Employee Ownership Legal Digest (16) 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

ESOP Lawsuit Over Sale of ESOP Company Can Proceed

In Moore v. Va. Cmty. Bankshares, No. 3:19-cv-00045 (W.D. Va.. Mar. 30, 2022), 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. VCB set up an ESOP in 2006 and terminated it in 2016. A separate lawsuit over the valuation of the shares in that case is continuing. In this case, plaintiffs allege that directors and officers of the company unduly benefitted from the
sale of the company to Blue Ridge Bank. VCB originally planned to sell to another bank in 2017, but that fell through. Participants were told that the bank would focus on staying independent, but defendants soon conducted a search for another buyer, ultimately selling to Blue Ridge Bank.

Right-pointing arrow Continue Reading

Corey Rosen

Court Dismisses Valuation Firm’s Claim Against Insurer

In Stout Risisus 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) for actions arising out of its valuation work for Wilmington Trust, which acted as the trustee for an ESOP at Constellis, Inc. In Constellis Emp. Stock Ownership Plan v. Wilmington Tr. N.A., Case No. 15 Civ. 1494, a court ruled that Wilmington was liable for causing the plan to overpay for Constellis shares. Wilmington then sued SRR over the valuation. SRR in turn sought to have Aspen, as its insurer, cover its costs. In this case, SRR asked the court for a declaratory judgment against Aspen requiring it to make these payments. The policy provided that coverage is subject to a prior knowledge condition, namely that as of “Any Knowledge Date identified in the Declarations of this Policy, no Insured knew or could have reasonably foreseen that such Wrongful Act or Interrelated Wrongful Acts might give rise to a Claim.” Aspen said that the Wilmington suit was known to SRR, so it knew there was a claim, and thus it not have to provide coverage.

Right-pointing arrow Continue Reading

Corey Rosen

Court Allows Valuation Case to Proceed

In Lysengen v. Argent Trust, et. al., No. 1:20-cv-01177-MMM-JEH (D.C. Ill., March 22, 2022) a court ruled 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. Plaintiffs sought here to add the estates of selling shareholders for having constructive knowledge of the alleged violation of the ESOP overpaying for the shares. 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. The court also agreed that the plaintiff had sufficiently pled that the defendants had sufficient knowledge of the deal so that they could be considered co-fiduciaries.

Right-pointing arrow Continue Reading

Corey Rosen

Mixed Ruling in Appvion ESOP Case

In the long-running case of Appvion Retirement Savings Retirement and Employee Stock Ownership Plan v. Buth, Case No. 18-CV-1861-WCG (E.D. Wis., Mar. 17, 2022) a magistrate recommended to the court that it dismiss most of the claims in a revised complaint, but allow two to stand. The case involves an ESOP at Appleton Paper (later Appvion). Employees funded the $106 million transaction by investing funds from their 401(k) plan. In 2018, the sole remaining member of the Appvion Retirement Savings and ESOP Committee sued the various defendants for fraud, arguing that the employees overpaid for the shares, that board members and executives received excessive bonuses for completing the deal, and that key advisors and board members improperly touted how good a deal this was in their roadshows selling it. The company performed well for several years, but eventually went bankrupt in 2017. Prior decisions have sided with the defendants. In this case, plaintiffs filed a 395-page revised complaint against directors, officers, advisors, and the two different trustees who had been involved at different times. The magistrate recommended that all the claims be dismissed except two against Argent Trust, which became the trustee in the later years of the ESOP, and who the plaintiff alleges allowed the ESOP to overpay for shares. Other claims against other defendants were dismissed, generally because they were either time barred, the defendants were not deemed fiduciaries, or the plaintiffs failed to state a plausible claim.

Right-pointing arrow Continue Reading

Corey Rosen

IRS Private Letter Ruling on Tax Status of ESOP Held Shares in a Spinoff

In PLR 202210004 (March 11, 2022) the IRS issued a private letter ruling concerning a complex business reorganization of a public company that offered an ESOP. The company spun off some of its assets to a new company it controlled and spun out another company as a separate entity. The company’s ESOP now will include stock in both the parent and the controlled subsidiary. The IRS ruled the shares of the subsidiary held by the ESOP were qualifying securities and the basis for the shares in each plan would be determined by allocating the basis between the two plans based on their relative fair market value after the spinoff. Participants in the new controlled entity were also allowed to divest out of company stock into a new plan. The IRS ruled that this conversion would not be treated as a taxable event. The net unrealized appreciation on the sale would be made without regard to any temporary investment of Company B stock sales proceeds in cash and other short-term investments.

Right-pointing arrow Continue Reading

Corey Rosen

Court Dismisses Some Claims in ESOP Valuation Case

In Novosel v. Azcon Inc. Employee Benefits Plan Committee, No. 21 C 3080, (N.D. Il, E.D., March 8, 2022), a district court dismissed two claims concerning the valuation of stock for their plaintiff in Azcon’s ESOP, but allowed her to continue a breach of contract claim alleging that Azcon miscalculated her share value and distributed $50,000 less than she was owed. Novosel retired in 2015 and took advantage of a diversification option. She had understood the value of the diversified shares to be $1,840 per share, but a midyear valuation that would serve as the actual basis for the diversification set the value at only $165 per share. Novosel filed a claim against the administrative committee, and they agreed to settle to allow her to rescind her diversification and wait until she reached retirement age in 2019. The distribution would be paid in two or possibly more than two installments based on the value of the shares. In 2019, the share value had gone back to $1,055 per share, but dropped back to $561 after a midyear valuation an independent trustee asked for based on the significant hit to the company business from COVID. Novosel sued.

Right-pointing arrow Continue Reading

Corey Rosen

IRS Issues Proposed Regulations for Required Minimum Distributions Under SECURE Act

On February 24, the IRS issued proposed regulations for retirement distributions under the SECURE Act. The 273-page proposal deals with a wide variety of issues, such as how RMDs are distributed to heirs after a participant’s death, how annuities are treated, and other issues.

Right-pointing arrow Continue Reading

Corey Rosen

Court Rules Plaintiffs Have to Plead More Than Suspicion of Wrongdoing to Justify Case Proceeding

In recent years, plaintiffs have been seeking to move to discovery in ESOP litigation based largely on complaints of a drop in share price after a transaction. In Plutzer v. Bankers Trust Company of South Dakota et. al., No. 1:21-cv-03632-MKV (S.D.N.Y., February 28, 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.

Right-pointing arrow Continue Reading

Corey Rosen

Moving Qualified Replacement Property into Grantor Trust Is Not a Disposition Under Section 1042

In PLR 202206009, Feb. 11. 2022, the IRS ruled that a taxpayer who sold stock to an ESOP and took the capital deferral treatment available under Section 1042 of the Code will not be treated as having made a disposition of the qualified replacement property purchased after the sale into a grantor trust the taxpayer controls. The IRS rules that “Section 673 [of the Code] provides that the grantor shall be treated as the owner of any portion of a trust that the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds five percent of the value of such portion.”

Right-pointing arrow Continue Reading

Corey Rosen

Casino Queen Must Face ESOP Lawsuit

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., No. 3:20-CV-377-DWD (S.D. Ill., Jan. 28, 2022), a federal judge denied an Illinois casino company’s motion to dismiss a proposed class action from former employees who allege the company’s ESOP overpaid for shares in the now closed casino company. Plaintiffs allege the company’s 2012 purchase of the company for $170 million was based on excessively optimistic projections. They also allege the company sold and then leased back real property it owned for too low a price and that the two trustees for the deal were insiders with conflicts of interest and subject to direction from the board and ESOP administrative committee. Defendants responded that they hired an independent outside trustee to direct the insiders.

Right-pointing arrow Continue Reading