Employee Ownership Legal Digest (11) 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

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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Corey Rosen

World Travel ESOP Settlement Approved

In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA June 29, 2023), plaintiffs agreed to settle a lawsuit in dispute over the company’s ESOP valuation. An ESOP bought World Travel from members of the Wells family in 2017 for $200 million. Plaintiffs alleged the plan overpaid because of faulty projections, including not accounting for liabilities for potential refunds of commissions to its clients and improper discount rates. The plaintiffs also alleged that the ESOP paid for control it did not have because the sellers retained board control. The final settlement will result in about $9,000 per participant, or 39% of the total claimed value.

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Corey Rosen

Arbitration Clause Does Not Override Litigants’ ERISA Rights in RNVB Case

In Su v. Petersen et al., No. 4:19-cv-00705 (E.D. Tex. July 12, 2023), a district court also allowed a case to proceed despite an arbitration clause. Plaintiffs allege that a trustee allowed a sale of the assets of the ESOP trust back to the company (RNVB) at a price that was below what the stock was worth. Four days after the sale, a partnership formed by officers and an investment partnership agreed to pay a much higher price to buy the company. Plaintiffs contend that the board replaced the prior trustee with a new trustee because the prior one would not go along with the deal. The company had an arbitration clause for the ESOP, but the court, relying on the same logic that the circuit courts referenced above have used, said the clause did not prevent the case from moving forward. A related ESOP case against the company and its plan trustees was the subject of a separate settlement agreement in Casey et al. v. Reliance Trust Co., No. 4:18-cv-00424 (E.D. Tex. March 16, 2020).

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Corey Rosen

Labor Department Wins Court Order Removing Trustee in Case Involving Misappropriations of Assets

In Su v. Ascent Construction Inc., No. 2:23-cv-250 (D.C. Utah July 3, 2023) the US Labor Department won a court order removing the trustee of a Utah construction company’s employee stock ownership plan. The DOL said the sole trustee of the plan, Ascent Construction President Bradley Knowlton, “withdrew money from the Plan’s accounts and deposited the funds into Ascent’s corporate accounts and used the money for non-Plan purposes….Knowlton and Ascent further failed to distribute Participant funds totaling $30,129.91.” The court removed Knowlton as a trustee and required the company to appoint a new outside trustee to help resolve the issue.

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Corey Rosen

Arbitration Clauses Not Enforceable in ESOP Cases

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.”

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Corey Rosen

Guidance Issued on Expansion of Employee Plans Compliance Resolution System

SECURE 2.0 expanded the application of the Employee Plans Compliance Resolution System (EPCRS), which allows companies to voluntarily correct certain errors. The current guidance on how to use the system is in Revenue Procedure 2021-30. SECURE 2.0 requires that the IRS develop new guidance within two years of the date of the bill’s enactment. In Notice 2023-43, the IRS issued advance guidance on the new provision that companies can use (pending the final rules) and also solicited comments on the proposal.

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Corey Rosen

Trustee, Not Participants, Has the Right to File Claims in ESOP Bankruptcy Case

In CPESAZ v. Oxford Restructuring Advisers, Bk. No. 9:20-bk-10554-DS (9th Cir. Bankruptcy Appellate Panel, June 2, 2023), the 9th Circuit ruled that ESOP participants in an ESOP at Community Provider of Enrichment Services Arizona do not have grounds for filing claims against the company in a bankruptcy liquidation case. The 100% ESOP-owned provider of mental health services filed for bankruptcy in 2020 and liquidated its assets. The ESOP was terminated. Several employees and the trustee filed claims for payment. The trustee filed one claim stating that a 2018 valuation was excessive and that current participants deserved to have funds added to their accounts. The trustee also filed a claim for excess assets after the liquidation that should be added to ESOP accounts.

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Corey Rosen

Triad Manufacturing ESOP Case Settled

In Smith v. Greatbanc Trust, No. 20 C 2350 (D. Ill. June 7, 2023), a district court approved 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 Seventh 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 the defendants argued that this was simply an artifact of the acquisition debt.

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Corey Rosen

KPC Healthcare Case Comes to an End

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-V-01126-SB-SHK (C.D. Cal. June 5, 2023), Silver Point Capital agreed to a $100,000 settlement over its role in the ESOP at KPC Healthcare. Silver Point had previously won a dismissal from the case. 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. The other defendants in the case, including Alerus, agreed to a $9 million settlement last year. With the Silver Point settlement, the plaintiff has agreed to drop her pending appeal of the case over the settlement.

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Corey Rosen

DOL ESOP Valuation Regulation Process Outlined

The US Department of Labor (DOL) has stated that it will undertake a formal notice and comment rulemaking “relatively soon” on the adequate consideration requirement governing the valuation of ESOP-held shares. The WORK Act (part of the SECURE 2.0 Act of 2022) required the DOL to set guidelines for ESOP valuation. Simultaneously, the DOL has been facing a formal petition under the Administrative Procedures Act (APA) brought by The ESOP Association (TEA) calling for the same formal rulemaking. The DOL denied the petition under the APA but nonetheless agreed to a formal public notice and comment rulemaking with a process that includes publishing their draft proposed regulation through public notice and providing the opportunity for stakeholder comments. The agency must then respond to those comments before issuing any final regulation.

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