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August 5, 2004.

JOHN DANIELS, et al., and similarly situated individuals, Plaintiffs,
WAYNE BURSEY, et al., Defendants.

The opinion of the court was delivered by: MATHEW KENNELLY, District Judge


This case concerns the marketing and administration of a "severance trust executive program" (STEP) plan, a type of employee welfare benefit plan targeted to employers with highly compensated employees. John Daniels and Manuel Sanchez, along with other partners and employees of the Chicago-based Sanchez & Daniels law firm, and on behalf of a putative class of STEP Plan investors, sued Step Plan Services, Inc., its principals and predecessors (referred to in this litigation as the "Administrative Defendants"), and several insurance companies (including Prudential Insurance Company and its agent Thomas Murphy), alleging that the defendants violated the Employee Retirement Income Security Act (ERISA), the Illinois Consumer Fraud Act, the Racketeer Influenced and Corrupt Organizations Act (RICO), and their common law duty of care. The various defendants have filed two rounds of motions to dismiss that were granted in part and denied in part. The Court declined to dismiss the ERISA, breach of duty of care and RICO claims against the Administrative Defendants. The Court also allowed the plaintiffs to proceed on their fraud claim against the insurance companies as well as their claim that the insurance companies knowingly participated in the Administrative Defendants fiduciary breach. For a detailed factual background of the case, see Daniels v. Bursey, 313 F. Supp. 2d 790 (N.D. Ill. 2004).

The Administrative Defendants have filed a cross-claim against Prudential and Murphy seeking indemnification or contribution under New York or Illinois law in the event that the Administrative Defendants are found liable for conduct in which Prudential or Murphy participated or from which they benefitted. In particular, the Administrative Defendants argue they are entitled to indemnification or contribution from Prudential and Murphy if they are found liable for misrepresentations that Prudential and Murphy made in marketing the STEP Plan or changing STEP Plan documents for Prudential's benefit. Prudential and Murphy have moved to dismiss the cross-claim, arguing that because the Court has already found the Insurance Companies were not fiduciaries, the Administrative Defendants have no right to indemnification under ERISA or state law. For the reasons stated below, the Court denies in part and grants in part Prudential and Murphy's motion to dismiss the cross-claim.


  The plaintiffs' allegations regarding changes made to the STEP Plan documents and misrepresentations made by Prudential and Murphy in marketing the Plan involve the Administrative Defendants only in the context of Count 2, which alleges the Administrative Defendants violated ERISA or, in the alternative, a common law duty of care, or Counts 6 and 8, which allege the Administrative Defendants violated RICO and conspired to commit a RICO violation. The Court has a difficult time seeing how the Administrative Defendants could be found liable for Prudential or Murphy's conduct, which is the subject of Counts 2 and 5. But when considering a motion to dismiss for failure to state a claim upon which relief can be granted, the Court reads the complaint liberally, granting the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted). At this point in the litigation, the Court cannot say that there is no set of facts under which the Administrative Defendants could be held liable for Prudential and Murphy's conduct.

  But saying the Administrative Defendants could be held liable for Prudential and Murphy's conduct does not mean the Administrative Defendants can seek indemnification or contribution from them. The Administrative Defendants argue that they are entitled to indemnification or contribution under New York law. They maintain New York law applies because the STEP Plan documents contained a choice of law provision electing New York law. Prudential and Murphy argue that the Administrative Defendants do not have a right to indemnification or contribution under either New York or Illinois law. But what both parties miss entirely is that the Administrative Defendants' right to indemnification or contribution on the federal claims is, in the first instance, an issue of federal law.*fn1

  The Seventh Circuit has stated that "[w]here contribution is sought by one who has had to pay damages for violating a federal statute, the scope and limitations of the right of contribution are invariably treated as questions of federal rather than state law." Donovan v. Robbins, 752 F.2d 1170, 1179 (7th Cir. 1985) (citations omitted). The court derived this rule from the legislative history of ERISA, explaining that "it [is] extremely unlikely that Congress would have wanted ERISA fiduciaries to be subject to the vagaries of state contribution law — a body of law so various, mutable, complex, and uncertain that its application to ERISA fiduciaries might well result in subjecting them to inconsistent duties and a risk of multiple liability. ERISA fiduciaries are entitled to a uniform nationwide rule (we realize that such a rule may not emerge till the Supreme Court decides the question)." Id. at 1180. There is no basis to believe that the general rule that federal law governs the right of contribution for damages assessed for violating federal statutes is restricted to ERISA violations. Cf. Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630 (1981) (analyzing right of contribution under Sherman and Clayton Acts as a matter of federal law); Musick, Peeler & Garrett v. Employers Insurance of Wausau, 508 U.S. 286 (1993) (analyzing contribution in SEC Rule 10b-5 action as a matter of federal law). Thus the Administrative Defendants' right to seek indemnification or contribution if they are found to have violated ERISA or RICO depends on whether federal law creates a right of indemnification or contribution for ERISA and RICO violations.

  Right to contribution or indemnification under ERISA

  First, we consider what, if any, right to contribution exists for a fiduciary found liable for damages under ERISA. The Seventh Circuit has held that "where an ERISA plan suffers losses and where the plan participants and beneficiaries have established a cause of action on their own behalf or on behalf of the plan assets against one fiduciary, that fiduciary may seek indemnification or contribution from co-fiduciaries in accordance with 29 U.S.C. § 1105(a)." Alton Memorial Hospital v. Metropolitan Life Insurance Co., 656 F.2d 245, 250 (7th Cir. 1981). The court reasoned that "Congress intended to protect trustees from being ruined by the actions of their cofiduciaries, both because the language of ERISA provides protection for co-trustees and because Congress evidenced an intent to apply general trust principles to the trustee provisions of ERISA." Free v. Briody, 732 F.2d 1331, 1337 (7th Cir. 1984). But the Seventh Circuit has since indicated that the right to contribution under ERISA is "still unsettled," Lumpkin v. Envirodyne Industries, Inc., 933 F.2d 449, 464 n. 10 (7th Cir. 1991), and the circuits have split on the issue.

  The Ninth Circuit has rejected the right to contribution under ERISA, reasoning that because the Supreme Court has said § 409 of ERISA provides remedies only for the benefit of the plan, it "cannot be read as providing for an equitable remedy of contribution in favor of a breaching fiduciary." Kim v. Fujikawa, 871 F.2d 1427, 1432 (9th Cir. 1989) (emphasis in original; citing Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 141-42 (1984) and Call v. Sumitomo Bank, 689 F. Supp. 1014, 1017-20 (N.D. Cal. 1988)). In denying contribution under ERISA, the court also relied on Texas Industries, in which the Supreme Court held there is no right to contribution under the Sherman or Clayton Acts because allowing for contribution would undermine the punitive design of the treble damages remedy for antitrust violations. The Ninth Circuit concluded that "implying a right of contribution is particularly inappropriate where, as in this case, the party seeking contribution is a member of the class [e.g., fiduciaries] whose activities Congress intended to regulate for the protection and benefit of an entirely distinct class [e.g., ERISA plans], and where there is no indication in the legislative history that Congress was concerned with softening the blow on joint wrongdoers." Id. at 1433 (internal quotation marks omitted; citing Texas Industries, 451 U.S. at 639).

  But analyzing the same cases, the Second Circuit has concluded that "the traditional trust law right to contribution must also be recognized as a part of ERISA." Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12, 16 (2d Cir. 1991). The court first noted that "[t]he Supreme Court has left no doubt that courts are to develop a federal common law of rights and obligations under ERISA-regulated plans." Id. at 16 (internal quotation marks omitted; citing Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 110 (1989)). The court further explained that the Supreme Court

has stated: "ERISA abounds with the language and terminology of trust law. . . . ERISA's legislative history confirms that the Act's fiduciary responsibility provisions, 29 U.S.C. §§ 1101-1114, `codify and make applicable to ERISA fiduciaries certain principles developed in the evolution of the law of trusts.'" We thus hold that the federal courts have been authorized to develop a federal common law under ERISA, and in doing so, are to be guided by the principles of traditional trust law.
Id. (quoting Firestone, 489 U.S. at 110; other citations omitted). The court concluded that fiduciaries have a right to contribution from co-fiduciaries under ERISA because "indisputably," "the right of contribution among co-trustees has been for over a century, and remains, an integral and universally-recognized part of trust doctrine." Id. (citing Restatement (second) of Trusts § 258 (1959), G. Bogert, Law of Trusts and Trustees, § 701 (rev. 2d ed. 1982)).

  The court said that Texas Industries and Northwest Airlines, Inc. v. Transport Workers Union of America, 451 U.S. 77 (1981), in which the Supreme Court rejected the right to contribution under the Equal Pay Act and Title VII, were distinguishable.

Although it rejected the authority of the federal courts to develop a federal common law under the antitrust laws, Title VII, and the Equal Pay Act, the Supreme Court drew a sharp contrast with other areas of the law, such as admiralty and labor relations, where our power to fashion rules of federal common law is well established. Just as with the Labor Management Relations Act, under ERISA, both the legislative history and the statute itself clearly contemplate development of a federal common law. Thus, Texas Industries and Northwest are not impediments to our holding that, under ERISA, a federal common law, including the traditional trust concept of a right to contribution, is appropriate.
Chemung Canal Trust, 939 F.2d at 17. Similarly, the court found Russell was not dispositive because "the decision in Russell did not discuss the availability of federal common ...

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