In 2002, the Department of Labor (DOL) concluded that the trustees of an Ohio insurance company’s ESOP may have violated several ERISA provisions. The DOL took specific exception to the method used in the company’s annual valuations. After the plan paid $500,000 to correct the violations, the trustees (and the plan’s insurers) sued the valuation firm and its managing director in Ohio federal district court. Plaintiffs alleged state law claims of professional negligence and breach of contract as well as breach of ERISA fiduciary duties against the appraisers were based on the annual "valuation letters" they provided the ESOP from 1994 to 2002.

The trial court granted summary judgment on the ERISA claims in favor of the appraisers, but dismissed the state law claims without prejudice, permitting their refiling in state court. The appraisers appealed to the Sixth Circuit, which reexamined whether the "preemptive force" of the federal ERISA statute precludes the pursuit of state claims.

Appraisers are not ESOP fiduciaries

"It is important to note, at the outset, the district court’s uncontested determination that [the appraisers] are not fiduciaries relative to the ESOP or its beneficiaries," the Court stated. "[T]hat conclusion drives much of our analysis." Sixth Circuit decisions have consistently held that ERISA does not preempt state claims of malpractice or misrepresentation against non-fiduciary professional service providers such as attorneys, life insurance brokers, banks, actuaries, and other outside consultants. Federal courts of appeals have held likewise regarding professional entities acting in a non-fiduciary capacity related to the ESOP.

The appraisers tried to distinguish this case from precedent. Because ESOP mandated the valuation they performed, they argued that federal law preempted any state law claims against them arising out of their work. "[B]oth the fiduciary duties of [plaintiffs] and the valuation criteria at issue are expressly set forth by ERISA," they pointed out.

But the plaintiffs’ ERISA-imposed duties "are largely irrelevant for the…purposes here," the Court held, "as this case does not involve a claim against plaintiffs for breach of their fiduciary duties." The DOL’s letter to the ESOP trustees did not speak to any obligations imposed upon the appraisers in their valuations. Rather, it referenced the plaintiffs’ "failure to obtain annual independent appraisals that properly determine the fair market value" of the stock. The DOL’s concern arose from the plaintiffs’ possible breach of their fiduciary duties, not the appraisers’.

A malpractice claim by any other name

In a last attempt, the appraisers asserted that a resolution of the state law claims would require evaluation of ERISA and the ESOP. "However, they point to no provisions of ERISA or the ESOP that could conceivably underlie plaintiffs’ suit," the Court said. Indeed, the basis for plaintiffs’ claims was their service agreements with the appraisers for the annual valuation services, which were completely independent of the ESOP terms. Similarly, the appraisers’ obligations as CPAs gave rise to the plaintiffs’ professional negligence claim, "which is simply a malpractice claim by another name." These state law claims are entirely distinct from those arising under ERISA, and thus, the federal regulatory scheme does not shield appraisers from potential liability.