Employee Ownership Legal Digest
Corey Rosen (19)

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NCEO founder and senior staff member

Corey Rosen

April 02, 2021

Mixed Decision in ESOP Valuation Case

In Stewart v. Saakvitne, No. 18-00155 SOM-WRP, (D. Haw., March 12, 2021), a district court denied summary judgment to former members of the board of directors of an ESOP firm, Bowers + Kubota, over an ESOP valuation case. The court also denied a DOL claim that the two individuals could be considered plan fiduciaries prior to their formally adopting a decision to proceed with the plan and hire an outside fiduciary (that fiduciary has since deceased). The court also denied a DOL claim concerning the validity of an indemnification provision for the board members because the DOL did not show they actually benefitted from it. Finally, the court ruled that the directors could be held accountable as fiduciaries if at trial they are shown to have inadequately monitored or improperly influenced the trustee concerning the valuation.

Corey Rosen

April 02, 2021

Class Status Approved in ESOP Refinancing Case

In Gamache v. Hogue, No. 1:19-CV-21, (M.D. Ga. March 3, 2021), a court certified class to allowed plaintiffs to proceed with a lawsuit alleging that a refinancing of a 97% ESOP that resulted in the two principals of the firm ending up with 40% of the shares was a violation. Defendants argued this was a corporate transaction, not an ESOP transaction, among other contentions.

Corey Rosen

April 02, 2021

Former ESOP Company Executive Sentenced to Prison for Financial Fraud

In United States v. Lindsey 3:20-cr-00022 (E.D. Va. Feb 18, 2020), a district court convicted Patrick Lindsey, a former vice president of MGT Construction, of financial fraud involving over $20 million and sentenced him to 27 months in prison. The subsequent bankruptcy of MGT and its parent company, Thalheimer, led to a different lawsuit that was settled last year concerning Thalheimer’s ESOP (Brincefield v. Studdard, No. 3:17-cv-00718-JAG (E.D. Va., April 30, 2019).

Corey Rosen

April 02, 2021

ESOP Valuation Case Can Proceed

In Scalia v. Reliance Trust et.al., No. 17-cv-4540 SRN-ECW (D.C., Minn., March 2, 2021), a district court rejected motions to provide a partial summary judgment for the plaintiffs or to dismiss the case for defendants. The case involves the alleged overvaluation of shares at Kurt Manufacturing. Defendants include Reliance as well as board members in their capacity to monitor the trustee. The court ruled that only a full trial review of the evidentiary claims could resolve whether a breach of fiduciary duty had occurred.

Corey Rosen

April 02, 2021

Plaintiffs Lose Again in Johnson & Johnson Case

In Perrone v. Johnson & Johnson, No. 3:19-cv-00923, (D. N.J., Feb. 26, 2021), a district court rejected a lawsuit alleging that Johnson & Johnson executives breached their fiduciary duties when they did not reveal problems with its talcum powder that were linked to cancer cases. Plaintiffs argued that the defendants “could have directed the Plans to hold incoming ESOP assets in cash until Johnson & Johnson stock was no longer artificially inflated.” The court ruled, however, that such an action arguably would have required disclosure and could have harmed the stock price. Plaintiffs also argued that by incorporating J&J’s securities filings “into plan-related documents,” such as the Summary Plan Description, corrective disclosures are now both corporate and fiduciary acts. The court disagreed, saying that the individuals involved had to pay attention to their “two hats” and that issuing a corrective securities disclosure was purely a corporate act, not a fiduciary requirement. Finally, the court said the plaintiff’s alternative course of action could not have been shown to do more good than harm.

Corey Rosen

March 01, 2021

IRS Seeks Comments on Form 5309 ESOP Determination Letter Request

As part of a program to reduce federal paperwork requirements, the IRS is asking for comments on Form 5309, Application for Determination of Employee Stock Ownership Plan. Comments are dues by April 21. Direct all written comments to Kinna Brewington, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224.

Corey Rosen

March 01, 2021

GreatBanc Case Can Proceed

In Godfrey v. GreatBanc et. al., No. 18 C 7918 (N.D. Ill., Feb. 21, 2021), a district court certified a class action lawsuit in an ESOP case at McBride and Sons involving a 2013 reorganization that reduced the ESOP’s ownership from 100% to 60%, with officers of the company owning 40%. In 2017, the ESOP’s shares were sold back to the new holding company entity. Plaintiffs allege that the reorganization deprived them of distribution rights and gave them shares with fewer control rights. Defendants argued that some of the plaintiffs lacked standing because they were not harmed by the transaction, including employees who may not have held stock at the time of the proposed transaction.

Corey Rosen

March 01, 2021

Request for Arbitration of ESOP Lawsuit Denied

In Hensiek et.al, vs Board of Directors of Casino Queen Holding Company, Inc., et.al, No. 3:20-CV-377-DWD (7th Cir. January 25, 2021), the Seventh Circuit denied a request by the defendants in an ESOP case to compel arbitration over claims of a fiduciary breach related to the valuation of Casino Queen stock. The plan did not contain an arbitration clause initially, but in 2017 was amended to require arbitration over benefits claims. The plaintiffs said the change was unilateral and could not be binding. The Seventh Circuit agreed, saying that arbitration clauses are only valid if 1) both parties agree, 2) those claiming a benefit have not received any benefit they would not have had otherwise had there not been an arbitration clause, and 3) continued employment and/or the right to receive benefits from the ESOP do not imply a required acceptance of arbitration. The court focused particularly on the issue of the plaintiff not receiving consideration, writing that “consideration is a prerequisite to the validity of a proposed agreement or modification of an existing agreement. Consideration exists only if there is a grant of an advantage or the bargained for acceptance of a disadvantage.” The court ruled the plaintiff received no such advantage. The rulings were pursuant to Illinois law concerning arbitration but given the similarity of state laws on these issues suggest that at least in the Seventh Circuit, arbitration clauses would only apply in certain cases. The case was remanded to the district court, which affirmed that the plaintiffs can proceed with their case and not be subject to the arbitration clause.

Corey Rosen

March 01, 2021

Raydon Settlement Denied:

In Woznicki v. Raydon, No: 6:18-cv-2090-Orl-78GJK (M.D. Fl., Feb. 17, 2021), a district court denied approval of a $2.4 million settlement with Lubbock National Bank in a $60.5 million lawsuit over an ESOP at Raydon Corporation. The stock price of the company declined about 12% in the following two years. The court said two of the class participants are not entitled to $10,000 under the settlement.

Corey Rosen

March 01, 2021

GE Wins Stock Drop Litigation Appeal

In Varga v. General Electric, No. 1:18-cv-01449-GLS-DJS (2nd Cir., Feb. 4, 2021), the Second Circuit affirmed a lower court ruling that the plaintiff did not show plausible alternative courses of actions that would have done more harm than good with respect to the drop in the value of GE stock in the company’s 401(k) plan. The lawsuit was based on GE’s inaccurate claims about reserves for insurance companies it owned, which ultimately caused the stock price to fall. But the court ruled that despite this, the plaintiff did not show that disclosure of the problem or removing the stock as an option would have done more good than harm, thus not meeting the Dudenhoeffer standard.

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