Employee Ownership Legal Digest
Corey Rosen (9)

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Corey Rosen

September 11, 2023

Arbitration Clause Not Binding in ESOP Case

In David Burnett, et al., v. Prudent Fiduciary Services LLC, et al., No. 22-270-RGA (3rd Cir. August 15, 2023), the 3rd Circuit affirmed a lower court ruling that an arbitration clause does not apply in an ESOP case. The employees helped the ESOP fund a minority stake in the company with their 401(k) assets. The stock price fell after the deal, and plaintiffs sued, charging the valuation was in error. The defendants sought to enforce an arbitration clause, but the court followed a magistrate’s recommendation, concluding that arbitration took away rights of participants to sue on behalf of the plan. Western Global continues to fly, but it filed for bankruptcy in August. The pilots appealed, but the 3rd Circuit agreed with the lower court

Corey Rosen

September 11, 2023

KPC Settlement

In our previous discussion of the settlement in the KPC Healthcare ESOP, we noted that the plaintiffs pointed to a sharp drop in the company’s stock price after the ESOP. We should have added that the settlement was for only $9 million in a $227 million complaint, suggesting that there were very strong arguments on the other side of this case.

Corey Rosen

September 11, 2023

Raytheon Defeats Bid to Reopen United Technologies Stock Plan Lawsuit

In Darnis v. Raytheon Techs. Corp., 22-2861-cv (2nd Cir. Aug. 3, 2023), the 2nd Circuit denied an effort by employees who had received equity compensation awards when United Technologies was sold to Raytheon in 2020. The plaintiffs contended that the conversion formula for their shares was unfair. Plaintiffs said that the plan required adjustments in the case of a conversion of shares so that the award value and the stock price would trend in the same direction. Plaintiffs said there was too much of a disconnect, but the judge ruled that the plan language stated that the compensation committee was granted discretion over how to do this.

Corey Rosen

September 11, 2023

In February, the IRS proposed changes to forfeiture rules for defined benefit and defined contribution plans. The comment period has now ended, and the changes should be finalized soon.

The proposed regulations would “clarify that forfeitures arising in any defined contribution plan (including in a money purchase pension plan) may be used for one or more of the following purposes, as specified in the plan: (1) to pay plan administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants’ accounts in accordance with plan terms.” The use of forfeitures to reduce employer contributions includes the restoration of inadvertent benefit overpayments and the restoration of conditionally forfeited participant accounts that might otherwise require additional employer contributions, for example, the restoration of accounts conditionally forfeited under § 1.411(a)-7(d) (relating to certain distributions and cash-outs of accrued benefits). ESOP forfeitures almost always are simply reallocated to other employee accounts.

Corey Rosen

August 03, 2023

World Travel ESOP Settlement Approved

In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA June 29, 2023), plaintiffs agreed to settle a lawsuit in dispute over the company’s ESOP valuation. An ESOP bought World Travel from members of the Wells family in 2017 for $200 million. Plaintiffs alleged the plan overpaid because of faulty projections, including not accounting for liabilities for potential refunds of commissions to its clients and improper discount rates. The plaintiffs also alleged that the ESOP paid for control it did not have because the sellers retained board control. The final settlement will result in about $9,000 per participant, or 39% of the total claimed value.

Corey Rosen

August 03, 2023

Arbitration Clause Does Not Override Litigants’ ERISA Rights in RNVB Case

In Su v. Petersen et al., No. 4:19-cv-00705 (E.D. Tex. July 12, 2023), a district court also allowed a case to proceed despite an arbitration clause. Plaintiffs allege that a trustee allowed a sale of the assets of the ESOP trust back to the company (RNVB) at a price that was below what the stock was worth. Four days after the sale, a partnership formed by officers and an investment partnership agreed to pay a much higher price to buy the company. Plaintiffs contend that the board replaced the prior trustee with a new trustee because the prior one would not go along with the deal. The company had an arbitration clause for the ESOP, but the court, relying on the same logic that the circuit courts referenced above have used, said the clause did not prevent the case from moving forward. A related ESOP case against the company and its plan trustees was the subject of a separate settlement agreement in Casey et al. v. Reliance Trust Co., No. 4:18-cv-00424 (E.D. Tex. March 16, 2020).

Corey Rosen

August 03, 2023

Labor Department Wins Court Order Removing Trustee in Case Involving Misappropriations of Assets

In Su v. Ascent Construction Inc., No. 2:23-cv-250 (D.C. Utah July 3, 2023) the US Labor Department won a court order removing the trustee of a Utah construction company’s employee stock ownership plan. The DOL said the sole trustee of the plan, Ascent Construction President Bradley Knowlton, “withdrew money from the Plan’s accounts and deposited the funds into Ascent’s corporate accounts and used the money for non-Plan purposes….Knowlton and Ascent further failed to distribute Participant funds totaling $30,129.91.” The court removed Knowlton as a trustee and required the company to appoint a new outside trustee to help resolve the issue.

Corey Rosen

August 03, 2023

Arbitration Clauses Not Enforceable in ESOP Cases

In Henry v. Wilmington Trust et al., No. C.A. 19-1925 DM (D.C. Del. June 30, 2023), a district court ruled that a plaintiff (Henry) was not subject to an arbitration clause in the company’s ESOP. Henry contends the ESOP had overpaid for the shares at BSC Ventures. The plaintiff also contends that he never knew about an arbitration clause affecting the ESOP until he filed a lawsuit and that he had never consented to it. Defendants argued that the clause was a condition of employment and thus applied to Henry. Defendants also argued that Henry lacked standing because he did not “allege sufficient facts to support a plausible inference of harm by showing the ESOP in fact overpaid.”

Corey Rosen

July 21, 2023

Guidance Issued on Expansion of Employee Plans Compliance Resolution System

SECURE 2.0 expanded the application of the Employee Plans Compliance Resolution System (EPCRS), which allows companies to voluntarily correct certain errors. The current guidance on how to use the system is in Revenue Procedure 2021-30. SECURE 2.0 requires that the IRS develop new guidance within two years of the date of the bill’s enactment. In Notice 2023-43, the IRS issued advance guidance on the new provision that companies can use (pending the final rules) and also solicited comments on the proposal.

Corey Rosen

July 21, 2023

Trustee, Not Participants, Has the Right to File Claims in ESOP Bankruptcy Case

In CPESAZ v. Oxford Restructuring Advisers, Bk. No. 9:20-bk-10554-DS (9th Cir. Bankruptcy Appellate Panel, June 2, 2023), the 9th Circuit ruled that ESOP participants in an ESOP at Community Provider of Enrichment Services Arizona do not have grounds for filing claims against the company in a bankruptcy liquidation case. The 100% ESOP-owned provider of mental health services filed for bankruptcy in 2020 and liquidated its assets. The ESOP was terminated. Several employees and the trustee filed claims for payment. The trustee filed one claim stating that a 2018 valuation was excessive and that current participants deserved to have funds added to their accounts. The trustee also filed a claim for excess assets after the liquidation that should be added to ESOP accounts.

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