Opinion ID: 4707273
Heading Depth: 1
Heading Rank: 3

Heading: Director and Oﬃcer Defendants

Text: Applying these principles to the claims against the directors and oﬃcers, we ﬁnd that the plaintiﬀs’ claims are not preempted because ERISA contemplates parallel statelaw liability against directors and oﬃcers serving dual roles as both corporate and ERISA ﬁduciaries. Section 408(c)(3) of ERISA explicitly allows corporate insiders to serve as ERISA ﬁduciaries. 29 U.S.C. § 1108(c)(3). This allowance has been called ERISA’s “fundamental contradiction” because of the tension it creates with both the traditional duty of loyalty at the heart of the common law of trusts and ERISA’s “exclusive beneﬁt” rule in 29 U.S.C. § 1104(a)(1)(A)(i). See Daniel R. Fischel & John H. Langbein, ERISA’s Fundamental Contradiction: The Exclusive Beneﬁt Rule, 55 U. Chi. L. Rev. 1105 (1988). Professors Fischel and Langbein defended this “fundamental contradiction” as necessary given employers’ and employees’ dual roles as both settlors and beneﬁciaries of ERISA plans. Id. at 1126. If dual-hat ﬁduciaries were not allowed, employers that established ERISA plans would be “assuming ﬁnancial liabilities without eﬀective controls,” and “Employers tend not to write blank checks.” Id. at 1127. 8 No. 20-2793 Allowing directors and oﬃcers to participate in plan decisionmaking as ERISA ﬁduciaries therefore supports employers’ incentives to form ERISA plans—something Congress clearly desired. Unsurprisingly, however, these dual roles also produce conﬂicts of interest that have for decades challenged ERISA plans and courts trying to implement ERISA faithfully in an array of contexts. ERISA expressly allows corporate insiders to have dual corporate and ERISA obligations. Whatever complications those dual roles may entail, we are persuaded that ERISA should not be interpreted to preempt parallel state-law liability against the directors and oﬃcers in this case. Our reasoning does not extend to preemption of the aiding and abetting claims against Argent and Stout because those claims seek, in essence, to impose the complicating dual roles on a single-role ERISA ﬁduciary and its contractor, whose actions should be governed by an undiluted exclusive-beneﬁt rule under ERISA.
There is little circuit-level precedent assessing whether and to what extent ERISA preempts corporation-law claims against dual-hat directors and oﬃcers. Beyond the Fifth Circuit’s decision in Sommers Drug Stores Co. Employee Proﬁt Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456 (5th Cir. 1986), there seems to be only a handful of district court cases that squarely address the problem. Most of these cases hold that ERISA does not preempt corporation-law claims against dual-hat directors and oﬃcers. In Sommers Drug Stores, for example, the Fifth Circuit assessed whether ERISA preempted a common-law breach of No. 20-2793 9 ﬁduciary duty claim brought by an employee proﬁt sharing trust (which was both a minority shareholder and ERISA plan) against the company president (a dual-hat corporate and ERISA ﬁduciary). 793 F.2d at 1468. The trust brought ﬁ- duciary duty claims under both state common law and ERISA. The district court held that ERISA preempted the state-law claims, but the Fifth Circuit reversed. The Fifth Circuit’s reasoning focused on the shareholder-director relationship, which imposed special duties wholly independent from any parallel ERISA duties: The state common law of ﬁduciary duty that the Trust seeks to invoke in this case centers upon the relation between corporate director and shareholder. The director’s duty arises from his status as director; the law imposes the duty upon him in that capacity only. Similarly, the shareholder’s rights against the corporate director arise solely from his status as shareholder. That in a case such as ours the director happens also to be a plan ﬁduciary and the shareholder a beneﬁt plan has nothing to do with the duty owed by the director to the shareholder. The state law and ERISA duties are parallel but in- dependent: as director, the individual owes a duty, deﬁned by state law, to the corporation’s shareholders, including the plan; as ﬁduciary, the individual owes a duty, deﬁned by ERISA, to the plan and its beneﬁciaries. Id. at 1468. Sommers Drug Stores’s “parallel but independent” duties theory has been followed in other cases. See In re Ullico Inc. 10 No. 20-2793 Litig., 605 F. Supp. 2d 210, 222 (D.D.C. 2009) (“[T]he allegations of breach of ﬁduciary duty … were not preempted because they ‘derive from the counterclaim defendants’ obligations and responsibilities as oﬃcers of the corporation under state corporate law, rather than their relationship to the … plans as beneﬁciaries.’”), quoting Carabillo v. ULLICO, Inc., 357 F. Supp. 2d 249, 259 n.7 (D.D.C. 2004), in turn citing Sommers Drug Stores, 793 F.2d at 1470; Crabtree v. Central Florida Investments, Inc. Deferred Comp. Plan, 2012 WL 6523584, at  (M.D. Fla. Oct. 3, 2012), report and recommendation approved, 2012 WL 6523078 (M.D. Fla. Dec. 14, 2012) (“The preemption principles do not apply when, as is the case here, the cause of action for breach of ﬁduciary duty is against a corporate oﬃcer for duties owed to the corporation.”); Richmond v. American Sys. Corp., 792 F. Supp. 449, 458–59 (E.D. Va. 1992) (same: “The state corporate laws … regulate relations between plaintiﬀs, as minority shareholders … and Ramsey and Curran, as … oﬃcers[] and directors. The relations … function irrespective of [ERISA plan] administration.”); In re Antioch Co., 456 B.R. 791, 839 (Bankr. S.D. Ohio 2011), report and recommendation adopted, 2011 WL 3664564 (S.D. Ohio Aug. 12, 2011), modiﬁed on reconsideration sub nom. Antioch Co. Litig. Trust v. Morgan, 2012 WL 6738676 (S.D. Ohio Dec. 31, 2012), (“[A]ll three defendants were ESOP ﬁduciaries. However, … all the claims against these defendants are based on independent legal duties owed in their roles as corporate ﬁduciaries….”); In re Dehon, Inc., 334 B.R. 55, 68 (Bankr. D. Mass. 2005) (relying on Sommers Drug Stores and ﬁnding no preemption: “the claims are brought by a third party to enforce rights held by the corporation against directors of that corporation for their acts as corporate directors”); see also Housman v. Albright, 368 No. 20-2793 11 Ill. App. 3d 214, 223, 857 N.E.2d 724, 733 (2006) (same), citing Sommers Drug Stores, 793 F.2d at 1465. Some courts have further noted that preempting state claims against directors and oﬃcers “[s]imply because events precipitating [them] occurred in the general context of an employee beneﬁt plan,” Richmond, 792 F. Supp. at 459, would contravene ERISA’s core purpose to prevent misuse of plan assets by enabling directors and oﬃcers to defraud shareholders and creditors whenever they don their ERISA hats. See In re Antioch, 456 B.R. at 841–42 (preemption “would do nothing more than immunize oﬃcers and directors … from allegations of self-dealing by the corporate entity to which they have deﬁned independent legal obligations”); see also Smith v. Crowder Jr. Co., 280 Pa. Super. 626, 639, 421 A.2d 1107, 1114 (Pa. Super. 1980) (“ERISA was not intended as a device to permit corporate directors and oﬃcers to defraud with impunity corporate shareholders and creditors….”). The defendants rely on two cases ﬁnding that ERISA did preempt certain state corporation-law claims: McLemore v. Regions Bank, 682 F.3d 414, 425 (6th Cir. 2012), and AT & T v. Empire Blue Cross/Blue Shield, 1994 WL 16057794, at  (D.N.J. July 19, 1994). These cases oﬀer little support for the directors and oﬃcers’ defense here. McLemore held ERISA preempted an entirely diﬀerent sort of claim. The McLemore plaintiﬀs asserted state-law damages claims against Regions Bank “for knowingly permitting [ERISA ﬁduciaries] to breach their ﬁduciary duties” under ERISA. 682 F.3d at 426. The Sixth Circuit held such claims were preempted because the plaintiﬀs were ERISA “participant[s], beneﬁciar[ies], or ﬁduciar[ies]” who could bring these same claims under ERISA. Such plaintiﬀs were seeking an “alternative 12 No. 20-2793 enforcement mechanism” under state law, which ERISA § 514 prohibits. Id. (internal quotation omitted). So, unlike in Sommers Drug Stores, the plaintiﬀs’ claims in McLemore sought to enforce ERISA duties, not corporation-law duties. And, unlike McLemore, the plaintiﬀs here—bankruptcy creditors suing on behalf of the corporation—have no corollary cause of action under ERISA that they could invoke. The AT & T case is also unhelpful because it rested on a faulty premise that ERISA preempts any state claim arising from conduct that occurs in the context of plan administration. AT & T held that since “ERISA at least arguably governs the alleged misconduct at issue, plaintiﬀs’ state law claims predicated upon that same alleged conduct are preempted.” 1994 WL 16057794 at . The Supreme Court has rejected such a broad rule, clarifying that “lawsuits against ERISA plans for run-of-the-mill state-law claims such as unpaid rent, failure to pay creditors, or even torts committed by an ERISA plan …, although obviously aﬀecting and involving ERISA plans and their trustees, are not preempted.” Mackey, 486 U.S. at 833. As a result, the defendants are left without any ﬁrm precedent supporting the position that ERISA preempts corporation-law claims against dual-hat directors and oﬃcers.
Turning to this case, we agree with the results reached in most of the above cases, that ERISA did not preempt the plaintiﬀs’ claims against the director and oﬃcer defendants. But our reasons diﬀer somewhat from the “parallel but independent” duties theory employed by other courts. We agree with Sommers Drug Stores that the duties must be parallel; state law cannot be allowed to require an act that No. 20-2793 13 ERISA forbids. So, here, the fact that the directors and oﬃcers’ corporation-law and ERISA duties both prohibit the fraudulent conduct alleged by the plaintiﬀs is crucial. But, unlike Sommers Drug Stores, we do not lean heavily on the fact that the defendants’ corporation-law duties have independent state-law grounds. Virtually all state-law causes of action derive from independent state-law duties. Rather, what we ﬁnd most important is that ERISA is written to invite, and certainly to tolerate, these speciﬁc parallel and independent duties—the directors and oﬃcers’ ﬁduciary duties to the corporation.
We can ﬁrst quickly dispel any notion that the plaintiﬀs are attempting to circumvent ERISA’s exclusive remedial scheme. These plaintiﬀs have no rights under ERISA as a “participant, beneﬁciary, or ﬁduciary.” 29 U.S.C. § 1132(a)(3). They are not asserting state-law claims as an end run around their more limited federal remedies. See Pilot Life, 481 U.S. at 54 (ERISA’s “policy choices … would be completely undermined if ERISA-plan participants and beneﬁciaries were free to obtain remedies under state law that Congress rejected in ERISA”) (emphasis added). Unlike plaintiﬀs covered by ERISA, these non-ERISA plaintiﬀs “were not parties to the ERISA ‘bargain’”; they did not “g[i]ve up state law causes of action” to “receive[] federal causes of action under ERISA in exchange.” Lordmann Enters., Inc. v. Equicor, Inc., 32 F.3d 1529, 1533–34 (11th Cir. 1994), quoting Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 249 (5th Cir. 1990). 1 1 We need not decide whether ERISA would preempt similar corporation-law claims brought by ERISA beneficiaries, participants, or 14 No. 20-2793 This is why, under the related ERISA doctrine of complete preemption—which addresses state-law causes of action more often—the ﬁrst prong of the Supreme Court’s test for preemption is whether the plaintiﬀ “at some point in time, could have brought his claim under ERISA….” Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004). This case arises under conﬂict preemption rather than complete preemption. But “given the similar underlying policy considerations,” Davila’s test is useful in assessing the similar question of alternative remedies under conﬂict preemption. Franciscan Skemp Healthcare, Inc. v. Cent. States Joint Board Health & Welfare Trust Fund, 538 F.3d 594, 600 n.3 (7th Cir. 2008). Here, Davila would not preempt the plaintiﬀs’ claims because the plaintiﬀs cannot sue under ERISA. That weighs against the presence of an alternative remedies problem here.
The alternative remedies issue, however, only begins our inquiry. ERISA would still preempt the plaintiﬀs’ claims if they “‘govern[] … a central matter of plan administration’ or ‘interfere[] with nationally uniform plan administration.’” Gobeille, 577 U.S. at 320, quoting Egelhoﬀ, 532 U.S. at 148. We must therefore analyze whether and to what extent the plaintiﬀs’ parallel state-law ﬁduciary duty claims interfere with how Congress intended ERISA’s ﬁduciary duties to operate. Section 404 of ERISA imposes an exclusive duty of loyalty on ﬁduciaries to act solely in the interest of ERISA beneﬁciaries. Subject to certain qualiﬁcations, “a ﬁduciary shall discharge his duties with respect to a plan solely in the interest of fiduciaries who can sue Appvion’s directors and officers under ERISA for the same conduct. No. 20-2793 15 the participants and beneﬁciaries and … for the exclusive purpose of … providing beneﬁts to participants and their beneﬁciaries.” 29 U.S.C. § 1104(a)(1)(A)(i) (emphases added). This is known as the “exclusive beneﬁt” rule. A related provision provides another formulation of the rule: “the assets of a plan shall never inure to the beneﬁt of any employer and shall be held for the exclusive purposes of providing beneﬁts to participants in the plan and their beneﬁciaries….” 29 U.S.C. § 1103(c)(1) (emphases added). In addition, 29 U.S.C. § 1106 provides a list of “prohibited transactions” and implements the exclusive beneﬁt rule by prohibiting various types of self-dealing and other conﬂicts of interest. ERISA’s exclusive beneﬁt rule derives from “one of the most fundamental and distinctive principles of trust law, the duty of loyalty.” Langbein & Fischel, 55 U. Chi. L. Rev. at 1108. ERISA is built on a trust-law model. See 29 U.S.C. § 1103(a) (“all assets of an employee beneﬁt plan shall be held in trust”). Congress intended courts to “apply rules and remedies similar to those under traditional trust law to govern the conduct of ﬁduciaries.” H.R. Rep. No. 93-1280, at 295 (1974) (Conf. Rep.). By importing the trust form and its duty of loyalty into beneﬁt plans, ERISA drew from a familiar legal framework to protect plans from the kind of internal misuse that motivated ERISA’s enactment. Congress enacted ERISA in response to widespread concern over the misuse of employee pensions, notoriously exempliﬁed by Studebaker’s default on its pension plan in 1963 and the severe corruption uncovered in the Teamsters union through Senate investigations. See John H. Langbein, What ERISA Means by “Equitable”: The Supreme Court’s Trail of Error in Russell, Mertens, and GreatWest, 103 Colum. L. Rev. 1317, 1322–24 (2003). 16 No. 20-2793 ERISA’s duty of loyalty is the “highest known to the law.” Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982). A ﬁduciary of a trust has “a duty to the beneﬁciary to administer the trust solely in the interest of the beneﬁciary.” Restatement (Second) of Trusts § 170(1) (1959). The reason for such a strict and exclusive duty of loyalty stems from the unique trust relationship, where a third party is entrusted with a settlor’s property to be used for the beneﬁciary. Under this arrangement, “neither the transferor nor the beneﬁciaries are well situated to monitor closely the actions of the trustee.” Langbein & Fischel, 55 U. Chi. L. Rev. at 1114. With such power comes responsibility. The duty of loyalty steps in as a forceful substitute for direct monitoring. It protects beneﬁciaries by barring any conﬂict of interest that might put the ﬁduciary in a position to engage in self-serving behavior at the expense of beneﬁciaries. The rule is designed to deter misbehavior by establishing an “irrebuttable presumption of wrongdoing whenever the trustee engages in conﬂict tainted transactions.” Id. at 1114–15. This is strong medicine—so strong that a “trustee who deals with trust property for his own account is not allowed a defense even when the transaction was … harmless to the beneﬁciaries,” and even if it actually “beneﬁt[s] both” the beneﬁciary and trustee. Id. at 1115. These common-law trust principles apply equally to ERISA’s duty of loyalty, embodied in the exclusive beneﬁt rule. Good faith is not a defense. Leigh v. Engle, 727 F.2d 113, 124 (7th Cir. 1984). And “ERISA clearly contemplates actions against ﬁduciaries who proﬁt by using trust assets, even where the plan beneﬁciaries do not suﬀer direct ﬁnancial loss.” Id. at 122. As 29 U.S.C. § 1104(a)(1)(A)(i) commands, No. 20-2793 17 ERISA ﬁduciaries must always act with an “eye single to the interests of the participants and beneﬁciaries.” Id. at 123, quoting Donovan v. Bierwirth, 680 F.2d at 271. Given the formidable backdrop of ERISA’s exclusive beneﬁt rule, we are skeptical of any state-law attempt to saddle ERISA ﬁduciaries with other distracting and potentially conﬂicting duties to the corporate employer. Nevertheless, when it comes to corporate directors and oﬃcers, ERISA tolerates some measure of dual loyalty.
Despite the exclusive beneﬁt rule, ERISA § 408(c)(3) explicitly allows corporate insiders—who already have ﬁduciary duties under corporation law—to serve as ERISA ﬁduciaries. Section 408(c)(3) states that ERISA’s “prohibited transactions” rules shall not “be construed to prohibit any ﬁduciary from … serving as a ﬁduciary in addition to being an ofﬁcer, employee, agent, or other representative of a party in interest.” 29 U.S.C. § 1108(c)(3). ERISA deﬁnes “party in interest” to include corporate employers and other plan sponsors. 29 U.S.C. § 1002(14). Moreover, ERISA invites conﬂicts of interest within ESOPs like the plan in this case. ERISA’s prohibited transaction rules ordinarily forbid deals between plans and other interested parties such as large stockholders, see 29 U.S.C. § 1106(a)(1)(E) & (a)(2), but ERISA speciﬁcally allows such deals for ESOPs, see 29 U.S.C. § 1107(b)(1) & (d)(3)(A)(ii). By “expressly contemplat[ing] ﬁduciaries with dual loyalties,” § 408(c)(3) takes “an unorthodox departure from the common law” that is in obvious tension with ERISA’s exclusive beneﬁt rule. Donovan v. Bierwirth, 538 F. Supp. 463, 468 (E.D.N.Y. 1981), aﬀ’d as modiﬁed, 680 F.2d 263 (2d Cir. 1982). 18 No. 20-2793 As noted, scholars have defended this “fundamental contradiction” as necessary to encourage employers to establish beneﬁt plans. Without dual-hat ﬁduciaries, employers that establish ERISA plans would be “assuming ﬁnancial liabilities without eﬀective controls.” Langbein & Fischel, 55 U. Chi. L. Rev. at 1127. The eﬀect of adhering strictly to the commonlaw rule would likely be a lower rate of plan formation. Id. ERISA’s necessary accommodation for dual-hat directors and oﬃcers has produced messy conﬂicts of interest that courts and commentators have long recognized and struggled to resolve. See generally Laurence B. Wohl, Fiduciary Duties Under ERISA: A Tale of Multiple Loyalties, 20 U. Dayton L. Rev. 43 (1994). Courts “are faced with the problem of reconciling the overwhelming requirements of common-law trustee singlemindedness with the ERISA permission for dual loyalties.” Id. at 58. Courts “must develop a tolerance for the resulting conﬂicts such dual roles undoubtedly will cause.” Id. The Supreme Court itself has noted this problem, writing that “the analogy between ERISA ﬁduciary and common law trustee becomes problematic … because the trustee at common law characteristically wears only his ﬁduciary hat when he takes action to aﬀect a beneﬁciary, whereas the trustee under ERISA may wear diﬀerent hats.” Pegram v. Herdrich, 530 U.S. 211, 225 (2000). Accordingly, since the 1980s, courts have recognized and tried to harmonize directors and oﬃcers’ dual loyalties under ERISA. In Donovan v. Bierwirth, for example, the Secretary of Labor sued dual-hat trustees of an ERISA plan for breaching their duty of loyalty to beneﬁciaries by using plan assets to purchase company stock at an inﬂated price to fend oﬀ an outside takeover bid. 538 F. Supp. at 465–68. The district court No. 20-2793 19 ﬁrst noted that, because ERISA “abrogated the traditional common law rule” and “clearly contemplates … ﬁduciaries with dual loyalties,” the trustees “did not commit per se violations of ERISA either by their failure to abstain from the investment decision … or by the mere acquisition of [company] stock.” Id. at 469–70. Nevertheless, the court held that “when a ﬁduciary has dual loyalties, his independent investigation into the basis for an investment decision which presents a potential conﬂict of interests must be both intensive and scrupulous” to ensure that the conﬂict is not inﬂuencing the decision. Id. at 470, discussing 29 U.S.C. § 1104(a)(1)(B) (ERISA duty of prudence). Applying that standard, the court found that the trustees failed to exercise such care by not recognizing and taking steps to neutralize their inherent conﬂict—such as, at the very least, consulting independent counsel. Id. at 473. The Second Circuit aﬃrmed, clarifying that dual-hat directors and oﬃcers must do everything possible to “avoid placing themselves” in a decision presenting an actual conﬂict, and if faced with such a conﬂict must inform themselves and act to neutralize it, perhaps by temporarily resigning as trustees. Donovan v. Bierwirth, 680 F.2d at 271–72. But unlike at common law, the court acknowledged, “oﬃcers of a corporation … do not violate their duties as trustees by taking action which, after careful and impartial investigation, they reasonably conclude best to promote the interests of participants and beneﬁciaries simply because it incidentally beneﬁts the corporation or, indeed, themselves.” Id at 271. In this circuit, we used a similar approach to reconcile ERISA’s exclusive beneﬁt rule with its allowance for dual-hat directors and oﬃcers in Leigh v. Engle, 727 F.2d 113 (7th Cir. 20 No. 20-2793 1984). Dual-hat directors and oﬃcers invested ERISA trust assets in companies that were targets of directors and oﬃcers’ hostile takeover attempts. We said that “plan trustees who are also oﬃcers of either the ‘target’ or the ‘raider’ could be seen as having a signiﬁcant ‘interest’ of their own in the outcome of the contest.” Id. at 127. We invoked the Donovan v. Bierwirth method of addressing directors and oﬃcers’ dual loyalties and held that the directors and oﬃcers violated ERISA’s ﬁduciary requirements: Where the potential for conﬂicts is substantial, it may be virtually impossible for ﬁduciaries to discharge their duties with an “eye single” to the interests of the beneﬁciaries, and the ﬁduci- aries may need to step aside, at least temporar- ily, from the management of assets where they face potentially conﬂicting interests. … Where it might be possible to question the ﬁduciaries’ loyalty, they are obliged at a minimum to en- gage in an intensive and scrupulous independ- ent investigation of their options to insure that they act in the best interests of the plan beneﬁ- ciaries. In the case before us, we believe there is an additional factor which weighs heavily in evaluating the loyalty of the ﬁduciaries. Here the control eﬀorts lasted for several months, and in the case of Hickory, for over a year. The Reli- able Trust held its shares involved in the control contests throughout these periods, and, as we discuss below, the trust’s use of its assets at all relevant times tracked the best interests of the Engle [corporate insiders’] group in the control contest. We believe that the extent and duration No. 20-2793 21 of these actions congruent with the interests of another party are also relevant for courts in de- ciding whether plan ﬁduciaries were acting solely in the interests of plan beneﬁciaries. Id. at 125–26, citing Donovan v. Bierwirth, 680 F.2d at 272; see also Newton v. Van Otterloo, 756 F. Supp. 1121, 1127–30 (N.D. Ind. 1991) (applying Leigh’s “three-pronged approach”); Danaher Corp. v. Chicago Pneumatic Tool Co., 635 F. Supp. 246, 250 (S.D.N.Y. 1986) (doubting “the appropriateness of [a] chief executive oﬃcer continuing in his position of ESOP trustee during [a] takeover attempt” that was favored by current beneﬁciaries at the expense of potential future beneﬁciaries). These cases illustrate how courts have adapted ERISA’s ﬁ- duciary rules to account for the exception allowing for dualhat director and oﬃcer ﬁduciaries. Courts have even applied these adapted ﬁduciary rules in cases involving ESOP valuations much like the one at issue in this case. In Donovan v. Cunningham, for example, the Fifth Circuit applied Donovan v. Bierwirth’s approach in a case where an ESOP trustee who was also a corporate oﬃcer participated in the valuation of corporate stock for an ESOP purchase. 716 F.2d 1455 (5th Cir. 1983). The court recognized that “the stringent prophylactic rules of the common law cannot be incorporated reﬂexively under” ERISA, id. at 1466–67, but that ERISA’s exception allowing ESOPs to purchase employer stock for “adequate consideration” must still be interpreted to imply an exacting duty of prudence for dual-hat ﬁduciaries with potential conﬂicts of interest. Id. at 1467 & n.27. The Fifth Circuit reaﬃrmed this principle in a case where dual-hat directors and oﬃcers were involved in an ESOP’s purchase of company stock at an inﬂated price. Perez v. 22 No. 20-2793 Bruister, 823 F.3d 250, 262–63 (5th Cir. 2016) (“The trustees did not separate Bruister’s personal interests from Donnelly’s valuation process so as to avoid a conﬂict of interest. Their breach of the duty of loyalty turns on their failure to place the interests of participants and beneﬁciaries ﬁrst”; to prove ESOP purchase was “prudent”, “care must be taken to avoid any identiﬁed conﬂicts of interest”); see also Howard v. Shay, 100 F.3d 1484, 1488–89 (9th Cir. 1996) (citing Donovan v. Bierwirth and Leigh v. Engle and holding that dual-hat ﬁduciaries violated their ERISA duties of care and loyalty when ESOP sold undervalued shares back to the dual-hat company president).
These cases inform our preemption holding as to the directors and oﬃcers in this case. Congress explicitly departed from the common law to allow directors and oﬃcers to serve as ERISA ﬁduciaries despite their dual loyalties. These permissible dual loyalties weigh in favor of allowing parallel corporation-law liability against the directors and oﬃcers in this case. If parallel liability were preempted, the directors and oﬃcers would in eﬀect cease to be corporate ﬁduciaries when carrying out their ERISA ﬁduciary roles. That result would contravene § 408(c)(3)’s mandate that ERISA not be construed to prevent corporate ﬁduciaries from also serving as ERISA ﬁduciaries. Preempting the plaintiﬀs’ corporation-law claims against the directors and oﬃcers would also thwart ERISA’s purpose to protect plan assets from misuse. The third-party bankruptcy creditors in this case cannot sue under ERISA. So, assuming the plaintiﬀs’ allegations are true, completely foreclosing their state-law claims could leave them without recourse for a fraudulent ESOP valuation that enabled insiders No. 20-2793 23 to loot the company as it was sinking toward bankruptcy. Congress enacted ERISA in response to Senate investigations into “widespread looting of plan funds through sweetheart deals, kickbacks, and … cronyism,” especially within the Teamsters union. Langbein, 103 Colum. L. Rev. at 1324. It would be odd if ERISA operated to shield similar fraudulent activity in this case. “ERISA was not intended as a device to permit corporate directors and oﬃcers to defraud with impunity corporate shareholders and creditors.” Smith, 421 A.2d at 1114. Preempting all of plaintiﬀs’ claims could also frustrate congressional intent by discouraging ESOP formation. It could be rational for creditors to demand higher interest rates or more security for loans to ESOP-owned companies to account for the risk that directors and oﬃcers might abuse the corporation without any recourse for creditors under corporation law. In the healthcare arena, courts have relied on a similar concern in refusing to preempt negligent misrepresentation claims by third-party hospitals against ERISA plan insurers. See Lordmann, 32 F.3d at 1533, citing Memorial Hospital Sys., 904 F.2d at 246 (“If ERISA preempts [hospitals’] potential causes of action for misrepresentation, health care providers can no longer rely as freely and must either deny care or raise fees…. In that event, the employees whom Congress sought to protect would ﬁnd medical treatment more diﬃcult to obtain.”). Finally, allowing plaintiﬀs to pursue their claims under corporation law against the directors and oﬃcers should not disrupt national uniformity in plan administration. The familiar “internal aﬀairs” doctrine is a conﬂict of laws principle that recognizes that only one state should have authority to 24 No. 20-2793 regulate a corporation’s internal aﬀairs, including ﬁduciary duties of directors and oﬃcers. See LaPlant v. Northwestern Mutual Life Ins. Co., 701 F.3d 1137, 1139 (7th Cir. 2012), citing Edgar v. MITE Corp., 457 U.S. 624, 645 (1982); Treco, Inc. v. Land of Lincoln Sav. & Loan, 749 F.3d 374, 377 (7th Cir. 1984); Restatement (Second) of Conﬂict of Laws § 302, cmts. a & e (1971). Our holding as to the directors and oﬃcers is limited to the plaintiﬀs’ particular claims in this case, which would impose corporate liability that runs parallel to, not in conﬂict with, ERISA’s ﬁduciary duties. By that we mean that the directors and oﬃcers’ corporation-law and ERISA duties both prohibit the fraudulent conduct alleged by plaintiﬀs. ERISA expressly contemplates such parallel liability for dual-hat directors and oﬃcers. We agree with the Fifth Circuit’s prediction in Sommers Drug Stores that a director’s state-law and ERISA duties will often run parallel, so that duties to shareholders require the same conduct as the duties to ERISA beneﬁciaries. See Sommers Drug Stores, 793 F.2d at 1468. In cases like this one, where shareholders and beneﬁciaries are both suing the directors and oﬃcers for the same conduct, if shareholders can recover then ERISA beneﬁciaries likely can as well. ERISA’s trust duty “imposes a standard of care at least as high as that imposed by the director-shareholder duty.” Id. at 1468–69; see also Wohl, 20 U. Dayton L. Rev. at 78 n.139 (when dual-hat directors and oﬃcers face “questions from the corporation’s shareholders,” they “will ﬁnd at least some protection by virtue of the business judgment rule”). If a dualhat director or oﬃcer’s duties irreconcilably conﬂict, however, the director or oﬃcer “might have to resign one position or No. 20-2793 25 the other,” Sommers Drug Stores, 793 F.2d at 1469. And if he or she does not, ERISA’s federal duties will trump conﬂicting corporation-law duties. Here, the plaintiﬀs are pursuing parallel corporation-law claims against dual-hat directors and oﬃcers, so ERISA does not preempt those claims.