9th Circuit Decision Emphasizes The Importance of Adequate ERISA Fiduciary Insurance

Just catching up on my summer reading here and getting some new posts on the blog.

Over the summer the 9th Circuit of the U.S. Court of Appeals handed down a scathing rebuke to the fiduciaries of an Employee Stock Ownership Plan, most of whom also served as directors and officers of the company 100% owned by the ESOP. In summary the fiduciaries had an agreement with the company that it would advance defense costs to any claim made against them for breach of fiduciary duty to the ESOP. In 2004 the company bought out a former owner's large block of stock options and paid him significant deferred compensation. Several current and former ESOP participants sued alleging the stock options and deferred compensation arrangements violated ERISA's standards of prudent conduct. The Department of Labor took an interest in the case early on and now the 9th Circuit has upheld a district court injunction against the company barring it from advancing any defense costs. Among other things the decision seems to underscore the view held by some that if an ESOP owns 100% of a company the distinction between the legal roles and exposures of the fiduciaries of the ESOP and the directors and officers of the company are practically indistinguishable.

Decision is posted here: http://www.ca9.uscourts.gov/datastore/opinions/2009/07/27/08-17369.pdf