Employee Ownership Legal Digest
Corey Rosen (3)

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Corey Rosen

IRS Private Letter Ruling on Uses of Match to 401(k) Plans May Allow Employees to Use Funds for Medical or Student Loan Costs

Most ESOP companies have 401(k) plans, so a recent IRS private letter ruling (PLR 202434006) may be of interest. Private letter rulings apply only to the company but they often indicate how the IRS would react to plan designs with the same or similar provisions. In this case, the company allowed its employees to designate the match in their 401(k) plan to go to their health savings account (HSA) or health retirement account (HRA) plan or to pay off student debt under a qualified education loan under the sponsor’s Internal Revenue Code (IRC) Section 127 educational assistance program. The funds cannot be taken as a taxable benefit.

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Corey Rosen

Lawsuit Over ESOP Valuation Can Continue, but One Executive Dismissed from Case

In Su v. Alerus Fin., N.A., No. 1:23-cv-00537-DCN (D. Idaho Nov. 4, 2024), the Department of Labor (DOL) plausibly alleged that Alerus, the trustee for the ESOP at Norco, improperly approved a valuation in a transaction in which Norco’s ESOP paid more than $140 million for a 35% stake in the company.

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Corey Rosen

Supreme Court Declines to Review Denial of Arbitration Claim in ESOP

On October 7, 2024, the Supreme Court denied an appeal of the denial of an arbitration clause in an ESOP. In Cedeno v. Argent Tr. Co., No. 20-CV-9987 (2nd Cir. May 1, 2024), the Second Circuit upheld a lower court ruling that an arbitration agreement precluded participants “from seeking relief for the plan as a whole, a form of relief that is otherwise provided for by ERISA” and that such action is “contrary to the language and intent of the law.” Cedeno alleged the plan overpaid for ESOP shares. Argent specifically requested that the district court compel arbitration “on an individual basis, rather than in a representative capacity or class, collective, or group basis.” Argent argued that individual arbitration would “not affect the remedy that [Cedeno] could personally achieve under ERISA section 502(a)(2),” asserting that Cedeno could, in any event, recover losses only within his individual plan account. The appeals court ruled that “because Cedeno’s avenue for relief under ERISA is to seek a plan-wide remedy, and the specific terms of the arbitration agreement seek to prevent Cedeno from doing so, the agreement is unenforceable.”

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Corey Rosen

Symbria ESOP Valuation Case Reaches Settlement Agreement

In Placht v. Argent et al., No. 1:21-cv5783 D (N.D. Ill. Oct. 24, 2024), the contesting parties reached a settlement agreement in an ESOP valuation case against the trustee for an ESOP at Symbria, Argent Trust. Symbria provides rehabilitation services, wellness programs, pharmacy services, experience surveys, and services to senior living and post-acute providers. The 2015 deal was for $66.5 million and was funded entirely with debt. Post-transaction, the value dropped to $9.3 million, and in 2020, the value was $8.65 million. Plaintiffs alleged the ESOP overpaid for the shares. The parties struck a tentative deal during a virtual settlement conference and have until December 22, 2024, to submit the agreement for court approval. The document did not include details about the terms of the deal.

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Corey Rosen

Western Global ESOP litigation settled

In David Burnett, et al., v. Prudent Fiduciary Services LLC, et al., No. 22-270-RGA (D. Del. Feb. 24, 2024), a district court gave preliminary approval for a settlement in a long-running lawsuit over a minority ESOP at cargo airliner Western Global. The employees helped the ESOP fund the plan 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 settlement is for $14.5 million for 335 participants.

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Corey Rosen

Supreme Court declines to review denial of attorneys’ fees to defendants where DOL decisively lost case

In Su v. Bowers, D.C. No. 1:18-cv-00155SOMWRP (Oct. 14, 2024), the Supreme Court declined to hear an appeal of a January 7, 2024, Ninth Circuit ruling 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 a sufficient (albeit short) amount of 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. Nevertheless, the Ninth Circuit reaffirmed an 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.”

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Corey Rosen

Claim that ESOP is rightful buyer of company dismissed, but other claims allowed to continue

In Walther et al., v. Wood et al., No. 1:23-CV-294-GSL-SLC (N.D. Ind.), a district court dismissed a claim by employees that their ESOP should have been the rightful buyer of the 90% of the stock the plan did not own at the time of the former owner’s death, but allowed a claim that the company and the plan’s fiduciary breached their fiduciary duties to continue.

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Corey Rosen

Plaintiff does not have the right to see the valuation report

In Truong v. KPC Healthcare ESOP Committee, Case No. 8:23-cv-01384-SB-BFM (C.D. Cal. Sept. 9, 2024), a court said the plaintiff in a long-running ESOP case did not have the right to see the valuation report in the deal. Plaintiffs had objected to the sale of ESOP-owned KPC Healthcare to Victor Valley Health Care, which was owned by the same two people who had sold KPC to the ESOP. Plaintiffs argued that the sale price was unfair to participants and asked to see the fairness opinion produced by the ESOP valuation firm (Stout) that the trustee would use to determine if the ESOP was receiving at least fair market value. The court concluded that “Defendants produce uncontroverted evidence that the transaction price (which was negotiated before Stout provided Alerus with its written opinion) exceeded the high end of the fair market value range identified by Stout. Thus, if Plaintiff were to obtain the Stout Report, she still would not know either the total sale price for the 2021 transaction or the value of her benefits following that sale…Plaintiff is correct that the Stout Report has some connection to the sale price, primarily in the sense that the sale could not have gone forward if Stout had concluded that the negotiated price was below fair market value. But the mere fact that it contains information that hypothetically could have affected the transaction if the negotiated price had been lower does not make the Stout Report an ‘other instrument’ under which the plan is established or operated” that are required to be disclosed to participants. The judge granted summary judgment to the defendants on this issue.

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Corey Rosen

RVR case proceeds to remedies phase

In Su v. Bensen et al., No. CV-19-03178-PHX-JJT (D.C. Ariz. Aug. 15, 2024), a district court moved an already decided case to the issue of remedies. The judge in the case seemed skeptical about a number of common ESOP practices. The judge said that Chartwell, one of the ESOP advisory firms in the deal, told the defendants that the deal provided “superior timing,” “certainty of close,” and “ease in negotiating terms.” To the judge, that said that the defendants could “manipulate the transaction’s terms to whatever way defendants desired.” The judge also ruled that the ESOP trust’s having 100% ownership of the company did not imply effective control of the company because the outside trustee was directed by the board of directors, all of whom were insiders (and defendants in the case).

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