Insights

7th Circuit Allows State Law Claims Against Dual-Hat Fiduciaries


On July 28, 2021, the Court of Appeals for the Seventh Circuit held that ERISA did not preempt a claim for state-law breach of corporate fiduciary duties but did preempt a state-law claim for aiding and abetting. In Halperin v. Richards (7th Cir., No. 20-2793, July 28, 2021), the trustees of the Chapter 11 bankruptcy for Appvion filed suit alleging that Appvion’s directors and officers had inflated the company’s stock value to conceal the company’s financial decline and benefit themselves.

Specifically, Appvion was wholly owned by employees through the company’s employee stock ownership plan (ESOP), and the bankruptcy trustees accused the officers and directors of fraudulently inflating the ESOP’s valuations with assistance from the ESOP trustee and its independent appraiser. Accordingly, the bankruptcy trustees filed suit against the directors and officers for breaching their corporate fiduciary duties and against the ESOP trustee and appraiser for aiding and abetting those breaches.

The defendants in the case moved to dismiss all the claims on the theory that their roles in Appvion’s ESOP valuations were governed by ERISA, causing ERISA to preempt state law. The district court agreed with the defendants, dismissing all the claims. But on appeal, the Seventh Circuit reversed the district court as to the claims for corporate fiduciary breach (against the directors and officers) and affirmed the district court as to the claims for aiding and abetting (against the ESOP trustee and appraiser).

In coming to those opposite conclusions, the court analyzed precedence on ERISA preemption. The court decided that ERISA did not preempt state laws on corporate breach of fiduciary duties because the executives in question served in dual capacities. Although ERISA’s “exclusive benefit rule” is paramount and requires that fiduciaries act solely in the interest of ERISA beneficiaries, ERISA also allows for corporate insiders to serve as ERISA fiduciaries. As such, the court held that it was possible for parallel state-law liability against executives who serve in dual roles.

The court also reasoned that if they were to decide that ERISA preempts state law in regard to claims for breach of corporate fiduciary duty, it would leave parties like the plaintiffs without any recourse against the malfeasance of corporate actors serving in dual capacities.

On the other hand, the court found that the ESOP trustee and independent appraiser were involved in the case in a singular role under ERISA. Since they did not have a separate corporate obligation for which the plaintiffs could bring a claim, the court held that ERISA did preempt state aiding and abetting laws against the ESOP trustee and appraiser.

Ultimately, this case serves as a reminder to corporate officers that they could be subject to both ERISA and state laws designed to protect the interests of corporations and their stakeholders.

Halperin v. Richards »