Court Opinion

ID: 2999429
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:53:58.281586+00
Date Added: 2024-06-11T09:12:26.956975
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

Nos. 05-4005, 05-4317
JERRY SUMMERS, et al., individually and
    on behalf of all others similarly situated,
                           Plaintiffs-Appellants, Cross-Appellees,
                                  v.

STATE STREET BANK & TRUST COMPANY,
                            Defendant-Appellee, Cross-Appellant,
                                 and

UAL CORPORATION ESOP COMMITTEE, et al.,
                                  Defendants, Cross-Appellees.
                          ____________
            Appeals from the United States District Court
        for the Northern District of Illinois, Eastern Division.
           No. 03 C 1537—Samuel Der-Yeghiayan, Judge.
                          ____________
        ARGUED APRIL 4, 2006—DECIDED JUNE 28, 2006
                          ____________

  Before POSNER, WOOD, and EVANS, Circuit Judges.
  POSNER, Circuit Judge. At the end of 2002, when United
Air Lines declared bankruptcy, its employees (both active
and retired) owned more than half the airline’s common
stock through an ESOP (employee stock ownership plan). In
2                                      Nos. 05-4005, 05-4317

re UAL Corp., 412 F.3d 775, 777 (7th Cir. 2005). ESOPs are
subject to ERISA, the federal pension law, 29 U.S.C.
§§ 1104(a)(2), 1107(b), (d)(6); Armstrong v. LaSalle Bank
National Ass’n, 446 F.3d 728, 730 (7th Cir. 2006), and this is
a suit under ERISA. The plaintiffs represent a class con-
sisting of United’s employees. The principal defendant is
State Street Bank & Trust, a cofiduciary of the UAL Corpo-
ration ESOP Committee. The Committee—which has six
members, all appointed by the unions that represent
United’s employees—is the only fiduciary named in the
plan. 29 U.S.C. § 1102(a)(1). The plan directs the Committee
“to establish an investment policy and objective for the Plan,
except that it is understood that the Plan is designed to
invest exclusively in Company Stock.” The Committee
established a policy and goal of owning United stock, and
appointed State Street to be the plan’s trustee, that is, to
manage the ESOP’s assets, initially consisting of that stock.
§ 1103(a). The class charges State Street with imprudent
management—specifically with failing to sell United stock
as its market price plummeted en route to the airline’s
bankruptcy—and is appealing from the grant of summary
judgment to State Street, which has in turn cross-appealed
on an unrelated issue that we discuss at the end of this
opinion.
  State Street is what is called a “directed” trustee, because
the Committee (the fiduciary named in the plan), in accor-
dance with the plan language that we have quoted, directed
State Street to invest the ESOP’s assets exclusively in stock
of United Air Lines. Directed trustees are permitted by
ERISA: if an ERISA plan “provides that the trustee or
trustees are subject to the direction of a named fiduciary [in
this case it is the UAL Corporation ESOP Committee] who
is not a trustee,…the trustees shall be subject to proper
directions of such fiduciary which are made in accordance
Nos. 05-4005, 05-4317                                         3

with the terms of the plan and which are not contrary to
[ERISA].” 29 U.S.C. § 1103(a)(1); see Maniace v. Commerce
Bank, N.A., 40 F.3d 264, 267 (8th Cir. 1994); May Dept. Stores
Co. v. Federal Ins. Co., 305 F.3d 597, 599 (7th Cir. 2002);
LaLonde v. Textron, Inc., 369 F.3d 1, 5 (1st Cir. 2004). Like
other ERISA trustees, a directed trustee has a statutory duty
of prudence. § 1104(a)(1)(B). But as an ESOP fiduciary, he
does not have the further (really, the included) duty to
diversify the trust assets, § 1104(a)(1)(C)—we call it
“included” in the duty of prudence because diversification
is normally an essential element of prudent investing by a
fiduciary. Armstrong v. LaSalle Bank National Ass’n, supra, 446
F.3d at 732. A directed trustee appointed under an ERISA
plan does not have that duty because the very purpose of an
ESOP is to invest in a single stock, that of the employer of
the ESOP’s participants.
  We must first decide whether a directed trustee of an
ESOP has any fiduciary duty with respect to the choice of
trust assets, specifically any duty ever to replace the em-
ployer’s stock—the normal holding of an ESOP—with some
other security. The Maniace case that we cited, along with
Herman v. NationsBank Trust Co., 126 F.3d 1354, 1361-62
(11th Cir. 1997), says no, but FirsTier Bank, N.A. v. Zeller, 16
F.3d 907, 911 (8th Cir. 1994), says yes, as does In re
WorldCom, Inc. ERISA Litigation, 354 F. Supp. 2d 423, 444-45,
449 (S.D.N.Y. 2005). The split reflects a rather confus-
ing statutory picture. One provision of ERISA states that the
directed trustee cannot be liable for obeying the directions
of the fiduciary named in the plan, § 1105(b)(3)(B), but other
provisions impose liability on a fiduciary for breaches of
fiduciary duty by a cofiduciary if he knows of the breach
and takes no reasonable efforts to prevent it, or if by his
own failure to exercise prudence he enables the breach. §§
1105(a)(2), (3). And recall that the directed trustee “shall be
4                                      Nos. 05-4005, 05-4317

subject to proper directions of [the named] fiduciary which
are made in accordance with the terms of the plan and which
are not contrary to [ERISA].” § 1103(a)(1) (emphasis added).
An imprudent direction cannot be a proper direction since
the trustee has an express statutory duty of prudence.
  The tension among these provisions is reflected in a
pamphlet published by the Labor Department’s Employee
Benefits Security Administration, which affirms both that
the directed trustee has a duty of prudence and that he
has no “direct obligation to determine the prudence of a
transaction” entrusted by the plan to another fiduciary.
“Fiduciary Responsibilities of Directed Trustees” (Field
Assistance Bulletin 2004-03, Dec. 17, 2004). “[D]irect” is the
critical word, inviting us to resolve the tension by ruling
that the trustee can disobey the named fiduciary’s directions
when it is plain that they are imprudent. (The Labor Depart-
ment’s pamphlet, as we’ll see, is actually consistent with
this approach.) The trustee physically controls the trust
assets; knowingly to invest them imprudently or let them
remain invested imprudently is irresponsible behavior for
a trustee, whose fundamental duty is to take as much care
with the trust assets as he would take with his own prop-
erty. He is “an agent who is required to treat his principal
with utmost loyalty and care—treat him, indeed, as if the
principal were himself.” Pohl v. National Benefits Consultants,
Inc., 956 F.2d 126, 128-29 (7th Cir. 1992). And although the
creator of an ordinary trust may be able to include a provi-
sion in the trust instrument excusing the trustee from
complying with the prudent-man rule, John H. Langbein,
“The Contractarian Basis of the Law of Trusts,” 105 Yale L.J.
625, 659-60 (1995), ERISA as we have seen expressly im-
poses the duty of prudence on directed trustees and forbids
them to comply with directions of the fiduciary named in
the plan that are not “proper.” That is why Kuper v. Iovenko,
Nos. 05-4005, 05-4317                                       5

66 F.3d 1447, 1457 (6th Cir. 1995), holds that an ERISA plan
“may not be interpreted to include a per se prohibition
against diversifying an ESOP.”
   Which brings us to the particulars of this case. The
plaintiffs argue that State Street violated its fiduciary duty
by failing to sell United stock held by the ESOP until the eve
of United’s bankruptcy. State Street knew long before then,
if the plaintiffs are to be believed, that the UAL Corporation
ESOP Committee, the named fiduciary, had unreasonably
refused to deviate from the plan and diversify the ESOP’s
holdings or take other measures to reduce the looming risk
to the employee-shareholders. The following chart traces the
ups and downs (mostly downs) of United’s stock price
between January 1, 2001, and December 9, 2002, when
United declared bankruptcy:
6                                      Nos. 05-4005, 05-4317

  The price of United stock, which on September 10, 2001,
was already 25 percent below the price at the beginning
of the year, dropped almost 50 percent more in the immedi-
ate aftermath of the September 11, 2001, terrorist attacks.
The following month, United’s CEO sent a gloomy letter
to all its employees which said that the company was “in a
struggle just to survive” and was not yet in “a financial
position that will allow us to continue operating,” that it
was “hemorrhaging money,” and unless the “bleeding [was]
stopped…United will perish sometime next year.” The price
of United stock fell another 20 percent in the two days after
the publication of the letter.
  The price continued falling, though with occasional
upticks, and the financial press began speculating on the
possibility of bankruptcy. State Street observed the de-
cline with anxiety, but not until August 15, 2002—by
which time the price had fallen to $2.70—did it notify the
UAL Corporation ESOP Committee that it might be impru-
dent for the ESOP to continue holding United stock. In
response to this warning the Committee authorized State
Street to sell the stock, and it began doing so on September
27. By that time, however, the price had fallen to $2.36. The
plaintiffs argue that State Street should have started selling
within 30 days after the October 2001 letter of United’s then-
CEO and that had it done so the ESOP would have avoided
$540 million in losses.
  The plaintiffs say the letter should have alerted State
Street that United was going into the tank. That is wrong.
After the market “read” the letter, it valued United stock at
$15.05 a share. Had the market thought that United would
be bankrupt by the end of 2002, it would not have priced its
stock that high in October 2001, implying a market capital-
ization for the company of more than $800 million. A trustee
Nos. 05-4005, 05-4317                                         7

is not imprudent to assume that a major stock market
(United was traded on the New York Stock Exchange)
provides the best estimate of the value of the stocks traded
on it that is available to him. In re UAL Corp., supra, 412 F.3d
at 777-78; see Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988);
In re Hovis, 356 F.3d 820, 823-24 (7th Cir. 2004); Feder v.
Electronic Data Systems Corp., 429 F.3d 125, 138 (5th Cir.
2005); Burton G. Malkiel, “Reflections on the Efficient
Market Hypothesis: 30 Years Later,” 40 Financial Rev. 1
(2005). At any price at which a sale takes place, the buyer
thinks he’s getting a bargain, or at least a reasonable
deal—otherwise he wouldn’t buy. Some investors, it is
true, consistently beat the market, but few of them are
trustees; it would be hubris for a trust company like State
Street to think it could predict United’s future more accu-
rately than the market could, and preposterous for a
committee of union officials (the named fiduciary) to
challenge the market’s valuation. Nor was State Street duty-
bound to offer the Committee’s members a tutorial on the
obligations of an ERISA trustee; the Committee had its own
lawyers for that.
   Thus, at every point in the long slide of United’s stock
price, that price was the best estimate available either to
State Street or to the Committee of the company’s value,
In re UAL Corp., supra, 412 F.3d at 777-78, and so neither
fiduciary was required to act on the assumption that the
market was overvaluing United. See Wright v. Oregon
Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004); Kuper
v. Iovenko, supra, 66 F.3d at 1460; In re WorldCom, Inc. ERISA
Litigation, supra, 354 F. Supp. 2d at 447. What is true,
however, though largely (and fatally) ignored by the
plaintiffs and mistakenly denied by State Street’s lawyers in
this court (State Street itself we assume knows better), is that
the fall in the market price of United was increasing the risk
8                                       Nos. 05-4005, 05-4317

borne by the owners of the stock, the participants in the
ESOP. There is always risk, in the sense of variance of
returns, to owning common stock, because the fortunes of
a company are uncertain and the stockholders, unlike
bondholders and other owners of the company’s debt, do
not have a fixed entitlement; they are the residual risk
bearers. Some companies, however, are riskier than others.
Of particular relevance to this case, the higher the ratio of
fixed-interest debt to equity is, the riskier is the position of
the equity holders (the common stockholders). If a company
has no debt, a 5 percent increase in the company’s value will
increase shareholder equity by 5 percent, and a 5 percent
decrease in the company’s value will decrease shareholder
equity by 5 percent. But if the company has a 1:1 debt-
equity ratio, a 5 percent increase in the company’s value will
increase shareholder equity by 10 percent (.05/.50) and a 5
percent decrease in the company’s value will decrease
shareholder equity by 10 percent. As the value of United, as
reckoned by the stock market, plummeted, the airline’s
debt-equity ratio soared because its debt wasn’t decreasing,
and this created an acute threat of bankruptcy.
  Such a threat would be of little moment to people who
held United stock as part of a diversified portfolio, be-
cause the risks of the various components of such a portfolio
tend to cancel out; that is the meaning and objective of
diversification. The Modern Theory of Corporate Finance 6
(Clifford W. Smith, Jr., ed., 2d ed. 1990). Probably, however,
shares of United stock were the principal financial assets of
most of United’s employee-shareholders—at least those
who, unlike pilots, have modest salaries—and hence their
principal source of retirement income. And probably most
of those non-wealthy employee-shareholders were risk
averse; that is, they would prefer $10,000 certain to a
1 percent chance of obtaining $1 million, even though
Nos. 05-4005, 05-4317                                          9

these are actuarial equivalents. They would be especially
risk averse with regard to provision for their retirement,
where they would be more dependent on their financial
assets since they would no longer have earned income.
Being risk averse, they would have preferred that the bulk
of their financial assets not be invested in a single stock that,
while worth as much as its market valuation (as far
as anyone not possessing inside information could know),
was extremely risky. “Because the value of any single
stock or bond is tied to the fortunes of one company,
holding a single kind of stock or bond is very risky. By
contrast, people who hold a diverse portfolio of stocks and
bonds face less risk because they have only a small stake
in each company.” N. Gregory Mankiw, Principles of
Economics 546 (1998). That is why ERISA fiduciaries have a
duty of diversification as part of their overall duty of
prudence—unless as in this case they are directed pursuant
to an ESOP to invest everything in stock of the participants’
employer.
  The employee-shareholders’ total wealth included not
only their stake in the ESOP but also, and for those not
yet retired or approaching retirement this was probably
more important, their expected earnings and fringe benefits
as employees of United. The financial distress that pushed
United’s stock price down also jeopardized that expected
wealth (insofar as United employees could not expect to
land equally good jobs at other companies) and so de-
pressed the employee-shareholders’ overall wealth by more
than the fall in the price of the stock. Brett McDonnell,
“ESOP’s Failures: Fiduciary Duties When Managers of
Employee-Owned Companies Vote to Entrench Them-
selves,” 2000 Colum. Bus. L. Rev. 199, 207 (2000). State
Street’s lawyers thus miss the point in arguing that Ameri-
can Airlines was on the verge of bankruptcy too but man-
10                                      Nos. 05-4005, 05-4317

aged to avoid it and so might United have done so. Some-
one who owned American Airlines stock, and would have
wanted but have been unable to diversify, would have been
bearing unwanted risk during American’s period of peril.
   But because an ESOP is at once a permissible form of
ERISA trust and nondiversified by definition, the trustee
(along with the named fiduciary) is in an awkward position.
If he diversifies he violates the plan, but if he doesn’t
diversify he may be imposing unwanted risk on the
employee-shareholders—for it is unrealistic to suppose that
the ESOP form was chosen because the employees wanted to
bear unnecessary risk. The goal of an ESOP is to give
employees not the thrills of gambling but a larger stake in
the company’s fortunes, see, e.g., United States v. McCord, 33
F.3d 1434, 1440 n. 6 (5th Cir. 1994), in hopes of “broadening
ownership of capital within a capitalist system” to the end
of “encouraging capital formation through an improved
form of finance, improved management-labor relations, and
increased productivity.” McDonnell, supra, at 220-21. Why
Congress thought it appropriate to stimulate the adoption
of this business form by giving companies tax breaks rather
than allowing the free market to determine the merits of the
form is a separate question but not one we need answer in
order to decide this case, although it is pertinent to note that
one of the goals not sought to be achieved by the ESOP form
is the funding of pension benefits. Michael A. Conte & Jan
Svejnar, “The Performance Effects of Employee Ownership
Plans,” in Paying for Productivity 143, 143-44 (Alan S. Blinder
ed. 1990). It is a goal that the form is ill suited to attain
because of its underdiversification.
  The tension between the goal of protection against risk
and the goal of a portfolio dominated by a single stock is
not acute if the participants in the ESOP have adequate
Nos. 05-4005, 05-4317                                       11

sources of income or wealth that are not correlated with the
risk of that stock, so that the ESOP is not their primary
financial asset. But if they don’t have substantial other
wealth the goals cannot be reconciled, though they can be
compromised by requiring fiduciaries to begin diversify-
ing the ESOP’s assets at the point at which an increase in the
riskiness of the assets, had it been foreseen, would have
induced the creators of the ESOP either to have not created
it at all or to have required at least partial diversification.
(We say “begin” diversifying because if the stock held by the
ESOP is a very large fraction of the outstanding stock of the
employer, as in this case, the sell-off would have to be
gradual in order to avoid precipitating a sharp drop in
price, Louis K. Chan & Josef Lakonishok, “The Behavior of
Stock Prices Around Institutional Trades,” 50 J. Finance 1147,
1147-48 (1995); the market does not treat the stocks of
different companies as being perfectly substitutable. Thus,
State Street had a policy of limiting any day’s sales of a
given stock to 30 percent of the volume of sales that
day.) Or, as Kuper v. Iovenko, supra, 66 F.3d at 1459, puts
it, “the plaintiff must show that the ERISA fiduciary
could not have reasonably believed that the plan’s drafters
would have intended under the circumstances that he
continue to comply with the ESOP’s direction that he invest
exclusively in employer securities.” See also Moench v.
Robertson, 62 F.3d 553, 571-72 (3d Cir. 1995).
  In Steinman v. Hicks, 352 F.3d 1101 (7th Cir. 2003), we
noted a situation in which the duty of prudence could
require diversification of an ESOP’s holdings: if the “ESOP
was [the employees’] principal retirement asset…and was
entirely invested in the stock of their employer…, and their
employer was bought in a stock-for-stock deal—so that
all the assets of the ESOP became stock in the acquirer by a
company that had a much higher debt-equity ratio than
12                                      Nos. 05-4005, 05-4317

their (former) employer and as a result its stock price was
much more volatile and its bankruptcy risk greater. Then,
even if the trustees did not predict the company’s ‘impending
collapse,’ they might be required in the interest of the
participants either to diversify the plan’s stockholdings or to
exchange the…stock for Treasury bills.” Id. at 1106 (empha-
sis added, citation deleted). The source of the duty to
diversify would not be the trustee’s disagreement with the
market valuation (their failure to predict the company’s
impending collapse), but the excessive risk imposed on
employee-shareholders by the rise in the debt-equity ratio
of the employer’s stock as a result, in the example given in
Steinman, of a merger and in our case of a plummeting stock
price. How excessive would depend in the first instance on
the amount and character of the employees’ other assets, for,
as we have already indicated, it is the riskiness of one’s
portfolio, not of a particular asset in the portfolio, that is
important to the risk-averse investor.
  The plaintiffs never sought to explore these issues. So
even if the methods of litigation could feasibly determine
the point at which the ESOP trustee should sell in order
to protect the employee-shareholders against excessive risk,
the plaintiffs have made no effort to establish that point.
They think that what State Street did wrong was to fail to
second-guess the market; in fact what State Street may well
have done wrong was to delay selling its United stock until
too late to spare the employee-shareholders from bearing
inordinate risk. Of course, if State Street had sold earlier and
the stock had then bounced back, as American Airlines’
stock did, State Street might well have been sued by the
same plaintiffs, though the analysis presented in this
opinion would have bailed it out.
  There has thus been a failure of proof. But the plaintiffs
can take some solace from the fact that determining
Nos. 05-4005, 05-4317                                        13

the “right” point, or even range of “right” points, for an
ESOP fiduciary to break the plan and start diversifying may
be beyond the practical capacity of the courts to determine.
The Department of Labor pamphlet that we cited earlier
states that a directed trustee may have a duty to sell “where
there are clear and compelling public indicators, as evi-
denced by an 8-K filing with the Securities and Exchange
Commission (SEC), a bankruptcy filing or similar public
indicator, that call into serious question a company’s
viability as a going concern.” U.S. Dept. of Labor, supra, at
5-6. That is not an administrable standard; note the hedge in
“may” and the fact that selling when bankruptcy is declared
will almost certainly be too late.
   The time may have come to rethink the concept of an
ESOP, a seemingly inefficient method of wealth accumula-
tion by employees because of the underdiversification to
which it conduces (though remember that what is important
is the diversification of the employee’s entire asset portfolio,
including his earning capacity, rather than whether an
individual asset is diversified). The tax advantages of the
form do not represent a social benefit, but merely a shift of
tax burdens to other taxpayers. Nor are we aware of an
argument for subsidizing the ESOP form, as the tax law
does, rather than letting the market decide whether it has
economic advantages over alternative forms of business
structure. As for the notion that having a stake in one’s
employer will induce one to be more productive, the
evidence for such an effect—see “Motivating Employees
with Stock and Involvement,” NBER Website, Apr. 25, 2006,
http://www.nber.org/digest/may04/ w10177.html; Joseph
Blasi, Michael Conte & Douglas Kruse, “Employee Stock
Ownership and Corporate Performance Among Public
Companies,” 50 Indus. & Lab. Rel. Rev. 60 (1996)—is weak
and makes no theoretical sense. An employee has no
14                                     Nos. 05-4005, 05-4317

incentive to work harder just because he owns stock in
his employer, since his efforts, unless he is a senior execu-
tive, are unlikely to move the price of the stock. Nor is
employee stock ownership likely to forge sentimental ties
between employees and employers that might cause the
former to work harder, although it may alleviate union
pressures for wages or benefits that would jeopardize
solvency.
  A second ground of appeal argued by the plaintiffs is that
the district judge should not have prevented their expert
witness, Lucian Morrison, from testifying about State
Street’s prudence or lack thereof in failing to sell United
stock sooner. The judge thought Morrison unqualified
because he lacks either a degree in economics or experience
with bankruptcy. That was error. Morrison is a highly
experienced trust officer and as such qualified to testify
about State Street’s management of the assets of the United
ESOP. “Rule 702 [of the Federal Rules of Evidence] specifi-
cally contemplates the admission of testimony by experts
whose knowledge is based on experience.” Walker v. Soo Line
R.R., 208 F.3d 581, 591 (7th Cir. 2000); see also Smith v. Ford
Motor Co., 215 F.3d 713, 718 (7th Cir. 2000); Hangarter v.
Provident Life & Accident Ins. Co., 373 F.3d 998, 1015-16 (9th
Cir. 2004). But the error is harmless. Morrison was planning
to testify that State Street should have seen the handwriting
on the wall back in October or, at the latest, November of
2001. That is an echo of the argument by the plaintiffs’
lawyers that State Street should have outsmarted the market
and is not a correct interpretation of the duty of prudent
management of trust funds, whatever a trust officer might
think.
  State Street has filed a contingent cross-appeal, chal-
lenging a settlement between the plaintiffs and its co-
fiduciary, the UAL Corporation ESOP Committee. Since we
Nos. 05-4005, 05-4317                                        15

are affirming the dismissal of the plaintiffs’ claim against
State Street, there is no imperative need to discuss the cross-
appeal; it is academic unless this court sitting en banc, or the
Supreme Court, reverses our decision in favor of State
Street. But the oddity of the situation presented by that
appeal calls for some comment. The Committee’s members
were insured, and the settlement gives the plaintiffs $5.2
million, the limit of the insurance policy after deduction of
incurred and expected legal expenses. The settlement
provides that if State Street is determined to be liable for
some amount of damages, the judge shall determine its fault
relative to the Committee’s and State Street may then seek
contribution from the Committee’s members. Suppose that
State Street was ordered to pay the plaintiffs $540 million
and the judge decided that it and the Committee were
equally at fault. Then State Street would be entitled to a
contribution of $264.8 million ($540 ÷ 2 = $270 – $5.2 =
$264.8) from the Committee. But the Committee’s members,
we are told by their lawyer, have no assets beyond the
insurance policy out of which to satisfy a judgment. This is
probably an exaggeration, but a slight one. Suppose improb-
ably that the six members have a total of $4.8 million in
personal assets that might be used to satisfy a judgment.
Then State Street, even though adjudged only 50 percent
responsible for the (supposed) wrongful injury to the
plaintiffs, would have to pay almost the entire judg-
ment—$530 million ($270 million + $270 million – $ 5.2
million (paid by insurance company) – $4.8 million (paid by
the Committee members) = $530 million) out of $540
million.
  The judge in approving the settlement entered an order in
effect barring State Street from seeking anything from the
Committee members beyond what personal assets they may
have. The judge gave no reason for this action; if we may
16                                    Nos. 05-4005, 05-4317

judge from the arguments of the parties’ lawyers, either he
thought this result “fair” or, as argued by the plaintiffs’
lawyer, thought it would make no difference because State
Street could in no event obtain from the Committee mem-
bers money they don’t have. But if this is what the judge
thought, he was wrong. The members’ unions have agreed
to indemnify them. Therefore if State Street obtained a
judgment of $264.8 million (in our example) against the
members, the unions would have to pay so much of that
judgment as they, not the Committee members, could
afford. (So we’re surprised that the union has not sought to
intervene in the suit.)
   The problem for which bar orders or, as they are some-
times called, “settlement bars” are a suggested solution was
explained recently in Denney v. Deutsche Bank AG, 443 F.3d
253, 273 (2d Cir. 2006): “If a nonsettling defendant against
whom a judgment had been entered were allowed to seek
payment from a defendant who had settled, then settlement
would not bring the latter much peace of mind. He would
remain potentially liable to a nonsettling defendant for an
amount by which a judgment against a nonsettling defen-
dant exceeded a nonsettling defendant’s proportionate fault.
This potential liability would surely diminish the incentive
to settle.” But to the extent that the nonsettling defendant
has a valid claim for contribution from the settling defen-
dant, a bar order that extinguished that claim would
encourage a race to settle (to the arbitrary disadvantage of
the defendants as a group), since each settling defendant’s
liability would be capped at the amount of his settlement.
This court, in a case not cited by the district judge, has
declined to adopt the settlement-bar approach on the
ground that the hearing necessary to determine the value of
the nonsettling defendant’s contribution claim would be
cumbersome and therefore costly, and “as the costs of
Nos. 05-4005, 05-4317                                      17

settlement rise closer to those of trial, the likelihood of
settlement falls—maybe far enough to offset the incentive to
settle that a defendant has who knows that settling will
enable him to avoid all liability to the other tortfeasors.”
Donovan v. Robbins, 752 F.2d 1170, 1181 (7th Cir. 1985).
  The settlement-bar approach assumes, moreover, that
there is a right of contribution, and it is unsettled whether
ERISA defendants have such a right. Lumpkin v. Envirodyne
Industries, Inc., 933 F.2d 449, 464 n. 10 (7th Cir. 1991);
compare Chemung Canal Trust Co. v. Sovran Bank/Maryland,
939 F.2d 12, 16-17 (2d Cir. 1991) (yes, contribution),
with Kim v. Fujikawa, 871 F.2d 1427, 1432-33 (9th Cir. 1989)
(no). We assumed in Alton Memorial Hospital v. Metropolitan
Life Ins. Co., 656 F.2d 245, 250 (7th Cir. 1981), that they
do, but did not actually discuss the question, which remains
an open one in this circuit. This is not the case in which to
close it, as it would not affect our result; we mention it
merely in the hope of heading off such errors in the future.
 The judgment in No. 05-4005 is affirmed, and appeal
No. 05-4317 is dismissed.

A true Copy:
       Teste:

                          _____________________________
                           Clerk of the United States Court of
                             Appeals for the Seventh Circuit

                    USCA-02-C-0072—6-28-06