On July 21, 2016, the US Court of Appeals for the Seventh Circuit held in Chesemore v. Fenkell that a court may order one fiduciary to indemnify another in an action under the Employee Retirement Income Security Act of 1974 (ERISA) ( (7th Cir. July 21, 2016)).

A Wisconsin manufacturer created an employee stock ownership plan (ESOP) in the mid-1980s (see Practice Note, Employee Stock Ownership Plans (ESOPs)). In 2002, defendants David Fenkell and Alliance Holdings, Inc., a company he founded and controlled, acquired the manufacturer's ESOP and folded it into Alliance's ESOP. Several years later, when Alliance was ready to sell the manufacturer's ESOP, the manufacturer's profits were flat, and no independent buyer would pay the price projected at the time of the deal. As a result, Fenkell offloaded the company to its employees in a complicated leveraged buyout. Because the purchase price for the buyout was inflated and the debt load was unsustainable, the company's stock was worthless by the end of 2008. The employee participants in the ESOP sued Alliance, Fenkell, his handpicked trustees, and several other entities alleging breach of fiduciary duty in violation of ERISA.

The district court held a bench trial, found the defendants liable, and crafted a remedial order to make the plaintiffs whole. The judge later awarded attorney's fees and approved settlements among some of the parties. Fenkell appealed, raising several arguments, including a challenge to the judge's order requiring him to indemnify his co-fiduciaries.

Section 502 of ERISA (29 U.S.C. § 1132) enables plan participants and beneficiaries, the Department of Labor (DOL), and other specified parties to bring claims for civil enforcement of ERISA (see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502). ERISA Section 502(a)(2) (29 U.S.C. § 1132(a)(2)) allows a cause of action for breach of fiduciary duty under Section 409 (29 U.S.C. § 1109). ERISA Section 409:

(29 U.S.C. § 1109.) However, it does not specifically provide that a breaching fiduciary may be liable to another fiduciary.

ERISA Section 502(a)(3) (29 U.S.C. § 1132(a)(3)) allows a claim for "other appropriate equitable relief" to redress the violation or enforce ERISA or plan terms. The type of equitable relief available under ERISA Section 502(a)(3) has been dramatically expanded in recent years (see Practice Note, ERISA Litigation: Causes of Action Under Section 502: Determining Equitable Relief). Under this jurisprudence, the courts have long held that the scope of equitable relief under ERISA should be determined according to the common law of trusts. Trust law considers indemnification and contribution to be traditional equitable remedies, suggesting that these equitable remedies also should be available under ERISA.

However, there is a circuit split regarding the availability of indemnification and contribution among fiduciaries as appropriate forms of equitable relief in ERISA cases (compare Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12 (2d Cir. 1991) with Travelers Cas. & Sur. Co. of Am. V. IADA Servs. Inc., 497 F.3d 862 (8th Cir. 2007) and Kim v. Fujikawa, 871 F.2d 1427 (9th Cir. 1989)).

The Seventh Circuit upheld the district court's ruling that ERISA Section 502(a)(3) permits indemnification and contribution among fiduciaries. The Seventh Circuit had previously held that contribution was permitted in an ERISA case in Free v. Briody (732 F.2d 1331 (7th Cir. 1984)). The court rejected Fenkell's argument that the Seventh Circuit had overruled its holding that contribution was available in ERISA cases in Summers v. State Street Bank & Trust Co. (453 F.3d 404 (7th Cir. 2006)). The opinion in Summers stated in dicta that "a right of contribution" under ERISA "remains an open [question] in this circuit," but did not mention Free or overturn it; Summers overlooked Free. The Seventh Circuit confirmed that Free is still good law and held that the district court had the authority to order Fenkell to indemnify his co-trustees.

Counsel should be aware that contribution and indemnification among ERISA fiduciaries is permitted under the Seventh Circuit's ruling as well as in the Second Circuit. However, the Eighth and Ninth Circuit have both held that contribution and indemnification are not permitted so there remains a circuit split regarding this issue.