Employee Ownership Legal Digest (26) 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

Target Employees Again Lose in Stock-Drop Case

In Dormani v. Target Corp., No. 0:17-cv-04049-JNESER (D-Minn, June, 15, 2018) a district court again ruled that Target’s not freezing company stock as a choice in the 401(k) plan was not a fiduciary violation. Plaintiffs had refiled after an earlier lawsuit was dismissed. Here they again argued the stock should have been frozen in light of problems Target was having in Canada. That argument had failed, in part, because the court ruled that under Dudenhoeffer, fiduciaries could not have known if this would have adversely affected the price of stock in the plan. Workers argued Target froze company stock as an option in 2017, with no effect on company stock price, but the court ruled that was not sufficient to overcome its prior conclusion. The court also rejected an alternative course of action that Target could have notified employees of the risks arising from the problems in Canada as also possibly adversely affecting stock price.

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Corey Rosen

Executives in ESOP Have Standing to Sue for Plan

In TBM Consulting Grp., Inc. v. Lubbock Nat’l Bank, No. 5:17-cv-00460-FL (E.D.N.C, May 31, 2018), a court rejected Lubbock National Bank’s argument that the executives of TBM Consulting lacked standing to sue on behalf of the plan because they were unrepresentative of the class and/or they did not provide adequate procedural safeguards to demonstrate that they could be. The court concluded that although these issues might be contested later if adequate facts are shown, at this point the plaintiffs do have standing to sue on behalf of the plan. The plaintiffs also brought a claim of negligent misrepresentation against Lubbock National Bank under state law, but the court ruled ERISA preempted that claim. The lawsuit revolves around a purchase of stock from an owner of TBM that had a value based on projections that turned out to be excessively optimistic.

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Corey Rosen

Supreme Court Declines to Hear Case Alleging Tolling Agreements Superseded by ERISA Limitation of Action Rules

In Preston v. Acosta No. 17-1238 (U.S., June 25, 2018), the Supreme Court refused to hear a challenge to an 11th Circuit decision (Preston v. Acosta, Oct. 12, 2017) that ruled that the CEO and trustee of the ESOP at TPP Holdings could not invoke a tolling agreement to halt a DOL lawsuit alleging that he had caused the ESOP at the company to overpay for the purchase of his shares in 2006 and again in 2008. Prior to filing suit, the DOL and Preston tried to reach a settlement and entered into a series of “tolling agreements” that provided the DOL would delay any litigation while the efforts were pending. No settlement was reached, and the DOL sued in 2014, one day before the expiration of the agreed-upon tolling period. Despite their agreement not to assert a time bar to litigation, the defendants moved to assert one on the grounds that all alleged violations that occurred before December 30, 2008, six years prior to the filing, and thus were not permitted under ERISA’s limitationof- actions provision. The court ruled that the agreements took precedence, and the Supreme Court let that ruling stand.

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Corey Rosen

Bradford Group Workers Get Class Certification in ESOP Valuation Case

n Nistra v. Reliance Tr. Co., No. 1:16-cv-04773 (N.D. Ill, order granting class certification, Feb. 13, 2018), employees of the Bradford Group, an ESOP-owned catalog company, received class status in a suit contending the ESOP overpaid for the stock by $56 million. The company was purchased in 2013 for $275 million. Reliance acted as the trustee. Reliance argued that “several” employees in the proposed class had signed releases waiving their rights to claims under ERISA, a number that the court said did not meet the standard set in other rulings on class actions. More important, the suit seeks relief for the plan, not for individuals.

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Corey Rosen

Supreme Court asks DOL to file a brief in Pioneer Holding Case

In Pioneer Centres Holding Co. Stock Ownership Plan v. Alerus Fin., No. 17-667, N.A., (U.S., invitation to solicitor general to file brief March 19, 2018), the Supreme Court asked the Department of Labor to file a brief concerning the issue of burden-shifting in cases alleging a fiduciary breach. Circuits have split on the issue. The Sixth, Ninth, and Tenth Courts of Appeal have said that plaintiffs have the burden of proof for fiduciary violations, of who has to prove each element of their claims, while the Fourth, Fifth, and Eight say after a valid case for a fiduciary breach has been made the defendants have the burden of proof. The Pioneer Holdings Case involved whether a fiduciary acted correctly in deciding not to pursue an ESOP transaction (see correction on this below). The fact that the Court asked for the brief does not mean it will take up the case.

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Corey Rosen

SunTrust Settles Employer Stock Claims

In In Re SunTrust Banks, Inc. ERISA Litigation, No. 1:08-cv-03384- RWS, (N.D.-Ga., unopposed motion for settlement March 9, 2018), SunTrust Banks agreed to settle a 10-year-old lawsuit alleging that plan fiduciaries allowed employees to invest in SunTrust Banks stock when they knew or should have known that the stock was artificially inflated. Some of the claims had been dismissed over the course of the litigation, but the courts allowed plaintiffs to proceed with their key allegation concerning the shares. SunTrust agreed to pay $4.75 million as well as provide faster vesting on matching contributions and guarantee that the vesting schedule will not become less generous for at least three years. SunTrust will also now make matching contributions in cash and change the composition of its fiduciary committee.

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Corey Rosen

Wilmington Trust Must Defend Itself in ESOP Lawsuit

In Swain v. Wilmington Tr., N.A., No. 1:17-cv-00071- RGA-MPT, (D. Del., order adopting in part report and recommendation Feb. 16, 2018) a district court rejected a magistrate’s decision that recommended that charges against ISCO and Wilmington Trust, the ESOP trustee, be dismissed because the plaintiffs had not sold any stock in the ESOP yet and thus lacked standing because they had not suffered any injury. Plaintiffs allege that ISCO stock dropped from $98 million to $39 million less than two weeks after the transaction. The stock had been appraised before and after the sale, which involved substantial leverage. Stock value normally drops post-transaction in leveraged ESOPs, but the magistrate did not address this issue or the allegation that the ESOP paid for control but the former owner effectively retained it.

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Corey Rosen

Another Loss for Plaintiffs in Stock Drop Case

In Usenko v. SunEdison Semiconductor LLC, No. 4:17-cv-02227-AGF (E.D.-Mo., order granting defendants’ motion to dismiss Feb. 21, 2018), a district judge ruled that alleging that a trustee knew or should have known that the stock of SunEdison was overvalued and too risky was insufficient to state a claim. The case is a bit different from other stock drop cases in that SunEdison Semicondictor (SEMI) was spun off from Sun Energy, but the SEMI retirement plan continued to hold Sun Energy shares. Plaintiffs allege that trustees should not have allowed the plan to continue to hold these shares because they were excessively risky. The court relied on Dudenhoeffer to conclude that defendants could not be expected to outguess the market.

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Corey Rosen

DOL Enters into New Settlement Agreement on ESOPs

The Department of Labor entered into a new settlement agreement with an ESOP fiduciary, in this case, Alpha Investment Consulting Group. The settlement arises out of a case alleging improper valuation and loan terms in the case of Acosta v. Mueller et al., Civil Action No.: 2:13-cv- 01302, (E.D. Wis., Dec. 27, 2017). The DOL alleged that the ESOP at Omni Resources overpaid for the shares by using a valuation done four months prior that did not reflect changed financial projections. In the settlement with Omni, the former owners agreed to repay the plan $1.523 million, reduce the amount due on the loan by $3.5 million, and pay an ERISA penalty of $479,000 to the DOL. Allocations from the payments to the ESOP will be retroactive to 2008, and former vested participants will receive part of the settlement as well. 

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Corey Rosen

Another Stock-drop Case Fails

In Gernandt v. SandRidge Energy, Inc., No. 5:15-cv-00834-D (W.D. Okla., Nov. 18, 2018) a district court ruled that plaintiffs had not met the Dudenhoeffer standards of providing a plausible alternative course of action. The court issued separate rulings dismissing claims against SandRidge, Reliance Trust, and the company’s CEO. SandRidge’s employees lost the entire value of their accounts when the company went into bankruptcy. The judge said that the result “may seem harsh under the circumstances,” but is correct given the new standards for employer stock lawsuits.

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