Another wrinkle in the Brundle ESOP case

BVWireIssue #225-3
June 23, 2021

ESOP valuations
damages, control premium, expert testimony, breach of fiduciary duty, trustee, projections, overpayment, erisa, lack of control, fair market value

Although the district and appellate courts in the landmark Brundle ESOP case ruled years ago against the trustee, Wilmington Trust, litigation related to the case is not over. A current lawsuit pits former allies, the trustee and ESOP appraiser, against each other. Recently, a district court ruled in favor of Wilmington’s claim for contribution.

In 2013, the owners of a private security firm, Costellis, sold their shares in the company to an ESOP in what a financial advisor called “a more advanced 100% structure” that would allow the owners to retain some control over the company. Constellis hired Wilmington Trust to serve as independent trustee representing the interests of the ESOP. Wilmington hired Stout Risius Ross (Stout) as ESOP appraiser. Both firms had extensive ESOP experience. In 2015, a former employee and participant in the ESOP (Tim Brundle) sued the trustee, alleging it violated its fiduciary duties to the ESOP by causing the latter to overpay for company stock.

The Brundle case was litigated in the eastern district of Virginia. The federal district court found the trustee liable for a nearly $30 million loss to the ESOP. Among other things, the court concluded the trustee failed to adequately scrutinize the ESOP appraiser’s valuation, which, the court said, included numerous defects and red flags. The court said Wilmington’s reliance on the Stout valuation was not “reasonably justified.” In a key decision, the 4th Circuit Court of Appeals affirmed the district court’s liability and damages rulings.

Trustee pays but wants contribution: Wilmington paid the $30 million judgment but has subsequently tried to recover from Stout some or all of the money. Wilmington, based on the district court’s findings as to the defects in the valuation report, sued Stout, alleging breach of contract and negligence and asking for contribution. In response, Stout filed a motion to dismiss the claims. The instant action is in the southern district of New York.

The court adjudicating this case agreed with Stout that the statute of limitations had run out on Wilmington’s breach of contract and negligence claims. However, the court sided with Wilmington regarding the contribution claim. Stout tried to argue this state law claim was preempted by federal law, specifically ERISA, “because that claim seeks to recover on a judgment for breach of ERISA-imposed fiduciary duties.”

In contrast, the court found, “ERISA does not bar Wilmington’s contribution claim against a non-fiduciary [Stout] merely because the judgment for which Wilmington seeks recovery is based on an ERISA violation.” Citing 2nd Circuit case law that has said Congress did not intend for ERISA to “completely immunize non-fiduciary plan advisors from damages claims,” the court allowed the case to proceed on Wilmington’s claim for contribution.

“[A] holding that ERISA preempts Wilmington’s contribution claim would immunize Stout from liability for breaching its common law duties,” the court said.

The case is Wilmington Trust N.A. v. Stout Risius Ross, Inc., 2021 U.S. Dist. LEXIS 54961; 2021 WL 1110040.

Digests of Brundle v. Wilmington Trust N.A. (I), 2017 U.S. Dist. LEXIS 35811, and Brundle v. Wilmington Trust N.A. (II), 2017 U.S. Dist. LEXIS 97752, and the court’s opinions are available at BVLaw.

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