, it has cautioned that “the authority of courts to develop a ‘federal common law’ under ERISA . . . is not the authority to revise the text of the statute.”

The statute’s civil enforcement provisions are found at ERISA § 502, 29 U.S.C. §1132, which sets forth the primary if not exclusive means of litigating ERISA actions. ERISA permits plan participants and beneficiaries to bring civil actions in essentially six circumstances: (a) to recover civil penalties against a plan administrator that fails to provide necessary COBRA notification, or to respond to appropriate requests for plan documents or information; (b) for benefits due, to enforce the plaintiff’s rights, or for a declaratory judgment; (c) for monetary relief for damages caused by the defendant’s breach of fiduciary duty to the plan; (d) to enjoin violations of the plan or ERISA; (e) to obtain other appropriate equitable relief, or to enforce any provision of the plan or ERISA; and (f) to obtain relief for failure to provide annual benefit statements.

ERISA is, however, silent with respect to whether a defendant fiduciary has the right to contribution or indemnification from other plan fiduciaries. The Supreme Court has never addressed the issue and there is a split of authority among the federal courts over whether the remedy exists. Cf. Chemung Canal Trust Co. v. Fairway Spring Co. (finding such relief permissible) with Kim v. Fujikawa (rejecting it) and Meoli v. American Medical Servs. of San Diego (same).

Under ERISA § 409, 29 U.S.C. § 1109, a plaintiff may recover monetary damages on behalf of a defendant fiduciary when the defendant’s breach causes harm to the plan, but not to an individual plaintiff. Therefore, attention has focused on ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), the statute’s so-called catchall provision, which allows a plaintiff or other litigant to seek specified forms of equitable relief in addition to those remedies specifically available under the statute. The Supreme Court, however, has held that because the catchall provision speaks only to equitable relief, money damages may rarely be recovered in an action under § 502(a)(3). Great-West Life & Annuity Ins. Co. v. Knudson.

The Scenario in Guididas

In Guididas, the plaintiffs—participants in an employee stock ownership plan (ESOP) sponsored by the defendant corporation—a brought a class action against various corporate directors and officers who were also fiduciaries of the ESOP. They alleged that the defendants breached their various fiduciary duties to the plan and its constituents. The defendants, in turn, filed a counterclaim alleging that three named plaintiffs were also plan fiduciaries and seeking contribution and indemnification from them on that basis. The three plaintiffs moved to dismiss the counterclaim on the ground that ERISA does not permit such relief.

The district court held that although the defendants could not seek contribution or indemnification under ERISA §§ 409 and 502(a)(3), they could recover under the federal common law of ERISA, and, thus, it denied the motion to dismiss. The court followed the Second Circuit’s holding in Chemung, noting that because ERISA was modeled, in part, after the common law of trusts, courts should apply common law principles when to do so is consistent with ERISA’s text and Congress’s intent.

Here, the court refused to dismiss the counterclaim on the additional grounds that these forms of recovery are not inconsistent with ERISA, would not undermine the best interests of participants and beneficiaries (or the remedies available to them, as they do not diminish the recovery available to the plan), and would allow defendants to allocate responsibility among other liable parties, rather than merely among those whom the plaintiff has fortuitously chosen to sue.

Impact of the Decision

“There is no question that the federal courts are authorized to develop a federal common law of ERISA,” says Howard Shapiro, New Orleans, former cochair of the Employee Benefits Committee of the Section of Labor and Employment Law of the ABA. “Here, the district court followed the Second Circuit’s holding in Chemung, which, on balance, is probably a good thing.”

“However, while the decision is somewhat logical in principle, there are some counter-considerations,” Shapiro notes. “Allowing contribution and indemnification will usually mean that parties who are the target of such claims will demand that their fiduciary liability insurers appoint separate counsel for them. And, since most fiduciary liability policies are self-liquidating, i.e., the coverage limits are eroded by defense costs, litigating contribution and indemnification claims will reduce the available coverage, which is in no one’s interest.”

“The federal courts have definitely split on this issue,” says Ronald K. Alberts, Los Angeles, an ABA member whose practice focuses extensively on ERISA. “Some hold that because ERISA was to be the only law governing employee benefit disputes, it is appropriate to fill in the gaps left by Congress—and there are gaps. Others, however, reason that no additional remedies should be implied because ERISA was the result of extensive study, is comprehensive, interlocking, and detailed in its scope, and could always be amended if Congress so chooses.

Guididas is an interesting case, because the district court found that contribution exists not within ERISA but strictly as a matter of federal common law,” Alberts adds. “Underthis approach,a party seeking contribution or indemnification would sue pursuant to the federal question statute, 28 U.S.C. §1331, rather than ERISA’s civil enforcement provisions, which are particularly narrow.”

Douglas E. Motzenbecker is a contributing editor for Litigation News.

Keywords: ERISA, contribution, indemnification

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