Readers may remember the 2017 Brundle v. Wilmington Trust case in which the district court concluded the ESOP trustee had caused the plan to overpay by almost $28 million. Notably, the independent trustee and valuation firm overseeing the underlying transaction had extensive ESOP experience. In ruling on the trustee’s post-decision challenge, the court conceded some valuation-related errors but found the mistakes were nonconsequential. The trustee has appealed the decision with the 4th Circuit Court of Appeals.
The ASA recently filed an amicus brief in support of the trustee. The document also serves as a strong statement in defense of ESOP fiduciaries and appraisers in general. It alleges that the DOL’s ESOP-focused national enforcement project has prompted a rise in lawsuits “in which a plaintiff submits a blanket accusation, without factual knowledge, that ESOP fiduciaries breached their duties … and violated prohibited transaction rules because they relied upon an appraisal that allegedly resulted in the ESOP’s overpayment for the shares it purchased.”
Noting the stellar qualifications and experience of the ESOP appraiser, the brief accuses the district court of “second-guessing” the appraiser’s sound contemporaneous analysis and value conclusions by relying on the “rough” and “after-the-fact opinion” of the plaintiff’s “underqualified ‘expert.’” The DOL’s expert approached the valuation both from a litigation perspective and with the benefit of hindsight, the brief says. It further notes that this expert was not an “independent qualified appraiser,” as required under the applicable regulations. He has served as the DOL’s “primary valuation consultant and expert on leveraged ESOPs” and performs as an advocate who “sides with the DOL and his valuations fundamentally depart from fair market value,” the brief says. Further, the expert lacks the education and training of an appraiser. (As we recently reported, the defendants in another ESOP case involving this expert made similar arguments in their partly successful Daubert motion.)
The ASA brief notes the district court opinion is vulnerable, from a valuation perspective, in three areas. The ruling improperly objects to the ESOP valuator’s use of a 10% control premium even though there was evidence that the ESOP had some control. Further, it rejects the ESOP valuator’s use of contemporaneous management projections even though the valuator “diligently probed” the accuracy of the projections. Instead, the court relied on the opposing expert’s “unsupported recasting of management’s projections,” while acknowledging those calculations lacked “a detailed analysis of how he arrived at his replacement projections.” Also, the court has acknowledged it misunderstood the concept of beta but failed to adjust its damages calculations to correct the error.
The district court’s judgment represents an “impermissible windfall for the ESOP participants,” which punishes a trustee that followed generally accepted procedures, “including hiring a highly-qualified and independent appraiser,” the brief concludes.
Digests of Brundle v. Wilmington Trust N.A., 2017 U.S. Dist. LEXIS 35811, and Brundle v. Wilmington Trust N.A. (Brundle II), 2017 U.S. Dist. LEXIS 97752, and the court’s opinions, are available at BVLaw.
The ASA will be issuing a press release on this matter which will appear in the ASA Newsroom section of its website.