Employee Ownership Legal Digest (5) 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

Western Global ESOP litigation settled

In David Burnett, et al., v. Prudent Fiduciary Services LLC, et al., No. 22-270-RGA (D. Del. Feb. 24, 2024), a district court gave preliminary approval for a settlement in a long-running lawsuit over a minority ESOP at cargo airliner Western Global. The employees helped the ESOP fund the plan with their 401(k) assets. The stock price fell after the deal, and plaintiffs sued, charging the valuation was in error. The defendants sought to enforce an arbitration clause, but the court followed a magistrate’s recommendation, concluding that arbitration took away rights of participants to sue on behalf of the plan. Western Global continues to fly, but it filed for bankruptcy in August. The settlement is for $14.5 million for 335 participants.

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Corey Rosen

Supreme Court declines to review denial of attorneys’ fees to defendants where DOL decisively lost case

In Su v. Bowers, D.C. No. 1:18-cv-00155SOMWRP (Oct. 14, 2024), the Supreme Court declined to hear an appeal of a January 7, 2024, Ninth Circuit ruling that the Department of Labor did not have to pay attorneys’ fees to the defendant attorneys in a valuation case the DOL decisively lost. In that earlier case, Walsh v. Bowers, et al., a court definitively ruled for the defendants against the DOL because the trustee had a sufficient (albeit short) amount of time to vet the ESOP transaction, had unfettered discretion to hire its own independent appraiser, and had negotiated the deal and even saved the ESOP money. Nevertheless, the Ninth Circuit reaffirmed an earlier ruling that “the district court did not abuse its discretion in denying attorneys’ fees. In hindsight, the Department of Labor’s case had many flaws. But the district court did not err in concluding that the government was ‘substantially justified’ in its litigation position when it went to trial. The government’s expert, despite his errors, arguably had a reasonable basis—at least at the time of trial—in questioning whether the company’s profits could surge by millions of dollars in just months.”

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Corey Rosen

Claim that ESOP is rightful buyer of company dismissed, but other claims allowed to continue

In Walther et al., v. Wood et al., No. 1:23-CV-294-GSL-SLC (N.D. Ind.), a district court dismissed a claim by employees that their ESOP should have been the rightful buyer of the 90% of the stock the plan did not own at the time of the former owner’s death, but allowed a claim that the company and the plan’s fiduciary breached their fiduciary duties to continue.

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Corey Rosen

Plaintiff does not have the right to see the valuation report

In Truong v. KPC Healthcare ESOP Committee, Case No. 8:23-cv-01384-SB-BFM (C.D. Cal. Sept. 9, 2024), a court said the plaintiff in a long-running ESOP case did not have the right to see the valuation report in the deal. Plaintiffs had objected to the sale of ESOP-owned KPC Healthcare to Victor Valley Health Care, which was owned by the same two people who had sold KPC to the ESOP. Plaintiffs argued that the sale price was unfair to participants and asked to see the fairness opinion produced by the ESOP valuation firm (Stout) that the trustee would use to determine if the ESOP was receiving at least fair market value. The court concluded that “Defendants produce uncontroverted evidence that the transaction price (which was negotiated before Stout provided Alerus with its written opinion) exceeded the high end of the fair market value range identified by Stout. Thus, if Plaintiff were to obtain the Stout Report, she still would not know either the total sale price for the 2021 transaction or the value of her benefits following that sale…Plaintiff is correct that the Stout Report has some connection to the sale price, primarily in the sense that the sale could not have gone forward if Stout had concluded that the negotiated price was below fair market value. But the mere fact that it contains information that hypothetically could have affected the transaction if the negotiated price had been lower does not make the Stout Report an ‘other instrument’ under which the plan is established or operated” that are required to be disclosed to participants. The judge granted summary judgment to the defendants on this issue.

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Corey Rosen

RVR case proceeds to remedies phase

In Su v. Bensen et al., No. CV-19-03178-PHX-JJT (D.C. Ariz. Aug. 15, 2024), a district court moved an already decided case to the issue of remedies. The judge in the case seemed skeptical about a number of common ESOP practices. The judge said that Chartwell, one of the ESOP advisory firms in the deal, told the defendants that the deal provided “superior timing,” “certainty of close,” and “ease in negotiating terms.” To the judge, that said that the defendants could “manipulate the transaction’s terms to whatever way defendants desired.” The judge also ruled that the ESOP trust’s having 100% ownership of the company did not imply effective control of the company because the outside trustee was directed by the board of directors, all of whom were insiders (and defendants in the case).

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Corey Rosen

Judge allows some claims in lawsuit over sale of ESOP company while declining others

In Miller v. Brozen, No. 23-2540 (RK) (JTQ), 2024 BL 304628 (D.N.J. Aug. 30, 2024), a district court dismissed some claims by plaintiffs while allowing others to continue in a case involving the sale of Asbury Carbons to Mill Rock Capital. The ESOP at Asbury owned 19% of the company. The company had been seeking offers to sell the company since 2021. At that time, the company estimated that it could sell for between $150 million and $200 million. When the company was ultimately sold in 2024, it was sold for just under $100 million. In an effort to reduce cash in the company a year and a half prior to the sale, however, the company issued a special dividend, the cash value of which ended up being somewhat greater than proceeds derived from the sale.

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Corey Rosen

Long-running Casino Queen ESOP case reaches settlement

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., 20-cv-377-DWD (S.D. Ill. Sept. 6, 2024), a settlement was reached in the long-running case over the bankruptcy of Casino Queen, which had been a 100% ESOP. Plaintiffs alleged the ESOP’s 2012 purchase of the company for $170 million was based on excessively optimistic projections. They also alleged the company sold and then leased back real property it owned for too low a price and that the two trustees for the deal were insiders with conflicts of interest subject to direction from the board and ESOP administrative committee.

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Corey Rosen

New owners who bought an ESOP company cannot sue on behalf of plan

In Arborwell v. Alerus Financial, No. 4:23-cv-02770-DMR (N.D. Cal. June 24, 2024), a district court dismissed an unusual lawsuit against ESOP trustee Alerus Financial over the sale of Arborwell and its parent company SavATree to CI Quercus. Arborwell was sold to an ESOP in 2020 and then sold to CI Quercus in 2023. CI Quercus alleges the sale hurt the interests of plan participants by excessively benefiting executives at the company and individuals who had sold to the ESOP. Plaintiffs also alleged the sellers violated noncompete requirements that were part of the sale by setting up a competing business.

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Corey Rosen

Tax court says taxpayers cannot undo section 1042 election

In Berman and Berman v. Commissioner, Nos. 202-13, 388-13 (US Tax Court, July 16, 2024), the Tax Court ruled taxpayers had to pay taxes on the disposition of qualified replacement property (QRP) they purchased after making a Section 1042 tax deferral election. The taxpayers elected the tax deferral treatment and purchased floating rate notes. Subsequently, they pledged the QRP as collateral for loans equal to 90% of the property’s value. The taxpayers acknowledge that this constituted a sale of the QRP. The taxpayers argued that the 1042 election they made was invalid because the company was an S corporation at the time (even though it converted to C status to do the transaction) and that even if the election were valid, they should be able to treat the sales as an installment sale and be taxed under  installment sale rules. The Tax Court said the full amount of the sale was taxable as capital gains but allowed the sellers to use the installment sale method for calculating the gains and applicable taxes.

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