Court Upholds Validity Of ERISA Fiduciary Indemnification

Ruling rejects DOL challenge of an agreement by a 100% ESOP-owned company to advance defense costs and indemnify a trustee.

On March 15, the U.S. District Court for the Central District of California issued an order in Harris v. GreatBanc Trust Co. dismissing, without leave to amend, a claim brought by the U.S. Department of Labor (DOL) to invalidate a defense and indemnification agreement between an ESOP trustee and the company sponsor of the ESOP.1 The DOL's position was that the agreement violated section 410(a) of ERISA, which states that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy." The court rejected this argument and upheld the validity of the agreement. This ruling is very important because if the DOL position had been upheld and ESOP trustees could not be defended or indemnified if a claim were brought against them, then few, if any, professional trust companies or private individuals would be willing to serve as ESOP trustees.

Facts

The DOL sued the ESOP trustee and the plan sponsor company in connection with a transaction under which the ESOP became the 100% owner of the company's stock. The ESOP trustee's engagement agreement with the company contained a defense and indemnification provision. Because the terms were important to the court's decision, the entire provision is set forth below:

For purposes of this Section 14, the term "Indemnitees" shall mean [the ESOP trustee] and its officers, directors, employees, and agents. Subject to the applicable provisions of ERISA, [the plan sponsor company] shall indemnify the Indemnitees for any loss, cost, expense or other damage, including attorney's fees, suffered by any of the Indemnitees resulting from or incurred with respect to any legal proceedings related in any way to the performance of services by any one or more of the Indemnitees pursuant to this Agreement, the Plan or the Trust. The indemnification provided for in this Section 14 shall include, but not be limited to: (a) any action taken or not taken by any of the Indemnities at the direction or request of [the plan sponsor company], any agent of [the plan sponsor company], or any committee or fiduciary under the Plan or Trust; and (b) all costs and expenses incurred by the Indemnitees in enforcing the indemnification provisions of this Section 14...