Court: Non-Fiduciary State Lawsuit not ERISA Barred

March 7, 2005 ( - A federal appeals court has thrown out part of a lower court's ruling that a Ohio company's state law claims against its employee stock ownership plan's (ESOP) recordkeeper were preempted by federal law.

>In throwing out part of the ruling from the US District Court for the Southern District of Ohio, the US 6 th Circuit Court of Appeals sent back for more hearings the allegations by employer Penny/Ohlmann/Nieman, a Dayton-based marketing and advertising company, against Miami Valley Pension Corp. (MVP), a Dayton-based TPA. MVP served as the recordkeeper and the broker of the life insurance policies held as assets for the Penny/Ohlmann/Nieman’s defined benefit plan and ESOP, according to the appeals ruling.

Circuit Judge Karen Nelson Moore, in writing for the appeals court panel, ruled that the employer’s claims against MVP were not barred by the Employee Retirement Income Security Act (ERISA), while Penny/Ohlmann/Nieman’s allegations against National City Bank (NCB) as trustee and recordkeeper for the Penny/Ohlmann/Nieman’s savings plan were prohibited by the federal statute.

Wrote Moore in the ruling, MVP “was simply a third-party service provider and its record-keeping services were no different than the consulting, custodial, actuarial, or legal services provided to ERISA plans in which the courts have found state-law causes of action to lie.”

MVP did not serve as a fiduciary to any of the employer’s three plans, the court said. MVP’s sole relationship with the employer was as a nonfiduciary service provider, charged with performing recordkeeping services for the ESOP pursuant to an oral agreement, the court added. The court noted that although the 6th Circuit has not yet addressed the issue, other courts of appeals have held that ERISA does not preempt state law claims brought against nonfiduciary service providers in connection with professional services rendered to an ERISA plan.

According to the ruling, Penny/Ohlmann/Nieman discovered in 1998 that the underlying value of the plans’ insurance policy had been incorrectly valued and that when it was properly valued, the ESOP and the savings plan would be considered top heavy. As a result of the miscalculation, the employer was fined $5,000, was required to make a minimum contribution of $137,087, and incurred additional expenses of $35,000, totaling $177,087.

The employer sued NCB for breach of fiduciary duty as a trustee under ERISA and both NCB and MVP for breaching their service contracts and negligently misrepresenting their ability to operate the plans. The lower court threw out the claims against both defendants.

The ruling in Penny/Ohlmann/Nieman Inc. v. Miami Valley Pension Corp is  here .