Home » Publications »
(front cover)
See larger image

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

This is the print version, and shipping charges apply. It also is available in a digital version with no shipping charges.
$15.00 for NCEO members; $25.00 for nonmembers

A 20% quantity discount will be applied if you are a member (or join now) and order 10 or more of this publication. If you need to order more than the maximum number in the drop-down list below, change the quantity once you have added it to your shopping cart.

Quantity:
Our 2011 ESOP Legal Update summarizes the previous year's judicial, regulatory, and legislative developments affecting employee stock ownership plans (ESOPs) and 401(k) defined contribution plans that invest in employer stock, with some coverage of events in early 2011. 2010 was the year of the stock drop case, as the dozens of lawsuits filed by class action plaintiffs' attorneys in reaction to the sharp downturn in the stock market beginning in 2008 came before federal district court judges on motions to dismiss and motions for summary judgment. The Internal Revenue Service (IRS) was relatively quiet in 2010, issuing one more technical assistance memorandum to the ESOP cadre in connection with their review of ESOP plan documents for determination letter purposes. The Employee Benefits Security Administration (EBSA) at the U.S. Department of Labor (DOL) made up for any shortfall in federal agency activity by dropping a bomb on the ESOP community when it issued proposed regulations redefining "fiduciary," an attempt to reverse 35 years of settled law on whether an ESOP appraiser was providing "investment advice" as an ERISA fiduciary. The DOL's solicitor's office filed several amicus curiae briefs in several high-profile cases, including a handful of stock drop cases. Legislatively, there were no developments directly targeted at ESOPs, but the 2010 Tax Relief Act extended the reduced capital gains and qualified dividends rate for two years.

About Our Issue Briefs

Our issue briefs cover a variety of special topics and are available in PDF and hard-copy format. They are available for individual purchase, but you also can buy an issue brief subscription and receive every new one as it is released. Read here for details or to order.

Publication Details

Format: Photocopied, 40 pages
Publication date: April 2011
Status: In stock

Contents

Case Law
I. Stock Drop Cases
II. U.S. Supreme Court ERISA Decision
III. ESOP-Related Cases
A. Fiduciary Duties
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
Internal Revenue Service
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.