In Johnson v. Couturier, Nos. 08-17369, 08-17373, 08-17375, 08-17631 (Ninth Circuit 2009), the Court broadened some of the thinking on the application of ERISA. In this case, in his capacity as president and a director of Noll Manufacturing Company and its successors (“Noll”), the defendant, Clair R. Couturier, Jr. had channeled $34.8 million of company assets to his own possession by applying that amount to buy out certain deferred compensation agreements (the “Buy Out”). Couturier was also a trustee of Noll’s employee stock ownership plan (the “ESOP”). The plaintiffs, who are participants in the ESOP, filed suit against Couturier alleging breach of fiduciary duties under ERISA. The Court faced a number of issues, including some interesting ERISA matters.
As to whether Couturier had breached his fiduciary duties, the Court said that Couturier, as ESOP trustee, was a fiduciary of the ESOP and therefore subject to the duties of loyalty and care, as well as the prohibition against self-dealing, under ERISA. Company decisions relating to compensation generally do not fall within ERISA’s purview. But since the assets of an ESOP include the company’s stock, the value of those assets are affected by the compensation paid by the company. Where, as here, an individual is both an ESOP fiduciary and a corporate director or officer, ERISA fiduciary duties are imposed on business decisions from which that individual could directly profit-such as the decision to compensate the individual by applying company assets to buy out the deferred compensation agreements. As such, the Court said that the plaintiffs are likely to prove that Couturier failed to meet his ERISA duties due to the Buy Out. The Buy Out involved a decision to use $34.8 million of company assets- approximately 2/3 of the company’s assets- to benefit Couturier by buying out the deferred compensation agreements. Those agreements were worth only between $6 million and $9 million, so that the Buy Out put Couturier’s financial interests ahead of the ESOP.
As another matter, Courturier had entered into an indemnification agreement with Noll. This agreement generally indemnified Couturier for any liabilities incurred in his service as director of Noll or as ESOP trustee. It required Noll to advance defense costs to Couturier. However, the district court had issued a preliminary injunction against any such advancement of costs by Noll, and the Ninth Circuit upheld this injunction. In doing so, the Court noted that Section 410(a) of ERISA specifies that any provision in an agreement which purports to relieve a fiduciary from liability for any responsibility, obligation, or duty under ERISA is void as against public policy. While this provision has been interpreted to allow insurance or a third party agreement to indemnify a fiduciary, the ERISA plan itself may not indemnify the fiduciary. In this case, payment by Noll under the indemnification agreement is tantamount to the ESOP indemnifying Couturier, since Noll is liquidating, so that any money taken from Noll to pay Couturier’s defense costs will, dollar for dollar, reduce the funds available for distribution to the ESOP and ultimately its participants.
Points for Employers: For many years, courts have followed the “business judgment rule”, under which a company’s business decision-whether to pay more salary, establish an employee benefit plan or otherwise- is not subject to ERISA. In ruling that ERISA fiduciary responsibilities can apply to a company’s business decision-even though the Court limited this ruling to situations in which an ESOP fiduciary is also a company director or officer and can directly profit from the decision-the Court has made a surprising incursion into the business judgment rule. If an employer sponsors an ESOP, or any plan which has invested in employer stock, to avoid the application of ERISA fiduciary rules to company decisions, the employer might consider appointing a fiduciary to the ESOP or plan who is not a director or officer of the company. It is not clear that, under the Court’s view in this case, merely excluding the plan fiduciary, who is a director or officer, from participating in the company decision to benefit him or her will prevent the application of ERISA fiduciary rules.
Also, the case encourages employers to use liability insurance to protect plan fiduciaries, rather than an indemnification agreement under which the employer itself could be required to indemnify the fiduciary. Following the Court’s reasoning, under some future circumstances, payment by the employer under an indemnification agreement could be construed by a court as depleting plan assets and thus be disallowed.