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Kaufman & Canoles Fiduciary Liability of Successor ESOP Trustees The ESOP Association 2011 Las Vegas Conference & Trade Show November 4, 2011 9:00 – 10:15.

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Presentation on theme: "Kaufman & Canoles Fiduciary Liability of Successor ESOP Trustees The ESOP Association 2011 Las Vegas Conference & Trade Show November 4, 2011 9:00 – 10:15."— Presentation transcript:

1 Kaufman & Canoles Fiduciary Liability of Successor ESOP Trustees The ESOP Association 2011 Las Vegas Conference & Trade Show November 4, :00 – 10:15 a.m. Robert E. Brown Gregory K. Brown Richard C. Mapp Schatz Brown Glassman Kossow LLP Katten Muchin Rosenman LLP Kaufman & Canoles, P.C

2 Background Trustee #1 is removed by Company A Board of Directors and Trustee #2 is appointed as the successor trustee. What liabilities for actions by Trustee #1 is Trustee #2 exposed to and under what circumstances? What should Trustee #2 do to minimize its exposure?

3 Relevant Statutes ERISA Section 409(b): “No fiduciary shall be liable with respect to a breach of fiduciary duty under Title I of ERISA, if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.”

4 Relevant Statutes ERISA Section 405(a)(3): “…a fiduciary shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan…if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.”

5 Relevant Statutes So which provision really applies to a successor trustee: section 409(b) or 405(a)(3)? Section 409(b) expressly applies to a successor fiduciary Section 405(a)(3) language applies to a co- fiduciary: can predecessor/successor fiduciaries be co-fiduciaries? Legislative history unclear on these points

6 Regulatory Interpretations No DOL regulations issued for either statute ERISA Advisory Opinion 76-95, provides that section 409(b) of ERISA does not provide protection to a successor trustee who knows of a breach and fails to take reasonable steps to remedy the breach. Confirmed in ERISA Advisory Opinions 77-79, A. Consistent with common law of trusts

7 Case Law Fernandez v. K-M Industries Holding Co., Inc. Court refused to dismiss ESOP participants’ action against successor trustee where participants alleged that successor trustee knew of breach by predecessor trustee but failed to take reasonable steps to remedy breach by the predecessor trustee. Court gave deference to DOL Opinion Letter

8 Case Law Stephens v. US Airways Group Court approved the view that section 405 of ERISA governs liability where a plan has multiple fiduciaries at one time. Also stated that section 409(b) does not always protect a successor trustee from acts of predecessor, such as where predecessor’s breach continues to have effect on beneficiaries during the term of successor trustee.

9 Actions to Take Successor trustee should carefully review actions of predecessor trustee before accepting appointment After successor accepts appointment, careful scrutiny of predecessor actions needed to assess whether corrective/remedial action needs to be taken Must assess risk of being second-guessed by participants and/or DOL Must also work closely with independent appraiser and attorneys

10 Practical Issues and Concerns (Issues Arising from Experience) What happens if you can’t find a new willing trustee? Can the new trustee contractually avoid the responsibility to examine the actions of a prior trustee and potentially bring an action against that trustee? Can a court issue an order in a legal proceeding that protects a trustee who is appointed by the court?

11 Practical Issues and Concerns (cont.) How can a successor trustee effectively obtain effective liability insurance? Does it matter whether the trustee is directed or discretionary?


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