Schafer v. Multiband Corp., 13-1316

• Decision Date: 06 January 2014
• Docket Number: No. 13-1316,13-1316
• Parties: Bernard J. Schafer; Henry Block, Plaintiffs - Appellees, v. Multiband Corp. Defendant - Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Bernard J. Schafer; Henry Block, Plaintiffs - Appellees, v. Multiband Corp. Defendant - Appellant.

No. 13-1316

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

FILED: January 6, 2014

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 14a0003n.06

ON APPEAL FROM THE

UNITED STATES DISTRICT

COURT FOR THE EASTERN

DISTRICT OF MICHIGAN

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.

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.

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 HoldingCompany]. . .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 thefiduciary 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 concludedthat "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...