UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT - PDF document

UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT üGREGORY JOHNSON; WILLIAMRODWELL; EDWARD RANGEL; KELLYMORRELL,Plaintiffs-Appellees,andDARLEEN STANTON,Plaintiff,ROORDA PIQUET & BESSEE, INC.,Non-party appearing witness,Witness,v.CLAIR R. COUTURIER, JR.,No. 08-17369Defendant,D.C. No.ýDAVID R. JOHANSON; NOLL2:05-cv-02046-MANUFACTURING COMPANYRRB-GGHEMPLOYEE STOCK OWNERSHIPPLAN AND TRUST; PENSCO, INC.;JOHANSON BERENSON LLP; THEEMPLOYEE OWNERSHIP HOLDINGCORPORATION, Employee StockOwnership Plan; N & NWMANUFACTURING HOLDINGCOMPANY, INC.; NOLLMANUFACTURING COMPANY,Defendants,andROBERT E. EDDY,Defendant-Appellant.þ üGREGORY JOHNSON; WILLIAMRODWELL; EDWARD RANGEL; KELLYMORRELL,Plaintiffs-Appellees,andDARLEEN STANTON,Plaintiff,ROORDA PIQUET & BESSEE, INC.,Non-party appearing witness,Witness,v.CLAIR R. COUTURIER, JR.,No. 08-17373Defendant,D.C. No.ýROBERT E. EDDY; NOLL2:05-cv-02046-MANUFACTURING COMPANYRRB-GGHEMPLOYEE STOCK OWNERSHIPPLAN AND TRUST; PENSCO, INC.;JOHANSON BERENSON LLP; THEEMPLOYEE OWNERSHIP HOLDINGCORPORATION, Employee StockOwnership Plan; N & NWMANUFACTURING HOLDINGCOMPANY, INC.; NOLLMANUFACTURING COMPANY,Defendants,andDAVID R. JOHANSON,Defendant-Appellant.þ JOHNSON v. COUTURIER üGREGORY JOHNSON; WILLIAMRODWELL; EDWARD RANGEL; KELLYMORRELL,Plaintiffs-Appellees,andDARLEEN STANTON,Plaintiff,ROORDA PIQUET & BESSEE, INC.,Non-party appearing witness,Witness,v.No. 08-17375CLAIR R. COUTURIER, JR.,D.C. No.Defendant-Appellant,ý2:05-cv-02046-andRRB-GGHROBERT E. EDDY; DAVID R.JOHANSON; NOLL MANUFACTURINGCOMPANY EMPLOYEE STOCKOWNERSHIP PLAN AND TRUST;PENSCO, INC.; JOHANSON BERENSONLLP; THE EMPLOYEE OWNERSHIPHOLDING CORPORATION, EmployeeStock Ownership Plan; N & NWMANUFACTURING HOLDINGCOMPANY, INC.; NOLLMANUFACTURING COMPANY,Defendants.þ JOHNSON v. COUTURIER üGREGORY JOHNSON; WILLIAMRODWELL; EDWARD RANGEL; KELLYMORRELL,Plaintiffs-Appellees,andDARLEEN STANTON,Plaintiff,ROORDA PIQUET & BESSEE, INC.,Non-party appearing witness,Witness,No. 08-17631v.D.C. No.CLAIR R. COUTURIER, JR.,2:05-cv-02046-Defendant-Appellant,ýRRB-GGHandOPINIONROBERT E. EDDY; DAVID R.JOHANSON; NOLL MANUFACTURINGCOMPANY EMPLOYEE STOCKOWNERSHIP PLAN AND TRUST;PENSCO, INC.; JOHANSON BERENSONLLP; THE EMPLOYEE OWNERSHIPHOLDING CORPORATION, EmployeeStock Ownership Plan; N & NWMANUFACTURING HOLDINGCOMPANY, INC.; NOLLMANUFACTURING COMPANY,Defendants.þAppeal from the United States District Courtfor the Eastern District of CaliforniaRalph R. Beistline, District Judge, PresidingArgued and SubmittedMay 7, 2009ÐSan Francisco, California JOHNSON v. COUTURIER Before: Procter Hug, Jr., Michael Daly Hawkins, andRichard C. Tallman, Circuit Judges.Opinion by Judge TallmanJOHNSON v. COUTURIER Theodore M. Becker (argued), Thomas M. Peterson, JosephE. Floren, and Elizabeth A. Frohlich, Morgan, Lewis & Bock-ius LLP, for appellant Clair R. Couturier, Jr.Christopher J. Rillo, Lars C. Golumbic, and Dipal A. Shah,Groom Law Group Chartered, for appellant David R. Johan-son.Gary D. Greenwald (argued), Ron Kilgard, and Gary A.Gotto, Keller Rohrback, PLC, and Terence J. Devine, Devine,Markovits & Snyder, LLP, for the appellees.Carol A. De Deo, Deputy Solicitor of Labor, Timothy D.Hauser, Associate Solicitor, Plan Benefits Security Division,Elizabeth Hopkins (argued), Counsel for Appellate and Spe-cial Litigation, and Robyn M. Swanson, Trial Attorney, U.S.Department of Labor, for the Secretary of Labor as amicuscuriae supporting appellees.OPINIONTALLMAN, Circuit Judge:In his capacity as president of Noll Manufacturing Com-pany (together with his fellow directors, diverted almost $35 million JOHNSON v. COUTURIER even in Couturier's own estimationÐto his own possessionthrough the buyout of deferred compensation agreements.Plaintiffs, all of whom are participants in Noll's employeestock ownership plan (and two other directors alleging, ciary duties under the Employee Retirement Income SecurityAct of 1974 (whether the district court abused its discretion when itenjoined advancement of defense costs and froze Couturier'sassets. We conclude that the district court did not abuse itsdiscretion, but remand to allow the district court, in the firstinstance, to set the terms and conditions of a surety bond suf-ficient to secure Couturier and the other defendants againstany harm that might wrongfully befall them as a result of theissuance of each injunction.IANoll, a closely held corporation founded in 1942, manufac-tured and sold galvanized sheet metal products. Throughrestructuring, Noll was succeeded first by N&NW HoldingCompany (Ownership Holding Company (Noll's founder, who died in 1980, established the ESOP in1977 to give the company's employees an opportunity toshare in its success. His will reflects an intent that the ESOPown the entire company. However, for reasons we cannot dis-cern from the record, the ESOP did not acquire full ownershipof Noll until 2001.Clair R. Couturier, Jr., became President of Noll in 1999.Noll's Board of Directors designated Couturier the soletrustee for the ESOP as of April 24, 2001. Attorney David R.Johanson, who had previously represented the ESOP in con-JOHNSON v. COUTURIER stock, was appointed a Noll director on June 20, 2001, joiningCouturier and Noll's general counsel on the Board. However,after the transfer of ownership to N&NW later that year, Cou-turier and Johanson remained as the sole directors.This litigation traces its genesis to the sizeable deferredcompensation awarded to Couturier during his tenure as presi-dent of Noll and its successors. Prior to 2001, retired Nollexecutives were entitled to continue receiving 75 percent oftheir base salary, with an adjustment made every three years,under a Compensation Continuation Agreement (2001, however, Johanson drafted three documents that tieddeferred executive compensation to company value: (1) anEquity Incentive Plan (option plan for key management personnel; (2) an IncentiveStock Option Agreement (shares at a strike price of $34;Incentive Plan (At the time these plans were enacted, one director reportedlyopined that this nonetheless approved by the Board on June 13, 2001.2After the reorganization of Noll under N&NW, Johansonand Couturier, remaining as the sole directors, orchestratedadditional incentive agreements in February 2002. The 2002EIP allowed for issuance of up to 110,000 shares, with nomore than 93,500 shares being awarded to a single grantee.The 2002 ISO again granted to Couturier 80,000 shares at astrike price of $34 per share. The 2002 VEIP created addi-tional synthetic equity for Couturier. Couturier and Johanson1issuance of only 50,000 shares, with a grant to any single employee notexceeding 25,000 shares. 2Couturier, voted to approve these compensation programs, one directorlater claimed that he had abstained from the vote. JOHNSON v. COUTURIER percent and enacted a Supplemental Executive RetirementPlan providing additional deferred compensation.3The advent of 2003 heralded further expansion of Couturi-er's compensation. That year, Couturier and Johansonapproved a retroactive annual cash bonus to Couturier equal-ing ten percent of the dollar amount of external debt repaid oncertain loans. Some of these loans were refinanced later thatsame year. N&NW then purchased a $5.5 million home (Palm Desert homebership in Palm Desert, California, for Couturier's personaluse.After unsuccessful negotiations with Alliance Holdings,Inc. for the acquisition of N&NWÐduring which the value ofCouturier's interest in the company became a point ofcontentionÐCouturier and Johanson appointed Couturier'sfinancial advisor, Robert E. Eddy, as Special Trustee to theESOP. Eddy's role was to evaluate proposed transactionsinvolving N&NW and the ESOP, including monetization ofCouturier's financial interest in N&NW. Couturier and Johan-son ultimately opted to merge N&NW into TEOHC, whichJohanson had incorporated in Delaware on December 15,2003. As the incorporator, Johanson appointed himself, Cou-turier, Eddy, and accountant James Roorda as directors. Pur-suant to a new plan, the ESOP was now to be administeredby Trustees appointed by the TEOHC Board of Directors; theBoard members appointed themselves as Trustees.3that the CCA, ISO, and VEIP did not constitute an unreasonable level ofcompensation, but specifically did not render an opinion as to whetheradopting these agreements was consistent with ERISA fiduciary duties.Moss Adams Advisory Services (neous opinion concluding that the 2002 ISO was fair to the ESOP froma financial point of view. JOHNSON v. COUTURIER turier received over $26 million in cash, title to the PalmDesert home, a Bentley automobile valued at $200,000, andvarious other benefits in exchange for his deferred compensa-tion interests. The parties value this buyout package at $34.8million.package equals about 65 percent of TEOHC's assets as ofJune 2004, and about 80 percent of N&NW's assets as of eachof the prior two years. The package also exceeded by morethan two-fold N&NW's 2002 stock market value.BOn October 11, 2005, several former and current Nollemployees (collectively, participants, filed suit against Couturier, Johanson, and Eddy(collectively, Court for the Eastern District of California. Claiming thatCouturier was vastly overcompensated, Plaintiffs' amendedcomplaint seeks relief from Defendants' alleged breach offiduciary duties in their capacities as ERISA fiduciaries andcorporate directors. Under ERISA, Plaintiffs seek: (1) to holdDefendants jointly and severally liable for all ESOP lossesrelated to their misconduct; (2) creation of a constructive trustfor disgorgement of Defendants' wrongful profit; and (3)removal of Eddy as ESOP Trustee. Couturier and Johanson jointly and severally liable for lossessuffered by Noll and N&NW because of directorial miscon-duct, and all three Defendants jointly and severally liable forlosses suffered by TEOHC because of directorial misconduct.Finally, Plaintiffs also accuse Johanson and his law firm of4fair to the ESOP from a financial and economic perspective. It specificallyexcluded any consideration of the fairness of Couturier's compensationpackage. The latter issue was separately analyzed by The CaliforniaAppraisal Institute, which concluded that Couturier's buyout package didnot exceed JOHNSON v. COUTURIER jointly and severally liable for losses suffered by Noll,N&NW, and TEOHC.CThe Defendant directors, officers, and trustees entered intomultiple and largely identical indemnification agreementswith Noll and its successors between 2001 and 2005. Theseagreements generally indemnify Defendants for any liabilitiesincurred in their service as directorsÐand, in the case of Cou-turier and Eddy, in their service as ESOP trusteesÐso long asany such liability did not involve or fornia law turier's trustee indemnification further specifies that it isª[s]ubject to the relevant provisions of [ERISA].At issue here are provisions within the indemnificationagreements requiring TEOHC to advance defense costs. Seek-ing advancement as promised in the indemnification agree-ments, each Defendant has executed an undertaking to repayTEOHC for of the final disposition of the [instant] suit[ ], if it shall ulti-mately be determined that I am not entitled to be indemnifiedby the Company5Johanson, and Eddy condition indemnification on an absence of ate wrongful actsHowever, the agreement indemnifying Couturier as a trustee excepts fromcoverage losses resulting from his misconduct.º One of the two agreements indemnifying Eddy as a trusteealso excepts from coverage losses resulting from his and/or intentional misconduct,losses resulting from his misconduct.º Because our ensuing analysis is identical regardless of whichsubset of these five exceptions applies, we refer to the ten agreements asindemnifying Defendants so long as any such liability did not involvedeliberate wrongful acts or gross negligence. JOHNSON v. COUTURIER for advancement of defense costs against TEOHC in a relatedcommercial arbitration proceeding conducted before theAmerican Arbitration Association (Department of Labor (trator declined to allow intervention, finding that tion of the contract interpretation questions presented herewould not be aided by input from these third parties,ordered TEOHC to advance Johanson's and Eddy's defensecosts. After Plaintiffs obtained an Order To Show Cause whythe advancement should not be enjoined, the district court onSeptember 26, 2008, found that Plaintiffs were not bound bythe AAA decision and had met their burden justifying issu-ance of a preliminary injunction prohibiting the advancementof defense costs. Couturier, Johanson, and Eddy all timelyappealed this injunction.6On October 24, 2008, the district court also granted a sec-ond preliminary injunction: (1) preventing Couturier fromªtransferring, secreting, assigning, pledging, mortgaging, orhypothecatingº the assets he received as part of the 2004 buy-out package without prior court approval; and (2) ordering anaccounting of these assets within 20 days. However, the courtlimited this injunction to allow Couturier living expenses and legal fees.this second preliminary injunction.DA subsidiary of Gibraltar Industries, Inc. purchasedTEOHC's assets on April 10, 2007, for almost $61 million.Approximately $15.8 million of the sale proceeds remainedfor distribution to the ESOP after payment of bank debt, exec-utive compensation, closing costs, and escrow. ConsultingFiduciaries, Inc., the current ESOP trustee, distributed $5 mil-6stay. JOHNSON v. COUTURIER has been withheld, at least partly in escrow, to allow TEOHCto pay for its own legal expenses once directors' and officers'liability (isfy the indemnification agreements with Defendants.IIDefendants collectively make three separate arguments toavoid invalidation of these agreements under ERISA: (1) thatthey are not ERISA fiduciaries; (2) that the setting of execu-tive compensation is a business decision not subject toERISA; and (3) their defense costs is purely a matter of state contract law. Weconsider and reject each argument in turn.A[1]dards . . . assuring the equitable character of [benefit] plansand their financial soundness. 1001(a). Toaccomplish this goal, ERISA requires that plan assets be heldin trust for the exclusive benefit of plan participants and theirbeneficiaries. 1103. Moreover, manage the operation and administration of the planvested in one or more named fiduciaries. 1102(a). Inorder benefit plans and their beneficiaries,ªstandards of conduct, responsibility, and obligation for fidu-ciaries of employee benefit plans. 1001(b). These stan-dards include duties of loyalty and care, 1104(a)(1), aswell as a prohibition on self-dealing, 1106(b)(1).[2]primarily in§ 1107(d)(6)(A). would be both an employee retirement benefit plan and atechnique of corporate finance that would encourageJOHNSON v. COUTURIER 346 (3d Cir. 2007) (quotation omitted). Although the creationof ESOPs necessitated their exemption from certain ERISArequirements, such as asset diversification, the core fiduciaryduties of loyalty and care as well as the prohibition againstself-dealing7 remain in effect. [3]tent with ERISA's policies and objectives.penters Pension Trust Fund v. Citibank, (Ariz.)720 (9th Cir. 1997). ERISA of formal trusteeship, but in authority over the plan.248, 262 (1993). Thus, ERISAÐand ESOPÐfiduciariesinclude not only those specifically named in the employeebenefit plan, 29 U.S.C. § 1102(a), but also any individual whoªexercises any discretionary authority or discretionary controlrespecting management of such plan or exercises any author-ity or control respecting management or disposition of itsassets,º 29 U.S.C. § 1002(21)(A)(i). We have accordinglyrecognized that where members of an employer's board ofdirectors have responsibility for the appointment and removalof ERISA trustees, those directors are themselves subject toERISA fiduciary duties, albeit only with respect to trusteeselection and retention.870 F.2d 1446, 1448- 49 (9th Cir. 1989).allow plan acquisition of employer stock. 29 U.S.C. § 1108(e). 8issued by the DOL in 1975, which provides: Q: In the case of a plan established and maintained by anemployer, are members of the board of directors of the employerfiduciaries with respect to the plan? A: Members of the board of directors of an employer whichmaintains an employee benefit plan will be fiduciaries only to theextent that they have responsibility for the functions described in[29 U.S.C. § 1002(21)(A)]. For example, the board of directors JOHNSON v. COUTURIER each was an ERISA fiduciary subject to the duties of loyaltyand care and to the prohibition against self-dealing. Couturierserved as the sole Trustee of the Noll ESOP beginning onApril 24, 2001. Eddy was appointed Special Trustee to theESOP in 2003. After Noll merged into TEOHC in 2004, allthree Defendants were appointed to the ESOP Board of Trust-ees.Johanson argues, without any citation to the record, that heserved on the TEOHC ESOP Board of Trustees for only oneday, and thus never had the opportunity to take any actionsthat would subject him to ERISA fiduciary duties. Be that asit may, Johanson, together with Couturier and Eddy, alsoserved on the TEOHC Board of Directors. The TEOHC ESOPPlan specified that it was to Trustees composed of individuals the unanimous action of the Board [of] DirectorsTEOHC. (Emphasis added.) The Plan further vested thepower of trustee removal in the TEOHC Board of Directors.Thus, as the de facto decision makers of closely held andrelated entities, all three defendantsÐincluding JohansonÐalso served as ERISA fiduciaries with respect to appointmentand removal of ESOP trustees. 1448- 49; 29 C.F.R. § 2509.75-8(D-4).BERISA confers upon federal district courts exclusive juris-diction over any civil action brought by a plan participant ormay be responsible for the selection and retention of plan fidu-ciaries. In such a case, members of the board of directors exerciseªdiscretionary authority or discretionary control respecting man-agement of such planto the plan. However, their responsibility, and, consequently,their liability, is limited to the selection and retention of fidu-ciaries . . . . 29 C.F.R. § 2509.75-8(D-4). JOHNSON v. COUTURIER ciary duty. 29 U.S.C. § 1132(a), (e). Johanson argues, how-ever, that the district court lacked subject matter jurisdictionover the instant case because the actions challenged byPlaintiffsÐactions that resulted in the allegedly excessivecompensation of CouturierÐare business decisions not sub-ject to ERISA.[5]fall within ERISA's purview. But where plan assets includethe employer's stock, the value of those assets depends on theemployer's equity. Employee compensation levels are, ofcourse, one of the many business expenditures reducing thevalue of the overall equity of any company. On the otherhand, decisions affect the fits that ESOP plan participants will ultimately receive.tin v. Feilenlogical conclusion, therefore, this line of thinking would, inthe case of an ESOP, extend the application of ERISA to acorporation's annual expenditures on office suppliesÐclearlyan absurd result. The Eighth Circuit has on this basis limitedan ERISA fiduciary's duties investing the ESOP's assets or administering the plan.Setting executive compensation levels does not obviously fallinto either category. 1012, 1023 (E.D. Mo. 2002) (holding that a corporate directoris not acting as an ESOP fiduciary in setting compensationlevels).[6]instant case does not risk encompassing within its confinesany and all day-to-day corporate decisions shielded by thebusiness judgment rule. Where, as here, an ESOP fiduciaryalso serves as a corporate director or officer, imposing ERISAduties on business decisions from which that individual coulddirectly profit does not to us seem an unworkable rule. To thecontrary, our holding merely comports with congressionalJOHNSON v. COUTURIER known to the law.Cir. 1996) (quotation omitted). To hold otherwise would pro-tect from ERISA liability obvious self-dealing, as Plaintiffsallege occurred here, to the detriment of the plan beneficia-ries.CDefendants argue that whether TEOHC is obligated toadvance their defense costs is purely a matter of state contractlaw, and that ERISA simply does not apply. ERISA preemp-tion is a question of law that we review tis Benefits Ins. Co.[7]with only limited exceptions it laws insofar as they may now or hereafter relate to anyemployee benefit plan. 1144(a). As in Boggssimply asking if state law conflicts with the provisions ofERISA or operates to frustrate its objects.(1997); Pension Plan(holding that ERISA's surviving spouse annuity preempts atestamentary transfer).[8]they are governed by California law. California allowsadvancement of defense costs by or on behalf of the agent to repay that amount if it shallbe determined ultimately that the agent is not entitled to beindemnified as authorized in this section.§ 317(f). Couturier, Johanson, and Eddy all submitted the req-9law, which similarly establishes that advancement is permissible uponreceipt of an undertaking. Del. Code Ann. tit. 8, § 145(e). JOHNSON v. COUTURIER their defense costs enforceable under state law.[9]vide complete indemnity so long as the challenged acts oromissions do not involve deliberate wrongful acts or grossnegligence. ERISA, by contrast, requires that a fiduciary actªwith the care, skill, prudence, and diligence under the cir-cumstances then prevailing that a prudent man acting in a likecapacity and familiar with such matters would use in the con-duct of an enterprise of a like character and with like aims.29 U.S.C. § 1104(a)(1)(B). The indemnification agreementsthus effectively limit Defendants' liability under ERISAbecause, so long as they do not engage in deliberate wrongfulacts or gross negligence, Defendants will be indemnifiedÐeven if they violated the ERISA care. Accordingly, application of state law in the instant caseconflicts with ERISA and is preempted. at 844 (the provisions and objectives of ERISA, the state law cannotstand.IIIWith these principles in mind, we turn to an evaluation ofthe district court's decision to enjoin advancement of defensecosts. establish [1] that he is likely to succeed on the merits, [2] thathe is likely to suffer irreparable harm in the absence of pre-liminary relief, [3] that the balance of equities tips in hisfavor, and [4] that an injunction is in the public interest.ter v. Natural Res. Defense Council, Inc.(2008). injunction for abuse of discretion.City of Los AngelesThis review is extend to the underlying merits of the case. Council v. MartinJOHNSON v. COUTURIER decision on an erroneous legal standard or on clearly errone-ous findings of fact.639). But will not be reversed simply because the appellate court wouldhave arrived at a different result if it had applied the law tothe facts of the case.F.3d 587, 590 (9th Cir. 2006)) (alteration in original).IVWe conclude that the district court did not abuse its discre-tion in preliminarily enjoining TEOHC from advancingDefendants' defense costs. Plaintiffs established all four ele-ments of the governing standard, and Defendants have failedto demonstrate that the district court based its decision eitheron an erroneous legal standard or on clearly erroneous find-ings of fact.A1[10]ceed in proving that Defendants breached their fiduciaryduties under ERISA. Plaintiffs allege that Defendantsbreached these obligations by engaging in a series of transac-tions that improperly diverted much of the equity in TEOHC(and thus in the ESOP) to Couturier. Plaintiffs claim that byengaging in these transactions, Defendants impermissiblyplaced Couturier's financial interests ahead of the ESOP. Thedistrict court correctly compared the size of Couturier's $34.8million buyout package with the company's overall value, andproperly noted its concern that this comparison by itself con-stitutes strong evidence that Defendants breached their fidu-ciary duties under ERISA. Couturier's buyout package of$34.8 million equaled nearly 65 percent of the company'sJOHNSON v. COUTURIER fold N&NW's 2002 value. [11]Adamsº) recommended that Couturier be given no more thanbetween $6 million and $9 million, the value of the deferredcompensation agreements which N&NW carried on its booksat that time. The record reveals that the Moss Adams fair-ness/valuation team was clearly uncomfortable with the pack-age proposed by Couturier and Johanson, and refused to opineon the fairness of what ultimately became a $34.8 millionpackage. On January 21, 2004, Moss Adams qualified itsopinion to specifically exclude the executive compensation for various executives and relatedpackages represent `reasonable' compensation,others the resolution of these matters. At least at this stage inthe proceedings, it is difficult to understand how an ERISAfiduciary exercising the requisite care, and acting exclusivelyin the ESOP's interest, could have acquiesced to a buyoutpackage for Couturier that apparently exceeded the fair mar-ket value by some $25 million. As trustees, Defendantsshould have opposed the buyout package. And as directorswith authority over the selection and retention of trustees,Defendants should have recognized that Couturier was hope-lessly mired in a clear conflict of interest involving such bla-tant self-dealing and sought his removal as an ESOP trustee.[12]Defendants breached their ERISA duties, they are also likelyto succeed in proving that Defendants are not entitled toindemnification, nor to advancement of defense costs,because section 410(a) of ERISA renders the governingagreements void. Section 410(a) specifies that in an agreement or instrument which purports to relieve afiduciary from responsibility or liability for any responsibility,obligation, or duty under this part shall be void as againstpublic policy. 1110(a). Thus, fiduciary writes words in an instrument exonerating itself ofJOHNSON v. COUTURIER generally without effect.107 F.3d 1415, 1418 (9th Cir. 1997).Admittedly, ERISA does not bar the purchase of liabilityinsurance by a plan, fiduciary, or employer. 29 U.S.C.§ 1110(b). The DOL has therefore interpreted section 410 topermit indemnification of fiduciaries so long as the agreementªdo[es] not relieve a fiduciary of responsibility or liabilityunder ERISA. 29 C.F.R. § 2509.75-4. In other words, anindemnification provision is valid if it another party to satisfy any liability incurred by the fiduciaryin the same manner as insurance.does not, however, extend to indemnification of a fiduciary bythe ERISA plan itself. prets section 410(a) as rendering void any arrangement forindemnification of a fiduciary of an employee benefit plan bythe plan.ment would have the same result as an exculpatory clause, inthat it would, in effect, relieve the fiduciary of responsibilityand liability to the plan by abrogating the plan's right torecovery from the fiduciary for breaches of fiduciary obliga-tions.º The indemnification agreements and associated advance-ment provisions at issue here clearly ] to relieveDefendants from their fiduciary responsibilities under ERISA.ERISA requires that a fiduciary discharge its duties care, skill, prudence, and diligence under the circumstancesthen prevailing that a prudent man acting in a like capacityand familiar with such matters would use in the conduct of anenterprise of a like character and with like aims.§ 1104(a)(1)(B). The indemnification agreements, by contrast,indemnify Defendants so long as the liability for which cover-age is sought did not involve any deliberate wrongful acts orgross negligence. Nor do the signed undertakings provide theESOP with any recourse should Defendants be found to haveviolated only their fiduciary duties under ERISA. Conse-JOHNSON v. COUTURIER the merits of their ERISA claims, they have also shown thatsection 410(a) likely renders void the indemnification agree-ments and advancement provisions therein.Defendants nonetheless argue that section 410(a) does notapply because advancement would be made from corporate,not plan, assets. 2510.3-101(h)(3) (establish-ing that corporate assets are not plan assets where the plan isan ESOP). But given that TEOHC's plan of liquidation pro-vides for payment of all remaining equity to ESOP partici-pants as shareholders, this is not a case where, in accordancewith 29 C.F.R. § 2509.75-4, the indemnification agreementªmerely permit[s] another party [other than the plan] to satisfyany liability incurred by the fiduciary.proceeds taken from TEOHC's remaining funds to pay Defen-dants' defense costs will, dollar for dollar, reduce the fundsavailable for distribution to ESOP participants. In otherwords, advancement is here tantamount to asking ESOP par-ticipants to pay for Defendants' defense costs, with no recov-ery possible or at least highly unlikelyÐ even if Defendantsbreached their fiduciary duties to the ESOPÐso long asDefendants did not engage in deliberate wrongful acts orgross negligence. Such a result is impermissible under section410(a).Finally, because the agreement indemnifying Couturier asa trustee specifies that it is sions of [ERISA],ment is not void under section 410(a). This assertionoverlooks two key points. First, the remaining three agree-ments indemnifying Couturier as a director contain no suchlimitation, even though in his capacity as director Couturierwas subject to ERISA fiduciary duties with respect toappointment and retention of ESOP trustees. Second, as weexplain above, Plaintiffs are likely to succeed in proving thatCouturier did in fact breach his ERISA obligations, thus alsoJOHNSON v. COUTURIER forceable.2[13]injunctive relief is available only if plaintiffs that irreparable injury is tion.º rejected the Ninth Circuit's test, noting that on a possibility of irreparable harm is inconsistent with ourcharacterization of injunctive relief as an extraordinary rem-edy that may only be awarded upon a clear showing that theplaintiff is entitled to such relief.allege that the district court failed to apply the requisite lihood of harmharm. We disagree.[14]likely succeed in proving that Defendants breached their fidu-ciary duties under ERISA. The district court therefore alsocorrectly found that Plaintiffs will likely succeed in provingthat the indemnification agreements are void under section410(a) of ERISA because they exculpate Defendants fromtheir fiduciary obligations. Consequently, there is more thana possibility that Defendants will be required to reimburseTEOHC for any advanced defense costsÐthere is at least alikelihood.[15]have the resources to reimburse TEOHC if defense costs areadvanced. Plaintiffs are not required to submit detailed finan-cial statements in support of this assertion. Rather, it isenough that Couturier himself alleged that Defendants evennow would not be able to pay their legal bills withoutadvancement of funds. expended the $5 million in D&O insurance coverage previ-JOHNSON v. COUTURIER attorneys raising a vigorous defense, and are facing a potentialjudgment in the tens of millions of dollars if found to havebreached their fiduciary duties.ted any financial data demonstrating that they will be able toreimburse TEOHC if a judgment is rendered against them.Thus, the district court did not abuse its discretion in findingthat Plaintiffs established a likelihood of irreparable harm ifinjunctive relief were denied.3[16]tedly, if the preliminary injunction is upheld, Defendants willbe forced either: (1) to find a way to pay for their own defenseand seek recovery after trial; (2) to find attorneys willing toaccept the risk of payment after trial; (3) to continue litigationwithout representation; or (4) to settle. We recognize thatthese options are accompanied by real and difficult conse-quences for each Defendant. Nonetheless, any such conse-quences are outweighed by the potential hardship to Plaintiffsif advanced defense costs are not reimbursed.[17]their fiduciary obligations under ERISA, section 410(a) ren-ders their indemnification agreements void and they are notentitled to advancement of defense costs. not the case, Plaintiffs are willing to place the potentialdefense costs in escrow; if they do so, Defendants will ulti-mately be able to recover their costs if so entitled. By con-trast, as explained above, recovery by Plaintiffs of anyadvanced defense costs seems remote, a result that wouldleave ESOP participants without the benefits whose securityERISA strives above all else to protect.4[18]should pay particular regard for the public consequences inJOHNSON v. COUTURIER 129 S. Ct. at 376- 77 (quoting Barcelopublic interest in ensuring that talented individuals remainwilling to serve as corporate directors and officers. But thisconcern, while significant, is far outweighed by the intereststhat ERISA protects. In enacting ERISA, Congress noted:that the continued well-being and security of mil-lions of employees and their dependents are directlyaffected by these plans; that they are affected with anational public interest; that they have become animportant factor affecting the stability of employ-ment and the successful development of industrialrelations; . . . that despite the enormous growth insuch plans many employees with long years ofemployment are losing anticipated retirement bene-fits owing to the lack of vesting provisions in suchplans; that owing to the inadequacy of current mini-mum standards, the soundness and stability of planswith respect to adequate funds to pay promised bene-fits may be endangered; that owing to the termina-tion of plans before requisite funds have beenaccumulated, employees and their beneficiaries havebeen deprived of anticipated benefits; and that it istherefore desirable in the interests of employees andtheir beneficiaries, for the protection of the revenueof the United States, and to provide for the free flowof commerce, that minimum standards be providedassuring the equitable character of such plans andtheir financial soundness. 29 U.S.C. § 1001(a). In order for ERISA interests of employees and their beneficiaries in employeebenefit plans,(1983), Congress chose to hold plan fiduciaries to a highstandardÐin fact, 100 F.3d at 1488 (quotation omitted). Congress also chose toJOHNSON v. COUTURIER from responsibility for a breach of that standard. 29 U.S.C.§ 1110(a). Accordingly, the public interest here favorsupholding the preliminary injunction barring advancement ofdefense costs by TEOHC.BWe also reject the numerous additional arguments throughwhich Defendants attempt to invalidate this preliminaryinjunction. Defendants attack the preliminary injunction asbased on insufficient evidence, as failing to give due defer-ence to the arbitration order, as improper under SupremeCourt precedent, as impermissibly granting relief of a differ-ent character than any judgment that might finally issue, andas improperly imposing a constructive trust. arguments has merit.1[19]rely on preliminary injunction. Cass Commc'ns, Inc.(finding an insufficient showing of irreparable harm in partbecause submitted 's own execu-tives] are conclusory and without sufficient support in factsThey object in particular to the district court's reliance on theinterested declaration of Plaintiffs' counsel and unverified cli-ent complaints.A district court may, however, consider hearsay in decidingwhether to issue a preliminary injunction. Philippines v. Marcos(en banc); 1389, 1394 (9th Cir. 1984) (inadmissible evidence some weight, when to do so serves thepurpose of preventing irreparable harm before trial.JOHNSON v. COUTURIER the challenged evidence but also on davits, declarations and factual allegations which have beensubmitted . . . by all parties . . . throughout the course of thislitigation.on this basis2[20]not be reconciled with the arbitrator's finding that TEOHC iscontractually obligated to advance defense costs. In particular,they cite the strong federal policy in favor of arbitration, aswell as the statutory provision that limits the venue where aparty may seek to enforce or vacate an arbitral award to thedistrict court where the arbitration occurred (here, the North-ern District of California). However, the district court cor-rectly found that Plaintiffs are not bound by theindemnification agreements or the arbitral decision, being aparty to neither. As we noted in Life Insurance Co.cannot get it off the hook with the employees who participatein the ERISA plan. They did not sign a contract exoneratingthe fiduciary.tration Act have not agreed to do so.U.S. 279, 293 (2002) (quotation omitted). Moreover, Defen-dants have not asserted any alternative contract or agencyprinciples which may bind a nonsignatory to an arbitrationagreement. (9th Cir. 2006). 10between 2001 and 2004, he became to 40% of the value of N&NW.ciaries acting in an ESOP's best interests would, first, determine their owncompensation and, second, award such a large percentage of the company,and indirectly of the ESOP's assets, to one individual. JOHNSON v. COUTURIER [21]is improper under Alliance Bond Fund, Inc.that the district court lacked authority injunction preventing the defendant from transferring assets inwhich no lien or equitable interest is claimed.310, 333 (1999). However, by its very terms, the holding ofGrupo Mexicanodamages are sought. a preliminary injunction barring asset transfer is availablewhere the suit seeks equitable relief. guishing (1940)); 387 F.3d 1077, 1085 (9th Cir. 2004) (exempts from its proscription against preliminary injunctionsfreezing assets[,] cases involving bankruptcy and fraudulentconveyances, and cases in which equitable relief is sought.Plaintiffs here seek equitable relief pursuant to section 409(a),29 U.S.C. § 1109(a), and section 502(a)(3), 29 U.S.C.§ 1132(a)(3), of ERISA. Accordingly, the preliminary injunc-tion barring advancement of defense costs by TEOHC is notimproper under 4[22]United Statesthat a preliminary injunction may only grant relief of the samecharacter as the judgment that may finally issue. injunction here prevents advancement of TEOHC assets butPlaintiffs ultimately seek to recover funds held by Couturier,Defendants argue that the preliminary injunction is impermis-sible due to its difference in character from the final reliefsought. But in antitrust law was to restrain future anticompetitive actionÐitwas without jurisdiction to enter a monetary judgment at anyJOHNSON v. COUTURIER v. Estate of MarcosLitig.injunction was inappropriate [in plaintiff was seeking money damages . . . the injunction wasinappropriate precisely because the plaintiff could any money damages.nal)).Here, by contrast, the district court has jurisdiction underERISA to impose a constructive trust over any assets inDefendants' possession it concludes rightfully belong to theESOP. 29 U.S.C. § 1109(a); & Textile Workers Union, AFL-CIO v. Murdock1406, 1412 & n.10 (9th Cir. 1988). Furthermore, if TEOHCis allowed to advance funds to Couturier, Plaintiffs willundoubtedly seek their recovery also as part of the final judg-ment. As this is not a case where the preliminary injunctionªdeals with a matter lying wholly outside the issues in thesuit,º 5[23]lish his liability under ERISA because they cannot identifyspecific funds or property in his possession over which theyseek to impose a constructive trust. Be that as it may, in addi-tion to imposing a constructive trust, Plaintiffs seek also tohold Johanson jointly and severally liable for all ESOP lossesrelated to Defendants' misconduct. Accordingly, this argu-ment, too, lacks merit.VIn granting the second preliminary injunction freezing Cou-turier's assets and requiring an accounting, the district courtapplied an alternative analytical framework and found there are serious questions on the merits and the balance ofJOHNSON v. COUTURIER Couturier challenges only the district court's failure to con-sider the element of irreparable harm. Although the validityof the district court's approach is questionable post-we conclude that the district court did not abuse its discretion.The court's analysis implicitly supports a likelihood of irrepa-rable harm to Plaintiffs in the absence of injunctive relief.[24]of dissipation of the claimed assets, or other inability torecover monetary damages, if relief is not granted.Conn. Gen. Life Ins. Co. v. New Images of Beverly HillsF.3d 878, 881 (9th Cir. 2003). have established that they are likely to succeed in proving thatCouturier impermissibly awarded himself tens of millions ofdollars in compensationÐin Couturier's own words, 40% of the valueof the highest fiduciary duties known to the law.mere five years that he served as CEO, Couturier somehowconvinced his fellow directors and trustees to consent to11v. Sahni`[b]ecause an asset freeze is such a drastic provisional remedy, this courtis of the opinion that We believe it was error to require this more stringent standard. So long asthe district court continued to believe that FSLIC was likely to succeed onthe merits, the court should only have required FSLIC to show a possibil-ity of dissipation of assets.However, because aspect of the 12injunction orders reveals that the district court altered its assessment of thestrength of Plaintiffs' ERISA claims. Specifically, the district court spokeof a tion, but only of a injunction. In freezing Couturier's assets, however, the district court spe-cifically relied on its first order in finding that Plaintiffs have `fair chance of success on the merits.' º Thus, the court did not change itsassessment, but merely tailored its language to the standard it employed. JOHNSON v. COUTURIER bank account. Such an individual is presumably more thancapable of placing assets in his personal possession beyondthe reach of a judgment. Accordingly, Couturier's own priorconduct establishes a likelihood that in the absence of an assetfreeze and accounting, Plaintiffs will not be able to recoverthe improperly diverted funds and will thus be irreparablyharmed. (finding ªevidence in the record that in the past [the defendant] madeaway with [the bankrupt company's] funds321 F.3d at 881 (concluding that the district court did notclearly err in finding a likelihood of dissipation given thedefendants' refusal to disclose asset information in defiance of court orderand their convenient divorce settlementMedia, LLCcluding that the district court did not clearly err in finding alikelihood of dissipation spiriting their commissions away to a Cook Islands trust[25]found that he would not be harmed by an asset freeze. Thedistrict court in fact concluded that a narrowly tailored assetfreeze would prejudice Couturier less than a denial of reliefwould prejudice Plaintiffs. In that context, the court foundthat any prejudice to Couturier would be substantially miti-gated by limiting the injunction to permit Couturier normal living expenses and legal feesturier to petition the court at any time for consent to an assettransfer or disposal. Given that the freeze on Couturier'sassets is limited to those in which Plaintiffs have an equitableinterest and does not extend to normal living expenses andlegal fees, the district court correctly balanced the relativehardships. where an asset freeze does not extend to normal livingexpenses and legal fees). JOHNSON v. COUTURIER have any merit. Couturier would have us believe that relief of this character has been thought justified in the longhistory of equity jurisprudence.But as discussed above, the district court in authority to enter a monetary judgment, thus rendering anasset freeze to ensure compliance with any final injunctiverelief impermissible. Court expressly differentiated the situation where an injunc-tion freezes subject of the provisions of any final decree.Beers1477- 78.VIFederal Rule of Civil Procedure 65(c) permits a court togrant preliminary injunctive relief security in an amount that the court considers proper to paythe costs and damages sustained by any party found to havebeen wrongfully enjoined or restrained.ingly mandatory language, court `with discretion as to the amount of security required,if any º 2003) (quoting 1237 (9th Cir. 1999)). In particular, dispense with the filing of a bond when it concludes there isno realistic likelihood of harm to the defendant from enjoin-ing his or her conduct.a district court's determination as to the amount and appropri-ateness of the security required by Rule 65(c). Gomez[26]security for each temporary restraining order preceding thecorresponding preliminary injunction. Although Plaintiffshave since stated that these cash bonds remain with the Clerkof Court as security for the preliminary injunctions, the dis-JOHNSON v. COUTURIER amounts except in the context of issuing the temporaryrestraining orders. We remand the question of bond suffi-ciency to the district court, which should set the terms andconditions of a surety bond for each preliminary injunction.The court may wish to take into account Plaintiffs' offer toplace in escrow potential defense costs, an offer which ifaccepted would itself ensure that Defendants' expenses willbe reimbursed if either preliminary injunction is ultimatelyfound to have been granted in error.VIIWe conclude that ERISA establishes federal subject matterjurisdiction over this case and that state law governingadvancement of defense costs is here preempted as its appli-cation would conflict with ERISA. We further conclude thatthe district court did not abuse its discretion in preliminarilyenjoining TEOHC from advancing defense costs, nor in freez-ing Couturier's assets and requiring an accounting. Finally,because it did not consider the question in the first instance,we remand the question of bond sufficiency to the districtcourt.Costs on appeal are awarded to Plaintiffs-Appellees.AFFIRMED but REMANDED with instructions.JOHNSON v. COUTURIER