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
As part of a program to reduce federal paperwork requirements, the IRS is asking for comments on Form 5309, Application for Determination of Employee Stock Ownership Plan. Comments are dues by April 21. Direct all written comments to Kinna Brewington, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224.
Corey Rosen
In Godfrey v. GreatBanc et. al., No. 18 C 7918 (N.D. Ill., Feb. 21, 2021), a district court certified a class action lawsuit in an ESOP case at McBride and Sons involving 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. 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.
Corey Rosen
In Hensiek et.al, vs Board of Directors of Casino Queen Holding Company, Inc., et.al, No. 3:20-CV-377-DWD (7th Cir. January 25, 2021), the Seventh Circuit denied a request by the defendants in an ESOP case to compel arbitration over claims of a fiduciary breach related to the valuation of Casino Queen stock. The plan did not contain an arbitration clause initially, but in 2017 was amended to require arbitration over benefits claims. The plaintiffs said the change was unilateral and could not be binding. The Seventh Circuit agreed, saying that arbitration clauses are only valid if 1) both parties agree, 2) those claiming a benefit have not received any benefit they would not have had otherwise had there not been an arbitration clause, and 3) continued employment and/or the right to receive benefits from the ESOP do not imply a required acceptance of arbitration. The court focused particularly on the issue of the plaintiff not receiving consideration, writing that “consideration is a prerequisite to the validity of a proposed agreement or modification of an existing agreement. Consideration exists only if there is a grant of an advantage or the bargained for acceptance of a disadvantage.” The court ruled the plaintiff received no such advantage. The rulings were pursuant to Illinois law concerning arbitration but given the similarity of state laws on these issues suggest that at least in the Seventh Circuit, arbitration clauses would only apply in certain cases. The case was remanded to the district court, which affirmed that the plaintiffs can proceed with their case and not be subject to the arbitration clause.
Corey Rosen
In Woznicki v. Raydon, No: 6:18-cv-2090-Orl-78GJK (M.D. Fl., Feb. 17, 2021), a district court denied approval of a $2.4 million settlement with Lubbock National Bank in a $60.5 million lawsuit over an ESOP at Raydon Corporation. The stock price of the company declined about 12% in the following two years. The court said two of the class participants are not entitled to $10,000 under the settlement.
Corey Rosen
In Varga v. General Electric, No. 1:18-cv-01449-GLS-DJS (2nd Cir., Feb. 4, 2021), the Second Circuit affirmed a lower court ruling that the plaintiff did not show plausible alternative courses of actions that would have done more harm than good with respect to the drop in the value of GE stock in the company’s 401(k) plan. The lawsuit was based on GE’s inaccurate claims about reserves for insurance companies it owned, which ultimately caused the stock price to fall. But the court ruled that despite this, the plaintiff did not show that disclosure of the problem or removing the stock as an option would have done more good than harm, thus not meeting the Dudenhoeffer standard.
Corey Rosen
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 of the shares their ESOP purchased. The ESOP bought 100% of KPC Healthcare in a 2015 transaction. 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 those 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 information 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 their duty to monitor made them potentially liable in the transaction as well. Third, the court refused to dismiss claims against the former owner, Kali Pradip Chaudhuri, on the grounds that he knew the price he was receiving might be excessive and thus could be deemed a fiduciary. Finally, the court denied a motion to dismiss a claim that participants as plaintiffs should have been able to see the valuation report. The court’s language, if a trial court agrees, could imply that participants in any ESOP have a right to see the report.
Corey Rosen
In McMaken v. GreatBanc Tr. Co., No. 1:17-cv-04983 (N.D. Ill., Aug. 21, 2019) a district court ruled that GreatBanc cannot use a release signed by the plaintiff Michael McMaken from claims against Chemonics or any of its fiduciaries when he left the ESOP-owned firm Chemonics. The court ruled that GreatBanc was a fiduciary for the ESOP trust and its reading of the release was too broad. GreatBanc had contended that its status as a fiduciary included being a fiduciary to the company.
Corey Rosen
In Pizzella v. Vinoskey, No. 6:16-cv-00062, (W.D. Va., Aug. 2, 2019), a district court imposed a $6.5 million judgment in an ESOP valuation case. An ESOP had bought the remaining shares of Sentry Equipment in the transaction for $21 million. The court ruled that the ESOP trustee, Evolve Bank and Trust, relied on an investigation of the transaction that was “rushed and cursory” because of the desire to close the transaction quickly. Part of the dispute revolved around whether to use a capitalization of earnings method, as was the case here, or discounted cash flow (DCF), which the DOL’s expert argued was usually the appropriate standard (generally, which method to use depends on how much past earnings best predict future earnings). The court said that the DCF standard was more common by a “small margin,” although it did not suggest the basis for that. The court also disagreed with the control assumptions because, even though the ESOP had 100% ownership, certain elements of the transaction, such as including the prior owners’ remaining involvement, reduced the trust’s effective control. Other factors included how various costs were calculated and the assumed weighted average cost of capital. The court also said that Evolve showed no evidence that it tried to negotiate the price.
Corey Rosen
In Cunningham v. Wawa, Inc., No. 19-8029, (3rd Cir., order granting petition to appeal, Aug. 13, 2019), Wawa convinced an appeals court to review a lower court ruling that certified a class of 1,000 who claimed they were improperly prevented from keeping their Wawa stock until they turned 68. Wawa agreed the employees could challenge the stock price, but not a change in provisions in the plan to move employees out of stock after termination. Wawa argues that the “right-to-hold” claim is a function of how much individuals relied on information provided by Wawa that members of the loss claim were misleading, so only individuals can sue. For instance, one of the plaintiffs admitted that the information did not support the claim.
Corey Rosen
In Lee v. Argent Trust, No. 5:19-cv-00156-BO (W.D.N.C., Aug. 7, 2019) a district court ruled that a post-transaction drop in the value of Choate Construction’s ESOP stock value from $198 million to $65 million did not indicate a fiduciary violation by the plan’s trustee, Argent Trust. The court ruled that the drop was due to the leverage used to buy the shares. The court said the plaintiff was not harmed by the transaction, nor did she allege any additional harm from the post-transaction drop in value. Moreover, the judge said that she “fundamentally misunderstood” the nature of the transaction. The judge wrote that rather than focusing on a simple before and after comparison, “it is better to conceive of this transaction, as defendants have argued, as being comparable to the purchase of a mortgage-financed house” in which the equity value naturally declines.
