Employee Ownership Legal Digest (10) Archive

Stay informed on the latest legal developments impacting employee ownership. This page provides timely and concise summaries of key cases and rulings, contributed by experienced attorneys, to help the entire employee ownership community understand their implications, and also offers access to NCEO's archive of prior content.

Corey Rosen

Supreme Court Denies Envision Motion to Have 10th Circuit Reconsider Its Ruling That Envision Cannot Compel Arbitration in ESOP Case

On October 10, the Supreme Court, without comment, denied an effort to hear an appeal of a 10th Circuit decision to deny arbitration in an ESOP case. In Harrison v. Envision Management Holding Company, No. 22-1098 (10th Cir. Apr. 11, 2023), the 10th Circuit denied a request that it reconsider its earlier three-judge ruling that Envision Management Holding Company cannot compel arbitration in a case concerning the price an ESOP paid for shares in the company. Envision asked that the entire court decide the issue. The plaintiff had alleged that the ESOP overpaid for the shares. The plan contained an arbitration clause, which Envision sought to enforce. The court agreed, concluding that “the arbitration provisions of the Plan Document effectively prevent Harrison from vindicating many of the statutory remedies that he seeks in his complaint under ERISA § 502(a)(2),” primarily because arbitration prevents him from pursuing claims for the plan rather than just for himself. The new ruling leaves the prior three-judge ruling intact.

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Corey Rosen

Supreme Court Denies Wilmington Motion to Reconsider Arbitration Ruling in BSC Case

On October 16, the Supreme Court denied a request to allow arbitration in another ESOP case. In Henry v. Wilmington Trust et al., No. C.A. 19-1925 DM (D.C. Del. June 30, 2023), a district court ruled that a plaintiff (Henry) was not subject to an arbitration clause in the company’s ESOP. Henry contends the ESOP had overpaid for the shares at BSC Ventures. The plaintiff also contends that he never knew about an arbitration clause affecting the ESOP until he filed a lawsuit and that he had never consented to it. Defendants argued that the clause was a condition of employment and thus applied to Henry. Defendants also argued that Henry lacked standing because he did not “allege sufficient facts to support a plausible inference of harm by showing the ESOP in fact overpaid.” The arbitration clause stated that a claim against the ESOP “must be brought solely [in an] individual capacity and not in a representative capacity or on a class, collective, or group basis.” It further prohibited a claimant from “seek[ing] or receiv[ing] any remedy which has the purpose or effect of providing additional benefits or monetary or other relief” to anyone other than the claimant.

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Corey Rosen

Triad Manufacturing ESOP Case Settlement Approved

In Smith v. Greatbanc Trust, No. 20 C 2350 (D. Ill. Aug. 22, 2023), a district court gave final approval to a $14.8 million settlement involving an ESOP at Triad Manufacturing. The ESOP had purchased the company for $106 million in 2015. The stock value dropped to $3.3 million after the leveraged transaction. The 7th Circuit had previously denied the company’s claim that the plaintiffs were subject to an arbitration clause. The court also seemed to accept the argument that the post-transaction decline in the value of the stock showed that the ESOP overpaid for the shares, even though the defendants argued that this was simply an artifact of the acquisition debt.

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Corey Rosen

Settlement Reached in RVR ESOP Case

In Walsh v. Reliance Trust Co., et al., No. CV-19-03178-PHX-JJT (D.C. Ariz. Aug. 30, 2023), a district court approved a $22.5 million consent decree in the case of RVR, Inc. The case originated in a 2019 lawsuit alleging that Reliance Trust allowed an ESOP to overpay for the shares of RVR, Inc. The ESOP purchased 100% of RVR’s stock for $105 million, but the DOL argued the stock was worth only $15 million. The deal was unusual in that the sellers took a very low rate of interest and warrants equal to 35% of the shares at $7.50 a share. Management incentive awards would further dilute the ESOP to 52.5% of the shares. The ESOP paid $105 per share. A variety of issues were involved in the lawsuit, including whether the company’s line of credit was a potential risk, whether the ESOP really had control, the short time involved in completing the transaction, and other concerns.

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Corey Rosen

Selling Shareholders Dismissed from Morton Buildings ESOP Case

In Lysengen v. Argent Trust, et al., No. 1:20-cv-01177MMM-JEH (D.C. Ill. Sept. 7, 2023), former shareholders of Morton Buildings were dismissed as defendants in a case concerning the valuation of their shares in a sale to the company’s ESOP. The lawsuit 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 plan initially owned a minority of the shares in the company. When it bought the remaining shares, participants meeting eligibility rules were given floor price protection against the anticipated debt-related drop in share price. The valuation also changed the way it treated excess cash, previously counted as a liability, as an asset. The company made payments to existing participants to compensate for that.

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Corey Rosen

Employee Can Sue on Behalf of Plan in ESOP Case

In Lysengen v. Argent Trust, et al., No. 1:20-cv-01177-MMM-JEH (D.C. Ill. Aug. 10, 2023) an individual plaintiff was allowed to sue on behalf of the ESOP trust. The case involved the alleged overvaluation of stock at Morton Buildings. The court ruled earlier 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. 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.

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Corey Rosen

Arbitration Clause Not Binding in ESOP Case

In David Burnett, et al., v. Prudent Fiduciary Services LLC, et al., No. 22-270-RGA (3rd Cir. August 15, 2023), the 3rd Circuit affirmed a lower court ruling that an arbitration clause does not apply in an ESOP case. The employees helped the ESOP fund a minority stake in the company 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 pilots appealed, but the 3rd Circuit agreed with the lower court

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Corey Rosen

KPC Settlement

In our previous discussion of the settlement in the KPC Healthcare ESOP, we noted that the plaintiffs pointed to a sharp drop in the company’s stock price after the ESOP. We should have added that the settlement was for only $9 million in a $227 million complaint, suggesting that there were very strong arguments on the other side of this case.

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Corey Rosen

Raytheon Defeats Bid to Reopen United Technologies Stock Plan Lawsuit

In Darnis v. Raytheon Techs. Corp., 22-2861-cv (2nd Cir. Aug. 3, 2023), the 2nd Circuit denied an effort by employees who had received equity compensation awards when United Technologies was sold to Raytheon in 2020. The plaintiffs contended that the conversion formula for their shares was unfair. Plaintiffs said that the plan required adjustments in the case of a conversion of shares so that the award value and the stock price would trend in the same direction. Plaintiffs said there was too much of a disconnect, but the judge ruled that the plan language stated that the compensation committee was granted discretion over how to do this.

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Corey Rosen

IRS proposed changes to forfeiture rules

The proposed regulations would “clarify that forfeitures arising in any defined contribution plan (including in a money purchase pension plan) may be used for one or more of the following purposes, as specified in the plan: (1) to pay plan administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants’ accounts in accordance with plan terms.” The use of forfeitures to reduce employer contributions includes the restoration of inadvertent benefit overpayments and the restoration of conditionally forfeited participant accounts that might otherwise require additional employer contributions, for example, the restoration of accounts conditionally forfeited under § 1.411(a)-7(d) (relating to certain distributions and cash-outs of accrued benefits). ESOP forfeitures almost always are simply reallocated to other employee accounts.

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