Pursuing a claim for breach of fiduciary duty against an individual necessarily involves the claimant establishing that the individual’s breach was committed while acting in his or her fiduciary capacity. In a recent case against an employee stock ownership plan (ESOP) trustee, the plaintiffs failed to make that case.

In 2003, the defendant in the aforementioned case incorporated a new company, National Financial Systems Management, Inc. (NFSM), and the NFSM board of simultaneously created an ESOP. All of NFSM’s stock was held by the ESOP, and the defendant was designated as the ESOP trustee. NFSM’s revenue came in the form of “management fees” paid by two other companies owned by defendant. In 2007 and 2008, NFSM purchased those two other companies from the defendant. The purchase price for the two companies was paid in part by the issuance of promissory notes. In 2009, the defendant entered into “default agreements” with NFSM, under which NFSM acknowledged it was in default on the outstanding promissory notes. NFSM then transferred the stock of the two companies back to defendant. The defendant did not refund any payments made by NFSM for the two companies and subsequently sold those two companies to a third party.

The plaintiffs commenced a lawsuit alleging, among other things, that the defendant breached his fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). The court dismissed the fiduciary duty claim. First, the court noted that the plaintiffs alleged that the defendant took part in or sanctioned in some way NFSM’s purchase of the two companies as CEO of NFSM. To whatever extent the defendant was involved in the transaction as a buyer on the NFSM side, the court concluded that the defendant participated as an agent for NFSM, and was thus acting as an employer. Second, ERISA fiduciary duties attach only to transactions that involve investing the ESOP’s assets or administering the ESOP. The defendant, in his role as seller, did not make any decision with respect to the ESOP; he merely offered up assets for sale to NFSM and received the purchase price.

Therefore, to the extent that the plaintiffs challenge the defendant’s involvement as seller of the two companies purchased by NFSM, the court ruled that the transaction is not governed by ERISA. The same reasoning applies to the defendant’s alleged participation in NFSM’s decision to transfer the two companies back to defendant via default agreement. (Middleton v. Stephenson, D. Utah 2012)