Employee Ownership Legal Digest
Corey Rosen (22)

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NCEO founder and senior staff member

Corey Rosen

Reliance Cannot Bring Estate Into ESOP Litigation

In Acosta v. Reliance Trust, No. 0:17-cv-04540- SRN-ECW (D-Mon. Ja. 7, 2019), a district court ruled that Reliance Trust could not bring the estate of a now deceased owner into a lawsuit the DOL has filed against Reliance in a case involving an alleged overvaluation of shares for sale to the ESOP. Reliance argued that the agreement with the ESOP stated that if an overvaluation was found, the seller would reimburse the ESOP trust, but the DOL argued that a) it had not sued the estate in this action and b) that Reliance’s interest in the case was the same as the estate’s, so it was not necessary to include the estate in the action.

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Corey Rosen

IBM Employees Get Rehearing of Stock Drop Case

Jander v. Retirement Plans Committee of IBM, No. 17-3518, (6th Cir., Dec. 10, 2018) is a potentially important ruling that runs against recent trends in stock drop cases. The Second Circuit reversed and remanded a lower court ruling that found that the trustees of IBM’s ESOP were not in violation of their fiduciary duty when they failed to disclose that a major division of the company was overvalued. The lower court ruled that plaintiffs failed to show disclosure would not have done more harm than good. The Sixth Circuit, however, ruled that this standard is too strict. The court said the Dudenhoeffer ruling laid out two conflicting standards for determining if a fiduciary should have concluded an action would have done more harm than good. The first is whether an average fiduciary would have made that conclusion; the second is that any fiduciary could have made that decision. Here the court chose not to decide which standard applied, saying that the plaintiffs met either test. The plaintiffs had convincingly argued, the court said, that early disclosure and correction would not have resulted in more damage to the stock price than ultimately resulted when the division in question was sold and information came out about the accounting irregularities and other issues the division faced. The fiduciaries, the plaintiffs argued, could have taken action to correct these issues earlier and disclosed them to the market. In a presumably efficient market, the court said, the price would ultimately reflect the problems anyway. In light of all this, the court said the plaintiffs had made a sufficient plea to require remanding.

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Corey Rosen

Ninth Circuit Lowers Bar for Statute of Limitations in ERISA Cases

In Sulyma v. Intel Investment Policy Committee, No. 17-5864 (9th Cir., Nov. 28, 2018) the Ninth Circuit ruled on a statute of limitation claim involving Intel’s 401(k) plan. While employer stock was not involved, the decision is important for ESOP cases. Claims under ERISA must be brought the earlier of six years from when a) a breach of ERISA took place or b) the last date on which the fiduciary could have repaired the breach or c) three years after the plaintiff had actual knowledge of the breach. The Sixth Circuit has ruled that if an employee is given material stating the risks of an investment or other ERISA issue or right, that that constitutes actual knowledge. In this case, the plaintiff agreed he got the material, but said he did not read enough of it to understand the new investment options. The court said that this was enough to show he did not have actual knowledge. Under this interpretation, defendants have to show not just that they made the material available but that employees read and understood it, a difficult task.

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Corey Rosen

IRS Determination Later May Be Partially Renewed

Due to budget constraints, the IRS stopped issuing determination letters for periodic compliance. Under prior procedures, companies filed for letters of determination in a five-year cycle. The process allowed companies to receive IRS validation of plan changes. While not having to file will save some costs for companies, it means companies do not have any assurances that changes they make to a plan are acceptable to the IRS on audit. As a result, companies need to be particularly diligent in making sure any changes they make to their plans are fully compliant with the law, including periodic internal reviews to make sure plan requirements are being followed. 

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Corey Rosen

Piggly Wiggly Employees Reach Settlement in Major ESOP Case

In Spires v. Schools, No. 2:16-cv-00616- RMG, (D.C. S.C., preliminary settlement approved), a district court approved a $5.2 million settlement of $5.2 million in cash plus an additional deposit into the settlement fund account of between $2.475 million and $3.45 million. The suit revolved around the collapse of Piggly Wiggly Carolina (there are other Piggly Wiggly chains, some that have ESOPs; they are separate businesses), which at one time employed several thousand workers at over 100 stores. The plaintiffs accused then third-generation management of imprudent business decisions, including taking very large bonuses, siphoning money into other ventures, the trustee not insisting on independent board members who could have helped steer the company in a different direction, paying excessive rent for some properties in which executives had a financial interest, and paying too much money for notes payable to individuals involved in the transaction. The defendants said the decline was not due their malfeasance but competition from Walmart and Kroger. The story generated major attention in the Charleston area, where the company is based, including a long report, Stickin with the Pig: A Tale of Loyalty and Loss in the Charleston Post and Courier.

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Corey Rosen

Distribution Deemed to Have Occurred When Made, Not Received

In Wengert v. Rajendran, No. 16-4571 (8th Cir. Apr. 3, 2018), a circuit court upheld a lower court ruling on how much discretion can be given to plan administrators concerning the timing of distributions. The case revolved around unusual facts. The plaintiff was the divorced spouse of an ESOP company CEO. Compliant with the rules of the plan, the CEO requested a lump-sum distribution of his account on a Friday, but died two days later. He and his spouse were not divorced at the time of the distribution. She submitted a claim for the benefit as the surviving spouse, as defined in the ESOP plan document. The plan administrator said that when the distribution was sent, the CEO was still alive. The spouse said that the distribution was not actually received until after he died. The courts ruled that the administrator had used reasonable discretion in determining the effective date of the distribution.

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Corey Rosen

Settlement Filed in Case of Executives Buying Company Back from an ESOP

In Gough v. Tennyson, (N.D. Cal., No. 4:17-cv-02215-PJH, March 2, 2018, motion for preliminary settlement approval), a court approved a $1.75 million settlement in a case in which executives bought a company from an ESOP at an allegedly considerable discount to fair market value. The ESOP paid $7.425 million to buy 100 percent of the company’s stock in 2005, but the company declined in the recession until it was worth only $300,000 in 2010. It rebounded to $2.637 million in 2012. In 2015, three executives bought the shares from the ESOP for $100,000. Defendants argued they were no longer fiduciaries because the shares had been sold, but the court rejected that disingenuous argument.

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Corey Rosen

Settlement in ESOP Case Involving Self-Serving Executive Decisions

In Brent v. Meeker, No. 8:17-cv-02433- EAK-AEP, (M.D. Fla., March 29, 2018, motion for settlement approval), parties agreed to a $170,000 settlement in the case of Meeker Enterprises. Plaintiffs allege that executives of the 100% ESOP extended the ESOP loan repayment, extended the company’s line of credit to another company owned by CEO William Meeker, and paid a family member who did little work. The suit also alleged that the ESOP paid for control when, in practice, Meeker had effective control through various covenants and control of the board. The proposal must be approved by the court.

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Corey Rosen

Sonnax Case Settled

In Acosta v. First Bankers Tr. Servs., Inc., (No. 5:16-cv-00328-gwc) (D.-Vt, proposed consent judgment, April 27, 2018) the DOL and First Bankers Trust settled a lawsuit alleging that the ESOP at Sonnax Industries overpaid for its shares. The ESOP had purchased the shares for $48.8 million in 2011. The DOL alleged the value was inflated because of overly aggressive assumptions about future growth. Sonnax agreed to pay ESOP participants back $2 million, two executives will pay $200,000 in civil penalties, and First Bankers $25,000 in penalties. Sonnax was sold to Berkshire Hathaway in April contingent on the settlement for $65 million, a 35% increase over the 2011 valuation. Employees overwhelmingly voted for the transaction.

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