The Seventh Circuit has concluded that ERISA did not preempt state-law breach of corporate fiduciary duty claims against a company's directors and officers who served dual roles as both corporate fiduciaries and ERISA fiduciaries (Halperin v. Richards, (7th Cir. July 28, 2021)). However, the court held that ERISA did preempt state-law aiding and abetting claims against the trustee and appraiser of the company's employee stock ownership plan (ESOP).

The plaintiffs in this case were the bankruptcy creditors of a paper company that suffered declining revenues for several years before filing for bankruptcy in 2017. The creditors alleged that while the company's paper business was sharply declining, the company's directors and officers inflated the value of the company's stock—which was wholly owned by the company's employees under an ERISA-governed ESOP (see Practice Note, Employee Stock Ownership Plans (ESOPs)). By doing so, the creditors asserted, the directors increased their own pay (which was tied to the stock's value). The creditors also alleged that the directors were knowingly assisted in inflating the stock valuations by the ESOP's trustee and its independent appraiser.

After the bankruptcy filing, the creditors brought state-law claims in bankruptcy court against:

The claims were later moved to federal district court and the directors argued that because the claims involved valuations under an ERISA ESOP, they were preempted by ERISA (see Practice Note, ERISA Litigation: Preemption of State Laws: Overview). In particular, the directors asserted that although they served in dual roles as corporate fiduciaries and ERISA fiduciaries, they acted in their ERISA capacity regarding their ESOP-related actions. The trustee and appraiser also argued that the claims against them were ERISA-preempted. A district court agreed that ERISA preempted the creditors' appeal, and the creditors appealed.

On appeal, the Seventh Circuit held that ERISA did not preempt the creditors' state-law claims because ERISA contemplates that directors and officers such as the defendants may have parallel and independent duties to a corporation—in addition to their ERISA fiduciary duties.

Focusing on ERISA's conflict preemption rules, the court considered whether (and how much) the creditors' state-law fiduciary duty claims interfered with ERISA's fiduciary duties (see Practice Note, ERISA Litigation: Preemption of State Laws: Overview: Conflict Preemption Analysis). In doing so, the court observed that ERISA's exclusive benefit rule requires ERISA fiduciaries to act for the exclusive purpose of providing benefits to participants and beneficiaries.

However, the Seventh Circuit also recognized that under a competing ERISA provision (ERISA Section 408(c)(3)) corporate insiders with fiduciary duties under state corporation law may nonetheless serve as ERISA fiduciaries (29 U.S.C. § 1108(c)(3)). This provision (related to ERISA's prohibited transaction rules) permits ERISA fiduciaries to also serve as officers, employees, or other representatives of a corporate employer or plan sponsor. As a result, the court noted, this provision operates as an exception to ERISA's exclusive benefit rule and permits "dual-hat" directors and officers.

Applying this framework to the creditors' claims, the Seventh Circuit reasoned that the permitted dual loyalty under ERISA weighed in favor of allowing parallel state-law fiduciary liability for the directors and officers. If parallel liability were ERISA-preempted, the court observed, then:

In holding that the creditors' claims against the directors and officers were not ERISA-preempted, the Seventh Circuit emphasized that its conclusion was limited to the creditors' particular claims in this case. Specifically, this referred to situations where the directors' and officers' corporation law and ERISA fiduciary duties both prohibited the alleged fraudulent conduct.

The Seventh Circuit reached a different preemption conclusion, however, regarding the creditors' claim that the ESOP trustee and appraiser knowingly aided and abetted the directors and officers in violating their state-law corporate fiduciary duties. The court held that ERISA did preempt these claims. The key difference, in the Seventh Circuit's view, was that the trustee—unlike the directors and officers—did not have a separate duty of loyalty under state law. The court reasoned that ERISA did not contemplate that "single hat" fiduciaries would be subject to parallel corporate liability or duties to the corporation (even a limited duty not to aid and abet breaches against the corporation).

Similarly, the independent appraiser acted in a limited single hat ERISA role when it aided the ESOP valuation process. The appraiser was obligated under ERISA to avoid aiding the trustee's (or the directors' and officers') alleged breaches. The Seventh Circuit therefore concluded that ERISA preempted the creditors' aiding and abetting claim under state law because:

In reaching its conclusion, the Seventh Circuit offered an overview of key cases addressing what the court referred to as ERISA's "fundamental contradiction" on directors' and officers' dual loyalties. Although those cases are limited in number, according to the Seventh Circuit, most of them have concluded—as the court did here—that ERISA does not preempt corporation-law claims against dual-hat directors and officers. That may come as a surprise to directors and officers, who may expect ERISA's otherwise broad preemption rules to shield them from liability against state-law claims such as the ones involved here.

For more information on ERISA preemption, see: