STATE LAW BREACH OF FIDUCIARY DUTY CLAIMS MAY NOT BE PREEMPTED BY ERISA IF THE DEFENDANT IS NOT AN ERISA FIDUCIARY UNDER THE PLAN

In April 2010, the United States District Court for the Eastern District of Pennsylvania issued an opinion expanding the potential liabilities for ERISA plan advisers who are found not to be fiduciaries under the plan. In Nagy v. De Wese, the plaintiff brought suit against three defendants in part for breach of fiduciary duty under ERISA, unjust enrichment and breach of fiduciary duty under state law. 2010 WL 1375414, at *1 (E.D. Pa. Apr. 7, 2010). One of the defendants, Smith Barney, moved to dismiss the plaintiff’s state law breach of fiduciary duty claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting that the plaintiff’s state law claim was preempted by ERISA.

In its opinion, the Eastern District offered a detailed analysis of ERISA Section 514(a), which provides that the Act preempts—with certain exceptions—“any and all State laws insofar as they may now or hereafter relate to any other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” (emphasis added). Smith Barney argued that the language of Section 514(a) preempted the plaintiff’s state law breach of fiduciary duty claim because it “related to” an “employee benefit plan” within the meaning of Section 514(a). Significantly, the plaintiff admitted that his state law breach of fiduciary duty claim was preempted if Smith Barney was found to be an ERISA fiduciary. However, the plaintiff asserted that his state law claim was merely an alternative pleading to support recovery if Smith Barney was found not to be an ERISA fiduciary by the court. In response, Smith Barney argued that whether it was an ERISA fiduciary or not was irrelevant to whether the plaintiff’s state law breach of fiduciary duty claim “related to” the plan at issue.

Contrary to Smith Barney’s argument, the Eastern District of Pennsylvania relied upon the Third Circuit’s holding in Glaziers and Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Securities, Inc. in finding that in some instances, ERISA fiduciary status may in fact affect whether a state law claim is preempted. In Glaziers, the Third Circuit Court of Appeals recognized that if a defendant is found not to be an ERISA fiduciary, there is still “room to argue that any fiduciary duty [the defendant] may have had…arises under state law and does not ‘relate to,’ but only ‘affects and involves' an ERISA plan. That is, the state law claim may not relate to the administration of an employee benefit plan at all.”

With Glaziers in mind, the Eastern District analyzed the plaintiff’s state law breach of fiduciary duty claim as follows:

"Unlike plaintiff’s allegations that Smith Barney breached fiduciary duties owed to the Plan, which involve duties owed under state law by virtue of the Plan’s status as Smith Barney’s customer, and not as an ERISA plan, the allegations that Smith Barney breach fiduciary duties owed to the Plan’s participants depend on the existence of, and Smith Barney’s knowledge of, the Plan. Because the existence of the Plan and Smith Barney’s knowledge of the Plan are essential elements of the state law breach of fiduciary duty claim to the extent that the claim alleges breach of duties owed to the Plan’s participants, that claim is preempted."

Relying on Glaziers, the Eastern District ultimately granted in part and denied in part Smith Barney’s Rule 12(b)(6) motion to dismiss. Specifically, the court held that the plaintiff’s state law breach of fiduciary duty claim was preempted to the extent it sought to recover for Smith Barney’s breach of fiduciary duties owed to the plan participants. However, the plaintiff’s breach of fiduciary duty claim was not preempted to the extent that it sought to recover for Smith Barney’s breach of fiduciary duties owed to the plan itself if Smith Barney was determined not to be an ERISA fiduciary.

The Eastern District of Pennsylvania’s holding in Nagy v. De Wese leaves open the possibility that an ERISA plan adviser may incur fiduciary liability for its conduct with regard to an ERISA plan even though that adviser is not an ERISA fiduciary under the plan.

A copy of the Nagy v. De Wese opinion can be found here.