A court in the Western District of Virginia held that a lawyer working as a Senior Trust Officer for a fiduciary to an Employee Stock Ownership Plan could be personally liable to workers who claim they overpaid for their employer’s stock purchased by the employer’s ESOP. Hugler v. Vinoskey, 2017 BL 145574, W.D. Va., No. 6:16-cv-00062, 5/2/17. 

Sentry Equipment Erectors, Inc. maintained an Employee Stock Ownership and Savings Plan (the “Plan”). The Plan was developed primarily to invest in Sentry stock and allowed the principals of Sentry, Adam and Carole Vinoskey, to sell their stock in Sentry to the Plan.

Evolve Bank & Trust was hired as an independent transaction trustee when the Plan purchased stock from Vinoskey at an allegedly significantly inflated price. Subsequently, the Department of Labor brought a complaint against Vinoskey, Evolve, Sentry, the Plan and Michael New.

Michael New, an attorney, was employed by Evolve as a Senior Trust Officer. The parties agreed that Evolve acted as an ERISA fiduciary, but New argued that he was simply an employee of a fiduciary (Evolve), not a fiduciary himself, and therefore should be dismissed from the complaint. An ERISA fiduciary “is broader than the common law concept of trustee … the term includes not only those named as fiduciaries in the plan instrument … but any individual who de facto performs specified discretionary functions with respect to the management, assets, or administration of the plan.” Custer v. Sweeney, 89 F.3d 1156, 1161 (4th Cir. 1996).

The court considered whether  the Department of Labor had alleged sufficient facts to demonstrate that New had sufficient individual discretion to be considered a “de facto fiduciary,” with an “individual discretionary role.” The complaint alleged that New (1) selected the share price, (2) signed a document stating that the share price was in the ESOP’s best interest, and (3) was not required to obtain approval from Evolve’s Trust Committee before approving the sale.

New asked the court to consider a case from the Second Circuit, Lowen v. Tower Asset Management, Inc., 829 F.2d 1209 (2nd Cir. 1987), asserting that the plaintiff needed to pierce the corporate veil to hold an employee liable as a fiduciary. However, the court was not persuaded, and held that Tower did not “state (or even imply) that veil piercing is a prerequisite to finding that an individual employee is a fiduciary.”

The court held that the complaint sufficiently alleged that New exercised individual discretion by selecting and approving the stock price on his own, and that New was not merely signing forms on behalf of Evolve or performing only ministerial functions. “Not every employee of an independent transaction trustee becomes a de facto trustee simply by working on a transaction such as this, but when an employee exercises individual discretion – such as acting alone to select and approve the transaction price – that employee can be considered a fiduciary.”

What Does This Mean?

It is unnerving for attorneys to hear of a case where an attorney was found to be a plan fiduciary.

However, it appears that New was not acting in his capacity as an attorney or as counsel for Evolve or Sentry, but rather only as an employee employed as a fiduciary. Therefore, it is likely that New’s status as attorney was not the critical factor; had a non-attorney filled New’s role for Evolve and taken the same action, the court likely would have still found him to be a fiduciary.

Generally, an individual will be a fiduciary under ERISA if they perform certain functions with respect to plans or “plan asset” entities. Any employee, whether or not a lawyer, who is working in a role where he or she makes decisions with limited to no oversight with respect to plan administration or assets will want to carefully consider whether they could be found to have fiduciary liability, and may wish to seek professional guidance if they are unsure. After all, it is well established doctrine that title does not ultimately determine whether a person is an ERISA fiduciary. Rather, the actions that they take and their exercise of discretion are among the factors that would be considered should their status as a fiduciary ever come into question.

Another level of review overseeing them, whether a review board or a supervising individual with fiduciary duty, may have protected New from potential liability. The court discussed in detail the fact that the complaint alleged that New made decisions impacting the plan with little to no oversight; specifically calling out the fact that Evolve did not have a review board responsible for overseeing New’s decisions.

It is also important for individuals in these roles with a potential for fiduciary liability to understand whether they are covered by their company’s fiduciary liability insurance, and the extent of that coverage.