Our September 2009 and November 2008 Newsletters discussed earlier rulings in the Noll ESOP litigation. This litigation involves exigent circumstances in which the CEO/fiduciary was alleged to have looted the ESOP by setting his compensation at $34.8 million, or two-thirds of the company’s total value. In those earlier rulings the courts held that, at least under these extreme facts, the setting of executive compensation was an ERISA fiduciary function, and that the remaining company assets could not be used to indemnify the costs of defense since this payment was effectively being made from plan assets (the assets were being held in escrow to distribute to the ESOP pending the indemnification ruling).

In the latest ruling in this litigation, in Stanton v. Couturier, Case No. 2:09-cv-00519 (E.D. Cal. Dec. 16, 2009), the district court addressed whether a non-fiduciary, non party in interest’s compensation agreement could be a prohibited transaction under ERISA. The defendant was Bruce Couturier, the brother of Claire Couturier, who was the one accused of looting the ESOP by paying himself the excessive compensation. The court agreed that Bruce was not a fiduciary or party-in-interest at the time Bruce’s compensation was set. The court nonetheless held that his compensation could be a prohibited transaction because it was allegedly paid so that Bruce would support Claire in his alleged scheme to defraud the ESOP, and thus was paid to “ultimately benefit” the fiduciary, Claire.

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Under the “ultimate benefit” reasoning applied by the court, the lines defining when a person is a fiduciary or a party-in-interest are obliterated. It does not take much creativity to allege that a subordinate took actions to curry favor with his boss. Under the reasoning applied in this case, the subordinate’s pay could be deemed to be a prohibited transaction if that boss is a fiduciary. There is reason to expect, however, that the rulings in the Noll ESOP litigation will be limited by their extreme facts.