Employee Ownership Legal Digest
Corey Rosen (17)

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NCEO founder and senior staff member

Corey Rosen

Court Allows ESOP Valuation Case to Proceed

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK (C.D. Cal. Jan. 15, 2021), a district court allowed employees of KPC Healthcare to proceed with their lawsuit over an alleged overvaluation. The ESOP bought 100% of KPC in 2015. Plaintiffs allege that Alerus, the ESOP trustee, did not sufficiently question the valuation, which was 9 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. Alerus said the complaint alleged no specific facts about its fiduciary process, but the court ruled that inference and belief were sufficient at this stage of pleading to allow the case to proceed. Company defendants asked for dismissal on the grounds that their job was to appoint an independent trustee, but the court ruled that their duty to monitor made them potentially liable as well. The court refused to dismiss claims against the former owner on the grounds that he knew the price he was receiving might be excessive. Finally, the court denied a motion to dismiss a claim that participants as plaintiffs should have been able to see the valuation report.

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Corey Rosen

Plaintiff Can Pursue Claim Despite Arbitration Clause

In a very similar case on arbitration Henry v. Wilmington Trust et.al., No. C.A. 19-1925 DM (DC, Del., Sept. 10, 2021), a district court ruled that a plaintiff (Henry) could pursue his claim that an ESOP had overpaid for the shares at SSC Ventures. The plaintiff contends that he never knew about an arbitration clause affecting the ESOP until he filed a lawsuit and that he had never consented to it. Defendants argued that the clause was a condition of employment and this applied. Defendants also argued that Henry lacked standing because he did not “allege sufficient facts to support a plausible inference of harm by showing the ESOP in fact overpaid.”

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Corey Rosen

One 401(k) Stock Drop Case Can Proceed, One Cannot

In Myers v. Administrative Committee Seventy Seven Energy Retirement Plan, No. CIV-17-200-D (W.D., Okla., Sept. 29, 2021), a district court disallowed a class-action lawsuit to continue concerning the spinoff of Seventy Seven Energy from Chesapeake Energy. Chesapeake Energy stock continued to be held in the Seventy Seven’s 401(k) plan but declined in value. In the Myers case, the plaintiff had signed a severance agreement that precluded the claims and the court found that her situation could not be shown to be typical of a class that stakes a claim. But in a separate case, Snider v. Administrative Committee Seventy Seven Energy Retirement Plan, Cov-29-977-D (W.D., Okla., Oct. 8, 2021), another employee was allowed standing because the court ruled his claims could be typical of a class of employees in the plan.

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Corey Rosen

Settlement Reached in Unusual ESOP Case

In Foster v. Adams & Assocs., Inc., No. 3:18-cv-02723-JSC (N.D. Cal. Sept. 26, 2021), a class of current and former employees agreed to pay $3 million to settle allegations that trustees and board members of Adams & Associates, a Job Corps contractor, participated in prohibited transactions, failed to make required disclosures, and improperly agreed to indemnification. The trustee (now deceased) had pled guilty to embezzling funds from other ESOP companies. Plaintiffs said the board of director defendants failed to tell the trustee that when the company became a 100% ESOP, it would lose its DOL set-aside status, and failed to disclose falling student revenue, all of which led to the ESOP overpaying for the shares.

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Corey Rosen

Seventh Circuit Upholds Ruling That Arbitration in ESOP Case Inapplicable

In Smith v. Greatbanc Trust, No. 20 C 2350 (7th Cir., Sept. Sept. 10, 2021), the Seventh Circuit upheld a lower court ruling that an arbitration clause in a plan document could not be used to prevent a former participant from pursuing a claim that the ESOP had overpaid for shares in a valuation case involving Triad Manufacturing. Defendants argued that an arbitration clause had been added to the plan after the employee terminated but before the employee received a distribution. The employee contended he had not seen or consented to the clause and could not forfeit his right to sue the plan on behalf of other participants in the plan. The Seventh Circuit agreed, noting that ERISA provides that participants can seek relief individually and as a class. The language of the decision provided some guidance on how an arbitration agreement could be made acceptable.

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Corey Rosen

Appeals Court Says Chubb Ltd. Not Liable for Insurance Payments to ESOP Trustee

In Martin Resource Management Corp. v. Federal Insurance Co. (5th Cir., Aug. 6, 2021), the Fifth Circuit ruled that Chubb Ltd. did not have to cover Martin Resource Management for its reimbursement to Wilmington Trust, its ESOP trustee, for payments it made in an ESOP valuation case settled in 2020. Martin filed suit when the insurance company said it was not liable under the terms of its policy to cover the ESOP trustee because “the demands, as they appear from Wilmington, are facially insufficient to trigger the insuring clause, which requires the assertion of a ‘Fiduciary Claim … made against (Martin) … for a Wrongful Act committed … by (Martin).’” Martin was not named as a fiduciary in the complaints and there were no allegations made against Martin, only Wilmington, so Martin had no recourse against the insurer.

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Corey Rosen

Court Rules Former ESOP Company CEO Must Pay Back Misappropriated Funds

In Rael & Letson v. Clark (Cal. Appeals Court, Unpublished, Apr. 14, 2021), a California court ruled that Michael Clark was liable as former CEO for misappropriating over $3 million from the company for his personal use by having the company pay personal credit card bills, charges for his home utilities, private airplanes, country club dues at four clubs, a car, and other items for his personal use.

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Corey Rosen

Seventh Circuit Says ERISA Does Not Preempt Certain Bankruptcy Law Claims

In Halperin v. Richards, No. 20-2793, WL 3184305 (7th Cir. July 28, 2021), the Seventh Circuit considered whether ERISA “preempts certain state-law claims brought by bankruptcy creditors on behalf of a company against its directors and officers and others alleged to have inflated the company’s stock value to conceal the company’s decline and to benefit corporate insiders.” The plaintiffs, who are co-trustees of the Appvion Liquidating Trust, argued that the defendants (the ESOP trustee, the appraisal firms, and the directors and officers of Appvion) overvalued the shares bought by the company’s ESOP, causing the company to eventually go bankrupt. An ERISA lawsuit in the case (Appvion v. Buth) over similar issues had been dismissed.

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