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
In Walsh v. Maine Oxy Acetylene Supply, No. 2:20- incv-00326NT (D. Me. Dec. 13, 2022), parties reached a $6.5 million settlement in a case in which plaintiffs contended that the ESOP trustee and the CEO of the company terminated an ESOP at an improperly low price to orchestrate a favorable deal for members of the board to buy back the 49% of the company the ESOP then owned.
Corey Rosen
In Lloyd v. Argent Trust, No. 1:22-cv-04129-DLC (S.D. NY, Dec. 6, 2022), a district court refused to send to arbitration a suit claiming Argent Trust allowed an ESOP to overpay for its purchase of stock in W BBQ at an inflated price. Argent said that the plan had an arbitration clause, but the judge ruled that would deny plaintiffs rights afforded under ERISA. Argent plans to appeal.
Corey Rosen
In Stegemann v. Gannett, No. 1:18-cv-00325-AJT-JFA (E.D. Va., Nov. 17, 2022) a district court dismissed a motion for summary judgment from Gannett corporation arguing that plaintiffs could not be certified as a class in a long-running case involving employees at a Gannett spinoff, Tegna. After the spinoff, employees who no longer worked at Tegna, including Gannett employees, could not buy more Tegna stock, but they could continue to hold it, as well as sell and invest in other assets in the 401(k) plan. Tegna stock dropped sharply, and employees sued, saying the trustees should have sold the shares in the plan even absent employee directions. The Tegna stock fund was eventually removed as one of the plan’s 401(k) options.
Corey Rosen
In Plutzer v. Bankers Trust Company of South Dakota et. al., No. 22-561-cv (2nd Cir., Nov. 21, 2022) a court dismissed a claim against Bankers Trust of South Dakota, the trustee for the ESOP at Tharanco Group. In 2015, an ESOP bought 100% of Tharanco for $133 million. The sale was fully leveraged, and the stock dropped to $13 million the next year. It rose in the following years, but dropped down to $9.8 million in 2019. The plaintiff essentially argued that the decrease was sufficient cause to move to the next stage of a trial. The court ruled that the mere statement of a claim followed by “threadbare” justification is insufficient to show the plaintiff could demonstrate actual harm. Defendants argued that, among other things, the drop in value was a result of leverage.
Corey Rosen
In IRS Notice 2022-45, the IRS extended plan amendment deadlines for compliance with two recent laws. These include:
Corey Rosen
In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA, Nov. 7, 2022), the 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, improper discount rates, and using the wrong discount rates. The plaintiffs also alleged that the ESOP paid for control it did not have because the sellers retained board control.
Corey Rosen
In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc. et al., No. 2:19-cv-11294 (E.D. Mi, Nov. 1, 2022), a district court ruled the ESOP valuation firm Stout Risius must pay $60,000 in costs the company argued should have been covered by its insurer, Great American Fidelity Insurance Company. Great American had claimed it did not have to defend or indemnify the ESOP appraisal firm Stout Risius Ross over allegations about its valuation work for Appvion, an ESOP company that went bankrupt. All the federal claims under ERISA have been dismissed in the case, but state securities laws claims are still being litigated. Great American claims it is not liable because of an exclusion clause it claims exempts it if the defendant can be shown to have violated ERISA or securities laws.
Corey Rosen
In Walsh v. Robert N. Preston, TPP Holdings, No. 1:14-cv-04122-ELR (N.D. Ga., Sept. 20, 2022), a court ordered TPP Holdings and former owner Robert Preston to restore $540,000 to the ESOP over an alleged overvaluation of shares the plan bought in 2006 and 2008, as well as other violations. Preston acted as both the trustee and the seller in the plan. The ESOP paid $6 million in the transactions. Two years after the final transaction, the stock was worthless. The DOL alleged that the valuation was flawed and based on excessively optimistic projections. The DOL also alleged that the company failed to make required distributions to the ESOP, allocated fewer shares to the plan than required, commingled company and plan assets, and failed to make required distributions to terminated participants.
Corey Rosen
In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-V-01126-SB-SHK (C.D. Cal. Oct. 10, 2022), Alerus agreed to a $4 million settlement with KPC Healthcare in an ERISA valuation case. As we detailed in the October 2022 issue of this newsletter, litigants had already secured $5 million from other defendants in the case. Plaintiffs alleged the stock price the ESOP paid was too high because it was nine to 15 times higher than the price of company shares on the public market just two years before.
Corey Rosen
In Best et al v. James., No. 320-cv-299-JRW (W.D. Ky., Sept. 22, 2022) a court 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 ESOP paid $98 million for the shares with a note from the sellers at a 2.4% annual rate over 25 years. Post-leverage, the shares were revalued at $39 million. In settling, Wilmington denied it had done anything improper.
