August 18, 1995

Roth Court Rules That Stock Is Not "Adequate Security"

NCEO founder and senior staff member

In Roth v. Sawyer-Cleator Lumber Co. (CA 8, No. 94-3368, 7/27/95), a U.S. Court of Appeals revisited a case that has been the subject of a number of rulings. Sawyer-Cleator had an ESOP that paid departing employees over 10 years in equal installments with interest. The stock of the company was used to secure the promissory note. The company went bankrupt and was unable to pay on the notes. Two participants sued. The trustees prevailed in district court, arguing that the bankruptcy of the company meant employees would have suffered a loss in any event, but the court ruled that had the trustees obtained better security, participants would have obtained payment.