The Sixth Circuit recently issued a decision that commercial banks around the country will applaud. In McLemore v. EFS, Inc., Nos. 10-5480/5491, (6th Cir. June 8, 2012), the Court dismissed both ERISA and state law claims brought by former clients of an investment advisor who swindled millions of dollars from employee benefit plans, finding that Regions Banks –which held the client funds as the depository bank — was not a fiduciary.
By way of background, 1Point Solutions served as an investment advisor and third party administrator for a number of different ERISA plans. In furtherance of the business, 1Point opened a number of accounts at Regions Bank where it deposited client funds. To say the least, this enterprise was not on the up and up. Rather than create individual client accounts, 1Point pooled client funds in a variety of accounts held in the business’ name (on advice from Regions), thus permitting the company to freely transfer and embezzle funds. Eventually, this malfeasance came to light when 1Point went bankrupt, and plaintiffs discovered their money had vanished.
The trustee of the bankruptcy estate later sued Regions on behalf of 1Point’s clients, arguing that the bank was complicit in the fraud by failing to take action despite obvious warning signs. According to the trustee, Regions knew or should have known about the misuse of funds and thus should be held accountable under ERISA and state law.
Regions countered that (1) the trustee lacked standing to sue on behalf of the defrauded clients; (2) that it was not an ERISA fiduciary; and (3) ERISA preempted the state law claims. On the first point, the Sixth Circuit disagreed, finding that the trustee alleged the requisite control of plan assets to qualify as an ERISA fiduciary. As such, the trustee enjoyed statutory authority to bring a claim on behalf of the former clients. The court also rejected Regions’ claim that the doctrines of in pari delicto and unclean hands barred the trustee’s fiduciary status, finding that the trustee “stepped in to the shoes of the plan, rather than those of the criminal debtors.”
With respect to Region’s second two points, however, the Sixth Circuit agreed. First, the trustee failed to demonstrate that Regions exercised sufficient “authority or control” over the ERISA plan accounts to assume fiduciary status. The fact that Regions had custody of the accounts and advised 1Point on how to structure them did not amount to control. Likewise, that Regions collected routine fees from the accounts did not signify control. In short, the trustee could not point to any aspects of Regions’ management of the accounts that would confer fiduciary status and dismissed the ERISA claims accordingly.
Finally, the Court determined that the trustee’s various state law claims were preempted by operation of both ERISA and Tennessee’s Uniform Fiduciaries Act (“UFA”). The Court found that the UFA barred negligence claims against depository banks, the trustee could only proceed under an “actual knowledge” or “bad faith” standard, as to which an ERISA remedy was available. The Sixth Circuit thus affirmed the dismissal of the state law claims.
The case is significant because it narrowly construes the scope of ERISA fiduciary status in situations where a bank or other third party simply performs routine, non-discretionary functions involving plan assets.