In this article, we're revisiting three court cases involving ESOP fiduciary indemnification that left some head-scratching over when and how an ESOP company can indemnify its ESOP trustees. This year being the fifth anniversary of the last decision, Harris v. GreatBanc Trust Company, and the landscape still a little murky, we thought it might be prudent to go over some of the lessons learned from those three decisions. But first a little background.
You Can't, Maybe You Can
In Johnson v. Couturier, the court blocked an ESOP-owned company from advancing attorneys' fees to plan fiduciary defendants out of corporate assets.
The subsequent decision, Fernandez v. K-M Industries Holding Co., Inc., disallowed indemnification any time the plan would bear the financial burden of indemnification – whether directly or indirectly, making the situation even more perilous for ESOP fiduciaries.
Then came the GreatBanc decision, which returned to the traditional understanding of the DOL's plan asset regulations that distinguish corporate assets from plan assets – a view that allows the company sponsoring the plan to indemnify ESOP fiduciaries.
But taken as a whole, the three cases point to some uncertainty about the circumstances in which courts will permit an ESOP-owned company to indemnify its trustees. That’s why plan sponsors and fiduciaries should be thoughtful about their indemnifications and consider obtaining fiduciary liability insurance.
What To Do?
First, make sure you have the correct language in your indemnification agreements. The fiduciaries in both the Couturier and Fernandez cases suffered because the indemnification agreements used only "gross negligence" and "willful misconduct" exceptions. Your indemnification agreement should clearly preclude indemnification if there is an ERISA violation.
Second, the plan sponsor (or the fiduciary) should purchase and maintain fiduciary liability insurance. These policies are complex and difficult to decipher. Therefore, it is useful to have an attorney review the policy to make sure it covers those you want covered in the way that you want them covered. Too often, reviews of fiduciary liability insurance policies reveal fatal flaws. Many policies contain ERISA or ESOP-specific exclusions. Many policies define covered individuals in a way that excludes people intended to be covered (e.g., plan committee members or trustees might not fit the definition of covered individual because they are not company employees).
Third, if you are an ERISA fiduciary and you have a choice between the Northern District of California and the Central District of California, choose the latter. District courts in the Ninth Circuit (as well as other panels of the Ninth Circuit) must follow the Couturier decision as required by stare decisis, the policy under which lower courts give deference to higher court decisions. But as discussed above, the meaning of Couturier is anything but clear. We have only two relevant district court decisions in the Ninth Circuit and they could not be more different. District courts are not bound by other district courts – the GreatBanc court did not even cite Fernandez. But, as a practical matter, judges are likely to give deference to decisions in their district.
Check your indemnification agreement. Check your fiduciary liability insurance policy. What the court decided in Couturier is anyone's guess.
If you are interested in learning more about the facts of the cases, read Indemnifying ESOP Fiduciaries: Harris v. GreatBanc Trust Company.