Employee Ownership Legal Digest (17) 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

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

Corey Rosen

Employee in Sham S ESOP Must Pay Taxes

In Larson v. Commissioner, T.C. Memo 2022-3, No. 15809-11, (U.S. Tax Court, Feb. 2, 2022), the tax court rejected an appeal by the plaintiff over an assessment of several million dollars in taxation for his nominally restricted stock. The deal terms were a variation of sham ESOP transactions that were attempted in the early 2000s and were shut down by the IRS. The deal included assigning all profits to a minority S ESOP and granting large amounts of nominally restricted stock to Larson and his partners. Larson contended his stock grants were not taxable because of the restrictions, which included performance terms, but the court concluded that because of the control he and his colleagues exercised, the restrictions were not likely to be enforced and that, in any event, the ESOP trustees were not properly informed of the grants or their terms. To top it off, the firm’s business was to sell tax shelters that the IRS named as listed transactions. As a very good article explaining this elaborate tax dodge put it, “You cannot make this stuff up.”

Right-pointing arrow Continue Reading

Corey Rosen

Suit Against World Travel Can Move Forward

In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA, Feb. 2, 2022), a district court allowed an ESOP valuation case against the sellers and the trustee on the case to proceed to trial. An ESOP bought World Travel from members of the Wells family in 2017 for $200 million. Plaintiffs allege 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 allege that the ESOP paid for control it did not have because the sellers retained board control. The court ruled that at this stage, plaintiffs had pled sufficient allegation to allow the case to proceed. The court also allowed challenges to the indemnification for the trustee to proceed on the basis that the clause did not include an exemption for instances where the trustee was found to have violated ERISA. It dismissed the case against two of the three family member defendants, however, because they were not shown to have sufficient control over the transaction to be fiduciaries, while allowing the case against Jim Wells, the CEO, to continue.

Right-pointing arrow Continue Reading

Corey Rosen

ESOP Company and Trustee Agree on Settlement in Valuation Case

In Walsh v. Reliance Trust et. Al., No. 17-CV-04540 (D.C. Minn. Jan. 5, 2022), Reliance Trust and the directors of Kurt Manufacturing agreed on a $9.4 million settlement in an ESOP valuation case. Reliance will pay $8.4 million to the company’s ESOP and the directors and officers of Kurt Manufacturing will pay $989,000. The directors and officers also agreed not to serve as ESOP fiduciaries in the future and will not get future stock appreciation rights. The current trustee (Reliance had been replaced) will appoint an independent outside board member.

Right-pointing arrow Continue Reading

Corey Rosen

DOL Investigation Results in Settlement with ESOP Company

We don’t normally report on DOL investigations, but a recent (January 4, 2022) settlement is instructive. Fiduciaries of the Mohawk Hospital Equipment Inc. ESOP will have to pay $431,000 over claims of excessive compensation paid to themselves and family members. Plaintiffs must also appoint an independent director and establish an independent compensation committee. The CEO will resign as trustee of the ESOP and be replaced with an independent trustee to better advocate for the plan’s interests.

Right-pointing arrow Continue Reading

Corey Rosen

Release of Claims Not Enough to Dismiss Case

In Zavala v. Kruse- Western, Inc., No. 1:19-cv-00239- DAD-SKO (E.D. Cal., Dec. 13, 2021), a district court ruled that GreatBanc Trust and the board of Kruse-Western Inc. must defend themselves in a lawsuit over the 90% drop in stock price following a $244 million ESOP buyout. The share price fell both because of leverage and following a poisoning of horses that resulted from feed from Kruse-Western’s Western milling division. The defendants argued that the plaintiff had voluntarily released claims against the company and the plan and lacked standing because he became a participant after the initial stock purchase. The plaintiff agreed he had signed a release as part of a severance agreement, but said the terms were not discussed in any detail. The court ruled that the claims by the plaintiff were brought on behalf of the plan, however, so the plaintiff could not have released the claims without the consent of the ESOP.

Right-pointing arrow Continue Reading

Corey Rosen

Uncompleted ESOP Deal Results in Broker Dealer Rescission Claims

In GunBroker.com, LLC v. Tenor Capital Partners, LLC, no. 1:2020cv00613 (N.D. GA., Nov. 3, 2021), a Georgia court provided mixed rulings on whether Tenor Capital was required to be a registered investment advisor under the Federal Investment Advisors Act or Georgia state law. Defendants argued that if Tenor were not properly registered, the contract between GunBroker and Tenor Capital would be void as a matter of law. The court ruled for GunBroker. This aspect of the case is reviewed in detail in a separate article in this issue of the newsletter, “Must ESOP Transaction Advisory Firms Be Registered Investment Advisors?”.

Right-pointing arrow Continue Reading

Corey Rosen

Court Reduces Settlement in Sentry Equipment Case

In Walsh v. Vinoskey, No. 20-1252 (4th Cir., Dec. 7, 2021), the 4th Circuit reduced a $6.5 million settlement between Adam Vinoskey, the former owner of Sentry Equipment & Erectors Inc., and the Department of Labor, by $4.2 million. The case concerned a second ESOP transaction that brought the ESOP to 100%. The court ruled that the valuation was flawed for three reasons: 1) It assumed the ESOP trust now had effective control when the court concluded sellers retained significant operational control; 2) projections were too optimistic; and 3) the weighted average cost of capital assumptions were flawed. The DOL said that Vinoskey had a duty to make reasonable efforts to remedy the trustee’s breach in approving the valuation, even though he was not involved in it, because he was intimately familiar with the company’s financial situation and its value. Vinoskey argued, in part, that he had provided $4.6 million in loan forgiveness on his seller note and should be credited for that. The district court did not agree.

Right-pointing arrow Continue Reading

Corey Rosen

ESOP Lawsuit Not Covered by Fiduciary Insurance

In Secretary of Labor v. Potts, 2021 No. 20-3856, (6th Cir., Nov. 24, 2021, unpublished) a circuit court ruled that a DOL lawsuit against an ESOP trustee in a valuation case is not covered by the company’s professional liability insurance policy because the policy expressly excluded ESOP issues from coverage. The defendants said the renewal application was “abundantly clear” that it covered ESOP issues, but the court said that “the text of the policies’ exclusion applies to all ERISA violations by its plain terms” and contains no exception for the defendants’ activities as a stock plan fiduciary. A concurring opinion said the case was a “cautionary tale” and that the policy at issue is “close to the line of an illusory policy.”

Right-pointing arrow Continue Reading