Court Opinion

ID: 2648205
Source: CourtListenerOpinion
Date Created: 2014-01-06 16:45:58.97816+00
Date Added: 2024-06-11T15:05:23.291609
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                            File Name: 14a0003n.06

                                             No. 13-1316
                                                                                         FILED
                           UNITED STATES COURT OF APPEALS                          Jan 06, 2014
                                FOR THE SIXTH CIRCUIT                          DEBORAH S. HUNT, Clerk

Bernard J. Schafer; Henry Block,                             )
                                                             )
        Plaintiffs - Appellees,                              )    ON APPEAL FROM THE
                                                             )    UNITED STATES DISTRICT
                v.                                           )    COURT FOR THE EASTERN
                                                             )    DISTRICT OF MICHIGAN
Multiband Corp.                                              )
                                                             )
        Defendant - Appellant.                               )
                                                             )

BEFORE: ROGERS, STRANCH, and DONALD, Circuit Judges.

        ROGERS, Circuit Judge. The trustees of employee stock ownership plans settled claims of

breach of fiduciary duty and sought indemnification from the parent companies pursuant to

contractual provisions that provide for such indemnification.           An arbitrator found the

indemnification agreements to be invalid under a provision of the Employment Retirement Income

Act of 1974 (ERISA), which makes exculpatory agreements unenforceable. The arbitrator’s

decision would doubtless be reversed if it were a court decision under the precedent of this court,

because the arbitrator’s reading of the relevant section of ERISA is contrary to our precedent. But

the arbitrator’s decision reasoned from the statute and the contract, and not in clear disregard of

them, such that the arbitrator’s decision should not have been vacated by the district court because

of the legal error of the arbitrator. Absent extraordinary circumstances, arbitration is supposed to

resolve, with finality, legal as well as factual disputes.
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

        In this case, Multiband Corporation appeals the district court’s order vacating an arbitrator’s

finding that an indemnification agreement between Multiband and Bernard Schafer and Henry Block

was categorically void as against public policy. The arbitrator relied on § 410(a) of ERISA, which

provides that “any provision in an agreement or instrument which purports to relieve a fiduciary

from responsibility or liability for any responsibility, obligation, or duty under this part shall be void

as against public policy.” 29 U.S.C. § 1110(a). The district court concluded that the arbitrator had

acted in “manifest disregard of the law” by ignoring “clearly established legal precedent (including

that of the Sixth Circuit),” and vacated the decision because the validity of indemnification

provisions “is clearly defined and the arbitrator refused to heed [this principle].”

        Bernard Schafer and Henry Block were the owners and founders of Michigan Microtech,

Inc., a company that sells and installs satellite television equipment. In 2003, they acquired partial

ownership and management interests in DirecTECH, and became members of the board of directors

of DirecTECH. DirecTECH executed indemnification agreements with Schafer and Block, which

provided the following:

                The Company hereby agrees to indemnify and hold the Board
                Member harmless from and against any and all past, present, or future
                losses, claims, damages, expenses, or liabilities (including, but not
                limited to, reasonable attorney’s fees, court costs, judgments, fines,
                excise taxes related to litigation or aggregate amount pain [sic] in
                reasonable settlement of any actions, suites [sic], proceedings, or
                claims) (hereinafter collectively referred to as “Loss”), incurred in
                connection with any and all actions, proceedings, or suits of any kind
                or nature whatsoever, which arises as a result of acts or omissions of
                the Board Member within the scope of his activities for and on behalf
                of the Company and which do not involve deliberate wrongful acts
                or gross negligence by the Board Member.

                                                  -2-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

Microtech subsequently executed identical indemnification agreements with Schafer and Block.

Microtech then created an employee stock ownership plan (“ESOP”) and an employee stock

ownership trust (“ESOT”). Schafer and Block were named as trustees of the Microtech ESOP,

which executed another nearly identical indemnification agreement in favor of Schafer and Block.

DirecTECH also formed an ESOP and an ESOT, but Schafer and Block were not named as trustees.

       Microtech and DirecTECH then joined with two other companies, DirecTECH Southwest,

Inc. and JBM, Inc. to form a holding corporation, DirecTECH Holding Company, Inc. Owners of

these four entities exchanged their ownership interests for shares of stock in the holding company,

and the holding company became the parent company of all four entities. The holding company then

formed its own ESOP and ESOT. Schafer and Block became directors of the holding company, and

trustees of its ESOP and ESOT. Another indemnification agreement (nearly identical to the earlier

agreements) was executed in favor of Schafer and Block in their capacity as directors of the holding

company and trustees of the ESOP. The agreement also contained a mandatory arbitration clause.

       In 2005, the Department of Labor (“DOL”) began investigating the Holding Company and

its four subsidiaries because they suspected that the directors and trustees had breached their

fiduciary duties by purchasing company stock for the ESOPs at inflated prices. Around this time,

Multiband began negotiating to purchase the holding company (DirecTECH). In 2009, after

Multiband had been fully informed of the ongoing DOL investigation, the purchase was completed.

Multiband agreed to indemnify Schafer and Block for any losses “which arise as a result of acts or

omissions of the Board Member within the scope of his activities for and on behalf of [the Holding

                                               -3-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

Company]. . .which do not involve deliberate wrongful acts or gross negligence by the board

member.” Multiband also assumed the agreements and obligations of the holding company,

including the indemnification agreements with Schafer and Block. Schafer and Block assert that

these agreements with Multiband were material terms of their contract to sell the holding company.

        In 2009, following the purchase, the DOL informed Schafer and Block that they had

breached their fiduciary duties by allowing the various ESOPs to purchase company stock at inflated

prices, and offered to settle the case for $42 million. Pursuant to the terms of the indemnification

agreement, Schafer and Block requested that Multiband indemnify them. Multiband refused. In

2011, after the DOL filed suit against Schafer and Block, and without admitting any liability,

Schafer and Block agreed to pay the DOL $1,450,000 each. Again, they requested indemnification

from Multiband, and again, Multiband refused to pay.

        Schafer and Block filed an arbitration complaint against Multiband for its refusal to

indemnify them, as required by the terms of the indemnification agreements. Multiband defended

its decision on the grounds that the agreements were void as against public policy under § 1110(a)

of the Employee Retirement Income Security Act (ERISA), which provides that “any provision in

an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for

any responsibility, obligation, or duty under this part shall be void as against public policy.” 29

U.S.C. § 1110(a). The same statutory section includes, however, an exception for a plan that

“purchase[es] insurance for its fiduciaries or for itself to cover liability or losses occurring by reason

of the act or omission of a fiduciary, if such insurance permits recourse by the insurer against the

                                                  -4-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

fiduciary in case of a breach of a fiduciary obligation by such fiduciary.” 29 U.S.C. § 1110(b)(1).

The three issues submitted to the arbitrator were as follows:

                1) Inducement Indemnities. Is an agreement between a former
                fiduciary to an ESOP (Block/Schafer), on one hand, and a third party
                stranger to the ESOP (Multiband), on the other, invalid or
                unenforceable under 29 U.S.C. § 1110, as a matter of law, where the
                third party agrees to indemnify the fiduciary against claims arising
                from its past acts or omissions as a fiduciary?

                2) Assumption Agreements. Is an agreement between a company
                sponsoring an ESOP (DTHC), one hand, and a third party stranger to
                the ESOP (Multiband), on the other, invalid or unenforceable under
                29 U.S.C. § 1110, as a matter of law, where the third party agrees to
                indemnify the company's directors and former trustees to the ESOP
                (Block/Schafer) against claims arising from their past acts or
                omissions as fiduciaries?

                3) Does the payment of a settlement in the DOL Litigation render the
                indemnity agreements inapplicable or void under 29 U.S.C. § 1110
                as a matter of law?

The arbitrator determined that, “Distilled to their essence, all three issues pose a single question: Are

the indemnity agreements invalidated by operation of ERISA Section 410(a), 29 U.S.C. § 1110(a).”

The arbitrator cited numerous federal cases, including Sixth Circuit case law, holding that

indemnification agreements are in fact permitted under ERISA. The arbitrator noted, however, that

“in the context of ESOP plans, some courts have invalidated indemnity agreements requiring an

employer to indemnify a fiduciary, finding such agreements are, in effect, indemnification by the

ESOP.” The arbitrator then interpreted the text of § 410(a) as “clear and unambiguous” that

“[i]ndemnity agreements do not fall within this statutory scheme,” that is, that they do not fall within

the statutory exception for insurance agreements. For that reason, the arbitrator likewise concluded

                                                  -5-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

that “although nearly contemporaneous with the statute’s enactment, the Department of Labor

interpretive bulletin [permitting indemnification agreements under ERISA] is entitled to no

deference.” The arbitrator reasoned,

               The current economy offers further support for this view. The
               Claimants were, and the Respondent is, engaged in providing access
               to electronic information. This is an area, which, at this time, is
               constantly changing, as technology is being developed and refined.
               A company that looks stable and well able to provide security for an
               ERISA plan today, may show itself unable to hold its place in this
               changing environment.

The arbitrator declared the agreements invalid.

       Schafer and Block filed suit in federal court, seeking to have the arbitrator’s decision vacated

because “the Arbitrator expressly disregarded controlling federal law and held for the first time in

American jurisprudence, that Section 1110 categorically bars all private indemnification agreements

between plan fiduciaries and third parties.” The court found that “manifest disregard of the law”

survives as a basis for vacating an arbitrator’s decision, and held that the arbitrator committed more

than “a mere error in interpretation or application of the law” when he decided that ERISA does not

permit indemnification agreements. Instead, the arbitrator’s conclusions were, according to the

court, “contrary to clearly established legal precedent” of which the arbitrator was aware, but chose

to ignore. The district court therefore vacated the arbitrator’s decision. Multiband timely appeals.

       Notwithstanding an apparent error of law, the arbitrator did not manifestly disregard the law

in concluding that the indemnification agreement between Schafer and Block and Multiband was

void as against public policy. His decision therefore should not have been vacated.

                                                -6-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

        The arbitrator’s decision did not fall under any of the grounds provided by the Federal

Arbitration Act (FAA) for vacating an arbitration award. When courts are called on to review an

arbitrator’s decision, the review is very narrow; it is one of the narrowest standards of judicial

review in all of American jurisprudence. Uhl, 512 F.3d at 305. Under the FAA, “a court ‘must’

confirm an arbitration award ‘unless’ it is vacated, modified, or corrected ‘as prescribed’ in §§ 10

and 11. Section 10 lists grounds for vacating an award. Hall St. Assocs. v. Mattel, Inc., 552 U.S.
576, 582 (2008). These are:

                (1) where the award was procured by corruption, fraud, or undue
                means;
                (2) where there was evident partiality or corruption in the arbitrators,
                or either of them;
                (3) where the arbitrators were guilty of misconduct in refusing to hear
                evidence pertinent and material to the controversy; or of any other
                misbehavior by which the rights of any party have been prejudiced;
                or
                (4) where the arbitrators exceeded their powers, or so imperfectly
                executed them that a mutual, final, and definite award upon the
                subject matter submitted was not made.

9 U.S.C. § 10. None of the first three bases is even arguably present here. There is also no

argument that under the fourth ground the arbitrator exceeded his powers, apart from an argument

that, by manifestly disregarding the law, the arbitrator exceeded his powers.

        Because the arbitrator, notwithstanding his apparent error of law, did not manifestly

disregard the law so as to warrant vacatur of the award, we need not decide whether a manifest

disregard of the law legitimately forms a basis for vacatur in the first place, either as an

interpretation of the fourth statutory basis for vacatur, or as a fifth, inferred, basis for vacatur. The

                                                  -7-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

issue has not been firmly settled.1 But if review for manifest disregard of the law is not permitted,

vacatur was clearly not proper in the instant case. And if review for manifest disregard of the law

is still permitted, there has not been such a manifest disregard of the law in this case. Even under

that standard, a “general review for an arbitrator’s legal errors” is not permitted. Hall St. Assocs.,
522 U.S. at 585.

       It is true that the arbitrator’s analysis appears to be legally unsupportable under this circuit’s

precedents, such that we would reverse the decision if it had been made by a district court. ERISA

states that “any provision in an agreement or instrument which purports to relieve a fiduciary from

responsibility or liability for any responsibility, obligation, or duty under this part shall be void as

against public policy.” 29 U.S.C. § 1110(a). However, Section 410(b) permits the purchase of

insurance to cover a fiduciary’s potential liability. 29 U.S.C. § 1110(b). Thus, agreements that

       1
         In Hall Street, the Supreme Court held that “the statutory grounds [for vacatur] are
exclusive,” but went on to say that “[m]aybe the term ‘manifest disregard’ was meant to name a new
ground for review, but maybe it merely referred to the § 10 grounds collectively, rather than adding
to them.” Hall St. Assocs., 522 U.S. at 585. After Hall Street, the circuits split over whether
“manifest disregard” was still a viable ground for overturning an arbitration decision. In 2010, the
Supreme Court wrote in dicta, “We do not decide whether ‘manifest disregard’ survives our decision
in Hall Street as an independent ground for review or as a judicial gloss on the enumerated grounds
for vacatur set forth at 9 U.S.C. § 10.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662,
672 n. 3 (2010). Since Hall Street, we have continued to acknowledge “manifest disregard” as a
ground for vacatur—albeit not in a published holding. E.g., Coffee Beanery, Ltd. v. WW, L.L.C.,
300 F. App’x 415, 418 (6th Cir. 2009) (stating that manifest disregard survives Hall Street); Dealer
Computer Servs., Inc. v. Dub Herring Ford, 547 F.3d 558, 561 n.2 (6th Cir. 2008) (same); Ozormoor
v. T-Mobile USA, Inc., 08-11717, 2010 WL 3272620, at *2 (E.D. Mich. Aug. 19, 2010), aff’d, 459
F. App’x 502 (6th Cir. 2012); but see Grain v. Trinity Health, Mercy Health Services Inc., 551 F.3d
374, 380 (6th Cir. 2008) (“Hall Street’s reference to the ‘exclusive’ statutory grounds for obtaining
relief casts some doubt on the continuing vitality of that theory.”)

                                                 -8-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

exculpate a fiduciary from liability are invalid, but agreements insuring fiduciaries against loss are

permissible, so long as plan assets are not used to reimburse a fiduciary actually found liable for

breach of duty.2 Moreover, as the arbitrator acknowledged, the Department of Labor’s view is that

“[i]ndemnification provisions which leave the fiduciary fully responsible and liable, but merely

permit another party to satisfy any liability incurred by the fiduciary in the same manner as

insurance purchased under section 410(b)(3), are therefore not void under section 410(a).” 29

C.F.R. § 2509.75-4. This court held in Pfahler v. Nat’l Latex Prods. Co., 517 F.3d 816, 837 (6th

Cir. 2007) that indemnification agreements are valid: “Given that ERISA explicitly permits parties

to insure against possible liability, it would be illogical to interpret the statute as prohibiting

indemnification agreements, which accomplish the same thing.” Similarly, in Packer Engineering,

Inc. v. Kratville, 965 F.2d 174, 176 (7th Cir. 1992), the Seventh Circuit upheld an agreement to

indemnify a fiduciary who had been exonerated of charges of breach of duty. See also Shelter

Distrib. v. Gen. Drivers, Warehousemen & Helpers Local Union No. 89, 674 F.3d 608, 612 (6th Cir.

2012) (validating indemnification agreements in the context of union pension plans); Tullis v. UMB

Bank, N.A., 423 F. App’x. 567, 571 (6th Cir. 2011) (addressing indemnification in the context of

employer pension plans).

       It is true that in some cases cited by the arbitrator an indemnity agreement has been treated

as in effect an exculpatory agreement where the payment of the indemnity would, or could,

       2
        Schafer and Block admit that such an agreement would have “the same effect as an
exculpatory provision, in that it effectively abrogates the plan’s ability to recover.”

                                                -9-
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

adversely affect the resources of the victim of the fiduciary violation. A number of courts have

invalidated indemnity agreements because they would have some sort of financial impact on the plan

itself. E.g. Johnson v. Couturier, 572 F.3d 1067, 1080 (9th Cir. 2009); Donovan v. Cunningham, 541
F. Supp. 276, 289 (S.D. Tex. 1982) rev’d in part on other grounds, 716 F.2d 1455 (5th Cir. 1983);

Fernandez v. K-M Indus. Holding Co., 646 F. Supp. 2d 1150 (N.D. Cal. 2009) (all voiding

agreements to indemnify ESOP fiduciaries as functionally equivalent to the plan’s indemnifying

itself). The arbitrator however made no finding that the indemnity in this case could adversely affect

the interests of the victims of the trust violation. His analysis was instead simply that reimbursement

not clearly identified as “insurance” is not permitted under the statute. Bernard J. Schafer & Henry

Block v. Multiband Corp., Case No. 1340008997, Arb. Dec., 11.

       Legal error by the arbitrator—even clear legal error—is however not by itself sufficient for

vacatur of an arbitration agreement. One of the advantages of arbitration is the avoidance of the

expense of appeals, and the avoidance of such costs would be undermined by permitting appeals

based on clear error of law. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-220 (1985)

(recognizing that one of the primary goals of the Arbitration Act is the encouragement of efficient

and speedy dispute resolution). Even assuming that manifest disregard of the law is a basis for

vacatur of an arbitral decision, the scope of the basis has to be very narrow. Manifest disregard of

the law is not just manifest error of law. If the arbitrator expressed disagreement with the law, rather

than interpretation of the law, that might suggest “disregard.” But there is little evidence of that in

the arbitrator’s decision. Instead, the arbitrator relied on a very broad “plain” reading of the ERISA

                                                 - 10 -
No. 13-1316
Bernard J. Schafer v. Multiband Corporation

provision invalidating contractual provisions that relieve a fiduciary of liability, and relied on a

narrow and formal meaning of the insurance exception to that provision. The arbitrator also relied

on precedents that we can distinguish. Even together, however, this is not enough to show a

manifest (as opposed to possible, or even likely) disregard (as opposed to questionable reading) of

the law.

        Moreover, the very idea that an arbitral decision is not appealable for legal error leads to the

conclusion that the arbitrator is not necessarily bound by legal holdings of this court. If an arbitrator

relies on a colorable meaning of the words of the statute—as the arbitrator did here—the fact that

there is Sixth Circuit precedent to the contrary is not necessarily determinative. Sixth Circuit

holdings are binding in courts and on agencies whose decisions are appealable to the Sixth Circuit,

ultimately because of that appealability. An arbitrator cannot reject the law, but can disagree with

nonbinding precedent without disregarding the law.

        The narrow nature of our review and the policies underlying the finality of arbitral decisions

accordingly preclude vacatur in this case. The judgment of the district court is reversed and

remanded for further proceedings consistent with this opinion.

                                                 - 11 -