Employee Ownership Legal Digest
Corey Rosen (5)

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NCEO founder and senior staff member

Corey Rosen

August 12, 2024

11th Circuit Grants En Banc Hearing Appeal by Department of Labor over Exhaustion of Legal Remedies Case

In Bolton v. Inland Fresh Seafood, No. 1:22-cv-04602AT (N.D. Ga. Dec. 5, 2023), a court dismissed a lawsuit against Inland Fresh Seafood over the valuation of the company when it was sold to the ESOP in 2016 for $92 million. The defendants did not respond to the substance of the claim in their legal filings, but instead argued that the case should be dismissed because the plaintiffs were required by the plan to pursue their legal remedies under the plan first. On appeal, however, the 11th Circuit, in a strongly worded opinion, ruled that the Department of Labor could receive an en banc hearing on the case (No. 1:22-CV-04602-LMM, 11th Cir. May 22, 2024). The appeals court ruled that exhaustion of administrative remedies under the plan did not cover issues of statutory fiduciary obligations that apply to the plan as a whole. The court noted that a fiduciary has a self-interest in denying the claims and that the complaint here did not focus on issues about the application of plan provisions to the participant but on the way in which the plan itself was operated. The court said that while plan administrators can review individual benefit denials and award benefits, they cannot impose personal liability on breaching fiduciaries to restore plan losses or subject non-fiduciaries to equitable relief.

Corey Rosen

August 12, 2024

Suit Can Proceed over ESOP Releveraging

In Shipp v. Central States, No. 5:23-CV-5215 (W.D. Ark. July 5, 2024), a district court ruled the plaintiffs had pleaded sufficient arguments to deny dismissal to the defendants, Central States Manufacturing and GreatBanc Trust, over charges that a releveraging at the 100% ESOP-owned company caused the share price for affected employees to fall improperly. The rapidly growing company had a mature ESOP and a quickly rising stock price. It chose to releverage its ESOP in order to purchase shares from former employee participants so that those shares could then be reallocated for all participants in the plan. The plaintiffs alleged that there were other ways for the company to handle getting shares to new employees and managing the company’s ongoing repurchase obligation. Defendants argued that the employees had not shown standing because they were not harmed by the transaction and that the trustees had an obligation to act in the best interest of the plan as a whole and not just for former employees who still had accounts. The plaintiffs did not argue that releveraging per se was improper, but that the manner in which it was done was. The judge ruled that at this stage, the plaintiffs had presented a sufficient case to deny dismissal.

Corey Rosen

July 12, 2024

Department of Defense Seeks Comments on Pilot Program to Provide Contracting Preferences to 100% ESOP-Owned Companies

The 2023 National Defense Authorization Act created a pilot program, known as Sec. 874, that allows the DOD to award certain follow-on contracts without initiating a competitive process to an employee-owned business that meets the definition of a “qualified business.” The program states that “contracting officers supporting a program selected for participation in the pilot will be able to award a follow-on contract for the continued development, production, or provision of products or services that are the same or substantially similar to those procured by DOD under a previous contract with a ‘qualified business’ under the authority of § 3201(c)(5).” The program was extended in 2024. The program authorizes contracting officers to award a sole source, follow-on contract to procure products or services similar to those acquired under predecessor contracts.

Corey Rosen

July 12, 2024

ESOP Class Action Case Can Proceed

In Bonds v. Heeter, et al., No. 23-12045 (E.D. Mich. May 8, 2024), a former steel processing company employee advanced most of his proposed class action challenging a $60 million stock purchase by the company’s employee stock ownership plan. The complaint argues that the $60 million sale to the ESOP was overvalued. Heeter argued that the sale price included a control premium when the ESOP did not have effective control and that projections used for the valuation were unrealistic. Two officers of the company contended they were not fiduciaries and should not be part of the defendant group, but the court said, at this point, it was enough to allege that actions they took, including projections for the forecast, caused the price to be inflated.

Corey Rosen

July 12, 2024

Defendants Can Appeal Class Certification in Morton Buildings ESOP Case

In Lysengen v. Argent Trust, et al., No. 1:20-cv-01177MMM-JEH (D.C. Ill. May 6, 2024), a court ruled that Argent Trust can appeal a granting of class certification by the court in 2023. The lawsuit hinges on a 50% drop in the value of Morton Buildings in the year following the company’s taking on debt to fund the ESOP purchase (these declines are normal in leveraged ESOPs). The plan initially owned a minority of the shares in the company. When it bought the remaining shares, participants meeting eligibility rules were given floor price protection against the anticipated debt-related drop in share price. The valuation also changed the way it treated excess cash, previously counted as a liability, as an asset. The company made payments to existing participants to compensate for that. The court had ruled earlier that Lysengen was not representative of a class but could sue as an individual representing the ESOP trust. In this ruling, the court said that Argent could appeal the decision because the issue is a matter of law, not fact.

Corey Rosen

July 12, 2024

Second Circuit Denies Arbitration Clause in ESOP Case

In Cedeno v. Argent Tr. Co., No. 20-CV-9987 (JGK) (2nd Cir. May 1, 2024), the Second Circuit upheld a lower court ruling 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.” Argent has appealed. Cedeno alleged the plan overpaid for ESOP shares. Argent specifically requested that the district court compel arbitration “on an individual basis, rather than in a representative capacity or class, collective, or group basis.” Argent argued that individual arbitration would “not affect the remedy that [Cedeno] could personally achieve under ERISA section 502(a)(2),” asserting that Cedeno could, in any event, recover losses only within his individual plan account. The appeals court ruled that “because Cedeno’s avenue for relief under ERISA is to seek a plan-wide remedy, and the specific terms of the arbitration agreement seek to prevent Cedeno from doing so, the agreement is unenforceable.”

Corey Rosen

June 12, 2024

ESOP Interim Valuation Case Settled

In Nguyen v. Westlake Services Holding Company, No. 8:23-cv-00854 (C.D. Cal. Feb. 5, 2024), the plaintiff alleged that Westlake Holding Company changed its ESOP rules in 2020 to allow the company to segregate accounts of former employees before their receiving a distribution as well as to allow a special interim valuation to reflect economic challenges arising from the pandemic. Westlake provides financing for vehicle purchases and is part of the Hankey Group, which includes a number of dealerships. Until the changes in 2020, the participants received a distribution in the second quarter of the year following termination based on the most recent appraisal. That was changed in 2020 to allow for account segregation at termination. At the same time, the company did a special interim valuation that reduced the 2019 price by 30%. The initial 2019 price was the one that otherwise would have been used for distribution for people terminating in 2020. Nguyen sued, saying that she was not informed of the change and that the change violated ERISA. The parties have now agreed to a settlement, but the amount was not disclosed.

Corey Rosen

June 12, 2024

Seventh Circuit Revives ESOP Lawsuit in Appvion Case

In the long-running case of Appvion Retirement Savings Retirement and Employee Stock Ownership Plan v. Buth, No. 18-CV-1861-WCG (7th Cir. Apr. 24, 2024), the 7th Circuit overruled part of a lower court’s dismissal of the ESOP valuation lawsuit. The case involves an ESOP at Appleton Paper (later Appvion). In 1998, employees funded the $106 million transaction by investing funds from their 401(k) plan. In 2018, the sole remaining member of the Appvion Retirement Savings and ESOP Committee sued the various defendants for fraud, arguing that the employees overpaid for the shares, that board members and executives received excessive bonuses for completing the deal, and that key advisors and board members improperly touted how good a deal this was in their roadshows selling it. The company performed well for several years but eventually went bankrupt in 2017. Most of the claims were dismissed either because they were time-barred or because the court found the plaintiffs failed to state a claim.

Corey Rosen

June 12, 2024

Court Allows Case to Proceed in Another KPC Healthcare Lawsuit

There have been multiple lawsuits involving the ESOP at KPC Healthcare over the initial valuation and later the sale of the company. Three have been settled, but in Truong v. KPC Healthcare ESOP Committee, Case No. 8:23-cv-01384-SB-BFM (C.D. Cal. May 3, 2024), a court let a case proceed. The main issue here was the plaintiff’s request to see the valuation report. The ESOP committee did not notify the plan participants of the sale until approximately eight months after it occurred and did not disclose the sale amount, the price per share, or the fact that the buyer, Victor Valley Healthcare, was owned by the same two people who had sold KPC to the ESOP.

Corey Rosen

June 12, 2024

Seventh Circuit Grants Casino Queen Request to Appeal Denial of Class Status

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., 20-cv-377-DWD (S.D. Ill. Mar. 6, 2024), the 7th Circuit approved a request by workers to appeal a prior judgment denying them class status. The workers allege that company executives charged their ESOP $170 million for shares that ended up being worthless. The district court had previously denied class status because of tolling requirement limitations.

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