Court Rules in Favor of ESOP Trustees Who Did Not Diversify Holdings

A U.S. Court of Appeals has ruled that an ESOP trustee cannot generally be held liable for failing to diversify ESOP holdings out of company stock, even if such diversification would have been a more prudent course of investment. The case (Kuper v. Iovenko, CA 6, No. 94-3688, 10/4/95) concerned former employees of the Emery Division of Quantum Chemical. Emery was sold by Quantum in 1989, but the actual transfer of assets took place 18 months later. During that time, Quantum stock fell from $50 to $10, although it went up and down during the period. The Emery employees were still ESOP participants during the 18 months. The court ruled that the trustees have a presumptive right not to diversify because the plan is designed to invest primarily in employer stock.

The same reasoning was used in another appeals court ruling on a similar issue (Moench v. Robertson, CA 3, No. 94-5637, 8/10/95), even though, in this case, the court ruled the trustee should have diversified because the trustees knew, or should have known, that they were continuing to purchase shares in a company whose financial future was very poor. In the Quantum case, the future of the company was much more uncertain. There was at least a legitimate argument that the stock price would rebound during the time period in question.

On another matter in the Quantum case, the court ruled that the date of the appropriate valuation for the sale should be when the assets were transferred. In a decision by another appeals court in a parallel case on the same issue (Wulf v. Quantum Chemical, CA 6, June 1994, 22 BPR 1220, 18 EBC 1449), the court ruled the appropriate date was the day the sale took place.