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
The SECURE 2.0 Act made a number of changes to rules for required minimum distributions (RMDs) from retirement plans. Most important, it extended the age at which RMDs must start and reduced penalties for failing to take one. On July 17, 2024, the IRS issued final rules for these distributions.
Corey Rosen
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.
Corey Rosen
In Moore v. Virginia Community Bankshares, No. 3:19-cv00045 (W.D. Va. June 24, 2024), a settlement has been approved in a lawsuit alleging fiduciary improprieties in the sale of ESOP shares at Virginia Community Bank (VCB) prior to a merger. VCB set up an ESOP in 2006 and terminated it in 2016. VCB originally planned to sell to another bank in 2017, but that fell through. Participants were told that the bank would focus on staying independent. VCB offered employees the chance to cash out at $34 per share (the prior year’s value) or continue to hold the shares. Many employees did cash out. Officers were notified that they could purchase the shares that had been sold.
Corey Rosen
In Su v. Ascent Construction, No. 23-4114 (10th Cir. June 24, 2024), the appeals court ruled that the president of a Utah construction company cannot appeal a preliminary injunction removing him as the fiduciary for the plan because the appeal was made moot by the district court making the preliminary injunction permanent. The company was in financial difficulty and down to just a few participants when the president removed $310,000 in cash from the plan to pay business expenses, and the plan failed to pay out required distributions to a plan participant.
Corey Rosen
In Nguyen v. Westlake Services Holding Company, No. 8:23-cv-00854 (C.D. Cal. June 28, 2024), the plaintiff alleged that Westlake Holding Company changed its ESOP rules in 2020 to allow the company to segregate accounts of former employees before their receiving a distribution as well as to allow a special interim valuation to reflect economic challenges arising from the pandemic. In 2020, the plan was changed to allow for account segregation at termination. At the same time, the company did a special interim valuation that reduced the 2019 price by 30%. The initial 2019 price was the one that otherwise would have been used for distribution for people terminating in 2020. Nguyen sued, saying that she was not informed of the change and that the change violated ERISA. The parties have now agreed to a $1.25 million settlement for 185 participants.
Corey Rosen
In Bolton v. Inland Fresh Seafood, No. 1:22-cv-04602AT (N.D. Ga. Dec. 5, 2023), a court dismissed a lawsuit against Inland Fresh Seafood over the valuation of the company when it was sold to the ESOP in 2016 for $92 million. The defendants did not respond to the substance of the claim in their legal filings, but instead argued that the case should be dismissed because the plaintiffs were required by the plan to pursue their legal remedies under the plan first. On appeal, however, the 11th Circuit, in a strongly worded opinion, ruled that the Department of Labor could receive an en banc hearing on the case (No. 1:22-CV-04602-LMM, 11th Cir. May 22, 2024). The appeals court ruled that exhaustion of administrative remedies under the plan did not cover issues of statutory fiduciary obligations that apply to the plan as a whole. The court noted that a fiduciary has a self-interest in denying the claims and that the complaint here did not focus on issues about the application of plan provisions to the participant but on the way in which the plan itself was operated. The court said that while plan administrators can review individual benefit denials and award benefits, they cannot impose personal liability on breaching fiduciaries to restore plan losses or subject non-fiduciaries to equitable relief.
Corey Rosen
In Shipp v. Central States, No. 5:23-CV-5215 (W.D. Ark. July 5, 2024), a district court ruled the plaintiffs had pleaded sufficient arguments to deny dismissal to the defendants, Central States Manufacturing and GreatBanc Trust, over charges that a releveraging at the 100% ESOP-owned company caused the share price for affected employees to fall improperly. The rapidly growing company had a mature ESOP and a quickly rising stock price. It chose to releverage its ESOP in order to purchase shares from former employee participants so that those shares could then be reallocated for all participants in the plan. The plaintiffs alleged that there were other ways for the company to handle getting shares to new employees and managing the company’s ongoing repurchase obligation. Defendants argued that the employees had not shown standing because they were not harmed by the transaction and that the trustees had an obligation to act in the best interest of the plan as a whole and not just for former employees who still had accounts. The plaintiffs did not argue that releveraging per se was improper, but that the manner in which it was done was. The judge ruled that at this stage, the plaintiffs had presented a sufficient case to deny dismissal.
Corey Rosen
The 2023 National Defense Authorization Act created a pilot program, known as Sec. 874, that allows the DOD to award certain follow-on contracts without initiating a competitive process to an employee-owned business that meets the definition of a “qualified business.” The program states that “contracting officers supporting a program selected for participation in the pilot will be able to award a follow-on contract for the continued development, production, or provision of products or services that are the same or substantially similar to those procured by DOD under a previous contract with a ‘qualified business’ under the authority of § 3201(c)(5).” The program was extended in 2024. The program authorizes contracting officers to award a sole source, follow-on contract to procure products or services similar to those acquired under predecessor contracts.
Corey Rosen
In Bonds v. Heeter, et al., No. 23-12045 (E.D. Mich. May 8, 2024), a former steel processing company employee advanced most of his proposed class action challenging a $60 million stock purchase by the company’s employee stock ownership plan. The complaint argues that the $60 million sale to the ESOP was overvalued. Heeter argued that the sale price included a control premium when the ESOP did not have effective control and that projections used for the valuation were unrealistic. Two officers of the company contended they were not fiduciaries and should not be part of the defendant group, but the court said, at this point, it was enough to allege that actions they took, including projections for the forecast, caused the price to be inflated.
Corey Rosen
In Lysengen v. Argent Trust, et al., No. 1:20-cv-01177MMM-JEH (D.C. Ill. May 6, 2024), a court ruled that Argent Trust can appeal a granting of class certification by the court in 2023. The lawsuit hinges on a 50% drop in the value of Morton Buildings in the year following the company’s taking on debt to fund the ESOP purchase (these declines are normal in leveraged ESOPs). The plan initially owned a minority of the shares in the company. When it bought the remaining shares, participants meeting eligibility rules were given floor price protection against the anticipated debt-related drop in share price. The valuation also changed the way it treated excess cash, previously counted as a liability, as an asset. The company made payments to existing participants to compensate for that. The court had ruled earlier that Lysengen was not representative of a class but could sue as an individual representing the ESOP trust. In this ruling, the court said that Argent could appeal the decision because the issue is a matter of law, not fact.
