Employee Ownership Legal Digest (12) 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

Silicon Valley Bank Employees Can Get Back $25 Million Set Aside for Stock Purchases Under ESPP

About 4,000 employees of failed Silicon Valley Bank will get back $25 million that they had set aside to buy stock at a discount under the bank’s employee stock purchase plan. The plan allowed employees to set aside wages over an offering period to purchase company stock at a 15% discount when the offering period ends. There was some uncertainty about whether the employees could recoup these funds after the bank failed, but on April 25, the FDIC announced that its insurance program would cover these funds.

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Corey Rosen

SBA Adopts New Guidance Making Loans to ESOPs Much Easier

The Small Business Administration (SBA) has taken steps to make loans to ESOPs much easier than under prior rules. The agency had received considerable criticism for issuing requirements for ESOP loans that are inconsistent with the language and intention of the Main Street Employee Ownership Act (MSEOA). That law was passed in 2018 to remove numerous barriers that made SBA loans or loan guarantees for ESOP acquisitions impractical. The law was also designed to allow ESOPs to qualify for loans under the SBA’s 7(a) program, which allows qualified lenders to process loan applications that can receive SBA guarantees. The loans can be for up to $5 million.

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Corey Rosen

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

ESOP Trustee Must Face Class Action Lawsuit in Symbria Transaction

In Placht v. Argent et. al., No. 1:21-cv5783 D (N.D. Ill. Apr. 11, 2023), a district court allowed plaintiffs to proceed as a class in an ESOP valuation case against the trustee, Argent Trust. Symbria provides rehabilitation services, wellness programs, pharmacy services, experience surveys, and strategic consulting 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 was valued at $8.65 million in 2020. Plaintiffs alleged the ESOP overpaid for the shares. Argent did not contest the filing for class action status, but the court ruled that it had to make its own assessment.

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Corey Rosen

Timeliness and Standing Issues Do Not Prevent ESOP Lawsuit over Sale of ESOP Company From Proceeding

In Moore v. Va. Cmty. Bankshares, No. 3:19-cv45 (W.D. Va. Mar. 30, 2023), a court ruled that a lawsuit alleging fiduciary improprieties in the sale of ESOP shares at Virginia Community Bank (VCB) prior to a merger could continue. The defendants argued that the plaintiff’s original claims were not filed in a timely way. The plaintiff responded that the statute of repose for her claims is tolled (extended) because there was fraudulent concealment prior to the ESOP’s termination on December 31, 2016, and the errors were not cured prior to distributions being made in 2018. The court ruled that there were sufficient allegations of fact concerning concealment to allow the case to proceed.

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Corey Rosen

Suit over Price Paid to Former ESOP Participants Can Continue

In Daly v. W. Monroe Partners, Inc., No. 21 C 6805 (N.D. Ill. Mar. 15, 2023), a district court allowed a former employee of West Monroe Partners to continue, although it ruled for the defendant on some issues. West Monroe, a management consulting firm, had been 100% owned by its ESOP until 2021, when it sold 50% of its stock to an investor and terminated its ESOP. Daly and other plaintiffs were former employees who had their shares repurchased for $515 each just prior to the investment. The plaintiffs alleged that West Monroe had received a number of offers, and that the share price should have reflected the higher price these offers promised.

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Corey Rosen

Plaintiffs Can Proceed with Lawsuit over Sale of ESOP Company

In Rush v. GreatBanc, No. 19-cv-00738 (N.D. Ill., Dec. 16, 2022),a district court allowed a lawsuit to proceed claiming the sale of an ESOP company was for too little money. The company was 100% ESOP-owned until sold in 2016. Rush, representing the class of ESOP participants, was a vice president at the time. The plaintiffs contend that the board should have sought a higher bid and that selling to a strategic buyer would have yielded $55 million more. The plaintiffs are suing the trustee, the board, and several executives.

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Corey Rosen

Employee Can Amend Complaint in ESOP Valuation Case

In Novosel v. Azcon Inc. Employee Benefits Plan Committee, No. 21 C 3080, (N.D. Il, E.D., Jan. 9, 2023), an employee was allowed to amend her complaint that she was underpaid for her ESOP shares because of an interim valuation that reduced the value of her stock by $53,000. Some of her claims had been dismissed in a prior ruling, as we discussed in an article in our April 2022 issue. The interim valuation had been performed because of hits to the company’s earnings as a result of the pandemic. The court had dismissed claims based on whether the company could do an interim valuation, but allowed the plaintiff to amend her complaint to focus on the terms of her severance agreement with the company concerning what valuation date applied. In this ruling, the court allowed her to proceed on an amended version of the complaint on that basis.

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Corey Rosen

ISCO Plaintiffs Lose Request to Court to Reconsider Arbitration Decision

In Best et al v. James., No. 320-cv-299-JRW (W.D. Ky., Jan. 9, 2023) a court again ruled that plaintiffs must agree to arbitrate their claims against executives of ISCO Industries concerning the buyback of company shares from the ESOP. In a prior 2019 decision, Swain v. Wilmington Trust N.A., a federal judge approved a $5 million settlement with a class of employees at ISCO Industries who alleged the ESOP had overpaid for the shares. The settlement amounted to about $12,000 per employee, minus legal fees and taxes. The plaintiffs said the arbitration ruling ignored the 6th Circuit ruling in Hawkins v. Cintas, which concluded that arbitration rights that apply to the plan, not individual employees, cannot be forfeited. The judge rejected that reading of the company’s arbitration provisions, but allowed the employees 30 days to revise their compliant.

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Corey Rosen

Insurance Issues in ESOP Cases Become More Common

Insurance for ESOP companies and fiduciaries has become more common in recent years, with courts limiting claims often because of contract exclusions, as in Martin Resource Management Corp. v. Federal Insurance Co., (5th Cir., Aug. 6, 2021); Gemini Insurance v. Potts, No. 2:16-cv-612 (S.D. Ohio Jul. 15, 2020); and Great American Fidelity Insurance Company v. Stout Risius Ross, Inc., No. 19-cv-11294 (E.D. Mich., Aug 23, 2021). In Ross v. Aspen Insurance, No. 21 Civ. 4412 (ER) (S.D. N.Y., March 18, 2022), a district court ruled that Aspen Insurance did not have a duty to indemnify and defend Stout Risius Ross (SRR) or actions arising out of its valuation work for Wilmington Trust, which acted as the trustee for an ESOP at Constellis, Inc. SRR asked the court for a declaratory judgment against Aspen requiring it to pay insurance. The policy provided that coverage is subject to a “prior knowledge condition.” Aspen said that the Wilmington suit was known to SRR, so it knew there was a claim, and thus it did not have to provide coverage. SRR unsuccessfully argued that Wilmington had never before claimed its services were deficient, that SRR and Wilmington had a long-standing professional relationship, and that Wilmington had never before threatened litigation (and, in fact, had argued that the valuation SRR did was appropriate).

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