Employee Ownership Legal Digest (24) 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

Settlement Filed in Case of Executives Buying Company Back from an ESOP

In Gough v. Tennyson, (N.D. Cal., No. 4:17-cv-02215-PJH, March 2, 2018, motion for preliminary settlement approval), a court approved a $1.75 million settlement in a case in which executives bought a company from an ESOP at an allegedly considerable discount to fair market value. The ESOP paid $7.425 million to buy 100 percent of the company’s stock in 2005, but the company declined in the recession until it was worth only $300,000 in 2010. It rebounded to $2.637 million in 2012. In 2015, three executives bought the shares from the ESOP for $100,000. Defendants argued they were no longer fiduciaries because the shares had been sold, but the court rejected that disingenuous argument.

Right-pointing arrow Continue Reading

Corey Rosen

Settlement in ESOP Case Involving Self-Serving Executive Decisions

In Brent v. Meeker, No. 8:17-cv-02433- EAK-AEP, (M.D. Fla., March 29, 2018, motion for settlement approval), parties agreed to a $170,000 settlement in the case of Meeker Enterprises. Plaintiffs allege that executives of the 100% ESOP extended the ESOP loan repayment, extended the company’s line of credit to another company owned by CEO William Meeker, and paid a family member who did little work. The suit also alleged that the ESOP paid for control when, in practice, Meeker had effective control through various covenants and control of the board. The proposal must be approved by the court.

Right-pointing arrow Continue Reading

Corey Rosen

Sonnax Case Settled

In Acosta v. First Bankers Tr. Servs., Inc., (No. 5:16-cv-00328-gwc) (D.-Vt, proposed consent judgment, April 27, 2018) the DOL and First Bankers Trust settled a lawsuit alleging that the ESOP at Sonnax Industries overpaid for its shares. The ESOP had purchased the shares for $48.8 million in 2011. The DOL alleged the value was inflated because of overly aggressive assumptions about future growth. Sonnax agreed to pay ESOP participants back $2 million, two executives will pay $200,000 in civil penalties, and First Bankers $25,000 in penalties. Sonnax was sold to Berkshire Hathaway in April contingent on the settlement for $65 million, a 35% increase over the 2011 valuation. Employees overwhelmingly voted for the transaction.

Right-pointing arrow Continue Reading

Corey Rosen

401(k) Employer Stock Challenge Loses

Continuing the string of losses in challenges to employer stock in 401(k) plans, in Fentress v. Exxon Mobil Corp., No. 4:16-cv-03484, (S.D. Tex., March 30, 2018, order granting defendants’ motion to dismiss), a district court rejected plaintiff claims that Exxon Mobil 401(k) fiduciaries knew or should have known that the price of the stock was inflated. The court ruled the plaintiffs did not allege a plausible alternative course of action.

Right-pointing arrow Continue Reading

Corey Rosen

Judge Trims Back DOL Claims on Valuation, Personal Liability of Trustee in ESOP Case

In Acosta v. Vinoskey, No. 6:16-cv-00062-NKMRSB, (W.D. Va., April 17, 2018, order on summary judgment motions 4/17/18), a federal court allowed a case against the ESOP at Sentry Equipment Corporation to proceed, but only after sharply cutting back on some of the DOL’s claims. First, the judge rejected the claim that Michael New, who worked for the independent trustee in the deal, Evolve Bank and Trust, could be held personally responsible as a fiduciary. That would have been the first time in ESOP law that an individual acting on behalf of an institutional trustee was considered potentially liable.

Right-pointing arrow Continue Reading

Corey Rosen

DOL settles lawsuit relating to Cactus Feeders ESOP transaction

In Acosta v. Cactus Feeders, Inc., et al., 2:16-cv-00049-J-BR (N.D., Tex., May 4, 2018), the insurers for Cactus Feeders, certain of its present and former directors, officers and members of its ESOP Committee, and Lubbock National Bank (the ESOP trustee) agreed to pay $5.4 million into the Cactus Feeders ESOP to settle a lawsuit initiated by the DOL alleging that the appraisal for a transaction that increased the ESOP’s ownership of Cactus Feeders from 30% to 100% did not adequately adjust for the alleged dilutive impact of warrants and stock options, did not apply a discount for lack of marketability, and did not include a discount for lack of control. The defendants agreed to the settlement, but with no admission of liability. The transaction was for $100 million, so the settlement amounted to 5.4% of the total, mostly to be added to the ESOP trust. As part of the settlement, Lubbock National Bank agreed to adopt the same process agreement that the DOL and GreatBanc Trust Company entered into in 2014.

Right-pointing arrow Continue Reading

Corey Rosen

Epic Systems Supreme Court Case May Impact Arbitration in ESOP Companies

In an online article “The Potential Impact of the Supreme Court’s Epic Systems Decision on ESOPs,” Chelsea Ashbrook McCarthy, Louis Joseph, and Jessica Farmer of Holland & Knight note that the Court’s analysis in the case indicates that it “would likely reject an argument that an arbitration provision with a class action waiver in an employee stock ownership plan (ESOP) is fundamentally unenforceable under ERISA.” The Epic case did not deal with an ESOP company (although Epic, one of several companies involved, does say that it offers all employees stock) but more broadly employers’ rights to enforce arbitration causes. Arbitration clauses are not common in ESOPs, however, and questions remain about whether they could still be challenged given the specifics of how ESOPs work. Read more at https://tinyurl.com/ ESOParbitration.

Right-pointing arrow Continue Reading

Corey Rosen

ERISA Supersedes State Tax Law

In Matters of Patrick Murphy & Kathleen Murphy, DTA No. 825277 (N.Y.S. Tax App. Trib., Mar. 6, 2018), the New York State Tax Tribunal ruled that ERISA supersedes state tax law claims against what appears to be a sham ESOP. JJF Realty was 99% owned by an ESOP and 1% by the Triune Foundation. Mr. Murphy was the president of Triune and the sole trustee of the JJF ESOP. Murphy and his wife were the only ESOP participants. The company was a limited liability partnership taxed as an S corporation. In 2006, the partnership sold property for a $2.2 million gain. The state alleged that the amount was subject to capital gains tax; the Murphy’s argued that the JJF was not taxable as an ESOP. The state contended that the ESOP was not legitimate. On appeal, the State Tax Tribunal ruled that ERISA preempts state law on these matters. It is not clear from the case why the IRS allowed the JJF plan to continue, as it appears to be a clear violation of the anti-abuse rules for S ESOPs.

Right-pointing arrow Continue Reading

Corey Rosen

DOL, Court Argue for Limits on ESOP Fiduciary Indemnification

In Pfeifer v. Wawa, Inc., No. 2:16-cv-00497- PD (E.D. Pa., motion for settlement approval filed 12/29/17), a case we reported on previously, the Department of Labor argued, and the court agreed, that a company cannot indemnify an ESOP fiduciary. That has been the position of the Ninth Circuit, but the Sixth Circuit in Pfahler v. National LatexProducts said that indemnification was allowed within certain limits. The Wawa case does not set any precedents, and was settled before a trial was concluded, but if it does hold more broadly, it reinforces the need for companies to have adequate fiduciary insurance to pay for defense and settlement costs.

Right-pointing arrow Continue Reading