Employee Ownership Legal Digest
Corey Rosen (6)

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NCEO founder and senior staff member

Corey Rosen

May 17, 2024

Appeals Court Says Valuation Firm Owes Part of Costs of Defense in ESOP Case

In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc., Nos. 23-1167/1195 (6th Cir., Apr. 8, 2024), the 6th Circuit ruled that Great American was not responsible for all of the cost of the legal defense for Stout Risius, an ESOP valuation firm, in an ESOP lawsuit. The district court ruled that “Stout’s insurance policy obligated Great American to defend Stout in the underlying litigation until only claims falling within an exclusion provision remained, and that Stout had to reimburse Great American for defending Stout after the exclusion applied.” The case arose out of litigation against the ESOP at Appvion. Defendants won that case, but Great American claimed that its policy did not require it to pay for Stout’s defense after a certain point in the proceedings under Michigan law.

Corey Rosen

May 17, 2024

Symbria ESOP Valuation Case Can Proceed

In Placht v. Argent et. al., No. 1:21-cv5783 D (N.D. Ill. Mar. 24, 2024), a district court came to a mixed ruling in an ESOP valuation case against the trustee for an ESOP at Symbria, Argent Trust. Symbria provides rehabilitation services, wellness programs, pharmacy services, experience surveys, and strategic consulting services to senior-living and post-acute providers. The 2015 deal was for $66.5 million and was funded entirely with debt. Post-transaction, the value dropped to $9.3 million, and in 2020, the value was $8.65 million. Plaintiffs alleged the ESOP overpaid for the shares.

Corey Rosen

May 17, 2024

ESOP Radiology Company Settles Lawsuit

In a second radiology company case, Colon v. Johnson, No. 8:22-cv-00888-TPB-TGW (Mar. 28, 2024), a $19 million settlement was reached concerning alleged diversion of assets in an ESOP company. Plaintiffs sued the executives and the trustee, GreatBanc Trust, alleging that the executives and former owners of Advanced Diagnostic (ADG) had deprived the ESOP of value by diverting contracts from ADG to other companies they owned, structuring the deal with an excessive amount of warrants (42% of the fully diluted value), and ultimately selling ADG in a transaction that excessively favored the executives and owners. Plaintiffs alleged the defendants at ADG set up shell companies to acquire a valuable management contract for multiple imaging centers, even though ADG performed all of the work under a subcontract. In 2019, ADG was sold for $215 million, with the ESOP receiving only $10 million of that, partly due to the exercise of warrants and partly due to the ESOP paying off remaining acquisition loan debt. Plaintiffs also alleged, however, that much of the sale value was captured by the other entities the defendants had set up that were sold simultaneously, value the plaintiffs claim should have gone to the ESOP. The settlement will be divided among 285 plan participants.

Corey Rosen

May 17, 2024

Court Rules Arbitration Clause Does Not Apply in A360 ESOP Termination Lawsuit

In Williams v. Shapiro, No. 1:23-cv-03236-VMC (Mar. 20, 2024), plaintiffs allege that an ESOP set up at their company, A360, was improperly terminated, preventing them from reaping potentially very large gains on their unallocated stock. In 2017, A360 was spun off from a law firm to perform support services for law firms. A leveraged ESOP bought all of the shares. The market for such services soared in the next two years. The sellers, who remained in control of the company, decided to terminate the plan and buy back the shares in order to take advantage of the hot market. Sellers bought back the allocated shares at the most recent valuation, but plaintiffs allege the unallocated shares (the large majority of the shares at that point) were bought back at the purchase price, not the most recent sale price, thus depriving the participants of the appreciation on unallocated shares.

Corey Rosen

May 17, 2024

ESOP Valuation Case Against Envision Radiology Can Proceed

In Harrison v. Envision Management Holding Company, No. 22-1098 (D. Colo. Mar. 21, 2024), a district court said that plaintiffs had pleaded sufficient allegations to allow a case concerning the price paid by an ESOP for Envision Radiology to continue. Envision was sold to an ESOP in 2017. The ESOP paid $163.7 million to the sellers. Plaintiffs allege the ESOP paid $1,770 per share for 64% of the Envision shares and $1,404 per share for 36% of the Envision shares, but that there was no reason for the discrepancy. The defendants argued this was incorrect. The stock dropped to $349 after the transaction (the deal was financed with debt, so the stock price would normally decline). The judge ruled that at this stage, there were voluminous filings to review, and that it was premature to dismiss the case.

Corey Rosen

May 17, 2024

Former CEO and Owner of ESOP Company Sentenced to Prison for Fraud

In USA v. Corl et al., Docket No. 5:18-cr-00576 (N.D. Cal. Mar. 19, 2024), Harry Corl, former owner and CEO of Nu-Metal Finishing, was sentenced to serve 30 months in prison and pay $253,625 in restitution to 30 former employees of a company he and his wife had partially owned. The Corls sold part of the company to the ESOP, while the other part was owned by a separate owner. The Corls also served as plan fiduciaries. Corl and his wife were convicted of wire fraud and embezzlement, including spending company funds on extravagant jewelry and a Ferrari. The Corls arranged the sale of Nu-Metal, but they did not tell the buyer that there was an ESOP or another owner. The sentencing follows a four-year investigation by the Department of Labor.

Corey Rosen

April 08, 2024

Plaintiff Must Arbitrate ESOP Claim

In Harris v. Paredes, No. 3:23-cv-50231 (N.D. Ill. Feb. 26, 2024), a district court ruled that an arbitration in a plaintiff in an ESOP valuation lawsuit requires the plaintiff to pursue arbitration. The clause was written so that it would not apply if the issue was an ERISA violation subject to a class action but was instead focused on the claims of an individual. The court agreed with the plaintiff that arbitration claims cannot vitiate the rights of a plaintiff to sue for equitable or monetary relief on behalf of the plan but agreed with the defendants that the clause does not as written do that. It therefore ruled that “to the extent that Harris brings section 502(a)(2) claims that are to be pursued solely by her on behalf of the Plan—that is, in her ‘individual capacity’ within the meaning of the arbitration agreement—arbitrating them is compulsory. To the extent that Harris purports to bring claims on behalf of a class under section 502(a)(2), the Plan has validly agreed to waive that right, and she may not pursue them in arbitration.”

Corey Rosen

April 08, 2024

Casino Queen Employees Cannot Be Certified as Class in ESOP Valuation Suit

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., No. 3:20-CV-377-DWD (S.D. Ill. Feb. 26, 2024), a federal judge denied class certification in a long-running dispute over the valuation of shares in the sale of Casino Queen to an ESOP in 2012. Plaintiffs allege the ESOP’s 2012 purchase of the company for $170 million was based on excessively optimistic projections. They also allege the company sold and then leased back real property it owned for too low a price and that the two trustees for the deal were insiders with conflicts of interest and subject to direction from the board and ESOP administrative committee. The court said the actions in question occurred at different times over three years and affected participants in the suit in different ways. Of special concern was that some of the complaints are subject to a tolling limitation that can only be overcome by showing that fraud and concealment prevented plaintiffs from knowing an abuse had occurred. In this case, different members of the proposed class were not involved in the ESOP at the time of the alleged violations. The court agreed with the defense that the proposed class “includes a large subset of participants who cannot rely on the FAC’s concealment exceptions to toll ERISA’s six-year limitations period.” As a result, the court ruled the plaintiffs can only proceed individually.

Corey Rosen

April 08, 2024

Case Over Valuation of Terminated ESOP Shares Can Continue

In Bowers, et al. v. Russell, et al. No. 22-10457 (D. Mass., Feb. 15, 2024), a district court allowed plaintiffs to continue their case against the defendants in a valuation and release of claims dispute. Russelectric became a 30% ESOP in 2010. In 2013, the founder died, and ensuing disputes between the family members and an ex-wife over probate resulted in a settlement that led to terminating the ESOP in 2016. As part of the termination, shares in the suspense account were sold back to the company, and employees received the remaining value after the loan was paid on the unallocated shares. For the allocated shares, employees were paid $134 per share plus an agreement that participants would be paid the difference between $134 and any price paid for any sale of the company should one take place over the next three years. That sale did occur in 2019 for $676 per share.

Corey Rosen

April 08, 2024

Wells Fargo KSOP Litigation Can Continue

In Randall et al v. Greatbanc Trust Company et al., No. 0:2022cv02354 (D. Minn. Feb. 21, 2024), a court ruled that plaintiffs can continue their suit over the use of dividends on preferred shares in a 401(k)/ESOP at Wells Fargo. Wells Fargo previously reached a settlement with the DOL on the plan, but the court allowed an amended complaint from these plaintiffs to continue. Wells Fargo matched employer contributions to the 401(k) plan at 6% per year. The match could be made on shares released to participants in the ESOP from the suspense account. Wells Fargo used preferred stock in the plan, and used the dividends on the shares to help repay the ESOP loan and meet the match requirement. Plaintiffs allege the preferred was undervalued and that the use of the dividends to repay the loan did not benefit the participants. GreatBanc and the company officer defendants argued that “[t]here is nothing inherently suspicious, much less unlawful, about using dividends paid on stock held by an ESOP to pay down the sponsoring company’s loan to its ESOP, and then using the shares generated by the paydown of the loan to satisfy corporate matching obligations.” The court ruled that there were sufficient allegations at this stage to proceed.

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