Employee Ownership Legal Digest
Corey Rosen (21)

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NCEO founder and senior staff member

Corey Rosen

June 19, 2019

ESOP Law Firm Can’t Escape Liability

In Bloostein et al. v. Morrison Cohen LLP et al. No. 651241/2102, (Supreme Court of NY, Feb. 19, 2019), the law firm Morrison Cohen was denied a motion to dismiss a case against it arguing that advice it provided to sellers to multiple ESOPs caused them to lose their tax deferral in a Section 1042(a) transaction. The sellers paid $24 million in capital gains as a result. The sellers bought ESOP notes issued by Stonebridge Pass-Through Trust, with the bonds financed ultimately by Nomura International. Initially, the terms of the loan said that Nomura could sell the bonds if their grade dropped below a certain level, but at the last minute that was changed to allow a sale even if the insurance policy on the bonds fell. That latter event happened, and Nomura sold the bonds, creating a taxable event for sellers. Morrison Cohen said that it had relied on a tax opinion of another firm issued to the sellers, but the court decided that these opinions were not more than opinions, and that the plaintiffs could pursue their case against Morrison Cohen for not warning them of the potential risk. Morrison Cohen will appeal.

Corey Rosen

June 19, 2019

Tolling Period Can Be Extended in ESOP Case

In Foster v. Adams & Assocs., Inc., No. 3:18-cv-02723-JSC, N.D. Cal., Feb. 26, 2019), a district court ruled that employees can proceed with a lawsuit alleging the ESOP at Adams & Associates overpaid for the shares and that the trustee for the plan, a former felon, should not have been appointed. The defendants argued the three-year tolling period should have started in 2013 when the company filed its 5500 form, but the court ruled that employees did not have actual knowledge of the breach until later. The court thus took the view that tolling does not start when there is constructive knowledge, as the Sixth Circuit has ruled, but actual knowledge, as had been ruled by the Ninth Circuit.

Corey Rosen

June 19, 2019

Exxon Again Prevails in Stock Drop Suit

In Fentress v. Exxon Mobil, No. 4:16-cv-03484 (S.D. Tex, Feb. 4, 2019) a district court again rejected employee claims over the decline in Exxon Mobil stock price in their 401(k) plan. Employees alleged the company was inflating its actual oil reserves, causing the stock price to fall. The court ruled that the company could rely on the Dudenhoeffer standard that any alternative action would have done more harm than good.

Corey Rosen

June 19, 2019

Sellers and Company Can Be Held as Fiduciaries for Oversight of Trustee

In Acosta v. Saakvitne, No. 18-2019 BL18093 (D. Haw., Jan. 18, 2019), a district court denied motions to dismiss both the company, Bowers + Kubota Consulting, and the sellers to the company’s ESOP, for their alleged roles as fiduciaries. The DOL charged that the ESOP overpaid for the shares based on faulty revenue projections and sued the two parties as well as the trustee, Nicholas Saakvitne (who has since deceased). The company noted that the complaint did not allege any wrongdoing on the part of the company, but the court ruled that other violations might turn up at trial. The sellers argued that they did what they were supposed to do in appointing an independent fiduciary to handle the transaction, but the court ruled that sellers allegedly told Saakvitne that the company was worth $40 million, which may have made them functional fiduciaries and, in any event, they (as well as the company) had a duty to monitor the trustee as appointing fiduciaries. That raises important legal questions about what an appointing fiduciary should do if it finds the process being used appropriate, but disagrees with the price. That would make it a functional fiduciary and could be seen as an improper influence on the price.

Corey Rosen

June 19, 2019

Wawa Provides Limited Agreement on Class Status of Plaintiffs

In Cunningham v. Wawa, No. 2:18-cv-03355 (E.D. Pa., Feb. 18, 2019), Wawa partially agreed to allow plaintiffs to proceed with their action as a class, but reserved the right to challenge whether named plaintiffs are representative and whether affirmative defenses apply to any individuals. The case revolved around a change in Wawa’s distribution policy.

Corey Rosen

June 19, 2019

DOL Amicus Brief in Lifetouch Case Argues for Stricter Standards for ESOP Fiduciaries

In Vigeant v. Meek, No. 18-3616 (Eighth Cir., Feb. 26, 2019), the DOL entered an amicus brief on the side of plaintiffs appealing a previous district court ruling saying that plaintiffs in the Lifetouch ESOP case did not adequately plead that the plan’s fiduciaries had violated their ERISA duties with respect to an alleged overvaluation and continued purchase of Lifetouch shares. The court ruled the plaintiffs did not state their allegations with sufficient particularity as to what the defendants did wrong. The court also ruled that having an independent annual valuation was sufficient to determine if the price for the shares was appropriate. Moreover, the company was not in such dire straits that it might go bankrupt and thus continued purchasing of shares was reasonable. The DOL contends this is too high a bar because plaintiffs cannot know the particulars of what might have led to an improper valuation, that just having an annual valuation is not a sufficient defense, and that courts have tossed out the standard that holding and buying shares is acceptable as long as the company is not in imminent danger.

Corey Rosen

June 09, 2019

IBM Case Put on Hold

Jander v. Retirement Plans Committee of IBM, No. 17-3518, (2nd Cir., Feb. 4, 2019): The Second Circuit refused a request by IBM to put a case on hold in which the Court had previously ruled that plaintiffs in a stock drop suit could rely on a more favorable interpretation of the Dudenhoeffer standard. IBM wanted to delay the litigation while IBM sought an appeal to the Supreme Court. The one-page ruling did not elaborate on the rationale.

Corey Rosen

June 09, 2019

Qualifying Equity Grants Under Empowering Employee Ownership Act

The 2017 tax bill contained provisions that allowed employees in private companies that provide non-qualified stock options and restricted stock units to at least 80% of their workforce to defer taxation on the awards until up to five years after termination. The law was intended to prevent employees from ending up with grants that were taxed even though the resulting shares could not yet be sold.

Corey Rosen

January 13, 2019

Judge Inclined to Consider Owners of Company Sold to ESOP as Fiduciaries

In Acosta v. Saakvitne, No. 1:18-cv-00155-SOM-RLP, (D. Haw. inclinations Jan. 13, 2019) a district judge told counsels that she was inclined to rule that two owners of a Hawaii construction company that sold to an ESOP could be considered fiduciaries of the plan because they hired and were responsible for monitoring the appraisal firm and failed to provide realistic financial projections. The lawsuit also names the plan’s trustee, who has since died. The statement is not a decision, but advice to parties on how to prepare for oral arguments.

Corey Rosen

January 10, 2019

Wawa Suit Can Move Forward

In Cunningham v. Wawa, Inc., No. 2:18-cv-03355-PD (E.D. Pa., Ja. 10, 2019), a judge allowed a lawsuit against Wawa over changes in its ESOP to move forward. Plaintiffs allege that participants in the Wawa ESOP were harmed when the company amended the plan so that former employees who had stock in their accounts had to have the shares purchased and moved to cash investments. Wawa had previously settled with a group of plaintiffs but sought to dismiss the case from the second group. The judge agreed that the change did not violate the anti-cutback rule, but agreed that plaintiffs had sufficiently alleged a case that a change from stock to cash can, in effect, only be done prospectively, not for those who have already left employment under the prior terms of the plan. The lawsuit also alleged that their shares had been improperly valued, that plaintiffs relied on language from the SPD that seemed to prevent such a change, and that their rights had been misrepresented.

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