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

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?”.

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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.

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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In Secretary of Labor v. Potts, 2021 No. 20-3856, (6th Cir., Nov. 24, 2021, unpublished) a circuit court ruled that a DOL lawsuit against an ESOP trustee in a valuation case is not covered by the company’s professional liability insurance policy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.”

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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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