Appeal in Lee ESOP case dismissed; ESOP class action also close to resolution

BVWireIssue #215-1
August 5, 2020

ESOP valuations
appraisal, breach of fiduciary duty, fair market value (FMV), overpayment, employee stock ownership plan (ESOP)

The last few weeks have seen the end of two ESOP litigations that have drawn a lot of attention from the ESOP community. They include the Lee case in which the plaintiff appealed the district court’s dismissal of her complaint for failure to show an injury as well as a class action against Raydon Corp., the trustee, and various individuals for alleged ERISA violations related to a 2015 company stock sale.

Dismissal in Lee case: The case centered on the 2016 sale of company stock to an ESOP. The transaction was financed with a loan from the company. The ESOP paid $198 million for an 80% ownership stake in the company. A 2016 year-end annual appraisal that came about two weeks later valued the shares at $64.8 million. The defendant trustee oversaw the transaction; an experienced ESOP appraiser prepared the valuation underlying the transaction and subsequent annual valuations.

The plaintiff’s complaint suggested that the two figures showed the trustee overpaid for company stock, but a district court, last fall, dismissed the case. The court said the plaintiff “fundamentally misunderstands” the transaction and the subsequent valuation and that the ESOP “realized an immediate equitable benefit.”

In her appeal to the 4th Circuit Court of Appeals, the plaintiff asserted that the facts in her case were similar to those in the Brundle case in which the 4th Circuit had affirmed the district court’s substantial judgment for the plaintiff. The trustee, in turn, asked the 4th Circuit to affirm the dismissal, arguing the allegations pled in Brundle were “far different—and more significant—than the barebones allegations in the Complaint here.” “Federal courts are called to sort viable ERISA claims from those that are merely would-be clones of Brundle,” the trustee said.

Both sides received support from amici. The amicus brief of the Pension Rights Center (PRC) argued the plaintiff made plausible allegations that the trustee caused the plan to overpay for company stock. ESOP trustees don’t always conduct “real world’” due diligence or try to obtain the best price possible for the ESOP, the PRC claimed. The amicus brief of the American Society of Appraisers retorted that the practices of “real world” buyers (i.e., private equity buyers) are “incompatible with ERISA’s requirements and fundamental valuation principles.” The ASA noted the standard of value applicable to ESOP transactions is fair market value, which is “not the lowest possible price a [private equity] buyer might pay.”

On July 16, the 4th Circuit granted “the motion to dismiss this appeal,” noting there did not appear to be opposition to the dismissal. This marks the end of the case.

Settlement underway in Raydon case: This case arose out of a 2015 transaction in which shareholders in Raydon, a company providing simulation and training technology for military outfits, including the U.S. Army, sold company stock to an ESOP for $60.5 million. The transaction followed the owner’s failed attempt to sell the company and the loss of an important contract with the army. The transaction also included contested million-dollar payments to two director defendants in exchange for noncompetes. An independent trustee oversaw the ESOP transaction. At the end of 2015, the fair market value of company stock was $5.11 million. Two years later, the stock was valued at $4.55 million. The plaintiff was a participant in the ESOP and alleged the trustee and selling shareholders engaged in a prohibited transaction (i.e., paying more than fair market value for company stock) and the trustee and others breached their fiduciary duties to the ESOP.

In March 2020, the federal district court granted the plaintiff’s motion for class certification, finding the plaintiff alleged sufficient facts to show she suffered an injury “fairly traceable to Defendants’ conduct.” The court said the plaintiff also showed she was a member of the proposed class of plaintiffs.

On July 20, the parties filed a joint notice of settlement in which they state they “have reached agreement on the monetary and primary non-monetary terms of a proposed class action settlement.” They said they would seek approval of the court under the applicable statute and asked the court to stay the action in the meantime.

Check out our earlier reporting in BVWire on the appeal in the Lee case. Also, a digest of the district court’s dismissal in Lee v. Argent Trust Co., 2019 U.S. Dist. LEXIS 132066 (Aug. 7, 2019), and the court’s opinion are available to subscribers of BVLaw.

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