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The Employee Ownership Update

Corey Rosen

November 21, 2001

(Corey Rosen)

ERISA Does Not Preempt State Law Claims

In Abraham v. Norcal Waste Systems, Inc., 9th Cir., No. 99-17040, 9/7/01), an appeals court overruled a lower court's decision that ERISA preempted a claim by shareholders (some of whom were also ESOP participants) against Norcal for defaulting on a loan. The appeals court ruled that the plaintiffs could proceed with their suit under state law. Norcal began its life as a worker cooperative, with ownership eventually ending up in the hands of a large number of current and former workers by the 1980s. In 1986, an ESOP was formed to buy out the owners, some of whom were still employees and became ESOP participants. The buyout was structured so that sellers received both cash (obtained from bank loans) and a note from the Norcal ESOP. Norcal then defaulted on its bank loan, causing it to default on the shareholder notes (Norcal has since recovered financnially). Shareholders sued Norcal, the ESOP, and the banks. The defendants argued the claim was preempted by ERISA. A trial court agreed, but the appeals court reversed the ruling, arguing that just because the plaintiffs were also parties in interest under ERISA, this did not negate their standing separately as shareholders. The ESOP participants in the suit were not suing as participants, but as shareholders, and therefore their claims should stand, the court said.

Trustee Not Required to Use Proceeds From Stock Sale to Repay ESOP Loan

In Benefits Committee of Saint-Goban Corp. et. al vs. Key Trust Company of Ohio, N.A. (U.S. District Court, Northern District of Ohio, Eastern Div., No. 1:00 CV 751, 2/5/05), the court concluded that Key Trust, acting as trustee for the Furon Corporation ESOP, was not required to use the proceeds from the sale of stock in Furon's terminated leveraged ESOP to repay the ESOP's loan. Furon Corporation set up in 1990 and loaned money to the ESOP to buy its shares. The loan was not secured by the stock the ESOP acquired. In 1999, Furon was acquired by Saint-Goban. There was over $6 million in stock still in the suspense account when the sale occurred, and $2.3 million in principal remaining to be paid. The sale agreement did not perfect a security interest in the shares in the suspense account for Saint-Goban. Saint-Goban wanted the proceeds of the sale of suspense account shares to be used to repay the remaining principal, as is normal in these situations. Key Bank, as trustee of the ESOP, refused, saying that while the plan document allowed the sale proceeds to be used in this way, it did not require it. Because the shares in the ESOP were not serving as collateral for the loan, there was no obligation to use sale proceeds to repay the loan. The court ruled in favor of Key Bank, and all of the plan's assets were distributed to employees.

Floor Price Agreement Does Not Apply to All Employees

An arbitrator ruled that a union agreement with Dyncorp Aerospace Technology did not require the company to pay out employees who were not both vested and had received a payout during the specified contractual term at a collectively bargained floor price. Dyncorp had agreed on a floor price for its shares of $27 per share, which was $3 above what was actually paid out to the employees not meeting these conditions (In the matter of Dyncorp Aerospace Technology IUEW, AFL-CIO Local 770, Nicholas, Arb., FMCS No. 001001-13805-06, 8/7/01).

ESOP Qualification Revoked

In Beal Bros. Management Corp. v. Commissioner (T.C., No. 10871-99R, T.C. Memo. 2001-234, 9/6/01), the IRS ruled that Beal Brothers Management Corporation's ESOP did not meet minimum participation standards. The company set up an ESOP for its four employees in 1987, then bought a manufacturing company and merged the manufacturer into the parent. The manufacturer had 41 employees.

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