Sixth Circuit Holds That ERISA Preempts State Law Claims Against Nonfiduciary Plan Custodian

Author:Goodwin Procter's ERISA Litigation Practice
Profession:Goodwin Procter LLP
 
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In McLemore v. Regions Bank, No. 10-5480 (6th Cir. June 8, 2012), a divided panel of the U.S. Court of Appeals for the Sixth Circuit ruled that ERISA preempted state law claims brought against a custodian that allegedly failed to prevent a plan fiduciary from stealing plan funds.

In McLemore, a third-party administrator (the "TPA") for a number of ERISA plans directed the plans to send funds to depository accounts with a bank (the "Bank") that were held in the name of the TPA. Over a four-year period, the TPA effectively stole over $19 million from these accounts through numerous withdrawals and transfers. After the TPA became bankrupt and its theft of the plans' funds was discovered, the trustee of the TPA's bankruptcy estate sued the Bank on behalf of the plans in federal district court, asserting fiduciary claims under ERISA § 502(a)(2) as well as claims under state law. On the Bank's motion, the district court dismissed both sets of claims, ruling that the complaint failed to allege adequately that the Bank was an ERISA fiduciary and that the state law claims were preempted by ERISA. On appeal, the Sixth Circuit (in an opinion authored by Judge Cook) affirmed the district court ruling in a 2 – 1 decision that addressed four issues.

First, the Court of Appeals determined that the trustee of the TPA's bankruptcy estate had standing as a fiduciary to bring claims on behalf of the plans under ERISA § 502(a)(2). In this regard, the court concluded that the bankruptcy trustee had adequately pleaded its fiduciary status, in light of the complaint's allegations that – as "successor fiduciary" of the TPA – the bankruptcy trustee exercised control over assets of the plans.

Second, the Sixth Circuit rejected the Bank's arguments that, because the bankruptcy trustee asserted it was "step[ping] into the shoes of [the TPA]" to sue as fiduciary, its claims should be barred by the equitable doctrines (in pari delicto and unclean hands) that in certain situations prevent culpable parties from bringing suit. The court emphasized that, in suing on behalf of the plans, the bankruptcy trustee was "stepping into the shoes of the plans" and was not attempting to recover funds for the TPA's bankruptcy estate.

Third, the court affirmed the dismissal of the ERISA fiduciary claims against the Bank, agreeing with the district court's conclusion that, under the complaint's allegations, the Bank was not an ERISA fiduciary of the plans. In this regard, the complaint alleged:...

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