:: Fiduciaries’ Attorney Malpractice Claims Are Not Preempted By ERISA
Initially, although Defendants do not raise the issue, the malpractice cause of action is not preempted by ERISA ( see Gerosa v. Savasta & Co. Inc., 329 F3d 317, 323 [2nd Cir2003], cert. denied 540 U.S. 967, 1074 [2003]; Airparts Company, Inc. v. Custom Benefit Services of Austin, Inc., 28 F3d 1062, 1066-67 [10th Cir1994]; Painters of Phila. Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146, 1153 n. 7 [3rd Cir1989] ). HSBC Bank USA v. Bond, Schoeneck and King, PLLC, — N.Y.S.2d —-, 2007 WL 1585538 (N.Y.Sup.), 2007 N.Y. Slip Op. 27227 (June 4, 2007)
In this ESOP litigation, the plaintiffs, having settled fiduciary litigation with plan participants (see Beam v. HSBC Bank USA, 2003 WL 22087589 – hereinafter the “Beam litigation”), sued legal counsel involved in ESOP transactions on various theories. The case provides insight on viable theories of recovery as between fiduciaries and non-fiduciary services providers. Although a state court decision, the judge handles the ERISA issues as thoroughly and ably as any federal district court.
State or Federal Law?
Since the plaintiffs’ liability to the ESOP participants arose under ERISA, an initial issue was presented as to whether the plaintiffs’ claim for indemnification should be determined by reference to Federal or New York law. The question was more than just academic:
Defendants move to dismiss the first cause of action primarily on the grounds that it seeks contribution, rather than indemnification, and is precluded under General Obligations Law (GOL) § 15-108(c), which provides that “[a] tortfeasor who has obtained his own release from liability shall not be entitled to contribution from any other person.â€
The court addressed the choice of law issue as follows:
This Court is bound to apply United States Supreme Court precedent in ERISA cases, as well as precedent from the lower Federal courts to the extent that such precedent is in agreement ( see Flanagan v. Prudential-Bache Securities, Inc., 67 N.Y.2d 500, 506 [1986], cert. denied 479 U.S. 931 [1986] ). Where there is a split in authority among the lower Federal courts, however, “a State Court required to interpret [a] Federal Statute has the same responsibility as the lower Federal courts and is not precluded from exercising its own judgment or bound to follow the decision of the Federal Circuit Court of Appeals within the territorial boundaries of which it sits†( Flanagan, 67 N.Y.2d at 506 [citations omitted] ). Thus, this Court’s analysis should be no different than if the third-party action in the Beam action had been commenced (which sought both contribution and indemnification), except to separately analyze the effect, if any, the settlement has on Plaintiffs’ rights to claims for contribution and indemnification.
The Court noted that the United States Supreme Court has not yet addressed the issue of which body of law to apply in the situation before it, citing Donovan v. Robbins, 752 F.2d 1170, 1178-1181 (7th Cir. 1985) and McDannold v. Star Bank, N.A., 261 F3d 478, 484-485 (6th Cir2001). Since ERISA preempts State law, however, and since pre-emption doctrines apply in State courts as well as in Federal courts, the Court determined it should apply Federal common law in deciding whether the New York General Obligations Law and its ban on contribution for settling tortfeasors barred the plaintiffs’ indemnification claim.
Split In Circuits As To Right To Contribution And Indemnity
Nonetheless, the issue still remained complicated given the split of authority among the federal courts of appeal. The Court stated:
There is a split among the Federal circuits as to whether there is a right to contribution and indemnity between fiduciaries under ERISA ( see generally 1A Couch on Insurance § 7:12 [collecting cases]; compare Chemung Canal Trust Co., 939 F.2d at 15 and Lumpkin v. Envirodyne Indus. Inc., 933 F.2d 449, 464 [7th Cir1991], cert. denied 502 U.S. 939 [1991] with Kim v. Fujikawa, 871 F.2d 1427, 1432-33 [9th Cir1989]; Site-Blauvelt Engineers, Inc. v. First Union Corp., 153 FSupp2d 707, 709-710 [ED Pa 2001] [Second Circuit recognizes contribution and indemnification claims under ERISA, while Ninth Circuit and several district courts do not] ). The Supreme Court has held that, in developing Federal common law under ERISA, courts must be guided by the principles of trust law ( see Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 250 [2000] ). The Second and Seventh Circuit Courts of Appeals have held that, because traditional trust law provides for a right of contribution among “defaulting fiduciariesâ€, the doctrines of contribution and indemnity should be available between co-fiduciaries under ERISA ( see Chemung, 939 F.2d at 16; see also Free v. Briody, 732 F.2d 1331, 1337 [7th Cir1984] [accord] ).
Further Split In Circuits As To Non-Fiduciaries
Furthermore, the case before the court involved fiduciaries under ERISA seeking indemnification against non-fiduciaries, i.e., the defendant law firms. Thus, the division in authorities continued even among those courts permitting indemnification actions in ERISA cases. The Court observed:
Among the Federal courts that recognize a right to contribution and indemnity under ERISA, there is further disagreement whether such rights exist between a fiduciary and a non-fiduciary, either because of the non-fiduciary’s participation in a fiduciary breach or participation in a prohibited transaction, as alleged here. Some courts have held that indemnification and contribution are unavailable under ERISA between a fiduciary and a non-fiduciary ( see National Elec. Benefit Fund v. Heary Brothers Lightning Protection Co., Inc., 931 F Supp 169, 192-193 [WDNY 1995]; see also Glaziers & Glassworkers Local 252 Annuity Fund v. Newbridge Securities, Inc., 823 F Supp 1191 [ED Pa 1993] ). Since the Supreme Court’s decision in Harris Trust & Savings Bank v. Salomon Smith Barney Inc., 530 U.S. 238 [2000] ), those decisions have been questioned ( see Daniels v. Bursey, 329 F Supp 2d 975, 979-981 [ND Illinois 2004] ). Harris held that non-fiduciary “parties in interest†may be sued for “appropriate equitable relief†under section 502(a)(3) (29 USC [a][3] ) ( Harris Trust & Sav. Bank, 530 U.S. at 241).
The Court held that, under its view of the federal common law of ERISA, the New York statute did not apply to the case before it, stating:
The Seventh Circuit . . . contains the clearest reasoning for the rule:
Where contribution is sought by one who has had to pay damages for violating a Federal statute, the scope and limitations of the right of contribution are invariably treated as questions of Federal rather than state law * * *. A departure from that principle would be unjustified in the case of ERISA fiduciaries * * *. Although there is great peril in using general language to decide specific cases not foreseen by the speaker, the language we have quoted and much else besides in the legislative history indicate that Congress had no great concern with preserving state prerogatives in this area. This mood makes it extremely unlikely that Congress would have wanted ERISA fiduciaries to be subject to the vagaries of state contribution law a body of law so various, mutable, complex, and uncertain that its application to ERISA fiduciaries might well result in subjecting them to inconsistent duties and a risk of multiple liability. ERISA fiduciaries are entitled to a uniform nationwide rule.
Therefore, “[b]ecause the greater weight of Federal authority holds that contribution for ERISA claims is available (a point that Defendants do not dispute), and based on the need for uniformity among the decisions interpreting ERISA,” the Court held that the New York settlement bar rule did not apply “whether Plaintiffs refer to their claims as seeking contribution or indemnification.”
Malpractice Claims Not Preempted
Though the court applied federal law in evaluating the viability of the plaintiffs’ indemnity claim, it did not view ERISA’s preemptive provisions applicable to the plaintiffs’ claims of malpractice. The Court stated that “the malpractice cause of action is not preempted by ERISA” and cited the following cases for that proposition:
Gerosa v. Savasta & Co. Inc., 329 F3d 317, 323 [2nd Cir2003], cert. denied 540 U.S. 967, 1074 [2003]; Airparts Company, Inc. v. Custom Benefit Services of Austin, Inc., 28 F3d 1062, 1066-67 [10th Cir1994]; Painters of Phila. Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146, 1153 n. 7 [3rd Cir1989] ).
The Court reached a similar conclusion on a negligent misrepresentation claim:
Initially, this cause of action is not preempted by ERISA, because it “involve[s] distinctly traditional state law duties and in no way impact[s] on the legislative interests enacted in ERISA†( see Carpenters’ Local Union No. 964 Pension Fund v. Silverman, 1995 WL 378539, [SDNY], citing Aetna Life Ins. Co v. Borges, 869 F.2d 142, 145-147 [2d Cir], cert denied 493 U.S. 811 [1989] ).
Note: For purposes of clarity, the summary above omits discussion of limitations periods and the effect of certain tolling agreements.
For further discussion of claims against service providers, see Court Permits ERISA Contribution Claim By Claims Administrator Against Insurance Broker; Court Permits Employer To Include TPA In Employer’s Dispute With Participants; Employer Malpractice Claims Against Service Providers – A User’s Guide
