Employee Ownership Legal Digest
Corey Rosen (16)

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Corey Rosen

February 11, 2022

DOL Investigation Results in Settlement with ESOP Company

We don’t normally report on DOL investigations, but a recent (January 4, 2022) settlement is instructive. Fiduciaries of the Mohawk Hospital Equipment Inc. ESOP will have to pay $431,000 over claims of excessive compensation paid to themselves and family members. Plaintiffs must also appoint an independent director and establish an independent compensation committee. The CEO will resign as trustee of the ESOP and be replaced with an independent trustee to better advocate for the plan’s interests.

Corey Rosen

February 11, 2022

Release of Claims Not Enough to Dismiss Case

In Zavala v. Kruse- Western, Inc., No. 1:19-cv-00239- DAD-SKO (E.D. Cal., Dec. 13, 2021), a district court ruled that GreatBanc Trust and the board of Kruse-Western Inc. must defend themselves in a lawsuit over the 90% drop in stock price following a $244 million ESOP buyout. The share price fell both because of leverage and following a poisoning of horses that resulted from feed from Kruse-Western’s Western milling division. The defendants argued that the plaintiff had voluntarily released claims against the company and the plan and lacked standing because he became a participant after the initial stock purchase. The plaintiff agreed he had signed a release as part of a severance agreement, but said the terms were not discussed in any detail. The court ruled that the claims by the plaintiff were brought on behalf of the plan, however, so the plaintiff could not have released the claims without the consent of the ESOP.

Corey Rosen

January 10, 2022

Uncompleted ESOP Deal Results in Broker Dealer Rescission Claims

In GunBroker.com, LLC v. Tenor Capital Partners, LLC, no. 1:2020cv00613 (N.D. GA., Nov. 3, 2021), a Georgia court provided mixed rulings on whether Tenor Capital was required to be a registered investment advisor under the Federal Investment Advisors Act or Georgia state law. Defendants argued that if Tenor were not properly registered, the contract between GunBroker and Tenor Capital would be void as a matter of law. The court ruled for GunBroker. This aspect of the case is reviewed in detail in a separate article in this issue of the newsletter, “Must ESOP Transaction Advisory Firms Be Registered Investment Advisors?”.

Corey Rosen

January 10, 2022

Court Reduces Settlement in Sentry Equipment Case

In Walsh v. Vinoskey, No. 20-1252 (4th Cir., Dec. 7, 2021), the 4th Circuit reduced a $6.5 million settlement between Adam Vinoskey, the former owner of Sentry Equipment & Erectors Inc., and the Department of Labor, by $4.2 million. The case concerned a second ESOP transaction that brought the ESOP to 100%. The court ruled that the valuation was flawed for three reasons: 1) It assumed the ESOP trust now had effective control when the court concluded sellers retained significant operational control; 2) projections were too optimistic; and 3) the weighted average cost of capital assumptions were flawed. The DOL said that Vinoskey had a duty to make reasonable efforts to remedy the trustee’s breach in approving the valuation, even though he was not involved in it, because he was intimately familiar with the company’s financial situation and its value. Vinoskey argued, in part, that he had provided $4.6 million in loan forgiveness on his seller note and should be credited for that. The district court did not agree.

Corey Rosen

January 10, 2022

ESOP Lawsuit Not Covered by Fiduciary Insurance

In Secretary of Labor v. Potts, 2021 No. 20-3856, (6th Cir., Nov. 24, 2021, unpublished) a circuit court ruled that a DOL lawsuit against an ESOP trustee in a valuation case is not covered by the company’s professional liability insurance policy because the policy expressly excluded ESOP issues from coverage. The defendants said the renewal application was “abundantly clear” that it covered ESOP issues, but the court said that “the text of the policies’ exclusion applies to all ERISA violations by its plain terms” and contains no exception for the defendants’ activities as a stock plan fiduciary. A concurring opinion said the case was a “cautionary tale” and that the policy at issue is “close to the line of an illusory policy.”

Corey Rosen

January 10, 2022

Court Provides Mixed Ruling in Stock Distribution Case

In Horan et al v. Goal Structured Solutions, Inc. Employee Stock Ownership Plan et al, 3:20-cv-02290 (S.D., Calif. Nov. 2, 2021) a district court said that plaintiffs could proceed with a claim for equitable relief. Plaintiffs had received a distribution election form allowing them to take a distribution or keep what they were due in the plan. The plaintiffs elected not to take a distribution, but soon thereafter the company notified them that their shares were being cashed out and rolled into an IRA. The entire plan was terminated the next year, but in that ensuing year (2019) the company’s stock value went up and the value of the IRA investments went down. The plaintiffs said they suffered involuntary losses as a result.

Corey Rosen

December 08, 2021

Aetna Prevails in Stock-Drop Lawsuit

In Radcliffe v. Aetna, Inc., No. 3:20-cv-01274, 2021 WL 4477408 (D. Conn. Sept. 30, 2021) a district court said that plaintiffs failed to state a claim concerning the continued holding of Aetna stock while the stock price was artificially inflated. Aetna is a subsidiary of CVS Healthcare, and CVS stock declined after changes in its accounting practices. The court ruled that neither Aetna nor CVS was a fiduciary because investment decisions were delegated to the Aetna Benefits Finance Committee. Because all alleged nonpublic information about the risks to CVS’s stock had already been disclosed by CVS in public filings with the SEC, the court ruled that the market had already incorporated this information into the pricing of the shares and plaintiffs had the information available to them.

Corey Rosen

December 08, 2021

Second Circuit Affirms Lower Court Ruling that Officers and Trustees’ Action in Tribune Corporation’s ESOP LBO Were Not Fraudulent Conveyance

In In re Trib. Co. Fraudulent Conv. Litig., 10 F.4th 147 (2d Cir. 2021), reh’g en banc denied, No. 19-3049 (2d Cir. Oct. 7, 2021), the Second Circuit upheld lower court rulings that officers, board members, and various advisors (including GreatBanc as ESOP trustee and Duff & Phelps as a financial advisor) could not be sued by the bankruptcy trustee for fraudulent conveyance. The court determined that the bankruptcy trustee did not allege that Duff & Phelps provided inaccurate or incomplete information in connection with the LBO to Tribune or GreatBanc and that Tribune Corp. received reasonably equivalent value in exchange for the financial advisors’ fees.

Corey Rosen

December 08, 2021

DOL Argues Shares in ESOP Suspense Account Should Not Have to Bear Costs of Repaying an ESOP Loan When a Company Is Sold

A complaint filed by the Department of Labor in Walsh v. Peterson et al., No. 4:21-cv-0086, (E.D. Tex. Oct. 29, 2021) raises a potentially troublesome line of argument for ESOPs. The case grows out of Coleman v. Brozen, No. 4:19-cv-00705 (E.D. Tex., May 6, 2020). The DOL as plaintiff alleges that the ESOP trustee Neil Brozen allowed a sale of the assets of the trust back to the company at a price that was below what the stock was worth. Shortly after the sale, a private equity firm paid a much higher price to buy the company. The DOL contends that the board replaced Argent Trust with Brozen because Argent would not go along with the deal.

Corey Rosen

December 08, 2021

ESOP Arbitration Clause Again Rejected

Continuing a recent series of court decisions, in Cedeno v. Argent Tr. Co., No. 20-CV-9987 (JGK), (S.D.N.Y. Nov. 2, 2021) a district court ruled that an arbitration agreement precluded participants “from seeking relief for the plan as a whole, a form of relief that is otherwise provided for by ERISA” and that such action is contrary to the language and intent of the law.

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