When a fiduciary breach occurs, some fiduciaries may be more culpable than others. In such cases, a court can order those parties to indemnify other fiduciaries who were, despite their technical status as fiduciaries, without blame. That ruling was the opinion of the U.S. Court of Appeals for the Seventh Circuit in a recent case.

Shuffling the Facts of the Case

In Chesemore v. Fenkell, David Fenkell was the CEO and controlling owner of Alliance Holdings, Inc., a company that sponsored an employee stock ownership plan (ESOP). Under the ESOP’s terms, participants could sell their employer stock shares back to the company after a prescribed period. The date on which a senior executive could make the sale was approaching, requiring the company to make a substantial cash outlay.

Fenkell was against the cash outlay. After failing to find independent buyers willing to pay his price, he engineered the sale of the company to the ESOP at a price the court deemed “inflated.” According to the court, he also installed ESOP trustees who were beholden to him.

The ESOP had to borrow heavily to buy all of the shares, and the burden of servicing that debt contributed to the company’s subsequent demise. The employees sued, and the trial court ordered the CEO to compensate the employees and pay their attorneys’ fees.

Win, Lose, or Draw: The Court Decides

Rather than denying liability, Fenkell argued that it should be distributed among all of the ESOP’s fiduciaries. The court found that Fenkell’s appointed trustees “lacked the experience and the incentive to assess” the sale and that the CEO “orchestrated the entire complex transaction.” Therefore, his culpability “vastly exceeded theirs.”

The appeals court noted that although the Employee Retirement Income Security Act (ERISA) “contemplates the allocation of fiduciary obligations among co-fiduciaries, thereby limiting subsequent losses,” ERISA is not an absolute standard. Noting that the Supreme Court has interpreted ERISA as “incorporating the law of trusts,” the appeals court reasoned that trial courts can order “appropriate equitable relief.”

This court had ruled similarly in an earlier case. Courts can provide an award to make the injured plan whole while equitably apportioning the damages among wrongdoers. Technically, this ruling applies only in the Seventh Circuit, but another circuit has ruled the same way. Meanwhile, two other circuits have taken the opposite view, leaving five other circuits and 30 states in limbo.

CRI Can Help You Avoid Fiduciary Blame in Spades

Although the Chesemore ruling does not apply to all 50 states, the moral of the story is that plan sponsors should play their cards in the best interests of plan participants. If you need assistance with abiding by this principle, then please contact CRI’s benefit plan services team.