In Zavala v. Kruse-Western, Inc. et al., No. 1:19-cv-00239 (E.D. Cal. July 26, 2019), the federal court dismissed the plaintiff's ERISA claim for equitable relief against non-fiduciaries and ERISA fiduciary-breach claims against shareholders who sold stock to an ESOP. The case affirms some limitations under ERISA for claims against non-fiduciaries and the scope of fiduciary obligations.
The complaint was brought by a former Kruse-Western employee and current participant in an ESOP. The ESOP bought Kruse-Western's outstanding stock, allegedly for almost 10 times its actual value, and the plaintiff sued the trustee and the selling shareholders. The two claims against the selling shareholders alleged that they, in a non-fiduciary capacity as sellers, were subject to equitable remedies for receiving plan assets as a result of a prohibited transaction, and that they, in a fiduciary capacity with the obligation to appoint and remove a trustee for the ESOP, failed to monitor GreatBanc.
The Court dismissed both claims. The equitable claim, which was brought under ERISA § 502(a)(3), failed because ERISA limits such claims to only those that seek "appropriate equitable relief." The complaint must contain allegations that the relief sought is equitable, rather than legal, or it will be dismissed. Relying on the Ninth Circuit's recent decision in Depot, Inc. v. Caring for Montanans, Inc., the court explained that appropriate equitable relief focuses on the particular funds the non-fiduciaries obtained and whether the court can impose some type of equitable remedy on those funds. The plaintiff's complaint must identify those funds in some manner. Without a means to identify the particular funds, the remedy is not equitable, but legal, and legal relief is not available under ERISA § 502(a)(3). The Court granted the plaintiff leave to amend.
The Court also dismissed a claim against board members for breaching their fiduciary obligation to appoint and monitor an ESOP trustee. Appointing fiduciaries have a limited obligation to select and retain a qualified fiduciary. The plaintiff's claims really concerned the stock transaction, and the complaint did not plausibly allege that the defendants exercised control over the ESOP and caused it to buy the Kruse-Western stock. That claim also was dismissed with leave to amend.
In recent years, we have seen many plaintiffs attempt to expand the scope of liability under ERISA. ERISA, which was the product of a decade of legislative drafting, discussion, hearings, studies and revision, contains the exclusive causes of action available for ERISA violations, and Congress carefully drafted the remedies provisions to provide for some remedies and exclude others. Non-fiduciaries generally are not liable for others' fiduciary breaches, and monitoring fiduciaries have extremely limited roles in the underlying fiduciaries' actual, day-to-day conduct. This well-reasoned decision affords Congress the deference it deserves by limiting claims and remedies only to those Congress intended to provide in ERISA. This limitation protects non-fiduciaries from being held liable for what ultimately are fiduciary obligations under ERISA.
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