In McLemore v. Regions Bank, No. 10-5480 (6th Cir. June 8, 2012), a divided panel of the U.S. Court of Appeals for the Sixth Circuit ruled that ERISA preempted state law claims brought against a custodian that allegedly failed to prevent a plan fiduciary from stealing plan funds.
In McLemore, a third-party administrator (the "TPA") for a number of ERISA plans directed the plans to send funds to depository accounts with a bank (the "Bank") that were held in the name of the TPA. Over a four-year period, the TPA effectively stole over $19 million from these accounts through numerous withdrawals and transfers. After the TPA became bankrupt and its theft of the plans' funds was discovered, the trustee of the TPA's bankruptcy estate sued the Bank on behalf of the plans in federal district court, asserting fiduciary claims under ERISA § 502(a)(2) as well as claims under state law. On the Bank's motion, the district court dismissed both sets of claims, ruling that the complaint failed to allege adequately that the Bank was an ERISA fiduciary and that the state law claims were preempted by ERISA. On appeal, the Sixth Circuit (in an opinion authored by Judge Cook) affirmed the district court ruling in a 2 – 1 decision that addressed four issues.
First, the Court of Appeals determined that the trustee of the TPA's bankruptcy estate had standing as a fiduciary to bring claims on behalf of the plans under ERISA § 502(a)(2). In this regard, the court concluded that the bankruptcy trustee had adequately pleaded its fiduciary status, in light of the complaint's allegations that – as "successor fiduciary" of the TPA – the bankruptcy trustee exercised control over assets of the plans.
Second, the Sixth Circuit rejected the Bank's arguments that, because the bankruptcy trustee asserted it was "step[ping] into the shoes of [the TPA]" to sue as fiduciary, its claims should be barred by the equitable doctrines (in pari delicto and unclean hands) that in certain situations prevent culpable parties from bringing suit. The court emphasized that, in suing on behalf of the plans, the bankruptcy trustee was "stepping into the shoes of the plans" and was not attempting to recover funds for the TPA's bankruptcy estate.
Third, the court affirmed the dismissal of the ERISA fiduciary claims against the Bank, agreeing with the district court's conclusion that, under the complaint's allegations, the Bank was not an ERISA fiduciary of the plans. In this regard, the complaint alleged: that the Bank knew that the TPA's accounts held plan assets; that the Bank had assisted the TPA in opening the accounts in its own name in order to circumvent banking rules; and that the Bank had withdrawn over $500,000 in fees and other charges from the accounts for its own benefit. In the court's view, these allegations did not establish the requisite "authority or control" over management or disposition of plan assets within the meaning of ERISA's definition of fiduciary, because they indicated that the Bank acted only as a nondiscretionary custodian that followed the TPA's directions and collected its "contractually owed fees" from the accounts.
Lastly, the Sixth Circuit ruled that ERISA preempted the complaint's state law claims. The court noted that, in the circumstances of this case, applicable state law limited the claims that could be brought to allegations of knowing or bad faith conduct by the Bank (effectively eliminating claims based on, e.g., negligence). The court observed further that state law claims alleging the Bank had knowingly, or in bad faith, permitted the TPA to steal funds from the plans would effectively constitute state law claims that the Bank had knowingly participated in the TPA's actions that constituted breaches of the TPA's fiduciary duties under ERISA. The court reasoned that such state law claims would be preempted by ERISA, which itself provides a cause of action against nonfiduciaries who knowingly participate in breaches of fiduciary duties by ERISA fiduciaries. The court stressed that the remedies for such a "knowing participation" claim under ERISA would be limited to equitable relief (such as the restitution of plan funds in the Bank's possession), while remedies for state law knowing participation claims could provide for broader relief (such as damages to make the plans whole for their losses). It found that the state law claims were preempted because they would impermissibly supplement the remedies established by ERISA's remedial scheme, which Congress intended to be exclusive.
Judge Merritt dissented from the majority's conclusion that the state law claims were preempted, arguing that, before ERISA was enacted, the plan participants could have had state law remedies against the Bank in the circumstances of this case, and that Congress intended ERISA to be protective of participants. He asserted in dissent that he "would not adopt a construction of preemption that perversely deprives [plan] participants of rights they previously possessed."
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