Employee Ownership Legal Digest
Corey Rosen (7)

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Corey Rosen

Valuation, Use of Dividends Case Against Churchill Mortgage Can Continue

Churchill became a 49% ESOP in 2023, with the ESOP owning convertible preferred shares. In Arnold v. Paredes, No. 3:23-cv-00545 (M.D. Tenn., Jan. 31, 2024), plaintiffs allege that part of the dividends paid on the shares were used to pay off the ESOP debt and offset required employer contributions to the plan, which the defendants argue is what the dividends are supposed to be used for. In 2020, the ESOP acquired the remaining shares. Plaintiffs also allege that the 2020 valuation was three times the prior valuation. The difference, the defendants claim, was due to improved performance, the conversion of preferred to common, and the ESOP gaining control. Plaintiffs say that the prior CEO and owner retained effective control as well as stock appreciation rights and that the debt taken on to purchase the shares was both imprudent and caused the share price to drop. Defendants argued that two of the plaintiffs had signed arbitration waivers and could not claim to be part of a class. The court ruled that plaintiffs cannot waive claims owed to the ESOP.

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Corey Rosen

Former Employee and Plan Fiduciary Can Pursue Lawsuit Over Improper Firing Over ESOP Valuation Dispute Issues

In Johns v. Morris, No. 5:23-CV-324-D (E.D.N.C. Feb. 6, 2024), a district court ruled that Johns, the former COO and CEO of Morris & Associates, had standing to sue under ERISA over allegations that he was improperly dismissed from his job because as the ESOP fiduciary. John questioned the validity of the valuation of company stock and the company’s allowing the excessive use of company assets for the personal use of other individuals at the company. After he filed suit, the company also dismissed him as trustee. The company moved for dismissal, arguing that Johns was no longer an employee and did not have standing. The court ruled that because he was still a plan participant (he was fired in 2023), he did have standing. The company also argued that the “complaint fails to allege he [Johns] gave information, testified, or was about to testify in any inquiry or proceeding relating to ERISA,” a standard set in King v. Marriott International, Inc. for what an employee needs to show in order to file a claim under Section 510 of ERISA, which is intended to protect employees from being fired over complaints about their plan (but only under narrowly defined circumstances). In this case, the court ruled that Johns was also acting as a fiduciary, so this standard did not apply. The case is one of the very few ESOP cases filed under Section 510, in part because it does set such a high bar for plaintiffs.

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Corey Rosen

Tax Case Over ESOP and Synthetic Equity Rollover Must Go to Court

In Couturier v. Comm’r of Internal Revenue, No. 19714-16, (U.S.T.C. Jan. 22, 2024), a tax court ruled that a case must go to trial over a dispute over whether Claire Couturier made an excess contribution of $25,132,892 of the $26 million paid to an individual retirement account (IRA) during 2004–2005. Couturier filed for summary judgment, contending that there was no “excess contribution” because the property for which the $26 million was allegedly paid was from his ESOP. Couturier had owned 4,586 shares of stock through Noll Corporation’s ESOP. He also had stock options for at least 80,000 shares, participated in another incentive plan through which he held at least 500 more shares, plus “tax bonus units,” and through a deferred compensation plan, was entitled on retirement to monthly payments of $30,000 as of 2004. He was bought out for $256 million for all these accounts and rolled them into an IRA. The IRS failed to challenge his tax return for income tax deficiencies before the statute of limitations expired. However, in 2016, the IRS issued a notice that claimed Couturier was liable for roughly $8.5 million in excise taxes because the 4,586 shares of stock that could legitimately be rolled over to his IRA had been worth only $830,392, and the vast majority of the $26 million was a buyout of the three incentive and compensation plans noted above, none of which were qualified plans eligible for nontaxable IRA rollovers. The case has moved in and out of court since its filing. The ESOP transaction was also the subject of litigation and was ultimately settled in Solis v. Couturier (Civ. 2:08-cv-02732-RRB-GGH, E.D. Ca., filed Mar. 10, 2010).

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Corey Rosen

Case Concerning Change to Account Segregation and Valuation Rules Can Proceed

In Nguyen v. Westlake Services Holding Company, No. 8:23-cv-00854 (C.D. Cal., Feb. 5, 2024), a district court allowed a case to proceed in which the plaintiff alleges that Westlake Holding Company changed its ESOP rules in 2020 to allow the company to segregate accounts of former employees prior to their receiving a distribution as well as to allow a special interim valuation to reflect economic challenges arising from the pandemic. Westlake provides financing for vehicle purchases and is part of the Hankey Group, which includes a number of dealerships. Until the changes in 2013, participants received a distribution in the second quarter of the year following termination based on the most recent appraisal. That was changed in 2013 to allow for account segregation at termination. At the same time, the company conducted a special interim valuation in 2020 that reduced the  price by 30%. The prior higher price was the one that otherwise would have been used for distribution for people terminating in 2020. Nguyen sued, alleging that she was not informed of the change and that the change violated ERISA. The court stated that Westlake could do an interim valuation but that there were sufficient grounds on the timing and accuracy of the valuation at this stage not to dismiss the case. It agreed with the defendants that the timing of the distribution was permitted. The court allowed the plaintiff to amend the complaint.

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Corey Rosen

Inequality Inc.: Rich Get Richer as Poor Get Poorer

In a report that received significant media attention, Oxfam, a nonprofit focusing on hunger and other poverty-related issues, found that “the combined fortunes of the world’s five richest men have more than doubled to $869 billion since 2020 while five billion people have been made poorer.” Other data points in the same direction of increasing concentration of wealth.

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Corey Rosen

Ninth Circuit Again Denies Rehearing Motion for DOL to Repay Attorneys’ Fees in Bowers & Kubota Case

In Su v. Bowers, D.C. No. 1:18-cv-00155SOMWRP (9th Cir. Jan. 7, 2024), the Ninth Circuit again said 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 sufficient (albeit a short) 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. The court found that the ESOP trustee fulfilled its duty to the ESOP and its participants even though the trustee had worked for the seller before and knew the price the seller wanted in advance. The judge rejected the DOL’s valuation expert as unreliable. Nevertheless, in Su v. Bowers, the Ninth Circuit reaffirmed its 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

Inland Seafood ESOP Valuation Lawsuit Dismissed; Court Rules Plaintiffs Must Exhaust Plan Remedies Before Suing

In Bolton v. Inland Fresh Seafood Employee Stock Ownership Plan, No. 1:22-cv-04602-AT (N.D. Ga. Dec. 5, 2023) a district court dismissed a lawsuit at Inland Fresh Seafood over the valuation of the company when it was sold to the ESOP in 2016 for $92 million. The plaintiffs alleged that the defendants (including the independent trustee and sellers to the ESOP (all of whom were executives of the company), and the executives each were acting as fiduciaries. The suit alleged the executives had already received multiple bids for the company at lower prices. They provided the appraiser with allegedly highly unrealistic projections about significant increases in revenues and profits, which they allege were accepted to provide a higher than fair value. The plaintiffs said the defendants sought multiple valuations for the stock and accepted the highest one.

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Corey Rosen

ESOP Participants at TPI Hospitality Can Continue Lawsuit

In Kloss v. Argent Trust Co., No. 23-cv-0301 (D. Minn. Dec. 12, 2023), a federal court allowed a case over the purchase of shares in TPI by an ESOP to continue. TPI operates dozens of hotels and other facilities in Minnesota and Florida. It was sold to an ESOP in 2015. In 2018, the ESOP acquired 100% of the company for $10 million. That year, the company announced plans to develop a Margaritaville Resort on property the company owned in Fort Myers Beach, Florida. In April 2020, TPI Hospitality received over $600,000 in Paycheck Protection loans. In early 2021, TPI Hospitality owned a portfolio of 34 hotels and generated $130 million in annual revenue. Plaintiffs argue the sale was not in the interest of plan participants. The ESOP was terminated in 2021. Argent sold the ESOP’s stock to John Dammermann, a friend of TPI’s CEO Thomas Torgerson and a coinvestor with him in several properties, including the Fort Myers Beach Margaritaville Resort. Argent sold the ESOP’s stock to Dammermann for $500,000, which the complaint alleges was below the fair market value.

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Corey Rosen

ESOP Lawsuit Over Sale of ESOP Company Reaches Settlement

In Moore v. Va. Cmty. Bankshares, No. 3:19-cv00045 (W.D. Va. Nov. 28, 2023), a settlement has been reached in a lawsuit alleging fiduciary improprieties in the sale of ESOP shares at Virginia Community Bank (VCB) prior to a merger. VCB set up an ESOP in 2006 and terminated it in 2016. Plaintiffs alleged 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. VCB offered employees the chance to cash out at $34 per share (the prior year’s value) or continue to hold the shares. Many employees did cash out. Officers were notified that they could purchase the shares that had been sold. Soon after that, VCB entered negotiations with Blue Ridge Bank and ultimately sold for $58 per share. Plaintiffs allege that the valuation used in the 2017 offer was dated, that funds in the plan were used to pay ESOP legal fees inappropriately, and that the defendants used their inside knowledge of the pending deal to buy shares at a lower price and sell them at a higher one.

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