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Court Allows Breaching Fiduciary to Countersue Cofiduciaries for Indemnification and Contribution



Leventhal v. MandMarblestone Grp., LLC, 2020 WL 2745740 (E.D. Pa. 2020)

A 401(k) plan, its sponsor, and one of the sponsor’s owners (the plaintiffs) sued the plan’s third-party administrator (TPA) and custodian for breaches of fiduciary duty after $400,000 was fraudulently withdrawn from the plan. The TPA countersued for contribution and indemnification, alleging that the plan sponsor’s carelessness with cybersecurity protocols (including allowing an employee working remotely to use her personal email account for work) enabled the fraudulent withdrawal, making the plaintiffs liable for the losses. In affirmative defenses, the TPA and custodian asserted that the actions of the plan sponsor and one of its owners were the actual or more substantial cause of the plan’s losses. Consequently, the TPA and custodian denied liability for some or all of the losses and alternatively asserted that the plan sponsor and the owner were proportionally liable for the losses. Further, the custodian filed a third-party complaint asserting multiple causes of action against the perpetrators of the fraud. The plaintiffs sought dismissal of all counterclaims, affirmative defenses, and the third-party complaint.

Although some of the parties disputed their fiduciary status, the court assumed that all the parties (with the exception of the perpetrators of the fraud) were fiduciaries for purposes of this decision. Noting that lower courts in the Third Circuit have allowed claims of contribution and indemnity between cofiduciaries in the ERISA context based on traditional trust law principles, the court declined to dismiss these counterclaims. However, the court dismissed the TPA’s and custodian’s affirmative defenses, holding that breaching fiduciaries are jointly and severally liable for all losses resulting from a breach, and their joint and several liability cannot be reduced or eliminated by asserting that other fiduciaries more directly caused a plan’s losses. With respect to the third-party complaint, the court determined that ERISA claims against non-fiduciaries are permitted only if there is evidence that the non-fiduciaries knowingly participated in a prohibited transaction as a party in interest. Since the perpetrators of the fraud were not parties in interest with respect to the plan and litigating non-ERISA claims against the perpetrators would unduly complicate the case by introducing extraneous matters, the court dismissed the third-party complaint.

EBIA Comment: This case highlights the complexity of sorting out responsibility for fiduciary breaches when there may be blame to share. The courts are split as to whether a breaching fiduciary can seek indemnification or contribution from other fiduciaries who arguably are more culpable for a plan’s losses. Some courts (including the Eighth and Ninth Circuits) have disallowed such claims on the grounds that ERISA does not expressly provide for this remedy, while other courts (including the Second and Seventh Circuits) have permitted such claims as an appropriate application of trust law principles. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV (“ERISA Fiduciary Rules: Overview”) and XXXVII.H (“Claims for Breach of Fiduciary Duty”). See also EBIA’s ERISA Compliance manual at Sections XXVIII.B.7 (“Co-Fiduciary Responsibilities”), XXVIII.I (“Fiduciary Liability and Litigation”), and XXX.G (“Litigation Involving TPAs”).

Contributing Editors: EBIA Staff.

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