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2011 ESOP Legal Update
An NCEO Issue Brief
(Print Version)
by Stanley E. Bulua, Laurence A. Goldberg, Steven B. Greenapple, Gregory M. Hansen, Sharon B. Hearn, Tim Jochim, Jeffrey S. Kahn, Susan D. Lenczewski, Babcock MacLean, Richard C. Mapp III, Susan Peters Schaefer, Robert F. Schatz, and Jay Van Heyde
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Publication Details
Format: Photocopied, 40 pages
Publication date: April 2011
Status: In stock
Contents
I. Stock Drop Cases
II. U.S. Supreme Court ERISA Decision
III. ESOP-Related Cases
B. Requirement to Exhaust Administrative Remedies Not Excused Due to Worthlessness of Stock
C. Litigation Arising from ESOP Company Bankruptcy
D. Indemnification of Fiduciaries
E. ESOP Administration and Qualification
F. ESOP-Related Malpractice Claim
G. Venue for ESOP Litigation
H. Interference with ERISA Rights and Retaliation
I. Deductibility of ESOP Stock Distributions
I. Final Regulations Setting Forth Diversification Requirements for Defined Contribution Plans with Publicly Traded Employer Securities
II. Private Letter Ruling 2010244005
III. Response to Technical Assistance Request #5 (2010)
Department of Labor
I. Interim Final Regulations for Plan Service Providers
II. Proposed Regulation Redefines "Fiduciary"
III. Amicus Brief in Fish v. GreatBanc Trust Co.
IV. Amicus Brief in Quan v. Computer Sciences Corporation
Legislation
I. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
Excerpts
From "Fiduciary Duty of Trustee to Sue Himself: Blankenship v. Chamberlain"
The risks of serving as corporate officer or director while serving as ESOP trustee were highlighted in Blankenship v. Chamberlain, 695 F. Supp. 2d 966 (D. Mo. Feb. 1, 2010), in which the court refused to dismiss a complaint by ESOP participants that the trustee breached his ERISA fiduciary duties by failing to bring a derivative action against himself based upon alleged corporate acts of self-dealing and mismanagement. Although the defendant argued that he was acting in his corporate, rather than fiduciary, capacity when he took the alleged acts, the court held that the defendant could still breach a fiduciary duty to the ESOP by failing to challenge those alleged acts of self-dealing and mismanagement.The defendant was the company's sole shareholder until he sold all of his shares to the company's ESOP for $3 million. The stock purchase agreement between the defendant and the ESOP required the company to enter into an employment agreement with the defendant retaining him as president and CEO of the company and as sole trustee of the ESOP. The employment agreement required the company to keep the defendant in his position with the company until the ESOP loan was repaid, at which point the company could terminate his employment. For the first few years after the transaction, the defendant ceased active management of the company. Over that period, the company was profitable, made accelerated payments on the ESOP loan, and anticipated paying off the loan five years ahead of its due date. Before the payoff of the loan, however, the defendant returned to manage the company and arranged the refinancing of the loan and extension of the payoff date.
The plaintiffs, who were ESOP participants, alleged that the defendant's purpose for extending the maturity date of the loan was to defer the date at which the company could terminate his employment. Plaintiffs also alleged that defendant took a number of actions exceeding his authority, such as paying himself an excessive salary, receiving distributions of the company's profits (when he was no longer a shareholder), using the company's funds for personal expenses, and entering into a series of one-sided real estate transactions with the company for his personal benefit. Plaintiffs brought ERISA claims against the defendant alleging that in his role as ESOP trustee he breached fiduciary duties owed to the ESOP, specifically by failing to bring a derivative action against himself based on his alleged mismanagement and self-dealing with the company. The defendant moved to dismiss the claims against him, arguing that the alleged breaches of fiduciary duty arose only out of actions he took in a corporate managerial capacity.
The court denied the defendant's motion to dismiss the plaintiffs' claim. The court noted that the Eighth Circuit recognized, in Martin v. Feilen, 965 F.2d 660 (1992), that when a fiduciary becomes aware of corporate action that would give rise to a derivative claim, the decision of whether or not to bring such a claim—even if the proper defendant would be the fiduciary himself—is subject to ERISA's fiduciary duties. In Feilen, the court determined that the basis for the ERISA action was not the alleged perpetration of fraud on the corporation's shareholders but the fact that, knowing that the ESOP's investment in employer stock had been impaired by their own fraudulent acts, defendants, acting as fiduciaries, failed to take any steps to protect the plan's assets from dissipation.


