Employee Ownership Legal Digest (28) 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

Hewlett-Packard, Eaton Defeat Challenges to Stock in 401(k) Plans

In two unpublished decisions, Laffen v. Hewlett-Packard Co., No. 15-16360, (Ninth Cir., unpublished Ja. 9, 2018) and Graham v. Fearon, No. 17-3407, (Sixth Cir., unpublished Ja. 8, 2018), two circuit courts ruled for the defendants in stock drop lawsuits involving company stock in 401(k) plans. In both cases, plaintiff argued that alleged fraudulent accounting and reporting caused a drop in stock prices, but the courts in both cases ruled that the plaintiffs had not established a plausible alternative course of action as required under the Dudenhoeffer doctrine. The fact that the decisions were not published suggests the courts regard this as settled doctrine. The cases continue to show that the Dudenhoeffer ruling has made successful litigation on this issue exceptionally difficult.

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Corey Rosen

Wilmington Trust Cannot Transfer Lawsuit to Delaware

In Acosta v. Wilmington Tr., N.A., No. 1:17-cv-01755 (N.D. Ohio, order denying defendant’s motion to transfer venue 12/20/17), a court denied Wilmington Trust’s request to move jurisdiction in an ESOP lawsuit concerning valuation at Graphite Sales to Delaware. The court ruled that most of the plaintiffs are in Ohio and there was no cause to relocate the case. 

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Corey Rosen

One-Person ESOP Not Qualified

In Paza Staffing Servs. v. Commissioner, No. 18-1407 (3rd Cir. Nov. 2, 2018, unpublished), a circuit court ruled the IRS correctly disqualified an ESOP set up for a surgeon as the sole participant. The surgeon had five other employees. He set up a management company just for himself and set up an ESOP. The five employees were in a separate company controlled by the management company. Because it was part of a control group, the plan had to cover at least 70% of all non-highly compensated employees, and this covered none.

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Corey Rosen

Settlement in Triple-T Transport Case

In Acosta v. Potts, No. 2:16-cv-00612-JLG-CMV (S.D. Ohio, Oct. 17, 2018), the DOL and Thomas Potts agreed to a settlement of $465,000, pending additional amounts that may be recovered pending litigation with the fiduciary insurer. The DOL had reached a $2.475 million settlement with the company over an alleged improper valuation, but the defendants (the trustee and the company) demonstrated an inability to pay unless a pending lawsuit against the fiduciary insurance company over indemnification prevails. Potts could also end up paying more depending on his future income.

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Corey Rosen

Stock-drop Case Fails

In Quatrone v. Gannett Co., Inc., No. 1:18-cv-00325 (E.D. Va., Sept. 26, 2018), a district court ruled that plaintiffs could not plead a plausible alternative course of action for plan trustees to take regarding the holding of company stock in Tegna’s 401(k) plan. In 2015, Gannett Corporation changed its name to Tegna and spun off its publishing business (USA Today and others) to the new Gannett Corporation. Tegna retained mostly broadcast holdings. Employees at Tegna had been able to buy stock in the company in their 401(k) plan. After the spinoff, Tegna employees could not buy more company stock, but they could continue to hold it, as well as sell and invest in other assets in the 401(k) plan. They could not buy more stock. Tegna stock dropped sharply, and employees sued, saying the trustees should have sold the shares in the plan even absent employee directions. They contended that the stock was much more volatile than other stocks, so trustees should have known that it was not a prudent holding. As in other cases, the court ruled this required a second guessing of the market and was not a plausible alternative course of action for trustees.

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Corey Rosen

Plaintiffs lose in SunEdison stock-drop case

In In re SunEdison, Inc. ERISA Litig, No. 16-mc-2744 (S.D.N.Y., Aug. 6. 2018), the Second District Court for Southern New York continued its string of defeats for plaintiffs when it ruled that offering employer stock within an ESOP in the company’s 401(k) plan was not an ERISA violation. SunEdison faced a variety of financial challenges that eventually led to bankruptcy. Plaintiff S.D.N.Y. alleges that public information should have led the fiduciaries to view the stock as too risky and that inside information showing additional risk should have been disclosed. The court ruled the first claim required the trustees to outguess the market; the second proposed action could have driven the stock price down even further. Therefore, the court said, plaintiffs did not meet the “strenuous pleading standards” under Dudenhoeffer.

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Corey Rosen

Reliance Trust Settles Tobacco Rag Processors Suit

In Acosta v. Reliance Trust Co., Inc., No. 5:17-cv-00214-D (E.D.N.C., consent judgment Sept. 18, 2018), Reliance Trust agreed to settle a 2017 lawsuit over a $82.5 million ESOP transaction to buy the stock of Tobacco Rag Processors. The DOL alleged that Reliance did not determine the stock price in good faith, in particular by not sufficiently questioning key assumptions and financial projections. The settlement is for $4.545 million, plus 10% of that in civil penalties. Reliance agreed not to seek contribution or indemnification from the company.

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Corey Rosen

Company and top executives must defend actions in excessive valuation complaint

In Acosta v. Zander Group Holdings, Inc., No. 3:17-cv-01187 (M.D. Tenn., Sept. 10, 2018, order to dismiss defendants’ motion to dismiss), a court ruled that the company and its top executives had to defend their actions in a case alleging excessive valuation for an ESOP.  Jeffrey Zander was the trustee and beneficiary of two trusts that owned Zander Group; he was also Zander Group’s CEO. Stephen Thompson was hired as the trustee. Plaintiffs allege that Zander pressured the valuation firm to come up with a price in excess of fair market value. The company was also named as a defendant. The company sought to have the case dismissed because it said it was not a fiduciary, but the court ruled that it was a fiduciary through its direction by Zander. Zander argued he was not a fiduciary and that the trustee was. But the court ruled that Zander’s alleged efforts to pressure Thompson and failure to monitor his assessment of the appraiser as to the valuation made him a co-fidiuciary.

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Corey Rosen

Sears defeats stock-drop lawsuit

In Catalfamo v. Sears Holdings Corp. No. 1:17-cv-05230, (N.D. Ill., order granting defendants’ motion to dismiss 8/21/18) a district court ruled that Sears and its top executives did not violate ERISA by allowing company stock to remain in the 401(k) plan despite a 76.3% decline in stock value. The plaintiffs alleged that publicly available information should have led the defendants to remove the shares, but the court, relying on Dudenhoeffer, said that would have required the defendants to, at any particular point, outguess the market.

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Corey Rosen

Henny Penny employee cannot be forced to agree to arbitration clause

In Brown v. Wilmington Tr., N.A., No. 3:17-cv-00250 (S.D. Ohio, order denying defendant’s motion to compel arbitration 7/24/18), a district court ruled that a former employee cannot be forced to go through an arbitration clause regarding her ESOP account. The company set up its ESOP in 2014, and the employee was allocated shares. Two years later, the company adopted an arbitration clause for disputes over distributions. By then, the employee had left. The company and the ESOP trust, Wilmington Trust, wanted to enforce the arbitration clause, but the court ruled that she had never agreed to it because she had left the company by then and had cashed out her plan. The plaintiff is one of a class of employees suing over an alleged overvaluation of the stock.

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