Alan Halperin v. Mark Richards

Case Type:
Case Status:
Reversed and Remanded
20-2793 (7th Circuit, Jul 28,2021) Published
In a two-part opinion, the U.S. Court of Appeals for the Seventh Circuit (Panel) held that the Employee Retirement Income Security Act (ERISA) does not preempt a bankrupt entity's creditor's state law claims against its directors and officers, who serve as both corporate and ERISA fiduciaries, but does preempt such claims against the former ERISA trustee of the employee benefit plan and its non-fiduciary contractor, as such corporate aiding-and-abetting liability would fatally interfere with the exclusive benefit rule, the linchpin of ERISA's fiduciary duty schematic.
Procedural context:
In October 2017, Appvion and its affiliates filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (BC). Under Appvion’s liquidation plan, its estate's creditors were given authority through a liquidating trust (ALT) to pursue certain corporation-law claims on behalf of Appvion to recover losses from the defendants’ alleged wrongs against the corporation. With this permission in hand, the plaintiffs here, Alan Halperin and Eugene Davis, the co-trustees of the ALT, launched the underlying suit in the BC. Eventually, the BC transferred the first eight counts of their complaint to the U.S. District Court for the Eastern District of Wisconsin. Counts I, II, III, and IV asserted state law claims for beach of their corporate fiduciary duties, and Counts VII and VIII asserted state-law claims for unlawful dividends, against certain directors and officers. Counts V and VI, however, targeted the trustee for an ERISA-covered Employee Stock Ownership Plan (ESOP) as well as its independent trustee for aiding and abetting the directors' and officers' breaches of their fiduciary duties. All these defendants sought to dismiss all 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. Persuaded by these arguments, the DC held that ERISA preempted all of the plaintiffs’ claims. It therefore granted the defendants’ motion to dismiss all eight counts with prejudice, their grounding in ERISA-related duties and relationship to an ESOP demanding nothing less. The plaintiffs timely appealed. As the Panel explained, the DC had painted with too broad of a brush. Its dismissal of the two counts against the trustee and auditor would stand -- but not its dismissal of the six counts pled against Appcion's directors and officers.
Citing to the complaint, as Rule 12 requires, the Panel told a story of financial turmoil and collapse. According to plaintiffs, Appvion 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 ESOP. At the same time, the defendants fraudulently inflated these stock valuations to line the pockets of directors and officers, whose pay was tied to the ESOP valuations. In the plaintiffs' telling, 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 tainted directors and officers. Not quite done, the directors went even further by allegedly providing unlawful dividends to its parent company, Paperweight Development Corporation, by forgiving and re-extending certain intercompany notes to it.
Michael S. Kanne; Ilana K. D. Rovner; and David F. Hamilton

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