Employee Ownership Legal Digest (7) 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

Second Circuit Denies Arbitration Clause in ESOP Case

In Cedeno v. Argent Tr. Co., No. 20-CV-9987 (JGK) (2nd Cir. May 1, 2024), the Second Circuit upheld a lower court ruling that an arbitration agreement precluded participants “from seeking relief for the plan as a whole, a form of relief that is otherwise provided for by ERISA” and that such action is “contrary to the language and intent of the law.” Argent has appealed. Cedeno alleged the plan overpaid for ESOP shares. Argent specifically requested that the district court compel arbitration “on an individual basis, rather than in a representative capacity or class, collective, or group basis.” Argent argued that individual arbitration would “not affect the remedy that [Cedeno] could personally achieve under ERISA section 502(a)(2),” asserting that Cedeno could, in any event, recover losses only within his individual plan account. The appeals court ruled that “because Cedeno’s avenue for relief under ERISA is to seek a plan-wide remedy, and the specific terms of the arbitration agreement seek to prevent Cedeno from doing so, the agreement is unenforceable.”

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Corey Rosen

ESOP Interim Valuation Case Settled

In Nguyen v. Westlake Services Holding Company, No. 8:23-cv-00854 (C.D. Cal. Feb. 5, 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. Westlake provides financing for vehicle purchases and is part of the Hankey Group, which includes a number of dealerships. Until the changes in 2020, the participants received a distribution in the second quarter of the year following termination based on the most recent appraisal. That was changed in 2020 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 settlement, but the amount was not disclosed.

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Corey Rosen

Seventh Circuit Revives ESOP Lawsuit in Appvion Case

In the long-running case of Appvion Retirement Savings Retirement and Employee Stock Ownership Plan v. Buth, No. 18-CV-1861-WCG (7th Cir. Apr. 24, 2024), the 7th Circuit overruled part of a lower court’s dismissal of the ESOP valuation lawsuit. The case involves an ESOP at Appleton Paper (later Appvion). In 1998, employees funded the $106 million transaction by investing funds from their 401(k) plan. In 2018, the sole remaining member of the Appvion Retirement Savings and ESOP Committee sued the various defendants for fraud, arguing that the employees overpaid for the shares, that board members and executives received excessive bonuses for completing the deal, and that key advisors and board members improperly touted how good a deal this was in their roadshows selling it. The company performed well for several years but eventually went bankrupt in 2017. Most of the claims were dismissed either because they were time-barred or because the court found the plaintiffs failed to state a claim.

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Corey Rosen

Court Allows Case to Proceed in Another KPC Healthcare Lawsuit

There have been multiple lawsuits involving the ESOP at KPC Healthcare over the initial valuation and later the sale of the company. Three have been settled, but in Truong v. KPC Healthcare ESOP Committee, Case No. 8:23-cv-01384-SB-BFM (C.D. Cal. May 3, 2024), a court let a case proceed. The main issue here was the plaintiff’s request to see the valuation report. The ESOP committee did not notify the plan participants of the sale until approximately eight months after it occurred and did not disclose the sale amount, the price per share, or the fact that the buyer, Victor Valley Healthcare, was owned by the same two people who had sold KPC to the ESOP.

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Corey Rosen

Seventh Circuit Grants Casino Queen Request to Appeal Denial of Class Status

In Hensiek v. Bd. of Dirs. of Casino Queen Holding Co., 20-cv-377-DWD (S.D. Ill. Mar. 6, 2024), the 7th Circuit approved a request by workers to appeal a prior judgment denying them class status. The workers allege that company executives charged their ESOP $170 million for shares that ended up being worthless. The district court had previously denied class status because of tolling requirement limitations.

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Corey Rosen

Appeals Court Says Valuation Firm Owes Part of Costs of Defense in ESOP Case

In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc., Nos. 23-1167/1195 (6th Cir., Apr. 8, 2024), the 6th Circuit ruled that Great American was not responsible for all of the cost of the legal defense for Stout Risius, an ESOP valuation firm, in an ESOP lawsuit. The district court ruled that “Stout’s insurance policy obligated Great American to defend Stout in the underlying litigation until only claims falling within an exclusion provision remained, and that Stout had to reimburse Great American for defending Stout after the exclusion applied.” The case arose out of litigation against the ESOP at Appvion. Defendants won that case, but Great American claimed that its policy did not require it to pay for Stout’s defense after a certain point in the proceedings under Michigan law.

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Corey Rosen

Symbria ESOP Valuation Case Can Proceed

In Placht v. Argent et. al., No. 1:21-cv5783 D (N.D. Ill. Mar. 24, 2024), a district court came to a mixed ruling in an ESOP valuation case against the trustee for an ESOP at Symbria, Argent Trust. Symbria provides rehabilitation services, wellness programs, pharmacy services, experience surveys, and strategic consulting services to senior-living and post-acute providers. The 2015 deal was for $66.5 million and was funded entirely with debt. Post-transaction, the value dropped to $9.3 million, and in 2020, the value was $8.65 million. Plaintiffs alleged the ESOP overpaid for the shares.

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Corey Rosen

ESOP Radiology Company Settles Lawsuit

In a second radiology company case, Colon v. Johnson, No. 8:22-cv-00888-TPB-TGW (Mar. 28, 2024), a $19 million settlement was reached concerning alleged diversion of assets in an ESOP company. Plaintiffs sued the executives and the trustee, GreatBanc Trust, alleging that the executives and former owners of Advanced Diagnostic (ADG) had deprived the ESOP of value by diverting contracts from ADG to other companies they owned, structuring the deal with an excessive amount of warrants (42% of the fully diluted value), and ultimately selling ADG in a transaction that excessively favored the executives and owners. Plaintiffs alleged the defendants at ADG set up shell companies to acquire a valuable management contract for multiple imaging centers, even though ADG performed all of the work under a subcontract. In 2019, ADG was sold for $215 million, with the ESOP receiving only $10 million of that, partly due to the exercise of warrants and partly due to the ESOP paying off remaining acquisition loan debt. Plaintiffs also alleged, however, that much of the sale value was captured by the other entities the defendants had set up that were sold simultaneously, value the plaintiffs claim should have gone to the ESOP. The settlement will be divided among 285 plan participants.

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Corey Rosen

Court Rules Arbitration Clause Does Not Apply in A360 ESOP Termination Lawsuit

In Williams v. Shapiro, No. 1:23-cv-03236-VMC (Mar. 20, 2024), plaintiffs allege that an ESOP set up at their company, A360, was improperly terminated, preventing them from reaping potentially very large gains on their unallocated stock. In 2017, A360 was spun off from a law firm to perform support services for law firms. A leveraged ESOP bought all of the shares. The market for such services soared in the next two years. The sellers, who remained in control of the company, decided to terminate the plan and buy back the shares in order to take advantage of the hot market. Sellers bought back the allocated shares at the most recent valuation, but plaintiffs allege the unallocated shares (the large majority of the shares at that point) were bought back at the purchase price, not the most recent sale price, thus depriving the participants of the appreciation on unallocated shares.

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Corey Rosen

ESOP Valuation Case Against Envision Radiology Can Proceed

In Harrison v. Envision Management Holding Company, No. 22-1098 (D. Colo. Mar. 21, 2024), a district court said that plaintiffs had pleaded sufficient allegations to allow a case concerning the price paid by an ESOP for Envision Radiology to continue. Envision was sold to an ESOP in 2017. The ESOP paid $163.7 million to the sellers. Plaintiffs allege the ESOP paid $1,770 per share for 64% of the Envision shares and $1,404 per share for 36% of the Envision shares, but that there was no reason for the discrepancy. The defendants argued this was incorrect. The stock dropped to $349 after the transaction (the deal was financed with debt, so the stock price would normally decline). The judge ruled that at this stage, there were voluminous filings to review, and that it was premature to dismiss the case.

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