Employee Ownership Legal Digest
Corey Rosen (10)

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Corey Rosen

July 21, 2023

Trustee, Not Participants, Has the Right to File Claims in ESOP Bankruptcy Case

In CPESAZ v. Oxford Restructuring Advisers, Bk. No. 9:20-bk-10554-DS (9th Cir. Bankruptcy Appellate Panel, June 2, 2023), the 9th Circuit ruled that ESOP participants in an ESOP at Community Provider of Enrichment Services Arizona do not have grounds for filing claims against the company in a bankruptcy liquidation case. The 100% ESOP-owned provider of mental health services filed for bankruptcy in 2020 and liquidated its assets. The ESOP was terminated. Several employees and the trustee filed claims for payment. The trustee filed one claim stating that a 2018 valuation was excessive and that current participants deserved to have funds added to their accounts. The trustee also filed a claim for excess assets after the liquidation that should be added to ESOP accounts.

Corey Rosen

July 21, 2023

Triad Manufacturing ESOP Case Settled

In Smith v. Greatbanc Trust, No. 20 C 2350 (D. Ill. June 7, 2023), a district court approved a $14.8 million settlement involving an ESOP at Triad Manufacturing. The ESOP had purchased the company for $106 million in 2015. The stock value dropped to $3.3 million after the leveraged transaction. The Seventh Circuit had previously denied the company’s claim that the plaintiffs were subject to an arbitration clause. The court also seemed to accept the argument that the post-transaction decline in the value of the stock showed that the ESOP overpaid for the shares—even the defendants argued that this was simply an artifact of the acquisition debt.

Corey Rosen

July 21, 2023

KPC Healthcare Case Comes to an End

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-V-01126-SB-SHK (C.D. Cal. June 5, 2023), Silver Point Capital agreed to a $100,000 settlement over its role in the ESOP at KPC Healthcare. Silver Point had previously won a dismissal from the case. The ESOP bought 100% of KPC in 2015. Plaintiffs allege that Alerus, the ESOP trustee, did not sufficiently question the valuation, which was nine to 15 times higher than the price of company shares on a public market just two years before, when the company went private. The company had declining revenues during the ensuing two years, and the stock price fell after the transaction. The other defendants in the case, including Alerus, agreed to a $9 million settlement last year. With the Silver Point settlement, the plaintiff has agreed to drop her pending appeal of the case over the settlement.

Corey Rosen

June 09, 2023

DOL ESOP Valuation Regulation Process Outlined

The US Department of Labor (DOL) has stated that it will undertake a formal notice and comment rulemaking “relatively soon” on the adequate consideration requirement governing the valuation of ESOP-held shares. The WORK Act (part of the SECURE 2.0 Act of 2022) required the DOL to set guidelines for ESOP valuation. Simultaneously, the DOL has been facing a formal petition under the Administrative Procedures Act (APA) brought by The ESOP Association (TEA) calling for the same formal rulemaking. The DOL denied the petition under the APA but nonetheless agreed to a formal public notice and comment rulemaking with a process that includes publishing their draft proposed regulation through public notice and providing the opportunity for stakeholder comments. The agency must then respond to those comments before issuing any final regulation.

Corey Rosen

June 09, 2023

Triad ESOP Settlement Terms Announced

In Smith v. GreatBanc Trust Company, No. 20 C 2350 (N.D. Ill. Feb. 9, 2023), plaintiffs and defendants agreed to settle a case in which the plaintiffs argued that their ESOP paid $104 million for stock they contend was worth only $4 million. On April 24, the parties filed a settlement agreement for $14.8 million for the court to approve. The settlement follows a 10th Circuit ruling in 2021 that denied the defendants’ motion to force arbitration in the case.

Corey Rosen

June 09, 2023

Silicon Valley Bank Employees Can Get Back $25 Million Set Aside for Stock Purchases Under ESPP

About 4,000 employees of failed Silicon Valley Bank will get back $25 million that they had set aside to buy stock at a discount under the bank’s employee stock purchase plan. The plan allowed employees to set aside wages over an offering period to purchase company stock at a 15% discount when the offering period ends. There was some uncertainty about whether the employees could recoup these funds after the bank failed, but on April 25, the FDIC announced that its insurance program would cover these funds.

Corey Rosen

June 09, 2023

SBA Adopts New Guidance Making Loans to ESOPs Much Easier

The Small Business Administration (SBA) has taken steps to make loans to ESOPs much easier than under prior rules. The agency had received considerable criticism for issuing requirements for ESOP loans that are inconsistent with the language and intention of the Main Street Employee Ownership Act (MSEOA). That law was passed in 2018 to remove numerous barriers that made SBA loans or loan guarantees for ESOP acquisitions impractical. The law was also designed to allow ESOPs to qualify for loans under the SBA’s 7(a) program, which allows qualified lenders to process loan applications that can receive SBA guarantees. The loans can be for up to $5 million.

Corey Rosen

May 16, 2023

Court Denies Envision Motion to Have 10th Circuit Reconsider Its Ruling That Envision Cannot Compel Arbitration in ESOP Case

In Harrison v. Envision Management Holding Company, No. 22-1098 (10th Cir. Apr. 11, 2023), the 10th Circuit denied a request that it reconsider its earlier three-judge ruling that Envision Management Holding Company cannot compel arbitration in a case concerning the price an ESOP paid for shares in the company. Envision asked that the entire court decide the issue. The plaintiff had alleged that the ESOP overpaid for the shares. The plan contained an arbitration clause, which Envision sought to enforce. The court agreed, concluding that “the arbitration provisions of the Plan Document effectively prevent Harrison from vindicating many of the statutory remedies that he seeks in his complaint under ERISA § 502(a)(2),” primarily because arbitration prevents him from pursuing claims for the plan rather than just for himself. The new ruling leaves the prior three-judge ruling intact.

Corey Rosen

May 16, 2023

ESOP Trustee Must Face Class Action Lawsuit in Symbria Transaction

In Placht v. Argent et. al., No. 1:21-cv5783 D (N.D. Ill. Apr. 11, 2023), a district court allowed plaintiffs to proceed as a class in an ESOP valuation case against the trustee, Argent Trust. Symbria provides rehabilitation services, wellness programs, pharmacy services, experience surveys, and strategic consulting services to senior-living and post-acute providers. The 2015 deal was for $66.5 million and was funded entirely with debt. Post-transaction, the value dropped to $9.3 million, and was valued at $8.65 million in 2020. Plaintiffs alleged the ESOP overpaid for the shares. Argent did not contest the filing for class action status, but the court ruled that it had to make its own assessment.

Corey Rosen

May 16, 2023

Timeliness and Standing Issues Do Not Prevent ESOP Lawsuit over Sale of ESOP Company From Proceeding

In Moore v. Va. Cmty. Bankshares, No. 3:19-cv45 (W.D. Va. Mar. 30, 2023), a court ruled that a lawsuit alleging fiduciary improprieties in the sale of ESOP shares at Virginia Community Bank (VCB) prior to a merger could continue. The defendants argued that the plaintiff’s original claims were not filed in a timely way. The plaintiff responded that the statute of repose for her claims is tolled (extended) because there was fraudulent concealment prior to the ESOP’s termination on December 31, 2016, and the errors were not cured prior to distributions being made in 2018. The court ruled that there were sufficient allegations of fact concerning concealment to allow the case to proceed.

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