Supreme Court May Hear Case About Co-fiduciary Indemnifying Trustees

The Supreme Court has invited the solicitor general to file a brief in a case concerning whether the Employee Retirement Income Security Act (ERISA) permits courts to order one fiduciary to indemnify another.

According to case documents, Trachte Building Systems, Inc. established an employee stock ownership plan (ESOP) in the mid-1980s. In the late 1990s, David Fenkell and Alliance Holdings, Inc., a company Fenkell founded and controlled, developed a niche specialty of buying and selling ESOP-owned companies with limited marketability. In the typical transaction, Fenkell would merge the ESOP of an acquired company into Alliance’s own ESOP, hold the company for a few years and then spin it off for a profit.

Alliance acquired Trachte in 2002 for $24 million and folded its ESOP into Alliance’s ESOP. Fenkell estimated the company would gain him around $50 million in five years. However, when the time came to sell, Trachte’s profits were flat, its growth had stalled and no independent buyer would pay that price.

Therefore, Fenkell offloaded the company to its employees in a complicated leveraged buyout. When all was completed, Trachte and the new Trachte ESOP had paid $45 million for 100% of Trachte’s stock and incurred $36 million in debt. By the end of 2008, Trachte’s stock was worthless.

The participants in the new Trachte ESOP sued Alliance, Fenkell, his hand-picked trustees and others alleging breach of ERISA fiduciary duties. The National Center for Employee Ownership notes that a district court ruled that the ESOP trustees needed to restore losses suffered by the plan while at the same time ruling that Fenkell, indemnify the other trustees. The district court found that Fenkell was the “more culpable fiduciary,” and the 7th U.S. Circuit Court of Appeals affirmed this decision.

Circuit courts are split on whether ERISA permits courts to order one fiduciary to indemnify another.