Circuit Division Remains on Availability of Equitable Relief from ERISA Co-Trustees | Holland & Knight LLP
The U.S. Supreme Court denied a petition for certiorari in First Reliance Standard Life Insurance Company v. Giorgio Armani Corporation. While the headlines usually come when the Supreme Court issues an opinion, its denial in this case is notable because it means there will continue to be a divided circuit on the key issue of whether ERISA allows a fiduciary to obtain indemnification and contribution from a co-trustee for liabilities arising from a breach of ERISA.
the First confidence case concerns the life insurance coverage of the late husband of a Giorgio Armani employee. Armani had established and sponsored an employee benefit plan pursuant to ERISA for the benefit of its employees and their dependents. First Reliance has issued a voluntary group term life insurance policy to Armani for the provision of life insurance benefits to eligible Armani employees and dependents.
One of Armani’s employees took part in the open enrollment in the police and chose life insurance for her husband in the amount of $500,000. Although First Reliance required to collect proof of good health and proof of insurability, Armani did not at any time request or collect this information from the employee. About a year and a half later the husband died and the employee filed a claim under the policy for $500,000. After investigating the claim, First Reliance took the position that the employee was only entitled to a $50,000 benefit.
The employee sued First Reliance, seeking payment of the full $500,000 requested. First Reliance responded by filing a third-party complaint against Armani, asserting equitable compensation and contribution claims under ERISA. The U.S. District Court for the Central District of California awarded the employee the full amount of her husband’s life insurance policy. Importantly, he also granted Armani’s motion to dismiss a third-party complaint, finding that Ninth Circuit precedent prevents a breaching trustee from seeking contribution from other alleged breaching trustees. Notably, in one of these earlier Ninth Circuit cases, the U.S. Department of Labor submitted an amicus curiae brief in support of the position that ERISA can be construed as authorizing a cause of action in contribution between co-trustees. However, because this position had previously been rejected by the Ninth Circuit, the district court was bound by compelling precedent, which held that the claims were governed by ERISA, and ERISA did not provide remedies against the co-trustees. in infraction.
First Reliance’s appeal to the Ninth Circuit was denied. In its Brief Opinion, the Ninth Circuit cited the same Ninth Circuit precedent as the District Court and held that ERISA’s plain language does not provide an equitable contribution remedy for a breaching fiduciary, and there is no indication that Congress intended to provide such relief.
Following the adverse ruling, First Reliance filed a petition for certiorari in the Supreme Court, arguing that there is an entrenched split between the circuits, with a series of cases (i.e. those arising from the Ninth Circuit) allowing a less culpable co-trustee to bear the entire loss, even if there is a more culpable co-trustee who was excluded from the litigation. First Reliance has also argued for the need for uniformity, particularly in litigation involving large, multi-state employers where inconsistent results can arise from factually identical lawsuits – depending solely on where the lawsuit is brought.
Armani opposed the motion and urged the Supreme Court to deny certiorari, pointing out that ERISA was comprehensive law enacted by Congress and did not include a provision allowing trustees to seek contribution or indemnity from co – trustees. On February 22, 2022, certiorari was formally denied, leaving the Ninth Circuit’s opinion intact.
The division of the circuit persists
Although a majority of Circuits have not taken a position on this issue, as things currently stand, the Second and Seventh Circuits permit a fiduciary to seek contribution and indemnification from co-trustees in breach under the ERISA, unlike the eighth and ninth circuits.
Underlying the grant of equitable remedies between and among ERISA’s co-trustees, the Second Circuit held that Congress intended the federal courts to fashion a federal common law of ERISA, with contribution and compensation as integral aspects. See for example, In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1029 (2d Cir. 1992). Guided by principles of traditional trust law, federal courts have permitted the development of such remedies under federal common law for ERISA. Chemung Canal route. Co. v. Sovran Bank/Md., 939 F.2d 12, 16 (2d Cir. 1991). Similarly, the Seventh Circuit explained that “ERISA grants courts the power to fashion an award so as to render the injured plan whole while apportioning damages fairly among the wrongdoers” and that equitable remedies are “properly within the equitable powers of the tribunal.” Free vs. Briody732 F.2d 1331, 1337 (7th Cir. 1984).
While the Eighth and Ninth Circuits focus on the exact wording of the ERISA legislation (and the lack of particular wording) to assess available remedies, the Second and Seventh Circuits take the position that the wording merely codifies the principles long-standing expertise in trust law with the ability to shape them to meet the needs of employee benefit plans.
Without the intervention of the Supreme Court, the current distribution of powers between the courts remains in place. In this case, First Reliance had to pay the full amount of the insurance claim that might otherwise have been denied, primarily due to the default of a co-trustee, and then was unable to recover any of these damages. with this co-trustee. To mitigate potential damages resulting from a breach of fiduciary duty, ERISA Trustees should be mindful of their maintenance of fiduciary insurance coverage, inclusion of contribution and indemnification clauses in inter-fiduciary contracts. , inclusion of forum selection clauses in plan documents , and appropriate monitoring of co-trustees to ensure compliance with plan and policy requirements.