Employee Ownership Legal Digest (18) 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

Court Provides Mixed Ruling in Stock Distribution Case

In Horan et al v. Goal Structured Solutions, Inc. Employee Stock Ownership Plan et al, 3:20-cv-02290 (S.D., Calif. Nov. 2, 2021) a district court said that plaintiffs could proceed with a claim for equitable relief. Plaintiffs had received a distribution election form allowing them to take a distribution or keep what they were due in the plan. The plaintiffs elected not to take a distribution, but soon thereafter the company notified them that their shares were being cashed out and rolled into an IRA. The entire plan was terminated the next year, but in that ensuing year (2019) the company’s stock value went up and the value of the IRA investments went down. The plaintiffs said they suffered involuntary losses as a result.

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Corey Rosen

Aetna Prevails in Stock-Drop Lawsuit

In Radcliffe v. Aetna, Inc., No. 3:20-cv-01274, 2021 WL 4477408 (D. Conn. Sept. 30, 2021) a district court said that plaintiffs failed to state a claim concerning the continued holding of Aetna stock while the stock price was artificially inflated. Aetna is a subsidiary of CVS Healthcare, and CVS stock declined after changes in its accounting practices. The court ruled that neither Aetna nor CVS was a fiduciary because investment decisions were delegated to the Aetna Benefits Finance Committee. Because all alleged nonpublic information about the risks to CVS’s stock had already been disclosed by CVS in public filings with the SEC, the court ruled that the market had already incorporated this information into the pricing of the shares and plaintiffs had the information available to them.

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Corey Rosen

Second Circuit Affirms Lower Court Ruling that Officers and Trustees’ Action in Tribune Corporation’s ESOP LBO Were Not Fraudulent Conveyance

In In re Trib. Co. Fraudulent Conv. Litig., 10 F.4th 147 (2d Cir. 2021), reh’g en banc denied, No. 19-3049 (2d Cir. Oct. 7, 2021), the Second Circuit upheld lower court rulings that officers, board members, and various advisors (including GreatBanc as ESOP trustee and Duff & Phelps as a financial advisor) could not be sued by the bankruptcy trustee for fraudulent conveyance. The court determined that the bankruptcy trustee did not allege that Duff & Phelps provided inaccurate or incomplete information in connection with the LBO to Tribune or GreatBanc and that Tribune Corp. received reasonably equivalent value in exchange for the financial advisors’ fees.

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Corey Rosen

DOL Argues Shares in ESOP Suspense Account Should Not Have to Bear Costs of Repaying an ESOP Loan When a Company Is Sold

A complaint filed by the Department of Labor in Walsh v. Peterson et al., No. 4:21-cv-0086, (E.D. Tex. Oct. 29, 2021) raises a potentially troublesome line of argument for ESOPs. The case grows out of Coleman v. Brozen, No. 4:19-cv-00705 (E.D. Tex., May 6, 2020). The DOL as plaintiff alleges that the ESOP trustee Neil Brozen allowed a sale of the assets of the trust back to the company at a price that was below what the stock was worth. Shortly after the sale, a private equity firm paid a much higher price to buy the company. The DOL contends that the board replaced Argent Trust with Brozen because Argent would not go along with the deal.

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Corey Rosen

ESOP Arbitration Clause Again Rejected

Continuing a recent series of court decisions, in Cedeno v. Argent Tr. Co., No. 20-CV-9987 (JGK), (S.D.N.Y. Nov. 2, 2021) a district court 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.

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Corey Rosen

Court Allows ESOP Valuation Case to Proceed

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 9 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. Alerus said the complaint alleged no specific facts about its fiduciary process, but the court ruled that inference and belief were sufficient at this stage of pleading to allow the case to proceed. Company defendants asked for dismissal on the grounds that their job was to appoint an independent trustee, but the court ruled that their duty to monitor made them potentially liable as well. The court refused to dismiss claims against the former owner on the grounds that he knew the price he was receiving might be excessive. Finally, the court denied a motion to dismiss a claim that participants as plaintiffs should have been able to see the valuation report.

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Corey Rosen

Plaintiff Can Pursue Claim Despite Arbitration Clause

In a very similar case on arbitration Henry v. Wilmington Trust et.al., No. C.A. 19-1925 DM (DC, Del., Sept. 10, 2021), a district court ruled that a plaintiff (Henry) could pursue his claim that an ESOP had overpaid for the shares at SSC Ventures. The plaintiff contends that he never knew about an arbitration clause affecting the ESOP until he filed a lawsuit and that he had never consented to it. Defendants argued that the clause was a condition of employment and this applied. Defendants also argued that Henry lacked standing because he did not “allege sufficient facts to support a plausible inference of harm by showing the ESOP in fact overpaid.”

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Corey Rosen

One 401(k) Stock Drop Case Can Proceed, One Cannot

In Myers v. Administrative Committee Seventy Seven Energy Retirement Plan, No. CIV-17-200-D (W.D., Okla., Sept. 29, 2021), a district court disallowed a class-action lawsuit to continue concerning the spinoff of Seventy Seven Energy from Chesapeake Energy. Chesapeake Energy stock continued to be held in the Seventy Seven’s 401(k) plan but declined in value. In the Myers case, the plaintiff had signed a severance agreement that precluded the claims and the court found that her situation could not be shown to be typical of a class that stakes a claim. But in a separate case, Snider v. Administrative Committee Seventy Seven Energy Retirement Plan, Cov-29-977-D (W.D., Okla., Oct. 8, 2021), another employee was allowed standing because the court ruled his claims could be typical of a class of employees in the plan.

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Corey Rosen

Settlement Reached in Unusual ESOP Case

In Foster v. Adams & Assocs., Inc., No. 3:18-cv-02723-JSC (N.D. Cal. Sept. 26, 2021), a class of current and former employees agreed to pay $3 million to settle allegations that trustees and board members of Adams & Associates, a Job Corps contractor, participated in prohibited transactions, failed to make required disclosures, and improperly agreed to indemnification. The trustee (now deceased) had pled guilty to embezzling funds from other ESOP companies. Plaintiffs said the board of director defendants failed to tell the trustee that when the company became a 100% ESOP, it would lose its DOL set-aside status, and failed to disclose falling student revenue, all of which led to the ESOP overpaying for the shares.

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Corey Rosen

Seventh Circuit Upholds Ruling That Arbitration in ESOP Case Inapplicable

In Smith v. Greatbanc Trust, No. 20 C 2350 (7th Cir., Sept. Sept. 10, 2021), the Seventh Circuit upheld a lower court ruling that an arbitration clause in a plan document could not be used to prevent a former participant from pursuing a claim that the ESOP had overpaid for shares in a valuation case involving Triad Manufacturing. Defendants argued that an arbitration clause had been added to the plan after the employee terminated but before the employee received a distribution. The employee contended he had not seen or consented to the clause and could not forfeit his right to sue the plan on behalf of other participants in the plan. The Seventh Circuit agreed, noting that ERISA provides that participants can seek relief individually and as a class. The language of the decision provided some guidance on how an arbitration agreement could be made acceptable.

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