Trustee Not Required to Use Proceeds From Stock Sale to Repay ESOP Loan

In Benefits Committee of Saint-Goban Corp. et. al vs. Key Trust Company of Ohio, N.A. (U.S. District Court, Northern District of Ohio, Eastern Div., No. 1:00 CV 751, 2/5/05), the court concluded that Key Trust, acting as trustee for the Furon Corporation ESOP, was not required to use the proceeds from the sale of stock in Furon's terminated leveraged ESOP to repay the ESOP's loan. Furon Corporation set up in 1990 and loaned money to the ESOP to buy its shares. The loan was not secured by the stock the ESOP acquired. In 1999, Furon was acquired by Saint-Goban. There was over $6 million in stock still in the suspense account when the sale occurred, and $2.3 million in principal remaining to be paid. The sale agreement did not perfect a security interest in the shares in the suspense account for Saint-Goban. Saint-Goban wanted the proceeds of the sale of suspense account shares to be used to repay the remaining principal, as is normal in these situations. Key Bank, as trustee of the ESOP, refused, saying that while the plan document allowed the sale proceeds to be used in this way, it did not require it. Because the shares in the ESOP were not serving as collateral for the loan, there was no obligation to use sale proceeds to repay the loan. The court ruled in favor of Key Bank, and all of the plan's assets were distributed to employees.