Halperin v. Richards

• Decision Date: 28 July 2021
• Docket Number: No. 20-2793,20-2793
• Citation: 7 F.4th 534
• Parties: Alan D. HALPERIN and Eugene I. Davis, Plaintiffs-Appellants, v. Mark R. RICHARDS, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

7 F.4th 534

Alan D. HALPERIN and Eugene I. Davis, Plaintiffs-Appellants,

v.Mark R. RICHARDS, et al., Defendants-Appellees.

No. 20-2793

United States Court of Appeals, Seventh Circuit.

Argued April 15, 2021

Decided July 28, 2021

Gordon Zachary Novod, Attorney, Grant & Eisenhofer P.A., New York, NY, for Plaintiffs-Appellants.

Craig C. Martin, Amanda S. Amert, Michael T. Graham, Attorneys, Willkie Farr & Gallagher LLP, Chicago, IL, for Defendants-Appellees Mark R. Richards, Thomas J. Ferree, Tami L. Vanstraten.

Brian P. Muething, Jacob D. Rhode, Michael L. Scheier, Attorneys, Keating, Muething & Klekamp, Cincinnati, OH, for Defendant-Appellee Argent Trust Company.

Lars Golumbic, William J. Delany, Meredith Kimelblatt, Andrew Salek-Raham, Elizabeth L. Woods, Attorneys, Groom Law Group, Washington, DC, for Defendant-Appellee Stout Risius Ross, Inc.

Before Kanne, Rovner, and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

We consider in this case whether the Employee Retirement Income Security Act (ERISA) preempts certain state-law claims brought by bankruptcy creditors on behalf of a company against its directors and officers and others alleged to have inflated the company's stock value to conceal the company's decline and to benefit corporate insiders. We hold that ERISA does not preempt the plaintiffs’ claims against the company's directors and officers. ERISA expressly contemplates parallel corporate liability against directors and officers who serve dual roles as both corporate and ERISA fiduciaries. We also hold, however, that ERISA preempts the plaintiffs’ claims against the former ERISA trustee of the employee benefit plan and its non-fiduciary contractor. Corporation-law aiding and abetting liability against these defendants would interfere with the cornerstone of ERISA's fiduciary duties—the exclusive benefit rule in Section 404, 29 U.S.C. § 1104(a)(1)(A).

I. Factual and Procedural Background

In reviewing a grant of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), we accept the plaintiffs’ factual allegations as true and draw all reasonable inferences in their favor. Kolbe & Kolbe Health & Welfare Benefit Plan v. Medical College of Wisconsin, Inc. , 657 F.3d 496, 502 (7th Cir. 2011). According to the plaintiffs, Appvion, Inc. was in financial freefall from 2012 to 2016 as revenues from its paper business declined sharply. During those years, Appvion repeatedly missed its financial projections, yet the defendants continued to project unrealistic success when valuing the company's stock—which was wholly-owned by employees under an ERISA-covered Employee Stock Ownership Plan (ESOP).

The plaintiffs assert that, while the corporate ship was sinking, the defendants fraudulently inflated these stock valuations to line the pockets of directors and officers, whose pay was tied to the ESOP valuations. Plaintiffs allege that the directors and officers carried out this scheme with knowing aid from the ESOP trustee, Argent Trust Company (Argent), and its independent appraiser, Stout Risius Ross, LLC (Stout), who led the ESOP valuation process in coordination with the directors and officers. The plaintiffs also allege that Appvion directors provided unlawful dividends to its parent company, Paperweight Development Corporation, by forgiving and re-extending certain intercompany notes to it.

In October 2017, Appvion and its affiliates filed for bankruptcy protection in the Bankruptcy Court for the District of Delaware. See In re OLDAPCO, Inc., 622 B.R. 140 (Bankr. D. Del. 2020). Under Appvion's liquidation plan, Appvion's bankruptcy creditors were given authority through a liquidating trust to pursue certain corporation-law claims on behalf of Appvion to recover losses from the defendants’ alleged wrongs against the corporation. See Halperin v. Richards , 2020 WL 5095308, at *1 (E.D. Wis. Aug. 28, 2020) (describing bankruptcy proceedings).

Plaintiffs here are Alan Halperin and Eugene Davis, co-trustees of the Appvion Liquidating Trust. They originally filed this action in the Delaware bankruptcy court. The bankruptcy court transferred Counts I–VIII of the plaintiffs’ Revised Second Amended Complaint to the U.S. District Court for the Eastern District of Wisconsin. Counts I–IV assert state-law claims against the director and officer defendants (Mark Richards, Thomas Ferree, Tami Van Straten, Jeffrey Fletcher, Kerry Arent, Stephen Carter, Terry Murphy, Andrew Reardon, Kathi Seifert, Mark Suwyn, Carl Laurino, and David Roberts) for breaching their corporate fiduciary duties. Counts V and VI allege that Argent and Stout aided and abetted those breaches. And Counts VII and VIII assert state-law unlawful dividend claims against the directors and officers.

All defendants moved in the district court to dismiss all of these claims on the theory that their roles in Appvion's ESOP valuations were governed by ERISA and that ERISA preempted state corporation-law liability arising from the ESOP valuation process. More specifically, the directors and officers argue that, despite their dual roles as corporate and ERISA fiduciaries, they acted exclusively in their ERISA roles when carrying out the ESOP activity underlying the plaintiffs’ claims. See 29 U.S.C. § 1002(21)(A) (a corporate officer "is a fiduciary with respect to a plan to the extent ... he has any discretionary authority or discretionary responsibility in the administration of such plan"). Argent and Stout similarly argue that the claims against them "relate to" the plan, 29 U.S.C. § 1144(a), because they are based on the performance of their ERISA duties in valuing the company stock owned by the ESOP.

The district court agreed with defendants that ERISA preempts all of plaintiffs’ claims. The court granted the defendants’ motion to dismiss Counts I–VIII with prejudice because they "are grounded in ... ERISA-related duties ... and ‘relate to’ the ESOP." Halperin , 2020 WL 5095308, at *4. The district court's ERISA preemption finding is a matter of law that we review de novo. Kolbe & Kolbe , 657 F.3d at 504.

II. Principles of ERISA Preemption

In enacting ERISA, Congress included two distinct and powerful preemption provisions: complete preemption under ERISA § 502, 29 U.S.C. § 1132, and conflict preemption under ERISA § 514, 29 U.S.C. § 1144. The defendants assert that the claims in this case are conflict-preempted under the latter provision, which preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA.

The fundamental challenge in interpreting this preemption provision stems from its broad language: "If ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course...." New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. , 514 U.S. 645, 655, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995). But, on the other hand, Congress clearly intended ERISA preemption to be broad. Congress chose "deliberately expansive" language, "conspicuous for its breadth." California Div. of Labor Standards Enf't v. Dillingham Construction, N.A., Inc. , 519 U.S. 316, 324, 117 S.Ct. 832, 136 L.Ed.2d 791 (1997), quoting Morales v. Trans World Airlines, Inc. , 504 U.S. 374, 384, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992).

Since the broad and vague statutory text offers little help in drawing boundaries for ERISA conflict preemption, Travelers , 514 U.S. at 655, 115 S.Ct. 1671, the Supreme Court "considers ERISA's objectives ‘as a guide to the scope of the state law that Congress understood would survive.’ " Rutledge v. Pharmaceutical Care Mgmt. Ass'n , ––– U.S. ––––, 141 S. Ct. 474, 480, 208 L.Ed.2d 327 (2020), quoting Dillingham Construction , 519 U.S. at 325, 117 S.Ct. 832. Congress's objective in enacting ERISA's conflict preemption provision was " ‘to ensure that plans and plan sponsors would be subject to a uniform body of benefits law,’ thereby ‘minimiz[ing] the administrative and financial burden of complying with conflicting directives’ and ensuring that plans do not have to tailor substantive benefits to the particularities of multiple jurisdictions." Id. , quoting Ingersoll-Rand Co. v. McClendon , 498 U.S. 133, 142, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990).

Guided by that objective, the Supreme Court has written that a law "relates to" an ERISA plan "if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc. , 463 U.S. 85, 96–97, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983) (state law requiring plans to pay specific benefits was not enforceable against ERISA plans). This generally encompasses two categories of state laws. Gobeille v. Liberty Mut. Ins. Co. , 577 U.S. 312, 319, 136 S.Ct. 936, 194 L.Ed.2d 20 (2016). First, "[w]here a State's law acts immediately and exclusively upon ERISA plans ... or where the existence of ERISA plans is essential to the law's operation ..., that ‘reference’ will result in pre-emption." Id. at 319–20, 136 S.Ct. 936, quoting Dillingham Construction , 519 U.S. at 325, 117 S.Ct. 832 ; see, e.g., Mackey v. Lanier Collection Agency & Serv., Inc. , 486 U.S. 825, 829, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988) ("The Georgia statute at issue here expressly refers to—indeed, solely applies to—ERISA employee benefit plans."). Second, ERISA preempts a state statute or claim that, while not facially tied to ERISA, " ‘governs ... a central matter of plan administration’ or ‘interferes with nationally uniform plan administration.’ " Gobeille , 577 U.S. at 320, 136 S.Ct. 936, quoting Egelhoff v. Egelhoff , 532 U.S. 141, 148, 121 S.Ct. 1322, 149 L.Ed.2d 264 (2001) (preempting Washington benefits rule that would create state-by-state differences in plan administration).

State laws that directly prohibit something ERISA permits, and vice versa, fall into this second category. See, e.g., Alessi v. Raybestos-Manhattan, Inc ., 451 U.S. 504, 524, 101 S.Ct. 1895, 68 L.Ed.2d 402 (1981) (state...