NCEO founder and senior staff member
Corey Rosen
In Cothran v. Adams, No. 8:23-cv-00518-CEH-CPT (M.D. Fl. Feb. 16, 2024), a settlement has been reached in another case of an ESOP termination. In 2011, Electric Supply (ESI) set up a non-leveraged ESOP with the intention of the ESOP becoming the majority owner over time. After some years, the family owners decided to stop buying shares, although they continued to put in cash.
Corey Rosen
In Chea v. Lite Star ESOP Committee, No. 1:23-cv-00647-JLT-SAB (E.D. Cal., Jan. 25, 2025), a magistrate court ruled that a lawsuit over the valuation of shares sold to an ESOP at B-K Lighting was overstated, largely because of allegedly excessively optimistic forecasts and because the ESOP paid for control it did not functionally have. The plaintiffs did not actually see the valuation, and defendants argue they suffered no harm from the transaction and had no factual basis for the allegations, but the judge ruled that at this stage, it was too early to dismiss the claims. The judge made a similar ruling as to whether the sellers and executives, not just the independent trustee, could be parties to the suit. The court also ruled that nontrustee defendants could have exercised some degree of control over the valuation through their financial projections and other actions and thus could not be dismissed from the case at this point.
Corey Rosen
Churchill became a 49% ESOP in 2023, with the ESOP owning convertible preferred shares. In Arnold v. Paredes, No. 3:23-cv-00545 (M.D. Tenn., Jan. 31, 2024), plaintiffs allege that part of the dividends paid on the shares were used to pay off the ESOP debt and offset required employer contributions to the plan, which the defendants argue is what the dividends are supposed to be used for. In 2020, the ESOP acquired the remaining shares. Plaintiffs also allege that the 2020 valuation was three times the prior valuation. The difference, the defendants claim, was due to improved performance, the conversion of preferred to common, and the ESOP gaining control. Plaintiffs say that the prior CEO and owner retained effective control as well as stock appreciation rights and that the debt taken on to purchase the shares was both imprudent and caused the share price to drop. Defendants argued that two of the plaintiffs had signed arbitration waivers and could not claim to be part of a class. The court ruled that plaintiffs cannot waive claims owed to the ESOP.
Corey Rosen
In Johns v. Morris, No. 5:23-CV-324-D (E.D.N.C. Feb. 6, 2024), a district court ruled that Johns, the former COO and CEO of Morris & Associates, had standing to sue under ERISA over allegations that he was improperly dismissed from his job because as the ESOP fiduciary. John questioned the validity of the valuation of company stock and the company’s allowing the excessive use of company assets for the personal use of other individuals at the company. After he filed suit, the company also dismissed him as trustee. The company moved for dismissal, arguing that Johns was no longer an employee and did not have standing. The court ruled that because he was still a plan participant (he was fired in 2023), he did have standing. The company also argued that the “complaint fails to allege he [Johns] gave information, testified, or was about to testify in any inquiry or proceeding relating to ERISA,” a standard set in King v. Marriott International, Inc. for what an employee needs to show in order to file a claim under Section 510 of ERISA, which is intended to protect employees from being fired over complaints about their plan (but only under narrowly defined circumstances). In this case, the court ruled that Johns was also acting as a fiduciary, so this standard did not apply. The case is one of the very few ESOP cases filed under Section 510, in part because it does set such a high bar for plaintiffs.
Corey Rosen
In Couturier v. Comm’r of Internal Revenue, No. 19714-16, (U.S.T.C. Jan. 22, 2024), a tax court ruled that a case must go to trial over a dispute over whether Claire Couturier made an excess contribution of $25,132,892 of the $26 million paid to an individual retirement account (IRA) during 2004–2005. Couturier filed for summary judgment, contending that there was no “excess contribution” because the property for which the $26 million was allegedly paid was from his ESOP. Couturier had owned 4,586 shares of stock through Noll Corporation’s ESOP. He also had stock options for at least 80,000 shares, participated in another incentive plan through which he held at least 500 more shares, plus “tax bonus units,” and through a deferred compensation plan, was entitled on retirement to monthly payments of $30,000 as of 2004. He was bought out for $256 million for all these accounts and rolled them into an IRA. The IRS failed to challenge his tax return for income tax deficiencies before the statute of limitations expired. However, in 2016, the IRS issued a notice that claimed Couturier was liable for roughly $8.5 million in excise taxes because the 4,586 shares of stock that could legitimately be rolled over to his IRA had been worth only $830,392, and the vast majority of the $26 million was a buyout of the three incentive and compensation plans noted above, none of which were qualified plans eligible for nontaxable IRA rollovers. The case has moved in and out of court since its filing. The ESOP transaction was also the subject of litigation and was ultimately settled in Solis v. Couturier (Civ. 2:08-cv-02732-RRB-GGH, E.D. Ca., filed Mar. 10, 2010).
Corey Rosen
In Nguyen v. Westlake Services Holding Company, No. 8:23-cv-00854 (C.D. Cal., Feb. 5, 2024), a district court allowed a case to proceed in which the plaintiff alleges that Westlake Holding Company changed its ESOP rules in 2020 to allow the company to segregate accounts of former employees prior to 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, 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 court said that Westlake could do an interim valuation but that there were sufficient grounds on the timing and accuracy of the valuation at this stage not to dismiss the case. It agreed with the defendants that the timing of the distribution was permitted. The court allowed the plaintiff to amend the complaint.
Corey Rosen
In a report that received significant media attention, Oxfam, a nonprofit focusing on hunger and other poverty-related issues, found that “the combined fortunes of the world’s five richest men have more than doubled to $869 billion since 2020 while five billion people have been made poorer.” Other data points in the same direction of increasing concentration of wealth.
Corey Rosen
NCEO member Vicki Graft at FORVIS wrote the following useful reminder of new rules that go into effect in 2024 for ESOPs and other defined contribution plans:
Corey Rosen
In Su v. Bowers, D.C. No. 1:18-cv-00155SOMWRP (9th Cir. Jan. 7, 2024), the Ninth Circuit again said that the Department of Labor did not have to pay attorneys’ fees to the defendant attorneys in a valuation case the DOL decisively lost. In that earlier case, Walsh v. Bowers, et al., a court definitively ruled for the defendants against the DOL because the trustee had sufficient (albeit a short) time to vet the ESOP transaction, had unfettered discretion to hire its own independent appraiser, and had negotiated the deal and even saved the ESOP money. The court found that the ESOP trustee fulfilled its duty to the ESOP and its participants even though the trustee had worked for the seller before and knew the price the seller wanted in advance. The judge rejected the DOL’s valuation expert as unreliable. Nevertheless, in Su v. Bowers, the Ninth Circuit reaffirmed its earlier ruling that “the district court did not abuse its discretion in denying attorneys’ fees. In hindsight, the Department of Labor’s case had many flaws. But the district court did not err in concluding that the government was ‘substantially justified’ in its litigation position when it went to trial. The government’s expert, despite his errors, arguably had a reasonable basis—at least at the time of trial—in questioning whether the company’s profits could surge by millions of dollars in just months.”
Corey Rosen
In Bolton v. Inland Fresh Seafood Employee Stock Ownership Plan, No. 1:22-cv-04602-AT (N.D. Ga. Dec. 5, 2023) a district court dismissed a lawsuit at Inland Fresh Seafood over the valuation of the company when it was sold to the ESOP in 2016 for $92 million. The plaintiffs alleged that the defendants (including the independent trustee and sellers to the ESOP (all of whom were executives of the company), and the executives each were acting as fiduciaries. The suit alleged the executives had already received multiple bids for the company at lower prices. They provided the appraiser with allegedly highly unrealistic projections about significant increases in revenues and profits, which they allege were accepted to provide a higher than fair value. The plaintiffs said the defendants sought multiple valuations for the stock and accepted the highest one.
