Employee Ownership Legal Digest
Corey Rosen (11)

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Corey Rosen

Employee Can Amend Complaint in ESOP Valuation Case

In Novosel v. Azcon Inc. Employee Benefits Plan Committee, No. 21 C 3080, (N.D. Il, E.D., Jan. 9, 2023), an employee was allowed to amend her complaint that she was underpaid for her ESOP shares because of an interim valuation that reduced the value of her stock by $53,000. Some of her claims had been dismissed in a prior ruling, as we discussed in an article in our April 2022 issue. The interim valuation had been performed because of hits to the company’s earnings as a result of the pandemic. The court had dismissed claims based on whether the company could do an interim valuation, but allowed the plaintiff to amend her complaint to focus on the terms of her severance agreement with the company concerning what valuation date applied. In this ruling, the court allowed her to proceed on an amended version of the complaint on that basis.

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Corey Rosen

ISCO Plaintiffs Lose Request to Court to Reconsider Arbitration Decision

In Best et al v. James., No. 320-cv-299-JRW (W.D. Ky., Jan. 9, 2023) a court again ruled that plaintiffs must agree to arbitrate their claims against executives of ISCO Industries concerning the buyback of company shares from the ESOP. In a prior 2019 decision, Swain v. Wilmington Trust N.A., a federal judge approved a $5 million settlement with a class of employees at ISCO Industries who alleged the ESOP had overpaid for the shares. The settlement amounted to about $12,000 per employee, minus legal fees and taxes. The plaintiffs said the arbitration ruling ignored the 6th Circuit ruling in Hawkins v. Cintas, which concluded that arbitration rights that apply to the plan, not individual employees, cannot be forfeited. The judge rejected that reading of the company’s arbitration provisions, but allowed the employees 30 days to revise their compliant.

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Corey Rosen

Insurance Issues in ESOP Cases Become More Common

Insurance for ESOP companies and fiduciaries has become more common in recent years, with courts limiting claims often because of contract exclusions, as in Martin Resource Management Corp. v. Federal Insurance Co., (5th Cir., Aug. 6, 2021); Gemini Insurance v. Potts, No. 2:16-cv-612 (S.D. Ohio Jul. 15, 2020); and Great American Fidelity Insurance Company v. Stout Risius Ross, Inc., No. 19-cv-11294 (E.D. Mich., Aug 23, 2021). In Ross v. Aspen Insurance, No. 21 Civ. 4412 (ER) (S.D. N.Y., March 18, 2022), a district court ruled that Aspen Insurance did not have a duty to indemnify and defend Stout Risius Ross (SRR) or actions arising out of its valuation work for Wilmington Trust, which acted as the trustee for an ESOP at Constellis, Inc. SRR asked the court for a declaratory judgment against Aspen requiring it to pay insurance. The policy provided that coverage is subject to a “prior knowledge condition.” Aspen said that the Wilmington suit was known to SRR, so it knew there was a claim, and thus it did not have to provide coverage. SRR unsuccessfully argued that Wilmington had never before claimed its services were deficient, that SRR and Wilmington had a long-standing professional relationship, and that Wilmington had never before threatened litigation (and, in fact, had argued that the valuation SRR did was appropriate).

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Corey Rosen

Settlement Approved in Maine Oxy Case

In Walsh v. Maine Oxy Acetylene Supply, No. 2:20- incv-00326NT  (D. Me. Dec. 13, 2022), parties reached a $6.5 million settlement in a case in which plaintiffs contended that the ESOP trustee and the CEO of the company terminated an ESOP at an improperly low price to orchestrate a favorable deal for members of the board to buy back the 49% of the company  the ESOP then owned. 

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Corey Rosen

ESOP trustee loses motion to send case to arbitration

In Lloyd v. Argent Trust, No. 1:22-cv-04129-DLC (S.D. NY, Dec. 6, 2022), a district court refused to send to arbitration a suit claiming Argent Trust allowed an ESOP to overpay for its purchase of stock in W BBQ at an inflated price. Argent said that the plan had an arbitration clause, but the judge ruled that would deny plaintiffs rights afforded under ERISA. Argent plans to appeal.

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Corey Rosen

Class approved in Gannett 401(k) employer stock lawsuit

In Stegemann v. Gannett, No. 1:18-cv-00325-AJT-JFA (E.D. Va., Nov. 17, 2022) a district court dismissed a motion for summary judgment from Gannett corporation arguing that plaintiffs could not be certified as a class in a long-running case involving employees at a Gannett spinoff, Tegna. After the spinoff, employees who no longer worked at Tegna, including Gannett employees, could not buy more Tegna stock, but they could continue to hold it, as well as sell and invest in other assets in the 401(k) plan. Tegna stock dropped sharply, and employees sued, saying the trustees should have sold the shares in the plan even absent employee directions. The Tegna stock fund was eventually removed as one of the plan’s 401(k) options.

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Corey Rosen

Bankers Trust of South Dakota decisively defeats appeal on Tharanco ESOP lawsuit

In Plutzer v. Bankers Trust Company of South Dakota et. al., No. 22-561-cv (2nd Cir., Nov. 21, 2022) a court dismissed a claim against Bankers Trust of South Dakota, the trustee for the ESOP at Tharanco Group. In 2015, an ESOP bought 100% of Tharanco for $133 million. The sale was fully leveraged, and the stock dropped to $13 million the next year. It rose in the following years, but dropped down to $9.8 million in 2019. The plaintiff essentially argued that the decrease was sufficient cause to move to the next stage of a trial. The court ruled that the mere statement of a claim followed by “threadbare” justification is insufficient to show the plaintiff could demonstrate actual harm. Defendants argued that, among other things, the drop in value was a result of leverage.

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Corey Rosen

World Travel Lawsuit Settled

In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA, Nov. 7, 2022), the 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, improper discount rates, and using the wrong discount rates. The plaintiffs also alleged that the ESOP paid for control it did not have because the sellers retained board control.

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Corey Rosen

Stout Risius Must Pay Fiduciary Insurer

In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc. et al., No. 2:19-cv-11294 (E.D. Mi, Nov. 1, 2022), a district court ruled the ESOP valuation firm Stout Risius must pay $60,000 in costs the company argued should have been covered by its insurer, Great American Fidelity Insurance Company. Great American had claimed it did not have to defend or indemnify the ESOP appraisal firm Stout Risius Ross over allegations about its valuation work for Appvion, an ESOP company that went bankrupt. All the federal claims under ERISA have been dismissed in the case, but state securities laws claims are still being litigated. Great American claims it is not liable because of an exclusion clause it claims exempts it if the defendant can be shown to have violated ERISA or securities laws.

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