Employee Ownership Legal Digest
Corey Rosen (14)

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Corey Rosen

KPC ESOP Class Action Can Proceed Against Investment Manager

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK (C.D. Cal. Jan. 15, 2021), a district court allowed employees of KPC Healthcare to proceed with their lawsuit over an alleged overvaluation. The ESOP bought 100% of KPC in 2015. Plaintiffs allege that Alerus, the ESOP trustee, did not sufficiently question the valuation, which was nine to 15 times higher than the price of company shares on a public market just two years before, when the company went private. The company had declining revenues during the ensuing two years, and the stock price fell after the transaction. In this motion, plaintiff Danielle Gamino sought to win approval to represent a class of employees in adding the investment management firm SPCP to the defendants. SPCP acted as a financial advisor for the deal. SPCP opposed the motion and challenged the adequacy requirement of certification pursuant to Rule23(a). SPCP argued that Gamino is an inadequate class representative because she lacks the required knowledge and understanding of the claim. The court ruled that the threshold for knowledge in an ESOP case is low and that, in any event, Gamino understands that the “implied price of KPC stock in the 2015 ESOP Transaction should have been a ‘red flag’ to SPCP, especially because they ‘said they did their due diligence.’”

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Corey Rosen

McBride ESOP Case Settled

In Godfrey v. GreatBanc et al., No. 18 C 7918 (N.D. Ill. May 16, 2022), a court approved an agreement to settle a lawsuit over an ESOP reorganization at McBride & Company in a 2013 reorganization that reduced the ESOP’s ownership from 100% to 60%, with officers of the company owning 40%. In 2017, the ESOP’s shares were sold back to the new holding company entity. Plaintiffs allege that the reorganization deprived them of distribution rights and gave them shares with fewer control rights.

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Corey Rosen

Settlement Approved in Raydon Case

In Woznicki v. Raydon Corp., No. 6:18-cv-02090-WWB-GJK (M.D. Fla., May 2, 2022), a district court awarded a $2.4 million settlement in a case challenging a $60.5 million transaction in which Raydon became owned by an ESOP. Plaintiffs alleged that shortly after the sale to the ESOP the company started laying people off, and the stock dropped to a value of $4.55 million two years later. Defendants, including the trustee Lubbock National Bank, argued that the Dudenhoeffer standard applies here, and the plaintiffs failed to state a claim that the defendants had a plausible alternative course of action. The court ruled that this standard does not apply to closely held companies because the lack of a market for the shares means that any action must be based on an appropriately determined fair market value. Prior attempts to settle had failed after a magistrate court found that there were multiple problems with the deal, including its failure to include an appropriate plan of allocation or to properly protect class members’ personal data.

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Corey Rosen

ESOP Lawsuit Over Sale of ESOP Company Can Proceed

In Moore v. Va. Cmty. Bankshares, No. 3:19-cv-00045 (W.D. Va.. Mar. 30, 2022), a court ruled that a lawsuit alleging fiduciary improprieties in the sale of ESOP shares at Virginia Community Bank (VCB) prior to a merger could continue. VCB set up an ESOP in 2006 and terminated it in 2016. A separate lawsuit over the valuation of the shares in that case is continuing. In this case, plaintiffs allege that directors and officers of the company unduly benefitted from the
sale of the company to Blue Ridge Bank. VCB originally planned to sell to another bank in 2017, but that fell through. Participants were told that the bank would focus on staying independent, but defendants soon conducted a search for another buyer, ultimately selling to Blue Ridge Bank.

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Corey Rosen

Court Dismisses Valuation Firm’s Claim Against Insurer

In Stout Risisus 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) for actions arising out of its valuation work for Wilmington Trust, which acted as the trustee for an ESOP at Constellis, Inc. In Constellis Emp. Stock Ownership Plan v. Wilmington Tr. N.A., Case No. 15 Civ. 1494, a court ruled that Wilmington was liable for causing the plan to overpay for Constellis shares. Wilmington then sued SRR over the valuation. SRR in turn sought to have Aspen, as its insurer, cover its costs. In this case, SRR asked the court for a declaratory judgment against Aspen requiring it to make these payments. The policy provided that coverage is subject to a prior knowledge condition, namely that as of “Any Knowledge Date identified in the Declarations of this Policy, no Insured knew or could have reasonably foreseen that such Wrongful Act or Interrelated Wrongful Acts might give rise to a Claim.” Aspen said that the Wilmington suit was known to SRR, so it knew there was a claim, and thus it not have to provide coverage.

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Corey Rosen

Court Allows Valuation Case to Proceed

In Lysengen v. Argent Trust, et. al., No. 1:20-cv-01177-MMM-JEH (D.C. Ill., March 22, 2022) a court ruled that an ESOP valuation could proceed against additional defendants in a case where the court had previously allowed the case to proceed against the plan’s trustee. Plaintiffs sought here to add the estates of selling shareholders for having constructive knowledge of the alleged violation of the ESOP overpaying for the shares. The complaint 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). Defendants argued that any claims should be handled in probate court, but the court ruled that ERISA has primacy. The court also agreed that the plaintiff had sufficiently pled that the defendants had sufficient knowledge of the deal so that they could be considered co-fiduciaries.

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Corey Rosen

Mixed Ruling in Appvion ESOP Case

In the long-running case of Appvion Retirement Savings Retirement and Employee Stock Ownership Plan v. Buth, Case No. 18-CV-1861-WCG (E.D. Wis., Mar. 17, 2022) a magistrate recommended to the court that it dismiss most of the claims in a revised complaint, but allow two to stand. The case involves an ESOP at Appleton Paper (later Appvion). 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. Prior decisions have sided with the defendants. In this case, plaintiffs filed a 395-page revised complaint against directors, officers, advisors, and the two different trustees who had been involved at different times. The magistrate recommended that all the claims be dismissed except two against Argent Trust, which became the trustee in the later years of the ESOP, and who the plaintiff alleges allowed the ESOP to overpay for shares. Other claims against other defendants were dismissed, generally because they were either time barred, the defendants were not deemed fiduciaries, or the plaintiffs failed to state a plausible claim.

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Corey Rosen

IRS Private Letter Ruling on Tax Status of ESOP Held Shares in a Spinoff

In PLR 202210004 (March 11, 2022) the IRS issued a private letter ruling concerning a complex business reorganization of a public company that offered an ESOP. The company spun off some of its assets to a new company it controlled and spun out another company as a separate entity. The company’s ESOP now will include stock in both the parent and the controlled subsidiary. The IRS ruled the shares of the subsidiary held by the ESOP were qualifying securities and the basis for the shares in each plan would be determined by allocating the basis between the two plans based on their relative fair market value after the spinoff. Participants in the new controlled entity were also allowed to divest out of company stock into a new plan. The IRS ruled that this conversion would not be treated as a taxable event. The net unrealized appreciation on the sale would be made without regard to any temporary investment of Company B stock sales proceeds in cash and other short-term investments.

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Corey Rosen

Court Dismisses Some Claims in ESOP Valuation Case

In Novosel v. Azcon Inc. Employee Benefits Plan Committee, No. 21 C 3080, (N.D. Il, E.D., March 8, 2022), a district court dismissed two claims concerning the valuation of stock for their plaintiff in Azcon’s ESOP, but allowed her to continue a breach of contract claim alleging that Azcon miscalculated her share value and distributed $50,000 less than she was owed. Novosel retired in 2015 and took advantage of a diversification option. She had understood the value of the diversified shares to be $1,840 per share, but a midyear valuation that would serve as the actual basis for the diversification set the value at only $165 per share. Novosel filed a claim against the administrative committee, and they agreed to settle to allow her to rescind her diversification and wait until she reached retirement age in 2019. The distribution would be paid in two or possibly more than two installments based on the value of the shares. In 2019, the share value had gone back to $1,055 per share, but dropped back to $561 after a midyear valuation an independent trustee asked for based on the significant hit to the company business from COVID. Novosel sued.

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Corey Rosen

IRS Issues Proposed Regulations for Required Minimum Distributions Under SECURE Act

On February 24, the IRS issued proposed regulations for retirement distributions under the SECURE Act. The 273-page proposal deals with a wide variety of issues, such as how RMDs are distributed to heirs after a participant’s death, how annuities are treated, and other issues.

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