This 109-page publication briefly summarizes decisions in ESOP and 401(k) company stock cases from 1990 through June 2021. The cases are organized by issue, so cases that involve multiple issues appear in more than one section. Twenty-five ESOP cases, all but one in private companies, were added for the 2021 edition. A total of 417 ESOP cases and a number of 401(k) cases are included. The publication categorizes all the court decisions in 401(k) company stock cases from 1990 through mid-2021 and provides brief summaries for decisions starting in 2010. Appendices discuss what the Supreme Court's Dudenhoeffer decision has meant for ESOPs, plus key elements in recent DOL fiduciary process agreements reached in settlements. We have tried to be comprehensive, but advisors must always supplement this with their own research.

Here's what's new in the 2021 edition: The last 12 months since June 2020 (the cutoff date for the 2020 edition) saw 25 new ESOP cases make it to court, all but one in private companies, although there were some additional decisions in some ongoing cases. Only three of the cases were either initiated by or had an amicus brief from the U.S. Department of Labor (DOL). Indemnification and insurance claims were a more active area during the last 12 months, with five decisions coming to mixed results. There were no specific trends that emerged in the last year, but valuation continues to be the most contested and consequential issue for ESOPs.

ESOP Regulatory Rulings 1990-2021

You also may be interested in our companion publication ESOP Regulatory Rulings 1990-2021, which provides a summary of rulings and regulations on ESOPs and related plans, including private letter rulings, DOL advisory opinions, DOL field assistance bulletins, IRS Technical Assistance Memoranda, and similar pronouncements such as the "ESOP Cadre" guidance.

Product Details

PDF, 109 pages
12th (August 2021)
Available for immediate purchase

Table of Contents

Special Note on the Presumption of Prudence Issue
DOL Process Agreements
Summary of ESOP Case Decisions
ESOP Cases
Claims Against Providers
Deferral of Gains Issues
Disclosure of Information
Distribution and Diversification
Employment Rights and Plan Eligibility Issues
ESOPs as a Takeover Defense
Executive Compensation
Indemnification and Insurance
Lenders as Fiduciaries
Management of Plan Assets: General
Management of Plan Assets: "Stock Drop" Cases pre-Dudenhoeffer (Including Presumption of Prudence)
Party-in-Interest Definitions
Plan Qualification
Qualification for Set-Asides
S Corporation Anti-Abuse Rules
Securities Law Issues Other Than Disclosure
Standard of Prudence After the 2014 Dudenhoeffer Case
State Law Claims
Voting, Tendering Rights, and ESOP Governance Rights
Who Is a Fiduciary?
401(k) Cases
Claims Against Providers
Issues with Offering and Holding Company Stock Other than Presumption of Prudence
Presumption of Prudence Issues
Right to Jury Trial
Securities Law and Required Disclosure Issues: Disclosure May Be Required
Securities Law and Required Disclosure Issues: Disclosure May Not Be Required
Standard of Prudence After the 2014 Dudenhoeffer Case
Standing Affirmed for Participants
Standing Not Affirmed for Participants
Other Standing and Class Certification Issues
Who Is a Fiduciary?
Appendix 1: What the Supreme Court's Dudenhoeffer Decision Means for ESOPs
Key Points
Standard of Prudence
Effect on ESOPs
Appendix 2: Appendix: Key Issues in DOL Settlement Agreements in GreatBanc, First Bankers Trust, James Joyner, Alpha Investment, Lubbock National Bank, and Farmers National Bank Cases
Valuation Assessment
Loan Structure
Providing the Right Information to the Appraiser


From "Management of Plan Assets: General"

Vigeant v. Meek, No. 18-3616 (8th Cir. Mar. 24, 2020): The Eighth Circuit denied an appeal by plaintiff employees of Lifetouch of a lower court ruling (Vigeant v. Meek, No. 0:18-cv-00577-JNETNL [D. Minn. Nov. 17, 2018]) over management of Lifetouch stock. Lifetouch stock dropped by more than $840 million between 2015 and 2018, resulting in an average loss of $22,000 per participant. Lifetouch was sold in 2017 to Shutterfly. The plaintiffs, supported by a DOL amicus brief, argued that the trustee should have diversified the shares when Lifetouch was in financial trouble, as required under the Tribble v. Edison ruling. But the appeals court said the relevant standard was Dudenhoeffer. That ruling, it said, says that ESOPs are intended to invest primarily in employer stock and that “any prudential duty to monitor that investment cannot be defined by traditional trust law standards, whether the employer’s stock is publicly or privately held….Thus, if the Trustee Defendants had determined that Lifetouch stock was excessively risky in 2015 and 2016, the only potential buyer for the stock was Lifetouch, which in effect would be a stock redemption.” The court also ruled that the purchase of shares based on a valuation of shares at the prior year’s end, even though new projections showed the likelihood of financial problems would drive the stock price down, was not an issue because the terms of the plan required it.

Moore v. Virginia Community Bankshares, No. 3:19-cv-00045 (D.C. Va. June 29, 2020): Ruled that the plaintiffs (who are current employees) could continue with a suit over valuation (see the separate discussion of this case below under “Valuation”) alleging that the company’s decision to finance a repurchase of shares by having the ESOP trust borrow money was a prohibited transaction and should have been at a lower price.

Godfrey v. GreatBanc et al., No. 18 C 7918 (N.D. Ill. Aug. 19, 2020): A district court allowed a case to proceed against GreatBanc Trust and certain officers of McBride & Sons. The company had been 100% ESOP-owned until a 2013 reorganization that reduced the ESOP’s ownership to 60%, with officers of the company owning 40%. In 2017, the ESOP’s shares were sold back to the new holding company entity. The plaintiffs allege that the reorganization deprived them of distribution rights and gave them shares with fewer control rights. GreatBanc argued that it was not responsible for these corporate decisions as a trustee. The court ruled that GreatBanc had a duty to review or potentially disallow the decisions to protect plan assets.

United States v. Lindsey 3:20-cr-00022 (E.D. Va. Feb 18, 2020): A district court convicted Patrick Lindsey, a former vice president of MGT Construction, of financial fraud involving over $20 million and sentenced him to 27 months in prison. The subsequent bankruptcy of MGT and its parent company, Thalheimer, led to a different lawsuit that was settled in 2019 concerning Thalheimer’s ESOP (Brincefield v. Studdard, No. 3:17-cv-00718-JAG [E.D. Va. Apr. 30, 2019]).

Hensiek et al., v. Board of Directors of Casino Queen Holding Company, Inc., et al., No. 3:20-CV-377-DWD (7th Cir. Jan. 25, 2021): The Seventh Circuit denied a request by the defendants in an ESOP case to compel arbitration over claims of a fiduciary breach related to the valuation of Casino Queen stock. The plan did not initially contain an arbitration clause, but in 2017 it was amended to require arbitration over benefits claims. The plaintiffs said the change was unilateral and could not be binding. The Seventh Circuit agreed.

From "Tolling"

Foster v. Adams & Assocs., Inc., No. 3:18-cv-02723-JSC (N.D. Cal. Feb. 26, 2019): Ruled that employees can proceed with a lawsuit alleging the ESOP at Adams & Associates overpaid for the shares and that the trustee for the plan, a former felon, should not have been appointed. The defendants argued the three-year tolling period should have started in 2013 when the company filed its Form 5500, but the court ruled that employees did not have actual knowledge of the breach until later. Also see the ruling in this case discussed under “Standing” below.

Walsh v. Maine Oxy-Acetylene Supply, No. 2:20-cv-00326-NT (D.C. Me. June 21, 2021): A court ruled that the trustee of an ESOP at Maine Oxy-Acetylene Supply cannot be dismissed from a case in which the plaintiffs contend that the ESOP trustee and the CEO of the company improperly terminated an ESOP at an improperly low price to orchestrate a favorable deal for members of the board to buy back the 49% of the company the ESOP then owned. The defendant, Carl Paine, argued that the six-year statute of limitation had passed because the date the valuation in question was sent to the trustee was more than six-years before the tolling period in the suit began. The court ruled, however, that Paine had continuing duties as a trustee until the plan was terminated and breached his duties by failing to act to rectify the violation. Paine also said that he should not be liable because the decision to terminate was a board decision, but the court noted that he was a member of the board and, in any event, as the trustee had to make sure that the ESOP received fair market value for the shares.