Employee Ownership Legal Digest
Corey Rosen (23)

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Corey Rosen

DOL settles lawsuit relating to Cactus Feeders ESOP transaction

In Acosta v. Cactus Feeders, Inc., et al., 2:16-cv-00049-J-BR (N.D., Tex., May 4, 2018), the insurers for Cactus Feeders, certain of its present and former directors, officers and members of its ESOP Committee, and Lubbock National Bank (the ESOP trustee) agreed to pay $5.4 million into the Cactus Feeders ESOP to settle a lawsuit initiated by the DOL alleging that the appraisal for a transaction that increased the ESOP’s ownership of Cactus Feeders from 30% to 100% did not adequately adjust for the alleged dilutive impact of warrants and stock options, did not apply a discount for lack of marketability, and did not include a discount for lack of control. The defendants agreed to the settlement, but with no admission of liability. The transaction was for $100 million, so the settlement amounted to 5.4% of the total, mostly to be added to the ESOP trust. As part of the settlement, Lubbock National Bank agreed to adopt the same process agreement that the DOL and GreatBanc Trust Company entered into in 2014.

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Corey Rosen

Epic Systems Supreme Court Case May Impact Arbitration in ESOP Companies

In an online article “The Potential Impact of the Supreme Court’s Epic Systems Decision on ESOPs,” Chelsea Ashbrook McCarthy, Louis Joseph, and Jessica Farmer of Holland & Knight note that the Court’s analysis in the case indicates that it “would likely reject an argument that an arbitration provision with a class action waiver in an employee stock ownership plan (ESOP) is fundamentally unenforceable under ERISA.” The Epic case did not deal with an ESOP company (although Epic, one of several companies involved, does say that it offers all employees stock) but more broadly employers’ rights to enforce arbitration causes. Arbitration clauses are not common in ESOPs, however, and questions remain about whether they could still be challenged given the specifics of how ESOPs work. Read more at https://tinyurl.com/ ESOParbitration.

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Corey Rosen

ERISA Supersedes State Tax Law

In Matters of Patrick Murphy & Kathleen Murphy, DTA No. 825277 (N.Y.S. Tax App. Trib., Mar. 6, 2018), the New York State Tax Tribunal ruled that ERISA supersedes state tax law claims against what appears to be a sham ESOP. JJF Realty was 99% owned by an ESOP and 1% by the Triune Foundation. Mr. Murphy was the president of Triune and the sole trustee of the JJF ESOP. Murphy and his wife were the only ESOP participants. The company was a limited liability partnership taxed as an S corporation. In 2006, the partnership sold property for a $2.2 million gain. The state alleged that the amount was subject to capital gains tax; the Murphy’s argued that the JJF was not taxable as an ESOP. The state contended that the ESOP was not legitimate. On appeal, the State Tax Tribunal ruled that ERISA preempts state law on these matters. It is not clear from the case why the IRS allowed the JJF plan to continue, as it appears to be a clear violation of the anti-abuse rules for S ESOPs.

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Corey Rosen

DOL, Court Argue for Limits on ESOP Fiduciary Indemnification

In Pfeifer v. Wawa, Inc., No. 2:16-cv-00497- PD (E.D. Pa., motion for settlement approval filed 12/29/17), a case we reported on previously, the Department of Labor argued, and the court agreed, that a company cannot indemnify an ESOP fiduciary. That has been the position of the Ninth Circuit, but the Sixth Circuit in Pfahler v. National LatexProducts said that indemnification was allowed within certain limits. The Wawa case does not set any precedents, and was settled before a trial was concluded, but if it does hold more broadly, it reinforces the need for companies to have adequate fiduciary insurance to pay for defense and settlement costs.

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Corey Rosen

Stock is Not Money Under Railroad Retirement Act

In Wis. Cent. Ltd. v. United States, U.S., No. 17-530, (U.S. June 17, 2018) the Supreme Court ruled that stock options paid to railroad employees are not taxable as “money” under the terms of Railroad Retirement Act. Wisconsin Central had paid taxes on the options, then decided it should not have because the Act states that only “money” received by employees is taxable. The court remanded the case on a 5-4 vote. The case involved only the specifics of the Railroad Retirement Act rules. Rules for the taxation of stock options in general are very specific in stating how they need to be taxed. 

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Corey Rosen

Chicago Bridge and Iron 401(k) Stock-Drop Case Dismissed

In Kinra v. Chicago Bridge & Iron, 17 CV-4251 (S.D.N.Y., May 24, 2018), the Second District Court for New York continued its pattern of denying stock-drop claims in public company 401(k) plans. Plaintiffs alleged fiduciaries knew or should have known that the stock was likely to fall following a troubled acquisition, but the court ruled that a) the plaintiffs failed to allege sufficient facts that the fiduciaries should have known the stock would fall and b) failed to show that there were plausible courses of alternative action, such as disclosure or freezing the option to buy the shares, that would not have adversely affected the price of stock in the plan.

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Corey Rosen

Allergan Beats Stock-Drop Lawsuit

In In re Allergan ERISA Litigation, No. 2:17-cv-01554-SDW-LDW, (D.-N.J., July 2., 2018), a judge dismissed a suit against Allergan and its directors in a 401(k) stock-drop suit concluding that the plaintiffs did not show that the defendants were plan fiduciaries. The court ruled that it was insufficient to allege that the defendants were fiduciaries because they appointed the independent plan trustee. The ruling does not refer to a duty to monitor the trustee, but focuses on whether the defendants took action that caused the trustee, in this case, not to remove the stock. The court found insufficient evidence for this claim. Defendants were also not fiduciaries as a result of their securities filings. The court also ruled that the plaintiffs did not allege reasonable alternative courses of action the company or its executives could have taken in light of the company’s alleged antitrust violations. Disclosing these, the court said, could have done more harm than good.

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Corey Rosen

Bank Should Have Allowed Employees to Transfer Shares Out of ESOP

In Bryant v. Community Bankshares, Inc., 17-15360 (11th. Cir., unpublished June 12, 2018) an appeals court ruled that plaintiffs were correct in alleging that the trustees of the Community Bankshares ESOP breached their fiduciary duty when they failed to follow the participants’ instructions to diversify shares, as the plan and the law provided they could do. The court rejected Community Bankshares’ argument that allowing the plaintiffs’ diversification to proceed would cause harm to other plan participants.

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Corey Rosen

Rainbow Disposal Case Must Proceed

In a detailed decision, in Hurtado et. al. v. Rainbow Disposal Co., Inc. Employee Stock Ownership Plan, 8:17-cv-01605-JLS-DFM (C.D. Cal, July 9, 2018) the judge refused to grant summary judgment to the executives and ESOP Committee of Rainbow Disposal, as well as GreatBanc Trust and various other individuals. The case involved Rainbow Disposal’s executives arranging the 2010 purchase of two other companies that would work with Rainbow. The arrangement led to substantial losses and in 2014, the company was sold. Employees allege that they were ultimately paid about 15% less for the shares than the 2014 sale price indicated, and that the company’s value would have been even greater if imprudent decisions had not been made. Among the issues as stake were whether GreatBanc, although a directed trustee, should have overridden directions from the ESOP committee, whether the structure of the transaction required an employee vote, whether a three-month-old valuation would be prudent in the circumstances and was still accurate as of the date of the sale, whether the executives were involved in self-dealing through employment agreements with the ultimate buyer, and whether indemnification applied. The judge ruled against the defendants on all counts, notably ruling that in an ESOP that owned almost all the stock, it is not possible to say per se that company assets are not plan assets.

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