Employee Ownership Legal Digest (15) 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

Claims Dismissed in Sale Against Board, Trustee in Sale of ESOP Company

In Szalanski, Brenda v. Arnold, Mike et al., No. 3:2019cv00940 - Document 47 (W.D. Wis. 2022), a court ruled in favor of defendants in the sale of PDQ to Kwik Trip. PDQ set up a 100% ESOP in 2009. In 2017, it was sold to Kwik Trip. Plaintiffs alleged that members of the PDQ, Inc. board violated ERISA by incorporating $1 million in noncompete payments from Kwik Trip, Inc. for each board member, making payments of $4.9 million in SARs to holders of these awards, and creating an incentive agreement to certain individuals to successfully negotiate long-term leases, along with a variety of other unspecified additional compensation. In addition, Kwik Trip, Inc. was allowed to buy $2 million in property held by one of its directors. The board recommended that employees vote in favor of the deal. The company provided detailed information on the transaction to the board. GreatBanc, the ESOP trustee, also voted in favor of the deal for undirected or unallocated shares. The sale price was $17,500 per share, compared to the appraised value of $10,380 per share six months earlier.

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Corey Rosen

DOL Files Amicus Brief Opposing Arbitration

The Department of Labor has filed an amicus brief in Cedeno v. Argent Tr. Co., No. 20-CV-9987 (JGK), (S.D.N.Y. Nov. 2, 2021). A district court had ruled that an arbitration agreement precluded participants “from seeking relief for the plan as a whole, a form of relief that is otherwise provided for by ERISA” and that such action is “contrary to the language and intent of the law.” Argent has appealed. In its brief on the appeal, the DOL wrote that it “is not here contending that ERISA claims are categorically non-arbitrable,” but “a participant cannot be compelled to arbitrate if they are deprived of the full range of ERISA remedies that would be available had they brought the same claim in federal court.” The DOL said because Cedeno alleged breaches that concern not just his account but that affect potential remedies that apply to the entire plan, the arbitration clause is too limiting.

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Corey Rosen

McBride ESOP Case Settlement Reached

In Godfrey v. GreatBanc et al., No. 18 C 7918 (N.D. Ill., May 24, 2022) plaintiffs and defendants have reached a settlement agreement for $16.5 million. The court revolves around the 2013 reorganization that reduced the ESOP’s ownership from 100% to 60%, with officers of the company owning 40%. In 2017, the ESOP’s shares were sold back to the new holding company entity. Plaintiffs alleged that the reorganization deprived them of distribution rights and gave them shares with fewer control rights. Defendants argued that some of the plaintiffs lacked standing because they were not harmed by the transaction, including employees who may not have held stock at the time of the proposed transaction. The settlement must still be approved by the court.

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Corey Rosen

EBSA Nominee Nears Approval

After a prolonged process, the Senate is poised to approve President Biden’s nominee to be the head of the Department of Labor’s Employee Benefit Security Administration. Lisa Gomez has been a partner at the law firm Cohen Millstein, where she has focused on unions, multiemployer pension plans, and health and welfare plans, not defined contribution plans. Cohen Millstein, however, has been one of the primary and most aggressive plaintiffs’ attorneys in ESOP litigation.

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Corey Rosen

IRS Launches Pilot Audit Compliance Program

In the June 3, 2022, issue of the IRS Employee Plans News, the IRS announced a pre-examination retirement plan pilot compliance program that allows plan sponsors to voluntarily correct any errors prior to an audit. Under the program, the IRS will notify a plan sponsor by letter that its retirement plan has been selected for an examination. The sponsor then will have 90 days to reviews its plan for any errors and make corrections under the IRS voluntary corrections program, if allowed. If there are errors or if a plan sponsor does not respond within 90 days, the IRS will contact the plan sponsor to schedule an exam.

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Corey Rosen

Alabama Telecommunications Company Settles ESOP Lawsuit

In Threadford, et al. v. Horizon Trust & Investment Management, et al. (Case No. 20-cv-00750 (W.D. Okla., May 18, 2022) a district court approved a $2.1 million settlement between Horizon Trust and two of McKinney Communication Company’s founders and the plaintiffs, who represented 309 ESOP participants. The ESOP purchased the shares for $65,485,225 in 2016, which the plaintiffs claimed exceeded fair market value. Plaintiffs based their complaint largely on the argument that the plan did not receive a discount for lack of control even though the plan did not obtain control because the selling shareholders retained their executive positions in the firm, had warrants, and could designate board members.

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Corey Rosen

Seventy Seven Energy 401(k) Stock Drop Case Settled

In Snider v. Administrative Committee Seventy Seven Energy Retirement Plan, Cov29-977-D (W.D. Okla., May 21, 2022), a district court approved a $15 million settlement for 4,000 employees covered by a 401(k) plan at Seventy Seven Energy that had invested in the stock of Chesapeake Energy, Seventy Seven Energy’s previous parent. Plaintiffs argued Chesapeake stock was not suitable for the Seventy Seven’s 401(k) plan because it was too risky and that the plan should have further diversified. The defendant in that case, Principal Trust, argued that it was a directed trustee and the terms of the plan required it to invest in Chesapeake stock.

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Corey Rosen

KPC ESOP Class Action Can Proceed Against Investment Manager

In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK (C.D. Cal. Jan. 15, 2021), a district court allowed employees of KPC Healthcare to proceed with their lawsuit over an alleged overvaluation. 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. In this motion, plaintiff Danielle Gamino sought to win approval to represent a class of employees in adding the investment management firm SPCP to the defendants. SPCP acted as a financial advisor for the deal. SPCP opposed the motion and challenged the adequacy requirement of certification pursuant to Rule23(a). SPCP argued that Gamino is an inadequate class representative because she lacks the required knowledge and understanding of the claim. The court ruled that the threshold for knowledge in an ESOP case is low and that, in any event, Gamino understands that the “implied price of KPC stock in the 2015 ESOP Transaction should have been a ‘red flag’ to SPCP, especially because they ‘said they did their due diligence.’”

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Corey Rosen

McBride ESOP Case Settled

In Godfrey v. GreatBanc et al., No. 18 C 7918 (N.D. Ill. May 16, 2022), a court approved an agreement to settle a lawsuit over an ESOP reorganization at McBride & Company in a 2013 reorganization that reduced the ESOP’s ownership from 100% to 60%, with officers of the company owning 40%. In 2017, the ESOP’s shares were sold back to the new holding company entity. Plaintiffs allege that the reorganization deprived them of distribution rights and gave them shares with fewer control rights.

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Corey Rosen

Settlement Approved in Raydon Case

In Woznicki v. Raydon Corp., No. 6:18-cv-02090-WWB-GJK (M.D. Fla., May 2, 2022), a district court awarded a $2.4 million settlement in a case challenging a $60.5 million transaction in which Raydon became owned by an ESOP. Plaintiffs alleged that shortly after the sale to the ESOP the company started laying people off, and the stock dropped to a value of $4.55 million two years later. Defendants, including the trustee Lubbock National Bank, argued that the Dudenhoeffer standard applies here, and the plaintiffs failed to state a claim that the defendants had a plausible alternative course of action. The court ruled that this standard does not apply to closely held companies because the lack of a market for the shares means that any action must be based on an appropriately determined fair market value. Prior attempts to settle had failed after a magistrate court found that there were multiple problems with the deal, including its failure to include an appropriate plan of allocation or to properly protect class members’ personal data.

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